Diageo CEO Debra Crew has sought to emphasise the group’s “return to growth” but, as one analyst put it, a $200m profit risk from potential US tariffs “pooped the party”.
“I know it’s like tariff watch, so I want to make sure that our results do get front-and-center coverage here”, Crew told reporters during a first-half results presentation at Diageo’s London headquarters yesterday (4 February).
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Nevertheless, the morning release of those numbers caught the eye, more so because Diageo scrapped its mid-term guidance for organic growth of 5-7%, citing “macroeconomic and geopolitical uncertainty”.
On a call with analysts during the day, CFO Nik Jhangiani stressed that while it was still “a pretty fluid situation” with respect to potential tariffs on Canada and Mexico – paused for now in a Trump reprieve – the impact could cost the business $200m.
“If you look forward now planning for 1st March, so four months, we are talking about circa $200 million of gross exposure on operating profit, with 85% of that being largely on tequila, which is an industry-wide issue. So, keep that in mind,” he said.
Meanwhile, Crew pointed out that Diageo’s return to growth included four of its five business regions, included the key North America market.
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By GlobalDataThe Tanqueray brand owner saw organic net sales grow 1% to $10.9bn, but they declined 0.6% on a reported basis. Operating profit dipped 4.9% in reported terms and 1% organically to $3.2bn, while group volumes remained flat year on year at 122.8 million equivalent units.
Diageo’s North America market, which has seen a shaky performance over the past year, recorded flat reported net sales at $4.1bn. Reported and organic volumes were down 3% in the region.
The Guinness brewer’s Latin America and Caribbean market saw organic net sales return to growth on an organic basis, increasing 5%. Reported net sales in the region though were still down 2% at $1.1bn.
Asia-Pacific net sales recorded a 4% dip on a reported basis to $2.1bn driven by weak performances in south-east Asia and Greater China.
Diageo’s total growth in the six months was also an improvement compared to the recent performance of some of its competitors, including Rémy Cointreau and LVMH.
Despite that outperformance, the group decided to withdraw its medium-term guidance and received a mixed response from analysts.
Bernstein’s Trevor Stirling called the removal “pragmatic”.
Barclays said it was “hard to make a firm conclusion from these results”, adding that while Diageo had seen growth in four out of its five divisions, withdrawing guidance and downgrading consensus “could either be interpreted as increased market uncertainty, coupled with structurally weaker consumers or simply an attempt to underpromise”.
Slow recovery
The Captain Morgan distiller’s decision to remove guidance struck a chord and concentrated analysts’ minds yesterday.
When asked about the rationale behind the move at Diageo’s HQ yesterday, Crew said there were a couple of reasons.
Firstly, the group was “off” the 5-7% medium-term goal “by some measure”, she said, adding that it was expecting recovery to take a little longer than maybe previously expected, with the timeline remaining “unclear” for markets like China.
She said: “The reality is the pacing and the recovery timeline that we’re seeing. I mean, look the US. We do see green shoots and some real positive momentum in certain places… but the pace and recovery of that timeline is coming slower.”
Instead of providing medium-term guidance, Crew said the company would look to share more frequent updates with investors in the interim “due to the volatility and uncertainty”.
While guidance is off the table for now, some analysts expect the company to still do well, but not achieve an overly impressive growth in the medium term.
In a note to clients yesterday, Bernstein’s Stirling said: “Tactically, we still think Diageo will outperform, at least operationally, benefiting from its better brand, category and country exposure… But at this price, we see better medium-term opportunities in other spirits majors. And we see downside risk to estimates if the tariffs are implemented.”
“Tariffs pooped the party”
While Crew might have wanted the group’s latest results to take centre stage, the risk of tariffs was a hot topic for analysts.
As Bernstein’s Trevor Stirling said: “Tariffs pooped the party, and might have more impact than we thought.”
Around 45% of Diageo’s US net sales are made up of agave-based spirits and Canadian whisky, which, if tariffs are eventually implemented, could have a significant effect on performance.
Alongside its results, the group did also reveal initial details on its tariff mitigation plan, which included managing pricing and promotions, inventory, re-allocating investments and optimising its supply chain.
In the analysts call, Jhangiani said he expected the plan could “mitigate approximately 40%” of that operating profit impact.
He also stressed, for now at least, the mitigation plan “does not include anything on pricing”.
The CFO added: “But that is not to say pricing is not off the table, but it is just not the first thing that we would go for, given that we already have some mitigations. And we will look at the consumer environment, what competition is doing.”
Diageo’s first-half performance did deliver to a certain extent but tariffs continue to prod at future performance expectations.
As Stifel analysts said in a note yesterday: “Meeting expectations in this dull environment is an already solid performance, but US tariffs remain the main question mark.”
They added: “With fundamentals back on track, short-term share price behaviour will be driven more than ever by geopolitical issues, we believe.”
Shaking up the portfolio
In his prepared remarks, Jhangiani said part of Diageo’s plan to “optimise maximise returns” would include being “more rigorous in pursuing disposals”, which would help “deleverage our balance sheet”.
“As you’ve seen more recently with the disposal of our shareholding in Guinness Nigeria and Ghana, which was announced last week, these disposals have gone beyond the more normal active portfolio management with individual brands, and we will continue to explore further opportunities through multiple value-creation lenses as we move forward.”
The company also plans to engage in “selective M&A” when deals might be “relevant”, Jhangiani said.
While he didn’t indicate how soon either disposals or M&A could take place, he did say the company was engaging in these actions “with speed”.
When asked by reporters on Tuesday which areas or brands in the portfolio the group was assessing in its disposal strategy, Jhangiani said it was still in the assessment stage.
“I would say it’s going to vary depending on how we want to position and shape and evolve our strategy. Some areas are working fantastic, and there’s nothing to do.
“I would almost say there’s the opposite, where there might be some areas for instance where we might want to look selectively at acquisitions, and how do we actually look at that play, and are we right with the brands that we have, or is there gap based on… around the price laddering type of opportunity?
“I think it’s premature to give you anything more outside looking at it holistically around what stays or what might have to come in too.”
China’s “cautious consumer environment”
Diageo continued to see a pressured consumer in its Asia-Pacific market, most specifically in south-east Asia and Greater China.
Speaking to Just Drinks yesterday, Crew said Vietnam was the main country where it was “seeing the pressure” in south-east Asia in its first-half.
“There was a zero tolerance on drink driv[ing] that got put into place, there was an anti-graft movement as well, so there’s just been some broader macro environment things that have really slowed down the market quite a bit. We navigate that, we make sure we pull back on inventory as an example, and everything else to kind of navigate that environment. But you know, we’re still feeling good about those markets overall, it’s just the broader macros that we’re navigating through.”
The Asia-Pacific market made up 19% of Diageo’s reported net sales in its first half period.
Commenting on how the company expected the consumer environment to play out in Greater China over the next year, Crew added: “We just think it’s going to continue to be a pretty cautious consumer environment. We’re seeing it on Baiju right now, what you have is you had a lot of stock and inventory… with some of the competitors, we have seen a bit more inventory that’s out there. Just in that more cautious environment, we’re just expecting that to stay pretty tight for a bit.
“On the imported side, on international spirits, what we’re seeing there, and this is what took down some of our price mix, is we are seeing consumers trade down in that environment, that is trading down, we say the Chinese style. It’s no longer Singleton 20, 21, it’s Singleton 18.
“It’s still a great opportunity, because it’s a small market. There’s limited number of provinces, really, so we still see a big brand-building opportunity.”
