Diageo (DGELN; A3/A-/A-) FY24 (to June) Results

Clear evidence of consumer trading down within its brands. The 16% it has in beer grew strongly leaving no negative read-through to brewer curves. Still mgmt believes long-term trends of "spirits gaining share from beer and wine and long-term premiumization" are unchanged. In-line with that mentality, co is continuing to boost equity pay-outs while it faces the headline falls and sizeable margin falls...never a good sign for credit and leaves it at top-end of leverage target. It's reaffirmed in earnings call that the target range is unch and will guide future pay-outs. Turnaround seems not in sight; guidance for FY25 left non-numeric but with pessimistic tone.

On RV; it's still higher margin than the top of Brewers (AB-InBev) but its trading through it - which in this consumer environment seems aggressive. Reminder Diageo (with €19b in sales) is #1 in spirits, #2 is Pernod Ricard (Baa1/BBB+) (€12b sales) - latter is giving +25bps on the 5Y which again seems harsh. It is higher levered (net/gross 3.3x/3.8x vs. 3/3.1x) and will likely be facing similar industry headwinds. No firm view on it - especially ahead of FY results on 29th August - but if it can perform better (consensus doesn't think so at -1.4% organic growth & -25bps to a 26.7% on EBIT) spread to Diageo (below) should get compressed.

• FY24 saw $20b in sales (organic -0.6%), with price/mix of +2.9% offset by a -3.5% volume fall. EBIT was $6b (-5%) at a 29.6% margin (-130bps).
• It's saying headline was dragged by Latin America and Caribbean Region (9% of group sales, down -21%). It has re-stated that excluding it sales was +1.8% (volume still -2.1% ), EBIT -0.1% and margin -56bps. We are not sure how much value there is in pulling it out - even ex. it NA fell while APAC & Europe rose (i.e. no clear trend to growth).
• NA (39% of group) was -3% (-4% volume, price/mix +2%), Europe (24%) +3% (-1%v, +4%p/m), APAC (19%) +4% (+1v, +4%p/m), LATAM (9%) -21% (-16%v, -6%p/m) and Africa (9%) +12% (-6%v, +18%p/m).
• On the EBIT margin its blaming headline falls in LATAM and the US alongside elevated overheads and marketing spend.
• In FY24 78% of sales was in Spirits (24% in Scotch, 11% in Tequila) while Beer made up 16%. Spirits fell -4% (volume -5%) while Beer rose +14% (volume +5%) - i.e. limited negative read-through to brewers on these results.
• Growth is coming out of top end; super-premium -6.7%, while value was up +5.4%.
• Net of $1.4b in capex, FCF was $2.6b (+17% yoy). FY dividend is $1.035 (+5%) or circa $2.3b and it did another $987m in buybacks dragging cash down $600m. Support from business sales was smaller this year; only $88b from Windsor Global (Whiskey brand).
• Gross/net debt (incl. $0.6b in leases) was $22b/21b which left it it 3.1/3x levered up from the net 2.7x last year. Policy is to stay net 2.5-3x which it has reaffirmed it will stick to.
• FY25 outlook; "environment continues to be challenging...expect the negative pressure on organic opiating margin that we saw in 1H to persist in FY25".
• Numeric guidance included capex of $1.3-$1.5b which it says will sit higher for the next few years before normalising to historical (as % of sales) starting in FY27 (we see mid 6% now vs. 4-5% historical).