Diageo ditches fiscal 2020 guidance amid covid-19 crisis

9th April, 2020 by Nicola Carruthers

Johnnie Walker owner Diageo has withdrawn its guidance on net sales and operating profit for fiscal 2020 due to “uncertainty” over how the pandemic has hit the group.

Johnnie-Walker-Blue-Label-Ghost-and-Rare-Glenury-Royal

Diageo’s portfolio includes Johnnie Walker blended Scotch whisky

On 26 February, Diageo said in a trading update that the coronavirus outbreak is expected to drag full-year 2020 profits down by up to £200 million (US$260m). The group also predicted its organic net sales will drop by between £225m and £325m (US$290m and US$420m). The update covered Greater China, certain other Asia Pacific markets and travel retail, mainly in the Asia Pacific region.

In today’s (9 April) update, Diageo has provided additional information on the spread of coronavirus on the group’s other markets.

Regarding the retraction of the group’s financial guidance for 2020, Diageo said: “Given the global nature of the covid-19 pandemic, and the uncertainty around the severity and duration of the impact across multiple markets, we are not in a position to accurately assess the impact of this on our future financial performance.”

Geographical impact

On the current trading environment, Smirnoff maker Diageo said that social distancing measures, along with the closure of on-trade outlets, had been introduced in most of its markets.

“We are tracking changes in consumer behaviour during this time and adjusting our plans and resources in response,” Diageo said.

In mainland China, Diageo said it is starting to see a “very slow return of on-trade consumption” as bars and restaurants gradually reopen.

The group also said the “significant impact” on global travel retail, as mentioned in the February update, has extended beyond Asia Pacific into other markets in March 2020 as a result of a “steep drop in passenger numbers” and new travel restrictions across a number of countries.

In North America, where on-trade channel accounts for around 20% of Diageo’s US spirits’ net sales, most states closed bars and restaurants last month.

Europe has also witnessed major closures of on-trade premises in most countries. This channel accounts for approximately 50% of Diageo’s Europe net sales, although the size of the on-trade outlet varies significantly between individual countries, the group said.

In both the US and Europe, Diageo said it had “seen some pick-up in the off-trade channel in recent weeks, although it is unclear whether this will be sustained”.

In India, a nationwide lockdown shut on- and off-trade channels, as well as production facilities across most industries. As a result, the group’s United Spirits’ supply operations has closed for an initial period of three weeks until 14 April 2020.

Looking across Africa’s main markets, on-trade channels have also been hit and two of Diageo’s production sites have shut in Nigeria. South Africa has imposed a lockdown for an initial period of three weeks until 16 April 2020.

On-trade restrictions are also in place across a number of countries in Latin America and the Caribbean, Diageo noted.

Among its mitigation efforts, Diageo said it has cut optional expenditure and is altering resources across the group in the short term.

The group has also stopped advertising and promotional (A&P) spend and will “tightly” manage working capital and postpone flexible capital expenditure projects.

The group also said it has a “strong balance sheet” and has made available bank facilities of £2.8 billion (US$3.4bn).

Diageo’s next phase of its three-year share buyback programme of up to £4.5bn (US$5.5bn) will not commence during the remainder of fiscal 2020. Under the first phase of the programme, which ended on 31 January 2020, the group returned £1.25bn (US$1.5bn) to shareholders.

‘Necessary action’

Ivan Menezes, chief executive, said: “During this challenging time, our top priority is to safeguard the health and wellbeing of our people, while taking necessary action to protect our business. I am confident in Diageo’s long-term strategy and our ability to move quickly in this difficult environment.

“We will continue to execute with discipline and invest prudently to ensure we are strongly positioned for a recovery in consumer demand. I am proud of the resilience and commitment of our people as they work hard to support our partners, customers and communities.”

The group will provide an “appropriate level of support” to its key suppliers and customers to ensure a “strong recovery in consumer demand” in the future.

Diageo said it has “stringent safety protocols” across its sites, including heightened sanitation measures, restrictions on movement and a work from home policy.

The trading update follows trade union Unite’s move to urge Diageo to stop production at its bottling and distilling sites across Scotland. Unite said it had written a letter to Diageo’s senior management team following concerns over the safety of staff and “rising levels of stress and anxiety”.

Diageo also said it will continue to actively help its industry and communities. Last month, Diageo pledged to donate enough alcohol to create more than eight million bottles of hand sanitiser for frontline workers during the covid-19 crisis.

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