Unaudited financial results for the quarter ended 30th September 2020
04 NOV 2020
While ‘progressive improvement’ seen in external environment over the course of second quarter, first half performance is impacted by Covid-19 pandemic
Second quarter performance highlights:
• Reported net sales declined 6.6%, a sequential improvement from Q1 driven by strong off-trade resilience, offset by the on-trade remaining largely shut and the contraction of owned and franchise business in Andhra Pradesh (AP). Underlying net sales declined 3.4% after adjusting for the one-off benefit of bulk Scotch sales last year.
• Prestige & Above segment net sales grew 1%.
• Popular segment net sales declined 12.5% versus last year with priority states declining at 10%. Increased consumer prices impacted demand in this price conscious segment and unfavourable State mix further contributed to the decline.
• Gross margin was 42.1% down 284bps on reported basis, primarily driven by contraction of business in Andhra Pradesh which resulted in a one-off inventory provision and a decline in the South franchise business. Removing the one-off inventory provision, effective gross margin for the quarter was 43.2%.
• Reported EBITDA was Rs. 270 Crores, down 35.1%. Reported EBITDA margin was 12.6%, down 553bps primarily driven by a higher A&P investment rate to support national renovation roll-out of two core brands, McDowell’s No.1 Whisky and Royal Challenge Whisky, and lower fixed cost absorption. Underlying EBITDA decline was down 497bps. Removing the impact of the one-off inventory provision, EBITDA margin for the quarter was 14.5%.
• Interest costs were Rs. 51 Crores, 12% higher than last year due to one-off reversals in the prior year and increase in non-debt related interest expenditure.
• Profit after tax was Rs. 128 Crores, down 43%.
First half performance highlights:
• Reported net sales declined 29.7%; with marked improvement seen sequentially in second quarter vs Q1FY21.
• Prestige & Above segment net sales declined 25%.
• Popular segment net sales declined 31% and priority states were down by 27%.
• Gross margin was 42.0%, down 415bps versus last year, primarily due to contraction of owned and franchise business in AP and resulted impact on South franchise business, lower fixed cost absorption and obsolete inventory provisions.
• Underlying A&P re-investment rate of 7.4% was lower 52bps over prior year. The absolute 32% decline reflects restricted activities in Q1 during the peak of the lock-down.
• Reported EBITDA was Rs. 192 Crores, down 76%. Reported EBITDA margin was 6.0%, down 1191bps due to negative impact of fixed cost de-leverage. After adjusting for the one-off impact of bulk Scotch sale and restructuring costs, underlying EBITDA declined 74%.
• Interest costs was Rs.101 Crores.
• Profit after tax was Rs. (87) Crores (net loss).
Anand Kripalu, CEO, commenting on the quarter and six months ended 30 September 2020 said:
"The underlying revenue decline of 3.4% in the second quarter is ahead of expectations and reflects the resilience of our category, notwithstanding prolonged on-trade closures, the route to market change in Andhra Pradesh and high taxation led price increases post Covid-19. The agility of our supply chain team provided a fast start post lockdown and the renovation of our two core brands supported the top-line recovery.
Prestige & Above segment net sales grew 1% in Q2, backed by strong momentum in our Scotch portfolio, driven by improved relative price positioning in key markets as well as lapping softer comparatives. The A&P reinvestment rate of 8.6% in Q2, up from 5.0% in Q1, reflected our conscious choice to re-energize demand. Underlying EBITDA margin for the quarter excluding the one-off inventory provision was 14.5% and we delivered a PAT of Rs. 128 Crores.
Our “Raising the Bar” initiative is testimony to Diageo’s commitment to the bar and restaurant community. This will provide unequivocal support to our on-trade partners, helping them to safely welcome back consumers during these challenging times.
First half performance has been primarily impacted by initial Covid-19 led lockdown driven challenges in Q1 and lower fixed cost absorption. Contraction of owned and franchise business in AP due to the RTM change further impacted performance adversely. Notwithstanding the satisfactory second quarter performance, our net sales in the first half declined 27%, EBITDA margin contracted to 6% with a net loss of Rs. 87 Crores. Operating cash flow remained strong which facilitated Rs 780 Crores of debt repayment during the first half of FY 2020-21.
Looking ahead, we remain cautiously optimistic with the gradual re-opening of on-premise and the ensuing festive season, recognising that safety and social distancing norms could impact demand versus prior years. Due to unprecedented variability in the macro environment brought on by Covid-19, the company is unable to provide quantitative guidance for fiscal 2021. Our business fundamentals and our financial position is strong allowing us to navigate this pandemic as circumstances evolve.”