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Fitch upgrades Diageo on 'strong business profile'

Fitch Ratings on Oct. 8 upgraded Diageo PLC's short-term issuer default rating to F1 from F2 and affirmed its senior unsecured rating at A- with a stable outlook, citing the company's "strong and defensible business profile."

The rating agency said the London-based maker of Johnnie Walker whiskey and Smirnoff vodka has the ability to drive EBITDA growth through brand portfolio management, innovation and operating efficiencies.

Fitch said the stable outlook is based on the agency's expectation that Diageo will maintain strong operating performance and cash generation while managing shareholder distributions at its discretion.

The agency projects continued growth in organic sales for Diageo in the mid-single digits, mainly due to the premiumization of spirits consumption, in addition to the company's innovation and marketing strategies. Fitch also expects Diageo to maintain a strong free cash flow margin of 6% to 7% over fiscal years 2020-2023.

Fitch projects that Diageo will continue to manage its product offerings by acquiring and disposing of assets to further strengthen the company's exposure to fast-growing categories and evolving drinking habits.

Fitch said an upgrade is likely if Diageo's operational profile remains strong, among other drivers. A downgrade is also likely if Diageo witnesses a protracted drop in revenue and profit as a result of weakened pricing power or a slowdown in sales.