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UPDATE: Diageo Reports Better Quarter But US And China Still Drag

Thu, 29th Jan 2015 09:38

LONDON (Alliance News) - Diageo PLC, the maker of Johnnie Walker Scotch whisky and Captain Morgan rum, among many other drinks brands, said sales improved in its second quarter but were down for the first half as a whole, hit by slower demand in markets such as the US and China, which remained a drag on profit.

The British-based drinks giant, the world's largest spirits producer and a major producer of beer and wine, reported a pretax profit of GBP1.64 billion for the six months to end-December, lower than the GBP2.13 billion profit it reported last year.

Diageo shares were trading 1.3% higher Thursday morning at 1,987.50 pence.

Diageo said organic net sales were down 0.1% in the recent half year, compared to 2% growth in the first half of the year before. Net sales came in at GBP5.90 billion, compared with GBP5.93 billion the year before, while volume was down 2%, on the back of lower sales and volume for scotch, rum and liqueurs such as Baileys.

Sales came in very slightly lower than analyst expectations, which called for flat organic net sales, not a decline.

Diageo said organic net sales improved in the second quarter, rising 0.7%, while volume fell 2.0%. Sales fell 1.5% in the first quarter, when volume fell by 3.5%.

The drinks giant said it is facing a combination of socio-political and macro issues, alongside weaker demand, especially soft consumer demand in the US, which is its biggest and most profitable market.

Diageo has a 30% share of the US alcoholic beverages market, according to an analyst at Banco Santander, a market that is the largest for premium drinks in the world. North America accounts for about a third of Diageo's net sales and around 45% of its operating profit.

The company's overall sales have been driven by emerging markets and its US growth in recent years, although growth in both regions has slowed over the past 18 months, and it also has been hurt by exchange rate movements, with the pound strong against currencies such as the Venezuelan bolivar, Russian rouble and the euro.

Diageo said that at current foreign exchange rates, it expects currency movements to hit net sales for the full year ending June by GBP120 million and operating profit by GBP85 million, and to increase net finance charges by GBP10 million.

Chief Financial Officer Deirdre Mahlan told journalists Thursday that Diageo was not yet feeling the benefit of an improving economic picture in the US, as hoped. Diageo said North America weakened even further in the second quarter, falling 0.2%, having grown by 0.1% in the first quarter. Mahlan said its Smirnoff vodka brand has struggled in the US over the past year.

"In some places sales were encouraging over the Christmas holiday, but we are not seeing any positive momentum from macro data, especially lower gas prices," said Mahlan, adding: "The market is still soft but we are comfortable with our product innovation."

The group declared a 9% increase in its interim dividend to 21.5 pence per share. Earnings before one-off items were 53.7 pence per share, compared with 62.6 pence the year before.

"We have already taken action to improve the performance of those brands and markets that have not performed as well as we would expect. This contributed to our stronger second quarter performance, and I expect to maintain this momentum through the year," said Chief Executive Ivan Menezes in a statement, citing cost savings as another supporting factor to gross margin improvements.

In the first quarter, Diageo said that, in Africa, sales weakened in Nigeria, while it was facing de-stocking by customers in Latin America and South East Asia.

Diageo said trading in Africa picked up in the second quarter, recording net sales growth of 9.4%. Although sales improved in Latin America and the Caribbean in the quarter, sales were still down 0.2%.

"We have begun to lap the excise duty change on Senator in Kenya in the half, performance in our Africa regional markets has improved as beer in Ghana and Cameroon is in good growth, we have delivered strong growth in spirits in Angola as a result of improved route to consumer, and our performance in Nigeria improved," said Menezes in the statement.

In Asia-Pacific, Diageo is struggling with anti-extravagance measures imposed in mainland China, as part of the Chinese government's efforts to crackdown on corruption and government spending in the form of lavish corporate entertainment. Those measures have hit the global luxury market, including sales of high-end spirits.

In the first quarter, Asia Pacific sales fell by 7.4%, although Diageo said it managed to pare back some of the sale decline in the second quarter, down only 4%.

"Performance for Asia Pacific reflects inventory reductions and a tough comparison against high shipments in South East Asia last year, and weakness in Scotch in China. Elsewhere, North Asia, Taiwan and India delivered growth, and Australia's performance improved, led by innovation in the ready to drink segment," the company said.

Mahlan told journalist that she is not counting on a significant uplift in China.

In Europe, meanwhile, sales grew by 0.4%, having fallen by 1.4% in the first quarter. Diageo said it is still facing a challenging environment in Russia and Eastern Europe.

Analysts are concerned that continued consumer weakness in the US and Europe could weigh on the company's ability to reach organic earnings targets.

"Excise tax increases by fiscally strapped governments across the globe represent a constant threat to volume growth," said Santander analyst Anthony Bucalo in a recent research note.

By Rowena Harris-Doughty;; @rharrisdoughty

Copyright 2015 Alliance News Limited. All Rights Reserved.

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