Diageo boosted by ‘North American innovation machine’

1st February, 2013 by Ron Emler - This article is over multiple pages: 1 2

“God bless America” might have been the underlying theme when Paul Walsh, Diageo’s chief executive, unveiled the results for the second half of last year.

Paul Walsh

Paul Walsh

He said that the world’s biggest premium alcohol drinks group was “exactly on track” at the half-way point of its three-year medium-term strategy, but also agreed that “the US is recovering a bit quicker than we thought” – the implication is that he might have been marginally behind target had trade in the US not been comparatively buoyant.

North America, which accounts for about one-third of Diageo’s £6 billion-plus sales excluding taxes, generated 30% of the group’s extra revenues in the half year and almost 40% of the profits, underlining its key role in Diageo’s business. What Walsh called “the North American innovation machine” improved its operating margin by more than a percentage point. Vodka sales were 9% ahead and whisky achieved “double-digit growth”.

Walsh was in confident mood, stressing Diageo’s “top line growth and marketing improvements” which generated an additional 9% operating profits in the half year, 9% growth in earnings per share and an extra £125m free cash flow. The interim dividend was raised by 9% – “the third consecutive dividend upgrade since we launched our three-year medium-term guidance” (of average annual organic growth of 6%).

“We are a strong business, getting stronger,“ he said. And Diageo would concentrate on a three-pronged strategy of “improving net sales growth, delivering margin expansion and targeted acquisitions to create access to new growth”.

Diageo has been on a spending spree over the past couple of years, and it is not over yet. Although Walsh walked away from Jose Cuervo – he wanted to own the tequila brand rather than just distribute it – he is on the verge of landing India’s United Spirits in a complicated deal that will give him control for about £1.3 billion.

There have been rumours that the Indian stock market authorities are unhappy with how the takeover is structured, but their doubts are not thought to be insurmountable. Walsh says that he has to “respect the confidentiality of the process” but it is a matter of “when” the deal is consummated not “if”. Indeed, Delhi sources say that the Indian government would be unhappy if any undue obstacles were put in Diageo’s way.

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