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Bullish Walsh milks strategy success

At last, a good news story. Full-year earnings at Diageo are up by 6% – easily beating forecasts – the dividend up by 6%, organic net sales and operating profits up by 5%, and gross margins up by 70 basis points.

With the promise of more to come over the medium term, no wonder Paul Walsh, Diageo’s chief executive, was in bullish mood when he announced the annual results to the end of June, especially as shares rose by almost 5% in response.

While others fret about a second leg of global recession, Walsh is predicting medium-term growth in annual earnings of about 10%, although he acknowledges that it will not be a “straight line”.

He has set targets of growing underlying sales by 6% and improving margins by two percentage points to 31% over the next two years and thus creating even stronger dividend growth.

“The aim is to be the benchmark for performance in the industry,” he said. And he produced evidence from the results to support his optimism.

“Our leading brands and superior routes to market have delivered volume growth, positive price/mix, gross margin expansion and strong cash flow,” Walsh said.

The programme of backing the business in emerging markets is paying off. For instance, Diageo enjoyed sales growth last year of 70% in the premium and super premium spirits categories.

Scotch sales grew by 16% in emerging markets, with Johnnie Walker growing at 19% in these regions.

“Emerging markets are the growth engine of the business,” Walsh said.

Today they provide 60% of the group’s profits and in four years time they will be the source of half of all its sales, he predicted.

Building on the “existing strong platform” to generate expansion in faster-growing markets combined with “sharper focus” on costs will “maximise cash and returns” and “underpin faster dividend growth”, he said.

During the year, Diageo spent £1.6 billion on mergers and acquisitions such as Mey Içki in Turkey and ShuiJingFang in China as well taking controlling stakes in Serengeti Breweries in Tanzania and Zacapa premium rum.

Such acquisitions give access to burgeoning local populations, bring with them desirable brands and at the same time provide enhanced routes to market for Diageo’s existing portfolio.

Yet despite those heavy outlays and increased marketing spend, Diageo achieved free cash flow of £1.7bn, leaving Walsh’s balance sheet stronger than ever.

That begs the question of whether more takeovers are on the way. “We will look at all opportunities, but we are alert to the pitfalls as well as the potential benefits of acquisitions. For instance, a few years ago some people wanted us to expand further into wine – where are they now?” he asked.

There is no doubt that Walsh would like more acquisitions such as Mey Içki, “but they will have to create real value and fit our growth parameters”, he said. While not excluding more immediate action, he said there would be more opportunities “in three or four years’ time”.

He told the drinks business that further future involvement with José Cuervo and Moët Hennessy rested in the hands of the owning Beckmann family and Bernard Arnault (of LVMH) respectively. He would certainly like the brands in the portfolio.

He admitted to “running the numbers” on Beam Global’s portfolio, but suggested that the only brands worth having were Jim Beam itself and Sauza Tequila, “but why have Sauza when we have got Cuervo  – and we couldn’t have both.”

Walsh even sought to portray potential job losses at Diageo as positive in creating a stronger, more profitable business.

He would not be drawn on numbers or a timetable, but undoubtedly there will be some as part of £83m set aside to “focus” operations in the new financial year.

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