Emerging markets boost Diageo

Diageo today posted a rise in full-year profits based on increased sales and volumes, driven by surging demand in emerging markets which negated weak performances in North America and Europe.

The world’s biggest drinks company also set guidance for double-digit earnings growth in the medium term, despite chief executive Paul Walsh’s assertion that the company is “not immune” from the fragile global economy.

Diageo reported a 5.4% rise in full-year pre-tax profits to £2.36 billion on revenues of £13.2bn, up from £12.9bn in the same period last year.

The company said it is looking to grow underlying sales by 6% and improve margins, but admitted trading had remained particularly tough in Spain and Greece.

“While Diageo is not immune from a fragile global economy, this is a strong platform,” said Walsh.

“It is the basis of our medium term outlook for average organic top line growth of 6%, organic operating margin improvement, with the first 200 basis points achieved in the next three years, and double digit eps growth. Achievement of these aims would underpin even stronger dividend growth.”

Analysts welcomed the results, which were in sharp contrast to the depressing picture painted by brewers such as Heineken and Carlsberg in recent weeks.

City insiders said spirit makers were less dependent on weather and gained from strong emerging markets, with Diageo less exposed to beer and Europe than these two brewers. Just over 10% of Diageo’s sales come from beer, while some 35% of its overall turnover derives from fast-growing emerging markets like Brazil, China, India and Mexico.

“The targets themselves imply a good level of confidence in the business, but also that the management feel under pressure to deliver on this platform. Investors will take confidence that the group is setting itself stretch targets,” Credit Suisse analyst Michael Bleakley said.

Diageo said it would cut costs by £80m by June 2013 after it announced a review back in May aimed at reducing the cost of inputs and operating costs.

It is anticipated that much of the cost cutting would be achieved through job losses. Walsh declined to comment on the issue at a briefing in London today.

For a full analysis of the Diageo results, see tomorrow’s Finance on Friday.

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