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Brexit ‘not a big deal for us’ says Diageo chief

Ivan Menezes, Diageo’s chief executive, seems a much more relaxed man than when he took over the top job three years ago.

Ivan Menezes
Ivan Menezes, Diageo’s chief executive

In the intervening period he has had to contend with febrile in demand in the US, which accounts for almost half the group’s profits, China’s crackdown on ostentation and political entertaining, a European market becalmed by virtual recession, the comparative strength of sterling and the legal wrangling involved in becoming the controlling shareholder of India’s United Sprits (USL).

No wonder at times he seemed defensive. But when presenting Diageo’s full-year results yesterday, Menezes had the air of someone who can see his strategies working, of being in control of a business he has made leaner and morefleet of foot.

True, as the drinks business reported yesterday, net profit for the year to June 30 fell from £2.38bn a year ago to £2.24bn, but that is explained by the effects of one-off disposals and adverse exchange rates.

The underlying trend is positive.

Volumes grew by 1.3% organically, net sales were up by 2.8% and operating profit was 3.5% ahead.

Menezes said the results delivered “what we set out to achieve” and demonstrated the group’s “momentum”. Indeed, most trends within the company were much more positive in the six months since Christmas than in the first half of Diageo’s financial year.

Menezes had billed 2015/16 as a transition year. And that is what it was. The crucial performance in the US saw net sales grow by 3%, but the strategic North American whiskey brands grew by 6% as Crown Royal and Bulleit gained market share.

Even in the tough European markets, net sales rose by 3%, the same as in Africa. The Asia Pacific region put on 2%, but within that South East Asia grew by 16% and the China market stabilised with the Shui Jing Fang baijui seeing net sales 22% ahead. Earlier this week, USL in India reported an almost quadrupling of first quarter profits.

Across the board, Menezes and his team squeezed extra results from their marketing budgets and controlled stocks more tightly through improved systems. In addition, he streamlined the group by disposing of non-core assets such as the American wines, the Gleneagles hotel and Bushmills Irish Whiskey.

“Our six global brands and our US spirits business are all back in growth and we have seen a significant improvement in the performance of our scotch and beer portfolios, “he said.”The delivery of volume growth; organic margin expansion; increased free cash flow; and the disposal of £1bn in non-core assets, comes from an everyday focus on efficiency in each aspect of our business.”

While never closing his options, he suggested that he has got the product portfolio into largely the shape he wants and that further significant disposals were unlikely. But he does have plenty of firepower if a likely acquisition is identified.

Menezes went on to paint a more optimistic picture for shareholders than he has at the end of the past two financial years “These results position us well to deliver a stronger performance in F17,” he said. “We are confident of achieving our objective of mid-single digit top line growth, and in the three years ending F19 delivering 100bps of organic operating margin improvement.”

Indeed, confidence was a theme running through his remarks and this has been reflected in the share price which has soared from about £18 in the run up to the Brexit vote to above £22 today. And significantly most stockbroker analysts rate Diageo a “hold” or a “buy”. They too see the potential Menezes is keen to exploit.

“Brexit is not a big deal for us”, he said.

While it creates some uncertainty, Menezes is confident (that word again) that European markets will remain unaffected because World Trade Organisation rules will apply.

Elsewhere around the globe Scotch could face some legislative headwinds, however Menezes said: “There are opportunities if we get this [Brexit] right.”

He pointed out that Diageo already has more experienced trade negotiators in Brussels than the UK government and that his sole aim in that regard was to make sure that the scotch whisky industry, which is Britain’s largest food and drink sector exporter, emerged from the process buoyantly. He expressed a minor irritation that there might be “more paperwork”.

Meanwhile the post-June 23 fall in sterling’s value is predicted to lift sales in the year just begun by about £1.1bn, adding an extra £370m or so to the bottom line in 12 months time. Finance director Kathryn Mikells points out that that will only partially redress the foreign exchange hits Diageo has taken in the past three years.

In some ways, Menezes remains cautious. Despite £2.1bn in free cash flow, he still wants to get Diageo’s net debt down so that the Ebitda ratio falls from 2.5 to 2.3 or below. “In that respect we are a conservative company,” he says.

And if final proof were needed about how much more positive he seems, he even laughed off a question about whether he wished he had never hear of Vijay Mallya, the former controlling shareholder and chairman of USL. “Just look at the potential [of USL],” he beamed. “You have to overcome problems to get the results.”

And anyhow, USL has a strong management team put in place by Diageo and the Mallya machinations, despite their intrigue, are in the past.

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