Diageo builds momentum

26th January, 2017 by Arabella Mileham

Diageo has continued to build momentum in its half-year results, driven by improvements in its US spirit business and Scotch portfolio.

The global drinks giant reported stronger than expected performance in both its sales and operating profit in the half year to 31 January, with net sales up 4.4% organically (or 14.5% on a reported basis) to £6,421 million. Operating profit also grew 4.4% organically (28% on a reported basis) to £2,065 million, which the company attributed to an improvement in the gross margin, progress in improving productivity, favourable exchange rates,  weaker than normal comparables and the disposal of non-core businesses.

There was organic growth across all regions, with 1.8% volume growth, it said.

Chief executive Ivan Menezes said it was a strong set of results with “broad based improvement”.

“This positive momentum demonstrates continued effective execution of our strategy,” he said. “Diageo is building a stronger, more consistent, better performing company.”

He highlighted the improved performance in the US Spirits business and scotch portfolio, which was being driven by marketing, innovation and expanding routes to the consumer.

Menezes continued that it was identifying consumer trends faster, expanding the reach of its products across markets and “developing trade channels to capture these growth opportunities”.

“Our productivity work is on track, driving efficiency and effectiveness across the business. Our work on trade and marketing spend gives us better data enabling smarter, quicker decisions that generate higher returns.”

He concluded that the company was confident of achieving “consistent mid-single digit topline growth” and seeing organic operating margin improvement of 100bpc in the three years ending 30 June 2019.”

The impact of the exchange rate across the year is expected to boost net sales by around £1.4 billion, and operating profit by £460 million, driven by the stronger US dollar and Euro, along with an adverse impact on net interest of approximately £36 million.

North America, which makes up a third of its total business, saw an improvement, reporting organic growth of 3%, driven predominantly by US Spirits, notably North American whisk(e)y, scotch and tequila. delivered the strongest category performance. Gains by Crown Royal and Bulleit also helped net sales grow 15%, while Scotch was driven by reserve variants (+11%) and Johnnie Walker Black Label (+9%) Other gains were seen in its beer business (+3%), Canada (+5%) and travel retail. However Ketel One vodka, Smirnoff and Bailey’s fell.

Continental Europe drove the 5% growth in the Europe, Russia and Turkey region, with net sales up 5% overall, driven by Johnnie Walker, Baileys, Guinness and Tanqueray. Sales in the UK were broadly flat, but there was movement in Bailey’s performance and Tanqueray on the back of increased distribution. Germany, Austria and Switzerland saw strong sales, and the on-trade drove sales in Spain and Portugal, which benefitted from the comparison to last year’s figures. There was also growth in Poland. Volume was down in Turkey, but net sales grew as the results of prices increases.

In East Africa, regional markets, Nigeria and South Africa were key performers in Africa’s 4% organic growth.

Latin America and the Caribbean, which constitutes the smaller region at 10% of total company sales, saw an 11% growth, while India, Australia, Greater China contributed and South East Asia contributed to Asia Pacific’s 3% growth.

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