Menezes: Diageo will take Brexit in its stride

Ivan Menezes, chief executive of Diageo, believes the company will take Brexit in its stride, giving it “eight, possibly nine” out of 10 for its performance in the past 12 months.

Diageo CEO Ivan Menezes (Photo: Diageo)

“We will take Brexit in our stride”, Menezes said. “Our trade within the EU will be tariff-free because of the World Trade Organisation’s arrangements. And we are working with the government to ensure that other arrangements where scotch whisky benefits from EU arrangements remain in place (such as in Korea).

“We want to ensure that over time some of the new free trade deals give us a better arrangement. Clearly we want a smooth Brexit. We don’t want conditions that make it tough for business but I don’t see a scenario where Diageo won’t come out of it healthy. The key thing we need to do is keep scotch whisky healthy,” he added.

“What you see in our results is our strategy in action,” said Menezes after Diageo’s annual results to the end of June were revealed yesterday (27/07/17.)

He said he would give the world’s largest premium spirits group “eight, possibly nine” for its performance in the past 12 months, but “six or seven out of 10 in terms of potential and where we can get to.”

“The world is still challenging”, he said. “I’m as restless as hell”, underling that he is demanding more from the group which is “showing broad based momentum…and broad based growth across the world.”

Each of Diageo’s operating regions significantly improved its performance and the company’s shares shot up by 7% when the results were unveiled. They have put on some 15% so far in 2017.

His three priorities for the year just past were “the US, scotch and India”, which all performed well. “In every category except vodka, we increased market share” he said. “And I feel much better about Smirnoff.”

Overall US sales grew by about 3% (6% excluding Ciroc and Ketel 1) while global scotch sales put on 5% at constant exchange rates (or 19% allowing for the devaluation of sterling).

“India was hit by the perfect storm” of demonetarisation [the withdrawal of high value notes], the ban on sales by highways and the new general consumer tax. “But in spite of that I feel very good about our performance in India because in prestige brands and above we grew by 7%,” Menezes said.

The US, Scotch and India will remain at the top of the agenda but Menezes also highlighted improving productivity throughout Diageo’s operation and predicted that it would generate and extra £200m in savings over the next couple of years.

“We have raised our profit guidance on the back of continued top line growth and better productivity,” he added.

Diageo is generating more than £2.5bn in free cash every year and its debt to earnings ratio is down to just 2, below its target range of 2.5 to 3. That strength is allowing the group to return £1.5bn to shareholders in the next 12 months through buying back and cancelling shares, proportionately increasing the value of those continuing to circulate in the market.

But returning cash to shareholders does not mean that Diageo is putting potential mergers and acquisitions lower down its priority list.

“Not at all”, says finance director Kathryn Mikells. The group’s strong cash flow means it can support existing brands and look for additions.

“After the £800m Casamigos {super premium tequila] deal is finalised later this year we will be looking for things that can be added to our portfolio. But we have a lot in our portfolio and we have to be aware of changing consumer attitudes and we will also continue to work with founder-led brands”, she said, highlighting an area in which Diageo is investing with increasing emphasis.

Mikells said that Diageo has a “large pipeline of opportunities” and that it spends much time looking at the opportunities they might offer. Only a very few (such as Casamigos) will ever become strong targets, however. At the same time, Diageo’s seed-funding of young companies with potentially interesting brands (such as Seedlip, the non-alcoholic botanical gin substitute) could generate some interesting products “maybe 10 years ahead”.

Menezes was delighted with Diageo’s 5% net sales growth in Europe, calling it a “pretty damned good performance”.