just On Call - Interview: Diageo CEO Paul Walsh upbeat, cautious on Jim Beam
- Immediate move for Jim Beam looks slim
- Listing in Asia still on the cards
- Profit growth will follow sales north in emerging markets
Diageo sitting pretty after solid full-year showing
Diageo has been tipped as a possible bidder for Beam Global, albeit in tandem with another party, following the planned dissolution of the Jim Beam Bourbon producer's owner, Fortune Brands. The new-look Beam Inc is set to begin trading from early in the fourth quarter of this year.
Bourbon represents a gap in Diageo's portfolio and many analysts have said that the chance to acquire Jim Beam may prove hard for the company to resist. Beam would significantly extend Diageo's leadership of the US spirits market, from which the drinks giant already recoups 40% of its annual profits.
While Diageo has the funds for acquisitions, however, its CEO remains sanguine about a play for Beam. "Our presence, given the scale that we enjoy in other categories, in Bourbon we are light," Paul Walsh told just-drinks in an interview today (25 August) prior to the firm's full-year results conference. But, he added: "I don't see it changing in the near-term."
For now, Walsh is keen to talk up Diageo's performance in so-called emerging markets. These markets are expected to provide around half of Diageo's annual net sales by 2015, compared to around 40% now. Yesterday, the firm completed its acquisition of Turkey's leading spirits group, Mey Icki, and has also bolstered its position in China and Vietnam so far this year. Around three quarters of new marketing spend, meanwhile, goes to emerging markets, such as China, Africa and Latin America.
That said, though, profits remain skewed to mature regions. Europe and North America account for around two thirds of Diageo's annual profits. So, does Walsh expect the same shift in profits distribution as in sales? "Profit may lag that 50% sales a little bit, but it won't be a lot," he said.
"If you look at our gross margins, there is nothing structurally that suggests that these developing markets can't have the same overall profitability," he said. "The issue you've got is scale. We've got to get to scale."
Walsh said that Diageo continues to mull a potential stock listing in Asia, although has not taken any action in this direction as yet. Earlier this year, it moved the headquarters for its high-end spirits brands, the Reserve portfolio, to Singapore.
At the same time, the firm is cutting costs in Europe, where sales continue to struggle. The firm has said it will not detail numbers for job cuts, and would only say that the majority of cuts have been made in back-office functions. It registered a GBP77m (US$126m) one-off charge related to cost savings initiatives in its latest fiscal year, to the end of June.
The group's share price rose by 5% on the London Stock Exchange today after it beat analysts' expectations for trading over the 12-month period. Operating profits only crept up by 1%, but net profits rose by 17%, to GBP1.9bn (US$3.1bn), while net sales increased by 5% to GBP9.94bn.
Investors were also buoyed by the Smirnoff distiller taking the unusual step of outlining medium-term guidance. Over the next three years, Diageo said that it expects net sales to rise by an average of 6% per year, excluding the benefit of any acquisitions or impact from currency. On the same terms, net profits are expected to show double-digit growth.
"This business is building momentum and it's getting stronger," Walsh told journalists at today's results conference.
The full interview with Paul Walsh will be published on just-drinks within the next few weeks.
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