UK: Diageo hit by trading conditions but forsees better H2

By Chris Brook-Carter | 20 February 2003

The wine and spirits industry's leading player Diageo beat the market consensus by posting profit before tax and exceptional items for the first six months of 2003 of £1295m compared to the expected £1252m. The figure was up on the £1,228m recorded for the same period last year.

However, as anticipated the tough market conditions have impacted on the top and bottom line in what CEO Paul Walsh called "challenging market conditions".

Including a £1.4 billion loss on the sale of Burger King, Diageo made a first-half loss of £459m.

Diageo had warned in October that its targets would be tough to meet. Indeed, speaking on a conference call this morning to reporters, finance director Nick Rose said the group would not meet its initial goal of over 10% organic profit growth and eight to 10% organic sales growth in this financial year. He said that given the tough markets it would be "overly bold" to say when Diageo's financial goals can be met again.

Turnover was down to £5,428m on 2001's £6,478m, although 2001's figure included £1,455m from Pillsbury. Operating profit before goodwill amortisation and exceptional items was £1,243m, compared to £1,236m for the same period last year.

The group was lead once again by its premium drinks division which saw turnover up 11% to £4,949m and operating profit before goodwill amortisation and exceptional items up 23% to £1,188m.

Premium drinks saw organic volume growth of 1%, while the global priority brads were up 4% in volume and 7% in value. The Seagram brands, which the company purchased when the business was sold contributed volumes of 9.4m cases and net sales of £518m.

Walsh said: "When we announced our preliminary results in September and again in our AGM trading update, we anticipated that we would face more challenging market conditions in many markets. That caution proved correct and this has been a tough six months. Top and bottom line growth has been constrained by economic weakness particularly in Latin America and parts of Europe. However, we have delivered strong performances in North America, in Great Britain, in many of our key markets especially in Africa and across our venture markets.

"Our scale, our diverse geographic reach and our unrivalled range of brands has enabled us to increase market share and deliver organic operating profit growth even in difficult times. This has been achieved as we continue to invest for the future growth of the business, for example by changing our distribution arrangements in South Korea and increasing marketing investment."

Commenting on current trading, Walsh said: "Diageo has the scale, geographic reach and brands to face the current challenging environment with confidence. We acknowledge that these are without doubt uncertain times. However, in the absence of any significant change to market trends we expect Diageo's organic growth performance in the second half to improve against the first half. In that period we will compare against a lower second half growth rate in 2002 and benefit from the inclusion of the Seagram brands, which continue to perform ahead of our expectations."

However, analysts feared that growth in the second half would be at the expense of margins and prices. Analyst with German bank WestLB Panmure, Stuart Price, said: ". Diageo now seems to expect H2 weighting - it says that it delivered 6% volume growth for its key brands in H1 and will better that in H2. We don't see it -unless it surrenders on margins and price. We expect full year numbers to be revised downward."

However in the long term the forecasts were better, Price put a target price of 775p on the stock saying: "Despite these results, we believe that there is longer-term value in the stock. Its competitive advantages primarily lie in its brands and distribution network. Diageo has the strongest brand portfolio in the sector [and] is seeking improvements in distribution. Diageo remains a long-term buy."

Companies: Diageo

View next/previous articles

Currently reading -

UK: Diageo hit by trading conditions but forsees better H2

There are currently no comments on this article

Be the first to comment on this article

Related articles

UK: Diageo completes another share buyback

Diageo has completed another share buyback transaction.

US: Diageo unveils Tanqueray marketing plan

Diageo is to launch a national advertising campaign for its gin band Tanqueray in the US.

S KOREA: Whiskey sales continue downturn in Q1

Whiskey sales in South Korea took another mauling in the first quarter of this year, according to industry sources.

just-drinks tagline

Not a member? Join here

Decrease font sizeDecrease font sizeDecrease font size Increase font sizeIncrease font sizeIncrease font size Comment on this article Email this to a friend Print this page