UK: Diageo still strong in FY, but future looks tougher

By | 28 August 2008

Diageo has posted rising sales and profits for its latest fiscal year, but has warned of slowing growth going forward.

The drinks giant said today (28 August) that net profit for the year to the end of June increased by 2% year-on-year to GBP1.52bn (US$2.79bn), as sales lifted on a reported basis by 8% to GBP8.09bn. Operating profit also headed north, climbing by 3% on a reported basis to GBP2.23bn.

In volume terms, sales rose by 3% to 145m equivalent units.

The company credited a strong performance from its Scotch whisky portfolio in Latin America and healthy beer sales in Africa for driving net sales growth.

In North America, spirits, beer and wine delivered sales growth, offset by a 10% slide in RTD sales. Operating profit from the region rose a healthy 10%. In Europe, meanwhile, operating profit rose by 3%, with Diageo increasing its focus on the off-trade in Great Britain, premium Scotch brands in Continental Europe and further investment in Eastern Europe and Russia.

In Asia Pacific, however, operating profit fell for the year, by 12%, as the loss of its import licence in Korea for part of the period took effect. Authorities in the country withdrew Diageo's licence in June last year, after the company was found to be using unlicensed wholesalers in the country. The Korean National Tax Service reissued the licence to Diageo Korea in February.

Finally, in Diageo's International division, operating profit climbed by 19%, as Scotch in Latin America, South Africa and Global Travel and Middle East grew net sales 11%, 24% and 20% respectively. Diageo's beer brands in Africa also continued their strong growth with net sales up 19%.

Turning to brands, the company saw its flagship vodka brand, Smirnoff, deliver reported net sales growth of 12%, with the Johnnie Walker Scotch brand coming in 14% up year-on-year. Guinness, which has been the subject of possible sale speculation for quite some time, saw sales in the year rise by 9% on a reported basis. Diageo's Jose Cuervo Tequila brand continued to struggle - down by 5% in sales terms - against the growth of the ultra premium Tequila segment in North America.

"Price rises and mix improvement covered increased input costs and gross margin has improved," said Diageo's CEO, Paul Walsh. "We have benefited from marketing spend efficiencies and scale in our global brands and we have reduced marketing spend in RTD to maintain the profitability of that segment.

"We enter the new financial year facing slowing global GDP growth and more challenging global economic trends," Walsh warned, however. "Given the strength and diversity of Diageo's business, we believe we can deliver organic operating profit growth for the coming year within our range of 7% to 9%."

Sectors: Beer & cider, Spirits, Wine

Companies: Diageo, Smirnoff, Johnnie Walker, Guinness

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