Emerging markets, US lift Diageo

Emerging markets, US lift Diageo

In Scotch whisky and Sean 'Diddy' Combs Diageo has a lot to be thankful for after a first-half performance that was generally toasted by analysts. Here, just-drinks looks more closely at the market reaction.

Is there a people in this world that can't be seduced by the lure of a barrel-aged spirit from Scotland? If there is, Diageo has yet to find the address. The group's half-year results yesterday (9 February) showed Johnnie Walker net sales up by 15% for the six months to the end of December.

It drove a strong performance from the group's Scotch whisky brands, which, in turn, set Diageo up for a 12% rise in global spirits sales for the six months. Consumers from China to Colombia lusted after Diageo's Scotch, and many of them were prepared to spend big. Johnnie Walker "deluxe" sales were up by more than a quarter for the half-year. 

Meanwhile, with all eyes focused on emerging markets, the US looks to have sneakily clambered out of its prematurely-dug grave, as the Distilled Spirits Council noted only last week. The Wall Street Journal highlighted that Diageo's figures underline that more consumers heading back to bars and choosing cocktails over beer: that is, unless you're talking about Tequila Sunrises, in which case the story is not so positive. Jose Cuervo sales dropped over the period as gold Tequila lost its shimmer. 

Far and away the outstanding performer for Diageo in the US was Ciroc vodka, which it markets in partnership with rap star Sean 'Diddy' Combs. Ciroc sales rose by 50% for the half-year, with volumes up by 47%. This was, though, off a small base, and just as important for overall figures was growth for Ketel One and rebounding demand for Smirnoff. The US accounts for 42% of Diageo's operating profits.

In general, analysts were pretty pleased with Diageo's six-month performance. Sanford Bernstein said that the results "confirm that Diageo is on track to deliver its three-year guidance of 6% average organic top-line growth and 200bps of margin expansion". Investec Securities agreed, saying that it remains "comfortable buyers" of the firm's stock.

The sting in the tail remains Western and Southern Europe. "Western Europe remains the big drag with underlying trends showing no sign of improvement," said Bernstein. Russia and the acquisition of Mey Icki in Turkey added a much-improved dynamic to Diageo's Europe business over the six months, but sales in Western Europe fell by 2%.      

Investec said: "Overall, flat sales for the half in Europe was modestly below consensus, and given the 5% sales growth in Q1, implies a material reversal in trends in the second quarter." Europe acounted for about 26% of Diageo operating profits in the firm's last fiscal year.

Western Europe stood out as the oddity in Diageo's half-year numbers and, as such, many observers were quick to investigate the region's travails and associate them with Diageo's caution.

Despite an 8% rise in group net sales for the six months, to GBP5.76bn, plus an 8% increase in operating profits, Diageo's CEO, Paul Walsh, declared the firm to be "cautious as to the consumer and economic trends we will face in 2012".

Diageo's president for Europe, Andrew Morgan, told journalists at yesterday's results conference: "The outlook is looking a bit less certain now than nine months ago. Things are absolutely not getting any easier for us in many parts of Europe." However, he added that the company is maintaining market share in key drinks categories. 

And, of course, emerging markets are picking up a lot of the slack. For example, Diageo's beer volumes fell in Europe as Guinness lost some allure in the UK and Ireland, but Africa ensured that the firm's overall beer sales grew for the six months.

Shore Capital's Phil Carroll highlighted Diageo's growing exposure to emerging markets, which accounted for 40% of its business in the period. "It is becoming an emerging market growth story, too, and a structural growth story from the perspective of a growing spirits market," he said. 

All-in-all, most people seem a lot happier about Diageo's trajectory than at this time last year. What a fickle existence. Game on.