Focus - Diageo and Pernod Ricard Q3: Score-Draw
Both Diageo and Pernod Ricard issued Q3 trading updates today
Third quarter trading updates, delivered this morning (5 May), found both firms upbeat after revealing strong overall sales growth and beating forecasts. Buoyant Asian markets drove these figures, but it wasn’t cork popping all round, as weak European markets continue to hamper both companies.
“As expected," said analyst Trevor Stirling, of Bernstein Research, "if Asia was the main driver of organic growth, Europe remained a drag on both companies' results.”
Let’s cast our eye east, and look at the good news first. Diageo’s organic net sales were up an impressive 9% in Asia Pacific and 14% in international regions. Long-standing chief executive Paul Walsh put the performance down to the “continuing strength of our Scotch brands especially around Chinese new year, improving trends for our beer brands in Africa, especially in Nigeria, and stronger growth in South Africa and Australia”.
Pernod, meanwhile, was equally upbeat about its performance in Asia/Rest of the World, as it remained its “most dynamic region”, with sales up by 23%. The French firm pointed to China and India as posting “outstanding growth”, while other emerging markets are “expanding rapidly”. But, in contrast, Pernod described the situation in Australia as “difficult” - perhaps explained by the recent freak weather to hit the country.
In the Americas, the French firm appears more upbeat than its rival. Pernod’s US sales accelerated, partly thanks to a “marked recovery” for premium brands and rising on-trade consumption. Over the first nine months, this represents a rise in sales of 14%, it noted, driven by strong growth of its leading brands - Jameson, Absolut, Chivas Regal, as well as Ballantine’s and Havana Club.
However, Diageo was more circumspect in its appraisal of North America, with Walsh noting that trading was “improving, albeit modestly”. “Diageo’s Scotch, vodka and Tequila brands performed strongly in the quarter,” he added.
And so, to Europe. In February, we highlighted this region offered the sharpest contrast between the two groups – with Pernod trouncing Diageo, partly due to Diageo’s stronger presence in “financial basket case” Greece. But, this time around, both firms flagged up the continuing problems they face here – particularly in Spain, now rivaling Greece in its economic woes. In Europe overall, Pernod sales were down by 3% on a reported basis for the year so far, due to its recent disposals of assets in Spain and Scandinavia. It noted the situation remained “difficult overall” in Western Europe, particularly Spain, but that growth was helped by its performance in Russia and the Ukraine.
Diageo also cited a “deterioration” of the on-trade in Spain as a reason for the “challenging” situation it continues to face in Europe. However, Walsh noted that the stronger price/mix in the UK and Russia has helped to offset the weaker price/mix in Ireland and Greece.
Analyst Sterling pointed to the “late timing of Easter” as another factor in the weak European performances for the third quarter. Figures from Bernstein Research also showed Pernod still two percentage points ahead of Diageo in organic revenue growth for the year-to-date.
So, what of the future? Both firms, predictably, talked up their prospects. Walsh’s parting shot in the Diageo release was: “We remain confident that our up-weighted marketing investment, together with the increased investment we have made in emerging markets in the year, will continue to deliver improving performance.”
While his Pernod counterpart, Pierre Pringuet said: “The third quarter confirmed the improved business trends since the start of the financial year and strengthens our confidence in our ability to meet our targets.”
Although there’s no reason to doubt this confidence, Stirling points to risks both firms face. These include a double-dip recession in the US, and the threat of foreign exchange movements – such as a drop in the dollar – hitting non-European profits.
Next time, Diageo will be first out of the blocks, reporting full-year results at the end of August, while Pernod is due to report in early September. Expect more fun, as analysts sharpen their pencils for those breakdowns.
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