30th Jan 2014 13:40
LONDON (Alliance News) - Shares in Diageo PLC tumbled Thursday after the spirits and alcoholic beverage giant reported a slight dip in sales and missed analyst expectations for the first half of the year, despite a slight increase in profits.
Diageo, the world's largest producer of spirits and a major producer of beer and wine, reported pretax profit of GBP2.13 billion for the six months ended December 31, 2013, up from GBP1.93 billion a year earlier. It said total sales for the period were GBP8.01 billion, compared with GBP8.13 billion the prior year.
It said it was hit by a steeper-than-expected decline in emerging markets, including its small but struggling Chinese white spirits business, and in Africa, in particular in Nigeria's beer market, where hopes of some improvement in the market, didn't materialise.
It's not just Diageo that has highlighted growing concerns about the slowdown in emerging markets, as the slowdown in many emerging economies of late, has hit the shares of Diageo and other companies with high exposure to these markets, such as Unilever PLC and brewing giant SABMiller PLC. The tapering of the US Federal Reserve's asset-buying programme, which was continued this month, has drawn investment away from emerging markets.
"After having a few years where emerging markets were the stars, now our performance is being driven from developed markets like North America, with the higher-end of our brand portfolio, and an improved western Europe," Chief Financial Officer Deirdre Mahlan said in a call with journalists Thursday.
"We are facing challenges in emerging markets and the impact has been evolving over the calender year. We were hoping for improvements during the period, but weakness continued, with currencies playing a big part, and will continue for the remainder of the year," she added.
Diageo said it saw a slight increase in profits for the first half of its financial year, as developed markets such as North America and an improving picture in Western Europe helped offset continued weakness in emerging markets. Chief Executive Officer Ivan Menezes said Western Europe is "turning a corner" and expects the improving picture to continue, highlighting innovation as the key to growth in that region.
The group increased its interim dividend by 9.0% to 19.7 pence per share, from 18.1p, and said it does expect some top-line improvements in the second half of the year, as de-stocking in the first half of the year is now complete and ordering will improve again. Diageo said it also expects some improvements from Africa, although its performance in North America will soften slightly in the second half, due to less innovation compared to the first half.
Diageo also highlighted new savings targets of GBP200 million a year by 2017, which it said it will invest in growth and improved margin.
"This will be coming from supply chain efficiencies, IT, and simplification and alignment across the business, so we will be more agile," said Mahlan, adding that there will be some job cuts made, but it is too early to comment on that specifically.
On a regional basis, the biggest hit in the recent period came from China, where Diageo's Baijiu business took a hit from government policies discouraging conspicuous consumption of luxury products. The company said it expects this push to continue knocking sales during the remainder of the year.
In the Asia-Pacific region as a whole, Diageo said organic net sales fell 6%, reported net sales fell 10% to GBP835 million, and volume declined 4%. Diageo said significant price discounting by competitors to Baijiu drove a 66% decline in net sales from the Shui Jing Fang business in Greater China, including falling sales of its Johnnie Walker Black Label.
The group said it has seen a strong performance in India. Chief Executive Officer Ivan Menezes said he is "optimistic" about the spirits market in India, as well as about Diageo's ongoing issues with United Spirits Ltd, with which the company is currently in a legal battle and is appealing to the India High Court.
"We are defending the case, and we are confident in our position," CFO Mahlan told journalists Thursday.
In North America, Diageo said that while volume declined by 2% during the first half, organic net sales were up 5% to GBP1.94 billion, with an 8% increase in operating profit to GBP822 million, driven by spirits and high-end and premium brands at higher prices.
Diageo also said the picture in Western Europe is improving. Although overall organic net sales for the division was down 1% to GBP1.17 billion, both the Britain and France returned to growth during the period, it said, while north European markets such as Germany and the Nordics continue to perform well.
Diageo has a strong M&A track record, and has been shifting its focus from growth from acquisitions, to organic growth. However, the group has been making a number of smaller bolt-on acquisitions of late, and Mahlan said there may be more acquisitions on the cards.
The group has recently been expanding its tequila portfolio, having acquired super-premium tequila brand Peligroso earlier this week, and recently announcing a new joint venture with Combs Wine & Spirits, a privately owned premium spirits and wine business founded by rapper and entrepreneur Sean ?Diddy? Combs, for the acquisition of the tequila brand DeLeón.
At the end of 2012, Diageo ditched its distribution agreement with leading tequila brand Jose Cuervo.
"We said we intended to re-establish our position with tequila since we stopped working with Jose Cuervo. We are continuing to look at opportunities with tequila, and we are constantly looking at more brands to help improve our brands portfolio," said Mahlan.
Diageo said growth in spirits, which represents 69% of net sales, was 2% in the half despite a disappointing result from emerging markets, as sales of super and ultra premium spirits in North America led the growth and contributed to positive price mix.
Diageo said it very high-end brands, particularly of its Scotch whiskey, performed better than premium brands. It said pricing above its Johnnie Walker Black Label is performing very well, while premium brands, such as Bell's whiskey, are performing well, but not as strongly.
In vodka, which represents 12% of Diageo's net sales, net sales grew 3%, as growth from super and ultra premium brands helped offset some softness in Smirnoff vodka in North America, due to pricing issues.
Diageo said net sales in rum grew 9% in the first-half of the year, driven by Captain Morgan in Europe and Latin America.
Diageo shares were the biggest faller on the FTSE 100 Thursday, down 4.0% at 1,833.24 pence.
By Rowena Harris-Doughty; [email protected]; @rharrisdoughty
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