16th Oct 2014 06:50
LONDON (Alliance News) - Johnnie Walker and Smirnoff maker Diageo PLC Thursday reported a 1.5% decline in organic net sales for the first quarter, hit by a fall in volume, on the back of significantly weaker trading in emerging markets, currency rate movements, and de-stocking issues in some of its key markets.
The results were in the middle of market expectations. Analysts were expecting between a 1% to 2% decline in group organic sales for the quarter.
Diageo, the world's largest spirits producer and a major producer of beer and wine, said organic net sales were down 1.5% in the three months to September 30, with volumes down 3.5%. On a reported basis, net sales declined 1.7% in the quarter, partly hit by the devaluation of the Venezuelan bolivar.
Diageo said a number of factors were at play driving negative growth, including de-stocking in Latin America and South East Asia, a downturn in the US and prolonged weakness in emerging markets, once its driving force behind growth in the business.
"Consumer trends in most markets are unchanged and our first quarter performance is in line with our expectations given the prior year comparison of the performance of our US Spirits & Wines business and the de-stock we have implemented in South East Asia," said Chief Executive Ivan Menezes in a statement.
"We expect full-year top-line growth to improve on last year's performance," he added.
Diageo said it is seeing a market slowdown in demand and growth in emerging markets, while developed markets such as Western Europe have begun to stabilise. It is also seeing growth constrained by currency moves.
"Emerging markets' performance remains weak with further currency weakness in a few markets and specific geopolitical situations in some areas. However our brand performance has been strong in many markets including Turkey, East Africa, India and Colombia," said Menezes.
Diageo said it expects currency moves to wipe around GBP95 million off its operating profit for the year ending June 30, 2015, with a "hyperinflation charge" of around GBP50 million.
In North America, organic net sales were up 0.1%, a region where the drink giant is facing de-stocking issues and slower price increases in the US.
"In North America, consumer demand for mainstream brands is still constrained by weak consumer confidence in average-income households, while our reserve brands and our innovations continue to perform well, as they do globally," Menezes said in a statement.
Diageo said organic net sales in Europe were down 1.4%, hit by declining sales in Russia and Eastern Europe, due to weak consumer confidence and the uncertainty caused by the situation in Ukraine. In Western Europe, net sales declined 1%, where Diageo said sales were hit by a weaker performance in Benelux, following price increases, and continued weakness in Germany, which it said it does not expect to improve until the second half.
"Western Europe is now stable and I continue to expect full year performance to be flat although there will be quarterly fluctuations around that level," Chief Executive Menezes added.
In Latin America and the Caribbean sales were down 1.4%. Diageo said net sales in Brazil declined in the quarter as price increases were taken in some states to align prices across the country.
"This short-term negative impact will strengthen the long-term performance of the market. The border zone business in West LAC declined as currency weakness continued, leading to both lower trade confidence and lower consumer demand," Diageo said, referring to Latin American and the Caribbean.
The biggest sales decline was in Asia Pacific, where organic net sales fell by 7.4%, due to its decision to reduce inventory levels in South East Asia and a challenging trading environment in mainland China, such as the Chinese government's anti-extravagance campaign, which Diageo said has severely hit that trade channel.
In Africa, sales were flat, Diageo said.
"Although Nigeria was weak, performance was strong in Diageo's Africa Regional Markets and East Africa. Underlying growth in South Africa was also good, however net sales growth was affected by the transfer of production of Smirnoff Ice Double Black Guarana to Diageo's DHN joint venture," it said.
Diageo said net assets increased to GBP8.4 billion at September 30, while net borrowings rose to GBP10.8 billion, primarily due to the GBP1.1 billion consideration paid for an additional 26% investment in United Spirits Ltd, and the consolidation of net borrowings of United Spirits estimated at GBP765 million.
By Rowena Harris-Doughty; [email protected]; @rharrisdoughty
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