Diageo Earnings Up 7% in Year of Growth

28/08/08 Leading alcoholic beverage supplier Diageo has reported another year of strong organic growth: net sales up 7%, operating profit up 9% and underlying eps up 11%.

North America’s performance reflected strong net sales growth with spirits up 7%, beer up 6% and wine up 12%, partially offset by a 10% decrease in net sales of ready to drink. Strong volume growth in priority and reserve brands offset weakness in value brands. Smirnoff, Johnnie Walker, Captain Morgan, Crown Royal, Guinness, Sterling Vineyards and Chalone wines were again the performance leaders. Price increases and strong growth of the reserve brands Cîroc, Don Julio and Johnnie Walker Blue Label drove net sales growth. Marketing excluding ready to drink was up 5% with strong investment behind the reserve brands. Diageo’s share of US spirits was broadly maintained at 28.3 percentage points, with share of priority spirits brands up 0.3 percentage points.

In Europe performance improved against last year driven by growth in spirits, with net sales up 5% and the continued outperformance of Guinness against the beer categories in Ireland and Great Britain. Increased focus behind the off trade in Great Britain, behind premium scotch brands in Continental Europe and further investment in Eastern Europe and Russia drove the growth in spirits in Europe. Smirnoff and Johnnie Walker performed particularly strongly with net sales up 5% and 11% respectively and JεB returned to growth in the region supported by the ‘Start a Party’ campaign. Ready to drink however declined by a further 13%. Marketing spend increased more strongly than net sales with increased spend on the priority brands in Great Britain and Ireland and behind Johnnie Walker in Spain.

International continues to drive overall Diageo performance as scotch in Latin America, South Africa and Global Travel and Middle East grew net sales 11%, 24% and 20% respectively, and Diageo’s beer brands in Africa continued their strong growth with net sales up 19%. Growth in International is becoming increasingly broad based and Smirnoff, Baileys, Cacique and JεB all grew as a result of increased consumer demand and marketing spend, which grew strongly again behind successful marketing campaigns. Price increases and mix improvements across most of Diageo’s brands in all hubs within International resulted in strong operating profit growth.

The overall performance in Asia Pacific was affected by a number of factors including the loss of the import licence in Korea for part of the year. Investment continued to support the expansion of the regional infrastructure with the increase in locally bottled brands in India and the opening up of new markets such as Vietnam and the focus on priority brands in markets such as Australia. Diageo has maintained market leading positions and continued to grow share and awareness in the key scotch markets of the region such as China and Korea. Smirnoff also continued to grow its leadership of the vodka category in the region with growth in net sales of 29% and share gains in key markets such as India and Australia.

Paul Walsh, Chief Executive of Diageo, commenting on year ended 30 June 2008 said: “The combination of Diageo’s leading brands and our global reach has delivered another year of strong organic growth with net sales up 7% and operating profit up 9%.

“The main drivers of top and bottom line growth were International, where scotch in Latin America and beer in Africa drove net sales growth of 16%, and North America, where growth in the priority brands drove a 5% increase in net sales. In Europe, we delivered better performance than last year, with net sales up 3% from growth in Eastern Europe, Russia and Great Britain. In Asia Pacific, even though overall performance was impacted by the loss of our Korean licence for part of the year, we grew the top line 2% as we gained share in China and expanded in India and the markets of South East Asia.”

“We have continued to invest behind great campaigns and this year has seen our global priority brands again extend their leadership positions. Smirnoff grew across all markets posting 8% volume and 10% net sales growth. Johnnie Walker grew net sales by 12% and now has annual net sales of over £1 billion. The return to growth of JεB in Europe together with its strong performance in International delivered 9% net sales growth. Guinness grew net sales 6% with over 50% of that growth coming from Africa, where the brand grew 13%. Our other beer brands in Africa grew net sales 25%.”

“Price rises and mix improvement covered increased input costs and gross margin has improved. We have benefited from marketing spend efficiencies and scale in our global brands and we have reduced marketing spend in ready to drink to maintain the profitability of that segment. Overall we have delivered a further 70 basis points organic improvement in operating margin.”