Diageo Operating Profit Up 9% in First Half

14/02/08 Diageo is on track to deliver full year guidance with strong first half performance - volume up 4%, net sales up 7% and operating profit up 9%.

Paul Walsh, Chief Executive of Diageo, commenting on six months ended 31 December 2007 said: “Diageo’s strength is its geographic diversity with leading brands across all categories. We have again delivered broad based growth in a half when we have continued to invest behind our brands and in our routes to market. In the half net sales grew 7%, operating margin increased by 80 basis points and return on invested capital was also up 80 basis points.

‘While performance was broadly based some individual areas of the business were key in driving these first half results.  In North America our US spirits business again delivered strong top line growth. In Europe we have captured the opportunities offered by growing consumer demand for premium brands in Eastern Europe and Russia and we improved our sales execution in Great Britain in the key Christmas selling season. In International we have driven top line growth and margin improvement with continued strong performance across the region. Performance in Asia Pacific reflects our continued investments to build our route to market and widen our brand offerings in both India and China. In the first half overall performance in Asia Pacific has been affected by the loss of our import licence in Korea.

‘Looking at our individual brand performances; Johnnie Walker has again delivered double-digit net sales growth as have Smirnoff and Captain Morgan. The performance of Guinness has also improved with net sales up 6% and share gains in Great Britain and Ireland. In addition, a new marketing campaign has reintroduced JεB to consumers in Continental Europe, Mexico and South Africa and the brand grew strongly in the first half.

‘This first half performance demonstrates that our brands are well supported and our routes to market remain strong and therefore, while we continue to watch for any impact that recent financial market volatility may have on broader trading conditions, we are maintaining our guidance for 9% organic operating profit growth for the current fiscal year.” 

North America again delivered strong performance led by US spirits where net sales were up 8%.  The priority brands Smirnoff, Captain Morgan, Johnnie Walker, Crown Royal and Sterling and Chalone wines were the primary growth drivers.  These together with price increases and mix benefits across the business from innovation and premiumisation, drove top line growth and margin improvement despite increased spend behind key growth drivers such as the Reserve Brands Group. 

In Europe, growth continued in line with the improved performance delivered in the second half of F’07 driven by Great Britain, Russia and Eastern Europe with volume up 3% and net sales up 4%. Europe’s performance overall reflected the success of the strategy to focus on premium brands and growth markets. In Great Britain recovery against the prior period was the result of increased marketing spend and a simplified Christmas pricing strategy on Smirnoff Red and Baileys. Guinness returned to growth in Great Britain and Ireland following increased marketing investment resulting in share gains in both markets. Johnnie Walker and Baileys were the major contributors to growth in the Russian business where consumers continue to demand premium brands.  Sales recovered following the disruption caused in the prior period by the introduction of strip stamps.  There was strong growth throughout Eastern Europe as a result of strong performance of Johnnie Walker, JεB and Smirnoff.  In Continental Europe deluxe and reserve brands were again the key drivers of growth.

In International, double-digit growth in net sales and operating profit were achieved in Latin America, Africa and Global Travel and Middle East, with volume up 7% and net sales up 16%. In International a strong performance from Diageo’s beer brands in Africa and continued growth of scotch in Latin America, South Africa and Global Travel and Middle East were the main drivers of this strong performance. The growth of Smirnoff, Baileys and JεB also made a significant contribution to the growth in the region.  Price increases and mix improvements across Diageo’s scotch brands and price increases in beer in Africa drove the significant improvement in overall price/mix and delivered operating margin improvement.
 
In Asia Pacific, performance in the half was impacted by Korea and investments in market infrastructure. Volume was up 6% with net sales up 1%. Consumer demand in the region remained strong and Diageo continued to enhance routes to market by introducing brands into markets such as India, exploring opportunities in new markets such as Vietnam and focusing on priority brands in markets such as Australia. Diageo has continued to grow share in the key scotch markets of the region such as China. The overall performance in Asia Pacific has been affected by a number of factors including the loss of the import licence in Korea.