Diageo Profits Up But Warns of Challenging Year Ahead

Performance in Europe was impacted by the worsening economic environment, which led to the overall decline in both volume and net sales. Spirits, beer and ready to drink net sales were down as a result of the decline in the beverage alcohol market across Europe and a further shift to the off-trade.

27 Aug 2009 --- In a year of global economic downturn Diageo delivered organic net sales in line with the prior year; 4% organic growth in operating profit and 10% growth in reported eps. Exchange rate movements increased net sales by £1,095 million; brand additions, primarily Ketel One vodka, contributed £151 million and there was an organic decline of £25 million. Operating profit before exceptional items benefited by £167 million from exchange rate movements, £43 million from brand additions and £99 million from organic growth. Exceptional operating costs were £170 million, in respect of the global restructuring programme and the restructuring of Irish brewing operations.

Paul Walsh, Chief Executive Officer of Diageo, said: “This has been a very challenging year. Overall however our results demonstrate the resilience of our business. Our brand range and our geographic reach enabled us to deliver 4% organic operating profit growth and 10% eps growth.  While the economic downturn has affected all markets, the response of customers and consumers has not been uniform and therefore the impact on our business has been varied. By region, International, North America and Asia Pacific have been stronger than Europe. By category, we have delivered growth in categories which account for over 50% of our sales, primarily vodka, rum, tequila and beer.  The gin and wine categories have been weaker and scotch and liqueurs have been most impacted by de-stocking.”

“Smirnoff, Captain Morgan, Jose Cuervo and Guinness, two of our three largest local priority brands, Buchanan’s and Windsor, and category brands, Cîroc, Cacique and Harp, all grew supported by innovation and effective marketing. We benefited from the addition of Ketel One vodka, Zacapa rum and Rosenblum Cellars wine, all of which have broadened our brand range in important categories. Johnnie Walker faced a tougher market environment being at a relatively higher price point and saw more impact from de-stocking. The consumer downturn in Spain and de-stocking in a number of markets also affected the performance of Baileys. 
“We took action quickly to manage these difficult times, reducing our cost base and refocusing marketing spend as consumer trends changed.  In fiscal 2010 we will benefit from cost reductions of £120 million as a result of our global restructuring initiative.

“While the global economy appears to be stabilising, there is still uncertainty as to the sustainability and pace of any recovery and F10 will be challenging, as we lap a strong first quarter and a reasonable first half performance this year. That being recognised, we expect to deliver low single digit organic operating profit growth in fiscal 2010.”

Diageo announced two restructuring initiatives in the year. The first programme, which was announced in February, will generate £120 million of cost reductions in the year ending 30 June 2010. An exceptional charge of £166 million was taken in the year ended 30 June 2009 in respect of this global restructuring programme and a further charge of approximately £70 million will be taken in the year ending 30 June 2010. In July 2009 Diageo announced a second restructuring initiative which will generate cost savings of £40 million in the year ending 30 June 2012 and will reduce the cost of production of maturing stocks by £10 million per annum in the year ending 30 June 2011.  An exceptional charge of £120 million will be taken in the year ending 30 June 2010 in respect of this restructuring.

Despite the difficult economic climate, the total beverage alcohol market in the United States remained in growth. Growth in spirits offset weakness in wine and beer as Diageo was again the best performing full line spirits company in the United States. Smirnoff vodka, Captain Morgan and Jose Cuervo performed well as the premium spirits segment proved to be the most resilient as consumers traded down from the ultra and super premium segments. Diageo’s innovation capability also contributed to the performance of these brands with successful launches of Captain Morgan 100, Jose Cuervo Silver and a range of ready to serve Smirnoff Cocktails. By the year end, Diageo’s share of US spirits, as measured by IRI, was 30%, an organic decline of 0.2 percentage points in the year and an increase of 1.4 percentage points from brand additions, Ketel One vodka and Zacapa rum. As a result of the planned stock reduction and as consumers traded out of imported beer to domestic beer, beer net sales declined 6%. The wine category was affected by the economic climate as consumers traded down from higher price points and net sales declined 7%. The performance of Ketel One vodka and Zacapa rum was ahead of our expectations despite the more difficult economic environment in the year. Marketing spend decreased by 9% reflecting reduced investment behind ready to drink and as a result of media rate deflation. Marketing spend was re-allocated behind growth opportunities in the premium segment, behind innovation and behind the strong growth of Cîroc vodka and share of voice in spirits grew 4 percentage points.

Performance in Europe was impacted by the worsening economic environment, which led to the overall decline in both volume and net sales. Spirits, beer and ready to drink net sales were down as a result of the decline in the beverage alcohol market across Europe and a further shift to the off-trade; wine net sales increased driven by Blossom Hill in Great Britain.  Spain and Ireland, two of the region’s biggest markets, were hit hardest, as their economies went into steep decline, and a significant rise in unemployment impacted consumer confidence and spending power. In Great Britain net sales grew 2% as Diageo continued to out-perform a declining total beverage alcohol market. The market in Russia weakened in the second half although full year net sales growth was achieved following a strong first half performance. Price increases were taken in the majority of markets although at more moderate levels than in previous years.  Marketing spend was significantly reduced, mainly in Spain and Ireland where Diageo acted in response to the economic conditions and as a result of media rate deflation.

International continued to be the key contributor to Diageo’s performance. In Africa 2% volume growth and strong pricing led to 16% net sales growth led by Guinness and Harp. Growth for the full year was slightly behind the rates seen in the first half because, as expected, the global economic downturn impacted the consumer in Africa in the second half. In Latin America and the Caribbean the performance was mixed. Volume and net sales grew in the three largest markets Venezuela, Mexico and Brazil with good performances by Buchanan’s and Johnnie Walker.  This was partially offset by volume and net sales decline elsewhere in the region as price increases were taken to offset major currency devaluations. In the duty free business in Latin America the difficult trading environment, resulting from the slowdown in economic growth, currency devaluations and credit issues, led to a decline in volume and net sales. In Global Travel volume and net sales declined as the travel retail business continued to be impacted by lower passenger numbers. This was partially offset by volume and net sales growth in the Middle East driven by a strong performance in scotch. Marketing spend in International declined by 3%. In Latin America Diageo’s significant leadership in share of voice was maintained and efficiencies were delivered through multi-market campaigns. In Africa the transfer of spend on ready to drink, cider and beer brands in South Africa to the new joint venture there, offset increased spend elsewhere in Africa on beer and ready to drink brands.

The decline in ready to drink in Australia, following the significant excise duty increase last year, reduced the region’s volume by 3 percentage points and net sales by 4 percentage points.  Spirits net sales across the region declined 1%, impacted by reduced sales in the on-trade channel and trade de-stocking throughout the supply chain in particular in South East Asia and China. Guinness remained resilient with net sales growth of 6%. In Korea strong share gains for Windsor more than offset scotch category decline in this important market. Marketing spend in spirits increased 7%, ahead of growth in net sales, although reduced spend behind ready to drink led to an overall 5% reduction for the region.