Diageo Reports 0.3% Organic Net Sales Growth

17 Apr 2014 --- Diageo delivered 0.3% organic net sales growth in the nine months ended 31 March 2014. In the quarter organic net sales declined 1.3%. As a result of recent developments in Venezuela, including the new currency exchange mechanism and the related reporting implications, Diageo has translated the group’s Venezuelan operations for the quarter and for the nine months ended 31 March 2014 at a rate of $1 = VEF49.81 (£1 = VEF83.18).

Diageo’s organic net sales growth for the nine months and the quarter ended 31 March 2014 reflect this exchange rate.

Volume declined 2% in the nine months ended 31 March 2014 and 1% in the third quarter.

Reported net sales were down 7.4% in the nine months due to the impact of adverse currency movements and the termination of the distribution agreement with Jose Cuervo.

The third quarter saw currency and economic weakness impact consumer confidence across many emerging markets while consumer trends in the developed markets were in line with those in the first half.

“In North America consumer trends are unchanged from the first half and the performance in the quarter was in line with our expectations, with organic net sales up 1.2% given the strong third quarter last year. Western Europe continues to drive incremental improvement and benefited from the phasing of sales in the quarter.

Share improved in Russia although net sales were down as consumer confidence declined on economic slowdown and currency weakness. There was a similar slowdown in South Africa and in Kenya Senator Keg sales saw further decline. Performance in the Africa, Eastern Europe and Turkey region was therefore weaker in the quarter, despite growth in Turkey and, more recently, improving trends in Nigeria.

The performance in Latin America and Caribbean improved in the quarter reflecting further improvement in Brazil and a stronger performance in West LAC, in part as it benefited from a comparison against a weak quarter last year. This stronger performance was partially offset by weakness in Mexico, while the use of a new exchange rate to translate Diageo’s business in Venezuela reduced the market’s overall contribution to regional growth.

It was a weak quarter in Asia Pacific with South East Asia seeing further negative impact from the political instability in Thailand and lower trade confidence across a number of markets. As Shuijingfang is a listed entity, performance is reported a quarter in arrears and this quarter’s results reflect the weaker performance in Chinese white spirits in the three months ended 31 December 2013. Elsewhere, Korea continued its positive momentum, and India and Global Travel Asia and Middle East both delivered double digit growth.

At 31 March 2014, net assets were £7,382 million (£8,038 million at 31 December 2013).The reduction was primarily the result of providing for the interim dividend of £493 million and adverse foreign exchange movements. Net borrowings were £9,420 million (£9,096 million at 31 December 2013).

Diageo’s guidance for the adverse impact which exchange rate movements will have on operating profit before exceptional items in the year ending 30 June 2014, has been updated to incorporate the new Venezuelan exchange rate of $1= VEF49.81 (£1= VEF83.18) and is expected to be approximately £330 million.”

Ivan Menezes, Chief Executive of Diageo commented: “Our performance reflects the challenging environment we are operating in. Consumers in North America are most resilient, as are consumers of our reserve brands in most markets. In Western Europe the economy, consumer confidence and our business are all improving slowly but consistently. In the emerging markets currency volatility and caution about the outlook for GDP growth are negatively impacting business and consumer confidence.”

These results have increased our determination to deliver the operating efficiencies we have identified, to delayer the organisation and to continue to build a stronger business through our focus on our six performance drivers: premium core brands; reserve; innovation; route to consumer; cost and talent.

The current emerging market weakness does not reduce our confidence in the long term growth opportunities of these markets and we have continued to invest to build our brands and routes to consumer for the future. Current trends will however impact top line growth this financial year, but strong management of our cost base means that we remain committed to the delivery of our margin expansion goals.”