Downturn Continuing to Hit Diageo

Paul Walsh: The economic and consumer environment remained weak in many markets and we faced a difficult comparison against Q1 last year yet the second quarter did show a return to growth.

12 Feb 2010 --- Diageo has reported that sales increased by £237 million from £6,691 million in the six months ended 31 December 2008 to £6,928 million in the six months ended 31 December 2009. On a reported basis net sales increased by £139 million from £5,068 million in the six months ended 31 December 2008 to £5,207 million in the six months ended 31 December 2009. Exchange rate movements increased reported sales by £263 million and reported net sales by £207 million.

On a reported basis, operating costs before exceptional items increased by £151 million in the six months ended 31 December 2009 due to an increase in cost of sales of £105 million, from £1,996 million to £2,101 million, a decrease in marketing expenses of £10 million from £735 million to £725 million, and an increase in other operating expenses before exceptional costs of £56 million, from £694 million to £750 million. The impact of exchange rate movements increased total operating costs before exceptional items by £164 million.

Paul Walsh, Chief Executive of Diageo, commenting on the six months ended 31 December 2009 said: "As we had anticipated this was a challenging six months. The economic and consumer environment remained weak in many markets and we faced a difficult comparison against Q1 last year yet the second quarter did show a return to growth. In addition we reduced stock levels in all regions. While this had a negative impact on volume growth in the half, it positions us appropriately for the future. While pricing opportunities have been limited and the performance of our standard priced brands has been stronger than that of our premium priced brands, our diversity, through category and brand range and our wide geographic reach, means that overall price/mix has been maintained.

“Our category leading brands, the consistency and scale of our marketing investment, successful innovation and our industry leading sales capabilities have led to share gains for Diageo’s priority brands in key markets.

“We are in the early stages of recovery with more encouraging signs in the emerging and developing markets. However, in a difficult environment this half we have continued to improve the efficiency of our functions, reduced our cost base, strengthened our relationships with our customers and generated significant free cash flow which has again enhanced our financial strength. Focused marketing spend by category and geography continues to build our brand equities.

“We are maintaining our guidance for low single digit organic operating profit growth for the full year. At a time when future economic and consumer trends continue to be difficult to forecast, the steps we have taken have created a stronger business which will position the company well.”

The economic environment and consumer confidence in North America remained weak. Growth of the beverage alcohol market has slowed with volume growth estimated to be no greater than 1% and value flat in the half. Results were mixed regionally and there was a continued decline in the on-trade. Diageo spirits brands faced a difficult comparison against the comparable period when stock levels increased. However, Diageo gained volume share and although value share was down overall, it was maintained on the priority brands and Diageo continued to outperform most of its major competitors. Facing softer comparisons due to the planned de-stock which was undertaken in fiscal 2009, Diageo’s beer brands grew volume and net sales and gained 0.2 percentage points of share. Wine volume grew due to a strong performance from Sterling Vineyards but net sales declined due to increased promotional activity and innovations focused on price points at $10 and below.

Performance in Europe varied by market. There are, as yet, no signs of an overall improvement in economic conditions but Diageo’s performance did improve in December in some markets as a result of share gains. Volume and net sales grew in Great Britain as a result of strong sales execution, particularly during the Christmas campaign in the off-trade. Volume and net sales also grew in Southern Europe led by Greece and Turkey, and volume grew in Russia, where focus was increased on those Diageo brands and formats most relevant for the value-conscious consumer. Net sales declined in Spain and Ireland, reflecting the continued slowdown of the industry, particularly in the on-trade. Guinness remained resilient and delivered share gains in both Great Britain and Ireland. Overall price/mix was negative due to increased promotional activity on spirits in the off-trade channel and as consumers traded down from super premium and premium into lower priced segments. The continued consumer shift from on-trade to off-trade accelerated in many markets during the period. Marketing spend was reduced as investment was focused behind fewer brands and campaigns. Media rate deflation and procurement efficiencies continued through the period.

Volume and net sales increased in International as a result of strong performances in both the beer and scotch categories. In Africa beer net sales grew strongly. Guinness net sales were up in all key markets across Africa with the exception of Cameroon. Harp net sales doubled in Nigeria and Tusker continued to grow very strongly in East Africa. Scotch net sales grew as a result of growth in net sales of Johnnie Walker and Old Parr in Latin America and the return to growth of Johnnie Walker in Global Travel and Middle East. Marketing spend increased 9% focusing on core brand and market opportunities, in particular the “250th Celebration” of Guinness in Africa, and on Johnnie Walker in Global Travel and Middle East.

Performance in Asia Pacific showed an improving trend but was impacted by the comparison to inappropriately high shipments in India in the prior year and by pockets of continued de-stocking in China and Korea. Australia, the largest market in the region, returned to net sales growth. South East Asia also delivered a very strong performance led by Johnnie Walker and Guinness. Increased investment behind the “250th Celebration” campaign together with price increases led to double-digit net sales growth of Guinness. Marketing spend as a percentage of net sales remained in line with the same period last year. Spend was reduced in India and also in China where the later timing this year of the Shanghai Grand Prix and Chinese New Year means that marketing activities for these two key events will be in the second half. Investment was stepped up behind key brands in Australia, Korea and South East Asia.