International Growth Fuels Strong Diageo Profits

01/09/06 Diageo, the world's biggest alcoholic drinks group has reported a 10 percent rise in annual earnings and said its operating profit will grow by at least 7 percent in its current financial year. Diageo Plc said annual profit increased 42 percent as sales strengthened in foreign markets including the U.S. Net income climbed to 1.91 billion pounds ($3.6 billion) in the year ended June 30 from 1.34 billion pounds a year earlier. Sales rose 8.7 percent to 7.26 billion pounds.

In the US, volume was up 5%, while net sales, after deducting excise duties was up 7%. Diageo said that its North America business continues to outperform the market and gain share. As a result of proven marketing campaigns and stronger execution of on and off trade sales programmes, top line growth has been achieved across the business with net sales, after deducting excise duties, up 8% for spirits, 7% for wine, 11% for beer and 3% for ready to drink. The priority spirits brands continued to perform strongly, especially Smirnoff vodka, Captain Morgan and Jose Cuervo which each delivered double digit growth in net sales, after deducting excise duties. Diageo said that its premium beer brands, Guinness, Red Stripe and Smithwicks, continue to broaden their consumer appeal through effective advertising campaigns and targeted product placement. In wine, following its acquisition in February 2005, Chalone has provided another growth engine and the performance of that business is ahead of expectations. 

In Europe, volume was up 1%, while net sales, after deducting excise duties, unchanged year on year. Diageo said that the European business has implemented change in the year to build a more cost effective organisation focused on profitable growth opportunities. The decline in the ready to drink segment in Europe and the challenges inherent in the Irish beer market have adversely impacted top line growth. However, Diageo’s spirits brands in Europe and the beer brands outside of Ireland have performed well. This is the result of focus on those brands and markets which will generate future growth and a fuller innovation pipeline. Cost initiatives implemented in the year have improved operating margins and driven operating profit growth.

On international markets, Diageo reported growth across all key markets, with volume up 14% and net sales, after deducting excise duties, up 13%. Diageo said that it is well-positioned to take advantage of the opportunities in these markets. Top line growth is accelerating and the International business is delivering share gains for the key brands. The successful implementation of turnaround plans in Nigeria, Korea and Taiwan have also contributed to the improvement. This excellent top line growth has facilitated very high levels of increased marketing investment behind the growth of key brands, particularly Johnnie Walker in expanding markets such as China and Mexico, and behind innovation, the company said.

Commenting on the results, Paul Walsh, Chief Executive of Diageo said, "With well-positioned brands and a more efficient and effective organisation, we enter the new financial year with confidence. We expect that organic net sales growth will be in line with that achieved in the current year and we plan to deliver organic operating profit growth of at least 7% for the year and to return a further £1.4 billion to shareholders through our continuing buyback programme."