Diageo sales beat expectations as US spirits rebound

Half-year sales surged at Diageo, the owner of Guinness, Smirnoff and Pimm’s, as it benefitted from favourable foreign exchange rates and was also bolstered by an improved performance in the US spirits market.

The FTSE 100 company’s expectations for the full year are unchanged and its remains confident of achieving its medium term objective of consistent mid-single digit top line growth and 100 basis points of organic operating margin improvement in the three years ending 30 June 2019.

Revenue for the six months ended 31 December 2016 climbed 14.5% to £6.42bn, compared to the previous year, and operating profit surged 28% to £2.07bn, reflecting accelerated organic growth and favourable foreign exchange rates.

Organic growth improved across all regions with a 4.4% increase in net sales, which compared to the analyst consensus according to Bloomberg of 3.1%.

This was matched by organic operating profit up 4.4% due to a an improvement in the gross margin improvement, progress on productivity, which offset implementation costs, and the profit from the sale of its stake in Indian drinks firm, United Breweries, to Heineken International before the period.

For 2016, the company posted £1.08bn in free cash flow, up by £245m compared to the prior year, with net cash from operating activities up £230m to £1.27bn.

Basic earnings per share was 60.3p and pre-exceptional earnings per share was 62p, up 21%, as higher operating profit and associate income along with favourable foreign exchange rates offset the impact of disposals and a higher tax.

The company declared an interim dividend of 23.7p per share, up 5%.

In North America, net sales grew 3%, and US spirits sales grew 4% with volume growth.

Chief executive Ivan Menezes said there was an improved performance in the US spirits business and across the scotch portfolio, driven by the company’s focus on marketing, innovating at scale, expanding the route to consumer, and winning in reserve.

In Europe, sales grew 5% with continental Europe the main contributor, in Russia price rises reflected the currency weakness in a tough economic and exchange environment, which led to a sales increase of 6% with volume down 7%, and in Turkey volume was down 5% but price increases drove sales up 5%.

In Africa, sales were up 4% with Beer segment affected by the significant increase in duty on bottled beer in Kenya with Guinness down 22% and Tusker 15%.

For Latin America and the Caribbean, sales grew 11%, reflecting a strong recovery as although Brazil remained weak Mexico and the Andean region performed strongly.

In Asia Pacific, sales rose 3% with significant growth in China and a solid performance in India, Australia and South East Asia, but the continued contraction of the local whisky market in Korea led to a further decline in sales.

Menezes said: "Diageo is building a stronger, more consistent, better performing company. We are identifying consumer trends faster, expanding the reach of our products across markets and developing trade channels to capture these growth opportunities. Our productivity work is on track, driving efficiency and effectiveness across the business. Our work on trade and marketing spend gives us better data enabling smarter, quicker decisions that generate higher returns."