Diageo results, year ended June 30

The world’s largest premium drinks company has announced a net sales increase of 5% for the year ended June 30.

It reports flat organic net sales with free cash flow of £2 billion, up £0.7bn. United Spirits has been fully consolidated into the group. Investors will be pleased: 9% final dividend increase to give recommended full year dividend of 56.4 pence.

Shipment volume is down 1% but depletion volume is estimated to be up 1%.

The company further reports productivity gains will release a further £500 million of cost to invest in growth and improve margin over a three year period from F17 (financial year, 2017).

Chief Executive Ivan Menezes said: "Our F15 performance reflects the challenges we have seen on top line growth. However, it does not diminish my confidence in what we can achieve in F16 and even more so beyond that. Diageo has an enviable position, by geography, by brand and by category range, in an attractive consumer market place with strong long term growth drivers.

“This year we made further changes to build strong, sustained performance including embedding our sell out discipline, improving cash conversion and strengthening our route to consumer. We have consistently applied a long term perspective in making these changes, despite the short term challenges we have faced from an external environment where currency volatility continues to impact the emerging market consumer.

"We acquired control of United Spirits in the year giving Diageo unparalleled access to one of the world’s most attractive spirits markets. We have enhanced our position in tequila by acquiring the remaining 50% of Don Julio, a brand that is already growing net sales double digit and for which I see significant potential now we have full control,” he said.

“Our participation strategy is clear by market and category. We are focused on our core and have a more proactive approach to our portfolio. We sold Gleneagles in the year, and since the year end, have sold the shares USL owned in United Breweries and we restructured our South African operations to focus on spirits and monetise investments worth £125 million.

"We are delivering the change which will further strengthen this business and deliver our performance ambition. In F16 we believe stronger volume growth will deliver an improved top line performance. As we achieve our productivity gains from F17 we expect to deliver mid single digit organic top line growth on a sustained basis and operating margin expansion of 100 basis points over three years. Our brands, our global footprint and our people give me confidence that Diageo can deliver strong and sustained performance," said Menezes.

Thomas Buckley of Bloomberg News, commented: “Diageo Plc forecast a return to sales growth this year as the world’s largest spirits company takes more control over its range of businesses around the globe to combat weak results in the US and a slowdown in emerging markets.

“As he starts his third year as CEO, Menezes has tried to gain more control over his sprawling liquor empire. He’s bought out United Spirits Ltd., India’s largest distiller, took full ownership of Don Julio tequila and dissolved a South African joint venture with Heineken NV. Diageo is also shifting to a business model that focuses more attention on purchases by consumers, rather than the amount of bottles it ships to distributors,” said Buckley.

The shares rose 1.1% to 1,860.5 pence at 08:01 in London today, July 30).

They are little changed this year, said Buckley, compared with a 17% increase at main competitor Pernod Ricard SA. The maker of Smirnoff vodka has appointed chief financial officer Deirdre Mahlan to run the North America division and bolster earnings from the US, the company’s largest region.

Euromonitor International’s senior alcoholic drinks analyst, Jeremy Cunnington, said: “Diageo’s weak results come from a combination of historic failings and weak global conditions. The former caused by too much focus pre-2008 economic crisis on a few core markets in North America and Western Europe. This has meant many of its core brands such as Smirnoff, Baileys and Captain Morgan have struggled for growth as the brands mature in these markets. With weak global conditions there is little Diageo can do when core emerging markets such as Brazil and Russia are universally suffering.

“While there have undoubtedly been errors in judgement such as slowness in developing a high end bourbon, spirits is a long game and judgement should not be rushed. Short sighted solutions such as divesting its beer operations would only make the situation worse in the long-term by depriving Diageo of a major platform for long term growth in Africa, which is potentially one of the most dynamic regions for spirits in the future,”  said Cunnington.