Diageo: net sales down, profits up 1.6%

Diageo has reported that net sales are down 3% but operating profit grew 1.6% for the year ended June 30, 2016.

The world’s largest premium drinks company says organic results improved with volume growth of 1.3%, net sales growth of 2.8% and operating profit growth of 3.5%.

Reported net sales declined 3.0% as organic growth in each region and acquisitions were more than offset by adverse exchange and disposals.

Reported operating profit grew 1.6% with organic growth, lower exceptional operating charges and acquisitions partially offset by adverse exchange and disposals.

Cash flow continued to be strong at £2.1 billion, up £134 million on last year. Operating cash flow was £2.5 billion.

The Diageo board has recommended a final dividend increase of 5% bringing the full year dividend to 59.2 pence per share.

Chief executive Ivan Menezes said: "This is a good set of results delivering what we set out to achieve this time last year and demonstrating our momentum.

“This better performance reflects the work we have done to strengthen our big brands through marketing and innovation, as well as expanding our distribution reach. Our six global brands and our US spirits business are all back in growth and we have seen a significant improvement in the performance of our scotch and beer portfolios.

"The delivery of volume growth; organic margin expansion; increased free cash flow; and the disposal of £1bn in non-core assets, comes from an everyday focus on efficiency in each aspect of our business. We have also made significant progress this year in our aim to improve the role of alcohol in society, partner with our communities and reduce our environmental impact.

“These results position us well to deliver a stronger performance in F17 (financial year 2017). We are confident of achieving our objective of mid-single digit top line growth, and in the three years ending F19 delivering 100bps of organic operating margin improvement,” said Menezes.

Thomas Buckley of Bloomberg News commented: “Diageo Plc reported full-year earnings growth in line with analysts’ estimates as improved demand for whiskey and vodka in the US offset declines in Brazil and China.”

The median estimate of analysts surveyed by Bloomberg was for growth of 3.1%. Organic revenue grew 3%, says Bloomberg News.

“Menezes is trying to return Diageo to growth after lackluster results by reshuffling senior managers, cutting costs and boosting productivity. Investors expect that the company will benefit from the weaker pound as profits made outside the UK will be worth more when translated back into sterling. The shares have gained 14% since Britain’s vote to leave the European Union as the pound weakened to its lowest level against the dollar since 1985.”

Diageo also maintained its sales forecast for the current financial year of mid-single digit revenue growth. Organic figures exclude the impact of currency fluctuations and acquisitions, said Buckley. 

Jeremy Cunnington, Euromonitor's senior alcoholic drinks analyst, said: “Diageo’s broad geographic spread should mean that the company sees a solid set of results. However, much will depend on how it copes with its exposure in troubled markets such as Brazil. It will be interesting to see what progress the company has had in the US in re-invigorating its struggling major brands such as Smirnoff and Captain Morgan and how much progress is being made in India. Having finally integrated United Spirits into its operations, and stabilised its volume share in India, now is the time to see if it can start major the success of its rival, Pernod Ricard.”