Diageo hit by emerging market weakness in H1 - UPDATE

30th Jan 2014 07:49

Johnnie Walker whisky and Smirnoff vodka group Diageo took a hit from weakness in emerging markets as it revealed a 1.8 per cent rise in global first half sales and plans to save 200m pounds a year by 2017.Diageo, which also makes Guinness, Ciroc and Bell's whisky, said sales in emerging markets climbed just 1.3% due to weakness in Nigeria and in sales of baijiu spirit in China.Volumes and operating profit in Asia Pacific fell 4% and sales were down 6%, while African, Eastern European and Turkish volumes and profit dropped 4%.Latin America provided a silver lining, with volumes down just 2% and operating profit up a tenth.Emerging market strategy unchangedChief Executive Ivan Menezes told a news conference in London that Diageo's emerging market strategy remained unchanged despite tough trading.Emerging market growth was 7-8% three to four years ago and 4-5% now. "It's still ahead of the developed world," he said.Menezes voiced confidence that Diageo's spirits would maintain their appeal even amid shocks and volatility."We see 1.3bn consumers coming into the emerging middle class in the emerging markets. There will be shocks and volatility but our brands play in a real sweet spot."Menezes said Diageo had not regarded US spirits firm Beam, which is the subject of a takeover proposal by Japanese group Suntory, as a key takeover target."This is an asset that at some point was going to go and I would not say any more apart from the fact that it was not high on our list of priorities."Asked whether Diageo would make a counter-bid, Menezes said: "I never go on the record in saying yes or no to a question like that."Menezes said savings from more efficient IT and procurement would make up a quarter of plans to save £200m a year by 2017, while improvements to the way it supplies customers would also contribute.He added that the company was reviewing its regional structures, but said it was too early to talk about job implications."We'll be working on that in the next couple of months and our people will be the first to know how our ways of working will evolve," he said.Menezes also faced questions about the potential impact on Diageo and the Scotch whisky industry of the Scottish independence referendum this September.Menezes said Diageo has assessments of the possible outcomes under way. "We're clearly assessing all the possible scenarios and await more clarity."He said the company was working with others including the Scotch Whisky Association to ensure that the potential impact of the vote on trade, Scotland's membership of the EU, industry conditions and regulations "do not get in the way of one of the great success stories of this country."Net sales growth may have hit a lowThe shares fell 4% to 1,832.5p by 13:41 in London.Broker Berenberg, which is advising investors to buy the stock, said the fall in the company's share price on Thursday looked to be a result of revised guidance on adverse foreign currency movements, from £165m to £280m, and worsening organic net sales growth.But it believed emerging market net sales growth had hit a low and should now start improving as economic growth picks up and as Diageo cuts prices of under-performing brands. Downgrades to current earnings per share consensus should be limited."This is why we now think today's share price decline represents a buying opportunity," the broker said.Sales in North America climbed 4.6% and fell 1% in western Europe, which Diageo said continued an improvement in the first quarter.It said its super and ultra premium brands grew strongly, with reserve brands up 18.5%. Beer was the only product area to decline, down 2.6%, with weakness in Nigeria and Ireland.Group operating profit before one-off items rose 3% to £2.06bn. Diageo increased its interim dividend by 9% to 19.7p.Menezes, who replaced Paul Walsh last year, said: "We think our top line performance will improve in the full year and given our continued cost focus, we remain focused on achieving operating margin targets."Even though some markets may remain challenging, this business is in good shape for the medium and long-term." PW