Diageo Sales Growth Meets Estimates as Emerging Markets Gain

Diageo Plc (DGE), the maker of Johnnie Walker whiskey, reported first-half sales growth that matched analysts’ estimates as rising demand for liquor in emerging markets offset a slowdown in Europe.

So-called organic revenue rose 7 percent in the six months ended Dec. 31, the London-based company said today. Operating profit gained 9 percent, excluding some items, compared with the median estimate of 11 analysts for growth of 8.4 percent.

Chief Executive Officer Paul Walsh said the distiller is “cautious as to the consumer and economic trends we will face in 2012.” The maker of Guinness stout and Smirnoff vodka has sought to further its expansion outside Europe, where consumers are spending less amid the sovereign-debt crisis.

“Europe remains a mixed bag,” Martin Deboo, an analyst at Investec Securities in London, said in a note, adding that he doesn’t anticipate “material change” to full-year estimates.

Organic revenue rose in all of Diageo’s regions except Europe, where it was unchanged. Sales increased 23 percent in Latin America and 5 percent in North America.

“Positive surprises came from the emerging markets” including Latin America and Africa, Laetitia Delaye, an analyst at Kepler Capital Markets in Paris, wrote in a note.

Diageo shares were little changed at 1,462.5 pence as of 2:09 p.m. in London.

Medium-Term Goals

The distiller has a goal for organic sales growth of 6 percent in the “medium term” and to widen its operating margin by 2 percentage points in the next three years. The margin improved by 0.6 percentage points in the first half.

The U.S., the world’s largest market for spirits, “had a very encouraging performance,” Chief Financial Officer Deirdre Mahlan said on a conference call. Sales of “strategic” brands are improving, she said, and the Smirnoff vodka and Captain Morgan rum brands returned to growth in the second quarter. Diageo offered fewer promotions on lower-priced brands, leading to a loss of market share in the country, Mahlan said.

Sales in so-called emerging markets now represent almost 40 percent of the business, the company said today. Diageo has acquired businesses including Met Abo Brewery in Ethiopia, and completed the $2.1 billion purchase of Turkey’s Mey Alkollu Ickiler Sanayi & Ticaret AS in August last year.

Acquisition Opportunities

“The acquisitions we’ve done recently have all been in emerging markets, but I wouldn’t exclude developed-market acquisitions if we think there’s one that’s going to grow our business in the future,” Mahlan said. The company looks at “all of the opportunities” for acquisitions, she said, when asked whether Diageo would consider making an offer for all or some of Beam Inc., (BEAM) the maker of Jim Beam bourbon.

Diageo is in talks with the Beckmann family, which owns the Jose Cuervo tequila brand, as its distribution agreement expires in June 2013, Mahlan said. The company held talks about buying the brand for more than $2 billion, three people with knowledge of the matter said in May.

“We would like to have a deeper interest in the Cuervo brands,” she said, “whether through equity participation or deeper participation.”

Walsh, who is also a non-executive director of Unilever, said speculation that he may step down as Diageo CEO is “premature.” Walsh is seen as a candidate to take over from Michael Treschow, the current chairman of Unilever, the Sunday Times newspaper reported in October.

“We put out our mid-term guidance, and I’d expect to see that guidance being fulfilled,” Walsh said.

Diageo’s revenue growth figures were reported on a basis that excludes acquisitions, disposals and currency fluctuations. Overall growth was slower than the first quarter’s 9 percent, which Diageo said in October benefited from some non-recurring events.

To contact the reporter on this story: Clementine Fletcher in London at cfletcher5@bloomberg.net

To contact the editor responsible for this story: Sara Marley at smarley1@bloomberg.net

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