Diageo Sees ‘Soft Spots’ in Emerging Markets as Growth Slows

Diageo Plc (DGE), the world’s biggest distiller, said today it sees some “soft spots” in emerging markets and reported full-year sales growth at a slower pace than last year and its mid-term goal.

Trading in Brazil was “relatively soft” in the year ended June 30 and could continue to be weak in the first half of this fiscal year, Chief Financial Officer Deirdre Mahlan said today on a conference call. The distiller also reported slower growth in its Asia Pacific region, where government anti-extravagance measures are restraining sales in China.

The Johnnie Walker maker has been expanding in developing markets as it seeks to generate half its revenue from faster-growing economies to offset stagnant growth in Europe. It bought cachaca brand Ypioca last year in Brazil and this year expanded in India with the purchase of a stake in United Spirits, and consolidated control over a maker of Chinese baijiu liquor.

“Diageo’s move to medium-term organic sales guidance of 6 percent famously set light to the shares in August 2011,” Martin Deboo, an analyst at Investec in London, wrote today. “Two years in, chronic weakness in Southern Europe and trouble spots in Korea, Brazil and elsewhere are contriving to impede recovery.” This “all adds up to a difficult debut for new Chief Executive Officer Ivan Menezes.”

Medium-Term Targets

The company is “on track” to meet its medium-term guidance, Menezes said today in a statement, reporting his first results since taking the reins from Paul Walsh this month after Walsh stepped down as leader of the distiller for 13 years.

In 2011, Diageo said it would target organic sales growth of an average 6 percent in the “medium term” as well as seeking to widen its operating margin by 2 percentage points over three years. The announcement sent shares up as much as 8.5 percent on the day.

Group organic sales rose 5 percent in the year through June, the London-based maker of Smirnoff vodka and Johnnie Walker Scotch whisky said in today’s statement. The median estimate of 12 analysts surveyed by Bloomberg News was for a 4.7 percent increase. Organic measures exclude the effects of acquisitions and currency fluctuation. Sales rose 6 percent in the same period a year earlier.

Diageo shares were up 0.7 percent at 2,004 pence as of 10:13 a.m. in London, bringing the advance to 12 percent this year. The stock climbed as much as 1.8 percent and fell as much as 3.5 percent earlier in the day.

China Policy

Organic sales in Asia Pacific edged up 3 percent in the year, a slower pace than the 4 percent reported in the first nine months. Government-led crackdowns on extravagant spending and gifting in China are stinting sales of premium drinks, Mahlan said, and political tensions between South Korea and North Korea cut travel retail sales.

Operating profit excluding some items totalled 3.53 billion pounds ($5.38 billion), compared with a 3.48 billion-pound median estimate. Diageo’s margin, a measure of profitability, rose 0.8 of a percentage point this year.

“We see the organic margin delivery as very achievable,” Melissa Earlam, an analyst at UBS AG in London, wrote today in a note. “But it’s somewhat more challenging to get a 6 percent compound annual growth rate sales increase.”

U.S. Growth

Sales increased 5 percent and operating profit excluding some items rose 9 percent in North America, the company’s biggest region, aided by sales of Crown Royal and Bulleit bourbon in the U.S. That helped offset a 4 percent sales decline in Western Europe, where there was a 7 percent slump in profit caused by tough economic conditions in southern Europe and Ireland.

Emerging markets sales now total 42 percent of the company’s business, Diageo said, and grew 11 percent in the year. Sales grew 10 percent in Africa, Eastern Europe and Turkey and 15 percent in Latin America and the Caribbean. Revenue in Paraguay, Uruguay and Brazil climbed 1 percent, the smallest advance in the Latin America region.

Some consumer-goods companies have warned of a deceleration in emerging market economic growth. Unilever (UNA) reported quarterly sales last week that missed estimates and said growth is slowing in economies such as India and China.

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

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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