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Diageo Sales Miss Estimates as Emerging Markets Disappoint

An employee inspects a bottle of Johnnie Walker Black Label whisky at Diageo Plc's Shieldhall factory in Glasgow, Scotland. Photographer: Mike Wilkinson/Bloomberg
An employee inspects a bottle of Johnnie Walker Black Label whisky at Diageo Plc's Shieldhall factory in Glasgow, Scotland. Photographer: Mike Wilkinson/Bloomberg

April 18 (Bloomberg) -- Diageo Plc, the world’s biggest distiller, reported third-quarter sales that missed estimates as sluggish European demand and slower-than-expected emerging-market growth offset expansion in the U.S.

So-called organic revenue climbed 4 percent in the three months through March 31, the London-based company said today, compared with the median estimate of 10 analysts for a 5 percent increase. Volume fell 1 percent.

Diageo, whose brands include Johnny Walker whisky, is among consumer companies seeing a slowdown in growth in emerging markets that have been helping offset falling demand in Europe. SABMiller Plc, the world’s second-biggest brewer, today reported an unexpected decline in sales in Latin America, while Nestle SA said it experienced “softening” in certain emerging markets including Asia.

“The emerging-market growth slowdown in the quarter may worry people,” Melissa Earlam, an analyst at UBS AG in London, said today. “Consensus organic sales growth estimates for the year probably need to nudge down” for Diageo.

Diageo shares were unchanged at 1,974.5 pence at 12:02 p.m. in London trading and SABMiller advanced 0.2 percent to 3,350 pence. That compared with a 0.4 percent rise in the benchmark FTSE 100 index. Nestle declined 0.3 percent to 64.10 Swiss francs in Zurich.

Diageo’s organic sales advanced 5 percent in the first nine months of the fiscal year as revenue slumped 4 percent in western Europe. North American sales climbed 6 percent, aided by price rises in the company’s biggest market.

U.S. Improvement

Earlam cut her annual sales growth estimate to 5.4 percent from 5.6 percent. The improvement in the higher-margin U.S. may offset declines in less profitable markets including Brazil, she said, and “while estimates for full-year earnings aren’t changing, the weaker-than-expected third-quarter performance isn’t great for sentiment.”

Diageo has been snapping up assets in emerging markets to gain access to the growing middle classes with disposable income to spend on its spirits, which include Smirnoff vodka. It bought Mey Icki in Turkey in 2011, helping sales in the Africa, eastern Europe and Turkey unit grow 9 percent in the nine months. It’s also agreed to buy a 27 percent stake in Indian tycoon Vijay Mallya’s United Spirits Ltd.

Geographic Diversity

Sales increases at Diageo’s Africa, eastern Europe and Turkey unit and the Latin America unit were weaker than analysts expected on slower growth in Nigeria and Brazil and changes in shipment patterns in Russia, Colombia and Venezuela.

Africa, eastern Europe and Turkey organic sales rose 9 percent compared with an 11 percent median estimate, and Latin American sales rose 14 percent against a 17 percent estimate. Sales in Asia Pacific rose 4 percent, restrained by a continued decline in Scotch demand in South Korea.

Diageo is seeking to increase its profitability over the next two years and expand its organic sales by an average of 6 percent annually in “the medium term.” Chief Financial Officer Deirdre Mahlan said in January that the guidance was “not meant to be linear,” but a compound annual growth rate, spurring analysts including Earlam at UBS to cut their sales growth estimates for the year.

“Given our market positions and geographic diversity we remain confident that Diageo’s performance continues to be in line with our medium-term guidance,” Paul Walsh, Diageo’s chief executive officer, said in today’s statement.

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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