Diageo Sees Emerging-Market Rebound as 2014 Growth Slows

Diageo Plc, the world’s biggest distiller, expects improvement in emerging-market performance in the second half of its current fiscal year after lackluster sales in regions such as Asia weighed on revenue growth.

Organic sales rose 0.4 percent in the 12 months ended June 30, the London-based maker of Smirnoff vodka said in a statement today. The median estimate from 12 analysts surveyed by Bloomberg was for a 0.5 percent increase. Earnings before interest and taxes, excluding some items, totaled 3.13 billion pounds ($5.3 billion), compared with a 3.2 billion-pound estimate. Sales in the Asia-Pacific region declined 7 percent on an organic basis.

“This was not a vintage set of results from Diageo, but in the context of recent hiccups it counts as satisfactory,” James Edwardes Jones, an analyst at RBC Europe, said in a note.

The maker of Johnnie Walker Scotch has been grappling with China’s crackdown on lavish spending, which “severely impacted” sales of whisky and white spirits, while tax increases hurt sales in Southeast Asia, the company said. Chief Financial Officer Deirdre Mahlan said some higher-end brands of white spirits lowered prices, sending sales of Diageo’s Shui Jing Fang down 78 percent. The company also reported a writedown of about 79 million pounds for its Chinese business.

“Trading conditions, particularly in emerging markets, have been tough,” Mahlan said in an interview. “We do expect improvement, more in the back half in general terms.”

Share Performance

Diageo rose 0.8 percent to 1,804 pence at 8:18 a.m. in London, after declining at the start of today’s trading. The stock has declined about 10 percent this year.

“Our business has faced macroeconomic and market-specific challenges,” Chief Executive Officer Ivan Menezes said in the statement. “But we have gained share and expanded margin.”

The distiller has been expanding outside its European heartland and the U.S., its largest region, pushing sales of pricey liquor in emerging markets and buying assets in countries from India to Turkey. Remy Cointreau SA, the French cognac maker, said July 18 that its sales declined 5.7 percent in the three months through June as revenue at the Remy Martin cognac unit plunged 15 percent.

Diageo gained control of United Spirits Ltd. this month after completing a $1.9 billion tender offer for stock of India’s biggest spirits maker. In Turkey, the company bought raki producer Mey Icki for $2.1 billion in 2011.

Under Menezes, who took the helm a year ago, Diageo has pledged to cut annual spending by as much as 200 million pounds by the end of fiscal 2017. Most of the savings will come from information systems, procurement and simplification of the organization, Mahlan has said.

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