Diageo profits lifted by emerging markets demand

26th August 2010, Comments 0 comments

Diageo, the world's biggest maker of alcoholic drinks, said Thursday that annual net profits rose slightly on a strong second half driven by growth in emerging markets which offset weakness in the West.

The maker of Guinness stout, Baileys liqueur and Smirnoff vodka said profits after tax increased by 1.5 percent to 1.629 billion pounds (1.994 billion euros, 2.536 billion dollars) in the 12 months to June compared with 2008/09.

Group sales rose five percent to 9.780 billion pounds.

"As expected this has been a year of challenges and opportunities," said Diageo chief executive Paul Walsh amid slow economic recovery in Europe and the United States.

"Our performance was much stronger in the second half than in the first. Our performance in the developing markets drove overall growth while markets in North America and Europe remained weak," he added in the earnings statement.

Diageo, which also makes Johnnie Walker whisky and Captain Morgan rum, said that operating profit grew 2.0 percent to 2.75 billion pounds -- in line with analysts' consensus forecast according to Dow Jones Newswires.

"The impact of the global economic crisis varied by market and the strength of the recovery appears to be equally variable," added Walsh.

Jeremy Cunnington, a liquor market analyst at Euromonitor International in London, said Diageo was suffering in the United States because the country's cash-strapped consumers preferred to buy Diageo's cut-priced products.

He added: "In Europe, the company managed to see volume growth but at the expense of value ... Even in fast growing emerging markets volume growth came at the expense of value such as in Brazil and a less extent in China, although the latter was also helped by heavier marketing spend."

Diageo's share price slid 0.94 percent to 1,056 pence after the earnings update, underperforming London's rising FTSE 100 index.

"Despite today's (share price) dip, the company is well regarded," said Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers.

"The shares have outperformed the wider FTSE 100 over the last year, having risen 10 percent versus four percent, and the current market consensus that the shares are a buy is likely to remain unchallenged."

Diageo on Thursday said it was recommending a 6.0 percent increase in the group's final dividend, adding that it had considered reinstating its share buyback programme, which was put on hold during the financial crisis.

Analyst Hunter added that a recent spike in wheat prices caused by drought in Russia would provide a headwind for Diageo going forward, whilst exchange rate fluctuations could also be a challenge.

"Nonetheless, the company's strict focus on operational efficiency, along with its product and geographical diversification, leave the company well placed for any future sustained global economic recovery," said Hunter.

© 2010 AFP

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