FDBusiness.com

Diageo has reported a 5.4% increase in net sales to £10.813 billion, reflecting the full consolidation of United Spirits which contributed £921 million, and a 3.3% rise in group operating profit to £2.797 billion for the year ended 30th June 2015. However, the full consolidation of United Spirits lowered reported operating margin for the group but organic operating margin improved by 24bps, largely as a result of cost savings and efficiencies, which more than offset the impact of cost inflation and negative market mix.

Indeed, productivity gains are expected to release a further £500 million of cost to invest in growth and improve margin over a three year period from financial year 2017.

Reported net sales and operating profit were significantly impacted by adverse exchange movements driven by the devaluation of many currencies against the pound, in particular the euro, the Venezuelan bolivar, and the Russian rouble. The exchange rate movements for the year ending 30 June 2016 are estimated to have adversely impacted both net sales and operating profit by approximately £370 million and £100 million, respectively.

Diageo’s organic volume fell by 1% due chiefly to lower shipments in the United States, reduction in inventory levels in South East Asia and the impact of pricing in Venezuela and Brazil.

Ivan Menezes, chief executive of Diageo, comments: “Our F15 performance reflects the challenges we have seen on top line growth. However, it does not diminish my confidence in what we can achieve in F16 and even more so beyond that. Diageo has an enviable position, by geography, by brand and by category range, in an attractive consumer market place with strong long term growth drivers. This year we made further changes to build strong, sustained performance including embedding our sell out discipline, improving cash conversion and strengthening our route to consumer. We have consistently applied a long term perspective in making these changes, despite the short term challenges we have faced from an external environment where currency volatility continues to impact the emerging market consumer.”

Ivan Menezes, chief executive of Diageo.

The acquisition of control of United Spirits in India has given Diageo unparalleled access to one of the world’s most attractive spirits markets. Diageo also enhanced its position in tequila by acquiring the remaining 50% of Don Julio, a brand that is already growing net sales at double digit rates. Also during the year, Diageo disposed of the Gleneagles Hotel business. Since the year end, Diageo has sold the shares United Spirits owned in United Breweries, and restructured its South African operations to focus on spirits and monetise investments worth £125 million.

Ivan Menezies continues:  “We are delivering the change which will further strengthen this business and deliver our performance ambition. In F16 we believe stronger volume growth will deliver an improved top line performance. As we achieve our productivity gains from F17 we expect to deliver mid single digit organic top line growth on a sustained basis and operating margin expansion of 100 basis points over three years. Our brands, our global footprint and our people give me confidence that Diageo can deliver strong and sustained performance.”

European Business

Diageo’s European performance reflected an improved momentum in Western Europe, growth in Turkey, and a challenging environment in Russia. In Western Europe net sales were up 1%, as performance improved in more than half of the company’s markets. Reserve brands delivered another strong performance with net sales up 20% and growing double digit even in the more challenging economies in Southern Europe.

Innovation remained a key performance driver with net sales up 30%, driven by successes such as ‘The Brewers Project’ which helped put Guinness back in growth in both Great Britain and Ireland. Diageo continued to invest in its route to consumer, increasing the number of sales people by 30% and the number of outlets we cover by 60%. In Russia, which continued to be impacted by economic volatility, consumers traded down, and customers reduced inventory levels, while Diageo gained share in Scotch and rum. Turkey net sales were up 3% driving premiumisation in the raki category and gained share in scotch and vodka. Total operating margin for the region improved 75bps largely driven by gross margin improvement in Turkey, and overhead cost reduction in Western Europe, which was partially reinvested in marketing spend and route to consumer.