Improved Performance From Diageo
Diageo has reported a 3% decline in net sales to £10.485 billion for the year ended 30 June 2016 as adverse exchange rates and disposals more than offset organic growth in each of its regions and acquisitions. However, on an organic basis, the global drinks giant achieved volume growth of 1.3%, net sales growth of 2.8%, and operating profit growth of 3.5%. Reported operating profit grew 1.6% to £2.841 billion as organic growth, lower exceptional operating charges and acquisitions were partially offset by adverse exchange rates and disposals.
The adverse exchange movements were driven by the weakness of a number of currencies against sterling, in particular the Nigerian naira, the South African rand, the Venezuelan Bolivar, the Brazilian real and the Turkish lira, partially offset by the strengthening of the US dollar.
Acquisitions made in 2015 increased net sales in the year ended 30 June 2016 by £90 million and operating profit by £22 million, largely due to the acquisition of the remaining 50% shareholdings in Don Julio and United National Breweries.
Businesses which were disposed of in the year ended 30 June 2015, primarily Bushmills and Gleneagles, and those disposed of in the year ended 30 June 2016, the sale of wines and certain beer assets, contributed net sales of £655 million and operating profit of £121 million in the period ended 30 June 2015, and contributed net sales of £255 million and operating profit of £25 million in the period ended 30 June 2016. The year on year movement on net sales was £400 million and £96 million on operating profit.
Ivan Menezes, chief executive of Diageo.
Ivan Menezes, chief executive of Diageo, comments: “This is a good set of results delivering what we set out to achieve this time last year and demonstrating our momentum. This better performance reflects the work we have done to strengthen our big brands through marketing and innovation, as well as expanding our distribution reach. Our six global brands and our US spirits business are all back in growth and we have seen a significant improvement in the performance of our Scotch and beer portfolios. The delivery of volume growth; organic margin expansion; increased free cash flow; and the disposal of £1 billon in non-core assets, comes from an everyday focus on efficiency in each aspect of our business.”
He adds: “These results position us well to deliver a stronger performance in F17. We are confident of achieving our objective of mid-single digit top line growth, and in the three years ending F19 delivering 100bps of organic operating margin improvement.”
Diageo’s performance in its Europe, Russia and Turkey region reflects momentum in Europe, strong net sales growth in Russia driven by price increases in a tough economic and exchange environment and good growth in Turkey.
In Europe, net sales were up 3% with Great Britain and Continental Europe the main contributors and with share gains across the market. Baileys performed strongly driven by execution against core growth drivers, especially sampling. Guinness net sales were up 2% supported by innovations from ‘The Brewers Project’ and Tanqueray grew net sales double digit in most countries across Europe. Reserve brands continued to perform well also growing double digit.
In Russia, price increases led to net sales increase of 27% while volume was down 9%, with share gains in rum but share losses in Scotch in the face of increased competition. In Turkey net sales were up 6% driven by Johnnie Walker underpinned by steady growth in raki at 3%.
Gross margins were up in both Europe and Russia. Overall region operating margins improved by 51 bps. In Europe procurement savings offset increased marketing and overheads leaving margin improvement in Russia to drive the region’s increase.
