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Diageo full-year profits up, but outlook weaker

Diageo PLC, the world's largest producer and distributor of alcoholic drinks, said it is pushing ahead with its focus on premium sales as it posted a small rise in full-year net profit on Thursday and cut its earnings forecasts for the current year.
/ Source: The Associated Press

Diageo PLC, the world's largest producer and distributor of alcoholic drinks, said it is pushing ahead with its focus on premium sales as it posted a small rise in full-year net profit on Thursday and cut its earnings forecasts for the current year.

The maker of Johnnie Walker whisky, Guinness stout and Smirnoff vodka earned 1.52 billion pounds ($2.8 billion) for the year ending June 30, up 2.7 percent from 1.48 billion pounds a year ago.

Revenue rose 8 percent to 8.09 billion pounds ($14.9 billion) from 7.48 billion pounds, underpinned by sales of scotch in Latin America, beer in Africa and premium brands in North America.

The earnings met Diageo's predictions of a 9 percent rise in operating profit and a 7 percent lift in sales, assuaging fears by some analysts that the company would not meet its targets amid the rising cost of raw materials like grain, energy, glass and packaging and an anticipated downturn in demand due to the global economic slowdown.

The London-based company also remained relatively upbeat about the coming year, despite lowering its forecast for operating profit in the current financial year to a rise of 7-9 percent.

"You can't be certain, but you can be confident," Diageo Chief Executive Paul Walsh said of the company's forecasts given the prevailing economic climate, adding that its brands — which also include Captain Morgan rum, Baileys liqueur and Gordon's gin — had strong sales momentum to push through any accelerated slowdown.

"The other thing I would say about our brands is that they have faced world wars, they have faced revolutions, they have faced more economic cycles than we will see and they are today faster, more profitable and appealing to more customers than ever before," Walsh added.

The company's shares closed up 2 percent at 1,000 pence ($18.27), after initially dipping lower on the London Stock Exchange.

"Inevitably, the company's outlook for 2009 is rather less bullish, and the ongoing rise in commodity costs could yet erode some of its operating margins," said Hargreaves Lansdown analyst Richard Hunter. "Nonetheless, the company is well positioned to withstand slowing economic growth."

Diageo's vast geographical spread has helped insulate it from the general economic downturn, particularly its inroads into emerging markets in Asia and Latin America where demand for its premium drinks like single malt whiskies is booming.

Walsh said the company planned to continue its strategy of increasing its range of "super-premium" products to counteract declining markets for beer and cheaper liquor brands in Britain, the United States and Europe.

Over the year, Diageo bought a 50 percent stake in Dutch vodka brand Ketel One and also added Zacapa rum and Rosenblum Cellars wine to its stable of brands.

The company now employs some 300 people worldwide who are focused on promoting its "reserve" brands, and has rolled out high-profile advertising campaigns as well as a revenue-sharing deal for U.S. rapper Sean "Diddy" Coombs to promote its Ciroc vodka.

Questioned about that strategy at a time when many consumers are tightening their belts, Walsh said that demand for "affordable luxuries" remained.

"People are not necessarily drinking more, but are wanting to drink better," he said. "There's still this nucleus of consumers that can access the best and want to do so."

Walsh added that price increases and improvement in the sales mix had covered a net increase of 3 percent in input costs over the past year.

Chief Financial Officer Nick Rose said that price increases would continue for certain brands, noting that the company's earnings forecasts included around 4 percentage points from pricing and improvements to the sales mix.

Rose highlighted the company's strong performance in North America, where there had been concerns that a slowdown in consumer spending would have a strong impact on the company's lucrative spirits business.

Net sales in the region were up 5 percent, including a 7 percent rise in spirits growth, as demand for "priority" and "reserve" brands offset weakness in "value" brands — there was a 10 percent drop in net sales of "ready-to-drink," or premixed, products.

"North America remains in pretty good shape," said Rose, adding that the company's view on the region remained "reasonably robust."

Among Diageo's best sellers across all regions were Smirnoff, which saw net sales grow by 10 percent and Johnnie Walker, which posted a 12 percent rise in net sales.

Sales of Diageo's trademark Guinness stout rose 6 percent, with more than 50 percent of that growth coming from Africa.