Diageo poised to reveal progress in hitting profit targets

Source: Scotsman

By MARTIN FLANAGAN

Sunday 19 August 2012

STRONG emerging markets and greater resilience than expected in its core American territory will see spirits giant Diageo this week set a strong pace in meeting ambitious three-year trading targets unveiled a year ago.

Paul Walsh, chief executive of Diageo, Scotland's largest whisky producer, told the City last August that the group was launching a project to achieve 6 per cent average annual organic net sales growth over three years.

In addition, the group said it was targeting a 200 basis point improvement in profit margins. Analysts expect Diageo to announce significant progress in hitting those targets at its annual results on Thursday,

Gideon Adler, drinks analyst at Investec Securities, said: "In the first nine months of this year Diageo has been running at 7 per cent topline [sales] growth, so therefore look well set to deliver against their targets.

"They have seen strong growth in emerging markets and look well on their way to achieving their other target of 50 per cent of sales from those markets by 2015."

Under Walsh, the world's biggest spirits company has been ploughing extra investment into satisfying a growing, aspirational middle class in the likes of Asia and Africa. Premium Scotch whisky brands such as Johnnie Walker have led the way. Adler added: "Meanwhile, Diageo's US market [accounting for over 40 per cent of its operating profits] has been better than expected. Diageo's spirits customers in the US are not immune from the economic travails there, but they are still more resilient than the mainstream beer drinker.

"At the high end of the market, consumers continue to trade up into premium Diageo brands like Johnnie Walker Blue Label and Ciroc vodka."

Deutsche Bank said in a note: "We expect Diageo to be well on track to hit its new mid-term targets and to have delivered another perfect P&L - mid single digit top-line growth, high single digit Ebit [earnings before interest and tax] and double digit earnings per share growth."

City optimism on the group's latest performance has also been fuelled by a positive trading update in May and strong recent results from drinks ­rivals such as Beam, Brown Forman and Campari.

The City consensus for annual underlying operating profits at Diageo is £3.2 billion against £2.8bn in the previous year. Consensus for annual organic net sales growth is 6 per cent, against 5 per cent in 2011 when Walsh ratcheted up the key target.