Diageo’s FY results flatline as volatility continues

Currency volatility, political instability and an “uneven recovery” in the US have caused Diageo’s organic full year sales to fall flat.

Johnnie Walker and number of Diageo’s other leading brands have struggled in 2014/15

In its full year fiscal results, the world’s largest alcoholic drinks group said its organic (excluding impact of currency and acquisitions) net sales stagnated in 2014/15, while organic operating profit fell by 1%.

On a reported basis, net sales increased 5% to £10.8bn, compared to £10.2bn in the year to 30 June 2015, meanwhile operating profits increased marginally from £2.7bn to £2.79bn.

Diageo blamed its mixed results on multiple “market challenges”, including the anti-corruption drive in China – which contributed to the group’s £1.1bn sales decline in 2014/15 – and turbulence in Russia caused by its conflict with the Ukraine.

In addition, the group was impacted by currency devaluation in Venezuela, Europe and Russia, excise duty increases in Kenya and a “challenging environment” in Nigeria which Diageo admits it was “slow to read”.

Overall, the firm estimates exchange rate movements “adversely impacted” both net sales and operating profit by approximately £370m and £100m respectively. Cash flow meanwhile increased from 1.2bn to 1.9bn.

In North America, the group saw its net sales fall 2% due to reduced shipments, with its top three “global giants”, Smirnoff, Captain Morgan and Johnnie Walker, all struggling in the region.

Diageo’s net sales dropped 7% in Europe as “improved momentum” in the west and growth in Turkey was not enough to offset turbulence in Russia, which saw sales fall 14%.

Africa boasted a better performance for the firm, with overall sales up 6% and spirits reporting double-digit growth. Reserve brands grew 26% in the region. However, net sales fell 10% in Latin America and the Caribbean, with an enormous 60% dip in reported net sales in Venezuela.

Mixed performance in Asia

The group’s Reserve Brands portfolio experienced a more favourable performance in the year

The group finally saw its Shui Jing Fang baijiu brand recover, boosting its performance in China and the wider Asia Pacific region. However new regulations in Indonesia caused “major disruptions”.

Looking at its key categories, Diageo’s Scotch portfolio declined reported net sales by 10%, yet North American whiskey – including the Crown Royal and Bulleit Bourbon brands – grew 15%.

Johnnie Walker’s reported net sales dropped a significant 12% due to unfavourable comparisons with 2014/15 and increased competition in China. Smirnoff was impacted by weakness of the flavoured vodka category in the US, with sales falling 3%.

Captain Morgan also struggled against competition from other categories in the US and declined 7%.

Diageo’s Reserve Brands portfolio, which includes the Ketel One, Don Julio Tequlia, Ciroc, and Bulleit Bourbon and represents 13% of the group’s overall sales, grew 8%

Ivan Menezes, CEO of Diageo, said he remains confident the group can further growth in the year ahead.

“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,” he said.

“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.”

Menezes added that he expects to achieve mid single-digit organic growth in 2015/16.