Diageo shrugs off vodka weakness to post H1 growth

Diageo’s organic net sales grew 4.2% to £6.5 billion (US$9.2bn) in the first six months of its 2017/18 financial year, despite continued struggles for the distiller’s vodka portfolio.

Johnnie Walker delivered a “strong performance” in H1

Reported sales growth – taking into account exchange rate movements, acquisitions and disposals – was slower, at +1.7%. Diageo estimated that its full-year 2017/18 net sales will lose £460m due to adverse exchange rates for the pound.

Reported figures were also impacted by Diageo’s £1bn acquisition deal for George Clooney’s Casamigo’s Tequila brand, which was completed in August last year.

Operating profit was up 6.1% to £2.2bn in the six months to 31 December 2017, with a higher marketing spend offset by productivity efficiencies.

Free cash flow sits at £1bn – a reduction of £55m due to increased investment in Diageo’s maturing inventory and a one-off £107m tax payment made to HMRC last year.

All regions contributed to the group’s organic net sales, with Asia Pacific and Latin America and the Caribbean showing the greatest gains, both up 7%. This was despite India’s roadside drinking ban and the effects of Hurricanes Irma and Maria that caused sales in the Caribbean and Central America to drop 6%.

North America and Africa recorded the slowest growth, both with 2% gains. The US was hit by weakness in Diageo’s vodka portfolio, while east Africa suffered uncertainty following the presidential election in Kenya.

Ivan Menezes, CEO of Diageo

Vodka was Diageo’s only spirits category to decline. Smirnoff, the world’s largest vodka brand, experienced an organic net sales loss of 1%, while Cîroc and Ketel One declined by 6% and 11% respectively.

Diageo’s cheaper blended Scotch brands that target local markets – namely J&B, Windsor and Old Parr – also struggled in the period. However, Black & White bucked this trend, with 42% growth.

Other top brand performers included Johnnie Walker (+7%), Tanqueray gin (+16%), Don Julio Tequila (+42%) and Shui Jing Fang baijiu (+75%).

Ivan Menezes said the H1 results “demonstrate continued positive momentum from the consistent and rigorous execution of our strategy”.

He added: “We have delivered broad based improvement in both organic volume and net sales growth. We have increased investment behind our brands and expanded organic operating margin through our sustained focus on driving efficiency and effectiveness across the business.”

Diageo expects to deliver mid-single-digit top line growth for the year ending 30 June 2018.