Tequila star performer in Diageo’s half-year results

Diageo registered an organic net sales increase of 4% to £7.2 billion (US$9.3bn) for the final six months of 2019, boosted by the double-digit growth of Tequila.

Don Julio Tequila grew by double digits in the US

Organic operating profit for the period grew by 4.6% to £2.5bn (US$3.2bn) due to “productivity benefits from everyday cost efficiencies and strong price/mix, partially offset by cost inflation and upweighted marketing investment”.

All regions contributed to Diageo’s “broad-based” organic growth. The firm also reported free cash flow at £1bn (US$1.3bn).

Diageo chief executive Ivan Menezes said: “Diageo has delivered another good, consistent set of results in the first half, with broad-based organic net sales growth across regions and categories. We have continued to increase investment behind marketing and growth initiatives, while expanding organic operating margins.

“These results reflect the changes we are making in the business to drive shifts in our culture. They are in line with our current mid-term guidance and have been delivered in the face of increased levels of volatility in India, Latin America and Caribbean and travel retail.”

In 2019, the board approved a further incremental share buyback programme of £660 million (US$860m), bringing the total scheme up to £3bn (US$3.9bn) for fiscal 2019. A further £4.5bn (US$5.9bn) was approved in July and will be returned to shareholders between fiscal 2020-2022.

Brand performance

The group’s Scotch portfolio was “flat” due to Johnnie Walker Black Label and Johnnie Walker Red Label, which “softened globally” as a result of “challenging trading conditions in Mexico; volatility in travel retail and the Middle East; and political and economic disruptions in Peru and Chile”.

Diageo said Johnnie Walker’s performance was offset by its single malt portfolio, which grew organic net sales by 17%. In addition, the firm’s latest Game of Thrones-themed products Johnnie Walker A Song of Ice and A Song of Fire, and the Game of Thrones Single Malt Whisky Collection “maintained its value contribution”.

Vodka sales dropped 1%, due to a decline in North America. Smirnoff grew 1% boosted by “strong growth” in Mexico and Australia, while Cîroc fell by 9% and Ketel One declined by 1%. Both the decreases were attributed to the US spirits market.

Canadian whisky grew 11% with “strong growth” from Crown Royal in the US, led by flavoured line extensions Crown Royal Regal Apple, Crown Royal Vanilla and the limited edition Crown Royal Peach.

Rum grew 2%, attributed to Captain Morgan’s growth in Europe and the US. In July last year, Menezes said the firm had plans for its marketing and expected its trajectory to get better.

Liqueurs increased 7% with growth in all regions except Latin American and Caribbean. Baileys was up 8%, driven by a “good start” from the new Baileys Red Velvet Cupcake, which recently launched in the UK and US.

Gin grew 7%, with double-digit growth in Latin American and Caribbean, and Africa. Tanqueray grew by 13% and Gordon’s increased by 2%.

Tequila continued to grow strongly, reporting a 31% increase. The growth was driven by the double-digit growth of Don Julio and Casamigos in the US, and Don Julio in Latin American and Caribbean.

Bulleit Bourbon led the growth of US whiskey, which increased by 6%. Ready-to-drink increased by 11% with “broad-based growth across all regions”.

‘Ongoing uncertainty’

During the period, Diageo increased its shareholding in non-alcoholic ‘spirit’ Seedlip to a majority stake in August 2019. The completion of the deal has resulted in an “exceptional step up gain of £8m (US$10.4m)”.

Menezes expects organic net sales for the full-year to be at the “lower end” of the 4-6% mid-term guidance range.

He continued: “There is ongoing uncertainty in the global trade environment and we would not be immune from further policy changes. We remain focused on building the long-term health of our brands, supported by data-led insights and a culture of everyday efficiency

“With the consumer at the heart of the business and with greater agility and discipline in the execution of our strategy, we are growing Diageo in a consistent, sustainable way.”