By Saabira Chaudhuri
LONDON-- Diageo PLC reported lower operating profit for the year
as the world's largest spirits maker was hit by weaker sales in its
key North America business.
The maker of Johnnie Walker whisky and Smirnoff vodka reported
its operating profit, excluding one-time items, fell 0.8% to
GBP1.45 billion ($2.26 billion), while per-share earnings before
one-time items dropped to 88.8 pence from 95.5 pence. On an organic
basis, which strips out currency movements and acquisitions, net
sales were flat.
The results cap a tough couple of years for Diageo, which has
lost market share in North America where once-blockbuster brands
like Smirnoff and Captain Morgan have floundered. Diageo has also
been hammered by weakness in Asia amid an anticorruption campaign
in China and social unrest in Thailand both of which have slowed
demand in the region.
Including the impact of currency and acquisitions, Diageo
reported a net profit of GBP2.38 billion for the year ended June
30, compared with GBP2.25 billion a year earlier, on net sales that
rose 5.4% to GBP10.81 billion, including Indian liquor maker United
Spirits Ltd. and tequila brand Don Julio, which it acquired in
February.
Under Chief Executive Ivan Menezes, Diageo has said its shifting
its focus to more closely tracking what's actually sold to
retailers--called depletions in industry jargon--rather than what
is shipped to distributors. Diageo recently received an inquiry
from the U.S. Securities and Exchange Commission, which is probing
whether the spirits maker has been shipping excess inventory to
distributors in an effort to boost results. Diageo has said its
working with the SEC and that the inquiry pertains just to U.S.
distributors.
Thursday, the company reported organic sales in North America
fell 1% from a year earlier as volumes dropped 3%. Diageo recently
said it was moving Chief Financial Officer Deirdre Mahlan to be the
new head of the North America arm, the latest in a slew of
executive reshuffling at the unit. The company hasn't yet named her
replacement. Thursday, Ms. Mahlan said the company is seeing a
better performance from Smirnoff--which Diageo has been heavily
promoting--but said "there is still work to do on Captain Morgan,"
the rum brand.
Ms. Mahlan said the first half of next year will be "relatively
weak" in North America--Diageo's largest and most profitable
region--as shipments stay slow, but for the full year, the company
expects shipments and depletions to be roughly equal.
In the Asia-Pacific region, organic sales fell 2% from a year
earlier as volumes declined 3%. Diageo has been working to
"destock" in Southeast Asia--or pause shipments--to allow excess
inventory that is piled up with wholesalers to trickle off. Ms.
Mahlan expects more destocking in Asia, although at a lower level
than last year. In China, Diageo's baijiu spirits business is
recovering, although scotch is expected to remain weak in the
current fiscal year.
The company has also been destocking in parts of Latin America,
where currency fluctuations and soft demand have led to shipments
being out of sync with demand. In Latin America and the Caribbean,
organic sales nudged 1% lower from a year earlier.
In Europe, organic net sales were flat. Africa was a relative
bright spot, with sales rising 6%. Diageo earlier this week moved
to wield more control over its business in South Africa,
terminating a joint venture with Heineken NV .
The company also reported its shipment volume for the year was
down 1% and that depletion volume is estimated to be up 1%. In
North America, Ms. Mahlan said depletions rose 4%.
Looking to fiscal 2017, the company said it expects to
mid-single digit organic revenue growth and operating margin
expansion of 100 basis points over three years, guidance that RBC
analyst James Edwardes Jones called "notably upbeat."
Ms. Mahlan characterized the current fiscal year as a
"transition year" as Diageo continues to work to get what it sends
to distributors in line with what's actually sold to customers, but
said revenue will improve as volume growth picks up.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
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