Instead, much of the group’s growth was seen in emerging markets, particularly from the Johnnie Walker and Smirnoff brands.
Overall, sales increased by £213m to £9.92bn. Operating profit rose to £2.16m from £2.04m, but higher finance charges and the impact of a large disposal last year pushed pre-tax profits below last year’s figure of £2.14bn to £2.09bn. The final dividend is raisedo 5.2% to 20.15p, taking the total to 32.7p.
The results were buoyed by a strong performance from Johnnie Walker, Smirnoff, Baileys and Guinness. However, costs rose £106m, mostly from increased marketing to shore up the group’s key brands.
The results from North America were hit by the weak dollar, which knocked £69m off operating profit. Net sales were also hit, falling from £2.51bn to £2.47bn. Smirnoff and Baileys showed double-digit net sales growth, boosted by new advertising campaigns. Diageo’s share of the spirit market also increased.
In Europe, performance was weak in the first half of the year, but growth resumed in the second half, leaving the region largely flat overall. Net sales were £2.43bn, down by £28m. Operating profit for the region fell £14m to £723m. Price increases masked falls in the volume of sales. Baileys was hit in the UK as a result of the Christmas pricing strategy to increase net sales.
It was in the emerging markets that the group saw the strongest growth. Johnnie Walker, Smirnoff and Buchanan’s were the key drivers of net sales growth. Guinness grew 15%, led by strong growth in Africa. Growth in Bailey’s was driven by the launch of Bailey’s flavours.
The international division is still a relatively small part of overall revenue at £1.7bn, but this is an increase of £211m from last year. Operating profit rose £54m to £499m for the year. The exchange rate had a negative impact of £46m. The group’s largest brands grew 15% in the division, while local brands grew 19%.
Chief executive Paul Walsh said the group expects organic operating profits growth of 9% for 2008, though it is keeping an eye on the potential fallout from volatile equity markets.
The shares were up 7p to 1,025p in early trading. This is marginally higher than 12 months ago when the price was 944p. The high for the year was in June at 1,094p. The shares have seen a fairly steady rise over the past three years.
The shares aren’t cheap at 16.8x future earnings and the current price does not factor in any weakness from lower interest rates. Diageo does 30% of its business is in North America, which is seeing the worst of the current economic turmoil. The group has a reasonably high dividend yield at 3.41%, but underlying growth in some of its major markets looks weak.
The group also has regulatory momentum working against it as Western governments get more prescriptive about the health of their citizens. Growth in emerging markets may support declines in developed markets, but overall, there is little to get excited about in Diageo.
