Diageo Plc. (DEO) reported its preliminary results for the year ended 30 June 2012, wherein fiscal 2012 earnings went up 13% from the year-ago period to $1.26 (94.2 pence). The upswing in profit was the result of strong global organic growth and improved performance of strategic brands like Johnnie Walker and Ciroc.
The company recorded net revenue (i.e. total revenue minus excise duties) growth of 6% in the year. Volume grew 2% year over year organically.
Gross profit for fiscal 2012 climbed 10.2% year over year on the back of higher net sales. Operating profit increased 9.0% from the year-ago level despite an 8% hike in marketing spend due to controlled promotional expenses. Operating margin inflated 60 basis points driven by positive pricing mix shift to premium products.
Segment Details
In North America, Diageo’s net sales went up 6% on an organic basis. Volume went up 2% in fiscal 2012. Spirits’ net sales went up year over year on the back of strong performance of the Ciroc brand, which in turn was driven by new product launches like Ciroc Peach. However, Wine reported a year over decline in net sales due to intense pricing pressure U.S. The segment operating profit went up 6% in fiscal 2012.
In Europe, net sales declined 1% on an organic basis. Volume also went down 1% from the year-ago level due to the challenging economic conditions in Southern Europe. However, the company performed better in the emerging markets of Eastern Europe like Russia and Turkey. Scotch sales remained strong during the year with Smirnoff and Captain Morgan performing well in Great Britain. The segment operating profit went up 3% in fiscal 2012 on the back of the company’s new restructuring program started in fiscal 2011. Under this program, Diageo reviewed its operating model in Scotland and Ireland with an objective to improve the effectiveness and productivity of the group’s operations and deploy resources closer to the market.
In Africa net sales increased 11% on an organic basis backed by double-digit growth in East Africa, Ghana and Cameroon. Volume went up 5% in fiscal 2012. Beer and Spirits did well, backed by investment in brands like Guinness, Tusker and Johnnie Walker and innovations like Harp Lime in Nigeria. The company further strengthened its presence in Africa with the acquisition of Meta Abo Brewery in Ethiopia. The segment’s operating profit went up 20% in fiscal 2012.
In Latin America and the Caribbean, net sales went up 19% on an organic basis driven by strong businesses in Paraguay, Uruguay and Brazil. Volume went up 10%. Scotch boosted net sales in the region backed by strong performance of brands like Johnnie Walker and Old Parr. Operating profit went up 22% in fiscal 2012 due to the positive price mix in the region.
In Asia Pacific, net revenue went up 8% on an organic basis with strong performance in South East Asia, Greater China and India. Scotch drove growth in the region backed by the company’s deluxe as well as reserve brands like Zacapa, Ketel One vodka and Ciroc. Volume rose 2% in fiscal 2012. Operating profit went up 18% in fiscal 2012.
Road Ahead
For fiscal 2013, the company expects input cost inflation to average around 4%. The company is concerned that Western Europe might witness further weakness during the period.
Recommendation
Based in London, United Kingdom, Diageo is involved in producing, distilling, brewing, bottling, packaging and distributing spirits, wine and beer.
Currently, we have a long-term Neutral recommendation on Diageo, which carries a Zacks #3 Rank (short-term Hold rating).
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