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Diageo Meets Expectations Showing Strength in Emerging Markets

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Diageo Meets Expectations Showing Strength in Emerging Markets

Diageo plc (LON:DGE) (NYSE:DEO), the world’s largest producer of alcoholic drinks, reported preliminary results for the year ending June 30, 2012.

Some of the highlights of the year according to Diageo’s press release were as follows.

Emerging markets saw net sales growing 15%, with operating profits up 23%. The company made some acquisitions in emerging countries, notably Mey ?çki in Turkey, which added £320 million in sales and £82 million in operating profits. Diageo plc (LON:DGE) (NYSE:DEO) ramped up its stakes in Shuijingfang and Halico, and plans to acquire the Ypióca brand in Brazil. Emerging markets now account for 40% of Diageo’s business.

Free cash flow generated was £1.6 billion. The company enhanced its dividend by 8%.

Chief Executive Paul S Walsh:

“Diageo is a strong business, getting stronger and the results we released this morning show that very clearly. We have increased our presence in the faster growing markets of the world, through both acquisitions and strong organic growth. We have enhanced our leading brand positions globally, through effective marketing and industry leading innovation, and we have strengthened our routes to market. 6% organic top line growth, 9% operating profit growth and 60 basis points of margin expansion is a strong performance, and demonstrates our commitment to delivering efficient growth.

A year ago I set out our expectations for the medium term, and these results put us firmly on track to meet those goals.

In F12, we have continued to invest to ensure this business is well positioned for the future. Our confidence in the achievement of our medium term guidance is underscored by the 8% recommended increase in our final dividend.”

Diageo plc (LON:DGE) (NYSE:DEO) reported post-tax profits of £1.94 billion, up 2% against £1.9 billion last year. Operating profit excluding items was higher by 11% to £3.198 billion, a shade better than street expectations of £3.18 billion. Revenues were higher by 8% to £10.76 billion.

Citi Research has a Neutral rating on the stock and a price target of £15.50.

Citi feels the company has put in a solid organic performance in line with estimates. North American sales came in higher than estimates, but growth in EBIT was as expected. Growth in emerging markets continued to be strong though the rate slowed somewhat in the second half of the year. However, profit margins expanded across the board. As expected, Europe was a dismal show, with sales down 0.6% but EBIT growing 3.3%.

According to Citi, the numbers reported by Diageo are confirmation that western spirits continue to see resilient demand in emerging economies, even in an environment of slowing economic growth. The U.S. market is however, a different story, as margins are cramped due to competition and growth is being engineered through mix.

In comparison, brewing giant Anheuser-Busch InBev NV (NYSE:BUD) (EBR:ABI) last full year’s results, declared in March, reported decent top line trends and profit growth in the double digits. Revenue was up 4.6% to $39 billion, with volume growth the strongest in the Asia Pacific region and weak in developed markets. Profits increased by 45 percent to $5.9 billion and free cash flow was about $7.8 billion.

Brewer Molson Coors Brewing Company (NYSE:TAP) (NYSE:TAP.A) earlier reported second quarter results that beat analysts’ revenue expectations – net sales were $999.4 million, up from $933.6 million a year earlier, and topping analysts’ average estimate of $934.8 million. Earnings, however, were down 53%, due to higher costs. The company is making efforts to expand into emerging markets with acquisitions.


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