Diageo has momentum

on 29 July, 2016

The chief executive of the world’s largest premium drinks company expressed satisfaction at the company’s progress at a briefing to journalists and city analysts yesterday (July 28) following the announcement of its end of year results.

The company reported volume growth of 1.3%, net sales growth of 2.8%, operating profit of 1.6%, operating cash flow at £2.5 billion and a final dividend increase of 5% - to keep the all-important shareholders and institutional investors happy.

Ivan Menezes is a much more relaxed man than he was a few years ago.  Stiff and aloof, he now goes round, shaking hands and calling financial hacks by their first names.

He said the company now has “momentum” and “under the numbers” he was satisfied with the “texture of the performance”.

He reeled off some of the reasons: efficiency, consistency of performance, growth across all of Diageo’s global brands.  The US accounts for approximately 25% of Diageo’s business and that has stormed back led by brands such as Captain Morgan, Smirnoff, Johnnie Walker, Crown Royal, Don Julio tequila, Bulleit bourbon and Buchanan’s blended scotch whisky.

Europe was doing OK but Brazil, Russia and Nigeria were “economically challenged”.  But then again Mexico, Columbia, SE Asia, India and Turkey were all in growth for Diageo.

He finished his speech by saying that Diageo was stronger; there was better cash conversion; efficiency was embedded and there was investment in the business to shore up growth. Also, that a survey of company employees showed that virtually everyone was happy.

Before he went to questions and answers he extolled, rightly so, what Diageo is doing in terms of investing in alcohol abuse, drink/drive initiatives and water efficiency programmes both in making their products and in Africa where water is life or death.

Asked about how the current political turmoil in Turkey was affecting the business, Menezes said: “Our business is more domestic and things appear to have returned to normal. Tourism is more impacted but that is not so important to us.”

On the US, he said that “granular understanding” allowed the company to drill down and “measure the effectiveness of what we are doing. We are able to track down sales to a particular event.”

Menezes would not be drawn on either Brexit or the possibility of Scotland leaving the United Kingdom, other than to say that they would look for the “most favourable conditions for scotch whisky”, which represents 25% of Diageo’s business. On being pushed, he proffered that it would mean “more paperwork, more complexity but they would work around them and put solutions in place.”

On the need to formulate free trade agreements following Brexit, Menezes cited India as a good example of where the non-EU UK could forge an advantageous agreement.

He went on to say: “I love India. It is the second biggest market for spirits. The demographics are excellent and the Indians love whisky.”  No wonder he bought United Spirits despite all its problems.

On the rise of e-commerce, Menezes acknowledged problems, restrictions with selling alcoholic drinks. He said it was “small, under 2-3%” of their business but Diageo had “invested in that space and ‘tech benchers’” looking at it.

He defended the sale of Bushmills Irish whiskey, saying it failed to “get traction in the US - I know. I was there.” Better to have full ownership of Don Julio as tequila was growing, not just in the US, he claimed.

On trends, Menezes said trends come and go. He said: “Vodka is by means dead. There is double-digit growth in South Africa.  Whisky was hot in Spain and gin was nowhere. You need to be healthy enough to ride it when things go bad.”

So everything appears to be rosy in the Diageo house as re-arranged by Ivan Menezes. He appears able to sit down and relax.

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