Credit: Diageo ( DEO ) reported a solid full-year earnings on July 27, for the year ended June 2017, exceeding consensus expectations. Its organic net sales growth of 4.3% was driven by organic volume growth and a strong price mix, reflecting broad-based growth across all the regions. These factors also helped to strengthen the operating margins, which improved by 119 basis points on a reported basis, and by 37 basis points on an organic basis.
Given the impressive performance of the company, the management has increased the productivity savings goal to £700 million from £500 million estimated earlier, two-thirds of which will be reinvested in the business. While the company continues to expect mid-single digit top line growth, it is raising the margin improvement guidance, provided earlier, to 175 bps for the three years ending FY 2019 (ending June 2019). The company is also launching a share buyback program of up to £1.5 billion in FY 2018, which should help give a boost to the bottom-line.
Performance of FY 2017 Focus Areas
1. Scotch
- The sales of Scotch were up 5%, with the category forming a quarter of the company's net sales. The organic net sales growth was 4.7%, versus 0.4% in the previous year.
- The Johnnie Walker brand represents 55% of the sales in this segment, and is back to upbeat growth rates.
- Of the three biggest regions for this category, Asia Pacific and North America delivered accelerated growth. In Europe, the growth slowed down, driven by Great Britain and Benelux.
- The company has undertaken a number of campaigns to drive the growth of this key category. DEO partnered with F1, enabling it to reach the 3.4 million visitors to the events each year; personalization of labels for gifting purposes was extended to 33 countries and 59 cities; the "Keep Walking America" campaign was launched in the US on the eve of the presidential election; a skywriting stunt was performed for the Johnnie Walker brand at the Coachella music festival.
- The company also has brands across different price points in this segment, in order to accelerate growth even in emerging economies where premium scotch may not sell at a high rate.
2. US Spirits
- Organic net sales of US Spirits grew by 3.4% in the year, driven by volume growth. However, they were held back by the performance of super premium vodka. Excluding this, the sales growth was 6.1%.
- The company has taken a number of actions to drive the growth, such as increasing the marketing spend; improving the digital content; leveraging partnerships with Drizly, Uber, and Tasty; launching innovation variants of its brands; driving efficiencies to cut down costs, etc.
- These actions have helped to drive growth of a number of its core brands such as Don Julio, Bulleit, and Buchanan's.
- While the company's performance in this category has shown vast improvement since the negative growth seen in the six months ended December 2015, steps still need to be taken to improve its vodka brands, such as Smirnoff, Ciroc, and Ketel One.
3. India
- Organic net sales growth of 1.9% was delivered in India, despite short term headwinds such as the demonetization policy implemented in November 2016, and the ban on the sale of liquor within 500 meters of a state highway. While the former should not impact the sales going forward, the negative impact of the latter may continue in the future, though by a much lesser extent.
- Strong growth of the prestige and above brands continued this year driven by Scotch and the relaunching of certain brands.
- The company was able to gain 20 basis points of spirits market share in the region (till May), with prestige and above brands gaining over 70 basis points of industry share.
- Price increases, positive mix, and productivity savings helped to push the gross margins higher by 56 basis points.
- The Goods and Service Tax ( GST ) implemented in the country, which went live in July, should have an impact on the margins in the future, as a result of higher tax rates on packaging material, molasses, and services, partially offset by reduced input costs.
- In the medium term (by FY 2019), the company aims to improve organic operating margins to the mid-high teens.
See Our Complete Analysis For Diageo Here
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Notes:
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2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Diageo .
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
