Diageo cuts profit forecast while Pernod confirms guidance

“Lack of visibility.” These three words uttered within the past 24 hours by both Paul Walsh and Pierre Pringuet, respectively the chief executive of Diageo and Pernod Ricard, underline how uncertain is the outlook for even the largest and most resilient drinks companies. 

Both were reporting their half-year results to the end of December. Diageo revealed a 6% rise in organic operating profit (aided by reduced advertising spending) and 3% organic growth in net sales while Pernod Ricard said its net profit was 5% ahead and that operating margins had jumped by 2.4 percentage points to 28.4%. There, however, the companies diverged.

Diageo has cut its profit forecast for the full year to the end of June to growth of between 4% and 6% rather than the previous target of 7% to 9%. Pernod Ricard, however, says that it is confirming its guidance of double-digit growth of net profit from recurring operations, despite warning that the post-Christmas quarter may see organic sales decline. As a result, Diageo’s shares fell by 4.7% in London yesterday while in early trading in Paris today, Pernod Ricard’s put on more than 6%.

That reflects the tone of each company’s announcement. Walsh said that Diageo had even considered not offering a profits forecast at all, so uncertain were conditions. Pringuet had fewer doubts. Underlying investors’ immediate reactions to Diageo’s results, however, was the accompanying statement that the group was suspending its share buybacks and conducting a £200m global restructuring programme aimed at saving £100m a year. Included in that could be the loss of about 1,000 jobs out of 23,000, some of which could be in Britain.

Walsh said the programme was designed to make sure that Diageo emerged from the recession “even stronger”, reinforcing its position as the world’s leading beverage alcohol group. Although he believes the next few months “will be quite challenging”, he stressed: “This business is still in growth”. Pringuet too predicted gaining market share.

Both groups are continuing the strategy of driving up the value and profitability of their products through premiumisation, but it’s noticeable that in the run up to Christmas both had suffered volume declines in key brands. For instance, at Diageo only Smirnoff, Captain Morgan and Crown Royal increased their case sales while at Pernod Ricard Scotch whisky volumes increased through Chivas Regal, Ballantine’s and The Glenlivet; Jameson also continued its advance, as did Montana wines from New Zealand.  

Finance on Friday, 13.02.09