Diageo’s Walsh masters the art of persuasion

Paul Walsh, Diageo’s chief executive, is a persuasive man. At any other time the group’s first half results to the end of December would have been viewed with dismay.

Pre-tax profit fell slightly to £1.39 billion from £1.41bn a year ago in what he called a "challenging" period. Organic net sales were down by 2% and the consumer environment remained weak, he said. Not surprisingly, the shares slid initially.

These are not normal times, however, and by the time Walsh had finished briefing the City, a more positive view had emerged and Diageo’s shares were regaining ground. And Walsh had some good arguments to deploy.

The 2% drop in profits was a better outcome than had been forecast and while organic operating profit was 3% down, the trend in the past three months was much more positive. "If you look at the second quarter, it’s clear that the US and Europe remain pretty slow but markets such as Asia, Latin America and Africa are quite buoyant," he said.

Walsh said Diageo had weathered the storm well in what was the most difficult global downturn most people can remember. It had gained market share in its major markets and brand categories, had increased free cash flow to £904 million, reduced interest costs by £100m and had increased the dividend by 5%.

In addition, the company had reduced its cost base by £185m in a full year. No further restructuring is planned, but a further downturn would force the group to remain very flexible. Combined, said Walsh, these factors allowed him to maintain his forecast of “low single-digit operating profit growth for the full year.”

The message was that Diageo was lean and fit, ready to capitalise on opportunities as and when the world economy recovers.

Nevertheless, there are trends that Diageo would rather not be facing. The comment that “the performance of our standard-priced brands has been stronger than that of our premium-priced brands” points to consumers trading down and pressure on margins. Indeed, in the key US market, where destocking had taken place, volumes fell by 4% and net sales were 6% lower. In Europe, volumes fell by 5% and sales by 5%. In Africa and Latin America, however, volumes rose by 2% and sales were up 8%.

Most key brands suffered falls in both volumes and net sales value but the brightest performer was Johnnie Walker, which achieved a 3% increase in volumes and a 4% gain in sales value.  

Walsh suggested that markets in Europe and the US would remain flat until at least the summer but that emerging markets would drive further growth. He also suggested that the rate of the switch in consumption from the on-trade to drinking at home would slow but that in some markets (notably the UK) it might not necessarily reverse. That is why Diageo’s marketing expertise would stand it in good stead, he said.

Overall, Walsh was bullish but he did have a message for the government, saying the 50% higher income tax rate was a disincentive to bringing talented people to work in Britain. Corporation tax, he said, needed to be cut and he called for a more simplified and unwavering tax regime.

This was not a threat that Diageo would switch from being a British company, but was a warning from Walsh that governments should not take any business for granted. “If the tax regime becomes so egregious, either for corporates or individuals we would have no option but to look at alternatives," he said.

Finance on Friday, 12.02.2010