Tequila drives Diageo sales as vodka stalls

Diageo has reported a 1.7% uplift in net sales in its 2018 half year results, which reached £6.5 billion, driven by Tequila and gin, but warned that adverse exchange rates will impact its end of year net sales.

Reported net sales (£6.5 billion) and operating profit (£2.2 billion) were up 1.7% and 6.1% for the half year ended 31 December 2017, while organic net sales rose 4.2%, exceeding the 3.7% average estimated among analysts, according to The Financial Times.

All regions contributed to a “broad based organic net sales growth”, up 4.2%, across the board, while overall organic volumes grew 1.8%, a result that Diageo said had been “partially offset by adverse exchange” conditions.

It expects exchange fluctuations to take a £460m bite from its net sales, and £60m from its operating profits in its end of year results to 30 June 2018.

Pre-tax profits climbed 6.3 per cent to £2.2bn, while cash flow continued to be strong and in line with last year, with net cash from operating activities at £1.2 billion and free cash flow at £1 billion. The interim dividend increased 5% to 24.9 pence per share.

“We have delivered broad based improvement in both organic volume and net sales growth. We have increased investment behind our brands and expanded organic operating margin through our sustained focus on driving efficiency and effectiveness across the business,” said Ivan Menezes, Diageo chief executive.

“By consistently delivering on our six strategic priorities, Diageo continues to get stronger: we have better consumer insight through superior analytics, improved execution on brand and commercial plans and have embedded everyday efficiency across the business through our productivity initiatives. This has enabled continued growth, improved agility, and consistent cash flow generation.”

The drinks producer reported organic growth in all of its major regions, with the Asia Pacific and Latin America and the Caribbean markets achieving the strongest growth rates at 7% each. North America and Africa both saw organic net sales increase 2%, while Europe and Turkey achieved 4% growth.

In terms of brands, Don Julio Tequila achieved the biggest increase in terms of global sales, with organic net sales increasing by 42%, highlighting the growing popularity of Tequila. Tanqueray was close behind at 16%, followed by Bulleit (11%), Johnnie Walker (7%).

Brands taking a tumble included Ketel One and Ciroc vodka, which saw organic net sales slide by 11% and 6% respectively. Smirnoff fared better, reporting a slower decline of 1%.

“Execution of improved plans on Cîroc and Ketel One vodka started in the first half and are expected to take time to impact performance,” said Diageo. “Smirnoff net sales performance improved versus last year and brand equity scores improved as it continued to remind consumers that it is a quality vodka at a great price through a campaign involving celebrity influencers, new packaging with quality cues and local activation against multi-cultural millennial consumers.”

Menezes said the group’s financial performance expectations remain unchanged, forecasting mid-single digit top line growth and 175bps of organic operating margin improvement in the three years to 30 June 2019.