Spirits maker Diageo full-year net profit up 7 pct

[August 27, 2009]  LONDON (AP) -- Diageo PLC, the world's largest spirits maker, posted a 7 percent rise in full-year net profit on Thursday, benefiting from favorable currency exchange rates and cost-cutting amid weaker demand for many of its key products.

The maker of Johnnie Walker whisky, Smirnoff vodka and Guinness stout cut its profit target for the current year because of concerns about the strength of an economic recovery -- but also stressed that it believed the worst was over.

Net profit for the 12 months to June 30 was 1.62 billion pounds ($2.62 billion), up from 1.52 billion pounds a year ago.

Revenue rose 15 percent to 9.31 billion pounds, but sales were flat when the exchange rate gains were stripped out.

The rise in earnings angered union leaders who are protesting the company's decision to close a 199 year-old distillery in Glasgow and a bottling plant in Kilmarnock as part of cost-cutting in Scotland. The closure will mean the loss of 900 jobs.

Protestors gathered outside Diageo's headquarters in central London, before moving on to Prime Minister Gordon Brown's residence at No. 10 Downing Street and then the embassies of key importers of Diageo's products. Unite union spokesman Len McCluskey said cutting the jobs was about short-term greed.

"Even in a global recession, Diageo can pull in billions of pounds in pure profit," McCluskey said. "For 185 years, generations of Scotland's workers have delivered for this company. Their hard work has made this company extraordinarily wealthy and its products loved around the world."

Diageo has said the job cuts will be partly offset by the creation of 400 new jobs at its packaging plant in Fife.

Scotland is one of Diageo's largest spirit supply centres, currently employing about 4,500 people and producing nearly 50 million cases of Scotch whisky and white spirits, but Chief Executive Paul Walsh said that the company needed to refocus and cut costs as consumer trends change.

"The reality is that Scotch whisky's future lies beyond these shores, we have to penetrate new markets," Walsh told BBC Scotland. "The cost of entry is high and therefore we have to have a competitive offering."

Diageo has been hit by recent destocking -- stores and distributors keeping fewer of its products -- in the United States and weak demand in Europe.

Organic operating profit growth -- the figure closely watched by analysts -- was 4 percent. That was at the lower end of the 4 to 6 percent range the company forecast in February, a prediction that was itself a lowered target from an earlier forecast of 7 to 9 percent growth.

The company dropped the target further for the current financial year, pegging "low single digit" growth.

Diageo shares were 3 percent lower at 966 pence in morning trade on the London Stock Exchange.

Chief Financial Officer Nick Rose said that he was confident that the company's core premium brands would not suffer long-term from the economic downturn, saying that the recent tendency of consumers to seek out value brands had been overstated.

"The question that we are often being asked is: Is the basic business model of premiumisation over? We feel very strongly that it isn't," Rose told reporters on a conference call.

"Although we are not shouting about the green shoots as aggressively as some people are, we would say that the worst is over."

The so-called premium sector includes brands that retail for around $10 a bottle in the United States, such as Diageo's Smirnoff and Ketel One vodkas and Captain Morgan rum. Super-premium brands start at $20, with the ultra-premium sector ranging from $50-100.

Rose also said that he did not expect to see further significant destocking, which had a heavy effect in the first few months of 2009.

Diageo, which also makes Baileys liqueur and Gordon's gin, said that growth in spirits offset a weakness in wine and beer sales in its key U.S. market over the year. While volumes were flat, U.S. sales rose 1 percent and Rose said he expects North America to remain "very resilient."

The international division was a major contributor to the company's earnings report, with continued growth in Africa and increases in Latin America driving net sales growth of 7 percent, despite a 4 percent drop in volumes. Guinness stout was a star performer, with sales up 15 percent.

In Europe, volumes fell 6 percent and net sales were down 5 percent. Spain and Ireland were particularly impacted by the worsening economic environment.

The company's Asia Pacific region was the worst performer. Volumes were down 11 percent and sales down 4 percent due to trade de-stocking and a decline in sales of ready-to-drink products in Australia after an increase in alcohol tax.

[Associated Press; By JANE WARDELL]

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