Diageo says profits on track as Europe worsens

Thu, Jul 7, 2005, 01:00

The world's biggest spirits group Diageo, said today annual underlying operating profits will grow at around 6 percent in line with its guidance, but warned that the trading environment in Europe had worsened.

The firm, which makes Smirnoff vodka, Johnnie Walker scotch and Guinness beer, said volume growth and mix improvements had slowed due to tough trading in Europe and a slowdown in the market for ready-to-drink products, such as Smirnoff Ice, in the US

Diageo, which also owns Scotland's Gleneagles hotel hosting the Group of Eight world leaders meeting this week, said trading in Europe had deteriorated and net sales which were one percent lower in its first-half (July-December 2004), are set to be down further in its second-half for the region.

Its 8 key global brands - such as Smirnoff, Baileys liqueur and Captain Morgan rum - increased organic, or underlying, volumes in the year to June 30, 2005 by 4 percent, similar to first-half growth, but Diageo saw a slowdown in the growth of its beer brands.

For the new financial year, 2005-2006, Diageo expects similar growth in organic volumes to that achieved in the year just ended, while it sees price increases and cost efficiencies boosting operating margins.

Diageo faces increased competition as French rival Pernod Ricard  is set to complete its takeover of Allied Domecq later this month bringing together the world's second and third largest spirits producers and closing the gap on Diageo.

Diageo sided with Pernod and its U.S. partner Fortune Brands in the battle for Allied, with the French group agreeing to sell Diageo its own Bushmills Irish whiskey and give it an option to buy Allied's New Zealand Montana wines.

Diageo shares have narrowly outperformed the FTSE 100 index by 2 percent this year and closed on Wednesday at 838-1/2 pence, valuing the group at nearly 25 billion pounds.