Diageo sets 'ambitious' targets

Spirits group Diageo has set an ambitious 10 per cent-plus earnings growth target, when beating forecasts with a 16 per cent rise in its full-year earnings today.

The company, which sells Guinness and a number of popular spirit brands, was upbeat about current trading, saying it had not seen the effect of poor weather and weak consumer demand which undermined brewer Heineken.

"We have finished the year strongly, the last couple of months of July and August have continued along the same trajectory. We feel confident over the last two months," finance director Deirdre Mahlan said on a conference call.

She also said Diageo was a more balanced business than Heineken with a broader base, and although the southern European markets of Greece and Spain saw sales falling, emerging markets in Latin America, Africa and Asia grew strongly, and even North America saw some growth.

Chief executive Paul Walsh set stretching new targets for his group, looking to grow underlying sales by 6 per cent, improve margins - by 2 percentage points to 31 per cent in the next three years - and sees double-digit percentage earnings growth in the medium term.

"While Diageo is not immune from a fragile global economy, this is a strong platform ... Achievement of these aims would underpin even stronger dividend growth," Mr Walsh said.

"The targets themselves imply a good level of confidence in the business, but also that the management feel under pressure to deliver on this platform. Investors will take confidence that the group is setting itself stretch targets," Credit Suisse analyst Michael Bleakley said.

European brewer Heineken had said on Wednesday weak consumer sentiment and a damp summer would wipe out its profit growth in 2011, while last week Danish brewer Carlsberg cut its 2011 outlook due to falling Russian sales.

Analysts said spirit makers were less dependent on weather and gained from strong emerging markets, with Diageo less exposed to beer and Europe than these two brewers. Just over 10 per cent of Diageo's sales come from beer, while some 35 per cent of its overall turnover derives from fast-growing emerging markets like Brazil, China, India and Mexico.

"In the context of poor results from the brewers, today's results were a relief," Citi analyst Andrea Pistacchi said.

London-based Diageo posted underlying earnings of 83.6 pence per share, beating a Reuters SmartEstimate of 78.9 pence and a company-compiled consensus of 79.1 pence for the year to June.

The full year dividend rose 6 per cent to 40.4 pence.

Diageo said it would cut costs by £80 million by June 2013 after it announced a review back in May aimed at reducing the cost of inputs and operating costs.

The group said underlying annual sales and operating profit both rose 5 per cent in the year to end-June, while overall group sales grew 2 per cent to £9.9 billion.

Reuters