-- Emerging markets, U.S. recovery drives business
-- CEO says the company is getting stronger and on track to meet
targets
-- Continues discussions over Jose Cuervo
(Rewrites throughout, adding executive comments from second
paragraph, analyst comment in 17th paragraph, share price in final
paragraph.)
By Simon Zekaria
LONDON--Diageo PLC (DGE.LN) Thursday said it remains in talks
over the acquisition of Mexico's Jose Cuervo, the world's biggest
tequila brand, as it recorded a steady rise in profit, driven by
emerging markets growth as well as a U.S. recovery, and raised its
dividend.
"When we have something to announce, we'll announce it," said
Chief Financial Officer Deirdre Mahlan.
Chief Executive Paul Walsh said the U.K.-based producer of
Johnnie Walker Scotch whisky and Guinness stout is "getting
stronger" and is on course to hit its medium-term targets.
Growing demand for premium spirits like whisky, vodka and rum in
Asia-Pacific and Latin America, where rising incomes and adult
populations are supporting high-end consumption, is driving
Diageo's earnings growth, like its French rival Pernod Ricard SA
(RI.FR). Diageo expects developing economies to contribute half of
its global revenue by 2015, up from almost 40% currently.
Consumers opting for higher-priced products and price increases
across various markets have also boosted Diageo's top line.
Meanwhile, trading remains sluggish in Western Europe, where
below-inflation pay rises and unemployment are squeezing
spending.
While Pernod prioritizes debt reduction, Diageo has been on a
more active acquisition trail in recent years across developing
economies, having snapped up Turkish raki maker Mey Icki, Chinese
baijiu producer Shui Jing Fang and, most recently, leading
Brazilian cachaca brand Ypioca.
Reports have said Diageo is close to a $3 billion acquisition of
Jose Cuervo from the Beckmann family. Diageo's Jose Cuervo
distribution contract in major export markets expires in June next
year, and the company has made clear its preference for an equity
tie-up in the brand, which has seen trading hit by destocking and a
consumer shift away from dark tequilas.
"We do need to do more work to improve the performance of Jose
Cuervo," Ms. Mahlan said.
The London-based company said net profit in the year ended June
30 increased to 1.94 billion pounds ($3.08 billion) from GBP1.9
billion the previous year.
Operating profit before exceptional items--a closely watched
metric--grew 11% to GBP3.20 billion, ahead of market expectations
of GBP3.18 billion.
Sales rose 8.3% to GBP10.76 billion, just ahead of market
expectations of GBP10.75 billion, and up 6% excluding acquisitions,
disposals and currency effects. Full-year volumes on the same basis
rose 2%.
The numbers fit Diageo's medium-term outlook for average
top-line growth of 6% excluding acquisitions, disposals and
currency effects. The targets also call for operating-margin
improvement on the same basis and double-digit earnings-per-share
growth.
Excluding acquisitions, disposals and currency effects, Latin
America and Caribbean sales soared 19%, while sales in Asia Pacific
and Africa rose 8% and 11%, respectively. Ms. Mahlan said there is
no slowdown in rapid-growth markets, only some softness in Brazil
and the vodka business in India.
Sales in North America increased 6%, an improvement on 3% growth
a year earlier. The company has also been buoyed by a rebound in
the U.S. spirits market, as consumers shift away from beer, even as
economic conditions remain largely fragile. Solid recent trading of
peers Beam Inc. (BEAM), Brown-Forman Corp. and Davide
Campari-Milano SpA (CPR.MI) in the region raised expectations that
the world's biggest consumer market is showing momentum.
European sales dipped 1%, an improvement from last year's 3%
decline. The region also swung to an operating profit of 3%,
following a 7% fall last year, as Diageo reined in costs.
"I wouldn't declare victory. I think it is still going to be a
challenging environment," Ms. Mahlan said on Europe.
Atif Latif, a trader at Guardian Stockbrokersm said: "There was
some concern into these results of a slowdown in these numbers, but
they have beaten expectations."
Diageo recommended a full-year dividend of 43.5 pence, up 8%
from 40.4 pence last year.
At 0830 GMT, its shares were up 9.5 pence, or 0.57%, to 1690
pence, in a slightly higher London market. The shares have gained
more than 50% in the past year.
Write to Simon Zekaria at simon.zekaria@dowjones.com
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