UPDATE 5-Diageo cuts profit target on slowdown, shares fall

Thu Feb 12, 2009 11:04am EST

Related Topics

* Cuts annual operating profit growth target to 4-6 pct

* Half-year earnings per share rise 21 percent

* Restructuring to lead to unspecified job cuts

* Profits to benefit from pound's weakness

* Shares down 4 percent at 871 pence (Adds Chief Executive comments from news conference)

By David Jones

LONDON, Feb 12 (Reuters) - Diageo Plc (DGE.L), the world's biggest alcoholic drinks group, cut its profit target due to the global slowdown, sending its shares lower, despite posting a 21 percent rise in half-year earnings that topped forecasts.

The London-based maker of Johnnie Walker whisky, Smirnoff vodka and Guinness beer warned that sales growth was slowing markedly, particularly in Europe, as it launched a cost savings programme which will mean job losses across the world next year.

Chief Executive Paul Walsh said the group faced slowing consumer demand in 2009, especially in key markets such as Spain, and was reacting by trimming 100 million pounds ($143 million) off costs and by halting its share buyback programme.

"It's tough out there and the next few months will be quite challenging," he told a news conference after results.

Diageo shares fell nearly 7 percent to a low of 845-1/2 pence in early trade before recovering to trade off 4 percent at 871p with the FTSE 100 .FTSE down 1.6 percent by 1600 GMT.

"The fact that Diageo has been impacted by global macro economic conditions of itself is not surprising but perhaps the speed is," said analyst Philip Morrisey at broker Citi.

Sales growth virtually disappeared in the final three months of 2008 as Diageo cancelled orders where there was any doubt about payments, sparking a fall in inventory levels in Europe.

This prompted Diageo to cut its target for operating profit growth for the year to end-June 2009 to 4-6 percent from 7-9 percent, after half-year underlying sales growth slowed to 3 percent from a July-Sept first-quarter rise of 6 percent.

"The world is not getting any better, we do not see any improvement in sales in the second half compared with the 3 percent growth seen in the first half," said Finance Director Nick Rose, adding that Diageo can still meet its profit target even with flat underlying sales in its second half.

He said Europe - particularly Spain - was very challenging but the group had also seen weakness in Ireland, Eastern Europe, Korea and in the wine market of the United States.

"So where did it hurt? The key area of weakness relative to our expectations was volume growth, where Diageo suffered an organic decline of 2 percent relative to our forecast of one percent growth," said analyst Martin Deboo at Investec.

The group, which also makes Baileys liqueur, Gordon's gin and Captain Morgan rum, reported underlying earnings per share of 45.6 pence for the six months to Dec. 31, compared with an average forecast of 43.0p and a range of 40.9-46.8p.

The interim dividend was raised 5.3 percent to 13.9p.

It still sees a double-digit percentage rise in full-year earnings helped by the weaker pound as operating profit was boosted by 103 million pounds in its first half, and the rise would be over 200 million pounds for the full year.

The benefits from Diageo's 100 million pounds cost saving restructuring will be largely seen in its 2009-10 financial year, and will lead to unspecified job losses. The group also halted its share buyback programme after buying back 352 million pounds of shares in the first half.

Diageo's arch-rival Pernod Ricard (PERP.PA) of France reports its half-year figures on Friday after it said last month that its July-December operating profit would rise 8 percent but gave no prediction for its full year to end-June 2009.

Diageo's warning of slower growth hit other European drinks stocks such as Heineken (HEIN.AS) which has big operations in Spain. Its stock was off 3.4 percent at 21.63 euros, with Pernod off 3.9 percent and ABInBev INTB.BR down 4.1 percent. (Editing by David Cowell)

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