UPDATE 2-Diageo, Remy Cointreau crimped by Chinese sobriety

Thu Apr 17, 2014 7:37am EDT

* Diageo 3rd-qtr sales fall 1.3 pct, Asia down 19 pct

* Remy sees full-year profit down as much as 40 pct

* Remy says China crackdown shows no sign of abating

* Diageo, Remy shares down 4 percent (Adds details on Remy, comments, bullet points, byline)

By Martinne Geller and Dominique Vidalon

LONDON/PARIS, April 17 (Reuters) - Britain's Diageo and France's Remy Cointreau reported steep sales declines in China on Thursday, failing to revive a taste for their luxury spirits more than a year after an anti-corruption campaign first hit conspicuous consumption.

Diageo, maker of Johnnie Walker Scotch and Smirnoff vodka, posted a 1.3 percent drop in third-quarter organic net sales, versus market expectations for a 2 percent increase, according to analysts. Sales slid 19 percent in Asia and saw weakness in other emerging markets including Russia, South Africa and Kenya.

Volatility in emerging markets more broadly hurt sales, and the weakening of Venezuela's currency on the back of a new foreign exchange system also reduced growth by about 1 percentage point in the first half for Diageo.

"Current trends will however impact top line growth this financial year, but strong management of our cost base means that we remain committed to the delivery of our margin expansion goals," Diageo Chief Executive Ivan Menezes said.

Remy and Diageo shares were both down 4 percent on Thursday.

"It's clearly a bad quarter and what's worse is it's clear that some of those trends moved into the fourth quarter," said Oriel Securities analyst Chris Wickham about Diageo's results, though he cautioned that the third quarter accounts for only 18 percent of annual sales.

Moreover, he noted, Diageo still gets two-thirds of its profits from more stable markets like North America and Europe.

Remy, however, generates about 40 percent of its profit from selling cognac in China. The French company said its operating earnings would fall by as much as 40 percent in the year ended March 31 as the anti-corruption measures in China showed no sign of letting up.

"It's now expanding from the big cities to the regions and there was a crackdown on trendy bars and discotheques during the Chinese New Year," said Remy's Chief Financial Officer Luca Marotta.

Remy, which also makes Mount Gay Rum and Cointreau liqueur, said like-for-like sales fell 16.1 percent in the fourth quarter, while cognac sales alone slumped 32.3 percent.

Marotta said Remy assumed that sales from wholesalers to retailers, restaurants and bars would stabilize in China in the fiscal year that began on April 1st. If that happened, he said, Remy's cognac division could return to growth at a mid-single to low double-digit rate.

BUILDING FOR THE LONG-TERM

Despite the short-term woes, Diageo and Remy said they continued to invest in building their brands and distribution networks, as emerging markets remain long-term growth opportunities.

For the fiscal year ending 30 June, Diageo said it now expects adverse currency moves to shave 330 million pounds ($554 million) from its operating profit, versus an earlier estimate of 280 million pounds, due largely to the devaluation of the Venezuelan currency. Its operating profit for the first half of the year was 2 billion pounds.

In the three months ended 31 March, it saw sales rise 1.2 percent in North America and Western Europe, and nearly 28 percent in Latin America and the Caribbean, fuelled by strength in Brazil. Sales tumbled 19 percent in the Asia Pacific region and fell 5.2 percent in Africa, Eastern Europe and Turkey.

Overall, Diageo's sales by volume fell 1 percent in the quarter. (Reporting by Martinne Geller in London; Editing by Louise Ireland and Jon Boyle)

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