* H1 sales up 1.8 pct after rising 2.2 pct in 1st qtr
* Total sales in China down 22 percent
* Expects sales to strengthen in 2nd half - CFO
* See savings of 200 mln pounds/yr by fiscal 2017
* Stock down 7 pct; Pernod, Remy shares down 3 pct
(Rewrites first paragraph, adds details on markets, comment on
outlook, changes headline)
By Martinne Geller
LONDON, Jan 30 Diageo Plc, the world's
biggest spirits company, reported a worse than expected slowdown
in sales growth in the last six months, flagging a sharp drop in
demand in China and some other emerging markets and pummelling
The British maker of Johnnie Walker whisky, Smirnoff vodka
and Guinness beer is the latest spirits maker to be hit by
factors including a Chinese anti-corruption clampdown on
expensive gift-giving and said its hopes for an end to the
downturn had been frustrated.
"The impact of what's happening in emerging markets has been
evolving over the calendar year and while we were hopeful that
we'd get some improvement, in fact the weakness has continued
through the end of our calendar year and through the holiday
period," Chief Financial Officer Dierdre Mahlan said on
Mahlan said she expected sales to improve in the rest of the
current fiscal year, but did not give a forecast.
Diageo, which generates about 42 percent of its sales from
emerging markets, said total sales rose 1.8 percent in the first
half of its fiscal year ending in June, following a rise of 2.2
percent in the first quarter.
Estimating that growth in the second quarter slowed to 1.6
percent, analysts said the results were weaker than expected.
"This surprising miss may read rather negatively for the
whole industry, given how scale and U.S. exposure is supposed to
act as a buffer for Diageo compared to more vulnerable peers,"
said HSBC analysts in a research note, adding the outcome was
almost 200 basis points below their forecasts.
Diageo shares were down 7 percent at 1,778 pence by 1045
GMT, having fallen as low as 1,691p, their lowest since
September 2012. Shares in French rivals Pernod Ricard
and Remy Cointreau, already hit by similar emerging
market concerns, were each down about 3 percent.
Diageo's statement was marked by a 22 percent drop in total
sales in China, a trend which echoed a recent update from Remy
Cointreau, which derives roughly 40 percent of operating profit
from selling cognac in China and which said earlier this month
cognac sales fell 32 percent in its third quarter.
Diageo also said price discounting in China by rival makers
of baiju white spirit drove a 66 percent drop in sales by
Shuijingfang, the baiju maker in which Diageo has a controlling
A Chinese government crackdown on gift-giving and personal
spending by civil servants has hammered sales of spirits like
cognac and its high-end baiju spirit, eroding sales there for
Diageo and its rivals.
Diageo's first-half earnings before items rose 4 percent to
62.6 pence per share. The company also announced a cost-savings
programme aimed at saving 200 million pounds a year by the end
of June, 2017. Mahlan said it was too early to quantify any job
cuts that may result.
In the six months ended Dec. 31, net sales rose about 5
percent in North America, fuelled by a 26 percent rise in
higher-priced "reserve" brands such as Ketel One and Ciroc
vodkas. In western Europe, sales fell about 1 percent, Diageo
said, citing weak economies in southern Europe and Ireland.
In emerging markets as a whole, sales rose a mere 1.3
percent, due to a slowdown that Mahlan said was "widespread but
not uniform." She noted sales rose 35 percent in India, helped
by increased distribution, and 20 percent in South Africa.
In Kenya, the company's Senator beer suffered from the
reduction of an excise duty rebate that led to a 67 percent
price increase. Sales fell 10 percent in Nigeria, as consumers
opted for cheaper beers in the face of high inflation that is
constraining disposable incomes.
"Nigeria continues to be a difficult market from a macro
point of view. We had expected there to be some improvement this
year, which did not materialise," Mahlan said.
In southeast Asia, Diageo said net sales fell 11 percent,
hurt by political unrest and tax hikes that resulted in
double-digit price increases.
(Editing by David Holmes)