Diageo Boosts Outlook as Yearly Profit Climbs

By and Reuters

The world's biggest alcoholic drinks group, Diageo, matched forecasts with a 13% rise in annual earnings on Thursday and raised its target for future profit growth.

The London-based maker of Johnnie Walker whisky, Smirnoff vodka and Guinness beer said it saw no signs of a North American slowdown and growth returning to Europe, while emerging markets such as Russia, China and Latin America grew strongly.

Chief Executive Paul Walsh said the strong results prompted him to raise his underlying operating profit growth target to 9% in the current year, after beating an 8% target in the year to June 2007 with a 9% increase.

"We would guide to 9% organic operating profit growth in the fiscal year we've just started," Walsh told CNBC's "Squawk Box Europe."

He said the group, which bought a spirits maker in China earlier this year, was open to opportunities for other acquisitions in the region, and that the current crisis on the credit markets would not affect its expansion plans.

"We are a very cash-generative business ... so on that basis we will not change the way we finance acquisitions," Walsh added.

Strong U.S. Market

The group, which also makes Captain Morgan rum, Baileys liqueur and Jose Cuervo tequila, reported earnings per share of 55.4 pence for the year to June 30, in line with the average forecast of 55.5p in a Reuters poll of 12 analysts whose forecasts ranged from 54.6p to 56.6p.

"We feel robust about North America right now, while there is great momentum in the business with the second half better than the first," Finance Director Nick Rose told Reuters.

Walsh told CNBC that the subprime crisis is not likely to affect its U.S. business because the group targets wealthy consumers who will not be affected.

Describing the results as the best in Diageo's 10-year history as they showed broadly-based growth, he added that sales and profits accelerated in the second half to show 9 and 10% rises, ahead of the 7 and 9% annual increases.

Diageo shares rose 1%, reflecting the increase in the profit target, although some analysts tempered the optimism by pointing out a bigger hit than expected from the weaker dollar for the current year.

"The increase in the profit target was a welcome surprise and shows Diageo is really motoring," said one analyst.

Currency Movements Weigh

However, the Tanqueray and Gordon's gin group increased to 65 million pounds the damage it expected to operating profit from currency movements for the current year, after saying in June currency would slice 40 million off operating profit.

Rose said scotch sales grew 13%, led by Johnnie Walker, while Guinness returned to growth with annual volumes up 2%, driven by Africa as Nigeria pushed Ireland aside to be the beer's second biggest market after Britain.

The group, which raised its full year dividend 5% to 32.7 pence, reiterated it will also return 1 billion pounds to shareholders via a share buyback program in the current year.

Diageo shares trade on 16.7 times forecast June 2008 earnings, according to Reuters data, a discount to rival Pernod Ricard on 17.2 times as the French group's underlying sales grew faster at 9.1% in the year to June 2007 and earnings are set to grow above 20%.

Although Diageo produces consistent growth, many investors prefer Pernod due to its faster top-line sale outlook since it took over Allied Domecq in 2005 and the Paris group's greater scope to improve margins and to take part in industry takeovers.

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