LONDON (AFX) - The world's largest alcoholic drinks producer Diageo PLC remains committed to its long-running ownership of 34 pct stake in Moet Hennessy, but concedes the venture could be established differently if it were put in place today.
In a telephone interview with AFX News, CFO Nick Rose said: 'Given that it was set up many, many, many years ago, it would probably be stupid for me to say you would do it in exactly the same way, but I think the basic principles still hold.'
Rose was speaking after the producer of Johnnie Walker Scotch whisky and Smirnoff vodka unveiled first half organic operating profit growth of 8 pct to 1.306 bln stg, on net sales up 6 pct to 4.022 bln stg.
On the back of the strong performance, especially in North America and International regions, the group upgraded its full-year guidance to 8 pct organic operating profit growth. Rose also indicated the company was on target to return 1.4 bln stg to shareholders this year through share buybacks, and has the potential to return 1 bln stg through buybacks in fiscal 2008.
Regarding Diageo's interest in the distributor of Moet et Chandon and Hennessy Cognac producer, which predates the creation of Diageo, Rose said: 'We have a policy of always wanting to be the number 1 or number 2 brands in a category. And there's no doubt in our mind that if you want to be associated with Cognac or you want to be associated with Champagne, there's only one place to go.'
'Do we want to be associated with those brands? Absolutely,' he said. 'Those are the best brands in those categories and therefore for us.'
Speculation has been growing that Diageo has been looking to break its agreement for Moet Hennessy, selling its stake back to French luxury goods group Louis Vuitton Moet Hennessy in order to pursue a takeover of Remy Cointreau.
However, Rose confirmed that Diageo would face exit penalties should it decide to sell its interest. One analyst interviewed by AFX News put those penalties at 300-500 mln eur, or around 200-335 mln stg.
'Under the terms of the original agreement there are mechanisms actually designed for the partnership to stay together,' said Rose. 'This was a marriage made to last, it wasn't an agreement where a simple divorce could ever be contemplated.'
Rose said the agreement did not preclude the group from making an acquisitions in the Champagne or Cognac categories, but added there are terms about not competing with each other.
LVMH acquired Scotch whisky producer Glemorangie in 2004, but Rose added there was an 'enormous overall opportunity in Scotch and single malts', with Diageo's Scotch portfolio growing at around 7 pct.
The group announced today it will be putting a total of 100 mln stg into its operations in Scotland to cater for growing demand in markets including Brazil, Russia, India, China and Mexico.
Of the investment, 80 mln stg will be put into developing a new malt whisky distillery in Speyside and expanding its Cameronbridge grain distillery in Fife. A further 20 mln stg will be spent on packaging and warehousing.
'There is plenty of growth around for us and plenty of space for them to have a brand like Glenmorangie, which is still very, very small in all honesty,' he said.
Following the dissolving of the Schiefflin & Somerset joint marketing venture in the US in 2003, Rose said LVMH and Diageo brands still shared route to market through the same regional distributors.
He said there are currently some 2,300 'dedicated sales people selling Diageo and Moet Hennessy brands'.
The group reported operating profit growth of 11 pct in North America, driven by strong spirits growth.
Rose said while available data for December potentially indicated a slowdown in the market, January figures are 'a lot more positive'.
He admitted there is a slowing from the 'absolute peaks' some 18 months ago, but said any dip is at the value end of the spectrum, rather than the premium and super-premium end where Diageo competes.
'We don't feel anywhere near under as much pressure as the value end of the equation,' he said, adding the company expects its topline growth of 7 pct in the region to continue for the rest of this year.
However, the company said the adverse dollar exchange rate is expected to reduce operating profits by 90 mln stg in the full year, while also reducing the company's interest charge by 10 mln stg.
Diageo said Europe delivered underlying double-digit earnings growth, but said volume was down 5 pct in the region and net sales down 2 pct.
Rose said Continental Europe showed growth of 4 pct and will become the largest part of the group's European business by the end of the year.
However, he said GB saw 'challenges' in the first half as the company maintained its premium pricing position in the face of discounting pressure. He believes Diageo will have to go through another crucial Christmas period to assess its efforts.
'I wouldn't expect to see any improvement in the GB position in the second half of our year,' said Rose. 'I would be looking into this part of 2008 for GB to begin to trend more towards what we really expect that market to be able to do.'
International saw operating profit increase 17 pct, with marketing spend up 22 pct in the period. Net sales increased 16 pct, driven by strong performances, particularly in Scotch whisky.
The company is expected to report maiden results for the recently created Asia Pacific arm at its preliminary announcement later this year.
Shares in the company soared 3 pct in opening deals thanks to the full-year guidance upgrade and the announcement of continuing share buybacks in 2008 to the tune of 1 bln stg.
While Goldman Sachs noted the higher-than-expected exchange rate impact, forecast at 90 mln stg for full year, it said organic operating profit growth of 8 pct for the full year 'will please the market, even if this was partially expected'.
However, debt rating agency Fitch downgraded Diageo from 'A+' to 'A' on the back of the continued share buybacks. Fitch said the decision by Diageo to continue its share buyback programme would not allow the company to improve its credit protection measures.
Diageo said it will pay an interim dividend of 12.55 pence a share, up 5 pct.
At 11.30 am shares in the company were up 30-1/2 pence at 1,051-1/2 pence. simon.meads@thomson.com sjm/vlb/sjm/vlb/sjm/amb COPYRIGHT Copyright AFX News Limited 2006. All rights reserved. The copying, republication or redistribution of AFX News Content, including by framing or similar means, is expressly prohibited without the prior written consent of AFX News. AFX News and AFX Financial News Logo are registered trademarks of AFX News Limited
© 2007 AFX News
