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diageo h1 2013 results

Diageo CEO bowled Cuervo ball, but hints at 'exciting' 2013 tequila entry

By Ben Bouckley+

31-Jan-2013
Last updated on 31-Jan-2013 at 14:47 GMT

Diageo CEO Paul Walsh says he was ‘somewhat disappointed’ by the breakdown of talks to acquire the Jose Cuervo tequila brand, but hints his firm may make an ‘organic entry’ into the category in 2013.

Walsh discussed the failure of the transaction in passing during an investment presentation on Diageo’s H1 2013 results released today.

These showed that Diageo’s group net sales rose 5% on an organic basis to £6.039bn ($9.55bn) for the half year, while the UK plc's net income rose an impressive 61% to £708m ($1.120bn).

But discussing the breakdown in talks with the Cuervo family, Walsh said: “I am somewhat disappointed that we were not able to acquire the Cuervo brand.”

Hints at ‘organic’ entrance to tequila

“I admire the brand and I admire the family, but ultimately, buying the brand through the transaction available to us would have been the wrong decision for this business.”

Cryptically – given rumors that Diageo could target Beam Inc. and its rival Sauza tequila – Walsh then added that Diageo shareholders would be “much better served by our organic entry into this category”.

“I hope we will be able to reveal exciting details later in the year,” he added.

Walsh also alluded to Diageo’s potential acquisition of a controlling stake in India’s United Spirits (UST) while caveating that the deal was subject to regulatory approval.

“When completed it will be a significant milestone in Diageo’s strategy to build our presence in the world’s fastest-growing markets,” he said.

But as BeverageDaily.com reported yesterday, one analyst insists Diageo will have to work hard to premiumize the UST portfolio, or at least boost margins significantly.

North American ‘innovation machine’

Dubbing North America Diageo’s “biggest developing market”, Walsh said the region contributed over 30% of organic net sales growth, with 6% US spirits growth.

With these numbers the firm was outpacing its peers by more than one percentage point, he added, while favourable demographics would only improve the market’s growth potential.

Diageo was an “innovation machine” in North America, Walsh added, having launched industry-leading innovations in spirits and five major wine launches that put the latter business back into growth territory.

Portfolio highlights included double-digit growth across whiskey, with Crown Royal up 12% boosted by a Maple Finished innovation, while Diageo doubled net sales of bourbon brand Bulleit.

“It is a mark of the strength of this business that we have been able to achieve all of that while significantly improving an already high operating margins.”

Driving price/mix had been a key factor in this success, Walsh said, but Diageo had also driven cross-business efficiencies.

“Both in marketing spend as I alluded to above, as well as in overheads as we embed the new operating model with increased accountabilities in our distributor partners”

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