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Profits are down at Diageo as sales of spirits toil in Far East

DIAGEO has suffered a 12.7 per cent drop in pre-tax profits as the Bell's, Smirnoff and Guinness owner saw its spirits toil in the Far East.

The drinks giant cited the Chinese government's ongoing anti-extravagance measures and political unrest in Thailand as it reported pre-tax profits of £2.71 billion for the year ended June 30.

The company said it had turned in a "mixed performance" over the year, with growth in North America and stability in Western Europe countered by weakness in emerging markets.

Its results showed net sales, stripping out the effects of currency exchange and acquisitions, had risen by 0.4 per cent, including a fourth quarter rise of 0.8 per cent. Turnover fell to £13.98 billion, compared with £15.28 billion in 2013.

Diageo's difficulties in the Far East caused organic net sales in Asia Pacific to plunge by seven per cent, including a 31 per cent in China.

The company said a 20 per cent decrease in Scotch sales was behind a 14 per cent decline in sales of its international brands in the world's second biggest economy. This included a 28 per cent drop in sales of Johnnie Walker Black Label, with the prestigious brand seeing an 11 per cent fall in net sales overall in Asia Pacific.

However the company noted that Reserve, its luxury brands division, grew net sales by nine per cent, driven by strong growth in malts.

Elsewhere in Asia Pacific, a 19 per cent fall in organic net sales in South East Asia was linked by Diageo to recent political unrest and tax increases in Thailand.

Diageo also said trade confidence in the region was affected by pricing pressure, currency devaluation and economic uncertainty.

However it reported net sales growth of nine per cent in Taiwan, the fastest-growing global market for single malt, driven by a strong showing by The Singleton.

And it noted strong "double digit" net sales growth in India, helped by its sales agency agreement with United Spirits Limited (USL). Diageo now holds 57.78 per cent of the issued share capital in USL, after acquiring an additional 37.8 million shares (26 per cent of the issued share capital) for £1.12 billion on July 2.

Its acquisition of a controlling stake in USL has led Diageo to dispose of Glasgow-based Scotch whisky business Whyte & Mackay to satisfy UK competition concerns. It expects to complete the sale of Whyte & Mackay to Philippine firm Emperador Inc for £430 million in September.

Elsewhere, Diageo reported a net sales increase of three per cent in North America, its biggest and most profitable market. This was driven by growth of five per cent in its US Spirits and Wines business. The "uneven" nature of economic recovery in the US was attributed by the firm to slow growth in the spirits category. Premium and "above price points are driving category growth", it said, powered by Scotch, whiskey and Tequila.

In Western Europe, Diageo said its business had stabilised - in spite "weak economies and fragile consumer confidence". It highlighted "modest growth" in Great Britain, France and the Nordic and Benelux countries, which offset slowing declines across southern Europe and Ireland. Net sales were up two per cent in a "relatively flat" drinks market in Great Britain.

Chief executive Ivan Menezes said: "This year our business has faced macroeconomic and market specific challenges that have impacted our top line performance. But we have gained share and expanded margin while continuing to invest in our brands, our markets and our people."

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