Diageo expects second half to drive full-year growth

By Martinne Geller and Rahul B

REUTERS - Diageo, the maker of Johnnie Walker whisky and Smirnoff vodka, forecast stronger sales and profit growth in the second half of its financial year after a first half affected by negative factors in China and India and higher spending.

The world's biggest spirits maker said earlier on Wednesday that its first-half sales growth would be hurt both by the Chinese New Year falling later than in 2017 and a ban on selling alcohol near Indian highways.

Diageo gave the warning in a trading update ahead of its annual general meeting in London on Wednesday, sending its shares down 2 percent and making them the weakest performer on the FTSE 100 Index.

India's top court banned liquor outlets within 500 metres of national and state highways in April, in a move that was expected to hit revenue for spirits makers such as Diageo and French rival Pernod Ricard.

Diageo, however, stood by its target for sales growth in the mid single digits and an improvement in its organic operating margin of 175 basis points over the three years to June 2019.

"Our expectations on overall performance for the year remain unchanged," Diageo said in the trading update.

The company said growth in its operating margin this year would also be weighted toward the second half, following increased spending on its U.S. spirits and Scotch whisky business in the first half.

Analysts said it was good that Diageo was investing in its businesses but were disappointed the company had not previously disclosed that the shape of the year's growth would be affected by the Chinese and Indian factors.

"Given that both of these were known about at the time of the full-year results back in July we wonder why it wasn't pointed out then," RBC Capital Markets wrote in a note.

Liberum analyst Nico von Stackelberg said Diageo's targets promised a lot in a tough market environment so Wednesday's warning on sales growth came as a surprise.

"Diageo has set expectations high and are guiding that the first half will not be as strong as expected due, in part, to technical reasons," Stackelberg said, adding that the stronger pound would also weigh, as Diageo makes 90 percent of its sales outside the United Kingdom.

Pernod, which makes Mumm champagne and Absolut vodka, had also warned that the Indian ban would hurt sales in the first half of its 2017-18 fiscal year but did not quantify the likely impact.

Diageo's net sales in India, its largest market in the Asia-Pacific region, rose 2 percent in its last financial year that ended on June 30, driven by the popularity of its whiskys.

(Editing by David Clarke)