LONDON -- Diageo (LSE:DGE) (NYSE:DEO) issued its half-time results this morning, which showed "a strong business getting stronger." In response, the shares finished the day 24 pence higher to reach 1,877 pence -- only 9 pence off their five-year high of 1,886 pence.
Total volume increased 1% (6% on a reported basis) to 88.8 million units, with Latin America and the Caribbean displaying a 7% rise, Africa lifting 3%, and North America and Asia-Pacific both up by 1%. Driving this emerging-market opportunity, marketing spending was up 5% organically to 926 million pounds, helping these fast-growth markets contribute 42% of Diageo's net sales in the half. This helped offset the disappointing performance in Europe that brought the volume average down 3% year on year.
Elsewhere in the interim results, net sales saw organic growth of 5% to 6.04 billion pounds against 5.76 billion pounds from the first half of 2012. Operating profit (before exceptional items) increased 9% organically to 2.03 billion pounds from 1.87 billion pounds in the first half of last year. That's with transaction and integration costs of 29 million pounds, including 21 million pounds in respect of the United Spirits deal, which stalled over the weekend as Indian authorities questioned whether a put clause in the agreement was compliant with Indian law. The deal is now expected to be delayed until the second quarter of the year.
Chief executive Paul Walsh commented:
These results reflect the global strength of our strategic brands, our leadership in the U.S. spirits market and our increasing presence in the fastest growing markets of the world. Our expanding reach to emerging middle-class consumers in faster growing markets was the key driver of our volume growth, while net sales growth was driven by our pricing strategy and premiumisation, especially in the U.S. This drove gross margin expansion, which together with our continued focus on operating efficiencies, delivered operating margin improvement.
This is a strong set of results, confirming our medium term guidance and supporting our decision to increase the interim dividend by 9%.
Shareholders would have been encouraged by the free cash flow on Diageo's books, now standing at 708 million pounds, while earnings per share (pre-exceptionals) lifted 9% to 60.9 pence. The interim dividend also increased 9% year on year to 18.1 pence, which is about what analysts were expecting, putting the shares on a prospective yield of 2.4%.
A reliance on fast-growth markets is a regular theme we're seeing this year, following Unilever's declaration that 55% of its turnover now comes from emerging markets. And with Diageo capitalizing on the trend too, I wouldn't be surprised to see more companies with exposure to fast-growth markets benefiting this year. As it is, Diageo is able to call itself, as it does, "a strong business getting stronger."
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Sam owns shares in Diageo. The Motley Fool has recommended shares in Unilever and Diageo. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.