Latin America: Diageo’s Latin America sales to be hit by accounting error this year

Diageo PLC’s Latin America sales for fiscal 2016 will be hit by an accounting error the spirits giant made over sales of its high-end tequila brand Don Julio last year, the company disclosed on May 16.

Diageo’s sales in Latin America will take a 2% hit in the current fiscal year ending June 30 from sales that the company accidentally double booked, Diageo’s Latin America and Caribbean president Alberto Gavazzi said on a conference call with analysts.

Diageo’s Mexico unit sold some bottles of Don Julio to the company’s U.S. unit that it recorded as an external sale. The company’s U.S. unit then sold on those bottles and recorded that as a separate sale.

Diageo logged net sales of £1.03 billion ($1.48 billion) in Latin America and the Caribbean last year. Diageo said the accounting error’s impact amounts to roughly £15.1 million.

Diageo acquired the remainder of Don Julio that it didn’t already own from Jose Cuervo in 2015 and hence the accounting adjustment didn’t require Diageo to restate so-called “organic sales,” which strip out currency effects and acquisitions, for fiscal 2015 according to a spokeswoman. The error was made during the integration of Don Julio into Diageo, she added. However the reported sales figure for fiscal 2015 was inflated, meaning organic net sales growth for fiscal 2016 will come in lower than it otherwise would have.

The company on May 16 said it expects fiscal 2016 sales to be up by low single digits following the adjustment made for Don Julio and because of a slowdown in shipments in Brazil compared with the first half of the year when retailers rushed to buy alcohol ahead of a duty increase in December.

Latin America contributed roughly 10% of Diageo’s sales and 9% of profit last year. Mr. Gavazzi said Diageo sees a big opportunity in the region as the legal purchasing age grows faster than the general population, adding an additional seven million people every year to 2020.

“In a region where beer and local mainstream spirits account for 80% of beverage alcohol sales, we believe that we can drive higher penetration of premium spirits as consumer incomes rise,” he said adding that Diageo will focus on driving sales of both high-end and standard Scotch.

Diageo has seen sales grow strongly in Mexico driven by Scotch but the company has struggled in parts of Latin America lately amid currency volatility and unfriendly tax regulations. Diageo in the first half took a £104 million impairment charge tied to its Ypioca brand in Paraguay, Uruguay and Brazil.

17 May, 2016