Business Irish

Friday 28 October 2016

Currency issues to cut Diageo operating profit by over €200m

Paul O'Donoghue

Published 24/09/2015 | 02:30

Sales in North America, Diageo's biggest profit earner are set to fall 2pc.
Sales in North America, Diageo's biggest profit earner are set to fall 2pc.

Drinks giant Diageo has said that adverse exchange rates could reduce its operating profit by about £150m (€207m) compared to its 2015 financial year.

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Diageo has pinned much of its hopes for growth on the emergence of richer consumers in developing economies who are prepared to spend more on premium spirits.

In a trading update issued yesterday chief executive Ivan Menezes said that sales volumes themselves were growing well, rising in "mid-single digit" percentages "in line with expectations".

However, sales in North America, Diageo's biggest profit earner are set to fall 2pc. This is due in part to increased competition from rivals, Mr Menezes said. He also predicted that developing economies will under-deliver because of the currency swings.

"Our reported results will be impacted by adverse exchange rate movements, which at current rates will reduce operating profit for [financial year] 2016 by approximately £150m against last year," Mr Menezes said.

"While currencies are weaker in [emerging] markets, we continue to believe that stronger volume growth in F16 will lead to improved top line performance and that we can deliver modest organic margin improvement."

The reduction in its operating profit forecast compares with an initial estimate of a £100m impact issued in July, when Diageo suggested that exchange rates could also reduce revenue by £370m.

The most high-profile currency drop since the start of the year came in China, where the authorities devalued the yuan by 2pc against the dollar, in the first such move in more than two decades.

At the same time the expected rise in interest rates in the UK and US means sterling may rise further as investors' cash flows out of emerging markets and into richer economies, harming Diageo's reported revenues from those growth markets.

Diageo's brands include Guinness, Smirnoff, Johnnie Walker and Baileys.

Mr Menezes added that Diageo is working to build its brand in emerging markets with increased advertising and innovation, and is responding more quickly to changing consumer trends.

Diageo forecast "mid-single digit organic top line growth on a sustained basis" from the 2017 financial year, somewhat helped by improvements in productivity.

The company's most recent sales results show that it made an operating profit of £2.8bn in the 12 months to the end of June, up 3pc compared to the 2014 financial year.

Organic sales were flat in the period although pre-tax profit was a better than expected £2.9bn, ending two years of declines.

Global net sales of Guinness were unchanged, although the brand did see a 3pc growth in the US, and a 2pc increase in Ireland. Organic net sales of Baileys were down 4pc globally, Johnnie Walker was down 9pc, and Smirnoff fell 2pc.

Diageo shares were up by 1pc in early morning trading in London yesterday.

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