Weak currencies could slash Diageo profits by £150m
Drinks giant Diageo has said weak and adverse exchange rates could reduce its operating profit by about £150m, according to the boss of the company.
The firm 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 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 2% in part because of increased competition from rivals, Mr Menezes said.
And he also predicted that developing economies would under-deliver because of swings in the values of currencies.
"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 will lead to improved top-line performance and that we can deliver modest organic margin improvement."
The reduction in the company's 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 communist authorities devalued the yuan by 2% against the dollar in the first such move for 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.
Mr Menezes added that Diageo was working to build its brand in emerging markets with increased advertising and innovation, and was responding more quickly to changing consumer trends.
The firm 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 3% compared to the 2014 financial year.
Organic sales were flat in the period, although pre-tax profit stood at a better-than-expected £2.9bn, ending two consecutive years of decline.
Diageo's brands include Guinness, Smirnoff, Johnnie Walker and Baileys.
Global net sales of Guinness were unchanged during the period, although the brand saw a 3% growth in the US and a 2% increase in Ireland. Organic net sales of Baileys were down 4% globally, Johnnie Walker down 9%, and Smirnoff fell 2%.
Shares climbed 1% in London morning trading yesterday.