Diageo Profit Hit by Euro's Decline as Sales Beat Estimates

Diageo CEO: Currency Volatility Is Biggest Challenge
  • Currency pain should ease in second half of year: CFO Mikells
  • First-half sales growth was fueled by whiskies and Guinness

Diageo Plc reported first-half profit growth that underwhelmed analysts as a sharp decline in its vodka business and the weakening euro offset a rebound in Europe.

Earnings before interest and tax rose 2.4 percent on a so-called organic basis in the six months through December, London-based Diageo said Thursday. The median analyst estimate was for growth of 1.5 percent. Vodka sales fell 8 percent, hurt mainly by the Ciroc brand in the U.S. even as its flagship Smirnoff brand returned to growth in that region.

“The recovery at Diageo has yet to be demonstrated,” James Edwardes Jones, an analyst at RBC Europe, said in a note.

Unfavorable currency movements shaved 125 million pounds ($178 million) off Diageo’s earnings. The impact should ease in the second half of the year, Chief Financial Officer Kathryn Mikells said in an interview. The company said Thursday that currency fluctuations will reduce full-year profit by 85 million pounds, trimming an earlier forecast of 100 million.

“The biggest factor we’re facing is the volatility and indeed the depreciating currencies in the emerging markets,” Chief Executive Officer Ivan Menezes said in an interview with Bloomberg TV. “It’s hard to predict whether we’ll have further depreciations in those currencies or not. Places like Russia or South Africa and Nigeria and Brazil still have downside risk.”

Sales and profits in Europe bested analysts’ expectations, boosted by so-called reserve brands like Johnnie Walker scotch. The performance in the region was “better than expected,” Canaccord Genuity analyst Alicia Forry said in a note.

Europe Rebound

The rebound in Europe, where sales had been in decline, is welcome as Diageo had been relying on emerging markets such as Africa, which it aims should account for 20 percent of Diageo’s sales by 2020. Sales of Smirnoff in North America also turned a corner, growing 4 percent.

Diageo’s first-half organic sales rose 1.8 percent, compared with analysts’ estimates for growth of 1.6 percent and reversing the first-quarter’s 1.5 percent decline. Beer revenue rose 7 percent. Organic measures exclude the effects of acquisitions and currency fluctuations.

“For the full year we expect volume growth to drive stronger top-line performance, margin to slightly improve and strong cash conversion to continue,” Menezes said in the statement.

The shares fell 0.4 percent at 9:14 a.m. in London, and have declined 5.2 percent over the past twelve months.

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