Diageo profits to be diluted by emerging markets volatility
Diageo has been buffeted by "increased volatility in some markets" and heightened emerging market foreign exchange instability in recent weeks, which will results in a £45m hit to profits.
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Ahead of its annual shareholder meeting on Thursday, the maker of Smirnoff vodka, Casamigos tequila and Guinness stout said that despite the volatility it still expects organic net sales growth broadly in line with last year and management's medium-term guidance for mid-single digit growth.
Although EM currency volatility has been partially offset a stronger US dollar, based on current rates the FTSE 100 group expects currency swings to dent sales by £175m operating profit by £45m, up from £10m previously.
Nevertheless, chief executive Ivan Menezes said that the year has "started well" and that the underlying performance was "in line with our expectations".
He said: "We are focused on delivering both growth and efficiency, allowing us to continue to reinvest in the business to support the long-term growth of our brands."
Organic operating margins guidance remained for growth of 175 basis points in the three years to 30 June 2019, with 60bps required in the current year to meet this target.
Shares in Diageo fell in early trading on Thursday but by early afternoon were slightly in positive territory at 2,636p.
"Overall, a reassuring statement, in our view," said analyst Phil Carroll at Shore Capital, as the company was demonstrating its "resilience and reliability as a compounder of growth and cash".
Russ Mould at broker AJ Bell said the emerging markets currency warning illustrates the conundrum facing multi-national companies.
“In order to deliver growth these firms need to take their products to new geographies, but this probably means accepting that some less mature markets will deliver volatile revenue in the short term due to foreign exchange movements and other factors.
“In the long term having a footprint in the developing world has to be the right strategy for Diageo and the £45m impact on full year operating profit which is forecast at current exchange rates should be easily absorbed.
“After all, consensus estimates put operating profit for the 12 months to June 2019 at upwards of £4bn and underpinned by brands such as Johnnie Walker whisky, Guinness and Smirnoff vodka the group remains on track to hit margin improvement targets.”
Michael Hewson at CMC Markets said, as an indicator of things to come, this was "a timely warning to investors that the effects of higher US rates and trade wars could prompt similar warnings in the coming months".