Diageo profits hit by foreign exchange rates but beats expectations with a rise in organic sales

Madeline Ratcliffe
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Diageo owns the Johnnie Walker brand, along with Smirnoff, Baileys and Tanqueray gin (Source: Getty)

Diageo reported a 1.8 per cent rise in sales in its half year results to the end of December 2015. The drinks giant owns the Johnnie Walker, Smirnoff, Baileys and Tanqueray gin brands, to name a few.

Diageo shares fell 0.75 per cent to 1,854.50p in early trading.

The figures

Organic sales grew 1.8 per cent, and there was a one per cent increase in volumes, Diageo reported.

This was better than the 1.6 per cent sales growth and 0.6 per cent volume growth expected by analysts, and the 1.5 per cent fall in the first quarter.

Operating profit fell seven per cent to £1.7bn, from £1.8bn the year before, thanks to adverse exchange rates in the countries Diageo operates in, and the sale of various brands during the period. Last year it sold its 57.9 per cent holding in Red Stripe brewer Desnoes & Geddes, and its wine business, which includes the Blossom Hill brand.

On a reported basis, net sales fell five per cent to £5.6bn.

Earnings per share (EPS) grew seven per cent, to 56.1p, taking into account these sales as exceptional items. EPS before exceptional items fell four per cent to 51.3p.

Interim dividend rose five per cent to 22.6 pence per share.

Why it's interesting

Sales in Europe, which had been sluggish, picked up in the six-month period, with a two per cent rise in sales. Growth in the UK was driven by strong Guinness sales, which rose by four per cent.

Baileys is back in fashion in Europe, with a seven per cent increase in sales. That meant Diageo was less reliant on the US, where sales fell two per cent overall.

Africa, and emerging markets in Latin America remain an important area for growth; sales increased by three per cent and nine per cent respectively, although these markets are some of the worst-affected by currency weakness.

What Diageo said

Ivan Menezes, chief executive, said he expected the growth volume to contribute to a stronger top line for the full year results, adding:

Diageo has become a stronger, more competitive business. We have delivered volume growth, a stronger top line, improved the performance of our key brands, driven cost productivity and continued to generate strong cash flow.

While trading conditions remain challenging in some markets, Diageo’s brands, capabilities in marketing and innovation and our route to consumer have proved resilient. I am confident that Diageo can deliver improved, sustained performance.

In short

Menezes remains confident sales figures will improve in the second half of the 2016 financial year, but investors may need some Dutch courage if the strong dollar continues to weigh on profits.

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