Diageo profits fall 6% amid currency turmoil

Diageo’s profits dropped 6% in 2015/16 amid currency volatility, however a strong performance in the US and growth in Europe means it is on track to deliver on its 2017 growth plans, according to its chief executive.

Diageo CEO Ivan Menezes (Photo: Diageo)

Releasing its preliminary end of year results to 30 June today, the world’s largest spirits producer reported a net profit of £2.24 billion ($2.94 billion) for the year ended June 30, down by 6% from £2.38bn a year earlier. Organic net sales grew by 2.8%, although reported net sales declined 3%.

This growth in net sales was driven by two acquisitions made by Diageo in 2015; Don Julio Tequila and South Africa’s United National Breweries. These acquisitions boosted net sales by £90m and operating profits by £20m.

This gain was offset by two disposals throughout the year, with Diageo selling off its Bushmillls Irish whiskey, trading it for Don Juilo, and its Glenagles Hotel estate in Scotland.

Reported operating profit grew 1.6% with organic growth to £2.84 billion, up from £2.8bn in 2015, driven by organic growth, acquisitions and lower exceptional operating costs, which fell from £269m in 2015 to £167m in 2015.

Operating profit, before exceptional items, fell 1.9% to £3 billion on the back of unfavourable currency movements.

By region, the biggest gains were reported in North America, and Europe, Russia and Turkey.

Operating profits in North American grew by 4% to $56 million, while net sales grew by 3% to £97m. Growth in North American whiskey, Scotch and Tequila drove this growth, with net sales of American whiskey up 6% as Crown Royal and Bulleit continue to gain share of the category.

In Europe net sales grew by 3%, driven by continental Europe and Great Britain, where net sales grew 4%. Baileys was highlighted as performing particularly strongly in this market, growing by 11%. Following Brexit in the UK, Diageo noted the need to secure trade deals going forward, with chief executive Ivan Menezes having publicly supported the remain campaign.

“Following the UK’s vote to leave the EU, Diageo is working closely with government and industry bodies to ensure its views are reflected in the transition process”, it said. “Diageo welcomes the formation of a specialist international trade department, as it is important for Diageo that the UK continues to benefit from open access to the EU as well as favourable international trade agreements.”

By volume Africa grew by 2.3%, with net sales growing by 3% in all markets except Nigeria, where net sales declined by 15%. This increase was credited with the success of Guinness’ ‘Made of Black’ campaign and its Guinness Africa Special brew.

The board recommended a final dividend increase of 5% bringing the full year dividend to 59.2 pence per share

“This better performance reflects the work we have done to strengthen our big brands through marketing and innovation, as well as expanding our distribution reach”, said Ivan Menezes, Diageo chief executive. “Our six global brands and our US spirits business are all back in growth and we have seen a significant improvement in the performance of our scotch and beer portfolios. The delivery of volume growth; organic margin expansion; increased free cash flow; and the disposal of £1bn in non-core assets, comes from an everyday focus on efficiency in each aspect of our business.”

While its latest set of results are somewhat muted in their success, looking ahead Menezes said he was confidents that Diageo would be able to deliver a “Stronger performance” in 2017.

“We are confident of achieving our objective of mid-single digit top line growth, and in the three years ending F19 delivering 100bps of organic operating margin improvement.”