Sales rise at drinks giant Diageo
LONDON, England (Reuters) -- British drinks giant Diageo said on Thursday sales of key brands such as Johnnie Walker whisky and Bailey's liqueur were accelerating, but that a weaker U.S. dollar was likely to hold back profits.
The world's biggest spirits group, which also makes Smirnoff vodka and Guinness beer, said net sales of its premium brands rose six percent in the half year to December 31, up from four percent in its last financial year.
But underlying profits rose only two percent, reined in by higher pension costs and a weak dollar, and Finance Director Nick Rose said exchange rates could take an even bigger chunk out of second-half profits if they remained at current levels.
"We're expecting to see a substantially larger (dollar hit) in the second half,'' he told reporters, saying it could reach £80 million($153 million) compared with 14 million in the first half.
Nigel Davies, an industry analyst at JP Morgan, said the news was mixed.
"The underlying performance probably looks better (than expected), but the reported figures probably aren't,'' he said, keeping a "neutral'' investment rating on Diageo shares.
At 0850 GMT, the shares were 0.8 percent higher at 715-1/2 pence, valuing the maker of Captain Morgan rum and Gordon's gin at about £22 billion.
Drinks groups across the world are benefiting as consumers regain the taste for premium brands as economies recover.
Diageo's closest rival, Allied Domecq, said in January strong demand in North America was offsetting the impact of a weaker dollar, while world No. 3 spirits group Pernod Ricard raised its 2003 profit forecast this month.
Similar trends
Diageo, which has sold food groups Pillsbury and Burger King to focus on spirits and wines, said profit before tax and exceptionals rose two percent to £1.297 billion in the six months to December 31, broadly in line with expectations.
This figure included a £30 million hit from the introduction of FRS17, a new accounting standard for pensions.
The interim dividend was 10.6p per share, up seven percent.
Finance Director Rose said performance was particularly strong in North America, underpinned by a new distribution system where sales forces are assigned to individual brands.
But continental Europe was weaker and profits in Ireland slumped 17 percent as the firm's Guinness brand continued to suffer against competition from premium lagers.
Ready-to-drink products such as Smirnoff Ice, the driving force of growth a few years ago, also continued to struggle amid duty increases and cheap competition, particularly in Britain.
"Looking forward, the trends that we have seen in the first half are expected to continue,'' Chief Executive Paul Walsh said.
Finance Director Rose said future growth was likely to depend on new forms of premium brands and cited Guinness Extra Smooth, which was recently introduced in Africa, as an example.
He said Diageo did not expect to sell any of its 22 percent stake in General Mills Inc, a legacy of the Pillsbury food sale, until a U.S. regulatory investigation into the cereals maker had been completed.
Analysts have been looking for Diageo to sell at least some of the stake to give a boost to its share buyback programme.
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