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Johnnie Walker maker Diageo toasts £460m boost from Brexit vote Brexit vote causing mixed fortunes for multinationals
(about 2 hours later)
The company behind Johnnie Walker, Smirnoff and Guinness has enjoyed a £460m increase in operating profit, as the sharp drop in the value of the pound since the Brexit vote ramped up revenues from the US and other foreign countries. The contrasting impact of Britain’s vote to leave the European Union on business was underlined when some of the world’s largest companies warned it had hiked food prices and lowered demand for household appliances on one hand but raised overseas profits for British companies on the other.
Diageo shares rose by 4.6% to £22.40, the best performer in the FTSE 100, after the company said favourable exchange rates would flatter full-year sales by about £1.4bn and operating profit by about £460m. Unilever, the consumer goods group; Diageo, the owner of Guinness and Johnnie Walker; and Whirlpool, the world’s largest maker of home appliances, all flagged up the impact of Brexit in their financial results on Thursday.
The drinks multinational does well from weak sterling because a high proportion of its earnings are taken in dollars from overseas sales. Shares have risen by about one-fifth since the EU referendum last June. Unilever said it stood by a controversial decision to raise the price of Marmite in response to the weakening pound – which led to a row with Tesco – saying other food manufacturers have followed suit by hiking their prices or reducing the size of their products.
In the first half of Diageo’s financial year to the end of December, a struggling pound helped drive up sales by 14.5% to £6.4bn. Profit increased by 28% to £2.1bn. Drinks group Diageo said the fall in the sterling will flatter its full-year sales by about £1.4bn and boost operating profit by about £460m. The company has benefited from the weak pound because a high proportion of its earnings are from overseas sales registered in dollars. In the first half of Diageo’s financial year to the end of December, sales rose 15% to £6.4bn with pre-tax profits up 16% to £2.1bn. Diageo shares climbed 77p to 2218p, the biggest riser in the FTSE 100.
Stripping out the impact of the exchange rate boost, sales and profit were up by 4.4%, beating analysts’ expectations, as consumers splashed out on their favourite tipples. However, US-based Whirlpool warned it has taken a $40m (£32m) hit in the UK due to weaker pound and falling demand for its products, which include washing machines and dishwashers, due to uncertainty following the referendum.
Ivan Menezes, the Diageo chief executive, said its US spirits business and scotch brands performed particularly well in the first half, helped by marketing campaigns and an improvement in logistics. In the UK, sales were broadly flat, but revenues rose by 11% in continental Europe. Ivan Menezes, chief executive of Diageo, welcomed Theresa May’s update on her ambitions for Brexit and said the key thing for the drinks group would be opening up export markets.
“We are identifying consumer trends faster, expanding the reach of our products across markets and developing trade channels to capture these growth opportunities,” Menezes said. “The clarity on Brexit that we now have is very helpful,” he said. “Secondly, the impacts for Diageo are net neutral to positive, depending on when we open up new markets and FTA agreements [free trade agreements].
Despite the boost from the pound, Diageo left results expectations unchanged for the full financial year. “We’re getting a tremendous level of support from the government. The key here is opening up export markets and creating the conditions for Scotch to thrive. It’s one of the leading export businesses in the UK.”
Steve Clayton, a fund manager at Hargreaves Lansdown, said the results reflected a solid underlying performance that was “hugely flattered” by lower sterling. Menezes said from Diageo’s point of view he would like to see the government prioritise a trade deal with India “because the duties are so high on scotch whiskey.”
“Consumers around the world have been faced with a series of extraordinary events, from Brexit to the election of President Trump and even the demonetisation of the Indian economy. Whatever the events, it appears their reaction was to pour a larger than usual measure while they sat back and tried to figure out what on earth was going on,” he said. Paul Polman, chief executive of Unilever, said the company’s decision to raise prices was “definitely the right one” given that sterling had fallen against the dollar by up to 20% last year.
He said Unilever, which also makes household brands such Flora margarine, Magnum ice-cream and Dove soap, had to balance “value for money” for shoppers with “long-term” factors.
Polman added: “That is true for us and true for others, otherwise you end up being unsustainable.”
Tesco, Britain’s biggest retailer, removed Marmite and other household brands made by Unilever from its website last October, after the manufacturer tried to raise its prices by about 10% owing to sterling’s slump after the Brexit vote.
Tesco and Unilever resolved their dispute, but the price of Marmite has risen sharply in UK supermarkets.
The Unilever boss said that since the company raised prices many other items – including own-brand supermarket products – had risen in price or shrunk in size, a process known as “shrinkflation”.
Polman was speaking as Unilever reported revenues had fallen by 1% to €52.7bn (£44.9bn) in 2016.
Although underlying sales rose 4.3% at constant exchange rates, a negative currency impact of 5.1% dragged down revenues. However, pre-tax profits for the year rose 3.4% to £7.5bn.
Polman said 2016 had been an “unpredictable year” but Unilever had “demonstrated resilience”. Sales rose by 6.5% in emerging markets, driven by Asia and Latin America, but developed markets dropped by 0.2% as a rise in the volume of products sold in North America was offset by price deflation in Europe.
As well as the impact of Brexit and the fall in the value of sterling, Unilever was affected by the economic crisis in Brazil and the removal of 500 and 1,000 rupee notes from India.
Analysts said Unilever’s track record suggested it should be able to withstand the economic and political headwinds.
George Salmon, analysts at Hargreaves Lansdown, said: “Unilever has been able to deliver solid, if not spectacular, growth in margins, sales and dividends for years. Much of this can be attributed to its €8bn (£6.8bn) advertising budget, which funds the relentless promotion of its everyday products, and helps to ensure its products feature regularly on consumers’ shopping lists, regardless of regular price increases.
“‘Marmitegate’ highlights the strength of this strategy. For all the bluster that accompanied the story, it’s worth remembering that the net effect of the dispute with Tesco was a chunky increase in prices. In all but the very worst of conditions, Unilever should be able to keep its growth going.”