Smirnoff-maker Diageo's sales set for currency hangover

(Reuters) - British spirits maker Diageo (L:DGE) flagged a bigger than expected sales hit from currency movements on Thursday, an early indication of the potential impact of recent volatility on companies with emerging market revenues.

However, the maker of Johnnie Walker scotch and Smirnoff vodka said its performance from the start of the year was in line with expectations and its organic sales would grow in line with last year.

Diageo, which has operations across 180 countries, said it expected currency effects to knock 175 million pounds off net sales, compared to a previous estimate of 70 million pounds, which would wipe 45 million pounds off its full-year profit, up from an earlier estimate of 10 million pounds.

While Diageo's revenue from emerging markets like India or China suffers as their currencies weaken, it is helped by the strengthening of the dollar which has driven such moves.

The currency hit represents just a fraction of the 12 billion pounds Diageo reported in full-year sales last year and the spirit maker's shares were broadly unchanged.

"The FX update is worth less than 1 percent to EPS but shares already largely reflect the move," analysts from brokerage Jefferies said in a note on the update.

"The year has started well."

Diageo said its organic net sales growth in 2019 would be "broadly" in line with last fiscal year when it grew organic sales by 5 percent.

The company said that it continued to expect operating margins growth of 175 basis points in the three years ending June 30, 2019.

Diageo, which suffers when sterling rises against the dollar because it reduces the value of its largely foreign sales, assumed average rates of the pound at $1.35 when it reported results in July , compared to $1.27 a year ago.


Sterling, hurt by worries over Brexit and the rise in U.S. interest rates, was trading around $1.3150 on Thursday.