Diageo to issue update this week 07/02/2010 - 10:28:18
A clearer picture on consumer spending may emerge this week as firms including Diageo are among those due to issue updates.
The Bank of England’s much-awaited inflation report on Wednesday is likely to see rate-setters trim back growth forecasts following the UK’s sluggish pull out of recession.
The 0.1% first estimate for the final three months of 2009 marked a technical end to the slump, but was little cause for cheer with the market expecting a stronger advance.
The Bank surprised most forecasters with bullish predictions of a strong bounce-back in November’s report, which forecast the UK economy growing at a year-on-year rate of around 4% by the end of 2010.
But in comments with its latest no-change decision following the completion of its £200bn (€229bn) programme to boost the money supply last week, the Bank’s Monetary Policy Committee called the performance “sluggish” and said the recovery would be “gradual”.
“Credit conditions are likely to remain restrictive, while the need to strengthen public and private sector finances will also weigh on spending,” the Bank said.
Investec economist Philip Shaw said: “It should be more apparent that the MPC’s previous projections...were too optimistic.
“The wording of the recent statement accompanying the interest rate announcement gave the impression that the committee is somewhat hesitant over recovery prospects... we would not be surprised if the Inflation Report contains a set of downgraded GDP projections from what looked a set of optimistic forecasts in November.”
Inflation meanwhile jumped at a record rate in December to 2.9% after higher petrol prices and VAT effects, and will almost certainly have breached 3% in January after the return of the tax to 17.5%.
This will prompt another open letter from Governor Mervyn King to the Chancellor.
The forecasts could show a bigger spike for inflation than previously thought in the first half of 2010 before the slack in the economy opened up by the slump brings prices back down.
This has caused some twitchiness among the more hawkish members of the committee, with some hinting at a tightening of policy sooner rather than later.
The Governor warned in January the patience of UK households would be “sorely tried” in the months ahead by the temporary impact of the inflation spike, with the outlook for wage growth minimal.
But the Bank is also likely to stress again next week the extraordinary level of uncertainty over its forecasts – not just over the strength of the recovery but by the level of Government belt-tightening following the general election.
Travel giants Thomas Cook and Thomson Holidays owner TUI Travel will go head to head in trading updates this week with the focus on prospects for the all-important summer season.
TUI – first up on Tuesday – said in December that demand for summer holidays this year had held up despite “exceptional fuel and currency driven cost inflation” as well as lingering economic gloom.
The firm, which owns First Choice, was also pleased with early booking patterns for the summer, as hard-pressed consumers cling to holiday plans.
Numis analyst Wyn Ellis said: “Current guidance is for flat capacity growth in summer 2010 but we think it possible that TUI may be tempted to increase capacity by a percentage point or two.”
Thomas Cook, which posts first quarter results on Thursday, also said in November that summer bookings were on track and cheered the City with better than expected profits of £308m (€353m).
Chief executive Manny Fontenla-Novoa said the results were “particularly pleasing” against the backdrop of recession and the swine flu outbreak, which cost it an estimated £8m (€9m) in the UK.
The firm, which carries around six million UK holidaymakers a year, expects “continued strong growth” from destinations such as Turkey and Egypt as customers shun eurozone countries due to the weakness of the pound.
Mr Ellis added: “We believe that, whilst the consumer outlook remains uncertain, demand has held up well and that the summer vacation remains a priority consumer purchase: consequently we expect a positive update.”
Telecoms giant BT has already boosted market hopes ahead of its third quarter results on Thursday, having recently upped full-year revenues guidance.
BT said in November that costs were down by more than £900m (€1bn) after a jobs cull in the first six months of its financial year.
The group is in the process of cutting 15,000 jobs in the period to March 31 after trading difficulties at its global IT services division.
The operational problems left BT more than £100m (€115m) in the red last year, but chief executive Ian Livingston said there were some encouraging signs as he improved his guidance for group revenues.
BT said annual underlying revenues were likely to be down between 3% and 4%, but that was an improvement on its previous forecast for a decline of 4% to 5%.
Analysts are expecting third quarter pre-tax profits to have improved to £188m (€215.6m) against £113m (€130m) a year earlier, although this is still far below the £601m (€689m) seen in the same quarter two years ago.
Third quarter revenues are expected to be lower due to weaker demand in the recession.
And attention is likely to focus on performance at BT’s global services division following recent operational improvements.
Cillit Bang to Vanish household goods giant Reckitt Benckiser’s should continue to defy recession on Wednesday with a rise in annual profits of more than 20%.
Although the group has been given a tailwind by the effects of a weaker pound, Reckitt has traded strongly through the downturn and should post operating profits of £1.87bn (€2bn).
The company also upgraded revenue growth forecasts for the second time last year at its third-quarter results in October.
Full year sales are expected to come in at around £7.7bn (€8.8bn) as the group’s strong growth in emerging markets takes up the slack from more mature Western markets.
Europe is its biggest market, representing 47% of net revenues, followed by America and Australia and lastly developing markets with 27% and 19% respectively. But third-quarter earnings grew 17% in emerging markets compared with just 1% growth in Europe.
Highlights of the year for Reckitt included strong sales of Dettol as swine flu fears caused a surge in demand for anti-bacterial and virus products – helped by a major marketing campaign as the firm also benefited from cheaper advertising rates.
But the group’s strong showing has also been driven by good performances across its 17 key so-called “powerbrands”.
The firm, which traces its roots back to 1823, was formed by a merger of Reckitt & Colman and Benckiser in 1999.
Engineering and aerospace giant Rolls-Royce is tipped for forecast-beating results when it reports its full-year profits on Thursday.
According to analyst consensus the Derby and Bristol-based company is expected to post pre-tax profits of £868m (€995m) for the 12 months to December 31 – down from £880m (€1bn) last year.
But Andrew Gollan, of Investec Securities, said he is “increasingly convinced” that these predictions are too low and has pencilled in a surplus of £892.2m (€1bn) for the firm.
Overall, half year pre-tax profits rose 9% to £445m (€510m) – ahead of expectations.
While the firm has a multi-dimensional business, making everything from jet engines to products for nuclear power plants, it has been battered by the global economic downturn and a decline in travel and air freight.
Huge oil price rises in 2008 have also been blamed for the delayed take-up of Airbus A380 and Boeing 787 widebody programmes in the year.
The firm’s order book stood at £57.5bn (€66bn) at the end of June, with the aerospace division accounting for around £46.7bn (€53.6bn).
In June the firm said underlying profits will be lower across the year in this division, compared to 2008.
But Rolls announced a major boost to its order book in November, with deals for new engines with Air China and Ethiopian Airlines worth a combined $2bn (€1.5bn).
Looking into the next financial year Mr Gollan predicts a decline in volumes for business and regional jets, as well as lower narrowbody engine production. Engine aftercare is also expected to be flat.
But he added: “We are acutely aware of the many moving parts to Rolls-Royce’s numbers.”
He said the firm would benefit from cost saving measures, increased currency improvements and the likely robust performances of its other divisions - defence, marine, energy and nuclear.
Signs of better trading conditions from SAB Miller gave optimism for the drinks market ahead of interim results from Diageo on Thursday.
The Guinness-to-Smirnoff firm reports on half-year trading to December 31 after a tough 2009 for the global drinks market.
Diageo has been slashing jobs as part of a restructuring programme to cut £120m (€137.6m) in costs, including controversial plans to axe 900 jobs in Scotland.
It said in August that half-year pre-tax profits dipped to £2.02bn (€2.3bn) from £2.09bn (€2.4bn), with all its markets impacted by the economic troubles.
And it said little had changed in its first quarter, with sales weak against year-on-year comparatives and stock levels down.
But Grolsch rival SAB gave hope last month of a turnaround as it said underlying performance in its half-year had been strong.
The brewer said adjusted earnings rose 10% and flagged expected improvements for the second half on more favourable exchange rates and raw material costs.
Sam Hart, analyst at Charles Stanley, is forecasting Diageo’s interim pre-tax profits to remain flat at £1.4bn (€1.6bn), with net sales also holding up – at £5.08bn (€5.82bn) versus £5.07bn (€5.8) a year earlier.
He said Diageo’s outlook comments on consumer spending would be closely watched.
However, Diageo may also face questions over recent reports of a “sweetheart deal” to try and tempt the group to relocate to Switzerland.
The firm is understood to have turned down the offer, which is said to have promised income tax exemption for 200 top staff and lower corporate tax.
