Diageo could make “substantial changes” to its product portfolio in the form of asset disposals, CFO Nik Jhangiani said today (19 May).
Speaking to analysts, Jhangiani said Diageo had identified opportunities to offload assets that were different in scope to the deals the Johnnie Walker maker had conducted in recent years.
“Clearly we see through our reviews that we’ve been doing internally and with the board some opportunities for what I would call substantial changes versus portfolio trimming,” Jhangiani said.
“I can’t say any more than that but clearly it’s going to be above and beyond the usual smaller brand disposals that you’ve seen over the last three years.”
Jhangiani was speaking after Diageo announced plans to save around $500m in costs over the next three years.
The Tanqueray maker said the move would help the company invest in “future growth” and improve its “operating leverage”.
Diageo said the cuts were part of a broader initiative – dubbed ‘Accelerate’ – that will see “a shift in how we do business”, including developing a “more agile global operating model”.
Under the plans, the UK-listed group also said it expects to generate around £3bn free cash flow a year from its 2025/26 fiscal year.
Possible sources of savings
Asked where the $500m in savings would come from, Jhangiani pointed to Diageo’s “trade investment”, its spending on A&P, overheads and the company’s supply chain.
“The … piece … around overheads. We’ve highlighted in the release how we want to think about our operating framework and model choices to really leverage our scale but continue to build a much more agile and resilient [company] but then drive efficiency and effectiveness how we do things,” he explained.
Jhangiani said Diageo plans to provide more detail on the Accelerate programme in August, when the company is scheduled to report its full-year financial results.
He added: “Our supply teams continue to do a great job as we look at offsetting inflationary pressures but there’s also broader efficiency plays that we’ll be looking at within supply and part of that goes back to some of the work that the team has done with the supply agility programme, so those will start coming through as well.”
Just Drinks has approached Diageo to ask what impact the savings plan could have on jobs.
At the end of Diageo’s 2021/22 financial year, the company announced a “supply chain agility programme” to cover the subsequent five years, efforts designed to boost productivity and, then CEO Ivan Menezes said, “strengthen our supply chain, improve its resilience and agility”.
Asked on today’s call if that programme was ongoing or would be part of the new Accelerate efforts, CEO Debra Crew said: “We’ve had some different productivity numbers flying around and supply agility as well and what was included in what. As Nik came in – and he talked about it at the first half results – we stepped back, have re-cut and taken a look across all of these programmes because some of these productivity things that were laid out were under very different macro conditions, different growth expectations, different capex expectations, etc.
“As part of that $500m, the supply agility, the programmes that are ongoing will be included in that. We’re trying to give better transparency to sort of one number that’s all inclusive of all of these efforts.”
Pressure on Diageo sales in Europe
The announcement came alongside a trading update for the third quarter of Diageo’s current financial year, three months that ran to the end of March.
Net sales increased 2.9% to £4.38bn and were up 5.9% on an organic basis. The company said the “phasing” of its sales boosted its organic net sales by around four percentage points. Diageo said its volumes rose 2.8% organically.
In North America, Diageo’s reported net sales rose 5.9% during the quarter. On an organic basis, the company’s spirits sales in the region were up 7%, with depletions growing by around 5%. Diageo said distributors had pulled forward imports in anticipation of changes to tariffs.
In Europe, despite “strong momentum” from Guinness, the group’s net sales dipped 1.3%, with organic sales 0.4% lower.
Crew said: “The Guinness performance, putting that aside, it has been impacted by consumer pressure and just uncertainty surrounding all the geopolitical conflict and we are seeing that impact in having some downtrading on spirits.
“Price-mix, we are seeing a downward pressure. It's hard to see, because Guinness gives us such great price-mix. You see overall Europe showing very positive price-mix but we definitely are seeing downtrading on the spirit side. We do have a very standard-priced portfolio within Europe, so we're having to navigate through that but, no doubt, that is one of the pieces of uncertainty that we're really feeling in the market as well.”
Outlook
Diageo maintained its full-year guidance, pointing out the increased growth rate the company saw in its third quarter versus the first half of the fiscal year was “mainly driven by phasing”.
The group said it continues to expect to see a “sequential improvement” in the growth of its organic net sales compared with the first half of its financial year.
Diageo also continues to expect a “slight decline” in its organic operating profit in the second half of the year, which would be “broadly in line” with the decrease the company saw in the first half. That forecast includes the impact of the tariffs already announced that will impact its 2024/25 financial year.
The company provided an update on how it sees the changes on tariffs affecting its business. In February, the Don Julio Tequila owner had forecast tariffs would hit profits by around $200m over a four-month period. Today, Diageo said the current situation meant it was forecasting an “unmitigated impact” of $150m a year. The higher tariffs the US and China have imposed on each other “do not have a material impact on our business”, Diageo said.
Shares in Diageo were down 0.93% at 2,132p at 12:45 BST.
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"Diageo eyeing “substantial” asset sales" was originally created and published by Just Drinks, a GlobalData owned brand.
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