Diageo halves dividend as new CEO Sir Dave Lewis plots shake-up
Diageo CEO, Sir Dave Lewis, has moved swiftly to reset strategy after mixed half-year results and sliding sales for the Guinness owner. The dividend cut aims to boost financial flexibility as Diageo faces pressure in North America and China.
Diageo’s new chief executive, Sir Dave Lewis, has been in post for just seven weeks but has already seen enough of the business to identify several areas he wants to change to improve following sliding sales and profits in the half year to the end of December.
Dividend cut ends ‘Dividend Aristocrat’ era
Calling the results “mixed”, he has more than halved the group’s dividend, a decision he called “not easy” because Diageo has been hailed as a Dividend Aristocrat, famed for increasing shareholder payouts regularly since its inception in 1997.
The reason, he said, was that it “would create more financial flexibility” to invest in the business to make it more competitive.
As a result, Diageo’s shares fell by more than 6% in London. However, that reaction still left them about 12% up in the past two months as investors looked to Lewis to shake up the business, which has seen its value halve in the past five years.
Sales and profit decline in first half
Diageo’s net sales fell 4% to US$10.5 billion in the six months to the end of December, with organic sales down 2.8%.
Growth in Europe, Latin America and Africa was more than offset by weakness in North America and China. Excluding Chinese white spirits, organic sales would have been around 2% higher, finance director Nik Jhiangani claimed.
Operating profit declined 1.2% to US$3.1 billion, with pre-exceptional earnings per share falling 2.5% to 95.3 cents. Tariffs caused 1.2% of the operating profit decline.
For the current financial year, Diageo now expects organic sales to fall by between 2% and 3%, with operating profit flat to up low single digits. The group reiterated its guidance for US$3 billion of free cash flow and said that its cost-saving Accelerate programme to save US$625 million was well on track.
Lewis instigates spring turnaround plan
Lewis, who is famed for his rejuvenation of both Unilever and Tesco, told investors that he would present his turnaround proposals later in the spring, but he gave them a flavour of what is to come.
Diageo is a “very strong business with an enviable position and lots of energy…but we have some significant work to do,” he said.
Spirits is “a resilient category”, he said. “It is very, very stable”, so he foresees many opportunities with the challenge being “economic”, especially in the US, where consumers have been squeezed for the past five years.
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He pointed out that in America, Diageo’s share of the RTD market had fallen from 25% to 10% as consumers traded down and discretionary spending had shrunk.
“The idea that we can’t service the demand that’s there is both a source of significant regret, but it’s also an opportunity for us.”
He outlined three immediate priorities.
The first is “reinforcing competitive strategies and winning with relevant brands”, investing in the premium portfolio but also exploring new opportunities, especially with small packs.
Second is focus on the customer. Lewis was highly critical of Diageo’s customer service record, which he said was poor for its distributors and retail customers. It was, he said, “frankly very poor”, and consequently the group was failing to capitalise on demand for popular brands such as Guinness.
“The idea that we can’t service the demand that’s there is both a source of significant regret, but it’s also an opportunity for us,” he said.
“Our approach to customers must be that we grow our customers’ categories and we look to gain disproportionately with that growth,” he said.
Redesigning operating framework
The third immediate priority is to redesign what he called Diageo’s “operating framework”, to improve clarity within the organisation to make Diageo and make it more agile.
“We ned to build, sharpen and constantly invest in our competitive edge to become a more competitive organisation focused on shareholder value.
Potential disposals
Lewis said that he would consider disposals but that he would not sell assets cheaply. He confirmed that Diageo was looking to sell its Royal Challengers Bangalore Indian cricket franchise but gave no guidance on immediate timing despite the new season beginning in April.
Reports in India suggest that Diageo has received bids of up to almost US$2 billion for the team.
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