Diageo shares dive on cost cutting

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British spirit maker Diageo is the FTSE 100’s biggest faller this morning, down over five per cent.

Recent emerging market turmoil hit the drinks firm, which has reported net sales growth of just 1.8 per cent in the first half, having seen growth of 2.2 per cent in the first quarter.

In a bid to streamline the business, chief executive Ivan Menezes has announced a new cost savings plan to save £200m by 2017.

Numis has called the results disappointing, anticipating downward revisions to consensus estimates.

North America remains the driver of business for Diageo, with organic net revenue growth of 4.6 per cent in the second quarter.

Emerging market sales did creep up 1.3 per cent but were stung by weak sales of Baiju (the potent Chinese white spirit).

The Chinese government’s clampdown on extravagent entertainment and gift-giving by officials has put many luxury brands - part of a £180bn-a-year market - in a vulnerable position.

Diageo’s net sales were down 22 per cent in China in the last six months, and 10 per cent in Nigeria.

Nigerian and Irish beer sales were tough, said the firm, which owns Guinness and Red Stripe - down 2.6 per cent in the period.

The company was also hit by exchange rates, which decreased net sales by £86m and operating profits by £54m in the first half.

Operating profit grew slightly, however, up 2.9 per cent, and Diageo’s premium brands continued to do well, with reserve brands up 18.5 per cent.

Menezes said:

Over the next two months we will set out detailed plans to simplify our processes and de-layer our organisation. This will create a more agile, accountable and effective organisation to deliver our performance ambition. I expect this to deliver cost savings of £200m a year by the end of fiscal 2017.

He added that the company expects just modest improvement in the short term: “We do expect some top line improvement in the second half”.

(Google)

S&P Capital IQ has maintained their 'buy' rating on Diageo but has reduced its 12-month target price to £20.20 from £22.70p.