Diageo plc 2026 H2 Earnings Call

Good morning, ladies and gentlemen, and thank you for joining us this morning. Nik and I are here to share with you the results of fiscal 2026 for Diageo, and I'd also like to say something about the Capital Markets Day, which is taking place in our office this afternoon. We've issued today two statements, one to cover 2026 and the other to cover Capital Markets Day. I think the way we'll do this, if it's okay with you, is I'll ask Nik to walk you through the results of last year, and then I'll come back and share a few thoughts as we get ready for the Capital Markets Day this afternoon.

Nik, over to you. Thank you, Dave.

Fiscal 2026 has been a mixed year with good momentum in Europe, Latin America, and Africa, but with challenges in North America and Asia Pacific that we've talked about through the year. We're focused on becoming more competitive in the U.S., and we'll share more details on this later at our Capital Markets Day. We have delivered strong free cash flow, which has enabled us to reduce leverage at the end of the year. We've made good progress on the three priorities that Dave set out at our interim results. The implementation of the new operating model is already well progressed. The savings from the actions we are taking will allow us to invest without reducing operating profit. We look forward to expanding and sharing more detail on this later today. Let me walk you through our results.

In the context of a continued challenging macro environment and industry backdrop in many of our markets, but in particular, U.S. spirits and Chinese white spirits, organic net sales declined 2%. However, our group operating profit increased 2%. Notably, excluding the impact from Chinese white spirits, organic net sales would have declined around half a percentage point with organic profit growth around 4.5%. For Asia Pacific, excluding Chinese white spirits, net sales would've been up low single digits. Europe, LAC, and Africa delivered strong growth. Our focus on cost savings through the Accelerate program supported organic operating profit and offset the impact of lower gross profit due to the mix of market growth.

EPS pre-exceptionals was up 0.7% with the positive impact of organic operating profit growth and favorable foreign exchange, mostly offset by lower fair value remeasurement versus the prior year, as well as lapping the impact of the disposal of our businesses in Ghana and Nigeria. Our strong focus on cash resulted in free cash flow delivery of $3.2 billion for the year, $463 million up on last year. We also recommended a full-year dividend of $0.50 per share, equating to a 30% dividend payout ratio in line with the dividend payout policy we moved to earlier this year of 30%-50%. Turning to the regions, the biggest challenge was an 8.4% organic sales decline in North America, driven by softness in our U.S. spirits performance, particularly in tequila, which declined approximately 21%.

This was driven by both Casamigos and Don Julio with tough comps for Don Julio and down trading within what has been a weaker category. John will talk to this later at our Capital Markets Day. Organic growth in Diageo Beer Company was good at around 4%, led by both Guinness and Smirnoff RTD. Moving to Europe, organic net sales increased approximately 3%, driven by double-digit growth in Guinness in Great Britain and double-digit volume growth in raki, Scotch, and gin in Turkey as a result of increased distribution and visibility. The continued impact of weakness in Chinese white spirits adversely impacted sales in APAC, resulting in organic sales down around 6%. The negative impact of Chinese white spirits on region net sales was circa 8%.

In India, continued momentum in prestige and above segment brands, combined with locally inspired flavor and innovation on Smirnoff and successful format innovation on Royal Challenge contributed to strong results. This momentum enabled India to deliver organic net sales growth of around 7%, despite the adverse impact from the excise policy changes in Maharashtra, which especially impacted net sales from lower prestige price points. In LAC, we saw net sales growth in most markets with particularly strong performance in Brazil and Colombia. Notably, the second half in Brazil saw a recovery in consumer confidence following the impact on the industry in Q2 of counterfeit alcohol incidents, which was particularly pronounced in the on-trade. Across Africa, we saw broad-based net sales growth across the region with strong double-digit growth in South Africa, driven by RTDs and also strong beer performance across East Africa.

Let me now take you through the movement in net sales for the year in more detail. Reported net sales declined 3%, driven by organic sales decline and the adverse impact of acquisitions and disposals. This was only partly mitigated by favorable foreign exchange and the hyperinflation adjustments. You'll note we have presented the offset between the outsized hyperinflationary adjustment relating to Venezuela and the foreign exchange impact, which are due to the hyperinflationary accounting and our foreign exchange reporting approach. This presentation allows a clearer picture of the movements within organic growth, excluding this impact. Organic volume growth declined 0.4% as good volume growth in Africa and LAC was offset by volume losses in NAM and APAC. Excluding the impact of Chinese white spirits, volumes were broadly flat.

Europe and LAC delivered positive price mix with 1.6% decline at the group level, driven mainly by the adverse impact of Chinese white spirits weakness and the decline in U.S. spirits, primarily due to tequila, as I talked to earlier. If you exclude the impact of Chinese white spirits, price mix would be down approximately half a point. The negative impact from acquisitions and disposals was due to the disposal of Guinness Ghana at the beginning of fiscal 2026, and the disposals of Guinness Nigeria, which completed in September 2024, and Cîroc, which completed in the fourth quarter of fiscal 2025. Turning now to the movement in operating profit for the year. Reported operating profit before exceptionals declined 0.4%, with organic operating profit growth and favorable foreign exchange offset by the movement in acquisitions and disposals and lower fair value remeasurement.

Gross profit declined $506 million organically, with adverse product mix, cost inflation, and tariffs being only partly mitigated by cost efficiencies. Organic profit growth was supported by savings from Accelerate, from more efficient A&P and overhead spend, partly offset by lower gross profit. Marketing spend was lower, in part reflecting Accelerate savings, combined with deliberate prioritization and being more choiceful in how and where we spend. As I've said consistently through the year, our commitment to investing in our brands for the future remains unchanged. Accelerate also contributed to lower overheads, with savings reflecting optimized IT costs and strong cost controls across the corporate organization. I am pleased that we delivered $514 million, or circa 85% of the Accelerate program in fiscal 2026. As mentioned, the savings come from a focus on driving efficiency and effectiveness from A&P investment, supply, and overheads.

You will have seen some of the detail in the earlier slides on the A&P savings of $210 million, as well as $130 million in lower overheads. This was also supplemented by circa $180 million from supply savings and also $20 million from trade spend efficiency. You may remember that the latter was something we had said would take longer to come through and benefits the P&L through net sales. Going forward, we will update you on supply chain savings and the operating framework as shared separately in our CMD release and the event later today. Moving to cash. Free cash flow increased $463 million versus fiscal 2025 to $3.2 billion. This strong year-on-year delivery was driven by a more disciplined investment in CapEx and maturing stock, along with lower tax payments.

This result also includes a circa $125 million one-off investment in working capital to increase resilience through the implementation of our new S/4HANA ERP system, and to a lesser degree, to mitigate risk arising from the Middle East conflict. The cash outflow from maturing stock through the year was minimal as we continue to optimize investment with more frequent and dynamic reviews of our mid to long-term maturing liquid requirements. CapEx was approximately $1.2 billion, a decrease of about $370 million on last year, reflecting a disciplined approach to investing in projects including Guinness production capacity expansion, supply agility, and digital infrastructure. Tax paid was lower, partly due to a historic tax refund of circa $100 million. EPS pre-exceptionals increased 0.7% on last year to $1.653, mainly driven by organic operating profit growth, partly offset by lower fair value remeasurement.

There was also some offset between favorable foreign exchange and the negative impact of the disposals on reported operating profit I mentioned earlier and higher finance charges. I would like to spend some time on exceptional operating charges given their magnitude. I'll take you through the detail particularly related to impairment, but also the work on restructuring. During the period, we incurred impairment charges of circa $1.5 billion and restructuring charges of circa $0.9 billion. The impairment charge included two large items. Firstly, a $786 million charge related to the Turkey business and the goodwill from the Mey İçki acquisition and several brands. The Turkey related impairment was largely due to the impact of hyperinflationary accounting on carrying values relative to the inflationary environment as we look to be more competitive on shelf.

As you will have seen in our fiscal 2026 results, we're pleased with the on-the-ground performance in Turkey, despite the challenges of operating in a high inflationary environment. The other sizable amount was a $287 million charge related to the impairment of the Don Papa brand, which was impacted by the decline of the rum category in Europe. The restructuring charges are mainly related to the implementation of our new operating framework, with $752 million in fiscal 2026, and the balance of the restructuring related to supply chain and Accelerate program, which will now be closed off. This included impairments related to our supply chain assets as we took corrective actions to rightsize our capacity based on industry outlooks and improve returns. Moving to the balance sheet, we closed the year with lower net debt at $20.5 billion.