Diageo H2 Earnings Call Highlights

Key Points

• Mixed fiscal 2026 results: Diageo’s organic net sales fell 2%, while organic operating profit rose 2% as growth in Europe, Latin America and Africa offset weakness in North America and Asia Pacific.
• Regional weakness was concentrated in the U.S. and China: North American sales declined 8.4%, driven by a roughly 21% drop in tequila, while Asia Pacific fell about 6% due to Chinese white spirits. India, Europe, Brazil and Africa delivered solid growth.
• Cost cuts improved cash generation and reduced leverage: The Accelerate program delivered $514 million in savings, lifting free cash flow to $3.2 billion and lowering net debt to $20.5 billion. Diageo also announced a two-year, $1.2 billion restructuring plan expected to generate approximately $1 billion in savings.

Diageo NYSE: DEO reported a mixed fiscal 2026, with growth in Europe, Latin America and Africa offset by weaker performance in North America and Asia Pacific. Organic net sales declined 2%, while organic operating profit increased 2%, supported by cost savings under its Accelerate program.

Chief Financial Officer Nik Jhangiani said the company faced a challenging macroeconomic and industry environment, particularly in U.S. spirits and Chinese white spirits. Excluding the effect of Chinese white spirits, he said organic net sales would have declined by roughly 0.5 percentage point and organic profit growth would have been about 4.5%.

Reported net sales declined 3%, reflecting the organic sales decrease and the effect of acquisitions and disposals, partly offset by favorable foreign exchange and hyperinflation adjustments. Organic volume declined 0.4%, although volumes would have been broadly flat excluding Chinese white spirits, according to Jhangiani.

North America and Asia Pacific Weigh on Sales

North America was the company’s largest regional challenge, with organic sales declining 8.4%. The decline was driven by softness in U.S. spirits, particularly tequila, where sales fell about 21%.

Jhangiani said both Casamigos and Don Julio were affected, citing difficult comparisons for Don Julio and consumer downtrading in a weaker tequila category. Diageo Beer Company, however, posted approximately 4% organic growth, led by Guinness and Smirnoff ready-to-drink products.

Asia Pacific organic sales declined around 6%, largely due to continued weakness in Chinese white spirits. The impact from Chinese white spirits reduced regional net sales by approximately 8%, Jhangiani said. Excluding that business, Asia Pacific sales would have risen by low single digits.

India delivered roughly 7% organic net sales growth, supported by momentum in prestige-and-above brands, locally inspired Smirnoff flavors and format innovation for Royal Challenge. The growth came despite excise policy changes in Maharashtra that affected lower-prestige price points.

Growth in Europe, Latin America and Africa

Europe generated approximately 3% organic net sales growth. Guinness posted double-digit growth in Great Britain, while raki, Scotch and gin delivered double-digit volume growth in Turkey, aided by expanded distribution and visibility.

Latin America and the Caribbean recorded sales growth in most markets, with particularly strong performance in Brazil and Colombia. Jhangiani said Brazil’s second half benefited from a recovery in consumer confidence after counterfeit alcohol incidents disrupted the industry and on-trade demand during the second quarter.

Africa produced broad-based growth, including strong double-digit gains in South Africa driven by ready-to-drink products. Beer performance was also strong across East Africa.

Cost Savings Support Profit and Cash Flow

Organic gross profit declined by $506 million, as adverse product mix, cost inflation and tariffs more than offset cost efficiencies. Still, Diageo’s Accelerate program supported operating profit through lower advertising and promotion spending, lower overheads, supply savings and trade-spend efficiencies.

The company delivered $514 million of Accelerate savings during fiscal 2026, representing about 85% of the program. This included $210 million of advertising and promotion savings, $130 million in overhead reductions, roughly $180 million in supply savings and about $20 million from trade-spend efficiency.

Jhangiani said marketing spending declined partly because of the program’s savings and more selective allocation of investment. He said the company’s commitment to investing in brands for the future remained unchanged.

Free cash flow rose $463 million year over year to $3.2 billion. The improvement reflected more disciplined capital spending and investment in maturing stock, as well as lower tax payments. Capital expenditures were approximately $1.2 billion, down about $370 million from the prior year.

Pre-exceptional earnings per share rose 0.7% to $1.653. Diageo recommended a full-year dividend of $0.50 per share, representing a 30% payout ratio and aligning with its stated policy of distributing 30% to 50% of earnings.

Impairments, Restructuring and Balance Sheet

Reported operating profit before exceptional items declined 0.4%. Diageo recorded approximately $1.5 billion in impairment charges and about $0.9 billion in restructuring charges during the year.

The impairment charges included a $786 million charge related to the Turkey business, the goodwill from the Mey İçki acquisition and several brands. Jhangiani said the charge was largely linked to hyperinflationary accounting and carrying values relative to Turkey’s inflationary environment. Diageo also recorded a $287 million impairment related to Don Papa, citing a decline in the European rum category.

Restructuring charges included $752 million related to the company’s new operating framework, with the remaining charges connected to supply-chain actions and the Accelerate program. Net debt ended the year at $20.5 billion, down $1.4 billion, while leverage declined to 3.1 times from 3.4 times a year earlier.

Diageo said the planned sale of its 65% interest in EABL, expected to complete in the second half of calendar 2026, should reduce leverage by about 0.25 times. The pending sale by United Spirits of its ownership in Royal Challengers Bengaluru is also expected to lower net debt-to-EBITDA by roughly 0.1 times.

The company said it would provide further guidance at its Capital Markets Day. It also outlined a two-year, $1.2 billion restructuring plan, including $1.1 billion related to operating-framework changes and about $100 million for supply chain measures. The program is expected to generate approximately $1 billion in savings, including $850 million from operating-framework actions and $150 million from supply-chain initiatives.

About Diageo (NYSE:DEO)

Diageo plc is a global producer, marketer and distributor of alcoholic beverages, headquartered in London, England. The company was created through the 1997 merger of Guinness plc and Grand Metropolitan plc and is publicly traded on multiple exchanges, including the New York Stock Exchange NYSE: DEO and the London Stock Exchange. Diageo operates a worldwide business, selling products in a broad range of markets across the Americas, Europe, Africa, Asia and Latin America.

Diageo's core activities cover the production, marketing and sale of a diverse portfolio of spirits, beer and liqueurs.

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