Diageo Q3 Earnings Call Highlights

Diageo NYSE: DEO reported modest organic net sales growth in its fiscal 2026 third quarter, supported by strength in Europe, Latin America and the Caribbean (LAC), and Africa, while North America remained a key area of weakness as U.S. spirits continued to decline.

Third-quarter top-line trends

Chief Financial Officer Nik Jhangiani said organic net sales rose 0.3% in the quarter, driven by 0.4% organic volume growth, with “slightly negative price mix.” Reported net sales increased 2.3%, helped by a positive hyperinflation adjustment that was “partially offset by the negative impact of disposals including Guinness Nigeria and Guinness Ghana Breweries,” according to Jhangiani.

Jhangiani attributed some of the quarter’s strength to calendar and event-related phasing, including the “timing of Easter” and sales into the trade ahead of the upcoming FIFA World Cup, particularly in LAC. He also cited the “later timing of Chinese New Year” as a factor in Asia-Pacific comparisons.

Regional performance: Europe, LAC and Africa offset North America pressure

North America: Organic net sales declined 9.4%, which Jhangiani said reflected “soft market conditions and the need for a more competitive offer.” U.S. spirits net sales fell 15.4%. He said the decline was “weaker than depletions decline by circa 5%,” pointing to ongoing differences between shipment trends and consumer takeaway.

Jhangiani noted U.S. spirits results were impacted by “lapping tough comps last year due to the pre-tariff pull forward of imports to distributors as well as tequila restocking.” Tequila declined double digits, which he attributed to “tough comps from prior year, competitive pressure, and continued category softness.”

In contrast, Diageo Beer Company grew 9.1%, “led by both Smirnoff RTDs and Guinness,” with Jhangiani saying Guinness continued to perform strongly.

Europe: Organic net sales rose 8.8%, supported by Easter timing. Jhangiani cited “continued strength of Guinness in Great Britain and Ireland” and a “good performance across spirits,” led by MENA, Central and Eastern Europe, and Turkey.

Asia Pacific: Organic net sales declined 0.8%, driven by weakness in Greater China. Jhangiani said Chinese white spirits fell “just over 20%,” reflecting “reduced consumption, primarily due to market policy,” which impacted regional net sales by about 3% and group net sales by 0.6%. India was impacted by the Maharashtra excise tax increase, though he said that excluding Maharashtra, India grew high single digits.

LAC: Organic net sales grew 16.2%, supported by FIFA World Cup-related buy-in and Easter timing. Jhangiani said Scotch performed well across multiple markets, and “Brazil led the growth of RTDs.”

Africa: Organic net sales increased 17.1%, with double-digit growth in East Africa and Southwest and Central Africa. Jhangiani said innovation with Kenya Cane and performance from Mainstay in South Africa contributed to results.

Guidance reiterated; cash flow and savings program update

Diageo reiterated its fiscal 2026 guidance, which Jhangiani said was unchanged from the company’s February half-year results. The company continues to expect organic net sales to decline 2% to 3% for the full year, with organic profit growth “flat to up low single digits.”

Jhangiani also reiterated free cash flow expectations of about $3 billion after exceptionals related to the Accelerate program, but before an approximately $100 million one-off inventory build tied to the implementation of the S/4HANA ERP system at the start of fiscal 2027.

On cost savings, Jhangiani said Diageo saw “continued momentum with our Accelerate program” and remains on track to deliver approximately $300 million of savings by the end of fiscal 2026.

He added that efforts to improve balance sheet flexibility are ongoing, noting that the March announcement of United Spirits Limited’s sale of its Royal Challengers Bengaluru cricket club, and the expected completion in the second half of calendar 2026 of the disposal of Diageo’s EABL shareholding in Africa, will support deleveraging.

Competitive actions in the U.S. and Mexico; inventory and pricing focus

On the Q&A, management fielded multiple questions on North America, where Diageo has said it is taking steps to improve competitiveness. Responding to Citi analyst Simon Hales, Jhangiani said Diageo is continuing to “test the elasticities on Casamigos,” referencing work in Florida that delivered “positive results.” He said the company is initiating similar actions in additional states, including cities tied to World Cup activity, and called the early results “clearly positive,” while noting such changes take time to appear on shelf.

Jhangiani also discussed tequila price architecture, pointing to a focus on entry-level tequila (Astral) and “the right price tiering with Don Julio” as Casamigos pricing is adjusted.

CEO Dave Lewis said the company has been “surgical” where possible, but emphasized that a “deep piece of work” is underway on the “underlying competitiveness of the business,” with more detail expected during the strategy update.

In Mexico, Jhangiani said a “more cautious consumer” environment is weighing on performance. He said the company is pursuing “price repositioning to ensure that we’ve got a more competitive offering,” citing Don Julio Blanco as an example of the need to compete at “the right price points” to drive recruitment and then premiumization over time. He said Diageo is seeing “encouraging” early trends, though he expects a lag before the full impact is visible.

UBS analyst Sanjeet Aujla asked about the gap between shipments and depletions and inventory levels in the U.S. Jhangiani said depletions have been tracking ahead of shipments, and Diageo wants to end the year with “appropriate levels of inventory in trade.” He said investors should expect a similar dynamic to what is “baked into” the full-year guidance.

Capital Markets Day and World Cup activation

Lewis said Diageo plans to hold a Capital Markets Day on Aug. 6 in London, with a morning full-year trading update and an afternoon strategy and operating framework presentation at the company’s headquarters.

On the FIFA World Cup, Lewis noted that it is “the first time there’s ever been a spirit sponsor of the World Cup,” calling it a learning opportunity. He said Diageo will evaluate impact using “the usual metrics” for brand equity as well as short-, medium-, and long-term sales. Lewis expressed more confidence in Latin America given the region’s football culture, while describing North America as more of a “voyage of discovery.”

In closing remarks, Lewis said there was “real encouragement in a number of areas,” while reiterating that improvements in North America will take longer. He said the company will share details of its strategic refresh in August.

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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