Diageo plc ($DGE)

Hello, and welcome, everyone, to the Diageo plc Fiscal '26 Q3 Trading Statement. My name is Lucy, and I'll be coordinating the call today. [Operator Instructions]. I will now hand you over to Sonya Ghobrial to begin. Sonya, please go ahead when you're ready.

Thanks, Lucy. Good morning, everyone. Welcome to Diageo's Fiscal 2026 Q3 Trading Statement Call. I'm Sonya Ghobrial, Head of Investor Relations, and I'm joined this morning by Sir Dave Lewis, Chief Executive Officer; and Nik Jhangiani, Chief Financial Officer. Just a quick reminder for those on the call that in the discussions today, the company may make certain forward-looking statements, including those that refer to our estimates, plans and expectations. Please refer to this morning's release for more detail, including factors that could lead to actual results to materially differ from those expressed in or implied by any such forward-looking statements. Hopefully, you've all seen this morning's press release, which can be found on our website. For those listening, we'd like to ask a question, please use the dial-in details included in today's press release. Also, if I could ask if you could limit to one question per analyst, we can hopefully get round to everyone. First, let me hand over to Dave for some brief opening remarks.

So, thank you very much, indeed, and good morning, everybody, and thank you for joining us today. I'm joining the call from the States, Sonya and Nik are in the office in London. And before I pass over to Nik to take us through the trading update, thought I'd say a word about the upcoming Capital Markets Day. You would have seen in the release that we're intending to hold the Capital Markets Day on the 6th of August in the office in London. The work on the strategy update is progressing well as is the redesign of the operating framework. There's lots of work for us still to do, but we're confident that we'll have that complete and ready to share with you on the 6th. So the plan at the moment is in the morning, we'll do a short full year trading update. And then in the afternoon, invite you into the Diageo and share with you that strategy update and any of the redesign of the operating framework. So with that, Nik, I'm going to hand over to you for the Q3 trading update.

Great. Thanks, Dave, and good morning, everyone. Thank you all for joining us today. I'll walk through our results for fiscal quarter 3 of '26, and then Dave and I will answer any questions you might have. So let me start with a quick overview of the top line trends. In the quarter, organic net sales were up 0.3%, driven by a volume growth of 0.4%. We saw strong growth in Europe, LAC and Africa, all up at least high single digits, aided in part by the timing of Easter and sales into the trade as they get ready for the upcoming FIFA World Cup, particularly in LAC. In North America, organic net sales declined high single digits, reflecting continued U.S. spirits weakness. Asia Pacific net sales declined slightly with weakness in Chinese white spirits, offsetting low single-digit growth in international premium spirits and some benefit in the region from the later timing of Chinese New Year. Our progress towards increasing financial flexibility and strengthening our balance sheet continues. We saw continued momentum with our Accelerate program and are on track to deliver circa $300 million of savings by the end of fiscal '26. The announcement in March of U.S. [ sales ] sale of its Royal Challengers Bengaluru Cricket Club as well as the expected completion in the second half of calendar 2026 of the disposal of our [ EABL ] shareholding in Africa will support our focus on deleveraging. Our guidance for fiscal '26 is unchanged from what we shared in February at the half year results. Now moving to reported net sales. This was up 2.3%, with a notable impact from the positive hyperinflation adjustment, which was partially offset by the negative impact of disposals, including Guinness Nigeria in Guinness Ghana breweries and the limited impact from foreign exchange. As indicated earlier, organic net sales growth of 0.3% comprised of positive organic volume growth of 0.4% and slightly negative price mix. Notably, price/mix was largely positive across all regions with the exception of U.S. Spirits and Africa. Now getting into some detail on net sales across the regions. In North America, organic net sales declined 9.4% as a result of soft market conditions and the need for a more competitive offer. This decline was largely due to U.S. spirits down 15.4%, weaker than depletions declined by circa 5%. As Dave communicated in our press release, actions are already underway to address this. Although NAND price increase increased by 0.5%, this was driven by a one-off item in Canada relating to a favorable resolution of a commercial terms agreement with our largest customer. Our underlying NAND price mix was negative largely due to adverse U.S. spares mix. U.S. Spirits net sales were impacted by lapping tough comps last year due to the pre-tariff pull forward of imports to distributors as well as tequila restocking. We did, however, also see some shipments benefit from distributor buy-in ahead of FIFA World Cup. Tequila declined double digits, driven by tough comps from prior year, competitive pressure and continued category softness. The [indiscernible] company, net sales grew 9.1%, led by both Smirnoff-RTDs and Guinness, which continued to perform strongly. Europe saw a positive impact from Easter timing, growing organic net sales 8.8%. Of note, the continued strength of Guinness in Guinness of [indiscernible] Great Britain and Ireland and good performance across spirits, which was led by [ MENA ], Central and Eastern Europe and Turkey. Asia Pacific organic net sales declined 0.8%, driven by weakness in Greater China, with some performance benefit from the later timing of Chinese New Year, as I indicated earlier. In Greater China, Chinese white spirits declined just over 20%, reflecting reduced consumption primarily due to market policy impacting the region's net sales by circa 3% and group net sales by 0.6%. India was impacted by the Maharashtra excise tax increase excluding Maharashtra, India grew high single digits. LAC also benefited in the quarter from the buying ahead of the FIFA World Cup as well as Easter timing to deliver organic net sales of 16.2% and Scotch performed well across multiple markets, and Brazil led the growth of RTDs. Finally, Africa delivered solid 17.1% organic net sales with double-digit growth in both East Africa and Southwest and Central Africa. Innovation with [ Kenya Cane ] was also a positive contributor as was [indiscernible] in South Africa. Moving to our outlook for 2026. We reiterated our fiscal '26 guidance shared with half 1 results, namely for organic net sales down 2% to 3% and organic profit growth flat to up low single digits. We continue to expect free cash flow of circa $3 billion after exceptionals related to the Accelerate program but before an approximately $100 million one-off adjustment for inventory build at year-end to cover implementation of the [indiscernible] ERP system at the start of fiscal '27. The other financial guidance for fiscal '26, which is also unchanged, can be found in the appendix of the slides. As Dave said in today's release, we are mindful of continued geopolitical uncertainty, including the impact of the ongoing conflict in the Middle East on energy, supply and distribution. As you would expect, we continue to monitor developments here, and we will ensure that we do the right thing to protect our business and build further resilience for 2027. This could include the buildup of additional inventory through advanced production and shipment of business-critical SKUs. Finally, whilst we welcome the news on scotch and tariffs, this will likely have minimal impact, if any, on fiscal '26 and is more relevant to the next year. With that, let me hand back to the operator to open the line for your questions. Thank you. Operator?

[Operator Instructions]. The first question today comes from Simon Hales of Citi.

I wonder if you could talk a little bit more about some of the actions you've been taking perhaps since the H1 results when we last properly met to put the group on a thermal footing, especially perhaps in the U.S. I mean you say in the statement, Dave, that you have been moved to make the business more competitive and those moves are underway. Where have you taken perhaps further price reposition action on [indiscernible] in recent months? And is there any early data on the consumer response to those moves that you can share with us at all, please?

Yes, sure. So I mean I think if you look at it, it's very much in line with what we've been referring to, which is really being able to continue testing the elasticities on [indiscernible]. As we had indicated to you, we have already initiated some of that work in Florida with positive results. And across a number of the states, particularly where we want to be able to test this through the cities in which the World Cup will be taking place we're initiating actions there as well. The early results are clearly positive. We will continue to monitor that. Remember, these take some time before they show up on shelf but we will continue to monitor those as we go forward. I think the other piece would continue to be around how do we also look at the entry point tequila of [indiscernible]. And how do we also ensure that we've got the right price tiering with [ Don Julio ] as we bring the [ Casamigos ] pricing more in line as well. So a number of moving parts, but one that we feel is the right approach to give us some good early indications, and you'll see much more of that continue into '27. Dave, I don't know if you want to add anything on to that?

No, Nik. I think that's right. I think we said at the half year that we knew that it would take us a little bit more time to have the impact in North America that we wanted to, where we can be surgical. We've been surgical, and Nik talked about that mainland [ Casamigos ] and the World Cup. I think there's a deep piece of work going on to understand the underlying competitiveness of the business, and that we'll share that with you when we update the strategy.

The next question comes from Celine Pannuti of JPMorgan.

My question is on the outlook. And obviously, Q3 has come with a better-than-expected results, but as well with moving parts, including Easter. You mentioned that Nik and FIFA and I don't know whether there was some selling as well in Middle East. Is it possible to have an aggregate view of our value of what the impact has been on Q3 and what you are making for Q4 when you decided to reiterate the outlook and maybe my question is underlying performance. It seems that the U.S. you are still seeing challenging market. But outside of the U.S., do you think that the overall momentum in the market has been better and whether that as well could have a bearing on Q4 performance?

Yes. Celine, listen, obviously, a lot of moving parts. So I'm not going to quantify what that phasing impact is. But clearly, you can see that with our reiteration of the guidance that we feel strong about the continued momentum, as we've said, in Europe, LAC Africa, whether the underlying fundamentals outside of the lapping issues and/or the phasing issue continue to be strong. And I think this is a continuation of what you've seen through the first half as well. Clearly, U.S. more challenged. And as I think Dave just mentioned as well, we will reveal a lot more beyond just [indiscernible] and tequila in terms of how we're thinking about a U.S. market positioning with a more competitive offer as we look forward and more of that will come in August. Listen, I think the positive is we're still trying to manage what we can manage and control within the U.S. And I think the call-out I would make to you, which is a continuation of what I had said at the half year, our depletions are tracking ahead of what we're trying to do with themselves. So we're also trying to make sure that we're managing our inventory levels into distributor. Obviously, clearly, the outsell from retail is a little more challenging given the softer consumer environment. but one that we will continue to monitor. So overall, I think we're continuing to see good momentum, as I said, in rest of the world, Chinese white spirits, you will see that normalization just given what we'll be lapping as we look forward. And U.S. will continue to talk about a more competitive strategy when we update you in August.

The next question comes from Mitch Collett of Deutsche Bank.

Just a quick one on the factors that would see you land towards the top or bottom of the range for guidance, both on sales and operating profit, given, I guess, you've got 1 quarter to go on organic sales and obviously, a whole half for operating profit. What are the sort of factors you're looking at that would see you land towards the top or bottom end of your guidance range?

I think if you step back, it's kind of unchanged from what we had talked about, right? We had talked about the fact that we had good Guinness capacity coming on stream, and you're seeing that in terms of is continuing to play out in terms of the strong performance into Q3, and that will continue into Q4 as well. I think FIFA World Cup is critically important. I think as Dave has mentioned before, this is the first time with spirits producers really supporting this, and we want to make sure that we've got the right plans in place across North America and [ LAC ] but also rest of world because I think this is -- after a while, you're seeing 2014, I think, was the last time in Brazil, where you had the matches being and during this period of time with the time zone differences. But clearly, I think that would be another element that we would be tracking that could have an impact on the performance on the top line. From a profit perspective, I think as we've indicated, the Accelerate savings continue to support. And if we continue to see positive mix coming through, particularly from some of the LAC and NAND activations on FIFA that will clearly have an impact as well. But I think more importantly, let's just step back and say, we feel good about our ability to deliver against the guidance that we've indicated.

The next question comes from Sanjeet Aujla of UBS.

Just going back to the U.S., where are inventory levels versus where you'd like them to be at the end of the quarter? And should we think about that shipment versus depletion gap widening as we go into Q4? Or is that what's embedded in the guidance?

I would say to you, Sanjit, when you look at it, I mean, clearly, if you remember, even through half 1, our depletions were tracking ahead of shipments. And you can see that gap actually having increased back to what we had said. We want to ensure that we end the year with the appropriate levels of inventory in trade. Again, we can't manage, obviously, the full sell out through retail. But I think you would expect to see that similar level that's been baked into our full year guidance.

The next question comes from Edward Mundy of Jefferies.

I appreciate we'll probably have to wait until August for a bit more detail, but I'd just like to pick up with a comment around sort of deep work going on around the underlying competitiveness of the business. Is that a reference to some of the initiatives that you're taking on the portfolio architecture execution, broadening in the parts of the industry, you're not currently playing in? Or is that more a comment around making the business more efficient? And the [ number ] of my question is, if part of what you're trying to do will require more reinvestment, will additional savings be able to offset that potential reinvestment? Or will one be greater than the other when you think about the scale of those 2 things.

Thank you, Edward. Look, to answer all of those questions, we wouldn't need to have the Capital Markets Day. So look, the way that we think about this Edward is we're taking a step back. We're taking a step back across the world and looked at all of the regions and all of the categories. And we've asked ourselves some pretty fundamental questions about what's driving competitiveness in each and every one of those categories and each and every one of those regions. So it's quite a fundamental piece of work that starts as it should do with the consumer looks at the capabilities of the organization looks at the portfolio and look, we gave you some indication of what the short-term priorities are in terms of sort of relevant brand and competitive category strategies, a different approach to how we think about customers. And yes, looking at the operating framework to see if we could be more effective and competitive. That work is very much underway, shared increasingly internally tested internally. We'll be ready to share that with you in August on the 6th. So the detailed answers to your questions, I will -- we will attempt to give that to you then. But the work is not complete. So not in a position to give you any more guidance than I'm giving it at this point.

The next question comes from Olivier Nicolai of Goldman Sachs

First on Mexico, just wanted to clarify something that you put in the press release, but could you give us a bit of an update on the strategy and when you would expect things to turn around looks like Mexico was a drag on price mix in the region and sales decline in Q3? And then secondly, since the last results, you put on a [indiscernible] in charge of the U.S. Could you give us a bit more detail on this mandate and the key KPIs?

Nik, why don't you take Mexico and I'll take North America?

So as you rightly called out, I think Mexico continues to see a more cautious consumer both from a sentiment perspective and their disposable income, which is clearly impacting the performance in Q3. Half 1 was helped by some easier comps, if you go back to what we had indicated, but this wasn't the case in Q3. Now I think if you look at it from an angle of what we've been indicating, we need to have some price repositioning to ensure that we've got a more competitive offering. And this goes back to what we've been -- Dave has talked about, I've talked about. And in particular, one example that we've talked about in Mexico is really what we need to be doing with [ Don Julio Blanco ] to be playing in what is a large top line and profit pool at the right price points, which will both enable recruitment but also help us then up the ladder from a premiumization perspective as we build that brand equity. So I think as we've been doing that, clearly, we see an encouraging set of shared trends. And there will be some lag before you see the full results. But I think what we're seeing from a share perspective in particular, is encouraging, and we'll continue to monitor that and provide you some more color on that, both at the half -- at the full year, but as well as Dave said, with that broader work that's undergoing across all regions from an angle of our offering, our competitiveness and where we have the right to win. So more to come on that. Dave, I'll hand over to you for you indeed.

Thank you, Nik. Look, I think in -- we've talked already that North America is a softer market, and there's much for us to do in North America. In conversations with [ Sally], we mutually agreed it was a good time for us to make a change. So I put on record our appreciation for everything that [ Sally ] has done for Diageo in a time with us. And in nominating John, we take one of Diageo's most experience spirits executives into our largest region. And his brief is exactly as I've articulated ours to you, which is to step back and have a full evaluation of our competitiveness, our capabilities within that North American operation has been an intrinsic part of the strategy exercise that's ongoing. And so yes, as [ Rene ] is to step back and advise and guide us in terms of how it is we can improve the competitors in North America. And as Nik says, we'll share the details or some of the details of that when we meet you in August.

The next question comes from Richard Withagen of Kepler Cheuvreux.

A question on the World Cup. This is a bit of a first for you in terms of activation and so on. I think you've selected a couple of brands. to focus on specifically, but can you sort of describe what are your longer-term benefit that you expect from the FIFA World Cup activation, please?

Do you want to start Nik? Or shall I?

Well, why don't you start, and I'll add in it?

Look, Richard, it's the first time there's ever been a spirit sponsor of the World Cup, right? So it's not been done before. So in that sense, we're all going to learn something. I think, look, having been involved in intimately in the plans in Latin America, I think the relationship of football our brands and all of the occasions that go with that feels like a very strong link and we'll look at it in terms of the impact, both on brand equity and obviously, brand sales. I think in North America, let's be honest, it's going to be a learning curve. We'll see how the World Cup goes in North America. The buildup to it, as I said, I'm in the states here, and I reviewed something yesterday, the buildup to the World Cup seemed strong. But we don't know. There is no history in terms of how the brands will respond to activation, but we'll use the usual metrics in terms of impact on the brand equity and also the impact on both short-term and sort of medium long-term sales. But North America, I think, is probably going to be a bit more of a voyage of discovery. I think we probably feel more confident in the reaction in Latin America, given what we know about the passion to football that exists in that part of the world.

The next question comes from Sarah Simon of Morgan Stanley.

Yes. Just a quick one on the Canada commercial dispute. Is it right to assume that, that will all drop to the bottom line because I think there's no volume. It's just a kind of refund or something? And also, was that kind of included, did you know that was coming when we gave guidance at H1?

Yes. So to your point on -- does it all just drop to the bottom line? Well, technically, yes. But having said that, we're also coming back to the point around wanting to ensure that we're taking advantage of where we have some opportunities to invest in advance where we feel that we can get a good payback, we would look at that. And so we're looking at it in the aggregate of what makes sense for the business as we look forward. So that's where that is. Did we know that was coming? Well, obviously, we track what the -- a position might be, so we couldn't say with certainty where it was. But as I said, more importantly, it gives us some more opportunity to look at potential investment with some returns as we go into Q4.

The next question comes from Chris Pitcher of Rothschild & Co.

Can I just quickly follow up on Sarah's question and ask mine. I mean in terms of quantifying the Canada benefit, you talked about price/mix in North America being negative without it. I can't see any reason why the price mix in the first half would have improved, which would indicate it could be a $50 million, $60 million benefit. And I believe you had agreed with the [ LCBO ] or within [ Taro ] to increase spending in the province. So it sounds like it could almost cover off that? Can I just clarify that? And then secondly, [indiscernible] the question. On U.S. beer, we've seen improving momentum in the U.S. beer market and your beer business improved. Was there anything in that acceleration in the U.S. that was technical or phasing? Or are you seeing increasing momentum across both Guinness and Smirnoff?

To the last question, yes, we are seeing increasing momentum and part of this is very much back to what we had talked about when we talked about second half, where we're focused a lot more on RTDs, and we'd indicated that would be happening. And positively, we are seeing that coming through. And Guinness, both from an angle of continued deep cultural relevance even in the U.S. as we're building out our Guinness brand as well as more capacity that's allowing us to supply more is supporting that. So nothing technical outside of continuing momentum on that. From an angle of the question on the Canada piece, no, it's not that high. So I wouldn't give you an absolute number. but it is definitely a lot lower than what you're referring to. So yes, there was negative price/mix U.S. spirits. But I would say that's kind of what we've indicated with really the mix coming through from the spirits weakness as well as the category down trading within that space. for clarification, [indiscernible]?

The next question comes from Trevor Sterling of Bernstein.

So just one question from my side, please. And this may be one we have to wait until August, Dave. But you talked in February about RTDs and there obviously been press reports about an increased focus on RTDs being one element of the strategy. I wonder if there's any sort of color you can give us ahead of August.

Trevor, I suppose the short answer is no, really. I think we stay with the position, which is -- we consider RTVs to be a growth opportunity. I think we would readily accept that we've been perhaps a little slow in addressing that opportunity. There's plans in place now, there will be even more plans in place as we go forward. But Trevor, I suspect as we go between here and December, just given the nature of where the business has been, there will always be, I think, little stories that will pop out into the U.K. press. It's not going to be my intention to respond to each and every rumor that gets out there. That's not going to be helpful to anybody. I think also we'll be sensitive as we go forward about anything that we would consider to be competitively sensitive. So I'm not going to comment as we go through on any particular brand plan. That wouldn't be -- I don't think that would be appropriate or helpful even to Diageo investors. But we will give you a strategic overview and some real clarity when we see you in August.

And the last question today is from Andrea Pistacchi of Bank of America.

So a question on Europe, where you had a strong quarter. And I think even netting out the phasing effects, the performance remains very solid. Now beer is the key driver there. But just interested in your assessment of the situation from your -- from [ Gari ] perspective on spirits in Europe and also how you see the competitiveness of your brand there, which tend to be a bit more mainstream than they are in the U.S.

Yes. So listen, I think clearly, as you've seen, the momentum on Guinness, particularly in Great Britain and Ireland, continues strongly. But I would also say with some of the broader portfolio play, Dave talked about that with MENA. I think we've also taken some actions in Great Britain as well as some of the other European markets we're playing in a broader portfolio at the right price points at the right price positioning on shelf to be competitive as well as support our customers. So a lot more work to do, but you're already seeing the early signs of that coming through, which is a positive. And I think we'll provide you, as Dave said, more color on that across all the regions as we think about our competitiveness, our category and brand strategy and how we want to work with our customers to be able to drive a shared growth agenda and drive value for them and for us, -- so more to come on that. But I think scotch, tequila, vodka, I think we're doing the right things as we think about a broader portfolio play across the region, in addition, obviously, to Guinness.

Thank you. This concludes the Q&A session. So I'd like to hand back to Dave for closing remarks.

Thank you very much indeed, and thank you, everybody, for joining us and for your questions. I suppose the way that I would sum up is, look, there's some real encouragement in a number of areas. We've been able to make interventions in parts of the group and see responses quite quickly. We know that in North America that, that was going to take longer, and we consider that, that will still be the case. I'm -- particularly encouraged by the way that the team, the whole of the Diageo team is engaging in the strategic refresh and rethinking around how it is we can be more competitive and effective as an organization. We'll share that with you in some detail when we meet in August. I think when half year, we said by the end of the summer. So we hope that by bringing it forward to the 6th of August, we'll complete all of your questions before you head up for your summer holiday. So with that, I thank you again for your time and your support, and we'll see you in August.