Diageo plc (DGE) Earnings Call Transcript & Summary

Hello, and welcome, everyone, to the Diageo plc Fiscal '27 Q1 Trading Statement and AGM. My name is Lucy, and I'll be coordinating the call today. [Operator Instructions] I will now hand you over to Sonya Ghobrial, Global Head of Investor Relations, to begin. Sonya, please go ahead when you're ready.

Thanks, Lucy. Good morning, everyone, welcome to Diageo's Fiscal 2027 Q1 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 our detail, including factors that could lead to actual results to materially differ from those expressed 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 in the Investors section. [Operator Instructions] Also if I could ask if you could limit one or two questions per analyst, that way we can hopefully get around everyone, particularly when it's a busy day ahead of our AGM. But first, let me hand over to Dave for some brief opening remarks.

Sonya, thank you, and good morning, everyone, and thank you for joining us. As Sonya says, it's a busy day for Diageo. So let me get straight to it. When we spoke in August, I think we were trying to be very clear about the opportunity that we see for Diageo, but we were also equally clear that there was a lot of work ahead of us, and we had much to do to improve our performance. Quarter 1 was in line with our expectations. And given the amount of change that we've been executing in the organization in the last while, the results represent, I think, a small step in the right direction. North America remains our biggest challenge. The market remains soft, and our focus remains on making our offering more compelling and competitive. There are clear actions underway as part of that turnaround plan. We shared those with you at the Capital Markets Day in August, and the focus of John, the team and everyone is firmly on execution. I'd also like to highlight the fact that nothing has changed in our view about the confidence we have in the long-term value creation of the Diageo business. We reiterated our guidance for '27, and we remain completely focused on a consistent creating value for shareholders. But with that, let me handover to Nik, and he'll walk you through Q1, Nik?

Great. Thanks, Dave, and good morning, everyone. I'll take you through our performance in the first quarter before Dave and I take your questions. So let me start with a few of the key highlights. In the quarter, organic net sales, excluding EABL, grew 0.6%, with positive price/mix of 0.7%. And if you included EABL, organic net sales increased 1.4%. And in LAC and APAC, we delivered mid-single-digit growth, while in India in a year, we grew low single digits. In North America, organic net sales declined mid-single digit, reflecting continued market softness, as Dave just referenced to. By category, we highlighted good momentum in Whiskey, Guinness and Smirnoff RTDs. Our guidance for fiscal '27 remains unchanged from what we shared at the Capital Markets Day. Now if you look at reported net sales, those were up 1.2% to $4.9 billion, with positive organic growth, partly offset by the negative impact of foreign exchange and disposals. Organic net sales grew 0.6%, excluding the impact of EABL, with slightly negative organic volume growth of 0.1% and positive price/mix of 0.7%, as I referenced to earlier. Getting into some more detail on net sales across the regions. In North America, organic net sales declined 3.6%, reflecting continued market softness. As Dave said, North America remains our biggest challenge, but clear actions are underway. We remain focused on making the offer more compelling, more competitive and executing the turnaround plan we shared in August. In the U.S., net sales declined 3.7%, with a small phasing benefit and distributor stock levels in line with Q1 last year. In Spirits, weakness in Don Julio, Casamigos and Crown Royal was partly offset by growth mainly in Johnnie Walker. Guinness and Smirnoff Ice both delivered double-digit growth. In EMEA, we grew 2.4%, led by Turkey, Africa and the Middle East, more than offsetting weakness in Italy and France. Growth was volume led with negative price mix reflecting targeted price repositioning. Spirits and RTDs were the key drivers of growth. In Beer, double-digit growth in Guinness in Africa and DACH offset a low single-digit decline in Great Britain and Ireland. Asia Pac grew 4.1% with double-digit growth in global travel and mid-single-digit growth in Southeast Asia and North Asia. Greater China declined mid-single digits due to weakness in Taiwan, while in Mainland China, both Chinese white spirits and International premium spirits were relatively flat. Guinness delivered strong double-digit growth, with particularly strong performance in Southeast Asia and in Australia. LAC delivered 4.8% organic net sales growth, with double-digit growth across CCAV, South LAC and Colombia, partly offset by weakness in Mexico, while Brazil was broadly flat. Scotch performed well with high single-digit growth across multiple markets and RTDs grew double digit, led by Smirnoff Ice. In India, we grew 3.4% with Prestige & Above the bulk of our business, up 7.1% due to double-digit growth in both Vodka and Scotch. This was partly offset by the popular segment, which continued to be impacted by regulatory policy and excise changes in the key states of Maharashtra and Karnataka. Finally, in Corporate, EABL delivered double-digit growth across all three markets. So turning now to the outlook. As I mentioned earlier, our fiscal '27 guidance remains unchanged. We continue to expect broadly flat organic net sales growth and low to mid-single-digit organic operating profit growth. We still expect free cash flow for around $2 billion after exceptional costs and excluding EABL. And finally, we expect to end fiscal '27 at the midpoint of our target leverage range including the benefit from the completion of the EABL transaction and the sale of RCB by USL. So with that, let me hand back to the operator, and Dave and I will be happy to take your questions. Thank you.

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

My first question is just on North America. And I just wondered if you could perhaps share a little bit more color on the performance in the period, particularly for the U.S. Spirits business. You mentioned there, Nik there was a small phasing impact on the quarter, which is pretty typical at this time of year. Are you able to drive any quantification of that or maybe talk about some of the underlying depletion trends that you've seen through Q1? And then maybe associated sort of with that, more broadly, and to some of Dave's comments. Can you talk about some of the actions that have gone into market since the CMD in August in the U.S., where we are on the price repositioning journey now of Casamigos at retail, where the broader category brand laddering process is at some of the initiatives that John was talking about, around packaging implementation and changes on Smirnoff and Crown Royal, et cetera? Are those in market now? And are you starting to see any pickup from those actions in some of the data that you're seeing?

Okay. Simon, let me start, and if Nik wants to add, is very, very welcome. Look, the first part of your question, no, the small phasing that Nik talked about is completely normal, as you suggested, been and had a look at it very, very deliberately just to make sure that we're all very comfortable. As Nik said, actually, the stockholding in trade in North America is at or slightly lower this year than it was last year. So it's just the normal phasing as you prepare for O&D. So Look, the -- in North America, we're seeing -- we continue to see a mixed picture. We see a very strong growth for Guinness. We see a very strong growth for Johnnie Walker, but we do see still a challenge in our Tequila brands and still in Crown Royal, exactly as we said to you in the Capital Markets Day. In terms of activity, I think I said -- we said -- John said at the Capital Markets Day, it was going to take us a year, just the lead time from CapEx to be able to then have the things that we wanted into North America, it's a 9 to 12 months. So what you see in the first quarter is really not a function of those packaging changes that we talked about at Capital Markets Day, those are still to come. I think what is true is there's a clearer focus in execution in North America. And where we have innovation that was coming through the first quarter, the execution of that has been better. But look, we still got a long, long way to go in North America, but most of the things that we talked to you in the Capital Markets Day about really have a 12-month lead time before we're going to see material benefit as those in the North American market. Nik is there anything you want to add?

No, all covered.

The next question comes from Andrea Pistacchi of Bank of America.

My first question is on Guinness, please. You called out a low single-digit decline for Guinness in GB and Ireland, reflecting the unusually hot weather and competitive pressure. Can you give a bit more color, please, on this competitive pressure and particularly, is it primarily within Stout? Are you seeing it more in the off-trade or the on-trade? And what are you doing in response? And then if I may go back to the U.S. a second with a slightly sort of broader industry question there. The industry seemed to have had a marginal improvement since the summer, at least based on Nielsen data. The comparison base should be easier in calendar Q4 as we head into the festive season. So what are you expecting for the holiday season, anything a little bit better? Is it reasonable to expect some slight improvement in industry trends? I'm obviously aware that you're reiterating the expectation of minus 3% industry for the year.

Yes, Andrea. So let's talk Guinness first, shall we. So look, double-digit growth in the quarter. So Guinness continues to be a powerhouse for Diageo, think we call out a particular situation in the U.K. and Ireland. And you're right. If you look -- if you track over the last 5 years, there's a very strong correlation in terms of -- and we've had a very, very, very warm summer. So the Stout market does have some impact. We need to do something about that, and there's been some interesting work about how we might impact that going forward, but we didn't see that benefit in this year yet. And I think that explains most of the issue. But we have had -- look, I think success draws competition. Guinness has been very successful. The competition is within Stout. There is a need to make sure that we stay competitive at every touch point. So I think there's some work for us to do there, not rocket science, but we need to do it. There's a plan in place to do that, but really very confident and comfortable with where Guinness sits in both of those two markets, but we have to call out the impact of the weather and the idea that I think we need to be a bit sharper in some of the executional touch points and that's been -- it's actually in both off-trade and on-trade. I think when competition comes, it comes to you in both of those channels, and it's very important that we react and respond. Guinness is eminently capable of doing that. But as we keep pushing the equity in the brand forward, we need to make sure that we deal with some of that competitive pressure head on, and that's what the team will do. In terms of North American trend, look, we've guided what we anticipate for North America for the year. I'm just going to stick with that at this point. I'm not going to try and forecast Thanksgiving and Christmas in the States. Look, our focus has to be how compelling, how competitive is our offering to North American consumers. That's what we're trying to do. We're going to sharpen that as much as we possibly can as we go through O&D. But we know we've got other things that we want to do that don't come until the end of the calendar -- the fiscal year. But look, let's -- I'm not going to be able to forecast the holiday trend for you, Andrea, I'm afraid.

The next question comes from Trevor Sterling of Bernstein.

Just one question for me, Dave. You're coming up to your first anniversary at Diageo. You shared with us in August, the CMD, the plans are underway. What are you pleased about? What do you think is working better than you thought? And what maybe needs a bit more work doing?

Thank you. Look, as I said in my introduction, there's a lot of change happening in Diageo. We put a -- we really have rewired out how the organization is operating. So there's a learning curve there. I think the leading edge of that has actually been in the marketing area in terms of building category strategies, building a different way of thinking about brand and innovation and how it is we look to be bigger and better and more impactful in the way that we innovate. So if you ask me for a place where I think we've made really good progress, and I'm pleased and I can -- I feel the momentum sort of taking hold itself is in those category strategies and the way that the brand organization is coming together. There's real momentum in the changes that need to happen. We use the phrase back office, which doesn't really cover the amount of transformational change that's happening in Nik's area, in the technology space. A lot still to do, but we've got some progress. So I think -- everybody learning, I don't overstate this, everybody is learning some new roles. We're learning different ways of working. And look, that's energizing I would say 80% of what we're doing together is working. 20% of it were not getting it right first time and having to regroup and do it again. The most important thing is the spirit inside the business around that journey is really very positive, which given, as I say, given the amount of changes is really very encouraging for me.

The next question comes from Sanjeet Aujla of UBS.

Two for me, please. Firstly, coming back to [indiscernible], but focusing more on the the Guinness and Smirnoff performance. Momentum seems to be accelerating versus last year. Are there any phasing nuances there? Or is that fully reflective of underlying momentum on those brands? That's my first question. The second question is going into EMEA. I think you called out weakness in Italy and France. And I recall, those are markets where you've gone through some route-to-market changes in recent times. How is that transition going? Is that on plan?

So Sanjeet, the performance that you see in Guinness and Smirnoff in North America is underlying performance improvement. Guinness is around expansion of distribution, but also some really positive improvements in the velocity of sales of Guinness in the outlets where it stores. So it's a really good quality of growth in North America. Likewise, with Smirnoff, you saw some of the relaunch activity that was at the end of Q4, that's been working well for us in Q1, and we hope that signals a return to a more positive growth trajectory. It's interesting that Smirnoff RTD globally grew at 15% in the quarter. So there's something working well for us in that relaunch, not just in North America, but elsewhere as well. Look, in terms of the organization changes, I think in the Middle East, despite -- let's be honest, some very significant operational challenges, I'm really very pleased with the way that the team are managing that situation. We're gaining share. We continue to grow even in a market which clearly has had its challenges. So in the Middle East, really very good. The changes in some of the European markets you mentioned, perhaps more significant in terms of change of model. But I think we would say so far so good, but it's too early to sort of make a definitive statement. There's new teams, new people, that's very much further down the learning curve, but so far, so good.

The next question comes from James Edwards Jones of RBC.

You referred specifically to price repositioning in Latin America and Europe. We obviously saw price repositioning in North America last year. Is pricing now for the group broadly where you would want it to be? And I guess, by extension, have you discerned any meaningful competitive reaction?

So it's -- James, it's a good question. So we shared with you at Capital Markets Day and I think at other times, some of the work that we've done on repositioning, we continue -- look, one of the things I want Diageo to be more going forward than perhaps we've been in the past is really quite agile to market situations. I think the category strategies allow people to do that. I reiterate, we're not talking about a dramatic repositioning here. We're talking about precision portfolio-specific work, that twisting and tweaking carries on. There are lots of local circumstances that need to be managed. So I anticipate that there'll be a low level of that, that is part of our business model as we go forward going on. But there's -- I reiterate, there's no major fundamental repositioning of price in the Diageo portfolio in our plan than ever was. But I do want to make sure that our category portfolio offering is always competitive across all the different touch points. And look, we're finding that, that is working well for us. When I look underneath and when Nik and I look underneath the category of the brand and you start looking at pack sizes and all the detail of where this precision comes in. Actually, I'm really quite pleased that, that sharpening is working for us. But your final question, no, this is not sort of the thing that draws a competitive reaction. This is about us tightening up our offering rather than a price repositioning in the marketplace that draws a competitive reaction.

Yes. And I would just add to Dave's point, it's not like you're done, you do one and you go. You keep looking at your offering. We keep looking at our formats and pack sizes. So that's always something that we need to have surgical precision with on an ongoing basis.

The next question comes from Laurence Whyatt of Barclays.

A couple of specific questions for me. Firstly, on Guinness, last couple of years across the U.K., there's been a few capacity constraints. I'm going to just want to confirm that those have all been solved with build out of your capabilities on that brand. And so we shouldn't expect any concerns in the Christmas trading, particularly in the U.K. And then secondly, on the Casamigos ready-to-drink canned products in the U.S., I appreciate it's been off shelf for a few months now. Just wondering when you expect that one to come back on shelf.

So very simple Laurence, answers to your question. No capacity constraints for Guinness in the U.K. or Ireland. So clear there. Casamigos sadly, as we said at the Capital Markets Day, needed to regroup, and we go again, you'll see the going again in -- at the end of calendar Q1 into calendar Q2 is when I anticipate us being back in the marketplace.