Diageo plc Q4 FY2026 earnings call

• Overall Performance Summary:

  • Fiscal 26 was a mixed year: strong momentum in Europe, LAC, and Africa, with ongoing challenges in North America and Asia Pacific, particularly in U.S. spirits and Chinese white spirits.
  • The company delivered strong free cash flow that enabled net debt reduction and lower leverage by year end.
  • Good progress was made on the three executive priorities set at the interim results, and implementation of the new operating model is well advanced.

• Cost Savings (Accelerate Program):

  • The company delivered $514 million in Accelerate program savings in fiscal 26, reaching ~85% of the program's total target. Savings break down to $210 million from A&P efficiency, $130 million from overhead reductions, $118 million from supply chain savings, and $20 million from trade spend efficiency.
  • Cost savings from the program offset the impact of lower gross profit from adverse product mix, allowing the company to invest in growth without reducing operating profit.
  • Marketing spend was reduced in part due to Accelerate savings and deliberate spend prioritization, but management confirms commitment to long-term brand investment remains unchanged.

• Balance Sheet & Cash:

  • Net debt decreased $1.4 billion year-over-year to $20.5 billion, bringing the leverage ratio down to 3.1x from 3.4x at the end of fiscal 25.
  • CapEx was ~$1.2 billion, $370 million lower than last year, reflecting disciplined investment focused on Guinness capacity expansion, supply chain agility, and digital infrastructure.
  • A $125 million one-off working capital investment was made to increase resilience during S4HANA ERP implementation and mitigate risks from the Middle East conflict.

• Restructuring & Impairments:

  • Total exceptional charges for the year were ~$3 billion, split evenly between $1.5 billion in impairment charges and $1.5 billion in restructuring charges.
  • Impairments include a $786 million charge for the Turkey business (goodwill from the Mayachiki acquisition and local brands, driven by hyperinflationary accounting impacts on carrying values) and a $287 million charge for the Don Papa brand, impacted by declining rum category demand in Europe.
  • Most restructuring charges ($752 million) relate to implementing the new operating framework, with the remainder tied to the Accelerate program and supply chain capacity right-sizing.
  • Management announced a total $1.2 billion two-year restructuring plan tied to the new operating model, with $1.1 billion for framework changes and $100 million for supply chain adjustments, expected to generate $1 billion in total annual savings.

Diageo reports aggregated regional segment performance for fiscal 26 as follows: 1. North America: Organic net sales declined 8.4%, driven by a ~21% drop in tequila sales (across Casamigos and Don Julio, due to tough comparables for Don Julio and category-wide down-trading). Diageo Beer Company delivered ~4% organic growth, led by Guinness and Smirnoff RTD. 2. Europe: Organic net sales increased ~3%, with double-digit Guinness growth in Great Britain, and double-digit volume growth for Raki, Scotch, and Gin in Turkey supported by expanded distribution and visibility. 3. Asia Pacific: Organic net sales declined ~6%, with Chinese white spirits dragging down regional net sales by ~8% (excluding Chinese white spirits, regional net sales grew low single digits). India delivered ~7% organic net sales growth, driven by momentum in the prestige and above segment, flavor innovation on Smirnoff, and format innovation on Royal Challenge, partially offset by excise policy changes in Maharashtra that hit lower prestige price point sales. 4. LAC (Latin America and Caribbean): Net sales grew across most markets, with particularly strong results in Brazil and Colombia. Brazil saw a second half consumer confidence recovery following industry disruption from counterfeit alcohol incidents in Q2. 5. Africa: Broad-based net sales growth, including strong double-digit growth in South Africa led by RTDs, and strong beer performance across East Africa. On a group level, organic net sales declined 2% (declined ~0.5% excluding Chinese white spirits impact), organic operating profit increased 2% (increased ~4.5% excluding Chinese white spirits impact), reported net sales declined 3%, organic volume declined 0.4% (flat excluding Chinese white spirits), group price mix declined 1.6% (declined ~0.5% excluding Chinese white spirits), reported operating profit before exceptionals declined 0.4%, free cash flow was $3.2 billion ($463 million higher year-over-year), and EPS pre-exceptionals increased 0.7% to 165.3 cents.

Management did not release new full-year guidance in this earning call. All forward guidance and strategy updates will be presented at the company's Capital Markets Day event held the same afternoon, including further details on the new operating framework, the turnaround plan for North America, and long-term savings and investment targets. Pre-announced balance sheet expectations were confirmed: the completion of the sale of Diageo's 65% stake in EABL, expected in the second half of calendar 2026, is projected to reduce the leverage ratio by ~0.25x, and the ongoing completion of the Royal Challengers Bangalore ownership sale is expected to reduce leverage by an additional ~0.1x.

• Challenging macroeconomic and industry conditions, specifically for U.S. spirits and Chinese white spirits, have pressured top-line performance in key markets
  • Down-trading and weak category demand in U.S. tequila drove steep sales declines for Diageo's key tequila brands
  • Sustained weakness in Chinese white spirits continues to drag down overall Asia Pacific regional performance
• High inflationary operating environments, such as in Turkey, create accounting and competitive pressures that led to material goodwill and brand impairment charges in fiscal 26
• Ongoing geopolitical risk from the Middle East conflict required incremental working capital investment to mitigate supply chain and operational disruption
• Counterfeit alcohol incidents created industry-wide disruption for Diageo's Brazil on-trade business in the first half of fiscal 26
• Excise policy changes in Maharashtra, India negatively impacted sales of lower prestige price point products in the market

No questions were asked or answered in the provided transcript of the opening portion of the earning call; all questions will be addressed during the Capital Markets Day event later the same day.