Core Insights - Diageo plc reported a decline in pre-exceptional earnings per share by 8.6% year over year to 164.2 cents, primarily due to lower contributions from Moët Hennessy and adverse currency effects [1][8] - Net sales decreased by 0.1% year over year to $20.2 billion, impacted by unfavorable currency effects and adjustments from acquisitions and disposals, despite improved organic sales [2][8] Financial Performance - Organic net sales increased by 1.7% year over year, supported by a 0.9% growth in organic volume and a 0.8% improvement in price/mix [3] - The reported operating profit fell by 27.8% year over year to $4.3 billion, influenced by exceptional impairment and restructuring charges, unfavorable currency movements, and a contraction in organic operating margin [9] - Organic operating profit decreased by 0.7% year over year, with a reported operating margin contraction of 819 basis points [10] Regional Performance - Volume declined in North America and Europe due to a cautious consumer environment, while volume gains were observed in the Asia Pacific, Africa, and Latin America [4] - North America experienced positive price/mix contributions driven by tequila, particularly aged variants, while Europe saw growth from Guinness [5] Future Outlook - Diageo anticipates organic net sales for fiscal 2026 to be broadly in line with fiscal 2025, with growth expected to be weighted towards the second half of the fiscal year [13] - The company forecasts mid-single-digit growth in organic operating profit for fiscal 2026, primarily driven by cost savings under its Accelerate Program [14] - Capital expenditures are projected to be between $1.2 billion and $1.3 billion, with free cash flow expected to reach $3 billion [15]

Financial Data and Key Metrics Changes - The company is planning for a more cautious consumer environment in the US for fiscal 2026, indicating a focus on managing inventory levels and achieving normalized stock levels [10][11] - Organic sales guidance for fiscal 2026 is expected to be similar to fiscal 2025, with a potential acceleration in the second half of the year [15][16] - The company anticipates a $50 million reduction in starting EBIT due to disposals, with additional impacts from the sale of Ghana and Seychelles breweries [21][22] Business Line Data and Key Metrics Changes - The spirits segment in Europe has faced pressure, but the company views this as an opportunity to better control outcomes by focusing on local markets and consumer dynamics [11][12] - The company is focusing on driving growth in key brands such as Don Julio and Guinness, despite organic sales declines [19][20] Market Data and Key Metrics Changes - The US market is expected to be cautious, with a stretched consumer wallet impacting sales [28][29] - The company is optimistic about the potential for growth in the Asia Pacific region, particularly in China, despite recent challenges [30][31] Company Strategy and Development Direction - The company is reorganizing to capture growth opportunities by being more locally focused and occasion-led in various markets [12][13] - There is a clear strategy to enhance commercial execution at the point of sale, with a focus on training and upskilling resources [17][18] - The company is committed to premiumization and expanding its portfolio, particularly in the tequila segment [40][41] Management's Comments on Operating Environment and Future Outlook - Management acknowledges the current macroeconomic pressures but believes that moderation trends in consumer behavior present new opportunities [65][66] - The company remains confident in the long-term growth potential of the US spirits market despite short-term pressures [79][80] Other Important Information - The company is implementing changes to its currency hedging strategy to reduce volatility and align hedge targets with operating profit exposure [36][37] - The company plans to reinvest 50% of cost savings into better commercial execution and digitization efforts [70][71] Q&A Session Summary Question: US depletion outlook and inventory message - Management indicated that inventory levels have normalized and they are planning for a cautious consumer environment in the US for fiscal 2026 [10][11] Question: Investment in Europe and spirits portfolio - Management acknowledged the pressure on the spirits portfolio in Europe but sees it as an opportunity for better control and growth [11][12] Question: Organic sales guidance for fiscal 2026 - Management expects organic sales guidance for fiscal 2026 to be similar to fiscal 2025, with potential acceleration in the second half [15][16] Question: Impact of disposals on EBIT - Management confirmed a $50 million reduction in starting EBIT due to disposals, with additional impacts from recent sales [21][22] Question: Focus on moderation trends - Management noted that moderation trends are here to stay and the company is looking to tap into this with a broader range of products [65][66] Question: Reinvestment of cost savings - Management stated that 50% of cost savings will be reinvested into commercial execution and digitization efforts [70][71]

Financial Data and Key Metrics Changes - The company is planning for a more cautious consumer environment in the US for fiscal 2026, indicating a focus on managing inventory levels and achieving normalized stock levels [8][9] - Organic sales guidance for fiscal 2026 is expected to be similar to fiscal 2025, with a potential acceleration in the second half of the year [14][30] - The company anticipates a $50 million reduction in starting EBIT due to disposals, with additional impacts from recent sales in Ghana and Seychelles [22][30] Business Line Data and Key Metrics Changes - The spirits segment in Europe has faced pressure, but the company sees this as an opportunity to better control outcomes by focusing on local markets and consumer dynamics [9][10] - The company is focusing on driving growth in key brands such as Don Julio, Guinness, and Johnny Walker, despite organic sales declines [20][30] Market Data and Key Metrics Changes - The US market is expected to be cautious, with consumer wallets still stretched, impacting sales performance [28][30] - In Asia Pacific, particularly China, the market has been more challenged outside of the Chinese New Year, but the company is optimistic about future growth opportunities [29][30] Company Strategy and Development Direction - The company is reorganizing to capture growth opportunities by being more locally focused and occasion-led, particularly in Southern Europe [10][11] - There is a clear strategy to enhance commercial execution at the point of sale, with a focus on training and upskilling resources [18][47] - The company is committed to premiumization and expanding its portfolio, particularly in the tequila segment [40][42] Management's Comments on Operating Environment and Future Outlook - Management acknowledges the current macroeconomic pressures but believes that moderation trends in consumer behavior present new growth opportunities [62][70] - The company is focused on balancing growth across its portfolio, with an emphasis on both volume and price mix [56][59] Other Important Information - The company is actively managing its portfolio, with ongoing disposals of non-core assets while maintaining a focus on core brands [86] - There is a commitment to reinvest 50% of cost savings into better commercial execution and digitization efforts [70][71] Q&A Session Summary Question: US depletion outlook and inventory message - Management indicated that inventory levels have normalized and they are planning for a cautious consumer environment in the US for fiscal 2026 [8][9] Question: Organic sales guidance for fiscal 2026 - Management expressed confidence in achieving a similar organic sales performance to fiscal 2025, with expectations for acceleration in the second half [14][30] Question: Impact of disposals on EBIT - Management confirmed a $50 million reduction in EBIT due to disposals, with additional impacts from recent sales in Ghana and Seychelles [22][30] Question: Focus on the Astral brand in the US - Management sees significant growth potential for the Astral brand in the super premium segment and is optimistic about its scaling [40][41] Question: Changes in US route to market - Management highlighted the importance of both increasing the number of salespeople and enhancing their effectiveness through training and focused execution [46][47] Question: Structural headwinds and moderation trends - Management acknowledged the ongoing moderation trend but emphasized the company's ability to innovate and adapt to consumer preferences [62][70]

Financial Data and Key Metrics Changes - The company delivered 1.7% organic sales growth, or 1.5% before the impact of the Syrah transaction in North America [4] - Organic profit declined by 0.7%, including the Syrah transaction impact, and declined by 1% excluding this [4] - Free cash flow was $2.7 billion, up $100 million from last year, reflecting solid working capital management [5] - EPS pre-exceptionals declined almost 9%, mainly due to a significantly lower contribution from Moire Tennessee and adverse FX [5] - Recommended full year dividend remained flat compared to last year, deemed prudent given the current backdrop [5] Business Line Data and Key Metrics Changes - Positive organic sales growth was observed in almost all regions, although operating profits were adversely impacted by increased overheads [4] - In North America, U.S. spirits net sales grew 1.6% organically with a positive price mix of 2.9% [32] - In India, growth was driven by prestige and above whiskey, with the UK-India free trade agreement expected to support future growth [30] - In Europe, Guinness was a main driver of growth, recovering from a period of consumer down trading [46] - In Africa, organic net sales growth was led by Ghana, while Brazil benefited from a more stable environment through premiumization [31] Market Data and Key Metrics Changes - Trading conditions remained challenging due to macroeconomic and geopolitical uncertainty, particularly in key markets like the U.S. and China [29] - The company held or grew market share in 65% of total net sales in measured markets, including the U.S. [29] - Consumer sentiment remains subdued, with 25% of consumers indicating saving money as a top reason for moderating their TBA consumption [24] - Gen Z household penetration of spirits increased by six percentage points to 55% in 2024 compared to 2020 [26] Company Strategy and Development Direction - The company is sharpening its strategy to leverage its portfolio and competitive strengths in an evolving TBA landscape [7] - The Accelerate program aims to deliver $625 million in cash savings over the next three years, focusing on operational excellence and cost efficiency [10] - The company is committed to delivering approximately $3 billion of free cash flow per annum from fiscal 2026 [21] - There is a focus on digital investment to leverage data for actionable insights and consistent metrics [14] Management's Comments on Operating Environment and Future Outlook - The management believes spirits remain an attractive sector long-term, supported by favorable demographics and increasing female per capita consumption [22] - Near-term pressures on the sector are viewed as largely cyclical and driven by the macroeconomic environment [24] - The company expects organic net sales growth to be slightly negative in fiscal 2026, with growth skewed to the second half [57] - Management is focused on instilling confidence in the team and leveraging the strength of the brand portfolio for future growth [62] Other Important Information - The company announced significant exceptional charges totaling $1.4 billion, including a $450 million charge related to Distill Ventures and a $230 million impairment charge for Aviation Gin [52][53] - Closing net debt was $21.9 billion, which was $800 million higher than at the start of the year due to unfavorable foreign exchange movements [54] - The leverage ratio increased to 3.4 times net debt adjusted EBITDA, above the target range of 2.5 to 3 times [54] Q&A Session Summary Question: What are the expectations for organic net sales growth in fiscal 2026? - The company expects similar rates of organic net sales growth to those seen in fiscal 2025, with a cautious outlook for the consumer environment [56][57] Question: How is the company addressing the impact of tariffs? - The company anticipates a 10% rate for UK imports and a 15% rate for European imports into the U.S., expecting to mitigate 50% of the impact in the first year [59] Question: What is the focus of the Accelerate program? - The Accelerate program is focused on delivering cash savings, improving operational efficiency, and driving better growth through a more agile operating model [10][11]

Financial Data and Key Metrics Changes - The company delivered 1.7% organic sales growth, or 1.5% before the impact of the Syrah transaction in North America, with organic profit declining 0.7% including the Syrah transaction impact and 1% excluding it [4][5] - Free cash flow was $2.7 billion, up $100 million from last year, reflecting solid working capital management [5][48] - EPS pre-exceptionals declined almost 9%, mainly due to a significantly lower contribution from Moire Tennessee and adverse foreign exchange [5][49] - Reported net sales were broadly flat at £20.2 billion, with positive organic growth offset by the net impact of acquisitions and disposals as well as unfavorable foreign exchange [42][43] Business Line Data and Key Metrics Changes - In North America, U.S. spirits net sales grew 1.6% organically with a positive price mix of 2.9%, driven by strong performance in tequila brands like Don Julio and Crown Royal [30][31] - In Europe, Guinness continued to drive growth, delivering double-digit organic net sales growth despite a challenging beer market [31][44] - In Asia Pacific, positive volume growth was particularly noted in India, while price mix declined due to consumer down trading in Southeast Asia and China [43][44] Market Data and Key Metrics Changes - The company gained market share in 65 of its total net sales in measured markets, including the U.S., despite challenging trading conditions [27] - In India, growth was driven by prestige and above whiskey, with the UK-India free trade agreement expected to support future growth potential [28] - In Africa, organic net sales growth was observed across all markets, led by Ghana [29] Company Strategy and Development Direction - The company is sharpening its strategy to leverage its portfolio and competitive strengths, focusing on commercial execution and optimizing trade investments [7][8] - The Accelerate program aims to deliver $625 million in cash savings over the next three years, with a commitment to drive better growth alongside cost-cutting measures [9][13] - The company is committed to delivering approximately $3 billion of free cash flow per annum from fiscal 2026, supported by mid-single-digit organic operating profit growth and reduced CapEx [20][54] Management's Comments on Operating Environment and Future Outlook - The management believes that the spirits sector remains attractive long-term, supported by favorable demographics and increasing female per capita consumption [21][22] - Near-term pressures on the sector are viewed as largely cyclical and driven by the macroeconomic environment, with consumer sentiment remaining subdued [23][25] - The company expects organic net sales growth to be slightly negative in fiscal 2026, with growth skewed to the second half of the year [54] Other Important Information - The company announced a flat full-year dividend, which is considered prudent given the current economic backdrop [5] - Significant exceptional charges of $1.4 billion were reported, including a $450 million charge related to Distill Ventures and a $230 million impairment charge for Aviation Gin [49][50] - The company is focused on optimizing its supply chain and has announced a new manufacturing and warehousing facility in Montgomery, Alabama [31] Q&A Session Summary Question: What are the expectations for organic net sales growth in fiscal 2026? - The company expects organic net sales growth to be slightly negative, with growth skewed to the second half of the year due to various factors [54] Question: How is the company addressing the challenges in the spirits sector? - The management is focused on leveraging its brand portfolio and optimizing commercial execution to drive growth despite the cyclical pressures [25][26] Question: What are the plans for cash flow and capital expenditures? - The company aims to deliver approximately $3 billion of free cash flow in fiscal 2026, with a reduced CapEx spend expected to trend to mid-single digits as a percentage of net sales [20][54]

Financial Performance - Organic net sales increased by 1.7%[9], but excluding the Cîroc transaction, the increase was 1.5%[9] - Organic operating profit decreased by 0.7%[10], attributed to overheads, primarily staff costs and strategic investments[10] - Pre-exceptional EPS decreased by 8.6% to 164.2 cents[10], mainly due to a lower Moët Hennessy contribution and unfavorable FX at 103.48c[10] - Free cash flow increased by $0.1 billion to $2.7 billion[9], driven by strong working capital management[10] Strategic Initiatives - The company is implementing the "Accelerate" program to deliver approximately $625 million in cost savings over 3 years[22], with about 50% reinvested for future growth and 50% dropping through to the bottom line[29] - Capital expenditure for fiscal year 26 is guided to be in the range of $1.2-$1.3 billion[47], moving to mid-single-digit % net sales (fiscal 25: 7.7%) over 3 years[47] - The company aims to be well within the leverage target range of 2.5-3.0x net debt/EBITDA no later than fiscal year 28[23] Market Dynamics - Developed markets accounted for 62% of organic net sales, while emerging markets accounted for 38%[67] - The company gained or held share in 65% of measured markets[65] - Non-alcoholic beverages experienced approximately 40% organic net sales growth[88] Regional Performance - North America: Organic sales growth with share gains in TBA led by Don Julio and Crown Royal[69] - Asia Pacific: Weaker performance in China and Travel Retail offset India growth[65] - Latin America and Caribbean: Return to growth[65], with organic sales growth of 9.2%[68]

Core Insights - Diageo plc's third-quarter fiscal 2025 results highlight a strong commitment to premiumization, with organic net sales growth of 5.9% and a positive price/mix contribution of 3.1% [1][9] - The company is focusing on higher-end offerings, particularly in tequila and Guinness variants, which has allowed it to maintain revenue growth despite softer consumer demand in some markets [1][2] Regional Performance - North America experienced a 6.2% organic net sales increase, driven by strong demand for tequila and favorable mix effects [2][9] - In Europe, double-digit growth in Guinness and pricing strength helped offset declines in spirits, indicating effective brand-led premium execution [2] - Asia Pacific faced pressure on price/mix due to downtrading and an unfavorable market mix, showing sensitivity to regional economic shifts [2] Strategic Initiatives - Diageo's "Accelerate" program aims to save $500 million over three years, with funds allocated for brand-building and innovation, reinforcing its premiumization strategy [3] - The company is strategically divesting lower-margin assets and focusing on core premium brands to prioritize high-margin growth [3] Market Challenges - Ongoing 10% tariffs on U.K. and European spirits imported into the U.S. present a challenge, but Diageo's premiumization strategy provides some buffer against these cost pressures [4] - Higher-end brands like Don Julio and Johnnie Walker maintain strong brand equity, allowing Diageo to pass on some increased costs to consumers without significantly eroding demand [4] Valuation - Diageo shares are currently trading at a forward 12-month price-to-earnings (P/E) multiple of 15.61X, which is below the industry's average of 17.58X [7]

Investment Ratings - Diageo: Sell [2] - Pernod: Buy [3] - Campari: Neutral [4] Core Insights - The US spirits market is experiencing a decline, with overall sales down -3.3% excluding RTDs, and a slight decline of -0.3% including RTDs, driven by a volume increase of +2.6% [6][27] - Diageo continues to lose market share, with volumes including RTDs declining -7.5% and sales down -3.7% [2][11] - Pernod's volumes declined -7.8%, but Jameson showed modest improvement, indicating some resilience in the brand [19] - Campari's performance is underwhelming, with volumes down -1.8% and sales falling -1.9%, despite some growth in Aperol [28] Summary by Company Diageo - The USA accounted for 36% of Diageo's FY24 sales and 46% of EBIT [2][17] - Key brands like Crown Royal and Don Julio showed mixed results, with Crown Royal volumes flat and Don Julio up +20% [11][16] - Vodka brands Smirnoff, Ketel One, and Ciroc all lost market share, with Ciroc declining -27.8% [11][12] Pernod - The USA accounted for 19% of Pernod's FY24 sales and 24% of EBIT [3][20] - Jameson volumes improved slightly by +0.2%, while Absolut and Malibu faced declines of -4.6% and -9.2% respectively [19][21] - Overall sales declined by -6.4%, indicating a challenging market environment [19][23] Campari - The USA accounted for 28% of Campari's FY24 sales [4][29] - Espolon volumes turned negative for the first time since June '23, while Aperol grew by +4.7% [28][31] - Sales fell -1.9%, with a broadly flat price/mix indicating pricing pressures [28][32]

Core Insights - Sin stocks, representing companies in industries like alcohol, tobacco, cannabis, and gambling, have consistently outperformed broader markets due to strong cash flows and inelastic demand [2][4][11] Industry Overview - The U.S. alcoholic beverages market is projected to grow from $544.19 billion in 2024 to $709.13 billion by 2029, with a CAGR of 5.4% [8] - The global tobacco market is expected to increase from $921.4 billion in 2024 to $1,198.4 billion by 2035, reflecting a CAGR of 2.3% from 2025 to 2035 [9] - The global online gambling market was valued at $78.66 billion in 2024 and is projected to grow at a CAGR of 11.9% from 2025 to 2030 [10] Company Insights - Molson Coors (TAP) is focusing on market share growth through innovation and premiumization in the alcohol sector [7] - Boyd Gaming (BYD) is enhancing growth through property upgrades and strategic investments in the gambling industry [7] - Philip Morris International Inc. (PM) is transforming towards a smoke-free future, aiming for a majority of its revenue from reduced-risk products by 2030 [13][15] - MGM Resorts International (MGM) is well-positioned to capitalize on the recovery of the gaming and tourism industries, with a strong digital strategy through BetMGM [17][18] - Diageo Plc (DEO) is focusing on premiumization and innovation, with a strong portfolio of iconic brands and a strategy to enhance direct-to-consumer engagement [20][21][22]