Diageo PLC (DEO) Q2 2024 Earnings Call Transcript

For the period ending December 31, 2023

January 30, 2024 12:45 p.m. ET

Prepared Remarks

Questions and Answers

Call Participants

Prepared Remarks:

Debra Crew

Good morning, everyone. Thank you for joining our results presentation for the first half of fiscal '24.

As we shared in November, we expected that the first half of fiscal '24 was going to see slower growth than the second half of fiscal '23, due to materially weaker performance in LAC, our Latin American Region, which is nearly 10% of Diageo's net sales value. We ended the half in line with our November trading update. But let me be clear, we are not satisfied with these results.

Today, I will share my reflections on our performance for the half, including an update on LAC. Lavanya will then discuss our results in more detail before I return to discuss our near-term outlook.

The group's organic net sales declined 0.6% in the first half of fiscal '24, and organic operating margin declined by 167 basis points. Excluding LAC, organic net sales grew 2.5%, driven by good growth in Europe, Asia Pacific and Africa. And while North America declined versus the prior year, we did deliver sequential improvement period-on-period, as our actions in the region began to show an early impact. Organic operating margin declined 53 basis points, excluding LAC, driven entirely by increased marketing investment.

We generated strong free cash flow of $1.5 billion, up $0.5 billion while continuing to invest in the future growth potential of our brands. This was driven by strong working capital improvement and Lavanya will discuss this further. Once again, we increased our dividend, up 5%, maintaining our track record of increases, since Diageo's formation over 25 years ago.

Usually, our performance discussion begins with the 2 around the world, starting with NAM because it is our largest region. But as I promised in November, I first want to give you an update on the inventory issue in LAC, the actions we have taken and our expectations for fiscal '24.

Lavanya and I have spent a lot of time with our LAC team, since November to understand exactly what happened. And with the local teams, we have formulated action plans towards reducing inventory to more appropriate levels for the current consumer environment by the end of the fiscal, and most importantly, to be confident that this does not happen again.

During the COVID super cycle, LAC experienced an extraordinary period of growth organic NSV increased by 50% on a constant currency basis over the 3 years from fiscal '19 through fiscal '22. The spirits category showed significant volume growth and significant premiumization and according to IWSR, we gained around 130 basis points between calendar years 2020 and 2022.