Good morning, welcome to the Diageo Interim Results presentation. As you know, it's my first results session for Diageo. In fact, this is my seventh week. I'll share a few initial impressions and immediate priorities with you later. First, I'd like to hand over to Nik to share with you the results of the first half of 2026. Nik?
Thank you, Dave, and welcome to Diageo. In the context of a continued challenging macro environment and industry backdrop in many of our markets, but in particular, US Spirits and Chinese white spirits, both organic net sales and organic operating profit declined 2.8%. Notably, excluding the impact from Chinese white spirits, we would have reported organic net sales down approximately 0.5% and approximately 1.5% growth in organic operating profit. Europe, LAC, and Africa delivered strong growth, but this was more than offset by NAM and APAC. Our focus on cost savings benefited organic operating profit, but did not offset lower gross profit, given the mix of market growth. This profit decline, as well as lapping the impact of the disposal of our businesses in Ghana and Nigeria, impacted our EPS pre-exceptionals, which declined 2.5%.
Our focus on cash delivery continues, delivering just over one and a half billion dollars in free cash flow for the half year, $164 million lower than last year due to adverse movement in working capital. We have also declared a dividend today of $0.20 per share, at the same time announced that we are moving to a dividend payout policy of 30%-50%. This decision is not something that we have taken lightly, but one that we view as important in ensuring that we make the right decisions for the business for the long term. Dave will come back on this later.
Moving to regions, the biggest challenge has been a circa 7% organic sales decline in NAM, which was driven by softness in US Spirits, especially in Tequila, which declined approximately 23%, driven by both Casamigos and Don Julio, for a number of reasons, including category downtrading. Organic growth in Diageo Beer Company of approximately 7% and in Canada of just over 2% only partly offset this. I will provide more detail on this shortly. In Europe, both volume and value growth in Turkey, with double-digit growth in Johnnie Walker, as we increase distribution and visibility. This was alongside Rakı, which benefited from increased focus and new pack designs. Momentum in MENA continued, as did the growth of Guinness across almost all markets, particularly GB and Ireland.
Across Europe, by bringing decision-making closer to customers and consumers, we are improving commercial execution and delivering some positive early results. The continued impact of decline in Chinese white spirits adversely impacted sales in APAC, with organic sales down approximately 11%. Excluding this, organic sales would have been up slightly. In India, continued momentum in prestige and above segment brands and locally inspired flavor innovation on Smirnoff, as well as format innovation on Royal Challenge, all contributed to strong results. In LAC, we saw net sales growth in most markets, including both Brazil and Mexico. This was despite the impact in Q2 in Brazil of counterfeit alcohol incidents, which was particularly pronounced in the on-trade. More recently, we have seen a gradual recovery of consumer confidence in this market.
Across Africa, we saw broad-based net sales growth across the region, with strong double-digit growth in South Africa, driven by RTDs, and also in Tanzania, driven by strong beer performance. In the half, we grew or held total market share in circa 30% of markets measured by contribution to net sales. This result was clearly disappointing and was largely a reflection of performance in the U.S., which saw a 9 BPS TBA share loss, which represents circa 35% of the total net sales value in measured markets. Turning to North America, pressure on consumer wallets and an increasingly competitive environment, especially in Tequila, is having a marked adverse impact on US Spirits performance. Dave will come back and give you more context on this performance later, including specifically the pressure on ultra-premium Tequila. Organic sales decline was almost entirely driven by Don Julio, Casamigos, and Crown Royal.
In the first half, tough comparatives, plus an increasingly competitive Tequila environment, put pressure on results. This was exacerbated by both ongoing Tequila litigation and media on additives and adulteration, two separate issues, but both negatively impacting consumer sentiment. We continue to view the litigation claims as baseless and are pushing for case dismissal in New York. We are also working with industry influencers to inform the narrative, and we are confident that our Tequilas are crafted from 100% blue agave. There was good performance on Johnnie Walker, driven by Johnnie Walker Blue, and encouraging performance in smaller spirits brands, such as Ketel One and Astral. Ketel One, priced in super premium and with a consistent made to cocktail platform, activated at all consumer touchpoints, gained share of vodka and maintained spirits share. RTDs and Guinness also delivered positive growth.
RTD share gains were driven by Casamigos Margaritas, an innovation from Smirnoff Sunny Daze, which taps into nostalgic flavors, and Smirnoff Shorties as well. Guinness gained share every week of half one fiscal 2026, with continued participation in culture. In APAC, performance was adversely impacted by weaker Chinese white spirits consumption as a result of market policy. Excluding Chinese white spirits, APAC would have reported slightly positive net sales growth. Additionally, and as we guided previously, we saw some impact across the region from the later Chinese New Year, as well as the macroeconomic impact in North Asia. I mentioned earlier that India delivered strong results from both core brands and innovation and successful recruitment. Royal Challenge, Smirnoff, and Johnnie Walker all performed well.
Finally, in APAC, although Guinness organic growth was impacted by the route to market changes in China and Australia, in the latter, the brand saw strong double-digit growth in distribution and record on-trade market share. During half one, we've made good progress with Accelerate, with around 50% of the $625 million of total savings now expected to be delivered in fiscal 2026. I had previously shared that these savings were expected to be greater in the second half. Consistent with this, we saw circa 40% of the total estimated savings in the first half. Taking you through the main drivers, the majority of the Accelerate savings in the first half were in supply agility and cost efficiencies, as well as through A&P, which I will come back to shortly.
There were also some savings in overheads, but these were smaller and related to improved cost control in corporate functions, as well as some headcount reductions. On supply agility, we benefited from improved utilization rates, facility and logistics optimization, and digital supply chain transformation. For example, using SIP, our Scotch Intelligence Platform. You will recall the other bucket we shared that would drive Accelerate savings was trade efficiency, which we have always said would take longer to come through. In the first half, we didn't see any savings from this, as these savings are typically tied to renegotiations with our large customers, which are normally on a calendar year basis. On A&P, let me start by saying that nothing has changed in terms of our commitment to investing in our brands for the future.
We are committed to being more effective and efficient with our spend and being choiceful where we invest and where we may choose not to, given the market conditions. Our tools, such as Catalyst, are helping us do this and to maximize both ROI and volume. During the first half, we pivoted investment towards Guinness in Europe. We reallocated investment from spirits to RTDs in Brazil. You will have seen A&P spend down circa 10% on last year. Taking you through the reasons for this, consistent with Accelerate, we saw savings in A&P, primarily from lower development costs, which were 15% of A&P spend, compared with about 17.5% last year. I have shared some examples of the areas of savings on the slide.
AI content using virtual content studios, facilitating market customization at scale. Procurement savings with improved rates and new contracts. Concentrated development spend on fewer, bigger opportunities. Johnnie Walker is a great example of this, which supported brand growth. Finally, smart media buying using allocation tools to maximize returns. Let me now take you through the movement in net sales for the half year in more detail. Reported net sales declined 4%, with organic sales decline and the adverse impact of acquisitions and disposals only partly mitigated by favorable foreign exchange and hyperinflation adjustments. Organic volume declined 0.9%, as solid volume growth in Africa was offset by volume losses across the other four regions. Excluding the impact of Chinese white spirits, volumes were down approximately 0.5%.
Europe, LAC and Africa delivered positive price mix, with 1.9% decline at group level, driven mainly by the adverse impact of Chinese white spirits weakness in China and the decline in US Spirits, primarily due to Tequila, as I talked to earlier. If you were to exclude the impact of Chinese white spirits, price mix would have been broadly flat. The negative impact from acquisitions and disposals was due to the disposal of Guinness Ghana at the beginning of the half and the disposals of Guinness Nigeria, completed in September 2024, and CÎROC, completed in the fourth quarter of fiscal 2025. The positive impact of foreign exchange was primarily driven by favorable movement on sterling and euro, partly offset by adverse impact of the Turkish lira. Turning now to the movement in operating profit for the half year.
Reported operating profit before exceptionals declined circa 3.5%, as lower gross profit and the movement in acquisitions and disposals was in part mitigated by lower marketing spend, overheads, and FX benefits. Gross profit declined $324 million organically, driven by top-line performance, adverse product mix, cost inflation, and tariffs. Efficiencies across manufacturing, logistics, and supply networks partly mitigated this, with gross margin remaining broadly flat. Lower marketing spend provided a $178 million benefit to operating profit, which I talked to earlier. Overhead savings were largely due to lower indirect overhead costs, given savings from the Accelerate program, such as optimized IT costs.
Moving to cash, free cash flow decreased by $164 million versus half one fiscal 2025, to just over $1.5 billion, representing approximately half of the $3 billion guided to for the full year. This was because we lacked a very favorable movement in creditor balances in the prior year, and also a lower creditor balance at the end of the half. Importantly, creditor days compared to prior were broadly flat. The cash outflow from maturing stock in the half was minimal, as we continued to optimize investment in our mid-to-long-term maturing liquid requirements. Tax paid was lower due to lower operating profit, and the timing of payments and net interest paid reduced, given both a lower effective interest rate and the capitalization of certain borrowing costs.
CapEx was approximately $590 million, a decrease of about $40 million on last year, reflecting a disciplined approach to investing in projects, including Guinness production, capacity expansion, supply agility, and digital infrastructure. Our full year guidance for CapEx remains unchanged at the lower end of the $1.2 billion-$1.3 billion range. EPS pre-exceptionals declined 2.5% on last year to $0.953, largely driven by the impact of lower organic operating profit and lapping the impact of disposals. There was also some offset from a lower tax charge and reduced minority interests. As previously guided, our exceptionals were significantly reduced versus fiscal 2025, with details shared in the appendix.
Moving to the balance sheet, we closed the half with lower net debt of $21.7 billion, a small decrease compared with the balance at the end of fiscal 2025. Given lower EBITDA year-on-year, our leverage ratio remained flat compared to June 2025. As a reminder, we have guided that the completion of the sale of our 65% shareholding in EABL, announced in December, is expected to de-lever our balance sheet by circa 0.25 turns, and we are making progress through the strategic review by USL of its ownership in Royal Challengers Bangalore. This is consistent with our guidance to de-lever and strengthen our balance sheet and increase financial flexibility. Let me take you through our fiscal 2026 guidance. We've updated organic net sales growth guidance, given further weakness in the U.S.
We now expect this to be down 2%-3%, which compares with flat to slightly down previously. As a result of this change, we've also updated our organic operating profit guidance, which is now expected to be flat to up low single digits. This compares with low to mid-single digit growth before. This includes the impact of tariffs, assuming a 10% rate on U.K. imports and a 15% rate on European imports, as well as assuming that the USMCA exemption remains. We note that the recent ruling on tariff policy by the Supreme Court of the United States has increased uncertainty and potentially increased risk surrounding the impact of US tariff policy, which we continue to monitor and have not updated our guidance for this. Our tax, interest, and CapEx guidance are all unchanged from what we shared previously, as shown on the slide.
Finally, on free cash flow, we have reiterated our $3 billion guidance for fiscal 2026. As a reminder, this is after exceptional costs relating to Accelerate. However, it does not include an approximate $100 million one-off impact on working capital, given inventory build ahead of the implementation of S/4HANA in early fiscal 2027. With that, let me hand back to Dave.
Thanks, Nik. As I said at the introduction, I'm seven weeks in. It's been pretty intense. It's been great meeting the team. I've had a fantastic welcome, and the energy in the business is really very high and infectious. This energy is gonna be crucial and a key requirement to the turnaround journey ahead. In the last seven weeks, I've spent time in North America, in New York, Florida, Texas. I've spent time with the whole Latin American team in Colombia, and I've spent time in Europe, Middle East, and India, as well as getting functional briefings here in London. The induction is not complete. We'll take two weeks out now for the results, and then I'll spend time in Africa and in Asia. We're looking to have an updated strategy proposal for the board in calendar Q2 before sharing with the market mid-calendar Q3.
The business moves on, and as Nik says, we face some challenges now. I want to share with you a few first impressions before sharing three immediate priorities that will guide our endeavors before sharing with you any strategy revision. I understand the commentary of TBA, but I'd like to focus where our business actually is: spirits and beer. Spirits, including RTD format, account for more than 80% of our sales, and if I add Guinness, we get to more than 95% of our business. The spirits category is a very, very stable category. In fact, it's one of the most stable I've ever seen. Between 2010 and 2024, volume growth is around 13%. The significant feature of the market is the strong trend to premiumization, and Diageo deserves great credit here for seeing the opportunity and driving this trend.
It was a fantastic strategy, and it developed a portfolio of truly exceptional brands. Whilst I fully recognize that there are factors affecting this category and will continue to affect this category going forward, questions like GLP-1 and the attitude of certain sectors of society to the category, the core category drivers are still really stable. On the chart, you see the penetration frequency and the consumption profile for four of our key markets, and what you see is that penetration of Spirits is really very stable. The consumption frequency of Spirits is actually slightly increasing due to the different lifestyle that people now follow. A number of new occasions being in third places as people consume on the go.
It's the serves per occasion where we see the change, and these fewer serves per occasion point to a pressure in the economics that our consumer groups are facing. Whilst I do not diminish at all factors like GLP-1, you know, or the attitudes towards the category, at this moment in time, they show a very small impact on Spirits consumption, but there is a challenge which is broader economically. To get under the skin of this, I've been asking the Diageo team to focus first on consumers, how they live their lives, before we even get to the alcohol category. What you see is a very significant squeeze on disposable income.
If you look at the chart on the left-hand side and look at U.S. households, this is a basket of CPG staples over the last five years, and you see that the cost of that basket has increased by more than 25%, and actually, the volume for that 25% increase is some 8% fewer items. There's a very significant squeeze for U.S. consumers, and that's before you start talking about the cost of healthcare and other costs that U.S. consumers are having to bear. Slightly different study in the U.K. looks at discretionary household expenditure, and you see the increase in the costs around the essentials, be that housing, fuel and power, transport, and essential food and non-alcoholic drinks.
There's a change in profile also in terms of discretionary effort. What you see is that in our category of alcohol, the spend is flat. It's not down, it's flat. Whilst there's been inflation in the category, it's that consumption level that I talked about earlier in terms of serves per occasion, that is the dynamic behind that flat. We need to recognize that the discretionary spending power of consumers in key markets is under some pressure. Looking at that a little more, if we start on the right-hand side of this chart, we look at the North American market, the USA market, by age. Young people, of the age of 34, penetration of spirits is actually slightly increasing.
The frequency is also up as people change their lifestyle, but the serves per occasion is dropping, and this is mainly due to the economic factors I talked about before. On the left-hand side, we try and recognize that there are a number of things that are impacting our category. By far and away, the strongest is those pressurized consumer wallets. Yes, there is some moderation in drinking, and there is some impact from GLP-1s, but it's small when you think of Spirits specifically. We need to keep an eye out on the emerging substitutes, but as we speak today, at a global level, these are a small impact on the category. If that's the category, how have we done in this very stable space?
The chart shows you Diageo's market share, again, going back to 2010, with all of that drive in premiumization that you know about, our core share of Spirits is up 118 basis points to 16.7%. However, if I include RTDs, then our share of total Spirits has come down by 46 basis points. The majority of consumers come to RTDs with the same motivation of Spirits. They appreciate the convenience, the consistency, and the control, and very importantly, the lower out-of-pocket expenditure that accompanies those purchases. We have very stable shares in a very stable Spirits market, but with a premium portfolio, which over the last five years has relatively got slightly more premium, given the price mix changes illustrated on the bottom of the chart.
If we look specifically at the U.S. market as a key example, the chart looks at the percentage of the market sold at each price point and compares the Diageo portfolio contribution. For example, in the US Spirits market, 21% of the market is sold in units, $45 and above. For Diageo, that percentage of our portfolio is 31%. In Tequila, the concentration is even more significant. 35% of the market is above $45, and for Diageo, that's 70%. As a consequence, in the mass market, part of the portfolio, we are significantly underrepresented. This is both a challenge and indeed an opportunity. The final thing I will pull out of this chart is to look at the sales below $10.
This recognizes a growth in small packs, again, as economic pressure has found its way into the U.S. category, we see a down trading to smaller pack sizes. Here, if you look at US Spirits, 9% of the market is now in those pack sizes, but Diageo's portfolio is only contributing 5% from that particular segment. If we move to RTDs, this is an increasingly relevant role in the Spirits socializing occasion. On the left-hand side, significant to see how Diageo, who created this category with the launch of Smirnoff Ice, circa 26 years ago, drove a very significant share.
A loss of focus on RTDs since around 2008, means that we now have a share of RTDs, which is below 10%, from a high of more than 25%, at a time when RTD share of the spirits market has increased significantly and is now around 15%. If you take those RTDs and see where the growth is coming from, you can see that of the $8 billion of growth between 2021 and 2024, 50% of the growth is in their higher ABV, ready-to-drink segment. Again, giving some illustration of what is happening in terms of attitude to alcohol. Young people are choosing RTDs, but they're choosing RTDs with higher ABV, which gives some indication of their attitude towards this category.
We believe that there's a very significant and profitable opportunity for Diageo in RTDs, but we have work to do. I'd like to talk a little about Guinness. Guinness is a brand I thought I knew from the outside of Diageo, a brand that I respected and admired. I thought it was a phenomenally strong brand before I joined Diageo. Now, I can see it from the inside, it's even stronger than I thought. It's growing very strongly everywhere. In North America, in the last period, it's growing by more than 15% and is the fastest-growing beer brand in North America. Its historic return on invested capital is very high. You see from the chart on the right-hand side, that we are geographically constrained.
Eight markets are more than 85% of the business, and if you've tried to buy a pint in London, you also know that we have some capacity constraints, too. This capacity and geographical constraint is an issue that we need to address, and quickly, but please be in no doubt what a phenomenal asset I think that Guinness is. With that simplified overview of reflections, I'd like to share my thoughts on our immediate priorities. Immediate priority number one: competitive category strategies, winning with relevant brands. I've chosen these words very deliberately. Competitive category strategies. Diageo is known for its focus on brand. I want to keep the focus on outstanding brands, but I'd like to add the category lens. It's how our customers think and buy.
It's how our consumers navigate their off-trade purchases, and it's the lens through which we can focus and leverage our innovation resources. Relevant brands, because I believe there are some proposition spaces that are opportunities for Diageo, but it's also relevance through the lens of price point, and that's particularly relevant given the economic backdrop that I've shared earlier. We'll continue to invest in the premium portfolio. Be in no doubt, the premium portfolio is a massive asset. We will continue to invest in it, but we will also, in addition, explore new portfolio opportunities. That might involve some price repositioning, and it might open up new proposition spaces. In addition, we need to sharpen our price pack architecture and particularly address the opportunity that I've already referred to in the growth of small packs.
The idea is that we build truly competitive category strategies, and I'd like to illustrate one of those by sharing an example from the Middle East. This is the market, UAE. The team in UAE have been thinking about how it can serve all consumers in one of the markets, which has really quite a strong premium consumer and brand portfolio already. Let me briefly explain the chart. What you see is, from left to right, all of the brands in the UAE market. The shaded columns relate to the volume of that brand within that market, and the red line is their price positioning per liter.
What you see is in the from and to, that actually, what we've done, what the team in the UAE has done really very well, is introduce new premium offerings, Johnnie Walker Black Ruby and Bulleit, to show two on the right-hand side. Also a small reposition of price on Johnnie Walker Black Label and Red Label. A significant repositioning of the Vat 69, Black & White and J&B Rare brands against a more value-based opportunity. What we do with this portfolio is we appeal to reach and service the broader consumer universe within that market. Whilst the percentage margin of the portfolio in today's portfolio is slightly dilutive to that which we had before, the absolute quantum of gross profit is significantly higher.
Put it another way, while the % margin in the new portfolio is lower, the value creation for shareholders is significantly greater in that new portfolio. Immediate priority two: customer, customer. If there is one surprise over the last seven weeks, it's the low level of investment in how we build and execute our business with our customers. In the on-trade, we know that this is key to how we build our brands. Our capability here was dismantled, understandably, during COVID, given the closure of that sector, but our build back has been slow and patchy, and therefore leads to an opportunity. I've seen the power of this done exceptionally well in Latin America and the Middle East, but we need to build that capability and invest in it around the world. Our customer service in the off-trade is, frankly, really very poor.
I've shared with you here the customer service levels I experienced in North America, Latin America, and the U.K. They really are not acceptable. When we're looking for growth, the idea that we can't service the demand that's there is both a source of significant regret, but it's also an opportunity for us. A big part of this is Guinness and the capacity constraint I talked about earlier, but it's not all. The systems and processes that we have in place that facilitate the engagements with our customers, frankly, are just not fit for purpose. If I told you that 60% of all the orders that Diageo enters are entered manually, it would give you some semblance for how developed those processes are. We need to address this.
We need to start to build joint business plans for the development of the business, but also the execution of the business. Ultimately, our approach to our customers must be that we grow our customers' categories, and we look to gain disproportionately from that growth. We grow with our customers. Significant opportunity for Diageo. Immediate priority three is the redesign of the Diageo operating framework. Feedback inside of Diageo is really very loud, that we could improve the clarity of our operations, global, regional, local, clear accountability, clear responsibilities. There's an opportunity for us to be clearer. That clarity will help us in our agility. A lot of the time cycles inside the business are not quick enough, and there's an opportunity for us to design a much more agile Diageo operating framework.
When I look at it from an effectiveness point of view, also, there's an opportunity for us to be better. That effectiveness is either in the output, and some of that you've seen in what I've said around our engagement with customers. If I was also to talk about our innovation process, I would say that we have a lot, but a lot of very small projects, and there's an opportunity for the effectiveness of the innovation part of our business to be significantly more impactful. There's also an opportunity to be more effective in terms of cost, and again, I've given some indication of that in the customer space, but there are also other areas of the business where I see significant cost opportunities.
If I give you a small example, I was in India recently and saw that the cost of running the payroll system for Diageo, with circa 30,000 employees, is 10 times more expensive than my previous place of employment that had more than 15 times, and that number gives you some idea of the opportunity. We're redesigning the operating framework also to identify and invest in the differentiating competencies that will drive a more competitive Diageo. We need to build, sharpen, and constantly invest in a competitive edge, and we'll do that by always being very disciplined about how we deploy our capital. Those of you who know me from my Tesco days know that I take this responsibility really very seriously.
Overall, the opportunity to redesign the Diageo operating framework is through the lens of how we can build a more competitive organization that is focused on shareholder value creation. In summer, I find Diageo to be a very strong business with an enviable position and lots of energy. The market provides significant opportunity, but we have some significant work to do. We'll start by focusing on the portfolio and the category strategies, our customer relationships, and our operating model. It's true the spirits market has some headwinds, principally economic, and there is also a small impact from GLP-1s and changing lifestyle. Our leadership position is strong, and there is ample room to grow, and we will go on this turnaround journey by maintaining very strong capital deployment discipline. On this last point, let me say a few words on the board's dividend decision.
This is not an easy decision to make. We believe it is the right one. The North American market is challenged. Our portfolio needs some time and investment to make it more competitive. At the same time, we need to invest in our business, specifically, Guinness capacity and capability investment. We want to do both of these things and strengthen the balance sheet. We will make disposals if appropriate. We will not sell brands cheaply. All this leads to a change in the dividend policy. It gives us the space we need to turn around the business and the optionality around capital returns to shareholders as this turnaround unfolds. Thank you very much for your time. Look forward to your questions later.