Diageo PLC (NYSE:DEO) Q2 2024 Earnings Conference Call January 30, 2024 12:45 PM ET
Company Participants
Debra Crew – CEO
Lavanya Chandrashekar – CFO
Conference Call Participants
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.
The strong category growth started to turn rapidly in the second half of fiscal ’23 and continued into this fiscal with elections and macroeconomic slowdowns in key markets that followed higher inflation and U.S. interest rate hikes. We saw a shift in where and how consumers were spending in the spirits category. As an example, in Brazil, we saw down trading primarily into beer. And we saw large channels like Cash and Carry declined by double digits. This meant that some quantities of inventory shipped in the first half of fiscal ’23 was not the right product and ultimately did not pull through to the consumer. The net result was a buildup in inventory levels at our direct customers, which we flagged at the end of fiscal ’23.
While the team expected to work through this by the end of the first quarter of fiscal ’24, persistent category decline and a weak consumer environment impacted their ability to reduce inventories in certain channels, including in the second tier of customers below our direct customers to which we had limited visibility.
LAC ended the half with 23.5% decline in organic net sales value. And while direct customer inventories came down, there is still inventory at elevated levels in the channel. But as you’ve seen in our announcement this morning, we are taking actions towards reducing inventories to a more appropriate level for the current consumer environment by the end of our fiscal. And therefore, in the second half of the fiscal, we expect a 10% to 20% organic net sales decline in LAC versus the prior year.
Lastly, in terms of inventory in other regions, we have conducted a global review to validate with our other regions, the robustness of their processes and mechanisms. Post this review, I am confident that we have the necessary processes, data, incentives and sell-out culture across all our regions.
So what are we doing in response? Well, we are working to expand the coverage of sell-out data by formalizing data collection from our largest customers where possible. For example, in Brazil, two of our largest Cash & Carry customers will give us around 10% better sell-out coverage in this market alone. In several of our top distributors in our largest markets we will also be incentivizing them to report sell-out information and to allow independent stock counts at their top customers. This would provide insights into approximately 200 to 300 major customers at the second tier within the trade’s inventory channel and will allow for better insight and forecasting on our direct customer order patterns. We also will be increasing investment to improve our sales and operations planning, commercial planning and monitoring processes in the region to be more forward-looking and agile.
Finally, in addition, our global team is looking at potential tech solutions to increase visibility. And in the second half, we will test technology that we already use in our China business. With the use of RFID labels, we will be able to track cases as they move through the distribution network. We’re exploring this with one of our largest customers in Mexico on key SKUs across scotch and tequila.
The technology also has future potential for enhanced consumer engagement. This is a great example of how we can leverage existing know-how across the breadth of our regions. And I’m very excited about the possibilities for our wider business in terms of speed, efficiency and using digital solutions to drive better insights all the way through our supply chain and route to consumer.
Turning back to our business as a whole. The first half of fiscal ’24 was challenging for Diageo in our sector as we lapped high single-digit growth in the prior year and faced an uneven global consumer environment. Against this backdrop, the strength and power of our diversified footprint remains more important than ever. Across the board, our regional performance for the first half was in line with the expectations we shared in November. And as I mentioned earlier, excluding LAC, organic net sales growth was up 2.5%. I will cover the performance of each of these regions in a few minutes, but first, let’s review our share results.
In the first half, we held or grew share in 30% of our net sales value in measured markets. Markets holding or gaining share include several large markets, including most of Europe and in China, Brazil, CCA in Canada. After three consecutive years of gaining or holding share in the U.S., our share of TBA declined by 17 basis points in the first half. I know the move in our global market share position looks quite stark. So for context, I will explain how we calculate this metric.
It is binary. So if the U.S. as a market is in a net share loss position, our overall group metric is, therefore, lowered by the full impact of the organic net sales value of our U.S. business, even if we are gaining share in key categories. So for this period, this represents the 39% loss. Overall price competition has intensified in the U.S., particularly impacting whiskey and tequila, I’ll discuss more about the U.S. consumer environment in a few minutes.
We are not satisfied with where our share is at in the U.S. Then the team is focusing on key interventions to turn this around as consumer behavior is normalizing in our largest market. But to be clear, we are focused on doing this the right way, winning high-quality market share. We’re not interested in gaining short-term share, if it comes at the cost of brand equity driven by significant price promotions. We manage our business for the long term. And long term, I am confident that our advantaged portfolio of brands and focus on operational excellence provides us with an industry-leading high-quality growth opportunity.
So what are we doing to work towards regaining TBA share in the U.S.? At our Capital Markets event in November, we shared our priority areas, which are winning in whiskey, expanding our tequila portfolio, recruiting with innovation and raising the bar on execution. These have not changed. And as I mentioned earlier, our actions are beginning to show an early impact. In the broader world of whiskey, which is one of the fastest-growing and most dynamic areas of spirits in the U.S., we are currently leading the category in market share, but we know we have the opportunity to do more.
We are focusing on Crown Royal, Bulleit and our scotch portfolio, particularly Johnnie Walker and Buchanan’s. On Crown Royal, it is still early days, but recently, our share losses have moderated and net sales improved sequentially in the first half of fiscal ’24. This reflects our ongoing investment in the brand and the positive impact of our actions. This includes maximizing distribution in both the on and off trade, so Crown is now available to more consumers in more places than ever. And also our new advertising campaign, highlighting the quality of our liquid, which you might have seen on TV during the key Thanksgiving holiday period.
For the second half, we have a robust innovation pipeline, the launch of Crown Royal, Canadian single malt, capitalizing on the popularity of single malts and Crown Royal Blackberry, delicious and a cocktail with Lemonade. Our other whiskey brands are gaining share. Over the last 12 months, Bulleit is gaining 25 basis points of category share and maintaining its position as the number one Rye. Johnnie Walker gained 56 basis points of scotch in the half and the Buchanan’s trademark gained 11 basis points of share in U.S. spirits.
In tequila, our broad portfolio is gaining share of spirits overall. Our depletions performance, which was significantly better than our shipments remains positive, led by Don Julio. The Don Julio portfolio was leading the path, leading in culture from the Oscars to Cinco de Mayo. It is growing 7 times faster than the total U.S. spirits industry and continued to gain category share of tequila and spirits in the half.
While Casamigos lost share in the half, it has more than doubled its share of the tequila category over the last four years and depletions volume is growing. We have robust intervention plans for Casamigos in the second half, including expanding distribution of smaller pack sizes. But our participation in tequila is more than Don Julio and Casamigos through DeLeon, which we now fully own, along with Astral and 21 Seeds, our tequila portfolio extends into the super premium price tier enabling us to participate in that booming segment of the category.
On to innovation. As we discussed at our Capital Markets event, we are focused on consumer-backed innovation that allows us to capture new occasions and the LDA+ consumers. Innovation contributed to the sequential improvement in organic NSV in the first half, and we currently have 7 out of the top 10 core spirits innovations in Nielsen. In November, we introduced our ready-to-serve cocktail collection, including the Kettle 1 Cosmo and Espresso Martini to participate in the convenience occasion. While it’s still early days, these are outperforming expectations and have gained 34 basis points of category share.
Since our Capital Markets event, I have spent a lot of time in the U.S., been on the ground in 5 states in the on-trade and off-trade. And I’ve spent time with the team talking to several customers. A couple of things are apparent to me. The U.S. consumer environment is still normalizing from the COVID super cycle.
While consumer sentiment across both our internal sources and external sources, is improving versus the prior year. Consumers are still facing multiple headwinds, including higher interest rates and higher priced food baskets. So while consumers are resilient, they are still cautious and thoughtful. And premiumization continues, but there are some pockets of down trading.
Fiscal year-to-date, we are seeing the spirits industry grow in the low single digits. We believe the path back to industry normalization in the U.S. will not necessarily be linear and industry recovery will be more gradual over the next several months. Therefore, as we look ahead to the second half of fiscal ’24, we expect to drive gradual improvement in organic net sales performance. We are confident we have the right actions across our portfolio to navigate the challenges we face through a combination of improved brand building and local execution plans that we are putting into place.
Moving on to Europe, where as expected, organic net sales growth was slower in the half than the second half of fiscal ’23. Excluding the impact of lapping the final sales of inventories in Russia, the region grew 6%. The region’s 3% organic net sales growth in the half was mainly driven by Guinness, which grew 24% in the period. Nearly all of this growth was in Great Britain and Ireland.
Guinness 0.0 also continued to perform strongly, more than doubling in the period. In Ireland, there are now around 1,000 trade outlets with a Guinness 0.0 keg. Tequila also contributed to Europe’s growth more on that later. Scotch performance, excluding the impact of cycling final sales in Russia grew 5%, driven by Johnnie Walker, which grew 15%. Johnnie Walker Red Label drove most of this growth with Johnnie Walker Black Label also contributing.
Looking ahead to the remainder of fiscal ’24, we expect resilient growth across markets despite lapping strong double-digit growth in the second half of fiscal ’23. In Asia Pacific, we maintained good momentum with super premium plus price tiers driving most of the region’s organic net sales growth led by Greater China, which grew 18%. Our participation in Chinese white spirits through Shui Jing Fang puts us in a unique position amongst global spirits players operating in Greater China.
With the lifting of on-trade restrictions, which were in place in the prior year, Chinese white spirits proved to be more resilient in the half, driving our growth, while momentum decelerated in our international spirits business. In India, momentum continued with 9% organic net sales growth, lapping double-digit growth in the prior year. India continues to drive strong demand for scotch with organic net sales up 16% in the half, including a 21% increase in Johnnie Walker. In the second half of fiscal ’24, we expect growth in APAC to continue from the first half, supported by lapping of subdued Chinese New Year in the prior year, balanced by the weaker consumer confidence we see across the region.
Finally, in Africa, beer performed strongly, benefiting from price increases, while also driving volume growth driven by Malta Guinness, Senator and Guinness, each delivering double-digit growth. The macroeconomic outlook remains challenging. However, given current market conditions, we expect to see continued growth through the second half of fiscal ’24.
I will now share some performance highlights about our three largest categories in the first half of fiscal ’24, starting with scotch. As we’ve mentioned before, while LAC is nearly 10% of Diageo’s overall organic net sales value or NSV, it drives almost 25% of Diageo’s scotch organic NSV. So unsurprisingly, LAC’s underperformance impacted our scotch sales in the half.
About two-thirds of the 10% decline in our Scotch organic NSV in the half was attributable to LAC and a third to the combination of lapping stock increases in the previous year in NAM and disposal of inventories in Russia.
Importantly, we are winning market share in the scotch category in measured markets that represent 77% of our total NSV, including in North America, led by Johnnie Walker. This iconic brand is gaining share in 8 out of the 10 of our largest measured scotch markets. We believe the consumer fundamentals of the business are strong, and we expect our organic net sales to improve as we normalize inventory levels in LAC and LAP on more normalized growth period.
Moving on to tequila. Our global rollout beyond LAC and NAM continued in the half. In markets outside NAM and LAC, net sales more than doubled in the half, albeit off a small base, led almost equally by very strong growth in Europe and APAC followed by Africa. I’m pleased to say that in Europe, we continue to drive tequila using the Paloma cocktail.
Organic net sales grew just over 80% in the period, driving 19% of the growth in the region. 13% of APAC NSV growth was driven by our tequila expansion, this is being fueled by Don Julio 1942. While still early, we are encouraged by the global rollout of our tequila. And as we get local market learnings, we can lean into the versatility of the category and the strength of our tequila brands. We are confident that there is so much more to go after.
Guinness continued its strong growth momentum, once again achieving double-digit organic NSV growth, up 14%. The majority of the growth was in Europe, followed by Africa and the U.S. Guinness 0.0 continues to gain strong momentum, more than doubling in the period and driving 14% of the uplift in NSV growth of Guinness. Over 4% of Guinness brewed at St. James Gate in Dublin, is now Guinness 0.0. Guinness continues to gain broad appeal in the U.S. It was recently named the most popular beer. And last month, our Guinness Storehouse in Dublin was named the world’s leading tourist attraction at the 2023 World Travel Awards.
Moving on to ESG. I announced back at our Capital Markets event that I had launched a review into our 2030 spirit of progress plan. We now have more visibility into what it will take to deliver our goals. We will continue to simplify our spirit of progress plan so that we can focus on the real priorities for our business. For example, we will accelerate our positive drinking and water ambitions, the two most material areas for us. This simplification and enhanced focus will allow us to drive efficiencies, whilst being responsive to forthcoming regulations.
On the pillar of accelerating to a more low carbon world we have pivoted to a more focused approach. This pillar requires action by us and significant contribution from outside of Diageo, but we cannot do this alone. We will need others, including governments, regulators and commercial partners outside Diageo to go further and move faster together to enable us to achieve our goals. Therefore, we are prioritizing and focusing on targeting the triple wins, where not only we can reduce carbon, but also, where we can improve cost and cash.
I’ll now hand over to Lavanya, who will take you through our financials in more detail before I return to discuss our outlook for the remainder of fiscal ’24 and ’25.
Lavanya Chandrashekar
Thank you, Debra, and good morning, everyone. As Debra mentioned, we are disappointed with our fiscal ’24 first half results. Organic net sales were down 0.6%, with positive price mix performance, mostly mitigating a decline in volume. Excluding LAC, the business grew organic net sales by 2.5% despite the slightly negative impact from North America, where we did see sequential improvement to the second half of fiscal ’23. Organic operating margin declined by 167 basis points primarily driven by LAC.
Excluding LAC, organic operating margin was down 53 basis points driven entirely by increased investment in A&P. We generated free cash flow of $1.5 million. Strong working capital management and lower tax payments more than offset the combined impact of the decline in operating profit, higher interest payments and increased investment in CapEx. Pre-exceptional earnings per share declined mainly due to lower operating profit and higher finance charges. We increased our interim dividend by 5%, reflecting our continued confidence in the business and commitment to a progressive dividend policy.
We believe our profitable growth algorithm continues to support sustainable long-term growth. Our focus continues to be on driving growth through winning quality market share. We continue to premiumize our portfolio, benefit from increased prices and drive productivity, all of which enables us to continue to invest smartly back into the business. Price/mix contributed 4.6 percentage points to top line growth, reflecting price increases in all regions except for LAC. Price contribution to organic net sales growth was in the low- to mid-single digits. Organic volume was down 5.2% with the biggest driver by far being the decline of spirits volume in LAC. I will cover this in further detail shortly.
We unlocked a further $335 million of productivity cost savings across cost of goods, marketing and overheads during the half and are on track to exceed our three-year $1.5 billion productivity savings target by the end of fiscal ’24. We drove productivity in our A&P spend and increased marketing investment by 3.8%. We deploy marketing investment in a considered and disciplined way and target increases, where we believe we will drive long-term sustainable growth and strong returns.
On 10th of November, we updated you on our organic net sales growth expectations for the first half of fiscal ’24. All five regions delivered the half in line with these expectations. In North America, organic net sales growth was down 2%. However, within this, U.S. spirits depletion growth rate was nearly 1 percentage point ahead of shipments. And again, we ended the period with overall U.S. spirits distributor inventory in line with historical levels.
In LAC, in the first half, organic net sales declined 23.5%. Depletions declined less than shipments. And as Debra said, we are taking actions with the aim of returning to inventory levels appropriate for the current consumer environment. Therefore, in the second half of the fiscal, we expect organic net sales to decline 10% to 20% in the region compared to the prior year.
On inventories, more broadly, I want to take this opportunity to reiterate the review we conducted with all our regions. In addition to reviews by the markets and regional teams, the global controllers team and the global audit team have conducted a review of compliance to our stock and trade standard and have reconfirmed the effectiveness of our controls. I am confident that we have the necessary controls, policies, procedures and sell-out culture in place to monitor and manage stock and trade levels across all of our markets.
And now to look at our results at a category level. In the first half of fiscal ’24, our beer business delivered 14% organic net sales growth, primarily driven by continued momentum in Guinness, which also grew 14% and strong double-digit growth in Malta and Senator in Africa. Chinese white spirits grew 32% as we lap the first half of fiscal ’23, when COVID-19 restrictions were still in place.
We also delivered strong growth in other whiskeys, fueled by the successful launch of Buchanan’s Pineapple in North America, and double-digit growth of IMFL whiskey in India. However, this growth was offset by the weak performance in LAC, which impacted the scotch and tequila results. Scotch was also negatively impacted by lapping inventory replenishment in North America and the final sale of inventories in Russia in fiscal ’23.
Tequila organic net sales were down 6%, driven by LAC and lapping inventory replenishments in North America, partially offset by the benefit from the global rollout of the category. Recollect in North America Tequila, we only got to supply sufficiency in fiscal ’23, and we will continue to lap this inventory replenishment in the second half of fiscal ’24 as well.
Our portfolio provides resilience and captures consumer demand during uncertain economic times. More recently, the shape of premiumization has been uneven across the market and we are seeing pockets of down trading. That said, excluding LAC, the standard and premium price points continue to outperform the value price point.
And while organic net sales of super premium plus price points declined 2%, this was primarily in our U.S. spirits business. Here, organic net sales shipment growth lag depletions growth as the business lapped the replenishment of inventory levels in the first half of fiscal ’23. Adjusting for this, our group super premium plus portfolio, excluding LAC, would be in good growth.
Over the recent years, we have significantly premiumized our business and have seen consistent premiumization trends across total beverage alcohol categories. We believe this long-term trend will resume as we complete the lapping of the unevenness of the COVID-19 inventory replenishment cycle. In the half, organic net sales decline was driven by volume partially offset by positive price mix. We took strong price increases on Guinness in Europe and on Guinness and Malta in Africa with consistent investment and strong brand equity volume grew in the half.
Spirits volume decline was mainly driven by LAC. Excluding LAC, targeted pricing actions across our premium, standard and value price points have led to a volume decline. However, the price mix impact is positive. In fact, excluding LAC across these price tiers, price mix more than offset the negative volume impact on organic net sales growth.
These price increases have been essential to help mitigate the impact of cost inflation and protect margins. And the organic net sales decline in super premium plus spirits price points was, as I discussed, driven by U.S. spirits lapping prior-year inventory replenishment. In the second half, I expect overall volume growth to improve slightly as the impact from strategic pricing actions moderates. Looking ahead, we will continue to leverage our RGM capabilities to balance top-line growth more evenly between volume, price and mix.
With our culture of everyday efficiency, we have delivered strong productivity benefits year-after-year. In fiscal ’23, we stepped up the delivery of productivity, which reduced the impact of cost inflation and enabled us to invest in our business. In the first half of fiscal ’24, we delivered productivity savings of $335 million, up versus previous years. The majority of savings come from cost of goods through procurement benefits on ocean freight, packaging, other transport costs, as well as, from manufacturing and logistics efficiencies. Marketing and overheads also drove a material contribution. As I mentioned earlier, we are on track to exceed the fiscal ’22 to fiscal ’24 productivity target of $1.5 billion.
Looking ahead, and as I shared at our recent Capital Markets event, we have committed to significantly step up our productivity commitment to $2 billion over the next three years, fiscal ’25 through fiscal ’27. An enabler is the five-year supply agility program, which we announced at the end of fiscal ’22. Savings from this program are expected to step up from fiscal ’25 and accelerate in the following years.
Organic operating margin declined year-on-year by 167 basis points predominantly driven by LAC. LAC operating margin significantly declined, driven by lower operating leverage, increased trade spend investment and cost inflation. Excluding LAC, operating margin was down by 53 basis points, and this was entirely driven by an increase of 70 basis points in our marketing reinvestment rate. At the group level, the positive impact from pricing and supply productivity initiatives more than offset the absolute dollar impact of cost of goods inflation.
Our disciplined approach to managing overheads allowed us to achieve year-on-year cost reduction. We continue to invest in our brands with marketing investment growth in the first half ahead of net sales. We use a disciplined approach to the deployment of A&P investment and target opportunities for long-term sustainable growth and strong returns. This half, the increase in marketing investment has been deployed to the global rollout of tequila, especially in Europe and Asia Pacific. We also increased investments in Johnnie Walker in Europe, in Chinese white spirits, which recovered from COVID-19 restrictions and in India, which grew 9%.
Looking ahead to the second half, I would expect the increase in our marketing reinvestment rate to moderate as we benefit from marketing efficiencies in North America and lap the prior-year increase in reinvestment rate across regions.
Free cash flow increased primarily driven by our strong working capital management interventions, which was partially offset by lower operating profit and an increase in interest payments. Over the past years, we had increased inventory to navigate COVID-19-related supply disruptions, and we have been actively reducing these levels over the half.
To enable this, we recently implemented new data analytics solutions and improved stock management processes. We also benefited from a onetime phasing benefit relating to the late receipt of certain raw and packaging materials. We renegotiated payment terms with some of our key suppliers and standardize and streamline work processes. We also benefited from lapping one-off tax payments made in the first half of fiscal ’23. We continue to invest in maturing stock to support future business growth. CapEx spend increased in line with our long-term reinvestment strategy and prior guidance.
Moving on to foreign exchange. Foreign exchange movements positively impacted operating profit, but adversely impacted net sales. Translation exchange had a negative impact on both net sales and operating profit. The exchange loss was driven by emerging market currencies, mainly the Nigerian naira, the Turkish lira and the Kenyan shilling, partially offset by gains on the British pound and Mexican peso. The transaction benefit was mostly due to favorable hedge rates on the British pound and Mexican peso, partially offset by the Nigerian naira.
We hedge our transactional foreign exchange on a rolling basis for our major currency exposures. This strategy results in foreign exchange rates that reflect the average of our hedging positions built over time. We completed the half with our leverage ratio at 2.9 times towards the upper end of our target range of 2.5 to 3 times, reflecting higher debt and lower year-on-year profit. In the first half of fiscal ’24, our net finance charges increased by $86 million year-on-year, reflecting the higher interest rate environment. Our effective interest rate at 4.4% is broadly in line with our guidance. Looking ahead to the full year, I expect our effective interest rate to be marginally lower than the first half given current market conditions.
I want to emphasize that we remain committed to our target leverage range. And I’m conscious that we are at the upper end of the range. We will make the right decisions to support the long-term growth of the business. Should our leverage ratio fall outside of the range, we will take steps to return to the range as soon as practical. Our consistent and disciplined approach to capital allocation is unchanged. Our priority is to invest in sustainable organic growth and to acquire strategic brands that strengthen our exposure to fast-growing categories.
Today, we announced an interim dividend of $0.405 per share. This is a 5% increase on our interim dividend in fiscal ’23 recast to U.S. dollars. Our dividend cover at 1.9 times is within our target range of 1.8 to 2.2 times. When we have excess cash, we will return it to shareholders.
At the beginning of fiscal ’24, we announced a new share buyback program for up to $1 billion. As of 31st December 2023, we have returned to shareholders $0.5 billion and expect to return the remaining amount in the second half of the year. Basic earnings per share before exceptional items decreased 7% from $1.164 to $1.081. This reduction was primarily driven by weaker operating profit performance compared to the first half of fiscal ’23 and an increase in interest charges, as a result of operating in a higher interest rate environment.
And now back to you, Debra.
Debra Crew
Thank you, Lavanya. In this uneven global economic environment for the second half, we expect our organic net sales growth rate to gradually improve compared to the growth rate for the group in the first half. And we expect an organic operating profit decline in the second half compared to the prior year, but we expect the rate of decline to improve compared to the first half of fiscal ’24.
While we expect headwinds to persist from continued inflation and relatively low operating leverage as we reduce inventory and LAC, we will continue to focus on delivering strong productivity and benefit from revenue growth management. We will continue to invest in marketing and brand building for the future. As we move into fiscal ’25, and the consumer environment improves, we expect to progress towards the delivery of our medium-term guidance, with our organic net sales growth trajectory improving compared to fiscal ’24. And we expect organic operating profit growth in fiscal ’25 to be broadly in line with organic net sales growth.
The first half of fiscal ’24 was no doubt challenging for Diageo and our sector. But I am pleased with how we are responding as a team, and I would like to thank all my Diageo colleagues for their hard work, dedication and resilience, especially in the last 6 months. I am 8 months into my tenure as CEO of this wonderful business. And despite the uneven global pattern of economic recovery, we can and, I believe, will do much better. We are focused on accelerating the business, winning share raising the bar on operational execution and building the foundations for our next successful decade of growth.
My confidence in our ability to drive sustainable growth and returns for shareholders over the long term is as unchanged as when I originally joined the Board of Diageo nearly five years ago, back in 2019. Yes, we face an uneven global consumer environment. But this is a resilient company, staffed by resilient and talented people, who do business the right way. Remember, Diageo has a track record of navigating volatility. We’ve done it before, and we will do it again. We are diversified by category, price point and region, and we’ll continue to invest behind our iconic brands and actively manage the portfolio to maintain our position as an industry leader in total beverage alcohol, an attractive sector with a long runway for growth.
My focus is to generate long-term sustainable value for shareholders by driving performance of our brands, especially in scotch, tequila and Guinness, meeting global consumers evolving taste and stepping up our operational excellence to win quality market share. The job to be done is clear, and we have both the long-term strategy and have put in shorter-term interventions to do it.
Thank you for watching, and I look forward to meeting many of our shareholders in the weeks ahead.
Question-and-Answer Session
Q –
