Diageo plc (DEO) Earnings Call Transcript & Summary

Good morning, and welcome to Diageo's F '25 Preliminary Results Q&A Conference Call. Your call today will be hosted by Nik Jhangiani, Diageo's Interim Chief Executive. [Operator Instructions] Sonya, please go ahead.

Good morning, everyone, and welcome to Diageo Fiscal '25 Results Q&A. I'm Sonya Ghobrial, Head of Investor Relations, and I'm joined this morning by Nik Jhangiani, Interim Chief Executive. Just to remind listeners on the call that in discussions today, the company may make certain forward-looking statements, including those that refer to our estimates, plans and expectations. Please refer to this morning's release and the company's U.K. and U.S. filings for more detail, including factors that could lead to actual results to materially differ from those expressed in or implied by any such forward-looking statements. Hopefully, you've all seen in this morning's press release and presentation. For those listening to our webcast, who would like to ask a question, please use the dial-in details included in today's press release. With that, I'll hand the call back to the operator for your questions.

We'll start today by taking our first question from Sanjeet Aujla from UBS.

A couple of questions from me, please. Firstly, on the U.S., Nik, are you able to give us a sense of how you're thinking about the depletions outlook? I appreciate you've called out a bit of caution at the start of fiscal '26, but I'd love to get your sense on how you're thinking about depletions there. And should we interpret the inventory message to imply shipments in line with depletions on a full year basis in the U.S.? And secondly, you're investing a lot behind Europe. The spirits part of the portfolio has been quite a bit under pressure in fiscal '25. What are you hoping for out of Europe in fiscal '26 as the investment step-up?

Thanks, Sanjeet. Great to be here today with all of you. On your first question, I mean, I think clearly, our focus in '25 was to get the inventory levels back to more normalized levels. And as you saw in Q3, clearly, there was a free tariff kind of buy-in, which we believe has largely been cycled through in Q4, but we will continue to look at that from an angle of how that might play out during Q1 as well. So -- but largely, we believe that has come through. Clearly, we were trying to manage to get back to more normalized stock levels, and I think we've achieved that. And the team feels good about where we are from both local as well as imports. Clearly, just putting it back into perspective, we are planning for a more cautious consumer environment in the U.S. for fiscal '26 on the top line, but very much focused around how and where we can continue to outperform, but doing a broader strategy, sharpen and refresh across the group, truly look at how do we get a broader brand portfolio growth happening, both in the U.S. and across the rest of the globe. In some ways, that does also talk to your question on Europe, clearly, you're absolutely right. I think the spirits market for us was in shopper decline than we would have liked to see. But I think we see that as an opportunity actually looking forward to better control some of the outcomes in Europe, by being a lot more locally focused and occasion-led. And I think that's the opportunity when we talk about kind of reorganizing ourselves to be able to capture that growth. And I talked a little bit in my prepared remarks around the fact that Southern Europe, just using that as one example. The fact that we were managing 4 or 5 very unique, very different markets, and you all know from my prior experience, we had a lot of focus as we looked market by market because the consumer dynamics and more importantly, even the customers and your route to market are quite different. So I think as we look at France, for instance, having taken that over and setting ourselves up and setting up a more competitive and market relevant route to market, working with our customers looking at that outlet segmentation that I've talked about, and that's one of the first markets where we're doing some really good work around that. To be able to look at unlocking those growth opportunities in spirits and not just in whiskey, for instance, France, which is a large whiskey market. Same thing in Italy or Spain, and I would say even in a market like Germany, combining Germany and Austria and Switzerland having a focus there, allows us to really be a lot more consumer and customer-centric. So I think that's what we're excited about that brings us that much closer to the markets. And hence, we feel that we will be able to then support growth. And it's not a 1-year focus. This is what we're looking at in terms of a longer-term trajectory as we look forward.

Our next question comes from Simon Hales from Citi.

Two from me as well, please, if I can. Firstly, I mean just building on some of the things you've just been saying, Nik. Can you just talk a little bit more about the moving parts in that fiscal 2026 organic sales guidance to be similar to 2025? On my math, given that you're suggesting it's probably down in the first half, it suggests an acceleration to somewhere around 4% or above in the second half of the year. I know you referenced in your prepared remarks, Nik, things like the timing and phasing of Chinese New Year, perhaps impacting the H1, H2 shift. But what gives you the confidence that you're really going to see that H2 acceleration come through? And then secondly, can I ask about just some technical factors that maybe are impacting EBIT and earnings into 2026? On the EBIT side, you've clearly carried out a number of disposals in the year, which you flagged. I think you've disclosed that the deconsolidation of those probably is about a $50 million reduction in starting EBIT. But since the year-end, you've also sold Ghana and the Seychelles breweries. How big an impact will that have from a scope standpoint? And then below the line on finance costs, I think you've capitalized some finance costs, I believe, for the first time in the P&L. Given that some of the projects related to those capitalized finance costs are ongoing, how should we think about the size of that element in the finance line as we go into fiscal '26 and beyond?.

Great. So let me tackle the first question. I mean I think, clearly, you rightfully called out what does the shape look like for half 2 and what gives us the confidence there. I think there's a couple of things that I would focus in on. And I would look at it from an angle of where we want to build more capability and where we want to really accelerate some of our work. And the areas that I would really call out are in 3 main buckets. Clearly, a lot of work that we kicked off on driving for much sharper commercial execution at point of sale. And I think that is critical in terms of allowing us to bring together really that great work we do with the brand and how do we bring it live and activate at the point of sale, be it off-trade, on-trade and a lot of work that we're doing when we're looking at menu placements, back bar displays, but having very clear metrics and KPIs against which we can measure our progress. And this would be a multiyear journey, but we feel the work that we're kicking off or have already kicked off in several markets should allow to help with that. The other piece I would call out is, you might recall we talked about 6 priority markets on RTDs. And I think when we step back and look at Smirnoff Ice, what we actually set up in what was a category 20 years ago and the fact that even with some reinvigoration and stuff that we're doing around the brand, the flavors, the portfolio offering, how we're looking at that piece in terms of the relevance to consumer occasions is what we'll try and accelerate. And I think you'll see that in the first half, but really, that will ramp up in the second half. And then I would say the last piece is really the broader work we want to do on our portfolio. Clearly, we've had some really good performance in key brands and some of our global brands, be it on Julio, be it Guinness, be it what we've talked about with Crown and Johnnie Walker, even though the organic sales decline, we gained share, but I think there's more that we can do when we look at both the mainstream core and premium core, and we've got to be able to start driving that. I think when we look at the premiumization piece that's very much here to stay. How do we continue to build on the Johnnie Walker brand, for instance, and the price laddering and everything that we've done with Blonde as one example on one end of the spectrum and what we're doing all the way up to Blue Label involved. And I think the last piece I would really say is we've laid out a clear strategy on malls where we've got great liquid, winning brands, and we need to execute that at scale as well. So I think those are the 3 big pieces that I would call out that we feel good about as we look forward. And that's not just a half to '26. That's an ongoing piece of work that we'll be looking at. From an angle of your technical factors, I think you rightfully called out with what we have already exited as of the end of the year. That's about $50 million in operating profit, which had about $250 million in NSP. When you look at the deals that had not completed at year-end but have since completed, that's really Ghana and Seychelles that would have approximately another $50 million impact on operating profit for F '26 and about $350 million NSP. But again, those would all be normalized when we look at scope and growth as we look forward. In terms of finance costs, we'll come back to you with specific numbers, but remember, there was also an element of what was a bit of prior adjustment. So we would expect that to more normalize as we look at '26, and we can come back to you with some more specifics around that off-line.

Our next question comes from the line Celine Pannuti from JPMorgan.

So my first question, Nik, is on the first half, you called the weakness in organic. Can you give us a sense of where do you see that? Because obviously, you talked about your question about North America, but I wanted as well to understand how you look at Asia Pac. So China seems to have been quite weak and beyond Chinese New Year, trying to understand what's going on in the country as you pivot, I think your portfolio towards maybe less expensive SKUs. And what does that mean for margin in that division -- in that region that has been usually quite elevated? My second question is on the organic EBIT guide. So if I look at the savings, roughly speaking, I think that probably would contribute to half of the organic improvement above top line growth. So in an environment where top line is slightly positive, can you talk about what are the other driver of that extra organic EBIT expansion. And I noted that gross margin was [ helped ] by a lower cost inflation in '25. If you could give us as well what it means for '26?

So I mean I think if you look at the half 1 in terms of the guide, you're right, in terms of U.S. We clearly are planning for a more cautious environment. And I would say that's probably one that's through most of the year, but I would expect to see that more half year weighted because we've also got the lapping of some of the Don Julio restocking that happened in half 1 of '25. And quite honestly, when you look at the Nielsen NAPCA data, as we look at the exit, you can see that the consumer environment and the consumer wallet is still stretched. But the team is doing a lot of work to really look at how do we reinvigorate some of the other brands and some of the stuff that I just talked about. The early signs in terms of the route-to-market changes that we're making in North America are really starting to pay dividends. We're getting very positive feedback where we've implemented this with well-trained feet on the street, both in the distributor and our level in terms of what they're able to drive with customers to improve portfolio mix offerings and ultimately drive their margins and as a result ours as well. I think there's a strong focus on wanting to continue being that customer of choice with our retailers. I think RTDs, I talked about where, clearly, the U.S. would be one of those 6 priority markets, which is an opportunity as well. Pivoting on to then your question around China, Clearly, outside of Chinese New Year timing, the market has been more challenged. But again, I look at that market and having visited late last year and having spent time with the team, again, in March in Southeast Asia, where we were getting some good data points of what was happening. I think the team is doing a lot in terms of looking to your point around, are there different parts of the portfolio that are important from an angle of being able to still have relevance for our brands in the right packs and ensure that the brand equity stay, and we know that people will come back and that premiumization journey, particularly in a market like China is very much intact. But at the same time, there's an opportunity as we look at a broader range of products that we can sell as well. So I think clearly cautious, but we are doing the right things in China, but I think across APAC as well. You probably look to China and seen some of the by June numbers. We do hope that, that will start improving depending on how the government continues to look at some of the restrictions that they put in place towards the second half of the year, so more to come on that. In regards to your EBIT question, clearly, the savings are what is the main drivers of growth. And the big area that we're continuing to unlock is twofold. I would say, on the trade investment and A&P spend, we are already seeing some early opportunities of how we can better rationalize for investment, but returns-driven investment. And so both on the customer A&P and the trade investment side, that's a positive. Then I would say we continue to focus on the absolute dollars of spend on the development on nonworking dollars, and the team has been doing a phenomenal job, and we're moving at pace with what we can do to really replicate some of the work that we've already done in '25 and where those costs get captured. Because quite honestly, we're doing this well with our Conscious Create teams, our Agile Brand Communities, really leveraging the virtual content studio. There should be very little that we should have to be incurring at the market level. So those are all benefits and part of that will go back into supporting media scale and reach but there will be a fall through to the bottom line. I think I called out in my prepared remarks that we had already initiated some actions around North America corporate and some of the markets in APAC in Q4 of '25, which obviously will then start getting us benefits in the second half of '26 as well, and that's a positive move. So we feel good about being able to deliver against that EBIT guide that we provided, both from where we see organic growth opportunities, but from the savings as well. On COGS inflation, I think we're seeing low single-digit underlying COGS inflation. But remember, this comes back again to where the team within supply has done a very good job continuing to look at productivity to be able to offset that, and we'll continue to have that everyday productivity mindset as we look forward.

Our next question comes from the line of Andrea Pistacchi from Bank of America.

So 2 questions, please. First one is on FX, please. Could you give a bit more color? You said you've made some changes to how you're hedging currency. Could you give a little bit more color on that? And on the $60 million impact on EBIT that you anticipate for this year, could you say how much of that is translation versus transaction, please? And then I have a specific question on a brand, please, which is Astral in the U.S. You're talking about wanting to broaden growth to more brands in the U.S. And in the press release, I think you called out specifically Astral as a tequila brand growing very strongly in the super premium price segment. So how much of a focus is this brand for you? Could you see it becoming really scaling up, becoming, say, a 1 million case brand. Would it be a slow burn? Or do you think it could be quite fast?

On the hedging policy, we've done a lot of work with our treasury team on a twofold piece, I would say. One was really looking at how can we extend the coverage duration and align the hedge targets more closely with the operating profit exposure.And I think over time, this should really help reduce that volatility. When you look at it in terms of what does that actually mean practically, we're looking at both hedged or unhedged transaction exchange exposure and what we would like to hedge but not in isolation with where we see the unhedged translation exposure, which we don't go out to cover, but we were almost in some ways overhedging and then having the impact from the translation piece and netting that out allows us to have a much more effective hedging approach and less volatility, as I said. So that's what we will be doing, and we'll continue to share more on that. So the $16 million impact is how much is really the translation piece based on what we see today from an angle of the current spot rates. But we can give you more detail on that as those continue to move. But clearly, we'll come back on that. You rightfully called out Astral in the U.S. because I think while we've done a really good job in trying to now reset Casamigos and it's still at very early days when you look at the element of, yes, it's come into the Dedicated division, but getting the pricing ladder and positioning right relative to Don Julio and ensuring that we've got the right outlets and in solid segmentation in terms of where Casamigos rightfully has the opportunity to win is now what we're going to be leveraging going forward. And we've got a new advertising campaign, which I think is really exciting. We just launched in a few states, the RTDs under the Casamigos brand, which is going to have a great halo effect on the brand, and that's going to go nationwide. But again, remember, these are more still when you look at it, at the super premium plus or actually even above in terms of price points. Astral has a great role to play in being able to address that super premium where a lot of the other brands are playing and quite honestly, I think now having gotten Don Julio and Casamigos right, and we want to get those back in growth, we have a huge opportunity to start winning with Astral, which again is great tasting liquid. And I actually would say to you, it's an approach that we're taking beyond North America only, where clearly, I think Astral will play a critical role when we look at expansion into the global markets with a clear strategy, not just on winning with Don Julio and Casamigos, but how do we win with Astral as well. So you're looking at now the 3 price segments that we can actually effectively play around. Will it be a slow burn or a fast build? I'd like to believe it's going to be a fast build that we're going to be working in on. And I think the team is working at speed in the U.S., and we're clarifying the position for the rest of world as well and where can Astral truly play. And I think it is the preferred brand for the most part that we will go with. We do have some other brands as well. Remember, we've got DeLeon. We've just brought in 1707, so I think we're making sure that we've got the right positioning and the right brand equities and strengths that we want to build on across the market. And clearly, we have the liquid and the capacity to be able to do that. So clearly, tequila is a big part of our global strategy. And I think the team has been doing a phenomenal job trying to unlock value and grow with that.

Our next question comes from the line of Trevor Stirling from Bernstein.

Two questions, please, Nik. First one, just going back to the U.S. and your route-to-market transformation in the U.S. Could you just perhaps give us a little bit more color about what changes actually are you making on the ground? Is it extra feet on the street? Or is it the same people doing different things? And second question, perhaps longer term, Nik, if we look back in a couple of years' time, what do you think will be the next big global brand or a brand that really significant contribution to growth? We have Don Julio, we have Guinness doing incredibly well at the moment, what do you think will be the third big brand that we're looking forward?.

Thanks, Trevor. So what does it really mean in terms of the change in terms of the U.S. route to market. I think a couple of things. Clearly, this is about incremental feet on the street, both from our distributor partners as well as ourselves. But not being clear on what the role of those salespeople and extra feet on the street is, is what's critically important. And I think that's what we're changing. So it's about having a much more focused model where I think we're really leading the industry in terms of both incremental to my point, but upscale resources to drive and help our partners drive sharper execution. We want to build those customer relationships that allow us to help them grow their business and as a result of them growing their business, us growing our business but then being seen as that partner of choice. So I think it's both number of people, but what do they actually do to be able to drive incremental value for our customers and ourselves as opposed to order taking. So being very mundane around that piece. So what are we practically doing? Well, we've got an academy for beverage leadership, where we're actually training resources in terms of how do you actually sell and upsell and help your partners, how do you bring them things that they might not have thought about, whether it's new brands, whether it's packs, whether it's formats that can help when we look at the type of CCF work that we do and understand the occasions that, that outlet is serving, what kind of brands and portfolios should be relevant and how they can actually help position and sell those, whether it's front of store, whether it's gondola and aisles, whether it's around in bars, menus, displays, et cetera. So it's really helping them being able to uplift their performance. And I think we're doing it in a very targeted way where we see the upside when we look at the outlet universe and where is the largest value pool that we want to go after first. So I think we're committed to building these capabilities nationally. And maintaining that leadership. And this is going to be great as we look at this, not just in North America, but that's what drives my focus that I talked about in terms of how do we truly drive commercial excellence and execution at the point of sale. To your question around what's the next big global brand, I'd like to believe it's not just one more, I'd like to believe there's a lot more that we can do. And I think that's what I'd like to come back with in the next months as we work on sharpening that strategy that I think can really help us look at in an evolving TBA landscape, how do we actually appeal and drive for more occasions and more consumers wanting to buy our brands. And we've got an amazing portfolio when you look across all of the categories in which we play, I just don't think we've necessarily been as deliberate stepping back and looking at it from an angle of selective plays on mainstream, our premium core as well as what we can do on a premiumization journey with Johnnie Walker, with our malts. We've got an amazing portfolio of malts, and we've got a very clear strategy now around what plays globally and what plays really strong regionally. And then I talked about tequila right now with that last question from Andrea. So I think we feel excited about a number of vectors as opposed to one single brand that I'd like to see as the next big one outside of Don Julio and Guinness. But more to come on that, Trevor, as we go forward.

Our next question comes from Edward Mundy from Jefferies.

I think one of the things that's come through quite clearly, both in the presentation and also in the Q&A today is the sort of desire to broaden growth opportunities beyond Guinness, Don Julio, Crown and some of those big successes. As you reinvigorate growth and leverage the full breadth of the portfolio, I'd be interested in sort of philosophically, what's really going to drive that? Is it going to be the reprioritization of A&P to provide more oxygen to a broader range of brands? Or is it really execution-driven, moving the goalpost to really drive that deliberate portfolio strategy? So that's my first question. And then my second question is on the U.S. specifically. I think in the presentation, you talked about looking to drive more balanced growth. Is that balanced growth across both of the portfolio, but also balanced growth across volumes, price and also mix?

Great. Thanks for the question. So I think from an angle of broaden the growth opportunities, I think, clearly, we're a consumer goods company. And I think supporting our brands in the right way with a good focus around both returns but sufficiency of investment is critically important as well. And I think all the work that we're doing on the customer A&P and particularly the nonworking will actually give us more oxygen to invest in the media scale and reach piece with appropriate returns to be able to get that breadth of portfolio effectively covered. And this is not going to be a single year journey. This is going to be a multiyear journey. But I think it starts up with really understanding back to that consumer, back to that occasion, where the value pools are and how do we then ensure that we've got the right resources backing where the growth opportunities are but at the same time, also looking for future growth opportunities. So I think we've got to get that balance right. Having said that, I don't think you do one without the other. So I think we could do that great. But if we don't have a clear execution focus, well, again, we'll be doing great stuff on brand building, but it never comes through at the point of sale. And vice versa, if we're doing great stuff only on execution without having the right support from that through the line piece, I very much see this going together. And I think that's what is the great opportunity as we look forward for a number of years to come around that through the line sufficiency across the brands, the building, the availability and the execution with excellence. So I truly see that as something that would be a big unlock as we look forward for the years to come. And I think the team is excited and invigorated by that, not just in the U.S. but globally as well. And I think the U.S. has already started doing that with some of the examples that I talked about in terms of the route-to-market changes. In terms of the U.S. and getting back to growth from a portfolio perspective and also balanced around the volume price mix. Listen, ideally, I would like to see both. I am also very conscious that we are in a more challenged consumer environment, and that's what we planned for, for '26. So without being able give you specifics around that, is that our focus and goal as we look forward? Absolutely. We see volume growth drivers. Now whether that's with RGDs, more that we can do with Guinness, more that we can do when we actually look at our premium core and some of our mainstream brands that we can leverage and be able to get that volume growth, I think, yes, that will come through. But that's probably more '27 and beyond. But I also think we should look at it from an angle of -- I mean, you probably heard me talk about this or us talk about it [indiscernible] but I think beyond volume in the U.S., we also have to start looking at transactions and how -- particularly with smaller formats, if we're getting consumers into our brand equities or keeping them there. Over time, as a consumer wallet becomes less stressed, we would expect them to continue, obviously, being able to be with our brands and hopefully, upsize as we look forward as well. So I think in the developed markets as well, we've got to have a focus not just on volume, but on transactions as well. Beyond that, across our other markets, I mean, clearly, you're going to have Africa, LAC, India, some of our other Asian markets be able to drive volume growth. And I think that came through well when you even look at our '25 results from an angle that, yes, volume was more challenged in some of our developed markets or when we look at China, et cetera, but we did get a good balance overall between our volume and price mix, and we'd like to continue to see that coming through as we look forward. And I think one other thing I would call out in the smaller formats, while we're driving share in the U.S. I still believe we don't have our fair share. So that's a big opportunity. And that's why my focus around not just volume but transactions as well.

Our next question comes from Mitch Collett from Deutsche Bank.

In the release, you talked about some of the initiatives you are beginning to use to reaccelerate growth. And I'd be really interested to hear how those initiatives tally with your thoughts on some of the potential structural headwinds within the sector. I know you talked a bit about RTD, but I guess I'm particularly interested in moderation and how you see that trend as an opportunity. And then my second question, you have given 50% of the cost savings are going to be reinvested. Can you just give us some color on where that reinvestment will be focused. And if possible, how should we think about marketing in fiscal '26 either in absolute terms or as a percentage of sales?

Great. Thanks, Mitch. I think you and I actually guys talk about this a little bit when I was in Paris. So moderation has been around for a number of years. So it's not something new. But I think as you rightfully called out, we are stepping back and looking at this from an angle of -- we clearly do see today's pressure as being largely more macro and cyclical. Having said that, we also do believe moderation in some form is here to stay and moderation, as you and I talked about before, does mean different things to different people, whether it's about drinking less on weekdays, whether it's about Zebra striping, whether it's about going for different formats and options that allow them to manage portion control. And I think that's what we've got to tap into more. Today, we're in a very fortunate position that we have a portfolio of non-alc brands, obviously led by Guinness 0.0 that is allowing us to win, but obviously, it's a small base. And I think we have the ability with the incredible brands and the power of our innovation team to be able to develop more opportunities, not just in RTDs, I'll come back to that in a moment, but also what we can do with not just no ABV, but low ABV. And it was interesting because I challenged my own thinking in the last months when I was thinking, well, why do we need to have low ABV when we've got full ABV and 0 ABV and someone can mix it up. And one of my region presidents shared a really good example of when he was out in the market and saw a lady picked up a bottle of Tanqueray 0.0 and a bottle of Tanqueray. And he went up and asked her around why was she buying both. Now it's quite interesting because when you do look at consumers and shoppers, those who are buying 0.0 or 0 alcohol are also typically buying full spirit because they want to have that choice. She had a really interesting angle and take that said I want to have my gin and tonic and I want to get the same flavor. And if I just put more tonic into Tanqueray and dilute it, will I lose some of that flavor by actually mixing and doing equal parts of Tanqueray 0.0 and Tanqueray full ABV, I actually get that taste and flavor profile coming through without the over reliance or over taste of the tonic coming through. And that I think was really interesting because I had challenged my own mindset saying, well, then low ABV does have an option, or an opportunity to play. And we've got a great innovation team that can help build that out for us. And RTDs is a great example of where you can actually manage ABV, calories where that people might be looking for. So I think there's a lot more for us to go after to really look at that as an opportunity. And in my mind, an no regrets move. Because it's not saying that we're not going to be focused on our core portfolio and a broader portfolio. It's not like we don't believe that premiumization is here to stay and we can still leverage that, and we've got a great portfolio and brands to be able to do that. It's about here's another vector of growth that we can tap into because that is a theme of how people are thinking about how, where and when they want to consume. So I think that's what excites us about that piece. To your question around the 50% being reinvested, I would call that out as 2 big areas, and that is about better commercial execution and what do we need to do, whether it's about extra resources, whether it's about training and building up skill sets of those resources to be able to upsell, et cetera but also providing them with the right tools, and that's another area of focus, which is around digitization and how do we do that at speed and scale. The other piece comes back to what I touched upon earlier. We are a consumer brand company, and we recognize the need to be investing smartly in A&P and particularly on the media, but through the line efficiency. So I would say where we get efficiency savings particularly when we look at the nonworking and '25 is a good example of that. You've seen that come down from circa 20% down to 15%, while our overall dollars stay pretty much intact. And so we were able to reposition that into where we saw good returns. And I think we'll have a more laser-focused approach on that as we look forward. I won't get into absolute right now in terms of what dollar spend would be. You would expect that overall to be lower but not because the media scale and reach number is coming down, it's actually because we will drive more efficiencies through the commercial A&P and continue to drive nonworking dollars out and where we should be putting it, which is back into media scale and reach.

Our next question comes from the line of Gen Cross from BNB Paribas.

First question is on total beverage alcohol. I mean in your presentation script, you referred to a recent key market study, which showed saving money was one of the top 4 reasons for consumers moderating total alcohol consumption. I just wondered if you could share whether saving money was the #1 reason and what the other top reasons were? The second question is more specifically on U.S. spirits. You've taken various impairment charges in the year, and one of them is $170 million on various U.S. brands, fixed assets and inventory, which at least appears to be partly driven by what you described as softening category outlook. So is the right read of this is that they view U.S. spirits category growth over the midterm is now being a bit lower than it was under your previous assessment or is it more just driven by short-term pressures?

Thanks. To your first question, Gen, around total beverage alcohol and what we're seeing in terms of consumers' wallets and reasons for what they're focused in on. I wouldn't necessarily say because it'll vary by market, but that was the top reason. There was definitely a large reason that people were calling out around the consumption habits or what they were spending. The other piece does come back a little bit more to the moderation piece. So I am looking at different ways of consuming, I am looking at back to that point, moderation for me might be drinking a fewer occasions. But when I do consume, I consume with responsibility, but I enjoy what I'm having. It might be back to those points around low ABV and I'm looking for more choice. And so when I'm not getting that choice, unfortunately, I'm going into something else. And I talked a little about that at a conference in Paris around, there are people who are just choosing not to substitute, there are people who are choosing to drink something else. And that's where I think we have the opportunity when we look at what can we offer to be able to gain back some of those drinkers into our products for the types of occasions that really serve them well, whether it's RTDs, whether it's smaller formats, whether it's around low ABVs, whether it's about when I drink I drink better, not more. Those are all elements we want to tap into as opposed to them drinking more functional beverages or more soft drinks, et cetera. So I think there's a lot more that we want to unpack there as we continue to build on our research as to what are the reasons people are not buying and what can we do to drive more relevance of our brands and our portfolio for those occasions. And that's a part of the work that I've talked about in terms of our strategy kind of sharpening that we'll be doing in the months to come together with the broader exec team and our markets. I think to your question around the impairments that we've taken. Remember, this is very much driven by triggers that you need to look at in terms of how the brand is performing and what the nearer-term outlook has been and what the historical data looks like. So I don't think it in any way changes our view in terms of the U.S. spirits market and the opportunities there. So really much more around some of the near-term pressures and how we need to look at that. And I think in some ways, while it's never great to take an impairment, I think this allows us to have a clean start as we look forward to really focus on growing those brands in a structured, systematic and sustainable way. But our belief in U.S. spirits continues to be just as strong, albeit, as I said, with an evolving TBA landscape that we'll continue to monitor and look at how we can play and be relevant.

Our next question comes from the line of Javier Gonzalez Lastra from Berenberg.

Two questions, please, for me. First 1 on disposals. Nick, you mentioned that the CMD back in May that you would be targeting disposals outside Guinness and more Tennessee that would be substantial. We've seen since news that both the cricket team in India and the East African breweries business are potentially up for sale which are indeed substantial, as you said. My question is whether we should expect this to be it or whether there might be more in the pipeline? And my second question is on agave costs. Would you be able to help us understand better how significant the benefit from reduced purchase costs might be in 2026 or how does it compare your average agave supply price in fiscal '25 to the existing market price?

As you can very hopefully understand, I can't really talk about specific assets or comment on any kind of speculation that's out there in the media. But I think nothing has changed in terms of our strategy on disposals. We had guided before that this was a part of our commitment, but more being led from a strategic angle and looking at assets or businesses that we didn't quite see as noncore or what wouldn't necessarily fit in as we continue to sharpen our strategy as we look forward. This continues to remain the case. And I think we're making progress on those substantial asset disposals that I talked about. And I feel confident that we have a ready pool of interesting buyers that will allow us to maximize value for Diageo and our shareholders, but more importantly, too, I think those are assets that probably belong well with some of those potential buyers and, hence, their level of interest. I will just reconfirm that we do not have any intentions of selling Guinness, nor our stake in Moët Hennessy at this point. And in terms of a broader portfolio question just to take that head on, as a part of our review, we are looking at our portfolio. I think Diageo has had a history of being active portfolio managers. Nothing more to add or say there, but we'll come back in due course if there's something of interest to share with you. To your question around agave pricing, I think I'd like to just give you some background in terms of how you all should be thinking about this. We have a very diverse supply chain sourcing strategy and agave in particular. So we own some of our own production, we do purchase on long-term contracts, and we do access spot markets. So it's a combination of those. So just the fact that today's spot market price for agave is lower should not be reflective of the price going into our tequila COGS because it is that combination, but are we clearly leveraging the combination of all those as we look forward, not just into '26, absolutely. I think we've got some good liquid already in place. Now that's positive from an angle that we have liquid to be able to sell and meet market demands, whether it's on DJ or on Casamigos. But remember, that's already in our inventory that will be coming through, but that was at prior periods agave costs. So that will have an impact as it starts coming through, not just in '26, but more beyond when you look at that first piece around our supply model. And then on FX, given some of the movements over the past couple of years, remember, we do hedge that transaction impact. As we look forward, this is a great example of where we would look at both the transaction and the translation piece, particularly with USD and Mexican peso. That should help us in some of that volatility as we look forward. So hopefully, that helps you understand how we look at that.

Our next question comes from Chris Pitcher from Rothschild & Co.

A couple of questions, please. Firstly, following on the maturing spirits comment, Nik. I mean if we look at where your inventories are, indeed the industry inventories are across the piece, have you given -- forgive me if you have, have you given any clarity on what you think your incremental investment will be next year? And then secondly, on Guinness. I know it's still growing strongly. Is there anything in your more cautious view in the first half on Guinness slowing a bit more or are you still very comfortable in it continuing the double-digit growth or there or thereabouts into fiscal '26?

Chris, so on your question on maturing spirits, we have not provided anything specific in terms of what that growth would be during '26. I would just call out, and I think maybe if there was any confusion, but just to clarify, when you look at actually the '25 numbers in our closing balance, while part of that was obviously the incremental investment in maturing stock, that was about half of it, and the rest of the half was really FX as you restate your maturing liquid balance. As we look forward, and I think as I talked about, one of the things that we have done, given the liquid that we have and how we look at what is our notional pool of safety stock, it is complex, as you -- you probably know even better than me, you helped educate me as I was first coming in, in terms of that liquid, which is very valuable liquid but is complex in terms of the different flavor profiles, the age profiles, what we need for blends, what we need for single malts. And I think what the team has done a phenomenal job over the last 4 months working with me and my broader team is to really understand where we have that incremental notional pool in the age profile and the liquids that we have and how can we actually look at that as we shape our strategy. But more importantly, as we look at laying down more liquid, what is our distilling capacities and how and where can we manage that throttle to be able to utilize some of the liquid, but without compromising on the investment for the future. And I think that's the work that we've done. I think we are in a position in terms of our planning to be able to see that benefit starting to come through some in '26, but this would be a multiyear journey because we want to be able to be much more dynamic and look at that almost every quarter to 6 months to saying, have we made some of the right choices. Do we need to throttle up a little bit? Do we need to pull back? Where are the potential risks or what we might be seeing based on how we're seeing demand generation and consumption. So that's the work that we've been doing, and I feel that we'll continue to have a much better handle on that. Like I said, every 6 months and doing the right things to protect the long term but also not draw up on a lot of cash in the short term, if it's not needed. To your question on Guinness, I wouldn't necessarily say that we expect anything significantly slower in the first half versus the second, I would just call out that we do have more capacity that's coming on stream in the second half which will actually help us to even accelerate and build on what has been tremendous momentum, not just in the high-growth markets, which are largest markets of GB, Ireland and the U.S. But you were with us in Dublin, and we talked about the big unlock opportunity as we look into other markets. And I think that's an opportunity as we look at how we want to accelerate growth in '26 and probably in some of the second half numbers as well because that capacity will really help us get into other markets and leverage that growth opportunity in existing markets as well.

Our next question comes from Laurence Whyatt from Barclays.

A couple from me as well, please. Firstly, Don Julio in the U.S.A., we've been talking about balanced growth across the portfolio. But of course, in that brand, I think a lot of the growth has really been coming from the Reposado SKU. As you think going forward, firstly, why do you think the growth has been so strong in Reposado? What is it about the Reposado category that's really captured attention of consumers recently? And within that, would you expect acceleration on the other parts of the Don Julio brand? I think historically, there's a lot more growth from the very ultra premium parts of the brand, and would you expect a bit of a recovery across, say, the Blanco 1942 other parts as well as the strength you've seen in Reposado? And then secondly, since, I guess, at the beginning of this year, you talked about growing in the upper quartile of consumer staples, and I think on the call, the prerecorded call that we listened to earlier today, you talked about the upper quartile of TSR, is what you're aiming at achieving. But I think previously in the year, you've talked about being in the upper quartile in organic profit growth in the way that the company used to guide. I was just wondering, is that an intentional change in messaging or do you expect to be upper quartile in both of those? Perhaps if you could just clarify your views on upper quartile.

Absolutely. So let me start with that one, Laurence. In terms of what was in the prepared remarks, I think TSR is ultimately an outcome if you're doing things well from an angle of getting that right balance in what I rightfully have said, but not just on profit around all our metrics and how do we look at top line growth translating with positive operating leverage into operating profit dollar growth faster than that top line growth and very much around conversion to cash and ultimately, better returns. And I think we're doing that well with a very clear capital allocation policy that ultimately leads to TSR. So I think I was using that just as a proxy as opposed to calling out everything else, but very much intact in terms of our thinking around a much broader-based algo across all of those measures to be able to drive more consistent and positive TSR growth in the years to come. So that's what I would call out the quartile and that's what myself, the exec and the Board are very much focused on setting up our strategy and our focus around being able to deliver that. To your question around Don Julio, it's really -- it's a great question. I think the Repo growth is really coming from the fact that -- obviously, people coming into the tequila category and typically, you come in through something that's more accessible and you might come in through Blanco, but then you do also find that, that aging of the liquid without going to a very strong-aged liquid in a Añejo or even beyond is what is driving that. I think the team has also done a phenomenal job in really steeping Don Julio Reposado in culture, in moments of enjoyment. It really does well in cocktails as well. I mean I'm speaking as a user myself, that's my go to drink. I typically go for Don Julio Reposado, and I like that because I have it quite clean, just with soda and a slice of orange, if you want to know, but it just kind of gives me that taste of slightly aged liquid as well. And then if I'm sipping, I might move up to an Añejo, but if I'm doing just a regular cocktail, I might have a Blanco. So I think that's the range offering that we want to continue building on for a broader consumer base. And I think you're absolutely right, 1942 and all the variants that we're doing there and how that's playing into culture and bringing in influencers, I mean the Don Julio 1942 activation, for instance, that I saw during Super Bowl was incredible. I think the small format that we have of the 50cl in the Don Julio 1942 has been doing amazingly well because you might not see that in the volume numbers, but you see that in the transactions because people really are able to use that from an affordability play or a cash outlay play, but still will be able to enjoy what is great liquid. I think your question around the broader portfolio, I'll take it out of the U.S. for a moment, and I was chatting with our new MD who actually moved from GB into Mexico, and he talked about the big opportunity that we have with Don Julio Blanco, which is a very recognized brand, great brand equity, but we've actually tended in that market to only focus on actually higher-value offerings. And so we've, in some ways, left that market open where we have great liquid, a great brand and I think there's a broader opportunity as we look at our tequila play that is not just linked to the premiumization end, but how do we get that whole opportunity all the way from Blanco up. And it's not just about Don Julio, it comes back to my earlier comments, whether what we can do with Casamigos, what we can do with Astral, et cetera. So I think we've got a bigger opportunity to play for in our broader markets as we look at tequila as a whole. So we're very excited about that opportunity going forward.

That concludes the time we have for questions today. Yes, over to you Nik for closing remarks.

Great. So I really want to thank you all for joining us today. I want to reiterate just a few points as we close the call. I know we have much to do, but please be assured that I, alongside the Board and the exec team, I mean, we're fully engaged in both stabilizing and then sustainably growing our business in the coming years. Diageo rightfully as leaders should and will be leading the way as we continue to sharpen our strategy in what is -- what we've called out as a really evolving TBA landscape. I think we all look forward to sharing more on this in the coming months. We continue to be focused on what we can manage and control as I've outlined, but continue to focus on building new core capabilities to allow us to win with our customers, and continue building our great brands and leveraging consumers' preferences. My team and I are committed to rebuilding a high-performance culture, driving clarity across the organization, clear allocation of resources and execution, discipline and excellence. So a lot more to come for us -- from us in the coming months, but we remain committed to being able to drive this business positively for the long term. And thank you for joining us today.

This now concludes today's call. Thank you for your attendance. You can disconnect your line.