Diageo plc (DEO) Earnings Call Transcript & Summary

Good morning, and welcome to Diageo's Q1 trading call. [Operator Instructions] We're now ready to start the call. Sonya, please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for Diageo's Q1 2026 Trading Statement. I'm Sonya Ghobrial, Head of Investor Relations. And today, I'm joined by Nik Jhangiani, Interim CEO; and Deirdre Mahlan, Interim CFO. Just to remind listeners on the call that in the discussions today, the company may make certain forward-looking statements, including those that refer to our plans and expectations. Please refer to this morning's announcement for more details, including factors that could lead actual results to differ materially from those expressed in or implied by any such forward-looking statements. Hopefully, you will see in our press release released this morning. I'll hand over to Nik and Deirdre for some brief comments on the quarter before opening lines to those who would like to question, but those who would like to ask something, the dial-in details are in today's release. As a reminder, if you can stick to one to each in the Q&A session, that will be appreciated. And hopefully, we can get through more questions this way. With that, over to Nik.

Thanks, Sonya, and good morning, everyone. Thank you all for joining Deirdre and I today. Let me start with a quick overview of our results. In the quarter, net sales was flat on an organic basis, strong organic net sales growth in Europe, LAC and Africa. It was offset by weakness in Chinese white spirits, impacting Asia Pacific results and softer performance in North America as U.S. spirits showed a further decline, reflecting a weaker consumer, worse than we had planned for. While we made progress in Q1, we are clearly not satisfied with the current performance and are stepping up our actions with urgency to drive growth while staying focused on what we can manage and control. We are well advanced in sharpening our strategy and are implementing the number of initiatives, not just to navigate the near-term challenging backdrop, but also better position Diageo for the future by driving growth across the broad portfolio, ensuring that we meet consumer occasions of the future. I am pleased with how the work on advancing stronger commercial execution is progressing with encouraging results from this already coming through, especially in Europe and in conjunction with our distributor partners. And importantly, our Accelerate program is progressing well at pace and we will share some examples of the work and early wins on this shortly. As you will have seen in today's release, we have updated our full year guidance, and I will come back to that later. Let me now hand over to Deirdre for some more details on our performance.

Thanks, Nik. It's a pleasure to be back at the at the -- to be speaking to all of you today. At a group level, organic net sales in Q1 were flat, reflecting weakness in Chinese white spirits, which adversely impacted group sales by about 2.5%. Positive organic volume growth of 2.9% was offset by negative 2.8% price/mix driven largely by negative market mix given the impact of Chinese white spirits. Excluding this impact, price/mix would have been relatively flat, demonstrating our to -- focus to do the right things for our brands. . Reported net sales of $4.9 billion were down 2.2% versus last year and were negatively impacted mainly by the Guinness Nigeria disposal and the Ciroc North America transaction. In the quarter, the impact of foreign exchange was negligible. Looking at net sales across the regions, we saw solid organic net sales growth in Europe, LAC and Africa, offset by North America and Asia Pacific. In North America, organic net sales declined 2.7% with U.S. Spirits down 4.1% and the Diageo Beer Company up 9.2%. As a reminder, we set with fiscal '25 results that we had planned for a cautious U.S. environment. However, the quarter was weaker than we had planned as the economic environment continued to weigh on consumer sentiment. Additionally, we saw increased competitive pressure, particularly in tequila. The weaker overall results in tequila reflected a number of factors: lapping tough comparatives restocking and size extensions, consumers trading down, general category weakness as well as increased promotional intensity. Scotch and our ready to drink and ready-to-serve portfolio delivered strong growth. In Europe, we saw good organic net sales growth of 2.5%, driven by sustained mentum in Guinness Draught and Guinness 0.0, as well as strong net sales growth in spirits led by Turkey and Middle East North Africa. I want to -- touch to a solid growth overall driven by Johnnie Walker. We restructured some markets in Europe as part of Accelerate to be closer to the consumer and customer and drive stronger in-market commercial focus. We are starting to see some encouraging early results from these changes. APAC organic net sales decline of 7% and 10% was driven by Chinese white spirits in Greater China with reduced consumption occasions across the -- category, primarily as a result of market policy. The weakness in Chinese white spirits adversely impacted regional net sales by approximately 13%, and around 2.5% at the group level. Double-digit growth in India and good performance in other markets only partly offset this with scotch, driven by Johnnie Walker performing well across the region. In LAC, Organic net sales growth was 10.9%, led by double digit growth in Brazil. The consumer environment continued to stabilize in Mexico. Scotch growth was strong, driven by Johnnie Walker in Brazil. There was also a very long growth in RTDs led by Smirnoff Ice, also in Brazil. And in Africa, where we reported organic sales growth of 8.9%, we saw a continued broad growth across our 2 major markets of East Africa and Southwest and Central Africa. Price/mix declined due to market mix. As we said in today's release, we're making good progress on accelerating our program to strengthen Diageo's foundations for long-term sustainable growth launched in May this year. Momentum to date reinforces our confident to deliver $3 billion free cash flow guidance in fiscal '26 and onwards. Specifically, work undertaken on cost efficiency, process simplification and stronger analysts increases our confidence that we can deliver productivity and cash goals. Rigorous application and focus on established tools and capabilities are facilitating greater discipline and where we prioritize allocation of A&P to drive future growth. For example, in GB, on profitable markets, we have halved our A&P development spend and reduced the number of agencies we use by 30%. We're also making strides in optimizing trade spend with learnings from early markets, including GB, but also in Australia. Learnings from these efforts are being shared across the business. We will share more on progress on excelling in our half year results in February. Now I'll hand back to Nik.

Thanks, Deirdre, and I can honestly think it's great to have you back in the business, partnering with me and the rest of the exec. So let's go back to updating on a slide we shared earlier this year. We're in on our work to sharpen our strategy and drive growth. As you can see, we are continuing to work on improving operating leverage and the work focused on strengthening commercial excellence is well underway in a structured and sustainable manner. Our work evaluating and building capabilities is also well underway with an extensive review of our operating model well advanced. . We have established and implemented a clearer framework for decision making across the center market region, which will bring with it speed and agility. We're continuing to work on end-to-end processing, including defining future processes and ultimate process owners to drive clear accountabilities across the business as well as our global business operations team. So turning now to full year guidance. We have updated organic sales and profit guidance for the expected impact from Chinese white spirits as well as to reflect the weakening in the U.S. consumer confidence, which extended beyond what we had expected. As a result, we now see organic net sales growth flat to slightly down for the full year with the decline in organic net sales greater in the first half. We still expect to drive positive operating leverage but now expect organic operating profit growth to be in the low to mid-single-digit range for fiscal year '26. Reflecting our full year net sales guidance, we expect a stronger second half with the first half showing a decline. Let me take you through some of the moving parts. Firstly, adverse market mix will be more pronounced in the first half as a result of the dynamics being seen in Chinese white spirits and -- the as well as the stronger growth coming through from India, obviously, at a lower margin. Secondly, Accelerate savings are skewed to the second half. However, given the current environment, we are moving at speed with our initiatives. So that circa 40% of the $625 million commitment of savings that we made from the Accelerate program will now be delivered in fiscal '26. The timing of delivery is ahead of our prior guidance and reflects the increased pace across the business. We have spoken to prioritize allocation of A&P spend and being more focused around both short-term and long-term returns. Given seasonality due to the key trading period of OND, these savings will be more pronounced in the second half as well our changes in trade investment terms and conditions. Our focus on building stronger free cash flow remains unchanged. We continue to expect circa $3 billion in free cash flow for the full year supported by the Accelerate program, but also by actioning the work to date on managing maturing staff more dynamically, our A&P spend, as I just discussed, CapEx and broader cost discipline. As you see, we have updated fiscal '26 expected CapEx to the lower end of the guidance range of $1.2 billion to $1.3 billion. We remain committed to returning to well within our target leverage ratio range of 2.5 to 3x, no later than fiscal '28. As I have said this -- as I said this before, this will be supported by appreciate -- and selective disposals over the coming years. We have seen U.S. sales released yesterday regarding the strategic review of our investment in SMB and we're very pleased with the pace with which this will move. This is a differentiated and valuable asset for many investors, but clearly noncore to our Alcobev business in India. We're also moving forward with other noncore disposal intros -- and we'll provide further updates as and when appropriate. We are still excited by the opportunities to accelerate growth in RTDs, Guinness, and Guinness 0.0 and of course, activation in showcasing our brands, both NAM and LAC during FIFA 2026. So taking everything together, while there was some good progress in the first quarter, there's still more for us to do, and we need to go faster. We are acting with pace, sharpening our strategy to drive broader growth, better results and ultimately improved shareholder returns. We have a fantastic portfolio of iconic category-leading brands and we can and should do better with a focus, rigor and sense of urgency on the work well underway at Diageo to do this. With that, let me hand back to the operator to open the line for questions for both Deirdre and myself.

[Operator Instructions] The first question comes from Simon Hales of Citi.

Nik, welcome back. My question is on the U.S. really. I want to understand a little bit more the moving parts in the quarter and how we should really think about the U.S. as we move into Q2 and in the context of your revised guidance. Specifically, I mean you highlighted that U.S. spirits declined 4.1% in Q1. However, some of that was driven more -- some of the underlying performance is driven by some benefits of pull on tariffs and some stocking ahead of OND. How do we think about the unwind of some of those phasing benefits in Q2 and beyond? And could you share an underlying depletion rate for Q1 and perhaps what the exit rate was as we've headed into October, please? .

Yes. So I mean, clearly, a lot of moving parts in the U.S., as you just called out, particularly with some tariff prebuy as well as obviously the seasonality with OND. But let me hand over to Deirdre who can give you some more details on some of the numbers and how you should think about the Q2 and half 1 in particular.

Okay. Simon, in North America, we did have net sales a bit ahead of depletions as is typical this time of the year. So our depletion addition -- NSV was down about 7% and net sales, as we said, down about 4%. The difference -- they're surrounding there. The difference is about 2.5 points. That's not atypical this time of year. As you know, every year, there's always some changes. Last year, we had some restocking of some Johnnie Walker SKUs in the quarter. This year, we did have some pull-forward relating to tariffs. But there's also, as we mentioned in the release, some weakening depletions overall as we're seeing the categories decline in particular to tequila. The. Tequila category is declining, and we have a very big position in tequila. And so you can see that. So we are getting some depletions, I think, declining ahead of our net sales. We don't really manage this on a quarter-to-quarter basis. When we get to the full year, of course, we're always making sure that -- I mean, the full -- the half year, okay, after the end of OND, we, of course, work to ensure that we have a balance between ships and depletes. So of course, that some of this depends on the activity during OND, the execution during that period and how big the holiday is. So we will have a little bit of unwind of tariffs, although that will be material in Q2 because some of it already unwound in the first quarter. So we had -- it was -- it came in early in the fiscal year, and then some of that pull-forward for tariffs unwound in the quarter, although there's still an overhang. So there will be a bit of that. And I think we're watching carefully what's happening with consumer takeoff in the period, which will be the biggest factor.

Got it. So taking all that into account, Deirdre, is it fair to say if the depletion rate continue to be at minus 7 or there or thereabouts, and you had a little bit of unwind, we should be at the moment, depending on what happens with OND take off, be thinking about Q2 U.S. spirit sales being down perhaps high single digit.

Yes. I mean it's really hard to say. I don't want to forecast what the depletions will be. We are actively working, of course, to have the best execution we have in the quarter. And it is the holiday. So the first quarter is frequently not the strongest quarter in spirits as we all know. So going into the second quarter, I'm not trying to dodge your question. I really just think it's unclear what it's going to be. We don't see anything that would cause a significant change in the current trends. They are weaker, but we're not seeing a significant change in that. And of course, we'll come and give you the update on the half.

Simon, I would just pick up on the point that Deirdre made because I think it is important to talk about how well we are showing up from a commercial execution perspective. And I talked a little bit about that. And I think the work that the team continues to do is we look at our route-to-market evolution, right, and how we need to continue challenging that because it's never always a fit-for-purpose in what might be a changing environment, and I think we're looking at that as well. But clearly, where we have our business development folks, either on the ground ourselves and or through our distributor partners, where we've really stepped that up in terms of feet on the street, we can see stronger performance in those states versus some of the controlled accounts. So that is what we're focused on. How well can we show up and how well do we drive that execution. And I think the team is doing a great job there. But to Deirdre's point, it's very difficult to predict what the consumer will continue to feel and confident about in terms of what they want to spend. But we're staying close to that.

The next question comes from Sanjeet Aujla of UBS.

Welcome back Deirdre as well. I want to dig a bit deeper into tequila in the U.S. You called out increased competitive pressure. Can you just dig a bit deeper into what you're seeing there and what interventions are you putting in place to try and improve at least your competitive performance there between Don Julio and Casamigos, please?

Great. I'll kind of give you some overall perspectives and then Deirdre will give you some numbers in terms of what we're seeing. So I mean clearly, the tequila category as a whole, remember, we were outperforming the category quite significantly last year, right? And particularly with Don Julio. So we knew going into the year, all else being equal, is still going to have an issue with the comps in terms of some of the restocking by distributors as well as some of our size extensions, right? But clearly, consumers are trading down, all right? And we're seeing that in terms of the category. And we've had some really strong anecdotal but also some data points that you can see in terms of just shifting out of the category potentially and going into RTDs and/or then using tequila as kind of a chaser, so that really what that means is their rate of purchase is going to be that much lower, right? . I think competitive pressure has increased. You're seeing that much more in terms of both frequency and depth of discounting. But clearly, we're focused on all of those elements, right? And I think this is where continuing to work hard on our portfolio. Astral is a great example of what we want to be able to step up as we think about that shift from ultra premium into super premium or even to premium, right? And how do we meet the consumer where they are, but still continue to drive affordability both from a cash outlay perspective with smaller sizes, which continue to do well and again, show up great in terms of our execution. So I don't know, Deirdre, if you want to add some stuff on some of the numbers.

I can give some specifics about that. So if you look at what's happened -- well, I'll talk about Don Julio specifically since that was the biggest change in the quarter from a consumer takeoff point of view. The share moderation in Don Julio in the quarter is about 3/4, about 75% of it is due to comps, and this is what Nik pointed out. And the comps show up in 2 different places. One is in May of 2025 is when the small sizes were launched. So -- and of course, distribution was building during that period. So the peak of that is really around September. So we started really lapping those comps in particular, going into the September, but you could see it actually in the numbers, if you looked on it month-over-month, starting in June. And so the other thing was the big ramp up, an increase in share in Reposado last year, which were lapping. So those 2 things combined have a significant impact. The other point that I'll just share is the category itself. If you look at what's happening to tequila as a category, it was growing, I think, 10% in 2024 and then 6% in September 2025 -- and I'm sorry, in 2023, 10%; in 2024 6%; and now it's down to about 3% or just under 3%. So there's some category weakness the tequila category, which had transcended most of the core spirits category for the last couple of years is now -- can no longer define gravity. I think, with respect to what's happening overall. So there is some reduction in that, given how strong our position is, you're seeing overall that come down. And the final point that I'll make is the train down. The consumers, of course, as I mentioned, are under some pressure. So we're seeing a bit of a shift between the super premium where our products sit. Don Julio and Casamigos, the premium, okay? And so we're sitting at a point where we were getting more growth from super premium previously. And if you look at the 12 months versus the 3 months, that has moderated and the purchasing of premium has gone up for super premium, which is about $19 to $35, which is where Astral is to Nik's point, but Don Julio and Casamigos far above that. And so I think we are seeing the effects of all 3 of those things. And so in terms of what's going to happen, I think the lapping part, of course, will start to moderate. So that impact on our performance will moderate, but I think we're going to continue as long as the consumer is feeling some pressure. I think we're going to continue to see a bit of consumers moving to small sizes instead of buying the larger sizes and also perhaps buying at other price points. We are now -- again, as Nik pointed out, leaning into Astral. So we do have offers for when the consumer makes those shifts. But it is quite a dynamic category at the moment in terms of consumer behavior, and that's what you're seeing show up in the numbers. One final point is on Casamigos because we really didn't talk about that. I think we've mentioned in the past that we've been working to get our Casamigos pricing in the place that we think is appropriate. We have taken those actions. It does take some time for the retailers to reflect that on the shelf. In some places, we're seeing that happen more rapidly than others and those adjustments are still coming through. Where we are getting -- where those price adjustments on the shelf are coming through, we are seeing improved performance. And of course, we've got a great launch from Casamigos RTD, which we feel really excited about. And I think it's a sign of the strength of the brand overall. I know that's such a lot of information. So probably some in back up.

I think that was really helpful, Deirdre because it really helps understand what's happening in the category and how much of that is really the lapping, right, which is important. But there is a softening of the category. But I am excited about what we're doing with the RTDs and Casamigos to Deirdre's point because that really will help continue building the brand halo and bring people back into the spirits. So that's exciting. One last piece, I just wanted to make sure that we're all talking about in the most constructive way. You've probably seen the whole issue around the lawsuits and the credentials of tequila. And I think the legal team is doing a great job, and I won't get into that in terms of the focus around dismissing those class action suits, which clearly are completely baseless. But if you do think about the element of what we need to continue managing in a dynamic environment is also how do we make sure our customers, the trade consumers all feel really good about the quality of our products and the credentials of our products. and the fact that it's all made from 100% blue gate -- right? So I think the team in the U.S. is doing a great job with a lot of action that you'll start seeing around that to ensure that all of those 3 constituents. Some are trading our customers in particular, but our consumers feel really good about the credentials of our brand, but more on that in days, weeks, months to come.

The next question comes from Andrea Pistacchi of Bank of America.

Yes. Nik, Deirdre, welcome back also from me, Deirdre. So my question is on the EBIT guidance, please. You're adjusting this guidance, but only slightly, and you should still be able to deliver low to mid-single-digit EBIT despite the negative tariff impact, probably negative country mix, given the baijiu -- situation, given the U.S. being soft. You said that you're accelerating efficiencies and my sort of quick calculation is that with 40% of your efficiencies delivered this year and a 50% drop-through of that, that's worth about 2% to EBIT. But I was wondering, efficiencies aside, could you talk a bit about the other moving parts that could support margins? Is input cost a tailwind this year, particularly agave, some of your peers like Cerba seeing material benefit from agave. Or maybe are there other factors also affecting margins? And what is your level of confidence on this new guidance for the full year? .

I mean I think, listen, firstly, to be very clear, we have a very good level of confidence because we wouldn't have come out with that if we didn't feel good about the actions that we're putting into place. So you're right in terms of your calculation from an angle of Accelerate. But remember, we've kind of said circa 40% on that anyway. So again, we'll continue to look at that dynamically, in terms of that element. And remember, what I had talked about when we talked about Accelerate savings, we have been very clear from an angle that we don't expect to be reinvesting a lot of that in -- one, and so you'll see that all kind of really drop-through as we continue to look at what we need to do in '27 and beyond on digital, on more feet on the street, commercial execution, et cetera. So that's good. But I would say to you, you're right in terms of the mix of markets, and I called that out in half 1. But I do think we are seeing some stronger growth across whiskey, in particular, and you've seen us talk about Johnnie Walker, for instance, and it is helping from a margin perspective. I think we're also looking at broader cost discipline outside Accelerate in terms of OpEx spend. And I think those elements all give us the confidence they can deliver on that guidance for operating profit as well as the fact that we continue to be very focused on cash, and I'll come back to just reiterate our commitment to deliver the $3 billion of free cash flow, right? We're the -- thing that we looked at with EBIT, but also what we've done on maturing liquid, and we talked about getting more dynamic in terms of how we think about planning and what we're laying down, CapEx, et cetera. So I think we feel good about both those levels both on free cash flow and EBIT. I don't know if you want to add anything, Deirdre.

I'll just throw in a couple of things. Look, as we've said throughout this, the kind of market conditions right now are quite variable and somewhat unpredictable. That has been the theme, my guess is, so it's called it bit -- and that has continued in different ways in different places. And so what we are focused on is making sure that our brands show up best possible way in the markets and controlling what we can control, which is our cost base. So we're wanting to make sure we're very efficient on driving cost. This is what the Accelerate program is all about. And also to make sure the investments, whether it be in trade spend or in marketing are fit for purpose. And that's a big piece of the work that we've been doing. I referenced some of it in my remarks about looking at how we can ensure that our development costs in A&P are not too high and that the A&P that we are spending is getting us -- and Nick mentioned this, the short- and long-term returns. We'll talk about that more as we get at the half as some of those programs continue and we're sharing learnings from the early markets across the other markets. So we can come out with some specific examples at the half. But what I can say is we are being able to see the cost through our investments as well. And that's part of -- that's what is giving us confidence that even with some of the weaker market mix that we're still going to be able to deliver in that range.

Okay. But I gather it's not -- sorry, agave is not a big factor, not one of the major factors, and it's efficiencies and all the things you've gotten through now. .

It is well, there is a factor of that. I wouldn't say that's a main factor, right? And remember, we just talked about some of the challenges we're seeing in tequila, right? But remember, just to be clear, what some of our competitors might be seeing could be different in terms of how we buy, right? And we've talked about that before, right? If we were clearly on spot market only, absolutely, we'd be seeing a lot better of that comes through. But again, we are managing this category for the long term, right? So the combination of what we have with our own plantations, what we have with our own contracts, and what we will continue to benefit from in terms of spot pricing, not just for the sale but for the future as well, it will be that balance, right? And I think that's the way we look at it. So it's a factor, but I wouldn't say it's the big driving factor in our numbers.

The next question comes from Mitch Collett of Deutsche Bank.

Deirdre, welcome back. I think you said, Nik, that you have been able to reduce A&P in GB, I think you said 50%. So I'd be interested to know when did you manage to make that change? And any thoughts on the impact of that scale of reduction and what that tells you about the opportunity to say and to be more efficient with your marketing spend in other geographies going forward? .

Yes. Thanks for the question. I think just to be clear, I don't think we said we were able to reduce that by 50%. In fact, Deirdre made some opening comments where she talked about, we have that development cost which is circa, let's say, 15% to 20% of the total spend that we would have in A&P in that market. and we've reduced the number of agencies we use by 13%. So just to be clear on the numbers. Having said that, I think we're challenging as both Deirdre and I have said across all our markets, how are we truly looking at investing behind growth, how are we allocating with the One Diageo mindset in terms of where that growth is and what are we going after and very much also looking at those short-term and long-term returns in terms of through the line spend. Because I think for a while, we've been focused on one element of that spend, which is just the media spend as opposed to through the line. And that's where it shows up that when we also think about how well are we spending our money on commercial A&P and on trading investors. And that's the work that we have done in Australia and then we've replicated that work in GB, and we'll be taking it into the other European markets. And that's what I talked about in terms of being more second half weighted in terms of the opportunity that we see there. So hopefully, that clarifies that confusion, Mitch.

Yes, understood.

Yes. I mean, again, I think it's very important that we just come back to the bigger point here. We are a branded consumer goods company. We see the level of spend that we need to have to continue building and protecting brand equity as quickly important. So Deirdre and I are very focused with our presidents and our markets around are we spending that appropriately and are we getting the best bang for that. I actually truly believe from a dollar spend perspective, we continue to have an opportunity to get much more for less in terms of dollars that we spent, and that's what we're focused in on. And remember, we're also not going to be shy if there is a reason to pause in a certain area, and come back when we see that growth coming back, for instance, right? So that's why we're being very dynamic with that whole level of spend without in any way killing our brand equities.

The next question comes from Olivier Nicolai of Goldman Sachs.

Deirdre, welcome back. I just got 1 question, which is a bit of a follow-up, but it is on the Accelerate program. And if you could give us a bit more detail on some concedes -- going to help H2. And then on A&P specifically, which is related to Accelerate, how confident are you that you can get some savings while also keeping your share voice the same compared to your competitors? .

I'll give you a couple of comments on that. So I think actually your level of question around how confident are we, we're extremely confident because that's what we've actually been working on probably since the early out of this year and have been refining those plans and hence, we feel with the analytics and the tools and what we're going after, we feel very good about delivering that. I think to your question around some specific examples, right? We've now done some really good work around our trade spend, okay, in some of the larger markets where that spend is there. So I'm going to talk about Australia and GB, for example. And we know that some of that is not generating, forget about returns for us, it's actually not even generating returns for our customer. So is that the best and prioritized use of our cash or is there better way we reallocate for that spend and drop some of those savings to the bottom line, but still be able to support what we might need from a customer activation perspective. On the A&P, I think using our tools more effectively to look at through the line effectiveness of that dollar spend is what I was just referring to as opposed to just the share of voice from a media perspective is what we need to be thinking about because it is also how we show up and activate at the point of SIP that creates a lot of excitement around our brands. And this is where the work that we're doing around commercial execution, starting up with the off-trade, but being very focused in a structured way around understanding our outlet universe, segmenting out in the universe making sure our portfolio is right and then activating there is a great way to build habits and in some ways, amplify our share of voice through point of sale, right? So those are the things that we're doing that give us the confidence around that area. The update that I talked about was the work that we've been doing on operating model and framework. And those might sound very wooly, but it is critically important because those are elements that help us change how we work and the culture and speed and agility with which we move. So clarity of decision-making, where does that sit, right, bring speed and agility that allows us to move to make quick decisions in terms of how we need to allocate resources more ruthlessly, back to that One Diageo mindset and supporting where growth is as opposed to where we might have been working in the past where it was very siloed within the region and/or in the market, right? So those are some of the things that will start giving us casual results, but those sometimes a little softer, that's how we change the culture of this organization as well. So we felt very good. And I would say it's not just Deirdre and me, I would say the whole exec team is coming together in a very different way in terms of how we're thinking about how and where we allocate resources jointly together for the best interest of Diageo. So that's some of the color there. I don't know if you want to add anything, Deirdre.

The next question comes from Sarah Simon of Morgan Stanley.

Just had a question on the margin and the operating leverage point. Can you just confirm in terms of -- I think you said, Nik, that you're going to deliver 40% of the savings in the quarter -- sorry, in the year. And I think, if I'm right, the previous guide was basically equally spread. So is this -- you're basically getting more savings earlier? That was part one. And then secondly, if U.S. depletions and consumption has got a bit worse, does that not imply that you're going to work through pre-tariff sold in stock. Are you going to have less of a tariff impact across the year than you previously anticipated? Just want to understand that.

Sarah, to your first question, you're absolutely right. That's what we've said. We've accelerated some of that work on the savings. So versus circa 1/3 that we would have seen come through. And remember, again, just that point around, we had said we would see that in the earlier part of the program dropped to the bottom line. That's now circa 40%. And again, that's a rounded number. So that's where we are. I don't know if you want to, Deirdre, on the depletions point.

Look, I think the North American depletions point, the prebuy or where we saw the pull forward was in this year. So I think it's just going to wash out in the year. I don't think it changes what we have said originally about the tariff impact. I think that was already considered when we gave the kind of pre-mitigation numbers, which was around $200 million pre-mitigation. But I don't -- that is all being managed in the business. But the prebuy, which I mentioned was in the first quarter, some of which is already unwound. The rest will unwind in the second quarter. I don't think it changes the total amount in this year. It's just a question of where it lands in the quarters.

The next question comes from Trevor Stirling of Bernstein.

Diedre, let me reecho the welcome back. Just return to something you said earlier, Deirdre, you talked about depletions down 7. Have you any estimate what the sellout is doing underneath that? I presume depletions, you've got some element of retailer destocking because they had pre-bought ahead of tariffs as well. But have you any estimates around what the sellout is on that minus 7 depletions.

You mean the consumer take off because the depletion number is the sales from the wholesaler to the retailer. So that is actually showing that a sale -- the consumer data, I mean, you can see what's happening across core spirits. I mean I think core spirits, if you take out ready to drink and ready to serve is softening slightly. And within that, of course, we have some good performance. I hold this out, I think, in the -- or Nik did in the presentation, where we have some good performance in -- Johnnie Walker was good for us in the quarter, Ketel One is performing well, we have some improvement across rum as well. . But overall, I think you're seeing the weight of our share impact in tequila, where tequila is softer. I spoke about a bit of that earlier in the Q&A. But what we are seeing is just some -- and this is why we called it out in terms of our thinking about what's happening in North America. We are seeing the consumer a bit weaker than we expected. Everyone was looking for stabilizing core spirits. And I think the core spirits continues to be soft to slightly softening with the better performance coming in ready-to-drink and ready to serve. And I think that, again, is an indication of what about our longer amount the consumer moving to formats and to types of application, where the formats are different, and that's creating some weakness in core spirits. We're not anticipating an improvement or degradation really from that place. We're just launching carefully and, of course, ensure that our brands show up in the right place at the right price with the right kind of presentation in terms of execution. So again, we'll come back at the half and talk more as we see how the holiday as we know that's really important. We all do in this sector. So we'll come back after that and then talk about how we see the rest of the year for that.

And then just stepping back from the shorter-term piece there. I think what's important is, can we understand the importance of getting more balanced growth across our broader portfolio, right? So we are really looking at the work through our sharpening of our strategy is how do we focus around broader recruitment? I think in some ways, we've forgotten that because we were so focused on premiumization. I don't think they need to be at odds with each other because you can recruit and be premiumizing at the same time, right? So I think bringing that focus around core spirits growth even within our premium range is critically important, and that's some of the work that we're doing as we speak. Clearly, whiskey and tequila will continue to be a big opportunity for us. And I'm thrilled with the early results of some of the work that we've been doing through our GVTs and CCT, et cetera, on Johnnie Walker and the execution of that because you're starting to see that in our results come through, right? Tequila clearly is a bit more of a challenge, as Deirdre highlighted from adding perspective, the category weakness, but that's North America. And I think we have a big opportunity when you think about tequila globally and not just on halo, but also Astral, right? And then I think we have to continue thinking about RTDs and RTS in a positive way from an angle of what it can bring in terms of the consumers and the drinkers coming in through RTDs into spirits earlier, right? And that's a positive, right? And we shouldn't shy away from that. But it's also a great way to think about meeting the consumer from what they're looking for, whether it be lower ABV, calorie control and portion-controlled, being clear around how much they're consuming and what we can offer them, whether it's around functionality, et cetera. And there's an element of how we're also thinking about what does the consumer want for the future, when they're thinking about drinking occasions and how do we look at that? So clearly, there are some shorter-term pressures as we're seeing that consumer, particularly in the U.S. in terms of continued down-trading, et cetera. But we've got to step back and look at how we're thinking about a broader range of growth opportunities as we look forward, not just for North America, but Rest of World as well.

The next question comes from Jeremy Fialko of HSBC.

I have a question on Europe. Can you talk a bit more about the implementation of these business model changes in Europe, some of the early benefits of that? And are there any elements of that, which could be replicated or models for the U.S. or not remotely in the just massive distribution differences between the 2 geographies?

Yes, great question. So listen, I think a lot of what we did as we've had a new President, Dayalan takeover in Europe, was to say, are we truly is at the core of what we want to do is be closer to converse and our customers, are we structured right way. And I think for a number of years, we were managing continent of Europe as one big market. And then we did some work, I believe, a couple of years ago, when I joined where we did go into some lower level clusters. But I think those clusters were still not necessarily getting us the impact on what we were looking for, right? So a great example of that was Southern Europe and looking at differently in terms of Italy, France and Iberia. And we can see as having great benefits already because the team is that much closer to the customer, understanding the outlet universe better, understanding the differences in terms of how we think about occasions and consumer needs and how are we are making sure our portfolio offering is good for versus for that market, right? And I think that is an early sign of a positive that we're seeing because I think we're going to be executing very differently, being closer to the customer, right, and consumer. To your point around whether we can take that into the U.S., I think there's always cross learnings that we can have. And I think in the U.S., the team is doing a great job of what I would say, continuously being disciplined with how we need to think about the market, right? And what can we do to differentiate ourselves. Clearly, have an advantage from our size and scale right. Clearly, we have a dedicated distribution division that helps position us for success. Are we truly leveraging that to the whole extent that we have, right? Is there a difference between what we need to do when we think about a geographic coverage versus a category coverage. And those are things that we will continue to challenge as we think about, again, getting ourselves closer to the consumer location and are we set up for the right way to be able to do that. So I think there is that positive discontent that helps us continue to challenge us even in that market and look at what we need to be different too. And there's always going to be good cross-learning so what we can take from one market to the other.

The next question comes from Celine Pannuti of JPMorgan.

Nik, I wanted to come back to the outlook. Thank you for providing some building blocks on the H1 EBIT decline. I just wanted to think about -- when you saw that we -- like the new guidance for top line and given the little visibility, if I think about H2 has quite some country volume comparative. So first of all, you were saying before that H1 like-for-like would be slightly negative. Is this still the case? Or is it going to be a bit more than slightly negative given commentary you made on Q2? And yes, how do you think about the I mean, H2 going to be positive, given what I said about the tougher comp on volume. And maybe as well, on H1, if I understood well, will margin be declining? .

Yes. I'll give you some higher-level comments and I'm sure Deirdre will support me on some of the planning that we've done as we look at the balance between the 2. So to your first question around H1, while we have said that would be slightly -- that will be worse, just given what we're seeing with 2 big impacts. One is Chinese white spirits, and let me try and cover that first. Clearly, the policy changes that came in has led to the sharp decline that you've seen in the baijiu category in Q1 across not just our business but all our competitors, et cetera. I think we're in a slightly better position because we also manage down the stock levels at the same time to make sure that we were preparing for what might be a tougher couple of months, if not quarters to come, right? Now the positive there was there was a slight total change from the government Green mid autumn festival, which has resulted in us seeing some signs of better depletions, but it's early days, right? So we're continuing to plan for that to be more challenging in half 2, but we do expect Chinese New Year and depending how government policy continues to play out is how will that show through. So I think we'll be able to give you a much better addition of that with half 1 results. I think Deirdre talked about some of the moving parts when we think about the U.S. particularly with half 1 with where we were in Q1 in terms of depletes versus sales and some of the category pressures that we're seeing with tequila, right? Remember, we had talked about the fact that half 1 was going to be more towards growth. And some of those are actually still very much intact elements of our plan, right? You've seen the acceleration in RTD, RTS. Well, we're expecting that to continue at an accelerated rate, not just in North America, but also for some of the other markets where we've seen really good success and the work that we've been doing. We talked about giving us capacity coming on stream, and we're going to be leveraging that fully, right? Some of the Europe changes that we're doing, right, is early days, and we would expect that to step up in terms of the benefits that we can see. And then lastly, it's also linked to FIFA activation, right? We have a unique opportunity with a huge viewership of that event globally, but really being able to bring that to life in NAM and LAC with several of our brands. So I think all of those still very much stay intact. And the teams are working at pace and I'm sure the constitution of those continues to be at its best level and that's what we're doing through OND. So it takes us very well into how we're thinking about second half as well. So those are some of the things that we feel good about in terms of the building blocks, both for the top line as well as even. Deirdre, I don't know if I missed anything.

No, I couldn't said it better.

The next question is from Gen Cross of BNP Paribas.

My ones on Brazil. So quite strong performance in the quarter, double-digit growth, and it's quite in contrast to the numbers in the quarter that we've seen from other beverage and staples companies. I just wonder if you could share a bit more color on what drove the strength and particularly whether double-digit sell-in was aligned with your estimate of sell-out in Brazil?

We had strong performance in Brazil in Johnnie Walker and RTD in the period. Those were the 2 strongest drivers of performance in the period. So I think we are feeling good about the overall performance. Of course, there has been some of the issues in the media about alcohol more broadly. We are -- that's something that we're watching carefully in terms of the total category dynamic, although we did get good performance in our brands in the period. .

Absolutely. And I think the only other thing I would add to what Deirdre said is if you do look at it from a weather implication perspective and where some of maybe their peer companies were impacted, we didn't see as much of that, right? And clearly, we will help with the progress, as Deirdre called out on RTDs, where the team has been doing a phenomenal job under the leadership of Paulina. So there is a space that we'll continue to watch in terms of that whole issue with what we've seen in terms of the spirits piece. But I think this is where, again, longer term, that's a benefit from an angle of known and trusted brands and what people would want to consume, right? So we've got to stay focused again on what does that mean for the longer term? And how does that help and benefit us in terms of our position. And in RTD, this a great way again to make sure people get trust because they're opening up a can they know what they're drinking and they know exactly what's in it, right? And I think the team that -- the work that the team has been doing sets us up well from that angle as well.

The next question is from Edward Mundy of Jefferies.

And welcome back as well Deirdre. Deirdre, a question for you, I think. I know you've been back in Diageo for a couple of months, but I think you started in the industry, if you don't mind me saying back in 1992, which was a really tough time, both for beverage, alcohol and spirits haven't had a really bad sort of 1980s period. So I think you started in the industry, just as spirits started to get its mojo back, and then we saw a 25-year super cycle with a couple of great big years at the end of that through COVID. My question is really having been through a couple of cycles both for Diageo and the industry, what do you think is going to be the catalyst to get this industry back into sustainable levels of growth?

I will let Deirdre answer that. But I would say to you that probably you don't really need to call out when she entered the industry.

That was a long time ago. Absolutely right. I have seen the cycles, including a broad premiumization cycle and kind of situation that we had in 2009 with the economic crisis, a big move into emerging markets. And then, of course, a big growth for a long period in the U.S. I think we are seeing now -- and Nick has spoken about this before, a bit of a shifting landscape across the industry. So we have 2 things happening. One is the same issue that we had before. We are on the back of a super cycle, which has been exacerbated by weak economic environment, in particular, in some of our biggest markets in the U.S., in particular. So it's happening from a consumer perspective in the U.S. and its impact on this category is a bit unprecedented. We haven't seen periods where I forget, it was a very long tune where spirits volume wasn't in growth, and that's happening now for spirits. So we're seeing shifts in the way and where consumers are consuming our products. and that is a period now where everyone in the industry is adjusting to that. We think we're very well placed to win coming out of that. We participate, we can see. We didn't talk much about it today, but Guinness in the U.S. is up 9%. So we have Guinness and Guinness Zero and RTDs. And what -- I think what we're seeing is a number of the players in the industry really thinking through where are their strengths, where are they in the categories and formats and geographies occasions that they believe they're best placed to win. And given the breadth of our portfolio, and the strength of our brands, we think we're in a really good position as these industry changes evolve and consumer behaviors evolve to win. So I do think what's happening now is just -- it's largely economic, and I know people have been saying that and I believe that. If you just look at the changes that we're seeing in terms of trade down, both in formats and price points. And then there were some changes in the way people experience the products. And we lived through that before though, of course. And I think we're going to actually work through that and start to see the industry take a turn as the economies globally in particular, in the U.S. start to improve.

The next question comes from Laurence Whyatt of Barclays.

Deirdre, you just mentioned that Guinness is growing at around 9% in the U.S. And I was wondering if you could just give us a bit more color on Guinness. Because it looks like it has accelerated in Europe as well. I think, high single digit in Europe. I think it delivered about a double digit in the full year last year, maybe around mid-single in Ireland. But just wondering if that is an acceleration at the moment, if it is, what do you think is driving that, if we see any impact from the Guinness series from Netflix? And as we go into the end of the year, looking for the new house in London being completed. And just wondering if you think you've got enough capacity to not have any repeats of the stock out that we saw last year.

Well, I'll make a few comments since I just referenced it and then I'm sure Nik will have more color on it. Look, we're very excited about the performance of this brand. And this is on the back of a deliberate effort by us in terms of thinking about how we wanted that brand to show up in the market, how we wanted to invest behind it and in some degree, meeting the consumer where they are, which is -- and evidence of that is the -- and I mentioned shifts in consumer behavior, the significant -- in Guinness 0.0. And we're finding that the combination of Guinness 0.0 and of course, Guinness Draught in many places, is great -- is getting a combination for consumers so that in terms of -- and evening out, they, of course, can have Guinness 0.0 and they can have an Draught Guinness and they can kind of manage their consumption if that's what -- if they're wanting to moderate. . And -- but it's a multipronged effort over many years. So if you look at the CAGR, this hasn't just happened overnight. The CAGR on Guinness over the last 3 years and over the last 5 years has been very high double digits or very high single digit. And we have continued to grow in a number of markets in Ireland and GB and in the U.S. specifically, but in other markets as well. And we have been putting on new capacity. And so I think we will see that strength continue to grow. And of course, we are working to ensure that we have sufficient product to meet the demands of the consumer as that happens. With respect to the House of Guinness, I mean it's early days. I did hear yesterday it was renewed for a second season. So I guess the consumers are liking the show. We were not associated with that program at all. And so we have -- I don't think that's what's driving the performance of our brand. Of course, it may drive some levels of awareness, but we were seeing and continue to see very small performance with the Guinness brand. I don't know, Nik, if you want to share...

Yes. Just a few other things I would just add to the contract. So in fact, we actually spent some good time yesterday with our Board as we looked about growth plans with one capacity that's just coming on stream, as I referenced to earlier in little cone that we'll be able to leverage not just into half 2 but beyond as well. But we also look at plans '28, '29 onwards, which clearly are focused around what can we do in both Europe, GB in particular, and I'll come back and talk about that, but also the U.S. So very focused around that because I think we continue to have a great brand that can still be very much scaled, but also premium, right, in terms of the offering, that's where the consumer is going. In particular, when you look at GB and 0.0 that data referenced to, there's a lot of talkability around that, given the fact that people are enjoying that, whether it's zebra striping, whether it's semi-skilled options of what they're doing, it's causing a lot of excitement around the brand. The team has done a phenomenal job steeping this in culture. And so we're expanding the user base quite significantly from twofold angle, right? One, it was really seen much more as a winter drink and now it's becoming an all-year round drink, right? And that's been helped by what we're calling a Lovely Day for a Guinness campaign, right? And that's been really strong. It's also attracting the younger demographic and more female into the category as well, which is all really positive when we think about the growth opportunities looking forward. To your question on the U.S., in particular, clearly, it's been outperforming there, right. We have share gains in 50 of the past 52 weeks, right? And so that's a real positive, and we see a big opportunity for further growth there with 0.0 as well, right? So I think overall, as Deirdre said, we continue to see the same trajectory of growth continuing for the next 3 to 5 years. And we're thinking about that in a balanced way in terms of how we want to think about capacity build, CapEx and expansion plans, but continue to be very excited about that.

Our final question comes from Chris Pitcher of Rothschild & Co Redburn.

Deirdre, welcome back as well. Can I ask a slightly bit strategic question. Two of your biggest profit pools, the U.S. and China have deteriorated quite materially. And it hasn't escaped investors' attention that you both have the title interim front of your job title. Can you give us reassurance that yourselves and the Board feel that the big strategic decisions don't need to be made down in those markets. Certainly, from the commentary, it sounds like you're going to see how Christmas plays out in the U.S. and how Chinese New Year plays out for Shui Jing Fang before you do anything dramatic. I just wanted to feel there isn't this tension between urgent action required and executive decisions. .

I think for both of us, but also it's great to have Deirdre back, and you're actually right, we both have the interim title, but I don't think that in any way is slowing us down and all the boards kind of mandate to us to continue at pace, right? We've just finished up a couple of days of really good discussions with the Board, which was focused around how we're thinking about the future. So we wouldn't be doing that if we both were sitting here with interim titles, and they were just kind of waiting for something to change. So I don't see that as an issue at all. And I think hopefully, you're getting a sense that while we're talking about the things that are impacting us in the short term, we are still very much thinking about the longer term of the business, right? And I called out some of those things with the sharpening of the strategy work that we're doing as an exec with our MDs is really around how we're going to actually meet the consumer of the future and think about occasions for which we have a more relevant portfolio that is leveraging all parts of where we have already a right to win, but have not been playing it effectively. And what are the areas that we need to think about differently as Deirdre highlighted, because the consumers are potentially drinking differently, where they're drinking, what they're drinking, how they're thinking and what they want from a beverage company as opposed to just a spirits company is how we need to be thinking about our programs. So rest assured, I can say to you, neither one of us is sitting back nor is the rest of the organization in any way. So please stay confident on that. And Deirdre, I don't know if you want to add.

I would just add one thing. I just want to be clear. When I said we were, of course, waiting to see how the consumer would behave. I'm not waiting to see how they behave before we decide how to manage our brands. I said that in the context of, of course, the consumer takeoff in the quarter will impact our overall performance. So we -- I mean, I've known you a long time, Chris. I certainly -- I'm not going to sit and wait for something to happen regardless of what my job title is. We are running this business for the long term for the strength of the consumer fit of our shareholders into the medium and long term and nothing about our job title changes that as well.

We have no further questions. So I'd like to hand the call back over to Nick for closing remarks.

Great. Well, thank you, everyone, for joining us today. It's great that Deirdre is back with us, and you all gave her a warm welcome. So thank you. I'm looking forward to sharing more on our Accelerate program when we report results in February. As highlighted today, I think we've really made some good progress in the first quarter, but there's a lot more for us to do, and we're not shying away from that, and we need to go faster and we just talked about that, right? So we are acting with pace to sharpen our strategy to drive growth, better results. And as Deirdre just said, ultimately improve shareholder returns. We're very conscious of that. And as always, any further queries, please just follow up with Sonya and the IR team, and have a great day. Thank you all for joining. .

Thanks all.

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