Diageo plc (DGE) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining the Diageo F '26 Interim Results Call. My name is Lucy, and I'll be coordinating your call today. [Operator Instructions] It is now my pleasure to hand over to your host, Sonya Ghobrial, Global Head of Investor Relations, to begin. Please go ahead.

Thanks very much. Good morning, everyone. Welcome to Diageo's Fiscal '26 Interim Results Q&A. I'm Sonya Ghobrial, Head of Investor Relations and I'm joined this morning by Sir Dave Lewis, Chief Executive Officer; and Nik Jhangiani, Chief Financial Officer. Firstly, thanks all for joining us on what I know is a busy day for results with peers and some good friends reporting. Just a quick reminder for those on the call that in the 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 this morning's press release and presentation, both of which can be found on our website. For those listening, who would like to ask a question, please use the dial-in details included in today's press release. Also if I could ask you to limit to 1 question per analyst, we can hopefully get around everyone. First, let me hand over to Dave, though, for some opening remarks.

Thank you, Sonya. Good morning, everyone. Thanks again for joining us. If I just take 2 minutes before we get straight into questions. You've seen, obviously, the results from us today. As I say in the press release, we consider them to be mixed. Encouragement in Latin America, Europe and Africa, offset by the weakness in Chinese white spirits and North America. In fairness to the team, the Chinese white spirits is not particularly in our direct control, but clearly, the North American position is. Against that background, we set out 3 immediate priorities, and you had a chance to see that in the presentation and obviously take some questions. We're also clear that we are working hard on a revisit to the strategy for Diageo. We will complete that in calendar Q2 with Diageo and then share it with you as soon as we can thereafter. I suppose the thing that I need to refer to is obviously the change in the dividend policy that's been announced today. From our perspective, this is about recognizing that we need to invest in the competitiveness of our business, and that's particularly around the portfolio to allow us the space to invest in the capacity, particularly in Guinness that we need to support that growth, but also in the capability improvement that I see as an opportunity in the business. And then with urgency to rebuild the balance sheet. That's the reason that the Board has revisited the dividend policy. I'm sure there'll be questions about it, but I thought I would give you a little bit of context before we open it up to your questions. With that, over to you.

[Operator Instructions] The first question today comes from Sanjeet Aujla from UBS.

My question is, following the dividend cut announced today, do you think Diageo needs a short-term profit reset as we go into 2027 to execute your immediate priorities? Or is there enough cost savings to help fund that?

Sanjeet, thank you very much. Why don't I start and then Nik can add. Look, we're not guiding into '27, as you know. We've been clear about what the guidance for '26 is. We're looking at a profitability, which is flat with potential for a little bit of growth, and we're committed to the GBP 3 billion of cash that we'll generate this year. We will revisit the strategy, as I've said. I suppose the thing that I would point to, Sanjeet, is that if the reason -- one of the reasons we gave the MENA example is we may have to invest in diluting a little the percentage margin of our portfolio in order to get the competitiveness that we're looking for. But actually, the quantum of gross profit that's come back in that particular case has paid for that investment. So I actually think there's opportunity within the portfolio to have some volume return on the investment. But I also think there are opportunities inside Diageo for us to be more efficient. I just need a little bit more time for us to work through those, and we'll bring that to you in the strategy because we're not giving any guidance for '27 as we said. Nik, I don't know if you want to...

No, I think you said that. The only thing I would add there is, as Dave said, some of these choices and decisions take time, and it's not necessarily a one-for-one in terms of how that might come through. But as you look forward, the ability to look at the gross profit value pool and where we play continues to be a big opportunity.

The next question comes from Simon Hales of Citi.

So Dave, I was struck by some of your comments around particularly what you're saying about redesigning the Diageo operating framework as it sounds like that's going to drive hopefully faster innovation and some further efficiencies. So I've got just a couple of sub-questions to that. I mean given that you highlighted that need to step up on the innovation side that will be more agile, particularly in the areas of RTDs, is that urgency something we might see show up over the next 6 months? Are there some perhaps new RTD launches already in the pipeline, for example? And then secondly, on the cost side,you've clearly been able to deliver savings from the Accelerate program a bit more quickly in fiscal 2026 than originally expected. You're not specifically referencing Accelerate beyond 2026 as things stand unless I missed it. So I think you'll probably come back at the midyear and give us a bit more of a flavor on cost efficiencies from here. But how should we think about the trade-off between reinvestment into the business given you're talking about differentiating competencies over the medium term versus a drop-through to the bottom line of potential further savings?

Got it. Simon, thank you very much indeed. Again, I'll kick off. Look, I think there is a significant opportunity for us to rethink how it is, we, as Diageo, go-to-market. I think there are opportunities for us to be more competitive in the way we think about how we deploy all of our resources. So that's something that we need to work through as a team. It's going to take us a little bit of time, but I'll share it with you as soon as I possibly can. I think Nik touched on one thing. One of the things that's come, Simon, as someone new to this particular industry is there is some lead time between decision and being able to implement. So the innovation plan for the 6 months in the balance of this year is pretty much set. So there's going to be -- as a result of the presentations today, you shouldn't assume that there's going to be a material change in the -- now there's a very good activity plan for the balance of the year, but you shouldn't read that there's going to be a change particularly to that as a result of what we said this morning. I think on the Accelerate program, Nik kicked this off before. I think the program is delivering. We talk about delivering 50% of the $625 million. This year, in the first half, we've done 40% of that 50%. So the progress -- and we will carry on. What we will probably do, in fact, is we will roll in a full review of the operating framework that we'll share with you in '27 and any continuing part of Accelerate will be consumed within that. But that would be my point. I think the thing I would say, going back to the innovation is if you look in -- particularly in North America, which is obviously a focal point for reasons that were obvious in the statement, we've got FIFA in the second half of this year. So the idea that we were to change any of the plans in the second half of the year just really isn't an opportunity for us. So again, I don't think you should read in that you're going to see material changes in the next 6 months as a result of the comments that I made this [ morning ].

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

Yes. Dave, you talked about needing to provide more affordability to consumers and investing in competitiveness of the business. And you said, I think that while you'll continue to invest in premium, you'll also explore opportunities which might involve some price repositioning. So I'd like if you could please expand a bit more on this potential for price repositioning, particularly on the U.S. Would the -- and maybe this is a bit more detail, it's a bit too detailed for now, but would the repositioning you have in mind be, as you're thinking of it, be quite specific and targeted by brand, I don't know like, for example, a Casamigos? Or do you believe that a broader price adjustment may be required? And sort of connected to this, what gives you the confidence that price elasticities are high enough to get an adequate volume response? And do you see the risks of getting into an even more competitive sort of pricing environment?

Andrea, fantastic question. So let me try and then Nik can add. Look, I think the way that I think about Andrea, is that we start from a place which is let's consider all consumers and not just those which sit in the premium space. I don't want to take focus away from the premium. I just want to add the lens, which is there's a whole bunch of people at the moment who are not enjoying a brand from Diageo in our core categories. And that, I think, is an opportunity for us. It's interesting. If I give a different example to the ones I gave this morning, if I look at the market in Latin America, our portfolio across Latin America really only plays in the top 25%, 30% of the market. And therefore, there's an opportunity for us to think about that market below those price points. Now if we do that and we do that well, that would be incremental to our business and therefore, not something that we should be anything but joined about. But the critical thing for us is, as you say, that price repositioning, that very selective price repositioning that needs to be done will be done surgically. It will be done by brand. It will be done by pack size. It will be done by market, it will be done by channel, it will be -- that's where in the -- I talked about that price pack architecture. This is where category management really comes to the fore. I think, again, going back to the MENA example, really very encouraged. You see it at play in that example. We launched yet more premium offerings, Bulleit is a really good example, but we slightly tweaked the price positioning of, yes, Johnnie Walker, but very significantly with VAT 69, Black & White and J&B, we changed those positions. That now, does dilute the percentage margin of those 3 brands in the portfolio, but it pays back -- in that particular case, it's paid back by gross profit. The work that we need to do that will inform the strategy is some of that flat price elasticity that you referred to. I don't have all of that in every market as we speak, but we will have it before we finalize the strategy. So it's going to be a very targeted, very specific piece of work. We do think, based on what we've seen so far, that there is a volume response to price repositioning if we get it right. That's the opportunity. But what it does mean is you dilute a little bit the percentage profitability and look to gain quantum of gross profit as you make those changes, I don't know, Nik, do you want to add anything to that?

No, I think you've covered it.

The next question is from Gen Cross of BNP Paribas.

It appears in the presentation that you view the weakness in the U.S. spirits market is very much being principally driven by economic pressure on disposable income. So I guess on the basis that economic pressure will eventually ease, as you think about building out your updated strategy, will it be based on the assumption that over the midterm, the U.S. spirits category will eventually return to its kind of pre-pandemic growth cadence?

Gen, Look, I think -- look, we'll share with you what assumptions we make about the U.S. economy as we write the strategy. We'll probably look at different scenarios as you would expect us to. But you're right, we do see the economics and the disposable income as being one of the biggest downward pressures on the spirits category in North America. Gen, I think I'd share with you my background and my experience leads me to a place where I think that having a portfolio of offerings is the right medium- and long-term strategy to have. Sometimes the economy will be strong, sometimes it will be weak. It's important that we have a portfolio that is competitive and creates value for shareholders in both of those circumstances. So the way we'll think about strategy is how do we build out a portfolio that actually reflects and is effective in the prevailing economic conditions. We can make some calls about how that might change into the future. But I don't want the Diageo business to be something that has to rely on the economic temperature in order to be successful. That's going to be the change in the strategy you see going forward. We've got a brilliant portfolio of premium, but we can add to that in a way which makes the portfolio significantly more resilient. We just need to do that in a way which creates value for shareholders.

The next question comes from Mitch Collett of Deutsche Bank.

So Dave, Nik, Sonya, a few times in the slides, you have the sort of focus on customer, customer, customer. I guess you've been a customer of Diageo. So Dave, so I'm really interested in your thoughts on how Diageo can improve that customer execution and ultimately, how that improved execution would better serve Diageo shareholders.

Mitch, thank you very much indeed. And can I just say, please? It's just Dave, all right? Sorry, I should have said -- it's definitely just Dave. Look, Mitch, I'll be very candid with you. I said -- I was asked the question when I first started on my first day by a lot of Diageo colleagues about what Tesco's view of Diageo was. People in the room here are smiling, they remember. And the feedback I gave them, I don't mind sharing with you is we always as Tesco, we were in all of the branded portfolio that Diageo had, right? And I'm saying that unashamedly, it was always what a fantastic portfolio. But some years, the innovation plan was super strong, some years less, but the brands were phenomenal. We always felt though that they didn't really engage with us and thinking about how we run our business as Tesco, i.e., the category lens. And that actually some of the things in terms of how they engaged operationally processes were not best-in-class, right? So that was the impression back at Tesco. I have to say, and I was candid with the team as I gave the global feedback, having now been inside Diageo for 7 weeks, we have not invested in the customer relationship. We've not invested in the systems and the processes that would make it a professional operation. I gave you some of the customer service headlines for some of the key geographies to -- as a simple illustration of that. But if I tell you that today, Diageo across the world enters 65% of its orders from its customers manually, gives you some idea about how far behind we are. But as I say, an opportunity about how we might engage with our customers differently. So I think there's a whole area of transactional engagement with customers that operationally, we can and we should improve. That will do 2 things. That should, if we do it well, lower the cost of servicing our customers. It should also free up cash if we do it properly. But the bigger opportunity for us is to think about categories. Off-trade customers think through the lens of category. And the more that we can go to our customers and show that actually we're thinking about how it is we grow their categories, actually, that is a basis on which you can build real partnership. And what I want us to do is I want to start thinking about how we grow with our customers rather than thinking about how we grow through our customers. Subtle difference, but if we're able to do that, then that will yield more value to Diageo shareholders. But I have to be honest, it's a change in mindset for the Diageo business. And that's why I'm calling it out for both an internal audience and indeed an external one.

The next question comes from Laurence Whyatt of Barclays.

Just one on your strategic reviews and potential disposals. You sort of see you're progressing with the Royal Challenges in India and the Chinese spirits business. Can we assume then you're largely done with the sort of major sort of slightly more substantial disposals. And of course, it was speculated last year around brands like Guinness, you mentioned how you think Guinness is an excellent brand. But no real mention of Moët Hennessy. And of course, that was speculated earlier last year. I wonder if you have any comments or reiterate the comments that were made earlier last year that's absolutely not so.

Well, Laurence, thank you. Why don't I say something about the approach in general and I'll ask Nik to update you on where we are with the ABL and the review that's going on by the Indian business. Look, I think we will never comment on speculation. One of the things that I said very clearly is I have no interest in selling brands below their value. I understand where this market is at this moment in time, and I understand the speculation is that the way that we should delever our businesses through disposals. You mentioned 2 speculative ones, but they're certainly not things that we have referenced. I want us as Diageo to be super clear. We're not going to sell brands below fair value. If somebody were to approach us and make us an offer that we can't refuse, the portfolio assets, which are not part of our strategy, as a sensible business people, we will obviously listen and engage with that. What I want to be clear is we're not actively out in the marketplace hawking a whole series of what people have called [indiscernible] and nor are we active in a couple of things that you have speculated about. But I just want to be clear about that. We're going to strengthen the balance sheet through the actions that we've talked about rather than looking to dispose of some of the assets that people speculate about. But Nik, do you want to say something about what we are actually doing in this space?

Yes. And it just comes back to precisely what David has just said. And I think that's been our position from day 1 that we are exiting certain noncore businesses. We never talked about brands. And obviously, when you now look at what we're doing, you've seen the announcement on EABL. And USL alongside us is doing a strategic review of RCB. Again, we don't need to own a Cricket Club. That's not core to our business, but important in terms of the brand and what we can do. So that's in train and in progress, won't speculate any further, and we'll update you in due course. Just on your comment on SJF, just to be clear, we have never talked about that. That's speculation. And so I won't comment on that further. And I will just reiterate on both Guinness and Moët Hennessy, we were very clear. We are not sellers, and that still stands as it is. And the last thing I would say to Dave's point, there's a lot of tail brands that were exited pre and during my arrival here. And as Dave said, we've been clear, no fireside sale of any of these assets. And more importantly, let the strategy first be laid out, and that will determine what we think about our brand and our portfolio going forward.

The next question is from Chris Pitcher of Rothschild & Co Redburn.

You're clearly impressed with Guinness, but you mentioned specifically that the brand has geographic constraints. Would you have sold the assets in Africa? And following on from that, the previous strategy was to free up capital from beer and make it an asset-light business. Do you still agree with that? Because it does sound like you're looking to put more capital into the business to expand capacity. But does it need more people on the ground to sustain the current growth? And which markets do you see as most interesting, not just for growth in license volume, but growth profit? Sorry, long question.

No, no, no, Chris, it's a great question. But you probably -- if you didn't pick up in my previous life, the one thing I'm never going to share on a call like this is what I might do in the future. I always consider those things to be competitively sensitive. So I'll decline to give you my rollout plan for Guinness, if you don't mind. Look, I think my -- I'm very impressed with the brand, really very impressed with the brand. I'm very impressed with the team and the way the team are thinking about the brand. I'm very impressed with some of the work that's thinking about different business models behind the brand, and you referenced one of them, which is a more asset-light way of thinking about how you can take Guinness into new markets. So I look at the locker of Guinness and I see it as a very full locker with opportunity. However, we sit here today with capacity constraints, capacity constraints on Guinness and Guinness Zero. I've shown you some of the customer service levels, which are just not unacceptable. And I've shown you that actually 10 markets are 80% of the business. So we do see opportunity for Guinness in a number of other markets. We can't even consider that until we sort out the capacity point. Now in fairness, what the team have been doing historically is balancing how much we can invest in Guinness with some of the other investments in the portfolio, the usual stuff that management teams have to do. But I don't want to, in any way, constrain the investment in Guinness capacity given that we have a wealth of opportunities. But forgive me, Chris, I'm going to decline to tell you which markets and when we might deploy that.

I would just add, Chris, and you were present, you saw us at the Guinness Mini event. And we clearly laid out the opportunity when you look across markets, even where we're present today, as Dave said. And some of that capacity will come on in half 2, Q4 in particular. But to Dave's point, with the growth that we're seeing, that's not going to be enough for the next 2 or 3 years, and we need to continue leveraging on the growth opportunity and the gross profit dollars that brings...

The next question comes from James Edwardes Jones of RBC.

Timing, mid-Q3 seems quite a long time to wait for you to update the market, particularly as you're kind of proposing -- giving your proposals to the Board in Q2. How are you using your time between now and then?

James, I take the challenge. Look, I gave some detail of what I've been doing in the first 7 weeks. This week and next week go with investors, as you can imagine. I've then got a complete getting around. So there's still Africa, there's Asia for me to spend some time. So I just want to make sure that I've got the firmest of foundations in understanding the business we have today. There's been quite a lot of engagement with the exec around strategic options, choices, consequences that need to be fully explored and evaluated. A lot of work underway there, but we need to then get ourselves as a team through that evaluation of those alternatives. We then need to engage with the Board. And then depending how quickly that goes, obviously, I'll be in a position where we can share it with other stakeholders and principally, obviously, the city. So I'd rather -- one thing I won't do, James, is rush. I don't think there's any benefit here in being quick and incomplete. So I give us the challenge that when we come, I hope you're impressed with what we've done. But I need to make sure that we do that properly. And that's probably first me, understanding the business fully, then with the exec really exploring the alternatives and then bringing the Board into those discussions so we can get ourselves to a place where we've done a proper job. And as soon -- I'll say to you is as soon as we've done that and we've agreed, we'll find the right way of sharing with you. I try to give you some broad time lines, but we'll firm those up as we go through the calendar year.

The next question comes from Javier Gonzalez-Lastra of Berenberg.

One question from me. On the U.S., I just wondered how feasible is it for Diageo to reset prices or activate more mainstream brands in the portfolio without impacting margins in a major way?

Javier, it's a really good question. It's -- the distribution routes in North America are particular. It needs to be planned. It comes a little bit to what Nik was saying earlier, which is it takes time to change the plan in North America. It takes time to change the plan in North America anyway, particularly takes time when you've got an event like FIFA that's been built in with all customers for quite some time now. But it is possible. If you talk to Sally and the team, it is possible. We need to be thoughtful, mindful and have a longer and medium-term position, and that's the work that's going on now. But it goes back, Javier, to what I said earlier, which is that's why I don't think you should see any meaningful difference in the U.S. plan as a result of what I've said. That's why we're holding the guidance that we've given you on profit and cash for this year, but we're indicating that we're going to have to invest in the North American business in '27 and on. And that means how do we invest in the portfolio, but also in a way which enhances quantum of gross profit even if it dilutes percentage margin. But it's possible to do. It just needs to be done carefully and thoughtfully and with some lead time. So Nik, I don't know if you want to add anything on that.

No.

The next question comes from Trevor Stirling of Bernstein.

Dave, you've hinted at some of the softer aspects of the redesigning the Diageo operating framework. But if you took a broader picture, what's your assessment of Diageo's culture and how the culture of the organization needs to evolve?

It's a great question, Trevor. I have touched on it. I think -- look, there's -- first and foremost, the thing that strikes me -- has struck me over the 7 years -- 7 years -- 7 weeks -- is the energy in the organization. Actually coming in, given the difficulty in the last few years, one of the questions was what would the energy be like in the organization, especially given that there's a turnaround required, the energy levels are really very high. And that I think it's a very big and very important positive. I think there is quite a lot of feedback inside the team that the way that we operate is not as clear and not as agile as it could be. So people have been quite open to sharing some of that frustration. That's why I referred to it in the presentation in the way that I do. I think the bits of culture that I -- the 2 things that I would point to at this point, Trevor, would be, there's a question for us to think about what are those differentiating competencies. What are the capabilities of the organization that either are there but need to be sharpened or indeed need to be brought to the business. I think we're there on the way we think about brand, but we need to add that lens of category. It's not there in the way that we think. So from a capability point of view, we need to add that. We need to add a greater priority and a different approach to our customers. I've not seen anything in the culture that makes me concerned about our ability to do that. If anything, I think the culture is thirsty for us to be a little bit more competitive, a little bit more external in the way that we go. It's a very collegiate culture, which is one of its great strengths. Maybe sometimes that makes us a little bit slower than we could be. So how we inject some pace, but that's for me and that's for the leadership team. But I've not felt any resistance to that, Trevor. But look, when we get to the point where we share the strategy, I will share also a little bit more what we're doing in terms of the evolution of the culture inside Diageo as well.

The next question comes from Richard Withagen from Kepler Cheuvreux.

I want to go back to the U.S. Maybe can you please share your thoughts on the margin structure in the U.S. and how that stacks up to the potential growth of the portfolio and also resource allocation within the portfolio?

Why don't I give you the general answer, Richard, and then I'll ask Nik to give you a bit more specific. Look, I think the -- we use the example of our U.S. spirits business and tequila to show how our portfolio is very well served at the premium end, but we're underrepresented in the volume parts of the market. That's an opportunity for us. That means that we will have to think about selective price repositioning, maybe possibly activating brands that we haven't activated for a while, and we're fortunate to have a portfolio of opportunities there. That, I think, is likely to have a in '27, a downward pressure in terms of the percentage margin of our portfolio in North America. Not in a place that I can guide you to that at this point in time. But I think if you want some direction of travel, it's an investment in the percentage margin of our business in North America. What we've got to work through is what is the quantum of gross profit that comes from that price investment. And therefore -- and if we don't -- in the unlikely event that we don't happen to cover it all, how can we mitigate that from elsewhere. But what we must do is make our portfolio competitive in North America, not just in 1 or 2 segments, but more broadly. So that's how I think about it at a general level. Nik, I don't know if you want to say anything more specific to, Richard?

No, I think the only thing I would add, and this is probably, again, an example, right, of what we can do. We've talked about the fact that when we look at tequila, we've got an enviable portfolio, but it's been playing at the top end. And in some ways, if you look at the brands and take Casamigos, it's actually been competing like we've said with Don Julio, right? And there clearly is an opportunity to reposition that. Now we can reposition that to Dave's point, very smartly and surgically when we look at it across channels, packs, occasions, et cetera. And we'll continue to test that in the right way. One of the things, for instance, that we know while we've done this in Florida, clearly, that's had a positive impact, right? Now there's more to do. One of the biggest issues we still deal with is the fact that Casamigos, for example, is in lockbox. Well, clearly, we know if it's in lockbox, that has an implication on consumers' propensity or shoppers propensity to buy that. How do we work with our customers back to Dave's point, around helping them grow and helping the category grow by putting it on the floor, right, at the right price point, right, to serve the right type of consumer occasion that's coming in there. So there's a lot more work that we need to do, and I'm just giving you that as one example, but there's other brands in the same thing, whether it's Smirnoff, whether it's Captain Morgan, et cetera. So that's the work that we'll be going through.

The next question comes from Sarah Simon of Morgan Stanley.

I just had one question around GLP-1. So you've talked about a sort of pretty limited impact from that, which is sort of not surprising because weighed sort of generically, there's not that many people on GLP-1s yet. But clearly, the price of GLP-1s is going down, they're going off patent, et cetera. It's not just going to be a sort of U.S.-centric issue. So just interested in your thoughts on kind of, okay, GLP-1, maybe not so much impact up until now, but how are you thinking about preparing the portfolio for more GLP-1 in the future?

Yes. No, thank you, Sarah. Obviously, clear, and we touched on it in the presentation, and I don't at all want to diminish it. Something we need to understand and we need to constantly evaluate, especially as you say, as the price comes down and potentially the adoption increases. I suppose the interesting thing is this is why it's important to think through the lens of spirits rather than TBA. What I've seen in the work -- I'm trying to read just about everything that anybody writes on this particular subject for reasons that you can imagine. Attitude to spirits is really quite distinct and different. Hope you've seen this, I think it was more in conduit or [indiscernible]. Very interesting deep dive survey that came out, I believe, less than a week ago. Looking at a sample size of around 60,000 GLP-1 users. So one of the bigger samples that we've seen. And the attitudes towards different categories in there are really very interesting. And what you see is that actually the impact on spirits is really rather small. In fact, actually, as part of a new lifestyle, I say that in this comments, this is the consumers who are using GLP-1 talking, not me, actually, experimentation, socializing, actually engaging with other people increases as they change as a result of GLP-1s. And all of those things actually are positive to wanting to explore the spirits category. So I don't want at all to diminish it. I think it's something we will stay very cognizant of, but we'll look at it through the lens of spirits, particularly, and we'll think about that as we redefine our innovation approach going forward. But I'm just sharing with people the evaluation as it sits today, Sarah.

The next question comes from Fintan Ryan of Goodbody.

2 questions from me, please. Firstly, could you elaborate some of your thinking or the thinking at the Board level around the change to the dividend, payout ratio for this year and going forward? I appreciate that 30% to 50% is a quite wide range and lower than the market had been anticipating, but your thoughts around how that should evolve in this -- within the range this year and going forward? And as well, just in terms of the free cash generation and some of the investments you're talking about in margins, particularly North America into next year, does this -- does the dividend cut imply you're less confident with the GBP 3 billion free cash generation minimum from FY '27 onwards that I guess -- that the business had been talking to previously?

Why don't I start and then I'll pass to Nik, I think. Look, first and foremost, reconfirming the GBP 3 billion this year as we have done in the release. I think what we -- one of the conversations with the Board has been, yes, there's a very big timing question here. As we invest in making the portfolio more competitive, the first step is one which clearly dilutes the percentage margin. We've then got to see the volume come back. We've got quite a lot of work to do to see and do all the detailed work around those elasticities. But what we're saying is we know the one thing that we can't do is not invest in the competitive in the North American business. And so that's what the Board has factored into its decision. And at the same time, if I look at what the Street is looking at in terms of CapEx, we think you're on the low side, not by a lot, but by some because we want to invest in Guinness and the capabilities that I've talked about before. So it's that combination of investments, leading investments selectively in North America and investing in a little bit more CapEx than you guys are currently that basically says we need to create more space as well as our desire to rebuild the balance sheet more quickly. So that's what's driving the decision to revisit the dividend policy. But then when it comes to payout ratios and the -- why don't t I pass to you, Nik.

Yes. So I think just building on Dave's point. Stepping back and when we were sitting at the full year and the guidance that we provided on Accelerate. The first thing I would say, Dave and my commitment to generating strong cash flows from this business is unchanged, okay? And we're very aligned on that. So there's no issue there. The second thing I would say is, clearly, our view of the U.S. market and the U.S. spirits category was quite different. And if you remember, we talked about the fact that we weren't expecting a further deterioration from where we were in fiscal '25. We weren't planning for a significant improvement either. But clearly, this has deteriorated at a much faster rate from an angle of the affordability. And our portfolio then as a result, is not playing that, right? And if we want to give ourselves the space and the flexibility, hence, the difficult discussion and decision that Dave talked about that we've had together as a Board around how do we do that. And the best way to do that to invest in the business was to come up with a payout ratio, probably starting at the lower end of that, but allows us to build into what is clearly our focus, which is shareholder value creation. And we all recognize that we want to continue to return cash to shareholders. This gives us more flexibility to invest in the business and also find the appropriate forms of which we can return cash to shareholders. And I'll stop there because I don't think there's anything more to say there.

The next question comes from Pierre Tegnér of ODDO BHF.

First, welcome back, Dave, and big thanks for the first thoughts you shared. Very interesting. As a follow-up to the previous questions on the more frequency and the need to raise the bar in terms of category management. Do you think the spirits industry is embracing clearly a new big challenge of doing more frequently on a more speedy way, increasing velocity and asset rotation with maybe lower percentage margin? And on a more global thinking, how much is it suggesting a big change of the future drivers for cash generation and ROIC? I will mean a better balance between P&L and asset rotation on the medium term.

Nice to talk to you again, Pierre, and as always, a very good and detailed question. But I think there's -- 2 things. I think -- and Nik, please add. I think there are a couple of things that I see. Look, I deliberately gave a historic perspective. Actually, the spirits category, if you look over the last 15 years, is the most stable category I think I've ever come across in my consumer goods life, right? And when you look at how people engage with it and you look at how it grows in line with GDP, it's remarkable. So I've not seen anything at all, Pierre, that says to me at this point in time, there's a massive disruption in the way that people engage with spirits in the immediate future. I haven't. I think what's happening is the way people are choosing to engage with the category is changing, particularly for younger people. And there's much more on the go. There's much more third spaces. They're making choices about where and how they choose to socialize that are different. And therefore, the invitation for a consumer goods business like ours is how do we adjust our business so we can serve them where they want to be. I think that is real. I think we need to think carefully about that. I think does that mean that some of the metrics and how we think about our portfolio and our asset base need to change? Yes, in some cases, possibly, yes. I look at RTDs. I look at that trend and I perhaps see it slightly differently than maybe historically people see it. We look at it -- and if I may be so bold, I think Diageo historically would have looked at it and said, look, the percentage margin is too dilutive do we really want to play here? I think I heard before I joined, I heard Nik talk about this phenomena a couple of times for Diageo. If you look at it through the lens of a cost per serve, you see a completely different mechanic, right? So this is -- an RTD is a more expensive way for consumers to have a simple cocktail than it would be if they were able to buy a larger pack and make it themselves. But it's also cheaper than it would be to buy the same drink in a pub and therefore, given the out of pocket, they choose to go there and they can take it where they want. So those things are changing, Pierre, and we need to change with it. Actually, when you look at the profitability of that serve, it can actually be accretive versus the large pack. And therefore, we might need to think about our metrics slightly differently because I was taught very early in my career that you don't take percentages to the bank, you take cash to the bank. And so I'll be looking at total gross profit. And in parts of our portfolio, I think we might need to change the lens that we look at and how it is we think about shareholder return. But I don't think that, that is a precursor to a massive change in what I would consider to be the core spirits market. More to do. You'll see this come to life as we think about the strategy going forward. I don't think you'll see something which you and I would consider to be material, but I think you'll see some sharpness as to how we think about the portfolio and how it is we activate the portfolio in a way which generates return for our shareholders in a way that we've not had in the business before. But I'm not [ precursoring ] a massive change in the spirits market given where your question started. Anything to add...

No. All good.

We take one more.

Our last question today comes from Edward Mundy of Jefferies.

So I've got just one question, which hopefully brings together all 3 priorities, Dave. So the 3 parts. So the first part is around your first priority, which is competitive category and brand repositioning work. Can you do this without increasing A&P? In other words, is the quantum of EBIT that you would expect from this also higher? That's the first part. The second is on the customer piece, the shift from growing through your customers to growing with your customers. Does this cost money? Or can you also do this through shifting around your enormous trade spend, GBP 3 billion bucket and also a pretty big A&P ticket? And then the third part which is back to the redesign of the operating framework. And if there is more investment, can all this be funded by this new potential operating framework redesign?

Nice to hear you again. And a very clever way of getting 3 questions into one. I like that. Look, I think when it comes to category and brand, I think you can think about Diageo historically and you think about premium, you think the only way to grow brand is A&P. Actually, when you think about category portfolios, there are very, very different ways of thinking about how you build brands. So I don't think you should necessarily read category strategy and read an increase in A&P. I think actually, when you're looking at price points, which are different from premium, it's much more about investing in price on shelf and position and other things rather than A&P. So no, I don't think a category brand -- a more category-driven approach leads you to a place where you spend more A&P. I think you have to be a little bit more dextrous about different support models for different brands in different price positions. I think when we talk about growing with our customers, the whole idea here is you're opening new value. We used to talk when I was a customer, which is if the relationship with a supplier is that the size of the cake is constant or is getting smaller, all that happens is you argue over the divvy up of the cake. When you start growing with your customer, you make the cake bigger. It makes the conversation so much easier to have -- and that's why if you go back to the chart, I talk about growing our customers category and gaining disproportionately from that growth. That's where we both grow together. So yes, will it mean that we think differently about how we invest some of that money? Yes. Do I see some pockets of spend, which actually are not working for our customers and for ourselves and we repurpose? Yes. We have to work that through, but I'm not seeing that being more customer focused is going to be more expensive for us. And actually, in terms of the back office, I can see ways of actually making it leaner, quicker and I say even more efficient than today. Look, I don't want to pretrial the operating framework too much. I've said that there are opportunities for us to be more cost effective. I think that's true. I think Nik had identified that with the Accelerate program. What the operating framework is designed to do, first and foremost, is how do we make Diageo a much more competitive organization than it is today. That's about capability. It's about speed. It's about agility. Yes, it's about cost. But I don't want it to just be about cost. I want to take 30,000 Diageo colleagues on a journey of how it is we make this business truly competitive again. That's the way that we'll think about it. Obviously, if there are opportunities to make it lower cost, we will take it. But I'd like you to think about that as an enabler of competitiveness rather than a way of reducing cost to invest back in the business. Look, ladies and gentlemen, I'm getting the hand across the throat. That's the -- obviously the end of the time. Thank you very much for your questions. Thank you very much for investing the time in Diageo. I really do appreciate it. Clearly, this is the start of a journey for me and a new team. We're clear about what the immediate priorities are. We're confident about the medium and the long-term future. We've taken with the Board support, some big decisions just recently. They give us the space to invest in the [ turnaround ], and that's important. The onus is now on us to share with you the detail of that. Please, bear with us. Give us a little bit of time to be able to rethink that. But we'll share it with you as soon as we have it. And with that, I look forward to seeing, I think, some of you, if not most of you this evening in the Diageo office. So thank you very much indeed. Have a good day. See you later.