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Hello, and welcome, everyone, to the Diageo plc Fiscal '26 Q3 Trading Statement. My name is Lucy, and I'll be coordinating the call today. [Operator Instructions]. I will now hand you over to Sonya Ghobrial to begin. Sonya, please go ahead when you're ready.

Thanks, Lucy. Good morning, everyone. Welcome to Diageo's Fiscal 2026 Q3 Trading Statement Call. 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.

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 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, which can be found on our website. For those listening, we'd like to ask a question, please use the dial-in details included in today's press release. Also, if I could ask if you could limit to one question per analyst, we can hopefully get round to everyone. First, let me hand over to Dave for some brief opening remarks.

So, thank you very much, indeed, and good morning, everybody, and thank you for joining us today. I'm joining the call from the States, Sonya and Nik are in the office in London. And before I pass over to Nik to take us through the trading update, I want to say a word about the upcoming Capital Markets Day. You would have seen in the release that we're intending to hold the Capital Markets Day on the 6th of August in the office in London.

The work on the strategy update is progressing well as is the redesign of the operating framework. There's lots of work for us still to do, but we're confident that we'll have that complete and ready to share with you on the 6th. So the plan at the moment is in the morning, we'll do a short full year trading update. And then in the afternoon, invite you into the Diageo HQ and share with you that strategy update and any of the redesign of the operating framework. So with that, Nik, I'm going to hand over to you for the Q3 trading update.

Great. Thanks, Dave, and good morning, everyone. Thank you all for joining us today. I'll walk through our results for fiscal quarter 3 of '26, and then Dave and I will answer any questions you might have.

So let me start with a quick overview of the top line trends. In the quarter, organic net sales were up 0.3%, driven by a volume growth of 0.4%. We saw strong growth in Europe, LAC and Africa, all up at least high single digits, aided in part by the timing of Easter and sales into the trade as they get ready for the upcoming FIFA World Cup, particularly in LAC.

In North America, organic net sales declined high single digits, reflecting continued U.S. spirits weakness. Asia Pacific net sales declined slightly with weakness in Chinese white spirits, offsetting low single-digit growth in international premium spirits and some benefit in the region from the later timing of Chinese New Year.

Our progress towards increasing financial flexibility and strengthening our balance sheet continues. We saw continued momentum with our Accelerate program and are on track to deliver circa $300 million of savings by the end of fiscal '26. The announcement in March of USL's sale of its Royal Challengers Bengaluru Cricket Club as well as the expected completion in the second half of calendar 2026 of the disposal of our EABL shareholding in Africa will support our focus on deleveraging. Our guidance for fiscal '26 is unchanged from what we shared in February at the half year results.

Now moving to reported net sales. This was up 2.3%, with a notable impact from the positive hyperinflation adjustment, which was partially offset by the negative impact of disposals, including Guinness Nigeria in Guinness Ghana Breweries and the limited impact from foreign exchange. As indicated earlier, organic net sales growth of 0.3% comprised of positive organic volume growth of 0.4% and slightly negative price/mix. Notably, price/mix was largely positive across all regions with the exception of U.S. Spirits and Africa.

Now getting into some detail on net sales across the regions. In North America, organic net sales declined 9.4% as a result of soft market conditions and the need for a more competitive offer. This decline was largely due to U.S. spirits down 15.4%, weaker than depletions declined by circa 5%. As Dave communicated in our press release, actions are already underway to address this.

Although NAND price increase increased by 0.5%, this was driven by a one-off item in Canada relating to a favorable resolution of a commercial terms agreement with our largest customer. Our underlying NAND price/mix was negative largely due to adverse U.S. spares mix. U.S. Spirits net sales were impacted by lapping tough comps last year due to the pre-tariff pull forward of imports to distributors as well as tequila restocking. We did, however, also see some shipments benefit from distributor buy-in ahead of FIFA World Cup.

Tequila declined double digits, driven by tough comps from prior year, competitive pressure and continued category softness. Diageo Beer Company, net sales grew 9.1%, led by both Smirnoff RTDs and Guinness, which continued to perform strongly. Europe saw a positive impact from Easter timing, growing organic net sales 8.8%.

Of note, the continued strength of Guinness -- in Guinness -- of Guinness Great Britain and Ireland and good performance across spirits, which was led by MENA, Central and Eastern Europe and Turkey. Asia Pacific organic net sales declined 0.8%, driven by weakness in Greater China, with some performance benefit from the later timing of Chinese New Year, as I indicated earlier.

In Greater China, Chinese white spirits declined just over 20%, reflecting reduced consumption primarily due to market policy, impacting the region's net sales by circa 3% and group net sales by 0.6%. India was impacted by the Maharashtra excise tax increase. Excluding Maharashtra, India grew high single digits. LAC also benefited in the quarter from the buying ahead of the FIFA World Cup as well as Easter timing to deliver organic net sales of 16.2%. Scotch performed well across multiple markets, and Brazil led the growth of RTDs.

Finally, Africa delivered solid 17.1% organic net sales with double-digit growth in both East Africa and Southwest and Central Africa. Innovation with Kenya Cane was also a positive contributor as was Smirnoff Ice in South Africa.

Moving to our outlook for 2026. We reiterated our fiscal '26 guidance shared with half 1 results, namely for organic net sales down 2% to 3% and organic profit growth flat to up low single digits. We continue to expect free cash flow of circa $3 billion after exceptionals related to the Accelerate program but before an approximately $100 million one-off adjustment for inventory build at year-end to cover implementation of the S/4 HANA ERP system at the start of fiscal '27.

The other financial guidance for fiscal '26, which is also unchanged, can be found in the appendix of the slides. As Dave said in today's release, we are mindful of continued geopolitical uncertainty, including the impact of the ongoing conflict in the Middle East on energy, supply and distribution. As you would expect, we continue to monitor developments here, and we will ensure that we do the right thing to protect our business and build further resilience for 2027.

This could include the buildup of additional inventory through advanced production and shipment of business-critical SKUs. Finally, whilst we welcome the news on scotch and tariffs, this will likely have minimal impact, if any, on fiscal '26 and is more relevant to the next year. With that, let me hand back to the operator to open the line for your questions. Thank you. Operator?

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

I wonder if you could talk a little bit more about some of the actions you've been taking perhaps since the H1 results when we last properly met to put the group on a thermal footing, especially perhaps in the U.S., I mean you say in the statement, Dave, that there have been moves to make the business more competitive and those moves are underway. Where have you taken perhaps further price reposition action on Casamigos in recent months? And is there any early data on the consumer response to those moves that you can share with us at all, please?

Yes, sure. So I mean I think if you look at it, it's very much in line with what we've been referring to, which is really being able to continue testing the elasticities on Casamigos. As we had indicated to you, we have already initiated some of that work in Florida with positive results. And across a number of the states, particularly where we want to be able to test this through the cities in which the World Cup will be taking place we're initiating actions there as well. The early results are clearly positive. We will continue to monitor that. Remember, these take some time before they show up on shelf but we will continue to monitor those as we go forward.

I think the other piece would continue to be around how do we also look at the entry point tequila of Astral. And how do we also ensure that we've got the right price tiering with Don Julio as we bring the Casamigos pricing more in line as well. So a number of moving parts, but one that we feel is the right approach to give us some good early indications, and you'll see much more of that continue into '27. Dave, I don't know if you want to add anything on to that?

No, Nik. I think that's right. I think we said at the half year that we knew that it would take us a little bit more time to have the impact in North America that we wanted to, where we can be surgical. We've been surgical, and Nik talked about that mainly around Casamigos and the World Cup. I think there's a deep piece of work going on to understand the underlying competitiveness of the business, and that -- we'll share that with you when we update the strategy.

The next question comes from Celine Pannuti of JPMorgan.

My question is on the outlook. And obviously, Q3 has come with a better-than-expected results, but as well with moving parts, including Easter. You mentioned that Nik and FIFA and I don't know whether there was some sell-in as well in Middle East. Is it possible to have an aggregate view of our value of what the impact has been on Q3 and what you are making for Q4 when you decided to reiterate the outlook and maybe my question is underlying performance.

It seems that the U.S. you are still seeing challenging market. But outside of the U.S., do you think that the overall momentum in the market has been better and whether that as well could have a bearing on Q4 performance?

Yes. Celine, listen, obviously, a lot of moving parts. So I'm not going to quantify what that phasing impact is. But clearly, you can see that with our reiteration of the guidance that we feel strong about the continued momentum, as we've said, in Europe, LAC, Africa, whether the underlying fundamentals outside of the lapping issues and/or the phasing issue continue to be strong.

And I don't think this is a continuation of what you've seen through the first half as well. Clearly, U.S. more challenged. And as I think Dave just mentioned as well, we will reveal a lot more beyond just Casamigos and tequila in terms of how we're thinking about a U.S. market positioning with a more competitive offer as we look forward and more of that will come in August.

Listen, I think the positive is we're still trying to manage what we can manage and control within the U.S. And I think the call-out I would make to you, which is a continuation of what I had said at the half year, our depletions are tracking ahead of what we're trying to do with net sales. So we're also trying to make sure that we're managing our inventory levels into distributor. Obviously, clearly, the outsell from retail is a little more challenging given the softer consumer environment, but one that we will continue to monitor.

So overall, I think we're continuing to see good momentum, as I said, in rest of the world, Chinese white spirits, you will see that normalization just given what we'll be lapping as we look forward. And U.S. will continue to talk about a more competitive strategy when we update you in August.

The next question comes from Mitch Collett of Deutsche Bank.

Just a quick one on the factors that would see you land towards the top or bottom of the range for guidance, both on sales and operating profit, given, I guess, you've got 1 quarter to go on organic sales and obviously, a whole half for operating profit. What are the sort of factors you're looking at that would see you land towards the top or bottom end of your guidance range?

I think if you step back, it's kind of unchanged from what we had talked about, right? We had talked about the fact that we had good Guinness capacity coming on stream, and you're seeing that in terms of is continuing to play out in terms of the strong performance into Q3, and that will continue into Q4 as well.

I think FIFA World Cup is critically important. I think as Dave has mentioned before, this is the first time with spirits producers really supporting this, and we want to make sure that we've got the right plans in place across North America and LAC but also rest of world because I think this is -- after a while, you're seeing 2014, I think, was the last time in Brazil, where you had the matches being and during this period of time with the time zone differences.

But clearly, I think that would be another element that we would be tracking that could have an impact on the performance on the top line. From a profit perspective, I think as we've indicated, the Accelerate savings continue to support. And if we continue to see positive mix coming through, particularly from some of the LAC and NAND activations on FIFA that will clearly have an impact as well. But I think more importantly, let's just step back and say, we feel good about our ability to deliver against the guidance that we've indicated.

The next question comes from Sanjeet Aujla of UBS.

Just going back to the U.S., where are inventory levels versus where you'd like them to be at the end of the quarter? And should we think about that shipment versus depletion gap widening as we go into Q4? Or is that what's embedded in the guidance?

I would say to you, Sanjeet, when you look at it, I mean, clearly, if you remember, even through half 1, our depletions were tracking ahead of shipments. And you can see that gap actually having increased back to what we had said. We want to ensure that we end the year with the appropriate levels of inventory in trade. Again, we can't manage, obviously, the full sellout through retail. But I think you would expect to see that similar level that's been baked into our full year guidance.

The next question comes from Edward Mundy of Jefferies.

I appreciate we'll probably have to wait until August for a bit more detail, but I'd just like to pick up with a comment around sort of deep work going on around the underlying competitiveness of the business. Is that a reference to some of the initiatives that you're taking on the portfolio architecture, execution, broadening in the parts of the industry, you're not currently playing in? Or is that more a comment around making the business more efficient?

And my question is, if part of what you're trying to do will require more reinvestment, will additional savings be able to offset that potential reinvestment? Or will one be greater than the other when you think about the scale of those 2 things.

Thank you, Edward. Look, to answer all of those questions, we wouldn't need to have the Capital Markets Day. So look, the way that we think about this Edward is we're taking a step back. We're taking a step back across the world and looked at all of the regions and all of the categories.

And we've asked ourselves some pretty fundamental questions about what's driving competitiveness in each and every one of those categories and each and every one of those regions. So it's quite a fundamental piece of work that starts as it should do with the consumer, looks at the capabilities of the organization, looks at the portfolio and look, we gave you some indication of what the short-term priorities are in terms of sort of relevant brand and competitive category strategies, a different approach to how we think about customers.

And yes, looking at the operating framework to see if we could be more effective and competitive. That work is very much underway, shared increasingly internally, tested internally. We'll be ready to share that with you in August on the 6th. So the detailed answers to your questions, I will -- we will attempt to give that to you then, but the work is not complete. So not in a position to give you any more guidance than I'm giving it at this point.

The next question comes from Olivier Nicolai of Goldman Sachs.

First on Mexico, just wanted to clarify something that you put in the press release, but could you give us a bit of an update on the strategy and when you would expect things to turn around looks like Mexico was a drag on price/mix in the region and sales decline in Q3? And then secondly, since the last results, you put on John O'Keeffe in charge of the U.S. Could you give us a bit more detail on this mandate and the key KPIs?

Nik, why don't you take Mexico and I'll take North America?

So as you rightly called out, I think Mexico continues to see a more cautious consumer both from a sentiment perspective and their disposable income, which is clearly impacting the performance in Q3. Half 1 was helped by some easier comps, if you go back to what we had indicated, but this wasn't the case in Q3.

Now I think if you look at it from an angle of what we've been indicating, we need to have some price repositioning to ensure that we've got a more competitive offering. And this goes back to what we've been -- Dave has talked about, I've talked about. And in particular, one example that we've talked about in Mexico is really what we need to be doing with Don Julio Blanco to be playing in what is a large top line and profit pool at the right price points, which will both enable recruitment but also help us then up the ladder from a premiumization perspective as we build that brand equity.

So I think as we've been doing that, clearly, we see an encouraging set of shared trends. And there will be some lag before you see the full results. But I think what we're seeing from a share perspective in particular, is encouraging, and we'll continue to monitor that and provide you some more color on that, both at the half -- at the full year, but as well as Dave said, with that broader work that's undergoing across all regions from an angle of our offering, our competitiveness and where we have the right to win. So more to come on that. Dave, I'll hand over to you for you the U.S.

Thank you, Nik. Look, I think in -- we've talked already that North America is a softer market, and there's much for us to do in North America. In conversations with Sally, we mutually agreed it was a good time for us to make a change. So I put on record our appreciation for everything that Sally has done for Diageo in a time with us. And in nominating John, we take one of Diageo's most experience spirits executives into our largest region.

And his brief is exactly as I've articulated ours to you, which is to step back and have a full evaluation of our competitiveness, our capabilities within that North American operation. It's been an intrinsic part of the strategy exercise that's ongoing. And so yes, his remit is to step back and advise and guide us in terms of how it is we can improve the competitors in North America. And as Nik says, we'll share the details or some of the details of that when we meet you in August.

The next question comes from Richard Withagen of Kepler Cheuvreux.

A question on the World Cup. This is a bit of a first for you in terms of activation and so on. I think you've selected a couple of brands to focus on specifically. But can you sort of describe what are your longer-term benefit that you expect from the FIFA World Cup activation, please?

Do you want to go Nik? Or shall I?

Well, why don't you start, and I'll add in.

Look, Richard, it's the first time there's ever been a spirit sponsor of the World Cup, right? So it's not been done before. So in that sense, we're all going to learn something. I think, look, having been involved in intimately in the plans in Latin America, I think the relationship of football, our brands and all of the occasions that go with that feels like a very strong link, and we'll look at it in terms of the impact, both on brand equity and obviously, brand sales.

I think in North America, let's be honest, it's going to be a learning curve. We'll see how the World Cup goes in North America. The buildup to it, as I said, I'm in the states here, and I reviewed something yesterday, the buildup to the World Cup seems strong. But we don't know. There is no history in terms of how the brands will respond to activation, but we'll use the usual metrics in terms of impact on the brand equity and also the impact on both short-term and sort of medium, long-term sales. But North America, I think, is probably going to be a bit more of a voyage of discovery. I think we probably feel more confident in the reaction in Latin America, given what we know about the passion to football that exists in that part of the world.

The next question comes from Sarah Simon of Morgan Stanley.

Yes. Just a quick one on the Canada commercial dispute. Is it right to assume that, that will all drop to the bottom line because I think there's no volume. It's just a kind of refund or something? And also, was that kind of included, did you know that was coming when we gave guidance at H1?

Yes. So to your point on -- does it all just drop to the bottom line? Well, technically, yes. But having said that, we're also coming back to the point around wanting to ensure that we're taking advantage of where we have some opportunities to invest in advance where we feel that we can get a good payback, we would look at that. And so we're looking at it in the aggregate of what makes sense for the business as we look forward.

So that's where that is. Did we know that was coming? Well, obviously, we track what the -- a position might be, so we couldn't say with certainty where it was. But as I said, more importantly, it gives us some more opportunity to look at potential investment with some returns as we go into Q4.

The next question comes from Chris Pitcher of Rothschild & Co.

Can I just quickly follow up on Sarah's question and ask mine? I mean in terms of quantifying the Canada benefit, you talked about price/mix in North America being negative without it. I can't see any reason why the price mix in the first half would have improved, which would indicate it could be a $50 million, $60 million benefit. And I believe you had agreed with the LCBO or with Ontario to increase spending in the province. So it sounds like it could almost cover off that? Can I just clarify that?

And then secondly, or the question, on U.S. beer, we've seen improving momentum in the U.S. beer market and your beer business improved. Was there anything in that acceleration in the U.S. that was technical or phasing? Or are you seeing increasing momentum across both Guinness and Smirnoff?

So to the last question, yes, we are seeing increasing momentum and part of this is very much back to what we had talked about when we talked about second half, where we're focused a lot more on RTDs, and we'd indicated that would be happening. And positively, we are seeing that coming through. And Guinness, both from an angle of continued deep cultural relevance even in the U.S. as we're building out our Guinness brand as well as more capacity that's allowing us to supply more is supporting that.

So nothing technical outside of continuing momentum on that. From an angle of the question on the Canada piece, no, it's not that high. So I wouldn't give you an absolute number. but it is definitely a lot lower than what you're referring to. So yes, there was negative price/mix U.S. spirits. But I would say that's kind of what we've indicated with really the mix coming through from the spirits weakness as well as the category down trading within that space.

The next question comes from Trevor Stirling of Bernstein.

So just one question from my side, please. And this may be one we have to wait until August, Dave. But you talked in February about RTDs and there obviously been press reports about an increased focus on RTDs being one element of the strategy. I wonder if there's any sort of color you can give us ahead of August.

Trevor, I suppose the short answer is no, really. I think we stay with the position, which is -- we consider RTDs to be a growth opportunity. I think we would readily accept that we've been perhaps a little slow in addressing that opportunity. There's plans in place now, there will be even more plans in place as we go forward. But Trevor, I suspect as we go between here and December, just given the nature of where the business has been, there will always be, I think, little stories that will pop out into the U.K. press.

It's not going to be my intention to respond to each and every rumor that gets out there. That's not going to be helpful to anybody. I think also we'll be sensitive as we go forward about anything that we would consider to be competitively sensitive. So I'm not going to comment as we go through on any particular brand plan. That wouldn't be -- I don't think that would be appropriate or helpful even to Diageo investors. But we will give you a strategic overview and some real clarity when we see you in August.

And the last question today is from Andrea Pistacchi of Bank of America.

So a question on Europe, where you had a strong quarter. And I think even netting out the phasing effects, the performance remains very solid. Now beer is the key driver there. But just interested in your assessment of the situation from your -- from Diageo perspective on spirits in Europe and also how you see the competitiveness of your brand there, which tend to be a bit more mainstream than they are in the U.S.

Yes. So listen, I think clearly, as you've seen, the momentum on Guinness, particularly in Great Britain and Ireland, continues strongly. But I would also say with some of the broader portfolio play, Dave talked about that with MENA. I think we've also taken some actions in Great Britain as well as some of the other European markets we're playing in a broader portfolio at the right price points at the right price positioning on shelf to be competitive as well as support our customers.

So a lot more work to do, but you're already seeing the early signs of that coming through, which is a positive. And I think we'll provide you, as Dave said, more color on that across all the regions as we think about our competitiveness, our category and brand strategy and how we want to work with our customers to be able to drive a shared growth agenda and drive value for them and for us, so more to come on that. But I think scotch, tequila, vodka, I think we're doing the right things as we think about a broader portfolio play across the region, in addition, obviously, to Guinness.

Thank you. This concludes the Q&A session. So I'd like to hand back to Dave for closing remarks.

Thank you very much indeed, and thank you, everybody, for joining us and for your questions. I suppose the way that I would sum up is, look, there's some real encouragement in a number of areas. We've been able to make interventions in parts of the group and see responses quite quickly. We know that in North America that, that was going to take longer, and we consider that, that will still be the case. I'm -- particularly encouraged by the way that the team, the whole of the Diageo team is engaging in the strategic refresh and rethinking around how it is we can be more competitive and effective as an organization.

We'll share that with you in some detail when we meet in August. I think when half year, we said by the end of the summer. So we hope that by bringing it forward to the 6th of August, we'll complete all of your questions before you head up for your summer holiday. So with that, I thank you again for your time and your support, and we'll see you in August.

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.

Good morning, and welcome to the Diageo interim results presentation. As you know, it's my first results session for Diageo. In fact, this is my seventh week, and I'll share a few initial impressions and immediate priorities with you later. But first, I'd like to hand over to Nik to share with you the results of the first half of 2026. Nik?

Thank you, Dave, and welcome to Diageo. In the context of a continued challenging macro environment and industry backdrop in many of our markets, but in particular, U.S. spirits and Chinese white spirits, both organic net sales and organic operating profit declined 2.8%. Notably, excluding the impact from Chinese white spirits, we would have reported organic net sales down approximately 0.5% and approximately 1.5% growth in organic operating profit.

Europe, LAC and Africa delivered strong growth, but this was more than offset by NAM and APAC. Our focus on cost savings benefited organic operating profit but did not offset lower gross profit given the mix of market growth. This profit decline as well as lapping the impact of the disposal of our businesses in Ghana and Nigeria impacted our EPS pre-exceptionals, which declined 2.5%. Our focus on cash delivery continues, delivering just over $1.5 billion in free cash flow for the half year, but $164 million lower than last year due to adverse movement in working capital.

We have also declared a dividend today of $0.20 per share and at the same time, announced that we are moving to a dividend payout policy of 30% to 50%. This decision is not something that we have taken lightly, but one that we view as important in ensuring that we make the right decisions for the business for the long term. Dave will come back on this later.

Now moving to regions. The biggest challenge has been a circa 7% organic sales decline in NAM, which was driven by softness in U.S. spirits, especially in tequila, which declined approximately 23%, driven by both Casamigos and Don Julio for a number of reasons, including category down trading. Organic growth in Diageo Beer Company of approximately 7% and in Canada of just over 2% only partly offset this. I will provide more detail on this shortly.

In Europe, both volume and value growth in Turkey with double-digit growth in Johnnie Walker as we increased distribution and visibility. This was alongside Raki, which benefited from increased focus and new pack designs. Momentum in MENA continued as did growth of Guinness across almost all markets, particularly GB and Ireland. Across Europe, by bringing decision-making closer to customers and consumers, we are improving commercial execution and delivering some positive early results.

The continued impact of decline in Chinese white spirits adversely impacted sales in APAC with organic sales down approximately 11%. Excluding this, organic sales would have been up slightly.

In India, continued momentum in Prestige and Above segment brands and locally inspired flavor innovation on Smirnoff as well as format innovation on Royal Challenge, all contributed to strong results.

In LAC, we saw net sales growth in most markets, including both Brazil and Mexico. This was despite the impact in Q2 in Brazil of counterfeit alcohol incidents, which was particularly pronounced in the on-trade. More recently, we have seen a gradual recovery of consumer confidence in this market. Across Africa, we saw broad-based net sales growth across the region with strong double-digit growth in South Africa, driven by RTDs and also in Tanzania, driven by strong beer performance.

In the half, we grew or held total market share in circa 30% of markets measured by contribution to net sales. This result was clearly disappointing and was largely a reflection of performance in the U.S., which saw a 9 bps TBA share loss, which represents circa 35% of the total net sales value in measured markets.

Turning to North America. Pressure on consumer wallets and an increasingly competitive environment, especially in tequila, is having a marked adverse impact on U.S. spirits performance. Dave will come back and give you more context on this performance later, including specifically the pressure on ultra-premium tequila.

Our organic sales decline was almost entirely driven by Don Julio, Casamigos and Crown Royal. In the first half, tough comparatives plus an increasingly competitive tequila environment put pressure on results. This was exacerbated by both ongoing tequila litigation and media on additives and adulteration, two separate issues, but both negatively impacting consumer sentiment. We continue to view the litigation claims as baseless and are pushing for case dismissal in New York. We are also working with industry influencers to inform the narrative, and we are confident that our tequilas are crafted from 100% Blue Agave.

There was good performance on Johnnie Walker, driven by Johnnie Walker Blue and encouraging performance in smaller spirits brands such as Ketel One and Astral. Ketel One priced in super premium and with a consistent Made-to-cocktail platform activated at all consumer touch points, gained share of vodka and maintained spirits share.

RTDs and Guinness also delivered positive growth. RTD share gains were driven by Casamigos Margaritas and innovation from Smirnoff Sunny Days, which taps into nostalgic flavors and Smirnoff Shorties as well. Guinness gained share every week of half 1 fiscal '26 with continued participation in culture.

In APAC, performance was adversely impacted by weaker Chinese white spirits consumption as a result of market policy. Excluding Chinese white spirits, APAC would have reported slightly positive net sales growth. Additionally, and as we guided previously, we saw some impact across the region from the later Chinese New Year as well as the macroeconomic impact in North Asia.

I mentioned earlier that India delivered strong results from both core brands innovation and successful recruitment. Royal Challenge, Smirnoff and Johnnie Walker all performed well.

Finally, in APAC, although Guinness organic growth was impacted by the route-to-market changes in China and Australia, in the latter, the brand saw strong double-digit growth in distribution and record on-trade market share.

During half 1, we've made good progress with Accelerate with around 50% of the $625 million of total savings now expected to be delivered in fiscal '26. I have previously shared that these savings were expected to be greater in the second half, and consistent with this, we saw circa 40% of the total estimated savings in the first half.

Taking you through the main drivers, the majority of the Accelerate savings in the first half were in Supply Agility and cost efficiencies as well as through A&P, which I will come back to shortly. There were also some savings in overheads, but these were smaller and related to improved cost control in corporate functions as well as some headcount reductions.

On Supply Agility, we benefited from improved utilization rates, facility and logistics optimization and digital supply chain transformation, for example, using SIP, our Scotch Intelligence Platform. You will recall the other bucket we shared that would drive Accelerate savings was trade efficiency, which we have always said would take longer to come through. In the first half, we didn't see any savings from this as these savings are typically tied to renegotiations with our large customers, which are normally on a calendar year basis.

On A&P, let me start by saying that nothing has changed in terms of our commitment to investing in our brands for the future. However, we are committed to being more effective and efficient with our spend and being choiceful where we invest and where we may choose not to given the market conditions. Our tools such as Catalyst are helping us to do this and to maximize both ROI and volume. For example, during the first half, we pivoted investment towards Guinness in Europe and we reallocated investment from spirits to RTDs in Brazil.

You will have seen A&P spend down circa 10% on last year. Taking you through the reasons for this and consistent with Accelerate, we saw savings in A&P primarily from lower development costs, which were 15% of A&P spend compared with about 17.5% last year. I have shared some examples of the areas of savings on the slide. AI content using Virtual content studios, facilitating market customization at scale, procurement savings with improved rates and new contracts, Concentrated development spend on fewer, bigger opportunities, Johnnie Walker is a great example of this, which supported brand growth. And finally, smart media buying using allocation tools to maximize returns.

Let me now take you through the movement in net sales for the half year in more detail. Reported net sales declined 4% with organic sales decline and the adverse impact of acquisitions and disposals only partly mitigated by favorable foreign exchange and hyperinflation adjustments. Organic volume declined 0.9% as solid volume growth in Africa was offset by volume losses across the other 4 regions. Excluding the impact of Chinese white spirits, volumes were down approximately 0.5%.

Europe, LAC and Africa delivered positive price/mix with 1.9% decline at group level, driven mainly by the adverse impact of Chinese white spirits weakness in China and the decline in U.S. spirits, primarily due to tequila, as I talked to earlier. If you were to exclude the impact of Chinese white spirits, price/mix would have been broadly flat.

The negative impact from acquisitions and disposals was due to the disposal of Guinness Ghana at the beginning of the half and disposals of Guinness Nigeria completed in September '24 and Cîroc completed in the fourth quarter of fiscal '25. The positive impact of foreign exchange was primarily driven by favorable movement on sterling and euro, partly offset by adverse impact of the Turkish lira.

Turning now to the movement in operating profit for the half year. Reported operating profit before exceptionals declined circa 3.5% as lower gross profit and the movement in acquisitions and disposals was in part mitigated by lower marketing spend, overheads and FX benefits. Gross profit declined $324 million organically, driven by top line performance, adverse product mix, cost inflation and tariffs. Efficiencies across manufacturing, logistics and supply networks partly mitigated this with gross margin remaining broadly flat.

Lower marketing spend provided $178 million benefit to operating profit, which I talked to earlier. Overhead savings were largely due to lower indirect overhead costs given savings from the Accelerate program such as optimized IT costs.

Moving to cash. Free cash flow decreased by $164 million versus half 1 fiscal '25 to just over $1.5 billion, representing approximately half of the $3 billion guided to for the full year. This was because we lapped a very favorable movement in creditor balances in the prior year and also a lower creditor balance at the end of the half. Importantly, creditor days compared to prior year were broadly flat.

The cash outflow from maturing stock in the half was minimal as we continue to optimize investment in our mid- to long-term maturing liquid requirements.

Tax paid was lower due to lower operating profit and the timing of payments and net interest paid reduced, given both a lower effective interest rate and the capitalization of certain borrowing costs.

CapEx was approximately $590 million, a decrease of about $40 million on last year, reflecting a disciplined approach to investing in projects, including Guinness production, capacity expansion, supply agility and digital infrastructure. Our full year guidance for CapEx remains unchanged at the lower end of the $1.2 billion to $1.3 billion range.

EPS pre-exceptionals declined 2.5% on last year to $0.953, largely driven by the impact of lower organic operating profit and lapping the impact of disposals. There was also some offset from a lower tax charge and reduced minority interest. As previously guided, our exceptionals was significantly reduced versus fiscal '25 with details shared in the appendix.

Moving to the balance sheet. We closed the half with lower net debt of $21.7 billion, a small decrease compared with the balance at the end of fiscal '25. Given lower EBITDA year-on-year, our leverage ratio remained flat compared to June 2025. As a reminder, we have guided that the completion of the sale of our 65% shareholding in EABL, announced in December, is expected to delever our balance sheet by circa 0.25 turns, and we are making progress through the strategic review by USL of its ownership in Royal Challengers Bangalore. This is consistent with our guidance to delever and strengthen our balance sheet and increase financial flexibility.

Let me take you through our fiscal '26 guidance. Firstly, we have updated organic net sales growth guidance given further weakness in the U.S. We now expect this to be down 2% to 3%, which compares with flat to slightly down previously. As a result of this change, we've also updated our organic operating profit guidance, which is now expected to be flat to up low single digits. This compares with low to mid-single-digit growth before.

This includes the impact of tariffs, assuming a 10% rate on U.K. imports and a 15% rate on European imports as well as assuming that the USMCA exemption remains. However, we note that the recent ruling on tariff policy by the United States Supreme Court has increased uncertainty and potentially increased risk surrounding the impact of U.S. tariff policy, which we continue to monitor and have not updated our guidance for this.

Our tax, interest and CapEx guidance are all unchanged from what we shared previously, as shown on the slide.

Finally, on free cash flow, we have reiterated our $3 billion guidance for fiscal '26. As a reminder, this is after exceptional costs relating to Accelerate. However, it does not include an approximate $100 million one-off impact on working capital given inventory build ahead of the implementation of S/4HANA in early fiscal '27.

And with that, let me hand back to Dave.

Thanks, Nik. As I said at the introduction, I'm 7 weeks in. It's been pretty intense. It's been great meeting the team. I've had a fantastic welcome and the energy in the business is really very high and infectious. This energy is going to be crucial and a key requirement to the turnaround journey ahead.

In the last 7 weeks, I spent time in North America, in New York, Florida, Texas. I spent time with the whole Latin American team in Colombia, and I spent time in Europe, Middle East and India as well as getting functional briefings here in London. Obviously, the induction is not complete. We'll take 2 weeks out now for the results, and then I'll spend time in Africa and in Asia. We're looking to have an updated strategy proposal for the Board in calendar Q2 before sharing with the market mid-calendar Q3.

But the business moves on. And as Nik says, we face some challenges now. So I want to share with you a few first impressions before sharing three immediate priorities that will guide our endeavors before sharing with you any strategy revision.

I understand the commentary of TBA, but I'd like to focus where our business actually is, spirits and beer. Spirits, including RTD format, account for more than 80% of our sales, and if I add Guinness, we get to more than 95% of our business.

The spirits category is a very, very stable category. In fact, it's one of the most stable I've ever seen. Between 2010 and 2024, volume growth is around 13%. The significant feature of the market is the strong trend to premiumization. And Diageo deserves great credit here for seeing the opportunity and driving this trend. It was a fantastic strategy, and it developed a portfolio of truly exceptional brands.

And whilst I fully recognize that there are factors affecting this category and will continue to affect this category going forward, questions like GLP-1 and the attitude of certain sectors of society to the category, the core category drivers are still really stable. On the chart, you see the penetration frequency and the consumption profile for four of our key markets. And what you see is the penetration of spirits is really very stable. The consumption frequency of spirits is actually slightly increasing due to the different lifestyle that people now follow, a number of new occasions being in the places as people consume on the go.

But it's the serves per occasion where we see the change. And these fewer serves per occasion point to a pressure in the economics that our consumer groups are facing. So whilst they do not diminish at all factors like GLP-1 or the attitudes towards the category, at this moment in time, they show a very small impact on spirits consumption, but there is a challenge, which is broader economically.

To get under the skin of this, I've been asking the Diageo team to focus first on consumers how they live their lives before we even get to the alcohol category. And what you see is a very significant squeeze on disposable income.

If you look at the chart on the left-hand side and look at U.S. households, this is a basket of CPG staples over the last 5 years. And you see that the cost of that basket has increased by more than 25% and actually, the volume for that 25% increase is some 8% fewer items. There's a very significant squeeze for U.S. consumers, and that's before you start talking about the cost of healthcare and other costs that U.S. consumers are having to bear.

A slightly different study in the U.K. looks at discretionary household expenditure and you see the increase in the costs around the essentials, be that housing, fuel and power, transport and essential food and nonalcoholic drinks. There's a change in profile also in terms of discretionary effort. And what you see is that in our category of alcohol, the spend is flat. It's not down, it's flat. And whilst there's been inflation in the category, it's that consumption level that I talked about earlier in terms of serves per occasion that is the dynamic behind that flat. But we need to recognize that the discretionary spending power of consumers in key markets is under some pressure.

Looking at that a little more, if we start on the right-hand side of this chart, we look at the North American market, the U.S.A. market by age. Young people, LPA to 34, penetration of spirits is actually slightly increasing. The frequency is also up as people change their lifestyle, but the serves per occasion is dropping. And this is mainly due to the economic factors I talked about before. So on the left-hand side, we try and recognize that there are a number of things that are impacting our category. By far and away, the strongest is those pressurized consumer wallets.

Yes, there is some moderation in drinking and there is some impact from GLP-1s, but it's small when you think of spirits specifically. We need to keep an eye out on the emerging substitutes. But as we speak today, at a global level, these are a small impact on the category.

So if that's the category, how have we done in this very stable space? The chart shows you Diageo's market share, again, going back to 2010. And with all of that drive in premiumization that you know about, our core share of spirits is up 118 basis points to 16.7%. However, if I include RTDs, then our share of total spirits has come down by 46 basis points. The majority of consumers come to RTDs with the same motivation of spirits. They appreciate the convenience, the consistency and the control and very importantly, the lower out-of-pocket expenditure that accompanies those purchases.

So we have very stable shares in a very stable spirits market, but with a premium portfolio, which over the last 5 years has relatively got slightly more premium given the price mix changes illustrated on the bottom of the chart.

So if we look specifically at the U.S. market as a key example. The chart looks at the percentage of the market sold at each price point and compares the Diageo portfolio contribution. So for example, in the U.S. spirits market, 21% of the market is sold in units $45 and above. For Diageo, that percentage of our portfolio is 31%. In tequila, the concentration is even more significant. 35% of the market is above $45 and for Diageo, that's 70%.

As a consequence, in the mass market part of the portfolio, we are significantly underrepresented. This is both a challenge and indeed an opportunity. The final thing I would pull out of this chart is to look at the sales below $10. This recognizes a growth in small packs. And again, as economic pressure has found its way into the U.S. category, we see a down trading to smaller pack sizes. And here, if you look at U.S. spirits, 9% of the market is now in those pack sizes, but Diageo's portfolio is only contributing 5% from that particular segment. Again, an opportunity for Diageo.

If we move to RTDs, this is an increasingly relevant role in the spirits socializing occasion. On the left-hand side, significant to see how Diageo, who created this category with the launch of Smirnoff Ice circa 26 years ago, drove a very significant share, but a lot of focus on RTDs since around 2008 means that we now have a share of RTDs, which is below 10% from a high of more than 25% at the time when RTD share of the spirits market has increased significantly and is now around 15%.

If you take those RTDs and see where the growth is coming from, you can see that of the $8 billion of growth between 2021 and 2024, 50% of the growth is in the higher ABV ready-to-drink segment. Again, giving some illustration of what it is, is happening in terms of attitude to alcohol. Young people are choosing RTDs, but they are choosing RTDs with higher ABV, which gives some indication of their attitude towards this category. We believe that there's a very significant and profitable opportunity for Diageo in RTDs, but we have work to do.

I'd like to talk a little about Guinness. This is a brand I thought I knew from the outside of Diageo, a brand that I respected and admired. I thought it was a phenomenally strong brand before I joined Diageo. Now I can see it from the inside, it's even stronger than I thought. It's growing very strongly everywhere. In North America in the last period, it's grown by more than 15% and is the fastest-growing beer brand in North America. Its historic return on invested capital is very high.

But you see from the chart on the right-hand side that we are geographically constrained. Eight markets are more than 85% of the business, and if you try to buy a pint in London, you also know that we have some capacity constraints, too. This capacity and geographical constraint is an issue that we need to address and quickly. But please be in no doubt what a phenomenal asset I think that Guinness is.

So with that simplified overview of reflections, I'd like to share my thoughts on our immediate priorities. Immediate priority #1, Competitive Category Strategies, winning with relevant brands. Now I've chosen these words very deliberately, Competitive Category Strategies.

Diageo is known for its focus on brand. I want to keep the focus on outstanding brands, but I'd like to add the category lens. It's how our customers think and buy. It's how our consumers navigate their off-trade purchases, and it's the lens through which we can focus and leverage our innovation resources.

Relevant brands because I believe there are some proposition spaces that are opportunities for Diageo, but it's also relevant through the lens of price point. And that's particularly relevant given the economic backdrop that I've shared earlier. So we'll continue to invest in the premium portfolio, being no doubt, the premium portfolio is a massive asset. We will continue to invest in it. But we will also, in addition, explore new portfolio opportunities that might involve some price repositioning, and it might open up new proposition spaces.

In addition, we need to sharpen our price pack architecture and particularly address the opportunity that I've already referred to in the growth of small packs. The idea is that we build truly competitive category strategies. And I'd like to illustrate one of those by sharing an example from the Middle East. This is the market UAE. The team in UAE have been thinking about how it can serve all consumers in one of the markets which has really quite a strong premium consumer and brand portfolio already.

Let me briefly explain the chart. What you see is from left to right, all of the brands in the UAE market. The shaded columns relate to the volume of that brand within that market and the red line is their price positioning per liter. What you see is in the from and to, that actually what we've done, what the team in the UAE has done really very well, is introduce new premium offerings, Johnnie Walker Black Ruby and Bulleit to show two on the right-hand side, but also a small repositioning of price on Johnnie Walker Black Label and Red Label, but a significant repositioning of the VAT 69, Black & White and J&B Rare brands against a more value-based opportunity.

So what we do with this portfolio is we appeal to reach and service the broader consumer universe within that market. And whilst the percentage margin of the portfolio in today's portfolio is slightly dilutive to that which we had before, the absolute quantum of gross profit is significantly higher. Put it another way, whilst the percentage margin in the new portfolio is lower, the value creation for shareholders is significantly greater in that new portfolio.

Immediate priority 2, customer, customer, customer. If there is one surprise over the last 7 weeks, it's the low level of investment in how we build and execute our business with our customers. In the on-trade, we know that this is key to how we build our brands. Our capability here was dismantled understandably during COVID given the closure of that sector. But our build back has been slow and patchy and therefore, leads to an opportunity. I've seen the power of this done exceptionally well in Latin America and the Middle East, but we need to build that capability and invest in it around the world.

Our customer service in the off-trade is frankly really very poor. I've shared with you here the customer service levels I experienced in North America, Latin America and the U.K. and they really are not acceptable. When we're looking for growth, the idea that we can't service the demand that's there is both a source of significant regret, but it's also an opportunity for us.

A big part of this is Guinness and the capacity constraint I talked about earlier, but it's not all. And the systems and processes that we have in place that facilitate the engagements with our customers, frankly, are just not fit for purpose. And if I told you that 60% of all the orders that Diageo enters are entered manually, it would give you some semblance for how developed those processes are. We need to address this. We need to start to build joint business plans for the development of the business, but also the execution of the business. And ultimately, our approach to our customers must be that we grow our customers' categories, and we look to gain disproportionately from that growth. We grow with our customers, a significant opportunity for Diageo.

Immediate priority 3 is the redesign of the Diageo operating framework. Feedback inside of Diageo is really very loud that we could improve the clarity of our operations, global, regional, local, clear accountability, clear responsibilities, there's an opportunity for us to be clearer. That clarity will help us in our agility. A lot of the time cycles inside the business are not quick enough, and there's an opportunity for us to design a much more agile Diageo operating framework.

And when I look at it from an effectiveness point of view, also, there's an opportunity for us to be better. That effectiveness is either in the output and some of that you've seen in what I've said around our engagement with customers. But if I was also to talk about our innovation process, I would say that we have a lot of very small projects, and there's an opportunity for the effectiveness of the innovation part of our business to be significantly more impactful.

There's also an opportunity more effective in terms of cost. And again, I've given some indication of that in the customer space, but there are also other areas of the business where I see significant cost opportunities. If I give you a small example, I was in India recently and saw that the cost of running the payroll system for Diageo with circa 30,000 employees is 10x more expensive than my previous place of employment that had more than 15x that number, gives you some idea of the opportunity.

But we're redesigning the operating framework also to identify and invest in the differentiating competencies that will drive a more competitive Diageo. We need to build, sharpen and constantly invest in a competitive edge. And we'll do that by always being very disciplined about how we deploy our capital. Those of you who know me from my Tesco days know that I take this responsibility really very seriously.

So overall, the opportunity to redesign the Diageo operating framework is through the lens of how we can build a more competitive organization that is focused on shareholder value creation.

So in summary, I find Diageo to be a very strong business with an enviable position and lots of energy. The market provides significant opportunity, but we have some significant work to do. We'll start by focusing on the portfolio and the category strategies, our customer relationships and our operating model.

It's true the spirits market has some headwinds, principally economic, and there is also a small impact from GLP-1s and changing lifestyle. But our leadership position is strong and there's ample room to grow. And we will go on this turnaround journey by maintaining very strong capital deployment discipline.

On this last point, let me say a few words on the Board's dividend decision. Firstly, this is not an easy decision to make, but we believe it is the right one. The North American market is challenged. Our portfolio needs some time and investment to make it more competitive. At the same time, we need to invest in our business, specifically Guinness' capacity and capability investment. We want to do both of these things and strengthen the balance sheet.

We will make disposals if appropriate, but we will not sell brands cheaply.

All this leads to a change in the dividend policy. It gives us the space we need to turn around the business and the optionality around capital returns to shareholders as this turnaround unfolds.

Thank you very much for your time and look forward to your questions later.

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.

Good afternoon, everyone, and thank you very much again for joining us for this afternoon session. I'm very happy to have Nik Jhangiani here from Diageo joining us.

So Nik, thank you for coming to the conference this year.

Cheers.

Yes. We've got these lovely Ritual drinks in front of us. So...

Yes. We served them all day yesterday, I think, starting at 8:10, and that's the beauty of a nonalcoholic product. There's no real cocktail hour that you need to wait for to start drinking them. So if you haven't tried them, please go out and buy some today.

Okay. So you've been at the company for about a year now. So how has that measured up to your expectations?

How has it measured up to my expectations? I mean, I think, listen, I joined Diageo for what I have truly seen, which is amazing iconic brands, amazing marketing and brand building capabilities, I mean, I think, unparalleled scale and reach both from an angle of the size of the markets and the categories in which we play, but also from an angle of just our geographic diversity of where it is. And all of that's been incredible. And that's really been supported by amazingly passionate people who truly love the business, love the brands, love our consumers.

But on the flip side, having come in from the Coke system and spent more of my time on the bottling side of the business, it's also incredible to see where we don't necessarily have, in my mind, the same degree of love and passion, and I'd link it to our customers and our commercial execution capabilities. And I think that's a big opportunity when I look at Diageo. I also look at it from an angle that says it's a really interesting time to come into a company where clearly there is a lot of noise. I didn't realize that I'd spend my whole first year in every kind of conversation, be it with investors and with friends and with family, around structural versus cyclical.

And Laurence and I were joking, I probably wake up in the middle of the night saying, I don't know. But it's something that I just never expected to have dominate the conversation so much. But it is interesting when you then start getting into it that says there are clearly trends and indications of stuff that's been around for a number of years. So potentially, is this cycle taking us longer for a variety of different reasons that, I believe, and we can talk about those potentially. But is that also some accelerated changes that have been around that might be coming more at pace? And do we need to be thinking about our business and our business model and portfolio with a slightly different lens without losing what is the beauty of what we have?

And I think that's the exciting part of coming in and being here a year and, in some ways, still being in that luxurious position of being that what I call an insider-outsider, where you've been inside long enough to have a view in a sense, but you're still an outsider where you're continuing to view and challenge because you haven't been there long enough that you've gotten kind of steeped into that culture or that environment or that category or that business, where you can step away and say something different. So that's where I am.

We'll certainly get to a number of those topics, structural, cyclical and portfolio and the like.

I thought I addressed it right there.

We're going to go a bit deeper than that, I think.

Okay.

But in terms of -- you've come up with -- new cost saving target has gone up from $500 million to $625 million recently. Where are you finding these cost savings? Where does the additional opportunity come from? And importantly, will it cost you anything to deliver them?

Yes. There's no such thing as a free lunch, so yes, it will cost us, but we'll come back and talk about that. So I think Diageo has been really good in terms of some of the work that they've been doing in the recent years around supply agility. And I think there continues to be opportunities as we look at our supply chain all the way from manufacturing through to logistics and distribution and how can we actually look and eke out dollars that are not necessarily driving growth and/or efficiency for us.

So I think that continues, but truly looking at it with a lens of what is actually dollars that are delivered to the bottom line as opposed to a cost avoidance element, which is important for us to track in terms of how we're performing relative to how the market is doing, but that's not necessarily real savings that come through. So I think for me, that's just a bit of a shift in terms of how we're looking at it and how we're communicating to the market around those opportunities.

The second piece really is when you look at Diageo, one of the strengths that they've had which you don't want to lose is you've got this real entrepreneurial way of working. So each of the markets in a way has had a lot more freedom to be able to go out and do what they need to do, which is great because you want them to be close to the consumer and the customer, and you don't want to lose that. But with that freedom also means there's almost been an opportunity for them to opt in, opt out and/or also, in my mind, I joke and I say, it's not just a menu that we offer. And they kind of say, well, I'll pick this and I'll pick that. It's actually they also have the choice of going off menu.

Well, what does that mean? Well, clearly, when I talked about one of the strengths and the scale that we have, why aren't we creating those capabilities at scale but still being able to have that flexibility at a local level? And that comes back to being clear around some of the decision and what gets done where, and what happens at a market level, what happens at a region level, what happens at a corporate or group level or a center of excellence or capability development. And that can unlock a lot of wasted resources and dollars because you're creating a lot that might just be on the margin different but not necessarily giving something that's so substantially strategically different. So I think that's the second bucket of work that we're looking at that will drive obviously some OpEx savings.

And then the third piece really is around the whole bucket of our trade investment and our A&P dollars, which have both grown at a very high rate. And in some ways, they've grown at a much higher rate than our NSV growth. And we've allowed that to continue happening because it was almost this vicious cycle around, well, I need to continue investing there to get the growth. And if I'm not getting the growth, I'll put more money in there, and I hope that the growth will come. And I'm not saying that we want to look at that and in any way cut what is the brand building element of it.

Because if I look at those numbers, you've got about $3 billion of addressable spend in trade investment. And if I look at the $3.6 billion that we spend in A&P dollars, only about 40% of that today, rough numbers, is actually spent on media scale and reach. Another 40% was being spent on commercial A&P, which is also linked to trade investment. And then we've got this big bucket of what was nonworking, which we've been working very hard at bringing down, and we can talk a little bit about that.

So I think it's really feeding more on the media scale reach piece through more digitization and digital media that we can leverage where we can track better returns and move quicker in terms of how we allocate those dollars to where the growth is and actually pull out inefficiency in these other buckets to be able to reinvest. So that's what it's all about.

And I think as we laid out the target of around $500 million, as we got deeper into some of the work and actually, in some ways, it was great because we started working with each of the markets around that, and they were able to think about unlocking more opportunity and, hence, the ability to take that number up. In terms of cost, I would say to you, circa $500 million over that 3 years to deliver that savings.

But remember, that would be an exceptional cost in our P&L, but that's very much included in my free cash flow guidance because cash is cash. I always joke, there's no exceptional cash and I can kind of pull that out. It's cash. So we will deliver the $3 billion, which is net of any of the cash element of that $500 million.

When we think about cost savings, I guess, as analysts, we, of course, like that and it's going to grow the margin and all the rest of it. But whenever I talk to people in the industry, there's a sense that the drinks world, the spirits world is a very relationship driven world. So how can you be sure -- like you mentioned in terms of the marketing spend, how can you be sure that when you take the cost out of the business, you still maintain that person-to-person relationships that are so important to the industry?

Yes. So it's a really great question because I actually think in the last round of the productivity savings that Diageo did back in '17 through '19, one of the areas that they cut the most was on the commercial muscle, okay? And if you look at what we've positioned and talked about is we do expect to see roughly half of those savings being reinvested. And I would actually tell you, that's around commercial excellence and commercial execution.

Now is it linked to more business development and feet on the street? Is it related to more tools that allow us to work with our partners to effectively drive better margin-enhancing growth, whether it's around the center of expertise for our GM capabilities where we can drive data and insights? That's where I see a lot of that going. So in fact, that's where I think we need to rebuild and actually gain back that strength because you're absolutely right. It is very relationship oriented. And that relationship should be that point of contact that's helping that outlet grow their business.

But it's also that relationship that has a better ability to understand what is happening at the consumer trend level through that outlook for the occasion and/or experience that the person who's coming into that outlet is there for. Because you don't expect each of them to build out their own shopper marketing or consumer kind of choice framework. That's what we should be able to bring to them. But that has to then marry up with how we actually brand build both in terms of digital or traditional media or scale and reach through influencers, et cetera, as well as how does it come to life at the point of sale.

Because I always say brand love is great. But if it's not translating into a purchase of my product, well, how good is brand love? So that's where we need to rebuild some of that muscle.

And I guess similarly on marketing spend, when I talked to your predecessors, there was a general sense that marketing was looked as you just want to get the return on the marketing spend you put in. There's no limit to how much was spent on marketing. There was no maximum and actually marketing spend has been increasing over the past sort of few years, well, around a decade.

How are you thinking about the sort of quantum of marketing spend that the business is going to be putting in? Do you have a set limit? Or are you looking at things like the returns that you're taking from that marketing?

Yes. I mean, I think, again, you have to step back and look at it. Are you looking at just the marketing scale and reach? Or are you looking at your commercial A&P dollars and what it's actually delivering at that point of sale? And you've got to look at it holistically. So I think the first thing we need to be focused in on is how well are we looking at it end-to-end and how well are we looking at it from the brand building all the way to the point of sale. And I think that's where we've not been as strong.

I think where we have to continue driving that cost down is on wasted commercial A&P that is not necessarily effectively going back towards shopper, consumer and/or customer if we want them to be our preferred partner of choice. And it's not just I add more discounts because I want to push more volume because I want to get it out there, but there's nothing really that drives to help activate that at the point of sale.

So I don't necessarily look at it as we need a prescribed number of dollars. We need to look at it firstly in terms of growth. We also need to look at it in terms of markets because not all markets are created equal. And what are the markets in which we see breakout growth or future growth potential versus what our value contributors today versus what our growth engines today, and how do we allocate resources within market, within portfolio, within channel end-to-end in a more effective way?

And I joke about the fact that we've got a number of brands. It's kind of like having a lot of children. But I don't each love all my children in the exact same way. Might sound terrible to parents, I'm a parent. But yes, but that's why I only had two so I could love them equally. But when you have the 100-plus, well, it's difficult to love them all equally. So we've got to go where the performance is and where the growth is.

I think one of the changes that we've heard from you since you joined a year ago was a focus much more on the dollar margin rather than the percent margin focus. What's this change all about? I wonder if you could sort of run us through what your thinking is there.

Yes. I think what I saw as I came, and I can give you a couple of examples of that, which is there was such an obsession with gross margin percentage that we were actually driving some of the wrong behaviors in the business, all right? So we were getting out of categories or businesses because the margin percentage was low. And I'm not talking about RTD, so I'll come back and talk about that in a moment.

I'm also talking about within, let's say, whiskey, because we were so focused on premiumization or because we were so focused on margin percentage, and that meant how much more can I premiumize, than I was forgetting or not focusing on what might be primaries or lower-aged liquid. And in some instances, I was actually selling off those brands where, if I came from the last place, I would kill and chop my left arm and leg off to get a business that had that type of gross margin. I'm talking about 65% plus as opposed to an arbitrary 70% being a measure. So it was leading us to the wrong decisions that we weren't going after the growth.

I'll give you another great example of that. We have a new GM MD who's gone into Mexico, and he was in GB. And we had spent a lot of time together in the U.K. market, just home market, and it was easy to go out and stuff for that. And we were chatting a lot around this margin percentage piece. And he got to Mexico. And he said, I've come here and I want to redo my whole business plan. And I said, tell me more. And he said, well, I've come here and we're just about to launch Don Julio Ceniza, but that sells at MXN 900 a bottle. But we are completely ignoring doing Don Julio Blanco because it sells at MXN 600 market and the margin is going to be lower.

The size of the Don Julio Blanco market is probably 10x as large as the Ceniza market. And more importantly, what have you lost by not playing in that profit pool? And opportunity to build the Diageo brand, Don Julio, right a Blanco, which naturally then leads to brand affinity. And if you've got a brand ladder, you can move people up, like we do with Johnnie Walker, for instance. That was a flawed choice because it was a margin percentage led kind of decision to be able to do that.

So that's why I kind of am turning that metric around because there's profit pools and dollar pools that we're not going after where the absolute growth is great and we have a right to win. And that's why I think, in some ways, that's very liberating for the organization who were told, well, you can't do it if the margin is going to come down percentage. Even though if we're focused on operating profit dollars and an outcome, if I'm growing my operating profit dollars at a faster rate than growing my top line, is clearly going to mean the commitment to leverage, which means an expansion of my operating profit margin and, over time, that will also allow me to get my dollars.

And if I'm focused on those elements of cost in the right way, does it really matter what my gross profit margin is, whether it's 69% or 70%, as long as my operating profit and what cash I take to the bank is growing? That's not to say margin percentage isn't important, but it's an outcome of you doing your business right.

No, that's very helpful. The examples are very helpful as well. Just want to go back to something you said at the beginning around portfolio. Because at the beginning of this year, you talked about substantial disposals and, of course, this have caused a lot of speculation in the world.

Intentionally.

Sure. But how are you evaluating the various parts of the business that could be thought of in this way in terms of their relative importance? Are there any criteria that you're putting on any brands or businesses that could be potentially looked at as disposals?

Yes. I mean, I think we've looked at it from the first lens that says if we're growing, and the largest part of our business is actually growing in the spirits world, okay? And yes, it's international spirits but it's not only about premiumization. Are there businesses that I have today that don't offer me synergies and/or growth opportunities for what is the largest part of my business?

And am I actually driving that business which actually could belong in the hands of someone else, and particularly, if it's a scarce asset, it might be something that a buyer universe would be willing to pay very attractive valuations for, which also then means I have the focus on what I'm doing? So I really see those are noncore, nonstrategic types of businesses. And disposing of those also allows me to focus where I'm growing but, more importantly, gives me that flexibility also on my balance sheet because I'm clearly not happy with where we're sitting from a leverage perspective.

But that's an outcome, again, as opposed to I'm doing it because I want to get to a leverage target because my leverage target should really be achieved by me doing the right things organically and growing my profits and growing my cash flows to allow me to delever. But this will support it, but it's being led by a strategic review. And I think as we continue to do the work around our portfolio being led very much by the consumer, the occasion, the experience and the choice that they're looking for, do we have the right portfolio going forward?

I think we largely do, but I think there's work that we need to continue doing. And are there areas that indicate, well, maybe this isn't a part of our portfolio going forward and/or do we have gaps that we need to think about? And that gives me more flexibility if there's either M&A and/or partnership opportunities that today I'm a little more strapped on given where my leverage is. Now if it's the right opportunity, I'm still going to go ahead and do that. But I'd clearly like to have a lot more flexibility.

So that's the way we've thought about it. And I think it's truly where we feel we can maximize value for Diageo and our shareholders but also allow us to get more focused, and that's what we're doing.

Okay. Well, I do want to talk about the structural/cyclical question as it's one that does dominate the....

At least you waited until about the sixth question.

Well, yes, we've got a little bit through. But I guess you've changed the tune, I suppose, from a lot of your peers within the industry talking about the effects of moderation on the industry. I think you've said it's largely cyclical but there potentially are some elements of moderation. I guess we don't take a hugely different view. But some of these moderation trends we have seen for, say, 15-odd years. I think some of our data suggest that anyway.

And what we've seen in terms of alcohol consumption is a very dramatic change over the past 3 years, really since the middle of the pandemic to now. Do you think there's been any real change in moderation over that period that could explain that really quite dramatic change? Or are you describing a more continuous -- well, a continuation of the moderation changes that we've seen over that sort of, say, 15 years?

Yes. So listen, the big debate has been out there, which then goes down to, well, so if it is not cyclical and it's more structural, what are those structural issues. And what are the ones we all talk about, well, or I get asked about? Well, cannabis, GLPs, Gen Z is drinking less and then, to your point, a continuation of moderation.

Now let's come back to the first three. But when you think about moderation, it's interesting because are people moderating because I'm more focused on health and wellness? Or am I more focused on how much I'm consuming and how I'm going to wake up the next morning? Are they also moderating because they just don't have enough money to spend and so they're moderating? That's still moderating. Now is that a trend that's a continued one or is that a trend that will reverse because that's linked to more of the cyclical or the macroeconomic issue? And is that probably a part of what's exacerbating what looks like a longer trend and a more dramatic falloff?

Because what ended up happening, at the end of the day, people were buying so much through COVID and at premiumized because they had a lot more money. They were buying better stuff and I wasn't going out and I wasn't traveling and all that kind of stuff. And then all the post-COVID issues hit from a supply chain issue, from a cost issue, et cetera. And what did everybody do? They started taking their prices up. And in some ways, I would almost step back and say, has the discipline been in place in the industry, and I would actually say led by Diageo being the leader, around taking pricing almost each year?

And I don't mean just a blanket I'm going to go out and take a 1% pricing each year and that's what's going to solve my problems. But it's actually back to this RGM capability and where is there elasticities or relative inelasticities for not a brand, but for an occasion or an experience that a consumer is looking for in a particular type of outlet? And how well are you taking advantage of that as your price and mix opportunities? So you get a lot more surgical around how you think about that. But let's come back to that because that's a capability that we need to build.

But going back to this then, it says there was such a large inflation element and people were already dealing with the fact that they had stock. Well, clearly things slowed down. And then when you're actually going to think about replacing that stock, well, you're thinking twice because you don't want to spend that money or you'll wait until you're literally down to the last drink before you go out and replace that. But you also start thinking about your cash outlay. So moderation just is coming through from a macroeconomic pressure perspective.

But the other elements are probably different. And there's probably one that's the one that I think we need to continue to understand more, which is what is the impact of GLP-1s on consumption. Now clearly there's been impacts on some categories. To date, we don't necessarily see anything of a significant impact on TBA other than potentially, within TBA, how are people consuming, but it's one that we need to think about. And that's the one piece that's different.

Because cannabis has been around for a while. And in fact, when we look at all the trends of what we're seeing and the research that we have across the states where it's been legalized and keeping aside some of these THC and hemp-derived beverages, actually, the majority of the consumption is co-consumption. So it's not like people are saying, I'm only smoking or I'm vaping or I'm chewing and I'm not drinking as well. So there's a lot of co-consumption going on. So I don't think that's a big issue.

I think this whole thing about Gen Z drinking less, I think, is an over-exaggerated piece because that's probably the cohort that is feeling the most pressure on their wallet. And that's not something that suddenly -- a structural change doesn't happen overnight. It's years. So I do think moderation is a theme. But it's not suddenly that moderation was pacing, and I'm making up a number, 1%, suddenly it's is gone to 10%. Now is that 1% going to be 2%? Or is it going to be 1.5%? Or is it going to be 3%? We don't know that.

But there is a real world of a continuation of moderation and perhaps maybe at a slightly higher pace. We don't know. Because we'll only know that once the economic elements kind of settle and people get back to more normality. But even when you look at the Gen Z cohort, we're talking about a group of people, some of whom have not even reached legal drinking age, some of who are in the earlier part of their legal drinking age piece and they're probably the most cash strapped. So actually, when people say it's all about health and wellness and the younger generations, all about health and wellness, I'll call a bit bulls*** on that.

There probably is, don't get me wrong. But it's not every one of those coming in is like suddenly become the healthiest person overnight. And that's all that they're focused in on. And actually, when you look at it, as they get into the large -- the higher age cohorts, there's probably a different level of type of socializing that happens. And then they'll probably get back to more normal levels.

But I almost step back in a way and I say, well, if there is a theme here, and even if it's slightly higher or even if it's at the same rate, is there something that we can tap into in terms of what we can offer from an angle of moderation? And we've been doing some research, and it's early days. But I guarantee you if we went around this room with over 100 people and we asked what moderation means, we have at least 15 different answers of what moderation means to that individual. Because moderation doesn't mean the same thing to me as it probably does to you.

And so the research, what we've been doing says, okay, in a world of moderation, well, what are you consuming? And I joke and I say, well, there's one end of the spectrum of people who say, well, I'm not substituting with anything. Well, those are the boring lot that none of you want to go out and party with. So at the end of the day, someone's going to go out and I'm just not drinking something. Well, kind of boring. So we'll keep them aside for a moment and we'll see how we can convert them over time. But we can only convert them if we offer them a great alternative where they feel that they might be willing to drink something.

But there are other ones who are drinking soft drinks, adult soft drinks, more premium soft drinks, functional beverages, hot beverages. So those are -- are there pools or opportunities there that we might be able to tap into? But there's also ones who are saying I'm looking for lower ABV products. I'm looking for RTDs and convenient formats because I'm drinking differently. There's ones who are saying, well, when I do drink, because I'm moderating, I drink premium, not more. So I actually will have my one drink, but I really go for that 1942 as opposed to two Blancos type of thing. There's ones who are zebra striping. I'll have one regular and have -- so everybody is doing something different.

Those are areas we can tap into more. But also I would say, that broader other occasion consumption that we don't play in today, is there something that we can do there? And that's how I want us to think about an opportunity set that in potentially a world of moderation, could we tap into that? And if all of this is all cyclical, well, I've still got my business that I want to continue growing, but not just on one vector, which is premiumization.

Well, it sounds like we're going to be in violent agreement around the structural versus cyclical arguments. But one of the other areas we do think about a lot and get a lot of questions on is, I think it's fair to say that Diageo is generally taking share within the U.S. market over the past few years. But that recent growth has largely come from -- it's not even just two brands. There's a couple of SKUs within the portfolio.

You've got Don Julio Reposado, which has been doing brilliantly. Crown Royal Blackberry, a recent innovation. And then you might also argue Guinness has been very helpful as well. But outside of those successes, there is a lot of the portfolio that has been struggling and is feeling the impact of the difficult industry. So how can you breathe life back into all of these brands, not just the few that are being very successful?

Yes. No, you're absolutely right. Listen, firstly, I think we should be proud of the growth that we've had and the market share gains that we've had because that's where the growth has been and we've been winning there. So I don't want to take away from that. But absolutely, why do I have a portfolio or why do I have 100 children when only 2 of my children actually smart and doing well and the other 98 are dunces? Well, that's not great.

And so either it comes back to, do I have the right portfolio? But if I do have the right portfolio that I'm thinking about from a consumer and an occasion-led perspective that is relevant there, why am I not utilizing that as effectively? So I think it does come back to stepping back and looking at, again, consumer occasion, experience led, what is relevant. And are we focused around execution then of that set of brands and/or category or sub-offerings within that for that particular channel and occasion? And I think that's where we need to get better.

And I think part of it has also come because of this element back to margin percentage and premiumization was the one vector. And that's great. But I've also got a great set of other brands in the premium plus and the mainstream core that actually have a role to play for what is actually a great consumer base that I might not be addressing. And I think we just need to look at it differently. So I think there's an opportunity as we look forward to be -- but that doesn't mean I do everything everywhere. So I've got to be more choiceful. And I think the U.S. team has clearly been focused around tequila but also building out a lot of expertise in whiskey because those are our two biggest brands and those are probably the two biggest growing opportunities. But that's not to say we won't do stuff on some of the others.

Ketel One is actually a great example of a brand where we've actually maintained, if not slightly gained share. And it's incredible because vodka is an interesting category and you've seen one of our competitors do extremely well over there. But we've done a great job in terms of bartender advocacy around Ketel One. And I think another thing that we're doing with Ketel One that's great is with some of these ready-to-serve cocktails and the Ketel One Espresso Martini that's being sold out, those are elements that build the brand as well. Bulleit is another example of that. And so we've got to continue looking at where these pockets of growth are too and how do we accelerate some of that too. So that's what we're focused in on, and that's what we'll be doing going forward.

And then I appreciate we've only got a couple of minutes left. But are you seeing -- one of the themes at this conference has been what's happening in the U.S. consumer. Are you seeing any signs of an improvement in the U.S. consumer as we sit here today?

I can't say we are. It's something that I would say we continue to track even from an angle of how is sentiment looking as opposed to necessarily buying because one links to the other. I think there's still a large period of continued flux and uncertainty. I don't think the tariff situation and everything that's going on there helps. I don't think, obviously, outside of the signaling of what might be happening from a rate cut perspective, it's really happened and how long does that actually take to translate into the spend power and/or sentiment that starts improving.

So for '26, for our fiscal, we haven't necessarily planned for an improving consumer environment, but nor we planned for a further deterioration in that environment either. And again, we remain very much focused on what we can manage and control for now, but also, at the same time, building out a more robust and inclusive growth algorithm that we can start leveraging sooner than later but, at the same time, do what we can manage and control.

Okay. Well, I feel we've only scratched the surface of what we could talk about. But you've been in meetings the last few days. And are there any questions you think we, as analysts, or the investment community should be asking you. What part of Diageo do you not talk about, do you want to talk about? Where should the focus be?

Well, I think, obviously, if you ask me, I think it's been an overfocus on this whole structural versus cyclical. And I do believe that the category is still very robust and very attractive. And I think there are growth opportunities in this that are just not being appreciated right now because of the uncertainty around this whole debate, is there truly much more structural versus the cyclical element. So I think that's probably an area that gets overindexed on.

I think the other interesting piece for me is really this whole debate out there around, in some ways and links into what could be structural if people bought into that, this whole no safe level type of piece that seems to have just garnered and gained so much momentum when clearly the science doesn't really support it. But you don't start rationalizing and reasoning with people from a scientific perspective only because outside of the scientific element, there's a social and a structural element of enjoyment and being together that's equally important. And we were talking earlier, at the end of the day, when that happens, it typically revolves around drink and food and stuff like that.

So I think the category is still very robust and has been overshone and overtaken by some of this. And as an industry, I think we can do a lot more to be able to manage that dialogue in the public domain space. Not so much with the regulators because I think we work with them. It's about what is that public opinion piece.

Nik, I could ask you questions all afternoon, but I really appreciate you coming and joining us at the Barclays Conference.

Thank you.

Thank you very much.

Appreciate it.

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

Good morning, everyone, and welcome to Diageo Fiscal '25 Results Q&A. I'm Sonya Ghobrial, Head of Investor Relations, and I'm joined this morning by Nik Jhangiani, Interim Chief Executive. Just to remind listeners on the call that in discussions today, the company may make certain forward-looking statements, including those that refer to our estimates, plans and expectations. Please refer to this morning's release and the company's U.K. and U.S. filings for more detail, including factors that could lead to actual results to materially differ from those expressed in or implied by any such forward-looking statements.

Hopefully, you've all seen in this morning's press release and presentation. For those listening to our webcast, who would like to ask a question, please use the dial-in details included in today's press release. With that, I'll hand the call back to the operator for your questions.

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

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

Thanks, Sanjeet. Great to be here today with all of you. On your first question, I mean, I think clearly, our focus in '25 was to get the inventory levels back to more normalized levels. And as you saw in Q3, clearly, there was a free tariff kind of buy-in, which we believe has largely been cycled through in Q4, but we will continue to look at that from an angle of how that might play out during Q1 as well. So -- but largely, we believe that has come through.

Clearly, we were trying to manage to get back to more normalized stock levels, and I think we've achieved that. And the team feels good about where we are from both local as well as imports. Clearly, just putting it back into perspective, we are planning for a more cautious consumer environment in the U.S. for fiscal '26 on the top line, but very much focused around how and where we can continue to outperform, but doing a broader strategy, sharpen and refresh across the group, truly look at how do we get a broader brand portfolio growth happening, both in the U.S. and across the rest of the globe.

In some ways, that does also talk to your question on Europe, clearly, you're absolutely right. I think the spirits market for us was in shopper decline than we would have liked to see. But I think we see that as an opportunity actually looking forward to better control some of the outcomes in Europe, by being a lot more locally focused and occasion-led. And I think that's the opportunity when we talk about kind of reorganizing ourselves to be able to capture that growth.

And I talked a little bit in my prepared remarks around the fact that Southern Europe, just using that as one example. The fact that we were managing 4 or 5 very unique, very different markets, and you all know from my prior experience, we had a lot of focus as we looked market by market because the consumer dynamics and more importantly, even the customers and your route to market are quite different. So I think as we look at France, for instance, having taken that over and setting ourselves up and setting up a more competitive and market relevant route to market, working with our customers looking at that outlet segmentation that I've talked about, and that's one of the first markets where we're doing some really good work around that.

To be able to look at unlocking those growth opportunities in spirits and not just in whiskey, for instance, France, which is a large whiskey market. Same thing in Italy or Spain, and I would say even in a market like Germany, combining Germany and Austria and Switzerland having a focus there, allows us to really be a lot more consumer and customer-centric. So I think that's what we're excited about that brings us that much closer to the markets. And hence, we feel that we will be able to then support growth. And it's not a 1-year focus. This is what we're looking at in terms of a longer-term trajectory as we look forward.

Our next question comes from Simon Hales from Citi.

Two from me as well, please, if I can. Firstly, I mean just building on some of the things you've just been saying, Nik. Can you just talk a little bit more about the moving parts in that fiscal 2026 organic sales guidance to be similar to 2025? On my math, given that you're suggesting it's probably down in the first half, it suggests an acceleration to somewhere around 4% or above in the second half of the year. I know you referenced in your prepared remarks, Nik, things like the timing and phasing of Chinese New Year, perhaps impacting the H1, H2 shift. But what gives you the confidence that you're really going to see that H2 acceleration come through?

And then secondly, can I ask about just some technical factors that maybe are impacting EBIT and earnings into 2026? On the EBIT side, you've clearly carried out a number of disposals in the year, which you flagged. I think you've disclosed that the deconsolidation of those probably is about a $50 million reduction in starting EBIT. But since the year-end, you've also sold Ghana and the Seychelles breweries. How big an impact will that have from a scope standpoint?

And then below the line on finance costs, I think you've capitalized some finance costs, I believe, for the first time in the P&L. Given that some of the projects related to those capitalized finance costs are ongoing, how should we think about the size of that element in the finance line as we go into fiscal '26 and beyond?.

Great. So let me tackle the first question. I mean I think, clearly, you rightfully called out what does the shape look like for half 2 and what gives us the confidence there. I think there's a couple of things that I would focus in on. And I would look at it from an angle of where we want to build more capability and where we want to really accelerate some of our work. And the areas that I would really call out are in 3 main buckets. Clearly, a lot of work that we kicked off on driving for much sharper commercial execution at point of sale. And I think that is critical in terms of allowing us to bring together really that great work we do with the brand and how do we bring it live and activate at the point of sale, be it off-trade, on-trade and a lot of work that we're doing when we're looking at menu placements, back bar displays, but having very clear metrics and KPIs against which we can measure our progress.

And this would be a multiyear journey, but we feel the work that we're kicking off or have already kicked off in several markets should allow to help with that. The other piece I would call out is, you might recall we talked about 6 priority markets on RTDs. And I think when we step back and look at Smirnoff Ice, what we actually set up in what was a category 20 years ago and the fact that even with some reinvigoration and stuff that we're doing around the brand, the flavors, the portfolio offering, how we're looking at that piece in terms of the relevance to consumer occasions is what we'll try and accelerate.

And I think you'll see that in the first half, but really, that will ramp up in the second half. And then I would say the last piece is really the broader work we want to do on our portfolio. Clearly, we've had some really good performance in key brands and some of our global brands, be it on Julio, be it Guinness, be it what we've talked about with Crown and Johnnie Walker, even though the organic sales decline, we gained share, but I think there's more that we can do when we look at both the mainstream core and premium core, and we've got to be able to start driving that.

I think when we look at the premiumization piece that's very much here to stay. How do we continue to build on the Johnnie Walker brand, for instance, and the price laddering and everything that we've done with Blonde as one example on one end of the spectrum and what we're doing all the way up to Blue Label involved.

And I think the last piece I would really say is we've laid out a clear strategy on malls where we've got great liquid, winning brands, and we need to execute that at scale as well. So I think those are the 3 big pieces that I would call out that we feel good about as we look forward. And that's not just a half to '26. That's an ongoing piece of work that we'll be looking at.

From an angle of your technical factors, I think you rightfully called out with what we have already exited as of the end of the year. That's about $50 million in operating profit, which had about $250 million in NSP. When you look at the deals that had not completed at year-end but have since completed, that's really Ghana and Seychelles that would have approximately another $50 million impact on operating profit for F '26 and about $350 million NSP. But again, those would all be normalized when we look at scope and growth as we look forward.

In terms of finance costs, we'll come back to you with specific numbers, but remember, there was also an element of what was a bit of prior adjustment. So we would expect that to more normalize as we look at '26, and we can come back to you with some more specifics around that off-line.

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

So my first question, Nik, is on the first half, you called the weakness in organic. Can you give us a sense of where do you see that? Because obviously, you talked about your question about North America, but I wanted as well to understand how you look at Asia Pac. So China seems to have been quite weak and beyond Chinese New Year, trying to understand what's going on in the country as you pivot, I think your portfolio towards maybe less expensive SKUs. And what does that mean for margin in that division -- in that region that has been usually quite elevated?

My second question is on the organic EBIT guide. So if I look at the savings, roughly speaking, I think that probably would contribute to half of the organic improvement above top line growth. So in an environment where top line is slightly positive, can you talk about what are the other driver of that extra organic EBIT expansion. And I noted that gross margin was [ helped ] by a lower cost inflation in '25. If you could give us as well what it means for '26?

So I mean I think if you look at the half 1 in terms of the guide, you're right, in terms of U.S. We clearly are planning for a more cautious environment. And I would say that's probably one that's through most of the year, but I would expect to see that more half year weighted because we've also got the lapping of some of the Don Julio restocking that happened in half 1 of '25. And quite honestly, when you look at the Nielsen NAPCA data, as we look at the exit, you can see that the consumer environment and the consumer wallet is still stretched. But the team is doing a lot of work to really look at how do we reinvigorate some of the other brands and some of the stuff that I just talked about.

The early signs in terms of the route-to-market changes that we're making in North America are really starting to pay dividends. We're getting very positive feedback where we've implemented this with well-trained feet on the street, both in the distributor and our level in terms of what they're able to drive with customers to improve portfolio mix offerings and ultimately drive their margins and as a result ours as well. I think there's a strong focus on wanting to continue being that customer of choice with our retailers.

I think RTDs, I talked about where, clearly, the U.S. would be one of those 6 priority markets, which is an opportunity as well. Pivoting on to then your question around China, Clearly, outside of Chinese New Year timing, the market has been more challenged. But again, I look at that market and having visited late last year and having spent time with the team, again, in March in Southeast Asia, where we were getting some good data points of what was happening. I think the team is doing a lot in terms of looking to your point around, are there different parts of the portfolio that are important from an angle of being able to still have relevance for our brands in the right packs and ensure that the brand equity stay, and we know that people will come back and that premiumization journey, particularly in a market like China is very much intact.

But at the same time, there's an opportunity as we look at a broader range of products that we can sell as well. So I think clearly cautious, but we are doing the right things in China, but I think across APAC as well. You probably look to China and seen some of the by June numbers. We do hope that, that will start improving depending on how the government continues to look at some of the restrictions that they put in place towards the second half of the year, so more to come on that.

In regards to your EBIT question, clearly, the savings are what is the main drivers of growth. And the big area that we're continuing to unlock is twofold. I would say, on the trade investment and A&P spend, we are already seeing some early opportunities of how we can better rationalize for investment, but returns-driven investment. And so both on the customer A&P and the trade investment side, that's a positive.

Then I would say we continue to focus on the absolute dollars of spend on the development on nonworking dollars, and the team has been doing a phenomenal job, and we're moving at pace with what we can do to really replicate some of the work that we've already done in '25 and where those costs get captured. Because quite honestly, we're doing this well with our Conscious Create teams, our Agile Brand Communities, really leveraging the virtual content studio. There should be very little that we should have to be incurring at the market level. So those are all benefits and part of that will go back into supporting media scale and reach but there will be a fall through to the bottom line. I think I called out in my prepared remarks that we had already initiated some actions around North America corporate and some of the markets in APAC in Q4 of '25, which obviously will then start getting us benefits in the second half of '26 as well, and that's a positive move.

So we feel good about being able to deliver against that EBIT guide that we provided, both from where we see organic growth opportunities, but from the savings as well. On COGS inflation, I think we're seeing low single-digit underlying COGS inflation. But remember, this comes back again to where the team within supply has done a very good job continuing to look at productivity to be able to offset that, and we'll continue to have that everyday productivity mindset as we look forward.

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

So 2 questions, please. First one is on FX, please. Could you give a bit more color? You said you've made some changes to how you're hedging currency. Could you give a little bit more color on that? And on the $60 million impact on EBIT that you anticipate for this year, could you say how much of that is translation versus transaction, please?

And then I have a specific question on a brand, please, which is Astral in the U.S. You're talking about wanting to broaden growth to more brands in the U.S. And in the press release, I think you called out specifically Astral as a tequila brand growing very strongly in the super premium price segment. So how much of a focus is this brand for you? Could you see it becoming really scaling up, becoming, say, a 1 million case brand. Would it be a slow burn? Or do you think it could be quite fast?

On the hedging policy, we've done a lot of work with our treasury team on a twofold piece, I would say. One was really looking at how can we extend the coverage duration and align the hedge targets more closely with the operating profit exposure.And I think over time, this should really help reduce that volatility. When you look at it in terms of what does that actually mean practically, we're looking at both hedged or unhedged transaction exchange exposure and what we would like to hedge but not in isolation with where we see the unhedged translation exposure, which we don't go out to cover, but we were almost in some ways overhedging and then having the impact from the translation piece and netting that out allows us to have a much more effective hedging approach and less volatility, as I said.

So that's what we will be doing, and we'll continue to share more on that. So the $16 million impact is how much is really the translation piece based on what we see today from an angle of the current spot rates. But we can give you more detail on that as those continue to move. But clearly, we'll come back on that.

You rightfully called out Astral in the U.S. because I think while we've done a really good job in trying to now reset Casamigos and it's still at very early days when you look at the element of, yes, it's come into the Dedicated division, but getting the pricing ladder and positioning right relative to Don Julio and ensuring that we've got the right outlets and in solid segmentation in terms of where Casamigos rightfully has the opportunity to win is now what we're going to be leveraging going forward. And we've got a new advertising campaign, which I think is really exciting.

We just launched in a few states, the RTDs under the Casamigos brand, which is going to have a great halo effect on the brand, and that's going to go nationwide. But again, remember, these are more still when you look at it, at the super premium plus or actually even above in terms of price points. Astral has a great role to play in being able to address that super premium where a lot of the other brands are playing and quite honestly, I think now having gotten Don Julio and Casamigos right, and we want to get those back in growth, we have a huge opportunity to start winning with Astral, which again is great tasting liquid. And I actually would say to you, it's an approach that we're taking beyond North America only, where clearly, I think Astral will play a critical role when we look at expansion into the global markets with a clear strategy, not just on winning with Don Julio and Casamigos, but how do we win with Astral as well.

So you're looking at now the 3 price segments that we can actually effectively play around. Will it be a slow burn or a fast build? I'd like to believe it's going to be a fast build that we're going to be working in on. And I think the team is working at speed in the U.S., and we're clarifying the position for the rest of world as well and where can Astral truly play. And I think it is the preferred brand for the most part that we will go with. We do have some other brands as well. Remember, we've got DeLeon. We've just brought in 1707, so I think we're making sure that we've got the right positioning and the right brand equities and strengths that we want to build on across the market.

And clearly, we have the liquid and the capacity to be able to do that. So clearly, tequila is a big part of our global strategy. And I think the team has been doing a phenomenal job trying to unlock value and grow with that.

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

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

Thanks, Trevor. So what does it really mean in terms of the change in terms of the U.S. route to market. I think a couple of things. Clearly, this is about incremental feet on the street, both from our distributor partners as well as ourselves. But not being clear on what the role of those salespeople and extra feet on the street is, is what's critically important. And I think that's what we're changing. So it's about having a much more focused model where I think we're really leading the industry in terms of both incremental to my point, but upscale resources to drive and help our partners drive sharper execution. We want to build those customer relationships that allow us to help them grow their business and as a result of them growing their business, us growing our business but then being seen as that partner of choice. So I think it's both number of people, but what do they actually do to be able to drive incremental value for our customers and ourselves as opposed to order taking. So being very mundane around that piece.

So what are we practically doing? Well, we've got an academy for beverage leadership, where we're actually training resources in terms of how do you actually sell and upsell and help your partners, how do you bring them things that they might not have thought about, whether it's new brands, whether it's packs, whether it's formats that can help when we look at the type of CCF work that we do and understand the occasions that, that outlet is serving, what kind of brands and portfolios should be relevant and how they can actually help position and sell those, whether it's front of store, whether it's gondola and aisles, whether it's around in bars, menus, displays, et cetera. So it's really helping them being able to uplift their performance.

And I think we're doing it in a very targeted way where we see the upside when we look at the outlet universe and where is the largest value pool that we want to go after first. So I think we're committed to building these capabilities nationally. And maintaining that leadership. And this is going to be great as we look at this, not just in North America, but that's what drives my focus that I talked about in terms of how do we truly drive commercial excellence and execution at the point of sale.

To your question around what's the next big global brand, I'd like to believe it's not just one more, I'd like to believe there's a lot more that we can do. And I think that's what I'd like to come back with in the next months as we work on sharpening that strategy that I think can really help us look at in an evolving TBA landscape, how do we actually appeal and drive for more occasions and more consumers wanting to buy our brands.

And we've got an amazing portfolio when you look across all of the categories in which we play, I just don't think we've necessarily been as deliberate stepping back and looking at it from an angle of selective plays on mainstream, our premium core as well as what we can do on a premiumization journey with Johnnie Walker, with our malts. We've got an amazing portfolio of malts, and we've got a very clear strategy now around what plays globally and what plays really strong regionally. And then I talked about tequila right now with that last question from Andrea. So I think we feel excited about a number of vectors as opposed to one single brand that I'd like to see as the next big one outside of Don Julio and Guinness. But more to come on that, Trevor, as we go forward.

Our next question comes from Edward Mundy from Jefferies.

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

And then my second question is on the U.S. specifically. I think in the presentation, you talked about looking to drive more balanced growth. Is that balanced growth across both of the portfolio, but also balanced growth across volumes, price and also mix?

Great. Thanks for the question. So I think from an angle of broaden the growth opportunities, I think, clearly, we're a consumer goods company. And I think supporting our brands in the right way with a good focus around both returns but sufficiency of investment is critically important as well. And I think all the work that we're doing on the customer A&P and particularly the nonworking will actually give us more oxygen to invest in the media scale and reach piece with appropriate returns to be able to get that breadth of portfolio effectively covered. And this is not going to be a single year journey. This is going to be a multiyear journey. But I think it starts up with really understanding back to that consumer, back to that occasion, where the value pools are and how do we then ensure that we've got the right resources backing where the growth opportunities are but at the same time, also looking for future growth opportunities. So I think we've got to get that balance right.

Having said that, I don't think you do one without the other. So I think we could do that great. But if we don't have a clear execution focus, well, again, we'll be doing great stuff on brand building, but it never comes through at the point of sale. And vice versa, if we're doing great stuff only on execution without having the right support from that through the line piece, I very much see this going together. And I think that's what is the great opportunity as we look forward for a number of years to come around that through the line sufficiency across the brands, the building, the availability and the execution with excellence.

So I truly see that as something that would be a big unlock as we look forward for the years to come. And I think the team is excited and invigorated by that, not just in the U.S. but globally as well. And I think the U.S. has already started doing that with some of the examples that I talked about in terms of the route-to-market changes. In terms of the U.S. and getting back to growth from a portfolio perspective and also balanced around the volume price mix. Listen, ideally, I would like to see both. I am also very conscious that we are in a more challenged consumer environment, and that's what we planned for, for '26. So without being able give you specifics around that, is that our focus and goal as we look forward? Absolutely.

We see volume growth drivers. Now whether that's with RGDs, more that we can do with Guinness, more that we can do when we actually look at our premium core and some of our mainstream brands that we can leverage and be able to get that volume growth, I think, yes, that will come through. But that's probably more '27 and beyond. But I also think we should look at it from an angle of -- I mean, you probably heard me talk about this or us talk about it [indiscernible] but I think beyond volume in the U.S., we also have to start looking at transactions and how -- particularly with smaller formats, if we're getting consumers into our brand equities or keeping them there.

Over time, as a consumer wallet becomes less stressed, we would expect them to continue, obviously, being able to be with our brands and hopefully, upsize as we look forward as well. So I think in the developed markets as well, we've got to have a focus not just on volume, but on transactions as well. Beyond that, across our other markets, I mean, clearly, you're going to have Africa, LAC, India, some of our other Asian markets be able to drive volume growth.

And I think that came through well when you even look at our '25 results from an angle that, yes, volume was more challenged in some of our developed markets or when we look at China, et cetera, but we did get a good balance overall between our volume and price mix, and we'd like to continue to see that coming through as we look forward. And I think one other thing I would call out in the smaller formats, while we're driving share in the U.S. I still believe we don't have our fair share. So that's a big opportunity. And that's why my focus around not just volume but transactions as well.

Our next question comes from Mitch Collett from Deutsche Bank.

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

Great. Thanks, Mitch. I think you and I actually guys talk about this a little bit when I was in Paris. So moderation has been around for a number of years. So it's not something new. But I think as you rightfully called out, we are stepping back and looking at this from an angle of -- we clearly do see today's pressure as being largely more macro and cyclical. Having said that, we also do believe moderation in some form is here to stay and moderation, as you and I talked about before, does mean different things to different people, whether it's about drinking less on weekdays, whether it's about Zebra striping, whether it's about going for different formats and options that allow them to manage portion control. And I think that's what we've got to tap into more.

Today, we're in a very fortunate position that we have a portfolio of non-alc brands, obviously led by Guinness 0.0 that is allowing us to win, but obviously, it's a small base. And I think we have the ability with the incredible brands and the power of our innovation team to be able to develop more opportunities, not just in RTDs, I'll come back to that in a moment, but also what we can do with not just no ABV, but low ABV. And it was interesting because I challenged my own thinking in the last months when I was thinking, well, why do we need to have low ABV when we've got full ABV and 0 ABV and someone can mix it up. And one of my region presidents shared a really good example of when he was out in the market and saw a lady picked up a bottle of Tanqueray 0.0 and a bottle of Tanqueray. And he went up and asked her around why was she buying both.

Now it's quite interesting because when you do look at consumers and shoppers, those who are buying 0.0 or 0 alcohol are also typically buying full spirit because they want to have that choice. She had a really interesting angle and take that said I want to have my gin and tonic and I want to get the same flavor. And if I just put more tonic into Tanqueray and dilute it, will I lose some of that flavor by actually mixing and doing equal parts of Tanqueray 0.0 and Tanqueray full ABV, I actually get that taste and flavor profile coming through without the over reliance or over taste of the tonic coming through. And that I think was really interesting because I had challenged my own mindset saying, well, then low ABV does have an option, or an opportunity to play.

And we've got a great innovation team that can help build that out for us. And RTDs is a great example of where you can actually manage ABV, calories where that people might be looking for. So I think there's a lot more for us to go after to really look at that as an opportunity. And in my mind, an no regrets move. Because it's not saying that we're not going to be focused on our core portfolio and a broader portfolio. It's not like we don't believe that premiumization is here to stay and we can still leverage that, and we've got a great portfolio and brands to be able to do that. It's about here's another vector of growth that we can tap into because that is a theme of how people are thinking about how, where and when they want to consume. So I think that's what excites us about that piece.

To your question around the 50% being reinvested, I would call that out as 2 big areas, and that is about better commercial execution and what do we need to do, whether it's about extra resources, whether it's about training and building up skill sets of those resources to be able to upsell, et cetera but also providing them with the right tools, and that's another area of focus, which is around digitization and how do we do that at speed and scale. The other piece comes back to what I touched upon earlier. We are a consumer brand company, and we recognize the need to be investing smartly in A&P and particularly on the media, but through the line efficiency.

So I would say where we get efficiency savings particularly when we look at the nonworking and '25 is a good example of that. You've seen that come down from circa 20% down to 15%, while our overall dollars stay pretty much intact. And so we were able to reposition that into where we saw good returns. And I think we'll have a more laser-focused approach on that as we look forward. I won't get into absolute right now in terms of what dollar spend would be. You would expect that overall to be lower but not because the media scale and reach number is coming down, it's actually because we will drive more efficiencies through the commercial A&P and continue to drive nonworking dollars out and where we should be putting it, which is back into media scale and reach.

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

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

Thanks. To your first question, Gen, around total beverage alcohol and what we're seeing in terms of consumers' wallets and reasons for what they're focused in on. I wouldn't necessarily say because it'll vary by market, but that was the top reason. There was definitely a large reason that people were calling out around the consumption habits or what they were spending. The other piece does come back a little bit more to the moderation piece. So I am looking at different ways of consuming, I am looking at back to that point, moderation for me might be drinking a fewer occasions. But when I do consume, I consume with responsibility, but I enjoy what I'm having. It might be back to those points around low ABV and I'm looking for more choice.

And so when I'm not getting that choice, unfortunately, I'm going into something else. And I talked a little about that at a conference in Paris around, there are people who are just choosing not to substitute, there are people who are choosing to drink something else. And that's where I think we have the opportunity when we look at what can we offer to be able to gain back some of those drinkers into our products for the types of occasions that really serve them well, whether it's RTDs, whether it's smaller formats, whether it's around low ABVs, whether it's about when I drink I drink better, not more.

Those are all elements we want to tap into as opposed to them drinking more functional beverages or more soft drinks, et cetera. So I think there's a lot more that we want to unpack there as we continue to build on our research as to what are the reasons people are not buying and what can we do to drive more relevance of our brands and our portfolio for those occasions. And that's a part of the work that I've talked about in terms of our strategy kind of sharpening that we'll be doing in the months to come together with the broader exec team and our markets.

I think to your question around the impairments that we've taken. Remember, this is very much driven by triggers that you need to look at in terms of how the brand is performing and what the nearer-term outlook has been and what the historical data looks like. So I don't think it in any way changes our view in terms of the U.S. spirits market and the opportunities there. So really much more around some of the near-term pressures and how we need to look at that. And I think in some ways, while it's never great to take an impairment, I think this allows us to have a clean start as we look forward to really focus on growing those brands in a structured, systematic and sustainable way. But our belief in U.S. spirits continues to be just as strong, albeit, as I said, with an evolving TBA landscape that we'll continue to monitor and look at how we can play and be relevant.

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

Two questions, please, for me. First 1 on disposals. Nick, you mentioned that the CMD back in May that you would be targeting disposals outside Guinness and more Tennessee that would be substantial. We've seen since news that both the cricket team in India and the East African breweries business are potentially up for sale which are indeed substantial, as you said. My question is whether we should expect this to be it or whether there might be more in the pipeline?

And my second question is on agave costs. Would you be able to help us understand better how significant the benefit from reduced purchase costs might be in 2026 or how does it compare your average agave supply price in fiscal '25 to the existing market price?

As you can very hopefully understand, I can't really talk about specific assets or comment on any kind of speculation that's out there in the media. But I think nothing has changed in terms of our strategy on disposals. We had guided before that this was a part of our commitment, but more being led from a strategic angle and looking at assets or businesses that we didn't quite see as noncore or what wouldn't necessarily fit in as we continue to sharpen our strategy as we look forward.

This continues to remain the case. And I think we're making progress on those substantial asset disposals that I talked about. And I feel confident that we have a ready pool of interesting buyers that will allow us to maximize value for Diageo and our shareholders, but more importantly, too, I think those are assets that probably belong well with some of those potential buyers and, hence, their level of interest.

I will just reconfirm that we do not have any intentions of selling Guinness, nor our stake in Moët Hennessy at this point. And in terms of a broader portfolio question just to take that head on, as a part of our review, we are looking at our portfolio. I think Diageo has had a history of being active portfolio managers. Nothing more to add or say there, but we'll come back in due course if there's something of interest to share with you.

To your question around agave pricing, I think I'd like to just give you some background in terms of how you all should be thinking about this. We have a very diverse supply chain sourcing strategy and agave in particular. So we own some of our own production, we do purchase on long-term contracts, and we do access spot markets. So it's a combination of those. So just the fact that today's spot market price for agave is lower should not be reflective of the price going into our tequila COGS because it is that combination, but are we clearly leveraging the combination of all those as we look forward, not just into '26, absolutely.

I think we've got some good liquid already in place. Now that's positive from an angle that we have liquid to be able to sell and meet market demands, whether it's on DJ or on Casamigos. But remember, that's already in our inventory that will be coming through, but that was at prior periods agave costs. So that will have an impact as it starts coming through, not just in '26, but more beyond when you look at that first piece around our supply model. And then on FX, given some of the movements over the past couple of years, remember, we do hedge that transaction impact.

As we look forward, this is a great example of where we would look at both the transaction and the translation piece, particularly with USD and Mexican peso. That should help us in some of that volatility as we look forward. So hopefully, that helps you understand how we look at that.

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

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

Chris, so on your question on maturing spirits, we have not provided anything specific in terms of what that growth would be during '26. I would just call out, and I think maybe if there was any confusion, but just to clarify, when you look at actually the '25 numbers in our closing balance, while part of that was obviously the incremental investment in maturing stock, that was about half of it, and the rest of the half was really FX as you restate your maturing liquid balance.

As we look forward, and I think as I talked about, one of the things that we have done, given the liquid that we have and how we look at what is our notional pool of safety stock, it is complex, as you -- you probably know even better than me, you helped educate me as I was first coming in, in terms of that liquid, which is very valuable liquid but is complex in terms of the different flavor profiles, the age profiles, what we need for blends, what we need for single malts.

And I think what the team has done a phenomenal job over the last 4 months working with me and my broader team is to really understand where we have that incremental notional pool in the age profile and the liquids that we have and how can we actually look at that as we shape our strategy. But more importantly, as we look at laying down more liquid, what is our distilling capacities and how and where can we manage that throttle to be able to utilize some of the liquid, but without compromising on the investment for the future.

And I think that's the work that we've done. I think we are in a position in terms of our planning to be able to see that benefit starting to come through some in '26, but this would be a multiyear journey because we want to be able to be much more dynamic and look at that almost every quarter to 6 months to saying, have we made some of the right choices. Do we need to throttle up a little bit? Do we need to pull back? Where are the potential risks or what we might be seeing based on how we're seeing demand generation and consumption. So that's the work that we've been doing, and I feel that we'll continue to have a much better handle on that. Like I said, every 6 months and doing the right things to protect the long term but also not draw up on a lot of cash in the short term, if it's not needed.

To your question on Guinness, I wouldn't necessarily say that we expect anything significantly slower in the first half versus the second, I would just call out that we do have more capacity that's coming on stream in the second half which will actually help us to even accelerate and build on what has been tremendous momentum, not just in the high-growth markets, which are largest markets of GB, Ireland and the U.S. But you were with us in Dublin, and we talked about the big unlock opportunity as we look into other markets. And I think that's an opportunity as we look at how we want to accelerate growth in '26 and probably in some of the second half numbers as well because that capacity will really help us get into other markets and leverage that growth opportunity in existing markets as well.

Our next question comes from Laurence Whyatt from Barclays.

A couple from me as well, please. Firstly, Don Julio in the U.S.A., we've been talking about balanced growth across the portfolio. But of course, in that brand, I think a lot of the growth has really been coming from the Reposado SKU. As you think going forward, firstly, why do you think the growth has been so strong in Reposado? What is it about the Reposado category that's really captured attention of consumers recently?

And within that, would you expect acceleration on the other parts of the Don Julio brand? I think historically, there's a lot more growth from the very ultra premium parts of the brand, and would you expect a bit of a recovery across, say, the Blanco 1942 other parts as well as the strength you've seen in Reposado?

And then secondly, since, I guess, at the beginning of this year, you talked about growing in the upper quartile of consumer staples, and I think on the call, the prerecorded call that we listened to earlier today, you talked about the upper quartile of TSR, is what you're aiming at achieving. But I think previously in the year, you've talked about being in the upper quartile in organic profit growth in the way that the company used to guide. I was just wondering, is that an intentional change in messaging or do you expect to be upper quartile in both of those? Perhaps if you could just clarify your views on upper quartile.

Absolutely. So let me start with that one, Laurence. In terms of what was in the prepared remarks, I think TSR is ultimately an outcome if you're doing things well from an angle of getting that right balance in what I rightfully have said, but not just on profit around all our metrics and how do we look at top line growth translating with positive operating leverage into operating profit dollar growth faster than that top line growth and very much around conversion to cash and ultimately, better returns. And I think we're doing that well with a very clear capital allocation policy that ultimately leads to TSR.

So I think I was using that just as a proxy as opposed to calling out everything else, but very much intact in terms of our thinking around a much broader-based algo across all of those measures to be able to drive more consistent and positive TSR growth in the years to come. So that's what I would call out the quartile and that's what myself, the exec and the Board are very much focused on setting up our strategy and our focus around being able to deliver that. To your question around Don Julio, it's really -- it's a great question. I think the Repo growth is really coming from the fact that -- obviously, people coming into the tequila category and typically, you come in through something that's more accessible and you might come in through Blanco, but then you do also find that, that aging of the liquid without going to a very strong-aged liquid in a Añejo or even beyond is what is driving that. I think the team has also done a phenomenal job in really steeping Don Julio Reposado in culture, in moments of enjoyment. It really does well in cocktails as well. I mean I'm speaking as a user myself, that's my go to drink.

I typically go for Don Julio Reposado, and I like that because I have it quite clean, just with soda and a slice of orange, if you want to know, but it just kind of gives me that taste of slightly aged liquid as well. And then if I'm sipping, I might move up to an Añejo, but if I'm doing just a regular cocktail, I might have a Blanco. So I think that's the range offering that we want to continue building on for a broader consumer base.

And I think you're absolutely right, 1942 and all the variants that we're doing there and how that's playing into culture and bringing in influencers, I mean the Don Julio 1942 activation, for instance, that I saw during Super Bowl was incredible. I think the small format that we have of the 50cl in the Don Julio 1942 has been doing amazingly well because you might not see that in the volume numbers, but you see that in the transactions because people really are able to use that from an affordability play or a cash outlay play, but still will be able to enjoy what is great liquid.

I think your question around the broader portfolio, I'll take it out of the U.S. for a moment, and I was chatting with our new MD who actually moved from GB into Mexico, and he talked about the big opportunity that we have with Don Julio Blanco, which is a very recognized brand, great brand equity, but we've actually tended in that market to only focus on actually higher-value offerings. And so we've, in some ways, left that market open where we have great liquid, a great brand and I think there's a broader opportunity as we look at our tequila play that is not just linked to the premiumization end, but how do we get that whole opportunity all the way from Blanco up. And it's not just about Don Julio, it comes back to my earlier comments, whether what we can do with Casamigos, what we can do with Astral, et cetera. So I think we've got a bigger opportunity to play for in our broader markets as we look at tequila as a whole. So we're very excited about that opportunity going forward.

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

Great. So I really want to thank you all for joining us today. I want to reiterate just a few points as we close the call. I know we have much to do, but please be assured that I, alongside the Board and the exec team, I mean, we're fully engaged in both stabilizing and then sustainably growing our business in the coming years. Diageo rightfully as leaders should and will be leading the way as we continue to sharpen our strategy in what is -- what we've called out as a really evolving TBA landscape. I think we all look forward to sharing more on this in the coming months. We continue to be focused on what we can manage and control as I've outlined, but continue to focus on building new core capabilities to allow us to win with our customers, and continue building our great brands and leveraging consumers' preferences.

My team and I are committed to rebuilding a high-performance culture, driving clarity across the organization, clear allocation of resources and execution, discipline and excellence. So a lot more to come for us -- from us in the coming months, but we remain committed to being able to drive this business positively for the long term. And thank you for joining us today.

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

Good morning, and thank you for joining our results presentation for fiscal year '25. I would like to start by thanking Debra Crew for her contributions to Diageo, including managing the challenging aftermath of the global pandemic and the ensuing geopolitical and macroeconomic volatility. I know I speak for every company in thanking her for her work over the last 6 years and wishing her the very best for the future.

Now turning to fiscal '25 results. Today, I will talk to some of the highlights of our fiscal '25 reported performance. In addition, having shared our reshaped priorities and areas of focus earlier this year, I'd like to update you on our progress to date and how we're sharpening our strategy to drive accelerated growth in a potentially evolving TBA landscape. I will also provide an update on our Accelerate program, underpinning these priorities which we announced with our Q3 trading statement and which is progressing with speed, creating a more agile performance and returns-focused organization.

Our focus on cash continues and we remain confident in delivering on our deleveraging commitment, strengthening our balance sheet and increasing financial flexibility. I will also briefly talk to why we continue to believe in the attractive long-term fundamentals of the industry, and our ability to outperform even in an evolving TBA landscape. I'm joined today by Sonya Ghobrial, our Head of Investor Relations, who will walk through some of the fiscal '25 results with me. Also, you will have seen last week that we announced that Deirdre Mahlan will be joining us as Interim CFO. Whilst she is not with us today, she will be on our next results call. We are looking forward to welcoming her in a few weeks' time and to her partnering with me and the rest of the exec team as we stabilize the business and restore a profitable and sustainable growth mindset.

Starting with the fiscal '25 performance highlights. Against a challenging market backdrop, we delivered in line with our guidance. We delivered 1.7% organic sales growth or 1.5% before the impact of the CÎROC transaction in North America. Organic profit declined 0.7%, including the CÎROC transaction impact and declined 1% excluding this. Encouragingly, volume and price/mix were both positive and relatively evenly split. There was positive organic sales growth in almost all regions, although operating profits were impacted adversely by investment in overheads, which we had already referenced at the half year.

Importantly, this increase in overheads included some key investments, which will support our future growth agenda, which Sonya will come back on later. Free cash flow was $2.7 billion, up $100 million on last year, reflecting solid working capital management. EPS pre-exceptionals declined almost 9%, mainly due to a significantly lower contribution from Moët Hennessy and adverse FX. Finally, as you will have seen today, our recommended full year dividend is flat on last year, which we think is prudent given the current backdrop. We remain committed to growing this sustainably over time. More details on the results shortly from Sonya.

So shifting gears a little, you will recall that at the half year, we introduced our global reshaped priorities to drive long-term sustainable growth. Since then, initiatives underpinning the 4 key strategic pillars are being embedded across our business. While there is further opportunity on all of them, I am pleased that we have moved with pace to make progress on some of the areas indicated. I will share more progress on some of them today, some coming through in our performance and also some underpinned by our Accelerate program.

In addition, in order to ensure Diageo is back on the front foot and focused on driving sustainable growth ahead of the market, we're working to sharpen our strategy with the intention to fully leverage our incredible portfolio and the competitive strengths of our business and significantly elevating areas, where we can do much more in an evolving TBA landscape. One opportunity I have consistently highlighted at Diageo, given my experience and capabilities from previous roles, is the significant potential to step up our commercial execution.

True partnerships with customers are key to ensure that we are fully in sync and maximize our brand building, ensuring that our physical availability in stores and bars matches up with the mental availability that our brand marketing has established with consumers is key. The 3 main work screens we're progressing on are: firstly, trade investment optimization, something I will share more on as a part of Accelerate. Secondly, work is underway to fully map and segment the outlet universe and to then overlay the occasions they serve and our portfolio offering as a result. This will enable accurate sizing of the value pools and growth opportunities, ultimately optimizing our resources.

Thirdly, brilliant execution is key with a clear picture of success or PECOS, establishing a best-in-class standard for availability and activation at the point of purchase. More to come on this. As we shared in our release, the first phase at Accelerate, our disciplined approach to operational excellence and cost efficiency has been implemented across the business and is progressing well. As a reminder, work in Accelerate underpins these refocused priorities and some of the actions directly. I will walk through this in more detail but would highlight that we've identified further cash savings compared to the $500 million communicated in May, with the commitment now to deliver $625 million of cash savings over the next 3 years.

As we have consistently said, Accelerate is not just about cutting costs, it's also about driving better growth. And to this end, the work on our operating model is key. Underpinning our operating model changes is the intention to move Diageo to be more agile globally. This includes really leveraging scale and prioritizing where we invest. It should also enable faster decision-making and is linked with our internal drive to embed a mindset of everyday productivity.

Accelerate is also focused on implementing more simplified ways of working and accountabilities and importantly, bringing clarity to the organization on roles and responsibilities, i.e., the right roles in the right places, whether at market, region or global and ensuring that we better leverage our centers of expertise and shared services. It will simplify how we work and build capabilities where we can be stronger than where we are today.

Let me share 2 examples where we have seen some progress to date. In marketing, we have talked to changes in our operating model, with agile brand communities and conscious create teams set up across our global brands to standardize and centralize. This work enabled a central and effective creation of the first scale Smirnoff Ice advertising campaign for over 20 markets, creating well over 500 different assets, covering different pack sizes, formats, flavors, languages and regulations and more than halving the time it would have taken previously.

Importantly, the central production resulted in a circa 40% cost reduction in development costs on Smirnoff globally. In Europe, our strategy has been refocused on the greatest growth opportunities. This resulted in more targeted investment and establishing more stand-alone market operations to bring us closer to the customers and consumers to drive improved performance with the right priorities locally.

For example, in Southern Europe, historically, Iberia, France and Italy were managed as one market despite very different consumer behaviors, categories and occasions. Italy over-indexes in the Aperitivo occasion, France is the largest scotch market in Europe, almost 1.5x larger than the next, and Spain has a strong relax occasion focus. Now having set up separate market teams, we can ensure we are really capitalizing on these distinct growth opportunities and be more locally consumer and customer-centric.

We announced today increased cost savings of $625 million, relatively evenly spread over the next 3 years from the $500 million previously, with around 50% dropping to operating profit and circa 50% reinvested for future growth. We will be investing in digital, where there's much more to do to leverage our data to drive clear actionable insights and define more consistent metrics. This will support faster decision making, investing to enhance capabilities, fully utilizing AI and will enable us to truly leverage our scale. Additionally, there's much more we can do to step up commercial execution, something I talked to just earlier.

This includes strengthening capabilities in the market, building a stronger muscle in the on-trade, in particular, through best-in-class commercial execution at the point of sale, in market, where and when our consumers show up. I've talked before to the sources of savings on this chart, A&P effectiveness, trade spend optimization, overheads and supply agility. A&P savings will come through earlier as you've already started to see in fiscal '25. Trade spend optimization and overheads will take more time to come through, so will be more back-end loaded. Supply chain savings are likely to be evenly spread over the next 3 years.

On A&P, we have outlined over the last months that there's much more we can do to optimize the spend to be more effective and efficient. At CAGNY, we shared our intention to reduce our nonworking or development costs to around 10% of A&P spend, and we made good progress in fiscal '25 with this now around 15% of our spend down from 21% in fiscal '24. While the percentage of spend is important, I'm also focusing the teams on the absolute dollar amounts and the quality of the spend and what happens centrally versus in market.

As I said earlier, we're leveraging our organizational changes with conscious create and agile brand communities, increasing earlier co-collaboration and reducing in-market agency fees and development costs as a result. There's also significant opportunities for us to fully utilize AI creativity with our virtual content studios. Introduced in fiscal '25, we are scaling this in-house content creation across our markets and brands in fiscal '26.

In fiscal '25, these tools enabled us to activate our Guinness Premier League partnership at scale quickly. And as you see in the Asia Pacific examples on the slide, we were able to adapt materials for local cultural nuances easily and at speed. As I have said, there's much more that we can do here. Connected to our A&P spend is also the work being done on trade spend optimization. Addressable trade spend is significant at circa $3 billion globally and by adding more rigor and consistency into evaluating the effectiveness of this, we expect to be able to make better investment decisions with improved payback.

We are leveraging and consolidating learnings from the initial work in Australia and GB as we take this into the other markets at pace. For example, in GB, the improved visibility we now have of the ROI of promotional events in the grocery channel, it is enabling us to make better investment decisions. We also continue to look at our overheads with work underway to benchmark against relevant peers to ensure the business is best positioned for the future. While this includes headcount, and we did do some streamlining in Q4 to set us up for fiscal '26, we are also focused on ensuring our capabilities are maximized to leverage digital, technology and AI where applicable.

In supply, our work to optimize our supply chain continues. And whilst much has been done, there's still more to do. This includes ensuring our systems, our processes and our KPIs are standardized, ensuring our footprint is appropriately based for consumers and markets and again, prioritizing growth. We are committed to delivering circa $3 billion of free cash flow per annum from fiscal '26, and this is underpinned by a renewed focus on cash across the full organization. Given guidance for fiscal '26, we expect this to be supported by mid-single-digit organic operating profit growth as well as reduced CapEx. CapEx is reducing from the more recent elevated levels and is expected to be mid-single digits as a percentage of net sales in 3 years without compromising long-term sustainable growth.

We also have the opportunity to improve our working capital, something we want to do in a sustainable way, primarily through increased discipline on receivables and stock. With maturing stock, we are leveraging our proprietary Scotch Intelligence Platform, building on hundreds of years of experience in scotch, to better forecast and plan along with demand planning. All driving more effective management of our scotch maturing stock without compromising our liquid gold. I had mentioned before our decision to make appropriate and selective disposals. The intention to do this and the timing of the coming years is unchanged, and we remain committed to actively pursuing disposals of appropriate noncore assets.

Before we share more details on fiscal '25, I want to take a moment to run through some thoughts on the current macroeconomic environment and the spirit sector more generally. We continue to believe that spirits remains an attractive sector longer term, and this is supported by favorable fundamentals, namely demographics, growing middle class, growth of LPA+ consumers and increasing female per capita consumption. Over the last 10 years, TBA has softened, albeit gradually, with moderation clearly playing a role. Moderation is something we continue to expect going forward, and we are now more focused on how we leverage the opportunity that this brings.

Coming back to spirits, per capita consumption was relatively flat over the last 10 years as it gained share from beer and wine, another trend we remain positive on given the versatility of spirits. Finally, importantly, in our largest market, the U.S., consumer spend value on TBA has remained constant. Also, we believe the versatility of spirits positions the category well for the future across occasions, premiumization and the evolution of consumer trends, including moderation and sourcing growth from other drinking occasions.

We continue to view the near-term pressure on the sector as largely cyclical and driven by the macroeconomic environment. Consumer sentiment though, does remain subdued, a grocery basket continues to deliver less at a higher cost and around 25% of consumers in our recent key market study showed that saving money was one of the top 4 reasons in their choice to moderate their TBA consumption. The role of saving money in moderation was even higher with Gen Z consumers we surveyed.

Naturally, we continue to track and monitor data for any changes in behaviors. We continue to prioritize consumer insights and tracking. Consistent with comments to date, Gen Z household penetration of spirits was up 6 percentage points to 55% in 2024 versus 2020. We believe spirits RTDs have played a large role in this as LPA+ Gen Z increasingly enter TBA in this category versus historically coming in through beer. As I will talk to later, we have introduced a more deliberate strategy for selected RTD markets, which is showing some early positive results. We are also keeping a close eye on the impact of cannabis, including THC drinks and GLP-1s.

Recent consumer research from the team in the U.S. reinforces our view that to date, the impact of both has not been significant. As mentioned in the release, we are sharpening our strategy. Whilst we view the sector near-term pressures as largely macro-driven and cyclical, there isn't enough data to definitively say that they won't impact the medium term nor that TBA environment won't evolve. This includes the role of moderation, which has been around for some time.

Whilst currently it is clearly being supported by pressure on wallets, it is a theme which we expect to remain. Interestingly, consumers who are moderating are not socializing any less across a broad range of occasions, so we are working to ensure that we best leverage the opportunity this brings. We are also moving to address areas that even in a continued or evolving consumer backdrop will drive growth, leveraging the strength of our brand portfolio, our scale and our marketing and our distribution, and I look forward to coming back on this in the coming months.

With that, let me take you through more detail on our fiscal '25 performance. I've already talked to the key metrics, so I will take you through some of the highlights across our regions and brands before Sonya shares the financial detail. Trading conditions remain challenging through fiscal '25 for TBA and particularly for spirits, reflecting macroeconomic and geopolitical uncertainty as well as weak consumer confidence in many of our key markets, including the U.S. and China. Our broad and diverse portfolio across regions and markets enabled us to capture growth opportunities in selective parts of the globe.

This, combined with a focus on what we could manage and control and executing at pace, enabled us to hold or grow market share in 65% of our total net sales in measured markets, including the U.S. As a reminder, this was in line with what we reported at the half year. Beyond the U.S., which I will talk to shortly, a few highlights across the regions.

In India, we continued recruitment and premiumization of consumers with growth driven by prestige and above whiskey, including smaller pack sizes. The U.K.-India Free Trade agreement will support future growth potential for whiskey in the years to come. In Europe, our MENA business, which was established at the end of fiscal '24, is showing exciting progress in both luxury and non-alc, albeit currently from a small base. And in GB, both Casamigos and Don Julio are growing double digit alongside continued momentum on Guinness.

Also, as I talked to earlier, we also refocused our strategy to focus on higher growth opportunities. In LAC, Brazil benefited from a more stable environment through premiumization and targeted investment to drive growth opportunities in markets such as Mexico. And in Africa, we saw organic net sales growth across all markets led by Ghana. In North America, sustained pressure on consumer wallets continued to weigh on spending.

Despite this environment, we delivered positive organic net sales growth. We also gained TBA share driven by focused execution and portfolio prioritization. U.S. spirits, net sales grew 1.6% organically with positive price/mix of 2.9%. Don Julio, led by Reposado and Crown Royal, led by BlackBerry continued their strong momentum, including distribution and household penetration gains. Diageo outperformed within smaller formats in fiscal '25, gaining share, a direct result of focused investment to address consumer demand for our premium brands in tequila and scotch at an accessible and affordable price point. As we shared in Dublin in May, Guinness is building great momentum in the U.S. and delivered double-digit organic net sales growth despite a challenging beer market.

We also continue to optimize our supply chain and announced a new manufacturing and warehousing facility in Montgomery, Alabama earlier this year. By moving production closer to customers, we will enable a more efficient and sustainable supply chain. This is part of our journey to bring more agility and resilience into our North American supply chain. Our investment in U.S. spirits route to market is off to a good start, with our Academy of Beverage Leadership training rolling out at. This program is building long-term capabilities and strengthening partnerships with retailers by bringing deep category knowledge and is a great example of progress we're making, strengthening our commercial execution capabilities.

Targeted accounts are benefiting from focused commercial execution and are performing ahead of benchmarks with about 85% of our customers surveyed recognizing the benefits of this new approach. We are seeing the greatest impact in the on-trade, particularly with menu placements of Diageo brands in cocktails. On Casamigos, Sally shared at CAGNY, our strategy to improve brand performance, which included a new campaign and launching the Casamigos Margarita RTD in fiscal '25.

Although early days, we are encouraged by the take-up and feedback from both retailers and consumers to date and will be leveraging the brand's role in the FIFA World Cup partnership in the coming year. While we are pleased with our F '25 performance in the U.S., we are clear we need to focus on driving more balanced growth in the coming years, given the ongoing economic pressure on the U.S. consumer, and that we are lapping a period of strong share growth. As such, we have planned for a more cautious consumer environment in this coming year.

I have consistently said how impressed I am by the strength of our brand building, and I would like to talk to 3 of our largest global brands and the progress made this year. Don Julio, Johnnie Walker and Guinness. Both Don Julio and Guinness delivered double-digit organic growth across our regions, with both brands gaining share. Johnnie Walker whilst it gained share of international whiskey and scotch and recruited consumers, saw an organic net sales decline, largely driven by the U.S., Asia Pacific Travel Retail and Greater China. As a reminder, in times when the consumer wallet is under pressure, typically, scotch is one of the more adversely impacted categories. In fiscal '26, we are focused on accelerating Johnnie Walker recruitment through both premiumization and scaling winning innovation across the price ladder as well as broadening reach to access a range of consumer occasions.

All 3 of these brands I just mentioned successfully recruited a broader set of consumers through both innovation and participating in culture at scale. For example, in tequila, Don Julio 1942 saw a special edition developed with a global influencer, Peggy Gou, available for scale in nearly 30 markets, driving incredible social media engagement and brand interest. A mini format also provided a more accessible price point, building on our strong performance in smaller sizes of tequila. Innovation across the Johnnie Walker price ladder also enabled new consumer recruitment and enhanced brand equity. This included Johnnie Walker Vault, a luxury experience showcasing the art of blending through made-to-measure blends. Whilst at the other end of the latter, Johnnie Walker Blonde is recruiting younger LPA+ and female consumers from occasions where beer is strong and is now available in 16 markets.

Finally, Johnnie Walker Black Ruby, while still early in its launch, offers a premium accessible and sweeter whiskey, perfect for cocktails. And on Guinness, the amazing momentum continues on Guinness 0.0. We are expanding into more markets as more capacity comes on stream, given the exciting runway for growth we talked to at length in Dublin. Both Don Julio and Guinness are great examples of successful brand building and recruitment, driving outperformance with focus and investment, and I'm convinced we can do more with our other brands.

Recognizing consumer choice, we're making progress addressing the continuing trend and growth opportunity of moderation by ensuring that we provide a range of choices to consumers. In fiscal '25, we saw significant growth in our offerings here. We are the #1 non-alc spirits brand owner globally, over 4x the size of the nearest #2. Our broad portfolio offers a great range of quality non-alc alternatives across occasions and markets. This year, we also added to this with the purchase of Ritual Zero Proof, the #1 non-alc spirits brand in the U.S.

Guinness 0.0 is an important part of our non-alc portfolio, which overall delivered around 40% growth for the year. We are focused on being consumer and occasion led as we think about our portfolio and format offering. Many of those occasions are increasingly in nontraditional locations such as sports games, festivals or concerts where RTDs, for instance, provide a convenient serve format in premeasured serve and often at a lower ABV. While Diageo's strategy with RTDs has been less consistent over recent years, in fiscal '25, we proactively changed this approach to be more focused and targeted on growth markets and brands.

We see this as a key recruitment channel for LPA+ consumers going forward and a real opportunity where we can leverage the strength of our brands. Within this segment, we saw 2% organic net sales growth, and we can do much more. We are moving at pace and with a cross-functional team to improve commercial execution and visibility, and to innovate on liquid and across packed formats with a more FMCG mindset.

We also launched the first global advertising campaign on Smirnoff Ice that I talked to earlier, marking its 25th year anniversary. There is a huge opportunity for us to accelerate performance across both our non-alc offers and RTDs as well as lower ABV products. Looking ahead and at our broader portfolio and brands, there's much more work to do, and we are focused on improving sustainable performance. We will update you on our actions as we move through the year.

Now over to Sonya.

Thanks, Nik. Let me start by taking you through the movement in net sales for the year. Reported net sales were broadly flat at $20.2 billion, with positive organic growth offset by the net impact of acquisitions and disposals as well as unfavorable foreign exchange. The negative impact from acquisitions and disposals was largely driven by the Guinness Nigeria disposal as well as the CÎROC transaction in North America. Adverse foreign exchange was mainly driven by the Turkish lira, Brazilian real and other emerging market currencies, with the latter only partly offset by gains from the cedi in Ghana and the British pound.

As Nik shared earlier, organic net sales grew 1.7%, including the benefit from the closure of the CÎROC transaction in North America. Adjusting to remove this impact, organic net sales would have been up 1.5%, consistent with guidance for a sequential improvement in the second half on what we reported for the first half of the year. The contribution to growth from volume and price mix was relatively balanced. 3 of our 5 regions delivered volume growth and consistent with the first half, 4 of our 5 regions delivered positive price/mix. Volume was down in North America and Europe, given a continued cautious consumer environment and also ongoing macroeconomic uncertainty and inflationary pressure.

However, this was more than offset by positive volume growth in Asia Pacific, particularly in India as well as volume growth in both Africa and LAC. Moving to price/mix. In North America, a positive price/mix was driven by tequila, with consumers increasingly moving to aged liquids and, in particular, strength in Don Julio. In Europe, Guinness was again the main driver of growth. We saw continued positive price/mix from LAC as the region recovered from a period of consumer down trading and a highly congestive environment as well as some benefit from lapping favorable comparatives. In Asia Pacific, price/mix declined driven by consumer downtrading in Southeast Asia and China, combined with unfavorable market mix.

Turning to the movement in operating profit for the year. Gross profit increased $224 million, driven by top line performance with gross margin up slightly, up by 9 basis points, benefiting from supply efficiency initiatives and lower cost inflation. Reported operating profit was down 4.1% due to unfavorable foreign exchange, mainly driven by the Mexican peso. Coming back to operating profit, this declined 0.7% organically in the year. As with net sales, there was a benefit from the closure of the CÎROC transaction in North America, and adjusting to remove this, organic operating profit would have been down 1%. This was also consistent with our earlier guidance for a similar decline in operating profit organically in both the first and second half of the year.

The year-on-year decline in operating profit was primarily due to increased overheads, comprising staff costs, including incentives and wage cost inflation as well as strategic investment in areas, including route to market in the U.S. The sustained pressure on margin in the second half was something which we highlighted at the interim results in February would continue into the second half of the year. As was the case in the first half, excluding the impact of restating incentives, organic operating profit would have been up slightly, reflecting improved performance on last year.

Going forward, we'd expect to more than offset any increases in staff costs through positive operating leverage. A&P investment was broadly flat as we strategically reshaped our A&P spend across regions and delivered some efficiencies. As we said at the interim results, we've been prioritizing spend on higher growth opportunities and reducing nonworking or development costs, as Nik talked to earlier. On to cash. Year-on-year, free cash flow improved by $139 million to $2.7 billion, largely driven by working capital improvement. This was partly offset by lower year-on-year EBITDA post exceptionals, given both higher exceptionals and also unfavorable foreign exchange.

Solid working capital performance was driven by favorable creditor movement and lower year-on-year investment in maturing stock. Additionally, given the lower dividend from our noncontrolling stake in Moët Hennessy, this was also lower in other compared with last year. CapEx was around $1.5 billion, a small increase on last year and elevated compared with the guidance for the spend over the next 3 years.

There was continued investment in projects to support production capacity expansion in prioritized categories, including Guinness and also in the U.S. supply chain. We've guided for a reduced CapEx spend over the next 3 years, trending to mid-single digit as a percentage of net sales, as Nik spoke to earlier. EPS pre-exceptionals declined 8.6% on last year, and this was largely driven by lower earnings from our noncontrolling stake in Moët Hennessy as well as unfavorable foreign exchange. The impact of a lower tax charge also benefited EPS.

Let me just spend a moment talking through exceptionals. As you will have seen that this year, these were significant at $1.4 billion. It's important to understand the components of this charge, as these are quite different and also explain its magnitude. Firstly, there was a charge of around $450 million relating to the Distill Ventures, which was the direct result of a strategic decision to move forward with a reduced number of investments and to no longer bring in new brands.

Also, there was around a $230 million impairment charge for Aviation Gin, given the challenging macroeconomic environment and the softening of the overall gin category. We're focused on reinvigorating the Aviation brand and strengthening it for the future. Secondly, there was a $230 million charge for restructuring investment and costs relating to the supply chain agility program and Accelerate.

Finally, there was around $150 million charge for the changes in the distribution model in France. The remaining balance comprises smaller charges for mostly U.S. brand impairments, and you can find a detailed slide in the appendix.

Moving to the balance sheet. We finished the year with closing net debt of $21.9 billion, which was $0.8 million higher than at the start of the year due to unfavorable foreign exchange movements from both sterling and euro debt. Given the lower EBITDA year-on-year and unfavorable foreign exchange, our leverage ratio increased to 3.4x net debt adjusted EBITDA, ahead of where we ended in the prior fiscal year. This was above our target range of 2.5 to 3x. However, it was consistent with the guidance that we shared during the year.

As Nik said, as part of Accelerate, we've been clear on our commitment to bring leverage down, guiding for this to be well within our target leverage range, no later than fiscal '28.

And with that, I'd like to hand back to Nik.

Thank you, Sonya. Let me talk you through the guidance for fiscal '26 and then share some closing thoughts. We're already about a month into fiscal '26, and I continue to see a challenging consumer environment. For the full year, we expect similar rates of organic net sales growth to those that we have seen in fiscal '25. We're also mindful that some factors will impact phasing of growth through fiscal '26. Two key regions I would highlight here are Asia Pacific, where we will have a relatively late Chinese New Year in 2026 and also NAM, where we are lapping the increase of Don Julio inventories as we highlighted through the fiscal '25.

As such, for the first half of fiscal '26, we expect organic net sales growth to be slightly negative with growth skewed to the second half. We expect to deliver positive operating profit leverage as we set out before, boosted by our savings from our Accelerate program. For fiscal '26, we expect mid-single-digit organic operating profit growth. This also includes the impact of U.S. tariffs based on what we know today. We have also shared today tax and interest cost guidance.

Finally, on free cash flow, we expect to deliver circa $3 billion of free cash flow in fiscal '26. This is also importantly after cash exceptional costs. You will also see in the appendix, a slide updating on the latest guidance for tariffs into the U.S. Assuming that there are no changes to what is currently proposed, namely a 10% rate for U.K. imports and a 15% rate for European imports into the U.S. then the annualized impact would be circa $200 million, of which we expect to mitigate 50% in the first year before any broader pricing actions specific to tariffs.

This also assumes Mexican and Canadian imports remain exempt under USMCA. As I have said, this is included in our fiscal '26 guidance. Also, as highlighted in today's press release, we have changed our policy on hedging and now net out anticipated transactional and translational foreign exchange.

Going forward, this should reduce foreign exchange volatility over time. So to close, in a challenging year, we delivered organic sales and profit in line with our guidance in fiscal '25, and with a healthy balance between volume and price/mix. Whilst I'm encouraged by our areas of progress, there's clearly much more to do, and I'm excited by the potential opportunities as we sharpen our strategy to ensure Diageo is on the front foot again. We remain focused on driving sustainable growth ahead of the market in an evolving TBA landscape, including addressing the role of moderation.

We will fully leverage our incredible portfolio and the competitive strengths of our business. We remain firmly focused on what we can manage and control. The implementation of our Accelerate program is key to strengthening Diageo for the future. We are embedding a more performance-driven culture across Diageo, embracing continuous improvement, increasing speed and agility and driving increased accountability amongst our leadership. This is supported by clear expectations on behaviors, capability building and aligned incentives where we have made progress in the year, specifically on free cash flow and ROIC. While there is a lot to do, I'm also focused on instilling confidence in the team and with our people on what we can do together.

Personally, now 11 months in, I am honored to be trusted by the Board and the broader organization to lead Diageo in the interim period. And I'd like to say that I've never been more convinced as I am today about our employees' passion for our brands, the strength of our brand portfolio and the incredible growth potential ahead for this company. I'm excited by our work underway to drive meaningful growth opportunities as we continue to progress our reshaped priorities.

I look forward to updating you on how we can accelerate top line growth, how we are strengthening our capabilities and improving commercial excellence in the coming months. More to come on this, but rest assured, the Board and I are working at speed and with a clear mandate to restore Diageo to a top quartile TSR consumer company. Thank you, everyone, for listening to us today.

Good afternoon, everyone. My name is Mitch Collett from Deutsche Bank's Consumer Staples research team in London, and I am delighted to be joined on stage by Nik Jhangiani, the CFO of Diageo.

Nik, it's only been a couple of weeks since we saw each other in Dublin. I'm aware that at that event, you had your very first pint of Guinness. I guess the first question, I'd like to know the answer to is how was that pint of Guinness?

Actually, it was pretty amazing, and I wasn't quite sure how I was going to feel about it, and it was funny because my son kept telling me, do not try our first Guinness in front of the investors. You have terrible ways of controlling your facial expressions. That's not a criticism, but so just be careful.

So the night before they took me up to the bar and I actually poured my own Guinness. It's quite a procedure, it's 6 steps. So it's quite exciting. I actually did quite well. I'm going to say something I'm not supposed to say. So is this -- being I shouldn't say that. I'm not just saying it already. No, not -- okay, it's being webcast. I won't say it. But if anybody wants to know what happened, I will tell you separately.

But I tried my first Guinness and I tried side-by-side the Guinness 0.0, and I swore to you if someone wasn't standing by me, telling me what I should be kind of looking for in terms of the difference in the taste? I would not have known. So good experience. Having said that, I'm still pretty much in love with this brand. So -- well, I just add it to my repertoire. Let's put it that way.

It's a great product. So hopefully, the first of many. So you're roughly 9 months into the role still a relative newcomer to Diageo. What are your reflections on Diageo as a business? What has impressed you? And what do you think needs more work?

Yes. It's been 9 months. It's been a long 9 months. I've been on the road a lot, which has been really positive because I've literally outside of getting into Latin America physically as in into some of the larger markets there. I had a chance to meet the whole team in Miami. So I have been pretty much everywhere from South Africa to Nairobi to Nigeria to Shanghai to Singapore, I'll stop naming them. But yes, I've traveled a lot.

But you know why? It was really important was to get a really good sense of our people, but also get a chance to meet our customers, right, and get a sense of what they like, what was challenging, what would they see in terms of market trends, et cetera. So it's been amazing. But what clearly was evident was we truly have some of the world's best brands, right? We are leaders across multiple categories, if not most of the categories in which we play within the Spirit space.

We have been -- I've been blown away by the level of our marketing. And I think our supply chain capabilities are fantastic as well, right? And it's quite concentrated when you think about that. So very solid there. But ultimately, it's all fueled by 3,000 very passionate people who really believe in the business, really believe in the brands and want to grow, right? It's been a challenging time for the last couple of years, I think, coming out from what happened in November '23 with the profit warning and then obviously, just kind of the macro situation, the slowdown and the destocking, et cetera, so incredibly passionate people who want to win.

So a lot to kind of rebuild in terms of that confidence internally, but what we can deliver externally as well. On the flip side, I think there's lots of opportunities, right? And I say that with a perspective of, while I think we're really solid on the brand side, I think we haven't necessarily been as solidly synced up when I think about brand and physical availability and commercial execution, right? And I see that being even more important in a space where it is quite crowded when you think about TBA and if you even think about the Spirits world, right?

And whether it's walking into a bar and seeing the back bar display and if you're looking for something, it's hard to find. When you go on to a menu, and it's not just going to be 1 category or 1 product or 1 brand that's listed or called out, right? When you go into a shopping aisle of a liquor store or a retailer, it's a very crowded space, right? I mean, in terms of the number of brands. And actually, what's actually grown even within categories of brands is flavor proliferation, right? Vodka being a clear example of that. So I think it becomes even that much more important around how good are we at execution at the point of sale where you're truly able to link up physical and mental availability. So I think there's a lot of opportunity there.

Clearly, I think we have opportunities when you think about metrics in terms of how we are focused and measured. And I think, obviously, continuing to look and lead the way from a growth angle, given how large we are in terms of within the industry, particularly in North America, and a big part of that, I think, is also how we think about RGM and pricing and mix that continues to be relevant when you link it back to consumer occasions, choices, channel structure, your pack price architecture, et cetera. So there's a lot more in that space, I think that we can do.

Understood. So 2 weeks ago, you launched Accelerate where you're targeting $500 million of cost savings. And that the event in Dublin gave some context around the 4 buckets of savings as you see them. So perhaps let's dig into each of those. So the first one is A&P. Where do you see the biggest opportunities to make your A&P more efficient? What makes you confident you can do that without harming your brands? And to what extent does digital and AI play into that opportunity?

Yes. So I would actually take the 2 buckets together because I think there's A&P spend and there's also trade investment. And then I'm going to link them up a little bit, so you get a sense, right? So I think let's start with the most simple one around A&P spend. And I'm just going to give you that first bucket piece in terms of the split, rough numbers, but roughly about 40% of our spend of that bucket of circa 3.6 billion is in what you would call media scale and reach. So what are you really doing whether it's through print, digital, social, TV, et cetera, in terms of back to that mental availability piece, right? So good dollars there, and I'll come back to how I think we can do that differently, okay?

Then you've got linked to that is very much about circa 20%, which is your development cost or you're nonworking as you might call it, right? So that's everything from your creators to your media buying through content generation et cetera. And so that's about 20%, all right? So I think when you look at those 2 holistically, first, I think there's a big opportunity to bring down that nonworking. And this is where I think AI, to your point, comes in and better digital tools because all of our media buying today is so disparate and so fragmented. And there's no reason why it should be that way, particularly in a world where we've got great tools and you've got an ability to even narrow down the number of agencies that you work with even absent tools, right?

The second piece is there's a lot of duplication of costs because in what has been quite a decentralized model within Diageo, even their global brand teams. There's almost been an ability for local teams to content to create and actually use some of what their local content creation is versus what is the global brand even though they might be sticking to brand parameters, right, of what are the intrinsics of the extrinsics you want to talk about, but they're driving duplication. Why? Because they've been allowed, right? So in some ways, I almost say, well, if we change the way we work in terms of that development, where there's co-creation between the local brands, local companies or local markets and the global routines. And it doesn't have to be in every area or category. So gin, for instance, where we know the U.K. is very big in gin. We know, for instance -- Spain is very big in gin. We know there are certain countries in Latin America, they're very big in gins.

So if they are content co-creating you avoid that duplication of costs, and then you get the benefit around the fact that, that content that has been created gets better where in and where out, right? Because you're running it more through a larger number of markets. So your returns on that are a lot better as well, right? So I think both in terms of nonworking through tools, content creation, co-creation, the virtual studio that we've created that allows you to actually take something and do it with AI within seconds. Where you actually don't even need to bring another agency in when you're thinking about what's going to be relevant for GB versus what's going to be relevant for Spain, for instance, right?

And how you can customize that within seconds, right? I was with the CEO of WPP a week ago, and he was in our office having drinks with us and he was showing me literally on his screen 2 ads that were running side by side, right? One that it costs tens of millions to build and create and one that have been created by AI, okay? I actually got it wrong in terms of which one is which. So it just tells you the power of what's available out there that allows us to think about that development cost. But the media scale and reach piece, I don't think we've been very good at how we're allocating that spend back to a full cohesion across the line when you're looking at that mental and physical availability but sufficiency of spend behind the brand and also returns both on a short-term and a long-term metrics.

So I think you've got to look at it holistically, right? And I don't think we've been very good about doing that. So I think there's been a lot of money put and some of it is great, but there's an opportunity to really rework that. And then you've got your commercial A&P piece, which is really about your commercial execution, right, and what you're doing, point-of-sale material, for instance, what you're offering in terms of promo activity. But that also links to your gross to net, which is your trade investment and both of those have been outpacing our top line growth. Well, that's not acceptable for me, right? So I think there's a big opportunity in terms of how we look at rationalizing that spend. in a more effective way to drive more pay for performance as well, right? But that's a multiyear journey.

That doesn't happen overnight, right? So I think when I look at those 2 buckets in combination, that clearly is an opportunity for us to go after, right? And actually, to your point, not compromise our brand equities and actually invest better dollars with better returns around growth.

And if we can dig in, I know you covered trade spend optimization there, but is there -- how do you think about managing trade spend such that it doesn't impact affordability given that affordability is clearly something that consumers are very focused on now?

Yes. But I think the challenge in your question is you're thinking that I'm going to cut trade spend. I'm actually talking about optimizing my trade spend and linking it to more pay-for-performance. So I don't want to take it away from my customer, but I want to link it to what is consumer facing. And what is ultimately reaching them as opposed to funny money that they just get to deduct and keep in their buckets, right? That's the difference.

So it's not necessarily about reduction, it's about optimization. With optimization, that could be better allocation and some reduction as well. But there's duplication of trade spend both in trade investment and commercial A&P as well. And within commercial A&P, the other piece that we're not doing very well is how well we actually do our POS for. And clearly, that's an opportunity to. So I don't see us in any way risking our brand equities. In fact, I see us being over-indexed on investing around brand development, around brand equities, particularly where growth is.

Understood. And then maybe the next 2 parts, we'll try and do those together. So overheads is part of it. But I've always thought Diageo is actually a very efficient business. So interested to know how you can take money out or make cost savings on overhead. And then also supply chain because you had the supply chain agility program, which I think is still running. Are these savings incremental to that? Or is it all sort of woven in together.

So I'm not going to get into what's incremental or what. Because I'm drawing a line in terms of what was in the past. I can't really talk about that, and I'm talking about what we can do for the future. I think to your point around overheads, you are absolutely right. Actually, when you look at it on the element of how our overheads are and how they have been as a part of revenue, actually, we run pretty lean. My challenge back would be, I don't think we necessarily have invested in the right places. And in some places, again, we've got excess and fat in duplication. What do I mean with that? With the fact that we have a very decentralized model, we build a lot and invest a lot in terms of capability tools, very much at a local level, right? We don't leverage our scale, right? We haven't truly defined clear operating principles because I think Diageo, particularly in the last 5, 6 years, has grown tremendously, right?

And we haven't really defined what is the role of a country or a market, a region and group. What needs to stay very close to in the market is consumer and customer. You don't want to lose that relevance. You have to have that localness, right? But that doesn't mean that everything needs to be tailored and done differently, right? And I think that's where we need to leverage our scale and how we build capabilities and look at our business end to end. And for me, it's not so much around savings there, it's about reallocation and how do we invest smarter. One of the areas, for instance, that I talked about was I don't think we have best-in-class commercial execution. Where in a crowded space, you probably need that even more. I don't think we've been structured as we think about marrying up a consumer choice framework with our brand portfolio strategy with our market growth framework with how we need to think about outlet occasion segmentation, right?

And a lot of that last piece and bringing that all together also the rubber hits the road when you have really good feet on the street, so to speak, right? The feet on the street that are not in their order taking and/or merchandising, feet on the street that are actually helping the customer upsell and drive their margins and ultimately drive our distributor and our margin as a result of, right? But only if it's linked to clear occasion channel app price architecture, RGM is another area where I think we need to build capabilities at the central level and have some element of that local.

So I think that's the operating model piece that might mean back to that point that I made earlier or when we talked about this, was some of that might need to be reinvested in different areas to build capabilities that we don't have as strong today.

Okay. So you've talked about how the operating model is changing and how that's all been done as part of Accelerate, I guess can you talk about how you are ensuring that employees are engaged and behind the Accelerate initiative because it sounds like quite a big change in your approach?

Yes. Listen, I've been I've been actually very positively surprised by the level of engagement, both from when I've been out in markets. But also, as I've talked with the senior leadership group, we've had the opportunity to do to large meetings with them. These are 130-odd top leaders, then also with the exec and then with the Board as well. And I think bringing clarity and structure and being very clear on the deliverables and the outcomes and the metrics and the incentives or link up. So it's not doing one without bringing it all together. I think we've got incredibly passionate people, as I said, we are excited about the brands and what we can do.

It's not great that they feel pretty beat up in terms of what's happened in the last couple of years. And what that's meant in terms of performance, but what that's also meant in terms of share price, right, for at least that large top cohort. But we've got metrics all the way down that are important for everybody as well. And I find an incredible amount of energy from the organization around what is Accelerate, because it's not Accelerate being seen as a cost savings and a cost-cutting program. it's accelerated to allow us to invest where there's growth and actually bring more structure and rigor, but also in some ways, simplicity to how we think about our business, right? So to date, but more to come as we continue to go down that journey.

Okay. So another aspect of Accelerate is the commitment to sustainably deliver at least $3 billion of free cash flow from next year yes. And maybe we can talk about some of the components there. So CapEx, first up. I know there's some projects still in flight. You've also said there is going to be a glide path down. I think the level last year was close to 7%. I remember when the Azure had a CapEx to sales of closer to 4%. Can you give a bit more context on how you manage that glide path down? And what is the sustainable level longer term?

Yes. So I think probably for the last four years, there's been an elevated level of spend. And quite honestly, it's been even higher than the 7%, okay? And in absolute dollar terms, you're talking about circa $1.3 billion to $1.5 billion a year, all right? So it's been quite significant. Now keep in mind, that was very much on the back of a new growth algorithm that was put out which the narrative got all consumed by just one element of that, which was the top line, which was the 5% to 7%. And I think keeping aside the external narrative internally, that's what was being driven for.

So clearly, if you're driving for that, well, all your choices in terms of investments to be able to support that level of growth, go into capacity, go into maturing liquid, go into tools that you're creating so that you can hopefully be able to recognize and capitalize on that growth, all that kind of stuff, right? Now we are where we are, right? And what I'm trying to make sure that we're doing is it doesn't make sense to stop things that are midstream that are 60%, 70% kind of there. And we need to continue and then we need to look at how do we effectively really look at that asset base and sweat that asset base a lot more as we go forward, right? And that's where the supply chain piece comes in.

Because for me, it's not so much just about procurement savings, et cetera, it's really about how much more are we going to be looking at efficiency of use of that asset base as we look forward, right? So clearly, as I look at CapEx beyond '26, I do think there's a glide path. I've said in the short term, in the shorter to midterm, we should see that coming down more towards the 5% to 6%, right? I think we also have to keep in mind within that is there. And I think in some ways, you have to pull out the beer piece separate to that. because you were with us and some of you in the room might have been with us in Dublin.

The Guinness growth is very, very attractive and continues to be something that we feel we have not leveraged as much. Part of it has been linked to capacity, right? I wish we could rewind the clock and have pulled back on some of the whisky and the tequila and the Chinese whiskey and India, a single mall type of lay down of capacity and put more into Guinness. But hey, listen, hindsight is a great thing. But I think we just have to separate that out in terms of how we want to look at that growth profile as well of the beer business. So I think if we look at that 5% to 6% and then over time, for me, it's also about not just that percentage because I can be misleading. So what do I see as a good absolute level of spend. And we'll come back with more color around that in terms of absolute dollars because I think this is a business that also needs to focus on absolute dollars on so many different levels, whether it's on free cash flow, whether it's on operating profit and a and gross margin in dollars as opposed percentages, which sometimes can be very misleading.

So I think there's a lot more for us to do on CapEx as we look forward. I think maturing liquid is another area that I'm really looking at with a different lens in terms of both scenario planning in terms of growth, but not just growth within whiskey, growth as we look at categories, even crossover today. versus they probably didn't as much in the past. But it's a complicated process. That's because you're laying down liquid for what's going to be consumed at a minimum 7 to 10 years from now. But it's not just about the quantum of liquid any given year. It's also the flavor profile of each of those liquids that you need for your blends, et cetera. So a couple of things changing there, moving away from this historic bias of that was the growth, and that's what's going to come back.

It is a different world, particularly when you think about cross-category growth. And then also a bit of a risk-averse mindset around I always need to have enough liquid, because I never want to be out of stock. And I definitely never want to be out of stock. I want to be on shelf, right? But I also think that we can manage that by being more dynamic in terms of how we look around managing that throttle around laying down liquid. But ultimately, our free cash flow is going to be growing also from top line growth, operating leverage and driving that piece. That's critically important as well, right? So we've got to put it all together. And like I said, the 3 billion of floor on which we feel very confident that we can continue to grow by using all of those multiple leads.

Okay. Last question on Accelerate and then I promise I'll let you move on something else. So the last point is that you have targeted 2.5x to 3x net debt to EBITDA by 2028?

No later than.

No later than 2028. Apologies. You said that within that divestments might play a role, and I think you used the word substantial. I appreciate you're not going to tell me what you're selling today. But what does substantial look like? And what are you solving for? What are you looking for in the assets that you would look to potentially sell?

Yes. So first, what I'm solving for is really stepping back and looking at our strategy and making sure that every one of the assets that we have is rightfully a part of our strategy as we look forward, right? So that's the first piece. The second piece is, alongside that, how capital intensive are some of those businesses? And how much of a drain are there as we look at what I want to continue to focus on delivering in terms of fee cash flow.

But most importantly, I would say it also links back to what kind of valuations can I receive and particularly where some of those assets, again, not get into details might be quite interesting for a number of different buyers, right? And actually belong better in line with their strategies than mine, right? So I don't see this being driven in any way by a unilateral focus to delever, although I think clearly, that supports our deleveraging targets. And hence, both from a valuation perspective and a time line perspective, have not, in any way, strapped ourselves in because we need to do what's right for realizing maximized value, but because those are not in line with our longer-term strategy.

Okay. Thank you. Let's move on to the U.S. And there's obviously a lot of debate about whether the softer U.S Spirits market growth is a function of cyclicality or normalization or structural factors, including things like GLP-1. What are your thoughts? What are my thoughts.

So I think today, the way I see it today, right? Is, I think, largely the weakness is being driven by the macroeconomic environment and the challenges on the consumer wallet as well as the fact that you do have this whole destocking cycle in some ways from what was out there in the past, and there's a lot of noise and how that keeps moving. I do believe largely keeping aside tariffs and what's been happening from a tariff perspective in terms of some of the stocking into the U.S., which I think we called out very clearly with our third quarter results. I do believe other than that, largely that seems to be behind us.

But again, I say largely, right? We'll continue to monitor and track that. To your question around the structural versus cyclical elements, I think it's probably the biggest point in my mind that probably keeps me awake at night, right? Why? Because keeping aside macro I don't think there's enough data to categorically one way or another, say, these are not having impacts, okay? I mean I'm going to try to break down what are the 3 biggest ones. And what I think is kind of an underlying theme across at least 2 of them, or broadly speaking, a bigger theme that we need to be conscious of.

So you look at cannabis, and I think, hopefully, a number of us in this room who have been in the U.S. and cannabis has been around for a long time in a number of states from the data that we have to date. And again, I say this is something that we need to monitor. To date, we continue to see that, that is not having much of an impact on Spirits consumption in particular. And in fact, most of the occasions where people are consuming, whether it's edibles, chewable, smokable, in some instances, drinkables and I'm going to come back to that. There's a lot of co-consumption with Spirits as well or with alcohol, right?

So it's not like you consume one or the other, and that's it, there's co-consumption. But it's one that we need to keep tracking. Where I think there is a lot of potential noise. Rightfully so is this THC hemp-derived beverages that are meant to be at a certain level that clearly are not just even crossing those levels, but crossing state borders and getting into ways of distribution that kind of was not what the farm bill was intended for, right? So it's an area we need to watch because either it's going to get more regulated, right? And if it does, is that something we want to play in and/or something is going to have to give that. But it's one that we need to watch. GLPs to your question. again, from the data that we have seen, and there's probably about 12 million, I'm talking about people who've been on it, but maybe even the number is higher. But people who have been on it or have been in and out, et cetera. Again, to date, we're not seeing a significant impact in terms of their reduction of Spirits. And I'm going to distinguish TBA and Spirits because I do think we're not seen on Spirits, that could be something different on their side of things. For people who are drinking larger quantities of a carbonated or nitrogenated product, that probably has some impact on gut from what we're hearing, right?

But again, some of that is anecdotal as opposed to true data. I always joke, and I'm sure several of us in this room have friends who are on it. And I always joke and say, well, if you're going to be on GLP-1, so you're going to be losing some weight and looking good. You probably want to go out and show yourself off and you probably want to be want to consume because that's what you tend to do, right? Now how you consume what you consume might be different. And I think that's where we're going to continue to stay with that trend because I don't think it's going away, right? And I think it's about truly realizing if there are impacts, how do we tailor our offering and our portfolio.

And I'll come back and talk about that because that's the broader theme to meet that up. And then I think the third piece is really a Gen-Z is drinking less, right? Again, it's one that we need to track and watch. It's probably going to be the largest cohort of LPA population. If you look at the next 5 years, it's coming in. to the legal drinking age. They are definitely drinking better, not more, is what we see, and they're definitely coming into Spirits earlier than the millennials of the same age cohort that these guys are, right? So clearly, there's some favorability, but the drinking they're definitely drinking less. What does that all kind of play out when you think about GLPs, in particular, maybe cannabis?

And then obviously, this whole drink less or not drinking is what does it mean in terms of moderation? Because if that is a continuing trend, and it's actually only picking up steam, how do we look at that? And we've been doing some research, which is, again, early days, and we're doing it across 21 months, but we've got some early indications from both the U.S. and GB. And there's almost 10 things that people are looking at when we've interviewed them, right?

Now again, take all of this with a bit of pinch you salt when you do traditional research, because everybody is going to go to you and say, oh, I haven't drunk for 3 months. I'm drinking less and I'm -- or I floss every day and they haven't floss for a year type of thing. So it -- but it's good data points for us to think about, right? So at one end of the spectrum, we hear people say, well, I'm actually just not substituting. Now what they're doing with their lives, I don't know, but I don't want to be hanging out with them, but they're just not substituting with anything, right? So they're drinking tap water, they're drinking milk, I don't know, right? Then there's an element of those that say, well, if I'm drinking thing, I want something that has functional benefits.

So I want something that's good for me too. And that's a space that we need to think about. Then you've got people who are just saying, well, I'm consuming hot beverages, drinking soft drinks or drinking premium soft drinks. So in some ways, there are ways that we might be able to play, particularly when I think about functional right, elements. But then when you look at what they're drinking if they are drinking and staying in the alcohol space. There's 5 things there, too, that are happening. One, RTDs okay? So they're looking at that as a way of controlling either their ABV and/or ABV and calories because there's very clear transparent guidelines in terms of what that is.

So there's RTDs. There's smaller formats that people are going to because, again, it's a way of portion control, so to speak. There is a whole focus around this, I'm making better, not more. So how do you continue to play into that premiumization piece when people are going out I'd rather drink one, but really good stuff. And there is 2 other pieces which are quite interesting. One is people are drinking 0.0, so, nonalcoholic, right? And then the last one, which was quite interesting for me is we want lower ABV products. Now is that lower ABV products in RTEs, it is low ABV actual Spirits bottles, et cetera. That's a space where I think we need to think about because in my mind, I was thinking, well you can make your own low ABV, just for half a peg as opposed to a full peg instead of a double, you have a single.

But I think if it comes back to control and being mindful on your consumption, well, then you know what you're consuming when you have low ABV as well. So I think that's where we need to be focused. When we think about moderation across how it might play across all of these vectors, right? And how do we think about addressing that, particularly in those 5 or 6 spaces where we have a right to be able to play and win.

Okay. I'm conscious we're getting short on time. But earlier, you mentioned focusing on dollars. And I think I've heard you say in the past, perhaps as an organization you've been a little bit too focused on percentage profitability versus absolute dollar. Can you talk about what that ultimately means when you think about operating leverage going forward? And to what extent is that reflected in incentivization? Or is that perhaps something you're going to look to change?

So on the latter, yes, absolutely, we are having discussions with the RemCo. but I think as a Board we'll make the right decisions and come up with what do we see as the right metrics because I'm a firm believer around, do you have the right metrics and you are measuring those to deliver those, you need to incentivize them as well as simple as that. So there's no 2 ways about it. And that works time and time again. So we've got to be focused on the right metrics. I think it comes back to your question around have we had some of those right metrics and has there been an overfocus on margin percentage.

And for all you analysts, including you, Mitch, who loves to do your models, right? I'm not going to make your life easy. It's about dollar profit, right? And it's not about just being able to put into a spreadsheet how much is my margin percentage going to grow. And how does that -- what does that really mean, right? So -- but on a serious note, I think the challenge has really been it's potentially driven wrong behaviors or some wrong choices in terms of where we want to play or not play, because of margin percentage even though absolute dollars and value pools are quite attractive, and we should be playing there.

RTD is a perfect example of that. Where I actually look back and I've come in from the Coca-Cola system where we've gone into RTDs, but why have we gone into RTDs or why did they go into RTDs? Well, because it was margin accretive. And it was a very similar business and a route to market and all that kind of stuff. But in some ways, you left that space open, right? So did beer companies come in, right? Well, why? I mean when you think about Diageo and actually Smirnoff Ice and the fact that even with an inconsistent and unclear strategy around continuing to invest and grow there, it still stayed live. It's a great product, right? And we have a huge opportunity when you go back to this element around the fact that it's a recruitment tool. If people are drinking less and drinking better, there's either the premium Spirits, but if they're also looking at ABV and convenience, right, back to this point around moderation, RTDs play a very important role there.

If you marry it up with the right brands for yourself, you actually build brand equity because they're coming into Spirits earlier. So I think there's elements of what we need to do to change that mindset and actually play in value pools outside of just RTD, and I can give you several examples, but I know it's 34 seconds. But there's examples to where we've not made the right choices, which are going to change going forward.

Okay. Thank you. I'll try and squeeze one last question in. We've going to talk about India. It's been the great hope for the category globally for a number of years, but now we're nearing a free trade agreement. How do you think about the role India plays for the group going forward?

Incredible. Well, listen, I think India has played a great role for the company so far, right? But I think when you think about the fact that it is one of the largest whiskey markets. And it's not just about the local brands, but really are some of the IMFLs and the more premium opportunities as well. That reduction clearly is something we'd want to pass on, which would stimulate volume and top line growth, right? And it's a category in which I think the team has done an incredible job building out our presence with both local and foreign brands. And they've actually expanded both the repertoire and the drinking occasions and the drinkers who are coming into that space. So super excited about that.

Great. That's a perfect place to leave it, Nik. As always, it's been an absolute pleasure. Thank you very much.

Thank you.