Diageo - Earnings Call - H2 2025 (Q&A)
August 5, 2025
Transcript
Operator (participant)
Good morning, and welcome to Diageo's f twenty five preliminary results q and a conference call. Your call today will be hosted by Nick Gangiani, Diageo's interim chief executive. This conference is being recorded. To ask a question today, please press star followed by one on your telephone keypad. And to withdraw your question, hit star followed by 2.
We're now ready to start the call. Sonia, please go ahead.
Sonya Ghobrial (Global Head - IR)
Thanks very much. Good morning, everyone, and welcome to GAVA's fiscal twenty five results q and a. I'm Sonia Gabriel, head of investor relations, and I'm joined this morning by Nick Sandiani, interim chief executive.
Just 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 UK and US 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. 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.
Operator (participant)
Thank you. We'll Okay. Thanks. Start today by taking thank you. We'll start today by taking our first question from Sanjit Baiulia from UBS. Your line is now open. Please go ahead.
Sanjeet Aujla (MD - European Beverages Equity Research Analyst)
Hi. Good morning, everyone. A couple of questions for me, please. Firstly, on the on The US, Nick, are you able to give us a sense of how you're thinking about the depletion outlook? Appreciate you've you've called out a bit of caution at the start of fiscal twenty six, but love to get your your sense of how you think about depletions there.
And should we interpret the inventory message to to imply shipments in line with depletions on a full year basis in The US? And secondly, you're you're investing a lot behind Europe. The spirits part of the portfolio has been quite a bit under pressure in fiscal twenty five. What are you hoping for out of Europe in fiscal twenty six as the investment step up? Thanks.
Nik Jhangiani (Interim CEO & Director)
Thanks, Sandeep. Great to be here today with all of you. On your first question, I mean, I think, you know, clearly, our focus in '25 was to get the inventory levels back to more normalized levels. And as you saw in q three, clearly, was a free tariff kind of, you know, buy in, which we believe has largely been cycled through in q four. But, you know, we will continue to look at that from an angle of how that might play out during q one as well.
Right? 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 a local as well as imports. You know, clearly, just putting it back into perspective, we are planning for a more cautious consumer environment in The US for fiscal twenty six on on the top line, but very much focused around how and where we can continue to outperform.
But, you know, doing a broader strategy, sharpen and refresh across the group to really look at how do we get a broader brand portfolio growth happening both in The US and across the rest of the globe. In some ways, that that does also talk to your question on Europe. Clearly, you're absolutely right. I think the spirit, you know, market for us was in sharper 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, right, 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, you know, Southern Europe, just using that as one example, the fact that we were managing, you know, four or five very unique, very different markets. And, you know, you'll know from my prior experience, we had a lot of focus as we looked market by market to the consumer dynamics, and more importantly, even the customers and your route to market are quite different. Right? So, you know, I think if 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, and 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 spirit and not just in whiskey, for instance, France, which is a large whiskey market.
Same thing in in, you know, Italy or Spain. And I would say even in a market like Germany, you know, combining Germany and Austria and Switzerland, having a focus there allows us to really be a lot more consumer and comes to customer centric. So I think that's what we're excited about that brings us that much closer to the market. And hence, you know, we feel that we will be able to then support growth, and it's not a one year focus. Right?
This is what we're looking at in terms of a longer term trajectory as we look forward.
Operator (participant)
Our next question comes from Simon Hales from Citi. Your line is now open. Please go ahead.
Simon Hales (MD - Consumer Staples & Beverages Research)
Thank you. Good morning, Nick. Good morning, Sonia. Two for me as well, please, if I can. But firstly, mean, I'm just building on some of the things you've just been saying, Nick. Can you just talk a little bit more about the moving parts in that fiscal twenty twenty six 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, Nick, things like the timing and phasing of the Chinese New Year perhaps impacting the h one, h two shift. But what gives you the confidence that you're gonna be able to see that h two acceleration come through? And then secondly, can I ask about just some technical factors that maybe are impacting EBIT and earnings into 2026? On on the EBIT side, you clearly carried out a number of disposals in the year, which you flagged. I think you disclosed that the deconsolidation of those probably is about a $50,000,000 reduction in starting EBIT. But since the year end, you've also sold Ghana in The Seychelles breweries. How big an impact will that have from a scope standpoint?
And then below the line on finance cost, I think you capitalized some finance cost, I believe, for the first time in the p and l. Given that some of the projects related to those capitalized funds costs are ongoing, how should we think about the size of that element in the finance line as we go into fiscal twenty six and beyond?
Nik Jhangiani (Interim CEO & Director)
Great. So let me tackle the first question. I mean, I think, you you rightfully called out, you know, what what does the show look like for half two 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 wanna build more capability capability and where we want to really accelerate some of our work. And the areas that I would really call out are in in two main buckets.
Right? Clearly, a lot of work that we kicked off on driving for much sharper commercial execution at point of sale. Right? And I think that is critical in terms of allowing us to bring together really that that great work we do with the brand and how do we bring it alive and activate the point of sale, be it off trade, on trade, and, you know, a lot of work that we're doing when we're looking at menu placement, back bar displays, but having very clear metrics and KPIs against which we can measure our progress. And this will be a monthly year 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 six priority markets on RTDs. Right? And I think when we step back and look at SmartArby, what we actually set up in or with the category twenty years ago, And the fact that even with some reinvigoration and stuff that we're doing around the the brand, the flavors, the portfolio offerings, how we're looking at that piece in terms of the, you know, relevance to consumer occasions is what we're trying to accelerate. And I think you'll see that in the first half, but really that will ramp up in the in the second half. And then I would say the last piece is really the the broader work we wanna do on our portfolio.
Right? Clearly, we've had some really good, you know, performance in key brands and some of our global brands, be it Don Julio, be it Guinness, be it, you know, what we've talked about with Crown and Johnny Walker, even though the organic sales declined, we gained share. But I think there's more that we can do when we look at both the mainstream core and premium core. Right, and we've gotta be able to start driving that. I think when we look at the premiumization piece, that's very much there to stay.
How do we continue to build on the Johnny Walker brand, for instance, and the price laddering and everything that we've done with blonde as 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, you know, at scale as well. So I think those are the three 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 your technical factors, think you rightfully called out with what we have already, you know, exited as of the end of the year. That's about 50,000,000 in operating profit. We've had about 250,000,000 in in NFT. When you look at the deals that had not completed year end but have since completed, that's really Ghana and Stayshow. That would have approximately another 15,000,000 impact on operating profit for f twenty six and about 350,000,000 in NFT.
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, offline. You
Operator (participant)
Our next question comes from the line Celine Panucci from JPMorgan. Your line is now open. Please proceed.
Celine Pannuti (Managing Director)
Thank you very much. Good morning.
So my first question, Nick, is on the the first half. You called the the Can you give us a sense of where do you see that? Because obviously, you talk about your question about North America, but I wanted 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 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 held by a lower compensation in '25.
If you could give us as well what it means for '26. Thank you.
Nik Jhangiani (Interim CEO & Director)
Right. So, I mean, I think if you look at the half one in terms of the guide, you're right in terms of US. You know, 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, you know, I would expect to see that more half year weighted because we've also got the lapping of some of the Don Julio re stocking, you know, that happened in '25. And, you know, quite honestly, when you look at the Nielsen NAFTA data, as you look at the exit, you can see that, you know, 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. You know, the 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, you know, feet on the street, both in the distribution 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, you know, as a result, ours as well. Right? 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, you know, clearly, The US would be one of those six priority markets, which is an opportunity as well. Pivoting on to then your question around China, clearly, you know, outside of Chinese New Year timing, the market has been more challenged. But, again, I I look at that market and having visited, you know, late last year and having spent time with the team, you know, again in in March in Southeast Asia where, you know, 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 your point around other different parts of the portfolio that that are important from an angle of being able to still have relevance for our brands in the right path and ensure that, you know, the brand equity stay and we know that people will come back and that premiumization journey, particularly in a market like China, is 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, you know, clearly cautious, but we are doing the right things in China, but I think across APAC as well. You probably looked at China and seen some of the Baidu numbers. You know, we do hope that that will start improving depending on how the government continues to look at, you know, some of the restrictions that they've put in place towards the second half of the year. So more to come on that. In regards to your your EBIT question, you know, 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 and p spend, we are already seeing some early opportunities of how we can better rationalize for investment, but returns driven investment. Right? And so both on the customer A and 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 or 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. Right? Because, you know, quite honestly, if we're doing this well with our conscious creating as our brand community, really leveraging the virtual content studio, there should be very little that we should have to be incur be incurring at the market level. Right? 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 the in '25, which obviously will then start getting us benefits in the '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, you know, where we see organic growth opportunities, but from the savings as well. On COGS inflation, I think we're seeing low single digit, you know, underlying COGS inflation. But remember, this comes back again to where the team is within supply has done a very good job, continue to look at productivity to be able to offset that, and we'll continue to have that everyday productivity mindset as we look forward.
Operator (participant)
Our next question comes from the line of Andrea Versace from Bank of America. Your line is now open. Please proceed.
Andrea Pistacchi (Managing Director)
Yes. Morning, Nick and and Sonia. So two questions, please. First one is on FX, please. Could 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 60,000,000 impact on EBIT that you anticipate for this year, could you say how much of that is translation versus transaction, please? Then I I have a a specific question on a brand, please, which is Astral in The US. You're talking about wanting to broaden growth to more brands in in in The US.
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 how much of a focus is this this brand for you? Could you see it becoming really scaling up, becoming, say, a one medium case brand? Would it be a slow burn, or do you do you think it could be quite fast?
Nik Jhangiani (Interim CEO & Director)
Great. Thanks,
Andrea. On the hedging policy, you know, we've done a lot of work with with our treasury team on on a twofold piece, 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. Right? And I think over time, this should really help reduce that volatility.
When you look at it, you know, in terms of what does that actually mean practically, we're looking at both hedged or an 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, you know, we were almost in some ways over hedging 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. You'll, you know, you'll continue to share more on that.
So the 16,000,000 impact is how much is really the the translation piece based on what we see today from an angle of, you know, the the current spot rates. But we can give you more detail on that as we continue to move, you know, clearly, we'll come back on that. You rightfully called out as trial in The US because I think while we've done a a really good job in trying to now reset custom logos, and it's still at very early days when you look at the element of yes. It's coming to 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 and solid segmentation in terms of where Casamigos, you know, rightfully has the opportunity to win is now what we're gonna 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 custom Eagles brand, which is gonna have a great halo effect on the brand, and that's gonna go nationwide. But again, remember, these are 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 other brands are playing. And quite honestly, I think now having gotten Don Julio and Casamigos right and we wanna get those back in growth, we have a huge opportunity to start winning with that stride, which, again, is great tasting liquid. Right?
And I actually would say to you, it's an approach that we're taking beyond North America only where clearly, I think, Axtral 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 looking at now the three price segments that we can actually effectively play around. You know, will it be a slow burn or a fast build? I'd like to believe it's gonna be a fast build that we're gonna be working in on, and I think the team is is, you know, working at speed in The US, 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 De Leon. We just brought in seventeen o seven. So I think we're making sure that we've got the right positioning on the right brand equities, and strengths that we wanna build on across the market. And, clearly, we have the liquid and the capacity to be able to do that.
So, you know, clearly, tequila is a big part of our global strategy, and I think the team's been doing a phenomenal job trying to unlock value and grow up that.
Operator (participant)
Our next question comes from the line of Trevor Sterling from Bernstein. Your line is now open. Please proceed.
Trevor Stirling (MD & Senior Research Analyst)
Yeah. Morning, Nick and Sonia. Two questions for you, Nick. First one, just coming back to The US and your route to market transformation in The US.
Trevor Stirling (MD & Senior Research Analyst)
I could could you just perhaps give us a little bit more color about what changes actually are you making on the ground?
Trevor Stirling (MD & Senior Research Analyst)
Is it extra feet on the street or is it the same people doing different things? And second question, perhaps longer term, Nick. You know, if we look back in a couple of years time, what do you think will be the the the next big global brand or brands that really significant contribution to growth? You have done for you. We have Guinness doing incredibly well at the moment.
What do you think will be the third big brand that we're looking for?
Nik Jhangiani (Interim CEO & Director)
Thanks, Trevor. So what does it really mean in terms of the change in terms of, you know, The US route to market? I think a couple of things. Clearly, this is about incremental feet on the street, both from our our distributor partners as well as ourselves. But, you know, not being clear on what the role of those those salespeople and extra feet on the street is is what's critically important.
And I think that's what we're changing. Right? 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 up skill resources to drive and help our partners drive the shop shopper execution. You know, we wanna 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.
Right? So I think it's a 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, you know, order taking. Right? So being very mundane around that that piece. So what would what are we practically doing?
Well, we've got an academy for beverage leadership. Right? 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, it's formats that can help when we look at the type of CCF work that we do and understand, you know, the occasions that that outlet is serving, what kind of brands and portfolio 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, etcetera. 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's the largest value pool that we wanna go after first. So I think we're committed to building these capabilities nationally and maintaining that that that leadership, and this is gonna be great as we look at this not just in North America, but that's what drives my, you know, 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. Right? 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, you know, in the next month as we work on sharpening that strategy that, you know, I think can really help us look at in an evolving TBA landscape, you know, how do we actually appeal and drive for more occasions and more consumers, you know, wanting to buy our brand.
And we've got an amazing portfolio when you look across all of the categories in which we play. I I just don't think we've necessarily been as deliberate stepping back and looking at it from an angle of, you know, selective plays on mainstream, our premium call, as well as what we can do on a premiumization journey with Johnny Walker, with malls. We've got an amazing portfolio of malls, 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.
Operator (participant)
Our next question comes from Edward Mundy from Jefferies. Your line is now open. Please go ahead with your question.
Edward Mundy (MD - Beverages Research)
Morning, Nick. Morning, Sonia. I think one of the things that's come through quite clearly, both in the presentation and also in q and a today is the sort of desire to broaden the growth opportunities, you know, beyond, you know, Guinness, Donghelier, Crown, and and and some of those big successes. As you reinvigorate growth and, you know, leverage the full breadth of the portfolio, I'd be interested in sort of philosophically what's really gonna drive that. Is it gonna be the reprioritization of A and P to provide more oxygen, you know, to a broader range of brands?
Or is it really execution driven, you know, moving the goalpost to to really drive that deliberate portfolio strategy? So that's my first question. And then my second question is on The US specifically. I think in the presentation, you talked about looking to drive more balanced growth. Is that balanced growth across both the portfolio, but also balanced growth across volumes, price, and also mix?
Nik Jhangiani (Interim CEO & Director)
Great. Thanks thanks for the question, Ed. So I think from an angle of, you know, broaden the growth opportunities, I think, clearly, we're a consumer goods company. Right? 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.
Right? And I think all the work that we're doing on the customer a and c 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 gonna be a single year journey. Right? This is gonna 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. Right? So I think we've gotta get that balance right. Having said that, I don't think you do one without the other. Right?
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 by first, if we're doing great stuff only on execution without having the right support from that through the line piece, you know, 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, you know, 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 is it integrated by that, not just in The US, but globally as well.
And I think The US 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 US 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. Okay? I am also very conscious that we are in a more challenged, you know, consumer environment, and that's what we planned for for '26. So without being able to give you specifics around that, is that our our focus and goal as we look forward?
Absolutely. You know, we see volume growth nowadays. Now whether that's RGB, more that we can do with Guinness, more that we can do when we actually look at our premium port and some of our mainstream, you know, brands that we can leverage and be able to get that volume growth, I think, yes, that will come through. But that's probably, you know, 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 I've talked about this Coke.
But I think beyond volume in The US, we also have to cut start looking at transactions and how particularly with smaller format, if we're getting consumers into our our our brand equity or keeping that set them there, over time, as the consumer wallet becomes less stressed, we would expect them to continue, obviously, being able to deal with our brands and hopefully upsize as we look forward as well. So I think in the developed markets as well, we've gotta have a focus not just on volume, but on transactions as well. Beyond that, across the other markets, I mean, clearly, you're gonna have, you know, Africa, lack, India, some of our other Asian markets be able to drive volume growth. And 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 you look at, you know, China, etcetera, but we did get a good balance overall between our volumes 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 format, you know, while we're driving share in The US, 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.
Operator (participant)
Our next question comes from Mitch Collette from Deutsche Bank. Your line is now open. Please go ahead.
Mitch Collett (Director)
Hi, Nick. Hi, Sonia. 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 in 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 how should we think about marketing in fiscal twenty six, either in in absolute terms or or as a percentage of sales? Thank you.
Nik Jhangiani (Interim CEO & Director)
Great. Thanks, Mitch. And I think, you know, I actually got to talk about this a little bit when I was in in Paris. So, you know, moderation has been around for a number of years. So it's not something new.
But I think as you rightfully called out, we we're stepping back and looking at this from an angle of, you know, we clearly do see today's pressure as being largely more macro and, you know, cyclical. Having said that, we also do believe moderation, you know, in some form is here to stay. Right? 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, you know, portion control. And I think that's what we've gotta tap into more. Today, we're in a very fortunate position that we have a portfolio of non op brands, obviously, led by Guinness Zero Zero that is allowing us to win, but, obviously, it's a small base. Right? 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 our TVs.
I'll come back to that in a moment, but also what we can do with not just no ABB, but low ABB. And it was interesting because, you know, I I challenged my my own thinking, you know, in the last month when I was thinking, well, why do we need to have low ABB when you've got full ABV and zero ABV? And someone can mix it up. And one of my region presidents, you know, shared a really good example of when he was out in the market and saw a lady pick up a bottle of 10 kore zero and a bottle of 10 kore. And he went up and asked around, you know, why was she buying both?
Now it's quite interesting because when you do look at consumers and shoppers, you know, those who are buying zero zero or zero alcohol are also typically buying full spirit because they wanna have that choice. She had a really interesting angle in taste that said, you know, I wanna have my gin and tonic, and I wanna get the same flavor. And if I just put more tonic into, you know, Tanqueray and dilute it, will I lose some of that flavor? By actually mixing and doing equal parts of Tankarae zero zero and Tankarae, you know, kind of full ABV, I actually get that, you know, 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 challenged my own mindset thing.
Well, then low ABV does have an option, right, or an opportunity to play. And we've got a great innovation team that can help build that out for us. Right? And RTDs is a great example of where you can actually manage ABD, 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, there's no regrets to me. Right? Because it's not saying that we're not gonna be focused on our core portfolio and a broader portfolio. It's not like we 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, right, of how people are thinking about how, where, and when they wanna consume.
Right? So I think that's what excites us about that piece. To to your question around, you know, the the 50% being reinvested, I would call that out as, you know, two two 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, etcetera, but also providing them with the right tools, and that's another area of focus, which is around digitization. Right? And how do we how do we do that at speed and scale?
The other piece comes back to, you know, what I touched upon earlier. We are a consumer brands company, and we recognize the need to be investing smartly in a and p, and particularly on the media, but through the line efficiency. Right? 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, you know, 20% down to 15%.
Well, our overall dollars stayed pretty much intact. Right? And so we were able to reposition that into where we saw, you know, good returns. And I think we have a more laser focused approach on that as we look forward. I won't get into absolute right now, you know, 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 and b and continue to drive nonworking dollars out and where we should be putting it, which is back into media scale and reach.
Operator (participant)
Our next question comes from the line of Jen Cross from BNB Paribas XAIM. Your line is now open. Please go ahead.
Gen Cross (Director)
Morning, Nick. Morning, Sonia. Thank you for the questions. First question is on total beverage alcohol. I mean, in your presentation script, you referred to recent key market study which showed that saving money was one of the top four reasons for consumers moderating total alcohol consumption. I I just wonder if you could share whether saving money was the number one reason and what the other top reasons were. The second question is more specifically on on US spirits. You've taken various impairment charges in the end. One of them is a $170,000,000 on on various US brands, fixed assets and inventory, which at least I think it's partly driven by what you described as softening category outlook. So is the right read of this is that the view US bridge, there is category growth over the midterm as now being a bit lower than it was under your previous assessment, or is it more just driven by short term pressures? Thank you.
Nik Jhangiani (Interim CEO & Director)
Thanks. You know, I to your first question, Jen, around total beverage alcohol and what we're seeing in terms of consumers' wallets and reasons for, you know, what they're focused in on, I wouldn't actually say because it'll vary by market that that was the top reason, but was definitely a large reason that people were calling out around, you know, the the consumption habits or what they were spending. The other piece does come back a little bit more to, you know, the moderation. So I am looking at different ways of consuming. I am looking at, you know, back to that point, you know, moderation for me might be drinking at fewer occasions.
But when I do do consume, I consume, you know, with responsibility, but I enjoy 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 to her about that at the at the the conference in in Paris around, you know, there are people who are just choosing not to substitute. There are two people who are choosing to drink something else.
Right? 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, you know, 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, you know, when I drink, I'll drink better, not more. Those are all elements we wanna tap into as opposed to them drinking, you know, more functional better beverages or more soft drinks, etcetera. So I think there's a lot more that we wanna 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, you know, sharpening that we'll be doing in the month to come together with with the broader exact team and our markets.
You know, I think to your question around, you know, the impairments that we've taken, Remember, this is very much, you know, driven by triggers that we need to look at in terms of how the brand is performing, 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 US 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, you know, 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 US spirits continues to be just as strong.
I'll be able, as I said, with an evolving CBA landscape that we'll continue to monitor and look at how we can play and be relevant.
Operator (participant)
Our next question comes from the line of Javier Gonzalez Lasser from Berenberg. Your line is now open. Please go ahead.
Javier Gonzalez-Lastra (Head of European Beverages Research)
Yeah. Good morning, Nick and Sonia. Two questions, please, for me. First one on disposals. Nick, you mentioned that the c n b c n b back in in May that you would be targeting disposals outside Guinness and Moorit, 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 Agava costs. Would you 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 dollar supply price in fiscal twenty five to the existing market price? Thank you.
Nik Jhangiani (Interim CEO & Director)
Thanks, Javier. 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, you know, assets or businesses that we didn't quite see as non core 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, you know, 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 interested 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 and their level of interest. I will just reconfirm that we do not have any intentions of selling Guinness, no uptake in in Tennessee at this point. And, you know, in terms of a broader portfolio question, just to to take that head on, as a part of our review, you know, we are looking at our portfolio. I think Diaz 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, you know, Agave pricing, you know, I think I I'd like to just give you some some background in terms of how you all should be thinking about this. You know, we have a very diverse supply chain, you know, sourcing strategy and about it in particular. So we own some of our own production. We do purchase on long term contracts, and we do access spot market. So it's a combination of those.
So, you know, just the fact that today's spot market price for Adobe, you know, is is lower should not be reflective of the price going into our tequila cogs. Right? Because it is that combination. But are we clearly leveraging the combination of all those as we look forward, not just into '26? Absolutely.
You know, 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, you know, at prior, you know, period of that cost. 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 our supply model. And then, you know, on FX, given some of the movements over the past couple of years, remember we do, know, 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 fees, particularly with USD and Mexico Mexican peso. That should help us in some of that volatility as we look forward. So hopefully, helps you understand how we look at that.
Operator (participant)
Our next question comes from Chris Pitchell from Rothschild and Co. Your line is now open. Please go ahead.
Chris Pitcher (Partner)
Good morning, Nick. It's funny. Thank you. Have a couple of questions, please. Actually, on on following on on the maturing spirit comment, Nick.
I mean, if we look at where your inventories are, indeed, the industry inventories are across the base, Have you given forgive me if you have. Have have you given any clarity on 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 on Guinness slowing a bit more, or are you still very comfortable in it continuing the the double digit growth or there or thereabouts in into into fiscal twenty six? Thanks.
Nik Jhangiani (Interim CEO & Director)
Hey, Chris. So on your question on maturing spirits, no. We have not provided anything, you know, specific in terms of 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 is really FX as you re you know, as you restate your maturing liquid balance.
As we look forward, and I think as I talked about, you know, 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, you know, it is complex as you you probably know even better than me. You helped educate me about first coming in, you know, in terms of of that that liquid, which is, you know, very valuable liquid, but, you know, is complex in terms of the different flavor profiles, the age profiles, what we need for blends, what we need for single malts. Right? And I think what the team has done a phenomenal job over the last, you know, four months working with with with me and my broader team is to really understand where we have that incremental notional pool in the age profile and the liquid 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 capacity, and how and where can we manage that struggle to be able to be able to utilize some of the liquid but without compromising on the investment for the future.
Right? And I think that's the work that we've done. I think we're 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 wanna be able to be much more dynamic and look at that almost every quarter to six months to think, have we made some of the right choices? Do we need to shuffle up a little bit? Do we need to pull back?
Where are the potential risks so that 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, you know, like I said, every six months and doing the right thing to protect the long term, but also not, you know, 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, you know, 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, you know, the high growth markets, which are our largest markets for GB Ireland and The US, But, you know, you were with us in 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 wanna 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.
Operator (participant)
Our next question comes from Laurence Wyatt from Barclays. Your line is now open. Please proceed with your question.
Laurence Whyatt (Head of European Beverages Research)
Morning, Nick and Sonja. A couple from me as well, please. Firstly, on Bonhoeulio in The USA, 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 lot more growth in the very ultra premium parts of the the the brand. And would you expect a bit of a recovery across, say, the Blanco, ninety forty two, other parts as well as the the strength you've seen in Reposado? And then secondly, since, I guess, the the beginning of this year, you talked about growing in the upper quartile of consumer staples.
And I think on the on the call the the prerecorded call that we listened to earlier today, you talked about the upper quartile of TSR as what you're aiming at achieving. But I think 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 up a quartile in in both of those? Or, I don't perhaps you could just clarify your your views on that per quartile. Thank you.
Nik Jhangiani (Interim CEO & Director)
Absolutely. So let me start with that one, Lloyd. Thanks for the questions, by the way. In terms of what was in the prepared remarks, and I think CSR 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.
Right? And I think we are doing that well with a very clear capital allocation policy that ultimately leads to TSR. 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, you know, and positive TSR growth in the years to come. So that's what I would call up a quartile, and that's what myself, the exec, and the board are very much focused on setting up our strategy and our our our focus around being able to deliver that. To your question around Don Julio, it's a really it's a great question.
You know, I think the repo growth is really coming from the fact that, obviously, people coming into the the the tequila category, and typically, you come in through something that's more accessible, and you might come in through a Blanco. But then, you know, you do also find that that aging of of the liquid without going to a a a very strong aged liquid in, you know, a Neajo or or even beyond is what is, you know, driving that. I think the team has also done a phenomenal job in really keeping Don Julio Reposado, you know, in culture, in moments of enjoyment. It really does well in cocktails as well. And I'm speaking as a user myself, that's my go to drink.
Right? I typically go for a Don Julio Reposado, and I like that because I had it quite clean, just with soda and a slice of orange, you wanna know. But it just kind of gives me that taste of, you know, a slightly aged liquid as well. And then if I'm sipping, I might move up to a habanero. But if I'm doing just a regular cocktail, I might have a Blanco.
So I think that's the range offering that we wanna continue building on for a broader consumer base. And I think you're absolutely right. You know, 1942 and all the variants that we're doing there and how that's playing into culture and bringing in influences. I mean, the the 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 50 c l in, you know, the Don Julio '19 42 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 great liquid.
I think your question around, you know, the broader portfolio, I'll take it out of The US 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. Right? 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 of really 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 that trial, etcetera. So I think we've got a bigger opportunity to play for in our broader market, you know, markets as we look at tequila as a whole. So we're very excited about that opportunity going forward.
Operator (participant)
Thank you. That is it for time we have for questions today. Yeah. Over to you, Nick, for closing remarks. Thank you.
Nik Jhangiani (Interim CEO & Director)
Great. So, you know, I I I really wanna thank you all for joining us today. I wanna 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. You know, the Azure rightfully as leaders should and will be moving the way as we continue to sharpen our strategy in in what is, you know, what we call 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 our pipeline, but continue to focus on building new core capabilities to allow us to win with our customers and continue building our great brands and, you know, 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, you know, we we remain committed to being able to drive this business positively for the long term. And thank you for joining us today.
Operator (participant)
This now concludes today's call. Thank you for your attendance. You can disconnect your line.