Diageo plc

Good morning and welcome to Diageo's F24 Preliminary Results Q&A Conference. Your call today will be hosted by Deborah, Diageo's CEO, and Lavanya, Diageo's CFO. This conference is being recorded. To ask a question today, please press star followed by one on your telephone keypad. To withdraw your question, it's star followed by two. We are now ready to start the call. Deborah, please go ahead.

Good morning and thank you for joining our Preliminary Results call for Fiscal 24. I hope you've had a chance to read our press release and watch our presentation on Diageo.com. Fiscal 24 was a challenging year for both our industry and Diageo as we navigated a volatile operating environment across the globe. Group organic net sales declined 0.6% and the main driver was materially weaker performance in Latin America and Caribbean region. For perspective, if you exclude LAC, organic net sales grew plus 1.8%, driven by resilient growth in Africa, Asia Pacific, and Europe regions. This offset the decline in North America, which was attributable to a cautious consumer environment, retailer inventory adjustments, and the impact of lapping inventory replenishment in the prior year. We made good progress against our strategic priorities, and we ended fiscal 24 gaining or holding share in over 75% of our net sales value in measured markets, including in the U.S. We also took deliberate actions to improve on near-term execution, and these include meeting our commitment to improve our inventory position in LAC, stepping up our route to market across several key markets, including our most significant transformation in at least a decade in our U.S. spirits organization, and delivering a record productivity savings of nearly $700 million. We've also generated $2.6 billion in free cash flow while continuing to invest for long-term growth. Looking ahead to fiscal 25, the consumer environment continues to be challenging, and we expect the challenges we saw towards the end of fiscal 24 to persist. Our focus continues to be on strengthening our business's resilience, and investing smartly in strategic initiatives to enable us to return to growth when the consumer environment improves. I continue to believe in the long-term fundamentals of TBA, Diageo's advantage position within it, and our ability to grow ahead of TBA and gain quality market share. We'll open it up for questions. Can we get the questions started?

Thank you. As a reminder, if you'd like to ask a question, please press Start, followed by 1 on your telephone keypad. Our first question for today comes from Simon Hales of Citi. Your line is now open. Please go ahead.

Thank you. Morning, Deborah. Morning, Lavanya. Hi. A couple of questions for me. Hi, Deborah. I just want to understand, Deborah, or make sure I understand fully your comments around where inventory levels are in trade as we head into fiscal 2025. I think if I interpreted the remarks and the prepared presentation correctly, what you're saying is that although we could see a further ongoing deterioration in demand, and that would naturally lead to some ongoing destocking throughout the supply chain. In the absence of further deterioration in demand, you kind of think that stock levels are appropriate now in most markets, perhaps with the exception of Mexico. Is that the right way to think about it? Have I got that correct? Or are you still expecting in the U.S. to see further wholesaler or retailer destocking in the first half? That's my first question. Okay. And then secondly... Again, in the prepared remarks, I think it was one of the slide, she pulled out the different performance through the year of the different price tiers within your portfolio. Clearly, value has outperformed the premium segments of the portfolio this year. I wonder if you could talk about how we've exited the year in terms of the performance of those different price points. Is there any sign at all? that premium is starting to see some improvement relative to value, I suppose, particularly once we X out the lack destocking effect.

Yeah, so I'll go ahead and take the first one on inventory levels and kind of step through the world so you can – so we'll do that, and then I'll pass to Lavanya to follow up on the price tier question. So first of all, we ended up in really good inventory levels I would say really across the world. Let me start with LAC, since that has been the one that we committed at the interims that we would get back to more appropriate levels, and that's where we have done significant destocking, working with the wholesalers and customers in the region. In LAC, we have delivered on the commitment that we set out at the interims. We did call out Mexico specifically in the presentation. And the reason that we did, it isn't so much that we think we have a bunch of inventory left. It's just the volatile environment that we're still seeing in that market. We're still seeing significant competitive activity. There's some down trading in tequila and scotch, which, of course, is important to us. And we're not gaining share. And so because of this, We do believe we're at certainly more appropriate levels for the environment, but it is just, you know, it's still a deteriorating situation. So, you know, versus having some kind of big bounce back, you know, we're just calling out that it really is, you know, about the consumer situation there. But certainly, you know, we would expect our performance overall to more align to that consumer demand going forward. That's Latin America. Stepping around the rest of the globe, we're really seeing very normal, our historic Forward Days cover as we step around the world. We have called out a couple of other inventory things. In APAC, our SJF business, they were quite low going into the last fiscal year. just not really knowing when we were going to emerge out of COVID, then they restocked at the beginning in the first half of our fiscal 23, the back half of the calendar year of 23. And so we're going to have to lap that this year. We're going to have to lap that restocking in China, in APAC. And then also, look, the U.S. situation, we are fine on distributor inventory. We have been fine. We ended with the same level of date. We actually have taken out some inventory, just getting it appropriate for the environment. But overall, we have complete transparency in the U.S., so we haven't had any problems at the wholesaler level at all. And really, from a retailer destocking, this is the third round that we see of retailer destocking. That's less to do with, you know, frankly, I think that's more about interest rates remaining high, and you just don't see retailers wanting to be cut long. Also, if you do the calculus on this, it's not really worth it for them, in many cases, to hold a lot of, you know, extra inventory, and they're just not wanting to anticipate the consumer at all. Like I said, this is our third round. I remember first talking to you guys about this back at our Scotch Investor Day, you know, more than a year ago. So this is, you know, we're now seeing inventory levels. This isn't, you know, like I said, this point really isn't about even the coming out of the pandemic. This is more about just in a high interest rate environment how they're choosing to manage their stocks. Look, I think overall, we feel like we're in good position. We do have to navigate, to your point, we are having to navigate a volatile world, but we are managing this quite closely. As you can imagine, we've gone around and tested the robustness of what we can see. We've strengthened our consumer insights, just making sure that we stay as close as possible to the situation so we don't have any kind of repeat of where we've been. Lavanya, I'll pass it to you for the price of your question. Thank you, Debra.

Hello, Simon. Let me just start off by framing that while we do see some pockets of down trading across the world, premiumization continues to be a tailwind for the category and for our business. What's driving the growth of the value here in fiscal 24 has really been the growth of the very strong performance of beer in Africa, and other whiskey in India, which, you know, other whiskey in India grow almost double digits. So that's what's driving the growth of value here. If you look at the premium tier, that and above, that was significantly impacted by Latin America. Latin America is a much more premium business for us, and a very heavily Scotch business, as you know. And as we took down the inventory levels in trade, in Latin America down to a more appropriate level at the end of the year, that impacted the numbers of the premiums here. The premiums here would have grown at 3.7% if you exclude the impact of Latin America. You know, more broadly speaking, it's Scotch and Tequila which play in our premium and super premium and above-priced tiers. And if you really look at it in Scotch, as Deborah shared in her presentation, We're gaining share in nine out of our ten largest markets. So this is a business that's in good health. And as we lap some of the sort of one-time things that happened in fiscal 24 and actually back even in fiscal 23, like the sale of final inventories in Russia, as well as the replenishment of inventory levels in North America, you know, we'll come out of these in a positive way. If you look at our largest region in the US, more than 100% of the growth of the category is still coming from the super premium and above price segments. Premiumization does continue to be a tailwind for us and these numbers, that's why we took some time to explain these numbers out in the presentation.

One other thing I'll just add to what Lavanya said, the tequila also did impact this. I think we shared a couple of these in the press release, but just to highlight for you, remember, we were lapping the restocking of tequila because this was one that, because of the high demand, we recovered late from the glass shortages. Tequila is impacting this as well. If you take a look at Don Julio, the underlying depletions, I think, are plus 21% compared to the shipments show up as plus 12%. By the way, those underlying depletions do align with the Nielsen NABCA consumption as well, plus 20%. And then CostaMigos is showing that minus 22%. Actually, if you look at depletions, while still down, it's only down minus 9. If you look at the Nielsen NABCA on the last 12 months, it's minus 7. So, you know, so you can see through there, that definitely impacted that shipment analysis, and that would have shown up in the super premiums here.

Thank you, Simon.

Very helpful.

Thank you. Thank you. Our next question comes from Edward Mundy of Jefferies. Your line is now open. Please go ahead.

Morning, Deborah. Morning, Lavania. Two questions for me as well, please. The first is really on your best estimate on the time of recovery for the industry within the U.S. And I know on slide 9 you've given some quite useful charts just showing the more recent trends. I guess First part is, you know, what do you think the industry is growing at, both distilled versus RTDs? Are you able to put any timeframe on when you think the industry might get back to that sort of mid single digit run rate? And then, you know, what do you think is the bridge to get back towards that middle single digit run rate? Is it volume? Is it mix? Is it price? Is it RTDs rolling? Is it the stocking coming to an end? I mean, how do you think about the bridge back towards that sort of four to five-ish run rate? That's on the US. And the second question is on Guinness, if I can. You know, it's a brand that's very well distributed. I mean, you haven't really grown through distribution gains because most pubs in both UK and Ireland, you've essentially brought new consumers into it or you've got existing consumers who drink more. Could you maybe just deconstruct what's made Guinness so successful? It's such a good story. Do you think it's going to be sticky? And are there any learnings from Guinness that can be applied to some of your other brands?

Yeah. You know, I'll start with... Let me start with the U.S. and then I'll come back to Guinness. Going through the industry, we do believe that in fiscal 24, the U.S. industry grew in low single digits. If you take a look at that and break that out, it was probably more one to two if you include things like the spirits-based RTDs. It was probably more flat to one if you think about core spirits. And look, it wasn't even through the year. You know, so we were seeing improvements, and then it dipped down, and then we saw a slight improvement again, and then it dipped down. But, you know, it most likely is in the low single digits as you look at it. And if you look at NAFCA, that's what, you know, that's what NAFCA, and because that captures everything. It's not the most vibrant states, but because it captures everything, that gives you a good, you know, point in context. You know, volumes were down on core spirits. if you exclude all the RTDs, but two-thirds of that volume decline is in vodka and rum. I look at that, and you look at the heat that you still have on the tequila category, which is growing at things like plus 7%, still even tucked into that low single-digit number. I think the mix for us still makes us feel good, because remember, our North American whiskey business is bigger than our vodka and rum business. As we look at the industry, it's kind of sitting there in low single digits, but it is being drugged down by volume. Price mix actually in the industry is holding up okay. It really is about volumes. In price mix, you would ask to break out between the ready to drink and core spirits. They're kind of the bottles. Core spirits price mix was probably two to three. We were above that for the year, so we kind of look at that and feel pretty good. When you have RTDs in there, it does bring down the price mix, so I do think it's important to break that out, but I think on core spirits, price mix is starting to work its way back, and it's because, as Lavanya mentioned earlier, actually over 100% of the growth is in the super premium plus price tiers in the industry. We also saw household penetration of core spirits plus 2%. What you're seeing when you see these lower volumes is really the units per basket are down. That is from this pressure to think about vodka and rum. These are the more standard based spirits. Those are those households that are under pressure that are buying a little less. We're not really seeing the down trading. When people do go in to buy, they are buying still. the brands that they want. And then we are still seeing spirits gain from beer and wine in the U.S. So overall TBA, household penetration, kind of flattish, spirits, you know, plus one, beer is kind of flat, and then wine we're seeing is minus one. So that's a little bit about the industry. As far as the timeframe to recovery, you know, when you break through all the noise, and get around all these shipments and laps, which thankfully, you know, what is it going to take to get back? Well, we clearly need to finish the rollout of all of that COVID super cycle. Fortunately, I think we're largely at the end of that. You know, certainly from our big laps, we don't have that in our numbers as we roll forward. So that's a positive. But the consumer recovery, you know, and I do think things like rate cuts will certainly help, you know, if we get a rate cut in the U.S., The uncertainty with things like the political environment and some of that is when you do some of these and you look into consumer sentiment, that's weighing on consumers a bit because we're even seeing consumers with a little extra money being a little more cautious in their spending. It really is hard to predict. I know I said six months ago that it would be six to 18 months. The only update I'll give you is that it wasn't six months. It was not linear, as we've said. There was a great July 4th. If you saw the Nielsen for July 4th, we started to see, we had pretty decent spirits growth there on July, but sentiment is still quite cautious. I'm just hesitant to put out any timeframe on it. What we're trying to do is really set ourselves up with getting back to share growth. We've got great share momentum. in the U.S., you know, on core spirits, not just in TBA, but on core spirits. And so that's really what we're focused on, on getting back there. Guinness, let's talk about Guinness, because Guinness is a great news story. So plus 15%, and it's being driven in our largest markets. And even in our home market of Ireland, to your point, there's not a lot of places you can't buy Guinness in Ireland. That being said, I do think the innovation agenda has helped us tremendously. The nitrous surge, that's the cap. We don't have it in the U.S., but in Ireland and GB, it's a cap you can kind of put on the top of the Guinness can, and it gives you just the perfect pour of Guinness. That has done really well for us. Guinness Zero-Zero is just, we literally can't make enough of it. We've more than doubled the business in GB as well. That's really helping us. I would say from a consumer standpoint, we've broadened the consumer. We still have the classic rugby lads, but we're also bringing more women into the franchise. We're just continuing. Also from a marketing and experience, I think the brand's done some really great social media. We've let kind of consumers take over some of the conversation about where's the best pint pour, you know, which is – people really get into this. And so that's been really great. And so what I do think is sustainable is I think we have built – you know, we've stayed very true to the liquid. We've stayed true to the consumer while expanding that base. And look, we just signed We're official sponsors of the Premier League, and we're very excited about that. We've got a great history with Six Nations, but, of course, the Premier League is quite a global audience, and so we're excited about where that can take Guinness going forward.

Great. Thank you.

Thank you, Ed.

Thank you. As a reminder, if you'd like to ask a question, you can press star 5 by 1 on your telephone keypad. Please limit yourself to one question at a time. Thank you. Our next question comes from Selina Panuti from JP Morgan. Your line is now open. Please go ahead.

Yes, good morning, Deborah and Lavinia. Sorry, I have one question, one follow-up. So my first question is just wanted to understand your clarification of your outlook. Are you hinting, because you said that growth will return when consumer confidence will return, so are you hinting to flaps organic growth for fiscal year 25? And within that, what are the moving parts? Because I saw that your price mix, even though you mentioned was positive in the US, decelerated to 0.7% in the second half. So is price mix still positive as you baked that into fiscal year 25? And then I think you also mentioned that organic EBIT margin will be aligned with H2, which was down 100 basis points. So is that as well the base for fiscal year 25 and within that could you elaborate a bit which regions are driving this decline. Then my second question is really on, you know, I think about the mid-term outlook where you have not yet seen when the demand will return. I mean, CapEx investment is quite elevated now for several years. You have more than double your CapEx investment, and you continue to invest in maturing inventory. I want you to understand what kind of volume growth underpins these investments, and whether you know your Consumer Insights program that you are rolling out. How does it inform you in terms that the behavior are economical versus structural in terms of the weakening demand and volume? Thank you.

I'll start with just first on fiscal 25 and a little bit about our guidance there. Look, what we're saying there is when the consumer environment improves, we will return to growth. As far as where does that land us on the year, it really does depend upon when we start seeing some of these better trends on the consumer. While we certainly exited the year with more momentum with our share gains, the category in the industry kind of more limped in to the end of the fiscal. And so that's what we're pointing out. So, you know, whether it's going to be, you know, flat or above will depend upon when that consumer environment improves. And so that's why we're kind of flagging that exit rate on the industry in the U.S. You know, look, I think operating margins, you know, we flagged also the negative pressure there. So that pressure's coming from multiple places. It really is about, oh, and you mentioned, first of all, North America. North America price mix we would expect to be positive. There's, you know, part of what did impact us in the second half is remember these tequila numbers. The tequila numbers that we talked through, the difference in the shipments, versus the underlying consumer. That's one that definitely negatively impact us is we had to lap that tequila restocking from prior year. That's what's going on underneath that. Now, moving on to margins, several things. The strategic investments that we made in the second half of the year will, of course, carry over into the first half. We talked about the digital investments that we're making and also some of the route to investments that we've made as well. So that continues. And by the way, that would have hit some of our North America margins in the second half. We also, you know, things like salary inflation, particularly in emerging markets, is another place where we would expect that to continue to roll forward. You know, also that pressure on the top line does impact our Particularly the pressure on the top line in NAM does impact our margins. It does impact the leverage that we get with our cost structure. That's why if the year improves, you do see that coming right along with growth. We are very focused on productivity and pricing to really offset inflation. But, you know, these are some of the mechanical things and the roll forwards, et cetera, that we're seeing from the second half and the first half that we're trying to flag. I don't know if you would add anything to that, Lavinia. No, I think you covered it perfectly. And then on the midterm, so for CapEx, I'm going to talk about a little bit of where our CapEx spending was this year and where it was.

Sure. So, Celine, I mean, when we think about CapEx and maturing stocks, let me just start with maturing stocks maybe and then come to CapEx. Maturing stock, the way we think about the investments we make in maturing stock is really looking at long-term projected volume growth rates. And this is based off of both looking at historic volume growth rates, but also modeling forward based on what we see happening with the consumer. And so these are not based on the next three years or the next five years volume growth rates, but much longer term projections of volume growth rates. And the way to think about it perhaps from a modeling perspective would be to, the easiest way would be sort of looking at historic volume growth rates, which typically would have been a combination of population growth as well as the growth from moving, consumers moving out of beer and wine into spirits. And then the third is volume growth that you get in emerging markets as GDP. and earnings levels increase in these emerging markets. So the combination of the three is what really drives the maturing stock investments. On CapEx, a significant portion of our CapEx investment this year was the projects that we had announced. So we started the construction of a second distillery or a second brewery for Guinness in Ireland. And if you look at the growth rates that we've had on Guinness this year, you can understand why we need to put in that investment. And Guinness is an extremely asset-like model. Unlike regular beer businesses, most of our global Guinness volume comes out of one factory in Ireland, which we are now trying to build a second one, also to keep pace with the growth of Guinness 000. So that's been a part of it. The other project that I will mention is we're building out a new distillery for single malt whiskey in China, in Yunnan. Now that's going to come, we just started to make liquid to put into barrels now. We're not going to see the benefit of that, you know, come through for many, many years, but it will be delicious liquid, I'm sure, when it comes out. The reason I mention these is because a lot of our CapEx investments are of this nature. They are much more long-term in nature, and that's what's driving the CapEx growth. What we have guided to is that we do expect this level of CapEx investment to stay on for fiscal 25 and 26 and then come back to more close to back down as the percentage of NSV back to historic levels after that.

Oh, and then I think you had a final question of consumer insights and just, you know, what we were doing around consumer insights. And so, yeah, look, we are strengthening our – and I mentioned this consumer choice framework. This is our proprietary network. We – our network data. This is our proprietary data that we use to look at occasions and how those are growing around the world. Some of that we featured at our Capital Markets Day event. But we are taking it to all of our major markets and that will be in place really by the end of the calendar year. We will literally have it everywhere that we want it to be. And that's enabling us to really identify these pockets of growth and actively move resources. And in this kind of volatile environment, it has been very important for us to get underneath and to be able to shift as appropriate. And we have done that, you know, in several places, you know, just to make sure that we're getting the right A&P deployed in the right place, the right liquid allocations put in the right place, and where we've decided to sort of invest in route to market. And, of course, this even goes down into our U.S. route to market changes as well. Thank you.

Thank you. Our next question comes from Mitch Collette from Deutsche Bank. Your line is now open. Please go ahead.

Thanks. First question, given you're retaining your five to seven medium term guidance, I appreciate next year feels a long way off, but it sounds like fiscal 25 is unlikely to be back in that range. Can you give us your sense of confidence that perhaps fiscal 26 could see you within that range and Really, other than the consumer changing, is there anything you can do to get yourself back there? And then as an add-on to that, my second question is, it's obviously been a very challenging year for spirits as a category. And by the sounds of it, it's been getting more challenging as the year has progressed. So what gives you the confidence that those challenges are cyclical and not structural? And I'd love to get your thought process around why you think things recover. Thank you.

Yeah, I mean, so let's talk a little bit about the medium-term guidance. And we have flagged that, yes, certainly for fiscal 25, given the current consumer environment, we're really focused on driving execution, strengthening our resilience and market share, and that when the consumer environment improves, we will return to growth. And depending upon where that happens in the year, that will be how we progress back. You know, we do remain confident in the long-term fundamentals and do believe this is not structural but is more cyclical and near-term in nature. If you think about what underpins the fundamentals of our medium-term guidance, the demographic trends, the rising incomes in developing world, spirits gaining share occasions from beer and wine, the long-standing trend of premiumization, You know, I walked through some of those in the U.S., which you can continue to see that spirits gaining share from beer and wine occasions, the longstanding trend of premiumization being there. You see what's happening for us in India, some of our Africa markets on, you know, on spirits growth. And so, you know, and then look, demo trends. I know there's been a lot of noise about Gen Z. So let me talk about that for a second, because actually as we look at Gen Z in the U.S., And while they're reporting kind of higher preference for moderation, we're actually seeing spirits penetration up plus 3%. And, in fact, they're more likely to purchase spirits than millennials were at the same age. And so we're seeing, you know, look, whether it's the RTDs that are now spirits-based that are bringing people into spirits earlier, but we really see those demo trends, we don't see that cutting against us. We really do see that supporting spirits. the ongoing long-term trends that we've seen, and things like premiumization. Look, we did see down trading in Europe and in APAC, but you see where their price mix actually was plus 4%. You had nice performance there on premiumization within our portfolio. We can handle that within our kind of broad portfolio. We were still able to get that despite what was happening. That's some of the things that we can do to pull forward on our own destiny. This is why I do believe our portfolio is positioned really well in the right categories. When you look at what is still growing, it is tequila. We're seeing pockets of whiskey also continuing to do well while there's some down trading in there. We've got a nice broad portfolio that can catch people. That's why we're really focused on this quality market share because that helps us outperform even in a more pressured market. We do believe that long-term fundamentals are there and that this really will be much more about consumers and some of the volume pressure that we're feeling on consumers. Look, some of them still carry it in maybe a little bit. They're drinking further down into their bar. that maybe they had built up during COVID. So, you know, the further we're getting away from this super cycle and we're really into more of a normal cycle, we are seeing consumers come back and, you know, and buying. It's just they had their own inventory. Now you go into an economic pressure situation and we are seeing, you know, a little less volume than what you know, you would expect. But don't forget the noise also that we have in some of the volume that will roll off as we go forward. What haven't I not addressed? Good. Very good. Thank you.

Thank you. Our next question comes from Olivier Nicolai from Goldman Sachs. The line is now open. Please go ahead.

Hi. Good morning, Deborah and Avanya. Just a question on disposals. You sold a few non-core brands over the years at Diageo, including some beer assets as well in Africa and more recently in Nigeria. Is there much more to do in terms of disposals of non-core spirits assets, which could ultimately boost the top line for Diageo and also help to reduce the leverage? Is there more to do on spirits side? Is it more actually perhaps exiting a bit more beer market in Africa, for instance? And then in the context of that, do you see this as a path to reduce group net debt to be dire and potentially reinstate the share buyback in the future? Thank you.

Yeah, I think, you know, we've always been active portfolio managers. And look, and particularly on Guinness, we've had an asset light strategy for, you know, handling that business as we move around the world. We're quite happy with the disposals that we've made this year because it really does follow along trends that we're seeing. We talked about a year ago about getting out of some of the more local and mainstream spirit spreads in India, and it's because we saw the premiumization there. We're convicted around that, that that would continue, that premiumization journey would continue to handle, so we felt like it was the right time to get out and exit from some of those brands. Likewise, we see that in some of these disposals that we're doing in Europe as well. And then, you know, on Africa, I mean, we do feel very good about Nigeria because what that's doing is it really is helping us from a bottom line perspective as well and just the volatility that you get in currencies there. But it's also going to help us continue to grow the Guinness business because Toleram has this amazing distribution network that we can get to a lot more places than what we would have been able to do working off of the brewery footprint that we had. Disposals are a key piece of this and the non-core pieces of it. I'm, of course, not going to comment on anything that we would necessarily be looking at going forward, but it is to say that we are active in taking a look at that and doing what we need to do based on long-term strategy. It certainly does also help us on this walk back on on EBITDA, and our capital allocation strategy remains unchanged. And when we have that excess capital, we will return that to shareholders. Thank you.

Thank you. Our next question comes from Assangeet Uza from UBS. Your line is now open. Please go ahead.

Morning, Deborah and Lavanya. A couple from me, please. Firstly, just going back to the U.S., please give us your take on the The pricing environment, particularly in tequila and whiskey, we are noticing an intensification of promotional activity. So just love to get your take on how you're navigating that across your brand portfolios. And more specifically on tequila, we've observed down trading within Blanco Tequila over the last several quarters. Do you think that's cyclical or structural?

Yeah, so look, on the pricing environment, actually, you know, one of the things you As you're looking at that, make sure you do tease out the ready to drink portfolio from the rest of spirits because that is the most promoted part of the spirits category. Of course, there's been just a lot of competition coming there. That's still the area that we're seeing the most promotion in. That being said, actually, look, from a tequila standpoint, there's been a lot of entrance. It certainly is competitive. We would say that it's not necessarily people down trading as much as super premium is the place where people are entering tequila. Remember, the tequila category, latest 12 months, is still growing in this environment, almost 7%. And by the way, household penetration on tequila is still two-thirds of vodka, so it's got a long runway to go. Super premium plus, that's what's the heat of the category, plus 12%. But ultra premium plus, where we really play heavily, is plus 3%. And we're gaining share, you know, within that. So it's not so much that people are down trading. You know, certainly the $100 plus type bottles, that aspirational – 1942 on a Tuesday night, that occasion is not, but that we've really lacked. What we're seeing now is more about consumers coming into tequila from other things and they're entering at that super premium plus price point. To your point on Blanco, Blanco is where there is the most activity. I think what we really like about our portfolio and the moat we feel like we're kind of building, we actually have a very different tequila business from most. As an example, Don Julio, two-thirds of the brand is Reposado and above. You take the direct competitor to Don Julio, that business is the opposite. only about a quarter is Reposado and above. We actually feel like for Casamigos, it's 50-50. That's a bit more of a Blanco business. We've seen the price competition in that, but we still feel good about our total tequila portfolio and what we're doing and being able to drive the total portfolio and gain shares. That's kind of what we're seeing. Whiskey, you know, whiskey environment we're not seeing, you know, we're not bothered by anything we're seeing. What we see seems to be quite, you know, kind of normal activity for this time of year. You know, you do have retailers that are, as they're competing for traffic, sometimes retailers will do some things, but there's nothing that we're seeing in whiskey that we're concerned about. Thank you.

Thank you. Our next question comes from James Edward Jones of RBC. Your line is now open. Please go ahead.

Thank you. Morning, Deborah. Morning, Lavanya. A couple, please. First, I think, Deborah, you said the price mix is holding up okay in the US and the problem is volume. And this sounds like classic price elasticity. Diageo is the category leader. Have you considered... just lowering prices overall and seeing what happens. And secondly, to lack, further to Simon's question, you were saying we can't assume a bounce back in lack. But volumes are down 15% odd last year, basically because you weren't selling product to a lot of distributors for quite a long time, accepting the consumer subdued. But just arithmetically, shouldn't there be some sort of bounce back because of that?

We'll take the last one first. Look, in Mexico, in Q4, the industry was down 20%. Yes, we have destocked, but to think, even though it's laughing, it was laughing, remember in the first half of the year, we were down you know, in that range. It doesn't necessarily just mean it's just going to, you know, whip back based on the consumer environment that we're seeing. And so that's why we have flagged that. So we're not saying that there won't be a bounce back, and we certainly see that in certain markets. You know, but, you know, the Mexico one is one I flagged because it is our second largest market. But even in other places, in South Black and other places, we are definitely seeing just with the volatility in the region, you know, it's just, Didn't want you to mechanically kind of drop that in thinking, oh, that'll be, you know, it's done. The consumer environment there, you know, is quite volatile. So you would expect, though, our performance to more align with that consumer environment versus what we just cycled. And then, you know, look, lowering pricing. I mean, that, you know, I mean, look, we've got super premium brands. And remember, super premium plus is what is driving the growth. So what you're seeing are consumers, when they have the occasions that they want to consume spirits, they want the brands that they want, and they want premium brands. So lowering price isn't a panacea by any means. And look, we're still very affordable luxury. When you put us into perspective of other, you know, goods, This is still a great way. People do want to celebrate. One of the things that even when sentiment has remained low in places, people do want to go out and celebrate with their friends. They're doing more low-tempo occasions. And these are places where we know when we get it right, we're hitting it out of the park. Things like the Crown Royal Blackberry, you know, that has brought people into whiskey, and it is because it is you know, it's a great easy serve and it really captured people's imagination. So, you know, it's not just about lowering price. But, you know, one thing I will say, I do think when I talked about the volume declines, we're mostly on, in the category, we're mostly on vodka and rum. Those are the more standard and value priced parts of the portfolio. And so they are most likely more sensitive. And because of that, you know, that's, That's what you see going on there. And that's why there is more competitive activity there, but you see it's not coming out in net sales total growth. So hopefully that answers your question. Thanks.

Thank you. Our next question comes from Lawrence Wyatt of Barclays. Your line is now open. Please go ahead.

Morning, Deborah. Thanks very much for the questions. A couple on your key brands. Casamigos didn't have the best of years, despite Don Julio doing pretty well. You mentioned a couple of reasons earlier in the call, such as Casamigos not having quite so much in the higher end. Do you think there's a structural problem with the brand now that it's got so big? We sort of hear a bit more about consumers getting fatigued with their Celebrity tequilas or perhaps Casamigos not having that sort of ultra-premium line extensions. Do you think there's a possibility that Casamigos sort of got as big as it can ever get, and we shouldn't really expect too much growth from there? And then, similarly, in China, you actually got some very strong success with Shui Jing Fang. But, of course, many of your peers are reporting much weaker results from China in international spirits. Do you think there's any sort of structural change in China that's causing consumers to want to drink more domestically made spirits as opposed to international? Thank you very much.

Yeah, thanks. So, look, on Casamigos – and Casamigos has been on quite a tear for the last, you know, several years that, you know, we flagged in there. It's been a plus 70%, you know, growth cagger – But it is a newer brand. And one of the things that we've uncovered on it, so first of all, it is structurally we're in more Blanco. There is more competition there. But that being said, we're still growing an on-premise. And on-premise is where brands get, you know, this is growing an on-premise is where people first try brands in this industry. And so we actually feel great about the runway for Casamigos. We still have various states. It's quite fascinating when you start to have the footprint, and this is what's nice about having as broad of a portfolio that we have in tequila, because we can see opportunities for Casamigos yet in several states where we're actually undershared. What's interesting about the brand is that brand awareness is two-thirds of what Don Julio and other competitors ... It's a big opportunity for us. For fiscal 25, we've made the announcement. We are fully integrating Casamigos into our Diageo dedicated sales division. We're excited about this because we can put more feet on the street against this brand and bring the full power of Diageo, bring in all the advanced analytics, the RGM. We see Casamigos having a huge future. It's a really nice... It's a great liquid for if you don't know if you're going to like tequila, you try Casamigos, and you're like, wow, I like tequila. It's very different and complementary to Don Julio, so we still feel great. There's a lot of people to yet bring in to Casamigos. On China, yes, we did post plus 12%, and it was driven by SJF. We also saw pressure on our whiskey business and on our imported scotch. Within that, though, Singleton, actually our malt business, we have plus 12% on Singleton. So felt really good there. And part of that, we saw some trade down, but it's like you're going from Singleton 21 to Singleton 15. So it is still a really nice price mix for us. It's trade down, but it's still affordable and it's a great value. So we're not seeing anything structural there other than I mean, China really still hasn't fully recovered from COVID. You haven't seen the bounce back there that we saw in other markets around the world. So, you know, we're kind of still waiting to see that and to see a little more confidence from the Chinese consumer. Lavanya mentioned earlier the local whiskey distillery that we're building. We're excited about the opportunity on that. So more to come in that space. But China, for us, we're still underdeveloped. Net-net, it's an opportunity for us. Thanks.

Thank you. Our next question comes from Simon of Morgan Stanley. Your line is now open. Please go ahead.

Yes, hi. I've got two questions, please. First one was on Guinness. Obviously, you benefited from quite a lot of price in fiscal 24. Can you give us an idea what kind of pricing we should expect for Guinness in 2025? And then the second one was more about the kind of structural. Take your point about Gen Z being more likely to drink spirits and so on. But what do you think in terms of volumes? Because anecdotally, it would appear that people are just trying to scale back volumes across the board. So If everybody does that, is the fact that Gen Z might be a bit more spirits inclined still enough to kind of offset that? Thanks.

Yeah, I mean, you know, look, we're not going to flag any forward kind of pricing information. I mean, we're very thoughtful and disciplined about how we do pricing. And, you know, and some of the pricing that we've done has really been around the inflationary environment that we've been in and needing to, you know, to handle that and particularly remember you know, getting seen, you know, very focused in on Europe, and we've had some particularly high inflation in Europe over the past year. So, but look, you know, we are seeing inflation start to come down. So, you know, that's all I'll say about pricing. And then, you know, as far as your questions around structural and kind of volumes, Look, what we've always said is people want to drink better, not more. And so there's part of this that plays into the premiumization journey, I think, as well. I flag that spending is actually in line for Gen Z, in line with prior generations, but of course you're getting less for those dollars. So I don't think it's a generational issue. I think it's more, it's that same economic pressure that everyone's feeling. In the U.S., the student loan repayments having to resume and some of this, this puts pressure in wallets across generations. I would attribute some of that more to what's happening in just the economy and how people are feeling. In particular, young people are feeling pressure on their wallets. I don't think there's really... Anything else I would point to at this point, you can certainly explain what we're seeing based on the economy and the more cyclical things versus structural. Thanks.

Thank you. Our next question comes from Jeremy Fianco of HSBC. The line is now open. Please go ahead.

Thanks for taking the questions that come from me. First one is just following up on James's question. Can you tell us what the exit rate was or H2 sellout in LAC when you just take it from an overall regional perspective? And then the second question is on innovation. You did well with the Crown Royal BlackBerry, but perhaps you could talk about how some of the other innovations have landed there. and I guess particularly North America, how you see the innovation pipeline shaping up for fiscal 25 when you kind of scale it and size it relative to what there was in fiscal 24. Thanks.

Yeah, so look, on the exit rates for Latin America, You know, I mean, look, this is a mistake we're not going to make again. Part of it is we are looking at the kind of go forward. We're looking at what we're seeing and projecting going forward versus just taking a look, a backward look, because that is one of the things that has gotten us into trouble. One of the things that we see is when the market drops off, it drops off quite fast. Remember, some of these markets like Mexico are quite tied into also the interest rate environment and things like the US. There's a lot of factors that play in as we look forward there. What we have flagged is the exit rate for Mexico. That Q4, the industry was down 20%, so that you can expect. Look, Brazil's a different case. Brazil actually had a flat category, and we were gaining share on that. That's our largest market, so there's some positive news there, but then when you go into South Lap, we are seeing some volatility there. It really is quite different. I wouldn't be helping you to give you some kind of regional average. On innovation, we actually had a very strong year, and that's really one of the things that has helped us, I think, really pick up share momentum in North America. The cocktail collection, which we talked to you about at Capital Markets Day and then kind of rolled out right around the holidays this year, we've continued to expand distribution there. By the way, there's still more distribution opportunities on that. It's growing three times faster than the industry. Our convenience portfolio kind of all in, so that would be the cans plus what we've been doing on these more ready-to-serve or the multi-serve shake, kind of pour and serve type of products, plus 15%. So that certainly helped us. We also had really nice innovation on Bullet with the American Single Malt, the Rye 12-year-old launches. That showed up in Bullitt as well. Buchanan's has continued to do well off of Pineapple. Pineapple's really in its second year. One of the things we're trying to do with our innovation is we're really trying to have innovation that is not so short cycle, really bringing in new buyers. It's one of the reasons we kind of touted on the Crown Blackberry. A lot of new New buyers into the franchise, also new to whiskey. We're really part of this consumer insights and getting in and making sure you have incremental occasions. It's what's helping us pair with food. It's what's helping us for moderation, for convenience, and some of these underlying consumer trends, going against that, delivering the right product, and we are seeing great results for that. We've got a great pipeline coming up as well. We're actually extending on cocktail collection. We're going to have a crown variant coming out. And sort of more to come on that as we move through the year. We'll tell you more about our innovation pipeline as we announce that. Thanks.

Thank you. Our next question comes from a Fintan line from Goodbody. Your line is now open. Please go ahead.

Good morning, Deborah. Two questions for me, please. Firstly, I guess big picture, just in terms of your marketing spend, I appreciate that you pulled back some of the spending in the second half of the year, but for the year as a whole, marketing spend was still about a 15 basis point headwind to group margins. Given that you're now expecting the industry to be softer for longer, how should we think about this marketing spend going forward, notwithstanding the new Guinness Premier League sponsorship, but is there a situation where marketing could be a tailwind to margin margins in the short term while you sort of retrench a bit if the industry is going to be that bit softer. Then secondly, just in terms of the route to market changes within France and the MOA Hennessy relationship there, can you give us a sense of what that will do in terms of your operations within Western Europe as a whole and is there potential for you to change your structure with MOA Hennessy in China?

Going to marketing spend first, we've always said we don't manage to a specific rate. We really do look at the returns of what we're doing and then when we're not getting as much of a return from it, we do pull back money. When we get a great return from it, we're doubling down. Then there's a few what I would call quite strategic kind of A&P investments that we view with a little bit longer time horizon. But even there, when things aren't working, we're constantly optimizing on that. And we've got great tools. We've talked in the past about tools like Catalyst Sensor. We're also adding in virtual create hubs where we actually can make and produce content much cheaper. And we're finding some of that productivity that I flagged, the 700 million, actually came from marketing. So we're able to spend the same amount of dollars and go farther. So it does speak to, you know, to your point, we are finding ways to make our dollars stretch. We are looking at the current environment and adjusting accordingly. And that's why you saw us pull back on marketing in certain places and then spend in others We're not managing that to a rate. We are looking at where the opportunities are, but we are actively managing that and we're well aware of the environment. On the route to market for France and MHC, we saw a great opportunity. We have relatively low market share in France, and yet it's a great whiskey market. We saw an opportunity and announced earlier in the year. that we were going to be setting up our own, you know, demand kind of marketing unit within a commercial organization within France. And then, of course, we recently made the announcement we are going ahead and bringing all of our brands in. And we're quite excited about it, and we see a great opportunity. It does not impact any of our other JVs that we have. with Moet Hennessy around the world, nor does it impact our overall shareholding. We just make these decisions on a market-by-market basis, and we were seeing an opportunity in France that we thought we could capitalize with our own resources. So hopefully that answers your question, and I do think we are out of time. So I want to thank everyone for joining us today and for your interest in Diageo. Thank you.

Thank you for joining today's call. You may now disconnect your lines.