Diageo(DEO) - 2025 Q4 - Annual Report

Strategic Report Chair's Statement The Chair reflects on a challenging year, noting 1.7% organic net sales growth, a flat dividend, and the launch of the 'Accelerate' program, while highlighting moderation as a key opportunity and leadership changes Fiscal 2025 Performance Highlights | Metric | Value/Change | | :--- | :--- | | Organic Net Sales Growth | 1.7% | | Organic Volume Growth | 0.9% | | Positive Price/Mix | 0.8% | | Full Year Dividend | 103.48 cents per share (flat) | - The 'Accelerate' program was launched to strengthen the business through disciplined cost management, cash delivery, and improvements to the operating model and capabilities[45] - Diageo views the consumer trend of moderation as a significant opportunity, leveraging its position as the world's largest non-alcoholic spirits player and expanding its portfolio with acquisitions like Ritual Beverage Company[48][49] - Significant leadership changes occurred, including the stepping down of CEO Debra Crew and the initiation of a comprehensive search for her successor. Nik Jhangiani was appointed Interim CEO[53][54] Chief Executive's Statement The Interim CEO reports 1.7% organic net sales growth and a 0.7% organic operating profit decline in a challenging market, highlighting strong Tequila and Guinness performance, portfolio management, and 'Accelerate' program progress Fiscal 2025 Financial Results | Metric | Value/Change | | :--- | :--- | | Organic Net Sales Growth | +1.7% | | Organic Operating Profit | -0.7% | | Net Cash Flow from Operating Activities | $4.3 billion | | Free Cash Flow | $2.7 billion | - Tequila organic net sales grew 18%, with the Don Julio brand performing strongly. Guinness also continued its remarkable growth, becoming the number one beer in football occasions in Great Britain[79][81] - The company made selective disposals of non-core brands (Pampero, Safari, Cacique) and shifted to an asset-light model in Africa with disposals of shareholdings in Guinness Nigeria, Guinness Ghana, and Seychelles Breweries[81] Accelerate Program Targets | Target Area | Goal | | :--- | :--- | | Consistent Cash Delivery | c. $3 billion free cash flow per annum from fiscal 26 | | Cost Savings | c. $625 million over the next three years | | Deleveraging | Within 2.5-3.0x net debt to adjusted EBITDA no later than fiscal 28 | Performance Highlights Diageo's fiscal 2025 highlights include $20.2 billion reported net sales, 2% organic growth, a 28% reported operating profit decline, $2.7 billion free cash flow, and progress in ESG metrics like underage drinking education and leadership diversity Fiscal 2025 Group Financial Performance | Metric | 2025 Value | 2024 Value | Organic Movement | | :--- | :--- | :--- | :--- | | Reported Net Sales | $20,245 million | $20,269 million | 2% | | Reported Operating Profit | $4,335 million | $6,001 million | -1% | | Free Cash Flow | $2,748 million | $2,609 million | N/A | | Earnings Per Share (EPS) | 105.9 cents | 173.2 cents | N/A | | Total Recommended Dividend | 103.48 cents | 103.48 cents | N/A | Fiscal 2025 Non-Financial Performance | Metric | 2025 Value | 2024 Value | | :--- | :--- | :--- | | People educated on underage drinking | 2.0 million | 2.2 million | | Female leaders globally | 43% | 44% | | Ethnically diverse leaders globally | 46% | 46% | | Water efficiency change vs FY20 | -15.8% | -12.9% | | GHG emissions change vs FY22 | -18.8% | -14.4% | - The 'Accelerate' program was launched to deliver consistent performance, targeting c.$625 million in cost savings over three years and returning to a leverage ratio of 2.5x-3.0x no later than fiscal 28[106][107] Investment Case Diageo presents a strong investment case based on attractive long-term industry fundamentals, including spirits versatility, premiumization, and a 4.5% global TBA share, leveraging its 1 position in international spirits, 13 billion-dollar brands, and diversified geographical footprint, all supported by the 'Accelerate' program - The long-term value growth in spirits is driven by premiumization, with the super-premium-plus price tier growing over 50% faster than other tiers in the last 10 years[122] - Diageo's competitive advantages include being the 1 player in international spirits, possessing 13 billion-dollar brands, and having a diversified geographical footprint that reduces dependency on any single region[124][125] - The 'Accelerate' program underpins the company's reshaped priorities, aiming to build a more agile operating model with clear targets for cash delivery, cost efficiency, and deleveraging[128][129] Market Dynamics Near-term industry pressures are cyclical, but long-term fundamentals remain compelling with a growing legal purchase age population and spirits gaining share, while moderation is a significant opportunity despite monitoring potential headwinds like cannabis and GLP-1s - Long-term industry fundamentals are considered attractive, with 600 million new legal-purchase-age consumers expected to enter the market by 2035[136] - Potential headwinds such as cannabis and GLP-1 weight-loss drugs are being monitored, but recent US research indicates they have not yet shown significant disruption to spirits consumption[137] - Moderation is viewed as a significant opportunity. The versatility of spirits and Diageo's leadership in non-alcoholic options like Seedlip, Ritual, and Guinness 0.0 position the company to shape the future of this trend[138][139] Our Strategy Diageo's strategy focuses on unleashing brand power, leading consumer trends like moderation and luxury, and achieving operational excellence through the 'Accelerate' program, with specific goals for whisk(e)y, tequila, and Guinness - The strategy focuses on key categories like Whisk(e)y and Tequila, with an aim to maintain the 1 value position, alongside prioritizing the growth of Guinness and developing culturally relevant local portfolios[144][149][150] - Diageo aims to lead and shape consumer trends including cocktail culture, moderation, exploration, convenience, food pairings, and the luxury segment through its Diageo Luxury Group[146][147][151][152][153][154] - Operational excellence is supported by the 'Accelerate' program, which has three main goals: sustainably deliver c.$3 billion in free cash flow annually from FY26, achieve c.$625 million in cost savings over three years, and deleverage to within the 2.5-3.0x net debt to adjusted EBITDA range by FY28[159] - In November, the Diageo Luxury Group was established to accelerate the growth of brands retailing at $100 and above, aiming to become the number one luxury spirits company in the world[181][182] Performance Review Overall Performance Metrics Diageo's fiscal 2025 saw 1.7% organic net sales growth, a 0.7% organic operating profit decline, $2.75 billion free cash flow, and 13.7% ROIC, alongside progress in ESG areas like underage drinking education and environmental targets Key Financial Performance Indicators (Fiscal 2025) | Metric | Value/Change | | :--- | :--- | | Organic Net Sales Growth | 1.7% | | Organic Operating Profit Growth | (0.7)% | | Basic EPS before exceptional items | 164.2 cents (-8.6%) | | Free Cash Flow | $2,748 million | | Return on Average Invested Capital (ROIC) | 13.7% | | Total Shareholder Return (TSR) | (24)% | - Reported net sales of $20.2 billion declined 0.1%, impacted by unfavorable foreign exchange and disposals, while organic net sales growth of 1.7% was driven by 0.9% volume growth and 0.8% positive price/mix[190] - Reported operating profit declined 27.8%, primarily due to exceptional impairment and restructuring costs. Organic operating profit declined by 0.7%, with the margin down 68bps due to investment in overheads[194] Key Non-Financial Performance Indicators (Fiscal 2025) | Metric | 2025 Performance | 2030 Target/Ambition | | :--- | :--- | :--- | | People educated on underage drinking | 2.0 million | 10 million (cumulative) | | Female leaders globally | 43% | 50% | | Ethnically diverse leaders globally | 46% | 45% | | Water efficiency (vs. FY20) | (15.8)% | (30)% | | Scope 1 & 2 GHG emissions (vs. FY22) | (18.8)% | (50)% | Summary Financial Review Diageo's fiscal 2025 reported net sales were down 0.1% to $20,245 million, with 1.7% organic growth, while reported operating profit declined 27.8% due to exceptional items, and free cash flow increased to $2,748 million, supported by the 'Accelerate' program targeting $625 million in cost savings Fiscal 2025 Financial Summary | Metric | Fiscal 2025 | Fiscal 2024 | | :--- | :--- | :--- | | Reported Net Sales | $20,245 million | $20,269 million | | Organic Net Sales Growth | 1.7% | N/A | | Reported Operating Profit | $4,335 million | $6,001 million | | Organic Operating Profit Decline | 0.7% | N/A | | Basic EPS before exceptionals | 164.2 cents | 179.6 cents | | Free Cash Flow | $2,748 million | $2,609 million | | Net Debt | $21,854 million | $21,017 million | - Exceptional operating items increased significantly to $1,369 million, largely driven by impairments related to Distill Ventures ($458 million) and Aviation American Gin ($231 million), as well as restructuring costs for the Accelerate program ($225 million)[223] - The 'Accelerate' program aims to deliver c.$625 million in cost savings over three years, with approximately 50% contributing to operating profit and 50% reinvested in growth areas[240] - The company estimates the unmitigated annualized impact of current tariffs to be c.$200 million, but expects to mitigate around half of this impact on operating profit through actions like inventory management and supply chain optimization[232][233] Business Review This section reviews Diageo's fiscal 2025 performance across five geographic regions and key product categories, highlighting strong organic growth in Tequila (18%) and Beer (10%), while Scotch and Vodka experienced declines North America In fiscal 2025, North America delivered 1.5% organic net sales growth, driven by 16.9% Tequila growth (Don Julio up 41.9%), despite declines in Casamigos, Johnnie Walker, and vodka, with Guinness contributing to Diageo Beer Company's 4.8% growth Europe Europe's organic net sales grew 0.3%, with a 4.3% volume decline offset by 4.5% positive price/mix, driven by strong Guinness growth in Great Britain and Ireland, while Southern and Northern Europe declined, and Türkiye saw 20.9% growth Asia Pacific Asia Pacific organic net sales declined 3.2% and operating profit fell 11.0% due to macroeconomic challenges in China and Travel Retail, despite strong 7.1% growth in India's Prestige & Above segment Latin America and Caribbean Latin America and Caribbean delivered strong 9.2% organic net sales growth and 11.7% organic operating profit increase, led by Brazil's 18.0% growth in scotch and Mexico's Don Julio performance Africa Africa reported strong 10.5% organic net sales growth and 27.7% organic operating profit growth, with broad-based performance across markets like Ghana, South Africa, and Tanzania, driven by beer, rum, scotch, and Gordon's gin Category and Brand Review Tequila led category growth with 18% organic net sales, followed by Beer at 10%, while Scotch, Vodka, Rum, and Gin declined, with Don Julio (38%) and Guinness (13%) showing strong brand performance Group Financial Review Diageo's fiscal 2025 reported net sales were $20,245 million, with operating profit at $4,335 million, significantly impacted by $1,425 million in exceptional items, while net borrowings increased to $21,854 million and the final dividend remained flat Reconciliation of Operating Profit (FY24 to FY25) | Description | Amount ($ million) | | :--- | :--- | | FY24 Reported Operating Profit | 6,001 | | Exceptional operating items | (1,425) | | Exchange | (200) | | Acquisitions and disposals | (27) | | Organic movement | (38) | | Fair value remeasurement | 13 | | Reclassification | — | | Hyperinflation | 11 | | FY25 Reported Operating Profit | 4,335 | - Exceptional operating items in FY25 were a charge of $1,369 million, primarily due to impairments ($910 million), restructuring programs ($225 million), and a distribution model change in France ($145 million)[328] - Net borrowings increased from $21,017 million in FY24 to $21,854 million in FY25. The increase was mainly driven by unfavorable exchange movements on non-US dollar debt, equity dividends paid, and cash outflows for other borrowings, partially offset by free cash flow and proceeds from bond issuances[336] - The recommended final dividend is 62.98 cents per share, keeping the total dividend for the year flat. Dividend cover for FY25 was 1.6 times, below the target range of 1.8-2.2 times[333][339] Spirit of Progress (ESG) Diageo's 'Spirit of Progress' ESG plan focuses on positive drinking, grain-to-glass sustainability, and inclusion/diversity, with updated targets for emissions, regenerative agriculture, and packaging, overseen by the Board and Executive Committee, while preparing for new regulatory frameworks - The 'Spirit of Progress' ESG action plan is structured around three core priorities: Promote positive drinking, Pioneer grain-to-glass sustainability, and Champion inclusion and diversity[361] - In fiscal 2025, the company updated its emissions reduction, regenerative agriculture, and packaging ambitions to reflect a new ESG issues assessment and updated Science Based Targets initiative (SBTi) targets[359] - The Board and Executive Committee oversee the 'Spirit of Progress' plan, with the Chief Executive having ultimate accountability for performance against its ambitions[363] Business Integrity and Human Rights Diageo upholds business integrity through its Code of Business Conduct, 'SpeakUp' service, and 'Know Your Business Partner' program, committing to UN Guiding Principles on Human Rights, with salient risks like health and safety monitored via assessments and audits Our People and Culture Diageo reports strong employee engagement (83%) and pride (90%), with 79% of leadership appointments internal, focusing on an agile culture, and supporting wellbeing through a holistic framework including 'Carers Leave' and 'One World' share plan Health and Safety Diageo prioritizes health and safety with its 'Safer Together' strategy, improving Lost Time Accident Frequency Rate to 0.82 per 1,000 employees, and implementing continuous improvement initiatives like a global governance baseline survey and 'Safer Driver Programme' Promote Positive Drinking Diageo promotes positive drinking by educating 2.0 million young people on underage drinking and 1.6 million on drink driving, leveraging its DRINKiQ platform and Diageo Marketing Code, with no upheld marketing complaints in fiscal 2025 Pioneering Grain to Glass Sustainability Diageo addresses climate risks through its grain-to-glass sustainability strategy, updating decarbonization targets (50% Scope 1 & 2 reduction by 2030, net zero by 2040), improving water efficiency by 15.8%, launching five regenerative agriculture programs, and increasing recycled packaging content to 46% Champion Inclusion and Diversity Diageo champions inclusion and diversity, with 43% female and 46% ethnically diverse leaders, exceeding its 2030 ethnic diversity ambition, supported by inclusive policies, talent programs, and reaching 35,000 people through 'Learning for Life' Risk Factors Diageo faces principal risks from global economic instability, geopolitical conflicts, tariffs, inflation, shifts in consumer preferences (moderation, GLP-1s), regulatory changes, climate change, cyber-attacks, supply chain disruptions, and brand reputation damage - Global economic risks, including geopolitical instability (e.g., conflicts in Ukraine and the Middle East), tariffs, and inflationary pressures, could erode consumer confidence and reduce demand for Diageo's products[616][617] - Climate change poses physical risks, such as water scarcity and extreme weather events affecting raw material supply, and transition risks from new regulations and changes in consumer behavior[624][625] - The business faces risks from shifting consumer preferences, including trends towards moderation, lower/no alcohol beverages, and the potential impact of GLP-1 medications reducing alcohol consumption[629][631] - Diageo is exposed to significant risks from cyber-attacks and IT threats, which could disrupt production, lead to data theft, and harm the company's reputation and financial results[657][658] Governance Report Corporate Governance Report Diageo's governance framework fully complies with the 2018 UK Corporate Governance Code, featuring a diverse Board (75% female, 50% minority ethnic) and clear separation of roles, with active monitoring of culture and adapted Board processes for enhanced responsiveness - The company confirms full compliance with the 2018 UK Corporate Governance Code for the year ended 30 June 2025[694] - As of August 2025, the Board's composition includes 75% women and 50% directors from minority ethnic groups, exceeding its diversity policy objectives of at least 40% female representation and at least one director from a minority ethnic group[731] - The Board monitors and assesses the company's culture through various channels, including site visits, employee surveys ('Your Voice'), reports from the 'SpeakUp' whistleblowing service, and a formal workforce engagement program[810][811][812][814] - Following a review, the Board adapted its processes and committee structure, moving to a more conventional model with smaller committee memberships to improve effectiveness and responsiveness to the external environment[783][784] Audit Committee Report The Audit Committee reviewed financial reporting integrity, internal controls, and risk management, focusing on asset impairment, Brazilian tax exposures, and cyber security, confirming effective internal controls and an unqualified external auditor opinion - The Committee reviewed significant financial judgments, including the impairment of intangible assets (Distill Ventures, Aviation American Gin), tax exposures, and the valuation of post-employment liabilities[889][890][892] - The Committee oversees the company's cyber security risk management, which is aligned to the group's principal risk of 'Cyber and IT resilience', and is enhancing processes to align with new regulations like the EU's NIS2 directive[897][898] - Management concluded that as of June 30, 2025, internal control over financial reporting was effective, based on the COSO 2013 framework. The external auditor, PricewaterhouseCoopers LLP, issued an unqualified report on this assessment[877] - The FRC reviewed the company's 2024 annual report and had no questions or queries, though it noted some matters for potential improvement, which have been addressed in the 2025 report[852] Nomination Committee Report The Nomination Committee supervised the CEO search, appointed Nik Jhangiani as Interim CEO, oversaw Executive Committee transitions, and implemented a new, more focused committee structure, while managing the annual board evaluation and ensuring diversity targets are met - The committee is supervising a comprehensive formal search process for a new Chief Executive following the departure of Debra Crew. Nik Jhangiani has been appointed Interim Chief Executive[910] - The committee oversaw a change in board committee composition, moving to a more conventional model with smaller, more focused memberships for the Audit and Remuneration Committees starting in fiscal 2026[913][924] - The Board's diversity policy targets have been met, with a commitment to maintain no less than 40% female representation and at least one director from a minority ethnic group[929] Directors' Remuneration Report The report details fiscal 2025 executive pay, with Annual Incentive Plan (AIP) payouts at 40% of maximum and Long-Term Incentive Plan (DLTIP) vesting at 12.5% (driven by ESG), and outlines fiscal 2026 changes including new adjusted operating cash flow and ROIC measures Fiscal 2025 Incentive Outcomes (% of Maximum) | Plan | Metric Category | Payout | | :--- | :--- | :--- | | Annual Incentive Plan (AIP) | Financial Measures | 40.0% | | | Total (incl. IBOs) - CEO | 42.0% | | Long-Term Incentive Plan (DLTIP) | Financial Measures | 0% | | | ESG Measures | 62.5% | | | Total Vesting | 12.5% | - For fiscal 2026, incentive plans will be updated. The AIP will replace operating cash conversion with a new adjusted operating cash flow measure. The DLTIP will introduce a return on invested capital (ROIC) measure and refresh its ESG metrics[962] - Debra Crew stepped down as CEO post year-end, with leaving arrangements in line with policy. Nik Jhangiani was appointed Interim CEO[946] - The Remuneration Committee agreed to a salary freeze for the majority of the Executive Committee for fiscal 2026, reflecting the challenging industry conditions and lower salary increase budgets for the wider workforce[958] Directors' Report This report provides statutory information on Diageo plc, including director re-election, major shareholders (BlackRock at 5.89%), change of control clauses for the Moët Hennessy joint venture, and details on employment policies and trading markets for its shares and ADSs Major Shareholders (as of 30 June 2025) | Shareholder | % of Issued Ordinary Share Capital | | :--- | :--- | | BlackRock Investment Management (UK) Limited | 5.89% | | Capital Research and Management Company | 4.99% | | Massachusetts Financial Services Company | 4.99% | - Significant agreements with LVMH regarding the Moët Hennessy joint venture contain change of control clauses. If a competitor takes control of Diageo, LVMH may require Diageo to sell its 34% interest in Moët Hennessy[1190] - Diageo's ordinary shares are listed on the London Stock Exchange, and its American Depositary Shares (ADSs), each representing four ordinary shares, are listed on the New York Stock Exchange[1196] Financial Statements Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified opinion on Diageo's consolidated financial statements and effective internal controls, identifying contingent liabilities for Brazilian taxes as a Critical Audit Matter due to significant judgment and subjectivity - The auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion, stating that the consolidated financial statements present fairly, in all material respects, the financial position and results of Diageo's operations[1223] - The company's internal control over financial reporting as of June 30, 2025, was deemed effective in all material respects[1223] - A Critical Audit Matter was identified concerning the contingent liabilities associated with taxes in Brazil, highlighting the significant management judgments and high degree of auditor subjectivity required to assess the probability and amount of expected settlements[1230][1231] Consolidated Financial Statements Diageo's fiscal 2025 consolidated financial statements show profit for the year at $2,538 million, total assets of $49,322 million, total equity of $13,178 million, and a net cash inflow from operating activities of $4,297 million Consolidated Income Statement Highlights ($ million) | Line Item | 2025 | 2024 | | :--- | :--- | :--- | | Net Sales | 20,245 | 20,269 | | Operating Profit | 4,335 | 6,001 | | Profit for the year | 2,538 | 4,166 | | Basic Earnings Per Share (cents) | 105.9 | 173.2 | Consolidated Balance Sheet Highlights ($ million) | Line Item | 30 June 2025 | 30 June 2024 | | :--- | :--- | :--- | | Total Assets | 49,322 | 45,474 | | Total Liabilities | 36,144 | 33,404 | | Total Equity | 13,178 | 12,070 | Consolidated Statement of Cash Flows Highlights ($ million) | Line Item | 2025 | 2024 | | :--- | :--- | :--- | | Net cash inflow from operating activities | 4,297 | 4,105 | | Net cash outflow from investing activities | (1,720) | (1,595) | | Net cash outflow from financing activities | (1,494) | (3,106) | Notes to the Consolidated Financial Statements This section provides detailed explanations of accounting policies and figures, including segmental information, exceptional items (e.g., $1,369 million charge for impairments and restructuring), acquisitions/disposals (e.g., Guinness Nigeria sale), intangible assets, financial instruments, net borrowings, and contingent liabilities (e.g., $906 million for Brazil tax disputes) - Exceptional operating items totaled a charge of $1,369 million, primarily driven by impairment charges of $910 million (including Distill Ventures and Aviation American Gin), restructuring program costs of $225 million, and a $145 million charge for the distribution model change in France[1293] - The company completed the sale of its shareholding in Guinness Nigeria PLC, resulting in a non-operating exceptional loss of $125 million. It also announced agreements to sell its breweries in Ghana and Seychelles[1310][1311][1313] - Significant impairment charges were recognized against intangible assets, including $231 million for the Aviation American Gin brand and $458 million related to the Distill Ventures program[1298] - The group faces significant contingent liabilities from ongoing tax cases, with a known possible exposure of up to approximately $906 million for Brazil and $90 million for India, for which no provision has been made[1630] Additional Information Unaudited Financial Information (Non-GAAP Measures) This section defines and reconciles non-GAAP measures like 'organic movements', presented on a constant currency basis, and other key metrics including EPS before exceptional items, Free Cash Flow, ROIC, and Adjusted Net Borrowings to Adjusted EBITDA - Organic movements are a key non-GAAP measure used by management. They are calculated on a constant currency basis and exclude the impact of exceptional items, certain fair value remeasurements, hyperinflation, and acquisitions/disposals to show the underlying performance of the business[1669] Reconciliation of Key Non-GAAP Measures (Fiscal 2025) | Metric | Value | | :--- | :--- | | Basic EPS before exceptional items | 164.2 cents | | Free Cash Flow | $2,748 million | | Return on Average Invested Capital (ROIC) | 13.7% | | Adjusted Net Borrowings to Adjusted EBITDA | 3.4x | - The document provides detailed reconciliation tables for fiscal 2025, showing the adjustments for exchange rates, acquisitions/disposals, and hyperinflation that bridge the gap between reported results and organic movements for each geographical segment[1685] Liquidity and Capital Resources Diageo's liquidity primarily stems from operations, with $3.5 billion in undrawn bank facilities, while its adjusted net borrowings to adjusted EBITDA ratio was 3.4x (above the 2.5–3.0x target), and net borrowings increased to $21,854 million - The primary source of liquidity is cash from operations. The group had $3.5 billion in available undrawn committed bank facilities as of June 30, 2025[1805][1807] Capital Structure and Liquidity Metrics (Fiscal 2025) | Metric | Value | | :--- | :--- | | Net Borrowings | $21,854 million | | Adjusted Net Borrowings to Adjusted EBITDA Ratio | 3.4x | | Target Leverage Ratio | 2.5–3.0x | | Effective Interest Rate | 4.1% | - Net cash inflow from operating activities was $4,297 million, an increase of $192 million from the prior year, driven by favorable working capital movements[1813]