TIDMDGE
RNS Number : 5999O
Diageo PLC
31 January 2019
Interim results, six months ended 31 December 2018
31 January 2019
Delivering our strategy through strong consistent performance
-- Reported net sales (GBP6.9 billion) was up 5.8% with organic
growth partially offset by unfavourable exchange. Reported
operating profit (GBP2.4 billion) was up 11.0%, driven by organic
growth
-- All regions contributed to broad based organic net sales
growth, up 7.5%, with organic volume up 3.5%
-- Organic operating profit grew 12.3%, ahead of top line
growth, as cost inflation and higher marketing investment were more
than offset by improved price/mix and efficiencies from our
productivity programme
-- Cash flow continued to be strong, with net cash from
operating activities at GBP1.6 billion, up GBP356 million and free
cash flow at GBP1.3 billion, up GBP317 million
-- Basic eps of 80.9 pence was down by (1.6)%. Pre-exceptional
eps was 77.0 pence, up 13.6%, driven by higher operating profit and
lower finance charges, which more than offset an increased tax
charge largely as a result of lapping the positive impact of US tax
reform in the prior period
-- The interim dividend increased 5% to 26.1 pence per share
See Explanatory Notes for explanation of the use of non-GAAP
measures.
Ivan Menezes, Chief Executive, commenting on the results said:
"Diageo delivered broad-based volume and organic net sales
growth across regions and categories. We continue to expand organic
operating margins while increasing investment in our brands ahead
of organic net sales growth.
These results are further evidence of the changes we have made
in Diageo to put the consumer at the heart of our business, to
embed productivity and to act with agility to enable us to win
sustainably.
At GBP1.3 billion, we delivered another period of strong free
cash flow. As a result the board approved an incremental share
buyback of GBP660 million, bringing the total programme up to
GBP3.0 billion for the year ending 30 June 2019.
This half has benefitted from some one-time and phasing gains in
both organic net sales and operating profit, and therefore we
continue to expect to deliver mid-single digit organic net sales
growth for the year and to expand operating margins in line with
our previous guidance of 175 bps for the three years ending 30 June
2019.
As we deploy our strategy, we remain focused on building the
long-term health of our brands and ensuring we grow our business in
a consistent and sustainable way."
Key financial information
Six months ended 31 December 2018
Summary financial information
Organic Reported
growth growth
F19 H1 F18 H1 % %
----------------------------------------- ----------- ------ ------ ------- ----------
Volume EUm 130.5 126.4 4 3
----------------------------------------- ----------- ----- ----- ------- ------
Net sales GBP million 6,908 6,530 7 6
----------------------------------------- ----------- ----- ----- ------- ------
Marketing GBP million 1,054 968 9 9
----------------------------------------- ----------- ----- ----- ------- ------
Operating profit before exceptional
items GBP million 2,451 2,190 12 12
----------------------------------------- ----------- ----- ----- ------- ------
Exceptional operating items(i) GBP million (21) -
----------------------------------------- ----------- ----- ----- ------- ----------
Operating profit GBP million 2,430 2,190 11
----------------------------------------- ----------- ----- ----- ------- ------
Share of associate and joint venture
profit after tax GBP million 179 168 7
----------------------------------------- ----------- ----- ----- ------- ------
Exceptional non-operating gain(i) GBP million 146 -
----------------------------------------- ----------- ----- ----- ------- ----------
Net finance charges GBP million (128) (154)
----------------------------------------- ----------- ----- ----- ------- ----------
Exceptional taxation (charge)/credit(i) GBP million (30) 360
----------------------------------------- ----------- ----- ----- ------- ----------
Tax rate including exceptional items % 21.3 3.5 509
----------------------------------------- ----------- ----- ----- ------- ------
Tax rate before exceptional items % 21.2 19.8 7
----------------------------------------- ----------- ----- ----- ------- ------
Profit attributable to parent company's
shareholders GBP million 1,976 2,058 (4)
----------------------------------------- ----------- ----- ----- ------- ------
Basic earnings per share pence 80.9 82.2 (2)
----------------------------------------- ----------- ----- ----- ------- ------
Earnings per share before exceptional
items pence 77.0 67.8 14
----------------------------------------- ----------- ----- ----- ------- ------
Interim dividend pence 26.1 24.9 5
----------------------------------------- ----------- ----- ----- ------- ------
(i) For further details of exceptional items see Additional
Financial Information (c) Exceptional items.
Outlook for exchange
Using exchange rates GBP1 = $1.32; GBP1 = EUR1.16, the exchange
rate movement for the year ending 30 June 2019 is estimated to
adversely impact net sales by approximately GBP80 million and
operating profit by approximately GBP10 million.
Outlook for tax
The tax rate before exceptional items for the six months ended
31 December 2018 was 21.2% compared with 19.8% in the prior
comparable period. Our current expectation is that the tax rate
before exceptional items for the year ending 30 June 2019 will be
in the range of 21% to 22%, which reflects changing business mix
and the increased levels of uncertainty in the current tax
environment for most multinationals. For further details on
taxation see Additional Financial Information (d) Taxation.
Share buyback programme
On 26 July 2018 the Board approved a share buyback programme to
return up to GBP2.0 billion to shareholders during the year ending
30 June 2019. On 20 December 2018 Diageo completed the sale of a
portfolio of 19 brands to Sazerac. The net proceeds of
approximately GBP340 million, after corporate tax and transaction
costs, will be returned to shareholders through a share buyback
programme, which brought the total programme to GBP2.34
billion.
On 30 January 2019 the board approved a further incremental
share buyback programme of GBP660 million, bringing the total
programme to up to GBP3.0 billion for the year ending 30 June
2019.
In the six months ended 31 December 2018, 46.5 million shares
were repurchased for an aggregate consideration of GBP1.275
billion.
Acquisitions and disposals
The impact of acquisitions and disposals on the reported figures
was primarily attributable to the disposal of a portfolio of 19
brands to Sazerac which was completed on 20 December 2018 and to
the prior year acquisition of the Casamigos brand.
For further details on the impact of acquisitions and disposals
see Explanatory Notes.)
Net sales (GBP million)
Reported net sales were up 5.8% with organic growth partially
offset by unfavourable exchange
Organic net sales grew 7.5% driven by volume up 3.5% and
positive price/mix up 4.0%
(i
Net sales GBP million
---------------------------- -------------
F18 H1 6,530
Exchange(i) (91)
Acquisitions and disposals (7)
Volume 224
Price/mix 252
F19 H1 6,908
---------------------------- ----------
(i) Exchange rate movements reflect the translation of prior
year reported results at current year exchange rates.
Reported net sales grew 5.8%, driven by organic growth which was
partially offset by unfavourable exchange and acquisitions and
disposals.
Organic volume growth of 3.5% and 4.0% positive price/mix drove
7.5% organic net sales growth. All regions reported organic net
sales growth.
Operating profit (GBP million)
Reported operating profit grew 11.0%
Organic operating profit grew 12.3%
Operating profit GBP million
----------------------------- -------------
F18 H1 2,190
----------------------------- ----------
Exceptional operating items (21)
Exchange -
----------------------------- ----------
Acquisitions and disposals (3)
Organic movement 264
----------------------------- ----------
F19 H1 2,430
----------------------------- ----------
Reported operating profit was up 11.0% with organic growth
partially offset by exceptional operating items and acquisitions
and disposals. Organic operating profit grew ahead of net sales at
12.3%.
Operating margin (%)
Reported operating margin increased 164bps
Organic operating margin increased 152 bps
Operating margin ppt
----------------------------- --------
F18 H1 33.5
Exceptional operating items (0.30)
-----------------------------
Exchange 0.47
-----
Acquisitions and disposals (0.05)
Gross margin 0.50
Marketing (0.26)
Other operating expenses 1.28
F19 H1 35.2
----------------------------- -----
Reported operating margin increased 164bps driven by organic
operating margin improvement and the positive impact on operating
margin due to exchange, as a result of the higher negative impact
of exchange on net sales relative to operating profit. Organic
operating margin improved 152bps driven by improved price/mix and
efficiencies from our productivity programme partially offset by
higher marketing spend.
Basic earnings per share (pence)
Basic eps decreased 1.6% from 82.2 pence to 80.9 pence
Eps before exceptional items increased 13.6% from 67.8 pence to
77.0 pence
(i
Basic earnings per share pence
------------------------------------ --------
F18 H1 82.2
------------------------------------ -----
Exceptional items after tax (10.5)
------------------------------------
Exchange on operating profit 0.1
------------------------------------
Acquisitions and disposals (0.1)
------------------------------------
Organic operating profit growth(i) 10.4
------------------------------------ -----
Associates and joint ventures 0.4
-----
Net finance charges 2.2
Tax (4.0)
Share buyback 1.1
Non-controlling interests (0.9)
------------------------------------ -----
F19 H1 80.9
------------------------------------ -----
(i) Excluding exchange
Basic eps declined 1.3 pence largely due to lapping the benefit
of an exceptional tax credit in the prior period following the tax
reduction in the United States under the US Tax Cut and Jobs
Act.
Eps before exceptional items increased 9.2 pence as organic
operating profit growth and lower finance charges more than offset
the higher tax charge.
Free cash flow (GBP million)
Net cash from operating activities(i) was GBP1,604 million, an
increase of GBP356 million compared to the same period last year.
Free cash flow was GBP1,346 million, an increase of GBP317
million
Free cash flow GBP million
----------------------- -------------
F18 H1 1,029
----------------------- ----------
Exchange(ii) -
----------------------- ----------
Operating profit(iii) 283
Working capital(iv) (126)
----------
Capex (57)
----------------------- ----------
Tax 179
----------------------- ----------
Interest 23
----------------------- ----------
Other(v) 15
----------------------- ----------
F19 H1 1,346
----------------------- ----------
(i) Net cash from operating activities excludes net capex,
movements in loans and other investments (2018 - (GBP258) million;
2017 - (GBP219) million).
(ii) Exchange on operating profit before exceptional items.
(iii) Operating profit excludes exchange, depreciation and
amortisation, post employment charges and non-cash items.
(iv) Working capital movement includes maturing inventory.
(v) Other items include post employment payments, dividends
received from associates and joint ventures, and movements in loans
and other investments.
Free cash flow continued to be strong at GBP1.3 billion largely
driven by operating profit growth and lower tax payments which
benefitted from the lapping of the one-off payment made to the UK
tax authorities in August 2017. This increase was partially offset
by a higher year on year working capital outflow, including
increased investment in maturing inventory, and increased
capex.
The operating working capital position, excluding maturing
inventory, on the balance sheet improved in the half compared to
the same period last year, largely as a result of higher
creditors.
Returnon average invested capital (%)(i)
ROIC improved 135bps
Return on average invested capital ppt
------------------------------------ --------
F18 H1 16.5
Exchange 0.19
Acquisitions and disposals (0.16)
-----
Organic operating profit growth 2.38
Associates and joint ventures (0.03)
------------------------------------ -----
Tax (0.68)
------------------------------------ -----
Other (0.35)
F19 H1 17.8
------------------------------------ -----
(i) ROIC calculation excludes exceptional items.
ROIC increased 135bps largely driven by organic operating profit
growth which was partially offset by the impact from higher tax
charges, acquisitions and disposals and associates and joint
ventures.
Reported growth by region
Volume Net sales Marketing Operating profit(i)
% EUm % GBP million % GBP million % GBP million
-------------------------- --- ----- ---- ----------- --------- ------------- -------- -------------
North America 2 0.4 8 173 13 45 7 74
-------------------------- ---- ---- ----------- ----- -------- --- -------- -----------
Europe and Turkey 2 0.5 2 34 6 14 3 15
-------------------------- ---- ---- ----------- ----- -------- --- -------- -----------
Africa 1 0.2 6 47 10 8 28 33
-------------------------- ---- ---- ----------- ----- -------- --- -------- -----------
Latin America and
Caribbean (1) (0.1) 4 23 1 1 17 36
-------------------------- ---- ---- ----------- ----- -------- --- -------- -----------
Asia Pacific 7 3.1 8 100 11 20 29 93
-------------------------- ---- ---- ----------- ----- -------- --- -------- -----------
Corporate - - 4 1 (50) (2) 11 10
-------------------------- ---- ---- ----------- ----- -------- -------- -----------
Diageo 3 4.1 6 378 9 86 12 261
-------------------------- ---- ---- ----------- ----- -------- --- -------- -----------
Organic growth by region
Volume Net sales Marketing Operating profit(i)
% EUm % GBP million % GBP million % GBP million
------------------------- --- ----- ---- ----------- --------- ------------- -------- --------------
North America 3 0.6 6 130 10 36 4 36
------------------------- ---- ---- ----------- ----- -------- --- -------- ------------
Europe and Turkey 1 0.3 5 83 9 21 5 31
------------------------- ---- ---- ----------- ----- -------- --- -------- ------------
Africa 1 0.2 6 49 6 5 30 35
------------------------- ---- ---- ----------- ----- -------- --- -------- ------------
Latin America and
Caribbean (1) (0.1) 9 57 6 6 21 44
------------------------- ---- ---- ----------- ----- -------- --- -------- ------------
Asia Pacific 7 3.4 13 156 13 24 35 106
------------------------- ---- ---- ----------- ----- -------- --- -------- ------------
Corporate - - 4 1 (50) (2) 13 12
------------------------- ---- ---- ----------- ----- -------- -------- ------------
Diageo 4 4.4 7 476 9 90 12 264
------------------------- ---- ---- ----------- ----- -------- --- -------- ------------
(i) Before operating exceptional items.
Notes to the business and financial review
Unless otherwise stated:
-- commentary below refers to organic movements
-- volume is in millions of equivalent units (EUm)
-- net sales are sales after deducting excise duties
-- percentage movements are organic movements
-- share refers to value share
See Explanatory Notes for explanation of the calculation and use
of non-GAAP measures.
BUSINESS REVIEW
Six months ended 31 December 2018
North America
North America delivered net sales growth of 6%, with growth
across all markets. The disposal of a portfolio of 19 brands to
Sazerac, that was completed on 20 December 2018, positively
impacted net sales growth of the region by 78bps. In US Spirits,
net sales increased 5%, with overall share trends improving. Net
sales in Crown Royal increased 4%, largely driven by Regal Apple
and the limited time offer Salted Caramel. Bulleit net sales were
up 7% and continued to gain share in US whiskey. Scotch grew 10%
with broad based growth across brands and share gains in the
category. Vodka net sales were flat, an improvement versus last
year, as the successful launch of Ketel One Botanical more than
offset net sales decline in Smirnoff and Cîroc vodka. Captain
Morgan net sales declined 9% and lost share in a declining
category. In tequila, both Don Julio and Casamigos delivered strong
double digit growth and gained share in the category. Diageo Beer
Company USA net sales grew 13% largely driven by growth in ready to
drink, as a result of successful prior year innovation launches.
Performance in beer also improved. Net sales in Canada increased 5%
as the spirits business lapped a weaker comparative in the same
period last year and with good growth in ready to drink. Operating
margin declined 112bps largely driven by gross margin decline as a
result of negative market mix within the region, higher commodity
and logistics costs and up-weighted marketing investment in US
Spirits, with productivity efficiencies being reinvested in the
business.
Key financials GBP million:
Acquisitions Reported
and Organic F19 movement
F18 H1 FX Reclassifi-cation(i) disposals movement H1 %
----------- ------ ---------------------- -------------- --------- ----- -----------
Net sales 2,183 44 1 (2) 130 2,356 8
------------ ------ -------- --- --------- ----- ---------
Marketing 338 10 (1) - 36 383 13
------------ ------ -------------- ----- -------- ---- --------- ----- ---------
Operating
profit 1,027 39 1 (2) 36 1,101 7
------------ ------ -------------- ------ -------- --- --------- ----- ---------
(i) Reclassification comprises a reallocation of the results of
Travel Retail to the geographical regions.
Markets: Global giants, local stars and reserve(i)
:
Organic Reported
Organic Reported net net Organic Organic Reported
volume volume sales sales volume net sales net sales
movement movement movement movement movement(ii) movement movement
% % % % % % %
---------- ----------- ----------- -------- -------- ----------- -------------- ---------- ------------
North Crown
America 3 2 6 8 Royal 5 4 7
---------- ------ --- ------ --- -------- -------- ----------- --------- --- --------- --------
Smirnoff - (1) -
---------- ----------- ----------- -------- -------- ----------- --------- --- --------- --------
US Captain
Spirits 1 - 5 7 Morgan (6) (7) (6)
---------- ------ --- ------ --- -------- -------- ----------- --------- --------- --------
Johnnie
DBC USA 10 10 13 15 Walker 9 10 12
---------- ------ --- ------ --- -------- -------- ----------- --------- --- --------- --------
Ketel
Canada 5 5 5 3 One(iii) 19 22 25
---------- ------ --- ------ --- -------- -------- ----------- --------- --- --------- --------
Cîroc
vodka (11) (14) (11)
---------- ----------- ----------- -------- -------- ----------- --------- --------- --------
Spirits 2 1 5 7 Baileys 3 4 5
---------- ------ --- ------ --- -------- -------- ----------- --------- --- --------- --------
Beer (1) (1) 1 3 Guinness (1) 2 4
---------- ------ ------ -------- -------- ----------- --------- --------- --------
Ready to
drink 23 23 22 24 Tanqueray (2) (5) (1)
---------- ------ --- ------ --- -------- -------- ----------- --------- --------- --------
Don Julio 22 28 31
---------- ----------- ----------- -------- -------- ----------- --------- --- --------- --------
Bulleit 10 7 10
---------- ----------- ----------- -------- -------- ----------- --------- --- --------- --------
Buchanan's 12 7 9
---------- ----------- ----------- -------- -------- ----------- --------- --- --------- --------
(i) Spirits brands excluding ready to drink.
(ii) Organic equals reported volume movement except for Johnnie
Walker 8%, Cîroc vodka (12%), Baileys 2% and Tanqueray (3%),
largely due to the reallocation of the results of Travel
Retail.
(iii) Ketel One includes Ketel One vodka and Ketel One Botanical.
-- Net sales in US Spirits were up 5%, broadly in line with
depletions. The net sales growth benefitted from the disposal of a
portfolio of 19 brands to Sazerac that was completed on 20 December
2018. Crown Royal net sales were up 4% and gained share in its
category. Growth was largely driven by Regal Apple and the limited
time offer Salted Caramel, which more than offset a net sales
decline in Crown Royal Deluxe which lapped strong growth in the
prior year. Net sales in Bulleit were up 7% as the brand benefitted
from the scaled up "frontier work" platform. In scotch, share gains
were achieved by Johnnie Walker, Buchanan's and the portfolio of
scotch malts. Johnnie Walker net sales increased 9% largely driven
by the successful launch of "White Walker by Johnnie Walker"
inspired by the TV series Game of Thrones. In vodka, net sales were
flat, an improvement, having declined 8% in the prior year. Ketel
One vodka net sales were up 22% as the trademark benefitted from
the successful launch of Ketel One Botanical, and offset declines
in Smirnoff and Cîroc vodka. Smirnoff net sales declined 2% but
brand equity scores improved through focus on its quality
credentials at a great price and the introduction of the new "Fun
Percent" campaign platform which highlights Smirnoff's unique view
point of the world through "You Don't Need a Lot to Have a Good
Time". Captain Morgan net sales declined 9% as the brand was
impacted by a strong comparative in the prior year and category
decline. Baileys grew 4% and gained category share as it continued
to focus on reminding consumers of its indulgent treat year-round
positioning. In tequila, Don Julio and Casamigos grew strong double
digit and gained share in the period within the tequila
category.
-- DBC USA net sales increased 13% with good performance in both
ready to drink and beer. Ready to drink net sales increased 24%, as
the business continued to benefit from the success of Smirnoff
Spiked Seltzer and Smirnoff Ice Smashed roll out, as well as growth
in core Smirnoff Ice. In beer, net sales were up 2% driven by
Guinness, with the brand expanding consumption occasions at home
and in craft bars and benefitting from the successful opening of
its Open Gate Brewery and Barrel House in Maryland.
-- Net sales in Canada grew 5%, driven by growth in ready to
drink and spirits. In ready to drink, growth was driven by Smirnoff
Ice which benefitted from packaging renovation and the launch of
new flavours. Spirits net sales were up 4% with broad based growth
across all categories, as the business also benefitted from a weak
comparative in the prior year.
-- Marketing grew 10% with an up-weight in investment to
continue to strengthen brand equity and deliver sustainable growth
in the medium term.
Europe and Turkey
Europe and Turkey delivered 5% net sales growth, reflecting
another half year of consistent performance in Europe where net
sales were up 5% with double digit growth in Turkey. Europe growth
was driven by Great Britain, Ireland and Continental Europe. Strong
growth in gin continued with Tanqueray and Gordon's growing double
digit. Western Europe gained over 600bps of market share in gin.
Both Gordon's and Tanqueray continued to benefit from strong growth
across their core and innovation variants. Beer was up 4% driven by
strong performance from Guinness Draught, continued growth of Hop
House 13 Lager and the successful launch of Rockshore lager in
Ireland. Scotch net sales were down 1% as innovation led growth in
Johnnie Walker was more than offset by the weaker performance of J
B and scotch malts. Smirnoff net sales grew 1% driven by growth in
Great Britain and Ireland partially offset by a decline in
Continental Europe. Ready to drink grew 28% driven by strong growth
across the Gordon's premix range. In Turkey, net sales were up 10%
driven by inflation and excise led price increases. The operating
margin remained flat as positive price/mix and productivity savings
were offset by up-weighted marketing investment, as well as
inflationary pressure, especially in Turkey.
Key financials GBP million:
Acquisitions Reported
and Organic movement
F18 H1 FX Reclassifi-cation(i) disposals movement F19 H1 %
------------------ ------ ---- -------------------- -------------- --------- ------ -----------
Net sales 1,599 (60) 12 (1) 83 1,633 2
------------------ ------ --- -------------------- -------- --- --------- ------ ---------
Marketing 246 (7) - - 21 260 6
------------------ ------ --- -------------------- -------- ---- --------- ------ ---------
Operating profit 599 (25) 9 - 31 614 3
------------------ ------ --- -------------------- -------- ---- --------- ------ ---------
(i) Reclassification comprises a reallocation of the results of
Travel Retail to the geographical regions.
Markets: Global giants and local stars(i)
:
Organic
Organic Reported net Reported Organic Organic Reported
volume volume sales net sales volume net sales net sales
movement movement movement movement movement(ii) movement movement
% % % % % % %
---------- ----------- ----------- -------- ------------ ---------- -------------- ------------ ------------
Europe
and
Turkey Guinness 3 3 3
---------- ---------- -------- ---- ------- --- --------
Johnnie
1 2 5 2 Walker (2) 3 6
---------- ------- -------- -------- ---------- -------- --- ------- --- --------
Smirnoff - 1 1
---------- ----------- ----------- -------- ------------ ---------- -------- ---- ------- --- --------
Europe 4 4 5 4 Baileys (3) - (1)
---------- ------- ------- -------- -------- ---------- -------- --- ------- --- --------
Yenì
Turkey (11) (12) 10 (25) Raki (17) 5 (29)
---------- ------- ------- -------- -------- ---------- -------- --- ------- --- --------
Captain
Morgan 2 (1) (3)
---------- ----------- ----------- -------- ------------ ---------- -------- ---- ------- --------
Spirits 1 1 4 - J B (9) (9) (9)
---------- ------- ------- -------- -------- ---------- -------- --- ------- --------
Beer 5 5 4 4 Tanqueray 25 34 33
---------- ------- ------- -------- -------- ---------- -------- ---- ------- --- --------
Ready to
drink 24 23 28 27
---------- ------- ------- -------- -------- ---------- -------------- ------------ ------------
(i) Spirits brands excluding ready to drink.
(ii) Organic equals reported volume movement except for Johnnie
Walker 1%, Captain Morgan 1%, J B (8%) and Tanqueray 24% largely
due to the reallocation of the results of Travel Retail.
-- In Europe, net sales were up 5%:
-- In Great Britain, net sales grew 14%. Gordon's and Tanqueray
both delivered strong double digit growth. Diageo gained almost
700bps of share in an expanding gin category. Guinness net sales
grew 6% and gained 14bps of market share, driven by a strong
performance for Hop House 13 Lager. Scotch net sales were flat as
growth in Johnnie Walker and Bell's was offset by an increasingly
competitive environment in scotch malts. Johnnie Walker grew 6%
partially driven by the launch of "White Walker by Johnnie Walker".
Smirnoff returned to growth with a 4% increase. Baileys net sales
declined 5% driven by shipment phasing, but gained share in the
category.
-- Ireland grew net sales 5%. Beer grew net sales 3% driven by
the launch of Rockshore lager and the continued growth of Hop House
13 Lager, partially offset by a 3% decline in Guinness Draught. In
spirits net sales grew double digit largely driven by Gordon's and
Baileys.
-- In Continental Europe, net sales were up 1%:
-- Iberia net sales grew 1%. Growth was driven by strong
performance in Tanqueray, Baileys and Gordon's. Scotch declined 3%
as growth in Cardhu and Johnnie Walker was offset by declines in J
B. In Spain market share in scotch was broadly flat, as the
category continued to decline.
-- In Central Europe, net sales declined 6% largely driven by
volume declines in Germany following recent pricing actions.
-- In Northern Europe net sales were up 10% driven by growth
across both Benelux and the Nordics.
-- In Mediterranean Hub, net sales were down by 5% lapping a
strong comparative performance in the prior period.
-- Europe Partner Markets grew net sales 6% driven by strong
Guinness performance and continued growth in Johnnie Walker.
-- Russia net sales grew 2%. Growth was largely driven by scotch.
-- France net sales declined 1% due to a decline in J B and
Johnnie Walker, partially offset by double digit growth in Captain
Morgan.
-- In Turkey, net sales grew 10% reflecting the impact of price
taken in response to increases in excise duties and inflation.
Growth was largely driven by Yenì Raki which grew net sales by 6%
and scotch which grew double digit, led by strong growth in Johnnie
Walker.
-- Marketing investment increased 9% focused on the most significant growth opportunities.
Africa
Africa net sales grew 6% with growth in East Africa, Africa
Regional Markets and South Africa partially offset by a decline in
Nigeria. In East Africa net sales grew 13% lapping prior year
weakness following the presidential election in Kenya. Across
Africa, beer net sales were up 5% with strong growth in Serengeti
Lite in Tanzania and Senator Keg in Kenya. Guinness and Malta
Guinness grew 5% and 10%, respectively across all key markets.
Spirits delivered double digit net sales growth largely driven by
Smirnoff 1818 and Tanqueray in South Africa, and Chrome Vodka in
Kenya. Scotch has returned to growth at 1% driven by strong growth
across East Africa, Africa Regional Markets and Nigeria, partially
offset by declines in South Africa as a result of category
weakness. Operating margin improved by 336bps driven by improved
price/mix and the continued benefit from productivity initiatives
more than offsetting cost inflation.
Key financials GBP million:
Acquisitions Reported
and Organic movement
F18 H1 FX disposals movement F19 H1 %
------------------ ------ --- -------------- --------- ------ -----------
Net sales 774 (1) (1) 49 821 6
------------------ ------ -------- --- --------- ------ ---------
Marketing 83 3 - 5 91 10
------------------ ------ -------- ---- --------- ------ ---------
Operating profit 120 (2) - 35 153 28
------------------ ------ -------- ---- --------- ------ ---------
Markets: Global giants and local stars(i)
:
Organic Reported Organic Reported Organic Organic Reported
volume volume net sales net sales volume net sales net sales
movement movement movement movement movement movement movement
% % % % % % %
------------- ---------- ---------- ----------- ----------- ---------- ----------- ------------ ------------
Africa 1 1 6 6 Guinness 3 5 5
------------- ------ ------ ------ --- ------ --- ---------- ------ --- ------- --- ------- ---
Johnnie
Walker (8) (1) (1)
------------- ---------- ---------- ----------- ----------- ---------- ------ ------- -------
East Africa 13 13 13 16 Smirnoff 2 14 12
------------- ------ ------ ------ --- ------ --- ---------- ------ --- ------- --- ------- ---
Africa
Regional
Markets(ii) (4) 4 6 10
------------- ------ ------ ------ --- ------ ---
Nigeria (13) (13) (4) (3) Other beer:
------------- ------ ------ ------ ------
South
Africa(ii) - (10) 4 (8)
------------- ------ ------ ------ --- ------ ---------- ----------- ------------ ------------
Malta
Guinness 4 10 7
------------- ---------- ---------- ----------- ----------- ---------- ------ --- ------- --- ------- ---
Spirits 5 5 11 9 Tusker (8) (3) (1)
------------- ------ ------ ------ --- ------ --- ---------- ------ ------- -------
Beer 1 1 5 7 Senator 20 23 27
------------- ------ ------ ------ --- ------ --- ---------- ------ --- ------- --- ------- ---
Ready to
drink (1) (1) 7 6 Serengeti 59 65 65
------------- ------ ------ ------ --- ------ --- ---------- ------ --- ------- --- ------- ---
(i) Spirits brands excluding ready to drink.
(ii) In the six months ended 31 December 2018 the following
countries, Mozambique, Zambia, Zimbabwe, St Helena and Malawi,
moved on a management basis from South Africa to Africa Regional
Markets. This reallocation has been reflected in the organic
reporting.
-- In East Africa, net sales grew by 13%. Kenya benefitted from
lapping prior year weakness driven by political uncertainty
following the presidential election and Tanzania continued to grow
double digit. Beer grew 12% led by continued strong growth in
Serengeti Lite in Tanzania and a return to growth of Senator Keg in
Kenya. Guinness grew by 3%. Mainstream spirits continued to grow
strong double digit.
-- In Africa Regional Markets, net sales increased by 6% with
growth in Ghana and a return to growth in Cameroon as it lapped
prior year challenges in the distributor network. Beer grew 6%
driven by growth across all key brands with particularly strong
performance in Malta Guinness and return to growth in Guinness.
Scotch also returned to growth lapping a weak comparative in
Cameroon.
-- South Africa net sales returned to growth of 4% driven by
strong spirits performance in Tanqueray, Captain Morgan and double
digit growth in Smirnoff 1818.
-- In Nigeria, net sales declined by 4% as growth in Guinness
and double digit growth in spirits was more than offset by
competitive pressure impacting the lager segment.
-- Marketing investment increased 6%. In Nigeria, marketing was
focused on key campaigns including Malta Guinness "Fuel Your
Greatness". In East Africa last year's successful Guinness campaign
was evolved as "Win a Chance to meet Rio Ferdinand" and Serengeti
is a sponsor of the Tanzanian national football team.
Latin America and Caribbean
Latin America and Caribbean delivered 9% growth in net sales
with strong performance in Mexico, Colombia and CCA, which
benefitted from lapping the impact of last year's hurricanes.
Growth in the region was broad based across all categories. Scotch
grew 8% with continued solid performance of Johnnie Walker and
primary scotch growing 8% and 15%, respectively. Buchanan's was up
8% and Old Parr returned to growth as the brands benefitted from
lapping last year's tax changes in Colombia. Don Julio delivered
double digit growth led by Mexico. Tanqueray and Smirnoff's double
digit growth was driven by Brazil. Operating margin for the region
increased 365bps benefitting from improved price/mix and
productivity led efficiencies partially offset by inflationary
pressure on commodity input costs.
Key financials GBP million:
Acquisitions Reported
and Organic F19 movement
F18 H1 FX Reclassifi-cation(i) disposals movement H1 %
------------------ ------ ---- ---------------------- ------------ --------- --- -----------
Net sales 649 (35) - 1 57 672 4
------------------ ------ --- -------------- ------ ------------ --------- --- ---------
Marketing 109 (6) 1 - 6 110 1
------------------ ------ --- -------------- ------ ------------ --------- --- ---------
Operating profit 218 (7) (1) - 44 254 17
------------------ ------ --- -------------- ----- ------------ --------- --- ---------
(i) Reclassification comprises a reallocation of the results of
Travel Retail to the geographical regions.
Markets: Global giants and local stars(i)
:
Organic
Organic Reported Organic Reported Organic net Reported
volume volume net sales net sales volume sales net sales
movement movement movement movement movement(ii) movement movement
% % % % % % %
----------- ----------- ----------- ----------- ----------- ------------ -------------- -------- -----------
Latin
America
and Johnnie
Caribbean Walker 5 8 3
----------- ------------ -------- ---- -------- -------
(1) (1) 9 4 Buchanan's 2 8 4
----------- ------- ------- ------- ------------ -------- ---- -------- -------
Smirnoff 6 13 -
----------- ----------- ----------- ----------- ----------- ------------ -------- ---- -------- -------
PUB (4) (4) - (13) Old Parr 3 5 2
----------- ------- ------- ------- ------- ------------ -------- ---- -------- -------
Mexico 4 4 9 7 Baileys 2 9 9
----------- ------- ------- ------- ------- ------------ -------- ---- -------- -------
CCA 17 17 22 27 Ypióca (10) 1 (15)
----------- ------- ------- ------- ------- ------------ -------- --- -------- -------
Black &
Andean (29) (29) 20 9 White 11 7 (2)
----------- ------- ------- ------- ------- ------------ -------- ---- -------- -------
PEBAC 13 13 2 (1)
----------- ------- ------- ------- ------- ------------ -------------- -------- -----------
Spirits (1) - 10 5
----------- ------- ------- ------- ------- ------------ -------------- -------- -----------
Beer 4 4 (11) (13)
----------- ------- ------- ------- ------- ------------ -------------- -------- -----------
Ready to
drink (8) (8) 7 (2)
----------- ------- ------- ------- ------- ------------ -------------- -------- -----------
(i) Spirits brands excluding ready to drink.
(ii) Organic equals reported volume movement except for Johnnie
Walker 6%, Old Parr 4%, and Baileys 5% largely due to the
reallocation of the results of Travel Retail.
-- In PUB (Paraguay, Uruguay and Brazil), net sales were flat.
Brazil delivered 2% growth. Scotch net sales declined 3% lapping a
strong first half in the prior year. Black & White declined as
it was impacted by a state tax change in Brazil. Scaled up
commercial activations in conjunction with media support helped
Tanqueray grow triple digit and become the market leader in the gin
category in Brazil. Smirnoff grew double digit benefitting from the
continued expansion of small formats to drive accessibility and
ongoing focus behind the brand's biggest serve Caipiroska through a
national omni-channel competition "The Best Caipiroska in
Brazil".
-- In Mexico, net sales increased 9%. Growth was broad based but
led by Don Julio which gained more than 2pps share of the tequila
category, reflecting strong brand momentum and well-executed
marketing campaigns and commercial platforms. Scotch grew 7% with
Johnnie Walker up 11% and Black & White up 8% supported by an
increased focus on brand availability through trade
activations.
-- In CCA (Caribbean and Central America), net sales increased
22% benefitting from lapping a weaker first half last year
following the impact of the hurricanes. Growth was broad based but
led by Johnnie Walker Black Label which grew double digit as it
benefitted from greater visibility with the "Keep Walking"
campaign.
-- Andean (Colombia and Venezuela) net sales increased 20% with
Colombia lapping the impact of tax changes last year. Scotch
delivered double digit net sales growth with contributions from
Buchanan's supported by local media campaigns and Black & White
benefitting from route to consumer expansion. Venezuela volume was
still in decline as economic conditions continued to
deteriorate.
-- PEBAC (Peru, Ecuador, Bolivia, Argentina and Chile) delivered
2% net sales growth, driven by Ecuador and Chile but offset by
Argentina, which faced the continuing impact of currency
devaluation, and Peru, which was impacted by tax changes. Growth
was driven by scotch with strong contribution from Johnnie Walker
Red Label and VAT 69 taking market share from local spirits.
-- Marketing investment increased by 6%, focused on scotch with
support for key campaigns including Johnnie Walker "We are all
Human", Buchanan's "Vivamos Grandes Momentos" and Old Parr "Cambia
el Guión".
Asia Pacific
In Asia Pacific net sales grew 13% with strong growth in Greater
China, India, South East Asia and Travel Retail Asia and Middle
East. This was partially offset by the continued contraction of the
scotch category in Korea. Greater China grew 20% driven by strong
performance in both scotch and Chinese white spirits. Net sales in
India grew 12%, largely driven by both IMFL whisky and scotch in
the prestige and above segment, and enhanced by lapping a weak
prior year. In scotch, net sales were up 15% as strong performance
in Johnnie Walker and scotch malts more than offset the net sales
decline of Windsor in Korea. Operating margin increased 486bps
driven by positive price/mix and productivity led savings.
Key financials GBP million:
Acquisitions Reported
F18 and Organic F19 movement
H1 FX Reclassifi-cation(i) disposals movement H1 %
------------------ ----- ---- ---------------------- -------------- --------- ----- -----------
Net sales 1,298 (39) (13) (4) 156 1,398 8
------------------ ----- ---- --------------- ---- -------- --- --------- ----- ---------
Marketing 188 (4) - - 24 208 11
------------------ ----- ---- --------------- ----- -------- ---- --------- ----- ---------
Operating profit 316 (3) (9) (1) 106 409 29
------------------ ----- --- --------------- ---- -------- --- --------- ----- ---------
(i) Reclassification includes a reallocation of the results of
Travel Retail to the geographical regions.
Markets: Global giants and local stars(ii)
:
Organic Reported Organic Reported Organic Organic Reported
volume volume net sales net sales volume net sales net sales
movement(i) movement movement movement movement(iii) movement movement
% % % % % % %
----------- ----------- -------- ------------ ------------ ----------- --------------- ----------- ------------
Asia Johnnie
Pacific 7 7 13 8 Walker 15 20 16
----------- ----------- -------- ------- --- ------- --- ----------- -------- ----- ------- --------
McDowell's 8 11 2
----------- ----------- -------- ------------ ------------ ----------- -------- ----- ------- --------
India 7 6 12 3 Windsor (8) (20) (18)
----------- ----------- -------- ------- --- ------- --- ----------- -------- ---- ------- --------
Greater
China 7 4 20 19 Smirnoff - 8 5
----------- ----------- -------- ------- --- ------- --- ----------- -------- ----- ------- --------
Australia 6 6 8 2 Guinness 3 6 3
----------- ----------- -------- ------- --- ------- --- ----------- -------- ----- ------- --------
South East
Asia 16 16 16 18 Bundaberg 2 1 (4)
----------- ----------- -------- ------- --- ------- --- ----------- -------- ----- ------- --------
Shui Jing
North Asia 3 3 (7) (5) Fang(iv) 13 22 20
----------- ----------- -------- ------- ------- ----------- -------- ----- ------- --------
Travel
Retail
Asia and
Middle
East 15 4 24 12
----------- --------------- ----------- ------------
Spirits 7 7 13 8
----------- ----------- -------- ------- --- ------- --- ----------- --------------- ----------- ------------
Beer 2 2 6 3
----------- ----------- -------- ------- --- ------- --- ----------- --------------- ----------- ------------
Ready to
drink 5 5 11 8
----------- ----------- -------- ------- --- ------- --- ----------- --------------- ----------- ------------
(i) Difference between organic and reported volume for India is
in respect of the Nepal business disposal.
(ii) Spirits brands excluding ready to drink.
(iii) Organic equals reported volume movement except for Johnnie
Walker 11% largely due to the reallocation of the results of Travel
Retail.
(iv) Organic growth figures represent total Chinese white
spirits of which Shui Jing Fang is the principal brand. Organic
growth adjusted to remove bulk sales reported in the prior
comparable period. Reported volume was up 4%.
-- In India net sales increased 12% benefitting from lapping
weak prior year performance due to the impact of the Supreme Court
ruling prohibiting the sale of alcohol in certain outlets near
state highways and route to market changes in certain states.
Prestige and above was up 17%, led by strong double digit growth in
scotch, driven by Johnnie Walker and Black & White. This was
supported by solid performance from McDowell's No. 1 enhanced by
the launch of its new Platinum range and strong growth in Royal
Challenge and Signature. Vodka net sales were up 10%, with Smirnoff
expanding its distribution. Net sales in the popular brands segment
increased 2%.
-- In Greater China net sales increased 20%, with growth in both
Chinese white spirits and scotch, and enhanced by the benefit of an
earlier Chinese New Year. As expected, Chinese white spirits net
sales growth slowed to 22%. Scotch net sales increased by 19% with
continued growth in mainland China and a return to growth in
Taiwan. The main drivers of scotch growth were Johnnie Walker super
deluxe and scotch malts.
-- Net sales in Australia grew 8%, driven by strong performance
in the ready to drink and spirits portfolios as it benefitted from
lapping the prior year working capital efficiencies. Ready to drink
net sales increased 13% fuelled by innovation geared towards more
premium products like Gordon's Premium Pink and Soda, and Tanqueray
& Tonic. Bundaberg continues to improve on the back of the
"Unmistakably Ours" campaign.
-- In South East Asia, net sales increased 16% driven by growth
across all countries except Thailand. Scotch has been the key
growth driver with net sales growth of 16%, led by Johnnie Walker
Black Label and super deluxe.
-- In North Asia, net sales declined 7% with growth in Japan
being offset by continued weakness in Korea. In Korea net sales
declined 15% due to a weak Windsor performance, associated with the
contraction of the scotch category. Japan net sales grew 8%, driven
by scotch, with share gains across most segments.
-- Travel Retail Asia and Middle East net sales grew 24% driven
by improved commercial activation and successful launches within
the premium scotch portfolio, including "White Walker by Johnnie
Walker".
-- Marketing investment increased by 13% driven by increased investment in China and India.
CATEGORY AND BRAND REVIEW
Six months ended 31 December 2018
Key categories:
Organic Organic Reported
volume net sales net sales
movement(iii) movement movement
% % %
-------------------------------------------- ----------------- ------------- -------------
Spirits(i) 4 7 5
-------------------------------------------- ---------- ----- -------- --- -------- ---
Scotch 4 7 6
-------------------------------------------- ---------- ----- -------- --- -------- ---
Vodka(ii)(iv) 2 3 2
-------------------------------------------- ---------- ----- -------- --- -------- ---
US whiskey 2 4 6
-------------------------------------------- ---------- ----- -------- --- -------- ---
Canadian whisky 5 5 6
-------------------------------------------- ---------- ----- -------- --- -------- ---
Rum(ii) (4) (3) (5)
-------------------------------------------- ---------- ---- -------- --------
Indian-Made Foreign Liquor (IMFL) whisky 9 11 2
-------------------------------------------- ---------- ----- -------- --- -------- ---
Liqueurs - 3 2
-------------------------------------------- ---------- ----- -------- --- -------- ---
Gin(ii) 25 28 29
-------------------------------------------- ---------- ----- -------- --- -------- ---
Tequila 18 29 36
-------------------------------------------- ---------- ----- -------- --- -------- ---
Beer 2 4 5
-------------------------------------------- ---------- ----- -------- --- -------- ---
Ready to drink 9 16 15
-------------------------------------------- ---------- ----- -------- --- -------- ---
(i) Spirits brands excluding ready to drink.
(ii) Vodka, rum, gin including IMFL brands.
(iii) Organic equals reported volume movement except for
Canadian whisky 3%, IMFL whisky 8%, gin 24%, and tequila 23%, which
were impacted by acquisitions and disposals.
(iv) Vodka includes Ketel One Botanical.
-- Scotch represents 27% of Diageo's net sales and was up 7%
with growth in Asia Pacific, Latin America and Caribbean and North
America partially offset by decline in Europe. Scotch growth was
driven by Johnnie Walker, which delivered a strong performance with
net sales up 10%. Primary scotch brands grew 10% largely driven by
Black & White. Buchanan's grew 8% in Latin America and
Caribbean and 7% in North America. Old Parr returned to growth as
the brand lapped tax changes in Colombia. Scotch malts were up 5%
with growth coming from Asia Pacific, North America and Latin
America and Caribbean. J B continued to be under pressure in Europe
led by the challenged scotch category in Iberia. Sustained scotch
category decline in Korea continued to drive declines in
Windsor.
-- Vodka represents 11% of Diageo's net sales and returned to
growth with net sales up 3% and growth across all the regions
driven by Smirnoff and Ketel One(iv) partially offset by a decline
in Cîroc vodka. Overall, Smirnoff grew 2%. Smirnoff performance
outside the US was strong, up 6%, and more than offsetting 2%
decline in US Spirits. Ketel One(iv) performance was driven by
strong growth in US Spirits and Europe. Cîroc vodka decline was
driven by US Spirits.
-- US whiskey represents 2% of Diageo's net sales and grew 4%.
Performance continued to be driven by strong growth in Bulleit
benefitting from the scaled up "Frontier Work" platform.
-- Canadian whisky represents 7% of Diageo's net sales and grew
5%. Solid growth of Crown Royal in US Spirits was largely driven by
Regal Apple and the limited time offer Salted Caramel.
-- Rum represents 7% of Diageo's net sales and declined 3%
largely driven by Captain Morgan in US Spirits.
-- IMFL whisky represents 5% of Diageo's net sales and grew 11%
driven by the strong performance of the McDowell's trademark, Royal
Challenge and Signature, all brands in double digit growth.
-- Liqueurs represent 6% of Diageo's net sales and grew 3%
driven by Baileys. Performance was driven by continued focus on
reminding consumers of Baileys' indulgent treat year-round
positioning.
-- Gin represents 4% of Diageo's net sales and grew 28% with
double digit growth across all regions except North America. Europe
was the largest contributor to growth driven by the strong
performance of Gordon's and Tanqueray. In Western Europe we gained
over 600bps of market share in gin.
-- Tequila represents 3% of Diageo's net sales and grew 29%. The
performance was driven by strong double digit growth of Don Julio
in US Spirits and Latin America and Caribbean as well as Casamigos
in US Spirits.
-- Beer represents 15% of Diageo's net sales and grew 4%,
largely driven by Guinness with growth coming from all regions
except Latin America and Caribbean. Guinness net sales were up 4%
with strong performance in Europe driven by Guinness Draught and
continued growth of Hop House 13 Lager. Europe also saw the
successful launch of Rockshore lager in Ireland. Africa had a good
performance with Guinness growing 5% and strong performance of
Senator Keg and Serengeti Lite.
-- Ready to drink represents 5% of Diageo's net sales and grew
16% primarily driven by North America and Europe.
Global giants, local stars and reserve(i) :
Organic Organic Reported
volume net sales net sales
movement(ii) movement movement
% % %
------------------------------ ---------------- ------------- -------------
Global giants
------------------------------ ---------------- ------------- -------------
Johnnie Walker 5 10 9
------------------------------ ------------ --------- ---------
Smirnoff 1 2 2
------------------------------ --------- ---------
Baileys - 3 3
------------------------------ ------------ --------- ---------
Captain Morgan (2) (4) (3)
------------------------------ ------------ --------- ---------
Tanqueray 20 21 22
------------------------------ ------------ --------- ---------
Guinness 3 4 4
------------------------------ ------------ --------- ---------
Local stars
------------------------------ ---------------- ------------- -------------
Crown Royal 5 5 7
------------------------------ ------------ --------- ---------
Yenì Raki (17) 5 (29)
------------------------------ ------------ --------- ---------
Buchanan's 5 7 6
------------------------------ ------------ --------- ---------
J B (11) (10) (10)
------------------------------ ------------ --------- ---------
Windsor (8) (20) (18)
------------------------------ ------------ --------- ---------
Old Parr 5 6 3
------------------------------ ------------ --------- ---------
Bundaberg 2 1 (4)
------------------------------ ------------ --------- ---------
Black & White 11 16 7
------------------------------ ------------ --------- ---------
Ypióca (10) 1 (15)
------------------------------ ------------ --------- ---------
McDowell's 8 10 2
------------------------------ ------------ --------- ---------
Shui Jing Fang(iii) 13 22 20
------------------------------ ------------ --------- ---------
Reserve
------------------------------ ---------------- ------------- -------------
Scotch malts 4 5 8
------------------------------ ------------ --------- ---------
Cîroc vodka (9) (12) (9)
------------------------------ ------------ --------- ---------
Ketel One(iv) 18 21 24
------------------------------ ------------ --------- ---------
Don Julio 13 26 27
------------------------------ ------------ --------- ---------
Bulleit 8 6 8
------------------------------ ------------ --------- ---------
(i) Spirits brands excluding ready to drink.
(ii) Organic equals reported volume movement except for scotch
malts 5%.
(iii) Organic growth figures represent total Chinese white
spirits of which Shui Jing Fang is the principal brand. Organic
growth adjusted to remove bulk sales reported in the comparable
period last year. Reported volume was up 4%.
(iv) Ketel One includes Ketel One vodka and Ketel One
Botanical.
-- Global giants represent 42% of Diageo's net sales and grew
6%. Growth was broad based across all brands with the exception of
Captain Morgan whose net sales declined 4%.
-- Local stars represent 20% of Diageo's net sales and grew 6%,
largely driven by strong growth of Chinese white spirits,
McDowell's No. 1 in India, Crown Royal in US Spirits and Buchanan's
in Latin America and Caribbean. This was partially offset by
declines of Windsor in Korea and J B in Iberia.
-- Reserve brands represent 19% of Diageo's net sales and grew
11% largely driven by strong double digit growth in Don Julio,
Chinese white spirits and Ketel One vodka. Net sales of Johnnie
Walker reserve variants were up 6%.
ADDITIONAL FINANCIAL INFORMATION
Six months ended 31 December 2018
SUMMARY INCOME STATEMENT
Acquisitions
31 December Exchange and disposals 31 December
2017 (a) (b) Organic movement(i) 2018
GBP million GBP million GBP million GBP million GBP million
-------------------------- ----------- ------------- ---------------- --------------------- -------------
Sales 9,934 (314) (13) 756 10,363
========================== ========== ========= =========== ================ === ==========
Excise duties (3,404) 223 6 (280) (3,455)
-------------------------- ---------- --------- ----------- --- ---------------- ----------
Net sales 6,530 (91) (7) 476 6,908
========================== ========== ========= =========== ================ === ==========
Cost of sales (2,439) 68 5 (142) (2,508)
-------------------------- ---------- --------- ----------- --- ---------------- ----------
Gross profit 4,091 (23) (2) 334 4,400
========================== ========== ========= ================ === ==========
Marketing (968) 4 - (90) (1,054)
========================== ========== ========= =========== === ================ ==========
Other operating expenses (933) 19 (1) 20 (895)
-------------------------- ---------- --------- ----------- ---------------- --- ----------
Operating profit before
exceptional items 2,190 - (3) 264 2,451
-------------------------- ---------- --------- ----------- ---------------- --- ----------
Exceptional operating
items (c) - (21)
-------------------------- ---------- ============= ================ ===================== ----------
Operating profit 2,190 2,430
========================== ========== ==========
Non-operating items
(c) - 146
========================== ========== ==========
Net finance charges (154) (128)
========================== ========== ==========
Share of after tax
results of associates
and joint ventures 168 179
-------------------------- ---------- ----------
Profit before taxation 2,204 2,627
========================== ========== ==========
Taxation (d) (77) (560)
-------------------------- ---------- ----------
Profit for the period 2,127 2,067
-------------------------- ---------- ----------
(i) For the definition of organic movement see Explanatory Notes.
(a) Exchange
The impact of movements in exchange rates on reported figures is
principally in respect of strengthening of sterling against the
Turkish lira, the Brazilian real, the Indian rupee, the Australian
dollar and the Russian rouble, partially offset by weakening of
sterling against the US dollar.
The effect of movements in exchange rates and other movements on
profit before exceptional items and taxation for the six months
ended 31 December 2018 is set out in the table below.
Gains/(losses)
GBP million
------------------------------------------------------------ ----------------
Translation impact (27)
------------------------------------------------------------ ----------------
Transaction impact 27
------------------------------------------------------------ ----------------
Operating profit before exceptional items -
------------------------------------------------------------
Net finance charges - translation impact (2)
------------------------------------------------------------
Impact of IAS 21 and IFRS 9 on net other finance charges (3)
------------------------------------------------------------ ----------------
Net finance charges (5)
------------------------------------------------------------ ----------------
Associates - translation impact -
------------------------------------------------------------ --------------
Profit before exceptional items and taxation (5)
------------------------------------------------------------ ----------------
Six months ended Six months ended
31 December 31 December
2018 2017
---------------------- ---------------- ------------------
Exchange rates
---------------------- ---------------- ------------------
Translation GBP1 = $1.29 $1.32
---------------------- ---------------- ----------------
Transaction GBP1 = $1.31 $1.41
---------------------- ---------------- ----------------
Translation GBP1 = EUR1.12 EUR1.12
---------------------- ---------------- ----------------
Transaction GBP1 = EUR1.13 EUR1.17
---------------------- ---------------- ----------------
(b) Acquisitions and disposals
The acquisitions and disposals movement was mainly attributable
to the disposal of a portfolio of 19 brands (see the list of brands
disposed of in Explanatory Notes) to Sazerac completed on 20
December 2018.
(c) Exceptional items
Exceptional operating charges in the six months ended 31
December 2018 were GBP21 million before tax (2017 - GBPnil).
On 26 October 2018, the High Court of Justice of England and
Wales issued a judgment in a claim between Lloyds Banking Group
Pension Trustees Limited (the claimant) and Lloyds Bank plc
(defendant) that UK pension schemes should equalise pension
benefits for men and women for the calculation of their guaranteed
minimum pension liability. The judgment concluded that the claimant
has a duty to amend their pension schemes to equalise benefits and
provided comments on the method to be adopted to equalise the
benefits. This court ruling impacts the majority of companies with
a UK defined benefit pension plan that was in existence before
1997. For the Diageo Pension Scheme (DPS) an estimate was made of
the impact of equalisation which increased the liabilities of the
DPS by GBP21 million with a corresponding charge to exceptional
operating items. Additional work will be carried out to finalise
the charge post 31 December 2018.
Non-operating exceptional items in the six months ended 31
December 2018 were GBP146 million before tax (2017 - GBPnil).
Diageo completed the sale of a portfolio of 19 brands on 20
December 2018 to Sazerac for an aggregate consideration of $550
million (GBP435 million). The net proceeds of approximately GBP340
million, after corporate tax and transaction costs, will be
returned to shareholders through a share buyback programme, which
will be incremental to the previously announced programme. The
transaction resulted in an exceptional gain before taxation of
GBP154 million.
The disposal of United National Breweries (UNB), Diageo's wholly
owned sorghum business in South Africa, was agreed in December 2018
and is subject to receipt of regulatory approvals. The prospective
sale has resulted in an exceptional loss of approximately GBP8
million.
See Explanatory Notes for the definition of exceptional
items.
(d) Taxation
The reported tax charge for the six months ended 31 December
2018 was 21.3% compared with 3.5% for the six months ended 31
December 2017.
The tax charge for the six months ended 31 December 2018
included exceptional tax charges of GBP34 million in respect of the
disposal of a portfolio of 19 brands to Sazerac and an exceptional
tax credit of GBP4 million in respect of the equalisation of
liabilities for males and females in the Diageo Pension Scheme. In
the six months ended 31 December 2017 there was an exceptional tax
credit of GBP360 million ($475 million) as a consequence of the
reduction in the US Federal tax rate (from 35% to 21%) enacted by
the Tax Cuts and Jobs Act in the United States.
The tax rate before exceptional items for the six months ended
31 December 2018 was 21.2% compared with 19.8% in the six months
ended 31 December 2017.
It is expected that the tax rate before exceptional items for
the year ending 30 June 2019 will be in the range of 21% to
22%.
(e) Dividend
The group aims to increase the dividend at each half-year and
the decision as to the rate of the dividend increase is made with
reference to dividend cover as well as the current performance
trends including top and bottom line together with cash generation.
Diageo targets dividend cover (the ratio of basic earnings per
share before exceptional items to dividend per share) within the
range of 1.8-2.2 times. For the year ended 30 June 2018 dividend
cover was 1.8 times. It is expected that dividend increases will be
maintained at roughly a mid-single digit rate until the cover is
comfortably back in the policy range.
An interim dividend of 26.1 pence per share will be paid to
holders of ordinary shares and ADRs on the register as of 1 March
2019. The ex-dividend date is 28 February 2019. This represents an
increase of 5% on last year's interim dividend. The interim
dividend will be paid to ordinary shareholders on 11 April 2019.
Payment to US ADR holders will be made on 16 April 2019. A dividend
reinvestment plan is available to holders of ordinary shares in
respect of the interim dividend and the plan notice date is 21
March 2019.
(f) Share buyback
On 26 July 2018 the Board approved a share buyback programme to
return up to GBP2.0 billion to shareholders during the year ending
30 June 2019.
On 20 December 2018 Diageo completed the sale of a portfolio of
19 brands to Sazerac. The net proceeds of approximately GBP340
million, after corporate tax and transaction costs, will be
returned to shareholders through a share buyback programme, which
brought the total programme to GBP2.34 billion.
On 30 January 2019 the Board approved an incremental share
buyback programme of GBP660 million, bringing the total programme
up to GBP3.0 billion for the year ending 30 June 2019.
At 31 December 2018 the group had purchased 46.5 million
ordinary shares at a cost of GBP1.275 billion (including GBP7
million of transaction costs) and has funded the purchases through
a combination of cash and borrowings. A financial liability of
GBP80 million has been established at 31 December 2018 (2017 -
GBP182 million) representing the 2.9 million shares that are
expected to be purchased by 31 January 2019.
MOVEMENT IN NET BORROWINGS AND EQUITY
Movement in net borrowings
2018 2017
GBP million GBP million
------------------------------------------------------ ----------- -------------
Net borrowings at 30 June (9,091) (7,892)
------------------------------------------------------ ---------- ----------
Free cash flow (a) 1,346 1,029
------------------------------------------------------ ---------- ----------
Acquisitions (b) (32) (561)
------------------------------------------------------ ---------- ----------
Sale of businesses and brands (c) 419 2
------------------------------------------------------ ---------- ----------
Share buyback programme (1,275) (742)
------------------------------------------------------ ---------- ----------
Proceeds from issue of share capital 1 1
------------------------------------------------------ ---------- ----------
Net sale/(purchase) of own shares for share schemes
(d) 25 (28)
------------------------------------------------------ ---------- ----------
Dividends paid to non-controlling interests (76) (61)
------------------------------------------------------ ---------- ----------
Rights issue proceeds from non-controlling interests
of subsidiary company - 26
------------------------------------------------------ ---------- ----------
Net movements in bonds (e) 1,754 188
------------------------------------------------------ ---------- ----------
Purchase of shares of non-controlling interests (f) (697) -
------------------------------------------------------ ---------- ----------
Net movements in other borrowings (g) 220 911
------------------------------------------------------ ---------- ----------
Equity dividends paid (993) (968)
------------------------------------------------------ ---------- ----------
Net increase/(decrease) in cash and cash equivalents 692 (203)
------------------------------------------------------ ---------- ----------
Net increase in bonds and other borrowings (1,974) (1,099)
------------------------------------------------------ ---------- ----------
Exchange differences (h) (32) 47
------------------------------------------------------ ---------- ----------
Other non-cash items 53 (51)
------------------------------------------------------ ---------- ----------
Net borrowings at 31 December (10,352) (9,198)
------------------------------------------------------ ---------- ----------
(a) See Free Cash Flow for the analysis of free cash flow.
(b) On 28 September 2018 Diageo acquired the remaining 70% of
Copper Dog Whisky Limited (CDWL) that it did not already own for an
upfront valuation of GBP6.5 million and further earn-out payments
based on CDWL achieving performance targets. The discounted current
estimate for the earn-out payments is GBP10 million. Other
acquisitions include deferred consideration paid in respect of
prior year acquisitions and additional investments in a number of
Distill Venture associates.
In the six months ended 31 December 2017 acquisitions included
$705 million (GBP548 million) in respect of the completion of the
acquisition of Casamigos.
(c) In the six months ended 31 December 2018, sale of businesses
and brands represents the disposal of a portfolio of 19 brands to
Sazerac net of transaction costs.
(d) Net sale/purchase of own shares comprised purchase of
treasury shares for the future settlement of obligations under the
employee share option schemes of GBP1 million (2017 - GBP67
million) less receipts from employees on the exercise of share
options of GBP26 million (2017 - GBP39 million).
(e) In the six months ended 31 December 2018, the group issued
bonds of EUR2,000 million (GBP1,754 million). In the comparable
period the group issued bonds of EUR1,275 million (GBP1,136
million) and repaid bonds of $1,250 million (GBP948 million).
(f) In the six months ended 31 December 2018 purchase of shares
of non-controlling interests comprised RMB 6,084 million (GBP696
million) and transaction costs of GBP1 million in respect of the
acquisition of 20.29% of the share capital of Sichuan Shuijingfang
Company Limited (SJF). This took Diageo's shareholding in SJF from
39.71% to 60%. SJF is a manufacturer and distributor of Chinese
white spirits located in Sichuan province in China and was
controlled and therefore consolidated prior to the transaction in
the period.
(g) In the six months ended 31 December 2018 the net movement in
other borrowings principally arose from cash movements on foreign
exchange swaps and forwards. In the comparable period movements
were driven by the issue of commercial paper and the cash movements
of foreign exchange swaps and forwards.
(h) Increase in net borrowings of GBP32 million is primarily
driven by the adverse exchange differences on US dollar and euro
denominated borrowings partially offset by a favourable change on
foreign exchange swaps and forwards.
Movement in equity
2018 2017
GBP million GBP million
-------------------------------------------------------- ----------- -------------
Equity at 30 June 11,713 12,028
-------------------------------------------------------- ---------- ----------
Profit for the period 2,067 2,127
-------------------------------------------------------- ---------- ----------
Exchange adjustments (a) 251 (428)
-------------------------------------------------------- ---------- ----------
Remeasurement of post employment plans net of taxation 150 (86)
-------------------------------------------------------- ---------- ----------
Purchase of shares of non-controlling interests (b) (703) -
-------------------------------------------------------- ---------- ----------
Rights issue proceeds from non-controlling interests
of subsidiary company (c) - 26
-------------------------------------------------------- ---------- ----------
Dividends to non-controlling interests (55) (61)
-------------------------------------------------------- ---------- ----------
Equity dividends paid (993) (968)
-------------------------------------------------------- ---------- ----------
Share buyback programme (1,355) (924)
-------------------------------------------------------- ---------- ----------
Other reserve movements 58 (24)
-------------------------------------------------------- ---------- ----------
Equity at 31 December 11,133 11,690
-------------------------------------------------------- ---------- ----------
(a) Movement in the six months ended 31 December 2018 primarily
arose from exchange gains in respect of the US dollar and Indian
rupee partially offset by exchange losses on the Turkish lira.
(b) In the six months ended 31 December 2018 Diageo acquired
20.29% of the share capital of Sichuan Shuijingfang Company Limited
(SJF) which was already controlled and therefore consolidated prior
to the transaction. This took Diageo's shareholding in SJF from
39.71% to 60%.
(c) In the six months ended 31 December 2017 a rights issue was
completed by Guinness Nigeria (GN) where Diageo's controlling
equity share in GN increased from 54.32% to 58.02%. The transaction
resulted in a credit of GBP31 million to non-controlling interests
and a charge of GBP5 million to reserves.
Post employment plans
The net surplus of the group's post employment benefit plans
increased by GBP234 million from GBP63 million at 30 June 2018 to
GBP297 million at 31 December 2018. The increase primarily arose
due to the increase in returns from 'AA' rated corporate bonds used
to calculate the discount rates on the liabilities of the post
employment plans (UK from 2.8% to 2.9%, Ireland from 1.7% to 2.0%)
partially offset by a decrease in the market value of the assets
held by the post employment schemes.
The operating profit charge before exceptional items decreased
by GBP13 million from GBP45 million for the six months ended 31
December 2017 to GBP32 million for the six months ended 31 December
2018 primarily due to changes made to the future benefits earnt by
employees in the Diageo Pension Scheme (DPS). The six months ended
31 December 2018 includes past service gains of GBP22 million
following a communication to the members of the DPS reducing future
pension increases which was broadly in line with a past service
gain recognised in the six months ended 31 December 2017.
Total cash contributions by the group to all post employment
plans in the year ending 30 June 2019 are estimated to be
approximately GBP200 million.
DIAGEO CONDENSED CONSOLIDATED INCOME STATEMENT
Six months ended Six months ended
31 December 31 December
2018 2017
Notes GBP million GBP million
Sales 2 10,363 9,934
Excise duties (3,455) (3,404)
-------------- --------------
Net sales 2 6,908 6,530
Cost of sales (2,508) (2,439)
-------------- --------------
Gross profit 4,400 4,091
Marketing (1,054) (968)
Other operating expenses (916) (933)
-------------- --------------
Operating profit 2 2,430 2,190
Non-operating items 3 146 -
Finance income 4 181 113
Finance charges 4 (309) (267)
Share of after tax results of associates
and joint ventures 179 168
-------------- --------------
Profit before taxation 2,627 2,204
Taxation 5 (560) (77)
-------------- --------------
Profit for the period 2,067 2,127
============== ==============
Attributable to:
Equity shareholders of the parent company 1,976 2,058
Non-controlling interests 91 69
-------------- --------------
2,067 2,127
============== ==============
million million
Weighted average number of shares
Shares in issue excluding own shares 2,442 2,505
Dilutive potential ordinary shares 10 12
------------------ ------------------
2,452 2,517
================== ==================
pence pence
Basic earnings per share 80.9 82.2
============== ==============
Diluted earnings per share 80.6 81.8
============== ==============
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME
Six months Six months
ended 31 ended 31
December December
2018 2017
GBP million GBP million
Other comprehensive income
Items that will not be recycled subsequently
to the income statement
Net remeasurement of post employment plans
- group 183 (85)
- associates and joint ventures 1 5
Tax on post employment plans (34) (6)
---------- ----------
150 (86)
Items that may be recycled subsequently to the
income statement
Exchange differences on translation of foreign
operations
- group 265 (492)
- associates and joint ventures 43 33
- non-controlling interests 42 (54)
Net investment hedges (99) 85
Tax on exchange differences - group 1 11
Effective portion of changes in fair value of
cash flow hedges
- hedge of foreign currency debt of the group 115 (96)
- transaction exposure hedging of the group (66) 53
- commodity price risk of the group (6) 1
- hedges by associates and joint ventures (5) 4
- recycled to income statement - hedge of foreign
currency debt of the group (71) 49
- recycled to income statement - transaction exposure
hedging of the group 20 15
Tax on effective portion of changes in fair value
of cash flow hedges (2) 6
Hyperinflation adjustment (4) 13
Tax on hyperinflation adjustment 2 (6)
---------- ----------
235 (378)
---------- ----------
Other comprehensive profit/(loss), net of tax,
for the period 385 (464)
Profit for the period 2,067 2,127
---------- ----------
Total comprehensive income for the period 2,452 1,663
========== ==========
Attributable to:
Equity shareholders of the parent company 2,319 1,648
Non-controlling interests 133 15
---------- ----------
Total comprehensive income for the period 2,452 1,663
========== ==========
DIAGEO CONDENSED CONSOLIDATED BALANCE SHEET
31 December 2018 30 June 2018 31 December
2017
GBP GBP GBP GBP GBP
Notes million million million million million GBP million
Non-current
assets
Intangible
assets 12,555 12,572 12,807
Property, plant
and equipment 4,238 4,089 3,953
Biological
assets 26 23 21
Investments in
associates
and joint
ventures 3,230 3,009 3,053
Other
investments 48 46 49
Other
receivables 59 46 56
Other financial
assets 281 182 184
Deferred tax
assets 106 122 179
Post employment
benefit
assets 1,036 935 300
-------- -------- ---------
21,579 21,024 20,602
Current assets
Inventories 6 5,276 5,015 4,919
Trade and other
receivables 3,541 2,678 3,431
Assets held for
sale 83 24 -
Corporate tax
receivables 12 65 107
Other financial
assets 12 35 123
Cash and cash
equivalents 7 1,591 874 920
-------- -------- ---------
10,515 8,691 9,500
-------- --------- ---------
Total assets 32,094 29,715 30,102
-------- --------- ---------
Current
liabilities
Borrowings and
bank overdrafts 7 (1,742) (1,828) (2,378)
Other financial
liabilities (386) (230) (324)
Trade and other
payables (4,415) (3,950) (4,142)
Liabilities held
for sale (32) - -
Corporate tax
payables (446) (243) (300)
Provisions (107) (109) (109)
-------- -------- ---------
(7,128) (6,360) (7,253)
Non-current
liabilities
Borrowings 7 (10,272) (8,074) (7,647)
Other financial
liabilities (154) (212) (426)
Other payables (250) (209) (196)
Provisions (295) (288) (286)
Deferred tax
liabilities (2,123) (1,987) (1,786)
Post employment
benefit
liabilities (739) (872) (818)
-------- -------- ---------
(13,833) (11,642) (11,159)
-------- --------- ---------
Total
liabilities (20,961) (18,002) (18,412)
-------- --------- ---------
Net assets 11,133 11,713 11,690
======== ========= =========
Equity
Share capital 767 780 789
Share premium 1,350 1,349 1,349
Other reserves 2,341 2,133 2,362
Retained
earnings 4,908 5,686 5,422
-------- -------- ---------
Equity
attributable to
equity
shareholders of
the parent
company 9,366 9,948 9,922
Non-controlling
interests 1,767 1,765 1,768
-------- --------- ---------
Total equity 11,133 11,713 11,690
======== ========= =========
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Retained earnings/(deficit)
Equity
attributable
Other to parent Non-
Share Share Other Own retained company controlling Total
capital premium reserves shares earnings Total shareholders interests equity
GBP GBP GBP GBP GBP GBP GBP million GBP million GBP
million million million million million million million
At 30 June 2017 797 1,348 2,693 (2,176) 7,651 5,475 10,313 1,715 12,028
Adoption of IFRS
15 (note 1) - - - - (69) (69) (69) (2) (71)
Profit for the
period - - - - 2,058 2,058 2,058 69 2,127
Other
comprehensive
income - - (331) - (79) (79) (410) (54) (464)
Employee share
schemes - - - (2) (3) (5) (5) - (5)
Share-based
incentive
plans - - - - 21 21 21 - 21
Share-based
incentive
plans in
respect
of associates - - - - 5 5 5 - 5
Tax on
share-based
incentive plans - - - - 7 7 7 - 7
Shares issued - 1 - - - - 1 - 1
Purchase of
non-controlling
interests - - - - (70) (70) (70) 70 -
Purchase of
rights
issue of
non-controlling
interests - - - - (5) (5) (5) 31 26
Change in fair
value
of put options - - - - (32) (32) (32) - (32)
Share buyback
programme (8) - - - (916) (916) (924) - (924)
Dividends paid - - - - (968) (968) (968) (61) (1,029)
----- ------- ------ ------
At 31 December
2017 789 1,349 2,362 (2,178) 7,600 5,422 9,922 1,768 11,690
===== ======= ======= ====== ======= ====== ======== ==== ======== === ======
At 30 June 2018 780 1,349 2,133 (2,144) 7,830 5,686 9,948 1,765 11,713
Profit for the
period - - - - 1,976 1,976 1,976 91 2,067
Other
comprehensive
income - - 195 - 148 148 343 42 385
Employee share
schemes - - - 73 (26) 47 47 - 47
Share-based
incentive
plans - - - - 25 25 25 - 25
Share-based
incentive
plans in
respect
of associates - - - - 3 3 3 - 3
Shares issued - 1 - - - - 1 - 1
Purchase of
non-controlling
interests - - - - (627) (627) (627) (76) (703)
Change in fair
value
of put options - - - - (2) (2) (2) - (2)
Share buyback
programme (13) - 13 - (1,355) (1,355) (1,355) - (1,355)
Dividends
declared - - - - (993) (993) (993) (55) (1,048)
------
At 31 December
2018 767 1,350 2,341 (2,071) 6,979 4,908 9,366 1,767 11,133
===== ======= ======= ====== ======= ====== ======== ==== ======== === ======
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended Six months ended
31 December 2018 31 December 2017
GBP million GBP million GBP million GBP million
Cash flows from operating activities
Profit for the period 2,067 2,127
Taxation 560 77
Share of after tax results of associates
and joint ventures (179) (168)
Net finance charges 128 154
Non-operating items (146) -
----------
Operating profit 2,430 2,190
Increase in inventories (245) (162)
Increase in trade and other receivables (829) (908)
Increase in trade and other payables and
provisions 418 540
---------- ----------
Net increase in working capital (656) (530)
Depreciation, amortisation and impairment 185 187
Dividends received 3 3
Post employment payments less amounts included
in operating profit (61) (66)
Other items 37 -
----------
164 124
---------- ----------
Cash generated from operations 1,938 1,784
Interest received 101 76
Interest paid (206) (204)
Taxation paid (229) (408)
---------- ----------
(334) (536)
---------- ----------
Net cash inflow from operating activities 1,604 1,248
Cash flows from investing activities
Disposal of property, plant and equipment
and computer software 13 9
Purchase of property, plant and equipment
and computer software (271) (210)
Movements in loans and other investments - (18)
Sale of businesses and brands 419 2
Acquisition of businesses (32) (561)
---------- ----------
Net cash inflow/(outflow) from investing
activities 129 (778)
Cash flows from financing activities
Share buyback programme (1,275) (742)
Proceeds from issue of share capital 1 1
Net sale/(purchase) of own shares for share
schemes 25 (28)
Dividends paid to non-controlling interests (76) (61)
Rights issue proceeds from non-controlling
interests - 26
Proceeds from bonds 1,754 1,136
Repayment of bonds - (948)
Purchase of shares of non-controlling interests (697) -
Net movements in other borrowings 220 911
Equity dividends paid (993) (968)
---------- ----------
Net cash outflow from financing activities (1,041) (673)
---------- ----------
Net increase/(decrease) in net cash and cash
equivalents 692 (203)
Exchange differences 14 (28)
Net cash and cash equivalents at beginning
of the period 693 917
---------- ----------
Net cash and cash equivalents at end of the
period 1,399 686
========== ==========
Net cash and cash equivalents consist of:
Cash and cash equivalents 1,591 920
Bank overdrafts (192) (234)
---------- ----------
1,399 686
========== ==========
NOTES
1. Basis of preparation
This condensed set of financial statements has been prepared in
accordance with IAS 34 Interim Financial Reporting as issued by the
International Accounting Standards Board (IASB) and as adopted by
the EU. IFRS as adopted by the EU differs in certain respects from
IFRS as issued by the IASB. The differences have no impact on the
group's condensed consolidated financial statements for the periods
presented.
The annual financial statements of the group are prepared in
accordance with International Financial Reporting Standards (IFRSs)
as issued by the IASB and as adopted by the EU. As required by the
Disclosure and Transparency Rules of the Financial Conduct
Authority, the condensed set of financial statements has been
prepared applying the accounting policies and presentation that
were applied in the preparation of the company's published
consolidated financial statements for the year ended 30 June 2018
except for the impact of the adoption of new accounting standards
and amendments explained below. IFRS is subject to ongoing review
and endorsement by the EU or possible amendment by interpretative
guidance and the issuance of new standards by the IASB. In
preparing these condensed interim financial statements, the
significant judgements made by management when applying the group's
accounting policies and the significant areas where estimates were
required were the same as those that applied to the consolidated
financial statements for the year ended 30 June 2018, with the
exception of changes in estimates disclosed in note 13 - Contingent
liabilities and legal proceedings.
Having reassessed the principal risks the directors considered
it appropriate to adopt the going concern basis of accounting in
preparing the condensed consolidated financial statements.
New accounting standards
The following amendments to the accounting standards, issued by
the IASB or International Financial Reporting Interpretations
Committee (IFRIC) and endorsed by the EU, have been adopted by the
group from 1 July 2018 with no impact on the group's consolidated
results, financial position or disclosures:
-- Amendments to IAS 40 - Transfers of Investment Property
-- Amendments to IFRS 2 - Classification and Measurement of Share-based payment transactions
-- Amendments to IFRS 4 - Applying IFRS 9 with IFRS 4 Insurance contracts
-- Improvements to IFRS 1 - First-time Adoption of International
Financial Reporting Standards: Deletion of short-term exemptions
for first-time adopters
-- Improvements to IAS 28 - Investments in Associates and Joint
Ventures: Measuring investees at fair value through profit or loss:
an investment-by-investment choice or a consistent policy
choice
IFRS 15 - Revenue from contracts with customers (IFRS 15)
Diageo adopted IFRS 15 in the year ended 30 June 2018. In the
six months ended 31 December 2017 Diageo recorded the impact of the
first time adoption of IFRS 15 on its consolidated results. This
resulted in a net charge to retained earnings in the period of
GBP71 million with a corresponding decrease in net assets. At 30
June 2018 the net charge to retained earnings on the adoption of
IFRS 15 increased to GBP91 million with a corresponding decrease in
net assets. The company has not reflected this immaterial
correction in the consolidated statement of changes in equity for
the six months ended 31 December 2017 or the consolidated balance
sheet as at 31 December 2017.
The following standard issued by the IASB and endorsed by the
EU, have not yet been adopted by the group:
IFRS 16 - Leases (effective in the year ending 30 June 2020)
sets out the principles for the recognition, measurement,
presentation and disclosure of leases for both the lessee and the
lessor. It eliminates the classification of leases as either
operating leases or finance leases currently required under IAS 17
and introduces a single lessee accounting model where the lessee is
required to recognise assets and liabilities for all material
leases. All material leases will be recognised on the balance sheet
as right of use assets and depreciated on a straight line basis.
The liability, recognised as part of net borrowings, will be
measured at a discounted value and any interest will be charged to
finance charges in the income statement. Therefore, the charge to
the income statement for the operating lease payment will be
replaced with depreciation on the right of use asset and the
interest charge inherent in the lease.
The group will implement IFRS 16 from 1 July 2019 by applying
the modified retrospective method, meaning that the comparative
figures in the financial statements for the year ending 30 June
2020 will not be restated to show the impact of IFRS 16. The
operating leases which will be recorded on the balance sheet
following implementation of IFRS 16 are principally in respect of
warehouses, office buildings, plant and machinery, cars and
distribution vehicles. The group has decided to reduce the
complexity of implementation to take advantage of a number of
practical expedients on transition on 1 July 2019 namely:
(i) to measure the right of use asset at the same value as the
lease liability
(ii) to apply the short term and low value exemptions
(iii) to treat, wherever possible, services provided as an
income statement item and only capitalise the lease payment amounts
in respect of the asset
The anticipated impact of the standard on the group is not yet
known though is not expected to be material on the income statement
or net assets. Assets and liabilities will be grossed up for the
net present value of the outstanding operating lease liabilities
excluding low value assets and short term leases as at 1 July 2019.
Operating lease commitments were GBP312 million as at 30 June
2018.
The following standard, issued by the IASB has not been endorsed
by the EU and has not been adopted by the group:
IFRS 17 - Insurance Contracts (effective in the year ending 30
June 2022) is ultimately intended to replace IFRS 4. Based on a
preliminary assessment the group believes that the adoption of IFRS
17 will not have a significant impact on its consolidated results
or financial position.
There are a number of other amendments and clarifications to
IFRS, effective in future years, which are not expected to
significantly impact the group's consolidated results or financial
position.
The comparative figures for the financial year ended 30 June
2018 are not the company's statutory accounts for that financial
year. Those accounts have been reported on by the company's
auditor, PricewaterhouseCoopers LLP, and delivered to the Registrar
of Companies. The report of the auditor (i) was unqualified, (ii)
did not include a reference to any matters to which the auditor
drew attention by way of emphasis without qualifying their report
and (iii) did not contain a statement under section 498 (2) or (3)
of the Companies Act 2006.
2. Segmental information
The segmental information presented is consistent with
management reporting provided to the Executive Committee (the chief
operating decision maker).
The Executive Committee considers the business principally from
a geographical perspective based on the location of third party
sales and the business analysis is presented by geographical
segment. In addition to these geographical selling segments, a
further segment reviewed by the Executive Committee is the
International Supply Centre (ISC), which manufactures products for
other group companies and includes the production sites in the
United Kingdom, Ireland, Italy and Guatemala.
Continuing operations also include the Corporate function.
Corporate revenues and costs are in respect of central costs,
including finance, marketing, corporate relations, human resources
and legal, as well as certain information systems, facilities and
employee costs that are not allocable to the geographical segments
or to the ISC. They also include rents receivable and payable in
respect of properties not used by the group in the manufacture,
sale or distribution of premium drinks.
Diageo uses shared services operations, including captive and
outsourced centres, to deliver transaction processing activities
for markets and operational entities. These centres are located in
Hungary, Kenya, Colombia, the Philippines and India. The captive
business service centre in Budapest also performs certain central
finance activities, including elements of financial planning and
reporting and treasury. The results of shared services operations
are recharged to the regions.
The segmental information for net sales and operating profit
before exceptional items is reported at budgeted exchange rates in
line with management reporting. For management reporting purposes
the group measures the current period at, and restates the prior
period net sales and operating profit to, the current year's
budgeted exchange rates. These exchange rates are set prior to the
financial year as part of the financial planning process and
provide a consistent exchange rate to measure the performance of
the business throughout the year. The adjustments required to
retranslate the segmental information to actual exchange rates and
to reconcile it to the group's reported results are shown in the
tables below. The comparative segmental information, prior to
retranslation, has not been restated at the current year's budgeted
exchange rates but is presented at the budgeted rates for the year
ended 30 June 2018.
In addition, for management reporting purposes Diageo presents
separately the result of acquisitions and disposals completed in
the current and prior year from the results of the geographical
segments. The impact of acquisitions and disposals on net sales and
operating profit is disclosed under the appropriate geographical
segments in the tables below at budgeted exchange rates.
Latin Eliminate
Europe America inter- Total Corporate
Six months North and and Asia segment operating and
ended America Turkey Africa Caribbean Pacific ISC sales segments other Total
31 December GBP GBP GBP GBP GBP GBP GBP GBP GBP
2018 million million million million million million million million GBP million million
Sales 2,667 2,879 1,160 864 2,765 923 (923) 10,335 28 10,363
======= ====== ======= ========= ======= ====== ======= ========= ====== === ======
Net sales
At budgeted
exchange
rates(i) 2,108 1,629 784 648 1,379 980 (920) 6,608 29 6,637
Acquisitions
and disposals 68 1 1 - 1 - - 71 - 71
ISC allocation 7 35 3 8 7 (60) - - - -
Retranslation
to actual
exchange
rates 173 (32) 33 16 11 3 (3) 201 (1) 200
------- ------ ------- --------- ------- ------ ------- --------- ------ ------
Net sales 2,356 1,633 821 672 1,398 923 (923) 6,880 28 6,908
======= ====== ======= ========= ======= ====== ======= ========= ====== === ======
Operating
profit/(loss)
At budgeted
exchange
rates(i) 953 581 143 221 385 88 - 2,371 (77) 2,294
Acquisitions
and disposals 40 1 1 - - - - 42 - 42
ISC allocation 10 46 4 19 9 (88) - - - -
Retranslation
to actual
exchange
rates 98 (14) 5 14 15 - - 118 (3) 115
------- ------ ------- --------- ------- ------- --------- ------ ------
Operating
profit/(loss)
before
exceptional
items 1,101 614 153 254 409 - - 2,531 (80) 2,451
Exceptional
items - - - - - - - - (21) (21)
------ ------- --------- ------- ------ ------- --------- ------ ------
Operating
profit/(loss) 1,101 614 153 254 409 - - 2,531 (101) 2,430
======= ====== ======= ========= ======= ====== ======= ========= ======
Non-operating
items 146
Net finance
charges (128)
Share of after
tax
results of
associates
and joint
ventures 179
------
Profit before
taxation 2,627
======
Latin Eliminate
Europe America inter- Total Corporate
Six months North and and Asia segment operating and
ended America Turkey Africa Caribbean Pacific ISC sales segments other Total
31 December GBP GBP GBP GBP GBP GBP GBP GBP GBP
2017 million million million million million million million million GBP million million
Sales 2,467 2,887 1,088 840 2,625 797 (797) 9,907 27 9,934
====== ======= ======= ========= ====== ====== ====== ====== === ====== === ======
Net sales
At budgeted
exchange
rates(i) 2,151 1,521 753 629 1,306 827 (778) 6,409 24 6,433
Acquisitions
and disposals 20 - - - - - - 20 - 20
ISC allocation 7 28 3 6 5 (49) - - - -
Retranslation
to actual
exchange
rates 5 50 18 14 (13) 19 (19) 74 3 77
------ ------- ------- --------- ------ ------ ------ ------ --- ------ --- ------
Net sales 2,183 1,599 774 649 1,298 797 (797) 6,503 27 6,530
====== ======= ======= ========= ====== ====== ====== ====== === ====== === ======
Operating
profit/(loss)
At budgeted
exchange
rates(i) 1,038 541 116 208 325 74 - 2,302 (89) 2,213
Acquisitions
and disposals 2 - - - - - - 2 - 2
ISC allocation 10 43 3 10 8 (74) - - - -
Retranslation
to actual
exchange
rates (23) 15 1 - (17) - - (24) (1) (25)
------ ------- ------- ------ ------ ------ --- ------ ------ ------
Operating
profit/(loss) 1,027 599 120 218 316 - - 2,280 (90) 2,190
====== ======= ======= ========= ====== ====== ====== === ====== === ======
Net finance
charges (154)
Share of after
tax
results of
associates
and joint
ventures 168
------
Profit before
taxation 2,204
======
(i) These items represent the IFRS 8 performance measures for
the geographical and ISC segments.
(1) The net sales figures for ISC reported to the Executive
Committee primarily comprise inter-segmental sales and these are
eliminated in a separate column in the above segmental analysis.
Apart from sales by the ISC segment to the other operating
segments, inter-segmental sales are not material.
(2) The group's net finance charges are managed centrally and
are not attributable to individual operating segments.
(3) Approximately 40% of annual net sales occur in the last four
months of each calendar year.
Weighted average exchange rates used in the translation of
income statements were US dollar - GBP1 = $1.29 (2017 - GBP1 =
$1.32) and euro - GBP1 = EUR1.12 (2017 - GBP1 = EUR1.12). Exchange
rates used to translate assets and liabilities at the balance sheet
date were US dollar - GBP1 = $1.27 (31 December 2017 - GBP1 =
$1.35, 30 June 2018 - GBP1 = $1.32) and euro - GBP1 = EUR1.11 (31
December 2017 - GBP1 = EUR1.12, 30 June 2018 - GBP1 = EUR1.13). The
group uses foreign exchange transaction hedges to mitigate the
effect of exchange rate movements.
3. Exceptional items
Exceptional items are those which, in management's judgement,
need to be disclosed separately by virtue of their size or nature
in order for the user to obtain a proper understanding of the
financial information. See Explanatory Notes (c) Exceptional items
for the definition of exceptional items and the criteria used to
determine whether an exceptional item is accounted for as operating
or non-operating.
Six months ended Six months ended
31 December 31 December
2018 2017
GBP million GBP million
Items included in operating profit
GMP equalisation (21) -
------------ --- ----------------
(21)
Non-operating items (sale of businesses)
Portfolio of 19 brands 154 -
United National Breweries (8) -
------------ --- ----------------
146 -
Exceptional items before taxation 125 -
Items included in taxation
Tax on exceptional operating items 4 -
Tax on exceptional non-operating items (34) -
Exceptional taxation - 360
------------ ---- ----------------
(30) 360
Total exceptional items 95 360
================== ================
Attributable to:
Equity shareholders of the parent company 95 360
Non-controlling interests - -
------------ ---- ----------------
Total exceptional items 95 360
============ ==== ================
Exceptional items included in operating profit are charged to
other operating expenses.
4. Finance income and charges
Six months ended Six months ended
31 December 31 December
2018 2017
GBP million GBP million
Interest income 102 74
Fair value gain on financial instruments 59 29
------------- --- ------------- ---
Total interest income 161 103
Interest charges (224) (208)
Fair value loss on financial instruments (57) (25)
------------- -------------
Total interest charges (281) (233)
------------- -------------
Net interest charges (120) (130)
============= =============
Net finance income in respect of post employment
plans in surplus 14 4
Hyperinflation adjustment in respect of Venezuela
(a) 6 6
Total other finance income 20 10
Net finance charge in respect of post employment
plans in deficit (12) (11)
Unwinding of discounts (8) (6)
Interest in respect of tax (5) -
Change in financial liability (Level 3) (2) (16)
Other finance charges (1) (1)
------------- -------------
Total other finance charges (28) (34)
------------- -------------
Net other finance charges (8) (24)
============= =============
(a) Hyperinflation adjustment in respect of Venezuela
Venezuela is a hyper-inflationary economy where the government
maintains a regime of strict currency controls with multiple
foreign currency rate systems. Access to US dollars on these
exchange systems is very limited. In March 2018 Venezuela's
President ordered a re-denomination of the ailing bolivar currency.
The so called "Bolívar Soberano" (Sovereign Bolivar) was introduced
from 20 August 2018 when 100,000 "Bolívar Fuerte" (VEF) were
redenominated as one Sovereign Bolivar. The foreign currency
denominated transactions and balances of the group's Venezuelan
operations are translated into the local functional currency (VES)
at the rate they are expected to be settled, applying the most
appropriate official exchange rate. For consolidation purposes, the
group converts its Venezuelan operations using management's
estimate of the exchange rate considering the inflation forecast
and the most appropriate official exchange rate (DICOM). The
exchange rate used to translate the results of the group's
Venezuelan operations was VES/GBP 10,466 for the six months ended
31 December 2018 (2017 - VEF/GBP 63,450 - VES/GBP 0.6345).
The following table presents the contribution of the group's
Venezuelan operations to the consolidated income statement, cash
flow statement and net assets for the six months ended 31 December
2018 and with the amounts that would have resulted if the DICOM
exchange rate had been applied for consolidation.
At estimated At DICOM exchange
exchange rate rate
VES/GBP 10,466 VES/GBP 809
GBP million GBP million
Net sales - 1
Operating profit - -
Other finance income - hyperinflation adjustment 6 72
Net cash inflow from operating activities - 1
Net assets 65 843
5. Taxation
For the six months ended 31 December 2018, the GBP560 million
taxation charge (2017 - GBP77 million) comprises a UK tax charge of
GBP134 million (2017 - GBP64 million) and a foreign tax charge of
GBP426 million (2017 - GBP13 million).
Exceptional items in the six months ended 31 December 2018
comprised a tax charge of GBP30 million in respect of the disposal
of a portfolio of 19 brands to Sazerac less a tax credit in respect
of the equalisation of benefits in the Diageo Pension Scheme.
6. Inventories
31 December 30 June 31 December
2018 2018 2017
GBP million GBP million GBP million
Raw materials and consumables 327 321 352
Work in progress 51 44 46
Maturing inventories 4,201 4,028 3,904
Finished goods and goods for resale 697 622 617
----------- ----------- -----------
5,276 5,015 4,919
=========== =========== ===========
7. Net borrowings
31 December 30 June 31 December
2018 2018 2017
GBP million GBP million GBP million
Borrowings due within one year and bank
overdrafts (1,742) (1,828) (2,378)
Borrowings due after one year (10,272) (8,074) (7,647)
Fair value of foreign currency forwards
and swaps 195 107 82
Fair value of interest rate hedging instruments 20 (15) (10)
Finance lease liabilities (144) (155) (165)
---------- ---------- ----------
(11,943) (9,965) (10,118)
Cash and cash equivalents 1,591 874 920
---------- ---------- ----------
(10,352) (9,091) (9,198)
========== ========== ==========
8. Reconciliation of movement in net borrowings
Six months ended Six months ended
31 December 31 December
2018 2017
GBP million GBP million
Net increase/(decrease) in cash and cash equivalents
before exchange 692 (203)
Net increase in bonds and other borrowings (1,974) (1,099)
-------------- --------------
Net increase in net borrowings from cash flows (1,282) (1,302)
Exchange differences on net borrowings (32) 47
Other non-cash items 53 (51)
Net borrowings at beginning of the period (9,091) (7,892)
-------------- --------------
Net borrowings at end of the period (10,352) (9,198)
============== ==============
In the six months ended 31 December 2018, the group issued bonds
of EUR2,000 million (GBP1,754 million) under its European Debt
Issuance Programme and in the comparable period the group issued
bonds of EUR1,275 million (GBP1,136 million) and repaid bonds of
$1,250 million (GBP948 million).
All bonds, medium-term notes and commercial paper issued by
Diageo plc's 100% owned subsidiaries are fully and unconditionally
guaranteed by Diageo plc.
9. Financial instruments
Fair value measurements of financial instruments are presented
through the use of a three-level fair value hierarchy that
prioritises the valuation techniques used in fair value
calculations.
The group maintains policies and procedures to value instruments
using the most relevant data available. If multiple inputs that
fall into different levels of the hierarchy are used in the
valuation of an instrument, the instrument is categorised on the
basis of the most subjective input.
Foreign currency forwards and swaps, cross currency swaps and
interest rate swaps are valued using discounted cash flow
techniques. These techniques incorporate inputs at levels 1 and 2,
such as foreign exchange rates and interest rates. These market
inputs are used in the discounted cash flow calculation
incorporating the instrument's term, notional amount and discount
rate, and taking credit risk into account. As significant inputs to
the valuation are observable in active markets, these instruments
are categorised as level 2 in the hierarchy.
Other financial liabilities include a put option, which does not
expire, held by Industrias Licoreras de Guatemala (ILG) to sell the
remaining 50% equity stake in Rum Creations & Products Inc, the
owner of the Zacapa rum brand, to Diageo. The liability is fair
valued and as at 31 December 2018 an amount of GBP171 million (30
June 2018 - GBP164 million) is recognised as a liability with
changes in fair value included in retained earnings. As the
valuation of this option uses assumptions not observable in the
market, it is categorised as level 3 in the hierarchy. As at 31
December 2018 because it is unknown when or if ILG will exercise
the option the liability is measured as if the exercise date is on
the last day of the current financial year considering forecast
future performance (in prior years the potential liability also
assumed a possible exercise date).
The option is sensitive to reasonably possible changes in
assumptions. If the option were to be exercised as at 30 June 2020,
the fair value of the liability would increase by approximately
GBP20 million.
There were no significant changes in the measurement and
valuation techniques, or significant transfers between the levels
of the financial assets and liabilities in the six months ended 31
December 2018.
The group's financial assets and liabilities measured at fair
value are categorised as follows:
31 December 2018 30 June 2018 31 December
2017
(restated(i)
)
GBP million GBP million GBP million
Derivative assets 293 217 307
Derivative liabilities (145) (123) (184)
------------- ---------- ----------
Valuation techniques based on observable
market input (Level 2) 148 94 123
============= === ========== ==========
Other financial assets 91 89 72
Other financial liabilities (171) (164) (219)
------------- ---------- ----------
Valuation techniques based on unobservable
market input (Level 3) (80) (75) (147)
============= ========== ==========
(i) Restated to include loans and advances to associates and
third parties.
Finance lease liabilities were GBP144 million at 31 December
2018 (30 June 2018 - GBP155 million).
The carrying amount of the group's financial assets and
liabilities are generally the same as their fair value apart from
borrowings. At 31 December 2018 the fair value of gross borrowings
(excluding finance lease liabilities, the financial liability in
respect of the share buyback programme and the fair value of
derivative instruments) was GBP12,409 million and the carrying
value was GBP12,014 million (30 June 2018 - GBP10,304 million and
GBP9,902 million, respectively).
10. Dividends and other reserves
Six months ended Six months ended
31 December 31 December
2018 2017
GBP million GBP million
Amounts recognised as distributions to equity
shareholders in the period
Final dividend for the year ended 30 June 2018
of
40.4 pence per share (2017 - 38.5 pence) 993 968
================ ================
An interim dividend of 26.1 pence per share (2017 - 24.9 pence)
was approved by the Board of Directors on 30 January 2019. As the
approval was after the balance sheet date, it has not been included
as a liability.
Other reserves of GBP2,341 million at 31 December 2018 (2017 -
GBP2,362 million) include a capital redemption reserve of GBP3,176
million (2017 - GBP3,146 million), a hedging reserve of GBP83
million deficit (2017 - GBP11 million surplus) and an exchange
reserve of GBP752 million deficit (2017 - GBP795 million deficit).
Out of the GBP83 million hedging reserve deficit GBP22 million
surplus (2017 - GBP24 million deficit) is attributable to cost of
hedging reserve.
11. Acquisition of businesses and purchase of non-controlling
interests
On 17 August 2018 Diageo completed the purchase of 20.29% of the
share capital of Sichuan Shuijingfang Company Limited (SJF) for RMB
6,084 million (GBP696 million) and transaction costs of GBP7
million (GBP1 million of which had been paid by 31 December 2018).
This took Diageo's shareholding in SJF from 39.71% to 60%. SJF was
already controlled and therefore consolidated prior to the
transaction.
On 28 September 2018 Diageo acquired the remaining 70% of Copper
Dog Whisky Limited (CDWL) that it did not already own for an
upfront valuation of GBP6.5 million and further earn-out payments
based on CDWL achieving performance targets. The discounted current
estimate for the earn-out payments is GBP10 million.
Other acquisitions include deferred consideration paid in
respect of prior year acquisitions and additional investments in a
number of Distill Venture associates.
12. Sale of businesses and brands
Cash consideration received and net assets disposed of in
respect of sale of businesses and brands in the six months ended 31
December 2018, were in respect of the disposal of a portfolio of 19
brands to Sazerac on 20 December 2018:
GBP million
Sale consideration
Cash received in period 419
Transaction costs payable (17)
Deferred consideration receivable 16
---------
418
Net assets disposed of
Brands (230)
Goodwill (12)
Property, plant and equipment (2)
Investment in associates (3)
Inventories (17)
(264)
Gain on disposal before taxation 154
---------
Taxation (34)
---------
Gain on disposal after taxation 120
=========
Diageo completed the sale of a portfolio of 19 brands (see
Explanatory Notes, Other definitions for the list of brands
disposed of) to Sazerac on 20 December 2018 for an aggregate
consideration of $550 million (GBP435 million). The net proceeds of
approximately GBP340 million, after corporate tax and transaction
costs, will be returned to shareholders through a share buyback
programme to be completed by 30 June 2019, which is incremental to
the previously announced programme.
Diageo will continue to provide manufacturing services for all
disposed brands until December 2019 and for five brands up to
December 2028.
In the six months ended 31 December 2018 these brands
contributed net sales of GBP67 million (2017 - GBP81 million),
operating profit of GBP43 million (2017 - GBP52 million) and profit
after taxation of GBP34 million (2017 - GBP41 million).
The disposal of United National Breweries (UNB), Diageo's wholly
owned sorghum business in South Africa, was agreed in December 2018
for a gross consideration, subject to adjustments, of ZAR 731
million (GBP40 million). The assets and liabilities of UNB have
been transferred to assets and liabilities held for sale
respectively and the prospective sale has resulted in an
exceptional loss of approximately GBP8 million. The disposal is
expected to be completed in the second half of the year ending 30
June 2019, subject to receipt of regulatory approvals.
13. Contingent liabilities and legal proceedings
(a) Guarantees and related matters
As of 31 December 2018, the group has no material unprovided
guarantees or indemnities in respect of liabilities of third
parties.
(b) Acquisition of USL shares from UBHL, winding-up petitions
against UBHL and other proceedings in relation to the USL
transaction
On 4 July 2013, Diageo completed its acquisition, under a share
purchase agreement with United Breweries (Holdings) Limited (UBHL)
and various other sellers (the SPA), of 21,767,749 shares (14.98%)
in United Spirits Limited (USL) for a total consideration of INR
31.3 billion (GBP349 million), including 10,141,437 shares (6.98%)
from UBHL. The SPA was signed on 9 November 2012 and was part of
the transaction announced by Diageo in relation to USL on that day
(the Original USL Transaction). Through a series of further
transactions, as of 2 July 2014, Diageo had a 54.78% investment in
USL (excluding 2.38% owned by the USL Benefit Trust).
Prior to the acquisition from UBHL on 4 July 2013, the High
Court of Karnataka (High Court) had granted leave to UBHL under
sections 536 and 537 of the Indian Companies Act 1956 (the Leave
Order) to enable the sale by UBHL to Diageo to take place (the UBHL
Share Sale) notwithstanding the continued existence of five
winding-up petitions that were pending against UBHL on 9 November
2012, being the date of the SPA. Additional winding-up petitions
have been brought against UBHL since 9 November 2012, and the Leave
Order did not extend to them. At the time of the completion of the
UBHL Share Sale, the Leave Order remained subject to review on
appeal. However, as stated by Diageo at the time of closing on 4
July 2013, it was considered unlikely that any appeal process in
respect of the Leave Order would definitively conclude on a timely
basis and, accordingly, Diageo waived the conditionality under the
SPA relating to the absence of insolvency proceedings in relation
to UBHL and acquired the 10,141,437 USL shares from UBHL at that
time.
Following closing of the UBHL Share Sale, appeals were filed by
various petitioners in respect of the Leave Order. On 20 December
2013, the division bench of the High Court set aside the Leave
Order (the December 2013 Order). Following the December 2013 Order,
Diageo filed special leave petitions (SLPs) in the Supreme Court of
India against the December 2013 Order.
On 10 February 2014, the Supreme Court of India issued an order
giving notice in respect of the SLPs and ordering that the status
quo be maintained with regard to the UBHL Share Sale pending a
hearing on the matter in the Supreme Court. Following a number of
adjournments, the next date for a substantive hearing of the SLPs
(in respect of which leave has since been granted and which have
been converted to civil appeals) is yet to be fixed.
In separate proceedings, the High Court passed a winding-up
order against UBHL on 7 February 2017. On 4 March 2017, UBHL
appealed against this order before a division bench of the High
Court. This appeal is currently pending. Diageo continues to
believe that the acquisition price of INR 1,440 per share paid to
UBHL for the USL shares is fair and reasonable as regards UBHL,
UBHL's shareholders and UBHL's secured and unsecured creditors.
However, adverse results for Diageo in the proceedings referred to
above could, absent leave or relief in other proceedings,
ultimately result in Diageo losing title to the 10,141,437 USL
shares acquired from UBHL. Diageo believes it would remain in
control of USL and be able to consolidate USL as a subsidiary
regardless of the outcome of this litigation. There can be no
certainty as to the outcome of the existing or any further related
legal proceedings or the timeframe within which they would be
concluded.
Diageo also has the benefit of certain contractual undertakings
and commitments from the relevant sellers in relation to potential
challenges to its unencumbered title to the USL shares acquired on
4 July 2013, including relating to the winding-up petitions
described above and/or certain losses and costs that may be
incurred in the event of third party actions relating to the
acquisition of the USL shares.
(c) Continuing matters relating to the resignation of Dr Vijay
Mallya from USL and USL internal inquiries
On 25 February 2016, Diageo and USL each announced that they had
entered into arrangements with Dr Mallya under which he had agreed
to resign from his position as a director and as chairman of USL
and from his positions in USL's subsidiaries. As specified by
Diageo in its announcement at that time, these arrangements ended
its prior agreement with Dr Mallya regarding his position at USL,
therefore bringing to an end the uncertainty relating to the
governance of USL, and put in place a five-year global non-compete
(excluding the United Kingdom), non-interference, non-solicitation
and standstill arrangement with Dr Mallya. As part of those
arrangements, USL, Diageo and Dr Mallya agreed a mutual release in
relation to matters arising out of an inquiry into certain matters
referred to in USL's financial statements and the qualified
auditor's report for the year ended 31 March 2014 (the Initial
Inquiry) which had revealed, among other things, certain diversions
of USL funds. Dr Mallya also agreed not to pursue any claims
against Diageo, USL and their affiliates (including under the prior
agreement with Diageo). In evaluating entering into such
arrangements, Diageo considered the impact of the arrangements on
USL and all of USL's shareholders, and came to the view that the
arrangements were in the best interests of USL and its
shareholders.
Diageo's agreement with Dr Mallya (the February 2016 Agreement)
provided for a payment of $75 million (GBP53 million) to Dr Mallya
over a five year period in consideration for the five-year global
non-compete, non-interference, non-solicitation and standstill
commitments referred to above, his resignation from USL and the
termination of his USL-related appointment and governance rights,
the relinquishing of rights and benefits attached to his position
at USL, and his agreement not to pursue claims against Diageo and
USL. The February 2016 Agreement also provided for the release of
Dr Mallya's personal obligations to indemnify (i) Diageo Holdings
Netherlands B.V. (DHN) in respect of its earlier liability ($141
million (GBP96 million)) under a backstop guarantee of certain
borrowings of Watson Limited (Watson) (a company affiliated with Dr
Mallya), and (ii) Diageo Finance plc in respect of its earlier
liability (GBP30 million) under a guarantee of certain borrowings
of United Breweries Overseas Limited. $40 million (GBP28 million)
of the $75 million (GBP53 million) amount was paid on signing of
the February 2016 Agreement with the balance being payable in equal
instalments of $7 million (GBP5 million) a year over five years,
subject to and conditional on Dr Mallya's compliance with certain
terms of the agreement. While the first two instalments of $7
million (GBP5 million) each would have become due on 25 February
2017 and 25 February 2018, respectively, owing to various reasons
(including breaches committed by Dr Mallya and certain persons
connected with him of several provisions of the February 2016
Agreement and agreements of the same date between Dr Mallya and
USL), Diageo believes that it was not liable to pay such amount,
and is very unlikely to become liable to pay any future
instalments, to Dr Mallya. By notice to Dr Mallya and certain
persons connected with him on 24 February 2017, 3 November 2017, 23
February 2018 and 22 August 2018, Diageo and other group companies
have demanded from Dr Mallya the repayment of $40 million (GBP28
million) which was paid by Diageo on 25 February 2016, and also
sought compensation from him for various losses incurred by the
relevant members of the Diageo group on account of the breaches
committed by him and certain persons connected with him. On 16
November 2017, Diageo and other relevant members of the Diageo
group commenced claims in the High Court of Justice in England and
Wales (the English High Court) against Dr Mallya in relation to
certain of the matters specified in those notices. At the same time
DHN also commenced claims in the English High Court against Dr
Mallya, his son Sidhartha Mallya and two companies affiliated with
Dr Mallya (Watson and Continental Administration Services Limited
(CASL)) for in excess of $142 million (GBP105 million) (plus
interest) in relation to Watson's liability to DHN in respect of
its borrowings referred to above and the breach of associated
security documents. These additional claims are described in
paragraph (d)
below. Dr Mallya, Sidhartha Mallya and the relevant affiliated
companies filed a defence to such claims and the additional claims
on 12 March 2018, and Dr Mallya also filed a counterclaim for
payment of the two $7 million (GBP5 million) instalment payments
withheld by Diageo as described above. Diageo and the other
relevant members of its group filed a reply to that defence and a
defence to the counter-claim on 5 September 2018. Diageo intends to
continue to prosecute its claims and to defend the counterclaims
and, on 18 December 2018, Diageo and the other relevant members of
its group filed an application for strike out and/or summary
judgment in respect of certain aspects of their defence, including
their defence in relation to Watson and CASL's liability to repay
DHN.
As previously announced by USL, the Initial Inquiry identified
certain additional parties and matters indicating the possible
existence of other improper transactions. These transactions could
not be fully analysed during the Initial Inquiry and, accordingly,
USL, as previously announced, mandated that its Managing Director
and Chief Executive Officer conduct a further inquiry into the
transactions involving the additional parties and the additional
matters to determine whether they also suffered from improprieties
(the Additional Inquiry). USL announced the results of the
Additional Inquiry in a notice to the Indian Stock Exchange dated 9
July 2016. The mutual release in relation to the Initial Inquiry
agreed by Diageo and USL with Dr Mallya announced on 25 February
2016 does not extend to matters arising out of the Additional
Inquiry.
As stated in USL's previous announcement, the Additional Inquiry
revealed further instances of actual or potential fund diversions
from USL and its Indian and overseas subsidiaries to, in most
cases, Indian and overseas entities in which Dr Mallya appears to
have a material direct or indirect interest, as well as other
potentially improper transactions involving USL and its Indian and
overseas subsidiaries.
In connection with the matters identified by the Additional
Inquiry, USL has, pursuant to a detailed review of each case of
such fund diversion and after obtaining expert legal advice, where
appropriate, filed civil suits for recovery of funds from certain
parties, including Dr Mallya, before the relevant courts in
India.
The amounts identified in the Additional Inquiry have been
previously provided for or expensed in the financial statements of
USL or its subsidiaries for prior periods. Further, at this stage,
it is not possible for the management of USL to estimate the
financial impact on USL, if any, arising out of potential
non-compliance with applicable laws in relation to such fund
diversions.
(d) Other continuing matters relating to Dr Mallya and
affiliates
DHN issued a conditional backstop guarantee on 2 August 2013 to
Standard Chartered Bank (Standard Chartered) pursuant to a
guarantee commitment agreement (the Guarantee Agreement). The
guarantee was in respect of the liabilities of Watson, a company
affiliated with Dr Mallya, under a $135 million (GBP92 million)
facility from Standard Chartered (the Facility Agreement). The
Guarantee Agreement was entered into as part of the arrangements
put in place and announced at the closing of the USL transaction on
4 July 2013.
DHN's provision of the Guarantee Agreement enabled the
refinancing of certain existing borrowings of Watson from a third
party bank and facilitated the release by that bank of rights over
certain USL shares that were to be acquired by Diageo as part of
the USL transaction. The facility matured and entered into default
in May 2015. In aggregate DHN paid Standard Chartered $141 million
(GBP96 million) under this guarantee, i.e. including payments of
default interest and various fees and expenses.
Watson remains liable for all amounts paid by DHN under the
guarantee. Under the guarantee documentation with Standard
Chartered, DHN is entitled to the benefit of the underlying
security package for the loan, including: (a) certain shares in
United Breweries Limited (UBL) held solely by Dr Mallya and certain
other shares in UBL held by Dr Mallya jointly with his son
Sidhartha Mallya, and (b) the shareholding in Watson.
Aspects of the security package are the subject of various
proceedings in India in which third parties are alleging and
asserting prior rights to certain assets comprised in the security
package or otherwise seeking to restrain enforcement against
certain assets by Standard Chartered and/or DHN. These proceedings
are ongoing and DHN will continue to vigorously pursue these
matters as part of its efforts for enforcement of the underlying
security and recovery of outstanding amounts. Diageo believes that
the existence of any prior rights or dispute in relation to the
security would be in breach of representations and warranties given
by Dr Mallya to Standard Chartered at the time the security was
granted and further believes that certain actions taken by Dr
Mallya in relation to the proceedings described above also breached
his obligations to Standard Chartered. In addition to these third
party proceedings, Dr Mallya is also subject to proceedings in
India under the Prevention of Money Laundering Act and the Fugitive
Economic Offenders Act in which the relevant Indian authority, the
Directorate of Enforcement, is seeking confiscation of the UBL
shares which were provided as security for Watson's liabilities.
DHN is participating in these proceedings in order to protect its
security interest in respect of the UBL shares.
Under the terms of the guarantee and as a matter of law, there
are arrangements to pass on to DHN the benefit of the security
package upon payment under the guarantee of all amounts owed to
Standard Chartered. Payment under the guarantee has now occurred as
described above. To the extent possible in the context of the
proceedings described above, Standard Chartered has taken certain
recovery steps and is working with DHN in relation to these
proceedings. DHN is actively monitoring the security package and is
discussing with Standard Chartered steps to continue enforcement
against the background of the proceedings described above, as well
as enforcement steps in relation to elements of the security
package that are unaffected by those proceedings. DHN's ability to
assume or enforce security over some elements of the security
package is also subject to regulatory consent. It is not at this
stage possible to determine whether such consent would be
forthcoming. In addition to the Indian proceedings just described,
certain of the assets comprised in the security package may also be
affected by a worldwide freezing order of the English High Court
granted on 24 November 2017 and continued on 8 December 2017 and 8
May 2018 in respect of the assets of Dr Mallya.
The agreement with Dr Mallya referenced in paragraph (c) above
does not impact the security package. Watson remains liable for all
amounts paid pursuant to the guarantee and DHN has the benefit of a
counter-indemnity from Watson in respect of payments in connection
with the guarantee. The various security providers, including Dr
Mallya and Watson, acknowledged in the February 2016 Agreement
referred to in paragraph (c) above that DHN is entitled to the
benefit of the security package underlying the Standard Chartered
facility and have also undertaken to take all necessary actions in
that regard. Further, Diageo believes that the existence of any
prior rights or disputes in relation to the security package would
be in breach of certain confirmations given to Diageo and DHN
pursuant to that agreement by Dr Mallya, Watson and certain
connected persons.
On 16 November 2017, DHN commenced various claims in the English
High Court for, in aggregate, in excess of $142 million (GBP105
million) (plus interest) in relation to these matters, including
the following: (i) a claim against Watson for $141 million (GBP96
million) (plus interest) under Watson's counter-indemnity to DHN in
respect of payments made by DHN to Standard Chartered under the
guarantee referred to above; (ii) a claim against Dr Mallya and
Sidhartha Mallya under various agreements creating or relating to
the security package referred to above for (a) the costs incurred
to date in the various Indian proceedings referred to above (plus
interest), and (b) damages of $141 million (GBP96 million), being
DHN's loss as a result of those Indian proceedings which currently
prevent enforcement of the security over shares in UBL (plus
interest); and (iii) a claim against CASL, as a co-surety with DHN
of Watson's obligations under the Facility Agreement, for 50% of
the difference between the amount claimed under (i) above and the
amount (if any) that DHN is in fact able to recover from Watson, Dr
Mallya and/or Sidhartha Mallya. As noted in paragraph (c), Dr
Mallya, Sidhartha Mallya and the relevant affiliated companies
filed a defence to these claims on 12 March 2018. Diageo and the
other relevant members of its group filed a reply to that defence
on 5 September 2018. As stated in paragraph (c), DHN and Diageo
intends to continue to prosecute these claims and, on 18 December
2018, Diageo and the other relevant members of its group filed an
application for strike out and/or summary judgment in respect of
certain aspects of the defence filed by Dr Mallya, Sidhartha Mallya
and the relevant affiliated companies, including in respect of
Watson and CASL's liability to repay DHN. That application is
listed for hearing on 23 May 2019.
(e) Other matters in relation to USL
Following USL's earlier updates concerning the Initial Inquiry
as well as in relation to the arrangements with Dr Mallya that were
the subject of the 25 February 2016 announcement, USL and Diageo
have received various notices from Indian regulatory authorities,
including the Ministry of Corporate Affairs, Enforcement
Directorate and Securities and Exchange Board of India (SEBI).
Diageo and USL are cooperating fully with the authorities in
relation to these matters. Diageo and USL have also received
notices from SEBI requesting information in relation to, and
explanation of the reasons for, the arrangements with Dr Mallya
that were the subject of the 25 February 2016 announcement as well
as, in the case of USL, in relation to the Initial Inquiry and the
Additional Inquiry, and, in the case of Diageo, whether such
arrangements with Dr Mallya or the Watson backstop guarantee
arrangements referred to in paragraphs (c) and (d) above were part
of agreements previously made with Dr Mallya at the time of the
Original USL Transaction announced on 9 November 2012 and the open
offer made as part of the Original USL Transaction. Diageo and USL
have complied with such information requests and Diageo has
confirmed that, consistent with prior disclosures, the Watson
backstop guarantee arrangements and the matters described in the 25
February 2016 announcement were not the subject of any earlier
agreement with Dr Mallya. In respect of the Watson backstop
guarantee arrangements, SEBI issued a further notice to Diageo on
16 June 2016 that if there is any net liability incurred by Diageo
(after any recovery under relevant security or other arrangements,
which matters remain pending) on account of the Watson backstop
guarantee, such liability, if any, would be considered to be part
of the price paid for the acquisition of USL shares under the SPA
which formed part of the Original USL Transaction and that, in that
case, additional equivalent payments would be required to be made
to those shareholders (representing 0.04% of the shares in USL) who
tendered in the open offer made as part of the Original USL
Transaction. Diageo is clear that the Watson backstop guarantee
arrangements were not part of the price paid or agreed to be paid
for any USL shares under the Original USL Transaction and therefore
believes the decision in the SEBI notice to be misconceived and
wrong in law and appealed against it before the Securities
Appellate Tribunal, Mumbai (SAT). On 1 November 2017, SAT issued an
order in respect of Diageo's appeal in which, amongst other things,
it observed that the relevant officer at SEBI had neither
considered Diageo's earlier reply nor provided Diageo with an
opportunity to be heard, and accordingly directed SEBI to pass a
fresh order after giving Diageo an opportunity to be heard.
Following SAT's order, Diageo has made its further submissions in
the matter, including at a personal hearing before a Deputy General
Manager of SEBI.
Diageo is unable to assess if the notices or enquiries referred
to above will result in enforcement action or, if this were to
transpire, to quantify meaningfully the possible loss or range of
loss, if any, to which any such action might give rise if
determined against Diageo or USL.
In relation to the matters described in the 25 February 2016
announcement, Diageo had also responded to a show cause notice
dated 12 May 2017 from SEBI arising out of the previous
correspondence in this regard and made its further submissions in
the matter, including at a personal hearing before a Whole Time
Member of SEBI. On 6 September 2018, SEBI issued an order holding
that Diageo had acquired sole control of USL following its earlier
open offers, and that no fresh open offer was triggered by
Diageo.
(f) USL inventory review
As announced in USL's results for the quarter ended 31 December
2018, USL recently learned of potential differences in inventory of
certain categories of work in progress and related processes in
certain plants in India. USL are undertaking a review and will take
appropriate steps to understand and address any issues. At this
stage, USL is unable to determine the related financial impact, if
any, arising from such potential differences.
(g) SEC Inquiry
Diageo has received requests for information from the US
Securities and Exchange Commission (SEC) regarding its distribution
in and public disclosures regarding the United States and its
distribution in certain other Diageo markets as well as additional
context about the Diageo group globally. Diageo is currently
responding to the SEC's requests for information in this matter.
Diageo is unable to assess if the inquiry will evolve into further
information requests or an enforcement action or, if this were to
transpire, to quantify meaningfully the possible loss or range of
loss, if any, to which any such action might give rise.
(h) Tax
The international tax environment has seen increased scrutiny
and rapid change over recent years bringing with it greater
uncertainty for multinationals. Against this backdrop, Diageo has
been monitoring developments and continues to engage transparently
with the tax authorities in the countries where Diageo operates to
ensure that the group manages its arrangements on a sustainable
basis.
In October 2017, the European Commission opened a state aid
investigation into the Group Financing Exemption in the UK
controlled foreign company rules. The Group Financing Exemption was
introduced in legislation by the UK government in 2013. In common
with other UK-based international companies whose arrangements are
in line with current UK CFC legislation, Diageo may be affected by
the outcome of this investigation. Diageo is monitoring
developments. If the preliminary findings of the European
Commission's investigation into the UK legislation are upheld,
Diageo calculates its maximum potential liability to be
approximately GBP278 million. Based on its current assessment,
Diageo believes that no provision is required in respect of this
issue.
Diageo has also been in discussions with the French Tax
Authorities over the deductibility of certain interest costs. As
previously reported, the French Tax Authorities have issued
assessments denying tax relief for interest costs incurred in the
periods ended 30 June 2011 to 30 June 2017. Diageo believes that
the interest costs are deductible and accordingly is challenging
the assessments from the French Tax Authorities. Including interest
and penalties, the exposure for the periods ended 30 June 2011 to
31 December 2018 is approximately EUR241 million (GBP214 million).
Based on its current assessment, Diageo believes that no provision
is required in respect of this issue.
The group operates in a large number of markets with complex tax
and legislative regimes that are open to subjective interpretation.
As assessing an accurate value of contingent liabilities in these
markets requires a high level of judgment, contingent liabilities
are disclosed on the basis of the current known possible exposure
from tax assessment values.
Diageo has reviewed its disclosures in relation to Brazil and
India, where Diageo has a large number of ongoing tax cases. While
these cases are not individually significant, the current
assessment of the aggregate possible exposures is up to
approximately GBP260 million for Brazil and up to approximately
GBP130 million for India. The group believes that the likelihood
that the tax authorities will ultimately prevail is lower than
probable but higher than remote. Due to the fiscal environment in
Brazil and in India the possibility of further tax assessments
related to the same matters cannot be ruled out. Based on its
current assessment, Diageo believes that no provision is required
in respect of these issues.
(i) Other
The group has extensive international operations and is a
defendant in a number of legal, customs and tax proceedings
incidental to these operations, the outcome of which cannot at
present be foreseen. In particular, the group is currently a
defendant in various customs proceedings that challenge the
declared customs value of products imported by certain Diageo
companies. Diageo continues to defend its position vigorously in
these proceedings.
Save as disclosed above, neither Diageo, nor any member of the
Diageo group, is or has been engaged in, nor (so far as Diageo is
aware) is there pending or threatened by or against it, any legal
or arbitration proceedings which may have a significant effect on
the financial position of the Diageo group.
14. Related party transactions
The group's significant related parties are its associates,
joint ventures, key management personnel and pension plans. There
have been no transactions with these related parties during the six
months ended 31 December 2018 on terms other than those that
prevail in arm's length transactions.
15. Post balance sheet events
On 30 January 2019 the Board approved an incremental share
buyback programme of GBP660 million, bringing the total programme
up to GBP3.0 billion for the year ending 30 June 2019.
INDEPENT REVIEW REPORT TO DIAGEO PLC
Report on the condensed set of financial statements
Our conclusion
We have reviewed Diageo plc's condensed set of financial
statements (the "interim financial statements") in the interim
results of Diageo plc for the six month period ended 31 December
2018. Based on our review, nothing has come to our attention that
causes us to believe that the interim financial statements are not
prepared, in all material respects, in accordance with
International Accounting Standard 34, 'Interim Financial
Reporting', as adopted by the European Union and the Disclosure
Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the condensed consolidated balance sheet as at 31 December 2018;
-- the condensed consolidated income statement and condensed
consolidated statement of comprehensive income for the period then
ended;
-- the condensed consolidated statement of cash flows for the period then ended;
-- the condensed consolidated statement of changes in equity for the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the interim results
have been prepared in accordance with International Accounting
Standard 34, 'Interim Financial Reporting', as adopted by the
European Union and the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority.
As disclosed in note 1 to the interim financial statements, the
financial reporting framework that has been applied in the
preparation of the full annual financial statements of the Group is
applicable law and International Financial Reporting Standards
(IFRSs) as issued by the International Accounting Standards Board
(IASB) and as adopted by the European Union.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The interim results, including the interim financial statements,
is the responsibility of, and has been approved by, the directors.
The directors are responsible for preparing the interim results in
accordance with the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim
financial statements in the interim results based on our review.
This report, including the conclusion, has been prepared for and
only for the company for the purpose of complying with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We
do not, in giving this conclusion, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the interim
results report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
30 January 2019
a) The maintenance and integrity of the Diageo plc website is
the responsibility of the directors; the work carried out by the
auditors does not involve consideration of these matters and,
accordingly, the auditors accept no responsibility for any changes
that may have occurred to the interim financial statements since
they were initially presented on the website.
b) Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
ADDITIONAL INFORMATION FOR SHAREHOLDERS
EXPLANATORY NOTES
Comparisons are to the six months ended 31 December 2017 (2017)
unless otherwise stated. Unless otherwise stated, percentage
movements given throughout this announcement for volume, sales, net
sales, marketing spend, operating profit and operating margin are
organic movements after retranslating prior period reported numbers
at current period exchange rates and after adjusting for the effect
of operating exceptional items and acquisitions and disposals.
This announcement contains forward-looking statements that
involve risk and uncertainty. There are a number of factors that
could cause actual results and developments to differ materially
from those expressed or implied by these forward-looking
statements, including factors beyond Diageo's control. Please refer
to Risk Factors - 'Cautionary statement concerning forward-looking
statements' for more details.
This announcement includes names of Diageo's products which
constitute trademarks or trade names which Diageo owns or which
others own and license to Diageo for use.
Definitions and reconciliation of non-GAAP measures to GAAP
measures
Diageo's strategic planning process is based on the following
non-GAAP measures. They are chosen for planning and reporting, and
some of them are used for incentive purposes. The group's
management believes these measures provide valuable additional
information for users of the financial statements in understanding
the group's performance. These non-GAAP measures should be viewed
as complementary to, and not replacements for, the comparable GAAP
measures and reported movements therein.
It is not possible to reconcile the forecast tax rate before
exceptional items and forecast organic operating margin improvement
to the most comparable GAAP measures as it is not possible to
predict, with reasonable certainty, the future impact of changes in
exchange rates, acquisitions and disposals and potential
exceptional items.
Volume
Volume is a non-GAAP measure that is measured on an equivalent
units basis to nine-litre cases of spirits. An equivalent unit
represents one nine-litre case of spirits, which is approximately
272 servings. A serving comprises 33ml of spirits, 165ml of wine,
or 330ml of ready to drink or beer. Therefore, to convert volume of
products other than spirits to equivalent units, the following
guide has been used: beer in hectolitres, divide by 0.9; wine in
nine-litre cases, divide by five; ready to drink in nine-litre
cases, divide by 10; and certain pre-mixed products that are
classified as ready to drink in nine-litre cases, divide by
ten.
Organic movements
In the discussion of the performance of the business, 'organic'
information is presented using pounds sterling amounts on a
constant currency basis excluding the impact of exceptional items
and acquisitions and disposals. Organic measures enable users to
focus on the performance of the business which is common to both
periods and which represents those measures that local managers are
most directly able to influence.
Calculation of organic movements
The organic movement percentage is the amount in the row titled
'Organic movement' in the tables below, expressed as a percentage
of the amount in the row titled '2017 adjusted'. Organic operating
margin is calculated by dividing operating profit before
exceptional items by net sales after excluding the impact of
exchange rate movements and acquisitions and disposals.
(a) Exchange rates
'Exchange' in the organic movement calculation reflects the
adjustment to recalculate the prior period results as if they had
been generated at the current period's exchange rates.
Exchange impacts in respect of the external hedging of
intergroup sales of products and the intergroup recharging of third
party services are allocated to the geographical segment to which
they relate. Residual exchange impacts are reported in
Corporate.
(b) Acquisitions and disposals
For acquisitions in the current period, the post acquisition
results are excluded from the organic movement calculations. For
acquisitions in the prior period, post acquisition results are
included in full in the prior period but are included in the
organic movement calculation from the anniversary of the
acquisition date in the current period. The acquisition row also
eliminates the impact of transaction costs that have been charged
to operating profit in the current or prior period in respect of
acquisitions that, in management's judgement, are expected to be
completed.
Where a business, brand, brand distribution right or agency
agreement was disposed of, or terminated, in the period up to the
date of the external results announcement, the group, in the
organic movement calculations, excludes the results for that
business from the current and prior period. In the calculation of
operating profit, the overheads included in disposals are only
those directly attributable to the businesses disposed of, and do
not result from subjective judgements of management.
(c) Exceptional items
Exceptional items are those which, in management's judgement,
need to be disclosed by virtue of their size or nature. Such items
are included within the income statement caption to which they
relate, and are separately disclosed in the notes to the
consolidated financial statements, and are excluded from the
organic movement calculations.
Exceptional operating items are those that are considered to be
material and are part of the operating activities of the group such
as impairments of fixed assets, duty settlements, property
disposals and changes in post employment plans.
Gains and losses on the sale of businesses, brands or
distribution rights, step up gains and losses that arise when an
investment becomes an associate or an associate becomes a
subsidiary and other material, unusual non-recurring items, that
are not in respect of the production, marketing and distribution of
premium drinks, are disclosed as non-operating exceptional items
below operating profit in the consolidated income statement.
It is believed that separate disclosure of exceptional items and
the classification between operating and non-operating further
helps investors to understand the performance of the group.
Organic movement calculations for the six months ended 31
December 2018 were as follows:
Latin
Europe America
North and and Asia
America Turkey Africa Caribbean Pacific Corporate Total
million million million million million million million
Volume (equivalent
units)
2017 reported 25.2 25.2 17.4 12.5 46.1 - 126.4
Reclassification(ii) - 0.2 - - (0.2) - -
Disposals(iii) (1.5) - - - (0.1) - (1.6)
------- ------- ------- ------- ------- --------- -------
2017 adjusted 23.7 25.4 17.4 12.5 45.8 - 124.8
Disposals(iii) 1.3 - - - - - 1.3
Organic movement 0.6 0.3 0.2 (0.1) 3.4 - 4.4
------- ------- ------- ------- ------- --------- -------
2018 reported 25.6 25.7 17.6 12.4 49.2 - 130.5
======= ======= ======= ======= ======= ========= =======
Organic movement
% 3 1 1 (1) 7 - 4
======= ======= ======= ======= ======= ========= =======
Europe Latin
North and America Asia
America Turkey Africa and Pacific Corporate Total
GBP GBP GBP Caribbean GBP GBP GBP
million million million GBP million million million million
Sales
2017 reported 2,467 2,887 1,088 840 2,625 27 9,934
Exchange(i) 52 (193) (1) (47) (125) - (314)
Reclassification(ii) 1 12 - - (13) - -
Disposals(iii) (97) (4) (3) - (9) - (113)
------ ------ ------ ------ --- ------ --------- ------
2017 adjusted 2,423 2,702 1,084 793 2,478 27 9,507
Acquisitions and
disposals(iii) 93 3 2 1 1 - 100
Organic movement 151 174 74 70 286 1 756
------ ------ ------ ------ --- ------ --------- ------
2018 reported 2,667 2,879 1,160 864 2,765 28 10,363
====== ====== ====== ====== === ====== ========= ======
Organic movement
% 6 6 7 9 12 4 8
====== ====== ====== ====== === ====== ========= ======
Europe Latin
North and America Asia
America Turkey Africa and Pacific Total
GBP GBP GBP Caribbean GBP Corporate GBP
million million million GBP million million GBP million million
Net sales
2017 reported 2,183 1,599 774 649 1,298 27 6,530
Exchange(i) 44 (60) (1) (35) (39) - (91)
Reclassification(ii) 1 12 - - (13) - -
Disposals(iii) (75) (2) (2) - (5) - (84)
----- ----- ---- --- ----- ---- ----- ---- ----- -----
2017 adjusted 2,153 1,549 771 614 1,241 27 6,355
Acquisitions and
disposals(iii) 73 1 1 1 1 - 77
Organic movement 130 83 49 57 156 1 476
----- --- ----- --- ---- ---- ----- ---- ----- --- ---- ----- ----- ---
2018 reported 2,356 1,633 821 672 1,398 28 6,908
===== === ===== === ==== ==== ===== ==== ===== === ==== ===== ===== ===
Organic movement
% 6 5 6 9 13 4 7
===== === ===== === ==== ==== ===== ==== ===== === ==== ===== ===== ===
Marketing
2017 reported 338 246 83 109 188 4 968
Exchange(i) 10 (7) 3 (6) (4) - (4)
Reclassification(ii) (1) - - 1 - - -
Disposals(iii) (1) - - - - - (1)
----- ----- --- ---- ---- ----- ---- ----- --- ---- ----- -----
2017 adjusted 346 239 86 104 184 4 963
Acquisitions(iii) 1 - - - - - 1
Organic movement 36 21 5 6 24 (2) 90
----- --- ----- --- ---- ---- ----- ---- ----- --- ---- ---- ----- ---
2018 reported 383 260 91 110 208 2 1,054
===== === ===== === ==== ==== ===== ==== ===== === ==== ===== ===== ===
Organic movement
% 10 9 6 6 13 (50) 9
===== === ===== === ==== ==== ===== ==== ===== === ==== ==== ===== ===
Operating profit
2017 reported 1,027 599 120 218 316 (90) 2,190
Exchange(i) 39 (25) (2) (7) (3) (2) -
Reclassification(ii) 1 9 - (1) (9) - -
Acquisitions and
disposals(iii) (46) (1) (1) - (1) - (49)
----- ----- ---- --- ----- ---- ----- ---- ----- -----
2017 adjusted 1,021 582 117 210 303 (92) 2,141
Acquisitions and
disposals(iii) 44 1 1 - - - 46
Organic movement 36 31 35 44 106 12 264
----- --- ----- --- ---- ---- ----- ---- ----- --- ---- ----- ----- ---
2018 reported 1,101 614 153 254 409 (80) 2,451
===== === ===== === ==== ==== ===== ==== ===== === ==== ==== ===== ===
Organic movement
% 4 5 30 21 35 13 12
===== === ===== === ==== ==== ===== ==== ===== === ==== ===== ===== ===
Organic operating
margin %
2018 46.3% 37.6% 18.5% 37.9% 29.3% n/a 35.2%
2017 47.4% 37.6% 15.2% 34.2% 24.4% n/a 33.7%
Margin
improvement/(decline)
(bps) (112) (1) 336 365 486 n/a 152
(1) For the reconciliation of sales to net sales see Additional
Financial Information, Summary Income Statement.
(2) Percentages and margin improvement are calculated on rounded figures.
Notes: Information in respect of the organic movement
calculations
(i) The impact of movements in exchange rates on reported
figures is principally in respect of strengthening of sterling
against the Turkish lira, the Brazilian real, the Indian rupee, the
Australian dollar and the Russian rouble partially offset by
weakening of sterling against the US dollar.
(ii) In the year ended 30 June 2018 part of the results of the
Travel Retail operations were reclassified to the geographical
regions to better reflect the region in which the sale to the
customer is made. The information for the six months ended 31
December 2017 has not been restated as the amounts involved are not
material.
(iii) In the six months ended 31 December 2018 the acquisitions
and disposals that affected volume, sales, net sales, marketing and
operating profit were as follows:
Operating
Volume Sales Net sales Marketing profit
equ. units GBP million GBP million GBP million GBP million
million
Six months ended 31 December
2017
Acquisitions
Transaction costs - - - - 4
-------- --------- --------- -------- --- ---------
- - - - 4
-------- --------- --------- -------- --- ---------
Disposals
Portfolio of 19 brands (1.5) (106) (81) (1) (52)
Nepal (0.1) (7) (3) - (1)
-------- --------- --------- -------- --- ---------
(1.6) (113) (84) (1) (53)
-------- --------- --------- -------- ---------
Acquisitions and disposals (1.6) (113) (84) (1) (49)
======== ========= ========= ======== =========
Six months ended 31 December
2018
Acquisitions
Casamigos - 11 10 1 3
-------- --------- --------- -------- --- ---------
- 11 10 1 3
-------- --------- --------- -------- --- ---------
Disposals
Portfolio of 19 brands 1.3 89 67 - 43
-------- --------- --------- -------- --- ---------
1.3 89 67 - 43
-------- --------- --------- -------- --- ---------
Acquisitions and disposals 1.3 100 77 1 46
======== ========= ========= ======== === =========
Earnings per share before exceptional items
Earnings per share before exceptional items is calculated by
dividing profit attributable to equity shareholders of the parent
company before exceptional items by the weighted average number of
shares in issue.
Earnings per share before exceptional items for the six months
ended 31 December 2018 and 31 December 2017 are set out in the
table below.
2018 2017
GBP million GBP million
Profit attributable to equity shareholders of
the parent company 1,976 2,058
Exceptional operating and non-operating items
attributable to equity shareholders of the parent
company (125) -
Exceptional taxation credit - (360)
Tax in respect of exceptional operating and non-operating
items attributable to equity shareholders of
the parent company 30 -
1,881 1,698
========== ==========
Weighted average number of shares million million
Shares in issue excluding own shares 2,442 2,505
Dilutive potential ordinary shares 10 12
2,452 2,517
========== ==========
pence pence
Basic earnings per share before exceptional items 77.0 67.8
=========== =============
Diluted earnings per share before exceptional
items 76.7 67.5
=========== =============
Free cash flow
Free cash flow comprises the net cash flow from operating
activities aggregated with the net cash received/paid for working
capital loans receivable, cash paid or received for investments and
the net cash cost paid for property, plant and equipment and
computer software that are included in net cash flow from investing
activities.
The remaining components of net cash flow from investing
activities that do not form part of free cash flow, as defined by
the group's management, are in respect of the acquisition and sale
of businesses and non-working capital loans to and from
associates.
The group's management regards the purchase and disposal of
property, plant and equipment and computer software as ultimately
non-discretionary since ongoing investment in plant, machinery and
technology is required to support the day-to-day operations,
whereas acquisitions and sales of businesses are discretionary.
Where appropriate, separate explanations are given for the
impacts of acquisitions and sale of businesses, dividends paid and
the purchase of own shares, each of which arises from decisions
that are independent from the running of the ongoing underlying
business.
Free cash flow reconciliations for the six months ended 31
December 2018 and 31 December 2017 are set out in the table
below:
2018 2017
GBP million GBP million
Net cash from operating activities 1,604 1,248
Disposal of property, plant and equipment and
computer software 13 9
Purchase of property, plant and equipment and
computer software (271) (210)
Movements in loans and other investments - (18)
Free cash flow 1,346 1,029
========== ==========
Return on average total invested capital
Return on average total invested capital is used by management
to assess the return obtained from the group's asset base and is
calculated to aid evaluation of the performance of the
business.
The profit used in assessing the return on average total
invested capital reflects operating profit before exceptional items
attributable to the equity shareholders of the parent company plus
share of after tax results of associates and joint ventures after
applying the tax rate before exceptional items for the period.
Average total invested capital is calculated using the average
derived from the consolidated balance sheets at the beginning and
end of the period. Average capital employed comprises average net
assets attributable to equity shareholders of the parent company
for the period, excluding post employment benefit net
assets/liabilities (net of deferred tax) and average net
borrowings. This average capital employed is then aggregated with
the average restructuring and integration costs net of tax, and
goodwill written off to reserves at 1 July 2004, the date of
transition to IFRS, to obtain the average total invested
capital.
Calculations for the return on average total invested capital
for the six months ended 31 December 2018 and 31 December 2017 are
set out in the table below.
2018 2017
GBP million GBP million
Operating profit 2,430 2,190
Exceptional operating items 21 -
Profit before exceptional operating items attributable
to non-controlling interests (91) (69)
Share of after tax results of associates and
joint ventures 179 168
Tax at the tax rate before exceptional items
of 21.2% (2017 - 19.8%) (538) (453)
-------------- --------------
2,001 1,836
============== ==============
Average net assets (excluding net post employment
assets/liabilities) 11,279 12,263
Average non-controlling interests (1,766) (1,741)
Average net borrowings 9,722 8,545
Average integration and restructuring costs (net
of tax) 1,639 1,639
Goodwill at 1 July 2004 1,562 1,562
-------------- --------------
Average total invested capital 22,436 22,268
============== ==============
Return on average total invested capital 17.8% 16.5%
================== ==================
Net borrowings to earnings before exceptional operating items,
interest, tax, depreciation, amortisation and impairment
(EBITDA)
Diageo manages its capital structure to achieve capital
efficiency, provide flexibility to invest through the economic
cycle and give efficient access to debt markets at attractive cost
levels. The group regularly assesses its debt and equity capital
levels to enhance its capital structure by reviewing the ratio of
adjusted net borrowings to EBITDA.
Calculations for the ratio of net borrowings to EBITDA for the
six months ended 31 December 2018 and 31 December 2017 are set out
in the table below.
2018 2017
GBP million GBP million
Borrowings due within one year 1,742 2,378
Borrowings due after one year 10,272 7,647
Fair value of foreign currency derivatives and
interest rate hedging instruments (215) (72)
Finance lease liabilities 144 165
Less: Cash and cash equivalents (1,591) (920)
---------- ----------
Net borrowings 10,352 9,198
Post employment benefit liabilities before tax 739 818
---------- ----------
Adjusted net borrowings 11,091 10,016
========== ==========
Operating profit 3,931 3,684
Exceptional operating items 149 42
Depreciation, amortisation and impairment (excluding
exceptional items) 366 370
Share of after tax results of associates and joint
ventures 320 306
---------- ----------
EBITDA 4,766 4,402
========== ==========
Adjusted net borrowings to EBITDA (x) 2.3 2.3(i)
========== =============
(1) EBITDA is calculated based on last 12 months.
(i) The post employment benefit asset is excluded from the net
borrowings to EBITDA calculation. To be comparable for the half
year ended 31 December 2017 the ratio has been restated to 2.3 from
the previously reported 2.2.
Tax rate before exceptional items
Tax rate before exceptional items is calculated by dividing the
total tax charge on continuing operations before tax charges and
credits in respect of exceptional items, by profit before taxation
adjusted to exclude the impact of exceptional operating and
non-operating items, expressed as a percentage. The measure is used
by management to assess the rate of tax applied to the group's
continuing operations before tax on exceptional items.
The tax rates from operations before exceptional and after
exceptional items for the six months ended 31 December 2018 and six
months ended 31 December 2017 are set out in the table below:
2018 2017
GBP million GBP million
Tax before exceptional items (a) 530 437
Tax in respect of exceptional items 30 -
Exceptional tax credit - (360)
---
Taxation on profit (b) 560 77
=== ===
Profit from operations before taxation and exceptional
items (c) 2,502 2,204
Non-operating items 146 -
Exceptional operating items (21) -
---
Profit before taxation (d) 2,627 2,204
=== ===
Tax rate before exceptional items (a/c) 21.2% 19.8%
Tax rate from operations after exceptional items
(b/d) 21.3% 3.5%
Other definitions
Volume share is a brand's retail volume expressed as a
percentage of the retail volume of all brands in its segment. Value
share is a brand's retail sales value expressed as a percentage of
the retail sales value of all brands in its segment. Unless
otherwise stated, share refers to value share.
Price/mix is the number of percentage points by which the
organic movement in net sales differs to the organic movement in
volume. The difference arises because of changes in the composition
of sales between higher and lower priced variants/markets or as
price changes are implemented.
Shipments comprise the volume of products made to Diageo's
immediate (first tier) customers. Depletions are the estimated
volume of the onward sales made by our immediate customers. Both
shipments and depletions are measured on an equivalent units
basis.
References to emerging markets include Russia, Eastern Europe,
Turkey, Africa, Latin America and Caribbean, and Asia Pacific
(excluding Australia, Korea and Japan).
References to reserve brands include, but not limited to,
Johnnie Walker Blue Label, Johnnie Walker Green Label, Johnnie
Walker Gold Label Reserve, Johnnie Walker Platinum Label 18 year
old, John Walker & Sons Collection, Johnnie Walker The Gold
Route, Johnnie Walker The Royal Route and other Johnnie Walker
super premium brands; Roe & Co; The Singleton, Cardhu,
Talisker, Lagavulin and other malt brands; Buchanan's Special
Reserve, Buchanan's Red Seal; Bulleit Bourbon, Bulleit Rye;
Tanqueray No. TEN, Tanqueray Malacca Gin; Cîroc, Ketel One vodka;
Don Julio, Casamigos, Zacapa, Bundaberg SDlx, Shui Jing Fang, Jinzu
gin, Haig Club whisky, Orphan Barrel whiskey and DeLeón
Tequila.
References to global giants include the following brand
families: Johnnie Walker, Smirnoff, Captain Morgan, Baileys,
Tanqueray and Guinness. Local stars spirits include Buchanan's,
Bundaberg, Crown Royal, J B, McDowell's, Old Parr, Yenì Raki, Black
& White, Shui Jing Fang, Windsor and Ypióca. Global giants and
local stars exclude ready to drink and beer except Guinness.
References to Shui Jing Fang represent total Chinese white spirits
of which Shui Jing Fang is the predominant brand.
References to ready to drink also include ready to serve
products, such as pre-mix cans in some markets, and progressive
adult beverages in the United States and certain markets supplied
by the United States.
References to beer include cider and some non-alcoholic products
such as Malta Guinness.
The results of Hop House 13 Lager are included in the Guinness
figures.
References to the disposal of a portfolio of 19 brands comprise
the following brands that were primarily sold in the United States:
Seagram's VO, Seagram's 83, Seagram's Five Star, Popov, Myers's,
Parrot Bay, Yukon Jack, Romana Sambuca, Scoresby, Goldschlager,
Relska, Stirrings, The Club, Booth's, Black Haus, Peligroso, Grind,
Piehole and John Begg.
References to the group include Diageo plc and its consolidated
subsidiaries.
RISK FACTORS
Diageo's products are sold in over 180 countries worldwide,
which subjects Diageo to risks and uncertainties in multiple
jurisdictions across developed and developing markets. The group's
aim is to manage risk and control its business and financial
activities cost-effectively and in a manner that enables it to:
exploit profitable business opportunities in a disciplined way;
avoid or reduce risks that can cause loss, reputational damage or
business failure; manage and mitigate historic risks and exposures
of the group; support operational effectiveness; and enhance
resilience to external events. To achieve this, an ongoing process
has been established for identifying, evaluating and managing risks
faced by the group. A detailed description of the key risks and
uncertainties facing the group are described in the 'Strategic
report' section of the Annual report for the year ended 30 June
2018 and under 'Risk Factors' in the Annual report on Form 20-F for
the year ended 30 June 2018. The directors of Diageo plc consider
that the principal risks and uncertainties facing the group remain
essentially unchanged since the publication of the annual report
for the year ended 30 June 2018 and the filing of the annual report
on Form 20-F for the year ended 30 June 2018.
These key risks and uncertainties include: unfavourable
economic, political, social or other developments and risks in the
countries in which Diageo operates, including in relation to the
potential impact of any global, regional or local trade wars and
the negotiating process surrounding, as well as the eventual terms
of, the exit of the United Kingdom from the European Union; changes
in consumer preferences and tastes and adverse impacts of a
downturn in economic conditions, among other factors, which could
adversely affect demand; litigation or similar proceedings
specifically directed at the beverage alcohol industry, as well as
other litigation or proceedings more generally; changes in the
international tax environment resulting in unexpected tax
exposures; the impact of climate change, or legal, regulatory or
market measures intended to address climate change, including on
the cost and supply of water; changes in the cost of production;
other legal and regulatory developments impacting the production,
distribution and marketing of Diageo's products and its business
more generally; the consequences of any failure to comply with
anti-corruption, sanctions or similar laws and regulations; any
failure of internal controls, including those affecting compliance
with accounting and/or disclosure requirements; the impact of any
contamination, counterfeiting or other events on support for and
sales of Diageo's brands; any failure by Diageo to maintain its
brand image and corporate reputation; competitive pressures, which
could reduce Diageo's market share and margins; any disruption to
production facilities, business service centres or information
systems (including as a result of cyber-attacks); failures to
derive the expected benefits from Diageo's business strategies,
acquisitions and/or any cost-saving and restructuring programmes;
increased costs for, or shortages of, talent; fluctuations in
exchange and/or interest rates; movements in the value of Diageo's
pension funds; any failure to maintain or renegotiate distribution,
supply, manufacturing and licence agreements on favourable terms;
any inability by Diageo to protect its intellectual property
rights; and difficulty in effecting service of US process and
enforcing US legal process against Diageo and its directors.
Cautionary statement concerning forward-looking statements
This document contains 'forward-looking' statements. These
statements can be identified by the fact that they do not relate
only to historical or current facts. In particular, forward-looking
statements include all statements that express forecasts,
expectations, plans, outlook, objectives and projections with
respect to future matters, including trends in results of
operations, margins, growth rates, overall market trends, the
impact of changes in interest or exchange rates, the availability
or cost of financing to Diageo, anticipated cost savings or
synergies, expected investments, the completion of any strategic
transactions or restructuring programmes, anticipated tax rates,
changes in the international tax environment, expected cash
payments, outcomes of litigation, anticipated changes in the value
of assets and liabilities related to pension schemes and general
economic conditions. By their nature, forward-looking statements
involve risk and uncertainty because they relate to events and
depend on circumstances that will occur in the future. There are a
number of factors that could cause actual results and developments
to differ materially from those expressed or implied by these
forward-looking statements, including factors that are outside
Diageo's control.
These factors include, but are not limited to:
-- economic, political, social or other developments in countries and
markets in which Diageo operates, which may contribute to a reduction
in demand for Diageo's products, adverse impacts on Diageo's customer,
supplier and/or financial counterparties, or the imposition of import,
investment or currency restrictions (including the potential impact
of any global, regional or local trade wars or any tariffs, duties
or other restrictions or barriers imposed on the import or export
of goods between territories, including but not limited to, imports
into and exports from the United States, Canada, Mexico, the United
Kingdom and/or the European Union);
-- the negotiating process surrounding, as well as the final terms of,
the United Kingdom's exit from the European Union, which could lead
to a sustained period of economic and political uncertainty and complexity
whilst detailed withdrawal terms and any successor trading arrangements
with other countries are negotiated, finalised and implemented, potentially
adversely impacting economic conditions in the United Kingdom and
Europe more generally as well as Diageo's business operations and
financial performance (see more detailed status on Brexit below);
-- changes in consumer preferences and tastes, including as a result
of changes in demographics, evolving social trends (including any
shifts in consumer tastes towards locally produced small-batch products),
changes in travel, vacation or leisure activity patterns, weather
conditions, and/or a downturn in economic conditions;
-- any litigation or other similar proceedings (including with customs,
competition, environmental, anti-corruption or other regulatory authorities),
including litigation directed at the beverage alcohol industry generally
or at Diageo in particular;
-- changes in the domestic and international tax environment, including
as a result of the OECD Base Erosion and Profit Shifting Initiative
and EU anti-tax abuse measures, leading to uncertainty around the
application of existing and new tax laws and unexpected tax exposures;
-- the effects of climate change, or legal, regulatory or market measures
intended to address climate change, on Diageo's business or operations,
including on the cost and supply of water;
-- changes in the cost of production, including as a result of increases
in the cost of commodities, labour and/or energy or as a result of
inflation;
-- legal and regulatory developments, including changes in regulations
relating to production, distribution, importation, marketing, advertising,
sales, pricing, labelling, packaging, product liability, antitrust,
labour, compliance and control systems, environmental issues and/or
data privacy;
-- the consequences of any failure by Diageo or its associates to comply
with anti-corruption, sanctions, trade restrictions or similar laws
and regulations, or any failure of Diageo's related internal policies
and procedures to comply with applicable law or regulation;
-- the consequences of any failure of internal controls, including those
affecting compliance with existing or new accounting and/or disclosure
requirements;
-- contamination, counterfeiting or other circumstances which could
harm the level of customer support for Diageo's brands and adversely
impact its sales;
-- Diageo's ability to maintain its brand image and corporate reputation
or to adapt to a changing media environment;
-- increased competitive product and pricing pressures, including as
a result of actions by increasingly consolidated competitors or increased
competition from regional and local companies, that could negatively
impact Diageo's market share, distribution network, costs and/or
pricing;
-- any disruption to production facilities, business service centres
or information systems, including as a result of cyber-attacks;
-- Diageo's ability to derive the expected benefits from its business
strategies, including in relation to expansion in emerging markets,
acquisitions and/or disposals, cost savings and productivity initiatives
or inventory forecasting;
-- increased costs for, or shortages of, talent, as well as labour strikes
or disputes;
-- fluctuations in exchange rates and/or interest rates, which may impact
the value of transactions and assets denominated in other currencies,
increase Diageo's cost of financing or otherwise adversely affect
Diageo's financial results;
-- movements in the value of the assets and liabilities related to Diageo's
pension plans;
-- Diageo's ability to renew supply, distribution, manufacturing or
licence agreements (or related rights) and licences on favourable
terms, or at all, when they expire; or
-- any failure by Diageo to protect its intellectual property rights.
Brexit
There continues to be uncertainty with respect to the process
surrounding the United Kingdom's proposed exit from the European
Union and the eventual outcome of the ongoing Brexit negotiations.
We continue to believe that, in the event of either a negotiated
exit or no-deal scenario, the direct financial impact to Diageo
will not be material. In the EU, we expect that our finished case
goods will continue to trade tariff free in either scenario. While
there continues to be uncertainty over future trading arrangements
between the UK and the rest of the world, we have mitigation plans
in place for the short-term disruption that could arise from a 'no
deal' scenario; in which the UK leaves the EU on the current
deadline for exit, under the Article 50 notification of 29 March
2019, without the parties reaching a formal withdrawal agreement
approved by the UK Parliament, and including the inability of the
UK Government to renew existing EU Free Trade Agreements with third
party countries to which we export and where trading could revert
to WTO rules.
We have further considered the principal impact to our supply
chain which we have assessed as limited and have appropriate stock
levels in place to mitigate this risk. The full implications of
Brexit will not be understood until future tariffs, trade,
regulatory, tax, and other free trade agreements to be entered into
by the United Kingdom are established. Furthermore, we could
experience changes to laws and regulations post Brexit, in areas
such as intellectual property rights, employment, environment,
supply chain logistics, data protection, and health and safety.
A cross-functional working group is in place that meets on a
regular basis to identify and assess the consequences of Brexit,
with all major functions within our business represented. We
continue to monitor this risk area very closely, including a
continuing focus on identifying critical decision points to ensure
potential disruption is minimised, and take prudent actions to
mitigate risk wherever practical.
All oral and written forward-looking statements made on or after
the date of this document and attributable to Diageo are expressly
qualified in their entirety by the above cautionary factors, by the
'Risk Factors' section immediately preceding those and by the 'Risk
Factors' included in Diageo's Annual Report on Form 20-F for the
year ended 30 June 2018 filed with the US Securities and Exchange
Commission (SEC). Any forward-looking statements made by or on
behalf of Diageo speak only as of the date they are made. Diageo
does not undertake to update forward-looking statements to reflect
any changes in Diageo's expectations with regard thereto or any
changes in events, conditions or circumstances on which any such
statement is based. The reader should, however, consult any
additional disclosures that Diageo may make in any documents which
it publishes and/or files with the SEC. All readers, wherever
located, should take note of these disclosures.
This document includes names of Diageo's products, which
constitute trademarks or trade names which Diageo owns, or which
others own and license to Diageo for use. All rights reserved. (c)
Diageo plc 2019.
The information in this document does not constitute an offer to
sell or an invitation to buy shares in Diageo plc or an invitation
or inducement to engage in any other investment activities.
This document may include information about Diageo's target debt
rating. A security rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal at any
time by the assigning rating organisation. Each rating should be
evaluated independently of any other rating.
Past performance cannot be relied upon as a guide to future
performance.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
Each of the directors of Diageo plc confirms, to the best of his
or her knowledge, that:
-- the condensed set of financial statements has been prepared
in accordance with IAS 34 Interim Financial Reporting as issued by
the IASB and endorsed and adopted by the EU and give a true and
fair view of the assets, liabilities, financial position and profit
and loss of the group;
-- the interim management report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority,
being an indication of important events that have occurred during
the first six months of the financial year and their impact on the
condensed set of financial statements; and a description of the
principal risks and uncertainties for the remaining six months of
the year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority,
being related party transactions that have taken place in the first
six months of the current financial year and that have materially
affected the financial position or performance of the group during
that period; and any changes in the related party transactions
described in the last annual report that could do so.
The directors of Diageo plc are as follows: Javier Ferrán
(Chairman), Ivan Menezes (Chief Executive), Kathryn Mikells (Chief
Financial Officer), Lord Davies of Abersoch (Senior Non-Executive
Director), Alan Stewart (Non-Executive Director and Chairman of the
Audit Committee), Susan Kilsby (Non-Executive Director and Chairman
of the Remuneration Committee) and Non-Executive Directors: Ho
KwonPing and Nicola Mendelsohn.
Webcast, presentation slides and transcript
At 07:15 (UK time) on Thursday 31 January 2019, Ivan Menezes,
Chief Executive and Kathryn Mikells, Chief Financial Officer will
present Diageo's interim results as a webcast. This will be
available to view at www.diageo.com.
The presentation slides and script will also be available to
download from www.diageo.com at 07:15 (UK time).
A transcript of the Q&A session will be available for
download on 1 February 2019 at www.diageo.com.
Live Q&A conference call and replay
Ivan Menezes, Chief Executive and Kathryn Mikells, Chief
Financial Officer will be hosting a Q&A conference call on
Thursday 31 January 2019 at 09:30 (UK time). If you would like to
listen to the call or ask a question, please use the dial in
details below.
From the UK (local): +44 (0)330 336 9105
From the UK (free call): 0800
358 6377
From the USA (local): +1 323
794 2093
From the USA (free call):
866 548 4713
The conference call is for analysts and investors only. To join
the call please use the password already sent to you or email
suzanne.austin@diageo.com.
To hear a replay of the call, please use the telephone numbers
below:
From the UK (free call): 0808
101 1153
From the USA (free call):
888 203 1112
Investor enquiries to: Andy Ryan +44 (0) 20 8978 6504
Pier Falcione +44 (0) 20 8978 4838
Vinod Rao +44 (0) 20 8978 2402
Sharon Rolston +44 (0) 20 8978 1219
investor.relations@diageo.com
Media enquiries to: Jessica Rouleau +44 (0) 7925 642 561
Clemmie Raynsford +44 (0) 7590 810 800
Dominic Redfearn +44 (0) 7971 977 759
press@diageo.com
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR BIGDBIGXBGCG
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