TIDMDGE
RNS Number : 3572B
Diageo PLC
30 January 2020
Interim results, six months ended 31 December 2019
30 January 2020
Delivering consistent performance and broad based growth
-- Reported net sales (GBP7.2 billion) increased 4.2% driven by
organic growth. Reported operating profit (GBP2.4 billion)
increased 0.5%, driven by organic growth offset by unfavourable
exchange, exceptional operating items and acquisitions and
disposals
-- All regions contributed to broad based organic net sales
growth, up 4.2%, with organic volume up 0.2%
-- Organic operating profit grew 4.6%, ahead of organic net
sales, driven by productivity benefits from everyday cost
efficiencies and strong price/mix, partially offset by cost
inflation and upweighted marketing investment
-- We continue to deliver consistently solid cash flow with net
cash from operating activities at GBP1.3 billion, GBP0.3 billion
lower than prior period and free cash flow at GBP1.0 billion,
GBP0.4 billion lower than prior period largely due to one-off tax
impacts and timing of tax payments
-- Basic eps of 79.2 pence decreased by 2.1% due to prior year
exceptional gains. Pre-exceptional eps grew 4.2% to 80.2 pence,
driven by higher operating profit and the capital return
programme
-- Interim dividend increased 5% to 27.41 pence per share
See Explanatory Notes for explanation and reconciliation of
non-GAAP measures.
Ivan Menezes, Chief Executive, commenting on the results said:
"Diageo has delivered another good, consistent set of results in
the first half, with broad based organic net sales growth across
regions and categories. We have continued to increase investment
behind marketing and growth initiatives, while expanding organic
operating margins.
During the half, we returned GBP1.1bn to shareholders via share
buybacks, as part of our plan to return up to GBP4.5 billion of
capital to shareholders for the period Fiscal 20 to Fiscal 22. We
have also delivered another half of solid free cash flow at almost
GBP1 billion.
These results reflect the changes we are making in the business
to drive shifts in our culture. They are in line with our current
mid-term guidance and have been delivered in the face of increased
levels of volatility in India, Latin America and Caribbean and
Travel Retail.
For the full year, we therefore expect organic net sales growth
to be towards the lower end of our 4 to 6% mid-term guidance range.
We continue to expect organic operating profit to grow roughly one
percentage point ahead of organic net sales.
There is ongoing uncertainty in the global trade environment and
we would not be immune from further policy changes. We remain
focused on building the long-term health of our brands, supported
by data-led insights and a culture of everyday efficiency. With the
consumer at the heart of the business and with greater agility and
discipline in the execution of our strategy, we are growing Diageo
in a consistent, sustainable way."
Key financial information
Six months ended 31 December 2019
Summary financial information
Organic Reported
growth growth
F20 H1 F19 H1 % %
----------------------------------------- ----------- ------ ------ ------- ----------
Volume EUm 130.5 130.5 0 0
----------------------------------------- ----------- ----- -------
Net sales GBP million 7,200 6,908 4 4
----------------------------------------- ----------- ----- -------
Marketing GBP million 1,116 1,054 6 6
----------------------------------------- ----------- ----- -------
Operating profit before exceptional
items GBP million 2,501 2,451 5 2
----------------------------------------- ----------- ----- -------
Exceptional operating charges(i) GBP million (59) (21)
----------------------------------------- ----------- ----- -------
Operating profit GBP million 2,442 2,430 0
----------------------------------------- ----------- ----- -------
Share of associate and joint venture
profit after tax GBP million 176 179 (2)
----------------------------------------- ----------- ----- -------
Non-operating exceptional gain(i) GBP million - 146
----------------------------------------- ----------- ----- -------
Net finance charges GBP million (154) (128)
----------------------------------------- ----------- ----- -------
Exceptional taxation (charge)/credit(i) GBP million 14 (30)
----------------------------------------- ----------- ----- -------
Tax rate including exceptional items % 21.5 21.3 1
----------------------------------------- ----------- ----- -------
Tax rate before exceptional items % 21.6 21.2 2
----------------------------------------- ----------- ----- -------
Profit attributable to parent company's
shareholders GBP million 1,865 1,976 (6)
----------------------------------------- ----------- ----- -------
Basic earnings per share pence 79.2 80.9 (2)
----------------------------------------- ----------- ----- -------
Earnings per share before exceptional
items pence 80.2 77.0 4
----------------------------------------- ----------- ----- -------
Interim dividend pence 27.41 26.1 5
----------------------------------------- ----------- ----- ----- ------- ------
(i) For further details of exceptional items see Summary Income
Statement (c) Exceptional items and Notes, Exceptional items.
Outlook for exchange
Using exchange rates GBP1 = $1.31; GBP1 = EUR1.19, the exchange
rate movement for the year ending 30 June 2020 is estimated to
unfavourably impact net sales by approximately GBP110 million and
operating profit by approximately GBP40 million.
Outlook for tax
The tax rate before exceptional items for the six months ended
31 December 2019 was 21.6% compared with 21.2% in the prior
comparable period. We continue to expect a tax rate before
exceptional items for the year ending 30 June 2020 to be in the
range of 21% to 22%. For further details on taxation see Summary
Income Statement (e) Taxation and Notes, Taxation.
Return of capital
On 25 July 2019, the Board approved plans for a further return
of capital programme of up to GBP4.5 billion to shareholders over
the three-year period 1 July 2019 to 30 June 2022, utilising the
most appropriate mechanic of either share buybacks or special
dividends depending on market conditions.
On 1 August 2019, Diageo entered into a non-discretionary
agreement with a third party to execute the first phase of this
return of capital programme to enable the company to buy back
shares up to a maximum of GBP1.25 billion by 31 January 2020.
In the six months to 31 December 2019, GBP1.1 billion has been
spent to repurchase 34.6 million shares and these shares have been
cancelled.
Acquisitions and disposals
The impact of acquisitions and disposals on the reported figures
was largely attributable to the disposal of the portfolio of 19
brands to Sazerac in the prior year.
For further details on the impact of acquisitions and disposals
see Explanatory Notes, Acquisitions and disposals.
(i)
Net sales (GBP million)
Reported net sales grew
4.2
%
Organic net sales grew 4.2%
(i
Net sales GBP million
---------------------------- -------------
F19 H1 6,908
----------
Exchange(i) 52
Acquisitions and disposals (46)
Volume 11
Price/mix 275
F20 H1 7,200
---------------------------- ----------
(i) Exchange rate movements reflect the adjustment to
recalculate the reported results as if they had been generated at
the prior period weighted average exchange rates.
Reported net sales grew 4.2%, driven by organic growth and
favourable exchange which was partially offset by acquisitions and
disposals.
Organic volume growth of 0.2% and 4.0% positive price/mix
delivered 4.2% organic net sales growth. All regions reported
organic net sales growth.
Operating profit (GBP million)
Reported operating profit grew 0.5%
Organic operating profit grew 4.6%
Operating profit GBP million
----------------------------- -------------
F19 H1 2,430
----------------------------- ----------
Exceptional operating items (38)
Exchange (15)
----------------------------- ----------
Acquisitions and disposals (45)
Organic movement 110
----------------------------- ----------
F20 H1 2,442
----------------------------- ----------
Reported operating profit was up 0.5% driven by organic growth,
partially offset by unfavourable exchange, the impact of
acquisitions and disposals and exceptional items.
Organic operating profit grew ahead of net sales at 4.6%.
Operating margin (%)
Reported operating margin declined 126bps
Organic operating margin increased 13bps
Operating margin ppt
----------------------------- --------
F19 H1 35.2
Exceptional operating items (0.52)
-----------------------------
Exchange (0.46)
-----
Acquisitions and disposals (0.41)
Gross margin (0.65)
Marketing (0.25)
Other operating items 1.03
F20 H1 33.9
----------------------------- -----
Reported operating margin declined 126bps driven by exceptional
items, unfavourable exchange and the impact from acquisitions and
disposals, partially offset by organic operating margin
improvement.
Organic operating margin improved 13bps driven by productivity
benefits from cost efficiencies and strong price/mix, partially
offset by cost inflation and higher marketing investment.
Basic earnings per share (pence)
Basic eps decreased 2.1% from 80.9 pence to 79.2 pence
Eps before exceptional items increased 4.2% from 77 pence to
80.2 pence
(
Basic earnings per share pence
--------------------------------- -------
F19 H1 80.9
--------------------------------- ----
Exceptional items after tax (4.9)
--------------------------------- ----
Exchange on operating profit (0.6)
--------------------------------- ----
Acquisitions and disposals(i) (1.4)
--------------------------------- ----
Organic operating profit growth 4.5
--------------------------------- ----
Associates and joint ventures (0.1)
----
Finance charges(ii) 0.3
--------------------------------- ----
Tax(iii) (1.3)
----
Share buyback(i) 1.7
----
Non-controlling interests 0.1
--------------------------------- ----
F20 H1 79.2
--------------------------------- ----
(i) Includes finance charges net of tax.
(ii) Excludes finance charges related to acquisitions, disposals
and share buyback.
(iii) Excludes tax related to acquisitions, disposals and share
buybacks.
Eps before exceptional items increased 3.2 pence as organic
operating profit growth and the share buyback programme more than
offset the higher tax charge and impact from acquisitions and
disposals.
Basic eps decreased 1.7 pence principally due to a prior year
exceptional gain.
Free cash flow (GBP million)
Net cash from operating activities(i)(ii) was GBP1,288
million
Free cash flow(ii) was 966 million
Free cash flow GBP million
---------------------- -------------
F19 H1 1,346
---------------------- ----------
Exchange(iii) (15)
---------------------- ----------
Operating profit(iv) 69
----------------------
Working capital(v) (22)
----------
Capex (64)
---------------------- ----------
Tax (318)
---------------------- ----------
Interest (48)
---------------------- ----------
Other(vi) 18
---------------------- ----------
F20 H1 966
---------------------- ----------
(i) Net cash from operating activities excludes net capex and
movements in loans and other investments (F20 H1- GBP(322) million;
F19 H1
GBP(258) million).
(ii) Net cash from operating activities and free cash flow for
the six months ended 31 December 2019 has benefited by GBP32
million as a result of the adoption of IFRS 16 on 1 July 2019.
(iii) Exchange on operating profit before exceptional items.
(iv) Operating profit excludes exchange, depreciation and
amortisation, post employment charges and other non-cash items.
(v) Working capital movement includes maturing inventory.
(vi) Other items include post employment payments, dividends
received from associates and joint ventures, and movements in loans
and other investments.
Net cash from operating activities was GBP1,288 million, a
decrease of GBP316 million compared to the prior period. Free cash
flow was GBP966, GBP380 million lower compared to prior period as
growth in operating profit was offset by higher tax payments,
increased capital expenditure and higher interest charges. Higher
tax payments were driven by changes in the timing of instalments
and one-off items, including the settlement made with French tax
authorities.
Return on average invested capital (%)(i)
ROIC decreased 33bps
Return on average invested capital ppt
------------------------------------ --------
F19 H1 17.8
Exchange 0.09
Acquisitions and disposals (0.34)
-----
Organic operating profit growth 0.97
Associates and joint ventures (0.14)
------------------------------------ -----
Tax (0.29)
------------------------------------ -----
Other (0.62)
F20 H1 17.5
------------------------------------ -----
(i) ROIC calculation excludes exceptional items and includes an
adverse impact of 20bps as a result of the adoption of IFRS 16 on 1
July 2019.
ROIC decreased 33bps against the prior comparable period as
organic operating profit growth was offset by increased tax, the
impact of acquisitions and disposals and other movements, primarily
net capex investment.
Reported growth by region
Volume Net sales Marketing Operating profit(i)
% EUm % GBP million % GBP million % GBP million
------------------------- --- ----- ------- ------------- ----- ----------- ------------ -------------
North America 2 0.5 6 146 5 21 2 19
------------------------- ---- --- --------- ----- ----------- ------- --- -------- ---
Europe and Turkey (1) (0.3) 2 33 3 8 - 1
------------------------- ---- --- --------- ----- ----------- ------- --- -------- ---
Africa 2 0.3 3 27 7 6 4 6
------------------------- ---- --- --------- ----- ----------- ------- --- -------- ---
Latin America and
Caribbean (1) (0.1) 1 8 3 3 1 3
------------------------- ---- --- --------- ----- ----------- ------- --- -------- ---
Asia Pacific (1) (0.4) 6 79 12 24 6 23
------------------------- ---- --- --------- ----- ----------- ------- --- -------- ---
Corporate - - (4) (1) - - (3) (2)
------------------------- ---- --- --------- ----- ----------- ------- --------
Diageo - - 4 292 6 62 2 50
------------------------- ---- --- --------- ----- ----------- ------- --- -------- ---
Organic growth by region
Volume Net sales Marketing Operating profit(i)
% EUm % GBP million % GBP million % GBP million
-------------------------- --- ----- ------- ------------- ----- ----------- ----------- -------------
North America 3 0.7 6 129 6 22 5 56
-------------------------- ---- --- --------- ----- ----------- ------ --- ---------
Europe and Turkey (1) (0.3) 3 42 4 11 2 10
-------------------------- ---- --- --------- ----- ----------- ------ --- ---------
Africa 2 0.3 5 40 5 5 13 19
-------------------------- ---- --- --------- ----- ----------- ------ --- ---------
Latin America and
Caribbean (1) (0.1) 2 14 2 2 3 7
-------------------------- ---- --- --------- ----- ----------- ------ --- ---------
Asia Pacific (1) (0.4) 4 62 11 22 6 23
-------------------------- ---- --- --------- ----- ----------- ------ --- ---------
Corporate - - (4) (1) - - (6) (5)
-------------------------- ---- --- --------- ----- ----------- ------ ---------
Diageo - 0.2 4 286 6 62 5 110
-------------------------- ---- --- --------- ----- ----------- ------ --- ---------
(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 2019
North America
North America delivered net sales growth of 6%, with growth
across all three key markets. In US Spirits, net sales increased
6%. Tequila net sales grew strongly at 35%. Both Don Julio and
Casamigos delivered double digit growth and gained further share in
the category. Crown Royal net sales increased by 11% and the brand
continued to gain share driven by the sustained performance of
Crown Royal Regal Apple, as well as the limited time offer Crown
Royal Peach. Scotch net sales grew by 4% driven by good
performances from Buchanan's, Oban and Lagavulin and slightly
benefited from buy-in due to tariff uncertainty. Johnnie Walker
declined 3%, lapping last year's strong performance of "White
Walker by Johnnie Walker". Vodka net sales were down 5%, with
Smirnoff continuing to stabilise, supported by the ongoing success
of Smirnoff Zero Sugar Infusions but offset by a decline in Cîroc
and Ketel One. Captain Morgan net sales grew 1% supported by
increased marketing investment as well as lapping a softer
performance in prior year. Diageo Beer Company USA grew net sales
11% with continued strong performance of ready to drink driven by
good growth across the Smirnoff RTD range. Beer net sales grew by
4%, building momentum and gaining share. Net sales in Canada
increased 7% with strong broad based growth across categories.
North America operating margin declined 16bps, mainly driven by
market mix, with Diageo Beer Company USA growing ahead of the rest
of the business.
Key financials GBP million:
Acquisitions Reported
and Organic Other movement
F19 H1 FX disposals movement (v) F20 H1 %
------------------ ------ --- -------------- --------- ----- ------ -----------
Net sales 2,356 54 (37) 129 - 2,502 6
------------------ ------ --------- --------- ---- ------ ---------
Marketing 383 (2) 1 22 - 404 5
------------------ ------ --------- --- --------- ---- ------ ---------
Operating profit 1,101 7 (40) 56 (4) 1,120 2
------------------ ------ --------- --------- ---- ------ ---------
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(iii) movement movement
% % % % % % %
------------- -------- ----------- -------- -------- ----------- --------------- ------------ ------------
North Crown
America 3 2 6 6 Royal 10 11 14
------------- -------- ------ --- -------- -------- ----------- --------- ---- ------- --- ------- ---
Smirnoff (2) - 4
------------- -------- ----------- -------- -------- ----------- --------- --- ------- --- ------- ---
US Captain
Spirits(ii) 2 (3) 6 5 Morgan 1 1 4
------------- -------- ------ -------- -------- ----------- --------- ---- ------- --- ------- ---
Johnnie
DBC USA 9 9 11 14 Walker (4) (5) (3)
------------- -------- ------ --- -------- -------- ----------- --------- --- ------- -------
Ketel
Canada 4 1 7 7 One(iv) (1) (3) 1
------------- -------- ------ --- -------- -------- ----------- --------- --- ------- ------- ---
Cîroc
vodka (11) (9) (7)
------------- -------- ----------- -------- -------- ----------- --------- --- ------- -------
Spirits 2 1 6 6 Baileys 4 7 9
------------- -------- ------ --- -------- -------- ----------- --------- ---- ------- --- ------- ---
Beer - - 4 6 Guinness 1 4 7
------------- -------- ------ --- -------- -------- ----------- --------- ---- ------- --- ------- ---
Ready to
drink 16 18 19 22 Tanqueray (1) 2 4
------------- -------- ------ --- -------- -------- ----------- --------- --- ------- --- ------- ---
Don Julio 26 26 25
------------- -------- ----------- -------- -------- ----------- --------- ---- ------- --- ------- ---
Bulleit 7 4 7
------------- -------- ----------- -------- -------- ----------- --------- ---- ------- --- ------- ---
Buchanan's 6 9 12
------------- -------- ----------- -------- -------- ----------- --------- ---- ------- --- ------- ---
(i) Spirits brands excluding ready to drink.
(ii) Reported US Spirits volume, and net sales, growth include
impacts from the disposal of a portfolio of 19 brands to
Sazerac.
(iii) Organic equals reported volume movement.
(iv) Ketel One includes Ketel One vodka and Ketel One Botanical.
(v) The adjustment to other operating expenses is the
elimination of fair value changes to contingent consideration
liabilities in respect of prior year acquisitions.
-- Net sales in US Spirits were up 6%, broadly in line with
depletions with a slight increase in scotch stock levels driven by
customer pull caused by tariff uncertainty offset by other brands
in the half. Crown Royal grew net sales by 11% gaining further
category share, driven by the continued growth of Crown Royal Regal
Apple, and accelerated momentum behind the limited time offer Crown
Royal Peach. This momentum is supported by continued marketing
investment, which was up-weighted last year. In scotch, Johnnie
Walker net sales declined 3%. The Game of Thrones inspired
innovation, "Johnnie Walker Game of Thrones Limited Editions A Song
of Ice and a Song of Fire", has performed well, but is lapping last
year's highly successful "White Walker by Johnnie Walker". Malts
continued to perform well with strong growth from Oban and
Lagavulin. In vodka net sales were down 5%, driven mainly by Cîroc.
Smirnoff continued to stabilise, with strong price/mix growth due
to a reduction in promotional volume. Smirnoff Zero Sugar Infusions
innovation, launched in May 2019, continues to gain momentum. Cîroc
vodka continued to decline, albeit at a slower rate. Cîroc Summer
Watermelon limited time offer performed well over the summer and
Cîroc White Grape was launched for the winter season. Ketel One
declined, with strong core Ketel One vodka performance more than
offset by a decline in Ketel One Botanical as it lapped last year's
highly successful launch. In tequila, Don Julio and Casamigos had
strong double digit growth and gained share in the rapidly growing
tequila category. Don Julio continued its media investment to drive
awareness and strengthen its authenticity positioning. Casamigos
further strengthened its distribution coverage and improved its
rate of sale. Captain Morgan net sales grew 1% as marketing
investment increased behind the brand and lapped softer performance
last year. Baileys net sales grew by 9%, benefiting from the launch
of Baileys Red Velvet Limited Edition. Bulleit net sales were up 4%
with the brand continuing to gain share.
-- Diageo Beer Company USA net sales increased 11%, driven by
ready to drink growth of 21% with continued strong growth across
the Smirnoff ready to drink range. In beer, net sales were up 4%,
with Guinness up 5% supported by an increased focus on its brewing
credentials. Visitor numbers to the Guinness Open Gate Brewery and
Barrel House continue to grow, supporting the brand's
performance.
-- Net sales in Canada grew 7%, driven by continued growth in
spirits and ready to drink. Vodka grew 7% with Smirnoff No.21 Red
continuing to grow following the launch of the new global campaign.
Cîroc and Ketel One both grew double digits. Crown Royal also grew
double digit, gaining market share and strengthening its leadership
position in this growing Canadian whiskey category. Performance was
supported by the launch of a new "generosity" campaign connecting
the brand to its roots. Scotch also grew double digit with Johnnie
Walker Black Label becoming the #1 selling scotch brand in Canada.
Ready to drink also grew net sales at double digit, with Smirnoff
Ice retaining its #1 position in the market.
-- Marketing grew 6% in line with net sales growth, following
last year's up-weighted investment. Marketing effectiveness
analytic tools continued to enhance our investment decisions,
strengthening brand equity and delivering sustainable growth.
Europe and Turkey
Europe and Turkey delivered organic net sales growth of 3%,
reflecting consistent performance in Europe and double digit growth
in Turkey. In Europe, growth was driven by Continental Europe and
Great Britain. Gin grew 1% driven by Tanqueray in Continental
Europe, partially offset by a decline in Gordon's in Great Britain
due to lapping strong prior period innovation performance. Beer net
sales growth was flat with growth in Guinness offset by a decline
in other lager brands in Ireland. Scotch was up 1% driven by scotch
malts but partially offset by Bell's in Great Britain and Haig in
Greece. Baileys was up 7% largely driven by Baileys Original in
Great Britain and Continental Europe. Smirnoff net sales grew 1%
driven by Great Britain. Captain Morgan grew double digit driven by
Great Britain, France and Continental Europe. Tequila grew double
digit with growth across all markets. Ready to drink grew 5% driven
by Smirnoff and Gordon's premix range. Reserve was up 11% largely
driven by scotch and tequila. In Turkey, net sales were up 13% due
to inflation and excise duty led price increases. Operating margin
declined 34bps as positive price/mix and productivity savings were
offset by up-weighted marketing investment, as well as inflationary
cost pressures in Turkey.
Key financials GBP million:
Acquisitions Reported
and Organic movement
F19 H1 FX disposals movement F20 H1 %
------------------ ------ ---- -------------- --------- ------ -----------
Net sales 1,633 (13) 4 42 1,666 2
------------------ ------ --- -------- ---- --------- ------ ---------
Marketing 260 (4) 1 11 268 3
------------------ ------ --- -------- ---- --------- ------ ---------
Operating profit 614 (6) (3) 10 615 -
------------------ ------ --- -------- --- --------- ------ ---------
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 1 2 -
---------- ---------- -------- ---- ------- --- ------- ---
Johnnie
(1) (1) 3 2 Walker (1) (3) (3)
---------- ------ ------ -------- ------- --- ---------- -------- --- ------- -------
Smirnoff (4) 1 (1)
---------- ----------- ----------- -------- ------------ ---------- -------- --- ------- --- -------
Europe (1) (1) 3 2 Baileys 10 7 7
---------- ------ ------ -------- ------- --- ---------- -------- ---- ------- --- ------- ---
Yenì
Turkey (5) (5) 13 15 Raki (16) 2 5
---------- ------ ------ -------- ------- --- ---------- -------- --- ------- --- ------- ---
Captain
Morgan 7 12 12
---------- ----------- ----------- -------- ------------ ---------- -------- ---- ------- --- ------- ---
Spirits (1) (1) 3 3 J B (3) (1) (3)
---------- ------ ------ -------- ------- --- ---------- -------- --- ------- -------
Beer (1) (1) - (2) Tanqueray 6 6 5
---------- ------ ------ -------- ------- ---------- -------- ---- ------- --- ------- ---
Ready to
drink 2 2 5 2
---------- ------ --- ------ --- -------- ------- --- ---------- -------------- ------------ ------------
(i) Spirits brands excluding ready to drink.
(ii) Organic equals reported volume movement.
-- In Europe, net sales were up 3%:
-- In Great Britain, net sales grew 2%. Performance was mainly
driven by Guinness, Baileys and Captain Morgan, partly offset by a
decline in Gordon's due to lapping a strong prior year innovation,
and the continued impact of commercial negotiations following prior
year pricing decisions. Guinness performance benefited from growth
of Guinness Draught in the on-trade and key digital activations
targeting specific after-work occasions. Baileys' strong
performance was driven by focused promotional activity, while
Captain Morgan's growth was due to strong on-trade performance.
-- Ireland net sales declined by 1%. Beer was down 2% with
Guinness flat and a decline in other lager brands partially offset
by the continued success of Rockshore Lager and Rockshore Cider
innovations. Spirits grew 1%, driven by vodka and rum.
-- In Continental Europe, net sales were up 5%:
-- Iberia net sales grew 1%, driven by positive price/mix and
improvements in scotch and tequila.
-- In Central Europe net sales grew 12%, benefiting from lapping
a soft prior year. Strong scotch performance was due to effective
Johnnie Walker activations and the "Game of Thrones Single Malt
Scotch Whisky Collection". Baileys also contributed to the growth
on the back of key outlet activations.
-- In Northern Europe net sales were up 9% driven by net revenue
initiatives in scotch and optimised promotions of Baileys.
-- In the Mediterranean Hub, net sales grew 1%. Positive
performance of gin in Italy was offset by weak scotch performance
in Greece.
-- In Europe Partner Markets, net sales were flat as we drove
commercial footprint efficiencies which led to inventory reduction.
Gin and rum growth was partly offset by a decline in Guinness
distribution sales.
-- Russia net sales were down 7%, due to declines in scotch and rum.
-- France net sales grew 3%. Continued double digit growth of
Captain Morgan was driven by format innovations, partially offset
by soft scotch performance.
-- In Turkey, net sales grew 13% despite a decline of 5% in
volume. This reflected the impact of price increases taken in
response to increases in excise duties and inflation. Growth was
largely driven by premium Raki, wine and scotch, with strong growth
in Johnnie Walker.
-- Marketing investment increased 4%, marginally ahead of net
sales. Increased investment was primarily driven by rugby
sponsorship and summer time campaigns.
Africa
Africa delivered organic net sales growth of 5%, with growth
across East Africa and Africa Regional Markets, Nigeria returning
to growth and a decline in South Africa. In East Africa and Africa
Regional Markets net sales grew 10% and 5%, respectively, driven by
strong growth in spirits in both markets and double digit growth in
beer in East Africa. Net sales in Nigeria grew 1%, with beer flat
and growth in mainstream spirits. In South Africa, net sales
declined 4% with double digit growth in gin offset by a decline in
scotch and vodka. Across Africa, beer net sales were up 5% driven
by strong growth in Senator Keg, Serengeti Lite and Malta,
partially offset by declines in Meta and Satzenbrau. Guinness net
sales were flat driven by strong growth in Nigeria offset by a
decline in Africa Regional Markets following one-off supply
challenges. Spirits delivered good net sales growth driven by
scotch in Africa Regional Markets and East Africa as well as strong
growth of Tanqueray, offset by a decline in vodka in South Africa.
Scotch net sales were up 9% driven by Johnnie Walker, up 13%, which
saw double digit growth in Johnnie Walker Black Label in Africa
Regional Markets and East Africa. Operating margin improved by
139bps driven by improved price/mix through premiumisation and the
continued benefit from productivity initiatives more than
offsetting cost inflation.
Key financials GBP million:
Acquisitions Reported
and Organic movement
F19 H1 FX disposals movement F20 H1 %
------------------ ------ ---- -------------- --------- ------ -----------
Net sales 821 (1) (12) 40 848 3
------------------ ------ --- --------- --------- ------ ---------
Marketing 91 1 - 5 97 7
------------------ ------ --- --------- --- --------- ------ ---------
Operating profit 153 (11) (2) 19 159 4
------------------ ------ --- --------- --------- ------ ---------
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(iii) movement movement movement movement(ii) movement movement
% % % % % % %
---------- --------------- ----------- ------------ ---------- ---------- -------------- ------------ -----------
Africa 2 2 5 3 Guinness (3) - 1
---------- ------- ------ ------ --- ------- --- ------ ---------- ------- ---- ------- --- -------
Johnnie
Walker 18 13 12
---------- --------------- ----------- ------------ ---------- ---------- ------- ----- ------- --- -------
East
Africa 6 5 10 11 Smirnoff (11) (9) (10)
---------- ------- ------ ------ --- ------- --- ------ ---------- ------- ---- ------- -------
Africa
Regional
Markets (4) (4) 5 -
---------- ------- ----- ------ ------- --- ------
Nigeria 12 13 1 5 Other beer:
---------- ------- ------ ------ --- ------- --- ------
South
Africa (8) (9) (4) (11)
---------- ------- ----- ------ ------- ------ ---------- -------------- ------------ -----------
Malta (8) 5 1
---------- --------------- ----------- ------------ ---------- ---------- ------- ---- ------- --- -------
Spirits 4 4 7 6 Tusker (2) 2 3
---------- ------- ------ ------ --- ------- --- ------ ---------- ------- ---- ------- --- -------
Beer - - 5 5 Senator 14 17 19
---------- ------- ------ ------ --- ------- --- ------ ---------- ------- ----- ------- --- -------
Ready to
drink 7 - 6 (12) Serengeti 22 27 30
---------- ------- ------ ------ --- ------- --- ------ ---------- ------- ----- ------- --- -------
(i) Spirits brands excluding ready to drink.
(ii) Organic equals reported volume movement.
(iii) Organic equals reported volume movement, except for South
Africa and East Africa impacted by acquisitions and disposals.
-- In East Africa, net sales grew by 10%. Kenya grew strongly
driven by double digit growth across key spirits categories in
scotch, vodka and gin and Tanzania continued to grow double digit.
Beer net sales grew 10% led by strong growth in Serengeti in
Tanzania, Senator in Kenya, and the launch of Guinness Smooth in
Kenya.
-- In Africa Regional Markets, net sales increased by 5% with
double digit growth in Ghana driven by beer, and scotch in Central
and Southern Emerging Markets. These were partially offset by a
decline in Guinness across the region as a result of one-off
operational issues impacting supply in Cameroon. Scotch continued
to grow high double digit demonstrating the impact of the refreshed
Johnnie Walker campaign on the core brand variants.
-- In Nigeria, net sales returned to growth at 1% driven by
strong growth in mainstream spirits, Guinness and ready to drink.
These were partially offset by declines of Malta and lager.
-- South Africa net sales declined by 4% driven by scotch and
vodka. The decline in scotch reflects a slow down in the category
due to the broader macroeconomic climate principally in respect of
J B and Black & White. Similarly, the vodka category, and in
particular Smirnoff, has been impacted by the popularity of gin
which has gained share with new entrants at competitive price
points. This decline was partially offset by strong performance of
Tanqueray, which was boosted by the launch of Tanqueray Flor de
Sevilla.
-- Marketing investment increased by 5% in line with net sales,
through the Johnnie Walker "Highball" campaign and support of new
product launches in South Africa and East Africa.
Latin America and Caribbean
Latin America and Caribbean delivered 2% growth in net sales
with strong performance in Colombia, Brazil and CCA partially
offset by declines in Mexico and PEBAC. Net sales in Colombia grew
22% largely driven by scotch. Brazil grew 7% on the back of a
strong gin performance. CCA was up 4% on broad based growth,
particularly in scotch. Gin grew double digit driven by the strong
growth of Tanqueray in Brazil. Tequila was up 18% across the
region, largely driven by Don Julio performance in Mexico. Scotch
performance was soft, declining 3%, driven largely by Johnnie
Walker in PEBAC and Mexico. This was partially offset by continued
momentum in Buchanan's, up 9%, and Old Parr which grew 6% both
driven by CCA and Colombia. Operating margin for the region
increased 25bps benefiting from productivity led efficiencies
offset by adverse product mix impacts.
Key financials GBP million:
Acquisitions Reported
and Organic movement
F19 H1 FX disposals movement Other(iii) F20 H1 %
------------------ ------ --- -------------- --------- ---------- ------ -----------
Net sales 672 (5) (1) 14 - 680 1
------------------ ------ -------- --- --------- ---------- ------ ---------
Marketing 110 1 - 2 - 113 3
------------------ ------ -------- ---- --------- ---------- ------ ---------
Operating profit 254 (8) - 7 4 257 1
------------------ ------ -------- ---- --------- ---------- ------ ---------
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(ii) movement movement
% % % % % % %
----------- ----------- ----------- ---------- ----------- ------------ -------------- ----------- -----------
Latin
America
and Johnnie
Caribbean Walker (12) (12) (13)
----------- ------------ ------- ---- ------- -------
(1) (1) 2 1 Buchanan's 8 9 8
----------- ------- ------- ------ ------- ------------ ------- ----- ------- -------
Smirnoff 9 16 17
----------- ----------- ----------- ---------- ----------- ------------ ------- ----- ------- -------
PUB - - 7 5 Old Parr 3 6 2
----------- ------- ------- ------ ------- ------------ ------- ----- ------- -------
Mexico (1) (1) (2) - Baileys (4) - (5)
----------- ------- ------- ------ ------- ------------ ------- ---- ------- -------
CCA (3) (3) 4 1 Ypióca (3) (1) (2)
----------- ------- ------- ------ ------- ------------ ------- ---- ------- -------
Black &
Andean 25 25 23 14 White 1 2 1
----------- ------- ------- ------ ------- ------------ ------- ----- ------- -------
PEBAC (21) (20) (30) (30)
----------- ------- ------- ------ -------
Spirits (1) (1) 1 1
----------- ------- ------- ------ -------
Beer 2 2 4 2
----------- ------- ------- ------ -------
Ready to
drink 8 8 15 15
----------- ------- ------- ------ ------- ------------ -------------- ----------- -----------
(i) Spirits brands excluding ready to drink.
(ii) Organic equals reported volume movement.
(iii) The adjustment to cost of sales reflects the elimination
of the fair value changes for biological assets in respect of
growing agave plants.
-- In PUB (Paraguay, Uruguay and Brazil), net sales grew 7%.
Brazil delivered 7% growth driven by strong growth in gin and
price/mix benefits as premiumisation trends continue across
categories. Tanqueray drove the growth in gin supported by targeted
commercial activations in growing third spaces and more generally
in early evening occasions. Scotch net sales grew 4% led by
continued White Horse momentum.
-- In Mexico, net sales declined 2%. Strong growth in vodka and
tequila was offset by soft scotch performance, impacted by slowing
macro-economic trends, challenging trading conditions and lapping
the successful "White Walker by Johnnie Walker" innovation in the
prior comparable period. Smirnoff grew triple digit as a result of
Smirnoff X1 which grew share and is now the largest vodka brand by
value sales in Mexico. Don Julio grew double digit as "The Man
Behind the Brand" campaign continues to highlight brand history and
drive improved relevance.
-- In CCA (Caribbean and Central America), net sales increased
4% benefiting from strong performance across the domestic markets.
Growth was broad based led by Buchanan's and Old Parr which both
grew double digit driving share gains across key markets. Tequila
momentum continued, driven by Don Julio which was supported by
Cantina Don Julio activations as well as regional trend influence
from neighbouring Mexico and the United States.
-- Andean (Colombia and Venezuela) net sales increased 23%
driven by Colombia. Growth was broad based across all key
categories led by scotch which delivered double digit growth.
Buchanan's continues to lead the premiumisation movement of scotch
in Colombia and benefited from expansion into the casual and early
evening consumer occasion. Old Parr continued to grow as the brand
builds on its strong local heritage. Johnnie Walker grew double
digit as increased investment behind visibility, influencer
endorsement and digital drove consumer engagement as well as new
consumption experiences.
-- PEBAC (Peru, Ecuador, Bolivia, Argentina and Chile)
performance was challenged. Net sales declined 30% driven by social
and political instability across key markets. Despite overall
industry pressure, driven by macroeconomic conditions, share growth
has continued in Peru and Chile. Innovation continues to contribute
to overall growth with new launches such as Tanqueray Flor de
Sevilla and Smirnoff Bitter Citric.
-- Marketing investment increased 2%, in line with sales growth
driven by the key campaigns including Johnnie Walker "A Highball in
Every Hand", Buchanan's "#gamechangers", Old Parr "Life Well Lived"
and Tanqueray "Time to Begin".
Asia Pacific
Asia Pacific delivered 4% growth in net sales with strong growth
in Greater China and Australia, partially offset by declines in
North Asia, Travel Retail Asia and Middle East and a slowdown in
growth in India. Greater China grew 24% driven by strong
performance in both Chinese white spirits and scotch. Net sales in
India grew 2%, reflecting the economic downturn, with growth in
IMFL whisky and scotch. Australia net sales grew 13% with broad
based growth across categories. South East Asia performance was
flat with growth in spirits offset by a decline in Guinness. Travel
Retail, Asia and Middle East declined by 18% driven by challenging
trading conditions in the Middle East and Hong Kong. Scotch net
sales were up 1% across the region led by strong performance in
Johnnie Walker and scotch malts in China, Australia and South East
Asia offset the net sales decline of Windsor in Korea and Johnnie
Walker in Travel Retail and Middle East. Net sales of Reserve
brands were up 22% largely driven by Chinese white spirits and
Johnnie Walker super deluxe variants. Operating margin increased
33bps driven by price/mix, with productivity led savings partially
offset by inflationary challenges in India.
Key financials GBP million:
Acquisitions Reported
and Organic movement
F19 H1 FX disposals movement F20 H1 %
------------------------------------- ------ ------------ --------- ------ -----------
Net sales 1,398 17 - 62 1,477 6
------------------------------------- ------ ------------ --------- ----- ------ ---
Marketing 208 2 - 22 232 12
------------------------------------- ------ ------------ --------- ----- ------ ---
Operating profit before exceptional
items 409 - - 23 432 6
------------------------------------- ------ ------------ --------- ----- ------ ---
Exceptional operating items(i) - (59)
------------------------------------- ------ ------------ --------- ----- -----------
Operating profit 409 373 (9)
------------------------------------- ------ ------------ --------- ----- ------
(i) For further details on exceptional operating items see
Summary Income Statement, (c) Exceptional items.
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(i) movement movement movement movement(ii) movement movement
% % % % % % %
----------- ------------- ----------- ----------- ----------- ----------- -------------- ----------- -----------
Asia Johnnie
Pacific (1) (1) 4 6 Walker (7) (1) 1
----------- -------- ------- ------- ------- ----------- -------- --- ------- -------
McDowell's - 3 6
----------- ------------- ----------- ----------- ----------- ----------- -------- ---- ------- -------
India - - 2 5 Windsor (26) (13) (16)
----------- -------- --- ------- ------- ------- ----------- -------- --- ------- -------
Greater
China 21 21 24 24 Smirnoff (2) 4 2
----------- -------- --- ------- ------- ------- ----------- -------- --- ------- -------
Australia 10 10 13 9 Guinness 2 1 (4)
----------- -------- --- ------- ------- ------- ----------- -------- ---- ------- -------
South East
Asia (4) (5) - 3 Bundaberg 4 4 1
----------- -------- ------- ------- ------- ----------- -------- ---- ------- -------
Shui Jing
North Asia (6) (4) (3) (3) Fang(iii) 29 26 26
----------- -------- ------- ------- ------- ----------- -------- ---- ------- -------
Travel
Retail
Asia and
Middle
East (29) (28) (18) (19)
-------- ------- -------
Spirits (1) (1) 5 7
----------- -------- ------- ------- -------
Beer 1 1 1 (4)
----------- -------- --- ------- ------- -------
Ready to
drink 7 7 6 5
----------- -------- --- ------- ------- ------- ----------- -------------- ----------- -----------
(i) Spirits brands excluding ready to drink.
(ii) Organic equals reported volume movement.
(iii) Organic growth figures represent total Chinese white
spirits of which Shui Jing Fang is the principal brand.
-- In India net sales increased 2%, with growth primarily
impacted by a broad based consumption slowdown, and partly hampered
by both a temporary supply chain disruption in the first quarter as
well as liquidity challenges in certain key markets for scotch.
Despite these challenges, the main growth driver was Prestige and
Above brands which were up 5% driven by Johnnie Walker and Black
& White. This was supported by a solid performance from
McDowell's No.1 enhanced by the continued success of its Platinum
range. Net sales in the popular brands segment declined 4%.
-- In Greater China net sales increased 24%, with double digit
growth in both Chinese white spirits and scotch. Chinese white
spirits grew 25% as a result of continued route to consumer
expansion and increased marketing investment. Scotch net sales
increased 19% with continued double digit growth in scotch malts
and Johnnie Walker super deluxe in mainland China and continued
growth in Johnnie Walker and scotch malts in Taiwan. This growth
was supported by focused investment behind scotch category
development, and a continued expansion in the route to consumer
through the development of whisky boutiques and whisky reserve
shops.
-- Net sales in Australia grew 13%, driven by strong performance
in the scotch, ready to drink, liqueur and gin. Scotch net sales
increased 10%, driven by Johnnie Walker Blue Label and the new
"Johnnie Walker Game of Thrones Limited Editions A Song of Ice and
A Song of Fire" innovation. Ready to drink net sales increased 12%
as Gordon's Premium Pink Gin & Soda and Tanqueray & Tonic
continued to grow, aided by new innovation through Tanqueray Flor
de Sevilla & Soda. Gin grew double digit through Gordon's and
Tanqueray whilst Baileys maintained strong growth driven by both
core brand and innovation. Bundaberg net sales grew 5% as a result
of growth from the core variant Bundaberg UP.
-- In South East Asia, net sales were flat, driven by growth
across Vietnam and Indonesia offset by declines in Key Accounts
following recent customer price increases. Scotch was the main
growth driver with net sales growth of 3%, led by the Game of
Thrones inspired innovation "Johnnie Walker Game of Thrones Limited
Editions A Song of Ice and A Song of Fire", Johnnie Walker Red
Label and Johnnie Walker super deluxe. This was partially offset by
a decline in Guinness in Indonesia as a result of a slowdown in the
category growth.
-- In North Asia, net sales declined 3% with a declines in Japan
and Korea of 2% and 4%, respectively. In Japan, Guinness and
Smirnoff Ice grew as a result of the Rugby World Cup, offset by the
impact of a consumption tax increase in October 2019, which
resulted in declines across gin and the ready to drink category. In
Korea, the main driver of decline was Windsor as a result of the
continued contraction in the whisky category. This was offset by
double digit growth in Guinness following the launch of Hop House
13 Lager.
-- Travel Retail Asia and Middle East, net sales declined 18%
due to challenging trading conditions in the Middle East including
some reduction of inventory levels and lower passenger traffic
including through Hong Kong.
-- Marketing investment increased 12%, ahead of net sales
growth, driven by increased investment in Chinese white spirits and
the launch of the new Johnnie Walker "Highball" campaign across the
region.
CATEGORY AND BRAND REVIEW
Six months ended 31 December 2019
Key categories:
Organic Organic Reported
volume net sales net sales
movement(iii) movement movement
% % %
-------------------------------------------- ---------------- ------------ ------------
Spirits(i) - 4 5
-------------------------------------------- ---------- ---- ------- --- ----------
Scotch (3) - 1
-------------------------------------------- ---------- --- ------- --- ----------
Vodka(ii)(iv) (1) (1) -
-------------------------------------------- ---------- --- ------- ----------
Canadian whisky 10 11 10
-------------------------------------------- ---------- ---- ------- --- ----------
Rum(ii) (2) 2 1
-------------------------------------------- ---------- --- ------- --- ----------
Liqueurs 7 7 6
-------------------------------------------- ---------- ---- ------- --- ----------
Indian-Made Foreign Liquor (IMFL) whisky 1 3 6
-------------------------------------------- ---------- ---- ------- --- ----------
Gin(ii) (2) 7 7
-------------------------------------------- ---------- --- ------- --- ----------
Tequila 25 31 32
-------------------------------------------- ---------- ---- ------- --- ----------
US whiskey 2 6 8
-------------------------------------------- ---------- ---- ------- --- ----------
Beer - 2 2
-------------------------------------------- ---------- ---- ------- --- ----------
Ready to drink 10 11 8
-------------------------------------------- ---------- ---- ------- --- ----------
(i) Spirits brands excluding ready to drink.
(ii) Vodka, rum, gin including IMFL brands.
(iii) Organic equals reported volume movement except for vodka
(2)%, ready to drink 8% and Canadian whisky 9%, which were impacted
by acquisitions and disposals.
(iv) Vodka includes Ketel One Botanical.
-- Scotch represents 26% of Diageo's net sales with global
performance softening to flat. The Single Malts portfolio,
Buchanan's and Johnnie Walker reserve grew in the period but was
offset by Johnnie Walker Black Label and Johnnie Walker Red Label
which softened globally. This was driven by challenging trading
conditions in Mexico; volatility in travel retail and the Middle
East; and political and economic disruptions in Peru and Chile.
Innovation related to the HBO Game of Thrones partnership
maintained its value contribution compared to the prior period due
to "Johnnie Walker Game of Thrones Limited Editions A Song of Ice
and A Song of Fire" and the "Game of Thrones Single Malt Scotch
Whisky Collection". Buchanan's grew 9% in both North America and
Latin America and Caribbean. Scotch malts were up 17% with broad
based double digit growth across all regions driven by core
variants, Game of Thrones Six Kingdoms, Prestige Scotch in China
and Singleton innovation in Taiwan. Old Parr remained in growth
driven by focused activations in Colombia, whilst J B slowed its
declines in Iberia. Primary scotch brands remained flat largely as
growth of Black & White and VAT 69, was offset by declines of
Haig in Greece and Bell's in Great Britain. Scotch continued to
decline in Korea, driven by Windsor.
-- Vodka represents 11% of Diageo's net sales and declined by 1%
overall, driven by a decline in North America partially offset by
growth across all other regions. Vodka performance was driven by
Smirnoff growth, offset by a softening of Ketel One and continued
declines in Cîroc vodka. Overall, Smirnoff grew 1% with a decline
in US Spirits more than offset by growth in rest of the world, led
by strong growth in Mexico and Australia. Ketel One was down 1% due
to a 4% decline in US Spirits. This was partially offset by growth
across other markets. Ketel One core brand growth of 4% was offset
by a decline in Ketel One Botanical, a result of lapping last
year's success. The decline in Cîroc vodka was driven by US
Spirits.
-- Canadian whisky represents 7% of Diageo's net sales and grew
11%. Strong growth of Crown Royal in US Spirits was driven by Crown
Royal innovations such as Crown Royal Regal Apple, Crown Royal
Vanilla and the Crown Royal Peach limited time offer. As a result,
the brand continues to grow share within its category.
-- Rum represents 6% of Diageo's net sales and grew 2% largely
driven by Captain Morgan growth in Europe and US Spirits.
-- Liqueurs represent 6% of Diageo's net sales and grew 7% with
growth in all regions, except Latin America and Caribbean. Baileys
grew 8%, with broad based regional growth, apart from Latin America
and Caribbean where it was flat. Performance was driven by a good
start on Baileys Red Velvet innovation, and a continued focus on
reminding consumers that Baileys is an indulgent treat
year-round.
-- IMFL whisky represents 5% of Diageo's net sales and grew 3%
driven by the growth of McDowell's No. 1, Bagpiper, Director's
Special Black and Royal Challenge.
-- Gin represents 4% of Diageo's net sales and grew 7% with
double digit growth in Latin America and Caribbean and Africa.
Europe and Turkey, North America and Asia Pacific all grew single
digit. Strong growth in gin continued, with double digit growth in
Tanqueray and Gordon's growing 2%. Both Tanqueray and Gordon's grew
across their core brand and innovation variants, despite lapping a
strong prior year.
-- Tequila represents 4% of Diageo's net sales and grew 31%. The
performance was driven by strong double digit growth of Don Julio
and Casamigos in US Spirits and Don Julio in Latin America and
Caribbean.
-- US whiskey represents 2% of Diageo's net sales and grew 6%.
Performance continued to be driven by good growth in Bulleit in US
Spirits.
-- Beer represents 15% of Diageo's net sales and grew 2%. In
Africa beer grew 5%, largely driven by Senator Keg in Kenya and
Serengeti in Tanzania which were partially offset by declines in
Malta and Guinness in Cameroon, Malta in Nigeria and local brands
in Ethiopia. Globally, Guinness grew 1.5%, with growth largely
driven by Guinness Draught in Great Britain, Guinness Foreign Extra
Stout in Nigeria and Guinness Extra in North America. These were
partially offset by declines in Cameroon, Kenya, Ghana and Hop
House 13 Lager in Great Britain. In Ireland, Rockshore continued
double digit growth.
-- Ready to drink represents 6% of Diageo's net sales and grew
11% driven by broad based growth across all regions.
Global giants, local stars and reserve(i) :
Organic Organic Reported
volume net sales net sales
movement(ii) movement movement
% % %
------------------------------ --------------- ------------ ------------
Global giants
------------------------------ --------------- ------------ ------------
Johnnie Walker (5) (4) (3)
------------------------------ ----------- -------- --------
Smirnoff (2) 1 2
------------------------------ -------- --------
Baileys 8 8 8
------------------------------ ----------- -------- --------
Captain Morgan 4 5 6
------------------------------ ----------- -------- --------
Tanqueray 9 13 13
------------------------------ ----------- -------- --------
Guinness - 1 1
------------------------------ ----------- -------- --------
Local stars
------------------------------ --------------- ------------ ------------
Crown Royal 10 11 13
------------------------------ ----------- -------- --------
Yenì Raki (16) 3 5
------------------------------ ----------- -------- --------
Buchanan's 8 9 10
------------------------------ ----------- -------- --------
J B (3) (3) (4)
------------------------------ ----------- -------- --------
Windsor (26) (13) (16)
------------------------------ ----------- -------- --------
Old Parr 2 5 2
------------------------------ ----------- -------- --------
Bundaberg 4 4 1
------------------------------ ----------- -------- --------
Black & White 4 5 6
------------------------------ ----------- -------- --------
Ypióca (3) (1) (2)
------------------------------ ----------- -------- --------
McDowell's - 3 6
------------------------------ ----------- -------- --------
Shui Jing Fang(iii) 29 26 26
------------------------------ ----------- -------- --------
Reserve
------------------------------ --------------- ------------ ------------
Scotch malts 11 17 18
------------------------------ ----------- -------- --------
Cîroc vodka (10) (9) (7)
------------------------------ ----------- -------- --------
Ketel One(iv) 1 (1) 2
------------------------------ ----------- -------- --------
Don Julio 13 25 24
------------------------------ ----------- -------- --------
Bulleit 6 4 7
------------------------------ ----------- -------- --------
(i) Spirits brands excluding ready to drink.
(ii) Organic equals reported volume movement.
(iii) Organic growth figures represent total Chinese white
spirits of which Shui Jing Fang is the principal brand.
(iv) Ketel One includes Ketel One vodka and Ketel One
Botanical.
-- Global giants represent 41% of Diageo's net sales and grew
1%. Growth was broad based with all brands in growth except for
Johnnie Walker. Johnnie Walker was down 4%, driven by declines
across all regions, except Africa, which was up double digits. Weak
performance on Johnnie Walker in Latin America and Caribbean was
driven by political and economic issues and challenging trading
conditions in Asia Pacific and the Middle East, and US Spirits was
lapping strong "White Walker by Johnnie Walker" innovation.
-- Local stars represent 20% of Diageo's net sales and grew 8%,
largely driven by strong growth of Crown Royal in US Spirits,
Chinese white spirits in Asia Pacific, Buchanan's in Latin America
and Caribbean, McDowell's No. 1 in India, and Old Parr in Latin
America and Caribbean. This was partially offset by declines of
Windsor in Korea and a slowing decline of J B in Iberia.
-- Reserve brands represent 21% of Diageo's net sales and grew
11% largely driven by double digit growth of Don Julio in US
Spirits and Mexico, Chinese white spirits, and Casamigos in US
Spirits partially offset by declines in Cîroc. Net sales of Johnnie
Walker reserve variants were up 6%.
ADDITIONAL FINANCIAL INFORMATION
Six months ended 31 December 2019
SUMMARY INCOME STATEMENT
Acquisitions Fair value
31 December Exchange and disposals Organic remeasure-ment 31 December
2018 (a) (b) movement(i) (d) 2019
GBP million GBP million GBP million GBP million GBP million GBP million
-------------------- ----------- ------------- ---------------- -------------- ----------------- -------------
Sales 10,363 85 (58) 441 - 10,831
==================== ========== ========= =========== ========== ========== ===== ==========
Excise duties (3,455) (33) 12 (155) - (3,631)
-------------------- ---------- --------- ----------- --- ---------- ---------- ----- ----------
Net sales 6,908 52 (46) 286 - 7,200
==================== ========== ========= =========== ========== ========== ===== ==========
Cost of sales (2,508) (57) 7 (148) 4 (2,702)
-------------------- ---------- --------- ----------- --- ---------- ---------- ----- ----------
Gross profit 4,400 (5) (39) 138 4 4,498
==================== ========== ========= =========== ========== ========== ===== ==========
Marketing (1,054) 2 (2) (62) - (1,116)
==================== ========== ========= =========== ========== ========== ===== ==========
Other operating
items (895) (12) (4) 34 (4) (881)
-------------------- ---------- --------- ----------- ---------- ---------- ---- ----------
Operating profit
before
exceptional items 2,451 (15) (45) 110 - 2,501
-------------------- ---------- ========= =========== ========== ---------- ----- ----------
Exceptional
operating
items (c) (21) (59)
-------------------- ---------- ----------
Operating profit 2,430 2,442
==================== ========== ==========
Non-operating items
(c) 146 -
==================== ========== ==========
Net finance charges (128) (154)
==================== ========== ==========
Share of after tax
results of
associates
and joint ventures 179 176
-------------------- ---------- ----------
Profit before
taxation 2,627 2,464
==================== ========== ==========
Taxation (e) (560) (530)
-------------------- ---------- ----------
Profit for the
period 2,067 1,934
-------------------- ---------- ----------
(i) For the definition of organic movement see Explanatory Notes, Organic movements.
(a) Exchange
The impact of movements in exchange rates on reported figures
for sales and net sales is principally in respect of the
translation exchange impact of the weakening of sterling against
the US dollar, the Indian rupee and the Mexican peso, partially
offset by strengthening of sterling against the euro. The impact of
movements in exchange rates on reported figures for operating
profit is principally in respect of the transactional exchange
impact of the strengthening 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 2019 is set out in the table below.
Gains/(losses)
GBP million
---------------------------------------------- --------------
Translation impact 33
---------------------------------------------- --------------
Transaction impact (48)
---------------------------------------------- --------------
Operating profit before exceptional items (15)
---------------------------------------------- --------------
Net finance charges - translation impact (1)
---------------------------------------------- --------------
Net finance charges - transaction impact (2)
---------------------------------------------- --------------
Net finance charges (3)
---------------------------------------------- --------------
Associates - translation impact (3)
---------------------------------------------- --------------
Profit before exceptional items and taxation (21)
---------------------------------------------- --------------
Six months ended Six months ended
31 December 31 December
2019 2018
---------------------- ---------------- ------------------
Exchange rates
---------------------- ---------------- ------------------
Translation GBP1 = $1.26 $1.29
---------------------- ---------------- ----------------
Transaction GBP1 = $1.36 $1.31
---------------------- ---------------- ----------------
Translation GBP1 = EUR1.14 EUR1.12
---------------------- ---------------- ----------------
Transaction GBP1 = EUR1.13 EUR1.13
---------------------- ---------------- ----------------
(b) Acquisitions and disposals
The acquisitions and disposals movement was mainly attributable
to the acquisition of Seedlip Ltd and Anna Seed 83 Ltd and the
prior year disposal of a portfolio of 19 brands to Sazerac
completed on 20 December 2018.
See Notes, Acquisition of businesses and purchase of
non-controlling interests for further details.
(c) Exceptional items
Exceptional operating charges in the six months ended 31
December 2019 were GBP59 million before tax (2018 - GBP21
million).
In the six months ended 31 December 2019, an impairment charge
of GBP59 million in respect of the Old Tavern brand in India has
been recognised in exceptional operating items. For further details
see Notes, Intangible assets.
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 prior to
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.
Non-operating items in the six months ended 31 December 2019
were GBPnil (2018 - GBP146 million income).
Diageo completed the acquisition of Seedlip Ltd and Anna Seed 83
Ltd and certain other smaller businesses resulting in an
exceptional step up gain of GBP8 million.
The completion of the disposal of United National Breweries
(UNB), Diageo's wholly owned sorghum business in South Africa is
expected to close in the second half of the financial year. The
group has recognised an incremental loss on the sale in the period
of GBP7 million.
The disposal of an associate, Equal Parts, LLC resulted in an
exceptional loss of GBP1 million.
Non-operating items of GBP146 million in the six months ended 31
December 2018 comprised:
-- a gain of GBP154 million in respect of the sale of a
portfolio of 19 brands on 20 December 2018 to Sazerac for an
aggregate consideration of $550 million (GBP435 million).
-- a loss of GBP8 million in respect of the prospective sale of UNB.
See Explanatory Notes, (c) Exceptional items, for the definition
of exceptional items.
(d) Fair value remeasurement
The adjustment to cost of sales reflects the elimination of the
fair value changes for biological assets in respect of growing
agave plants. The adjustment to other operating expenses is the
elimination of fair value changes to contingent consideration
liabilities in respect of prior year acquisitions.
(e) Taxation
The reported tax rate for the six months ended 31 December 2019
was 21.5% compared with 21.3% for the six months ended 31 December
2018.
The tax charge for the six months ended 31 December 2019
included a tax credit of GBP14 million in respect of the Old Tavern
brand impairment charge. 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.
The tax rate before exceptional items for the six months ended
31 December 2019 was 21.6% compared with 21.2% in the six months
ended 31 December 2018.
It is expected that the tax rate before exceptional items for
the year ended 30 June 2020 will be in the range of 21%-22%.
(f) Dividend
The group aims to increase the dividend each half-year and the
decision as to the rate of dividend increase is made with reference
to dividend cover as well as current performance trends including
sales and profit after tax 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 2019 dividend cover was
1.9 times. It is expected that a mid-single digit increase in the
dividend will be maintained until the cover is operating
comfortably in the policy range.
An interim dividend of 27.41 pence per share will be paid to
holders of ordinary shares and ADRs on the register as of 28
February 2020. The ex-dividend date is 27 February 2020. This
represents an increase of 5% on last year's interim dividend. The
interim dividend will be paid to ordinary shareholders on 9 April
2020. Payment to US ADR holders will be made on 14 April 2020. A
dividend reinvestment plan is available to holders of ordinary
shares in respect of the interim dividend and the plan notice date
is 19 March 2020.
(g) Share buyback
On 25 July 2019 the Board approved a return of capital programme
to return up to GBP4.5 billion to shareholders over the three year
period to 30 June 2022.
During the six months ended 31 December 2019 the group had
purchased 34.6 million ordinary shares at a cost of GBP1,129
million (including GBP6 million of transaction costs) and has
funded the purchases through a combination of operating cash
inflows and incremental borrowings. A financial liability of GBP71
million has been established at 31 December 2019 (30 June 2019 -
GBP26 million; 31 December 2018 - GBP80 million) representing an
additional 2.2 million shares that are expected to be purchased by
29 January 2020.
MOVEMENT IN NET BORROWINGS AND EQUITY
Movement in net borrowings
2019 2018
GBP million GBP million
----------------------------------------------------- ----------- -------------
Net borrowings at 30 June (11,277) (9,091)
----------------------------------------------------- ---------- ----------
Free cash flow (a) 966 1,346
----------------------------------------------------- ---------- ----------
Acquisitions (b) (106) (32)
----------------------------------------------------- ---------- ----------
Sale of businesses and brands (c) - 419
----------------------------------------------------- ---------- ----------
Share buyback programme (1,155) (1,275)
----------------------------------------------------- ---------- ----------
Proceeds from issue of share capital 1 1
----------------------------------------------------- ---------- ----------
Net sale/(purchase) of own shares for share schemes
(d) 33 25
----------------------------------------------------- ---------- ----------
Dividends paid to non-controlling interests (76) (76)
----------------------------------------------------- ---------- ----------
Net movements in bonds (e) 1,289 1,754
----------------------------------------------------- ---------- ----------
Purchase of shares of non-controlling interests (f) (25) (697)
----------------------------------------------------- ---------- ----------
Net movements in other borrowings (g) 209 220
----------------------------------------------------- ---------- ----------
Equity dividends paid (1,006) (993)
----------------------------------------------------- ---------- ----------
Net increase in cash and cash equivalents 130 692
----------------------------------------------------- ---------- ----------
Net increase in bonds and other borrowings (1,503) (1,974)
----------------------------------------------------- ---------- ----------
Exchange differences (h) 209 (32)
----------------------------------------------------- ---------- ----------
Other non-cash items (i) (439) 53
----------------------------------------------------- ---------- ----------
Net borrowings at 31 December (12,880) (10,352)
----------------------------------------------------- ---------- ----------
(a) See Key Financial Information, Free cash flow for the
analysis of free cash flow.
(b) In the six months ended 31 December 2019 Diageo acquired the
remaining share capital of Seedlip Ltd and Anna Seed 83 Ltd (the
brand owner of Aecorn) which it did not already own as well as a
number of smaller transactions and additional investments in the
Distill Ventures programme. Additionally, acquisitions include
deferred and contingent consideration paid in respect of previous
acquisitions.
In the six months ended 31 December 2018 Diageo acquired the
remaining 70% of Copper Dog Whisky Limited that it did not already
own, made additional investments in a number of Distill Venture
associates and made contingent consideration payments in respect of
previous acquisitions.
(c) In the six months ended 31 December 2018 sale of businesses
and brands represented the cash received on the disposal of a
portfolio of 19 brands sold 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 (2018 - GBP1 million)
less receipts from employees on the exercise of share options of
GBP34 million (2018 - GBP26 million).
(e) In the six months ended 31 December 2019, the group issued
bonds of $1,600 million (GBP1,289 million). In the comparable
period the group issued bonds of EUR2,000 million (GBP1,754
million).
(f) In the six months ended 31 December 2019 Diageo acquired an
additional 3,310,515 shares (representing 0.46% of total shares) of
United Spirits Limited for INR1,960 million (GBP23 million) and
completed the purchase of 4% of the share capital of Serengeti
Breweries Limited for $3 million (GBP2 million).
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%.
(g) In the six months ended 31 December 2019 the net movement in
other borrowings principally arose from the issue of commercial
papers partially offset by cash movements on foreign exchange swaps
and forwards. In the comparable period movements were driven by the
cash movements of foreign exchange swaps and forwards.
(h) The exchange arising on net borrowings of GBP209 million is
primarily driven by favourable exchange movements on US dollar and
euro denominated borrowings partially offset by an unfavourable
movement on foreign exchange swaps and forwards.
(i) Other non-cash items are principally in respect of the
adoption of IFRS 16 on 1 July 2019 and additional leases entered
into in the six months ended 31 December 2019. In the six months
ended 31 December 2018 other non-cash items are principally in
respect of changes in the fair value of borrowings.
Movement in equity
2019 2018
GBP million GBP million
-------------------------------------------------------- ----------- -------------
Equity at 30 June 10,156 11,713
-------------------------------------------------------- ---------- ----------
Profit for the period 1,934 2,067
-------------------------------------------------------- ---------- ----------
Exchange adjustments (a) (623) 251
-------------------------------------------------------- ---------- ----------
Remeasurement of post employment plans net of taxation (82) 150
-------------------------------------------------------- ---------- ----------
Purchase of shares of non-controlling interests (b) (25) (703)
-------------------------------------------------------- ---------- ----------
Dividends to non-controlling interests (52) (55)
-------------------------------------------------------- ---------- ----------
Equity dividends paid (1,006) (993)
-------------------------------------------------------- ---------- ----------
Share buyback programme (1,200) (1,355)
-------------------------------------------------------- ---------- ----------
Other reserve movements 128 58
-------------------------------------------------------- ---------- ----------
Equity at 31 December 9,230 11,133
-------------------------------------------------------- ---------- ----------
(a) Exchange movement in the six months ended 31 December 2019
primarily arose from exchange losses in respect of the Indian
rupee, the euro and the US dollar.
(b) In the six months ended 31 December 2019 Diageo acquired an
additional 3,310,515 shares of United Spirits Limited for INR1,960
million (GBP23 million) and completed the purchase of 4% of the
share capital of Serengeti Breweries Limited for $3 million (GBP2
million).
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%.
Post employment plans
The net surplus of the group's post employment benefit plans
decreased by GBP12 million from GBP214 million at 30 June 2019 to
GBP202 million at 31 December 2019. The decrease in net surplus is
primarily attributable to the changes in assumptions in the United
Kingdom due to the decrease in returns from 'AA' rated corporate
bonds used to calculate the discount rates on the liabilities of
the post employment plans (from 2.3% to 2.0%), partially offset by
an increase in the market value of the assets held by the post
employment schemes and the cash contribution paid into the plans in
excess of income statement charge.
The operating profit charge before exceptional items increased
by GBP4 million from GBP32 million for the six months ended 31
December 2018 to GBP36 million for the six months ended 31 December
2019. The six months ended 31 December 2019 includes a past service
gain of GBP19 million following a communication to the deferred
members of the Guinness Ireland Group Pension Scheme in respect of
changing their expectation of a full pension prior to reaching the
age of 65 (2018 - GBP22 million credit in respect of changes to
future pension increases for the members of the UK Diageo Pension
Scheme).
Total cash contributions by the group to all post employment
plans in the year ending 30 June 2020 are estimated to be
approximately GBP160 million.
DIAGEO CONDENSED CONSOLIDATED INCOME STATEMENT
Six months ended
Six months ended 31 December
31 December 2019 2018
Notes GBP million GBP million
Sales 2 10,831 10,363
Excise duties (3,631) (3,455)
--------------- --------------
Net sales 2 7,200 6,908
Cost of sales (2,702) (2,508)
--------------- --------------
Gross profit 4,498 4,400
Marketing (1,116) (1,054)
Other operating items (940) (916)
--------------- --------------
Operating profit 2 2,442 2,430
Non-operating items 3 - 146
Finance income 4 163 181
Finance charges 4 (317) (309)
Share of after tax results of associates
and joint ventures 176 179
--------------- --------------
Profit before taxation 2,464 2,627
Taxation 5 (530) (560)
--------------- --------------
Profit for the period 1,934 2,067
=============== ==============
Attributable to:
Equity shareholders of the parent company 1,865 1,976
Non-controlling interests 69 91
--------------
1,934 2,067
=============== ==============
million million
Weighted average number of shares
Shares in issue excluding own shares 2,356 2,442
Dilutive potential ordinary shares 10 10
--------------- --------------
2,366 2,452
=============== ==============
pence pence
Basic earnings per share 79.2 80.9
=============== ==============
Diluted earnings per share 78.8 80.6
=============== ==============
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME
Six months Six months
ended 31 ended 31
December December
2019 2018
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 (101) 183
- associates and joint ventures (1) 1
Tax on post employment plans 20 (34)
---------- ----------
(82) 150
Items that may be recycled subsequently to the
income statement
Exchange differences on translation of foreign
operations
- group (585) 265
- associates and joint ventures (161) 43
- non-controlling interests (100) 42
Net investment hedges 223 (99)
Tax on exchange differences - group (7) 1
Effective portion of changes in fair value of cash
flow hedges
- hedge of foreign currency debt of the group (60) 115
- transaction exposure hedging of the group 63 (66)
- commodity price risk of the group 5 (6)
- hedges by associates and joint ventures 3 (5)
- recycled to income statement - hedge of foreign
currency debt of the group 50 (71)
- recycled to income statement - transaction exposure
hedging of the group 12 20
Tax on effective portion of changes in fair value
of cash flow hedges 5 (2)
Hyperinflation adjustment (15) (4)
Tax on hyperinflation adjustment 4 2
---------- ----------
(563) 235
---------- ----------
Other comprehensive (loss)/profit, net of tax, for
the period (645) 385
Profit for the period 1,934 2,067
---------- ----------
Total comprehensive income for the period 1,289 2,452
========== ==========
Attributable to:
Equity shareholders of the parent company 1,320 2,319
Non-controlling interests (31) 133
---------- ----------
Total comprehensive income for the period 1,289 2,452
========== ==========
DIAGEO CONDENSED CONSOLIDATED BALANCE SHEET
31 December 30 June 2019 31 December
2019 2018
GBP GBP GBP GBP GBP
Notes million million million million million GBP million
Non-current
assets
Intangible
assets 6 12,035 12,557 12,555
Property, plant
and equipment 4,834 4,455 4,238
Biological
assets 42 34 26
Investments in
associates
and joint
ventures 3,202 3,173 3,230
Other
investments 51 49 48
Other
receivables 48 53 59
Other financial
assets 338 404 281
Deferred tax
assets 71 138 106
Post employment
benefit assets 955 1,060 1,036
-------- --------- ---------
21,576 21,923 21,579
Current assets
Inventories 7 5,459 5,472 5,276
Trade and other
receivables 3,587 2,694 3,541
Assets held for
sale 51 65 83
Corporate tax
receivables 68 83 12
Other financial
assets 42 127 12
Cash and cash
equivalents 8 950 932 1,591
-------- --------- ---------
10,157 9,373 10,515
--------- --------- ---------
Total assets 31,733 31,296 32,094
--------- --------- ---------
Current
liabilities
Borrowings and
bank overdrafts 8 (3,381) (1,959) (1,742)
Other financial
liabilities (474) (307) (306)
Share buyback
liability (71) (26) (80)
Trade and other
payables (4,474) (4,202) (4,415)
Liabilities held
for sale (27) (32) (32)
Corporate tax
payables (336) (378) (446)
Provisions (90) (99) (107)
-------- --------- ---------
(8,853) (7,003) (7,128)
Non-current
liabilities
Borrowings 8 (10,091) (10,596) (10,272)
Other financial
liabilities (405) (124) (154)
Other payables (185) (222) (250)
Provisions (320) (317) (295)
Deferred tax
liabilities (1,896) (2,032) (2,123)
Post employment
benefit
liabilities (753) (846) (739)
-------- --------- ---------
(13,650) (14,137) (13,833)
--------- --------- ---------
Total
liabilities (22,503) (21,140) (20,961)
--------- --------- ---------
Net assets 9,230 10,156 11,133
========= ========= =========
Equity
Share capital 743 753 767
Share premium 1,351 1,350 1,350
Other reserves 1,930 2,372 2,341
Retained
earnings 3,499 3,886 4,908
-------- --------- ---------
Equity
attributable to
equity
shareholders of
the parent
company 7,523 8,361 9,366
Non-controlling
interests 1,707 1,795 1,767
--------- --------- ---------
Total equity 9,230 10,156 11,133
========= ========= =========
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Retained earnings/(deficit)
Equity
attributable
Other to parent
Share Share Other Own retained company Non-controlling Total
capital premium reserves shares earnings Total shareholders interests equity
GBP GBP GBP GBP GBP GBP GBP million GBP GBP
million million million million million million million million
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 option - - - - (2) (2) (2) - (2)
Share buyback
programme (13) - 13 - (1,355) (1,355) (1,355) - (1,355)
Dividends paid - - - - (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
===== ======= ======= ====== ======= ====== ========= === =========== ==== ======
At 30 June 2019 753 1,350 2,372 (2,026) 5,912 3,886 8,361 1,795 10,156
Profit for the
period - - - - 1,865 1,865 1,865 69 1,934
Other
comprehensive
income - - (452) - (93) (93) (545) (100) (645)
Employee share
schemes - - - 74 (35) 39 39 - 39
Share-based
incentive
plans - - - - 23 23 23 - 23
Share-based
incentive
plans in
respect of
associates - - - - 1 1 1 - 1
Shares issued - 1 - - - - 1 - 1
Purchase of
non-controlling
interests - - - - (15) (15) (15) (10) (25)
Non-controlling
interest
in respect of
new subsidiary - - - - - - - 5 5
Change in fair
value
of put option - - - - (1) (1) (1) - (1)
Share buyback
programme (10) - 10 - (1,200) (1,200) (1,200) - (1,200)
Dividends paid - - - - (1,006) (1,006) (1,006) (52) (1,058)
---------
At 31 December
2019 743 1,351 1,930 (1,952) 5,451 3,499 7,523 1,707 9,230
===== ======= ======= ====== ======= ====== ========= === =========== ==== ======
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended Six months ended
31 December 2019 31 December 2018
GBP million GBP million GBP million GBP million
Cash flows from operating activities
Profit for the period 1,934 2,067
Taxation 530 560
Share of after tax results of associates
and joint ventures (176) (179)
Net finance charges 154 128
Non-operating items - (146)
----------
Operating profit 2,442 2,430
Increase in inventories (85) (245)
Increase in trade and other receivables (1,016) (829)
Increase in trade and other payables and
provisions 423 418
---------- ----------
Net increase in working capital (678) (656)
Depreciation, amortisation and impairment 286 185
Dividends received 3 3
Post employment payments less amounts included
in operating profit (60) (61)
Other items (5) 37
----------
224 164
---------- ----------
Cash generated from operations 1,988 1,938
Interest received 86 101
Interest paid (239) (206)
Taxation paid (547) (229)
---------- ----------
(700) (334)
---------- ----------
Net cash inflow from operating activities 1,288 1,604
Cash flows from investing activities
Disposal of property, plant and equipment
and computer software 8 13
Purchase of property, plant and equipment
and computer software (330) (271)
Sale of businesses and brands - 419
Acquisition of businesses (106) (32)
Net cash (outflow)/inflow from investing
activities (428) 129
Cash flows from financing activities
Share buyback programme (1,155) (1,275)
Proceeds from issue of share capital 1 1
Net sale of own shares for share schemes 33 25
Dividends paid to non-controlling interests (76) (76)
Proceeds from bonds 1,289 1,754
Purchase of shares of non-controlling interests (25) (697)
Net movements in other borrowings 209 220
Equity dividends paid (1,006) (993)
----------
Net cash outflow from financing activities (730) (1,041)
---------- ----------
Net increase in net cash and cash equivalents 130 692
Exchange differences (32) 14
Net cash and cash equivalents at beginning
of the period 721 693
----------
Net cash and cash equivalents at end of the
period 819 1,399
========== ==========
Net cash and cash equivalents consist of:
Cash and cash equivalents 950 1,591
Bank overdrafts (131) (192)
---------- ----------
819 1,399
========== ==========
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 2019
except for changes on 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 2019, with the
exception of changes in estimates disclosed in note 15 - 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 and interpretations
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 2019 with no impact on the group's consolidated
results, financial position or disclosures:
-- Amendments to IAS 28 - Long-term Interests in Associates and Joint Ventures
-- Amendments to IFRS 9 - Prepayment Features with Negative Compensation
-- Improvements to IFRS 3 and IFRS 11 - Business combinations
and Joint arrangements - Accounting for previously held
interests
-- Improvements to IAS 12 - Income taxes - Accounting for income
tax consequences of payments on financial instruments that are
classified as equity
-- Improvements to IAS 23 - Borrowing costs on completed qualifying assets
-- Amendments to IAS 19 - Plan Amendment, Curtailment or Settlement
The following standard issued by the IASB and endorsed by the
EU, has been adopted by the group:
IFRS 16 - Leases. IFRS 16 replaced existing lease guidance
including IAS 17 - Leases, IFRIC 4, SIC 15 and SIC 27. The group
adopted IFRS 16 with effect from 1 July 2019 by applying the
modified retrospective method, meaning that the figures, as at, and
for the six months ended 31 December 2018 and the year ended 30
June 2019 have not been restated.
Information in respect of the adoption of IFRS 16 is included in
Note 14.
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
2019 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, Guatemala and Mexico.
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 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, treasury and HR services. The
costs 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 2019.
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
2019 million million million GBP million million million million million GBP million million
Sales 2,830 2,971 1,212 893 2,898 811 (811) 10,804 27 10,831
====== ====== ====== ===== ==== ====== ===== ====== ======= ===== ==== ======
Net sales
At budgeted
exchange
rates(i) 2,395 1,617 825 679 1,455 874 (811) 7,034 27 7,061
Acquisitions
and disposals 25 5 17 - 1 - - 48 - 48
ISC allocation 8 37 3 8 7 (63) - - - -
Retranslation
to actual
exchange
rates 74 7 3 (7) 14 - - 91 - 91
------ ------ ------ ----- --- ------ ------- ------
Net sales 2,502 1,666 848 680 1,477 811 (811) 7,173 27 7,200
====== ====== ====== ===== ==== ====== ===== ====== ======= ===== ==== ======
Operating
profit/(loss)
At budgeted
exchange
rates(i) 1,098 573 164 250 424 73 - 2,582 (84) 2,498
Acquisitions
and disposals 1 (2) - - - - - (1) - (1)
ISC allocation 11 37 3 12 10 (73) - - - -
Fair value
remeasurement
of contingent
consideration (4) - - - - - - (4) - (4)
Fair value
remeasurement
of biological
assets - - - 4 - - - 4 - 4
Retranslation
to actual
exchange
rates 14 7 (8) (9) (2) - - 2 2 4
------ ------ ------ ----- --- ------ ------ --- ------- ----- ---- ------
Operating
profit/(loss)
before
exceptional
items 1,120 615 159 257 432 - - 2,583 (82) 2,501
Exceptional
items - - - - (59) - - (59) - (59)
------ ------ ----- ---- ------ ----- ------ --- ------- ----- ---- ------
Operating
profit/(loss) 1,120 615 159 257 373 - - 2,524 (82) 2,442
====== ====== ====== ===== ==== ====== ===== ====== === ======= ===== ===
Non-operating
items -
Net finance
charges (154)
Share of after
tax
results of
associates
and joint
ventures 176
------
Profit before
taxation 2,464
======
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
======
(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 = $1.26 (2018 - GBP1 =
$1.29) and euro - GBP1 = EUR1.14 (2018 - GBP1 = EUR1.12). Exchange
rates used to translate assets and liabilities at the balance sheet
date were US dollar - GBP1 = $1.32 (31 December 2018 - GBP1 =
$1.27, 30 June 2019 - GBP1 = $1.27) and euro - GBP1 = EUR1.18 (31
December 2018 - GBP1 = EUR1.11, 30 June 2019 - GBP1 = EUR1.12). The
group uses foreign exchange transaction hedges to mitigate the
effect of exchange rate movements.
3. Exceptional items
Exceptional items are those that in management's judgement need
to be disclosed separately. 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
2019 2018
GBP million GBP million
Items included in operating profit
Impairment of Old Tavern brand (59) -
Guaranteed minimum pension equalisation - (21)
(59) (21)
Non-operating items
Acquisition/sale of businesses
Step up acquisitions 8 -
Loss on the expected sale of United National
Breweries (7) (8)
Loss on disposal of associate (1) -
Portfolio of 19 brands - 154
- 146
Exceptional items before taxation (59) 125
Items included in taxation
Tax on exceptional operating items 14 4
Tax on exceptional non-operating items - (34)
14 (30)
Total exceptional items (45) 95
============ === ============ ====
Attributable to:
Equity shareholders of the parent company (25) 95
Non-controlling interests (20) -
------------ --- ------------ ----
Total exceptional items (45) 95
============ === ============ ====
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
2019 2018
GBP million GBP million
Interest income 122 102
Fair value gain on financial instruments 24 59
------------- --- ------------- ---
Total interest income 146 161
Interest charges (271) (224)
Fair value loss on financial instruments (23) (57)
------------- -------------
Total interest charges (294) (281)
------------- -------------
Net interest charges (148) (120)
============= =============
Net finance income in respect of post employment
plans in surplus 13 14
Hyperinflation adjustment in respect of Venezuela
(a) 3 6
Other finance income 1 -
------------- ---
Total other finance income 17 20
Net finance charge in respect of post employment
plans in deficit (9) (12)
Unwinding of discounts (7) (8)
Interest charge in respect of direct and indirect
tax (5) (5)
Change in financial liability (Level 3) (1) (2)
Other finance charges (1) (1)
------------- -------------
Total other finance charges (23) (28)
------------- -------------
Net other finance charges (6) (8)
============= =============
Included in interest charges was interest in respect of leases
of GBP7 million for the six months ended 31 December 2019 (2018 -
GBP4 million), including interest expense of GBP4 million as a
result of the adoption of IFRS 16.
(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. 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 2,525,956 for the six months ended 31 December 2019 (2018 -
VES/GBP 10,466).
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
2019 and 31 December 2018 and the impact that would have resulted
if the DICOM exchange rate had been applied for consolidation.
6 months to 31 December
2019 6 months to 31 December 2018
At estimated At DICOM exchange At estimated At DICOM
exchange rate rate exchange rate exchange rate
2,525,956 VES/GBP 61,213 VES/GBP 10,466 VES/GBP 809 VES/GBP
GBP million GBP million GBP million GBP million
Net sales - 4 - 1
Operating profit - 11 - -
Other finance income
- hyperinflation
adjustment 3 132 6 72
Net cash inflow
from operating activities - 7 - 1
Net assets 48 2,000 65 843
5. Taxation
For the six months ended 31 December 2019, the GBP530 million
taxation charge (2018 - GBP560 million) comprises a UK tax charge
of GBP133 million (2018 - GBP134 million) and a foreign tax charge
of GBP397 million (2018 - GBP426 million).
6. Intangible assets
In the six months ended 31 December 2019, an impairment charge
of GBP59 million in respect of the Old Tavern brand in India has
been recognised in other operating expenses. Forecast cash flow
assumptions were reduced principally due to the general economic
downturn in India. A pre-tax discount rate of 13% (2019 - 14%) for
India has been used to calculate the net present value of the
future cash flows expected to be generated by Old Tavern brand.
Sensitivity to change in key assumptions
Impairment testing for the six months ended 31 December 2019
identified cash-generating units (CGUs) as being sensitive to
reasonably possible changes in assumptions.
The table below shows the headroom at 31 December 2019 and the
impairment charge that would be required if the assumptions in the
calculation of their value in use were changed:
1ppt increase 5ppt decrease in
Carrying in 2ppt decrease annual growth rate
value of discount in annual growth forecast period
CGU Headroom rate rate 2020-2029
GBP million GBP million GBP million GBP million GBP million
--------------------- ------------ ------------ --------------- ------------------- ---------------------
India(i) 4,501 592 (59) - (978)
Antiquity brand(ii) 198 36 - - (19)
Windsor Premier
brand(iii) 607 6 (75) (167) -
(i) As India is a developing market, where maturity is not
expected for a number of years, a management forecast growth
projection was used until 2029. Reasonably possible changes in the
key assumptions that would result in an impairment of the
cash-generating unit is considered to be 5ppt decrease in the
annual growth rates throughout the forecast period or a 1ppt
increase in discount rate. The cumulative effect of such a change
is disclosed in the table above.
(ii) Antiquity brand is disclosed as sensitive as forecast cash
flow assumptions were reduced principally due to the general
economic downturn in India. The only change in the key assumptions
considered reasonably possible that would result in an impairment
of the brand would be a 5ppt decrease in the annual growth rates
throughout the forecast period. The cumulative effect of such a
change is disclosed in the table above.
(iii) The Windsor Premier brand is disclosed as sensitive due to
the challenging whisky market in Korea. Reasonably possible changes
in the key assumptions that would result in an impairment of the
brand would be a 2ppt decrease in the annual growth rate in
perpetuity or a 1ppt increase in discount rate. The cumulative
effect of such changes is disclosed in the table above.
It remains possible that changes in assumptions could arise
other than those indicated in the table above.
For all intangibles with an indefinite life, other than those
disclosed in the table above, management has concluded that no
reasonable possible change in the key assumptions on which it has
determined the recoverable amounts would cause their carrying
values to materially exceed their recoverable amounts.
7. Inventories
31 December 30 June 31 December
2019 2019 2018
GBP million GBP million GBP million
Raw materials and consumables 322 338 327
Work in progress 59 46 51
Maturing inventories 4,358 4,334 4,201
Finished goods and goods for resale 720 754 697
----------- ----------- -----------
5,459 5,472 5,276
=========== =========== ===========
8. Net borrowings
31 December 30 June 31 December
2019 2019 2018
GBP million GBP million GBP million
Borrowings due within one year and bank
overdrafts (3,381) (1,959) (1,742)
Borrowings due after one year (10,091) (10,596) (10,272)
Fair value of foreign currency forwards
and swaps 39 370 195
Fair value of interest rate hedging instruments 89 104 20
Lease liabilities (486) (128) (144)
---------- ---------- ----------
(13,830) (12,209) (11,943)
Cash and cash equivalents 950 932 1,591
---------- ---------- ----------
(12,880) (11,277) (10,352)
========== ========== ==========
Lease liabilities at 31 December 2019 include GBP376 million in
respect of leases that would have been accounted for as operating
leases prior to the adoption of IFRS 16. Comparative information
has not been restated.
9. Reconciliation of movement in net borrowings
Six months ended Six months ended
31 December 31 December
2019 2018
GBP million GBP million
Net increase in cash and cash equivalents
before exchange 130 692
Net increase in bonds and other borrowings(i) (1,503) (1,974)
-------------- --------------
Net increase in net borrowings from cash flows (1,373) (1,282)
Exchange differences on net borrowings 209 (32)
Other non-cash items(ii) (188) 53
Net borrowings at beginning of the period (11,277) (9,091)
Adoption of IFRS 16 (251) -
-------------- --------------
Net borrowings at end of the period (12,880) (10,352)
============== ==============
(i) In the six months ended 31 December 2019, net increase in
bonds and other borrowings excludes GBP5 million cash outflow in
respect of derivatives designated in forward point hedges (2018 -
nil).
(ii) In the six months ended 31 December 2019 other non-cash
items are principally in respect of leases of GBP169 million
entered into in the period. In the six months ended 31 December
2018 other non-cash items are principally in respect of changes in
the fair value of borrowings.
In the six months ended 31 December 2019, the group issued bonds
of $1,600 million (GBP1,289 million) and in the comparable period
the group issued bonds of EUR2,000 million (GBP1,754 million).
All bonds and commercial papers issued by Diageo plc's 100%
owned subsidiaries are fully and unconditionally guaranteed by
Diageo plc.
10. 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
have an expiry date, 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 2019 GBP165 million
(30 June 2019 - GBP174 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 2019 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.
The option is sensitive to reasonably possible changes in
assumptions. If the option were to be exercised as at 30 June 2021,
the fair value of the liability would increase by approximately
GBP15 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 month ended 31
December 2019.
The group's financial assets and liabilities measured at fair
value are categorised as follows:
31 December 2019 30 June 2019 31 December 2018
(restated(i)
)
GBP million GBP million GBP million
Derivative assets 379 531 293
Derivative liabilities (228) (129) (145)
------------- ---------- -------------
Valuation techniques based
on observable market input
(Level 2) 151 402 148
============= === ========== ============= ===
Financial assets - other 96 86 91
Financial liabilities - other (386) (401) (377)
------------- ---------- -------------
Valuation techniques based
on unobservable market input
(Level 3) (290) (315) (286)
============= ========== =============
(i) Restated to include contingent consideration of GBP206
million recognised on acquisitions of businesses in financial
liabilities - other.
Lease liabilities were GBP486 million at 31 December 2019 (30
June 2019 - GBP128 million prior to the adoption of IFRS 16).
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 2019 the fair value of gross borrowings
(excluding finance lease liabilities and the fair value of
derivative instruments) was GBP14,288 million and the carrying
value was GBP13,472 million (30 June 2019 - GBP13,240 million and
GBP12,555 million, respectively).
11. Dividends and other reserves
Six months ended Six months ended
31 December 31 December
2019 2018
GBP million GBP million
Amounts recognised as distributions to equity
shareholders in the period
Final dividend for the year ended 30 June 2019
of
42.47 pence per share (2018 - 40.40 pence) 1,006 993
================ ================
An interim dividend of 27.41 pence per share (2018 - 26.10
pence) was approved by the Board of Directors on 29 January 2020.
As the approval was after the balance sheet date, it has not been
included as a liability.
Other reserves of GBP1,930 million at 31 December 2019 (2018 -
GBP2,341 million) include a capital redemption reserve of GBP3,200
million (2018 - GBP3,176 million), a hedging reserve of GBP41
million surplus (2018 - GBP83 million deficit) and an exchange
reserve of GBP1,311 million deficit (2018 - GBP752 million
deficit).
12. Acquisition of businesses and purchase of non-controlling
interests
(i) Acquisition of businesses
In the six months ended 31 December 2019 Diageo completed a
number of small acquisitions. The largest of which were Seedlip Ltd
and Anna Seed 83 Ltd (the brand owner of Aecorn), makers of
distilled non-alcoholic spirits and aperitifs. Both acquisitions
were completed on 6 August 2019.
Provisional fair value of assets and liabilities acquired and
cash consideration paid in respect of acquisition of businesses in
the six months ended 31 December 2019 were as follows:
GBP million
Brands 102
Working capital (1)
Cash 2
Deferred tax liability (19)
---------
Fair value of assets and liabilities 84
Goodwill arising on acquisition 8
Step acquisition (23)
---------
Consideration payable 69
=========
Satisfied by:
Cash consideration paid 27
Contingent consideration payable 42
---------
69
=========
Cash consideration paid for subsidiaries (27)
Cash consideration paid for investments in associates (4)
Cash acquired 2
Capital injection to associates (23)
Cash consideration paid in respect of prior year acquisitions (54)
Net cash outflow on acquisition of business (106)
=========
The contingent consideration payable represents the present
value of payments up to GBP60 million linked to certain performance
targets and are expected to be paid over the next 6 years.
(ii) Purchase of shares of non-controlling interests
On 29 July 2019 East African Breweries Limited completed a
purchase of 4% of the share capital of Serengeti Breweries Limited
for $3 million (GBP2 million). This increased Diageo's effective
shareholding from 39.2% to 40.2%.
On 20 August 2019 Diageo acquired 3,310,515 shares of United
Spirits Limited (USL) for INR1,960 million (GBP23 million) which
increased Diageo's percentage of shares owned in USL from 54.78% to
55.24% (excluding 2.38% owned by the USL Benefit Trust).
13. Sale of businesses
In the six months ended 31 December 2018 Diageo completed the
sale of a portfolio of 19 brands to Sazerac for an aggregate
consideration of $550 million (GBP435 million).
14. Adoption of IFRS 16 Leases
The group adopted IFRS 16 with effect from 1 July 2019 by
applying the modified retrospective method, meaning that the
figures, as at, and for the six months ended 31 December 2018 and
the year ended 30 June 2019 have not been restated. Under the new
standard, outstanding lease liabilities have been recognised at 1
July 2019, for leases previously classified as operating leases, at
the present value of the future lease payments over their
reasonably certain lease term. Right-of-use assets have been
recognised equal to the net present value of the lease liabilities,
adjusted for the amount of any prepaid or accrued lease payment,
lease incentives and provisions for onerous leases. There was no
impact on retained earnings as at 1 July 2019. The interest rate
used to discount the future payments in the calculation of the
lease liability is the incremental borrowing rate at 1 July 2019
taking into account the currency and duration of the lease. The
weighted average incremental borrowing rate applied across all
operating leases capitalised on 1 July 2019 was 3.2%.
The group has decided to reduce the complexity of implementation
by taking advantage of a number of practical expedients on
transition on 1 July 2019 namely:
(i) to not capitalise leases which expire within a year of 1 July 2019;
(ii) to apply a single discount rate to portfolios of leases
with similar characteristics; and
(iii) to adjust the right-of-use asset by the amount of any
provision for onerous leases recognised immediately before the date
of initial application.
The group has not capitalised leases on transition where the
value of the asset when it is new is lower than $5,000 (low value
assets).
The group has recognised services associated with a lease as
other operating expenses. Payments associated with leases of low
value assets and leases with a lease term of twelve months or less
are recognised as other operating expenses.
A judgement in calculating the initial impact on adoption
includes determining the lease term where extension or termination
options exist. In such instances any economic incentive to retain
or end a lease have been considered and extension periods only
included when it is considered reasonably certain that an option to
extend a lease will be exercised.
The leases (previously classified as operating leases) which
have been 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.
A reconciliation of differences between the operating lease
commitments disclosed under IAS 17 and disclosed in note 19(b) of
Diageo's 2019 Annual Report and the lease liabilities under IFRS
16, at 1 July 2019, is as follows:
GBP million
----------------------------------------------------------- -------------
Operating lease commitments at 30 June 2019 (321)
----------------------------------------------------------- ---------
Leases expiring within a year of 1 July 2019 19
----------------------------------------------------------- ---------
Low value assets 11
----------------------------------------------------------- ---------
Impact of discounting 40
Total additional lease liabilities recognised on adoption
of IFRS 16 (251)
----------------------------------------------------------- ---------
Finance lease liabilities at 30 June 2019 (128)
----------------------------------------------------------- ---------
Total lease liabilities at 1 July 2019 (379)
----------------------------------------------------------- ---------
Total lease liabilities at 1 July 2019 - current (107)
----------------------------------------------------------- ---------
Total lease liabilities at 1 July 2019 - non-current (272)
----------------------------------------------------------- ---------
The impact of the adoption of IFRS 16 on affected lines of the
consolidated balance sheet at 1 July 2019 is as follows:
30 June 2019 IFRS 16 impact 1 July 2019
GBP million GBP million GBP million
------------ ---------------- -------------
Non-current assets
Property, plant and equipment 4,455 236 4,691
Other financial assets 404 1 405
Current assets
Trade and other receivables 2,694 (2) 2,692
Current liabilities
Other financial liabilities (307) (64) (371)
Trade and other payables (4,202) 13 (4,189)
Non-current liabilities
Other financial liabilities (124) (187) (311)
Provisions (317) 3 (314)
As a result of the adoption of IFRS 16 the total assets
increased by GBP235 million from GBP31,296 million to GBP31,531
million and the total liabilities increased by GBP235 million from
GBP21,140 million to GBP21,375 million on 1 July 2019.
There is no impact on deferred tax balances. With effect from 1
July 2019, the consolidated income statement includes the
depreciation of the right-of-use asset in operating profit and the
unwind of the discount on the lease liability in finance charges.
Under IAS 17 in the six months ended 31 December 2018 the operating
lease payments were included in operating profit in the income
statement. For the six months ended 31 December 2019 depreciation
of right-of-use assets was GBP39 million and the finance charge in
respect of the group's lease liabilities was GBP7 million.
The adoption of IFRS 16 resulted in an immaterial benefit to
operating profit and an immaterial increase in finance charges.
Profit before tax, taxation and earnings per share have not been
significantly impacted. The adoption of IFRS 16 has had no impact
on the group's net cash flows although a presentation change has
been reflected whereby the principal element of the lease payments
(for leases formerly classified as operating leases under IAS 17)
of GBP32 million in the six months ended 31 December 2019, are
disclosed as part of cash flow from financing activities and the
interest element is included in cash flow from operating
activities. Under IAS 17 both the principal and interest cash flows
from operating leases would have been disclosed as part of cash
flows from operating activities.
15. Contingent liabilities and legal proceedings
(a) Guarantees and related matters
As of 31 December 2019, 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). Following a series of further
transactions, as of 31 December 2019, Diageo has a 55.24%
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. On 10 January 2020, the
Supreme Court directed the High Court to decide the UBHL appeal
within three months.
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, a subsidiary of UBHL. $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 three instalments of $7 million (GBP5 million)
each would have become due on 25 February 2017, 25 February 2018
and 25 February 2019, 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 amounts
and did not do so. Diageo further believes that it 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, 22 August 2018
and 22 February 2019, 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, Watson (a company affiliated with
Dr Mallya) Continental Administration Services Limited (CASL) (a
company which holds assets on trust for and is affiliated with Dr
Mallya) 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 continues to prosecute its claims and to defend the
counterclaim. As part of this, on 18 December 2018, Diageo and the
other relevant members of its group filed an application for strike
out and/or summary judgement in respect of certain aspects of the
defence filed by Dr Mallya and the other defendants, including
their defence in relation to Watson and CASL's liability to repay
DHN. That application was made by DHN on the basis that the defence
filed by Dr Mallya and his co-defendants in relation to those
matters had no real prospect of success.
DHN's summary judgement and strike out application was heard by
the English High Court on 24 May 2019. The court decided in favour
of DHN that (i) Watson is liable to pay, and has no defence against
paying, $135 million (GBP102 million ) plus interest of $11 million
(GBP8 million) to DHN, and (ii) CASL is liable, as co-surety, to
pay, and has no defence against paying, 50% of any such amount
unpaid by Watson, i.e. up to $67.5 million (GBP51 million) plus
interest of $5.5 million (GBP4 million) to DHN. Watson and CASL
were ordered to pay such sums, as well as certain amounts in
respect of DHN and Diageo's costs, to DHN by 21 June 2019. Such
amounts were not paid on that date by either Watson or CASL.
Accordingly, Diageo and DHN have sought asset disclosure and are
considering further enforcement steps against those companies, both
in the United Kingdom and in other jurisdictions where they are
present or hold assets.
The remaining elements of the claims originally commenced on 16
November 2017 by Diageo and the relevant members of its group are
now proceeding to trial and following a case management conference
on 6 December 2019, that trial is scheduled to take place from 11
October 2021 through 21 October 2021.
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 and others 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 by DHN 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, DHN continues to work towards
enforcement of the security package, including, when appropriate,
in conjunction with Standard Chartered. 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, as well as a claim against CASL as a co-surety
with DHN of Watson's obligations. 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.
DHN and Diageo continue to prosecute these claims. As part of
that, 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.
The successful outcome of that application and the current status
of other aspects of the claims are described in paragraph (c)
above.
(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 co-operating 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 made its further submissions in the
matter, including at a personal hearing before a Deputy General
Manager of SEBI. On 26 June 2019, SEBI issued an order reiterating
the directions contained in its previous notice dated 16 June 2016.
As with the previous notice, Diageo believes SEBI's latest order to
be misconceived and wrong in law and has filed an appeal before SAT
against the order. This appeal is currently pending. 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 range of loss, if any, to which
any such action might give rise to 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's dispute with IDBI Bank Limited
Prior to the acquisition by Diageo of a controlling interest in
USL, USL had prepaid a term loan of GBP72 million (INR 6,280
million) taken through IDBI Bank Limited (IDBI), an Indian bank,
which was secured on certain fixed assets and brands of USL, as
well as by a pledge of certain shares in USL held by the USL
Benefit Trust (of which USL is the sole beneficiary). The maturity
date of the loan was 31 March 2015. IDBI disputed the prepayment,
following which USL filed a writ petition in November 2013 before
the High Court of Karnataka (the High Court) challenging the bank's
actions.
Following the original maturity date of the loan, USL received
notices from IDBI seeking to recall the loan, demanding a further
sum of GBP5 million (INR 459 million) on account of the outstanding
principal, accrued interest and other amounts, and also threatening
to enforce the security in the event that USL did not make these
further payments. Pursuant to an application filed by USL before
the High Court in the writ proceedings, the High Court directed
that, subject to USL depositing such further amount with the bank
(which amount was duly deposited by USL), the bank should hold the
amount in a suspense account and not deal with any of the secured
assets including the shares until disposal of the original writ
petition filed by USL before the High Court.
On 27 June 2019, a single judge bench of the High Court issued
an order dismissing the writ petition filed by USL, amongst other
things, on the basis that the matter involved an issue of breach of
contract by USL and was therefore not maintainable in exercise of
the court's writ jurisdiction. USL has since filed an appeal
against this order before a division bench of the High Court, which
on 30 July 2019 has issued an interim order directing the bank to
not deal with any of the secured assets until the next date of
hearing. On 13 January 2020, the division bench of the High Court
admitted the writ appeal and extended the interim stay. This appeal
is currently pending.
(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 expects this matter
to reach a conclusion in fiscal 2020, and it believes the outcome
will have an immaterial effect on its financial results in the
period.
(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 April 2019, the European Commission issued its decision in a
state aid investigation into the Group Financing Exemption in the
UK controlled foreign company rules. The European Commission found
that part of the Group Financing Exemption constitutes state aid.
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 ultimate outcome of this
investigation. The UK government and other UK-based international
companies, including Diageo, have appealed to the General Court of
the European Union against the decision. The UK government is
required to commence collection proceedings and therefore it is
expected that Diageo will have to make a payment in the year ending
30 June 2020 in respect of this case. At present it is not possible
to determine the amount that the UK government will seek to
collect. If the decision of the European Commission is upheld,
Diageo calculates its maximum potential liability to be
approximately GBP275 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 judgement, 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 GBP350 million for Brazil and up to approximately
GBP170 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.
In addition to the risks highlighted above, payments were made
under protest in India in respect of the periods 1 July 2009 to 30
June 2015 in relation to tax assessments where the risk is
considered to be remote. These payments have to be made in order to
challenge the assessments and as such have been recognised as a
receivable on the consolidated balance sheet. The total amount of
protest payments recognised as a receivable as at 31 December 2019
is GBP101 million (corporate tax payments of GBP91 million and
indirect tax payments of GBP10 million).
(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.
16. 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 2019 on terms other than those that
prevail in arm's length transactions.
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
2019. 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 2019;
-- 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 and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
29 January 2020
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 2018 (2018)
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 current period reported
numbers at prior 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 Explanatory Notes, 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 certain non-GAAP
measures, including organic movements. These non-GAAP measures 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 profit increases
to the most comparable GAAP measures as it is not possible to
predict, without unreasonable effort, 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
Organic information is presented using pounds sterling amounts
on a constant currency basis excluding the impact of exceptional
items, certain fair value remeasurement and acquisitions and
disposals. Organic measures enable users to focus on the
performance of the business which is common to both years 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 absolute amount in the associated relevant row titled
'adjusted'. Organic operating margin is calculated by dividing
operating profit before exceptional items by net sales after
excluding the impact of exchange rate movements, certain fair value
remeasurement and acquisitions and disposals.
(a) Exchange rates
'Exchange' in the organic movement calculation reflects the
adjustment to recalculate the reported results as if they had been
generated at the prior period weighted average exchange rates.
Exchange impacts in respect of the external hedging of
intergroup sales by the markets in a currency other than their
functional currency and the intergroup recharging of services are
also translated at prior period weighted average exchange rates and
are allocated to the geographical segment to which they relate.
Residual exchange impacts are reported as part of the Corporate
segment.
(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 reporting period,
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 that in management's judgement need
to be disclosed separately. Such items are included within the
income statement caption to which they relate, and are excluded
from the organic movement calculations. 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.
Exceptional operating items are those that are considered to be
material and unusual or non-recurring in nature and are part of the
operating activities of the group such as impairments of fixed
assets, indirect tax 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.
Exceptional current and deferred tax items, comprising material
unusual non-recurring items, impact taxation. Examples include
direct tax provisions and settlements in respect of prior years and
the remeasurement of deferred tax assets and liabilities following
tax rate changes.
(d) Fair value remeasurement
Fair value remeasurement in the organic movement calculation
reflects an adjustment to eliminate the impact of fair value
changes in biological assets and fair value changes relating to
contingent consideration liabilities and equity options that arose
on acquisitions recognised in the income statement.
Organic movement calculations for the six months ended 31
December 2019 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)
2018 reported 25.6 25.7 17.6 12.4 49.2 - 130.5
Disposals(iii) (1.3) - (0.3) - - - (1.6)
------- ------- ------- -------- ------- --------- -------
2018 adjusted 24.3 25.7 17.3 12.4 49.2 - 128.9
Organic movement 0.7 (0.3) 0.3 (0.1) (0.4) - 0.2
Disposals(iii) 1.1 - 0.3 - - - 1.4
2019 reported 26.1 25.4 17.9 12.3 48.8 - 130.5
======= ======= =======
Organic movement
% 3 (1) 2 (1) (1) - -
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
Sales
2018 reported 2,667 2,879 1,160 864 2,765 28 10,363
Exchange(i) (24) (28) (4) 1 5 - (50)
Disposals(iii) (81) (3) (42) (1) (1) - (128)
------ ------ ------ ------ ------ ------- ---- ------
2018 adjusted 2,562 2,848 1,114 864 2,769 28 10,185
Organic movement 150 107 64 36 85 (1) 441
Acquisitions and
disposals(iii) 34 5 30 - 1 - 70
Exchange(i) 84 11 4 (7) 43 - 135
------ ------ ------ ------ ------ ------- ---- ------
2019 reported 2,830 2,971 1,212 893 2,898 27 10,831
Organic movement
% 6 4 6 4 3 (4) 4
Europe Latin
North and America Asia
America Turkey and Pacific Total
GBP GBP Africa Caribbean GBP Corporate GBP
million million GBP million GBP million million GBP million million
Net sales
2018 reported 2,356 1,633 821 672 1,398 28 6,908
Exchange(i) (20) (20) (4) 2 3 - (39)
Disposals(iii) (62) (1) (29) (1) (1) - (94)
2018 adjusted 2,274 1,612 788 673 1,400 28 6,775
Organic movement 129 42 40 14 62 (1) 286
Acquisitions and
disposals(iii) 25 5 17 - 1 - 48
Exchange(i) 74 7 3 (7) 14 - 91
2019 reported 2,502 1,666 848 680 1,477 27 7,200
Organic movement
% 6 3 5 2 4 (4) 4
Marketing
2018 reported 383 260 91 110 208 2 1,054
Exchange (2) (7) - 1 - - (8)
2018 adjusted 381 253 91 111 208 2 1,046
Organic movement 22 11 5 2 22 - 62
Acquisitions(iii) 1 1 - - - - 2
Exchange - 3 1 - 2 - 6
2019 reported 404 268 97 113 232 2 1,116
Organic movement
% 6 4 5 2 11 - 6
Operating profit
2018 reported 1,101 614 153 254 409 (80) 2,451
Exchange(ii) (7) (13) (3) 1 2 1 (19)
Disposals(iii) (41) (1) (2) - - - (44)
2018 adjusted 1,053 600 148 255 411 (79) 2,388
Organic movement 56 10 19 7 23 (5) 110
Acquisitions and
disposals(iii) 1 (2) - - - - (1)
Fair value
remeasurement
of contingent
considerations
and equity option (4) - - - - - (4)
Fair value
remeasurement
of biological
assets - - - 4 - - 4
Exchange(ii) 14 7 (8) (9) (2) 2 4
2019 reported 1,120 615 159 257 432 (82) 2,501
Organic movement
% 5 2 13 3 6 (6) 5
Organic operating
margin %
2019 46.2% 36.9% 20.2% 38.1% 29.7% n/a 35.4%
2018 46.3% 37.2% 18.8% 37.9% 29.4% n/a 35.2%
Margin improvement
/ (decline) (bps) (16) (34) 139 25 33 n/a 13
(1) For the reconciliation of sales to net sales see 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 for sales and net sales is principally in respect of the
translation exchange impact of the weakening of sterling against
the US dollar, the Indian rupee and the Mexican peso, partially
offset by strengthening of sterling against the euro.
(ii) The impact of movements in exchange rates on reported
figures for operating profit is principally in respect of the
transactional exchange impact of the strengthening of sterling
against the US dollar.
(iii) In the six months ended 31 December 2019 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
2018
Disposals
Portfolio of 19 brands (1.3) (88) (67) - (42)
South African ready to
drink (0.3) (38) (25) - -
South African cider - (2) (2) - (2)
(1.6) (128) (94) - (44)
Six months ended 31 December
2019
Acquisition
Seedlip and Aecorn - 5 5 2 (3)
- 5 5 2 (3)
Disposals
Supply contracts in respect
of the 19 brands sold
to Sazerac 1.1 35 26 - 2
South African ready to
drink 0.3 30 17 - -
1.4 65 43 - 2
Acquisitions and disposals 1.4 70 48 2 (1)
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 2019 and 31 December 2018 are set out in the
table below.
2019 2018
GBP million GBP million
Profit attributable to equity shareholders
of the parent company 1,865 1,976
Exceptional operating and non-operating items
attributable to equity shareholders of the
parent company 33 (125)
Tax in respect of exceptional operating and
non-operating items attributable to equity
shareholders of the parent company (8) 30
1,890 1,881
Weighted average number of shares million million
Shares in issue excluding own shares 2,356 2,442
Dilutive potential ordinary shares 10 10
2,366 2,452
pence pence
Basic earnings per share before exceptional
items 80.2 77.0
Diluted earnings per share before exceptional
items 79.9 76.7
(1) The impact of the adoption of IFRS 16 on 1 July 2019 on
earnings per share before exceptional items for the six months
ended 31 December 2019 is immaterial.
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 2019 and 31 December 2018 are set out in the table
below:
2019 2018
GBP million GBP million
Net cash inflow from operating activities 1,288 1,604
Disposal of property, plant and equipment and computer
software 8 13
Purchase of property, plant and equipment and computer
software (330) (271)
Free cash flow 966 1,346
(1) Free cash flow for the six months ended 31 December 2019 has
benefited by GBP32 million as a result of the adoption of IFRS 16
on 1 July 2019.
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 2019 and 31 December 2018 are
set out in the table below.
2019 2018
GBP million GBP million
Operating profit 2,442 2,430
Exceptional operating items 59 21
Profit before exceptional operating items attributable
to non-controlling interests (89) (91)
Share of after tax results of associates and joint ventures 176 179
Tax at the tax rate before exceptional items of 21.6%
(2018 - 21.2%) (559) (538)
2,029 2,001
Average net assets (excluding net post employment assets/liabilities) 9,520 11,279
Average non-controlling interests (1,751) (1,766)
Average net borrowings 12,204 9,722
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 23,174 22,436
Return on average total invested capital 17.5% 17.8%
(1) Calculation of average net borrowings includes GBP251million
in respect of IFRS 16 adoption for 1st July 2019.
(2) The return on average total invested capital for the six
months ended 31 December 2019 was adversely impacted by 20bps as a
result of the adoption of IFRS 16 on 1 July 2019.
Net borrowings to earnings before exceptional operating items,
interest, tax, depreciation, amortisation and impairment (adjusted
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 adjusted EBITDA.
Calculations for the ratio of adjusted net borrowings to
adjusted EBITDA at 31 December 2019 and 31 December 2018 are set
out in the table below.
2019 2018
GBP million GBP million
Borrowings due within one year 3,381 1,742
Borrowings due after one year 10,091 10,272
Fair value of foreign currency derivatives and interest
rate hedging instruments (128) (215)
Lease liabilities 486 144
Less: Cash and cash equivalents (950) (1,591)
Net borrowings 12,880 10,352
Post employment benefit liabilities before tax 753 739
Adjusted net borrowings 13,633 11,091
Operating profit 4,054 3,931
Depreciation, amortisation and impairment (excluding
exceptional items) 416 366
Share of after tax results of associates and joint
ventures 309 320
Exceptional impairment 59 128
Non-operating items (2) 146
EBITDA 4,836 4,891
Exceptional operating items (excluding impairment) 53 21
Non-operating items 2 (146)
Adjusted EBITDA 4,891 4,766
Adjusted net borrowings to adjusted EBITDA 2.8 2.3
(1) EBITDA and adjusted EBITDA is calculated based on last 12
months.
(2) The ratio of adjusted net borrowings to adjusted EBITDA at
31 December 2019 increased by 0.1 times as a result of the adoption
of IFRS 16 on 1 July 2019.
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 2019 and six
months ended 31 December 2018 are set out in the table below:
2019 2018
GBP million GBP million
Tax before exceptional items (a) 544 530
Tax in respect of exceptional items (14) 30
Taxation on profit (b) 530 560
Profit from operations before taxation and exceptional
items (c) 2,523 2,502
Non-operating items - 146
Exceptional operating items (59) (21)
Profit before taxation (d) 2,464 2,627
Tax rate before exceptional items (a/c) 21.6% 21.2%
Tax rate from operations after exceptional items
(b/d) 21.5% 21.3%
(1) The tax rate before exceptional items is not materially
affected by the adoption of IFRS 16 on 1 July 2019.
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 Diageo's 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 are not limited to,
Johnnie Walker Blue Label, Johnnie Walker Green Label, Johnnie
Walker Gold Label Reserve, Johnnie Walker Aged 18 Years, John
Walker & Sons Collection 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, Ketel One Botanicals; Don
Julio, Casamigos, Zacapa, Bundaberg SDlx, Shui Jing Fang, Jinzu
gin, Haig Club whisky, Orphan Barrel whiskey and DeLeón Tequila;
Villa Ascenti, Copper Dog whisky, Belsazar.
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
2019 and under 'Risk Factors' in the Annual Report on Form 20-F for
the year ended 30 June 2019.
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 disputes
(including but not limited to any such dispute between the United
States and the European Union and/or the United Kingdom) and the
process surrounding 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); any disruption to
the business caused by health concerns or pandemics; 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.
Brexit and related risks
The process surrounding the United Kingdom's future trading
relationship with the European Union continues. We remain of the
view that, in the event of either a future free trade agreement
(FTA) or a 'no FTA' outcome at the end of the implementation period
between the UK and the EU, the direct financial impact to Diageo
will not be material. In the EU, we expect that the vast majority
of our finished case goods will continue to trade tariff free, with
no change to existing tariffs in either scenario. There has been
progress made in relation to the future trading arrangements of the
UK with a number of third party countries agreeing to trade on the
terms of existing EU FTAs, once the UK leaves the EU. If the UK
Government is unable to renew all of the existing FTAs on which we
rely, trading could revert to WTO rules. We have mitigation plans
in place to minimise any short term disruption that could arise
from such a scenario.
We have further considered the principal impact to our supply
chain of a no FTA scenario which we have assessed as limited and
believe that we have appropriate plans in place to mitigate this
risk. The full implications of Brexit will not be understood until
future trade, regulatory and tax arrangements 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, as well as the
broader environment risks, including a continuing focus on
identifying critical decision points to ensure potential disruption
is minimised, and take prudent actions to mitigate these risks
wherever practical.
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 or regulatory enquiries,
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.
Factors that could cause actual results and developments to
differ materially from those expressed or implied by
forward-looking statements 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 disputes, including but not limited to any
such dispute between the United States and the European Union
and/or the United Kingdom) or any tariffs, duties or other
restrictions or barriers imposed on the import or export of goods
between territories;
-- the process surrounding the United Kingdom's exit from the
European Union, which could lead to a sustained period of economic
and political uncertainty and complexity whilst 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 above);
-- changes in consumer preferences and tastes, including as a
result of changes in demographics, evolving social trends
(including any shifts in consumer tastes towards small-batch craft
alcohol, low or no alcohol, or other alternative products), changes
in travel, vacation or leisure activity patterns, weather
conditions, health concerns, pandemics and/or a downturn in
economic conditions;
-- any litigation or other similar proceedings (including with
tax, 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;
-- Diageo's ability to maintain its brand image and corporate
reputation or to adapt to a changing media environment;
-- contamination, counterfeiting or other circumstances which
could harm the level of customer support for Diageo's brands and
adversely impact its sales;
-- 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;
-- increased costs for, or shortages of, talent, as well as labour strikes or disputes;
-- 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;
-- 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.
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 2019 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 2020.
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), Susan Kilsby (Senior Independent Director and
Chairman of the Remuneration Committee), Alan Stewart
(Non-Executive Director and Chairman of the Audit Committee) and
Non-Executive Directors: Debra Crew, Lord Davies of Abersoch, Ho
KwonPing and Nicola Mendelsohn.
Webcast, presentation slides and transcript
At 07.15 (UK time) on Thursday 30 January 2020, 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 at this time.
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 30 January 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: +44 (0)330 027 1446
From the UK (free call): 0800 756 3333
From the USA: +1 334 777 6978
From the USA (free call): 800 367 2403
The conference call is for analysts and investors only. To join
the call please use the password already sent to you or email
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A transcript of the Q&A session will be available for
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To hear a replay of the call, please use the telephone numbers
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Investor enquiries to: Andy Ryan +44 (0) 20 8978 6504
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Media enquiries to: Jessica Rouleau +44 (0) 7925 642 561
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END
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