TIDMDGE
RNS Number : 9983U
Diageo PLC
04 August 2020
Preliminary results, year ended 30 June 2020
4 August 2020
Consistent first half performance significantly impacted by Covid-19
in the second half
-- Reported net sales (GBP11.8 billion) were down 8.7% driven by
organic declines. Reported operating profit (GBP2.1 billion)
declined 47.1%, driven mainly by exceptional operating items and
organic net sales.
-- Organic net sales were down 8.4%, with growth in North
America more than offset by declines in all other regions. Organic
volumes were down 11.2%.
-- Organic operating profit was down 14.4%, ahead of organic net
sales, driven by volume declines, cost inflation and unabsorbed
fixed costs that were partially offset by short term cost
reductions and ongoing productivity benefits.
-- Solid cash flow delivery with net cash from operating
activities at GBP2.3 billion, GBP0.9 billion lower than prior
period and free cash flow at GBP1.6 billion, GBP1.0 billion lower
than prior period, in each case largely due to lower organic
operating profit, lower dividends from associates, one-off tax
impacts and increased working capital use.
-- Measures have been put in place to reinforce Diageo's already
solid liquidity including pausing the current three-year return of
capital programme, bringing forward a GBP2.0bn USD bond issuance
launched in April 2020 and putting in place an additional committed
credit facility of GBP2.5 billion.
-- Exceptional operating items included non-cash impairment
charges of GBP1.3 billion. These were in India, Nigeria, Ethiopia
and on the Windsor brand in Korea, reflecting the impact of
Covid-19 and challenging trading conditions.
-- Basic eps of 60.1 pence decreased by 54.0% primarily due to
exceptional operating items. Pre-exceptional eps declined 16.4% to
109.4 pence, driven primarily by lower operating profit.
-- The final recommended dividend of 42.47 pence per share is
the same as the final dividend for fiscal 19. This brings the full
year dividend for fiscal 20 to 69.88 pence per share, an increase
of 2% .
See Explanatory Notes for explanation and reconciliation of
non-GAAP measures.
Ivan Menezes, Chief Executive, commenting on the results said:
"Fiscal 20 was a year of two halves: after good, consistent
performance in the first half of fiscal 20, the outbreak of
Covid-19 presented significant challenges for our business,
impacting the full year performance. Through these challenging
times we have acted quickly to protect our people and our business,
and to support our customers, partners and communities.
The actions we have taken to strengthen Diageo over the last six
years provide a solid foundation to respond to the impacts of the
pandemic. We are now a more agile, efficient and effective
business.
We have taken decisive action through the second half of fiscal
20, tightly managing our costs, reducing discretionary expenditure
and reallocating resources across the group. We are further
enhancing our data analytics and technology tools to rapidly
respond to local consumer and customer shifts triggered by the
pandemic. We have strengthened liquidity, giving us flexibility to
continue to invest effectively in the business for the long
term.
While the trajectory of the recovery is uncertain, with
volatility expected to continue into fiscal 21, I am confident in
our strategy, the resilience of our business and am very proud of
the way our people have responded. We are well-positioned to emerge
stronger."
Key financial information
For the year ended 30 June 2020
Summary financial information
Organic Reported
growth growth
2020 2019 % %
----------------------------------------- ----------- ------- ------- ------- ----------
Volume EUm 217.0 245.9 (11) (12)
----------------------------------------- ----------- ------- ------ ------
Net sales GBP million 11,752 12,867 (8) (9)
----------------------------------------- ----------- ------ ------ ------
Marketing GBP million 1,841 2,042 (10) (10)
----------------------------------------- ----------- ------- ------
Operating profit before exceptional
items GBP million 3,494 4,116 (14) (15)
----------------------------------------- ----------- ------ ------ ------
Exceptional operating items (i) GBP million (1,357) (74)
----------------------------------------- ----------- ------ ------ -------
Operating profit GBP million 2,137 4,042 (47)
----------------------------------------- ----------- ------ ------ -------
Share of associate and joint venture
profit after tax GBP million 282 312 (10)
----------------------------------------- ----------- ------ ------ -------
Non-operating exceptional items
(i) GBP million (23) 144
----------------------------------------- ----------- ------ ------ -------
Net finance charges GBP million (353) (263)
----------------------------------------- ----------- ------ ------ -------
Exceptional taxation credit/(charge)
(i) GBP million 154 (39)
----------------------------------------- ----------- ------ ------ -------
Tax rate including exceptional items % 28.8 21.2 36
----------------------------------------- ----------- ------ ------- -------
Tax rate before exceptional items % 21.7 20.6 5
----------------------------------------- ----------- ------ ------ -------
Profit attributable to parent company's
shareholders GBP million 1,409 3,160 (55)
----------------------------------------- ----------- ------ ------ -------
Basic earnings per share pence 60.1 130.7 (54)
----------------------------------------- ----------- ------ ------ -------
Earnings per share before exceptional
items pence 109.4 130.8 (16)
----------------------------------------- ----------- ------ ------ -------
Recommended full year dividend pence 69.9 68.6 2
----------------------------------------- ----------- ------ ------ ------- ------
(i) For further details on exceptional items see Summary Income
Statement (c) Exceptional items and Notes, Exceptional items
Outlook for exchange
Given the continued uncertainty caused by the ongoing Covid-19
pandemic, we are not able to provide specific financial guidance
and as such not able to provide the expected impact of exchange for
the year ending 30th June 2021.
Outlook for tax
The tax rate before exceptional items for the year ended 30 June
2020 was 21.7%, consistent with our guidance of 21% to 22% and
compared with 20.6% in the prior comparable period. We continue to
expect a tax rate before exceptional items for the year ending 30
June 2021 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 from 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. This
agreement was executed in full with 38.7 million shares repurchased
to a value of GBP1.25 billion. The shares purchased under the share
buyback programme were cancelled. On 9 April 2020 Diageo announced
that it had not initiated the next phase of the three-year
programme and that it would not do so during the remainder of
fiscal 2020.
At 30 June 2020 the leverage ratio, calculated as adjusted net
debt to adjusted EBITDA, was 3.3x and Diageo anticipates leverage
to be above the target range of 2.5-3.0x through the year ending 30
June 2021. As such Diageo does not currently plan to reinitiate the
programme until the leverage ratio is back within the target
range.
(i)
Net sales (GBP million)
Reported net sales declined
8.7
%
Organic net sales declined 8.4%
(i
Net sales GBP million
---------------------------- -------------
2019 12,867
----------
Exchange(i) 32
Acquisitions and disposals (76)
Reclassification(ii) (10)
Volume (1,416)
Price/mix 355
2020 11,752
---------------------------- ----------
(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.
(ii) For the year ended 30 June 2019 trade investment of GBP10
million has been reclassified from marketing to net sales.
Reported net sales declined 8.7%, driven mainly by decline in
organic net sales and, to a lesser extent, the negative impact of
acquisitions and disposals, partially offset by favourable foreign
exchange.
Organic net sales declined 8.4% driven by an 11.2% reduction in
volume partially offset by 2.8% positive price/mix. All regions
reported declines in organic net sales except for North America and
this shift in market mix was the main driver behind the positive
price/mix.
Operating profit (GBP million)
Reported operating profit declined 47.1%
Organic operating profit declined 14.4 %
Operating profit GBP million
----------------------------- -------------
2019 4,042
----------------------------- ----------
Exceptional operating items (1,283)
Exchange (1)
----------------------------- ----------
Acquisitions and disposals (34)
FVA(i) 2
Organic movement (589)
-----------------------------
2020 2,137
----------------------------- ----------
(i) For further details on exceptional items see Summary Income
Statement (c) Exceptional items.
(ii) Fair value adjustments. For further details on fair value
remeasurement see Summary Income Statement (d) Fair value
remeasurement.
Reported operating profit was down 47.1% mainly driven by
exceptional operating items and by decline in organic operating
profit. Exceptional operating items were mainly driven by non-cash
impairments in India, Korea, Nigeria and Ethiopia due to Covid-19
and challenging trading conditions.
Organic operating profit declined ahead of net sales at 14.4%
with first half growth of 4.6% more than offset by impact of
Covid-19 in the second half.
Operating margin (%)
Reported operating margin declined 1,323bps
Organic operating margin declined 212bps
Operating margin ppt
----------------------------- ---------
2019 31.4
Exceptional operating items (10.97)
-----------------------------
Exchange (0.09)
------
Acquisitions and disposals (0.08)
Other(i) 0.03
Gross margin (1.74)
Marketing 0.22
Other operating items (0.60)
2020 18.2
----------------------------- ------
(i) Fair value adjustments and reclassification.
Reported operating margin declined 1,323bps mainly driven by
exceptional operating items and decline in organic operating
margin.
Organic operating margin declined 212bps driven by lower volumes
impacting fixed cost absorption, cost inflation and other expense
offsetting savings in marketing investment and productivity
benefits from cost efficiencies.
Basic earnings per share (pence)
Basic eps decreased 54.0% from 130.7 pence to 60.1 pence
Eps before exceptional items decreased 16.4% from 130.8 pence to
109.4 pence
(
Basic earnings per share pence
--------------------------------- --------
2019 130.7
--------------------------------- -----
Exceptional items after tax (49.2)
Acquisitions and disposals(i) (1.2)
--------------------------------- -----
Organic operating profit growth (24.4)
--------------------------------- -----
Associates and joint ventures (1.2)
-----
Finance charges(ii) (1.2)
--------------------------------- -----
Tax(iii) 3.9
-----
Share buyback(i) 1.1
-----
Non-controlling interests 1.5
--------------------------------- -----
Other(iv) 0.1
--------------------------------- -----
2020 60.1
--------------------------------- -----
(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 buyback.
(iv) Fair value adjustments and exchange on operating profit.
Basic eps decreased 70.6 pence principally due to impairments in
exceptional items and the decline in organic operating profit. For
further detail see Summary Income Statement (c) Exceptional items
and Notes, Exceptional items.
Eps before exceptional items decreased 21.4 pence driven by
decline in organic operating profit, lower income from associates
and joint ventures, increased finance charges and the impact of
acquisitions and disposals. These were partially offset by tax,
lower non-controlling interests and the impact of the share buyback
programme.
Free cash flow (GBP million)
Generated GBP2,320 million from operating activities(i)(ii)
and
GBP1,634 million free cash flow.
Free cash flow GBP million
---------------------- -------------
2019 2,608
---------------------- ----------
Exchange(iii) (1)
---------------------- ----------
Operating profit(iv) (541)
----------------------
Working capital(v) (106)
----------
Capex (47)
---------------------- ----------
Tax (96)
---------------------- ----------
Interest (56)
---------------------- ----------
Other(vi) (127)
---------------------- ----------
2020 1,634
---------------------- ----------
(i) Net cash from operating activities excludes net capex and
movements in loans and other investments (2020 - GBP(686) million;
2019 - GBP(640) million).
(ii) Net cash from operating activities and free cash flow for
the year ended 30 June 2020 benefited by GBP74 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 GBP2,320 million, a
decrease of GBP928 million compared to the prior period. Free cash
flow was GBP1,634 million, GBP974 million lower compared to prior
period primarily driven by the decline in operating profit, lower
dividends from joint ventures and associates (see note 14(g) Notes)
increased use of working capital, higher tax payments and higher
interest charges. The tax increase was mainly due to one-off tax
settlements and change in payment timing in the first half, which
was partially offset by lower tax on reduced earnings in the second
half as well as some delay in second half payments associated with
Covid-19
Return on average invested capital (%)(i)
ROIC decreased 267bps
Return on average invested capital ppt
------------------------------------ --------
2019 15.1
Exchange 0.22
Acquisitions and disposals (0.12)
-----
Organic operating profit growth (2.60)
Associates and joint ventures (0.24)
------------------------------------ -----
Tax 0.29
------------------------------------ -----
Other (0.22)
2020 12.4
------------------------------------ -----
(i) ROIC calculation excludes exceptional operating items from
operating profit and includes an adverse impact of 18bps as a
result of the adoption of IFRS 16 on 1 July 2019.
ROIC decreased 267bps against the prior comparable period driven
mainly by organic operating profit decline.
Reported growth by region F20 FY
Volume Net sales Marketing Operating profit(i)
% EUm % GBP million % GBP million % GBP million
------------------------- ---- ------ ---- ----------- ----- ------------- ----------- -------------
North America (2) (1.0) 4 163 (5) (35) 4 86
------------------------- --- ----- --- ---------- ---- --------- ------- ---------
Europe and Turkey (11) (5.2) (13) (372) (13) (62) (25) (257)
------------------------- --- ----- --- ---------- ---- --------- ------- ---------
Africa (14) (4.8) (16) (251) (8) (14) (63) (174)
------------------------- --- ----- --- ---------- ---- --------- ------- ---------
Latin America and
Caribbean (15) (3.4) (20) (222) (23) (46) (32) (117)
------------------------- --- ----- --- ---------- ---- --------- ------- ---------
Asia Pacific (15) (14.5) (16) (418) (11) (47) (29) (202)
------------------------- --- ----- --- ---------- ---- --------- ------- ---------
Corporate - - (28) (15) 100 3 (22) 42
------------------------- --- ----- --- ---------- ---- --------- ------- ---------
Diageo (12) (28.9) (9) (1,115) (10) (201) (15) (622)
------------------------- --- ----- --- ---------- ---- --------- ------- ---------
Organic growth by region F20 FY
Volume Net sales Marketing Operating profit(i)
% EUm % GBP million % GBP million % GBP million
------------------------ ---- ---- ----------- ----- ------------- ------------ -------------
North America - 0.1 2 105 (6) (49) 4 80
------------------------ --- ----- --- ---------- ---- --------- ------- --- ---------
Europe and Turkey (11) (5.2) (12) (358) (12) (56) (24) (243)
------------------------ --- ----- --- ---------- ---- --------- ------- ---------
Africa (13) (4.0) (13) (200) (8) (14) (56) (150)
------------------------ --- ----- --- ---------- ---- --------- ------- ---------
Latin America and
Caribbean (15) (3.4) (15) (169) (15) (29) (29) (107)
------------------------ --- ----- --- ---------- ---- --------- ------- ---------
Asia Pacific (15) (14.5) (16) (423) (11) (47) (29) (207)
------------------------ --- ----- --- ---------- ---- --------- ------- ---------
Corporate - - (29) (16) - - 20 38
------------------------ --- ----- --- ---------- ---- --------- ------- --- ---------
Diageo (11) (27.0) (8) (1,061) (10) (195) (14) (589)
------------------------ --- ----- --- ---------- ---- --------- ------- ---------
(i) Before operating exceptional items.
Organic net sales growth
F20H1 F20H2(i)
-------- -----------
% %
----------------------------- -------- -----------
North America 6 (1)
----------------------------- ---- -------
Europe and Turkey 3 (31)
----------------------------- ---- -------
Africa 5 (33)
----------------------------- ---- -------
Latin America and Caribbean 2 (40)
----------------------------- ---- -------
Asia Pacific 4 (38)
----------------------------- ---- -------
Corporate (4) (56)
----------------------------- ---- -------
Diageo 4 (23)
----------------------------- ---- -------
(i) F20 H2 growth rates are based on unrounded numbers and not
necessarily identical to the difference of full year less first
half due to acquisitions and disposals and reclassification. For
further details on acquisitions and disposals see Notes,
Acquisition of businesses and purchase of non-controlling interests
and Notes, Sale of businesses.
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
For the year ended 30 June 2020
North America
North America delivered net sales growth of 2%, with growth in
all three markets, US Spirits, Diageo Beer Company USA and Canada.
Strong net sales growth in the first half of the year was only
partially offset by lower on-trade sales in the second half. This
reflects strong demand in the off-trade channel during Covid-19. US
Spirits net sales increased 2%. Tequila net sales grew 36%
reflecting strong double-digit growth in Don Julio and Casamigos
throughout the year. Crown Royal net sales increased 8% driven by
the sustained performance of innovations. Scotch net sales declined
9%. Good growth in Malts was offset by lower sales of Johnnie
Walker, as a result of the on-trade channel closure in the second
half and lapping the prior year success of "White Walker by Johnnie
Walker". Vodka net sales declined 7% due to lower sales of
Smirnoff, Ketel One and Cîroc. Bulleit net sales increased 4%.
Captain Morgan net sales decreased 5%. Diageo Beer Company USA grew
net sales 8% as a result of the continued strong performance of
ready to drink products. Beer net sales declined 5% due to the
closure of the on-trade channel as a result of Covid-19. Net sales
in Canada increased 7% with good broad-based growth across all
categories, with the exception of beer, which was more impacted by
the on-trade channel closure. North America operating margin
increased 75bps. The adverse margin impact from lower fixed cost
absorption and a change in category and channel mix resulting from
Covid-19 was more than offset by reduced discretionary
expenditure.
Key financials GBP million:
Acquisitions Reported
and Organic Other movement
2019 FX disposals movement (v) 2020 %
--------------------------------- ----- --- -------------- ----------- ----- ----- -----------
Net sales 4,460 101 (43) 105 - 4,623 4
--------------------------------- ----- --- --------- ------- ---- ----- ------ ---
Marketing 762 11 3 (49) - 727 (5)
--------------------------------- ----- --- --------- --- ------- ---- ----- ------
Operating profit before
exceptional items 1,948 44 (28) 80 (10) 2,034 4
--------------------------------- ----- --- --------- ------- ---- ----- ------ ---
Exceptional operating items(vi) - 54
--------------------------------- ----- --- -------------- ----------- ----- ----- -----------
Operating profit 1,948 2,088 7
--------------------------------- ----- --- -------------- ----------- ----- ----- -----------
Markets: Global giants, local stars and
reserve (i) :
Organic Reported Organic Reported Organic Organic Reported
volume volume net sales net sales volume net sales net sales
movement movement movement movement movement(iii) movement movement
% % % % % % %
------------- ----------- ----------- ------------ ------------ ----------- --------------- ---------- ----------
North Crown
America - (2) 2 4 Royal 8 8 10
------------- ------ --- ------ ------- --- ------- --- ----------- -------- ----- ------ ------
Smirnoff (1) (2) -
------------- ----------- ----------- ------------ ------------ ----------- -------- ---- ------ ------
US Johnnie
Spirits(ii) (1) (3) 2 3 Walker (9) (13) (11)
------------- ------ ------ ------- --- ------- --- ----------- -------- ---- ------ ------
Captain
DBC USA 7 7 8 10 Morgan (3) (4) (2)
------------- ------ --- ------ --- ------- --- ------- --- ----------- -------- ---- ------ ------
Canada 7 4 7 7 Don Julio 21 26 29
------------- ------ --- ------ --- ------- --- ------- --- ----------- -------- ----- ------ ------
Ketel
One(iv) (2) (4) (2)
------------- ----------- ----------- ------------ ------------ ----------- -------- ---- ------ ------
Spirits - (3) 2 3 Guinness (6) (5) (3)
------------- ------ --- ------ ------- --- ------- --- ----------- -------- ---- ------ ------
Beer (7) (7) (6) (4) Baileys - 1 3
------------- ------ ------ ------- ------- ----------- -------- ----- ------ ------
Ready to
drink 17 17 19 22 Bulleit 5 4 7
------------- ------ --- ------ --- ------- --- ------- --- ----------- -------- ----- ------ ------
Cîroc
vodka (15) (14) (13)
------------- ----------- ----------- ------------ ------------ ----------- -------- ---- ------ ------
Casamigos 61 68 72
------------- ----------- ----------- ------------ ------------ ----------- -------- ----- ------ ------
Tanqueray - - 3
------------- ----------- ----------- ------------ ------------ ----------- -------- ----- ------ ------
(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.
(vi) For further details on exceptional operating items see
Summary Income Statement (c) Exceptional items and Notes,
Exceptional items.
-- Net sales in US Spirits were up 2%, with depletions ahead of
shipments resulting in a reduction in distributor inventories. Don
Julio and Casamigos delivered strong double-digit growth and gained
share in the rapidly growing tequila category. While the brands
were disproportionately impacted by the on-trade closures, an agile
response drove strong demand in at-home occasions. Crown Royal grew
net sales 8%, gaining further category share, driven by the
continued growth of Crown Royal Regal Apple and Crown Royal
Vanilla, and the success of the limited time offer, Crown Royal
Peach. Johnnie Walker net sales declined 11% and the brand lost
share in the scotch category. A decline in net sales in the first
half, due to lapping the highly successful limited edition of
"White Walker by Johnnie Walker", was exacerbated in the second
half by the on-trade channel closure. Malts continued to perform
well with growth from Oban and Lagavulin, as well as Talisker and
Mortlach. Vodka net sales were down 7%. Lower sales of Ketel One
reflect its strong presence in the on-trade channel and a decline
in Ketel One Botanical, lapping last year's successful launch.
Smirnoff net sales declined, although Smirnoff Zero Sugar Infusions
and seasonal innovations, including the Smirnoff Red, White and
Berry limited time offer performed well. Cîroc continued to
decline. Bulleit net sales were up 4%. An effective marketing
approach drove off-trade sales in the second half and continued
share gain in US whiskey. Captain Morgan net sales declined 5% and
the brand lost share in the rum category. Baileys net sales grew 1%
driven by the launch of Baileys Red Velvet limited edition and
growth in Baileys Salted Caramel.
-- Diageo Beer Company USA net sales increased 8%, despite a
reduction in distributors' inventories. This reflected ready to
drink growth of 19%, with continued strong growth across the
Smirnoff range. Strong sales in the second half were supported by a
large-scale media campaign to promote Smirnoff's Red, White and
Berry limited time offer variants, including Smirnoff Ice and a new
Smirnoff Seltzer. Beer net sales declined 5% as a result of the
closure of the on-trade and the Guinness Open Gate Brewery.
However, beer gained share in the off-trade due to Guinness'
success in raising brand awareness and connecting with consumers
during the Covid-19 lockdown.
-- Net sales in Canada grew 7%, with good growth across all
categories except beer, which was more impacted by the on-trade
channel closure. Shipments were slightly ahead of depletions, as
customers held more stock to manage volatility in the second half.
Vodka grew 6% with Smirnoff No.21 continuing to grow, supported by
a new global campaign in the first half and the launch of the
redesigned Smirnoff bottle in the second half. Cîroc and Ketel One
both grew strongly. Crown Royal grew double-digit, gaining market
share and strengthening its leadership position in the growing
Canadian whisky category. Performance was supported by the launch
of a new "generosity" campaign connecting the brand to its roots,
and successful limited time offer innovations. Scotch grew 7%, with
Johnnie Walker Black Label remaining the number-one selling scotch
in Canada. Ready to drink net sales continued to deliver
double-digit growth, with Smirnoff Ice retaining its position as
the number-one selling ready to drink in Canada.
-- Marketing expenses declined 6%. This was due to reduced
investment in the second half that we believed would have been
ineffective during Covid-19, as well as productivity savings during
the year. We believe that our marketing effectiveness tools will
enable us to efficiently accelerate investment as consumer demand
recovers.
Europe and Turkey
Europe and Turkey net sales declined 12%. Growth in the first
half was more than offset by the impact of Covid-19 in the second
half. High on-trade exposure significantly impacted markets across
the region through the closures of the channel in many countries.
In Europe, beer was particularly impacted, declining 20%. Growth of
scotch in the first half was offset by declines in Continental
Europe and France in the second half due to on-trade closures. Rum
grew 3%, driven by Captain Morgan. Vodka declined 12%, driven
mainly by Smirnoff in Continental Europe. Gin declined 9%, driven
by declines of Gordon's and Tanqueray mainly in Continental Europe.
Travel Retail was also severely impacted. In Turkey, net sales
declined 6%, driven by declines in raki and vodka. Total operating
margin declined 470bps. Impacts of the closure of the on-trade on
volumes and adverse mix, bad debt provisions, along with one-offs
and inflationary cost pressures in Turkey more than offset actions
driving overhead and marketing spend savings through the second
half.
Key financials GBP million:
Acquisitions Reported
and Organic movement
2019 FX disposals movement Other(iii) 2020 %
--------------------------------- ------ ---- -------------- --------- ------------ ------ -----------
Net sales 2,939 (23) 9 (358) - 2,567 (13)
--------------------------------- ----- --- -------- ---- -------- ------- --- ----- -------
Marketing 490 (10) 4 (56) - 428 (13)
--------------------------------- ----- --- -------- ---- -------- ------- --- ----- -------
Operating profit before
exceptional items 1,014 (7) (3) (243) (4) 757 (25)
--------------------------------- ----- --- -------- --- -------- ------- ----- -------
Exceptional operating items(iv) (18) (62)
--------------------------------- ----- ---- -------------- --------- ------------ ----- -----------
Operating profit 996 695 (30)
--------------------------------- ----- ---- -------------- --------- ------------ ----- -----------
Markets: Global giants and local stars(i)
:
Organic
Organic Reported Organic Reported volume Organic Reported
volume volume net sales net sales movement net sales net sales
movement movement movement movement (ii) movement movement
% % % % % % %
---------- ----------- ----------- ----------- ------------ ---------- ----------- ------------ ------------
Europe
and
Turkey Guinness (19) (20) (21)
---------- ---------- ------ -------- --------
Johnnie
(11) (11) (12) (13) Walker (17) (20) (21)
---------- ------- ------- -------- ---------- ------ -------- --------
Baileys (4) (6) (8)
---------- ----------- ----------- ----------- ------------ ---------- ------ -------- --------
Europe (10) (10) (12) (12) Smirnoff (14) (11) (12)
---------- ------- ------- ------- -------- ---------- ------ -------- --------
Captain
Turkey (12) (12) (6) (7) Morgan 2 6 6
---------- ------- ------- ------- -------- ---------- ------ --- -------- --------
Yenì
Raki (22) (15) (15)
---------- ----------- ----------- ----------- ------------ ---------- ------ -------- --------
Spirits (11) (11) (11) (11) Tanqueray (12) (15) (16)
---------- ------- ------- ------- -------- ---------- ------ -------- --------
Beer (16) (16) (20) (21) J B (18) (17) (17)
---------- ------- ------- ------- -------- ---------- ------ -------- --------
Ready to
drink (3) (3) (1) -
---------- ------- ------- ------- -------- ---------- ----------- ------------ ------------
(i) Spirits brands excluding ready to drink.
(ii) Organic equals reported volume movement.
(iii) The adjustment to other operating expenses is the
elimination of fair value changes to contingent consideration
liabilities in respect of prior year acquisitions.
(iv) For further details on exceptional operating items see
Summary Income Statement (c) Exceptional items and Notes,
Exceptional items .
-- In Europe, net sales were down 12%:
-- In Great Britain, net sales declined 4%. Solid first half
results were offset by the impact of on-trade closures from March
despite an increase in off-trade sales. The impact was further
amplified by the cancellation of significant sporting and cultural
events. Continued growth in rum and liqueurs were offset by
declines in beer, scotch, wine and vodka. Guinness was impacted by
on-trade closures and the decision to support customers, and
maintain product quality, through a keg return scheme. Focus on
e-commerce was upweighted as partnerships were strengthened on
activities to drive consumer engagement and sales.
-- Ireland net sales declined 20%. A soft first half performance
was further exacerbated by on-trade closures. Beer declined 22%.
Rockshore continued to grow double-digit through Rockshore Cider
and high single-digit in Rockshore Lager despite Covid-19 lockdown
restrictions. This was offset by declines in Guinness, driven by
closure of the on-trade and further impacted by a keg return scheme
to support customers and maintain product quality. Total spirits
declined 10%, as off-trade sales increases were not sufficient to
offset Covid-19 related closures of the on-trade.
-- In Continental Europe, net sales declined 15%:
-- Iberia net sales were down 22%. Growth in the first half was
offset by the impact of lockdowns affecting the on-trade channel
and tourism in the second half, which accounts for a high
proportion of sales in the market. On-trade investment was placed
on hold as resources were deployed to the off-trade to support
customers and activations in the off-trade.
-- In Central Europe, net sales declined 9%. Strong double-digit
performance in the first half was impacted by on-trade lockdowns
across the market in the second half. Captain Morgan performance
was flat while Baileys, Smirnoff and Johnnie Walker declined.
-- In Northern Europe net sales declined 1%. Good first half
performance was offset by the cancellation of key events and
on-trade closures in the second half. Resilient performance due to
rum growth, driven by Captain Morgan Original Spiced Rum, and gin
driven by Gordon's Premium Pink Distilled Gin and Tanqueray Flor de
Sevilla innovations in the second half, was offset by declines in
scotch.
-- In the Mediterranean Hub, net sales declined 26%. Growth in
the first half was offset by on-trade closures and significantly
reduced tourism which severely impacted volume.
-- In Europe Partner Markets, net sales declined 19%. Rum and
tequila growth were offset by declines in scotch and beer. Declines
were mainly due to lockdowns affecting the on-trade, and while
absolute inventory levels were reduced, they remain elevated
relative to demand. Guinness also responded with a keg return
scheme to support the channel and protect product quality.
-- Russia net sales were down 8%. Growth in gin was offset by declines in scotch and rum.
-- France net sales declined 5%. Good growth in rum was offset
by a decline in scotch, driven by competitive challenges and
category declines in standard scotch, and on-trade closures.
-- In Turkey, net sales declined 6%. Double-digit growth in the
first half was offset by on-trade closures from March. Scotch
declined 3%, as Bell's growth was offset by Johnnie Walker and VAT
69. Raki declined 9%, with volume declines driven by ongoing
impacts from excise increases in the first half and on-trade
restrictions. Commercial and marketing teams were repurposed to
focus on growth categories and less affected channels.
-- Marketing investment declined 12%, in line with net sales.
On-trade marketing spend was reduced, with some redeployed to
digital, while focus was placed on e-commerce partnerships to
deliver key celebrations as well as online platforms.
Africa
Africa net sales declined 13%. Growth in the first half was
offset by the impact of Covid-19 in the second half. East Africa
declined 10% where continued beer growth in Tanzania was offset by
lockdown closures affecting the on-trade in Kenya and Uganda. Net
sales in Nigeria declined 20%, driven by double-digit declines in
beer and scotch. In South Africa, net sales declined 25%, driven by
scotch and vodka, as a result of both on-trade and off-trade
closures and a troubled economic climate. Africa Regional Markets
declined 8%, as strong beer growth in Ghana was offset by on-trade
closures and the impact of significant excise increases in
Ethiopia. Beer declined 13% as growth of Serengeti was offset by
other key beer brands, including Guinness, Tusker and Senator,
mainly due to on-trade closures. Spirits declined 14%, mainly
impacting Johnnie Walker, Kenya Cane and Smirnoff. Operating margin
declined 877bps, driven mainly by volume losses that caused lower
fixed cost absorption and excise duty increases. These were
partially offset by marketing spend savings and improved overhead
management.
Key financials GBP million:
Acquisitions Reported
and Organic movement
2019 FX disposals movement 2020 %
--------------------------------- ----- ---- -------------- --------- ------ -----------
Net sales 1,597 (10) (41) (200) 1,346 (16)
--------------------------------- ----- --- --------- -------- ----- -------
Marketing 174 - - (14) 160 (8)
--------------------------------- ----- --- --------- --- -------- ----- -------
Operating profit before
exceptional items 275 (21) (3) (150) 101 (63)
--------------------------------- ----- --- --------- -------- ----- -------
Exceptional operating items(iv) - (145)
--------------------------------- ----- ---- -------------- --------- ----- -----------
Operating profit 275 (44) (116)
--------------------------------- ----- ---- -------------- --------- ----- -----------
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
% % % % % % %
---------- ----------- ----------- ----------- ----------- ---------- -------------- ----------- ------------
Africa
(iii) (13) (14) (13) (16) Guinness (17) (16) (16)
---------- ------- ------- ------- ------- ---------- -------- --- ------- --------
Johnnie
Walker (8) (18) (19)
---------- ----------- ----------- ----------- ----------- ---------- -------- --- ------- --------
East
Africa (11) (11) (10) (9) Smirnoff (25) (23) (25)
---------- ------- ------- ------- ------- ---------- -------- --- ------- --------
Africa
Regional
Markets
(iii) (12) (17) (8) (13)
---------- ------- ------- ------- -------
Nigeria (10) (10) (20) (19) Other beer:
---------- ------- ------- ------- -------
South
Africa
(iii) (23) (25) (25) (33)
---------- ------- ------- ------- ------- ---------- -------------- ----------- ------------
Malta (16) (10) (13)
---------- ----------- ----------- ----------- ----------- ---------- -------- --- ------- --------
Spirits (10) (10) (14) (15) Senator (16) (13) (12)
---------- ------- ------- ------- ------- ---------- -------- --- ------- --------
Beer (16) (16) (13) (13) Tusker (22) (20) (20)
---------- ------- ------- ------- ------- ---------- -------- --- ------- --------
Ready to
drink
(iii) (6) (17) (7) (27) Serengeti 15 19 22
---------- ------- ------- ------- ------- ---------- -------- ---- ------- --------
(i) Spirits brands excluding ready to drink.
(ii) Organic equals reported volume movement.
(iii) Africa, Africa Regional Markets, South Africa and Ready to
drink reported volume movement impacted by acquisitions and
disposals.
(iv) For further details on exceptional operating items see
Summary Income Statement (c) Exceptional items and Notes,
Exceptional items.
-- In East Africa, net sales declined 10%. Strong first half
growth, and a continuation of resilient sales growth in Tanzania in
the second half, was offset by volume declines in other markets.
Tanzania grew 14% as it was minimally impacted by limited Covid-19
related lockdowns, and benefitted from the ongoing successes of
Serengeti Lager and Serengeti Lite. Kenya declined 14%, driven by
the high exposure to on-trade closures impacting Senator Keg and
other beer sales, which was partially offset by vodka, driven by
double-digit growth in Chrome and Triple Ace. Increased focus in
the off-trade and e-commerce channels partially recovered lost
on-trade sales.
-- In Africa Regional Markets, net sales declined 8%. Resilient
growth in Ghana during the year was offset by double-digit declines
in Cameroon and Ethiopia. Due to the impact of Covid-19 in the
second half, beer and spirits inventory levels were reduced. Ghana
grew 5%, driven by continued success of the ABC Lager innovation
and Malta Guinness growth, which addressed consumer shifts for
portability and non-returnable formats throughout lockdown.
Cameroon declined 15% due to one-off production challenges in the
first half, with the second half impacted by Covid-19 driving
declines in Guinness in the on-trade. Ethiopia declined 24%, as
beer and international premium spirits growth was impacted by
excise increases, supply issues and the impact of on-trade
closures. Impacts of shutdowns were partially offset as markets
reprioritised brand packs to capture off-trade consumer shifts.
-- In Nigeria, net sales declined 20%. First half growth was
offset by volume impacts from Covid-19 restrictions as it
exacerbated an already challenging economic climate; while VAT and
spirits excise increases also impacted consumer demand in a
competitive environment. Robust performance of Orijin Bitters,
successful spirits innovations, and increased at-home consumption,
were offset by declines in beer. Malta Guinness and Guinness were
impacted by on-trade closures. Increased focus on the off-trade and
e-commerce channels, through the introduction of trade telesales
and consumer platforms together with an online store, reduced some
impacts of lockdown.
-- South Africa net sales declined 25%. Economic and social
challenges in the first half were further exacerbated by the
banning of alcohol sales across all channels from 27 March to 31
May. While absolute inventory levels were reduced, they remain
elevated relative to demand. Scotch and vodka were most affected
with double-digit declines, as a result of the softening economic
climate and consumer shifts into the mainstream gin category.
-- Marketing investment declined 8%. We rapidly reacted to
consumer shifts in the second half, through telesales, pack
reprioritisation and the redeployment of investment to e-commerce
and the off-trade.
Latin America and Caribbean
Latin America and Caribbean net sales declined 15%. Performance
in the second half continued to be impacted by economic and
socio-political pressures in key markets compounded by the impact
of the Covid-19 pandemic. All markets declined except Andean which
grew 8% due to a strong first half and continued momentum in scotch
in Colombia. Scotch overall declined 21% as growth in Buchanan's in
Colombia and Brazil, and White Horse in Brazil, were offset by
declines in Johnnie Walker across the region. Gin grew double-digit
primarily driven by Tanqueray in Brazil. Tequila was down 11% as
strong Don Julio performance in Caribbean and Central America was
more than offset by a decline in Mexico. Operating margin for the
region was down 544bps due to the adverse impact of product mix and
lower fixed cost absorption despite actions taken to reduce
discretionary spend.
Key financials GBP million:
Acquisitions Reported
and Organic movement
2019 FX Reclassifi-cation(i) disposals movement Other(ii) 2020 %
--------------- ----- ---- ---------------------- -------------- --------- --------- ---- -----------
Net sales 1,130 (42) (10) (1) (169) - 908 (20)
--------------- ----- --- --------------- ---- -------- --- -------- --------- --- -------
Marketing 201 (7) (10) - (29) - 155 (23)
--------------- ----- --- --------------- ---- -------- ---- -------- --------- --- -------
Operating
profit before
exceptional
items 365 (26) - - (107) 16 248 (32)
--------------- ----- --- --------------- ----- -------- ---- -------- --------- --- -------
Exceptional
operating
items(v) - (6)
--------------- ----- ---- ---------------------- -------------- --------- --------- --- -----------
Operating
profit 365 242 (34)
--------------- ----- ---- ---------------------- -------------- --------- --------- --- -----------
Markets: Global giants and local stars
(iii) :
Organic Reported Organic Reported Organic Organic Reported
volume volume net sales net sales volume net sales net sales
movement movement movement movement movement(iv) movement movement
% % % % % % %
----------- ----------- ----------- ----------- ----------- ----------- -------------- ----------- ------------
Latin
America
and Johnnie
Caribbean Walker (27) (29) (33)
----------- ----------- -------- --- ------- --------
(15) (15) (15) (20) Buchanan's (15) (14) (17)
----------- ------- ------- ------- ----------- -------- --- ------- --------
Old Parr (17) (16) (20)
----------- ----------- ----------- ----------- ----------- ----------- -------- --- ------- --------
PUB (14) (14) (7) (17) Smirnoff (7) 4 (2)
----------- ------- ------- ------- ------- ----------- -------- --- ------- --------
Black &
Mexico (14) (14) (19) (21) White (9) (10) (18)
----------- ------- ------- ------- ------- ----------- -------- --- ------- --------
CCA (17) (18) (16) (16) Tanqueray 6 17 7
----------- ------- ------- ------- ------- ----------- -------- ---- ------- --------
Andean 2 3 8 (2) Baileys (15) (13) (21)
----------- ------- ------- ------- ------- ----------- -------- --- ------- --------
PEBAC (29) (29) (44) (47)
----------- ------- ------- ------- -------
Spirits (16) (16) (16) (21)
----------- ------- ------- ------- -------
Beer (10) (10) (9) (11)
----------- ------- ------- ------- -------
Ready to
drink - - 8 2
----------- ------- ------- ------- ------- ----------- -------------- ----------- ------------
(i) For the year ended 30 June 2019 trade investment of GBP10
million have been reclassified from marketing to trade spend.
(ii) The adjustment to cost of sales reflects the elimination of
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.
(iii) Spirits brands excluding ready to drink.
(iv) Organic equals reported volume movement.
(v) For further details on exceptional operating items see
Summary Income Statement (c) Exceptional items and Notes,
Exceptional items.
-- In PUB (Paraguay, Uruguay and Brazil), net sales declined 7%,
mainly driven by scotch declining 11% across the market. Brazil
declined 5% as a solid first half was fully offset by Covid-19
on-trade closures and domestic and foreign travel restrictions.
Momentum in gin continued as Tanqueray and Gordon's grew double
digit supported by major marketing campaigns. In Brazil, scotch net
sales declined 6% as double-digit growth of White Horse and
Buchanan's was offset by declines in Johnnie Walker and Black &
White. Johnnie Walker decline was driven by a strong reliance on
the on-trade and border stores as well as the weakening economy and
devaluation impacting consumption. Super-premium scotch remained
resilient through actions taken to address the at-home occasion via
digital activations and supporting availability of cocktail
offerings.
-- In Mexico, net sales were down 19% as the economic slowdown
continued into the second half and was amplified by Covid-19,
including the reduction of on-trade wholesaler inventory and stock
returns to support customers. Despite this, the successful Smirnoff
X1 Spicy Tamarind innovation delivered strong growth building on
local cues and strong activations. This was fully offset by the
softening of the scotch category, challenging trading conditions in
the first half, and declines in Don Julio due to competitive
pricing pressure. Tequila production was secured amidst
non-essential business closures along with an enhanced focus on
e-commerce and off-trade partnerships.
-- In CCA (Caribbean and Central America), net sales decreased
16% as broad-based growth in the first half was subsequently
disrupted by restrictions to curtail the spread of Covid-19. The
tequila category grew during the year driven by double-digit growth
of Don Julio led by strong activations, however all other
categories declined due to reduced tourism, on-trade closures and
Covid-19 related bans of alcohol sales. At-home occasion promotions
and the launch of e-commerce platforms with our partners partially
offset net sales declines.
-- Andean (Colombia and Venezuela) net sales increased 8% driven
by Colombia. Scotch net sales grew mid-single digit driven by
Buchanan's, as double digit first half sales growth was followed by
a resilient second half. Johnnie Walker was flat as on-trade
closures muted strong first half performance of Johnnie Walker Red
Label and Johnnie Walker Black Label. Brands such as Buchanan's,
Baileys and Smirnoff X1 Lulo benefitted from an agile shift of
activations to at-home consumption, streamlined route to consumer
solutions and the refocusing of resources to e-commerce throughout
the Covid-19 lockdown.
-- PEBAC (Peru, Ecuador, Bolivia, Argentina and Chile) net sales
declined 44% driven by continued social unrest across key markets
compounded by the impact of Covid-19. Scotch declined
significantly, however category share leadership was maintained
across PEBAC benefiting from new and existing distribution
partnerships. Strong double-digit growth of Smirnoff No.21 as it
lapped a softer comparable period and the successful Smirnoff
Bitter Citric innovation continued to drive vodka in Argentina.
-- Marketing investment was down 15%, in line with the decline
in net sales. Despite cost mitigations in the second half, support
was continued behind key brands and home occasions with #homehour
#digitaldrink #onlinedrinkswithfriends and 'Digital Golden Hour'
campaigns.
Asia Pacific
Asia Pacific net sales declined 16%. Despite growth in the first
half for the region, all markets other than Australia declined due
to the impact of Covid-19. Greater China declined 7% as scotch,
liqueurs and beer growth was offset by declines in Chinese white
spirits. Australia net sales grew 6%, driven by ready to drink,
liqueurs, gin and scotch. India net sales declined 17%, driven by
the continued economic slowdown exacerbated by lockdowns impacting
both Prestige and Above and Popular segments. South East Asia
declined 23%, driven by scotch in Key Accounts and beer in
Indonesia. North Asia declined 15%, driven by double-digit decline
in scotch, partially offset by beer growth. In Travel Retail Asia
and Middle East, net sales declined 46%, as first half declines
were further exacerbated by significant declines of travellers due
to Covid-19. Scotch declined 20%, driven by Johnnie Walker in
Travel Retail Asia and Middle East, South East Asia, and Korea.
Operating margin declined 420bps driven mainly by volume loss due
to closures which caused lower fixed cost absorption. These impacts
were partially offset by a reduction of marketing spend and
overhead savings.
Key financials GBP million:
Acquisitions Reported
and Organic movement
2019 FX disposals movement 2020 %
------------------------------------- ------ ------------ --------- ------- -----------
Net sales 2,688 5 - (423) 2,270 (16)
------------------------------------- ----- ------------ -------- ------ -------
Marketing 412 - - (47) 365 (11)
------------------------------------- ----- ------------ -------- ------ -------
Operating profit before exceptional
items 703 5 - (207) 501 (29)
------------------------------------- ----- ------------ -------- ------ -------
Exceptional operating items(i) (35) (1,198)
------------------------------------- ----- ------------ --------- ------ -----------
Operating profit 668 (697) (204)
------------------------------------- ----- ------------ --------- ------ -----------
Markets: Global giants and local stars(ii)
:
Organic Reported Organic Reported Organic Organic Reported
volume volume net sales net sales volume net sales net sales
movement movement movement movement movement(iii) movement movement
(i)
% % % % % % %
----------- ----------- ----------- ----------- ----------- ----------- --------------- ----------- -----------
Asia Johnnie
Pacific (15) (15) (16) (16) Walker (23) (25) (24)
----------- ------- ------- ------- ------- ----------- ------- ----- ------- -------
McDowell's (17) (15) (15)
----------- ----------- ----------- ----------- ----------- ----------- ------- ----- ------- -------
Shui Jing
India (15) (15) (17) (16) Fang (iv) (9) (16) (16)
----------- ------- ------- ------- ------- ----------- ------- ----- ------- -------
Greater
China (4) (4) (7) (7) Guinness (10) (12) (10)
----------- ------- ------- ------- ------- ----------- ------- ----- ------- -------
The
Australia 5 5 6 2 Singleton (5) (1) 2
----------- ------- ------- ------- ------- ----------- ------- ----- ------- -------
South East Royal
Asia (19) (20) (23) (21) Challenge (15) (15) (14)
----------- ------- ------- ------- ------- ----------- ------- ----- ------- -------
North Asia (18) (17) (15) (14) Windsor (44) (26) (28)
----------- ------- ------- ------- ------- ----------- ------- ----- ------- -------
Travel
Retail
Asia and
Middle
East (47) (47) (46) (47)
------- ------- -------
Spirits (15) (15) (16) (15)
----------- ------- ------- ------- -------
Beer (11) (11) (12) (10)
----------- ------- ------- ------- -------
Ready to
drink (4) (4) (1) (5)
----------- ------- ------- ------- ------- ----------- --------------- ----------- -----------
(i) For further details on exceptional operating items see
Summary Income Statement (c) Exceptional items and Notes,
Exceptional items.
(ii) Spirits brands excluding ready to drink
(iii) Organic equals reported volume movement.
(iv) Growth figures represent total Chinese white spirits of
which Shui Jing Fang is the principal brand.
-- In India, net sales declined 17%. First half growth was
impacted principally by an economic slowdown which was further
exacerbated in the second half by the 42 day nationwide total
lockdown of on-trade and off-trade alcohol sales, regulatory
changes and continuation of on-trade closures thereafter. Prestige
& Above declined 14%, driven by IMFL whisky and scotch. Popular
brands declined 23%, driven by Old Tavern Whisky and McDowell's No.
1 Rum. These declines were partially offset by Innovation growth in
McDowell's No.1 Luxury and Captain Morgan. Trade investment was
optimised and refocused in the off-trade.
-- In Greater China, net sales declined 7%. Strong performance
in scotch, liqueur and beer was offset by a decline in Chinese
white spirits. Chinese white spirits declined 16%, as strong first
half growth was offset by the impact of Covid-19 on the key Chinese
New Year consumption period with consequential reduced sales and
inventory reductions through the second half. Resilient scotch
growth of 3%, was driven by malts and Johnnie Walker super deluxe
growth in Mainland China along with continued growth in malts and
Johnnie Walker super deluxe innovation in Taiwan. Beer grew 12% as
it lapped a weaker prior year and supported by the launch of the
first Guinness Gatehouse in Shanghai. Increased focus behind
e-commerce drove improved digital consumer engagement and food
delivery partnerships to address at-home consumption, softened the
impact of lockdown driven volume losses.
-- A ustralia net sales grew 6%. Strong first half growth was
partially offset by a weaker but still solid second half
performance despite Covid-19 lockdowns. This was mainly due to low
exposure to the on-trade and a focus on accelerating e-commerce
activities. Scotch grew 4%, driven by the new Johnnie Walker "Game
of Thrones Limited Editions A Song of Fire and A Song of Ice"
innovations. Rum grew 4%, driven by Captain Morgan and continued
growth in Bundaberg. Gin grew double-digit and ready to drink grew
6%, as growth in the core brands was complimented by innovation in
both categories such as Gordon's Premium Pink Distilled Gin and
Tanqueray Flor de Sevilla.
-- In South East Asia, net sales declined 23%. Solid growth in
Vietnam, driven by Johnnie Walker super deluxe and malts, was
offset by Covid-19 related lockdowns across the region. Thailand
declined 24%, driven by on-trade closures. Key Accounts declined
double-digit due to Covid-19 and a stock-return customer support
programme in the second half. Indonesia declined double-digit
mainly due to lockdowns impacting Guinness. Activities were
upweighted to focus on at-home and small group consumer occasion
trends.
-- In North Asia, net sales declined 15%, with double-digit
declines in Japan and Korea. In Japan, declines in the first half
were further exacerbated by on-trade lockdowns. In Korea, scotch
declined 23%, driven by continued category contraction, regulatory
changes limiting trade spend for wholesalers and venues affecting
the category, on-trade closures and a reduction of inventory
levels. This was partially offset through strong beer growth,
driven by Hop House 13 Lager as it lapped launch in the prior
period. Increased investment behind the off-trade in South Korea,
especially through digital campaigns, contributed to increased
at-home consumption.
-- In Travel Retail Asia and Middle East, net sales declined
46%. First half performance was impacted by challenging trading
conditions in the Middle East including some reduction of inventory
levels. In the second half the global travel channel was severely
impacted by Covid-19 travel restrictions, with significant declines
of passengers. While absolute inventory levels were reduced, it
remains at a high level relative to ongoing reduced passenger
travel.
-- Marketing investment declined 11%, as variable trade
investment was repurposed and redeployed into the off-trade and
e-commerce channel, which focused on home delivery and at-home
consumption.
CATEGORY AND BRAND REVIEW
For the year ended 30 June 2020
Key categories:
Organic Organic Reported
volume net sales net sales
movement
(iii) movement movement
% % %
-------------------------------------------- ------------ ------------- -------------
Spirits(i) (11) (8) (8)
-------------------------------------------- -------- --------- ---------
Scotch (16) (17) (17)
-------------------------------------------- -------- --------- ---------
Vodka (ii)(iv) (8) (8) (8)
-------------------------------------------- -------- --------- ---------
Canadian whisky 7 8 8
-------------------------------------------- -------- --------- ---------
Rum (ii) (11) (7) (7)
-------------------------------------------- -------- --------- ---------
Liqueurs (4) (4) (5)
Indian-Made Foreign Liquor (IMFL) whisky (14) (14) (13)
Tequila 12 25 27
-------------------------------------------- -------- --------- ---------
Gin (ii) (9) (4) (5)
-------------------------------------------- -------- --------- ---------
US whiskey (1) 3 4
-------------------------------------------- -------- --------- ---------
Beer (15) (15) (15)
-------------------------------------------- -------- --------- ---------
Ready to drink 5 8 3
-------------------------------------------- -------- --------- ---------
(i) Spirits brands excluding ready to drink.
(ii) Vodka, rum, gin including IMFL brands.
(iii) Organic equals reported volume movement except for vodka
(10)%, Canadian whisky 6%, rum (12)%, liqueurs (5)% and ready to
drink 1%, which were impacted by acquisitions and disposals.
(iv) Vodka includes Ketel One Botanical.
-- Scotch represents 23% of Diageo's net sales and declined by
17%. Soft performance in the first half was impacted by ongoing
commercial challenges along with political and economic disruption
which continued through the year. This was further exacerbated by
Covid-19 in the second half. Johnnie Walker declined 22% where
growth in Ethiopia, Canada and Australia was offset by most other
markets. The brand also lapped strong innovation in the prior year.
Buchanan's declined 12% with double-digit growth in Colombia,
primarily offset by continued declines in Mexico due to category
softness. J B declined 18% as global lockdowns exacerbated ongoing
challenges for the brand in Continental Europe. Old Parr declined
15%, driven by downtrading to primary scotch and the impact of
lockdown restrictions in Latin America and Caribbean. The malts
portfolio, whilst in growth in the first half, declined over the
full year. Scotch innovations such as the collaborations with HBO's
Game of Thrones and Johnnie Walker Black Label 12 Year Old Origin
Series were not enough to offset prior year.
-- Vodka represents 11% of Diageo's net sales and declined by
8%. Challenging performance in the first half was further
exacerbated by some category declines and on-trade closures.
Smirnoff declined 6% globally, where growth in Mexico and Canada
were offset by declines in Continental Europe, Africa, Brazil and
US Spirits. Ketel One declined 6% driven mainly by US Spirits where
on-trade sales mix was relatively stronger and also lapping the
first full year of the Ketel One Botanical innovation. Cîroc
declined 17%, driven by continued performance challenges, mainly in
US Spirits. Innovations across the vodka portfolio, such as
Smirnoff X1 Spicy Tamarind in Mexico, and limited time offers such
as Cîroc White Grape, partially offset the declines in other brands
and variants.
-- Canadian whisky represents 8% of Diageo's net sales and grew
8%. Crown Royal in US Spirits grew 8% as it gained further category
share despite a single digit decline in Crown Royal Deluxe.
Positive results were driven by the sustained media investment
enabling further momentum across the portfolio including continued
double-digit growth of Crown Royal Regal Apple and Crown Royal
Vanilla, and the success of the limited time offer variant Crown
Royal Peach. In Canada, Crown Royal grew double-digit, gaining
market share and strengthening its leadership position in the
growing category.
-- Rum represents 7% of Diageo's net sales and declined by 7%.
Growth in the first half was offset by declines due to some
category challenges and Covid-19 impacts in US Spirits, India and
East Africa. In Europe, Captain Morgan growth was partially offset
by declines of Zacapa.
-- Liqueurs represent 5% of Diageo's net sales and declined by
4%. Strong Baileys growth in the first half was offset by the
impact of Covid-19, as increased off-trade growth, due to
successful at-home activities, was not sufficient to fully mitigate
the impact of on-trade closures.
-- IMFL whisky represents 5% of Diageo's net sales and declined
14%. Growth in first half was offset by the on-going economic
slowdown impacting the category, and nationwide Covid-19 lockdowns
closing both on and off-trade outlets and major sporting
events.
-- Tequila represents 5% of Diageo's net sales and grew 25%.
Casamigos was up strong double-digit despite on-trade closures
driven by strong category momentum in key markets and actions taken
to strengthen its position in at-home occasions. Don Julio was up
15%, as continued growth in US Spirits was partially offset by
Mexico declines due to competitor pricing pressures and lockdowns
in the second half.
-- Gin represents 5% of Diageo's net sales and declined by 4%.
Resilient full year performance in Brazil and Australia was offset
by the impact of lockdowns, mainly in Europe.
-- US whiskey represents 3% of Diageo's net sales and grew by
3%. Bulleit grew 4% in US Spirits, where it has been gaining
category share, and in Canada grew 14%, despite lockdowns. Bulleit
strengthened its positioning in the at-home occasion during
Covid-19 with effective marketing campaigns across TV and social
media.
-- Beer represents 15% of Diageo's net sales and declined by
15%. Good first half performance was offset by declines in all
regions in the second half driven by on-trade closures and excise
increases in Africa. Guinness declined 16%, as growth of Guinness
Draught in Can was offset by on-trade volume declines in most
markets. The on-trade decline was exacerbated by the Guinness keg
return programme to support the on-trade and maintain product
quality across Europe and North America. Serengeti continued to
grow double-digit in East Africa but was offset by the decline in
Senator Keg and Tusker which are highly exposed to the on-trade.
Nigeria declined due to the challenging economic environment, and
declines in Kenya and Ethiopia were due to excise increases, with
all three markets further impacted by lockdowns. Rockshore
continued to grow double-digit driven by Rockshore Cider and
Rockshore Lager despite on-trade closures.
-- Ready to drink represents 7% of Diageo's net sales and grew
8% driven by Diageo Beer Company USA, Canada, and Australia.
Smirnoff Ice Flavour innovations in Diageo Beer Company USA,
Smirnoff Ice Smash and Smirnoff Spiked Seltzers all contributed to
growth.
Global giants, local stars and reserve(i) :
Organic Organic Reported
volume net sales net sales
movement(ii) movement movement
% % %
------------------------------ ---------------- ------------- -------------
Global giants
------------------------------ ---------------- ------------- -------------
Johnnie Walker (20) (22) (22)
------------------------------ ------------ --------- ---------
Smirnoff (9) (6) (6)
------------------------------ --------- ---------
Baileys (3) (3) (3)
------------------------------ ------------ --------- ---------
Captain Morgan (2) (2) -
------------------------------ ------------ --------- ---------
Tanqueray (5) (4) (4)
------------------------------ ------------ --------- ---------
Guinness (15) (16) (16)
------------------------------ ------------ --------- ---------
Local stars
------------------------------ ---------------- ------------- -------------
Crown Royal 7 8 10
------------------------------ ------------ --------- ---------
Yenì Raki (22) (15) (15)
------------------------------ ------------ --------- ---------
Buchanan's (14) (12) (13)
------------------------------ ------------ --------- ---------
J B (18) (18) (18)
------------------------------ ------------ --------- ---------
Windsor (44) (26) (28)
------------------------------ ------------ --------- ---------
Old Parr (17) (15) (19)
------------------------------ ------------ --------- ---------
Bundaberg 3 - (4)
------------------------------ ------------ --------- ---------
Black & White (7) (5) (10)
------------------------------ ------------ --------- ---------
Ypióca (17) (14) (24)
------------------------------ ------------ --------- ---------
McDowell's (17) (15) (15)
------------------------------ ------------ --------- ---------
Shui Jing Fang(iii) (9) (16) (16)
------------------------------ ------------ --------- ---------
Reserve
------------------------------ ---------------- ------------- -------------
Scotch malts (5) (3) (1)
------------------------------ ------------ --------- ---------
Cîroc vodka (17) (17) (16)
------------------------------ ------------ --------- ---------
Ketel One(iv) (4) (6) (4)
------------------------------ ------------ --------- ---------
Don Julio (1) 15 16
------------------------------ ------------ --------- ---------
Bulleit 4 3 6
------------------------------ ------------ --------- ---------
(i) Spirits brands excluding ready to drink.
(ii) Organic equals reported volume movement.
(iii) 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 39% of Diageo's net sales and
declined by 13%. This was driven by declines in Johnnie Walker and
Guinness across all regions, while Smirnoff declined in all regions
except for Latin America and Caribbean. Good first half performance
for all brands except Johnnie Walker was offset by global lockdowns
in the second half. Johnnie Walker performance was also impacted by
a continuation of political, and economic challenges in some
emerging markets, as well as lapping "White Walker by Johnnie
Walker" innovation last year.
-- Local stars represent 20% of Diageo's net sales and declined
by 7%. Continued growth of Crown Royal in US Spirits was offset by
declines, mainly in Chinese white spirits in China, McDowell's in
India, Buchanan's in Latin America and Caribbean and US Spirits and
J B in Iberia and South Africa due to imposed lockdowns. Windsor
continued to decline in Korea exacerbated by on-trade closures.
-- Reserve brands represent 21% of Diageo's net sales and
declined 4%. Continued growth in Don Julio and Casamigos in US
Spirits were offset by declines in Chinese white spirits, Johnnie
Walker Reserve variants, Cîroc and Ketel One.
ADDITIONAL FINANCIAL INFORMATION
Year ended 30 June 2020
SUMMARY INCOME STATEMENT
Fair value
Acquisitions remeasure-
Exchange and disposals Organic ment Reclassifi-
2019 (a) (b) movement(i) (d) cation(ii) 2020
GBP GBP million GBP million GBP million GBP million GBP million GBP million
million
--------------- ------------- -------------- ----------- ------------- -------------
Sales 19,294 (1) (108) (1,478) - (10) 17,697
=============== ========= ========= ========== ========== ======== === ========= ==========
Excise duties (6,427) 33 32 417 - - (5,945)
--------------- --------- ---------- ---------- -------- --- ---------
Net sales 12,867 32 (76) (1,061) - (10) 11,752
=============== ========= ========= ========== ========== ======== === ========= ==========
Cost of sales (4,866) (31) 41 193 9 - (4,654)
--------------- --------- ---------- ---------- -------- --- ---------
Gross profit 8,001 1 (35) (868) 9 (10) 7,098
=============== ========= ========== ========== ======== === =========
Marketing (2,042) 3 (7) 195 - 10 (1,841)
=============== ========= ========= ========== ========== ======== === ========= ==========
Other
operating
items (1,843) (5) 8 84 (7) - (1,763)
--------------- --------- ---------- ---------- -------- ---------
Operating
profit
before
exceptional
items 4,116 (1) (34) (589) 2 - 3,494
--------------- ========= ========= ========== ========== -------- --- ========= ==========
Exceptional
operating
items (c) (74) (1,357)
---------------
Operating
profit 4,042 2,137
===============
Non-operating
items
(c) 144 (23)
=============== ========= ==========
Net finance
charges (263) (353)
=============== ========= ==========
Share of after
tax results
of
associates
and
joint
ventures 312 282
--------------- ----------
Profit before
taxation 4,235 2,043
=============== ========= ==========
Taxation (e) (898) (589)
--------------- ---------
Profit for the
year 3,337 1,454
--------------- --------- ----------
(i) For the definition of organic movement see Explanatory Notes, organic movements.
(ii) For the year ended 30 June 2019 trade investment of GBP10
million has been reclassified from marketing to net sales.
(a) Exchange
The impact of movements in exchange rates on reported figures
for net sales is principally in respect of the translation exchange
impact of the weakening of sterling against the US dollar,
partially offset by strengthening of sterling against the Brazilian
real, the Australian dollar and 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
weakening of the Brazilian real, the Colombian peso and the
Nigerian naira, broadly offset by translational exchange impact of
the strengthening of the US dollar against sterling.
The effect of movements in exchange rates and other movements on
profit before exceptional items and taxation for the year ended 30
June 2020 is set out in the table below.
Gains/(losses)
GBP million
---------------------------------------------- ----------------
Translation impact 56
---------------------------------------------- ----------------
Transaction impact (57)
---------------------------------------------- -----------
Operating profit before exceptional items (1)
----------------------------------------------
Net finance charges - translation impact (5)
----------------------------------------------
Net finance charges - transaction impact 3
---------------------------------------------- ----------- ---
Net finance charges (2)
---------------------------------------------- -----------
Associates - translation impact (3)
---------------------------------------------- -----------
Profit before exceptional items and taxation (6)
---------------------------------------------- -----------
Year ended Year ended
30 June 2020 30 June 2019
---------------------- ------------- ---------------
Exchange rates
---------------------- ------------- ---------------
Translation GBP1 = $1.26 $1.29
---------------------- ------------- -------------
Transaction GBP1 = $1.35 $1.33
---------------------- ------------- -------------
Translation GBP1 = EUR1.14 EUR1.13
---------------------- ------------- -------------
Transaction GBP1 = EUR1.12 EUR1.13
---------------------- ------------- -------------
(b) Acquisitions and disposals
The acquisitions and disposals movement was mainly attributable
to the acquisition of Seedlip and Anna Seed 83, the disposal of
United National Breweries and the prior year disposal of a
portfolio of 19 brands to Sazerac.
See Notes, Acquisition of businesses and purchase of
non-controlling interests and Notes, Sale of businesses, for
further details.
(c) Exceptional items
Exceptional operating items in the year ended 30 June 2020 were
GBP1,357 million before tax (2019 - GBP74 million).
Value in use calculation and fair value less costs of disposal
methodologies were both considered to assess the recoverable amount
of the India cash-generating unit. Having considered the volatility
in local share prices, the premiums that businesses controlled by
large multinationals trade at and other factors, we assessed a
range of fair value less costs of disposal with particular focus on
the value a third party may pay for a controlling stake in the
current environment. The value in use calculation was above our
view of fair value less costs of disposal and was therefore used to
determine the recoverable amount of this cash-generating unit.
Based on this, in the year ended 30 June 2020, an impairment charge
of GBP655 million in respect of the India cash-generating unit
containing the India goodwill was recognised in exceptional
operating items. Impairment charges of GBP78 million in respect of
the Old Tavern brand, GBP38 million in respect of the Bagpiper
brand and GBP1 million in respect of fixed assets in India were
also recognised in exceptional operating items. Forecast cash flow
assumptions were reduced principally due to the general economic
downturn further aggravated by the Covid-19 pandemic, including
pandemic related recent regulatory changes, negatively impacting
both demand and margins.
An impairment charge of GBP434 million in respect of the Windsor
Premier brand was recognised in exceptional operating items. The
forecast cash flow assumptions were reduced principally due to the
recent regulatory changes limiting trade spend for wholesalers and
venues and the Covid-19 pandemic negatively impacting the
challenging whisky category in Korea.
Having considered both value in use and fair value less cost of
disposal, an impairment of GBP84 million in respect of the group's
Nigerian tangible fixed assets was recognised in exceptional
operating items. The profit generating ability of the assets were
reduced principally due to the deteriorated economic outlook as a
result of the combination of the oil price crisis in Nigeria and
the Covid-19 pandemic.
An impairment of GBP55 million in respect of the group's
Ethiopian tangible fixed assets was recognised in exceptional
operating items. The forecast cash flow assumptions were reduced
principally due to the impact of the recent excise duty increase
and the Covid-19 pandemic.
In line with the group's accounting policy, given the unusual
nature and magnitude of the below items, these are reported as
exceptional operating items:
(i) Diageo has launched the "Raising the Bar" programme to
support pubs and bars to welcome customers back and recover
following the Covid-19 pandemic. The programme includes a
commitment of $100 million (GBP81 million) over a period of up to
two years from 1 July 2020, to support qualifying outlets across a
limited number of iconic global cities and some regional cities in
certain key markets. Diageo has also provided other forms of
support to help the communities and the industry during the
Covid-19 pandemic. Supporting packages for bartenders and bar
owners and donations of grain neutral spirit to produce hand
sanitisers amounted to GBP8 million in the year ended 30 June
2020.
(ii) In the year ended 30 June 2020, an exceptional charge of
GBP30 million was recognised in respect of obsolete inventories
that have been or will be destroyed as a direct consequence of the
Covid-19 pandemic. The amount comprises of a GBP23 million
inventory provision and GBP7 million directly attributable to
handling and destruction costs.
(iii) In the year ended 30 June 2020, an estimated benefit of
$105 million (GBP83 million) for substitution drawback claims (net
of legal and broker fees of $2 million (GBP2 million)) previously
filed and to be filed with the US Government in relation to prior
years was recognised in exceptional operating items. Following a
recent court decision and a related legal assessment, the
collection of the excise duty benefit has become virtually
certain.
In the year ended 30 June 2019, the group recognised a provision
of GBP35 million for indirect tax in respect of certain channel
accounts and regulatory change in Korea in respect of prior
years.
An assessment was issued by the Korea Tax Authority in the year
ended 30 June 2020, that has resulted in the reversal of the prior
year's provision in the amount of GBP24 million.
On 26 October 2018, the High Court of Justice of England and
Wales issued a judgement 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 judgement 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.
In July 2019 Diageo reached agreement with the French tax
authorities resulting in penalty charges of GBP18 million (see
Taxation below).
Non-operating items in the year ended 30 June 2020 were GBP23
million loss before tax (2019 - GBP144 million income).
In the year ended 30 June 2020, Diageo completed the acquisition
of Seedlip and Anna Seed 83 and acquired controlling interests in
certain Distill Ventures entities. As a result of these entities
becoming subsidiaries of the group a gain of GBP8 million arose,
being the difference between the book value of the associates prior
to the transaction and their fair value.
The disposal of United National Breweries was completed in the
year ended 30 June 2020, which has resulted in an aggregate
exceptional loss of GBP32 million, including a GBP4 million
cumulative exchange loss in respect of prior years, recycled from
other comprehensive income, and an impairment charge recognised in
the period.
The disposal of an associate, Equal Parts, LLC resulted in an
exceptional loss of GBP1 million.
In the year ended 30 June 2020, the group has reversed $3
million (GBP2 million) from provisions in relation to the sale of a
portfolio of 19 brands to Sazerac on 20 December 2018.
In the year ended 30 June 2019, the aggregate consideration for
the disposal of a portfolio of 19 brands to Sazerac was $550
million (GBP435 million) resulting in a profit before taxation of
$198 million (GBP155 million).
The group recognised an exceptional loss of GBP9 million in
respect of the disposal of United National Breweries.
The disposal of the Indian wine business has resulted in an
exceptional loss of GBP2 million.
See Explanatory Note (c) for the definition of exceptional
items.
(d) Fair value remeasurement
The adjustment to cost of sales reflects the elimination of fair
value changes for biological assets in respect of growing agave
plants of GBP9 million gain. The adjustment to other operating
expenses is the elimination of fair value changes to contingent
consideration liabilities in respect of prior year acquisitions of
GBP7 million loss (GBP10 million loss in respect of the Casamigos
contingent consideration liability, GBP4 million loss in respect of
the Copper Dog contingent consideration liability and GBP7 million
gain in respect of the Pierde Almas contingent consideration
liability).
(e) Taxation
The reported tax rate for the year ended 30 June 2020 was 28.8%
compared with 21.2% for the year ended 30 June 2019.
Included in the tax charge of GBP589 million for the year ended
30 June 2020 is an exceptional tax credit of GBP154 million mainly
comprising exceptional tax credits on the impairment of the Windsor
and USL brands of GBP105 million and GBP25 million, respectively,
exceptional tax credits in respect of fixed assets impairments in
Nigeria and Ethiopia of GBP25 million and GBP10 million,
respectively, and a further GBP7 million exceptional tax credit in
respect of obsolete inventories offset by a GBP20 million
exceptional tax charge in respect of substitution drawback
claims.
In the year ended 30 June 2019, Diageo reached a resolution with
the French tax authorities on the treatment of interest costs for
all open periods which resulted in a total exceptional charge of
EUR100 million (GBP88 million), comprising a tax charge of EUR69
million (GBP61 million), penalties of EUR21 million (GBP18 million)
and interest of EUR10 million (GBP9 million). This brought to a
close all open issues with the French tax authorities for periods
up to and including 30 June 2017. In addition, the tax charge for
the year ended 30 June 2019 included an exceptional tax credit of
GBP51 million principally arising from remeasuring the deferred tax
liabilities in respect of the Ketel One vodka distribution rights
from 25% to 20.5%, an exceptional tax charge of GBP33 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 year ended 30 June
2020 was 21.7%, consistent with our guidance of 21%-22% and
compared with 20.6% in the prior comparable period.
We continue to expect a tax rate before exceptional items for
the year ending 30 June 2021 to be in the range of 21%-22%.
(f) Dividend
The group aims to increase the dividend each year and the
decision in respect of the dividend 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 2020 dividend cover was
1.6 times. The recommended final dividend for the year ended 30
June 2020, to be put to the shareholders for approval at the Annual
General Meeting is 42.47 pence, the same as the final dividend for
the year ended 30 June 2019. This brings the full year dividend to
69.88 pence per share, an increase of 2% on the prior year. We will
keep future returns of capital, including dividends, under review
through year ending 30 June 2021 to ensure we allocate Diageo's
capital in the best way to maximize value for the business and our
stakeholders.
Subject to approval by shareholders, the final dividend will be
paid to holders of ordinary shares and US ADRs on the register as
of 14 August 2020. The ex-dividend date both for the holders of the
ordinary shares and for US ADR holders is 13 August 2020. The final
dividend, once approved by shareholders, will be paid to
shareholders on 8 October 2020 and payment to US ADR holders will
be made on 14 October 2020. A dividend reinvestment plan is
available to holders of ordinary shares in respect of the final
dividend and the plan notice date is 17 September 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 year ended 30 June 2020 the group purchased
approximately 39 million ordinary shares at a cost of GBP1,282
million (including GBP7 million of transaction costs) and funded
the purchases through a combination of operating cash inflows and
incremental borrowings. This amount includes the aggregate
consideration of GBP26 million (including GBP17 million settlement
payments for the purchases made in the year ended 30 June 2019 and
30 June 2020) in relation to the prior year programme, which was
completed on 10 July 2019 resulting in the repurchase of 0.3
million shares in the year ended 30 June 2020.The shares purchased
under the share buyback programmes were cancelled.
At 30 June 2020 the leverage ratio, calculated as adjusted net
debt to adjusted EBITDA, was 3.3x and the group anticipates
leverage to be above the target range of 2.5-3.0x through the year
ending 30 June 2021. The company has paused the return of capital
programme until leverage is back within the target range.
MOVEMENT IN NET BORROWINGS AND EQUITY
Movement in net borrowings
2020 2019
GBP million GBP million
----------------------------------------------------- ----------- -------------
Net borrowings at the beginning of the year (11,277) (9,091)
----------------------------------------------------- ---------- ----------
Free cash flow (a) 1,634 2,608
----------------------------------------------------- ---------- ----------
Acquisitions (b) (130) (56)
----------------------------------------------------- ---------- ----------
Sale of businesses and brands (c) 11 426
----------------------------------------------------- ---------- ----------
Share buyback programme (1,282) (2,775)
----------------------------------------------------- ---------- ----------
Proceeds from issue of share capital 1 1
----------------------------------------------------- ---------- ----------
Net sale of own shares for share schemes (d) 54 50
----------------------------------------------------- ---------- ----------
Dividends paid to non-controlling interests (111) (112)
----------------------------------------------------- ---------- ----------
Net movements in bonds (e) 4,368 1,598
----------------------------------------------------- ---------- ----------
Purchase of shares of non-controlling interests (f) (62) (784)
----------------------------------------------------- ---------- ----------
Net movements in other borrowings (g) (285) 721
----------------------------------------------------- ---------- ----------
Equity dividends paid (1,646) (1,623)
----------------------------------------------------- ---------- ----------
Net increase in cash and cash equivalents 2,552 54
----------------------------------------------------- ---------- ----------
Net increase in bonds and other borrowings (4,089) (2,331)
----------------------------------------------------- ---------- ----------
Exchange differences (h) (95) (22)
----------------------------------------------------- ---------- ----------
Other non-cash items (i) (86) 113
----------------------------------------------------- ---------- ----------
Adoption of IFRS 16 (251) -
----------------------------------------------------- ---------- ----------
Net borrowings at the end of the year (13,246) (11,277)
----------------------------------------------------- ---------- ----------
(a) See Explanatory Notes, Free cash flow for the analysis of
free cash flow.
(b) In the year ended 30 June 2020, Diageo completed the
acquisition of Seedlip and Anna Seed 83 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 prior year
acquisitions.
In the year ended 30 June 2019, 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 prior year
acquisitions.
(c) In the year ended 30 June 2020, sale of businesses and
brands included the sale of United National Breweries, Diageo's
wholly owned sorghum beer business.
In the year ended 30 June 2019, 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 of own shares comprised purchase of treasury shares
for the future settlement of obligations under the employee share
option schemes of GBP2 million (2019 - GBP16 million) less receipts
from employees on the exercise of share options of GBP56 million
(2019 - GBP66 million).
(e) In the year ended 30 June 2020, the group issued bonds of
$4,100 million (GBP3,296 million), EUR1,750 million (GBP1,594
million) and GBP298 million (including GBP2 million discount and
fee) and repaid bonds of $1,000 million (GBP820 million). In the
year ended 30 June 2019, the group issued bonds of EUR2,600 million
(GBP2,270 million) and GBP496 million (including GBP4 million
discount and fee) and repaid bonds of EUR1,350 million (GBP1,168
million).
(f) In the year ended 30 June 2020, Diageo acquired additional
shares in United Spirits Limited for INR 5,495 million (GBP60
million) which took Diageo's percentage of shares owned in United
Spirits Limited from 54.78% to 55.94% (excluding 2.38% owned by the
USL Benefit Trust). During the year ended 30 June 2020, Diageo
completed the purchase of 4% of the share capital of Serengeti
Breweries Limited for $3 million (GBP2 million) which took Diageo's
effective economic interest in Serengeti Breweries Limited from
39.2% to 40.2%.
In the year ended 30 June 2019, purchase of shares of
non-controlling interests comprised RMB 6,774 million (GBP775
million) and transaction costs of GBP9 million in respect of the
acquisition of 23.43% of the share capital of Sichuan Shuijingfang
Company Limited (SJF) in two separate transactions. This took
Diageo's shareholding in SJF from 39.71% to 63.14%.
(g) In the year ended 30 June 2020, the net movement in other
borrowings principally arose from foreign exchange swaps and
forwards, partially offset by the cash movement on lease
liabilities. In the comparable period movements were driven by the
issue of commercial paper.
(h) The exchange arising on net borrowings of GBP95 million is
primarily driven by unfavourable exchange movements on US dollar
and euro denominated borrowings and cash and cash equivalents,
partially offset by a favourable movement on foreign exchange swaps
and forwards.
(i) In the year ended 30 June 2020, other non-cash items are
principally in respect of leases of GBP206 million entered into in
the year, partially offset by the fair value changes of cross
currency interest rate swaps. In the year ended 30 June 2019, other
non-cash items are principally in respect of changes in the fair
value of borrowings.
Movement in equity
2020 2019
GBP million GBP million
-------------------------------------------------------- ----------- -------------
Equity at the beginning of the year 10,156 11,713
-------------------------------------------------------- ---------- ----------
Profit for the year 1,454 3,337
-------------------------------------------------------- ---------- ----------
Exchange adjustments (a) (282) 255
-------------------------------------------------------- ---------- ----------
Remeasurement of post employment plans net of taxation 3 36
-------------------------------------------------------- ---------- ----------
Purchase of shares of non-controlling interests (b) (62) (784)
-------------------------------------------------------- ---------- ----------
Dividends to non-controlling interests (117) (114)
-------------------------------------------------------- ---------- ----------
Equity dividends paid (1,646) (1,623)
-------------------------------------------------------- ---------- ----------
Share buyback programme (1,256) (2,801)
-------------------------------------------------------- ---------- ----------
Other reserve movements 190 137
-------------------------------------------------------- ----------
Equity at the end of the year 8,440 10,156
-------------------------------------------------------- ---------- ----------
(a) Exchange movement in the year ended 30 June 2020 primarily
arose from exchange losses driven by the Indian rupee, euro and the
Turkish lira, partially offset by exchange gains in respect of the
US dollar.
(b) In the year ended 30 June 2020, Diageo acquired additional
shares in United Spirits Limited for INR 5,495 million (GBP60
million) and additional shares in Serengeti Breweries Limited for
$3 million (GBP2 million).
In the year ended 30 June 2019, Diageo acquired additional
shares in Sichuan Shuijingfang Company Limited (SJF) which was
already controlled and therefore consolidated prior to the
transaction.
Post employment plans
The net surplus of the group's post employment benefit plans
increased by GBP148 million from GBP214 million at 30 June 2019 to
GBP362 million at 30 June 2020. The increase in net surplus is
primarily attributable to 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. These were partially offset by the change in assumptions in
the United Kingdom (including an adverse impact 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 1.5%) partially offset by a favourable impact of the
decrease in inflation rate assumption (from 3.2% to 2.8%)).
The operating profit charge before exceptional items decreased
by GBP3 million from GBP50 million for the year ended 30 June 2019
to GBP47 million for the year ended 30 June 2020. The operating
profit for the year ended 30 June 2020 includes past service gains
of GBP47 million in respect of the Guinness Ireland Group Pension
Scheme (GIGPS), following separate communications to the deferred
members in respect of changing their expectations of a full pension
prior to reaching the age of 65 and to pensioners in respect of
future pension increases (2019 - GBP54 million credit due to
changes made to future pension increases for members of the Diageo
Pension Scheme in the United Kingdom and changes to the GIGPS), and
curtailment gains of GBP12 million (2019 - GBP4 million) mainly in
respect of the Diageo Pension Scheme and the GIGPS.
Total cash contributions by the group to all post employment
plans in the year ending 30 June 2021 are estimated to be
approximately GBP140 million.
DIAGEO CONDENSED CONSOLIDATED INCOME STATEMENT
Year ended Year ended
30 June 2020 30 June 2019
Notes GBP million GBP million
Sales 2 17,697 19,294
Excise duties (5,945) (6,427)
------------ ------------
Net sales 2 11,752 12,867
Cost of sales (4,654) (4,866)
------------ ------------
Gross profit 7,098 8,001
Marketing (1,841) (2,042)
Other operating items (3,120) (1,917)
------------
Operating profit 2 2,137 4,042
Non-operating items 3 (23) 144
Finance income 4 366 442
Finance charges 4 (719) (705)
Share of after tax results of associates and
joint ventures 282 312
------------ ------------
Profit before taxation 2,043 4,235
Taxation 5 (589) (898)
------------ ------------
Profit for the year 1,454 3,337
============ ============
Attributable to:
Equity shareholders of the parent company 1,409 3,160
Non-controlling interests 45 177
------------ ------------
1,454 3,337
============ ============
Weighted average number of shares million million
Shares in issue excluding own shares 2,346 2,418
Dilutive potential ordinary shares 8 10
------------ ------------
2,354 2,428
============ ============
pence pence
Basic earnings per share 60.1 130.7
============ ============
Diluted earnings per share 59.9 130.1
============ ============
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME
Year ended Year ended
30 June 2020 30 June 2019
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 38 33
- associates and joint ventures (14) 2
Tax on post employment plans (21) 1
----------- -----------
3 36
Items that may be recycled subsequently to the
income statement
Exchange differences on translation of foreign
operations
- group (104) 274
- associates and joint ventures 82 19
- non-controlling interests (37) 55
Net investment hedges (227) (93)
Exchange loss recycled to the income statement
- on translation of foreign operations 4 -
Tax on exchange differences 4 (19)
Effective portion of changes in fair value of cash
flow hedges
- hedge of foreign currency debt of the group 221 180
- transaction exposure hedging of the group (43) (86)
- commodity price risk hedging of the group (11) (9)
- hedges by associates and joint ventures 6 (6)
- recycled to income statement - hedge of foreign
currency debt of the group (75) (82)
- recycled to income statement - transaction exposure
hedging of the group 42 45
- recycled to income statement - commodity price
risk hedging of the group 8 -
Tax on effective portion of changes in fair value
of cash flow hedges (23) (11)
Hyperinflation adjustment (18) (22)
Tax on hyperinflation adjustment 4 6
----------- -----------
(167) 251
----------- -----------
Other comprehensive (loss)/profit, net of tax, for
the year (164) 287
Profit for the year 1,454 3,337
----------- -----------
Total comprehensive income for the year 1,290 3,624
=========== ===========
Attributable to:
Equity shareholders of the parent company 1,282 3,392
Non-controlling interests 8 232
----------- -----------
Total comprehensive income for the year 1,290 3,624
=========== ===========
DIAGEO CONDENSED CONSOLIDATED BALANCE SHEET
30 June 2020 30 June 2019
Notes GBP million GBP million GBP million GBP million
Non-current assets
Intangible assets 11,300 12,557
Property, plant and equipment 4,926 4,455
Biological assets 51 34
Investments in associates
and joint ventures 3,557 3,173
Other investments 41 49
Other receivables 46 53
Other financial assets 686 404
Deferred tax assets 119 138
Post employment benefit assets 1,111 1,060
---------- ----------
21,837 21,923
Current assets
Inventories 6 5,772 5,472
Trade and other receivables 2,111 2,694
Assets held for sale - 65
Corporate tax receivables 190 83
Other financial assets 75 127
Cash and cash equivalents 7 3,323 932
---------- ----------
11,471 9,373
---------- ----------
Total assets 33,308 31,296
---------- ----------
Current liabilities
Borrowings and bank overdrafts 7 (1,995) (1,959)
Other financial liabilities (389) (307)
Share buyback liability - (26)
Trade and other payables (3,683) (4,202)
Liabilities held for sale - (32)
Corporate tax payables (246) (378)
Provisions (183) (99)
---------- ----------
(6,496) (7,003)
Non-current liabilities
Borrowings 7 (14,790) (10,596)
Other financial liabilities (393) (124)
Other payables (175) (222)
Provisions (293) (317)
Deferred tax liabilities (1,972) (2,032)
Post employment benefit liabilities (749) (846)
---------- ----------
(18,372) (14,137)
---------- ----------
Total liabilities (24,868) (21,140)
----------
Net assets 8,440 10,156
========== ==========
Equity
Share capital 742 753
Share premium 1,351 1,350
Other reserves 2,272 2,372
Retained earnings 2,407 3,886
---------- ----------
Equity attributable to equity
shareholders of the parent
company 6,772 8,361
Non-controlling interests 1,668 1,795
----------
Total equity 8,440 10,156
========== ==========
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
year - - - - 3,160 3,160 3,160 177 3,337
Other
comprehensive
income - - 212 - 20 20 232 55 287
Total
comprehensive
income - - 212 - 3,180 3,180 3,392 232 3,624
Employee share
schemes - - - 118 (49) 69 69 - 69
Share-based
incentive
plans - - - - 49 49 49 - 49
Share-based
incentive
plans in
respect of
associates - - - - 3 3 3 - 3
Tax on
share-based
incentive plans - - - - 20 20 20 - 20
Shares issued - 1 - - - - 1 - 1
Purchase of
non-controlling
interests - - - - (694) (694) (694) (90) (784)
Non-controlling
interest
in respect of
new subsidiary - - - - - - - 2 2
Change in fair
value
of put option - - - - (3) (3) (3) - (3)
Share buyback
programme (27) - 27 - (2,801) (2,801) (2,801) - (2,801)
Dividends paid - - - - (1,623) (1,623) (1,623) (114) (1,737)
At 30 June 2019 753 1,350 2,372 (2,026) 5,912 3,886 8,361 1,795 10,156
Profit for the
year - - - - 1,409 1,409 1,409 45 1,454
Other
comprehensive
loss - - (116) - (11) (11) (127) (37) (164)
Total
comprehensive
(loss)/income - - (116) - 1,398 1,398 1,282 8 1,290
Employee share
schemes - - - 90 (36) 54 54 - 54
Share-based
incentive
plans - - - - 2 2 2 - 2
Share-based
incentive
plans in
respect of
associates - - - - 4 4 4 - 4
Tax on
share-based
incentive plans - - - - 1 1 1 - 1
Share based
payments
and purchase of
treasury
shares in
respect of
subsidiaries - - - - (1) (1) (1) - (1)
Shares issued - 1 - - - - 1 - 1
Transfers - - 5 - (5) (5) - - -
Purchase of
non-controlling
interests - - - - (39) (39) (39) (23) (62)
Non-controlling
interest
in respect of
new subsidiary - - - - - - - 5 5
Change in fair
value
of put option - - - - 9 9 9 - 9
Share buyback
programme (11) - 11 - (1,256) (1,256) (1,256) - (1,256)
Dividends
declared - - - - (1,646) (1,646) (1,646) (117) (1,763)
---------
At 30 June 2020 742 1,351 2,272 (1,936) 4,343 2,407 6,772 1,668 8,440
===== ======= ======= ====== ======= ====== ========= === =========== ==== ======
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended Year ended
30 June 2020 30 June 2019
GBP million GBP million GBP million GBP million
Cash flows from operating activities
Profit for the year 1,454 3,337
Taxation 589 898
Share of after tax results of associates
and joint ventures (282) (312)
Net finance charges 353 263
Non-operating items 23 (144)
----------
Operating profit 2,137 4,042
Increase in inventories (366) (434)
Decrease in trade and other receivables 523 11
(Decrease)/increase in trade and other payables
and provisions (485) 201
---------- ----------
Net increase in working capital (328) (222)
Depreciation, amortisation and impairment 1,839 374
Dividends received 4 168
Post employment payments less amounts included
in operating profit (109) (121)
Other items (14) 64
----------
1,720 485
---------- ----------
Cash generated from operations 3,529 4,305
Interest received 185 216
Interest paid (493) (468)
Taxation paid (901) (805)
---------- ----------
(1,209) (1,057)
---------- ----------
Net cash inflow from operating activities 2,320 3,248
Cash flows from investing activities
Disposal of property, plant and equipment
and computer software 14 32
Purchase of property, plant and equipment
and computer software (700) (671)
Movements in loans and other investments - (1)
Sale of businesses and brands 11 426
Acquisition of businesses (130) (56)
---------- ----------
Net cash outflow from investing activities (805) (270)
Cash flows from financing activities
Share buyback programme (1,282) (2,775)
Proceeds from issue of share capital 1 1
Net sale of own shares for share schemes 54 50
Dividends paid to non-controlling interests (111) (112)
Purchase of shares of non-controlling interests (62) (784)
Proceeds from bonds 5,188 2,766
Repayment of bonds (820) (1,168)
Net movements in other borrowings (285) 721
Equity dividends paid (1,646) (1,623)
---------- ----------
Net cash inflow/(outflow) from financing
activities 1,037 (2,924)
---------- ----------
Net increase in net cash and cash equivalents 2,552 54
Exchange differences (120) (26)
Net cash and cash equivalents at beginning
of the year 721 693
---------- ----------
Net cash and cash equivalents at end of the
year 3,153 721
========== ==========
Net cash and cash equivalents consist of:
Cash and cash equivalents 3,323 932
Bank overdrafts (170) (211)
---------- ----------
3,153 721
========== ==========
NOTES
1. Basis of preparation
This condensed set of financial statements has been prepared in
accordance with International Financial Reporting Standards (IFRSs)
as issued by the International Accounting Standards Board (IASB)
and as adopted by the EU. International Financial Reporting
Standards (IFRSs) 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
years 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 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 14 - Contingent liabilities
and legal proceedings.
The potential financial impact of the Covid-19 pandemic has been
modelled in our cash flow projections and stress tested by
including several severe but plausible downside scenarios which are
linked to our principal risks. In our downside Covid-19 scenario,
we have considered the key impacts of the pandemic for each region
including the potential restrictions on the sale of our products in
both on-trade and off-trade channels. We have then considered the
expected duration of those restrictions, as well as a forecast for
the length of time to recovery (a return to 2019 volumes), based on
industry projections. As a result of these factors, in our severe
but plausible scenarios, we do not anticipate that the on-trade
business recovers to volumes experienced in the year ending 30 June
2019 within the next 18 month period. Even with these negative
sensitivities for each region taken into account, the group's cash
position is still considered to remain strong, as we have protected
our liquidity by increasing the level of committed facilities and
accelerating certain bond issuance programmes. Mitigating actions,
should they be required, are all within management's control and
could include reduced advertising and promotion spend, dividend
cash payments, non-essential overheads and non-committed capital
expenditure in the next 12 months. Having considered the outcome of
these assessments, it is deemed appropriate to prepare the
consolidated financial statements on a going concern basis.
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
The following standard and amendment 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 year ended 30 June 2019 have not been restated. Information
in respect of the adoption of IFRS 16 is included in note 13.
Amendments to IAS 19 - Plan Amendment, Curtailment or
Settlement. The amendment requires the remeasurement of service
cost and interest charge for the rest of the period following plan
amendments, settlements and curtailments using actuarial
assumptions prevailing at the date of these events. The amendment
is applicable to Diageo from 1 July 2019 on a prospective basis and
has resulted in an additional service cost of GBP1 million
following the remeasurement of the Irish Scheme.
The following standard and amendment, 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.
Amendments to IFRS 9, IAS 39 and IFRS 7 - Interest rate
benchmark reform (phase 1). The amendment provides temporary relief
from applying specific hedge accounting requirements to hedging
relationships directly affected by interbank offered rate (IBOR)
reform. The reliefs have the effect that IBOR reform should not
generally cause hedge accounting to terminate.
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
centers are located in Hungary, Kenya, Colombia, the Philippines
and India. The captive business service centers in Budapest and
Bangalore also perform 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.
As part of the annual planning process a budget exchange rate is
set each year equal to the prior year's weighted average rate. This
rate is used for management reporting purposes and, in order to
ensure a consistent basis on which performance is measured through
the year, the prior period results are restated to the budget rate
as well. Segmental information for net sales and operating profit
before exceptionals are reported on a consistent basis with our
management reporting. 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 respective year.
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
North and and Asia segment operating and
Year ended America Turkey Africa Caribbean Pacific ISC sales segments other Total
GBP GBP GBP GBP GBP GBP GBP GBP
30 June 2020 million million million GBP million million million million million GBP million million
Sales 5,222 4,697 1,911 1,184 4,645 1,343 (1,343) 17,659 38 17,697
====== ====== ====== ====== === ====== ====== ======= ======= ===== ==== ======
Net sales
At budgeted
exchange
rates(i) 4,445 2,501 1,300 944 2,253 1,439 (1,341) 11,541 38 11,579
Acquisitions
and disposals 32 10 50 - 1 - - 93 - 93
ISC allocation 11 60 4 10 12 (98) - (1) 1 -
Retranslation
to actual
exchange
rates 135 (4) (8) (46) 4 2 (2) 81 (1) 80
------ ------ ------ ------ ------ ------- ------
Net sales 4,623 2,567 1,346 908 2,270 1,343 (1,343) 11,714 38 11,752
====== ====== ====== ====== === ====== ====== ======= ======= ===== ==== ======
Operating
profit/(loss)
At budgeted
exchange
rates(i) 2,007 730 116 254 498 45 - 3,650 (152) 3,498
Acquisitions
and disposals (1) (4) - - - - - (5) - (5)
ISC allocation 6 26 2 5 6 (45) - - - -
Fair value
remeasurement
of contingent
consideration (10) (4) - 7 - - - (7) - (7)
Fair value
remeasurement
of biological
assets - - - 9 - - - 9 - 9
Retranslation
to actual
exchange
rates 32 9 (17) (27) (3) - - (6) 5 (1)
------ ------ ------ ------ ------ ------- ------- ----- ---- ------
Operating
profit/(loss)
before
exceptional
items 2,034 757 101 248 501 - - 3,641 (147) 3,494
Exceptional
items 54 (62) (145) (6) (1,198) - - (1,357) - (1,357)
------ ------ ------ ------ ------ ------ ------- ------- ----- ----
Operating
profit/(loss) 2,088 695 (44) 242 (697) - - 2,284 (147) 2,137
====== ====== ====== ====== === ====== ====== ======= ======= ===== ===
Non-operating
items (23)
Net finance
charges (353)
Share of after
tax
results of
associates
and joint
ventures 282
Profit before
taxation 2,043
======
Latin Eliminate
Europe America inter- Total Corporate
North and and Asia segment operating and
Year ended America Turkey Africa Caribbean Pacific ISC sales segments other Total
GBP GBP GBP GBP GBP GBP GBP GBP GBP
30 June 2019 million million million million million million million million GBP million million
Sales 5,074 5,132 2,235 1,444 5,356 1,739 (1,739) 19,241 53 19,294
======= ====== ======= ========= ====== ====== ======= ======= ====== === ======
Net sales
At budgeted
exchange
rates(i) 4,034 2,951 1,529 1,095 2,656 1,843 (1,738) 12,370 54 12,424
Acquisitions
and disposals 88 1 1 1 1 - - 92 - 92
ISC allocation 11 63 5 15 11 (105) - - - -
Retranslation
to actual
exchange
rates 327 (76) 62 19 20 1 (1) 352 (1) 351
------- ------ ------- --------- ------ ------ ------- ------- ------ ------
Net sales 4,460 2,939 1,597 1,130 2,688 1,739 (1,739) 12,814 53 12,867
======= ====== ======= ========= ====== ====== ======= ======= ====== === ======
Operating
profit/(loss)
At budgeted
exchange
rates(i) 1,755 972 257 312 671 139 - 4,106 (186) 3,920
Acquisitions
and disposals 29 (1) - - - - - 28 - 28
ISC allocation 13 72 6 32 16 (139) - - - -
Retranslation
to actual
exchange
rates 151 (29) 12 21 16 - - 171 (3) 168
------- ------ ------- ------ ------ ------- ------- ------ ------
Operating
profit/(loss)
before
exceptional
items 1,948 1,014 275 365 703 - - 4,305 (189) 4,116
Exceptional
items - (18) - - (35) - - (53) (21) (74)
------- ------ ------- --------- ------ ------ ------- ------- ------ ------
Operating
profit/(loss) 1,948 996 275 365 668 - - 4,252 (210) 4,042
======= ====== ======= ========= ====== ====== ======= ======= ======
Non-operating
items 144
Net finance
charges (263)
Share of after
tax
results of
associates
and joint
ventures 312
------
Profit before
taxation 4,235
======
(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 45% of annual net sales occurred in the last
four months of the calendar year 2019.
Weighted average exchange rates used in the translation of
income statements were US dollar - GBP1 = $1.26 (2019 - GBP1 =
$1.29) and euro - GBP1 = EUR1.14 (2019 - GBP1 = EUR1.13). Exchange
rates used to translate assets and liabilities at the balance sheet
date were US dollar - GBP1 = $1.23 (30 June 2019 - GBP1 = $1.27)
and euro - GBP1 = EUR1.09 (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.
Year ended Year ended
30 June 2020 30 June 2019
GBP million GBP million
Exceptional operating items
Brand, goodwill, tangible and other assets impairment (1,345) -
Donations (89) -
Obsolete inventories (30) -
Substitution drawback 83 -
Indirect tax in Korea 24 (35)
Guaranteed minimum pension equalisation - (21)
French tax audit penalty - (18)
(1,357) (74)
Non-operating items
Step acquisitions 8 -
Sale of businesses and brands
United National Breweries (32) (9)
Loss on disposal of associate (1) -
Portfolio of 19 brands 2 155
USL wine business - (2)
(23) 144
French tax audit interest - (9)
Exceptional items before taxation (1,380) 61
Items included in taxation
Tax on exceptional operating items 154 4
Tax on exceptional non-operating items - (33)
Exceptional taxation - (10)
154 (39)
Total exceptional items (1,226) 22
============ ========== ===
Attributable to:
Equity shareholders of the parent company (1,157) (4)
Non-controlling interests (69) 26
------------ ---------- ---
Total exceptional items (1,226) 22
============ ========== ===
Operating exceptional items are charged to other operating
expenses.
See Summary Income Statement (c) Exceptional items for detailed
explanation on exceptional items.
4. Finance income and charges
Year ended Year ended
30 June 2020 30 June 2019
GBP million GBP million
Interest income 192 232
Fair value gain on financial instruments 123 155
----------- -----------
Total interest income 315 387
Interest charges (510) (471)
Interest charge on leases classified as finance
leases under the previous standard (6) (7)
Interest charge on leases (IFRS 16 adoption impact) (9) -
Fair value loss on financial instruments (123) (157)
----------- -----------
Total interest charges (648) (635)
----------- -----------
Net interest charges (333) (248)
=========== ===========
Net finance income in respect of post employment
plans in surplus 26 29
Hyperinflation adjustment in respect of Venezuela
(a) 6 10
Interest income in respect of direct and indirect
tax 16 16
Other finance income 3 -
Total other finance income 51 55
Net finance charge in respect of post employment
plans in deficit (17) (22)
Unwinding of discounts (24) (17)
Interest charge in respect of direct and indirect
tax (22) (11)
Change in financial liability (Level 3) (6) (8)
Other finance charges (exceptional) - (9)
Guarantee fees (1) -
Other finance charges (1) (3)
----------- -----------
Total other finance charges (71) (70)
----------- -----------
Net other finance charges (20) (15)
=========== ===========
(a) Hyperinflation adjustment in respect of Venezuela
Venezuela is a hyperinflationary 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 (Venezuelan bolivar)
at the rate they are expected to be settled, applying the most
appropriate official exchange rate (DICOM). For consolidation
purposes, the group converts its Venezuelan operations using
management's estimate of the exchange rate considering forecast
inflation and the most appropriate official exchange rate. The
exchange rate used to translate the results of the group's
Venezuelan operations was VES/GBP 10,024,865 for the year ended 30
June 2020 (2019 - VES/GBP 403,700). Movement in the price index for
the year ended 30 June 2020 was 2,464% (2019 - 1,087,262%). The
inflation rate used by the group is provided by an independent
valuer, because no reliable, official published rate is available
that is representative of the situation in Venezuela.
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 year ended 30 June 2020 and
30 June 2019 and with the amounts that would have resulted if the
official DICOM exchange rate had been applied:
Year ended 30 June 2020 Year ended 30 June 2019
At estimated At DICOM exchange At estimated At DICOM
exchange rate rate exchange rate exchange rate
10,024,865 VES/GBP 252,558 VES/GBP 403,700 VES/GBP 8,553 VES/GBP
GBP million GBP million GBP million GBP million
Net sales - 3 - 3
Operating profit - 10 - 2
Other finance income
- hyperinflation
adjustment 6 222 10 455
Net cash inflow
from operating activities - 6 - 5
Net assets 48 1,893 56 2,643
5. Taxation
For the year ended 30 June 2020, the GBP589 million taxation
charge (2019 - GBP898 million) comprises a UK tax charge of GBP144
million (2019 - GBP179 million) and a foreign tax charge of GBP445
million (2019 - GBP719 million).
The group has a number of ongoing tax audits worldwide for which
provisions are recognised based on best estimates and management's
judgements concerning the ultimate outcome of the audit. As at 30
June 2020 the ongoing audits that are provided for individually are
not expected to result in a material tax liability. The current tax
asset of GBP190 million (2019 - GBP83 million) and tax liability of
GBP246 million (2019 - GBP378 million) includes GBP189 million
(2019 - GBP251 million) of provisions for tax uncertainties.
The tax rate before exceptional items for the year ended 30 June
2020 was 21.7%, consistent with our guidance of 21%-22% and
compared with 20.6% in the prior comparable period.
6. Inventories
30 June 2020 30 June 2019
GBP million GBP million
Raw materials and consumables 363 338
Work in progress 48 46
Maturing inventories 4,562 4,334
Finished goods and goods for resale 799 754
------------ ------------
5,772 5,472
============ ============
7. Net borrowings
30 June 2020 30 June 2019
GBP million GBP million
Borrowings due within one year and bank overdrafts (1,995) (1,959)
Borrowings due after one year (14,790) (10,596)
Fair value of foreign currency forwards and swaps 497 370
Fair value of interest rate hedging instruments 189 104
Lease liabilities (470) (128)
----------- -----------
(16,569) (12,209)
Cash and cash equivalents 3,323 932
----------- -----------
(13,246) (11,277)
=========== ===========
In the year ended 30 June 2019, the group only recognised lease
liabilities in relation to leases that were classified as finance
leases under IAS 17.
8. Reconciliation of movement in net borrowings
Year ended Year ended
30 June 2020 30 June 2019
GBP million GBP million
Net increase in cash and cash equivalents before
exchange 2,552 54
Net increase in bonds and other borrowings(i) (4,089) (2,331)
------------ ------------
Net increase in net borrowings from cash flows (1,537) (2,277)
Exchange differences on net borrowings (95) (22)
Other non-cash items(ii) (86) 113
Adoption of IFRS 16 (251) -
Net borrowings at beginning of the year (11,277) (9,091)
Net borrowings at end of the year (13,246) (11,277)
============ ============
(i) In the year ended 30 June 2020, net increase in bonds and
other borrowings excludes GBP6 million cash outflow in respect of
derivatives designated in forward point hedges (2019 - GBP12
million).
(ii) In the year ended 30 June 2020, other non-cash items are
principally in respect of leases of GBP206 million entered into in
the year partially offset by the fair value changes of cross
currency interest rate swaps. In the year ended 30 June 2019, other
non-cash items are principally in respect of changes in the fair
value of borrowings.
In the year ended 30 June 2020, the group issued bonds of $4,100
million (GBP3,296 million), EUR1,750 million (GBP1,594 million) and
GBP298 million (including GBP2 million discount and fee) and repaid
bonds of $1,000 million (GBP820 million). In the year ended 30 June
2019, the group issued bonds of EUR2,600 million (GBP2,270 million)
and GBP496 million (including GBP4 million discount and fee) and
repaid bonds of EUR1,350 million (GBP1,168 million).
All bonds and commercial papers issued by Diageo plc's 100%
owned subsidiaries are fully and unconditionally guaranteed by
Diageo plc.
9. Financial instruments
Fair value measurements of financial instruments are presented
through the use of a three-level fair value hierarchy that
prioritises the valuation techniques used in fair value
calculations.
The group maintains policies and procedures to value instruments
using the most relevant data available. If multiple inputs that
fall into different levels of the hierarchy are used in the
valuation of an instrument, the instrument is categorised on the
basis of the most subjective input.
Foreign currency forwards and swaps, cross currency swaps and
interest rate swaps are valued using discounted cash flow
techniques. These techniques incorporate inputs at levels 1 and 2,
such as foreign exchange rates and interest rates. These market
inputs are used in the discounted cash flow calculation
incorporating the instrument's term, notional amount and discount
rate, and taking credit risk into account. As significant inputs to
the valuation are observable in active markets, these instruments
are categorised as level 2 in the hierarchy.
Other financial liabilities include a put option, which does not
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 30 June 2020 an amount of GBP167
million (30 June 2019 - GBP174 million) is recognised as a
liability with changes in fair value of the put option 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 30 June 2020 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 next financial year
considering forecast future performance.
Included in other financial liabilities, the contingent
consideration on acquisition of businesses represents the present
value of payments up to GBP283 million linked to certain
performance targets which are expected to be paid over the next 10
years.
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 year ended 30 June
2020.
The group's financial assets and liabilities measured at fair
value are categorised as follows:
30 June 2020 30 June 2019
GBP million GBP million
Derivative assets 758 531
Derivative liabilities (145) (129)
---------- ----------
Valuation techniques based on observable market
input (Level 2) 613 402
========== ==========
Financial assets - other 116 86
Financial liabilities - other (416) (401)
---------- ----------
Valuation techniques based on unobservable market
input (Level 3) (300) (315)
========== ==========
In the year ended 30 June 2020, the increase in financial assets
- other of GBP30 million is principally due to additions. In the
year ended 30 June 2019, the decrease in financial assets - other
of GBP3 million was mainly due to additions offset by advances
promised to associates recognised only when targets are
achieved.
The movements in level 3 instruments, measured on a recurring
basis, are as follows:
Contingent Contingent
consideration consideration
recognised recognised
Zacapa financial on acquisition Zacapa financial on acquisition
liability of businesses(i) liability of businesses
2020 2020 2019 2019
GBP million GBP million GBP million GBP million
At the beginning of the
year (174) (227) (164) (188)
Net losses included in
the income statement (6) (24) (8) (25)
Net losses included in
exchange in other
comprehensive
income (5) (5) (8) (8)
Net gains/(losses) included
in retained earnings 9 - (3) -
Additions - (42) - (15)
Settlement of liabilities 9 49 9 9
At the end of the year (167) (249) (174) (227)
============= ============== ============= ============
(i) Included in the balance at 30 June 2020 is GBP173 million in
respect of the acquisition of Casamigos (2019 - GBP197
million).
There were no transfers between levels during the two years
ended 30 June 2020 and 30 June 2019.
Lease liabilities were GBP470 million at 30 June 2020 (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 30 June 2020 the fair value of gross borrowings
(excluding finance lease liabilities and the fair value of
derivative instruments) was GBP18,175 million and the carrying
value was GBP16,785 million (30 June 2019 - GBP13,240 million and
GBP12,555 million, respectively).
10. Dividends and other reserves
Year ended Year ended
30 June 2020 30 June 2019
GBP million GBP million
Amounts recognised as distributions to equity shareholders
in the year
Final dividend for the year ended 30 June 2019
of
42.47 pence per share (2018 - 40.40 pence) 1,006 993
Interim dividend for the year ended 30 June 2020
of
27.41 per share (2019 - 26.1 pence) 640 630
-------------
1,646 1,623
============= =============
A final dividend of 42.47 pence per share was recommended by the
Board of Directors on 3 August 2020 for approval by shareholders at
the Annual General Meeting scheduled to be held on 28 September
2020 bringing the full year dividend to 69.88 pence per share for
the year ended 30 June 2020. As the approval will be after the
balance sheet date, the final dividend has not been included as a
liability.
Other reserves of GBP2,272 million at 30 June 2020 (2019 -
GBP2,372 million) include a capital redemption reserve of GBP3,201
million (2019 - GBP3,190 million), a hedging reserve of GBP93
million surplus (2019 - GBP37 million deficit) and an exchange
reserve of GBP1,022 million deficit (2019 - GBP781 million
deficit). GBP30 million surplus (2019 - GBP1 million surplus) out
of the hedging reserve represents the cost of hedging arising as a
result of imperfections of foreign exchange markets in the form of
foreign currency basis spreads.
11. Acquisition of businesses and purchase of non-controlling
interests
(i) Acquisition of businesses
Fair value of assets and liabilities acquired and cash
consideration paid in respect of acquisition of businesses in the
year ended 30 June 2020 were as follows:
GBP million
Brands 102
Inventories 2
Other working capital (3)
Deferred tax (19)
Cash 2
---------
Fair value of assets and liabilities 84
Goodwill arising on acquisition 8
Step acquisitions (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 Casamigos (49)
Cash consideration paid in respect of other prior year acquisitions (9)
Cash consideration paid for investments in associates (6)
Capital injection in associates (41)
Cash acquired 2
Net cash outflow on acquisition of business (130)
Purchase of shares of non-controlling interests (62)
Total net cash outflow (192)
=========
During the year ended 30 June 2020, Diageo completed a number of
acquisitions, the largest of these were Seedlip Ltd and Anna Seed
83 Ltd, the brand owners of Seedlip and Aecorn distilled
non-alcoholic spirits and aperitifs, both of which completed on 6
August 2019. 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 six
years.
(ii) Purchase of shares of non-controlling interests
On 29 July 2019, East African Breweries Limited completed the
purchase of 4% of the share capital of Serengeti Breweries Limited
for $3 million (GBP2 million). This increased Diageo's effective
economic interest from 39.2% to 40.2%.
In August 2019 and February 2020, in two separate purchases,
Diageo acquired shares in United Spirits Limited (USL) for INR
5,495 million (GBP60 million) which increased Diageo's percentage
of shares owned in USL from 54.78% to 55.94% (excluding 2.38% owned
by the USL Benefit Trust).
12. Sale of businesses
Cash consideration received and net assets disposed of in
respect of sale of businesses in the year ended 30 June 2020:
UNB Other Total
GBP million GBP million GBP million
Sale consideration
Cash received in year 10 1 11
Transaction costs payable (1) - (1)
--------- -------- --- ---------
9 1 10
Net assets disposed of
Property, plant and equipment - (1) (1)
Investments in associates - (1) (1)
Assets and liabilities held for sale (30) - (30)
(30) (2) (32)
--------- -------- ---------
Impairment charge recognised up until the
date of sale (7) - (7)
Exchange recycled from other comprehensive
income (4) - (4)
--------- -------- --- ---------
Loss on disposal before taxation (32) (1) (33)
Taxation - - -
--------- -------- --- ---------
Loss on disposal after taxation (32) (1) (33)
========= ======== =========
On 1 April 2020, Diageo completed the sale of United National
Breweries (UNB), Diageo's wholly owned sorghum beer business in
South Africa. In the year ended 30 June 2020, up until the date of
sale, UNB contributed net sales of GBP31 million (2019 - GBP43
million; 2018 - GBP49 million), operating profit of GBPnil (2019 -
GBP1 million; 2018 - GBP6 million) and profit after taxation of
GBPnil (2019 - GBP1 million; 2018 - GBP4 million).
13. Adoption of IFRS 16 Leases
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%.
For leases previously classified as finance leases the group
recognised the carrying amount of the lease asset and lease
liability immediately before transition as the carrying amount of
the right-of-use asset and the lease liability at the date of
adoption of IFRS 16, 1 July 2019. The re-measurement principles of
IFRS 16 are only applied after that date.
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 where the value of the
asset when it is new is lower than $5,000 (low value assets).
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 on 1 July 2019 total
assets increased by GBP235 million from GBP31,296 million to
GBP31,531 million and total liabilities increased by GBP235 million
from GBP21,140 million to GBP21,375 million.
14. Contingent liabilities and legal proceedings
(a) Guarantees and related matters
As of 30 June 2020, 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 30 June 2020, Diageo has a 55.94% 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. On 6 March 2020, the division bench of the High Court
confirmed the winding up order dated 7 February 2017, and dismissed
the appeal filed by UBHL. On 30 June 2020, UBHL filed a special
leave petition in the Supreme Court of India against the order of
the division bench of the High Court. This petition is currently
pending.
Diageo continues to believe that the acquisition price of INR
1,440 per share paid to UBHL for the USL shares is fair and
reasonable as regards UBHL, UBHL's shareholders and UBHL's secured
and unsecured creditors. However, adverse results for Diageo in the
proceedings referred to above could, absent leave or relief in
other proceedings, ultimately result in Diageo losing title to the
6.98% stake acquired from UBHL (now represented by 50,707,185 USL
shares following a share split). Diageo believes, including by
reason of its rights under USL's articles of association to
nominate USL's CEO and CFO and the right to appoint, through USL, a
majority of the directors on the boards of USL's subsidiaries as
well as its ability as promoter to nominate for appointment up to
two-thirds of USL's directors for so long as the chairperson of USL
is an independent director, that 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 (GBP61 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 (GBP115 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 (GBP32 million) of the $75 million (GBP61 million) amount
was paid on signing of the February 2016 Agreement with the balance
being payable in equal instalments of $7 million (GBP6 million) a
year over five years, subject to and conditional on Dr Mallya's
compliance with certain terms of the agreement.
While the first four instalments of $7 million (GBP6 million)
each would have become due on 25 February 2017, 25 February 2018,
25 February 2019 and 25 February 2020, 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, 22 February 2019 and 24 February 2020, Diageo and
other group companies have demanded from Dr Mallya the repayment of
$40 million (GBP32 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 affiliated with Dr Mallya and understood
to hold assets on trust for him and certain persons affiliated with
him) for in excess of $142 million (GBP115 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 (GBP6 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 (GBP110 million ) plus interest of $11 million
(GBP9 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 (GBP55 million) plus
interest of $5.5 million (GBP5 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 (GBP110 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
(GBP115 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 (GBP115
million) (plus interest) in relation to these matters, including
the following: (i) a claim against Watson for $141 million (GBP115
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 (GBP115 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 INR 6,280 million (GBP68
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 INR 459 million (GBP5 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. Based on the assessment of USL's management
supported by external legal opinions, USL continues to believe that
it has a strong case on the merits and therefore continues to
believe that the
aforesaid amount of INR 459 million (GBP5 million) remains recoverable from IDBI.
(g) 2019 Moët Hennessy dividend
No dividend was received during the financial year ended 30 June
2020 in respect of Diageo's 34% investment in Moët Hennessy SAS and
Moët Hennessy International SAS (together MH). This investment is
governed by a Partners' Agreement with certain members of the LVMH
Moët Hennessy - Louis Vuitton group (LVMH) which holds 66% of MH,
which includes the dividend policy and minimum annual dividend
requirements for MH. Diageo believes that non-payment by MH of the
dividend in respect of the financial year ended 31 December 2019
constitutes a breach by LVMH of the Partners' Agreement and that
the minimum aggregate dividend that should have been received by
Diageo in respect of that period was EUR181 million (GBP166
million). Diageo has commenced arbitration proceedings under the
Partners' Agreement in respect of this dispute.
(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 2021 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 GBP285 million for Brazil and up to approximately
GBP150 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.
Payments were made under protest in India in respect of the
periods 1 April 2006 to 31 March 2017 in relation to tax
assessments where the risk is considered to be remote or possible.
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 30 June 2020 is GBP117 million
(corporate tax payments of GBP107 million and indirect tax payments
of GBP10 million).
A lawsuit was filed on 15 April 2019 by the National Association
of Manufacturers (NAM) against the United States Department of the
Treasury (U.S. Treasury) and the United States Customs and Border
Protection (CBP) on behalf of its affected industry members,
including Diageo, to invalidate regulations published in February
2019 and to ensure that substitution drawback is permitted in
accordance with 19 U.S.C.-- 1313(j)(2) as amended by the Trade
Facilitation and Trade Enforcement Act of 2015, which was enacted
on 24 February 2016 (TFTEA). Substitution drawback permits the
refund, including of excise taxes, paid on imported merchandise
when sufficiently similar substitute merchandise is exported. The
United States Congress passed the TFTEA to, among other things,
clarify and broaden the standard for what constitutes substitute
merchandise. This change should entitle Diageo to obtain
substitution drawback in respect of certain eligible product
categories. Despite this change in the law, U.S. Treasury and CBP
issued final regulations in 2019 declaring that substitution
drawback is not available for imports when substituted with an
export on which no tax was paid. The Court of International Trade
issued a judgement in favour of NAM on 18 February 2020, denying
the request by the U.S. Treasury and CBP for a stay of payment on
15 May 2020, and on 26 May 2020, ordered the immediate processing
of claims. Current eligible claims of Diageo Americas Supply, Inc.
are estimated at GBP95 million ($117 million), with a financial
impact of GBP87 million ($110 million) for the year ended 30 June
2020 of which Diageo has received GBP26 million ($33 million).
However, on 23 July 2020 the U.S. Treasury and CBP filed an appeal
with the U.S. Federal Court of Appeal, and, although Diageo
believes that the NAM is more likely than not to ultimately
prevail, if they were to fail, the CBP could be permitted to
recover these payments.
(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.
15. 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
year ended 30 June 2020 on terms other than those that prevail in
arm's length transactions.
ADDITIONAL INFORMATION FOR SHAREHOLDERS
EXPLANATORY NOTES
Comparisons are to the year ended 30 June 2019 (2019) 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 for more details on 'Cautionary statement
concerning forward-looking statements'.
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 '2019
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.
The group changed its method of calculating the exchange impact
used to calculate organic growth in its results during the year
ending 30 June 2020. 'Exchange' in the organic movement calculation
now reflects the adjustment to recalculate the reported results as
if they had been generated at the prior period weighted average
exchange rates. Previously, Diageo had calculated the exchange
adjustment included in the organic calculation by translating the
prior period results at the current period exchange rates. The
change simplified processes by aligning management and organic
reporting and is more consistent with how Diageo's peer group
report.
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.
In addition, as part of acquisitions and disposals in the
reconciliation for operating profit before exceptional items in the
year ended 30 June 2019, there is a charge of GBP15 million in
respect of an increase in the contingent consideration payable to
the former owners of the Casamigos brand which was acquired in
August 2017.
(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 impairment of intangible
assets and 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 that 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 year ended 30 June 2020
were as follows:
Europe Latin
North and America Asia
America Turkey Africa and Caribbean Pacific Corporate Total
million million million million million million million
Volume
(equivalent
units)
2019 reported 49.4 45.4 33.6 22.4 95.1 - 245.9
Disposals(v) (2.1) (0.1) (2.7) - - - (4.9)
------- ------- ------- ---------- ------- --------- -------
2019 adjusted 47.3 45.3 30.9 22.4 95.1 - 241.0
Organic
movement 0.1 (5.2) (4.0) (3.4) (14.5) - (27.0)
Acquisitions
and
disposals(v) 1.0 0.1 1.9 - - - 3.0
------- ------- ------- ---------- ------- -------
2020 reported 48.4 40.2 28.8 19.0 80.6 - 217.0
======= ======= ======= ========== ======= ========= =======
Organic
movement
% - (11) (13) (15) (15) - (11)
======= ======= ======= ========== ======= ========= =======
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
2019 reported 5,074 5,132 2,235 1,444 5,356 53 19,294
Exchange (39) (28) (4) 3 (8) 2 (74)
Reclassification(iii) - - - (10) - - (10)
Disposals(v) (106) (3) (114) (1) (2) - (226)
----- ----- ----- ------ ------ ------ --- ------
2019 adjusted 4,929 5,101 2,117 1,436 5,346 55 18,984
Organic movement 98 (388) (261) (193) (718) (16) (1,478)
Acquisitions and
disposals(v) 42 10 64 - 2 - 118
Exchange 153 (26) (9) (59) 15 (1) 73
----- ----- ----- ------ ------ ------ ------
2020 reported 5,222 4,697 1,911 1,184 4,645 38 17,697
===== ===== ===== ====== === ====== ====== === ======
Organic movement
% 2 (8) (12) (13) (13) (29) (8)
===== ===== ===== ====== ====== ====== ======
Europe Latin
North and America Asia
America Turkey Africa and Pacific
GBP GBP GBP Caribbean GBP Corporate Total
million million million GBP million million GBP million GBP million
Net sales
2019 reported 4,460 2,939 1,597 1,130 2,688 53 12,867
Exchange(i) (34) (19) (2) 4 1 2 (48)
Reclassification(iii) - - - (10) - - (10)
Disposals(v) (75) (1) (91) (1) (1) - (169)
----- ----- ----- ----- --- ----- ----- ---- ------
2019 adjusted 4,351 2,919 1,504 1,123 2,688 55 12,640
Organic movement 105 (358) (200) (169) (423) (16) (1,061)
Acquisitions and
disposals(v) 32 10 50 - 1 - 93
Exchange(i) 135 (4) (8) (46) 4 (1) 80
----- --- ----- ----- ----- --- ----- --- ----- --- ------ ---
2020 reported 4,623 2,567 1,346 908 2,270 38 11,752
===== === ===== === ===== === ===== ==== ===== === ===== ==== ====== ===
Organic movement
% 2 (12) (13) (15) (16) (29) (8)
===== === ===== ===== ===== === ===== ===== === ======
Marketing
2019 reported 762 490 174 201 412 3 2,042
Exchange (1) (11) - 1 (1) - (12)
Reclassification(iii) - - - (10) - - (10)
Disposals(v) - - (1) - - - (1)
2019 adjusted 761 479 173 192 411 3 2,019
Organic movement (49) (56) (14) (29) (47) - (195)
Acquisitions and
disposals(v) 3 4 1 - - - 8
Exchange 12 1 - (8) 1 3 9
----- --- ----- --- ----- --- ----- --- ----- --- ----- ---- ------ ---
2020 reported 727 428 160 155 365 6 1,841
===== === ===== === ===== === ===== ==== ===== === ===== ==== ====== ===
Organic movement
% (6) (12) (8) (15) (11) - (10)
===== ===== ===== ===== === ===== ===== ==== ======
Operating profit
before exceptional
items
2019 reported 1,948 1,014 275 365 703 (189) 4,116
Exchange(ii) 12 (16) (4) 1 8 (1) -
Acquisitions and
Disposals(v) (27) 1 (3) - - - (29)
----- ----- --- ----- ----- ---- ----- --- ----- ---- ------
2019 adjusted 1,933 999 268 366 711 (190) 4,087
Organic movement 80 (243) (150) (107) (207) 38 (589)
Acquisitions and
disposals(v) (1) (4) - - - - (5)
Fair value
remeasurement
of contingent
considerations
and equity option
(iv) (10) (4) - 7 - - (7)
Fair value
remeasurement
of biological assets - - - 9 - - 9
Exchange(ii) 32 9 (17) (27) (3) 5 (1)
----- --- ----- --- ----- ----- --- ----- ----- ---- ------
2020 reported 2,034 757 101 248 501 (147) 3,494
===== === ===== === ===== === ===== ==== ===== === ===== === ====== ===
Organic movement
% 4 (24) (56) (29) (29) 20 (14)
===== === ===== ===== ===== === ===== ===== ==== ======
Organic operating
margin %
2020 45.2% 29.5% 9.0% 27.1% 22.3% n/a 30.2%
2019 44.4% 34.2% 17.8% 32.6% 26.5% n/a 32.3%
Margin movement (bps) 75 (470) (877) (544) (420) n/a (212)
(1) For the reconciliation of sales to net sales see Summary
Income Statement.
(2) Percentages and margin movement 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 net sales is principally in respect of the translation
exchange impact of the weakening of sterling against the US dollar,
partially offset by strengthening of sterling against the Brazilian
real, the Australian dollar and 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 weakening of the Brazilian
real, the Colombian peso and the Nigerian naira, broadly offset by
translational exchange impact of the strengthening of the US dollar
against sterling.
(iii) For the year ended 30 June 2019 trade investment of GBP10
million has been reclassified from marketing to net sales.
(iv) Change in contingent consideration re Casamigos was
reported as part of Acquisitions in year ended 30 June 2019.
(v) In the year ended 30 June 2020 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
Year ended 30 June 2019
Acquisition
Change in contingent
consideration
re Casamigos - - - - 15
- - - - 15
-------- --------- --------- -------- --- ---------
Disposals
Portfolio of 19 brands (2.2) (114) (79) - (42)
South African ready to drink (0.5) (65) (43) - -
South African cider - (4) (4) - (1)
UNB (2.2) (43) (43) (1) (1)
(4.9) (226) (169) (1) (44)
-------- --------- --------- -------- ---------
Acquisitions and disposals (4.9) (226) (169) (1) (29)
======== ========= ========= ======== =========
Year ended 30 June 2020
Acquisition
Seedlip and Aecorn 0.1 12 12 7 (8)
0.1 12 12 7 (8)
-------- --------- --------- -------- --- ---------
Disposals
Supply contracts in respect
of the 19 brands sold to
Sazerac 1.1 42 31 - 3
South African ready to drink 0.3 33 19 - -
UNB 1.5 31 31 1 -
2.9 106 81 1 3
-------- --------- --------- -------- --- ---------
Acquisitions and disposals 3.0 118 93 8 (5)
======== ========= ========= ======== === =========
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 year ended
30 June 2020 and 30 June 2019 are set out in the table below.
2020 2019
GBP million GBP million
Profit attributable to equity shareholders of
the parent company 1,409 3,160
Exceptional operating and non-operating items 1,380 (61)
Exceptional taxation charges/(benefits) - 10
Tax in respect of exceptional operating and non-operating
items (154) 29
Exceptional items attributable to non-controlling
interests (69) 26
----------
2,566 3,164
========== ==========
Weighted average number of shares million million
Shares in issue excluding own shares 2,346 2,418
Dilutive potential ordinary shares 8 10
2,354 2,428
========== ==========
pence pence
Basic earnings per share before exceptional items 109.4 130.8
=========== =============
Diluted earnings per share before exceptional
items 109.0 130.3
=========== =============
(1) The impact of the adoption of IFRS 16 on 1 July 2019 on
earnings per share before exceptional items for year ended 30 June
2020 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 year ended 30 June 2020
and 30 June 2019 are set out in the table below:
2020 2019
GBP million GBP million
Net cash inflow from operating activities 2,320 3,248
Disposal of property, plant and equipment and computer
software 14 32
Purchase of property, plant and equipment and computer
software (700) (671)
Movements in loans and other investments - (1)
Free cash flow 1,634 2,608
========== ==========
(1) Free cash flow for the year ended 30 June 2020 has benefited
by GBP74 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 year.
Average total invested capital is calculated using the average
derived from the consolidated balance sheets at the beginning,
middle and end of the year. Average capital employed comprises
average net assets attributable to equity shareholders of the
parent company for the year, 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 year ended 30 June 2020 and 30 June 2019 are set out in the
table below.
2020 2019
GBP million GBP million
Operating profit 2,137 4,042
Exceptional operating items 1,357 74
Profit before exceptional operating items attributable
to non-controlling interests (114) (151)
Share of after tax results of associates and joint
ventures 282 312
Tax at the tax rate before exceptional items of 21.7%
(2019 - 20.6%) (795) (881)
----------
2,867 3,396
==========
Average net assets (excluding net post employment
assets/liabilities) 9,063 10,847
Average non-controlling interests (1,723) (1,776)
Average net borrowings 12,551 10,240
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 23,092 22,512
==========
Return on average total invested capital 12.4% 15.1%
(1) Calculation of average net borrowings includes GBP251million
in respect of IFRS 16 adoption for 1 July 2019.
(2) The return on average total invested capital for the year
ended 30 June 2020 was adversely impacted by 18bps as a result of
the adoption of IFRS 16 on 1 July 2019.
Adjusted net borrowings to earnings before exceptional operating
items, interest, tax, depreciation, amortisation and impairment
(adjusted EBITDA)
Diageo manages its capital structure with the aim of achieving
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 30 June 2020 and 30 June 2019 are set out in the
table below.
2020 2019
GBP million GBP million
Borrowings due within one year 1,995 1,959
Borrowings due after one year 14,790 10,596
Fair value of foreign currency derivatives and interest
rate hedging instruments (686) (474)
Lease liabilities 470 128
Less: Cash and cash equivalents (3,323) (932)
Net borrowings 13,246 11,277
Post employment benefit liabilities before tax 749 846
Adjusted net borrowings 13,995 12,123
Operating profit 2,137 4,042
Depreciation, amortisation and impairment (excluding
exceptional items) 494 374
Share of after tax results of associates and joint
ventures 282 312
Exceptional impairment 1,345 -
Non-operating items (23) 144
EBITDA 4,235 4,872
Exceptional operating items (excluding impairment) 12 74
Non-operating items 23 (144)
Adjusted EBITDA 4,270 4,802
Adjusted net borrowings to adjusted EBITDA 3.3 2.5
(1) The ratio of adjusted net borrowings to adjusted EBITDA at
30 June 2020 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 year ended 30 June 2020 and year ended 30
June 2019 are set out in the table below:
2020 2019
GBP million GBP million
Tax before exceptional items (a) 743 859
Tax in respect of exceptional items (154) 29
Exceptional tax charge/(credit) - 10
Taxation on profit (b) 589 898
Profit before taxation and exceptional items (c) 3,423 4,174
Non-operating items (23) 144
Exceptional finance charges - (9)
Exceptional operating items (1,357) (74)
Profit before taxation (d) 2,043 4,235
Tax rate before exceptional items (a/c) 21.7% 20.6%
Tax rate after exceptional items (b/d) 28.8% 21.2%
(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
ready to drink, 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,
Pierde Almas.
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 connection with
the Covid-19 pandemic, 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 negotiation process surrounding the terms
of the United Kingdom's future trading relationships with the
European Union and other countries; changes in consumer preferences
and tastes and the adverse impacts of downturns in economic
conditions, among other factors, which could adversely affect
demand; changes in the domestic and 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; litigation or similar proceedings
specifically directed at the beverage alcohol industry, as well as
other litigation or proceedings more generally; 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; any failure by Diageo to maintain
its brand image and corporate reputation; the impact of any
contamination, counterfeiting or other events on support for and
sales of Diageo's brands; 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 and pandemics); increased
costs for, or shortages of, talent; failures to derive the expected
benefits from Diageo's business strategies, acquisitions and/or any
cost-saving and restructuring programmes; fluctuations in exchange
and/or interest rates; movements in the value of Diageo's pension
funds; any failure to maintain or renegotiate distribution, supply,
manufacturing and licence agreements on favourable terms; any
inability by Diageo to protect its intellectual property rights;
and difficulty in effecting service of US process and enforcing US
legal process against Diageo and its directors.
Cautionary statement concerning forward-looking statements
This document contains 'forward-looking' statements. These
statements can be identified by the fact that they do not relate
only to historical or current facts. In particular, forward-looking
statements include all statements that express forecasts,
expectations, plans, outlook, objectives and projections with
respect to future matters, including trends in results of
operations, margins, growth rates, overall market trends, the
impact of changes in interest or exchange rates, the availability
or cost of financing to Diageo, anticipated cost savings or
synergies, expected investments, the completion of any strategic
transactions or restructuring programmes, anticipated tax rates,
changes in the international tax environment, expected cash
payments, outcomes of litigation 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 (including as a
result of the Covid-19 pandemic), 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 impact of the Covid-19 pandemic, or other epidemics or
pandemics, on Diageo's business, financial condition, cash flows
and results of operation;
-- the negotiating process surrounding, as well as the final
terms of, the United Kingdom's future trading relationships with
the European Union and other countries, which could lead to a
sustained period of economic and political uncertainty and
complexity whilst 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 ;
-- 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, lower or no alcohol, or other alternative products),
changes in travel, holiday or leisure activity patterns, weather
conditions, health concerns, pandemics and/or a downturn in
economic conditions;
-- 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;
-- 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;
-- 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
The responsibility statement set out below has been prepared in
connection with (and will be set out in) the annual report and
accounts for the year ended 30 June 2020, which will be published
on 7 August 2020 (and which can be found thereafter at
www.diageo.com).
The directors consider that the annual report and accounts,
taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the group and
company's position and performance, business model and
strategy.
Each of the directors of Diageo plc confirms that, to the best
of his or her knowledge:
-- the group financial statements contained in the annual report
and accounts for the year ended 30 June 2020, which have been
prepared in accordance with IFRS as issued by the IASB and as
adopted for use in the European Union, give a true and fair view of
the assets, liabilities, financial position and profit of the
group; and
-- the Directors' Report contained in the annual report and
accounts for the year ended 30 June 2020 includes a fair review of
the development and performance of the business and the position of
the group and company, together with a description of the principal
risks and uncertainties that they face.
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: Melissa Bethell, Ho KwonPing and Nicola
Mendelsohn.
Diageo plc LEI: 213800ZVIELEA55JMJ32
Webcast, presentation slides and transcript
At 07.15 (UK time) on Tuesday 4 August 2020, Ivan Menezes, Chief
Executive and Kathryn Mikells, Chief Financial Officer will present
Diageo's preliminary results as a webcast. This will be available
to view at www.diageo.com.
The presentation slides and script will also be available to
download from www.diageo.com at 07.15 (UK time). A transcript of
the Q&A session will be available for download on Wednesday 5
August at www.diageo.com.
Live Q&A conference call and replay
Ivan Menezes, Chief Executive and Kathryn Mikells, Chief
Financial Officer will be hosting a Q&A conference call on
Tuesday 4 August 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)330 336 9105
From the UK (free call): 0800 358 6377
From the USA: +1 323 794 2093
From the USA (free call): 866 548 4713
The conference call is for analysts and investors only. To join
the call please use the password already sent to you or email
suzanne.austin@diageo.com.
To hear a replay of the call, please use the telephone numbers
below:
From the UK: +44 (0)20 7660 0134
From the UK (free call): 0808 101 1153
From the USA: +1 719 457 0820
From the USA (free call): 888 203 1112
Investor enquiries to: Vinod Rao +44 (0) 7834 805 733
Lucinda Baker +44 (0) 7974 375 550
investor.relations@diageo.com
Media enquiries to: Jessica Rouleau +44 (0) 7925 642 561
Rebecca Perry +44 (0) 7590 809 101
Dominic Redfearn +44 (0) 7971 977 759
Francesca Olivieri +44 (0) 7523 930 130
press@diageo.com
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR FLFITTVIVIII
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