REG - Diageo Capital plc - Half-year Report
27/03/2024 18:15
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RNS Number : 5711I Diageo Capital plc 27 March 2024
Diageo Capital
plc
LEI: 213800L23DJLALFC4O95
Half-year results for the six months ended 31 December 2023
The Directors present their interim financial report for the six months ended
31 December 2023.
Activities
Diageo Capital plc (the "company") is engaged in the provision of treasury,
risk and cash management for Diageo plc and its subsidiary undertakings (the
"group"). Diageo Capital plc's principal activity is to raise external funds,
principally using the London and New York financial markets. The company
finances other companies of the group via intragroup loans and deposits.
Foreign exchange translation hedging, interest rate risk management and cash
management are also performed by the company.
The company does not anticipate any changes in its activities in the remaining
six months of the financial year.
Business review
Development and performance of the business of the company during the period
and position of the company as at 31 December 2023
The results of the company and the development of its business are influenced
to a considerable extent by group financing requirements. Further information
on the risk management policies of the group is included in the Annual Report
2023 of Diageo plc (see note 16 of the consolidated financial statements of
Diageo plc).
Net finance income was $77 million in the six months ended 31 December 2023,
which is a $50 million increase from net finance income of $27 million in the
six months ended 31 December 2022.
External borrowings increased by $1,134 million in the six months ended
31 December 2023 to $9,203 million from $8,069 million in the year ended
30 June 2023, mainly due to two new bond issuances during the period.
Financial and other key performance indicators
As the company forms part of the group's treasury operations, the company's
performance is measured at the group level.
$63 million profit was transferred to reserves in the six month ended
31 December 2023, (six months ended 31 December 2022 - $30 million) and the
other comprehensive income is $3 million (six months ended 31 December 2022 -
$31 million).
The Directors do not propose the payment of an interim dividend to be
distributed to shareholders in regard to the six months ended 31 December
2023 (six months ended 31 December 2022 - $nil).
Going concern
The company's business activities, together with the factors likely to affect
its future development and position, are set out below. The company is
expected to continue to generate profit for its own account and to remain in a
positive net asset position for the foreseeable future. The company is in net
current liability position, however the company participates in the group's
centralised treasury arrangements and the parent will provide financial
support for the foreseeable future. The Directors have no reason to believe
that a material uncertainty exists that may cast significant doubt about the
ability of the company to continue as a going concern.
Going concern (continued)
On the basis of their assessment, the company's Directors have a reasonable
expectation that the company will be able to continue in operational existence
for a period of at least 12 months from the date the financial statements are
approved and signed as the ultimate parent undertaking has agreed its policy
is and in a position to provide financial support for this period. Thus they
continue to adopt the going concern basis of accounting in preparing the
annual financial statements.
In arriving at this conclusion, the Directors have also considered the
potential impact that the principal risks outlined below may have on the
company and believe that any impact would be minimal.
Principal and financial risks and uncertainties facing the company as at
31 December 2023
The principal risks identified by the group are disclosed on page 88 to 93 of
the Diageo plc Annual Report 2023. The most relevant of the group risks to
this entity are the ones we have selected and articulated below, together with
specific considerations relating to the company's operations and
environment. If any of these risks occur, the company's business, financial
condition and operational results could suffer. As the company forms part of
the group's financial operations, the financial risk management measures used
by management to analyse the development, performance and position of the
company's business are mainly similar to those facing the group as a whole and
are managed by the group's treasury department.
Principal and financial risks and uncertainties facing the company as at
31 December 2023 (continued)
In addition, given that the company performs treasury functions for the group,
it is exposed to interest rate risk arising principally on changes in US
dollar interest rates. The company uses derivative financial instruments to
hedge its exposures to fluctuations in interest rates. Fair value hedges are
carried out to manage the interest rate risks to which the fair value of
certain assets and liabilities are exposed.
Starting in fiscal 24, in line with reporting requirements the functional
currency of Diageo plc changed from sterling to US dollar. Diageo Capital has
also changed its presentation currency to US dollar. For further details
please refer to Note 14 of the financial statements.
The Directors have assessed the potential risk of the increasing interest
rates and resulting potential increase in cost of borrowing on the operation
and the financial statements of the company. Considering the company forms
part of the group's financial operations and as such it will be reimbursed for
any potential increase in the charges of its financial instruments therefore
the impact of this risk is considered to be very limited.
Geopolitical and macroeconomic volatility
Geopolitical forces, primarily driven by the Russia / Ukraine conflict,
coupled with macro-economic stress, increase the likelihood of international
and domestic tensions, disputes and conflict that might impact the business.
Macroeconomic conditions include inflationary pressures, unemployment and
global trade tensions. Financial volatility risk could arise from variability
in financial markets, interest rate fluctuations and currency instability.
Failure to react quickly enough to changing economic and/or political
conditions, e.g. inflationary pressures, currency instability, global trade
tensions, heightened political protectionism, changes to customs duties and
tariffs, and/or eroded consumer confidence, may impact on the freedom to
operate in a market and could adversely impact financial performance.
The group monitors key business drivers and performance, to prepare for rapid
changes in the external environment and there are an enhanced group-level
strategic analysis and scenario planning to strengthen market strategies and
risk management.
The group has continued to improve long-term forecasting and planning
capabilities, to better assess and respond to long-term opportunities and
risks. The group has introduced a new strategic planning and performance
function with a stronger governance model for financial and non-financial
decision-making, which will enable closer monitoring of external
volatility/risk and multi-country investment strategy with a central hedging
and currency monitoring to manage volatility.
During the year ended 30 June 2023, the group introduced advanced analytics to
scenario plan volume ranges over a longer time period, allowing better
mitigation against changes in the external landscape. Scenario-planning has
been embedded into Executive and Board meetings and integrated into the
strategic planning cycle. Inflation has remained high and has reduced more
slowly than expected in many countries. High levels of inflation are expected
to continue in the short to medium term. Foreign exchange volatility has
increased across several markets. There are dedicated cross-functional
steering groups to manage acute issues including inflation and foreign
exchange volatility.
Cyber and IT resilience
Cyber-attacks are becoming more prevalent, and there is an increased
dependency on third-party IT services and solutions. As geopolitical tensions
are growing, there is a rise in more sophisticated cyber threats affecting all
organisations, therefore the risk of a cyber-attack is heightened.
The group has strong enterprise-wide cyber risk management processes and
policies and next generation security technologies to tackle advanced attacks.
There is an IT and Operations Technology ("OT") disaster recovery and business
continuity testing across the key systems. The group continue to enhance and
deploy next generation security technologies to tackle advanced attacks and
upgrade the enterprise resource planning system and associated processes to
ensure they remain resilient.
Climate Risk
Considering that the company forms part of the group's treasury operations,
the probability of climate change related risks having a significant and
direct impact on the activities and operation of the company is remote. The
Directors believe that the risk mitigation actions taken in relation to
climate risk by the group are appropriate measures in managing direct or
indirect risks posed by climate change. Including the risk to the company of
being able to access financing at competitive rates where borrowings could
become sustainability linked. Based on the climate risk assessment performed
by the group, the risk attached to the recoverability of intercompany balances
is considered to be remote.
Statement on Section 172 of the Companies Act 2006
Section 172 of the Companies Act 2006 requires the Directors to promote the
success of the company for the benefit of the members as a whole, having
regard to the interests of stakeholders in their decision-making. In making
decisions, the Directors consider what is most likely to promote the success
of the company for its shareholders in the long term, as well as the interests
of the group's stakeholders. The Directors understand the importance of taking
into account the views of stakeholders and the impact of the company's
activities on local communities, the environment, including climate change,
and the group's reputation.
The Company is a member of the group of companies (the "Group") whose ultimate
holding company is Diageo plc ("Diageo"). In accordance with the requirements
of UK company law, Diageo has included in its 2023 Annual Report and Accounts
on page 9 a statement as to how the directors of Diageo have had regard to the
matters set out in Section 172 of the Companies Act 2006.
In order to ensure consistency in how the Group operates with regard to its
wider stakeholders, the Group has adopted an internal Code of Business Conduct
alongside a comprehensive framework of global policies and standards that are
designed to ensure, amongst other things, that all companies throughout the
Group, including the Company, have regard to its wider stakeholders in a
consistent manner.
The Company has therefore had regard to the matters set out in Section 172 of
the Act in a manner that is consistent with the approach adopted by Diageo,
while at the same time ensuring the directors of the Company are fulfilling
their duties.
Independent review
This interim report has not been audited or reviewed by auditors.
Statement of Directors' responsibilities
The Directors confirm that this condensed set of interim financial information
has been prepared in accordance with Financial Reporting Standard 104: Interim
Financial Reporting, issued by the Financial Reporting Council, and that the
interim management report includes a fair review of the information required
by DTR 4.2.7R and DTR 4.2.8R namely:
• an indication of important events that have occurred during the
first six months of the financial year and their impact on the condensed set
of financial statements, and a description of the principal risks and
uncertainties for the remaining six months of the financial year, and
• material related party transactions in the first six months of the
financial year and any material changes in the related party transactions
described in the last annual report.
The Directors of the company are listed in the company's annual report and
financial statements for the year ended 30 June 2023.
James Edmunds
Director
27 March 2023
INCOME STATEMENT (UNAUDITED)
Six months ended Six months ended
31 December 2023 31 December 2022
Notes $ million $ million
Other operating income (14) 3
Finance income 1 355 345
Finance charges 1 (278) (318)
Operating profit 63 30
Profit before taxation on ordinary activities 63 30
Taxation on profit on ordinary activities - -
Profit for the year 63 30
STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Six months ended Six months ended
31 December 2023 31 December 2022
Notes $ million $ million
Other comprehensive income
Items that may be recycled subsequently to the income statement
Effective portion of changes in fair value of cash flow hedges
gains taken to other comprehensive income/(expense) - 72
-recycled to income statement (3) (35)
Tax charge on effective portion of changes in fair value of cash flow hedge 2 6 (6)
Other comprehensive income 3 31
Profit for the year 63 30
Total comprehensive income for the year 66 61
BALANCE SHEET (UNAUDITED)
31 December 2023 30 June 2023
Notes $ million $ million
Non-current assets
Other receivables 11,189
8,909
Other financial assets 4 - 438
11,189
9,347
Current assets
Trade and other receivables 16 23
Other financial assets 4 - -
16 23
Total assets 11,205
9,370
Current liabilities
Trade and other payables (1,308) (612)
Other financial liabilities 4 - (3)
Borrowings and bank overdrafts 3 (727) (747)
(2,035) (1,362)
Non-current liabilities
Borrowings 3 (8,476) (7,322)
Other financial liabilities 4 (276) (333)
Deferred tax liability (37) (38)
(8,789) (7,693)
Total liabilities (10,824) (9,055)
Net assets 381 315
Equity
Share premium 315 315
Fair value and hedging reserves 119 116
Other reserves 88 88
Retained deficit (141) (204)
Total equity 381 315
STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
ATTRIBUTABLE TO SHAREHOLDERS OF THE COMPANY
Subtotal
Share Hedging Other Other Retained
premium reserve reserves reserves deficit Total
$ million $ million $ million $ million $ million $ million
Balance at 30 June 2022 302 57 85 142 (303) 141
Other comprehensive loss for the period - 54 - 54 - 54
Profit for the period - - - - 106 106
Other movements 13 5 3 8 (7) 14
CTA on SC/SP/HR/RE on opening balance 13 2 3 5 (12) 6
CTA on SC/SP/HR/RE on movement balance - 3 - 3 5 8
Balance at 30 June 2023 315 116 88 204 (204) 315
Other comprehensive income for the period - 3 - 3 - 3
Profit for the period - - - - 63 63
Balance at 31 December 2023 315 119 88 207 (141) 381
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
The company is incorporated and domiciled as a public limited company in the
United Kingdom.
The interim financial statements of the company for the six months ended
31 December 2023 were authorised for issue in accordance with a resolution of
the Directors on 27 March 2024.
Basis of preparation
The annual report and financial statements of the company for the year ended
30 June 2023 were prepared in accordance with Financial Reporting Standard
101 Reduced Disclosure Framework (FRS 101) and Companies Act 2006.
The interim condensed financial statements for the six months ended
31 December 2023 have been prepared in accordance with Financial Reporting
Standard 104 Interim Financial Reporting (FRS 104), issued by the Financial
Reporting Council. The interim condensed financial statements do not include
all of the information and disclosures required in the annual financial
statements, and should be read in conjunction with the company's annual
financial statements at 30 June 2023.
The accounting policies adopted in the preparation of the interim financial
statements are consistent with those followed in the preparation of the
company's annual report and financial statements for the year ended 30 June
2023.
These condensed interim financial statements have not been subject to a full
audit or audit review and do not constitute statutory financial statements as
defined in section 434 of the Companies Act 2006. The annual report and
financial statements for the year ended 30 June 2023 were approved by the
Directors of the company on 25 October 2023 and have been filed with the
Registrar of Companies. The report of the auditors on those financial
statements was unqualified, did not contain an emphasis of matter paragraph
and did not contain any statement under section 498 of the Companies Act 2006.
The company is a wholly owned subsidiary of Diageo plc and is included in the
consolidated financial statements of Diageo plc which are publicly available.
These financial statements are separate financial statements.
Functional and presentational currency
These financial statements are presented in US dollar ($), which is the
company's functional currency.
All financial information presented in US dollar has been rounded to the
nearest million.
Going concern
The financial statements have been prepared on a going concern basis as a
fellow group undertaking has agreed to provide financial support for the
foreseeable future.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) (continued)
1. FINANCE INCOME AND CHARGES
Six months ended Six months ended
31 December 2023 31 December 2022
$ million $ million
Interest income from fellow group undertakings 293 243
Amortisation of fair value changes 3 2
Fair value gain on intra-group derivative financial instruments 59 3
Fair value adjustment on borrowings - 97
Total finance income 355 345
Interest charge to fellow group undertakings (36) (82)
Interest charge on all other borrowings (176) (132)
Fair value loss on intra-group derivative financial instruments - (101)
Discount and fee amortisation (4) (3)
Total finance charges (278) (318)
Net finance income/(charges) 77 27
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) (continued)
2. TAXATION
The total tax credit for the six months ended 31 December 2023 was $6 million
(31 December 2022 - $6 million charge), in accordance with increase in
deferred tax liability in relation to the effective portion of changes in fair
value of cash flow hedges. The change in deferred tax liability is presented
as part of the other comprehensive income.
3. BORROWINGS AND BANK OVERDRAFTS
31 December 2023 30 June 2023
$ million $ million
Commercial paper 127 250
US$ 600 million 2.125% bonds due 2024 600 -
US$ 500 million 3.500% bonds due 2023 - 500
Fair value adjustment to borrowings - (3)
Borrowings due within one year and bank overdrafts 727 747
US$ 600 million 2.125% bonds due 2024 - 598
US$ 750 million 1.375% bonds due 2025 749 748
US$ 500 million 5.20% bonds due 2025 499 499
US$ 800 million 5.375% bonds due 2026 796 -
US$ 750 million 5.30% bonds due 2027 748 748
US$ 500 million 3.875% bonds due 2028 498 498
US$ 1,000 million 2.375% bonds due 2029 992 992
US$ 1,000 million 2.000% bonds due 2030 995 994
US$ 750 million 2.125% bonds due 2032 744 743
US$ 750 million 5.50% bonds due 2033 744 744
US$ 900 million 5.625% bonds due 2033 894 -
US$ 600 million 5.875% bonds due 2036 594 594
US$ 500 million 3.875% bonds due 2043 492 492
Fair value adjustment to borrowings (269) (328)
Borrowings due after one year 8,476 7,322
Total external borrowings 9,203 8,069
The interest rates of external borrowings shown in the table above are those
contracted on the underlying borrowings before taking into account any
interest rate hedges. Bonds are stated net of unamortised finance costs of
$55 millions (30 June 2023 - $49 millions).
Bonds are reported at amortised cost with a fair value adjustment shown
separately. All bonds issued by the company are fully and unconditionally
guaranteed by Diageo plc.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) (continued)
4. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
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.
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. 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 period ended
31 December 2023.
The company's financial assets and liabilities measured at fair value are
categorised as follows:
31 December 2023 30 June 2023
$ million $ million
Derivative assets - 438
Derivative liabilities (276) (336)
Valuation techniques based on observable market input (276) 102
(Level 2)
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