REG - Diageo Capital plc - Half-year Report
22/03/2022 15:30
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RNS Number : 6387F Diageo Capital plc 22 March 2022
Diageo Capital plc
LEI: 213800L23DJLALFC4O95
Half-year results for the six months ended 31 December 2021
The Directors present their interim financial report for the six months ended
31 December 2021.
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 2021
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
2021 of Diageo plc (see note 15 of the consolidated financial statements of
Diageo plc).
Net finance charge was £1 million in the six months ended 31 December 2021,
which is a £4 million decrease from net finance charge of £5 million in the
six months ended 31 December 2020.
External borrowings increased by £112 million in the six months ended
31 December 2021 to £5,550 million from £5,438 million in the year ended
30 June 2021, mainly due to the strengthening of US dollar versus sterling.
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.
There was no profit or loss transferred to reserves in the six month ended
31 December 2021, (six months ended 31 December 2020 - £nil) and the other
comprehensive loss is £10 million (six months ended 31 December 2020 - loss
of £105 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
2021 (six months ended 31 December 2020 - £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 Covid-19 outbreak 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 2021
The principal risks identified by the group are disclosed on page 45-48 of the
Diageo Annual Report 2021. 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.
In addition, given that the company performs treasury functions for the group,
it is exposed to foreign currency risk associated with certain foreign
currency denominated bonds and interest rate risk arising principally on
changes in US dollar and sterling interest rates. The company uses derivative
financial instruments to hedge its exposures to fluctuations in interest and
exchange rates. Cash flow hedges are carried out to hedge the currency risk of
highly probable future foreign currency cash flows, as well as the cash flow
risk from changes in interest rates. Fair value hedges are carried out to
manage the currency and/or interest rate risks to which the fair value of
certain assets and liabilities are exposed.
Brexit
The European Union and the United Kingdom have agreed the EU-UK Trade and
Cooperation Agreement which fully came into force on 1 May 2021. We remain
of the view that the direct financial impact to the group or the company will
not be material. A cross-functional working group is in place to identify and
assess the consequences of Brexit, with all major functions within our
business represented, including the treasury function responsible for raising
external funding. The group will monitor the implications of the Agreement
very closely, as well as the risks brought by the broader environment,
including a continuing focus on identifying critical decision points to ensure
potential disruption is minimised, and take prudent actions to mitigate these
risks wherever practical.
Pandemics
Global outbreak of a public health threat or fear of such an event could
result in continuing, periodic and unplanned government restrictions and
regulations. This could include the shutdown of the on-trade, restrictions to
travel, and quarantining of employees resulting in a negative impact to
consumer demand, or a slowdown or halting of the group business operations due
to supply or logistic constraints which could adversely impact the group
financial performance. To mitigate these challenges the group regularly
gathers data and obtains insights which enable management to assess conditions
in the markets where the group operates and to amend forecasts and investment
decisions appropriately.
Principal risks and uncertainties facing the company as at 31 December 2021
(continued)
Pandemics (continued)
The Directors have assessed that the key impacts from the pandemic on the
company would be in respect of any change in credit risk impacting the
valuation of derivatives and the effect of Covid-19 on remote working and
ability to access IT systems, along with a potentially heightened cyber risk.
The Directors believe that the risk mitigation actions taken in relation to
the Covid-19 pandemic have been agile and effective and that the group will
maintain adequate liquidity and be strongly positioned for a recovery in
consumer demand. During the year, the group took actions to protect the
business and support Diageo partners and communities. As part of the group
viability statement assessment, the group has prepared cash flow forecasts
which have also been sensitised to reflect severe, but plausible downside
scenarios taking into consideration the group's principal risks. The potential
financial impact of a slower Covid-19 pandemic recovery has been modelled in
the plausible downside scenarios. Even with these negative sensitivities, the
group's cash position is still considered to remain strong, therefore it is
not anticipated that the solvency or the liquidity of the company will
deteriorate.
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. Further information on the group's actions to
combat climate change are disclosed on pages 50-55 of Diageo plc's 2021 Annual
Report.
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 2021 Annual Report and Accounts
on page 7 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. The company's
principal activity is to raise external funds through debt capital markets in
order to finance other companies in the group, and therefore in making their
decisions, the Directors consider the interests of the holders of the
company's listed debt securities as well as the needs of the group.
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.
Principal risks and uncertainties facing the company as at 31 December 2021
(continued)
Statement on Section 172 of the Companies Act 2006 (continued)
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 2021.
J Edmunds
Director
22 March 2022
INCOME STATEMENT (UNAUDITED)
Six months ended Six months ended
31 December 2021 31 December 2020
Notes £ million £ million
Other operating income 1 5
Finance income 1 138 145
Finance charges 1 (139) (150)
Operating loss - -
Loss before taxation on ordinary activities - -
Taxation on profit on ordinary activities - -
Loss for the period - -
STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Six months ended Six months ended
31 December 2021 31 December 2020
Notes £ million £ million
Other comprehensive income/(expense)
Items that may be recycled subsequently to the income statement
Effective portion of changes in fair value of cash flow hedges
-gains/(losses) taken to other comprehensive (expense)/income 66 (280)
-recycled to income statement (53) 150
Tax (charge)/credit on effective portion of changes in fair value of cash flow 2 (3) 25
hedge
Other comprehensive income/(expense) 10 (105)
Profit for the period - -
Total comprehensive income/(expense) for the period 10 (105)
BALANCE SHEET (UNAUDITED)
31 December 2021 30 June 2021
Notes £ million £ million
Non-current assets
Other receivables 8,002 7,594
Other financial assets 4 295 295
8,297 7,889
Current assets
Trade and other receivables 19 17
Other financial assets 4 12 3
31 20
Total assets 8,328 7,909
Current liabilities
Trade and other payables (2,522) (2,217)
Other financial liabilities 4 (12) (3)
Borrowings and bank overdrafts 3 - (13)
(2,534) (2,233)
Non-current liabilities
Borrowings 3 (5,550) (5,425)
Other financial liabilities 4 (92) (112)
Deferred tax liability (20) (17)
(5,662) (5,554)
Total liabilities (8,196) (7,787)
Net assets 132 122
Equity
Share premium 250 250
Fair value and hedging reserves 61 51
Other reserves 70 70
Retained deficit (249) (249)
Total equity 132 122
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 2020 250 155 70 225 (250) 225
Other comprehensive income for the period - (104) - (104) - (104)
Profit for the period - - - - 1 -
Balance at 30 June 2021 250 51 70 121 (249) 122
Other comprehensive expense for the period - 10 - 10 - 10
Balance at 31 December 2021 250 61 70 131 (249) 132
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 2021 were authorised for issue in accordance with a resolution of
the Directors on 22 March 2022.
Basis of preparation
The annual report and financial statements of the company for the year ended
30 June 2021 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 2021 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 2021.
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
2021.
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 2021 were approved by the
Directors of the company on 27 October 2021 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 sterling (£), which is the
company's functional currency.
All financial information presented in sterling 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.
1. FINANCE INCOME AND CHARGES
Six months ended Six months ended
31 December 2021 31 December 2020
£ million £ million
Interest income from fellow group undertakings 89 90
Amortisation of fair value changes 1 -
Fair value gain on intra-group derivative financial instruments 10 12
Fair value adjustment on borrowings 38 43
Total finance income 138 145
Interest charge to fellow group undertakings (11) (11)
Interest charge on all other borrowings (78) (79)
Fair value loss on intra-group derivative financial instruments (48) (55)
Discount and fee amortisation (2) (5)
Total finance charges (139) (150)
Net finance charges (1) (5)
2. TAXATION
The total tax charge for the six months ended 31 December 2021 was £3
million (31 December 2020 - £25 million income), 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 2021 30 June 2021
£ million £ million
Bank overdrafts - 13
Borrowings due within one year and bank overdrafts - 13
US$ 500 million 3.500% bonds due 2023 370 360
US$ 1,350 million 2.625% bonds due 2023 999 970
US$ 600 million 2.125% bonds due 2024 444 431
US$ 750 million 1.375% bonds due 2025 553 537
US$ 500 million 3.875% bonds due 2028 369 358
US$ 1,000 million 2.375% bonds due 2029 733 711
US$ 1,000 million 2.000% bonds due 2030 735 714
US$ 750 million 2.125% bonds due 2032 550 534
US$ 600 million 5.875% bonds due 2036 440 427
US$ 500 million 3.875% bonds due 2043 364 353
Fair value adjustment to borrowings (7) 30
Borrowings due after one year 5,550 5,425
Total external borrowings 5,550 5,438
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
£36 millions (30 June 2021 - £37 millions).
Bonds are reported at amortised cost with a fair value adjustment shown
separately. All bonds, medium term notes and commercial papers issued by the
company are fully and unconditionally guaranteed by Diageo plc
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.
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. 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 2021.
The company's financial assets and liabilities measured at fair value are
categorised as follows:
31 December 2021 30 June 2021
£ million £ million
Derivative assets 307 298
Derivative liabilities (104) (115)
Valuation techniques based on observable market input 203 183
(Level 2)
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