REG - Diageo PLC - Interim results, six months ended 31 December 2021
27/01/2022 07:00
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RNS Number : 7750Z Diageo PLC 27 January 2022
Interim results, six months ended 31 December 2021
27 January 2022
Diageo delivers strong net sales growth and margin expansion
Delivered strong net sales growth across all regions
- Reported net sales of £8.0 billion increased 15.8%, with strong organic
growth, partially offset by an adverse foreign exchange impact.
- Organic net sales grew 20.0%, driven by strong double-digit growth
across all regions, supported by effective marketing and excellent commercial
execution.
- Growth reflects continued recovery in the on-trade, resilient consumer
demand in the off-trade and market share gains, and was underpinned by
favourable industry trends of spirits taking share of total beverage alcohol
and premiumisation((i)).
Expanded operating margin while increasing marketing investment
- Reported operating profit of £2.7 billion increased 22.5%, and reported
operating margin increased 190bps, primarily due to growth in organic
operating profit.
- Organic operating profit grew 24.7%, with growth across all regions.
- Organic operating margin increased 131bps, primarily driven by a strong
recovery in gross margin and leverage on operating costs, while increasing
marketing investment.
- Supply productivity savings and price increases more than offset the
impact of cost inflation.
Delivered broad-based category growth and gained market share
- Broad-based growth across most categories, with particularly strong
performance in scotch, tequila and beer.
- Premium plus brands contributed 56% of reported net sales and drove 74%
of organic net sales growth.
- Grew or held off-trade market share in over 85%((ii)) of total net sales
value in measured markets.
Invested to sustain long-term growth
- Organic growth in marketing investment of 27.0%, ahead of organic net
sales growth.
- Continued capex investment in production capacity, digital capabilities
and consumer experiences.
Delivered strong cash generation
- Net cash flow from operating activities decreased £0.1 billion to £1.9
billion, and free cash flow decreased £0.2 billion to £1.6 billion,
primarily due to lapping an exceptionally strong working capital benefit in
the first half of fiscal 21.
- Strong balance sheet, with leverage ratio((iii)) of 2.5x at 31 December
2021, at the low end of our target range.
Continued progress in delivering Society 2030 goals
- Opened our first carbon-neutral whiskey distillery in North America and
broke ground on a carbon-neutral distillery in China.
- Responsible drinking campaigns: launched 'Wrong Side of the Road' and
continued roll out of 'Know When to Stop'.
- Included in Dow Jones World Sustainability Index for fourth consecutive
year.
- Retained 'double A' status for both climate change and water security on
CDP's lists.
Created long-term shareholder value
- Increased basic eps by 24.7% to 84.3 pence and pre-exceptional eps by
22.5% to 85.6 pence.
- Increased interim dividend by 5% to 29.36 pence per share.
- Completed £0.5 billion of share buybacks as part of return of capital
programme of up to £4.5 billion.
- Accelerating timeline to complete return of capital programme during
fiscal 23.
See Explanatory notes for explanation and reconciliation of non-GAAP measures,
including organic net sales, organic operating profit, free cash flow, eps
before exceptionals, ROIC, adjusted net debt, adjusted EBITDA and tax rate
before exceptional items.
(i) IWSR, 2021 (20 TBA markets, approximately 75% of industry TBA
volume).
(ii) Internal estimates incorporating AC Nielsen, Association of
Canadian Distillers, Dichter & Neira, Frontline, Intage, IRI, ISCAM,
NABCA, Scentia, State Monopolies, TRAC, IPSOS and other third-party providers.
All analysis of data has been applied with a tolerance of +/- 3 bps.
Percentages represent percent of markets by total Diageo net sales
contribution that have held or gained off-trade share. India, Nigeria and
Canada share data represents total trade. Measured markets indicate a market
where we have purchased any market share data. Market share data may include
beer, wine, spirits or other elements. Measured market net sales value sums to
87% of total Diageo net sales value in first half of fiscal 22.
(iii) Ratio of adjusted net borrowings to adjusted EBITDA.
Ivan Menezes, Chief Executive, said:
I am very pleased with our financial results, which build on our growth
momentum in fiscal 21. We delivered strong organic net sales growth across all
regions and operating margin expansion. This performance demonstrates our
world-class brand building capability, supply chain excellence and agile
culture, and reflects the strength of our portfolio across geographies,
categories and price tiers.
In the off-trade channel, where consumer demand has remained resilient, we
have gained or held market share across the majority of our measured markets.
We also benefitted from the continued recovery of the on-trade channel,
particularly in Europe and North America.
Strong sales volume growth and continued premiumisation drove an improvement
in organic operating margin during the half. This was achieved while
increasing our investment in marketing to gain share and support innovation,
particularly in North America and Greater China. In addition, our focus on
revenue growth management and productivity savings are helping to mitigate the
impact of cost inflation.
Strong cash flow generation is enabling re-investment in sustainable long-term
growth. We are expanding our production capacity, enhancing our digital
capabilities, investing in talent and progressing with our ambitious 10-year
sustainability plan. During the half, we also returned £0.5 billion to
shareholders via share buybacks and we are accelerating the timeline of our
return of capital programme of up to £4.5 billion to now be completed during
fiscal 23.
We have made a strong start to fiscal 22. While we expect near-term volatility
to remain, including potential impacts from Covid-19, global supply chain
constraints and rising cost inflation, I am confident in our ability to
successfully navigate these disruptions through the remainder of the year.
Over the medium-term, from fiscal 23 to fiscal 25, we continue to expect
organic net sales to consistently grow within a range of 5% to 7% and organic
operating profit to grow sustainably within a range of 6% to 9%.
Financial performance
Volume (equivalent units) Operating profit Earnings per share (eps)
EU140.2m £2,743m 84.3p
(F21 H1: EU 128.3 m) (F21 H1: £2,239m) (F21 H1: 67.6p)
Reported movement 9 % h Reported movement 23 % h Reported movement 25 % h
Organic movement((i)) 9 % h Organic movement((i)) 25 % h Eps before exceptional items((i)) 22 % h
Net sales Net cash from operating activities Interim dividend
per share
£7,957m £1,947m 29.36p
(F21 H1: £6,874m) (F21 H1: £1,998m) (F21 H1: 27.96p)
Reported movement 16 % h F22 H1 free cash flow((i)) £1,575m Increase 5 % h
Organic movement((i)) 20 % h F21 H1 free cash flow((i)) £1,753m
(i) See Explanatory notes for explanation and reconciliation of
non-GAAP measures.
Key financial information
Six months ended 31 December 2021
Summary financial information
F22 H1 F21 H1 Organic growth Reported growth
% %
Volume EUm 140.2 128.3 9 9
Net sales £ million 7,957 6,874 20 16
Marketing £ million 1,351 1,085 27 25
Operating profit before exceptional items £ million 2,743 2,256 25 22
Exceptional operating items((i)) £ million - (17)
Operating profit £ million 2,743 2,239 23
Share of associate and joint venture profit after tax £ million 190 154 23
Non-operating exceptional items((i)) £ million (31) 5
Net finance charges £ million (180) (200)
Exceptional taxation (charge)/credit((i)) £ million - (42)
Tax rate including exceptional items % 23.3 24.4 (5)
Tax rate before exceptional items % 23.0 22.4 3
Profit attributable to parent company's shareholders £ million 1,965 1,580 24
Basic earnings per share pence 84.3 67.6 25
Basic earnings per share before exceptional items pence 85.6 69.9 22
Interim dividend pence 29.36 27.96 5
(i) For further details on exceptional items see Summary income
statement, (c) Exceptional items and Notes, 3. Exceptional items.
Reported growth by region
Volume Net sales Marketing Operating profit before exceptional items Operating profit
% EUm % £ million % £ million % £ million % £ million
North America 1 0.3 10 263 24 105 6 69 6 69
Europe 23 5.4 21 309 22 55 37 167 43 184
Asia Pacific 4 1.7 10 136 16 36 17 65 17 65
Africa 15 2.5 17 123 21 18 85 81 85 81
Latin America and Caribbean 16 2.0 41 240 60 47 69 136 69 136
Corporate - - 109 12 500 5 (33) (31) (33) (31)
Diageo 9 11.9 16 1,083 25 266 22 487 23 504
Organic growth by region
Volume Net sales Marketing Operating profit before exceptional items
% EUm % £ million % £ million % £ million
North America 1 0.2 13 338 24 105 7 89
Europe 23 5.4 27 389 26 65 42 184
Asia Pacific 4 1.7 13 181 18 41 19 72
Africa 16 2.6 23 166 28 23 85 88
Latin America and Caribbean 16 2.0 45 258 65 50 80 152
Corporate - - 109 12 133 4 (36) (35)
Diageo 9 11.9 20 1,344 27 288 25 550
First half of fiscal 19 to first half of fiscal 22 growth on a constant
basis((i))
First half of fiscal 19 to first half of fiscal 22 First half of fiscal 19 to first half of fiscal 22
Reported growth %((i)) Growth on a constant basis %((i))
Net sales
North America 26 34
Europe 7 17
Asia Pacific 10 14
Africa 6 26
Latin America and Caribbean 22 39
Corporate (18) (18)
Diageo 15 25
(i) For further details on first half of fiscal 19 to first half of
fiscal 22 growth on a constant basis see Explanatory notes, Growth on a
constant basis.
See Explanatory notes for explanation and reconciliation of non-GAAP measures.
Net sales (£ million)
Reported net sales grew 15.8%
Organic net sales grew 20.0%
(i
Reported net sales grew 15.8%, driven by strong organic growth, partially
offset by unfavourable foreign exchange.
Organic net sales growth of 20.0% reflects organic volume growth of 9.3% and
positive price/mix of 10.7%. All regions grew organic net sales, driven by the
recovery of the on-trade channel, resilient consumer demand in the off-trade
channel and market share gains. Growth was supported by favourable industry
trends of spirits taking share of total beverage alcohol and
premiumisation((i)).
The positive price/mix benefit was primarily driven by mix, reflecting the
strong growth of premium plus brands, particularly in scotch, tequila and
Chinese white spirits, as well as the continued recovery of the on-trade
channel in Europe and North America and the partial recovery of Travel Retail.
There was also a price benefit, primarily from price increases in Latin
America and Caribbean, Africa and North America.
Net sales £ million
F21 H1 6,874
Exchange((ii)) (271)
Acquisitions and disposals 17
Reclassification((iii)) (7)
Volume 624
Price/mix 720
F22 H1 7,957
(i) IWSR, 2021 (20 TBA markets, approximately 75% of industry TBA
volume).
(ii) 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.
(iii) For the six months ended 31 December 2021, £7 million has been
reclassified from cost of sales to excise duties.
Operating profit (£ million)
Reported operating profit grew 22.5%
Organic operating profit grew 24.7%
Reported operating profit increased 22.5%, primarily due to growth in organic
operating profit. This was partially offset by the negative impact of adverse
exchange rate movements.
Organic operating profit grew 24.7%, ahead of organic net sales growth, driven
by growth across all regions.
Operating profit £ million
F21 H1 2,239
Exceptional operating items((i)) 17
Exchange (87)
Acquisitions and disposals (10)
FVR((ii)) 34
Organic movement 550
F22 H1 2,743
(i) For further details on exceptional operating items see Summary
income statement, (c) Exceptional items and Notes, 3. Exceptional items.
(ii) Fair value remeasurements. For further details see Summary income
statement, (d) Fair value remeasurement.
Operating margin (%)
Reported operating margin increased 190bps
Organic operating margin increased 131bps
Reported operating margin increased 190bps, primarily driven by an increase in
organic operating margin.
Organic operating margin increased 131bpsdriven by a strong recovery in gross
margin and leverage on operating costs, while increasing marketing investment.
Latin America and Caribbean, Europe and Africa largely drove the operating
margin improvement, partially offset by a decline in North America.
Gross margin increased 147bps, primarily driven by positive mix and improved
fixed cost absorption from volume growth. Supply productivity savings and
price increases more than offset the impact of cost inflation.
Operating margin ppt
F21 H1 32.6
Exceptional operating items((i)) 0.25
Exchange 0.05
Acquisitions and disposals (0.17)
Other((ii)) 0.46
Gross margin 1.47
Marketing (0.92)
Other operating items 0.76
F22 H1 34.5
(i) For further details on exceptional operating items see Summary
income statement, (c) Exceptional items and Notes, 3. Exceptional items.
(ii) Fair value remeasurements and reclassification. For the six
months ended 31 December 2021, £7 million has been reclassified from cost of
sales to excise duties.
Basic earnings per share (pence)
Basic eps increased 24.7% from 67.6 pence to 84.3 pence
Basic eps before exceptional items((i)) increased 22.5% from 69.9 pence to
85.6 pence
Basic eps increased 16.7 pence primarily driven by organic operating profit
growth, partially offset by higher tax, and an unfavourable foreign exchange
impact.
Basic eps before exceptional items increased 15.7 pence.
(
Basic earnings per share pence
F21 H1 67.6
Exceptional items after tax((ii)) 1.0
Exchange on operating profit (3.7)
Acquisitions and disposals((iii)) (0.5)
Organic operating profit 23.5
Associates and joint ventures 1.5
Finance charges((iv)) 1.0
Tax((v)) (5.9)
Share buyback 0.2
Non-controlling interests (1.8)
FVR((vi)) 1.4
F22 H1 84.3
(i) See Explanatory notes for explanation of the calculation and use
of non-GAAP measures.
(ii) For further details on exceptional items see Summary income
statement, (c) Exceptional items and Notes, 3. Exceptional items.
(iii) Includes finance charges net of tax.
(iv) Excludes finance charges related to acquisitions and disposals.
(v) Excludes tax related to acquisitions and disposals.
(vi) Fair value remeasurements. For further details see Summary income
statement, (d) Fair value remeasurement.
Net cash from operating activities and free cash flow (£ million)
Generated £1,947 million million net cash from operating activities((i)) and
£1,575 million free cash flow.
Net cash from operating activities was £1,947 million, a decrease of £51
million compared to the first half of fiscal 21. Free cash flow decreased by
£178 million to £1,575 million.
Free cash flow was lower than in the first half of fiscal 21, as strong growth
in operating profit was more than offset by the impact of lapping an
exceptionally strong working capital benefit in the first half of fiscal 21,
increased capex, a negative foreign exchange impact and higher cash tax paid.
The working capital benefit in the first half of fiscal 21 was due to a large
increase in creditors as operating performance recovered during the half,
following reduced volumes and cost control measures in the second half of
fiscal 20.
The negative cash flow impact from 'other' items was due to lapping a payment
of £82 million from Moët Hennessy, which was received in the first half of
fiscal 21 but related to the financial year ended December 2019.
Free cash flow £ million
F21 H1 Net cash from operating activities 1,998
F21 H1 Capex and movements in loans and other investments (245)
F21 H1 Free cash flow 1,753
Exchange((ii)) (87)
Operating profit((iii)) 621
Working capital((iv)) (481)
Capex (133)
Tax (62)
Interest 38
Other((v)) (74)
F22 H1 Free cash flow 1,575
F22 H1 Capex and movements in loans and other investments 372
F22 H1 Net cash from operating activities 1,947
(i) Net cash from operating activities excludes net capex (F22 H1 -
£(375) million; F21 H1 - £(242) million) and movements in loans and other
investments. Net capex movement was £(133) million compared to the first half
of fiscal 21.
(ii) Exchange on operating profit before exceptional items.
(iii) Operating profit excludes exchange, depreciation and amortisation,
post-employment charges of £(10) million and other non-cash items.
(iv) Working capital movement includes maturing inventory.
(v) Other items include dividends received from associates and joint
ventures, post-employment payments and movements in loans and other
investments.
Return on average invested capital (%)((i))
ROIC increased 352bps
ROIC increased 352bps, driven mainly by organic operating profit growth,
partially offset by increased tax.
Return on average invested capital ppt
F21 H1 15.8
Exchange 0.27
Acquisitions and disposals (0.40)
Organic operating profit 5.01
Associates and joint ventures 0.24
Tax (1.51)
Other (0.11)
F22 H1 19.3
(i) ROIC calculation excludes exceptional operating items from
operating profit.
Fiscal 22 outlook
Net sales
We expect organic net sales momentum to continue through the second half of
fiscal 22, albeit we are lapping a tougher comparator. We believe we are well
positioned to benefit from resilience in the off-trade and continued recovery
in the on-trade. However, we expect near-term volatility to remain, including
potential impacts from Covid-19 and global supply chain constraints, and for
disruption in Travel Retail to continue.
In North America, we expect consumer demand to remain resilient, albeit we are
lapping a tougher comparator. We will continue to invest ahead of net sales
growth in marketing and innovation to underpin growth in our well-positioned
portfolio.
In Europe, we expect to benefit from continued recovery in the on-trade to the
extent that restrictions ease. We expect the off-trade channel to remain
resilient.
In Asia Pacific, Africa and Latin America and Caribbean, we will continue to
build on the momentum in the first half, recognising that disruption related
to Covid-19 will likely persist in these markets.
Operating margin
During the second half of fiscal 22, we expect organic operating profit to
grow ahead of organic net sales. We expect organic operating margin to benefit
from growth in sales volumes, favourable channel mix and premiumisation
trends. We expect our focus on everyday efficiency and revenue growth
management to help mitigate the impact of cost inflation. We will continue to
invest in marketing and commercial capabilities, particularly in North America
and China.
Exchange
We are not able to provide specific guidance for foreign exchange in relation
to fiscal 22. If we applied exchange rates of £1=$1.36 and £1=€1.20, we
would expect a negative impact on net sales and operating profit in the second
half of fiscal 22. However, we would expect the impact to be significantly
lower than in the first half of fiscal 22.
Taxation
We expect the tax rate before exceptional items to be in the range of 22.0% to
24.0% in fiscal 22. For further details on taxation see Summary income
statement, (e) Taxation and Notes, 5. Taxation.
Effective interest rate
We expect the effective interest rate to be in the range of 2.7% to 3.0% in
fiscal 22.
Capital expenditure
We expect capital expenditure to be in the range of £950 million to £1
billion in fiscal 22 as we invest behind our strategic priorities, including
projects that were delayed in fiscal 21 due to Covid-19.
Notes to the business and financial review
Unless otherwise stated:
- movements in results are for the six months ended 31 December 2021
compared to the six months ended 31 December 2020
- commentary below refers to organic movements unless stated as reported
- volume is in millions of equivalent units (EUm)
- net sales are sales after deducting excise duties
- percentage movements are organic movements unless stated as reported
- share refers to value share
See Explanatory notes for explanation of the calculation and use of non-GAAP
measures.
Business review
North America
- Reported net sales grew 10%, primarily reflecting strong organic
growth. Net sales were unfavourably impacted by foreign exchange, mainly due
to weakening of the US dollar.
- Organic net sales increased 13%, building on strong growth in the
first half of fiscal 21, largely driven by US Spirits.
- US Spirits grew 15%, reflecting the recovery of the on-trade channel,
resilient consumer demand in the off-trade channel and market share gains.
Growth was underpinned by favourable industry trends of premiumisation and
spirits taking share of total beverage alcohol.
- US Spirits price/mix benefit of 12% reflects strong growth in
super-premium plus products, positive channel mix from recovery of the
on-trade and price increases.
- US spirits growth was primarily driven by tequila, up 61%, as well as
strong growth in Canadian whisky, scotch and vodka, which more than offset
declines in rum, US whiskey and Baileys.
- Beer grew 1%, reflecting the recovery of Guinness in the on-trade,
offset by a decline in flavoured malt beverages.
- Organic operating margin decreased by 224bps, primarily reflecting
upweighted investment in marketing, as well as lapping lower discretionary
expenditure. Benefits from pricing, productivity savings and other items
mostly offset cost inflation and an adverse category mix.
Key financials £ million:
F21 H1 Exchange Acquisitions Organic movement Other((i)) F22 H1 Reported movement
%
and
disposals
Net sales 2,701 (93) 18 338 - 2,964 10
Marketing 443 (14) 15 105 (1) 548 24
Operating profit 1,226 (20) (9) 89 9 1,295 6
Markets: Global giants, local stars and reserve((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
% % % % % % %
North America((ii)) 1 1 13 10 Crown Royal 5 11 7
Smirnoff (4) (5) (8)
US Spirits 3 3 15 11 Johnnie Walker 7 19 15
DBC USA((ii)) (2) 2 1 1 Captain Morgan (11) (14) (17)
Canada (6) (6) (2) (2) Don Julio 41 44 38
Ketel One((v)) 10 21 16
Spirits 1 1 14 11 Guinness 10 9 6
Beer (2) (2) 1 (3) Baileys (10) (7) (10)
Ready to drink((ii)) 4 45 9 47 Bulleit (17) (19) (22)
Cîroc vodka 9 17 13
Casamigos 82 86 79
Tanqueray 4 10 7
(i) Fair value remeasurements. For further details see Summary
income statement, (d) Fair value remeasurement.
(ii) Reported volume movement impacted by acquisitions. For further
details see Explanatory notes, Organic growth excluding Travel Retail and
Guinness.
(iii) Spirits brands excluding ready to drink and non-alcoholic
variants.
(iv) Organic equals reported volume movement.
(v) Ketel One includes Ketel One vodka and Ketel One Botanical.
North America contributed North America organic net sales grew
37% of Diageo reported net sales in first half of fiscal 22 13% in first half of fiscal 22
Market highlights
US Spirits
Strong growth driven by on-trade recovery
Net sales increased 15%, reflecting recovery of the on-trade channel,
resilient consumer demand in the off-trade channel and market share gains.
Shipments were broadly in line with depletions, with some variation on certain
brands.
The tequila category benefitted from strong growth reflecting its broad
occasion appeal. Net sales increased 61%, with Casamigos growing 87% and Don
Julio growing 43%, with both brands gaining share of the spirits market and
tequila category. This reflects strong volume growth and the benefit of price
increases. This strong performance was delivered despite constraints on the
supply of certain aged variants.
Crown Royal net sales increased 12%, with strong growth in the core variant.
Supply constraints of aged liquid led to slower growth of flavour variants and
a decline in Crown Royal's share of the Canadian whisky category.
Scotch grew 11% and gained share of the spirits market and the scotch
category. Johnnie Walker net sales grew 16%, with double-digit growth in
Johnnie Walker Blue Label and Johnnie Walker Black Label, as well as
benefitting from the launch of Johnnie Walker High Rye. Buchanan's net sales
increased 8% and gained share of both the spirits market and the scotch
category. Scotch malts declined 5%, primarily due to a decline in Lagavulin as
a result of liquid constraints.
Vodka net sales grew 8%. Ketel One net sales increased 21%, primarily driven
by strong growth in the core variant, as well as continued growth of Ketel One
Botanical. Cîroc net sales growth of 16% was largely driven by strong
performance of the Cîroc Pomegranate, Summer Watermelon and Summer Citrus
flavour variants. Smirnoff sales declined 5%, primarily due to lower sales of
the core variant, Smirnoff No.21 Red, which were only partially offset by
growth from recent innovations, including Smirnoff Pink Lemonade.
Captain Morgan net sales declined 15% and the brand lost share of the rum
category, primarily driven by a decline in Captain Morgan Spiced.
Bulleit net sales declined 19% and the brand lost share of the US whiskey
category due to glass supply constraints, which impacted production volumes.
Baileys net sales declined 9%, primarily reflecting a decline of Baileys
Original, due to lapping strong growth in the first half of fiscal 2021.
Spirits-based ready to drink net sales grew 50%, primarily driven by strong
performance of Crown Royal Cocktails.
Diageo Beer Company USA
Recovery in Guinness offset by decline in flavoured malt beverages
Net sales grew 1%. Recovery of Guinness in the on-trade was broadly offset by
a decline in flavoured malt beverages. Growth in Smirnoff Ice was more than
offset by a decline in seltzers.
Canada
Slight decline in net sales
Canada net sales declined 2%, primarily reflecting declines in ready to drink,
rum and Canadian whisky, which were partially offset by growth in tequila and
scotch.
Marketing
Increased investment ahead of net sales growth
Marketing investment grew 24%, ahead of net sales, driven by continued
investment in growth opportunities across key brands, informed by our
marketing analytics tools.
Europe
- Reported net sales increased 21%, primarily driven by strong organic
growth. Net sales were unfavourably impacted by foreign exchange, mainly due
to the weakening of the Turkish lira and the euro.
- Organic net sales increased 27%, lapping a decline in the first half of
fiscal 21, with strong double-digit growth in all markets.
- Growth was driven by the recovery of the on-trade channel, particularly
in Great Britain, Southern Europe and Ireland, as well as resilient consumer
demand in the off-trade channel, where Diageo continued to gain market share.
- Spirits net sales grew 24%, with broad-based growth across scotch,
vodka, Baileys, gin, rum and raki. Growth was underpinned by the spirits
category gaining share of total beverage alcohol and premiumisation.
- Beer net sales grew 44%, driven by a strong increase in Guinness as
on-trade restrictions eased in Ireland and Great Britain.
- Strong improvement in organic operating margin of 351bps primarily
reflects leverage on operating costs as organic net sales recovered strongly.
Benefits from positive channel mix, productivity savings and improved fixed
cost absorption more than offset cost inflation
Key financials £ million:
F21 H1 Exchange Acquisitions Organic movement Other((i)) F22 H1 Reported movement
and %
disposals
Net sales 1,443 (83) 3 389 - 1,752 21
Marketing 252 (11) 1 65 - 307 22
Operating profit before exceptional items 446 (44) (1) 184 28 613 37
Exceptional operating items((ii)) (17) -
Operating profit 429 613 43
Markets: Global giants and local stars((iii)):
Organic Reported Organic Reported Organic Organic Reported
volume
volume volume net sales net sales
movement((iv)) net sales net sales
movement movement movement movement movement movement
% % % % % % %
Europe 23 23 27 21 Guinness 32 46 42
Johnnie Walker 32 39 32
Great Britain 15 15 19 19 Baileys 22 19 16
Northern Europe 20 20 13 8 Smirnoff 31 29 26
Southern Europe 32 32 32 25 Captain Morgan 23 23 20
Eastern Europe 20 20 25 24 Yenì Raki 10 11 (14)
Ireland 26 26 49 43 Tanqueray 44 41 36
Turkey 24 24 43 9 JεB 20 24 17
Spirits 22 22 24 17
Beer 27 27 44 40
Ready to drink 30 30 28 25
(i) Fair value remeasurements. For further details see Summary
income statement, (d) Fair value remeasurement.
(ii) For further details on exceptional operating items see Summary
income statement, (c) Exceptional items and Notes, 3. Exceptional items.
(iii) Spirits brands excluding ready to drink and non-alcoholic variants.
(iv) Organic equals reported volume movement, except for Smirnoff, which
had reported volume movement of 32% due to a reclassification.
Europe contributed Europe organic net sales grew
22% of Diageo reported net sales in first half of fiscal 22 27% in first half of fiscal 22
Market highlights
Great Britain
Strong recovery of the on-trade and off-trade resilience
Net sales increased 19%, primarily driven by recovery in the on-trade and
resilient consumer demand in the off-trade. Spirits grew 13%, with broad-based
growth across vodka, Baileys and rum, partially offset by a decline in gin.
Vodka grew 21%, largely driven by Smirnoff No.21 Red and the launch of
Smirnoff Raspberry Crush. Guinness grew strongly as the on-trade recovered,
with net sales growth of over 30%. Ready to drink grew 34%, reflecting
positive category momentum and innovation.
Northern Europe
Strong net sales growth across channels
Net sales increased 13%, reflecting continued strong performance in the
off-trade, recovery of the on-trade and market share gains. Growth was
broad-based across key categories.
Southern Europe
Strong recovery in the on-trade channel
Net sales increased 32%, lapping a decline in the first half of fiscal 21.
Growth reflects the easing of on-trade restrictions and the gradual recovery
of tourism. Scotch grew 20%, driven by Johnnie Walker and JεB. Gin, rum and
Baileys delivered strong double-digit growth.
Eastern Europe
Off-trade momentum and on-trade recovery
Net sales increased 25%, lapping a decline in the first half of fiscal 2021,
which reflects continued momentum in the off-trade and recovery in the
on-trade. Growth was predominantly driven by Johnnie Walker, Captain Morgan
and Baileys.
Ireland
Partial easing of on-trade restrictions drove strong growth
Net sales increased 49%, lapping a significant decline in the first half of
fiscal 21. Guinness net sales grew over 76%, benefitting from the partial
recovery of the on-trade.
Turkey
Strong growth in challenging economic environment
Net sales increased 43%, driven by price increases and strong volume growth,
as restrictions eased in the on-trade. Scotch grew 90%, driven by Johnnie
Walker. Raki grew 20%, primarily driven by our more premium variant Tekirdağ
Raki.
Travel Retail Europe
Partial recovery as travel restrictions eased
Net sales partially recovered as travel restrictions eased across Europe and
duty-free sales between the UK and mainland Europe were reinstated following
Brexit.
Marketing
Increased investment broadly in line with net sales growth
Investment increased 26% as the on-trade recovered and to support off-trade
market share gains.
Asia Pacific
- Reported net sales grew 10%, primarily reflecting strong organic
growth. Net sales were unfavourably impacted by foreign exchange, mainly due
to the weakening of the Indian rupee.
- Organic net sales grew 13%, lapping a decline in the first half of
fiscal 21, driven by strong growth in Greater China and India.
- Greater China net sales grew 18%, primarily driven by strong momentum
in both Chinese white spirits and super-premium plus scotch.
- Net sales grew 12% in India, reflecting strong consumer demand in the
off-trade channel, recovery of the on-trade channel and strong premiumisation.
- Net sales continued to recover in North Asia, South East Asia and
Travel Retail Asia and Middle East, however, performance remained impacted by
on-trade restrictions, international travel restrictions and reduced tourism
related to Covid-19.
- Australia net sales slightly declined, primarily due to lapping strong
growth in the first half of fiscal 2021 and on-going Covid-19 restrictions.
- Spirits grew 15%, mainly driven by scotch, Chinese white spirits and
IMFL whisky(i).
- Organic operating margin improved by 141bps, reflecting positive
category mix, primarily from strong growth in super-premium plus scotch and
Chinese white spirits and leverage on operating costs. This was partially
offset by cost inflation and increased marketing investment.
Key financials £ million:
F21 H1 Exchange Reclassification((ii)) Acquisitions Organic movement F22 H1 Reported movement
and %
disposals
Net sales 1,395 (38) (7) - 181 1,531 10
Marketing 227 (5) - - 41 263 16
Operating profit 386 (7) - - 72 451 17
Markets: Global giants, local stars and reserve((iii)):
Organic Reported Organic Reported Organic Organic Reported
volume
volume volume net sales net sales
movement((iv)) net sales net sales
movement movement movement movement movement movement
% % % % % % %
Asia Pacific 4 3 13 10 Johnnie Walker 16 21 19
McDowell's 3 5 -
India 4 4 12 7 Shui Jing Fang((v)) 17 26 27
Greater China 7 7 18 18 Guinness 3 9 (8)
Australia (2) (2) (2) (4) The Singleton 2 9 8
South East Asia - - 13 6 Smirnoff 8 12 10
North Asia (14) (14) 7 (1) Windsor (7) (5) (11)
Travel Retail Asia and Middle East 135 122 167 168 Bundaberg - (1) (4)
Spirits 4 4 15 13
Beer - - 8 (9)
Ready to drink (1) (1) (2) (6)
(i) Indian-Made Foreign Liquor (IMFL) whisky.
(ii) For the six months ended 31 December 2021, £7 million has been
reclassified from cost of sales to excise duties.
(iii) Spirits brands excluding ready to drink and non-alcoholic
variants.
(iv) Organic equals reported volume movement, except for Smirnoff, which
had reported volume movement of 7% due to a reclassification.
(v) Growth figures represent total Chinese white spirits of which Shui
Jing Fang is the principal brand.
Asia Pacific contributed Asia Pacific organic net sales grew
19% of Diageo reported net sales in first half of fiscal 22 13% in first half of fiscal 22
Market highlights
India
Premiumisation drives strong growth, particularly in the prestige and above
segment
Net sales grew 12%, driven by strong consumer demand in the off-trade channel,
recovery of the on-trade channel and strong premiumisation. Scotch and
IMFL whisky grew 60% and 3% respectively, driven by Johnnie Walker and
McDowell's. The prestige and above segment grew 19%, lapping a decline in the
first half of fiscal 21. Net sales in the popular segment were broadly flat.
Greater China
Continued strong growth in Chinese white spirits
Net sales increased 18%. Growth was partially offset by a decline in Taiwan,
which continued to be impacted by on-trade restrictions. Growth was driven by
Chinese white spirits, which grew 25%. Scotch grew 6%, with strong
double-digit growth in the super-premium plus segment and in mainland China.
Australia
Slight decline in sales lapping a strong comparator period
Net sales declined 2%, due to lapping strong growth in the first half of
fiscal 2021, and the impact of continued on-trade restrictions in key states.
Growth in Smirnoff and Johnnie Walker was more than offset by declines in
ready to drink and Baileys.
South East Asia
Partial recovery as restrictions eased
Net sales grew 13%, lapping a decline in the first half of fiscal 21. Growth
continued to be impacted by on-trade restrictions and reduced tourism. Scotch
grew 10%, with double-digit growth in Johnnie Walker super deluxe variants and
scotch malts.
North Asia
Continued strong off-trade performance
Net sales grew 7%, lapping a decline in the first half of fiscal 21, primarily
driven by premiumisation. Korea net sales grew 11%, with double-digit growth
in Johnnie Walker, partially offset by a decline in Windsor, which continued
to be impacted by on-trade restrictions. Slower growth in Japan reflected the
impact of Covid-19 related restrictions.
Travel Retail Asia and Middle East
Partial recovery as restrictions eased
Net sales partially recovered, lapping a significant decline in the first half
of fiscal 21. Growth was primarily driven by the strong performance of Johnnie
Walker.
Marketing
Increased investment behind strategic growth priorities
Investment increased 18%, ahead of net sales, mainly in Greater China, across
Chinese white spirits and scotch. South East Asia and North East Asia also
invested ahead of net sales.
Africa
- Reported net sales grew 17%, primarily driven by strong organic growth.
Net sales were unfavourably impacted by foreign exchange, mainly due to the
weakening of the Nigerian naira and Kenyan shilling.
- Organic net sales grew 23%, lapping flat sales in the first half of
fiscal 21, with growth across all markets.
- Strong growth in East Africa and Nigeria was driven by the continued
recovery of the on-trade channel, particularly in Kenya, as well as price
increases, positive mix and focused execution of our total beverage alcohol
strategy.
- Growth in Africa Regional Markets reflected a good performance across
all markets except Ethiopia, which continued to decline.
- Growth in South Africa was impacted by continued on-trade and off-trade
restrictions related to Covid-19, as well as economic and social challenges.
- Beer net sales grew 24%, primarily driven by Malta Guinness and
Guinness.
- Spirits net sales grew 18%, driven by double-digit growth in both
mainstream and international spirits, particularly scotch and gin.
- Organic operating margin improved 723bps, primarily driven by price
increases and leverage on operating costs. The benefit from price increases,
higher fixed cost absorption and productivity savings more than offset cost
inflation.
Key financials £ million:
F21 H1 Exchange Acquisitions Organic movement F22 H1 Reported movement
and %
disposals
Net sales 745 (39) (4) 166 868 17
Marketing 84 (5) - 23 102 21
Operating profit 95 (7) - 88 176 85
Markets: Global giants and local stars((ii)):
Organic Reported Organic Reported Organic Organic Reported
volume
volume volume net sales net sales
movement((iii)) net sales net sales
movement movement movement movement movement movement
% % % % % % %
Africa 16 15 23 17 Guinness 8 19 11
Johnnie Walker 12 19 18
East Africa 23 23 22 17 Smirnoff 11 15 15
Africa Regional Markets 8 8 12 7
Nigeria 13 13 51 36 Other beer:
South Africa((i)) 8 5 7 5
Malta Guinness 55 69 54
Spirits 12 12 18 15 Senator 43 38 32
Beer 19 19 24 17 Tusker 7 14 10
Ready to drink((i)) 18 7 36 17 Serengeti 3 3 (1)
(i) Reported volume movement impacted by disposals. For further
details see Explanatory notes, Organic growth excluding Travel Retail and
Guinness.
(ii) Spirits brands excluding ready to drink and non-alcoholic
variants.
(iii) Organic equals reported volume movement, except for Johnnie
Walker, which had reported volume movement of 11% due to a reclassification.
Africa contributed Africa organic net sales grew
11% of Diageo reported net sales in first half of fiscal 22 23% in first half of fiscal 22
Market highlights
East Africa
Strong growth lapping a decline in the first half of fiscal 2021
Net sales grew 22%, with all markets growing double-digit. Kenya grew 27%,
lapping a decline in the first half of fiscal 2021, with strong growth in beer
as the on-trade recovered, and spirits, with particular strength in mainstream
gin. Double-digit growth in Uganda and Tanzania was primarily driven by strong
performance in beer, which benefitted from a partial recovery of the on-trade.
Africa Regional Markets
Growth driven primarily by strong beer performance
Net sales grew 12%, with growth in all markets except Ethiopia. Double-digit
growth in beer was led by Guinness and Malta Guinness, which benefitted from
the recovery of the on-trade channel and price increases.
Nigeria
Strong growth across total beverage alcohol categories
Net sales grew 51%, benefitting from price increases, resilient consumer
demand and the benefit from improved route to consumer across the business.
Double-digit growth in beer, mainstream spirits and international premium
spirits reflects continued recovery of the on-trade channel and momentum in
the off-trade. Growth in beer was primarily driven by Malta Guinness and
Guinness. Double-digit growth in ready to drink was primarily driven by
Smirnoff.
South Africa
Continued impact from economic and social challenges and Covid-19 related
restrictions
Net sales grew by 7%, lapping a decline in the first half of fiscal 21. Growth
was primarily driven by Johnnie Walker and Smirnoff, partially offset by a
decline in gin.
Marketing
Investing ahead of net sales as region recovers
Marketing investment increased 28%, ahead of net sales growth, lapping a
decline in the first half of fiscal 21. Investment focused on key categories,
as well as e-commerce and new route to consumer opportunities.
Latin America and Caribbean
- Reported net sales grew 41%, primarily reflecting strong organic
growth. Net sales were unfavourably impacted by foreign exchange, mainly due
to weakening of the Colombian peso and the Brazilian real.
- Organic net sales increased 45%, lapping a slight decline in the first
half of fiscal 21, driven by strong double-digit growth in all markets.
- Growth was driven by the recovery in the on-trade channel and resilient
consumer demand in the off-trade channel, where Diageo continued to gain
market share. Growth also reflects positive mix from strong growth of premium
plus scotch and price increases across key markets.
- Spirits net sales grew 46%, with growth across key categories,
particularly scotch.
- Organic operating margin improved by 797bps driven by premiumisation,
price increases and leverage on operating costs. This was partially offset by
an increase in marketing investment and cost inflation.
Key financials £ million:
F21 H1 Exchange Acquisitions Organic movement Other((i)) F22 H1 Reported movement
and %
disposals
Net sales 579 (18) - 258 - 819 41
Marketing 78 (3) - 50 - 125 60
Operating profit 197 (13) - 152 (3) 333 69
Markets: Global giants and local stars((ii)):
Organic Reported Organic Reported Organic Organic Reported
volume
volume volume net sales net sales
movement((iii)) net sales net sales
movement movement movement movement movement movement
% % % % % % %
Latin America and Caribbean Johnnie Walker 43 63 60
16 16 45 41 Buchanan's 58 72 67
Old Parr 56 70 65
PUB 4 4 30 25 Smirnoff 32 25 23
Mexico - - 13 13 Black & White (13) (1) (5)
CCA 37 37 68 68 Tanqueray 45 40 36
Andean 19 19 52 40 Baileys 34 45 41
PEBAC 63 63 107 100
Spirits 15 15 46 42
Beer 19 19 12 7
Ready to drink 38 38 55 48
(i) Fair value remeasurements. For further details see Summary income
statement, (d) Fair value remeasurement.
(ii) Spirits brands excluding ready to drink and non-alcoholic
variants.
(iii) Organic equals reported volume movement.
Latin America and Caribbean contributed Latin America and Caribbean organic net sales grew
11% of Diageo reported net sales in first half of fiscal 22 45% in first half of fiscal 22
Market highlights
PUB (Paraguay, Uruguay and Brazil)
Strong broad-based growth in several key categories
Net sales increased 30%, primarily driven by scotch. Growth in ready to drink,
gin, and vodka was partially offset by a decline in cachaça. Scotch net sales
increased 35%, with double-digit growth in Johnnie Walker, Buchanan's, White
Horse and Old Parr. Brazil net sales grew 27%, reflecting continued momentum
in the off-trade channel, price increases and recovery in the on-trade
channel.
Mexico
Partial recovery as restrictions ease
Net sales increased 13%, lapping a decline in the first half of fiscal 21.
Scotch net sales grew 24%, driven by Johnnie Walker and Buchanan's, which both
benefitted from price increases. Tequila declined 5% due to constraints on the
supply of certain aged variants.
CCA (Central America and Caribbean)
Resilient domestic consumption and partial recovery of the on-trade
Net sales grew 68%, lapping a decline in the first half of fiscal 21. Growth
was driven by resilient domestic consumption and partial recovery of the
on-trade. Scotch net sales increased 74%, driven by strong growth in Johnnie
Walker, Buchanan's and Old Parr.
Andean (Colombia and Venezuela)
Growth driven by strong scotch performance in Colombia
Net sales increased 52%, driven by Colombia. Growth was primarily driven by
scotch, which grew 45% due to double-digit growth in Buchanan's, Old Parr and
Johnnie Walker.
PEBAC (Peru, Ecuador, Bolivia, Argentina and Chile)
Partial easing of restrictions drives strong growth across all markets
Net sales increased 107%, benefitting from strong performance of the
off-trade, price increases, favourable category mix and recovery in the
on-trade channel. Scotch delivered strong double-digit net sales growth,
primarily driven by Johnnie Walker.
Travel Retail Latin America and Caribbean
Recovery as travel restrictions eased
Net sales recovered ahead of pre-Covid-19 levels due to the reopening of
international travel.
Marketing
Investing ahead of net sales as region recovers
Marketing investment increased 65%, ahead of net sales, lapping a decline in
the first half of fiscal 21. Investment focussed on strategic growth
priorities.
Category and brand review
- Spirits grew 20%, with growth across most categories, with
particularly strong performance in scotch, tequila, vodka and gin. US whiskey
declined due to glass supply constraints which impacted production volumes of
Bulleit.
- Scotch grew 27%, with Johnnie Walker growing 31%; both grew
double-digits across all regions.
- Tequila grew 56%, with Don Julio and Casamigos continuing to gain
share of the fast-growing tequila category in US Spirits.
- Vodka grew 14%, with growth across all regions, particularly in Europe
and North America. Smirnoff, Ketel One and Cîroc grew strongly.
- Gin grew across all regions with strong double-digit growth in
Europe, Africa and Latin America and Caribbean.
- Beer grew 22%, primarily driven by strong growth of Guinness in
Ireland, Great Britain and Africa.
- Ready to drink grew 17%, with growth in all regions except Asia
Pacific.
Key categories:
Organic Organic Reported
volume
movement((i)) net sales net sales
%
movement movement
% %
Spirits((ii)) 8 20 16
Scotch 18 27 23
Vodka((iii)(iv)) 13 14 10
Canadian whisky 2 10 7
Rum((iii)) 2 2 (2)
Liqueurs 13 11 7
Indian-Made Foreign Liquor (IMFL) whisky 2 3 (2)
Tequila 49 56 51
Gin((iii)) 19 21 19
US whiskey (10) (8) (11)
Beer 16 22 16
Ready to drink 15 17 17
(i) Organic equals reported volume movement.
(ii) Spirits brands excluding ready to drink and non-alcoholic
variants.
(iii) Vodka, rum, gin, including IMFL brands.
(iv) Vodka includes Ketel One Botanical.
Scotch
26% of Diageo's reported net sales and grew 27%, following a decline in the
first half of fiscal 2021
Growth in all regions, particularly Latin America and Caribbean, Asia Pacific
and Europe.
- Johnnie Walker net sales increased 31%, with double-digit growth in all
regions.
- Johnnie Walker Black Label grew 33%, with growth across all regions.
- Johnnie Walker Blue Label grew 65%, with growth in all regions,
particularly North America and Asia Pacific.
- Johnnie Walker Red Label grew 20% with double-digit growth in Europe,
Latin America and Caribbean, and Asia Pacific.
- Primary scotch brands grew 13%, primarily driven by double-digit growth
of Black Dog and Black & White in India.
- Scotch malts grew 12%, primarily driven by strong growth in Asia
Pacific.
- Buchanan's and Old Parr net sales grew 42% and 64% respectively,
primarily driven by strong growth in Latin America and Caribbean.
Vodka
10% of Diageo's reported net sales and grew 14%
Growth in all regions, with particularly strong performance in Europe and
North America.
- Smirnoff net sales increased 8%, with double-digit growth in all regions
except North America, where net sales declined.
- Cîroc grew 22%, primarily driven by strong growth in North America and
Europe.
- Ketel One grew 24%, primarily driven by North America, with strong
growth in the core variant and Ketel One Botanical.
Tequila
9% of Diageo's reported net sales and grew 56%
Growth was mainly driven by the strong performance of Casamigos and Don Julio
within the fast-growing tequila category in US Spirits, which benefitted from
its broad occasion appeal.
Canadian whisky
7% of Diageo's reported net sales and grew 10%
Growth of Crown Royal in North America was primarily driven by continued
momentum in the core variant. Supply constraints of aged liquid led to slower
growth of flavour variants and a decline in Crown Royal's share of the
Canadian whisky category.
Rum
5% of Diageo's reported net sales and grew 2%
Growth in Europe and Latin America and Caribbean was partially offset by a
decline in North America. The decline of Captain Morgan in North America was
partially offset by double-digit growth in Europe. Zacapa performed strongly,
with double-digit growth in Europe, Latin American and Caribbean and North
America.
Liqueurs
6% of Diageo's reported net sales and grew 11%
Growth was driven by Baileys Original in Europe and Latin America and
Caribbean, partially offset by a decline in North America due to lapping
strong growth in the first half of fiscal 2021.
Gin
5% of Diageo's reported net sales and grew 21%
Growth across all regions with strong double-digit growth in Europe, Africa
and Latin America and Caribbean.
- Strong growth in Europe was largely driven by Tanqueray and Gordon's in
Southern Europe.
- Strong growth in Africa was mainly driven by Gilbey's in Kenya.
- Strong growth in Latin America and Caribbean was driven by double-digit
growth of Tanqueray and Gordon's.
IMFL whisky
4% of Diageo's reported net sales and grew 3%, following a decline in the
first half of fiscal 2021
Growth was primarily driven by McDowell's.
US whiskey
2% of Diageo's reported net sales and declined 8%
The decline was primarily driven by Bulleit, which was affected by glass
supply constraints that impacted production volumes.
Beer
15% of Diageo's reported net sales and grew 22%
- Guinness grew 27%, with strong growth in Europe and Africa, driven by
the recovery of the on-trade.
- Strong double-digit growth in Malta Guinness, which benefitted from the
continued recovery of the on-trade and price increases in some markets.
- Beer in Africa grew 24%, following a decline in the first half of fiscal
2021, driven by Malta Guinness and Guinness as the on-trade continued to
recover and restrictions eased.
- Smirnoff flavoured malt beverages declined, with growth in Smirnoff Ice
more than offset by a decline in seltzers.
Ready to drink
4% of Diageo's reported net sales and grew 17%
Growth across all regions except Asia Pacific. Performance in Asia Pacific was
impacted by the slight decline of Bundaberg in Australia due to lapping a
strong performance in the first half of fiscal 2021.
Global giants, local stars and reserve((i)):
Organic Organic Reported
volume
movement((ii)) net sales net sales
%
movement movement
% %
Global giants
Johnnie Walker 25 31 28
Smirnoff 12 8 6
Baileys 13 10 6
Captain Morgan 2 (2) (5)
Tanqueray 24 25 21
Guinness 16 27 20
Local stars
Crown Royal 4 11 7
Yenì Raki 10 11 (14)
Buchanan's 39 42 37
JƐB 18 20 15
Windsor (7) (5) (11)
Old Parr 53 64 59
Bundaberg - (1) (3)
Black & White (1) 13 9
Ypióca (24) (11) (15)
McDowell's 2 4 (1)
Shui Jing Fang((iii)) 17 26 27
Reserve
Scotch malts 11 12 9
Cîroc vodka 15 22 18
Ketel One((iv)) 15 24 19
Don Julio 25 38 34
Bulleit (14) (16) (20)
Casamigos 84 88 81
(i) Spirits brands excluding ready to drink and non-alcoholic
variants.
(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
39% of Diageo's reported net sales and grew by 20%, following a decline in the
first half of fiscal 2021
All brands grew net sales, except for Captain Morgan, which declined in North
America. Johnnie Walker grew across all regions. Double-digit growth in
Guinness was driven by strong performance in Europe and Africa.
Local stars
20% of Diageo's reported net sales and grew 17%
Growth was largely driven by double-digit growth in Buchanan's in Latin
America and Caribbean and North America, Chinese white spirits in Greater
China, Crown Royal in North America and Old Parr in Latin America and
Caribbean.
Reserve
27% of Diageo's reported net sales and grew 31%
Growth was largely driven by the strong performance of Casamigos and Don Julio
in US Spirits, Johnnie Walker Reserve variants in all regions and Chinese
white spirits in Greater China. Bulleit net sales declined 16% and the brand
lost share of the US whiskey category due to glass supply constraints which
impacted production volumes.
Additional financial information
Six months ended 31 December 2021
Summary income statement
.
31 December 2020 Exchange Acquisitions and disposals Organic movement((i)) Fair value remeasurement Reclassification((ii)) 31 December 2021
(a) (b) (d)
£ million £ million £ million £ million £ million £ million £ million
Sales 10,436 (491) 15 1,793 - - 11,753
Excise duties (3,562) 220 2 (449) - (7) (3,796)
Net sales 6,874 (271) 17 1,344 - (7) 7,957
Cost of sales (2,661) 112 (13) (400) - 7 (2,955)
Gross profit 4,213 (159) 4 944 - - 5,002
Marketing (1,085) 37 (16) (288) 1 - (1,351)
Other operating items (872) 35 2 (106) 33 - (908)
Operating profit before exceptional items 2,256 (87) (10) 550 34 - 2,743
Exceptional operating items (c) (17) -
Operating profit 2,239 2,743
Non-operating items (c) 5 (31)
Net finance charges (200) (180)
Share of after tax results of associates and joint ventures 154 190
Profit before taxation 2,198 2,722
Taxation (e) (537) (634)
Profit for the period 1,661 2,088
(i) For the definition of organic movement see Explanatory notes.
(ii) For the six months ended 30 December 2021, £7 million has been
reclassified from cost of good sold to excise duties.
(a) Exchange
The impact of movements in exchange rates on reported figures for net sales
and operating profit is principally in respect of the translation exchange
impact of the strengthening of sterling against the US dollar, the euro, the
Indian rupee and the Turkish lira.
The effect of movements in exchange rates and other movements on profit before
exceptional items and taxation for the six months ended 31 December 2021 is
set out in the table below.
Gains/(losses)
£ million
Translation impact (101)
Transaction impact 14
Operating profit before exceptional items (87)
Net finance charges - translation impact 7
Net finance charges - transaction impact (2)
Net finance charges 5
Associates - translation impact (9)
Profit before exceptional items and taxation (91)
Six months ended 31 December 2021 Six months ended 31 December 2020
Exchange rates
Translation £1 = $1.36 $1.31
Transaction £1 = $1.30 $1.34
Translation £1 = €1.17 €1.11
Transaction £1 = €1.15 €1.11
(b) Acquisitions and disposals
The acquisitions and disposals movement was primarily attributable to prior
years' acquisitions in the six months ended 31 December 2021 partially offset
by the impact of prior years' disposal.
See Movements in net borrowings and equity; Notes, 11. Acquisition of
businesses; and Explanatory notes, Organic growth excluding Travel Retail and
Guinness for further details.
(c) Exceptional items
Exceptional operating items in the six months ended 31 December 2021 were
£nil before tax (2020 - £17 million loss).
In the six months ended 31 December 2020, an additional provision of TRY 152
million (£15 million) was recorded as an exceptional item in respect of the
ongoing litigation in Turkey.
On 20 November 2020, the High Court of Justice of England and Wales issued a
ruling that requires schemes to equalise pension benefits for men and women
for the calculation of their guaranteed minimum pension liability (GMP) on
historic transfers out, which resulted in an additional liability of
£5 million. The corresponding expense was recognised as an exceptional
operating item in the six months ended 31 December 2020, consistent with the
charge in relation to the initial GMP ruling in the year ended 30 June 2019.
In the six months ended 31 December 2020, an inventory provision of £3
million was released in respect of inventories that had earlier been expected
to be returned and destroyed as a consequence of the Covid-19 pandemic,
resulting in an exceptional gain.
Non-operating items in the six months ended 31 December 2021 were £31 million
loss (2020 - £5 million gain).
On 21 January 2022, Diageo agreed the sale of its Ethiopian subsidiary, Meta
Abo Brewery Share Company (Meta). At 31 December 2021, the assets and
liabilities of Meta were classified as held for sale and were measured at
their fair value less costs to dispose. In the six months ended 31 December
2021, a loss of ETB 2,254 million (£33 million) was recognised as a
non-operating item attributable to the prospective sale of Meta. At the
completion of the transaction, the cumulative translation losses will be
recycled to the income statement. At 31 December 2021, cumulative translation
losses recognised in exchange reserves were £65 million.
In the six months ended 31 December 2021, ZAR 43 million (£2 million) (2020 -
£5 million) of deferred consideration was paid to Diageo in respect of the
sale of United National Breweries, resulting in a non-operating gain, which
has been classified as exceptional item consistent with the original charge.
Exceptional tax charges in the six months ended 31 December 2021 were £nil
(2020 - £42 million, attributable to a change in the applicable corporate
tax rate in the Netherlands).
See Explanatory notes, (c) Exceptional items for the definition of exceptional
items.
(d) Fair value remeasurement
The adjustment to cost of sales reflects the elimination of fair value changes
for biological assets in respect of growing agave plants of £3 million gain
for the six months ended 31 December 2021 and £3 million gain for the six
months ended 31 December 2020. The adjustments to marketing and other
operating expenses are the elimination of fair value changes to contingent
consideration liabilities and earn out arrangements in respect of prior year
acquisitions of £23 million gain for the six months ended 31 December 2021
and £11 million loss for the six months ended 31 December 2020.
(e) Taxation
The reported tax rate for the six months ended 31 December 2021 was 23.3%
compared with 24.4% for the six months ended 31 December 2020.
For the six months ended 31 December 2021, income tax expense has been
recognised based on management's best estimate of the weighted average annual
income tax rate expected for the full financial year applied to the pre-tax
income of the interim period in line with the relevant accounting standard.
On 15 December 2020, legislation was substantively enacted in the Netherlands
to maintain the headline corporate tax rate at 25%, reversing a previously
enacted reduction in the corporate tax rate to 21.7% from 2021. As a result of
the change, an exceptional tax charge of £42 million was recognised for the
six months ended 31 December 2020 in relation to the remeasurement of deferred
tax liabilities.
The tax rate before exceptional items for the six months ended 31 December
2021 was 23.0% compared with 22.4% for the six months ended 31 December 2020.
We expect the tax rate before exceptional items for the year ending 30 June
2022 to be in the range of 22% - 24%.
(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 2021 dividend cover was 1.6 times.
It is expected that dividend increases will be maintained at roughly a
mid-single digit rate as we look to build dividend cover and operate
comfortably within the policy range.
An interim dividend of 29.36 pence per share will be paid to holders of
ordinary shares and ADRs on the register as of 25 February 2022. The
ex-dividend date is 24 February 2022. This represents an increase of 5% on
last year's interim dividend. The interim dividend will be paid to ordinary
shareholders on 7 April 2022. Payment to ADR holders will be made on 12 April
2022. A dividend reinvestment plan is available to holders of ordinary shares
in respect of the interim dividend and the plan notice date is 11 March 2022.
(g) Return of capital
On 25 July 2019, the Board approved a return of capital programme to return up
to £4.5 billion to shareholders over the three-year period from 1 July 2019
to 30 June 2022. Under the first phase of the programme, which ended on 31
January 2020, the company returned £1.25 billion to shareholders via share
buybacks. Due to the impact of Covid-19, the original completion date for the
programme has been extended by two years to 30 June 2024. The second phase of
the programme of up to £1 billion to shareholders via share buybacks was
initiated on 12 May 2021 and is expected to be completed no later than 4 March
2022.
Diageo will accelerate the return of capital programme to return up to £4.5
billion to shareholders, which we now expect to complete during the year
ending 30 June 2023. The Board expects to consider the next phase of the
programme in due course.
In the six months ended 31 December 2021, the company purchased 14.6 million
ordinary shares at a cost of £538 million (including £3 million of
transaction costs) (2020 - £nil). All shares purchased under the share
buyback programme were cancelled. A financial liability of £184 million was
established at 31 December 2021 representing the shares that were expected to
be purchased by 27 January 2022.
Movements in net borrowings and equity
Movements in net borrowings
2021 2020
£ million £ million
Net borrowings at 30 June (12,109) (13,246)
Free cash flow (a) 1,575 1,753
Acquisitions (b) (134) (364)
Sale of businesses and brands 2 5
Share buyback programme (538) -
Net sale of own shares for share schemes (c) 42 9
Purchase of treasury shares in respect of subsidiaries (13) -
Dividends paid to non-controlling interests (51) (53)
Net movements in bonds (d) (769) (216)
Purchase of shares of non-controlling interests (e) - (34)
Net movements in other borrowings (f) 38 (345)
Equity dividends paid (1,040) (992)
Net decrease in cash and cash equivalents (888) (237)
Net decrease in bonds and other borrowings 729 561
Exchange differences (g) (31) 420
Other non-cash items (h) (32) (159)
Net borrowings at 31 December (12,331) (12,661)
(a) See Explanatory Notes, Free cash flow for the analysis of free cash flow.
(b) In the six months ended 31 December 2021, Diageo paid £110 million in
relation to past acquisitions.
In the six months ended 31 December 2020, Diageo completed the acquisition of
Aviation Gin and Davos Brands for a total consideration of $337 million (£263
million) in cash and contingent consideration of up to $275 million (£214
million) over a ten-year period linked to performance targets.
In both periods acquisitions also include additional investments as part of
the Distill Ventures programme as well as deferred and contingent
consideration paid in respect of previous acquisitions.
(c) Net sale of own shares comprised receipts from employees on the exercise
of share options of £56 million (2020 - £10 million) less purchase of
treasury shares for the future settlement of obligations under the employee
share option schemes of £14 million (2020 - £1 million).
(d) In the six months ended 31 December 2021, the group repaid bonds of €900
million (£769 million).
In the six months ended 31 December 2020, the group issued bonds of
€700 million (£636 million - net of discount and fee) and £395 million
(including £5 million discount and fee) and repaid bonds of $696 million
(£551 million) and €775 million (£696 million).
(e) In the six months ended 31 December 2020 , East African Breweries Limited,
a subsidiary of Diageo, completed the purchase of 30% of the share capital of
Serengeti Breweries Limited for $55 million (£42 million).
(f) In the six months ended 31 December 2021, the net movements in other
borrowings principally arose from cash movement of foreign exchange swaps and
forwards partially offset by the repayment of lease liabilities.
In the six months ended 31 December 2020, the net movements in other
borrowings principally arose from cash movement of foreign exchange swaps and
forwards.
(g) In the six months ended 31 December 2021, the exchange differences arising
on net borrowings of £31 million is primarily driven by adverse exchange
movements on US dollar denominated borrowings, partially offset by beneficial
movement on euro denominated borrowings, cash and cash equivalents, foreign
exchange swaps and forwards.
In the six months ended 31 December 2020, the exchange differences arising on
net borrowings of £420 million was primarily driven by favourable exchange
movements on US dollar and euro denominated borrowings, moderately offset by
an unfavourable movement on cash and cash equivalents, foreign exchange swaps
and forwards.
(h) In the six months ended 31 December 2021, other non-cash items are
principally in respect of additional leases entered into during the period.
In the six months ended 31 December 2020, other non-cash items are principally
in respect of fair value changes of cross currency interest rate swaps.
Movements in equity
2021 2020
£ million £ million
Equity at 30 June 8,431 8,440
Profit for the period 2,088 1,661
Exchange adjustments (a) 29 (590)
Remeasurement of post employment plans net of taxation 453 (115)
Purchase of shares of non-controlling interests (b) - (42)
Dividends to non-controlling interests (26) (24)
Equity dividends paid (1,040) (992)
Share buyback programme (c) (631) -
Other reserve movements 27 40
Equity at 31 December 9,331 8,378
(a) Exchange movements in the six months ended 31 December 2021 primarily
arose from exchange gains driven by the US dollar and the Indian rupee
partially offset by the Turkish lira. Exchange movements in the six months
ended 31 December 2020 primary arose from exchange losses driven by the US
dollar, Indian rupee and the Turkish lira.
(b) In the six months ended 31 December 2020, East African Breweries Limited
completed the purchase of 30% of the share capital of Serengeti Breweries
Limited for $55 million (£42 million).
(c) See Summary income statement, (g) Return of capital for details of
Diageo's return of capital programmes.
Post employment plans
The net surplus of the group's post employment benefit plans has increased by
£614 million from £444 million at 30 June 2021 to £1,058 million at 31
December 2021. The increase in net surplus is predominantly attributable to
the favourable change in the market value of assets held by the post
employment schemes in the United Kingdom and Ireland.
The operating profit charge before exceptional items has decreased by £5
million from £54 million for the six months ended 31 December 2020 to £49
million for the six months ended 31 December 2021. The operating profit charge
for the six months ended 31 December 2021 includes curtailment gains of £5
million in respect of redundancies in Diageo Pension Scheme and Guinness
Ireland Group Pension Scheme.
Total cash contributions by the group to all post employment plans in the year
ending 30 June 2022 are estimated to be approximately £120 million.
Diageo condensed consolidated income statement
Six months ended 31 December 2021 Six months ended 31 December 2020
Notes £ million £ million
Sales 2 11,753 10,436
Excise duties (3,796) (3,562)
Net sales 2 7,957 6,874
Cost of sales (2,955) (2,661)
Gross profit 5,002 4,213
Marketing (1,351) (1,085)
Other operating items (908) (889)
Operating profit 2 2,743 2,239
Non-operating items 3 (31) 5
Finance income 4 130 127
Finance charges 4 (310) (327)
Share of after tax results of associates and joint ventures 190 154
Profit before taxation 2,722 2,198
Taxation 5 (634) (537)
Profit for the period 2,088 1,661
Attributable to:
Equity shareholders of the parent company 1,965 1,580
Non-controlling interests 123 81
2,088 1,661
Weighted average number of shares million million
Shares in issue excluding own shares 2,331 2,336
Dilutive potential ordinary shares 8 7
2,339 2,343
pence Pence
Basic earnings per share 84.3 67.6
Diluted earnings per share 84.0 67.4
Diageo condensed consolidated statement of comprehensive income
Six months ended 31 December 2021 Six months ended 31 December 2020
£ million £ million
Other comprehensive income
Items that will not be recycled subsequently to the income statement
Net remeasurement of post employment plans
Group 585 (128)
Associates and joint ventures 4 (1)
Tax on post employment plans (136) 14
Changes in the fair value of equity investments at fair value through other 7 -
comprehensive income
460 (115)
Items that may be recycled subsequently to the income statement
Exchange differences on translation of foreign operations
Group 74 (887)
Associates and joint ventures (45) (78)
Non-controlling interests 46 (138)
Net investment hedges (46) 513
Tax on exchange differences (5) (3)
Effective portion of changes in fair value of cash flow hedges
Hedge of foreign currency debt of the group 66 (280)
Transaction exposure hedging of the group (87) 138
Commodity price risk hedging of the group 12 14
Hedges by associates and joint ventures (10) 13
Recycled to income statement - hedge of foreign currency debt of the group (53) 150
Recycled to income statement - transaction exposure hedging of the group 26 (18)
Recycled to income statement - commodity price risk hedging of the group (18) 5
Tax on effective portion of changes in fair value of cash flow hedges 12 (4)
Hyperinflation adjustment (3) (16)
Tax on hyperinflation adjustment 1 5
(30) (586)
Other comprehensive income/(loss), net of tax, for the period 430 (701)
Profit for the period 2,088 1,661
Total comprehensive income for the period 2,518 960
Attributable to:
Equity shareholders of the parent company 2,349 1,017
Non-controlling interests 169 (57)
Total comprehensive income for the period 2,518 960
Diageo condensed consolidated balance sheet
31 December 2021 30 June 2021 31 December 2020
Notes £ million £ million £ million £ million £ million £ million
Non-current assets
Intangible assets 10,921 10,764 10,877
Property, plant and equipment 5,091 4,849 4,757
Biological assets 75 66 63
Investments in associates and joint ventures 3,473 3,308 3,578
Other investments 50 40 36
Other receivables 28 36 41
Other financial assets 319 327 410
Deferred tax assets 83 100 114
Post employment benefit assets 1,544 1,018 1,083
21,584 20,508 20,959
Current assets
Inventories 6 6,235 6,045 5,750
Trade and other receivables 3,328 2,385 3,075
Assets held for sale 16 - -
Corporate tax receivables 5 151 145 173
Other financial assets 66 121 84
Cash and cash equivalents 7 1,780 2,749 2,763
11,576 11,445 11,845
Total assets 33,160 31,953 32,804
Current liabilities
Borrowings and bank overdrafts 7 (1,184) (1,862) (1,214)
Other financial liabilities (388) (257) (332)
Share buyback liability (184) (91) -
Trade and other payables (5,327) (4,648) (4,624)
Liabilities held for sale (30) - -
Corporate tax payables 5 (380) (146) (364)
Provisions (111) (138) (176)
(7,604) (7,142) (6,710)
Non-current liabilities
Borrowings 7 (12,693) (12,865) (14,063)
Other financial liabilities (378) (384) (376)
Other payables (278) (338) (267)
Provisions (278) (274) (295)
Deferred tax liabilities (2,112) (1,945) (1,900)
Post employment benefit liabilities (486) (574) (815)
(16,225) (16,380) (17,716)
Total liabilities (23,829) (23,522) (24,426)
Net assets 9,331 8,431 8,378
Equity
Share capital 737 741 742
Share premium 1,351 1,351 1,351
Other reserves 1,551 1,621 1,835
Retained earnings 4,019 3,184 2,890
Equity attributable to equity shareholders of the parent company 7,658 6,897 6,818
Non-controlling interests 1,673 1,534 1,560
Total equity 9,331 8,431 8,378
Diageo condensed consolidated statement of changes in equity
Retained earnings/(deficit)
Share Share Other reserves Own shares Other retained earnings Total Equity attributable to parent company shareholders Non-controlling interests Total equity
capital premium
£ million £ million £ million £ million £ million £ million £ million £ million £ million
At 30 June 2020 742 1,351 2,272 (1,936) 4,343 2,407 6,772 1,668 8,440
Profit for the period - - - - 1,580 1,580 1,580 81 1,661
Other comprehensive loss - - (437) - (126) (126) (563) (138) (701)
Total comprehensive (loss)/income - - (437) - 1,454 1,454 1,017 (57) 960
Employee share schemes - - - 41 (20) 21 21 - 21
Share-based incentive plans - - - - 17 17 17 - 17
Share-based incentive plans in respect of associates - - - - (1) (1) (1) - (1)
Purchase of non-controlling interests - - - - (15) (15) (15) (27) (42)
Change in fair value of put option - - - - (1) (1) (1) - (1)
Dividends paid - - - - (992) (992) (992) (24) (1,016)
At 31 December 2020 742 1,351 1,835 (1,895) 4,785 2,890 6,818 1,560 8,378
At 30 June 2021 741 1,351 1,621 (1,877) 5,061 3,184 6,897 1,534 8,431
Profit for the period - - - - 1,965 1,965 1,965 123 2,088
Other comprehensive (loss)/income - - (74) - 458 458 384 46 430
Total comprehensive (loss)/income - - (74) - 2,423 2,423 2,349 169 2,518
Employee share schemes - - - 30 36 66 66 - 66
Share-based incentive plans - - - - 30 30 30 - 30
Share-based incentive plans in respect of associates - - - - 2 2 2 - 2
Purchase of treasury shares in respect of subsidiaries - - - - (8) (8) (8) (5) (13)
Associates' transactions with non-controlling interests - - - - 1 1 1 - 1
Unclaimed dividends - - - - 3 3 3 1 4
Change in fair value of put option - - - - (11) (11) (11) - (11)
Share buyback programme (4) - 4 - (631) (631) (631) - (631)
Dividends paid - - - - (1,040) (1,040) (1,040) (26) (1,066)
At 31 December 2021 737 1,351 1,551 (1,847) 5,866 4,019 7,658 1,673 9,331
Diageo condensed consolidated statement of cash flows
Six months ended 31 December 2021 Six months ended 31 December 2020
£ million £ million £ million £ million
Cash flows from operating activities
Profit for the period 2,088 1,661
Taxation 634 537
Share of after tax results of associates and joint ventures (190) (154)
Net finance charges 180 200
Non-operating items 31 (5)
Operating profit 2,743 2,239
Increase in inventories (187) (112)
Increase in trade and other receivables (976) (1,078)
Increase in trade and other payables and provisions 653 1,161
Net increase in working capital (510) (29)
Depreciation, amortisation and impairment 224 219
Dividends received 1 82
Post employment payments less amounts included in operating profit (23) (14)
Other items 34 (1)
236 286
Cash generated from operations 2,469 2,496
Interest received 41 84
Interest paid (185) (266)
Taxation paid (378) (316)
(522) (498)
Net cash inflow from operating activities 1,947 1,998
Cash flows from investing activities
Disposal of property, plant and equipment and computer software 7 8
Purchase of property, plant and equipment and computer software (382) (250)
Movements in loans and other investments 3 (3)
Sale of businesses and brands 2 5
Acquisition of businesses (134) (364)
Net cash outflow from investing activities (504) (604)
Cash flows from financing activities
Share buyback programme (538) -
Net sale of own shares for share schemes 42 9
Purchase of treasury shares in respect of subsidiaries (13) -
Dividends paid to non-controlling interests (51) (53)
Proceeds from bonds - 1,031
Repayment of bonds (769) (1,247)
Purchase of shares of non-controlling interests - (34)
Cash inflow from other borrowings 136 -
Cash outflow from other borrowings (98) (345)
Equity dividends paid (1,040) (992)
Net cash outflow from financing activities (2,331) (1,631)
Net decrease in net cash and cash equivalents (888) (237)
Exchange differences 14 (236)
Net cash and cash equivalents at beginning of the period 2,637 3,153
Net cash and cash equivalents at end of the period 1,763 2,680
Net cash and cash equivalents consist of:
Cash and cash equivalents 1,780 2,763
Bank overdrafts (17) (83)
1,763 2,680
Notes
1. Basis of preparation
On 31 December 2020, International Financial Reporting Standards (IFRSs) as
adopted by the European Union (EU) at that date were brought into UK law and
became UK-adopted International Accounting Standards, with future changes
being subject to endorsement by the UK Endorsement Board. Diageo plc
transitioned to UK-adopted International Accounting Standards in its
consolidated financial statements on 1 July 2021. This change constitutes a
change in accounting framework. However, there is no impact on recognition,
measurement or disclosure in the period reported as a result of the change in
framework.
These unaudited condensed consolidated financial statements have been prepared
in accordance with UK adopted IAS 34 'Interim Financial Reporting', IAS 34
'Interim Financial Reporting' as issued by the International Accounting
Standards Board ('IASB'), IAS 34 'Interim Financial Reporting' as adopted by
the EU and The Disclosure Guidance and Transparency Rules sourcebook of the
UK's Financial Conduct Authority. These financial statements should be read in
conjunction with the company's published consolidated financial statements for
the year ended 30 June 2021, which were prepared in accordance with
international accounting standards in conformity with the requirements of the
Companies Act 2006 and International Financial Reporting Standards adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the EU, and
International Financial Reporting Standards as issued by the IASB, including
interpretations issued by the IFRS Interpretations Committee.
At 31 December 2021, there were no unendorsed standards effective for the six
months ended 31 December 2021 affecting these financial statements, and there
was no difference between IFRSs adopted by the UK, IFRSs as adopted by the EU
and IFRSs issued by the IASB in terms of their application to the group.
In preparing these condensed consolidated 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 2021, with the exception of changes in estimates disclosed in
note 12 - Contingent liabilities and legal proceedings.
The financial statements for Diageo plc for the year ended 30 June 2022 will
be prepared in accordance with IFRS as adopted by the UK, IFRSs as adopted by
the EU and IFRSs, as issued by the IASB, including interpretations issued by
the IFRS Interpretations Committee.
Management 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. In the base case scenario, net sales momentum is
expected to continue, however, near-term volatility is also expected to
remain. The potential financial impact of a slower Covid-19 pandemic recovery
has been modelled in the plausible downside scenarios. Even with these
negative sensitivities for each region taken into account, the group's cash
position is still considered to remain strong, as the group's liquidity has
been protected by launching and pricing €700 million of fixed rate Euro and
£400 million of fixed rate sterling denominated bonds under Diageo's
European Debt Issuance Programme in the year ended 30 June 2021. Mitigating
actions, should they be required, are all within management's control and
could include reductions in discretionary spending as acquisitions and capital
expenditure, as well as a temporary suspension of the share buyback programme
and dividend payments in the next 12 months or drawdowns on committed
facilities. Having considered the outcome of these assessments, the Directors
are comfortable that the company is a going concern for at least 12 months
from the date of signing the company's condensed consolidated financial
statements.
Weighted average exchange rates used in the translation of income statements
were US dollar - £1 = $1.36 (2020 - £1 = $1.31) and euro - £1 = €1.17
(2020 - £1 = €1.11). Exchange rates used to translate assets and
liabilities at the balance sheet date were US dollar - £1 = $1.35 (31
December 2020 - £1 = $1.36) and euro - £1 = €1.19 (31 December 2020 - £1
= €1.11). The group uses foreign exchange transaction hedges to mitigate the
effect of exchange rate movements.
New accounting standards and interpretations
The following amendment to the accounting standards, issued by the IASB and
endorsed by the UK and EU, have been adopted by the group from 1 July 2021
with no impact on the group's consolidated results, financial position or
disclosures:
- Amendments to IFRS 16 - Covid-19 - related rent concessions beyond
30 June 2021
The following amendment issued by the IASB and endorsed by the UK and EU, has
been adopted by the group:
- Amendments to IFRS 9, IAS 39 and IFRS 7 - Interest rate benchmark
reform (phase 2). The amendment to IFRS 9 provides relief from applying
specific hedge accounting and financial instrument derecognition requirements
directly affected by interbank offered rate (IBOR) reform. By applying the
practical expedient, Diageo will not be required to discontinue its hedging
relationships as a result of changes in reference rates due to IBOR reform.
The amendment to IFRS 7 will require additional disclosure explaining the
nature and extent of risk related to the reform and the progress of the
transition.
The following standard issued by the IASB has been endorsed by the EU, but has
not yet been endorsed by the UK, and has not been adopted by the group:
- IFRS 17 - Insurance contracts (effective in the year ending 30 June
2024) is ultimately intended to replace IFRS 4. Based on a preliminary
assessment the group believes that the adoption of IFRS 17 will not have a
significant impact on its consolidated results or financial position.
There are a number of other amendments and clarifications to IFRSs, 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 2021 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 Supply Chain and Procurement (SC&P) segment, which
manufactures products for other group companies and includes production sites
in the United Kingdom, Ireland, Italy, Guatemala and Mexico, as well as
comprises the global procurement function.
The group's 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 SC&P. They also include rents receivable
and payable in respect of properties not used by the group in the manufacture,
sale or distribution of premium drinks.
Diageo uses shared services operations to deliver transaction processing
activities for markets and operational entities. These centres are located in
India, Hungary, Colombia and the Philippines. These captive business service
centres 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.
For planning and management reporting purposes, Diageo uses budgeted exchange
rates that are set at the prior year's weighted average exchange rate. In
order to ensure a consistent basis on which performance is measured through
the year, prior period results are also restated to the budgeted exchange
rate. Segmental information for net sales and operating profit before
exceptional items are reported on a consistent basis with 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 the result of
acquisitions and disposals completed in the current and prior year separately
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.
(a) Segmental information for the consolidated income statement
North America Europe Asia Africa Latin America and Caribbean SC&P Eliminate Total Corporate Total
Pacific inter- operating and other
segment segments
sales
Six months ended 31 December 2021 £ million £ million £ million £ million £ million £ million £ million £ million £ million £ million
Sales 3,257 3,178 2,999 1,244 1,052 972 (972) 11,730 23 11,753
Net sales
At budgeted exchange rates((i)) 2,959 1,782 1,544 888 822 1,027 (979) 8,043 23 8,066
Acquisitions and disposals 18 3 - - - - - 21 - 21
SC&P allocation 6 29 5 2 6 (48) - - - -
Retranslation to actual exchange rates (19) (62) (18) (22) (9) (7) 7 (130) - (130)
Net sales 2,964 1,752 1,531 868 819 972 (972) 7,934 23 7,957
Operating profit/(loss)
At budgeted exchange rates((i)) 1,288 647 454 192 333 (8) - 2,906 (132) 2,774
Acquisitions and disposals (16) (1) - - - - - (17) - (17)
SC&P allocation 10 (23) (3) (1) 9 8 - - - -
Fair value remeasurement of contingent considerations, equity option and earn 5 21 - - (3) - - 23 - 23
out arrangements
Fair value remeasurement of biological assets - - - - 3 - - 3 - 3
Retranslation to actual exchange rates 8 (31) - (15) (9) - - (47) 7 (40)
Operating profit/(loss) 1,295 613 451 176 333 - - 2,868 (125) 2,743
Non-operating items (31)
Net finance charges (180)
Share of after tax results of associates and joint ventures 190
Profit before taxation 2,722
North America Europe Asia Africa Latin America and Caribbean SC&P Eliminate Total Corporate Total
Pacific inter- operating and other
segment segments
sales
Six months ended 31 December 2020 £ million £ million £ million £ million £ million £ million £ million £ million £ million £ million
Sales 3,022 2,727 2,837 1,064 775 785 (785) 10,425 11 10,436
Net sales
At budgeted exchange rates((i)) 2,790 1,442 1,418 790 641 824 (786) 7,119 11 7,130
Acquisitions and disposals 7 - - 5 - - - 12 - 12
SC&P allocation 5 21 4 2 6 (38) - - - -
Retranslation to actual exchange rates (101) (20) (27) (52) (68) (1) 1 (268) - (268)
Net sales 2,701 1,443 1,395 745 579 785 (785) 6,863 11 6,874
Operating profit/(loss)
At budgeted exchange rates((i)) 1,325 461 391 124 246 (23) - 2,524 (98) 2,426
Acquisitions and disposals (9) - - - - - - (9) - (9)
SC&P allocation (13) - - - (10) 23 - - - -
Fair value remeasurement of contingent considerations (4) (7) - - - - - (11) - (11)
Fair value remeasurement of biological assets - - - - 3 - - 3 - 3
Retranslation to actual exchange rates (73) (8) (5) (29) (42) - - (157) 4 (153)
Operating profit/(loss) before exceptional items 1,226 446 386 95 197 - - 2,350 (94) 2,256
Exceptional items - (17) - - - - - (17) - (17)
Operating profit/(loss) 1,226 429 386 95 197 - - 2,333 (94) 2,239
Non-operating items 5
Net finance charges (200)
Share of after tax results of associates and joint ventures 154
Profit before taxation 2,198
(i) These items represent the IFRS 8 performance measures for the
geographical and SC&P segments.
(1) The net sales figures for SC&P reported to the Executive
Committee primarily comprise inter-segment sales and these are eliminated in a
separate column in the above segmental analysis. Apart from sales by the
SC&P segment to the other operating segments, inter-segment sales are not
material.
(2) The group's net finance charges are managed centrally and are not
attributable to individual operating segments.
(3) Approximately 44% of calendar year net sales occurred in the last
four months of 2021.
(b) Category and geographical analysis
Category analysis Geographical analysis
Six months ended 31 December 2021 Spirits Beer Ready to drink Other Total Great United India Rest of Total
£ million £ million £ million £ million £ million Britain States £ million world £ million
£ million £ million £ million
Sales((i)) 9,680 1,520 418 135 11,753 1,204 3,072 1,704 5,773 11,753
Six months ended 31 December 2020
Sales((i)) 8,648 1,310 363 115 10,436 1,044 2,817 1,650 4,925 10,436
(i) The geographical analysis of sales is based on the location of
third-party sales.
3. Exceptional items
Exceptional items are those that in management's judgement need to be
disclosed separately. See Explanatory notes, (c) Exceptional items for the
definition of exceptional items and the criteria used to determine whether an
exceptional item is accounted for as operating or non-operating.
Six months ended 31 December 2021 Six months ended 31 December 2020
£ million £ million
Exceptional operating items
Ongoing litigation in Turkey - (15)
Guaranteed minimum pension equalisation - (5)
Reversal of provision for obsolete inventories - 3
- (17)
Non-operating items
Sale of businesses and brands
Loss on the prospective sale of Meta (33) -
United National Breweries 2 5
(31) 5
Exceptional items before taxation (31) (12)
Items included in taxation
Exceptional taxation - (42)
- (42)
Total exceptional items (31) (54)
Attributable to:
Equity shareholders of the parent company (31) (54)
Non-controlling interests - -
Total exceptional items (31) (54)
Exceptional operating 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
Six months ended 31 December 2021 Six months ended 31 December 2020
£ million £ million
Interest income 61 58
Fair value gain on financial instruments 58 56
Total interest income 119 114
Interest charge on bank loans, bonds and overdrafts (181) (203)
Interest charge on leases (5) (7)
Fair value loss on financial instruments (59) (55)
Interest charge on other borrowings (36) (35)
Total interest charges (281) (300)
Net interest charges (162) (186)
Net finance income in respect of post employment plans in surplus 10 9
Hyperinflation adjustment in respect of Venezuela (a) 1 2
Change in financial liability (Level 3) - 2
Total other finance income 11 13
Net finance charge in respect of post employment plans in deficit (5) (7)
Foreign exchange revaluation of monetary items in respect of Lebanon (a) (2) (8)
Unwinding of discounts (6) (8)
Interest charge in respect of direct and indirect tax (8) (2)
Change in financial liability (Level 3) (7) -
Other finance charges (1) (2)
Total other finance charges (29) (27)
Net other finance charges (18) (14)
(a) Hyperinflation adjustment
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/£ 593 for the six months ended 31
December 2021 (2020 - VES/£ 64). Movement in the price index for the six
months ended 31 December 2021 was 158% (2020 - 479%). 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 six months ended 31 December 2021 and 31 December 2020 and with
the amounts that would have resulted if the official DICOM exchange rate had
been applied:
Six months ended 31 December 2021 Six months ended 31 December 2020
At estimated exchange rate At DICOM exchange rate At estimated At DICOM
exchange rate((i)) exchange rate((i))
593 VES/£ 6 VES/£ 64 VES/£ 2 VES/£
£ million £ million £ million £ million
Net sales - 8 - 4
Operating profit - 2 - 11
Other finance income - hyperinflation adjustment 1 120 2 100
Net cash (outflow)/inflow from operating activities - (3) - 9
Net assets 37 3,501 39 1,656
(i) Prior year rates have been restated to reflect the Central Bank
of Venezuela's decision to cut six zeros from the bolivar currency from 1
October 2021.
Lebanon is considered as a hyperinflationary economy, hence for the group's
operations in Lebanon the hyperinflationary gains and foreign exchange losses
associated with monetary items are reported in finance charges. The impact of
hyperinflationary accounting was immaterial both in the current and
comparative period.
5. Taxation
For the six months ended 31 December 2021, the £634 million tax charge (2020
- £537 million) comprises a UK tax charge of £116 million (2020 - £89
million) and a foreign tax charge of £518 million (2020 - £448 million).
For the six months ended 31 December 2021, income tax expense has been
recognised based on management's best estimate of the weighted average annual
income tax rate expected for the full financial year applied to the pre-tax
income of the interim period in line with the relevant accounting standard.
The group has a number of ongoing tax audits worldwide for which provisions
are recognised in line with the relevant accounting standard taking into
account best estimates and management's judgements concerning the ultimate
outcome of the tax audit. For the six months ended 31 December 2021, the
ongoing audits that are provided for individually are not expected to result
in a material tax liability. The current tax asset of £151 million (30 June
2021 - £145 million) and tax liability of £380 million (30 June 2021 -
£146 million) includes £122 million (30 June 2021 - £129 million) of
provisions for tax uncertainties.
The tax rate before exceptional items for the six months ended 31 December
2021 was 23.0% compared with 22.4% for the six months ended 31 December 2020.
6. Inventories
31 December 2021 30 June 2021 31 December 2020
£ million £ million £ million
Raw materials and consumables 401 348 332
Work in progress 68 60 53
Maturing inventories 4,801 4,668 4,562
Finished goods and goods for resale 965 969 803
6,235 6,045 5,750
7. Net borrowings
31 December 2021 30 June 2021 31 December 2020
£ million £ million £ million
Borrowings due within one year and bank overdrafts (1,184) (1,862) (1,214)
Borrowings due after one year (12,693) (12,865) (14,063)
Fair value of foreign currency forwards and swaps 122 169 117
Fair value of interest rate hedging instruments 4 63 146
Lease liabilities (360) (363) (410)
(14,111) (14,858) (15,424)
Cash and cash equivalents 1,780 2,749 2,763
(12,331) (12,109) (12,661)
8. Reconciliation of movement in net borrowings
Six months ended 31 December 2021 Six months ended 31 December 2020
£ million £ million
Net decrease in cash and cash equivalents before exchange (888) (237)
Net decrease in bonds and other borrowings((i)) 729 561
Net (increase)/decrease in net borrowings from cash flows (159) 324
Exchange differences on net borrowings (31) 420
Other non-cash items((ii)) (32) (159)
Net borrowings at beginning of the period (12,109) (13,246)
Net borrowings at end of the period (12,331) (12,661)
(i) In the six months ended 31 December 2021, net decrease in bonds
and other borrowings excludes £2 million cash outflow in respect of
derivatives designated in forward point hedges (2020 - £nil).
(ii) In the six months ended 31 December 2021, other non-cash items
are principally in respect of additional leases entered into during the
period. In the six months ended 31 December 2020, other non-cash items are
principally in respect of fair value changes of cross currency interest rate
swaps.
In the six months ended 31 December 2021, the group repaid bonds of €900
million (£769 million). In the six months ended 31 December 2020, the group
issued bonds of €700 million (£636 million - net of discount and fee) and
£395 million (including £5 million discount and fee) and repaid bonds of
$696 million (£551 million) and €775 million (£696 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 Creation & Products Inc., the owner of
the Zacapa rum brand, to Diageo. The liability is fair valued and as at 31
December 2021 an amount of £169 million (30 June 2021 - £149 million) is
recognised as a liability with changes in the 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 31 December 2021, because it is unknown when or if ILG will
exercise the option, the liability is measured as if the exercise date is on
the last day of the current financial year considering forecast future
performance. The option is sensitive to reasonably possible changes in
assumptions. If the option were to be exercised as at 30 June 2023, the fair
value of the liability would increase by approximately £41 million.
Included in other financial liabilities, the contingent consideration on
acquisition of businesses represents the present value of payments up to
£361 million linked to certain performance targets which are expected to be
paid over the next 9 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 six months ended 31 December 2021.
The group's financial assets and liabilities measured at fair value are
categorised as follows:
31 December 2021 30 June 2021 31 December 2020
£ million £ million £ million
Derivative assets 381 443 489
Derivative liabilities (237) (129) (150)
Valuation techniques based on observable market input (Level 2) 144 314 339
Financial assets - other 167 138 122
Financial liabilities - other (483) (578) (481)
Valuation techniques based on unobservable market input (Level 3) (316) (440) (359)
In the six months ended 31 December 2021 and 31 December 2020, the increase in
financial assets - other of £29 million (2020 - £6 million) is principally
due to acquisitions.
The movements in level 3 instruments, measured on a recurring basis, are as
follows:
Zacapa Contingent consideration recognised on acquisition of businesses((i)) Zacapa Contingent consideration recognised on acquisition of businesses
financial
financial
liability
liability
Six months ended Six months ended Six months ended Six months ended
31 December 2021 31 December 2021 31 December 2020 31 December 2020
£ million £ million £ million £ million
At the beginning of the period (149) (429) (167) (249)
Net (losses)/gains included in the income statement (7) 18 2 (17)
Net (losses)/gains included in exchange in other comprehensive income (4) (9) 15 27
Net (losses)/gains included in retained earnings (12) - 1 -
Acquisitions - - - (181)
Settlement of liabilities 3 106 1 87
At the end of the period (169) (314) (148) (333)
(i) Included in the balance at 31 December 2021 is £nil in respect
of the acquisition of Casamigos as it was fully repaid on 17 September 2021
(2020 - £80 million), £163 million in respect of the acquisition of
Aviation Gin and Davos Brands (2020 - £172 million), and £51 million in
respect of the acquistion of Far West Spirits LLC, owner of the Lone River
Ranch Water brand (2020 - £nil).
The carrying amount of the group's financial assets and liabilities are
generally the same as their fair value apart from borrowings. At 31 December
2021, the fair value of gross borrowings (excluding lease liabilities and the
fair value of derivative instruments) was £21,428 million, and the carrying
value was £13,877 million (30 June 2021 - £15,895 million and
£14,727 million, respectively).
10. Dividends and other reserves
Six months ended Six months ended
31 December 2021 31 December 2020
£ million £ million
Amounts recognised as distributions to equity shareholders
Final dividend for the year ended 30 June 2021 of 44.59 pence per share (2020 1,040 992
- 42.47 pence)
An interim dividend of 29.36 pence per share (2020 - 27.96 pence) was approved
by the Board of Directors on 26 January 2022. As the approval was after the
balance sheet date, it has not been included as a liability.
Other reserves of £1,551 million at 31 December 2021 (2020 -
£1,835 million) include a capital redemption reserve of £3,206 million
(2020 - £3,201 million), a hedging reserve surplus of £61 million (2020 -
£111 million surplus) and an exchange reserve deficit of £1,716 million
(2020 - £1,477 million deficit). Currency basis spreads included in the
hedging reserve represent the cost of hedging arising as a result of
imperfections of foreign exchange markets. Exclusion of currency basis spreads
would result in a surplus £22 million (2020 - £30 million surplus) in the
hedging reserve.
11. Acquisition of businesses
Cash consideration paid in respect of the acquisition of businesses in the six
months ended 31 December 2021 were as follows:
Consideration
£ million
Cash consideration paid for Casamigos (83)
Cash consideration paid in respect of other prior year acquisitions (27)
Cash consideration paid for investments in associates (3)
Capital injection in associates (21)
Net cash outflow on acquisition of businesses (134)
The final earn-out payment of Casamigos amounting to $113 million
(£83 million) was made on 17 September 2021. There is no remaining balance
on contingent consideration liability.
Cash consideration paid in respect of other prior year acquisitions is
primarily attributable to Aviation Gin and Davos Brands.
12. Contingent liabilities and legal proceedings
(a) Guarantees and related matters
As of 31 December 2021, 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 (£349 million),
including 10,141,437 shares (6.98%) from UBHL. The SPA was signed on 9
November 2012 and was part of the transaction announced by Diageo in relation
to USL on that day (the Original USL Transaction). Following a series of
further transactions, as of 31 December 2021, 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. On 26 October 2020, the Supreme Court of India dismissed the
petition filed by UBHL.
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 (£53 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 (£96 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 (£30 million) under a guarantee of certain borrowings of
United Breweries Overseas Limited, a subsidiary of UBHL. $40 million
(£28 million) of the $75 million (£53 million) amount was paid on signing
of the February 2016 Agreement with the balance being payable in equal
instalments of $7 million (£5 million) a year over five years, subject to
and conditional on Dr Mallya's compliance with certain terms of the agreement.
While the five instalment payments of $7 million (£5 million) would have
become due on 25 February 2017, 25 February 2018, 25 February 2019, 25
February 2020 and 25 February 2021, 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. 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, 24 February 2020 and 22 February 2021,
Diageo and other group companies have demanded from Dr Mallya the repayment of
$40 million (£28 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 and 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 (£105 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
(£5 million) instalment payments that had then been 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 counterclaim 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 judgment 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.
As described in paragraph (d) below, this application was successful in
relation to the predominant part of Watson and CASL's liability to repay DHN
and, since that application, Watson and CASL's defence in relation to the
remaining part of this liability has also been struck out. Accordingly, Diageo
and DHN have sought asset disclosure and are considering further enforcement
steps against Watson and CASL, 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 proceeding to a trial,
which is currently scheduled to take place from 21 November 2022 through 5
December 2022.
On 26 July 2021 Dr Mallya was declared bankrupt by the English High Court
pursuant to a bankruptcy petition presented by a consortium of Indian banks
which are creditors of Dr Mallya. The UK Official Receiver was initially
appointed as Dr Mallya's Trustee in Bankruptcy but has now been replaced by an
insolvency practitioner, Teneo Restructuring Limited, as Trustee. Diageo and
the relevant members of its group have informed the Official Receiver of their
position as creditors in the bankruptcy and they will engage with Teneo
Restructuring Limited regarding their claims and the status of the current
proceedings. Dr Mallya has applied for permission to appeal the bankruptcy
order and a prior order of the English High Court related to the bankruptcy.
The consortium of Indian banks has also applied for permission to appeal a
prior order of the English High Court related to the bankruptcy. The
bankruptcy proceedings are ongoing. At this stage, it is not possible to
assess the extent to which the various proceedings related to these bankruptcy
matters will affect the remaining elements of the claims by Diageo and the
relevant members of its group.
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 (£100 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 (£101 million) under this guarantee, 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 a 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 proceedings under the Prevention of Money Laundering Act, the Special
Court passed an order on 24 May 2021 directing, among other things, the
release of certain assets of Dr Mallya including the UBL shares in favour of
third-party banks. DHN has subsequently filed a writ petition before the
Bombay High Court challenging this order of the Special Court insofar as it
relates to 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 and the
bankruptcy order made against Dr Mallya on 26 July 2021.
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 (£105 million) (plus interest)
in relation to these matters, including the following: (i) a claim against
Watson for $141 million (£104 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 (£101 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.
This summary judgment 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 (£100 million)
plus interest of $11 million (£8 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 (£50 million) plus interest
of $5.5 million (£4 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. As noted at paragraph (c) above. Diageo and DHN have sought asset
disclosure and are considering further enforcement steps against Watson and
CASL, both in the United Kingdom and in other jurisdictions where they are
present or hold assets.
On 15 October 2020, as a result of applications made by DHN to recover certain
outstanding costs owed by Watson and CASL (being approximately £260,000 plus
interest, which remained unpaid), Dr Mallya and Sidhartha Mallya were ordered
to pay those amounts by 27 November 2020. As Dr Mallya and Sidhartha Mallya,
in default of the Court order, failed to make the required payments to DHN:
(i) Watson and CASL's defence to DHN's remaining claim for payment of
approximately $6 million (£4 million) (plus interest) has been struck out,
with further judgment in DHN's favour being entered which will be pursued
along with the original judgment as set out above, and (ii) DHN is pursuing
enforcement against Dr Mallya and Sidhartha Mallya for the judgment debt of
approximately £260,000 plus interest. As noted at paragraph (c) above, Dr
Mallya was declared bankrupt by the English High Court on 26 July 2021. The
UK Official Receiver was initially appointed as Dr Mallya's Trustee in
Bankruptcy but has now been replaced by an insolvency practitioner, Teneo
Restructuring Limited, as Trustee. DHN has informed the Official Receiver of
its position as creditor and will engage with Teneo Restructuring Limited to
pursue recovery of these costs as part of the bankruptcy process.
(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 (£61 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
(£5 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
(£5 million) remains recoverable from IDBI.
(g) 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.
The group operates in a large number of markets with complex tax and
legislative regimes that are open to subjective interpretation. In the context
of these operations, it is possible that tax exposures which have not yet
materialised (including those which could arise as a result of tax
assessments) may result in losses to the group. In the circumstances where tax
authorities have raised assessments, challenging interpretations which may
lead to a possible material outflow, these have been included as contingent
liabilities.
Diageo has a large number of ongoing tax cases in Brazil and India. Since
assessing an accurate value of contingent liabilities in these markets
requires a high degree of judgement, contingent liabilities are disclosed on
the basis of the current known possible exposure from tax assessment values.
While not all of these cases are individually significant, the current
aggregate known possible exposure from tax assessment values is up to
approximately £439 million for Brazil and up to approximately £124 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 and the judicial
processes may take extended periods to conclude. 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 be able to challenge the assessments and as such have been recognised as a
receivable in the group's balance sheet. The total amount of payments under
protest recognised as a receivable as at 31 December 2021 is £102 million
(corporate tax payments of £92 million and indirect tax payments of £10
million).
In the United States, a lawsuit was filed on 15 April 2019 by the National
Association of Manufacturers (NAM) against the United States Department of the
Treasury (US 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 USC § 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, the US 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 judgment in favour of NAM on
18 February 2020, denying the request by the US Treasury and CBP for a stay of
payment on 15 May 2020, and on 26 May 2020, ordered the immediate processing
of claims. The US Treasury and CBP subsequently appealed the judgment from the
Court of International Trade to the US Court of Appeals for the Federal
Circuit. In August 2021, the US Court of Appeals affirmed the decision of the
Court of International Trade. The deadline for the US Treasury and CBP to
appeal the decision of the Court of Appeals to the US Supreme Court has
passed.
(h) Information request
Diageo has received an inquiry from the US Securities and Exchange Commission
requesting information relating to Diageo's business operations in certain
markets and to its policies, procedures and compliance environment. Diageo is
responding to this information request but is currently unable to assess
whether the inquiry will evolve into any enforcement action or, if this were
to transpire, to quantify meaningfully the possible loss or range of loss, if
any, to which any such action might give rise.
(i) Other
The group has extensive international operations and routinely makes
judgements on a range of legal, customs and tax matters which are incidental
to the group's operations. Some of these judgements are or may become the
subject of challenges and involve proceedings, the outcome of which cannot 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.
13. Related party transactions
The group's significant related parties are its associates, joint ventures,
key management personnel and pension plans.
There have been no transactions with these related parties during the six
months ended 31 December 2021 on terms other than those that prevail in arm's
length transactions.
Independent review report to Diageo plc
Report on the condensed consolidated interim financial statements
Our conclusion
We have reviewed Diageo plc's condensed consolidated interim financial
statements (the "interim financial statements") in the interim results of
Diageo plc for the 6 month period ended 31 December 2021 (the "period").
Based on our review, nothing has come to our attention that causes us to
believe that the interim financial statements are not prepared, in all
material respects, in accordance with UK adopted IAS 34 'Interim Financial
Reporting', IAS 34 'Interim Financial Reporting' as issued by the
International Accounting Standards Board ('IASB'), IAS 34 'Interim Financial
Reporting' as adopted by the EU and The Disclosure Guidance and Transparency
Rules sourcebook of the UK's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
• the condensed consolidated balance sheet as at 31 December 2021;
• the condensed consolidated income statement and condensed
consolidated statement of comprehensive income for the period then ended;
• the condensed consolidated statement of cash flows for the period
then ended;
• the condensed consolidated statement of changes in equity for the
period then ended; and
• the explanatory notes to the interim financial statements.
The interim financial statements included in the interim results of Diageo plc
have been prepared in accordance with UK adopted IAS 34 'Interim Financial
Reporting', IAS 34 'Interim Financial Reporting' as issued by the IASB, IAS 34
'Interim Financial Reporting' as adopted by the EU and The Disclosure Guidance
and Transparency Rules sourcebook of the UK's Financial Conduct Authority.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The interim results, including the interim financial statements, is the
responsibility of, and has been approved by the directors. The directors are
responsible for preparing the interim results in accordance with the
Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim financial
statements in the interim results based on our review. This report, including
the conclusion, has been prepared for and only for the company for the purpose
of complying with the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority and for no other purpose. We
do not, in giving this conclusion, accept or assume responsibility for any
other purpose or to any other person to whom this report is shown or into
whose hands it may come save where expressly agreed by our prior consent in
writing.
What a review of interim financial statements involves
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information
Performed by the Independent Auditor of the Entity' issued by the Auditing
Practices Board for use in the United Kingdom. A review of interim financial
information consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review
procedures.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and, consequently, does not
enable us to obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do not express
an audit opinion.
We have read the other information contained in the interim results and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
26 January 2022
a. The maintenance and integrity of the Diageo plc website is the
responsibility of the directors; the work carried out by the auditors does not
involve consideration of these matters and, accordingly, the auditors accept
no responsibility for any changes that may have occurred to the interim
financial statements since they were initially presented on the website.
b. Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation in other
jurisdictions.
Additional information for shareholders
Explanatory notes
Comparisons are to the six months ended 31 December 2020 (2020) 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 exceptional operating 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 'Cautionary statement concerning forward-looking statements' for more
details.
This announcement includes names of Diageo's products which constitute
trademarks or trade names which Diageo owns or which others own and license to
Diageo for use.
Definitions and reconciliation of non-GAAP measures to GAAP measures
Diageo's strategic planning process is based on certain non-GAAP measures,
including organic movements. These non-GAAP measures are chosen for planning
and reporting, and some of them are used for incentive purposes. The group's
management believes that 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, forecast organic net sales growth and forecast organic operating profit
increase to the most comparable GAAP measure 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 performance indicator 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 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 relevant
absolute amount in the row titled 'Six months ended 31 December 2020
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 remeasurements and acquisitions and
disposals.
(a) Exchange rates
'Exchange' in the organic movement calculation reflects the adjustment to
recalculate the reported results as if they had been generated at the prior
period weighted average exchange rates.
Exchange impacts in respect of the external hedging of intergroup sales by the
markets in a currency other than their functional currency and the intergroup
recharging of services are also translated at prior period weighted average
exchange rates and are allocated to the geographical segment to which they
relate. Residual exchange impacts are reported as part of the Corporate
segment. Results from hyperinflationary economies are translated at respective
years' actual rates.
(b) Acquisitions and disposals
For acquisitions in the current period, the post acquisition results are
excluded from the organic movement calculations. For acquisitions in the prior
period, post acquisition results are included in full in the prior period but
are included in the organic movement calculation from the anniversary of the
acquisition date in the current period. The acquisition row also eliminates
the impact of transaction costs that have been charged to operating profit in
the current or prior period in respect of acquisitions that, in management's
judgement, are expected to be completed.
Where a business, brand, brand distribution right or agency agreement was
disposed of or terminated in the reporting period, the group, in the organic
movement calculations, excludes the results for that business from the current
and prior period. In the calculation of operating profit, the overheads
included in disposals are only those directly attributable to the businesses
disposed of, and do not result from subjective judgements of management.
(c) Exceptional items
Exceptional items are those that in management's judgement need to be
disclosed separately. Such items are included within the income statement
caption to which they relate, and are excluded from the organic movement
calculations. It is believed that separate disclosure of exceptional items and
the classification between operating and non-operating items further helps
investors to understand the performance of the group. Changes in estimates and
reversals in relation to items previously recognised as exceptional are
presented consistently as exceptional in the current year.
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 exceptional non-operating items below
operating profit in the consolidated income statement.
Exceptional current and deferred tax items comprise 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,
earn-out arrangements that are accounted for as remuneration and fair value
changes relating to contingent consideration liabilities and equity options
that arose on acquisitions recognised in the income statement.
Growth on a constant basis
Growth on a constant basis is a measure used by the group to understand the
trends of the business and its recovery towards pre-Covid-19 performance.
The 2018 adjusted base (i.e. the six months ended 31 December 2018) is an
appropriate comparator for fiscal 19 to fiscal 22 growth calculation on a
constant basis, as the rates used for constant currency calculations in fiscal
20 were not materially different from those used constant currency
calculations, in fiscal 21 and fiscal 22 there were no material acquisition
or disposal related adjustments or accounting treatment changes in the period.
2018 (i.e. the six months ended 31 December 2018) to 2021 (i.e. the six months
ended 31 December 2021) growth on a constant basis is calculated as adding up
the respective periods' organic movement in the row titled 'Organic movement'
in the tables below, expressed as a percentage of the relevant absolute amount
in the row titled 'Six months ended 31 December 2018 adjusted'. The most
comparable GAAP financial measure is six months ended 31 December 2018 to six
months ended 31 December 2021 reported movement % below, which is calculated
by combining the reported movements for the respective periods, expressed as a
percentage of the six months ended 31 December 2018 reported amount.
Organic growth excluding Travel Retail and Guinness
The performance of the Travel Retail channel is dependent on the level of
international travel and the performance of Guinness is highly dependent on
the availability of the on-trade channel (particularly in Europe). Due to
ongoing travel restrictions and market variability of on-trade recovery
conditions brought about by the Covid-19 pandemic, slower growth had been
experienced in Travel Retail and Guinness performance.
Additional information on the performance of the business excluding Travel
Retail and Guinness has therefore been provided. Management used this
information to assess business performance, and similarly believed that such
information will be useful to readers of this document.
In the first half of fiscal 22, the recovery of the on-trade, particularly in
Europe, and the partial recovery of Travel Retail has driven a significant
improvement in volumes for Travel Retail and Guinness. As a result, the
performance of Travel Retail and Guinness has not had a significant impact on
the performance of the group.
The measures noted are calculated by excluding the performance of Travel
Retail and Guinness from 'Six months ended 31 December 2018/ six months ended
31 December 2020 adjusted' and 'Organic movement', respectively, on memo
lines, and 'Movement excluding Travel Retail and Guinness' is expressed as a
percentage of the relevant absolute amount in the rows titled 'Six months
ended 31 December 2018/ six months ended 31 December 2020 adjusted excluding
Travel Retail and Guinness'.
Organic movement calculations for the six months ended 31 December 2021 were
as follows:
North America Europe Asia Africa Latin America Corporate Total
million million Pacific million and Caribbean million million
million million
Volume (equivalent units)
Six months ended 31 December 2018 reported 25.6 25.7 49.2 17.6 12.4 - 130.5
Disposals (1.3) - - (0.3) - - (1.6)
Six months ended 31 December 2018 adjusted 24.3 25.7 49.2 17.3 12.4 - 128.9
memo: Six months ended 31 December 2018 Travel Retail and Guinness 1.1 3.4 2.2 2.0 0.4 - 9.1
memo: Six months ended 31 December 2018 adjusted excluding Travel Retail and 23.2 22.3 47.0 15.3 12.0 - 119.8
Guinness
Organic movement (2019) 0.7 (0.3) (0.4) 0.3 (0.1) - 0.2
memo: Six months ended 31 December 2019 Travel Retail and Guinness movement (0.1) (0.1) (0.4) (0.1) - - (0.7)
memo: Six months ended 31 December 2019 Movement excluding Travel Retail and 0.8 (0.2) - 0.4 (0.1) - 0.9
Guinness
Organic movement (2020) 2.0 (1.2) (1.4) (0.2) 0.5 - (0.3)
memo: Six months ended 31 December 2020 Travel Retail and Guinness (0.4) (1.5) (1.0) 0.2 (0.2) - (2.9)
movement
memo: Six months ended 31 December 2020 Movement excluding Travel Retail and 2.4 0.3 (0.4) (0.4) 0.7 - 2.6
Guinness
Six months ended 31 December 2019 and six month ended 31 December 2020 2.7 (1.5) (1.8) 0.1 0.4 - (0.1)
movement on a constant basis
Volume (equivalent units)
Six months ended 31 December 2020 reported 27.7 24.0 47.4 16.4 12.8 - 128.3
Disposals((v)) - - - (0.1) - - (0.1)
Six months ended 31 December 2020 adjusted 27.7 24.0 47.4 16.3 12.8 - 128.2
memo: Six months ended 31 December 2020 Travel Retail and Guinness 0.6 1.8 0.8 2.1 0.2 - 5.5
memo: Six months ended 31 December 2020 adjusted excluding Travel Retail and 27.1 22.2 46.6 14.2 12.6 - 122.7
Guinness
Organic movement 0.2 5.4 1.7 2.6 2.0 - 11.9
memo: Six months ended 31 December 2021 Travel Retail and Guinness movement 0.1 1.1 0.4 0.1 0.2 - 1.9
memo: Six months ended 31 December 2021 Movement excluding Travel Retail and 0.1 4.3 1.3 2.5 1.8 - 10.0
Guinness
Acquisitions((v)) 0.1 - - - - - 0.1
Six months ended 31 December 2021 reported 28.0 29.4 49.1 18.9 14.8 - 140.2
Organic movement % 1 23 4 16 16 - 9
memo: Organic movement % excluding Travel Retail and Guinness - 19 3 18 14 - 8
Six months ended 31 December 2018 to six month ended 31 December 2021 reported 9 14 - 7 19 - 7
growth %
Six months ended 31 December 2018 to six month ended 31 December 2021 growth 12 15 - 16 19 - 9
on a constant basis %
North America Europe Asia Africa Latin America Corporate Total
£ million £ million Pacific £ million and Caribbean £ million £ million
£ million £ million
Sales
Six months ended 31 December 2020 reported 3,022 2,727 2,837 1,064 775 11 10,436
Exchange (84) (40) (49) (20) (10) - (203)
Disposals((v)) - - - (8) - - (8)
Six months ended 31 December 2020 adjusted 2,938 2,687 2,788 1,036 765 11 10,225
memo: Six months ended 31 December 2020 Travel Retail and Guinness 101 282 86 192 9 3 673
memo: Six months ended 31 December 2020 adjusted excluding Travel Retail and 2,837 2,405 2,702 844 756 8 9,552
Guinness
Organic movement 321 659 264 236 301 12 1,793
memo: Six months ended 31 December 2021 Travel Retail and Guinness movement 23 132 41 32 25 6 259
memo: Six months ended 31 December 2021 Movement excluding Travel Retail and 298 527 223 204 276 6 1,534
Guinness
Acquisitions((v)) 19 4 - - - - 23
Exchange (21) (172) (53) (28) (14) - (288)
Six months ended 31 December 2021 reported 3,257 3,178 2,999 1,244 1,052 23 11,753
Organic movement % 11 25 9 23 39 109 18
memo: Organic movement % excluding Travel Retail and Guinness 11 22 8 24 37 75 16
North America Europe Asia Africa Latin America Corporate Total
£ million £ million Pacific £ million and Caribbean £ million £ million
£ million £ million
Net sales
Six months ended 31 December 2018 reported 2,356 1,633 1,398 821 672 28 6,908
Exchange((i)) (20) (20) 3 (4) 2 - (39)
Disposals (62) (1) (1) (29) (1) - (94)
Six months ended 31 December 2018 adjusted 2,274 1,612 1,400 788 673 28 6,775
memo: Six months ended 31 December 2018 Travel Retail and Guinness 148 325 213 150 26 22 884
memo: Six months ended 31 December 2018 adjusted excluding Travel Retail and 2,126 1,287 1,187 638 647 6 5,891
Guinness
Organic movement (2019) 129 42 62 40 14 (1) 286
memo: Six months ended 31 December 2019 Travel Retail and Guinness movement (5) (6) (26) - 3 (1) (35)
memo: Six months ended 31 December 2019 Movement excluding Travel Retail and 134 48 88 40 11 - 321
Guinness
Organic movement (2020) 307 (163) (48) (3) (9) (16) 68
memo: Six months ended 31 December 2020 Travel Retail and Guinness (46) (128) (108) 8 (21) (19) (314)
movement
memo: Six months ended 31 December 2020 Movement excluding Travel Retail and 353 (35) 60 (11) 12 3 382
Guinness
Six months ended 31 December 2019 and six months ended 31 December 2020 436 (121) 14 37 5 (17) 354
movement on a constant basis
Net sales
Six months ended 31 December 2020 reported 2,701 1,443 1,395 745 579 11 6,874
Exchange((iii)) (74) (21) (20) (17) (9) - (141)
Reclassification((iv)) - - (7) - - - (7)
Disposals((v)) - - - (4) - - (4)
Six months ended 31 December 2020 adjusted 2,627 1,422 1,368 724 570 11 6,722
memo: Six months ended 31 December 2020 Travel Retail and Guinness 95 189 73 147 9 3 516
memo: Six months ended 31 December 2020 adjusted excluding Travel Retail and 2,532 1,233 1,295 577 561 8 6,206
Guinness
Organic movement 338 389 181 166 258 12 1,344
memo: Six months ended 31 December 2021 Travel Retail and Guinness movement 23 103 39 29 25 6 225
memo: Six months ended 31 December 2021 Movement excluding Travel Retail and 315 286 142 137 233 6 1,119
Guinness
Acquisitions((v)) 18 3 - - - - 21
Exchange((iii)) (19) (62) (18) (22) (9) - (130)
Six months ended 31 December 2021 reported 2,964 1,752 1,531 868 819 23 7,957
Organic movement % 13 27 13 23 45 109 20
memo: Organic movement % excluding Travel Retail and Guinness 12 23 11 24 42 75 18
Six months ended 31 December 2018 to six month ended 31 December 2021 reported 26 7 10 6 22 (18) 15
growth %
Six months ended 31 December 2018 to six month ended 31 December 2021 growth 34 17 14 26 39 (18) 25
on a constant basis %
North America Europe Asia Africa Latin America Corporate Total
£ million £ million Pacific £ million and Caribbean £ million £ million
£ million £ million
Marketing
Six months ended 31 December 2020 reported 443 252 227 84 78 1 1,085
Exchange (12) (2) (3) (3) (1) 2 (19)
Six months ended 31 December 2020 adjusted 431 250 224 81 77 3 1,066
memo: Six months ended 31 December 2020 Travel Retail and Guinness 28 34 7 20 1 - 90
memo: Six months ended 31 December 2020 adjusted excluding Travel Retail and 403 216 217 61 76 3 976
Guinness
Organic movement 105 65 41 23 50 4 288
memo: Six months ended 31 December 2021 Travel Retail and Guinness movement 6 10 7 1 2 - 26
memo: Six months ended 31 December 2021 Movement excluding Travel Retail and 99 55 34 22 48 4 262
Guinness
Acquisitions((v)) 15 1 - - - - 16
Fair value remeasurement of contingent considerations, equity option and earn (1) - - - - - (1)
out arrangements
Exchange (2) (9) (2) (2) (2) (1) (18)
Six months ended 31 December 2021 reported 548 307 263 102 125 6 1,351
Organic movement % 24 26 18 28 65 133 27
memo: Organic movement % excluding Travel Retail and Guinness 25 25 16 36 63 133 27
North America Europe Asia Africa Latin America Corporate Total
£ million £ million Pacific £ million and Caribbean £ million £ million
£ million £ million
Operating profit before exceptional items
Six months ended 31 December 2018 reported 2,451
Exchange((ii)) (19)
Disposal (44)
Six months ended 31 December 2018 adjusted 2,388
memo: Six months ended 31 December 2018 Travel Retail and Guinness 424
memo: Six months ended 31 December 2018 adjusted excluding Travel Retail and 1,964
Guinness
Organic movement (2019) 110
memo: Six months ended 31 December 2019 Travel Retail and Guinness movement (31)
memo: Six months ended 31 December 2019 Movement excluding Travel Retail and 141
Guinness
Organic movement (2020) (85)
memo: Six months ended 31 December 2020 Travel Retail and Guinness (225)
movement
memo: Six months ended 31 December 2020 Movement excluding Travel Retail and 140
Guinness
Six months ended 31 December 2019 and six months ended 31 December 2020 25
movement on a constant basis
Operating profit before exceptional items
Six months ended 31 December 2020 reported 1,226 446 386 95 197 (94) 2,256
Exchange((iii)) (28) (13) (7) 8 (4) (3) (47)
Fair value remeasurement of contingent considerations and equity option 4 7 - - - - 11
Fair value remeasurement of biological assets - - - - (3) - (3)
Acquisitions((v)) 7 - - - - - 7
Six months ended 31 December 2020 adjusted 1,209 440 379 103 190 (97) 2,224
memo: Six months ended 31 December 2020 Travel Retail and Guinness 16 67 30 39 5 6 163
memo: Six months ended 31 December 2020 adjusted excluding Travel Retail and 1,193 373 349 64 185 (103) 2,061
Guinness
Organic movement 89 184 72 88 152 (35) 550
memo: Six months ended 31 December 2021 Travel Retail and Guinness movement 12 65 27 12 17 2 135
memo: Six months ended 31 December 2021 Movement excluding Travel Retail and 77 119 45 76 135 (37) 415
Guinness
Acquisitions((v)) (16) (1) - - - - (17)
Fair value remeasurement of contingent considerations, equity option and earn 5 21 - - (3) - 23
out arrangements
Fair value remeasurement of biological assets - - - - 3 - 3
Exchange((iii)) 8 (31) - (15) (9) 7 (40)
Six months ended 31 December 2021 reported 1,295 613 451 176 333 (125) 2,743
Organic movement % 7 42 19 85 80 (36) 25
memo: Organic movement % excluding Travel Retail and Guinness 6 32 13 119 73 (36) 20
Organic operating margin %
Six months ended 31 December 2021 44 34 29 21 41 n/a 34
Six month ended 31 December 2020 46 31 28 14 33 n/a 33
Margin movement (bps) (224) 351 141 723 797 n/a 131
Six months ended 31 December 2018 to six month ended 31 December 2021 reported 12
growth %
Six months ended 31 December 2018 to six month ended 31 December 2021 growth 24
on a constant basis %
(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 sales and net sales is principally in respect of the translation exchange
impact of the weakening of sterling against the US dollar, the Indian rupee
and the Mexican peso, partially offset by strengthening of sterling against
the euro.
(ii) The impact of movements in exchange rates on reported figures for
operating profit is principally in respect of the transactional exchange
impact of the strengthening of sterling against the US dollar.
(iii) The impact of movements in exchange rates on reported figures for net
sales and operating profit is principally in respect of the translation
exchange impact of the strengthening of sterling against the US dollar, the
euro, the Indian rupee and the Turkish lira.
(iv) In the six months ended 31 December 2021, £7 million has been
reclassified from cost of sales to excise duties.
(v) In the six months ended 31 December 2021, the acquisitions and
disposals that affected volume, sales, net sales, marketing and operating
profit were as follows:
Volume Sales Net sales Marketing Operating
profit
equ. units million £ million £ million £ million £ million
Six months ended 31 December 2020
Acquisitions
Aviation Gin and Davos Brands - - - - 7
- - - - 7
Disposals
South African ready to drink (0.1) (8) (4) - -
(0.1) (8) (4) - -
Acquisitions and disposals (0.1) (8) (4) - 7
Six months ended 31 December 2021
Acquisitions
Aviation Gin and Davos Brands - 6 5 (4) (5)
Chase Distillery - 4 3 (1) (1)
Lone River 0.1 11 11 (8) (8)
Loyal 9 Cocktails - 2 2 (3) (3)
0.1 23 21 (16) (17)
Earnings per share before exceptional items
Earnings per share before exceptional items is calculated by dividing profit
attributable to equity shareholders of the parent company before exceptional
items by the weighted average number of shares in issue.
Earnings per share before exceptional items for the six months ended 31
December 2021 and 31 December 2020 are set out in the table below:
2021 2020
£ million £ million
Profit attributable to equity shareholders of the parent company 1,965 1,580
Exceptional operating and non-operating items 31 12
Exceptional tax charges/(benefits) - 42
1,996 1,634
Weighted average number of shares million Million
Shares in issue excluding own shares 2,331 2,336
Dilutive potential ordinary shares 8 7
2,339 2,343
Pence Pence
Basic earnings per share before exceptional items 85.6 69.9
Diluted earnings per share before exceptional items 85.4 69.7
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 expenditure
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 acquisition and sale of businesses are
discretionary.
Where appropriate, separate explanations are given for the impacts of
acquisition and sale of businesses, dividends paid and the purchase of own
shares, each of which arises from decisions that are independent from the
running of the ongoing underlying business.
Free cash flow reconciliations for the six months ended 31 December 2021 and
31 December 2020 are set out in the table below:
2021 2020
£ million £ million
Net cash inflow from operating activities 1,947 1,998
Disposal of property, plant and equipment and computer software 7 8
Purchase of property, plant and equipment and computer software (382) (250)
Movements in loans and other investments 3 (3)
Free cash flow 1,575 1,753
Return on average invested capital
Return on average 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 invested capital reflects
operating profit before exceptional items attributable to the equity
shareholders of the parent company plus share of after tax results of
associates and joint ventures after applying the tax rate before exceptional
items for the period. Average invested capital is calculated using the average
derived from the consolidated balance sheets at the beginning and end of the
period. Average capital employed comprises average net assets attributable to
equity shareholders of the parent company for the year, excluding net post
employment benefit 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 invested capital for the six months
ended 31 December 2021 and 31 December 2020 are set out in the table below:
2021 2020
£ million £ million
Operating profit 2,743 2,239
Exceptional operating items - 17
Profit before exceptional operating items attributable to non-controlling (123) (81)
interests
Share of after tax results of associates and joint ventures 190 154
Tax at the tax rate before exceptional items of 23.0% (2020 - 22.4%) (675) (540)
2,135 1,789
Average net assets (excluding net post employment benefit assets/liabilities) 8,331 8,162
Average non-controlling interests (1,604) (1,614)
Average net borrowings 12,220 12,953
Average integration and restructuring costs (net of tax) 1,639 1,639
Goodwill at 1 July 2004 1,562 1,562
Average invested capital 22,148 22,702
Return on average invested capital 19.3 % 15.8 %
Adjusted net borrowings to adjusted EBITDA
Diageo manages its capital structure with the aim of achieving capital
efficiency, providing flexibility to invest through the economic cycle and
giving 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
(earnings before exceptional operating items, interest, tax, depreciation,
amortisation and impairment).
Calculations for the ratio of adjusted net borrowings to adjusted EBITDA at 31
December 2021 and 31 December 2020 are set out in the table below:
2021 2020
£ million £ million
Borrowings due within one year 1,184 1,214
Borrowings due after one year 12,693 14,063
Fair value of foreign currency derivatives and interest rate hedging (126) (263)
instruments
Lease liabilities 360 410
Less: Cash and cash equivalents (1,780) (2,763)
Net borrowings 12,331 12,661
Post employment benefit liabilities before tax 486 815
Adjusted net borrowings 12,817 13,476
Profit for the year 3,226 1,181
Taxation 1,004 596
Net finance charges 353 399
Depreciation, amortisation and impairment (excluding exceptional items) 452 486
Exceptional impairment - 1,286
EBITDA 5,035 3,948
Exceptional operating items (excluding impairment) (2) 29
Non-operating items 22 18
Adjusted EBITDA 5,055 3,995
Adjusted net borrowings to adjusted EBITDA 2.5 3.4
(1) EBITDA and adjusted EBITDA are calculated based on the last 12 months.
Tax rate before exceptional items
Tax rate before exceptional items is calculated by dividing the total tax
charge 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 operations before
tax on exceptional items.
The tax rates from operations before exceptional and after exceptional items
for the six months ended 31 December 2021 and six months ended 31 December
2020 are set out in the table below:
2021 2020
£ million £ million
Tax before exceptional items (a) 634 495
Exceptional tax charge - 42
Taxation on profit (b) 634 537
Profit before taxation and exceptional items (c) 2,753 2,210
Non-operating items (31) 5
Exceptional operating items - (17)
Profit before taxation (d) 2,722 2,198
Tax rate before exceptional items (a/c) 23.0 % 22.4 %
Tax rate after exceptional items (b/d) 23.3 % 24.4 %
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.
Net sales are sales less excise duties. Diageo incurs excise duties throughout
the world. In the majority of countries excise duties are effectively a
production tax which becomes payable when the product is removed from bonded
premises and is not directly related to the value of sales. It is generally
not included as a separate item on external invoices; increases in excise
duties are not always passed on to the customer and where a customer fails to
pay for a product received the group cannot reclaim the excise duty. The group
therefore recognises excise duty as a cost to the group.
Price/mix is the number of percentage points difference between the organic
movement in net sales and 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 sold 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 Poland, 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; The Singleton, Cardhu, Talisker,
Lagavulin, Oban and other malt brands; Buchanan's Special Reserve, Buchanan's
Red Seal; Haig Club whisky; Copper Dog whisky; Roe & Co; Bulleit Bourbon,
Bulleit Rye; Orphan Barrel whiskey; Tanqueray No. TEN, Tanqueray ready to
drink, Tanqueray Malacca Gin; Aviation, Jinzu and Villa Ascenti gin; Cîroc,
Ketel One vodka, Ketel One Botanical; Don Julio, Casamigos and DeLeón
tequila; Zacapa, Bundaberg Master Distillers' Collection and Pampero
Aniversario rum; Shui Jing Fang, Seedlip, Belsazar and Pierde Almas.
References to global giants include the following brand families: Johnnie
Walker, Smirnoff, Captain Morgan, Baileys, Tanqueray and Guinness. Local stars
include Buchanan's, Bundaberg, Crown Royal, JεB, 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-mixed cans in some markets.
References to beer include cider, flavoured malt beverages 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 group include Diageo plc and its consolidated
subsidiaries.
Risk factors
The principal risks and uncertainties facing Diageo are set out on pages 45 to
49 of the Annual Report for the year ended 30 June 2021 and pages 72 to 82 of
Diageo's Annual Report on Form 20-F for the year ended 30 June 2021. These
principal risks and uncertainties include: cyber threats; climate change,
sustainability & responsibility; pandemics; global economic volatility;
consumer disruption; geopolitical & natural hazards risk; counterfeit;
business integrity, compliance & controls; data privacy; product quality;
regulation, indirect tax & trade barriers; and international direct tax.
The nature and potential impact of the principal risks and uncertainties
facing Diageo did not change in the six months to 31 December 2021, and are
not expected to change in respect of the second six months of the financial
year.
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 the statements set forth in the
'Fiscal 22 Outlook' section and any other statements with respect to 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 wars or any tariffs, duties or other restrictions or barriers imposed on
the import or export of goods between territories; including but not limited
to, imports into and exports from the United States and the European Union
and/or the United Kingdom, as well as the United Kingdom's recent departure
from the European Union);
- the impact of the Covid-19 pandemic, or any other global or regional
public health threats, on Diageo's business, financial condition, cash flows
and results of operation;
- 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 consumer preferences and tastes, including as a result of
disruptive market forces, changes in demographics, evolving social trends
(including any shifts in consumer tastes towards at-home occasions,
premiumisation, 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;
- changes in the cost of production, including as a result of increases in
the cost of commodities, labour and/or energy, supply chain disruptions and/or
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 of internal controls, including those
affecting compliance with existing or new accounting and/or disclosure
requirements;
- 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;
- cyber-attacks or any other disruptions to core business operations
including manufacturing and supply, business service centres and/or
information systems;
- contamination, counterfeiting or other circumstances which could harm
the level of customer support for Diageo's brands and adversely impact its
sales;
- Diageo's ability to maintain its brand image and corporate reputation or
to adapt to a changing media environment;
- increased competitive product and pricing pressures, including as a
result of actions by increasingly consolidated competitors or increased
competition from regional and local companies, that could negatively impact
Diageo's market share, distribution network, costs and/or pricing;
- 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 financing costs 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 2021 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. © Diageo plc 2022.
The information in this document does not constitute an offer to sell or an
invitation to buy shares in Diageo plc or an invitation or inducement to
engage in any other investment activities.
This document may include information about Diageo's target debt rating. A
security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organisation. Each rating should be evaluated independently of any other
rating.
Past performance cannot be relied upon as a guide to future performance.
Statement of directors' responsibilities
Each of the Directors of Diageo plc confirms that, to the best of his or her
knowledge:
- the condensed consolidated financial statements have been prepared in
accordance with IAS 34 Interim Financial Reporting as issued by the IASB and
endorsed and adopted by the UK Endorsement Board and give a true and fair view
of the assets, liabilities, financial position and profit and loss of the
group;
- the interim management report includes a fair review of the information
required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority, being an indication of
important events that have occurred during the first six months of the current
financial year and their impact on the condensed consolidated financial
statements, and a description of the principal risks and uncertainties for the
remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority, being related party
transactions that have taken place in the first six months of the current
financial year and that have materially affected the financial position or
performance of the group during that period, and any changes in the related
party transactions described in the last annual report that could do so.
The Directors of Diageo plc are as follows: Javier Ferrán (Chairman), Ivan
Menezes (Chief Executive), Lavanya Chandrashekar (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, Valérie
Chapoulaud-Floquet, Sir John Manzoni, Lady Mendelsohn and Ireena Vittal.
Webcast, presentation slides and transcript
At 07.15 (UK time) on Thursday 27 January 2022, Ivan Menezes, Chief Executive
and Lavanya Chandrashekar, Chief Financial Officer will present Diageo's
interim results as a webcast. This will be available to view at
www.diageo.com. The presentation slides and script will also be available to
download at this time.
Live Q&A conference call and replay
Ivan Menezes and Lavanya Chandrashekar will be hosting a Q&A conference
call on Thursday 27 January at 09:30 (UK time). If you would like to listen to
the call or ask a question, please use the dial in details below.
From the UK: +44 (0)330 336 9601
From the UK (free call): 0800 279 6877
From the USA: +1 323 701 0160
From the USA (free call): 800 289 0720
The conference call is for analysts and investors only. To join the call
please use the password already sent to you or email
investor.relations@diageo.com.
To hear a replay of the call, please use the telephone numbers below:
From the UK: +44 (0)20 3859 5407
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: Durga Doraisamy +44 (0) 7902 126906
Lucinda Baker +44 (0) 7974 375550
Belinda Brown +44 (0) 7590 810246
investor.relations@diageo.com
Media enquiries to: Jessica Rouleau +44 (0) 7925 642 561
Dominic Redfearn +44 (0) 7971 977 759
Francesca Olivieri +44 (0) 7523 930 130
press@diageo.com
Diageo plc LEI: 213800ZVIELEA55JMJ32
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