TIDMDGE
RNS Number : 4608F
Diageo PLC
28 July 2016
Preliminary results, year ended 30 June 2016
28 July 2016
Stronger organic growth underpins improving momentum across the business
* Organic results improved with volume growth of 1.3%,
net sales growth of 2.8%, and operating profit growth
of 3.5%
* Reported net sales declined 3.0% as organic growth in
each region and acquisitions were more than offset by
adverse exchange and disposals
* Reported operating profit grew 1.6% with organic
growth, lower exceptional operating charges and
acquisitions partially offset by adverse exchange and
disposals
* Free cash flow continued to be strong at GBP2.1
billion, up GBP134 million on last year. Operating
cash flow was GBP2.5 billion
* Basic eps of 89.5 pence was down 6% as lower
exceptional income reduced basic eps by 6.1 pence.
Pre-exceptional eps increased 1% to 89.4 pence
* The board recommended a final dividend increase of 5%
bringing the full year dividend to 59.2 pence per
share
See explanatory notes section for explanation of the use of non-GAAP
measures.
Ivan Menezes, Chief Executive, commenting on the results said:
"This is a good set of results delivering what we set out to
achieve this time last year and demonstrating our momentum.
This better performance reflects the work we have done to
strengthen our big brands through marketing and innovation, as well
as expanding our distribution reach. Our six global brands and our
US spirits business are all back in growth and we have seen a
significant improvement in the performance of our scotch and beer
portfolios. The delivery of volume growth; organic margin
expansion; increased free cash flow; and the disposal of GBP1bn in
non-core assets, comes from Exaim to improve the role of alcohol in
society, partner with our communities and reduce our environmental
impact.
These results position us well to deliver a stronger performance
in F17. We are confident of achieving our objective of mid-single
digit top line growth, and in the three years ending F19 delivering
100bps of organic operating margin improvement."
Key financial information
For the year ended 30 June 2016
Summary financial information
Organic Reported
growth growth
2016 2015 % %
-------------------------------------- ------------ ------ ------ ------- --------
Volume EUm 246.4 246.2 1 -
====================================== ============= ====== ====== ======= ========
Net sales GBP million 10,485 10,813 3 (3)
====================================== ============= ====== ====== ======= ========
Marketing GBP million 1,562 1,629 (2) (4)
====================================== ============= ====== ====== ======= ========
Operating profit before exceptional
items GBP million 3,008 3,066 3 (2)
====================================== ============= ====== ====== ======= ========
Exceptional operating items GBP million (167) (269)
====================================== ============= ====== ====== ======= ========
Operating profit GBP million 2,841 2,797 2
====================================== ============= ====== ====== ======= ========
Share of associates and joint
ventures profit
after tax GBP million 221 175 26
====================================== ============= ====== ====== ======= ========
Exceptional non-operating items GBP million 123 373
====================================== ============= ====== ====== ======= ========
Net finance charges GBP million 327 412
====================================== ============= ====== ====== ======= ========
Tax rate % 17.4 15.9 9
====================================== ============= ====== ====== ======= ========
Tax rate before exceptional
items % 19.0 18.3 4
====================================== ============= ====== ====== ======= ========
Profit attributable to parent
company's shareholders GBP million 2,244 2,381 (6)
====================================== ============= ====== ====== ======= ========
Basic earnings per share pence 89.5 95.0 (6)
====================================== ============= ====== ====== ======= ========
Earnings per share before exceptional
items pence 89.4 88.8 1
====================================== ============= ====== ====== ======= ========
Recommended full year dividend pence 59.2 56.4 5
-------------------------------------- ------------- ------ ------ ------- --------
Exceptional items (for further 2016
details see notes 3)
GBP million
Operating items before taxation
--------------------------------- -----------
Impairment of Ypióca (118)
==================================== ===========
Disengagement agreement relating
to USL (49)
------------------------------------ -----------
Total operating items before
taxation (167)
------------------------------------ -----------
Non-operating items before
taxation
--------------------------------- -----------
Sale of Jamaica, Singapore
and Malaysia brewing businesses 457
==================================== ===========
Sale of wines (229)
==================================== ===========
Provision for a receivable
related to a loan guarantee (92)
==================================== ===========
Other (13)
------------------------------------ -----------
Total non-operating items before
taxation 123
------------------------------------ -----------
Outlook for exchange
Using current exchange rates (GBP1 = $1.31; GBP1 = EUR1.19), the
exchange rate movement for the year ending 30 June 2017 is
estimated to favourably impact net sales by approximately GBP1.1
billion and operating profit by approximately GBP370 million, and
have an adverse impact of approximately GBP20 million on net
interest. This is primarily driven by the weakness of sterling post
the EU referendum.
Outlook for tax
The tax rate before exceptional items for the year ended 30 June
2016 was 19.0% compared with 18.3% in the prior year. It is
expected that the tax rate before exceptional items for the year
ending 30 June 2017 will be 21%.
United Kingdom (UK) and the European Union (EU)
Following the UK's vote to leave the EU, Diageo is working
closely with government and industry bodies to ensure its views are
reflected in the transition process. Diageo welcomes the formation
of a specialist international trade department, as it is important
for Diageo that the UK continues to benefit from open access to the
EU as well as favourable international trade agreements.
Net sales (GBP million)
Organic net sales growth of 2.8% driven by volume and mix
Net sales GBP million
--------------------------------------- ------------
2015 10,813
======================================= ============
Exchange(i) (172)
======================================= ============
Disposals (400)
======================================= ============
Acquisitions 90
======================================= ============
Volume 131
======================================= ============
Price/mix 145
======================================= ============
Asia Pacific net sales adjustment(ii) (122)
--------------------------------------- ------------
2016 10,485
--------------------------------------- ------------
(i) Exchange rate movements reflect the translation of prior
year reported results at current exchange rates.
(ii) Diageo has reflected the full year impact of an accounting
change USL made in its most recent quarterly results to account for
sales by third party manufacturers on a net sales basis. See
additional financial information section for more details.
Net sales declined 3.0%. Adverse impact of exchange and
disposals reduced net sales by 5.3%. These movements were partially
offset by organic net sales growth of 2.8% with volume growth of
1.3% and positive price/mix, primarily mix.
Net sales and operating profit were impacted by adverse exchange
movements driven by the weakness of a number of currencies against
sterling, in particular the Nigerian naira, the South African rand,
the Venezuelan Bolivar, the Brazilian real and the Turkish lira,
partially offset by the strengthening of the US dollar.
Operating profit (GBP million)
Organic operating profit growth of 3.5%
Operating profit GBP million
----------------------------- ------------
2015 2,797
============================= ============
Exceptional operating items 102
============================= ============
Exchange (83)
============================= ============
Disposals (96)
============================= ============
Acquisitions 22
============================= ============
Organic movement 99
----------------------------- ------------
2016 2,841
----------------------------- ------------
Operating profit growth of 1.6% was driven by organic growth,
acquisitions and lower exceptional operating charges (GBP167
million in 2016; GBP269 million in 2015). These movements were
partially offset by adverse exchange and the impact of
disposals.
Acquisitions and disposals
Acquisitions made in 2015 increased net sales in the year ended
30 June 2016 by GBP90 million and operating profit by GBP22
million, largely due to the acquisition of the remaining 50%
shareholdings in Don Julio and United National Breweries.
Businesses which were disposed of in the year ended 30 June
2015, primarily Bushmills and Gleneagles, and those disposed of in
the year ended 30 June 2016, the sale of wines and certain beer
assets, contributed net sales of GBP655 million and operating
profit of GBP121 million in the period ended 30 June 2015, and
contributed net sales of GBP255 million and operating profit of
GBP25 million in the period ended 30 June 2016. The year on year
movement on net sales was GBP400 million and GBP96 million on
operating profit.
For further details on the impact of acquisitions and disposals
see explanatory notes, acquisitions and disposals.
Organic growth by region
Volume Net sales Marketing Operating profit
(i)
---------- --------------- ----------------- ------------------
% EUm % GBP million % GBP million % GBP million
---------------------------- --- ----- ----------- ---- ----------- ---- ------------
North America 1 0.5 3 97 (2) (10) 4 56
============================ === ===== =========== ==== =========== ==== ============
Europe, Russia and Turkey 2 0.8 4 102 5 20 6 45
============================ === ===== =========== ==== =========== ==== ============
Africa 9 2.3 3 34 1 1 (11) (27)
============================ === ===== =========== ==== =========== ==== ============
Latin America and Caribbean (2) (0.4) 1 5 - - (1) (2)
============================ === ===== =========== ==== =========== ==== ============
Asia Pacific - (0.1) 2 34 (12) (42) 13 44
============================ === ===== =========== ==== =========== ==== ============
Corporate - - 13 4 (50) (6) (13) (17)
---------------------------- --- ----- ----------- ---- ----------- ---- ------------
Diageo 1 3.1 3 276 (2) (37) 3 99
---------------------------- --- ----- ----------- ---- ----------- ---- ------------
(i) Before operating exceptional items.
Operating margin (%)
Organic margin improved by 19 bps
Operating margin Ppt
-------------------------------------- -------
2015 25.87
====================================== =======
Exceptional operating items 0.89
====================================== =======
Exchange (0.32)
====================================== =======
Acquisitions and disposals 0.14
====================================== =======
Gross margin 0.55
====================================== =======
Marketing 0.78
====================================== =======
Overheads and other (1.14)
====================================== =======
Asia Pacific net sales adjustment(i) 0.33
-------------------------------------- -------
2016 27.10
-------------------------------------- -------
(i) Diageo has reflected the full year impact of an accounting
change USL made in its most recent quarterly results to account for
sales by third party manufacturers on a net sales basis. It has no
impact on gross profit or operating profit. See additional
financial information for more details.
Operating margin improved by 123bps mainly driven by lower
exceptional operating charges, a 19bps improvement in organic
margin and the net sales adjustment in Asia Pacific. These
movements were partially offset by an adverse exchange impact.
Organic operating margin improvement was driven by favourable mix,
including the return to growth in North America which drove gross
margin improvement, as well as net procurement efficiencies after
reinvestment in increased marketing activity. These benefits were
partially offset by higher overheads driven by a year on year
increase in annual incentive plan costs and inflation.
Basic earnings per share (pence)
eps before exceptional items increased from 88.8 pence to 89.4 pence
Basic earnings per share pence
------------------------------------- -------
2015 95.0
===================================== =======
Exceptional items (i) (6.14)
===================================== =======
Exchange on operating profit (3.33)
===================================== =======
Acquisitions and disposals (2.97)
===================================== =======
Operating profit excluding exchange 3.95
===================================== =======
Associates and joint ventures 1.83
===================================== =======
Finance charges 3.39
===================================== =======
Tax (1.37)
===================================== =======
Non-controlling interests (0.82)
------------------------------------- -------
2016 89.5
------------------------------------- -------
(i) Exceptional items net of tax and non-controlling interests.
Lower exceptional income(i) (GBP2 million in 2016; GBP156
million in 2015), reduced basic earnings per share by 6.1 pence.
Pre-exceptionals eps was up 0.6 pence as adverse exchange, net
impact of acquisitions and disposals, a higher tax rate and the
increase in non-controlling interests from higher operating profit
in USL, were more than offset by organic operating profit growth,
higher associate income and lower finance charges. Finance charges
were lower on the fall in both net interest charge and other
financing charges. Net interest charges declined from debt
reduction and lower interest rates. Other finance charges dropped
due to lower hyperinflation charge for Venezuela as we moved to a
consolidation rate which recognised the impact of the inflation
rate as well as the impact of lapping a GBP13 million charge in
2015 in respect of an increase in value of Zacapa related financial
liabilities.
Movement in net finance charges
GBP million
--------------------------------------------- ----- -----------
2015 412
============================================= ===== ===========
Net interest charge reduction (51)
============================================= ===== ===========
Reduction in other finance charges (34)
--------------------------------------------- ----- -----------
2016 327
--------------------------------------------- ----- -----------
2016 2015
--------------------------------------------- ----- -----------
Average monthly net borrowings (GBP million) 9,245 10,459
============================================= ===== ===========
Effective interest rate (i) 3.3% 3.5%
--------------------------------------------- ----- -----------
(i) For the calculation of the effective interest rate, the net
interest charge excludes fair value adjustments to derivative
financial instruments and borrowings. Average monthly net
borrowings include the impact of interest rate swaps that are no
longer in a hedge relationship but excludes the market value
adjustment for cross currency interest rate swaps.
The fall in average monthly net borrowings arose from disposals
proceeds and continued strong cash flow. The effective interest
rate reduced in the year ended 30 June 2016 largely driven by
changes in financing in USL together with the repayment of Diageo
bonds with a higher interest rate.
Free cash flow (GBP million)
Operating cash flow(i) was GBP2,548 million in 2016 a decline of GBP3 million on GBP2,551
million in 2015
Free cash flow was GBP2,097 million in 2016 an increase of GBP134 million
Free cash flow GBP million
------------------------ ------------
2015 1,963
======================== ============
Capex 137
======================== ============
Exchange (ii) (83)
======================== ============
Operating profit (iii) 152
======================== ============
Working capital (170)
======================== ============
Interest and tax 93
======================== ============
Other (iv) 5
------------------------ ------------
2016 2,097
------------------------ ------------
(i) Operating cash flow excludes capex, loans and other
investments (collectively (GBP451) million in 2016 - (GBP588)
million in 2015).
(ii) Exchange - on operating profit before exceptional items.
(iii) Operating profit excluding exchange, depreciation and
amortisation, post-employment payments and non-cash items but
including operating exceptional items.
(iv) Other items include post-employment payments, dividends
received from associates and joint ventures, loans and other
investments.
Free cash flow improved GBP134 million driven by lower capex,
increased operating profit before exchange, and lower interest
payments. The negative working capital movement was driven by the
year on year comparison to a significant reduction in receivables
in 2015. This was partially offset by a favourable movement on
inventory and payables.
Return on average invested capital (%)(i)
ROIC decreased 22bps
Return on average invested capital(i) ppt
--------------------------------------- -------
2015 12.3
======================================= =======
Exchange (0.62)
======================================= =======
Acquisitions and disposals (0.16)
======================================= =======
Operating profit excluding exchange 0.47
======================================= =======
Associates and joint ventures 0.14
======================================= =======
Non-controlling interests (0.08)
======================================= =======
Other 0.03
--------------------------------------- -------
2016 12.1
--------------------------------------- -------
(i) ROIC calculation excludes exceptional items.
ROIC before exceptional items decreased 22bps driven mainly due
to the adverse impact of exchange which was partially offset by the
increased return from growth in operating profit and income from
associates.
Notes to the business and financial review
Unless otherwise stated:
-- commentary below refers to organic movements
-- volume is in millions of equivalent units (EUm)
-- net sales are sales after deducting excise duties
-- percentage movements are organic movements
-- share refers to value share
-- GTME refers to Global Travel Asia and Middle East
BUSINESS REVIEW
For the year ended 30 June 2016
North America
North America delivered net sales growth of 3%, following the
expected strong performance in the second half in US Spirits. Full
year depletion and net sales growth in US Spirits was 3%. Growth in
North American whiskey, scotch and tequila drove positive mix.
North American whiskey, with net sales up 6%, was the main driver
of net sales growth as Crown Royal and Bulleit continued to gain
share in the category. Performance of Smirnoff and Captain Morgan
improved, with net sales up 2% for both brands. In scotch, Johnnie
Walker and Buchanan's both performed well, with net sales up 7% and
9%, respectively. Reserve brands performance also improved, with
net sales up 5%, driven by Johnnie Walker reserve variants,
Bulleit, Don Julio and Ketel One vodka. Elsewhere in the region
DGUSA net sales grew 1%, with growth in ready to drink offsetting a
decline in beer, and in Canada net sales were up 4%. Marketing in
North America was down 2% as a result of procurement efficiencies
and more focused spend on innovation. Operating margin increased
39bps for the year, as improvement in gross margin and lower
marketing more than offset higher overheads.
Key financials GBP million:
Acquisitions Reported
and Organic movement
2015 FX disposals movement 2016 %
------------------------------------- ----- --- ------------ --------- ----- ---------
Net sales 3,455 172 (159) 97 3,565 3
------------------------------------- ----- --- ------------ --------- ----- ---------
Marketing 542 23 (14) (10) 541 -
------------------------------------- ----- --- ------------ --------- ----- ---------
Operating profit before exceptional
items 1,448 77 (30) 56 1,551 7
------------------------------------- ----- --- ------------ --------- ----- ---------
Exceptional operating items (28) -
------------------------------------- ----- --- ------------ --------- ----- ---------
Operating profit 1,420 1,551 9
------------------------------------- ----- --- ------------ --------- ----- ---------
Markets:
Organic Reported Organic Reported
volume volume net sales net sales
movement movement movement movement
% % % %
----------------- ------------- ---------- ---------- ---------
North America 1 (1) 3 3
----------------- ------------- ---------- ---------- ---------
US Spirits 1 (1) 3 4
----------------- ------------- ---------- ---------- ---------
DGUSA - (3) 1 5
----------------- ------------- ---------- ---------- ---------
Canada 2 2 4 (5)
----------------- ------------- ---------- ---------- ---------
Spirits 1 1 3 8
----------------- ------------- ---------- ---------- ---------
Beer (3) (7) (2) (2)
----------------- ------------- ---------- ---------- ---------
Ready to drink 4 1 5 7
----------------- ------------- ---------- ---------- ---------
Reported
volume
Organic Reported
net sales net sales
movement(ii) movement movement
% % %
----------------- ------------- ---------- ----------
Crown Royal 6 6 12
----------------- ------------- ---------- ----------
Smirnoff 1 2 6
----------------- ------------- ---------- ----------
Captain Morgan 3 2 6
----------------- ------------- ---------- ----------
Johnnie Walker - 5 10
----------------- ------------- ---------- ----------
Ketel One vodka 2 4 10
----------------- ------------- ---------- ----------
Cîroc (6) (7) (1)
----------------- ------------- ---------- ----------
Baileys (2) - 4
----------------- ------------- ---------- ----------
Guinness - - 5
----------------- ------------- ---------- ----------
Tanqueray 5 7 13
----------------- ------------- ---------- ----------
Don Julio 30 34 42
----------------- ------------- ---------- ----------
Bulleit 25 28 36
----------------- ------------- ---------- ----------
Buchanan's 3 9 16
----------------- ------------- ---------- ----------
(i) Spirits brands excluding ready to drink.
(ii) Reported equals organic volume movement.
-- Net sales in US Spirits were up 3%, with a 10% net sales
increase in the second half following a transition to a
replenishment model for innovation launches. Diageo's North
American whiskey brands accounted for half of the overall net sales
growth as Crown Royal and Bulleit continued to gain share. Crown
Royal net sales increased 5%, with net sales of Crown Royal Deluxe
up 5% as it benefitted from the new "The One Made For A King"
campaign which focused on the quality and heritage of the brand.
Crown Royal Regal Apple continued to benefit from the popularity of
the shot occasion and delivered a solid performance, with net sales
up 15%, as it entered its second year after launch. Cîroc
performance improved in the second half, as the brand benefitted
from the launch of its Apple flavour. Smirnoff net sales were up 2%
but it underperformed the vodka category. Growth from a more
focused flavours portfolio and the newly launched Smirnoff Sourced,
a blend of real fruit juice and spirit, offset a decline in
Smirnoff Red which lapped last year's brand renovation and
promotional activity and continued to be impacted by a competive
price environment. Performance in scotch improved as Johnnie
Walker's net sales increased 7%, largely driven by reserve
variants, up 23%. Buchanan's net sales were up 9% and share
increased, as the 'A lo Grande' campaign enhanced the connection
with hispanic consumers. Increased investment in the on-trade and
focus on recruiting new consumers amongst millenials had a positive
impact on Captain Morgan which gained share despite weakness in the
rum category. Net sales for the brand were up 2%, largely driven by
the Original Spiced variant and Cannon Blast, which proved to be
popular in the shot occasion. Don Julio, with net sales up 34%, was
the fastest growing brand in the portfolio and gained share.
-- DGUSA net sales increased 1%, as growth in ready to drink
offset a decline in beer. In ready to drink the launch of Smirnoff
Electric and a solid performance of Smirnoff Ice, which benefitted
from new flavours and packaging, drove net sales growth of 7%. Beer
net sales were down 3% largely driven by a decline in Smithwick and
Harp. Guinness net sales were broadly flat as the launch of
Guinness Nitro IPA offset the net sales decline of Guinness
American Blonde Lager, which lapped the previous year launch, and
Guinness draught which continued to be impacted by a crowded craft
beer segment.
-- Net sales in Canada increased 4%, largely driven by Crown
Royal which benefitted from the launch of Crown Royal Northern
Harvest Rye, rated '2016 world whiskey of the year' by Jim Murray's
Whiskey Bible, distribution gains, and the 'We Make Whisky The
Canadian Way' campaign, which highlights the brand's quality and
craftmanship. Performance in vodka and ready to drink was also
good, with net sales up 2% and 6%, respectively.
-- Marketing reduced 2% driven by procurement efficiencies and
more focused spend on innovations. Spend was also focused against
the largest brands in US Spirits, with investment in Smirnoff,
Crown Royal and Captain Morgan up 6%, and fast growing brands such
as Don Julio, Bulleit and Buchanan's where investment was up
16%.
Europe, Russia and Turkey
The region's performance reflects momentum in Europe, strong net
sales growth in Russia driven by price increases in a tough
economic and exchange environment and good growth in Turkey. In
Europe, net sales were up 3% with Great Britain and Continental
Europe the main contributors and with share gains across the
market. Baileys performed strongly driven by execution against core
growth drivers, especially sampling. Guinness net sales were up 2%
supported by innovations from 'The Brewers Project' and Tanqueray
grew net sales double digit in most countries across Europe.
Reserve brands continued to perform well also growing double digit.
In Russia, price increases led to net sales increase of 27% while
volume was down 9%, with share gains in rum but share losses in
scotch in the face of increased competition. In Turkey net sales
were up 6% driven by Johnnie Walker underpinned by steady growth in
raki at 3%. Gross margins were up in both Europe and Russia.
Overall region operating margins improved by 51bps. In Europe
procurement savings offset increased marketing and overheads
leaving margin improvement in Russia to drive the region's
increase.
Key financials GBP million:
Acquisitions Reported
and Organic movement
2015 FX disposals movement 2016 %
------------------------------------- ----- ---- ------------ --------- ----- ---------
Net sales 2,617 (87) (88) 102 2,544 (3)
------------------------------------- ----- ---- ------------ --------- ----- ---------
Marketing 388 1 (5) 20 404 4
------------------------------------- ----- ---- ------------ --------- ----- ---------
Operating profit before exceptional
items 804 (24) (24) 45 801 -
------------------------------------- ----- ---- ------------ --------- ----- ---------
Exceptional operating items (20) -
------------------------------------- ----- ---- ------------ --------- ----- ---------
Operating profit 784 801 2
------------------------------------- ----- ---- ------------ --------- ----- ---------
Markets:
Organic Reported Organic Reported
volume volume net sales net sales
movement movement movement movement
% % % %
---------------- -------- -------- --------- ---------
Europe, Russia
and Turkey 2 - 4 (3)
---------------- -------- -------- --------- ---------
Europe 4 - 3 (2)
---------------- -------- -------- --------- ---------
Russia (9) (12) 27 (12)
---------------- -------- -------- --------- ---------
Turkey (2) (2) 6 (7)
---------------- -------- -------- --------- ---------
Spirits 2 1 6 -
---------------- -------- -------- --------- ---------
Beer 2 - - (2)
---------------- -------- -------- --------- ---------
Ready to drink 2 2 (3) (2)
---------------- -------- -------- --------- ---------
Global giants and local stars(i) :
Reported Organic Reported
volume net sales net sales
movement(ii) movement movement
% % %
---------------- ------------ --------- ---------
Guinness 4 2 1
---------------- ------------ --------- ---------
Johnnie Walker 3 7 3
---------------- ------------ --------- ---------
Smirnoff - 1 -
---------------- ------------ --------- ---------
Baileys 5 9 6
---------------- ------------ --------- ---------
Yenì Raki 1 4 (9)
---------------- ------------ --------- ---------
Captain Morgan 8 9 5
---------------- ------------ --------- ---------
J B (3) (4) (6)
---------------- ------------ --------- ---------
(i) Spirits brands excluding ready to drink.
(ii) Reported equals organic volume movement.
-- In Europe net sales were up 3%:
-- In Great Britain net sales were up 4%. Baileys performance
accelerated with net sales up 11% driven by increased off-trade
visibility and on-trade activation. Smirnoff net sales were up 1%
supported by a full year of the 'We're Open' platform. Guinness net
sales were up 1% benefitting from the Rugby World Cup activation,
improved distribution and innovation successes from 'The Brewers
Project'. Tanqueray net sales grew double digit and the brand
gained 2pps of share in the gin category, driven by expanding
distribution with improved visibility and increased bartender
advocacy. Reserve brands continued to drive profitable growth with
net sales up 26% driven by Cîroc and scotch malts.
-- Ireland net sales were broadly flat. Guinness net sales were
up 4%, driven by the continued successful innovations launched
through 'The Brewers Project'. Of these, Hop House 13 Lager has
proven to be a stand out success gaining almost 3% share of lager
beer in the Republic of Ireland. Other beer brands net sales
declined 4% and net sales in spirits were down 1%.
-- In France net sales increased 3% driven by Captain Morgan
which almost doubled sales and reserve brands up 8%, driven mainly
by scotch malts, partially offset by weakness in Smirnoff ready to
drink.
-- In Continental Europe net sales were up 4%:
-- Net sales in Iberia were up 2%. Johnnie Walker net sales grew
6% in the year and Baileys performed strongly supported by
increased investment. Gordon's net sales were also up in the
growing gin category. These positive net sales performances more
than offset net sales decline in J B.
-- Net sales in Germany, Austria and Switzerland grew 12% driven
by double digit growth in Johnnie Walker, Smirnoff, Tanqueray and
Baileys. Reserve brand net sales were up 11% driven by scotch
malts, Johnnie Walker and Tanqueray No. TEN.
-- Benelux net sales were down 1% overall in this group of
countries. Performance was impacted by a significant tax increase
implemented towards the end of the first half in Belgium. As a
result, the spirits market in Belgium has seen a significant
decline through the second half which led to a 26% net sales
decline over the same period.
-- In Italy net sales were up 8% driven by double digit growth
in scotch and gin. Johnnie Walker and scotch malts performed well
with both Tanqueray and Gordon's delivering strong growth albeit
not as fast as the gin category.
-- In Greece, net sales were up 5% driven by route to consumer
investment and focus on consistent activation.
-- Net Sales in Poland and the Europe Partner Markets were broadly flat.
-- Performance in Russia continued to be impacted by the
challenged economic dynamics. Price increases were implemented to
offset currency devaluation, which impacted volume, down 9% but
with net sales up 27%. Diageo scotch share has declined as a result
of the level of these price increases on scotch relative to the
competition. Captain Morgan however continued to achieve strong
share gains and net sales growth, supported by consistent execution
of growth drivers and the launch of Captain Morgan white.
-- In Turkey net sales grew 6% and in raki, with net sales up
3%, the premiumisation trend continued with Yenì Raki and the super
premium variant Tekirda Raki driving growth. Johnnie Walker net
sales continued to be up double digit.
-- Marketing increased by 5% and benefitted from procurement
savings resulting in an underlying investment increase of 10%. The
region continues to be focused on the key growth opportunities,
reserve brands, gin, beer and innovation.
Africa
Net sales increased 3% with growth in all markets except Nigeria
where net sales declined 15%. In East Africa, the recovery of
Senator in Kenya following the duty change and double digit growth
in rum and vodka led to strong net sales growth. Net sales in
Africa Regional Markets grew 9%, led by beer which was underpinned
by the 'Made of Black' Guinness campaign, innovation with Guinness
Africa Special, sustained growth of Malta Guinness and the roll out
of Orijin in Ghana. Vodka, particularly Smirnoff 1818, continued to
be the engine of growth in South Africa. Across the region, spirits
net sales grew 4%, with reserve brands up 35% on the back of Cîroc
and Johnnie Walker reserve brands which benefited from the enhanced
route to consumer and the launch of Johnnie Walker Green Label.
Operating margin decreased 252bps due primarily to the impact of
adverse mix and volume decline in Nigeria as well as weaker mix in
East Africa. This was partially offset by procurement savings
delivered across the region.
Key financials GBP million:
Acquisitions Reported
and Organic movement
2015 FX disposals movement 2016 %
------------------------------------- ----- ----- ------------ --------- ----- ---------
Net sales 1,415 (102) 54 34 1,401 (1)
------------------------------------- ----- ----- ------------ --------- ----- ---------
Marketing 147 (11) 6 1 143 (3)
------------------------------------- ----- ----- ------------ --------- ----- ---------
Operating profit before exceptional
items 318 (67) (12) (27) 212 (33)
------------------------------------- ----- ----- ------------ --------- ----- ---------
Exceptional operating items (7) -
------------------------------------- ----- ----- ------------ --------- ----- ---------
Operating profit 311 212 (32)
------------------------------------- ----- ----- ------------ --------- ----- ---------
Markets:
Organic Reported Organic Reported
volume volume net sales net sales
movement movement movement movement
% % % %
----------------- -------- -------- --------- ---------
Africa 9 19 3 (1)
----------------- -------- -------- --------- ---------
Nigeria (11) (11) (15) (19)
----------------- -------- -------- --------- ---------
East Africa 25 25 16 3
----------------- -------- -------- --------- ---------
Africa Regional
Markets 11 57 9 23
----------------- -------- -------- --------- ---------
South Africa 1 5 5 (6)
----------------- -------- -------- --------- ---------
Spirits 2 2 4 (7)
----------------- -------- -------- --------- ---------
Beer 20 39 11 9
----------------- -------- -------- --------- ---------
Ready to drink (37) (23) (43) (35)
----------------- -------- -------- --------- ---------
Global giants and local stars(i) :
Reported Organic Reported
volume net sales net sales
movement(ii) movement movement
% % %
---------------- ------------ --------- ---------
Guinness 6 6 1
---------------- ------------ --------- ---------
Malta Guinness 14 13 10
---------------- ------------ --------- ---------
Tusker (15) (11) (27)
---------------- ------------ --------- ---------
Senator 151 157 134
---------------- ------------ --------- ---------
Harp (23) (26) (28)
---------------- ------------ --------- ---------
Johnnie Walker (10) 1 (7)
---------------- ------------ --------- ---------
Smirnoff 6 12 (4)
---------------- ------------ --------- ---------
(i) Spirits brands excluding ready to drink.
(ii) Reported equals organic volume movement.
-- In Nigeria, net sales declined 15% due primarily to Orijin
lapping the successful launch last year and now competing with 'me
too' brands. The introduction of new formats at compelling price
points, brand equity building through the 'Live Orijinal' campaign
and the recruitment of new consumers with Orijin Zero have
stabilised the brand. In beer, distribution expansion, higher brand
equity driven by the 'Made of Black' campaign, robust activation
during the broadcast sponsorship of Barclay's Premier League and
innovation with Guinness Africa Special led to the growth of
Guinness. Malta Guinness also grew, with net sales up 15%, on the
back of 'You vs' brand campaign and increased distribution
particularly into the off-trade. The business continued to broaden
its portfolio in the value lager segment with brands such as
Satzenbrau offsetting the decline in Harp. Beer net sales grew
8%.
-- In East Africa, net sales increased 16% driven by double
digit growth in beer, spirits and ready to drink. Senator grew in
Kenya following the roll back of the duty increase early in the
year and momentum was sustained throughout the year. This more than
offset the decline in Tusker, which was impacted by the duty
increase in Kenya and currency volatility in the markets, resulting
in 17% net sales growth in beer. Mainstream spirits grew 26% led by
Kenya Cane and Kane Extra, together with innovation such as Kenya
Cane Coconut and Chrome vodka. The improved route to consumer, with
deepening mainstream outlet coverage, continued to drive growth in
this segment. Reserve brands grew 24% following enhanced
distribution and activation supported by brand ambassadors. Ready
to drink was up 14% as Smirnoff Ice Double Black and Guarana grew
with positive gearing driven by price increase.
-- In Africa Regional Markets, net sales grew 9% reflecting the
strong growth in Cameroon, Ghana and Ethiopia. Ghana net sales
growth accelerated to 30% due to the launch of Orijin Bitters and
ready to drink variants. Beer, driven by Guinness, was up 9% as
activation and promotion was stepped up behind the 'Made of Black'
campaign and Guinness Africa Special was rolled out. In Cameroon,
net sales growth of 12% was driven largely by good performance in
beer coupled with double digit growth in spirits and ready to drink
categories. In Ethiopia, net sales grew 8% with Malta Guinness up
71%. This more than offset the slight decline in Meta as
competition intensified. A number of interventions were made,
including relaunching Meta in November and introducing Azmera in
April 2016 to recruit value oriented consumers. Markets continued
to benefit from the enhanced route to consumer and capability
builds, including the adoption of a sales force automation tool.
Angola net sales declined 65% due to the macroeconomic headwinds
and inventory reduction in view of weakening consumer demand and
weaker currency.
-- South Africa grew 5% driven by 13% growth in vodka led by
Smirnoff 1818. Overall, scotch sales were flat reflecting the
weaker performance of Bell's, White Horse, J B and Black and White
due to increased competition in this price sensitive consumer
segment. This was offset by 9% growth in Johnnie Walker across key
variants such as Johnnie Walker Red Label, Johnnie Walker Black
Label, Johnnie Walker Gold Label Reserve and Johnnie Walker Green
Label which was launched in the second half of the year.
-- Marketing was up 1% in the region with investment prioritised
behind the biggest growth opportunities with proven sales drivers.
In Nigeria, marketing declined in line with net sales, with spend
focused on the Guinness and Orijin brands. East Africa up-weighted
investment on mainstream spirits and value beer, notably in Kenya
Cane and Senator. In Africa Regional Markets, the innovation,
marketing campaigns and activation programmes behind Guinness and
Malta Guinness contributed to the increase in marketing. South
Africa maintained spend in Smirnoff to build scale and increased
investment behind Johnnie Walker.
Latin America and Caribbean
Net sales grew 1% in LAC. Growth in Mexico, Colombia and the
domestic markets of West LAC was partially offset by the decline in
Brazil, travel retail and the export channels. In Brazil,
performance was impacted by subdued consumer confidence, a tax
increase and significant slowdown in the travel retail channel,
which resulted in a 7% decline in net sales. Performance in Mexico
and Colombia was strong with net sales up 10% and 28% respectively,
led by scotch and vodka. Currency weakness and lower underlying
demand continued to impact the West LAC export channels. Diageo's
strategy in LAC is to expand our leadership position in scotch and
broaden our portfolio. Scotch net sales grew 2%, led by Buchanan's
and Black and White, with share gains in most markets. Net sales of
Johnnie Walker declined with weakness in PUB and West LAC partially
offset by strong growth in Mexico and Colombia. Vodka net sales
grew 8% driven primarily by growth in Mexico, Colombia and the
domestic markets in West LAC. Don Julio gained share supported by
increased activity to build brand awareness and drive recruitment
in Mexico. Gross margin improved, benefitting from mix as well as
procurement savings across logistics and production. This was
offset by higher overheads resulting in operating margin decline of
39bps.
Key financials GBP million:
Acquisitions Reported
and Organic movement
2015 FX disposals movement 2016 %
------------------------------------- ----- ----- ------------ --------- ----- ---------
Net sales 1,033 (134) (41) 5 863 (16)
------------------------------------- ----- ----- ------------ --------- ----- ---------
Marketing 194 (26) (1) - 167 (14)
------------------------------------- ----- ----- ------------ --------- ----- ---------
Operating profit before exceptional
items 263 (57) (5) (2) 199 (24)
------------------------------------- ----- ----- ------------ --------- ----- ---------
Exceptional operating items
(i) (5) (118)
------------------------------------- ----- ----- ------------ --------- ----- ---------
Operating profit 258 81 (69)
------------------------------------- ----- ----- ------------ --------- ----- ---------
(i) The impairment of Ypióca
in 2016.
Markets:
Organic Reported Organic Reported
volume volume net sales net sales
movement movement movement movement
% % % %
---------------- -------- -------- --------- ---------
Latin America
and
Caribbean (2) (5) 1 (16)
---------------- -------- -------- --------- ---------
PUB (5) (5) (9) (27)
---------------- -------- -------- --------- ---------
Colombia 9 9 28 -
---------------- -------- -------- --------- ---------
Mexico 10 19 10 7
---------------- -------- -------- --------- ---------
West LAC (2) (17) (3) (20)
---------------- -------- -------- --------- ---------
Venezuela 4 3 173 (69)
---------------- -------- -------- --------- ---------
Spirits (2) (2) 1 (12)
---------------- -------- -------- --------- ---------
Beer 23 (41) 14 (60)
---------------- -------- -------- --------- ---------
Ready to drink (11) (12) - (20)
---------------- -------- -------- --------- ---------
Global giants and local stars(i) :
Reported Organic Reported
volume net sales net sales
movement(ii) movement movement
% % %
----------------- ------------ --------- ---------
Johnnie Walker (8) (4) (15)
----------------- ------------ --------- ---------
Buchanan's (5) 9 (7)
----------------- ------------ --------- ---------
Smirnoff - 6 (19)
----------------- ------------ --------- ---------
Old Parr (15) (1) (17)
----------------- ------------ --------- ---------
Baileys (3) (1) (14)
----------------- ------------ --------- ---------
Ypióca (6) (6) (28)
----------------- ------------ --------- ---------
Black and White 48 63 34
----------------- ------------ --------- ---------
(i) Spirits brands excluding ready to drink.
(ii) Reported equals organic volume movement except for Smirnoff 4%.
-- In Paraguay, Uruguay and Brazil (PUB), net sales declined 9%.
In Brazil, net sales were down with declines in scotch, vodka and
cachaça, driven primarily by the slowing economy, a tax increase in
December 2015, currency volatility and a slowdown in the duty free
channel. Despite the challenging operating environment, the
business gained share in scotch, delivered through Johnnie Walker
and Black and White marketing campaigns. The business continued to
invest behind the Smirnoff trademark in music festivals and trade
activations, as well as the rejuvenation of Ypióca. Net sales in
Paraguay and Uruguay declined due to reduced demand in the export
and travel retail channels given currency volatility.
-- Colombia delivered 9% volume growth and 28% net sales
increase, on the back of favourable mix and successive price
increases following the currency devaluation. Scotch was the key
growth driver, with double digit growth and share gains. The
portfolio in Colombia continues to broaden with gin, vodka and
tequila net sales growing double digit.
-- Mexico net sales increased 10%. Scotch was a key growth
driver with net sales up 17%, reflecting strong volume growth and
price increase. Buchanan's was up 20% following the relaunch of the
brand with the 'Good versus Great' campaign, the introduction of
new packaging and strong activations around Father's Day with 'A
Great Father A Great Day' campaign. Similarly, Johnnie Walker net
sales grew double digit on the back of 8% volume growth across core
variants such as Johnnie Walker Red Label, Johnnie Walker Black
Label and Johnnie Walker reserve brands including the newly
launched Johnnie Walker Green Label. In mainstream scotch, Black
and White net sales grew supported by expanded distribution and
activation across the on and off-trade. Following the execution of
the new Smirnoff strategy to build the brand's credentials through
participation in music festivals and increasing activation across
the on-trade, Smirnoff net sales doubled and share increased in the
last six months. Don Julio also gained share in the year reflecting
the successful marketing campaign, activation and higher brand
awareness.
-- West LAC net sales declined 3% primarily due to weakness in
the export channels. Domestic markets' net sales were stable with
growth in Peru, Chile and Jamaica offset by a decline in Central
America and Caribbean. In Peru, net sales grew 16%, led by
increases in Johnnie Walker Red Label, Johnnie Walker Black Label
and Old Parr, underpinned by the marketing campaigns and
activations around gifting for Christmas and Father's Day. Scotch
was also a key engine behind Chile's net sales growth of 9%.
Johnnie Walker Red Label and mainstream scotch such as VAT 69, Old
Parr and White Horse grew following distribution expansion as well
as improved trade visibility. Central America and Caribbean net
sales contracted 4% given currency volatility across the
market.
-- In Venezuela, volume increased 4% driven primarily by strong
growth in rum as the business resumed production of local spirits
following the stabilisation of glass supply. This was offset by the
decline in scotch as access to foreign currency remains
constrained. Net sales grew significantly faster as the business
increased prices in a high inflation environment and transacted
some scotch sales in sterling.
-- Marketing increased broadly in line with net sales. Spend in
Brazil was reduced in view of the weaker economic outlook. Mexico
increased spend by 9%, investing behind Smirnoff and scotch to
build brand equity and enhance activations. In Colombia,
incremental spend was invested behind Johnnie Walker, Buchanan's
and Smirnoff ready to drink to support the Smirnoff Ice Green Apple
flavour launch.
Asia Pacific
Net sales in Asia Pacific grew 2% as a result of growth in
India, South East Asia and Australia. In China, Chinese white
spirits grew while scotch declined and the shift towards lower ABV
products in Korea led to a decline in net sales. Global Travel Asia
and Middle East business declined primarily due to the geopolitical
developments in the Middle East. The changes made to improve
performance in USL led to net sales growth of 5% in India, largely
driven by growth in IMFL whisky and scotch. Net sales in South East
Asia grew 16% as the inventory reduction experienced last year
ended. Australia net sales grew 2% driven by scotch and Guinness.
Reserve brands net sales grew 4% largely driven by the strong
performance of Shui Jing Fang in China and Johnnie Walker in South
East Asia. Margin improved 176bps as a result of reducing marketing
in India with the termination of USL related party agreements, and
for Johnnie Walker Black Label and Johnnie Walker Blue Label in
China. The sale by USL of United Breweries Limited shares also
contributed to operating margin expansion.
Key financials GBP million:
Acquisitions Asia Pacific Reported
and Organic net sales movement
2015 FX disposals movement adjustment 2016 %
-------------------------------- ----- ---- ------------ --------- ------------ ----- ---------
Net sales 2,213 (21) (28) 34 (122) 2,076 (6)
-------------------------------- ----- ---- ------------ --------- ------------ ----- ---------
Marketing 344 - (1) (42) - 301 (13)
-------------------------------- ----- ---- ------------ --------- ------------ ----- ---------
Operating profit before
exceptional
items 356 (5) - 44 - 395 11
-------------------------------- ----- ---- ------------ --------- ------------ ----- ---------
Exceptional operating items
(i) (193) (49)
-------------------------------- ----- ---- ------------ --------- ------------ ----- ---------
Operating profit 163 346 112
-------------------------------- ----- ---- ------------ --------- ------------ ----- ---------
(i) Disengagement agreement relating
to USL in 2016.
Markets:
Organic Reported Organic Reported
volume volume net sales net sales
movement movement movement movement
% % % %
----------------- -------- -------- --------- ---------
Asia Pacific - (3) 2 (6)
----------------- -------- -------- --------- ---------
India - (4) 5 (11)
----------------- -------- -------- --------- ---------
South East Asia 3 3 16 15
----------------- -------- -------- --------- ---------
Greater China (5) (5) (2) -
----------------- -------- -------- --------- ---------
Global Travel
Asia and
Middle East (9) (9) (15) (14)
----------------- -------- -------- --------- ---------
Australia 2 2 2 (5)
----------------- -------- -------- --------- ---------
North Asia 6 6 (5) (6)
----------------- -------- -------- --------- ---------
Spirits - (3) 1 (7)
----------------- -------- -------- --------- ---------
Beer 8 8 7 4
----------------- -------- -------- --------- ---------
Ready to drink (3) (3) (3) (8)
----------------- -------- -------- --------- ---------
Global giants and local stars(i) :
Reported Organic Reported
volume net sales net sales
movement(ii) movement movement
% % %
--------------- ------------ --------- ---------
Johnnie Walker (4) (2) (2)
--------------- ------------ --------- ---------
McDowell's (2) - (16)
--------------- ------------ --------- ---------
Windsor (4) (10) (12)
--------------- ------------ --------- ---------
Smirnoff (4) (7) (9)
--------------- ------------ --------- ---------
Guinness 8 7 4
--------------- ------------ --------- ---------
Bundaberg (5) (3) (10)
--------------- ------------ --------- ---------
Shui Jing Fang 55 20 22
--------------- ------------ --------- ---------
(i) Spirits brands excluding ready to drink.
(ii) Reported equals organic volume movement except for McDowell's 0%.
-- South East Asia net sales were up 16% as it lapped the
inventory reduction last year. In Thailand performance improved
after a weak first half with net sales growing in the second half
as the launch of Smirnoff Midnight 100 ready to drink offset the
decline in scotch, which gained share in a declining category. In
Indonesia net sales increased 1% as Guinness grew due to the focus
on the on-trade post regulations restricting sale of alcohol in the
off-trade were introduced last year. Vietnam was impacted by the
special consumption tax on imported products introduced in January
2016 resulting in a net sales decline of 35%. Reserve brands
performance was strong with net sales up 27% led by Johnnie Walker
Gold Label Reserve and Johnnie Walker Blue Label.
-- Greater China net sales were down 2%. In mainland China,
scotch declined 42% as the continued weakness in premium scotch in
the traditional on-trade channel resulted in distributors reducing
inventory, although Diageo gained share in the super deluxe scotch
segment. Chinese white spirits net sales grew 19% as growth in the
second half was lower due to a tougher prior year comparison. In
Taiwan net sales grew 8% driven by growth in Johnnie Walker.
-- India net sales were up 5%, driven by the premiumisation
strategy with good growth in Prestige and above brands and popular
brands net sales flat. Royal Challenge and McDowell's No. 1 were
relaunched during the year performed and contributed to growth with
Royal Challenge net sales up 54%. Scotch grew 17% as Black Dog grew
23% and Johnnie Walker grew 22% with strong performance in Johnnie
Walker Black Label, Johnnie Walker Red Label and Johnnie Walker
Blue Label. The integration of Diageo's brands into USL has created
an exceptionally strong brand portfolio in India that participates
across all price tiers in the IMFL and imported spirits segments.
As a result of the focus on route to consumer, 20% of outlets are
now meeting 'perfect outlet' standards driving recruitment and
brand building. Gross margin improved 99bps with the growth of
prestige and above brands driving positive mix and productivity
initiatives that reduced the cost of goods sold. Operating margin
improved 702bps as a result of gross margin improvement, lower
marketing and the sale by USL of United Breweries Limited
shares.
-- Global Travel Asia and Middle East net sales declined 15%
largely driven by the Middle East where net sales declined 20% as
geopolitical developments led to weak performance in the domestic
and travel retail business. Global Travel Asia net sales declined
7% as a result of lower spend by travellers and currency
volatility.
-- Australia net sales increased 2% with growth in scotch,
vodka, liqueurs and gin offsetting the decline in the ready to
drink business. In rum, strong growth of Captain Morgan both in
ready to drink and spirits categories, offset the decline in
Bundaberg. Reserve brands were up 7% largely driven by Johnnie
Walker, as consumers continue to premiumise within the spirits
category.
-- North Asia net sales were down 5%. In Korea, net sales
declined 10%, as Windsor suffered from increased competition in the
traditional on-trade with net sales down 20% which offset growth
from W-Ice, an innovation in the growing lower ABV premium whisky
segment. In Japan, net sales were up 8% largely driven by scotch
net sales growing 21% capitalising on the growth of the brown
spirits segment.
-- Marketing was 12% lower driven by reductions on Johnnie
Walker Black Label and Johnnie Walker Blue Label in China and India
where marketing reduced as a result of termination of USL related
party agreements.
Corporate
Key financials GBP million:
Acquisitions Reported
and Organic movement
2015 FX disposals movement 2016 %
------------------------------------- ----- --- ------------ --------- ----- ---------
Net sales 80 - (48) 4 36 (55)
------------------------------------- ----- --- ------------ --------- -----
Operating profit before exceptional
items (123) (7) (3) (17) (150) (22)
------------------------------------- ----- --- ------------ --------- ----- ---------
Exceptional operating items (10) -
------------------------------------- ----- --- ------------ --------- ----- ---------
Operating profit (133) (150) (13)
------------------------------------- ----- --- ------------ --------- ----- ---------
Reported corporate net sales in the year ended 30 June 2016 were
GBP36 million, down 55% from the previous year due to the sale of
the Gleneagles Hotel in June 2015. Operating charges increased due
to costs related to the productivity programme, the reinvestment of
the savings delivered by the organisational review announcement in
January 2014, and increase in the annual incentive plan costs.
These increases were partially offset by increased profit on land
sales. There were no exceptional charges in respect of
restructuring costs in the year.
CATEGORY AND BRAND REVIEW
For year ended 30 June 2016
Key categories:
Reported Organic net Reported net
volume sales sales
movement(iii) movement movement
% % %
------------------------------------------ ------------- ----------- ------------
Spirits(i) (1) 3 (1)
------------------------------------------ ------------- ----------- ------------
Scotch (3) - (4)
------------------------------------------ ------------- ----------- ------------
Vodka(ii) - 1 2
------------------------------------------ ------------- ----------- ------------
North American whiskey 4 6 12
------------------------------------------ ------------- ----------- ------------
Rum(ii) 2 3 (3)
------------------------------------------ ------------- ----------- ------------
Indian-Made Foreign Liquor (IMFL) whisky (5) 3 (11)
------------------------------------------ ------------- ----------- ------------
Liqueurs 1 3 2
------------------------------------------ ------------- ----------- ------------
Gin(ii) 3 8 6
------------------------------------------ ------------- ----------- ------------
Tequila 15 8 28
------------------------------------------ ------------- ----------- ------------
Beer 21 6 1
------------------------------------------ ------------- ----------- ------------
Ready to drink (9) (11) (11)
------------------------------------------ ------------- ----------- ------------
(i) Spirits brands excluding ready to drink.
(ii) Vodka, rum, gin including IMFL brands.
(iii) Reported equals organic volume movement except for IMFL
(1)%, Tequila (17)%, Beer 13% and Ready to drink (13)%.
-- Scotch represents 24% of Diageo net sales and was flat in the
year. Net sales grew in North America, Europe and Latin America and
Caribbean driven by Johnnie Walker and Buchanan's supported by new
campaigns. Net sales declined in Africa; primarily in Angola, and
in Asia Pacific driven by declines in China and Korea. The
performance of Black and White was strong with net sales up 31%.
Windsor net sales declined double digit in Korea due to the decline
of the whisky category. Scotch reserve brands net sales grew 7%
driven by strong growth in Johnnie Walker Gold Label Reserve,
Johnnie Walker Blue Label and Johnnie Walker Green Label.
-- Vodka represents 13% of Diageo's net sales and grew 1%.
Performance of Smirnoff, the largest brand in the category,
improved growing 2%. Ketel One vodka returned to growth in the
United States and Canada supported by a new campaign and pricing
strategy. In addition, Cîroc performance improved from the first
half driven by the success of Cîroc Apple in the United States.
-- North American whiskey represents 8% of Diageo's net sales
and grew 6%. Performance continued to be driven by strong growth in
Crown Royal Regal Apple and Bulleit which continue to gain share in
the United States.
-- Rum represents 7% of Diageo's net sales and grew 3%. Captain
Morgan grew 3% driven by the base variant Original Spiced rum
growing 3% and the Cannon Blast launch going well in the United
States. Kenya Cane, a mainstream rum in Kenya, and Zacapa also
contributed to the growth.
-- IMFL whisky represents 5% of Diageo's net sales and grew 3%.
The relaunches of two of the biggest brands Royal Challenge and
McDowell's No. 1 drove this growth with Royal Challenge net sales
up 55% due to the relaunch.
-- Liqueurs represents 5% of Diageo's net sales and grew 3%.
Baileys, the leading brand in this category, grew 4% due to 9%
growth in its biggest market, Europe. The key growth drivers were
on premise visibility, focused media content and sampling.
-- Gin represents 3% of Diageo's net sales and grew 8%.
Tanqueray was the largest contributor growing double digit,
followed by Gordon's.
-- Tequila represents 1% of Diageo's net sales and grew 8%. The
performance was driven by continued double digit growth of Don
Julio in its biggest market, the United States.
-- Beer represents 18% of Diageo's net sales and grew 6% driven
by strong performance in Africa where net sales grew 11%. Key
contributors were East Africa and Nigeria. Strong growth of Senator
following the excise duty remission grew sales in East Africa. In
Nigeria, Malta Guinness, Pilsner and value brand Satzenbrau
delivered a strong performance. Europe grew 2% on Guinness driven
by the effectiveness of the 'Made of More' advertising campaign,
innovations like Hop House 13 lager from 'The Brewers Project' and
strong activation around the Rugby World Cup.
-- Ready to drink represents 6% of Diageo's net sales and
declined 11%. This was largely driven by the decline in Orijin in
Nigeria. The decline was partially offset by a good performance in
Smirnoff Ice flavours in the United States driven by new marketing
programmes and the launch of Orijin in Ghana and Cameroon. In
Thailand, the Smirnoff Midnight 100 launch continued to progress
well.
Global giants, local stars and reserve(i) :
Reported Organic Reported
volume net sales net sales
movement(ii) movement movement
% % %
------------------ ------------ --------- ---------
Global giants
------------------ ------------ --------- ---------
Johnnie Walker (4) 1 (3)
------------------ ------------ --------- ---------
Smirnoff 1 2 -
------------------ ------------ --------- ---------
Baileys 2 4 3
------------------ ------------ --------- ---------
Captain Morgan 4 3 5
------------------ ------------ --------- ---------
Tanqueray 11 12 15
------------------ ------------ --------- ---------
Guinness 4 4 2
------------------ ------------ --------- ---------
Local stars
------------------ ------------ --------- ---------
Crown Royal 5 6 11
------------------ ------------ --------- ---------
Yenì Raki 1 4 (9)
------------------ ------------ --------- ---------
Buchanan's (2) 10 1
------------------ ------------ --------- ---------
J B (6) (9) (12)
------------------ ------------ --------- ---------
Windsor (4) (10) (12)
------------------ ------------ --------- ---------
Old Parr (13) 1 (14)
------------------ ------------ --------- ---------
Bundaberg (6) (3) (10)
------------------ ------------ --------- ---------
Bell's - (1) (10)
------------------ ------------ --------- ---------
White Horse (11) 6 (15)
------------------ ------------ --------- ---------
Ypióca (6) (6) (28)
------------------ ------------ --------- ---------
Cacique 25 9 (24)
------------------ ------------ --------- ---------
McDowell's (2) - (16)
------------------ ------------ --------- ---------
Shui Jing Fang 55 20 22
------------------ ------------ --------- ---------
Reserve
------------------ ------------ --------- ---------
Scotch malts 8 7 6
------------------ ------------ --------- ---------
Cîroc (2) (3) 2
------------------ ------------ --------- ---------
Ketel One vodka 4 4 10
------------------ ------------ --------- ---------
Don Julio 25 18 40
------------------ ------------ --------- ---------
Bulleit 27 29 36
------------------ ------------ --------- ---------
(i) Spirits brands excluding ready to drink.
(ii) Reported equals organic volume movement except for White
Horse (9)%, Don Julio (13)% and McDowell's 0%.
-- Global Giants represent 40% of Diageo net sales and grew at 3%.
-- Johnnie Walker net sales grew 1% due to reserve brands
growing 10% driven by Johnnie Walker Gold Label Reserve, Johnnie
Walker Blue Label and Johnnie Walker Green Label. Europe and North
America were the largest contributors with 7% and 5% growth,
respectively. In Latin America and Caribbean, double digit growth
in Mexico and Colombia was more than offset by decline in Brazil.
In Asia Pacific, double digit growth in India and South East Asia
was offset by declines in the Middle East, Global Travel and
China.
-- Smirnoff net sales grew 2%, as it returned to growth in the
United States, the biggest market, where net sales were up 2%. In
Europe, performance improved versus the first half and net sales
grew 1%. South Africa and Mexico also delivered strong growth on
Smirnoff growing double digit.
-- Baileys net sales grew 4%, driven by 9% growth in Europe with
the brand growing double digit in Great Britain, Iberia, Germany
and Austria.
-- Captain Morgan net sales grew 3% due to a strong performance
in Europe and Russia. In the United States net sales grew 2% and it
gained share in the category driven by increased on premise
activity and the launch of Captain Morgan Cannon Blast.
-- Tanqueray net sales grew 12% with Europe and North America
accounting for more than two thirds of the growth. All other
regions also delivered strong growth.
-- Guinness net sales grew 4%. In Nigeria net sales grew 3%
driven by the success of the 'Made of Black' campaign and
activation against the football viewing occasion. In Cameroon and
Ghana net sales increased double digit. Guinness also gained share
and increased net sales in Great Britain and Ireland supported by
the 'Brewers Project' innovations.
-- Local Stars represent 19% of net sales and grew 3%, due to
Crown Royal in North America growing 6% and Buchanan's up 10%,
largely in North America and Mexico. Growth in Yenì Raki in Turkey
and Shui Jing Fang in China largely offset the declines in Windsor
in Korea and J B.
-- Reserve brands represent 15% of net sales and grew 7%. The
return to growth in the second half was a result of the improved
performance of Cîroc driven by the success of Cîroc Apple in the
United States. Scotch reserve brands grew 7% with Johnnie Walker
driving the growth particularly in the United States where it grew
23% and scotch malts growing 7%. Bulleit continued its strong
growth with net sales 29%. Net sales of Shui Jing Fang were up 20%
and Tanqueray No. TEN grew 26%.
-- In Africa there are four local beer brands Senator, Malta
Guinness, Tusker and Harp. Their performance is covered in the
Africa section.
ADDITIONAL FINANCIAL INFORMATION
For the year ended 30 June 2016
INCOME STATEMENT
Acquisitions
Exchange and disposals Organic Reclassifi-
2015 (a) (b) movement(ii) cation(iii) 2016
GBP million GBP million GBP million GBP million GBP million GBP million
---------------------------- ----------- ----------- -------------- ------------- ------------ -----------
Sales 15,966 (360) (362) 397 - 15,641
============================ =========== =========== ============== ============= ============ ===========
Excise duties (5,153) 188 52 (121) (122) (5,156)
---------------------------- ----------- ----------- -------------- ------------- ------------ -----------
Net sales 10,813 (172) (310) 276 (122) 10,485
============================ =========== =========== ============== ============= ============ ===========
Cost of sales(i) (4,585) 68 200 (56) 122 (4,251)
---------------------------- ----------- ----------- -------------- ------------- ------------ -----------
Gross profit 6,228 (104) (110) 220 - 6,234
============================ =========== =========== ============== ============= ============ ===========
Marketing (1,629) 13 17 37 - (1,562)
============================ =========== =========== ============== ============= ============ ===========
Other operating expenses(i) (1,533) 8 19 (158) - (1,664)
---------------------------- ----------- ----------- -------------- ------------- ------------ -----------
Operating profit before
exceptional items 3,066 (83) (74) 99 - 3,008
============================ =========== =========== ============== ============= ============ ===========
Exceptional operating
items (c) (269) (167)
---------------------------- ----------- -----------
Operating profit 2,797 2,841
============================ =========== ===========
Non-operating items
(c) 373 123
============================ =========== ===========
Net finance charges (412) (327)
============================ =========== ===========
Share of after tax results
of associates and joint
ventures 175 221
---------------------------- ----------- -----------
Profit before taxation 2,933 2,858
============================ =========== ===========
Taxation (d) (466) (496)
---------------------------- ----------- -----------
Profit for the year 2,467 2,362
---------------------------- ----------- -----------
(i) Before exceptional operating items, see notes 3.
(ii) For the definition of organic movement see explanatory
notes.
(iii) Following a review of the third party production
arrangements in India it was determined to be more appropriate to
ensure consistent reporting by reclassifying the excise duties
payable by the third party production companies as excise duties.
This change was implemented by USL in its first three months of its
financial year ended 30 June 2016, and resulted in net sales for
the year ended 30 June 2016 reducing by GBP122 million with a
corresponding decrease in cost of sales. There was no impact on
gross or operating profit.
(a) Exchange
The impact of movements in exchange rates on reported figures is
principally in respect of the Nigerian naira, the South African
rand, the Venezuelan bolivar, the Brazilian real and the Turkish
lira, partially offset by the US dollar.
Venezuela is a hyper-inflationary economy where the government
maintains a regime of strict currency controls with multiple
foreign currency rate systems. Access to US dollar 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 (VEF) at the rate
they are expected to be settled, applying the most appropriate
official exchange rate. For consolidation purposes, the group
converts its Venezuelan operations using management's estimate of
the exchange rate that capital and dividend repatriations are
expected to be realised. The consolidation exchange rate and the
accounting treatment are monitored and reviewed depending on the
economic and regulatory developments in the country.
The effect of movements in exchange rates and other movements on
profit before exceptional items and taxation for the year ended 30
June 2016 is set out in the table below.
Gains/
(losses)
GBP million
----------------------------------------------------------- -----------
Translation impact (13)
------------------------------------------------------------- -----------
Transaction impact (70)
------------------------------------------------------------- -----------
Operating profit before exceptional items (83)
------------------------------------------------------------ -----------
Net finance charges - translation impact (17)
------------------------------------------------------------- -----------
Mark to market impact of IAS 39 on interest expense (9)
------------------------------------------------------------ -----------
Impact of IAS 21 and IAS 39 on net other finance charges 2
------------------------------------------------------------ -----------
Net finance charges (24)
------------------------------------------------------------- -----------
Associates - translation impact (4)
------------------------------------------------------------- -----------
Profit before exceptional items and taxation (111)
------------------------------------------------------------ -----------
Year ended Year ended
30 June 2016 30 June 2015
---------------------- ------------ ------------
Exchange rates
---------------------- ------------ ------------
Translation GBP1 = $1.48 $1.57
---------------------- ------------ ------------
Transaction GBP1 = $1.55 $1.58
---------------------- ------------ ------------
Translation GBP1 = EUR1.34 EUR1.31
---------------------- ------------ ------------
Transaction GBP1 = EUR1.28 EUR1.23
---------------------- ------------ ------------
(b) Acquisitions and disposals
The impact of acquisitions and disposals on the reported figures
was primarily attributable to the disposals of The Old Bushmills
Distillery Company Limited on 27 February 2015, Gleneagles Hotels
Limited on 30 June 2015, Desnoes & Geddes Limited (D&G) on
7 October 2015, the wine businesses in the United States and the UK
Percy Fox wine business on 1 January 2016, which were partially
offset by the acquisition of 50% equity interests, that the group
did not own, in both Don Julio in Mexico on 27 February 2015 and a
joint venture in South Africa on 29 May 2015.
(c) Exceptional items
Exceptional operating charges in the year ended 30 June 2016
totalled GBP167 million before tax, a decrease of GBP102 million
against last year.
Exceptional operating charges in the year ended 30 June 2016
included an impairment charge in respect of the Ypióca brand and
related tangible fixed assets and goodwill allocated to the
Paraguay, Uruguay and Brazil (PUB) cash-generating unit of GBP62
million, GBP14 million and GBP42 million, respectively. Forecast
cash flow assumptions have been reduced principally due to a
challenging economic environment in Brazil and significant adverse
changes in local tax regulation.
On 25 February 2016 the group incurred an exceptional operating
charge of GBP49 million including a $75 million (GBP53 million)
payment to Dr Vijay Mallya over a five year period in consideration
for (i) his resignation and the termination of his appointment and
governance rights and his relinquishing of the rights and benefits
attached to his position as Chairman and Non-Executive Director of
United Spirits Limited (USL); (ii) his agreement to five-year
global non-compete (excluding the United Kingdom),
non-interference, non-solicitation and standstill undertakings; and
(iii) his agreement that he and his affiliates will not pursue any
claims against Diageo, USL and their affiliates. In addition to the
amount Diageo agreed to pay Dr Vijay Mallya there was net gain of
GBP4 million arising from the termination of certain related
agreements, that were previously provided for less legal fees
directly attributable to the settlement.
In the year ended 30 June 2015 exceptional operating charges
were GBP269 million before tax which comprised GBP146 million in
respect of a settlement agreement of disputes with the Korean
customs authorities, GBP82 million in respect of restructuring
programmes and an exceptional impairment charge of GBP41 million in
respect of the group's 45.56% equity investment in Hanoi Liquor
Joint Stock Company.
Non-operating items in the year ended 30 June 2016 were a net
gain of GBP123 million before tax compared to a gain of GBP373
million before tax last year, a decrease of GBP250 million against
last year.
The year ended 30 June 2016 included an exceptional gain before
taxation of GBP457 million in respect of the sale of Diageo's
57.87% shareholding in D&G (Jamaican Red Stripe business) and a
49.99% stake in GAPL Pte Limited (Singapore and Malaysian beer
businesses) to Heineken, which completed on 7 October 2015. The
gain is net of a GBP13 million cumulative exchange loss, in respect
of prior years, recycled from other comprehensive income and
transaction costs of GBP7 million. As part of the transaction,
Diageo purchased an additional 20% shareholding in Guinness Ghana
Breweries Limited (GGBL) from Heineken which increased Diageo's
shareholding in GGBL to 72.42%.
On 1 January 2016, Diageo completed the sale of the majority of
its wine interests in the United States and its UK based Percy Fox
businesses to Treasury Wine Estates. Together with the sale of the
group's other wine interests in the United States the transactions
resulted in a loss before taxation on disposal of GBP191 million
including an estimated provision for the settlement of a guarantee
given in respect of the lease payments due to Realty Income
Corporation, the lessor of the vineyards. The loss is net of an
exchange gain of GBP12 million, in respect of prior years, recycled
from other comprehensive income and transaction costs of GBP8
million.
On 29 January 2016, Diageo disposed of its interests in
Argentina to Grupo Peñaflor. The transaction resulted in a loss
before taxation of GBP38 million including a cumulative exchange
loss of GBP20 million, in respect of prior years, recycled from
other comprehensive income and other directly attributable costs of
GBP7 million.
On 1 December 2015, Diageo disposed of its 42.25% equity
interests in DHN Drinks, its 25% equity stake in Sedibeng Breweries
Limited and its 15.01% equity stake in Namibia Breweries Limited
(South African associate interests) to Heineken. The net cash
consideration received was GBP120 million, which included the
repayment of GBP31 million in respect of loans previously made to
DHN Drinks and Sedibeng Breweries Limited. A loss before taxation
of GBP27 million, including a GBP30 million cumulative exchange
loss, in respect of prior years, recycled from other comprehensive
income, was accounted for in the income statement.
On 30 September 2015, the group completed the disposal of its
shareholding in Central Glass Industries Limited (CGI), a Kenyan
glass bottle manufacturer, resulting in a gain before taxation of
GBP14 million, net of GBP1 million transaction costs. GBP7 million
of the gain is attributable to non-controlling interests.
A guarantee provided by Diageo for a loan of $135 million (GBP92
million) given by Standard Chartered Bank (SCB) to Watson Limited
was called and $135 million paid to SCB during the year. The
underlying security package for the loan remains in place. A
provision of $135 million has been made. Further details are set
out in note [12(a)].
In the year ended 30 June 2015 non-operating items included a
gain of GBP63 million as a result of Don Julio becoming a
subsidiary of the group and as part of the transaction, Diageo sold
its wholly owned subsidiary, The Old Bushmills Distillery Company
Limited to the Cuervo group, resulting in a gain of GBP174 million.
A gain of GBP103 million arose on the increase of the group's
investment in United Spirits Limited (USL) from 25.02% to 54.78%
(excluding the 2.38% interest owned by USL Benefit Trust). On 30
June 2015, Diageo completed the disposal of Gleneagles Hotel
Limited to the Ennismore group resulting in an exceptional gain of
GBP73 million. In addition a provision of GBP30 million was charged
to the income statement in respect of a guarantee provided to a
third party financial institution.
Cash payments in the year ended 30 June 2016 for exceptional
restructuring, for the payment in respect of the Watson guarantee
(reported in 'movements in loans and other investments' in the
consolidated statement of cash flows), for disengagement agreements
relating to United Spirits Limited and for thalidomide were GBP52
million, GBP92 million, GBP28 million and GBP12 million,
respectively. In the comparable period the cash expenditure for
exceptional restructuring, for the legal settlement in Korea, for
the guarantee and for thalidomide were GBP117 million, GBP74
million, GBP30 million and GBP19 million, respectively.
(d) Taxation
The reported tax rate for the year ended 30 June 2016 was 17.4%
compared with 15.9% for the year ended 30 June 2015. The tax rate
before exceptional items for the year ended 30 June 2016 was 19.0%
compared with 18.3% in the prior year. It is expected that the tax
rate before exceptional items for the year ending 30 June 2017 will
be 21%.
(e) Dividend
The group aims to increase the dividend at each half-year and
the decision as to the rate of the dividend increase is made with
reference to dividend cover as well as the current performance
trends including top and bottom line 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 2015 dividend
cover was 1.6 times. Beginning with the interim dividend for the
year ended 30 June 2016 we slowed growth to 5% consistent with our
focus on stabilising and rebuilding dividend cover. The recommended
final dividend for the year ended 30 June 2016 is 36.6 pence, an
increase of 5% consistent with our interim dividend. This brings
the full year dividend to 59.2 pence per share and dividend cover
to 1.5 times. We would expect to maintain dividend increases at
roughly a mid-single digit rate until cover is back in range.
Subject to approval by shareholders, the final dividend will be
paid to holders of ordinary shares and ADRs on the register as of
12 August 2016. The ex-dividend date for the holders of the
ordinary shares is 11 August 2016, and 10 August 2016 for US ADR
holders. The final dividend will be paid to shareholders on 6
October 2016. Payment to US ADR holders will be made on 12 October
2016. A dividend reinvestment plan is available to holders of
ordinary shares in respect of the final dividend and the plan
notice date is 15 September 2016.
MOVEMENT IN NET BORROWINGS AND EQUITY
Movement in net borrowings
2016 2015
GBP million GBP million
----------------------------------------------------- ----------- -----------
Net borrowings at the beginning of the year (9,527) (8,850)
----------------------------------------------------- ----------- -----------
Free cash flow (a) 2,097 1,963
----------------------------------------------------- ----------- -----------
Acquisition and sale of businesses (b) 1,047 (306)
----------------------------------------------------- ----------- -----------
Proceeds from issue of share capital 1 1
----------------------------------------------------- ----------- -----------
Net purchase of own shares for share schemes (c) (1) (8)
----------------------------------------------------- ----------- -----------
Dividends paid to non-controlling interests (101) (72)
----------------------------------------------------- ----------- -----------
Purchase of shares of non-controlling interests (d) (21) -
----------------------------------------------------- ----------- -----------
Disposal of non-controlling interests - 1
----------------------------------------------------- ----------- -----------
Net movements in bonds (e) (1,003) (701)
----------------------------------------------------- ----------- -----------
Net movements in other borrowings (f) (233) 386
----------------------------------------------------- ----------- -----------
Equity dividends paid (1,443) (1,341)
----------------------------------------------------- ----------- -----------
Net increase/(decrease) in cash and cash equivalents 343 (77)
----------------------------------------------------- ----------- -----------
Net decrease in bonds and other borrowings 1,236 315
----------------------------------------------------- ----------- -----------
Exchange differences (g) (725) (7)
----------------------------------------------------- ----------- -----------
Borrowings on acquisition of businesses - (869)
----------------------------------------------------- ----------- -----------
Borrowings disposed through sale of businesses 14 -
----------------------------------------------------- ----------- -----------
Other non-cash items 24 (39)
----------------------------------------------------- ----------- -----------
Net borrowings at the end of the year (8,635) (9,527)
----------------------------------------------------- ----------- -----------
(a) See free cash flow table for the analysis of free cash
flow.
(b) Acquisitions and sale of businesses include the disposal of
the group's shareholdings in D&G and GAPL on 7 October 2015 for
a net cash consideration, including disposal costs, of $783 million
(GBP510 million); the disposal of the group's equity stake in its
South African associate interests on 1 December 2015 for a cash
consideration of ZAR 2,517 million (GBP119 million), net of
disposal costs; the disposal of the group's wine interests in the
United States and its UK based Percy Fox for a cash consideration
of $551 million (GBP375 million), net of disposal costs; and the
proceeds from the sale of CGI, a Kenyan glass manufacturer, for KES
3,931 million (GBP25 million), net of disposal costs.
In the year ended 30 June 2015 cash payments primarily comprised
GBP1,118 million in respect of the acquisition of additional 26%
investment in USL and GBP192 million for the 50% equity interest in
Don Julio BV that it did not already own, partially offset by cash
received of GBP391 million in respect of sale of the Whyte and
Mackay Group and GBP456 million on the sale of equity share capital
in The Old Bushmills Distillery Company Limited.
(c) Net purchase of own shares comprised purchase of treasury
shares for the future settlement of obligations under the employee
share option schemes of GBP47 million (2015 - GBP75 million) less
receipts from employees on the exercise of share options of GBP46
million (2015 - GBP67 million).
(d) In the year ended 30 June 2016 Diageo purchased an
additional 20% shareholding in Guinness Ghana Breweries Limited for
GBP21 million.
(e) In the year ended 30 June 2016, the group repaid bonds of
$1,500 million (GBP1,003 million). In the comparable period, the
group repaid bonds of EUR1,000 million (GBP792 million) and $500
million (GBP330 million), issued bonds of EUR1,000 million (GBP791
million), and a bond of GBP370 million acquired on the purchase of
USL was repaid using the proceeds from the sale of the Whyte and
Mackay Group.
(f) Net movements in other borrowings are driven by the net
repayment of short term commercial paper.
(g) Net borrowings increased because of unfavourable exchange
differences primarily on the US dollar and euro denominated
borrowings partially offset by a favourable movement on foreign
exchange swaps and forwards.
Movement in equity
2016 2015
GBP million GBP million
------------------------------------------------------- ----------- -----------
Equity at the beginning of the year 9,256 7,590
------------------------------------------------------- ----------- -----------
Profit for the year 2,362 2,467
------------------------------------------------------- ----------- -----------
Exchange adjustments (a) 875 (225)
------------------------------------------------------- ----------- -----------
Net remeasurement of post employment plans (856) 113
------------------------------------------------------- ----------- -----------
Tax on post employment plans 166 (11)
------------------------------------------------------- ----------- -----------
Exchange recycled to the income statement (b) 51 88
------------------------------------------------------- ----------- -----------
Fair value movements on available-for-sale investments (20) 20
------------------------------------------------------- ----------- -----------
Non-controlling interests acquired (b) - 641
------------------------------------------------------- ----------- -----------
Purchase of shares of non-controlling interests (21) -
------------------------------------------------------- ----------- -----------
Disposal of non-controlling interest (24) -
------------------------------------------------------- ----------- -----------
Dividends to non-controlling interests (101) (72)
------------------------------------------------------- ----------- -----------
Dividends paid (1,443) (1,341)
------------------------------------------------------- ----------- -----------
Other reserve movements (65) (14)
------------------------------------------------------- ----------- -----------
Equity at the end of the year 10,180 9,256
------------------------------------------------------- ----------- -----------
(a) Movement in the year ended 30 June 2016 primarily arose from
exchange gains in respect of the Indian rupee, Turkish lira, US
dollar and euro.
(b) In the year ended 30 June 2016 exchange losses of GBP51
million were recycled to the income statement in respect of
disposals.
In the year ended 30 June 2015 following the acquisition of
majority equity stakes in USL, 50% equity interest in Don Julio and
one of the group's joint ventures in South Africa that it did not
already own exchange losses of GBP88 million were recycled to the
income statement and on the acquisition of USL a 43.9%
non-controlling interest of GBP641 million was recognised.
Post employment plans
The deficit in respect of post employment plans before taxation
increased by GBP934 million from GBP259 million at 30 June 2015 to
GBP1,193 million at 30 June 2016. The increase primarily arose due
to a decrease in returns from 'AA' rated corporate bonds used to
calculate the discount rates on the liabilities of the post
employment plans (United Kingdom reduced from 3.8% to 2.9% and
Ireland from 2.6% to 1.4%) partially offset by a reduction in long
term inflation rates (UK RPI from 3.2% to 2.8%, UK CPI from 2.2% to
1.8% and Ireland CPI from 1.6% to 1.4%). Total cash contributions
by the group to all post employment plans in the year ending 30
June 2017 are estimated to be approximately GBP200 million.
DIAGEO CONDENSED CONSOLIDATED INCOME STATEMENT
Year ended Year ended
30 June 2016 30 June 2015
Notes GBP million GBP million
Sales 2 15,641 15,966
Excise duties (5,156) (5,153)
----------- ------------
Net sales 2 10,485 10,813
Cost of sales (4,251) (4,610)
----------- ------------
Gross profit 6,234 6,203
Marketing (1,562) (1,629)
Other operating expenses (1,831) (1,777)
----------- ------------
Operating profit 2 2,841 2,797
Non-operating items 3 123 373
Finance income 4 262 244
Finance charges 4 (589) (656)
Share of after tax results of associates
and joint ventures 221 175
----------- ------------
Profit before taxation 2,858 2,933
Taxation 5 (496) (466)
----------- ------------
Profit for the year 2,362 2,467
=========== ============
Attributable to:
Equity shareholders of the parent company 2,244 2,381
Non-controlling interests 118 86
----------- ------------
2,362 2,467
=========== ============
Weighted average number of shares million million
Shares in issue excluding own shares 2,508 2,505
Dilutive potential ordinary shares 10 12
----------- ------------
2,518 2,517
=========== ============
pence pence
Basic earnings per share 89.5 95.0
=========== ============
Diluted earnings per share 89.1 94.6
=========== ============
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended Year ended
30 June 2016 30 June 2015
GBP million GBP million
Other comprehensive income
Items that will not be recycled subsequently
to the income
statement
Net remeasurement of post employment plans
- group (851) 125
- associates and joint ventures (4) (10)
- non-controlling interests (1) (2)
Tax on post employment plans 166 (11)
------------- -------------
(690) 102
Items that may be recycled subsequently to the
income
statement
Exchange differences on translation of foreign
operations
- group 1,217 (345)
- associates and joint ventures 325 (205)
- non-controlling interests 176 56
Net investment hedges (843) 269
Exchange loss recycled to the income statement
- on translation of foreign operations 133 88
- on net investment hedges (82) -
Tax on exchange differences - group (8) 30
Tax on exchange differences - non-controlling
interests 4 -
Effective portion of changes in fair value of
cash flow hedges
- gains/(losses) taken to other comprehensive
income - group 28 (40)
- gains/(losses) taken to other comprehensive
income - associates
and joint ventures 3 (6)
- recycled to income statement (145) (58)
Tax on effective portion of changes in fair value
of cash flow hedges 3 18
Fair value movements on available-for-sale investments
- gains taken to other comprehensive income -
group 4 11
- gains taken to other comprehensive income -
non-controlling
interests 4 9
- recycled to income statement - group (15) -
- recycled to income statement - non-controlling
interests (13) -
Tax on available-for-sale fair value movements 4 (4)
Hyperinflation adjustment 6 18
Tax on hyperinflation adjustment (2) -
----- -----
799 (159)
----- -----
Other comprehensive profit/(loss), net of tax,
for the year 109 (57)
Profit for the year 2,362 2,467
----- -----
Total comprehensive income for the year 2,471 2,410
===== =====
Attributable to:
Equity shareholders of the parent company 2,183 2,261
Non-controlling interests 288 149
----- -----
Total comprehensive income for the year 2,471 2,410
===== =====
DIAGEO CONDENSED CONSOLIDATED BALANCE SHEET
30 June 2016 30 June 2015
Notes GBP million GBP million GBP million GBP million
Non-current assets
Intangible assets 12,370 11,231
Property, plant and equipment 3,881 3,690
Biological assets 10 65
Investments in associates and joint ventures 2,528 2,076
Other investments 31 109
Other receivables 46 46
Other financial assets 9 420 292
Deferred tax assets 298 189
Post employment benefit assets 55 436
----------- -----------
19,639 18,134
Current assets
Inventories 6 4,579 4,574
Trade and other receivables 2,686 2,435
Assets held for sale 3 143
Other financial assets 9 495 46
Cash and cash equivalents 7 1,089 472
----------- -----------
8,852 7,670
----------- -----------
Total assets 28,491 25,804
----------- -----------
Current liabilities
Borrowings and bank overdrafts 7 (2,058) (1,921)
Other financial liabilities 9 (280) (156)
Trade and other payables (3,372) (2,943)
Liabilities held for sale - (3)
Corporate tax payable (340) (162)
Provisions (137) (105)
----------- -----------
(6,187) (5,290)
Non-current liabilities
Borrowings 7 (8,071) (7,917)
Other financial liabilities 9 (500) (443)
Other payables (70) (69)
Provisions (253) (238)
Deferred tax liabilities (1,982) (1,896)
Post employment benefit liabilities (1,248) (695)
----------- -----------
(12,124) (11,258)
----------- -----------
Total liabilities (18,311) (16,548)
----------- -----------
Net assets 10,180 9,256
=========== ===========
Equity
Share capital 797 797
Share premium 1,347 1,346
Other reserves 2,625 1,994
Retained earnings 3,761 3,634
----------- -----------
Equity attributable to equity
shareholders of the parent company 8,530 7,771
Non-controlling interests 1,650 1,485
-------- ------
Total equity 10,180 9,256
======== ======
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Retained
earnings/(deficit)
--------------------------
Equity
attributable
Other to parent Non-
Share Share Other Own retained company controlling Total
capital premium reserves shares earnings Total shareholders interests equity
GBP GBP GBP GBP GBP GBP GBP million GBP million GBP
million million million million million million million
At 30 June 2014 797 1,345 2,243 (2,280) 4,718 2,438 6,823 767 7,590
Profit for the
year - - - - 2,381 2,381 2,381 86 2,467
Other
comprehensive
income - - (249) - 129 129 (120) 63 (57)
Employee share
schemes - - - 52 (58) (6) (6) - (6)
Share-based
incentive
plans - - - - 35 35 35 - 35
Share-based
incentive
plans
in respect of
associates - - - - 2 2 2 - 2
Tax on
share-based
incentive
plans - - - - 4 4 4 - 4
Shares issued - 1 - - - - 1 - 1
Acquisitions - - - - - - - 641 641
Change in fair
value
of put
options - - - - (9) (9) (9) - (9)
Disposal of
non-controlling
interests - - - - 1 1 1 1
Dividends paid - - - - (1,341) (1,341) (1,341) (72) (1,413)
------- ------- -------- ------- -------- ------- ------------ ----------- -------
At 30 June 2015 797 1,346 1,994 (2,228) 5,862 3,634 7,771 1,485 9,256
Profit for the
year - - - - 2,244 2,244 2,244 118 2,362
Other
comprehensive
income - - 631 - (692) (692) (61) 170 109
Employee share
schemes - - - 39 (38) 1 1 - 1
Share-based
incentive
plans - - - - 29 29 29 - 29
Share-based
incentive
plans
in respect of
associates - - - - 1 1 1 - 1
Tax on
share-based
incentive
plans - - - - 10 10 10 - 10
Shares issued - 1 - - - - 1 - 1
Disposal of
non-controlling
interests - - - - - - - (24) (24)
Purchase of
non-controlling
interests - - - - (18) (18) (18) (3) (21)
Purchase of
rights
issue of
non-controlling
interests - - - - (5) (5) (5) 5 -
Dividends paid - - - - (1,443) (1,443) (1,443) (101) (1,544)
At 30 June 2016 797 1,347 2,625 (2,189) 5,950 3,761 8,530 1,650 10,180
------- ------- -------- ------- -------- ------- ------------ ----------- -------
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended Year ended
30 June 2016 30 June 2015
GBP million GBP million GBP million GBP million
Cash flows from operating activities
Profit for the year 2,362 2,467
Taxation 496 466
Share of after tax results of associates and
joint ventures (221) (175)
Net finance charges 327 412
Non-operating items (123) (373)
----------- -----------
Operating profit 2,841 2,797
Increase in inventories (95) (204)
(Increase)/decrease in trade and other receivables (86) 274
Increase in trade and other payables and provisions 128 47
----------- -----------
Net (increase)/decrease in working capital (53) 117
Depreciation, amortisation and impairment 473 440
Dividends received 173 183
Post employment payments less amounts included
in operating profit (59) (70)
Other items (15) (11)
----------- -----------
572 542
----------- -----------
Cash generated from operations 3,360 3,456
Interest received 174 183
Interest paid (479) (599)
Taxation paid (507) (489)
----------- -----------
(812) (905)
----------- -----------
Net cash from operating activities 2,548 2,551
Cash flows from investing activities
Disposal of property, plant and equipment
and computer software 57 52
Purchase of property, plant and equipment
and computer software (506) (638)
Movements in loans and other investments (2) (2)
Sale of businesses 1,062 978
Acquisition of businesses (15) (1,284)
----------- -----------
Net cash inflow/(outflow) from investing activities 596 (894)
----------- -----------
Cash flows from financing activities
Proceeds from issue of share capital 1 1
Net purchase of own shares for share schemes (1) (8)
Dividends paid to non-controlling interests (101) (72)
Disposal of non-controlling interests - 1
Purchase of shares of non-controlling interests (21) -
Proceeds from bonds - 791
Repayment of bonds (1,003) (1,492)
Net movements on other borrowings (233) 386
Equity dividends paid (1,443) (1,341)
----------- -----------
Net cash outflow from financing activities (2,801) (1,734)
----------- -----------
Net increase/(decrease) in net cash and cash
equivalents 343 (77)
Exchange differences 84 (73)
Net cash and cash equivalents at beginning
of the year 382 532
----------- -----------
Net cash and cash equivalents at end of the
year 809 382
=========== ===========
Net cash and cash equivalents consist of:
Cash and cash equivalents 1,089 472
Bank overdrafts (280) (90)
----------- -----------
809 382
=========== ===========
NOTES
1. Basis of preparation
The financial information included within this report has been
prepared using accounting policies in accordance with International
Financial Reporting Standards (IFRS) as issued by the International
Accounting Standards Board (IASB) and adopted for use in the
European Union (EU), and in accordance with the Disclosure and
Transparency Rules (DTR) of the Financial Conduct Authority. This
condensed consolidated financial information has been prepared on
the basis of accounting policies consistent with those applied in
the consolidated financial statements for the year ended 30 June
2015. IFRS is subject to ongoing review and endorsement by the EU
or possible amendment by interpretative guidance and the issuance
of new standards by the IASB.
The consolidated financial statements are prepared on a going
concern basis.
New accounting standards
No amendments to the accounting standards were issued by the
IASB or the International Financial Reporting Interpretations
Committee (IFRIC) that are first applicable to Diageo in the year
ended 30 June 2016.
IAS 32 - Financial Instruments: Presentation-Offsetting and
cash-pooling arrangements
In April 2016 guidance was issued by the IFRS Interpretations
Committee (IFRIC) to help determine whether entities are able to
offset cash-pooling balances in accordance with IAS 32. The group
has changed its accounting policy to be in line with the
interpretation, but has not restated the prior year financial
statements as the amounts involved are not material. Cash and cash
equivalents and borrowings and bank overdrafts as at 30 June 2015
would have increased by GBP139 million with the same impact on
total assets and total liabilities.
The following standards issued by the IASB (not yet endorsed by
the EU) have not yet been adopted by the group:
IFRS 9 - Financial instruments (effective in the year ending 30
June 2019) is ultimately intended to replace IAS 39 and covers the
classification, measurement and derecognition of financial
instruments together with a new hedge accounting model and new
impairment methodology.
Based on a preliminary assessment the group believes that the
adoption of IFRS 9 will not have a significant impact on its
consolidated results or financial position.
IFRS 15 - Revenue from contracts with customers (effective in
the year ending 30 June 2019) is based on the principle that
revenue is recognised when control of goods or services is
transferred to the customer and provides a single, principles based
five-step model to be applied to all sales contracts. It replaces
the separate models for goods, services and construction contracts
under current IFRS.
Based on a preliminary assessment the group believes that the
adoption of IFRS 15 will not have a significant impact on its
consolidated results or financial position.
IFRS 16 - Leases (effective in the year ending 30 June 2020)
sets out the principles for the recognition, measurement,
presentation and disclosure of leases for both the lessee and the
lessor. It eliminates the classification of leases as either
operating leases or finance leases and introduces a single lessee
accounting model where the lessee is required to recognise assets
and liabilities for all material leases that have a term of greater
than a year.
The group is currently considering the implications of IFRS 16
which is expected to have an impact on the group's consolidated
results and financial position.
There are a number of amendments to IFRS, effective for the year
ending 30 June 2017, which are not expected to significantly impact
the group's consolidated results or financial position.
The financial information included in this preliminary
announcement does not constitute the company's statutory accounts
for the year ended 30 June 2016 and 2015 but is derived from those
accounts. Statutory accounts for 2015 have been delivered to the
registrar of companies, and those for 2016 will be delivered in due
course. KPMG LLP, the previous auditor had reported on the accounts
for the year ended 30 June 2015, and PricewaterhouseCoopers LLP has
reported on the statutory accounts for the year ended 30 June 2016.
The reports of both auditors were (i) unqualified, (ii) did not
include a reference to any matters to which the auditor drew
attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of
the Companies Act 2006.
2. Segmental information
The segmental information presented is consistent with
management reporting provided to the executive committee (the chief
operating decision maker).
The executive committee considers the business principally from
a geographical perspective based on the location of third party
sales and the business analysis is presented by geographical
segment. In addition to these geographical selling segments, a
further segment reviewed by the executive committee is the
International Supply Centre (ISC), which manufactures products for
other group companies and includes the production sites in the
United Kingdom, Ireland, Italy and Guatemala.
Continuing operations also include the Corporate function.
Corporate revenues and costs are in respect of central costs,
including finance, marketing, corporate relations, human resources
and legal, as well as certain information systems, facilities and
employee costs that are not allocable to the geographical segments
or to the ISC. They also include rents receivable and payable in
respect of properties not used by the group in the manufacture,
sale or distribution of premium drinks and the results of
Gleneagles Hotel (disposed on 30 June 2015).
Diageo uses shared services operations, including captive and
outsourced centres, to deliver transaction processing activities
for markets and operational entities. These centres are located in
Hungary, Romania, Kenya, Colombia, the Philippines and India. The
captive business service centre in Budapest also performs certain
central finance activities, including elements of financial
planning and reporting and treasury. The results of shared service
operations are recharged to the regions.
The segmental information for net sales and operating profit
before exceptional items is reported at budgeted exchange rates in
line with management reporting. For management reporting purposes
the group measures the current year at, and restates the prior year
net sales and operating profit to, the current year's budgeted
exchange rates. These exchange rates are set prior to the financial
year as part of the financial planning process and provide a
consistent exchange rate to measure the performance of the business
throughout the year. The adjustments required to retranslate the
segmental information to actual exchange rates and to reconcile it
to the group's reported results are shown in the tables below. The
comparative segmental information, prior to retranslation, has not
been restated at the current year's budgeted exchange rates but is
presented at the budgeted rates for the year ended 30 June
2015.
In addition, for management reporting purposes Diageo presents
separately the result of acquisitions and disposals completed in
the current and prior year from the results of the geographical
segments. The impact of acquisitions and disposals on net sales and
operating profit is disclosed under the appropriate geographical
segments in the tables below at budgeted exchange rates.
Europe, Latin Eliminate
Russia America inter- Total
North and and Asia segment operating Corporate
Year ended America Turkey Africa Caribbean Pacific ISC sales segments and other Total
GBP GBP GBP GBP GBP GBP GBP GBP GBP GBP
30 June 2016 million million million million million million million million million million
Sales 4,037 4,593 1,875 1,078 4,022 1,355 (1,355) 15,605 36 15,641
======= ======= ======= ========= ======= ======= ========= ========= ========= =======
Net sales
At budgeted
exchange
rates(i) 3,282 2,481 1,286 901 2,114 1,452 (1,373) 10,143 38 10,181
Acquisitions
and
disposals 106 75 74 59 9 - - 323 - 323
ISC allocation 10 50 4 8 7 (79) - - - -
Retranslation
to actual
exchange
rates 167 (62) 37 (105) (54) (18) 18 (17) (2) (19)
------- ------- ------- --------- ------- ------- --------- --------- --------- -------
Net sales 3,565 2,544 1,401 863 2,076 1,355 (1,355) 10,449 36 10,485
======= ======= ======= ========= ======= ======= ========= ========= ========= =======
Operating
profit/(loss)
At budgeted
exchange
rates(i) 1,459 738 212 221 399 112 - 3,141 (149) 2,992
Acquisitions
and
disposals 24 7 (8) 13 1 - - 37 - 37
ISC allocation 14 70 6 11 11 (112) - - - -
Retranslation
to
actual
exchange
rates 54 (14) 2 (46) (16) - - (20) (1) (21)
------- ------- ------- --------- ------- ------- --------- --------- --------- -------
Operating
profit/(loss)
before
exceptional
items 1,551 801 212 199 395 - - 3,158 (150) 3,008
Exceptional
items - - - (118) (49) - - (167) - (167)
------- ------- ------- --------- ------- ------- --------- --------- --------- -------
Operating
profit/(loss) 1,551 801 212 81 346 - - 2,991 (150) 2,841
======= ======= ======= ========= ======= ======= ========= ========= =========
Non-operating
items 123
Net finance
charges (327)
Share of after
tax results
of
associates
and
joint
ventures 221
-------
Profit before
taxation 2,858
=======
Year ended
Europe, Latin Eliminate
Russia America inter- Total
North and and Asia segment operating Corporate
30 June 2015 America Turkey Africa Caribbean Pacific ISC sales segments and other Total
GBP GBP GBP GBP GBP GBP GBP GBP GBP GBP
million million million million million million million million million million
Sales 3,909 4,683 1,868 1,297 4,129 1,381 (1,381) 15,886 80 15,966
======= ======= ======= ========= ======= ======= ========= ========= ========= =========
Net sales
At budgeted
exchange
rates(i) 3,462 2,666 1,457 1,105 1,291 1,485 (1,413) 10,053 82 10,135
Acquisitions
and
disposals 25 34 1 26 903 - - 989 - 989
ISC allocation 9 44 4 8 7 (72) - - - -
Retranslation
to actual
exchange
rates (41) (127) (47) (106) 12 (32) 32 (309) (2) (311)
------- ------- ------- --------- ------- ------- --------- --------- --------- ---------
Net sales 3,455 2,617 1,415 1,033 2,213 1,381 (1,381) 10,733 80 10,813
======= ======= ======= ========= ======= ======= ========= ========= ========= =========
Operating
profit/(loss)
At budgeted
exchange
rates(i) 1,477 779 329 314 303 75 - 3,277 (136) 3,141
Acquisitions
and
disposals (3) 12 - 1 49 1 - 60 4 64
ISC allocation 10 47 4 8 7 (76) - - - -
Retranslation
to actual
exchange
rates (36) (34) (15) (60) (3) - - (148) 9 (139)
------- ------- ------- --------- ------- ------- --------- --------- --------- ---------
Operating
profit/(loss)
before
exceptional
items 1,448 804 318 263 356 - - 3,189 (123) 3,066
Exceptional
items (28) (20) (7) (5) (193) (6) - (259) (10) (269)
------- ------- ------- --------- ------- ------- --------- --------- --------- ---------
Operating
profit/(loss) 1,420 784 311 258 163 (6) - 2,930 (133) 2,797
======= ======= ======= ========= ======= ======= ========= ========= =========
Non-operating
items 373
Net finance
charges (412)
Share of after
tax results
of
associates
and
joint
ventures 175
---------
Profit before
taxation 2,933
=========
(i) These items represent the IFRS 8 performance measures for the geographical
and ISC segments.
(1) The net sales figures for ISC reported to the executive
committee primarily comprise inter-segment sales and these are
eliminated in a separate column in the above segmental analysis.
Apart from sales by the ISC segment to the other operating
segments, inter-segmental sales are not material.
(2) The group's net finance charges are managed centrally and
are not attributable to individual operating segments.
(3) Approximately 40% of annual net sales occur in the last four
months of each calendar year.
Weighted average exchange rates used in the translation of
income statements were US dollar - GBP1 = $1.48 (2015 - GBP1 =
$1.57) and euro - GBP1 = EUR1.34 (2015 - GBP1 = EUR1.31). Exchange
rates used to translate assets and liabilities at the balance sheet
date were US dollar - GBP1 = $1.33 (30 June 2015 - GBP1 = $1.57)
and euro - GBP1 = EUR1.20 (30 June 2015 - GBP1 = EUR1.41). The
group uses foreign exchange transaction hedges to mitigate the
effect of exchange rate movements.
3. Exceptional items
Exceptional items are those which, in management's judgement,
need to be disclosed by virtue of their size or nature in order for
the user to obtain a proper understanding of the financial
information.
Year ended Year ended
30 June 2016 30 June 2015
GBP million GBP million
Items included in operating profit
Impairment of Ypióca brand, related tangible
fixed assets and PUB goodwill (118) -
Disengagement agreements relating to United
Sprits Limited (49) -
Korea settlement - (146)
Restructuring programmes - (82)
Associate impairment (Halico) - (41)
(167) (269)
Non-operating items
Sale of businesses
Jamaica, Singapore and Malaysia beer interests 457 -
Wines in the United States and Percy Fox (191) -
Argentina (38) -
South African associate interests (27) -
Kenya - glass business (CGI) 14 -
Bushmills - 174
Gleneagles Hotel - 73
Step ups
United Spirits Limited - 103
Don Julio - 63
South Africa - (10)
Others
Provision for a receivable related to a loan
guarantee (92) -
Guarantee - (30)
------------ ------------
123 373
Exceptional items before taxation (44) 104
Items included in taxation
Tax on exceptional operating items 7 51
Tax on exceptional non-operating items 49 -
------------ ------------
56 51
Total exceptional items 12 155
============ ============
Attributable to:
Equity shareholders of the parent company 2 156
Non-controlling interests 10 (1)
------------ ------------
Total exceptional items 12 155
============ ============
Exceptional items included in operating profit
are charged to:
Cost of sales - (25)
Other operating expenses (167) (244)
------------ ------------
(167) (269)
============ ============
Cash generated from operations includes GBP92 million (2015 -
GBP240 million) of cash outflows in respect of exceptional
items.
4. Finance income and charges
Year ended Year ended
30 June 2016 30 June 2015
GBP million GBP million
Interest income 153 162
Fair value gain on interest rate instruments 88 61
------------ ------------
Total interest income 241 223
Interest charges (459) (528)
Fair value loss on interest rate instruments (91) (55)
------------ ------------
Total interest charges (550) (583)
------------ ------------
Net interest charges (309) (360)
============ ============
Net finance income in respect of post employment
plans in surplus 18 13
Other finance income 3 8
------------ ------------
Total other finance income 21 21
Net finance charge in respect of post employment
plans in deficit (23) (26)
Unwinding of discounts (11) (14)
Hyperinflation adjustment on Venezuela (1) (17)
Change in financial liability - (13)
Other finance charges (4) (3)
------------ ------------
Total other finance charges (39) (73)
------------ ------------
Net other finance charges (18) (52)
============ ============
5. Taxation
For the year ended 30 June 2016, the GBP496 million taxation
charge (2015 - GBP466 million) comprises a UK tax charge of GBP95
million (2015 - GBP78 million) and a foreign tax charge of GBP401
million (2015 - GBP388 million).
6. Inventories
30 June 30 June
2016 2015
GBP million GBP million
Raw materials and consumables 301 333
Work in progress 49 66
Maturing inventories 3,647 3,586
Finished goods and goods for resale 582 589
----------- -----------
4,579 4,574
=========== ===========
7. Net borrowings
30 June 2016 30 June 2015
GBP million GBP million
Borrowings due within one year and bank overdrafts (2,058) (1,921)
Borrowings due after one year (8,071) (7,917)
Fair value of foreign currency forwards and
swaps 612 82
Fair value of interest rate hedging instruments 35 19
Finance lease liabilities (242) (262)
------------ ------------
(9,724) (9,999)
Cash and cash equivalents 1,089 472
------------ ------------
(8,635) (9,527)
============ ============
8. Reconciliation of movement in net borrowings
Year ended Year ended
30 June 2016 30 June 2015
GBP million GBP million
Net increase/(decrease) in cash and cash
equivalents before exchange 343 (77)
Net decrease in bonds and other borrowings 1,236 315
------------ ------------
Decrease in net borrowings from cash flows 1,579 238
Exchange differences on net borrowings (725) (7)
Borrowings on disposal/(acquisition) of businesses 14 (869)
Other non-cash items 24 (39)
Net borrowings at beginning of the year (9,527) (8,850)
------------ ------------
Net borrowings at end of the year (8,635) (9,527)
============ ============
In the year ended 30 June 2016, the group repaid bonds of $1,500
million (GBP1,003 million).
All bonds, medium-term notes and commercial paper issued by the
group'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 an option held by Industrias
Licoreras de Guatemala to sell the remaining 50% equity stake in
Rum Creations Products Inc, the owner of the Zacapa rum brand, to
Diageo, with changes in fair value of this 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. The exercise date of this option is estimated based on
forecast future performance and an estimated rate of return.
Available-for-sale investments at 30 June 2015 comprised shares
held in United Breweries Limited categorised as level 1 in
hierarchy. These shares were sold on 7 July 2015.
There were no significant changes in the measurement and
valuation techniques, or significant transfers between the levels
of the financial assets and liabilities in the year ended 30 June
2016.
The group's financial assets and liabilities measured at fair
value are categorised as follows:
30 June 30 June
2016 2015
GBP million GBP million
Available-for-sale investments - 80
----------- -----------
Unadjusted quoted prices in active markets (Level
1) - 80
=========== ===========
Derivative assets 879 338
Derivative liabilities (373) (198)
----------- -----------
Valuation techniques based on observable market
input (Level 2) 506 140
=========== ===========
Other financial liabilities (165) (139)
----------- -----------
Valuation techniques based on unobservable market
input (Level 3) (165) (139)
=========== ===========
Finance lease liabilities were GBP242 million at 30 June 2016
(2015 - GBP262 million) and finance lease receivables were GBP36
million at 30 June 2016 (2015 - GBPnil).
The carrying amount of the group's financial assets and
liabilities are generally the same as their fair value apart from
borrowings. At 30 June 2016 the fair value of gross borrowings
(excluding finance lease liabilities and the fair value of
derivative instruments) was GBP10,709 million and the carrying
value was GBP10,129 million (30 June 2015 - GBP10,115 million and
GBP9,838 million respectively).
10. Dividends and other reserves
Year ended Year ended
30 June 2016 30 June 2015
GBP million GBP million
Amounts recognised as distributions to
equity
shareholders in the period
Final dividend for the year ended 30 June
2015 of
34.9 pence per share (2014 - 32.0 pence) 876 801
Interim dividend paid for the year ended
30 June 2016 of
22.6 pence per share (2015 - 21.5 pence) 567 540
------------ ------------
1,443 1,341
============ ============
A final dividend of 36.6 pence per share was recommended by the
Board of Directors on 27 July 2016 for approval by shareholders at
the Annual General Meeting to be held on 21 September 2016 bringing
the full year dividend to 59.2 pence per share for the year ended
30 June 2016. As the approval was after the balance sheet date, the
final dividend has not been included as a liability.
Other reserves of GBP2,625 million at 30 June 2016 (2015 -
GBP1,994 million) include a capital redemption reserve of GBP3,146
million (2015 - GBP3,146 million) and hedging and exchange reserve
of GBP521 million deficit (2015 - GBP1,152 million deficit).
11. Sale of businesses
Cash consideration received and net assets disposed of in
respect of sale of businesses in the year ended 30 June 2016, were
as follows:
2016 2015
------------- ---------- ------------ ------------ ------------
Wines in
United
Jamaica, States
Singapore and Percy
and Malaysia Fox GBP Other Total Total
GBP million million GBP million GBP million GBP million
------------- ---------- ------------ ------------ ------------
Sale consideration
Cash received in year 531 418 165 1,114 1,001
(Cash)/overdraft disposed of (14) 1 (1) (14) (17)
Transaction and directly attributable
costs paid (7) (22) (9) (38) (6)
------------- ---------- ------------ ------------ ------------
Net cash received 510 397 155 1,062 978
Deferred consideration
receivable/(payable) - 15 (1) 14 (3)
----------
510 412 154 1,076 975
------------- ---------- ------------ ------------ ------------
Net assets disposed of
Brands - (94) - (94) (144)
Goodwill - (34) (2) (36) (44)
Property, plant and equipment (40) (86) (13) (139) (118)
Biological assets - (70) - (70) -
Investment in associates (18) - - (18) -
Assets and liabilities held
for sale - - (113) (113) (404)
Inventories (7) (263) (24) (294) (78)
Other working capital 4 (4) (5) (5) 19
Post employment benefit liabilities (6) 5 - (1) 10
Current tax 1 - - 1 1
Deferred tax 3 - (1) 2 33
Borrowings - - 14 14 -
------------- ---------- ------------ ------------ ------------
(63) (546) (144) (753) (725)
Non-controlling interests 24 - - 24 -
Accelerated depreciation and
directly attributable costs
payable (1) (69) (11) (81) (3)
Exchange recycled from other
comprehensive income (13) 12 (50) (51) -
------------- ---------- ------------ ------------ ------------
(53) (603) (205) (861) (728)
Gain/(loss) on disposal before
taxation 457 (191) (51) 215 247
Taxation (7) 54 2 49 -
------------- ---------- ------------ ------------ ------------
Gain/(loss) on disposal after
taxation 450 (137) (49) 264 247
============= ========== ============ ============ ============
On 7 October 2015, the group completed the sale of Diageo's
Jamaica, Singapore and Malaysian beer interests to Heineken. In the
year ended 30 June 2016 Jamaica beer interests contributed net
sales of GBP41 million, including sales made in respect of country
distribution agreements that were terminated after 7 October 2015,
(2015 - GBP107 million), operating profit of GBP7 million (2015 -
GBP24 million) and profit after taxation of GBP6 million (2015 -
GBP21 million). In the year ended 30 June 2016 the Singaporian and
Malaysian beer interests contributed GBP3 million to share of
associates (2015 - GBP13 million).
On 1 January 2016 Diageo completed the sale of the majority of
its wine interests in the United States and its UK based Percy Fox
businesses to Treasury Wine Estates. In addition, in the year ended
30 June 2016 Diageo's other US wine interests were disposed of. In
the year ended 30 June 2016 the wine businesses, including the
ending of distribution agreements in respect of wine brands in the
United Kingdom that terminated post 1 January 2016, contributed net
sales of GBP161 million (2015 - GBP343 million), operating profit
of GBP12 million (2015 - GBP58 million) and profit after taxation
of GBP4 million (2015 - GBP31 million).
Other includes the sale of the group's South African associate
interests disposed of on 1 December 2015 which were disclosed as
assets held for sale at 30 June 2015, the group's shareholding in
Central Glass Industries Limited (CGI) disposed of on 30 September
2015, the Bouvet wine business in France and the group's subsidiary
in Argentina.
In the year ended 30 June 2015 the group disposed of the entire
share capital of The Old Bushmills Distillery Company Limited to
Jose Cuervo Overseas. The comparative also includes businesses
disposed of following the acquisition of USL including the net cash
receipt of GBP391 million on the sale of the Whyte and Mackay Group
on 31 October 2014. It also includes the proceeds and net assets
following the disposal of Gleneagles Hotels Limited on 30 June
2015.
12. Contingent liabilities and legal proceedings
(a) Guarantees and related matters
As of 30 June 2016, the group has no material guarantees or
indemnities outstanding in respect of liabilities of third parties.
The following matters relate to guarantees previously
discharged.
Diageo Holdings Netherlands B.V. (DHN) issued a conditional
backstop guarantee 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 Limited (Watson), a company affiliated with Dr Vijay Mallya
(Dr Mallya), under a $135 million (GBP92 million) facility from
Standard Chartered. The Guarantee Agreement was entered into as
part of the arrangements put in place and announced at closing of
the United Spirits Limited (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. Whilst the guarantee was not payable immediately, DHN and
Standard Chartered agreed to extend the date on which the guarantee
was payable to 29 January 2016 to allow additional time for
enforcement of the security package underlying the facility. As
part of this agreement, in August 2015 DHN deposited $135 million
(GBP92 million) in an escrow account with Standard Chartered. The
loan remained in default and the guarantee was paid on 29 January
2016. The $135 million (GBP92 million) deposit was released to
Standard Chartered and has been fully provided for during the year
ended 30 June 2016. In aggregate DHN paid Standard Chartered $141
million (GBP96 million) under this guarantee, including the $135
million (GBP92 million) previously deposited, as well as payments
of default interest and various fees and expenses.
While the guarantee amount has been fully provided for, Watson
remains liable for all amounts paid by DHN under the guarantee. DHN
is entitled to the benefit of the underlying security package for
the loan, which includes shares in United Breweries Limited (UBL),
Watson's interest in Orange India Holdings S.a.r.l. (Orange), the
joint venture that owns the Force India Formula One (F1) team, and
the shareholding in Watson, all of which remains in place. On 19
June 2015, a consortium of banks led by State Bank of India (SBI)
obtained an ex-parte order from the Debt Recovery Tribunal (DRT) in
Bangalore preventing the sale or any other transfer of such UBL
shares as part of the enforcement process pending further orders
from the DRT. This order was passed following the filing of a
memorandum by Dr Mallya with the tribunal that he had no objection
to it issuing the order in respect of the UBL shares. There was a
further ex-parte order of the DRT on 15 July 2015 restraining the
UBL shares being handed over to DHN or to any other party pending
further orders of the DRT. DHN filed a writ petition before the
High Court of Karnataka (the High Court) against such orders of the
DRT, and on 7 November 2015, the High Court passed an interim order
granting an interim stay of the order of the DRT dated 15 July 2015
and directing that the UBL shares shall not be dealt with until
further orders. Subsequently, DHN was joined in the proceedings
before the DRT.
Further, in a separate application filed by the SBI-led
consortium before the DRT, on 17 May 2016 the DRT passed another
ex-parte order attaching the shares held by Dr Mallya in Watson and
directing Watson not to disburse amounts including dividends on
shares held by Watson in Orange until further orders of the DRT.
DHN and Standard Chartered (who were not named as parties in the
above mentioned application filed by the SBI-led consortium) filed
applications before the DRT to lift this order.
DHN is continuing to vigorously pursue these matters in order to
lift the above DRT orders as part of the efforts for enforcement of
the underlying security and recovery of outstanding amounts.
Arguments on these matters have been made before the DRT, and the
Presiding Officer of the DRT has not yet issued orders. Diageo
believes that the existence of any prior rights or dispute in
relation to the security would be in breach of representations and
warranties given by Dr Mallya to Standard Chartered at the time the
security was granted and further believes that Dr Mallya's filing
of the memorandum with the tribunal in relation to the UBL shares
and his failure to object to the order for status quo in that
regard are breaches of his obligations to Standard Chartered.
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 under the guarantee of all amounts owed to
Standard Chartered. Payment under the guarantee has now occurred as
described above. Standard Chartered has taken certain recovery
steps and is working with DHN in relation to the DRT proceedings.
DHN is actively monitoring the security package and is discussing
with Standard Chartered steps to continue enforcement against the
background of the DRT proceedings described above as well as in
relation to the other elements of the security package. 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, DHN has the benefit of a
counter-indemnity from Watson in respect of payments in connection
with the guarantee.
The agreement with Dr Mallya referenced in paragraph (d) below
does not impact the security package, which includes shares in UBL
and Watson's interest in Orange, the joint venture that owns the F1
team. Watson remains liable for all amounts paid pursuant to the
guarantee. DHN is entitled to the benefit of the security package
underlying the facility and the security providers have undertaken
to take all necessary actions in that regard.
(b) Thalidomide litigation
In June 2014, claim forms alleging product liability and
negligence for injuries arising from the consumption of thalidomide
were filed in the High Court in London against Distillers Company
(Biochemicals) Limited, its parent Diageo Scotland Limited
(formerly Distillers Company Limited), as well as against Gr
nenthal GmbH, the developer of the drug (not a member of the
group). On 4 December 2014 these claims forms were served by
lawyers acting for the claimants. Since then the proceedings in
respect of the 28 individuals that have now issued claims in the
United Kingdom have been stayed until 30 September 2016 while
discussions are ongoing between Diageo and the claimants'
lawyers.
Diageo is unable to meaningfully quantify the possible loss or
range of loss to which these lawsuits may give rise. Distillers
Company (Biochemicals) Limited distributed thalidomide in the
United Kingdom for a period in the late 1950s and early 1960s.
Diageo has worked voluntarily for many years with various
thalidomide organisations and has provided significant financial
support. A scheduled periodic review of Diageo's financing of the
UK Thalidomide Trust will be undertaken during the year ending 30
June 2017.
(c) Acquisition of USL shares from UBHL, winding-up petitions
against UBHL and other proceedings in relation to the USL
transaction
(i) On 4 July 2013 Diageo completed its acquisition, under a
share purchase agreement with UBHL and various other sellers (the
SPA), of 21,767,749 shares (14.98%) in USL for a total
consideration of INR 31.3 billion (GBP349 million), including
10,141,437 shares (6.98%) from UBHL. The SPA was signed on 9
November 2012 and was part of the transaction announced by Diageo
in relation to USL on that day (the Original USL Transaction).
Through a series of further transactions, as of 2 July 2014, Diageo
has a 54.78% 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 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 20 December Order). Following the 20 December Order,
Diageo filed special leave petitions (SLPs) in the Supreme Court of
India against the 20 December 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 hearing date for 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, various winding-up petitions against
UBHL have been admitted by the High Court. These petitions and
certain related proceedings have been progressing through the High
Court since closing of the UBHL Share Sale. Following earlier
adjournments there is currently no fixed date for the next hearing
of the various winding-up proceedings.
Diageo continues to believe that the acquisition price of INR
1,440 paid to UBHL for the USL shares is fair and reasonable as
regards UBHL, UBHL's shareholders and UBHL's secured and unsecured
creditors. However, adverse results for Diageo in the proceedings
referred to above could, absent leave or relief in other
proceedings, ultimately result in Diageo losing title to the
10,141,437 USL shares acquired from UBHL. Diageo believes it would
remain in control of USL and be able to consolidate USL as a
subsidiary regardless of the outcome of this litigation. There can
be no certainty as to the outcome of the existing or any further
related legal proceedings or the timeframe within which they would
be concluded.
Diageo also has the benefit of certain contractual undertakings
and commitments from the relevant sellers in relation to potential
challenges to its unencumbered title to the USL shares acquired on
4 July 2013, including relating to the winding-up petitions
described above and/or certain losses and costs that may be
incurred in the event of third party actions relating to the
acquisition of the USL shares.
(ii) Separately, Diageo's contractual rights in relation to the
acquisition of an additional 3,459,090 USL shares (representing
2.38% of the share capital of USL) under the SPA from the USL
Benefit Trust have not been capable of completion. Currently
certain lenders to USL are refusing to release security that they
hold over those shares notwithstanding that they have been repaid
in full. USL filed a petition against such lenders before the High
Court for release of the security and the High Court granted a stay
order in favour of USL in December 2015 restraining the lenders
from dealing with the 3,459,090 pledged USL shares until further
order of the High Court. As previously disclosed, while those
shares are held by the USL Benefit Trust pending any sale, they are
subject to an undertaking that the trustees would only vote the
shares at the direction of USL.
(iii) Diageo has notified UBHL and its subsidiary, KFinvest, of
certain claims that it believes it has against such parties under
the SPA in relation to the matters revealed by the Initial Inquiry
described in paragraph (d) below, including under provisions
requiring the discharge of inter-group balances and also as a
result of the non-disclosure of these matters to it during the due
diligence exercise that preceded the Original USL Transaction.
Diageo also believes that it may have additional claims against
those parties under the SPA in relation to the matters revealed by
the Additional Inquiry described in paragraph (d) below.
(d) USL internal inquiries, resignation of Dr Vijay Mallya from
USL and related matters
In a notice to the Indian stock exchange dated 4 September 2014,
USL announced that its board of directors had directed 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). The transactions noted in the Initial
Inquiry occurred prior to Diageo gaining significant influence over
USL on 4 July 2013 when it completed the transaction to purchase
shares in USL to take its aggregate shareholding to 25.02%. USL
provided an update on 25 April 2015 in relation to the Initial
Inquiry which covered various matters, including certain doubtful
receivables, advances and deposits. Additional updates have been
provided by USL in subsequent quarterly announcements and most
recently in the announcement of their audited financial results on
26 May 2016, in respect of the year ended 31 March 2016.
As previously stated by USL, the Initial Inquiry: (a) revealed
that funds involved in many of the commercial transactions covered
by the Initial Inquiry were diverted from USL and/or its
subsidiaries to certain companies in the UBHL group, including in
particular Kingfisher Airlines Limited; (b) prima facie revealed
that certain accounting entries appear to have been made and
certain transactions entered into on behalf of USL appear to have
been undertaken in order to show a lower exposure of USL (and its
subsidiaries) to UBHL than that which actually existed at the
relevant time; and (c) also identified certain additional parties
and matters where documents identified raised concerns as to the
propriety of certain underlying commercial transactions with
counterparties referred to in the notes to USL's audited accounts
for the year ended 31 March 2014. The Initial Inquiry suggested
that the manner in which these various transactions were conducted,
prima facie, indicates various improprieties and potential
violations of provisions, inter alia, of the Indian Companies Act,
1956 and the listing agreements signed by USL with various stock
exchanges in India on which its securities are listed.
USL has recorded provisions in an aggregate amount of
approximately INR 6,712 million (GBP75 million) with respect to (a)
above, and in an aggregate amount of approximately INR 2,368
million (GBP26 million) with respect to (c) above. These amounts
were fully provided for in the fair value balance sheet
consolidated by Diageo on 2 July 2014. Diageo does not expect any
further material financial impact on Diageo's financial results in
connection with such transactions. USL made provisions in its
financial statements for the two years ended 31 March 2014 and 31
March 2015 in respect of the issues identified by the Initial
Inquiry. The audit report on the financial statements of USL for
the year ended 31 March 2015 was also qualified in respect of these
issues.
The USL board stated in its update of 25 April 2015 that it was
not in a position to make any final determination with regard to
the position of any individuals involved and therefore directed USL
to report the relevant transactions to the authorities as required
under applicable law and to provide the Initial Inquiry report to
USL's auditors and other regulators. The USL board also resolved
that USL should take the necessary steps to assess USL's legal
position and then take such action as is necessary to recover its
funds from the relevant parties to the extent possible. As
previously announced by USL on 2 November 2015, USL has been taking
steps for recovery of the funds that were identified by the Initial
Inquiry to have been diverted from USL and/or its subsidiaries to
the extent possible. During the quarter ended 30 September 2015,
USL reached a settlement with one of the parties pursuant to which
the party withdrew claims amounting to approximately INR 279
million (GBP3 million), and accordingly a provision of
approximately INR 279 million (GBP3 million) was written back.
Additionally, subsequent to the year ended 31 March 2016, USL has
signed settlement agreements with certain such parties and based on
these settlements has reversed provisions with respect to interest
claimed amounting to INR 265 million (GBP3 million). During the
year ended 31 March 2016, based on its assessment of
recoverability, USL's management has written off INR 5,666 million
(GBP63 million) out of the amounts provided for with respect to the
relevant parties.
In light of the above, and without making any determination as
to fault or culpability, the USL directors noted in the update of
25 April 2015 that they had lost confidence in Dr Mallya continuing
in his role as a director and as chairman of USL and therefore the
USL board called upon Dr Mallya to resign forthwith as a director
and as chairman of the board and step down from his positions in
USL's subsidiaries. The board of USL also resolved that, in the
event Dr Mallya declined to step down, it would recommend to the
shareholders of USL the removal of Dr Mallya as a director and as
chairman of the board. Dr Mallya indicated at the time that he
would not tender his resignation.
Diageo is the majority shareholder in USL with a 54.78% holding
in USL. As previously announced by Diageo, it had certain
contractual obligations to support Dr Mallya continuing as
non-executive director and chairman of USL subject to certain
conditions and in the absence of certain defaults. Those matters
were agreed on 9 November 2012 as part of a broader shareholders'
agreement and came into effect on 4 July 2013 when Diageo completed
the purchase of shares to take its aggregate shareholding in USL to
25.02%.
Subsequent to its announcement of 25 April 2015, USL provided
its Initial Inquiry report and all related materials to Diageo.
Diageo announced on 27 April 2015 that it noted the recommendation
of the USL board and was considering its position under its
agreements with Dr Mallya and UBHL in light of the inquiry report
and materials provided to it.
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 the Initial Inquiry and 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 25 February Agreement) provided for a payment
of $75 million (GBP53 million) to Dr Mallya over a five year period
in consideration for the five-year global non-compete,
non-interference, non-solicitation and standstill commitments
referred to above, his resignation from USL and the termination of
his 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 25 February Agreement
also provided for the release of Dr Mallya's personal obligations
to indemnify DHN and Diageo Finance in respect of any liabilities
under the guarantee arrangements described in paragraph (a) above
and his personal obligation to indemnify Diageo Finance in respect
of its earlier liability (GBP30 million) under a guarantee of
certain borrowings of United Breweries Overseas Limited. $40
million (GBP28 million) of the $75 million (GBP53 million) amount
was paid on signing of the 25 February Agreement with the balance
being payable in equal instalments of $7 million (GBP5 million) a
year over five years, subject to and conditional on Dr Mallya's
compliance with certain terms of the agreement.
On 7 March 2016, a consortium of banks led by SBI obtained an
order from the DRT in Bangalore attaching the sum of $75 million
(GBP53 million) payable to Dr Mallya under the 25 February
Agreement. The order provides that Dr Mallya is not to draw on that
sum, Diageo is not to disburse such sum to Dr Mallya and Diageo is
to deposit such sum with the DRT. Diageo filed an affidavit in the
DRT on 5 April 2016 explaining that the sum of $40 million (GBP28
million) was paid on 25 February 2016, prior to the order dated 7
March 2016. Diageo further explained that no sum is presently due
and payable by Diageo to Dr Mallya under the terms of the 25
February Agreement, and there can be no certainty that any amount
will become due and payable under the terms of the 25 February
Agreement in the future because of the conditional nature of the
obligation. Diageo's position is that the order is not currently
capable of being performed. Pursuant to an order of the DRT dated
29 April 2016, on 12 May 2016 Diageo and USL filed memos with the
DRT furnishing copies of their respective agreements with Dr
Mallya. On 16 July 2016, the DRT issued a clarification in relation
to its order dated 7 March 2016 (which forms part of that order),
stating that: (i) if Diageo is liable to pay any amount under the
25 February Agreement to Dr Mallya, such amount shall be deposited
in the DRT under the 7 March order; and (ii) if Diageo is not
liable to pay any amount under the 25 February Agreement to Dr
Mallya, Diageo does not need to deposit any amount in the DRT.
At the time of the 25 February 2016 announcement, Diageo
confirmed that, by virtue of Dr Mallya having been a director of
USL, a subsidiary of Diageo, the arrangements described in that
announcement, which were required to be aggregated with certain
prior transactions and arrangements, constituted a smaller related
party transaction within LR11.1.10R of the Listing Rules.
Accordingly, Diageo obtained written confirmation from BofA Merrill
Lynch, as sponsor, that the terms of the relevant arrangements were
fair and reasonable as far as Diageo shareholders were
concerned.
As previously announced by USL and as noted above, 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 & CEO 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.
As stated in that announcement, the Additional Inquiry revealed:
(a) further instances of actual or potential fund diversions
amounting to approximately INR 9,135 million (GBP102 million) as
well as other potentially improper transactions involving USL and
its Indian and overseas subsidiaries amounting to approximately INR
3,118 million (GBP35 million); (b) that these transactions occurred
during the period from October 2010 to July 2014, although certain
transactions appear to have been initiated prior to that period;
and (c) that these improper transactions involved the diversion of
funds to certain non-Indian entities in which Dr Mallya appears to
have a material direct or indirect interest (including Force India
Formula One, Watson Limited, Continental Administrative Services,
Modall Securities Limited, Ultra Dynamix Limited and Lombard Wall
Corporate Services Inc) as well as certain Indian entities
(including, in most cases, Kingfisher Airlines Limited).
The USL board has, in light of these findings, and based on
expert advice, directed that copies of the Additional Inquiry
report be provided to the relevant authorities and its auditors.
The USL board also directed that USL should conduct a detailed
review of each indicated case of fund diversion to assess its legal
position and then take such action as is necessary to recover its
funds from the relevant parties and individuals, to the extent
possible. The mutual release in relation to the Initial Inquiry
agreed by Diageo and USL with Dr Mallya and announced on 25
February 2016 does not extend to matters arising out of the
Additional Inquiry. In addition to the notification sent by Diageo
to UBHL and KFinvest in relation to the claims it believes it has
against such parties under the SPA in relation to the matters
revealed in the Initial Inquiry, as noted in paragraph (c)(iii)
above, Diageo also believes it may have claims against UBHL and
KFinvest under the SPA in relation to the matters revealed by the
Additional Inquiry, including under certain provisions requiring
the discharge of inter-group balances and also as a result of the
non-disclosure of these matters to it during the due diligence
exercise that preceded the Original USL Transaction.
Almost all of 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 (including
by way of provisions made in relation to impairment in the value of
or loss on sale of USL's overseas subsidiaries). USL's management
has recommended to the USL board that a further provision of INR
217 million (GBP2 million) should be made for the value of certain
improper transactions identified by the Additional Inquiry which
were not previously expensed or provided for. Based on the
information currently available, Diageo believes that no further
provisions are required at this stage.
(e) Regulatory notices 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, Serious Fraud
Investigation Office, National Stock Exchange, Income Tax
Department, Enforcement Directorate, Securities and Exchange Board
of India, Bangalore police, Central Excise Intelligence and the
Institute of Chartered Accountants of India. Diageo and USL are
cooperating fully with the authorities in relation to these
matters, and, as noted in paragraph (d) above, USL reported the
matters covered by the Initial Inquiry and the Additional Inquiry
to the relevant authorities.
Diageo and USL have also received notices from the Securities
and Exchange Board of India (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, in the case of Diageo, whether such
arrangements with Dr Mallya or the Watson backstop guarantee
arrangements described in paragraph (a) 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 as noted in paragraph (a) above) 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 it is taking steps to appeal it.
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 loss or range of
loss, if any, to which any such action might give rise if
determined against Diageo or USL.
(f) SEC Inquiry
Diageo has received requests for information from the US
Securities and Exchange Commission (SEC) regarding its distribution
in and public disclosures regarding the United States as well as
additional context about the Diageo group globally. Diageo is
currently responding to the SEC's requests for information in this
matter. Diageo is unable to assess if the inquiry will evolve into
further information requests or an 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.
(g) Other
The group has extensive international operations and is the
defendant in a number of legal, customs and tax proceedings
incidental to these operations, the outcome of which cannot at
present be foreseen. In particular, the group is currently the
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) are 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
year ended 30 June 2016 on terms other than those that prevail in
arm's length transactions.
ADDITIONAL INFORMATION FOR SHAREHOLDERS
EXPLANATORY NOTES
Comparisons are to the year ended 30 June 2015 (2015) 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 prior year reported numbers at
current year exchange rates and after adjusting for the effect of
exceptional items and acquisitions and disposals.
This announcement contains forward-looking statements that
involve risk and uncertainty. There are a number of factors that
could cause actual results and developments to differ materially
from those expressed or implied by these forward-looking
statements, including factors beyond Diageo's control. Please refer
to '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 the following
non-GAAP measures. They are chosen for planning and reporting, and
some of them are used for incentive purposes. The group's
management believes these measures provide valuable additional
information for users of the financial statements in understanding
the group's performance. These non-GAAP measures should be viewed
as complementary to, and not replacements for, the comparable GAAP
measures and reported movements therein.
Volume
Volume is a non-GAAP measure that is measured on an equivalent
units basis to nine-litre cases of spirits. An equivalent unit
represents one nine-litre case of spirits, which is approximately
272 servings. A serving comprises 33ml of spirits, 165ml of wine,
or 330ml of ready to drink or beer. Therefore, to convert volume of
products other than spirits to equivalent units, the following
guide has been used: beer in hectolitres, divide by 0.9; wine in
nine-litre cases, divide by five; ready to drink in nine-litre
cases, divide by 10; and certain pre-mixed products that are
classified as ready to drink in nine-litre cases, divide by
five.
Organic movements
In the discussion of the performance of the business, 'organic'
information is presented using pounds sterling amounts on a
constant currency basis excluding the impact of exceptional items
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 amount in the row titled '2015 adjusted'. Organic operating
margin is calculated by dividing operating profit before
exceptional items by net sales after excluding the impact of
exchange rate movements and acquisitions and disposals.
(a) Exchange rates
'Exchange' in the organic movement calculation reflects the
adjustment to recalculate the prior year results as if they had
been generated at the current year's exchange rates.
Exchange impacts in respect of the external hedging of
intergroup sales of products and the intergroup recharging of third
party services are allocated to the geographical segment to which
they relate. Residual exchange impacts are reported in
Corporate.
Exchange impacts in respect of profit on intergroup sales of
products and intergroup recharges are reported in 'other operating
expenses'.
(b) Acquisitions and disposals
For acquisitions in the current year, the post acquisition
results are excluded from the organic movement calculations. For
acquisitions in the prior year, post acquisition results are
included in full in the prior year but are included in the organic
movement calculation from the anniversary of the acquisition date
in the current year. The acquisition row also eliminates the impact
of transaction costs that have been charged to operating profit in
the current or prior year in respect of acquisitions that, in
management's judgement, are expected to complete.
Where a business, brand, brand distribution right or agency
agreement was disposed of, or terminated, in the period up to the
date of the external results announcement, the group, in the
organic movement calculations, excludes the results for that
business from the current and prior year. In the calculation of
operating profit, the overheads included in disposals are only
those directly attributable to the businesses disposed of, and do
not result from subjective judgements of management. In addition,
disposals include the elimination of the results (for volume,
sales, net sales and marketing only) of operations in India where
United Spirits Limited (USL) previously fully consolidated the
results but which are now operated on a royalty or franchise model
where USL now receives royalties only for sales made by that
operation.
(c) Exceptional items
Exceptional items are those which, in management's judgement,
need to be disclosed by virtue of their size or nature. Such items
are included within the income statement caption to which they
relate, and are separately disclosed in the notes to the
consolidated financial statements, and are excluded from the
organic movement calculations.
Organic movement calculations for the year ended 30 June 2016
were as follows:
Europe,
Russia Latin America Asia
North America and Turkey Africa and Caribbean Pacific Corporate Total
million million million million million million million
Volume (equivalent
units)
2015 reported 47.3 44.1 26.2 21.6 107.0 - 246.2
Disposals(iii) (1.3) (2.3) (0.2) (1.3) (3.3) - (8.4)
------------- ----------- -------- -------------- -------- --------- --------
2015 adjusted 46.0 41.8 26.0 20.3 103.7 - 237.8
Acquisitions and
disposals(iii) 0.5 1.3 3.0 0.7 - - 5.5
Organic movement 0.5 0.8 2.3 (0.4) (0.1) - 3.1
------------- ----------- -------- -------------- -------- --------- --------
2016 reported 47.0 43.9 31.3 20.6 103.6 - 246.4
============= =========== ======== ============== ======== --------- ========
Organic movement
% 1 2 9 (2) - - 1
============= =========== ======== ============== ======== ========= ========
Latin
Europe, America
North Russia and Asia
America and Turkey Africa Caribbean Pacific Corporate Total
GBP GBP GBP GBP GBP GBP GBP
million million million million million million million
Sales
2015 reported 3,909 4,683 1,868 1,297 4,129 80 15,966
Exchange(i) 199 (181) (143) (181) (54) - (360)
Disposals(iii) (283) (247) (31) (119) (48) (48) (776)
--------- ---------- ---------- --------- ---------- ---------- ----------
2015 adjusted 3,825 4,255 1,694 997 4,027 32 14,830
Acquisitions and
disposals(iii) 117 124 89 76 8 - 414
Organic movement 95 214 92 5 (13) 4 397
--------- ---------- ---------- --------- ---------- ---------- ----------
2016 reported 4,037 4,593 1,875 1,078 4,022 36 15,641
========= ========== ========== ========= ========== ========== ==========
Organic movement
% 2 5 5 1 - 13 3
========= ========== ========== ========= ========== ========== ==========
Net sales
2015 reported 3,455 2,617 1,415 1,033 2,213 80 10,813
Exchange(i) 172 (87) (102) (134) (21) - (172)
Disposals(iii) (272) (184) (18) (98) (35) (48) (655)
--------- ---------- ---------- --------- ---------- ---------- ----------
2015 adjusted 3,355 2,346 1,295 801 2,157 32 9,986
Acquisitions and
disposals(iii) 113 96 72 57 7 - 345
Organic movement 97 102 34 5 34 4 276
Reclassification(ii) - - - - (122) - (122)
--------- ---------- ---------- --------- ---------- ---------- ----------
2016 reported 3,565 2,544 1,401 863 2,076 36 10,485
========= ========== ========== ========= ========== ========== ==========
Organic movement
% 3 4 3 1 2 13 3
========= ========== ========== ========= ========== ========== ==========
Europe, Latin
Russia America
North and and Asia
America Turkey Africa Caribbean Pacific Corporate Total
GBP GBP GBP GBP GBP GBP GBP
million million million million million million million
Marketing
2015 reported 542 388 147 194 344 14 1,629
Exchange(i) 23 1 (11) (26) - - (13)
Disposals(iii) (22) (7) - (11) (1) (2) (43)
--------- --------- ---------- --------- ---------- ---------- ----------
2015 adjusted 543 382 136 157 343 12 1,573
Acquisitions and
disposals(iii) 8 2 6 10 - - 26
Organic movement (10) 20 1 - (42) (6) (37)
--------- --------- ---------- --------- ---------- ---------- ----------
2016 reported 541 404 143 167 301 6 1,562
========= ========= ========== ========= ========== ========== ==========
Organic movement
% (2) 5 1 - (12) (50) (2)
========= ========= ========== ========= ========== ========== ==========
Operating profit
before exceptional
items
2015 reported 1,448 804 318 263 356 (123) 3,066
Exchange(i) 77 (24) (67) (57) (5) (7) (83)
Acquisitions and
disposals(iii) (55) (34) (5) (17) (1) (2) (114)
--------- --------- ---------- --------- ---------- ---------- ----------
2015 adjusted 1,470 746 246 189 350 (132) 2,869
Acquisitions and
disposals(iii) 25 10 (7) 12 1 (1) 40
Organic movement 56 45 (27) (2) 44 (17) 99
--------- --------- ---------- --------- ---------- ---------- ----------
2016 reported 1,551 801 212 199 395 (150) 3,008
========= ========= ========== ========= ========== ========== ==========
Organic movement
% 4 6 (11) (1) 13 (13) 3
========= ========= ========== ========= ========== ========== ==========
Organic operating
margin %
2016 44.2% 32.3% 16.5% 23.2% 18.0% n/a 28.9%
2015 43.8% 31.8% 19.0% 23.6% 16.2% n/a 28.7%
Margin
improvement/(decline)
(bps) 39 51 (252) (39) 176 n/a 19
(1) For the reconciliation of sales to net sales and operating
profit before exceptional items to operating profit see additional
financial information and notes 2.
(2) Percentages and margin improvement/(decline) are calculated on rounded figures.
Notes: Information in respect of the organic movement
calculations
(i) The exchange adjustments for sales, net sales, marketing and
operating profit are principally in respect of the Nigerian naira,
the South African rand, the Venezuelan bolivar, the Brazilian real
and the Turkish lira, partially offset by the US dollar.
(ii) Following a review of the third party production
arrangements in India it was determined to be more appropriate to
ensure consistent reporting by reclassifying the excise duties
payable by the third party production companies as excise duties.
This change was implemented by USL in its first three months of its
financial year ended 30 June 2016, and resulted in net sales for
the year ended 30 June 2016 reducing by GBP122 million with a
corresponding decrease in cost of sales. There was no impact on
gross or operating profit.
(iii) In the year ended 30 June 2016 the acquisitions and
disposals that affected volume, sales, net sales, marketing and
operating profit were as follows:
Operating
Volume Sales Net sales Marketing profit
equ. units GBP million GBP million GBP million GBP million
million
Year ended 30 June 2015
Acquisitions
Integration costs - - - - 7
- - - - 7
Disposals
North America Wines
and Percy Fox (2.2) (386) (343) (18) (58)
Grand Marnier (0.2) (26) (20) - (2)
Bouvet (0.1) (16) (16) (1) (2)
Argentina (0.6) (38) (33) (3) (4)
South Africa (0.2) (27) (15) - (3)
Jamaica and Red Stripe (1.1) (133) (107) (11) (23)
Bushmills (0.7) (65) (50) (8) (23)
USL owned to franchise (3.2) (29) (17) - -
Gleneagles - (48) (48) (2) (4)
Other (0.1) (8) (6) - (2)
(8.4) (776) (655) (43) (121)
Acquisitions and disposals (8.4) (776) (655) (43) (114)
Year ended 30 June 2016
Acquisitions
Don Julio 0.3 34 22 6 23
United National Breweries 2.6 44 44 1 4
South Africa 0.3 35 23 5 (11)
Argentina - 1 1 - -
Transaction costs - - - - (1)
3.2 114 90 12 15
Disposals
North America Wines
and Percy Fox 1.1 181 161 8 12
Grand Marnier 0.3 28 22 - 3
Bouvet - 7 7 - 1
Argentina 0.3 19 16 2 -
South Africa 0.1 9 4 - (1)
Jamaica and Red Stripe 0.5 52 41 4 7
Bushmills - 3 2 - 1
Other - 1 2 - 2
2.3 300 255 14 25
Acquisitions and disposals 5.5 414 345 26 40
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 years ended
30 June 2016 and 30 June 2015 are set out in the table below.
2016 2015
GBP million GBP million
Profit attributable to equity shareholders of
the parent company 2,244 2,381
Exceptional operating items attributable to equity
shareholders of the parent company 171 268
Non-operating items attributable to equity shareholders
of the parent company (115) (373)
Tax in respect of exceptional operating and non-operating
items attributable to equity shareholders of the
parent company (58) (51)
2,242 2,225
Weighted average number of shares million million
Shares in issue excluding own shares 2,508 2,505
Dilutive potential ordinary shares 10 12
2,518 2,517
pence pence
Basic earnings per share before exceptional items 89.4 88.8
Diluted earnings per share before exceptional
items 89.0 88.4
Free cash flow
Free cash flow comprises the net cash flow from operating
activities aggregated with the net cash received/paid for loans
receivable and other investments and the net cash cost paid for
property, plant and equipment and computer software that are
included in net cash flow from investing activities.
The remaining components of net cash flow from investing
activities that do not form part of free cash flow, as defined by
the group's management, are in respect of the acquisition and sale
of businesses.
The group's management regards the purchase and disposal of
property, plant and equipment and computer software as ultimately
non-discretionary since ongoing investment in plant, machinery and
technology is required to support the day-to-day operations,
whereas acquisitions and sales of businesses are discretionary.
Where appropriate, separate explanations are given for the
impacts of acquisitions and sale of businesses, dividends paid and
the purchase of own shares, each of which arises from decisions
that are independent from the running of the ongoing underlying
business.
Free cash flow reconciliations for the years ended 30 June 2016
and 30 June 2015 are set out in the table below:
2016 2015
GBP million GBP million
Net cash from operating activities 2,548 2,551
Disposal of property, plant and equipment and
computer software 57 52
Purchase of property, plant and equipment and
computer software (506) (638)
Movements in loans and other investments (2) (2)
----------- -----------
Free cash flow 2,097 1,963
Operating cash conversion
Operating cash conversion is calculated by dividing cash
generated from operations excluding cash inflows/outflows in
respect of exceptional items, dividends received from associates,
maturing inventories, other items and post-employment payments in
excess of the amount charged to operating profit by operating
profit before depreciation, amortisation, impairment and
exceptional operating items.
The ratio is stated at the budgeted exchange rate for the
respective year in line with management reporting and is expressed
as a percentage.
Operating cash conversion for the years ended 30 June 2016 and
30 June 2015 were as follows:
2016 2015
GBP million GBP million
Operating profit 2,841 2,797
Exceptional operating items 167 269
Depreciation and amortisation(i) 355 371
Retranslation to budgeted exchange rates 18 146
3,381 3,583
Cash generated from operations 3,360 3,456
Cash payments in respect of exceptional items 80 221
Post employment payments less amounts included
in
operating profit(i) 58 67
Net movement in maturing inventories 144 247
Dividends received from associates (173) (183)
Other items(i) 15 (21)
Retranslation to budgeted exchange rates 75 148
3,559 3,935
Operating cash conversion 105.3% 109.8%
(i) excluding exceptional items
Return on average total invested capital
Return on average total invested capital is used by management
to assess the return obtained from the group's asset base and is
calculated to aid evaluation of the performance of the
business.
The profit used in assessing the return on average total
invested capital reflects operating profit before exceptional items
attributable to the equity shareholders of the parent company plus
share of after tax results of associates and joint ventures after
applying the tax rate before exceptional items for the year.
Average total invested capital is calculated using the average
derived from the consolidated balance sheets at the beginning,
middle and end of the year. Average capital employed comprises
average net assets attributable to equity shareholders of the
parent company for the year, excluding post employment benefit net
liabilities (net of deferred tax) and average net borrowings. This
average capital employed is then aggregated with the average
restructuring and integration costs net of tax, and goodwill
written off to reserves at 1 July 2004, the date of transition to
IFRS, to obtain the average total invested capital.
Calculations for the return on average total invested capital
for the years ended 30 June 2016 and 30 June 2015 are set out in
the table below:
2016 2015
GBP million
Operating profit 2,841 2,797
Exceptional operating items 167 269
Profit before exceptional operating items
attributable to non-controlling interests (108) (87)
Share of after tax results of associates and
joint ventures 221 175
Tax at the tax rate before exceptional items
of 19.0% (2015 - 18.3%) (593) (577)
2,528 2,577
=========== =======
Average net assets (excluding net post employment
liabilities) 10,202 8,910
Average non-controlling interest (1,558) (1,240)
Average net borrowings 9,130 9,682
Average integration and restructuring costs
(net of tax) 1,639 1,604
Goodwill at 1 July 2004 1,562 1,562
Adjustment in respect of acquisition of USL(i) - 493
----------- -------
Average total invested capital 20,975 21,011
=========== =======
Return on average total invested capital 12.1% 12.3%
(i) For the year ended 30 June 2015 average net assets were
adjusted for the inclusion of USL as though it was owned throughout
the year as it became a subsidiary on 2 July 2014.
Tax rate before exceptional items
Tax rate before exceptional items is calculated by dividing the
total tax charge on continuing operations before tax charges and
credits, classified as or in respect of exceptional items, by
profit before taxation adjusted to exclude the impact of
exceptional operating and non-operating items, expressed as a
percentage. The measure is used by management to assess the rate of
tax applied to the group's continuing operations before tax on
exceptional items.
The tax rates from operations before exceptional and after
exceptional items for the year ended 30 June 2015 and 30 June 2016
are set out in the table below:
2016 2015
GBP million GBP million
Tax before exceptional items (a) 552 517
Tax in respect of exceptional items (56) (51)
Taxation on profit from operations (b) 496 466
Profit from operations before taxation and exceptional
items (c) 2,902 2,829
Non-operating items 123 373
Exceptional operating items (167) (269)
Profit before taxation (d) 2,858 2,933
Tax rate before exceptional items (a/c) 19.0% 18.3%
Tax rate after exceptional items (b/d) 17.4% 15.9%
Other definitions
Volume share is a brand's retail volume expressed as a
percentage of the retail volume of all brands in its segment. Value
share is a brand's retail sales value expressed as a percentage of
the retail sales value of all brands in its segment. Unless
otherwise stated, share refers to value share.
Price/mix is the number of percentage points by which the
organic movement in net sales differs to the organic movement in
volume. The difference arises because of changes in the composition
of sales between higher and lower priced variants/markets or as
price changes are implemented.
Depletion is the estimated volume of the first onward sales from
our direct customers, measured on an equivalent units basis.
References to emerging markets include Russia, Eastern Europe,
Turkey, Africa, Latin America and Caribbean, and Asia Pacific
(excluding Australia, Korea and Japan).
References to reserve brands include Johnnie Walker Blue Label,
Johnnie Walker Green Label, Johnnie Walker Gold Label 18 year old,
Johnnie Walker Gold Label Reserve, Johnnie Walker Platinum Label 18
year old, John Walker & Sons Collection, Johnnie Walker The
Gold Route, Johnnie Walker The Royal Route and other Johnnie Walker
super premium brands; The Singleton, Cardhu, Talisker, Lagavulin
and other malt brands; Buchanan's Special Reserve, Buchanan's Red
Seal; Bulleit Bourbon, Bulleit Rye; Tanqueray No. TEN, Tanqueray
Malacca Gin; Cîroc, Ketel One vodka; Don Julio, Zacapa, Bundaberg
SDlx, Shui Jing Fang, Jinzu gin, Haig Club whisky, Orphan Barrel
whiskey and DeLeón Tequila.
References to global giants include the following brand
families: Johnnie Walker, Smirnoff, Captain Morgan, Baileys,
Tanqueray and Guinness. Local stars spirits include, but are not
limited to, Bell's, Buchanan's, Bundaberg, Bulleit, Cacique, Crown
Royal, Don Julio, J B, McDowell's, Old Parr, Yenì Raki, Ketel One
vodka, scotch malts, White Horse, Windsor and Ypióca. Global giants
and local stars exclude ready to drink.
References to ready to drink also include ready to serve
products, such as pre-mix cans in some markets, and progressive
adult beverages in the United States and certain markets supplied
by the United States.
References to beer include non-alcoholic products such as Malta
Guinness.
References to the group include Diageo plc and its consolidated
subsidiaries.
RISK FACTORS
Diageo's products are sold in over 180 countries worldwide,
which subjects Diageo to risks and uncertainties in multiple
jurisdictions across developed and developing markets. The group's
aim is to manage risk and control its business and financial
activities cost-effectively and in a manner that enables it to:
exploit profitable business opportunities in a disciplined way;
avoid or reduce risks that can cause loss, reputational damage or
business failure; manage and mitigate historic risks and exposures
of the group; support operational effectiveness; and enhance
resilience to external events. To achieve this, an ongoing process
has been established for identifying, evaluating and managing risks
faced by the group. A detailed description of the key risks and
uncertainties facing the group are described in the 'Strategic
report' section of the annual report for the year ended 30 June
2015 and under 'Risk Factors' in the annual report on Form 20-F for
the year ended 30 June 2015.
These key risks and uncertainties include: unfavourable
economic, social, or political or other developments and risks in
the countries in which Diageo operates including the impact of the
decision in the recent UK referendum to leave the European Union;
changes in consumer preferences and tastes and adverse impacts of a
declining economy, among many factors, may adversely affect demand;
litigation directed at the beverage alcohol industry and other
litigation; climate change, or legal, regulatory or market measures
to address climate change; water scarcity or poor quality;
increased costs of raw materials or energy; regulatory decisions
and changes in the legal, international tax and regulatory
environment could increase Diageo's costs and liabilities, increase
the effective tax rate or limit its business activities; increasing
costs of monitoring and maintaining compliance with anti-corruption
laws; failure to maintain Diageo's brand image and corporate
reputation; competition may reduce Diageo's market share and
margins; expected benefits may not be derived from Diageo's
business strategies or from its acquisitions or its cost-saving and
restructuring programmes designed to enhance earnings;
contamination, counterfeiting or other events could harm integrity
of customer support for Diageo's brands and adversely affect the
sales of those brands; increased costs or shortages of talent;
disruption to production facilities, business service centres or
information systems (including cyber-attacks) and change programs
may not deliver the benefits intended; movements in the value of
Diageo's pension funds, fluctuations in exchange rates and interest
rates; failure to maintain or renegotiate distribution, supply,
manufacturing and licence agreements on favourable terms; inability
to protect Diageo's intellectual property rights; and difficulty in
effecting service of US process and enforcing US legal process
against the directors of Diageo.
Cautionary statement concerning forward-looking statements
This document contains 'forward-looking' statements. These
statements can be identified by the fact that they do not relate
only to historical or current facts. In particular, forward-looking
statements include all statements that express forecasts,
expectations, plans, outlook, objectives and projections with
respect to future matters, including trends in results of
operations, margins, growth rates, overall market trends, the
impact of changes in interest or exchange rates, the availability
or cost of financing to Diageo, anticipated cost savings or
synergies, expected investments, the completion of Diageo's
strategic transactions and restructuring programmes, anticipated
tax rates, expected cash payments, outcomes of litigation,
anticipated deficit reductions in relation 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.
These factors include, but are not limited to:
-- economic, political, social or other developments in
countries and markets in which Diageo operates, which may
contribute to reduced demand for Diageo's products, reduced
consumer spending, negative impacts on Diageo's customer, supplier
and financial counterparties or the imposition of import,
investment or currency restrictions;
-- the results of the decision in the United Kingdom's
referendum on 23 June 2016 to leave the European Union, which may
lead to a sustained period of economic and political uncertainty
and complexity until the detailed terms of the United Kingdom's
exit from the European Union are finalised and as the United
Kingdom negotiates and concludes any successor trading arrangements
with other countries, and which may also negatively impact economic
conditions in Europe more generally which could have an adverse
impact on Diageo's business operations and financial
performance;
-- changes in consumer preferences and tastes, including as a
result of changes in demographic and social trends, public health
regulations and travel, vacation or leisure activity patterns, or
as a result of contamination, counterfeiting or other circumstances
which could harm the integrity or sales of Diageo's brands;
-- any litigation or other similar proceedings (including with
tax, customs and other regulatory authorities), including that
directed at the drinks and spirits industry generally or at Diageo
in particular, or the impact of a product recall or product
liability claim on Diageo's profitability or reputation;
-- the effects of climate change and related regulations and
other measures to address climate change, including any resulting
impact on the cost and supply of water;
-- changes in the cost of production, including as a result of
increases in the cost of commodities, labour and/or energy or as a
result of inflation;
-- legal and regulatory developments, including changes in
regulations regarding production, product liability, distribution,
importation, labelling, packaging, consumption, advertising and
data privacy; changes in tax law (including tax treaties), rates or
requirements (including with respect to the impact of excise tax
increases) or accounting standards; and changes in environmental
laws, health regulations and the laws governing labour and
pensions;
-- the consequences of any failure by Diageo to comply with
anti-corruption and other laws and regulations or any failure of
Diageo's related internal policies and procedures to comply with
applicable law;
-- ability to maintain Diageo's brand image and corporate
reputation or to adapt to a changing media environment, and
exposure to adverse publicity, whether or not justified, and any
resulting impacts on Diageo's reputation and the likelihood that
consumers choose products offered by Diageo's competitors;
-- increased competitive product and pricing pressures,
including as a result of actions by increasingly consolidated
competitors, that could negatively impact Diageo's market share,
distribution network, costs or pricing;
-- the effects of Diageo's business strategies, including in
relation to expansion in emerging markets and growth of
participation in international premium spirits markets, the effects
of business combinations, partnerships, acquisitions or disposals,
existing or future, and the ability to realise expected synergies
and/or costs savings;
-- Diageo's ability to benefit from its strategy, including its
ability to expand into new markets, to complete and benefit from
existing or future business combinations or other transactions, to
implement cost saving and productivity initiatives or to forecast
inventory levels successfully;
-- contamination, counterfeiting or other events that could
adversely affect the perception of Diageo's brands;
-- increased costs or shortages of talent;
-- disruption to production facilities or business service
centres or information systems (including cyber-attack), existing
or future;
-- fluctuations in exchange rates and interest rates, which may
impact the value of transactions and assets denominated in other
currencies, increase the cost of financing or otherwise affect
Diageo's financial results;
-- movements in the value of the assets and liabilities related to Diageo's pension funds;
-- renewal of supply, distribution, manufacturing or licence
agreements (or related rights) and licences on favourable terms or
at all when they expire; and
-- failure of 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 factors and by the 'Risk
factors' section above. 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 US Securities and Exchange
Commission (SEC). All readers, wherever located, should take note
of these disclosures.
This document includes names of Diageo's products, which
constitute trademarks or trade names which Diageo owns, or which
others own and license to Diageo for use. All rights reserved. (c)
Diageo plc 2016.
The information in this document does not constitute an offer to
sell or an invitation to buy shares in Diageo plc or an invitation
or inducement to engage in any other investment activities.
This document may include information about Diageo's target debt
rating. A security rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal at any
time by the assigning rating organisation. Each rating should be
evaluated independently of any other rating.
Past performance cannot be relied upon as a guide to future
performance.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The responsibility statement set out below has been prepared in
connection with (and will be set out in) the Annual Report for the
year ended 30 June 2016, which will be published on 9 August 2016
(and which can be found thereafter at www.diageo.com).
Each of the directors of Diageo plc confirms, "to the best of
his or her knowledge, that:
-- the Annual Report for the year ended 30 June 2016, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the group's performance, business model and strategy;
-- the consolidated financial statements contained in the Annual
Report for the year ended 30 June 2016, which have been prepared in
accordance with IFRS as issued by the IASB and as adopted for use
in the EU, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the group; and
-- the management report represented by the directors' report
contained in the Annual Report for the year ended 30 June 2016
includes a fair review of the development and performance of the
business and the position of the group, together with a description
of the principal risks and uncertainties that the group faces."
The directors of Diageo plc are as follows: Dr Franz B Humer
(Chairman), Ivan Menezes (Chief Executive), Kathryn Mikells (Chief
Financial Officer), Lord Davies of Abersoch (Senior Non-Executive
Director and Chairman of the Remuneration Committee), Philip G
Scott (Non-Executive Director and Chairman of the Audit Committee)
and Non-Executive Directors: Peggy B Bruzelius, Betsy D Holden, Ho
Kwon Ping, Nicola Mendelsohn, Alan Stewart, Emma Walmsley and
Javier Ferrán (was appointed from 22 July 2016).
Diageo will release its preliminary results for the year ended
30 June 2016 on Thursday 28 July 2016.
Webcast, presentation slides and transcript
At 08.00 (UK time) on Thursday 28 July, Ivan Menezes, Chief
Executive and Kathryn Mikells, Chief Financial Officer will present
Diageo's preliminary results as a webcast. This will be available
to view at www.diageo.com.
The presentation slides and transcript will also be available to
download from www.diageo.com at 08.00 (UK time).
A transcript of the Q&A session will be available for
download on 29 July 2016 at www.diageo.com.
Live Q&A conference call and replay
Ivan Menezes, Chief Executive and Kathryn Mikells, Chief
Financial Officer will be hosting a Q&A conference call on
Thursday 28 July 2016 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 0844 571 8892
From the UK (free
call) 0800 376 7922
From the USA (free call) 1 866 966 1396
International dial in number +44 (0)20 7192 8000
The conference call is for analysts and investors only. To join
the call please use the password already sent to you or email
Suzanne.austin@diageo.com.
To hear a replay of the call, please use the telephone numbers
below.
From the UK 0844 338 6600
From the UK (free
call) 0800 953 1533
From the USA (free call) 1 866 247 4222
International dial in number +44 (0)1452 550 000
Investor enquiries to: Andy Ryan +44 (0) 20 8978 6504
Pier Falcione +44 (0) 20 8978 4838
Rohit Vats +44 (0) 20 8978 1064
investor.relations@diageo.com
Media enquiries to: Dominic Redfearn +44 (0) 20 8978 2714
Kirsty King +44 (0) 20 8978 6855
Lisa Crane +44 (0) 20 8978 4771
global.press.office@diageo.com
This information is provided by RNS
The company news service from the London Stock Exchange
END
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