RNS Number : 7999V
Diageo PLC
26 July 2018
 

Preliminary results, year ended 30 June 2018

26 July 2018

This document contains inside information

 

Strong performance reflects consistent and rigorous execution of our strategy

 

 

·  Reported net sales (£12.2 billion) and operating profit (£3.7 billion) were up 0.9% and 3.7%, respectively, as organic growth was partially offset by adverse exchange

 

·     All regions contributed to broad based organic growth, with organic net sales up 5.0% and organic volume up 2.5%

 

·     Organic operating profit was up 7.6%, improving organic operating margins by 78 basis points, as higher marketing investment was more than offset by efficiencies from our productivity programme

 

·    Cash flow continued to be strong, broadly in line with last year, with £3.1 billion net cash from operating activities and £2.5 billion free cash flow

 

·     Basic eps of 121.7 pence was up 14.8%. Pre-exceptional eps was 118.6 pence, up 9.3%, principally due to higher organic operating profit

 

·   On 26 July the Board approved a share buyback programme to return up to £2.0 billion to shareholders during the year ending 30 June 2019

 

·      The board recommended a final dividend increase of 5% bringing the full year dividend to 65.3 pence per share

 

See explanatory notes for explanation of the use of non-GAAP measures.

 

 

Ivan Menezes, Chief Executive, commenting on the results said:

 

 

"Diageo has delivered another year of strong, consistent performance. Organic volume and net sales growth is broad based across regions and categories. We have expanded organic operating margin while increasing investment behind our brands ahead of organic net sales growth.

These results reflect the high performance culture we have created in Diageo, the ongoing rigorous execution of our strategy, our focus on the consumer and our ability to move swiftly on trends and insights.

During the year we returned £1.5 billion to shareholders through a share buyback.  We have delivered another year of strong cash flow generation in F18. Consequently, the Board has approved an additional share buyback programme of up to £2.0 billion during F19.

The changes we have made in the business and the shifts in culture we continue to drive, ensure we are well placed to capture opportunities and deliver sustained growth. Our financial performance expectations are unchanged and we expect to continue to invest in the business to deliver our mid-term guidance of consistent mid-single digit organic net sales growth and 175bps of organic operating margin expansion for the three years ending 30 June 2019."

 

Key financial information

For the year ended 30 June 2018

 

Summary financial information

 

 

2018

2017

Organic

growth

%

Reported growth

%

Volume

EUm

240.4

242.2

2

(1)

Net sales

£ million

12,163

12,050

5

1

Marketing

£ million

1,882

1,798

7

5

Operating profit before exceptional items

£ million

3,819

3,601

8

6

Exceptional operating items (i)

£ million

(128)

(42)

 

 

Operating profit

£ million

3,691

3,559

 

4

Share of associate and joint venture profit after tax

£ million

309

309

 

-

Exceptional non-operating gain (i)

£ million

-

20

 

 

Net finance charges

£ million

260

329

 

 

Exceptional taxation credit (i)

£ million

203

4

 

 

Tax rate including exceptional items

%

15.9

20.6

 

(23)

Tax rate before exceptional items

%

20.7

20.6

 

-

Discontinued operations (after tax) (i)

£ million

-

(55)

 

 

Profit attributable to parent company's shareholders

£ million

3,022

2,662

 

14

Basic earnings per share

pence

121.7

106.0

 

15

Earnings per share before exceptional items

pence

118.6

108.5

 

9

Recommended full year dividend

pence

65.3

62.2

 

5

(i)   For further details of exceptional items and discontinued operations items see Notes 3. Exceptional Items.


 

Outlook for exchange

Using exchange rates £1 = $1.33; £1 = €1.13, the exchange rate movement for the year ending 30 June 2019 is estimated to adversely impact net sales by approximately £70 million and operating profit by approximately £10 million.

 

Outlook for tax

The tax rate before exceptional items for the year ended 30 June 2018 was 20.7%. Our current expectation is that the tax rate before exceptional items for the year ending 30 June 2019 will be in the range of 21% to 22% which reflects changing business mix and the increased levels of uncertainty in the current tax environment for most multinationals. For further details on taxation see Additional Financial Information (d) Taxation.

 

Share buyback programme

On 26 July 2017 the Board approved a share buyback programme to return up to £1.5 billion to shareholders during F18. The programme was completed in February 2018 with 58.9 million shares being repurchased. On 26 July 2018 the Board approved a new share buyback programme to return up to £2.0 billion to shareholders during the year ending 30 June 2019.

 

Acquisitions and disposals

The impact of acquisitions and disposals on the reported figures was primarily attributable to the acquisition of the Casamigos brand which was completed on 15 August 2017 and to the prior year change to a franchise model for some popular segment brands in India.

 

For further details on the impact of acquisitions and disposals see Explanatory Notes.

 

Net sales (£ million)

Reported net sales up 0.9% with organic growth partially offset by unfavourable exchange

Organic net sales growth of 5.0% driven by 2.5% volume growth and 2.5% positive price/mix

 

Net sales

£ million

2017

12,050

Exchange(i)

(454)

Acquisitions and disposals

(5)

Volume

288

Price/mix

284

2018

12,163

 (i)  Exchange rate movements reflect the translation of prior year reported results at current year exchange rates.

 

Reported net sales grew 0.9%, driven by organic growth which was partially offset by unfavourable exchange.

 

Organic volume growth of 2.5% and 2.5% of positive price/mix drove 5% organic net sales growth with organic growth delivered across all regions.

 

 

Operating profit (£ million)

Reported operating profit grew 3.7%

Organic operating profit grew 7.6%

 

 

 

Reported operating profit was up 3.7% with organic growth partially offset by exceptional operating items and adverse exchange. Organic operating profit grew ahead of net sales at 7.6%.

 

Operating profit

£ million

2017

3,559

Exceptional operating items

(86)

Exchange

(56)

Acquisitions and disposals

4

Organic movement

270

2018

3,691

 

Operating margin (%)

Reported operating margin increased 81bps

Organic operating margin increased 78bps

 

Operating margin

ppt

2017

29.5

Exceptional operating items

(0.70)

Exchange

0.69

Acquisitions and disposals

0.04

Gross margin

(0.43)

Marketing

(0.27)

Other operating expenses

1.48

2018

30.3

Reported operating margin increased 81bps driven by organic operating margin improvement and the positive impact on operating margin from exchange, due to the stronger negative impact of exchange on net sales relative to operating profit, which more than offset the impact from exceptional operating items. Organic operating margin improved 78bps driven primarily by our productivity programme partially offset by higher marketing spend.

 

Basic earnings per share (pence)

Basic eps epBasic eps increased 14.8% from 106.0 pence to 121.7 pence

Eps before exceptional items increased 9.3% from 108.5 pence to 118.6 pence

 

Basic earnings per share

pence

2017

106.0

Exceptional items after tax

3.3

Discontinued operations after tax

2.2

Exchange on operating profit

(2.3)

Acquisitions and disposals

0.2

Organic operating profit growth(i)

10.8

Net finance charges

3.0

Tax

(2.6)

Share buyback

1.2

Non-controlling interests

(0.1)

2018

121.7

(i)   Excluding exchange

 

Eps before exceptional items increased 10.1 pence driven by organic operating profit growth and lower finance charges partially offset by the negative impact from exchange and higher tax expense.

Basic eps increased by 14.8% being impacted by a benefit of exceptional items after tax and the lapping of discontinued losses in the year ended 30 June 2017. The net exceptional credit was due to the balance sheet re-measurement of our deferred tax liabilities in the US as a result of the headline rate reduction. This was partially offset by the tax charge as a result of the transfer pricing agreement reached with HMRC on the UK tax assessment and the impairment of certain of our assets in Africa Regional Markets.

 

Free cash flow (£ million)

Net cash from operating activities(i) was £3,084 million, a decrease of £48 million compared to the same period last year. Free cash flow was £2,523 million, a decrease of £140 million

 

Free cash flow

£ million

2017

2,663

Capex

(72)

Exchange(ii)

(56)

Operating profit(iii)

280

Working capital(iv)

(310)

Tax

(19)

Interest

62

Other(v)

(25)

2018

2,523

(i)   Net cash from operating activities excludes net capex, movements in loans and other investments ((£561) million in 2018 - (£469) million in 2017).

(ii)  Exchange on operating profit before exceptional items.

(iii)  Operating profit excluding exchange, depreciation and amortisation, post employment charges and non-cash items but including operating exceptional items.

(iv) Working capital movement includes maturing inventory.

(v)  Other items include post employment payments, dividends received from associates and joint ventures, and loans and other investments.

 

Free cash flow continued to be strong at £2.5 billion. Operating profit growth was largely offset by increased investment in maturing stock and capex as well as lower operating working capital improvements year on year. Operating working capital improved but the benefits on free cash flow were lower than in the prior year.

 

 

Return on average invested capital (%)(i)

ROIC improved 48bps

 

Return on average invested capital

ppt

2017

13.8

Exchange

0.04

Acquisitions and disposals

(0.21)

Organic operating profit growth

1.24

Associates and joint ventures

(0.15)

Tax

(0.40)

Other

(0.04)

2018

14.3

(i)   ROIC calculation excludes exceptional items.

 

ROIC before exceptional items increased 48bps as organic operating profit growth was partially offset by the impact from acquisitions and disposals and higher underlying tax charges.

 

Reported growth by region

 

 

 

Volume

Net sales

Marketing

Operating profit(i)

 

%

EUm

%

£ million

%

£ million

%

 £ million

North America

2

0.8

(1)

(45)

3

20

(1)

(17)

Europe and Turkey

4

1.9

4

108

7

31

10

92

Africa

3

1.0

(4)

(65)

(5)

(8)

(12)

(27)

Latin America and Caribbean

5

1.1

2

25

1

1

23

58

Asia Pacific

(7)

(6.6)

3

84

13

45

17

81

Corporate

-

-

13

6

(56)

(5)

16

31

Diageo

(1)

(1.8)

1

113

5

84

6

218

 

Organic growth by region

 

 

Volume

Net sales

Marketing

Operating profit(i)

 

%

EUm

%

£ million

%

£ million

%

 £ million

North America

1

0.6

4

142

6

35

2

43

Europe and Turkey

4

1.7

4

110

6

28

8

74

Africa

3

1.0

3

39

2

3

(5)

(9)

Latin America and Caribbean

5

1.1

7

66

4

8

19

49

Asia Pacific

2

1.4

9

210

15

50

19

89

Corporate

-

-

11

5

(50)

(4)

13

24

Diageo

2

5.8

5

572

7

120

8

270

(i) Before operating exceptional items.

 

Notes to the business and financial review

 

Unless otherwise stated:
 

·      commentary below refers to organic movements

·      volume is in millions of equivalent units (EUm)

·      net sales are sales after deducting excise duties

·      percentage movements are organic movements

·      share refers to value share

 

See Explanatory Notes for explanation of the calculation and use of non-GAAP measures.

 

BUSINESS REVIEW

For the year ended 30 June 2018

 

North America

 

North America delivered net sales growth of 4% with US Spirits growing 3% and continued growth in both Diageo Beer Company USA (DBC USA) and Canada. In US Spirits, category share gains were achieved for all key brands except in vodka. Crown Royal grew 3% with Crown Royal Deluxe and Crown Royal Regal Apple growth accelerating, partially offset by Crown Royal Vanilla lapping its launch last year. Bulleit continued its double digit growth, up 10%. Scotch grew 4% with Johnnie Walker up 6%, driven by Johnnie Walker Black Label growing 5% and double digit growth in reserve variants. Baileys growth accelerated while Captain Morgan growth moderated as it cycled a strong performance last year. Vodka net sales, while declining 3%, showed some improvement versus last year driven by Ketel One vodka and Cîroc vodka. Smirnoff net sales were down 2%. Don Julio growth accelerated with net sales growing 37%. DBC USA net sales grew 5% with ready to drink growing 14% and beer declining 2%. Net sales in Canada were up 1%. Marketing in North America increased 6% and grew ahead of net sales as investment was up-weighted. Operating margin declined 58bps as the impact of increased marketing, hurricane remediation costs and logistics inflation more than offset the benefits from productivity initiatives.  

 

 Key financials £ million:

 

2017

FX

Reclassifi-cation(i)

Acquisitions

and

disposals

Organic movement

2018

Reported movement  

%

 Net sales

4,161

(228)

(8)

49

142

4,116

(1)

 Marketing

642

(21)

(2)

8

35

662

3

 Operating profit

1,899

(60)

(4)

4

43

1,882

(1)

(i)   Reclassification comprises changes to a reallocation of the results of the Travel Retail operations to the geographical regions.

 

 

Markets:

 

 

 

 

 

Global giants, local stars and reserve (i) :

 

Organic

volume

movement

Reported

volume

movement

Organic

net sales

movement

Reported

net sales

movement

 

 

Organic

volume

movement(ii)

Organic

net sales

movement

Reported

net sales

movement

 

%

%

%

%

 

 

%

%

%

 North America

1

2

4

(1)

 

 Crown Royal

2

3

(3)

 

 

 

 

 

 

 Smirnoff

(1)

(2)

(8)

 US Spirits

1

2

3

(1)

 

 Captain Morgan

-

(1)

(7)

 DBC USA

5

5

5

(1)

 

 Johnnie Walker

5

8

6

 Canada

-

-

1

(1)

 

 Ketel One vodka(iii)

3

(2)

(7)

 

 

 

 

 

 

 Cîroc vodka

(1)

(4)

(10)

 Spirits

1

2

3

-

 

 Baileys

9

11

6

 Beer

(2)

(2)

(1)

(6)

 

 Guinness

(1)

-

(5)

 Ready to drink

11

11

12

6

 

 Tanqueray

4

3

(3)

 

 

 

 

 

 

 Don Julio

36

37

30

 

 

 

 

 

 

 Bulleit

8

10

4

 

 

 

 

 

 

 Buchanan's

2

-

(5)

(i)   Spirits brands excluding ready to drink.

(ii)  Organic equals reported volume movement except Johnnie Walker 7%, Baileys 10% and Buchanan's 3% due to the reallocation of the Travel Retail operations.

(iii) Ketel One vodka includes Ketel One Botanicals.

 

 

·      Net sales in US Spirits were up 3%. Net sales were broadly in line with depletions. Crown Royal and Bulleit continued share gains in the Canadian whisky and US whiskey categories, respectively. The Generosity platform is working for Crown Royal, driving gains in equity and category share. Crown Royal net sales grew 3% with acceleration in Crown Royal Deluxe and Crown Royal Regal Apple growth partially offset by Crown Royal Vanilla cycling its launch last year. Johnnie Walker grew 6% with the successful 'Keep Walking America' platform being followed up by a new campaign 'Step Right up', scaled up 'liquid on lips' and continued focus on Johnnie Walker Blue Label in the gifting occasion. Buchanan's net sales were broadly flat with depletion performance improving in the second half and category share gains continuing. Vodka while declining, showed some improvement versus last year. Ketel One vodka benefitted from the execution of improved plans, as did the trademark from the launch of Ketel One Botanicals. Cîroc vodka saw some improvement in performance with the focus on core variants. Smirnoff net sales declined 2% with brand equity scores improving as it continued to remind consumers that it is a quality vodka at a great price. The 'Live like a Captain' campaign continues to resonate with consumers, driving category share and equity gains for Captain Morgan. Baileys growth accelerated versus last year as it reminded consumers of its indulgent treat positioning over the holidays. Don Julio net sales grew 37% with growth and category share gains accelerating versus last year.

·      DBC USA net sales increased 5% with ready to drink growing 14%. Ready to drink growth was driven by continued growth of Smirnoff Ice and Smirnoff Spiked Sparkling Seltzer, and the launch of Smirnoff Ice Smash. Beer declined 2% with Guinness declining 1%.

·      Net sales in Canada grew 1% driven by growth in Johnnie Walker, Baileys, Guinness and ready to drink. Johnnie Walker benefitted from a focus on Johnnie Walker Black Label highlighting its credentials to consumers through mentoring events, media and in-store activation. Guinness benefitted from the growth in the on-trade and the launch of Hop House 13 Lager.

·      Marketing grew 6% with the upweighting of marketing investment funded largely from productivity initiatives.

 

 

Europe and Turkey

 

The region delivered 4% net sales growth, reflecting another year of consistent performance in Europe where net sales were up 4% and a strong performance in Turkey growing net sales by 11%. Europe growth was largely driven by Great Britain, Ireland and Continental Europe, with continued share gains in spirits, up 50bps across Western Europe. Performance was led by strong growth in gin, where Tanqueray gained share in the fastest growing category and Gordon's benefitted from the launch of its Pink variant. Guinness was up 6% driven by a good performance for Guinness Draught supported by double digit growth in Hop House 13 Lager. Net sales of Captain Morgan grew 7%. Johnnie Walker grew 2% despite lapping a strong performance last year. Smirnoff declined 4% driven by Iberia and Great Britain, in line with the vodka category. In Turkey net sales were up 11% driven by volume growth of 5% and price increases across all categories. Operating margin improved 126bps as up-weighting in marketing investment was more than offset by ongoing productivity initiatives and lapping other one-off operating costs.

 

 Key financials £ million:

 

2017

FX

Reclassifi-cation(i)

Acquisitions

and

disposals

Organic movement

2018

Reported movement  

%

 Net sales

2,824

(15)

16

(3)

110

2,932

4

 Marketing

443

2

1

-

28

474

7

 Operating profit before exceptional items

936

7

11

-

74

1,028

10

 Exceptional operating items(ii)

(33)

 

 

 

 

-

 

 Operating profit

903

 

 

 

 

1,028

 

(i)   Reclassification comprises changes to a reallocation of the results of the Travel Retail operations to the geographical regions.

(ii)  For further details of exceptional operating items see Notes 3. Exceptional Items.

 

 

Markets:

 

 

 

 

 

Global giants and local stars(ii):

 

Organic

volume

movement

Reported

volume

movement

Organic

net sales

movement

Reported

net sales

movement

 

 

Organic

volume

movement (iii)

Organic

net sales

movement

Reported

net sales

movement

 

%

%

%

%

 

 

%

%

%

 Europe

 

 

 

 

 

 Guinness

5

6

8

 and Turkey

4

4

4

4

 

 Johnnie Walker

2

-

8

 

 

 

 

 

 

 Smirnoff

(4)

(4)

(4)

 Europe (i)

5

7

4

8

 

 Baileys

8

6

7

 Turkey

5

5

11

(7)

 

 Yenì Raki

-

10

(9)

 

 

 

 

 

 

 Captain Morgan

5

6

10

 Spirits

4

4

4

4

 

 J?B

(5)

(10)

(7)

 Beer

4

4

4

6

 

 Tanqueray

18

18

22

 Ready to drink

12

12

11

11

 

 

 

 

 

(i)   Following a change in management responsibilities the Europe market, from 1 July 2017, includes Russia and the Algeria, Iraq, Jordan, Lebanon and Morocco markets.

(ii)  Spirits brands excluding ready to drink.

(iii) Organic equals reported volume movement except Johnnie Walker 5% due to the reallocation of the Travel Retail operations.

 

·      In Europe, net sales were up 4%:

·     In Great Britain, net sales grew 8%. Tanqueray delivered strong double digit net sales growth and gained 30bps share in the fastest growing category across Western Europe and Gordon's benefitted from the successful launch of its Pink variant. Guinness net sales increased 8% and gained 30bps of share in the beer category, driven by a strong performance in Guinness Draught and Hop House 13 Lager. Scotch net sales were up 6% mainly driven by scotch malts and Johnnie Walker supported by incremental media activation, "liquid on lips" and additional off trade visibility. Smirnoff declined 2% in line with the vodka category. Reserve brands continued to deliver double digit growth, with strong performance led by our scotch portfolio.

·      Net sales in Ireland were up by 3%. Guinness grew 2% driven by the continued success of Hop House 13 Lager and the launch of the 'Behind every town' campaign across the country. In spirits, net sales were up 14% largely driven by strong performance in Gordon's and Tanqueray.

 

·      In Continental Europe, net sales were up 1%:

·    Iberia net sales declined 6% due to J?B driven by category decline and an increased competitive pricing environment.

·    In Central Europe, net sales declined 1%. Double digit growth in Tanqueray and good performance from Johnnie Walker in Poland were offset by a soft performance in Baileys as it lapped a strong performance in the prior year, a weaker performance of Captain Morgan and Smirnoff.

·      In Northern Europe net sales were flat as net sales growth in the Nordics was offset by a decline in Benelux as the spirits category slowly began to recover following a prior year excise increase. 

·      In the Mediterranean Hub, net sales were up 4% largely driven by Italy with broad growth across the spirits categories.

·    Europe Partner Markets grew net sales 8% driven by strong activations, innovation and performance improvement in Johnnie Walker and Guinness.

·      Russia net sales grew 14% with 5pps of positive price/mix driven by price increases in the previous year. Growth was largely driven by scotch led by Johnnie Walker and strong growth in Captain Morgan. 

·      In France, net sales were up 1%. Continued strong performance in Captain Morgan and Zacapa was partially offset by weakness in J ? B.

·    In Turkey, net sales grew 11% with volume growth of 5% and excise led price increases as well as good raki and vodka performance.  

·     Marketing investment increased 6% focused on key growth opportunities for the region in Guinness, Johnnie Walker, reserve brands and gin. Productivity initiatives continued to improve the efficiency and effectiveness of the investment.

 

 

 

Africa

 

Africa net sales grew 3% with growth in Nigeria and with East Africa recovering from the first half impact of the uncertainty following the presidential election in Kenya. This was partially offset by weakness in Africa Regional Markets due to challenging conditions in Cameroon and Ethiopia, and a competitive environment in South Africa. Across Africa, beer net sales were up 5%, with strong growth of Dubic in Nigeria and the successful launch of Serengeti Lite in Tanzania. Guinness and Malta Guinness grew 7% and 4% respectively, while Senator Keg declined in Kenya. Mainstream spirits saw continued double digit growth in East Africa and Nigeria partially offset by soft performance of Smirnoff 1818 and primary scotch whiskies in South Africa. Scotch net sales declined 6%. Operating margin declined by 96bps driven by input cost inflation, adverse mix and one-off charges, partially offset by productivity savings in supply, lower indirect spend as well as organisational effectiveness benefits.

 

 Key financials £ million:

 

2017

FX

Reclassifi-cation(i)

Acquisitions

and

disposals

Organic movement

2018

Reported movement  

%

 Net sales

1,556

(105)

1

-

39

1,491

(4)

 Marketing

166

(11)

-

-

3

158

(5)

 Operating profit before exceptional items

218

(20)

2

-

(9)

191

(12)

 Exceptional operating items(ii)

-

 

 

 

 

(128)

 

 Operating profit

218

 

 

 

 

63

(71)

(i)   Reclassification comprises changes to a reallocation of the results of the Travel Retail operations to the geographical regions and the results of North African countries which were formerly reported in the Africa geographical regions now being included in Europe and Turkey.

(ii)  For further details of exceptional operating items see Notes 3. Exceptional Items.

 


 

Markets:

 

 

 

 

 

Global giants and local stars(i):

 

Organic

volume

movement

Reported

volume

movement

Organic

net sales

movement

Reported

net sales

movement

 

 

Organic

volume

movement(ii)

Organic

net sales

movement

Reported

net sales

movement

 

%

%

%

%

 

 

%

%

%

 Africa

3

3

3

(4)

 

 Guinness

2

7

-

 

 

 

 

 

 

 Johnnie Walker

(5)

(4)

(5)

 East Africa

7

7

4

(2)

 

 Smirnoff

-

(10)

(12)

 Africa Regional

 Markets

(5)

(5)

(2)

(7)

 

 

 

 

 

 Nigeria

10

10

13

(4)

 

Other beer:

 South Africa

(1)

(1)

(3)

(4)

 

 

 

 

 

 

 

 

 

 

 

 Malta Guinness

(4)

4

(10)

 Spirits

10

10

2

(1)

 

 Tusker

1

-

(6)

 Beer

-

-

5

(4)

 

 Senator

(12)

(12)

(17)

 Ready to drink

(2)

(2)

(1)

(7)

 

 Satzenbrau

(28)

(22)

(34)

(i)   Spirits brands excluding ready to drink.

(ii)  Organic equals reported volume movement except Johnnie Walker (4)% due to the reallocation of the Travel Retail operations.

 

 

 

·    In East Africa, net sales grew 4% with a stronger second half performance, with conditions normalising after the political uncertainty in the first half.  Beer net sales grew 4% as a decline in Senator Keg in Kenya was more than offset by the successful launch of Serengeti Lite in Tanzania and Guinness net sales growing 8%. Mainstream spirits continued to deliver strong performance driven by improved distribution, consumer promotions and new launches.

·      In Africa Regional Markets, net sales declined 2% with growth in Ghana more than offset by weakness in Cameroon, due to third party distributor challenges in the first half and social unrest, and in Ethiopia due to political instability, high inflation driven by currency devaluation and competitive pressures. This resulted in a double digit decline in scotch. Beer net sales were flat with double digit growth in Malta Guinness offset by a decline in Guinness in Cameroon. In Ghana net sales increased 7% with net sales growth in Malta Guinness and Guinness offsetting decline in ready to drink where Orijin faced increased competitive pressure.  

·    Net sales in South Africa declined 3% largely driven by decline in mainstream spirits, Smirnoff 1818 and primary scotch whiskies, which were impacted by price increases and an increased competitive environment.

·     In Nigeria, net sales grew 13%. Beer grew 15% with continued strong growth from Dubic post-launch in the prior year and Guinness, up 24%, as it benefitted from the on premise activation against football, leveraging the English Premier League and the football World Cup. In spirits, net sales were up 28% as a result of strong double digit growth in mainstream spirits driven by innovation launches and new formats.

·    Marketing investment increased 2%. In Nigeria, marketing was focused on key campaigns including Malta Guinness "Fuel Your Greatness" and Satz "Smart Choice". In East Africa, the focus of marketing investment was on the Guinness campaign "Meet The Legend", the Tusker "Here is to Us" campaign and the launch of Serengeti Lite.

 

Latin America and Caribbean

 

In Latin America and Caribbean net sales grew 7% with strong performances in Mexico, PUB, and PEBAC partially offset by weakness in the export channels and declines in the domestic markets of Caribbean and Central America. Growth in the region was broad based across categories. In scotch, net sales were up 3% with continued strong performance of Black & White in Brazil, Mexico and Colombia and Johnnie Walker was up 3% across the region. This was partially offset by a decline in Old Parr in Colombia and the export channels and in Buchanan's in Mexico. Don Julio delivered double digit growth. Gin also performed strongly with Tanqueray more than doubling its net sales with strong growth across the region driven by Brazil and Mexico. Smirnoff grew double digit driven by Argentina, Mexico and Brazil. Operating margin in the region increased 299bps as organisational effectiveness benefits, productivity savings and the lapping of one-off tax charges more than offset adverse mix.

 

 Key financials £ million:

 

2017

FX

Reclassifi-cation(i)

Acquisitions

and

disposals

Organic movement

2018

Reported movement  

%

 Net sales

1,044

(43)

2

-

66

1,069

2

 Marketing

195

(8)

1

-

8

196

1

 Operating profit

250

10

(1)

-

49

308

23

(i)   Reclassification comprises changes to a reallocation of the results of the Travel Retail operations to the geographical regions

 

 

Markets:

 

 

 

 

 

Global giants and local stars (i) :

 

Organic

volume

movement

Reported

volume

movement

Organic

net sales

movement

Reported

net sales

movement

 

 

Organic

volume

movement(ii)

Organic

net sales

movement

Reported

net sales

movement

 

%

%

%

%

 

 

%

%

%

 Latin America and

 

 

 

 

 

 Johnnie Walker

3

3

(3)

 Caribbean

5

5

7

2

 

 Buchanan's

(5)

(4)

(8)

 

 

 

 

 

 

 Smirnoff

15

16

5

 PUB

6

6

11

3

 

 Old Parr

(4)

(11)

(12)

 Mexico

8

8

12

9

 

 Baileys

(3)

(4)

(9)

 CCA

(1)

(1)

(4)

(3)

 

 Ypióca

2

2

(6)

 Andean

(5)

(6)

(2)

(14)

 

 Black & White

38

56

47

 PEBAC

24

24

15

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Spirits

6

5

7

1

 

 

 

 

 

 Beer

3

3

4

5

 

 

 

 

 

 Ready to drink

(15)

(15)

(4)

(12)

 

 

 

 

 

(i)   Spirits brands excluding ready to drink.

(ii)  Organic equals reported volume movement except for Johnnie Walker 2%, Baileys (5)% and Old Parr (5)% due to the reallocation of the Travel Retail operations.

 

·    In PUB (Paraguay, Uruguay and Brazil) net sales increased 11%. In Brazil growth was broad based across spirits categories. Scotch net sales were up 11% driven by Black & White. In gin, Tanqueray net sales more than doubled through increased activation and distribution. Smirnoff net sales increased 4% through new formats to increase accessibility and the amplification of the cocktail culture through sponsorship of "The Best Caipiroska in Brazil" event. In Paraguay net sales increased double digit driven by scotch, Tanqueray and Cîroc underpinned by domestic market growth.

·    In Mexico net sales increased 12%. Growth was broad based but led by Don Julio which gained 1.8pps of share of the tequila category with increasing premiumisation from new innovations, Barricas and Reposado Claro. Scotch was flat with growth in Black & White offset by declines in Buchanan's whose performance was impacted by price increases. Smirnoff returned to growth, with improved performance on Smirnoff 21 and the launch of Smirnoff X1.

·    In CCA (Caribbean and Central America) net sales declined 4%. Hurricanes Irma and Maria impacted performance in the domestic markets where net sales declined 3%. Export channels net sales declined 5% as market conditions remained challenging with continuing currency weakness against the US dollar.

·    In Andean (Colombia and Venezuela) net sales declined 2% primarily driven by Colombia as last year's tax regulations resulted in higher retail selling prices for premium imported whisky, impacting the performance of Old Parr. As consumers traded down, Black & White was the biggest beneficiary supported by up-weighted media campaigns. In Venezuela volume declined 18% driven by locally produced brands as economic conditions continued to deteriorate.

·    PEBAC (Peru, Ecuador, Bolivia, Argentina and Chile) delivered net sales growth of 15% driven by Argentina and Chile as well as Ecuador where economic conditions improved. Growth was driven by scotch which gained share, and by increased distribution of Smirnoff. 

·    Marketing investment increased by 4%, driven by up weighted investment across the scotch portfolio focused on Johnnie Walker and Black & White.

 

Asia Pacific

 

In Asia Pacific net sales grew by 9% with strong growth in Greater China, India, and Travel Retail Asia and Middle East. This was partially offset by the continued contraction of the scotch category in Korea. Growth was broad based across the majority of spirits categories. Chinese white spirits continued to grow strong double digit. Net sales in India grew by 9% with strong second half growth as the impact of the Supreme Court ruling prohibiting the sale of alcohol in certain outlets near state highways was lapped. In scotch, net sales were up 4% as strong performance of Johnnie Walker in Travel Retail Asia and Middle East, South East Asia, and China Mainland was partially offset by the decline of Windsor in Korea. Net sales of reserve brands were up 29% driven by Chinese white spirits and Johnnie Walker Super Deluxe in Travel Retail Asia and Middle East and premium scotch in South East Asia. Operating margin in the region improved by 181bps as savings from both indirect spend and organisational effectiveness programmes more than offset the up-weighted marketing investment.

 

 Key financials £ million:

 

2017

FX

Reclassifi-cation(i)

Acquisitions

and

disposals

Organic movement

2018

Reported movement  

%

 Net sales

2,419

(64)

(11)

(51)

210

2,503

3

 Marketing

343

(5)

-

-

50

388

13

 Operating profit before exceptional items

487

1

(8)

(1)

89

568

17

 Exceptional operating items(ii)

(9)

 

 

 

 

-

 

 Operating profit

478

 

 

 

 

568

19

(i)   Reclassification comprises changes to a reallocation of the results of the Travel Retail operations to the geographical regions.

(ii)  For further details of exceptional operating items see Notes 3. Exceptional Items.

 

 

Markets:

 

 

 

 

 

Global giants and local stars(ii):

 

Organic

volume

movement (i)

Reported

volume

movement

Organic

net sales

movement

Reported

net sales

movement

 

 

Organic

volume

movement(iii)

Organic

net sales

movement

Reported

net sales

movement

 

%

%

%

%

 

 

%

%

%

 Asia Pacific

2

(7)

9

3

 

Johnnie Walker

7

12

11

 

 

 

 

 

 

McDowell's

-

8

(3)

 India

1

(9)

9

(1)

 

Windsor

(12)

(19)

(20)

 Greater China

15

15

27

25

 

Smirnoff

6

2

1

 Australia

(2)

(2)

-

(4)

 

Guinness

5

4

-

 South East Asia

10

8

5

2

 

Bundaberg

(3)

(4)

(7)

 North Asia

1

1

(6)

(9)

 

Shui Jing Fang (iv)

50

63

61

 Travel Retail Asia

 and Middle East

11

5

22

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Spirits

2

(7)

10

5

 

 

 

 

 

 Beer

4

4

3

(1)

 

 

 

 

 

 Ready to drink

(5)

(5)

(4)

(6)

 

 

 

 

 

(i)   Difference between organic and reported volume for Asia Pacific is driven by the move to a franchise model for some popular segment brands in India.

(ii)  Spirits brands excluding ready to drink.

(iii)  Organic equals reported volume movement except for Johnnie Walker 5% and McDowell's (9)% due to the reallocation of the Travel Retail operations, the change from an owned to a franchise model for some popular segment brands in India and the disposal of a subsidiary in Nepal.

(iv) Organic growth figures represent total Chinese white spirits of which Shui Jing Fang is the predominant brand. tl Chinese white spirits of which Shui Jing Fang is the predominant brand.

 

 

·       In India net sales increased 9% reflecting a strong acceleration in the second half as the business lapped the implementation of the Supreme Court ruling prohibiting the sale of alcohol in certain outlets near state highways. Prestige and above net sales grew 12% driven by McDowell's No. 1 supported by the launch of its "Never Drink and Drive" campaign, Royal Challenge which leveraged a partnership with T20 cricket through Royal Challengers Bangalore and celebrity endorsement of Signature. Scotch net sales were up 11% supported by up-weighted marketing investment. Rum net sales were up 3% driven by the national launch of Captain Morgan. The popular brand segment recovered in the second half following a focus on key states and brands, resulting in full year net sales growth of 4%.

·       In Greater China net sales increased 27% driven by Chinese white spirits which grew strong double digit through improved execution, expanded distribution and increased marketing investment. Scotch net sales declined 5% as strong double digit growth in mainland China in Johnnie Walker and The Singleton was more than offset by declines in Taiwan where scotch net sales declined by 15% as a result of commercial challenges and category contraction.

·      Net sales in Australia were flat. Growth in Guinness and Tanqueray, with the latter gaining 1.1pps of share, was offset by declines in Smirnoff and Bundaberg in the ready to drink category.

·     In South East Asia net sales increased 5% driven by double digit growth in Key Accounts where Johnnie Walker was supported by continued focus on route to consumer and seasonal gifting. Scotch net sales grew 11% with growth in all markets except Vietnam and Thailand.

·     In North Asia net sales declined 6% as scotch led growth in Japan driven by Johnnie Walker was more than offset by continued weakness in Korea. In Korea net sales declined 11% driven by Windsor as the scotch category continued to contract as consumers switched to lower alcohol content alternatives. This was partially offset by growth in the W range by Windsor, in the lower ABV segment, and Guinness, which both delivered double digit net sales gains.

·      Travel Retail Asia and Middle East net sales grew 22% with growth driven by scotch, particularly Johnnie Walker, as the Middle East lapped weak performance in the prior year along with expanded distribution and improved commercial activations.

·       Marketing investment increased 15% driven by investment in China and India.

 

CATEGORY AND BRAND REVIEW

Year ended 30 June 2018

 

Key categories:

 

Organic

volume

movement (iv)

%

Organic

net sales

movement

%

Reported

net sales

movement

%

Spirits(i)

3

5

2

  Scotch

3

2

1

  Vodka (ii)(iii)

1

(1)

(6)

  US whiskey

2

7

1

  Canadian whisky

-

2

(4)

  Rum (ii)

(3)

1

(4)

  Indian-Made Foreign Liquor (IMFL) whisky

4

8

(1)

  Liqueurs

6

6

4

  Gin (ii)

17

16

14

  Tequila

35

40

56

Beer

1

4

(1)

Ready to drink

2

4

-

(i)   Spirits brands excluding ready to drink.

(ii)  Vodka, rum, gin including IMFL brands.

(iii)  Vodka includes Ketel One Botanicals.

(iv) Organic equals reported volume movement except for spirits (1)%, rum (10)%, IMFL whisky (3)%, vodka flat, tequila 58% and gin 12%.
IMFL whisky was impacted by the move from an owned to a franchise model for some popular segment brands in certain states in India and the disposal of a subsidiary in Nepal, Tequila reported volume benefits from the Casamigos acquisition and other categories were impacted by the reallocation of the Travel Retail operations .

 

 

·      Scotch represents 25% of Diageo's net sales and was up 2% with growth in North America, Asia Pacific and Latin America and Caribbean partially offset by decline in Africa and Europe. Scotch growth was driven by Johnnie Walker, which delivered a strong performance with net sales up 5%, and primary scotch brands net sales increased 7% largely driven by Black & White in Latin America and Caribbean and Asia Pacific. Africa was impacted by South Africa's decline in primary scotch and the soft economic environment in Cameroon. In Europe performance was impacted by weakness in J?B. Elsewhere Windsor net sales were down double digit as it continued to suffer from the category decline in Korea and Old Parr performance was impacted by tax changes in Colombia. Net sales in scotch malts were up 1% with growth primarily in Great Britain and China Mainland partially offset by weakness of The Singleton in Taiwan.

·      Vodka represents 11% of Diageo's net sales and declined 1%, an improvement against the 4% decline last year. The net sales decline was driven predominantly by Smirnoff in US Spirits and Europe as well as Smirnoff 1818 in South Africa which continued to be impacted by the competitive pressure in the mainstream segment. This more than offset the good performance of Smirnoff in Latin America and Caribbean. Cîroc vodka and Ketel One vodka also declined with growth in Europe and Latin America and Caribbean more than offset by declines in US Spirits despite improved performance on both brands compared to last year.

·     US whiskey represents 2% of Diageo's net sales and grew 7% largely driven by Bulleit continuing to win share in the US whiskey category.

·      Canadian whisky represents 7% of Diageo's net sales and grew 2%. Net sales in Crown Royal grew 3% and continued to gain share in the Canadian whisky category of the US market.

·     Rum represents 7% of Diageo's net sales and grew 1% with broad based growth across all regions except North America where we continue to gain share despite category headwinds. Rum overall performance was largely driven by Captain Morgan, up 2%, as well as Zacapa that grew 8%. Captain Morgan and Zacapa performance more than offset declines in Parrot Bay, Bundaberg and Cacique.

·      IMFL whisky represents 5% of Diageo's net sales and grew 8% driven by strong performance of McDowell's No.1 and Royal Challenge.

·      Liqueurs represents 5% of Diageo's net sales and grew 6% driven by double digit growth of Baileys in US Spirits as the brand benefited from a new media campaign and 'liquid on lips' sampling activations and good performance in Europe due to Baileys Original, up 2%, strong recruitment via Baileys Almande and launch of time limited flavour Baileys Strawberries and Cream.

·      Gin represents 4% of Diageo's net sales and grew 16% with broad based growth across all regions. Tanqueray and Gordon's in Europe were the largest contributors to growth as both brands grew double digit.

·      Tequila represents 3% of Diageo's net sales and grew 40%. The performance was driven by strong double digit growth of Don Julio in US Spirits and Mexico.

·      Beer represents 16% of Diageo's net sales and grew 4%. Growth was largely driven by Guinness, Dubic and Serengeti Lite. Guinness net sales were up 5% with strong performance in Europe driven by Hop House 13 Lager and Guinness Draught. Nigeria also had a strong performance with Guinness growing 24%. In East Africa, performance of Senator was impacted by excise driven price increase and political instability.

·      Ready to drink represents 6% of Diageo's net sales and grew 4% driven by good performance in North America and Europe.

 

Global giants, local stars and reserve(i):

 

Organic

volume

movement(ii)

%

Organic

net sales

movement

%

Reported

net sales

movement

%

 

Global giants

 

 

 

 

Johnnie Walker

3

5

5

 

Smirnoff

-

(2)

(5)

 

Baileys

6

6

5

 

Captain Morgan

6

2

(1)

 

Tanqueray

14

15

12

 

Guinness

3

5

2

 

Local stars

 

 

 

 

Crown Royal

1

3

(3)

 

Yenì Raki

-

10

(9)

 

Buchanan's

(3)

(2)

(6)

 

J?B

(5)

(9)

(7)

 

Windsor

(13)

(19)

(20)

 

Old Parr

(3)

(9)

(10)

 

Bundaberg

(3)

(4)

(7)

 

Black & White

26

33

28

 

Ypióca

2

2

(7)

 

McDowell's(ii)

-

8

(3)

 

Shui Jing Fang(iii)

50

63

61

 

Reserve

 

 

 

 

Scotch malts(ii)

1

1

4

 

Cîroc vodka

1

(2)

(6)

 

Ketel One vodka

3

(1)

(7)

 

Don Julio

34

39

32

 

Bulleit

9

11

5

 

(i)   Spirits brands excluding ready to drink.

(ii)  Organic equals reported volume movement except for McDowell's (9)% and Scotch malts 2% which were impacted by the move from an owned to a franchise model in India.

(iii)  Organic growth figures represent total Chinese white spirits of which Shui Jing Fang is the predominant brand.

 

·      Global giants represent 41% of Diageo's net sales and grew 4%. Growth was broad based across all brands with the exception of Smirnoff whose net sales declined 2%.

·     Local stars represent 20% of Diageo's net sales and grew 6%, largely driven by strong growth of Chinese white spirits, IMFL whisky, Crown Royal in US Spirits and Black & White in Latin America and Caribbean. This was partially offset by declines of Windsor in Korea, J?B in Iberia and Old Parr in Colombia.

·      Reserve brands represent 18% of Diageo's net sales and grew 14% largely driven by strong double digit growth in Chinese white spirits and Don Julio. Net sales of Johnnie Walker reserve variants were up 8%. Double-digit growth in Tanqueray No. TEN and Bulleit more than offset declines in Ketel One vodka and Cîroc vodka.

 

ADDITIONAL FINANCIAL INFORMATION

Year ended 30 June 2018

 

SUMMARY INCOME STATEMENT

 

 

2017

Exchange

(a)

Acquisitions and disposals

(b)

Organic movement(ii)

2018

 

£ million

£ million

£ million

£ million

£ million

Sales

18,114

(724)

(147)

1,189

18,432

Excise duties

(6,064)

270

142

(617)

(6,269)

Net sales

12,050

(454)

(5)

572

12,163

Cost of sales

(4,680)

286

29

(269)

(4,634)

Gross profit

7,370

(168)

24

303

7,529

Marketing

(1,798)

44

(8)

(120)

(1,882)

Other operating expenses(i)

(1,971)

68

(12)

87

(1,828)

Operating profit before exceptional items

3,601

(56)

4

270

3,819

Exceptional operating items (c)

(42)

 

 

 

(128)

Operating profit

3,559

 

 

 

3,691

Non-operating items (c)

20

 

 

 

-

Net finance charges

(329)

 

 

 

(260)

Share of after tax results of associates and joint ventures

309

 

 

 

309

Profit before taxation

3,559

 

 

 

3,740

Taxation (d)

(732)

 

 

 

(596)

Profit from continuing operations

2,827

 

 

 

3,144

Discontinued operations (c)

(55)

 

 

 

-

Profit for the year

2,772

 

 

 

3,144

(i)   Before exceptional operating items, see Notes 3. Exceptional Items .

(ii)  For the definition of organic movement see Explanatory Notes.

 

(a) Exchange  

The impact of movements in exchange rates on reported figures is principally in respect of strengthening of sterling against the US dollar , the Turkish lira and the Kenyan shilling, partially offset by weakening of sterling against the euro.

 

 

The effect of movements in exchange rates and other movements on profit before exceptional items and taxation for the year ended 30 June 2018 is set out in the table below.

 

 

 

Gains/(losses)

 

 

£ million

   Translation impact

 

(117)

   Transaction impact

 

61

Operating profit before exceptional items

(56)

   Net finance charges - translation impact

 

1

   Impact of IAS 21 and IFRS 9 on net other finance charges

(8)

Net finance charges

 

(7)

Associates - translation impact

 

8

Profit before exceptional items and taxation

(55)

 

 

 

 

Year ended

 30 June 2018

Year ended

 30 June 2017

Exchange rates

 

1

    Translation  £1 =

$1.35

$1.27

    Transaction £1 =

$1.36

$1.45

    Translation  £1 =

€1.13

€1.16

    Transaction £1 =

€1.16

€1.22

 

(b) Acquisitions and disposals

The impact of acquisitions and disposals on the reported figures was primarily attributable to the acquisition of the Casamigos brand which was completed on 15 August 2017 and to the prior year move to a franchise model for some popular segment brands in India.

 

(c) Exceptional items

Exceptional operating charges   in the year ended 30 June 2018 were £128 million before tax, an increase of £86 million against last year.

 

In the year ended 30 June 2018, an impairment charge of £128 million in respect of the Meta brand, Ethiopian tangible fixed assets, associated spare parts included in inventories and goodwill allocated to the Africa Regional Markets cash-generating unit has been recognised in other operating exceptional expenses. The £115 million net exceptional charge includes the reversal of deferred tax liabilities of £13 million. Forecast cash flow assumptions were reduced principally due to the devaluation of the Ethiopian birr increasing costs of imported raw materials and products, an increased competitive environment and political unrest in Ethiopia.

 

Operating items of £42 million in the year ended 30 June 2017 comprised:

·      a loss of £33 million in respect of a Turkish Competition Authority investigation into certain of Mey ?çki's trading practices in Turkey.

·      a loss of £32 million in respect of a customer claim in India.

·      a gain of £23 million in respect of a settlement with Dr Vijay Mallya.

 

There were no non-operating items in the year ended 30 June 2018.

 

Non-operating items in the year ended 30 June 2017 comprised a net gain of £20 million in respect of the sale of Diageo's wines interests in the United States and its UK based Percy Fox business.

 

See Explanatory Notes for the definition of exceptional items.

 

Discontinued operations in the year ended 30 June 2017 comprised £55 million (net of deferred tax of £9 million) of additional amounts payable to the UK Thalidomide Trust.

(d) Taxation

The reported tax rate for the year ended 30 June 2018 was 15.9% compared with 20.6% for the year ended 30 June 2017. The tax rate before exceptional items for the year ended 30 June 2018 was 20.7% compared with 20.6% in the prior year.

Included in the tax charge of £596 million is a net exceptional tax credit of £203 million comprising the favourable impact of applying the Tax Cuts and Jobs Act, enacted on 22 December 2017, in the United States of £354 million, which was partially offset by the additional exceptional tax charge in respect of the transfer pricing agreement in the United Kingdom of £143 million and other net exceptional charges of £8 million.

In its interim announcement for the six months ended 31 December 2017, Diageo reported that discussions were being held with HMRC to seek clarity on Diageo's transfer pricing and related issues, and that a preliminary assessment for diverted profits tax notice had been issued. Final charging notices were issued in August 2017 and Diageo paid £107 million in respect of the two years ended 30 June 2016. Diageo agreed in June 2018 with HMRC that diverted profits tax does not apply and at the same time has reached resolution on the transfer pricing issues being discussed. The agreement in respect of transfer pricing covers the period from 1 July 2014 to 30 June 2017 and has resulted in an additional UK tax charge of £143 million. In the year ended 30 June 2018 an additional tax charge of £47 million has been recognised in current tax which is based on the approach agreed with HMRC.

As for most multinationals the current tax environment is creating increased levels of uncertainty. The current expectation is that the tax rate before exceptional items for the year ending 30 June 2019 will be approximately 21% to 22%.

 

(e) Dividend

The group aims to increase the dividend each year and the decision in respect of the dividend increase is made with reference to dividend cover as well as current performance trends including sales and profit after tax together with cash generation. Diageo targets dividend cover (the ratio of basic earnings per share before exceptional items to dividend per share) within the range of 1.8-2.2 times. For the year ended 30 June 2017 dividend cover was 1.7 times. The recommended final dividend for the year ended 30 June 2018 is 40.4 pence, an increase of 5% consistent with the interim dividend increase. This brings the full year dividend to 65.3 pence per share and dividend cover to 1.8 times.   It is expected that a mid-single digit increase in the dividend will be maintained until the cover is comfortably back in the policy range.

Subject to approval by shareholders, the final dividend will be paid to holders of ordinary shares and ADRs on the register as of 10 August 2018. The ex-dividend date both for the holders of the ordinary shares and for US ADR holders is 9 August 2018. The final dividend will be paid to shareholders on 4 October 2018. Payment to US ADR holders will be made on 10 October 2018. A dividend reinvestment plan is available to holders of ordinary shares in respect of the final dividend and the plan notice date is 13 September 2018.

 

(f) Share buybacks

In the year ended 30 June 2018 the group completed a share buyback programme and repurchased and cancelled 58.9 million ordinary shares (representing 2.1% of the issued ordinary share capital) at an average price of £25.43 per share, and an aggregate cost of £1,507 million (including £9 million of transaction costs).

On 26 July 2018 the Board approved a new share buyback programme to return up to £2.0 billion to shareholders during the year ending 30 June 2019.

 

MOVEMENT IN NET BORROWINGS AND EQUITY

 

Movement in net borrowings

 

 

2018

2017

 

£ million

£ million

Net borrowings at the beginning of the year

(7,892)

(8,635)

Free cash flow (a)

2,523

2,663

Acquisition and sale of businesses (b)

(590)

(83)

Share buyback programme

(1,507)

-

Proceeds from issue of share capital

1

1

Net sale/(purchase) of own shares for share schemes (c)

8

(41)

Dividends paid to non-controlling interests

(80)

(83)

Rights issue proceeds from non-controlling interests of subsidiary company

26

-

Net movements in bonds (d)

1,041

(1,234)

Net movements in other borrowings

(26)

414

Equity dividends paid

(1,581)

(1,515)

Net (decrease)/increase in cash and cash equivalents

(185)

122

Net (increase)/decrease in bonds and other borrowings

(1,015)

820

Exchange differences (e)

80

(205)

Other non-cash items

(79)

6

Net borrowings at the end of the year

(9,091)

(7,892)

 

(a) See free cash flow for the analysis of free cash flow.

 

(b) In the year ended 30 June 2018 acquisitions and sale of businesses included $706 million (£549 million) in respect of the acquisition of Casamigos. In addition, the group is expected to pay contingent consideration of $300 million (£233 million) in tranches over the next ten years subject to Casamigos achieving certain performance targets.

In the year ended 30 June 2017 acquisitions and sale of businesses included part of the settlement of the guarantee in respect of the US wines disposal partially offset by the working capital settlement received from Treasury Wine Estates.

 

(c) Net purchase of own shares comprised purchase of treasury shares for the future settlement of obligations under the employee share option schemes of £68 million (2017 - £102 million) less receipts from employees on the exercise of share options of £76 million (2017 - £61 million).

 

(d) In the year ended 30 June 2018, the group issued bonds of €1,275 million (£1,136 million) and $2,000 million ( £1,476 million) and repaid bonds of $2,100 million ( £ 1,571 million). In the comparable period the group repaid bonds of $1,600 million (£1,234 million).

 

(e) Decrease in net borrowings of £80 million is primarily driven by the favourable exchange differences on US dollar denominated borrowings and foreign exchange swaps and forwards .

 

Movement in equity

 

 

2018

2017

 

£ million

£ million

Equity at the beginning of the year

12,028

10,180

Profit for the year

3,144

2,772

Exchange adjustments (a)

(609)

36

Remeasurement of post employment plans net of taxation

368

522

Rights issue proceeds from non-controlling interests of subsidiary company (b)

26

-

Dividends to non-controlling interests

(101)

(83)

Equity dividends paid

(1,581)

(1,515)

Share buyback programme

(1,507)

-

Other reserve movements

(55)

116

Equity at the end of the year

11,713

12,028

 

(a) Movement in the year ended 30 June 2018 primarily arose from exchange losses in respect of the Indian rupee and the Turkish lira partially offset by gains on the US dollar.

 

(b) In the year ended 30 June 2018 a rights issue was completed by Guinness Nigeria (GN) where Diageo's controlling equity share in GN increased from 54.32% to 58.02%. The transaction resulted in a credit of £31 million to non-controlling interests and a charge of £5 million to reserves.

 

 

Post employment plans

The net position of the group's post employment benefit plans improved by £554 million from a deficit of £491 million at 30 June 2017 to a surplus of £63 million at 30 June 2018. The change primarily arose due to an increase in the market value of the assets held by the post employment schemes, the contributions paid into the post employment plans being in excess of the income statement charge and an increase in returns from 'AA' rated corporate bonds used to calculate the discount rates on the liabilities of the post employment plans.

The operating profit charge decreased by £25 million from £109 million for the year ended 30 June 2017 to £84 million for the year ended 30 June 2018 primarily due to changes in pension obligations to members of the UK and Ireland pension plans.

Total cash contributions by the group to all post employment plans in the year ending 30 June 2019 are estimated to be approximately £200 million.

 

DIAGEO CONDENSED CONSOLIDATED INCOME STATEMENT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended 30 June 2018

 

Year ended 30 June 2017

 

 

Notes

 

£ million

 

£ million

 

 

 

 

 

 

 

 

Sales

2

 

18,432

 

18,114

 

Excise duties

 

 

(6,269)

 

(6,064)

 

Net sales

2

 

12,163

 

12,050

 

Cost of sales

 

 

(4,634)

 

(4,680)

 

Gross profit

 

 

7,529

 

7,370

 

Marketing

 

 

(1,882)

 

(1,798)

 

Other operating expenses

 

 

(1,956)

 

(2,013)

 

Operating profit

2

 

3,691

 

3,559

 

Non-operating items

 

 

-

 

20

 

Finance income

4

 

243

 

235

 

Finance charges

4

 

(503)

 

(564)

 

Share of after tax results of associates and joint ventures

 

 

309

 

309

 

Profit before taxation

 

 

3,740

 

3,559

 

Taxation

5

 

(596)

 

(732)

 

Profit from continuing operations

 

 

3,144

 

2,827

 

Discontinued operations

 

 

-

 

(55)

 

Profit for the year

 

 

3,144

 

2,772

 

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

Equity shareholders of the parent company - continuing operations

 

 

3,022

 

2,717

 

Equity shareholders of the parent company - discontinued operations

 

 

-

 

(55)

 

Non-controlling interests

 

 

122

 

110

 

 

 

 

3,144

 

2,772

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares

 

 

million

 

million

 

Shares in issue excluding own shares

 

 

2,484

 

2,512

 

Dilutive potential ordinary shares

 

 

11

 

11

 

 

 

 

2,495

 

2,523

 

 

 

 

 

 

 

 

 

 

 

pence

 

pence

 

Basic earnings per share

 

 

 

 

 

 

Continuing operations

 

 

121.7

 

108.2

 

Discontinued operations

 

 

-

 

(2.2)

 

 

 

 

121.7

 

106.0

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

Continuing operations

 

 

121.1

 

107.7

 

Discontinued operations

 

 

-

 

(2.2)

 

 

 

 

121.1

 

105.5

 

DIAGEO CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended 30 June 2018

 

Year ended 30 June 2017

 

 

 

£ million

 

£ million

 

Other comprehensive income

 

 

 

 

 

  Items that will not be recycled subsequently to the income

   statement

 

 

 

 

 

  Net remeasurement of post employment plans

 

 

 

 

 

    -  group

 

456

 

649

 

    -  associates and joint ventures

 

2

 

(8)

 

    -  non-controlling interests

 

1

 

3

 

  Tax on post employment plans

 

(91)

 

(122)

 

 

 

368

 

522

 

  Items that may be recycled subsequently to the income

   statement

 

 

 

 

 

  Exchange differences on translation of foreign operations

 

 

 

 

 

    -  group

 

(631)

 

105

 

    -  associates and joint ventures

 

3

 

120

 

    -  non-controlling interests

 

(72)

 

35

 

  Net investment hedges

 

91

 

(224)

 

  Tax on exchange differences - group

 

7

 

(2)

 

  Tax on exchange differences - non-controlling interests

 

2

 

-

 

  Effective portion of changes in fair value of cash flow hedges

 

 

 

 

 

    -  hedge of foreign currency debt of the group

 

(64)

 

(8)

 

    -  transaction exposure hedging of the group

 

22

 

(26)

 

    -  hedges by associates and joint ventures

 

(15)

 

5

 

    -  recycled to income statement - hedge of foreign currency debt of the group

 

6

 

(42)

 

    -  recycled to income statement - transaction exposure hedging of the group

 

(7)

 

142

 

    -  recycled to income statement - commodity price risk of the group

 

-

 

1

 

  Tax on effective portion of changes in fair value of cash flow hedges

 

14

 

(3)

 

  Hyperinflation adjustment

 

11

 

47

 

  Tax on hyperinflation adjustment

 

(11)

 

(21)

 

 

 

(644)

 

129

 

Other comprehensive (loss)/profit, net of tax, for the year

 

(276)

 

651

 

Profit for the year

 

3,144

 

2,772

 

Total comprehensive income for the year

 

2,868

 

3,423

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

Equity shareholders of the parent company - continuing operations

 

2,815

 

3,330

 

Equity shareholders of the parent company - discontinued operations

 

-

 

(55)

 

Non-controlling interests

 

53

 

148

 

Total comprehensive income for the year

 

2,868

 

3,423

 

 

 

 

 

 

 

DIAGEO CONDENSED CONSOLIDATED BALANCE SHEET

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30 June 2018

 

30 June 2017

 

 

 

Notes

 

£ million

 

£ million

 

£ million

 

£ million

 

 

Non-current assets

 

 

 

 

 

 

 

 

 

 

 

Intangible assets

 

 

12,572

 

 

 

12,566

 

 

 

 

Property, plant and equipment

 

 

4,089

 

 

 

4,014

 

 

 

 

Biological assets

 

 

23

 

 

 

21

 

 

 

 

Investments in associates and joint ventures

 

 

3,009

 

 

 

2,824

 

 

 

 

Other investments

 

 

46

 

 

 

31

 

 

 

 

Other receivables

 

 

46

 

 

 

58

 

 

 

 

Other financial assets

9

 

182

 

 

 

267

 

 

 

 

Deferred tax assets

 

 

122

 

 

 

134

 

 

 

 

Post employment benefit assets

 

 

935

 

 

 

281

 

 

 

 

 

 

 

 

 

21,024

 

 

 

20,196

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Inventories

6

 

5,015

 

 

 

4,788

 

 

 

 

Trade and other receivables

 

 

2,678

 

 

 

2,592

 

 

 

 

Assets held for sale

 

 

24

 

 

 

 

 

-

 

 

Corporate tax receivable

 

 

65

 

 

 

-

 

 

 

 

Other financial assets

9

 

35

 

 

 

81

 

 

 

 

Cash and cash equivalents

7

 

874

 

 

 

1,191

 

 

 

 

 

 

 

 

 

8,691

 

 

 

8,652

 

 

Total assets

 

 

 

 

29,715

 

 

 

28,848

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Borrowings and bank overdrafts

7

 

(1,828)

 

 

 

(2,459)

 

 

 

 

Other financial liabilities

9

 

(230)

 

 

 

(215)

 

 

 

 

Trade and other payables

 

 

(3,950)

 

 

 

(3,563)

 

 

 

 

Corporate tax payable

 

 

(243)

 

 

 

(294)

 

 

 

 

Provisions

 

 

(109)

 

 

 

(129)

 

 

 

 

 

 

 

 

 

(6,360)

 

 

 

(6,660)

 

 

Non-current liabilities

 

 

 

 

 

 

 

 

 

 

 

Borrowings

7

 

(8,074)

 

 

 

(6,583)

 

 

 

 

Other financial liabilities

9

 

(212)

 

 

 

(383)

 

 

 

 

Other payables

 

 

(209)

 

 

 

(24)

 

 

 

 

Provisions

 

 

(288)

 

 

 

(286)

 

 

 

 

Deferred tax liabilities

 

 

(1,987)

 

 

 

(2,112)

 

 

 

 

Post employment benefit liabilities

 

 

(872)

 

 

 

(772)

 

 

 

 

 

 

 

 

 

(11,642)

 

 

 

(10,160)

 

 

Total liabilities

 

 

 

 

(18,002)

 

 

 

(16,820)

 

 

Net assets

 

 

 

 

11,713

 

 

 

12,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

Share capital

 

 

780

 

 

 

797

 

 

 

 

Share premium

 

 

1,349

 

 

 

1,348

 

 

 

 

Other reserves

 

 

2,133

 

 

 

2,693

 

 

 

 

Retained earnings

 

 

5,686

 

 

 

5,475

 

 

 

 

Equity attributable to equity

  shareholders of the parent company

 

 

 

 

9,948

 

 

 

10,313

 

 

Non-controlling interests

 

 

 

 

1,765

 

 

 

1,715

 

 

Total equity

 

 

 

 

11,713

 

 

 

12,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DIAGEO CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

attributable

to parent

company

shareholders

 

 

 

 

 

 

 

 

 

 

 

Retained earnings/(deficit)

 

 

 

 

 

 

Share

capital

 

Share

premium

 

Other

reserves

 

Own

shares

 

Other

retained

earnings

 

Total

 

 

Non-

controlling

interests

 

Total

equity

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 30 June 2016

797

 

1,347

 

2,625

 

(2,189)

 

5,950

 

3,761

 

8,530

 

1,650

 

10,180

Profit for the year

-

 

-

 

-

 

-

 

2,662

 

2,662

 

2,662

 

110

 

2,772

Other comprehensive income

-

 

-

 

68

 

-

 

545

 

545

 

613

 

38

 

651

Employee share schemes

-

 

-

 

-

 

13

 

(23)

 

(10)

 

(10)

 

-

 

(10)

Share-based incentive plans

-

 

-

 

-

 

-

 

34

 

34

 

34

 

-

 

34

Share-based incentive plans

 in respect of associates

-

 

-

 

-

 

-

 

3

 

3

 

3

 

-

 

3

Tax on share-based

 incentive plans

-

 

-

 

-

 

-

 

12

 

12

 

12

 

-

 

12

Shares issued

-

 

1

 

-

 

-

 

-

 

-

 

1

 

-

 

1

Purchase of non-controlling

 interests by associates

-

 

-

 

-

 

-

 

(5)

 

(5)

 

(5)

 

-

 

(5)

Change in fair value of put options

-

 

-

 

-

 

-

 

(12)

 

(12)

 

(12)

 

-

 

(12)

Dividends paid

-

 

-

 

-

 

-

 

(1,515)

 

(1,515)

 

(1,515)

 

(83)

 

(1,598)

At 30 June 2017

797

 

1,348

 

2,693

 

(2,176)

 

7,651

 

5,475

 

10,313

 

1,715

 

12,028

Adoption of IFRS 15 (note 1)

-

 

-

 

-

 

-

 

(89)

 

(89)

 

(89)

 

(2)

 

(91)

Adoption of IFRS 9 by associate

-

 

-

 

(3)

 

-

 

3

 

3

 

-

 

-

 

-

Profit for the year

-

 

-

 

-

 

-

 

3,022

 

3,022

 

3,022

 

122

 

3,144

Other comprehensive (loss)/income

-

 

-

 

(574)

 

-

 

367

 

367

 

(207)

 

(69)

 

(276)

Employee share schemes

-

 

-

 

-

 

32

 

(7)

 

25

 

25

 

-

 

25

Share-based incentive plans

-

 

-

 

-

 

-

 

39

 

39

 

39

 

-

 

39

Share-based incentive plans

 in respect of associates

-

 

-

 

-

 

-

 

4

 

4

 

4

 

-

 

4

Tax on share-based

 incentive plans

-

 

-

 

-

 

-

 

(2)

 

(2)

 

(2)

 

-

 

(2)

Shares issued

-

 

1

 

-

 

-

 

-

 

-

 

1

 

-

 

1

Disposal of non-controlling interests

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(1)

 

(1)

Purchase of non-controlling

 interests

-

 

-

 

-

 

-

 

(72)

 

(72)

 

(72)

 

70

 

(2)

Purchase of rights issue of

 non-controlling interests

-

 

-

 

-

 

-

 

(5)

 

(5)

 

(5)

 

31

 

26

Change in fair value of put

 option

-

 

-

 

-

 

-

 

7

 

7

 

7

 

-

 

7

Share buyback programme

(17)

 

-

 

17

 

-

 

(1,507)

 

(1,507)

 

(1,507)

 

-

 

(1,507)

Dividends declared

-

 

-

 

-

 

-

 

(1,581)

 

(1,581)

 

(1,581)

 

(101)

 

(1,682)

At 30 June 2018

780

 

1,349

 

2,133

 

(2,144)

 

7,830

 

5,686

 

9,948

 

1,765

 

11,713

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DIAGEO CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

30 June 2018

 

Year ended

30 June 2017

 

 

 

£ million

 

£ million

 

£ million

 

£ million

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

Profit for the year

 

3,144

 

 

 

2,772

 

 

 

Discontinued operations

 

-

 

 

 

55

 

 

 

Taxation

 

596

 

 

 

732

 

 

 

Share of after tax results of associates and joint ventures

 

(309)

 

 

 

(309)

 

 

 

Net finance charges

 

260

 

 

 

329

 

 

 

Non-operating items

 

-

 

 

 

(20)

 

 

 

Operating profit

 

 

 

3,691

 

 

 

3,559

 

Increase in inventories

 

(271)

 

 

 

(159)

 

 

 

(Increase)/decrease in trade and other receivables

 

(202)

 

 

 

89

 

 

 

Increase in trade and other payables and provisions

 

314

 

 

 

221

 

 

 

Net (increase)/decrease in working capital

 

 

 

(159)

 

 

 

151

 

Depreciation, amortisation and impairment

 

493

 

 

 

361

 

 

 

Dividends received

 

159

 

 

 

223

 

 

 

Post employment payments less amounts included in operating profit

 

(108)

 

 

 

(111)

 

 

 

Other items

 

10

 

 

 

(6)

 

 

 

 

 

 

 

554

 

 

 

467

 

Cash generated from operations

 

 

 

4,086

 

 

 

4,177

 

Interest received

 

167

 

 

 

180

 

 

 

Interest paid

 

(418)

 

 

 

(493)

 

 

 

Taxation paid

 

(751)

 

 

 

(732)

 

 

 

 

 

 

 

(1,002)

 

 

 

(1,045)

 

Net cash from operating activities

 

 

 

3,084

 

 

 

3,132

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

Disposal of property, plant and equipment and computer software

 

40

 

 

 

46

 

 

 

Purchase of property, plant and equipment and computer software

 

(584)

 

 

 

(518)

 

 

 

Movements in loans and other investments

 

(17)

 

 

 

3

 

 

 

Sale of businesses

 

4

 

 

 

(52)

 

 

 

Acquisition of businesses

 

(594)

 

 

 

(31)

 

 

 

Net cash outflow from investing activities

 

 

 

(1,151)

 

 

 

(552)

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

Share buyback programme

 

(1,507)

 

 

 

-

 

 

 

Proceeds from issue of share capital

 

1

 

 

 

1

 

 

 

Net sale/(purchase) of own shares for share schemes

 

8

 

 

 

(41)

 

 

 

Dividends paid to non-controlling interests

 

(80)

 

 

 

(83)

 

 

 

Rights issue proceeds from non-controlling interests

 

26

 

 

 

-

 

 

 

Proceeds from bonds

 

2,612

 

 

 

-

 

 

 

Repayment of bonds

 

(1,571)

 

 

 

(1,234)

 

 

 

Net movements on other borrowings

 

(26)

 

 

 

414

 

 

 

Equity dividends paid

 

(1,581)

 

 

 

(1,515)

 

 

 

Net cash outflow from financing activities

 

 

 

(2,118)

 

 

 

(2,458)

 

 

 

 

 

 

 

 

 

 

 

Net (decrease)/increase in net cash and cash equivalents

 

 

 

(185)

 

 

 

122

 

Exchange differences

 

 

 

(39)

 

 

 

(14)

 

Net cash and cash equivalents at beginning of the year

 

 

 

917

 

 

 

809

 

Net cash and cash equivalents at end of the year

 

 

 

693

 

 

 

917

 

 

 

 

 

 

 

 

 

 

 

Net cash and cash equivalents consist of:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

874

 

 

 

1,191

 

Bank overdrafts

 

 

 

(181)

 

 

 

(274)

 

 

 

 

 

693

 

 

 

917

 

                                                                           

NOTES

 

1. Basis of preparation

 

The condensed financial information of the group are prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the IASB and as adopted by the EU. As required by the Disclosure and Transparency Rules of the Financial Conduct Authority, the condensed set of financial statements has been prepared applying the accounting policies and presentation that were applied in the preparation of the company's published consolidated financial statements for the year ended 30 June 2017 except for the impact of the adoption of new accounting standards and amendments explained below. IFRS is subject to ongoing review and endorsement by the EU or possible amendment by interpretative guidance and the issuance of new standards by the IASB. In preparing these condensed financial information, the significant judgements made by management when applying the group's accounting policies and the significant areas where estimates were required were the same as those that applied to the consolidated financial statements for the year ended 30 June 2017, with the exception of the adoption of IFRS 9 and IFRS 15 and interpretations of accounting standards, as described below, and changes in estimates disclosed in note 12 - Contingent liabilities and legal proceedings.

Having reassessed the principal risks the directors considered it appropriate to adopt the going concern basis of accounting in preparing the condensed consolidated financial statements.

 

 

New accounting standards and interpretations

 

The following amendments to the accounting standards, issued by the IASB which have been endorsed by the EU, have been adopted by the group from 1 July 2017 with no impact on the group's consolidated results, financial position or disclosures:

 

·      Amendments to IAS 7 - Disclosure initiative

·      Amendment to IAS 12 - Recognition of deferred tax assets for unrealised losses

·      Amendment to IFRS 12 - Disclosure of interests in other entities

 

The following standards issued by the IASB and endorsed by the EU have been early adopted by the group from 1 July 2017 :

 

IFRS 9 - Financial instruments   replaces IAS 39 (Financial instruments - Recognition and measurement) and addresses the classification and measurement of financial instruments, introduces new principles for hedge accounting and a new forward-looking impairment model for financial assets.

The adoption of IFRS 9 hedge accounting principles did not result in a restatement of the group's results and the impact on the year ended 30 June 2018 is not material. The adoption of IFRS 9 did not result in any changes in the measurement or classification of financial instruments as at 1 July 2017.  All classes of financial assets and financial liabilities had as at 1 July 2017 the same carrying values under IFRS 9 as they had under IAS 39.

Diageo's principal associate, Moët Hennessy has adopted IFRS 9. This has no impact on Diageo's share of the net assets of Moët Hennessy but resulted in a decrease in the group's hedging reserve of £3 million with a corresponding increase in retained earnings. This change has been disclosed as a movement in the year ended 30 June 2018.

 

IFRS 15 - Revenue from contracts with customers   provides enhanced detail on the principle of recognising revenue to reflect the concept that revenue should be recognised when the control of goods or services is transferred to the customer at a value that the company is expected to receive. It replaces the separate models for goods, services and construction contracts under previous IFRS (IAS 11, IAS 18 and related interpretations) which was based on the concept of the transfer of risks and rewards. It also provides further guidance on the initial measurement of sales on contracts which have discounts, rebates and consignment inventories by identifying separate performance obligations that may apply. 

During the year ended 30 June 2017 the group carried out a detailed review of the recognition criteria for revenue applying the requirements of IFRS 15 to ensure that the same principles were being applied consistently across the group. This review in particular examined promotional and marketing support payments made to customers post the initial sale of product, the timing of the recognition of sales made where a third party manufactures or modifies a product on behalf of Diageo and consignment inventories. On application of IFRS 15 some changes in accounting policy resulted, principally in respect of variable consideration receivable where the criteria applied for deducting future promotional payments from the initial revenue recognition was more stringent than under the former accounting policy. Management have also ensured that this policy is being adopted consistently across the group . The revised accounting policy establishes that revenue is recognised to the extent that it is highly probable that a reversal in the amount of revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently settled. This means that Diageo, under the revised accounting policy, deducts from the initial revenue recognised any future promotional payments to direct and indirect customers unless it is highly probable that they will not be incurred.

Diageo has adopted the modified retrospective transition method, recognising the cumulative effect of initially applying IFRS15 as an adjustment to the balance of retained earnings as at 1 July 2017.

 

Retained earnings at 1 July 2017 has been debited by £89 million. The adjustment comprised an increase in creditors of £116 million, a decrease in debtors of £9 million, an increase in inventories of £8 million, a decrease in non-controlling interests of £2 million and an increase in deferred tax assets of £26 million. The changes in accounting policy that resulted in these adjustments are principally in respect of variable consideration where the criteria for deducting future promotional payments from the initial revenue recognition is more stringent than under the former accounting policy. The revised accounting policy establishes that revenue is recognised to the extent that it is highly probable that a reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently settled. This means that Diageo, under the new accounting policy, deducts from the initial revenue recognised any future promotional payments unless it is highly probable that they will not be incurred.

For the year ended 30 June 2018, as a result of applying the new accounting policy, sales increased by £11 million, operating profit increased by £12 million, taxation was £3 million higher and profit for the year increased by £9 million.

The operating profit benefit in the year was more than offset by the impact to sales and profit of working capital efficiencies, including inventory reductions, delivered by Diageo's customers.

Consideration was also given to the disclosure of revenue into different categories. It was determined that all revenue would be disclosed as 'sale of goods' as revenue from other sources was immaterial.

 

IFRIC agenda decision - In October 2017 the IFRIC clarified that interest and penalties in respect of corporate taxes should generally be accounted for under IAS 37 rather than IAS 12 and therefore not be disclosed in the income statement within 'Taxation'. For comparative years Diageo disclosed interest and penalties in respect of corporate taxes as part of 'Taxation' in the consolidated income statement and consolidated balance sheet. As a result of the clarification by the IFRIC Diageo has changed its accounting policy from 1 July 2017. In addition, for consistency, Diageo has changed its treatment of interest arising on indirect tax. For the year ended 30 June 2018, £10 million of interest and £2 million of penalties in respect of corporate tax and indirect taxes was charged to other finance charges and operating profit, respectively. At 30 June 2017, the cumulative interest and penalties in respect of corporate tax included in 'Corporate tax payable' in the consolidated balance sheet was £37 million. At 30 June 2018 the cumulative interest in respect of corporate taxes is included in interest payable (£34 million) and penalties within other payables (£2 million). Interest and penalties in respect of indirect taxes in the consolidated balance sheet are immaterial. Comparatives have not been restated as the amounts are immaterial.

 

 

The following standard issued by the IASB and endorsed by the EU, has not yet been adopted by the group:

 

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 currently required under IAS 17 and introduces a single lessee accounting model where the lessee is required to recognise assets and liabilities for all material leases. All material leases will be recognised on the balance sheet as right of use assets and depreciated on a straight line basis. The liability, recognised as part of net borrowings, will be measured at a discounted value and any interest will be charged to finance charges in the income statement. Therefore, the charge to the income statement for the operating lease payment will be replaced with depreciation on the right of use asset and the interest charge inherent in the lease.

 

The group will implement IFRS 16 from 1 July 2019 by applying the modified retrospective method, meaning that the comparative figures in the financial statements for the year ending 30 June 2020 will not be restated to show the impact of IFRS 16. The operating leases which will be recorded on the balance sheet following implementation of IFRS 16 are principally in respect of warehouses, office buildings, plant and machinery, cars and distribution vehicles. The group has decided to reduce the complexity of implementation to take advantage of a number of practical expedients on transition on 1 July 2019 namely:

(i) to measure the right of use asset at the same value as the lease liability

(ii) to apply the short term and low value exemptions

(iii) to treat, wherever possible, services provided as an income statement item and only capitalise the lease payment amounts in respect of the asset

 

The anticipated impact of the standard on the group is not yet known though is not expected to be material on the income statement or net assets though assets and liabilities will be grossed up for the net present value of the outstanding operating lease liabilities as at 1 July 2019.

 

The following standard, issued by the IASB has not been endorsed by the EU and has not been adopted by the group:

 

IFRS 17 - Insurance contracts ( effective in the year ending 30 June 2022) is ultimately intended to replace IFRS 4.

Based on a preliminary assessment the group believes that the adoption of IFRS 17 will not have a significant impact on its consolidated results or financial position.

 

There are a number of other amendments and clarifications to IFRS, effective in future years, which are not expected to significantly impact the group's consolidated results or financial position.

 

The comparative figures for the financial year ended 30 June 2017 are not the company's statutory accounts for that financial year. Those accounts have been reported on by the company's auditor, PricewaterhouseCoopers LLP and delivered to the registrar of companies. The report of the auditor (i) was unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

 

2. Segmental information

 

The segmental information presented is consistent with management reporting provided to the Executive Committee (the chief operating decision maker).

The Executive Committee considers the business principally from a geographical perspective based on the location of third party sales and the business analysis is presented by geographical segment. In addition to these geographical selling segments, a further segment reviewed by the Executive Committee is the International Supply Centre (ISC), which manufactures products for other group companies and includes the production sites in the United Kingdom, Ireland, Italy 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.

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, 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 the impact of acquisitions and disposals, ISC allocation and 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 2017.

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.

 

Year ended

North America

 

Europe and Turkey(ii)

 

Africa

 

Latin America and Caribbean

 

Asia

Pacific

 

ISC

 

Eliminate

inter-

segment

sales

 

Total

operating

segments

 

Corporate

and other

 

Total

30 June 2018

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

Sales

4,671

 

5,232

 

2,083

 

1,352

 

5,042

 

1,457

 

(1,457)

 

18,380

 

52

 

18,432

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At budgeted exchange rates(i)

4,138

 

2,821

 

1,467

 

1,064

 

2,555

 

1,512

 

(1,425)

 

12,132

 

48

 

12,180

Acquisitions and disposals

50

 

-

 

-

 

-

 

-

 

-

 

-

 

50

 

-

 

50

ISC allocation

11

 

53

 

4

 

11

 

8

 

(87)

 

-

 

-

 

-

 

-

Retranslation to actual

 exchange rates

(83)

 

58

 

20

 

(6)

 

(60)

 

32

 

(32)

 

(71)

 

4

 

(67)

Net sales

4,116

 

2,932

 

1,491

 

1,069

 

2,503

 

1,457

 

(1,457)

 

12,111

 

52

 

12,163

Operating profit/(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At budgeted exchange rates(i)

1,925

 

941

 

180

 

298

 

588

 

112

 

-

 

4,044

 

(160)

 

3,884

Acquisitions and disposals

4

 

-

 

-

 

-

 

-

 

-

 

-

 

4

 

-

 

4

ISC allocation

14

 

67

 

5

 

14

 

12

 

(112)

 

-

 

-

 

-

 

-

Retranslation to actual

 exchange rates

(61)

 

20

 

6

 

(4)

 

(32)

 

-

 

-

 

(71)

 

2

 

(69)

Operating profit/(loss)

 before exceptional items

1,882

 

1,028

 

191

 

308

 

568

 

-

 

-

 

3,977

 

(158)

 

3,819

Exceptional items

-

 

-

 

(128)

 

-

 

-

 

-

 

-

 

(128)

 

-

 

(128)

Operating profit/(loss)

1,882

 

1,028

 

63

 

308

 

568

 

-

 

-

 

3,849

 

(158)

 

3,691

Non-operating items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

Net finance charges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(260)

Share of after tax results of

 associates and joint ventures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

309

Profit before taxation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,740

Year ended

North America

 

Europe and Turkey(ii)

 

Africa

 

Latin America and Caribbean

 

Asia

Pacific

 

ISC

 

Eliminate

inter-

segment

sales

 

Total

operating

segments

 

Corporate

and other

 

Total

30 June 2017

 

 

 

 

 

 

 

 

 

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

4,725

 

4,985

 

2,132

 

1,303

 

4,923

 

1,390

 

(1,390)

 

18,068

 

46

 

18,114

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At budgeted exchange rates(i)

3,523

 

2,474

 

1,240

 

873

 

1,977

 

1,418

 

(1,324)

 

10,181

 

39

 

10,220

Acquisitions and disposals

-

 

2

 

15

 

7

 

41

 

           - 

 

           - 

 

65

 

           - 

 

65

ISC allocation

11

 

60

 

4

 

11

 

8

 

(94)

 

           - 

 

           - 

 

           - 

 

           - 

Retranslation to actual

 exchange rates

627

 

288

 

297

 

153

 

393

 

66

 

(66)

 

1,758

 

7

 

1,765

Net sales

4,161

 

2,824

 

1,556

 

1,044

 

2,419

 

1,390

 

(1,390)

 

12,004

 

46

 

12,050

Operating profit/(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At budgeted exchange rates(i)

1,648

 

741

 

159

 

195

 

375

 

116

 

           - 

 

3,234

 

(169)

 

3,065

Acquisitions and disposals

-

 

-

 

(8)

 

-

 

-

 

           - 

 

           - 

 

(8)

 

(1)

 

(9)

ISC allocation

14

 

72

 

5

 

13

 

12

 

(116)

 

           - 

 

           - 

 

           - 

 

           - 

Retranslation to actual

 exchange rates

237

 

123

 

62

 

42

 

100

 

           - 

 

           - 

 

564

 

(19)

 

545

Operating profit/(loss)

 before exceptional items

1,899

 

936

 

218

 

250

 

487

 

           - 

 

           - 

 

3,790

 

(189)

 

3,601

Exceptional items

           - 

 

(33)

 

           - 

 

-

 

(9)

 

           - 

 

           - 

 

(42)

 

-

 

(42)

Operating profit/(loss)

1,899

 

903

 

218

 

250

 

478

 

           - 

 

           - 

 

3,748

 

(189)

 

3,559

Non-operating items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

Net finance charges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(329)

Share of after tax results of associates and joint ventures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

309

Profit before taxation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,559

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(i) These items represent the IFRS 8 performance measures for the geographical and ISC segments.

(ii) The Europe and Turkey region was formerly named 'Europe, Russia and Turkey'. Countries included in the region have not changed.

                                                       

 

(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 - £1 = $1.35 (2017 - £1 = $1.27) and euro - £1 = €1.13 (2017 - £1 = €1.16). Exchange rates used to translate assets and liabilities at the balance sheet date were US dollar - £1 = $1.32 (30 June 2017 - £1 = $1.30) and euro - £1 = €1.13 (30 June 2017- £1 = €1.14). 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. See Explanatory Notes for the criteria used to determine whether an exceptional item is accounted for as operating or non-operating.

 

 

Year ended

30 June 2018

Year ended

30 June 2017

 

 

£ million

 

£ million

Items included in operating profit

 

 

 

 

Impairment of the Meta brand, goodwill, tangible and other assets

 

(128)

 

-

Competition authority investigation in Turkey

 

-

 

(33)

Customer claim in India

 

-

 

(32)

Disengagement agreements relating to United Spirits Limited

 

-

 

23

 

 

(128)

 

(42)

Non-operating items

 

 

 

 

Sale of businesses

 

 

 

 

Wines in the United States and Percy Fox

 

-

 

20

 

 

-

 

20

 

 

 

 

 

Exceptional items before taxation

 

(128)

 

(22)

 

 

 

 

 

Items included in taxation

 

 

 

 

Tax on exceptional operating items

 

13

 

11

Tax on exceptional non-operating items

 

-

 

(7)

Exceptional taxation

 

190

 

-

 

 

203

 

4

 

 

 

 

 

Exceptional items in continuing operations

 

75

 

(18)

 

 

 

 

 

Discontinued operations net of taxation

 

 

 

 

Thalidomide

 

-

 

(55)

 

 

 

 

 

Total exceptional items

 

75

 

(73)

 

 

 

 

 

Attributable to:

 

 

 

 

Equity shareholders of the parent company

 

75

 

(64)

Non-controlling interests

 

-

 

(9)

Total exceptional items

 

75

 

(73)

 

4. Finance income and charges

 

 

Year ended

30 June 2018

Year ended

30 June 2017

 

 

£ million

 

£ million

 

 

 

 

 

Interest income

 

155

 

148

Fair value gain on financial instruments

 

61

 

76

Total interest income

 

216

 

224

Interest charges

 

(395)

 

(451)

Fair value loss on financial instruments

 

(62)

 

(67)

Total interest charges

 

(457)

 

(518)

Net interest charges

 

(241)

 

(294)

 

 

 

 

 

Net finance income in respect of post employment plans in surplus

 

9

 

2

Hyperinflation adjustment in respect of Venezuela (a)

 

18

 

9

Total other finance income

 

27

 

11

Net finance charge in respect of post employment plans in deficit

 

(20)

 

(27)

Unwinding of discounts

 

(14)

 

(8)

Change in financial liability (Level 3)

 

-

 

(8)

Other finance charges

 

(12)

 

(3)

Total other finance charges

 

(46)

 

(46)

Net other finance charges

 

(19)

 

(35)

 

(a) Hyperinflation adjustment in respect of Venezuela

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 dollars on these exchange systems is very limited. The foreign currency denominated transactions and balances of the group's Venezuelan operations are translated into the local functional currency (VEF) at the rate they are expected to be settled, applying the most appropriate official exchange rate. For the group consolidation the group converts its Venezuelan operations using management's estimate of the exchange rate considering the inflation forecast and the most appropriate official exchange rate (DICOM). The exchange rate used to translate the results of the group's Venezuelan operations is VEF/GBP 3,858,826 for the year ended 30 June 2018 (2017 - VEF/GBP 6,110).

The following table presents the contribution of the group's Venezuelan operations to the consolidated income statement, cash flow statement and net assets for the year ended 30 June 2018 and the amounts that would have resulted if the DICOM exchange rate had been applied in the group consolidation.

 

 

At estimated exchange rate

At DICOM exchange rate

 

3,858,826 VEF/GBP

151,800 VEF/GBP

 

£ million

£ million

 

 

 

Net sales

1

27

Operating profit

-

16

Other finance income - hyperinflation adjustment

18

458

Net cash inflow from operating activities

1

12

Net assets

69

1,744

 

5. Taxation

 

For the year ended 30 June 2018, the £596 million taxation charge (2017 - £732 million) comprises a UK tax charge of £326 million (2017 - £112 million) and a foreign tax charge of £270 million (2017 - £620 million).

 

6. Inventories

 

 

 

30 June 2018

 

30 June 2017

 

 

£ million

 

£ million

 

 

 

 

 

Raw materials and consumables

 

321

 

327

Work in progress

 

44

 

45

Maturing inventories

 

4,028

 

3,820

Finished goods and goods for resale

 

622

 

596

 

 

5,015

 

4,788


 

7. Net borrowings

 

 

 

 

30 June 2018

 

30 June 2017

 

 

 

£ million

 

£ million

 

 

 

 

 

 

Borrowings due within one year and bank overdrafts

 

 

(1,828)

 

(2,459)

Borrowings due after one year

 

 

(8,074)

 

(6,583)

Fair value of foreign currency forwards and swaps

 

 

107

 

144

Fair value of interest rate hedging instruments

 

 

(15)

 

(2)

Finance lease liabilities

 

 

(155)

 

(183)

 

 

 

(9,965)

 

(9,083)

Cash and cash equivalents

 

 

874

 

1,191

 

 

 

(9,091)

 

(7,892)

 

8. Reconciliation of movement in net borrowings

 

Year ended

30 June 2018

Year ended

30 June 2017

 

 

£ million

 

£ million

 

 

 

 

 

Net (decrease)/increase in cash and cash equivalents before exchange

 

(185)

 

122

Net (increase)/decrease in bonds and other borrowings

 

(1,015)

 

820

(Increase)/decrease in net borrowings from cash flows

 

(1,200)

 

942

Exchange differences on net borrowings

 

80

 

(205)

Other non-cash items

 

(79)

 

6

Net borrowings at beginning of the year

 

(7,892)

 

(8,635)

Net borrowings at end of the year

 

(9,091)

 

(7,892)

 

In the year ended 30 June 2018 , the group issued bonds of €1,275 million ( £1,136 million) and $2,000 ( £1,476 million)   and repaid bonds of $2,100 million ( £ 1,571 million) (2017 - repaid bonds of $1,600 million ( £1,234 million)) .

All bonds, medium term notes and commercial paper issued on an unsecured basis by the group's 100% owned subsidiaries are fully and unconditionally guaranteed on an unsecured basis by Diageo plc.

 

9. Financial instruments

 

Fair value measurements of financial instruments are presented through the use of a three-level fair value hierarchy that prioritises the valuation techniques used in fair value calculations.

The group maintains policies and procedures to value instruments using the most relevant data available. If multiple inputs that fall into different levels of the hierarchy are used in the valuation of an instrument, the instrument is categorised on the basis of the most subjective input.

Foreign currency forwards and swaps, cross currency swaps and interest rate swaps are valued using discounted cash flow techniques. These techniques incorporate inputs at levels 1 and 2, such as foreign exchange rates and interest rates. These market inputs are used in the discounted cash flow calculation incorporating the instrument's term, notional amount and discount rate, and taking credit risk into account. As significant inputs to the valuation are observable in active markets, these instruments are categorised as level 2 in the hierarchy.

Other financial liabilities include a put option, which does not expire, held by Industrias Licoreras de Guatemala (ILG) to sell the remaining 50% equity stake in Rum Creations & Products Inc, the owner of the Zacapa rum brand, to Diageo. The liability is fair valued and as at 30 June 2018 an amount of £164 million ( 30 June 2017 - £183 million) is recognised with changes in fair value included in retained earnings. As the valuation of this option uses assumptions not observable in the market, it is categorised as level 3 in the hierarchy. As at 30 June 2018 because it is unknown when or if ILG will exercise the option the liability is measured as if the exercise date is on the last day of the next financial year considering forecast future performance (in prior years the potential liability also assumed a possible exercise date).

The option is sensitive to reasonably possible changes in assumptions. If the option were to be exercised two years later, the fair value of the liability would increase by approximately £30 million.

Apart from the change to the method used to estimate the potential liability of the option held by ILG 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 2018.

The group's financial assets and liabilities measured at fair value are categorised as follows:

 

 

 

30 June 2018

 

30 June 2017 (restated(i))

 

 

£ million

 

£ million

 

 

 

 

 

Derivative assets

 

217

 

348

Derivative liabilities

 

(123)

 

(232)

Valuation techniques based on observable market input (Level 2)

 

94

 

116

Financial assets - other

 

89

 

39

Financial liabilities - other

 

(164)

 

(183)

Valuation techniques based on unobservable market input (Level 3)

 

(75)

 

(144)

(i) Restated to include loans and advances to associates and third parties.

 

 

 

 

 

Finance lease liabilities were £155 million at 30 June 2018 (2017 - £183 million).

The carrying amount of the group's financial assets and liabilities is generally the same as their fair value apart from borrowings. At 30 June 2018 the fair value of gross borrowings (excluding finance lease liabilities and the fair value of derivative instruments) was £10,304 million and the carrying value was £9,902 million (2017 - £9,641 million and £9,042 million, respectively).

 

 

10. Dividends and other reserves

 

 

 

 

 

 

 

 

Year ended

30 June 2018

 

Year ended

30 June 2017

 

 

 

£ million

 

 

£ million

Amounts recognised as distributions to equity

   shareholders in the year

 

 

 

 

 

 

Final dividend for the year ended 30 June 2017 of 

   38.5 pence per share (2016 - 36.6 pence)

 

 

968

 

 

920

Interim dividend paid for the year ended 30 June 2018 of 

   24.9 pence per share (2017 - 23.7 pence)

 

 

613

 

 

595

 

 

 

1,581

 

 

1,515

 

A final dividend of 40.4 pence per share was recommended by the Board of Directors on 25 July 2018 for approval by shareholders at the Annual General Meeting to be held on 20 September 2018 bringing the full year dividend to 65.3 pence per share for the year ended 30 June 2018. As the approval was after the balance sheet date, the final dividend has not been included as a liability.

 

Other reserves of £2,133 million at 30 June 2018 (2017 - £2,693 million) comprise a capital redemption reserve of £3,163 million (2017 - £3,146 million), a hedging reserve of £68 million deficit (2017 - £21 million deficit) and an exchange reserve of £962 million deficit (2017 - £432 million deficit).

 

11. Acquisition of businesses

 

The fair value of assets and liabilities acquired and cash consideration paid in respect of acquisition of businesses in the year ended 30 June 2018 were as follows:

 

 

 

 

 

 

 

 

Casamigos

 

Other

 

Total

 

£ million

 

£ million

£ million

Brands

469

 

9

 

478

Inventories

4

 

-

 

4

Other working capital

5

 

(3)

 

2

Cash

6

 

-

 

6

Fair value of assets and liabilities

484

 

6

 

490

Goodwill arising on acquisition

237

 

12

 

249

Consideration payable

721

 

18

 

739

Satisfied by:

 

 

 

 

 

Cash consideration paid

549

 

6

 

555

Contingent consideration payable

172

 

12

 

184

 

721

 

18

 

739

 

 

 

 

 

 

Cash consideration paid for Casamigos

549

 

-

 

549

Cash consideration paid for other subsidiaries

-

 

6

 

6

Cash consideration paid for investments in associates

-

 

12

 

12

Cash acquired

(6)

 

-

 

(6)

Capital injection to associates

-

 

11

 

11

Cash consideration paid in respect of prior year acquisitions

-

 

22

 

22

Net cash outflow on acquisition of business

543

 

51

 

594

 

 

 

 

 

 

 

 

 

 

 

 

Casamigos

On 15 August 2017 Diageo completed the purchase of 100% of the share capital of Casamigos Tequila, LLC (Casamigos), a super premium tequila based in the United States, for $1,000 million (£777 million) of which $300 million (£233 million) was contingent on Casamigos achieving certain performance targets. Casamigos contributed £55 million to sales, £49 million to net sales, £4 million to operating profit (net of transaction costs of £4 million) and £3 million profit after tax in the year ended 30 June 2018.

It is expected that the goodwill will be deductible for tax purposes. The net present value of the contingent consideration payable was $221 million (£172 million) at the date of acquisition and is expected to be paid in tranches over the next ten years. The goodwill arising on the acquisition of Casamigos represents expected revenue and cost synergies and the acquired workforce.

 

Other

On 14 March 2018 Diageo completed the acquisition of Belsazar GmbH, a premium aperitif from Germany's Black Forest.

On 2 May 2018 Diageo acquired 100% of the intellectual property of Pierde Almas, an ultra premium mezcal.

 

 

12. Contingent liabilities and legal proceedings

 

(a) Guarantees and related matters

As of 30 June 2018, the group has no material unprovided guarantees or indemnities in respect of liabilities of third parties.

 

(b) Acquisition of USL shares from UBHL, winding-up petitions against UBHL and other proceedings in relation to the USL transaction

On 4 July 2013, Diageo completed its acquisition, under a share purchase agreement with United Breweries (Holdings) Limited (UBHL) and various other sellers (the SPA), of 21,767,749 shares (14.98%) in United Spirits Limited (USL) for a total consideration of INR 31.3 billion (£349 million), including 10,141,437 shares (6.98%) from UBHL. The SPA was signed on 9 November 2012 and was part of the transaction announced by Diageo in relation to USL on that day (the Original USL Transaction). Through a series of further transactions, as of 2 July 2014, Diageo had 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 of Karnataka (High Court) had granted leave to UBHL under sections 536 and 537 of the Indian Companies Act 1956 (the Leave Order) to enable the sale by UBHL to Diageo to take place (the UBHL Share Sale) notwithstanding the continued existence of five winding-up petitions that were pending against UBHL on 9 November 2012, being the date of the SPA. Additional winding-up petitions have been brought against UBHL since 9 November 2012, and the Leave Order did not extend to them. At the time of the completion of the UBHL Share Sale, the Leave Order remained subject to review on appeal. However, as stated by Diageo at the time of closing on 4 July 2013, it was considered unlikely that any appeal process in respect of the Leave Order would definitively conclude on a timely basis and, accordingly, Diageo waived the conditionality under the SPA relating to the absence of insolvency proceedings in relation to UBHL and acquired the 10,141,437 USL shares from UBHL at that time.

Following closing of the UBHL Share Sale, appeals were filed by various petitioners in respect of the Leave Order. On 20 December 2013, the division bench of the High Court set aside the Leave Order (the December 2013 Order). Following the December 2013 Order, Diageo filed special leave petitions (SLPs) in the Supreme Court of India against the December 2013 Order.

On 10 February 2014, the Supreme Court of India issued an order giving notice in respect of the SLPs and ordering that the status quo be maintained with regard to the UBHL Share Sale pending a hearing on the matter in the Supreme Court. Following a number of adjournments, the next firm 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, the High Court passed a winding-up order against UBHL on 7 February 2017. On 4 March 2017, UBHL appealed against this order before a division bench of the High Court. This appeal is currently pending.

Diageo continues to believe that the acquisition price of INR 1,440 per share paid to UBHL for the USL shares is fair and reasonable as regards UBHL, UBHL's shareholders and UBHL's secured and unsecured creditors. However, adverse results for Diageo in the proceedings referred to above could, absent leave or relief in other proceedings, ultimately result in Diageo losing title to the 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.

 (c) Continuing matters relating to the resignation of Dr Vijay Mallya from USL and USL internal inquiries

On 25 February 2016, Diageo and USL each announced that they had entered into arrangements with Dr Mallya under which he had agreed to resign from his position as a director and as chairman of USL and from his positions in USL's subsidiaries. As specified by Diageo in its announcement at that time, these arrangements ended its prior agreement with Dr Mallya regarding his position at USL, therefore bringing to an end the uncertainty relating to the governance of USL, and put in place a five-year global non-compete (excluding the United Kingdom), non-interference, non-solicitation and standstill arrangement with Dr Mallya. As part of those arrangements, USL, Diageo and Dr Mallya agreed a mutual release in relation to matters arising out of an inquiry into certain matters referred to in USL's financial statements and the qualified auditor's report for the year ended 31 March 2014 (the Initial Inquiry) which had revealed, among other things, certain diversions of USL funds. Dr Mallya also agreed not to pursue any claims against Diageo, USL and their affiliates (including under the prior agreement with Diageo). In evaluating entering into such arrangements, Diageo considered the impact of the arrangements on USL and all of USL's shareholders, and came to the view that the arrangements were in the best interests of USL and its shareholders.

Diageo's agreement with Dr Mallya (the February 2016 Agreement) provided for a payment of $75 million
(£53 million) to Dr Mallya over a five year period in consideration for the five-year global non-compete, non-interference, non-solicitation and standstill commitments referred to above, his resignation from USL and the termination of his USL-related appointment and governance rights, the relinquishing of rights and benefits attached to his position at USL, and his agreement not to pursue claims against Diageo and USL. The February 2016 Agreement also provided for the release of Dr Mallya's personal obligations to indemnify (i) Diageo Holdings Netherlands B.V. (DHN) in respect of its earlier liability ($141 million (£96 million)) under a backstop guarantee of certain borrowings of Watson Limited (Watson) (a company affiliated with Dr Mallya), and (ii) Diageo Finance plc in respect of its earlier liability (£30 million) under a guarantee of certain borrowings of United Breweries Overseas Limited. $40 million (£28 million) of the $75 million (£53 million) amount was paid on signing of the February 2016 Agreement with the balance being payable in equal instalments of $7 million (£5 million) a year over five years, subject to and conditional on Dr Mallya's compliance with certain terms of the agreement. While the first two instalments of $7 million (£5 million) each would have become due on 25 February 2017 and 25 February 2018, respectively, owing to various reasons (including breaches committed by Dr Mallya and certain persons connected with him of several provisions of the February 2016 Agreement and agreements of the same date between Dr Mallya and USL), Diageo believes that it was not liable to pay such amount, and is very unlikely to become liable to pay any future instalments, to Dr Mallya. By notice to Dr Mallya and certain persons connected with him on 24 February 2017, 3 November 2017 and 23 February 2018, Diageo and other group companies have demanded from Dr Mallya the repayment of $40 million (£28 million) which was paid by Diageo on 25 February 2016, and also sought compensation from him for various losses incurred by the relevant members of the Diageo group on account of the breaches committed by him and certain persons connected with him. On 16 November 2017, Diageo and other relevant members of the Diageo group commenced claims in the High Court of Justice in England and Wales (the English High Court) against Dr Mallya in relation to certain of the matters specified in the notices of 24 February 2017 and 3 November 2017. At the same time DHN also commenced claims in the English High Court against Dr Mallya, his son Sidhartha Mallya and two companies affiliated with Dr Mallya (Watson and Continental Administration Services Limited (CASL)) for in excess of $142 million (£105 million) (plus interest) in relation to Watson's liability to DHN in respect of its borrowings referred to above and the breach of associated security documents. These additional claims are described in paragraph (d) below. Dr Mallya, Sidhartha Mallya and the relevant affiliated companies filed a defence to such claims and the additional claims on 12 March 2018, and Dr Mallya also filed a counterclaim for payment of the two $7 million (£5 million) instalment payments withheld by Diageo as described above. Diageo intends to continue to prosecute its claims and to defend the counterclaims.

As previously announced by USL, the Initial Inquiry identified certain additional parties and matters indicating the possible existence of other improper transactions. These transactions could not be fully analysed during the Initial Inquiry and, accordingly, USL, as previously announced, mandated that its Managing Director and Chief Executive Officer conduct a further inquiry into the transactions involving the additional parties and the additional matters to determine whether they also suffered from improprieties (the Additional Inquiry). USL announced the results of the Additional Inquiry in a notice to the Indian Stock Exchange dated 9 July 2016. The mutual release in relation to the Initial Inquiry agreed by Diageo and USL with Dr Mallya announced on 25 February 2016 does not extend to matters arising out of the Additional Inquiry.

As stated in USL's previous announcement, the Additional Inquiry revealed further instances of actual or potential fund diversions from USL and its Indian and overseas subsidiaries to, in most cases, Indian and overseas entities in which Dr Mallya appears to have a material direct or indirect interest, as well as other potentially improper transactions involving USL and its Indian and overseas subsidiaries.

In connection with the matters identified by the Additional Inquiry, USL has, pursuant to a detailed review of each case of such fund diversion and after obtaining expert legal advice, where appropriate, filed civil suits for recovery of funds from certain parties, including Dr Mallya, before the relevant courts in India.

The amounts identified in the Additional Inquiry have been previously provided for or expensed in the financial statements of USL or its subsidiaries for prior periods. Further, at this stage, it is not possible for the management of USL to estimate the financial impact on USL, if any, arising out of potential non-compliance with applicable laws in relation to such fund diversions.

 

(d) Other continuing matters relating to Dr Mallya and affiliates

DHN issued a conditional backstop guarantee on 2 August 2013 to Standard Chartered Bank (Standard Chartered) pursuant to a guarantee commitment agreement (the Guarantee Agreement). The guarantee was in respect of the liabilities of Watson, a company affiliated with Dr Mallya, under a $135 million (£92 million) facility from Standard Chartered (the Facility Agreement). The Guarantee Agreement was entered into as part of the arrangements put in place and announced at the closing of the USL transaction on 4 July 2013.

DHN's provision of the Guarantee Agreement enabled the refinancing of certain existing borrowings of Watson from a third party bank and facilitated the release by that bank of rights over certain USL shares that were to be acquired by Diageo as part of the USL transaction. The facility matured and entered into default in May 2015. In aggregate DHN paid Standard Chartered $141 million (£96 million) under this guarantee, i.e. including payments of default interest and various fees and expenses.

Watson remains liable for all amounts paid by DHN under the guarantee. Under the guarantee documentation with Standard Chartered, DHN is entitled to the benefit of the underlying security package for the loan, including: (a) certain shares in United Breweries Limited (UBL) held solely by Dr Mallya and certain other shares in UBL held by Dr Mallya jointly with his son Sidhartha Mallya, (b) 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 (c) the shareholding in Watson.

Aspects of the security package are the subject of various proceedings in India in which third parties are alleging and asserting prior rights to certain assets comprised in the security package or otherwise seeking to restrain enforcement against certain assets by Standard Chartered and/or DHN. These proceedings are ongoing and DHN will continue to vigorously pursue these matters as part of its efforts for enforcement of the underlying security and recovery of outstanding amounts. Diageo believes that the existence of any prior rights or dispute in relation to the security would be in breach of representations and warranties given by Dr Mallya to Standard Chartered at the time the security was granted and further believes that certain actions taken by Dr Mallya in relation to the proceedings described above also breached his obligations to Standard Chartered.

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. To the extent possible in the context of the proceedings described above, Standard Chartered has taken certain recovery steps and is working with DHN in relation to these proceedings. DHN is actively monitoring the security package and is discussing with Standard Chartered steps to continue enforcement against the background of the proceedings described above, as well as enforcement steps in relation to elements of the security package that are unaffected by those proceedings. DHN's ability to assume or enforce security over some elements of the security package is also subject to regulatory consent. It is not at this stage possible to determine whether such consent would be forthcoming.

In addition to the Indian proceedings just described, certain of the assets comprised in the security package may also be affected by a worldwide freezing order of the English High Court granted on 24 November 2017 and continued on 8 December 2017 and 8 May 2018 in respect of the assets of Dr Mallya. The agreement with Dr Mallya referenced in paragraph (c) above does not impact the security package, which, as described above, includes shares in UBL and Watson's interest in Orange, the joint venture that owns the Force India F1 team. Watson remains liable for all amounts paid pursuant to the guarantee and DHN has the benefit of a counter-indemnity from Watson in respect of payments in connection with the guarantee. The various security providers, including Dr Mallya and Watson, acknowledged in the February 2016 Agreement referred to in paragraph (c) above that DHN is entitled to the benefit of the security package underlying the Standard Chartered facility and have also undertaken to take all necessary actions in that regard. Further, Diageo believes that the existence of any prior rights or disputes in relation to the security package would be in breach of certain confirmations given to Diageo and DHN pursuant to that agreement by Dr Mallya, Watson and certain connected persons.

On 16 November 2017, DHN commenced various claims in the English High Court for, in aggregate, in excess of $142 million (£105 million) (plus interest) in relation to these matters, including the following: (i) a claim against Watson for $141 million (£96 million) (plus interest) under Watson's counter-indemnity to DHN in respect of payments made by DHN to Standard Chartered under the guarantee referred to above; (ii) a claim against Dr Mallya and Sidhartha Mallya under various agreements creating or relating to the security package referred to above for (A) not less than $1.8 million (£1 million), being the costs incurred to date in the various Indian proceedings referred to above (plus interest), and (B) damages of $141 million (£96 million), being DHN's loss as a result of those Indian proceedings which currently prevent enforcement of the security over shares in UBL (plus interest); and (iii) a claim against CASL, as a co-surety with DHN of Watson's obligations under the Facility Agreement, for 50% of the difference between the amount claimed under (i) above and the amount (if any) that DHN is in fact able to recover from Watson, Dr Mallya and/or Sidhartha Mallya. As noted in paragraph (c), Dr Mallya, Sidhartha Mallya and the relevant affiliated companies filed a defence to these claims on 12 March 2018. As stated in paragraph (c), DHN and Diageo intends to continue to prosecute these claims.

 

( 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 (SEBI), 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.

Diageo and USL have also received notices from SEBI requesting information in relation to, and explanation of the reasons for, the arrangements with Dr Mallya that were the subject of the 25 February 2016 announcement as well as, in the case of USL, in relation to the Initial Inquiry and the Additional Inquiry, and, in the case of Diageo, whether such arrangements with Dr Mallya or the Watson backstop guarantee arrangements referred to in paragraphs (c) and (d) above were part of agreements previously made with Dr Mallya at the time of the Original USL Transaction announced on 9 November 2012 and the open offer made as part of the Original USL Transaction. Diageo and USL have complied with such information requests and Diageo has confirmed that, consistent with prior disclosures, the Watson backstop guarantee arrangements and the matters described in the 25 February 2016 announcement were not the subject of any earlier agreement with Dr Mallya. In respect of the Watson backstop guarantee arrangements, SEBI issued a further notice to Diageo on 16 June 2016 that if there is any net liability incurred by Diageo (after any recovery under relevant security or other arrangements, which matters remain pending) on account of the Watson backstop guarantee, such liability, if any, would be considered to be part of the price paid for the acquisition of USL shares under the SPA which formed part of the Original USL Transaction and that, in that case, additional equivalent payments would be required to be made to those shareholders (representing 0.04% of the shares in USL) who tendered in the open offer made as part of the Original USL Transaction. Diageo is clear that the Watson backstop guarantee arrangements were not part of the price paid or agreed to be paid for any USL shares under the Original USL Transaction and therefore believes the decision in the SEBI notice to be misconceived and wrong in law and appealed against it before the Securities Appellate Tribunal, Mumbai (SAT). On 1 November 2017, SAT issued an order in respect of Diageo's appeal in which, amongst other things, it observed that the relevant officer at SEBI had neither considered Diageo's earlier reply nor provided Diageo with an opportunity to be heard, and accordingly directed SEBI to pass a fresh order after giving Diageo an opportunity to be heard. Following SAT's order, Diageo has made its further submissions in the matter, including at a personal hearing before a Deputy General Manager of SEBI.

Diageo has also responded to a show cause notice dated 12 May 2017 from SEBI arising out of the correspondence in relation to the matters described in the 25 February 2016 announcement and made its further submissions in the matter, including at a personal hearing before a Whole Time Member of SEBI.

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 and its distribution in certain other Diageo markets 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) Tax

The international tax environment has received increased attention and seen rapid change over recent years, both at a US and European level, and by international bodies such as the Organisation for Economic Cooperation and Development (OECD). Against this backdrop, Diageo has been monitoring developments and continue to engage transparently with the tax authorities in the countries where Diageo operates to ensure that the group manages its arrangements on a sustainable basis.

In October 2017, the European Commission opened a state aid investigation into the Group Financing Exemption in the UK controlled foreign company rules. The Group Financing Exemption was introduced in legislation by the British government in 2013. In common with other UK-based international companies whose arrangements are in line with current UK CFC legislation, Diageo may be affected by the outcome of this investigation. Diageo is monitoring developments. If the preliminary findings of the European Commission's investigation into the UK legislation are upheld, Diageo calculates its maximum potential liability to be approximately £250 million. Based on its current assessment, Diageo believes that no provision is required in respect of this issue.

During the year ended 30 June 2018, Diageo reached agreement with HM Revenue & Customs in the United Kingdom in respect of transfer pricing and related issues. See Additional Financial Information, Taxation - note (d) for further information.

Diageo has also been in discussions with the French Tax Authorities over the deductibility of certain interest costs. During the year the French Tax Authorities issued assessments denying tax relief for interest costs incurred in the periods ended 30 June 2011 to 30 June 2017.  Diageo believes that the interest costs are deductible and accordingly is challenging the assessments from the French Tax Authorities. Including interest and penalties, the exposure for the periods ended 30 June 2011 to 30 June 2018 is approximately €241 million (£214 million) . Based on its current assessment, Diageo believes that no provision is required in respect of this issue.

 

(h) Other

The group has extensive international operations and is a defendant in a number of legal, customs and tax proceedings incidental to these operations, the outcome of which cannot at present be foreseen. In particular, the group is currently a defendant in various customs proceedings that challenge the declared customs value of products imported by certain Diageo companies. Diageo continues to defend its position vigorously in these proceedings.

Save as disclosed above, neither Diageo, nor any member of the Diageo group, is or has been engaged in, nor (so far as Diageo is aware) is there pending or threatened by or against it, any legal or arbitration proceedings which may have a significant effect on the financial position of the Diageo group.

 

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 2018 on terms other than those that prevail in arm's length transactions.

 

14. Post balance sheet events

 

Offer for shares in Sichuan Shuijingfang Company Limited (SJF)

On 10 July 2018 Diageo launched a partial tender offer to increase its aggregate equity stake in SJF from 39.71% to up to a maximum of 60%. The price per share offered is RMB62.00 per share (adjusted for any dividend distribution by SJF during the tender offer period) and gives all non Diageo shareholders the opportunity to elect to sell their shares in SJF to Diageo up to 11 August 2018. The maximum possible consideration to reach 60% of the equity in SJF is RMB6,146 million (£703 million), of which RMB1,229 million (£141 million) was deposited in escrow with the Chinese regulatory authorities on 3 July 2018. $900 million (£682 million) of the $3.5 billion (£2,652 million) available undrawn committed bank facilities have been ring-fenced, as a backstop to Diageo's normal funding sources, for the cost of acquiring the shares in SJF until settlement is completed.

 

Share buyback

On 26 July 2018 the Board approved a share buyback programme of up to £2.0 billion for the year ending 30 June 2019.

 

 

 

ADDITIONAL INFORMATION FOR SHAREHOLDERS

 

 

EXPLANATORY NOTES

 

 

Comparisons are to the year ended 30 June 2017 (2017) 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 operating exceptional items and acquisitions and disposals.

 

This announcement contains forward-looking statements that involve risk and uncertainty. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements, including factors beyond Diageo's control. Please refer to Risk Factors - '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.

 

It is not possible to reconcile the forecast tax rate before exceptional items and forecast organic operating margin improvement to the most comparable GAAP measures as it is not possible to predict, with reasonable certainty, the future impact of changes in exchange rates, acquisitions and disposals and potential exceptional items.

 

Volume

Volume is a non-GAAP measure that is measured on an equivalent units basis to nine-litre cases of spirits. An equivalent unit represents one nine-litre case of spirits, which is approximately 272 servings. A serving comprises 33ml of spirits, 165ml of wine, or 330ml of ready to drink or beer. Therefore, to convert volume of products other than spirits to equivalent units, the following guide has been used: beer in hectolitres, divide by 0.9; wine in nine-litre cases, divide by five; ready to drink in nine-litre cases, divide by 10; and certain pre-mixed products that are classified as ready to drink in nine-litre cases, divide by 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 '2017 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.

 

(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 be completed.

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 and net sales 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 only receives royalties 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.

Exceptional operating items are those that are considered to be material and are part of the operating activities of the group such as impairments of intangible and fixed assets, duty settlements, property disposals and changes in post employment plans.

Gains and losses on the sale of businesses, brands or distribution rights, step up gains and losses that arise when an investment becomes an associate or an associate becomes a subsidiary and other material, unusual non-recurring items, that are not in respect of the production, marketing and distribution of premium drinks, are disclosed as non-operating exceptional items below operating profit in the consolidated income statement.

Exceptional tax items comprise the direct tax consequences in respect of operating and non-operating exceptional items, material settlements with the tax authorities and material changes in tax rates.

It is believed that separate disclosure of exceptional items and the classification between operating and non-operating further helps investors to understand the performance of the group.

 

Organic movement calculations for the year ended 30 June 2018 were as follows:

 

 

 

North America

million

 

Europe and Turkey(iii)

million

 

Africa

million

 

Latin America

and Caribbean

million

 

Asia

Pacific

million

 

Corporate

million

 

Total

million

Volume (equivalent units)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017 reported

 

47.4

 

44.4

 

32.2

 

21.1

 

97.1

 

-

 

242.2

Reclassification(ii)

 

(0.1)

 

0.2

 

-

 

-

 

(0.1)

 

-

 

-

Disposals(iv)

 

-

 

-

 

-

 

-

 

(8.0)

 

-

 

(8.0)

2017 adjusted

 

47.3

 

44.6

 

32.2

 

21.1

 

89.0

 

-

 

234.2

Acquisitions and disposals(iv)

 

0.3

 

-

 

-

 

-

 

0.1

 

-

 

0.4

Organic movement

 

0.6

 

1.7

 

1.0

 

1.1

 

1.4

 

-

 

5.8

2018 reported

 

48.2

 

46.3

 

33.2

 

22.2

 

90.5

 

-

 

240.4

Organic movement %

 

1

 

4

 

3

 

5

 

2

 

-

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

£ million

 

Europe and Turkey(iii)

£ million

 

Africa

£ million

 

Latin America

and Caribbean

£ million

 

Asia

Pacific

£ million

 

Corporate

£ million

 

Total

£ million

Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017 reported

 

4,725

 

4,985

 

2,132

 

1,303

 

4,923

 

46

 

18,114

Exchange(i)

 

(261)

 

(113)

 

(130)

 

(61)

 

(160)

 

1

 

(724)

Reclassification(ii)

 

(8)

 

16

 

1

 

2

 

(11)

 

-

 

-

Disposals(iv)

 

-

 

(3)

 

-

 

-

 

(207)

 

-

 

(210)

2017 adjusted

 

4,456

 

4,885

 

2,003

 

1,244

 

4,545

 

47

 

17,180

Acquisitions and disposals(iv)

 

55

 

-

 

-

 

-

 

8

 

-

 

63

Organic movement

 

160

 

347

 

80

 

108

 

489

 

5

 

1,189

2018 reported

 

4,671

 

5,232

 

2,083

 

1,352

 

5,042

 

52

 

18,432

Organic movement %

 

4

 

7

 

4

 

9

 

11

 

11

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

£ million

 

Europe and Turkey(iii)

£ million

 

Africa

£ million

 

Latin America

and Caribbean

£ million

 

Asia

Pacific

£ million

 

Corporate

£ million

 

Total

£ million

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017 reported

 

4,161

 

2,824

 

1,556

 

1,044

 

2,419

 

46

 

12,050

Exchange(i)

 

(228)

 

(15)

 

(105)

 

(43)

 

(64)

 

1

 

(454)

Reclassification(ii)

 

(8)

 

16

 

1

 

2

 

(11)

 

-

 

-

Disposals(iv)

 

-

 

(3)

 

-

 

-

 

(55)

 

-

 

(58)

2017 adjusted

 

3,925

 

2,822

 

1,452

 

1,003

 

2,289

 

47

 

11,538

Acquisitions and disposals(iv)

 

49

 

-

 

-

 

-

 

4

 

-

 

53

Organic movement

 

142

 

110

 

39

 

66

 

210

 

5

 

572

2018 reported

 

4,116

 

2,932

 

1,491

 

1,069

 

2,503

 

52

 

12,163

Organic movement %

 

4

 

4

 

3

 

7

 

9

 

11

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017 reported

 

642

 

443

 

166

 

195

 

343

 

9

 

1,798

Exchange(i)

 

(21)

 

2

 

(11)

 

(8)

 

(5)

 

(1)

 

(44)

Reclassification(ii)

 

(2)

 

1

 

-

 

1

 

-

 

-

 

-

Disposals(iv)

 

-

 

-

 

-

 

-

 

-

 

-

 

-

2017 adjusted

 

619

 

446

 

155

 

188

 

338

 

8

 

1,754

Acquisitions and disposals(iv)

 

8

 

-

 

-

 

-

 

-

 

-

 

8

Organic movement

 

35

 

28

 

3

 

8

 

50

 

(4)

 

120

2018 reported

 

662

 

474

 

158

 

196

 

388

 

4

 

1,882

Organic movement %

 

6

 

6

 

2

 

4

 

15

 

(50)

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit before exceptional items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017 reported

 

1,899

 

936

 

218

 

250

 

487

 

(189)

 

3,601

Exchange(i)

 

(60)

 

7

 

(20)

 

10

 

1

 

6

 

(56)

Reclassification(ii)

 

(4)

 

11

 

2

 

(1)

 

(8)

 

-

 

-

Acquisitions and disposals(iv)

 

-

 

-

 

-

 

-

 

(2)

 

1

 

(1)

2017 adjusted

 

1,835

 

954

 

200

 

259

 

478

 

(182)

 

3,544

Acquisitions and disposals(iv)

 

4

 

-

 

-

 

-

 

1

 

-

 

5

Organic movement

 

43

 

74

 

(9)

 

49

 

89

 

24

 

270

2018 reported

 

1,882

 

1,028

 

191

 

308

 

568

 

(158)

 

3,819

Organic movement %

 

2

 

8

 

(5)

 

19

 

19

 

13

 

8

Organic operating margin %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

46.2%

 

35.1%

 

12.8%

 

28.8%

 

22.7%

 

n/a

 

31.5%

2017

 

46.8%

 

33.8%

 

13.8%

 

25.8%

 

20.9%

 

 n/a

 

30.7%

Margin (decline) / improvement (bps)

 

(58)

 

126

 

(96)

 

299

 

181

 

n/a

 

78

 

(1)   For the reconciliation of sales to net sales see Additional Financial Information and Notes.

(2)   Percentages and margin improvement 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 strengthening of sterling against the US dollar, the Turkish lira and the Kenyan shilling, partially offset by weakening of sterling against the euro.

(ii)  Reclassification comprised a change to a reallocation of the results of the Travel Retail operations to the appropriate geographical regions.

(iii)  The Europe and Turkey region was formerly named 'Europe, Russia and Turkey'. Countries included in the region have not changed.

(iv) In the year ended 30 June 2018 the acquisitions and disposals that affected volume, sales, net sales, marketing and operating profit were as follows:

 

 

Volume

 

Sales

 

Net sales

 

Marketing

 

Operating

profit

 

equ. units million

 

£ million

 

£ million

 

£ million

 

£ million

Year ended 30 June 2017

 

 

 

 

 

 

 

 

 

Acquisitions

 

 

 

 

 

 

 

 

 

     Transaction costs

 

-

 

-

 

-

 

1

 

-

 

-

 

-

 

-

 

1

Disposals

 

 

 

 

 

 

 

 

 

USL owned to franchise

(7.8)

 

(188)

 

(46)

 

-

 

-

Nepal

(0.2)

 

(19)

 

(9)

 

-

 

(2)

Yellow tail

 

(3)

 

(3)

 

-

 

-

 

(8.0)

 

(210)

 

(58)

 

-

 

(2)

 

 

 

 

 

 

 

 

 

 

Acquisitions and disposals

(8.0)

 

(210)

 

(58)

 

-

 

(1)

 

 

 

 

 

 

 

 

 

 

Year ended 30 June 2018

 

 

 

 

 

 

 

 

 

Acquisitions

 

 

 

 

 

 

 

 

 

Casamigos

 

55

 

49

 

8

 

8

Transaction costs