Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 6-K

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of the

Securities Exchange Act of 1934

 

5 February 2015

 

Commission File Number 1-10691

 

DIAGEO plc

(Translation of registrant’s name into English)

 

Lakeside Drive, Park Royal, London NW10 7HQ, England

(Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

 

 

Form 20-F  x

Form 40-F  o

 

Indicate by check mark whether the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o

 

Indicate by check mark whether the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o

 

This report on Form 6-K shall be deemed to be filed and incorporated by reference in the registration statements on Form F-3 (File No. 333-110804, 333-132732, 333-153488 and 333-179426) and registration statements on Form S-8 (File Nos. 333-169934, 333-162490, 333-153481, 333-154338 and 333-182315) and to be a part thereof from the date on which this report is furnished, to the extent not superseded by documents or reports subsequently filed or furnished.

 

 

 



Table of Contents

 

INDEX TO FORM 6-K

 

 

 

Page

Introduction

 

3

Presentation of financial information

 

3

Trademarks, trade names and market data

 

3

Cautionary statement concerning forward-looking statements

 

4

 

 

 

Selected Consolidated Financial Data

 

6

 

 

 

Capitalisation and Indebtedness

 

9

 

 

 

Business Review

 

10

Information presented

 

10

Revised segmental information for prior reporting periods

 

10

Trend information

 

10

Operating results for the six months ended 31 December 2014 compared with the six months ended 31 December 2013

 

11

Liquidity and capital resources

 

31

Off-balance sheet arrangements

 

32

Definitions and reconciliation of non-GAAP measures to GAAP measures

 

32

 

 

 

New International Financial Reporting Standards

 

38

 

 

 

Index to the Unaudited Condensed Financial Information for the six months ended 31 December 2014 and 31 December 2013

 

F-1

Unaudited condensed consolidated income statement

 

F-2

Unaudited condensed consolidated statement of comprehensive income

 

F-3

Unaudited condensed consolidated balance sheet

 

F-4

Unaudited condensed consolidated statement of changes in equity

 

F-5

Unaudited condensed consolidated statement of cash flows

 

F-6

Notes to the unaudited condensed consolidated financial information

 

F-7

 

 

 

Unaudited Computation of Ratio of Earnings to Fixed Charges

 

A-1

 

 

 

Signature

 

 

 

2



Table of Contents

 

INTRODUCTION

 

Diageo plc is a public limited company incorporated under the laws of England and Wales. As used herein, except as the context otherwise requires, the term ‘company’ refers to Diageo plc and the terms ‘group’ and ‘Diageo’ refer to the company and its consolidated subsidiaries. References used herein to ‘shares’ and ‘ordinary shares’ are, except where otherwise specified, to Diageo plc’s ordinary shares.

 

PRESENTATION OF FINANCIAL INFORMATION

 

Diageo plc’s fiscal year ends on 30 June. The company publishes its consolidated financial statements in pounds sterling. In this document, references to ‘pounds sterling’, ‘sterling’, ‘£’, ‘pence’ or ‘p’ are to UK currency, references to ‘US dollars’, ‘US$’, ‘$’ or ‘¢’ are to US currency and references to the ‘euro’ or ‘€’ are to the euro currency. For the convenience of the reader, this document contains translations of certain pounds sterling amounts into US dollars at specified rates, or, if not so specified, the noon buying rate in New York City for cable transfers in pounds sterling as certified for customs purposes by the Federal Reserve Bank of New York (the ‘noon buying rate’) on 31 December 2014 of £1 = $1.56. No representation is made that the pounds sterling amounts have been, could have been or could be converted into US dollars at the rates indicated or at any other rates.

 

Diageo’s condensed consolidated financial information has been prepared in accordance with IAS 34 ‘Interim Financial Reporting’ as adopted for use in the European Union (EU) and International Financial Reporting standards (IFRS) as issued by the International Accounting Standards Board (IASB). References to IFRS hereafter should be construed as references to both IFRS as adopted by the EU and IFRS as issued by the IASB. Unless otherwise indicated, all financial information contained in this document has been prepared in accordance with IFRS. This interim condensed consolidated financial information is unaudited and has been prepared on the basis of accounting policies consistent with those applied in the consolidated financial statements for the year ended 30 June 2014.

 

The business review, selected consolidated financial data and financial information included in this document for the six months ended 31 December 2014 and 31 December 2013 have been derived from the published Diageo interim condensed consolidated financial information.

 

The principal executive office of the company is located at Lakeside Drive, Park Royal, London NW10 7HQ, England and its telephone number is +44 (0)20 8978 6000.

 

TRADEMARKS, TRADE NAMES AND MARKET DATA

 

This report on Form 6-K includes names of Diageo’s products which constitute trademarks or trade names which Diageo owns or which others own and license to Diageo for use. All rights reserved. © Diageo plc 2015.

 

The market data and competitive set classifications are taken from independent industry sources in the markets in which Diageo operates.

 

3



Table of Contents

 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

This document contains ‘forward-looking’ statements. These statements can be identified by the fact that they do not relate only to historical or current facts. In particular, forward-looking statements include all statements that express forecasts, expectations, plans, outlook and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of changes in interest or exchange rates, the availability or cost of financing to Diageo, anticipated cost savings or synergies, expected investments, the completion of Diageo’s strategic transactions and restructuring programmes, anticipated tax rates, expected cash payments, outcomes of litigation, anticipated deficit reductions in relation to pension schemes and general economic conditions. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements, including factors that are outside Diageo’s control.

 

These factors include, but are not limited to:

 

·                  changes in political or economic conditions in countries and markets in which Diageo operates, including changes in levels of consumer spending, failure of customer, supplier and financial counterparties or imposition of import, investment or currency restrictions;

·                  changes in consumer preferences and tastes, demographic trends or perceptions about health related issues, or contamination, counterfeiting or other circumstances which could harm the integrity or sales of Diageo’s brands;

·                  developments in any litigation or other similar proceedings (including with tax, customs and other regulatory authorities) directed at the drinks and spirits industry generally or at Diageo in particular, or the impact of a product recall or product liability claim on Diageo’s profitability or reputation;

·                  the effects of climate change and regulations and other measures to address climate change including any resulting impact on the cost and supply of water;

·                  changes in the cost or supply of raw materials, labour and/or energy;

·                  legal and regulatory developments, including changes in regulations regarding production, product liability, distribution, importation, labelling, packaging, consumption or advertising; changes in tax law, rates or requirements (including with respect to the impact of excise tax increases) or accounting standards; and changes in environmental laws, health regulations and the laws governing labour and pensions;

·                  the costs associated with monitoring and maintaining compliance with anti-corruption and other laws and regulations, and the costs associated with investigating alleged breaches of internal policies, laws or regulations, whether initiated internally or by external regulators, and any penalties or fines imposed as a result of any breaches;

·                  ability to maintain Diageo’s brand image and corporate reputation, and exposure to adverse publicity, whether or not justified, and any resulting impacts on Diageo’s reputation and the likelihood that consumers choose products offered by Diageo’s competitors;

·                  increased competitive product and pricing pressures and unanticipated actions by competitors that could impact Diageo’s market share, increase expenses and hinder growth potential;

·                  the effects of Diageo’s strategic focus on premium drinks, the effects of business combinations, partnerships, acquisitions or disposals, existing or future, and the ability to realise expected synergies and/or costs savings;

·                  Diageo’s ability to complete existing or future business combinations, restructuring programmes, acquisitions and disposals;

·                  contamination, counterfeiting or other events that could adversely affect the perception of Diageo’s brands;

·                  increased costs or shortages of talent;

·                  disruption to production facilities or business service centres, and systems change programmes, existing or future, and the ability to derive expected benefits from such programmes;

·                  changes in financial and equity markets, including significant interest rate and foreign currency exchange rate fluctuations and changes in the cost of capital, which may reduce or eliminate Diageo’s access to or increase the cost of financing or which may affect Diageo’s financial results and movements to the value of Diageo’s pension funds;

·                  renewal of supply, distribution, manufacturing or licence agreements (or related rights) and licences on favourable terms when they expire;

·                  technological developments that may affect the distribution of products or impede Diageo’s ability to protect its intellectual property rights.

 

All oral and written forward-looking statements made on or after the date of this document and attributable to Diageo are expressly qualified in their entirety by the above factors and the ‘Risk factors’ contained in the annual report on Form 20-F for the year ended 30 June 2014 filed with the US Securities and Exchange Commission (SEC). Any forward-looking statements made by or on behalf of Diageo speak only as of the date they are made. Diageo does not undertake to update forward-looking statements to reflect any changes in Diageo’s expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. The reader should, however, consult any additional disclosures that Diageo may make in any documents which it publishes and/or files with the US Securities and Exchange Commission (SEC). All readers, wherever located, should take note of these disclosures.

 

This document includes names of Diageo’s products, which constitute trademarks or trade names which Diageo owns, or which others own and license to Diageo for use. All rights reserved. © Diageo plc 2015.

 

4



Table of Contents

 

The information in this document does not constitute an offer to sell or an invitation to buy shares in Diageo plc or an invitation or inducement to engage in any other investment activities.

 

This document includes information about Diageo’s target debt rating. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organisation. Each rating should be evaluated independently of any other rating.

 

Past performance cannot be relied upon as a guide to future performance.

 

The contents of the company’s website (www.diageo.com) should not be considered to form part of or be incorporated into this document.

 

5



Table of Contents

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

The selected consolidated financial data set out below has been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the European Union (EU) and IFRS as issued by the International Accounting Standards Board (IASB) and should be read in conjunction with, and are qualified in their entirety by reference to, the unaudited financial information and notes presented elsewhere in this document and to Diageo’s annual report on Form 20-F for the year ended 30 June 2014.

 

The following table presents selected consolidated financial data for Diageo: for the six months ended 31 December 2014 and 31 December 2013 and as at the respective period ends, derived from the unaudited interim condensed consolidated financial information presented elsewhere in this document; and for the five years ended 30 June 2014 and as at the respective year ends, derived from Diageo’s consolidated financial statements audited by Diageo’s independent auditor. The unaudited interim condensed consolidated financial information, in the opinion of Diageo management, includes all adjustments, consisting solely of normal, recurring adjustments, necessary to present fairly the information contained therein. The results of operations for the six months ended 31 December 2014 are not necessarily indicative of the results for the year ending 30 June 2015.

 

 

 

Six months ended 31 December

 

Year ended 30 June

 

Income statement

 

2014

 

2014

 

2013

 

2014

 

2013

 

2012

 

2011

 

2010

 

data(1)(6)

 

$ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

Sales

 

13,609

 

8,724

 

8,014

 

13,980

 

15,276

 

14,392

 

13,043

 

12,793

 

Operating profit

 

2,602

 

1,668

 

2,040

 

2,707

 

3,380

 

3,108

 

2,552

 

2,538

 

Profit for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations(2)

 

2,128

 

1,364

 

1,746

 

2,264

 

2,550

 

2,032

 

1,960

 

1,727

 

Discontinued operations(3)

 

 

 

(92

)

(83

)

 

(11

)

 

(19

)

Total profit for the period(2)

 

2,128

 

1,364

 

1,654

 

2,181

 

2,550

 

2,021

 

1,960

 

1,708

 

 

Per share data

 

$

 

pence

 

pence

 

pence

 

pence

 

pence

 

pence

 

pence

 

Dividend per share(4)

 

0.34

 

21.5

 

19.7

 

51.7

 

47.4

 

43.5

 

40.4

 

38.1

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations(2)

 

0.82

 

52.3

 

67.5

 

93.0

 

98.0

 

76.6

 

74.3

 

65.2

 

Discontinued operations(3)

 

 

 

(3.7

)

(3.3

)

 

(0.4

)

 

(0.8

)

Basic earnings per share

 

0.82

 

52.3

 

63.8

 

89.7

 

98.0

 

76.2

 

74.3

 

64.4

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations(2)

 

0.81

 

52.2

 

67.2

 

92.6

 

97.4

 

76.2

 

74.1

 

65.1

 

Discontinued operations(3)

 

 

 

(3.7

)

(3.3

)

 

(0.4

)

 

(0.8

)

Diluted earnings per share

 

0.81

 

52.2

 

63.5

 

89.3

 

97.4

 

75.8

 

74.1

 

64.3

 

 

 

 

million

 

million

 

million

 

million

 

million

 

million

 

million

 

million

 

Average shares

 

2,506

 

2,506

 

2,507

 

2,506

 

2,502

 

2,495

 

2,493

 

2,486

 

 

 

 

As at 31 December

 

As at 30 June

 

 

 

2014

 

2014

 

2013

 

2014

 

2013

 

2012

 

2011

 

2010

 

Balance sheet data(1)(6)

 

$ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

Total assets

 

43,540

 

27,910

 

24,245

 

22,964

 

24,991

 

22,269

 

19,720

 

19,394

 

Net assets

 

13,566

 

8,696

 

8,038

 

7,590

 

8,088

 

6,792

 

5,959

 

4,762

 

Net borrowings(5)

 

16,642

 

10,668

 

9,096

 

8,850

 

8,403

 

7,573

 

6,480

 

6,980

 

Equity attributable to the parent company’s equity shareholders

 

11,276

 

7,228

 

7,086

 

6,823

 

7,036

 

5,588

 

5,245

 

4,007

 

Share capital

 

1,243

 

797

 

797

 

797

 

797

 

797

 

797

 

797

 

 

This information should be read in conjunction with the notes on pages 7 to 8.

 

6



Table of Contents

 


Notes to the selected consolidated financial data

 

(1) IFRS accounting policies The unaudited condensed consolidated financial information for the six months ended 31 December 2014 has been prepared in accordance with IAS 34 ‘Interim Financial Reporting’ as issued by the International Accounting Standards Board (IASB) and adopted for use in the European Union.

 

(2) Exceptional items Exceptional items are charges or credits which, in management’s judgement, need to be disclosed by virtue of their size or incidence in order for the user to obtain a proper understanding of the financial information. Such items are included within the income statement caption to which they relate. An analysis of exceptional items is as follows:

 

 

 

Six months ended
31 December

 

Year ended 30 June

 

 

 

2014

 

2013

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

Items included in operating profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring programmes

 

(26

)

(20

)

(163

)

(69

)

(96

)

(111

)

(142

)

Duty settlements

 

(145

)

 

 

 

 

(127

)

 

Brand impairment

 

 

 

(264

)

(50

)

(59

)

(39

)

(35

)

Pension changes — past service credits

 

 

 

 

20

 

115

 

 

 

SEC settlement

 

 

 

 

 

 

(12

)

 

 

 

(171

)

(20

)

(427

)

(99

)

(40

)

(289

)

(177

)

Non-operating items

 

98

 

138

 

140

 

(83

)

147

 

(14

)

(15

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Items included in taxation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax credit on exceptional operating items

 

38

 

3

 

99

 

27

 

19

 

51

 

39

 

Tax on non-operating items

 

 

 

 

28

 

 

3

 

10

 

Loss of future tax amortisation

 

 

 

 

 

(524

)

 

 

Settlements with tax authorities

 

 

 

 

 

 

66

 

 

 

 

38

 

3

 

99

 

55

 

(505

)

120

 

49

 

Exceptional items included in continuing operations

 

(35

)

121

 

(188

)

(127

)

(398

)

(183

)

(143

)

Discontinued operations net of taxation (note 3)

 

 

(92

)

(83

)

 

(11

)

 

(19

)

Exceptional items

 

(35

)

29

 

(271

)

(127

)

(409

)

(183

)

(162

)

 

(3) Discontinued operations In the six months ended 31 December 2013 discontinued operations represented a charge after taxation of £92 million (year ended 30 June 2014 — £83 million; 2013 — £nil; 2012— £11 million; 2011 — £nil; 2010— £19 million) in respect of the settlement of the litigation in Australia and New Zealand and anticipated future payments to thalidomide injured individuals and thalidomide organisations.

 

(4) Dividends The board expects that Diageo will pay an interim dividend in April and a final dividend in October of each year. Approximately 40% of the total dividend in respect of any financial year is expected to be paid as an interim dividend and approximately 60% as a final dividend. The payment of any future dividends, subject to shareholder approval, will depend upon Diageo’s earnings, financial condition and such other factors as the board deems relevant. Proposed dividends are not considered to be a liability until they are approved by the board for the interim dividend and by the shareholders at the annual general meeting for the final dividend.

 

The table below sets out the amounts of interim, final and total cash dividends paid by the company on each ordinary share. The dividends are translated into US dollars per ADS (each ADS representing four ordinary shares) at the actual rate on each of the respective dividend payment dates.

 

 

 

 

 

Six months ended
31 December

 

Year ended 30 June

 

 

 

 

 

2014

 

2013

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

 

 

 

pence

 

pence

 

pence

 

pence

 

pence

 

pence

 

pence

 

Per ordinary share

 

Interim

 

21.5

 

19.7

 

19.7

 

18.1

 

16.6

 

15.5

 

14.6

 

 

 

Final

 

 

 

32.0

 

29.3

 

26.9

 

24.9

 

23.5

 

 

 

Total

 

21.5

 

19.7

 

51.7

 

47.4

 

43.5

 

40.4

 

38.1

 

 

 

 

 

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Per ADS

 

Interim

 

1.29

 

1.31

 

1.31

 

1.10

 

1.05

 

1.01

 

0.89

 

 

 

Final

 

 

 

2.06

 

1.89

 

1.72

 

1.59

 

1.48

 

 

 

Total

 

1.29

 

1.31

 

3.37

 

2.99

 

2.77

 

2.60

 

2.37

 

 

7



Table of Contents

 

Note: The interim dividend for the six months ended 31 December 2014 will be paid on 7 April 2015, and payment to US ADR holders will be made on 10 April 2015. In the table above, an exchange rate of £1 = $1.50 has been assumed for this dividend, but the exact amount of the payment to US ADR holders will be determined by the rate of exchange on 7 April 2015.

 

Diageo’s dividend philosophy has been a consistent increase in the annual dividend payable while maintaining dividend cover between 1.8 and 2.2 times earnings per share. In recent years this has allowed the group to increase its dividend by 9% a year. Given the economic slowdown in emerging markets and the associated currency weakness expected in the future both of which had such a significant impact on Diageo’s reported results in the year ended 30 June 2014, the group’s dividend coverage ratio is now below the lower end of the range set. However cash flow is improving as these results show and the strength of the dollar is providing some offset to emerging market currency weakness. Therefore the interim dividend growth was maintained at 9%, but this will be reviewed for the full year and if necessary the rate of increase may be changed for the final dividend in order to maintain the coverage ratio, albeit at the lower end of the range.

 

(5) Net borrowings definition Net borrowings are defined as gross borrowings (short term borrowings and long term borrowings plus finance lease liabilities plus interest rate hedging instruments, cross currency interest rate swaps and funding foreign currency forwards and swaps used to manage borrowings) less cash and cash equivalents.

 

(6) Exchange rates A substantial portion of the group’s assets, liabilities, revenues and expenses is denominated in currencies other than pounds sterling. For the convenience of the reader, selected consolidated financial information for the six months ended 31 December 2014 has been translated into US dollars at the noon buying rate on 31 December 2014 of £1 = $1.56.

 

The following table shows period end and average US dollar/pound sterling noon buying exchange rates, for the periods indicated, expressed in US dollars per £1.

 

 

 

Six months ended
31 December

 

Year ended 30 June

 

 

 

2014

 

2013

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Period/year end

 

1.56

 

1.66

 

1.71

 

1.52

 

1.57

 

1.61

 

1.50

 

Average rate*

 

1.62

 

1.60

 

1.64

 

1.57

 

1.59

 

1.59

 

1.57

 

 


* The average of the noon buying rates on the last business day of each month during the six months ended 31 December and during the years ended 30 June.

 

The average exchange rate for the period 1 January to 30 January 2015 was £1=$1.51 and the noon buying rate on 30 January 2015 was £1=$1.50.

 

These rates have been provided for information only. They are not necessarily the rates that have been used in this document for currency translations or in the preparation of the consolidated financial information. See note 2 to the unaudited condensed consolidated financial information for the actual rates used in the preparation of the consolidated financial information.

 

8



Table of Contents

 

CAPITALISATION AND INDEBTEDNESS

 

The following table sets out on an IFRS basis the unaudited capitalisation of Diageo as at 31 December 2014:

 

 

 

31 December 2014

 

 

 

£ million

 

Short term borrowings and bank overdrafts (including current portion of long term borrowings)

 

2,845

 

 

 

 

 

Long term borrowings

 

 

 

Due from one to five years

 

4,077

 

Due after five years

 

4,441

 

 

 

8,518

 

Finance lease obligations

 

276

 

Non-controlling interests

 

1,468

 

 

 

 

 

Equity attributable to the equity shareholders of the parent company

 

 

 

Share capital

 

797

 

Share premium

 

1,345

 

Capital redemption reserve

 

3,146

 

Fair value, hedging and exchange reserve

 

(753

)

Own shares

 

(2,241

)

Other retained earnings

 

4,934

 

 

 

7,228

 

Total capitalisation

 

20,335

 

 

Notes

 

(1)                                 At 31 December 2014, the group had cash and cash equivalents of £802 million.

 

(2)                                 At 31 December 2014, 2,754,258,478 ordinary shares of 28 101/108 pence each were issued, all of which were fully paid, including shares issued, shares issued and held in employee share trusts and those held as treasury shares.

 

(3)                                 There have been no material changes to the performance guarantees or indemnities in respect of liabilities of third parties from those reported in Diageo’s Annual Report on Form 20-F for the year ended 30 June 2014.

 

(4)                                 At 31 December 2014, £256 million of the group’s net borrowings were secured on assets of the group.

 

(5)                                 Since 31 December 2014 no shares have been acquired by Diageo as part of the share buyback programs or to be held as treasury shares for hedging share scheme grants provided to employees.

 

(6)                                 Save as disclosed above there has been no material change since 31 December 2014 in the group’s net borrowings, performance guarantees, indemnities and capitalisation.

 

9



Table of Contents

 

BUSINESS REVIEW

 

INFORMATION PRESENTED

 

Diageo is the world’s leading premium drinks business and operates on an international scale selling all types of beverage alcohol. It is one of a small number of premium drinks companies that operate globally across spirits, beer and wine.

 

The following discussion is based on Diageo’s results for the six months ended 31 December 2014 compared with the six months ended 31 December 2013.

 

Unless otherwise stated in this section, percentage movements are organic movements. These movements and organic operating margin are before exceptional items. Commentary, unless otherwise stated, refers to organic movements. Share, unless otherwise stated, refers to value share. See ‘Definitions and reconciliations of non-GAAP measures to GAAP measures’ for an explanation of organic movements on page 32.

 

REVISED SEGMENTAL INFORMATION FOR PRIOR REPORTING PERIODS

 

In the six months ended 31 December 2014 Diageo changed its internal reporting structure to reflect changes made to management responsibilities as announced on 30 July 2014. As a result of this change, Diageo reports the following geographical segments both for management reporting purposes and in the external financial statements: North America; Europe; Africa; Latin America and Caribbean; Asia Pacific and Corporate. As a consequence of these changes, comparative prior period figures have been restated. Restated segmental information for volume, sales, net sales, marketing spend and operating profit before exceptional items for prior periods with a reconciliation to previously reported figures is provided in ‘Definitions and reconciliations of non-GAAP measures to GAAP measures’ on page 32.

 

TREND INFORMATION

 

Ivan Menezes, Chief Executive of Diageo, commenting on the six months ended 31 December 2014 said:

 

“We have improved our performance during the half and we have again shown: the strength of our brands, which is driving our share gains; our strong innovation capability, which has enabled us to access new growth opportunities, and our focus on cost.  We delivered the planned savings from our global efficiency programme together with procurement benefits in marketing spend which we have reinvested in our brands and we increased our investment in our routes to consumer  while again expanding our margins.

 

We have already taken action to improve the performance of those brands and markets that have not performed as well as we would expect. This contributed to our stronger second quarter performance and I expect to maintain this momentum through the year.

 

The half saw Diageo acquire control of USL, putting us in the position to create an iconic leader in spirits in an attractive market.  We have also reached agreement to acquire all of Don Julio, which will significantly strengthen our position in one of our fastest growing categories.

 

The quality of these results in a tough environment, with depletions ahead of shipments and improving cash flow, reinforce my confidence that Diageo can realise its full potential and deliver our performance ambition.”

 

The above comments were made by Ivan Menezes, Chief Executive of Diageo, in connection with the release of the Interim Announcement published on 29 January 2015.

 

10



Table of Contents

 

OPERATING RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2014 COMPARED WITH THE SIX MONTHS ENDED 31 DECEMBER 2013

 

Key highlights

 

·                  Organic net sales in the half were broadly flat (-0.1%) with volume down 1.9%.  Performance improved in Q2

·                  Continued strong performance of reserve brands, up 10%, was a key driver of positive overall price/mix

·                  Marketing spend was in line with net sales, as effective spend benefitted from procurement efficiencies worth 3% of total marketing investment

·                  Restructuring benefits drove operating margin improvement of 28bps with organic operating profit up 0.7%

·                  Free cash flow was £699 million, up £373 million on the first half last year

·                  Eps before exceptional items was 53.7 pence per share, down 8.9 pence per share driven mainly by negative exchange impacts and lower income from associates and joint ventures

·                  Interim dividend up 9% to 21.5 pence per share

 

Key performance indicators

 

 

 

First 
Half 
F15

 

First 
Half

F14

 

Organic net sales growth

 

%

 

 

2

 

Organic operating margin improvement

 

basis points

 

28

 

37

 

Earnings per share before exceptional items

 

pence

 

53.7

 

62.6

 

Free cash flow

 

 

£ million

 

699

 

326

 

Return on average invested capital

 

%

 

13.9

 

17.8

 

 

Other financial information

 

 

 

First Half
F15
Reported

 

First Half
F14
Reported

 

Organic 
growth

%

 

Reported
growth
%

 

Volume

 

EUm

 

134.1

 

84.3

 

(2

)

59

 

Net sales

 

 

£ million

 

5,900

 

5,932

 

 

(1

)

Marketing spend

 

 

£ million

 

896

 

903

 

 

(1

)

Operating profit before exceptional items (a)

 

 

£ million

 

1,839

 

2,060

 

1

 

(11

)

Operating profit (b)

 

 

£ million

 

1,668

 

2,040

 

 

 

(18

)

Share of associates and joint ventures profit after tax

 

 

£ million

 

113

 

181

 

 

 

(38

)

Net finance charges

 

 

£ million

 

239

 

225

 

 

 

6

 

Reported tax rate

 

%

 

16.8

 

18.2

 

 

 

(8

)

Reported tax rate before exceptional items 

 

%

 

18.3

 

19.4

 

 

 

(6

)

Profit attributable to parent company’s shareholders

 

 

£ million

 

1,311

 

1,599

 

 

 

(18

)

Basic earnings per share

 

pence

 

52.3

 

63.8

 

 

 

(18

)

Interim dividend per share

 

pence

 

21.5

 

19.7

 

 

 

9

 

 


(a)         Operating profit before exceptional items included attributable transaction and integration costs of £10 million in the six months ended 31 December 2013 in respect of business acquisitions.

(b)         Operating profit includes an exceptional charge of £171 million, an analysis for which is provided on page 16.

 

11



Table of Contents

 

Key performance indicators

 

Net sales growth (£ million)

 

Reported net sales were flat. Adverse foreign exchange was offset by the full consolidation of USL. Growth in reserve brands and pricing in Venezuela offset volume decline

 

 


(a)         Impact of acquisitions and disposals on the first half F14 and the first half F15. See page 34 for further details.

 

Reported net sales were flat. Adverse foreign exchange was offset by the full consolidation of USL. Organic volume decline was largely driven by currency related market contraction in West LAC and South East Asia, a challenging environment in Venezuela and weakness in the standard price segment in North America. Positive price/mix was largely driven by the strong performance of reserve brands and price increases in Venezuela.

 

Operating margin improvement (%)

 

Cost savings delivered 28bps of organic margin improvement

 

 

The full consolidation of USL has rebased Diageo’s operating margin by 2pps. Adverse foreign exchange, primarily in respect of the Venezuelan bolivar, reduced reported margins while the organic increase in operating margin was 28bps driven by cost savings from the global efficiency programme.

 

12



Table of Contents

 

Earnings per share before exceptional items (pence)

 

Eps before exceptionals impacted by adverse foreign exchange, decrease in associate profit and increase in finance charges

 

 

Eps fell 8.9 pence largely as a result of adverse foreign exchange movements, which reduced eps 8.4 pence.  Operating profit after tax and excluding foreign exchange movements had a positive impact on eps as a result of organic growth and the lower tax rate.  Lower income from associates and joint ventures and the increase in other finance charges, which largely reflects updated projections for dividends payable in respect of the Zacapa agreement, also had a negative impact on eps.

 

Basic eps was 52.3 pence (2013 — 63.8 pence), with exceptionals reducing eps by 1.4 pence (2013 — 1.2 pence favourable).

 

For movements in net finance charges see below:

 

Movement in net finance charges

 

£ million

 

First Half F14 Reported

 

225

 

Net interest charge

 

6

 

Post employment charges

 

1

 

Venezuela hyperinflation adjustment

 

(3

)

Other finance charges

 

10

 

First Half F15 Reported

 

239

 

 

 

 

First Half
F15
Reported

 

First Half 
F14 
Reported

 

Average monthly net borrowings (£ million)

 

10,698

 

9,160

 

Effective interest rate

 

3.7%

 

4.1%

 

 

For the calculation of the effective interest rate, the net interest charge excludes fair value adjustments to derivative financial instruments and borrowings. Average monthly net borrowings include the impact of interest rate swaps that are no longer in a hedge relationship but excludes the market value adjustment for cross currency interest rate swaps.

 

The increase in average net borrowings was principally the result of the acquisition of the controlling interest in USL, completed on 2 July 2014, and the inclusion of USL’s net borrowings. The effective interest rate decreased in the six months ended 31 December 2014 principally as a results of lower interest rates on new debt issues.

 

13



Table of Contents

 

Free cash flow (£ million)

 

Positive working capital movement, lower interest and tax payments offset the impact of reduced operating profit and the full consolidation of USL on cash flow

 

 


(a)         Operating profit adjusted for non cash items including depreciation and amortisation.

(b)         Other movements includes dividends received from associates and joint ventures, movements in loans receivable and other investments, and payments in respect of the settlement of Thalidomide litigations.

 

The increase in free cash flow was primarily driven by the positive working capital movement, largely due to increases in creditor balances. Lower interest and tax payments are due to phasing. Contributions to pension plans were lower than the same period last year, largely driven by the one off payment made into the Irish pension scheme last year.

 

Return on average invested capital (ROIC) (a)

 

The investment in USL has rebased ROIC and adverse FX reduced ROIC in the period

 

 


(a)    ROIC calculation excludes exceptional items

 

The full consolidation of USL reduced ROIC by 2.1pps. Foreign exchange movements which reduced operating profit, were partially offset by the impact of foreign exchange on invested capital.

 

14



Table of Contents

 

Additional financial information

 

Income statement

 

 

 

31 December
2013

 

Exchange
(a)

 

Acquisitions
and disposals

(b)

 

Organic
movement

 

31 December
2014

 

 

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

Sales

 

8,014

 

(637

)

1,225

 

122

 

8,724

 

Excise duties

 

(2,082

)

149

 

(762

)

(129

)

(2,824

)

Net sales

 

5,932

 

(488

)

463

 

(7

)

5,900

 

Cost of sales*

 

(2,184

)

129

 

(359

)

(4

)

(2,418

)

Gross profit

 

3,748

 

(359

)

104

 

(11

)

3,482

 

Marketing

 

(903

)

43

 

(35

)

(1

)

(896

)

Other operating expenses*

 

(785

)

48

 

(35

)

25

 

(747

)

Operating profit before exceptional items

 

2,060

 

(268

)

34

 

13

 

1,839

 

Exceptional operating items (c)

 

(20

)

 

 

 

 

 

 

(171

)

Operating profit

 

2,040

 

 

 

 

 

 

 

1,668

 

Non-operating items (c)

 

138

 

 

 

 

 

 

 

98

 

Net finance charges

 

(225

)

 

 

 

 

 

 

(239

)

Share of after tax results of associates and joint ventures

 

181

 

 

 

 

 

 

 

113

 

Profit before taxation

 

2,134

 

 

 

 

 

 

 

1,640

 

Taxation

 

(388

)

 

 

 

 

 

 

(276

)

Profit from continuing operations

 

1,746

 

 

 

 

 

 

 

1,364

 

Discontinued operations (c)

 

(92

)

 

 

 

 

 

 

 

Profit for the period

 

1,654

 

 

 

 

 

 

 

1,364

 

 


* before exceptional operating items

 

(a) Exchange

 

The impact of movements in exchange rates on reported figures is principally in respect of the Venezuelan bolivar, the Russian rouble and the euro.

 

In March 2014, the Central Bank of Venezuela opened the Second Ancillary Foreign Currency Administration System (Sicad II) that allows private and public companies to trade foreign currency at a higher exchange rate than the official exchange rate. As a result, the group has applied Sicad II exchange rate to consolidate its Venezuelan operations for the year ended 30 June 2014 ($1 = VEF49.98; £1 = VEF85.47). Applying the consolidation rate of $1 = VEF49.99 (£1 = VEF77.98) at 31 December 2014 compared to the rate of $1 = VEF9 (£1 = VEF14.94) at 31 December 2013 reduced the net assets and cash and cash equivalents as at 31 December 2014 by £583 million and £404 million, respectively. The impact of applying the consolidation rate for the six months ended 31 December 2014 would have reduced the previously reported net sales and operating profit for the six months ended 31 December 2013 by £237 million and £183 million, respectively.

 

15



Table of Contents

 

The effect of movements in exchange rates, associated finance charge movements and mark to market impact on interest expense on profit before exceptional items and taxation for the six months ended 31 December 2014 is set out in the table below.

 

 

 

 

 

Gains/

 

 

 

 

 

(losses)

 

 

 

 

 

£ million

 

Translation impact

 

 

 

(221

)

Transaction impact

 

 

 

(47

)

Operating profit before exceptional items

 

 

 

(268

)

Net finance charges — translation impact

 

 

 

(1

)

Mark to market impact of IAS 39 on interest expense

 

 

 

5

 

Impact of IAS 21 and IAS 39 on net other finance charges

 

 

 

1

 

Interest and other finance charges

 

 

 

5

 

Associates — translation impact

 

 

 

(11

)

Profit before exceptional items and taxation

 

 

 

(274

)

 

 

 

Six months ended

 

Six months ended

 

 

 

31 December 2014

 

31 December 2013

 

Exchange rates

 

 

 

 

 

Translation £1 =

 

$1.61

 

$1.60

 

Transaction £1 =

 

$1.58

 

$1.58

 

Translation £1 =

 

€1.26

 

€1.18

 

Transaction £1 =

 

€1.24

 

€1.23

 

 

(b) Acquisitions and disposals

 

The impact of acquisitions and disposals on the reported figures was primarily attributable to the acquisition of United Spirits Limited (USL).

 

(c) Exceptional items

 

Exceptional operating charges of £171 million (2013 — £20 million) in the six months ended 31 December 2014 comprise:

 

·                  £18 million (2013 — £nil) in respect of the Global efficiency programme announced in January 2014;

·                  £11 million (2013 — £3 million) in respect of the Supply excellence restructuring programme;

·                  a gain of £3 million (2013 — charge of £17 million) arising from a property sale in respect of the restructuring of the group’s supply operations; and

·                  £145 million (2013 — £nil) representing an estimate of the income statement charge for the settlement cost of several related disputes with the Korean customs authorities regarding the transfer pricing methodology applicable to imported spirits. Payments to be made pursuant to settlement of these related disputes will be reduced by £88 million which was paid to the customs authorities prior to 30 June 2014, and was previously accounted for as a receivable from Korea customs.

 

In the second half of the year an exceptional operating charge of approximately £80 million is expected to be incurred primarily in respect of the Global efficiency and Supply excellence programmes.

 

Non-operating items in the six months ended 31 December 2014 include a gain of £103 million (2013 — gain of £140 million) following the acquisition of additional equity shares in USL which increased the group’s investment in USL from 25.02% to 54.78% excluding the 2.38% interest owned by the USL Benefit Trust (2013 — 10.04% to 25.02%). As a result of USL becoming a subsidiary of the group a gain is recognised on the difference between the book value of the 25.02% investment and the market value on the acquisition of the controlling stake on 2 July 2014. The gain includes a £79 million cumulative exchange loss recycled from other comprehensive income and £10 million of transaction costs.

 

Exceptional non-operating items comprise transaction costs of £5 million (2013 — £nil) in respect of the expected disposal of Bushmills.

 

Discontinued operations in the six months ended 31 December 2013 represent a charge after taxation of £92 million in respect of the settlement of the thalidomide litigation in Australia and New Zealand and anticipated future payments to thalidomide organisations.

 

Cash payments in the six months ended 31 December 2014 in respect of exceptional restructuring items and thalidomide were £62 million (2013 — £41 million) and £8 million (2013 — £2 million), respectively. Cash expenditure on exceptional restructuring items in the second half of the year is expected to be approximately £120 million.

 

(d) Dividend

 

An interim dividend of 21.5 pence per share will be paid to holders of ordinary shares and ADRs on the register as of 27 February 2015. This represents an increase of 9% on last year’s interim dividend. The interim dividend will be paid to shareholders on 7 April 2015. Payment to US ADR holders will be made on 10 April 2015. A dividend reinvestment plan is available to holders of ordinary shares in respect of the interim dividend and the plan notice date is 12 March 2015.

 

16



Table of Contents

 

Movement in net borrowings

 

 

 

2014

 

2013

 

 

 

£ million

 

£ million

 

Net borrowings at 30 June

 

(8,850

)

(8,403

)

Free cash flow (a)

 

699

 

326

 

Acquisition less sale of businesses (b)

 

(664

)

(420

)

Net purchase of own shares for share schemes (c)

 

(7

)

(61

)

Dividends paid to non-controlling interests

 

(34

)

(61

)

Purchase of shares of non-controlling interests (d)

 

 

(35

)

Net movements in bonds (e)

 

(371

)

(983

)

Net movements in other borrowings (f)

 

1,316

 

1,122

 

Equity dividends paid

 

(801

)

(735

)

Net increase/(decrease) in cash and cash equivalents

 

138

 

(847

)

Net increase in bonds and other borrowings

 

(945

)

(139

)

Exchange differences (g)

 

(143

)

337

 

Borrowings acquired on acquisition of USL

 

(849

)

 

Other non-cash items

 

(19

)

(44

)

Net borrowings at 31 December

 

(10,668

)

(9,096

)

 


(a) See page 14 for the analysis of free cash flow.

 

(b) On 2 July 2014 the group acquired an additional 26% investment in USL for INR 114.5 billion (£1,118 million). On 31 October 2014 the sale of the Whyte and Mackay Group by USL resulted in a net cash receipt of £395 million. In the six months ended 31 December 2013 cash payments primarily comprised £474 million in respect of the acquisition of a 18.74% investment in USL.

 

(c) Net purchase of own shares comprised purchase of treasury shares for the future settlement of obligations under the employee share option schemes of £39 million (2013 — £116 million) less receipts from employees on the exercise of share options of £32 million (2013 — £55 million).

 

(d) In the six months ended 31 December 2013 Diageo purchased the remaining 7% equity stake in Sichuan Chengdu Shuijingfang Group Co., Ltd.

 

(e) In the six months ended 31 December 2014, the group repaid bonds of €1,000 million (£792 million) and issued bonds of €1,000 million (£791 million). In the comparable period, the group repaid bonds of €1,150 million (£983 million). A bond of £370 million acquired on the purchase of USL was repaid using the proceeds from the sale of the Whyte and Mackay Group.

 

(f) Net movements in other borrowings are primarily in respect of the net drawdown of short term commercial paper which is used to finance day-to-day operations.

 

(g) Exchange differences primarily arose on US dollar and euro denominated borrowings partially offset by the favourable change on foreign exchange swaps and forwards.

 

17



Table of Contents

 

Movement in equity

 

 

 

2014

 

2013

 

 

 

£ million

 

£ million

 

Equity at 30 June

 

7,590

 

8,088

 

Profit for the period

 

1,364

 

1,654

 

Exchange adjustments (a)

 

266

 

(770

)

Net remeasurement of post employment plans

 

(341

)

(89

)

Exchange recycled to the income statement (b)

 

79

 

 

Fair value movements on available-for-sale investments (b)

 

11

 

(90

)

Non-controlling interests acquired (b)

 

594

 

 

Purchase of shares of non-controlling interests

 

 

(35

)

Dividends to non-controlling interests

 

(34

)

(61

)

Dividends paid

 

(801

)

(735

)

Other reserve movements

 

(32

)

76

 

Equity at 31 December

 

8,696

 

8,038

 

 


(a) Movement in the six months ended 31 December 2014 primarily arose on the US dollar, the euro, Brazilian real and the Indian rupee denominated net investments.

 

(b) Following the change in accounting for USL from an associate to a subsidiary, an exchange loss of £79 million has been recycled to the income statement in the six months ended 31 December 2014 and a 43.9% non-controlling interest has been recognised of £594 million. In the six months ended 31 December 2013 a gain of £85 million, in respect of USL, was recycled to the income statement reflecting the step up from available-for-sale investment to associate.

 

Post employment plans

 

The deficit in respect of post employment plans before taxation increased by £313 million from £475 million at 30 June 2014 to £788 million at 31 December 2014. The increase was primarily due to the reduction in returns from ‘AA’ rated corporate bonds used to calculate the discount rates on the liabilities of the post employment plans (United Kingdom reduced from 4.2% to 3.5% and Ireland from 3% to 2.1%) partially offset by a reduction in long term inflation and an increase in the value of the assets held by the plans. Total cash contributions to the group’s post employment plans for the year ending 30 June 2015 are expected to be approximately £185 million.

 

Analysis by reporting segments

 

The organic movements for volume, net sales, marketing spend and operating profit before exceptional items by reporting segment for the six months ended 31 December 2014 were as follows:

 

 

 

Volume

 

Net sales

 

Marketing spend

 

Operating profit (a)

 

Organic growth by region

 

%

 

EUm

 

%

 

£ million

 

%

 

£ million

 

%

 

£ million

 

North America

 

(2

)

(0.6

)

 

(1

)

3

 

8

 

(1

)

(7

)

Europe

 

(1

)

(0.2

)

 

(4

)

3

 

6

 

1

 

3

 

Africa

 

9

 

1.1

 

5

 

38

 

12

 

9

 

4

 

7

 

Latin America and Caribbean

 

(10

)

(1.3

)

(1

)

(4

)

3

 

3

 

7

 

13

 

Asia Pacific

 

(7

)

(0.6

)

(5

)

(39

)

(15

)

(24

)

(7

)

(14

)

Corporate

 

 

 

8

 

3

 

(20

)

(1

)

16

 

11

 

Diageo

 

(2

)

(1.6

)

 

(7

)

 

1

 

1

 

13

 

 


(a)         Before exceptional items.

 

18



Table of Contents

 

North America

 

“Net sales in North America were in line with last year, given the slowdown in the US spirits market as a result of weaker pricing and our comparison against a strong first half last year. In our US Spirits and Wines business volume was down but continued strong performance of reserve brands was the main driver of 2.6 percentage points of price/mix.  Given our already premium price position in many categories, we have taken fewer price increases and engaged in more tactical promotional activities in the most competitive segments. Scotch shipments were down 9% against the prior period which benefitted from a number of innovations.  Depletions, however, were up for our scotch malts portfolio and Buchanan’s and both gained share, and Buchanan’s became the number two super premium scotch by value behind Johnnie Walker.  Our strength in innovation continues to be a key growth driver and Cîroc Pineapple and Crown Royal Regal Apple contributed to overall growth in Diageo’s vodka and North American whiskey categories, up 6% and 3% respectively, while Captain Morgan gained share in rum driven by Captain Morgan White Rum.  Smirnoff saw improved consumer offtake driven by promotional activities and the new campaign and packaging, with the core brand gaining share.  Consumer demand for more authentic deluxe brands continued and our reserve brand business grew 10%, with strong performance from Don Julio and Bulleit which both outperformed their categories and gained share. In DGUSA net sales were broadly flat as ready to drink performance stabilised and the success of Guinness Blonde American Lager contributed to overall growth of the Guinness brand.  Diageo Canada has already seen some benefit from our new distribution system with net sales up 1%. Brand investment was up 3% focused on our innovation launches and Smirnoff.  Gross margin was negatively impacted by lower scotch shipments together with the one off impact on net sales from the change in the distribution system in Canada. This was only partially offset by lower overheads in the region and operating margin declined by 35 basis points.”

 

Key financials

 

First Half
F14
Reported
£ million

 

Exchange
£ million

 

Acquisitions
and
disposals
£ million

 

Organic
movement
£ million

 

First Half
F15
Reported
£ million

 

Reported
movement

%

 

Net sales

 

1,904

 

(25

)

(11

)

(1

)

1,867

 

(2

)

Marketing spend

 

293

 

(4

)

7

 

8

 

304

 

4

 

Operating profit before exceptional items

 

851

 

(21

)

(4

)

(7

)

819

 

(4

)

Exceptional items

 

(1

)

 

 

 

 

 

 

(11

)

 

 

Operating profit

 

850

 

 

 

 

 

 

 

808

 

(5

)

 

 

 

Organic

 

Organic

 

Reported

 

 

 

volume

 

net sales

 

net sales

 

 

 

movement (a)

 

movement

 

movement

 

Markets and categories

 

%

 

%

 

%

 

North America

 

(2

)

 

(2

)

 

 

 

 

 

 

 

 

US Spirits and Wines

 

(3

)

 

(1

)

DGUSA

 

(2

)

 

(1

)

Canada

 

 

1

 

(8

)

 

 

 

 

 

 

 

 

Spirits (b)

 

(2

)

 

(1

)

Beer

 

(3

)

(3

)

(5

)

Wine

 

2

 

1

 

1

 

Ready to drink

 

(1

)

1

 

(12

)

 

 

 

Organic

 

Organic

 

Reported

 

 

 

volume

 

net sales

 

net sales

 

 

 

movement (a)

 

movement

 

movement

 

Global giants and local stars (b)

 

%

 

%

 

%

 

Smirnoff

 

(5

)

(7

)

(8

)

Crown Royal

 

 

(1

)

(2

)

Captain Morgan

 

(7

)

(8

)

(9

)

Johnnie Walker

 

(4

)

(14

)

(15

)

Cîroc

 

27

 

27

 

26

 

Ketel One vodka

 

(1

)

(1

)

(1

)

Guinness

 

 

(1

)

(3

)

Baileys

 

(4

)

(6

)

(8

)

Tanqueray

 

 

2

 

1

 

Don Julio

 

13

 

21

 

20

 

Buchanan’s

 

30

 

32

 

31

 

Bulleit

 

52

 

59

 

58

 

 


(a)

Organic equals reported movement for volume except for North America (3)%, US Spirits and Wines (4)%, spirits (3)% and ready to drink (17)% reflecting the termination of the transitional arrangements following the disposal of Jose Cuervo.

(b)

Spirits brands excluding ready to drink.

 

 

19



Table of Contents

 

·

In US Spirits and Wines, which represents 82% of the net sales in the region, net sales were broadly flat, with 2.6pps of positive price/mix, driven by the double digit growth of reserve brands and innovation launches. Net sales in vodka grew 6% on the back of the successful launch of Cîroc Pineapple which resulted in an overall net sales growth of 28% for the Cîroc brand. High stock levels impacted Smirnoff net sales which were down 8%, however the relaunch of the brand with a new packaging and marketing campaign, coupled with targeted promotional activities have improved the core brand’s performance, which gained share. Captain Morgan net sales were down 9% as Captain Morgan Spiced Rum suffered from increasing competition in the spiced rum category and from lapping the launch of Captain Morgan White Rum last year, which performed well and gained share. Net sales in North American whiskey increased 3%, Bulleit continued to outperform the category with net sales up 58%, Crown Royal net sales declined 1%, with strong growth from the launch of Crown Royal Regal Apple offset by lapping the launch of Crown Royal XO in the same period last year. Johnnie Walker net sales were down 17% as it lapped the launch in the first half last year of super premium variants Johnnie Walker Platinum Label and Johnnie Walker Gold Label Reserve and the promotional activities and phasing of shipments in Johnnie Walker Black Label and Johnnie Walker Blue Label respectively. Buchanan’s net sales were up 33% as it continued to leverage its strong connection with the Hispanic community and it is now the second largest super premium scotch in value behind Johnnie Walker. Net sales of tequila were up 37%, driven by the continued success of Don Julio, with net sales up 21%, and the launches under Diageo’s ownership of the newly acquired Peligroso and DeLeón brands.

·

DGUSA net sales were broadly flat, with volume down 2%. Guinness net sales were up 1%, driven by the successful launch of Guinness Blonde American Lager, but the core brand was still impacted by the decline in the on trade. Ready to drink net sales were up 2% as it benefitted from comparison against last year’s destocking in the pouches segment.

·

Net sales in Canada benefitted from the change in distribution system and increased 1%, with volume broadly flat. Growth in Johnnie Walker Black Label and reserve brands partially offset the decline of Guinness, which was impacted by weakness in the on trade.

·

Marketing spend increased 3%, with the upweighted investment largely focused on supporting Smirnoff, with the new ‘Exclusively for Everybody’ campaign, innovations such as Cîroc Pineapple, Guinness Blonde American Lager, Crown Royal Regal Apple and Peligroso.

 

20



Table of Contents

 

Europe

 

“Diageo’s performance in Europe reflected a stable performance in Western Europe, strong growth in Turkey, and tough trading conditions in Russia and Eastern Europe.  In Western Europe, we continued our strategy to improve efficiency and invest behind our brands.  Great Britain, France and Italy were all in growth, driven by successful innovation launches and reserve brands, which were up double digit.  We continued to invest behind our route to consumer, which coupled with our focus on cost, enabled us to increase our coverage without increasing overheads.  In Turkey, net sales grew mainly through the continued premiumisation of the raki category, driven by Yenì Raki, the leading brand.  Share increased in the premium segment as a result of strong focus in the on trade.  Performance in Russia and Eastern Europe was significantly impacted by the economic environment in Russia, where consumer confidence is weak due to sanctions, currency devaluation and tighter credit.  In this challenging environment we gained share in scotch and rum.  Marketing spend was up 3%, up 44 basis points as a percentage of net sales, largely supporting the launch of Haig Club in Western Europe.  Margins in Western Europe were broadly flat, and despite weakness in Russia the strong performance of Turkey resulted in margin improvement of 30 basis points.

 

 

 

First Half
F14
Reported

 

Exchange

 

Acquisitions
and
disposals

 

Organic
movement

 

First Half
F15
Reported

 

Reported
movement

 

Key financials

 

£ million

 

£ million

 

£ million

 

£ million

 

£ million

 

%

 

Net sales

 

1,560

 

(92

)

(5

)

(4

)

1,459

 

(6

)

Marketing spend

 

231

 

(12

)

 

6

 

225

 

(3

)

Operating profit before exceptional items

 

509

 

(31

)

(1

)

3

 

480

 

(6

)

Exceptional items

 

 

 

 

 

 

 

 

(4

)

 

 

Operating profit

 

509

 

 

 

 

 

 

 

476

 

(6

)

 

 

 

Organic

 

Organic

 

Reported

 

 

 

volume

 

net sales

 

net sales

 

 

 

movement (a)

 

movement

 

movement

 

Markets and categories

 

%

 

%

 

%

 

Europe

 

(1

)

 

(6

)

 

 

 

 

 

 

 

 

Western Europe

 

(1

)

 

(4

)

Russia and Eastern Europe

 

(8

)

(12

)

(25

)

Turkey

 

5

 

11

 

(1

)

 

 

 

 

 

 

 

 

Spirits (b)

 

(1

)

 

(8

)

Beer

 

 

 

(4

)

Wine

 

4

 

2

 

(3

)

Ready to drink

 

(5

)

2

 

 

 

 

 

Organic

 

Organic

 

Reported

 

 

 

volume

 

net sales

 

net sales

 

 

 

movement (a)

 

movement

 

movement

 

Global giants and local stars (b)

 

%

 

%

 

%

 

Guinness

 

(2

)

(1

)

(4

)

Johnnie Walker

 

(10

)

(13

)

(20

)

Smirnoff

 

(3

)

(5

)

(8

)

Yenì Raki

 

(2

)

10

 

(2

)

Baileys

 

(3

)

(4

)

(10

)

JεB

 

(2

)

(5

)

(10

)

Captain Morgan

 

7

 

6

 

(2

)

 


(a)         Organic equals reported movement for volume.

(b)         Spirits brands excluding ready to drink.

 

 

21



Table of Contents

 

·                  Western Europe net sales were broadly flat as the performance of individual markets continued to reflect the mixed economic recovery across Europe.

·                  In Great Britain, net sales increased 2% with 2pps of positive price/mix, driven by strong growth of ready to drink and reserve brands. Innovation, including the launches of Haig Club and Cîroc Amaretto, and increased consumer focused activations such as the Global World Class Finals in London last summer and the London cocktail week, were the main drivers of the 50% net sales growth in reserve brands. In the more price competitive standard segment, Captain Morgan and Baileys performed well with net sales up 6% and 2% respectively.  Smirnoff net sales were flat, as it lapped the launch of Smirnoff Gold last year but with good performance from Smirnoff Red, which was up 3% and gained share.  Net sales in beer were down 2% as Guinness was impacted by weakness in the on trade, however it maintained share.  Ready to drink net sales were up 23% principally driven by Captain Morgan Original Spiced,  Gordon’s & Tonic  and Gordon’s Slimline & Tonic.

·                  In Ireland, net sales declined 2%, largely driven by the transfer of sales of wines to Diageo Wines Europe which was worth 2pps of growth.  Guinness net sales were up 1%, growing after more than six years of decline. The growth came from increased focus on execution in the on trade, partially offset by softness in spirits following last year’s duty increase.

·                  In Southern Europe, net sales declined 1% with 0.5pps of positive price/mix. While still a challenging trading environment, the performance in these countries has improved, as Italy and Greece were in growth and the decline in Spain moderated to 2%. In Spain, category performance was mixed with Tanqueray and Smirnoff net sales up 24% and 7% respectively, however largely offset by a soft performance of Johnnie Walker.  Reserve brands performed well and net sales grew double digit with a strong performance from scotch malts, Cîroc, which nearly trebled in Italy, and Zacapa.

·                  Net sales in Germany and Austria declined 13%. In Germany, net sales were down 9% largely driven by commercial negotiations and the transfer of sales of Yenì Raki to Mey İçki, which was worth 5pps of growth.  Scotch net sales declined 12% due to Johnnie Walker Black Label performance lapping a year of upweighted marketing investments. In Austria, performance was impacted by the comparison against the prior period which saw forward buying ahead of the January 2014 duty increase.

·                  In France net sales increased 2%, driven by a good performance in scotch malts and reserve brands. Smirnoff and Baileys were impacted by a competitive pricing environment and both net sales declined 7%, while Captain Morgan continued to perform well and doubled its net sales following its successful launch last year.

·                  Net sales in Benelux decreased 12% mainly driven by price realignment in Johnnie Walker and Smirnoff with both brands gaining share.

·                  Diageo Wines Europe net sales increased 7%, driven by strong growth in [yellow tail], expansion in other countries and the transfer of sales of wines from Diageo Ireland, which was worth 2pps of growth.  Blossom Hill net sales were down 1% as it lapped prior year strong promotional activities.

·                     The consumer environment in Russia and Eastern Europe has been severely impacted by the economic and political events there and net sales declined 12%.  Scotch, Diageo’s largest category in Russia, was hardest hit and declined 17%, although Johnnie Walker Red Label maintained its leadership position in standard scotch, and White Horse gained share.  Locally produced innovations, Rowson’s Reserve, an Irish whiskey drink, and Shark Tooth, which competes in rum, were successful with distribution gains and strong rates of sales, and Shark Tooth is now the third largest brand in the category in its second year in the market.  In Poland, net sales declined 18% as there was forward buying before an excise duty increase in the comparable period.  Johnnie Walker regained its leadership position in whisk(e)y, but net sales declined 24% and while depletions stabilised, Smirnoff Black was down 35%.  In Eastern Europe the conflict in Ukraine and route to market disruptions in Kazakhstan and Azerbaijan led to double digit net sales decline on Johnnie Walker Red Label and Baileys.  This was partially offset by the strong performance of Captain Morgan across Eastern Europe resulting in a net decline of 7%.

·                      Net sales in Turkey were up 11%, driven by raki and included the transfer of sales from the German former distributor to Mey İçki which was worth 2pps of growth.  Yenì Raki continued to drive premiumisation with Yenì Seri in the premium segment and Yenì Raki Ala in the super premium segment, recruiting consumers through perfect serve trade activations and limited edition innovations.  Tekirdağ gained share and a new ultra premium variant, Tekirdağ No: 10, was launched to reinforce the upper end of Diageo’s raki range.  The lower priced raki portfolio reached its highest market share in three years, driven by distribution gains and consumption shifting to lower priced tiers following excise duty increases.  Diageo’s international spirits continued to gain share with Johnnie Walker and the whiskey portfolio up 50 and 130 basis points respectively.

·                      Marketing spend in the region increased 3% largely driven by increased spend in Western Europe, up 4%, focused on innovations, including the launch of Haig Club, and reserve brands. In Russia and Eastern Europe, marketing spend declined 4%, reflecting the challenging macroeconomic environment, and spend was focused on driving penetration, awareness and trial as opposed to image building, with accelerated spend in digital.  In Turkey, marketing spend declined slightly as the mix of programmes changed following the introduction of greater restrictions in advertising legislation and spend was also cut from non-core categories such as wine and re-directed to higher priorities such as raki and scotch initiatives.

 

22



Table of Contents

 

Africa

 

“Our overall performance in Africa has improved, with net sales up 5%.  We have begun to lap the excise duty change on Senator in Kenya in the half, performance in our Africa Regional Markets has improved as beer in Ghana and Cameroon is in good growth, we have delivered strong growth in spirits in Angola as a result of improved route to consumer and our performance in Nigeria improved.  Nigeria remains a challenging market, though, as consumers continue to trade down into value beer.  However, the successful launch of Orijin and the improved performance of Satzenbrau drove growth in beer despite softness in other brands and destocking.  In South Africa Smirnoff 1818 and Johnnie Walker delivered very strong performances.  Spirits in Africa were up 19% with double digit growth in every market, driven by both mainstream international spirits and our strong local spirits brands.  Across Africa we have continued to build our route to consumer and invested in our brands, with marketing spend up 12%, driven by the global Guinness platform ‘Made of More’ and our latest execution ‘Made of Black’.  Reserve has gone from strength to strength with net sales up 25% and we have driven out costs from all of our markets.  Operating margin however was down 26 basis points.  Mix in South Africa and price and mix in East Africa drove margin improvement in these two markets, but margin declined in Nigeria and despite strong margin expansion in Ghana and Angola, net sales declines in other countries in Africa Regional Markets eroded margin for that market.”

 

Key financials

 

First half
F14
Reported
£ million

 

Exchange
£ million

 

Acquisitions
and
disposals
£ million

 

Organic
movement
£ million

 

First half
F15
Reported
£ million

 

Reported
movement

%

 

Net sales

 

774

 

(67

)

 

39

 

746

 

(4

)

Marketing spend

 

81

 

(5

)

 

9

 

85

 

5

 

Operating profit before exceptional items

 

188

 

(20

)

 

7

 

175

 

(7

)

Exceptional items

 

(2

)

 

 

 

 

 

 

(1

)

 

 

Operating profit

 

186

 

 

 

 

 

 

 

174

 

(6

)

 

 

 

Organic

 

Organic

 

Reported

 

 

 

volume

 

net sales

 

net sales

 

 

 

movement (a)

 

movement

 

movement

 

Markets and categories

 

%

 

%

 

%

 

Africa

 

9

 

5

 

(4

)

 

 

 

 

 

 

 

 

Nigeria

 

14

 

1

 

(6

)

East Africa

 

7

 

11

 

5

 

Africa Regional Markets

 

15

 

16

 

(3

)

South Africa

 

2

 

(6

)

(16

)

 

 

 

 

 

 

 

 

Spirits (b)

 

25

 

19

 

9

 

Beer

 

1

 

5

 

(4

)

Ready to drink

 

(37

)

(32

)

(38

)

 

 

 

Organic

 

Organic

 

Reported

 

 

 

volume

 

net sales

 

net sales

 

 

 

movement (a)

 

movement

 

movement

 

Global giants and local stars (b)

 

%

 

%

 

%

 

Guinness

 

(9

)

(11

)

(19

)

Malta

 

(12

)

(15

)

(26

)

Johnnie Walker

 

19

 

15

 

8

 

Smirnoff

 

21

 

18

 

6

 

Tusker

 

(3

)

13

 

7

 

Harp

 

(39

)

(52

)

(55

)

Senator

 

(28

)

(33

)

(36

)

 


(a)         Organic equals reported movement for volume.

(b)         Spirits brands excluding ready to drink.

 

 

23



Table of Contents

 

·                  In Nigeria, volume and net sales were up driven by the national launch of Orijin, for which extra capacity has been introduced to support growth, but performance of the beer portfolio remained relatively flat as the stout category continued to lose share to lager which impacted Guinness. Value lagers outperformed the mainstream and premium segments, which benefitted Satzenbrau but exacerbated pricing issues and the planned destocking of Harp.  While spirits net sales were up 29% in total, driven by strong local spirits performance, international spirits net sales declined by approximately a third as a result of a strategic decision to reduce inventory levels in the market.

·                  East Africa’s performance, with volume and net sales up 7% and 11% respectively was driven by robust performances in both beer and spirits.  Double digit net sales growth of both Tusker and Guinness for East Africa, along with value offerings Balozi in Kenya and Kibo Gold in Tanzania, more than offset the continued decline of Senator that resulted from excise duty changes in the comparable period and accounted for 5pps of net sales growth.  Spirits net sales growth was driven by Kane Extra and Johnnie Walker, which benefitted from increased distribution and new ‘Tavern Packs’ which combine 20 cl pack sizes of Red Label with ginger beer and a cup and are targeted at premium pubs and mainstream outlets that previously did not stock the brand.

·                  In Africa Regional Markets net sales grew 16%. Spirits performance in Angola recovered with the implementation of a new route to consumer strategy and the appointment of a new distributor.  In Ghana, Malta also benefitted from an improved route to consumer, along with a new advertising campaign and new packaging launched in the previous fiscal year that have driven 2.4pps of share gains.  Spirits in Ghana also performed well, up over 50%, driven by Johnnie Walker and Baileys.  Both beer and spirits in Cameroon were key drivers of performance, with share gains from Harp, a resilient Guinness performance despite short term supply constraints and Johnnie Walker which more than doubled net sales.  In the rest of Africa Regional Markets, the strong net sales growth of Malta was offset by the decline of Meta in Ethiopia in an increasingly competitive pricing environment.

·                  In a challenging economic environment, net sales in South Africa were down 6%.  This was driven by Smirnoff Ice Double Black and Guarana as the brand lapped very strong net sales and high stock levels in the comparable period, and transferred to DHN in the second quarter of this fiscal year. The underlying performance of the business was driven by spirits, notably Smirnoff 1818, which was up 23% with new packaging and sampling programmes.  Johnnie Walker also delivered a strong performance with Black Label and Red Label net sales up 13% and 17% respectively, supported by the ‘King of Flavours’ and ‘Johnnie and Ginger’ campaigns that focus on quality and liquid credentials.

·                  Marketing spend in Africa increased 12%.  Net sales of spirits was up 19% supported by a double digit increase in investment driven by South Africa where spend was significantly upweighted on vodka, both Smirnoff 1818 and Cîroc, as well as scotch and local spirits in East Africa.  A marketing services agreement with the new distributor in Angola drove spirits marketing spend efficiencies.  Spend on beer was up 6% as investments on Guinness and the ‘Made of More’ platform increased 20%, and Orijin was rolled out nationally in Nigeria.

 

24



Table of Contents

 

Latin America and Caribbean

 

“In LAC we have delivered a good performance across the domestic business while the border business remains challenging.  Currency volatility continues to impact underlying demand in the border trade and therefore inventory levels reduced to reflect this. Together with reduced imports into Venezuela, this has impacted net sales of our scotch brands which were down 7% in the half.  A strong contribution from our domestic markets mitigated the impact on net sales. In Venezuela, the actions we are taking to maximise our import and local portfolios, given limited access to foreign exchange, delivered net sales growth.  In Brazil, our decision to harmonise interstate price variances and our continued work on route to consumer led to inventory reduction in the distributor channel, the impact of which was partially offset by price increases.  Performance in Colombia was strong with share gains, and in Mexico the strength of our scotch portfolio delivered good growth.  Chile, Peru and Jamaica benefitted from our route to consumer interventions and all delivered good growth.  A reduction in overheads, particularly in Venezuela, led to an operating margin increase of 2.3 percentage points for the region.”

 

Key financials

 

First half
F14
Reported
£ million

 

Exchange
£ million

 

Acquisitions
and
disposals
£ million

 

Organic
movement
£ million

 

First Half
F15
Reported
£ million

 

Reported
movement

%

 

Net sales

 

900

 

(277

)

 

(4

)

619

 

(31

)

Marketing spend

 

123

 

(16

)

 

3

 

110

 

(11

)

Operating profit before exceptional items

 

386

 

(192

)

 

13

 

207

 

(46

)

Exceptional items

 

(1

)

 

 

 

 

 

 

(4

)

 

 

Operating profit

 

385

 

 

 

 

 

 

 

203

 

(47

)

 

 

 

Organic

 

Organic

 

Reported

 

 

 

volume

 

net sales

 

net sales

 

 

 

movement (a)

 

movement

 

movement

 

Markets and categories

 

%

 

%

 

%

 

Latin America and Caribbean

 

(10

)

(1

)

(31

)

 

 

 

 

 

 

 

 

PUB

 

(9

)

 

(7

)

Venezuela

 

(44

)

6

 

(79

)

Colombia

 

10

 

12

 

2

 

Mexico

 

4

 

7

 

 

West LAC

 

(11

)

(11

)

(17

)

 

 

 

 

 

 

 

 

Spirits (b)

 

(11

)

(4

)

(34

)

Beer

 

8

 

19

 

7

 

Wine

 

(14

)

(3

)

(29

)

Ready to drink

 

2

 

30

 

(10

)

 

 

 

Organic

 

Organic

 

Reported

 

 

 

volume

 

net sales

 

net sales

 

 

 

movement (a)

 

movement

 

movement

 

Global giants and local stars (b)

 

%

 

%

 

%

 

Johnnie Walker

 

(13

)

(10

)

(24

)

Buchanan’s

 

(13

)

(4

)

(50

)<