UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 6-K
 
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
 
25 January 2018
 
Commission File Number:  001-10691
 
DIAGEO plc
(Translation of registrant’s name into English)
 
 
Lakeside Drive, Park Royal, London NW10 7HQ
(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  
 
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):   
 
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):   
 
 
 
 
Interim results, six months ended 31 December 2017
25 January 2018
 
Strong performance reflects consistent and rigorous execution of our strategy
 
 
 
●            Reported net sales (£6.5 billion) and operating profit (£2.2 billion) were up 1.7% and 6.1%, respectively, as organic growth was partially offset by adverse exchange
 
●            All regions contributed to broad based organic net sales growth, up 4.2%, and organic volume grew 1.8%
 
●            Organic operating profit grew 6.7%, ahead of top line growth, as higher marketing investment was more than offset by efficiencies from our productivity programme
 
●            Cash flow continued to be strong and in line with last year, with net cash from operating activities at £1.2 billion and free cash flow at £1 billion
 
●            Basic eps of 82.2 pence was up 36.3%. Pre-exceptional eps was 67.8 pence, up 9.4%, driven by higher organic operating profit and lower finance charges
 
●            The interim dividend increased 5% to 24.9 pence per share
 
See explanatory notes for explanation of the use of non-GAAP measures.
 
Ivan Menezes, Chief Executive, commenting on the results said:
 
 
"These results demonstrate continued positive momentum from the consistent and rigorous execution of our strategy. We have delivered broad based improvement in both organic volume and net sales growth. We have increased investment behind our brands and expanded organic operating margin through our sustained focus on driving efficiency and effectiveness across the business.
 
By consistently delivering on our six strategic priorities, Diageo continues to get stronger: we have better consumer insight through superior analytics, improved execution on brand and commercial plans and have embedded everyday efficiency across the business through our productivity initiatives. This has enabled continued growth, improved agility, and consistent cash flow generation.
 
Our financial performance expectations for this year remain unchanged. We are confident in our ability to deliver consistent mid-single digit top line growth and 175bps of organic operating margin improvement in the three years ending 30 June 2019."
 
 
 
 
Key financial information
Six months ended 31 December 2017
 
Summary financial information
 
 
F18 H1
F17 H1
Organic
growth
%
Reported growth
%
Volume
EUm
126.4
129.4
2
(2)
Net sales
£ million
6,530
6,421
4
2
Marketing
£ million
968
908
7
7
Operating profit before exceptional items
£ million
2,190
2,065
7
6
Exceptional operating items(i)
£ million
-
-
 
 
Operating profit
£ million
2,190
2,065
 
6
Share of associate and joint venture profit after tax
£ million
168
171
 
(2)
Exceptional non-operating gain(i)
£ million
-
20
 
 
Net finance charges
£ million
154
182
 
 
Exceptional taxation credit(i)
£ million
360
-
 
 
Tax rate including exceptional items
%
3.5
21.0
 
(83)
Tax rate before exceptional items
%
19.8
20.9
 
(5)
Discontinued operations (after tax)(i)
£ million
-
(55)
 
 
Profit attributable to parent company's shareholders
£ million
2,058
1,514
 
36
Basic earnings per share
pence
82.2
60.3
 
36
Earnings per share before exceptional items
pence
67.8
62.0
 
9
Interim dividend
pence
24.9
23.7
 
5
(i)   For further details of exceptional items and discontinued operations items see additional financial information.
 
 
Outlook for exchange
Using exchange rates £1 = $1.39; £1 = €1.13, the exchange rate movement for the year ending 30 June 2018 is estimated to adversely impact net sales by approximately £460 million and operating profit by approximately £60 million.
 
Outlook for tax
The tax rate before exceptional items for the six months ended 31 December 2017 was 19.8% compared with 20.9% in the prior comparable period. Our current expectation is that the tax rate before exceptional items for the year ending 30 June 2018 will be approximately 20%, a 1ppt improvement versus our prior guidance. The decrease between our prior expectation and the estimated tax rate for the year ending 30 June 2018 is principally driven by the headline rate reduction in the United States introduced by the Tax Cuts and Jobs Act enacted on 22 December 2017. As for most multinationals the current tax environment is creating increased levels of uncertainty.
 
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. In the six months ended 31 December 2017, a total amount of £0.76 billion has been incurred to repurchase 29.5 million shares.
 
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 the 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 were up 1.7% with organic growth partially offset by unfavourable exchange. Organic net sales grew 4.2% driven by volume up 1.8% and positive price/mix
 
 
Net sales
£ million
F17 H1
6,421
Exchange(i)
(134)
Acquisitions and disposals
(17)
Volume
111
Price/mix
149
F18 H1
6,530
 (i)  Exchange rate movements reflect the translation of prior year reported results at current year exchange rates.
 
Reported net sales grew 1.7%, driven by organic growth which was partially offset by unfavourable exchange and impacts from acquisitions and disposals.
 
Organic volume growth of 1.8% and 2.4% positive price/mix drove 4.2% organic net sales growth. All regions reported organic net sales growth. 
 
 
 
 
Operating profit (£ million)
Reported operating profit grew 6.1%
Organic operating profit grew 6.7%
 
 
 
Operating profit
£ million
F17 H1
2,065
Exchange
(15)
Acquisitions and disposals
2
Organic movement
138
F18 H1
2,190
 
 
Reported operating profit was up 6.1% with organic growth partially offset by adverse exchange. Organic operating profit grew ahead of net sales at 6.7%.
 
 
Operating margin (%)
Reported operating margin increased 138bps
Organic operating margin increased 81bps
 
 
Operating margin
ppt
F17 H1
32.2
Exchange
0.45
Acquisitions and disposals
0.12
Gross margin
0.03
Marketing
(0.44)
Other operating expenses
1.22
F18 H1
33.5
Reported operating margin increased 138bps driven by organic operating margin improvement and positive impact on operating margin from exchange, due to the stronger negative impact of exchange on net sales relative to operating profit.  Organic operating margin improved 81bps driven by our productivity programme partially offset by higher marketing spend.
 
 
Basic earnings per share (pence)
Basic eps increased 36.3% from 60.3 pence to 82.2 pence due to exceptional tax credit
Eps before exceptional items increased 9.4% from 62.0 pence to 67.8 pence
 
Basic earnings per share
pence
F17 H1
60.3
Exceptional items after tax
13.8
Discontinued operations after tax
2.2
Exchange on operating profit
(0.6)
Organic operating profit growth(ii)
5.5
Associates and joint ventures
(0.1)
Net finance charges
1.1
Tax
(0.3)
Other
0.3
F18 H1
82.2
(i)   Excluding exchange
 
Basic eps was positively impacted by the remeasurement of deferred tax liabilities in the United States resulting in an exceptional tax credit following the tax reduction in the United States under the Tax Cut and Jobs Act enacted on 22 December 2017.
 
Eps before exceptional items increased 5.8 pence, as organic operating profit growth and lower finance charges, more than offset the negative impact of exchange and higher tax expense.
 
 
Free cash flow (£ million)
Net cash from operating activities(i) was £1,248 million, a decrease of £19 million compared to the same period last year. Free cash flow was £1,029 million, a decrease of £55 million
 
 
Free cash flow
£ million
F17 H1
1,084
Capex
(17)
Exchange(ii)
(15)
Operating profit(iii)
86
Working capital(iv)
(37)
Tax
(101)
Interest
21
Other(v)
8
F18 H1
1,029
(i)    Net cash from operating activities excludes net capex, movements in loans and other investments ((£219) million in 2017 - (£183) million in 2016).
(ii)   Exchange on operating profit before exceptional items.
(iii)  Operating profit excludes exchange, depreciation and amortisation, post employment charges and non-cash 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 £1 billion, although £55 million lower as growth in operating profit and improvements in operating working capital were offset by higher tax payments and increased investment in maturing inventory. Higher tax payments were driven by the one-off payment of £107 million made to HMRC for the preliminary UK tax assessment disclosed during the financial year ended 30 June 2017. The improvement in operating working capital was primarily driven by higher creditors.
 
 
 
Return on average invested capital (%)(i)
ROIC improved 77bps
 
Return on average invested capital
ppt
F17 H1
15.7
Exchange
0.10
Acquisitions and disposals
(0.10)
Organic operating profit growth
1.26
Associates and joint ventures
(0.20)
Tax
(0.18)
Other
(0.11)
F18 H1
16.5
(i)   ROIC calculation excludes exceptional items.
 
ROIC before exceptional items increased 77bps as organic operating profit growth was partially offset by the impact from associates and higher tax charges.
 
 
Reported growth by region
 
 
 
Volume
Net sales
Marketing
Operating profit(i)
 
%
EUm
%
£ million
%
£ million
%
 £ million
North America
2
0.4
1
11
6
20
1
8
Europe and Turkey
5
1.1
4
65
7
17
12
64
Africa
4
0.6
(4)
(34)
(1)
(1)
(9)
(12)
Latin America and Caribbean
8
0.9
3
21
10
10
6
13
Asia Pacific
(12)
(6.0)
3
43
8
14
22
57
Corporate
-
-
13
3
-
-
(6)
(5)
Diageo
(2)
(3.0)
2
109
7
60
6
125
 
 
Organic growth by region
 
 
 
Volume
Net sales
Marketing
Operating profit(i)
 
%
EUm
%
£ million
%
£ million
%
 £ million
North America
1
0.2
2
52
8
24
3
26
Europe and Turkey
5
1.1
4
68
6
14
12
62
Africa
4
0.6
2
13
2
2
(3)
(4)
Latin America and Caribbean
9
1.0
7
42
11
11
10
20
Asia Pacific
(1)
(0.7)
7
83
9
15
17
45
Corporate
-
-
8
2
-
-
(14)
(11)
Diageo
2
2.2
4
260
7
66
7
138
 
(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
Six months ended 31 December 2017
 
North America
 
North America delivered net sales growth of 2% with US Spirits growing 3%, continued growth in Diageo Beer Company USA (DBC USA) and Canada, and improvement in Travel Retail. In US Spirits, category share gains were achieved for all key brands except in vodka. North American whisk(e)y net sales grew 4%. Crown Royal grew 4% with Crown Royal Deluxe and Crown Royal Regal Apple growth accelerating, partially offset by Crown Royal Vanilla lapping its launch in the first half of last year. Bulleit continued its strong growth. Scotch grew 3% with Johnnie Walker growing 5%. Captain Morgan and Baileys continued their growth momentum. Vodka net sales declined 8% primarily driven by Cîroc and Ketel One vodka. Smirnoff net sales were down 2%, a slower decline than last year. Don Julio growth accelerated with net sales growing 39%. DBC USA net sales grew 2% with ready to drink growing 4% and beer declining 1%. Net sales in Canada were up 1%. Marketing in North America increased 8% and grew ahead of net sales as investment was up-weighted in the first half. Operating margin improved 6bps as positive mix and productivity initiatives delivered gross margin expansion with zero based budgeting and organisational effectiveness changes driving lower overhead cost, largely offset by increased marketing. 
 
Key financials £ million:
 
F17 H1
FX
Reclassifi-
cation(i)
Acquisitions
and
disposals
Organic movement
F18 H1
Reported movement  
%
 Net sales
2,172
(74)
13
20
52
2,183
1
 Marketing
318
(6)
-
2
24
338
6
 Operating profit
1,019
(31)
11
2
26
1,027
1
(i)   Reclassification includes 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
2
1
 
 Crown Royal
2
3
-
 
 
 
 
 
 
 Smirnoff
(2)
(2)
(5)
 US Spirits
1
1
3
-
 
 Captain Morgan
3
3
-
 DBC USA
2
2
2
(4)
 
 Johnnie Walker
4
9
9
 Canada
(2)
(2)
1
1
 
 Ketel One vodka
(8)
(13)
(16)
 
 
 
 
 
 
 Cîroc
(6)
(11)
(14)
 Spirits
1
2
4
1
 
 Baileys
16
17
14
 Beer
(1)
(1)
1
(2)
 
 Guinness
-
2
(1)
 Ready to drink
5
5
3
-
 
 Tanqueray
10
8
5
 
 
 
 
 
 
 Don Julio
36
39
34
 
 
 
 
 
 
 Bulleit
8
9
5
 
 
 
 
 
 
 Buchanan's
7
3
(1)
(i)   Spirits brands excluding ready to drink.
(ii)  Organic equals reported volume movement except Johnnie Walker 6%.
 
 
●     Net sales in US Spirits were up 3%. Net sales were marginally ahead of depletions. Crown Royal and Bulleit continued share gains in the North American whisk(e)y category. The Generosity platform is working for Crown Royal, driving gains in equity and category share. Crown Royal net sales grew 4% with acceleration in Crown Royal Deluxe and Crown Royal Regal Apple growth partially offset by Crown Royal Vanilla cycling its launch in the first half of last year. Johnnie Walker grew 5% as investment continued in the successful 'Keep Walking America' platform, scaled up 'liquid on lips' and highlighted Johnnie Walker Blue Label in the gifting occasion. Buchanan's grew 2% as it lapped a strong depletion performance in the first half of last year. Vodka decline was driven primarily by Cîroc and Ketel One vodka declining 12% and 13%, respectively. Execution of improved plans on Cîroc and Ketel One vodka started in the first half and are expected to take time to impact performance. Smirnoff net sales performance improved versus last year and brand equity scores improved as it continued to remind consumers that it is a quality vodka at a great price through a campaign involving celebrity influencers, new packaging with quality cues and local activation against multi-cultural millennial consumers. The 'Live like a Captain'  campaign is resonating well with consumers and driving strong category share and equity gains for Captain Morgan. Baileys growth accelerated versus last year with the launch of a new campaign reminding consumers of its indulgent treat positioning over the holidays. Don Julio net sales grew 39% with growth and category share gains accelerating versus last year.
●     DBC USA net sales increased 2% with ready to drink growing 4% and beer declining 1%. Ready to drink growth was driven by continued growth of Smirnoff Ice Spiked and Smirnoff Spiked Sparkling Seltzer which were launched last year. Beer declined 1% with Guinness net sales flat and declines on Smithwick's ale and Harp lager.
●     Net sales in Canada grew 1% driven by growth on 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 launch of Hop House 13 Lager.
●     Marketing grew 8% with upweight in marketing investment funded largely from productivity initiatives.
 
 
 
 
Europe and Turkey
 
 
The region delivered 4% net sales growth.  In Europe, net sales were up 4% largely driven by Great Britain and Continental Europe, with continued share gains in spirits, up 20bps. Growth was broad based across all key categories, but primarily driven by gin, where Tanqueray gained share in a growing category and Gordon's benefitted from the launch of its Pink variant. Guinness was up 4%.  Net sales of Captain Morgan grew double digit and the brand continued to gain share in the category. Scotch net sales were up 2% led by growth in Russia and Europe Partner Markets partially offset by weakness in JeB in Iberia.  Reserve brands continued to deliver a good performance with net sales up  8% largely driven by Cîroc, Zacapa and Bulleit. In Turkey, net sales were up 10% largely driven by price increases across categories. Operating margin improved 239bps as an up-weight in marketing investment was offset by the on-going productivity initiatives and lapping other one-off operating costs.
 
 
Key financials £ million:
 
F17 H1
FX
Reclassifi-
cation(i)
Acquisitions
and
disposals
Organic movement
F18 H1
Reported movement  
%
 Net sales
1,534
2
(3)
(2)
68
1,599
4
 Marketing
229
3
-
-
14
246
7
 Operating profit
535
4
(2)
-
62
599
12
(i)   Reclassification includes a reallocation of the results of the Travel Retail operations to the geographical regions.
 
 
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
3
4
6
 and Turkey
5
5
4
4
 
 Johnnie Walker
4
4
8
 
 
 
 
 
 
 Smirnoff
(1)
(1)
-
 Europe(i)
5
7
4
9
 
 Baileys
5
1
3
 Turkey
7
7
10
(8)
 
 Yenì Raki
2
7
(11)
 
 
 
 
 
 
 Captain Morgan
6
10
15
 Spirits
5
5
5
5
 
 JeB
(7)
(11)
(8)
 Beer
2
2
3
6
 
 Tanqueray
22
20
24
 Ready to drink
3
3
7
8
 
 
 
 
 
(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
 
  
●     In Europe, net sales were up 4%:
●     In Great Britain, net sales grew 7%, primarily driven by growth in gin and beer. Tanqueray delivered strong double digit net sales growth and gained 70bps of share and Gordon's benefitted from the launch of its Pink variant. Guinness net sales increased 8% and gained 20bps of share, driven by a strong performance in Guinness Draught and Hop House 13 Lager. Scotch net sales were up double digit mainly driven by scotch malts and Johnnie Walker supported by the seasonal "Christmas lights" campaign. Reserve brands continued to deliver double digit growth, with strong performance across brands, led by increased distribution in Cîroc and the launch of Cîroc French Vanilla. The business also partially benefitted from lapping prior year working capital efficiencies, including inventory reductions.
●     Net sales in Ireland were flat. Guinness grew 1% driven by the continued success of Hop House 13 Lager and the launch of the 'Behind every town' campaign across the country, offset by other beer brands where net sales declined 3%. In spirits, net sales were up 13% largely driven by strong performance in Gordon's and Tanqueray in gin.
●     In Continental Europe, net sales were up 3%:
●        Iberia net sales declined 7% due to a weak performance of JeB driven by category decline and increased competitive pressure.
●        In Central Europe, net sales grew 1%. Double digit growth in Tanqueray and improved performance of Johnnie Walker in Poland was partially offset by a soft performance in Baileys which lapped a strong performance the prior year with up-weighted promotional activities.
●        In Northern Europe net sales were up 2% as net sales growth in Nordics was partially offset by a 2% net sales decline in Benelux as the spirits category slowly began to recover following the duty increase in November 2016. 
●        In Mediterranean Hub, net sales were up 10% largely driven by Italy with broad growth across the spirits categories.
●        Europe Partner Markets grew net sales 12% driven by an expanded distribution footprint and performance improvement in Johnnie Walker.
●        Russia net sales grew 13% with 8.3pps of positive price/mix driven by price increases in the previous year. Growth was largely driven by scotch led by Johnnie Walker and also strong growth in Captain Morgan. 
●        In France, net sales were flat. Continued strong performance in Captain Morgan and Zacapa was offset by weakness in JeB and Smirnoff including ready to drink.
●    In Turkey, net sales grew 10% primarily driven by excise led price increases and good raki and vodka category performance. 
●    Marketing investment increased 6% focused on key growth opportunities for the region in Guinness, Johnnie Walker, reserve and gin. Productivity benefits continued to improve the efficiency and effectiveness of the investment.
 
 
 
 
 
Africa
 
 
Africa net sales increased 2%. Performance was mixed as double digit growth in Nigeria was partially offset by weakness in Africa Regional Markets and South Africa. In East Africa, our biggest market in the region, net sales were flat as performance was impacted by the uncertainty following the presidential election in Kenya. Across Africa,  beer net sales were up 5%, as weakness in Kenya was offset by strong growth of Dubic in Nigeria and the successful launch of Serengeti Lite in Tanzania. Guinness and Malta Guinness also delivered good growth with net sales up 3% and 9% respectively. Mainstream spirits continued to deliver strong double digit growth driven by solid performance in East Africa and Nigeria. Scotch net sales declined 7% largely driven by challenges within the third party distributor network in Cameroon. Operating margin declined by 79bps driven by adverse price-mix, partially offset by productivity savings in supply, lower indirect spend as well as organisational effectiveness benefits.
 
 
 Key financials £ million:
 
F17 H1
FX
Acquisitions
and
disposals
Organic movement
F18 H1
Reported movement  
%
 Net sales
808
(47)
-
13
774
(4)
 Marketing
84
(3)
-
2
83
(1)
 Operating profit
132
(8)
-
(4)
120
(9)
 
 
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
4
4
2
(4)
 
 Guinness
(1)
3
(4)
 
 
 
 
 
 
 Johnnie Walker
(2)
(7)
(9)
 East Africa
4
4
-
(5)
 
 Smirnoff
3
(13)
(14)
 Africa Regional
 Markets
(6)
(6)
(4)
(8)
 
 
 
 
 
 Nigeria
17
17
20
-
 
Other beer:
 South Africa
4
4
(2)
(2)
 
 
 
 
 
 
 
 
 
 
 
 Malta Guinness
(2)
9
(5)
 Spirits
12
12
(1)
(4)
 
 Tusker
2
1
(5)
 Beer
-
-
5
(4)
 
 Senator
(16)
(16)
(21)
 Ready to drink
(8)
(8)
(5)
(9)
 
 Satzenbrau
(22)
(7)
(22)
(i)   Spirits brands excluding ready to drink.
(ii)  Organic equals reported volume movement.
 
 
●     In East Africa, net sales were flat, as performance was impacted by the uncertainty following the presidential election in August 2017 in Kenya.  Beer net sales were flat as a decline in Senator Keg in Kenya was offset by the successful launch of Serengeti Lite in Tanzania. Despite the uncertain environment in its home market, Tusker grew 1% in East Africa supported by the 'Here's To Us' campaign and Guinness net sales increased 3%, as it leveraged activations around the English Premier League football matches. Mainstream spirits continued to deliver strong performance driven by improved distribution and increased marketing investment.
●     In Africa Regional Markets, net sales declined 4% with growth in beer offset by double digit decline in spirits largely driven by challenges within the third party distributor network in Cameroon. Beer net sales were up 1% driven by double digit growth in Malta Guinness supported by increased sampling activations, offset by double digit decline in Harp. In Ghana net sales increased 9% 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 2% largely driven by double digit decline in Smirnoff 1818 which was impacted by price increases and category decline in an increased competitive environment.
●    In Nigeria, net sales increased 20%. Beer net sales were up 23% as value beer continued to be the largest growth contributor driven by Dubic. Guinness net sales were up 14% as it benefitted from lapping a soft performance the prior year and the activation of the 'Be A Front Row Fan' which leveraged on the English Premier League matches. Malta Guinness net sales were up 6% supported by the launch of the 'Fuel Your Greatness' campaign. In spirits, net sales were up 22% through strong double digit growth in mainstream spirits driven by innovation launches and new formats.
●     Marketing investment increased 2% as the region benefitted from productivity initiatives. 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' and the launch of Serengeti Lite. South Africa increased investment behind the scotch portfolio.
 
 
 
 
 
Latin America and Caribbean
 
 
In Latin America and Caribbean net sales grew 7% with strong performance in PUB, Mexico, and PEBAC partially offset by a decline in Colombia, and weakness in the export channels.  All key spirits categories were in growth.  In scotch, net sales were up 2% with strong performance by Johnnie Walker and Black & White, which is recruiting new consumers across Brazil, Mexico and Colombia, partially offset by weak Old Parr performance in Colombia.  Don Julio delivered strong double digit growth, and Smirnoff net sales were also up double digit with the brand back in growth in Brazil, its largest market in the region.  In gin, Tanqueray drove category growth in Brazil and Mexico, and in rum net sales were up double digit with all key brands in growth.  Operating margin for the region increased 97bps as up-weighted investment in marketing was more than offset by productivity led overhead savings through organisational effectiveness programmes.
 
 
 Key financials £ million:
 
F17 H1
FX
Reclassifi-
cation(i)
Acquisitions
and
disposals
Organic movement
F18 H1
Reported movement  
%
 Net sales
628
(10)
(11)
-
42
649
3
 Marketing
99
(1)
-
-
11
109
10
 Operating profit
205
2
(9)
-
20
218
6
(i)   Reclassification includes 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
1
4
-
 Caribbean
9
8
7
3
 
 Buchanan's
(6)
-
(3)
 
 
 
 
 
 
 Smirnoff
15
14
12
 PUB
9
9
14
13
 
 Old Parr
(11)
(16)
(17)
 Mexico
7
6
12
12
 
 Baileys
(9)
(6)
(6)
 CCA
(6)
(6)
(6)
(6)
 
 Ypióca
12
7
6
 Andean
16
16
(1)
(12)
 
 Black & White
46
76
75
 PEBAC
31
31
17
18
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Spirits
8
8
7
4
 
 
 
 
 
 Beer
(5)
(5)
(5)
(2)
 
 
 
 
 
 Ready to drink
(8)
(8)
(1)
(4)
 
 
 
 
 
(i)   Spirits brands excluding ready to drink.
(ii)  Organic equals reported volume movement except for Johnnie Walker flat and Old Parr (12)% due to the reallocation of the Travel Retail
operations.
 
 
●    In PUB (Paraguay, Uruguay and Brazil), net sales increased 14%. In Brazil, growth was broad-based across all spirits categories. Scotch net sales were up 11% driven by continued activation on Black & White. In gin, Tanqueray tripled in value through increased activation and distribution and Smirnoff net sales increased 8% supported by new formats to drive accessibility.  Net sales in Paraguay and Uruguay continued to grow due to improved performance in the export channels.
●    In Mexico, net sales increased 12% driven by growth across all spirits categories. Reserve grew net sales 38% driven by Don Julio which gained 2.7pps of share. Scotch growth was fuelled by Black & White which continued its double digit growth. Johnnie Walker, the biggest brand in the market, gained share while Buchanan's performance was impacted by price increases.  Vodka net sales returned to growth with improved performance on Smirnoff 21 and the launch of Smirnoff X1.
●     In CCA (Caribbean and Central America), net sales declined 6%. Hurricanes Irma and Maria impacted performance in the domestic markets, where net sales increased 1%.  Export channels net sales declined 19% as market conditions remained challenging.
●    Andean (Colombia and Venezuela) net sales declined 1%. Colombia net sales were down 9% as recent tax regulations resulted in higher retail selling prices for premium imported whisky, and impacted the performance of Old Parr.  Negative price/mix was driven by expansion in the standard and primary segment where Johnnie Walker Red Label and Black & White are recruiting consumers from local spirits and capturing the down trading due to the impact of tax changes.  Overall Diageo Colombia gained share in scotch and consolidated its leadership position in the category. In Venezuela volume grew 26% largely driven by locally produced brands.  Net sales grew significantly faster as price increases offset high inflation.
●    PEBAC (Peru, Ecuador, Bolivia, Argentina and Chile) delivered net sales growth of 17%, mainly driven by Ecuador, where economic conditions have improved, and Argentina. In Argentina, net sales growth was led by Smirnoff, driven by increased distribution, and Johnnie Walker which gained 4.3pps of share.  Net sales also grew in Chile and Bolivia, partially offset by declines in Peru.
●     Marketing investment increased by 11%, driven by up-weighted investment on scotch across the portfolio with support focused behind Johnnie Walker and Black & White.
 
 
 
Asia Pacific
 
 
In Asia Pacific net sales grew 7% with strong growth in Greater China and solid performance in India, South East Asia, and Travel Retail Asia and Middle East.  This was partly offset by the continued contraction of the scotch category in Korea and a decline in net sales in Australia. Growth was broad based across most spirits categories.  Chinese white spirits continued to grow strong double digit driven by improved execution and expanded distribution.  Net sales in India grew 2% largely impacted by the Supreme Court ruling banning sales in certain outlets near state highways.  In scotch, net sales were up 5% as strong performance in Johnnie Walker more than offset the net sales decline in Windsor in Korea.  Net sales of reserve brands were up 29% largely driven by Chinese white spirits and strong growth in Johnnie Walker reserve variants. Gross margin for the region increased 39bps largely driven by India.  Operating margin increased 204bps driven by mix and productivity led overhead savings through both indirect spend and organisational effectiveness programmes. 
 
 
 
 Key financials £ million:
 
F17 H1
FX
Reclassifi
-cation(i)
Acquisitions
and
disposals
Organic movement
F18 H1
Reported movement  
%
 Net sales
1,255
(6)
1
(35)
83
1,298
3
 Marketing
174
(1)
-
-
15
188
8
 Operating profit
259
12
-
-
45
316
22
(i)   Reclassification includes a reallocation of the results of the Travel Retail operations to the geographical regions.
 
 
Markets:
 
 
 
 
 
Global giants and local stars(iii):
 
Organic
volume
movement(i)
Reported
volume
movement
Organic
net sales
movement
Reported
net sales
movement
 
 
Organic
volume
movement(iv)
Organic
net sales
movement
Reported
net sales
movement
 
%
%
%
%
 
 
%
%
%
 Asia Pacific
(1)
(12)
7
3
 
Johnnie Walker
14
13
14
 
 
 
 
 
 
McDowell's
(3)
3
(5)
 India
(3)
(15)
2
(4)
 
Windsor
(10)
(15)
(16)
 Greater China
29
29
32
32
 
Smirnoff
10
5
5
 Australia
(10)
(10)
(8)
(9)
 
Guinness
6
4
2
 South East Asia
8
27
10
7
 
Bundaberg
(13)
(8)
(9)
 North Asia
6
6
(5)
(8)
 
Shui Jing Fang(v)
69
75
72
 Travel Retail Asia
 and Middle East
29
28
27
32
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Spirits
(1)
(12)
8
5
 
 
 
 
 
 Beer(ii)
4
53
3
1
 
 
 
 
 
 Ready to drink
(13)
(13)
(11)
(12)
 
 
 
 
 
(i)   Difference between organic and reported volume for Asia Pacific is driven by the move to the franchise model for some popular segment brands in India.
(ii)  Following a review of group's reporting of volume an adjustment was made to include Malaysia and Singapore contract brew volume in the reported beer figures which increased the reported volume in Asia Pacific by 0.2 million equivalent cases for the six months ended 31 December 2016.
(iii)  Spirits brands excluding ready to drink.
(iv) Organic equals reported volume movement except for Guinness 54% and McDowell's (15)% which were impacted by a volume adjustment to include Malaysia and Singapore contract brew volume in the reported figures, and a change from an owned to a franchise model in India.
(v)  Organic growth figures represent total Chinese white spirits of which Shui Jing Fang is the predominant brand.
 
●     In India net sales increased 2% as growth from lapping the demonetisation and pricing benefits were offset by the impact of the Supreme Court ruling prohibiting the sale of alcohol in certain outlets near state highways and route to market changes in certain states.  Prestige and above net sales grew 6% driven by McDowell's No. 1, which was supported by the launch of its 'Never Drink and Drive' campaign, and Signature.  Scotch net sales were up 4% driven by Johnnie Walker and by Black Dog, which gained share in the category.  Rum net sales were up 2% and benefited from the national roll out of Captain Morgan.  Net sales in the popular brands segment declined 3% and now account for approximately 36% of the business. 
●     In Greater China net sales increased 32% despite the impact of the later Chinese New Year in 2018.  Chinese white spirits net sales grew 80% driven by improved execution and expanded distribution beyond our core provinces.  Scotch net sales declined as strong double digit growth in Mainland China, driven by Johnnie Walker and The Singleton, was more than offset by declines in Taiwan. In Taiwan scotch net sales were impacted by category decline and commercial challenges in the market.
●     Net sales in Australia were down 8% driven by working capital efficiencies, including inventory reductions, delivered with key customers.  Underlying performance in Bundaberg improved as it benefited from a packaging relaunch and the new 'Unmistakeably Ours' campaign launched in March 2017. The ready to drink category remains challenged, but recent innovation launches Bundaberg Lazy Bear and Smirnoff Pure continue to see solid growth.
●     In South East Asia, net sales increased 10% largely driven by strong double digit growth in Key Accounts and the Philippines where Johnnie Walker was supported by continued focus on route to consumer and occasion-driven activation.  Scotch net sales grew 19% with growth in all markets except Vietnam. In Thailand net sales increased 6% following the end of the mourning period for the death of the king.
●     In North Asia, net sales declined 5% as growth in Japan was offset by continued weakness in Korea.  In Korea net sales declined 9% as Windsor continued to be impacted by the scotch category decline as consumers move away from traditional on-trade occasions and look for alternatives with lower alcohol content.  This was partially offset by strong double digit net sales growth in the W range by Windsor, which plays in the lower ABV segment and by Guinness.  Japan net sales increased 2% with good performance in scotch offsetting decline in ready to drink.
●      Travel Retail Asia and Middle East net sales grew 27% as the Middle East lapped weak performance in the previous year as well as significant improvement in commercial activation and expanded distribution.
●      Marketing investment increased 9% driven by up-weighted investment in China and India.
 
 
 
 
CATEGORY AND BRAND REVIEW
 
Six months ended 31 December 2017
 
Key categories:
 
 
 
Organic
volume
movement(iii)
%
Organic
net sales
movement
%
Reported
net sales
movement
%
Spirits(i)
2
5
3
  Scotch
4
3
3
  Vodka(ii)
1
(3)
(6)
  North American whisk(e)y
1
4
-
  Rum(ii)
(1)
5
1
  Indian-Made Foreign Liquor (IMFL) whisky
(2)
1
(3)
  Liqueurs
5
5
5
  Gin(ii)
18
16
15
  Tequila
37
43
58
Beer
-
4
-
Ready to drink
(5)
(2)
(4)
(i)   Spirits brands excluding ready to drink.
(ii)  Vodka, rum, gin including IMFL brands.
(iii)  Organic equals reported volume movement except for spirits (3)%, rum (10)%, IMFL whisky (9)%, vodka (1)%, tequila 53%, gin 13% which were impacted by acquisitions and disposals and the move from an owned to a franchise model in India, and beer 2% which was impacted by an adjustment to include Malaysia and Singapore contract brew volume in the reported beer figures.
 
 
●     Scotch represents 27% of Diageo's net sales and was up 3% with broad based growth across all regions except Africa which was impacted by challenges within the third party distributor network in Cameroon. Johnnie Walker delivered a strong performance with net sales up 7% and primary scotch brands net sales increased 8% largely driven by Black & White in Latin America and Caribbean and Asia Pacific. Elsewhere Windsor net sales declined double digit as it continued to suffer from the category decline in Korea and Old Parr performance was impacted by tax regulation changes in Colombia. Net sales in scotch malts were up 3% with growth in North America, China Mainland, South East Asia and Travel Retail Asia and Middle East partially offset by weakness of The Singleton in Taiwan.
●     Vodka represents 11% of Diageo's net sales and declined 3% as good performance in Europe and Turkey, Latin America and Caribbean and Asia Pacific was offset by decline in North America and Africa. The net sales decline was driven predominantly by Cîroc and Ketel One vodka in North America. Smirnoff declined 1% driven by South Africa where Smirnoff 1818 was impacted by increased competitive pressure and Smirnoff net sales declined 14%. Smirnoff was also down 2% in US Spirits, partially offset by a good performance in most of our markets in Asia Pacific and Latin America and Caribbean.
●     North American whisk(e)y represents 9% of Diageo's net sales and grew 4%. Net sales in Crown Royal, our Canadian whisky, grew 3% and continued to gain share in US Spirits, its biggest market. Growth in American whiskeys was largely driven by Bulleit.
●     Rum represents 7% of Diageo's net sales and grew 5% with broad based growth across all regions. This was largely driven by Captain Morgan, up 6%, and Zacapa, up 21%, as both brands delivered good performance and share gains in our biggest markets: US Spirits and Europe.
●     IMFL whisky represents 5% of Diageo's net sales and grew 1%. Growth from successful relaunches of McDowell's No.1 and Signature were partially offset by declines of Bagpiper and Old Tavern in the declining popular segment.
●     Liqueurs represents 6% of Diageo's net sales and grew 5% 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.
●     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 43%. The performance was driven by strong double digit growth of Don Julio in US Spirits and Mexico.
●     Beer represents 15% of Diageo's net sales and grew 4%. Growth was largely driven by Guinness and Dubic, a value brand in Nigeria. Guinness net sales were up 4% with good performance in Europe, as the brand continued to benefit from the successful launch of the 'The Brewers Project' including Guinness Hop House 13 Lager, Nigeria and Korea. In East Africa performance of Senator was impacted by uncertainty following the presidential election in August 2017.
●     Ready to drink represents 5% of Diageo's net sales and declined 2%. Continued good performance in North America and Europe was largely offset by declines of Bundaberg and Smirnoff in Australia and Orijin in Nigeria and Ghana.
 
 
 
Global giants, local stars and reserve(i):
 
Organic
volume
movement(ii)
%
Organic
net sales
movement
%
Reported
net sales
movement
%
 
Global giants
 
 
 
 
Johnnie Walker
5
7
6
 
Smirnoff
2
(1)
(3)
 
Baileys
6
6
6
 
Captain Morgan
8
6
5
 
Tanqueray
16
16
15
 
Guinness
1
4
2
 
Local stars
 
 
 
 
Crown Royal
1
3
(1)
 
Yenì Raki
2
7
(11)
 
Buchanan's
(3)
1
(2)
 
JeB
(5)
(8)
(6)
 
Windsor
(11)
(15)
(16)
 
Old Parr
(11)
(15)
(16)
 
Bundaberg
(13)
(8)
(9)
 
Black & White
31
42
42
 
Ypióca
12
7
5
 
McDowell's
(3)
3
(6)
 
Shui Jing Fang(iii)
69
75
73
 
Reserve
 
 
 
 
Scotch malts
1
3
4
 
Cîroc
(2)
(6)
(9)
 
Ketel One vodka
(6)
(11)
(14)
 
Don Julio
35
42
38
 
Bulleit
10
11
8
 
(i)   Spirits brands excluding ready to drink.
(ii)  Organic equals reported volume movement except for McDowell's (15)%, which was impacted by the move from an owned to a franchise model in India, and Guinness 4% which was impacted by an adjustment to include Malaysia and Singapore contract brew volume in the reported beer figures
(iii)  Organic growth figures represent total Chinese white spirits of which Shui Jing Fang is the predominant brand.
 
●    Global giants represents 43% of Diageo's net sales and grew 5%. Growth was broad-based across all brands with the exception of Smirnoff whose net sales declined 1%.
●    Local stars represents 20% of Diageo's net sales and grew 5%, largely driven by strong growth of Chinese white spirits, Crown Royal in US Spirits and Black & White in Latin America and Caribbean. This was partially offset by declines of Windsor in Korea and Old Parr in Colombia.
●    Reserve brands represents 18% of Diageo's net sales and grew 11% largely driven by strong double digit growth in Chinese white spirits and Don Julio. Net sales of Johnnie Walker reserve variants were up 7%, driving the growth in scotch reserve brands. Double digit growth in Tanqueray No. Ten, Bulleit and Zacapa broadly offset declines in Ketel One vodka and Cîroc.
 
 
 
 
ADDITIONAL FINANCIAL INFORMATION
Six months ended 31 December 2017
 
SUMMARY INCOME STATEMENT
 
 
31 December
2016
Exchange
(a)
Acquisitions and disposals
(b)
Organic movement(i)
31 December
2017
 
£ million
£ million
£ million
£ million
£ million
Sales
9,615
(208)
(113)
640
9,934
Excise duties
(3,194)
74
96
(380)
(3,404)
Net sales
6,421
(134)
(17)
260
6,530
Cost of sales
(2,465)
92
29
(95)
(2,439)
Gross profit
3,956
(42)
12
165
4,091
Marketing
(908)
8
(2)
(66)
(968)
Other operating expenses
(983)
19
(8)
39
(933)
Operating profit
2,065
(15)
2
138
2,190
Non-operating items (c)
20
 
 
 
-
Net finance charges
(182)
 
 
 
(154)
Share of after tax results of associates and joint ventures
171
 
 
 
168
Profit before taxation
2,074
 
 
 
2,204
Taxation (d)
(436)
 
 
 
(77)
Profit from continuing operations
1,638
 
 
 
2,127
Discontinued operations (c)
(55)
 
 
 
-
Profit for the period
1,583
 
 
 
2,127
(i)   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, the Nigerian naira and the Kenyan schilling, 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 six months ended 31 December 2017 is set out in the table below.
 
 
 
Gains/(losses)
 
 
£ million
   Translation impact
 
(42)
   Transaction impact
 
27
Operating profit before exceptional items
(15)
   Net finance charges - translation impact
 
1
   Impact of IAS 21 and IFRS 9 on net other finance charges
3
Net finance charges
 
4
Associates - translation impact
 
6
Profit before exceptional items and taxation
(5)
 
 
 
 
Six months ended
 31 December 2017
Six months ended
 31 December 2016
Exchange rates
 
 
    Translation  £1 =
$1.32
$1.27
    Transaction £1 =
$1.41
$1.44
    Translation  £1 =
€1.12
€1.16
    Transaction £1 =
€1.17
€1.24
 
(b) Acquisitions and disposals
The acquisitions and disposals movement was primarily attributable to the comparable period movement where a number of brands in Indian states changed from being owned brands to being franchised and the acquisition of Casamigos Tequila, LLC (Casamigos), a super premium tequila based in the United States purchased on 15 August 2017.
 
(c) Exceptional items
There were no operating or non-operating exceptional items in the six months ended 31 December 2017. 
 
Non-operating items of £20 million in the six months ended 31 December 2016 comprised a net gain of £20 million before tax in respect of the sale of Diageo's wine interests in the United States.
 
See explanatory notes for the definition of exceptional items.
 
Discontinued operations in the six months ended 31 December 2016 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 six months ended 31 December 2017 was 3.5% compared with 21.0% for the six months ended 31 December 2016.
The significant decrease in the reported rate is driven by the remeasurement of deferred tax liabilities resulting in an exceptional tax credit of £360 million ($475 million), as a consequence of the reduction in the US Federal tax rate (from 35% to 21%) enacted by the Tax Cuts and Jobs Act (TCJA) in the United States on 22 December 2017.
The tax rate before exceptional items for the six months ended 31 December 2017 was 19.8% compared with 20.9% in six months ended 31 December 2016.
As at 30 June 2017 the expectation of the tax rate before exceptional items for the year ending 30 June 2018 was 21%. The current expectation is that the tax rate before exceptional items for the year ending 30 June 2018 will be approximately 20%.
The change in our expectation of the estimated tax rate for the year ending 30 June 2018 is principally driven by the application of the TCJA. In common with a number of other multinationals the current tax environment is creating increased levels of uncertainty.
 
(e) Dividend
The group aims to increase the dividend at each half-year and the decision as to the rate of the dividend increase is made with reference to dividend cover as well as the current performance trends including top and bottom line together with cash generation. Diageo targets dividend cover (the ratio of basic earnings per share before exceptional items to dividend per share) within the range of 1.8-2.2 times. For the year ended 30 June 2017 dividend cover was 1.7 times. It is expected that dividend increases will be maintained at roughly a mid-single digit rate until cover is back in range.
An interim dividend of 24.9 pence per share will be paid to holders of ordinary shares and ADRs on the register as of 23 February 2018. The ex-dividend date is 22 February 2018. This represents an increase of 5% on last year's interim dividend. The interim dividend will be paid to ordinary shareholders on 6 April 2018. Payment to US ADR holders will be made on 11 April 2018. A dividend reinvestment plan is available to holders of ordinary shares in respect of the interim dividend and the plan notice date is 14 March 2018.
 
(f) Share buyback
On 8 September 2017 the group commenced a share buyback programme to spend up to £1.5 billion to repurchase shares in the year ending 30 June 2018. At 31 December 2017 the group had purchased 28,739,449 ordinary shares for a cost of £742 million (including £4 million of transaction costs) and has funded the purchases through a combination of cash and short term commercial paper. A financial liability of £182 million has been established at 31 December 2017 representing 6,804,364 shares that are expected to be purchased by 24 January 2018. Of these shares 715,009 were purchased before 31 December 2017 for a cost of £19 million, but had not been paid by the period end.
 
 
MOVEMENT IN NET BORROWINGS AND EQUITY
 
Movement in net borrowings
 
 
2017
2016
 
£ million
£ million
Net borrowings at 30 June
(7,892)
(8,635)
Free cash flow (a)
1,029
1,084
Acquisition and sale of businesses (b)
(559)
(31)
Share buyback programme
(742)
-
Proceeds from issue of share capital
1
1
Net purchase of own shares for share schemes (c)
(28)
(49)
Dividends paid to non-controlling interests
(61)
(44)
Rights issue proceeds from non-controlling interests of subsidiary company
26
-
Net movements in bonds (d)
188
(461)
Net movements in other borrowings (e)
911
549
Equity dividends paid
(968)
(920)
Net (decrease)/increase in cash and cash equivalents
(203)
129
Net increase in bonds and other borrowings
(1,099)
(88)
Exchange differences (f)
47
(271)
Other non-cash items
(51)
(71)
Net borrowings at 31 December
(9,198)
(8,936)
 
(a)  See free cash flow for the analysis of free cash flow.
 
(b)  In the six months ended 31 December 2017 acquisitions and sale of businesses included $705 million (£548 million) in respect of the acquisition of Casamigos. The deferred consideration of $300 million (£233 million) is expected to be paid in tranches over the next ten years when Casamigos achieves certain performance targets.
In the six months ended 31 December 2016 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 £67 million (2016 - £86 million) less receipts from employees on the exercise of share options of £39 million (2016 - £37 million).
 
(d) In the six months ended 31 December 2017, the group issued bonds of €1,275 million (£1,136 million) and repaid bonds of $1,250 million (£948 million). In the comparable period the group repaid bonds of $600 million (£461 million).
 
(e) In the six months ended 31 December 2017 the net movement in other borrowings principally arose from the issue of commercial paper and cash movements on foreign exchange swaps and forwards. In the comparable period movements were driven by the settlements of the cross currency interest rate swaps and the cash movements of foreign exchange swaps and forwards.
 
(f) Decrease in net borrowings of £47 million is primarily driven by the favourable exchange differences on US dollar denominated borrowings partially offset by an adverse movement on euro denominated borrowings and an unfavourable change on foreign exchange swaps and forwards.
 
 
 
Movement in equity
 
 
2017
2016
 
£ million
£ million
Equity at 30 June
12,028
10,180
Profit for the period
2,127
1,583
Exchange adjustments (a)
(428)
304
Remeasurement of post employment plans including taxation
(86)
234
Rights issue proceeds from non-controlling interests of subsidiary company (b)
26
-
Dividends to non-controlling interests
(61)
(44)
Dividends paid
(968)
(920)
Share buyback programme
(924)
-
Other reserve movements
(24)
(84)
Equity at 31 December
11,690
11,253
 
(a) Movement in the six months ended 31 December 2017 primarily arose from exchange losses in respect of the Indian rupee, US dollar and the Turkish lira.
 
(b) In the six months ended 31 December 2017 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 deficit in respect of post employment plans before taxation increased by £27 million from £491 million at 30 June 2017 to £518 million at 31 December 2017. The increase primarily arose due to a decrease in returns from AA-rated corporate bonds used to calculate the discount rates on the liabilities of the post employment plans (UK from 2.6% to 2.5%, Ireland from 2.1% to 1.7%) largely offset by an increase in the market value of the assets held by the post employment schemes and the contributions paid into the post employment plans. Total cash contributions by the group to all post employment plans in the year ending 30 June 2018 are estimated to be approximately £200 million.
 
 
DIAGEO CONDENSED CONSOLIDATED INCOME STATEMENT
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended 31 December 2017
Six months ended 31 December 2016
 
Notes
 
£ million
 
£ million
 
 
 
 
 
 
Sales
2
 
9,934
 
9,615
Excise duties
 
 
(3,404)
 
(3,194)
Net sales
2
 
6,530
 
6,421
Cost of sales
 
 
(2,439)
 
(2,465)
Gross profit
 
 
4,091
 
3,956
Marketing
 
 
(968)
 
(908)
Other operating expenses
 
 
(933)
 
(983)
Operating profit
2
 
2,190
 
2,065
Non-operating items
 
 
-
 
20
Finance income
3
 
113
 
153
Finance charges
3
 
(267)
 
(335)
Share of after tax results of associates and joint ventures
 
 
168
 
171
Profit before taxation
 
 
2,204
 
2,074
Taxation
4
 
(77)
 
(436)
Profit from continuing operations
 
 
2,127
 
1,638
Discontinued operations
 
 
-
 
(55)
Profit for the period
 
 
2,127
 
1,583
 
 
 
 
 
 
Attributable to:
 
 
 
 
 
Equity shareholders of the parent company - continuing operations
 
 
2,058
 
1,569
Equity shareholders of the parent company - discontinued operations
 
 
-
 
(55)
Non-controlling interests
 
 
69
 
69
 
 
 
2,127
 
1,583
 
 
 
 
 
 
 
 
 
million
 
million
Weighted average number of shares
 
 
 
 
 
Shares in issue excluding own shares
 
 
2,505
 
2,511
Dilutive potential ordinary shares
 
 
12
 
12
 
 
 
2,517
 
2,523
 
 
 
 
 
 
 
 
 
pence
 
pence
Basic earnings per share
 
 
 
 
 
Continuing operations
 
 
82.2
 
62.5
Discontinued operations
 
 
-
 
(2.2)
 
 
 
82.2
 
60.3
 
 
 
 
 
 
Diluted earnings per share
 
 
 
 
 
Continuing operations
 
 
81.8
 
62.2
Discontinued operations
 
 
-
 
(2.2)
 
 
 
81.8
 
60.0
 
 
 
 
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended 31 December 2017
Six months ended
 31 December 2016
 
 
£ million
 
£ million
Other comprehensive income
 
 
 
 
  Items that will not be recycled subsequently to the income
   statement
 
 
 
 
  Net remeasurement of post employment plans
 
 
 
 
     -  group
 
(85)
 
298
     -  associates and joint ventures
 
5
 
(5)
  Tax on post employment plans
 
(6)
 
(59)
 
 
(86)
 
234
  Items that may be recycled subsequently to the income
   statement
 
 
 
 
  Exchange differences on translation of foreign operations
 
 
 
 
     -  group
 
(492)
 
470
     -  associates and joint ventures
 
33
 
64
     -  non-controlling interests
 
(54)
 
104
  Net investment hedges
 
85
 
(334)
  Tax on exchange differences - group
 
11
 
1
  Effective portion of changes in fair value of cash flow hedges
 
 
 
 
     -  losses taken to other comprehensive income - group
 
(42)
 
(35)
     -   gains taken to other comprehensive income - associates
          and joint ventures
 
4
 
-
     -  recycled to income statement
 
64
 
(34)
  Tax on effective portion of changes in fair value of cash flow hedges
 
6
 
16
  Hyperinflation adjustment
 
13
 
-
  Tax on hyperinflation adjustment
 
(6)
 
-
 
 
(378)
 
252
Other comprehensive (loss)/profit, net of tax, for the period
 
(464)
 
486
Profit for the period
 
2,127
 
1,583
Total comprehensive income for the period
 
1,663
 
2,069
 
 
 
 
 
Attributable to:
 
 
 
 
Equity shareholders of the parent company - continuing operations
 
1,648
 
1,951
Equity shareholders of the parent company - discontinued operations
 
-
 
(55)
Non-controlling interests
 
15
 
173
Total comprehensive income for the period
 
1,663
 
2,069
 
 
 
 
 
 
 
  
 
DIAGEO CONDENSED CONSOLIDATED BALANCE SHEET
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31 December 2017
 
30 June 2017
 
31 December 2016
 
Notes
 
£ million
 
£ million
 
£ million
 
£ million
 
£ million
 
£ million
 
 
Non-current assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets
 
 
12,807
 
 
 
12,566
 
 
 
12,911
 
 
Property, plant and equipment
 
 
3,953
 
 
 
4,014
 
 
 
3,992
 
 
Biological assets
 
 
21
 
 
 
21
 
 
 
10
 
 
Investments in associates and joint ventures
 
 
3,053
 
 
 
2,824
 
 
 
2,797
 
 
Other investments
 
 
49
 
 
 
31
 
 
 
31
 
 
Other receivables
 
 
56
 
 
 
58
 
 
 
55
 
 
Other financial assets
8
 
184
 
 
 
267
 
 
 
327
 
 
Deferred tax assets
 
 
179
 
 
 
134
 
 
 
296
 
 
Post employment benefit assets
 
 
300
 
 
 
281
 
 
 
84
 
 
 
 
 
 
 
20,602
 
 
 
20,196
 
 
 
20,503
Current assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Inventories
5
 
4,919
 
 
 
4,788
 
 
 
4,741
 
 
Trade and other receivables
 
 
3,431
 
 
 
2,592
 
 
 
3,603
 
 
Corporate tax receivable
 
 
107
 
 
 
-
 
 
 
-
 
 
Assets held for sale
 
 
-
 
 
 
-
 
 
 
3
 
 
Other financial assets
8
 
123
 
 
 
81
 
 
 
126
 
 
Cash and cash equivalents
6
 
920
 
 
 
1,191
 
 
 
1,254
 
 
 
 
 
 
 
9,500
 
 
 
8,652
 
 
 
9,727
Total assets
 
 
 
 
30,102
 
 
 
28,848
 
 
 
30,230
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings and bank overdrafts
6
 
(2,378)
 
 
 
(2,459)
 
 
 
(2,743)
 
 
Other financial liabilities
8
 
(324)
 
 
 
(215)
 
 
 
(274)
 
 
Trade and other payables
 
 
(4,142)
 
 
 
(3,563)
 
 
 
(3,939)
 
 
Corporate tax payable
 
 
(300)
 
 
 
(294)
 
 
 
(469)
 
 
Provisions
 
 
(109)
 
 
 
(129)
 
 
 
(140)
 
 
 
 
 
 
 
(7,253)
 
 
 
(6,660)
 
 
 
(7,565)
Non-current liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings
6
 
(7,647)
 
 
 
(6,583)
 
 
 
(7,502)
 
 
Other financial liabilities
8
 
(426)
 
 
 
(383)
 
 
 
(443)
 
 
Other payables
 
 
(196)
 
 
 
(24)
 
 
 
(38)
 
 
Provisions
 
 
(286)
 
 
 
(286)
 
 
 
(293)
 
 
Deferred tax liabilities
 
 
(1,786)
 
 
 
(2,112)
 
 
 
(2,180)
 
 
Post employment benefit liabilities
 
 
(818)
 
 
 
(772)
 
 
 
(956)
 
 
 
 
 
 
 
(11,159)
 
 
 
(10,160)
 
 
 
(11,412)
Total liabilities
 
 
 
 
(18,412)
 
 
 
(16,820)
 
 
 
(18,977)
Net assets
 
 
 
 
11,690
 
 
 
12,028
 
 
 
11,253
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Share capital
 
 
789
 
 
 
797
 
 
 
797
 
 
Share premium
 
 
1,349
 
 
 
1,348
 
 
 
1,348
 
 
Other reserves
 
 
2,362
 
 
 
2,693
 
 
 
2,772
 
 
Retained earnings
 
 
5,422
 
 
 
5,475
 
 
 
4,557
 
 
Equity attributable to equity
  shareholders of the parent company
 
 
 
 
9,922
 
 
 
10,313
 
 
 
9,474
Non-controlling interests
 
 
 
 
1,768
 
 
 
1,715
 
 
 
1,779
Total equity
 
 
 
 
11,690
 
 
 
12,028
 
 
 
11,253
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 period
-
 
-
 
-
 
-
 
1,514
 
1,514
 
1,514
 
69
 
1,583
Other comprehensive income
-
 
-
 
147
 
-
 
235
 
235
 
382
 
104
 
486
Employee share schemes
-
 
-
 
-
 
(22)
 
(12)
 
(34)
 
(34)
 
-
 
(34)
Share-based incentive plans
-
 
-
 
-
 
-
 
18
 
18
 
18
 
-
 
18
Share-based incentive plans
 in respect of associates
-
 
-
 
-
 
-
 
1
 
1
 
1
 
-
 
1
Tax on share-based
 incentive plans
-
 
-
 
-
 
-
 
(2)
 
(2)
 
(2)
 
-
 
(2)
Shares issued
-
 
1
 
-
 
-
 
-
 
-
 
1
 
-
 
1
Change in fair value of put
 options
-
 
-
 
-
 
-
 
(11)
 
(11)
 
(11)
 
-
 
(11)
Purchase of non-controlling
 interests in associates
-
 
-
 
-
 
-
 
(5)
 
(5)
 
(5)
 
-
 
(5)
Dividends paid
-
 
-
 
-
 
-
 
(920)
 
(920)
 
(920)
 
(44)
 
(964)
At 31 December 2016
797
 
1,348
 
2,772
 
(2,211)
 
6,768
 
4,557
 
9,474
 
1,779
 
11,253
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
-
 
-
 
-
 
-
 
(69)
 
(69)
 
(69)
 
(2)
 
(71)
Profit for the period
-
 
-
 
-
 
-
 
2,058
 
2,058
 
2,058
 
69
 
2,127
Other comprehensive income
-
 
-
 
(331)
 
-
 
(79)
 
(79)
 
(410)
 
(54)
 
(464)
Employee share schemes
-
 
-
 
-
 
(2)
 
(3)
 
(5)
 
(5)
 
-
 
(5)
Share-based incentive plans
-
 
-
 
-
 
-
 
21
 
21
 
21
 
-
 
21
Share-based incentive plans
 in respect of associates
-
 
-
 
-
 
-
 
5
 
5
 
5
 
-
 
5
Tax on share-based
 incentive plans
-
 
-
 
-
 
-
 
7
 
7
 
7
 
-
 
7
Shares issued
-
 
1
 
-
 
-
 
-
 
-
 
1
 
-
 
1
Purchase of non-controlling
 interests
-
 
-
 
-
 
-
 
(70)
 
(70)
 
(70)
 
70
 
-
Purchase of rights issue of non-controlling interests
-
 
-
 
-
 
-
 
(5)
 
(5)
 
(5)
 
31
 
26
Change in fair value of put
 options
-
 
-
 
-
 
-
 
(32)
 
(32)
 
(32)
 
-
 
(32)
Share buyback programme
(8)
 
-
 
-
 
-
 
(916)
 
(916)
 
(924)
 
-
 
(924)
Dividends paid
-
 
-
 
-
 
-
 
(968)
 
(968)
 
(968)
 
(61)
 
(1,029)
At 31 December 2017
789
 
1,349
 
2,362
 
(2,178)
 
7,600
 
5,422
 
9,922
 
1,768
 
11,690
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DIAGEO CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended
31 December 2017
 
Six months ended
31 December 2016
 
 
£ million
 
£ million
 
£ million
 
£ million
Cash flows from operating activities
 
 
 
 
 
 
 
 
Profit for the period
 
2,127
 
 
 
1,583
 
 
Discontinued operations
 
-
 
 
 
55
 
 
Taxation
 
77
 
 
 
436
 
 
Share of after tax results of associates and joint ventures
 
(168)
 
 
 
(171)
 
 
Net finance charges
 
154
 
 
 
182
 
 
Non-operating items
 
-
 
 
 
(20)
 
 
Operating profit
 
 
 
2,190
 
 
 
2,065
Increase in inventories
 
(162)
 
 
 
(72)
 
 
Increase in trade and other receivables
 
(908)
 
 
 
(864)
 
 
Increase in trade and other payables and provisions
 
540
 
 
 
443
 
 
Net increase in working capital
 
 
 
(530)
 
 
 
(493)
Depreciation, amortisation and impairment
 
187
 
 
 
178
 
 
Dividends received
 
3
 
 
 
4
 
 
Post employment payments less amounts included in operating profit
 
(66)
 
 
 
(76)
 
 
Other items
 
-
 
 
 
45
 
 
 
 
 
 
124
 
 
 
151
Cash generated from operations
 
 
 
1,784
 
 
 
1,723
Interest received
 
76
 
 
 
90
 
 
Interest paid
 
(204)
 
 
 
(239)
 
 
Taxation paid
 
(408)
 
 
 
(307)
 
 
 
 
 
 
(536)
 
 
 
(456)
Net cash inflow from operating activities
 
 
 
1,248
 
 
 
1,267
Cash flows from investing activities
 
 
 
 
 
 
 
 
Disposal of property, plant and equipment and computer software
 
9
 
 
 
13
 
 
Purchase of property, plant and equipment and computer software
 
(210)
 
 
 
(197)
 
 
Movements in loans and other investments
 
(18)
 
 
 
1
 
 
Sale of businesses
 
2
 
 
 
(13)
 
 
Acquisition of businesses
 
(561)
 
 
 
(18)
 
 
Net cash outflow from investing activities
 
 
 
(778)
 
 
 
(214)
Cash flows from financing activities
 
 
 
 
 
 
 
 
Share buyback programme
 
(742)
 
 
 
-
 
 
Proceeds from issue of share capital
 
1
 
 
 
1
 
 
Net purchase of own shares for share schemes
 
(28)
 
 
 
(49)
 
 
Dividends paid to non-controlling interests
 
(61)
 
 
 
(44)
 
 
Rights issue proceeds from non-controlling interests
 
26
 
 
 
-
 
 
Proceeds from bonds
 
1,136
 
 
 
-
 
 
Repayment of bonds
 
(948)
 
 
 
(461)
 
 
Net movements in other borrowings
 
911
 
 
 
549
 
 
Equity dividends paid
 
(968)
 
 
 
(920)
 
 
Net cash outflow from financing activities
 
 
 
(673)
 
 
 
(924)
 
 
 
 
 
 
 
 
 
Net (decrease)/increase in net cash and cash equivalents
 
 
 
(203)
 
 
 
129
Exchange differences
 
 
 
(28)
 
 
 
33
Net cash and cash equivalents at beginning of the period
 
 
 
917
 
 
 
809
Net cash and cash equivalents at end of the period
 
 
 
686
 
 
 
971
 
 
 
 
 
 
 
 
 
Net cash and cash equivalents consist of:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
920
 
 
 
1,254
Bank overdrafts
 
 
 
(234)
 
 
 
(283)
 
 
 
 
686
 
 
 
971
 
 
 
NOTES
 
1. Basis of preparation
 
This condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as issued by the International Accounting Standards Board (IASB) and as adopted by the EU.
The annual financial statements 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 interim financial statements, the significant judgements made by management when applying the group's accounting policies and the significant areas where estimates were required were the same as those that applied to the consolidated financial statements for the year ended 30 June 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 11 - 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
 
The following amendments to the accounting standards, issued by the IASB or International Financial Reporting Interpretations Committee (IFRIC) and 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
 
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, measurement of financial instruments, introduces new principles for hedge accounting and a new forward-looking impairment model for financial assets. Changes related to the classification and impairment of financial instruments did not impact the primary statements of the group. 
All classes of financial assets and financial liabilities had, in accordance with IAS 39 and IFRS 9, the same carrying values as at 1 July 2017.
The new impairment model requires the recognition of allowances for doubtful debt based on expected credit losses (ECL), rather than only incurred credit losses as is the case under IAS 39. The adoption of the expected loss approach has not resulted in any additional impairment loss for trade receivables as at 1 July 2017.
Diageo has applied the hedge accounting principles of IFRS 9 on a prospective basis. Accordingly, there was no transitional restatement of the group's results.
 
IFRS 15 - Revenue from contracts with customers is based on the principle that revenue is recognised when control of goods or services is transferred to the customer and provides a single, principles based five-step model to be applied to all sales contracts. It replaces the separate models for goods, services and construction contracts under previous IFRS (IAS 11, IAS 18 and related interpretations) which was based on the concept of the transfer risks and rewards. It also provides further guidance on the measurement of sales on contracts which have discounts, rebates and consignment inventories by applying variable consideration principles.
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 and to ensure that the same principles were being applied consistently across the Group. This review in particular examined promotional 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.
Diageo has adopted the modified retrospective transition method, recognising the cumulative effect of initially applying the revenue standard as an adjustment to the opening balance of retained earnings.
 
Retained earnings has been charged by £71 million as at 1 July 2017. The adjustment comprised an increase in creditors of £100 million, an increase in debtors of £1 million, an increase in inventories of £2 million and an increase in deferred tax assets of £26 million. The changes in accounting policy that resulted in the 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 policy, deducts from the initial revenue recognised any future promotional payments unless it is highly probable that they will not be incurred.
In the six months ended 31 December 2017, as a result of applying the new accounting policy, sales increased by £15 million, operating profit increased by £18 million, taxation was £4 million higher and profit for the period increased by £14 million.
The benefit in the period 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 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.
 
In October 2017 the IFRIC clarified that interest and penalties in respect of corporate tax settlements and liabilities should be disclosed in the income statement within finance charges and operating profit, respectively. Up to 30 June 2017 Diageo disclosed such items as part of corporate tax in the consolidated income statement and as a result of the clarification by IFRIC has changed its accounting treatment from 1 July 2017. For the six months ended 31 December 2017 and 31 December 2016 the interest and penalties on corporate tax liabilities was immaterial. At 31 December 2017, the cumulative interest and penalties in respect of corporate tax on the consolidated balance sheet was £35 million (30 June 2017 - £37 million; 31 December 2016 - £28 million). Comparatives have not been restated as the amounts are immaterial.
 
The following standard issued by the IASB and endorsed by the EU, have 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 and introduces a single lessee accounting model where the lessee is required to recognise assets and liabilities for all material leases that have a term of greater than a year.
The group is currently considering the implications of IFRS 16 which is expected to have an impact on the group's consolidated results and financial position.
 
The following standard, issued by the IASB that have not been endorsed by the EU have 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 exceptional items is reported at budgeted exchange rates in line with management reporting. For management reporting purposes the group measures the current period at, and restates the prior period 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.
 
 Six months 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
 
31 December 2017
£ million
 
£ million
 
£ million
 
£ million
 
£ million
 
£ million
 
£ million
 
£ million
 
£ million
 
£ million
Sales
2,467
 
2,887
 
1,088
 
840
 
2,625
 
797
 
(797)
 
9,907
 
27
 
9,934
Net sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At budgeted exchange rates(i)
2,151
 
1,521
 
753
 
629
 
1,306
 
827
 
(778)
 
6,409
 
24
 
6,433
Acquisitions and disposals
20
 
-
 
-
 
-
 
-
 
-
 
-
 
20
 
-
 
20
ISC allocation
7
 
28
 
3
 
6
 
5
 
(49)
 
-
 
-
 
-
 
-
Retranslation to actual exchange rates
5
 
50
 
18
 
14
 
(13)
 
19
 
(19)
 
74
 
3
 
77
Net sales
2,183
 
1,599
 
774
 
649
 
1,298
 
797
 
(797)
 
6,503
 
27
 
6,530
Operating profit/(loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At budgeted exchange rates(i)
1,038
 
541
 
116
 
208
 
325
 
74
 
-
 
2,302
 
(89)
 
2,213
Acquisitions and disposals
2
 
-
 
-
 
-
 
-
 
-
 
-
 
2