~~Net sales in~~ ~~US Spirits~~ were up 5%, broadly in line with depletions. Crown Royal grew net sales by 6% and gained share in its category, driven by continued growth of Crown Royal Regal Apple and Crown Royal Vanilla underpinned by strong marketing investment and the Crown Royal Peach and Crown Royal Salted Caramel limited time offers. In scotch, Johnnie Walker and Buchanan's gained share. Johnnie Walker net sales increased 6% with the successful launch of "White Walker by Johnnie Walker" inspired by the TV series Game of Thrones, which recruited new consumers into scotch. In vodka, net sales were flat, an improvement on the prior year's decline of 3%, despite continued weakness in Cîroc. Ketel One net sales were up 10%, benefitting from the success of Ketel One Botanical. Smirnoff returned to growth, up 2%, with strong marketing support reflected in the stabilisation of the base business and strengthened brand equity and with growth fuelled by the launch of Smirnoff Zero Sugar Infusions in May. Captain Morgan net sales declined by 5% in a category that is also in decline. Baileys net sales grew by 3% and gained category share as it continued its year-round focus on Baileys as an everyday treat. In tequila, Don Julio and Casamigos had strong double digit growth and gained share in the tequila category with Don Julio significantly up-weighting media investment to drive awareness and Casamigos focusing on public relations, social media and targeted events.

–

Net sales in US Spirits were up 2%, with depletions ahead of shipments resulting in a reduction in distributor inventories. Don Julio and Casamigos delivered strong double-digit growth and gained share in the rapidly growing tequila category. While the brands were disproportionately impacted by the on-trade closures, an agile response drove strong demand in at-home occasions. Crown Royal grew net sales 8%, gaining further category share, driven by the continued growth of Crown Royal Regal Apple and Crown Royal Vanilla, and the success of the limited time offer, Crown Royal Peach. Johnnie Walker net sales declined 11% and the brand lost share in the scotch category. A decline in net sales in the first half, due to lapping the highly successful limited edition of "White Walker by Johnnie Walker", was exacerbated in the second half by the on-trade channel closure. Malts continued to perform well with growth from Oban and Lagavulin, as well as Talisker and Mortlach. Vodka net sales were down 7%. Lower sales of Ketel One reflect its strong presence in the on-trade channel and a decline in Ketel One Botanical, lapping last year's successful launch. Smirnoff net sales declined, although Smirnoff Zero Sugar Infusions and seasonal innovations, including the Smirnoff Red, White and Berry limited time offer performed well. Cîroc continued to decline. Bulleit net sales were up 4%. An effective marketing approach drove off-trade sales in the second half and continued share gain in US whiskey. Captain Morgan net sales declined 5% and the brand lost share in the rum category. Baileys net sales grew 1% driven by the launch of Baileys Red Velvet limited edition and growth in Baileys Salted Caramel.

~~DBC USA~~ net sales increased 10%, driven by ready to drink growth of 18% as Smirnoff Spiked Seltzer and Smirnoff Ice Smash success continued. In beer, net sales were up 2% with Guinness up 3%. The opening of the Guinness Open Gate Brewery and Barrel House in Maryland and expanding at-home consumption occasions supported Guinness growth.

–

Diageo Beer Company USA net sales increased 8%, despite a reduction in distributors' inventories. This reflected ready to drink growth of 19%, with continued strong growth across the Smirnoff range. Strong sales in the second half were supported by a large-scale media campaign to promote Smirnoff's Red, White and Berry limited time offer variants, including Smirnoff Ice and a new Smirnoff Seltzer. Beer net sales declined 5% as a result of the closure of the on-trade and the Guinness Open Gate Brewery. However, beer gained share in the off-trade due to Guinness' success in raising brand awareness and connecting with consumers during the Covid-19 lockdown.

~~Net sales in~~ ~~Canada~~ grew 5%, driven by growth in spirits and ready to drink. Spirits net sales were up 3% with broad based growth across all categories, including a strong performance from "White Walker by Johnnie Walker". Ready to drink benefitted from innovation, particularly the Smirnoff Ice Berry Blast ready to drink.

–

Net sales in Canada grew 7%, with good growth across all categories except beer, which was more impacted by the on-trade channel closure. Shipments were slightly ahead of depletions, as customers held more stock to manage volatility in the second half. Vodka grew 6% with Smirnoff No.21 continuing to grow, supported by a new global campaign in the first half and the launch of the redesigned Smirnoff bottle in the second half. Cîroc and Ketel One both grew strongly. Crown Royal grew double-digit, gaining market share and strengthening its leadership position in the growing Canadian whisky category. Performance was supported by the launch of a new "generosity" campaign connecting the brand to its roots, and successful limited time offer innovations. Scotch grew 7%, with Johnnie Walker Black Label remaining the number-one selling scotch in Canada. Ready to drink net sales continued to deliver double-digit growth, with Smirnoff Ice retaining its position as the number-one selling ready to drink in Canada.

~~Marketing~~ grew 11%. Up-weighted investment coupled with the use of marketing effectiveness analytic tools to help make better investment decisions continued to strengthen brand equity and deliver sustainable growth.


–	Marketing expenses declined 6%. This was due to reduced investment in the second half that we believed would have been ineffective during Covid-19, as well as productivity savings during the year. We believe that our marketing effectiveness tools will enable us to efficiently accelerate investment as consumer demand recovers.

Business review (continued)

~~Europe~~Latin America and ~~Turkey~~Caribbean

1.56
2.51
1
—
Asia Pacific0.30
1.65
3
—
Diageo (total)0.60

⁽ⁱⁱⁱ⁾

2.12
16
1

(i) We do not report a rate for independent contractors due to the difficulty and administrative burden in accurately recording headcount.

(ii) Fatalities include any employee work-related fatality arising in their day-to-day work environment, or any work-related fatalities occurring to third parties and contractors (non full-time employees) while on Diageo’s premises.

(iii) Our performance was helped by sale of United National Breweries (UNB) in South Africa, which had a higher LTA rate than Diageo’s average. Previous year and baseline data is not restated for health and safety.

Business description (continued)

Non-financial information statement



Focus area	Relevant policies and standards	Read more in this report	Page
Positive drinking	– Marketing and Digital Marketing Policy – Employee Alcohol Global Policy – Position papers	– Promote positive drinking – Performing against our social targets	43-46 59-61
Our employees	– Code of Business Conduct – 2019 Great Britain Gender Pay Report – Human Rights Global Policy	– Champion inclusion and diversity – Our people – Performing against our social targets	46-47 48-49 59-61
Grain-to-glass sustainability	– Environmental Global Policy – Sustainable Agriculture Guidelines – Sustainable Packaging Commitments – Water Blueprint – Partnering with Suppliers Standard	– Pioneer grain-to-glass sustainability – Performing against our environmental targets – Responding to climate-related risks	49-52 62-64 72
Human rights	– Human Rights Global Policy – Modern Slavery Statement – Global Brand Promoter Standard	– Doing business the right way from grain to glass	65
Health and safety	– Health, Safety and Wellbeing Global Policy	– Doing business the right way from grain to glass	65-66
Anti-bribery and corruption	– Code of Business Conduct	– Effective risk management	74
Our contribution to the SDGs		– Performing against our social targets – Performing against our environmental targets	59-61 62-64

Business description (continued)

Risk factors

Diageo believes the following to be the principal risks and uncertainties that could adversely impact the group. These risks should be carefully considered together with other information included elsewhere within this annual report. If any of these risks occur, either alone or in combination with other risks, Diageo’s business, financial condition and performance could suffer and the trading price and liquidity of its securities could decline. The order of presentation of the risk factors below does not necessarily indicate the likelihood of a particular risk’s occurrence or the potential magnitude of its financial consequences.

In addition, because any global business of the kind Diageo is engaged in is inherently exposed to risks that become apparent only with the benefit of hindsight, risks which Diageo does not currently deem to be material or of which it is not presently aware could also materially and adversely impact Diageo’s business, financial condition and performance in future periods.

Risks related to the global economy

Diageo’s business may be adversely impacted by unfavourable economic, political, social or other developments and risks (including those resulting from the Covid-19 pandemic) in the countries in which it operates

Diageo has a presence in over 180 countries worldwide, and it may be adversely affected by unfavourable economic developments globally or in any of the countries where it has distribution networks, marketing companies or production facilities. In particular, Diageo’s business is dependent on general economic conditions in its most important markets, which include the United States, the United Kingdom, the countries that form the European Union, and certain countries within the Asia Pacific region. A significant deterioration in economic conditions globally or in any of Diageo’s important markets (including as a result of the Covid-19 pandemic), including economic slowdowns, local or global recessions or depressions, increased unemployment levels, inflationary pressures, increased tax rates and/or disruptions to credit and capital markets, could lead to decreased consumer confidence and consumer spending more generally, which in turn could reduce consumer demand for Diageo’s products.

Unfavourable economic conditions could also negatively impact Diageo’s customers, suppliers, distributors and financial counterparties, who may experience cash flow problems, increased credit defaults or other financial issues, which could lead to customer destocking as well as an increase in Diageo’s bad debt expense. In addition, volatility in the capital and credit markets caused by unfavourable economic developments and uncertainties, including those related to the Covid-19 pandemic, could result in a reduction in the availability of, or an increase in the cost of, financing to Diageo. Diageo’s business could also be affected by other economic developments such as fluctuations in currency exchange rates, the imposition of any import, investment or currency restrictions (including the potential impact of any global, regional or local trade wars or any tariffs, customs duties or other restrictions or barriers imposed on the import or export of goods between territories, including but not limited to, imports into and exports from the United States, the United Kingdom and/or the European Union), the imposition of economic or trade sanctions, or any restrictions on the repatriation of earnings and capital. Any of these developments may have a material adverse effect on Diageo’s business and financial results.

Diageo’s operations are also subject to a variety of other risks and uncertainties related to its global operations, including adverse political, social or other developments. Political and/or social unrest or uncertainties (including in relation to the United Kingdom’s recent departure from the European Union), natural disasters, disease outbreaks (including the Covid-19 pandemic and any future epidemics or pandemics, and government responses thereto), politically-motivated violence and terrorist threats and/or acts, including those which are specifically directed at the alcohol industry, may also occur in countries where Diageo has operations. Any of the foregoing could have a material adverse effect on Diageo’s business, financial condition and performance.

Many of the above risks are heightened, or occur more frequently, in emerging markets. A substantial portion of Diageo’s operations is conducted in emerging markets, which represented approximately 38% of Diageo’s net sales for the year ended 30 June 2020. In general, emerging markets are also exposed to relatively higher risks attributable to unstable governments, corruption, crime and lack of law enforcement, undeveloped or biased legal systems, military conflicts, expropriation of assets, sovereign default, liquidity constraints, inflation, devaluation, price volatility and currency convertibility issues, as well as additional legal and regulatory risks and uncertainties. Developments in emerging markets can affect Diageo’s ability to import or export products and to repatriate funds, as well as impact levels of consumer demand (for example, in duty-free outlets at airports or in on-trade premises in affected regions) and therefore Diageo’s levels of sales or profitability. Any of these factors may affect Diageo disproportionately or in a different manner from its competitors, depending on Diageo’s specific exposure to any particular emerging market, and could have a material adverse effect on Diageo’s business and financial results.

Business description (continued)

Diageo’s business, financial condition, cash flows and results of operations have been and may continue to be adversely affected by the Covid-19 pandemic

A novel strain of coronavirus (Covid-19) was first identified in Wuhan, China in late 2019, and subsequently declared a pandemic by the World Health Organization. This pandemic, which has now spread to nearly all regions around the world, as well as measures taken in response to contain or mitigate the pandemic, have caused and are continuing to cause business slowdowns or shutdowns in affected areas, as well as significant disruption in the financial markets globally.

At this time, Diageo remains unable to accurately assess the longer-term impact of the pandemic on its business and operations, including the degree to which, or the time period over which, its business will continue to be affected by the Covid-19 pandemic and related response measures. To date, the impacts on Diageo’s business from the Covid-19 pandemic and related response measures have included, but are not limited to, the following:


–	social distancing measures, including the closure of on-trade channels such as bars and restaurants and restrictions on banqueting, conferences and similar events, being introduced in most of Diageo's markets, leading to a negative impact on sales;


–	travel restrictions being imposed by many countries and concern over the pandemic resulting in significant declines in passenger numbers, particularly in airports, with a corresponding negative impact on Diageo's global Travel Retail business;

–

regulatory restrictions, combined with the implementation of heightened safety protocols across all of Diageo’s office and production sites (including increased sanitation measures, safety equipment and restrictions on access), resulting in office closures and reductions in levels of activity at certain of Diageo's production facilities, including the temporary closure of United Spirits’ supply operations due to a nationwide lockdown in India and the temporary closure of two production sites in Nigeria; and


–	wider disruptions in supply chains and routes to market, or those of Diageo's suppliers and/or distributors or customers, which could result in further increases in Diageo's costs of production and distribution or an increase in transnational trade or other trading practices impacting profitability.

The impacts of the Covid-19 pandemic and related response measures worldwide, including the impacts described above, have had and may continue to have an adverse effect on global economic conditions, as well as on Diageo’s business, results of operations, cash flows and financial condition, with recovery expected to be dependent on the success of public health measures, the impact of economic policies, the pace at which lockdown measures are eased, and how quickly consumers choose to return to bars and restaurants and resume international travel. However, even those regions that are beginning to experience business recovery or the scaling back of response measures, such as Greater China and Europe, may experience further impacts from Covid-19 or suffer a resurgence of Covid-19 cases, and economic activity in those regions may not recover quickly or at all, which may materially adversely impact global economic conditions. This could in turn lead to a further decline in discretionary spending by consumers.

Diageo conducts impairment reviews as and when required in accordance with applicable accounting standards, to ensure that, among other things, intangible assets, including brands, are not carried at above their recoverable amounts. The impacts of the Covid-19 pandemic and related response measures, in particular with respect to expectations of future cash flows, contributed to approximately £1.3 billion in impairments recognised by the Diageo group during its fiscal year ended 30 June 2020, primarily impacting assets located in India, Korea, Nigeria and Ethiopia where already challenging economic conditions and/or other factors were exacerbated by the Covid-19 pandemic, and may result in further material write-downs or impairments being recognised during future periods.

In addition, the impact of the Covid-19 pandemic on global economic conditions has impacted and may continue to impact the proper functioning of financial and capital markets, as well as foreign currency exchange rates, commodity and energy prices and interest rates. Responses to the Covid-19 pandemic may also result in both short-term and long-term changes to fiscal and tax policies in impacted jurisdictions, including increases in tax rates. Although Diageo completed bond issuances under both its European and US shelf programmes in spring 2020, has temporarily increased its committed bank facilities from £2.8 billion to £5.3 billion, and may take other actions to enhance its liquidity, there is no guarantee that Diageo’s existing arrangements or any future arrangements will provide sufficient liquidity over the course of the Covid-19 pandemic, and the impacts of the Covid-19 pandemic and related response measures may adversely impact Diageo’s liquidity or financial position. In addition, a continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on Diageo’s ability to access, or costs of, capital or borrowings, its liquidity, its financial position, its adjusted net debt to EBITDA ratio, its ability to comply with any applicable financial covenants or its credit ratings.

Business description (continued)

Any of the foregoing developments may have a material adverse effect on Diageo’s business, financial condition, cash flows and results of operations. In addition, the impact of the Covid-19 pandemic, or any other future epidemics or pandemics, may also have the effect of heightening many of the risks described elsewhere within this annual report.

The United Kingdom’s departure from the European Union may continue to result in a sustained period of economic and political uncertainty and complexity, and may have a negative impact on economic conditions in Europe and on Diageo’s business and financial results

Diageo is headquartered in the United Kingdom and has significant production and investment in both England and Scotland. In 2016, the United Kingdom voted by referendum to withdraw from membership in the European Union, with the UK prime minister formally initiating the negotiation process for the departure of the United Kingdom from the European Union (“Brexit”) in 2017. Following the ratification by the UK Parliament of a withdrawal agreement in early 2020, the United Kingdom exited the European Union on 31 January 2020, although it will still remain part of the EU customs union and single market during a Brexit transition period which is currently expected to end on 31 December 2020.

Although the potential impact of Brexit on Diageo’s business cannot be fully assessed until the United Kingdom negotiates, concludes and implements successor trading, regulatory and tax arrangements with other countries, it is likely that this negotiation process will continue to result in a sustained period of economic and political uncertainty and complexity. For example, in the event that the current Brexit transition period concludes without a free trade agreement or agreements in place (a “no deal” scenario), there remains uncertainty as to the terms under which the United Kingdom would trade with European Union countries as well as with third party countries with whom trade is currently conducted under EU Free Trade Agreements (“FTAs”). Although a number of countries have already agreed with the United Kingdom to continue to trade under the terms of the existing FTAs even in a no deal scenario, in the event that the United Kingdom is unable to renew all of the existing FTAs on which UK companies rely, the United Kingdom’s trade with certain countries could revert to the tariffs and duties set by World Trade Organisation rules. This could have an adverse impact on trade, including causing short-term disruptions in the import into and export from the United Kingdom of goods which could be delayed as a result of the imposition of additional customs inspections and documentation checks. Diageo could also be subject to changes in laws and regulations following Brexit in areas such as intellectual property rights, employment, environment, supply chain logistics, data protection and health and safety.

The United Kingdom’s withdrawal from the European Union could also negatively impact economic conditions in Europe more generally, which in turn could adversely impact global economic conditions. For instance, the negotiating process surrounding the future trading arrangements of the United Kingdom with the European Union and other countries may continue to contribute to significant volatility in exchange rates, wider risks to supply chains across the European Union and ultimately lead to changes in market access or trading terms, including to customs duties, tariffs and/or industry-specific requirements and regulations, restrictions on the mobility of employees and generally increased legal and regulatory complexity and costs. This could have adverse effects on Diageo’s business and financial results.

The withdrawal of the United Kingdom from the European Union could also have further implications for the constitutional makeup of the United Kingdom as a result of renewed discussions surrounding further devolved governments in Scotland and Northern Ireland and/or possible independence for Scotland following the outcome of the Brexit referendum. This could result in a further period of political uncertainty in the United Kingdom and otherwise adversely affect Diageo’s business and financial results, particularly since Diageo has substantial operations and inventory located in Scotland.

Business description (continued)

Risks related to Diageo’s industry

Demand for Diageo’s products may be adversely affected by many factors, including changes in consumer preferences and tastes and the adverse impacts of declining economies

Diageo’s portfolio of brands includes some of the world’s leading beverage alcohol brands, as well as a number of brands that are prominent in certain regional and/or country-specific markets. Maintaining Diageo’s competitive position depends on its continued ability to offer high-quality products that have a strong appeal to a wide range of consumers. Consumer preferences on a global, regional and/or local scale may shift due to a variety of factors, including changes in demographics, evolving social trends (including any shifts in consumer tastes towards at-home consumption occasions, small-batch craft alcohol, lower or no alcohol beverages, or other alternative products), changes in travel, holiday or leisure activity patterns, weather conditions, public health regulations and/or health and wellness concerns (including as a result of the Covid-19 pandemic), any or all of which may reduce consumers’ willingness to purchase beverage alcohol products from large producers such as Diageo or at all. Economic pressures could also cause consumers to choose products which have lower price points, including those of Diageo’s competitors, which may have an adverse effect on Diageo’s business and financial results. The competitive position of Diageo’s brands, as well as Diageo’s reputation more generally, could also be adversely affected by any failure by Diageo to provide consistent, reliable quality in its products or in its service levels to customers.

In addition, the social acceptability of Diageo’s products may decline due to negative publicity surrounding, and/or public concerns about, alcohol consumption. Such anti-alcohol publicity or sentiment could also result in regulatory action, litigation or customer complaints against companies in the beverage alcohol industry and have an adverse effect on Diageo’s business and financial results.

Diageo’s business has historically benefited from the launch of new to world products or variants of existing brands (with recent examples including the launch of “White Walker by Johnnie Walker”, the Ketel One Botanical range and several Smirnoff and Crown Royal innovations), and continuing product innovation and the creation of extensions to existing brands remain significant elements of Diageo’s growth plans. The launch and ongoing success of new products or brand extensions is inherently uncertain, especially with respect to such products’ initial and continuing appeal to consumers. The failure to successfully launch a new product or an extension of an existing brand, or to maintain the product’s initial popularity, can give rise to inventory write-offs and other costs, as well as negatively impact the consumer perception of and thus the growth of an existing brand. There can be no assurance of Diageo’s continuing ability to develop and launch successful new products or variants of existing products, or to ensure or extend the profitable lifespan of its existing products.

Diageo is subject to tax uncertainties, including changes in tax obligations, tax laws, regulations and interpretations, as well as enforcement actions by tax authorities

Changes in the political and economic climate have resulted in an increased focus on tax collection in recent years, leading to greater uncertainty for multinational companies such as Diageo. In recent years, tax authorities have shown an increased appetite to challenge the methodology used by multinational enterprises, even where a company complies with international best practice guidelines. Changes in tax law (including tax rates), tax treaties, accounting policies and accounting standards, including as a result of the Organisation for Economic Co-Operation and Development’s review of base erosion and profit shifting and the European Union’s anti-tax abuse measures, combined with increased investments by governments in the digitisation of tax administration, could also result in increased levels of audit activity, investigations, litigation or other actions by relevant tax authorities. For example, as discussed in note 18 to the consolidated financial statements, in April 2019 the European Commission issued a decision finding that part of the Group Financing Exemption (as introduced in legislation by the UK government in 2013) available under the UK controlled foreign company rules constitutes state aid, which could lead to liability for Diageo and other similarly situated companies. Although both the UK government and a number of UK-based international companies, including Diageo, have appealed this decision to the General Court of the European Union, the UK government is nonetheless obliged to begin collection proceedings, and as such it is currently considered likely that Diageo will be required to make a payment towards its potential liability in this respect during its fiscal year ending 30 June 2021. Diageo also operates in a large number of jurisdictions with complex tax and legislative regimes and whose related laws and regulations are open to subjective interpretation. These countries include Brazil and India, where Diageo is currently involved in a large number of tax cases, and Diageo may be subject to further future tax assessments in these jurisdictions based on the same or similar matters. Assessing the potential financial exposure arising from these cases in Brazil and India is particularly challenging due to the uncertain fiscal environment in these jurisdictions. Any such investigations, litigation or other actions may result in damages, penalties or fines as well as reputational damage to Diageo or its brands, and as a result, adversely impact Diageo’s business and financial results. For additional information with respect to legal proceedings, including the Group Financing Exemption matter and potential tax liabilities in Brazil and India, see ‘Additional information for shareholders - Legal proceedings’ and note 18 to the consolidated financial statements.

Business description (continued)

Beverage alcohol products are also subject to national excise taxes, import duties, sales or value-added taxes and other types of direct and indirect taxes in most countries around the world, most of which are specific to individual jurisdictions. Increases in any such taxes, or the imposition of new taxes, could have a material adverse impact on Diageo’s revenue from sales or its margin, either through reducing the overall level of beverage alcohol consumption and/or by encouraging consumers to switch to lower-taxed categories of beverage alcohol.

In addition to the above, other changes in tax law (including increases in tax rates as a result of the Covid-19 pandemic or other factors), tax treaties, related accounting policies and accounting standards could also increase Diageo’s cost of doing business and lead to a rise in Diageo’s effective tax rate, thus adversely affecting Diageo’s business and financial results.

Climate change, or legal, regulatory or market measures to address climate change or other environmental concerns, may negatively affect Diageo’s business or operations, and water scarcity or water quality issues could negatively impact Diageo’s production costs and capacity

In recent years, there has been growing concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse effect on global temperatures, weather patterns and the frequency and severity of extreme weather-related events and disasters. In the event that weather patterns and climate change, or legal, regulatory or market measures enacted to address such climate change or other environmental concerns, have a negative effect on agricultural productivity in the various regions from which Diageo procures its raw materials, Diageo may be subject to decreased availability or increased prices for a number of raw materials that are necessary in the production of Diageo’s products, including hops, cereals, agave, grapes, sugar and cream.

Water, which is the main ingredient in substantially all of Diageo’s products and consumed within its agricultural supply chain, is also a limited resource in many parts of the world. As demand for water continues to increase, and as water becomes scarcer and the quality of available water deteriorates, Diageo may be affected by increased production costs (including as a result of increases in certain water-related taxes or related regulations) or capacity constraints, which in turn could adversely affect Diageo’s business and financial results.

Diageo is also required to report greenhouse gas emissions, energy usage data and related environmental information to a variety of entities, including complying with the European Union Emissions Trading Scheme. If Diageo is unable to accurately measure and disclose such data in a timely manner, it could be subject to penalties in certain jurisdictions. In addition, increased governmental or public pressure for further reductions in greenhouse gas emissions and/or to address any other perceived environmental issues could damage Diageo's reputation and cause it to incur increased costs for energy, transportation and raw materials, as well as potentially require Diageo to make additional investments in facilities and equipment, thus adversely impacting Diageo’s business and financial results.

Any increases in the cost of production could affect Diageo’s profitability

The components that Diageo uses for the production of its beverage alcohol products are largely commodities purchased from suppliers which are subject to price volatility caused by factors outside of Diageo’s control, including changes in global and regional supply and demand, weather and/or agricultural conditions, fluctuations in relevant exchange rates and/or governmental controls. Fluctuations in the prices of various commodities, including energy prices, may result in unexpected increases in the cost of the raw materials Diageo uses in the production of its products, including the prices of the agricultural commodities, flavourings and other ingredients necessary for Diageo to produce its various beverages, as well as glass bottles and other packaging materials, thus increasing Diageo’s production costs. Diageo may also be adversely affected by shortages of any such materials, by increases in energy costs resulting in higher transportation, freight or other related operating costs, by inflation in any of the jurisdictions in which it produces its products, or by additional costs incurred to implement increased sanitation measures and related production safeguards necessitated by the Covid-19 pandemic. Diageo may not be able to increase its prices to offset these increased costs without suffering reduced volumes of products sold and/or decreased operating profit.

Business description (continued)

Diageo is subject to litigation specifically directed at the beverage alcohol industry, as well as to other litigation

Diageo and other companies operating in the beverage alcohol industry are, from time to time, exposed to class action or other private or governmental litigation and claims relating to product liability, alcohol marketing, advertising or distribution practices, alcohol abuse problems or other health consequences arising from the excessive consumption of or other misuse of alcohol, including underage drinking. Diageo may also be subject to litigation arising from legacy and discontinued activities, as well as other litigation in the ordinary course of its operations, including in connection with commercial disputes and the acquisition or disposal of businesses or other assets. Diageo is further subject to the risk of litigation, enforcement or other regulatory actions by tax, customs, competition, environmental, anti-corruption and other relevant regulatory authorities, including with respect to the methodology for assessing importation value, transfer pricing or compliance matters. Diageo’s listing in the United States may also expose it to a higher risk of securities-related class action suits, particularly following any significant decline in the price of Diageo’s securities. Any such litigation or other actions may be expensive to defend and result in damages, penalties or fines as well as reputational damage to Diageo or its brands, and/or impact the ability of management to focus on other business matters, and may adversely affect Diageo’s business and financial results. For additional information with respect to legal proceedings, including certain continuing litigation in India arising from Diageo’s acquisition of USL, see ‘Additional information for shareholders - Legal proceedings’ and note 18 to the consolidated financial statements.

Risks related to regulation

Regulatory decisions and changes in the legal, and regulatory environment could increase Diageo’s costs and liabilities or limit its business activities

Diageo’s operations are subject to extensive regulatory requirements relating to production, distribution, importation, marketing, advertising, sales, pricing, labelling, packaging, product liability, antitrust, labour, pensions, compliance and control systems, and environmental issues. Changes in any such applicable laws, regulations or governmental or regulatory policies and/or practices could cause Diageo to incur material additional costs or liabilities that could adversely affect its business. In particular, governmental bodies in jurisdictions where Diageo operates may impose new labelling, product or production requirements, limitations on the marketing, advertising and/or promotion activities used to market beverage alcohol, restrictions on retail outlets, restrictions on importation and distribution or other restrictions on the locations or occasions where beverage alcohol is sold which directly or indirectly limit the sales of Diageo products. For example, in 2014 and 2015, respectively, the states of Kerala and Bihar in India announced the imposition of a total ban on alcohol consumption, while, more recently, the Supreme Court of India issued a ruling prohibiting the sale of alcohol in certain outlets near highways. Although the restrictions imposed on the sale of alcohol in Kerala and aspects of the highway ban were subsequently relaxed, more recent government bans on the sale of alcohol introduced in response to the Covid-19 pandemic, including in India, South Africa and in Diageo’s Central America and Caribbean market, have impacted, and are likely to continue to impact, the sale of Diageo’s products in these and other impacted jurisdictions, which in turn could adversely affect Diageo’s business and financial results.

Regulatory authorities under whose laws Diageo operates may also have enforcement power that can subject the group to actions such as product recalls, product seizures or other sanctions which could have an adverse effect on Diageo’s sales or damage its reputation. Any changes to the regulatory environment in which Diageo operates could also cause Diageo to incur material additional costs or liabilities, which could adversely affect Diageo’s performance.

Diageo is subject to data privacy regulations in many of the markets in which it operates, and laws and regulations in this area are developing and changing on a continual basis. For example, Diageo is subject to the General Data Protection Regulation (“GDPR”) adopted in the European Union in April 2016, which was required to be fully implemented in all member states by May 2018. Diageo incurred significant costs in connection with the implementation of the GDPR, and the introduction of, or changes in, similar data privacy laws and regulations in other jurisdictions in which Diageo operates are likely to continue to require substantial expenditure to make any necessary up front changes to security systems, policies, procedures and business practices, as well as for ongoing compliance costs. Breach of any of these laws or regulations could also lead to significant penalties (including, under the GDPR, a fine of up to 4% of global turnover), other types of government enforcement actions, private litigation and/or damage to Diageo’s reputation, as well as impact Diageo’s ability to deliver on its digital productivity and growth plans.

Business description (continued)

Any failure by Diageo to comply with anti-corruption laws, sanctions, trade restrictions or similar laws or regulations, or any failure of Diageo’s related internal policies and procedures to comply with applicable law, may have a material adverse effect on Diageo’s business and financial results

Diageo produces and markets its products in a global scale, including in certain countries that, as a result of political and economic instability, a lack of well-developed legal systems and/or potentially corrupt business environments, have a higher level of corruption risk than other countries. There is increasing scrutiny and enforcement by regulators in many jurisdictions of anti-corruption laws, including pursuant to the US Foreign Corrupt Practices Act of 1977, the UK Bribery Act 2010, and certain jurisdictions’ equivalent local laws. Such enforcement has been enhanced by applicable regulations in the United States, which offer substantial financial rewards to whistleblowers for reporting information that leads to monetary fines.

If Diageo or any of its associates fails to comply with anti-corruption laws (including anti-bribery laws), or with existing or new economic sanctions or trade restrictions imposed by the United States, the European Union or other national or international authorities that are applicable to Diageo or its associates, Diageo may be exposed to the costs associated with investigating potential misconduct as well as potential legal liability and/or reputational damage.

While Diageo has implemented and maintains internal practices, procedures and controls designed to ensure compliance with anti-corruption laws, sanctions, trade restrictions or similar laws and regulations, and routinely conducts investigations, either at its own initiative or in response to requests from regulators in connection with compliance with such internal controls, there is no guarantee that such procedures will be effective in preventing compliance failures at Diageo or at third parties with whom Diageo maintains business relationships.

Any investigations and lawsuits, regardless of the ultimate outcome of the proceeding, are time consuming and expensive and can divert the time and effort of Diageo’s personnel, including senior management, from its business. Adverse publicity, legal and enforcement proceedings, and enhanced government scrutiny can also have a negative impact on Diageo’s reputation. To the extent that violations of anti-corruption, sanctions and/or trade restriction laws and regulations, and/or Diageo’s internal policies and procedures, are found, or if Diageo’s internal policies and procedures are found not to comply with applicable law, possible regulatory sanctions, fines and other penalties or consequences, including reputational damage, may also be material.

Defective internal controls could adversely affect Diageo’s financial reporting and management processes, as well as the accuracy of public disclosures

Diageo has in place internal control and risk management systems in relation to its financial reporting process and its process for the preparation of consolidated financial statements. In addition, management undertakes a review of the consolidated financial statements in order to ensure that the financial position and results of the group are appropriately reflected therein. Diageo is required by the laws of various jurisdictions to publicly disclose its financial results, as well as developments that could materially affect its financial results. Regulators routinely review the financial statements of listed companies such as Diageo for compliance with existing, new or revised accounting and regulatory requirements. Should Diageo be subject to an investigation into potential non-compliance with accounting and disclosure requirements or be found to have breached any such requirements, this may lead to restatements of previously reported results and/or significant penalties. In addition, the reliability of financial reporting is important in ensuring that the business’ management and its results are based on reliable data. Flaws in internal control systems could adversely affect Diageo’s business and financial results, including Diageo’s ability to execute its strategy.

Accurate disclosures also provide investors and other market professionals with information to understand Diageo’s business. Defective internal controls could result in inaccuracies or lack of clarity in public disclosures that could create market uncertainty regarding the reliability of the data presented. As a result, defective internal controls could adversely affect Diageo’s business and financial results and/or the price of Diageo’s securities.

Business description (continued)

Risks related to Diageo’s business

The value of Diageo’s brands and its net sales may be negatively affected by its failure to maintain its brand image and corporate reputation or adapt to a changing media environment

The value of Diageo’s brands and its profitability depends heavily on its ability to maintain its brand image and corporate reputation. Adverse publicity, whether or not justified, may tarnish Diageo’s reputation and cause consumers to purchase products offered by its competitors instead of by Diageo. Such adverse publicity could arise as a result of a perceived failure by Diageo to make adequate positive social contributions, including in relation to the level of taxes paid by Diageo, or by any failure of internal controls or compliance breaches leading to violations of Diageo’s Code of Business Conduct, Code of Ethics, its other key policies or the laws or regulations of the jurisdictions in which it operates. Diageo has also established and may continue to establish relationships with brand founders and/or other public figures to develop and promote its brands, and to establish brand equity, history and authenticity with consumers. If certain such individuals were to stop promoting a Diageo brand or brands contrary to their agreements, Diageo’s business could be adversely affected. Negative claims or publicity involving Diageo, its culture and values, brands, or any of its key employees or brand endorsers could also damage Diageo’s brands and/or reputation, regardless of whether such claims are accurate, and may have a material adverse effect on Diageo’s business and financial results.

In addition, Diageo’s ability to maintain, extend, and expand its brand image depends on its ability to adapt to a rapidly changing media environment. Diageo maintains an online presence as part of its business operations, and increasingly relies on social media and online dissemination of advertising campaigns. Diageo’s reputation may suffer if it is perceived to fail to appropriately restrict access to its online content or if it breaches any marketing regulation, code or policy. In addition, the growing use of social and digital media increases the speed and extent that information or misinformation and opinions can be shared. Negative posts or comments about Diageo, its brands or its products on social or digital media, whether or not valid, could seriously damage Diageo’s brands and reputation.

Any failure to maintain, extend, and expand Diageo’s brand image or adapt to a changing media environment may have a material adverse effect on Diageo’s business and financial results.

Contamination, counterfeiting or other events could harm the integrity of customer support for Diageo’s brands and adversely affect the sales of those brands

The success of Diageo’s brands depends upon the positive image that consumers have of those brands, and contamination, whether arising accidentally, or through deliberate third party action, or other events that harm the integrity of or consumer support for those brands, could adversely affect their sales. Diageo purchases most of the raw materials for the production and packaging of its products from third party producers or on the open market. Diageo may be subject to liability if contaminants in those raw materials or defects in the distillation, fermentation or bottling process lead to reduced beverage quality or illness among, or injury to, Diageo’s consumers, or if the products do not otherwise comply with applicable food safety regulations. Diageo may also recall products in the event of contamination or damage. A significant product liability judgment or a widespread product recall may negatively impact sales and profitability of the affected brand or all of Diageo’s brands for a period of time depending on product availability, competitive reaction and consumer attitudes. Even if a product liability claim is unsuccessful or is not fully pursued, any resulting negative publicity could adversely affect Diageo’s reputation with existing and potential customers as well as its corporate and individual brand image.

Additionally, third parties may sell products which are either counterfeit versions of Diageo brands or inferior brands that look like Diageo brands, and consumers of Diageo brands could confuse Diageo products with such counterfeit products. A negative consumer experience with such a product could cause them to refrain from purchasing Diageo brands in the future and impair Diageo’s brand equity, thus adversely affecting Diageo’s business.

Business description (continued)

Diageo faces competition that may reduce its market share and margins

Diageo faces substantial competition from several international companies as well as regional and local companies (including craft breweries) in the countries in which it operates, and competes with other drinks companies across a wide range of consumer drinking occasions. Within a number of categories, the beverage alcohol industry has been experiencing continuing consolidation among major global producers, as evidenced by business combinations of substantial value carried out by significant competitors in recent years. Consolidation is also taking place among Diageo’s customers in many countries. These trends may lead to stronger competitors, increased competitive pressure from customers, negative impacts on Diageo’s distribution network (including sub-optimal routes to customers and consumers), downward pressure on prices, predatory marketing tactics by Diageo’s competitors and/or a decline in Diageo’s market share in any of these categories. Adverse developments in economic conditions or declines in demand or consumer spending, including due to the Covid-19 pandemic, may also result in intensified competition for market share, with potentially adverse effects on sales volumes and prices. Any of these factors may adversely affect Diageo’s results and potential for growth.

Diageo may be adversely affected by disruption to production facilities, business service centres or information systems, including via cyber-attacks

Diageo operates production facilities around the world. If there was a technical failure, or a fire, explosion, flood or other significant event, at one or more of Diageo’s production facilities, this could result in significant damage to the facilities, plant or equipment, their surroundings and/or the local environment and/or injury or loss of life. Such an event could also lead to a loss of production capacity, result in regulatory action or legal liability, and/or damage Diageo’s reputation.

Diageo has a substantial inventory of aged product categories, including scotch whisky, which may mature over periods of up to 30 years or more. A substantial portion of this maturing inventory is stored in Scotland, and the loss through contamination, fire or other natural disaster of all or a portion of the stock of any one of those aged product categories could result in a significant reduction in supply of those products, and consequently, Diageo would not be able to meet consumer demand for those products as such demand arises. There can be no assurance that insurance proceeds would cover the replacement value of Diageo’s maturing inventory or other assets in the event that such assets were lost due to contamination, fire or natural disasters, destruction resulting from negligence or the acts of third parties, or failure of information systems or data infrastructure.

Diageo also relies on information technology (IT) systems, networks and services, including internet sites, data hosting and processing tools, hardware (including laptops and mobile devices), software, and technical platforms and applications, to process, store and transmit large amounts of data and to help it manage its business. Diageo uses its IT systems, networks and services for, among other key business functions, the hosting of its primary and brand-specific websites and its internal network and communications systems; supply and production planning, execution and shipping; the collection and storage of customer, consumer, IR and employee data; processing various types of transactions, including summarising and reporting its results of operations; the development and storage of strategic corporate plans; and ensuring compliance with various legal, regulatory and tax requirements. As with all large systems, Diageo’s IT systems, including those managed or hosted by third parties, could be subject to cyber-attacks (including phishing and ransomware attacks) by external or internal parties intent on disrupting production or other business processes or otherwise extracting or corrupting information. Diageo’s vulnerability to such cyber-attacks could also be increased due to a significant proportion of its employees working remotely during the course of the Covid-19 pandemic. Such unauthorised access could disrupt Diageo’s business, including its beverage alcohol and other production capabilities, and/or lead to loss of assets or to outside parties having access to confidential or even highly confidential information, including privileged data, personal data or strategic information of Diageo and its current or former employees, customers and consumers. Such information could also be made public in a manner that harms Diageo’s reputation.

Diageo’s use of shared business services centres, located in Hungary, Kenya, Colombia, the Philippines and India, to deliver transaction processing activities for markets and operational entities also means that any sustained disruption to a centre or issue impacting the reliability of the information systems used could impact a large portion of Diageo’s business operations. The captive shared business services centres in Hungary and India also perform certain central finance activities, including elements of financial planning and reporting, treasury and HR services. Any transitions of transaction processes to, from or within shared business services centres, as well as other projects which impact Diageo’s IT systems, could lead to business disruption. In addition, if Diageo does not allocate and properly manage the resources necessary to build, sustain and protect these centres or its wider IT systems, it could be subject to losses attributable to processing inefficiencies, the unexpected failure of computer systems, devices and software used by its IT platforms, production or supply chain disruptions, the unintended disclosure of sensitive business or personal data and the corruption or loss of accounting data necessary for it to produce accurate and timely financial reports. In certain circumstances, such disruptions or failures could also result in property damage, breaches of regulations, litigation, legal liabilities and reparation costs, thereby having a material adverse effect on Diageo’s business and financial results.

Business description (continued)

Diageo’s business may be adversely affected by increased costs for, or shortages of, talent, or by labour strikes or disputes

Diageo’s business could be adversely affected by labour or skill shortages or increased labour costs due to increased competition for employees, higher employee turnover or increased employee benefit costs. There is no guarantee that Diageo will continue to be able to recruit, retain and develop personnel possessing the skill sets that it requires to deliver its strategy, for example in relation to sales, marketing and innovation capability within markets, or in its senior management. The loss of senior management or other key personnel or the inability to identify, attract and retain qualified personnel in the future could make it difficult to manage Diageo’s operations and adversely affect Diageo’s business and financial results. In addition, labour strikes, work stoppages or slowdowns within Diageo’s operations or those of Diageo’s suppliers could adversely impact Diageo.

Diageo may not be able to derive the expected benefits from its business strategies, including in relation to expansion in emerging markets, acquisitions, investments in joint ventures, productivity initiatives or inventory forecasting

There can be no assurance that Diageo’s business strategies will result in opportunities for growth and improved margins. Part of Diageo’s growth strategy includes expanding its business in certain emerging market countries (including in Africa and Asia) where consumer spending in general, and spending on Diageo’s products in particular, has historically not been significant, but where Diageo believes there are strong prospects for growth. There is no guarantee that this strategy will be successful, and some of these markets may represent a higher risk in terms of their changing regulatory environments and higher degrees of uncertainty over levels of consumer spending.

It is also possible that Diageo’s business strategies could give rise to further business combinations, acquisitions, disposals, joint ventures and/or partnerships (including any associated financing or the assumption of actual or potential liabilities, depending on the transaction contemplated). However, there can be no assurance that any such transaction would be completed and/or that it would deliver the anticipated benefits, cost savings or synergies. The success of any transaction also depends in part on Diageo’s ability to successfully integrate new businesses with its existing operations. Acquisitions may also expose Diageo to liabilities it may not be aware of at the time of the acquisition, for example if acquired companies and business do not act, or have not acted, in compliance with applicable laws and regulations. The ongoing issues in USL detailed in note 18 to the consolidated financial statements provide an example of integration and legal challenges.

Diageo may from time to time hold interests and investments in joint ventures and associated companies in which it has a non-controlling interest and may continue to do so. In these cases, Diageo may have limited influence over, and limited or no control of, the governance, performance and cost of operations of the joint ventures and associated companies. Some of these joint ventures and associated companies may represent significant investments, and these investee entities or other joint venture partners or equity holders may make business, financial or investment decisions contrary to Diageo's interests or may make decisions different from those that Diageo itself may have made. The arbitration in connection with the dividend from Moet Hennessy detailed in Note 18(g) to the consolidated financial statements is an example of risks in connection with joint ventures and associated companies in which Diageo has a non-controlling interest.

Similarly, there can be no assurance that the global productivity and simplification programmes implemented by Diageo in order to drive efficiencies and cost savings, or other programmes designed to improve the effectiveness and efficiency of end-to-end operations, will deliver the expected benefits. Such programmes may also result in significant costs to Diageo or may have other adverse impacts on the business and operations of the group.

Certain of Diageo’s aged product categories may mature over periods of up to 30 years, and forecasts of demand for such products in future periods are subject to significant uncertainty. There is an inherent risk of forecasting error in determining the quantity of maturing stock to lay down in a given year for future consumption as a result of changes in business strategy, market demand and preferences, introductions of competing products and other changes in market conditions. Any forecasting error could lead to Diageo being unable to meet the objectives of its business strategy, future demand or lead to a future surplus of inventory and consequent write- down in value of maturing stocks. If Diageo is unable to accurately forecast demand for its products or efficiently manage its inventory, this may have a material adverse effect on Diageo’s business and financial results.

Diageo’s operations and financial results may be adversely affected by fluctuations in exchange rates and fluctuations in interest rates

Diageo is engaged in an international business that operates in, and makes sales into, countries with different currencies, while its financial results are presented in sterling. As a result, Diageo is subject to foreign currency risk due to exchange rate movements, which affects the sterling value of its transactions, as well as the translation to sterling of the results and underlying net assets of its operations. In particular, approximately 41% of Diageo’s net sales in the year ended 30 June 2020 were in US dollars, approximately 10% were in euros and approximately 8% were in sterling. Movements in exchange rates used to translate foreign

Business description (continued)

currencies into sterling may have a significant impact on Diageo’s reported results of operations from year to year. Exchange rate fluctuations may also expose Diageo to increased interest expense on borrowings denominated in currencies which appreciate against the sterling. As a result, Diageo’s business and financial results may be adversely affected by fluctuations in exchange rates. In addition, Diageo may be adversely impacted by fluctuations in interest rates, mainly through increased interest expense.

Diageo’s operations and financial results may be adversely affected by movements in the value of assets and liabilities related to its pension plans

Diageo operates a number of pension plans throughout the world, which vary in accordance with local conditions and practices. The majority of these pension plans are defined benefit plans and are funded by payments to separately administered trusts or insurance companies. The ability of these pension plans to meet their pension obligations may be affected by, among other things, the performance of assets owned by these pension plans, the liabilities in connection with the pension plans, the underlying actuarial assumptions used to calculate the surplus or deficit in the plans, in particular the discount rate and long-term inflation rates used to calculate the liabilities of the pension funds, and any changes in applicable laws and regulations. If there are significant declines in financial markets and/or deterioration in the value of fund assets or changes in discount rates or inflation rates, Diageo may need to make substantial contributions to these pension funds in the future.

Furthermore, if the market values of the assets held by Diageo’s pension funds decline, the valuations of assets by the pension trustees decline or the valuation of liabilities in connection with pension plans increase, pension expenses may increase which, as a result, could materially adversely affect Diageo’s financial position. There is no assurance that interest rates or inflation rates will remain constant, that pension fund assets can earn the assumed rate of return annually or that the value of liabilities will not fluctuate significantly. Diageo’s actual experience may also be significantly more negative than the assumptions used.

Diageo’s operations may be adversely affected by failure to maintain or renegotiate distribution, supply, manufacturing or licence agreements on favourable terms

Diageo’s business has a number of distribution, supply, manufacturing or licence agreements for brands owned by it or by other companies. These agreements vary depending on the particular brand, but tend to be for a fixed number of years. There can be no assurance that Diageo will be able to renegotiate its rights on favourable terms when these agreements expire or that they will not be terminated. Failure to renew these agreements on favourable terms, or any disputes with distributors of Diageo’s products or suppliers of raw materials, could have an adverse impact on Diageo’s business and financial results.

Diageo may not be able to protect its intellectual property rights

Given the importance of brand recognition to its business, Diageo has invested considerable effort in protecting its intellectual property rights, including trademark registration and domain names. Diageo’s patents cover some of its process technology, including some aspects of its bottle marking technology. Diageo also uses security measures and agreements to protect its confidential information and trade secrets. However, Diageo cannot be certain that the steps it has taken will be sufficient or that third parties will not infringe on or misappropriate its intellectual property rights in its brands or products. Moreover, some of the countries in which Diageo operates offer less intellectual property protection than Europe or North America. Given the attractiveness of Diageo’s brands to consumers, it is not uncommon for counterfeit products to be manufactured and traded in certain jurisdictions. Diageo cannot be certain that the steps it takes to assist the authorities to prevent, detect and eliminate counterfeit products will be effective in preventing material loss of profits or erosion of brand equity resulting from lower quality or even dangerous counterfeit product reaching the market. If Diageo is unable to protect its intellectual property rights against infringement or misappropriation, this could materially harm its future financial results and ability to develop its business.

Risks related to Diageo’s securities

It may be difficult to effect service of US process and enforce US legal process against Diageo and its directors

Diageo is a public limited company incorporated under the laws of England and Wales. The majority of Diageo’s directors and officers, and some of the experts named in this document, reside outside of the United States, principally in the United Kingdom. A substantial portion of Diageo’s assets, and all or a substantial portion of the assets of such persons, are located outside of the United States. Therefore, it may not be possible to effect service of process within the United States upon Diageo or these persons in order to enforce judgments of US courts against Diageo or these persons based on the civil liability provisions of US federal securities laws. There is also doubt as to the enforceability in England and Wales, in original actions or in actions for enforcement of judgments of US courts, of civil liabilities solely based on the US federal securities laws. In addition, punitive damages in actions brought in the United States or elsewhere may be unenforceable in England and Wales.

Business description (continued)

Cautionary statement concerning forward-looking statements

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

Factors that could cause actual results and developments to differ materially from those expressed or implied by forward-looking statements include, but are not limited to:

–

economic, political, social or other developments in countries and markets in which Diageo operates (including as a result of the Covid-19 pandemic), which may contribute to a reduction in demand for Diageo’s products, adverse impacts on Diageo’s customer, supplier and/or financial counterparties, or the imposition of import, investment or currency restrictions (including the potential impact of any global, regional or local trade wars or any tariffs, duties or other restrictions or barriers imposed on the import or export of goods between territories, including but not limited to, imports into and exports from the United States and the European Union and/or the United Kingdom);


–	the impact of the Covid-19 pandemic, or other epidemics or pandemics, on Diageo’s business, financial condition, cash flows and results of operation;

–

the negotiating process surrounding, as well as the final terms of, the United Kingdom’s future trading relationships with the European Union and other countries, which could lead to a sustained period of economic and political uncertainty and complexity whilst successor trading arrangements with other countries are negotiated, finalised and implemented, potentially adversely impacting economic conditions in the United Kingdom and Europe more generally as well as Diageo’s business operations and financial performance; ;


–	changes in consumer preferences and tastes, including as a result of changes in demographics, evolving social trends (including any shifts in consumer tastes towards small-batch craft alcohol, lower or no alcohol, or other alternative products), changes in travel, holiday or leisure activity patterns, weather conditions, health concerns, pandemics and/or a downturn in economic conditions;


–	changes in the domestic and international tax environment, including as a result of the OECD Base Erosion and Profit Shifting Initiative and EU anti-tax abuse measures, leading to uncertainty around the application of existing and new tax laws and unexpected tax exposures;


–	the effects of climate change, or legal, regulatory or market measures intended to address climate change, on Diageo’s business or operations, including on the cost and supply of water;


–	changes in the cost of production, including as a result of increases in the cost of commodities, labour and/or energy or as a result of inflation;


–	any litigation or other similar proceedings (including with tax, customs, competition, environmental, anti-corruption or other regulatory authorities), including litigation directed at the beverage alcohol industry generally or at Diageo in particular;


–	legal and regulatory developments, including changes in regulations relating to production, distribution, importation, marketing, advertising, sales, pricing, labelling, packaging, product liability, antitrust, labour, compliance and control systems, environmental issues and/or data privacy;


–	the consequences of any failure by Diageo or its associates to comply with anti-corruption, sanctions, trade restrictions or similar laws and regulations, or any failure of Diageo’s related internal policies and procedures to comply with applicable law or regulation;


–	the consequences of any failure of internal controls, including those affecting compliance with existing or new accounting and/or disclosure requirements;


–	Diageo’s ability to maintain its brand image and corporate reputation or to adapt to a changing media environment;


–	contamination, counterfeiting or other circumstances which could harm the level of customer support for Diageo’s brands and adversely impact its sales;

Business description (continued)


–	increased competitive product and pricing pressures, including as a result of actions by increasingly consolidated competitors or increased competition from regional and local companies, that could negatively impact Diageo’s market share, distribution network, costs and/or pricing;


–	any disruption to production facilities, business service centres or information systems, including as a result of cyber attacks;


–	increased costs for, or shortages of, talent, as well as labour strikes or disputes;


–	Diageo’s ability to derive the expected benefits from its business strategies, including in relation to expansion in emerging markets, acquisitions and/or disposals, cost savings and productivity initiatives or inventory forecasting;


–	fluctuations in exchange rates and/or interest rates, which may impact the value of transactions and assets denominated in other currencies, increase Diageo’s cost of financing or otherwise adversely affect Diageo’s financial results;


–	movements in the value of the assets and liabilities related to Diageo’s pension plans;


–	Diageo’s ability to renew supply, distribution, manufacturing or licence agreements (or related rights) and licences on favourable terms, or at all, when they expire; or


–	any failure by Diageo to protect its intellectual property rights.

All oral and written forward-looking statements made on or after the date of this document and attributable to Diageo are expressly qualified in their entirety by the above factors and by the principal risks set out in the ‘Risk factors’ section above. Any forward-looking statements made by or on behalf of Diageo speak only as of the date they are made. Diageo does not undertake to update forward-looking statements to reflect any changes in Diageo’s expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. The reader should, however, consult any additional disclosures that Diageo may make in any documents which it publishes and/or files with the U.S. 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 2020.

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

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

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

Business review

Operating results 2020 compared with 2019

Group financial review

Reported net sales were down 8.7% driven by organic declines

Reported operating profit declined 47.1% driven mainly by exceptional operating items and decline in organic operating profit

Organic volumes were down with volume decline of 11.2%

Organic net sales decline of 8.4%

Organic operating profit declined 14.4%

Net cash from operating activities was £2.3bn

Free cash flow was £1.6bn

Basic eps of 60.1p was down by 54.0%

Eps before exceptional items declined 16.4% to 109.4 pence


(i)	Excluding corporate net sales of £38 million (2019 - £53 million).


(ii)	Excluding net corporate cost of £147 million (2019 - £210 million).


(iii)	Excluding exceptional operating charges of £1,357 million (2019 - £74 million) and net corporate operating costs of £147 million (2019 - £189 million).

~~Europe~~

~~Other (principally~~
~~Travel Retail)~~

~~Spirits~~

~~Ready to drink~~

~~Turkey~~

~~Beer~~

~~Other~~



Summary financial information		2020		2019
Volume	EUm	217.0		245.9
Net sales	£ million	11,752		12,867
Marketing	£ million	1,841		2,042
Operating profit before exceptional items	£ million	3,494		4,116
Exceptional operating items⁽ⁱ⁾	£ million	(1,357	)	(74	)
Operating profit	£ million	2,137		4,042
Share of associate and joint venture profit after tax	£ million	282		312
Non-operating exceptional gain⁽ⁱ⁾	£ million	(23	)	144
Net finance charges	£ million	(353	)	(263	)
Exceptional taxation credit/(charge)⁽ⁱ⁾	£ million	154		(39	)
Tax rate including exceptional items	%	28.8		21.2
Tax rate before exceptional items	%	21.7		20.6
Profit attributable to parent company’s shareholders	£ million	1,409		3,160
Basic earnings per share	pence	60.1		130.7
Earnings per share before exceptional items	pence	109.4		130.8
Recommended full year dividend	pence	69.9		68.6

(i) For further details of exceptional items see pages 213 to 216.

Business review (continued)



Reported growth by region	Volume %		Sales %		Net sales %		Marketing %		Operating profit%		Operating profit before exceptional items %
North America	(2	)	3		4		(5	)	7		4
Europe and Turkey	(11	)	(8	)	(13	)	(13	)	(30	)	(25	)
Africa	(14	)	(14	)	(16	)	(8	)	(116	)	(63	)
Latin America and Caribbean	(15	)	(18	)	(20	)	(23	)	(34	)	(32	)
Asia Pacific	(15	)	(13	)	(16	)	(11	)	(204	)	(29	)
Diageo - reported growth by region⁽ⁱⁱ⁾	(12	)	(8	)	(9	)	(10	)	(47	)	(15	)
Organic growth by region	Volume %		Sales %		Net sales %		Marketing %				Operating profit⁽ⁱ⁾%
North America	—		2		2		(6	)			4
Europe and Turkey	(11	)	(8	)	(12	)	(12	)			(24	)
Africa	(13	)	(12	)	(13	)	(8	)			(56	)
Latin America and Caribbean	(15	)	(13	)	(15	)	(15	)			(29	)
Asia Pacific	(15	)	(13	)	(16	)	(11	)			(29	)
Diageo - organic growth by region⁽ⁱⁱ⁾	(11	)	(8	)	(8	)	(10	)			(14	)


(i)	Before exceptional operating items.


(ii)	Includes Corporate. In the year ended 30 June 2020 corporate net sales were £38 million (2019 - £53 million). Net corporate operating costs were £147 million (2019 - £189 million).

Business review (continued)

Key performance indicators

Net sales (£ million)

Reported net sales declined 8.7%

Organic net sales declined 8.4%


(i)	Exchange rate movements reflect the adjustment to recalculate the reported results as if they had been generated at the prior period weighted average exchange rates.

(ii) For the year ended 30 June 2019 trade investment of £10 million has been reclassified from marketing to net sales.

(iii) Organic movement

Reported net sales declined 8.7%, driven mainly by decline in organic net sales and, to a lesser extent, the negative impact of acquisitions and disposals, partially offset by favourable foreign exchange.

Organic net sales declined 8.4% driven by an 11.2% reduction in volume partially offset by 2.8% positive price/mix. All regions reported declines in organic net sales except for North America and this shift in market mix was the main driver behind the positive price/mix.

Operating profit (£ million)

Reported operating profit declined 47.1%

Organic operating profit declined 14.4%

Key financials 2018
£ million
Exchange
£ million
Acquisitions
and
disposals
£ million
Organic movement
£ million
2019
£ million
Reported movement
%
Net sales 2,932
(95 ) (2 ) 104
2,939
—
Marketing 474
(10 ) —
26
490
3
Operating profit before exceptional items 1,028
(35 ) (1 ) 22
1,014
(1 )
Exceptional operating items⁽ⁱ⁾
—

(18 )
Operating profit 1,028

996
(3 )


(i)	For further details on exceptional ~~operating~~ items see pages ~~196~~213-216.


(ii)	Fair value adjustments. For further details on fair value remeasurement see page 89.

Reported operating profit was down 47.1% mainly driven by exceptional operating items and by decline in organic operating profit. Exceptional operating items were mainly driven by non-cash impairments in India, Korea, Nigeria and Ethiopia due to Covid-19 and challenging trading conditions.

Organic operating profit declined ahead of net sales at 14.4% with first half growth of 4.6% more than offset by impact of Covid-19 in the second half.

Business review (continued)

Operating margin (%)

Reported operating margin declined 1,323bps

Organic operating margin declined 212 bps


(i)	Fair value adjustments and reclassification.

(ii) Organic movement

Reported operating margin declined 1,323bps mainly driven by exceptional operating items and decline in organic operating margin.

Organic operating margin declined 212bps driven by lower volumes impacting fixed cost absorption, cost inflation and other expense offsetting savings in marketing investment and productivity benefits from cost efficiencies.

Basic earnings per share (pence)

Basic eps decreased 54.0% from 130.7 pence to 60.1 pence

Eps before exceptional items decreased 16.4% from 130.8 pence to 109.4 pence


(i)	Includes finance charges net of tax.


(ii)	Excludes finance charges related to ~~198.~~acquisitions, disposals and share buyback.


(iii)	~~Within the geography of Europe there are two markets: Europe~~Excludes tax related to acquisitions, disposals and ~~Turkey. Our Europe business is driving consistent~~ share ~~gaining performance through execution at scale of our consumer marketing programme across the market as well as continuing to optimise our route to market. The economic environment~~buyback.


(iv)	Fair value adjustments and exchange on operating profit.

Basic eps decreased 70.6 pence principally due to impairments in exceptional items and the decline in organic operating profit. For further detail see pages 213 to 216.

Eps before exceptional items decreased 21.4 pence driven by decline in organic operating profit, lower income from associates and joint ventures, increased finance charges and the impact of acquisitions and disposals. These were partially offset by tax, lower non-controlling interests and the impact of the share buyback programme.

Business review (continued)

Net cash from operating activities and free cash flow (£ million)

Generated £2,320 million from operating activities.^(i)(ii)

Free cash flow was £1,634 million.

(i)

Net cash from operating activities excludes net capex and movements in ~~Turkey continues to be challenging but we remain focused on executing our strategy through growth of international premium spirits and premiumisation.~~

~~Our markets~~

Europe comprises Great Britain, Ireland, France, Continental Europe (including Northern Europe, Central Europe, Iberia, the Mediterranean and the Europe Partner Markets distribution businesses) and Russia, whilst Turkey is a standalone market. Europe is managed as a single market with country teams focusing on sales and customer marketing execution.

~~Supply operations~~

A number of Diageo’s International Supply Centre (ISC) operations are located in Europe including production sites in the United Kingdom, Ireland and Italy. The group owns 29 distilleries in Scotland, a Dublin based brewery, distillery, and maturation and packaging facilities in Scotland, England, Ireland and Italy. The ISC leads all supply chain activities for Europe and manufactures whisky, vodka, gin, rum, beer, cream liqueurs,loans and other ~~spirit-based drinks which are distributed in over 180 countries.~~

investments (2020 - £(686) million; 2019 - £(640) million).

(ii)

In 2018 we announced a £150 million investment in visitor experiences in Scotland over the next two years. We are transforming our Scotch whisky visitor experiences through investment in our 12 malt whisky distillery visitor centres with a focus on the ‘Four Corners distilleries’, Glenkinchie, Caol Ila, ClynelishNet cash from operating activities and Cardhu, celebrating the important role these single malts play in the flavours of Johnnie Walker. Also, as part of the investment programme, formal permission for plans to create a global flagship visitor experience for Johnnie Walker in Edinburgh city centre has been received. Raki and vodka are produced at a number of sites in Turkey and other local brands are produced in Russia.

~~Business review (continued)~~

~~Route to consumer~~

In Great Britain we sell and market our products through Diageo GB (spirits, beer and ready to drink) and Justerini & Brooks Fine Wines (wines private clients). Products are distributed through independent wholesalers and directly to retailers. In the on-trade, products are sold through major brewers, multiple retail groups and smaller regional independent brewers and wholesalers. In the Republic of Ireland and Northern Ireland, Diageo sells and distributes directly to the on-trade and the off-trade as well as wholesalers. In France our products are sold through a joint venture arrangement with Moët Hennessy. In Continental Europe and Russia, we distribute our spirits brands primarily through our own distribution companies, except in Europe Partner Markets where we typically use distributors.

~~In Turkey, we sell our products via the distribution network of Mey İçki~~, ~~our wholly owned subsidiary. Mey İçki distributes both local brands (raki, other spirits and wine) and Diageo’s global spirits brands.~~

~~Sustainability and responsibility~~

Encouraging moderation and tackling harmful drinking remain key strategic priorities. Our ‘Stay Yourself’ moderation campaign, which began on university campuses in 2018, reached a further five million students this year through online and offline channels, and we reached over 42,000 people through our 'Smashed' theatre-based education programme.

Our Learning for Life (L4L) skills programme goes from strength to strength. More than 600 people graduated this year in the UK, Spain, Portugal, the Netherlands, Belgium and Germany. We launched new L4L programmes in Italy and Greece, and in Ireland we launched the ‘Open Doors’ initiative, aimed at refugees, asylum seekers and people with disabilities. We received the inaugural Inclusion and Diversity Chambers award in Ireland for our L4L work with refugees and asylum seekers.

Forty-eight of our sites in Europe recorded zero lost-time accidents, maintaining the strong performance of last year. Our commitment to progress on environmental performance is reflected by a 10.8% improvement in our water use efficiency. Turkey performed particularly strongly, recording an improvement of nearly 16% this year. In April, we announced a £16 million investment in reducing the plastic content of our beer packaging through the use of 100% recyclable and biodegradable cardboard.

~~Performance~~

~~Sales and net sales~~

Sales decreased by £100 million, or (2)%, to £5,132 million in the year ended 30 June 2019 from £5,232 million in the year ended 30 June 2018. Excise duties were £2,193 million in the year ended 30 June 2019 and £2,300 million in the year ended 30 June 2018, a decrease of £107 million.

~~Net sales (sales less excise duties) were £2,939 million~~free cash flow for the year ended 30 June ~~2019 an increase~~2020 benefited by £74 million as a result of £7the adoption of IFRS 16 on 1 July 2019.


(iii)	Exchange on operating profit before exceptional items.


(iv)	Operating profit excludes exchange, depreciation and amortisation, post employment charges and other non-cash items.


(v)	Working capital movement includes maturing inventory.


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

Net cash from operating activities was £2,320 million, a decrease of £928 million compared to the prior period. Free cash flow was £1,634 million, £974 million lower compared to prior period primarily driven by the decline in operating profit, lower dividends from joint ventures and associates (see note 18(g) page 274), increased use of working capital, higher tax payments and higher interest charges. The tax increase was mainly due to one-off tax settlements and change in payment timing in the first half, which was partially offset by lower tax on reduced earnings in the second half as well as some delay in second half payments associated with Covid-19.

Business review (continued)

Return on invested capital (ROIC)%

Return on closing invested capital (%)

The return on closing invested capital of 17.2% for the year ended 30 June 2020, calculated as profit for the year divided by net assets as of 30 June 2020, decreased by 1570bps principally driven by lower profit after tax partially offset by a decrease in net assets.

Return on average invested capital (%)⁽ⁱ⁾decreased 267bps.


(i)	ROIC calculation excludes exceptional operating items from operating profit and includes an adverse impact of 18bps as a result of the adoption of IFRS 16 on 1 July 2019.

ROIC decreased 267bps against the prior comparable period driven mainly by organic operating profit decline.

Business review (continued)

Income statement



	2019 £ million		Exchange (a) £ million		Acquisitions and disposals (b) £ million		Organic movement⁽ⁱ⁾ £ million		Fair value remeasurement (d) £ million		Reclassification⁽ⁱⁱ⁾ £ million		2020 £ million
Sales	19,294		(1	)	(108	)	(1,478	)	—		(10	)	17,697
Excise duties	(6,427	)	33		32		417		—		—		(5,945	)
Net sales	12,867		32		(76	)	(1,061	)	—		(10	)	11,752
Cost of sales	(4,866	)	(31	)	41		193		9		—		(4,654	)
Gross profit	8,001		1		(35	)	(868	)	9		(10	)	7,098
Marketing	(2,042	)	3		(7	)	195		—		10		(1,841	)
Other operating items	(1,843	)	(5	)	8		84		(7	)	—		(1,763	)
Operating profit before exceptional items	4,116		(1	)	(34	)	(589	)	2		—		3,494
Exceptional operating items (c)	(74	)											(1,357	)
Operating profit	4,042												2,137
Non-operating items (c)	144												(23	)
Net finance charges	(263	)											(353	)
Share of after tax results of associates and joint ventures	312												282
Profit before taxation	4,235												2,043
Taxation (e)	(898	)											(589	)
Profit for the year	3,337												1,454

(i) For the definition of organic movement see page 123.

(ii) For the year ended 30 June 2019 trade investment of £10 million has been reclassified from marketing to net sales.

(a) Exchange

The impact of movements in exchange rates on reported figures for net sales is principally in respect of the translation exchange impact of the weakening of sterling against the US dollar, partially offset by strengthening of sterling against the Brazilian real, the Australian dollar and the euro. The impact of movements in exchange rates on reported figures for operating profit is principally in respect of the transactional exchange impact of the weakening of the Brazilian real, the Colombian peso and the Nigerian naira, broadly offset by translational exchange impact of the strengthening of the US dollar against sterling.

The effect of movements in exchange rates and other movements on profit before exceptional items and taxation for the year ended 30 June 2020 is set out in the table below.



	Gains/ (losses) £ million
Translation impact	56
Transaction impact	(57	)
Operating profit before exceptional items	(1	)
Net finance charges	(2	)
Associates – translation impact	(3	)
Profit before exceptional items and taxation	(6	)

Business review (continued)



	Year ended 30 June 2020		Year ended 30 June 2019
Exchange rates
Translation £1 =		$1.26		$1.29
Transaction £1 =		$1.35		$1.33
Translation £1 =		€1.14		€1.13
Transaction £1 =		€1.12		€1.13

(b) Acquisitions and disposals

The acquisitions and disposals movement was mainly attributable to the acquisition of Seedlip and Anna Seed 83, the disposal of United National Breweries and the prior year disposal of a portfolio of 19 brands to Sazerac.

See note 8 for further details.

Exceptional operating items in the year ended 30 June 2020 were £1,357 million before tax (2019 - £74 million).

Value in use calculation and fair value less costs of disposal methodologies were both considered to assess the recoverable amount of the India cash-generating unit. Having considered the volatility in local share prices, the premiums that businesses controlled by large multinationals trade at and other factors, we assessed a range of fair value less costs of disposal with particular focus on the value a third party may pay for a controlling stake in the current environment. The value in use calculation was above our view of fair value less costs of disposal and was therefore used to determine the recoverable amount of this cash-generating unit. Based on this, in the year ended 30 June 2020, an impairment charge of £655 million in respect of the India cash-generating unit containing the India goodwill was recognised in exceptional operating items. Impairment charges of £78 million in respect of the Old Tavern brand, £38 million in respect of the Bagpiper brand and £1 million in respect of fixed assets in India were also recognised in exceptional operating items. Forecast cash flow assumptions were reduced principally due to the general economic downturn further aggravated by the Covid-19 pandemic, including pandemic related recent regulatory changes, negatively impacting both demand and margins.

An impairment charge of £434 million in respect of the Windsor Premier brand was recognised in exceptional operating items. The forecast cash flow assumptions were reduced principally due to the recent regulatory changes limiting trade spend for wholesalers and venues and the Covid-19 pandemic negatively impacting the challenging whisky category in Korea.

Having considered both value in use and fair value less cost of disposal, an impairment of £84 million in respect of the group's Nigerian tangible fixed assets was recognised in exceptional operating items. The profit generating ability of the assets were reduced principally due to the deteriorated economic outlook as a result of the combination of the oil price crisis in Nigeria and the Covid-19 pandemic.

An impairment of £55 million in respect of the group's Ethiopian tangible fixed assets was recognised in exceptional operating items. The forecast cash flow assumptions were reduced principally due to the impact of the recent excise duty increase and the Covid-19 pandemic.

In line with the group’s accounting policy, given the unusual nature and magnitude of the below items, these are reported as exceptional operating items:

(i) Diageo has launched the “Raising the Bar” programme to support pubs and bars to welcome customers back and recover following the Covid-19 pandemic. The programme includes a commitment of $100 million (£81 million) over a period of up to two years from 1 July 2020, to support qualifying outlets across a limited number of iconic global cities and some regional cities in certain key markets. Diageo has also provided other forms of support to help the communities and the industry during the Covid-19 pandemic. Supporting packages for bartenders and bar owners and donations of grain neutral spirit to produce hand sanitisers amounted to £8 million in the year ended 30 June 2020.

(ii) In the year ended 30 June 2020, an exceptional charge of £30 million was recognised in respect of obsolete inventories that have been or will be destroyed as a direct consequence of the Covid-19 pandemic. The amount comprises of a £23 million inventory provision and £7 million directly attributable to handling and destruction costs.

Business review (continued)

(iii) In the year ended 30 June 2020, an estimated benefit of $105 million (£83 million) for substitution drawback claims (net of legal and broker fees of $2 million (£2 million)) previously filed and to be filed with the US Government in relation to prior years was recognised in exceptional operating items. Following a recent court decision and a related legal assessment, the collection of the excise duty benefit has become virtually certain.

In the year ended 30 June 2019, the group recognised a provision of £35 million for indirect tax in respect of certain channel accounts and regulatory change in Korea in respect of prior years.

An assessment was issued by the Korea Tax Authority in the year ended 30 June 2020, that has resulted in the reversal of the prior year's provision in the amount of £24 million.

On 26 October 2018, the High Court of Justice of England and Wales issued a judgement in a claim between Lloyds Banking Group Pension Trustees Limited (the claimant) and Lloyds Bank plc (defendant) that UK pension schemes should equalise pension benefits for men and women for the calculation of their guaranteed minimum pension liability. The judgement concluded that the claimant has a duty to amend their pension schemes to equalise benefits and provided comments on the method to be adopted to equalise the benefits. This court ruling impacts the majority of companies with a UK defined benefit pension plan that was in existence prior to 1997. For the Diageo Pension Scheme (DPS) an estimate was made of the impact of equalisation which increased the liabilities of the DPS by £21 million, with a corresponding charge to exceptional operating items.

In July 2019 Diageo reached agreement with the French tax authorities resulting in penalty charges of £18 million (see Taxation below).

Non-operating items in the year ended 30 June 2020 were £23 million loss before tax (2019 - £144 million income).

In the year ended 30 June 2020, Diageo completed the acquisition of Seedlip and Anna Seed 83 and acquired controlling interests in certain Distill Ventures entities. As a result of these entities becoming subsidiaries of the group a gain of £8 million arose, being the difference between the book value of the associates prior to the transaction and their fair value.

The disposal of United National Breweries was completed in the year ended 30 June 2020, which has resulted in an aggregate exceptional loss of £32 million, including a £4 million cumulative exchange loss in respect of prior years, recycled from other comprehensive income, and an impairment charge recognised in the period.

The disposal of an associate, Equal Parts, LLC resulted in an exceptional loss of £1 million.

In the year ended 30 June 2020, the group has reversed $3 million (£2 million) from provisions in relation to the sale of a portfolio of 19 brands to Sazerac on 20 December 2018.

In the year ended 30 June 2019, the aggregate consideration for the disposal of a portfolio of 19 brands to Sazerac was $550 million (£435 million) resulting in a profit before taxation of $198 million (£155 million).

The group recognised an exceptional loss of £9 million in respect of the disposal of United National Breweries.

The disposal of the Indian wine business has resulted in an exceptional loss of £2 million.

See page 124 for the definition of exceptional items.

(d) Fair value remeasurement

The adjustment to cost of sales reflects the elimination of fair value changes for biological assets in respect of growing agave plants of £9 million gain. The adjustment to other operating expenses is the elimination of fair value changes to contingent consideration liabilities in respect of prior year acquisitions of £7 million loss (£10 million loss in respect of the Casamigos contingent consideration liability, £4 million loss in respect of the Copper Dog contingent consideration liability and £7 million gain in respect of the Pierde Almas contingent consideration liability).

Business review (continued)

(e) Taxation

The reported tax rate for the year ended 30 June 2020 was 28.8% compared with 21.2% for the year ended 30 June 2019.

Included in the tax charge of £589 million for the year ended 30 June 2020 is an exceptional tax credit of £154 million mainly comprising exceptional tax credits on the impairment of the Windsor and USL brands of £105 million and £25 million, respectively, exceptional tax credits in respect of fixed assets impairments in Nigeria and Ethiopia of £25 million and £10 million, respectively, and a further £7 million exceptional tax credit in respect of obsolete inventories offset by a £20 million exceptional tax charge in respect of substitution drawback claims.

In the year ended 30 June 2019, Diageo reached a resolution with the French tax authorities on the treatment of interest costs for all open periods which resulted in a total exceptional charge of €100 million (£88 million), comprising a tax charge of €69 million (£61 million), penalties of €21 million (£18 million) and interest of €10 million (£9 million). This brought to a close all open issues with the French tax authorities for periods up to and including 30 June 2017. In addition, the tax charge for the year ended 30 June 2019 included an exceptional tax credit of £51 million principally arising from remeasuring the deferred tax liabilities in respect of the Ketel One vodka distribution rights from 25% to 20.5%, an exceptional tax charge of £33 million in respect of the disposal of a portfolio of 19 brands to Sazerac and an exceptional tax credit of £4 million in respect of the equalisation of liabilities for males and females in the Diageo Pension Scheme.

The tax rate before exceptional items for the year ended 30 June 2020 was 21.7%, consistent with our guidance of 21%-22% and compared with 20.6% in the prior comparable period.

We continue to expect a tax rate before exceptional items for the year ending 30 June 2021 to be in the range of 21%-22%.

(f) Dividend

The group aims to increase the dividend each year and the decision in respect of the dividend is made with reference to dividend cover as well as current performance trends including sales and profit after tax together with cash generation. Diageo targets dividend cover (the ratio of basic earnings per share before exceptional items to dividend per share) within the range of 1.8-2.2 times. For the year ended 30 June 2020 dividend cover was 1.6 times. The recommended final dividend for the year ended 30 June 2020, to be put to the shareholders for approval at the Annual General Meeting is 42.47 pence, the same as the final dividend for the year ended 30 June 2019. This brings the full year dividend to 69.88 pence per share, an increase of 2% on the prior year. We will keep future returns of capital, including dividends, under review through year ending 30 June 2021 to ensure we allocate Diageo’s capital in the best way to maximize value for the business and our stakeholders.

Subject to approval by shareholders, the final dividend will be paid to holders of ordinary shares and US ADRs on the register as of 14 August 2020. The ex-dividend date both for the holders of the ordinary shares and for US ADR holders is 13 August 2020. The final dividend, once approved by shareholders, will be paid to shareholders on 8 October 2020 and payment to US ADR holders will be made on 14 October 2020. A dividend reinvestment plan is available to holders of ordinary shares in respect of the final dividend and the plan notice date is 17 September 2020.

(g) Share buyback

On 25 July 2019 the Board approved a return of capital programme to return up to £4.5 billion to shareholders over the three year period to 30 June 2022.

During the year ended 30 June 2020 the group purchased approximately 39 million ordinary shares at a cost of £1,282 million (including £7 million of transaction costs) and funded the purchases through a combination of operating cash inflows and incremental borrowings. This amount includes the aggregate consideration of £26 million (including £17 million settlement payments for the purchases made in the year ended 30 June 2019 and 30 June 2020) in relation to the prior year programme, which was completed on 10 July 2019 resulting in the repurchase of 0.3 million shares in the year ended 30 June 2020.The shares purchased under the share buyback programmes were cancelled.

At 30 June 2020 the leverage ratio, calculated as adjusted net borrowings to adjusted EBITDA, was 3.3x and the group anticipates leverage to be above the target range of 2.5-3.0x through the year ending 30 June 2021. The company has paused the return of capital programme until leverage is back within the target range. Adjusted net borrowings to adjusted EBITDA ratio is a non-GAAP measure, see page 123 for reconciliation to GAAP measures.

Business review (continued)

Movement in net borrowings and equity



Movement in net borrowings	2020 £ million		2019 £ million
Net borrowings at the beginning of the year	(11,277	)	(9,091	)
Free cash flow (a)	1,634		2,608
Acquisitions (b)	(130	)	(56	)
Sale of businesses and brands (c)	11		426
Share buyback programme	(1,282	)	(2,775	)
Proceeds from issue of share capital	1		1
Net sale of own shares for share schemes (d)	54		50
Dividends paid to non-controlling interests	(111	)	(112	)
Net movements in bonds (e)	4,368		1,598
Purchase of shares of non-controlling interests (f)	(62	)	(784	)
Net movements in other borrowings (g)	(285	)	721
Equity dividends paid	(1,646	)	(1,623	)
Net increase in cash and cash equivalents	2,552		54
Net increase in bonds and other borrowings	(4,089	)	(2,331	)
Exchange differences (h)	(95	)	(22	)
Other non-cash items (i)	(86	)	113
Adoption of IFRS 16	(251	)	—
Net borrowings at the end of the year	(13,246	)	(11,277	)

(a) See page 85 for the analysis of free cash flow.

(b) In the year ended 30 June 2020, Diageo completed the acquisition of Seedlip and Anna Seed 83 as well as a number of smaller transactions and additional investments in the Distill Ventures programme. Additionally, acquisitions include deferred and contingent consideration paid in respect of prior year acquisitions.

In the year ended 30 June 2019, Diageo acquired the remaining 70% of Copper Dog Whisky Limited that it did not already own, made additional investments in a number of Distill Venture associates and made contingent consideration payments in respect of prior year acquisitions.

(c) In the year ended 30 June 2020, sale of businesses and brands included the sale of United National Breweries, Diageo’s wholly owned sorghum beer business.

In the year ended 30 June 2019, sale of businesses and brands represented the cash received on the disposal of a portfolio of 19 brands sold to Sazerac net of transaction costs.

(d) Net sale of own shares comprised purchase of treasury shares for the future settlement of obligations under the employee share option schemes of £2 million (2019 - £16 million) less receipts from employees on the exercise of share options of £56 million (2019 - £66 million).

(e) In the year ended 30 June 2020, the group issued bonds of $4,100 million (£3,296 million), €1,750 million (£1,594 million) and £298 million (including £2 million discount and fee) and repaid bonds of $1,000 million (£820 million). In the year ended 30 June 2019, the group issued bonds of €2,600 million (£2,270 million) and £496 million (including £4 million discount and fee) and repaid bonds of €1,350 million (£1,168 million).

(f) In the year ended 30 June 2020, Diageo acquired additional shares in United Spirits Limited for INR 5,495 million (£60 million) which took Diageo’s percentage of shares owned in United Spirits Limited from 54.78% to 55.94% (excluding 2.38% owned by the USL Benefit Trust). During the year ended 30 June 2020, Diageo completed the purchase of 4% of the share capital of Serengeti Breweries Limited for $3 million (£2 million) which took Diageo’s effective economic interest in Serengeti Breweries Limited from 39.2% to 40.2%.

Business review (continued)

In the year ended 30 June 2019, purchase of shares of non-controlling interests comprised RMB 6,774 million (£775 million) and transaction costs of £9 million in respect of the acquisition of 23.43% of the share capital of Sichuan Shuijingfang Company Limited (SJF) in two separate transactions. This took Diageo’s shareholding in SJF from 39.71% to 63.14%.

(g) In the year ended 30 June 2020, the net movement in other borrowings principally arose from foreign exchange swaps and forwards, partially offset by the cash movement on lease liabilities. In the comparable period movements were driven by the issue of commercial paper.

(h) The exchange arising on net borrowings of £95 million is primarily driven by unfavourable exchange movements on US dollar and euro denominated borrowings and cash and cash equivalents, partially offset by a favourable movement on foreign exchange swaps and forwards.

(i) In the year ended 30 June 2020, other non-cash items are principally in respect of leases of £206 million entered into in the year, partially offset by the fair value changes of cross currency interest rate swaps. In the year ended 30 June 2019, other non-cash items are principally in respect of changes in the fair value of borrowings.



Movement in equity	2020 £ million		2019 £ million
Equity at the beginning of the year	10,156		11,713
Profit for the year	1,454		3,337
Exchange adjustments (a)	(282	)	255
Remeasurement of post employment plans net of taxation	3		36
Purchase of shares of non-controlling interests (b)	(62	)	(784	)
Dividends to non-controlling interests	(117	)	(114	)
Equity dividends paid	(1,646	)	(1,623	)
Share buyback programme	(1,256	)	(2,801	)
Other reserve movements	190		137
Equity at the end of the year	8,440		10,156

(a) Exchange movement in the year ended 30 June 2020 primarily arose from exchange losses driven by the Indian rupee, euro and the Turkish lira, partially offset by exchange gains in respect of the US dollar.

(b) In the year ended 30 June 2020, Diageo acquired additional shares in United Spirits Limited for INR 5,495 million (£60 million) and additional shares in Serengeti Breweries Limited for $3 million (£2 million).

In the year ended 30 June 2019, Diageo acquired additional shares in Sichuan Shuijingfang Company Limited (SJF) which was already controlled and therefore consolidated prior to the transaction.

Post employment plans

The net surplus of the group’s post employment benefit plans increased by £148 million from £214 million at 30 June 2019 to £362 million at 30 June 2020. The increase in net surplus is primarily attributable to an increase in the market value of the assets held by the post employment schemes, and the cash contribution paid into the plans in excess of income statement charge. These were partially offset by the change in assumptions in the United Kingdom (including an adverse impact due to the decrease in returns from ‘AA’ rated corporate bonds used to calculate the discount rates on the liabilities of the post employment plans (from 2.3% to 1.5%) partially offset by a favourable impact of the decrease in inflation rate assumption (from 3.2% to 2.8%)).

The operating profit charge before exceptional items decreased by £3 million from £50 million for the year ended 30 June 2019 to £47 million for the year ended 30 June 2020. The operating profit for the year ended 30 June 2020 includes past service gains of £47 million in respect of the Guinness Ireland Group Pension Scheme (GIGPS), following separate communications to the deferred members in respect of changing their expectations of a full pension prior to reaching the age of 65 and to pensioners in respect of future pension increases (2019 - £54 million credit due to changes made to future pension increases for members of the Diageo Pension Scheme in the United Kingdom and changes to the GIGPS), and curtailment gains of £12 million (2019 - £4 million) mainly in respect of the Diageo Pension Scheme and the GIGPS.

Total cash contributions by the group to all post employment plans in the year ending 30 June 2021 are estimated to be approximately £140 million.

Business review (continued)

North America



l	US Spirits	l	Canada	l	Spirits	l	Ready to drink
l	DBC USA	l	Other (principally Travel Retail)	l	Beer	l	Other
			Other (principally Travel Retail)



Key financials	2019 £ million	Exchange £ million	Acquisitions and disposals £ million		Organic movement £ million		Other⁽ⁱ⁾ £ million		2020 £ million	Reported movement %
Net sales	4,460	101	(43	)	105		—		4,623	4
Marketing	762	11	3		(49	)	—		727	(5	)
Operating profit before exceptional items	1,948	44	(28	)	80		(10	)	2,034	4
Exceptional operating items⁽ⁱⁱ⁾	—								54
Operating profit	1,948								2,088	7

(i) The adjustment to other operating expenses is the elimination of fair value changes to contingent consideration liabilities in respect of prior year acquisitions.

(ii) For further details on exceptional operating items see pages 213-216.

North America is the second largest beverage alcohol market worldwide⁽ⁱ⁾.

The consumer lies at the heart of our business, which has been more important than ever in the face of shifting consumer behaviours and changes in the external environment. Our focus is on recruiting and re-recruiting consumers into the portfolio through meaningful consumer engagement, sustainable innovation and investments in our brands. Our strategy is enabled by our data driven insights, executional excellence and a consistent focus on developing an advantaged route to market.

Our markets

Diageo North America is headquartered in New York, having relocated from Norwalk, Connecticut, in January 2020. The business is comprised of US Spirits, Diageo Beer Company USA (DBC USA), and Diageo Canada, headquartered in Toronto.

Supply operations

With nine domestic production facilities across the United States, Canada and the U.S. Virgin Islands, Diageo North America’s supply function is one of the largest producers of beverage alcohol on the continent. We have made major investments in innovation and sustainability driving efficiency and best in class operations.

Our new Lebanon, Kentucky whiskey distillery will be carbon neutral, a first for Diageo. With electrified operations, powered by 100% renewable electricity, the distillery will avoid using fossil fuels for production.

(i) IWSR, Calendar Year 2019.

Business review (continued)

Route to consumer

The route to consumer in the United States is through the three-tier system across our spirits and beer portfolio. We have consolidated our U.S. Spirits business into single distributors or brokers in 42 states and the District of Columbia, representing more than 80% of our spirits volume. US Spirits is responsible for the sale of our portfolio of spirits products and manages sales through two divisions focused on Open (distribution through private distributors) and Control (distribution through governmental entities) States. DBC USA sells and markets brands including Guinness and Smirnoff Ice in over 400 beer distributors across the US. Diageo Canada distributes our portfolio of spirits, RTD and beer brands across all Canadian provinces, which operate within a highly regulated federal and provincial system. Diageo Canada manages all sales operations with the provincial liquor control boards and national chain account customers directly, utilising brokers to support execution at the point of sale.

Our strategy in North America is to be consumer-first, occasion-oriented, and focused on developing competitive differentiation in both our brand propositions and our route to consumer. This includes building key capabilities around commercial execution, Net Revenue Management, E-Commerce and robust performance management all of which is underpinned by data and analytics.

Sustainability and responsibility

We collected nearly 900,000 pledges never to drink and drive through various #JoinThePact initiatives, while Crown Royal and Captain Morgan leveraged their sports partnerships to promote integrated moderation campaigns through advertising and in-stadium activations. We announced plans for our new Kentucky whiskey distillery to be carbon neutral - a first for Diageo. It will be powered by 100% renewable electricity and will avoid using fossil fuels for the production of whiskey. We also introduced our first 100% recycled PET bottle, with Seagram’s 7 Crown.

We improved water use efficiency by 4.4%, saving over 101 million litres this year. We have made meaningful progress in our zero waste to landfill target, identifying and implementing options to eliminate waste to landfill in two remaining sites during the last quarter.

In September, 1,000 employees volunteered a day to local community causes through our Diageo CAREs programme. We trained more than 60 people in specialist hospitality skills through our Learning Skills for Life programme, which we have expanded into New Orleans. In June 2020, we created the Diageo Community Fund, with $20 million to support social justice in America, helping Black communities and businesses recover from Covid-19.

Performance

Sales and net sales

Sales increased by £148 million, or 3%, to £5,222 million in the year ended 30 June 2020 from £5,074 million in the year ended 30 June 2019. Excise duties were £599 million in the year ended 30 June 2020 and £614 million in the year ended 30 June 2019, a decrease of £15 million.

Net sales (sales less excise duties) were £4,623 million in the year ended 30 June 2020 an increase of £163 million, or 4%, compared to net sales of £4,460 million in the year ended 30 June 2019. Net sales were favourably impacted by organic growth of £105 million (see further performance analysis below), by exchange rate movements of £101 million primarily due to the strengthening of the US dollar against sterling and by the impact of acquired businesses of £4 million. This increase was partially offset by a decrease in net sales of £47 million generated by disposed businesses.

Operating profit

Operating profit was £2,088 million in the year ended 30 June 2020 an increase of £140 million compared to operating profit of £1,948 million in the year ended 30 June 2019. Operating profit increased by exceptional gain of £83 million with regards to substitution drawback on excise duties, by £80 million organic growth, by £44 million as a result of exchange rate movements due to the strengthening of the US dollar (£83 million translation less £39 million transactional exchange impact) and by a £12 million impact from acquisitions (lapping the £15 million Casamigos provision reassessment impact from prior year, less the £3 million operational loss generated by acquired businesses). This increase was partially offset by a decrease in operating profit of £40 million generated by disposed businesses, by exceptional losses of £29 million due to Covid-19 pandemic related implications (£16 million “Raising the Bar” provision, £9 million stock write-off and £4 million donation), and a £10 million charge in respect of a fair value reassessment of contingent consideration liabilities in respect of prior year acquisitions.

Business review (continued)

Further performance analysis

Unless otherwise stated percentage movements refer to organic movements in the following analysis.

North America delivered net sales growth of 2%, with growth in all three markets, US Spirits, Diageo Beer Company USA and Canada. Strong net sales growth in the first half of the year was only partially offset by lower on-trade sales in the second half. This reflects strong demand in the off-trade channel during Covid-19. US Spirits net sales increased 2%. Tequila net sales grew 36% reflecting strong double-digit growth in Don Julio and Casamigos throughout the year. Crown Royal net sales increased 8% driven by the sustained performance of innovations. Scotch net sales declined 9%. Good growth in Malts was offset by lower sales of Johnnie Walker, as a result of the on-trade channel closure in the second half and lapping the prior year success of "White Walker by Johnnie Walker". Vodka net sales declined 7% due to lower sales of Smirnoff, Ketel One and Cîroc. Bulleit net sales increased 4%. Captain Morgan net sales decreased 5%. Diageo Beer Company USA grew net sales 8% as a result of the continued strong performance of ready to drink products. Beer net sales declined 5% due to the closure of the on-trade channel as a result of Covid-19. Net sales in Canada increased 7% with good broad-based growth across all categories, with the exception of beer, which was more impacted by the on-trade channel closure. North America operating margin increased 75bps. The adverse margin impact from lower fixed cost absorption and a change in category and channel mix resulting from Covid-19 was more than offset by reduced discretionary expenditure.



Markets:	Organic volume movement %		Reported volume movement %		Organic net sales movement %		Reported net sales movement %
North America	—		(2	)	2		4

US Spirits⁽ⁱ⁾	(1	)	(3	)	2		3
DBC USA	7		7		8		10
Canada	7		4		7		7

Spirits	—		(3	)	2		3
Beer	(7	)	(7	)	(6	)	(4	)
Ready to drink	17		17		19		22
Global giants, local stars and reserve⁽ⁱⁱ⁾:			Organic volume movement⁽ⁱⁱⁱ⁾%		Organic net sales movement %		Reported net sales movement %
Crown Royal			8		8		10
Smirnoff			(1	)	(2	)	—
Johnnie Walker			(9	)	(13	)	(11	)
Captain Morgan			(3	)	(4	)	(2	)
Don Julio			21		26		29
Ketel One⁽ⁱⁱⁱ⁾			(2	)	(4	)	(2	)
Guinness			(6	)	(5	)	(3	)
Baileys			—		1		3
Bulleit			5		4		7
Cîroc vodka			(15	)	(14	)	(13	)
Casamigos			61		68		72
Tanqueray			—		—		3

(i)

Reported US Spirits volume, and net sales, ~~of £2,932 million in the year ended 30 June 2018. Net sales were positively impacted by organic~~ growth of £104 million (see further performance analysis below). This increase was partially offset by unfavourable exchange rate movements of £95 million primarily due to the weakening of the Turkish lira against sterling, and a reduction of £2 million of net sales due toinclude impacts from the disposal of a portfolio of 19 brands ~~sold~~ to ~~Sazerac~~Sazerac.

(ii) Spirits brands excluding ready to drink.

(iii) Ketel One includes Ketel One vodka and Ketel One Botanical.

Business review (continued)

Market highlights

–

Net sales in ~~December 2018.~~

~~Operating profit~~

~~Operating profit was £996 million~~US Spirits were up 2%, with depletions ahead of shipments resulting in a reduction in distributor inventories. Don Julio and Casamigos delivered strong double-digit growth and gained share in the ~~year ended 30 June 2019 a decrease~~rapidly growing tequila category. While the brands were disproportionately impacted by the on-trade closures, an agile response drove strong demand in at-home occasions. Crown Royal grew net sales 8%, gaining further category share, driven by the continued growth of ~~£32 million compared to operating profit~~Crown Royal Regal Apple and Crown Royal Vanilla, and the success of ~~£1,028 million~~the limited time offer, Crown Royal Peach. Johnnie Walker net sales declined 11% and the brand lost share in the ~~year ended 30 June 2018. Operating profit decreased as a result of unfavourable exchange rate movements of £35 million primarily~~scotch category. A decline in net sales in the first half, due to lapping the ~~weakening~~highly successful limited edition of ~~the Turkish lira against sterling (£5 million transactional exchange gain less £40 million translation loss)~~"White Walker by Johnnie Walker", by an exceptional charge of £18 million in respect of penalties on the settlement of the French tax audit and by a reduction of £1 million of operating profit due to the disposal of a portfolio of 19 brands sold to Sazerac in December 2018. This decrease was ~~partially offset by £22 million organic growth.~~

~~Business review (continued)~~

~~Further performance analysis~~

~~Unless otherwise stated percentage movements refer to organic movements~~exacerbated in the ~~following analysis.~~

~~Europe~~second half by the on-trade channel closure. Malts continued to perform well with growth from Oban and ~~Turkey delivered 4%~~Lagavulin, as well as Talisker and Mortlach. Vodka net sales ~~growth, reflecting another year~~were down 7%. Lower sales of ~~consistent performance~~Ketel One reflect its strong presence in ~~Europe where~~the on-trade channel and a decline in Ketel One Botanical, lapping last year's successful launch. Smirnoff net sales declined, although Smirnoff Zero Sugar Infusions and seasonal innovations, including the Smirnoff Red, White and Berry limited time offer performed well. Cîroc continued to decline. Bulleit net sales were up ~~3% with double digit growth~~4%. An effective marketing approach drove off-trade sales in ~~Turkey. Europe growth was driven by Continental Europe, Great Britain~~the second half and ~~Ireland. Strong growth~~continued share gain in ~~gin continued with Tanqueray~~US whiskey. Captain Morgan net sales declined 5% and ~~Gordon’s growing double digit. Western Europe continued to gain market~~the brand lost share in ~~gin. Both Gordon's and Tanqueray benefitted from strong growth across their core and innovation variants. Beer was up 1%. Lager~~the rum category. Baileys net sales grew ~~5% driven by Rockshore in Ireland, while Guinness Draught grew~~ 1%~~. Scotch net sales were flat as growth in Johnnie Walker and scotch malts was largely offset by the weaker performance of JεB. Baileys was up 2% largely~~ driven by the launch of Baileys ~~Strawberries & Cream~~Red Velvet limited edition and growth in ~~Continental Europe.~~Baileys Salted Caramel.

–

Diageo Beer Company USA net sales increased 8%, despite a reduction in distributors' inventories. This reflected ready to drink growth of 19%, with continued strong growth across the Smirnoff range. Strong sales in the second half were supported by a large-scale media campaign to promote Smirnoff's Red, White and Berry limited time offer variants, including Smirnoff Ice and a new Smirnoff Seltzer. Beer net sales declined ~~2% driven by Great Britain~~5% as a result of the closure of the on-trade and ~~Continental Europe, partially offset by growth~~the Guinness Open Gate Brewery. However, beer gained share in ~~Ireland. Tequila~~ the off-trade due to Guinness' success in raising brand awareness and connecting with consumers during the Covid-19 lockdown.

–

Net sales in Canada grew ~~double digit~~7%, with good growth across all ~~markets. Ready to drink grew 17% driven~~categories except beer, which was more impacted by the ~~Gordon's premix range. In Turkey, net sales~~on-trade channel closure. Shipments were ~~up 11% due~~slightly ahead of depletions, as customers held more stock to inflation and excise duty led price increases. Operating margin declined 49bps as positive price/mix and productivity savings were offset by up-weighted marketing investment, as well as inflationary cost pressure, particularlymanage volatility in ~~Turkey.~~

Markets:
Organic
volume
movement
%

Reported
volume
movement
%

Organic
net sales
movement
%

Reported
net sales
movement
%

Europe and Turkey (2 ) (2 ) 4
—

Europe —
—
3
2
Turkey (13 ) (13 ) 11
(20 )

Spirits (2 ) (2 ) 3
(1 )
Beer 1
1
1
—
Ready to drink 13
13
16
15
Global giants and local stars⁽ⁱ⁾:

Organic
volume
movement⁽ⁱⁱ⁾%

Organic
net sales
movement
%
Reported
net sales
movement
%
Guinness 1
1
1
Johnnie Walker (2 ) 3
1
Smirnoff (4 ) (1 ) (1 )
Baileys (2 ) 3
3
Yenì Raki (19 ) 6
(24 )
Captain Morgan 1
—
(2 )
JεB (8 ) (8 ) (10 )
Tanqueray 14
21
21


~~(i)~~	~~Spirits brands excluding ready to drink.~~


~~(ii)~~	~~Organic equals reported volume movement.~~

~~Business review (continued)~~

~~Key highlights~~

In ~~Europe, net sales were up 3%:~~

In ~~Great Britain, net sales~~the second half. Vodka grew ~~4%,~~6% with ~~Diageo gaining share across beer and spirits. Gordon’s and Tanqueray both delivered strong double digit growth, both benefitting from strong growth of their innovation variants. Ready~~Smirnoff No.21 continuing to ~~drink grew 17% driven by the Gordon’s premix range. Guinness net sales grew 4%, driven~~grow, supported by a ~~strong performance for Guinness Draught~~new global campaign in the first half and the ~~continued growth~~launch of ~~Hop House 13 Lager. Across Baileys,~~the redesigned Smirnoff bottle in the second half. Cîroc and ~~Captain Morgan supply chain actions as well as commercial negotiations following recent pricing decisions have resulted in net sales decline.~~

~~Ireland~~Ketel One both grew ~~net sales 3%. Beer net sales were flat. Lager net sales~~strongly. Crown Royal grew 4% driven by strong growth in Rockshore. Guinness net sales declined 2% impacted by difficult competitive conditions. In spirits, net sales grew double digit largely driven by Smirnoff, Baileys and Gordon's.

In ~~Continental Europe, net sales were up 3%:~~

~~Iberia~~ net sales grew 1%. Growth was driven by strong performance in Baileys and gin with growth across both Tanqueray and Gordon's. Scotch declined 3% as growth in Cardhu and Johnnie Walker was offset by declines in JεB. In Spain,double-digit, gaining market share and strengthening its leadership position in ~~scotch~~the growing Canadian whisky category. Performance was ~~broadly flat, as the category continued to decline.~~

In ~~Central Europe,~~ ~~net sales grew 4% driven~~supported by the launch of ~~Baileys Strawberries & Cream~~a new "generosity" campaign connecting the brand to its roots, and ~~double digit growth~~successful limited time offer innovations. Scotch grew 7%, with Johnnie Walker Black Label remaining the number-one selling scotch in ~~gin which more than offset the impact of pricing actions in Germany.~~

In ~~Northern Europe~~Canada. Ready to drink net sales ~~were up 9% driven by~~continued to deliver double-digit growth, ~~across both Benelux and~~with Smirnoff Ice retaining its position as the ~~Nordics partially driven by net revenue management initiatives.~~number-one selling ready to drink in Canada.

–

~~In the~~Marketing ~~Mediterranean Hub,~~ ~~net sales were down by~~ expenses declined 6% ~~driven by lapping strong comparable performance in Italy~~. This was due to reduced investment in the ~~prior year and a continuing tough economic environment in Greece.~~

~~Europe Partner Markets~~ ~~grew net sales 6% driven by strong scotch performance and continued growth in Guinness and gin.~~

~~Russia~~ ~~net sales declined 3% driven by a volatile external environment and lapping strong comparables in~~second half that we believed would have been ineffective during Covid-19, as well as productivity savings during the ~~prior~~ year.

~~France~~ ~~net sales grew 1%. Double digit net sales growth in Captain Morgan was partially offset by a decline in JεB.~~

In ~~Turkey, net sales grew 11% despite volume decline of 13%, reflecting the impact of price increases, which were taken in response~~ We believe that our marketing effectiveness tools will enable us to ~~increases in excise duties and inflation. Growth was largely driven by Yenì Raki which grew net sales by 7%, wine and scotch which grew double digit, led by strong growth in Johnnie Walker.~~

~~Marketing~~ efficiently accelerate investment increased 6%, ahead of net sales, largely driven by increased investment in beer and gin. Beer marketing investment growth was primarily driven by the Six Nations rugby sponsorship agreement supporting the Guinness brand. Up-weighted investment in gin was across both Gordon's and Tanqueray. as consumer demand recovers.

Business review (continued)

~~Africa~~



l	~~East Africa~~	l	~~South Africa~~	l	~~Spirits~~	l	~~Ready to drink~~
l	~~Africa Regional~~ ~~Markets (ARM)~~	l	~~Other (principally~~ ~~Travel Retail)~~	l	~~Beer~~	l	~~Other~~
	~~Africa Regional~~ ~~Markets (ARM)~~		~~Other (principally~~ ~~Travel Retail)~~
l	~~Nigeria~~

Key financials 2018
£ million
Exchange
£ million
Reclassifi-cation(i)£million
Acquisitions
and
disposals
£ million
Organic movement
£ million
2019
£ million
Reported movement
%
Net sales 1,491
8
—
(2 ) 100
1,597
7
Marketing 158
1
10
—
5
174
10
Operating profit before exceptional items 191
(6 ) —
(1 ) 91
275
44
Exceptional operating items⁽ⁱⁱ⁾
(128 )

—

Operating profit 63

275
337


~~(i)~~	~~Reclassification comprises a reallocation of costs from overheads to marketing.~~

~~(ii) For further details on exceptional operating items see pages 196 to 198.~~

In Africa our strategy is to grow through participation in beer and spirits across price points. We leverage the full range of the Diageo portfolio. Guinness, Malta and several local brands lead our brewing portfolio while Johnnie Walker and Smirnoff are at the heart of our international premium spirits offerings. Locally we produce a range of mainstream spirits. We are focused on consistent, profitable growth in the markets and categories in which we participate and continue to invest in manufacturing and partnerships to access more consumers across the continent.

~~Local sourcing is very important to our strategy, directly supporting our commercial operations whilst bringing wider benefits to local communities, farmers and society as a whole.~~

~~Our markets~~

~~The region comprises East Africa (Kenya, Tanzania, Uganda, Burundi, Rwanda and South Sudan), Africa Regional Markets (including Ghana, Cameroon, Ethiopia and Angola), Nigeria and South Africa.~~

~~Supply operations~~

During the financial year our operation in Africa consisted of 13 breweries in Africa, two sites that produce sorghum beer in South Africa, one cider plant and ten facilities which provide blending and malting services. In the year ended 30 June 2019 we established a site in Angola to produce spirits and ready to drink products and started production in a new brewery in Kisumu in Kenya increasing our capacity in an attractive market. We are in the process of selling the sorghum beer business in South Africa.

~~In addition, our beer and spirits brands are produced under license by third parties in 15 African countries.~~

~~Business review (continued)~~

~~Route to consumer~~

In Nigeria we own a 58.02% controlling stake in a listed company whose principal products are Guinness, Malta Guinness and Dubic, and in East Africa we own a 50.03% controlling equity stake in East African Breweries Limited (EABL).

EABL produces and distributes beer and spirits brands to a range of consumers in Kenya and Uganda, and also owns 51% of Serengeti Breweries Limited located in Tanzania. Within Africa Regional Markets, we have wholly owned subsidiaries in Cameroon, Ethiopia and Reunion and Diageo controlled subsidiaries in Ghana, Angola and the Seychelles. In South Africa we sell spirits and ready to drink products through our wholly owned subsidiary. Diageo has agreements with the Castel Group who brew and distribute Guinness under license in several countries across Africa Regional Markets. Diageo sells spirits through distributors in the majority of other sub-Saharan countries.

~~Sustainability and responsibility~~

We aim to create value in Africa beyond our significant contribution as an employer and taxpayer. Our supply chain is a key opportunity: more than 72,000 smallholder farmers and suppliers provide us with our raw materials, and we work with farmers to improve farm yield, livelihoods, and environmental and labour standards. This year we sourced 82% of our agricultural raw materials locally, and completed human rights impact assessments in South Africa and Nigeria.

This year we announced an investment of £180 million in projects at 11 breweries across Africa that include solar and biomass energy, and water treatment plants. We also co-founded the Africa Plastics Recycling Alliance while developing the Ghana Recycling Initiative by Private Enterprise (GRIPE) partnership to build plastic collection and recycling infrastructure.

We continue to partner with the NGO WaterAid to deliver safe sources of water and sanitation, which we aim to combine with our other community objectives, including skills training and women’s empowerment. This year, for example, alongside the launch of a new water system in Maroua, Cameroon, which provides water for two villages and irrigates local farmland, we trained 2,000 smallholder farmers in agricultural best practices and helped an additional 150 women create new water-related businesses. Project Heshima, in Kenya, provides vocational training to women at risk of consuming or producing illicit alcohol, empowering them economically while counteracting a serious public health risk.

As part of our focus on responsible drinking, we expanded our 'Smashed' underage drinking campaigns in Nigeria and Cameroon reaching 114,000 students. Our #DriveDry campaign in South Africa reached more than 40 million people.

~~Performance~~

~~Sales and net sales~~

Sales increased by £152 million, or 7%, to £2,235 million in the year ended 30 June 2019 from £2,083 million in the year ended 30 June 2018. Excise duties were £638 million in the year ended 30 June 2019 and £592 million in the year ended 30 June 2018, an increase of £46 million.

Net sales (sales less excise duties) were £1,597 million in the year ended 30 June 2019 an increase of £106 million, or 7%, compared to net sales of £1,491 million in the year ended 30 June 2018. Net sales were favourably impacted by organic growth of £100 million (see further performance analysis below), by exchange rate movements of £8 million primarily due to the strengthening of the Nigerian naira, the Kenyan schilling, partially offset by weakening South African rand and Ghanaian cedi against sterling. This increase was partially offset by a reduction of £2 million of net sales due to the disposal of a portfolio of 19 brands sold to Sazerac in December 2018.

~~Operating profit~~

Operating profit was £275 million in the year ended 30 June 2019 an increase of £212 million compared to operating profit of £63 million in the year ended 30 June 2018. Operating profit increased as a result of lapping an exceptional impairment charge of £128 million in respect of the Meta brand and associated tangible fixed assets and spare parts in Ethiopia and goodwill allocated to the Africa Regional Markets, and by £91 million due to organic growth. This increase was partially offset by unfavourable exchange rate movements of £6 million primarily due to the weakening of the Ghanaian cedi and South African rand against sterling (£5 million translation impact less £11 million transactional exchange impact) and by a reduction of £1 million of operating profit due to the disposal of a portfolio of 19 brands sold to Sazerac in December 2018.

~~Business review (continued)~~

~~Further performance analysis~~

~~Unless otherwise stated percentage movements refer to organic movements in the following analysis.~~

Africa delivered 7% net sales growth, with growth across East Africa, Africa Regional Markets and South Africa partially offset by a decline in Nigeria. In East Africa and Africa Regional Markets net sales grew 13% and 8%, respectively, driven by growth across both beer and spirits. East Africa partially benefitted from lapping prior year weakness in the first half. Net sales grew 6% in South Africa driven by growth in spirits. Nigeria net sales declined by 7% driven by the continued tough economic and competitive environment in the lager segment. Across Africa, beer net sales were up 5% driven by double digit growth in Senator Keg, Serengeti Lite, and Malta Guinness, partially offset by declines in Satzenbrau. Spirits delivered strong net sales growth driven by mainstream spirits and scotch across all key markets as well as strong growth of Tanqueray in South Africa. Scotch net sales were up 8% driven by Johnnie Walker, up 10%, partially as a result of a strong launch of "White Walker by Johnnie Walker" in South Africa. Operating margin improved by 494bps driven by improved price/mix and the continued benefit from productivity initiatives more than offsetting cost inflation.

Markets: Organic volume
movement
%
Reported volume
movement
%
Organic
net sales
movement
%
Reported
net sales
movement
%
Africa 1
1
7
7

East Africa 12
11
13
18
Africa Regional Markets⁽ⁱ⁾
(3 ) 3
8
9
Nigeria (10 ) (10 ) (7 ) (3 )
South Africa⁽ⁱ⁾
(2 ) (10 ) 6
(6 )

Spirits 5
5
13
10
Beer 1
1
5
8
Ready to drink (3 ) (3 ) 4
2
Global giants and local stars⁽ⁱⁱ⁾:

Organic volume
movement⁽ⁱⁱⁱ⁾%

Organic net sales
movement
%
Reported net sales
movement
%
Guinness (1 ) 2
3
Johnnie Walker 4
10
9
Smirnoff —
12
9

Other beer:
Malta Guinness 8
15
13
Tusker (5 ) 1
6
Senator 21
22
28
Serengeti 40
46
49


~~(i)~~	In the year ended 30 June 2019 the following countries, Mozambique, Zambia, Zimbabwe, St Helena and Malawi, moved on a management basis from South Africa to Africa Regional Markets. This reallocation has been reflected in the organic reporting.


~~(ii)~~	~~Spirits brands excluding ready to drink.~~


~~(iii)~~	~~Organic equals reported volume movement.~~

~~Business review (continued)~~

~~Key highlights~~

In ~~East Africa~~, net sales grew by 13%. Kenya continued to grow strongly driven by double digit growth in beer and mainstream spirits as well as partially benefitting from lapping prior year weakness in the first half as a result of the 2017 presidential election. Tanzania continued to grow double digit. Beer net sales grew 13% led by continued strong growth in Serengeti Lite in Tanzania and double digit growth of Senator Keg in Kenya. Guinness net sales grew by 4%.

In ~~Africa Regional Markets~~, net sales increased by 8% with double digit growth in Ghana and Angola and a return to growth in Cameroon as it lapped prior year challenges in the distributor network. Beer grew 6% driven by strong performance in Malta Guinness. Scotch also returned to growth driven by net revenue management actions.

~~South Africa~~ ~~net sales returned to growth of 6% driven by strong spirits performance in Tanqueray, double digit growth in Smirnoff 1818 and Captain Morgan and the launch of "White Walker by Johnnie Walker".~~

In ~~Nigeria, net sales declined by 7% driven by Satzenbrau, as a result of a tough economic and competitive environment impacting the lager segment. Net sales grew in Malta Guinness, Guinness and spirits.~~

~~Marketing~~ investment increased by 3% largely driven by up-weighted investment in Tusker marketing activities and media campaigns, the relaunch of Guinness Foreign Extra Stout, an evolution of Guinness' successful football campaign across Africa, led by Guinness brand ambassador Rio Ferdinand, and the continuation of Serengeti's sponsorship of the Tanzanian national football team.

~~Business review (continued)~~

Latin America and Caribbean

1.56

2.51

—

Asia Pacific

0.30

1.65

—

Diageo (total)

0.60

⁽ⁱⁱⁱ⁾

2.12

(i) We do not report a rate for independent contractors due to the difficulty and administrative burden in accurately recording headcount.

Business description (continued)

Non-financial information statement



Focus area	Relevant policies and standards	Read more in this report	Page
Positive drinking	– Marketing and Digital Marketing Policy – Employee Alcohol Global Policy – Position papers	– Promote positive drinking – Performing against our social targets	43-46 59-61
Our employees	– Code of Business Conduct – 2019 Great Britain Gender Pay Report – Human Rights Global Policy	– Champion inclusion and diversity – Our people – Performing against our social targets	46-47 48-49 59-61
Grain-to-glass sustainability	– Environmental Global Policy – Sustainable Agriculture Guidelines – Sustainable Packaging Commitments – Water Blueprint – Partnering with Suppliers Standard	– Pioneer grain-to-glass sustainability – Performing against our environmental targets – Responding to climate-related risks	49-52 62-64 72
Human rights	– Human Rights Global Policy – Modern Slavery Statement – Global Brand Promoter Standard	– Doing business the right way from grain to glass	65
Health and safety	– Health, Safety and Wellbeing Global Policy	– Doing business the right way from grain to glass	65-66
Anti-bribery and corruption	– Code of Business Conduct	– Effective risk management	74
Our contribution to the SDGs		– Performing against our social targets – Performing against our environmental targets	59-61 62-64

Business description (continued)

Risk factors

Risks related to the global economy

Business description (continued)

Diageo’s business, financial condition, cash flows and results of operations have been and may continue to be adversely affected by the Covid-19 pandemic


–	social distancing measures, including the closure of on-trade channels such as bars and restaurants and restrictions on banqueting, conferences and similar events, being introduced in most of Diageo's markets, leading to a negative impact on sales;


–	travel restrictions being imposed by many countries and concern over the pandemic resulting in significant declines in passenger numbers, particularly in airports, with a corresponding negative impact on Diageo's global Travel Retail business;

–


–	wider disruptions in supply chains and routes to market, or those of Diageo's suppliers and/or distributors or customers, which could result in further increases in Diageo's costs of production and distribution or an increase in transnational trade or other trading practices impacting profitability.

Business description (continued)

Risks related to Diageo’s industry

Demand for Diageo’s products may be adversely affected by many factors, including changes in consumer preferences and tastes and the adverse impacts of declining economies

Diageo is subject to tax uncertainties, including changes in tax obligations, tax laws, regulations and interpretations, as well as enforcement actions by tax authorities

Business description (continued)

Any increases in the cost of production could affect Diageo’s profitability

Business description (continued)

Diageo is subject to litigation specifically directed at the beverage alcohol industry, as well as to other litigation

Risks related to regulation

Regulatory decisions and changes in the legal, and regulatory environment could increase Diageo’s costs and liabilities or limit its business activities

Business description (continued)

Defective internal controls could adversely affect Diageo’s financial reporting and management processes, as well as the accuracy of public disclosures

Business description (continued)

Risks related to Diageo’s business

The value of Diageo’s brands and its net sales may be negatively affected by its failure to maintain its brand image and corporate reputation or adapt to a changing media environment

Any failure to maintain, extend, and expand Diageo’s brand image or adapt to a changing media environment may have a material adverse effect on Diageo’s business and financial results.

Contamination, counterfeiting or other events could harm the integrity of customer support for Diageo’s brands and adversely affect the sales of those brands

Business description (continued)

Diageo faces competition that may reduce its market share and margins

Diageo may be adversely affected by disruption to production facilities, business service centres or information systems, including via cyber-attacks

Business description (continued)

Diageo’s business may be adversely affected by increased costs for, or shortages of, talent, or by labour strikes or disputes

Diageo’s operations and financial results may be adversely affected by fluctuations in exchange rates and fluctuations in interest rates

Business description (continued)

Diageo’s operations and financial results may be adversely affected by movements in the value of assets and liabilities related to its pension plans

Diageo’s operations may be adversely affected by failure to maintain or renegotiate distribution, supply, manufacturing or licence agreements on favourable terms

Diageo may not be able to protect its intellectual property rights

Risks related to Diageo’s securities

It may be difficult to effect service of US process and enforce US legal process against Diageo and its directors

Business description (continued)

Cautionary statement concerning forward-looking statements

Factors that could cause actual results and developments to differ materially from those expressed or implied by forward-looking statements include, but are not limited to:

–


–	the impact of the Covid-19 pandemic, or other epidemics or pandemics, on Diageo’s business, financial condition, cash flows and results of operation;

–


–	changes in consumer preferences and tastes, including as a result of changes in demographics, evolving social trends (including any shifts in consumer tastes towards small-batch craft alcohol, lower or no alcohol, or other alternative products), changes in travel, holiday or leisure activity patterns, weather conditions, health concerns, pandemics and/or a downturn in economic conditions;


–	changes in the domestic and international tax environment, including as a result of the OECD Base Erosion and Profit Shifting Initiative and EU anti-tax abuse measures, leading to uncertainty around the application of existing and new tax laws and unexpected tax exposures;


–	the effects of climate change, or legal, regulatory or market measures intended to address climate change, on Diageo’s business or operations, including on the cost and supply of water;


–	changes in the cost of production, including as a result of increases in the cost of commodities, labour and/or energy or as a result of inflation;


–	any litigation or other similar proceedings (including with tax, customs, competition, environmental, anti-corruption or other regulatory authorities), including litigation directed at the beverage alcohol industry generally or at Diageo in particular;


–	legal and regulatory developments, including changes in regulations relating to production, distribution, importation, marketing, advertising, sales, pricing, labelling, packaging, product liability, antitrust, labour, compliance and control systems, environmental issues and/or data privacy;


–	the consequences of any failure by Diageo or its associates to comply with anti-corruption, sanctions, trade restrictions or similar laws and regulations, or any failure of Diageo’s related internal policies and procedures to comply with applicable law or regulation;


–	the consequences of any failure of internal controls, including those affecting compliance with existing or new accounting and/or disclosure requirements;


–	Diageo’s ability to maintain its brand image and corporate reputation or to adapt to a changing media environment;


–	contamination, counterfeiting or other circumstances which could harm the level of customer support for Diageo’s brands and adversely impact its sales;

Business description (continued)


–	increased competitive product and pricing pressures, including as a result of actions by increasingly consolidated competitors or increased competition from regional and local companies, that could negatively impact Diageo’s market share, distribution network, costs and/or pricing;


–	any disruption to production facilities, business service centres or information systems, including as a result of cyber attacks;


–	increased costs for, or shortages of, talent, as well as labour strikes or disputes;


–	Diageo’s ability to derive the expected benefits from its business strategies, including in relation to expansion in emerging markets, acquisitions and/or disposals, cost savings and productivity initiatives or inventory forecasting;


–	fluctuations in exchange rates and/or interest rates, which may impact the value of transactions and assets denominated in other currencies, increase Diageo’s cost of financing or otherwise adversely affect Diageo’s financial results;


–	movements in the value of the assets and liabilities related to Diageo’s pension plans;


–	Diageo’s ability to renew supply, distribution, manufacturing or licence agreements (or related rights) and licences on favourable terms, or at all, when they expire; or


–	any failure by Diageo to protect its intellectual property rights.

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.

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

Business review

Operating results 2020 compared with 2019

Group financial review

Reported net sales were down 8.7% driven by organic declines

Reported operating profit declined 47.1% driven mainly by exceptional operating items and decline in organic operating profit

Organic volumes were down with volume decline of 11.2%

Organic net sales decline of 8.4%

Organic operating profit declined 14.4%

Net cash from operating activities was £2.3bn

Free cash flow was £1.6bn

Basic eps of 60.1p was down by 54.0%

Eps before exceptional items declined 16.4% to 109.4 pence


(i)	Excluding corporate net sales of £38 million (2019 - £53 million).


(ii)	Excluding net corporate cost of £147 million (2019 - £210 million).


(iii)	Excluding exceptional operating charges of £1,357 million (2019 - £74 million) and net corporate operating costs of £147 million (2019 - £189 million).



Summary financial information		2020		2019
Volume	EUm	217.0		245.9
Net sales	£ million	11,752		12,867
Marketing	£ million	1,841		2,042
Operating profit before exceptional items	£ million	3,494		4,116
Exceptional operating items⁽ⁱ⁾	£ million	(1,357	)	(74	)
Operating profit	£ million	2,137		4,042
Share of associate and joint venture profit after tax	£ million	282		312
Non-operating exceptional gain⁽ⁱ⁾	£ million	(23	)	144
Net finance charges	£ million	(353	)	(263	)
Exceptional taxation credit/(charge)⁽ⁱ⁾	£ million	154		(39	)
Tax rate including exceptional items	%	28.8		21.2
Tax rate before exceptional items	%	21.7		20.6
Profit attributable to parent company’s shareholders	£ million	1,409		3,160
Basic earnings per share	pence	60.1		130.7
Earnings per share before exceptional items	pence	109.4		130.8
Recommended full year dividend	pence	69.9		68.6

(i) For further details of exceptional items see pages 213 to 216.

Business review (continued)



Reported growth by region	Volume %		Sales %		Net sales %		Marketing %		Operating profit%		Operating profit before exceptional items %
North America	(2	)	3		4		(5	)	7		4
Europe and Turkey	(11	)	(8	)	(13	)	(13	)	(30	)	(25	)
Africa	(14	)	(14	)	(16	)	(8	)	(116	)	(63	)
Latin America and Caribbean	(15	)	(18	)	(20	)	(23	)	(34	)	(32	)
Asia Pacific	(15	)	(13	)	(16	)	(11	)	(204	)	(29	)
Diageo - reported growth by region⁽ⁱⁱ⁾	(12	)	(8	)	(9	)	(10	)	(47	)	(15	)
Organic growth by region	Volume %		Sales %		Net sales %		Marketing %				Operating profit⁽ⁱ⁾%
North America	—		2		2		(6	)			4
Europe and Turkey	(11	)	(8	)	(12	)	(12	)			(24	)
Africa	(13	)	(12	)	(13	)	(8	)			(56	)
Latin America and Caribbean	(15	)	(13	)	(15	)	(15	)			(29	)
Asia Pacific	(15	)	(13	)	(16	)	(11	)			(29	)
Diageo - organic growth by region⁽ⁱⁱ⁾	(11	)	(8	)	(8	)	(10	)			(14	)


(i)	Before exceptional operating items.


(ii)	Includes Corporate. In the year ended 30 June 2020 corporate net sales were £38 million (2019 - £53 million). Net corporate operating costs were £147 million (2019 - £189 million).
l	~~PUB~~	l	~~Andean~~	l	~~Spirits~~	l	~~Ready to drink~~

Business review (continued)

Key performance indicators

Net sales (£ million)

Reported net sales declined 8.7%

Organic net sales declined 8.4%


(i)	Exchange rate movements reflect the adjustment to recalculate the reported results as if they had been generated at the prior period weighted average exchange rates.
l	~~Mexico~~	l	~~PEBAC~~	l	~~Beer~~	l	~~Other~~

(ii) For the year ended 30 June 2019 trade investment of £10 million has been reclassified from marketing to net sales.

(iii) Organic movement

Operating profit (£ million)

Reported operating profit declined 47.1%

Organic operating profit declined 14.4%


(i)	For further details on exceptional items see pages 213-216.
l	~~CCA~~


(ii)	Fair value adjustments. For further details on fair value remeasurement see page 89.

Organic operating profit declined ahead of net sales at 14.4% with first half growth of 4.6% more than offset by impact of Covid-19 in the second half.

Business review (continued)

Operating margin (%)

Reported operating margin declined 1,323bps

Organic operating margin declined 212 bps


(i)	Fair value adjustments and reclassification.

(ii) Organic movement

Reported operating margin declined 1,323bps mainly driven by exceptional operating items and decline in organic operating margin.

Basic earnings per share (pence)

Basic eps decreased 54.0% from 130.7 pence to 60.1 pence

Eps before exceptional items decreased 16.4% from 130.8 pence to 109.4 pence


(i)	Includes finance charges net of tax.


(ii)	Excludes finance charges related to acquisitions, disposals and share buyback.


(iii)	Excludes tax related to acquisitions, disposals and share buyback.


(iv)	Fair value adjustments and exchange on operating profit.

Basic eps decreased 70.6 pence principally due to impairments in exceptional items and the decline in organic operating profit. For further detail see pages 213 to 216.

Business review (continued)

Net cash from operating activities and free cash flow (£ million)

Generated £2,320 million from operating activities.^(i)(ii)

Free cash flow was £1,634 million.


(i)	Net cash from operating activities excludes net capex and movements in loans and other investments (2020 - £(686) million; 2019 - £(640) million).


(ii)	Net cash from operating activities and free cash flow for the year ended 30 June 2020 benefited by £74 million as a result of the adoption of IFRS 16 on 1 July 2019.


(iii)	Exchange on operating profit before exceptional items.


(iv)	Operating profit excludes exchange, depreciation and amortisation, post employment charges and other non-cash items.


(v)	Working capital movement includes maturing inventory.


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

Business review (continued)

Return on invested capital (ROIC)%

Return on closing invested capital (%)

Return on average invested capital (%)⁽ⁱ⁾decreased 267bps.


(i)	ROIC calculation excludes exceptional operating items from operating profit and includes an adverse impact of 18bps as a result of the adoption of IFRS 16 on 1 July 2019.

ROIC decreased 267bps against the prior comparable period driven mainly by organic operating profit decline.

Business review (continued)

Income statement



	2019 £ million		Exchange (a) £ million		Acquisitions and disposals (b) £ million		Organic movement⁽ⁱ⁾ £ million		Fair value remeasurement (d) £ million		Reclassification⁽ⁱⁱ⁾ £ million		2020 £ million
Sales	19,294		(1	)	(108	)	(1,478	)	—		(10	)	17,697
Excise duties	(6,427	)	33		32		417		—		—		(5,945	)
Net sales	12,867		32		(76	)	(1,061	)	—		(10	)	11,752
Cost of sales	(4,866	)	(31	)	41		193		9		—		(4,654	)
Gross profit	8,001		1		(35	)	(868	)	9		(10	)	7,098
Marketing	(2,042	)	3		(7	)	195		—		10		(1,841	)
Other operating items	(1,843	)	(5	)	8		84		(7	)	—		(1,763	)
Operating profit before exceptional items	4,116		(1	)	(34	)	(589	)	2		—		3,494
Exceptional operating items (c)	(74	)											(1,357	)
Operating profit	4,042												2,137
Non-operating items (c)	144												(23	)
Net finance charges	(263	)											(353	)
Share of after tax results of associates and joint ventures	312												282
Profit before taxation	4,235												2,043
Taxation (e)	(898	)											(589	)
Profit for the year	3,337												1,454

(i) For the definition of organic movement see page 123.

(ii) For the year ended 30 June 2019 trade investment of £10 million has been reclassified from marketing to net sales.

(a) Exchange

The effect of movements in exchange rates and other movements on profit before exceptional items and taxation for the year ended 30 June 2020 is set out in the table below.



	Gains/ (losses) £ million
Translation impact	56
Transaction impact	(57	)
Operating profit before exceptional items	(1	)
Net finance charges	(2	)
Associates – translation impact	(3	)
Profit before exceptional items and taxation	(6	)

Business review (continued)



	Year ended 30 June 2020		Year ended 30 June 2019
Exchange rates
Translation £1 =		$1.26		$1.29
Transaction £1 =		$1.35		$1.33
Translation £1 =		€1.14		€1.13
Transaction £1 =		€1.12		€1.13