Washington, D.C. 20549
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Act :
Organic movements and organic operating margins are before exceptional items. Commentary, unless otherwise stated, refers to
The brand ranking information presented in this report, when comparing information with competitors, reflects data published by sources such as Global Data, Nielsen, NABCA and IWSR. Market data information and competitive set classifications are taken from independent industry sources in the markets in which Diageo operates. In addition, Diageo’s financial year end is 30 June, and such data may relate to dates other than 30 June or periods other than the financial year ended 30 June, such as calendar year end.
The following pages and sections of this document do not form part of the Annual Report on Form 20-F and are furnished to the SEC for information only:
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2.Statement on Section 172 of the Companies Act 2006 |
Our valuesSection 172 of the Companies Act 2006 requires the Directors to promote the success of the company for the benefit of the members as a whole, having regard to the interests of stakeholders in their decision-making. In making decisions, the Directors consider what is most likely to promote the success of the company for its shareholders in the long-term, as well as the interests of the group’s stakeholders. The Directors understand the importance of taking into account the views of stakeholders and culture shape the way we work.impact of the company’s activities on local communities, the environment, including climate change, and the group’s reputation. |
Read about:
–How stakeholders were taken into account in decision-making on pages 137-141 |
To fulfill our Performance Ambition, we
Chief Executive's statement
Chief Executive's statement
Another year of
strong performance
Like everyone at Diageo, I will miss Ivan’s kindness, wisdom and counsel in the months and years ahead. It was an extraordinary privilege to know, work with and learn from Ivan over the last four years, and to benefit from his experience and generosity of spirit.
Together with all my colleagues, I am determined that we must earn the trustwill build on and respect of all our stakeholders. That is why our culture is rooted in a deep sense of our purpose and values. Our values underpin our business and guide how we work:do justice to his legacy.
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–Reported volume movement 2023: (7.4)% ↓ 2022:10.3% | Passionate about consumers and customers |
| Organic volume movement 2023: (0.8)% ↓ 2022: 10.3% |
–Reported net sales movement 2023: 10.7% ↑ 2022: 21.4% | Be the best |
Business description (continued)
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3. | Our strategic priorities provide the roadmap to achieving our ambition. |
Read more on page 35.
These priorities are inter-related and mutually reinforcing. Together, they drive our company forward.
Through them, we deliver the strategic outcomes against which we measure our performance.
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① Efficient growth | ③ Credibility and trust |
② Consistent value creation | ④ Engaged people |
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4. | Our priorities ensure our stakeholders’ interests are integral to how we manage our business |
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People | Consumers |
Customers | Communities |
Suppliers | Investors |
Governments and regulators |
Read more on pages 30-31.
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5. | We measure progress through a set of financial and non-financial indicators |
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Organic net sales growth ① | Reach and impact of positive drinking programmes ③ ④movement2023: 6.5% ↑ 2022: 21.4% |
Reported operating profit movement 2023: 5.1% ↑ 2022: 18.2% | Organic operating profit growth ① |
Earnings per share before exceptional items ① | Health and safety ③ ④ |
Free cash flow ① | Water efficiency ③ |
Return on average invested capital ② | Carbon emissions ③ |
Total shareholder return ② | Employee engagement ③ ④movement2023: 7.0% ↑ 2022: 26.3% |
Read more
Fiscal 23 performance
Diageo today is a business built to deliver resilient performance, even in turbulent times. We are geographically diverse, with a product portfolio built on pages 53-57.long-term investment in our brands, and a culture that delivers everyday efficiency while pursuing opportunities with focus and agility.
Business description (continued)
Those underlying strengths are reflected in our performance over the last year.We drove strong growth in four of our five regions, with Europe and Asia Pacific growing double-digit. Even with North America sales flat, following a period of very rapid growth, we have still been able to deliver overall organic net sales value growth of 6.5%, within our medium-term guidance, and organic operating margin expanded by 15bps.
Our pre-exceptional earnings per share rose 7.6% in fiscal 23 to 163.5 pence. And we have once again been able to increase the dividend by 5% to a full-year dividend of 80.00 pence.
Chief Executive’s statementFiscal 23 also saw standout performance from our scotch, tequila and beer categories. Scotch grew 12%, tequila grew 19% and beer was up 9% respectively. Johnnie Walker, the world’s leading international spirit brand, delivered another year of strong double-digit growth, increasing 15%. Tequila continues to have strong consumer momentum and our global market share of tequila rose 120bps to just over 23% of retail sales value. We also launched our strategy to ignite a new ‘Golden Age for Guinness’, with immediate results: organic net sales
were up 16% in the period, and in December 2022, Guinness became the number one beer brand by value share in the on-trade in Great Britain.(1)
Covid-19 has vividly demonstratedWe have also continued to benefit from sustained investment in our brand portfolio, with our premium-plus brands now accounting for 57% of net sales growth. Our premium-plus brands now account for 63% of Diageo’s net sales, up 7ppts from fiscal 19.
While I am pleased that governments, businessesour business can deliver this performance even in the face of significant turbulence in major markets, the prospect of ongoing volatility in our operating environment means that there is no room for complacency. We will continue to deliver investment in our brands for the long-term hand in hand with efficiency in our day-to-day operations. At the same time, I want to see our execution focus sharpen as we sustain high quality-growth and communities must work togethercontinue to build more resilient societies, better ablemarket share.
Engine for growth
We are confident that Diageo remains well positioned to withstand major socialdeliver our medium-term guidance of consistent organic net sales growth in the range of 5% to 7% and economic shocks. I am very proudsustainable organic operating profit of 6% to 9%. To achieve this, winning quality market share remains a primary focus and it is one of the key areas of opportunity I see for improvement in fiscal 24. With our advantaged portfolio of brands, core capabilities and competitive advantages, I believe we can drive market share gains of at least two-thirds of our total net sales value. I’m pleased that we gained or held share in markets that total 70% of our net sales value in fiscal 23.(2)
Productivity, our culture of everyday efficiency and smart investment will be critical to deliver our medium-term guidance. Notably, we unlocked a further £450 million of productivity savings during the fiscal 23.
Even as the leading company in international spirits, as of 2022, we only held a ∼4.7% share of the TBA market.(3) This is up from 4% in 2020 when we set our ambition to deliver a 50% increase by 2030. The opportunity is significant. We are a company with a diversified geographic footprint and advantaged portfolio in a very large and attractive industry. Our business is set up for consistent, sustainable long-term growth driven by premiumisation and active portfolio management.
Doing business the right way
Doing business the right way remains at the heart of our plans for growth, and we have made good progress in the past year on ‘Society 2030: Spirit of Progress‘ ESG action plan to build a responsible, inclusive and sustainable business as we grow.
We want to change the way people responded when they were truly tested thisdrink for the better, recognising that there is no drink of moderation, only the practice of moderation. This is why we promote moderate drinking and invest in education and programmes to discourage the harmful use of alcohol. Increasingly we are fully integrating our work to promote responsible drinking into our brand messages, such as in Captain Morgan’s ‘Enjoy Slow’ campaign last year. Together,
We continue to build a strong, diverse leadership team to better reflect the consumers we serve. 44% of our leaders globally are female, maintaining our progress against our 2030 ambition to reach 50%, while 43% of our leadership are now ethnically diverse, an increase of 2% from fiscal 22.
We have also made significant headway on our objective to embed sustainability in our business. We have continued our progress towards our net zero carbon goal in our direct operations by 2030, with an absolute Scope 1 and 2 greenhouse gas emission reduction of 5.4% in fiscal 23. This was partly the result of our continuing investments in renewable energy, which now accounts for 45% of our total energy use,an increase of 1.9% from fiscal 22.
Our other major sustainability focus is on water stewardship. In the last year, we have reduced the amount of water it takes to make each litre of our brands by 2.6% in our water-stressed areas. We also completed water efficiency projects that will enable Diageodeliver future benefit in several water-stressed areas including Kenya, Uganda and Nigeria. Beyond our own operations, we are working in partnership with CARE to empower women and make them stewards of our investments in water sanitation in the communities in which we live and work to emerge stronger from this pandemic.
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Volume movement | | Organic volume movement |
2020: â 11.8%
2019: á 2.3%
| | 2020: â 11.2%
2019: á 2.3%
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Net sales movement | | Organic net sales movement |
2020: â 8.7%
2019: á 5.8%
| | 2020: â 8.4%
2019: á 6.1%
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Reported operating profit movement | | Organic operating profit movement |
2020: â 47.1%
2019: á 9.5%
| | 2020: â 14.4%
2019: á 9.0%
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The Covid-19 pandemic represents the most challenging environment for international businesses for a generation. I want to thank all my colleagues for their remarkable dedication in such difficult circumstances and, especially, for the support they have shown to each other, our partners and the communities in which we live and work.
As well as causing devastating loss of life around the world, the pandemic has seriously affected many countries and significantly impacted our performance in the second half. Nonetheless, our business has shown considerable resilience throughout the pandemic. This is testament to the hard work of our colleagues and efforts over recent years to make our business more agile, putting the consumer at the heart of everything we do.
Our priority remains the health and wellbeing of our colleagues, while taking the necessary actions to protect our business. At the start of the pandemic, we put in place stringent safety protocols and heightened sanitation measures at all our sites and enabled employees to work from home wherever possible. Across the business, we have implemented new policies and resources to support all our people, both on site and at home.
From the beginning of this pandemic, we addressed the medical and humanitarian emergency with charitable donations, drinking water, food parcels, masks and hygiene products around the world. At a time of acute personal protective equipment (PPE) shortages, we donated alcohol to make more than ten million bottles of hand sanitiser for frontline healthcare workers in 20 countries and manufactured hand sanitiser to meet community surges in demand.
Many countries implemented lockdowns that included bar closures. As a result, we have provided support packages for bartenders and bar owners and have worked closely with our suppliers and customers to reduce the disruption to their businesses and ours. In June, we announced a $100 million recovery fund and global programme, ‘Raising the Bar’, to support pubs and bars as they start to welcome their customers back. We will continue to help communities and our industry, and we are determined to do what we can to support the global recovery.
Looking forward
I am very proud to become the Chief Executive of Diageo at a moment of enormous potential for our business. We believe the wayTBA market is the most exciting and creative consumer category in the world. Within it, spirits continue to gain share, and premiumisation is proving to be a resilient trend.
Diageo is well-placed to take advantage of these opportunities. Our geographic reach offers not just resilience through diversification, but also exposure to consumers looking to ‘drink better, not more’ around the world. Our long-term investment in building and actively shaping our people responded when they were truly tested this year. Together,portfolio gives us an advantaged position in the market, and our deep understanding of our consumers allows us to strengthen our relationship with them as we innovate to meet their needs and expectations. Underpinning these advantages, our core capabilities in digital, world-class brand building, supply chain and everyday efficiency allow us to execute effectively and with precision, while our 'Society 2030: Spirit of Progress' ESG action plan ensures that our business will become more responsible, diverse, and sustainable as it grows.
These are strengths that we will enable Diageo andbuild on in the communities in whichyear ahead. With the potential we live and work to emerge stronger from this crisis.
Performance
After several years of consistent delivery, the global outbreak of Covid-19 has presented significant challenges forsee across our business impacting fiscal 2020 performance.
In the first half,and our brands, we deliveredare confident that we will continue to navigate successfully through a good,volatile external environment while delivering our medium-term guidance: consistent set of results, with broad based organic net sales growth across regionsin the range of 5% to 7% and categories; we continued to increase investment behind marketing and growth initiatives, while expanding organic operating margins; we returned £1.1 billion to shareholders via share buybacks and delivered solid free cash flow at almost £1 billion.
Business description (continued)
For the full year, reported net sales were down 8.7%, driven by a decline in organic net sales. Organic net sales were down 8.4%, with growth in North America offset by declines in all other regions. Reported operating profit was down 47.1%, mainly driven by exceptional operating items, including impairments, and by a 14.4% decline in organic operating profit. The decline insustainable organic operating profit was driven by an 11.2% decline in volumes, cost inflation and unabsorbed fixed costs, which were partially offset by short term cost reductions and ongoing productivity benefits.
Reported and organic net sales were down across most brands and categories, withof 6% to 9%. At the exception of tequila, up 25%, Canadian whisky, up 8%, US whiskey, up 3% and ready to drink, up 8%. Organic net sales of our global giant brands were down 13%, driven by declines in Johnnie Walker and Guinness. Guinness was impacted by global on-trade closures and keg return schemes in the second half. Our local stars declined 7%, with continued growth of Crown Royal offset, primarily, by declines in Chinese white spirits in China. Our Reserve brands declined 4%, with double-digit growth in Don Julio and Casamigos offset by declines in Chinese white spirits, Johnnie Walker Reserve variants, Ciroc and Ketel One vodka. Earnings per share before exceptionals declined 16.4%, driven primarily by lower operating profit.
During the second half,same time, we reduced discretionary expenditure and reallocated resources across the group. As part of these mitigation measures, we stopped any A&P spend that would not be effective, but have been clear that we must remain invested in the medium to long term health of our brands and business. We also tightly managed working capital and deferred discretionary capital expenditure projects.
We have a strong balance sheet and recognise the importance of liquidity through uncertain times. During the second half we issued an additional £2 billion of bonds and temporarily increased our committed facilities from £2.8 billion to £5.3 billion. We delivered solid cash flow performance, with free cash flow at £1.6 billion. As a result, we have the liquidity and the confidence to continuefocussed on investing in our priorities. As demand recovers, we will continue investing behind the most effective initiativesbrands to ensure we emerge stronger.
2020 net sales by category (%)
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| l | Scotch | 23 | % | l | Liqueurs | 5 | % |
| l | Vodka | 11 | % | l | Gin | 5 | % |
| l | US Whiskey | 3 | % | l | Tequila | 5 | % |
| l | Canadian Whisky | 8 | % | l | Beer | 15 | % |
| l | Rum | 7 | % | l | Ready to drink | 7 | % |
| l | IMFL Whisky | 5 | % | l | Other | 6 | % |
Communities
Covid-19 has vividly demonstrated that governments, businesses and communities must work together to build more resilient societies, better able to withstand major social and economic shocks. I am proud that, despite the pandemic, Diageo has maintained its community investment to ensure the business has a positive impact on society: promoting moderation and tackling alcohol misuse; reducingmeet our carbon emissions and water usage; and supporting local communities through our global skills and empowerment programmes. You can read more on pages 49-52.
This year, our ambitious and stretching external targets for the environment and communities come to a close. While we are proud
ambition of our progress, we know there is much more to do. We have been developing our new targets to 2030, which will take our commitment to positive drinking, inclusion and diversity and grain-to-glass sustainability, even further. You can read more on page 65.
Business description (continued)
I am very proudincreasing Diageo’s share of the inclusive and diverse culture we are creating at Diageo. Championing inclusion and diversity is fundamental to driving engagement and achieving the best possible outcomes for our business. This year, we were ranked the second Most Diverse and Inclusive Workplace globally by the Refinitiv Diversity and Inclusion Index.
Raising the Bar
We are committed to taking every step necessary to champion equality everywhere. While we have made progress, there is so much more to do. I am proud that our $100 million global ‘Raising the Bar’ programme included a $20 million community fund to support social justice in the United States, helping Black communities and businesses recover from Covid-19.
As we look ahead, we are determined to continue building resilience in our business and to support our communities. The United Nations' International Labour Organization has forecast that 436 million enterprises worldwide face serious disruption and one in six young people will be unemployed due to Covid-19. Through our ‘Raising the Bar’ programme, we will provide support to help pay for the physical equipment needed for outlets to re-open in major hospitality centres around the world. These businesses play an essential role in bringing people together to socialise and celebrate – something that we have missed so much during this pandemic. They also sustain hundreds of millions of jobs, which provide a first foot on the employment ladder for many young people.
Outlook
Our immediate focus is on emerging from the Covid-19 in a stronger position, having built deeper relationships with our customers, consumers and communities in which we operate. Although the trajectory of the recovery is uncertain, with volatility expected to continue into fiscal 2021, we are well-positioned to invest effectively, as consumer demand returns. Recovery will depend 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.
Over the longer term, total beverage alcohol remains highly attractive, with robust fundamentals, and the actions we have takenmarket by 50%, from 4% to 6%, over the last six years provide solid foundationsdecade to grow in a consistent, sustainable way. We have passionate, committed people, an enviable portfolio of brands and a strong balance sheet. I am confident in Diageo’s strategy and our ability to move quickly in the current environment. We will continue to execute with discipline and invest appropriately to ensure we are strongly positioned for a recovery in consumer demand.2030.
Debra Crew
Ivan Menezes
Chief Executive
(1) CGA, 4 weeks to 3 December 2022
(2) Internal estimates incorporating Nielsen, Association of Canadian Distillers, Dichter & Neira, Frontline, INTAGE, IRI, ISCAM, NABCA, Scentia, State Monopolies, TRAC, IPSOS and other
third-party providers. All analysis of data has been applied with a tolerance of +/- 3 bps. Percentages represent percent of markets by total Diageo net sales contribution that have held or gained total trade share fiscal year to date. Measured markets indicate a market where we have purchased any market share data. Market share data may include beer, wine, spirits or other elements. Measured market net sales value sums to 87% of total Diageo net sales value in fiscal 23
(3) IWSR, 2022
Business description (continued)21
Our business modelM A R K E T O V E R V I E W
An attractive industry with a runway for growth
Creating
Total beverage alcohol (TBA) has seen a truly sustainable business forstrong record of value growth over the very long term
last 10 years. And international spirits, where Diageo is the number one player, has grown faster than TBA.(1)
We deliver our strategic priorities through a business model that leverages global and local expertise, has the consumer at its heart and puts our responsibilities to our stakeholders front and centre.
Our enablers
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Our people | Our insight and know-how |
We are proud of our people whose passion, commitment and specialist skills make the difference. | Our in-country sales and marketing teams give us greater agility and enhanced insight so we can anticipate the diverse needs of our consumers and customers.
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27,775 employees |
Our brands | Our infrastructure |
We have a leading portfolio of iconic brands across spirits and beer. | We have a global network of sites devoted to research and development, distillation, maturation, brewing, warehousing and packaging of spirits and beer. |
200+ brands | 150+ sites |
Our relationships | Our financial strength |
From grain to glass, strong, trusted relationships with all our stakeholders are essential to our business. | Attractive industry margins, a strong balance sheet and solid free cash flows give us the financial strength to execute our strategy and deliver strong stakeholder returns over the long-term.
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180+ countries |
What sets us apart
Our brand portfolio and geographic footprint
Our leading brand portfolio offers consumers a broad range of products across categories and price points. We have extensive operations in the United States and Europe, as well as leading positions in many of the markets that are expected to contribute most to medium-term industry growth.
Our track record in innovation and brand building
We innovate across centuries-old brands such as Johnnie Walker, Tanqueray and Guinness, and we develop and grow new brands like Bulleit and Roe & Co. We use our archives, two of the largest and most comprehensive in the drinks industry, to provide a rich source of inspiration for our brands.
Our relationships with the trade
Diageo Reserve World Class™ discovers the next generation of bartending talent, who set the latest mixology trends and bring these to the best bars worldwide. Since its launch in 2009, we have created a network of relationships with bartenders, customers and distributors that, provides us with a unique route to our consumers.
Our business activities
Consumer Insights
We have well-established proprietary data tools to understand consumers’ attitudes and motivations. We convert this information into insights which enable us to respond with agility to our consumers’ interests and preferences.
Innovation
Using our deep understanding of trends and consumer socialising occasions, we focus on drivingbelieve TBA presents sustainable innovation that provides new products and experiences for consumers, whether they choose to drink alcohol or not.
Sourcing
From small holder farmers in Africa to multinational companies, we work with our suppliers to procure high-quality raw materials and services. Where it makes sense, we source locally.
Distilling and brewing
We distill, brew, bottle and distribute our premium spirits and beer brands through a globally co-ordinated supply operation, working to the highest quality and manufacturing standards. Where it makes sense, we produce locally.
Business description (continued)
Marketing
We invest in world-class marketing to responsibly build vibrant brands that resonate with our consumers. We have a rigorous Marketing Code and belong to the Global Alliance for Responsible Media, working with peers to push for further consumer and brand safeguards.
Selling
We grow by working in partnership with our customers. Our global and local sales teams use proprietary data tools and insights to extend our sales reach and improve our execution. When our customers grow, we grow too.
Our expertise in distillation and brewing
Our supply chain teams are the guardians of our brands’ quality and craftsmanship. Their skills and experience range from the craft of barrel-making and coppersmithing, to blending scotch, brewing premium beer, designing, packaging and ensuring our complex modern supply operations are working to the highest standards.
The value we create(i)
Our People
We want our people to be the best they can be. We offer a diverse and inclusive workplace withlong-term growth opportunities for developmentDiageo, underpinned by attractive consumer fundamentals. This includes three key factors: a growing middle class; increased spirits penetration; and progression.
91% of employees are proud to work for Diageo
Our Consumers
We are passionate about the role our brands play in celebrations globally. We are committed to promoting moderation and reducing alcohol misuse.
229.2m people reached with moderation messages from our brands(ii)
Our Customers
We work closely with customers to build sustainable partnerships that help grow their businesses through great insight and execution.
149,000 bartenders trained through the Diageo Bar Academy
Our Communities
We help build thriving communities by making lasting contributions where we live, work, source and sell.
>293,000 people benefitted from our community programmes this year
Our Suppliers
We partner with suppliers to ensure long-term, mutually beneficial relationships. Respect for human rights is embedded throughout our global supply chain.
14th in the Gartner Supply Chain Top 25
Our Investors
We aim to maximise shareholder returns through consistent, efficient growth and a disciplined approach to capital allocation.
13% compound annual growth rate in total shareholder returns over 10 years
Governments and regulators
We contribute to economic and development priorities and advocate laws that protect communities, where these are not already in place.
£1.3m the average generated for every £1m we contribute to national GDP(iii)
(i) Data points refer to 2020 other than where indicated.
(ii) Cumulative for fiscal 2019 and fiscal 2020.
(iii) Oxford Economics, 2020 for calendar year 2019.
Business description (continued)
Production
Diageo owns manufacturing production facilities across the globe, including maltings, distilleries, breweries, packaging plants, maturation warehouses, cooperages, and distribution warehouses. Diageo’s brands are also produced at plants owned and operated by third parties and joint ventures at several locations all around the world. Diageo has monitored the operational status of its production sites (owned and third party) on a daily basis throughout the global pandemic. More details on the impacts of Covid-19 on the operation of production sites can be found in the Risk factors on pages 68-78.
Capacity
The locations, principal activities, products, packaging production capacity and packaging production volume of Diageo owned principal production centres in the year ended 30 June 2020 are as follows:
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| Location | | Principal products | | Production capacity in millions of equivalent units(i) |
| | Production volume in 2020 in millions of equivalent units |
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| United Kingdom (Spirits) | | Scotch whisky, gin, vodka, rum, ready to drink | | 96 |
| | 46 |
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| UK, Ireland (Guinness) | | Beer | | 8 |
| | 7 |
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| Ireland (Baileys) | | Irish cream liqueur | | 12 |
| | 7 |
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| Italy (Santa Vittoria) | | Vodka, rum, ready to drink | | 11 |
| | 7 |
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| Turkey | | Raki, vodka, gin, liqueur, wine | | 7 |
| | 4 |
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| United States, Canada, US Virgin Islands | | Vodka, gin, tequila, rum, Canadian whisky, American whiskey, progressive adult beverages, ready to drink | | 52 |
| | 33 |
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| Brazil | | Cachaça, vodka | | 10 |
| | 4 |
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| Mexico | | Tequila | | 4 |
| | 3 |
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| Australia | | Rum, vodka, ready to drink | | 4 |
| | 2 |
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| Singapore | | Finishing centre | | 7 |
| | 1 |
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| India | | Rum, vodka, whisky, scotch, brandy, gin, wine | | 64 |
| | 30 |
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| Nigeria | | Beer and spirits | | 11 |
| | 5 |
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| South Africa | | Spirits and ready to drink | | 4 |
| | 3 |
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| East Africa (Uganda, Kenya, Tanzania) | | Beer and spirits | | 17 |
| | 12 |
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| Africa Regional Markets (Ethiopia, Cameroon, Ghana, Seychelles) | | Beer and spirits | | 7 |
| | 4 |
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(i) Capacity represents ongoing production capacity. The production capacities quoted in the table are based on Diageo owned actual production levels for the year ended 30 June 2020 adjusted for the elimination of unplanned losses and inefficiencies. In addition, there are third party production arrangements with manufacturing facilities including brewers and co-packing partners licensed to produce Diageo brands.
Spirits
Spirits are produced in distilleries located worldwide. The group owns 29 Scotch whisky distilleries in Scotland, two whisky distilleries in Canada and two in the United States. Diageo produces Smirnoff internationally. Ketel One and Cîroc vodkas are purchased as finished product from The Nolet Group and Maison Villevert, respectively. Gin distilleries are in both the United Kingdom and in Santa Vittoria, Italy. Baileys is produced in the Republic of Ireland and Northern Ireland. Rum is blended and bottled in the United States, Canada, Italy and the United Kingdom, and is distilled in the US Virgin Islands and in Australia, Venezuela and Guatemala. Raki is produced in Turkey, Chinese white spirits are produced in Chengdu, in the Sichuan province of China, cachaça is produced in Ceará State in Brazil and tequila in Mexico.
Diageo’s maturing Scotch whisky is located in warehouses in Scotland (the largest at Blackgrange holding approximately 50% of the group’s maturing Scotch whisky), its maturing Canadian whisky in Valleyfield and Gimli in Canada, its maturing American whiskey in Kentucky and Tennessee in the United States and maturing Chinese white spirit in Chengdu, China.
Diageo continues to invest in our tequila facility in Mexico to enable additional capacity to support growth. The program includes a new distillery, bottling capacity expansion, wastewater treatment plan, tanking and liquid processing equipment as well as warehousing facilities for maturation, packaging materials, and finished goods. Bottling expansion happened in August 2018. During F20 building of phase II of the new distillery was started and the Wastewater treatment plant was completed.
The £150 million Scotch investment program focusing on whisky tourism is progressing. All the necessary regulatory approvals (planning and licensing) have been received for the Johnnie Walker Princes Street development and construction work began in summer 2019. In addition, planning approval has been received for work at the Johnnie Walker Four Corner distilleries (Glenkinchie, Caol Ila, Cardhu and Clynelish). Construction work began at all four sites in 2019.
Business description (continued)
All construction work at the investment sites was halted in March in line with Scottish Government guidance on the Covid-19 pandemic. Construction has re-started in accordance with Scottish Government guidance. It is still too early to say what the impact of the Covid-19 restrictions will be on the timeline for these projects.
Diageo owns a controlling equity stake in United Spirits Limited (USL) which is one of the leading alcoholic beverage companies in India selling almost 80 million equivalent cases per annum of Indian Made Foreign Liquor (IMFL). USL has a significant market presence across India and operates 16 owned sites as well as a network of leased and third-party manufacturing facilities in India. USL owns several Indian brands such as McDowell’s (Indian whisky, rum and brandy), Black Dog (scotch), Signature (Indian whisky), Royal Challenge (Indian whisky), Antiquity (Indian whisky) and Bagpiper (Indian whisky).
Beer
Diageo’s principal brewing facility is at the St James’s Gate brewery in Dublin, Ireland. In addition, Diageo owns breweries in a number of African countries: Nigeria, Kenya, Ghana, Cameroon, Ethiopia, Tanzania, Uganda and the Seychelles.
Guinness flavor extract is shipped from Ireland to all overseas Guinness brewing operations which use the flavor extract to brew Guinness locally. Guinness is transported from Ireland to Great Britain in bulk to the Runcorn facility which carries out the kegging of Guinness Draught. The Diageo OpEx Third Party Partnerships Team are the technical brewers supporting delivery of over 1.8 million hectolitres of beer through partner breweries. The team's focus is upon sustaining consistent quality of our brands through more than 50 partners globally while enhancing Diageo value through new partnerships and innovation projects. In addition to support Guinness and beer, the team has an expanding role in the support of licenced manufacturing of third party ready to drink and African mainstream spirits.
Ready to drink (RTD)
Diageo produces a range of ready to drink products mainly in the United Kingdom, Italy, across Africa, Australia, the United States and Canada.
Property, plant and equipment
As of 30 June 2020, Diageo’s land and buildings are included in the group’s consolidated balance sheet at a net book value of
£1,544 million. Approximately 21% of the total net book value of land and buildings are properties on leases and approximately 79% are owned by Diageo. These are including manufacturing, distilling, brewing, bottling and administration facilities it uses across the group’s worldwide operations.
Raw materials and supply agreements
The group has several long-term contracts in place for the purchase of raw materials including glass, other packaging, spirit, cream, rum and grapes. Forward contracts are in place for the purchase of cereals and packaging materials to minimise the effects of short-term price fluctuations.
Cream is the principal raw material used in the production of Irish cream liqueur and is sourced from Ireland. Grapes and aniseed are used in the production of Raki and are sourced from suppliers in Turkey. Other raw materials purchased in significant quantities to produce spirits and beer are molasses, cereals, sugar and several flavors (such as juniper berries, agave, chocolate and herbs). These are sourced from suppliers around the world.
Many products are supplied to customers in glass bottles. Glass is purchased from a variety of multinational and local suppliers; the largest suppliers are Ardagh Packaging in the United Kingdom and Owens Illinois in the United States.
Competition
Diageo’s brands compete primarily on the basis of quality and price. Diageo also seeks to recruit and re-recruit consumers to its brands, including through offering new innovations targeted at meeting changing consumer demands.
In spirits, Diageo’s major global competitors are Pernod Ricard, Beam Suntory, Bacardi and Brown Forman, each of which has several brands that compete directly with Diageo’s brands. In addition, Diageo faces competition from regional and local companies in the countries in which it operates.
In beer, Diageo competes globally as well as on a regional and local basis (with the profile varying between regions) with several competitors, including AB InBev, Heineken, Molson Coors, Constellation Brands and Carlsberg.
Business description (continued)
Research and development
Innovation forms an important part of Diageo’s growth strategy, playing a key role in positioning its brands for continued growthpremiumisation in both developed and emerging markets. The strength and depth of Diageo’s brand range also provides a solid platform from which to drive innovation. Diageo focuses its innovation on its strategic priorities and the most significant consumer opportunities, including the development
Retail sales value of global brand extensions and new-to-world products, and continuously invests to deepen its understanding of shopper trends and changing consumer habits to inform product and packaging development. Supporting this, the group has ongoing programmes to develop new beverage products which are managed internally by the innovation and research and development function.alcohol market(1)
Diageo produces, sells and distributes branded goods and is therefore substantially dependent on the maintenance and protection of its trademarks. All brand names mentioned in this document are trademarks. The group also holds numerous licences and trade secrets, as well as having substantial trade knowledge related to its products. The group believes that its significant trademarks are registered and/or otherwise protected (insofar as legal protection is available) in all material respects in its most important markets. Diageo also owns valuable patents and trade secrets for technology and takes all reasonable steps to protect these rights.
Regulations and taxes
Diageo’s worldwide operations are subject to extensive regulatory requirements relating to production, product liability, distribution, importation, marketing, promotion, sales, pricing, labelling, packaging, advertising, antitrust, labour, pensions, compliance and control systems and environmental issues.
In the United States, the beverage alcohol industry is subject to strict federal and state government regulations. At the federal level, the Alcohol and Tobacco Tax and Trade Bureau, or TTB of the U.S. Treasury Department oversees the industry, and each state as well as some local authorities in jurisdictions in which Diageo sells or produces products, also administers and enforces industry-specific regulations. Federal, state and local regulations cover virtually every aspect of Diageo's US operations, including production, distribution, marketing, promotion, sales, pricing, labelling, packaging and advertising.
Spirits and beer are subject to national import and excise duties in many markets around the world. Most countries impose excise duties on beverage alcohol products, although the form of such taxation varies significantly from a simple application toEquivalent units of alcohol sold(1)
5.4 billion
1 Consumer base that can afford premium spirits is growing
The latest projections by volume,the United Nations suggest that the global population could grow to advanced systems based onaround 8.5 billion by 2030(2).
Globally, an emerging middle class continues to grow in key markets such as China, where it is estimated that, between 2022 and 2030, the imported or wholesale valuemiddle class and affluent consumer will increase by 80 million, reaching nearly 40% of the product. Several countries impose additional import duty on distilledpopulation.(3)
This continued growth of the ‘middle class and above’ income bracket should enable 470 million(4) more consumers to access and enjoy our brands by 2032.
2 Consumers are increasingly choosing spirits often discriminating between categories (suchover beer and wine
Over the past five years, the TBA market worldwide grew at a 4% compound annual growth rate.(1) Spirits grew considerably faster at a 6% compound annual growth rate as Scotch whisky or bourbon) in the rate of such tariffs. Within the European Union, such productsconsumers increasingly move away from beer and wine.(1)
Spirits, which are subject to different rates of excise duty in each country, but within the overall European Union framework, there are minimum rates of excise duties that must first be applied to each relevant category of beverage alcohol.
Importversatile and excise duties canadaptable, have a significant impact on the final pricing of Diageo’s products to consumers. These duties have an impact on a brand's competitivestrong position as compared to other brands. The group devotes resources to encouraging the equitable taxation treatment of all beverage alcohol categories and to reducing government-imposed barriers to fair trading.
The advertising, marketing and sales of alcohol are subject to various restrictions in markets around the world. These range from a complete prohibition of alcohol in certain cultures and countries, such as in certain states in India, to the prohibition of the import into a certain jurisdiction of spirits, wine and beer, and to restrictions on the advertising style, media and messages used. In a number of countries, television is a prohibited medium for the marketing of spirits brands while in other countries, television advertising, while permitted, is carefully regulated. Many countries also regulate the use of internet-based advertising and social media in connection with alcohol sales.
Spirits and beer are also regulated in distribution. In many countries, alcohol may only be sold through licensed outlets, both on and off-trade, varying from government or state operated monopoly outlets (for example, in Canada, Norway and certain US states) to the common system of licensed on-trade outlets (for example, licensed bars and restaurants) which prevails in much of the Western world, including in most US states and in the European Union. In about one-third of the states in the United States, price changes must be filed or published 30 days to three months, depending on the state, before they become effective.
Labelling of beverage alcohol products is also regulated in many markets, varying from the required inclusion of health warning labels to importer identification, alcohol strength and other consumer information. As well as producer, importer or bottler identification, specific warning statements related to the risks of drinking beverage alcohol products are required to be included on all beverage alcohol products sold in the United States and in a number of other countries where Diageo operates. Expressions of political concern signify the uncertain future of beverage alcohol products advertising on network television in the United States. Any prohibitions on advertising or marketing could have an adverse impact on beverage alcohol sales.
Regulatory decisions and changes in the legal and regulatory environment could also increase Diageo’s costs and liabilities or impact on its business activities.
Business description (continued)
Acquisitions and disposals
Diageo has made a number of acquisitions of brands, distribution rights and equity interests and disposals in premium drinks businesses. For a description of principal acquisitions and disposals and contingent considerations recognised since 1 July 2017, see note 8 and note 15 (g) to the consolidated financial statements, respectively.
On 15 August 2017, Diageo completed the purchase of 100% of the share capital of Casamigos Tequila, LLC (Casamigos), a super premium tequila based in the United States, for $1,000 million (£777 million) of which $300 million (£233 million) was contingent on Casamigos achieving certain performance targets.
On 28 September 2018, Diageo acquired the remaining 70% of Copper Dog Whisky Limited (CDWL) that it did not already own for an upfront valuation of £6.5 million and further earn-out payments based on CDWL achieving performance targets. The discounted current estimate for the earn-out payments was £10 million as of the date of the acquisition.
On 17 August 2018, Diageo completed the purchase of 20.29% of the share capital of Sichuan Shuijingfang Company Limited (SJF) for RMB 6,084 million (£696 million) and transaction costs of £7 million. This took Diageo’s shareholding in SJF from 39.71% to 60%. SJF was already controlled and therefore consolidated prior to this transaction.
In addition, on 9 April 2019 Diageo completed the purchase of a further 3.14% of the share capital of SJF for RMB 690 million (£79 million) and transaction costs of £2 million, which took Diageo's shareholding in SJF from 60% to 63.14%.
On 29 July 2019, East African Breweries Limited completed a purchase of 4% of the share capital of Serengeti Breweries Limited for $3 million (£2 million). This increased Diageo’s effective shareholding from 39.2% to 40.2%.
On 6 August 2019, Diageo completed the purchase of the remaining share capital which it did not already own of Seedlip Ltd and Anna Seed 83 Ltd (the brand owner of Aecorn), makers of distilled non-alcoholic spirits and aperitifs.
In August 2019 and February 2020, in two separate purchases, Diageo acquired shares in United Spirits Limited (USL) for INR 5,495 million (£60 million) which increased Diageo’s percentage of shares owned in USL from 54.78% to 55.94% (excluding 2.38% owned by the USL Benefit Trust).
In addition, Diageo has made a number of smaller acquisitions of brands, distribution rights and equity interests in various drinks businesses.
Diageo completed the sale of a portfolio of 19 brands to Sazerac on 20 December 2018 for an aggregate consideration of $550 million (£435 million). Diageo continued to provide manufacturing services for all disposed brands until December 2019 with some extended up to June 2020 and for five brands these manufacturing services will continue up to December 2028.
On 1 April 2020, Diageo completed the sale of United National Breweries (UNB), Diageo’s wholly owned sorghum beer business in South Africa. In the year ended 30 June 2020, up until the date of sale, UNB contributed net sales of £31 million (2019 - £43 million; 2018 - £49 million), operating profit of £nil (2019 - £1 million; 2018 - £6 million) and profit after taxation of £nil (2019 - £1 million; 2018 - £4 million).
Diageo, consistent with its current strategy, expects to continue to focus on growing its brands on a worldwide basis and expects to make selective acquisitions in both its developed and emerging markets. Diageo explores the potential to make acquisitions on an ongoing basis and is currently evaluating a number of such opportunities, some of which could be significant. Funds for any such acquisitions may be drawn from internally generated cash, bank borrowings or the issuance of equity or debt securities (in an amount that cannot now be determined), or from the proceeds of any potential disposals.
Seasonality
Historically, approximately 40% of Diageo’s annual net sales have occurred during the last four months of each calendar year. However, approximately 45% of Diageo’s annual net sales for its fiscal year ended 30 June 2020 occurred during the last four months of calendar year 2019 due to a lower percentage of annual net sales occurring during the first six months of calendar year 2020 as a result of Covid-19 related economic disruption.
Business description (continued)
Stakeholder engagement
Ensuring a continuous dialogue
We aim to maintain open and positive dialogue with all our stakeholders, considering their key interests and communicating with them on a regular basis. This helps us build trust and respect and make choices as a business that help shape the role we play in society.
Our purpose and values help guide our engagement around the world.
|
| | | |
| People | Consumers | Customers |
Why we engage | Our people are at the core of our business. We aim to build a trusting, respectful and inclusive culture so every individual feels highly engaged and can be their best. We want our
people to feel their human rights are respected and they are treated with dignity. We are committed to creating opportunities for growth and to a continuous learning culture.
| Understanding our consumers is key to growing our business sustainably for the long term. Consumer motivations, attitudes and behaviour form the basis of our brand marketing and innovations. We make our brands with pride and want them to be enjoyed responsibly. On occasions when consumers choose alcohol, we want them to ‘drink better, not more'.
| Our customer partners are experts in the products they buy and sell, as well as in the experiences they create and deliver. We work with a wide range of customers: big and small, on-trade and off, digital and e-commerce. Our passion is to ensure we nurture mutually beneficial relationships that deliver joint value and the best outcome for all our consumers.
|
Our stakeholders' interests | – Prioritisation of health, safety and wellbeing
– Investment in learning opportunities for employee growth and development
– Ways of working, culture and benefits programme
– Contribute to the growth of our brands and our performance
– The promotion of inclusion and diversity
| – Choice of brands for different occasions, including no- and lower-alcohol
– Innovation in heritage brands and creation of new brands
– Responsible marketing
– Great experiences
– Product quality
– Sustainability credentials
– Price
| – A portfolio of leading brands that meets evolving consumer preferences
– Identification of opportunities that offer profitable growth
– Insights into consumer behaviour and shopper trends
– Trusted product quality
– Innovation, promotional support and merchandising
– Availability and reliable supply and stocking
– Technical expertise
|
How we respond | – Company-wide employee engagement surveys
– Consistent talent and performance management approach
– Extensive online learning and development material
– Informative and up-to-date employee communication channels
– Meetings with non-executive workforce engagement director
– Employee interest groups
| – Broad portfolio of choices across categories and price points
– Insightful innovation that satisfies consumer preferences
– Responsible advertising and marketing that adheres to our strict Diageo Marketing Code
– Active engagement and education to promote moderation and reduce the harmful use of alcohol
– High-quality manufacturing and environmental standards
| – Use of best practice sales analytics and technology to support our retailers and distributors
– Ongoing dialogue and account management support
– Physical and virtual sales calls
– Development of joint business plans
– Regular business updates
– Training and webinars through unique offerings, like the Diageo Bar Academy
|
Read more about how our Board engages with our stakeholders on pages 145 and 146.
Business description (continued)
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| | | |
Suppliers | Communities | Investors | Governments and regulators |
Our suppliers and agencies are experts in the wide range of goods and services we require to create and market our
brands. By working with them, we not only deliver high-quality products marketed responsibly, but improve our collective impact, ensuring sustainable supply chains, reducing our
environmental impact and making positive contributions to society.
| Investing in sustainable growth means supporting and empowering the communities where we live, work, source and sell. By ensuring we make a positive contribution, we can help build thriving communities and strengthen our business.
| We want to enable equity and debt investors to have an in-depth understanding of our strategy and our operational and financial performance, so they can more accurately assess the value of our shares and the opportunities to finance our business.
| The regulatory environment is critical to the success of our
business. We believe it is important that those who can influence policy, laws and regulation understand our views. We also want to share information and perspectives on areas that can impact our business and public health.
|
– Developing strong, mutually beneficial partnerships
– Collaborating to realise innovation
– Fair contract and payment terms
– Consistent performance measurement
– Joint risk assessment and mitigation
| – Impact of our operations on the local economy
– Access to skills development
– Opportunities for employment and supplier opportunities
– Improved access to water, sanitation and hygiene
– Responsible use of natural resources
– Gender equality, inclusion and diversity
– Transparency and engagement
| – Strategic priorities
– Financial performance
– Corporate governance
– Leadership credentials, experience and succession
– Executive remuneration policy
– Shareholder returns
– Environmental and social commitments and progress
| – Contribution to national economic and development priorities
– Tax, excise and illicit trade
– Positive drinking programmes and impacts
– Wider sustainability agenda, including human rights, environmental impacts, sustainable agriculture and support for communities
– Corporate behaviour
|
– Partnering with Suppliers standard, our code for working with suppliers
– Direct resolution process
– Confidential, independent whistleblowing helpline and website
– Regional supplier awards
– Supplier financing
– Supplier performance measurement and performance
reviews with two-way feedback
– Standards assessments through independent bodies
| – Ongoing dialogue, annual reviews
– Partnerships, including local raw material supply partnerships in Africa
– Learning for Life, our global training programme for hospitality and retail sector workers
– Our community water, sanitation and hygiene (WASH) programmes in Africa and India
– Community programme design that includes gender equality and inclusion and diversity considerations
– Tree planting programmes
– Participation in sustainability indices
| – Stock exchange announcements
– Results announcements
– Investor roadshows
– Meetings and calls
– Capital Markets Days
– Annual General Meeting
– Annual Report, Form 20-F and Sustainability and Responsibility Performance Addendum
– Shareholder information on www.diageo.com
– Participation in investor conferences
| – Ongoing dialogue
– Collaboration on responsible drinking initiatives and promotion of moderation, tackling illicit trade and strengthening industry standards
– Participation in governments’ business and industry advisory groups
– Sharing of research, economic modelling and international best practice, including as a member of industry trade organisations
– Diageo Code of Business Conduct
|
Business description (continued)
Our market dynamics
Total beverage alcohol is an attractive industry with a naturalconsiderable runway for sustainable growth given consumers' interest in new serves suitable for a broader range of occasions, including with food and at home.
Drinking occasions and practices vary depending on local culture and traditions. We believe that drinking in a responsible way can be part of a balanced lifestyle in many societies around3 Consumers across the world.
Our marketsworld are shaped by long-term consumer, economic, cultural and social trends, and the regulatory environment. Notwithstanding Covid-19, the long-term trends for our industry remain extremely attractive.
|
| | | | | | | | | |
£854 billion
retail sales value of global alcohol market(i)
| 6 billion
equivalent units of alcohol sold each year(i)
| 600 million
new legal purchase age consumers are expected to enter the market by 2030(ii)
| Higher price spirits tiers grew 10 times faster than the total spirits category(iii)
| +4% the increase in spirits share of total beverage alcohol(iii)
| 750 million
consumers are expected to be able to afford international-style spirits by 2030(iv)
| +8% theincrease in spirits share of beverages in mainstream eating outlets in Great Britain(v)
| +17% the annual rate at which the e-commerce sales channel for alcohol is expected to grow over the next five years(vi)
| Over 1 million young people, parents and teachers educated on the dangers of underage drinking over the last three years(vii)
| 73% of consumers believe it is not enough for brands to be environmentally responsible - they should be socially responsible too(viii)
|
(i) IWSR, 2019 (v) Kantar, Alcovision 2020 for the period 2009-2019(ii) World Bank, 2020 (vi) IWSR Global Ecommerce Strategic Study, 2020
(iii) IWSR, 2019 volumes for the period 2015-2019 (vii) Diageo, 2020
(iv) Euromonitor, 2020 (viii) Kantar Global Monitor, 2019
trading up, choosing superior quality
Consumers want to 'drink better'
Consumers are seeking new experiences and higher quality products. When it comes to beverage alcohol, consumers are ‘drinking better, not more’ –and are increasingly choosing brands and categories that stand out for superior quality, authenticity and taste. This
We call this trend premiumisation, trend is supported by product innovation and fuelled by higher levels of prosperity and disposable income, coupled within which consumers have a greater desire to explore new experiences, ingredients and serves for social occasions.
Impact
Over the last 15 years, brands in higher price tiers have consistently grown volume faster than those in lower price tires. Consumers are buying a broader range of premium products, including no- and lower-alcohol drinks, that reflect their diet and lifestyle choices and their interest in natural ingredients and craft production.
Our response
We have built an industry-leading portfolio of Reserve brands. We have done this through focused investment, brand-building, the creation of a dedicated management team and, in many countries, a dedicated route to market. Through the development of our Reserve portfolio, we are also able to influence the evolution of mass luxury spirits across different categories and occasions, including super premium scotch and tequila. We are also growing brands of the future. We do this through acquisition, through growing our own brands and through investing in entrepreneurs through our partnership with Distill Ventures.
Consumers are increasingly choosing spirits
Consumers who drink alcohol are increasingly choosing spirits over beer and wine. This is a long-term trend. In markets where spirits is a less mature category, mainstream spirits brands can offer quality and affordability. In more mature markets, premium core and Reserve brands offer choice and new experiences.
Impact
Gin is an example of a category benefitting from switching, starting in Europe and now accelerating in markets like Australia, South Africa and Brazil. This has been fuelled, in part, by an increase in the number of occasions on which consumers are choosing gin, where traditionally, they might have chosen beer or wine. In many emerging markets, spirits penetration is still low compared to developed markets, providing the potential for future growth.
Our response
Our innovation brings new brands and serves to our customers. Our broad, global portfolio across categories and price points provides
consumers with product choice to suit different occasions and their disposable income.
Business description (continued)
An emerging middle class who can afford international-style spirits
Global population growth and economic development are continuing to drive the emergence of consumers with a higher disposable income. These consumers are seeking new, aspirational experiences, and driving demand for quality drinks at a range of price points. They are also moving away from informal alcohol, which is estimated to account for around 25%
(1) IWSR, 2022
(2) United Nations Department of global alcohol sales despiteEconomic and Social Affairs, Population Division, 2022
(3) Mind the associated health risks and loss of tax revenue for governments.Generation Gap, Boston Consulting Group, 2023
(4) World Bank 2022
Impact
Demand for international-style spirits is rising. Around 600
546 million
new legal purchase age consumers are expectedestimated to enter the market globallyby 2033(4)
470 million
estimated to join the middle class and
above income bracket by 2032(4)
+9%
increase in spirits TBA share(1)
I N V E S T M E N T C A S E
Investing for
the long term
Diageo has a bold ambition and is well-positioned to capture more of the total beverage alcohol (TBA) market opportunity.
With only 4.7% of global TBA share(1), we believe we have significant headroom for sustainable, long-term growth, and our ambition is to outperform the market and increase our TBA value share to 6% by 2030. Over the same period we expect hundreds of millions of consumers to be able to afford international-style spirits.
Our responseIncreasing spirits penetration
We have builtDiageo has a diversified footprint globally with an advantaged portfolio of lowerbrands. The breadth and depth of our portfolio across attractive categories and price point options. Thesepoints positions us to capture large consumer growth opportunities, and provides resilience to international trading volatility. Globally, there is a significant opportunity to increase spirits penetration.
In markets where the spirits category is less mature, our mainstream brands give emerging market consumers access to our brandsproducts at affordable prices and enable us to help shape responsible drinking trends. Our mainstream spirits such as Baileys Delight and Smirnoff X1 in Africa,prices. For example McDowell’s No. 1 in India and Black & White in Latin America provideoffer quality products at more affordable price points and offergive opportunities forto consumers to trade up in the future.
Quality growth for Guinness
Beer is our second largest category after scotch. Our business model for the category is differentiated, increasingly asset-light, highly profitable and provides exposure to both emerging and developed markets. We use a variety of routes to the consumer, depending on the most efficient model for each market. Guinness leads our beer portfolio and is available in more than 100 countries and territories.
Read more about how Guinness became the number one pint in Great Britain on page 34.
Active portfolio management
We use our deep consumer insights to acquire strategic brands in higher-growth categories. In fiscal 23, we acquired Balcones Distilling, a leading producer of award-winning super-premium and above US whiskey. We also acquired Don Papa Rum, a super-premium dark rum from the Philippines, strengthening our position in the rum category, which is premiumising.
Our active portfolio management also includes strategic disposals. In fiscal 23, we sold Guinness Cameroun S.A., following a strategic review which identified a more efficient model to support the strong growth of the brand in Cameroon. We also disposed of Archers, as their disposable income increases.well as the disposal and franchising of a portfolio of brands in India.
ConsumersOur core competencies
Diageo is a world-class brand builder and has supply chain expertise, as well as an entrepreneurial spirit and advantaged culture.
Our world-class brand building is underpinned by deep consumer understanding, which fuels innovation and recruits consumers. We combine our consumer insights with marketing creativity which we execute with precision. This is underpinned by smart investment in marketing effectiveness tools, such as Catalyst, Sensor and CreativeX.
We believe that our diverse supply chain across the markets where we source, make and sell is a key competitive advantage. We leverage the scale and breadth of our business to build strategic relationships with suppliers that deliver regular cost savings, which we reinvest. Our culture of everyday efficiency and strong pipeline of productivity initiatives drove £450 million of savings in fiscal 23, fuelling sustained investment in brand building.
We are changing how they socialise
Consumers in developed markets are moving away from high-energy, late-night occasions towards more informalconsumer-focussed and food-related occasions. They are increasingly interested in drinks that fit occasions before, duringbrand obsessed, and after meals. This year, consumersour workforce is encouraged to have also been adapting to differentan entrepreneurial spirit, where new ways of socialising at home as a resultthinking are welcomed. Our ability to adapt to market challenges and our consistent focus on consumers and trade partners are the foundations from which we deliver our Performance Ambition. As an organisation, we are restless and we work hard to operate with agility and urgency to deliver consistent quality growth.
Read more about our core
competencies on pages 26-31
Delivering consistent performance and quality growth
To help ensure we deliver consistent performance and sustainable quality growth, we invest smartly in the areas we believe will bring the greatest benefits: capital expenditure for our strategic categories, digital capabilities, our ambitious sustainability agenda and our supply chain agility programme.
Production capacity and maturing inventories
In fiscal 23, scotch and tequila grew by 12% and 19% in net sales, respectively. Investing capital in production capacity is key to delivering long-term sustainable growth. We are investing in new whiskey distilleries in North America and China and increasing our tequila manufacturing footprint in Mexico. We are also investing in maturing inventories to support the future growth of these fast-growing categories. Over the Covid-19 pandemic.last five years, we have increased maturing inventories from £4.0 billion to £5.8 billion, including investments of £0.6 billion in fiscal 23.
ImpactShareholder value creation
Spirits, which are versatile and adaptable, are benefitting fromWe expect to deliver organic net sales growth consistently in the trend away from high-tempo socialising, as consumers discover new serves which are suitable for a broader range of occasions5% to 7% and organic operating profit growth sustainably in whichthe range of 6% to enjoy9% for fiscal 23 to fiscal 25. Sustainable top-line growth and productivity savings enable smart re-investment to drive long-term growth.
Digital and data capabilities
We’re investing in transformational digital and data capabilities. In marketing, CreativeX, our brands.
Our response
Our consumer insightlatest tool, enables us to innovate existing brands, anticipate new consumer occasions and create new brands that meet emerging consumer demand. This insight is supported byassess the effectiveness of our abilitydigital content before deployment to develop and launch products and campaigns rapidly and effectively, reachingensure we provide the right consumers fast. In Latin America this year, when bars and restaurants closed due to the Covid-19 pandemic, our teams rapidly developed online platforms to help consumers make cocktails at home; worked with well-known chefs to pair recipes with signature serves; and brought the bar experience into consumers’ homes through live-streaming.
Consumers are changing how they buy
Alongside shifts in the way people socialise and consume, digital and technology are changing the way consumers find and buy our brands. Online shopping for alcohol is still low compared to other retail categories, but it is a fast-growing channel. Consumers are increasingly using the internet to discover and learn about brands and products, where previously they might have done so in venues and while out socialising.
Impact
As regulations continue to evolve and e-commerce expands further, digital channels will play an ever-increasing role in bringing our productsperfect serve of advertising content to consumers. This trend has been accelerated by the impact of Covid-19. For example, Drizly, the American alcohol e-commerce marketplace, saw an increaseIt is now deployed in sales of over 400% in May versus growth projectionsprior to Covid-19(i).
(i) Drizly, 2020.
Our response
We have developed our route to consumer approach through multiple channels, with e-commerce being a key focus area this year. We work with a range of online retailers to ensure that our products are competitively and responsibly marketed – for example, through partnerships with online grocery retailers, e-marketplaces and on-demand delivery companies. We are also developing our own digital channels that help consumers grow their understanding and knowledgemarkets covering 75% of our brands, including through personalised experiences that help them find the right drink for the right occasion,net sales value. We’re also supporting our customers and our global sales teams leverage data and insights from digital tools such as Malts.comEDGE365 to extend our sales reach and improve our execution.
Continuing the digital transformation journey we embarked on in Great Britain, TheBar.com2017, in Brazilfiscal 23, we launched a five-year programme to modernise our IT environment and standardise our ‘What’s Your Whisky' app, which launchedbusiness operations. This makes us more agile in November.
Business description (continued)
A complex regulatory environment
The beverage alcohol industry is highly regulated. Regulation varies widely between countries and jurisdictions, often evolving inour response to changes in society. As a minimum we complycustomer needs, provides us with all lawsworld-class actionable insights and regulations wherever we operate, but we have long understood that a responsible alcohol company must go beyond compliance.
We are proud of our brands and we want themallows us to be enjoyed responsibly. Through our work, we support the United Nations' and the World Health Organization’s goal of reducing harmful drinking by 10% by 2025. We also advocate laws and industry standards, including minimum legal purchase age laws and maximum blood-alcohol concentration driving limits, in countries where these are not already in place.
Impact
While most people who choose to enjoy alcohol do so moderately and responsibly, the misuse of alcohol can harm individuals and those around them, damage our industry’s reputation and make it harder for us to create value.
Our response
We want to offer consumers the opportunity to ‘drink better, not more’ – an approach that is rootedmore efficient in our social values and aligns with our business model as a producer of premium drinks. We are committed to promoting moderation while campaigning to reduce harmful drinking and improving laws and industry standards. Our Positive Drinking strategy, described on page 43-46, includes ambitious targets for areas whereday-to-day operations.
Investing in sustainability
By 2030, we can have the greatest impact in reducing harm: drink driving, underage drinking and heavy drinking.
Consumers expect businesses to act responsibly
Consumers, like all stakeholders, are increasingly challenging businesses to show how they make a positive impact on society and to demonstrate their commitment to protecting the environment. Stakeholders rightly expect to see that businesses are generating wealth, fostering inclusion and diversity, respecting human rights, supporting their communities and acting on important environmental issues, including climate change and water stress.
Impact
Earning trust and respect is fundamentalhave invested around £1 billion of capital to achievingsupport our ambition. Any business that relies on agricultural raw materials and water has both a responsibilitydrive to the environment around it and an exposure to environmental risks. Our future success depends on us continuing to reduce our environmental impact and promoting inclusive economic growth, while making sure we do business with integrity and respectbe global champions for human rights.
Our response
Our environmental programmes reduce carbon emissions and improve water efficiency throughout our value chain, and address waste and sustainable packaging, including the use of plastic. With the oversight of our Climate Risk Steering Group, we are integrating the management of climate-related issues into our business. Our Water Blueprint defines our approach to water stewardship and prioritises our actions in areas we have defined as water-stressed.
We have a strategic commitment to inclusion and diversity within and beyond our business, while our community programmes are designed to empower women, help people develop their skills and increase access to clean water, sanitation and hygiene (WASH). Respect for human rights throughout our value chain, including the rightstrong contributor to a safe workplace, underpins everything we do.
The right insights to deliver consumer-led growth
Everything we do is designed to delight consumerslow-carbon world. We are doing this by improving water use efficiency, investing in water replenishment, using renewable energy, scaling circular solutions and customers. That means identifying the factors that drive consumer
choice, so we can put the right product in front of the right consumer at the right time.
Drawing on behavioural science and the power of data, we have transformed the way we understand consumer motivations
and behaviours. Our Diageo Foresight system analyses trends so we can make strategic choices and anticipate major shifts. Our
Consumer Choice Framework is giving us detailed information on a huge range of social contexts - what we call 'occasions' - so we better understand who is drinking, what, where and when.
Together, these market-leading research tools are inspiringimplementing regenerative agriculture. These investments will also help us to embrace bold, disruptive innovations, such as Ketel One Botanicalbe more efficient, reduce our resource consumption, develop innovative solutions and Smirnoff Infusions. At the same time, our insights enable us to unlock new opportunities for established brands. For example, we used improved global insights to re-launch Baileys as an ‘adult treat' brand in 2016. The move has revitalised the brand,ensure a more resilient supply chain.
which is now well established across a range of treating occasions. This year, our insight told us consumers were looking to treats
and baking as a creative outlet during lockdown and Baileys quickly repurposed its baking content across markets.
Business description (continued)25
Our strategic prioritiesS T R A T E G Y
Delivering our Performance Ambition
At the core of our strategy is the flywheel for growth. After several years of strong performance at Diageo, it has a proven track record.
Our six strategic priorities support the achievement of our performance ambition to be one of the best performing, most trusted and respected consumer products companies in the world. Through them,these priorities, we deliver the strategic outcomes against which we measure our performance.
Strategic outcomes:
| |
1. | Efficient growth - Consistently grow organic net sales, grow operating profit, deliver strong free cash flow
|
| |
2. | Consistent value creation - Top-tier total shareholder returns, increase return on invested capital
|
| |
3. | Credibility and trust - Trusted by stakeholders for doing business the right way, from grain to glass
|
| |
4. | Engaged people - High-performing and engaged teams, continuous learning, inclusive culture
|
The delivery of our strategic priorities is enabled by our culture and values
Our culture underpins the work we do to deliver our strategic priorities and is key to our success. It is shaped by our values and encourages our people to: lead bold execution that ensures consumers delight in our brands; act like entrepreneurs and encourage learning; take ownership for shaping and achieving our ambition; and create an inclusive environment where everyone can be their best.
Business description (continued)26
We strive to share our values with our stakeholders, building mutually fulfilling relationships and partnerships.
|
| | | | |
Passionate about
consumers and
customers
Our curiosity and insights deliver experiences
and products that delight and drive growth.
| Freedom to succeed
We foster an entrepreneurial spirit by giving each other
the freedom to succeed. It’s how we move with pace and keep our big company small.
| Proud of what we do
We are proud of how we operate and what we stand for.
We act sensitively with the highest standards for integrity and social responsibility.
| Valuing each other
We are creating a truly inclusive culture. We seek diversity in people and perspectives and believe in the benefits it delivers
across our business.
| Be the best
We are restless: always learning, always improving.
We strive to be the best at work and in our communities.
|
1. Sustain quality growth
Creating sustainable and consistent quality growth is at the heart of our ambition to be ‘oneone of the best performing’.performing consumer products companies. It enables us to invest in our business, grow our marginsmeans delivering consistent net sales and delivermargin growth as well as top-tier total shareholder returns.
|
| | | |
Market dynamics
| Strategic outcomes
| Progress in 2020
| Looking ahead to 2021
|
– Consumers want to ‘drink better’
– Consumers are increasingly choosing spirits
– An emerging middle class who can afford international-style spirits
– Consumers are changing how they socialise
– A complex regulatory environment
| – Efficient growth
– Consistent value creation
– Credibility and trust
| – Continued investment in brand building, targeting the most effective opportunities
– Further developed NRM processes and capabilities
– Significantly enhanced Diageo Bar Academy content and support for bartenders and bar owners
– Launched innovations to recruit new consumers and unlock new occasions, focusing on our global giants, no- and lower- alcohol and retail formats
| – Focus on emerging from the pandemic in a stronger position,
having built deeper relationships with our customers and
consumers
– Continue to build our NRM capabilities and route to consumer, at pace
– Innovate creatively, focusing on the right opportunities for the current environment
|
Delivering sustained quality growth
The demographic and economic market drivers for the beverage alcohol sector point to clear potential for growth. Over the long term, however, growth on its own is not enough to achieve our Performance Ambition. We need to make sure that our growth is sustainable, consistent and of high quality.
Creating sustained, quality growth is not new to us. Brands such as Guinness and Johnnie Walker, which celebrates its 200th anniversary in 2020, show how the right approach to quality, brand equity, innovation and investing for the long term can build lasting value. We focus on six key elements that help us sustain quality growth:
Key elements of our approach
| |
– | Grow volume, price and mix |
| |
– | Execute the most effective route to consumer |
| |
– | Grow next generation brands |
| |
– | Enable a positive policy environment |
Business description (continued)
Grow volume, price and mix
Supported by improved capabilities in net revenue management (NRM), a balance of volume, price and mix is essential for driving consistent net sales growth. NRM is all about driving quality growth by making sure we are offering our consumers and customers the right assortment of brands and formats in the right place, at the right price, and for the right occasion.
This year, we continued to embed NRM across the business. We established multi-disciplinary teams across markets and made our approach more holistic. This has allowed us to create actionable insights within shorter timeframes, increase the speed of our decision-making and enhance our ability to create, execute and adjust more bespoke plans that generate value for our customers and our business.
For example, in Northern Ireland this year we were better able to meet specific consumer and customer preferences by changing the mix of brands and formats available, which also improved our promotional plans and further integrated customers’ needs into our decision-making.
Our progress on NRM has enabled us to respond in an even more agile and targeted way to our consumers’ and customers’ rapidly evolving requirements during the Covid-19 pandemic. We adapted pack sizes and formats and reprioritised our investments in line with changing shopper behaviours and channel shifts.
Execute the most effective route to consumer
Our business is built on getting the right product to the right consumer for the right occasion – and at the right price. The shopper landscape is evolving, as are technologies and our consumers’ preferences. Through best practice sales analytics and technology, we are transforming the way we partner with our retailers and distributors. We want to ensure we create distinction and competitive advantage at every point in the route to consumer, not just when people enjoy our products.
This year, in order to support our bar and restaurant customers affected by Covid-19 related closures, we developed ‘Cocktails To Go’ programmes. These enabled our customers to simplify their offering, continue delivering quality cocktail experiences and connect with consumers online. Our ‘How to’ guides contain a range of support, from information on how to partner with third-party delivery services to branded content for menus and digital promotion, cocktail recipes, ‘to go’ packaging instructions and tips for enhancing the consumer experience.
Build brand equity
Our brands are key to our success and we work hard to ensure their long-term health by safeguarding and building their brand equity. This year, the second of our successful Six Nations Title Sponsorship, Guinness continued to build on its long-term affiliation with rugby. The brand has a history of powerful storytelling, releasing ‘Liberty Fields’, the latest advert in the ‘Made of More’ series during the Japan Rugby World Cup.
In the second half of the year, with Covid-19-related closures in the on-trade taking place just before St. Patrick’s Day, Guinness quickly amended its plans to stay relevant to consumers and unveiled measures to support pub and bar staff. In the United States, Guinness released advertising with an optimistic and hopeful message to its consumers: ‘We’ll March Again’. In Great Britain and Ireland when lockdowns were first put in place, Guinness announced over £2 million in funds to support on-trade staff, and in Nigeria, a new initiative saw Guinness support bar owners and staff impacted by closures by providing care packages.
Innovate sustainably
Driving sustainable growth is at the heart of our innovation. Led by our strength in developing consumer insights, each innovation either recruits new consumers, re-recruits them by giving them another reason to choose our products, or disrupts a category by changing consumer perceptions. Our focus is on recruiting new consumers to occasions and brands and this year 60% of our projects were in this category, compared to around 30% five years ago.
This year, Diageo brands won nearly 80 awards at the 2020 San Francisco World Spirits Competition, including 14 awards for innovation. Baileys Red Velvet Irish Liqueur, launched in the United States and Great Britain this year, was awarded a Double Gold, while Crown Royal Peach Flavoured Whisky was also recognised. George Dickel Bottled in Bond, a limited release 13-year-old whisky, was awarded Whisky of the Year by Whisky Advocate.
Business description (continued)
Grow next generation brands
While it is vital to grow the big brands of today, we also want to seed the successful brands of the future. We grow next generation brands by acquiring brands, like Casamigos, and developing our own, like Roe & Co Irish Whiskey.
This year, Zhong Shi JiTM, the new-to-world whisky we launched in China with our joint venture partner Yanghe Distillery Co. Ltd in 2019, was awarded a Silver Medal at the IWSC (International Wine and Spirit Competition). It is crafted by master blenders and distillers from Scotland and China through a unique process, including maturation in Chinese ceramic pots, which has created a full-flavoured, exceptionally smooth liquid.
We also grow next generation brands by investing in entrepreneurs with new ideas through our partnership with Distill Ventures. We have the option to acquire Distill Ventures’ portfolio companies and this year we acquired Seedlip.
Enable a positive policy environment
We sell our products in over 180 countries and to grow sustainably we rely on a transparent, predictable and fair public policy environment. We seek to secure this by constructively engaging governments and stakeholders around the world on evidence-based policies and recommendations to ensure our brands compete on a more equal playing field in terms of alcohol taxation and regulatory policy, while also supporting government policies and objectives. This year, for example, we worked with the local Spirits Association to help the Government of Uruguay develop robust laws aimed at reducing illicit trade on its border with Brazil.
Crown Royal: sustained growth driven by insight and innovation
Connecting with consumers and their passions is at the heart of sustained quality growth. This year, Crown Royal grew 8% and
was once again North America’s most valuable whisky brand(i), as consumers continue to connect with its purpose of 'inspiring exceptional generosity'.
The insight that it is better to give than to receive really resonates, as Crown Royal’s Purple Bag community gifting campaign continues to show. This strong brand equity is supported by sustainable innovation and consistent investment. The result is that Crown Royal is recruiting new consumers, accessing new occasions and reinforcing its premium status.
Crown Royal Regal Apple, for example, is now in its sixth year of growth. Other innovations, such as this year’s Crown Royal Peach, are also contributing to the brand’s growth and vibrancy. Our marketing places Crown Royal
at the centre of cultural occasions that connect with consumers. And in 2020, Crown Royal’s ‘The Guy Who’s Got It All’ campaign
won a prestigious Effie advertising award.
During the Covid-19 pandemic, the brand continued to connect with consumers’ desire to give back, hosting an online #GenerosityHour that has supported bartenders affected by closures.
(i) Nielsen/NABCA for the 12 months to 31 May 2020
Business description (continued)
2. Embed everyday efficiency
Everyday efficiency creates the fuel that allows us to invest smartly and sustain quality growth. At its heart, everyday efficiency is a mindset and a culture, which everyone in Diageo is encouraged to bring to life in their daily work.
|
| | | |
Market dynamics
| Strategic outcomes
| Progress in 2020
| Looking ahead to 2021
|
– Consumers want to ‘drink better’
– Consumers are increasingly choosing spirits
– Consumers are changing how they socialise
– Consumers are changing how they buy
– Consumers expect businesses to act responsibly
| – Efficient growth
– Consistent value creation
– Engaged people
| – Rollout of EDGE in Africa
– Introduction of EDGE365 and rollout in nine countries
– Development of almost 100 new intelligent automation processes
– Agile adaptation of creative campaigns and initiatives
to delight consumers and support customers during Covid-19 pandemic
| – Leverage and strengthen our efficiency culture
– Progress investments in data analytics and automation
– Strong focus on cost and cash
|
Delivering everyday efficiency
We are ensuring our resources are deployed where they are most effective. This means using technology and data analytics to make better, faster decisions and work in a more agile way. It also means simplifying our business so that we can liberate our teams to better meet the needs of our consumers and customers. At the same time as freeing resources to focus on great performance, everyday efficiency enables us to generate savings that we can invest smartly.
We focus on three key elements to help embed everyday efficiency:
Key elements of our approach
| |
– | Simplifying the business, injecting speed into what we do |
| |
– | Focusing resources on delighting customers and consumers |
| |
– | Unleashing technology, including data and analytics, on our processes to drive efficiency and insights |
Simplifying the business, injecting speed into what we do
Across the business, we are developing systems that enable our people to spend less time collecting data and more time on execution. Automated processes and reports are also liberating our people to create value by reducing task time and improving self-sufficiency.
This year we automated a key part of our product development process. Each year, our technical teams manage many hundreds of new product development projects, ranging from global brand redesigns to cutting-edge innovations. Collating in a single file the thousands of individual data points needed to manage each project was a highly repetitive, manual activity. By leveraging intelligent automation, we have reduced the time it takes to create the data in the format we need - in some instances, what used to take weeks now takes hours. We have also been able to automate data entry at the start of each project. So rather than spending time on collating data, our people have more time for review and analysis, which has improved efficiency and accuracy.
Focusing resources on delighting customers and consumers
We are changing the way we work so we act with more agility and focus resources on our top business priorities. This year, with thousands of hospitality workers across the United States facing unprecedented challenges, we introduced the #TipsFromHome social media programme to help get bartenders back to work at home, and fundraise for hospitality relief funds. The programme features bartenders who use their creative talents to make drinks crafted from pantry staples to inspire consumers to make their own at home. Bartenders’ cocktail making has been featured weekly on a 'Cocktails de la Casa' segment on ABC’s Jimmy Kimmel Live.
Business description (continued)
#TipsFromHome features a range of our brands including Bulleit, Don Julio, Johnnie Walker and Ketel One Botanical. We are donating $1 to the United States Bartenders’ Guild (USBG) every time someone shares a cocktail image on social media using #TipsFromHome and #DiageoDonation, up to a total of $1 million. This pledge is on top of more than $2 million we have donated this year to North American organisations serving the hospitality industry, including the USBG Foundation Covid-19 Relief Campaign of the Bartender Emergency Assistance Program.
Unleashing technology, including data and analytics, on our processes to drive efficiency and insights
Data and analytics offer a clear opportunity to create scale benefits across our business. In fact, they are critical enablers which provide us with tools to understand not just what has happened, but why. They help us make better, faster decisions and give us deeper insights into customers and consumers.
This year, the benefits of our investments have proved even more valuable, providing us with up-to-date insights in rapidly shifting market conditions. For example, earlier this year we introduced a new debtor reporting system. Using enhanced automation, this centralised approach to reporting enabled us to act with pace and agility and to more effectively manage our working capital when Covid-19 measures led to widespread closures of bars and restaurants around the world.
Over the last two years we have been embedding a suite of technology tools, known as EDGE (Every Day Great Execution). These capture in-store data and, through predictive analytics, revolutionise our ability to offer the right brands, in the right outlets, in the right way. This means we can work with customers so that each outlet has specific standards and recommendations that help boost incremental sales.
We introduced EDGE in the United States in early 2019 and this year, extended it to eight further markets in Asia Pacific, Europe and Africa.
In addition to accelerating the rollout of EDGE, we have also further developed the tools to reflect the rapid trend towards digitalisation.
In North America, where the use of EDGE is most advanced, we have been able to further simplify our data reporting and insight generation, eliminating over 200 reports and introducing a standardised and highly visual dashboard that enables teams to use data for decision-making even more efficiently.
EDGE365, which we introduced this year, is an industry-leading application for our sales force that integrates everything they need to manage their customer relationships into a single mobile application. In markets such as Australia and Spain, where EDGE365 has been launched either with our sales teams or with our distributors, we have seen significant improvements in efficiency and effectiveness, enabling more in-depth engagement across a larger number of customers.
In other parts of the business, we are piloting the use of advanced analytics to optimise distillation and fermentation processes at manufacturing sites, with early results showing yield improvements. We are also using data analytics to improve the accuracy of our demand forecasting in our supply operation. Through improved insights, planners can also identify any required adjustments more quickly. All of this is achieved while reducing the time spent on reporting.
‘Stop the Stops’: an efficiency culture led by employees
We are seeing the benefits of having a culture of everyday efficiency embedded across the business. This includes our supply operations, where our ‘Stop the Stops’ initiative is empowering our production teams to use their experience and expertise to create value.
Part of our manufacturing excellence programme, ‘Stop the Stops’ is based on a simple insight: that no one understands production better than those working on it every day. Our operators know that unplanned stops to our lines mean the potential loss of value in the production of our brands, which can impact the quality and availability of our products. With their knowledge and expertise, our operators are the best people to identify and resolve unplanned stops. They are developing and delivering the equipment fixes we need to reach our goal of reducing unplanned stops to zero. At the same time, they are building their knowledge, enhancing product quality and improving their work environment.
As we further develop ‘Stop the Stops’, we are rolling it out worldwide. In Europe, where it is most mature, we are already seeing higher engagement levels with our people, fewer defects and a typical reduction of 30% in unplanned stops.
Business description (continued)
3. Invest smartly
We are investing in the future success of our business – but that investment needs to be ‘smart’smart to support the delivery of consistent performance and enable sustainable, quality growth.
|
| | | |
Market dynamics
| Strategic outcomes
| Progress in 2020
| Looking ahead to 2021
|
– Consumers want to ‘drink better’
– Consumers are increasingly choosing spirits
– An emerging middle class who can afford international-style spirits
– Consumers are changing how they socialise
– Consumers expect businesses to act responsibly
| – Efficient growth
– Consistent value creation
– Engaged people
| – Continued to develop our Catalyst tools
– Further developed our use of intelligent automation
– Accelerated our e-commerce capabilities and strategy
– Opened the Guinness Gatehouse in Shanghai
– Received planning permission for our Johnnie Walker experience in Edinburgh
| – Invest prudently, focusing on the most effective opportunities in the current environment
– Enhance capabilities and continue to develop marketing data and analytical tools
– Build e-commerce and intelligent automation further
|
Delivering smart investment
Investing smartly means focusing on areas in which we believe investment will bring the greatest benefits: our people; advertising and promotional (A&P) spend; technology, data and e-commerce; capital expenditure; and mergers and acquisitions (M&A).
Key elements of our approach
| |
– | Invest to grow and develop our people |
| |
– | Acquire attractive new brands |
| |
– | SpendRead more on A&P, more effectively and efficiently |
| |
– | Build capabilities in technology, data and e-commerce |
| |
– | Support growth with the right capital investment |
Invest to grow and develop our people
Investing in our people is critical to our future success. Smart investment means ensuring our people have the right opportunities to develop their skills and capabilities; the right tools and resources to make faster, smarter decisions; and better data, analytics and information. Our work on building an engaged, inclusive and diverse team is described on pages 46-49.30-31
Acquire attractive new brands
Many of our iconic brands have been built over decades, or even centuries. While never losing sight of the importance of acting as stewards of these great brands, we need to identify and nurture the new brands that consumers will enjoy in the future. Our strategy is to invest in new-to-world brands which help us access fast-growing categories, such as no- and lower-alcohol drinks.
This year, we acquired Seedlip, the world’s first non-alcoholic distilled spirit. Seedlip was launched in 2015 to solve the dilemma of ‘what to drink when you’re not drinking®’. Its founder, Ben Branson, set out to change the way the world drinks while continuing his family’s 320-year-old farming legacy. In the last four and a half years, Seedlip has grown from Ben’s kitchen to a presence in more than 25 countries, over 250 top-rated restaurants, many of the world’s best cocktail bars, luxury hotels and high-quality retailers.
Spend more on A&P, more effectively and efficiently
We have always invested in marketing our brands to support their long-term brand equity and growth. We combine our creative flair with smart investment in A&P, which ensures we get maximum impact from our marketing by increasing the efficiency and effectiveness of our spend. Our Marketing Catalyst data analytics tools, for example, help us to accurately predict the short-and long-term impacts of our investments. This means we confidently know when, where and how much to invest to grow our brands.
Business description (continued)
Marketing Catalyst, which is now used in 60 countries by over a thousand marketers and our media agencies, is supporting greater data transparency and enabling us to track performance more closely than ever before. Its use covers global giants such as Guinness and Johnnie Walker and local stars like Tusker in Kenya and Bundaberg in Australia. Because Marketing Catalyst delivers more detailed insight as we gather more data, it gives us the confidence to invest in A&P for long-term growth. It also means we can optimise the short-term performance of our investments and make informed decisions where a change in market conditions or consumer behaviour might mean our investment is best focused elsewhere.
For example, this year in North America we were able to achieve a 19% increase in our return on investment in a key channel over the busy holiday period. In Brazil, a shift in spend delivered a significant improvement in the return on Tanqueray investment and in Africa, where we have increased our use of Catalyst, the Senator brand in Kenya also achieved a 20% improvement in return on investment by increasing our A&P spend in better performing channels. We further developed Marketing Catalyst this year by embedding broader and deeper measurement. We also launched an enhanced version of Catalyst in Europe and North America which provides us with additional insight into how our decisions about A&P investment impact other key financial metrics such as net sales and operating profit.
Build capabilities in technology, data and e-commerce
We are also investing in best-in-class technological capabilities that support productivity. We want to keep strengthening our analytical capabilities to build our competitive edge and take further strides in developing intelligent automation to make our core processes simpler and ensure our people are focused on higher value-added work.
This year, we have almost doubled the number of applications in which we use intelligent automation. We have used intelligent automation to inject speed and remove complexity for our marketers and creative agencies. Our Diageo Content Hub simplifies how our marketers and agencies are able to find relevant content and buy media. After less than two years in full operation, the millionth download was made in May this year. It took our previous tool over six years to achieve this – showing how the new hub has made it easier and faster for our people and agencies to access what they need.
While online shopping for alcohol is still at low levels compared to other retail categories, it is a fast-growing channel. With so many bar and restaurant closures resulting from Covid-19 lockdown measures, there has been a significant increase in consumers purchasing online this year and this has accelerated the development of e-commerce across our business. In our Caribbean and Central America market, for example, we moved swiftly, focusing our resources on developing our capabilities in this very underdeveloped channel – and with good results. In partnership with customer e-commerce platforms, delivery apps and distributors, we grew the e-commerce channel by over 400% between February and May. (i)
(i) Glovo & Appetito24, February to May 2020.
Support growth with the right capital investment
Sound capital investments underpin our drive to achieve sustained, quality growth. That means investing in our supply footprint, so that we have the capacity to grow in the future. It also means strategically investing in maturing stocks to support our long-term success. We also invest in consumer experiences through distillery visitor centres and attractions where people can engage directly with our brands.
In October we opened a new state-of-the-art Innovation and Research Centre in Scotland as part of our investment in the sustainable growth of the distilling industry. The £6.4 million laboratory provides a new home for our largest global science and innovation hub, where our teams work on science, technology and innovation projects across a number of our global brands, including Johnnie Walker, Smirnoff, Tanqueray, Gordon’s and Captain Morgan.
Business description (continued)
Efficient and effective investment: acting with agility and creativity
Covid-19 led to the closure of bars and restaurants around the world - so we re-doubled our focus on investing behind
opportunities that would be effective and relevant for consumers in a rapidly changing environment.
When the pandemic began, our brand team had a new advertisement depicting a busy summer party ready to drive sales of our new Smirnoff Red White & Berry Seltzer innovation in North America. The team worked quickly to adapt the original advertisement to the changed environment, making it fun and relevant to our consumers’ experience in lockdown. Leading with the message ‘Hang Out From Home For America', it ran predominantly on TV, achieving positive feedback from consumers.
Bulleit grew net sales by 4% this year. The brand responded to consumers being at home with a new Drinking Buddies campaign across digital and social media - and its first national TV campaign. #NewDrinkingBuddies delivered a tongue-in-cheek message that while we all miss our drinking buddies, at home, there are new ones everywhere. The campaign content was produced on an iPhone at home – delivering engaging content quickly and in a highly cost-effective way. Results were outstanding, with Bulleit adding 10bps of spirits share and gaining 34bps of US whiskey category share(i).
(i) Nielsen, year-on-year growth, three months to 16 June 2020 and NABCA, year-on-year growth, three months to 31 May 2020.
4. Promote positive drinking
We wantare determined to change the way the world drinks for the better, by promotingbetter. We will promote moderation and addressingcontinue to invest in education programmes around the world to help reduce the harmful use of alcohol. Our goal is forAs we reach more people with our programmes, we will change attitudes on underage drinking, drink driving and binge drinking.
Read more on pages 75-77
Champion inclusion and diversity
We believe that everybody should be able to 'drink better, not more' – becausethrive in an environment that values their contribution and celebrates what makes them unique. Across Diageo, we are proudchampion inclusion and diversity, from how we attract, recruit and develop our teams, to representation in our supply chain, the ways we portray the richness of society across our brands and we know thatour work to make a positive difference in our communities.
Read more on pages 86-90
Pioneer grain-to-glass sustainability
We are focussed on preserving the resources upon which our business and our communities depend. We are working to preserve water for life, accelerate to a low-carbon world and become sustainable by design – helping to create a better future for communities everywhere.
Find out more about our performance against all our ‘Society 2030: Spirit of Progress’ ESG action plan on pages 75-110.
Read more on pages 91-110
S T R A T E G I C P R I O R I T I E S
Sustain quality growth
To achieve our ambition of being one of the best performing, most trusted and respected consumer products companies in the world, delivering and sustaining quality growth is key. This means consistent net sales and margin growth, as well as top-tier shareholder returns.
Delivering sustained, quality growth is not new to us. Brands such as Johnnie Walker and Don Julio show how the right approach to quality, brand building, innovation and investing for the long-term can build lasting value.
Case study: Johnnie Walker
Johnnie Walker has been a key driver of our strong scotch performance this year, seeing sales growth of 15%.
This is the brand’s third consecutive year of double-digit net sales growth, with sales at an all-time high.
Premiumising scotch
Johnnie Walker’s growth has been primarily driven by premiumisation. Ensuring we offer consumers choice and provide options to easily trade up (e.g. moving from Johnnie Walker Red Label to Johnnie Walker Black Label) have meant that price and volume have had strong growth across all our regions and variants. In fact, the proportion of net sales from Johnnie Walker premium products – Johnnie Walker Black Label and above – reached 73% for the first time in fiscal 23.
This broad-based strong volume, price and mix performance allowed us to offset record inflation seen globally as well as strong foreign exchange headwinds to grow gross margin by +1.1ppt.
Record share performance
Johnnie Walker has also extended its lead as number one international spirits brand by 34bps.(1) Every month, 93 million people who choose to drink alcoholic beverages choose Johnnie Walker.(2)
As ever, this year we also looked to the future, and continued to invest ahead with a record high advertising and promotion (A&P) spend of £545 million and 22% sales return on A&P investment level with all markets increasing spend versus last year.
Sustaining quality growth in Latin America and Caribbean
This financial year, Johnnie Walker’s performance in Latin America and Caribbean stands out, with the region heavily focussed on premiumisation.
Net sales grew +16% to a record high, and gross margin percent grew +1ppt. Likewise A&P grew +36% which funded double-digit net sales growth of core variants (Johnnie Walker Red Label +15%, Johnnie Walker Black Label +18% and Johnnie Walker Blue Label +22%). We were also excited to roll out Johnnie Walker Blonde special edition across Mexico, Brazil and Chile.
(1) IWSR, 2022
(2) How the world drinks, Kantar 2022
(3) CGA, 4 weeks to 3 December 2022
To sustain quality growth, we focus on: developing new brands of the future; balancing volume, price and mix – what we call Revenue Growth Management; executing the most effective route to our consumers; and working with governments and stakeholders around the world to ensure our brands compete on a more equal playing field for alcohol taxation and regulatory policy.
Alongside this, we have a disciplined approach to portfolio management, making acquisitions and disposals in line with our strategy.
Examples of progress in fiscal 23:
• We drove strong growth in four of our five regions, with Europe and Asia Pacific growing double-digit
• Continued to generate quality growth across key brands, including Guinness, which became the number one beer in the Great Britain on-trade for the first time in December 2022(3)
• Launched new innovations in premium categories, including Don Julio Rosado in tequila and Elusive Expressions in scotch
• Made considered acquisitions focussed on fast-growing, premium categories such as Don Papa Rum and Mr Black coffee liqueur
• Equally we made considered disposals in aid of our long-term growth ambitions, including the sale of Archers and the sale and franchise of selected local brands in India
S T R A T E G I C P R I O R I T I E S continued
Embed everyday efficiency
Everyday efficiency creates the fuel that allows us to invest smartly and sustain quality growth. We want to ensure our resources are deployed where they are most effective.
This means using technology and data analytics to make better, faster decisions. It also means simplifying our business so that we can better meet the needs of our consumers and customers.
Case study:
Logistics reinvention
Through our logistics interventions, we are driving sufficiency, efficiency, sustainability, agility and resilience by focussing on five key areas.
1 Synchronised fulfilment
We revised our operating strategy by identifying never out of stock and strategic brands and products, which account for 80% of our revenue. Focussing on these stock keeping units has enabled us to service our customers faster, cutting cost, lead-time and carbon.
2 Alternative routes, ports, carriers and modes
In order to avoid congestion, we contracted alternative transportation routes, ports, carriers and modes. For example, we transferred a significant portion of our movements in Scotland from ships to rail.
3 Multi-dimensional partnerships with suppliers, customers and industry
We built stronger partnerships with our customers, our suppliers and the industry, working closer and more collaboratively. For example, we evolved our partnership with ocean freight carrier CMA, becoming their largest transatlantic customer to better support both parties.
4 Supply network design and investment
We studied our logistics process end-to-end, from the plant to the customer, which helped us anticipate and manage disruptions, allowing us to deliver to markets more quickly and efficiently. Additionally, by using regional hubs, we also brought products closer to our end customers and consumers.
5 Digitisation
All of this has been underpinned by strategic interventions on digitisation. We have real-time insights to anticipate supply chain blockages, enabling us to take timely action. We have been spearheading the use of automation such as bots and intelligent automation as a way to make the best decision at any point. We are also implementing artificial intelligence in our order cycle to optimise product availability, container fill rate and pricing.
In the face of heightened inflation, more than ever, we have focused on agility and speed to enable efficiencies across everything we do. These savings have been realised and have enabled us to continue to meet the needs of our customers and consumers, whilst still generating sufficient amounts to reinvest smartly.
Examples of progress in fiscal 23:
• Delivered £450 million annualised savings across the end-to-end value chain
• Began the first year of the five-year supply chain agility programme which will strengthen and make fit for themthe future our supply chain
• Made an £82 million saving from procurement efficiency, which was impactful across all regions
• Drove greater efficiency in our advertising and promotional (A&P) investment, with savings made through marketing effectiveness
S T R A T E G I C P R I O R I T I E S continued
Invest smartly
We continually invest in the future success of our business – but that investment needs to be enjoyedsmart to support the delivery of consistent performance and enable sustainable, quality growth.
This year, we have balanced quality growth and volume by driving pricing and mix to increase premiumisation. We have also optimised commercial decisions to best sustain long-term growth.
Case study:
Tequila
With the popularity of tequila on the rise(1), we saw an opportunity to be a driver of growth in the category.
We did this by investing in strategic key areas.
Investing in new distilleries
In September 2021, we announced plans to expand our tequila manufacturing footprint in Mexico through an investment of more than £400 million.
In fiscal 23, £160 million of this investment was spent on the construction of two new distilleries in the state of Jalisco, building further resiliency into our tequila supply chain and supporting growth in the category by increasing production capacity. Because of this, we can now operate 24 hours a day.
The first of the two distilleries is responsibly.expected to be operational by fiscal 24 Q1, and the second expected in fiscal 25 Q1.
Using new technologies to drive efficiency
As part of our ‘Society 2030: Spirit of Progress‘ ESG action plan, we have been investing in innovative environmentally friendly technologies. This includes drones which can count the number of agave plants in a field with greater accuracy and efficiency than manual processes.
Traditionally, spraying agave fields was done manually and had to take place in the night or very early in the morning. Operating in darkness created high complexity, including the risk of injury, wildlife attacks and exposure to harmful agricultural supplies.
Using drones has not only ensured the safety of our workers, but has also meant we can spray between 20-30 hectares of agave a day, the equivalent of the work of 30 people.
Saving water
The drone is also more efficient from a water saving perspective, using 70% less water than manual applications, as well as decreasing costs and having a positive impact on our carbon footprint through reducing the requirement for vehicles.
Because of this, water savings in fiscal 23 are expected to be 5.5 million litres, aiding us further in our water stewardship ambitions.
Digitising our supply chain
As we seek to further digitise our supply chain processes, we have designed and implemented the first ever digital planning tool on aged liquid, including the rotation of barrels between different age groups.
In addition, we have introduced an advanced supply planning tool which should enable us to drive end-to-end scenario planning and inventory optimisation.
The investment actions that we are taking now, and those we have planned for the future, will support our plans to take tequila global.
(1) IWSR, 2022
We are constantly making investments across our business in different areas to ensure we are delivering consistent growth.
This includes investing in our supply chain, including transforming the end-to-end supply network across our physical assets, as well as in our technical and digital capabilities.
Examples of progress in fiscal 23:
• Maintained our 18% investment in A&P, enabling us to continue to invest behind and grow our brands
• Invested in premium, high-growth categories, such as tequila, as well as brands like Don Papa Rum
• We significantly stepped up investments in key digital and experiential areas, including our Direct to Consumer (D2C) platform
• In sustainability, we invested capex in data foundations and decarbonising our supply chain
• Committed more than £60 million in capex funding for water efficiency projects over the next three years
• We have hired colleagues with the aim of building the internal capabilities necessary to deliver on our 2030 target
B U S I N E S S M O D E L
Creating a sustainable business
What we do
1. We source
From smallholder farmers in Africa and Mexico to multinational companies, we work with our suppliers to procure high-quality raw materials and services, with environmental sustainability in mind. Where it is practicable, we source locally
2. We innovate
Using our deep understanding of trends and consumer socialising occasions, we focus on driving sustainable innovation that provides new products and experiences for consumers, whether they choose to drink alcohol or not
3. We make
We distil, brew and bottle our spirits and beer brands through a globally coordinated supply operation, working to the highest quality and manufacturing standards. Where it makes sense, we produce locally
Our core competencies
The ability to work our business model hard to deliver success comes from our strength across several key areas. These core competencies set us apart from our competition.
World-class brand building
Our track record shows us to be experts in innovation and brand building. This is vital in order to first make the right products, and then be able to take those products to consumers and help them celebrate.
Read more on pages 34
Supply chain efficiency
We are constantly striving for excellence across our supply chain, finding ways to improve across all components and sites, whether that’s research and development, brewing or packaging.
Read more on pages 35
Entrepreneurial spirit
Our inclusive, collaborative culture enables us to work together in a dynamic and agile manner, creating a vibrant workplace as well as delivering our Performance Ambition.
Read more on pages 36
Creating value
Our business model allows us to create value across four main areas:
Financial – for our investors
Human – for our people, suppliers, customers and consumers
Social – for our communities
Natural – for our environment
We deliver our strategic priorities through a business model that leverages global and local expertise, has the consumer at its heart and puts our responsibilities to our stakeholders front and centre. Since launching our ‘Society 2030: Spirit of Progress’ ESG action plan, we have set out to help create a more inclusive and sustainable world, creating a positive impact in our company, and for our society.
4. We transport
We move our products to where they need to be in the world, whether that’s from a local distillery in market or shipping scotch around the world
5. We sell to customers
We grow by working closely with our customers. Our global and local sales teams use our data, digital tools and insights to extend our sales reach, improve our execution and help generate value for us and for our customers. When our customers grow, we grow too
6. We market to consumers
We invest in world-class marketing to responsibly build vibrant brands that resonate with our consumers. We have a rigorous global Marketing Code and belong to the Global Alliance for Responsible Media, working with peers to push for further consumer and brand safeguards
7. We help consumers celebrate
We continually evolve our data tools to understand consumers’ attitudes and motivations. We convert this information into insights which enable us to respond with agility to our consumers’ interests and preferences
W O R L D -C L A S S B R AND B U I L D I N G
The year Guinness became Great Britain's favourite pint
Great Britain loves Guinness.
So much so, for the first time ever, in December 2022, Guinness became Britain’s number one beer in the on-trade.(1)
Secrets to success
Guinness, which has been around for over two centuries, still manages to firmly embed itself in culture with its visual distinctiveness. In Great Britain, ‘the black stuff’ is heavily associated with events like St Patrick’s Day and the Six Nations rugby – because of this, Guinness saw a record on-trade share of 12.1% in March 2023.(2)
But the brand is not only focussed on select moments or seasons. Guinness has been making its biggest marketing investment to date in celebrations around the calendar such as Christmas and summer – including launching the ‘Lovely Day For A Guinness’ campaign which truly captures the summer feeling.
Guinness also has an ability to spot trends and jump on new opportunities. This year, the brand partnered with the Women’s Six Nations and viral DJ, Fred Again.
Choosing authentic partners in Great Britain, who are both established and emerging in terms of recognition, has enabled the brand to increase +60bps to 3.6% among women and +80bps to 7.7% amongst 18-34 year olds.(3)
While the recipe remains relatively unchanged, the Guinness brand is continually evolving and we actively pursue innovation. In fact, we are currently sustaining our biggest innovation pipeline in the last 30 years.
This includes scaling up our alcohol-free option, Guinness 0.0, growing our distribution and introducing new packs in the off-trade and launching in the on-trade. In the off-trade, the Guinness 0.0 four-pack was recently the number one non-alcoholic item by value and volume in Great Britain.(4)
And, in support of our ‘Society 2030: Spirit of Progress’ ESG action plan to promote positive drinking, we put Guinness 0.0 at the heart of the Six Nations Championship.
New products have also been key. ‘Guinness Nitrosurge’, a first-of-its-kind device that allows Guinness fans to enjoy the two-part pour at home, was rolled out in Great Britain in fiscal 23, premiumising the Guinness experience in new spaces.
These unique abilities are underpinned by world-class brand building. We are consistently leveraging our distinctive assets and deep understanding of our consumers, all powered by precision marketing.
This is the reason why in fiscal 23, more new consumers drank Guinness than ever before.
(1) CGA, 4 weeks to 3 December 2022
(2) Neilsen, 2023
(3) Kantar, 2023
(4) IWSR, 2022
S U P P L Y C H A I N E F F I C I E N C Y
Unboxing premium scotch to reduce waste
A little over 150 years ago, Johnnie Walker had a packaging problem. Too many bottles were being broken in transit over choppy seas. The solution? The iconic ‘square’ bottle: packaging that could be stacked safely and efficiently.
Today, we continue that tradition of finding news ways to solve problems.
Bottles included in the trial
Diageo remains as proud of its whiskies as ever, and no less careful with its packaging. But in the modern world, the task is different. Our packaging is already robust: now it must become sustainable too.
Packaging is synonymous with waste, and too many industries have adopted a ‘take-make-dispose’ model. At Diageo, we want to change this. We believe convenience should not come at the cost of our natural resources.
At the beginning of fiscal 23, we began a thorough review of our whiskies and came to the conclusion that not only could we change our packaging, but in some places, we could get rid of it altogether.
This is why we started our work to phase out cardboard gift boxes across a selection of products in our premium scotch portfolio. After all, the luxury of our products is in the liquid, not the packaging.
Solving a problem at scale
The next step was to bring a team together. With the sheer scale of the project, and the range of packaging across different markets, we gathered a group with global and cross-functional expertise. The taskforce worked to scope out the project, agree timelines, communicate to customers and make sure every market was aligned. To minimise disruption to our supply chain, the project was initially rolled out across selected markets, testing the consumer response and assessing if waste could really be reduced.
After a successful test, we were able to expand the project internationally. The first phase was delivered over fiscal 23, and we plan to roll it out to new markets in fiscal 24. The work is a continuation of Diageo’s ‘Society 2030: Spirit of Progress’ ESG action plan to help create a more inclusive and sustainable world.
Promising results
In fiscal 23, this new work stream has resulted in:
141 million
cardboard boxes eliminated from our supply chain
c.5,520 tonnes reduction in carbon emissions
E N T R E P R E N E U R I A L S P I R I T
Challenging traditional marketing concepts in Brazil
In fiscal 23, organic net sales in Latin America and Caribbean increased by 9% and we plan to keep growing.
Part of our growth plan in the region is making critical investments in one of the most rapidly advancing parts of our business: digital marketing.
Growing our e-commerce offering
For more than a decade, our award-winning website, TheBar.com, has helped customers to make cocktails at home. It has also been a key driver of our digital performance, connecting people directly to Diageo’s brands through recipes, luxury gifts and personalised engraving. Brazil now hosts the site’s biggest operation worldwide, with an omnichannel approach that combines physical stores and online engagement in a powerful media engine.
Expertise across borders
This year, we also set up Diageo’s first digital hub in Latin America, allowing us to share analytics, media insights, online commerce and scalable content across countries.
The new hub has helped us engage more closely with the people buying our brands. It means we can create more relevant content, engage in live conversations, and be more responsive to what consumers are saying online.
The hub has also enabled Diageo to scale up its key capabilities from one market to another – getting data from Colombia to Mexico, fast. Artificial intelligence helps tailor our work to local social media algorithms, which has enabled us to optimise our media in more than 37% of the region.
Led by consumers
In Brazil, we have invested in a new content laboratory. This is an interactive, digital platform run by a team of creators who monitor everything consumers are talking about, searching for, listening to, or sharing online – in real time. It’s part of our evolution from precision marketing to predictive marketing, not only listening to what consumers want, but anticipating future trends too. The content lab is a complete shift in communication, putting our brands at the heart of communities.
Together, these innovations are challenging the notions of traditional marketing. Diageo’s digital tools mean communication is no longer one-way, with brands talking to consumers, but consumers talking to each other: a more collective way of engaging with online culture. And it’s working. Since our content lab was launched, Diageo’s whisky brands in the region have expanded their leading share of consumer engagement, growing ‘talkability’ share by +7ppt.(1)
(1) Sprinklr, 2022
Net sales growth (%)
Definition
Sales growth after deducting excise duties.
Non-GAAP measures
Organic net sales growth (%)1 [R] [K]
↑6.5%
Definition
Sales growth after deducting excise duties, excluding the impact of exchange rate movements, hyperinflation adjustment and acquisitions and disposals.
Why we measure
This measure reflects our delivery of efficient growth and consistent value creation. Organic net sales growth is the result of the choices we make between categories and market participation, and reflects Diageo's ability to build brand equity, increase prices and grow market share.
Performance
Reported net sales grew 10.7%, driven by strong organic growth and favourable foreign exchange impacts. Organic net sales growth of 6.5% reflects 7.3 percentage points of positive price/mix and a decline in organic volume of 0.8%. Four out of five regions delivered growth, despite lapping strong double-digit growth at the group level in fiscal 22. Price/mix was driven by price increases and premiumisation.
More detail on page 37 46
1.Organic net sales growth, organic operating profit growth, earnings per share before exceptional items, free cash flow and return on average invested capital are non-GAAP measures. See definitions and reconciliation of non-GAAP measures to GAAP measures on pages [280-291]
2.For reward purposes this measure is further adjusted for the impact of exchange rates, hyperinflation adjustment and other factors not controlled by management, to ensure focus on our underlying performance drivers.
Operating profit growth (%)
Definition
Operating profit growth, including exceptional operating items.
Organic operating profit growth (%)1 [R] [K]
↑7.0%
Definition
Organic operating profit growth is calculated on a constant currency basis, excluding the impact of exceptional items, certain fair value remeasurement, hyperinflation adjustment and acquisitions and disposals.
Why we measure
The movement in operating profit measures our delivery of efficient growth and consistent value creation. Consistent operating profit growth is a business imperative, driven by investment choices, our focus on driving out costs across the business and improving mix.
Performance
Reported operating profit grew 5.1%, mainly driven by growth in organic operating profit and positive impacts from exchange rate movements. These favourable items were largely offset by the negative impact of exceptional operating items, primarily non-cash impairments related to India and the supply chain agility programme. Organic operating profit grew 7.0%, ahead of organic net sales growth, driven by growth across all regions except North America.
More detail on page 46
Basic earnings per share (pence)
Definition
Profit attributable to equity shareholders of the parent company, divided by the weighted average number of shares in issue.
Earnings per share before exceptional items (pence)1 [R] [K]
163.5p
Definition
Profit before exceptional items attributable to equity shareholders of the parent company, divided by the weighted average number of shares in issue.
Why we measure
Earnings per share reflects the profitability of the business and how effectively we finance our balance sheet. Eps measures our delivery of efficient growth in the year and consistent value creation over time.
Performance
Basic eps increased 24.7 pence, mainly driven by organic operating profit growth and exceptional items, partially offset by increased finance charges and higher tax.
Basic eps before exceptional items increased 11.6 pence.
More detail on page 48
Operating results 2023 compared with 2022
Chief Financial Officer’s introduction
"I am encouraged by our fiscal 23 results which were in line with our medium-term guidance despite ongoing economic volatility and continued inflationary pressure. Our diversified portfolio and profitable growth algorithm continue to deliver sustainable growth, and our consistent productivity savings enables us to smartly reinvest in our brands.
I am pleased with our performance in fiscal 23. We delivered a strong
set of results, despite ongoing global economic volatility and continued inflationary pressure. Both organic net sales and organic operating profit growth were within our medium-term guidance. Our advantaged portfolio of brands and diversified global footprint continue to fuel sustainable growth on top of two consecutive years of double-digit growth.
Our profitable growth algorithm underpins this strong top line performance. Our focus on quality sustainable growth is backed by investing smartly in marketing and data analytics tools to support our outstanding brand-building capabilities, active portfolio management and consumer-led innovation. Combined with our agile and dynamic supply chain and operational capabilities, they enable us to deliver sustainable, long-term growth. Alongside premiumising our portfolio, we are strategically increasing price and driving productivity, all of which enables us to invest smartly in the long-term.
We drove £450 million in productivity savings in fiscal 23 and delivered our highest-ever contribution from supply initiatives. These productivity savings fuelled a 6% increase in marketing spend and delivered organic operating margin expansion of 15bps.
We continued our disciplined conversion of profit into cash and delivered free cash flow of £1.8 billion. Strong operating discipline led to a reduction in debtors. However, creditors declined due to the moderation of sales growth in the year. We remain a progressive dividend payer and in addition to completing our £4.5 billion multi-year return of capital programme, we also returned an additional half a billion pounds of capital to shareholders. In total, we returned £3.1 billion to shareholders through dividends and share buybacks in fiscal 23.
Our core capabilities, strategic priorities and highly-engaged people give me confidence in our ability to navigate short-term volatility and uncertainty while continuing to drive sustainable long-term growth and deliver shareholder value.
Finally, starting in fiscal 24, in line with reporting requirements the functional currency of Diageo plc changed from sterling to US dollar. Diageo has also changed its presentation currency to US dollar."
Lavanya Chandrashekar
(Chief Financial Officer)
|
| | | | | | | |
Market dynamicsReported net sales growth 10.7% | Strategic outcomes | Alignment to UN SDGs | Progress in 2020 | Looking ahead to 2021Net cash from operating activities £3,024m |
– Consumers want to ‘drink better’Organic net sales growth(1)
– A complex regulatory environment
– Consumers expect businesses to act responsibly
– Consumers are changing how they buy
– Consumers are increasingly choosing spirits
– An emerging middle class who can afford international-style spirits
6.5%
| | – Credibility and rustFree cash flow(1)
– Engaged people£1,800m
|
Reported operating profit growth 5.1% | | 3 - Good health and well-beingReturn on closing invested capital
12 - Responsible consumption and production40.5%
|
Organic operating profit growth(1) 17 - Partnerships for the goals
For more details see page 327.0%
| | – Met our 2025 targetReturn on reaching 200m people with moderation messages from our brandaverage invested capital(1)
– Responded to Covid-19 through online resources16.3%
|
Basic earnings per share combating underage drinking, tackling drink driving and promoting moderation in lockdown
164.9 pence
| | Total shareholder return
(2)% |
– Continue to promote positive drinking byEarnings per share before exceptional items(1)
promoting moderation and reducing underage163.5 pence
drinking, drink driving and heavy drinking
– Go beyond our 2025 targets as we develop our strategy for 2030
| | |
(1) Organic net sales growth, organic operating profit growth, earnings per share before exceptional items, free cash flow and return on average invested capital are non-GAAP measures. See definitions and reconciliation of non-GAAP measures to GAAP measures on pages 280-291.
Our brands have been part of people’s celebrations for generations. We take huge pride in them and we want people to continue enjoying them responsibly in the future.
We want everyone at Diageo to be an advocate for positive drinking and we have long campaigned to reduce alcohol-related harm. We know that for most people who drink alcohol, drinking responsibly is common sense – but we also know that harmful drinking causes significant issues for individuals and for society.
Promoting moderation is the right thing to do and it is an essential part of our Performance Ambition. Our commercial success depends on us creating a positive impact on society, wherever we live, work, source and sell.
We aim to lead our industry in reducing underage drinking, drink driving and heavy drinking. We are working to empower our people and brands to make moderation the norm and we advocate improved laws and industry standards around the world.
Business descriptionreview (continued)
Promoting moderation
We aim to reinforce the message of moderation in everything we do.
We want our people to be ambassadors and we are using the reach and influence of our brands to carry moderation messages to consumers. For example, we continued to build on the success of our 'Guinness Clear' moderation campaign in the United Kingdom and Ireland through television and video on demand. Further campaigns bringing home the message of moderation to sports fans were run by Bundaberg, Captain Morgan and Crown Royal.
Our goals for positive drinking
| |
– | Change the way the world drinks for the better |
| |
– | Lead the industry in reducing underage drinking, drink driving and heavy drinking |
| |
– | Empower our people and brands to advocate moderation |
We have set ourselves stretching targets to reach by 2025.
For more details see pages 55 and 57.
These campaigns enabled us to meet our target of reaching 200 million people with moderation messages from our brands five years early. We are proud of this achievement and we look forward to building on this commitment.
Addressing underage drinking
We have a longstanding commitment to tackling underage drinking. It is never acceptable for people underage to drink alcohol and we welcome the fact that fewer young people are drinking under age in many countries. Our programmes aim to ensure this
downward trend continues and they have reached more than 375,000people this year, across 20 countries.
They include our flagship ‘Smashed’ education programme, which combines a live theatre production presented by professional actors with interactive workshops, evaluation and teaching resources for schools. In May 2020, we launched an online version of Smashed in the United Kingdom, making it available to more than a million school children.
Preventing drink driving
We have a longstanding commitment to addressing drink driving through a range of interventions. We invest in partnerships with police, local authorities and other agencies that support enforcement; we provide education for drivers and law enforcers; and we support safe rides and public transportation.
One of our key partnerships is with UNITAR, the United Nations Institute for Training and Research. The partnership supports road safety events aimed at reducing traffic deaths and injuries and improving road safety globally. It has a particular focus on high-visibility enforcement in Latin America, Asia and Africa. In April 2020, in response to Covid-19, we collaborated with UNITAR as it launched a series of online training resources in English and Spanish for government officials responsible for road safety and law enforcement.
Business description (continued)
Tackling heavy episodic drinking
DRINKiQ is one of our most important tools in promoting moderation and addressing heavy drinking. Now available in 16 languages and 35 countries, DRINKiQ is a dedicated responsible drinking website that gives information on alcohol and its impact on the body, along with a range of resources to encourage moderate consumption. To empower more consumers to drink responsibly, we developed the DRINKiQ quiz (see case study below).
Alongside DRINKiQ, our brand campaigns and our initiatives for the night-time economy with a coalition of partner agencies help reduce alcohol-related problems in entertainment districts.
Advocating improved laws and industry standards
As a minimum, we comply with all laws and regulations wherever we operate. We advocate sensible new regulation based on evidence, including blood-alcohol volume driving limits and legal purchase age laws, in countries where these do not exist. We continue to call on governments to increase the legal purchase age to 18 years old where a lower rate is set, for example for purchasing beer in certain European countries such as Germany, Belgium and Denmark.
We have also joined in collective action with our industry, including through the International Alliance for Responsible Drinking (IARD). We support IARD's commitments on digital marketing and commercial practices and a package of measures to combat underage drinking. For example, we have committed to including an age-restriction symbol or equivalent words on all of our alcohol brand products in all markets by 2024.
Responsible marketing
Our Diageo Marketing Code (DMC) and Digital Code set mandatory minimum standards for responsible marketing and we review them every two years.
At the heart of the DMC is our commitment to ensuring all our activities depict and encourage only responsible and moderate drinking, and never target those who are younger than the legal purchase age.
Across some of our markets, advertising monitoring and industry bodies publicly report breaches of self-regulatory alcohol marketing codes. This year we are pleased to report that no breaches were upheld by key industry bodies about Diageo’s advertising.
Complaints about advertising upheld by key industry bodies that report publicly(i)
|
| | | | | |
| Country | Body | Industry complaints upheld |
| Complaints about Diageo brands upheld |
|
| Australia | ABAC Scheme | 53 |
| 0 |
|
| Ireland | Advertising Standards Authority – for Ireland (ASAI) | 2 |
| 0 |
|
| United Kingdom | The Portman Group | 11 |
| 0 |
|
| | Advertising Standards Authority | 11 |
| 0 |
|
| United States | Distilled Spirits Council of the United States (DISCUS) | 2 |
| 0 |
|
(i) From 1 July 2019 to 30 June 2020
Promoting positive drinking during Covid-19
We were determined to make sure our longstanding work on positive drinking continued through the challenges of Covid-19 – including by making the most of digital resources to promote moderation and tackle harmful drinking.
Our flagship DRINKiQ programme, which had launched an online quiz to educate consumers in responsible drinking over the festive period from November 2019 to January 2020, drew on the quiz again for a topical new campaign on responsible drinking at home during lockdown. Over both campaigns, more than 80,000 consumers completed the quiz, which was available in 28 countries and in 18 languages.
Business description (continued)
Our Virtual Good Host Guide, launched in May 2020, helped hosts to plan great online celebrations, including reminding people to measure their pour when making drinks. Finally, local campaigns such as our 'double down' initiative in Mexico saw brands including Buchanan’s, Johnnie Walker, Black & White, Don Julio, Smirnoff and Captain Morgan promote positive drinking through their digital reach.
Committed to promoting moderation and reducing harm
| |
– | We were the first alcohol company to put nutritional information and alcohol content onto our labels. Our Diageo Consumer Information Standards (DCIS) provide benchmarks for the mandatory minimum information to be included on labels and packaging on all our brands, wherever they are legally permitted. |
| |
– | We have long supported the World Health Organization’s goal of reducing harmful drinking by 10% across the world by 2025. We work with partners from within and beyond our industry on initiatives that advance that goal. |
| |
– | DRINKiQ.com, our dedicated responsible drinking website, is now available in 16 languages and 35 countries. |
5. Champion inclusion and diversity
Our Performance Ambition is fuelled by our purpose and values. It drives us to create an inclusive culture where every individual can thrive and to champion inclusion and diversity in our business and in society more broadly.
|
| | | | |
Market dynamics | Strategic outcomes | Alignment to UN SDGs | Progress in 2020 | Looking ahead to 2021 |
– All stakeholders, including consumers and employees have an increasing expectation that businesses will have an inclusive and diverse culture
– Our global footprint requires us to access and grow divers talent
– Global multinationals have the ability to create polices that have a positive impact on society reach
| – Consistent value creation
– Credibility and trust
– Engaged people
| 5 - Gender equality
8 - Decent work and economicOur regional profile maximises the opportunity for growth
10 - Reduced inequalities
| – 39% of leadership roles in our businesssector. Where our products are held by women
– Named by Equileap as the top company globallysold each market is accountable for gender equality
– Began inviting employees globally to confidentially disclose their ethnicity
| – Establishing progressive goalsits own performance and targets to make a step
change on ethnic diversity
– Roll out inclusive leadership training more widely
– Extend focus on ethnic diversity through our brands, suppliers and agencies
driving growth. |
Our inclusive and diverse culture
(1) The above map is centralintended to our purpose of ‘Celebrating life, every day, everywhere’. At the same time as beingillustrate general geographic regions where Diageo has a moral imperative, having the best and most diverse talent drives innovation and commercial performance. We knowpresence and/or in which its products are sold. It is not intended to imply that to be one of the best performing consumerDiageo has a presence in and/or that its products companies we need to leverage the broadest range of backgrounds, skills and capabilities, and create a fully inclusive, high-performing culture.
We want to shape broader societal change by promoting equality and an inclusive culture through our brands, in our industry, across our value chain, and in the communities where we live, work, source and sell.
Key elements of our approach
| |
– | Foster the creation of an inclusive culture |
| |
– | Promote equality of experience for all employees |
| |
– | Champion inclusion and diversity beyond our business |
Business description (continued)
Celebrating our inclusive and diverse culture
We believe that an inclusive and diverse business is a better place to work – and a better performing business. Everyone should have the freedom to succeed, irrespective of their gender, race, religion, disability, age or sexual orientation.
Each of our markets has an inclusion and diversity plan and we have a global focus on developing a strong pipeline of female talent for all roles. This year, 39% of leadership roles in our business were held by women, taking us beyond the target we set for 2020, and towards our next milestone of 40% by 2025. 50% of our Board members and 38% of our Executive Committee members are women.
We also focus on ethnic diversity. This year, began inviting employees in over 50 countries to confidentially disclose their ethnicity to help us understand the makeup of our workforce and develop plans and targets to ensure Diageo reflects local market demographics.
We are also learning through employee listening sessionssold in every market and through our external partnerships with organisations such as INVOLVE, Business in the Community (BITC), and as early signatories of BITC’s Race at Work Charter.country or territory within a geographic region.
Fostering inclusion through progressive policies and employee resource groups
We continue to build employee-led advocacy through active employee resource groups (ERGs), such as AHEAD (African Heritage Employees at Diageo) and Conectados (Diageo employees championing Latin culture) in the United States, REACH (Race, Ethnicity and Cultural Heritage) in the United Kindgom and the many chapters internationally of our Spirited Women and Rainbow Networks. These groups support their members and offer leaders the opportunity to understand the barriers and concerns of diverse communities both within and outside the organisation, so that we can develop progressive approaches to breaking down barriers. Many of these groups focus(2) Based on building allies who can help champion change and inclusion. For the last two years we have supported a global INC. week, a week-long series of employee-led events, panels and workshops designed to help accelerate an inclusive culture through open and authentic conversations on issues and opportunities.
We also support inclusion through a range of progressive policies. Globally, for example, all new mothers are entitled to six months' fully-paid maternity leave, with all new fathers being entitled to a minimum of four weeks' paid paternity leave. In many markets – including the whole of North America and Europe, as well as Thailand, the Philippines, Singapore, Colombia, Venezuela, and Australia - parents have equal parental leave of up to 52 weeks.
We are proud that our progress is recognised by others. This year, we were named by Equileap as the top company globally for gender equality, ranked second in the Refinitiv Diversity and Inclusion Index and were listed in the Bloomberg Gender Equality Index.
Driving change beyond our business
To be true champions of inclusion and diversity, we need to use the scale and expertise of our business to make a difference in the communities around us and in society at large.
Inclusion and diversity are core elements of our community programmes, as described on pages 50-51. Iconic brands including Guinness and Smirnoff have actively promoted inclusivity and equality in their advertising this year.
We continue to work with others to drive change. We are part of the United Nations Unstereotype Alliance, working with peers across industries to combat harmful stereotypes in advertising, and we are members of Open for Business, which advocates LGBTQ+ rights around the world. We sponsor the Creative Equals Returners programme, which supports women returning to the creative industries after a career break, and we are members of the World Federation of Advertisers' Diversity & Inclusion Taskforce.
We also directly support under-represented groups and communities, especially those in the hospitality industry who have been so badly affected by Covid-19. In June 2020, we created the $20 million Diageo Community Fund to help address the urgent needs of Black communities and businesses in the United States who have been disproportionately harmed by Covid-19.
Business description (continued)
Our people
We want all our employees to feel valued to make a meaningful contribution to our purpose and ambition. We shape market-leading policies and practices so that our people are engaged, empowered and proud of what they do.
Engaged, empowered and proud of what we do
We want our people to be the best they can be, have the freedom to succeed and feel valued for who they are. This year, given the unique challenges faced by all employees during the Covid-19 pandemic, we have found innovative ways to support and engage our people. As well as increasing opportunities for flexible working and enhancing our employee assistance programme, we have developed specific courses on topics related to health, safety and wellbeing.
Key elements of our approach
| |
– | Engage and empower our people |
| |
– | Invest in our people's growth through learning and development |
| |
– | Invest in leadership development to include a focus on fostering an entrepreneurial culture |
A commitment to human rights, including employees' rights, underpins everything we do - see our policy framework on page 65.
Staying engaged and responsive
Employee engagement is one of the overarching measures that define our progress.
Covid-19 restrictions challenged our ability to deliver our annual Your Voice engagement survey this year, so in its place we launched a pulse survey tool to help us measure engagement, listen to employees' feedback and learn from their experience of working during the pandemic. The response rate was 74%, with 91% of respondents reporting that they were 'proud to work at Diageo', and 86% confirming they would 'recommend Diageo as a great place to work’. We recognise that these results are not directly comparable year on year with our employee engagement index, which explores broader questions, but they are highly encouraging, both within the unique circumstances of this year and as part of our long-term drive to have fully engaged employees.
Investing in our people’s future through training
Our new online learning management platform, My Learning Hub, is designed to help our employees, partners and distributors to be at their best, acquire new skills and develop a continuous learning culture that supports growth and progression (see case study below).
Building leadership
We have always used a range of communications and leadership interventions to bring our strategy and purpose to life for employees. This year, our Chief Executive, senior leaders and employees from across the business have been closely involved in communicating our strategic priorities as part of our Performance Ambition, including through video stories and written guides on our Performance Ambition Hub.
We also moved our planned face-to-face leadership event to a virtual format and we are delivering engaging, global learning sessions on topics such as unleashing the power of teams and leading with pace and boldness. Like other measures we have taken since the pandemic began, we believe we have strengthened our business and culture by enhancing our ability to work flexibly and becoming more agile and responsive.
My Learning Hub: building critical skillsreported net sales for the futureyear ended 30 June 2023. Does not include corporate net sales of £88 million (2022 – £54 million).
We want our people to be equipped with the best capability | | | | | | | | | | | | | | | | | |
| Fiscal 23 | North America | Europe | Asia Pacific | Latin America
and Caribbean | Africa |
| Volume (EUm) | 52.4 | | 51.3 | | 80.8 | | 26.2 | | 32.7 | |
Reported net sales(1) (£ million) | 6,758 | | 3,569 | | 3,200 | | 1,799 | | 1,699 | |
Reported operating profit(2) (£ million) | 2,592 | | 1,097 | | 432 | | 661 | | 176 | |
Operating profit before exceptional items(3) (£ million) | 2,689 | | 1,105 | | 905 | | 661 | | 220 | |
| Water efficiency (litres per litre of product packaged) | 5.11 | | 4.98 | | 2.91 | | 4.15 | | 3.19 | |
Total direct and indirect carbon emissions by weight (market/net based) (1,000 tonnes CO2e) | 83 | 194 | 9 | 26 | 89 |
Average number of employees(4) | 3,115 | | 10,062 | | 9,000 | | 4,325 | | 3,735 | |
(1) Excluding corporate net sales of £88 million (2022 – £54 million).
(2) Excluding net corporate operating costs of £326 million (2022 – £238 million).
(3) Excluding exceptional operating charges of £622 million (2022 – £388 million) and tools to seize growth opportunities and tackle new challenges. My Learning Hub, our training and skills platform which launched this year, gives employees everything they need for their own development, making it easy to find, use, share and comment on a huge rangenet corporate operating costs of learning options. These include world-class capabilities from across our global teams and from external resources.£326 million (2022 – £238 million)
Business description (continued)
Since we launched My Learning Hub, the number of employees engaged in self-learning has trebled, with 90% now enrolled in programmes. We are seeing thousands of our people use our Dignity at Work and Integrity at Diageo training, reinforcing our strong ethics culture. My Learning Hub has also been invaluable in the face of Covid-19 restrictions – we have launched dedicated channels including remote working and wellbeing resources.
Average number of employees by region by gender(i) |
| | | | | | | | | | | | | | | |
| Region | | Men |
| | % |
| | Women |
| | % |
| | Total |
|
| North America | | 1,583 |
| | 60 |
| | 1,055 |
| | 40 |
| | 2,638 |
|
| Europe and Turkey | | 6,062 |
| | 60 |
| | 4,025 |
| | 40 |
| | 10,087 |
|
| Africa | | 2,983 |
| | 72 |
| | 1,161 |
| | 28 |
| | 4,144 |
|
| Latin America and Caribbean | | 1,700 |
| | 63 |
| | 1,002 |
| | 37 |
| | 2,702 |
|
| Asia Pacific | | 6,101 |
| | 74 |
| | 2,103 |
| | 26 |
| | 8,204 |
|
| Diageo (total) | | 18,429 |
| | 66 |
| | 9,346 |
| | 34 |
| | 27,775 |
|
Average number of employees by role by gender |
| | | | | | | | | | | | | | | |
| Role | | Men |
| | % |
| | Women |
| | % |
| | Total |
|
| Executive Committee | | 8 |
| | 62 |
| | 5 |
| | 38 |
| | 13 |
|
Senior Manager(ii) | | 320 |
| | 61 |
| | 203 |
| | 39 |
| | 523 |
|
Line Manager(iii) | | 2,381 |
| | 69 |
| | 1,071 |
| | 31 |
| | 3,452 |
|
Supervised employee(iv) | | 15,720 |
| | 66 |
| | 8,067 |
| | 34 |
| | 23,787 |
|
| Diageo (total) | | 18,429 |
| | 66 |
| | 9,346 |
| | 34 |
| | 27,775 |
|
(i)(4) Employees have been allocated to the region in which they reside.
(ii) Top leadership positions
Business review (continued)
Production facilities
The company owns manufacturing production facilities across the globe, including distilleries, breweries, packaging plants, maturation warehouses, cooperages, and distribution warehouses. Diageo’s brands are also produced at plants owned and operated by third parties and joint ventures at several locations around the world. We believe that our facilities are in Diageo, excluding Executive Committee.good condition and working order. We have adequate capacity to meet our current needs, and, in the beer and spirit categories, we have undertaken activities to increase our production capacity to address our anticipated future demand.
(iii) All Diageo employees (non-senior managers)The major facilities with one or more direct reports.locations, principal activities, and products are presented in the below table.
(iv) All Diageo employees (non-senior managers) who have no direct reports.
6. Pioneer grain-to-glass sustainability
For our business to be sustainable, it needs to create enduring value - for us and for those around us. We must positively impact the communities in which we live, work, source and sell and protect the natural resources on which we all depend.
|
| | | | |
Market dynamics | Strategic outcomes | Alignment to UN SDGs | Progress in 2020 | Looking ahead to 2021 |
– Consumers want to ‘drink better’
– Consumers expect businesses to act responsibly
| – Consistent value creation
– Credibility and trust
– Engaged people
| 1. No poverty
2. Zero hunger
4. Quality education
5. Gender equality
6. Clean water and sanitation
7. Affordable and clean energy
8. Decent work and economic growth
13. Climate action
15. Life on land
17. Partnerships for goals
| A detailed description of our social and environmental performance is on pages 58-59.
| – Launching our social and environmental strategy and
targets for the critical decade to 2030 (pages 58-59)
– Address where we have not met our
2020 targets, such as water quality and reducing packaging weight
|
Our continued long-term success depends on the people and planet around us. We recognise that poverty, inequality, climate change, water stress, biodiversity loss and other challenges threaten the environment and the prosperity of communities: a reality brought into sharp focus by Covid-19.
We aim to be pioneers, driving innovation and solutions that will benefit our business, our communities and the environment. That means working with our whole value chain – the people and resources that contribute to our success, from grain to glass.
Business description (continued)
Key elements of our approach
| |
– | Support thriving communities where we live, work, source and sell |
| |
– | Build sustainable, resilient supply chains |
| |
– | Champion water stewardship and a low-carbon world |
| |
– | Minimise waste and develop circular economy solutions |
2030 ambitions: deeper connections and a stronger business
By showing leadership and by working with others, we aim to contribute to the delivery of the UN Sustainable Development Goals (SDGs) in the critical decade of action leading up to 2030, while giving our business the platform for sustained quality growth.
While the Covid-19 pandemic has delayed the launch of our full strategy for 2030 until later this financial year, it has also emphasised how important it is that we address issues that matter to our stakeholders and strengthen our business, deepening our connections with communities.
Building inclusive, thriving communities that work for everyone is a key to this. It requires us to be global champions for water stewardship and vocal advocates for a low-carbon world. It also means going further in exploring circular economy approaches, so we can make more drinks with fewer materials.
At the same time, we aim to be more efficient, to reduce our costs, to build a more secure and resilient supply chain, and attract and retain the best talent. Ultimately, this will help drive the trust, respect and commercial success that define our Performance Ambition.
We describe our work on embedding human rights throughout our value chain on page 65.
We describe our engagement with stakeholders and our materiality process on pages 58-59.
Measuring our progress to 2020
Our pioneering ambition for grain-to-glass sustainability is supported by a comprehensive set of targets and objectives that help us drive, measure, and report transparently on our progress.
In 2015, we set a range of environmental and social targets for 2020 and we have since set other targets for renewable electricity and plastic packaging.
We report on our performance against our targets in full on pages 59-64.
Supporting thriving communities where we live, work, source and sell
We aim to promote sustainable growth through inclusive programmes that provide equal access for all to resources, skills and employment opportunities.
Our largest programme is Learning for Life (L4L). L4L focuses on training in hospitality, retail and entrepreneurship. We have kept growing and broadening L4L, and this year developed content focused on the wellbeing of people working in the hospitality industry, on environmental sustainability and on the impacts of Covid-19 on the sector. When the pandemic began restricting face-to-face interactions, we offered our training online – enabling us to continue to build skills and support our communities despite lockdown measures. Through our range of skills programmes we have reached 6,600 people this year.
We also support communities by providing access to clean water, sanitation and hygiene (WASH) in water-stressed areas that supply our raw materials and support our business. These programmes contribute to SDG 6 (clean water and sanitation), while also helping to replenish the water we use in our products.
The Covid-19 pandemic has reinforced the importance of WASH for individual and community wellbeing (see case study on page 52).
Business description (continued)
Empowering programmes designed around inclusivity
Our community programmes aim to promote gender equality or empower people from under-represented groups.
Our impact has been enhanced by our strategic partnership with CARE International UK, which works to address the root causes of gender inequality in our value chain through research, programming and advocacy. We have also supported CARE International UK’s emergency Covid-19 response to address the disproportionate effects of the crisis on women across the world.
We also run programmes specifically designed to empower women, and supported over 35,000 women this year. Initiatives include our programme for women in Maharashtra and Rajasthan in India who manufacture and sell sanitary pads for their communities, and women in self-help groups in Maharashtra who run 'water ATMs' providing clean, safe water.
This year Diageo invested £18.9 million or 1.0% (2019 – 0.3%) of operating profit in community initiatives.
Creating impact and opportunity in our supply chains
We rely on resilient, thriving supply chains for the raw materials we use to make our brands. At the same time, our supply chain connects us to communities all over the world where we have a clear opportunity to have a positive social and environmental impact, by creating economic opportunity, promoting human rights and improving agricultural and environmental practices through responsible sourcing.
Driving progress through standards
Our Partnering with Suppliers standard sets out the minimum social, ethical and environmental standards we require all suppliers to follow as part of their contract with us.
Our Sustainable Agriculture Guidelines (SAG) set out the standards we expect of suppliers of agricultural raw materials, and how they should work towards sustainable farming. We use the Sustainable Agriculture Initiative Platform’s Farm Sustainability Assessment (FSA) tool to check compliance, with FSA’s bronze rating being our minimum requirement. We also work through AIM-PROGRESS, a forum of leading consumer goods companies, and the not-for-profit SEDEX, which both allow suppliers to share assessments and audits of ethical and responsible practices.
Local sourcing and working directly with farmers
We work directly with farmers on a range of sustainable agriculture projects, and we aim to increase our positive impact by sourcing locally where possible. We assist smallholder farmers in a variety of supports, such as: training, access to seeds and fertilisers, micro-loans, and financial resilience support.
This year, we supported more than 78,600 farmers in Africa. We sourced 79% of agricultural raw materials locally within Africa for use by our African markets, compared with 82% last year. This percentage fell slightly as Covid-19 restrictions pushed us just below our target of 80%.
Reducing our environmental impact and protecting natural resources
We recognise that the threats to our environment are urgent and growing, which is why we are committed to a pioneering approach that combines action and advocacy on the issues that matter most to our stakeholders and to us.
Championing water stewardship and a low-carbon world
Combating climate change and its associated impacts on water stress and the environment are at the heart of our strategy. We are committed to de-carbonising our own operations and our value chain, and acting as advocates for a low-carbon world. Water stewardship is a longstanding strategic priority for us and we are focused on preserving this critical resource, particularly in water- stressed areas. Our approach to carbon emission reduction and water stewardship is described in Responding to climate-related risks, page 72.
Business description (continued)
Taking action on waste
In the last three months of this year, we achieved zero waste to landfill at all our supply and office sites. We want to build on our use of circular economy approaches, push forward with our longstanding programmes to tackle packaging waste and make sure that more of what we do use is made from recycled material and can itself be recycled (see pages 63-64).
$100 million fund to help our industry recover from Covid-19
In June, we launched a new global programme, ‘Raising the Bar’, to help pubs and bars recover from the effects of the Covid-19 pandemic. We are providing $100 million to support the recovery of major hospitality centres including New York, London, Edinburgh, Dublin, Belfast, Mexico City, São Paulo, Shanghai, Delhi, Mumbai, Bangalore, Nairobi, Dar es Salaam, Kampala and Sydney. The money will pay for the equipment neighbourhood pubs and bars need to enable them to re-open safely. Of this fund, $20 million will go to Black communities in the United States particularly affected by the pandemic.
We are also offering any bar, anywhere in the world, free access to digital training through the Diageo Bar Academy, which includes advice on how to implement social distancing, enhance hygiene measures and optimise their recovery.
We also supported customers, communities and healthcare systems where we live and work by: pledging over 10 million bottles of hand sanitiser to support frontline healthcare workers across more than 20 countries; donating to local charities and relief efforts; supporting bartenders’ wages; and providing food vouchers and emergency assistance.
Meeting our water replenishment targets and supporting communities through Covid-19
Access to clean drinking water, sanitation and hygiene (WASH) can transform communities – especially when hand washing is
such an important part of protecting people and communities from Covid-19.
WASH projects play an important role in our water replenishment programme, alongside key water-related projects such as tree planting and rehabilitating dams and ponds. This year we reached over 250,000 people in Africa and India through our WASH projects.
Our water replenishment programme targets areas of water stress where water scarcity is a critical issue. We are therefore particularly pleased that this year we achieved our 2020 target of replenishing the amount of water used in our final product in water-stressed areas. Water stewardship will remain a core part of our approach as in the decade ahead.
Business description (continued)
Key performance indicators
Monitoring performance and progress
GAAP measures - Financial GAAP performance measures similar to the financial non-GAAP key performance indicators are presented below.
|
| | |
NET SALES (%)
| OPERATING PROFIT (%)
| BASIC EARNINGS PER SHARE (pence)
|
|
| | |
Definition | Definition | Definition |
Sales growth after deducting excise duties. | Operating profit growth including exceptional items. | Profit attributable to equity shareholders of the parent company, divided by the weighted average number of shares in issue. |
Performance | Performance | Performance |
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. | Reported operating profit was down 47.1% mainly driven by exceptional operating items and by decline in organic operating profit. | Basic eps decreased 70.6 pence principally due to impairments in exceptional items and the decline in organic operating profit. |
|
| |
NET CASH FROM OPERATING
ACTIVITIES (£ million)
| RETURN ON CLOSING INVESTED
CAPITAL (%)
|
|
| |
Definition | Definition |
Net cash from operating activities comprises the net cash flow from operating activities as disclosed on the face of the cash flow statement. | Profit for the year divided by net assets at the end of the financial year. |
Performance | Performance |
Net cash from operating activities was £2,320 million, a decrease of £928 million compared to the prior period primarily driven by the decline in operating profit, lower dividends from joint ventures and associates, increased use of working capital, higher tax payments and higher interest charges. | Return on closing invested capital decreased by 1,570bps principally driven by lower profit after tax partially offset by decrease in net assets. |
Business description (continued)
We use the following 11 key performance indicators (KPIs) to measure our financial and non-financial performance
Relevance to strategy
Efficient Growth - ①
Consistent Value Creation - ②
Credibility and Trust - ③
Engaged People - ④
|
| | | | | | | |
| Financial | ① ® | Financial | ① ®
| Financial | ① ®
|
Organic net sales decline (%) | (8.4 | )% | Organic operating profit growth (%) | (14.4 | )% | Earnings per share before
exceptional items (pence)(i) | 109.4p |
|
| | |
Definition | Definition | Definition |
Sales growth after deducting excise duties, excluding the impact of exchange rate movements, acquisitions and disposals. | Organic operating profit is calculated on a constant currency basis excluding the impact of exceptional items, certain fair value remeasurement, and acquisitions and disposals.
| Profit before exceptional items attributable to equity shareholders of the parent company, divided by the weighted average number of shares in issue. |
Why we measure | Why we measure | Why we measure |
This measure reflects our performance as the result of the choices made in terms of category and market participation, and Diageo’s ability to build brand equity, increase prices and grow market share. | The movement in operating profit measures the efficiency and effectiveness of the business. Consistent operating profit growth is a business imperative, driven by investment choices, our focus on driving out costs across the business and improving mix.
| Earnings per share reflects the profitability of the business and how effectively we finance our balance sheet. It is a key measure for our shareholders. |
Performance | Performance | Performance |
Organic net sales declined 8.4%, driven mainly 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.
| 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.
| 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. |
More detail on page 83 | More detail on page 83 | More detail on page 84 |
Business description (continued)
|
| | | | | |
Non-Financial | ③④
Location | Non-FinancialPrincipal activities | ③④
| Non-Financial | ③ |
Positive drinking | Health and safety
(lost-time accident frequency per 1,000 full-time employees)
| 0.60 | Water efficiency(ii)
(l/l)
| 4.62l/l
|
| Products |
| United Kingdom | distilling, bottling, warehousing, cooperage |
See pages 43-46 for more information about our approachbeer, scotch, gin, vodka, rum, ready to pioneering positive drinking | | |
Definition | Definition | Definition |
We report against three indicators for positive drinking. | Number of accidents per 1,000 full-time employees and directly supervised contractors resulting in time lost from work of one calendar day or more. | Ratio of the amount of water required to produce one litre of packaged product. |
Why we measure | Why we measure | Why we measure |
We want to change the way the world drinks for the better by promoting moderation and addressing the harmful use of alcohol. Our goal is for people to ‘drink better, not more’ - because we are proud of our brands and we know that the best way for them to be enjoyed is responsibly. | Health and safety is a basic human right: everyone has the right to work in a safe environment, and our Zero Harm safety philosophy is that everyone should go home safe and healthy, every day, everywhere. | Water is the main ingredient in all of our brands. We aim to improve efficiency, and minimise our water use, particularly in water-stressed areas. This will ensure we can sustain production growth, address climate change risk and respond to the growing global demand for water, as scarcity increases. |
Performance | Performance | Performance |
We launched a new Positive Drinking strategy in 2018 and this is the second year we have reported against these targets for 2025. | We achieved a milestone safety performance level of 0.60 lost-time accidents (LTAs) per 1,000 employees, our lowest rate ever. This represents a 41% reduction in LTAs compared with 2019. We continued to focus on markets in particular need of support, delivering improvements by increasing compliance with our core standards and programmes.
Our performance was helped by the sale of United National Breweries in South Africa, which had a higher LTA rate than Diageo’s average.
| Water efficiency improved by 2.1% compared to 2019 and by 46.0% versus our 2007 baseline. The impact of Covid-19 led to a reduction in packaged volume (which is a denominator in our water efficiency calculation) and a delay to key water recovery and reuse projects in East Africa and Nigeria. The benefits from these investments will be realised in future years. |
More detail on pages 60 | More detail on pages 66 | More detail on pages 62 |
Business description (continued)
|
| | | | | | | | |
| Financial | ① ® | Financial | ② | Financial | ② ® |
Free cash flow (£ million) |
| £1,634 | m | Return on average invested capital (ROIC) (%) | 12.4 | % | Total shareholder return (%) | (19)% |
| drink, non-alcoholic |
| Ireland | |
Definitiondistilling, brewing, bottling, warehousing | Definition | Definition |
Free cash flow comprises the net cash flow from operating activities aggregated with the net cash received/paid for loans receivable and other investments, and the net cash cost paid for property, plant and equipment, and computer software. | Profit before finance charges and exceptional items attributable to equity shareholders divided by average invested capital. Invested capital comprises net assets aggregated with exceptional restructuring costs and goodwill at the date of transition to IFRS, excluding post employment liabilities, net borrowings and non-controlling interests. | Percentage growth in the value of a Diageo share (assuming all dividends and capital distributions are re-invested). |
Why we measure | Why we measure | Why we measure |
Free cash flow is a key indicator of the financial management of the business and reflects the cash generated by the business to fund payments to our shareholders and acquisitions. | ROIC is used by management to assess the return obtained from the group’s asset base. Improving ROIC builds financial strength to enable Diageo to attain its financial objectives. | Diageo’s Directors have a fiduciary responsibility to maximise long-term value for shareholders. We also monitor our relative TSR performance against our peers. |
Performance | Performance | Performance |
Free cash flow was £1,6 billion, primarily driven by the decline in operating profit, lower dividends from joint ventures and associates, increased use of working capital, higher tax payments and higher interest charges. | ROIC decreased 267bps against the prior comparable period driven mainly by organic operating profit decline. | TSR was down 19% over the past 12 months driven by the lower year on year share price.
|
More detail on page 85 | More detail on page 86 | |
Business description (continued)
| beer, liqueur, Irish whiskey, non-alcoholic |
| Italy | distilling, bottling, warehousing | |
Non-Financial | ③ | Non-Financial | ③ ④ |
Carbon emissions(iii)
(1,000 tonnes CO2e)
| 507 | Employee engagement (%)
| N/A |
| vodka, rum, ready to drink, non-alcoholic |
| Turkey | distilling, bottling, warehousing | raki, vodka, gin |
Definition | DefinitionNorth America | distilling, bottling, warehousing | vodka, gin, rum, Canadian whisky, US whiskey, ready to drink |
Absolute volume of carbon emissions, in 1,000 tonnes. | Measured through our Your Voice survey; includes metrics for employee satisfaction, loyalty, advocacy and pride.Brazil | distilling, bottling, warehousing | cachaça, vodka, ready to drink |
Why we measure | Why we measureMexico | distilling, bottling, warehousing | tequila |
Carbon emissions are a key element of Diageo’s, and our industry’s, environmental impact. Reducing our carbon emissions is a significant part of our efforts to mitigate climate change, positioning us well for a future low-carbon economy, while creating energy efficiencies and savings now. | Employee engagement is a key enabler of our strategy and performance. The survey allows us to measure, quantitatively and qualitatively, how far employees believe we are living our values.East Africa | distilling, brewing, bottling, packaging, warehousing | beer, rum, vodka, gin, whisky, brandy, liqueur |
Performance | PerformanceNigeria | distilling, brewing, bottling, packaging | beer, rum, vodka, gin |
Carbon emissions reduced by 8.7% in 2020, and cumulatively by 50.1% against our 2007 baseline despite increased production volume. | This year we were unable to conduct an annual Your Voice survey due to Covid-19. In its place we used a pulse survey tool to help us measure engagement, listen to employee feedback and learn from their experience of working during the pandemic. The survey had a response rate of 74%, with 91% reporting that they were ‘proud to work at Diageo’ and 86% confirming they would ‘recommend Diageo as a great place to work’.South Africa | distilling, bottling, warehousing | rum, vodka, gin |
More detail on page 63 | More detail on pages 60ARM | distilling, brewing, bottling, warehousing | beer, vodka, gin |
| India | distilling, bottling, warehousing | rum, vodka, Indian-Made Foreign Liquor (IMFL), whisky, scotch, gin |
| Australia | distilling, bottling, warehousing | rum, vodka, gin, ready to drink |
RemunerationFor more details about our capital investments please see page 316.
Some KPIs are used as a measure in the incentives plans for the remuneration of executives. These are identified with the symbol ®.
See our Directors’ remuneration report from page 160 for more detail.
| |
(i) | For reward purposes this measure is further adjusted for the impact of exchange rates and other factors not controlled by management, to ensure focus on our underlying performance drivers. |
| |
(ii) | In accordance with Diageo’s environmental reporting methodologies, data for each of the four years in the period ended 30 June 2019 has been restated where relevant. |
| |
(iii) | In accordance with Diageo’s environmental reporting methodologies and WRI/WBCSD GHG Protocol, data for each of the four years in the period ended 30 June 2019 has been restated where relevant. |
| |
(iv) | Building on what we have learnt from our drink driving interventions and feedback from our stakeholders, we are evolving our approach to focus on education programmes that promote changes in attitudes as a way to tackle drink driving. As a result, F20 will be our final year for #JoinThePact, and we will no longer include it in our reporting. |
Business description (continued)
Sustainability performance
Our social and environmental performance
route to consumer
We have five different route to consumer models across our business. Most of the regions employ four of the five high level models defined below; however, how each model operates in certain countries will vary, as will the percentage of net sales delivered through the respective models in each market.
Wholesalers and Distributors
Diageo sells to a comprehensive set of targets that help us drive, measure and report transparently on our progress. In 2015, we setwholesaler or distributor who also sells a range of environmentalother brands and social targetscategories directly to end outlets where consumers can purchase our brands. Where required, this model may include a government control board (or similar), such as in certain states in the US and Canada.
Modern Trade
Diageo sells directly to a customer who owns and manages retail outlets, who then in turn sells to consumers via their outlets.
eMarketplace
Diageo sells to a third-party digital market place customer where that customer sells to B2B customers and consumers.
Direct to Consumer
Diageo sells directly to consumers, predominantly through portals such as Thebar.com, which is a growing route to consumer model for 2020. We have since set additional targetsour business. It allows for positive drinking, renewable electricity and plastic packaging.
Proud ofdirect interface with our progress, ambitious for the future
We believe our 2020 targets were among the most ambitious and stretching in our industry.
Building on the success of earlier targets, we were among the first companies to set our greenhouse gas (GHG) reduction targets in line with the principles of the Science Based Targets initiative and were an early adopter of absolute,consumers rather than relative, GHG reduction targets.
As we close our 2020 targets this year, we are proud of the significant progress we have made – and are aware that we have more to do.
We have reduced our GHG emissions from direct operations by 509,000 metric tonnes since 2007, delivering our commitment to a 50% absolute reduction. We have also reduced emissions by 33.7% across our total value chain.
We have ensured that over 99.5% of our packaging is recyclable and achieved 45% recycled content in our packaging. In the last three months of this year, we achieved zero waste to landfill at all supplythrough third-party sites and offices.
We also sourced 79% of raw materials for our Africa business locally, narrowly missing our goal of 80%, having exceeded it in 2019. Our targets for supporting communities have helped to drive positive impacts for millions of people within and beyond our business, including, in 2020, supporting 250,000 people through our projects focused on clean water, sanitation and hygiene (WASH).
We delivered on our target for water replenishment in water-stressed areas and achieved a 46% improvement in water use efficiency. This represents significant progress, but Covid-19 affected reaching our efficiency target of 50% due to delayed implementation of water recycling projects in Africa and lower packaged volumes in some markets.
Despite this significant progress, however, we have not achieved all our goals. As we reported last year, we have yet to achieve the full improvements we wantedas in the quality of wastewater we discharge, for example,eMarketplace model above.
Direct to Store
Diageo sells and we have found reducing the overall weight of our packaging by 15% more challenging than we expected. We provide full details of our performance on pages 60-64.
Taking forward what we have learnt
We have adapted our programmes over the yearsdelivers directly to improve their design as community needs, our business and the global context have changed.
In our communities work, a key improvement has been recognising that inclusion and gender equality should be built into every community programme,end outlets rather than treatedvia a central purchasing customer as a separate objective.
We have also seenin the importance of a holistic approach which draws onModern Trade model above. This model is less common than the strengths of the whole business and furthers the company’s wider objectives. Our community WASH programmes, forother models. For example, have changed their impact by focusing on communities directly connected to our core business while supporting our successful drive to replenish water in water-stressed areas.
We have seen how important it is to have total alignment within the business and strong sponsorship from leaders, as well as effective execution. We have also learnt that early investmentused in infrastructure and a process of continuous improvement are key to success.Ireland for beer distribution.
Finally, we have seen how we can increase our impact through long-term, strategic NGO partnerships with organisations like CARE International UK and WaterAid.
Business description (continued)43
Committed to a decade of action
We are developing our strategy to address our most material issues and support the delivery of the UN Sustainable Development Goals (SDGs) over the critical decade to 2030. While the launch of our strategy and targets has been delayed by Covid-19 until later this fiscal year, we are clear on our direction of travel and our overall goals. We know we must be leaders in promoting positive drinking, and be global advocates for water stewardship and a low-carbon world. We must champion inclusion and diversity within and beyond our business, and make sure we contribute to building inclusive, thriving communities wherever we live, work, source and sell. We will go further in pioneering sustainability, including through encouraging regenerative agriculture and driving circular economy approaches.
Our strategy will continue to be based on the knowledge that our future success is intertwined with the success of those around us. In line with that thinking, in June 2020 we announced our ‘Raising the Bar’ programme – a $100 million recovery fund to support pubs and bars as they welcome customers back following the Covid-19 pandemic.
See pages 49-52 for more information.
Developing our 2030 sustainability and responsibility strategy
|
| |
A rigorous materiality assessment
| Our areas of focus for the next decade |
Examination of external trends shaping our operating environment; alignment to UN SDGs in the critical decade ahead | Promote positive drinking
-Promoting moderation
-Ensuring responsible marketing and retailing of alcohol
-Preventing harmful use of alcohol
|
Extensive engagement with internal and external stakeholders
| Champion inclusion and diversity
Including and empowering women, minorities and other under-represented groups
Fostering an inclusive and diverse culture
|
Findings explored through:
-Regional multi-function internal stakeholder workshops in Bangalore, London, Nairobi, New York and Singapore
-A detailed workshop with full Diageo Executive Committee
-Engagement with Diageo Board
| Pioneer grain-to-glass sustainability
-Mitigating or adapting to climate change
-Ensuring access to clean water, sanitation and hygiene
-Reducing or eliminating waste
-Protecting the natural ecosystems our business relies on and strengthening security of raw material supply chains
-Supporting good livelihoods and working conditions
Built on the foundations of doing business the right way from grain to glass through a strong commitment to human rights and good governance.
Built on the foundations of doing business the right way from grain to glass through a strong commitment to human rights and good governance.
|
Performing against our social targets
UN Sustainable Development Goals:
| |
1. | No poverty 10. Reduced inequalities |
| |
2. | Zero hunger 11. Sustainable cities and communities |
| |
3. | Good health and well-being 12. Responsible consumption and production |
| |
4. | Quality education 13. Climate action |
| |
5. | Gender equality 14. Life below water |
| |
6. | Clean water and sanitation 15. Life on land |
| |
7. | Affordable and clean energy 16. Peace, justice and strong institutions |
| |
8. | Decent work and economic growth 17. Partnerships for the goals |
| |
9. | Industry, innovation, and infrastructure |
Business description (continued)
|
| | | | |
Positive drinking (2025 targets, cumulative progress) |
Educate 5 million young people, parents and teachers about the dangers of underage drinking | 1 million |
UN SDG alignment 3.5; 12.8; 17.6 |
Collect 50 million pledges never to drink and drive through #JoinThePact | 25.3 million |
UN SDG alignment 3.6; 12.8; 17.6 |
Reach 200 million people with moderation messages from our brands | 229.2 million |
UN SDG alignment 3.5; 12.8; 17.6 |
See pages 43-46 for more information about approach to pioneering positive drinking. |
Our 2020 target | KPI | Progress | Commentary |
Inclusion & diversity
|
Build diversity, with
35%(ii) of leadership positions held by women by 2020 (40% by 2025) and measures implemented to help female employees attain and develop in leadership roles.
| % of leadership positions held by women. | 39 | % | This year, 39% of leadership roles in our business were held by women, taking us beyond the target we set for 2020, and towards our next milestone of 40% by 2025. Each of our markets has an inclusion and diversity plan which includes a focus on developing a strong pipeline of female talent for all roles.
|
UN SDG alignment 5.5; 8.1; 10.2; 10.4 |
Our people |
Increase employee engagement to 80%, becoming a top quartile performer on measures such as employee satisfaction,
pride and loyalty.
| Employee satisfaction, loyalty, advocacy and pride, measured through the Your Voice survey.
| We did not conduct our Your Voice survey because of Covid-19. In its place we used a pulse survey tool to help us measure engagement, listen to employees' feedback and learn from their experience of working during the pandemic. The survey had a response rate of 74%, and 91% reported that they were ‘proud to work at Diageo’, with 86% confirming they would ‘recommend Diageo as a great place to work’. While these results are not directly comparable year on year with our employee engagement index we are encouraged by this strong response. |
Inclusive communities |
Our community programmes enable those who live and work in our communities, particularly women, to have the skills and resources to build a better future for themselves. We will evaluate and report on the tangible impacts of our programmes. | Number of people reached through skills and empowerment programmes.
| 6,600 |
| Our skills programmes have reached more than 146,000 people since 2008, with typically more than 70% gaining permanent jobs. We helped more than 6,600 people around the world this year. While the Covid-19 pandemic has meant we reached fewer people this year than planned, we have adapted our flagship Learning for Life programme to an online format, as described on page 50. |
Number of people reached through community
water, sanitation and hygiene (WASH) programmes.
| 250,000 |
| We have supported WASH programmes in 11 countries this year, benefitting more than 250,000 people.
|
Number of women
empowered by our
programmes.
| 35,000 |
| We have empowered over 35,000 women through our programmes including those related to entrepreneurship and menstrual health, taking the total empowered since our programmes began to 435,000. |
UN SDG alignment 1.2; 4.4; 5.5; 5.A; 6.1; 6.B; 8.1; 8.6; 10.2 |
(i) Building on what we have learnt from our drink driving interventions and feedback form our stakeholders, we are evolving our approach to focus on education
programmes that promote changes in attitudes as a way of tackle drink driving. As a result fiscal 2020 will be our final year for #JoinThePackt, and we will no
longer include it in our reporting.
(ii) We increased the 2020 target from 30% to 35% in 2017.
|
Business description (continued)
|
| | | | |
|
Our 2020 target | KPI | Progress | Commentary |
Sustainable supply chains
|
Deliver our responsible sourcing commitments with suppliers to improve labour standards and human rights in our supply chains. | % of potential high-risk supplier sites audited.
| 82 | % | This year, 1,261 of our supplier sites assessed as a potential risk completed a SEDEX self-assessment. Of these, 412 were assessed as a potential high risk, with 82% independently audited over the past three years. Of these audits, we commissioned 263, while 73 audits came through SEDEX or AIM-PROGRESS mutual recognition audits. 152 of these audits were conducted in the past year.
|
UN SDG alignment 8.7; 8.8 |
Source 80% of our agricultural raw
materials locally in Africa by 2020.
| % of agricultural raw
materials sourced
locally in Africa.
| 79 | % | We sourced 79% of agricultural raw materials locally within Africa for use by our African markets, compared with 82% last year. This percentage fell slightly as Covid-19 restrictions pushed us just below our target of 80%.
|
UN SDG alignment 8.3; 12.3 |
Establish partnerships with farmers to develop sustainable agricultural supplies of key raw materials. | Number of smallholder
farmers supported.
| 78,600 |
| We support more than 78,600 farmers in Africa in a variety of ways, including training, access to seeds and fertilisers, micro-loans and financial resilience support.
|
UN SDG alignment 2.3; 2.4; 8.3; 12.2; 12.3 |
For our human rights and health and safety targets, see pages 65-66.
Business description (continued)
Performing against our environmental targets (i)
|
| | | |
Our 2020 target | KPI | Progress | Commentary |
Water stewardship
|
Reduce water use through
a 50% improvement in water use efficiency.
| % improvement in litres of water used per litre of packaged product.
| 2.1%
2020
46.0%
Cumulative
| We are proud of the progress we have made on water stewardship and achieving a 46.0% improvement in water use efficiency, although we have fallen short of our 2020 target. This cumulative progress has been made through continuous improvement and innovation projects in our operations worldwide. This year, the impact of Covid-19 included a reduction in packaged volume (which is a denominator in our water efficiency calculation) and a delay to the commissioning of key water recycling and reuse facilities in East Africa and Nigeria. The benefits from these investments will be realised in future years.
This year, 16,692 m3 of water were used for agricultural purposes on land under our operational control. We report this separately from water used in our direct operations.
The volume of water we recycled or reused in our own production was 541,300m3, representing 3.3% of total water withdrawals.
|
UN SDG alignment 6.4
|
Return 100% of wastewater from our operations to the environment safely.
| % reduction in wastewater polluting power measured in BOD (‘000 tonnes). | 6.8%
2020
46.4%
Cumulative
| As indicated in last year's report, we did not met this target by the 2020 deadline but are encouraged by the progress we have made in the last 12 months. We continue to meet all regulatory requirements on wastewater at our sites and 90% of sites have achieved our 2020 target. We recognise the importance of returning water to the environment at an equal or better quality than the water we abstract and will continue to explore circular approaches to water use. |
UN SDG alignment 6.3; 6.6 |
Replenish the amount of water used in our final product in water-stressed areas.
| % of water replenished in water-stressed areas (m³).
| 39.5%
2020
116%
Cumulative
| Significant progress this financial year has resulted in us replenishing 1,400,000m3 of water, meaning that we have exceeded our cumulative target: we have replenished 116% of the total water used in our final product in water-stressed sites, representing 21.5% of total water used.
This remains vital work and an area of focus for 2030.
|
UN SDG alignment 6.1; 6.2; 6.6; 6.B; 3.2; 15.1
|
Equip our suppliers with tools to protect water resources in our most water-stressed locations. | % of key suppliers engaged in water management practices. | 86%
2020
| We engaged 144 suppliers to disclose their water management practices through CDP’s Supply Chain Water Programme, with an 86% response rate.
|
UN SDG alignment 6.1; 6.A; 6.B; 15.1; 17.6 |
| | | |
|
Business description (continued)
|
| | | |
| | | |
Our 2020 target | KPI | Progress | Commentary |
Carbon |
Reduce absolute greenhouse gas emissions from direct operations by 50%.
| % reduction in absolute GHG
(kt CO2e).
| 8.7%
2020
50.1%
Cumulative
| We are proud to have achieved this stretching and important target, with an 8.7% decrease in GHG emissions this year. In addition to continuous improvement at our operations and switching to lower carbon fuel, we have purchased renewable energy attribute certificates to support our carbon strategy. Achieving this target is a significant milestone, and we will build on it as we continue to decarbonise our business.
As a signatory to the RE100 global initiative committed to 100% renewable electricity, we aim to source 100% of our electricity from renewable sources by 2030. This year, 65.5% of electricity consumed was from renewable sources such as wind, hydro and solar (2019 - 45.4%), therefore exceeding our 2025 interim target of 50%. In the United Kingdom, 100% of our electricity came from renewable sources.
We use the World Resources Institute/World Business Council for Sustainable Development Greenhouse Gas Protocol as a basis for reporting our emissions, and we include all facilities where we have operational control for the full financial year.
Diageo’s total direct and indirect carbon emissions (location/gross) this year were 710,986 tonnes (2019 - 746,769 tonnes), comprising direct emissions (Scope 1) of 567,081 tonnes (2019 - 599,043 tonnes), and indirect (Scope 2) emissions of 143,905 tonnes (2019 - 147,726 tonnes). The intensity ratio for this year was 199 grams per litre packaged (2019 - 185 grams per litre
packaged)(ii).
|
UN SDG alignment 7.2; 7.3; 12.6; 13.3 |
Achieve a 30% reduction
in absolute greenhouse
gas emissions along the
total supply chain.
| % reduction in absolute GHG
(kt CO2e).
| 5.5%
2020
33.7%
Cumulative
| Our global effort across the total value chain to reduce GHG emissions has meant that we have achieved our 2020 target, with a 33.7% reduction in emissions in our total supply chain since the programme began. Our total supply chain carbon footprint this year was 2,922,538 tonnes, a 5.5% improvement on 2019.
This year we received responses from 88% of the 229 suppliers we engaged through the CDP and 51% of these suppliers reported that they had emissions reduction targets. Reducing our supply chain footprint is a key element of our decarbonisation strategy and will continue to be a focus in the years ahead.
|
UN SDG alignment 7.2; 7.3; 7.A; 12.6; 13.3; 17.6 |
Ensure all our new refrigeration equipment in trade is HFC-free, with a reduction in associated greenhouse gas emissions
from 2015.
| % of new equipment sourced HFC-free from 1 July 2015.
| 100%
2020
99.5%
Cumulative
| Eliminating HFCs plays a role in reducing our overall carbon footprint. 99.5% of the 53,000 fridges we have bought since July 2015 were HFC-free. Since 2017 100% of the fridges we have bought were HFC-free and this remains an ongoing policy.
|
UN SDG alignment 12.6 |
Waste |
Achieve zero waste to landfill.
| % reduction in total waste to landfill (tonnes).
| 39.0%
2020
98.2%
Cumulative
| In the last three months of this year we achieved zero waste to landfill at all our supply and office sites, an important milestone in our ambition to be a zero-waste business(ii). Our progress has been driven by continuous improvement at our sites and by close collaboration with partners.
|
UN SDG alignment 12.5; 12.6 |
| | | |
Business description (continued)
|
| | | |
| | | |
Our 2020 target | KPI | Progress | Commentary |
Packaging |
Reduce total packaging by 15%, while increasing recycled content to 45% and making 100% of packaging recyclable.
| % of total packaging (by weight). | 0.4%
2020
11.2%
Cumulative
| We have made good progress in some areas, but as we reported last year we have found this target challenging and it will remain in place beyond 2020.
|
% of recycled
content (by weight).
| 5.3%
2020
45.8%
Cumulative
| We have met our commitment to increase recycled content in our packaging, attaining 45.8% recycled content against a 45% target. Including returnable glass volumes drives the total recycled content of our packaging to 51.4%.
We remain committed to reducing the impact of our packaging and will continue to work with suppliers and other partners to provide customers and consumers with formats that advance recycling and a circular economy approach.
|
% of packaging recyclable (by
weight).
| 0.8%
2020
99.5%
Cumulative
| Following another year of progress we have moved to within 0.5% of our target. It is not currently possible to replace the remaining non-recyclable components, but we will continue to explore alternatives for these residual materials in addition to ensuring all our packaging is widely recyclable.
|
Sustainably source all of our paper and board packaging to ensure zero net deforestation.
| % of sustainably
sourced paper and
board packaging.
| 99%
2020
| We define ‘sustainably sourced’ as Forest Stewardship Council (FSC) or Programme for the Endorsement of Forest Certification (PEFC) certified, or recycled fibre. This year, we engaged all of our 251 suppliers, with 98% responding. Collectively these suppliers have self-reported that 99% of the paper and board packaging they supply meets our sustainable sourcing criteria. Reduced demand due to Covid-19 limited our ability to meet the full 100%, which we were on track to reach. |
UN SDG alignment 12.2; 12.6 |
Our 2025 packaging (plastic) targets (iii)
|
Achieve 40% average recycled content in all plastic bottles
(and 100% by 2030).
| Tonnes (metric) of recycled content/
total tonnes of plastics used.
| 2.5%
2020
2.5%
Cumulative
| In our second year of reporting against this target, we have delivered several opportunities to increase the use of recycled content in plastic (PET) bottles. In North America, for example, Seagram’s 7 Crown American whiskey moved all its PET formats to 100% recycled plastic bottles from January 2020. The full impact of the Seagram’s 7 project and other projects in the pipeline will advance us towards 40% recycled content by 2025 and 100% by 2030. While just 2% of our packaging is made from plastic (PET), we nonetheless consider this an important target. |
UN SDG alignment 12.5; 12.6 |
Ensure 100% of our plastics will be designed to be recyclable, reusable or compostable in countries where we operate. | Tonnes (metric) plastics widely recyclable (or reusable/
compostable)/
total tonnes of plastic used.
| 4.3%
2020
85.3%
Cumulative
| We continue to work on pack designs with our suppliers and other partners to remove non-recyclable plastics from our products and to promote better recycling infrastructure in selected markets. This year we eliminated approximately 500 tonnes of non-recyclable plastics. |
UN SDG alignment 12.5; 12.6 |
(i) Baseline year is 2007 except for packaging which is 2009 and water replenishment which is 2015.
(ii) Please refer to our reporting methodologies for more information on how data has been compiled, including standards and assumptions used.
(iii) These targets were introduced in 2018.
Business description (continued)
Doing business the right way from grain to glass
Doing the right thing, in the right way, is the foundation of our business. That means embedding respect for human rights into the way we work, every day, everywhere. We consider health and safety as a fundamental human right – and the health, safety and wellbeing of our employees is our highest priority.
Making respect for human rights everyone’s business
Respect for human rights should be a part of everyone's working day, as enshrined in our Code of Business Conduct. We are continuing to embed human rights into every function of our business, in every country, as part of our commitment to the UN Guiding Principles on Business and Human Rights (UNGP), which we signed in 2014.
We have a well-developed policy framework that addresses human rights and our commitment to integrity. We will not work with
anyone who does not align with these standards. We use our comprehensive human rights impact assessment (HRIA) process, which considers our entire value chain, and our Responsible Sourcing programme as part of our risk monitoring process.
In line with the UNGP, we have identified three external risks as particularly salient to our business: labour rights, including the risk of child labour, especially in agricultural supply networks; labour standards for contract workers; and sexual harassment in the hospitality sector. In response, we have developed a child protection toolkit for all markets where we source from smallholder farmers, to train employees who visit farms about risks to children’s safety. We have also delivered training on human rights with a specific focus on modern slavery to our procurement teams and a selection of key roles within the business. Our modern slavery statement is set out on our website. We introduced a Global Brand Promoter Standard in all our markets to protect brand promotion teams from harassment. Our governance process checks that this standard is included in agency contracts and that promoters receive relevant training.
Strengthening our approach
Embedding human rights is a continuous and evolving process. This year, for example, we began integrating the findings of our HRIAs into the overall Diageo risk management process, and we will continue to build on this in the next financial year. Helping our people understand the nature of our business risks and human rights generally is also critical to our success, and we have developed human rights training for all Diageo employees, which we launched on our new online My Learning Hub (for more details on My Learning Hub see case study on pages 48-49).
We also understand the importance of reviewing our HRIA process to ensure it remains relevant. Applying a gender lens to HRIAs, for example, is critical. We have updated our approach to ensure the voices of women in our supply chain are also fully heard throughout the assessment process, building more criteria into our country context reviews and exploring more assessment techniques such as women-only interviews with stakeholders.
Milestones this year
| |
– | HRIAs conducted in North America (United States/Canada), Middle East (first phase) and China and Australia; and action plans developed to address salient risks. |
| |
– | Human rights training focused on modern slavery rolled out to our procurement teams and other key roles. |
Progress against 2020 human rights target |
| | |
Our 2020 target | KPI | Overall progress |
Human rights |
Act in accordance with the UN Guiding Principles on Business and Human Rights, by carrying out HRIAs in all markets. | Number of markets
in which we have carried out human rights impact assessments (HRIAs).
| 17 of 21 markets
On track until Covid-19; target extended to December 2021.
|
Business description (continued)
Health and safety
Our global Health and Safety strategy aims to address the wellbeing and the safety of our people. At its heart is our global Zero Harm programme, which is designed to ensure that everyone goes home safe and healthy, every day, everywhere.
Our relentless focus on our Severe and Fatal Incident Prevention (SFIP) programme, specifically designed to identify and effectively control severe and fatal risks in our operations, has driven industry-leading progress within Diageo. But we are deeply saddened to report that an employee died in a traffic accident in Tanzania. We have, however achieved our lost-time accident (LTA) target of less than one per 1,000 employees for the third year in a row, at 0.60. Our independent contractors recorded 16 LTAs this year, a significant improvement on 24 in 2019(i). Our performance was helped by the sale of United National Breweries (UNB) in South Africa, which had a higher LTA rate than Diageo's average. To keep our people informed and help them manage their physical and mental health during the pandemic, we launched a number of new health and wellbeing resources and engagement campaigns, including a virtual mental health awareness week.
This year, we introduced a new, broader total recordable accident (TRA) target of achieving 3.5 or fewer per 1,000 employees and site-based third-party contractors, and we achieved a strong rate of 2.12. This indicator has enabled markets to apply the same rigour to finding the root causes of all levels of accidents and near misses, which helps predict and prevent more serious accidents and illnesses. There is no acceptable level of accidents, and we want to continue to accelerate our health and safety culture and performance. Our aim is to develop targets and performance measures for 2025 which combine leading and lagging health and safety indicators. At the same time, we are continuing to focus on improving our best practice culture and developing people’s capabilities. We are also working more closely with our contractors to ensure they are aligned with our expectations around Zero Harm and will be including more specific health and safety requirements in future service level agreements.
Progress against 2020 health and safety target
|
| | |
Our 2020 target | KPI | Overall progress |
Health and safety |
Keep our people safe by achieving less than one lost-time accident (LTA) per 1,000 employees and no fatalities. | Number of LTAs
Number of fatalities
Number of TRAs (new KPI this year)
| 0.60 LTAs per 1,000 employees
1 work-related fatality
2.12 TRAs per 1,000 employees and site-based third-party contractors
|
UN SDG alignment 3.9, 8.8 |
2020 safety data by region |
| | | | | | | | | | | | |
| | | Employee LTA rate(i) |
| | Employee TRA rate |
| | Independent contractor LTAs(i) |
| | Fatalities(ii) |
|
| North America | | 0.31 |
| | 2.21 |
| | — |
| | — |
|
| Europe and Turkey | | 1.03 |
| | 2.15 |
| | 6 |
| | — |
|
| Africa | | 0.35 |
| | 2.42 |
| | 6 |
| | 1 |
|
Latin America and Caribbean
| | 1.56 |
| | 2.51 |
| | 1 |
| | — |
|
| Asia Pacific | | 0.30 |
| | 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:
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– | 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; |
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– | 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; |
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– | 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 |
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– | 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:
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– | 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);
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– | the impact of the Covid-19 pandemic, or other epidemics or pandemics, on Diageo’s business, financial condition, cash flows and results of operation; |
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– | 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; ;
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– | 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;
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– | 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;
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– | 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;
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– | 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; |
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– | 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;
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– | 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;
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– | 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;
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– | the consequences of any failure of internal controls, including those affecting compliance with existing or new accounting and/or disclosure requirements;
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– | Diageo’s ability to maintain its brand image and corporate reputation or to adapt to a changing media environment; |
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– | 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)
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– | 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;
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– | any disruption to production facilities, business service centres or information systems, including as a result of cyber attacks;
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– | increased costs for, or shortages of, talent, as well as labour strikes or disputes;
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– | 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; |
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– | 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;
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– | movements in the value of the assets and liabilities related to Diageo’s pension plans;
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– | 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
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– | any failure by Diageo to protect its intellectual property rights.
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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.
Operating results 2020 compared with 2019
Group financial review
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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 |
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(i) | Excluding corporate net sales of £38 million (2019 - £53 million). |
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(ii) | Excluding net corporate cost of £147 million (2019 - £210 million). |
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(iii) | Excluding exceptional operating charges of £1,357 million (2019 - £74 million) and net corporate operating costs of £147 million (2019 - £189 million). |
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| Summary financial information | | | | 2020 |
| | 2019 |
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| Volume | | EUm | | 217.0 |
| | 245.9 |
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| Net sales | | £ million | | 11,752 |
| | 12,867 |
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| Marketing | | £ million | | 1,841 |
| | 2,042 |
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| Operating profit before exceptional items | | £ million | | 3,494 |
| | 4,116 |
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Exceptional operating items(i) | | £ million | | (1,357 | ) | | (74 | ) |
| Operating profit | | £ million | | 2,137 |
| | 4,042 |
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| Share of associate and joint venture profit after tax | | £ million | | 282 |
| | 312 |
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Non-operating exceptional gain(i) | | £ million | | (23 | ) | | 144 |
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| Net finance charges | | £ million | | (353 | ) | | (263 | ) |
Exceptional taxation credit/(charge)(i) | | £ million | | 154 |
| | (39 | ) |
| Tax rate including exceptional items | | % | | 28.8 |
| | 21.2 |
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| Tax rate before exceptional items | | % | | 21.7 |
| | 20.6 |
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| Profit attributable to parent company’s shareholders | | £ million | | 1,409 |
| | 3,160 |
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| Basic earnings per share | | pence | | 60.1 |
| | 130.7 |
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| Earnings per share before exceptional items | | pence | | 109.4 |
| | 130.8 |
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| Recommended full year dividend | | pence | | 69.9 |
| | 68.6 |
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(i) For further details of exceptional items see pages 213 to 216.
Business review (continued)
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| Reported growth by region | | Volume
% |
| | Sales % |
| | Net sales
% |
| | Marketing
% |
| | Operating profit
% |
| | Operating profit before exceptional items % |
|
| North America | | (2 | ) | | 3 |
| | 4 |
| | (5 | ) | | 7 |
| | 4 |
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| 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 | ) |
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(i) | Before exceptional operating items.
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(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).
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Business review (continued)
Key performance indicatorsfinancial information
Net sales (£ million)
Reported net sales declined 8.7%
Organic net sales declined 8.4%
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(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.2023
(iii) Organic movementSummary financial information
| | | | | | | | | | | | | | | | | | | |
| P12 | | | 2023 | 2022 | Organic growth
% | Reported growth
% |
| Volume | EUm | | | 243.4 | 263.0 | | (1) | | (7) | |
| Net sales | £ million | | | 17,113 | | 15,452 | | 6 | | 11 | |
| Marketing | £ million | | | 3,051 | 2,721 | | 6 | | 12 | |
| Operating profit before exceptional items | £ million | | | 5,254 | | 4,797 | | 7 | | 10 | |
Exceptional operating items(1) | £ million | | | (622) | | (388) | | | |
| Operating profit | £ million | | | 4,632 | | 4,409 | | | 5 | |
| Share of associate and joint venture profit after tax | £ million | | | 370 | | 417 | | | (11) | |
Non-operating exceptional items(1) | £ million | | | 328 | | (17) | | | |
| Net finance charges | £ million | | | (594) | | (422) | | | |
Exceptional taxation credit(1) | £ million | | | 186 | | 31 | | | |
| Tax rate including exceptional items | % | | | 20.5 | | 23.9 | | (14) | |
| Tax rate before exceptional items | % | | | 23.0 | | 22.5 | | | 2 | |
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| Profit attributable to parent company’s shareholders | £ million | | | 3,734 | | 3,249 | | | 15 | |
| Basic earnings per share | pence | | | 164.9 | | 140.2 | | | 18 | |
| Basic earnings per share before exceptional items | pence | | | 163.5 | | 151.9 | | | 8 | |
| Recommended full year dividend | pence | | | 80.00 | | 76.18 | | | 5 | |
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| | | | | | | |
Reported net sales declined 8.7%, driven mainly by decline in organic net sales(1) For further details on exceptional items see pages 65 and to a lesser extent, the negative impact of acquisitions and disposals, partially offset by favourable foreign exchange. 218-219.
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%
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(i) | For further details on exceptional items see pages 213-216. |
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(ii) | Fair value adjustments. For further details on fair value remeasurement see page 89. |
Reported operating profit was down 47.1% mainly drivengrowth 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.region
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| Volume | Net sales | Marketing | Operating profit before exceptional items | Operating profit |
| % | EUm | % | £ million | % | £ million | % | £ million | % | £ million |
| North America | (4) | | (2.4) | | 11 | | 663 | | 13 | | 160 | | 10 | | 235 | | 6 | 139 | |
| Europe | — | | 0.1 | | 11 | | 357 | | 10 | | 58 | | 9 | | 88 | | 26 | 226 | |
| Asia Pacific | (14) | | (13.4) | | 11 | | 316 | | 11 | | 56 | | 27 | | 194 | | (8) | (38) | |
| Latin America and Caribbean | (3) | | (0.9) | | 18 | | 274 | | 22 | | 53 | | 23 | | 123 | | 23 | 123 | |
| Africa | (8) | | (3.0) | | 1 | | 17 | | (2) | | (4) | | (30) | | (95) | | (44) | (139) | |
| | | | | | | | | | |
| Corporate | — | | — | | 63 | | 34 | | 58 | | 7 | | (37) | | (88) | | (37) | (88) | |
| Diageo | (7) | | (19.6) | | 11 | | 1,661 | | 12 | | 330 | | 10 | | 457 | | 5 | 223 | |
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)
Organic growth by region | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Volume | Net sales | Marketing | Operating profit before exceptional items | | |
| % | EUm | % | £ million | % | £ million | % | £ million | | |
| North America | (5) | | (2.5) | | — | | 11 | | 2 | | 22 | | (2) | | (57) | | | |
| Europe | — | | 0.1 | | 11 | | 347 | | 7 | | 42 | | 11 | | 103 | | | |
| Asia Pacific | 5 | | 3.9 | | 13 | | 353 | | 9 | | 46 | | 29 | | 200 | | | |
| Latin America and Caribbean | (3) | | (0.9) | | 9 | | 142 | | 14 | | 34 | | 12 | | 62 | | | |
| Africa | (7) | | (2.4) | | 5 | | 83 | | 2 | | 4 | | 12 | | 37 | | | |
| | | | | | | | | | |
| Corporate | — | | — | | 61 | | 33 | | 36 | | 4 | | (9) | | (24) | | | |
| Diageo | (1) | | (1.8) | | 6 | | 969 | | 6 | | 152 | | 7 | | 321 | | | |
| | | | | | | | | | | | | | | | | |
| Fiscal 19 to fiscal 23 growth |
| Reported net sales growth %(1) | Net sales growth on a constant basis %(1) | | Organic volume CAGR %(2) | Organic net sales CAGR %(2) |
| North America | 52 | | 41 | | | 2 | | 9 | |
| Europe | 21 | | 30 | | | 3 | | 7 | |
| Asia Pacific | 19 | | 24 | | | 1 | | 6 | |
| Latin America and Caribbean | 59 | | 62 | | | 4 | | 15 | |
| Africa | 6 | | 30 | | | 2 | | 8 | |
| Corporate | 66 | | 62 | | | — | | 14 | |
| Diageo | 33 | | 35 | | | 2 | | 8 | |
| | | | | |
| | | | | |
| | | | | |
See page 280 for explanation and reconciliation of non-GAAP measures
(1) For further details on fiscal 19 to fiscal 23 growth on a constant basis see pages 282-284.
(2) Fiscal 19 to fiscal 23 CAGR indicative. Calculated by applying each year’s individual organic growth rates
Business review (continued)
Key performance indicators
Reported net sales grew 10.7%
Organic net sales grew 6.5%
Reported net sales grew 10.7%, driven by strong organic growth and favourable foreign exchange impacts.
Organic net sales growth of 6.5% reflects 7.3 percentage points of positive price/mix and a decline in organic volume of 0.8%. Four out of five regions delivered growth, despite lapping strong double-digit growth at the group level in fiscal 22. Price/mix was driven by price increases and premiumisation.
Organic movement
(i
(1) 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.
(2) See pages 213-214 and 282-284 for details of hyperinflation adjustment.
Operating profit (£ million)
Reported operating profit grew 5.1%
Organic operating profit grew 7.0%
Reported operating profit grew 5.1%, mainly driven by growth in organic operating profit and positive impacts from exchange rate movements. These favourable items were largely offset by the negative impact of exceptional operating items, primarily non-cash impairments related to India and the supply chain agility programme.
Organic operating profit grew 7.0%, ahead of organic net sales growth, driven by growth across all regions except North America.
(1) For further details on exceptional operating items see pages 65 and 219-220.
(2) Fair value remeasurements. For further details see page 65.
(3) See pages 213-214 and 282-284 for details of hyperinflation adjustment.
Business review (continued)
Reported operating margin declined 1,323bpsby 147bps
Organic operating margin declined 212expanded by 15 bps
| |
(i) | Fair value adjustments and reclassification. |
(ii) Organic movement
Reported operating margin declined 1,323bps mainly drivenby 147bps, with organic operating margin expansion more than offset by exceptional operating items, negative impact of foreign exchange, acquisitions, disposals and decline in organic operating margin.other items.
Organic operating margin expanded by 15bps, reflecting disciplined cost management despite inflation. Strong operating margin expansion in Asia Pacific, Africa and Latin America and Caribbean was partially offset by declines in North America and Europe.
Organic gross margin declined 212bpsby 97bps, primarily driven by lower volumes impacting fixed cost absorption,pressures. Price increases more than offset the absolute impact of cost inflationinflation.
Organic movement
15bps
(1) Operating margin in waterfall is rounded to nearest decimal place.
(2) For further details on exceptional operating items see pages 65 and other expense offsetting savings in marketing investment219-220.
(3) Fair value remeasurements and productivity benefits from cost efficiencies.hyperinflation adjustment. For further details on fair value remeasurements see page 65. See pages 213-214 and 282-284 for details of hyperinflation adjustment.
Business review (continued)
Basic earnings per share (pence)
Basic eps decreased 54.0%increased 17.6% from 130.7140.2 pence to 60.1164.9 pence
EpsBasic eps before exceptional items decreased 16.4%(1) increased 7.6% from 130.8151.9 pence to 109.4163.5 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 70.6increased 24.7 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 pencemainly driven by decline in organic operating profit lower income from associatesgrowth and joint ventures,exceptional items, partially offset by increased finance charges and the impact of acquisitions and disposals. These were partially offset by tax, lower non-controlling interests and the impacthigher tax.
Basic eps before exceptional items increased 11.6 pence.
(i
(1) See page 280 for explanation of the calculation and use of non-GAAP measures.
(2) For further details on exceptional items see pages 65 and 219-220.
(3) Includes finance charges net of tax.
(4) Excludes finance charges related to acquisitions, disposals, share buyback programme.buybacks and includes finance charges related to hyperinflation adjustments.
(5) Excludes tax related to acquisitions, disposals and share buybacks.
(6) Fair value remeasurements. For further details see page 65.
(7) Operating profit hyperinflation adjustment movement was £12 million compared to fiscal 22 (F23 – £22 million; F22 – £10 million).
Business review (continued)
Net cash from operating activities and free cash flow (£ million)
Generated £2,320£3,024 million net cash from operating activities.(i)(ii)
Freeactivities(1) and £1,800 million 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.
|
Net cash from operating activities was £2,320£3,024 million, a decrease of £928£911 million compared to the prior period.fiscal 22. Free cash flow declined by £983 million to £1,800 million.
Free cash flow declined as strong growth in operating profit and favourable foreign exchange impacts were more than offset by higher year-on-year working capital outflows, tax payments, interest paid and capital investment.
The higher year-on-year working capital outflow was £1,634 million, £974 million lower compared to prior period primarily driven by normalisation of creditors relative to fiscal 22 as our growth rate moderated in fiscal 23.
The additional tax payments were the declineresult of increased profit impacting tax instalments and higher balancing payments. The increase in interest paid reflects the higher interest rate environment globally.
(1) Net cash from operating activities excludes net capex (2023 – £(1,167) million; 2022 – £(1,080) million) and movements in loans and other investments.
(2) Exchange on operating profit lowerbefore exceptional items.
(3) Operating profit excludes exchange, depreciation and amortisation, post employment charges of £36 million and other non-cash items.
(4) Working capital movement includes maturing inventory.
(5) Other items include dividends received from associates and joint ventures, movements in loans and associates (see note 18(g) page 274), increased use of working capital, higher tax paymentsother investments 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.post employment payments.
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.(1)
| |
(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(50)bps
ROIC decreased (50)bps, mainly driven mainly by increased capex, maturing stock investment and continued portfolio optimisation through acquisitions and disposals. The decline was partially offset by higher organic operating profit decline. growth, net of higher tax.
(1) ROIC calculation excludes exceptional operating items from operating profit. For further details on ROIC see page 288.
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.
(c) Exceptional items
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
•Reported net sales grew 11%, primarily driven by a favourable foreign exchange impact from the strengthening US dollar.•Organic net sales were flat as growth in Canada and Diageo Beer Company USA (DBC USA) were offset by a decline in US Spirits.
•Strong price/mix growth was offset by a decline in volume, while the region held share of TBA.
•US Spirits net sales declined 1%, lapping strong double-digit growth impacted by distributor stock replenishment and increased inventories of imported products in fiscal 22. Depletion growth was approximately two percentage points ahead of shipment growth in fiscal 23, with some variation across brands. Overall inventory levels at distributors at the end of fiscal 23 were in line with historical levels.
•DBC USA net sales grew 1% reflecting strong growth in Guinness, partially offset by a decline in Smirnoff flavoured malt beverages.
•Organic operating margin declined by 101bps, primarily driven by cost inflation and an adverse category mix. Strategic price increases and productivity savings more than offset the absolute impact of cost inflation.
•Marketing investment grew 2% as we continue to invest and support growth across key categories.
•Doubling the number of brands running responsible drinking campaigns, we reached more than 150 million consumers. We also led efforts with Black, Latino, and Native American organisations to address the harmful use of alcohol in the United States through our Multicultural Consortium for Responsible Drinking.
•Our operations reduced Scope 1 and 2 carbon emissions by 17% through continued energy efficiency and renewable energy initiatives. Key factors in this included a full year of operation for our carbon neutral distillery at Lebanon, powered by 100% renewable electricity, and running our Valleyfield site on renewable natural gas.
•Due to higher volume of distilled products going to maturation, overall water efficiency decreased by 0.8%. We implemented water-saving initiatives across our sites that enabled us to reduce total water usage compared to last year.
Market highlights - US Spirits:
•Tequila net sales grew 15%, and drove significant share gains in both the spirits industry and tequila category. Casamigos net sales grew 14% driven by strong price/mix and volume growth, and the launch of Casamigos Cristalino. Don Julio net sales grew 13%, primarily driven by aged variants and the launch of ultra-premium Don Julio Rosado Reposado. Both Casamigos and Don Julio shipments grew ahead of depletions as supply availability enabled distributors to increase inventory to more optimal levels.
•Crown Royal whisky net sales declined 10%, lapping inventory replenishment in fiscal 22 when the brand recovered from supply constraints. Crown Royal gained double-digit share of the Canadian whisky category, and depletions grew ahead of shipments in fiscal 23.
•Vodka net sales declined 7%, primarily due to Cîroc, partially offset by growth in Smirnoff. Smirnoff growth of 4% was driven by core and flavoured variants. Ketel One net sales were flat, reflecting growth in the core variant offset by a decline in Ketel One Botanicals. Cîroc net sales declined 32% as consumers shifted into other spirits categories.
•Johnnie Walker net sales declined 13%. Johnnie Walker gained share of the scotch category driven by Johnnie Walker Black Label and Johnnie Walker Blue Label, and depletions grew ahead of shipments.
•Rum net sales declined 1%, primarily due to Captain Morgan, which declined 2%. Zacapa grew 13% driven by super-premium and luxury variants.
•Bulleit whiskey net sales declined 6%, lapping inventory replenishment in fiscal 22 when the brand recovered from supply constraints. Bulleit whiskey gained both spirits industry and US whiskey category share, and depletions grew double-digit.
•Buchanan's net sales grew 10%, primarily driven by the launch of Buchanan's Pineapple, an innovation that gained spirits industry share. Buchanan's scotch declined 4%, but gained both spirits industry and scotch category share, and depletions grew ahead of shipments.
•Single Malts net sales grew 25%, primarily driven by ultra-premium Lagavulin 16YO and luxury innovation Lagavulin 11YO Charred Oak Cask.
•Spirit-based ready to drink (RTD) net sales declined 44% primarily due to lapping the launch of Crown Royal RTD in fiscal 22 and Loyal 9 underperformance in certain US states.
Business review (continued)
Key financials
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | Exchange | Acquisitions and disposals | Organic movement | Other(1) | 2023 | Reported movement |
| £ million | £ million | £ million | £ million | £ million | £ million | % |
| Net sales | 6,095 | | 632 | | 20 | | 11 | | — | | 6,758 | | 11 | |
| Marketing | 1,200 | | 122 | | 15 | | 22 | | 1 | | 1,360 | | 13 | |
| Operating profit before exceptional items | 2,454 | | 249 | | (12) | | (57) | | 55 | | 2,689 | | 10 | |
Exceptional operating items(2) | (1) | | | | | | (97) | | |
| Operating profit | 2,453 | | | | | | 2,592 | | 6 |
| | | | | | | | | | | | | | |
| Organic
volume
movement | Reported
volume
movement | Organic
net sales
movement | Reported
net sales
movement |
| Markets and categories: | % | % | % | % |
North America(3) | (5) | | (4) | | — | | 11 | |
| | | | |
US Spirits(3) | (6) | | (6) | | (1) | | 10 | |
DBC USA(4) | (3) | | (3) | | 1 | | 12 | |
| Canada | (2) | | (2) | | 4 | | 8 | |
| | | | |
Spirits(3) | (5) | | (4) | | — | | 11 | |
| Beer | (2) | | (2) | | 2 | | 12 | |
| Ready to drink | (11) | | (11) | | (16) | | (10) | |
| | | | |
Global giants, local stars and reserve(5) | Organic
volume
movement(6)
% | Organic
net sales
movement
% | Reported
net sales
movement
% |
| Crown Royal | | (12) | | (10) | | — | |
| Don Julio | | 8 | 13 | | 25 | |
Casamigos(7) | | 6 | | 13 | | 26 | |
| Johnnie Walker | | (5) | | (10) | | (1) | |
| Smirnoff | | (1) | | 4 | | 14 | |
| Captain Morgan | | (5) | | (1) | | 9 | |
| Ketel One | | (3) | | — | | 11 | |
| Guinness | | 4 | | 9 | | 20 | |
| Baileys | | (4) | | 1 | | 11 | |
Bulleit whiskey(8) | | (8) | | (6) | | 4 | |
| Buchanan's | | — | | 9 | | 21 | |
|
| | | | | | | |
l | US Spirits | l | Canada | l | Spirits | l | Ready to drink |
lNorth America contributed | DBC USA | l | Other (principally
Travel Retail) | l | Beer | l | OtherNorth America organic net sales were flat in fiscal 23 |
| 39% of Diageo reported net sales in fiscal 23 | | | | | | |
| | |
Reported net sales by market (%)
|
| | |
| Reported net sales by category (%) |
(1) Fair value remeasurements. For further details see page 65.
|
| | | | | | | | | | | | | | | | | | | | | |
| 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)(2) For further details on exceptional operating items see pages 213-216. 65 and 219-220.
North America is the second largest beverage alcohol market worldwide(i).
The consumer lies at the heart of our business, which(3) Reported volume movement has been more important than everimpacted by acquisitions and/or disposals. For further details see pages 282 and 285.
(4) Certain spirits-based ready to drink products in the face of shifting consumer behaviourscertain states are distributed through DBC USA and changes in the external environment. Our focus is on recruitingthose net sales are captured within DBC USA.
(5) Spirits brands excluding ready to drink and re-recruiting consumers into the portfolio through meaningful consumer engagement, sustainable innovationnon-alcoholic variants.
(6) Organic equals reported volume movement.
(7) Casamigos trademark includes both tequila 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.mezcal.
(8) Bulleit whiskey excludes Bulleit Crafted Cocktails.
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)
Europe
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•Reported net sales
Sales increased by £148 million, or 3% grew 11%, 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 impacteddriven by organic growth and the hyperinflation adjustment(1) related to Turkey, partially offset by an unfavourable impact from foreign exchange.
•Organic net sales grew 11%, driven by double-digit growth across most markets. Growth was mainly driven by price/mix, while holding volume.
•Price/mix was primarily driven by strong price increases across all markets, and supported by positive mix in beer and scotch.
•Spirits net sales grew 10%, driven by growth in scotch, vodka, tequila. Johnnie Walker grew 29% driven by Northern Europe, Southern Europe and Travel Retail.
•Beer net sales grew 18%, driven by price increases and volume growth. Guinness net sales grew 20% and gained share in the on-trade in Great Britain and Ireland.
•Organic operating margin declined by 13bps, primarily driven by cost inflation, partially offset by price increases, improved category mix and productivity savings.
•Marketing investment grew 7%, with focused investment in Tanqueray, Johnnie Walker, Baileys and Guinness.
•The SMASHED programme educated 112,910 young people on the dangers of £105 million (see further performance analysis below)underage drinking.
•We built strong momentum in year two of our water replenishment projects in Turkey, generating the annual capacity to replenish 137,349m3 water.
•Scope 1 and 2 carbon emissions increased by 35%, primarily driven by exchange rate movementsincreased scotch distillation. To mitigate some of £101 million primarilythis growth we switched some key distilleries (Auchroisk, Talisker and Cardhu) to biofuels. Our GHG emissions for beer stayed flat, even though production volumes were higher than planned.
•Water efficiency decreased by 2.4% due to the strengtheningvolume of distilled product increasing faster than packaged product, because of its maturation period. For beer, optimising pasteurisation in Runcorn and water recovery in St James’s Gate led to a 9% improvement in water efficiency.
•In year two of our three-year Guinness regenerative agriculture pilot, launched in February 2022, we recruited 44 farms across Ireland and gathered baseline data to let us accurately track the US dollar against sterlingproject’s impact.
Market highlights:
•Great Britain net sales grew 7%, mostly driven by strong performance in Guinness with strong market share gains. Spirits net sales growth was driven by tequila, vodka and by the impact of acquired businesses of £4 million. This increase wasRTDs, partially offset by a decrease ingin.
•Northern Europe net sales of £47 million generatedgrew 11%. Growth was primarily driven by disposed businesses.scotch with strong double-digit growth in Johnnie Walker, and strong growth in vodka and tequila. Spirits gained market share.
Operating profit
Operating profit was £2,088 million•Southern Europe net sales grew 12%, led by strong performance in scotch, in addition to tequila and gin. Growth reflected continued recovery in the year ended 30 June 2020 an increase of £140 million compared to operating profit of £1,948 millionon-trade and increased tourism, alongside market share gains in the year ended 30 June 2019. Operating profit increasedspirits.
•Ireland net sales grew 16%, primarily driven by exceptional gain of £83 million with regards to substitution drawback on excise duties, by £80 million organic growth by £44 million asin Guinness reflecting share gains in a result of exchange rate movementsrecovering on- trade.
•Eastern Europe net sales declined 3%, due to the strengtheningsuspension of exports to and sales in Russia as announced in March 2022 and the winding down of its operations announced in June 2022. In the rest of the US dollar (£83 million translation less £39 million transactional exchange impact)market, spirits grew double-digit and gained market share primarily driven by a £12 million impact from acquisitions (lapping the £15 million Casamigos provision reassessment impact from prior year, less the £3 million operational loss generatedJohnnie Walker.
•Turkey net sales grew 38%, with volume growth of 9%. Growth was driven by acquired businesses). This increaseprice increases in response to inflation and higher excise duties. Growth was partially offsetbroad-based, led by a decrease in operating profitscotch, vodka and raki.
Key financials
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | Exchange | Acquisitions and disposals | Organic movement | Other(2) | Hyperinflation(1) | 2023 | Reported movement |
| £ million | £ million | £ million | £ million | £ million | £ million | £ million | % |
| Net sales | 3,212 | | (85) | | (9) | | 347 | | — | | 104 | | 3,569 | | 11 | |
| Marketing | 577 | | 3 | | 2 | | 42 | | — | | 11 | | 635 | | 10 | |
| Operating profit before exceptional items | 1,017 | | 5 | | (31) | | 103 | | (11) | | 22 | | 1,105 | | 9 | |
Exceptional operating items(3) | (146) | | | | | | | (8) | | |
| Operating profit | 871 | | | | | | | 1,097 | | 26 | |
(1) See pages 213-214 and 282-284 for details 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 chargehyperinflation adjustment.
(2) Fair value remeasurements. For further details see page 65.
(3) Exceptional items are in respect of a fair value reassessment of contingent consideration liabilitiesDiageo’s decision, announced on 28 June 2022, to wind down its operations in respect of prior year acquisitions.Russia. For further details on exceptional operating items see pages 65 and 219-220.
Business review (continued)
| | | | | | | | | | | | | | |
| Markets and categories | Organic
volume
movement
% | Reported volume
movement
% | Organic net sales
movement
% | Reported net sales
movement
% |
| | | | |
| | | | |
Europe(1) | — | | — | | 11 | | 11 | |
| | | | |
Great Britain(1) | (8) | | (8) | | 7 | | 6 | |
Southern Europe(1) | 4 | | 5 | | 12 | | 13 | |
Northern Europe(1) | 8 | | 6 | | 11 | | 12 | |
Ireland(1) | 3 | | 3 | | 16 | | 18 | |
Eastern Europe(1) | (15) | | (15) | | (3) | | — | |
Turkey(1) | 9 | | 9 | | 38 | | 10 | |
| | | | |
Spirits(1) | — | | — | | 10 | | 10 | |
| Beer | 5 | | 5 | | 18 | | 20 | |
Ready to drink(1) | (2) | | (2) | | 10 | | 12 | |
Global giants and local stars(2) | | Organic
volume
movement(3)
% | Organic
net sales
movement
% | Reported
net sales
movement
% |
| Guinness | | 6 | | 20 | | 21 | |
| Johnnie Walker | | 18 | | 29 | | 25 | |
| Baileys | | (3) | | (1) | | 1 | |
| Smirnoff | | (1) | | 14 | | 16 | |
| Captain Morgan | | — | | 9 | | 10 | |
| Tanqueray | | — | | 6 | | 7 | |
| JεB | | (7) | | (1) | | 2 | |
| Yenì Raki | | — | | 7 | | (10) | |
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, growth include impacts from the disposal of a portfolio of 19 brands to 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 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.
|
| |
– | 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 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 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 and Turkey
|
| | | | | | | |
l | Europe | l | Other (principally
Travel Retail) | l | Spirits | l | Ready to drink |
lEurope contributed | Turkey |
| l | Beer | l | OtherEurope organic net sales grew |
21% of Diageo reported net sales in fiscal 23 |
|
|
|
|
|
|
11% in fiscal 23 |
| | |
Reported net sales by market (%)
|
| | |
| Reported net sales by category (%) |
(1) Reported volume movement has been impacted by acquisitions and/or disposals. For further details see pages 282 and 285. (2) Spirits brands excluding ready to drink and non-alcoholic variants.
(3) Organic equals reported volume movement, except for Tanqueray and JεB, which had reported volume movement of 1% and (6)% respectively.
|
| | | | | | | | | | | | | | | | | | | | | |
| Key financials | | 2019
£ million |
| | Exchange
£ million |
| | Acquisitions
and
disposals
£ million |
| | Organic movement
£ million |
| | Other(ii) £ million |
| | 2020
£ million |
| | Reported movement
% |
|
| Net sales | | 2,939 |
| | (23 | ) | | 9 |
| | (358 | ) | | — |
| | 2,567 |
| | (13 | ) |
| Marketing | | 490 |
| | (10 | ) | | 4 |
| | (56 | ) | | — |
| | 428 |
| | (13 | ) |
| Operating profit before exceptional items | | 1,014 |
| | (7 | ) | | (3 | ) | | (243 | ) | | (4 | ) | | 757 |
| | (25 | ) |
Exceptional operating items(ii) | | (18 | ) | |
| |
| |
| |
| | (62 | ) | |
|
| Operating profit | | 996 |
| |
| |
| |
| |
| | 695 |
| | (30 | ) |
Business review (continued)
(i) Asia Pacific
•Reported net sales grew 11%, primarily reflecting strong organic growth and a favourable impact from foreign exchange.
•Organic net sales grew 13%. All markets grew, except Greater China, with strong double-digit growth in India, South East Asia, Travel Retail Asia and Middle East and North Asia.
•Price/mix of 7% was led by strong price increases across all markets. Positive mix was driven by strength in premium-plus scotch in most markets. Volume grew 8% in premium-plus price tiers.
•Spirits net sales grew 14%, primarily driven by double-digit growth in scotch, the region’s largest category. IMFL whisky(1) also contributed to growth, partially offset by a decline in Chinese white spirits.
•Organic operating margin expanded by 363bps as the benefits from the continued recovery of Travel Retail, price increases and operational efficiencies more than offset the impact of cost inflation.
•Marketing investment grew 9%, with focused investment in scotch in South East Asia, India, and Greater China.
•Advocating for responsible consumption of alcohol through DRINKiQ and brand campaigns, we reached more than 134 million consumers with messages that promote moderation.
•The adjustmentSMASHED programme educated 340,216 young people on the dangers of underage drinking.
•We trained more than 8,236 people on business and hospitality skills through our Learning for Life programme and delivered 38,467 training sessions through Diageo Bar Academy.
•Our water efficiency improved by 16.2% this year, mainly by focussing on continuous improvement across the region. We piloted waterless cooling towers successfully in India and plan to other operating expenses isintroduce them more widely.
•Our Scope 1 and 2 carbon emissions decreased by 9%, mainly because of a green energy tariff in Australia and focussed energy improvement across the eliminationregion.
Market highlights:
•India net sales grew 17%, driven by strong consumer demand and continued premiumisation. IMFL whisky and scotch delivered double-digit growth. Scotch growth was driven by Black Dog, Johnnie Walker Black Label and Black & White.
•Greater China net sales declined 4%. Strong performance in scotch was more than offset by a decline in Chinese white spirits which continued to be impacted by Covid-19 restrictions, especially in the on-trade. Scotch grew 13%, driven primarily by Taiwan, with strong performance in the super-premium-plus segment led by Johnnie Walker and The Singleton.
•Australia net sales grew 2%, primarily driven by price increases. Growth was led by rum, tequila and beer.
•South East Asia net sales grew 33%, benefitting from a strong recovery following the easing of fair value changes to contingent consideration liabilitiesCovid-19 restrictions and strong growth in respectthe super-premium-plus segment. Scotch grew 31%, mostly driven by Johnnie Walker premium variants, and single malts, primarily The Singleton and Mortlach.
•North Asia (Korea and Japan) net sales grew 15%, benefitting from the recovery of prior year acquisitions.the on-trade. Growth was primarily driven by double-digit growth in Windsor and Johnnie Walker premium-plus variants led by Johnnie Walker Blue Label and Johnnie Walker Black Label.
(ii)•Travel Retail Asia and Middle East net sales grew 67% primarily driven by Johnnie Walker premium-plus variants, led by Johnnie Walker Blue Label and Johnnie Walker Black Label.
Key financials
| | | | | | | | | | | | | | | | | | | | | | |
| 2022 | Exchange | | Acquisitions and disposals | Organic movement | 2023 | Reported movement | |
| £ million | £ million | | £ million | £ million | £ million | % | |
| Net sales | 2,884 | | 65 | | | (102) | | 353 | | 3,200 | | 11 | | |
| Marketing | 490 | | 10 | | | — | | 46 | | 546 | | 11 | | |
| Operating profit before exceptional items | 711 | | 15 | | | (21) | | 200 | | 905 | | 27 | | |
Exceptional operating items(2) | (241) | | | | | | (473) | | | |
| Operating profit | 470 | | | | | | 432 | | (8) | | |
(1) Indian-Made Foreign Liquor (IMFL) whisky.
(2) For further details on exceptional operating items see pages 213-216. 65 and 219-220.
Within the geography of Europe there have been two markets: Europe and Turkey. Across our Europe business we continue to drive execution at scale of our consumer marketing programme and continuously optimising our route to market. We remain focused on executing our strategy through growth of international premium spirits, beer and through premiumisation. Moving forward, we will be structured as six individual markets: Great Britain, Ireland, Turkey, Northern, Southern and Eastern Europe.55
Our markets
Europe has comprised 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 has been managed as a single market with country teams focusing on sales and customer marketing execution but has moved to a six market model, each with end to end accountability.
Supply operations
A number of Diageo’s International Supply Chain and Procurement operations are located in Europe including production sites 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 team leads all supply chain activities for Europe and manufactures whisky, vodka, gin, rum, beer, cream liqueurs, and other spirit-based drinks which are distributed in over 180 countries.
Following the announcement of a £150 million investment in whisky tourism in Scotland in 2018, we have begun the transformation of our Scotch whisky visitor experiences through investment in 12 malt whisky distillery visitor centres with a focus on the ‘Four Corners distilleries’, Glenkinchie, Caol Ila, Clynelish and Cardhu, celebrating the important role these single malts play in the flavours of Johnnie Walker. Also, as part of the investment programme, construction to create a global flagship visitor experience for Johnnie Walker in Edinburgh city centre is underway.
Business review (continued)
| | | | | | | | | | | | | | | |
| Markets and categories | | Organic volume
movement
% | Reported volume
movement
% | Organic net sales
movement
% | Reported net sales
movement
% |
Asia Pacific(1) | | 5 | | (14) | | 13 | | 11 | |
| | | | | |
India(1) | | 6 | | (18) | | 17 | | 7 | |
| Greater China | | (2) | | (2) | | (4) | | (1) | |
| Australia | | (10) | | (10) | | 2 | | 5 | |
South East Asia(1) | | 20 | | 20 | | 33 | | 36 | |
| North Asia | | 6 | | 6 | | 15 | | 14 | |
| Travel Retail Asia and Middle East | | 38 | | 38 | | 67 | | 65 | |
| | | | | |
Spirits(1)(2) | | 6 | | (15) | | 14 | | 11 | |
| Beer | | 5 | | 5 | | 10 | | 12 | |
| Ready to drink | | (8) | | (8) | | 1 | | 4 | |
Global giants and local stars(2) | | | Organic
volume
movement(3)
% | Organic
net sales
movement
% | Reported
net sales
movement
% |
| Johnnie Walker | | | 13 | | 29 | | 30 | |
Shui Jing Fang(4) | | | (15) | | (14) | | (12) | |
| McDowell's | | | (1) | | 4 | | 7 | |
| Guinness | | | 4 | | 10 | | 13 | |
| The Singleton | | | 26 | | 26 | | 31 | |
| Smirnoff | | | 8 | | 15 | | 19 | |
| Windsor | | | 29 | | 41 | | 42 | |
| Black & White | | | 28 | | 36 | | 39 | |
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 and spirits). 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
In our own operations, we achieved our 2020 targets for greenhouse gas emissions reduction and waste. In the United Kingdom, we have reduced GHG emissions by 69% versus the baseline attributable to ongoing energy efficiency improvements, fuel switching and renewable energy certificates for indirect and direct energy consumption.
We continued to invest in our Learning for Life hospitality skills programme, adding an initiative in Greece to those in the United Kingdom, Italy, Spain, Ireland, Portugal, the Netherlands, Belgium and Germany. In doing so, we reached over 1,400 people in total across the region. We also provided further support to the Open Doors initiative in Ireland, with funding to establish it as a standalone entity. Open Doors gives opportunities to refugees, asylum seekers and non-native English speakers; young people under 25 with educational barriers; and people with disabilities.
As in all our regions, promoting positive drinking, with a focus on moderation, remains a key priority. Our ‘Weekend Not Wasted’ campaign to encourage 18-24-year-olds to drink responsibly was viewed by over 4 million people in the United Kingdom, Spain, Denmark and Germany. Our ‘Smashed’ theatre-based programme to tackle underage drinking, which began in this region, continued to go from strength to strength. Through the programme, we reached 119,000 young people in the United Kingdom, Ireland, Spain, Portugal and Italy.
Performance
Sales and net sales
Sales decreased by £435 million, or 8%, to £4,697 million in the year ended 30 June 2020 from £5,132 million in the year ended 30 June 2019. Excise duties were £2,130 million in the year ended 30 June 2020 and £2,193 million in the year ended 30 June 2019, a decrease of £63 million.
Net sales (sales less excise duties) were £2,567 million for the year ended 30 June 2020 a decrease of £372 million, or 13%, compared to net sales of £2,939 million in the year ended 30 June 2019. Net sales were negatively impacted by organic decrease of £358 million (see further performance analysis below), and unfavorable exchange rate movements of £23 million primarily due to the weakening of the euro and the Turkish lira against sterling. This decrease was partially offset by the impact of acquired and disposed businesses of £9 million.
Operating profit
Operating profit was £695 million in the year ended 30 June 2020 a decrease of £301 million compared to operating profit of £996 million in the year ended 30 June 2019. Operating profit decreased by £243 million organic decline, by exceptional losses of £62 million due to Covid-19 pandemic related implications (£41 million “Raising the Bar” provision, £17 million stock write-off and £4 million donation), by unfavorable exchange rate movements of £7 million primarily due to the weakening of the Turkish lira against sterling (£17 million translational exchange loss impact partially offset by £10 million transactional exchange gain impact), by a £5 million operational loss generated by acquired businesses, by a £4 million charge in respect of a fair value reassessment of contingent consideration liabilities in respect of prior year acquisitions. This decrease was partially offset by lapping exceptional charge of £18 million in respect of penalties on the settlement of the French tax audit and by £2 million of operating profit generated by disposed businesses.
Business review (continued)
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Europe and Turkey net sales declined 12%. Growth in the first half was more than offset by the impact of Covid-19 in the second half. High on-trade exposure significantly impacted markets across the region through the closures of the channel in many countries. In Europe, beer was particularly impacted, declining 20%. Growth of scotch in the first half was offset by declines in Continental Europe and France in the second half due to on-trade closures. Rum grew 3%, driven by Captain Morgan. Vodka declined 12%, driven mainly by Smirnoff in Continental Europe. Gin declined 9%, driven by declines of Gordon's and Tanqueray mainly in Continental Europe. Travel Retail was also severely impacted. In Turkey, net sales declined 6%, driven by declines in raki and vodka. Total operating margin declined 470bps. Impacts of the closure of the on-trade on volumes and adverse mix, bad debt provisions, along with one-offs and inflationary cost pressures in Turkey more than offset actions driving overhead and marketing spend savings through the second half.
|
| | | | | | | | | | | | |
| Markets: | | Organic volume movement % |
| | Reported volume movement % |
| | Organic net sales movement % |
| | Reported net sales movement % |
|
| Europe and Turkey | | (11 | ) | | (11 | ) | | (12 | ) | | (13 | ) |
| | | | | | | | | |
| Europe | | (10 | ) | | (10 | ) | | (12 | ) | | (12 | ) |
| Turkey | | (12 | ) | | (12 | ) | | (6 | ) | | (7 | ) |
| | | | | | | | | |
| Spirits | | (11 | ) | | (11 | ) | | (11 | ) | | (11 | ) |
| Beer | | (16 | ) | | (16 | ) | | (20 | ) | | (21 | ) |
| Ready to drink | | (3 | ) | | (3 | ) | | (1 | ) | | — |
|
Global giants and local stars(i): | | | | Organic
volume
movement(ii)
% |
| | Organic
net sales
movement
% |
| | Reported
net sales
movement
% |
|
| Guinness | | | | (19 | ) | | (20 | ) | | (21 | ) |
| Johnnie Walker | | | | (17 | ) | | (20 | ) | | (21 | ) |
| Baileys | | | | (4 | ) | | (6 | ) | | (8 | ) |
| Smirnoff | | | | (14 | ) | | (11 | ) | | (12 | ) |
| Captain Morgan | | | | 2 |
| | 6 |
| | 6 |
|
| Yenì Raki | | | | (22 | ) | | (15 | ) | | (15 | ) |
| Tanqueray | | | | (12 | ) | | (15 | ) | | (16 | ) |
JƐB | | | | (18 | ) | | (17 | ) | | (17 | ) |
| |
(i) | Spirits brands excluding ready to drink.
|
| |
(ii) | Organic equals reported volume movement. |
Business review (continued)
Market highlights
| |
– | In Europe, net sales were down 12%:
|
| |
– | In Great Britain, net sales declined 4%. Solid first half results were offset by the impact of on-trade closures from March despite an increase in off-trade sales. The impact was further amplified by the cancellation of significant sporting and cultural events. Continued growth in rum and liqueurs were offset by declines in beer, scotch, wine and vodka. Guinness was impacted by on-trade closures and the decision to support customers, and maintain product quality, through a keg return scheme. Focus on e-commerce was upweighted as partnerships were strengthened on activities to drive consumer engagement and sales.
|
| |
– | Ireland net sales declined 20%. A soft first half performance was further exacerbated by on-trade closures. Beer declined 22%. Rockshore continued to grow double-digit through Rockshore Cider and high single-digit in Rockshore Lager despite Covid-19 lockdown restrictions. This was offset by declines in Guinness, driven by closure of the on-trade and further impacted by a keg return scheme to support customers and maintain product quality. Total spirits declined 10%, as off-trade sales increases were not sufficient to offset Covid-19 related closures of the on-trade.
|
| |
– | In Continental Europe, net sales declined 15%:
|
| |
– | Iberia net sales were down 22%. Growth in the first half was offset by the impact of lockdowns affecting the on-trade channel and tourism in the second half, which accounts for a high proportion of sales in the market. On-trade investment was placed on hold as resources were deployed to the off-trade to support customers and activations in the off-trade.
|
| |
– | In Central Europe, net sales declined 9%. Strong double-digit performance in the first half was impacted by on-trade lockdowns across the market in the second half. Captain Morgan performance was flat while Baileys, Smirnoff and Johnnie Walker declined.
|
| |
– | In Northern Europe net sales declined 1%. Good first half performance was offset by the cancellation of key events and on-trade closures in the second half. Resilient performance due to rum growth, driven by Captain Morgan Original Spiced Rum, and gin driven by Gordon’s Premium Pink Distilled Gin and Tanqueray Flor de Sevilla innovations in the second half, was offset by declines in scotch
|
| |
– | In the Mediterranean Hub, net sales declined 26%. Growth in the first half was offset by on-trade closures and significantly reduced tourism which severely impacted volume.
|
| |
– | In Europe Partner Markets, net sales declined 19%. Rum and tequila growth were offset by declines in scotch and beer. Declines were mainly due to lockdowns affecting the on-trade, and while absolute inventory levels were reduced, they remain elevated relative to demand. Guinness also responded with a keg return scheme to support the channel and protect product quality.
|
| |
– | Russia net sales were down 8%. Growth in gin was offset by declines in scotch and rum.
|
| |
– | France net sales declined 5%. Good growth in rum was offset by a decline in scotch, driven by competitive challenges and category declines in standard scotch, and on-trade closures.
|
| |
– | In Turkey, net sales declined 6%. Double-digit growth in the first half was offset by on-trade closures from March. Scotch declined 3%, as Bell's growth was offset by Johnnie Walker and VAT 69. Raki declined 9%, with volume declines driven by ongoing impacts from excise increases in the first half and on-trade restrictions. Commercial and marketing teams were repurposed to focus on growth categories and less affected channels.
|
| |
– | Marketing investment declined 12%, in line with net sales. On-trade marketing spend was reduced, with some redeployed to digital, while focus was placed on e-commerce partnerships to deliver key celebrations as well as online platforms.
|
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 |
|
|
|
|
|
|
l | Nigeria |
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | |
| Key financials | | 2019
£ million |
| | Exchange
£ million |
| | Acquisitions
and
disposals
£ million |
| | Organic movement
£ million |
| | 2020
£ million |
| | Reported movement
% |
|
| Net sales | | 1,597 |
| | (10 | ) | | (41 | ) | | (200 | ) | | 1,346 |
| | (16 | ) |
| Marketing | | 174 |
| | — |
| | — |
| | (14 | ) | | 160 |
| | (8 | ) |
| Operating profit before exceptional items | | 275 |
| | (21 | ) | | (3 | ) | | (150 | ) | | 101 |
| | (63 | ) |
Exceptional operating items(i) | | — |
| |
| |
| |
| | (145 | ) | |
|
| Operating profit | | 275 |
| |
| |
| |
| | (44 | ) | | (116 | ) |
(i) For further details on exceptional operating items see pages 213-216.
In Africa our strategy is to grow through selective participation in beer and spirits, leveraging a broad 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 operate a fit for purpose operating model building resilience into our business and we drive smart investments to manufacturing, innovations and partnerships to unlock growth.
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 and Uganda), Africa Regional Markets (Ghana, Cameroon, Ethiopia, Indian Ocean and Angola), Nigeria and South Africa.
Supply operations
We have 13 breweries in Africa and ten facilities which provide blending and malting services. In the year ended 30 June 2020 we completed the disposal of our sorghum beer business and our cider plant in South Africa.
In addition, our beer and spirits brands are produced under licence by third parties in 14 African countries and distribute beer and spirits through several 3rd party relationships across the region. In the year ended 30 June 2020 we agreed a contract for AB InBev to manufacture, sell and market Smirnoff ready to drink products and Guinness in South Africa.
Business review (continued)
Route to consumer
Diageo has wholly owned entities in South Africa, Cameroon, Ethiopia, and Reunion. It has controlling stakes in East Africa Breweries Limited (EABL), Guinness Nigeria, Guinness Ghana and Seychelles Breweries Limited and a majority stake in a JV in Angola. In addition, Diageo has contract brewing arrangements in several countries across the region, most notably with the Castel Group as well as spirits distribution contracts in almost 30 countries.
Sustainability and responsibility
Across Africa, more than 78,600 smallholder farmers and suppliers provide us with our raw materials, and we work with farmers to improve crop yield, livelihoods, and environmental and labour standards. We sourced 79% of agricultural raw materials locally within Africa for use by our African markets, compared with 82% last year. This percentage fell slightly as Covid-19 restrictions pushed us just below our target of 80%.
In 2019, we announced a £180 million investment in 11 breweries across Africa that include solar and biomass energy, and water treatment plants. We also co-founded the Africa Plastics Recycling Alliance, through which this year we secured regulatory approval in Nigeria for the use of rPET (recycled polyethylene terephthalate), which will encourage rPET investment. In Nigeria, through our partnership with the Food Beverage Recycling Alliance and Lagos State WaterWays Authority, we launched a clean-up programme to remove plastic waste from water sources in Lagos. In Ghana, we began monthly community clean-ups and a plastics buy-back programme, and continued to develop the pioneering GRIPE partnership to build plastic collection, recycling and reprocessing infrastructure.
Through our ongoing partnership with the NGO WaterAid, we brought clean water and a sanitation programme to 21,000 people in Nigeria. And, with partners such as Amref Health Kenya, the Kenya Red Cross and WaterHealth International, we reached over 173,000 people across Ghana, Kenya, South Africa, Uganda, Ethiopia, Tanzania, Chad and Cameroon. In Kenya, we worked with Nature Kenya, Kenya Forest Services, and community forest associations to plant 180,000 trees in Kisumu county, where our new brewery is located.
To promote positive drinking, this year we signed up 1.1 million pledges never to drink and drive in Nigeria through #JoinThePact, with another 2.3 million pledges across 10 further markets. Through our ‘Smashed’ theatre-based programme, we educated 80,000 young people across the region about the dangers of underage drinking.
Performance
Sales and net sales
Sales decreased by £324 million, or 14%, to £1,911 million in the year ended 30 June 2020 from £2,235 million in the year ended 30 June 2019. Excise duties were £565 million in the year ended 30 June 2020 and £638 million in the year ended 30 June 2019, a decrease of £73 million.
Net sales (sales less excise duties) were £1,346 million in the year ended 30 June 2020, a decrease of £251 million, or 16%, compared to net sales of £1,597 million in the year ended 30 June 2019. Net sales were unfavourably impacted by organic decline of £200 million (see further performance analysis below), by a reduction of £41 million of net sales generated by disposed businesses, and by exchange rate movements of £10 million primarily due to the weakening of the Ghanaian cedi and the South African rand against sterling.
Operating profit
Operating loss was £44 million in the year ended 30 June 2020 a decrease of £319 million compared to operating profit of £275 million in the year ended 30 June 2019. Operating profit decreased by £150 million organic decline, by an exceptional charge of £139 million in respect of Nigeria and Ethiopia fixed asset impairment, by £21 million as a result of exchange rate movements due to the weakening of the Nigerian naira, the Ghanaian cedi and the South African rand (unfavourable £17 million transactional and £4 million translational exchange impact), by exceptional losses of £6 million due to Covid-19 pandemic related implications (£4 million “Raising the Bar” provision and £2 million stock write-off), and a decrease in operating profit of £3 million generated by disposed businesses.
Business review (continued)
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Africa net sales declined 13%. Growth in the first half was offset by the impact of Covid-19 in the second half. East Africa declined 10% where continued beer growth in Tanzania was offset by lockdown closures affecting the on-trade in Kenya and Uganda. Net sales in Nigeria declined 20%, driven by double-digit declines in beer and scotch. In South Africa, net sales declined 25%, driven by scotch and vodka, as a result of both on-trade and off-trade closures and a troubled economic climate. Africa Regional Markets declined 8%, as strong beer growth in Ghana was offset by on-trade closures and the impact of significant excise increases in Ethiopia. Beer declined 13% as growth of Serengeti was offset by other key beer brands, including Guinness, Tusker and Senator, mainly due to on-trade closures. Spirits declined 14%, mainly impacting Johnnie Walker, Kenya Cane and Smirnoff. Operating margin declined 877bps, driven mainly by volume losses that caused lower fixed cost absorption and excise duty increases. These were partially offset by marketing spend savings and improved overhead management.
|
| | | | | | | | | | | | |
| Markets: | | Organic volume
movement(iii)
% |
| | Reported volume
movement
% |
| | Organic
net sales
movement
% |
| | Reported
net sales
movement
% |
|
| Africa | | (13 | ) | | (14 | ) | | (13 | ) | | (16 | ) |
| | | | | | | | | |
| East Africa | | (11 | ) | | (11 | ) | | (10 | ) | | (9 | ) |
| Africa Regional Markets | | (12 | ) | | (17 | ) | | (8 | ) | | (13 | ) |
| Nigeria | | (10 | ) | | (10 | ) | | (20 | ) | | (19 | ) |
| South Africa | | (23 | ) | | (25 | ) | | (25 | ) | | (33 | ) |
| | | | | | | | | |
| Spirits | | (10 | ) | | (10 | ) | | (14 | ) | | (15 | ) |
| Beer | | (16 | ) | | (16 | ) | | (13 | ) | | (13 | ) |
| Ready to drink | | (6 | ) | | (17 | ) | | (7 | ) | | (27 | ) |
Global giants and local stars(i): | | | | Organic volume
movement(ii)
% |
| | Organic net sales
movement
% |
| | Reported net sales
movement
% |
|
| Guinness | | | | (17 | ) | | (16 | ) | | (16 | ) |
| Johnnie Walker | | | | (8 | ) | | (18 | ) | | (19 | ) |
| Smirnoff | | | | (25 | ) | | (23 | ) | | (25 | ) |
| Malta | | | | (16 | ) | | (10 | ) | | (13 | ) |
| Senator | | | | (16 | ) | | (13 | ) | | (12 | ) |
| Tusker | | | | (22 | ) | | (20 | ) | | (20 | ) |
| Serengeti | | | | 15 |
| | 19 |
| | 22 |
|
| |
(i)Asia Pacific contributed | Spirits brands excluding ready to drink.
| Asia Pacific organic net sales grew |
| 19% of Diageo reported net sales in fiscal 23 | | 13% in fiscal 23 |
| | |
(ii) | Organic equals reported volume movement. Reported net sales by market (%)
|
| | |
(iii) | Africa, Africa Regional Markets, South Africa and Ready to drink reported volume movement impactedReported net sales by acquisitions and disposals.category (%) |
(1) Reported volume movement has been impacted by acquisitions and/or disposals. For further details see pages 282 and 285.
(2) Spirits brands excluding ready to drink and non-alcoholic variants.
(3) Organic equals reported volume movement.
(4) Growth figures represent total Chinese white spirits of which Shui Jing Fang is the principal brand.
Business review (continued)
Market highlights
| |
– | In East Africa, net sales declined 10%. Strong first half growth, and a continuation of resilient sales growth in Tanzania in the second half, was offset by volume declines in other markets. Tanzania grew 14% as it was minimally impacted by limited Covid-19 related lockdowns, and benefitted from the ongoing successes of Serengeti Lager and Serengeti Lite. Kenya declined 14%, driven by the high exposure to on-trade closures impacting Senator Keg and other beer sales, which was partially offset by vodka, driven by double-digit growth in Chrome and Triple Ace. Increased focus in the off-trade and e-commerce channels partially recovered lost on-trade sales.
|
| |
– | In Africa Regional Markets, net sales declined 8%. Resilient growth in Ghana during the year was offset by double-digit declines in Cameroon and Ethiopia. Due to the impact of Covid-19 in the second half, beer and spirits inventory levels were reduced. Ghana grew 5%, driven by continued success of the ABC Lager innovation and Malta Guinness growth, which addressed consumer shifts for portability and non-returnable formats throughout lockdown. Cameroon declined 15% due to one-off production challenges in the first half, with the second half impacted by Covid-19 driving declines in Guinness in the on-trade. Ethiopia declined 24%, as beer and international premium spirits growth was impacted by excise increases, supply issues and the impact of on-trade closures. Impacts of shutdowns were partially offset as markets reprioritised brand packs to capture off-trade consumer shifts.
|
| |
– | In Nigeria, net sales declined 20%. First half growth was offset by volume impacts from Covid-19 restrictions as it exacerbated an already challenging economic climate; while VAT and spirits excise increases also impacted consumer demand in a competitive environment. Robust performance of Orijin Bitters, successful spirits innovations, and increased at-home consumption, were offset by declines in beer. Malta Guinness and Guinness were impacted by on-trade closures. Increased focus on the off-trade and e-commerce channels, through the introduction of trade telesales and consumer platforms together with an online store, reduced some impacts of lockdown.
|
| |
– | South Africa net sales declined 25%. Economic and social challenges in the first half were further exacerbated by the banning of alcohol sales across all channels from 27 March to 31 May. While absolute inventory levels were reduced, they remain elevated relative to demand. Scotch and vodka were most affected with double-digit declines, as a result of the softening economic climate and consumer shifts into the mainstream gin category
|
| |
– | Marketing investment declined 8%. We rapidly reacted to consumer shifts in the second half, through telesales, pack reprioritisation and the redeployment of investment to e-commerce and the off-trade.
|
Business review (continued)
Latin America and Caribbean
•Organic net sales grew 9%, with most markets delivering growth, despite lapping strong double-digit growth in fiscal 22. Growth was broad-based across price tiers, except for value, which declined as a result of our premiumisation strategy. Strong price/mix was partially offset by a 3% decline in volume, primarily in the value price tier. Double-digit sales growth in the first half of fiscal 23 was followed by inventory normalisation in the second half.
•Price/mix was driven by strong price increases across all markets, and positive mix supported by the strength in premium-plus scotch in most markets.
•Spirits net sales grew 11%, primarily led by double-digit growth in scotch, particularly Johnnie Walker Black Label, Johnnie Walker Red Label and Old Parr. Growth was also driven by strong double-digit growth in Don Julio and Smirnoff.
•Organic operating margin expanded by 72bps. The positive impact of price increases, premiumisation, leverage on operating costs and one-off tax benefits more than offset the increases in marketing investment and cost inflation.
•Marketing investment grew 14%, ahead of organic net sales growth, with increased investment in most markets.
•We reached more than 176 million people with campaigns promoting moderation. They included ‘Derribando Mitos’, a campaign created in fiscal 21 for Peru and expanded this year to the Caribbean and Central America market. It aims to challenge myths about alcohol consumption.In fiscal 23, 'Derribando Mitos' reached more than 51 million people in countries.
•The SMASHED programme educated 984,213 young people on the dangers of underage drinking.
•We reduced our Scope 1 and 2 carbon emissions by 32%. Tequila was the biggest contributor, through new or upgraded biomass boilers in Mexico, and our changing production mix has also played a part.
•We generated the annual capacity to replenish more than 280,977 m3 through water sanitation and hygiene, tree planting and water catchment rehabilitation projects for communities in Brazil and Mexico.
Market highlights:
•Brazil net sales grew 8%, led by double-digit growth in Johnnie Walker and Old Parr. Growth was driven by price increases and higher marketing investment, leading to market share growth.
•Mexico net sales grew 9%, primarily driven by scotch and tequila. Scotch growth was led by Johnnie Walker Red Label and Johnnie Walker Black Label, driven by price increases. Tequila growth was driven by price increases, the lapping of aged liquid supply constraints in fiscal 22 and increased marketing investment.
•Central America and Caribbean (CCA) net sales grew 14%, mainly driven by scotch and tequila. Growth was driven by price increases, premiumisation and continuing momentum in the on-trade. Scotch growth was mostly driven by Johnnie Walker Black Label and Buchanan's, supported by increased marketing investment. Tequila growth was driven by Don Julio 1942.
•South LAC (Argentina, Bolivia, Chile, Ecuador, Paraguay, Peru and Uruguay) net sales grew 21%, primarily driven by scotch, vodka and gin. Growth was driven by price increases and premiumisation, partially offset by a decline in volume.
•Andean (Colombia and Venezuela) net sales declined 7%, due to an adverse macroeconomic environment in Colombia. Strong price increases and premiumisation were more than offset by a decline in volume.
Key financials
| | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | Exchange | | Acquisitions and disposals | Organic movement | Other(1) | 2023 | Reported movement |
| £ million | £ million | | £ million | £ million | £ million | £ million | % |
| Net sales | 1,525 | | 129 | | | 3 | | 142 | | — | | 1,799 | | 18 | |
| Marketing | 243 | | 18 | | | 1 | | 34 | | — | | 296 | | 22 | |
| Operating profit | 538 | | 52 | | | — | | 62 | | 9 | | 661 | | 23 | |
| | | | | | | | |
| | | | | | | | |
(1) Fair value remeasurements. For further details see page 65.
Business review (continued)
Business review (continued)
| | | | | | | | | | | | | | |
| Markets and categories | Organic volume
movement
% | Reported volume
movement
% | Organic net sales
movement
% | Reported net sales
movement
% |
Latin America and Caribbean(1) | (3) | | (3) | | 9 | | 18 | |
| | | | |
Brazil(2) | (1) | | 3 | | 8 | | 29 | |
Mexico(1) | (4) | | (3) | | 9 | | 30 | |
| CCA | 1 | | 1 | | 14 | | 21 | |
South LAC(2) | (3) | | (11) | | 21 | | — | |
Andean(1) | (24) | | (24) | | (7) | | (13) | |
| | | | |
Spirits(1) | (3) | | (3) | | 11 | | 19 | |
| Beer | 9 | | 9 | | 16 | | 25 | |
| Ready to drink | (13) | | (13) | | (7) | | — | |
Global giants and local stars(3) | Organic volume movement(4) % | Organic
net sales
movement
% | Reported
net sales
movement
% |
| Johnnie Walker | | 4 | | 16 | | 23 | |
| Buchanan’s | | (5) | | 6 | | 11 | |
| Don Julio | | 6 | | 22 | | 40 | |
| Old Parr | | 10 | | 20 | | 26 | |
| Smirnoff | | 3 | | 18 | | 24 | |
| Black & White | | (7) | | 13 | | 26 | |
| Tanqueray | | — | | — | | 5 | |
| Baileys | | (18) | | (5) | | 1 | |
|
| | | | | | | |
l | PUB | l | Andean | l | Spirits | l | Ready to drink |
l | Mexico | l | PEBAC | l | Beer | l | Other |
l | CCA | l | Other (principally
Travel Retail) |
|
|
|
|
| |
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Key financials | | 2019
£ million |
| | Exchange
£ million |
| | Reclassifi-cation(i) £ million |
| | Acquisitions
and
disposals
£ million |
| | Organic movement
£ million |
| | Other(ii) £ million |
| | 2020
£ million |
| | Reported movement
% |
|
| Net sales | | 1,130 |
| | (42 | ) | | (10 | ) | | (1 | ) | | (169 | ) | | — |
| | 908 |
| | (20 | ) |
| Marketing | | 201 |
| | (7 | ) | | (10 | ) | | — |
| | (29 | ) | | — |
| | 155 |
| | (23 | ) |
| Operating profit before exceptional items | | 365 |
| | (26 | ) | | — |
| | — |
| | (107 | ) | | 16 |
| | 248 |
| | (32 | ) |
Exceptional operating items(iii) | | — |
| | | | | | | | | | | | (6 | ) | | |
| Operating profit | | 365 |
| | | | | | | | | | | | 242 |
| | (34 | ) |
(i) For the year ended 30 June 2019 trade investment of £10 million have been reclassified from marketing to trade spend.
| |
(ii)Latin America and Caribbean contributed | The adjustment to cost | Latin America and Caribbean organic net sales grew |
11% of Diageo reported net sales reflects the elimination of fair value changes for biological assets in respect of growing agave plants. The adjustment to other operating expenses is the elimination of fair value changes to contingent consideration liabilitiesfiscal 23 | | 9% in respect of prior year acquisitions.fiscal 23 |
| | |
(iii) | For further details on exceptional operating items see pages 213-216.Reported net sales by market (%)
|
| | |
| Reported net sales by category (%) |
In Latin America
(1) Reported volume movement has been impacted by acquisitions and/or disposals. For further details see pages 282-285.
(2) From 1 July 2022 Uruguay and Caribbean our strategic priority is to continue to lead with scotch, while broadening our category range through tequila, gins, vodka, rum, liqueurs and local spirits. As the industry leaders in spirits, we continue to strategically expand our reach and the breadth and depth of our portfolio of leading brands. Simultaneously, we are enhancing our supply structure enabling the business to widen our price points, providing both the emerging middle class, and an increasing number of affluent consumers with the premium brands they aspire to buy. Our presence is strengthened by our stanceParaguay domestic channels moved on responsible drinking and community development programmes.
Our markets
Our Latin America and Caribbean (LAC) business comprises five markets:a management basis from PUB (Paraguay, Uruguay and Brazil), Mexico, CCA (Central America and Caribbean), Andean (Colombia and Venezuela) and to PEBAC (Peru, Ecuador, Bolivia, Argentina and Chile).
Supply operations
Many of the brands sold in the region are manufactured by our International Supply Centre in Europe, but we also own manufacturing facilities in Mexico that produce tequila, in Brazil to produce cachaça and vodka, and in Guatemala that produce Zacapa rum. We also work with a wide array of local co-packers, bottlers, and licensed brewers throughout Latin America and the Caribbean.new cluster has been called South LAC. This reflects how management reviews performance.
(3) Spirits brands excluding ready to drink and non-alcoholic variants.
Route to consumer(4) Organic equals reported volume movement.
We drive an efficient route to consumer through differentiated models tailored to each markets’ size and needs. In Mexico and Brazil our in-market companies sell to a wide network of retailers, wholesalers, and resellers which make our product available to shoppers in both the on and off premise outlets. In most of Central America and the Caribbean, Argentina, Ecuador, Bolivia, and Venezuela, we partner with geographically exclusive distributors who are in charge of the sales execution and marketing programmes. In Colombia,
Business review (continued)
Africa
Peru,
•Reported net sales grew 1%, primarily driven by organic growth and Chile, we use hybrid models where Diageo sells directly to some key accounts while distributors are used to improve our products’ physical availability.disposals, mostly offset by an unfavourable impact from foreign exchange.
•Organic net sales grew 5%, with growth across all markets, except East Africa. Growth was driven by price increases, partially offset by a decline in volume.
Sustainability•Price/mix of 12% was driven by price increases across all markets and responsibility
We continued to focus on environmental improvements, particularly around water. In Brazil, we are constructing a new facility in Ceará state, which will bring together production from two existing sites. It will use solar energy, and water and effluent treatment facilities to reduce water consumption in beverage production by up to 40%. In Mexico, we plan to reuse over 25% of the water involved in production. This year we completed the expansion of our production site in Jalisco, Mexico, which includes our largest water treatment plantpositive mix. Volume declines were primarily in the region,value and standard price tiers.
•Spirits net sales grew 8%, driven by growth in international spirits particularly Johnnie Walker Black Label, and Orijin.
•Beer net sales grew 3%, with strong growth in Africa Regional Markets and Nigeria, partially offset by a boiler powereddecline in East Africa. Growth was primarily driven by wood chipsMalta Guinness and bagasse, a by-product of agave.Guinness, which grew 22% and 7% respectively.
•Organic operating margin expanded by 126bps, primarily driven by price increases, productivity savings, positive category mix and lapping prior year one-off costs. These impacts were partially offset by cost inflation.
We have worked hard to promote positive drinking, especially around reducing drink driving through our partnership with the United Nations Institute for Training and Research (UNITAR). In Brazil, we work with UNITAR and other stakeholders to support UNITAR’s programmes to promote road safety. In the Dominican Republic we work with UNITAR, the International Alliance for Responsible Drinking, and other industry partners to help the government with its breathalyser programme, including through training and by donating equipment for checkpoints.
We also•Marketing investment grew 2%, focused on reducing underage drinking through local adaptations of our ‘Smashed’ theatre-based programme. This year, in Brazil we reached 80,000supporting spirits premiumisation and Guinness.
•The SMASHED programme educated 548,478 young people through liveon the dangers of underage drinking.
•We reduced our Scope 1 and online versions2 carbon emissions by 33%, thanks largely to commissioning and optimising three biomass facilities in Kenya and Uganda.
•Our water efficiency decreased by 2.6% because of ‘Fala Sério’;lower production volumes. We partly mitigated this by commissioning our water recovery plants in Peru, we reached 4,700 studentsNigeria and further optimising our water recovery plants in the second year of ‘La Bomba’; in Colombia we reachedKenya and Uganda.
•We trained more than 13,000 students with ‘Sacúdete’;9,517 people (51% women) in business and in Mexico, we reached 5,200 teachers, parents and 7-9-year-olds with ‘Teiquirisi Club’.
Ourhospitality skills through our Learning for Life programme in seven countries, including for the first time, Mozambique.
•Our community water, sanitation and hygiene (WASH) programmes continue to promote skillsprovided clean water, sanitation and hygiene for water-stressed communities near our sites in the hospitality industry. This year, we began a new, 100% online programme of training in entrepreneurial skills for women in Atotonilco, Mexico, where we produce Don Julio. We also supported ‘Weaving the Future’ in Ceará, Brazil, for women in prison, reaching over 40 women so far. Through the programme they receive personal skills training, as well as technical and professional training in carnauba straw craftsmanship, to help them prepare for a better life when they are released.all our water-stressed markets.
Performance
Sales and net sales
Sales decreased by £260 million, or 18%, to £1,184 million in the year ended 30 June 2020 from £1,444 million in the year ended 30 June 2019. Excise duties were £276 million in the year ended 30 June 2020 and £314 million in the year ended 30 June 2019, a decrease of £38 million.
Net sales (sales less excise duties) were £908 million in the year ended 30 June 2020 a decrease of £222 million, or 20%, compared to net sales of £1,130 million in the year ended 30 June 2019. Net sales were unfavourably impacted by organic decline of £169 million (see further performance analysis below), by exchange rate movements of £42 million due to the weakening of the Brazilian real, Argentine peso, and the Colombian peso against sterling, by trade investment reclassification of £10 million and £1 million generated by disposed businesses.
Operating profit
Operating profit was £242 million in the year ended 30 June 2020 a decrease of £123 million compared to operating profit of £365 million in the year ended 30 June 2019. Operating profit was unfavourably impacted by organic decline of £107 million, by unfavourable exchange rate movements of £26 million due to the weakening of the Brazilian real, Argentine peso, and the Colombian peso against sterling (£7 million translation impact and £19 million transactional exchange impact) and by exceptional losses of £6 million due to Covid-19 pandemic related implications (£5 million “Raising the Bar” provision and £1 million stock write-off). This decrease was partially offset by an increase in operating profit of £16 million following a fair value reassessment (£9 million biological assets fair value adjustment and £7 million of fair value remeasurement 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.
Latin America and Caribbean•East Africa net sales declined 15%2%. PerformanceGrowth in the second half continued to be impacted by economic and socio-political pressures in key markets compounded by the impact of the Covid-19 pandemic. All markets declined except Andean which grew 8% due to a strong first half and continued momentum in scotch in Colombia. Scotch overall declined 21% as growth in Buchanan's in Colombia and Brazil, and White Horse in Brazil, were offset by declines in Johnnie Walker across the region. Gin grew double-digit primarily driven by Tanqueray in Brazil. Tequila was down 11% as strong Don Julio performance in Caribbean and Central Americaspirits was more than offset by a volume decline in Mexico. Operating margin for the regionbeer following price and duty increases. Spirits growth was down 544bps due to the adverse impact of product mixprimarily driven by scotch, particularly Johnnie Walker.
•Africa Regional Markets net sales grew 22% led by growth in beer, primarily driven by Malta Guinness supported by price increases. Spirits growth was primarily driven by Johnnie Walker Black Label.
•Nigeria net sales grew 11%. Growth was led by Guinness and lower fixed cost absorption despite actions taken to reduce discretionary spend.Orijin.
•South Africa net sales grew 1%, primarily driven by growth in tequila and rum, which offset declines in vodka and gin. Super-premium-plus brands grew strongly at 38%.
Key financials
| | | | | | | | | | | | | | | | | | | | | | |
| 2022 | Exchange | | | Acquisitions and disposals | Organic movement | 2023 | Reported movement |
| £ million | £ million | | | £ million | £ million | £ million | % |
| Net sales | 1,682 | | (40) | | | | (26) | | 83 | | 1,699 | | 1 | |
| Marketing | 199 | | (3) | | | | (5) | | 4 | | 195 | | (2) | |
| Operating profit before exceptional items | 315 | | (141) | | | | 9 | | 37 | | 220 | | (30) | |
Exceptional operating items(1) | — | | | | | | | (44) | | |
| Operating profit | 315 | | | | | | | 176 | | (44) |
| | | | | | | | |
| | | | | | | | |
(1) For further details on exceptional operating items see pages 65 and 219-220.
|
| | | | | | | | | | | | |
| Markets: | | Organic volume
movement
% |
| | Reported volume
movement
% |
| | Organic net sales
movement
% |
| | Reported net sales
movement
% |
|
| Latin America and Caribbean | | (15 | ) | | (15 | ) | | (15 | ) | | (20 | ) |
| | | | | | | | | |
| PUB | | (14 | ) | | (14 | ) | | (7 | ) | | (17 | ) |
| Mexico | | (14 | ) | | (14 | ) | | (19 | ) | | (21 | ) |
| CCA | | (17 | ) | | (18 | ) | | (16 | ) | | (16 | ) |
| Andean | | 2 |
| | 3 |
| | 8 |
| | (2 | ) |
| PEBAC | | (29 | ) | | (29 | ) | | (44 | ) | | (47 | ) |
| | | | | | | | | |
| Spirits | | (16 | ) | | (16 | ) | | (16 | ) | | (21 | ) |
| Beer | | (10 | ) | | (10 | ) | | (9 | ) | | (11 | ) |
| Ready to drink | | — |
| | — |
| | 8 |
| | 2 |
|
Global giants and local stars(i): | | Organic
volume
movement(ii)
% |
| | Organic
net sales
movement
% |
| | Reported
net sales
movement
% |
|
| Johnnie Walker | | | | (27 | ) | | (29 | ) | | (33 | ) |
| Buchanan’s | | | | (15 | ) | | (14 | ) | | (17 | ) |
| Old Parr | | | | (17 | ) | | (16 | ) | | (20 | ) |
| Smirnoff | | | | (7 | ) | | 4 |
| | (2 | ) |
| Black & White | | | | (9 | ) | | (10 | ) | | (18 | ) |
| Tanqueray | | | | 6 |
| | 17 |
| | 7 |
|
| Baileys | | | | (15 | ) | | (13 | ) | | (21 | ) |
| |
(i) | Spirits brands excluding ready to drink. |
| |
(ii) | Organic equals reported volume movement. |
Business review (continued)
Market highlights61
| |
– | In PUB (Paraguay, Uruguay and Brazil), net sales declined 7%, mainly driven by scotch declining 11% across the market. Brazil declined 5% as a solid first half was fully offset by Covid-19 on-trade closures and domestic and foreign travel restrictions. Momentum in gin continued as Tanqueray and Gordon’s grew double digit supported by major marketing campaigns. In Brazil, scotch net sales declined 6% as double-digit growth of White Horse and Buchanan’s was offset by declines in Johnnie Walker and Black & White. Johnnie Walker decline was driven by a strong reliance on the on-trade and border stores as well as the weakening economy and devaluation impacting consumption. Super-premium scotch remained resilient through actions taken to address the at-home occasion via digital activations and supporting availability of cocktail offerings.
|
| |
– | In Mexico, net sales were down 19% as the economic slowdown continued into the second half and was amplified by Covid-19, including the reduction of on-trade wholesaler inventory and stock returns to support customers. Despite this, the successful Smirnoff X1 Spicy Tamarind innovation delivered strong growth building on local cues and strong activations. This was fully offset by the softening of the scotch category, challenging trading conditions in the first half, and declines in Don Julio due to competitive pricing pressure. Tequila production was secured amidst non-essential business closures along with an enhanced focus on e-commerce and off-trade partnerships.
|
| |
– | In CCA (Caribbean and Central America), net sales decreased 16% as broad-based growth in the first half was subsequently disrupted by restrictions to curtail the spread of Covid-19. The tequila category grew during the year driven by double-digit growth of Don Julio led by strong activations, however all other categories declined due to reduced tourism, on-trade closures and Covid-19 related bans of alcohol sales. At-home occasion promotions and the launch of e-commerce platforms with our partners partially offset net sales declines.
|
| |
– | Andean (Colombia and Venezuela) net sales increased 8% driven by Colombia. Scotch net sales grew mid-single digit driven by Buchanan’s, as double digit first half sales growth was followed by a resilient second half. Johnnie Walker was flat as on-trade closures muted strong first half performance of Johnnie Walker Red Label and Johnnie Walker Black Label. Brands such as Buchanan's, Baileys and Smirnoff X1 Lulo benefitted from an agile shift of activations to at-home consumption, streamlined route to consumer solutions and the refocusing of resources to e-commerce throughout the Covid-19 lockdown.
|
| |
– | PEBAC (Peru, Ecuador, Bolivia, Argentina and Chile) net sales declined 44% driven by continued social unrest across key markets compounded by the impact of Covid-19. Scotch declined significantly, however category share leadership was maintained across PEBAC benefiting from new and existing distribution partnerships. Strong double-digit growth of Smirnoff No.21 as it lapped a softer comparable period and the successful Smirnoff Bitter Citric innovation continued to drive vodka in Argentina.
|
| |
– | Marketing investment was down 15%, in line with the decline in net sales. Despite cost mitigations in the second half, support was continued behind key brands and home occasions with #homehour #digitaldrink #onlinedrinkswithfriends and ‘Digital Golden Hour’ campaigns.
|
Business review (continued)
| | | | | | | | | | | | | | |
| | | | |
| Organic
volume
movement | Reported
volume
movement | Organic
net sales
movement | Reported
net sales
movement |
| Markets and categories | % | % | % | % |
| Africa(1) | (7) | | (8) | | 5 | | 1 | |
| | | | |
| East Africa | (7) | | (7) | | (2) | | — | |
| Nigeria | (4) | | (4) | | 11 | | 12 | |
Africa Regional Markets(1) | (1) | | (9) | | 22 | | (5) | |
| South Africa | (18) | | (18) | | 1 | | (3) | |
| | | | |
Spirits(1) | (2) | | (2) | | 8 | | 7 | |
Beer(1) | (13) | | (14) | | 3 | | (3) | |
| Ready to drink(1) | — | | (4) | | 11 | | 5 | |
| | | | |
| | | | |
| | Organic
volume
movement(3) | Organic
net sales
movement | Reported
net sales
movement |
Global giants and local stars(2) | | % | % | % |
| Guinness | | (8) | | 7 | | 1 | |
| Johnnie Walker | | 5 | | 11 | | 8 | |
| Smirnoff | | (23) | | (6) | | (9) | |
| | | | |
| Other beer: | | | | |
| Malta Guinness | | (7) | | 22 | | 2 | |
| Senator | | (17) | | (4) | | (4) | |
| Tusker | | (8) | | (5) | | (4) | |
| Serengeti | | (7) | | (1) | | 8 | |
Asia Pacific
|
| | | | | | | |
l | India | l | South East Asia | l | Spirits | l | Ready to drink |
l | Greater China | l | North Asia | l | Beer | l | Other |
l | Australia | l | Other (principally
Travel Retail) | | | | |
| | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| Key financials | | 2019
£ million |
| | Exchange
£ million |
| | Acquisitions
and
disposals
£ million |
| | Organic movement
£ million |
| | 2020
£ million |
| | Reported movement
% |
|
| Net sales | | 2,688 |
| | 5 |
| | — |
| | (423 | ) | | 2,270 |
| | (16 | ) |
| Marketing | | 412 |
| | — |
| | — |
| | (47 | ) | | 365 |
| | (11 | ) |
| Operating profit before exceptional items | | 703 |
| | 5 |
| | — |
| | (207 | ) | | 501 |
| | (29 | ) |
Exceptional operating items(i) | | (35 | ) | |
| |
| |
| | (1,198 | ) | |
|
| Operating profit | | 668 |
| |
| |
| |
| | (697 | ) | | (204 | ) |
| |
(i)Africa contributed | For further details on exceptional operating items see pages 213-216. | Africa organic net sales grew |
| 10% of Diageo reported net sales in fiscal 23 | | 5% in fiscal 23 |
| | |
Reported net sales by market (%)
|
| | |
| Reported net sales by category (%) |
In Asia Pacific our focus is to grow in both developed
(1) Reported volume movement has been impacted by acquisitions and/or disposals. For further details see pages 282 and emerging markets across our entire portfolio ranging from international and local spirits to285.
(2) Spirits brands excluding ready to drink formats and beer. We have a clear long-term strategy that enables us to allocate resources behind brands that win in key consumer occasionsnon-alcoholic variants.
(3) Organic equals reported volume movement, except for Guinness and categories. We manage our portfolio to meet the increasing demandsMalta Guinness, which had reported volume movement of the growing middle class(9)% and aim to inspire our consumers to drink better, not more. This strategy ensures that we deliver consistent and efficient growth with a key focus on developing our premium and super deluxe segments across the region.(9)% respectively.
Our markets
Asia Pacific comprises India (including Nepal and Sri Lanka), Greater China (China, Taiwan, Hong Kong and Macau), Australia (including New Zealand), South East Asia (Vietnam, Thailand, Philippines, Indonesia, Malaysia, Singapore, Cambodia, Laos, Myanmar), North Asia (Korea and Japan) and Travel Retail Asia and Middle East.
Supply operations
We have distilleries in Chengdu, China that produce Baijiu and in Bundaberg, Australia that produce Bundaberg Rum. Our manufacturing plant in Bali produces the highest quality spirits for the Indonesian market. United Spirits Limited (USL) in India operates 16 manufacturing sites across the country. In addition, USL and Diageo brands are also produced under licence by third party manufacturers. We have bottling plants in Thailand and Australia with ready to drink manufacturing capabilities.
Business review (continued)
Corporate
Route to consumer
In South East Asia, spirits and beer are sold through a combination of Diageo companies, joint venture arrangements, and third party distributors. In Thailand, Malaysia and Singapore, we have joint venture arrangements with Moët Hennessy, sharing administrative and distribution costs. Diageo operates wholly owned subsidiaries in the Philippines and Vietnam. In addition, in Vietnam, we own a 45.57% controlling equity stake in Hanoi Liquor Joint Stock Company which manufactures and sells vodka. In Indonesia, Guinness is brewed by, and distributed through third party arrangements.
In Greater China our market presence is established through our 63.14% equity investment in Sichuan Shuijingfang Company Limited which manufactures and sells baijiu, and our wholly owned entity Diageo China Limited, which sells Diageo brands, and a joint venture arrangement with Moët Hennessy where administrative and distribution costs are shared. Diageo operates a wholly owned subsidiary in Taiwan.
In India, we manufacture, market and sell Indian whisky, rum, brandy and other spirits through our 55.94% shareholding in USL. Diageo also sells its own brands through USL.
In Australia, we manufacture, market and sell Diageo products. In New Zealand we operate through third party distributors. In North Asia, we have our own distribution company in South Korea. In Japan, the majority of sales are through joint venture agreements with Moët Hennessy and Kirin. Airport shops and airline operators are serviced through a dedicated Diageo sales and marketing organisation. In the Middle East, we sell our products through third party distributors.
Sustainability and responsibility
Tackling drink driving and underage drinking remain priorities for us across the region. In Thailand and the Philippines, we have been building on our partnership with the United Nations Institute for Training and Research (UNITAR) to address road safety, including by gathering 48,500 pledges in Thailand never to drink and drive through #JoinThePact. In India, we trained 2,942 enforcement officials on road safety and gathered 3 million pledges never to drink and drive through our ‘Road to Safety’ programme. To combat underage drinking, we brought our ‘Smashed’ theatre-based programme to the region and are now running it with local partners in Thailand, Taiwan, Indonesia, Australia and New Zealand. So far, we have reached more than 28,000 young people, parents and teachers, and in Australia we ran a live performance for the Federal Parliament.
Human rights, the environment and empowering communities are issues that go hand-in-hand. In Tabanan, Bali, for example, we are supporting the local community through a multi-year eco-tourism project, while in India, our ‘water ATM’ programme is empowering women as entrepreneurs to run businesses that give people access to clean, low-cost drinking water. This year, 200 women joined the intervention, providing water for over 44,000 people. We were also proud that, in India, as reported last year, we delivered our 2020 carbon emissions and water efficiency targets, 12 months ahead of schedule.
Performance 2023
Sales and net sales
Sales decreased by £711 million, or 13%, to £4,645 million in the year ended 30 June 2020 from £5,356 million in the year ended 30 June 2019. Excise duties were £2,375 million in the year ended 30 June 2020 and £2,668 million in the year ended 30 June 2019, a decrease of £293 million.
Net sales (sales less excise duties) were £2,270 million in the year ended 30 June 2020 a decrease of £418 million, or 16%, compared toCorporate net sales of £2,688 million in the year ended 30 June 2019. Net sales were unfavourably impacted by organic decline of £423 million (see further performance analysis below), partially offset by £5 million of favourable exchange rate movements due to the strengthening of the Japanese yen, the Taiwan dollar and the Indian rupee against sterling.
Operating profit
Operating loss was £697 million in the year ended 30 June 2020 a decrease of £1,365 million compared to operating profit of £668 million in the year ended 30 June 2019. Operating profit was unfavourably impacted by India goodwill and Windsor, Old Tavern and Bagpiper brand impairment losses of £1,205 million, by organic decline of £207 million, by exceptional losses of £16 million due to Covid-19 pandemic related implications (£15 million “Raising the Bar” provision and £1 million stock write-off), and by exceptional losses of £1 million due to fixed assets impairment in India. This increase was partially offset by exceptional gain of £24 million in respect of indirect tax in Korea, by lapping exceptional charge of £35 million in respect of indirect tax in Korea and by favourable exchange rate movements of £5 million primarily due to the strengthening of the Japanese yen and the Taiwan dollar (£7 million transactional less £2 million translation exchange impact).
Business review (continued)
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Asia Pacific net sales declined 16%. Despite growth in the first half for the region, all markets other than Australia declined due to the impact of Covid-19. Greater China declined 7% as scotch, liqueurs and beer growth was offset by declines in Chinese white spirits. Australia net sales grew 6%, driven by ready to drink, liqueurs, gin and scotch. India net sales declined 17%, driven by the continued economic slowdown exacerbated by lockdowns impacting both Prestige and Above and Popular segments. South East Asia declined 23%, driven by scotch in Key Accounts and beer in Indonesia. North Asia declined 15%, driven by double-digit decline in scotch, partially offset by beer growth. In Travel Retail Asia and Middle East, net sales declined 46%, as first half declines were further exacerbated by significant declines of travellers due to Covid-19. Scotch declined 20%, driven by Johnnie Walker in Travel Retail Asia and Middle East, South East Asia, and Korea. Operating margin declined 420bps driven mainly by volume loss due to closures which caused lower fixed cost absorption. These impacts were partially offset by a reduction of marketing spend and overhead savings.
|
| | | | | | | | | | | |
| Markets: | Organic volume
movement
% |
| | Reported volume
movement
% |
| | Organic net sales
movement
% |
| | Reported net sales
movement
% |
|
| Asia Pacific | (15 | ) | | (15 | ) | | (16 | ) | | (16 | ) |
|
|
| |
|
| |
|
| |
|
|
| India | (15 | ) | | (15 | ) | | (17 | ) | | (16 | ) |
| Greater China | (4 | ) | | (4 | ) | | (7 | ) | | (7 | ) |
| Australia | 5 |
| | 5 |
| | 6 |
| | 2 |
|
| South East Asia | (19 | ) | | (20 | ) | | (23 | ) | | (21 | ) |
| North Asia | (18 | ) | | (17 | ) | | (15 | ) | | (14 | ) |
| Travel Retail Asia and Middle East | (47 | ) | | (47 | ) | | (46 | ) | | (47 | ) |
|
|
| |
|
| |
|
| |
|
|
| Spirits | (15 | ) | | (15 | ) | | (16 | ) | | (15 | ) |
| Beer | (11 | ) | | (11 | ) | | (12 | ) | | (10 | ) |
| Ready to drink | (4 | ) | | (4 | ) | | (1 | ) | | (5 | ) |
Global giants and local stars(i): | | Organic
volume
movement(ii)
% |
| | Organic
net sales
movement
% |
| | Reported
net sales
movement
% |
|
| Johnnie Walker | | (23 | ) | | (25 | ) | | (24 | ) |
| McDowell's | | (17 | ) | | (15 | ) | | (15 | ) |
Shui Jing Fang(iii) | | (9 | ) | | (16 | ) | | (16 | ) |
| Guinness | | (10 | ) | | (12 | ) | | (10 | ) |
| The Singleton | | (5 | ) | | (1 | ) | | 2 |
|
| Royal Challenge | | (15 | ) | | (15 | ) | | (14 | ) |
| Windsor | | (44 | ) | | (26 | ) | | (28 | ) |
| |
(i) | Spirits brands excluding ready to drink. |
| |
(ii) | Organic equals reported volume movement. |
| |
(iii) | Growth figures represent total Chinese white spirits of which Shui Jing Fang is the principal brand. |
Business review (continued)
Market highlights
| |
– | In India, net sales declined 17%. First half growth was impacted principally by an economic slowdown which was further exacerbated in the second half by the 42 day nationwide total lockdown of on-trade and off-trade alcohol sales, regulatory changes and continuation of on-trade closures thereafter. Prestige & Above declined 14%, driven by IMFL whisky and scotch. Popular brands declined 23%, driven by Old Tavern Whisky and McDowell's No. 1 Rum. These declines were partially offset by Innovation growth in McDowell’s No.1 Luxury and Captain Morgan. Trade investment was optimised and refocused in the off-trade.
|
| |
– | In Greater China, net sales declined 7%. Strong performance in scotch, liqueur and beer was offset by a decline in Chinese white spirits. Chinese white spirits declined 16%, as strong first half growth was offset by the impact of Covid-19 on the key Chinese New Year consumption period with consequential reduced sales and inventory reductions through the second half. Resilient scotch growth of 3%, was driven by malts and Johnnie Walker super deluxe growth in Mainland China along with continued growth in malts and Johnnie Walker super deluxe innovation in Taiwan. Beer grew 12% as it lapped a weaker prior year and supported by the launch of the first Guinness Gatehouse in Shanghai. Increased focus behind e-commerce drove improved digital consumer engagement and food delivery partnerships to address at-home consumption, softened the impact of lockdown driven volume losses.
|
| |
– | Australia net sales grew 6%. Strong first half growth was partially offset by a weaker but still solid second half performance despite Covid-19 lockdowns. This was mainly due to low exposure to the on-trade and a focus on accelerating e-commerce activities. Scotch grew 4%, driven by the new Johnnie Walker "Game of Thrones Limited Editions A Song of Fire and A Song of Ice” innovations. Rum grew 4%, driven by Captain Morgan and continued growth in Bundaberg. Gin grew double-digit and ready to drink grew 6%, as growth in the core brands was complimented by innovation in both categories such as Gordon's Premium Pink Distilled Gin and Tanqueray Flor de Sevilla.
|
| |
– | In South East Asia, net sales declined 23%. Solid growth in Vietnam, driven by Johnnie Walker super deluxe and malts, was offset by Covid-19 related lockdowns across the region. Thailand declined 24%, driven by on-trade closures. Key Accounts declined double-digit due to Covid-19 and a stock-return customer support programme in the second half. Indonesia declined double-digit mainly due to lockdowns impacting Guinness. Activities were upweighted to focus on at-home and small group consumer occasion trends.
|
| |
– | In North Asia, net sales declined 15%, with double-digit declines in Japan and Korea. In Japan, declines in the first half were further exacerbated by on-trade lockdowns. In Korea, scotch declined 23%, driven by continued category contraction, regulatory changes limiting trade spend for wholesalers and venues affecting the category, on-trade closures and a reduction of inventory levels. This was partially offset through strong beer growth, driven by Hop House 13 Lager as it lapped launch in the prior period. Increased investment behind the off-trade in South Korea, especially through digital campaigns, contributed to increased at-home consumption.
|
| |
– | In Travel Retail Asia and Middle East, net sales declined 46%. First half performance was impacted by challenging trading conditions in the Middle East including some reduction of inventory levels. In the second half the global travel channel was severely impacted by Covid-19 travel restrictions, with significant declines of passengers. While absolute inventory levels were reduced, it remains at a high level relative to ongoing reduced passenger travel.
|
| |
– | Marketing investment declined 11%, as variable trade investment was repurposed and redeployed into the off-trade and e-commerce channel, which focused on home delivery and at-home consumption.
|
Business review (continued)
Corporate
Performance
Sales and net sales
Corporate sales principally arise in the Guinnessfrom visitor centre in Dublin, Irelandcenters and the income from the global licensing of Diageo brands and trademarks. Corporate sales and net sales were £38£88 million in the year ended 30 June 2020 a decrease2023, an increase of £15£34 million. Net sales were favorably impacted by an organic increase of £33 million compared to net sales of £53 million in the year ended 30 June 2019 due to organic decrease of £16 million as a result of lower visitor numbers due to Covid-19 pandemic related implications, partially offset by favourable£1 million exchange of £1 million.rate movement gain.
Operating costs
Corporate operating costs comprise central costs, including finance, marketing, corporate relations, human resources and legal, as well as certain information systems, facilities and employee costs that are not allocable to the geographical segments or to the ISC.Supply Chain and Procurement. Operating costs were £147£326 million in the year ended 30 June 2020 a decrease2023 an increase of £63£88 million compared to operating costs of £210£238 million in the year ended 30 June 2019.2022. The decrease£24 million increase in costs in the year ended 30 June 20202023 was principally a result of decreasedincreased staff & IT costs, of £38 million, and lapping an exceptional item of £21 million in respect of guaranteed minimum pension equalization andpartially offset by favourable exchange rate movements of £4£58 million primarily due to the weakening of EUR against sterling (£332 million translation impact and £1£26 million transactional exchange impact).
Performance 2022
Sales and net sales
Corporate net sales principally arise in the Guinness visitor centre in Dublin, Ireland and the income from the global licensing of Diageo brands and trademarks. Corporate net sales were £54 million in the year ended 30 June 2022, an increase of £34 million compared to the net sales of £20 million in the year ended 30 June 2021 due to organic increase of £35 million slightly offset by £1 million exchange rate movement loss.
Operating costs
Corporate operating costs comprise central costs, including finance, marketing, corporate relations, human resources and legal, as well as certain information systems, facilities and employee costs that are not allocable to the geographical segments or to the Supply Chain and Procurement. Operating costs were £238 million in the year ended 30 June 2022 an increase of £30 million compared to operating costs of £208 million in the year ended 30 June 2021. The increase in costs in the year ended 30 June 2022 was principally a result of increased staff costs of £39 million, partially offset by favourable exchange rate movements of £9 million (£8 million transactional exchange impact and £1 million translation impact).
Business review (continued)
Category and brand review
Category review
•Spirits net sales grew 6%, with flat volume. Growth was across most categories, including double-digit performance in scotch, tequila and IMFL whisky.
◦Johnnie Walker Black Label grew 16%, with particularly strong growth in Asia Pacific, where it grew 30%.
◦Johnnie Walker Blue Label grew 3%, supported by the return of Travel Retail.
◦Johnnie Walker Red Label grew 16%, with double-digit growth in all regions except Africa.
◦Scotch malts grew 16%, primarily driven by strong double-digit growth in Asia Pacific and North America.
•Tequila net sales grew 19%, reflecting strong performance of Don Julio and Casamigos which grew 20% and 16% respectively, driven by North America.
•Vodka net sales grew 1% with a volume decline of 3%. Declines in North America and Africa were offset by double-digit growth across all other regions.
•Rum net sales grew 2% driven by Captain Morgan growth across all regions except North America. Rum volume declined 7%.
•Liqueurs net sales declined 1%, driven by Godiva.
•Beer net sales grew 9%, with growth in all regions driven by strong performance from Guinness in Great Britain, Ireland, North America and Africa.
•Ready to drink net sales were flat, with growth in Europe and Africa offset by a decline in North America.
| | | | | | | | | | | | | | |
| Key categories | Organic
volume
movement(1)
% | Organic
net sales
movement
% | Reported
net sales
movement
% | Reported
net sales
by category
% |
Spirits(2) | — | | 6 | | 12 | | 79 | |
| Scotch | 2 | | 12 | | 16 | | 25 | |
| Tequila | 10 | | 19 | | 32 | | 12 | |
Vodka(3)(4) | (3) | | 1 | | 7 | | 9 | |
Canadian whisky(5) | (10) | | (9) | | — | | 6 | |
Rum(4) | (7) | | 2 | | 9 | | 5 | |
| Liqueurs | (4) | | (1) | | 3 | | 5 | |
Gin(4) | — | | 5 | | 8 | | 5 | |
IMFL whisky(5) | 8 | | 15 | | — | | 4 | |
Chinese white spirits(5) | (15) | | (14) | | (12) | | 3 | |
US whiskey(5) | (8) | | (4) | | 7 | | 2 | |
| Beer | (7) | | 9 | | 9 | | 15 | |
| Ready to drink | (6) | | — | | 3 | | 4 | |
| | | | | | | | |
| Reported volume by category | Reported net sales by category | Reported marketing spend by category |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ln | Scotch | ln | Vodka | n | US whiskey | n | Canadian whisky | ln | Indian-Made Foreign Liquor (IMFL)Rum | n | IMFL whisky |
| n | lLiqueurs | Liqueursn | lGin | Tequilan | lTequila | n | Beer | n | Ready to drink | ln | Other |
l | Vodka |
|
| l | Gin | l | Beer |
|
|
|
l | US whiskey | l | Rum |
|
|
|
|
|
|
|
|
|
(1) Organic equals reported volume movement except for spirits (7)%, tequila 11%, vodka (4)%, gin (1)%, IMFL whisky (20)%, US whiskey (7)%, beer (8)% and ready to drink (7)%. |
| | | | | | | | | |
| Key categories | | Organic
volume
movement(iii)
% |
| | Organic
net sales
movement
% |
| | Reported
net sales
movement
% |
|
Spirits(i) | | (11 | ) | | (8 | ) | | (8 | ) |
| Scotch | | (16 | ) | | (17 | ) | | (17 | ) |
Vodka(ii)(iv) | | (8 | ) | | (8 | ) | | (8 | ) |
| Canadian whisky | | 7 |
| | 8 |
| | 8 |
|
Rum(ii) | | (11 | ) | | (7 | ) | | (7 | ) |
| Liqueurs | | (4 | ) | | (4 | ) | | (5 | ) |
| Indian-Made Foreign Liquor (IMFL) whisky | | (14 | ) | | (14 | ) | | (13 | ) |
| Tequila | | 12 |
| | 25 |
| | 27 |
|
Gin(ii) | | (9 | ) | | (4 | ) | | (5 | ) |
| US whiskey | | (1 | ) | | 3 |
| | 4 |
|
| Beer | | (15 | ) | | (15 | ) | | (15 | ) |
| Ready to drink | | 5 |
| | 8 |
| | 3 |
|
(i)(2) Spirits brands excluding ready to drink.drink and non-alcoholic variants.
(ii) Vodka, rum, gin including IMFL brands.
| |
(iii) | Organic equals reported volume movement except for vodka (10)%, Canadian whisky 6%, rum (12)%, liqueurs (5)% and ready to drink 1%, which were impacted by acquisitions and disposals. |
(iv)(3) Vodka includes Ketel One Botanical.
(4) Vodka, rum and gin include IMFL variants.
Unless otherwise stated percentage movements refer to organic movements in the following analysis.(5) See pages 51-52 for details of Canadian whisky, US whiskey and pages 55-56 for details of IMFL whisky and Chinese white spirits.
64
| |
– | Scotch represents 23% of Diageo's net sales and declined by 17%. Soft performance in the first half was impacted by ongoing commercial challenges along with political and economic disruption which continued through the year. This was further exacerbated by Covid-19 in the second half. Johnnie Walker declined 22% where growth in Ethiopia, Canada and Australia was offset by most other markets. The brand also lapped strong innovation in the prior year. Buchanan’s declined 12% with double-digit growth in Colombia, primarily offset by continued declines in Mexico due to category softness. JƐB declined 18% as global lockdowns exacerbated ongoing challenges for the brand in Continental Europe. Old Parr declined 15%, driven by downtrading to primary scotch and the impact of lockdown restrictions in Latin America and Caribbean. The malts portfolio, whilst in growth in the first half, declined over the full year. Scotch innovations such as the collaborations with HBO's Game of Thrones and Johnnie Walker Black Label 12 Year Old Origin Series were not enough to offset prior year.
|
Business review (continued)
| | | | | | | | | | | |
Global giants, local stars and reserve(1): | Organic
volume
movement(2)
% | Organic
net sales
movement
% | Reported
net sales
movement
% |
| Global giants | | | |
| Johnnie Walker | 9 | | 15 | | 19 | |
| Guinness | 1 | | 16 | | 17 | |
| Smirnoff | (2) | | 8 | | 14 | |
| Baileys | (5) | | — | | 5 | |
| Captain Morgan | (2) | | 5 | | 11 | |
| Tanqueray | (4) | | 1 | | 6 | |
| Local stars | | | |
| Crown Royal | (12) | | (10) | | — | |
| Buchanan’s | (3) | | 7 | | 15 | |
| McDowell's | (1) | | 4 | | 6 | |
Shui Jing Fang(3) | (15) | | (14) | | (12) | |
| Old Parr | 9 | | 18 | | 24 | |
| Black & White | 2 | | 20 | | 28 | |
| JεB | (9) | | (3) | | — | |
| Yenì Raki | — | | 8 | | (10) | |
| Windsor | 29 | | 41 | | 42 | |
| Bundaberg | — | | 18 | | 21 | |
| Ypióca | (9) | | 7 | | 21 | |
| Reserve | | | |
| Don Julio | 11 | | 20 | | 32 | |
Casamigos(4) | 7 | | 15 | | 27 | |
| Scotch malts | 3 | | 16 | | 19 | |
Ketel One(5) | (3) | | 1 | | 11 | |
Bulleit whiskey(6) | (9) | | (6) | | 4 | |
| Cîroc vodka | (23) | | (23) | | (17) | |
| |
– | Vodka represents 11% of Diageo’s net sales and declined by 8%. Challenging performance in the first half was further exacerbated by some category declines and on-trade closures. Smirnoff declined 6% globally, where growth in Mexico and Canada were offset by declines in Continental Europe, Africa, Brazil and US Spirits. Ketel One declined 6% driven mainly by US Spirits where on-trade sales mix was relatively stronger and also lapping the first full year of the Ketel One Botanical innovation. Cîroc declined 17%, driven by continued performance challenges, mainly in US Spirits. Innovations across the vodka portfolio, such as Smirnoff X1 Spicy Tamarind in Mexico, and limited time offers such as Cîroc White Grape, partially offset the declines in other brands and variants.
|
(1) Brands excluding ready to drink, non-alcoholic variants and beer except Guinness.
| |
– | Canadian whisky represents 8% of Diageo’s net sales and grew 8%. Crown Royal in US Spirits grew 8% as it gained further category share despite a single digit decline in Crown Royal Deluxe. Positive results were driven by the sustained media investment enabling further momentum across the portfolio including continued double-digit growth of Crown Royal Regal Apple and Crown Royal Vanilla, and the success of the limited time offer variant Crown Royal Peach. In Canada, Crown Royal grew double-digit, gaining market share and strengthening its leadership position in the growing category.
|
(2) Organic equals reported volume movement except for Guinness 0% and McDowell's (2)%.
| |
– | Rum represents 7% of Diageo’s net sales and declined by 7%. Growth in the first half was offset by declines due to some category challenges and Covid-19 impacts in US Spirits, India and East Africa. In Europe, Captain Morgan growth was partially offset by declines of Zacapa.
|
(3) Growth figures represent total Chinese white spirits of which Shui Jing Fang is the principal brand.
| |
– | Liqueurs represent 5% of Diageo’s net sales and declined by 4%. Strong Baileys growth in the first half was offset by the impact of Covid-19, as increased off-trade growth, due to successful at-home activities, was not sufficient to fully mitigate the impact of on-trade closures.
|
(5) Ketel One includes Ketel One vodka and Ketel One Botanical.
| |
– | IMFL whisky represents 5% of Diageo’s net sales and declined 14%. Growth in first half was offset by the on-going economic slowdown impacting the category, and nationwide Covid-19 lockdowns closing both on and off-trade outlets and major sporting events.
|
(6) Bulleit whiskey excludes Bulleit Crafted Cocktails.
| |
– | Tequila represents 5% of Diageo’s net sales and grew 25%. Casamigos was up strong double-digit despite on-trade closures driven by strong category momentum in key markets and actions taken to strengthen its position in at-home occasions. Don Julio was up 15%, as continued growth in US Spirits was partially offset by Mexico declines due to competitor pricing pressures and lockdowns in the second half.
|
| |
– | Gin represents 5% of Diageo’s net sales and declined by 4%. Resilient full year performance in Brazil and Australia was offset by the impact of lockdowns, mainly in Europe.
|
Global giants
| |
– | US whiskey represents 3% of Diageo’s net sales and grew by 3%. Bulleit grew 4% in US Spirits, where it has been gaining category share, and in Canada grew 14%, despite lockdowns. Bulleit strengthened its positioning in the at-home occasion during Covid-19 with effective marketing campaigns across TV and social media.
|
39% of Diageo’s reported net sales and grew 10%.
| |
– | Beer represents 15% of Diageo’s net sales and declined by 15%. Good first half performance was offset by declines in all regions in the second half driven by on-trade closures and excise increases in Africa. Guinness declined 16%, as growth of Guinness Draught in Can was offset by on-trade volume declines in most markets. The on-trade decline was exacerbated by the Guinness keg return programme to support the on-trade and maintain product quality across Europe and North America. Serengeti continued to grow double-digit in East Africa but was offset by the decline in Senator Keg and Tusker which are highly exposed to the on-trade. Nigeria declined due to the challenging economic environment, and declines in Kenya and Ethiopia were due to excise increases, with all three markets further impacted by lockdowns. Rockshore continued to grow double-digit driven by Rockshore Cider and Rockshore Lager despite on-trade closures.
|
| |
– | Ready to drink represents 7% of Diageo’s net sales and grew 8% driven by Diageo Beer Company USA, Canada, and Australia. Smirnoff Ice Flavour innovations in Diageo Beer Company USA, Smirnoff Ice Smash and Smirnoff Spiked Seltzers all contributed to growth.
|
Local stars
18% of Diageo’s reported net sales and declined 2%.
Reserve
29% of Diageo’s reported net sales and grew 7%.
Business review (continued)
Income statement
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 30 June 2022
£ million | Exchange
(a)
£ million | Acquisitions
and disposals
(b)
£ million | Organic movement(1)
£ million | Fair value remeasurement
(d)
£ million | | Hyperinflation(1) £ million | 30 June 2023
£ million |
| Sales | 22,448 | | 588 | | (683) | | 1,091 | | — | | | 71 | | 23,515 | |
| Excise duties | (6,996) | | 114 | | 569 | | (122) | | — | | | 33 | | (6,402) | |
| Net sales | 15,452 | | 702 | | (114) | | 969 | | — | | | 104 | | 17,113 | |
| Cost of sales | (5,973) | | (363) | | 84 | | (522) | | 5 | | | (63) | | (6,832) | |
| Gross profit | 9,479 | | 339 | | (30) | | 447 | | 5 | | | 41 | | 10,281 | |
| Marketing | (2,721) | | (151) | | (15) | | (152) | | (1) | | | (11) | | (3,051) | |
| Other operating items | (1,961) | | (66) | | (16) | | 26 | | 49 | | | (8) | | (1,976) | |
| Operating profit before exceptional items | 4,797 | | 122 | | (61) | | 321 | | 53 | | | 22 | | 5,254 | |
| Exceptional operating items (c) | (388) | | | | | | | | (622) | |
| Operating profit | 4,409 | | | | | | | | 4,632 | |
| Non-operating items (c) | (17) | | | | | | | | 328 | |
| Net finance charges | (422) | | | | | | | | (594) | |
| Share of after tax results of associates and joint ventures | 417 | | | | | | | | 370 | |
| Profit before taxation | 4,387 | | | | | | | | 4,736 | |
| Taxation (e) | (1,049) | | | | | | | | (970) | |
| | | | | | | | |
| | | | | | | | |
| Profit for the year | 3,338 | | | | | | | | 3,766 | |
(1) For the definition of organic movement and hyperinflation see pages 282-284.
(a) Exchange
|
| | | | | | | | | |
Global giants, local stars and reserve(i): | | Organic
volume
movement(ii)
% |
| | Organic
net sales
movement
% |
| | Reported
net sales
movement
% |
|
| Global giants | |
| |
| |
|
| Johnnie Walker | | (20 | ) | | (22 | ) | | (22 | ) |
| Smirnoff | | (9 | ) | | (6 | ) | | (6 | ) |
| Baileys | | (3 | ) | | (3 | ) | | (3 | ) |
| Captain Morgan | | (2 | ) | | (2 | ) | | — |
|
| Tanqueray | | (5 | ) | | (4 | ) | | (4 | ) |
| Guinness | | (15 | ) | | (16 | ) | | (16 | ) |
| Local stars | |
| |
| |
|
| Crown Royal | | 7 |
| | 8 |
| | 10 |
|
| Yenì Raki | | (22 | ) | | (15 | ) | | (15 | ) |
| Buchanan’s | | (14 | ) | | (12 | ) | | (13 | ) |
JƐB | | (18 | ) | | (18 | ) | | (18 | ) |
| Windsor | | (44 | ) | | (26 | ) | | (28 | ) |
| Old Parr | | (17 | ) | | (15 | ) | | (19 | ) |
| Bundaberg | | 3 |
| | — |
| | (4 | ) |
| Black & White | | (7 | ) | | (5 | ) | | (10 | ) |
| Ypióca | | (17 | ) | | (14 | ) | | (24 | ) |
| McDowell's | | (17 | ) | | (15 | ) | | (15 | ) |
Shui Jing Fang(iii) | | (9 | ) | | (16 | ) | | (16 | ) |
| Reserve | |
| |
| |
|
| Scotch malts | | (5 | ) | | (3 | ) | | (1 | ) |
| Cîroc vodka | | (17 | ) | | (17 | ) | | (16 | ) |
Ketel One(iv) | | (4 | ) | | (6 | ) | | (4 | ) |
| Don Julio | | (1 | ) | | 15 |
| | 16 |
|
| Bulleit | | 4 |
| | 3 |
| | 6 |
|
(i) Spirits brands excluding ready to drink. The effect of movements in exchange rates and other movements on profit before exceptional items and taxation for the year ended 30 June 2023 is set out in the table below.
(ii) Organic equals reported volume movement.
| | | | | |
(iii) | Growth figures represent total Chinese white spirits of which Shui Jing Fang is the principal brand.Gains/
(losses)
£ million |
| Translation impact | 246 | |
(iv)Transaction impact | Ketel One includes Ketel One vodka and Ketel One Botanical.
|
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
| (124) | |
–Operating profit before exceptional items | Global giants represent 39% of Diageo’s net sales and declined by 13%. This was driven by declines in Johnnie Walker and Guinness across all regions, while Smirnoff declined in all regions except for Latin America and Caribbean. Good first half performance for all brands except Johnnie Walker was offset by global lockdowns in the second half. Johnnie Walker performance was also impacted by a continuation of political, and economic challenges in some emerging markets, as well as lapping “White Walker by Johnnie Walker” innovation last year.
|
| 122 | |
| Net finance charges – translation impact | Local stars represent 20% of Diageo’s net sales and declined by 7%. Continued growth of Crown Royal in US Spirits was offset by declines, mainly in Chinese white spirits in China, McDowell’s in India, Buchanan's in Latin America and Caribbean and US Spirits and JƐB in Iberia and South Africa due to imposed lockdowns. Windsor continued to decline in Korea exacerbated by on-trade closures.
|
| (32) | |
| Net finance charges – transaction impact | Reserve brands represent 21% of Diageo’s net sales6
| |
| Net finance charges | (26) | |
| Associates – translation impact | 8 | |
Profit before exceptional items and declined 4%. Continued growth in Don Julio and Casamigos in US Spirits were offset by declines in Chinese white spirits, Johnnie Walker Reserve variants, Cîroc and Ketel One.taxation | 104 | |
| | | | | | | | |
| | Year ended 30 June 2023 | Year ended 30 June 2022 |
| Exchange rates | | |
| Translation £1 = | $1.20 | | $1.33 | |
| Transaction £1 = | $1.30 | | $1.29 | |
| Translation £1 = | €1.15 | | €1.18 | |
| Transaction £1 = | €1.16 | | €1.15 | |
Business review (continued)
(b) Acquisitions and disposals
The acquisitions and disposals movement in the year ended 30 June 2023 was primarily attributable to the disposal of the United Spirits Limited (USL) Popular brands and Guinness Cameroun S.A.
See pages 229-232 for further details.
(c) Exceptional items
In the year ended 30 June 2023, exceptional operating items were a loss of £622 million (2022 – a loss of £388 million), mainly due to charges related to brand impairment (£498 million) and the supply chain agility programme (£100 million).
In the year ended 30 June 2023, exceptional non-operating items were a gain of £328 million(2022 – a loss of £17 million), mainly driven by the gain in relation to the sale of Guinness Cameroun S.A. (£310 million).
See pages 218-220 for further details.
(d) Fair value remeasurement
The adjustments to marketing and other operating expenses were the elimination of fair value changes to contingent consideration liabilities and earn out arrangements in respect of prior year acquisitions of £113 million gain for the year ended 30 June 2023 and £65 million gain for the year ended 30 June 2022.
(e) Taxation
The reported tax rate for the year ended 30 June 2023 was 20.5% compared with 23.9% for the year ended 30 June 2022.
Included in the tax charge of £970 million in the year ended 30 June 2023 is a net exceptional tax credit of £186 million, including an exceptional tax credit of £124 million in respect of brand impairments, mainly the McDowell's brand, a tax credit of £57 million in respect of the deductibility of fees paid to Diageo plc for guaranteeing externally issued debt of its US group entities, a tax credit of £23 million in respect of the supply chain agility programme, partly offset by a tax charge of £42 million in respect of the sale of Guinness Cameroun S.A.
The reported tax charge for the year ended 30 June 2022 included an exceptional tax credit of £31 million, comprising exceptional tax credits of £35 million and £20 million on the impairment of the McDowell's and Bell's brands respectively, partly offset by an exceptional tax charge of £23 million in respect of the gain on the sale of the Picon brand and a further tax charge of £3 million in respect of winding down operations in Russia.
The tax rate before exceptional items for the year ended 30 June 2023 was 23.0% compared with 22.5% for the year ended 30 June 2022.
We expect the tax rate before exceptional items for the year ending 30 June 2024 to be in the region of 24%.
(f) Dividend
The group aims to increase the dividend each year. The decision in respect of the dividend is made with reference to the 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 2023, dividend cover is 2.0 times. The recommended final dividend for the year ended 30 June 2023, to be put to the shareholders for approval at the Annual General Meeting is 49.17 pence, an increase of 5% on the prior year final dividend. This would bring the full year dividend to 80.00 pence per share, an increase of 5% on the prior year. The group will keep future returns of capital, including dividends, under review through the year ending 30 June 2024 to ensure Diageo’s capital is allocated in the best way to maximize value for the business and its 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 25 August 2023. The ex-dividend date both for the holders of the ordinary shares and for US ADR holders is 24 August 2023. The final dividend, once approved by shareholders, will be paid to shareholders on 12 October 2023 and payment to US ADR holders will be made on 17 October 2023. A dividend reinvestment plan is available to holders of ordinary shares in respect of the final dividend and the plan notice date is 22 September 2023..
Business review (continued)
(g) Return of capital
Diageo completed a total of £1.4 billion return of capital for the year ended 30 June 2023, which included £0.9 billion related to the successful completion of Diageo’s previous share buyback programme in which £4.5 billion of capital was returned to shareholders, and returned an additional £0.5 billion of capital to shareholders which was announced as a new share buyback programme on 16 February 2023 and completed on 2 June 2023.
In the year ended 30 June 2023, the company purchased 37.8 million ordinary shares (2022 – 61.2 million) at a cost of £1,381 million (including transaction costs of £13 million) (2022 – £2,284 million including transaction costs of £16 million). All shares purchased under the share buyback programme were cancelled.
Business review (continued)
Movement in net borrowings and equity
| | | | | | | | |
| Movements in net borrowings | 2023 £ million | 2022 £ million |
| Net borrowings at the beginning of the year | (14,137) | | (12,109) | |
| Free cash flow (1) | 1,800 | | 2,783 | |
| Acquisitions (2) | (342) | | (206) | |
| Investment in associates (2) | (93) | | (65) | |
| Sale of businesses and brands (3) | 462 | | 82 | |
| Share buyback programme (d) | (1,381) | | (2,284) | |
| | |
| Net sale of own shares for share schemes (5) | 29 | | 18 | |
| Purchase of treasury shares in respect of subsidiaries | — | | (15) | |
| Dividends paid to non-controlling interests | (97) | | (81) | |
| | |
| Net movements in bonds (6) | 889 | | 742 | |
| Purchase of shares of non-controlling interests (7) | (146) | | — | |
| Net movements in other borrowings (8) | 59 | | 79 | |
| Equity dividend paid | (1,761) | | (1,718) | |
| Net decrease in cash and cash equivalents | (581) | | (665) | |
| Net increase in bonds and other borrowings | (950) | | (825) | |
| Exchange differences (9) | 159 | | (334) | |
| | |
| Other non-cash items (10) | (32) | | (204) | |
| | |
| Net borrowings at the end of the year | (15,541) | | (14,137) | |
(1) See page 49 for the analysis of free cash flow.
(2) In the year ended 30 June 2023, acquisitions included upfront payments of €246 million (£218 million) for Kanlaon Limited and Chat Noir Co. Inc. (the owner of Don Papa Rum) and $102 million (£89 million) for Balcones Distilling.
In the year ended 30 June 2022, acquisitions included the final earn-out payment in respect of the Casamigos acquisition amounting to $113 million (£83 million) and upfront payment of £62 million for 21Seeds.
In the years ended 30 June 2023 and 2022, investment in associates included additional investments in a number of Distill Ventures associates.
(3) In the year ended 30 June 2023, sale of businesses and brands included the disposal of Guinness Cameroun S.A. beer business for a net cash consideration, net of disposal costs, of £354 million and the disposal of the Popular brands of Diageo’s USL business, for a cash consideration, net of disposal costs, of £83 million.
In the year ended 30 June 2022, sale of businesses and brands included the cash received on the disposal of Picon brand, net of transaction costs.
(4) See page 66 for details of Diageo's return of capital programmes.
(5) Net sale of own shares comprised receipts from employees on the exercise of share options of £51 million (2022 – £32 million) less purchase of own shares for the future settlement of obligations under the employee share option schemes of £22 million (2022 – £14 million).
(6) In the year ended 30 June 2023, the group issued bonds of $2,000 million (£1,788 million – net of discount and fee) and €500 million (£441 million – net of discount and fee), and repaid bonds of $1,650 million (£1,340 million). In the year ended 30 June 2022, the group issued bonds of €1,650 million (£1,371 million - net of discount and fee) and £892 million (including £8 million discount and fee), and repaid bonds of €900 million (£769 million) and $1,000 million (£752 million).
(7) On 24 March 2023, Diageo completed the purchase of an additional 14.97% of the share capital of East African Breweries PLC (EABL). This increased Diageo's controlling shareholding position in EABL from 50.03% to 65.00%.
(8) In the year ended 30 June 2023, the net movements in other borrowings principally arose from the increase in commercial paper, collateral and bank loan balances offset by cash outflows of foreign currency swaps and forwards and repayment of lease liabilities. In the year ended 30 June 2022, the net movements in other borrowings principally arose from cash movements of foreign currency swaps and forwards partially offset by the repayment of lease liabilities.
(9) In the year ended 30 June 2023, exchange gains arising on net borrowings of £159 million were primarily driven by favourable exchange movements on US dollar and euro denominated borrowings and unfavourable exchange movements on cash and cash equivalents, foreign currency swaps and forwards. In the year ended 30 June 2022, exchange losses arising on net borrowings of £334
Business review (continued)
million were primarily driven by adverse exchange movements on US dollar denominated borrowings, partially offset by favourable movement on euro denominated borrowings, cash and cash equivalents, foreign currency swaps and forwards.
(10) In the year ended 30 June 2023, other non-cash items were principally in respect of additional leases entered into during the year partially offset by fair value movements of interest rate hedging instruments. In the year ended 30 June 2022, other non-cash items were principally in respect of additional leases entered into during the year.
| | | | | | | | |
| Movements in equity | 2023 £ million | 2022 £ million |
| Equity at the beginning of the year | 9,514 | | 8,431 | |
| Adjustment to 2021 closing equity in respect of hyperinflation in Turkey (1) | — | | 251 | |
| Adjusted equity at the beginning of the year | 9,514 | | 8,682 | |
| Profit for the year | 3,766 | | 3,338 | |
| Exchange adjustments (2) | (686) | | 799 | |
| Remeasurement of post employment benefit plans net of taxation | (469) | | 497 | |
| Purchase of shares of non-controlling interests (3) | (146) | | — | |
| | |
| Hyperinflation adjustments net of taxation (1) | 143 | | 291 | |
| Associates' transactions with non-controlling interests | (7) | | — | |
| Dividend to non-controlling interests | (97) | | (72) | |
| Equity dividend paid | (1,762) | | (1,718) | |
| Share buyback programme (4) | (1,273) | | (2,310) | |
| Other reserve movements | 309 | | 7 | |
| Equity at the end of the year | 9,292 | | 9,514 | |
(1) See page 280 for details of hyperinflation adjustments.
(2) Exchange movements in the year ended 30 June 2023 primarily arose from exchange loss driven by the Turkish lira, the Indian rupee and the Chinese yuan, partially offset by gains in Mexican peso and US dollar. Exchange movements in the year ended 30 June 2022 primarily arose from exchange gains driven by the US dollar and the Indian rupee, partially offset by Turkish lira.
(3) On 24 March 2023, Diageo completed the purchase of an additional 14.97% of the share capital of East African Breweries PLC (EABL). This increased Diageo's controlling shareholding position in EABL from 50.03% to 65.00%.
(4) See page 66 for details of Diageo's return of capital programmes.
Post employment benefit plans
The net surplus of the group’s post employment benefit plans decreased by £564 million from £1,151 million at 30 June 2022 to £587 million at 30 June 2023. The decrease in net surplus was predominantly attributable to the unfavourable change in the market value of assets held by the post employment benefit plans in the UK which was partially offset by the favourable change in the discount rate assumptions in the UK due to the increase in returns from ‘AA’ rated corporate bonds used to calculate the discount rates on the liabilities of the post employment benefit plans (from 3.8% to 5.2%). The net operating profit charge before exceptional items increased by £36 million from £39 million for the year ended 30 June 2022 to £75 million for the year ended 30 June 2023.
During the year ended 30 June 2023, following a remeasurement of the Diageo Lifestyle Plan, Diageo made a £16 million one-off deficit contribution to satisfy minimum funding requirement.
Total cash contributions by the group to all post employment benefit plans in the year ending 30 June 2024 are estimated to be approximately £75 million ($95 million).
Business review (continued)
Operating results 20192022 compared with 20182021
For the discussion on our operating results for the year ended 30 June 2018,2021, including certain comparative discussion on our operating results for the years ended 30 June 20182021 and 2019,2022, please refer to 'Operating results 20192022 compared with 2018' on pages 49 to 822021' from page 93 in our Annual Report on Form 20-F (File No. 001-10691) filed with the Securities and Exchange Commission on 54 August 2019.2022.
Business review (continued)
Liquidity and capital resources
1. AnalysisSources and uses of cash flow and balance sheetliquidity
The primary source of the group’s liquidity over the last three financial years has been cash generated from operations. These funds have generally been used to pay interest, taxes and dividends, and to fund capital expenditure and acquisitions, and, together with the group’s current strong cash position, are expected to continue to fund future operating and capital needs. Measures have been put in place to reinforce Diageo's already solid liquidity including pausing the current three-year return of capital programme, bringing forward a £2,000 million US dollar bond issuance launched in April 2020 and putting in place an additional committed credit facility of £2,500 million. Given these measures and
the group’s strong cash position, we believe that the group has sufficient working capital for present requirements.
2020 compared with 2019
Net cash from operating activities – see page 85
Movement in net borrowings – see page 91
Movement in equity – see page 92
Post employment net surplus – see page 92
2. Analysis of borrowings
a) Gross borrowings (excluding lease liabilities and the fair value of derivative instruments) are expected to mature as follows:
|
| | | | | |
| | 2020
£ million |
| | 2019
£ million |
|
| Within one year | 1,995 |
| | 1,959 |
|
| Between one and three years | 3,013 |
| | 2,940 |
|
| Between three and five years | 3,134 |
| | 2,879 |
|
| Beyond five years | 8,643 |
| | 4,777 |
|
| | 16,785 |
| | 12,555 |
|
b) The following bonds were issued and repaid:
|
| | | | | |
| | 2020
£ million |
| | 2019
£ million |
|
| Issued | | | |
| € denominated | 1,594 |
| | 2,270 |
|
| £ denominated | 298 |
| | 496 |
|
| US$ denominated | 3,296 |
| | — |
|
| Repaid | | | |
| € denominated | — |
| | (1,168 | ) |
| US$ denominated | (820 | ) | | — |
|
| | 4,368 |
| | 1,598 |
|
c) The group hadalso issues short-term commercial paper regularly in order to finance its day-to-day operations.
The table below sets forth the group’s available undrawn committed bank facilities as follows:
|
| | | | | |
| | 2020
£ million |
| | 2019
£ million |
|
Expiring within one year(i) | 2,439 |
| | — |
|
| Expiring between one and two years | 610 |
| | — |
|
| Expiring after two years | 2,236 |
| | 2,756 |
|
| | 5,285 |
| | 2,756 |
|
(i) Diageo has the rights to extend £813 million of the committed facilities expiring within one year to Mayat 30 June 2023 and 30 June 2022.
Business review (continued)
| | | | | | | | |
| 30 June 2023 | 30 June 2022 |
| £ million | £ million |
| Expiring within one year | 99 | | 793 | |
| Expiring between one and two years | 496 | | 103 | |
| Expiring after two years | 2,083 | | 1,893 | |
| 2,678 | | 2,789 | |
The facilities can be used for general corporate purposes and, together with cash and cash equivalents, support the group’s commercial paper programmes.
There are no financial covenants on the group’s material short- and long-term borrowings. Certain of these borrowings contain cross default provisions and negative pledges.
The committed bank facilities are subject to a single financial covenant, being minimum interest cover ratio of two times (defined as the ratio of operating profit before exceptional items, aggregated with share of after tax results of associates and joint ventures, to net interest)interest charges). They are also subject to pari passu ranking and negative pledge covenants.
Any non-compliance with covenants underlying Diageo’s financing arrangements could, if not waived, constitute an event of default with respect to any such arrangements, and any non-compliance with covenants may, in particular circumstances, lead to an acceleration of maturity on certain borrowings and the inability to access committed facilities. Diageo was in full compliance with its financial, pari passu ranking and negative pledge covenants in respect of its material shortshort- and long-term borrowings throughout each of the years presented.
2. Analysis of cash flows
The table below sets forth the group’s cash flows for the year ended 30 June 2023 and 30 June 2022.
| | | | | | | | |
| 30 June 2023 | 30 June 2022 |
| £ million | £ million |
| Net cash inflow from operating activities | 3,024 | | 3,935 | |
| Net cash outflow from investing activities | (1,197) | | (1,341) | |
| Net cash outflow from financing activities | (2,408) | | (3,259) | |
| Net decrease in net cash and cash equivalents | (581) | | (665) | |
| Exchange difference | (227) | | 239 | |
| Net cash and cash equivalents at beginning of period | 2,211 | | 2,637 | |
| | |
| Net cash and cash equivalents at end of period | 1,403 | | 2,211 | |
Net cash inflow from operating activities was £3,024 million, a decrease of £911 million compared to the prior period, primarily driven by a strong growth in operating profit and favourable foreign exchange impact, which was more than offset by higher year-on-year working capital outflows, tax payments and interest paid.
Net cash outflow from investing activities was £1,197 million, a decrease of £144 million compared to 2022, primarily driven by business acquisitions of £435 million (2022 - £271 million) offset by the sale of businesses of £462 million (2022 - £82 million).
Net cash outflow from financing activities was £2,408 million, a decrease of £851 million compared to fiscal 22. This change was largely driven by the decreased level of share buyback programme related cash flows of £1,381 million (2022 – £2,284 million) offset by the £889 million net inflow in relation to bond issuances and repayments (2022 – £742 million net inflow).
The operating, investing and financing activities described above resulted in a decrease in net cash and cash equivalents of £808 million, from £2,211 million at 30 June 2022 to £1,403 million at 30 June 2023.
Business review (continued)
3. Capital managementAnalysis of borrowings
The group policy with regard to the expected maturity profile of borrowings of group finance companies is to limit the proportion of such borrowings maturing within 12 months to 50% of gross borrowings less money market demand deposits, and the level of commercial paper to 30% of gross borrowings less money market demand deposits. In addition, it is group policy to maintain backstop facility terms from relationship banks to support commercial paper obligations.
The group’s gross borrowings and net borrowings are measured at amortised cost with the exception of borrowings designated in fair value hedge relationships, interest rate hedging instruments and foreign currency swaps and forwards. For borrowings designated in fair value hedge relationships, Diageo recognises a fair value adjustment for the risk being hedged in the balance sheet, whereas interest rate hedging instruments and foreign currency swaps and forwards are measured at fair value.
The table below sets forth the group’s gross borrowings and net borrowings as at 30 June 2023 and 30 June 2022.
| | | | | | | | |
| 30 June 2023 £ million | 30 June 2022 £ million |
| Overdrafts | (36) | | (74) | |
| Other borrowings due within one year | (1,665) | | (1,448) | |
| Borrowings due within one year | (1,701) | | (1,522) | |
| Borrowings due between one and three years | (3,522) | | (2,817) | |
| Borrowings due between three and five years | (2,874) | | (2,625) | |
| Borrowings due after five years | (8,405) | | (9,056) | |
| Fair value of foreign currency forwards and swaps | 347 | | 356 | |
| Fair value of interest rate hedging instruments | (377) | | (283) | |
| Lease liabilities | (448) | | (475) | |
| Gross borrowings | (16,980) | | (16,422) | |
| Offset by: | | |
| Cash and cash equivalents | 1,439 | | 2,285 | |
| Net borrowings | (15,541) | | (14,137) | |
The table below sets forth the percentage of the group’s gross borrowings and cash and cash equivalents by currency as at 30 June 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | US dollar % | Sterling
% | Euro
% | Indian Rupee
% | Chinese Yuan
% | Nigerian Naira
% | South Korean won
| Other
% |
| Gross borrowings | (16,980) | | 34.00 | % | 37.00 | % | 23.00 | % | — | % | — | % | — | % | — | % | 6.00 | % |
| Cash and cash equivalents | 1,439 | | 38.00 | % | 3.00 | % | 3.00 | % | 9.00 | % | 14.00 | % | 6.00 | % | 3.00 | % | 24.00 | % |
Based on average monthly net borrowings and net interest charge, the effective interest rate for the year ended 30 June 2023 was 3.9%. For this calculation, net interest charge excludes fair value adjustments to derivative financial instruments and borrowings and average monthly net borrowings include the impact of interest rate swaps that are no longer in a hedge relationship but exclude the market value adjustment for cross currency interest rate swaps.
For the year ended 30 June 2023, the group issued bonds of $2,000 million (£1,788 million – net of discount and fee) and €500 million (£441 million – net of discount and fee), and repaid bonds of $1,650 million (£1,340 million). In the year ended 30 June 2022, the group issued bonds of €1,650 million (£1,371 million - net of discount and fee) and £892 million (including £8 million discount and fee), and repaid bonds of €900 million (£769 million) and $1,000 million (£752 million).
The principal components of the £1,404 million increase in net borrowings from 30 June 2022 to 30 June 2023 were mainly the £1,800 million of free cash flow and £889 million net movements in bonds, partially offset by £1,762 million equity dividends and £435 million in respect of the acquisitions.
For information on the maturity profile of net borrowings and a further description of net borrowings, please see note 17 – Net borrowings in the consolidated financial statements.
Business review (continued)
For information on the use of financial instruments including for hedging purposes, please see “Note 16 – Financial instruments” in the consolidated financial statements.
The group’s management is committed to enhancing shareholder value in the long-term, both by investing in the business and brands so as to deliver continued improvement in the return from those investments and by managing the capital structure. Diageo manages its capital structure to achieve capital efficiency, provide flexibility to invest through the economic cycle and give efficient access to debt markets at attractive cost levels. This is achieved by targeting an adjusted net borrowings (net borrowings aggregated with post employment benefit liabilities) to adjusted EBITDA leverage of 2.5 –- 3.0 times, this range for Diageo being currently broadly consistent with an A band credit rating. Diageo would consider operating outside of this range in order to effect strategic initiatives within its stated goals, which could have an impact on its rating. If Diageo’s leverage was to be negatively impacted by the financing of an acquisition, it would seek over time to return to the range of 2.5 –- 3.0 times. The group regularly assesses its debt and equity capital levels against its stated policy for capital structure. As at 30 June 20202023 the adjusted net borrowings (£13,99515,914 million) to adjusted EBITDA ratio was 3.32.6 times. For this calculation, net borrowings are adjusted by post employment benefit liabilities before tax (£749373 million) whilst adjusted EBITDA (£4,2706,120 million) comprises operating profit excluding exceptional operating items and depreciation, amortisation and impairment and includes share of after tax results of associates and joint ventures. While we remain committed to maintaining anSee page 289 for the reconciliation and calculation of the adjusted net borrowingsborrowing to adjusted EBITDA ratioratio.
The group’s funding, liquidity and exposure to foreign currency, interest rate risks, financial credit risk and commodity price risk are conducted within a framework of 2.5 - 3.0 times, we currently expect levels aboveboard approved policies and guidelines. The group purchases insurance for commercial or, where required, for legal or contractual reasons. In addition, the group retains some insurable risk where external insurance is not considered to be an economic means of mitigating this rangerisk. Loan, trade and other receivables exposures are managed locally in the operating units where they arise and credit limits are established as deemed appropriate for the fiscal year ending 30 June 2021.customer.
b) The following bonds were issued and repaid:
| | | | | | | | |
| | 30 June 2023 | 30 June 2022 |
| £ million | £ million |
| Issued | | |
| € denominated | 441 | | 1,371 | |
| £ denominated | — | | 892 | |
| $ denominated | 1,788 | | — | |
| Repaid | | |
| € denominated | — | | (769) | |
| $ denominated | (1,340) | | (752) | |
| 889 | 742 |
Business description (continued)
4. Capital repayments
Authorisation was given by shareholders on 19 September 2019 to purchase a maximum of 237,177,623 shares at a minimum price of 28101/108 pence and a maximum price of higher of (a) 105% of the average of the middle market quotations for an ordinary share for the five preceding business days and (b) the higher of the price of the last independent trade and the highest current independent bid on the London Stock Exchange at the time the purchase is carried out. The programme expires at the conclusion of the next Annual General Meeting or on 18 December 2020 if earlier.
On 25 July 2019, the Board approved a return of capital programme with up to £4.5 billion to be returned to shareholders over the three-year period to 30 June 2022. Under the first phase of the programme, which ended on 31 January 2020, the group returned £1.25 billion via share buybacks.
During the year ended 30 June 2020 the group purchased approximately 39 million ordinary shares (2019 – 94.7 million, 2018 – 58.9 million), representing approximately 1.5% of the issued ordinary share capital (2019 – 3.5%, 2018 – 2.1%) at an average price of 32.43 per share, and an aggregate cost of £1,282 million (including £7 million of transaction costs) (2019 – £29.24 per share, and an aggregate cost of £2,775 million, including £6 million of transaction costs, 2018 - £25.43 per share, and an aggregate cost of £1,507 million, including £9 million of transaction costs) under the share buyback programme. 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)
For further details about the shares purchased and the average price paid per share please refer to note 17 in the consolidated financial statements.
During the year ended 30 June 2019 the company purchased call options over4 million shares at a cost of £14 millionto hedge employee share awards and share option grants. These are three-year call options, denominated in sterling. During the year ended 30 June 2018, as part of the employee share schemes, the company purchased 2.5 million ordinary shares, nominal value of £1 million, representing approximately 0.1% of the issued ordinary share capital (excluding treasury shares).
Business review (continued)
Contractual obligations and other commitments
| | | | | | | | | | | | | | | | | |
| | Payments due by period |
| As at 30 June 2023 | Less than
1 year
£ million | 1-3 years
£ million | 3-5 years
£ million | More than
5 years
£ million | Total
£ million |
| Long-term debt obligations | 1,459 | | 3,614 | | 2,982 | | 8,651 | | 16,706 | |
| Interest obligations | 541 | | 750 | | 623 | | 1,503 | | 3,417 | |
| Credit support obligations | 15 | | — | | — | | — | | 15 | |
| Purchase obligations | 1,904 | | 736 | 291 | 71 | 3,002 | |
| Commitments for short-term leases and leases of low-value assets | 32 | | 3 | | 1 | | — | | 36 | |
| | | | | |
| Provisions and other non-current payables | 125 | | 240 | | 157 | | 213 | | 735 | |
| Lease obligations | 93 | | 131 | | 88 | | 239 | | 551 | |
| Capital commitments | 596 | | 3 | | — | | — | | 599 | |
| Other financial liabilities | 218 | | — | | — | | — | | 218 | |
| Total | 4,983 | | 5,477 | | 4,142 | | 10,677 | | 25,279 | |
|
| | | | | | | | | | | | | | | |
| | | Payments due by period | |
| As at 30 June 2020 | | Less than 1 year £ million |
| | 1-3 years £ million |
| | 3-5 years £ million |
| | More than 5 years £ million |
| | Total £ million |
|
| Long-term debt obligations | | 1,645 |
| | 2,980 |
| | 3,079 |
| | 8,615 |
| | 16,319 |
|
| Interest obligations | | 466 |
| | 669 |
| | 541 |
| | 1,741 |
| | 3,417 |
|
| Credit support obligations | | 180 |
| | — |
| | — |
| | — |
| | 180 |
|
| Purchase obligations | | 1,073 |
| | 567 |
| | 128 |
| | 9 |
| | 1,777 |
|
| Commitments for short-term or low-value leases | | 12 |
| | 5 |
| | 1 |
| | 1 |
| | 19 |
|
Post employment benefits(i) | | 37 |
| | 64 |
| | 53 |
| | 62 |
| | 216 |
|
| Provisions and other non-current payables | | 185 |
| | 179 |
| | 115 |
| | 174 |
| | 653 |
|
| Lease obligations | | 115 |
| | 148 |
| | 80 |
| | 189 |
| | 532 |
|
| Capital commitments | | 301 |
| | 10 |
| | 1 |
| | — |
| | 312 |
|
| Other financial liabilities | | 167 |
| | — |
| | — |
| | — |
| | 167 |
|
| Total | | 4,181 |
| | 4,622 |
| | 3,998 |
| | 10,791 |
| | 23,592 |
|
| |
(i) | For further information see note 13 to the consolidated financial statements. |
Long-term debt obligations comprise the principal amount of borrowings (excluding foreign currency swaps) with an original maturity of greater than one year. Interest obligations comprise interest payable on these borrowings and are calculated based on the fixed amounts payable and where the interest rate is variable on an estimate of what the variable rates will be in the future. Credit support obligations represent liabilities to counterparty banks in respect of cash received as collateral under credit support agreements. Purchase obligations include various long-term purchase contracts entered into for the supply of raw materials, principally bulk
whisk(e)y, cereals, cans and glass bottles. Contracts are used to guarantee the supply of raw materials over the long term and to enable a more accurate prediction of costs of raw materials in the future. For certain provisions, discounted numbers are disclosed.
Corporate tax payable of £246£135 million and deferred tax liabilities of £2,183 million are not included in the table above, as the ultimate timing of settlement cannot be reasonably estimated.
Management believe that it has sufficient funding for its working capital requirements.
Post employment benefits contractual obligations comprise committed deficit contributions but exclude future service cost contributions.
Off-balance sheet arrangements
Neither Diageo plc nor any member of the Diageo group has any off-balance sheet financing arrangements that currently have or are reasonably likely to have a material future effect on the group’s financial condition, changes in financial condition, results of operations, liquidity, capital expenditure or capital resources.
Risk management
The group’s funding, liquidity and exposure to foreign currency, interest rate risks, financial credit risk and commodity price risk are conducted within a framework of board approved policies and guidelines. The group purchases insurance for commercial or, where required, for legal or contractual reasons. In addition, the group retains some insurable risk where external insurance is not considered to be an economic means of mitigating this risk. Loan, trade and other receivables exposures are managed locally in the operating units where they arise and credit limits are established as deemed appropriate for the customer.
For a detailed analysis of the group’s exposure to foreign exchange, interest rate, commodity price, creditmore information on commitments and liquidity riskscontingencies, please see note 15 to19 – Contingent liabilities and legal proceedings in the consolidated financial statements on pages 249-253.statements.
Business reviewdescription (continued)
5. Capital repayments
Critical accounting policies
The consolidated financial statements are prepared in accordance with IFRS. Diageo’s accounting policies are set out inAuthorisation was given by shareholders on 6 October 2022 to purchase a maximum of 227,870,414 ordinary shares at a minimum price of 28101/108 pence and a maximum price of the noteshigher of (a) 105% of the average market value of the company's ordinary shares for the five business days prior to the consolidated financial statements. In applying these policies,day the directors are required to make estimatespurchase is made and subjective judgements that may affect(b) the reported amountshigher of assetsthe price of the last independent trade and liabilitiesthe highest current independent bid on the trading venue where the purchase is carried out. The programme expires at the balance sheet date and reported profit for the year. The directors base these on a combination of past experience and any other evidence that is relevant to the particular circumstance. The actual outcome could differ from those estimates.
The critical accounting policies, which the directors consider are of greater complexity and/or particularly subject to the exercise of judgements, are set out in detail in the relevant notes:
| |
– | Exceptional items - page 213 |
| |
– | Taxation - pages 219, 220 and 269 |
| |
– | Brands, goodwill and other intangibles - page 228 |
| |
– | Post employment benefits - page 239 |
| |
– | Contingent liabilities and legal proceedings - page 269 |
New accounting standards
A number of accounting standards, amendments and interpretations have recently been issued by the IASB and IFRIC. Those that are of relevance to the group are discussed in note 1 to the consolidated financial statements on page 206.
Business review (continued)
Definitions and reconciliation of non-GAAP measures to GAAP measures
Diageo’s strategic planning process is based on certain non-GAAP measures, including organic movements. These non-GAAP measures are chosen for planning and reporting, and some of them are used for incentive purposes. The group’s management believes these measures provide valuable additional information for usersconclusion of the financial statements in understanding the group’s performance. These non-GAAP measures should be viewed as complementary to, and not replacements for, the comparable GAAP measures and reported movements therein.next Annual General Meeting or on 5 January 2024, if earlier.
It is not possible to reconcile the forecast tax rate before exceptional items and forecast organic operating profit increases to the most comparable GAAP measures as it is not possible to predict, without unreasonable effort, with reasonable certainty, the future impactDiageo completed a total of changes in exchange rates, acquisitions and disposals and potential exceptional items.
Volume
Volume is a non-GAAP measure that is measured on an equivalent units basis to nine-litre cases£1.4 billion return of spirits. An equivalent unit represents one nine-litre case of spirits, which is approximately 272 servings. A serving comprises 33ml of spirits, 165ml of wine, or 330ml of ready to drink or beer. Therefore, to convert volume of products other than spirits to equivalent units, the following guide has been used: beer in hectolitres, divide by 0.9; wine in nine-litre cases, divide by five; ready to drink in nine-litre cases, divide by 10; and certain pre-mixed products that are classified as ready to drink in nine-litre cases, divide by ten.
Organic movements
Organic information is presented using pounds sterling amounts on a constant currency basis excluding the impact of exceptional items, certain fair value remeasurement and acquisitions and disposals. Organic measures enable users to focus on the performance of the business which is common to both years and which represents those measures that local managers are most directly able to influence.
Calculation of organic movements
The organic movement percentage is the amount in the row titled ‘Organic movement’ in the tables below, expressed as a percentage of the absolute amount in the associated relevant row titled ‘2019 adjusted’. Organic operating margin is calculated by dividing operating profit before exceptional items by net sales after excluding the impact of exchange rate movements, certain fair value remeasurement and acquisitions and disposals.
(a) Exchange rates
'Exchange' in the organic movement calculation reflects the adjustment to recalculate the reported results as if they had been generated at the prior period weighted average exchange rates.
The group changed its method of calculating the exchange impact used to calculate organic growth in its results during the year ending 30 June 2020. 'Exchange' in the organic movement calculation now reflects the adjustment to recalculate the reported results as if they had been generated at the prior period weighted average exchange rates. Previously, Diageo had calculated the exchange adjustment included in the organic calculation by translating the prior period results at the current period exchange rates. The change simplified processes by aligning management and organic reporting and is more consistent with how Diageo’s peer group report.
Exchange impacts in respect of the external hedging of intergroup sales by the markets in a currency other than their functional currency and the intergroup recharging of services are also translated at prior period weighted average exchange rates and are allocated to the geographical segment to which they relate. Residual exchange impacts are reported as part of the Corporate segment.
(b) Acquisitions and disposals
For acquisitions in the current period, the post acquisition results are excluded from the organic movement calculations. For acquisitions in the prior period, post acquisition results are included in full in the prior period but are included in the organic movement calculation from the anniversary of the acquisition date in the current period. The acquisition row also eliminates the impact of transaction costs that have been charged to operating profit in the current or prior period in respect of acquisitions that, in management’s judgement, are expected to be completed.
Business review (continued)
Where a business, brand, brand distribution right or agency agreement was disposed of, or terminated, in the reporting period, the group, in the organic movement calculations, excludes the results for that business from the current and prior period. In the calculation of operating profit, the overheads included in disposals are only those directly attributable to the businesses disposed of, and do not result from subjective judgements of management.
In addition, as part of acquisitions and disposals in the reconciliation for operating profit before exceptional items in the year ended 30 June 2019, there is a charge of £15 million in respect of an increase in the contingent consideration payable to the former owners of the Casamigos brand which was acquired in August 2017.
(c) Exceptional items
Exceptional items are those that in management’s judgement need to be disclosed separately. Such items are included within the income statement caption to which they relate, and are excluded from the organic movement calculations. It is believed that separate disclosure of exceptional items and the classification between operating and non-operating further helps investors to understand the performance of the group.
Exceptional operating items are those that are considered to be material and unusual or non-recurring in nature and are part of the operating activities of the group such as impairment of intangible assets and fixed assets, indirect tax settlements, property disposals and changes in post employment plans.
Gains and losses on the sale of businesses, brands or distribution rights, step up gains and losses that arise when an investment becomes an associate or an associate becomes a subsidiary and other material, unusual non-recurring items, that are not in respect of the production, marketing and distribution of premium drinks, are disclosed as non-operating exceptional items below operating profit in the consolidated income statement.
Exceptional current and deferred tax items, comprising material unusual non-recurring items that impact taxation. Examples include direct tax provisions and settlements in respect of prior years and the remeasurement of deferred tax assets and liabilities following tax rate changes.
(d) Fair value remeasurement
Fair value remeasurement in the organic movement calculation reflects an adjustment to eliminate the impact of fair value changes in biological assets and fair value changes relating to contingent consideration liabilities and equity options that arose on acquisitions recognised in the income statement.
Business review (continued)
Organic movement calculations for the year ended 30 June 2020 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | North America
million |
| | Europe and Turkey
million |
| | Africa
million |
| | Latin America
and Caribbean
million |
| | Asia Pacific
million |
| | Corporate
million |
| | Total
million |
|
| Volume (equivalent units) | | | | | | | | | | | | | | |
| 2019 reported | | 49.4 |
| | 45.4 |
| | 33.6 |
| | 22.4 |
| | 95.1 |
| | — |
| | 245.9 |
|
Disposals(v) | | (2.1 | ) | | (0.1 | ) | | (2.7 | ) | | — |
| | — |
| | — |
| | (4.9 | ) |
| 2019 adjusted | | 47.3 |
| | 45.3 |
| | 30.9 |
| | 22.4 |
| | 95.1 |
| | — |
| | 241.0 |
|
| Organic movement | | 0.1 |
| | (5.2 | ) | | (4.0 | ) | | (3.4 | ) | | (14.5 | ) | | — |
| | (27.0 | ) |
Acquisitions and disposals(v) | | 1.0 |
| | 0.1 |
| | 1.9 |
| | — |
| | — |
| | — |
| | 3.0 |
|
| 2020 reported | | 48.4 |
| | 40.2 |
| | 28.8 |
| | 19.0 |
| | 80.6 |
| | — |
| | 217.0 |
|
| Organic movement % | | — |
| | (11 | ) | | (13 | ) | | (15 | ) | | (15 | ) | | — |
| | (11 | ) |
| | | North America
£ million |
|
| Europe and Turkey
£ million |
|
| Africa
£ million |
|
| Latin America
and Caribbean
£ million |
|
| Asia Pacific
£ million |
|
| Corporate
£ million |
|
| Total
£ million |
|
| Sales | | | | | | | | | | | | | | |
| 2019 reported | | 5,074 |
| | 5,132 |
| | 2,235 |
| | 1,444 |
| | 5,356 |
| | 53 |
| | 19,294 |
|
| Exchange | | (39 | ) | | (28 | ) | | (4 | ) | | 3 |
| | (8 | ) | | 2 |
| | (74 | ) |
Reclassification(iii) | | — |
| | — |
| | — |
| | (10 | ) | | — |
| | — |
| | (10 | ) |
Disposals(v) | | (106 | ) | | (3 | ) | | (114 | ) | | (1 | ) | | (2 | ) | | — |
| | (226 | ) |
| 2019 adjusted | | 4,929 |
| | 5,101 |
| | 2,117 |
| | 1,436 |
| | 5,346 |
| | 55 |
| | 18,984 |
|
| Organic movement |
| 98 |
|
| (388 | ) |
| (261 | ) |
| (193 | ) |
| (718 | ) |
| (16 | ) |
| (1,478 | ) |
Acquisitions and disposals(v) | | 42 |
| | 10 |
| | 64 |
| | — |
| | 2 |
| | — |
| | 118 |
|
| Exchange | | 153 |
| | (26 | ) | | (9 | ) | | (59 | ) | | 15 |
| | (1 | ) | | 73 |
|
| 2020 reported | | 5,222 |
| | 4,697 |
| | 1,911 |
| | 1,184 |
| | 4,645 |
| | 38 |
| | 17,697 |
|
| Organic movement % | | 2 |
| | (8 | ) | | (12 | ) | | (13 | ) | | (13 | ) | | (29 | ) | | (8 | ) |
Business review (continued)
|
| | | | | | | | | | | | | | | | | | | | | |
| | | North America
£ million |
| | Europe and Turkey
£ million |
| | Africa
£ million |
| | Latin America
and Caribbean
£ million |
| | Asia Pacific
£ million |
| | Corporate
£ million |
| | Total
£ million |
|
| Net sales | | | | | | | | | | | | | | |
| 2019 reported | | 4,460 |
| | 2,939 |
| | 1,597 |
| | 1,130 |
| | 2,688 |
| | 53 |
| | 12,867 |
|
Exchange(i) | | (34 | ) | | (19 | ) | | (2 | ) | | 4 |
| | 1 |
| | 2 |
| | (48 | ) |
Reclassification(iii) | | — |
| | — |
| | — |
| | (10 | ) | | — |
| | — |
| | (10 | ) |
Disposals(v) | | (75 | ) | | (1 | ) | | (91 | ) | | (1 | ) | | (1 | ) | | — |
| | (169 | ) |
| 2019 adjusted | | 4,351 |
| | 2,919 |
| | 1,504 |
| | 1,123 |
| | 2,688 |
| | 55 |
| | 12,640 |
|
| Organic movement |
| 105 |
|
| (358 | ) |
| (200 | ) |
| (169 | ) |
| (423 | ) |
| (16 | ) |
| (1,061 | ) |
Acquisitions and disposals(v) | | 32 |
| | 10 |
| | 50 |
| | — |
| | 1 |
| | — |
| | 93 |
|
Exchange(i) | | 135 |
| | (4 | ) | | (8 | ) | | (46 | ) | | 4 |
| | (1 | ) | | 80 |
|
| 2020 reported | | 4,623 |
| | 2,567 |
| | 1,346 |
| | 908 |
| | 2,270 |
| | 38 |
| | 11,752 |
|
| Organic movement % | | 2 |
| | (12 | ) | | (13 | ) | | (15 | ) | | (16 | ) | | (29 | ) | | (8 | ) |
| Marketing | | | | | | | | | | | | | | |
| 2019 reported | | 762 |
| | 490 |
| | 174 |
| | 201 |
| | 412 |
| | 3 |
| | 2,042 |
|
| Exchange | | (1 | ) | | (11 | ) | | — |
| | 1 |
| | (1 | ) | | — |
| | (12 | ) |
Reclassification(iii) | | — |
| | — |
| | — |
| | (10 | ) | | — |
| | — |
| | (10 | ) |
Disposals(v) | | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
| 2019 adjusted | | 761 |
| | 479 |
| | 173 |
| | 192 |
| | 411 |
| | 3 |
| | 2,019 |
|
| Organic movement |
| (49 | ) |
| (56 | ) |
| (14 | ) |
| (29 | ) |
| (47 | ) |
| — |
|
| (195 | ) |
Acquisitions and disposals(v) | | 3 |
| | 4 |
| | 1 |
| | — |
| | — |
| | — |
| | 8 |
|
| Exchange | | 12 |
| | 1 |
| | — |
| | (8 | ) | | 1 |
| | 3 |
| | 9 |
|
| 2020 reported | | 727 |
| | 428 |
| | 160 |
| | 155 |
| | 365 |
| | 6 |
| | 1,841 |
|
| Organic movement % | | (6 | ) | | (12 | ) | | (8 | ) | | (15 | ) | | (11 | ) | | — |
| | (10 | ) |
| Operating profit before exceptional items | | | | | | | | | | | | | | |
| 2019 reported | | 1,948 |
| | 1,014 |
| | 275 |
| | 365 |
| | 703 |
| | (189 | ) | | 4,116 |
|
Exchange(ii) | | 12 |
| | (16 | ) | | (4 | ) | | 1 |
| | 8 |
| | (1 | ) | | — |
|
Acquisitions and Disposals(v) | | (27 | ) | | 1 |
| | (3 | ) | | — |
| | — |
| | — |
| | (29 | ) |
| 2019 adjusted | | 1,933 |
| | 999 |
| | 268 |
| | 366 |
| | 711 |
| | (190 | ) | | 4,087 |
|
| Organic movement |
| 80 |
|
| (243 | ) |
| (150 | ) |
| (107 | ) |
| (207 | ) |
| 38 |
|
| (589 | ) |
Acquisitions and disposals(v) | | (1 | ) | | (4 | ) | | — |
| | — |
| | — |
| | — |
| | (5 | ) |
Fair value remeasurement of contingent considerations and equity option (iv) | | (10 | ) | | (4 | ) | | — |
| | 7 |
| | — |
| | — |
| | (7 | ) |
| Fair value remeasurement of biological assets | | — |
| | — |
| | — |
| | 9 |
| | — |
| | — |
| | 9 |
|
Exchange(ii) |
| 32 |
|
| 9 |
|
| (17 | ) |
| (27 | ) |
| (3 | ) |
| 5 |
|
| (1 | ) |
| 2020 reported | | 2,034 |
| | 757 |
| | 101 |
| | 248 |
| | 501 |
| | (147 | ) | | 3,494 |
|
| Organic movement % | | 4 |
| | (24 | ) | | (56 | ) | | (29 | ) | | (29 | ) | | 20 |
| | (14 | ) |
| Organic operating margin % | | | | | | | | | | | | | | |
| 2020 | | 45.2 | % | | 29.5 | % | | 9.0 | % | | 27.1 | % | | 22.3 | % | | n/a |
| | 30.2 | % |
| 2019 | | 44.4 | % | | 34.2 | % | | 17.8 | % | | 32.6 | % | | 26.5 | % | | n/a |
| | 32.3 | % |
| Margin movement (bps) | | 75 |
| | (470 | ) | | (877 | ) | | (544 | ) | | (420 | ) | | n/a |
| | (212 | ) |
(1) For the reconciliation of sales to net sales see page 87.
(2) Percentages and margin movement are calculated on rounded figures.
Notes: Information in respect of the organic movement calculations
(i) 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.
(ii) 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.
(iii) For the year ended 30 June 2019 trade investment of £10 million has been reclassified from marketing to net sales.
(iv) Change in contingent consideration re Casamigos was reported as part of acquisitions in year ended 30 June 2019.
| |
(v) | In the year ended 30 June 2020 the acquisitions and disposals that affected volume, sales, net sales, marketing and operating profit were as follows: |
Business review (continued)
Acquisitions
|
| | | | | | | | | | | | | | | |
| | | Volume
equ. units million |
| | Sales
£ million |
| | Net sales
£ million |
| | Marketing
£ million |
| | Operating
profit
£ million |
|
| Year ended 30 June 2019 | | | | | | | | | | |
| Acquisition | | | | | | | | | | |
| Change in contingent consideration re Casamigos | | — |
|
| — |
|
| — |
|
| — |
|
| 15 |
|
| | — |
| | — |
| | — |
| | — |
| | 15 |
|
| Disposals | | | | | | | | | | |
| Portfolio of 19 brands | | (2.2 | ) |
| (114 | ) |
| (79 | ) |
| — |
|
| (42 | ) |
| South African ready to drink | | (0.5 | ) |
| (65 | ) |
| (43 | ) |
| — |
|
| — |
|
| South African cider | | — |
|
| (4 | ) |
| (4 | ) |
| — |
|
| (1 | ) |
| UNB | | (2.2 | ) |
| (43 | ) |
| (43 | ) |
| (1 | ) |
| (1 | ) |
| | | (4.9 | ) |
| (226 | ) |
| (169 | ) |
| (1 | ) |
| (44 | ) |
| Acquisitions and disposals | | (4.9 | ) |
| (226 | ) |
| (169 | ) |
| (1 | ) |
| (29 | ) |
| Year ended 30 June 2020 | | | | | | | | | | |
| Acquisition | | | | | | | | | | |
| Seedlip and Aecorn | | 0.1 |
| | 12 |
| | 12 |
| | 7 |
| | (8 | ) |
| | 0.1 |
| | 12 |
| | 12 |
| | 7 |
| | (8 | ) |
| Disposals | | | | | | | | | | |
| Supply contracts in respect of the 19 brands sold to Sazerac | | 1.1 |
|
| 42 |
|
| 31 |
|
| — |
|
| 3 |
|
| South African ready to drink | | 0.3 |
|
| 33 |
|
| 19 |
|
| — |
|
| — |
|
| UNB | | 1.5 |
|
| 31 |
|
| 31 |
|
| 1 |
|
| — |
|
| | 2.9 |
|
| 106 |
|
| 81 |
|
| 1 |
|
| 3 |
|
| Acquisitions and disposals | | 3.0 |
|
| 118 |
|
| 93 |
|
| 8 |
|
| (5 | ) |
Business review (continued)
Earnings per share before exceptional items
Earnings per share before exceptional items is calculated by dividing profit attributable to equity shareholders of the parent company before exceptional items by the weighted average number of shares in issue.
Earnings per share before exceptional items for the year ended 30 June 2020 and 30 June 2019 are set out in the table below.
|
| | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
|
| Profit attributable to equity shareholders of the parent company | | 1,409 |
| | 3,160 |
|
| Exceptional operating and non-operating items | | 1,380 |
| | (61 | ) |
| Exceptional taxation charges/(benefits) | | — |
| | 10 |
|
| Tax in respect of exceptional operating and non-operating items | | (154 | ) | | 29 |
|
| Exceptional items attributable to non-controlling interests | | (69 | ) | | 26 |
|
| | | 2,566 |
| | 3,164 |
|
| Weighted average number of shares | | million |
| | million |
|
| Shares in issue excluding own shares | | 2,346 |
| | 2,418 |
|
| Dilutive potential ordinary shares | | 8 |
| | 10 |
|
| | | 2,354 |
| | 2,428 |
|
| | | pence |
| | pence |
|
| Basic earnings per share before exceptional items | | 109.4 |
| | 130.8 |
|
| Diluted earnings per share before exceptional items | | 109.0 |
| | 130.3 |
|
(1) The impact of the adoption of IFRS 16 on 1 July 2019 on earnings per share before exceptional items for year ended 30 June 2020 is immaterial.
Free cash flow
Free cash flow comprises the net cash flow from operating activities aggregated with the net cash received/paid for working capital loans receivable, cash paid or received for investments and the net cash cost paid for property, plant and equipment and computer software that are included in net cash flow from investing activities.
The remaining components of net cash flow from investing activities that do not form part of free cash flow, as defined by the group’s management, are in respect of the acquisition and sale of businesses and non-working capital loans to and from associates.
The group’s management regards the purchase and disposal of property, plant and equipment and computer software as ultimately non-discretionary since ongoing investment in plant, machinery and technology is required to support the day-to-day operations, whereas acquisitions and sales of businesses are discretionary.
Where appropriate, separate explanations are given for the impacts of acquisitions and sale of businesses, dividends paid and the purchase of own shares, each of which arises from decisions that are independent from the running of the ongoing underlying business.
Free cash flow reconciliations for the years ended 30 June 2020 and 30 June 2019 are set out in the table below:
|
| | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
|
| Net cash inflow from operating activities | | 2,320 |
| | 3,248 |
|
| Disposal of property, plant and equipment and computer software | | 14 |
| | 32 |
|
| Purchase of property, plant and equipment and computer software | | (700 | ) | | (671 | ) |
| Movements in loans and other investments | | — |
| | (1 | ) |
| Free cash flow | | 1,634 |
| | 2,608 |
|
(1) Free cash flow for the year ended 30 June 2020 has benefited by £74 million as a result of the adoption of IFRS 16 on 1 July 2019.
Business review (continued)
Return on average total invested capital
Return on average total invested capital is used by management to assess the return obtained from the group’s asset base and is calculated to aid evaluation of the performance of the business.
The profit used in assessing the return on average total invested capital reflects operating profit before exceptional items attributable to the equity shareholders of the parent company plus share of after tax results of associates and joint ventures after applying the tax rate before exceptional items for the year. Average total invested capital is calculated using the average derived from the consolidated balance sheets at the beginning, middle and end of the year. Average capital employed comprises average net assets attributable to equity shareholders of the parent company for the year, excluding post employment benefit net assets/liabilities (net of deferred tax) and average net borrowings. This average capital employed is then aggregated with the average restructuring and integration costs net of tax, and goodwill written off to reserves at 1 July 2004, the date of transition to IFRS, to obtain the average total invested capital.
Calculations for the return on average total invested capital for the year ended 30 June 20202023, which included £0.9 billion related to the successful completion of Diageo’s previous share buyback programme in which £4.5 billion of capital was returned to shareholders finalised in February 2023, and returned an additional £0.5 billion of capital to shareholders which was announced as a new share buyback programme on 16 February 2023 and completed on 2 June 2023.
During the year ended 30 June 20192023, the group purchased 38 million ordinary shares (2022 – 61 million; 2021 – 3 million), representing approximately 1.5% of the issued ordinary share capital (2022 – 2.4%; 2021 – 0.1%) at an average price of 3,616 pence per share, and an aggregate cost of £1,381 million (including £13 million of transaction costs) (2022 – 3,709 pence per share, and an aggregate cost of £2,284 million, including £16 million of transaction costs; 2021 – 3,407 pence per share, and an aggregate cost of £109 million, including £1 million of transaction costs) under the share buyback programme. The shares purchased under the share buyback programmes were cancelled.
For further details about the shares purchased and the average price paid per share please refer to note 18 in the consolidated financial statements.
Business description (continued)
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| 'Society 2030: Spirit of Progress' – putting positive societal impact at the heart of our business strategy We are a successful global business, building and nurturing some of the world’s most recognised brands. A fundamental part of our success is being responsible. That is about making sure we are inclusive and sustainable, and acknowledging that our impact and influence extend beyond our own operations. It is also about being accountable and transparent – which is why we report our non-financial performance in this section. |
Responding to the issues that matter
'‘Society 2030: Spirit of Progress‘ is our global programme addressing the most material(1) issues facing our company, people, brands, suppliers and communities. Its ambitions are embedded in our business strategy, and it aims to make a positive impact on people and the planet everywhere we live, work, source and sell.
The programme builds on our earlier progress on environmental, social and governance (ESG) issues. At the heart of ‘Society 2030: Spirit of Progress‘ are three priorities:
•Promote positive drinking – changing the way the world drinks, for the better.
•Champion inclusion and diversity – creating an inclusive and diverse culture for a better business.
•Pioneer grain-to-glass sustainability – preserving the natural resources we all depend on.
We have set 25 targets across a range of ESG issues that matter to our business, to the communities we work with, to society as a whole and to the planet. We’ve mapped these targets to the objectives and timeline of the UN’s 2030 Sustainable Development Goals. While we have made significant progress against many of our targets, there is still much to do. In some cases, we set our targets with the expectation that we'd need innovation to reach them, and we still do. We also regularly review our material issues to make sure the 'Society 2030: Spirit of Progress' plan is still fit for purpose to address the issues most material to our business and our impact on people and the planet. While we made no changes to our plan or targets in fiscal 23, we will continue to assess them and expect to refine and possibly reframe our approach to material issues in fiscal 24.
This section of the Annual Report sets out our progress against our targets in fiscal 23, and our future plans. It contains reporting on other aspects of our non-financial performance, as part of our continuing drive to be transparent and accountable. This includes reporting on how we are addressing climate change risk against the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). It also includes information about our approach to human rights, business integrity, our people and health and safety, all of which are fundamental to our long-term success as a responsible business.
A better world, a better business
By working towards our goals, we are doing the right thing by contributing to a better society and a healthier planet. We believe we are also making ourselves a better, more competitive business, and one that is more resilient for the long term.
More specifically, ‘Society 2030: Spirit of Progress‘ helps us to:
•Manage our risks from climate change, and spot opportunities to innovate
•Attract the best, most diverse talent
•Make our supply chains more resilient
•Enhance our reputation with our investors, consumers and other stakeholders
•Strengthen our brands
Governance
Both the Board and the Executive Committee oversee our ‘Society 2030: Spirit of Progress‘ plan. The Board conducts regular reviews of our most material issues, our strategy to address those issues and our targets used to measure our strategy in action. Our Chief Executive, Debra Crew, is ultimately accountable for overall performance against ESG targets, while responsibility for the component parts of 'Society 2030: Spirit of Progress' is shared between members of our Executive Committee. At the local and market level, our regional presidents and general managers have frontline responsibility, supported by our Global Spirit of Progress Director and team. The markets are also supported by Executive Committee members representing global functions.
Linking performance to remuneration
Five of our targets are key performance indicators for our business as a whole, which is why they're also linked to our senior leaders’ long-term incentive plans. The goals in our long-term incentive plans include:
•Number of people who confirm changed attitudes to the dangers of underage drinking after participating in a Diageo-supported education programme
•Inclusion and diversity (one measure of the percentage of female leaders globally and another measure of the percentage of ethnically diverse leaders globally)
•Improvement in water efficiency
•Reduction in greenhouse gas emissions in our direct operations (Scope 1 & 2)
This represents all three strategic priorities of our ‘Society 2030: Spirit of Progress‘ ambition, and reflects our vision to make a positive impact on the environment and society.
(1) Our latest materiality assessment is included in our ESG Reporting Index.
Business description (continued)
Reporting transparently
We define our targets carefully, along with clear non-financial reporting boundaries and methodologies for each. For more details, see page 292-295. The reporting of non-financial information is evolving quickly. We are committed to continuously evaluating and improving our approach as well as responding to changes in regulation.
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| | Promote positive drinking As a responsible business, we want to change the way people drink – for the better. This is why we promote moderate drinking and invest in education programmes to discourage the harmful use of alcohol.
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Around the world, we reach audiences with messages that aim to change attitudes, whether it’s highlighting the harm of underage drinking or binge drinking, warning of the dangers of drink driving, or using our brands to highlight the importance of moderation.
We continue to look for ways to improve as we strive to engage more people through our work to promote positive drinking. This extends to how we measure and evaluate the impact of our work and its effect on changing peoples' attitudes.
How we promote positive drinking
Our main tools are:
•DRINKiQ – our interactive online platform that gives users facts about alcohol and the effects of drinking on the body and mind, and the impact that harmful alcohol consumption has on people and society.
•SMASHED – an award-winning programme that educates young people on the dangers of underage drinking.
•'Wrong Side of the Road' – our interactive learning experience that aims to discourage drink driving.
•Brand-led campaigns – harnessing our marketing resources to promote moderation through our brands.
We stringently control our own marketing and advertising, in line with our Diageo Marketing Code. We work with our industry and with advertising organisations to help create a safe environment in media and online.
Our work is coordinated by our Positive Drinking Council, which has representatives from across the business.
Increasing knowledge and awareness with DRINKiQ
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Target by 2030 Champion health literacy and tackle harm through DRINKiQ in every market where we live, work, source and sell |
Number of markets that have
launched DRINKiQ | 21 |
DRINKiQ is our online responsible drinking tool. It champions health literacy by providing facts about alcohol, complementing resources offered by governments, charities and other stakeholders. The aim is to invite consumers to change their attitudes to alcohol and empower them to achieve a balanced lifestyle.
We have launched DRINKiQ in all the markets where it's legally permissible. It is live in 21 markets, 56 countries and 23 languages, and we promote it through our product labels, social media channels and marketing to make sure as many people as possible use it. While we have reached our target by launching DRINKiQ in all the markets we operate in, we are determined to continue promoting it so that consumers have access to information that can increase their knowledge and awareness of the impact of harmful drinking.
In fiscal 23, markets around the world ran campaigns to connect people with DRINKiQ. In Hungary, we teamed up with Sziget, the Island of Freedom, the biggest summer festival in Central Eastern Europe, to deliver an innovative DRINKiQ campaign. Visitors got responsible drinking messages and links to DRINKiQ.com through reusable cups, fence banners, tote bags, Facebook and Instagram posts. Tens of thousands of people visited DRINKiQ during the summer and the campaign was shortlisted for the European Festival Awards. In South Korea, a DRINKiQ digital campaign over the festive period resulted in more than 20,000 people completing the DRINKiQ Quiz and 2.4 million page views in just one month.
Business description (continued)
Tackling underage drinking through SMASHED
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Target by 2030 Scale up our SMASHED partnership and educate 10 million young people, parents and teachers on the dangers of underage drinking |
Number of people educated on the dangers of underage drinking through a Diageo-supported education programme in fiscal 23
| 1,985,817 | |
We believe it is never acceptable for anyone underage to consume alcohol. This is why we have run campaigns and programmes to combat underage drinking for many years, including campaigns to ensure a consistent approach to legal purchase age for alcohol across categories. SMASHED is a programme that educates young people aged from 10 to 17 in 38 countries on the dangers of underage drinking either live or online format. It was developed by Collingwood Learning and we are proud to sponsor it.
SMASHED began in 2005 as a live theatre production and has since been adapted for online learning. To make the programme as successful as possible, the performance can be tailored to specific countries using local actors and cultural references.
In fiscal 23, our ambition was to educate more than 800,000 people through SMASHED, but we have surpassed this by educating 1,985,817 people, with 1,548,996 people confirming changed attitudes on the dangers of underage drinking following participation in a Diageo-supported education programme. We have educated 3.79 million people since our baseline year of 2018.
To achieve this, we have:
•Extended SMASHED Live to 10 new countries and SMASHED Online to 12 new countries including Argentina, Chile, Paraguay, Panama and Costa Rica.
•Launched a shorter facilitated live version, allowing us to reach more people while maintaining the programme's effectiveness. This was a direct response to feedback from teachers.
•Developed three new versions of SMASHED Online in India.
•Launched a new version of SMASHED Online for Northern Ireland.
SMASHED has been recognised by industry and marketing peers, winning 12 awards from eight organisations in fiscal 23. The awards recognised the quality of the learning experience, the creativity of its immersive, story-led approach and excellence in other areas including innovation and digital technology.
Changing attitudes to drink driving
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Target by 2030 Extend our UNITAR partnership and promote changes in attitudes to drink driving, reaching five million people |
Number of people educated about
the dangers of drink driving in fiscal 23 | 706k |
We have long worked to alert people to the dangers of drink driving. Initially we partnered with police, local authorities and other agencies that support enforcement of drink drive laws. In 2021, we launched the 'Wrong Side of the Road' (WSOTR) digital learning resource with the United Nations Institute for Training and Research (UNITAR) to help people understand the impact of drink-driving on themselves and others.
WSOTR is available in digital and classroom formats, is live in 24 countries, and reached 706,000 people in fiscal 23. This year, we have found new ways to reach more people through partnerships in India, reaching 230,000 people by:
•Launching WSOTR with the national road safety agency – driving-test candidates can now experience WSOTR as they wait for their driving test.
•Making WSOTR available in a classroom format through driving schools.
We believe that promoting WSOTR in a setting such as a driving school, where people are already learning about road safety is a particularly effective setting for this resource.
Business description (continued)
Using the power of our brands
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Target by 2030 Leverage Diageo marketing and innovation to make moderation the norm – reaching 1 billion people with dedicated responsible drinking messages |
| Number of people reached with responsible drinking messages from our brands in fiscal 23 | 645m |
Our brands are among our most powerful tools in shaping consumer attitudes and promoting moderation. We are proud to have achieved our 2030 target early, having reached more than 1.4 billion people in total with messages of moderation from fiscal 21 to the end of fiscal 23. We have done this by delivering campaigns at scale in all the key regions where we operate.
Our fiscal 23 highlights include:
•In North America, reaching 88 million people with our Johnnie Walker 'Rewind the Night' moderation campaign.
•In Latin America and Caribbean, continuing to expand the 'Derribando Mitos' moderation campaign, now in its third year, to reach 51 million people across seven countries.
•In China, combining the power of the Baileys and Tanqueray No. TEN brands with a deep understanding of popular culture and a 'digital first' approach to promote moderation among young, urban adults, reaching 14.8 million people.
We remain committed to using our expertise in consumer insights and marketing to positively influence attitudes towards moderation across the world.
Marketing in a responsible way
Our Diageo Marketing Code (DMC) and Digital Code not only set minimum standards for responsible marketing, they also represent a cornerstone of our corporate culture and the way we do business. The DMC includes, among other principles, our commitment to making sure we depict and encourage only responsible and moderate drinking, and never target underage audiences. We are proud to have a proven track record of compliance, which is underpinned by mature business processes, and appropriate checks and balances in every market we operate in.
We published the latest version of the DMC in January 2023, with enhanced rules governing the marketing of our non-alcoholic brands and reinforcing our commitment to advertise them to adults only. Also, in September 2022 we launched a new e-learning module on digital compliance for our brand teams worldwide, with guidance on topics including:
•Transparency – making sure that influencers’ social media posts promoting our brands tell consumers about the nature of the partnership with hashtags such as #Ad.
•Data privacy – further strengthening our approach to the use of consumer data in our digital marketing in line with GDPR (General Data Protection Regulation) principles.
We continue to play a leading role in shaping a vision for a safe, inclusive online ecosystem for our consumers and brands. This is why we have championed the updated version of the World Federation of Advertisers (WFA) Global Media Charter, released in March 2023, re-emphasising our focus on marketing responsibly and making a positive societal impact.
We are pleased to report that all our ads complied with a 2023 review by the WFA’s Responsible Marketing Pact and the European Advertising Standards Alliance, aimed at making sure alcoholic beverage ads do not contain elements that appeal mainly
to minors. We are also pleased that no complaints about Diageo marketing were upheld by key industry bodies this year (see next page).
Business description (continued)
Advertising complaints upheld by key industry bodies that report publicly
Across some of our markets, advertising regulators and industry bodies publicly report breaches of self-regulatory alcohol marketing codes. No breaches were upheld by any of these key bodies about Diageo's advertising this year.
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Incidents of non-compliance concerning marketing communications – FY23(1) |
| Country | Body | Industry complaints upheld | Complaints about Diageo brands upheld |
| United States | Distilled Spirits Council of the United States | 0 | 0 |
| Australia | ABAC Scheme | 27 | 0 |
| United Kingdom | Advertising Standards Authority | 17 | 0 |
| Portman Group | 9 | 0 |
| Republic of Ireland | Advertising Standards Authority for Ireland | 3 | 0 |
(1) From 1 July 2022 to 5 May 2023.
Business description (continued)
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| | Doing business the right way We want to do business in the right way every day, everywhere. This is about making sure our people and suppliers demonstrating integrity, living our values, and behaving in an ethical way that underpins our Code of Business Conduct. We expect everyone who works for us and alongside us to uphold human rights and stand up for what is right.
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Standing up for human rights
We want people who work for us or with us to feel they are treated fairly and with respect. This means working hard to make sure we don’t infringe their human rights, and that we are not complicit with anyone else who does. We seek to build credibility and trust by expecting everyone who works with us to adopt our standards.
Our policies cover our responsibilities to protect the human rights of everyone working in our direct operations, our value chain and communities. They are in line with internationally recognised laws, regulations and guidelines including the UN Guiding Principles on Business and Human Rights, and the International Labor Organization’s Declaration on Fundamental Principles and Rights at Work.
Updating our human rights governance
We continue to enhance our policies(1), standards and disclosures and embed human rights in our enterprise risk management processes.
In fiscal 23, our Global Audit and Risk team reviewed our human rights due diligence by risk area and risk setting to look for opportunities to strengthen our approach and better assess its effectiveness. As a result, we are strengthening our internal governance risk assessment process and committing to more frequent audits of our high-risk markets with:
•A strategic human rights review with the Board at least once a year
•An annual review of our list of high-risk markets for direct operations
•An annual review of human rights risks by direct operations against a self-assessment questionnaire
•A commitment to audit high-risk markets once every three years
We have also developed training to build our teams' capability in effectively managing human rights risks. This helps us to be alert to these risks and able to act effectively when we see them.
Focussing on salient human rights issues
Our Human Rights Impact Assessment (HRIA) programme from 2015 to 2021 highlighted three salient external business and supply chain risks: labour rights, including child labour risks; labour standards for contract workers; and sexual harassment in the hospitality sector. In response, we created awareness programmes on child labour and modern slavery, conducted an independent review of contract labour and developed standards and training to protect brand promotion teams.
To refresh and enhance our assessment of salient issues, we’re reviewing current and emerging laws and regulations alongside our internal processes to assess our operational, commercial and reputational risk in priority jurisdictions. We are also assessing salient risks for third-party suppliers in priority supply chains.
We have also continued to address our global salient risks by:
•Launching a brand promoter training website in 18 languages to help us track training completions and agency compliance with our Brand Promoter Standard.
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Brand promoter training website in 18 languages |
•Refreshing our child labour training and making it part of our wider smallholder farmer programme from fiscal 24
•Participating in a pilot project in Africa to understand the gaps that exist within our supply chain to living wage benchmarks and how we can support our supply chain to bridge those gaps through time
Strengthening our approach to responsible sourcing
To enhance our approach to responsible sourcing we have begun screening for human rights with higher-risk potential suppliers before onboarding. This helps us make more informed decisions on human rights risks and gives us the chance to assess and mitigate the salient issues before we contract with a supplier. We have also extended our supplier requirements on responsible sourcing to our licensed manufacturers globally.
(1) https://www.diageo.com/en/our-business/corporate-governance/code-of-business-conduct/policies-and-standards
Business description (continued)
Connecting climate risk with human rights
Climate change is already having a negative impact on people and communities, not least through water stress, but also by affecting working conditions. We’ve begun a project looking at how we can help workers in our sugarcane supply chain avoid serious health impacts from heat stress driven by climate change. We have partnered with NGOs, government agencies, customers and our suppliers to build awareness around the issues workers face in a changing climate, measure their metabolic data and implement plans to improve conditions. This includes providing workers with more water and mobile shade tents, as well as rest schedules designed around the conditions in specific sites. We have launched this programme with our suppliers in our rum supply chain in Jamaica and Guatemala.
Upholding business integrity
Working with integrity is an important part of who we are and how we achieve our performance ambition to be the best performing, most trusted and respected consumer products company in the world. We all have a part to play in building credibility and trust with stakeholders by doing our jobs in the right way. By being proud of what we do, and how we do it, our conduct will bring about success we can all be proud of.
Reinforcing our Code of Business Conduct
Our Code of Business Conduct is central to how we encourage all our people to work in the right way by making the right choices. Our Code sets out what we stand for as a business and how we demonstrate our high standards of integrity and ethical behaviour. It is guided by our purpose and values. It seeks to provide clarity on how we are expected to behave to build the trust and respect of everyone who interacts
with us.
Each year, all eligible employees receive mandatory training as an opportunity to reflect and certify that they have read, understood and complied with the Code and our global policies. This year, 97% of eligible employees completed the training.
Training is via an interactive e-learning module accessible through any device, or classroom training for those who do not have regular computer access. The training covers topics that help employees understand more about doing the right thing, from grain to glass.
This year, there were 88 breaches of the Code, down by 27% compared to fiscal 22.
Training completed by
97% of eligible employees
Managing third-party risks
Business integrity is also vital in our network of relationships with third parties. Our Know Your Business Partner (KYBP) programme helps us screen for potential risks and be certain about the true identity of third parties before we start a contractual relationship with them.
Throughout fiscal 23, we continued to expand our third-party screening programme to incorporate the many new sanctions rules relating to Russia’s invasion of Ukraine. We also focussed on streamlining the KYBP process by better integrating it into our customer and vendor onboarding to make ourselves more efficient, without making the process any less thorough.
Promoting our whistleblowing service
We encourage everyone to report potential breaches of our Code, policies or standards through our confidential whistleblowing service, SpeakUp. This is run by an independent third-party, is available around the clock and lets employees and external parties report concerns anonymously. This includes issues like bullying, harassment, discrimination and human rights concerns.
The number of SpeakUp reports filed fell during fiscal 23 and is now similar to pre-pandemic levels. In fiscal 23, we rolled out a global awareness campaign for SpeakUp, emphasising our zero tolerance of retaliation against anyone reporting a concern or helping with an investigation. The video-based campaign also showcased the SpeakUp QR code for easy access to the system.
Training our leaders
Treating each other with dignity and respect is an important part of doing business the right way. To reinforce this, we’ve created a training programme for our leaders called Leading with Integrity, designed to:
•Increase awareness of our Dignity at Work policy
•Give guidance on managing SpeakUp reports and resolving any conflicts
•Give leaders the tools they need to handle and resolve issues around Dignity at Work
•Build knowledge, shared understanding and skills on the importance of leading in line with our values and leadership standards
Business description (continued)
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| Our people and culture:
the key to our success Our talented and diverse workforce, together with our brands and inclusive culture,
continue to be a competitive advantage for our business, enabling us to perform at our best.
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Highly engaged people and an inclusive culture
Our 30,237 people(1) are our most valuable assets. Their sense of
purpose and pride in what they do, and their commitment to our brands, consumers, customers and each other are the hallmarks of
our culture.
In December 2022, we celebrated our 25th anniversary with a global webcast and heard from employees on what they valued most about working for Diageo. The themes were consistent with those emerging from our employee listening sessions, namely the quality of our talent, our purpose, values and brands, and our uniquely diverse workforce and inclusive culture. The feedback also reinforces our core values: we are passionate about our customers and consumers and always strive to be the best. We give each other freedom to succeed and value each other. We work hard so we can be proud of what we do, and this pride is a source of energy that fuels our performance.
Employee Engagement Index
84%(2)
Despite ongoing volatility in our markets, we continue to see strong employee engagement. In our Your Voice survey this year, our Employee Engagement Index increased from 82% in fiscal 22 to 84%, and our Employer Advocacy score – the proportion of people who would recommend Diageo as a great place to work – is 84%, which is 11 percentage points higher than our external benchmark(3) . That is an improvement of two percentage points on last year. Similarly, the percentage of people who are proud to work for Diageo improved by one percentage point to 91%, which is 14 percentage points higher than our external benchmark. This strong advocacy and pride contributes to the strength of our external employer brand. In fiscal 23, we have seen a 31% increase in the number of external applicants for open roles, while engagement with our employer brand LinkedIn content has been above benchmark levels.
Diageo's purpose is 'celebrating life every day, everywhere'. Recognising the importance of celebration in engagement and performance, in fiscal 23 we began to roll out a global employee recognition programme, Celebrate. This programme empowers our people to formally acknowledge each other for the small and big moments. Building a culture of gratitude and appreciation is core to how we live our values and purpose every day. So far, employees have made 27,000 awards in North America, United Kingdom and Ireland through the programme. In markets where Celebrate is live, 85% of employees have received recognition through the Celebrate platform and we intend to roll the platform out across all our markets to further strengthen our culture.
Helping our people realise their potential
We believe that Diageo grows when our people grow. Our talent strategy is to empower our people with the developmental experiences to facilitate their growth and successful careers at Diageo. To support our people’s career progression, we aim to fill our vacancies internally where we can. In fiscal 23, we recorded 5,092 career moves which translates to an average of 14 people a day making career moves. We have increased internal appointments into leadership roles to 72.8% – up one percentage point on fiscal 22. Our general managers come from diverse functional and professional backgrounds, fuelling our strong performance with diversity of experience, and giving our people opportunities for cross-functional experiences. Also, international moves increased by 15.9% this year, and we continued to offer developmental webinars, workshops and networking to all employees through our Craft my Career programme.
To meet the demands of our growth strategy, we are putting extra investment into new and emerging capabilities in digital, ESG and leadership. In fiscal 23, our people completed 11,538 digital training courses in different areas in partnership with our external partners. Through our Digital Now capability programme, we are equipping our people with the capability and mindset to accelerate digital transformation. Similarly, we partnered with Oxford Saïd Business School to upskill our leadership in ESG to support the delivery of our ‘Society 2030: Spirit of Progress‘ goals.
We believe that an environment of openness, integrity and trust fosters greater collaboration, experimentation, and bolder execution. Our Senior Leadership Team have focussed on how to enable bolder performance by creating a psychologically safe environment, helping their teams take risks, share their opinions and experiment with innovative ideas. We have seen a five percentage point increase in the proportion of employees who feel comfortable with raising concerns, ideas, and opinions without fear of consequence this year compared to fiscal 22.
(1)This data is calculated as an average across the 12 months of fiscal 23
(2)This is based upon the respondents to the fiscal 23 Your Voice engagement survey
(3)Based on a blend of Ipsos Karian and Box, Qualtrics benchmark data. Global Manufacturing benchmark includes organisations with global coverage that operate within FMCG and other industry sectors.
Business description (continued)
Enabling a great employee experience
Putting our people at the heart of everything we do is critical to our success — it's how we deliver our people strategy and performance ambition, and create the most inclusive and diverse culture. To achieve this, it's imperative we take the needs and opinions of our people into account in designing and implementing effective people-centric solutions.
This year, we launched our employee experience champions network, providing a global, diverse 'voice of the employee' network enabling us to co-create solutions with and for our people. About 200 employee experience champions have been involved in our HR transformation programmes, sharing feedback on our people processes and policies, brainstorming ideas to radically liberate our people from low-value, time consuming activities and validating HR technology prototypes and solutions.
Our commitment to creating a strong employee experience has reinforced our employer advocacy and employer brand position. Over the years, we have been recognised in many markets for great people practices. Recently, Diageo Turkey won a Jury special award for HR practices in Sales(1) while Diageo North America achieved a top 10 Best Companies’ ranking(2).
Supporting our people’s wellbeing
We remain committed to supporting our people's wellbeing, offering guidance, and education in line with the four dimensions of our Global Wellbeing Philosophy. We make wellbeing part of our culture every day, everywhere so that our people are thriving physically and mentally, emotionally balanced, financially secure and socially connected.
In our 2023 employee survey, 79% of the respondents felt Diageo was ‘sufficiently supporting their health and wellbeing’. With wellbeing support identified as a key engagement driver, this underlines the need for us to continue to focus on wellbeing and improve our support.
In fiscal 23, we increased our focus on mental health and financial wellbeing. This included launching the Unmind mental wellbeing app – making us the first fast-moving consumer goods (FMCG) company to make it available for all employees, globally. In response to the rising cost of living, we delivered regular financial wellbeing masterclasses and offered mental ‘wealth’ first aid training to help identify financial stress and signpost others to support. We also offered a global one-time payment to all employees to support with the rising cost of living. This payment was well received as it was equivalent to 15% of the annual salary of employees in some markets. Our Employee Assistance Programme continues to offer employees free, confidential advice and counselling around the clock on personal, emotional, and work-life issues.
We know that our people thrive when they feel empowered to decide how, when and where they create their best work. Recognising that flexibility means different things to different people, we have always taken a progressive and inclusive approach to flexible working, making sure our people consider what works best for the individual and team. We have designed our office spaces to foster greater team collaboration, positive social interactions and deeper connections with our brands and culture.
(1)The award is by Sales Network.
(2)Seramount 2022 100 Best Companies List.
Business description (continued)
Average number of employees by region by gender(1)
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Region(2) | Men | % | Women | % | Not declared(3) | % | Total |
| North America | 1,839 | 59 | % | 1,258 | 40 | % | 18 | 0.6 | % | 3,115 |
| Europe | 5,836 | 58 | % | 4,211 | 42 | % | 15 | 0.1 | % | 10,062 |
| Asia Pacific | 5,957 | 66 | % | 3,042 | 34 | % | 1 | — | % | 9,000 |
| Latin America and Caribbean | 2,733 | 63 | % | 1,592 | 37 | % | 0 | — | % | 4,325 |
| Africa | 2,488 | 67 | % | 1,244 | 33 | % | 3 | 0.1 | % | 3,735 |
| Total | 18,853 | 62 | % | 11,347 | 38 | % | 37 | 0.1 | % | 30,237 |
Average number of employees by role by gender(1)
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| Role | Men | % | Women | % | Not declared(3) | % | Total |
Executive(4) | 7 | 50 | % | 7 | 50 | % | 0 | — | % | 14 |
Senior manager(5) | 311 | 56 | % | 248 | 44 | % | 1 | 0.2 | % | 560 |
Line manager(6) | 2,274 | 65 | % | 1,198 | 34 | % | 6 | 0.2 | % | 3,478 |
Supervised employee(7) | 16,261 | 62 | % | 9,894 | 38 | % | 30 | 0.1 | % | 26,185 |
| Diageo (total) | 18,853 | 62 | % | 11,347 | 38 | % | 37 | 0.1 | % | 30,237 |
(1)This data has been compiled as monthly average based on the proportion of employees who have identified their gender identity as male, female or undisclosed, and will not be fully representative of the gender identity or diversity within our employee population.
(2)Employees have been allocated to the region where they live.
(3)This data represents the proportion of employees who have chosen not to disclose their gender identity as male or female.
(4)Executive positions have been calculated based on year end as of 30 June.
(5)Top leadership positions in Diageo, excluding Executive Committee.
(6)All Diageo employees (excluding senior managers and Executive Committee) with one or more direct reports.
(7)All Diageo employees (excluding senior managers and Executive Committee) who have no direct reports
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| Health and safety It is our ambition to create a world-class health and safety culture to make sure we protect our people across our business.
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We have designed our Safer Together strategy and its associated programmes to prevent severe, fatal and process safety incidents. Our global policies, standards, compliance systems, technology and training create and embed innovative ways of working aimed at continuous improvement. The goal is to prevent accidents by keeping health and safety at the front of everyone's minds.
Being proactive, not reactive
One of our priorities is to create and embed a scorecard for leading and lagging key performance indicators for health and safety. ‘Lagging indicators’ like total recordable accident frequency rate (TRAFR) and lost-time accident frequency rate (LTAFR) allow us to monitor performance, but they do not indicate the effectiveness of our initiatives in preventing incidents and accidents. For this we use a leading indicator – severe injury and fatality exposure (SIFe) – to consider incidents that could be classified as ‘near misses’ and which had the potential to cause life-threatening or life-altering outcomes.
Senior management reviews performance against lagging and leading indicators each month, alongside any action we can take to prevent incidents. We believe that safety is everyone’s responsibility and an integral part of everyone’s job. Empowering and involving our people in safety embeds the idea that there is no acceptable level of accidents. Improving our performance on leading indicators and getting all employees more involved in spotting hazards strengthens the safety culture at each site and makes us better at reducing the risk of accidents.
We also provide employees with the most up-to-date health and safety training, so they can carry out day-to-day tasks and activities safely every day, everywhere. Our strategy extends to our contractors and third-party providers, because they share our commitment to keeping the risk of accidents to a minimum.
Our global self-assessment compliance programme helps keep all our locations legally compliant as well as aligned with our own health and safety requirements. Our locations audit themselves against our global health and safety standards and ways of working. Locations capture these assessments and action plans on our global governance digital platform. Our independent Audit Assurance programme is designed to make sure sites complete the audits correctly and complete any action plans. Senior leaders review performance against these plans.
Through our Safer Together programme and communication platforms, our Global Health and Safety team regularly communicates with all sites about specific initiatives and shared learnings from our leading and lagging KPI insights. Each month, our year-to-date performance is discussed and reviewed at site and regional level, and globally with senior leaders and global governance teams.
Business description (continued)
Monitoring our key performance measures
We report lost-time accident frequency rate (LTAFR). This year, we sustained 0.91 lost-time accidents (LTAs) per 1,000 full-time employees, compared to 0.92 in fiscal 22. The severity rate of these LTAs is a measure of the seriousness of the incidents and any absence from work they cause. This year, the severity rate increased due to a carry-over of days lost for accidents that occurred in fiscal 22.
Our total recordable accident frequency rate (TRAFR) records work-related injuries that need more than first aid treatment. We investigate each recordable accident to establish the root cause as well as uncover all contributing factors and insights we can learn from. We share the key learnings across the organisation aiming to prevent recurrences.
Acting to improve performance
Creating awareness of accident trends and communicating them effectively across our business is an important part of learning from them. Employees need to understand the risks inherent in their workplace, and how they could lead to injury. Despite improvements in our global health and safety KPI performance, accidents increased in Mexico and Turkey. In Mexico, we have significantly increased our agriculture footprint, which coincided with an increase in incidents. In Turkey, the increase is predominantly in our distilling and packaging operations. As a result of these trends, the Global Health and Safety team intervened to help local teams to address and improve performance. In both markets, global and regional health and safety experts worked with local teams on site to find the root cause of the dip in performance and agree a time-bound improvement plan. By involving our people in reviewing risk assessments and by making sure operations and leadership teams are regularly inspecting sites and equipment, we have improved our ability to spot potential dangers as well as areas for improvement.
We will continue to focus on implementing our systems and technology roadmap, aiming to codify and simplify some of our high-risk work activities and processes as well as further enhance our predictive analytical capability. We will also continue to strengthen our health and safety culture by rolling out our Behavioural Standard globally. We use the standard to measure the maturity level of our health and safety culture on a scale with four levels: baseline, stable, progressive and leading. The standard helps us spot key themes and actions.
Understanding the risk of severe and fatal injuries
Our strategy aims to eliminate severe and fatal injuries. Alongside our risk assessment protocols, which let us spot and mitigate potential risks with change management procedures, in fiscal 23 we started a Severe and Fatal Incident Exposure (SIFe) engagement programme. SIFe considers both potential and actual incidents that could result in a life-threatening or life-altering injury. SIFe is part of our Global Health and Safety KPI scorecard. We use a decision-tree approach, based on our Life Saving Rules, to identify any incident or safety-critical behaviour with a potentially life-threatening or life-altering outcome.
When an incident has been classified as having SIFe, it triggers these processes:
•We issue a global safety alert to heighten vigilance
•A site representative shares an investigation report of findings and remediation actions taken
•Global Safety Alert and action plan is communicated to all sites and the action close-out is assured.
Together with our long-standing lagging indicators of Lost-Time Accident and Total Recordable Frequency Rates, the SIFe process provides a comprehensive approach to managing our incident prevention programme.
Limiting risk from hazardous substances with a Global Process Safety Framework
How we handle hazardous substances is essential to safeguarding people and the environment. We are committed to protecting our employees, visitors and contractors, as well as protecting the local communities in which we operate. In fiscal 23, we've developed a global process safety framework to embed the right behaviour, systems and processes to manage or control incidents that could cause toxic effects, fires or explosions.
The framework includes a Process Safety Policy and risk calculator, and Process Safety Risk Management standards. All our sites can use the standards to help them assess their operations and create plans to fill any gaps. Sites can also document and share risk assessments on our digital platform, as well as share best practice and training tools through our new process safety network.
The framework helps us reduce the risk of injury and environmental damage, as well as keep production quality high while controlling our costs.
Business description (continued)
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| | Champion inclusion and diversity Championing inclusion and diversity is at the heart of what we do,
and is crucial to our purpose of ‘celebrating life, every day, everywhere’.
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Not only is it the right thing to do, as it means we play a part in shaping a more equitable society, it also makes us a better business. We are proud of having an inclusive culture where everyone can be themselves, as it helps us attract and retain the best and most diverse talent, and allows us to be more innovative and perform better. We’ve set ourselves ambitious goals, inside our business and beyond.
Our inclusion and diversity index score in our 2023 Your Voice employee survey remains high at 83% positive sentiment. This shows our commitment to creating an environment where colleagues can belong and thrive.
Promoting diversity
We promote inclusion and diversity in every sense, from gender, ethnicity, age and disability, to sexual orientation, social background and education – and we’re proud of the progress we’re making.
Since 2020, driving diverse representation in our leadership cohort(1) has been linked to our long-term incentive plan (LTIP), which means we incentivise every senior leader to make progress against this agenda.
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| Empowering women |
Ambition by 2030 Champion gender diversity, with an ambition to achieve 50% representation of women in leadership roles by 2030 |
| Percentage of female leaders globally | 44 | % |
In fiscal 23, representation of women in our leadership, including our Executive Committee, remained strong at 44%, maintaining our progress of 88% against our 2030 ambition to achieve 50% representation of women in leadership roles. We're proud to have 73% female Board representation following the appointment of Debra Crew as CEO, and 50% female executive committee representation. In fiscal 23, 45% of external appointments and 46% of internal promotions to our leadership cohort were female. We’re recognised for our gender equality work by the FTSE Women Leaders Review, Bloomberg Equality Index and others. In 2023, the Equileap Gender Equality Global Report ranked us second overall globally and first in the UK for gender equality. Our policies and practices help foster a truly gender-equal and inclusive environment. As well as our Family Leave policy, we have Thriving Through Menopause guidelines, Pregnancy Loss guidelines and Flexible Working and Wellbeing philosophies.
Helping women build careers
We have a clear equal opportunities recruitment policy, allowing us to hire the best talent, while ensuring a diverse slate of candidates throughout recruitment stages. We believe our industry should do more to attract women, particularly in areas where women have historically been under-represented, including science, technology, engineering and mathematics (STEM) and commercial roles. In Europe, 72% of graduates in our Supply Chain & Procurement function are female, and in fiscal 23, 80% of job offers were to women (an increase in the last four years of over 25%). In fiscal 23, we launched our first apprenticeship accelerator programme specifically for digital roles in our GB business, with 83% of job offers going to women. By focussing on early careers and entry-level roles, we continue to build our pipeline of female talent.
Business description (continued)
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| Championing ethnic diversity |
Ambition by 2030 Champion ethnic diversity, with an ambition to increase representation of leaders from ethnically diverse backgrounds to 45% by 2030 |
| Percentage of ethnically diverse leaders globally | 43 | % |
(1) Our leadership cohort reflects the top 2% of roles globally encompassing Executive Committee members and senior managers
We employ 30,237 people of 115 nationalities in over 70 countries which means we have a workforce whose diversity reflects that of our consumers and markets. We want ethnic diversity at every level of our business, including in our leadership cohort. The more progress we make, the more strongly we connect with our consumers and the more diverse our thinking becomes, fuelling our creativity and competitiveness.
Currently, 36% of our Board and 43%of our leadership (up from 41% in fiscal 22), including our Executive Committee, is made up of ethnically diverse talent, supported by 39% of external appointments and 46% of internal promotions into our leadership cohort across fiscal 23. Also, our former CEO Ivan Menezes, Chief HR Officer Louise Prashad and General Counsel & Company Secretary Tom Shropshire were recognised in the Involve Empower Role Model Lists, which highlights leaders championing inclusion in business.
To help us understand the makeup of our workforce and set meaningful goals, we invite all employees (where local laws allow) to share their ethnicity. By the end of fiscal 23, 75% of our global workforce and 97% of our leadership cohort had disclosed their ethnic background in our confidential HR system.
Each market and function have set stretching five-year diversity plans covering representation and development, supplier diversity and inclusive marketing.
Attracting ethnically diverse talent
In Brazil, our Programa Origens initiative attracts, hires and generates opportunities for Black and Indigenous people in higher education. Through professional development, including English language lessons, and mentoring opportunities, the programme has seen more than 40 people join to date.
Promoting ethnically diverse business
In North America, we became anchor investors in Pronghorn, a 10-year initiative to diversify the spirits industry. It’s cultivating the next generation of diverse founders, executive leaders and entrepreneurs to generate $2.4 billion in economic value for the Black community by 2032. In fiscal 23, Pronghorn has invested in 19 Black-owned spirits brands, supported founders with mentoring programmes, and worked with the industry and commercial partners to develop a talent pipeline of Black leaders.
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Gender representation of our leadership(1), (4) |
| Role | Men | % | Women | % | Total |
Leadership population(2) | 319 | 56 | % | 254 | 44 | % | 573(3) |
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Ethnic representation of our leadership(1), (4) |
| Role | Ethnically diverse | % | Non-ethnically diverse | % | Decline to self-identify | % | Not disclosed | % | Total |
Leadership population(2) | 249 | 43 | % | 289 | 50 | % | 19 | 3 | % | 17 | 3 | % | 574 |
1.This data is calculated as an average across the four quarters of fiscal 23.
2.Leadership population encompasses Executive Committee and senior managers.
3.One person has opted not to disclose their gender; they cannot be positively attributed to either group and therefore are not included.
4.Please refer to our non-financial reporting boundaries and methodologies in the Additional information section on pages 292-315 for more information on how data has been compiled, including standards and assumptions used.
Nurturing inclusivity
Our growing range of policies and guidelines help foster an inclusive environment that supports every employee.
Business description (continued)
Our Disability Inclusion guidelines, introduced in October 2022, were created by employees, with our We Are All Able employee resource group and our external partner Disability:IN, and are available in 15 languages. They give everyone knowledge, tools and guidance to support people with disabilities, covering issues from digital and physical accessibility to appropriate language to enable positive conversations about disability. Through ‘disability disclosure’, we invite employees in more than 40 countries to share their disability confidentially, helping us to better understand our workforce.
In January 2023, we launched inclusive design training that was created by design, brand and semiotics experts. This promotes inclusivity across our products, advertising campaigns and physical brand experiences, working to remove unconscious bias from the design process and celebrate the individual and cultural differences of the consumers we design for. A recent example of inclusive design was making disabled accessibility a key feature at Diageo's brand home, Johnnie Walker Princes Street, ensuring the highest standards of accessibility and inclusion for our guests.
Championing inclusion through Employee Resource Groups
Our network of Employee Resource Groups (ERGs) create connected communities of support, while helping the business better understand our diverse communities’ concerns. Our ERGs include AHEAD (African Heritage Employees at Diageo); Conectados (Diageo employees championing Latin culture); and PAN (Pan Asian Network), in the United States; We Are All Able and REACH (Race, Ethnicity and Cultural Heritage), in Europe; and our international Spirited Women and Rainbow Networks. Highlights from this year include:
•Conectados led Hispanic Future Month, recognising the contributions of Hispanic Americans to the history, culture and achievements of the United States. This included celebrating the Tequila Don Julio Fund, which in 2022 awarded a $20,000 grant to five Hispanic entrepreneurs who live their craft ‘Por Amor’.
•The Rainbow Network, including new chapters forming across India, South East Asia and South Africa led our Pride celebrations with
78 Diageo offices and sites taking part in our annual Pride flag-raising event championing greater LGBTQIA+ awareness and inclusion. In 2023, Johnnie Walker was a partner at Sydney World Pride while Johnnie Walker Princes Street was the lead sponsor at Edinburgh Pride.
•Throughout March 2023, championed by our Spirited Women Networks, we celebrated International Women’s Day with the theme of #EmbraceEquity. This included the launch event, hosted by Louise Prashad, Chief HR Officer, where former CEO Ivan Menezes, Board member Karen Blackett and Pronghorn co-founder Dia Simms talked about the importance of being curious, empathetic and proactive.
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| Marketing in progressive ways |
Ambition by 2030 Use our creative and media spend to support progressive voices, measuring and increasing spend year on year Measurement and evaluation framework under development |
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As one of the world’s largest advertisers, we’re committed to changing the industry from script to screen, so that everyone sees themselves represented. We use our Progressive Marketing to challenge stereotypes and commit investment to address under-representation of diverse voices in media, making mainstream media more inclusive. We are founding members of the United Nations Women Unstereotype Alliance and the World Federation of Advertisers D&I Task Force and work across the industry to foster inclusion and diversity in front of and behind the camera. For the past four years we have sponsored the Creative Equals ‘Creative Comeback’ Programme that focuses on bringing more women, disabled and neurodivergent people into the creative industry.
In fiscal 23, we refreshed our Progressive Marketing Framework and training to include a new model focused on inclusive design, which allows us to be at the forefront of breaking stereotypes in advertising for gender, race, sexuality, age, disability and social status. Some 47% of our global marketing campaigns were shot by female directors or photographers.
Two powerful examples of progressive marketing and our commitment to authentic representation in action are the Guinness 'Brothers' and Baileys ‘Delicious Descriptions’ campaigns. The Guinness ‘Brothers’ campaign in Africa, featuring Miracle, a blind actor, celebrates how football fans make the experience of watching the game accessible for everyone including members of the blind and visually impaired community. Members of this community were consulted to make the campaign reflected authentic experiences.
Baileys ‘Delicious Descriptions’ was launched on Global Accessibility Awareness Day in consultation with the Royal National Institute of Blind People (RNIB) and Meta. Baileys created a guide on how to write delicious image descriptions, helping ensure those who rely on screen readers experience the full deliciousness of Baileys treats. In Great Britain, the campaign achieved a reach of more than 12 million, with view-through rates up to 25.2%, five times higher than Meta regional and category benchmarks.(1)
Business description (continued)
Celebrate diverse audience
Johnnie Walker emphasises progressive marketing to celebrate and appeal to a diverse audience. The result is that globally around 29% of Johnnie Walker drinkers are female, with that proportion growing in most markets this year. In the United States, Johnnie Walker drinkers are also more ethnically diverse than those of other whiskies, at 44% compared to 31% for other whiskies.(2)
In the United Kingdom, Johnnie Walker partnered with Bridgerton star Simone Ashley and Instagram community Diet Paratha to champion the creative representation of the South Asian community.
In the United States, Johnnie Walker’s First Strides initiative debuted an alternative red carpet at the Oscars to spotlight seven film makers’ boundary-pushing contributions to culture. The brand delivered over 200 million paid media impressions that encouraged consumers to support female entertainment projects.
(1) PHD and Meta (Brand Lift Study)
(2) Johnnie Walker Brand Guidance system 2022 study
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| Supporting diverse suppliers |
Ambition by 2030 Increase spend with diverse-owned and disadvantaged businesses to 15% by 2030 |
| Percentage of spend with diverse-owned and disadvantaged businesses | 6.3% |
We believe a value chain built on inclusion and diversity can enhance representation, employment and resilience in marginalised communities, ultimately benefitting the wider economy and strengthening our business.
In fiscal 22, 4.8% of our global spend was with diverse-owned and disadvantaged businesses. We’ve since increased our number of diverse suppliers, as well as incorporated more disadvantaged groups like smallholder farmers in Africa, Turkey and Mexico. In fiscal 23, we’ve spent £620 million with 979 diverse-owned and disadvantaged suppliers – approximately 6.3% of global spend.
To help us connect with diverse-owned businesses, we’ve worked with advocacy organisations, including WEConnect International, MSDUK and others. For example, through Disability:IN, we’ve matched Diageo employees with disabled-owned businesses to share feedback and industry insights to understand the challenges they face in working with global corporations. In Kenya and Colombia, we’re proud to be part of Sourcing2Equal, an initiative increasing access to corporate procurement opportunities for women-owned businesses.
We are proud that in 2023 we were awarded Platinum in the Top Global Champions for Supplier Diversity & Inclusion Awards by WEConnect International. This is the highest possible accolade in this category, recognising Diageo as leader in inclusive spend, policies and procedures.
Nurturing women-owned business
In Jalisco, Mexico, we’ve worked with a women-owned supplier to decorate bottles of Don Julio for 15 years. We recognised their potential, helping them to develop their quality and safety processes and grow alongside the Don Julio brand. Today the business has 150 employees, approximately 90% of them women, including single mothers and people with disabilities.
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| Building a thriving and inclusive hospitality industry |
Ambition by 2030 Provide business and hospitality skills to 200,000 people, increasing employability and improving livelihoods through Learning for Life and our other skills programmes |
| Number of people reached through Learning for Life and other skills programmes in fiscal 23 | 31.6k |
Part of how we promote sustainable growth and a resilient supply chain is through inclusive programmes giving equal access to resources, skills and employment opportunities. This includes Learning for Life (L4L), our business and hospitality skills programme for people from under-represented groups.
In fiscal 23 we reached 31,600 people in 19 markets with Learning for Life, 59% of them women.
Business description (continued)
We also want L4L to tackle barriers faced by other under-represented groups including the ethnically diverse community and people with disabilities. In fiscal 23, we updated our inclusive by design principles to include recruitment practices, training content and venue accessibility, as well as modules on inclusion and diversity.
We ran a L4L impact assessment in Latin America, celebrating the programme’s 15th anniversary and its positive impact on communities. Insights from the assessment will shape the programme's future, increasing its reach and impact globally.
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Ambition by 2030 Through the Diageo Bar Academy (DBA) we will deliver 1.5 million training sessions, providing skills and resources to help build a thriving hospitality sector that works for all |
| Number of participations in training sessions delivered through Diageo Bar Academy in fiscal 23 | 236k |
Through the DBA, we work to drive sustainable growth in the hospitality sector and make it more diverse. Women are under-represented, in management and behind the bar. DBA helps them overcome two of their biggest barriers: lack of mentors and role models, and lack of access to training.
In fiscal 23, we delivered 236,000 training sessions to bartenders, waiting staff, owners and managers through face-to-face and virtual training, e-learning and masterclasses. We adapted courses to help the industry respond to challenges including staff shortages and hiring, retaining and upskilling staff while meeting guests’ increased expectations. We also ran women-only mentoring and training in Africa, Latin America and India.
This year, 88% of survey respondents agreed or strongly agreed that DBA presents a modern and progressive view of the bar community, up from 84% in 2022. Also, 82% of women agreed or strongly agreed that DBA supports their advancement in the industry, up from 68%
in 2022.
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| Creating inclusive communities |
Ambition by 2030 Ensure 50% of beneficiaries of our community programmes are women and that our community programmes are designed to enhance diversity and inclusion of under-represented groups |
| Percentage of beneficiaries of our community programmes who are women | 59 | % |
We’re committed to addressing barriers women face in accessing the skills, resources and opportunities we provide. This includes making sure at least 50% of people benefitting from our community programmes are women, and that these programmes meet women’s needs throughout design, implementation and evaluation. In fiscal 23, 59% of people benefiting from L4L were women.
This year, we’ve started to work with WaterAid and CARE International UK to give women a voice in decision-making about water, sanitation and hygiene (WASH). In each community where we run a WASH project, we set up a committee with equal representation from men and women. This includes facilitating community dialogue to tackle social norms that prevent women’s equal access to, and agency over WASH. This year 56% of WASH committee members were women across our programmes in nine countries.
We’ve also piloted a gender-inclusive approach to our work with smallholder farmers. This includes equal access to agricultural training and resources, and engaging with suppliers to increase women’s membership and leadership of farmer groups. We’ll roll this out as part of our programmes for smallholder farmers from fiscal 24.
For more information on our WASH and smallholder farmer programmes see pages 102 and 105.
Helping under-represented communities overcome barriers to education
In fiscal 23, we gave $1.75 million in endowments to Historically Black Colleges and Universities (HBCUs) and Minority-Serving institutions in the United States. This followed the $10 million in endowments to 25 HBCUs in 2021. This is part of how we address educational barriers in under-represented communities, by funding students in need and development programmes that complement traditional learning.
Business description (continued)
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| Managing climate risks and opportunities by pioneering
grain-to-glass sustainability Our business depends on natural resources and we are directly affected by changes in climate and the related challenges of nature and biodiversity loss. While we already feel the effects of climate change in our global operations, there are also opportunities for companies that develop credible plans to adapt to changing circumstances. |
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A changing climate has implications across our end-to-end operations. It can affect crops like barley and wheat, and natural resources like water that we rely on to make our products. It can cause disruption to our manufacturing sites and supply chain through extreme weather. And it can affect the communities we work with by threatening their livelihoods. But there are also opportunities for companies that innovate to make their operations and the products they sell more sustainable.
These issues intersect and converge. A changing climate can threaten our key commodities and our communities, while production, agriculture and packaging produce carbon which can accelerate climate change. Just as these issues are connected, our response and actions are too. We are working hard to reduce carbon emissions from our sites, for example by introducing renewable energy in our operations. Preserving water and promoting sustainable farming protects our commodities. And by reusing waste co-products from production, we help sustain the agricultural system that underpins what we do.
We are committed to acting responsibly to mitigate our contribution to global warming and conserve the environment in which we operate, while simultaneously adapting to the effects of a changing climate to keep our business resilient. We look to achieve this through our strategic priority to 'pioneer grain-to-glass sustainability', which focuses on three areas: 'preserve water for life', 'accelerate to a low-carbon world' and 'become sustainable by design'. Actions we take across these priorities are transforming our business to thrive in the longer term.
Focussing on grain-to-glass sustainability
Pioneering grain-to-glass sustainability is how we manage our environmental and climate challenges, and how we help preserve the scarce natural resources the world depends on. It is also how we adapt to climate change throughout our supply chain, and mitigate its effects. By managing our environmental impacts and the impact of the environment on us, we support our business and the communities we work alongside to be resilient for the long term. This is good for the planet and also good for our business. By investing in renewable energy, for instance, we lower carbon emissions by depending less on fossil fuels. We also manage risk and build resilience as the world moves towards a low-carbon economy.
Our action plan – ‘Society 2030: Spirit of Progress‘
Pioneering grain-to-glass sustainability includes ambitious targets, such as achieving net zero carbon emissions from our direct operations (Scopes 1 and 2) by 2030, and across our full value chain (Scope 3) by 2050 or earlier, using water more efficiently and taking action to replenish water in water-stressed areas. Our ‘Society 2030: Spirit of Progress’ targets reflect our most material ESG issues, and they align to the UN Sustainable Development Goals. We are also proud to be a signatory to the UN's Race to Zero and Race to Resilience campaigns reflecting our commitment to climate change mitigation and adaptation.
The issues are complex, which makes progress against our ambitious targets challenging. As we become more sophisticated in understanding our impacts and taking action to address them, we will also evolve our practices and metrics to make sure we strive to focus on and communicate the right things effectively.
Making climate change part of our strategy
To understand, quantify and mitigate climate risks and adapt to their impact, we partner with climate resilience experts to assess them, model their possible financial impact, and develop strategies to adapt and remain resilient over the long-term.
Many complex factors determine how climate change creates risks and opportunities for our business, which makes it harder to quantify how big an impact they’ll have, and when. Even so, scenario analysis helps us test how various assumptions related to climate change could affect our business. This year we’ve once again modelled with climate resilience experts the impacts of climate change under transition risk and physical risk scenarios.
We have incorporated the guidance of the Task Force on Climate-related Financial Disclosures (TCFD) framework into our reporting since 2020. It's helped us describe how we’re decarbonising our value chain, mitigating and adapting to climate risks and impacts, and spotting opportunities for transitioning to a low-carbon future. Through scenario analysis, we've also learned the range of possible financial impacts of various climate scenarios in our business. We started our carbon reduction efforts in 2008, as well as championing water stewardship around the world to combat water stress. In 2022 we published our Net Zero Carbon Strategy, which outlines how we will achieve our decarbonisation vision in direct operations. We intend to build on this with our net zero transition plan, taking into account the final guidance of the UK Transition Plan Taskforce when it's published.
Business description (continued)
Governance
Given its importance, we have governance processes in place intended to ensure that we consider and factor climate risk into our business operations and planning processes. To supplement our ‘Society 2030: Spirit of Progress’ governance summarised on page 75, our sustainability teams hold monthly sustainability performance reviews, track priority water efficiency and carbon reduction projects, and hold quarterly sustainability business reviews that focus on multi-year progress and plans leading up to 2030. We oversee climate risk specifically at the highest level of the company, and manage it through these governance structures and processes:
•Executive sponsorship and responsibility is shared jointly between the President, Global Supply Chain & Procurement and Chief Sustainability Officer (Ewan Andrew) and the Global Corporate Relations Director (Daniel Mobley).
•At an operational level, they are supported by our cross-functional Climate Risk Steering Group, which meets up to twice a month. Within this, a sub-group from Supply Chain & Procurement oversees physical risks, with other cross-functional working groups responsible for addressing transition risks and opportunities, for example market and reputation, policy and legal, and technology.
•The Climate Risk Steering Group updates executive sponsors monthly on progress and issues relating to climate risk, and quarterly updates are provided to the Board, making sure that potential risks and opportunities and their impact are part of decision-making.
•Any potential financial implications of climate risk and potential impacts on our consolidated financial statements, including performance and progress against non-financial metrics, are also shared with and considered by the Audit Committee annually.
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| Board oversight |
| Audit Committee |
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| Executive Committee ownership |
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| Executive sponsors |
| President, Global Supply Chain & Procurement and Chief Sustainability Officer | | Global Corporate Relations
Director |
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| Cross-functional Climate Risk Steering Group |
| Corporate relations | Supply | Strategy |
| Risk | Finance | | Legal | Marketing |
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Working groups assigned to address key risks
and opportunities identified |
Climate change and remuneration
The performance element of the long-term incentive plan (LTIP) for our senior leaders encourages and rewards performance against certain ESG measures (introduced in 2020, for fiscal 21 to 23). Some 10% of the performance share award, which is granted to the Executive Committee as well as other senior leaders, targets carbon emissions and water efficiency, which directly support mitigation of, and adaptation to, climate risk (see the Directors’ remuneration report on pages 174-194.
Business description (continued)
Identifying climate risks and opportunities
Climate risk is generally divided into physical and transition risk. Physical risks include chronic changes like sea level rises and temperature changes, and acute events like floods, droughts and heatwaves. Transition risks arise from actions to mitigate climate change, such as policy and legal changes like carbon taxes; technology changes, like renewable energy; or market changes, like growing consumer demand for more sustainable products.
Both categories of risk are already materialising in everyday life, and both are likely to increase. As the world continues to warm while we intensify efforts to mitigate climate change, we need to assess and prepare for both physical and transition risks. Opportunities, meanwhile, could arise from us mitigating risks more effectively than our competitors, or creating competitive advantage, for instance by meeting consumer demand for more sustainable products.
Climate change resilience
Our experience in managing the impact of normal variations in climatic conditions, water availability and agricultural yields has made us more resilient and adaptable. We adapt through careful planning in our supply chain and procurement organisation, by partnering to develop high-yield, drought-resistant crops, and by managing water in a way that makes our operations more resilient and helps our local communities and agricultural sourcing areas to adapt, with specific focus in water-stressed areas. We have integrated climate risk into our enterprise risk management processes since first referencing it within our principal risk factors in 2010. It is also part of our strategic and business continuity plans.
Identifying and assessing our physical risks
To assess the physical risks we are exposed to, and how they could develop under various scenarios, we worked with climate resilience experts from 2021 to 2023 to look at our full global supply chain. This table shows how we have phased the work:
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| Fiscal year | 2021 | 2022 | 2023 |
| Markets/regions assessed for physical risks | Largest supply centres
Scotland
North America | Highest water risk
Africa
Mexico
India
Turkey | Remaining locations
Asia Pacific
Latin America and Caribbean
Europe |
This scope covers all our wholly owned sites (except acquisitions completed after the start of the 2023 evaluation) and key third-party operations. We also included some sites that are planned or under construction to make sure we understand their exposure and build their resilience.
Our physical risk assessments measured how exposed and vulnerable activities at our sites and key third-party operations and suppliers are to 19 climate-related hazards. We reviewed the vulnerability of the main agricultural materials we procure in each region, and also ran a high-level analysis of our key distribution routes (road, rail and ports). We did this under two scenarios (IPCC scenario RCP4.5 – medium warming of 2-3°C, and IPCC scenario RCP8.5 – severe warming of 4-5°C) and two timeframes (to 2030 and to 2050).
•Production sites: For our own sites and many of our third-party operator sites that produce beverages on our behalf, we analysed at a high level the risks they are likely to be exposed to. For those that are most strategically important or at greatest risk, we carried out more detailed assessments. At each location, we looked at a combination of the different activities (e.g. malting, distilling and packaging), the part of the process that might be affected (e.g. infrastructure, water supply and energy sources) and the 19 physical risks that might occur.
•Supply chain and logistics: for all markets assessed, we analysed our key suppliers’ factories and warehouses, for example those handling our most critical or specialised ingredients and components, key agricultural commodities, and our most critical distribution routes (road, rail, and ports), to identify which might be exposed to physical risk in the future.
Our physical risks – results
Our assessment confirmed three key points:
1.Water scarcity is our most significant climate-related physical risk in terms of prevalence, trajectory and potential financial impact. It affects our ability to produce our products, and the access to agricultural ingredients that we need.
2.All agricultural ingredients are at risk, and we see that risk increasing under the timeframes and scenarios we analysed. Our models suggest that costs of most commodities will increase as a result of climate change, although estimates of the precise impact vary significantly depending on the model used, underscoring the difficulty of such projections.
3.Acute weather events, including floods, winds and storms, are projected to increase and to cause interruption to operations; however, they are unlikely to have a significant financial impact on us, under the scenarios analysed.
Physical risks in our supply chain
Our assessment of supply chain risk explored three areas: agricultural commodities, supplier assets and distribution routes.
In previous years we had covered a wide range of agricultural commodities used in the regions analysed, and this year we expanded our analysis to include hops and dairy. This highlighted the particular vulnerabilities of each crop type, how their exposure was likely
Business description (continued)
to increase in the growing regions of interest over time, and possible adaptation and mitigation responses. The diagram on page 94 sums up the main risks that the most important commodities are exposed to by region.
As well as the bulk commodities outlined in the diagram, we also did a high-level analysis of ingredients included in our products that are critical to particular categories for the characteristics they impart – juniper, angelica and liquorice, for example. The results of the agricultural commodity assessments have and will continue to inform our strategy. This includes working with farmers to increase their crops’ resilience to climate change, and developing contingencies where this isn’t possible.
Business description (continued)
Geographical scope of our physical risk assessments
| | | | | | | | | | | | | | | | | |
| Region | Owned/key third-party sites assessed | Detailed assessments | Agricultural commodities | Supplier assets (factories, warehouses) | Ports |
| North America | 12 | 4 | 8 | 86 | 6 |
| Europe | 76 | 13 | 18 | 262 | 27 |
| Asia Pacific | 63 | 11 | 6 | 281 | 9 |
| Latin America and Caribbean | 46 | 6 | 2 | 251 | 13 |
| Africa | 48 | 5 | 6 | 366 | 14 |
| Total | 245 | 39 | n/a(1) | 1,246 | 69 |
(1) Some commodities were analysed in more than one location
For more details on our scenario analysis approach, see the Non-financial reporting boundaries and methodologies section on pages 292-315.
We assessed more than 1,200 suppliers’ assets and found the most common risks were water stress and higher temperatures, with humidity and wildfire risks also intensifying in some locations. We use this information to work with suppliers on future adaptations and contingencies. We discuss this further in the Strategy section on page 100.
Our analysis of distribution routes included key ports, roads and rail networks identified in our supply chain in each of the markets we assessed. The analysis showed that, in general, the risks to ports come from water stress and changing temperatures, while the risks to road networks are broader, including chronic risks, like temperature increases and sea level rises, and acute risks, such as storms, floods or wildfires. We assessed both acute and chronic risks to be higher in warmer countries (e.g. India, Mexico and Turkey). These insights help us plan effectively for additional future contingencies we may require in our distribution routes.
Physical risks by region – Diageo
and key third-party supply sites
The most common physical hazards projected to intensify are water-related risks (water availability, water temperature and flooding) and high temperature. High temperatures might affect employees’ health and productivity, and processes such as fermentation and maturation, which are sensitive to temperature variations. There’s also increased cost associated with process and facility cooling. Cold temperature risks are projected to decline in all regions we analysed.
Water risk
Given the importance of water to our operations and producing our products, we focus particularly on understanding water-related risks so we can mitigate and adapt to them. As well as our physical climate risk assessments looking at the risks from water availability, water temperature, water quality and flooding, we conduct water-stress analysis at our sites every two to three years, using site surveys and World Resources Institute (WRI) Aqueduct data. In fiscal 23, we enhanced our water risk assessment by completing water source vulnerability assessments at 22 of our sites located in water-stressed areas, with the help of expert partners.
The water stress, climate risk and source vulnerability assessments give us comprehensive insights into how this profile might change due to climate change. They also show the degree of vulnerability of our operations and supply chains to water stress, bearing in mind various contributing factors in these sites’ catchment areas. Climate risk assessment tells us the number of our current sites exposed to high water stress isn’t projected to increase significantly in the foreseeable future. But water stress is likely to become more severe at some sites, making the detailed understanding of source vulnerability particularly valuable. The figure on page 97 shows our water-stressed sites and those that have had source vulnerability assessments completed, as well as those that are in our priority water basins.
Quantitative impact of physical risk
Our assessment shows that generally our sites are likely to be exposed to more frequent acute weather events like floods and storms, but financial impacts are unlikely to be significant. We are more exposed to the acute risk of drought, and to chronic changes like water scarcity. Water scarcity is the biggest climate-related risk to our operations, since we have many sites in water-stressed areas that might face interruption to operations if the warming temperature scenarios play out. Through our scenario analysis we have estimated the impact on our operations and financial condition to 2030, concluding that it is unlikely to be significant by that date. This is largely due to the adaptation actions we are taking (detailed below) and our contingencies to deal with short-term disruptions to our operations. This is reflected in our assessment of viability and impairment (see page 94 of the UK Annual Report).
Business description (continued)
Water stress
Under the warming scenarios we modelled, the proportion of our sales exposed to ‘extremely high’ water stress is likely to increase by 2030 and again by 2050, with the sites most likely to be affected in India, Mexico, Turkey and North America. Under these warming scenarios, even though the number of sites affected may not change substantially, those that are affected are likely to suffer even greater shortages of water, under both timeframes, which could have an impact on our operations, and on the health and wellbeing of employees at those sites.
Drought
Drought is the only physical risk likely to affect our operations or financial condition in any material way, because we rely on water to make our products. Analysing the financial impact of drought is particularly difficult because there are many factors involved, including the probability of drought, how long operations would have to be suspended and the impact of any adaptation or contingency measures.
Even so, we have modelled what we can, using scenario analysis and our own assessment of vulnerability, and considering highly conservative assumptions (e.g. some downtime in all sites due to drought). We concluded that, by 2030, we don’t expect drought to have a significant impact on our operations or on our financial condition. Beyond 2030 it is much harder to analyse, given the lengthy timeframe. But our models do show that if we don’t take mitigating action by 2050, drought could have the potential to interrupt operations and, as a result, potential lost sales. We discuss how we plan to deal with this risk in the Strategy section on page 100.
Commodity pricing
Commodity pricing is more difficult to estimate in these scenarios, with the models we used producing highly varied estimates. Prices were projected to increase for the majority of our commodities. The scenario analysis helps us build commodity price risk into our raw material procurement strategies, particularly for crops with unique provenance (e.g. agave and vanilla) or high sensitivity to growing conditions (e.g. hops). Our modelling suggested the biggest risks of higher prices in 2050 were to agave, sorghum, rice, dairy and hops. There are significant differences between models, but the impacts in 2050 could be significant.
Business description (continued)
Focus on water stress
Because we rely so greatly on water, we have been assessing our wholly owned production sites for water stress regularly since 2008. The most recent assessment, in 2021, was updated in fiscal 23 to reflect changes in our operations due to disposals. The assessment – and our classification of a site as ‘water-stressed’ – is based on external (WRI Aqueduct databases for watersheds around the world) and internal site surveys covering physical, regulatory, social and reputational considerations. It will be updated again in fiscal 24. Shown below are the sites for which we have conducted source vulnerability assessments, and those countries in which we have identified priority water basins.
Diageo sites located in water-stressed areas, and priority water basins in 2023
Flooding and storms
Flooding and storms are the next most likely physical risks to affect our financial performance, since they might damage our sites or disrupt our supply of agricultural commodities, and the price of most of the commodities we analysed is set to increase under the scenarios developed. Although the risk to our sites from acute physical events will increase, it is unlikely to be significant in the scenarios and timeframes we analysed.
Identifying and assessing our transition risks and opportunities
To assess transition risks and opportunities, and to estimate their financial impact under a Paris-aligned emissions scenario, we worked with climate resilience experts. The work performed deepened our understanding of our risks and opportunities which led to refined financial estimation of the risks and opportunities along with further clarity on how to respond to them.
Business description (continued)
In fiscal 21 to 23 we analysed, as defined by TCFD, the risks and opportunities for the associated with transitioning to a low-carbon economy. We identified the risks with the most potential impact by looking at our agricultural inputs, production and packaging, distribution and sales channels arriving at these most important transition risks and opportunities to monitor:
1.Decarbonisation costs: Changes to our production costs associated with moving to a low-carbon economy, including carbon taxes and related changes to input costs (risk and opportunity).
2.Consumer behaviour: Changes in consumer behaviour to become more sustainable, e.g. choosing circular (reusable) products or locally produced brands (risk and opportunity).
3.Regulatory changes: For example, restrictions on packaging, water use, agricultural materials or land that affect our ability to make our products (risk).
4.Technology changes: Shifting to low-carbon production of our products and packaging, and the associated risk of not doing this fast enough (risk and opportunity).
The next table on page 99 summarises the physical and transition risks and opportunities we consider most important to manage overall.
Quantitative impact of transition risks and opportunities
Transitioning to a low-carbon economy creates both risks and opportunities for us. Through our scenario analysis we have estimated the impact on our operations and financial condition to 2030, concluding that it is unlikely to be significant by that date, even assuming that we bear all changes in production costs.
We found the key driver of transition risk was glass and, to a lesser extent, aluminium packaging, which would contribute to an overall production cost increase. We also saw that lower transport and energy costs would partially mitigate this impact. The categories and markets most affected in this scenario were those where glass constitutes a relatively higher proportion of overall cost, particularly tequila, cream liqueurs and the Indian market. Lower future transport costs meant that categories where transport costs were relatively higher as a proportion of total cost were less affected, relatively, by increased glass cost.
Extending the analysis to 2050 is subject to many variables and unknowns and therefore significant uncertainty. But it lets us estimate what a ‘worst case scenario’ could look like based on our best available modelling of cost trajectories, and understand what’s driving risk so that we can develop plans to mitigate it. Based on this modelling we could make the estimated impact on our operations and financial condition not significant through pricing and/or our planned improvements in energy use, producing lightweight glass, reducing the carbon intensity of glass production, and using returnable or reusable packaging where possible.
The results of our scenario analysis of both physical and transition risks are reflected in our assessment of viability and impairment (see page 94 of the UK Annual Report).
Business description (continued)
Summary of our most important climate risks and opportunities
| | | | | | | | |
| Risks |
| Risk description | Water scarcity
Increasing water scarcity and water stress affects our ability to continue to produce in water-stressed areas | Agricultural raw material availability
Climate-related impacts on agricultural material availability cause scarcity or price increases |
| Category | Physical – chronic | Physical – chronic |
| Timeframe | Short-term (one to five years), medium-term (five to 10 years) and long-term (10 to 30 years) | Medium-, long-term |
| Impact (if not mitigated) | Moderate(1) | Moderate(1) |
| Response examples | Improvements in water use efficiency
Water replenishment plans in 100% of water-stressed areas
Collective action programme to improve water security in Diageo's ‘priority water basins’ | Regenerative agriculture adaptations
Smallholder farmer support
Development of drought-resistant crops
Alternative sourcing locations
Substitution with alternative crops
Improved water management |
|
| Risk description | Input costs
Policy changes (carbon taxation, shift to renewables) cause increases in input costs | Consumer behaviour
Consumers prioritise purchasing more sustainable products, rejecting those perceived to have a negative environmental impact |
| Category | Transition – policy/legal | Transition – market |
| Timeframe | Short-, medium- term | Short-, medium-, long-term |
| Impact (if not mitigated) | Moderate(1) | Moderate(1) |
| Response examples | Supply chain decarbonisation
Engaging suppliers in low-carbon technology development for their operations
Packaging weight reduction technologies | Packaging weight reduction
Increased recycled content in packaging
Developing circular (refill, reuse) product offerings |
| | |
| Opportunities |
| Opportunity description | Supply chain decarbonisation
Reducing our Scope 1, 2 and 3 emissions lowers our exposure to carbon taxes and related costs, and improves our reputation with customers and consumers | Innovation in sustainable products and packaging
Developing more sustainable products (e.g. lighter-weight, higher-recycled content, more refillable and reusable containers) meets consumers increasing demands |
| Category | Transition – policy/legal | Transition – market |
| Timeframe | Shor-t, medium-term | Short-, medium-term |
| Impact (if not realised) | Moderate(1) | Moderate(1) |
| Response examples | Decarbonisation programme and capital investment
Renewable energy and regenerative agriculture | Innovation to deliver more sustainable products (e.g. refillable and reusable packaging, alternative packaging materials) |
1.'Low' impact is defined as having a negligible impact on customer service, or an absorbable disruptive impact on one or more brands. 'Moderate' impact is defined as disruption to production/supply chain creating an inability to service a small portion of our customer base, the impact of which is manageable; or a significant short-term impact on one or more of our core or local priority brands that is absorbable by the business. 'High' impact is defined as an inability to service a significant portion of our customer base, or major reputational damage.
Business description (continued)
Our strategy for grain-to-glass sustainability
Our strategic priority to 'Pioneer grain-to-glass sustainability' acknowledges the breadth of the environmental and social consequences of climate change. It also reflects how interlinked they are and that our value chain is a series of interdependent parts. Our targets reflect the complexity of the risks and opportunities we face and are mapped to our most material issues: water, carbon and the sustainability of our packaging.
By setting challenging targets, ‘Society 2030: Spirit of Progress‘ looks to manage the potential impact of climate risks on our business, as well as minimising our impact on the environment and supporting communities we work with.
We cannot meet our target without investment. We expect to invest around £1 billion ($1.2 billion) to drive improvements in environmental sustainability by 2030. By doing this, we will strengthen our business by strengthening our communities and making our value chain more resilient. In the process, we can manage our climate risks and act on opportunities we find. Much of the focus to date has been on our sites in Africa, where we have invested in biomass and solar energy, energy efficiency and water recovery initiatives. We plan to increase investment for fiscal 24 to 26 to continue our progress towards our 2030 goals.
Our carbon and water roadmaps outline the projects needed to deliver our 2030 goals. These plans are backed by capital investment and undergo regular stress testing to help us in our efforts to meet our targets. Enhancing and digitising our sustainability data and reporting framework has given us more detailed insight into the progress in delivering our strategy. This lets us see where we need to optimise innovation opportunities or overcome project delivery challenges.
Responding to risks and opportunities
The next sections outline our targets and the progress we have made against those targets. We define our targets carefully, along with clear non-financial reporting boundaries and methodologies for each. For more details, see pages 292-315.
Preserving water
Our ‘Preserve Water for Life’ strategy is context-based and recognises the connections between how we use water and the impact on communities, supply chains and the environment. It is a ‘grain-to-glass’ approach that aims to replenish water in water-stressed catchments, supports farmers (especially smallholders) and regenerative agriculture, and improves how we use water in our operations. It also prioritises providing clean water to the communities we work in, and strongly advocates and drives more collective action to contribute to a net positive water impact in water-stressed basins.
Our work on water has earned us a place on the CDP Water Security ‘A List’ for the seventh year in a row, placing us in the top tier of participating companies for sustainable water management.
| | | | | |
| Water efficiency |
Target by 2030 Reduce water use in our operations with a 40% improvement in water use efficiency in water-stressed areas and a 30% improvement across the company |
| Percentage improvement in litres of water used per litre of product packaged from the prior year – in water-stressed areas | 2.6% |
| | | | | |
| Percentage improvement in litres of water used per litre of product packaged from the prior year – across the company | (1.2) | % |
Our water strategy aims to improve water security, especially in water-stressed areas. This is achieved through both projects to improve our operational efficiency and our replenishment programme, which works with local communities to replenish more water than we consume in water-stressed areas. Across our business, we're proud to have improved water efficiency by 51.1% since we started measuring performance against this metric in 2007 and by 9.4% since our 2020 baseline. In water-stressed areas, efficiency has improved even further, by 16.2% against the 2020 baseline.
While our ongoing focus on water-stressed areas continued to deliver efficiency improvements of 2.6% vs fiscal 22, fiscal 23 saw changes to our production profile that drove a 1.2% reduction in water use efficiency per litre of product packaged (4.09 litres/litre to 4.14 litres/litre). This was despite the implementation of a number of water efficiency projects across our production portfolio.
Business description (continued)
Our production footprint is complex; it includes distillation, brewing and packaging, and uses water in related but different ways. While we saw efficiency improvements across our distillation sites of 3.5% compared to fiscal 22, the increasing proportion of distillation in our portfolio produced an overall decline in performance according to the way we currently measure water efficiency – litres of water used per litre of packaged product. The reason for the decline under this combined metric is that most distilled products need to be matured for a number of years before bottling, so much of the water used in fiscal 23 went into distilling product that won’t be packaged for years to come.
For this reason, in fiscal 23, we reviewed our water efficiency methodology, so that it better reflects our progress and challenges on water efficiency against the background of our business model. Following a detailed review, we defined a new methodology that uses an index approach to show the aggregated change in water efficiency across our different production pillars weighted by their proportional water use. This methodology better represents underlying year-on-year site-level efficiency performance and, critically, addresses the timing difference between distillation and packaging, due to maturation requirements. We will change our measurement approach in fiscal 24.
In fiscal 23, we completed water efficiency projects that will deliver benefits in several water-stressed areas. In Kenya, Uganda and Nigeria we have installed or increased the capacity of water recovery plants. The volume of water recovered has now reached 530,850m3, equivalent to around 12% of total water withdrawals avoided across our African sites. This has helped to mitigate some of the obstacles to water efficiency created by lower production volume in Africa.
We are also building for the future. In fiscal 23, we broke ground on a wastewater treatment plant at our El Charcón site in Mexico. This will enable the construction of a water recovery plant in fiscal 24, which we expect to start delivering water efficiency improvements from fiscal 25. We are also partnering with innovators to embed new technologies identified through our Diageo Sustainable Solutions (DSS) programme into our site roadmaps. One example is our partnership with 4T2 sensors on sensor technologies, which we expect will reduce the amount of water required to clean equipment between production runs.
Thirteen of our distilleries have now achieved Alliance for Water Stewardship certification (the internationally recognised, auditable standard for responsible water use), including Cameronbridge, Scotland, 11 Speyside distilleries and the Alwar distillery in India, making us the first distiller to be certified against this leading standard in Asia.
Climate, water and regenerative agriculture are strongly connected. This is why we continue our work to influence indirect water use in our agricultural supply chains. This means mapping our water use and continuing to run water improvement projects with farmers, especially smallholders. This helps us make our overall supply chain more resilient and support vulnerable communities, particularly in water-stressed areas.
| | | | | |
| Water replenishment |
Target by 2026 Replenish more water than we use for operations in water-stressed areas |
| Percentage of water replenished in water-stressed areas in fiscal 23 | 22% |
Our water replenishment programme, an important contribution to supporting the climate resilience of our communities and supply chains, has had another strong year, putting us firmly on track to reach our 2026 target. In fiscal 23, our projects developed the annual volumetric replenishment capacity of 1,311,010m3water. This represents 22% of our target for 2026, and cumulatively (fiscal 16 to fiscal 23) we have replenished 71.5% of our estimated fiscal 26 volume. In India, Nigeria, Seychelles and South Africa we have achieved our 2026 replenishment target three years early. For 13 sites in these countries, we are now replenishing all the water we directly consume in the local water basin or the basin where we source the raw materials for the site.
Overall, in fiscal 23 we have completed 35 replenishment projects in 11 countries. Highlights include nature-based projects improving water quality and availability in priority catchments. In Jalisco, Mexico, we have worked with government, NGOs and local stakeholders to restore a wetland treating wastewater in a project that's the first of its kind for us. Other ambitious replenishment projects include improving irrigation with farmers in Turkey, de-silting dams to increase water infiltration in India, and providing access to water for many smallholder farming communities in Tanzania, Ghana, Brazil, Mexico, Uganda, Kenya
and India.
Business description (continued)
| | | | | |
| Water for communities |
Target by 2030 Invest in improving access to clean water, sanitation and hygiene (WASH) in communities near our sites and local sourcing areas in all our water-stressed markets |
| Percentage of water-stressed markets with investment in WASH | 100 | % |
An important part of our approach to water is providing access to clean water, sanitation and hygiene (WASH) in water-stressed communities near our sites and in water-stressed areas that supply our raw materials.
We reached our 2030 target in fiscal 23, launching a project in Mexico to harvest rainwater in 37 schools and provide drinking water in Jalisco, home of our tequila distilleries. This means all nine of the markets included in our target have invested in WASH projects since 2020. In fiscal 23, we invested in 17 WASH projects in seven countries bringing safe water and sanitation to 71,655 people.
In fiscal 23, we have also helped ensure more female representation in WASH programmes, which makes it more likely that everyone will benefit equally from access to water. For more about this, see the section on championing inclusion and diversity (page 86). In fiscal 24, we’ll consider how best to bring WASH projects to more communities in our supply chains.
| | | | | |
| Water collective action |
Target by 2030 Engage in collective action in all priority water basins to improve water accessibility, availability and quality and contribute to net positive water impact |
| Percentage of priority water basins with collective action participation | 50 | % |
We don't tackle water stress alone. We launched the Diageo Collective Action Programme in 2020, recognising that we need to collaborate with multiple stakeholders to create solutions and interventions that improve the water security across entire water-stressed catchments. Through this, we are now active in six out of our 12 ‘priority water basins’ – strategically important areas suffering particular water stress in 10 countries. In fiscal 23, with support through our partnership with The Nature Conservancy, we began two initiatives – one with the International Union for Conservation of Nature in Uganda’s Victoria Nile basin where we source sorghum and barley for our brewery in Kampala, and another in the Godavari 3 basin in India. We have also agreed to be a basin champion for the Water Resilience Coalition in Kenya’s Upper Tana basin, partnering with the Upper Tana-Nairobi Water Fund, increasing the commitment and investment we have already made there to improving the water security of the whole basin, which feeds Nairobi, home of our Tusker brewery.
Advocacy
Water is under pressure around the world, and the issues around preserving it are complex. So it will take multilateral action to address the challenge of responsible stewardship and scarcity. At the COP27 climate change conference, we were among businesses calling for more action on water and climate resilience. We also attended the UN Water Conference in New York in March 2023 and were among the first businesses to sign a declaration calling for accelerated action on water stewardship. Our partnerships with leading international organisations, such as Water Resilience Coalition, Alliance for Water Stewardship and WaterAid, are fundamental to our ambition to support the climate resilience of our business and communities. They also help us advocate for more global action to address the water and nature crisis. Continuing this important advocacy, we plan to attend World Water Week in Stockholm in August 2023, UN SDG Summit in September and COP28 in December.
Business description (continued)
Limiting carbon emissions
The planet needs significant science-based action to create a sustainable, low-carbon future and to mitigate the risk from climate change. We aim to reach net zero across our direct operations by 2030. We have also stated our ambitionto being net zero across our value chain by 2050, and halving these emissions by 2030. We have detailed plans for reducing emissions across our existing sites and we are also investing in carbon-neutral production(2) sites to add to those we already have.
| | | | | | | | | | | | | | | | | | | | |
Pathway to net zero(1) |
| 2008 | 2015 | 2020 | 2021 | 2030 | 2050 or earlier |
| Milestone | GHG targets
set for 2015 | GHG targets
set for 2020 | ‘Society 2030:
Spirit of Progress‘
(SOP) targets set | Targets
approved by
the SBTi | ‘Society 2030:
Spirit of Progress‘
targets due | Scope 3 net
zero targets due |
| Target | | 2015 targets
-50%
Scopes 1 & 2 | 2020 targets
-50%
Scopes 1 & 2
-30% Scope 3 | | Scope 1: net zero
Scope 2: net zero
Scope 3: -50% | Scope 1: net zero
Scope 2: net zero
Scope 3: net zero |
| Delivery | | -33%
Scopes 1 & 2 | -50.1% Scopes 1 & 2
-33.7% Scopes 1-3 |
|
| | Baseline = 2007 | Baseline = 2007 | | Baseline = 2020 | |
| Pathway to delivery |
| Scope 1 | Decarbonisation of direct operations by embedding energy efficiency and energy recovery into our processes and working towards using 100% renewable fuel and heat.
Exploring innovations, partnerships and renewable energy certification. | Continue to explore innovations, partnerships and carbon removals to maintain compliance with our SBTi-aligned net zero commitment. |
| Scope 2 | Continue switch to renewable electricity.
Create additional renewable energy capacity to power our sites through on-site developments and using power purchase agreements (PPA). | Once we have achieved 100% renewable electricity by 2030 we will focus on moving towards more on-site/near-site generation. |
| Scope 3 | Packaging: For example: low-carbon glass and aluminium manufacturing; packaging reduction; innovative glass coatings that support light-weighting, and moving towards circular packaging solutions. Agriculture: Regenerative agriculture programmes scale-up to reduce the emissions associated with crop growth. Partnerships: Mobilising the value chain by engaging, inspiring and activating our supplier and customer network to jointly decarbonise e.g. through the development of renewable energy solutions and increased carbon emission understanding and transparency. Collaborating across the business: Cross-functional governance structure in place creating shared Scope 3 delivery responsibility.
|
| Focus on progress: We continually test our decarbonisation progress through reports that assess the sufficiency of our plans to deliver our in-year, 2030 and 2050 targets. Decarbonisation plans are in place across our site footprint and we monitor them through performance management and strategic business reviews. Through Diageo Sustainable Solutions (DSS) and supplier collaboration, we identify opportunities to partner and innovate, driving systems change within the beverage industry. We may need to use high-quality certified carbon offsets to neutralise hard-to-abate residual emissions, though we anticipate these being no more than 5-10% of our baseline. |
(1) This is an estimate based on current management expectations; the underlying assumptions and future developments may change over time, which would cause changes to management expectations and this information. See pages 93-99 for more about the potential impact of climate change on Diageo and our current plans to manage and mitigate risks. |
Our risk assessment and scenario analysis show us that consumer behaviour is an important transition risk, and companies who don’t decarbonise their operations will suffer as consumers increasingly demand more sustainable products. Also, decarbonisation requires investment. But by working with suppliers to innovate in low-carbon manufacturing techniques for glass production, for example, we help to accelerate towards a low-carbon world while benefitting from the experience that comes from early innovation.
(2) Four carbon-neutral facilities have been assessed and certified using PAS2060 – Carbon Neutrality Standard and Certification (Scope 1&2, Direct Operations boundary) as reducing emissions aligned to an equivalent net zero trajectory with <5-10% of residual emissions neutralised using purchase of carbon offsets.
Business description (continued)
| | | | | |
| Emissions from our direct operations |
Target by 2030 Become net zero carbon in our direct operations (Scopes 1 and 2) |
| Percentage reduction in absolute carbon emissions (direct and indirect carbon emissions by weight (market/net based)) from the prior year | 5.4 | % |
In fiscal 23, as part of our ambition to decarbonise our operations to decouple growth from emissions, we continued to reduce our absolute carbon emissions (direct and indirect carbon emissions by weight (market/net based)), achieving a further 5.4% reduction on last fiscal year and a cumulative 14.7% improvement from our fiscal 20 baseline.
The main factor in reducing our emissions in fiscal 23 was our continued investment in renewable energy. We commissioned biomass facilities at sites in Kenya and Uganda, bringing significant emissions reductions of approximately 42,000 tonnes CO2e over the course of the year. We increased on-site bioenergy use at facilities in Scotland and Turkey and also replaced fossil fuel with liquid biofuels at two of our whisky distilleries in Scotland. We have also implemented continuous improvement initiatives across a number of sites, and continued to use certificate-backed renewable natural gas at facilities in the UK and Canada.To reach our 2030 SBTi-approved near-term target for direct operations, we must reduce our emissions by more than 95% from our 2020 baseline. We continue to invest in carbon-neutral facilities, in addition to our four carbon-neutral distilleries1 in Scotland and North America. We are designing new sites in Mexico, Canada, Ireland and China to be as efficient and low-emitting as possible.
| | | | | |
Target by 2030 Use 100% renewable energy across all our direct operations
by 2030 |
| Change in percentage of renewable energy across our direct operations in fiscal 23 | 1.9% |
This year, 45% of all the energy consumed at our facilities came from renewable sources, an increase of 1.9% on last year. To achieve this, we have increased the use renewable electricity, fuel and heat. Our improved performance in fiscal 23 was driven largely by the electrification of our sites, our efforts to source renewable electricity and our investment in biomass technology.
As a signatory of the RE100 initiative, with a target to reach 100% electricity from renewable sources by 2030, we are proud that we are already ahead of our 2025 target of 50% renewable electricity, reaching 86.7% this year, up from 85.6% in fiscal 22. We have invested in 100% renewable electricity sites like our Lebanon all-electric distillery in North America. Comprising approximately 8,000 panels that will add 4.1MW of renewable electricity generation capacity. As well as reaching 100% renewable electricity ourselves, we encourage our suppliers to use more electricity through power purchase agreements (PPAs) and support additional power generation opportunities in our markets.
This year we have increased our use of renewable thermal energy by 1.3% compared to last year across our global operations. The start up of three biomass facilities at our sites in Kenya and Uganda produced our biggest single increase in renewable thermal energy use, a 25% increase in renewable fuel and heat across our Africa market compared to fiscal 22. We also increased energy output from on-site biomass and biogas plants and introduced renewable biofuel at two sites in Scotland. As we make renewable energy advances across our operations, we have reduced our usage of certificate backed renewable gas.
We are a significant enabler of the generation of biomethane in Scotland through the supply of Diageo distillery co-products. This is used by third parties as a feedstock to generate green gas, which is injected into the natural gas network. We then reuse the resulting renewable gas in our distilleries, with 23% of the green gas used by our sites in Scotland derived from our own feedstocks this year.
Four carbon-neutral facilities have been assessed and certified using PAS 2060 – Carbon Neutrality Standard and Certification (Scope 1&2, Direct Operation boundary)see net zero carbon boundaries on pages 310-311) as reducing emissions aligned to an equivalent net zero trajectory with <5-10% of residual emissions neutralised using the purchase of carbon offsets.
Business description (continued)
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| Emissions from across our value chain |
Target by 2030 Reduce our value chain (Scope 3) carbon emissions by 50% |
| Percentage reduction in absolute greenhouse gas emissions (ktCO2e) from the prior year | 1.2 | % |
We continue to refine our understanding of our baseline and footprint, including our supplier network, after reviewing our total value chain footprint and associated emissions in 2023. This year our Scope 3 CO2e emissions decreased by 1.2% but we remain behind our 2020 baseline by 20.7%.
Our emissions derived from packaging decreased due to reductions in volumes, as well as decarbonisation activities including glass light-weighting, carton removals, and switching to lower-carbon materials. This was partly offset by increased emissions attributed to capital goods, including investments in plants that enable our low-carbon transition.
We are navigating the complexities of Scope 3 to ensure we achieve our reduction targets, and enable impactful change up and down the value chain by working with our suppliers, our peers and the wider beverage industry.
As well as reducing Scope 3 emissions by 50% by 2030, we want to achieve a net zero value chain by 2050 or sooner. To achieve these targets, in common with many multinationals, we are working with global GHG accounting bodies and our suppliers to get more detailed Scope 3 data. As we refine our value chain data, we can be more specific about our GHG footprint, including refined categories of upstream and downstream Scope 3 emissions.
(1) Four carbon-neutral facilities have been assessed and certified using PAS2060 – Carbon Neutrality Standard and Certification (Scope 1&2, Direct Operations boundary) as reducing emissions aligned to an equivalent net zero trajectory with <5-10% of residual emissions neutralised using purchase of carbon offsets.
| | | | | | | | | | | | | | |
| Total direct and indirect carbon emissions by region by year |
| Region | 2020 | 2021 | 2022 | 2023 |
| North America | 127 | 125 | 100 | 83 |
| Europe | 152 | 129 | 144 | 194 |
| Asia Pacific | 32 | 10 | 10 | 9 |
| Latin America and Caribbean | 22 | 27 | 38 | 26 |
| Africa | 137 | 154 | 132 | 89 |
| Diageo (total) | 470 | 445 | 424 | 401 |
| | | | | | | | | | | | | | |
| Streamlined Energy and Carbon Reporting (SECR) |
| 2020 | 2021 | 2022 | 2023 |
| Total Global energy consumption (MWh) | 3,310,388 | | 3,392,923 | | 3,557,760 | | 3,507,733 | |
Total market based (net) intensity ratio of GHG emissions (g CO2e per litre of packaged product) | 139 | | 122 | | 105 | | 105 | |
| Total UK energy consumption (MWh) | 1,056,931 | | 1,064,795 | | 1,091,153 | | 1,249,306 | |
| Direct (MWh) | 924,022 | | 927,917 | | 951,302 | | 1,102,403 | |
| Indirect (MWh) | 132,910 | | 136,878 | | 139,851 | | 146,903 | |
Total UK direct and indirect carbon emissions (kt CO2e) | 86 | | 71 | | 84 | | 136 | |
| Scope 1 | 86 | | 71 | | 84 | | 136 | |
| Scope 2 | — | | — | | — | | — | |
Moving towards regenerative agricultural sourcing
Our supply chain connects us to communities around the world. This gives us the chance to make a positive social and environmental impact by enhancing livelihoods and promoting regenerative agriculture.
Business description (continued)
One of the foundations of our regenerative agriculture strategy is our Sustainable Agriculture Guidelines (SAG), which set out the principles we expect our agricultural raw materials suppliers to adopt to make farming more regenerative. We work with suppliers and farmers across our supply chains to implement, assess and scale regenerative practices.
This work also helps make our supply chain more resilient. Our assessments show the possible impacts of climate change on agricultural commodities, and that they are vulnerable to climate hazards including water stress, temperature rises and flooding, particularly where the commodities only grow in one country.
We work with communities to help them adapt and build resilience through our 'Preserve Water for Life' strategy, implementing regenerative agricultural practices and developing climate-resistant variants of agricultural crops. We are also exploring alternative crops to build diversity and enhance resilience in crop systems and across our raw materials portfolio. By working with farmers in this way, and by giving them skills and resources, we make them and their communities economically, environmentally and socially stronger, as well as strengthening our own supply chain.
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| Positive partnerships |
Target by 2030 Develop regenerative agriculture pilot programmes in five key sourcing landscapes | |
| Number of regenerative agriculture pilot programmes initiated | 1 |
We are committed to partnerships with farmers to help them implement projects to test new regenerative farming approaches and practices, measure the results and share what we learn. By following regenerative practices, agriculture can restore soil health and fertility, boost biodiversity, protect watersheds and promote ecological resilience. By focussing on life above and below ground, everyone benefits from regenerative agriculture from the farmer to the ecosystem.
We also continue to build our understanding of the agronomic context across our key crops and sourcing regions, working with agronomic partners and our suppliers, growers and farmers. We are currently conducting assessments in the United Kingdom, United States, India, Brazil, Mexico and East Africa for barley, wheat, corn, rice, sugarcane, agave and sorghum production systems.
Guinness barley programme
Discovering how to lower farming's footprint
In Ireland, our programme looking for ways to lower-carbon emissions of barley production for Guinness is in its second year, with 45 farmers now participating. Data from 1,125 soil samples showed that three quarters of the soil’s carbon footprint is from nitrogen fertilisers. This shows there’s potential to reduce emissions by at least 30% from the baseline year through regenerative practices and low-carbon fertilisers.
We also supplied barley farmers with cover crops, which fix nitrogen and carbon in soil, and quantified biomass they generate.
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| Local sourcing |
Target by 2030 Provide all local sourcing communities with agricultural skills and resources, building economic and environmental resilience (supporting 150,000 smallholders) |
| Number of smallholder farmers in our supply chain supported by our smallholder farmer programme in fiscal 23 | 12.9k |
Business description (continued)
Where low yields and quality issues threaten smallholders’ income, we work with suppliers, research organisations and other partners to build more resilient local supply chains. This has included developing more climate-resistant and higher-yielding varieties of sorghum adapted for Kenya and Ghana.
We are on course to reach our target of supporting 150,000 smallholders by 2030, after supporting nearly 13,000 12,935farmers in fiscal 23 with sustainable development.
We have worked mainly in Kenya to test and learn from our approach to support our smallholders before expanding to the network of smallholders we source from. The programme focuses on training and enabling knowledge transfer for the transition to more resilient agriculture production systems. We trained smallholders on improving soil health, working with technical and implementation partners on the ground. We have also supported our smallholders with essential resources such as high-quality, certified seeds, distributing more than 100 tonnes of input at a subsidised rate to smallholder farmers.
Last year, we partnered with an agricultural technology provider to digitise our smallholder value chains. Starting with our primary crop for smallholder farmers, sorghum, we have rolled the technology platform out across Ghana, Kenya and Uganda in fiscal 23. We aim to broaden this to Nigeria and Tanzania. The technology acts as a valuable data source. We aim to use it to tailor our offering to smallholders based on their needs, while monitoring changes to baseline data to make sure our interventions have an impact on the ground. To help accelerate change for smallholders, we launched challenges through Diageo Sustainable Solutions, encouraging innovators to pitch ideas relating to soil biodiversity, carbon (relating to soil health) and water.
To clarify farming communities’ needs, we have used the main communication method in our sourcing regions: radio. Working with local agricultural radio shows and Farm Radio International, we are looking to understand farmers’ challenges to help us target our support. Together, we ran a six-week series on ‘Farming as a Business’, discussing challenges to women in agriculture and the support available to farmers. Listeners could freephone to submit views in their local dialect across eight radio stations in Ghana and Uganda.
Making packaging more sustainable
Consumers are rightly demanding more sustainable products and legislation continues to drive industry changes. We are committed to reducing our value chain's carbon footprint by reducing packaging and increasing the recycled content in the packaging we produce. We are also developing circular business models and designs, which allow for more reusable and refillable packaging.
By becoming sustainable by design in packaging, we reduce our carbon footprint, by using fewer materials in production and by limiting emissions when the packaging reaches the end of its life. We buy most of our packaging materials, so partnerships are crucial to achieving our ambitions. An example is Diageo Sustainable Solutions (DSS), where we partner with technology innovators, customers, suppliers and researchers to spot potential technology breakthroughs and pilot them, with the ultimate aim of scaling them to increase their impact.
Examples of how we are reducing our packaging footprint include:
•Pioneering net-zero glass bottles – In December 2022, we announced our partnership with Encirc, a leading glass manufacturer and co-packer, to create the world's first net zero glass bottles at scale by 2030. The new furnace at Encirc’s plant in Cheshire, United Kingdom, will reduce carbon emissions by 90% with an energy mix of green electricity and low-carbon hydrogen. We expect that carbon capture technology will capture the remaining carbon emissions by 2030. The furnaces are expected to be fully operational by 2027 and to produce up to 200 million Smirnoff, Captain Morgan, Gordon’s and Tanqueray bottles a year by 2030.
•Leading the way to sustainable aluminium – We have invested in a groundbreaking project to create a circular economy for aluminium in the United Kingdom. We are funding a new consortium (BACALL – British Aluminium Consortium for Advanced Alloys), which will build a plant to provide recycled aluminium for more than 400 million cans of Guinness and pre-mixed Gordon’s and tonic, significantly reducing our carbon emissions while also creating jobs in the United Kingdom.
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| Reducing packaging weight and increasing recycled content |
Target by 2030 Continue our work to reduce total packaging and increase recycled content in our packaging (delivering a 10% reduction in packaging weight and increasing the percentage of recycled content in our packaging to 60%) |
| Percentage reduction of total packaging (by weight) in fiscal 23 | 4 | % |
Business description (continued)
In fiscal 23, we reduced packaging weight by 4.4% compared to fiscal 22, but this was 14.9% above our 2020 baseline because we have increased production from fiscal 20 to fiscal 22. In fiscal 23, we removed 141 million cartons from some of our Johnnie Walker and scotch brands. We have reduced weight in our primary scotch portfolio by moving some of our bottles into standard, more lightweight formats, allowing us to take some heavier formats out of the portfolio. These changes have saved almost 4,000 tonnes of glass and 9,170 tonnes of board in fiscal 23. From fiscal 24, we will continue to embed our Design for Sustainability packaging guidelines, emphasising use of lightweight glass and recycled content. We also continue to encourage bars, restaurants and other on-trade outlets to support the reuse of packaging.
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| Change in percentage of recycled content (by weight) in fiscal 23 | (1.2)% |
Recycled content now makes up 39% of our packaging, down 1.2% on fiscal 22. This is because of a shortage of cullet, a feedstock for recycled glass, in the United Kingdom and North America. We continue to face challenges in sourcing quality recycled glass and PET (polyethylene terephthalate), though we are working with suppliers and industry peers to strengthen recycling infrastructure.
Despite the challenges, we have made positive changes, moving Johnnie Walker Gold Label Reserve from 0% recycled content to 40% and trialling Johnnie Walker core sizes with increased recycled content. We also launched Talisker x Parley: Wilder Seas in the brand’s first 100% recycled bottle.
Pioneering a lighter bottle
In 2021, we launched a challenge to develop lightweight bottles through Diageo Sustainable Solutions. This led to us working with glass industry consultants EXXERGY, which has developed an innovative glass coating technology that could enable us to use lighter glass for bottles, without reducing their strength. We invited strategic supply chain partner Ardagh Group to collaborate, and they engaged manufacturing software specialist Dassault Systèmes to support with testing the EXXERGY coating. We have been testing the coating through industry-first lab-based and virtual trials. Virtual trials allow us to develop innovations using real-time digital representations of products and processes, which reduces time, cost, energy and raw materials. After the trials, we will test the thinner glass on our Johnnie Walker bottles. Through this collaboration, we hope to significantly reduce the raw materials needed to create a bottle, and the overall weight, so it takes less carbon to transport our bottles.
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Target by 2030 Ensure 100% of our packaging is widely recyclable (or reusable/compostable) |
| Percentage of packaging recyclable (by weight) | 97.9 | % |
In fiscal 23, 97.9% of our packaging was technically recyclable, using the same fiscal 22 methodology.
We have an ambition to adjust our recyclability metrics in line with market-differentiated recycling frameworks in the future.
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| Recycled content and recyclability of plastic |
Target by 2025 Ensure 100% of our plastics are designed to be widely recyclable or reusable/compostable |
| Percentage of recyclable (or reusable/ compostable) plastic used in fiscal 23 | 11.2 | % |
In fiscal 23, we achieved 83.2% recyclability for plastics, an increase of 11.2% from last year. We continue to use the ‘technically recyclable’ definition. The remaining non-recyclable components are currently not replaceable, although we continue to explore alternatives.
Business description (continued)
| | | | | |
Target by 2030 Achieve 40% recycled content in our plastic bottles by 2025, and 100% by 2030 |
| Percentage of recycled content in our plastic bottles used | 7 | % |
In fiscal 23, we started projects in North America, Europe and Africa to increase recycled content in plastic bottles, particularly single-use formats, and achieved 7% recycled content in plastic bottles.
This year, in the United Kingdom we have moved our Johnnie Walker Red Label 1.75L bottles to 30% recycled PET. Our North America business achieved 26% recycled content in plastic bottles and in Africa we trialled 40% recycled content. In Ghana, we have partnered with the Mohinani Group to introduce the first bottle-to-bottle recycling plant in the country. In fiscal 23, 2,000 metric tonnes of plastic have been collected, with the aim of the plant being fully operational in fiscal 24. The plant will have a capacity to recycle 15,000 metric tonnes of plastic per year.
Also, our largest packaging site in Scotland has removed single-use shrink-wrap across a range of products, saving 67 metric tonnes of plastic per year, and delivering shrink-wrap-free drink flasks to 47 countries.
We will see these shifts continue in fiscal 24; sourcing recycled PET remains a priority.
Reusing and reducing waste
We manage around one million tonnes of waste each year. This includes ‘co-products’ from our production processes in the form of spent grain and other agricultural commodities. These co-products return to agriculture in the form of animal feed and fertiliser and are also used as feedstocks for biomass facilities. This helps reduce the environmental footprint of our agricultural supply chain and supports our regenerative agriculture programmes. By reusing scarce resources, we help improve the system that produces our key ingredients. In addition, we aim to divert all waste from landfill, so it is recycled or reused.
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| Reducing waste to landfill |
Target by 2030 Achieve zero waste in our direct operations and zero waste to landfill in our supply chain |
| Percentage reduction in total waste sent to landfill from the prior year | 35.5 | % |
Globally, the total volume of waste diverted from our direct operations to landfill was 180 tonnes this year (vs 279 tonnes in fiscal 22), which is below our zero waste to landfill de minimis threshold of 200 tonnes. We recycle, reuse and recover more than 99.98% of waste from our global operations either for our own reuse or in partnership with local agricultural communities and energy and waste handlers. Our performance in fiscal 23 means we have achieved a key milestone in fulfilling our 2030 direct operations zero-waste commitments.
In the second half of fiscal 23, we launched an initiative with our suppliers and KPMG to fully understand the waste in our supply base. The project will look for ways to change how we approach waste management across our Tier 1 supply chain by avoiding waste to landfill and recovering and recycling more waste by 2030. Our commitment to a more sustainable and less wasteful supply chain is also reflected in our marketing, where our point-of-sale (POS) project is working towards guidelines for sourcing better materials for experiential marketing, as well as designing POS and campaign props for reuse.
Last year, we reported that a third-party contractor at one of our facilities in Australia had incorrectly diverted waste material to landfill. This prompted a global review in fiscal 23 of more than 350 waste handlers and our own internal waste management practices, aiming to strengthen our controls and avoid similar issues in the future. This hadn’t been possible during the Covid-19 pandemic because of restrictions on site visits. The review of waste handlers identified 111 metric tonnes of waste that hadn’t been accounted for in fiscal 22, taking the total volume of waste sent to landfill to 279 tonnes. We have now included this in waste-to-landfill volumes for fiscal 22, representing 0.028% of the 984,057 tonnes we handled in that year. We’ll continue to assess our waste handlers regularly and improve our internal controls to maintain our zero waste to landfill status.
Business description (continued)
We consider we have achieved zero waste to landfill if we have disposed of less than 0.2% of baseline waste-to-landfill volume during the year. This volume equates to 200 tonnes and excludes any waste we are required to dispose to send to landfill under local regulations.
How we have reported consistent with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)
In preparing our disclosures, we have taken into consideration the TCFD all sector guidance.
| | | | | |
| TCFD recommendation | Compliance |
| GOVERNANCE See page 92 | |
a.Describe the board’s oversight of climate-related risks and opportunities. | Yes. See page 92. |
b.Describe management’s role in assessing and managing climate-related risks and opportunities. |
| RISK MANAGEMENT See pages 93-99 | |
a.Describe the organisation’s processes for identifying and assessing climate-related risks. | Yes. See pages 93-99. Having completed comprehensive risk assessments our focus is now on ensuring appropriate adaptation plans are in place for all risks identified. |
b.Describe the organisation’s processes for managing climate-related risks. |
c.Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management. |
| STRATEGY See pages 100-109 | |
a.Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term. | We have described risks and opportunities for our business in >95% of our operating locations, as well as the impact of those risks and opportunities on our strategy. We have modelled the resilience of our strategy under three climate-related scenarios. See pages 243-245. As a next step we are exploring the further development of our scenario analysis capability and associated tools. |
b.Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning. |
c.Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario. |
| METRICS & TARGETS See pages 100-109 | |
a.Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process. | Yes. See pages 100-109. |
b.Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas (GHG) emissions and the related risks. | Yes for Scope 1 and 2. See page 104. We are working with global GHG accounting bodies and our suppliers to get more detailed Scope 3 data. As we refine our value chain data, we can be more specific about our GHG footprint, including refined categories of upstream and downstream Scope 3 emissions. |
c.Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets. | Yes. See pages 100-109. |
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 and may generally, but not always, be identified by the use of words such as “’will”, “anticipates”, “should”, “could”, “would”, “targets”, “aims”, “may”, “expects”, “intends” or similar expressions statements. In this document, such statements include those that express forecasts, expectations, plans, outlook, objectives and projections with respect to future matters, including information related to Diageo’s fiscal 24 outlook, Diageo’s medium-term guidance for fiscal 23 to fiscal 25, Diageo’s supply chain agility programme, future Total Beverage Alcohol market share ambitions and any other statements relating to Diageo’s performance for the year ending 30 June 2024 or thereafter.
Forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There is 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, which include (but are not limited to):
(i) economic, political, social or other developments in countries and markets in which Diageo operates, including macro-economic events that may affect Diageo’s customers, suppliers and/or financial counterparties; (ii) the effects of climate change, or legal, regulatory or market measures intended to address climate change; (iii) changes in consumer preferences and tastes, including as a result of disruptive market forces, changes in demographics and evolving social trends (including any shifts in consumer tastes towards at-home occasions, premiumisation, small-batch craft alcohol, or lower or no-alcohol products and/or developments in e-commerce); (iv) changes in the domestic and international tax environment that could lead to uncertainty around the application of existing and new tax laws and unexpected tax exposures; (v) changes in the cost of production, including as a result of increases in the cost of commodities, labour and/or energy due to inflation and/or supply chain disruptions; (vi) any litigation or other similar proceedings (including with tax, customs, competition, environmental, anti-corruption or other regulatory authorities); (vii) legal and regulatory developments, including changes in regulations relating to environmental issues and/or e-commerce; (viii) the consequences of any failure of internal controls; (ix) 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; (x) Diageo’s ability to make sufficient progress against or achieve its ESG ambitions; (xi) cyber-attacks and IT threats or any other disruptions to core business operations; (xii) contamination, counterfeiting or other circumstances which could harm the level of customer support for Diageo’s brands and adversely impact its sales; (xiii) Diageo’s ability to maintain its brand image and corporate reputation or to adapt to a changing media environment; (xiv) fluctuations in exchange rates and/or interest rates; (xv) Diageo’s ability to derive the expected benefits from its business strategies, including Diageo’s investments in e-commerce and its luxury portfolio; (xvi) increased competitive product and pricing pressures, including as a result of introductions of new products or categories that are competitive with Diageo’s products and consolidations by competitors and retailers; (xvii) increased costs for, or shortages of, talent, as well as labour strikes or disputes; (xviii) movements in the value of the assets and liabilities related to Diageo’s pension plans; (xix) 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 (xx) any failure by Diageo to protect its intellectual property rights.
In preparing the ESG-related information contained in this document, Diageo has made a number of key judgements, estimations and assumptions and the processes and issues involved are complex. The ESG-related forward looking statements should be treated with special caution, as ESG and climate data, models and methodologies are often relatively new, are rapidly evolving and are not of the same standard as those available in the context of other financial information, nor are they subject to the same or equivalent disclosure standards, historical reference points, benchmarks, market consensus or globally accepted accounting principles. In particular, it is not possible to rely on historical data as a strong indicator of future trajectories in the case of climate change and its evolution. Outputs of models, processed data and methodologies are also likely to be affected by underlying data quality, which can be hard to assess and we expect industry guidance, market practice, and regulations in this field to continue to change. There are also challenges faced in relation to the ability to access data on a timely basis and the lack of consistency and comparability between data that is available. This means the ESG-related forward-looking statements and ESG metrics discussed in this document carry an additional degree of inherent risk and uncertainty, and as a result, our actual results and developments could differ materially from those expressed or implied by the ESG-related forward-looking statements in this document.
In light of the uncertainty as to the nature of future policy and market responses to climate change, including between regions, and the effectiveness of any such responses, Diageo may have to re-evaluate its progress and evolve its approach towards its ESG ambitions, commitments and targets in the future, update the methodologies it uses or alter its approach to ESG and climate analysis and may be required to amend, update and recalculate its ESG disclosures and assessments in the future, as market practice and data quality and availability develops rapidly.
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 cautionary statements contained or referred to in this section. In addition, all oral and written forward-looking statements made on or after the date of this document and attributable to Diageo are also expressly qualified in their entirety by the risks set out in the 'Risk factors' section below.
Any forward-looking statements made by or on behalf of Diageo speak only as of the date they are made. Diageo expressly disclaims any obligation or undertaking to publicly update or revise these forward-looking statements other than as required by applicable law. The reader should, however, consult any additional disclosures that Diageo may make in any documents which it publishes and/or files with the 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 2023.
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.
References in this document to information on websites are included as an aid to their location and such information is not incorporated in, and does not form part of, this document unless otherwise noted.
Risk factors
Investing in the securities of Diageo involves risk. Diageo believes the following to be the principal risks and uncertainties that are most likely to have a material adverse impact on the Diageo 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 has been and may, in the future, be adversely impacted by unfavourable economic, political, social or other developments and risks (including those resulting from a public health threat, increases in geopolitical instability, including in relation to Russia’s invasion of Ukraine, and/or inflationary pressures) in the countries in which it operates
Diageo’s products are sold in nearly 180 countries worldwide, and Diageo may be adversely affected by global economic volatility or unfavourable economic developments in any of the countries or regions where it has distribution networks, marketing companies or production facilities. In particular, Diageo’s business is dependent on general economic conditions in its major markets, which include the United States, the United Kingdom, the countries that form the European Union, and certain countries within the Latin American region, India and China, and failure to react quickly enough to changes in those economies could have an adverse effect on financial performance.
The markets in which Diageo operates have been significantly impacted, and could be impacted in the future, by public health threats, such as the Covid-19 pandemic. While restrictions imposed in response to the Covid-19 pandemic in most countries around the world have gradually eased, the long-term economic impact of the pandemic is still uncertain, particularly in China. Similarly, Russia’s invasion of Ukraine and the ongoing military conflict in the region has, among other things, resulted in elevated geopolitical instability and economic volatility. The economic volatility attributable to Covid-19 and Russia’s invasion of Ukraine is part of, and contributing to, a larger trend of persistently high inflation and a higher interest rate environment globally, which has had and may continue to have a significant adverse effect on economic activity that could have a material adverse impact on Diageo’s business, financial condition, results of operations and/or the price of Diageo’s securities.
Any future significant deterioration in economic conditions globally or in any of Diageo’s important markets, including economic slowdowns, global, regional or local recessions or depressions, currency instability, increased unemployment levels, increased custom duties, tariffs and/or other tax rates, increased inflationary pressures and/or disruptions to credit and capital markets, could lead to eroded consumer confidence and decreased 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, distributors, suppliers, and financial counterparties, who may experience cash flow problems, increased credit defaults, decreases in disposable income or other financial issues, which could lead to changes to ordinary customer stocking patterns, including destocking or stocking ahead of potential price increases 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 the heightened geopolitical instability caused by Russia’s invasion of Ukraine and/or inflationary pressures, could result in a reduction in the availability of, or a further 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, China, 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 financial performance.
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, natural disasters, public health threats (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. Additionally, upcoming election cycles in key market including the US, UK and Europe are likely to lead to increased volatility.
Many of the above risks are heightened, or occur more frequently, in emerging markets, such as Nigeria, Ghana and Turkey. 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, expropriation of assets, sovereign default, military conflicts, liquidity constraints, inflation, devaluation, price volatility and currency convertibility issues, as well as other 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.
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
Climate change is occurring around the world as a result of carbon dioxide and other greenhouse gases in the atmosphere having an adverse effect on global temperatures, weather patterns and the frequency and severity of extreme weather-related events and disasters. To the extent 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 of, or increased prices for, a number of raw materials that are necessary in the production of Diageo’s products, including wheat, maize, barley, sugar cane/molasses, vanilla, agave, rice, grapes, sorghum, and aniseed. Severe weather events or changes in the frequency or intensity of weather events could also pose physical risks to Diageo’s production facilities, impair Diageo’s production operations or disrupt Diageo’s supply chain, which may affect production operations as well as delivery of its products to customers. For example, a number of Diageo’s distilleries in Scotland are in lower coastal areas and, as a result, may suffer disruption due to coastal flooding and/or storms. Climate change and geographic limitations related to the production may also expose Diageo to water scarcity and quality risks due to the water required to produce its products, including water consumed in the agricultural supply chain. If climate change leads to droughts or water over-exploitation or has a negative effect on water availability or quality in areas that are part of Diageo’s supply chain, the price of water may increase in certain areas and certain jurisdictions may adopt regulations restricting the use of water or enact other unfavourable changes.
Water, which is the main ingredient in virtually all of Diageo’s products and a major component 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, including as a result of climate change, Diageo may be affected by increased production costs (including as a result of increases in certain water-related taxes or related regulations), capacity constraints, or requests to cease production entirely in water-stressed areas, which in turn could adversely affect Diageo’s business, financial results and reputation. A number of Diageo’s production sites are in water-stressed areas and may be exposed to potential disruption if demand for water exceeds the available amount during a certain period or if the poor quality of available water restricts its use.
In addition, a failure by Diageo to respond appropriately to increased governmental or public pressure for further reductions in greenhouse gas emissions, water usage and/or to address any other perceived environmental issues could damage Diageo's reputation. Increased governmental or public pressure for further reductions in greenhouse gas emissions or water usage may also cause Diageo 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. As governments and business take action to reduce or mitigate the effects of climate change, Diageo and its supply chain are expected to incur increased costs, including those associated with required improvements to energy usage in agriculture and glass manufacturing, water efficiency and usage, land practices and competition for land from bio-crops, the rising cost of natural gas and rising worldwide carbon prices. It is possible these costs increase beyond what is currently expected or that other categories of costs increase unexpectedly, either or both of which could have an adverse impact on Diageo’s financial results.
Diageo is also required to report greenhouse gas emissions, energy usage data and related environmental information to a variety of entities, and comply with the European Union Emissions Trading Scheme. Regulators in various jurisdictions, including Europe and the United States, have focused efforts on increased disclosures related to ESG matters, including climate change and mitigation efforts, and these regulations (if adopted) could expand the nature, scope and complexity of matters that companies are required to control, assess and report and Diageo may be required to make additional investments and implement new practices and reporting processes, all entailing additonal compliance risk. Disparate and evolving standards for identifying, measuring and reporting ESG metrics, including ESG-related disclosures that may be required by the US Securities and Exchange Commission, European and other regulators, will likely increase compliance burdens and associated regulatory and reporting costs and complexity significantly. Furthermore, while ESG reporting has improved, data remains of limited quality and consistency and is more uncertain than historical financial information. ESG data, methodologies and standards may evolve over time in line with
market practice, regulation, or owing to scientific developments. The use of inconsistent or incomplete data and models could result in sub-optimal decision making. If Diageo is unable to accurately measure and disclose required data in a timely manner, it could be subject to penalties in certain jurisdictions.
Diageo’s operations are also subject to environmental regulations by national, regional and local agencies, including, in certain cases, regulations that impose liability without regard to fault. These regulations can result in liability that might adversely affect Diageo’s operations and financial condition. As regulators in Diageo’s markets continue to respond to rising concerns about the impact of climate change and other environmental threats, regulation and enforcement is becoming stricter. There can be no assurance that Diageo will not incur a substantial liability or that applicable environmental laws and regulations will not change or become more stringent in the future.
Risks related to Diageo’s industry
Demand for Diageo’s products may be adversely affected by many factors, including disruptive market forces, 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. Any inability by Diageo to respond and adapt either its products or its processes to disruptive market forces, including e-commerce, digital, and new formats, could impact Diageo’s ability to effectively service its customers and consumers with the required agility, thereby threatening market share, revenue, profitability and growth ambitions. While Diageo is focused on expanding its digital platforms and effectively using technology in its supply chains, there is no guarantee that these efforts will help Diageo gain and/or maintain a competitive advantage over its peers.
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, premiumisation, 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, any or all of which may reduce consumers’ willingness to purchase beverage alcohol products from large producers such as Diageo or at all. There is also a risk to Diageo’s brands emerging from consumers making brand choices that reflect their increasingly polarised socio-political views, including with respect to ESG matters. The market share, profitability and growth ambitions of Diageo’s brands, as well as Diageo’s reputation more generally, could also be adversely affected by any failure by Diageo to service its customers and consumers with the required agility or to provide consistent, reliable quality in its products or in its service levels to customers.
Economic pressures in the markets Diageo serves may also reduce consumer demand for Diageo’s products. In particular, inflation, as measured by the consumer price index has been persistently high in advanced and emerging market economies, including in the United Kingdom, Europe and the United States, driven mainly by supply chain issues (including input shortages, labour constraints, rising commodity prices and soaring shipping costs), excess demand for goods and services, and significant increases in energy prices. Rising costs of living could negatively impact the spending habits of consumers in various markets which Diageo serves and could cause consumers to choose products which have lower price points, including those of Diageo’s competitors. Changes in consumers’ spending habits due to rising inflation may therefore have an adverse effect on Diageo’s business and financial results.
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 benefitted from the launch of new to world products or variants of existing brands (with recent examples including the Guinness Nitrosurge and Don Julio Rosado), 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-to-world products or global brand extensions is inherently uncertain, especially with respect to such products’ initial and continuing appeal to consumers. Similarly, brands that Diageo acquires may not deliver the expected benefits and/or may not scale as expected. 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. 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 potential tax liabilities in Brazil and India, see note 19 to the consolidated financial statements.
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 significant changes in tax law, 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 and/or unexpected tax exposures, thus adversely affecting Diageo’s business and financial results.
Any increases in the cost of production could affect Diageo’s profitability, including increases in the cost of commodities, labour and/or energy due to inflation
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, inflation, 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 raw materials 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. Diageo may not be able to increase its prices or create sufficient efficiencies to offset these increased costs without suffering reduced volumes of products sold and/or decreased operating profit.
While Diageo continues to closely monitor its operating environment, it is possible that the ongoing volatility related to significant cost inflation along with a potential weakening of consumer spending power may have an adverse effect on Diageo’s business financial condition and results of operations.
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, see note 19 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. 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.
Diageo is also subject to antitrust and competition laws in many of the jurisdictions in which it operates. In a number of these jurisdictions, there has been an increase in the enforcement of these laws during recent years. Should this trend continue, this may, among other things, result in increased regulatory scrutiny of Diageo, potential reputational damage and/or increased costs related to compliance.
Diageo is required to comply with data privacy laws and regulations in many of the markets in which it operates. For example, Diageo is subject to the General Data Protection Regulation (“GDPR”) in the European Union, the United Kingdom General Data Protection Regulation (“UK GDPR”), data privacy legislation in the United States and the Personal Information Protection Law (“PIPL”) in China. Breach of any of these laws or regulations could lead to significant penalties (including, under the GDPR and the UK GDPR, a fine of up to 4% of annual 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.
In many of the markets in which Diageo operates, the overall legal and regulatory landscape has become more complex in recent years and 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 business and financial performance.
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. Accurate disclosures provide investors and other market professionals with information to understand Diageo’s business. In addition, the reliability of financial reporting is important in ensuring that the business’ management and its results are based on reliable data.
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, among other things, lead to restatements of previously reported results, significant penalties, public censure and/or litigation. Any such regulatory action could adversely affect Diageo’s business and financial results, reputation and the price of Diageo’s securities. In addition, defective internal controls could result in inaccuracies or lack of clarity in public disclosures and could result in a material misstatement of financial reporting. This could create market uncertainty regarding the reliability of the data presented and have an adverse impact on Diageo’s reputation and the price of Diageo’s securities.
Any failure by Diageo to comply with anti-corruption laws, anti-money laundering laws, economic sanctions laws, trade restrictions or similar laws or regulations, or any failure of Diageo’s related internal policies and procedures designed to comply with applicable law, may have a material adverse effect on Diageo’s business and financial results, Diageo's reputation and the price of Diageo' securities
Diageo produces and markets its products on 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), anti-money laundering 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, including any sanctions introduced in response to Russia's invasion of Ukraine, Diageo may be exposed to the costs associated with investigating potential misconduct as well as significant financial penalties 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. In addition, any lack of an embedded business integrity culture and associated control framework in any market could increase the risk of non-compliance with relevant laws and regulations.
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. For additional information with respect to legal proceedings, see note 19 to the consolidated financial statements.
Risks related to Diageo’s business
Diageo may incur significant cost in connection with attempting to achieve its ESG ambitions, and may be subject to increased scrutiny and reputational risk if it is unable to make sufficient progress against or achieve its objectives
Diageo has articulated certain ESG ambitions as part of its ‘Society 2030: Spirit of Progress’ targets and is undertaking a number of strategic and operational initiatives in order to achieve those ambitions. In addition, from time to time, Diageo may introduce new initiatives in the future to make progress against those targets, as well as to address other ESG-related issues that arise. Diageo expects to incur significant costs and investments in connection with any such initiatives (including those related to human resources, technology, capital projects and operations), and as a result of compliance with new laws, regulations, reporting frameworks and industry practices. Consistent with many companies across the alcohol beverage industry, Diageo expects that future innovations and technological improvement will be required in order to achieve and sustain its ESG-related ambitions. In addition, the data, methodologies and standards that Diageo has used to develop its targets will likely evolve over time. Any changes could result in revisions to Diageo’s internal frameworks and reported data, and could mean that reported figures are not reconcilable or comparable year on year.
Furthermore, Diageo’s own current expectations with respect to its expected pathway to achieve its Society 2030 ambitions (including achieving “net zero”) are subject to change as underlying assumptions and its own operations change over time, including as a result of new information, changed expectations and innovation. In the event that Diageo is unable to make sufficient progress in a timely manner or achieve its ESG-related ambitions, it may be subject to additional scrutiny and criticism, and may face regulatory censure and/or fine. In addition, stakeholders and others who disagree with Diageo’s approach may speak negatively or advocate against Diageo or its products, with the potential to harm Diageo’s reputation or business through negative publicity, adverse government treatment, product boycotts or other means. Diageo could suffer reputation damage and a loss of trust from consumers, investors and other stakeholders, and/or the price of Diageo’s securities could be adversely affected, if it fails to achieve any of these goals for any reason or is otherwise perceived to be failing to act responsibility with respect to the environment or to effectively respond to regulatory requirements concerning climate change.
Diageo may be adversely affected by cyber-attacks and IT threats or other disruptions to core business operations including manufacturing and supply, business service centres and/or information systems
Diageo 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, investor relations 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 sophisticated cyber-attacks (including phishing and ransomware attacks) and IT threats by external or internal parties intent on disrupting production or other business processes or otherwise extracting or corrupting information. In recent years, ransomware attacks against some of Diageo’s peers have become more frequent, which has increased the likelihood of Diageo being targeted for a similar cyber-attack. Diageo’s vulnerability to such cyber-attacks could also be increased due to a significant proportion of its employees working remotely. Unauthorised access to Diageo’s IT systems could disrupt Diageo’s business, including its beverage alcohol and other production capabilities, and/or lead to theft, loss or misappropriation of critical 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 and financial results and, particularly in the case of personal data, could lead to regulators imposing significant fines on Diageo.
Diageo’s use of shared business services centres, located in Hungary, 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.
International and domestic security risks including terrorism and military conflicts, as well as natural hazards, also pose a threat to the safety of Diageo’s employees and third parties at its sites and events, as well as its property and products.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, including as a result of climate change-related severe weather events, 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 any failure of information systems or data infrastructure.
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 consumer support for those brands, could adversely affect their sales and Diageo’s corporate and brand reputation. 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 has had to recall products in the past due to contamination or damage and may have to do so again in the future. A significant product liability judgement or a widespread product recall may cause harm to consumers and 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 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. There is also a risk of physical threats to Diageo’s people due to the illicit nature of the type of organisations or individuals involved in counterfeit activities.
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 ESG-related performance, 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.In addition, certain such individuals could engage in behaviour, make statements or use their platforms in a manner that reflects poorly on Diageo’s brand image and corporate reputation or otherwise adversely affects Diageo. Diageo may be unable to prevent such actions, and the actions Diageo takes to address them may not be effective in all cases.Negative claims or publicity involving Diageo, its culture and values, brands, or any of its key employees or brand endorsers could damage Diageo’s brands and/or reputation, regardless of whether such claims are accurate, causing Diageo to lose existing customers or fail to attract new customers, 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 and reputation, as well as the price of Diageo’s securities.
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 for the year ended 30 June 2023 are presented in sterling. Additionally, as of 1 July 2023 Diageo changed its functional and presentation currency from sterling to the US dollar, in line with reporting requirements and reflecting the gradually changing environment in which Diageo primarily generates and expends cash, so going forward its financial results will be presented in US dollars. As a result, Diageo is subject to foreign currency risk due to exchange rate movements, which affect the sterling and US dollar value of its transactions, as well as the translation of the results and underlying net assets of its operations to sterling or the US dollar. In particular, approximately 43% of Diageo’s net sales in the year ended 30 June 2023 were in US dollars, approximately 11% were in euros and approximately 8% were in sterling. Movements in exchange rates used to translate foreign currencies into sterling or US dollars 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 or US dollar. 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. Accommodative monetary policy had generally made borrowings less expensive in the markets in which Diageo operates until recent years. However, the global economy has experienced persistently high levels of inflation, while benchmark interest rates, such as the US federal funds rate, have risen. Such inflationary pressures stem from and are compounded by ongoing disruptions in the global supply chain due to geopolitical tensions, including the conflict in Ukraine and rising energy prices (particularly for oil and gas). As a result, the availability and prices of inputs available to Diageo from its first- and second-tier suppliers are expected
to be volatile and inflationary pressures more broadly are expected to persist. As a result, market expectations are currently that benchmark interests rates could continue to rise and may be accompanied by other measures to reverse accommodative policy, such as quantitative tightening. Sharp increases and/or unexpected moves in interest rates due to any of the foregoing factors could have macroeconomic effects that materially adversely affect Diageo’s business and its financial results. In particular, rising interest rates could lead to a material increase in Diageo’s funding costs. In addition, if there is an extended period of constraint in the capital markets and, at the same time, cash flows from Diageo’s business are under pressure, Diageo’s ability to fund its long-term strategies may be materially adversely impacted.
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 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.
As part of its growth strategy, Diageo also made a number of acquisitions in recent years, and it is possible that Diageo may not be able to derive the expected benefits from these acquisitions and/or may experience unexpected integration challenges. In the future, Diageo’s business strategies will, almost certainly, 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. For additional information on the challenges of integration please see note 19 to the consolidated financial statements.
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 (including with respect to the distribution of profits and dividends) or may make decisions different from those that Diageo itself may have made.
To strengthen the resilience and agility of Diageo’s supply chain, Diageo has recently initiated a supply chain agility programme, expected to be implemented over the five years starting from the fiscal year ended 30 June 2023. And in May 2023, Diageo announced a five-year business transformation programme to modernise Diageo’s IT environment and standardise its business operations across nearly 180 countries. There can be no assurance that this programme 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 decades, 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 unplanned shifts in consumer 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 asurplus 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 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 and micro distilleries) 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. In addition, there has been a recent increase in competition for distribution channels, notably e-commerce channels. 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. For example, expansion in the seltzer and ready to drink categories has increased competitive pressures across product categories and in certain markets (such as in the United States). Adverse developments in economic conditions or declines in demand or consumer spending 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’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. This phenomenon of increased turnover in labour is particularly pronounced in the United States. As a result, competition for labour has increased and a shortage of labour has been noted in certain of the areas in which Diageo operates. 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’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 or, indeed, that Diageo will not inadvertently infringe a third party’s intellectual property rights.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. 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.
NON-FINANCIAL AND SUSTAINABILITY INFORMATION STATEMENT
Our ESG reporting approach
Reporting transparently on the ESG issues that affect our business, and that our business creates, plays a vital role in delivering our strategy. It helps us to manage ESG risks, take opportunities and promote sustainable development everywhere we live, work, source and sell.
Our ESG reporting suite aims to provide comprehensive and comparable disclosures for a broad range of stakeholders. As well as publishing our integrated Annual Report and ESG Reporting Index each year, we also submit non-financial information to benchmarking and index organisations, including those listed on the Awards and ranking page of our website.
The non-financial reporting space is evolving quickly. We are committed to continually evaluating and improving our approach and to actively tracking emerging ESG regulation, frameworks and good practice.
How we report to our stakeholders – our reporting suite
| | | | | | | | | | | |
| Annual Report Where we present our most material disclosures and describe how our strategy delivers value for our business and other stakeholders. The performance of non-financial KPIs are integrated into the relevant focus area sections. The document also includes detailed non-financial reporting boundaries and methodologies. | | Diageo.com Where, through the ‘Society 2030: Spirit of Progress‘ section, we give more details of our approach and performance, with examples of our strategy in action. | ESG Reporting Index Where we give additional disclosures in line with the GRI Standards and the UNGC advanced reporting criteria index, plus our response to the Sustainability Accounting Standards Board (SASB). This document also includes detailed non-financial reporting boundaries and methodologies. |
Who are our stakeholders? Everyone who is affected by our business, and everyone who affects it, is a stakeholder. A detailed description of our stakeholder engagement process is on pages 110-113 of the UK Annual Report.
Non-financial and sustainability information statement | | | | | | | | | | | |
| Focus area | Relevant policies and standards | Read more in this report | Page |
| Description of Diageo’s business model | | –Business model | 32-33 |
| Society 2030: Spirit of Progress' | | –'Society 2030: Spirit of Progress' | 75 |
| Promote positive drinking | –Global Marketing and Digital Marketing Policy(1) –Global Employee Alcohol Policy(1) –Position papers(1) | –Promote positive drinking including performance of the relating metrics
| 76-79 |
Champion inclusion and diversity
Our people and culture | –Code of Business Conduct(1) –Great Britain and Scotland Gender Pay Gap Report 2022 –Republic of Ireland Gender Pay Gap Report 2022 –Global Human Rights Policy(1) | –Champion inclusion and diversity including performance of the relating metrics –Our people and culture
| 86-90 82-85 |
| Pioneer grain-to-glass sustainability | –Global Environment Policy(1) –Sustainable Agriculture Guidelines(1) –Sustainable Packaging Commitments(1) –Partnering with Suppliers Standard(1) –Deforestation Guidelines | –Pioneer grain-to-glass sustainability including managing climate risks and opportunities and performance of the related metrics –Our principal risks and risk management | 100-109 113-123 |
| Task Force on Climate-related Financial Disclosures |
| –Pioneer grain-to-glass sustainability including managing climate risks and opportunities and performance of the related metrics –Our principal risks and risk management | 100-109 113-123 |
| Human rights | –Global Human Rights Policy(1) –Modern Slavery Statement(2) –Global Brand Promoter Standard(1) | –Doing business the right way –Our principal risks and risk management | 80-81 113-123 |
| Health and safety | –Global Health, Safety and Wellbeing Policy(1) | –Health and Safety
| 84-85 |
| Anti-bribery and corruption | –Code of Business Conduct(1) | –Doing business the right way –Our principal risks and risk management | 80-81 113-123 |
(1) https://www.diageo.com/en/esg/doing-business-the-right-way-from-grain-to-glass/
(2) https://www.diageo.com/en/esg/doing-business-the-right-way-from-grain-to-glass/modern-slavery-statement
LETTER FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS
Enabling our Ambition through Leadership
Dear Shareholder
On behalf of the Board, I am pleased to present the corporate governance report for the year ended 30 June 2023, which summarises how the Board and our governance has provided leadership over the year in support of the long-term sustainable success of Diageo.
Diageo's business has grown consistently over the last few years under the leadership of Sir Ivan Menezes, despite the challenges of the pandemic, instability in the global political and economic environment and continued inflationary pressures. We remain deeply grateful for his transformational leadership as we reflect on his sad passing.
Delivering our ambition in such a challenging and turbulent environment requires leadership which is agile and creative, evolving to changing circumstances, as well as resilient and committed to our strategy, values and purpose. It is the responsibility of the Board to provide direction for management, setting the strategic aims and performance ambition of the company, centred on Diageo's strong culture. The Board is also responsible for ensuring that the company has effective operational leadership to implement its strategy of investing for long-term sustainable growth. We were therefore very pleased to welcome Debra Crew back to the Board as Chief Executive in June.
A particular focus of the Board this past year has been on ensuring that Diageo is well-positioned for future growth. This includes managing appropriate allocation of capital such as investing in fast-growing categories, actively managing our footprint and brand portfolio through selective acquisitions and disposals, and investing in the capacity and environmental sustainability of our facilities and supply chain. It also includes ensuring that Diageo is resourced adequately, with performance enabled by highly engaged and motivated employees and a collaborative, values-based and inclusive culture.
We know that achieving this is dependent on the Board providing effective leadership, enabling swift execution of our clear strategy, and we look forward to working with Debra in guiding Diageo to move towards the next phase of delivering sustainable long-term value for our shareholders and other stakeholders.
Javier Ferrán
(Chairman)
Compliance with the UK Corporate Governance Code
The Board considers that for the year ended 30 June 2023, Diageo has fully applied the Principles and complied with the Provisions of the UK Corporate Governance Code 2018 (the Code) except for the pension alignment required under Provision 38, where full compliance was achieved from 1 January 2023 when company pension contributions for the then Chief Executive were aligned to that of the wider workforce as explained on page 143.
The table below details where key content on the compliance with the Code can be found in this report.
| | | | | | | | |
| Board Leadership & Company Purpose | | Composition, Succession and Evaluation |
–Section 172 statement - page 19 | | –Leadership and experience - page 127 |
–Board of Directors - page 132 | | –Performance evaluation - page 142 |
–2023 Governance at a Glance - page 126 | | –Nomination Committee report - page 154 |
–Purpose, values and culture - page 143 | | |
–Board activities - page 136 | | |
| Division of Responsibilities | | Audit, Risk and Internal Controls |
–Corporate governance structure and division of responsibilities - page 131 | | –Audit Committee report - page 146 |
–Board and committee attendance - page 135 | | Remuneration |
–Director independence - page 133 | | –Remuneration Committee report - page 166 |
Governance at aglance
| | | | | | | | | | | | | | | | | | | | |
Board
composition | | Non-executive
director tenure | | Board gender
diversity | | Board ethnic
diversity |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ò | Chairman | | ò | 0 – 3 years | | ò | Male | | ò | Directors of colour |
| ò | Executive director | | ò | 3 – 6 years | | ò | Female | | ò | White European |
| ò | Non-executive director | | ò | 6 – 9 years | | | | | | |
Fiscal 23 highlights
Board composition and changes
•Diageo ranked as the leading FTSE 100 company in the FTSE Women Leaders Review in February 2023 for the third year running, with 63.6% female representation on the Board.
•Debra Crew rejoined the Board as Chief Executive and Executive Director on 8 June 2023 following the sad passing of Sir Ivan Menezes.
Board attendance
•During fiscal 23, there were seven scheduled meetings of the Board which Directors attended either physically or remotely using video conference facilities.
•Directors' attendance record at the last AGM, scheduled Board and Board Committee meetings, for fiscal 23 is set out in the table below. Attendance is expressed as the number of scheduled meetings attended out of the number that each Director was eligible or invited to attend.
|
| | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
|
| Operating profit | | 2,137 |
| | 4,042 |
|
| Exceptional operating items | | 1,357 |
| | 74 |
|
| Profit before exceptional operating items attributable to non-controlling interests | | (114 | ) | | (151 | ) |
| Share of after tax results of associates and joint ventures | | 282 |
| | 312 |
|
| Tax at the tax rate before exceptional items of 21.7% (2019 – 20.6%) | | (795 | ) | | (881 | ) |
| | | 2,867 |
| | 3,396 |
|
| Average net assets (excluding net post employment assets/liabilities) | | 9,063 |
| | 10,847 |
|
| Average non-controlling interests | | (1,723 | ) | | (1,776 | ) |
| Average net borrowings | | 12,551 |
| | 10,240 |
|
| Average integration and restructuring costs (net of tax) | | 1,639 |
| | 1,639 |
|
| Goodwill at 1 July 2004 | | 1,562 |
| | 1,562 |
|
| Average total invested capital | | 23,092 |
| | 22,512 |
|
| Return on average total invested capital | | 12.4 | % | | 15.1 | % |
(1) Calculation of average net borrowings includes £251million in respect of IFRS 16 adoption for 1 July 2019.
(2) The return on average total invested capital for the year ended 30 June 2020•It was adversely impacted by 18bpsheld as a resulthybrid meeting with over 130 people attending physically, including shareholders, proxies, corporate representatives and guests, and with the ability for others to attend remotely or by virtual means using an online platform.
•All Directors attended the AGM either physically or remotely.
•During the AGM, the Chief Executive gave a review of the adoptionperformance of IFRS 16 on 1 July 2019. the company during fiscal 22, following which the Chairman took questions from shareholders which were responded to by the Chairman and other Directors.
Business review (continued)
Adjusted net borrowings to earnings before exceptional operating items, interest, tax, depreciation, amortisation and impairment (adjusted EBITDA)
Diageo manages its capital structure with•The vote procedure was carried out by way of poll as authorised by the aimArticles of achieving capital efficiency, provide flexibility to invest through the economic cycle and give efficient access to debt markets at attractive cost levels. The group regularly assesses its debt and equity capital levels to enhance its capital structure by reviewing the ratio of adjusted net borrowings to adjusted EBITDA.
Calculations for the ratio of adjusted net borrowings to adjusted EBITDA at year ended 30 June 2020 and 30 June 2019 are set outAssociation. All resolutions contained in the table below. Notice of Meeting were passed.
|
| | | | | |
| | 2020
£ million |
| | 2019
£ million |
|
| Borrowings due within one year | 1,995 |
| | 1,959 |
|
| Borrowings due after one year | 14,790 |
| | 10,596 |
|
| Fair value of foreign currency derivatives and interest rate hedging instruments | (686 | ) | | (474 | ) |
| Lease liabilities | 470 |
| | 128 |
|
| Less: Cash and cash equivalents | (3,323 | ) | | (932 | ) |
| Net borrowings | 13,246 |
| | 11,277 |
|
| Post employment benefit liabilities before tax | 749 |
| | 846 |
|
| Adjusted net borrowings | 13,995 |
| | 12,123 |
|
| Profit for the year | 1,454 |
| | 3,337 |
|
Taxation(i) | 589 |
| | 898 |
|
| Net finance charges | 353 |
| | 263 |
|
| Depreciation, amortisation and impairment (excluding exceptional items) | 494 |
| | 374 |
|
| Exceptional impairment | 1,345 |
| | — |
|
| EBITDA | 4,235 |
| | 4,872 |
|
| Exceptional operating items (excluding impairment) | 12 |
| | 74 |
|
| Non-operating items | 23 |
| | (144 | ) |
| Adjusted EBITDA | 4,270 |
| | 4,802 |
|
| Adjusted net borrowings to adjusted EBITDA | 3.3 |
| | 2.5 |
|
| | | | | | | | | | | | | | | | | |
(i) | For the year ended 30 June 2020 taxation includes £165 million tax credit on exceptional impairment, £11 million tax charge on other exceptional operating items, £nil on non-operating items and £nil exceptional tax charge (2019 - £nil, £4 million tax credit, £33 million tax charge and £10 million exceptional tax charge, respectively).Annual General
Meeting 2022 | Board
(maximum 7) | Audit Committee
(maximum 5) | Nomination Committee
(maximum 6) | Remuneration Committee
(maximum 7) |
| Javier Ferrán | ü | 7/7 | 5/5(1) | 6/6 | 7/7(1) |
Debra Crew(2) | N/A | 0/0 | 0/0 | 0/0 | 1/1(1) |
| Lavanya Chandrashekar | ü | 6/6 | 5/5(1) | 0/0 | 1/1(1) |
| Susan Kilsby | ü | 7/7 | 5/5 | 6/6 | 7/7 |
| Melissa Bethell | ü | 7/7 | 4/5 | 6/6 | 7/7 |
| Karen Blackett | ü | 6/7 | 4/5 | 6/6 | 7/7 |
| Valérie Chapoulaud-Floquet | ü | 6/7 | 4/5 | 6/6 | 7/7 |
| Sir John Manzoni | ü | 7/7 | 5/5 | 6/6 | 7/7 |
| Lady Mendelsohn | ü | 7/7 | 5/5 | 6/6 | 6/7 |
| Alan Stewart | ü | 7/7 | 5/5 | 6/6 | 7/7 |
| Ireena Vittal | ü | 7/7 | 4/5 | 6/6 | 7/7 |
| Former Directors | | | | | |
Sir Ivan Menezes(3) | ü | 5/6 | 2/5(1) | 4/5(1) | 4/6(1) |
(1) The ratio of adjusted net borrowings to adjusted EBITDA at 30 June 2020 increased1.Attended by 0.1 times as a result of the adoption of IFRS 16 on 1 July 2019.invitation.
Business review (continued)
Tax rate before exceptional items
Tax rate before exceptional items is calculated by dividing the total tax charge on continuing operations before tax charges and credits in respect of exceptional items, by profit before taxation adjusted to exclude the impact of exceptional operating and non-operating items, expressed as a percentage. The measure is used by management to assess the rate of tax applied2.Appointed to the group’s continuing operations before taxBoard on exceptional items. 8 June 2023.
3.Ceased being a director on 6 June 2023.
The tax rates from operations before exceptional and after exceptional items for the year ended 30 June 2020 and year ended 30 June 2019 are set out in the table below:
|
| | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
|
| Tax before exceptional items (a) | | 743 |
| | 859 |
|
| Tax in respect of exceptional items | | (154 | ) | | 29 |
|
| Exceptional tax charge/(credit) | | — |
| | 10 |
|
| Taxation on profit (b) | | 589 |
| | 898 |
|
| Profit before taxation and exceptional items (c) | | 3,423 |
| | 4,174 |
|
| Non-operating items | | (23 | ) | | 144 |
|
| Exceptional finance charges | | — |
| | (9 | ) |
| Exceptional operating items | | (1,357 | ) | | (74 | ) |
| Profit before taxation (d) | | 2,043 |
| | 4,235 |
|
| Tax rate before exceptional items (a/c) | | 21.7 | % | | 20.6 | % |
| Tax rate after exceptional items (b/d) | | 28.8 | % | | 21.2 | % |
(1) The tax rate before exceptional items is not materially affected by the adoption of IFRS 16 on 1 July 2019.
Business review (continued)
Other definitions
Volume share is a brand’s retail volume expressed as a percentage of the retail volume of all brands in its segment. Value share is a brand’s retail sales value expressed as a percentage of the retail sales value of all brands in its segment. Unless otherwise stated, share refers to value share.
Price/mix is the number of percentage points by which the organic movement in net sales differs to the organic movement in volume. The difference arises because of changes in the composition of sales between higher and lower priced variants/markets or as price changes are implemented.
Shipments comprise the volume of products made to Diageo’s immediate (first tier) customers. Depletions are the estimated volume of the onward sales made by Diageo's immediate customers. Both shipments and depletions are measured on an equivalent units basis.
References to emerging markets include Russia, Eastern Europe, Turkey, Africa, Latin America and Caribbean, and Asia Pacific (excluding Australia, Korea and Japan).
References to reserve brands include, but are not limited to, Johnnie Walker Blue Label, Johnnie Walker Green Label, Johnnie Walker Gold Label Reserve, Johnnie Walker Aged 18 Years, John Walker & Sons Collection and other Johnnie Walker super premium brands; Roe & Co; The Singleton, Cardhu, Talisker, Lagavulin and other malt brands; Buchanan’s Special Reserve, Buchanan’s Red Seal; Bulleit Bourbon, Bulleit Rye; Tanqueray No. TEN, Tanqueray ready to drink, Tanqueray Malacca Gin; Cîroc, Ketel One vodka, Ketel One Botanicals; Don Julio, Casamigos, Zacapa, Bundaberg SDlx, Shui Jing Fang, Jinzu gin, Haig Club whisky, Orphan Barrel whiskey and DeLeón Tequila; Villa Ascenti, Copper Dog whisky, Belsazar, Pierde Almas.
References to global giants include the following brand families: Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Tanqueray and Guinness. Local stars spirits include Buchanan’s, Bundaberg, Crown Royal, JεB, McDowell’s, Old Parr, Yenì Raki, Black & White, Shui Jing Fang, Windsor and Ypióca. Global giants and local stars exclude ready to drink and beer except Guinness. References to Shui Jing Fang represent total Chinese white spirits of which Shui Jing Fang is the predominant brand.
References to ready to drink also include ready to serve products, such as pre-mix cans in some markets, and progressive adult beverages in the United States and certain markets supplied by the United States.
References to beer include cider and some non-alcoholic products such as Malta Guinness.
The results of Hop House 13 Lager are included in the Guinness figures.
References to the disposal of a portfolio of 19 brands comprise the following brands that were primarily sold in the United States: Seagram’s VO, Seagram’s 83, Seagram’s Five Star, Popov, Myers’s, Parrot Bay, Yukon Jack, Romana Sambuca, Scoresby, Goldschlager, Relska, Stirrings, The Club, Booth’s, Black Haus, Peligroso, Grind, Piehole and John Begg.
References to the group include Diageo plc and its consolidated subsidiaries.
Board of Directors and Company Secretary
Diversity, balance and experience
Javier Ferrán
Chairman 3*
Nationality: Spanish
Appointed Chairman and Chairman of the Nomination Committee: January 2017 (Appointed Chairman Designate and Non-Executive Director: July 2016)
Key strengths: Brings extensive board-level experience from the drinks and consumer products industry, including at chief executive level, and has a wealth of experience in consumer goods through his venture capital activities to draw from in his role as Chairman and leader of the Board
Current external appointments: Non-Executive Director, International Consolidated Airlines Group, S.A., Coca-Cola European Partners plc; BlackRock Long Term Private Capital
Previous relevant experience: Non-Executive Director and Senior Independent Director, Associated British Foods plc; Member, Advisory Board of ESADE Business School; President and CEO, Bacardi Limited; Non-Executive Director, SABMiller plc
Ivan Menezes
Chief Executive 2*
Nationality: American/British
Appointed Chief Executive: July 2013 (Appointed Executive Director: July 2012)
Key strengths: Has extensive experience of over 20 years with the Diageo group at operational and leadership levels and within the consumer products industry, which brings valuable insight to lead the group and implement the strategy
Current external appointments: Vice Chairman of the Council, Scotch Whisky Association; Non-Executive Director, Tapestry Inc.; Member of the Global Advisory Board, Kellogg School of Management, Northwestern University; Trustee, Movement to Work; Member, International Alliance for Responsible Drinking, CEO Group
Previous Diageo roles: Chief Operating Officer; President, North America; Chairman, Diageo Asia Pacific; Chairman, Diageo Latin America and Caribbean; senior management positions, Guinness and then Diageo
Previous relevant experience: marketing and strategy roles, Nestlé, Booz Allen Hamilton Inc. and Whirlpool
Kathryn Mikells
Chief Financial Officer 2
Nationality: American
Appointed Chief Financial Officer and Executive Director: November 2015
Key strengths: Brings skills and experience from finance-based roles to effectively manage the group’s affairs relating to accounting, tax, treasury and investor relations, as well as commercial experience to the Board’s discussions
Current external appointments: Non- Executive Director and Audit Committee Chair, The Hartford Financial Services Group, Inc.; Member of the Main Committee, 100 Group of Finance Directors
Previous relevant experience: Corporate Executive Vice President and Chief Financial Officer, Xerox Corporation; Senior Vice President and Chief Financial Officer, ADT Corporation; Executive Vice President and Chief Financial Officer, Nalco Holding Company; Executive Vice President and CFO, UAL Corporation
Susan Kilsby
Senior Independent Director 1,3,4*
Nationality: American/British
Appointed Senior Independent Director: October 2019 (Appointed Non-Executive Director: April 2018 and Chairman of the Remuneration Committee: January 2019)
Key strengths: Brings wide-ranging corporate governance and board-level experience across a number of industries, including a consumer goods sector focus, with particular expertise in mergers and acquisitions, corporate finance and transaction advisory work
Current external appointments: Non-Executive Director, Unilever PLC, Unilever N.V., Fortune Brands Home & Security, Inc., BHP Group Plc, BHP Group Limited; Member, the Takeover Panel
Previous relevant experience: Senior Independent Director, BBA Aviation plc; Chairman, Shire plc, Mergers and Acquisitions EMEA, Credit Suisse; Senior Advisor, Credit Suisse; Non-Executive Director, Goldman Sachs International, Keurig Green Mountain, L’Occitane International, Coca-Cola HBC
Leadership and experience
Melissa Bethell 1,3,4
Non-Executive Director
Nationality: American/British
Appointed Non-Executive Director: June 2020
Key strengths: Has extensive international corporate and financial experience, including in relation to private equity, financial sectors, strategic consultancy and advisory services, as well as having strong non-executive experience at board and committee levels across a range of industries, including retail, consumer goods and financial services
Current external appointments:
Managing Partner, Atairos Europe; Non-Executive Director, Tesco plc, Exor N.V.
Previous relevant experience: Managing Director and Senior Advisor, Private Equity, Bain Capital; Non-Executive Director, Atento S.A., Worldpay plc; Samsonite S.A.
Ho KwonPing
Non-Executive Director 1,3,4
Nationality: Singaporean
Appointed Non-Executive Director: October 2012
Key strengths: Brings extensive commercial and entrepreneurial experience of operating in emerging markets, in particular in Asia Pacific, as well as in various consumer-facing industries such as retail banking, airlines and hospitality
Current external appointments: Executive Chairman and Founder, Banyan Tree Holdings Limited; Chairman, Laguna Resorts & Hotels Public Company Limited (a subsidiary of Banyan Tree Holdings Limited) and Thai Wah Public Company Limited (each such company being owned or ultimately controlled by Ho KwonPing’s family); Chairman of Board of Trustees, Singapore Management University
Previous relevant experience: Member, Global Advisory Board of Moelis & Company; Chairman, MediaCorp Pte. Ltd; Non-Executive Director, Singapore Airlines Limited, Singapore Power Limited, Standard Chartered PLC
Lady Mendelsohn
Non-Executive Director 1,3,4
Nationality: British
Appointed Non-Executive Director: September 2014
Key strengths: Has specialist knowledge and understanding of consumer-facing emerging technologies, cyber security and data issues, as well as wide experience of board and committee level appointments across diverse commercial, governmental and charitable institutions, as well as advisory roles in advertising and production of consumer goods
Current external appointments: Vice President, Facebook EMEA; Co-President, Norwood; Member, Mayor’s Business Advisory Board; Member, HMG Industrial Strategy Council
Previous relevant experience: Executive Chairman, Karmarama; Deputy Chairman, Grey London; Board Director, BBH and Fragrance Foundation; President, Institute of Practitioners in Advertising; Director, Women’s Prize for Fiction; Co-Chair, Creative Industries Council; Board Member, CEW; Trustee, White Ribbon Alliance; Chair, Corporate Board, Women’s Aid
Alan Stewart
Non-Executive Director 1*,3,4
Nationality: British
Appointed Non-Executive Director: September 2014 (Appointed Chairman of the Audit Committee: January 2017)
Key strengths: Has a strong background in financial, investment banking and commercial matters, with particular expertise in consumer retail industries, as well as board and committee level experience at industry institutions
Current external appointments: Chief Financial Officer, Tesco PLC; Non-Executive Director, Tesco Bank; Member of the Advisory Board, Chartered Institute of Management Accountants; Member of the Main Committee & Chairman of Pension Committee, 100 Group of Finance Directors; Co-Chair, A4S CFO Network
Previous relevant experience: Chief Financial Officer, Marks & Spencer, AWAS; Non- Executive Director, Games Workshop plc; Group Finance Director, WH Smith plc; Chief Executive, Thomas Cook UK
Siobhán Moriarty
General Counsel & Company Secretary
Nationality: Irish
Appointed General Counsel: July 2013
Appointed Company Secretary: August 2018
Previous Diageo roles: General Counsel Designate; Corporate M&A Counsel; Regional Counsel Ireland; General Counsel Europe
Previous relevant experience: various positions in law firm private practice, Dublin and London
Current external appointments: Non-Executive Director, Friends Board of the Royal Academy of Arts; Board Member, European General Counsel Association
Changes since 1 July 2019
| | |
–1.Javier Ferrán [N*] Chairman Nationality:Spanish Appointed:Chairman and Chairman of the Nomination Committee: January 2017 (Appointed Chairman Designate and Non-Executive Director: July 2016) Key strengths: Brings extensive board-level experience from the drinks and consumer products industry, including at chief executive level, and has a wealth of experience in consumer goods through his venture capital activities to draw from in his role as Chairman and leader of the Board Current external appointments: Chairman, International Consolidated Airlines Group, S.A.; Senior Advisor and chairman of investee company board, BlackRock Long Term Private Capital Previous relevant experience: Non-Executive Director and Senior Independent Director, Associated British Foods plc; Non-Executive Director, Coca-Cola European Partners plc; Member, Advisory Board of ESADE Business School; President and CEO, Bacardi Limited; Non-Executive Director, SABMiller plc |
2.Debra Crew ceased to be a [E*] Chief Executive Nationality: American Appointed: Chief Executive and Executive Director: June 2023 Key strengths: Has broad experience in various consumer products sectors at board, chief executive and management leadership levels, as well as over four years' experience in non-executive and executive roles at Diageo Current external appointments: Non-Executive Director, on 24 March 2020Stanley, Black & Decker, Inc. Previous Diageo roles: Chief Operating Officer; President, North America; Non-Executive Director, Diageo plc Previous relevant experience: Non-Executive Director, Newell Brands, Mondelēz International Inc.; President and becameCEO, Reynolds American, Inc; President, PepsiCo North America Nutrition, PepsiCo Americas Beverages, Western Europe Region; various positions with Kraft Foods, Nestlé, S.A., and Mars |
3.Lavanya Chandrashekar [E] Chief Financial Officer Nationality: American Appointed: Chief Financial Officer and Executive Director: July 2021 Key strengths: Brings broad financial expertise, commercial skills and strong consumer goods experience to manage the group’s affairs relating to financial controls, accounting, tax, treasury and investor relations Previous Diageo roles: Chief Financial Officer, Diageo North America from 1 July 2020.and Global Head of Investor Relations Previous relevant experience: Vice President Finance, Global Cost Leadership and Supply Chain, Mondelēz International; VP Finance, North America, Mondelēz International; VP Finance, Eastern Europe, Middle East and Africa, Mondelēz International; various senior finance roles at Procter & Gamble |
| | |
–4.Susan Kilsby [A] [N] [R*] Senior Independent Director Nationality: American/British Appointed: Senior Independent Director: October 2019 (Appointed Non-Executive Director: April 2018 and Chairman of the Remuneration Committee: January 2019) Key strengths: Brings wide-ranging corporate governance and board level experience across a number of industries, including a consumer goods sector focus, with particular expertise in mergers and acquisitions, corporate finance and transaction advisory work Current external appointments: Non-Executive Chair, Fortune Brands Innovations, Inc.; Non-Executive Director, Unilever PLC, NHS England; Member, the Takeover Panel Previous relevant experience: Senior Independent Director and Chair of Remuneration Committee, BHP Group Plc, BHP Group Limited; Senior Independent Director, BBA Aviation plc; Chairman, Shire plc; Chairman, Mergers and Acquisitions EMEA, Credit Suisse; Senior Advisor, Credit Suisse; Non-Executive Director, Goldman Sachs International, Keurig Green Mountain, L’Occitane International, Coca-Cola HBC |
5.Melissa Bethell was appointed[A] [N] [R] Non-Executive Director Nationality: American/British Appointed: Non-Executive Director: June 2020 Key strengths: Has extensive international corporate and financial experience, including in relation to private equity, financial sectors, strategic consultancy and advisory services, as well as having strong non-executive experience at board and committee levels across a range of industries, including retail, consumer goods and financial services Current external appointments: Non-Executive Director, with effect from 30Tesco PLC, Exor N.V.; Chair, Ocean Outdoor Limited; Senior Advisor, Atairos Previous relevant experience: Managing Director and Senior Advisor, Private Equity, Bain Capital; Non-Executive Director, Atento S.A., Worldpay plc, Samsonite S.A. |
6.Karen Blackett [A] [N] [R] Non-Executive Director Nationality: British Appointed: Non-Executive Director: June 2020.2022 Key strengths: Brings expertise in marketing, media and the creative industries, as well as broad experience in public policy and strategic initiatives through a number of different government, industry and public bodies Current external appointments: UK President, WPP plc; Chancellor, University of Portsmouth; Founding Trustee, BEO (Black Equity Organisation); Non-Executive Director, Creative UK, Non-Executive Director, The Pipeline Previous relevant experience: UK Race Equality Business Champion, HM Government; Business Ambassador, Department for International Trade, HM Government; Chairwoman, MediaCom UK & Ireland; Chief Executive Officer, GroupM UK; Chief Executive Officer, MediaCom UK; Chief Operations Officer, MediaCom EMEA; Marketing Director, MediaCom; UK Country Manager, WPP plc |
| | |
7.Valérie Chapoulaud-Floquet [A] [N] [R] Non-Executive Director Nationality: French Appointed: Non-Executive Director: January 2021 Key strengths: Brings strong experience and expertise in the luxury consumer goods sector, having spent her career in the industry working in a number of international markets, including developed and emerging markets, and as a former CEO in the premium drinks industry Current external appointments: Non-Executive Director, Lead Independent Director and Chair of Governance Committee, Danone S.A.; Non-Executive Director, Acné Studios A.B., Agrolimen S.A., Nextstage S.C.A., Jacobs Holding AG; Vice Chairman, Sofisport Previous relevant experience: Chief Executive Officer, Rémy Cointreau S.A.; President and CEO for the Americas, Louis Vuitton, LVMH Group; President and CEO for North America, Louis Vuitton, LVMH Group; President South Europe, Louis Vuitton, LVMH Group; President and CEO, Louis Vuitton Taiwan, LVMH Group; President, Luxury Product Division for the USA, L’Oréal Group |
8.Sir John Manzoni [A] [N] [R] Non-Executive Director Nationality: British Appointed: Non-Executive Director: October 2020 Key strengths: Has strong commercial executive experience as a former CEO in the energy sector and non-executive board level experience, including in the alcoholic beverage industry, as well as more recent expertise in public policy and government affairs Current external appointments: Chairman, SSE plc; Chairman, Atomic Weapons Establishment; Non-Executive Director, KBR Inc. Previous relevant experience: Chief Executive of the Civil Service and Permanent Secretary of the Cabinet Office, HM Government; President and Chief Executive Officer, Talisman Energy; Chief Executive, Refining & Marketing, BP p.l.c.; Chief Executive, Gas & Power, BP p.l.c.; Non-Executive Director, SABMiller plc |
9.Lady Mendelsohn [A] [N] [R] Non-Executive Director Nationality: British Appointed: Non-Executive Director: September 2014 Key strengths: Has specialist knowledge and understanding of consumer-facing emerging technologies, privacy and data issues, as well as wide experience of board and committee level appointments across diverse commercial, governmental and charitable institutions, as well as advisory roles in advertising and production of consumer goods Current external appointments: Head of the Global Business Group, Meta Platforms Inc.; Co-President, Norwood; Member, Mayor’s Business Advisory Board; Chair, Follicular Lymphoma Foundation Previous relevant experience: Executive Chairman, Karmarama; Deputy Chairman, Grey London; Board Director, BBH, Fragrance Foundation; President, Institute of Practitioners in Advertising; Director, Women’s Prize for Fiction; Co-Chair, Creative Industries Council; Member, HMG Industrial Strategy Council; Board Member, CEW; Trustee, White Ribbon Alliance; Chair, Corporate Board, Women’s Aid |
| |
– | Lord Davies of Abersoch retired from the Board on 30 June 2020. |
Future appointments
| |
– | Sir John Manzoni has been appointed10.Alan Stewart [A*] [N] [R] Non-Executive Director Nationality: British Appointed: Non-Executive Director: September 2014 (Appointed Chairman of the Audit Committee: January 2017) Key strengths: Has a strong background in financial, investment banking and commercial matters, with particular expertise in consumer retail industries, as a well as board and committee level experience at industry institutions Current external appointments: Non-Executive Director with effect from 1 October 2020. |
| and Chair of the Remuneration Committee, Reckitt Benckiser Group PLC; Non-Executive Director and Chair of Audit Committee, Burberry Group plc Previous relevant experience: Chief Financial Officer, Tesco PLC; Non-Executive Director, Tesco Bank; Chief Financial Officer, Marks & Spencer Group plc, AWAS; Non-Executive Director, Games Workshop plc; Group Finance Director, WH Smith PLC; Chief Executive, Thomas Cook UK |
– | Valérie Chapoulaud-Floquet has been appointed11.Ireena Vittal [A] [N] [R] Non-Executive Director Nationality: Indian Appointed: Non-Executive Director: October 2020 Key strengths: Brings a wealth of FMCG experience from a career in executive consulting with a focus on consumer sectors and emerging markets, including India, as a well as broad experience in non-executive board roles in the UK and India Current external appointments: Non-Executive Director, with effect from 1 January 2021.Compass Group PLC; Non-Executive and Lead Independent Director, Godrej Consumer Products Limited; Non-Executive Director, Asian Paints Limited Previous relevant experience: Head of Marketing and Sales, Hutchinson Max Telecom; Partner, McKinsey and Company; Non-Executive Director, Wipro Limited, Housing Development Finance Corporation Limited, Titan Company Limited, Tata Global Beverages Limited, Tata Industries, GlaxoSmithKline Consumer Healthcare |
Board committees
1. Audit Committee
2. Executive Committee
3. Nomination Committee
4. Remuneration Committee
*Chairman of the committee
Board diversity
|
| | | | | | | | | | | |
| l | Chairman | 12 | % | l | Male | 50 | % | l | 0-3 years | 40 | % |
| l | Executive Directors | 25 | % | l | Female | 50 | % | l | 3-6 years | 40 | % |
| l | Non-Executive Directors | 63 | % | | | | l | 6-9 years | 20 | % |
Expertise and diversity
Executive Committee
Board skillsDebra Crew and expertise
Ewan Andrew
President, Global Supply and Procurement
Nationality: British
Appointed: September 2019
Previous Diageo roles: Supply Director, International Supply Centre; Senior Vice President, Supply Chain & Procurement, Latin America & Caribbean; Senior Vice President Manufacturing & Distilling, North America; various supply chain, operational management and procurement roles
Current external appointments: MemberLavanya Chandrashekar are also members of the Council, Scotch Whisky AssociationExecutive Committee.
Their biographies can be found on page 127.
Debra Crew
President, Diageo North America
Nationality: American | | |
1.Ewan Andrew President, Global Supply Chain & Procurement and Chief Sustainability Officer Nationality: British Appointed: September 2019 Previous Diageo roles: Supply Director, International Supply Centre; Senior Vice President, Supply Chain & Procurement, Latin America and Caribbean; Senior Vice President Manufacturing & Distilling, North America; various supply chain, operational management and procurement roles Current external appointments: Member, Scotch Whisky Association Council, Scottish Business Climate Collaboration Board, One Planet Business for Biodiversity Board |
2.Soraya Benchikh President, Europe Nationality: French Appointed: January 2023 Previous Diageo roles: Managing Director, Northern Europe Previous relevant experience: Brand CEO and Area Director, East and Southern Africa, President, France and Regional Finance Director, Europe, British American Tobacco |
3.Alvaro Cardenas President, Latin America and Caribbean Nationality: Colombian Appointed: January 2021 Previous Diageo roles: Managing Director, Andean Region; Director, End-to-End Global Commercial Processes; Finance Director, South East Asia Region, PUB (Paraguay, Uruguay and Brazil) Region, Andean Region, Colombia |
4.Cristina Diezhandino Appointed: July 2020
Previous Diageo roles: Non-Executive Director, Diageo plc
Previous relevant experience: Non-Executive Director, Newell Brands; President and CEO, Reynolds American, Inc; President, PepsiCo North America Nutrition, PepsiCo Americas Beverages, Western Europe Region; various positions with Kraft Foods, Nestlé. S.A., and Mars
Current external appointments: Non-Executive Director, Stanley Black & Decker, Inc., Mondelēz International
Cristina Diezhandino
Chief Marketing Officer Nationality: Nationality: Spanish
Appointed: July 2020 Previous Diageo roles: Global Category Director, Scotch & Managing Director, Reserve Brands; Managing Director, Caribbean and Central America; Marketing & Innovation Director, Diageo Africa; Category Director, Scotch Portfolio & Gins; Global Brand Director, Johnnie Walker Previous relevant experience:Corporate Marketing Director, Allied Domecq Spain; marketing roles, Unilever HPC US, UK and Spain |
Sam Fischer
President, Diageo Greater China and Asia Pacific
Nationality: Australian
Appointed: September 2014
Previous Diageo roles: Managing Director, Diageo Greater China; Managing Director of South East Asia, Diageo Asia Pacific; General Manager, Diageo IndoChina and Vietnam
Previous relevant experience: Senior management roles across Central Europe and Indochina, Colgate Palmolive
Current external appointments: Non-Executive Director, Burberry PLC
Alberto Gavazzi
President, Diageo Latin America and Caribbean, Global Travel & Sales Opex
Nationality: Brazilian/Italian
Appointed: July 2013
Previous Diageo roles: Managing Director, West Latin America and Caribbean; Global Category Director Whiskey, Gins and Reserve Brands; General Manager Brazil, Paraguay and Uruguay; Vice President Consumer Marketing, Chicago; Marketing Director, Brazil
Previous relevant experience: Colgate-Palmolive; Unilever PLC
John Kennedy
President, Diageo Europe, Turkey and India
Nationality: American
Appointed: July 2016
Previous Diageo roles: President, Europe and Western Europe; Chief Operating Officer, Western Europe; Marketing Director, Australia; General Manager for Innovation, North America; President and Chief Executive Officer, Diageo Canada; Managing Director, Diageo Ireland
Previous relevant experience: brand management roles, GlaxoSmithKline and Quaker Oats
Anand Kripalu
CEO, United Spirits Limited
Nationality: Indian
Appointed: September 2014
Previous Diageo roles: CEO-Designate, United Spirits Limited
Previous relevant experience: Various management roles at Mondelēz International, Cadbury and Unilever
Current external appointments: Member of the Board of Governors, Indian Institute of Management, Jammu
5.Daniel Mobley Global Corporate Relations Director Nationality:British Appointed:June 2017 Previous Diageo roles: Corporate Relations Director, Europe Previous relevant experience:Regional Head of Corporate Affairs, India & South Asia, Regional Head of Corporate Affairs, Africa, Group Head of Government Relations, Standard Chartered; extensive government experience including in HM Treasury and Foreign & Commonwealth Office |
| | |
6.Hina Nagarajan Mairéad NayagerManaging Director and CEO of United Spirits Limited
Chief HR OfficerNationality: Indian
Nationality: IrishAppointed: July 2021
Appointed: October 2015
Previous Diageo roles: HRCEO-Designate, United Spirits Limited; Managing Director, Africa Regional Markets Previous relevant experience: Managing Director, China & SVP North Asia, Reckitt Benckiser; General Manager, Malaysia & Singapore, Reckitt Benckiser; CEO & MD Mary Kay India; senior marketing and general management roles, ICI Paints India and Nestlé India |
7.Dayalan Nayager President, Africa Nationality:South African/British Appointed: July 2022 Previous Diageo roles: Managing Director, Great Britain and Justerini & Brooks, Ireland and France, Global Travel; Regional Director, Global Travel Europe; HRCommercial Director, Brandhouse, South Africa; HRCustomer Marketing Director, DiageoSouth Africa; Key Account Director, South Africa Regional Markets; Talent & Organisational Effectiveness Director, Diageo Africa; Employee Relations Manager, Diageo Ireland Previous relevant experience: Irish BusinessVarious positions, Heinz, Mars and Employers’ ConfederationPick n Pay Retailers |
8.John O’KeeffeO'Keeffe President, Diageo AfricaAsia Pacific & Global Travel Nationality:Irish Appointed: July 2015 Previous Diageo roles:President, Africa & Beer; CEO and Managing Director, Guinness Nigeria; Global Head, Innovation; Global Head, Beer and Baileys; Managing Director, Russia and Eastern Europe; various general management and marketing positions |
9.Louise Prashad
Chief HR Officer
Ivan Menezes, Kathryn MikellsNationality: British
Appointed: January 2022 Previous Diageo roles: Global Talent Director; Talent Director, Africa; HR Director, Europe, West Latin America and SiobháCaribbean, Global Functions Previous relevant experience: various HR roles, Stakis Group and Hilton Hotels |
10.Claudia Schubert President, North America Nationality: American Appointed: October 2022 Previous Diageo roles: President, US Spirits and Canada; General Manager, Continental Europe; President, US Controls States and Canada; President, Diageo Chateau & Estate Wines Previous relevant experience: Boston Consulting Group |
11.Tom Shropshire General Counsel & Company Secretary Nationality: American/British Appointed: July 2021 Current external appointments: Member of the Court (Non-Executive Director), The Bank of England; Trustee, New York University School of Law; Member of the Steering Committee, The Parker Review; Trustee, Charity Projects Limited (Comic Relief); Director, Comic Relief Limited Previous relevant experience: Partner & Global US Practice Head, Linklaters LLP |
Corporate governance report
Enabling our ambition
Corporate governance structure and division of responsibilities
Non-Executive Directors
Melissa Bethell, Valérie Chapoulaud-Floquet, Sir John Manzoni, Lady Mendelsohn, Alan Stewart, Ireena Vittal and Karen Blackett
The Non-Executive Directors, all of whom the Board has determined are independent, experienced and influential individuals from a diverse range of industries, backgrounds and countries.
•Constructively challenge the Executive Directors
•Develop proposals on strategy
•Scrutinise the performance of management
•Satisfy themselves on the integrity of the financial information, controls and systems of risk management
•Set the levels of remuneration for Executive Directors and senior management
•Make recommendations to the Board concerning appointments to the Board
•Devote such time as is necessary to the proper performance of their duties
A summary of the terms and conditions of appointment of the Non-Executive Directors is available at https://www.diageo.com/en/our-business/corporate-governance.
Senior Independent Director
Susan Kilsby
•Acts as a sounding board for the Chairman and serves as an intermediary for the other Directors where necessary
•Together with the other Non- Executive Directors, leads the review of the performance of the Chairman, taking into account the views of the Executive Directors
•Available to shareholders if they have concerns where contact through the normal channels has failed
Company Secretary
Tom Shropshire
•The Board is supported by the Company Secretary who ensures information is made available to Board members in a timely fashion
•Supports the Chairman in setting Board agendas, designing and delivering Board inductions and Board evaluations, and co-ordinates post-evaluation action plans, including risk review and training requirements for the Board
•Advises on corporate governance matters
•Is a member of the Executive Committee as General Counsel
| | | | | | | | |
Chief Executive Debra Crew Develops the group’s strategic direction for consideration and approval by the Board •Implements the strategy agreed by the Board •Leads the Executive Committee •Manages the company and the group •Along with the Chief Financial Officer, leads discussions with investors •Is supported in her role by the Executive Committee •Is supported by the Finance Committee and Filings Assurance Committee in the management of financial reporting of the company | Chairman Javier Ferrán MoriartyResponsible for the operation, leadership and governance of the Board •Ensures all Directors are also membersfully informed of matters and receives precise, timely and clear information sufficient to make informed judgements •Sets Board agendas and ensures sufficient time is allocated to ensure effective debate to support sound decision-making •Ensures the effectiveness of the Board •Engages in discussions with shareholders •Meets with the Non-Executive Directors independently of the Executive Committee. Their biographies are found on pages 133 and 134.Directors |
Executive Committee diversity
As at 30 June 2020
Letter from the ChairmanChief Financial Officer Lavanya Chandrashekar Manages all aspects of the Board of Directorsgroup's financial affairs
Solid governance principles
Dear Shareholder
I am pleased, on behalf•Responsible for the management of the Board, to present the corporate governance report for the year ended 30 June 2020. It is the Board’s role to provide effective leadership to promote the long-term sustainable success of Diageo and to deliver long-term, sustainable value for shareholders. It is the responsibilitycapital structure of the Board to ensure that Diageo conducts its business with high standards of ethical behaviour and in a manner which contributes positively to wider society, having regard to the interests of its different stakeholders. In challenging and fast-moving environments, particular emphasis is placed on the Board’s ability to exercise good judgement ascompany
•Contributes to the management of risk, the allocationgroup's operations •Along with the Chief Executive, leads discussions with investors •Is supported by the Finance Committee and Filings Assurance Committee in the management of capitalthe financial affairs and other resources, while always adhering to uncompromising ethical standards. Underpinned byreporting of the company •Is a strong purpose, values and culture, and led by a high-functioning Board and experiencedmember of the Executive Committee I am proud of the resilience and commitment shown by Diageo and its people during the year, and in particular during this recent difficult period.
|
Good corporate governance is a key factor in achieving effective leadership and sustainable corporate behaviour, irrespective of the external environment. It means ensuring that there is an effective framework of internal controls, practices, policies and systems which together define clear levels of accountability and authority for decision-making, enabling management to take appropriate levels of risk within a culture of openness, ethics and values. The Board sets the tone for Diageo, guided by our deeply engrained corporate purpose and values, in achieving our Performance Ambition. Details of our governance structure and processes are set out on pages 140 to 141.
Throughout this year, there has been much focus on considering the impact of decisions on different stakeholder groups and on ensuring that decisions are made in light of the impact they may have on those stakeholders. In my role as designated non-executive director for workforce engagement, I have benefitted greatly from my interactions with the Diageo workforce across different locations and have sought to understand their views, present them to the Board and ensure that they are considered in our decision-making. Further details of how the Board engages with different stakeholder groups are set out on pages 145 and 146.
A good board is formed of a diverse group of individuals, each contributing different experiences, skills and backgrounds, and which enables independent and effective leadership coalescing around a common purpose and performance ambition. Inclusion and diversity remains a vital priority for us as a Board and for the wider company, and with that in mind, we are delighted to have announced the appointments of Melissa Bethell who joined the Board on 30 June 2020, as well as Sir John Manzoni and Valérie Chapoulaud-Floquet who will be joining the Board in October 2020 and January 2021 respectively. I am also excited that Debra Crew, formerly a non-executive director, has made the transition into executive management, being appointed President, Diageo North America. Finally, I am deeply grateful to Lord Davies, who has recently retired after more than nine years’ service on the Board, and to Ho KwonPing, who will shortly retire from the Board after eight years’ service. Further details of our Diversity Policy and recent changes to the Board are set out on pages 139 and 135.
We are clear that Diageo’s ability to deliver our strategy and to create sustainable long-term value for shareholders and other stakeholders is predicated on robust and efficient governance structures and processes, whatever the external environment. We remain firmly of the view that good corporate governance contributes to a sustainable business over the long term for the benefit of society as a whole.
Javier Ferrán
Chairman
Corporate governance report
Enabling our ambition
Compliance statement
The principal corporate governance rules applying to Diageo (as a UK company listed on the London Stock Exchange) for the year ended 30 June 2020 are contained in the UK Corporate Governance Code (the Code) and the UK Financial Conduct Authority (FCA) Listing Rules, which require us to describe, in our Annual Report, our corporate governance from two points of view: the first dealing generally with our application of the Code’s main principles and the second dealing specifically with non-compliance with any of the Code’s provisions. The two descriptions together are designed to give shareholders a picture of governance arrangements in relation to the Code as a criterion of good practice.
A copy of the Code is publicly available on the website of the Financial Reporting Council (FRC), www.frc.org.uk.
Diageo can confirm that it has complied with all relevant provisions set out in the Code throughout the year. Details of changes to pension contributions for Executive Directors as required under the Code can be found in the Directors’ remuneration report on page 161.
Diageo must also comply with corporate governance rules contained in the FCA Disclosure Guidance and Transparency Rules and certain related provisions in the Companies Act 2006 (the Act).
As well as being subject to UK legislation and practice, as a company listed on the New York Stock Exchange (NYSE), Diageo is subject to the listing requirements of the NYSE and the rules of the U.S. Securities and Exchange Commission (SEC), as they apply to foreign private issuers. Compliance with the provisions of the US Sarbanes-Oxley Act of 2002 (SOX), as it applies to foreign private issuers, is continually monitored.
As Diageo follows UK corporate governance practice, differences from the NYSE corporate governance standards are summarised in Diageo’s 20-F filing and on our website at www.diageo.com/en/our-business/corporate-governance/compliance/.
Board of Directors
Composition of the Board
The Board comprises the Non-Executive Chairman, two Executive Directors, the Senior Independent Director, and fourseven independent Non-Executive Directors. The biographies of all Directors are set out in this Annual Report on pages 133127-130.
Debra Crew was appointed Chief Executive and 134.Director, effective 8 June 2023.
Inclusion and diversity
ValuingThe Board sees championing inclusion and diversity isas one of the key enablers for achieving Diageo’s ambition. It is also a core principlesprinciple of Diageo'sthe company’s global Human Rights Policy which applies to all employees, subsidiaries and third-party contractors and which has been implemented as part of our Code of Business Conduct programme. Our objective is to maintain and sustain an inclusive and diverse business, across all levels, functions and geographies, in order to create a better working environment and a better-performingbetter performing business.
The As part of this, the Board has adopted a written Board Diversity Policy which is applicable to the Board only and sits alongside Diageo’s Code of Business Conduct and associated global policies, which set out Diageo’s broader commitment to inclusion and diversity. Diageo strongly supports diversity within its Board of Directors, including gender, ethnicity, age and professional diversity, as well as diversity of thought. The Board is comprised of individuals from a diverse range of skills, industries, backgrounds and nationalities, which enables a broad evaluation of all matters considered by the Board and contributes to a culture of collaborative and constructive discussion. The Board’s objective, as set out in its Diversity Policy, is that it shall include no less than 40% female representation (with the ultimate goal being parity between males and females on the Board) and at least one directorDirector from ana minority ethnic minority background. Currently,group. As at 26 July 2023, women make up 50%73% of the Board and there are three directorsfour Directors (36%) who self-disclose as being from minority ethnic minority backgrounds.
groups. Further information about diversity at Board and senior executive levels can be found on page 125 and in the 'Champion‘Our people and culture’ and ‘Champion inclusion and diversity' and 'Our people'diversity’ sections of 'Our strategic priorities'the Strategic Report on pages 46127-130 and 48.
Duties of the Board
302-307 respectively. The Board manages overall control of the company’s affairs with reference to the formal schedule of matters reserved for the Board for decision. The schedule was last reviewed in April 2020 andBoard's Diversity Policy is available at https://www.diageo.com/en/our-business/corporate-governance/committees/.board-diversity.
Outside interests and conflicts
The Board has agreed an approach and adopted guidelines for dealing with conflicts of interest, with Directors' outside interests being regularly reviewed and responsibility for authorising conflicts of interest is included inreserved for the scheduleBoard. In the case of matters reserved fora potential conflict, the Nomination Committee
considers the circumstances, appropriate controls and protocols, and makes a recommendation to the Board. The Board confirmed that it was not aware of any situations that may or did give rise to conflicts with the interests of the company, other than those that may arise from Directors’ other appointments as disclosed in their biographies.
Duties of the Board
The Board manages overall control of the company’s affairs with reference to the formal schedule of matters reserved for the Board for decision. The schedule was last reviewed in July 2023 and is available at https://www.diageo.com/en/our-business/corporate-governance. In order to fulfil their duties, procedures are in place for Directors to seek both independent advice and the advice and services of the Company Secretary, who is responsible for advising the Board through the Chairman, on all governance matters. The Non-Executive Directors meet without management present,Board considers a number of factors when making decisions, including the potential impact of those decisions on various stakeholder groups and also meet withon the Chairman without management present,Company's ‘Society 2030: Spirit of Progress‘ and other non-financial targets, including in respect of environmental sustainability. Further information on a regular basis.
the Board and the Audit Committee's roles in climate risk governance can be found on page 91. The terms of reference of Board Committees are reviewed regularly, most recently in April and June 2020,July 2023, and are available at
https://www.diageo.com/en/our-business/corporate-governance/committees/.corporate-governance.
Corporate governance structurerequirements
The principal corporate governance rules applying to Diageo (as a UK company listed on the London Stock Exchange) for the year ended 30 June 2023 are contained in the 2018 UK Corporate Governance Code (the Code) and the UK Financial Conduct Authority (FCA) Listing Rules, which require us to describe, in our Annual Report, our corporate governance from two points of view: the first dealing generally with our application of the Code’s main principles and the second dealing specifically with non-compliance with any of the Code’s provisions. The two descriptions together are designed to give shareholders a picture of governance arrangements in relation to the Code as a criterion of good practice. A copy of the Code is publicly available on the website of the Financial Reporting Council (FRC), www.frc.org.uk. Diageo’s statement as to compliance with the Code during the year ended 30 June 2023 can be found on page 133-134 . Diageo must also comply with corporate governance rules contained in the FCA Disclosure Guidance and Transparency Rules and certain related provisions in the Companies Act 2006 (the Act). Diageo is also listed on the New York Stock Exchange (NYSE), and as such is subject to the applicable rules of this exchange and jurisdiction. For example, Diageo is subject to the listing requirements of the NYSE and the rules of the US Securities and Exchange Commission (SEC), as they apply to foreign private issuers. Compliance with the provisions of the US Sarbanes-Oxley Act of 2002 (SOX), as it applies to foreign private issuers, is continually monitored.
Compliance with US corporate governance rules
Under applicable SEC rules and the NYSE’s corporate governance rules for listed companies, Diageo must disclose any significant ways in which its corporate governance practices differ from those followed by US companies under NYSE listing standards. Diageo believes the following to be the significant areas in which there are differences between its corporate governance practices and NYSE corporate governance rules applicable to US companies. This information is also provided on the company’s website at www.diageo.com.
•Basis of regulation: UK listed companies are required to include in their annual report a narrative statement of (i) how they have applied the principles of the Code and (ii) whether or not they have complied with the best practice provisions of the Code. NYSE listed companies must adopt and disclose their corporate governance guidelines. Certain UK companies are required to include in their annual report statements as to (i) how directors have complied with Section 172 of the Act, which requires directors to promote the success of the company for the benefit of the members as a whole, having regard to the interests of stakeholders and (ii) how directors have engaged with and taken account of the views of the company’s workforce and other stakeholder groups. Diageo complied throughout the year with the best practice provisions of the Code and the disclosure requirements noted above, other than as described on page 125.
•Director independence: The Code requires at least half the Board (excluding the Chairman) to be independent Non-Executive Directors, as determined by affirmatively concluding that a Director is independent in character and judgement and determining whether there are relationships and circumstances which are likely to affect, or could appear to affect, the Director’s judgement. The Code requires the Board to state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination. NYSE rules require a majority of independent directors, according to the NYSE’s own ‘brightline’ tests and an affirmative determination by the Board that the Director has no material relationship with the listed company. Diageo’s Board has determined that, in its judgement and without taking into account the NYSE brightline tests, all of the Non-Executive Directors are independent. As such, currently nine of Diageo’s eleven Directors are independent.Further details of this determination in relation to Alan Stewart, Non-Executive Director and Chairman of the Audit Committee, are set out on page 135.
•Chairman and Chief Executive: The Code requires these roles to be separate. There is no corresponding requirement for US companies. Diageo has a separate Chairman and Chief Executive.
•Non-Executive Director meetings: NYSE rules require Non-Management Directors to meet regularly without management and independent directors to meet separately at least once a year. The Code requires Non-Executive Directors to meet without the Chairman present at least annually to appraise the Chairman’s performance. During the year, Diageo has complied with these requirements with independent Non-Executive Directors, including the Chairman, meeting without the Executive Directors present four times and independent Non-Executive Directors meeting without the Chairman or Executive Directors present twice.
•Board committees:Diageo has a number of Board committees that are similar in purpose and constitution to those required by NYSE rules. Diageo’s Audit, Remuneration and Nomination Committees consist entirely of independent Non-Executive Directors. Under NYSE standards, companies are required to have a nominating/corporate governance committee, which develops and recommends a set of corporate governance principles and is composed entirely of independent directors. The terms of reference for Diageo’s Nomination Committee, which comply with the Code, do not contain such a requirement. In accordance with the requirements of the Code, Diageo has disclosed on page 142 the results and means of its annual evaluation of the Board, its Committees and the Directors, and it provides extensive information regarding the Directors’ compensation in the Directors’ remuneration report on pages 158-195.
•Code of ethics:NYSE rules require a Code of Business Conduct and Code of Ethics to be adopted for directors, officers and employees and disclosure of any waivers for executive directors or officers. Diageo has adopted a Code of Business Conduct for all Directors, officers and employees, as well as a Code of Ethics for Senior Financial Officers in accordance with the requirements of SOX. See page 149 for further details.
•Compliance certification: NYSE rules require chief executives to certify to the NYSE their awareness of any NYSE corporate governance violations. Diageo is exempt from this as a foreign private issuer but is required to notify the NYSE if any executive officer becomes aware of any non-compliance with NYSE corporate governance standards. No such notification was necessary during the period covered by this report.
Structure and division of responsibilities
The Board hasis committed to the highest standards of corporate governance and risk management, which is demonstrated in its established a corporate governance framework, as shown below andillustrated on page 140 and 141.pages 151-152. This includes the three Board Committees (Audit Committee, Nomination Committee and Remuneration Committee), as well as management committees which report to the Chief Executive Officer or Chief Financial Officer (Executive Committee, Finance Committee, Audit & Risk Committee and Filings Assurance Committee).
There is a clear separation of the roles of the Chairman, the Senior Independent Director and the Chief Executive which has been clearly established, set out in writing and agreedapproved by the Board. A copy of this is available at https://www.diageo.com/en/our-business/corporate-governance. No individual or group dominates the Board’s decision-making processes.
Further details on the Board Committees can be found in the separate reports from each Committee on pages 154 to 194, and details of the Executive Committee can be found on page 150.
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Leadership
| | Independent oversight and rigorous challenge |
Chairman
Javier Ferrán
• Responsible for the operation, leadership and governance ofFurther details on the Board
• Ensures all Directors are fully informed of matters Committees can be found in the separate reports from each committee on pages 117-153, and receives precise, timely and clear information sufficient to make informed judgements
• Sets Board agendas and ensures sufficient time is allocated to ensure effective debate to support sound decision making
• Ensures the effectiveness of the Board
• Engages in discussions with shareholders
• Meets with the Non-Executive Directors independentlydetails of the Executive Directors
• Designated non-executive director for workforce engagement
| | Non-Executive Directors
Melissa Bethell, Ho KwonPing, Lady Mendelsohn and Alan Stewart
The Non-Executive Directors, all of whom the Board has determined are independent, experienced and influential individuals from a diverse range of industries, backgrounds and countries. The independence of Ho KwonPing, who has servedCommittee can be found on the Board for over six years, was reviewed in 2019.
• Constructively challenge the Executive Directors
• Develop proposals on strategy
• Scrutinise the performance of management
• Satisfy themselves on the integrity of the financial information, controls and systems of risk management
• Set the levels of remuneration for Executive Directors and senior management
• Make recommendations to the Board concerning appointments to the Board
• Devote such time as is necessary to the proper performance of their duties
• A summary of the terms and conditions of appointment of the Non-Executive Directors is available at www.diageo.com/en/our-business/corporate-governance/compliance/.
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Chief Executive
Ivan Menezes
• Develops the group’s strategic direction for consideration and approval by the Board
• Implements the strategy agreed by the Board
• Manages the company and the group
• Along with the CFO, leads discussions with investors
• Is supported in his role by the Executive Committee
• Is supported by the Filings Assurance Committee in the management of financial reporting of the company
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Chief Financial Officer
Kathryn Mikells
• Manages all aspects of the group’s financial affairs
• Responsible for the management of the capital structure of the company
• Contributes to the management of the group’s operations
• Along with the Chief Executive, leads discussions with investors
• Is supported by the Finance Committee and Filings Assurance Committee in the management of the financial affairs and reporting of the company
| | Senior Independent Director
Susan Kilsby
• Acts as a sounding board for the Chairman and serves as an intermediary for the other Directors where necessary
• Together with the other Non-Executive Directors, leads the review of the performance of the Chairman, taking into account the views of the Executive Directors
• Available to shareholders if they have concerns where contact through the normal channels has failed
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Company Secretary |
Siobhán Moriarty
• The Board is supported by the Company Secretary who ensures information is made available to Board members in a timely fashion
• Supports the Chairman in setting Board agendas, designing and delivering Board inductions and Board evaluations, and co-ordinates post-evaluation action plans, including risk review and training requirements for the Board
• Advises on corporate governance matters
pages 141. |
Considering stakeholders in decision-making
During the year the Board reviewed how it was structured as regards governance of the group’s environmental, social and
governance (ESG) programmes. This review was considered in the light of increased expectations as to listed companies’
commitment to such matters by a number of stakeholder groups, including consumers, government and employees. As part of its review, the Board considered the governance structures of peer group companies, the experience of individual Directors and feedback received directly from certain institutional investor bodies and indirectly through the company’s brokers.
It was concluded that ESG was of such critical importance that all Directors should retain primary responsibility and involvement, rather than constituting a new standing committee of the Board dedicated to ESG matters.
Board skills and experience
The Board is of the view that it is essential to haveHaving an appropriate mix of attributes amongst its Directors, in particular in relation to experience, expertise, diversity and independence.independence is essential for Diageo's Board. Such a mixture ofdiverse attributes enablesenable the Board as a whole to provide informed opinions and advice on strategy and relevant topics, thereby discharging its duty of oversight. The Board skills matrix helps to identify the experience and expertise of existing Directors, required skill sets or competencies, and the strategic requirements of the company. Key strengths and relevant experience of each Director are set out on pages 133 to 134,127-130, and a matrix of the Board’s current skills and experience is set out below.
Independence
The Code requires the Board to state its reasons for concluding that a director is independent notwithstanding the existence of certain relationships or circumstances which are likely to impair or appear to impair the director's independence. A non-exhaustive list of such circumstances is set out in provision 10 of the Code and include, amongst other things, the fact that a director has served on the board for more than nine years. In September 2023, Alan Stewart will have served for nine years on the Board since he was first appointed in September 2014. Alan has also served as Chairman of the Audit Committee since January 2017. The Board has requested and Alan has agreed to extend the term of his appointment to enable a smooth transition of the role of Chair of the Audit Committee at a time when the company is commencing a significant business change programme to upgrade its financial systems and technology in order to enhance the company's reporting and controls environment, as further described on page 18. The Board believes that, given the critical role of the Audit Committee in supervising this programme, this additional period will help preserve the level of knowledge and experience on and help support a successful transition to a successor, who is expected to be appointed prior to the 2024 AGM. It was further considered to be in the following chart.best interests of the company that Alan continues in this role to provide further continuity in light of other changes to the Board and, in particular, the recent transition in Chief Executive. The Board has also considered the matter of Alan's independence in light of this extension and concluded that, notwithstanding his serving for more than nine years, he continues to make high-quality contributions to Board and committee meetings, providing effective and constructive challenge to management and demonstrating objective and independent judgment. In light of this assessment, the Board has determined that Alan Stewart remains independent.
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l | Finance |
l | Banking / corporate finance |
l | Consumer products |
l | Sales and marketing |
l | General management |
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Board and Committee attendance
Directors’ attendance record at the last AGM, scheduled Board meetings and Board Committee meetings, for the year ended 30 June 20202023 is set out in the table below.shown on page 126. Directors are expected to attend all meetings of the Board and its Committees and the AGM, but if unable to do so they are encouraged to give their views to the Chair of the meeting in advance. The 2022 AGM was held as a combined physical and electronic meeting via a live webcast with all Directors attending either physically or by video link. For Board and Board Committee meetings, attendance is expressed as the number of meetings attended out of the number that each Director was eligible to attend. Where Directors were unable to attend a meeting, they gave their views to the Chairmen of each respective meeting ahead of that meeting being held.
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| | Annual General Meeting 2019 | | Board
(maximum 9) | | Audit Committee (maximum 5) | | Nomination Committee (maximum 5) | | Remuneration Committee (maximum 5) | |
Javier Ferrán | | ü | | 9/9 | | 5/5 | (i)
| 5/5 | | 5/5 | (i)
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Ivan Menezes | | ü | | 9/9 | | 2/5 | (i)
| 5/5 | (i)
| 5/5 | (i)
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Kathryn Mikells | | ü | | 9/9 | | 5/5 | (i)
| 0/0 | | 4/5 | (i)
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Susan Kilsby | | ü | | 9/9 | | 5/5 | | 5/5 | | 5/5 | |
Melissa Bethell(ii)
| | N/A | | 0/0 | | 0/0 | | 0/0 | | 0/0 | |
Ho KwonPing(iii)
| | ü | | 9/9 | | 3/5 | | 3/5 | | 3/5 | |
Nicola Mendelsohn(iii)
| | ü | | 8/9 | | 4/5 | | 4/5 | | 4/5 | |
Alan Stewart | | ü | | 9/9 | | 5/5 | | 5/5 | | 5/5 | |
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Former Directors |
Debra Crew(iv)
| | ü | | 5/5 | | 4/4 | | 3/3 | | 3/3 | |
Lord Davies(iii)(v)
| | ü | | 7/9 | | 4/5 | | 4/5 | | 2/5 | |
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(i) | Attended by invitation. |
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(ii) | Appointed to the Board on 30 June 2020. |
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(iii) | Where Non-Executive Directors were unable to attend a meeting, they gave their views to the Chairman of each respective meeting ahead of the meeting being held. |
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(iv) | Retired from the Board on 24 March 2020. |
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(v) | Retired from the Board on 30 June 2020. |
Resilient and robust decision-making during the pandemic
In order better to assess the impact of the Covid-19 pandemic, to make well-informed and timely decisions and to provide strategic guidance on how the pandemic might impact Diageo’s business and operations, the Board increased the frequency of its meetings during April, May and June 2020, changed the agenda for its two-day Annual Strategy Conference held in April to focus solely on the impact of the pandemic, and constituted a committee of the Board with authority to approve urgent matters with agility and speed. The Board met virtually, using audio-video conferencing, to enable Directors located in different locations and time zones to participate in meetings, with senior executives providing updates and presentations. The agendas for these additional meetings were dedicated to providing the Board with the latest information on government containment measures taken or likely to be taken in various countries, including lockdowns, trade restrictions and closures, changes in macro-economic activity, including consumer behaviour and trends over the short and long terms, and scenario planning for the potential impact on Diageo’s business and that of our direct and indirect customers in different markets. The Board was also provided with information on the company’s liquidity position, latest trading and financial data, and details of management’s proposed actions in relation to Diageo’s workforce, plants and facilities, a number of which were closed as a result of government containment measures in some countries such as India and South Africa.
Decisions were taken to manage the company’s liquidity, including reducing discretionary expenditure, monitoring working capital, launching debt issuances, and to reallocate resources and A&P expenditure to address changing consumer behaviour, including significantly decreased sales in the on-trade but increased sales in off-trade and e-commerce channels. A key priority is to ensure that Diageo emerges strongly from the pandemic, with its reputation enhanced by the decisions and actions taken by the Board and management over the period. It was therefore critical for the Board to ensure that Diageo’s workforce was protected through appropriate safety protocols across all production and office sites, including increased sanitation measures, safety equipment and restrictions on access, including office closures and working from home where possible. Another important consideration for the Board has been to provide appropriate support to its other stakeholders through initiatives such as the $100 million 'Raising the Bar' fund to assist the on-trade recovery, creation of materials for consumers including the 'Virtual Good Host Guide', the donation of alcohol to be made into bottles of sanitiser for frontline healthcare workers in a number of markets, working closely with suppliers and customers to minimise business disruption and to provide support packages for bartenders and others impacted by trade restrictions and closures.
Board activities
Details of the main areas of focus of the Board and its Committees during the year are summarised below.
Relevance to strategy:
Efficient Growth - ①
Consistent Value Creation - ②
Credibility and Trust - ③
Engaged People - ④
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Area of focus | Strategic priority | Strategic outcome |
Strategic matters | • Held the Annual Strategy Conference through an online meeting at which the group’s strategy was considered in depth, including the potential impact of the Covid-19 pandemic on consumer behaviour and the group’s strategy and operations
• Regularly reviewed the group’s performance against the strategy
• Received reports on the financial performance of the group
• Reviewed the group’s tax strategic planning
• Reviewed the group’s e-commerce strategy, North America commercial strategy and ambition, and the Africa strategy and performance
• Reviewed the group’s strategy as to media procurement, raw materials procurement and global supply footprint
| -Sustain quality growth
-Invest smartly
-Pioneer grain-to-glass sustainability
| ①
②
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Operational matters | • Reviewed and approved the annual funding plan, insurance, banking and capital expenditure requirements
• Reviewed the impact of global trade developments and disputes
• Reviewed the impact of Brexit and mitigation planning for Brexit and other related risks
• Regularly reviewed and approved the group’s business development activities, reorganisations and various other projects
• Approved various significant procurement and other contracts and reviewed product quality risk management processes
• Reviewed the company’s innovation pipeline
• Reviewedsignificant office and supply site property developments and proposals
• Visited Diageo’s new offices in New York, which included receiving reports from management and meeting employees
| -Sustain quality growth
-Embed everyday efficiency
-Invest smartly
-Pioneer grain-to-glass sustainability
| ①
②
③
④
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Stakeholders | • Reviewed the group’s strategy in relation to environmental, social and governance policy and proposed targets
• Considered the company’s culture
• Reviewed and made decisions in relation to the company’s capital allocation and liquidity position, and its return of capital policy, including its dividend and share buyback programmes
• Received reports on workforce engagement over the year
• Reviewed the company’s succession planning and talent strategy and board diversity policy
• Reviewed the company’s sustainability and environmental strategy and proposed approach as to future ambition
• Reviewed the company’s key pensions governance and funding positions
• Received regular investor reports and reviewed a detailed investor perceptions study
• Twice yearly, received an update on ESG matters
| -Sustain quality growth
-Pioneer grain-to-glass sustainability
-Promote positive drinking
-Champion inclusion and diversity
| ①
②
③
④
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Governance, assurance and risk management | • Received reports on the work of the various Board Committees
• Received regular reports in relation to material legal matters
• Received updates on regulatory and governance developments and areas of risk
• Agreed actions from the 2019 internal evaluation of the Board’s performance
• Approved the approach in relation to the 2020 external Board evaluation process
• Approved the appointment of new Non-Executive Directors and new Senior Independent Director
• Reviewed and approved new terms of reference for the Audit Committee, Remuneration Committee and Nomination Committee
• Reviewed and approved updated description of separation of duties between the Chairman, Chief Executive and Senior Independent Director
• Reviewed and approved the schedule of matters reserved for the Board
• Reviewed and approved the company’s financial reporting and risk footprint
• Approved the constitution of new committee of the Board authorised to approve actions to be taken in response to the Covid-19 pandemic
• Approved increasing the number of Board meetings during year to ensure adequate governance in light of the Covid-19 pandemic
| -Sustain quality growth
-Pioneer grain-to-glass sustainability
-Champion inclusion and diversity
| ①
③
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Stakeholder engagement
Diageo’s culture and the nature of its business encourages the development of strong and positive relationships with external stakeholders, including business partners such as suppliers and customers, but also with government, consumers and the communities in which we operate. The Chief Executive and the Presidents are in regular contact with our principal customers, with performance updates being providedRe-appointment at all scheduled Board meetings. At least once a year, the Board meets in a location outside the United Kingdom during which it receives feedback in person from key customers. For example, in October 2019 the Board met with representatives of some of its key customers in the United States, Canada and Latin America, and in previous years, the Board met key customers in India and China. See pages 146 to 147 for our statement on wider stakeholder engagement.
Diageo’s purpose and values require that we make a positive contribution to society and the communities in which we operate. During the year, the Board has focused in particular on the next phase of the company’s long-term strategy to make a positive contribution to wider society, building on the progress made in working towards its 2020 environmental targets, including in water reuse and renewable energy in our African breweries, use of by-products from our distilleries in Scotland and the United states in energy generation, and improvements in packaging especially in relation to use of plastics. At its meeting in January 2020, the Board reviewed ambitious environmental and social targets beyond 2020. Further details of the company’s initiatives to reduce its environmental impact and to contribute to wider society can be found on pages 58 to 67 .
How the Board is kept informed about stakeholder engagement
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People | The Board recognises the importance of effective engagement with Diageo’s employees and wider workforce, including contractors and temporary staff. On an annual basis, the Board holds an extended meeting at one of Diageo’s overseas locations. In recent years, the Board has visited the group’s operations in Chengdu, China and Bangalore, India, and during this year the Board visited the company’s office in New York, USA. During these visits, the Board engages directly with local management and other employees during site and trade visits, with Board presentations and Board dinners and lunches enabling the Board to meet a broad spectrum of employees from differing departments and markets. Indirect engagement with employees also takes place through works councils, employee and workforce forums, community groups, pulse surveys and town hall meetings. This year the Board has enhanced its engagement with people through the Chairman in his role as designated non-executive director for workforce engagement, which has enabled the Board to take decisions during the Covid-19 pandemic to prioritise the health, safety and well-being of the group’s workforce.
Diageo’s Workforce Engagement Statement is set out on page 147.
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Consumers | Our business can only be sustained by a deep understanding of our consumers, their behaviours and motivations. At its Annual Strategy Conference, the Board receives presentations from the Executive Committee and other senior leaders on emerging consumer trends which provide opportunities to the business. At this year's Annual Strategy Conference, which was held in April, the Board focused on the impact of the Covid-19 pandemic on consumer behaviour, including short-term immediate activity, acceleration of existing trends and potential long-term structural changes in the industry. At other meetings during the year, the Board has reviewed and provided guidance in relation to the group’s e-commerce strategy and its innovation pipeline, ensuring that the group’s portfolio remains broad and relevant to consumers with brands and products at different price points, in different categories, markets and channels. The Board takes into account that consumers are increasingly considering business reputation and ethics in their purchasing choices, underlining the importance of sustainable and responsible business practices to individual consumers as well as other stakeholders. |
Customers | The Board engages with customers, primarily through the Chief Executive, who provides information about key customers in his regular report, in other business Board reports and at the annual overseas extended Board meeting, during which the Board will meet and interact directly with key customers from a particular market or region. Understanding the importance to customers of maintaining a broad portfolio with consumer offerings at a variety of price points and categories, the Board regularly reviews both innovation and inorganic opportunities to enhance its portfolio. During the year, the Board approved a number of additional investments in start-up brands as part of its Distill Ventures programme. The Board has also reviewed the group’s product quality control procedures during the year, which enable the group to provide high-quality products to customers, and has reviewed and approved material distribution agreements with certain customers. |
Suppliers | The Chief Executive and Chief Financial Officer provide the Board with information about key suppliers as and when relevant to Board discussions, including when approval is required for material contracts with suppliers. During the year, the Board reviewed and approved several critical procurement agreements, including in relation to raw materials such as neutral spirit, agave, glass and carried out a detailed review of the group’s global media and digital agency arrangements. The Board also reviewed management’s strategy in relation to sourcing certain key raw materials. The Board considers that it is important that the group remains a trusted partner for suppliers, with the relationship enhanced through fair contract and payment terms and through compliance with Diageo’s 'Partnering with Suppliers Standard'. |
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Communities | Maintaining close relationships with the communities in which Diageo operates has always been of critical importance to the Board, shaping its discussions and guiding the company’s approach to its responsibilities to wider society. The Board has had a number of discussions during the year to shape the company’s ambition for its impact on communities over the long term, including shaping targets and goals in relation to environmental and social initiatives. Recognising the severity of the impact of the Covid-19 pandemic on many of the communities in which the group operates, the Board focused on actions to support those communities, including those working in the on-trade such as bar tenders and hospitality employees. A number of initiatives were approved and launched by the Board during this period, as set out in detail on pages 50 and 52. |
Investors | The Board is kept updated on investor sentiment through a number of different channels, including a monthly report issued by Diageo’s investor relations team which frequently interacts with key investors and investor groups. In addition, the Chairman, Chief Executive and Chief Financial Officer meet on a regular basis with investors during each year. Shareholders can also contact the Chairman directly and put questions to the Board at the company’s annual general meeting. This year, the Board commissioned a report to provide an independent view on the company’s effectiveness in engaging with investors, the results of which were presented to the Board by the agency which compiled the report. In making decisions in relation to returns of capital, such as dividends and share buy backs, the Board has considered the views and priorities of investors recognising the importance of such return of capital to a wide range of investors, including institutional investors, pension funds and retail shareholders. Taking those views into account, as well as considering other factors including the company’s liquidity position, the potential impact of the Covid-19 pandemic, and the funding position of the company’s post employment benefits schemes, the Board decided not to initiate the next phase of its three-year return of capital programme but decided that it was appropriate to pay an interim dividend in April. |
Government and regulators | The Board engages indirectly with government, regulators and policy-makers through regular reports from the Chief Executive as well as periodic updates from management. In particular, the Board has received regular briefings during the year on Brexit, developments in relation to tariffs and international trade disputes. A number of Directors have experience of working in or with governments in the United Kingdom and elsewhere, and provide insights as to policymakers’ views and priorities which are then considered by the Board in making its decisions. The Board ensures that the company works closely with governmental and non-governmental bodies in relation to policy as to positive drinking, responsible advertising of alcoholic products, and education to enable consumers to make better choices about alcohol. |
Wider stakeholder engagement statement
During the last few months, given the spread of the Covid-19 and the impact that this has had on our business and that of our customers, we have focused on maintaining an active dialogue and engaging with our different stakeholder groups in different ways. We have prioritised the safety of our employees by managing the situation through local crisis management teams, by ensuring that those who can work from home do so, using technology and systems which the group has invested in over recent years, and by providing regular and ongoing communications and guidance to all employees and the wider workforce. We also reviewed our processes and practices to ensure a safe working environment for those of our workforce who cannot work from home, including in production facilities. We have maintained an ongoing dialogue with customers and suppliers to understand their concerns and have worked closely with them to mitigate disruption, including providing an appropriate level of support to our key suppliers and customers. In relation to our investors and shareholders, we have engaged directly through our investor relations team, our regular communications and our engagement programme. In addition, we have provided updates on developments in trading in the form of market announcements to ensure that all shareholders are informed about the impact of the pandemic on our business. As part of this, we withdrew guidance on group organic net sales growth and organic operating profit growth for the year, given the uncertain nature of the pandemic and its global impact.
We are aware that our Annual General Meeting (AGM) is a critical and valued opportunity for our shareholders to communicate directly with the Board, both in terms of asking questions during the meeting itself and also engaging less formally with management afterwards. As the safety of our shareholders and employees remain our priority, this year we will of course need to adapt how we conduct our AGM to ensure that government guidelines and restrictions are complied with while aiming to maintain the ability of shareholders to communicate directly with the Board. Further details of our AGM are set out in the accompanying Notice of Meeting.
Further information on our stakeholder considerations and activities throughout the year can be found on pages 30 and 31 and our section 172 statement is set out on page 18.
Workforce engagement statement
Our people are our most important asset and our inclusive and diverse culture is core to our purpose of ‘Celebrating life, every day, everywhere’, and essential to our future growth. We invest to grow and develop our people and aim to create an environment that enables everyone to thrive. We want to nurture great, diverse talent, with a range of backgrounds, skills and capabilities, while making a positive contribution to society. Diversity of thought fuels growth and innovation in our organisation and brings us closer to our consumer base. Understanding our employees’ views on the way they experience life at Diageo, from what works well, to where we can improve, makes good business sense. These insights help to shape our culture and make Diageo an attractive place to work, enabling us to recruit and retain the best talent.
On 1 July 2019, the Chairman was appointed the designated non-executive director for workforce engagement on behalf of the Board, as he is best positioned to engage with our workforce through regular visits to the markets in which Diageo has a presence around the world.
During the past year, the Chairman met with over 1,200 Diageo employees, representing every level and region in the organisation. These open and constructive sessions were held both in person and virtually, due to the Covid-19 outbreak. The Chairman enjoyed and appreciated the high levels of positive engagement, curiosity and candour in each discussion and was struck by the passion and pride employees had for Diageo.
The key themes that emerged from the past year’s workforce engagement discussions were:
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– | The strength of Diageo’s culture; our brand heritage; the importance of inclusion and diversity; our leadership and transparency; our focus on wellbeing; and the investment in learning and development. |
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– | Perspectives and ideas were also shared on the need to further simplify processes to enable even faster decision-making, greater knowledge sharing and collaboration with a recognition of the progress already made. Employees were keen to take advantage of best practice sharing of ideas across markets. |
The importance of connectivity and cross-functional collaboration provided valuable affirmation to the Board on the merits of the proposed investment in new office space in New York and planned investment in central London, which will bring people together from disparate out-of-town locations and bring us closer to our consumers. The Chairman’s engagement with employees across the world in the second half of our fiscal year also served as a helpful checkpoint on the company’s handling of the Covid-19 pandemic. This enabled the Board to review management’s decisions to prioritise the health, safety and wellbeing of employees through these uncertain and challenging times. In our recent Your Voice survey, employees reported high levels of pride in the care and support that Diageo has provided to our people, customers, partners and communities.
The focus of this first year of workforce engagement has been to understand the broad themes surfaced by employees of their experiences working at Diageo. In the coming year, the Chairman intends to continue a varied programme including, meeting with key talent; hosting employee town halls and virtual engagement forums; and meeting with employee representative groups. Focus will be placed on the progress being made on areas of opportunity for improvement and on gathering employees’ views on other challenges the Board should consider.
Read more about our engagement on page 143.
Performance evaluation
In November 2019, an evaluation of the Board’s effectiveness, including the effectiveness of the Chairman and the Board’s Committees, was undertaken with the assistance of the Company Secretary. The purpose of the evaluation was to review and evaluate how the Board and its Committees operate as measured against current best practice corporate governance principles, framed by reference to Principle L and Provisions 21, 22 and 23 of the Code. In addition to more conventional areas such as Board composition, administrative matters, performance and effectiveness, the 2019 evaluation focused on Directors’ views as to corporate culture, values and stakeholder engagement. These topics had been chosen in light of the prominence given to them in the Code and in subsequent commentary by government, corporate governance institutions and the investor community.
The evaluation was also conducted with reference to the detailed guidance on the optimal Board evaluation process set out in section 3 of the FRC’s ‘Guidance on Board Effectiveness’ issued in July 2018. The evaluation was also designed to build on the outcome of the previous year’s evaluation carried out in November 2018, whose findings were summarised in last year’s Corporate governance report.
The 2019 evaluation process was an internal process, comprising a questionnaire sub-divided into the five sections highlighted in the table below. Board administration, meetings, agendas and provision of information; Board, Committee and Directors' effectiveness and performance; stakeholder engagement; and culture, values and purpose. Responses to all questions were sent to the Chairman and responses on the effectiveness of the Committees were also submitted to the respective Committee chairmen. In addition, the Senior Independent Director held a meeting with Directors without the Chairman present to provide feedback in relation to the Chairman. The results of the evaluation process were reviewed by the Board at its meeting in December 2019 at which various actions were agreed to be taken. It is the Board’s intention to continue to review annually its performance and that of its Committees and individual Directors, with such evaluation being carried out by an external facilitator every three years. The evaluation to be undertaken in 2020 will be undertaken with the assistance of an external facilitator.AGMs
The Chairman has confirmed that the Non-Executive Directors standing for re-electionre-appointment at this year’s AGM continue to perform effectively, both individually and collectively as a Board, and that each demonstrateNon-Executive Director demonstrates commitment to their roles.roles and continues to provide constructive challenge, strategic guidance and offer specialist advice, as well as holding management to account. As can be seen from the attendance records set out on page 126, Directors’ attendance levels have been consistently high throughout the year ended 30 June 2023.
The main conclusions and key areas for focus as highlighted by the 2019 evaluation are as follows:
Board activities
Details of the main areas of focus of the Board and its Committees during the year include those summarised below:
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| Areas of focus | Strategic priority | Strategic outcome | Stakeholders |
Strategic
matters | Held a two-day Annual Strategy Conference (ASC) focussing on key strategic matters, including implementation of strategy across regions, convenience, China, ESG performance and supply chain strategy
Regularly reviewed the group’s performance against the strategy
Received reports on the financial performance of the group as against the annual plan
Reviewed the group’s tax strategy and policy
Received reports on the macro-economic environment, socio-political matters and emerging trends
Carried out deep dives into key strategic topics including the group's scotch whisky portfolio and strategy, tequila strategy, consumer insights, Latin America and Caribbean region, culture and capabilities, China, health and wellness, and volatility scenario planning | | | |
Operational
matters | Reviewed and approved the group's three-year plan and annual funding plan, insurance, banking and capital expenditure requirements
Reviewed the group's long-term demand forecasting processes, global business operations and shared service centre arrangements
Regularly reviewed and approved the group’s M&A and business development activities, reorganisations and various other projects
Reviewed the group's supply chain activities, including supply footprint
Approved capital expenditure investments, and various significant procurement, systems and other contracts, having taken into consideration financial, operational, sustainability and other ESG related factors
Initiated a global business transformation programme and systems upgrade
Reviewed the company’s capital allocation, funding and liquidity positions, and those of its pension schemes, and approved interim and final dividends
Reviewed and approved the company’s share buyback programme
Approved the appointment of a new Chief Executive, including as an Executive Director
Acting through the Nomination Committee, reviewed the company’s succession planning and talent strategy | | | |
| ESG matters | Increased focus on ESG matters throughout the year, including conducting a deep dive in relation to the company's approach to ESG matters and its 'Society 2030: Spirit of Progress' programme at the ASC
Reviewed approach and methodologies used in relation to non-financial targets
Received reports on workforce engagement over the year
Received regular investor reports
Received regular updates on ESG matters and progress towards ‘Society 2030: Spirit of Progress‘ targets
Completed actions identified following the previous evaluation of the Board's performance and carried out an internal evaluation of the Board’s performance
Reviewed schedule of matters reserved for the Board and terms of reference of its Committees
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Assurance
and risk
management | Received reports in relation to material legal matters, including disputes, regulatory and governance developments, and areas of legal or regulatory risk
On the recommendation of the Audit Committee, approved the company’s risk footprint, including reviewing and updating the principal risks
On the recommendation of the Audit Committee, approved the company’s filings, financial and non-financial reporting including interim and preliminary results announcements, US filings and Annual Report | | | |
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| Key | | | | | |
| Strategic priorities | Strategic outcomes | Stakeholders |
| Sustain quality growth | | Efficient growth | | People |
| Embed everyday efficiency | | Consistent value creation | | Consumers |
| Invest smartly | | Credibility and trust | | Customers |
| Promote positive drinking | | Engaged people | | Suppliers |
| Champion inclusion and diversity | | | | Communities |
| Pioneer grain-to-glass sustainability | | | | Investors |
| | | | | Governments and regulators |
Stakeholder engagement
We aim to maintain open and positive dialogue with all our stakeholders, considering their key interests in our decision-making and communicating with them on a regular basis. This dialogue helps us build trust and respect and make choices as a business that help shape the role we play in society.
The development of strong and positive relationships between Diageo and its external stakeholders is an intrinsic part of our purpose and culture. Our stakeholders include not only business partners such as suppliers and customers, our people and workforce, but also government, consumers and the wider communities in which we operate. As noted in the company’s statement on Section 172 of the Companies Act 2006 set out on page 19, in making their decisions and in discharging their duties to promote the success of the company, the Directors must have regard to the interests of its stakeholders. We have summarised below why our stakeholders are important to us, what we believe their principal interests are and how the Board and company seeks to engage and respond.
Board composition, membership and appointment processes | | | | | | | | |
Main conclusionsStakeholder and why we engage | | Key areas for focus |
Our people •While there was broadly an appropriate balance betweenPeople are at the numbercore of Executiveour business •We aim to build a trusting, respectful and Non-Executive Directors,inclusive culture where people feel engaged and fulfilled •We want our people to be treated with dignity at work and their human rights respected | What we believe matters most to them •Prioritisation of health, safety and well-being •Learning and development opportunities •Purpose, culture and benefits •Contributing to the currentgrowth of our brands and performance •Promotion of inclusion and diversity •Sustainability and societal credentials How the Board size appeared comparatively smallseeks to engage •Need to ensure prospective new membersActive dialogue maintained throughout the year as part of the Board have adequate industry experienceBoard's ongoing workforce engagement programme •Direct engagement through visits to offices, production and comesupply chain sites during the year •Indirect engagement through feedback from a variety of geographical backgroundsworks councils, employee and workforce forums, community groups, Your Voice and pulse surveys and townhall meetings • Clear desire
| Reporting to maintain and enhance Board’s positive gender diversity and to ensure that the Board diversifies •Regular reports from workforce engagement activities •Feedback through employee surveys, including annual group-wide Your Voice survey •Culture and capabilities session at Board meeting led by Chief HR Officer Upcoming priorities •Maintaining focus on simplifying internal processes, including upgrading and transforming business operations and systems •Evolving workforce engagement programme |
Consumers •Understanding our consumers is critical for our business’ long-term growth •Consumer motivations, attitudes and behaviours form the basis of our business strategy, brand marketing and innovation •We want consumers to enjoy our products responsibly and for them to ‘drink better, not more’ | What we believe matters most to them •Choice of brands for different occasions, including no- and lower-alcohol •Innovation in other areas, particularlyheritage brands and creation and nurturing of new brands •Responsible marketing •Great experiences •Product quality •Sustainability and societal credentials •Price How the Board seeks to engage •Monitoring consumer behaviours, motivations and insights •Responding to and anticipating emerging consumer trends as part of strategic sessions, including the Annual Strategy Conference •Regular review of business development opportunities, including active brand portfolio management •Review of innovation pipeline as part of the Annual Strategy Conference
| Reporting to the Board •Regular performance updates by the Chief Executive, including on key consumer trends •Papers prepared by strategy team on evolving consumer behaviours in relation to ethnic originadvance of Annual Strategy Conference • Nomination Committee performanceRegular updates by Business Development and ability to accessInnovation teams on organic and inorganic opportunities and portfolio choices Upcoming priorities •Ongoing review of portfolio and category participation opportunities •Developing pipeline of the potential non-executive talent had improvedinnovation informed by consumer insights • Executive and senior management succession planning has had good focus
| | • RecruitmentEnhancing marketing effectiveness through detailed understanding of additional Non-Executive Directors of appropriate quality, experience and background, with a view to ensuring appropriate gender and ethnic diversity on the Board
• Continued review of pipeline of Non-Executive Directors on an ongoing basis
• Review executive management succession planning and pipeline at least once a year in greater depthconsumer motivation
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Customers •Our customers are a broad range of businesses, large and small, on-trade and off-trade, retailers, wholesalers and distributors, digital and e-commerce •We want to nurture mutually beneficial relationships to deliver joint value and great consumer experiences | What we believe matters most to them •A portfolio of leading brands that meets evolving consumer preferences •Identification of opportunities that offer profitable growth •Insights into consumer behaviour and shopper trends •Trusted product quality •Innovation, promotional support and merchandising •Availability and reliable supply and stocking •Technical expertise •Joint risk assessment and mitigation •Sustainability and societal credentials How the Board administration, meetings, agendasseeks to engage •Regular review of innovation pipeline and provisioninorganic opportunities to ensure a broad portfolio at multiple price points •Review of informationsupply chain footprint to ensure efficient delivery of products to customers
•Direct engagement with key customers during market visits
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Main conclusions | | Key areasReporting to the Board •Regular performance updates by the Chief Executive, including customer and route-to-consumer concerns •Deep dive reviews on key regions or markets, including for focus |
• Strong satisfaction with the number of meetings, topics for discussion, quality and timeliness of Board papers
• Board had benefitted from deep dives on specific topics ensuring immersion into particular areas of interest
• Improvements noted in understanding of long-term consumer trends although more time could be allocated to idea generation, opportunity identification and potential impact of challenges
• Detailed views providedexample during fiscal 23 in relation to topicsLatin America and Caribbean, include consideration of customer relationships
Upcoming priorities •Scheduling face-to-face meetings for emerging areasDirectors to bemeet representatives of key customers during market visits •Enhancing relationships between the subject of future discussion by the Board
| | • Reviewing the format, timingcompany and agenda to enable better idea generation, opportunity identification and assessment of the
potential impact of challenges at future annual strategy meetings
• Continued shaping of agenda to ensure focus on highest value and identification ofits customers through engagement opportunities for deep-dive sessions and
external speakers, especially in relation to areas such as environmental sustainability measures, and digital and technological developments
• Continued vigilance in identifying and adapting to long-term trends and challenges, including societal trends
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Board, CommitteeStakeholder and Directors’ performance and effectiveness |
Main conclusionswhy we engage | | Key areas for focus |
Suppliers •Our suppliers, service providers and agencies are experts in their fields •We rely on them to deliver high-quality products and market responsibly •We collaborate with them to improve our collective impact, ensure sustainable and resilient supply chains, and make positive contributions to society | What we believe matters most to them •Strong, satisfaction with themutually beneficial partnerships •Strategic alignment and growth opportunities •Fair contract and payment terms •Collaboration to realise innovation •Consistent performance ofmeasures •Joint risk assessment and mitigation •Sustainability and societal credentials How the Board as a whole,seeks to engage •Periodic review of supply chain footprint in key markets to ensure resilience and flexibility, monitoring environmental impacts and efficiencies •Review and approval of material supply and procurement contracts including for critical raw materials •Supporting management in improving across a broad rangesupplier relationships through fair contract and payment terms, compliance with Diageo's 'Partnering with Suppliers Standard' and working collaboratively to mitigate environmental impacts and achieve ESG goals | Reporting to the Board •Terms of subjects and continuing to be top performing • Various examples of discussions during the year were cited as being demonstrative of the Board’s positive performance and ability to provide high-quality and robust debate
• Performance, transparency and openness of Executive Directors and Chairman noted in particular
• Broad satisfactionmaterial contracts with the amount of time allocated to enable full discussion at Board and Committee meetings
• Flexibility providedsuppliers are reviewed by Board through access to specialist or technical advice, with external advisors attending meetings, establishing committees of the Board
•Periodic updates provided to address specific matters, and deep-dive and risk review sessions • Strong support for the effectiveness of the Board in balancing short-termrelation to supply chain agility programme rollout
•Supply chain sustainability and performance matters with long-term strategic thinkingother ESG data included in quarterly 'Society 2030: Spirit of Progress' reports provided to the Board
Upcoming priorities
| | • Continue to reinforce and nurture the cultureContinued focus on rollout of transparency and openness in Board and Committee meetingssupply chain agility programme • Increase time allocation forMonitoring impact of supply chain disruption on operations, including through Audit Committee meetings by adding a further meetingrisk reviews •Supervision of initiatives to the Board’s annual cycle • Ensure adequate time is allocated to Nomination Committee meetings
improve sustainability and supply chain resilience
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Stakeholder
Communities •We aim to create long-term value for the communities in which we live, work, source and sell •We can help build thriving communities and strengthen our business through empowering people, increasing access to opportunities and championing inclusion and diversity | What we believe matters most to them •Impact of our operations on the local economy •Access to skills development, employment and supplier opportunities •Inclusion, diversity and tackling inequality in all forms •Responsible use of natural resources, biodiversity and sustainability •Transparency and engagement |
Main conclusionsHow the Board seeks to engage •Setting targets and monitoring progress on broader societal matters, including promoting positive drinking, inclusion and diversity •Considering the environmental and social consequences for communities of its key decisions, including encouraging inclusion and diversity, equal employment opportunities, skills development and support for communities and through wider value chains
| | Key areas for focusReporting to the Board •Quarterly reports provided to Board on progress made in relation to 'Society 2030: Spirit of Progress' targets •Reports on macro-economic and socio-political events provided to Board by management Upcoming priorities •Monitoring progress in relation to positive drinking programmes, including SMASHED and similar initiatives •Supporting management in advocacy in relation to water stewardship ambitions |
Investors • Seven categoriesWe want to enable equity and debt investors to have an in-depth understanding of our strategy, our operational, financial and holistic performance, so that they can more accurately assess the value of our business and the opportunities and risks of investing in it | What we believe matters most to them •Strategic priorities, opportunities and risks •Financial performance •Corporate governance •Leadership credentials, experience and succession •Executive remuneration policy •Shareholder returns •Environmental, inclusion and diversity, and social commitments and progress How the Board seeks to engage •Regular engagement between key stakeholder groups were identified: people, consumers, customers, suppliers, communities, investors and governmentChief Executive and regulatorsChief Financial Officer through Investor Relations programme of events •Participation in investor conferences such as the Consumer Analyst Group of New York meeting in February 2023 •Hosting investor events such as the Diageo Scotch day in June 2023 •Attendance at the Annual General Meeting in October 2022, including responding to questions from shareholders | Reporting to the Board •Monthly reports compiled by Investor Relations team provided to the Board, has sufficient visibilityproviding details on engagement sessions with investors and clarity as to wider stakeholder interests in its decision-making processes, although improvements could be made in certain areaskey trends • Good understandingBiennial survey of investor perceptionssentiment carried out by external consultancy and viewsreport provided to the Board
Upcoming priorities
| | • Ensuring wider stakeholder interests continueContinued proactive engagement with investors through structured programme of engagement activities over the year •Preparing for the Annual General Meeting to be considered as partheld in September 2023 •Engaging directly with investors through roadshow following announcement of decision-making processes • Increased focus on ESG matters through regular sessions at Board meetings
• Continued regular review of investor interests and developments
• Increased visibility for the Board on the company’s relationships with certain stakeholder groupsfiscal 23 results
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Culture, values
Governments and purpose |
Main conclusionsRegulators•The regulatory environment is critical to the success of our business •We share information and perspectives with those who influence policy and regulation to enable them to understand our views on areas that can impact public health and our business | | Key areas for focus |
What we believe matters most to them • Strong senseCompliance with applicable laws and regulations •Contribution to national and local economic development and public health priorities •International trade, excise, regulation and tackling illicit trade •Tackling harmful drinking and the impact of connectionresponsible drinking initiatives •Climate change and water sustainability agendas, including carbon reduction, human rights, environmental impacts, sustainable agriculture, biodiversity and support amongst Directors for Diageo’s purposecommunities How the Board seeks to engage •Indirect engagement through periodic updates from Chief Executive and corporate relations executives •Review of 'Celebrating life, everyday, everywhere'macro-economic and geopolitical developments as part of strategy sessions • Board demonstrates ethical leadership and displays the behaviours expected in a manner consistent with Diageo’s purpose and ambition • Strategy of the company is consistent with its purpose, values and ambition
• Appropriate tone at the top permeates the organisation to ensure adequate focusUpdates on corporate reputation and the management of reputational risk
• Satisfaction with how values and expected behaviours have been communicated within the company and externally to stakeholders
| | • Continued focus on ensuring that behaviours of management throughout the organisation are consistent with the company’s purpose and values, and are consistent with communicationsregulatory developments, including in relation to ethical business practicesnon-financial reporting, corporate governance and public policy
| Reporting to the Board • Continued emphasisReports on driving cultural change, ensuring agilitysocio-political events and speedissues periodically provided to the Board •Developments in regulatory matters, including governance and reporting obligations, are consistently maintained throughoutincluded in biannual reports to the organisationBoard prepared by management Upcoming priorities • Continued emphasis on effectiveness of Diageo’s contributions to societyMonitoring developments in regulation and effectiveness of the company’s processes and requirementsbest practice in respect of suppliersnon-financial reporting requirements, corporate governance and customersaudit regime •Supporting management's advocacy in relation to key public policy matters including water stewardship, positive drinking, inclusion and diversity |
RelationsPrincipal Board decision – Transforming our business processes and systems
In May 2022, the Board approved the commencement of a multi-year project with shareholders
the aim of improving Diageo’s internal processes and upgrading its financial systems and technology. This project is expected to be a significant business change programme introducing more intuitive business processes, powered by technology, to provide better access to data and information in order to enable quicker and more informed decision-making. The Board’s primary contact with institutional shareholders is through the Chief Executive and Chief Financial Officer. The Chief Executive and Chief Financial Officer are supported by the investor relations department,project, which is in regular contact with institutional shareholdersexpected to be implemented over a five-year period, has been designed to enhance Diageo’s business resilience and sell-side analysts.controls environment through simplifying and standardising the group’s ways of working across its functional domains. A monthly investor relations report, including coveragekey part of the company by sell-side analysts, is circulatedproject will be a transition to a new cloud-based enterprise resource planning platform, SAP S/4 HANA, which will be used to manage Diageo’s day-to-day business activities, enabling the Board.
The Board also ensures that all Directors develop an understandingflow of data between the group’s business processes in a way which minimises duplication and provides data integrity. During the course of fiscal 23, the progress of the views of major institutional shareholders through a periodic independent survey of shareholder opinion. In addition, major shareholders are invited to raise any company matters of interest to them at meetings with the Chairman ofproject has been monitored by both the Board and Audit Committee due to its importance to the Chairmancompany’s controls and reporting capabilities. For example, at its meetings in January 2023 and April 2023 the Audit Committee reviewed reports from the project team and supervised key decisions. These included the appropriate timing and phasing of rollout of the Remuneration Committee. Reportsproject, the need to ensure standardisation of end-to-end process ownership through a global process ownership model, the establishment of appropriate governance structures for the project, and the selection and engagement of key third-party suppliers and partners for implementation.
The Board has also considered a number of broader interdependencies between this project and other matters, including its relationship with the company’s culture and workforce capabilities, and the impact of the project on the scope of work of certain other functions. One related matter was the impact of the change in the company's functional currency to US dollar which took effect from 1 July 2023, as noted on page 279. As it was important to ensure that the company's reporting systems were capable of operating in a different currency, the Board was kept informed of the work being undertaken to prepare the company's reporting systems to minimise any meetings are madedisruption and ensure a smooth transition. As a result, when the functional currency change took effect, the Board approved go live of the systems change and approved a change in the company's presentation currency to US dollar to provide a better alignment of the reporting of Diageo's performance with its business exposures. The Board has also decided that commencing with the interim dividend to be declared in January 2024 and paid in April 2024, it intends to declare future dividends denominated in US dollar but that, subject to the Board.relevant resolutions being passed at the forthcoming AGM, holders of ordinary shares will continue to receive their dividends in sterling and will be offered the option to elect to receive their dividends in US dollar instead while holders of the company's ADRs will continue to receive dividends in US dollar as is currently the case.
Shareholders are invited to write toThe potential implications of the Chairman or any other Directorproject on key stakeholder groups have been important factors in these considerations, as required under Section 172 of the Companies Act. These have included:
•the impact of this project on the day-to-day activities and express their views on any issuesexperience of concern at any time,employees and the AGM provides an opportunity for shareholderswider workforce, including in particular the importance of simplification and streamlining of internal processes, as noted by feedback consistently received through the various engagement structures used by the Board to put their questionsunderstand workforce views;
•the improved capabilities in person.terms of accessibility and robustness of data as a result of implementing the new platform, which should enable quicker reporting both internally but also to external stakeholders including regulators and authorities;
•the benefits for investors and analysts in better understanding business performance by minimising foreign exchange volatility through the presentation of results and declaration of dividends in US dollars, consistent with the company's functional currency and more representative of its underlying business;
•the ability to offer choice to shareholders as to which currency in which to receive payment of dividends; and
•the implications of the new platform for supply chain third parties and customers, including customer and vendor lifecycle management processes, product sales reporting and returnable packaging management.
Wider stakeholder engagement
Diageo has ambitious goals across a variety of social and environmental targets and has a long track record of working with stakeholders to achieve these goals. Our ambition to be one of the best performing, most trusted and respected consumer products companies in the world can only be achieved through engagement and partnership with our stakeholders. The Board and its members have engaged directly and indirectly with a number of its key stakeholders during fiscal 23, which has seen continued volatility and uncertainty in many markets and has sought to understand and respond to stakeholder considerations in making its decisions and determining the company’s strategy and goals. These include the following activities:
•During fiscal 23, the Board met and engaged with the company’s key customers in North America, discussing their experience of working with Diageo including over the period of the Covid-19 pandemic, how the company’s ‘Raising the Bar’ programme and other support measures assisted them during this period and the impact of inflation and cost-of-living pressures on current consumer trends. Feedback received from customers in different markets is also reported to the Board by the Chief Executive in her regular performance summaries. Customer feedback about market trends and consumer activity, as well as the performance of the company’s portfolio, is an important input into the company’s consumer insights tools which are used as guidance for innovation, product development and marketing initiatives.
•The Board has continued its annual cycle of visits to different Diageo offices and production sites during fiscal 23. Directors met in Scotland in November 2022 for a multi-day meeting including an immersion into our production processes and facilities and a deep dive into the commercial and marketing aspects of our scotch whisky business. Meeting a broad group of employees supporting our production and scotch businesses enabled a deep understanding of the complexity of long-term forecasting and demand planning on production and maturation timelines for aged liquids. This is particularly relevant to recent decisions in relation to significant capital investment in our supply chain including in distillation and maturation capacity, where learnings from our supply sites in Scotland can be applied in relation to developing our supply capacity in other markets, including for example in respect of tequila production in Mexico.
•The Board’s workforce engagement programme is a well-established process with regular engagement sessions held with different parts of the global workforce over the course of the year, involving all Non-Executive Directors. These sessions provide Non-Executive Directors with insights into the company’s culture which are then fed back to the company’s engagement teams and used to shape our approach to people. See page 142-143 for this year’s workforce engagement statement which includes further details of the programme.
•Engagement with investors and analysts has remained a focus during fiscal 23, with a programme of regular meetings, calls and other engagement activities coordinated by the Investor Relations function. Highlights include participation by Board members, including the former and current Chief Executives and the CFO, alongside other senior executives at the annual Consumer Analyst Group of New York meeting held in February 2023 in Florida. Investor representatives and analysts were also invited to attend a presentation at Johnnie Walker Princes Street in Edinburgh which focussed on the company’s scotch whisky portfolio and business led by the current Chief Executive supported by the Chief Marketing Officer and the Chief Financial Officer, which was also webcast. Materials from these sessions are available on https://www.diageo.com/en/investors/results-reports-and-presentations.
Further information on our stakeholders, what we think is important to them and how the Board engages and responds to them can be found on pages 137-140. A case study summarising how stakeholder considerations were taken into account by the Board during fiscal 23, as required by Section 172 of the Companies Act, in respect of one of its principal decisions is set out on page 141.
Executive direction and control
Executive Committee
The Executive Committee, appointed and chaired by the Chief Executive, supports himher in discharging hisher responsibility for implementing the strategy agreed by the Board and for managing the company and the group.
It consists of the individuals responsible for the key operational and functional components of the business: North America, Europe, and Turkey, Africa, Latin America and Caribbean, Asia Pacific, International Supply CentreChain and Procurement and Corporate.
The Executive Committee focusesfocusses its time and agenda to align with the Performance Ambition and how to achieve Diageo’s financial and non-financial performance objectives. Performance metrics have been developed to measure progress. There is also focus on the company’s reputation. In support, monthly performance delivery calls, involving the senior leadership group,managing directors of each market, focus on current performance.
Committees appointed by the Chief Executive and intended to have an ongoing remit, including the Audit & Risk Committee, Finance Committee and Filings Assurance Committee, are shown (with their remits) at https://www.diageo.com/en/our-business/corporate-governance/committees/.corporate governance.
Filings Assurance CommitteePerformance evaluation
The Filings Assurance CommitteeWith the assistance of the company, which is chairedCompany Secretary, the evaluation of the Board's effectiveness, including the effectiveness of the Board's Committees and Directors, was undertaken from December 2022 to January 2023. The purpose of the evaluation was to review and evaluate how the Board and its Committees operate as measured against current best practice corporate governance principles framed by reference to Principle L and Provisions 21, 22 and 23 of the Code.
This year's evaluation was an internally managed process, comprising an online questionnaire for all Directors to complete, designed to gather an assessment of the level of satisfaction with specific areas and to enable each Director to express their views on them. The evaluation focused on Directors' views on three areas, being (i) Board composition, balance and performance, (ii) Board and Committee topics, support and provision of information, and (iii) Committees' effectiveness and performance. Responses to questions were sent to the Chairman of the Board and responses on the effectiveness of the Committees were also submitted to the respective Committee Chairmen. Following receipt of responses on the evaluation on the Chairman, the Senior Independent Director held a meeting with the Directors without the Chairman present to provide feedback in relation to the Chairman, consistent with the requirements of the Code. The results of the evaluation process were reviewed by the Chief Financial OfficerBoard at its meeting in January 2023 at which various actions were agreed to be taken. It is the Board’s intention to continue to review annually its performance and includes the Chief Executive, is responsible for implementingthat of its Committees and monitoring the processes which are designedindividual Directors, with such evaluation being carried out by an external facilitator every three years. The evaluation to ensure that the company complies with relevant UK, US and other regulatory reporting and filing provisions, including those imposedbe undertaken in 2023 will be carried out by the U.S. Sarbanes-Oxley Act of 2002 or derived from it. As at the end of the period coveredcalendar year with the assistance of an external facilitator, which will be engaged in due course following completion of a tender process. The Chairman has confirmed that the Non-Executive Directors standing for re-election at this year’s AGM continue to perform effectively, both individually and collectively as a Board, and that each demonstrates commitment to their roles. The main conclusions and key areas for focus highlighted by the Form 20-FDecember 2022 evaluation are set out in the table below.
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| Main conclusions | Key actions for focus |
| General feedback |
•Broad satisfaction with the composition, expertise and performance of the Board and content of its meetings •Diversity, inclusivity and openness of the Board are strengths •Performance of the Committees was felt to be strong and led well by the respective Chairs | •Continue to encourage culture of open discussion amongst Board members and with Executive Committee members •There remain opportunities for improvement in the interactions between management and Board members |
| Board composition |
•Board members feel well integrated into the Board and company •Strong focus on succession planning, particularly over the short to mid term •Transition in Board composition will require continued focus on key areas of expertise and experience | •Continue focus on Board and management succession planning and on ensuring pipeline of high-quality, diverse talent •Identify key areas for additional expertise and focus recruitment and talent pipeline on these areas in particular |
| Strategic focus |
•Continued focus on medium and longer-term issues, including tracking of key strategic decisions and investments •Regular discussions of culture and values are welcomed •Continued focus on ‘Society 2030: Spirit of Progress’ programme including approach to reporting in light of changing regulatory environment •Opportunities to enhance strategic focus of Board discussions, including in respect of emerging trends over the medium and long term •The workforce engagement process has been effective and beneficial | •Increase focus on key strategic matters, emerging trends and medium to long-term issues, ensuring appropriate allocation of time and resources •Schedule post-completion reviews of key strategic decisions •Identify alternative ways of reporting progress in relation to ongoing initiatives and projects
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| Company secretarial support |
•Broad recognition of an effective Company Secretarial function and the support provided to the Board •Re-design of the Board induction process has been very positive •Pre-read materials have improved significantly; however, there is a desire for even greater focus on key issues | •Continue to find opportunities for Board to engage with workforce in different geographies and to visit production facilities, sites and offices •Continue to develop and enhance induction process for new Directors •Continue focus on ensuring high-quality pre-read materials, action closure and time allocation |
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Workforce Engagement statement
At Diageo, creating an inclusive culture and an environment where people can openly share their views and feel listened to is key to sustaining high levels of engagement and remaining a great place to work.
To help us understand colleagues’ experience at Diageo, we listen to their views using formal and informal channels. Diageo’s Workforce Engagement programme is an important way for the Board to gather employee insights and feedback on key topics, including culture, strategy and ways of working. It is also a valued opportunity for teams to have direct access to members of the Board.
Diageo’s Chairman has acted as Non-Executive Director designated to workforce engagement over the past four years. In fiscal 23, together with all Non-Executive Directors, twelve sessions were held with 948 colleagues across all regions, functions and organisational levels.
Sessions have been highly engaging, with the Chairman and Non-Executive Directors valuing open conversations. These have highlighted many positive aspects of Diageo’s culture, as well as areas of opportunity.
The themes emerging from these workforce engagement discussions are:
•Colleagues shared their pride in working for Diageo and attributed this to the company’s advantaged culture, which connects them with Diageo’s purpose and brands, as well as the quality of leadership and management’s focus on performance.
•Diageo’s ongoing commitment to ‘Society 2030: Spirit of Progress‘ targets, including a leading approach to inclusion and diversity, as well as an embedded approach to doing business in the right way were positive highlights in the discussions.
•The calibre of talent across the business is seen as a strength and colleagues spoke positively about opportunities for learning and career development.
•Overly complex systems and processes were highlighted as barriers that can at times prevent colleagues from operating in the most efficient way. Improvements are being felt, and colleagues spoke positively of Diageo’s commitment to invest further in this area, including Diageo’s recently announced five-year investment into global digital transformation.
•Colleagues acknowledged positive shifts that are helping to speed up decisions, such as stronger cross-market collaboration, freedom to test and learn and quicker decision-making.
These themes were also reflected in this year's strong engagement results seen in the global employee survey, Your Voice, where engagement levels grew a further 1% to 84%, and pride in working for Diageo is at an all-time high at 91%.
Insights gathered from workforce engagement sessions held by the Board, alongside broader listening tools such as Your Voice survey, have helped to listen and respond to the perspectives of our employees, as well as identify specific areas to further enhance our employee experience.
In this coming year, ended 30 June 2020,Karen Blackett has taken over accountability as the Filings Assurancedesignated Non-Executive Director for workforce engagement. Karen, along with all other Non-Executive Directors, will continue to engage in meaningful conversation with a wide range of colleagues to help shape our culture, policies and ways of working, and ensure these insights help to inform the Board’s decision-making.
Purpose, values and culture
The Board is responsible for establishing Diageo’s purpose, values and culture and for monitoring how embedded that culture is within our business. Diageo has a long-established purpose and set of values which resonate strongly with our employees, as indicated by the Board's engagement sessions with Diageo's workforce and our employee surveys. We are very conscious that Diageo must operate with the highest standards of governance, doing business the right way, from grain to glass. This principle is embedded in our Code of Business Conduct and global policies, aligned with our ‘Society 2030: Spirit of Progress‘ goals, and reflected in our ways of working. We are pleased that we have a strong reputation for inclusion and diversity which reflects our values, attracts the best talent and enables our people to succeed. In order to improve our pace, agility and resilience, we continue to look to simplify and streamline our internal processes including through the launch of a significant business process and systems transformation project which is implemented in phases over the next few years, further details of which are set out on pages 140-141.
There are a number of ways in which the Board monitors and assesses culture, including:
Site visits
Directors are encouraged to visit the group’s offices, production facilities and sites in different markets and regions so that they can get a better understanding of the business and interact with employees and the wider workforce. Over the last year, Directors have visited the company's headquarters in London on a number of occasions as well as our offices in New York, meeting and interacting with employees. There have also been visits to our spirits production facilities, scotch brand homes and visitor centres in Scotland and a number of Directors have also travelled or are planning to travel to other locations, including our tequila operations in Mexico. At these locations, Directors get the opportunity to meet and discuss issues with employees, to see how Diageo’s safety and sustainability processes work in practice, to talk with local management and workforce and to assess how effectively Diageo’s culture is communicated and embedded at all levels. As part of the Board's workforce engagement programme, Non-Executive Directors regularly hold in-person and virtual meetings, townhalls and question and answer sessions with Diageo employees in different locations over the course of the year.
Employee surveys
The Board receives reports from the Chief HR Officer on the results of the company’s global annual ‘Your Voice’ survey, including levels of employee engagement, employee perceptions of Diageo’s purpose and of their line managers (including net promoter scores), and any themes raised. The survey results also give visibility of areas on which management must continue to focus, including continued simplification and process improvement work across the business. Results of this year's 'Your Voice' survey are indicated on page 43.
SpeakUp allegation reporting
The Business Integrity team provides regular reports to the Audit Committee of allegations of breaches of the Code of Business Conduct and other group policies, including those received through our confidential and independent whistleblowing service SpeakUp. These reports also include analyses of emerging trends, investigation status reports and closure rates, and summaries of actions taken. These reports enable the Directors to gain an understanding of common issues and action planning, as well as providing insights into how embedded Diageo’s purpose, values and culture are across its markets and functions.
For more details of the SpeakUp service, see page 150.
Workforce engagement programme
Insights drawn from the Board’s annual programme of workforce engagement are used by the Board to monitor and assess the culture of the company, with recommendations being fed back to management regularly with workforce engagement being discussed at Board meeting sessions twice a year. Over the participationpast few years, the engagement programme has expanded to enable all Non-Executive Directors to participate by directly engaging with employees from a variety of the Chief Executiveregions, functions and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of disclosure controls and procedures. These are defined as those controls and procedures that are designed to ensure that information required to be disclosed in reports filed under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarised and reported within the time periods specifiedlevels in the Commission’s rules and forms and include, without limitation, controls and procedures designedbusiness. From 1 July 2023, the role of Non-Executive Director with responsibility for workforce engagement transitioned from the Chairman to ensure that information required to be disclosed in the reports of the company is accumulated and communicated to management, including the Chief Executive and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of the date of the evaluation, the Chief Executive and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the company files or submits under the Exchange Act is recorded, processed, summarised and reported within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to the management of the company, including the company’s Chief Executive and the Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
Karen Blackett. For more on workforce engagement, see pages 142-143.
Additional information
Internal control and risk management
An ongoing process has been established for identifying, evaluating and managing risks faced by the group. This process, which complies with the requirements of the Code, has been in place for the full financial year and up to the date the consolidated financial statements were approved and accords with the guidance issued by the FRC in September 2014, entitled 'Guidance‘Guidance on Risk management,Management, Internal Control and relatedRelated Financial and Business Reporting'Reporting’. The Board confirms that, through the activities of the Audit Committee described below, a robust assessment of the principal and emerging risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity, has been carried out. These risks and their mitigations are set out above in the section of thisthe UK Annual Report dealing with principal risks.
and emerging risks on pages 113 to 123.
The Board acknowledges that it is responsible for the company’s systems of internal control and risk management and for reviewing their effectiveness. The Board confirms that, through the activities of the Audit Committee described below,in its report, it has reviewed the effectiveness of the company’s systems of internal control and risk management.
During the year, in line with the Code, the BoardAudit Committee considered the nature and extent of the risks itthat the Board was willing to take to achieve its strategic goals and reviewed the existing internal statement of risk appetite, (which was considered and recommendedwhich had been updated this year by the Executive Audit & Risk Committee, following which the Audit Committee made a recommendation to the Board which was then approved. The Audit Committee reviews the company's principal risks regularly throughout the year in accordance with a schedule proposed by bothmanagement with each such risk being reviewed by management in the Audit & Risk Committee andprior to it being considered by the Audit Committee). In accordance with the Code,Committee. The Board also regularly reviews emerging and disruptive risks as part of its Annual Strategy Conference, held this year in April in New York, from which a number of topics are identified for more detailed review by either the Board has also considered the company’s longer term viability, based on a robust assessment of its principal risks. This was done through the work ofor the Audit Committee which recommendedover the Viability statement to the Board.
In accordance with the Code, the Board has also considered the company’s longer-term viability, based on a robust assessment of its principal risks. This was done through the work of the Audit Committee which recommended the Viability statement to the Board.
following 12 months. The company has in place internal control and risk management systems in relation to the company’s financial reporting process and the group’s process for the preparation of consolidated accounts. Further, a review of the contents of the company's public filings and disclosures, including its consolidated financial statements and non-financial disclosures, is completed by management through the Filings Assurance Committee to ensure that the contents of the company's interim and preliminary results announcements, Annual Report and Form 20-F appropriately reflect the non-financial and financial position and results of the group are appropriately reflected.group. Further details of this are set out in the Audit Committee report on page 154.pages 146-153.
Compliance and ethics programme
Diageo is committed to conducting its business responsibly and in accordance with all laws and regulations to which its business activities are subject. We hold ourselves to the principles in our Code of Business Conduct, which is embedded through a comprehensive training and education programme for all employees. Our Code of Business Conduct and other Diageo global policies are available at www.diageo.com/en/our-business/corporate-governance/our-code-of-business-conduct/.
Viability statement
In accordance with the requirementsCode, the Board has also considered the company’s longer-term viability, based on a robust assessment of its principal and emerging risks. This was done through the Sarbanes-Oxley Act (and related SEC rules), Diageo has adopted a codework of ethics covering its Chief Executive, Chief Financial Officer, Presidents and other identifiable persons in the group, including those performing senior accounting and controller functions. No amendments to, or waivers in respect of, the code of ethics were made during the year.
The full text of the code of ethics is available at www.diageo.com/PR1346/aws/media/4051/code-of-ethics.pdf.
Both the Audit & Risk Committee and the Audit Committee regularly reviewwhich recommended the strategy and operationViability statement to the Board. For further information about how the Board has reviewed the long-term prospects of the compliancegroup, see page 94 of the UK Annual Report.
Going concern
Management prepared cash flow forecasts which were also sensitised to reflect severe but plausible downside scenarios taking into consideration the group's principal risks. In the base case scenario, management included assumptions for mid-single digit net sales growth, operating margin improvement and ethicsglobal TBA market share growth. In light of the ongoing geopolitical volatility, the base case outlook and severe but plausible downside scenarios incorporated considerations for a prolonged global recession, supply chain disruptions, higher inflation and further geopolitical deterioration. Even under these scenarios, the group’s liquidity is still expected to remain strong, as it was protected by issuing €500 million of fixed rate euro and $2 billion of fixed rate dollar-denominated bonds in the year ended 30 June 2023. Mitigating actions, should they be required, are all within management’s control and could include reductions in discretionary spending such as acquisitions and capital expenditure, as well as a temporary suspension of the share buyback programme throughand dividend payments in the year.next 12 months, or drawdowns on committed facilities. Having considered the
outcome of these assessments, the Directors are comfortable that the company is a going concern for at least 12 months from the date of signing the group's consolidated financial statements.
Political donations
The group has not given any money for political purposes in the United Kingdom and made no donations to EU political organisations and incurred no EU political expenditure during the year.
The group made contributions to non-EU political parties totalling £0.38£0.83 million during the year (2019 - £0.38(2022 – £0.64 million). These contributions were made almost exclusively to federal and state candidate committees, state political parties and federal leadership committees in North America (consistent with applicable laws), where it is common practice to make political contributions. No particular political persuasion was supported and contributions were made with the aim of promoting a better understanding of the group and its views on commercial matters, as well as a generally improved business environment.
Going concern
The potential financial impact of the Covid-19 pandemic has been modelled in our cash flow projections and stress tested by including several severe but plausible downside scenarios which are linked to our principal risks. In our downside Covid-19 scenario, we have considered the key impacts of the pandemic for each region including the potential restrictions on the sale of our products in both on trade and off trade channels. We have then considered the expected duration of those restrictions, as well as a forecast for the length of time to recovery (a return to 2019 volumes), based on industry projections. As a result of these factors, in our severe but plausible scenarios, we do not anticipate that the on-trade business recovers to volumes experienced in the year ending 30 June 2019 within the next 18 month period. Even with these negative sensitivities for each region taken into account, the group’s cash position is still considered to remain strong, as we have protected our liquidity by increasing the level of committed facilities and accelerating certain bond issuance programmes. Mitigating actions, should they be required, are all within management’s control and could include reduced advertising and promotion spend, dividend cash payments, non-essential overheads and non-committed capital expenditure in the next 12 months. Having considered the outcome of these assessments, it is deemed appropriate to prepare the consolidated financial statements on a going concern basis. Although not assessed over the same period as the going concern, the viability of the group has been assessed above.
Management’s report on internal control over financial reporting
Management, under the supervision of the Chief Executive and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over the group’s financial reporting.
Diageo’s internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the EU and IFRS as issued by the International Accounting Standards Board (IASB); provide reasonable assurance that receipts and expenditures are made only in accordance with authorisation of management and the directors of the company; and provide reasonable assurance regarding prevention or timely detection of any unauthorised acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Management has assessed the effectiveness of Diageo’s internal control over financial reporting (as defined in Rules 13(a)-13(f) and 15(d)-15(f) under the United States Securities Exchange Act of 1934) based on the framework in the document ‘Internal Control – Integrated Framework’, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Based on this assessment, management concluded that, as at 30 June 2020, internal control over financial reporting was effective.
Any internal control framework, no matter how well designed, has inherent limitations, including the possibility of human error and the circumvention or overriding of controls and procedures and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, who also audit the group’s consolidated financial statements, has audited the effectiveness of the group’s internal control over financial reporting, and has issued an unqualified report thereon, which is included on pages 196 to 198 of this document.
Changes in internal control over financial reporting
During the period covered by this report, there were no changes in internal control over financial reporting that have materially affected or are reasonably likely to materially affect the effectiveness of internal control over financial reporting.
Directors’Directors' responsibilities in respect of the Annual Report, Form 20-F and financial statements
The Directors are responsible for preparing the Annual Report, the information filed with the SEC on Form 20-F and the group and parent company financial statements in accordance with applicable law and regulations.
New York Stock Exchange corporate governance rulesregulation. Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have prepared the group consolidated financial statements in accordance with UK-adopted international accounting standards and the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 ‘Reduced Disclosure Framework’, and applicable law). In preparing the group consolidated financial statements, the Directors have also elected to comply with International Financial Reporting Standards issued by the International Accounting Standards Board (IFRSs as issued by IASB).
Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of the profit or loss of the group and parent company for that period. In preparing the financial statements, the Directors are required to:
•select suitable accounting policies and then apply them consistently;
•state whether applicable SEC rulesUK-adopted international accounting standards, IFRSs issued by IASB have been followed for the group financial statements and United Kingdom Accounting Standards, comprising FRS 101 ‘Reduced Disclosure Framework’ and applicable law have been followed for the parent company financial statements, subject to any material departures disclosed and explained in the financial statements;
•make judgements and accounting estimates that are reasonable and prudent; and
•prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and company will continue in business.
The Directors are responsible for safeguarding the assets of the group and parent company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are also responsible for keeping adequate accounting records that are sufficient to show and explain the group’s and parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the group and parent company and enable them to ensure that the financial statements and the NYSE’sDirectors’ Remuneration Report comply with the Companies Act 2006. The Directors are responsible for the maintenance and integrity of the corporate governance rules for listed companies, Diageo must disclose any significant ways in which its corporate governance practices differ from those followed by US companies under NYSE listing standards.
Diageo believes the following to be the significant areas in which there are differences between its corporate governance practices and NYSE corporate governance rules applicable to US companies. Thisfinancial information is also providedincluded on the company’s website at www.diageo.com.website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
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– | Basis of regulation: UK listed companies are required to include in their annual report a narrative statement of (i) how they have applied the principles of the Code and (ii) whether or not they have complied with the best practice provisions of the Code. NYSE listed companies must adopt and disclose their corporate governance guidelines. Certain UK companies are required to include in their annual report statements as to (i) how directors have complied with s.172 of the UK Companies Act 2006, which requires directors to promote the success of the company for the benefit of the members as a whole, having regard to the interests of stakeholders, (ii) how directors have engaged with and taken account of the views of the company’s workforce and other stakeholder groups. Diageo complied throughout the year with the best practice provisions of the Code and the disclosure requirements noted above. |
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– | Director independence: the Code requires at least half the Board (excluding the Chairman) to be independent Non-Executive Directors, as determined by affirmatively concluding that a Director is independent in character and judgement and determining whether there are relationship and circumstances which are likely to affect, or could appear to affect, the Director’s judgement. The Code requires the Board to state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination. NYSE rules require a majority of independent directors, according to the NYSE’s own ‘brightline’ tests and an affirmative determination by the Board that the Director has no material relationship with the listed company. Diageo’s Board has determined that, in its judgement and without taking into account the NYSE brightline tests, all of the Non-Executive Directors (excluding the Chairman) are independent. As such, currently five of Diageo’s eight directors are independent. |
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– | Chairman and Chief Executive: the Code requires these roles to be separate. There is no corresponding requirement for US companies. Diageo has a separate chairman and chief executive. |
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– | Non-Executive Director meetings: NYSE rules require Non-Management Directors to meet regularly without management and independent directors to meet separately at least once a year. The Code requires Non-Executive Directors to meet without the Chairman present at least annually to appraise the Chairman’s performance. During the year, an internally facilitated evaluation of the Board’s effectiveness, including the effectiveness of the Chairman, was undertaken. During the year, Diageo’s Chairman and Non-Executive Directors met six times as a group without Executive Directors being present. |
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– | Board committees: Diageo has a number of Board committees that are similar in purpose and constitution to those required by NYSE rules. Diageo’s Audit, Remuneration and Nomination Committees consist entirely of independent Non-Executive Directors (save that the Chairman of the Nomination Committee, Javier Ferrán, is not independent). Under NYSE standards, companies are required to have a nominating/corporate governance committee, which develops and recommends a set of corporate governance principles and is composed entirely of independent directors. The terms of reference for Diageo’s Nomination Committee, which comply with the Code, do not contain such a requirement. In accordance with the requirements of the Code, Diageo discloses in its Annual Report the results and means of evaluation of the Board, its Committees and the Directors, and it provides extensive information regarding the Directors’ compensation in the Directors’ remuneration report. |
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– | Code of ethics: NYSE rules require a Code of Business Conduct and ethics to be adopted for directors, officers and employees and disclosure of any waivers for executive directors or officers. Diageo has adopted a code of business conduct for all directors, officers and employees, as well as a code of ethics for Senior Officers in accordance with the requirements of SOX. Currently, no waivers have been granted to directors or executive officers. |
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– | Compliance certification: NYSE rules require chief executives to certify to the NYSE their awareness of any NYSE corporate governance violations. Diageo is exempt from this as a foreign private issuer but is required to notify the NYSE if any executive officer becomes aware of any non-compliance with NYSE corporate governance standards. No such notification was necessary during the period covered by this report. |
AUDIT COMMITTEE REPORT
Ensuring integrity across the business
Audit Committee report
Dear Shareholder
On behalf of the Audit Committee, I am pleaseddelighted to present itsthe Committee’s report for the year ended 30 June 2020.
2023.
The purposeAudit Committee has discharged its responsibilities over the year by providing effective independent oversight, with the support of this report is to describe howmanagement and the external auditors. The Committee has carried out its responsibilities during the year. In overview, the role of the Audit Committee is to monitormonitoring and review:reviewing the integrity of the company’s financial statements and reporting;reporting, its internal control and risk management;management processes, its audit and risk programmes;activities, business conduct and integrity; ‘whistleblowing’;integrity, whistleblowing and breach allegation investigations, and the appointment and performance of the external auditor. Regular reports on internal audit findings, business integrity and controls assurance work, breach allegation and investigation processes were given to and reviewed by the Committee. The Committee has also reviewed the company's principal and emerging risks, its approach to risk appetite and mitigations and has reviewed deep dives into key areas of potential risk including supply chain disruption, pension funding, cyber security and IT resilience, climate change, counterfeit and product quality, pandemics and business interruption, business ethics and integrity, and international taxation.
The Committee has also supervised progress in relation to a business transformation project which the company has commenced this year and which, once implemented, will enhance the company's internal reporting, systems and data management capabilities. Further details of this project are set out on page 142.
DuringOver the past few years, we have been closely following proposed regulatory and reporting changes, including changes to the UK corporate governance and audit regimes, implications of future EU reporting requirements with regard to corporate sustainability and supply chain due diligence, and developments in US disclosure requirements including in relation to climate change. This year the Committee gave attentionhas supervised how the company is responding to all elements ofand preparing for these changes, in particular focussing on its remit with continued focus on particular topics within the company’s risk management programme and emerging trends, including product quality risk management, cyber security and data access risks, internal and third-party data management and migration risks, pensions funding status and governance, and controls testing. During the year, the Committee also reviewed external analyses relatingapproach as to the effectivenessdevelopment of internal processes and capabilities for the validation and assurance of externally reported information in anticipation of drafting an audit and assurance policy. The company has also taken further steps this year to integrate its financial and non-financial disclosure processes to improve consistency and robustness in reporting with oversight by the Committee. We have also commenced an audit services tender process during fiscal 23 which we expect to complete before the end of the company’s internal audit and controls, compliance and ethics functions, as well as internal reports on the steps being taken to address internal audit findings, controls issues and investigations.current year.
As part of the annual Board evaluation, all membersThe performance of the Audit Committee completed an evaluation of the Committee. This concludedwas again evaluated this year and I am pleased to note that members werefeedback from Directors indicated very satisfiedstrong satisfaction with the performance of the Committee. In orderCommittee's performance.
The Committee remains committed to ensure that adequate time is givencontinuing to enable the Committee to continue to carry outdischarge its duties to a high standard, it was decided to increase the number of meetings which it ordinarily holds each year. Further details of the evaluation can be found on pages 147-149.
In discharging its duties, the Audit Committee seeks to balance independent oversight of the matters within its remit with providing support and guidance to management. I am confident that the Committee, supported by members of senior management and the external auditor, has carried out its duties in the year under review effectively and to a high standard.diligently during fiscal 24.
Alan Stewart
Chairman of the Audit Committee
Role and composition of the Audit Committee
The Audit Committee is responsible for:
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– | monitoring the integrity of the financial statements, including a review of the significant financial reporting judgements contained in them; |
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– | reviewing the effectiveness of the group’s internal control and risk management and of control over financial reporting; |
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– | monitoring and reviewing the effectiveness of the global audit and risk function, including reviewing the programme of work undertaken by that function; |
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– | reviewing the group’s policies and practices concerning business conduct and ethics, including whistleblowing; |
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– | overseeing the group’s overall approach to securing compliance with laws, regulations and company policies in areas of risk; and |
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– | monitoring and reviewing the company’s relationship with the external auditor, including its independence and management’s response to any major external audit recommendations. |
The formal role of the Audit Committee is set outfully described in its terms of reference, which are available at https://www.diageo.com/en/our-business/corporate-governance/committees/. Key elements of the role of the Committee and work carried out during the year are set out as follows.
Composition of the Audit Committee
corporate-governance. The members of the Audit Committee are independent non-executive directors and it comprisesNon-Executive Directors being Alan Stewart (Committee Chairman), Melissa Bethell, Karen Blackett, Susan Kilsby, Ho KwonPingValérie Chapoulaud-Floquet, Sir John Manzoni, Lady Mendelsohn and Lady Mendelsohn.Ireena Vittal. The Board has satisfied itself that the membershipChairman of the Board, the Chief Financial Officer, the General Counsel & Company Secretary, the Group Controller, the Head of Global Audit & Risk (GAR), the Chief Business Integrity Officer, the General Counsel Corporate, the Group Chief Accountant and the external auditor regularly attend meetings of the Committee. The Audit Committee includes at least one Directormet privately with recentthe external auditor, the Chief Business Integrity Officer and relevantthe Head of GAR regularly during the year. During the course of the year, the Committee met five times and its duly appointed subcommittee met once. Details of attendance of all Board and Committee meetings by Directors are set out on page 126.
Reporting and financial experience and has competence in accounting and/or auditing and in the sector which the company operates, and that all members are financially literate and have experience of corporate financial matters.
Financial statements
During the year, the Audit Committee met five times (and a subcommittee met twice) and reviewed both the interim results announcement, which includedincluding the interim financial statements, and the annual reportsAnnual Report and associated preliminary results announcement focusingand Form
20-F, focussing on key areas of judgement and complexity, critical accounting policies, disclosures (including those relating to contingent liabilities, climate change and principal risks), viability and going concern assessments, provisioning and any changes required in these areas or policies. The Audit Committee has also focussed in particular on the company’s approach to assurance and internal approvals processes. The company has again looked to develop its non-financial reporting in a manner that enhances consistency with the financial reporting and throughout the Strategic Report, including in relation to compliance with the recommendations of the Task Force on Climate-related Financial Disclosures.
This year the Committee has also had oversight of management's transformation project to improve Diageo’s internal processes and upgrading its financial systems and technology, with a particular focus on its impact on the company’s controls and reporting capabilities. The impact of the change in the company's functional and presentational currency, which took effect in July 2023, was also considered by the Committee. Further details of this project are set out on page 142.
The company has in place internal control and risk management systems in relation to the company’s financial and non-financial reporting process andincluding the group’s process for the preparation of consolidated accounts.financial statements. A review of the consolidated financial statements and the draft Annual Report is completed by the Filings Assurance Committee (FAC) to ensure that the financial position and results of the group are appropriately reflected therein. In addition to reviewing draft financial statements for publication at the half and full year, the FAC is responsible for examining the company’s financial and non-financial information and processes,disclosures, the effectiveness of internal controls relating to financial and non-financial reporting and disclosures, legal and compliance issues and determining whether the company’s disclosures are accurate and adequate. The FAC comprises senior executives such as the Chief Executive, the Chief Financial Officer, the General Counsel & Company Secretary, the General Counsel Corporate & Deputy Company Secretary, the Group Controller, the Group Chief Accountant, the Head of Investor Relations, the Head of Global Audit & Risk, the Controls Assurance Director,GAR and the Chief Business Integrity Officer and theOfficer. The company’s external auditor.auditor also attends meetings of the FAC. The Audit Committee reviewed the work of the FAC and a report on the conclusions of the FAC process was provided to the Audit Committee by the Chief Financial Officer.
Significant issuesDiageo has carried out an evaluation, under the supervision and judgements that were considered in respectwith the participation of management, including the Chief Executive and Chief Financial Officer, of the 2020 financial statements were as follows. These includeeffectiveness of the matters relating to risks discloseddesign and operation of Diageo's disclosure controls and procedures (as defined in the UK external auditor’s report.
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– | Disclosure on the quality of the earnings (material items of income or expense) and one-off items included in cash flow. The Audit Committee agreed that sufficient disclosure was made in the financial statements. |
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– | The Audit Committee determined that exceptional items are appropriately classified considering their size and nature, and sufficient disclosure is provided in the financial statements (see note 4). |
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– | Review of carrying value of assets, in particular intangible assets. The Audit Committee assessed the impairment charge recognised and agreed that, at 30 June 2020, the recoverable amount of the company’s assets was in excess of their carrying value (see notes 6, 9 and 10). |
Governance (continued)
US Securities Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Annual Report. Based upon that evaluation, Diageo's Chief Executive and Chief Financial Officer concluded that, as of 30 June 2023, Diageo's disclosure controls and procedures were effective.
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– | Exchange rate used to translate operations in Venezuela. The Audit Committee agreed that the rate is reasonable for the year ended 30 June 2020 for consolidation purposes, that represents the best estimation of the rate at which capital and dividend repatriations are expected to be realised (see note 1). |
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– | Disclosure on taxation. The Audit Committee agreed that the separate presentation of the tax risk appropriately addresses the significant change in the international tax environment and sufficient and transparent disclosures are provided for the ongoing tax discussions (see page 28 and note 7). |
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– | Review of legal cases. The Audit Committee agreed that adequate provision and/or disclosure has been made for all material litigation and disputes, based on the current most likely outcomes, including the litigation summarised in note 18. |
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– | Assumptions used in respect of post employment plans. Having considered advice from external actuaries and assumptions used by companies with comparator plans, the Audit Committee agreed that the assumptions used to calculate the income statement and balance sheet assets and liabilities for post employment plans were appropriate (see note 13). |
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– | Viability statement. The Audit Committee noted that severe but plausible risk scenarios had been identified; a robust risk assessment had been carried out; and the group’s viability and going concern consideration proved with stress testing. Taking into account the company’s balance sheet position, the Audit Committee expected the group to be able to meet its liabilities as they fell due over the three-year period ending 30 June 2023. The risk that the group would become insolvent during this timeframe was considered remote. The Audit Committee recommended to the Board that the Viability statement be approved. |
As part of its review of the company's Annual Report and associated disclosures, the Audit Committee has considered whether the report is ‘fair, balanced and understandable’ (notingand provides the Code’s referenceinformation necessary for shareholders to ‘position’assess the company's position, performance, business model and strategy, as required by Principle N of the Code. In doing so, the Committee has noted the guidance issued by the FRC on this subject as well as ‘performance,best practice recommendations from external advisors. The Committee has considered factors such as whether the report includes descriptions of the business model, strategy and strategy’).principal risks which are sufficiently clear and detailed to enable users to understand their importance to the company, whether the report is consistent throughout with the narrative reflecting the financial statements and understanding of directors during the year, that information is presented fairly, without omission of material information and not in a manner which might mislead users.
The Committee has also considered the presentation of GAAP and non-GAAP measures to ensure appropriate prominence is given to GAAP measures and that non-GAAP measures are presented consistently and can be clearly reconciled. The Audit Committee has also considered the governance and processes undertaken by management in drafting, developing and reviewing the contents of the Annual Report, which have been designed to ensure the robustness and adequacy of the information contained in it, including review by and input from senior executives, the company's advisors and through the work of the FAC. On thethis basis, of this work, the Audit Committee recommended to the Board that it could make the required statement that the Annual Report is ‘fair, balanced and understandable’.
Internal control and risk management; audit and risk programme; business conduct and ethics (including ‘whistleblowing’)
At its meetings, the Audit Committee reviewed reports from the Head of the Global Audit & Risk (GAR) team, the Controls Assurance Director and the Chief Business Integrity Officer (including coverage of the areas mentioned in the title of this section) and had sight of the minutes of meetings of management’s Audit & Risk Committee. The work and reporting to the Committee of these functions during the year included focus on cyber security and data access risks, internal and third-party data management and migration risks, controls testing and steps being taken to address internal audit findings, controls issues and investigations. The Committee also reviewed reports prepared by external advisors relating to the effectiveness of the GAR team as well as the company’s compliance and ethics framework and function, and implemented various changes as a result of recommendations in those reports. The Committee also received regular updates from the General Counsel & Company Secretary on significant litigation and from the Head of Tax on the group’s tax profile and key issues.
FRC correspondence
The Committee also considered key risks and related mitigations, including those set out in the section of this Annual Report dealing with principal risks. Based on this activity during the year, the Audit Committee madereviewed a recommendationletter to the Board coveringcompany from the nature and extentFRC following their review of the risks itcompany's interim results announcement for the six months ended 31 December 2022. The Committee was willingpleased to takenote that the FRC had no questions or queries to achieveraise following their review, although their letter did include some matters which the FRC believed could be improved for the benefit to users. In its strategic goals and its internal statement of risk appetite (which was considered also by management’s Audit & Risk Committee). The Board agreed this recommendation.
Through the activities of the Audit Committee described in this report and its related recommendationsreply to the Board,FRC, the Board confirmscompany noted those comments and confirmed that it has reviewedthey would be taken into consideration in future reporting. The Committee notes that the effectiveness ofFRC's review does not provide assurance that the company’s systems of internal control and risk management and that thereinterim results were nocorrect in all material failings identified and no significant failings identified which require disclosure in this Annual Report.respects as the FRC's role is not to verify information but to consider compliance with reporting requirements.
External auditor
During the year, the Audit Committee reviewed the external audit strategy and the findings of the external auditor from its review of the interim results and its audit of the consolidated financial statements.
The Audit Committee reviews annually the appointment of the auditor (taking into account the auditor’s effectiveness and independence and all appropriate guidelines) and makes a recommendation to the Board accordingly. Any decision to open the external audit to tender is taken on the recommendation of the Audit Committee. There are no contractual obligations that restrict the company’s current choice of external auditor. Following the last tender process, PwC was appointed as auditor of the company in 2015. TheRichard Oldfield became the lead audit partner for the year ended 30 June 2020 was Ian Chambers2021, following the rotation of the previous partner, and has been the lead audit partner during the year ended 30 June 2023. After three years in role, Richard Oldfield is stepping down as the lead audit partner at PwC on the conclusion of the audit partner fromfor the year endingended 30 June 2021 onwards.2023. We thank Richard for his conduct of the audit during his tenure. Richard will be replaced by Scott Berryman. The selection process for the new lead audit partner was designed to identify the best qualified partner for the role, to ensure audit quality. A shortlist of candidates was identified and interviewed by the Chairman of the Audit Committee and the Chief Financial Officer. The final selection was based on feedback from those interviews as well as an assessment of the candidates’ experience and expertise. We look forward to working with Scott, who has extensive knowledge of UK and US reporting requirements, and who we believe will continue to ensure the quality of the audit.
As the company is required to have a mandatory audit tender after 10 years, and, as the Audit Committee considers the relationship with the auditors to be working well and remains satisfied with their effectiveness, the Audit Committee does not currently anticipate that it will conductmanagement has initiated an audit services tender before itprocess which is requiredexpected to do so.complete during the year ending 30 June 2024. The Audit Committee considers that it is appropriate to initiate such a process at this time in order to beprepare for an adequate transition during 2025 in the best interests of the company’s shareholders for the reasons outlined above and will continue to monitor this annually to ensure the timing for theevent that a new audit tender remains appropriate, taking into account the effectiveness and independence of the auditor.
firm is selected. The company has complied with the provisions of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 (CMA Order) for the year ended 30 June 2020.2023.
External auditor effectiveness and quality
The Audit Committee assesses the ongoing effectiveness and quality of the external auditor and audit process through a number of methods, commencing with identification of appropriate risks by the external auditor as part of its detailed audit plan presented to the Audit Committee at the start of the audit cycle. These risks were reviewed by the Committee and the work performed by the auditor was used to test management’s assumptions and estimates relating to such risks. The effectiveness of the audit process in addressing these matters was assessed through reports presented by the auditor to the Audit Committee which were discussed by the Committee at both the half-year, in January, and year-end, in July. Following completion of the audit process, feedback on the basis ofits effectiveness was provided through review meetings and a questionnaire-based internal review with the company’s finance team and management and completion of questionnaires, in advance of management and the auditor providing assessments of auditor effectiveness and quality to the Audit Committee for consideration at its meeting in December. This year the questionnaire was updated to ensure more focus on the extent to which the auditor had challenged management. The auditor assessment is undertaken based on guidance issued to audit committees by the FRC in April 2016 and draft Minimum Standards for Audit Committees published by the FRC in November 2022, and includes consideration of the findings of the FRC's Audit Quality Review team which published its report on PwC in July 2022, periodic regulatory review carried out by the PCAOB and the Quality Assurance Department of the Institute of Chartered Accountants in England and Wales, as well as benchmarking of the auditor as against its peers. In this year's assessment, the overall satisfaction with PwC's performance was rated as solid, remaining broadly flat as compared to the prior year. Decreases from the prior year resulted from two issues, being the audit process in relation to hyperinflation in Turkey and the audit of certain UK subsidiaries. Consistent strong feedback was provided as to auditor independence, quality control processes, professional expertise, business knowledge and quality communication between auditors and management, which was consistent with the prior year's assessment. Areas where continued focus was required included timely review and feedback on audit matters, better alignment in internal communication, resource continuity and use, pro-activity in driving efficiencies, provision of best practice examples of processes and controls, and transparency on audit activities throughout the year. It was concluded that the relationship between the auditor and management was strong and open, with open and clear communications on areas and views which are considered significant.
During the external audit, the auditor challenged management on its approach taken as to impairment testing, including in relation to the impact of business projects across a number of markets and economic conditions in India and Turkey, and other senior executives. judgemental matters such as pension valuations and tax assessments. The auditor also challenged management while preparing the Annual Report in relation to whether disclosures as to the impact of certain risks in the financial statements were sufficiently consistent with and linked to the risks and disclosures set out in the Strategic Report and whether there was sufficient balance in the Strategic Report. These challenges were assessed by the Audit Committee which sought additional evidence from management in support of their assessments, including requesting that independent legal opinions were provided as to certain tax positions.
External auditor independence
The group has a policy on auditor independence and on the use of the external auditor for non-audit services, which is reviewed annually, most recently in July 2020. The review takes into consideration effectiveness2023. When last reviewed, minor changes were agreed to be made to the policy’s contents, reflecting the change in functional currency of the company and upcoming expected changes to UK FRC regulation on non-audit services. Effective from 1 July 2020,certain other administrative changes. Under the auditor independence policy, any member of the PwC global network shall provide to the company, its subsidiaries or any related entity only permissible services, subject to the approval of the Audit Committee after it has properly assessed through its governance process the threats to independence and the safeguards applied in accordance with the FRC Ethical Standard.Standard and US Public Company Accounting Oversight Board rules. These services are set out in full in the policy and are generally those which the external auditor is best placed to provide, which may include reporting required by law or regulation to be performed by the auditor and services where the services are closely linked to audit work and where the auditor's understanding of the group is relevant to the services. Any FRC permissible service to be provided by the auditor, regardless of the size of the engagement, must be specifically approved by the Audit Committee or its nominated delegate.delegate (being the Chairman of the Audit Committee) based on a defined scope of pre-approved services. The policy explicitly specifies the auditor independence review and approval mechanism process by the Committee for permissible engagements costing more than £250,000.above the specified threshold of £100,000. Fees paid to the auditor for audit, audit-related and other services are analysed in note 3(b) to the consolidated financial statements. The nature and level of all services provided by the external auditor are factors taken into account by the Audit Committee when it reviews annually the independence of the external auditor. During the year, no non-assurance related services were provided by the external auditor to the company, its subsidiaries or any related entity other than personal tax services provided to two Non-Executive Directors and the provision of services in connection with the issuance of senior notes by a group company.
‘Financial
'Financial expert’, compositionrecent and other attendeesrelevant financial experience
The Board has satisfied itself that the membership of the Audit Committee includes at least one Director with recent and relevant financial experience and has competence in accounting and/or auditing and in the sector which the company operates, and that all members are financially literate and have experience of corporate financial matters. For the purposes of the Code and the relevant rule under SOX, sectionSection 407, the Board has determined that Alan Stewart is independent and may be regarded as an Audit Committee financial expert, having recent and relevant financial experience, and that all members of the Audit Committee are independent Non-Executive Directors with relevant financial and sectoral competence. See pages 127-128 for details of relevant experience of Directors.
Internal audit, controls assurance and risk
The Chairman,company’s internal GAR team undertakes an annual audit and risk plan by delivering a series of internal assurance and audit assignments across a variety of markets, processes, business units and functions. On the Chief Financial Officer,conclusion of each assignment, GAR issues a report on its findings which may also include an overall rating as to the General Counsel & Company Secretary,status of the Group Controller,market, process or function being audited, detailed reasons for the rating and actions to be taken within a specific timetable. The Audit Committee receives regular reports from the Head of GAR on the latest reports issued.
This year GAR has undertaken a number of audits of the group's end-to-end processes and procedures in addition to market and functional audits. The Audit Committee assesses the effectiveness of GAR by reviewing its annual audit plan at the start of the financial year, monitoring its ongoing quality throughout the year, and assessing completion rates and feedback provided following completion of the annual audit plan. Having carried out this assessment, the Audit Committee is of the view that the quality, experience and expertise of GAR is appropriate for the business. The company operates a global controls assurance programme for controls in each market and function, which monitors compliance with and effective operation of the company’s controls framework. The Audit Committee receives regular reports on the status of the controls assurance plan, actions taken to enhance controls design and effectiveness, awareness training provided to employees, testing results and trends analysis derived from the company’s integrated risk management system. The Committee also reviewed and approved changes to the principal risk descriptions and risk footprint, as well as receiving regular presentations and reviews of the status of its principal and emerging risks. This year, these reviews have covered areas including cyber security and IT resilience, climate change, counterfeit and product quality, pandemics and business interruption, business ethics and integrity, and international taxation.
Business Integrity programmes
Diageo is committed to conducting its business responsibly and in accordance with all laws and regulations to which its business activities are subject. We hold ourselves to the principles in our Code of Business Conduct, which is embedded through a comprehensive training and education programme for all employees. Our employees are expected to act in accordance with our values, the Code of Business Conduct and in compliance with applicable laws and regulations. The Audit Committee monitors compliance with the company’s ethical standards through the Business Integrity framework, which helps enhance and protect all aspects of the company’s business. Regular reports are provided to the Audit Committee by the Chief Business Integrity Officer on progress in providing guidance, training and tools for all levels in the General Counsel Corporate, the Controls Assurance Director, the Chief Accountantbusiness, completion rates for training modules, launch and the external auditor regularly attend meetingsrollout of the Committee.new programmes or policies, monitoring use of whistleblowing mechanisms and investigating allegations of breaches.
The Audit Committee met privately with the external auditor, the Chief
Our Code of Business Integrity Officer, the Controls Assurance Director and the Head of GAR regularly during the year.
FRC correspondence
The Committee reviewed correspondence between theConduct, available in 20 languages, sets out what Diageo stands for as a company and how Diageo operates, enabling all employees to understand what is required of them in working for Diageo. Annual training on the FRC followingCode of Business Conduct and associated policies is mandatory for all managers and their review of the company’s annual report and accounts fordirect reports globally, encompassing over 21,000 eligible employees during the year ended 30 June 2019,2023. Training is delivered in an easily accessible e-learning format, with classroom training delivered to those employees who do not have regular access to a computer. The Code of Business Conduct and other global policies are available at https://www.diageo.com/en/our-business/corporate-governance.
Third-party risk is also managed through our Know Your Business Partner programme, which is designed to help the company evaluate the risk of doing business with a third-party before entering and during a contractual relationship. Business partners are assessed for potential risks including economic sanctions, bribery and corruption, money laundering, facilitation of tax evasion, data privacy and other reputational issues.
Employees and third-party business partners are encouraged to raise concerns about potential breaches of the Code of Business Conduct or policies, either to line managers, legal or HR colleagues, risk, compliance and Business Integrity teams, or to SpeakUp, a confidential whistleblowing mechanism. SpeakUp is a global service administered by an independent provider, accessible online or by telephone. Where legally permitted, it can be used anonymously and reports kept confidential. Allegations are investigated by independent Diageo teams, with progress being monitored by the Business Integrity team. When allegations are substantiated, appropriate disciplinary and corrective actions are taken. The Audit Committee receives and reviews regular reports on allegations, including trends information, root cause analysis and investigation closure rates. Since all of Diageo's Non-Executive Directors attend the Audit Committee, all Non-Executive Directors who make up the Board routinely review the findings of the company's whistleblowing processes in accordance with the UK Corporate Governance Code.
During the year ended 30 June 2023, 629 allegations of breaches were reported which was broadly consistent with the prior year. The substantiation rate of allegations has also remained broadly consistent compared to last year, with 32% of cases confirmed as breaches (versus 30% in fiscal 22). As of the end of fiscal 23, 43 people exited the business as a result of breaches of our Code of Business Conduct or policies (fiscal 22: 54 people). This is due to a reduction in severity and type of breaches this year. The number of leavers for fiscal 22 has been restated due to a number of open cases from fiscal 22 being concluded this year. At the end of fiscal 23, we had 137 open cases, which may lead to more people exiting the business. See below a summary of reported and substantiated breaches over the past three years.
Reported and substantiated breaches
| | | | | |
| ò | Reported |
| ò | Reported through SpeakUp |
| ò | Sustantiated breaches |
| ò | Code-related leavers |
Senior financial officers’ code of ethics and dealing code
In accordance with the requirements of SOX and related SEC rules, Diageo has adopted a code of ethics covering its Chief Executive, Chief Financial Officer, and other senior financial officers. During the year, no waivers were granted in respect of, this code of ethics. The full text of the code of ethics is available at https://www.diageo.com/en/our-business/corporate-governance/compliance. Both the Audit & Risk Committee and the Audit Committee regularly review the strategy and operation of the Business Integrity programme through the year.
The company has also adopted a dealing code setting out requirements in relation to dealings in Diageo securities by Directors, Executive Committee members and certain distributionsother employees, which is designed to ensure compliance with applicable insider trading and transactions relatedmarket abuse regulations, in particular the UK Market Abuse Regulation.
Audit and Assurance Policy
During the year management has reviewed its approach to assurance in preparation for drafting and adopting an audit and assurance policy, consistent with the reporting requirements set out in draft legislation proposed by the UK Department for Business and Trade
in July 2023. The Committee has reviewed and discussed the principles on which such policy will be based and will continue to monitor management's development of the policy.
Committee activities
Details of the main areas of focus of the Audit Committee during the year include those summarised below:
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| Areas of focus | | Strategic priority | Strategic outcome |
| Corporate reporting | •Half and full year external reporting updates •Interim and preliminary results review and approval •Annual Report and consolidated financial statements, Form 20-F review and approval •Implications of group functional and presentation currency change on reporting | | |
| Internal controls | •GAR updates •Business Integrity updates including breach and reporting update •Controls testing update and Section 404 assessment •Implications on controls environment of systems and process changes | | |
| External audit and assurance | •Report on external audit at half and full year periods •Insights and observations on reporting review •Auditor independence and non-audit work reviews •Auditor independence policy review •Review of management representation letters •Appointment of auditor and review of terms of engagement and fees •Auditor performance and effectiveness review and assessment •Commencement of auditor tender process •Audit regime reform and approach to assurance, preparatory to drafting an audit and assurance policy | | |
Risk
management | •Principal and emerging risk reviews and tracking •Risk updates, including group risk footprint and risk appetite review and approvals •Supply chain disruption, counterfeit, product quality, climate change and sustainability, energy, pandemics and business interruption, cyber and IT resilience, pension funding, business transformation and tax risk reviews | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Key | | | | | | | | |
| Strategic priorities | Strategic outcomes |
| Sustain quality growth | | Invest smartly | | Champion inclusion and diversity | | Efficient growth | | Credibility and trust |
| Embed everyday efficiency | | Promote positive drinking | | Pioneer grain-to-glass sustainability | | Consistent value creation | | Engaged people |
Management’s report on internal control over financial reporting
Management, under the supervision of the Chief Executive and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over the group’s financial reporting.
Diageo’s internal control over financial reporting includes policies and procedures that: pertain to the company’s employee share schemes undertaken between 10 May 2019maintenance of records that, in reasonable detail, accurately and 9 August 2019 which were contraryfairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to applicable provisionspermit the preparation of financial statements in accordance with IFRS as issued by the International Accounting Standards Board (IASB), and in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRS adopted by the UK; provide reasonable assurance that receipts and expenditures are made only in accordance with authorisation of management and the directors of the company; and provide reasonable assurance regarding prevention or timely detection of any unauthorised acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Management has assessed the effectiveness of Diageo’s internal control over financial reporting (as defined in Rules 13(a)-13(f) and 15(d)-15(f) under the United States Securities Exchange Act of 1934) based on the framework in the document ‘Internal Control – Integrated Framework’, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Based on this assessment, management concluded that, as further detailed on page 193. The Committeeat 30 June 2023, internal control over financial reporting was effective.
Any internal control framework, no matter how well designed, has overseeninherent limitations, including the incorporationpossibility of human error and the circumvention or overriding of controls and procedures and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, who also audit the group’s consolidated financial statements, has audited the effectiveness of the group’s internal control over financial reporting, and controls improvements followinghas issued an unqualified report thereon, which is included on pages 201 to 203 of this document.
Changes in internal control over financial reporting
During the FRC’s reviewperiod covered by this report, there were no changes in internal control over financial reporting that have materially affected or are reasonably likely to materially affect the effectiveness of internal control over financial reporting.
Directors’ responsibilities in respect of the Annual Report and have incorporated those improvements intofinancial statements
The Directors are responsible for preparing the company’s annualAnnual Report, the information filed with the SEC on Form 20-F and the group and parent company financial statements in accordance with applicable law and regulations.
Significant issues and judgements
Significant issues and judgements that were considered in respect of the 2023 financial statements are set out below. Our consideration of issues included discussion of the critical audit matters as outlined in the independent auditors' report.
| | | | | | | | |
| Matter considered | | How the Audit Committee addressed the matter |
| The nature and size of any one-off items impacting the quality of the earnings and cash flows. | | The Audit Committee assessed whether the related presentation and disclosure of those items in the financial statements were appropriate based on management’s analysis, and concluded that they were. |
| Items that were to be presented as exceptional. Refer to note 4 of the Financial Statements. | | The Audit Committee assessed whether the reporting of those items as exceptional, was in line with the group’s accounting policy, and that sufficient disclosure was provided in the financial statements, and concluded that they were. |
| Whether the carrying value of assets, in particular intangible assets, was supportable. Refer to notes 6, 9, 10 and 13 of the Financial Statements. | | The Audit Committee reviewed the methodology applied in conducting impairment assessments and result of management's impairment assessments that were performed during the year. The Committee was provided with information about the carrying amounts and the key assumptions incorporated in management’s estimate of discounted cash flows of significant assets that are sensitive to key assumptions. The Committee reviewed the key assumptions used in the impairment testing, including management’s cash flow forecasts, growth rates and the discount rate used in value in use calculations and agreed they were appropriate.
The Committee agreed with management’s judgements and conclusions, whereby McDowell’s, some smaller other brands and investments in associates and certain fixed assets have been impaired by £549 million in the year ended 30 June 2023, out of which £520 million was reported as exceptional operating charge. The Committee agreed that the recoverable amount of the company’s other assets was in excess of their carrying value and that appropriate disclosure was provided with respect to assets impaired, and whose value is more sensitive to changes in assumptions.
|
| The group’s more significant tax exposures and the appropriateness of any related provisions and financial statement disclosures. Refer to page 112 of 'Risk factors' and note 7 of the Financial Statements. | | The Audit Committee agreed that disclosure of tax risk appropriately addresses the significant change in the international tax environment, and that appropriate provisions and other disclosure with respect to uncertain tax positions were reflected in the financial statements. |
| The appropriateness of the valuation of post employment liabilities, and the recognition of any surplus. Refer to note 14 of the Financial Statements. | | The measurement of post employment liabilities is sensitive to changes in long-term interest rates, inflation and mortality assumptions. Having reviewed management’s papers setting out key changes to actuarial assumptions, the Audit Committee agreed that the assumptions used in the valuation are appropriate. The Committee reviewed management’s assessment of the economic benefit available as a refund of the surplus or as a reduction of contribution and the key judgements made in respect of the surplus restriction and concluded that those judgements were appropriate. The Committee reviewed and concluded that sufficient disclosures were provided in the financial statements. |
| Significant legal matters impacting the group. Refer to note 19 of the Financial Statements. | | The Committee agreed that adequate provision and/or disclosure have been made for all material litigation and disputes, based on the current most likely outcomes, including the litigation summarised in note 19 of the Financial Statements. |
Accounting for business combinations. Refer to note 8 of the Financial Statements.
| | Diageo acquired Kanlaon Limited and Chat Noir Co. Inc. on 10 March 2023 and completed a number of other smaller acquisitions during the year ended 30 June 2023, for an aggregate consideration of £397 million. As at the completion date of these acquisitions, Diageo performed valuations of the identifiable assets and liabilities and the resulting goodwill. The purchase price allocation exercises are subject to management’s judgement and estimates, including forecast cash flows, buyer specific synergies and the applicable discount rates used in valuations. The Committee reviewed management’s purchase price allocations and the disclosures provided in the Financial Statements and concluded they were appropriate. |
| Functional currency of Diageo plc and presentation currency of Diageo group. | | The Audit Committee agreed that in line with reporting requirements the functional currency of Diageo plc has changed from sterling to US dollar which is applied prospectively from fiscal 24. This is because the group's share of net sales and expenses in the US and other countries whose currencies correlate closely with the US dollar has been increasing over the years, and that trend is expected to continue in line with the group's strategic focus. Diageo has also decided to change its presentation currency to US dollar with effect from 1 July 2023, applied retrospectively, as it believes that this change will provide better alignment of the reporting of performance with its business exposures. |
| Whether the Annual Report is fair, balanced and understandable. | | The Audit Committee concluded that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s performance, business model and strategy and that there is an appropriate balance between statutory (GAAP) and adjusted (non-GAAP) measures ensuring equal prominence. |
| The impact of climate change on the group’s financial reporting and financial statements. Refer to pages 91-110 of 'Pioneer grain-to-glass sustainability' and note 1 and note 9 of the Financial Statements. | | The Audit Committee agreed that the disclosures on pages 91-110 made in response to the recommendations of the Task Force on Climate-related Financial Disclosures are appropriate and that the assumptions used in the financial statements are consistent with these disclosures. |
NOMINATION COMMITTEE REPORT
Championing our talent strategy
Dear Shareholder
I am pleased to provide the report and accountsof the Nomination Committee for the year ended
30 June 2020. In June 2020,2023.
A key responsibility for the FRC confirmed that the matters raised by their review are closed. The Committee notes that the FRC’s review does not provide assurance that the annual report and accounts are correct in all material respects as the FRC’s role is to consider compliance with reporting requirements.
Nomination Committee report
Dear Shareholder
On behalfensure adequate succession planning for Board appointments, maintenance of the Nomination Committee, I would like to present its report for the year ended 30 June 2020.
The Committee has ensured that there is a pipeline of strong candidates for potential nomination as Non-Executive Directorsdirectors, and reviewed succession planningsupervising transitions for new appointments. During this year, the Committee had oversight of the transition of Chief Executives with Debra Crew succeeding Sir Ivan Menezes after ten years of dedicated leadership of the company. This transition was well underway when Ivan sadly passed away following a brief illness, with Debra taking over earlier than expected.
We welcome Debra back to the Board and talent strategy forcongratulate her on her appointment. The Committee was unanimous in deciding that Debra is the Executive Committee. In orderright person to further embedlead Diageo into the next phase of growth, with her deep understanding of the company and its long-standing commitment to diversity,stakeholders coupled with her broad experience in other consumer goods industries.
This year the Committee also formalisedmanaged the diversity principles applicable toevaluation of the effectiveness of the Board, into a written Board Diversity Policy to promote a diverseits Committees, members and inclusive membership onprocesses. Further details, including the Board. This was approvedreview’s conclusions, recommendations and adopted by the Board in April 2020.
During the year, the Committee recommended that the Board appoint Melissa Bethellactions as Non-Executive Director, which recommendation was approved and took effect from 30 June 2020, and also recommended that the Board appoint Valérie Chapoulaud-Floquet and Sir John Manzoni as Non-Executive Directors, which recommendations were subsequently approved and will take effect from 1 January 2021 and 1 October 2020 respectively. These appointments had been preceded by a detailed market review and selection process carried out by the Committee with the assistance of Egon Zehnder, an independent consulting and recruitment agency which has no other connection with the company.
Melissa Bethell is the Managing Partner of Atairos Europe, an investment firm backed by Comcast NBC Universal, and spent over 18 years at Bain Capital, the global private equity firm, having previously worked at Goldman Sachs. Melissa is currently non-executive director on the boards of Tesco PLC and Exor, and has had considerable experience of other non-executive roles on other boards. Melissa brings her extensive expertise in international business strategy and investments to the company’s Board. Valérie Chapoulaud-Floquet is the former CEO of Rémy Cointreau S.A., which she led from September 2014 to December 2019, prior to which she had worked for Louis Vuitton, LVMH Group since 2008 in a number of different roles. Valérie’s extensive experience in consumer goods and premium drinks industries should serve Diageo well. Sir John Manzoni was Chief Executive of the Civil Service and Permanent Secretary to the UK Cabinet Office from 2014 to April 2020. He was previously President and Chief Executive Officer of Talisman Energy in Canada from 2007 to 2012 and had worked for BP from 1983 to 2007 in various roles. Sir John was also Non-Executive Director of SABMiller plc from 2004 to 2014. Sir John’s commercial acumen and business knowledge, together with his more recent public service experience, will complement the Board. I look forward to welcoming both Valérie and Sir Johnpresented to the Board in due course.January 2023, are set out on page 142.
The Committee has also been involved in reviewing talent planning and succession of Executive Committee membership, with two changes being implemented or approved during the year. Claudia Schubert was appointed as President, North America in October 2022 and Soraya Benchikh assumed the role of President, Europe in January 2023. I congratulate Claudia and Soraya on their appointments and look forward to working with them.
Javier Ferrán
Chairman of the Nomination Committee
Role and composition of the Nomination Committee
The Nomination Committee is responsible for keeping under review the composition of the Board and succession to it, reviewing succession planning for key Executive Committee role succession,roles, and succession planning and overall talent strategy for senior leadership positions, including in relation to ensuring and encouraging diversity in leadership positions. It makes recommendations to the Board concerning appointments to the Board. More details on the role of the Nomination Committee are set out in its terms of reference which are available at
https://www.diageo.com/en/our-business/corporate-governance.
The Nomination Committee comprises Javier Ferrán (Committee Chairman), Melissa Bethell, Karen Blackett, Susan Kilsby, Valérie Chapoulaud-Floquet, Sir John Manzoni, Lady Mendelsohn, Alan Stewart and Ireena Vittal.
Recruitment and election procedures
The recruitment process for Non-Executive Directors typically includes the development of a candidate profile and the engagement of a professional search agency (which has no other connection with the company) specialising in the recruitment of high-calibre non-executive directors.candidates. We have engaged executive search companies Egon Zehnder and Russell Reynolds Associates (neither of which have a connection with the company other than acting as an executive search agency) to assist with our current recruitment and pipelining requirements.
In the case of Executive Director or Executive Committee appointments, an executive leadership assessment may be carried out by an external professional agency. Reports on potential appointees are provided to the Committee, which, after careful consideration, makes a recommendation to the Board.
In determining its recommendations, the Committee has regard to a broad range of factors including the candidate's background, skillset and experience, their ability to express independent judgement and participate across a broad range of topics, including on sustainability and societal matters, their ability to devote sufficient time to the company and whether their appointment would contribute towards the Board’s diversity objectives which are set out in the Board Diversity Policy. This policy, which applies to the Board and its Committees, reflects the Board's belief that it is critical that Board membership includes a diverse range of skills, professional and industry backgrounds, geographical experience and expertise, gender, tenure, ethnicity and diversity of thought.
Any new Directors are appointed by the Board and, in accordance with the company’s articles of association, they must be elected at the next AGM to continue in office. All existing Directors retire by rotation and stand for re-election every year. The company’s policy is for all Directors to attend the AGM, either physically or by video conference as permitted by the company's Articles of Association. Details of attendance of all Board and Committee meetings by Directors are set out on page 126.
External appointments
While the Board does not have a written policy as regards the maximum number of other appointments that Directors should have, before recommending new appointments to the Board, the Nomination Committee considers other demands on candidates’ time. As a general principle, the Committee takes the view that Non-Executive Directors should have no more than four, and Executive Directors
no more than one, listed mandates in addition to their role as a director of the company. Once appointed, any proposed additional external appointments are also reviewed by the Nomination Committee to ensure that the additional demands on a Director’s time will not impact on the Director’s ability to perform his or her role as a Director of the company before the additional appointment is recommended for approval by the Board. Directors’ interests are reviewed and updated at each Board meeting. The formalBoard has concluded that each Non-Executive Director has sufficient time to discharge their duties as a director of the company, taking into consideration their external appointments and commitments.
CEO succession
It is the role of the Nomination Committee to have oversight of the company’s senior leadership development and succession plans, ensuring that the company has a pipeline of high-quality candidates for senior roles which is set outaligned with the company’s long-term strategic ambitions and diverse leadership requirements. In March 2023, it was announced that, after ten years in its termsrole, Sir Ivan Menezes would retire as Chief Executive and step down from the Board on 30 June 2023 and that Debra Crew, then Chief Operating Officer, would take over as Chief Executive effective 1 July 2023. Sir Ivan, who was one of referencethe UK’s longest serving FTSE 100 chief executives, had led the company through an outstanding period of change, growth and performance.
As succession planning is an ongoing process, the Nomination Committee had an established process for identifying the most suitable person for the role of Chief Executive including a shortlist of potential successors which are availablewas kept under review in anticipation of a transition. As part of this process, the Nomination Committee conducted a review of potential candidates including a number of internal candidates on the company’s internal succession plan as well as external candidates. The review included candidates who had different backgrounds and experience, and included diverse candidates. Following this review, the Nomination Committee made a recommendation to the Board that Debra Crew was the most suitable successor to Sir Ivan, having been a highly valued member of the Executive Committee with an impressive track record at www.diageo.com/en/our-business/corporate-governance/committees/.
Compositionboth Diageo and other global consumer goods companies. Acting on the recommendation of the Nomination Committee, the Board approved her appointment and announced the transition on 28 March 2023. With the sad passing of Sir Ivan in early June 2023 after a brief illness, Debra’s appointment as Chief Executive and Executive Director took effect earlier than expected, on 8 June 2023.
Set out below are the principal steps taken in relation to the announcement of the appointment of a new Chief Executive on 28 March 2023:
Prior to fiscal 21 and ongoing thereafter:
•A preliminary assessment of potential internal candidates and their development plans was reviewed, as part of annual talent and succession review with the Board.
During fiscal 21:
•An updated role specification for the Chief Executive was prepared, reviewed and approved by the Nomination Committee. Amongst other things, this set out the requirements for the role with regards to leadership capabilities, personal characteristics and key experiences, within the context of the performance and culture needed in Diageo.
•The Nomination Committee comprises Javier Ferrán (Committee Chairman), Melissa Bethell, Susan Kilsby, Ho KwonPing, Nicola Mendelsohnreviewed the results of an external talent benchmarking exercise conducted by an executive search firm, alongside continued assessment of the development of candidates on Diageo’s internal succession plan.
Commencing during fiscal 21 and Alan Stewart.subject to ongoing review thereafter:
•A focussed longlist of external candidates was reviewed by the Nomination Committee, together with internal candidates.
•Internal candidates were invited to take part in a formal assessment process overseen by the Chairman supported by the Chief HR Officer.
•A panel of Nomination Committee members met shortlisted candidates for formal panel interviews with the Chairman and the Non-Executive Directors.
•Development plans were drawn up for internal candidates to enable the Nomination Committee to review progress on a periodic basis.
During fiscal 22:
•Periodic regular review of the development progress of internal candidates was undertaken by the Nomination Committee.
•The role specification was kept under ongoing review to ensure it reflected developments in Diageo’s business context and any emerging requirements.
During fiscal 23:
•Proposed remuneration arrangements for the incoming and outgoing Chief Executives were reviewed and approved by the Remuneration Committee.
•The Nomination Committee recommended that the Board approve the appointment of Debra Crew as Diageo’s next Chief Executive. The Remuneration Committee approved remuneration arrangements for the appointment of Debra Crew and the retirement of Sir Ivan Menezes.
•The Board unanimously approved the appointment and a regulatory announcement was released on 28 March 2023.
Activities of the Nomination Committee
The principal activities of the Nomination Committee during the year were:
•the consideration, selection and recommendation as to the appointment of and transition plan for a new Chief Executive;
•the consideration of the talent pipeline for potential new Non-Executive Directors and other appointments to the Board;
•the design and conduct of the annual review of Board, Committee and individual Director effectiveness and performance and a review of the findings of the review and recommended actions;
•consideration and approval of the report of the Committee in the company’s Annual Report and consolidated financial statements for the year ended 30 June 2023;
•consideration and recommendation to the Board of proposed changes in Directors’ outside interests and any potential conflicts of interest; and
•a review of the succession plans for Executive Committee roles, including potential candidates for such roles, their backgrounds and experience, and how such candidates would contribute towards the company's diversity objectives.
Evaluation
As part of the annual Board evaluation, all members of the Nomination Committee participated in an evaluation of the Committee. Feedback indicated that the Committee was effective and that Directors were satisfied with its performance, that it had managed the Chief Executive succession during the year well and that its processes were robust, transparent and effective. Further details of the evaluation can be found on page 142.
Induction training and business engagementtraining
There is a formalOur customary induction programmeprocesses for newnewly appointed Directors which includes meetingindividual meetings with Executive Committee members and other senior executives, individuallyvisits to the company’s production facilities and visiting a numberoffices including the company's head office in London and the group's spirits production facilities, scotch brand homes, visitor centres and archives in Scotland.
Induction programmes for new Directors are tailored to suit the particular background and experience of operationsthe individual Director, with the Committee advising on priorities for that individual and sites around the group.
Following the initialtracking induction for Non-Executive Directors,activity. These induction processes supplement existing practices whereby a continuing understanding of the business is developed through appropriate business engagements. Visitsengagements for Non-Executive Directors such as visits to customers, engagements with employees, and brand events were arrangedworked into the annual cycle of Board meetings. Training on specific areas of risk and detailed reviews of strategic matters are provided by Executive Committee members, other internal senior leaders and external guest speakers and specialists through presentations, roundtable discussions and other sessions as part of the Board’s Annual Strategy Conference and during the year although these have been impacted in the second halfas part of the year due to Covid-19 travel restrictions.
Board and Audit Committee meetings. In addition, Executive Committee members and other senior executives are invited, as appropriate, to Board and strategy meetings to make presentations on their areas of responsibility. The company’s policy is for all Directors to attend the AGM.
All Directors are also provided with the opportunity, and encouraged, to attend regular trainingbriefings to ensure they are kept up to date on relevant legal and governance developments or changes, best practice developments and changing commercial and other risks.
ActivitiesDiversity
The Board has a longstanding commitment to prioritise diversity and supports the recommendations of the Nomination Committee
FTSE Women Leaders Review (previously the Hampton-Alexander Review) on gender diversity and the Parker Review on ethnic diversity. The principal activitiesBoard Diversity Policy sets out specific objectives with parity between male and female members of the NominationBoard being the ultimate goal in terms of gender diversity, with a commitment to have no less than 40% female representation on the Board, and having at least one Director reflecting ethnic diversity as defined in accordance with the Parker Review. The Committee duringis pleased to confirm that both these objectives have currently been met. The Board Diversity Policy also sets out the year were:
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– | the consideration of the talent pipeline for potential new appointments to the Board including potential new Non-Executive Directors |
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– | the review of Board, committee and individual Director performance as part of the annual evaluation process |
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– | a review of the Executive Committee membership and succession planning for it and for senior leadership positions |
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– | preparation and adoption of a Board Diversity Policy |
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– | appointment of a new Senior Independent Director. |
Diversity
DetailsBoard’s support for management’s actions to increase the proportion of Board diversitysenior leadership roles held by women and its diversity policy can be found on pages 133-135by people from minority backgrounds and 139. Details of diversity for the Executive Committee can be found on page 137.other under-represented groups. As at 30 June 2020,2023, the percentage of women on the Executive Committee and their direct reports is 38%43%.
Evaluation
As part of the annual Board evaluation, all members of the Nomination Committee participated in an evaluation of the Committee. This concluded that the performance of the Committee continued to improve, with a strong pipeline of candidates resulting in excellent recent appointments to the Board and a continued focusExecutive Committee reporting on diversity and enhancements to the induction programme for new Directors. Further details of the evaluation can be found on page 147-149.gender identity or sex
| | | | | | | | | | | | | | | | | |
| Number of Board members | Percentage of the Board | Number of senior positions on the Board (CEO, CFO, SID and Chair) | Number in executive management | Percentage of executive management |
| Men | 3 | 27.3 | % | 1 | 7 | 50.0 | % |
| Women | 8 | 72.7 | % | 3 | 7 | 50.0 | % |
| Not specified/prefer not to say | — | — | — | — | — |
Directors’ remuneration reportBoard and Executive Committee reporting on ethnic background
| | | | | | | | | | | | | | | | | |
| Number of Board members | Percentage of the Board | Number of senior positions on the Board (CEO, CFO, SID and Chair) | Number in executive management | Percentage of executive management |
| White British or other White (including minority-white groups) | 7 | 63.6 | % | 3 | 8 | 57.1 | % |
| Mixed/Multiple Ethnic Groups | — | | — | | — | | — | | — | |
| Asian/Asian British | 3 | 27.3 | % | 1 | 3 | 21.4 | % |
| Black/African/Caribbean/Black British | 1 | 9.1 | % | — | | 1 | 7.2 | % |
| Other ethnic group, including Arab | — | | — | | — | | 2 | 14.3 | % |
| Not specified/prefer not to say | — | | — | | — | | — | | — | |
| | | | | | | | | | | | | | | | | | | | |
Board
composition | | Non-Executive Director tenure | | Board gender
diversity | | Board ethnic
diversity |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ò | Chairman | | ò | 0 – 3 years | | ò | Male | | ò | Directors of colour |
| ò | Executive director | | ò | 3 – 6 years | | ò | Female | | ò | White European |
| ò | Non-executive director | | ò | 6 – 9 years | | | | | | |
Executive committee nationality
| | | | | | | | | | | | | | |
| ò | British | | ò | Indian |
| ò | American | | ò | Irish |
| ò | American/British | | ò | South African/British |
| ò | Colombian | | ò | Spanish |
| ò | French | | | |
Board diversity data
•Directors are defined as all Non-Executive and Executive Directors appointed to the Board. Board diversity related data are collated directly from each Director annually using a questionnaire and are given on a self-identifying basis.
•Directors of colour are defined in accordance with the Parker Review definitions as those "who identify as or have evident heritage from African, Asian, Middle Eastern, Central and South American regions".
•All Board diversity data above are given as at 30 June 2023.
Annual statement by the Chairman of the Remuneration Committee
"The company is committed to emerging stronger from the pandemic. It is important that we have flexibility in our remuneration framework so that we can remain nimble in a rapidly changing world."
Dear Shareholder
I am pleased to present to you the Directors’Directors' remuneration report for the year ended 30 June 2020,2023, which contains:
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– | The proposed Directors’ remuneration policy, to be approved at the 2020 AGM;• The updated Directors’ remuneration policy, which shareholders are being asked to approve at the Annual General Meeting (AGM) on 28 September 2023; and |
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– | The annual remuneration report, describing how the policy has been put into practice during 2020, and how the new policy will be implemented in 2021. |
I had• The annual remuneration report, describing how the opportunity to consult with a number of shareholderscurrent Directors' remuneration policy has been implemented during 2023 and how the year as we considered our proposals forpolicy will be implemented in 2024.
Proposed Directors' Remuneration Policy
The Committee has reviewed the latestcurrent Directors’ remuneration policy and I wantdetermined that it continues to thank yousupport the company’s strategy and will do so for your timethe next three years. The Committee is therefore asking shareholders to approve our current policy, largely unchanged except for a governance enhancement to the post-cessation shareholding requirement, which further improves shareholder alignment. Executive Directors will now be required to hold 100% of their in-service shareholding level (500% of salary for the CEO and your input, which has been very helpful400% of salary for the CFO) for two years post-exit. We have also improved the level of disclosure of our malus and constructive in shaping the final policy we are presenting here.clawback policy.
When I began meeting with shareholders about Diageo’sAs well as submitting an updated Directors’ remuneration policy for approval at the AGM in September 2023, shareholders are also being asked to approve the rules of the new Diageo Long-Term Incentive Plan (LTIP), as it is close to its 10-year expiry. No significant changes are being proposed to the rules.
During the year, the Committee reviewed the current Directors’ remuneration policy. In doing so, it sought to ensure continued alignment with the delivery of business strategy, our ongoing ability to recruit and retain high-quality, international talent and to meet the expectations of our shareholders and the governance community. Consideration was given to the global nature of the business, which includes a large presence in North America and, therefore, the need to compete for talent in a global pool. Attracting and retaining key talent in an increasingly competitive talent pool is critical for our business and, at all levels, Diageo’s talent strategy involves a global approach to internal talent mobility. Remuneration is an important aspect of being able to meet our talent objectives.
On behalf of the Committee, I engaged with our largest shareholders and their representatives on the new policy and considered the feedback received, which was positive. We also reviewed market practice trends in the FTSE 30 (excluding financial services) and our global consumer goods peer group. Further, and in line with our remuneration principles, the Committee considered the remuneration arrangements for the workforce globally when reviewing the policy for Executive Directors.
We value the views we have received from our shareholders and the strong support we have had in recent years. Maintaining both the dialogue and the support continue to be important to the Committee.
CEO transition
On 28 March 2023, we announced that Sir Ivan Menezes would retire on 30 June 2023 and Debra Crew would be appointed as the next CEO from the start of fiscal 24. Following the announcement on 7 June 2023 that Sir Ivan had sadly passed away, Debra Crew was appointed to the Board as CEO and Executive Director on 8 June 2023, having taken over as interim CEO on 5 June due to Sir Ivan’s deteriorating health.
We set the salary for Debra Crew at $1,750,000, slightly below Sir Ivan’s salary. The Committee determined that this salary level reflects Debra’s significant relevant experience, which includes a prior CEO position in the United States and four years with Diageo, including time on the Diageo Board as a Non-Executive Director. The Committee considered both the FTSE 30 pay practices, as well as those of our global peer group when determining the appropriate level of pay for our Chief Executive.
The remuneration arrangements for Sir Ivan were approved within the terms of the Directors’ remuneration policy and application of the plan rules on death in service. Further details, including exercises of discretion by the Committee, can be found on page 190.
Business performance and employees
As mentioned elsewhere in the Annual Report, Diageo delivered a strong set of 2023 results during a period of economic volatility and continued inflationary pressures. Both organic net sales and organic operating profit growth were within our medium-term guidance and follow two consecutive years of double-digit growth and are reflected in lower annual incentive outcomes this year relative to the prior two years. Over the year, we gained or held market share in markets that total 70% of our net sales value, delivered further expansion of organic operating margin through productivity savings and return on invested capital was 16.3%.
Colleagues across the business have continued to show resilience, agility and commitment during this period of sustained uncertainty. Diageo continues to focus on being market competitive and pro-active in the ways it supports the wellbeing of employees. Employee engagement has remained high again this year at 84%, one point higher than in 2022. Early in fiscal 23, Diageo made a one-time payment of £1,000 gross (capped at 15% of local equivalent annual salary) to all employees below Executive Committee level to recognise their commitment through challenging times. In addition, ongoing monitoring of the cost-of-living in all our geographies has resulted in off-cycle salary increases in countries experiencing the highest inflation. Other measures, such as financial education and progressive benefit policies have been implemented and more detail can be found on page 188.
Incentive outcomes
In determining annual and long-term incentive outcomes, the Remuneration Committee reviews not only the financial outcomes against targets set but also considers Diageo’s wider business performance. It assesses market share gains, financial returns relative to our Alcoholic Beverages and TSR peer groups, progress made towards our 'Society 2030: Spirit of Progress' goals and employee engagement, among other factors. It also considers the experience of shareholders over the applicable performance period, in particular the company’s TSR performance relative to our peer group.
Annual incentive
For the annual incentive, outcomes under the Net Sales (NSV) and Operating Profit (OP) measures were at and just under target respectively and Operating Cash Conversion (OCC) performance fell short of the minimum threshold required. Further detail is provided on page 176. Following a holistic review earlyof business performance in the year, the Committee concluded that the outcome was fair and did not require any adjustment. Our annual incentive also includes Individual Business Objectives (IBOs) and the outcomes are described on page 176.
Once IBO outcomes are included, overall annual incentive payouts for fiscal 23 were 37% of maximum for Sir Ivan Menezes, 35% of maximum for Debra Crew and 36% of maximum for Lavanya Chandrashekar.
Long-term incentives
Strong financial performance over the three-year period, particularly in respect of growth in organic net sales and profit before exceptional items and tax (PBET), free cash flow (FCF) and share price growth of 26% resulted in a vesting outcome of 99% of maximum for the 2020 performance share awards for the prior CEO, the CEO and the CFO and 78% of maximum for the 2020 share options granted to the prior CEO and the CEO. The 2020 performance share awards were the first Diageo awards which included an Environmental, Social and Governance (ESG) component and the outcomes against these measures show solid progress towards Diageo’s ‘Society 2030: Spirit of Progress‘ ambition over this first three-year period.
Prior to confirming the vesting of DLTIP awards, the Committee considered whether there was a compelling case to change the formulaic outcome by reviewing overall business performance and the targets set for these awards. For the 2020 DLTIP awards, the Committee was especially cognisant of investor concerns around the potential for windfall gains given the timing of the grant during the Covid-19 pandemic. The Committee considered various factors, including the share price used to calculate the 2020 awards relative to the prior year’s price, the stretch of the targets and the performance relative to peers (see page 180 for more detail). The Committee determined that the outcomes were appropriate and aligned to the assessment of Diageo’s underlying business performance over the three-year period and made no adjustment to the vesting levels.
The Committee believes that the incentive plans continue to drive the desired behaviours to support the company’s values and strategy and that the Directors’ remuneration policy has operated as intended in 2023.
The year ahead and alignment of incentives with strategy
The Committee approved a base salary increase of 4% for the CFO, effective 1 October 2023, having reviewed market practice in the FTSE 30 and our global consumer goods peer group. This increase is below the 2023 salary increase budget for employees in the UK, which was 5%. There will be no increase for the CEO, whose next review will be in October 2024.
The structure and performance measures for the annual and long-term incentives remain unchanged for 2024 as these continue to align with the company’s strategic priorities. The annual incentive focuses on net sales growth, operating profit (both of which represent critical measures of growth for Diageo) and operating cash conversion (which recognises the criticality of strong cash performance and cash containment, particularly in the current challenging market conditions) and IBOs add focus on individual strategic and financial objectives. The long-term incentive measures reflect key drivers of long-term growth by incorporating organic net sales, organic profit before exceptional items and tax (PBET), free cash flow (FCF), TSR and key ESG measures (greenhouse gas reduction, water efficiency, positive drinking and gender and ethnic diversity).
We were one of the first companies to include ESG measures in a long-term plan back in 2020, the coronavirus outbreak was in its very early stages and the severity and scale of its impact was not yet apparent. We now find ourselves in new and challenging circumstances. As for many companies, Diageo’s ability to do business has been immediately and significantly impacted by the pandemic, andconsequently, as our practices evolve, we recognise that it hasKPIs also caused considerable uncertainty and hardshipneed to evolve. The Committee believes in setting targets that incentivise the management team to make the right long-term decisions for our employees, customers, suppliersall stakeholders and the communities inenvironment. The water efficiency KPI under the 'Society 2030: Spirit of Progress' goals will, from fiscal 24, use an index approach, which we not only work, but sourcelinks directly to the underlying water efficiency of the two production pillars of distillation and sellbrewing & packaging. This approach reduces sensitivity to product mix compared to the current measure and the methodology used for each pillar is more consistent with what’s used by our products.industry peers (see page 101 for more detail). The water efficiency component of the 2023 LTIP awards reflects the updated water efficiency index KPI.
In summary
Diageo’s resilient performance in another period of broad and sustained uncertainty is reflected in the incentive outcomes and the decisions the Committee has made, which it considers are in line with its values, Diageo’s response to the Covid-19 pandemic has been focused on looking after our people, and protecting the safety, health and wellbeingcompany’s philosophy of all of our employees. Diageo has also acted fast to support those in need in the communities in which we operate, donating sanitisers and wipes to local health organisations across the world, as well as pledging financial support to bartenders who are unable to work during lockdown.
Looking ahead, the company is committed to emerging stronger from the pandemic by focusing on consumers, customers, cost and cash. It is important that we have flexibility in our remuneration framework so that we can remain nimble in a rapidly changing world.
Remuneration principles
Long-term value creation for shareholders and pay for performance continue to be at the heart of our remuneration policy and practices. Attracting and nurturing a vibrant mix of talent with a range of backgrounds, skills and capabilities - in good times and even more so in challenging times - enables Diageo to grow and thrive, and ultimately to deliver our Performance Ambition. Remuneration remains a key part of attracting and retaining the best people to lead our business, balanced against the need to ensure our packages are appropriate and fair in the business and wider employee context, delivering market-competitivemarket competitive pay in return for high performance against the company’s strategic objectives.
I hope that you will vote in favour of the proposed Directors’ remuneration policy and the Directors’ remuneration report for fiscal 23 at the AGM on 28 September 2023.
Finally, and importantly, I would like to personally reiterate the sentiment which has been so well expressed elsewhere in this Annual Report about the sad and shocking loss of our CEO, Sir Ivan Menezes, just weeks before his planned retirement. It was a pleasure and an honour to work with Sir Ivan over the years and my thoughts continue to be with his family at this time.
Susan Kilsby
Non-Executive Director and Chair of the Remuneration Committee
Remuneration principles
The approach to setting executive remuneration continues to be guided by the remuneration principles set out below. The Committee considers these principles carefully when making decisions on executive remuneration in order to strike the right balance between risk and reward, cost and sustainability, and competitiveness and fairness.
The company has a strategy to grow and leverage its leaders globally given the international nature of the business. We also need to have the right tools in place to source talent globally and the increasingly restrictive corporate governance environment in the United Kingdom presents some challenges when considered against the significantly higher pay norms in the United States and other parts of the world, particularly given the increasing international mobility of the senior talent pool. The approach
Long-term value creation for shareholders and pay for performance remains at the heart of our remuneration policy and practices. Attracting and nurturing a vibrant mix of international talent with a range of backgrounds, skills and capabilities enables Diageo to setting executive remuneration continuesgrow and thrive, and ultimately to be guided bydeliver our Performance Ambition. Remuneration remains a key part of attracting and retaining the following remuneration principles:
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– | Delivery of business strategy; |
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– | Creating sustainable, long-term performance; |
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– | Winning best talent; and |
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– | Consideration of stakeholder interests. |
best people to lead our global business, balanced against the need to ensure our packages are appropriate and fair in the business and wider employee context, delivering market-competitive pay in return for high performance against the company’s strategic objectives.
The Committee considers these principles carefully when making decisions on executive remuneration in order to strike the right balance between risk and reward, cost and sustainability, and competitiveness and fairness. This reflects the principles of the Corporate Governance Code in ensuring clarity, simplicity, appropriate management of risk, predictability, proportionality and alignment to culture (see page 189 for more detail on the role of the Remuneration Committee and how it delivers against these principles).
2020 Directors’ remuneration policy review
The remuneration policy was last approved by shareholders at the 2017 AGM and is now due for review and approval by shareholders for the next three-year cycle.
On behalf of the Remuneration Committee, I have engaged with Diageo’s largest shareholders to understand their views on the policy proposals, as well as continuing an open dialogue on the ongoing appropriateness of executive short- and long-term incentive plan design, and the performance measures and target-setting, and ensuring that remuneration arrangements continue to attract and retain the highest quality global talent.
Having taken account of the viewpoints of the investor community and best practice corporate governance guidelines, the Committee decided to make a number of changes to the remuneration policy, effective 1 July 2020, subject to being approved by shareholders at the AGM on 28 September 2020.
The key changes to the remuneration policy are:
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– | Maximum pension contribution for new-hire Executive Directors set at 14% of salary, in line with the maximum offered to new-hire employees in the United Kingdom;
|
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– | Commitment to align incumbent Executive Director pension contributions with the maximum offered to new-hire employees in the United Kingdom by 1 January 2023;
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– | Introduction of new bonus deferral share plan, requiring Executive Directors to defer one-third of their earned annual bonus into shares for three years; and
|
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– | Introduction of a post employment shareholding policy, requiring Executive Directors to hold some of their Diageo shares for two years after leaving the company.
|
Other changes include the review of Non-Executive Director fees every year instead of every two years, an increase in the aggregate Non-Executive Director fee limit from £1.2 million to £1.75 million, the removal of the requirement for straight-line vesting between threshold and maximum under the long-term incentive plan, and, in response to feedback from shareholders, the consideration of a returns measure as one of the factors used by the Committee to assess the appropriateness of long-term incentive outcomes.
Pension
New Executive Director appointments
In accordance with the latest guidance from institutional investors in the United Kingdom, the maximum company pension contribution for new Executive Director appointments has been reduced from 20% of salary to 14% of salary, a change which has been in effect since 1 July 2019. The maximum pension contribution for Executive Directors under the remuneration policy is aligned to the offering for new-hire employees in the United Kingdom, who are eligible to receive a potential company contribution of 14% of salary under the defined contribution pension scheme, regardless of seniority or tenure.
Incumbent Executive Directors
The Chief Executive agreed to a reduction in the company’s contribution to his pension scheme from 30% of salary to 20% of salary, effective 1 July 2019. This followed the earlier reduction to his pension from 40% of salary to 30% of salary, implemented on 1 July 2016. The pension contributions for the incumbent Chief Executive and Chief Financial Officer are now both set at 20% of salary and this is aligned to the current average company contribution to active members of all of the current and legacy pension schemes in the United Kingdom (weighted average of 20% of salary). The company pension contribution for many longer-serving employees participating in the legacy defined benefit or final salary schemes in the United Kingdom is higher than 20% of salary. As further context, the company contribution to active retirement schemes in the United States ranges between 10% and 16.5% of salary plus target bonus.
The Committee has committed to align the company pension contributions for incumbent Executive Directors to the level applicable to new-hire employees in the United Kingdom (14% of salary) by 1 January 2023.
Diageo's remuneration principles
Delivery of business strategy
Short- and long-term incentive plans reward the delivery of our business strategy and Performance Ambition. Performance measures are reviewed regularly and stretching targets are set relative to the company’s growth plans and peer group performance. The Committee seeks to embed simplicity and transparency in the design and delivery of executive reward.
Creating sustainable, long-term performance
A significant proportion of remuneration is delivered in variable pay linked to business and individual performance, focused on consistent and responsible drivers of long-term growth. Performance against targets is assessed in the context of underlying business performance and the ‘quality of earnings’.
Winning best talent
Market-competitive total remuneration with an appropriate balance of reward and upside opportunity allows us to attract and retain the best talent from all over the world, which is critical to our continued business success.
Consideration of stakeholder interests
Executives are focused on creating sustainable share price growth. The requirement to build significant personal shareholdings in Diageo and hold long-term incentive awards for two years post-vesting encourages executives to think and act like owners. Decisions on executive remuneration are made with consideration of the interests of the wider workforce and other stakeholders, as well as taking account of the external climate.
Annual incentive
The annual incentive plan for the financial year ended 30 June 2020 provided a bonus opportunity payable entirely in cash. In recognition of the external best practice guidelines in the United Kingdom and prevalent practice in other FTSE 100 companies, a new bonus deferral plan will be introduced for the year ended 30 June 2021, which will require Executive Directors to defer one-third of their actual earned bonus payment into Diageo shares, to be held for a minimum of three years. This further reinforces the focus on delivering long-term shareholder value, in addition to the high shareholding requirement, the level of stretch in performance targets under the incentive plans and the post-vesting holding period for long-term incentives. These measures ensure that executives are invested in managing risk appropriately for the business.
The structure of the annual incentive plan for Executive Directors in the year ending 30 June 2021 remains broadly the same, with 80% based on financial measures and 20% on individual business objectives. The average working capital measure (as a percentage of net sales value) will be replaced with a new operating cash conversion measure, in recognition of the criticality of strong cash performance and cost containment in the current challenging market conditions.
Given the global nature of the pandemic, the uncertainty around the severity and duration of impact across multiple markets in which Diageo operates, and the significant difficulties in setting meaningful targets for the year ahead, the target-setting process for the annual incentive plan for 2021 will be managed in two half-year periods, with financial targets for the first half of the year (1 July 2020 - 31 December 2020) approved immediately after the announcement of Diageo’s final results in July 2020, and financial targets for the second half of the year (1 January 2021 - 30 June 2021) approved immediately following the announcement of Diageo’s interim results in January 2021.
There will be no payout under the annual incentive plan until after the end of the financial year, in line with the normal timeline. The Remuneration Committee will consider Diageo’s holistic performance across the full financial year in order to determine the appropriate level of payment at the end of the financial year, based on a rigorous year-end assessment to ensure that the decisions that have been taken and the financial results that have been achieved align to the interests of Diageo’s shareholders and wider stakeholders over the long term. This review will consider factors such as market share, the relationship between revenue and profit performance, Diageo’s performance relative to its peer group, and any other relevant context impacting the business. The Committee retains full discretion to adjust annual incentive payouts to ensure they appropriately reflect underlying business performance and the experience of shareholders. Any discretionary adjustments will be detailed in the following year’s annual report on remuneration.
Long-term incentives
The Committee remains confident that the mix of performance shares and share options is an appropriate long-term incentive for the leaders of the business, and the share options element provides an additional stretch in that the share price has to grow materially in addition to the performance condition being achieved in order for the award to deliver value to executives. This further strengthens the alignment between the interests of executives and shareholders. Share option plans remain majority practice within Diageo’s international peer group, against which the company needs to remain competitive in order to attract and retain the highest calibre of talent.
As a result of very rich and productive discussions with shareholders, I am pleased to confirm that long-term incentive awards in 2020 will include a measure based on ESG (Environmental, Social and Governance) priorities, in line with Diageo’s vision to make a positive impact on the environment and society. The ESG measure will cover water efficiency, carbon reduction, positive drinking and inclusion and diversity. In considering the appropriateness of ESG priorities under the long-term incentive plan, the Committee and I have been focused on selecting measures that are strategically critical to the business over the long term, as well as being measurable and able to be independently validated. The other measures under the long-term incentive award for 2020 are detailed on page 188. To those of you with whom I consulted, thank you for your extensive input and experience in assessing the design and effectiveness of the long-term incentive plan.
Due to the Covid-19 pandemic, the Committee has decided to set targets for 2020 long-term incentive awards after the interim results have been reported for the period 1 July 2020 to 31 December 2020, at which time it is envisaged that there will be better visibility of the market conditions for the company’s three-year plan. We intend to consult again with shareholders before these targets are set and disclosed. Long-term incentive awards will be made as normal in September 2020. Awards are calculated on the basis of a six-month average share price for the period ending 30 June 2020. At £28.43, this award price is in line with previous years, and as a result no adjustment to award size is deemed necessary. The Committee will keep under review the targets for outstanding
long-term incentive awards made in 2018 and 2019 to ensure they remain appropriate.
Shareholding requirement
The in-employment shareholding requirement is high relative to other UK listed companies at 500% of salary for the Chief Executive and 400% of salary for the Chief Financial Officer, and both incumbents have exceeded that requirement at 2,635% and 791% respectively.
In accordance with best practice guidelines under the Corporate Governance Code, a new post employment shareholding requirement policy will be implemented from 1 July 2020, under which Executive Directors leaving the company will be required to hold 100% of their in-employment shareholding requirement (or their actual shareholding, if lower) for one year after exit, reducing to 50% of their in-employment shareholding requirement in the second year after exit. This ensures that departing Executive Directors remain invested in Diageo’s long-term share price performance and the appropriate management of risk.
Other decisions made during 2020
In addition to reviewing salaries, incentive awards and payments for the Executive Committee, setting targets for the annual and long-term incentive plans, and reviewing annual and long-term incentive outcomes for the Executive Committee, the Committee made other decisions during the year ended 30 June 2020, as outlined below.
Chairman’s fee increase for 2020 waived until 2021
In light of the current challenges affecting the company in relation to the Covid-19 pandemic, the Chairman asked to defer his planned fee increase for 2020 until 2021. The Chairman’s fee has not increased since his appointment in January 2017, and the Committee had approved an increase from £600,000 to £650,000, effective 1 January 2020. This fee increase will instead take effect on 1 January 2021.
No salary increases or bonus payments for Executive Directors in 2020
The significant and unpredictable impact of the pandemic on Diageo’s performance has required the company to review its approach to reward and incentives for all employees to reflect the challenges of the current environment, including the need to increase focus on cash and cost. Many of our employees will not receive a bonus for the year ended 30 June 2020 and there will be no annual salary review implemented during 2020. In keeping with the approach taken for the majority of employees across the company in 2020, there will be no annual salary increase for Executive Directors or members of the Executive Committee during 2020. Downward discretion has been exercised so that there is no payout, irrespective of performance, against the individual business objectives under the annual incentive plan, meaning that there will be no annual incentive payout for Executive Directors or members of the Executive Committee for the year
ended 30 June 2020.
Diageo has made the health and wellbeing of its employees its top priority in response to the Covid-19 pandemic. The company has safeguarded jobs, pay and benefits for its employees during the year ended 30 June 2020, has rolled out a global Employee Assistance Programme to provide personal, legal and financial advice to employees and their families, has extended emergency, bereavement leave and life insurance to all employees across the world and has provided access to learning resources on remote working, wellness and resilience through change. No doubt there will continue to be uncertain and challenging times ahead, but in focusing on emerging stronger, Diageo seeks to deliver the best possible outcomes for employees, shareholders and society.
The Directors’ remuneration policy will be put forward for your consideration and approval by binding vote, and the annual remuneration report by advisory vote, at the AGM on 28 September 2020. Thank you to those shareholders that engaged with us as part of the 2020 remuneration policy review; I believe the new policy supports the business strategy, drives pay for performance and meets the needs of all our stakeholders.
In closing, I want to recognise the level of energy, agility and resilience demonstrated by our people throughout these difficult times. There is a high level of passion, pride and accountability for our heritage-rich brands at Diageo and a shared commitment to be our best, and to do the right thing at work, in life and in the wider community. Our people have been working tirelessly to drive the best results for the business, and many people have continued to do their jobs outside of their homes to keep production and supply going. To all Diageo employees - thank you for your hard work, your solidarity and your commitment to emerging stronger.
Susan Kilsby
Non-Executive Director and Chairman of the Remuneration Committee
|
| | | | | |
| |
| Delivery of business strategy |
| Short and long-term incentive plans reward the delivery of our business strategy and Performance Ambition. Performance measures are reviewed regularly and stretching targets are set relative to the company’s growth plans and peer group forecasted performance. The Committee seeks to embed simplicity and transparency in the design and delivery of executive reward. |
| Creating sustainable, long-term performance |
| A significant proportion of remuneration is delivered in variable pay linked to business and individual performance, focussed on consistent and responsible drivers of long-term growth. Performance against targets is assessed in the context of underlying business performance and the ‘quality of earnings’. |
| Winning best talent |
| Well designed and market-competitive total remuneration, with an appropriate balance of fixed reward and upside opportunity, allows us to attract and retain the best talent from all over the world in a competitive talent market, which is critical to our continued business success. |
| Consideration of stakeholder interests |
| Executives are focussed on creating sustainable share price growth. The requirement to build significant personal shareholdings in Diageo, and to hold shares acquired from long-term incentive awards for two years post-vesting aligns executives and shareholders. Decisions on executive remuneration are made with consideration of the interests of the wider workforce and other stakeholders, as well as the external climate. |
| | | | | | | | | | | | | | | | | |
| Remuneration at a glance |
| PurposeSalary | Allowances and link to strategybenefits | Key featuresAnnual incentive | Planned for year ending 30 June 2021Long-term incentives | Implementation in year ended 30 June 2020 | Implementation in year ended 30 June 2019Shareholding requirement |
SalaryPurpose
| •Supports the attraction and retention of the best global talent with the capability to deliver Diageo’s strategy
| •Normally reviewed annually on 1 October
•Salaries take account of external market and internal employee context
| •No salary increase for Executive Directors or Executive Committee members
•Exceptional salary increases only (e.g. on promotion) for the wider workforce during 2020
| •Effective 1 October 2019:
– CEO 3% increase to $1,661,427
– CFO 3% increase to
$1,093,044
•In line with the pay budget for the wider workforce (3% for the UK and the US in 2019)
| •Effective 1 October 2018:
– CEO 2% increase to $1,613,036
– CFO 2% increase to $1,061,208
•Below the pay budget for the wider workforce
|
Allowances and benefits | •Provision of market competitivemarket-competitive and cost-effective benefits supports attraction and retention of talent
| •Provision of competitive benefits linked to local market practice
•Maximum company pension contribution is 14% of salary for new Executive Director appointments, which is aligned to the offering for new-hire employees in the United Kingdom | •Allowances and benefits
unchanged from prior year
•Company pension contribution:
-CEO 20% of salary
-CFO 20% of salary
| •Company pension contribution:
– CEO 20% of salary
(reduced from 30% of
salary effective 1 July
2019)
– CFO 20% of salary
| •Company pension
contribution:
– CEO 30% of salary
– CFO 20% of salary
|
Annual incentive | •Incentivises delivery of Diageo’s financial and strategic targets
•
Provides focus on key financial metrics and the individual’s contribution to the company’s performance
| •Rewards consistent long-term performance in line with Diageo’s business strategy
Provides focus on delivering superior long-term returns to shareholders
| Ensures alignment between the interests of Executive Directors and shareholders |
| Key features of current policy & proposed key policy changes | Normally reviewed annually on 1 October
Salaries take account of external market and internal employee context | Provision of competitive benefits linked to local market practice
Maximum company pension contribution is 14% of salary, which is aligned to the offering for the wider workforce in the United Kingdom | Target opportunity is 100% of salary and maximum is 200% of salary
•
Performance measures, weightings and stretching targets are set by the Remuneration Committee
•
Subject to malus and clawback provisions
•New requirement for
Executive Directors to defer a minimum of one-third of earned bonus payment into Diageo shares held for three years first taking effect on the bonus for the year ended 30 June 2021•
Remainder paid out in cash after the end of the financial year
| •Targets will be set over two half-year periods
•For the year ending 30 June 2021, measures on net sales growth, operating profit growth and operating cash conversion, weighted equally, with remaining 20% on individual objectives
| •No annual incentive payout for Executive Directors in 2020 | •Pay-out above target:
-CEO 61.0% of maximum
-CFO 57.6% of maximum
|
Long-term incentives | •Rewards long-term consistent performance in line with Diageo’s business strategy
•Provides focus on delivering superior long-term returns to shareholders
| •Annual grant of performance shares and share options
-CEO
CEO award up to 500% of salary
-CFO
CFO award up to 480% of salary (%
(% of salary for both CEO and CFO described in performance share equivalents)
•
Performance measures, weightings and stretching targets are set annually
•
Three-year performance period plus two-year retention period
•
Subject to malus and clawback provisions
•Grant price
Number of awards granted is based on a six-month average share price to 30 June preceding grant date
| •Retention of measures on NSV growth, relative TSR and cumulative free cash flow; introduction of new measures on ESG and EPS growth
•Size of long-term incentive
award opportunity is unchanged from prior year
| •Vesting of 2017 performance shares at 6.9% of maximum
•Vesting of 2017 share options at 27.5% of maximum
| •Vesting of 2016 performance shares at 89.3% of maximum
•Vesting of 2016 share options at 73.1% of maximum
|
Shareholding requirement | •Ensures alignment between the interests of Executive Directors and shareholders
| •Minimum shareholding requirement within five years of appointment:
-
CEO 500% of salary
-
CFO 400% of salary
| •New post employment
Post-employment shareholding requirement for Executive Directors of 100% of in-employment requirement in the first year after leaving the company and 50% in the second year after leaving the company
Proposed policy change: Post-employment shareholding requirement for Executive Directors of 100% of in-employment requirement to be retained in full for two years after leaving the company |
| Planned for year ending 30 June 2024 | •4% salary increase for the CFO, below the annual salary budgets for the wider workforce in the United Kingdom
New CEO shareholding 2,635%appointment from 5 June 2023. No salary increase in fiscal 24 | Allowances and benefits unchanged from prior year
Company pension contributions 14% of salary
•
| Size of annual incentive award opportunity is unchanged from prior year. For fiscal 24, measures are net sales growth, operating profit growth and operating cash conversion, 80% in total weighted equally, with remaining 20% on individual objectives | Performance measures are net sales growth, relative TSR, cumulative free cash flow, profit before exceptional items and tax and ‘Society 2030: Spirit of Progress‘ measures
Size of long-term incentive award opportunity is unchanged from prior year
| No change to in-employment shareholding requirement
Post-employment shareholding of 100% of in-year shareholding for two years after leaving the company |
| Implementation in year ended 30 June 2023 | 3% salary increase for the CEO and CFO, shareholding 791%slightly below the annual salary budgets for the wider workforce in the United Kingdom and the United States
| Allowances and benefits unchanged from prior year
Company pension contribution:
CEO 20% of salary
| •CEO shareholding 2,620% until 1 January 2023, which was then reduced to 14% of salary
•
CFO shareholding 563%14% of salary
| Payout of 32.5% of maximum for the financial elements of the plan
Total payout of 37.25% of maximum for the prior CEO, 35.38% for the CEO and 36.0% for the CFO | Vesting of 2020 performance shares at 98.7% of maximum for Ivan Menezes, and 98.8% of maximum for Debra Crew and Lavanya Chandrashekar
Vesting of 2020 share options at 77.5% of maximum for Ivan Menezes and Debra Crew. Lavanya Chandrashekar did not receive share options in 2020 | As at 30 June 2023, Ivan Menezes' shareholding was 2,728% of salary
As at 30 June 2023, Debra Crew's shareholding was 1% of salary (she has until 8 June 2028 to meet her requirement)
As at 30 June 2023, Lavanya Chandrashekar's shareholding was 47% of salary (she has until 1 July 2026 to meet her requirement) |
| Implementation in year ended 30 June 2022 | 3% salary increase for the CEO in line with wider workforce in the United Kingdom and the United States in 2021
CFO appointed 1 July 2021. No salary increases post appointment in 2021 | Allowances and benefits unchanged from prior year
Company pension contribution:
CEO 20% of salary
CFO 14% of salary | Payout of 100% of maximum for the financial elements of the plan
Total payout of 93.75% of maximum for the CEO and 90.0% of maximum for the CFO
| Vesting of 2019 performance shares at 59.3% of maximum for Ivan Menezes and 59.8% of maximum for Lavanya Chandrashekar
Vesting of 2019 share options at 61.5% of maximum for Ivan Menezes. The CFO did not receive share options in 2019 | •As at 30 June 2022, Ivan Menezes' shareholding was 3,093% of salary •As at 30 June 2022, Lavanya Chandrashekar's shareholding was 31% of salary (she has until 1 July 2026 to meet requirement)
|
Proportionality and management of risk
The structure of Diageo’s executive remuneration package ensures that executives have a vested interest in delivering performance over the short and long term. There is a three-year deferral of part of the annual incentive payout into shares, a two-year retention period on any vested awards under the long-term incentive plan and a post employment shareholding requirement that applies for two years after leaving the company. The performance and retention periods for each element of remuneration are outlined below.
Pay for performance at a glance
PerformanceThe charts below show performance outcomes against targets for the long-term and annual incentive targets had been tracking well until the beginning of the Covid-19 pandemic in early 2020. The outcomes are appropriate in light of year-end performance and the shareholder experience.plans. Targets under both incentive plans are set with reference to Diageo’s strategic plan and the historical and forecasted performance of Diageo and its peers.
Long-term incentives (for the period 1 July 20172020 to 30 June 2020)2023)
Annual incentive (for the period 1 July 20192022 to 30 June 2020)2023)
HistoricalHistoric reward outcomes under the annual and long-term incentive plans over the past five years are shown below. Vesting outcomes under the long-term incentive plan are shown against annualised total shareholder return for the three-year period ended in the year of vesting (i.e. annualised TSR for the three years ended 30 June 20202023 is shown against the vesting outcome for the 20172020 long-term incentive awards vesting in 2020)2023). Outcomes against annual incentive financial measures are shown against organic operating profit growth for each respective financial year, as disclosed in prior-year annual report.reports.
165
Remuneration Committee Governance
Remuneration Committee
The Remuneration Committee consists of the following independent Non-Executive Directors: Susan Kilsby, Melissa Bethell, Valérie Chapoulaud-Floquet, Sir John Manzoni, Lady Mendelsohn, Alan Stewart, Ireena Vittal and Karen Blackett. Susan Kilsby is the Chair of the Remuneration Committee and also the Senior Independent Director. The Chairman of the Board and the Chief Executive are invited to attend Remuneration Committee meetings, except when their own remuneration is being discussed. The Chief Human Resources Officer and Global Performance and Reward Director are also invited by the Remuneration Committee to provide their views and advice. The Chief Financial Officer may also attend to provide performance context to the Committee during its discussions about target setting and incentive outcomes. The Remuneration Committee's terms of reference are available in the corporate governance section of the company's website and on request from the Company Secretary.
The Remuneration Committee is responsible for all executive remuneration decisions throughout the year, which includes setting financial targets for the annual and long-term incentive plans and the outcomes under these plans. During fiscal 23, the Remuneration Committee also reviewed the Directors' remuneration policy and consulted with Diageo's largest investors in preparation for seeking shareholder approval at the 2023 AGM, as well as the CEO transition arrangements and the death-in-service remuneration arrangements following the sad passing of Sir Ivan Menezes. The Committee considered the remuneration policy and practices in the context of the principles of the Corporate Governance Code, as follows:
Clarity – the Committee engages regularly with executives, shareholders and their representative bodies in order to explain the approach to executive pay;
Simplicity – the purpose, structure and strategic alignment of each element of pay has been laid out in the remuneration policy;
Risk – there is an appropriate mix of fixed and variable pay, and financial and non-financial objectives, and there are robust measures in place to ensure alignment with long-term shareholder interests, including the DLTIP post-vesting retention period, shareholding requirement, bonus deferral into shares and malus and clawback provisions. The Committee also considers the impact on behaviour of both the measures and targets set;
Predictability-the pay opportunity under different performance scenarios is set out on page 170 of this report;
Proportionality – executives are incentivised to achieve stretching targets over annual and three-year performance periods, and the Committee assesses performance holistically at the end of each period, taking into account underlying business performance and the internal and external context. The Committee may exercise discretion to ensure that payouts are appropriate; and
Alignment with culture – non-financial objectives may be incentivised under the individual business objective element of the annual incentive plan and ‘Society 2030: Spirit of Progress‘ (ESG) priorities are incentivised under the long-term incentive plan, which reinforces the company’s purpose and values. The design of remuneration and the measures used, reflect Diageo's culture.
External advisors
During the year ended 30 June 2023, the Remuneration Committee received advice on Directors' remuneration from both Deloitte and FIT. FIT was appointed as the Committee’s new external advisor in October 2022.
The fees paid to Deloitte in fiscal 23 (until the end of their appointment) for advice provided to the Committee were £33,900. The fees paid to FIT in fiscal 23 since their date of appointment were £114,265. All fees were determined on a time and expenses basis.
The Committee is satisfied that FIT's (and previously Deloitte's) engagement partners, and the teams that provide remuneration advice to the Committee, have no connections with Diageo that may impair their independence. The Committee reviewed the potential for conflicts of interest and judged that there were appropriate safeguards against such conflicts. Deloitte provided and continues to provide unrelated services to the company in the areas of immigration and management consultancy. FIT does not provide Diageo with any other services. Deloitte and FIT are founder members of the Remuneration Consultants Group (RCG) which is responsible for developing and maintaining the Code of Conduct for Consultants to Remuneration Committees of UK listed companies. FIT attended Remuneration Committee meetings during the year following their appointment and the Committee is satisfied that the advice it has received has been objective and independent.
Statement of voting
The following table summarises the details of votes cast in respect of the resolutions on the Directors’ remuneration policy at the 2020 AGM and the Directors' remuneration report (excluding the policy) at the 2022 AGM.
| | | | | | | | | | | | | | | | | |
| | For | Against | Total votes cast | Abstentions |
Directors’ remuneration policy(1) | Total number of votes | 1,644,443,671 | 121,538,951 | 1,765,982,622 | 3,321,427 | |
| Percentage of votes cast | 93.12 | % | 6.88 | % | 100 | % | n/a |
Directors' remuneration report (excluding the policy)(2) | Total number of votes | 1,612,245,424 | 88,630,650 | 1,700,876,074 | 28,285,201 | |
| Percentage of votes cast | 94.79 | % | 5.21 | % | 100 | % | n/a |
(1) As shown on pages 89–94 of the 2020 UK Annual Report
(2) As shown on pages 106–112 and 119-131 of the 2022 UK Annual Report.
Directors' remuneration policy
This section of the report summarisessets out the 2023 Directors' remuneration policy for the remuneration of the company’s Directors. The policywhich will be put to a binding vote at the AGM on 28 September 2020, in accordance2023 and, if approved, will apply with section 439A of the Companies Act 2006.effect from 1 July 2023.
The current policy, which was approved by shareholders in September 20172020, can be found on the company’s website at https://www.diageo.com/en/investors/financial-results-and-presentations/directors-remuneration-report-2017/.
our-business/corporate-governance/remuneration-at-diageo.
The Remuneration Committee discussed the details of the policy over a series of meetings, taking into account the strategic priorities of the business and evolving market practice. Input was sought from the management team whilst ensuring any conflict of interest was suitably mitigated. An external perspective was provided by majorthe Remuneration Committee’s advisor and the Remuneration Committee Chair engaged with the company’s 20 largest shareholders and their representatives regarding the policy proposals. As referenced in the Remuneration Committee Chair’s letter, the Committee believes the current policy continues to support the business strategy and therefore the new policy being put forward for shareholder and independent advisers. These changes include: reduction of pension provision, introduction of a deferred bonus share plan, introduction of a post employmentapproval remains largely the same. The key change from the current policy relates to the increase in post-cessation shareholding requirement annual review of Non-Executive Director fees, increase to the Non-Executive Director fee limit, removalwhich requires 100% of the in-service shareholding requirement (or, if lower, their actual shareholding on cessation) to be held for straight-line vesting between thresholdtwo years after leaving (from 100% in the first year and maximum50% in the second year under the long-term incentive plancurrent policy). We have improved disclosures by providing more detail on our malus and clawback policy, the shareholding requirements and the consideration of a returns measure, in the discretionary assessment of long-term incentive outcomes. The rationaleenforcement mechanism for the post-cessation shareholding requirements. Some minor editorial changes are described on page 161. have also been made.
The Committee reserves the right to make minor changes to the policy, where required for regulatory, tax or administrative reasons.
| | | | | | |
| l | Base salary | |
| |
l | Base salary |
| Purpose and link to strategy
| |
| Supports the attraction and retention of the best global talent with the capability to deliver Diageo’s strategy and performance goals. | |
| Operation
| |
| •Normally reviewed annually or following a change in responsibilities with any increases usually taking effect from 1 October.
•The Remuneration Committee considers the following parameters when reviewing base salary levels:
-Pay ◦Pay increases for other employees across the group.
-Economic ◦Economic conditions and governance trends.
-The ◦The individual’s performance, skills and responsibilities.
-Base ◦Base salaries (and total remuneration) at companies of similar size and international scope to Diageo, with roles typically benchmarked against the FTSE 30 excluding financial services companies, or against similar comparator groups in other locations dependent on the Executive Director'sDirector’s home market.market as well as global consumer goods companies. | |
| Opportunity
| |
| Salary increases will be made in the context of the broader employee pay environment, and will normally be in line with those made to other employees in the relevant markets in which Diageo operates, typically the United Kingdom and the United States, unless there is a change in role or responsibility or other exceptional circumstances. | |
| l | Benefits | |
| Purpose and link to strategy
| |
| Provides market-competitive and cost effective benefits.cost-effective benefits as part of remuneration packages designed to attract and retain the best global talent. | |
| Operation | |
| Operation
•The provision of benefits typically depends on the country of residence of the Executive Director and may include but is not limited to a company car or travel allowance, the provision of a contracted car service or equivalent, product allowance, life insurance, accidental death and disability insurance, medical and dental cover, financial counsellingtax support and tax advice.
return preparation costs.
•The Remuneration Committee has discretion to offer additional allowances, or benefits, to Executive Directors, if considered appropriate and reasonable. These may include, but are not limited to, relocation expenses, housing allowance and school fees where a Director is asked to relocate from his/her home location as part of their appointment. Where appropriate, for example in relation to relocation benefits, the company may also meet the tax costs associated with the benefit provision. | |
| Opportunity | |
| Opportunity
•The benefits package is set at a level which the Remuneration Committee considers:
• Provides
◦provides an appropriate level of benefits depending on the role and individual circumstances;
• Is ◦is appropriate in the context of the benefits offered to the wider workforce in the relevant market,market; and
• Is ◦is in line with comparable roles in companies of a similar size and complexity in the relevant market. | |
| l | Post-retirement provision | |
| |
l | Post-Retirement Provision |
| Purpose and link to strategy
| |
| Provides cost-effective, competitive post-retirement benefits.benefits which are part of remuneration packages designed to attract and retain the best global talent. | |
| Operation | |
| Operation
•Provision of market-competitive pension arrangements or a cash alternative based on a percentage of base salary.
| |
| Opportunity | |
| Opportunity
•The maximum company pension contribution, under the 2020 remuneration policyor cash alternative allowance, for Executive Directors is 14% of salary for any new Executive Director appointments.
• Current legacy company contributions for Ivan Menezes and Kathryn Mikells in the year ended 30 June 2020 were each 20% of base salary. The company contribution for Ivan Menezes was reduced from 40% to 30% effective 1 July 2016,current CEO and from 30% to 20% effective 1 July 2019.
• It is the company’s intention to reduce theCFO receive a pension contribution for Ivan Menezes and Kathyrn Mikells toof 14% of salary, in line with the maximum company contribution to new-hire employees in the United Kingdom, by 1 January 2023.UK workforce.
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| l | Annual Incentive Plan (AIP) | |
| Purpose and link to strategy
| |
| Incentivises year-on-year delivery of Diageo’s annual financial and strategic targets. Provides focus on key financial metricstargets and the individual’s contributionachievement of key individual objectives which are chosen to align with the company’sbusiness strategy and create a platform for sustainable longer-term performance. Compulsory deferral of a minimum of one-third of any annual incentive earned into shares for three years promotes longer-term alignment of Executive Directors' interests with shareholders’ interests. | |
| Operation | |
| Operation
•Performance measures, weightings and targets are set by the Remuneration Committee. Appropriately stretching targets are set by reference to the annual operating plan and historical and projected performance for the company and its peer group.
•The level of award is determined with reference to Diageo’s overall financial and strategic performance and individual performance.
•A minimum of one-third of the actual earned bonus payment willis normally be deferred into a share award (pre-tax deferral) or owned shares (post-tax deferral) under the Deferred Bonus Share Plan, to be held for a minimum period of three years, other than in exceptional circumstances. The remainder of the bonus payment will beis paid out in cash after the end of the financial year. •The Remuneration Committee has discretion to adjust the level of payment if it is not deemed to reflect appropriately the individual’s contribution or the overall business performance. Any discretionary adjustments will be detailed in the following year’s annual report on remuneration.
•The Remuneration Committee has discretion to apply malus or clawback to bonus i.e.as detailed in the company may seek to recover bonus paid or'Malus and Clawback' section below. •In the case of pre-tax deferral, into shares, in exceptional circumstances such as gross misconduct or gross negligence during the performance period. • Notionalnotional dividends accrue on deferred bonus share awards, delivered as shares or cash at the discretion of the Remuneration Committee at the end of the vesting period.period (on post-tax deferral into owned shares, actual dividends are payable).
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| Opportunity
| |
| For threshold performance, up to 50% of salary may be earned, with up to 100% of salary earned for on-target performance and a maximum of 200% of salary payable for outstanding performance. The maximum includes the deferred share element but excludes dividend equivalents payable in respect of deferred share awards. | |
| Performance conditions | |
| Performance conditions
Annual incentive plan awards are normally based 70%-100% on financial measures which may include, but are not limited to, measures of sales, profit and cash;cash, and 0%-30% on broader objectives based on strategic goals and/or individual contribution.
The Remuneration Committee has discretion to amend the performance measures in exceptional circumstances if it considers it appropriate to do so, e.g. in cases of accounting policy changes, merger and acquisition activities or disposals. Any such amendments would be fully disclosed and explained in the following year’s annual report on remuneration. | |
| l | Diageo Long-Term Incentive Plan (DLTIP) | |
| Purpose and link to strategy
Provides focus on delivering superior long-term returns to shareholders. | |
| Provides a long-term incentive to achieve key performance measures which support the company’s strategy, and to align interests with shareholders. | |
| Operation | |
| Operation
•An annual grant of performance shares and/or market-price share options which vest subject to a performance test and continued employment, normally over a period of three years.
•Measures and stretching targets are reviewed annually by the Remuneration Committee for each new award. •The Remuneration Committee has the authority to exercise discretion to adjust the vesting outcome based on its assessment of underlying the overall business performance over the performance period. This may include the consideration of factors such as holistic performance relative to peers, stakeholder outcomes and significant investment projects, for example.
•Following vesting, there is normally a further retention period of two years. Executive Directors are able to exercise an option or sell sufficient shares to cover any tax liability when an award vests, provided they retain the net shares arising for the two-year retention period.
•Notional dividends accrue on performance share awards to the extent that the performance conditions have been met, delivered as shares or cash at the discretion of the Remuneration Committee at the end of the vesting period.
•The Remuneration Committee has discretion to reduce the number of shares which vest (subjectapply malus or clawback to HMRC rules regarding approved share options), for examplebonus as detailed in the event of a material performance failure, or a material restatement of the financial statements. There is an extensive malus clause for awards made from September 2014. The Committee has discretion to decide that:
-the number of shares subject to the award will be reduced;
-the award will lapse;
-retention shares (i.e. vested shares subject to the additional two-year retention period) will be forfeited;
-vesting of the award or the end of any retention period will be delayed (e.g. until an investigation is completed);
-additional conditions will be imposed on the vesting of the award or the end of the retention period; and/or
-any award, bonus or other benefit which might have been granted or paid to the participant in any later year will be reduced or not awarded.
• Malus'Malus and clawback provisions will apply up to delivery of shares at the end of the retention period (as opposed to the vesting date). The company also has the standard discretion to take account of unforeseen events such as a variation to share capital.Clawback' section below. | |
| Opportunity | |
| Opportunity
•The maximum annual grants for the Chief Executive and Chief Financial Officer are 500% and 480% of salary in performance share equivalents respectively (where a market-price option is valued at one-third of a performance share). Included within that maximum, no more than 375% of salary will be awarded in face-value terms in options, with the balance awarded in performance shares, to any Executive Director in any year.
•Awards vest at 20% of maximum for threshold performance and 100% of maximum if the performance conditions are met in full. The vesting schedule related to the levels of performance between threshold and maximum, including whether or not this will include an interim stretch performance level, will be determined by the Remuneration Committee on an annual basis and disclosed in the relevant remuneration report for that year. There is a ranking profile for the vesting of the part of the award based on relative total shareholder return, starting at 20% of maximum for achieving the threshold. |
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| Performance conditions | |
| Performance conditions
• The vesting of awards is linked to a range of measures which may include, but are not limited to:
-a•a growth measure (e.g. net sales growth, operating profit growth);
-a•a measure of efficiency (e.g. operating margin, cumulative free cash flow, return on invested capital);
-a•a measure of Diageo’s performance in relation to its peers (e.g. relative total shareholder return),; and
- •a measure relating to ESGour ‘Society 2030: Spirit of Progress‘ (environmental, social or governance) priorities.
• Measures that apply to performance shares and market pricemarket-price options may differ, as is the case for current awards. Weightings of these measures may also vary year on year.
• The Remuneration Committee has discretion to amend the performance conditions in exceptional circumstances if it considers it appropriate to do so, e.g. in cases of accounting policy changes, merger and acquisition activities or disposals. Any such amendments would be fully disclosed and explained in the following year’s annual report on remuneration.
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| | | | | |
l | Malus and Clawback | |
| Under the AIP and DLTIP, the Remuneration Committee has discretion to apply malus and clawback in the circumstances specified in the applicable malus and clawback policy from time to time in place, for example: •Material misstatement of results or an error resulting in overpayment. •Risk failure resulting in material financial loss or any business area being the subject of a regulatory investigation or in breach of regulation. •Employee misconduct/disciplinary action. •Employee accountability for material reputational damage to the group which could have been avoided. •In respect of the application of malus, deterioration in the financial situation of the Group which limits the ability to fund incentive awards. •Any other matter which, in the reasonable opinion of the Remuneration Committee, is required to be considered to comply with prevailing legal and/or regulatory requirements. The malus and clawback provisions may be invoked for one year following an AIP cash payment and two years following a DLTIP vesting. Where the Remuneration Committee determines that malus and/or clawback will apply, the Remuneration Committee has discretion to determine the basis of application and the means by which malus and/or clawback will be implemented. The malus and clawback policy will be reviewed from time to time to ensure that the policy is compliant with any regulatory requirements, such as the NYSE listing rules. | |
| | | | | |
| l | All-employee share plans |
| Purpose and link to strategy
|
| To encourage broader employee share ownership through locally approved plans. |
| Operation |
| Operation
•The company operates tax-efficient all-employee share acquisition plans in various jurisdictions.
•Executive Directors’ eligibility may depend on their country of residence, tax status and employment company. |
| Opportunity |
| Opportunity
•Limits for all-employee share plans are set by the tax authorities. The company may choose to set its own lower limits.
|
| Performance conditions |
| Performance conditions
•Under the UK Share Incentive Plan, the annual award of Freeshares ismay be based on Diageo plc financial measures which may include, but are not limited to, measures of sales, profit and cash.
|
| l | Shareholding requirement |
| Purpose and link to strategy
|
| •Ensures alignment between the interests of Executive Directors and shareholders. |
| Operation |
| Operation
•The minimum in-employment shareholding requirement is 500% of base salary for the Chief Executive and 400% of base salary for any other Executive Directors.
•Executive Directors are normally expected to build up their in-employment shareholding within five years of their appointment to the Board.
•Shares that count towards these minimum shareholding requirements are shares beneficially held by the Executive Director and their connected persons, including Deferred Bonus Share Plan (DBSP) shares within the three-year deferral period, on a net (if post-tax deferral)/notional net (if pre-tax deferral) of tax basis. •Executive Directors will beare restricted from selling more than 50% of shares which vest under the long-term incentive plan or deferred bonus share plan (excluding the sale of shares to cover tax on vesting and other exceptional circumstances to be specifically approved by the Chief Executive and/or Chairman), until the shareholding requirement is met.
•In order to provide further long-term alignment with shareholders, Executive Directors will normally be expected to maintain a holdingDiageo shareholding of shares in Diageo for a two-year period after leaving the company. Executive Directors will normally be required to continue to hold 100%
of the in-employment shareholding requirement (or, if lower, their actual shareholding on cessation) for the first year after leaving the company, reducing to 50% for the second yeartwo years after leaving the company.
•The Executive Directors enter into a deed undertaking to comply with the requirement and committing to hold the required number of shares in a specified nominee account. |
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| l | Chairman of the Board and Non-Executive DirectorsDirectors' fees |
| Purpose and link to strategy
|
| •Supports the attraction motivation and retention of world-class talent and reflects the value of the individual, their skills and experience, and performance.experience. |
| Operation |
| Operation
•Fees for the Chairman and Non-Executive Directors are normally reviewed every year.
•A proportion of the Chairman’s annual fee ismay be used for the monthly purchase of Diageo ordinary shares, which have to be retained until the Chairman retires from the company or ceases to be a Director.
•Fees are reviewed in the light of market practice in the FTSE 30, excluding financial services companies, and anticipated workload, tasks and potential liabilities.
•The Chairman and Non-Executive Directors do not participate in any of the company’s incentive plans nor do they receive pension contributions or benefits. Their travel and accommodation expenses in connection with attendance at Board meetings (and any tax thereon) are paid by the company.
•The Chairman and the Non-Executive Directors are eligible to receive a product allowance or cash equivalent at the same level as the Executive Directors. •All Non-Executive Directors have letters of appointment. A summary of their terms and conditions of appointment is available at www.diageo.com.www.diageo.com. The Chairman of the Board, Javier Ferrán, was appointedre-appointed on 1 January 2017, under6 October 2022 for a letter of appointment for an initial three-year term, terminable on sixthree months’ notice by either party or, if terminated by the company, by payment of sixthree months’ fees in lieu of notice. |
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|
|
|
|
|
| Opportunity |
| Opportunity
•Fees for Non-Executive Directors are within the limits set by the shareholders from time to time, with an aggregate limit of £1,750,000, excluding the Chairman’s fees.
|
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Policy considerations
Performance measures
Further details of the performance measures under the fiscal 24 annual incentive plan and measures and targets for DLTIP awards to be made in September 2023, are set out in the annual report on remuneration, on page 195.
Annual incentive targets will be disclosed retrospectively in next year’s annual report on remuneration as they are deemed by the Board to be commercially sensitive until after the end of the fiscal year.
Performance targets are set to be stretching yet achievable, and take into account the company’s strategic priorities and business environment. The Remuneration Committee sets targets based on a range of reference points, including the corporate strategy and broker forecasts for both Diageo and its peers.
Projected total remuneration scenarios
The graphs below illustrate scenarios for the projected total remuneration of Executive Directors at four different levels of performance: minimum, target, maximum, and maximum including assumed share price appreciation of 50% (in accordance with the Corporate Governance Code). The impact of potential share price movements is excluded from the other three scenarios. These charts reflect projected remuneration for the financial year ending 30 June 2021.2024.
Basis of calculation and assumptions:
The ‘Minimum’ scenario shows fixed remuneration only, i.e. base salary for the year ending 30 June 2021, total2024, value of contractually agreed benefits received in the year ended 30 June 2023, or the projected annual benefit value for 2021,year ending 30 June 2024 in the case of the newly appointed CEO, and the pension benefits to be accrued over the year ending 30 June 2021.2024. These are the only elements of the Executive Directors’ remuneration packages that are not subject to performance conditions.
The ‘Target’ scenario shows fixed remuneration as described above, plus a target payout of 50% of the maximum annual bonusincentive and threshold performance vesting for long-term incentive awards at 20%a midpoint payout of 60% of the maximum award.
long-term incentive awards.
The ‘Maximum’ scenario reflects fixed remuneration, plus full payout of annual and long-term incentives.
The ‘Maximum plus share price growth’ scenario reflects fixed remuneration, plus full payout of annual and long-term incentives, including, for the latter, an assumed 50% share price appreciation over the performance period.
For long-term incentives, the awards are treated as though they were granted all inentirely as performance shares.
share awards.
The amounts shown in sterling are converted using the cumulative weighted average exchange rate for the year ended 30 June 20202023 of £1 = $1.26.
$1.20.
Performance measures
Further details of the performance measures under the annual incentive plan for the year ending 30 June 2021 and under the long-term incentive plan for awards made in September 2020, and how they are aligned with company strategy and the creation of shareholder value, are set out in the annual report on remuneration, on page 176. Targets will be disclosed in next year's annual report on remuneration.
Performance targets are set to be stretching yet achievable, and take into account the company’s strategic priorities and business environment. The Committee sets targets based on a range of reference points including the corporate strategy and broker forecasts for both Diageo and its peers.
Approach to recruitment remuneration
Diageo is a global organisation selling its products in more than 180 countries around the world. The ability to recruit and retain the best talent from all over the world is critical to the future success of the business. People diversity in all its forms is a core element of Diageo’s global talent strategy and, managed effectively, is a key driver in delivering Diageo’s Performance Ambition.
The Remuneration Committee’s overarching principle for recruitment remuneration is to pay no more than is necessary to attract an Executive Director of the calibre required to shape and deliver Diageo’s business strategy, recognising that Diageo competes for talent in a global marketplace. The Committee will seek to align any remuneration package with Diageo’s remuneration policy, as laid out above, but retains the discretion to offer a remuneration package which is necessary to meet the individual circumstances of the recruited Executive Director and to enable the hiring of an individual with the necessary skills and expertise. However, the maximum shortshort-term and long-term incentive opportunity will follow the policy, although awards may be granted with different performance measures and targets in the first year. On appointment of an external Executive Director, the Committee may decide to compensate for variable remuneration elements the Directorindividual forfeits when leaving their current employer. In doing so, the Committee will ensure that any such compensation would have a fair value no higher than that of the awards forfeited, and would generally be determined on a comparable basis taking into account factors including the form in which the awards were granted, performance conditions attached, the probability of the awards vesting (e.g. past, current and likely future performance), as well as the vesting schedules. Depending on individual circumstances at the time, the Committee has the discretion to determine the type of award (i.e. cash, shares or options,options), holding period and whether or not performance conditions would apply).
apply.
Any such award would be fully disclosed and explained in the following year’s annual report on remuneration. When exercising its discretion in establishing the reward package for a new Executive Director, the Committee will carefully consider the balance between the need to secure an individual in the best interests of the company against the concerns of investors about the quantum of remuneration and, if considered appropriate at the time, will consult with the company’s biggest shareholders. The Remuneration Committee will provide timely disclosure of the reward package of any new Executive Director.
Service contracts and policy on payment for loss of office (including takeover provisions)
Executive Directors have rolling service contracts, details of which are set out below. These are available for inspection at the company’s registered office.
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| | | | |
| Executive Director | | Date of service contract |
Ivan MenezesDebra Crew | | 7 May 201328 March 2023 |
Kathryn MikellsLavanya Chandrashekar | | 1 October 2015 |
| | | | | |
| Notice period | The contracts provide for a period of six months’ notice by the Executive Director or 12 months’ notice by the company, the same as would apply for any newly-appointed Executive Director. A payment may be made in lieu of notice consisting of a sum equivalent to 12 months’the base salary which the Executive Director would have received for any notice period outstanding on the date employment ends and the cost to the company of providing contractual benefits for this period (including pension contributions but excluding incentive plans). The service contracts also provide for the payment of outstanding pay and bonus, if Executive Director leaves following a takeover, or other change of control of Diageo plc.
If, on the termination date, the Executive Director has exceeded his/hertheir accrued holiday entitlement, the value of such excess may be deducted by the company from any sums due to him/her, except to the extent that such deduction would subject the Executive Director to additional tax under section 409A of the Code (in the case of Ivan Menezes).them. If the Executive Director, on the termination date, has accrued but untaken holiday entitlement, the company will, at its discretion, either require the Executive Director to take such unused holiday during any notice period or make a payment to him/herthem in lieu of it, provided always that if the employment is terminated for cause then the Executive Director will not be entitled to any such payment. |
| Mitigation | The Remuneration Committee requires (or may exercise its discretion to requirerequire) a proportion of the termination payment to be paid in instalments and, upon the Executive Director commencing new employment, to be subject to mitigation except where termination is within 12 months of a takeover, or within such 12 months the Executive Director leaves due to a material diminution in status.mitigation. |
Annual incentive planIncentive Plan (AIP) | Where the Executive Director leaves for reasons including retirement, death in service, disability, ill-health, injury, redundancy, transfer out of the group and other circumstances at the Remuneration Committee’s discretion during the financial year, the Executive Director is usually entitled to an incentive payment pro-rated for the period of service during the performance period, which is typically payable at the usual payment date.date unless the Committee decides otherwise. Where the Executive Director leaves for any other reason, no payment or bonus deferral will be made.
The amount is subject to performance conditionsmeasures being met and is at the discretion of the Committee. The Committee has discretion to determine an earlier payment date, for example, on death in service. The bonus may, if the Committee decides, be paid wholly in cash. |
2020 Deferred Bonus Share Plan (DBSP)
| Where the Executive Director leaves for any reason other than dismissal, they are entitled to retain any deferred bonus shares, which will vest in full on departure, subject to any holding requirements under the post employmentpost-employment shareholding policy. It is not considered necessary for the bonus deferral to continue to apply after leaving, since the bonus is already earned based on performance, and there is a post employmentpost-employment shareholding requirement that ensures the Executive Director continues to be invested in the company'scompany’s longer-term interests. On a takeover, or other corporate event, awards vest in full. On other corporate events, the Remuneration Committee may allow awards to vest in full. |
Diageo 2014 Long-Term Incentive Plan (DLTIP) | Where the Executive Director leaves for reasons including retirement, death in service, disability, ill-health, injury, redundancy, transfer out of the group and other circumstances at the Remuneration Committee'sCommittee’s discretion during the financial year, awards continue in effect. Awards will vest on the original vesting date with the exception of death in service, when awards will vest on the date of death, in each case unless the Remuneration Committee decides otherwise (for example in the case of death in service).otherwise. When an Executive Director leaves for any other reason, all unvested awards generally lapse immediately. The applicable retention period for vested awards continues for all leavers other(other than in cases of disability, ill healthill-health or death in service, where the retention period will end on the date of death or leaving employment), unless the Remuneration Committee decides otherwise.
Where awards were granted in the form of options, on vesting they are generally exercisable for 12 months (or six months for approved options).
The proportion of the award released depends on the extent to which the performance condition is met. The number of shares is reduced on a pro-rata basis reflecting the length of time the Executive Director was employed by the company during the performance period, unless the Remuneration Committee decides otherwise (for example, in the case of death in service).
Where an Executive Director leaves within one month of the normal vesting date of the award, awards are not time pro-rated, unless the Remuneration Committee decides otherwise.
On a takeover or other corporate event, awards vest subject to the extent to which the performance conditions are met and, unless the Remuneration Committee decides otherwise, the awards are time pro-rated. Otherwise the Committee, in agreement with the new company, may decide that awards should be swapped for awards over shares in the new company; where awards are granted in the form of options, then on vesting they are generally exercisable for 12 months (or six months for approved options).company. |
| Repatriation/other | In cases where an Executive Director was recruited from outside the United Kingdom and has been relocated to the United Kingdom as part of their appointment, the company willmay pay reasonable repatriation costs for leavers at the Committee's discretion.TheRemuneration Committee’s discretion. The company may also pay for reasonable costs in relation to the termination, for example, tax, legal and outplacement support, where appropriate.
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Non-Executive Directors’ unexpired terms of appointment
All Non-Executive Directors are on three-year terms which are expected to be extended up to a total of nine years. The date of initial appointment to the Board and the point at which the current letter of appointment expires for Non-Executive Directors are shown in the table below. Debra Crew stepped down from the Board on 24 March 2020 and Lord Davies of Abersoch retired on 30 June 2020, having extended his term in 2019 in order to ensure continuity during the recruitment of additional Directors to the Board.
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| | | | | | | |
| Non-Executive Directors | | Date of appointment to the Board | | Current letter of appointment expires |
| | |
| Javier Ferrán | | 22 July 2016 | | AGM 20222025 |
| Susan Kilsby | | 4 April 2018 | | AGM 20212024 |
Lord Davies of AbersochMelissa Bethell | | 1 September 2010 | | 30 June 2020 | AGM 2023 |
Melissa BethellValérie Chapoulaud-Floquet | 1 January 2021 | 30 June 2020 | | AGM 20232024 |
Debra CrewSir John Manzoni | 1 October 2020 | 18 April 2019 | | 24 March 2020AGM 2023 |
Ho KwonPingLady Mendelsohn | | 1 October 2012 | | AGM 2021 |
Nicola Mendelsohn | | 1 September 2014 | | AGM 20202023 |
| Alan Stewart | | 1 September 2014 | AGM 2023 |
| Ireena Vittal | 2 October 2020 | AGM 20202023 |
| Karen Blackett | 1 June 2022 | AGM 2025 |
Payments under previous policies
The Committee reserves the right to make any remuneration payments and payments for loss of office, notwithstanding that they are not in line with the policy set out above, where the terms of the payment were agreed (i) under a previous policy, in which case the provision of that policy shall continue to apply until such payments have been made; (ii) before the policy or the relevant legislation came into effect; or (iii) at a time when the relevant individual was not a Directordirector of the company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a Directordirector of the company.
Approach to stakeholder engagement
Shareholder engagement
The Committee is interested in the views of investors and maintains an ongoing dialogue with a broad group of shareholders and institutional advisors on remuneration matters. In advance of finalising our proposed policy to be approved at the 2023 AGM, the Chair of the Remuneration Committee consulted with the company's largest shareholders and their representatives about the policy and the implementation plan for fiscal 24. The responses received from shareholders were supportive of the proposed change to enhance the post-cessation shareholding requirement, as well as the planned implementation for fiscal 24.
Employee engagement on executive remuneration
The Chairman of the Board led global workforce engagement sessions throughout the year and there were focus group sessions led by other Non-Executive Directors (more information can be found in the corporate governance section on page 137). As part of this engagement, there was a session where the Chairman shared information with employees about executive remuneration, including the Directors' remuneration policy, the role of the Remuneration Committee, executive remuneration principles and structure and how executive pay aligns with pay for the wider workforceworkforce.
Diageo also runs annual employee engagement surveys, which gives employees the opportunity to give feedback and express their views on a variety of topics, including remuneration. Any comments relating to Executive Directors' remuneration are fed back to the Remuneration Committee.
The structure of the reward package for the wider employee population is based on the principleThese activities ensure that it should be sufficient to attractshareholder views and retain the best talent and be competitive within our broader industry, remunerating employees for their contribution linked to our holistic performance. It is driven by local market practiceinterests, as well as levelthe all-employee reward context at Diageo, are considered when making executive remuneration decisions.
Consideration of senioritywider workforce remuneration
When reviewing Executive Directors’ salaries, the Committee takes into account the company’s salary budgets for key geographies and, accountability, reflectingeach year, the global natureCommittee has a session reviewing various aspects of Diageo’s business.
workforce remuneration to deepen its understanding of employee pay arrangements. There is clear alignment in the approach to pay structures for executives and the wider workforce in the way that remuneration principles are followed, aas well as the mechanics of the salary review process and incentive plan design, which are broadly consistent throughout the organisation. The performance measures under the annual incentive plan and long-term incentive plan are the same for executives and other eligible employees. ThereThe key differences are that a larger percentage of Executive Directors' remuneration is a strong focus on performance-related pay, with appropriateperformance related than that of other employees and salary, benefits and incentive participation levels of differentiationvary according to ensure that reward is invested inrole, seniority and business priorities.
When reviewing the talent that will makeDirectors’ remuneration policy, the biggest contribution toCommittee considered the execution of Diageo’s strategy. Where possible, the company also encourages employee share ownership through a number of share plans that allow employees to benefit from the company’s success.
The remuneration approach for Executive Directors is consistent with the reward package for members of the Executive Committee and the senior management population. Generally speaking, a much higher proportion of total remunerationarrangements for the Executive Directors is linked to business performance, compared to the rest of the employee population, so that remuneration will increase or decrease in line with business performance and to align the interests of Executive Directors and shareholders.
Each year the Remuneration Committee is briefed on the structure and quantum of the all-employee remuneration frameworkworkforce globally, as well as throughoutmarket practice in the year being informed aboutFTSE 30 (excluding financial services) and Diageo’s global consumer peer group. The Chairman also explains the context, challengesDirectors’ remuneration policy to employees and opportunities relating to the remunerationseeks their feedback as part of the wider workforce acrossengagement sessions, as described above. Given the world to enableminimal changes proposed for the Committee to consider the broader employee context when making executive2023 Directors’ remuneration decisions.policy, employees were not specifically consulted on this.
In 2020, the Remuneration committee has considered:
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– | Challenges and opportunities relating to the attraction and retention of key talent and the market competitiveness of specialist and critical roles (for example, in digital and e-commerce); |
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– | Pay philosophy and pay positioning globally; |
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– | Review of the gender pay gap report for the UK; |
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– | Differentiation of global reward outcomes and incentive payouts (where there is an individual element to recognise performance and potential) by gender; and |
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– | The review of global benefits programmes to better leverage economies of scale, to provide more consistent standards across the core offering and to provide more flexibility and choice, where possible, in line with the reward philosophy and in support of the company's culture of inclusion and diversity. |
The Committee also considers the annual salary increase budgets for employees in key markets as well as pay for the global senior management population. As part of the review of the Directors' remuneration policy for 2020, the Committee has considered each element of remuneration for executives and its alignment with the reward opportunity for other employees across the organisation, as an important factor in determining the appropriate balance of risk and reward to incentivise the delivery of Diageo's business strategy and Performance Ambition.
Shareholder engagement
The Committee greatly values the continued dialogue with Diageo’s shareholders and regularly engages with shareholders and representative bodies to take their views into account when setting and implementing the company’s remuneration policies.
This year, the company has engaged extensively with shareholders and their proxy advisors on the 2020 remuneration policy review, incentive plan design, performance measures and the approach to target setting as well as viewpoints on the Corporate Governance Code and its implications for Diageo’s remuneration policy and practices. More detail on the engagement with shareholders in 2020 can be found in the Remuneration Committee Chair's letter on pages 160-164.
Workforce engagement
Diageo runs annual employee engagement surveys, as well as more recently regular 'pulse' surveys on the company's handling of the impact of the pandemic on the workforce, which give employees the opportunity to give feedback and express their views on a variety of topics including remuneration. Any comments relating to Executive Directors’ remuneration are fed back to the Remuneration Committee. The Chairman was appointed to lead workforce engagement on behalf of the Board on 1 July 2019 and throughout the year has met with a range of employees across all levels and regions to hear their views on the company, culture and working environment. A workforce engagement statement has been shared with employees to feed back the key insights from all of the engagement activities during 2020.
Annual report on remuneration
The following section provides details of how the company’s 20172020 remuneration policy was implemented during the year ended 30 June 2020,2023, and how the Remuneration Committee intends to implement the proposed remuneration policy in the year ending 30 June 2021.2024.
Single total figure of remuneration for Executive Directors
The table below details the Executive Directors’ remuneration for the year ended 30 June 2020.2023.
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| Ivan Menezes(1) (2) | Debra Crew(1) (2) | Lavanya Chandrashekar(1) |
| 2023 | 2023 | 2022 | 2022 | 2023 | 2023 | 2022 | 2022 | 2023 | 2023 | 2022 | 2022 |
| £ '000 | $ '000 | £ '000 | $ '000 | £ '000 | $ '000 | £ '000 | $ '000 | £ '000 | $ '000 | £ '000 | $ '000 |
| Fixed pay | | | | | | | | | | | | |
Salary (3) | £1,403 | $1,683 | £1,277 | $1,699 | £105 | $126 | n/a | n/a | £831 | $997 | £733 | $975 |
Benefits (4) | £124 | $149 | £133 | $177 | £4 | $5 | n/a | n/a | £53 | $63 | £429 | $571 |
Pension(5) | £— | $— | £209 | $278 | £10 | $13 | n/a | n/a | £110 | $133 | £103 | $138 |
Total fixed pay(9) | £1,527 | $1,832 | £1,619 | $2,153 | £120 | $145 | n/a | n/a | £993 | $1,193 | £1,265 | $1,684 |
| | | | | | | | | | | | |
| Performance related pay | | | | | | | | | | | | |
Annual incentive(6) | £1,019 | $1,223 | £2,413 | $3,209 | £79 | $95 | n/a | n/a | £603 | $723 | £1,320 | $1,755 |
Long-term incentives(7) | £8,036 | $9,643 | £3,312 | $4,405 | £204 | $245 | n/a | n/a | £286 | $343 | £121 | $161 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Other incentives (8) | £0 | $0 | £0 | $0 | £0 | $0 | n/a | n/a | £3 | $4 | n/a | n/a |
Total variable pay(9) | £9,055 | $10,866 | £5,724 | $7,613 | £284 | $340 | n/a | n/a | £892 | $1,070 | £1,440 | $1,916 |
| | | | | | | | | | | | |
Total single figure of remuneration(9) | £10,582 | $12,698 | £7,343 | $9,767 | £403 | $485 | n/a | n/a | £1,885 | $2,263 | £2,706 | $3,599 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Ivan Menezes(i) | | | | | | | Kathryn Mikells(i) | |
| | | 2020 |
| | 2020 |
| | 2019 |
| | 2019 |
| | 2020 |
| | 2020 |
| | 2019 |
| | 2019 |
|
| Fixed pay | | '000 |
| | '000 |
| | '000 |
| | '000 |
| | '000 |
| | '000 |
| | '000 |
| | '000 |
|
| Salary | | £ | 1,309 |
| | $ | 1,649 |
| | £ | 1,244 |
| | $ | 1,605 |
| | £ | 861 |
| | $ | 1,085 |
| | £ | 819 |
| | $ | 1,056 |
|
Benefits(ii) | | £ | 99 |
| | $ | 124 |
| | £ | 95 |
| | $ | 123 |
| | £ | 42 |
| | $ | 53 |
| | £ | 27 |
| | $ | 34 |
|
Pension(iii) | | £ | 281 |
| | $ | 354 |
| | £ | 407 |
| | $ | 525 |
| | £ | 176 |
| | $ | 221 |
| | £ | 168 |
| | $ | 217 |
|
| Total fixed pay | | £ | 1,689 |
| | $ | 2,127 |
| | £ | 1,746 |
| | $ | 2,253 |
| | £ | 1,079 |
| | $ | 1,359 |
| | £ | 1,014 |
| | $ | 1,307 |
|
| Performance related pay | | | | | | | | | | | | | | | | |
Annual incentive(iv) | | £ | — |
| | $ | — |
| | £ | 1,521 |
| | $ | 1,961 |
| | £ | — |
| | $ | — |
| | £ | 946 |
| | $ | 1,220 |
|
Long-term incentives(v) | | | | | | | | | | | | | | | | |
| Value delivered through performance | | £ | 408 |
| | $ | 514 |
| | £ | 4,724 |
| | $ | 6,094 |
| | £ | 258 |
| | $ | 324 |
| | £ | 2,654 |
| | $ | 3,423 |
|
| Value delivered through share price growth | | £ | 42 |
| | $ | 53 |
| | £ | 3,785 |
| | $ | 4,882 |
| | £ | 27 |
| | $ | 33 |
| | £ | 2,891 |
| | $ | 3,730 |
|
Other incentives(vi) | | £ | — |
| | $ | — |
| | £ | — |
| | $ | — |
| | £ | 4 |
| | $ | 5 |
| | £ | 4 |
| | $ | 5 |
|
| Total variable pay | | £ | 450 |
| | $ | 567 |
| | £ | 10,030 |
| | $ | 12,937 |
| | £ | 289 |
| | $ | 362 |
| | £ | 6,495 |
| | $ | 8,378 |
|
| Total single figure of remuneration | | £ | 2,139 |
| | $ | 2,694 |
| | £ | 11,776 |
| | $ | 15,190 |
| | £ | 1,368 |
| | $ | 1,721 |
| | £ | 7,509 |
| | $ | 9,685 |
|
|
| | | | | | | | | | |
(i)(1) | Exchange rate | The amounts shown in sterlingUS dollars are converted to sterling using the cumulative weighted average exchange rate for the respective financial year. For the year ended 30 June 20202023, the exchange rate was £1 = $1.26$1.20 and for the year ended 30 June 20192022, the exchange rate was £1 = $1.29.$1.33. Ivan Menezes, Debra Crew and Kathryn MikellsLavanya Chandrashekar are both paid in US dollars. | |
(ii)(2) | BenefitsCEO transition | Ivan Menezes' pay and benefits reflects time served in fiscal 2023 up to and including the date of his death-in-service, which was also his last day of employment (6 June 2023). Debra Crew's pay and benefits reflect the period 5 to 30 June 2023 only, following her appointment as interim CEO on 5 June 2023 and CEO and Executive Director on 8 June 2023. | |
| (3) | Salary | Ivan Menezes' salary figure includes an amount of £42k in respect of untaken annual leave. | |
| (4) | Benefits is | The benefits numbers include the gross value of all taxable benefits. For Ivan Menezes, these include medical insurance (£15k)17k), company car allowance (£17k), contracted car service (£11k)19k), financial counsellingtax return preparation (£52k)68k), product allowance, life and long-term disability cover. Kathryn Mikells’Debra Crew's benefits for the period 5 to 30 June include flexible benefits allowance (£1.2k), travel allowance (£798), tax return preparation (£1.4k), product allowance and life and long-term disability cover. Lavanya Chandrashekar's benefits include flexible benefits allowance (£18k)20k), financial counsellingtravel allowance (£16k)11k), contracted car servicetax return preparation (£3k)14.4k), product allowance and life cover (£4k) and product allowance.long-term disability cover. | |
(iii)(5) | Pension | Pension benefits earned during the year representrepresents the increase in the pension fund balances over the year in the Diageo North America Inc. pension plans over and above the increase due to inflation. As Ivan Menezes has beenwas a deferred member of the UK Diageo Pension Scheme (DPS) in the United Kingdom since 31 January 2012 and receives standard statutory increases in deferment the United Kingdom pension amount that accrued over the two years in excess of inflation isover each of 2022 and 2023 under this scheme was nil. Kathryn Mikells became a director andDebra Crew started accruingto accrue benefits in the Supplemental Executive Retirement Plan (SERP) with effect from 9 November 2015.1 October 2022. Lavanya Chandrashekar started accruing benefits in the SERP from 1 July 2021. The company pension contribution has been 14% of salary from 1 January 2023 for all Executive Directors, aligned to the rate for the UK workforce. | Page
180 182 |
(iv)(6) | Annual Incentive
incentive | ThresholdThe performance was not achieved againstunder the fiscal 23 annual incentive plan resulted in an outcome of 32.5% of maximum for the financial measures underelements of the plan, which represented 80% of the maximum incentive opportunity. Taking account of performance against Individual Business Objectives (IBOs), the annual incentive plan. In viewpayout is 37.25% of maximum for Ivan Menezes, 35.38% of maximum for Debra Crew and 36.0% of maximum for Lavanya Chandrashekar. For Debra Crew, the 2023 amount reflects the period 5 to 30 June 2023 (as a proportion of the impact of Covid-19 on business performance and the absence of any bonus payout for many employees further down in the organisation, the Remuneration Committee exercised its discretionfinancial year).
In accordance with their elections to waive any payout for the individual elementdefer post-tax, one-third of the annual incentive plan. Asfor fiscal 23 shown in the table above for Debra Crew (which relates to the period 5 to 30 June 2023) and Lavanya Chandrashekar will be deferred into owned shares which are held for three years in a result, there is nonominee account. The annual incentive payout for Ivan Menezes will be paid entirely in cash, the Executive Directors and Executive Committee in 2020.having exercised discretion to waive the one-third deferral into shares (see page 190 for more details). | Page 176 |
(v)(7) | Long-term incentives | Long-term incentives represent the estimated gain (based on the average three-month ADR price to 30 June 2023 of $178.52) delivered through share options and performance shares where performance conditions have been met in the respective financial year. It also includes the value of additional shares grantedearned in lieu of dividends on these vested performance shares. Value delivered through performance’ is calculated as For Ivan Menezes, the number of vested performance shares and dividend shares multiplied by the share price on the date of grant.
‘Value delivered through share price growth’ is calculated as the difference between the average share price in the last three months of the financial year and the share price on the date of grant multiplied by the number of vested2023 long-term incentives amount comprises performance shares and share options.
options awarded in 2020 and vesting at 98.7% and 77.5% of maximum respectively. For Debra Crew, the 2023 amount reflects the period 5 to 30 June (as a proportion of the three-year performance period). The 2020 performance shares and share options were granted before she became an Executive Director, and due to a slightly different vesting schedule for awards granted below the Board, vested at 98.8% and 77.5% of maximum respectively. Lavanya Chandrashekar's 2020 performance share award was also granted before she became an Executive Director and vested at 98.8% of maximum.
Of the 2023 long-term incentive amounts shown in the table above, £2,954k for Ivan Menezes, £67k for Debra Crew and £72k for Lavanya Chandrashekar related to share price appreciation over the fiscal 21 to fiscal 23 performance period.
For 2022, long-term incentives comprise performance shares and share options awarded in 2017 and due to vest in September 2020 at 6.9% and 27.5% of maximum respectively. No discretion was exercised by the Remuneration Committee in determining these long-term incentive outcomes. For 2019 long-term incentives comprise performance shares and share options awarded in 2016 that vested in September 20192022 at 89.3%59.3% and 73.1%61.5% of maximum respectively for Ivan Menezes and dividend shares arising on performance shares that vested in September 2019. Long-term incentivesat 59.8% for Lavanya Chandrashekar, including dividend equivalents on performance shares. 2020 long-term incentive amounts have been re-statedrestated to reflect the ADR share price on the vesting date. No discretion was exercised bydate of $175.09 instead of the Remuneration Committeeaverage three-month ADR share price used in determining these long-term incentive outcomes.
last year’s report of $190.22. | Page
179 178 |
| | | | | | | | | | | |
(vi)(8) | Other incentives | Other incentives include the grant face value of awards made under the all-employee share plans (number of shares multiplied by the share price on the date of grant).plans. Awards do not have performance conditions attached. No discretion was exercised by | |
| (9) | Totals | Some figures and sub-totals add up to slightly different amounts than the Remuneration Committee in determining these long-term incentive outcomes.totals due to rounding. | |
Looking back on 2023
External appointments held by the Executive Directors | | |
| Annual incentive plan (AIP) payouts for 2023 |
Executive Directors may accept external appointments as Non-Executive Directors of other companies and retain any related fees paid to them, subject to the specific approval of the Board in each case.
Ivan Menezes – DuringAIP payout for the year ended 30 June 2023
AIP payouts for all of the Executive Directors serving during the year are based 80% on performance against the group financial measures and 20% on performance against Individual Business Objectives (IBOs), as assessed by the Remuneration Committee and summarised in the table below.
| | | | | | | | | | | | | | | | | | | | |
Group financial measures(1) | | | | | | |
| Measure | Weighting | Threshold | Target | Maximum | Actual | Payout
(% of total AIP opportunity) |
| Payout opportunity (% maximum) | | 25 | % | 50 | % | 100 | % | | |
Net sales (% growth)(2) | 26.7 | % | 3.5 | % | 6.5 | % | 9.5 | % | 6.5 | % | 13.34 | % |
Operating profit (% growth)(2) | 26.7 | % | 2.5 | % | 7.5 | % | 12.5 | % | 7.0 | % | 12.67 | % |
Operating cash conversion(3) | 26.7 | % | 95.0 | % | 100.0 | % | 105.0 | % | 93.3 | % | — | |
| Full year performance for 1 July 2022 - 30 June 2023 | 80.0 | % | | | | | 26.00 | % |
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| Individual business objectives | | | |
| Measure (IBOs equally weighted) and target | Weighting | Result | Payout
(% of total AIP opportunity) |
| Ivan Menezes Chief Executive | 20.00 | % | | 11.25 | % |
Global market share performance
Grow or hold total trade market share in 2/3rds of total net sales in measured markets.
| 10.00 | % | We gained or held total trade market share in markets that total 70% of our net sales in fiscal 23(6) | 5.00 | % |
Positive drinking
Continued improvement in Positive Drinking in fiscal 23
Educate 809,000 people on the dangers of underage drinking.
Progress towards a cumulative total of 1 billion people with dedicated responsible drinking messaging by 2030.
Help create a thriving hospitality sector post Covid-19 where responsible drinking is the norm by reaching 19,400 people by the end of fiscal 23 through skills building programmes.
| 10.00 | % | Positive drinking targets for fiscal 23 have been exceeded as set out below:
By the end of fiscal 23, we had educated just under 2 million people on the dangers of underage drinking, far exceeding the target.
The 2030 target of reaching 1 billion people with dedicated responsible drinking messaging has been met several years earlier than planned.
Significant achievement with Diageo markets across the world reaching 31,600 people with business and hospitality skills training.
| 6.25 | % |
| Lavanya Chandrashekar Chief Financial Officer | 20.00 | % | | 10.00 | % |
Global operating margin
Deliver Operating Margin in line with fiscal 23 Annual Operating Plan (AOP). | 10.00 | % | Achieved a performance level just below AOP for fiscal 23. | 3.75 | % |
Finance Transformation
Reduce time taken to set up customers in specified markets, thereby increasing speed to market and supporting growth.
Reduce finance organisation costs (people and indirect) by £10 million.
Close 80% of audit management action plans on time.
Improve Service Level Agreement(SLA) performance by resolving 80% of both critical and high priority incidents within the specified SLA timeframe.
| 10.00 | % | There has been over delivery on the finance transformation milestones for fiscal 23 as follows:
Delivered a new integrated customer account solution into six markets making customer set up time faster than the target of 10 business days.
Delivered finance productivity savings of greater than £18m.
Closure of 100% of all audit management actions, where these were required.
SLA improvement target exceeded for high priority incidents and just under target for critical incidents.
| 6.25 | % |
Notes
The AIP payout for Debra Crew is based 80% on performance against the group financial measures as noted in the table at the top of this page and 20% on performance against IBOs. Debra Crew's IBOs for fiscal 23 related to her role as Chief Operating Officer (COO), prior to appointment as CEO late in the financial year following the death in service of Ivan Menezes. The first of two equally weighted IBOs for the COO role (growing or holding total trade market share in 2/3rds of total net shares in measured markets) was aligned to Ivan Menezes's goal and was achieved. Ms Crew's second IBO for the COO role was to grow value market share in North America Total Beverage Alcohol, whilst driving operating margin in line with Annual Operating Plan (AOP) targets and there was satisfactory delivery under this IBO. The resulting overall IBO outcome was 9.38% out of a total of 20%.
| | | | | | | | | | | | | | | | | | | | |
| Payout | | | | | | |
| Group
(weighted 80%) | IBO
(weighted 20%) | Total
(% max) | Total
(% annual salary) | Total (’000)4 GBP | Total
(’000) USD |
Ivan Menezes(4),(5) | 26.0 | % | 11.25 | % | 37.25 | % | 69.40 | % | £1,019 | | $1,223 | |
Debra Crew(4),(5) | 26.0 | % | 9.38 | % | 35.38 | % | 5.40 | % | £79 | | $95 | |
Lavanya Chandrashekar(4),(5) | 26.0 | % | 10.00 | % | 36.00 | % | 72.00 | % | £603 | | $723 | |
(1) Performance against the AIP measures is calculated using 2023 budgeted exchange rates and is measured on a currency-neutral basis.
(2) For AIP purposes, Net Sales Value (NSV) growth and Operating Profit (OP) growth are calculated on budgeted currency exchange rates, after adjustments for acquisitions and disposals and incorporates the organic treatment of hyperinflationary economies.
(3) For AIP purposes, Operating Cash Conversion (OCC) is calculated by dividing cash generated from operations excluding cash inflows/outflows in respect of exceptional items, dividends, maturing inventories and post-employment payments in excess of the amount charged to operating profit by operating profit before depreciation, amortisation, impairment and exceptional items. The measure incorporates the organic treatment of hyperinflationary economies. The ratio is stated at the budgeted exchange rate for the year.
(4) AIP payments are calculated using base salary as at 30 June 2023, in line with the global policy that applies to other employees across the company. For Ivan Menezes, the payment reflects time employed in fiscal 23 up to and including 6 June 2023. For Debra Crew, the payment disclosed reflects the period 5 to 30 June, covering the period from appointment as interim CEO on 5 June 2023 to the end of the fiscal year and is based on her CEO salary which applied from 5 June 2023.
(5) In accordance with the 2020 remuneration policy and their individual elections to defer post tax, one-third of Debra Crew's and Lavanya Chandrashekar's after tax AIP payout disclosed in the table above will be deferred into Diageo shares, which will be held for three years in a nominee account. These shares will be acquired in September 2023 and the number of shares will be disclosed in the 2024 remuneration report. The Committee waived the deferral requirement in respect of Ivan Menezes.
(6) Market share reflects internal estimates incorporating Nielsen, Association of Canadian Distillers, CGA, Dichter and Neira, Frontline, Intage, IRI, ISCAM, NABCA, Scentia, State Monopolies, TRAC, Ipsos and other third-party providers.
(7) No discretion was exercised by the Remuneration Committee in determining the AIP outcome.
| | |
| Long-term incentive plans (LTIPs) vesting in 2023 |
Long-term incentive awards are made under the Diageo Long-Term Incentive Plan (DLTIP), which was approved by shareholders at the AGM in September 2014, which will be presented for shareholder renewal at the AGM in September 2023. Awards are designed to incentivise Executive Directors and senior managers to deliver long-term sustainable performance and are subject to performance conditions measured over a three-year period. Awards are granted on an annual basis in both performance shares and share options. Awards granted to Executive Directors vest at 20% of maximum for threshold performance, and 100% of the award will vest if the performance conditions are met in full, with a straight-line payout between threshold and maximum.
Share options – granted in September 2020, vesting in September 2023
In September 2020, Ivan Menezes servedand Debra Crew (although not an Executive Director at the time of grant) received share option awards over ADRs under the DLTIP, with an exercise price of $133.88. The award was subject to a performance condition assessed over a three-year period based on the achievement of the following equally weighted performance measures:
•Relative total shareholder return (TSR) ranked against the TSR of a peer group of international drinks and consumer goods companies; and
•Cumulative free cash flow (FCF)
The vesting profile for grants to Executive Directors for relative TSR is shown below:
| | | | | |
| TSR ranking (out of 17) | Vesting (% max) |
| 1st, 2nd or 3rd | 100 | |
| 4th | 95 | |
| 5th | 75 | |
| 6th | 65 | |
| 7th | 55 | |
| 8th | 45 | |
| 9th | 20 | |
| 10th or below | 0 | |
| | | | | | | | |
| TSR peer group (16 companies) | | |
| AB Inbev | Heineken | Pernod Ricard |
| Brown-Forman | Kimberly-Clark | Procter & Gamble |
| Carlsberg | L'Oréal | Reckitt Benckiser |
| The Coca-Cola Company | Mondelēz International | Unilever |
| Colgate-Palmolive | Nestlé | |
| Groupe Danone | PepsiCo | |
| | |
| | |
Performance shares – awarded in September 2020, vesting in September 2023
In September 2020, Ivan Menezes, Debra Crew and Lavanya Chandrashekar (Ms Crew and Ms Chandrashekar were not Executive Directors at the time of grant) received performance share awards under the DLTIP. Awards vest after a three-year period subject to the achievement of three performance conditions outlined below:
•Organic Net Sales Value (NSV) growth (weighted 40%);
•Profit Before Exceptional items and Tax (PBET) growth (weighted 40%); and
•ESG measures (water efficiency, carbon reduction, positive drinking & diversity & inclusion) weighted 20%.
Notional dividends accrue on awards and are paid out either in cash or shares on the number of shares which vest.
Vesting outcome for 2020 performance share and share option awards in September 2023
The 2020 performance share award vested at 98.7% of maximum for Ivan Menezes and 98.8% of maximum for Debra Crew and Lavanya Chandrashekar. The 2020 share options vested at 77.5% of maximum for Ivan Menezes and Debra Crew, as detailed below: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Vesting of 2020 DLTIP(5) | Weighting | Threshold | Midpoint | Maximum | Actual | Ivan Menezes vesting
(% maximum)(5) | Debra Crew vesting
(% maximum)(5)(6) | Lavanya Chandrashekar vesting
(% maximum)(5)(6) |
| Vesting if performance achieved (% maximum) | | 20%/25% | 60%/62.5% | 100 | % | | | | |
Organic net sales growth (NSV)(1) | 40 | % | 4.00 | % | 6.000 | % | 8.0 | % | 14.5 | % | 40.0 | % | 40.0 | % | 40.0 | % |
Profit before exceptional items and tax (PBET) growth(2) | 40 | % | 4.5 | % | 8.3 | % | 12.0 | % | 16.5 | % | 40.0 | % | 40.0 | % | 40.0 | % |
| Carbon reduction (ESG) | 5 | % | 0.063 | 0.103 | 0.143 | 0.147 | 5.0 | % | 5.0 | % | 5.0 | % |
| Water efficiency (ESG) | 5 | % | 6 | % | 9 | % | 11 | % | 9 | % | 3.7 | % | 3.8 | % | 3.8 | % |
| Positive drinking (ESG) | 5 | % | 0.75m | 1.0m | 1.25m | 2.2m | 5.0 | % | 5.0 | % | 5.0 | % |
| Inclusion & diversity - % female leaders globally (ESG) | 3 | % | 41 | % | 42 | % | 43 | % | 44 | % | 2.5 | % | 2.5 | % | 2.5 | % |
| Inclusion & diversity - % ethnically diverse leaders globally (ESG) | 3 | % | 38 | % | 39 | % | 40 | % | 43 | % | 2.5 | % | 2.5 | % | 2.5 | % |
| Vesting of performance shares (% maximum) | | | | | | 98.7 | % | 98.8 | % | 98.8 | % |
Cumulative free cash flow (FCF)(3) | 50 | % | £6,200m | £7,200m | £8,200m | £8,404m | 50.0 | % | 50.0 | % | n/a |
Relative total shareholder return(4) | 50 | % | 9th | – | 3rd | 7th | 27.5 | % | 27.5 | % | n/a |
| Vesting of share options (% maximum) | | | | | | 77.5 | % | 77.5 | % | n/a |
(1) Net Sales Value (NSV) growth is calculated on budgeted currency exchange rates, after adjustments for acquisitions and disposals and incorporates the organic treatment of hyperinflationary economies.
(2) Profit before exceptionals and tax growth is presented on a constant currency basis and it excludes the impact of acquisitions and disposals. The impact of hyperinflation on operating profit is considered under the same organic methodology as for net sales while the impact on other lines (primarily on finance charges) is excluded. This metric also includes adjustment to exclude the fair value remeasurement of contingent considerations, earn out arrangements and biological assets and to exclude post-employment credits. Furthermore, the metric excluded the interest on current year’s share repurchase program (SRP) and excludes the year-over-year change of M&A related interest.
(3) Cumulative FCF is based on the outcome for each of the three years within the performance period, measured before exceptional items and on an FX neutral basis by adjusting actual outcomes back to the base year exchange rates, and incorporates the organic treatment of hyperinflationary economies. Furthermore, the cash flow impact of any material business development activities such as share repurchase programmes, acquisitions and disposals, which were not known and planned at the beginning of the vesting period, are excluded from the 3-year performance.
(4) Relative total shareholder return (TSR) is measured as the percentage growth in Diageo’s share price (assuming all dividends and capital distributions are re-invested) compared to the TSR of a peer group of 16 international drinks and consumer goods companies. TSR calculations are based on an averaging period of 6 months and converted to a common currency (US dollars). Calculation is performed and provided by FIT.
(5) No discretion was exercised by the Remuneration Committee in determining the long-term incentive outcomes.
(6) At the time of grant of the 2020 awards, Debra Crew and Lavanya Chandrashekar were not Executive Directors. The vesting schedule for awards granted to executives below the Board has a threshold vesting of 25% of maximum (62.5% at midpoint). Vesting at threshold for awards granted to Executive Directors is 20% of maximum (60.0% at midpoint). No options were granted to Lavanya Chandrashekar in 2020 as she was not on the Executive Committee at the time of grant.
Summary of performance share awards and options vesting
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| Award | Award Date | Awarded
(ADRs) | Vesting
(% Max) | Vesting
(ADRs) | Option price | ADR price | Dividend equivalent share | Estimated value ($'000)(1) | Estimated value
(£'000) |
| Ivan Menezes | Performance shares | 03/09/2020 | 43,377 | | 98.7 | % | 42,813 | | — | | $179 | | 2,796 | $8,142 | | £6,785 | |
| Share options | 03/09/2020 | 43,377 | | 77.5 | % | 33,617 | | $ | 133.88 | | $179 | | — | $1,501 | | £1,251 | |
| Debra Crew | Performance shares | 03/09/2020 | 1,176(2) | 98.8 | % | 1,161 | | | $179 | | 75 | $221 | | £184 | |
| Share options | 03/09/2020 | 714(2) | 77.5 | % | 553 | | $ | 133.88 | | $179 | | | $25 | | £21 | |
| Lavanya Chandrashekar | Performance shares | 03/09/2020 | 1,827 | | 98.8 | % | 1,805 | | — | | $179 | | 117 | $343 | | £286 | |
| | | | | | | | | | |
(1) The total long-term incentives value shown in the single figure of remuneration on page 174 is split between performance shares and share options in the table above and is based on an average ADR price for the last three months of the fiscal year ($178.52).
(2) The value of performance share awards and options awarded and vesting included in the table above for Debra Crew are pro-rata amounts reflecting the period from 5 to 30 June as a Non-Executive Directorproportion of Tapestry Incthe three-year performance period, as shown in the single figure of remuneration on page 174. The 1,176 pro-rata performance shares awarded comprises 714 performance shares granted under the DLTIP (total award of 30,076 ADRs) and earned fees462 performance shares granted under the DESAP (total award of $90,000. 19,494 ADRs), which was granted in recognition of equity which was forfeited on joining Diageo. The pro-rata share options number reflects 714 share options granted under the DLTIP (total award of 30,076 ADRs)
In considering the vesting outcome of the 2020 DLTIP awards, the Remuneration Committee was especially cognisant of investor concerns around the potential risk of windfall gains following volatility in global stock markets at the time of grant as a result of the Covid-19 pandemic. The Committee considered a number of factors including share price movement over the performance period (up 26%), Diageo's underlying financial performance, historical award and vesting levels and absolute award value. The Committee noted that the 2020 DLTIP awards were made in September 2020 and, in line with usual Diageo practice, the Tapestry Inc policynumber of awards granted was determined using a six-month average share price up to 30 June. This helps to smooth out share price volatility and, at $143.63 for outside directors, Ivan Menezes is eligiblethe 2020 grants, the price used to be granted share optionscalculate the awards was only around 10% lower than the prior year's price. The Committee considered Diageo’s overall business performance and restricted share units (RSUs). Duringvalue created for shareholders and other relevant factors over the period and determined that the outcomes were fair and appropriate and made no adjustment to the payouts. It also considered the level of difficulty of the targets set at a time of uncertainty and determined that the vesting outcome was consistent with Diageo's long-term performance and returns to shareholders. Diageo's compound annual growth in net sales and profit over this period have also been at the top end of the global peer group.
Pensions and benefits in the year ended 30 June 2020, he2023
Benefits provisions for the Executive Directors are in accordance with the information set out in the Directors’ remuneration policy.
Pension arrangements
Ivan Menezes was granted 13,069 options ata member of the Diageo North America Inc. Supplemental Executive Retirement Plan (SERP), with an option priceaccrual rate of $27.07, 70 RSUs at a fair market value20% of $13.50 per share, 35 RSUs at a fair market valuebase salary until 1 January 2023 when it was reduced to 14% of $26.77, 23 RSUs in lieubase salary, until his date of dividends at a fair market valuedeath of $25.976 June 2023. Debra Crew and 19 RSUs in lieuLavanya Chandrashekar are members of dividends at a fair market valuethe SERP with an accrual rate of $31.81.
Kathryn Mikells – During14% of base salary respectively during the year ended 30 June 2023. The SERP is an unfunded, non-qualified supplemental retirement programme. Under the plan, accrued company contributions are subject to quarterly interest credits. Under the rules of the SERP, Debra Crew and Lavanya Chandrashekar can withdraw the balance of the plan six months after leaving service or age 55, if later and the balance may be withdrawn in either a lump sum or five equal annual instalments, depending on the size of the balance.
Ivan Menezes, Debra Crew and Lavanya Chandrashekar participated in the US Cash Balance Plan and the Benefit Supplemental Plan (BSP), until August 2012, 30 September 2022 and June 2021 respectively, and have accrued benefits under both plans. The Cash Balance Plan is a qualified funded pension arrangement. Employer contributions were 10% of pay capped at the Internal Revenue Service (IRS) limit. The BSP is a non-qualified unfunded arrangement; notional employer contributions were 10% of pay above the IRS limit. Interest (notional for the BSP) is credited quarterly on both plans.
Ivan Menezes was also a member of the Diageo Pension Scheme (DPS) in the United Kingdom between 1 February 1997 and 30 November 1999. The accrual of pensionable service ceased in 1999 but the linkage to salary remained until January 2012.
Upon death in service on 6 June 2023, a life insurance benefit of $3 million became payable by the insurance provider for Ivan Menezes. In the event of death in service, a lump sum of six times base salary is payable to Debra Crew and Lavanya Chandrashekar.
The table below shows the pension benefits accrued by each Executive Director as at year end (or to 6 June 2023 in the case of Ivan Menezes). The accrued United Kingdom benefits for Ivan Menezes are annual pension amounts, whereas the accrued US benefits for Ivan Menezes, Debra Crew and Lavanya Chandrashekar are one-off cash balance amounts. | | | | | | | | | | | | | | |
| 30 June 2023 | 30 June 2022 |
| Executive Director | UK pension
£'000 p.a. | US benefit
£'000 | UK pension
£'000 p.a. | US benefit
£'000 |
Ivan Menezes(1) | 75 | 9,563 | 75 | 9,251 |
Debra Crew(2) | Nil | 761 | Nil | 761 |
Lavanya Chandrashekar(3) | Nil | 413 | Nil | 302 |
(1) Ivan Menezes' US benefits are higher at 6 June 2023 than at 30 June 2022 by £312k. £452k of which is due to pension benefits earned over the year (none of which is over and above the increase due to inflation – as reported in the single figure of remuneration, see page 139). £103k of which is due to interest earned on his deferred US benefits until his death in service and a reduction of (£243k) which is due to exchange rate movements over the year.
(2) Debra Crew's US benefits are the same at 30 June 2023 than at the date of her appointment to interim CEO and Executive Director and CEO. The breakdown of this relates to £10k of which is due to pension benefits earned over the year (all of which is over and above the increase due to inflation – as reported in the single figure of remuneration, see page 174), £1k of which is due to interest earned on her deferred US benefits over the year and a reduction of (£11k) of which is due to exchange rate movements over the year.
(3) Lavanya Chandrashekar's US benefits are higher at 30 June 2023 than at 30 June 2022 by £111k. The breakdown of this relates to £122k of which is due to pension benefits earned over the year (£110k of which is over and above the increase due to inflation – as reported in the single figure of remuneration, see page 174), £7k of which is due to interest earned on her deferred US benefits over the year and a reduction of (£18k) of which is due to exchange rate movements over the year.
The Normal Retirement Age applicable to each Director’s benefits depends on the pension scheme, as outlined below.
| | | | | | | | | | | | | | |
| Executive Director | UK benefits
(DPS) | US benefits
(Cash Balance Plan) | US benefits
(BSP) | US benefits
(SERP) |
| Ivan Menezes | 60 | 65 | 6 months after leaving service | 6 months after leaving service |
| Debra Crew | n/a | 65 | 6 months after leaving service, or age 55 if later | 6 months after leaving service, or age 55 if later |
| Lavanya Chandrashekar | n/a | 65 | 6 months after leaving service, or age 55 if later | 6 months after leaving service, or age 55 if later |
| | | | |
Long-term incentive awards made during the year ended 30 June 2023
On 3 September 2022, Ivan Menezes, Debra Crew and Lavanya Chandrashekar received awards of performance shares and market-priced share options under the DLTIP based on a percentage of base salary as outlined below. Ms Crew was not an Executive Director at the time of grant. The three-year period over which performance will be measured is 1 July 2022 to 30 June 2025.
The performance measures and targets for awards made in September 2022 are outlined below. Net sales and profit before exceptional items and tax are key levers for driving top and bottom line growth. The free cash flow measure was selected because it represents a robust measure of cash performance consistent with typical external practice and is a key strategic priority. Total shareholder return, the only relative performance measure under the plan, provides good alignment with shareholder interests and increases the leverage based on share price growth. Finally, the environmental, social and governance (ESG) measure (20% of total performance share award), which was introduced in 2020, Kathryn Mikells servedreinforces the stretching and strategically important goals under the ‘Society 2030: Spirit of Progress’ ambition, Diageo’s 10-year action plan to help create an inclusive and sustainable world. The definition of the ESG measures was set out on page 163 of the annual remuneration report for fiscal 22.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Performance shares | | Share options |
| 2022 DLTIP | Organic net sales growth | Organic profit before exceptional items and tax growth | Reduction in greenhouse gas emission | Water efficiency | Changed attitudes on dangers of underage drinking | % Female leaders | % Ethnically diverse leaders | | Cumulative free cash flow(1) | Relative TSR |
| Weighting | 40 | % | 40 | % | 5 | % | 5 | % | 5 | % | 2.5 | % | 2.5 | % | | 50 | % | 50 | % |
| Target range | 4.5% - 8.5% | 5% - 12% | 10.7% - 17.6% | 6.3% - 12.1% | 2.6m - 4.0m | 45% - 47% | 42% - 44% | | $10,175m - $12,569m | Median - upper quintile |
1.The cumulative free cash flow (FCF) targets have been restated in USD following the change in reporting currency from fiscal 24 onwards (original GBP target range was £7,650m - £9,450m). More details can be found on page 41.
20% (25% for Ms Crew as the awards were made before she became an Executive Director) of DLTIP awards will vest at threshold, with vesting in a straight line up to 100% if the maximum level of performance is achieved. As explained in the remuneration policy, one performance share is deemed equal in value at grant to three share options.
| | | | | | | | | | | | | | | | | | | | | | | |
| Executive Director | Date of grant | Plan | Share type | Awards made
during the year | Exercise
price | Face value
$'000 | Face value
(% of salary) |
| Ivan Menezes | 02/09/2022 | DLTIP - share options | ADR | 33,845 | $176.95 | $6,610 | 375 | % |
| Ivan Menezes | 02/09/2022 | DLTIP - performance shares | ADR | 33,845 | — | $6,610 | 375 | % |
| Debra Crew | 02/09/2022 | DLTIP - share options | ADR | 26,629 | $176.95 | $5,200 | 360 | % |
| Debra Crew | 02/09/2022 | DLTIP - performance shares | ADR | 26,629 | $0.00 | $5,200 | 360 | % |
| Lavanya Chandrashekar | 02/09/2022 | DLTIP - share options | ADR | 18,512 | $176.95 | $3,615 | 360 | % |
| Lavanya Chandrashekar | 02/09/2022 | DLTIP - performance shares | ADR | 18,512 | — | $3,615 | 360 | % |
The proportion of the awards outlined above that will vest is dependent on the achievement of performance conditions and continued employment, and the actual value received may be nil. The vesting outcomes will be disclosed in the 2025 annual remuneration report.
In accordance with the plan rules, the number of performance shares and share options granted under the DLTIP was calculated by using the average closing ADR price for the last six months of the preceding financial year ($195.29). This price is used to determine the face value in the table above. In accordance with the plan rules, the exercise price was calculated using the average closing ADR price of the three days preceding the grant date ($176.95).
Outstanding share plan interests
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Plan name | Date of award | Performance period | Year of vesting | Award calculation share price | Exercise price | Number of shares/options at 30 June 2022 (1) | Granted | Vested/exercised | Dividend equivalent Shares released | Lapsed | Number of shares/options at 30 June 2023 | Share type |
| Ivan Menezes | |
DLTIP – share options(3) | Sep 2017 | 2017-2020 | 2020 | | $134.06 | | 14,098 | | | | | | 14,098 | | ADR |
DLTIP – share options(3) | Sep 2018 | 2018-2021 | 2021 | | $140.89 | | 4,284 | | | | | | 4,284 | ADR |
DLTIP – share options(3) | Sep 2019 | 2019-2022 | 2022 | | $170.28 | | 38,827 | | | | | 14,949 | 23,878 | ADR |
Total vested but unexercised share options in Ordinary shares(2) | 169,040 | ORD |
| | | | | | | | | | | | |
DLTIP - share options(4) (5) (9) | Sep 2020 | 2020-2023 | 2023 | | $133.88 | | 43,377 | | | | | 43,377 | ADR |
DLTIP – share options(6) (9) (11) | Sep 2021 | 2021-2024 | 2024 | | $194.75 | | 36,675 | | | | | 12,248 | 24,427 | ADR |
DLTIP - share options(7) (9) (11) | Sep 2022 | 2022-2025 | 2025 | | $176.95 | | | 33,845 | | | 22,574 | 11,271 | ADR |
Total unvested share options subject to performance in Ordinary shares(2) | 316,300 | ORD |
| DLTIP - performance shares | Sep 2019 | 2019-2022 | 2022 | $160.46 | | | 38,827 | | 23,024 | 1,476 | 15,803 | 0 | ADR |
DLTIP - performance shares(4) (5) (9) | Sep 2020 | 2020-2023 | 2023 | $143.63 | | | 43,377 | | | | | | 43,377 | ADR |
DLTIP - performance shares(6) (9) | Sep 2021 | 2021-2024 | 2024 | $174.97 | | | 36,675 | | | | | 12,248 | 24,427 | ADR |
DLTIP - performance shares(7) (9) | Sep 2022 | 2022-2025 | 2025 | $195.29 | | | | 33,845 | | | 22,574 | 11,271 | ADR |
Total unvested shares subject to performance in Ordinary shares(2) | 316,300 | ORD |
| Debra Crew | |
DLTIP - share options(4) (5) | Sep 2020 | 2020-2023 | 2023 | | $133.88 | | 30,076 | | | | | 30,076 | ADR |
DLTIP – share options(6) (11) | Sep 2021 | 2021-2024 | 2024 | | $194.75 | | 27,019 | | | | | | 27,019 | | ADR |
DLTIP - share options(7) (11) | Sep 2022 | 2022-2025 | 2025 | | $176.95 | | | 26,629 | | | | 26,629 | ADR |
Total unvested share options subject to performance in Ordinary shares(2) | 334,896 | ORD |
DLTIP - performance shares(4) (5) | Sep 2020 | 2020-2023 | 2023 | $143.63 | | | 30,076 | | | | | 30,076 | ADR |
DLTIP - performance shares(6) | Sep 2021 | 2021-2024 | 2024 | $174.97 | | | 27,019 | | | | | | 27,019 | | ADR |
DLTIP - performance shares(7) | Sep 2022 | 2022-2025 | 2025 | $195.29 | | | | 26,629 | | | | 26,629 | | ADR |
DESAP - performance shares(4)(5)(8) | Sep 2020 | 2020-2023 | 2023 | $143.63 | | | 19,494 | | | | | | 19,494 | | ADR |
DESAP - performance shares(8) | Mar 2022 | 2023-2025 | 2026 | $197.06 | | | 8,796 | | | | | | 8,796 | | ADR |
DESAP - performance shares(8) | Mar 2022 | 2024-2026 | 2027 | $197.06 | | | 8,930 | | | | | | 8,930 | | ADR |
DESAP - performance shares(8) | Mar 2022 | 2025-2027 | 2028 | $197.06 | | | 8,930 | | | | | | 8,930 | | ADR |
Total unvested shares subject to performance in Ordinary shares(2) | 519,496 | ORD |
DESAP – restricted stock units (8) | Mar 2022 | | 2027 | $197.06 | | | 8,796 | | | | | 8,796 | ADR |
DESAP – restricted stock units (8) | Mar 2022 | | 2028 | $197.06 | | | 8,930 | | | | | | 8,930 | | ADR |
DESAP – restricted stock units (8) | Mar 2022 | | 2029 | $197.06 | | | 8,930 | | | | | 8,930 | ADR |
Total unvested shares not subject to performance in Ordinary shares(2), (8) | 106,624 | ORD |
| Lavanya Chandrashekar | |
DLTIP – share options(3) | Sep 2018 | 2018-2021 | 2021 | | $140.89 | | 3,832 | | | | | 3,832 | ADR |
DLTIP – share options(3) | Sep 2018 | 2018-2021 | 2021 | | $140.89 | | 1,064 | | | | | 1,064 | ADR |
Total vested but unexercised share options in Ordinary shares(2) | 19,584 | ORD |
| | | | | | | | | | | | |
DLTIP – share options(6) (11) | Sep 2021 | 2021-2024 | 2024 | | $194.75 | | 20,060 | | | | | | 20,060 | | ADR |
DLTIP – share options(7) (11) | Sep 2022 | 2022-2025 | 2025 | | $176.95 | | | 18,512 | | | | 18,512 | ADR |
Total unvested share options subject to performance in Ordinary shares(2) | 154,288 | ORD |
| DLTIP – performance shares | Sep 2019 | 2019-2022 | 2022 | $160.46 | | | 1,444 | | | 863 | | 55 | | 581 | | — | | ADR |
DLTIP – performance shares(4) (5) | Sep 2020 | 2020-2023 | 2023 | $143.63 | | | 1,827 | | | | | | 1,827 | | ADR |
DLTIP – performance shares(6) | Sep 2021 | 2021-2024 | 2024 | $174.97 | | | 20,060 | | | | | | 20,060 | | ADR |
DLTIP – performance shares(7) | Sep 2022 | 2022-2025 | 2025 | $195.29 | | | | 18,512 | | | | 18,512 | ADR |
Total unvested shares subject to performance in Ordinary shares(2) | 161,596 | ORD |
DLTIP – restricted stock units (10) | Sep 2019 | 2019-2022 | 2022 | $160.46 | | | 1,567 | | | 1,567 | | 1,567 | | | — | | ADR |
DLTIP – restricted stock units (10) | Sep 2020 | 2020-2023 | 2023 | $143.63 | | | 2,635 | | | | | 2,635 | ADR |
Total unvested shares not subject to performance in Ordinary shares(2),(10) | 10,540 | ORD |
1) For unvested awards, this is the number of shares/options initially awarded. For exercisable share options, this is the number of outstanding options. All share options have an expiry date of 10 years after the date of grant.
2) ADRs have been converted to ORDs (one ADR is equivalent to four ordinary shares) for the purpose of calculating the total number of vested and unvested shares and options.
3) The total number of share options granted under the DLTIP in September 2017, 2018 and 2019 showing as outstanding as at 30 June 2023 are vested but unexercised share options.
(4) Performance shares and share options granted under the DLTIP in September 2020 and due to vest in September 2023 are included here as unvested share awards subject to performance conditions, although the awards have also been included in the single figure of remuneration table on page 174, since the performance period ended during the year ended 30 June 2023.
(5) Details of the performance conditions attached to DLTIP and DESAP awards of performance shares and share options granted in 2020 are organic net sales growth (4%-8%), organic growth in profit before exceptional items and tax (4.5%-12%), reduction in greenhouse gas emissions (6.3% - 14.3%), improvement in water
efficiency (5.8%-11.2%), changing attitudes on dangers of underage drinking (0.75m-1.25m), % of female leaders (41%-43%), % of ethnically diverse leaders (38%-40%), cumulative free cash flow (£6,200m-£8,200m) and relative total shareholder return (median-upper quintile).
(6) Details of the performance conditions attached to DLTIP awards of performance shares and share options granted in 2021 are organic net sales growth (5%-9%), organic growth in profit before exceptional items and tax (6.5%-13.5%), reduction in greenhouse gas emissions (19.1%-27.1%), improvement in water efficiency (6.3%-12.1%), changing attitudes on dangers of underage drinking (2.3m-3.7m), % of female leaders (44%-46%), % of ethnically diverse leaders (39%-41%), cumulative free cash flow ($10,058m-$12,488m) and relative total shareholder return (median-upper quintile).
(7) Details of the performance conditions attached to DLTIP awards of performance shares and share options granted in 2022 are organic net sales growth (4.5%-8.5%), organic growth in profit before exceptional items and tax (5.0%-12.0%), reduction in greenhouse gas emissions (10.7%-17.6%), improvement in water efficiency (6.3%-12.1%), changing attitudes on dangers of underage drinking (2.6m-4.0m), % of female leaders (45%-47%), % ethnically diverse leaders (42%-44%), cumulative free cash flow ($10,175m-$12,569m) and relative total shareholder return (median-upper quintile).
(8) The performance shares awarded to Debra Crew in 2020 under the Diageo Exceptional Stock Award Plan (DESAP) were granted in recognition of equity which was forfeited on joining Diageo in 2020 and have the same performance measures and targets as the 2020 DLTIP performance shares (see footnote 5). Debra Crew was granted a number of performance shares and restricted stock units under the DESAP in March 2022 for incentive and retention purposes. The DESAP performance shares will vest based on a performance hurdle of winning or holding market share in at least 2/3rs of total NSV in measured markets over the respective three-year performance periods (F23-F25 for awards due to vest in September 2026, F24-F26 for awards due to vest in September 2027 and F25-F27 for awards due to vest in September 2028). The DESAP restricted stock units vest subject to continued employment up to the vesting date.
(9) In accordance with the policy and plan rules treatment on death-in-service, the 2020, 2021 and 2022 awards for Ivan Menezes vested early on 2 August 2023 based on an assessment of performance as at 30 June 2023. Further information can be found on page 190.
(10) Lavanya Chandrashekar was granted a number of restricted stock units prior to her appointment as CFO and joining the Board.
(11) The Free Cash Flow (FCF) performance targets for both the 2021 and 2022 DLTIP awards have been restated in USD following the change in functional currency. More details can be found on page 41.
| | |
| Directors’ shareholding requirements and share and other interests |
The beneficial interests of the Directors who held office during the year ended 30 June 2023 (and their connected persons) in the ordinary shares (or ordinary share equivalents) of the company are shown in the table below.
| | | | | | | | | | | | | | | | | | | | |
| Ordinary shares or equivalent(1),(2) |
|
|
|
| 26 July 2023 | 30 June 2023 (or date of cessation, if earlier)(or date of departure, if earlier) | 30 June 2022
(or date of appointment if later) | Shareholding requirement (% salary)(3) | Shareholding at 25 July 2023
(% salary)(3) | Shareholding requirement met |
| Chairman | | | | | | |
Javier Ferrán(7) | 310,720 | 310,468 | 307,288 | | | |
| Executive Directors | | | | | | |
Ivan Menezes(4),(7) | 1,141,234 | 1,141,234 | 1,078,566 | 500 | % | 2,728 | % | Yes |
Debra Crew(7),(8) | 260 | 260 | n/a | 500 | % | 1 | % | No - to be met by June 2028 |
Lavanya Chandrashekar (5),(6),(7) | 11,113 | 11,109 | 6,228 | 400 | % | 47 | % | No - to be met by July 2026 |
| Non-Executive Directors | | | | | | |
Susan Kilsby(7) | 2,600 | 2,600 | 2,600 | | | |
| Melissa Bethell | 2,668 | 2,668 | 26.68 | | | |
| Valérie Chapoulaud-Floquet | 2,098 | 2,098 | 2,055 | | | |
| Sir John Manzoni | 2,929 | 2,929 | 2,870 | | | |
| Lady Nicola Mendelsohn | 5,000 | 5,000 | 5,000 | | | |
| Alan Stewart | 7,269 | 7,269 | 7,120 | | | |
| Ireena Vittal | — | — | — | | | |
| Karen Blackett | — | — | — | | | |
Notes
(1) Each person listed beneficially owns less than 1% of Diageo’s ordinary shares. Ordinary shares held by Directors have the same voting rights as all other ordinary shares.
(2) Any change in shareholding between the end of the financial year on 30 June 2023 and the last practicable date before publication of this report, being 26 July 2023, is outlined in the table above.
(3) Both the shareholding requirement and shareholding at 26 July 2023 are expressed as a Non-Executive Directorpercentage of base salary on 30 June 2023 and calculated using a three-month average share price for period ending 30 June 2023 of £35.11.
(4) In addition to the number of shares reported in the table above, Ivan Menezes' estate holds 169,040 vested but unexercised share options.
(5) Lavanya Chandrashekar's 2022 Deferred Bonus Plan Shares (1,698 ADRs) are included in the total share interests shown above.
(6) In addition to the number of shares reported in the table above, Lavanya Chandrashekar holds 19,584 vested but unexercised share options.
(7) Javier Ferrán, Ivan Menezes, Debra Crew, Lavanya Chandrashekar and Susan Kilsby have share interests in ADRs (one ADR is equivalent to four ordinary shares). The share interests in the table are stated as ordinary share equivalents.
(8) Debra Crew joined Diageo in 2020 and her first tranche of Diageo share awards will vest in September 2023.
Relative importance of spend on pay
The graphs below illustrate the relative importance of spend on pay (total remuneration of all group employees) compared with distributions to shareholders (total dividends plus the share buyback programme but excluding transaction costs), and the percentage change from the year ended 30 June 2022 to the year ended 30 June 2023. There are no other significant distributions or payments of profit or cash flow
Distributions to shareholders
(21.5)%
Staff pay
1.9%
CEO total remuneration and TSR performance
The graph below shows the total shareholder return for Diageo plc and the FTSE 100 Index since 30 June 2013 and demonstrates the relationship between pay and performance for the Chief Executive, using current and previously published single total remuneration figures. The FTSE 100 Index has been chosen because it is a widely recognised performance benchmark for large companies in the United Kingdom.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ivan Menezes(1)
£'000 F14 | Ivan Menezes(1)
£'000 F15 | Ivan Menezes(1)
£'000 F16 | Ivan Menezes(1)
£'000 F17 | Ivan Menezes1
£'000 F18 | Ivan Menezes(1)
£'000 F19 | Ivan Menezes(1)
£'000 F20 | Ivan Menezes(1)
£'000 F21 | Ivan Menezes(1)
£'000 F22 | Ivan Menezes(1)
£'000 F23 | Debra Crew(1)
£'000 F23 |
| Chief Executive total remuneration (includes legacy DLTIP awards) | 7,312 | 3,888 | 4,156 | 3,399 | 8,995 | 11,776 | 2,273 | 6,019 | 7,343 | 10,582 | 403 |
Annual incentive(2) | 9 | % | 44 | % | 65 | % | 68 | % | 70 | % | 61 | % | 0.0 | % | 94 | % | 93.75 | % | 37.25 | % | 35.38 | % |
Share options(2) | 71 | % | 0 | % | 0 | % | 0 | % | 60 | % | 73 | % | 27.5 | % | 10.0 | % | 61.5 | % | 77.5 | % | 77.5 | % |
Performance shares(2) | 55 | % | 33 | % | 31 | % | 0 | % | 70 | % | 89 | % | 10.0 | % | 29.3 | % | 59.3 | % | 98.7 | % | 98.8 | % |
1) To enable comparison, Ivan Menezes’ and Debra Crew's single total figure of remuneration has been converted into sterling using the average weighted exchange rate for the relevant financial year. The figure represented in the graph for fiscal 23 is the combined single figure total for Ivan Menezes and Debra Crew.
(2) % of total maximum opportunity.
| | |
| Remuneration for the wider workforce and CEO pay ratio |
Alignment of Executive pay with the wider workforce
There is clear alignment in the approach to pay for executives and the wider workforce in the way that remuneration principles are followed, as well as the mechanics of the Hartford Financial Servicessalary review process and incentive plan design, which are broadly consistent throughout the organisation. There is a strong focus on performance-related pay, and the performance measures under the annual incentive plan and long-term incentive plan are the same for executives and other eligible employees. The reward package for Executive Directors is consistent with that of the senior management population, however, a much higher proportion of total remuneration for the Executive Directors is linked to business performance, compared to the rest of the employee population. The Chairman also explains the Directors' remuneration policy to employees and seeks their feedback as part of the workforce engagement sessions.
The structure of our reward packages is based on the principle that it should enable Diageo to attract and retain the best talent globally within our broader industry. It is driven by local market practice, as well as the level of seniority and accountability, reflecting the global nature of our business. Diageo is committed to fostering an inclusive and diverse workplace, and creating a culture where every individual can thrive. Reflective of this, pay parity and consistency of treatment for all employees are critical to the reward practices across the organisation. The reward framework is regularly reviewed to ensure employees are rewarded fairly and appropriately, in line with the business strategy, performance outcomes, competitive paid market practice and our diversity agenda.
During the year, the Chairman explained the directors' remuneration policy and alignment with wider workforce pay to employees as part of the workforce engagement sessions.
Remuneration Committee review of wider workforce pay
Each year, the Remuneration Committee has a detailed session reviewing wider workforce remuneration. In fiscal 23, the review focussed on the prior year’s annual reward cycle outcomes, including improvements made to base pay competitive positions, the level of differentiation across our reward programmes, gender pay equity analysis, how cost-of-living challenges were addressed and how we have used reward structures to attract talent in key skills areas. The all-employee reward priorities for the coming year were also reviewed by the Committee. Information on wider workforce reward is also provided as required throughout the year to enable the Committee to consider the broader employee context when making executive remuneration decisions, for example the annual salary increase budgets by country.
Supporting our employees
We continue to focus on all aspects of the wellbeing of our employees. Early in fiscal 2023, we made a one-time recognition payment of £1,000 gross (capped at 15% of local equivalent annual salary) to thank employees for their ongoing efforts and support them with the rising cost of living in many locations. Since then, the Executive Committee has continued to monitor the cost-of-living in all our geographies using a formal monitoring process and has implemented actions as required, for example off-cycle salary increases in 16 high-inflation geographies. We have also provided financial education to all employees to support them in managing their personal finances more effectively.
Other reward based initiatives include the roll out of a new recognition platform into North America and the UK, with more regions planned for fiscal 24. We have deployed global support for menopause, including a global app for employees.
We continue to innovate with market leading benefit policies that support and demonstrate our commitment to diversity and inclusion, including increasing the provision of fertility support and personal counselling. We have continued to evolve our flexible working policy, creating guidelines to empower employees and leaders to decide how, when and where they create their best work, making sure our people consider what works best for the individual's and team's success.
The renewed focus on our employee assistance programmes continued with the deployment of a global mental health online tool in November 2022. This enables employees to proactively manage their mental health and covers key topics like sleep, diet, relationships and managing stress. To date the tool has been downloaded by over 4.7k employees, which is 19% of the global population.
CEO pay ratio
In accordance with The Companies (Miscellaneous Reporting) Regulations 2018, the table below sets out Diageo’s CEO pay ratios for the year ended 30 June 2023. These CEO pay ratios provide a comparison of the Chief Executive’s total remuneration, comprising the sum of both Ivan Menezes and Debra Crew's total single figure of remuneration, converted into sterling, with the equivalent remuneration for the employees paid at the 25th (P25), 50th (P50) and 75th (P75) percentile of Diageo’s workforce in the United Kingdom. Also shown are the salary and total remuneration for each quartile employee.
| | | | | | | | | | | | | | |
| Year | Method | 25th percentile pay ratio | Median pay ratio | 75th percentile pay ratio |
| 2023 | Option A(2) | 232:1 | 178:1 | 137:1 |
| 2023 | Total pay and benefits | £47,295 | £61,733 | £80,159 |
| 2023 | Salary | £33,137 | £44,398 | £54,679 |
2022 (1) | Option A(2) | 146:1 | 114:1 | 90:1 |
| 2021 | Option A(2) | 127:1 | 100:1 | 79:1 |
| 2020 | Option A(2) | 50:1 | 38:1 | 31:1 |
| 2019 | Option A(2) | 265:1 | 208:1 | 166:1 |
(1) 2022 CEO pay ratios have been updated to reflect the value of the updated 2022 single figure which incorporates long-term incentives based on the actual share price at vesting, rather than the average share price in the last three months of the financial year which had been used for the 2022 disclosure.
(2) Only people employed in the United Kingdom and with the same number of contractual working hours throughout the full 12-month period have been included in the calculation. Inclusion of employees outside of this group would require a complex simulation of full-time annual remuneration based on a number of assumptions and would not have a meaningful impact on the ratio.
Methodology
Consistent with the approach for Diageo’s disclosure in previous years, the methodology used to identify the employees at each quartile for 2023 is Option A, as defined in the regulations. We believe this is the most robust and accurate approach, and is in line with shareholder expectations.
Total full-time equivalent remuneration for employees reflects all pay and benefits received by an individual in respect of the relevant year and has, other than where noted below, been calculated in line with the methodology for the ‘single figure of remuneration’ for the Chief Executive (shown on page 174of this report). The total remuneration calculations were based on data as at 30 June 2023. Actual remuneration was converted into the full-time equivalent for the role and location by pro-rating earnings to reflect full-time contractual working hours and these figures were then ranked to identify the employees sitting at the percentiles. To ensure that the total remuneration for the selected median, 25th and 75th percentile employee is sufficiently representative of those positions, we calculated the total remuneration for a number of employees above and below each of the selected median, 25th and 75th percentile UK employees and used the median value. In light of financial performance outcomes being signed off close to the publication of the Annual Report, the Diageo Group Inc.business multiple, which is applicable to the majority of UK employees, has been used to calculate all payments under the annual incentive, although some employees may receive a variation on this multiple in practice. Pension values for each employee are not calculated on an actuarial basis as for the Chief Executive, but rather as the notional cost of the company’s pension contribution during the financial year, according to the relevant section of the pension scheme for each individual. This approach allows meaningful data for a large group of people to be obtained in a more efficient way.
Points to note for the year ended 30 June 2023
Diageo has delivered a strong set of results for fiscal 23 during a period of volatility, however payouts under the annual incentive plan both for Diageo’s Chief Executive and the wider UK workforce are lower than the prior two years which saw double digit growth in organic net sales and operating profit. The annual incentive plan outcome is directly linked to awards made under the Freeshares scheme, which all UK employees are eligible to participate in. The median remuneration and resulting pay ratio for 2023 are consistent with the pay and progression policies for Diageo’s UK employees as a whole and reflect the impact of performance-related pay on total remuneration for the year. As the Chief Executive has a larger proportion of their total remuneration linked to business performance than other employees in the UK workforce, the ratio has increased versus last year due to a significantly higher performance outcome under the 2020 long-term incentives which vested this year, compared to the 2019 awards which vested last year which has more than made up for the lower bonus outcome this year and resulted in a higher value used for the Chief Executive's remuneration. However, total remuneration for employees is reduced by the lower bonus outcome for fiscal 23 relative to fiscal 22.
Change in pay for Directors compared to wider workforce
The table below shows the percentage change in Directors’ remuneration and average remuneration of employees on an annual basis. Given the small size of Diageo plc’s workforce, data for all employees of the group has also been included.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| 2023 | 2022 | 2021 | 2020 |
| Salary | Bonus | Benefits | Salary | Bonus | Benefits | Salary | Bonus | Benefits | Salary | Bonus | Benefits |
Plc employee average(1) | 9.0 | % | (61.3 | %) | (7.2 | %) | 11.1 | % | 25.8 | % | 10.5 | % | 5.1 | % | N/A(5) | 38.8 | % | 7.5 | % | (100.0 | %) | 9.0 | % |
Average global employee(2) | 12.9 | % | (41.6 | %) | 17.0 | % | 6.4 | % | 38.4 | % | 11.7 | % | — | | 278.8 | % | 12.6 | % | 5.3 | % | (67.8) | | 6.9 | % |
Executive Directors(3) | | | | | | | | | | | | |
Ivan Menezes(6) | — | | — | | — | | 2.3 | % | 4.4 | % | 59.5 | % | 0.7 | % | N/A(5) | -10.7 | % | 2.7 | % | -100.0 | % | 0.8 | % |
Debra Crew(5) | N/A(5) | N/A(5) | N/A(5) | N/A(5) | N/A(5) | N/A(5) | N/A(5) | N/A(5) | N/A(5) | N/A(5) | N/A(5) | N/A(5) |
| Lavanya Chandrashekar | 2.3 | % | (58.8 | %) | (89.4 | %) | N/A(5) | N/A(5) | N/A(5) | N/A(5) | N/A(5) | N/A(5) | N/A(5) | N/A(5) | N/A(5) |
Non-Executive Directors(4) | | | | | | | | | | | | |
Melissa Bethell (7) | 3.0 | % | — | | 10.1 | % | 2.3 | % | — | | 16.0 | % | N/A(5) | — | | — | | — | | — | | — | |
Karen Blackett (5) | N/A(5) | — | | N/A(5) | N/A(5) | — | | N/A(5) | — | | — | | — | | — | | — | | — | |
Valérie Chapoulaud-Floquet (7) | 3.0 | % | — | | 108.5 | % | — | | — | | — | | N/A(5) | — | | — | | — | | — | | — | |
| Javier Ferrán (Chairman) | 2.3 | % | — | | (22.4 | %) | 8.3 | % | — | | 28.8 | % | 0.0 | % | — | | 0.0 | % | 0.0 | % | — | | 0.0 | % |
Susan Kilsby (7) | 2.6 | % | — | | 125.7 | % | 3.8 | % | — | | 300.0 | % | 9.6 | % | — | | (87.7 | %) | 37.3 | % | — | | 68.9 | % |
Sir John Manzoni (7) | 3.0 | % | — | | 20.0 | % | — | | — | | — | | — | | — | | — | | — | | — | | — | |
| Lady Mendelsohn | 3.0 | % | — | | 0.0 | % | 2.3 | % | — | | 0.0 | % | 3.2 | % | — | | 0.0 | % | 3.3 | % | — | | 0.0 | % |
| Alan Stewart | 3.2 | % | — | | 0.0 | % | 4.7 | % | — | | 0.0 | % | 2.4 | % | — | | 0.0 | % | 2.5 | % | — | | 0.0 | % |
Ireena Vittal (7) | 3.0 | % | — | | 734.0 | % | — | | — | | — | | — | | — | | 0.0 | % | — | | — | | 0.0 | % |
(1) Around 60 UK-based employees are employed by Diageo plc. Their remuneration has been calculated in line with the approach used for the CEO pay-ratio calculation and the average year-on-year change has been reported. Only those employed during the full financial year have been included in calculations.
(2) Calculated by dividing staff cost related to salaries, bonus and benefits by the average number of employees on a full-time equivalent basis, as disclosed in note 3c to the financial statements under staff costs and average number of employees on page 211, but reduced to account for the inclusion of Executive Directors in reported figures. The salary, bonus and benefits cost data used for calculation are subsets of the Wages and salaries figure disclosed in this note. The salary data used for this calculation has been adjusted to exclude costs related to severance payments which are included in staff costs, and last year’s disclosure has been updated in line with this for consistency. In line with the approach for Directors, the bonus values used for the calculation reflect the bonus earned in relation to performance during the relevant financial year.
(3) Calculated using the data from the single figure table in the annual report on remuneration (page 174) in US dollars, reflecting payment currency for Ivan Menezes, Debra Crew and Lavanya Chandrashekar.
(4) Calculated using the fees of $105,406,and taxable benefits disclosed under Non-Executive Directors’ remuneration in the table on page 192. Taxable benefits for Non-Executive Directors comprise a product allowance as well as expense reimbursements relating to attendance at Board meetings, which were deferred into equity.may vary year-on-yea
(5) N/A refers to a nil value in the previous year or an incomplete prior year, meaning that the year-on-year change cannot be calculated.
(6) The year-on-year percentage change for Ivan Menezes for 2023 is not included as we are not reporting full year values for 2023.
(7) The increase in benefits value in fiscal 23 relates to an increase in travel expenses due to more in-person meetings taking place in fiscal 23.
Payments to former Directors
There were no payments to former Directors in the year ended 30 June 2020.2023.
Payments for loss of office
There were no payments for lossDetails of officeSir Ivan Menezes' salary, benefits and bonus payable up to Executive Directorsand including the date of his death, which was also his last day of employment (6 June 2023) are set out in the single total figure table on page 174. The time pro-rated bonus is based on full year endedperformance and is payable at the normal time entirely in cash, the Committee having exercised its discretion to waive the one-third payment in deferred shares. Sir Ivan’s deferred bonus shares from fiscal 21 and fiscal 22 vested on the date of death in accordance with the plan rules.
Sir Ivan’s unvested long-term incentive awards granted in 2020, 2021 and 2022 vested early on 2 August 2023 in accordance with the treatment under the plan rules on death-in-service, subject to an assessment against the performance measures and time pro-rating. The Committee exercised its discretion under the policy to slightly extend the time pro-rating from 6 to 30 June 2020.2023 on compassionate grounds to reflect the full fiscal 23 year. The 2020 award vested based on actual performance measured over the full three-year period to 30 June 2023 as disclosed on pages 178 and 180. The 2021 and 2022 awards vested subject to an assessment by the Committee against the performance measures as at 30 June 2023. Sir Ivan was originally awarded 36,675 PSP and 36,675 SESOP options in 2021 which were each time pro-rated to 24,427 awards. The 2021 PSP award vested at 81.2% and the 2021 SESOP award vested at 10.0%. The 2022 awards (33,845 PSP awards and 33,845 SESOP awards) were each time pro-rated to 11,271 awards and vested at 48.0% (PSP) and 0.0% (SESOP). The total vesting value of the 2021 and 2022 awards was $3,693k and $987k respectively, calculated based on the average Diageo ADR share price over the three months from 1 April 2023 to 30 June 2023 of $178.52. The Committee has chosen not to disclose the detail of performance relative to the targets set for each performance measure for the 2021 and 2022 awards, measured over the shortened period, on the basis that the information is regarded as commercially sensitive. SESOP options will be
Looking back on 2020
Annual incentive plan (AIP)
AIP payoutexercisable for the year ended 30 June 2020
AIP payouts for the Executive Directors are based 80% on performance against the group financial measures and 20% on performance against the Individual Business Objectives (IBOs), as assessed by the Remuneration Committee and summarised in the table below.
As a direct result of the Covid-19 pandemic and the impact on business performance in the second half of the financial year, none of the performance measures were met and no AIP payouts will be made for the year ended 30 June 2020 to Executive Directors or any members of the Executive Committee. Whilst progress had been made against individual business objectives, the Committee decided that in light of the impact of the Covid-19 pandemic on business performance, no payout would be made to Executive Directors or members of the Executive Committee against this element of the annual incentive plan for the year ended 30 June 2020.
|
| | | | | | | | | | | | | | | | | | |
Group financial measures(i) | | | | | | | | | | | | |
| Measure | | Weighting | | Threshold | | Target | | Maximum | | Actual | | Payout
(% of total AIP opportunity) |
Net sales (% growth)(ii) | | 26.7 | % | | 4.0 | % | | 5.5 | % | | 7.00 | % | | (8.4 | )% | | 0 | % |
Operating profit (% growth)(ii) | | 26.7 | % | | 3.9 | % | | 6.2 | % | | 8.5 | % | | (14.4 | )% | | 0 | % |
Average working capital (% net sales)(iii) | | 26.7 | % | | (1)bps |
| | 39bps |
| | 79bps |
| | 22bps |
| | 0 | % |
| Group financial payout | | 80 | % | | | | | | | | | | 0 | % |
|
| | | | | | | |
Individual business objectives | | | | | | |
Measure (IBOs equally weighted) | | Weighting | | Target | | Payout
(% of total AIP opportunity) |
Ivan Menezes
Chief Executive
| | 20 | % | | | | — |
Global Scotch performance | | | | Growth in Scotch net sales
Growth in Scotch CAAP (Contribution After A&P) | | — |
Global Reserve performance | | | | Growth in Reserve net sales
Growth in Reserve CAAP | | — |
Positive drinking | | | | Lead the industry to proactively ensure the promotion of moderation and reduction of harmful drinking. | | — |
Kathryn Mikells
Chief Financial Officer
| | 20 | % | | | | — |
Group cash performance | | | | Deliver year-end operating cash flow outcome | | — |
Earnings per share performance | | | | Deliver earnings per share target | | — |
Key business driver | | | | Deliver 2020 initiatives across carbon and water and develop plan for delivery in F21 and F22. | | — |
|
| | | | | | | | | | | | | | | | | | | |
| Payout | | | | | | | | | | | | |
| | | Group
(weighted 80%) |
| | IBO
(weighted 20%) | | Total
(% max) |
| | Total
(% salary) |
| | Total (’000) (iv) |
| | Total (’000) |
|
| Ivan Menezes | | 0 | % | | — | | 0 | % | | 0 | % | | £ | 0 |
| | $ | 0 |
|
| Kathryn Mikells | | 0 | % | | — | | 0 | % | | 0 | % | | £ | 0 |
| | $ | 0 |
|
| |
(i) | Performance against the AIP measures is calculated using 2020 budgeted exchange rates in line with management reporting and excludes the impact of exchange and any exceptional items. |
| |
(ii) | For AIP purposes, the net sales and operating profit measures are calculated after adjustments for acquisitions and disposals at budgeted foreign exchange rates. |
| |
(iii) | For AIP purposes, average working capital as a percentage of net sales is calculated as the average of the last 1224 months of operating working capital (excluding maturing inventories and restructuring provisions) divided by annual net sales. |
| |
(iv) | AIP payments are calculated using base salary as at 30 June 2020, in line with the global policy that applies to other employees across the company. |
Long-term incentive plans (LTIPs)
As approved by shareholders at the AGM in September 2014, long-term incentive awards are made under the Diageo Long-Term Incentive Plan (DLTIP). Awards are designed to incentivise Executive Directors and senior managers to deliver long-term sustainable performance and are subject to performance conditions normally measured over a three-year period. Awards are delivered on an annual basis in both performance shares and share options. With the exception of the TSR measure, awards vest at 20% of maximum for threshold performance, and 100% of the award will vest if the performance conditions are met in full, with a straight-line payout between threshold and maximum.
Share options - granted in September 2017, vesting in September 2020
On 4 September 2017, Ivan Menezes and Kathryn Mikells received share option awards of 51,268 ADRs and 32,380 ADRs respectively under the DLTIP, with an exercise price of $134.06. The award was subject to a performance condition assessed over a three-year period based on the achievement of the following equally weighted performance measures:
| |
– | Diageo’s three-year total shareholder return (TSR) ranked against the TSR of a peer group of international drinks and consumer goods companies; |
| |
– | growth in compound annual adjusted profit before exceptional items and tax. |
The vesting profile for relative TSR is shown below:
|
| | | |
TSR ranking (out of 17) | | Vesting (% max) |
|
1st, 2nd or 3rd | | 100 | % |
4th | | 95 | % |
5th | | 75 | % |
6th | | 65 | % |
7th | | 55 | % |
8th | | 45 | % |
9th | | 20 | % |
10th or below | | 0 | % |
|
| |
TSR peer group (16 companies) | |
AB InBev | Mondelēz International |
Brown-Forman | Nestlé |
Carlsberg | PepsiCo |
Coca-Cola | Pernod Ricard |
Colgate-Palmolive | Procter & Gamble |
Groupe Danone | Reckitt Benckiser |
Heineken | L'Oreal |
Kimberly-Clark | Unilever |
Performance shares - awarded in September 2017, vesting in September 2020
On 4 September 2017, Ivan Menezes and Kathryn Mikells received performance share awards of 51,268 ADRs and 32,380 ADRs respectively under the DLTIP. Awards vest after a three-year period subject to the achievement of specified performance conditions. Notional dividends accrue on awards and are paid out either in cash or shares in accordance with the vesting schedule.
The vesting of 2017 performance share awards was subject to the achievement of three equally weighted performance measures:
| |
– | growth in compound annual adjusted profit before exceptional items and tax; |
| |
– | growth in organic net sales on a compound annual basis; and |
| |
– | cumulative adjusted free cash flow. |
The targets and vesting outcome for performance share and share option awards granted in September 2017 are shown in the following tables:
|
| | | | | | | | | | | | | | | |
| Vesting of 2017 DLTIP | | Threshold |
| | Midpoint |
| | Maximum |
| | Actual |
| | Vesting
(% maximum) |
|
Organic net sales (CAGR)(i) | | 3.5 | % | | 4.75 | % | | 6.0 | % | | 0.8 | % | | 0 | % |
Adjusted profit before exceptional items and tax (CAGR)(ii) | | 4.5% |
| | 7.50 | % | | 10.5% |
| | 0.3% |
| | 0 | % |
Cumulative free cash flow(iii) | | £7,200m |
| | £7,900m |
| | £8,600m |
| | £7,211m |
| | 20.6 | % |
| Vesting of performance shares (% maximum) | | | | | | | | | | 6.9 | % |
Adjusted profit before exceptional items and tax (CAGR)(ii) | | 4.5 | % | | 7.50 | % | | 10.5 | % | | 0.3 | % | | 0.0 | % |
Relative total shareholder return(iv) | | 9th |
| | — |
| | 3rd |
| | 7th |
| | 55.0 | % |
| Vesting of share options (% maximum) | | | | | | | | | | 27.5 | % |
(i) The compound annual growth rate (CAGR) for organic net sales is based on the application of annual organic net sales growth rates in each of the individual years ended June 2018, June 2019 and June 2020 (using the year ended 30 June 2017 as a base).
(ii) The compound annual growth rate (CAGR) for profit before exceptional items and tax is based on the application of annual adjusted PBET growth rates in each of the individual years ended June 2018, June 2019 and June 2020 (using the year ended June 2017 as a base) excluding the impact of exchange, exceptional items, share buyback programmes and the post employment net income/charges included in other financial charges.
(iii) Cumulative free cash flow is the aggregate of free cash flow for the three-year period excluding the impact of exchange, cash flows from exceptional items and the interest cost on share buyback programmes. As stated on page 274 of this Annual Report, Diageo believes that during the year ended 30 June 2020 an aggregate minimum dividend payment of €181 million (£166 million) should have been received in respect of its 34% investment in Moet Hennessy SAS and Moet Hennessy International SAS for their financial year ended 31 December 2019. Diageo believes that non-payment of this dividend constitutes a breach of the Partners’ Agreement that governs this investment and has commenced arbitration proceedings in respect of this dispute. Had this dividend been received before 30 June 2020, it would have resulted in cumulative free cash flow of £7,377m for the three-year period ended 30 June 2020, and a vesting outcome of 10% of maximum under the 2017 performance share award, instead of 6.9% of maximum as outlined in the table above. To the extent that any amounts are received by Diageo that are referable to this missed dividend payment, the Remuneration Committee will be asked to exercise its discretion to approve the vesting and release of up to the remaining 3.1% of the 2017 performance share award, on the basis that such amounts are most appropriately attributable to free cash flow for the year ended 30 June 2020. In this event, corresponding disclosure would be made in the remuneration report for the financial year in which the remaining award vests and is released to the Executive Directors, if applicable. In line with the above, for the purpose of assessing long-term incentive outcomes, any amounts received by Diageo that are referable to the missed dividend payment would be included in free cash flow for the year ended 30 June 2020 and not for any future period, to avoid any double counting.
(iv) The Relative total shareholder return is measured as the percentage growth in Diageo’s ordinary share price (assuming all dividends and capital distributions are re-invested) compared to the total shareholder return of the peer group of 16 international drinks and consumer goods companies, based on an average period of six months, and converted to a common currency (US dollars). 20% of the part of the award based on relative total shareholder return vests if the threshold is achieved at a ranking of 9th, with full vesting for a ranking of 1st, 2nd or 3rd. As outlined in the TSR table above, the vesting profile for this measure does not operate on a straight-line basis between threshold and maximum. 20% of the part of the award based on relative total shareholder return vests if the threshold is achieved at a ranking of 9th, with full vesting for a ranking of 1st, 2nd or 3rd. The vesting profile between threshold and maximum does not operate on a straight-line basis, as outlined in the vesting profile table above.
Accordingly, the 2017 performance share award vested at 6.9% and the 2017 share option award vested at 27.5% of the maximum.
Pension and benefits in the year ended 30 June 2020
Benefits provisions for the Executive Directors are in accordance with the information set out in the Directors' remuneration policy table.
Pension arrangements
Ivan Menezes and Kathryn Mikells are members of the Diageo North America Inc. Supplemental Executive Retirement Plan (SERP) with an accrual rate of 20% of base salary during the year ended 30 June 2020. The accrual rate for Ivan Menezes was reduced from 30% to 20% of salary with effect 1 July 2019.
The SERP is an unfunded, non-qualified supplemental retirement programme. Under the plan, accrued company contributions are subject to quarterly interest credits. Under the rules of the SERP, employees can withdraw the balance of the plan six months after leaving service (in the case of Ivan Menezes) or six months after leaving service or age 55, if later (in the case of Kathryn Mikells). The balance may be withdrawn in either a lump sum or five equal annual instalments, depending on the size of the balance.
Ivan Menezes participated in the US Cash Balance Plan and the Benefit Supplemental Plan (BSP) until August 2012 and has accrued benefits under both plans. The Cash Balance Plan is a qualified funded pension arrangement. Employer contributions are 10% of pay capped at the Internal Revenue Service (IRS) limit. The BSP is a non-qualified unfunded arrangement; notional employer contributions are 10% of pay above the IRS limit. Interest (notional for the BSP) is credited quarterly on both plans.
Ivan Menezes was also a member of the Diageo Pension Scheme (DPS) in the United Kingdom between 1 February 1997 and 30 November 1999. The accrual of pensionable service ceased in 1999 but the linkage to salary remained until January 2012. Under the Rules of the Scheme, this benefit is payable unreduced from age 60. Ivan Menezes is able to take his UK pension benefits from age 58 without consent, and his benefit would not be subject to any actuarial reduction in respect of early payment. This is a discretionary policy Diageo offers that is not set out in the DPS Scheme Rules.
Upon death in service, a life insurance benefit of $3 million is payable for Ivan Menezes and a lump sum of four times base salary is payable for Kathryn Mikells.
The table below shows the pension benefits accrued by each Director to date. The accrued UK benefits for Ivan Menezes are annual pension amounts, whereas the accrued US benefits for Ivan Menezes and Kathryn Mikells are one-off cash balance amounts.
|
| | | | | | | | | | | | |
| | 30 June 2020 | | | 30 June 2019 | |
| Executive Director | | UK pension
£'000 p.a. |
| | US benefit
£'000 |
| | UK pension
£'000 p.a. |
| | US benefit
£'000 |
|
Ivan Menezes(i) | | 74 |
| | 8,225 |
| | 73 |
| | 7,543 |
|
Kathryn Mikells(ii) | | Nil |
| | 797 |
| | Nil |
| | 587 |
|
(i) Ivan Menezes' US benefits are higher at 30 June 2020 than at 30 June 2019 by £682k:
(a) £368k of which is due to pension benefits earned over the year (£281k of which is over and above the increase due to inflation - as reported in the single figure of remuneration, see page 176);
(b) £58k of which is due to interest earned on his deferred US benefits over the year; and
(c) £256k of which is due to exchange rate movements over the year.
(ii) Kathryn Mikells’ US benefits are higher at 30 June 2020 than at 30 June 2019 by £210k:
(a) £186k of which is due to pension benefits earned over the year (£176k of which is over and above the increase due to inflation - as reported in the single figure of remuneration, see page 176); and
(b) £24k of which is due to exchange rate movements over the year.
The normal retirement age applicable to each Director’s benefits depends on the pension scheme, as outlined below.
|
| | | | | | | | |
| Executive Director | | UK benefits (DPS) | | US benefits (Cash Balance Plan) | | US benefits (BSP) | | US benefits (SERP) |
| Ivan Menezes | | 60 | | 65 | | 6 months after leaving service | | 6 months after leaving service |
| Kathryn Mikells | | n/a | | n/a | | n/a | | 6 months after leaving service, or age 55 if later |
Long-term incentive awards made during the year ended 30 June 2020
On 2 September 2019, Ivan Menezes and Kathryn Mikells received awards of performance shares and market-price share options under the DLTIP; details are provided in the table below. The three-year period over which performance will be measured is 1 July 2019 to 30 June 2022.
The performance conditions for performance share awards are organic net sales growth (3.75% - 6%), cumulative free cash flow (£8,600m - £9,600m) and organic profit before exceptional items and tax growth (4.5% - 10.5%), equally weighted. The performance measures for share option awards are organic profit before exceptional items and tax growth (4.5% - 10.5%) and relative total shareholder return (median-upper quintile), equally weighted. The targets were disclosed in full in the 2019 remuneration report.
20% of DLTIP awards will vest at threshold, with vesting up to 100% if the maximum level of performance is achieved.
|
| | | | | | | | | | | | | | | | | | | |
| Executive Director | | Date of grant | | Plan | | Share type | | Awards made
during the year | | Exercise
price |
| | Face value
'000 |
| | Face value
(% of salary) |
|
| Ivan Menezes | | 02/09/2019 | | DLTIP - share options | | ADR | | 38,827 | | $ | 170.28 |
| | $ | 6,230 |
| | 375 | % |
| Ivan Menezes | | 02/09/2019 | | DLTIP - performance shares | | ADR | | 38,827 | | — |
| | $ | 6,230 |
| | 375 | % |
| Kathryn Mikells | | 02/09/2019 | | DLTIP - share options | | ADR | | 24,552 | | $ | 170.28 |
| | $ | 3,935 |
| | 360 | % |
| Kathryn Mikells | | 02/09/2019 | | DLTIP - performance shares | | ADR | | 24,552 | | — |
| | $ | 3,935 |
| | 360 | % |
The proportion of the awards outlined above that will vest is dependent upon the achievement of performance conditions and continued employment, and the actual value may be nil. The vesting outcomes will be disclosed in the 2022 Annual Report.
The face value of each award has been calculated using the award price. In accordance with the Plan Rules, the number of performance shares and share options granted under the DLTIP was calculated by using the average closing share price for the last six months of the preceding financial year ($160.46). In accordance with the plan rules, the exercise price was calculated using the average closing share price of the three days preceding the grant date ($170.28). The ADR price on the date of grant was $174.72.death (already vested options) and the date of vesting (options vesting early on 2 August 2023), the Committee having exercised discretion to extend from 12 months to give the estate sufficient time to exercise the options. The two-year post-vesting holding periods will not apply and the post-employment shareholding requirement falls away.
Outstanding share plan interests
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Plan name | | Date of award | | Performance period | | Date of vesting | | Share type | | Share price on date of grant | | Exercise price | | Number of shares/options at 30 June 2019(i) |
| | Granted |
| | Vested/exercised |
| | Dividends awarded and released |
| | Lapsed |
| | Number of shares/options at 30 June 2020 |
|
| Ivan Menezes | | | | | | | | | | | | | | | | | | | | | | | | |
| DLTIP - share options | | Sep 2015 | 2015-2018 | | 2018 | | ADR | | | | $ | 104.93 | | 29,895 |
| | | | | | | | | | 29,895 |
|
DLTIP - share options(iii) | | Sep 2016 | 2016-2019 | | 2019 | | ADR | | | | $ | 113.66 | | 54,356 |
| | | | | | | | 14,622 |
| | 39,734 |
|
Total vested but unexercised share options in Ords(ii) | | | | | | | | 278,516 |
|
DLTIP - share options(iv) | | Sep 2017 | 2017-2020 | | 2020 | | ADR | | | | $ | 134.06 | | 51,268 |
| | | | | | | | | | 51,268 |
|
DLTIP - share options(v) | | Sep 2018 | 2018-2021 | | 2021 | | ADR | | | | $ | 140.89 | | 42,848 |
| | | | | | | | | | 42,848 |
|
| DLTIP - share options | | Sep 2019 | 2019-2022 | | 2022 | | ADR | | | | $ | 170.28 | | 0 |
| | 38,827 |
| | | | | | | | 38,827 |
|
Total unvested share options subject to performance in Ords(ii) | | | | | | | | 531,772 |
|
DLTIP - performance shares(vii) | | Sep 2016 | 2016-2019 | | 2019 | | ADR | | $ | 115.77 | | | | 54,356 |
| | | | 48,539 |
| | 2,792 |
| | 5,817 |
| | 0 |
|
DLTIP - performance shares(iv) | | Sep 2017 | 2017-2020 | | 2020 | | ADR | | $ | 134.83 | | | | 51,268 |
| | | | | | | | | | 51,268 |
|
DLTIP - performance shares(v) | | Sep 2018 | 2018-2021 | | 2021 | | ADR | | $ | 139.41 | | | | 42,848 |
| | | | | | | | | | 42,848 |
|
| DLTIP - performance shares | | Sep 2019 | 2019-2022 | | 2022 | | ADR | | $ | 174.72 | | | | 0 |
| | 38,827 |
| | | | | | | | 38,827 |
|
Total unvested shares subject to performance in Ords(ii) | | | | | | | | 531,772 |
|
Kathryn Mikells(ix) | | | | | | | | | | | | | | | | | | | | | | | | |
DLTIP - share options(iii)(vi) | Sep 2016 | 2016-2019 | | 2019 | | Ord | | | | 2113p | | 128,253 |
| | | | | | | | 34,501 |
| | 93,752 |
|
| Total vested but unexercised share options in Ords | | | | | | | | 93,752 |
|
DLTIP - share options(iv) | | Sep 2017 | 2017-2020 | | 2020 | | ADR | | | | $ | 134.06 | | 32,380 |
| | | | | | | | | | 32,380 |
|
DLTIP - share options(v) | | Sep 2018 | 2018-2021 | | 2021 | | ADR | | | | $ | 140.89 | | 27,062 |
| | | | | | | | | | 27,062 |
|
| DLTIP - share options | | Sep 2019 | 2019-2022 | | 2022 | | ADR | | | | $ | 170.28 | | 0 | | 24,522 | | | | | | | | 24,522 |
Total unvested share options subject to performance in Ords(ii) | | | | | | | | 335,856 |
|
DLTIP - performance shares(viii) | Sep 2016 | 2016-2019 | | 2019 | | Ord | | 2127p | | | | 128,253 |
| | | | 114,529 |
| | 6,220 |
| | 13,724 |
| | 0 |
|
DLTIP - performance shares(iv) | Sep 2017 | 2017-2020 | | 2020 | | ADR | | $ | 134.83 | | | | 32,380 |
| | | | | | | | | | 32,380 |
|
DLTIP - performance shares(v) | Sep 2018 | 2018-2021 | | 2021 | | ADR | | $ | 139.41 | | | | 27,062 |
| | | | | | | | | | 27,062 |
|
| DLTIP - performance shares | | Sep 2019 | 2019-2022 | | 2022 | | ADR | | $ | 174.72 | | | | 0 |
| | 24,522 |
| | | | | | | | 24,522 |
|
Total unvested shares subject to performance in Ords(ii) | | | | | | | | 335,856 |
|
| |
(i) | For unvested awards this is the number of shares/options initially awarded. For exercisable share options, this is the number of outstanding options. All share options have an expiry date of 10 years after the date of grant. |
| |
(ii) | ADRs have been converted to Ords (one ADR is equivalent to four ordinary shares) for the purpose of calculating the total number of vested and unvested shares and options. |
| |
(iii) | The total number of share options granted under the DLTIP in September 2016 and showing as outstanding as at 30 June 2020 are vested but unexercised share options. |
| |
(iv) | Awards made of performance shares and share options under the DLTIP in September 2017 and due to vest in September 2020 are included here as unvested share awards subject to performance conditions, although the awards have also been included in the single figure of remuneration table on page 176, since the performance period ended during the year ended 30 June 2020. |
| |
(v) | Details of the performance conditions attached to DLTIP awards of performance shares and share options granted in 2018 are organic net sales growth (3.75% – 6%), organic growth in profit before exceptional items and tax (4.5% – 10.5%), cumulative free cash flow (£7,400m – £8,700m) and relative total shareholder return (median–upper quintile). Full details of the performance conditions were disclosed in Diageo’s 2018 annual report on remuneration. |
| |
(vi) | 1,419 Ords of this award were delivered as tax-qualified share options. |
| |
(vii) | Sir Ivan’s 2006 employment contract provided for lifetime medical cover for Sir Ivan Menezes must retain 26,583 ADRs of the 48,539 shares that vested on 5 September 2019 until 5 September 2021 under the post-vesting retention period. |
| |
(viii) | Kathryn Mikells must retain 63,854 Ords of the 114,529 shares that vested on 4 September 2019 until 5 September 2021 under the post-vesting retention period. |
(ix) Kathryn Mikells also holds 1,031 outstanding options over ordinary shares under an all-employee share plan, which are not subject to performance and not included in this table.
Directors' shareholding requirements and share and other interests
his spouse on a cost sharing basis with the company. The beneficial interests of the Directors in office at 30 June 2020 (and their connected persons) in the ordinary shares (or ordinary share equivalents) oflifetime medical cover will continue for Sir Ivan’s surviving spouse, the company are shown in the table below.
|
| | | | | | | | | | | | | | | | | |
| | | Ordinary shares or equivalent(i)(ix) | | | | | | | |
| | | 31 July 2020(ii) |
| | 30 June 2020
(or date of departure, if earlier) |
| | 30 June 2019
(or date of departure, if earlier) |
| | Shareholding requirement (% salary) (iii) |
| | Shareholding at 31 July 2020 (% salary)(iii) |
| | Shareholding requirement met |
| Chairman | | | | | | | | | | | | |
Javier Ferrán(vi) | | 250,802 |
| | 250,496 |
| | 217,000 |
| | — |
| | — |
| | — |
| Executive Directors | | | | | | | | | | | | |
Ivan Menezes(iv)(vi) | | 1,134,374 |
| | 1,134,374 |
| | 1,122,042 |
| | 500 | % | | 2,635 | % | | Yes |
Kathryn Mikells(v)(vi) | | 223,964 |
| | 223,964 |
| | 158,506 |
| | 400 | % | | 791 | % | | Yes |
| Non-Executive Directors | | | | | | | | | | | | |
| Lord Davies of Abersoch | | — |
| | 5,052 |
| | 5,052 |
| | — |
| | — |
| | — |
| Ho KwonPing | | 4,649 |
| | 4,649 |
| | 4,543 |
| | — |
| | — |
| | — |
| Alan Stewart | | 6,905 |
| | 6,905 |
| | 6,751 |
| | — |
| | — |
| | — |
| Nicola Mendelsohn | | 5,000 |
| | 5,000 |
| | 5,000 |
| | — |
| | — |
| | — |
Susan Kilsby(vi) | | 2,600 |
| | 2,600 |
| | 2,600 |
| | — |
| | — |
| | — |
Debra Crew(vi)(vii) | | — |
| | 260 |
| | 260 |
| | — |
| | — |
| | — |
Melissa Bethell(viii) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
Notes
(i) Each person listed beneficially owns less than 1%cost of Diageo’s ordinary shares. Ordinary shares held by Directors have the same voting rights as all other ordinary shares.
(ii) Any change in shareholding between the end of the financial year on 30 June 2020 and the last practicable date before publication of this report, being 31 July 2020, is outlined in the table above. The last practicable date is within one month of the AGM notice.
(iii) Both the shareholding requirement and shareholding at 31 July 2020 are expressed as a percentage of base salary on 30 June 2020 and calculated using an average share pricewhich for the first year ended 30 June 2020 of 3064.84 pence.
| |
(iv) | In addition to the number of shares reported in the table above, Ivan Menezes holds 69,629 number of vested but unexercised share options (over ADRs; equal to 278,516 ordinary shares). |
| |
(v) | In addition to the number of shares reported in the table above, Kathryn Mikells holds 93,752 vested but unexercised share options (over ordinary shares). |
(vi) Javier Ferrán, Ivan Menezes, Kathryn Mikells, Susan Kilsby and Debra Crew have share interests in ADRs (one ADR is equivalent to four ordinary shares); the share interests in the table are stated as ordinary share equivalents.
(vii) Debra Crew stepped down from the Board$12,381, based on 24 March 2020.
(viii) Melissa Bethell was appointed to the Board on 30 June 2020.
| |
(ix) | No share options were exercised by the Directors during the year ended 30 June 2020. |
Relative importance of spend on pay
2023 rates. The graph below illustrates the relative importance of spend on pay (total remuneration of all group employees) compared with distributions to shareholders (total dividends plus the share buyback programme but excluding transaction costs), and the percentage change from the year ended 30 June 2019 to the year ended 30 June 2020. The Committee considers that there are no other significant distributions or payments of profit or cash flow.
CEO total remuneration and TSR performance
The graph below shows the total shareholder return for Diageo and the FTSE 100 Index since 30 June 2010 and demonstrates the relationship between pay and performance for the Chief Executive, using current and previously published single total remuneration figures. The FTSE 100 Index has been chosen because it is a widely recognised performance benchmark for large companies in the United Kingdom.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Paul S Walsh £'000 |
| | Paul S Walsh £'000 |
| | Paul S Walsh £'000 |
| | Ivan Menezes (i) £'000 |
| | Ivan Menezes (i) £'000 |
| | Ivan Menezes (i)£'000 |
| | Ivan Menezes (i)£'000 |
| | Ivan Menezes(i)£'000 |
| | Ivan Menezes (i)£'000 |
| | Ivan Menezes (ii)£'000 |
|
| Chief Executive total remuneration (includes legacy LTIP awards) | | 4,449 |
| | 11,746 |
| | 15,557 |
| | 7,312 |
| | 3,888 |
| | 4,156 |
| | 3,399 |
| | 8,995 |
| | 11,776 |
| | 2,139 |
|
Annual incentive(ii) | | 77 | % | | 74 | % | | 51 | % | | 9 | % | | 44 | % | | 65 | % | | 68 | % | | 70 | % | | 61.0 | % | | 0 | % |
Share option(ii) | | 100 | % | | 100 | % | | 100 | % | | 71 | % | | 0 | % | | 0 | % | | 0 | % | | 60 | % | | 73.1 | % | | 27.5 | % |
Performance share(ii) | | 0 | % | | 65 | % | | 95 | % | | 55 | % | | 33 | % | | 31 | % | | 0 | % | | 70 | % | | 89 | % | | 6.9 | % |
| |
(i) | To enable comparison Ivan Menezes’ single total figure of remuneration has been converted into sterling using the average weighted exchange rate for the relevant financial year. |
(ii) % maximum opportunity.
CEO pay ratio
In accordance with the Companies (Miscellaneous Reporting) Regulations 2018, the table below sets out Diageo’s CEO pay ratios for the year ended 30 June 2020. This compares the Chief Executive’s total remuneration – converted into sterling – with the equivalent remuneration for the employees paid at the 25th (P25), 50th (P50) and 75th (P75) percentile of Diageo’s workforce in the United Kingdom. The total remuneration for each quartile employee, and the salary component within this, is also outlined in the table below.
|
| | | | | | | | | | | | | | |
Year | | Method | | 25th percentile pay ratio
|
| | Median pay ratio |
| | 75th percentile pay ratio
|
|
2019(i)
| | Option A(ii)
| | 265:1 |
| | 208:1 |
| | 166:1 |
|
2020 | | Option A(ii)(iii)
| | 51:1 |
| | 39:1 |
| | 31:1 |
|
2020 | | Total pay and benefits | |
| £41,881 |
| |
| £54,234 |
| |
| £68,112 |
|
2020 | | Salary | |
| £30,886 |
| |
| £37,632 |
| |
| £52,659 |
|
| |
(i) | 2019 CEO pay ratios have been updated to reflect the value of the updated 2019 single figure of remuneration, which incorporates long-term incentives based on actual share price at vesting, rather than the average share price in the last three months of the financial year, which had been used as a proxy for the 2019 disclosure. |
| |
(ii) | Only people employed in the United Kingdom and with the same number of contractual working hours throughout the full 12-month period have been included in the calculation. Inclusion of employees outside this group would require a complex simulation of full-time annual remuneration and would not have a meaningful impact on the ratio. |
| |
(iii) | The total remuneration for employees is based on actual earnings for the 11 months to 31 May 2020, and a projection for June 2020 that replicates the relevant items of the previous month’s earnings. This pragmatic approach provides an accurate calculation of the ratios, while mitigating the challenge of the limited timeframe between the end of the financial year and the publishing of the Annual Report. Pay changes from May to June would seldom be material. This assumption was tested by replicating the 2019 calculation using actual earnings for June 2019, which resulted in no change to the median employee total pay and benefits figure for 2019 and indicated that the maximum variance in the median pay ratio in any given year would be 1 point only. |
Methodology
Consistent with the approach for Diageo’s voluntary disclosure in 2019, the calculation methodology used to identify the employees at each quartile for 2020 is Option A, as defined in the regulations. We believe this is the most robust and accurate approach, and in line with shareholder expectations. Total full-time equivalent remuneration for employees reflects all pay and benefits received by an individual in respect of the relevant year and has, other than where noted below, been calculated in line with the methodology for the ‘single figure of remuneration’ for the Chief Executive (shown on page 176 of this report). Actual remuneration was converted into the full-time equivalent for the role and location by pro-rating earnings to reflect full-time contractual working hours and these figures were then ranked to identify the employees sitting at the percentiles. In light of financial performance outcomes being signed off close to the publishing date of the Annual Report, the Diageo Group Business Multiple - which applies to the majority of UK employees - has been used to calculate all payments under the annual incentive schemes, although specific regional or market business multiples may apply in practice. Pension values are not calculated on the same basis as the Chief Executive figure, but rather as the total of contributions made by the company during the financial year. This approach allows meaningful data for a large group of individuals to be obtained in a more efficient way.
Points to note for the year 2020
As indicated in last year’s disclosure, Diageo’s Chief Executive has a larger proportion of his total remuneration linked to business performance than other employees in the UK Workforce. Last year’s performance was strong, but in 2020 there will be no annual incentive payout and long-term incentives related to the three-year period ended 30 June 2020 will have limited vesting. As a result, total remuneration for the Chief Executive has changed significantly from 2019 to 2020. Total remuneration across the wider UK workforce has also reduced due to the absence of a bonus pay out and freeshares award as a result of the Covid-19 pandemic, as evidenced by the reduction in the total pay and benefits figures versus last year. However, the main driver for the reduction of the pay ratios is variable pay for the Chief Executive. The median pay ratio for 2020 is consistent with the pay and progression policies for Diageo’s UK employees as a whole. As in 2019, the individual receiving median pay belongs to the group of manufacturing workers involved in the distillation, warehousing, maturation, bottling and packaging of Scotch whisky and other spirits and beer that makes up almost half of the workforce in the United Kingdom.
Looking after our people and investing in talent
Throughout the Covid-19 pandemic, our focus has been firmly on the wellbeing of our employees and providing the policies, support and guidance they need. Diageo has soughtcontinue to provide stability and reassurancetax support up to its workforce by safeguarding jobs, pay and benefits, and has increased its overall benefit offering by rolling-out a global employee assistance program and extending access to bereavement leave and life insurance to all employees across the world.
To help us emerge stronger, we continue to investmaximum annual amount of £28,000 (excl. VAT) for fees incurred in attracting world-class talent by offering total reward packages that people value and that support them to be their best. Although most employees’ salaries will remain unchanged in 2020, we still aim to offer fair and competitive rates of pay across the business and therefore we continue to carry out regular market benchmarking which allows us to intervene where required.
We are proud of being a UK Living Wage employer since 2017 and of the progress we have made towards closing the gender pay gap (more details available at www.diageo.com).
Benefits such as competitive pension schemes, the opportunity to participate in employee share-ownership schemes, a product allowance to help employees enjoy Diageo products, generous leave policies, healthcare and life insurance are key parts of our total reward offering.
Annual change in pay for Directors and all employees
In line with the requirements in The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019, which implement Articles 9a and 9b of European Directive 2017/828/EC1 (commonly known as the Revised Shareholder Rights Directive or SRD), the table below shows the percentage change in Directors’ remuneration and average remuneration of employees from the year ended 30 June 2019 to the year ended 30 June 2020. Given the small number of people employed by the Diageo plc entity, data for all employees of the Diageo Group has been included.
Relatively few employees will receive a bonus in 2020 and there will be no annual incentive payout for Executive Directors, the impact of which is visible in the bonus percentage change. The year-on-year movement in salary for Executive Directors and employees reflects the annual review implemented in October 2019 and changes throughout the financial year ending 30 June 2020. The impact of the announced absence of a global salary review in 2020 will be reflected in next year’s disclosure. The increase in Kathryn Mikell’s benefits relates to the provision of financial counselling for complianceconnection with UK and US tax affairs, as referencedreturn submissions up to and including the 2023 US tax return and the 2023/24 UK tax return, which are the final returns required to be submitted on behalf of Sir Ivan before tax filings become a matter for his estate. Upon death-in-service, a life assurance benefit of $3 million became payable by the insurance provider and Sir Ivan’s pension benefits will be treated in accordance with the single figure table on page 176. On 29 January 2019 Susan Kilsby was appointed Chairterms of the Remuneration Committee and subsequently became Senior Independent Director on 31 October 2019. These positions were previously held by Lord Davies of Abersoch and, as a result, there is a significant change in both of their fees from 2019 to 2020.relevant pension plans.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | Year-on-year change in pay for Directors compared to the global average employee |
| | | | Executive Directors(ii) | | Non-Executive Directors(iii) |
| | | Average
employee(i) |
| | Ivan Menezes |
| | Kathryn Mikells |
| | Javier Ferrán |
| | Debra Crew(iv) |
| | Lord Davies |
| | Susan Kilsby |
| | Ho KwonPing |
| | Nicola Mendelsohn |
| | Alan Stewart |
|
| Salary | | 3.7 | % | | 2.7 | % | | 2.8 | % | | 0 | % | | 3.3 | % | | (22.9 | )% | | 37.3 | % | | 3.3 | % | | 3.3 | % | | 2.5 | % |
| Bonus | | (67.8 | )% | | (100 | )% | | (100 | )% | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Benefits | | 6.9 | % | | 0.8 | % | | 55.9 | % | | 0 | % | | 527.7 | % | | 27.4 | % | | 68.9 | % | | 93.3 | % | | 0 | % | | 0 | % |
| | |
(i) | Calculated by dividing staff cost related to salaries, bonus and benefits by the average number of employees on a full-time equivalent basis, as disclosed in the financial statements under Staff cost and average number of employees (note 3c) on pages 212 and 213, but reduced to account for the inclusion of ExecutiveNon-Executive Directors in reported figures. The salary, bonus and benefits are subsets of the Wages and Salaries figure disclosed in note 3c. In line with the approach for the Directors, the bonus reflects the payouts in relation to performance during the relevant financial year. |
| |
(ii) | Calculated using the data from the single figure table in the annual report on remuneration (page 176) in US dollars, as both Ivan Menezes and Kathryn Mikells are paid in this currency. |
| |
(iii) | Calculated using the fees and taxable benefits disclosed under Non-Executive Directors’ remuneration in the table below. Taxable benefits for Non-Executive Directors comprise a product allowance as well as expense reimbursements relating to attendance at Board meetings, which may be variable year-on-year and have not exceeded £10k in total. |
| |
(iv) | Debra Crew was appointed to the Board on 18 April 2019 and stood down on 24 March 2020. To enable comparison and to provide a meaningful reflection of annual percentage increase, for the purposes of this calculation, her 2019 and 2020 fees were adjusted to reflect full-year appointment to the Board. |
Non-Executive Directors
Fee policy
Javier Ferrán’s fee as non-executive Chairman as at 1 January 2020 is £600,000was increased by 3% from £650,000 per annum rising to £650,000£670,000 on 1 January 2021 (the planned increase for 1 January 2020 was deferred, at the Chairman’s request, due to the Covid-19 pandemic).October 2022. The Chairman’s fee is appropriately positioned against our comparator group of FTSE 30 companies excluding financial services.
The basicExecutive Directors and the Chairman also approved an increase in the base fee for Non-Executive Directors increased from £92,000of 3% (from £101,000 to £98,000 and the additional fee for the Senior Non-Executive Director increased from £25,000 to £30,000, both£104,000), effective 1 January 2020. There was no changeOctober 2022.
| | | | | | | | |
| January 2023 | January 2022 |
| Per annum fees | £'000 | £'000 |
| Chairman of the Board | 670 | 650 |
| Non-Executive Directors |
|
|
| Base fee | 104 | 101 |
| Senior Non-Executive Director | 30 | 30 |
| Chairman of the Audit Committee | 35 | 35 |
| Chairman of the Remuneration Committee | 35 | 35 |
remuneration for Non-Executive Directors’ 30 June 2023
| | | | | | | | | | | | | | | | | | | | |
| Fees £'000 | Taxable benefits £'000(1) | Total £'000(4) |
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 |
| Chairman | | | | | | |
Javier Ferrán(2) | 665 | 650 | 1 | 2 | 666 | 652 |
| Non-Executive Directors | | | | | | |
| Melissa Bethell | 103 | 100 | 2 | 1 | 105 | 102 |
Karen Blackett(3) | 103 | | 8 | 1 | — | 104 | 9 |
| Valérie Chapoulaud-Floquet | 103 | 100 | 10 | 5 | 113 | 105 |
| Susan Kilsby | 168 | 164 | 11 | 5 | 179 | 169 |
| Sir John Manzoni | 103 | 100 | 2 | 1 | 105 | 102 |
| Lady Mendelsohn | 103 | 100 | 1 | 1 | 104 | 102 |
| Alan Stewart | 138 | 134 | 1 | 1 | 139 | 135 |
| Ireena Vittal | 103 | 100 | 10 | 1 | 113 | 102 |
(1) Taxable benefits include a product allowance and expense reimbursements relating to travel, accommodation and subsistence in connection with attendance at Board meetings during the additional fees foryear, which are deemed by HMRC to be taxable in the ChairUnited Kingdom. The amounts in the single total figure of remuneration table above include any tax gross-ups on the benefits provided by the company on behalf of the Audit Committee and ChairDirectors. Non-taxable expense reimbursements have not been included in the single figure of the Remuneration Committeeremuneration table above.
(2) £100,000 of Javier Ferrán’s net remuneration in the year ended 30 June 2020. The next review is scheduled2023 was used for January 2021.the monthly purchase of Diageo ordinary shares, which will be retained until he retires from the company or ceases to be a Director for any other reason.
(3) Karen Blackett was appointed to the Board on 1 June 2022.
(4) Some figures add up to slightly different totals due to rounding.
|
| | | | | | |
| | | January 2020 |
| | January 2019 |
|
| Per annum fees | | £'000 |
| | £'000 |
|
| Chairman of the Board | | 600 |
| | 600 |
|
| Non-Executive Directors | | | | |
| Base fee | | 98 |
| | 92 |
|
| Senior Non-Executive Director | | 30 |
| | 25 |
|
| Chairman of the Audit Committee | | 30 |
| | 30 |
|
| Chairman of the Remuneration Committee | | 30 |
| | 30 |
|
Looking ahead to 2024
Non-Executive Directors’ remuneration for the year ended 30 June 2020
|
| | | | | | | | | | | | | | | | | | |
| | | Fees
£'000 | | | Taxable benefits(i)
£'000 | | | Total
£'000 | |
| | | 2020 |
| | 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
| | 2019 |
|
| Chairman | | | | | | | | | | | | |
Javier Ferrán(ii) | | 600 |
| | 600 |
| | 1 |
| | 1 |
| | 601 |
| | 601 |
|
| Non-Executive Directors | | | | | | | | | | | | |
| Lord Davies of Abersoch | | 103 |
| | 134 |
| | 2 |
| | 1 |
| | 105 |
| | 135 |
|
| Susan Kilsby | | 144 |
| | 105 |
| | 10 |
| | 6 |
| | 154 |
| | 111 |
|
Melissa Bethell(iii) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Debra Crew(iv) | | 71 |
| | 19 |
| | 8 |
| | — |
| | 79 |
| | 19 |
|
| Ho KwonPing | | 95 |
| | 92 |
| | 4 |
| | 2 |
| | 99 |
| | 94 |
|
| Nicola S Mendelsohn | | 95 |
| | 92 |
| | 1 |
| | 1 |
| | 96 |
| | 93 |
|
| Alan JH Stewart | | 125 |
| | 122 |
| | 1 |
| | 1 |
| | 126 |
| | 123 |
|
| | |
(i) | Taxable benefits include a contracted car service, product allowance and expense reimbursements relating to travel, accommodation and subsistence in connection with the attendance at Board meetings during the year, which are deemed by HMRC to be taxable in the United Kingdom. The amounts in the single figure of total remuneration table above include the grossed-up cost of UK tax paid by the company on behalf of the Directors. Non-taxable expense reimbursements have not been included in the single figure of remuneration table above. |
| |
(ii) | £100,000 of Javier Ferrán’s net remuneration in the year ended 30 June 2020 was used for the monthly purchase of Diageo ordinary shares, which must be retained until he retires from the company or ceases to be a Director for any other reason. |
| |
(iii) | Melissa Bethell was appointed to the Board on 30 June 2020 and received £377 in feesSalary increases for the year endedending 30 June 2020.2024 |
(iv) Debra Crew stepped down from the Board on 24 March 2020.
Looking ahead to 2021
Salary increases for the year ending 30 June 2021
As outlined in the 2019 annual report on remuneration, base salaries for the Chief Executive and Chief Financial Officer were increased by 3%, effective from 1 October 2019.
In April 2020, theThe Remuneration Committee reviewed base salaries for senior managementExecutive Committee members and agreed that nothe following increase to salaries will apply fromfor the Chief Financial Officer, effective 1 October 2020, in light of the impact of the Covid-19 pandemic on business performance in the year ended 30 June 2020.2023.
|
| | | | | | | | | | | | | | | | |
| | | Ivan Menezes | | | Kathryn Mikells | |
| Salary at 1 October ('000) | | 2020 |
| | 2019 |
| | 2020 |
| | 2019 |
|
| Base salary | | $ | 1,661 |
| | $ | 1,661 |
| | $ | 1,093 |
| | $ | 1,093 |
|
| % increase (over previous year) | | 0 | % | | 3 | % | | 0 | % | | 3 | % |
Annual incentive designDebra Crew's salary for the year ending 30CEO role became effective when she was appointed as interim CEO on 5 June 20212023. Her next salary review will be in October 2024.
| | | | | | | | | | | | | | |
| Debra Crew | Lavanya Chandrashekar |
| Salary at 1 October ('000) | 2023 | 2022 | 2023 | 2022 |
| Base salary | $1,750 | n/a | $1,044 | $1,004 |
| % increase (over previous year) | n/a | n/a | 4 | % | 3 | |
| | |
Annual incentive design for the year ending
30 June 2024 |
The measures and targets used infor the AIPannual incentive plan are reviewed annually by the Remuneration Committee and are carefully chosen to drive financial and individual business performance goals related to the company’s short-term strategic operational objectives. The AIPplan design for Executive Directors infor the year ending 30 June 20212024 will comprise the following performance measures and weightings (no change from last year), with targets set for each half-year period and the final payout determined at the year-end, subject to the Committee’s assessment of holistic performance over the full financial year:
| |
– | operating profit (% growth) (26.67% weighting): stretching profit targets drive operational efficiency and influence the level of returns that can be delivered to shareholders through increases in share price and dividend income not including exceptional items or exchange; |
| |
– | net sales (% growth) (26.67% weighting): a key performance measure of year-on-year top line growth; |
| |
– | operating cash conversion (26.67% weighting): ensures focus on efficient cash delivery by the end of the year; |
| |
– | individual business objectives (20% weighting): measurable deliverables that are specific to the individual and are focused on supporting the delivery of key strategic objectives. |
–net sales (% growth) (26.67% weighting): a key performance measure of year-on-year top line growth;
–operating profit(% growth) (26.67% weighting): stretching profit targets drive operational efficiency and influence the level of returns that can be delivered to shareholders through increases in share price and dividend income not including exceptional items or exchange;
–operating cash conversion (26.67% weighting): ensures focus on efficient cash delivery by the end of the year; and
–individual business objectives (20% weighting): measurable deliverables that are specific to the individual and are focussed on supporting the delivery of key strategic objectives.
The Committee has discretion to adjust the payout to reflect underlying business performance and any other relevant factors.
Details of the targets for the year ending 30 June 20212024 will be disclosed retrospectively in next year’s annual report on remuneration, by which time they will no longer be deemed commercially sensitive by the Board.
The annual incentive opportunity for Executive Directors will remain consistent with prior years, equal to 100% of base salary at target, with a maximum opportunity of 200% of base salary.
| | |
| Long-term incentive awards to be made in the year ending 30 June 2024 |
As per last year, DLTIP awards to be made in the year ending 30 June 2021
The long-term incentive plan measures are reviewed annually by the Remuneration Committee and are selected to reward long-term consistent performance in line with Diageo’s business strategy and to create alignment with the delivery of value for shareholders. The Committee has ensured that the incentive structure for senior management does not raise environmental, social and governance risks by inadvertently motivating irresponsible behaviour.
As last year, DLTIP awards made in September 20202023 will comprise awards of both performance shares and share options, based on stretching targets against the key performance measures as outlined in the table below.on page 195, assessed over a three-year performance period. The relative total shareholder return measure is based on profit before exceptional itemsthe same constituent group and tax has been replaced by a measurevesting schedule as outlined on adjusted earnings per share growth to include the impact of tax. In addition, a new ESG measure has been introduced, as described below. page 179.
The performance share element of the DLTIP applies to the Executive Committee and the top cadrelevel of senior leaders across the organisation worldwide, whilst the share option element is applicable to a much smaller
Given the uncertainty population comprising only members of the severity and durationExecutive Committee. One market price performance-based option is valued at one-third of the impact of the Covid-19 pandemic on the long-term business plan, the targets for this award will be set after the announcement of the interim financial results in January 2021.
|
| | | | | | | | | | | | | | | |
| | Performance shares | | | Share options |
| | Organic net sales |
| | Cumulative free cash flow |
| | ESG measure |
| | Growth in adjusted earnings per share |
| | Relative total shareholder return |
|
| Weighting (% total) | | 40 | % | | 40 | % | | 20 | % | | 50 | % | | 50 | % |
a performance share.
The ESG measure comprisesmeasures in the DLTIP comprise four goals reflecting Diageo’s visionthe ‘Society 2030: Spirit of Progress‘ strategy, to make a positive impact on the environment and society, with eachsociety. Each goal is weighted equally:
| |
– | carbon reduction in direct operations; |
| |
– | water efficiency in direct operations; |
| |
– | number of people with positive attitudinal change on the dangers of underage drinking following participation in the Smashed education programme; and |
| |
– | inclusion and diversity metric (one measure on % female leaders globally, and another measure on % ethnically diverse leaders in certain geographies). |
•reduction in greenhouse gas emissions in our direct operations (scope 1&2);
•improvement in the water efficiency index;
•number of people who confirm changed attitudes to the dangers of underage drinking after participating in a Diageo-supported education programme; and
•inclusion and diversity (percentage of female leaders globally and percentage of ethnically diverse leaders globally).
From fiscal 24, the water efficiency KPI under the 'Society 2023: Spirit of Progress' goals will use an index approach which links directly to the underlying water efficiency of the two production pillars of distillation and brewing & packaging. This methodology is described further on page 79 and the water efficiency component of the 2023 DLTIP awards reflects the updated 'Society 2030: Spirit of Progress' KPI.
Awards are calculated on the basis of a six-month average share price for the period ending 30 June 2020, which is in line with the award price for previous years and as a result no adjustment to award size is considered necessary.
2023.
It is intended that a DLTIP award to the equivalent of 500% of base salary will be made to Ivan MenezesDebra Crew in September 2020,2023, comprising 375% of salary in performance shares and the equivalent of 125% of salary in market-pricemarket price performance-based share options (in
options. It is intended that a DLTIP award to the equivalent of 480% of salary will be made to Lavanya Chandrashekar in September 2023, comprising 360% of salary in performance shares and the equivalent of 120% of salary in market price share options. In performance share equivalents;equivalents, one market price option is valued at one-third of a performance share).share.
It is intended that a DLTIP award of 480% of salary will be made to Kathryn Mikells in September 2020, comprising 360% of salary in performance shares and 120% of salary in market price share options (in performance share equivalents).
The table below summarises the annual DLTIP awards to Ivan MenezesDebra Crew and Kathryn MikellsLavanya Chandrashekar to be made in September 2020.2023.
| | | | | | | | |
| Grant value (% salary) | Chief Executive | Chief Financial Officer |
| Performance share equivalents (1 share: 3 options) |
| Performance shares | 375 | % | 360 | % |
| Share options | 125 | % | 120 | % |
| Total | 500 | % | 480 | % |
Performance conditions for long-term incentive awards to be made in the year ending 30 June 2024
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Performance shares | | Share options |
| | Organic profit before exceptional items and tax (CAGR) | Environmental, social & governance (ESG) | | | | | |
| Organic net sales (CAGR) | Greenhouse gas reduction | Water efficiency index (1) | Positive drinking | % Female leaders | % Ethnically diverse leaders | Vesting schedule | | Relative Total Shareholder Return | Cumulative free cash flow ($m) (2) | Vesting schedule |
| Weighting (% total) | 40 | % | 40 | % | 5 | % | 5 | % | 5 | % | 2.5 | % | 2.5 | % | | | 50.0 | % | 50.0 | % | |
| Maximum | 8.0 | % | 11.5 | % | 25.9 | % | 8.3 | % | 4.2m | 49 | % | 46 | % | 100 | % | | 3rd and above | $12,600 | 100 | % |
| Midpoint | 6.0 | % | 8.0 | % | 21.9 | % | 6.0 | % | 3.5m | 48 | % | 45 | % | 60 | % | | — | | $11,000 | 60 | % |
| Threshold | 4.0 | % | 4.5 | % | 17.9 | % | 3.7 | % | 2.8m | 47 | % | 44 | % | 20 | % | | 9th and above | $9,400 | 20 | % |
(1) For more information on the water efficiency index, see pages 193 and 100.
(2) The cumulative free cash flow targets are shown in USD following the change in functional currency from GBP to USD from fiscal 24. More details on this can be found on page 41.
|
| | | | | | |
| | | Chief Executive |
| | Chief Financial Officer |
|
| Grant value (% salary) | | Performance share equivalents (1 share: 3 options) | |
| Performance shares | | 375 | % | | 360 | % |
| Share options | | 125 | % | | 120 | % |
| Total | | 500 | % | | 480 | % |
Additional information
Remuneration committee
Over the year, the Remuneration Committee has consisted of the following independent Non-Executive Directors: Susan Kilsby, Lord Davies of Abersoch, Melissa Bethell, Ho KwonPing, Nicola S Mendelsohn, Alan JH Stewart and Debra Crew. Susan Kilsby is the Chair of the Remuneration Committee. The Chairman of the Board and the Chief Executive may, by invitation, attend Remuneration Committee meetings except when their own remuneration is discussed. Diageo’s Chief Human Resources Officer and Global Performance and Reward Director are also invited from time to time by the Remuneration Committee to provide their views and advice. The Chief Executive and Chief Human Resources Officer are not present when their own remuneration is discussed. The Chief Financial Officer may also attend to provide performance context to the Committee during its discussions about target setting. Information on meetings held and Director attendance is disclosed in the corporate governance report.
The Remuneration Committee’s principal responsibilities are:
| |
– | making recommendations to the Board on remuneration policy as applied to the Executive Directors and the Executive Committee; |
| |
– | setting, reviewing and approving individual remuneration arrangements for the Chairman of the Board, Executive Directors and Executive Committee members including terms and conditions of employment; |
| |
– | determining arrangements in relation to termination of employment of the Executive Directors and other designated senior executives; |
| |
– | making recommendations to the Board concerning the introduction of any new share incentive plans which require approval by shareholders; and |
| |
– | ensuring that remuneration outcomes are appropriate in the context of underlying business performance, that remuneration practices are implemented in accordance with the approved remuneration policy, and that remuneration does not raise environmental, social and governance issues by inadvertently motivating irresponsible behaviour. |
Full terms of reference for the Committee are available at www.diageo.com and on request from the Company Secretary.
The Committee has considered the remuneration policy and practices in the context of the principles of the Corporate Governance Code, as follows:
Clarity – the Committee engages regularly with executives, shareholders and their representative bodies in order to explain the approach to executive pay;
Simplicity – the purpose, structure and strategic alignment of each element of pay has been clearly laid out in the remuneration policy;
Risk – there is an appropriate mix of fixed and variable pay, and financial and non-financial objectives, and there are robust measures in place to ensure alignment with long-term shareholder interests, including the post-vesting retention period, shareholding requirement and bonus deferral into shares;
Predictability – the pay opportunity under different performance scenarios are set out on page 171 of this report;
Proportionality – executives are incentivised to achieve stretching targets over an annual and three-year period, and the Committee assesses performance holistically at the end of each period, taking into account underlying business performance and the internal and external context. The Committee may exercise discretion to ensure that payouts are appropriate; and
Alignment with culture – non-financial objectives may be incentivised under the individual business objective element of the annual incentive plan and ESG priorities are incentivised under the long-term incentive plan, which reinforces the company's purpose and values.
External advisors
During the year ended 30 June 2020, the Remuneration Committee received advice on executive remuneration from Deloitte. Deloitte was appointed by the Committee in May 2019, following a comprehensive tendering process with several consulting firms. Deloitte is a founding member of the Remuneration Consultants Group and adheres to its code in relation to executive remuneration consulting. The Committee requests Deloitte attend meetings periodically during the year and is satisfied that the advice it has received has been objective and independent.
Deloitte provides unrelated services to the company in the areas of immigration services and management consultancy. During the year, Deloitte supported the Committee in providing: remuneration benchmarking survey data to support the salary review for the Executive Committee, advice on the design of long-term incentives and the level of stretch in the long-term incentive targets and providing periodic updates on the TSR of Diageo and its peer companies for outstanding performance cycles. The fees paid to Deloitte in relation to advice provided to the Committee were £151,100 and were determined on a time and expenses basis.
Clifford Chance provided advice on the operation of share plans during the year. Fees paid in relation to this advice, again on a time and expenses basis, were £62,095.
The Committee is satisfied that the Deloitte and Clifford Chance engagement partners and teams that provide remuneration advice to the Committee do not have connections with Diageo that may impair their independence. The Committee reviewed the potential for conflicts of interest and judged that there were appropriate safeguards against such conflicts.
Statement of voting
The following table summarises the details of votes cast in respect of the resolutions on the Directors’ remuneration policy at the 2017 AGM and Directors’ remuneration report at the 2019 AGM.
|
| | | | | | | | | | | |
| | | For |
| | Against |
| | Total votes cast |
| | Abstentions |
| Directors’ remuneration policy | | | | | | | | |
| Total number of votes | | 1,905,251,510 |
| | 75,507,013 |
| | 1,980,758,523 |
| | 2,048,247 |
| Percentage of votes cast | | 96.19 | % | | 3.81 | % | | 100 | % | | n/a |
| Annual report on remuneration | | | | | | | | |
| Total number of votes | | 1,694,726,156 |
| | 54,505,285 |
| | 1,749,231,441 |
| | 11,478,228 |
| Percentage of votes cast | | 96.88 | % | | 3.12 | % | | 100 | % | | n/a |
The Committee was pleased with the level of support shown for the remuneration policy and implementation report and appreciated the active participation of shareholders and their representative advisory bodies in consulting on executive remuneration matters.
Emoluments and share interests of senior management
The total emoluments for the year ended 30 June 2020 of the Executive Directors, the Executive Committee members and the Company Secretary (together, the senior management) of Diageo comprising base salary, annual incentive plan, share incentive plan, termination payments and other benefits were £12.1 million (2019 - £21.5 million).
The aggregate amount of gains made by the senior management from the exercise of share options and from the vesting of awards during the year was £37.3 million. In addition, they were granted 738,490 performance-based share options under the Diageo Long-Term Incentive Plan (DLTIP) during the year at a weighted average share price of 3483 pence, exercisable by 2029 and no options were granted under DLTIP that are not subject to performance. In addition they were granted 680 options over ordinary shares under the UK savings-related share options scheme (SAYE). They were also awarded 700,279 performance shares under the DLTIP in September 2019, which will vest in three years subject to the relevant performance conditions.
Senior management options over ordinary shares
At 31 July 2020, the senior management had an aggregate beneficial interest in 2,610,138 ordinary shares in the company and in the following options over ordinary shares in the company:
|
| | | | | | |
| | Number of options | | Weighted average exercise price | | Option period |
Ivan Menezes | | 810,288 | | 2561p | | 2018 - 2029 |
Kathryn Mikells | | 429,608 | | 2718p | | 2019 - 2029 |
Other(i)
| | 2,483,620 | | 2458p | | 2013 - 2029 |
| | 3,723,516 | | | | |
(i) Other members of the Executive Committee, which includes the Company Secretary.
Key management personnel related party transactions
Key management personnel of the group comprises the Executive and Non-Executive Directors, the members of the Executive Committee and the Company Secretary.
Diageo plc has granted rolling indemnities to the Directors and the Company Secretary, uncapped in amount, in relation to certain losses and liabilities which they may incur in the course of acting as Directors or Company Secretary (as applicable) of Diageo plc or of one or more of its subsidiaries. These indemnities continue to be in place at 30 June 2020.2023.
Other than disclosed in this report, no Director had any interest, beneficial or non-beneficial, in the share capital of the company. Save as disclosed above, no Director has or has had any interest in any transaction which is or was unusual in its nature, or which is or was significant to the business of the group and which was effected by any member of the group during the financial year, or which having been effected during an earlier financial year, remains in any respect outstanding or unperformed. There have been no material transactions during the last three years to which any Director or officer, or 3% or greater shareholder, or any spouse or dependent thereof, was a party. There is no significant outstanding indebtedness to the company from any Directors or officer or 3% or greater shareholder.
Statutory and audit requirements
This report was approved by a duly authorised Committee of the Board of Directors and was signed on its behalf on 4 August 202031 July 2023 by Susan Kilsby who is ChairmanChair of the Remuneration Committee.
The Board has followed the principles of good governance as set out in the UK Corporate Governance Code and complied with the regulations contained in the Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, the Listing Rules of the Financial Conduct Authority and the relevant schedules of the Companies Act 2006.
The Companies Act 2006 and the Listing Rules require the company’s auditor to report on the audited information in their report and to state that this section has been properly prepared in accordance with these regulations.
The annual remuneration report on remuneration is subject to shareholder approvalan advisory vote by shareholders at the AGM on 28 September 2020;
2023. The Directors' remuneration policy is subject to a binding vote by shareholders at the AGM on 28 September 2023 Terms defined in this Directors' remuneration report are used solely herein.
Directors'Directors’ report
The Directors present the Directors'Directors’ report for the year ended 30 June 2020.2023.
Annual General Meeting (AGM)Company status
The AGM will be held at the company’sDiageo plc is a public limited liability company incorporated in England and Wales with registered number 23307 and registered office and principal place of business at Lakeside Drive, Park Royal,16 Great Marlborough Street, London NW10 7HQW1F 7HS, United Kingdom. It is the ultimate holding company of the group, a full list of whose subsidiaries, partnerships, associates, joint ventures and joint arrangements is set out in note 10 to the financial statements set out on 28 September 2020 at 2.30 pm.pages 224-229 of the UK Annual Report.
Directors
The Directors of the company who currently serve are shown in the section ‘Board of Directors and Company Secretary’Directors’ on pages 133 and 134 and the names of additional and former Directors who served during the year are listed on page 135.
In 127-130 in accordance with the UK Corporate Governance Code, all the Directors with the exception of Ho KwonPing, will retire by rotation at the AGM and offer themselves for re-election.
Further details of Directors’ contracts, remuneration and their interests in the shares of the company at 30 June 20202023 are given in the Directors’ remuneration report.
The Directors’ powers are determined by UK legislation and Diageo’s articles of association. The Directors may exercise all the company’s powers provided that Diageo’s articles of association or applicable legislation do not stipulate that any powers must be exercised by the members.
Auditor
The auditor, PricewaterhouseCoopers LLP, is willing to continue in office and a resolution for its re-appointment as auditor of the company will be submitted to the AGM.
Disclosure of information to the auditor
In accordance with sectionSection 418 of the Companies Act 2006, the Directors who held office at the date of approval of this Directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the company’s auditor is unaware; and each Director has taken all reasonable steps to ascertain any relevant audit information and to ensure that the company’s auditor is aware of that information.
Corporate governance statement
The corporate governance statement, prepared in accordance with rule 7.2 of the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules, comprises the following sections of the Annual Report: the ‘Corporate governance report’, the ‘Audit Committee report’ and the ‘Additional information for shareholders’.
Significant agreements -– change of control
The following significant agreements contain certain termination and other rights for Diageo’s counterparties upon a change of control of the company.
Under the partners agreement governing the company’s 34% investment in Moët Hennessy SAS (MH) and Moët Hennessy International SAS (MHI), if a Competitor (as defined therein) directly or indirectly takes control of the company (which, for these purposes, would occur if such competitorCompetitor acquired more than 34% of the voting rights or equity interests in the company), LVMH Moët Hennessy -– Louis Vuitton SA (LVMH) may require the company to sell its interests in MH and MHI to LVMH.
The master agreement governing the operation of the group’s market-level distribution joint ventures with LVMH states that if any person acquires interests and rights in the company resulting in a Control Event (as defined) occurring in respect of the company, LVMH may within 12 months of the Control Event either appoint and remove the chairman of each joint venture entity governed by such master agreement, who shall be given a casting vote, or require each distribution joint venture entity to be wound up. Control Event for these purposes is defined as the acquisition by any person of more than 30% of the outstanding voting rights or equity interests in the company, provided that no other person or entity (or group of affiliated persons or entities) holds directly or indirectly more than 30% of the voting rights in the company.
Related party transactions
Transactions with other related parties are disclosed in note 2021 to the consolidated financial statements.
Distributions
In April 2020, the Directors became aware that certain share buy-backs and certain transactions related to the company’s employee share schemes with or for the benefit of the Company’s employee benefit and share ownership trusts undertaken between 10 May 2019 and 9 August 2019, amounting to approximately £320 million, (‘the affected transactions’), were undertaken contrary to the applicable provisions of the Companies Act 2006 as they were undertaken following utilisation in full of the company’s distributable reserves as set out in its balance sheet as at 30 June 2018. At the Annual General Meeting to be held on 28 September 2020, a resolution will be proposed which will appropriate an equivalent amount of distributable profits of the company to the payments made in respect of the affected transactions and will implement arrangements to put all potentially affected parties, so far as possible, in the position in which they were intended to be had the affected transactions been undertaken in accordance with the applicable provisions of the Companies Act 2006. This resolution and the arrangements that it implements will, if approved by shareholders, constitute a related party transaction under IAS 24 and under the Listing Rules, as the Directors would benefit from the waiver of any claims that the company has or may have against them as a result of the affected transactions. These arrangements are not expected to have any effect on the company’s financial position as the company has not recorded or disclosed its right potentially to make claims against any person in respect of the affected transactions as an asset or contingent asset of the company. The company has reviewed and implemented additional controls relating to distributable reserves to ensure that relevant requirements are complied with, and these controls will be subject to regular assessment as to ongoing effectiveness.
Major shareholders
At 30 June 2020,2023, the following substantial interests (3% or more) in the company’s ordinary share capital (voting securities) had been notified to the company.company:
| | | | | | | | | | | |
| Shareholder | Number of ordinary shares | Percentage
of issued ordinary share (excluding treasury shares) | Date of notification of interest |
| BlackRock Investment Management (UK) Limited (indirect holding) | 147,296,928 | 5.89 | % | 3 December 2009 |
| Capital Research and Management Company (indirect holding) | 124,653,096 | 4.99 | % | 28 April 2009 |
| Massachusetts Financial Services Company (indirect holding) | 114,036,646 | 4.95 | % | 1 June 2022 |
|
| | | | | | | | |
| Shareholder | | Number of ordinary shares |
| | Percentage of issued ordinary share capital (excluding treasury shares) |
| | Date of notification of interest |
| BlackRock Investment Management (UK) Limited (indirect holding) | | 147,296,928 |
| | 5.89 | % | | 3 December 2009 |
| Capital Research and Management Company (indirect holding) | | 124,653,096 |
| | 4.99 | % | | 28 April 2009 |
| |
(i) | On 5 February 2020, BlackRock Inc. filed an Amendment to Schedule 13G with the SEC in respect of the calendar year ended 31 December 2019 reporting that 166,511,608 ordinary shares representing 7.1% of the issued ordinary share capital were beneficially owned by BlackRock Inc. and its subsidiaries (including BlackRock Investment Management (UK) Limited). |
| |
(ii) | On 14 February 2020, Massachusetts Financial Services Company filed a Schedule 13G with the SEC in respect of the calendar year ended 31 December 2019 reporting that 123,237,269 ordinary shares representing 5.3% of the issued ordinary share capital were beneficially owned by Massachusetts Financial Services Company. |
2.On 8 February 2023, Massachusetts Financial Services Company filed an Amendment to Schedule 13G with the SEC in respect of the calendar year ended 31 December 2018, reporting that, as of December 31, 2022, 118,813,187 ordinary shares representing 5.2% of the issued ordinary share capital were beneficially owned by Massachusetts Financial Services Company.
The company has not been notified of any other substantial interests in its securities since 30 June 2020.2023. The company’s substantial shareholders do not have different voting rights. Diageo, so far as is known by the company, is not directly or indirectly owned or controlled by another corporation or by any government. Diageo knows of no arrangements, the operation of which may at a subsequent date result in a change of control of the company.
As at the close of business on 3126 July 2020, 335,449,7742023, 324,354,320 ordinary shares, including those held through ADSs,American Depositary Shares (ADSs), were held by approximately 2,7322,678 holders (including ADRAmerican Depositary Receipt (ADR) holders) with registered addresses in the United States, representing approximately 15.21%14.43% of the outstanding ordinary shares (excluding treasury shares). At such date, 88,761,12881,014,846 ADSs were held by 2,3402,224 registered ADR holders. Since certain of such ordinary shares and ADSs are held by nominees or former GrandMetGrand Metropolitan PLC or Guinness Groupplc ADR holders who have not re-registered their ADSs, the number of holders may not be representative of the number of beneficial owners in the United States or the ordinary shares held by them.
Employment policies
A key strategic imperative of the company is to attract, retain and grow a pool of diverse, talented employees. Diageo recognises that a diversity of skills and experiences in its workplace and communities will provide a competitive advantage. To enable this, the company has various global employment policies and standards, covering such issues as resourcing, data protection, human rights, dignity at work, health, safety and wellbeing. These policies and standards seek to ensure that the company treats current or prospective employees justly, solely according to their abilities to meet the requirements and standards of their role and in a fair and consistent way. This includes giving full and fair consideration to applications from prospective employees who are disabled, having regard to their aptitudes and abilities, and not discriminating against employees under any circumstances (including in relation to applications, training, career development and promotion) on the grounds of any disability. In the event that an employee, worker or contractor becomes disabled in the course of their employment or engagement, Diageo aims to ensure that reasonable steps are taken to accommodate their disability by making reasonable adjustments to their existing employment or engagement.
Trading market for shares
Diageo plc ordinary shares are listed on the London Stock Exchange (LSE) and on the Dublin and Paris Stock Exchanges.. Diageo ADSs, representing four Diageo ordinary shares each, are listed on the New York Stock Exchange (NYSE).
Diageo plc completed the voluntary delisting of its shares from the Dublin Euronext and Paris Euronext Exchanges by 30 May 2023. The principal trading market for the ordinary shares is the LSE. Diageo shares are traded on the LSE’s electronic order book. Orders placed on the order book are displayed on-screen through a central electronic system and trades are automatically executed, in price and then time priority, when orders match with corresponding buy or sell orders.
Only member firms of the LSE, or the LSE itself if requested by the member firm, can enter or delete orders on behalf of clients or on their own account. All orders are anonymous. Although use of the order book is not mandatory, all trades, whether or not executed through the order book and regardless of size, must be reported within three minutes of execution, but may be eligible for deferred publication.
The Markets in Financial Instruments Directive (MiFID) allows for delayed publication of large trades with a sliding scale requirement based on qualifying minimum thresholds for the amount of consideration to be paid/the proportion of average daily turnover (ADT) of a stock represented by a trade. Provided that a trade/consideration equals or exceeds the qualifying minimum size, it will be eligible for deferred publication ranging from 60 minutes from time of trade to three trading days after time of trade.
Fluctuations in the exchange rate between the pound sterling and the US dollar will affect the US dollar equivalent of the pound sterling price of the ordinary shares on the LSE and, as a result, will affect the market price of the ADSs on the NYSE. In addition, such fluctuations will
affect the US dollar amounts received by holders of ADSs on conversion of cash dividends paid in pounds sterling on the underlying ordinary shares.
American depositary shares
Fees and charges payable by ADR holders
Citibank N.A. serves as the depositary (Depositary) for Diageo’s ADS programme. Pursuant to the deposit agreement dated 14 February 2013 between Diageo, the Depositary and owners and holders of ADSs (the ‘Deposit Agreement’)Deposit Agreement), ADR holders may be required to pay various fees to the Depositary, and the Depositary may refuse to provide any service for which a fee is assessed until the applicable fee has been paid. In particular, the Depositary, under the terms of the Deposit Agreement, shall charge a fee of up to $5.00 per 100 ADSs (or fraction thereof) relating to the issuance of ADSs; delivery of deposited securities against surrender of ADSs; distribution of cash dividends or other cash distributions (i.e. sale of rights and other entitlements); distribution of ADSs pursuant to stock dividends or other free stock distributions, or exercise of rights to purchase additional ADSs; distribution of securities other than ADSs or rights to purchase additional ADSs (i.e. spin-off shares); and depositary services. Citibank N.A. is located at 388 Greenwich Street, New York, New York, 10013, U.S.A.
United States. In addition, ADR holders may be required under the Deposit Agreement to pay the Depositary (a) taxes (including applicable interest and penalties) and other governmental charges; (b) registration fees; (c) certain cable, telex, and facsimile transmission and delivery expenses; (d) the expenses and charges incurred by the Depositary in the conversion of foreign currency; (e) such fees and expenses as are incurred by the Depositary in connection with compliance with exchange control regulations and other regulatory requirements; and (f) the fees and expenses incurred by the Depositary, the Custodian,custodian, or any nominee in connection with the servicing or delivery of ADSs. The Depositary may (a) withhold dividends or other distributions or sell any or all of the shares underlying the ADSs in order to satisfy any tax or governmental charge and (b) deduct from any cash distribution the applicable fees and charges of, and expenses incurred by, the Depositary and any taxes, duties or other governmental charges on account.
Direct and indirect payments by the Depositary
The Depositary reimburses Diageo for certain expenses it incurs in connection with the ADR programme, subject to a ceiling set out in the Deposit Agreement pursuant to which the Depositary provides services to Diageo. The Depositary has also agreed to waive certain standard fees associated with the administration of the programme.
Under the contractual arrangements with the Depositary, Diageo has received approximately $2.3$2.6 million arising out of fees charged in respect of dividends paid during the year and a fixed contribution to the company’s ADR programme costs. These payments are received for expenses associated with non-deal road shows, third partythird-party investor relations consultant fees and expenses, Diageo’s cost for administration of the ADR programme not absorbed by the Depositary and related activities (e.g. expenses associated with the annual general meeting)AGM), travel expenses to attend training and seminars, exchange listing fees, legal fees, auditing fees and expenses, the Securities and Exchange Commission (SEC)SEC filing fees, expenses related to Diageo’s compliance with US securities law and regulations (including, without limitation, the Sarbanes-Oxley Act) and other expenses incurred by Diageo in relation to the ADR programme.
Employment policiesThe company is incorporated under the name Diageo plc, and is registered in England and Wales under registered number 23307. The following description summarises certain provisions of Diageo’s articles of association (as adopted by special resolution at the Annual General Meeting on 28 September 2020) and applicable English law concerning companies (the Companies Acts), in each case as at 26 July 2023. This summary is qualified in its entirety by reference to the Companies Acts and Diageo’s articles of association. Investors can obtain copies of Diageo’s articles of association by contacting the Company Secretary at the.cosec@diageo.com. Any amendment to the articles of association of the company may be made in accordance with the provisions of the Companies Act 2006, by way of special resolution.
A key strategic imperativeDiageo’s articles of association provide for a board of directors, consisting (unless otherwise determined by an ordinary resolution of shareholders) of not fewer than three directors and not more than 25 directors, in which all powers to manage the business and affairs of Diageo are vested. Directors may be elected by the members in a general meeting or appointed by the Board. At each annual general meeting, all the directors shall retire from office and may offer themselves for re-election by members. There is no age limit requirement in respect of directors. Directors may also be removed before the expiration of their term of office in accordance with the provisions of the Companies Acts.
Voting rights
Voting on any resolution at any general meeting of the company is by a show of hands unless a poll is duly demanded. On a show of hands,
(a) every shareholder who is present in person at a general meeting, and every proxy appointed by any one shareholder and present at a general meeting, has/have one vote regardless of the number of shares held by the shareholder (or, subject to attract, retain(b), represented by the proxy), and grow
(b) every proxy present at a poolgeneral meeting who has been appointed by more than one shareholder has one vote regardless of diverse, talented employees.the number of shareholders who have appointed him/her or the number of shares held by those shareholders, unless he/she has been instructed to vote for a resolution by one or more shareholders and to vote against the resolution by one or more shareholders, in which case he/she has one vote for and one vote against the resolution.
On a poll, every shareholder who is present in person or by proxy has one vote for every share held by that shareholder, but a shareholder or proxy entitled to more than one vote need not cast all his/her votes or cast them all in the same way (the deadline for exercising voting rights by proxy is set out in the form of proxy).
A poll may be demanded by any of the following:
•the chairman of the general meeting;
•at least three shareholders entitled to vote on the relevant resolution and present in person or by proxy at the meeting;
•any shareholder or shareholders present in person or by proxy and representing in the aggregate not less than one-tenth of the total voting rights of all shareholders entitled to vote on the relevant resolution; or
•any shareholder or shareholders present in person or by proxy and holding shares conferring a right to vote on the relevant resolution on which there have been paid up sums in the aggregate equal to not less than one-tenth of the total sum paid up on all the shares conferring that right.
Diageo’s articles of association and the Companies Acts provide for matters to be transacted at general meetings of Diageo recognises thatby the proposing and passing of two kinds of resolutions:
•ordinary resolutions, which include resolutions for the election, re-election and removal of directors, the declaration of final dividends, the appointment and re-appointment of the external auditor, the remuneration report and remuneration policy, the increase of authorised share capital and the grant of authority to allot shares; and
•special resolutions, which include resolutions for the amendment of Diageo’s articles of association, resolutions relating to the disapplication of pre-emption rights, and resolutions modifying the rights of any class of Diageo’s shares at a diversitymeeting of skillsthe holders of such class.
An ordinary resolution requires the affirmative vote of a simple majority of the votes cast by those entitled to vote at a meeting at which there is a quorum in order to be passed. Special resolutions require the affirmative vote of not less than three-quarters of the votes cast by those entitled to vote at a meeting at which there is a quorum in order to be passed. The necessary quorum for a meeting of Diageo is a minimum of two shareholders present in person or by proxy and experiencesentitled to vote.
A shareholder is not entitled to vote at any general meeting or class meeting in respect of any share held by them if they have been served with a restriction notice (as defined in Diageo’s articles of association) after failure to provide Diageo with information concerning interests in those shares required to be provided under the Companies Acts.
Pre-emption rights and new issues of shares
While holders of ordinary shares have no pre-emptive rights under Diageo’s articles of association, the ability of the Directors to cause Diageo to issue shares, securities convertible into shares or rights to shares, otherwise than pursuant to an employee share scheme, is restricted. Under the Companies Acts, the directors of a company are, with certain exceptions, unable to allot any equity securities without express authorisation, which may be contained in a company’s articles of association or given by its workplace and communities will provideshareholders in a competitive advantage. To enable thisgeneral meeting, but which in either event cannot last for more than five years. Under the company has various global employment policies and standards, coveringCompanies Acts, Diageo may also not allot shares for cash (otherwise than pursuant to an employee share scheme) without first making an offer to existing shareholders to allot such issues as resourcing, human rights, health, safety and wellbeing. These policies and standards seekshares to ensure thatthem on the company treats currentsame or prospective employees justly, solely accordingmore favourable terms in proportion to their abilitiesrespective shareholdings, unless this requirement is waived by a special resolution of the shareholders.
Repurchase of shares
Subject to meetauthorisation by special resolution, Diageo may purchase its own shares in accordance with the requirementsCompanies Acts. Any shares which have been bought back may be held as treasury shares or, if not so held, must be cancelled immediately upon completion of the purchase, thereby reducing the amount of Diageo’s issued share capital.
Restrictions on transfers of shares
The Board may decline to register a transfer of a certificated Diageo share unless the instrument of transfer (a) is duly stamped or certified or otherwise shown to the satisfaction of the Board to be exempt from stamp duty, and standardsis accompanied by the relevant share certificate and such other evidence of their rolethe right to transfer as the Board may reasonably require, (b) is in respect of only one class of share and (c) if to joint transferees, is in favour of not more than four such transferees. Registration of a fairtransfer of an uncertificated share may be refused in the circumstances set out in the uncertificated securities rules (as defined in Diageo’s articles of association) and consistent way. This includes giving full and fair considerationwhere, in the case of a transfer to applications from prospective employees who are disabled, having regardjoint holders, the number of joint holders to their aptitudes and abilities, and not discriminating against employees under any circumstances (including in relationwhom the uncertificated share is to applications, training, career development and promotion) on the groundsbe transferred exceeds four.
The Board may decline to register a transfer of any disability.of Diageo’s certificated shares by a person with a 0.25% interest (as defined in Diageo’s articles of association) if such a person has been served with a restriction notice (as defined in Diageo’s articles of association) after failure to provide Diageo with information concerning interests in those shares required to be provided under the Companies Acts, unless the transfer is shown to the Board to be pursuant to an arm’s-length sale (as defined in Diageo’s articles of association).
Other information
Other information relevant to the Directors’ report may be found in the following sections of the Annual Report:
| | | | | |
| Information (including that required by UK Listing Authority Listing Rule 9.8.4) | Location in Annual Report |
| Agreements with controlling shareholders | Not applicable |
| Contracts of significance | Not applicable |
| Details of long-term incentive schemes | Directors’ remuneration report |
| Directors’ indemnities and compensation | Directors’ remuneration report - Additional information; Consolidated financial statements - note 21 Related party transactions |
| Dividends | Group financial review; Consolidated financial statements - Unaudited financial information |
| Engagement with employees | Corporate governance report - Workforce engagement statement |
| Engagement with suppliers, customers and others | Corporate governance report - Stakeholder engagement |
| Events post 30 June 2023 | Consolidated financial statements - note 23 Post balance sheet events |
| Financial risk management | Consolidated financial statements - note 16 Financial instruments and risk management |
| Future developments | Chairman’s statement; Chief Executive’s statement; Our market dynamics |
| Greenhouse gas emissions | Pioneer grain-to-glass sustainability; Non-Financial and sustainability information statement |
| Interest capitalised | Not applicable |
| Non-pre-emptive issues of equity for cash (including in respect of major unlisted subsidiaries) | Not applicable |
| Parent participation in a placing by a listed subsidiary | Not applicable |
| Political donations | Corporate governance report |
| Provision of services by a controlling shareholder | Not applicable |
| Publication of unaudited financial information | Unaudited financial information |
| Purchase of own shares | Repurchase of shares; Consolidated financial statements - note 18 Equity |
| Research and development | Other Additional Information - Research and development; Consolidated financial statements - note 3 Operating costs |
| Review of the business and principal risks and uncertainties | Chief Executive’s statement; Our principal risks and risk management; Pioneer grain-to-glass sustainability; Business reviews |
| Share capital - structure, voting and other rights | Consolidated financial statements - note 18 Equity |
| Share capital - employee share plan voting rights | Consolidated financial statements - note 18 Equity |
| Shareholder waivers of dividends | Consolidated financial statements - note 18 Equity |
| Shareholder waivers of future dividends | Consolidated financial statements - note 18 Equity |
| Sustainability and responsibility | Pioneer grain-to-glass sustainability |
| Waiver of emoluments by a director | Not applicable |
| Waiver of future emoluments by a director | Not applicable |
The Directors’ report of Diageo plc for the year ended 30 June 2023 comprises these pages and the sections of the Annual Report referred to under ‘Directors’, ‘Corporate governance statement’ and ‘Other information’ above, which are incorporated into the Directors’ report by reference.
In addition, certain disclosures required to be contained in the Directors’ report have been incorporated into the ‘Strategic report’ as set out in ‘Other information’ above.
The Directors’ report, which has been approved by a duly appointed and authorised committee of the Board of Directors, was signed on its behalf by Tom Shropshire, the Company Secretary, on 31 July 2023.
Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Shareholders of Diageo plc
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheetsheets of Diageo plc and its subsidiaries (collectively, (the “Company”) as of 30 June 20202023 and 2019, 2022,and the related consolidatedincome statement,statements and consolidated statementstatements of comprehensive income, consolidated statement of changes in equity and the consolidated statement of cash flows for each of the three years in the period ended 30 June 2020,2023, including the related notes (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of 30 June 2020,2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of 30 June 20202023 and 2019 2022, and the results of itsoperations and itscash flows for each of the three years in the period ended 30 June 20202023in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and UK-adopted International Financial Reporting Standards as adopted by the European Union.Accounting Standards. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of 30 June 2020,2023, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Change in Accounting Principle
As discussed in note 1f to the consolidated financial statements, the Company changed the manner in which it accounted for leases in the period ended 30 June 2020 due to the adoption of IFRS 16.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s reportReport on internal controlInternal Control over financial reporting.Financial Reporting appearing under Part II. 15.B. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Companycompany are being made only in accordance with authorizations of management and directors of the Company;company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’scompany’s assets that could have a material effect on the financial statements.
Financial statements (continued)
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to theconsolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment assessment of indefinite-lived brand intangible assetsAssessment for brands and goodwill
As described in note 9 to the consolidated financial statements, the Company’s consolidated indefinite-lived brand intangibles balancebrands and goodwill balance asintangible asset carrying amounts at 30 June 20202023 were £7,755£7,520 million and £1,912£2,227 million, respectively. In the year ended 30 June 2023, an impairment charge of £498 million was recognised related to brands. Management conducts impairment tests for indefinite-lived brand intangiblesintangible assets, including brands and goodwill annually, or more frequently if events or circumstances indicate that the carrying amount may not be recoverable. The individual brands, other intangibles with indefinite useful lives and their associated tangible fixed assetsRecoverable amounts are aggregated and tested as separate cash-generating units. Goodwill is attributed to each ofcalculated based on the markets. Separate tests are carried out for each cash-generating unit and for each of the markets. The impairment test compares the net carrying value of the cash-generating unit for indefinite-lived brand intangibles and market for goodwill with the recoverable amount. Value in use andapproach, also considering fair value less costs of disposal were both considereddisposal. The value in use calculations are based on cash flows forecasted for these reviews and anyeach cash-generating unit for the financial years based on management’s approved plans. If the net carrying value exceeds the recoverable amount an impairment charge was based on these.is recognised. Management makes judgements in determining the value in use. The testskey assumptions used for the value in use calculations are dependent on management’s estimates in respect of the forecasting of future cash flows,estimated sales growth, operating costs, margin, terminal growth rates and the discount rates applicable to the future cash flows and what expected growth rates are reasonable. Judgment is required in determining the cash-generating units. The value in use calculations are based on discounted forecast cash flows using the assumption that cash flows continue in perpetuity at the terminal growth rate of each country or region. Cash flows are extrapolated up to five years using expected growth rates in line with management’s best estimates. Growth rates reflect expectations of sales growth, operating costs and margin, based on past experience and external sources of information. Where applicable, multiple cash flow scenarios were populated to predict the potential outcome, considering the increased risk of uncertainty around the duration and severity of the Covid-19 pandemic in the different markets. The five-year forecast period is extended by up to an additional ten years at acquisition date for some indefinite-lived intangible assets and goodwill when management believes that this period is justified by the maturity of the market and expects to achieve growth in excess of the terminal growth rate driven by Diageo’s sales, marketing and distribution expertise. Cash flows beyond the five-year period are projected using steady or progressively declining growth rates. These rates do not exceed the annual growth rate of the real gross domestic product (GDP) aggregated with the long-term annual inflation rate of the country or region. Cash flows for the subsequent years after the forecast period are extrapolated based on a terminal growth rate which does not exceed the long-term annual inflation rate of the country or region. The determination of discounted future cash flows include significant management judgments and assumptions, including sales growth, operating costs, margin, discount rates and terminal growth rates. flows.
The principal considerationconsiderations for our determination that performing procedures related to the impairment assessment of indefinite-lived brand intangible assetsfor brands and goodwill is a critical audit matter are there was(i) the significant judgmentjudgments made by management when developing its assessment ofestimating the recoverable amount for the cash-generating units. This in turn led toamount; (ii) a high degree of auditor judgment, subjectivity and effort in performing proceduresand evaluating management’s significant assumptions, including futurerelated to sales growth, margins and terminal growth rates included in forecasted cash flows and the applicable discount rates,rates; and expected growth rates. In addition,(iii) the audit effort involved the use of professionals with specialised skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained. knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill and indefinite-lived brand intangible assets impairment tests, including controls over the determinationmeasurement of the recoverable amounts. These procedures also included, among others:(i) testing management’s process for determiningestimating the recoverable amount of goodwillbrands and indefinite-lived brand intangible assets,goodwill; (ii), evaluating the appropriateness of the methodology used into determine the impairment models,recoverable amount; (iii) testing the completeness, accuracy, and relevance of underlying data used in the models, andmodels; (iv) evaluating the reasonableness of the significant assumptions used by management including the forecastedin estimating future cash flows, discount rates, expected growth rates, as well as management’s sensitivities and related(v) evaluating the sufficiency of the disclosures in the consolidated financial statement disclosures.statements. Evaluating the reasonableness of management’s assumptions involved 1) evaluating key market-related assumptions (including therelated to growth rates, margins, terminal growth rates and discount raterates involved evaluating whether the assumptions used were reasonable considering (i) consistency with external market and management’s estimatesindustry data, (ii) the current and past performance of the durationcash-generating unit and severity of the impact of the Covid-19 pandemic on cash flows) used in the models to external data, 2) performing a retrospective comparison of forecasted cash flows to actual past performance and previous forecasts, 3) performing sensitivity analyses, and 4) using professionals(iii) consistency with strategic plans approved by management. Professionals with specialised skill and knowledge were used to assist in the evaluation of the discount rates.rate assumption.
Taxation - Provisions for tax uncertainties
Financial statements (continued)
As described in noteNote 7 and note 18Note 19 to the consolidated financial statements, current tax asset of £232 million and tax liability of £135 million includes £173 million of provisions for tax uncertainties. Tax treatments are not recognised unless it is probable that a tax authority will accept the treatment. Tax treatments are reviewed each year to assess whether a provision should be taken against full recognition of the treatment on the basis of potential settlement through negotiation and/or litigation with the relevant tax authorities. The Company operates in a large number of markets with complex tax and legislative regimes that are open to subjective interpretation, and for which can take several years to resolve. The Company has a number of ongoing tax audits worldwide for which provisions are recognised based on management’s best estimates and judgments concerning the ultimate outcome. As at 30 June 2020outcome of the current tax asset of £190 million and tax liability of £246 million includes £189 million of provisions for tax uncertainties. The Company operates in a large number of markets with complex tax and legislative regimes that are open to subjective interpretation. Management is required to estimate the amount that should be recognised as a tax liability or tax asset in many countries which are subject to tax audits which by their nature are often complex and can take several years to resolve.audits. Tax provisions are based on management’s judgment and interpretation of country specific tax law and the likelihoodprobability of settlement. As disclosed by management, the actual tax liabilities could differ from the provision for tax uncertainties and in such event the Company would be required to make an adjustment in a subsequent period which could have a material impact on the Company’s profit for the year.
The principal considerationconsiderations for our determination that performing procedures related to the provisionprovisions for tax uncertainties is a critical audit matter are there was(i) the significant judgmentjudgments made by management in determiningestimating the provisions for tax uncertainties, including a high degree of estimation uncertainty due to the number and complexity of tax laws frequency of tax audits and potential for adjustments which could have a material impact on the Company’s profit for the year as a result of such audits. This in turn led toadjustments; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the timely identification and accurate measurement of provisions for tax uncertainties. Also, the evaluation of audit evidence related to the provisions for tax uncertainties required significant auditor judgment as the nature of the evidence is often subjective,uncertainties; and (iii) the audit effort involved the use of professionals with specialised skill and knowledge to assist in evaluating the audit evidence obtained.knowledge.
Financial statements (continued)
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the identificationrecognition and recognition of the liabilities for uncertain tax positions, and controls addressing completeness of the uncertain tax positions, as well as controls over measurement of the liabilities.provisions for tax uncertainties. These procedures also included, among others,others: (i) testing the information used in the calculation of the liability for uncertainprovisions, including local government legislation and litigation documents, international and federal filing treatments, and the related final tax positions;returns; (ii) testing the calculation of the liability for uncertain tax positionsprovisions by jurisdiction, includingjurisdiction; (iii) evaluating management’s assessment of the technical meritscountry specific tax law and probability of tax positions and estimates of the amount of tax benefit expected to be sustained; (iii) testing the completeness of management’s assessment of both the identification of uncertain tax positions and possible outcomes of each uncertain tax position; andsettlement; (iv) evaluating the status and results of tax audits with the relevant tax authoritiesauthorities; and (v) evaluating the sufficiency of the Company’s related disclosures. Professionals with specialised skill and knowledge were used to assist in the evaluation of the completenessrecognition and measurement of the Company’s uncertain tax positions, including evaluating the reasonableness of management’s assessment of whether tax positions are more-likely-than-not of being sustained, the application of relevant tax laws, and estimated interest and penalties, as well as evaluating the sufficiency of the Company’s related financial statement disclosures.
Legal contingent liabilities and proceedings
As described in note 18 to the consolidated financial statements, the Company records provisions for the anticipated settlement costs of legal disputes against the Company where it is considered to be probable that a liability exists and a reliable estimate can be made of the likely outcome. The Company discloses where it is possible that a settlement may be reached or it is not possible to make a reliable estimate of the estimated financial effect, but no provision is created. tax uncertainties.
The principal consideration for our determination that performing procedures related to legal contingent liabilities and proceedings is a critical audit matter are there was significant judgment made by management in assessing the likelihood that a legal dispute will succeed, or a liability will arise, and an estimate to quantify the possible range of any settlement. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing audit procedures and evaluating management’s assessments of the contingencies associated with the disputes.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s evaluation of legal disputes, including controls over determining whether a loss is probable and whether the amount of loss can be reliably estimated, as well as financial statement disclosures. These procedures also included, among others, obtaining and evaluating the letters of audit inquiry with external legal counsel, evaluating the reasonableness of management’s assessment regarding whether it is probable that a liability exists and a reliable estimate can be made of the likely outcome, and evaluating the sufficiency of the Company’s legal disclosures.
/s/PricewaterhouseCoopers LLP
London, United Kingdom
73 August 20202023
We have served as the company'sCompany's auditor since 2015.
Financial statements (continued)
Consolidated income statement
| | | | | Notes |
| | Year ended
30 June 2020
£ million |
| | Year ended
30 June 2019
£ million |
| | Year ended
30 June 2018
£ million |
| | Notes | Year ended 30 June 2023 £ million | Year ended 30 June 2022 £ million | Year ended 30 June 2021 £ million |
| Sales | | 2 |
| | 17,697 |
| | 19,294 |
| | 18,432 |
| Sales | 2 | | 23,515 | | 22,448 | | 19,153 | |
| Excise duties | | 3 |
| | (5,945 | ) | | (6,427 | ) | | (6,269 | ) | Excise duties | 3 | | (6,402) | | (6,996) | | (6,420) | |
| Net sales | | 2 |
| | 11,752 |
| | 12,867 |
| | 12,163 |
| Net sales | 2 | | 17,113 | | 15,452 | | 12,733 | |
| Cost of sales | | 3 |
| | (4,654 | ) | | (4,866 | ) | | (4,634 | ) | Cost of sales | 3 | | (6,899) | | (5,973) | | (5,038) | |
| Gross profit | | | | 7,098 |
| | 8,001 |
| | 7,529 |
| Gross profit | | 10,214 | | 9,479 | | 7,695 | |
| Marketing | | 3 |
| | (1,841 | ) | | (2,042 | ) | | (1,882 | ) | Marketing | 3 | | (3,051) | | (2,721) | | (2,163) | |
| Other operating items | | 3 |
| | (3,120 | ) | | (1,917 | ) | | (1,956 | ) | Other operating items | 3 | | (2,531) | | (2,349) | | (1,801) | |
| Operating profit | | | | 2,137 |
| | 4,042 |
| | 3,691 |
| Operating profit | | 4,632 | | 4,409 | | 3,731 | |
| Non-operating items | | 4 |
| | (23 | ) | | 144 |
| | — |
| Non-operating items | 4 | | 328 | | (17) | | 14 | |
| Finance income | | 5 |
| | 366 |
| | 442 |
| | 243 |
| Finance income | 5 | | 340 | | 497 | | 278 |
| Finance charges | | 5 |
| | (719 | ) | | (705 | ) | | (503 | ) | Finance charges | 5 | | (934) | | (919) | | (651) | |
| Share of after tax results of associates and joint ventures | | 6 |
| | 282 |
| | 312 |
| | 309 |
| Share of after tax results of associates and joint ventures | 6 | | 370 | | 417 | | 334 | |
| Profit before taxation | | | | 2,043 |
| | 4,235 |
| | 3,740 |
| Profit before taxation | | 4,736 | | 4,387 | | 3,706 | |
| Taxation | | 7 |
| | (589 | ) | | (898 | ) | | (596 | ) | Taxation | 7 | | (970) | | (1,049) | | (907) | |
| | Profit for the year | | | | 1,454 |
| | 3,337 |
| | 3,144 |
| Profit for the year | | 3,766 | | 3,338 | | 2,799 | |
| Attributable to: | | | | | | | | | Attributable to: | | |
| Equity shareholders of the parent company | | | | 1,409 |
| | 3,160 |
| | 3,022 |
| Equity shareholders of the parent company | | 3,734 | | 3,249 | | 2,660 | |
| | Non-controlling interests | | | | 45 |
| | 177 |
| | 122 |
| Non-controlling interests | | 32 | | 89 | | 139 | |
| | | | | 1,454 |
| | 3,337 |
| | 3,144 |
| | 3,766 | | 3,338 | | 2,799 | |
| | | |
| | million |
| | million |
| | million |
| | | million |
| Weighted average number of shares | | | | | | | | | Weighted average number of shares | | |
| Shares in issue excluding own shares | | | | 2,346 |
| | 2,418 |
| | 2,484 |
| Shares in issue excluding own shares | | 2,264 | | 2,318 | | 2,337 | |
| Dilutive potential ordinary shares | | | | 8 |
| | 10 |
| | 11 |
| Dilutive potential ordinary shares | | 7 | | 7 | | 8 | |
| | | | | 2,354 |
| | 2,428 |
| | 2,495 |
| | 2,271 | | 2,325 | | 2,345 | |
| | | |
| | pence |
| | pence |
| | pence |
| | |
| | | | | pence |
| Basic earnings per share | | | | 60.1 |
| | 130.7 |
| | 121.7 |
| Basic earnings per share | | 164.9 | | 140.2 | | 113.8 | |
| | Diluted earnings per share | | | | 59.9 |
| | 130.1 |
| | 121.1 |
| Diluted earnings per share | | 164.4 | | 139.7 | | 113.4 | |
|
The accompanying notes are an integral part of these consolidated financial statements.
Financial statements (continued)
Consolidated statement of comprehensive income
|
| | | | | | | | | |
| | | Year ended 30 June 2020
£ million |
| | Year ended 30 June 2019
£ million |
| | Year ended 30 June 2018
£ million |
|
| Other comprehensive income | | | | | | |
| Items that will not be recycled subsequently to the income statement | | | | | | |
| Net remeasurement of post employment plans | | | | | | |
| Group | | 38 |
| | 33 |
| | 456 |
|
| Associates and joint ventures | | (14 | ) | | 2 |
| | 2 |
|
| Non-controlling interests | | — |
| | — |
| | 1 |
|
| Tax on post employment plans | | (21 | ) | | 1 |
| | (91 | ) |
| | | 3 |
| | 36 |
| | 368 |
|
| Items that may be recycled subsequently to the income statement | | | | | | |
| Exchange differences on translation of foreign operations | | | | | | |
| Group | | (104 | ) | | 274 |
| | (631 | ) |
| Associates and joint ventures | | 82 |
| | 19 |
| | 3 |
|
| Non-controlling interests | | (37 | ) | | 55 |
| | (72 | ) |
| Net investment hedges | | (227 | ) | | (93 | ) | | 91 |
|
| Exchange loss recycled to the income statement | | | | | | |
| On translation of foreign operations | | 4 |
| | — |
| | — |
|
| Tax on exchange differences - group | | 4 |
| | (19 | ) | | 7 |
|
| Tax on exchange differences - non-controlling interests | | — |
| | — |
| | 2 |
|
| Effective portion of changes in fair value of cash flow hedges | | | | | | |
| Hedge of foreign currency debt of the group | | 221 |
| | 180 |
| | (64 | ) |
| Transaction exposure hedging of the group | | (43 | ) | | (86 | ) | | 22 |
|
| Hedges by associates and joint ventures | | 6 |
| | (6 | ) | | (15 | ) |
| Commodity price risk hedging of the group | | (11 | ) | | (9 | ) | | — |
|
| Recycled to income statement - hedge of foreign currency debt of the group | | (75 | ) | | (82 | ) | | 6 |
|
| Recycled to income statement - transaction exposure hedging of the group | | 42 |
| | 45 |
| | (7 | ) |
| Recycled to income statement - commodity price risk hedging of the group | | 8 |
| | — |
| | — |
|
| Tax on effective portion of changes in fair value of cash flow hedges | | (23 | ) | | (11 | ) | | 14 |
|
| Hyperinflation adjustment | | (18 | ) | | (22 | ) | | 11 |
|
| Tax on hyperinflation adjustment | | 4 |
| | 6 |
| | (11 | ) |
| | (167 | ) | | 251 |
| | (644 | ) |
| Other comprehensive (loss)/profit, net of tax, for the year | | (164 | ) | | 287 |
| | (276 | ) |
| Profit for the year | | 1,454 |
| | 3,337 |
| | 3,144 |
|
| Total comprehensive income for the year | | 1,290 |
| | 3,624 |
| | 2,868 |
|
| Attributable to: | | | | | | |
| Equity shareholders of the parent company | | 1,282 |
| | 3,392 |
| | 2,815 |
|
| Non-controlling interests | | 8 |
| | 232 |
| | 53 |
|
| Total comprehensive income for the year | | 1,290 |
| | 3,624 |
| | 2,868 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Financial statements (continued)
Consolidated balance sheet
|
| | | | | | | | | | | | | | |
| | | | | 30 June 2020 | | | 30 June 2019 | |
| | | Notes | | £ million |
| | £ million |
| | £ million |
| | £ million |
|
| Non-current assets | | | | | | | | | | |
| Intangible assets | | 9 | | 11,300 |
| | | | 12,557 |
| | |
| Property, plant and equipment | | 10 | | 4,926 |
| | | | 4,455 |
| | |
| Biological assets | |
| | 51 |
| | | | 34 |
| | |
| Investments in associates and joint ventures | | 6 | | 3,557 |
| | | | 3,173 |
| | |
| Other investments | | 12 | | 41 |
| | | | 49 |
| | |
| Other receivables | | 14 | | 46 |
| | | | 53 |
| | |
| Other financial assets | | 15 | | 686 |
| | | | 404 |
| | |
| Deferred tax assets | | 7 | | 119 |
| | | | 138 |
| | |
| Post employment benefit assets | | 13 | | 1,111 |
| | | | 1,060 |
| | |
| | | | | | | 21,837 |
| | | | 21,923 |
|
| Current assets | | | | | | | | | | |
| Inventories | | 14 | | 5,772 |
| | | | 5,472 |
| | |
| Trade and other receivables | | 14 | | 2,111 |
| | | | 2,694 |
| | |
| Corporate tax receivable | | 7 | | 190 |
| | | | 83 |
| | |
| Assets held for sale | | | | — |
| | | | 65 |
| | |
| Other financial assets | | 15 | | 75 |
| | | | 127 |
| | |
| Cash and cash equivalents | | 16 | | 3,323 |
| | | | 932 |
| | |
| | | | | | | 11,471 |
| | | | 9,373 |
|
| Total assets | | | | | | 33,308 |
| | | | 31,296 |
|
| Current liabilities | | | | | | | | | | |
| Borrowings and bank overdrafts | | 16 | | (1,995 | ) | | | | (1,959 | ) | | |
| Other financial liabilities | | 15 | | (389 | ) | | | | (307 | ) | | |
| Share buyback liability | | 17 | | — |
| | | | (26 | ) | | |
| Trade and other payables | | 14 | | (3,683 | ) | | | | (4,202 | ) | | |
| Liabilities held for sale | | | | — |
| | | | (32 | ) | | |
| Corporate tax payable | | 7 | | (246 | ) | | | | (378 | ) | | |
| Provisions | | 14 | | (183 | ) | | | | (99 | ) | | |
| | | | | | | (6,496 | ) | | | | (7,003 | ) |
| Non-current liabilities | | | | | | | | | | |
| Borrowings | | 16 | | (14,790 | ) | | | | (10,596 | ) | | |
| Other financial liabilities | | 15 | | (393 | ) | | | | (124 | ) | | |
| Other payables | | 14 | | (175 | ) | | | | (222 | ) | | |
| Provisions | | 14 | | (293 | ) | | | | (317 | ) | | |
| Deferred tax liabilities | | 7 | | (1,972 | ) | | | | (2,032 | ) | | |
| Post employment benefit liabilities | | 13 | | (749 | ) | | | | (846 | ) | | |
| | | | | | | (18,372 | ) | | | | (14,137 | ) |
| Total liabilities | | | | | | (24,868 | ) | | | | (21,140 | ) |
| Net assets | | | | | | 8,440 |
| | | | 10,156 |
|
| Equity | | | | | | | | | | |
| Share capital | | 17 | | 742 |
| | | | 753 |
| | |
| Share premium | |
| | 1,351 |
| | | | 1,350 |
| | |
| Other reserves | |
| | 2,272 |
| | | | 2,372 |
| | |
| Retained earnings | |
| | 2,407 |
| | | | 3,886 |
| | |
| Equity attributable to equity shareholders of the parent company | | | | | | 6,772 |
| | | | 8,361 |
|
| Non-controlling interests | | 17 | | | | 1,668 |
| | | | 1,795 |
|
| Total equity | | | | | | 8,440 |
| | | | 10,156 |
|
| | | | | | | | | | | | | | |
| | Notes | Year ended 30 June 2023 £ million | Year ended 30 June 2022 £ million | Year ended 30 June 2021 £ million |
| Other comprehensive income | | | | |
| Items that will not be recycled subsequently to the income statement | | | | |
| Net remeasurement of post employment benefit plans | | | | |
| Group | 14 | (643) | | 616 | | 16 | |
| Associates and joint ventures | | 13 | | 5 | | 3 | |
| Non-controlling interests | 14 | — | | (1) | | — | |
| Tax on post employment benefit plans | | 161 | | (123) | | (46) | |
| Changes in the fair value of equity investments at fair value through other comprehensive income | | (4) | | (12) | | — | |
| | (473) | | 485 | | (27) | |
| Items that may be recycled subsequently to the income statement | | | | |
| Exchange differences on translation of foreign operations | | | | |
| Group | | (876) | | 1,128 | | (1,233) | |
| Associates and joint ventures | 6 | (59) | | 60 | | (240) | |
| Non-controlling interests | | (148) | | 171 | | (173) | |
| Net investment hedges | | 416 | | (623) | | 810 | |
| Exchange (gain)/loss recycled to the income statement | | | | |
| On disposal of foreign operations | 8 | (18) | | 63 | | — | |
| On step acquisitions | | (1) | | — | | — | |
| Tax on exchange differences – group | | (2) | | (6) | | (9) | |
| Tax on exchange differences – non-controlling interests | | — | | — | | (1) | |
| Effective portion of changes in fair value of cash flow hedges | | | | |
| Hedge of foreign currency debt of the group | | 6 | | 233 | | (298) | |
| Transaction exposure hedging of the group | | 273 | | (172) | | 101 | |
| Hedges by associates and joint ventures | | 24 | | (15) | | (1) | |
| Commodity price risk hedging of the group | | (56) | | 78 | | 41 | |
| Recycled to income statement – hedge of foreign currency debt of the group | | 54 | | (239) | | 175 | |
| Recycled to income statement – transaction exposure hedging of the group | | (13) | | 42 | | 10 | |
| Recycled to income statement – commodity price risk hedging of the group | | (33) | | (46) | | (2) | |
| | | | |
| Tax on effective portion of changes in fair value of cash flow hedges | | (39) | | 32 | | (6) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Hyperinflation adjustments | | 182 | | 365 | | (17) | |
| Tax on hyperinflation adjustments | | (39) | | (74) | | 5 | |
| | (329) | | 997 | | (838) | |
| Other comprehensive (loss)/income, net of tax, for the year | | (802) | | 1,482 | | (865) | |
| Profit for the year | | 3,766 | | 3,338 | | 2,799 | |
| Total comprehensive income for the year | | 2,964 | | 4,820 | | 1,934 | |
| Attributable to: | | | | |
| Equity shareholders of the parent company | | 3,080 | | 4,561 | | 1,969 | |
| | | | |
| Non-controlling interests | 18 | (116) | | 259 | | (35) | |
| Total comprehensive income for the year | | 2,964 | | 4,820 | | 1,934 | |
The accompanying notes are an integral part of these consolidated financial statements.
Financial statements (continued)
Consolidated balance sheet
| | | | | | | | | | | | | | | | | |
| | | 30 June 2023 | 30 June 2022 |
| | Notes | £ million | £ million | £ million | £ million |
| Non-current assets | | | | | |
| Intangible assets | 9 | 11,512 | | | 11,902 | | |
| Property, plant and equipment | 10 | 6,142 | | | 5,848 | | |
| Biological assets | 11 | 156 | | | 94 | | |
| Investments in associates and joint ventures | 6 | 3,829 | | | 3,652 | | |
| Other investments | 13 | 57 | | | 37 | | |
| Other receivables | 15 | 31 | | | 37 | | |
| Other financial assets | 16 | 394 | | | 345 | | |
| Deferred tax assets | 7 | 141 | | | 114 | | |
| Post employment benefit assets | 14 | 960 | | | 1,553 | | |
| | | 23,222 | | | 23,582 | |
| Current assets | | | | | |
| Inventories | 15 | 7,661 | | | 7,094 | | |
| Trade and other receivables | 15 | 2,720 | | | 2,933 | | |
| Corporate tax receivables | 7 | 232 | | | 149 | | |
| Assets held for sale | 8 | — | | | 222 | | |
| Other financial assets | 16 | 347 | | | 251 | | |
| Cash and cash equivalents | 17 | 1,439 | | | 2,285 | | |
| | | 12,399 | | | 12,934 | |
| Total assets | | | 35,621 | | | 36,516 | |
| Current liabilities | | | | | |
| Borrowings and bank overdrafts | 17 | (1,701) | | | (1,522) | | |
| Other financial liabilities | 16 | (359) | | | (444) | | |
| Share buyback liability | | — | | | (117) | | |
| Trade and other payables | 15 | (5,300) | | | (5,887) | | |
| Liabilities held for sale | 8 | — | | | (61) | | |
| Corporate tax payables | 7 | (135) | | | (252) | | |
| Provisions | 15 | (119) | | | (159) | | |
| | | (7,614) | | | (8,442) | |
| Non-current liabilities | | | | | |
| Borrowings | 17 | (14,801) | | | (14,498) | | |
| Other financial liabilities | 16 | (747) | | | (703) | | |
| Other payables | 15 | (368) | | | (380) | | |
| Provisions | 15 | (243) | | | (258) | | |
| Deferred tax liabilities | 7 | (2,183) | | | (2,319) | | |
| Post employment benefit liabilities | 14 | (373) | | | (402) | | |
| | | (18,715) | | | (18,560) | |
| Total liabilities | | | (26,329) | | | (27,002) | |
| Net assets | | | 9,292 | | | 9,514 | |
| Equity | | | | | |
| Share capital | 18 | 712 | | | 723 | | |
| Share premium |
| 1,351 | | | 1,351 | | |
| Other reserves |
| 1,861 | | | 2,174 | | |
| Retained earnings |
| 3,898 | | | 3,550 | | |
| Equity attributable to equity shareholders of the parent company | | | 7,822 | | | 7,798 | |
| Non-controlling interests | 18 | | 1,470 | | | 1,716 | |
| Total equity | | | 9,292 | | | 9,514 | |
The accompanying notes are an integral part of these consolidated financial statements.
These consolidated financial statements have been approved by a duly appointed and authorised committee of the Board of Directors and were signed on its behalf by Ivan MenezesDebra Crew and Kathryn Mikells,Lavanya Chandrashekar, Directors and dated 73 August 2020.2023.
Financial statements (continued)
Consolidated statement of changes in equity
| | | | | | | | | | | | | | | | | | | | | | | | | | Other reserves | | Retained earnings/(deficit) | |
| | | | | | | Other reserves | | | Retained earnings/(deficit) | | | | | | | | | Notes | Share
capital
£ million | Share premium
£ million | Capital redemption reserve
£ million | Hedging and exchange reserve
£ million | | Own shares
£ million | Other retained earnings
£ million | Total
£ million | Equity attributable to parent company shareholders
£ million | Non- controlling interests
£ million | Total equity
£ million |
| At 30 June 2020 | | At 30 June 2020 | | 742 | | 1,351 | | 3,201 | | (929) | | | (1,936) | | 4,343 | | 2,407 | | 6,772 | | 1,668 | | 8,440 | |
| | | Share
capital
£ million |
| | Share premium
£ million |
| | Capital redemption reserve
£ million |
| | Hedging and exchange reserve
£ million |
| | Own shares
£ million |
| | Other retained earnings
£ million |
| | Total
£ million |
| | Equity attributable to parent company shareholders
£ million |
| | Non- controlling interests
£ million |
| | Total equity
£ million |
| |
| At 30 June 2017 | | 797 |
| | 1,348 |
| | 3,146 |
| | (453 | ) | | (2,176 | ) | | 7,651 |
| | 5,475 |
| | 10,313 |
| | 1,715 |
| | 12,028 |
| |
| Adoption of IFRS 15 | | — |
| | — |
| | — |
| | — |
| | — |
| | (89 | ) | | (89 | ) | | (89 | ) | | (2 | ) | | (91 | ) | |
| Adoption of IFRS 9 by associate | | — |
| | — |
| | — |
| | (3 | ) | | — |
| | 3 |
| | 3 |
| | — |
| | — |
| | — |
| |
| | Profit for the year | | — |
| | — |
| | — |
| | — |
| | — |
| | 3,022 |
| | 3,022 |
| | 3,022 |
| | 122 |
| | 3,144 |
| Profit for the year | | — | | — | | — | | — | | | — | | 2,660 | | 2,660 | | 2,660 | | 139 | | 2,799 | |
| Other comprehensive (loss)/income | | — |
| | — |
| | — |
| | (574 | ) | | — |
| | 367 |
| | 367 |
| | (207 | ) | | (69 | ) | | (276 | ) | |
| Other comprehensive loss | | Other comprehensive loss | | — | | — | | — | | (652) | | | — | | (39) | | (39) | | (691) | | (174) | | (865) | |
| Total comprehensive (loss)/income for the year | | — |
| | — |
| | — |
| | (574 | ) | | — |
| | 3,389 |
| | 3,389 |
| | 2,815 |
| | 53 |
| | 2,868 |
| Total comprehensive (loss)/income for the year | | — | | — | | — | | (652) | | | — | | 2,621 | | 2,621 | | 1,969 | | (35) | | 1,934 | |
| Employee share schemes | | — |
| | — |
| | — |
| | — |
| | 32 |
| | (7 | ) | | 25 |
| | 25 |
| | — |
| | 25 |
| Employee share schemes | | — | | — | | — | | — | | | 59 | | (10) | | 49 | | 49 | | — | | 49 | |
| Share-based incentive plans | | — |
| | — |
| | — |
| | — |
| | — |
| | 39 |
| | 39 |
| | 39 |
| | — |
| | 39 |
| Share-based incentive plans | 18 | | — | | — | | — | | — | | | — | | 49 | | 49 | | 49 | | — | | 49 | |
| Share-based incentive plans in respect of associates | | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | 4 |
| | 4 |
| | — |
| | 4 |
| Share-based incentive plans in respect of associates | | — | | — | | — | | — | | | — | | 3 | | 3 | | 3 | | — | | 3 | |
| Tax on share-based incentive plans | | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) | | (2 | ) | | — |
| | (2 | ) | Tax on share-based incentive plans | | — | | — | | — | | — | | | — | | 9 | | 9 | | 9 | | — | | 9 | |
| Shares issued | | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| |
| | Purchase of non-controlling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | (72 | ) | | (72 | ) | | (72 | ) | | 70 |
| | (2 | ) | Purchase of non-controlling interests | 8 | | — | | — | | — | | — | | | — | | (15) | | (15) | | (15) | | (27) | | (42) | |
| Disposal of non-controlling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | |
| Purchase of right issue of non-controlling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | (5 | ) | | (5 | ) | | (5 | ) | | 31 |
| | 26 |
| |
| | Associates' transactions with non-controlling interests | | Associates' transactions with non-controlling interests | | — | | — | | — | | — | | | — | | (91) | | (91) | | (91) | | — | | (91) | |
| Change in fair value of put option | | — |
| | — |
| | — |
| | — |
| | — |
| | 7 |
| | 7 |
| | 7 |
| | — |
| | 7 |
| Change in fair value of put option | | — | | — | | — | | — | | | — | | (2) | | (2) | | (2) | | — | | (2) | |
| Share buyback programme | | (17 | ) | | — |
| | 17 |
| | — |
| | — |
| | (1,507 | ) | | (1,507 | ) | | (1,507 | ) | | — |
| | (1,507 | ) | Share buyback programme | | (1) | | — | | 1 | | — | | | — | | (200) | | (200) | | (200) | | — | | (200) | |
| Dividends paid | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,581 | ) | | (1,581 | ) | | (1,581 | ) | | (101 | ) | | (1,682 | ) | |
| At 30 June 2018 | | 780 |
| | 1,349 |
| | 3,163 |
| | (1,030 | ) | | (2,144 | ) | | 7,830 |
| | 5,686 |
| | 9,948 |
| | 1,765 |
| | 11,713 |
| |
| Dividend declared for the year | | Dividend declared for the year | 18 | | — | | — | | — | | — | | | — | | (1,646) | | (1,646) | | (1,646) | | (72) | | (1,718) | |
| At 30 June 2021 | | At 30 June 2021 | | 741 | | 1,351 | | 3,202 | | (1,581) | | | (1,877) | | 5,061 | | 3,184 | | 6,897 | | 1,534 | | 8,431 | |
| Adjustment to 2021 closing equity in respect of hyperinflation in Turkey | | Adjustment to 2021 closing equity in respect of hyperinflation in Turkey | | — | | — | | — | | — | | | — | | 251 | | 251 | | 251 | | — | | 251 | |
| Adjusted opening balance | | Adjusted opening balance | | 741 | | 1,351 | | 3,202 | | (1,581) | | | (1,877) | | 5,312 | | 3,435 | | 7,148 | | 1,534 | | 8,682 | |
| Profit for the year | | — |
| | — |
| | — |
| | — |
| | — |
| | 3,160 |
| | 3,160 |
| | 3,160 |
| | 177 |
| | 3,337 |
| Profit for the year | | — | | — | | — | | — | | | — | | 3,249 | | 3,249 | | 3,249 | | 89 | | 3,338 | |
| Other comprehensive income | | — |
| | — |
| | — |
| | 212 |
| | — |
| | 20 |
| | 20 |
| | 232 |
| | 55 |
| | 287 |
| Other comprehensive income | | — | | — | | — | | 535 | | | — | | 777 | | 777 | | 1,312 | | 170 | | 1,482 | |
| Total comprehensive income for the year | | — |
| | — |
| | — |
| | 212 |
| | — |
| | 3,180 |
| | 3,180 |
| | 3,392 |
| | 232 |
| | 3,624 |
| Total comprehensive income for the year | | — | | — | | — | | 535 | | | — | | 4,026 | | 4,026 | | 4,561 | | 259 | | 4,820 | |
| Employee share schemes | | — |
| | — |
| | — |
| | — |
| | 118 |
| | (49 | ) | | 69 |
| | 69 |
| | — |
| | 69 |
| Employee share schemes | | — | | — | | — | | — | | | 39 | | 50 | | 89 | | 89 | | — | | 89 | |
| Share-based incentive plans | | — |
| | — |
| | — |
| | — |
| | — |
| | 49 |
| | 49 |
| | 49 |
| | — |
| | 49 |
| Share-based incentive plans | 18 | | — | | — | | — | | — | | | — | | 59 | | 59 | | 59 | | — | | 59 | |
| Share-based incentive plans in respect of associates | | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | 3 |
| | 3 |
| | — |
| | 3 |
| Share-based incentive plans in respect of associates | | — | | — | | — | | — | | | — | | 4 | | 4 | | 4 | | — | | 4 | |
| Tax on share-based incentive plans | | — |
| | — |
| | — |
| | — |
| | — |
| | 20 |
| | 20 |
| | 20 |
| | — |
| | 20 |
| Tax on share-based incentive plans | | — | | — | | — | | — | | | — | | 9 | | 9 | | 9 | | — | | 9 | |
| Shares issued | | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| |
| Purchase of non-controlling interests (note 8) | | — |
| | — |
| | — |
| | — |
| | — |
| | (694 | ) | | (694 | ) | | (694 | ) | | (90 | ) | | (784 | ) | |
| Non-controlling interest in respect of new subsidiary | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
| |
| Share-based payments and purchase of own shares in respect of subsidiaries | | Share-based payments and purchase of own shares in respect of subsidiaries | | — | | — | | — | | — | | | — | | (11) | | (11) | | (11) | | (6) | | (17) | |
| | Unclaimed dividend | | Unclaimed dividend | | — | | — | | — | | — | | | — | | 3 | | 3 | | 3 | | 1 | | 4 | |
| Change in fair value of put option | | — |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) | | (3 | ) | | — |
| | (3 | ) | Change in fair value of put option | | — | | — | | — | | — | | | — | | (34) | | (34) | | (34) | | — | | (34) | |
| | Share buyback programme | | (27 | ) | | — |
| | 27 |
| | — |
| | — |
| | (2,801 | ) | | (2,801 | ) | | (2,801 | ) | | — |
| | (2,801 | ) | Share buyback programme | | (18) | | — | | 18 | | — | | | — | | (2,310) | | (2,310) | | (2,310) | | — | | (2,310) | |
| Dividends paid | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,623 | ) | | (1,623 | ) | | (1,623 | ) | | (114 | ) | | (1,737 | ) | |
| At 30 June 2019 | | 753 |
| | 1,350 |
| | 3,190 |
| | (818 | ) | | (2,026 | ) | | 5,912 |
| | 3,886 |
| | 8,361 |
| | 1,795 |
| | 10,156 |
| |
| Dividend declared for the year | | Dividend declared for the year | 18 | | — | | — | | — | | — | | | — | | (1,720) | | (1,720) | | (1,720) | | (72) | | (1,792) | |
| At 30 June 2022 | | At 30 June 2022 | | 723 | | 1,351 | | 3,220 | | (1,046) | | | (1,838) | | 5,388 | | 3,550 | | 7,798 | | 1,716 | | 9,514 | |
| | Profit for the year | | — |
| | — |
| | — |
| | — |
| | — |
| | 1,409 |
| | 1,409 |
| | 1,409 |
| | 45 |
| | 1,454 |
| Profit for the year | | — | | — | | — | | — | | | — | | 3,734 | | 3,734 | | 3,734 | | 32 | | 3,766 | |
| Other comprehensive loss | | — |
| | — |
| | — |
| | (116 | ) | | — |
| | (11 | ) | | (11 | ) | | (127 | ) | | (37 | ) | | (164 | ) | Other comprehensive loss | | — | | — | | — | | (324) | | | — | | (330) | | (330) | | (654) | | (148) | | (802) | |
| Total comprehensive (loss)/income for the year | | — |
| | — |
| | — |
| | (116 | ) | | — |
| | 1,398 |
| | 1,398 |
| | 1,282 |
| | 8 |
| | 1,290 |
| Total comprehensive (loss)/income for the year | | — | | — | | — | | (324) | | | — | | 3,404 | | 3,404 | | 3,080 | | (116) | | 2,964 | |
| Employee share schemes | | — |
| | — |
| | — |
| | — |
| | 90 |
| | (36 | ) | | 54 |
| | 54 |
| | — |
| | 54 |
| Employee share schemes | | — | | — | | — | | — | | | 24 | | 24 | | 48 | | 48 | | — | | 48 | |
| Share-based incentive plans | | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
| | 2 |
| | — |
| | 2 |
| Share-based incentive plans | 18 | | — | | — | | — | | — | | | — | | 49 | | 49 | | 49 | | — | | 49 | |
| Share-based incentive plans in respect of associates | | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | 4 |
| | 4 |
| | — |
| | 4 |
| Share-based incentive plans in respect of associates | | — | | — | | — | | — | | | — | | 6 | | 6 | | 6 | | — | | 6 | |
| Tax on share-based incentive plans | | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
| | 1 |
| | — |
| | 1 |
| Tax on share-based incentive plans | | — | | — | | — | | — | | | — | | 6 | | 6 | | 6 | | — | | 6 | |
| Share based payments and purchase of treasury shares in respect of subsidiaries | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | | (1 | ) | | — |
| | (1 | ) | |
| Shares issued | | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| |
| Transfers | | — |
| | — |
| | — |
| | 5 |
| | — |
| | (5 | ) | | (5 | ) | | — |
| | — |
| | — |
| |
| Purchase of non-controlling interests (note 8) | | — |
| | — |
| | — |
| | — |
| | — |
| | (39 | ) | | (39 | ) | | (39 | ) | | (23 | ) | | (62 | ) | |
| Non-controlling interest in respect of new subsidiary | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | 5 |
| |
| Share-based payments and purchase of own shares in respect of subsidiaries | | Share-based payments and purchase of own shares in respect of subsidiaries | | — | | — | | — | | — | | | — | | 3 | | 3 | | 3 | | 2 | | 5 | |
| | Purchase of non-controlling interests | | Purchase of non-controlling interests | 8 | | — | | — | | — | | — | | | — | | (111) | | (111) | | (111) | | (35) | | (146) | |
| Associates' transactions with non-controlling interests | | Associates' transactions with non-controlling interests | | — | | — | | — | | — | | | — | | (7) | | (7) | | (7) | | — | | (7) | |
| | Unclaimed dividend | | Unclaimed dividend | | — | | — | | — | | — | | | — | | 1 | | 1 | | 1 | | — | | 1 | |
| Change in fair value of put option | | — |
| | — |
| | — |
| | — |
| | — |
| | 9 |
| | 9 |
| | 9 |
| | — |
| | 9 |
| Change in fair value of put option | | — | | — | | — | | — | | | — | | (16) | | (16) | | (16) | | — | | (16) | |
| Share buyback programme | | (11 | ) | | — |
| | 11 |
| | — |
| | — |
| | (1,256 | ) | | (1,256 | ) | | (1,256 | ) | | — |
| | (1,256 | ) | Share buyback programme | | (11) | | — | | 11 | | — | | | — | | (1,273) | | (1,273) | | (1,273) | | — | | (1,273) | |
| Dividends declared | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,646 | ) | | (1,646 | ) | | (1,646 | ) | | (117 | ) | | (1,763 | ) | |
| At 30 June 2020 | | 742 |
| | 1,351 |
| | 3,201 |
| | (929 | ) | | (1,936 | ) | | 4,343 |
| | 2,407 |
| | 6,772 |
| | 1,668 |
| | 8,440 |
| |
| Dividend declared for the year | | Dividend declared for the year | 18 | | — | | — | | — | | — | | | — | | (1,762) | | (1,762) | | (1,762) | | (97) | | (1,859) | |
| At 30 June 2023 | | At 30 June 2023 | | 712 | | 1,351 | | 3,231 | | (1,370) | | | (1,814) | | 5,712 | | 3,898 | | 7,822 | | 1,470 | | 9,292 | |
The accompanying notes are an integral part of these consolidated financial statements.
Financial statements (continued)
Consolidated statement of cash flows
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended 30 June 2023 | Year ended 30 June 2022 | Year ended 30 June 2021 |
| | Notes | £ million | £ million | £ million | £ million | £ million | £ million |
| Cash flows from operating activities | | | | | | | |
| Profit for the year | | 3,766 | | | 3,338 | | | 2,799 | | |
| | | | | | | |
| Taxation | | 970 | | | 1,049 | | | 907 | | |
| Share of after tax results of associates and joint ventures | | (370) | | | (417) | | | (334) | | |
| Net finance charges | | 594 | | | 422 | | | 373 | | |
| Non-operating items | | (328) | | | 17 | | | (14) | | |
| Operating profit | | | 4,632 | | | 4,409 | | | 3,731 | |
| Increase in inventories | | (675) | | | (740) | | | (443) | | |
| Decrease/(increase) in trade and other receivables | | 121 | | | (378) | | | (446) | | |
| (Decrease)/increase in trade and other payables and provisions | | (621) | | | 939 | | | 1,220 | | |
| Net (increase)/decrease in working capital | | | (1,175) | | | (179) | | | 331 | |
| Depreciation, amortisation and impairment | | 1,066 | | | 828 | | | 447 | | |
| Dividends received | | 219 | | | 190 | | | 290 | | |
| Post employment payments less amounts included in operating profit | | (25) | | | (89) | | | (30) | | |
| Other items | | 62 | | | 53 | | | 88 | | |
| | | 1,322 | | | 982 | | | 795 | |
| Cash generated from operations | | | 4,779 | | | 5,212 | | | 4,857 | |
| Interest received | | 131 | | | 110 | | | 89 | | |
| Interest paid | | (685) | | | (438) | | | (440) | | |
| Taxation paid | | (1,201) | | | (949) | | | (852) | | |
| | | (1,755) | | | (1,277) | | | (1,203) | |
| Net cash inflow from operating activities | | | 3,024 | | | 3,935 | | | 3,654 | |
| Cash flows from investing activities | | | | | | | |
| Disposal of property, plant and equipment and computer software | | 13 | | | 17 | | | 13 | | |
| Purchase of property, plant and equipment and computer software | | (1,180) | | | (1,097) | | | (626) | | |
| Movements in loans and other investments | | (57) | | | (72) | | | (4) | | |
| Sale of businesses and brands | 8 | 462 | | | 82 | | | 14 | | |
Acquisition of subsidiaries(1) | 8 | (342) | | | (206) | | | (450) | | |
Investments in associates and joint ventures(1) | 8 | (93) | | | (65) | | | (38) | | |
| Net cash outflow from investing activities | | | (1,197) | | | (1,341) | | | (1,091) | |
| Cash flows from financing activities | | | | | | | |
| Share buyback programme | 18 | (1,381) | | | (2,284) | | | (109) | | |
| | | | | | | |
| Net sale of own shares for share schemes | | 29 | | | 18 | | | 49 | | |
| Purchase of treasury shares in respect of subsidiaries | | — | | | (15) | | | — | | |
| Dividends paid to non-controlling interests | | (97) | | | (81) | | | (77) | | |
| Proceeds from bonds | 17 | 2,229 | | | 2,263 | | | 1,031 | | |
| Repayment of bonds | 17 | (1,340) | | | (1,521) | | | (1,247) | | |
| Purchase of shares of non-controlling interests | 8 | (146) | | | — | | | (42) | | |
| | | | | | | |
| Cash inflow from other borrowings |
| 433 | | | 503 | | | 34 | | |
| Cash outflow from other borrowings | | (374) | | | (424) | | | (787) | | |
| Equity dividends paid | | (1,761) | | | (1,718) | | | (1,646) | | |
| | | | | | | |
| Net cash outflow from financing activities | | | (2,408) | | | (3,259) | | | (2,794) | |
| Net decrease in net cash and cash equivalents | 17 | | (581) | | | (665) | | | (231) | |
| Exchange differences | | | (227) | | | 239 | | | (285) | |
| | | | | | | |
| Net cash and cash equivalents at beginning of the year | | | 2,211 | | | 2,637 | | | 3,153 | |
| Net cash and cash equivalents at end of the year | | | 1,403 | | | 2,211 | | | 2,637 | |
| | | | | | | |
| Net cash and cash equivalents consist of: | | | | | | | |
| Cash and cash equivalents | 17 | | 1,439 | | | 2,285 | | | 2,749 | |
| Bank overdrafts | 17 | | (36) | | | (74) | | | (112) | |
| | | 1,403 | | | 2,211 | | | 2,637 | |
|
| | | | | | | | | | | | | | | | | | | |
| | | | Year ended 30 June 2020 | | | Year ended 30 June 2019 | | | Year ended 30 June 2018 | |
| | Notes | | £ million |
| | £ million |
| | £ million |
| | £ million |
| | £ million |
| | £ million |
|
| Cash flows from operating activities | | | | | | | | | | | | | |
| Profit for the year | | | 1,454 |
| | | | 3,337 |
| | | | 3,144 |
| | |
| Taxation | | | 589 |
| | | | 898 |
| | | | 596 |
| | |
| Share of after tax results of associates and joint ventures | | | (282 | ) | | | | (312 | ) | | | | (309 | ) | | |
| Net finance charges | | | 353 |
| | | | 263 |
| | | | 260 |
| | |
| Non-operating items | | | 23 |
| | | | (144 | ) | | | | — |
| | |
| Operating profit | | | | | 2,137 |
| | | | 4,042 |
| | | | 3,691 |
|
| Increase in inventories | | | (366 | ) | | | | (434 | ) | | | | (271 | ) | | |
| Decrease/(increase) in trade and other receivables | | | 523 |
| | | | 11 |
| | | | (202 | ) | | |
| (Decrease)/increase in trade and other payables and provisions | | | (485 | ) | | | | 201 |
| | | | 314 |
| | |
| Net increase in working capital | | | | | (328 | ) | | | | (222 | ) | | | | (159 | ) |
| Depreciation, amortisation and impairment | | | 1,839 |
| | | | 374 |
| | | | 493 |
| | |
| Dividends received | | | 4 |
| | | | 168 |
| | | | 159 |
| | |
| Post employment payments less amounts included in operating profit | | (109 | ) | | | | (121 | ) | | | | (108 | ) | | |
| Other items | | | (14 | ) | | | | 64 |
| | | | 10 |
| | |
| | | | | | 1,720 |
| | | | 485 |
| | | | 554 |
|
| Cash generated from operations | | | | | 3,529 |
| | | | 4,305 |
| | | | 4,086 |
|
| Interest received | | | 185 |
| | | | 216 |
| | | | 167 |
| | |
| Interest paid | | | (493 | ) | | | | (468 | ) | | | | (418 | ) | | |
| Taxation paid | | | (901 | ) | | | | (805 | ) | | | | (751 | ) | | |
| | | | | | (1,209 | ) | | | | (1,057 | ) | | | | (1,002 | ) |
| Net cash inflow from operating activities | | | | | 2,320 |
| | | | 3,248 |
| | | | 3,084 |
|
| Cash flows from investing activities | | | | | | | | | | | | | |
| Disposal of property, plant and equipment and computer software | | | 14 |
| | | | 32 |
| | | | 40 |
| | |
| Purchase of property, plant and equipment and computer software | | | (700 | ) | | | | (671 | ) | | | | (584 | ) | | |
| Movements in loans and other investments | | | — |
| | | | (1 | ) | | | | (17 | ) | | |
| Sale of businesses and brands | 8 | | 11 |
| | | | 426 |
| | | | 4 |
| | |
| Acquisition of businesses | 8 | | (130 | ) | | | | (56 | ) | | | | (594 | ) | | |
| Net cash outflow from investing activities | | | | | (805 | ) | | | | (270 | ) | | | | (1,151 | ) |
| Cash flows from financing activities | | | | | | | | | | | | | |
| Share buyback programme | 17 | | (1,282 | ) | | | | (2,775 | ) | | | | (1,507 | ) | | |
| Proceeds from issue of share capital | | | 1 |
| | | | 1 |
| | | | 1 |
| | |
| Net sale of own shares for share schemes | | | 54 |
| | | | 50 |
| | | | 8 |
| | |
| Dividends paid to non-controlling interests | | | (111 | ) | | | | (112 | ) | | | | (80 | ) | | |
| Purchase of shares of non-controlling interests | 8 | | (62 | ) | | | | (784 | ) | | | | — |
| | |
| Rights issue proceeds from non-controlling interests | | | — |
| | | | — |
| | | | 26 |
| | |
| Proceeds from bonds | 16 | | 5,188 |
| | | | 2,766 |
| | | | 2,612 |
| | |
| Repayment of bonds | 16 | | (820 | ) | | | | (1,168 | ) | | | | (1,571 | ) | | |
| Net movements in other borrowings |
| | (285 | ) | | | | 721 |
| | | | (26 | ) | | |
| Equity dividends paid | 17 | | (1,646 | ) | | | | (1,623 | ) | | | | (1,581 | ) | | |
| Net cash inflow/(outflow) from financing activities | | | | | 1,037 |
| | | | (2,924 | ) | | | | (2,118 | ) |
| Net increase/(decrease) in net cash and cash equivalents | 16 | | | | 2,552 |
| | | | 54 |
| | | | (185 | ) |
| Exchange differences | | | | | (120 | ) | | | | (26 | ) | | | | (39 | ) |
| Net cash and cash equivalents at beginning of the year | | | | | 721 |
| | | | 693 |
| | | | 917 |
|
| Net cash and cash equivalents at end of the year | | | | | 3,153 |
| | | | 721 |
| | | | 693 |
|
| Net cash and cash equivalents consist of: | | | | | | �� | | | | | | | |
| Cash and cash equivalents | 16 | | | | 3,323 |
| | | | 932 |
| | | | 874 |
|
| Bank overdrafts | 16 | | | | (170 | ) | | | | (211 | ) | | | | (181 | ) |
| | | | | | 3,153 |
| | | | 721 |
| | | | 693 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Financial statements (continued)
Accounting information and policies
Introduction
This section describes the basis of preparation of the consolidated financial statements and the group’s accounting policies that are applicable to the financial statements as a whole. Accounting policies, critical accounting estimates and judgements that are specific to a note are included in the note to which they relate. ThisFurthermore, the section also explainsdetails new accounting standards, amendments and interpretations, that the group has adopted in the current financial year or will adopt in subsequent years.
1. Accounting information and policies
(a) Basis of preparation
The consolidated financial statements are prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRS)(IFRSs) adopted by the UK (UK-adopted International Accounting Standards) and related interpretations as adopted for use in the European Union (EU) andIFRSs, as issued by the International Accounting Standards Board (IASB).IASB, including interpretations issued by the IFRS Interpretations Committee. IFRS as adopted by the EUUK differs in certain respects from IFRS as issued by the IASB. The differences have no impact on the group’s consolidated financial statements for the years presented. The consolidated financial statements are prepared on a going concern basis under the historical cost convention, unless stated otherwise in the relevant accounting policy.
The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates.
(b) Going concern
The potential financial impact of the Covid-19 pandemic has been modelled in ourManagement prepared cash flow projections and stress tested by including severalforecasts which were also sensitised to reflect severe but plausible downside scenarios which are linked to ourtaking into consideration the group's principal risks. In our downside Covid-19the base case scenario, we have considered the key impactsmanagement included assumptions for mid-single digit net sales growth, operating margin improvement and global TBA market share growth. In light of the pandemic for each region includingongoing geopolitical volatility, the potential restrictions on the sale of our products in both on-tradebase case outlook and off-trade channels. We have then considered the expected duration of those restrictions, as well as a forecast for the length of time to recovery (a return to 2019 volumes), based on industry projections. As a result of these factors, in our severe but plausible downside scenarios we do not anticipate that the on-trade business recovers to volumes experienced in the year ending 30 June 2019 within the next 18 month period.incorporated considerations for a prolonged global recession, supply chain disruptions, higher inflation and further geopolitical deterioration. Even withunder these negative sensitivities for each region taken into account,scenarios, the group’s cash positionliquidity is still consideredexpected to remain strong, as we haveit was protected our liquidity by increasingissuing €500 million of fixed rate euro and $2 billion of fixed rate dollar-denominated bonds in the level of committed facilities and accelerating certain bond issuance programmes.year ended 30 June 2023. Mitigating actions, should they be required, are all within management’s control and could include reduced advertisingreductions in discretionary spending such as acquisitions and promotion spend,capital expenditure, as well as a temporary suspension of the share buyback programme and dividend cash payments non-essential overheads and non-committed capital expenditure in the next 12 months.months, or drawdowns on committed facilities. Having considered the outcome of these assessments, itthe Directors are comfortable that the company is deemed appropriate to prepare the consolidated financial statements on a going concern basis.for at least 12 months from the date of signing the group's consolidated financial statements.
(c) Consolidation
The consolidated financial statements include the results of the company and its subsidiaries together with the group’s attributable share of the results of associates and joint ventures. A subsidiary is an entity controlled by Diageo plc. The group controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Where the group has the ability to exercise joint control over an entity but has rights to specified assets and obligations for liabilities of that entity, the entity is included on the basis of the group’s rights over those assets and liabilities.
(d) Foreign currencies
Items included in the financial statements of the group’s subsidiaries, associates and joint ventures are measured using the currency of the primary economic environment in which each entity operates (its functional currency). The consolidated financial statements are presented in sterling, which is the functional currency of the parent company.company, Diageo plc. The functional currency of Diageo plc is determined by using management judgement that considers the parent company as an extension of its subsidiaries.
The income statements and cash flows of non-sterling entities are translated into sterling at weighted average rates of exchange, other thanexcept for subsidiaries in hyperinflationary economies that are translated with the closing rate at the end of the year and for substantial transactions that are translated at the rate on the date of the transaction. Exchange differences arising on the retranslation to closing rates are taken to the exchange reserve.
Financial statements (continued)
Assets and liabilities are translated at closing rates. Exchange differences arising on the retranslation at closing rates of the opening balance sheets of overseas entities are taken to the exchange reserve, as are exchange differences arising on foreign currency borrowings and financial instruments designated as net investment hedges, to the extent that they are effective. Tax charges and credits arising on such items are also taken to the exchange reserve. Gains and losses accumulated in the exchange reserve are recycled to the
Financial statements (continued)
income statement when the foreign operation is sold. Other exchange differences are taken to the income statement. Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction.
The principal foreign exchange rates used in the translation of financial statements for the three years ended 30 June 2020,2023, expressed in US dollars and euros per £1, were as follows:
| | | | | | | | | | | |
| | 2023 | 2022 | 2021 |
| US dollar | | | |
Income statement and cash flows(1) | 1.20 | | 1.33 | | 1.35 | |
Assets and liabilities(2) | 1.26 | | 1.21 | | 1.39 | |
| Euro | | | |
Income statement and cash flows(1) | 1.15 | | 1.18 | | 1.13 | |
Assets and liabilities(2) | 1.17 | | 1.16 | | 1.17 | |
|
| | | | | | | | | |
| | | 2020 |
| | 2019 |
| | 2018 |
|
| US dollar | | | | | | |
Income statement and cash flows(i) | | 1.26 |
| | 1.29 |
| | 1.35 |
|
Assets and liabilities(ii) | | 1.23 |
| | 1.27 |
| | 1.32 |
|
| Euro | | | | | | |
Income statement and cash flows(i) | | 1.14 |
| | 1.13 |
| | 1.13 |
|
Assets and liabilities(ii) | | 1.09 |
| | 1.12 |
| | 1.13 |
|
(i)(1) Weighted average rates
(ii) Year end(2) Closing rates
The group uses foreign exchange hedges to mitigate the effect of exchange rate movements. For further information, see note 15.16.
(e) Critical accounting estimates and judgements
Details of critical estimates and judgements which the directorsDirectors consider could have a significant impact uponon the financial statements are set out in the related notes as follows:
| |
– | Exceptional items – management judgement whether exceptional or not – page 213
|
| |
– | Taxation – management judgement of whether a provision is required and management estimate of amount of corporate tax payable or receivable, the recoverability of deferred tax assets and expectation on manner of recovery of deferred taxes – pages 219 and 220
|
| |
– | Brands, goodwill and other intangibles – management judgement of the assets to be recognised and synergies resulting from an acquisition. Management judgement and estimate are required in determining future cash flows and appropriate applicable assumptions to support the intangible asset value – page 228
|
| |
– | Post employment benefits – management judgement in determining whether a surplus can be recovered and management estimate in determining the assumptions in calculating the liabilities of the funds – page 239
|
| |
– | Contingent liabilities and legal proceedings – management judgement in assessing the likelihood of whether a liability will arise and an estimate to quantify the possible range of any settlement and significant unprovided tax matters where maximum exposure is provided for each – page 269
|
–Exceptional items – management judgement whether exceptional or not – page 219
–Taxation – management judgement whether a provision is required and management estimate of amount of corporate tax payable or receivable, the recoverability of deferred tax assets and expectation on manner of recovery of deferred taxes – pages 224 and 228 –Brands, goodwill, other intangibles and contingent considerations – management judgement whether the assets and liabilities are to be recognised and synergies resulting from an acquisition. Management judgement and estimate are required in determining future cash flows and appropriate applicable assumptions to support the intangible asset and contingent consideration value – pages 236
–Post employment benefits – management judgement whether a surplus can be recovered and management estimate in determining the assumptions in calculating the liabilities of the funds – page 244
–Contingent liabilities and legal proceedings – management judgement in assessing the likelihood of whether a liability will arise and an estimate to quantify the possible range of any settlement; and significant unprovided tax matters where maximum exposure is provided for each – page 272
(f) Hyperinflationary accounting
The group applied hyperinflationary accounting for its operations in Turkey, Venezuela and Lebanon.
Turkey has been a hyperinflationary economy where cumulative inflation for the three years ended 30 June 2022 exceeded 100%. Consequently, since March 2022, the group applies hyperinflationary accounting for its Turkish operations. The group’s consolidated financial statements for the years ended 30 June 2023 and 30 June 2022 include the results and financial position of its Turkish operations restated to the measuring unit current at the end of each period, with hyperinflationary gains and losses in respect of monetary items being reported in finance income and charges. Comparative amounts presented in the consolidated financial statements were not restated. Hyperinflationary accounting needs to be applied as if Turkey has always been a hyperinflationary economy, hence, as per Diageo’s accounting policy choice, the differences between equity at 30 June 2021 as reported and the equity after the restatement of the non-monetary items to the measuring unit current at 30 June 2021 were recognised in retained earnings. Such restatement includes impairment of TRY 2,133 million (£177 million) recognised on the goodwill in the Turkey cash-generating unit and TRY 1,627 million (£135 million) in respect of the Yenì Raki brand, as a result of the increased carrying values for those due to hyperinflation adjustments. When applying IAS 29 on an ongoing basis, comparatives in stable currency are not restated and the effect of inflating opening net assets to the measuring unit current at the end of the reporting period is presented in other comprehensive income. The inflation rate used by the group is the official rate published by the Turkish Statistical Institute. The movement in the publicly available official price index for the year ended 30 June 2023 was 38% (2022 – 79%).
Venezuela is a hyper-inflationaryhyperinflationary economy where the government maintains a regime of strict currency controls with multiple foreign currency rate systems. Access to US dollars on these exchange systems is very limited. The foreign currency denominated transactions and balances of the group’s Venezuelan operations are translated into the local functional currency (Venezuelan bolivar) at the rate they are expected to be settled, applying the most appropriate official exchange rate (DICOM). For consolidation purposes, the group converts its Venezuelan operations using management’s estimate of the exchange rate considering forecast inflation and the most appropriate official exchange rate. The exchange rate used to translate the results of the group’s Venezuelan operations was VES/£ 10,024,8653,807 for the year ended 30 June 2020 (2019 -2023 (2022 – VES/£ 403,700).759).This rate reflects management’s estimate of the exchange rate considering inflation and the most appropriate official exchange rate. Movement in the price index for the year ended 30 June 20202023 was 2,464% (2019 - 1,087,262%382% (2022 – 268%). The inflation rate used by the group is provided by an independent valuer because no reliable, officialofficially published rate is available that is representative of the situation infor Venezuela.
Financial statements (continued)
The following table presents the contribution of the group’s Venezuelan operations to the consolidated income statement,net sales, operating profit, operating cash flow statement and net assets for the yearyears ended 30 June 20202023 and 30 June 20192022 and with the amounts that would have resulted if the official DICOMreference exchange rate had been applied:
| | | | | | | | | | | | | | |
| Year ended 30 June 2023 | Year ended 30 June 2022 |
| | At estimated exchange rate | At official reference
exchange rate | At estimated
exchange rate | At official reference
exchange rate |
| 3,807 VES/£ | 36 VES/£ | 759 VES/£ | 7 VES/£ |
| £ million | £ million | £ million | £ million |
| Net sales | — | | 9 | | — | | 15 | |
| Operating loss | — | | — | | (1) | | (1) | |
| Other finance (charges)/income - hyperinflation adjustment | (2) | | (212) | | 1 | | 157 | |
| Net cash outflow from operating activities | — | | (3) | | — | | (5) | |
| Net assets | 6 | | 657 | | 41 | | 4,606 | |
Sterling amounts presented at the official reference exchange rate are results of simple mathematical conversion.
The impact of hyperinflationary accounting for Lebanon was immaterial both in the current and comparative periods.
|
| | | | | | | | | | | | |
| | | Year ended 30 June 2020 | | Year ended 30 June 2019 |
| | | At estimated exchange rate |
| | At DICOM exchange rate |
| | At estimated
exchange rate |
| | At DICOM
exchange rate |
|
| | | 10,024,865 VES/£ |
| | 252,558 VES/£ |
| | 403,700 VES/£ |
| | 8,553 VES/£ |
|
| | | £ million |
| | £ million |
| | £ million |
| | £ million |
|
| Net sales | | — |
| | 3 |
| | — |
| | 3 |
|
| Operating profit | | — |
| | 10 |
| | — |
| | 2 |
|
| Other finance income - hyperinflation adjustment | | 6 |
| | 222 |
| | 10 |
| | 455 |
|
| Net cash inflow from operating activities | | — |
| | 6 |
| | — |
| | 5 |
|
| Net assets | | 48 |
| | 1,893 |
| | 56 |
| | 2,643 |
|
(f)(g) New accounting standards and interpretations
The following amendments to the accounting standards, issued by the IASB which have beenand endorsed by the EU, have beenUK, were adopted by the group from 1 July 20192022 with no impact on the group’s consolidated results, financial position or disclosures:
| |
– | Amendments to IAS 28 - Long-term Interests in Associates and Joint Ventures
|
| |
– | Amendments to IFRS 9 - Prepayment Features with Negative Compensation
|
| |
– | Improvements to IFRS 3 and IFRS 11 - Business combinations and Joint arrangements - Accounting for previously held interests |
| |
– | Improvements to IAS 12 - Income taxes - Accounting for income tax consequences of payments on financial instruments that are classified as equity
|
| |
– | Improvements to IAS 23 - Borrowing costs on completed qualifying assets
|
–Amendments to IFRS 3 Updating a Reference to the Conceptual Framework
–Amendments to IAS 16 Property, Plant and Equipment: Proceeds before Intended Use
–Amendments to IAS 37 Onerous Contracts - Cost of Fulfilling a Contract
–Amendments to Annual improvements 2018-2020 - IFRS 9 - Fees in the '10 per cent' Test, IFRS 16 - Lease incentives, IAS 41 - Taxation in Fair Value Measurements
–Amendments to IAS 12 International Tax Reform – Pillar Two Model Rules
The following amendmentsstandard and standardsamendments issued by the IASB which have been endorsed by the EU,UK and have been adopted by the group:
IFRS 15 – Revenue from contracts with customers. The group adopted IFRS 15 from 1 July 2017 by applying the modified retrospective transition method, recognising the cumulative effect of initially applying IFRS 15 as an adjustment to the balance of retained earnings as at 1 July 2017. Retained earnings for the year ended 30 June 2017 was not restated.
IFRS 16 – Leases. The group adopted IFRS 16 from 1 July 2019 by applying the modified retrospective method, meaning that the figures, as at, and for the years ended 30 June 2018 and 2019 have not been restated. IFRS 16 replaced existing lease guidance including IAS 17 - Leases, IFRIC 4, SIC-15 and SIC-27. Information in respect of the adoption of IFRS 16 is included in note 11.
Amendments to IAS 19 - Plan Amendment, Curtailment or Settlement.The amendment requires the remeasurement of service cost and interest charge for the rest of the period following plan amendments, settlements and curtailments using actuarial assumptions prevailing at the date of these events. The amendment is applicable to Diageo from 1 July 2019 on a prospective basis and has resulted in an additional service cost of £1 million following the remeasurement of the Irish Scheme.
The following amendment and standard, issued by the IASB has not been adopted by the group:
IFRS 17 – Insurance contracts (effective infrom the year ending 30 June 2022)2024) is ultimately intended to replace IFRS 4.
Based on a preliminary assessment, the group believes that the adoption of IFRS 17 will not have a significant impact on its consolidated results or financial position.
Amendments to IFRS 9, IAS 3912 - Income taxes(effective from the year ending 30 June 2024) requires an entity to recognise deferred tax on initial recognition of particular transactions to the extent that the transaction gives rise to equal amounts of deferred tax assets and IFRS 7 - Interest rate benchmark reform (phase 1).liabilities. The amendment provides temporary relief from applying specific hedge accounting requirementsproposed amendments would apply to hedging relationships directly affected by interbank offered rate (IBOR) reform.transactions such as leases and decommissioning obligations for which an entity recognises both an asset and a liability. The reliefsgroup believes that the adoption of these amendments will not have the effect that IBOR reform should not generally cause hedge accounting to terminate.
a significant impact on its consolidated results and financial position.
There are a number of other amendments and clarifications to IFRS,IFRSs, effective in future years, which are not expected to significantly impact the group’s consolidated results or financial position.
(h) Climate change considerations
The impact of climate change assessment and the net zero carbon emission target for Diageo's direct operations (Scope 1 & 2) for 2030 have been considered as part of the assessment of estimates and judgements in preparing the group's consolidated financial statements.
The climate change scenario analyses performed in 2023 – conducted in line with TCFD recommendations (‘Transition Scenario’ (RCP 2.6), a ‘Moderate Warming’ Scenario (RCP 4.5) and a ‘Severe Warming Scenario’ (RCP 8.5)) – identified no material financial impact to these financial statements.
The following considerations were made in respect of the financial statements:
•The impact of climate change on factors (like residual values, useful lives and depreciation methods) that determine the carrying value of non-current assets.
•The impact of climate change on forecasts of cash flows used (including forecast depreciation in line with capital expenditure plans for Diageo's net zero carbon emission commitment) in impairment assessments for the value-in-use of non-current assets including goodwill (see note 9).
•The impact of climate change on post-employment assets.
Financial statements (continued)
Results for the year
Introduction
This section explains the results and performance of the group for the three years ended 30 June 2020.2023. Disclosures are provided for segmental information, operating costs, exceptional items, finance income and charges, the group's share of results of associates and joint ventures, taxation. For associates, joint ventures and taxation, balance sheet disclosures are also provided in this section.
2. Segmental information
Accounting policies
Salescomprise revenue from contracts with customers from the sale of goods, royalties and rents receivable. Revenue from the sale of goods includes excise and other duties which the group pays as principal but excludes duties and taxes collected on behalf of third parties, such as value added tax. Sales are recognised as or when performance obligations are satisfied by transferring control of a good or service to the customer, which is determined by considering, among other factors, the delivery terms agreed with customers. For the sale of goods, the transfer of control occurs when the significant risks and rewards of ownership are passed to the customer. Based on the shipping terms agreed with customers, the transfer of control of goods occurs at the time of dispatch for the majority of sales. Where the transfer of control is subsequent to the dispatch of goods, the time between dispatch and receipt by the customer is generally less than 5five days. The group includes in sales the net consideration to which it expects to be entitled. Sales are recognised to the extent that it is highly probable that a significant reversal will not occur. Therefore, sales are stated net of expected price discounts, allowances for customer loyalty and certain promotional activities and similar items. Generally, payment of the transaction price is due within credit terms that are consistent with industry practices, with no element of financing.
Net salesare sales less excise duties. Diageo incurs excise duties throughout the world. In the majority of countries, excise duties are effectively a production tax which becomes payable when the product is removed from bonded premises and is not directly related to the value of sales. It is generally not included as a separate item on external invoices; increases in excise duty are not always passed on to the customer and where a customer fails to pay for products received the group cannot reclaim the excise duty. The group therefore recognises excise duty, unless it regards itself as an agent of the regulatory authorities, as a cost to the group.
Advertising costs, point of sale materials and sponsorship payments are charged to marketing in operating profit when the company has a right of access to the goods or services acquired.
Diageo is an international manufacturer and distributor of premium drinks. Diageo also owns a number of investments in associates and joint ventures, as set out in note 6.
The segmental information presented is consistent with management reporting provided to the Executive Committee (the chief operating decision maker)decision-maker).
The Executive Committee considers the business principally from a geographical perspective based on the location of third partythird-party sales and the business analysis is presented by geographical segment. In addition to these geographical selling segments, a further segment reviewed by the Executive Committee is the International Supply Centre (ISC),Chain and Procurement (SC&P) segment, which manufactures products for other group companies and includes the production sites in the United Kingdom, Ireland, Italy, Guatemala and Mexico.Mexico, as well as comprises the global procurement function.
ContinuingThe group's operations also include the Corporate function.segment. Corporate revenues and costs are in respect of central costs, including finance, marketing, corporate relations, human resources and legal, as well as certain information systems, facilities and employee costs that are not allocable to the geographical segments or to the ISC. They also include rents receivable and payable in respect of properties not used by the group in the manufacture, sale or distribution of premium drinks.SC&P.
Diageo uses shared services operations to deliver transaction processing activities for markets and operational entities. These centres are located in India, Hungary, Kenya, Colombia and the Philippines and India. ThePhilippines. These captive business service centers in Budapest and Bangalorecentres also perform certain central finance activities, including elements of financial planning and reporting, treasury and treasury.HR services. The costs of shared serviceservices operations are recharged to the regions.
Financial statements (continued)
As part of the annualFor planning process a budget exchange rate is set each year equal to the prior year’s weighted average rate. This rate is used forand management reporting purposes, and, inDiageo uses budgeted exchange rates that are set at the prior year's weighted average exchange rate. In order to ensure a consistent basis on which performance is measured through the year, the prior period results are also restated to the budget rate as well.budgeted exchange rate. Segmental information for net sales and operating profit before exceptionalsexceptional items are reported on a consistent basis with our management reporting. The adjustments required to retranslate the segmental information to actual exchange rates and to reconcile it to the group’s reported results are shown in the tables below. The comparative segmental information, prior to retranslation, has not been restated at the current year��syear’s budgeted exchange rates but is presented at the budgeted rates for the respective year.
In addition, for management reporting purposes, Diageo presents separately the resultsresult of acquisitions and disposals completed in the current and prior year separately from the results of the geographical segments. The impact of acquisitions and disposals on net sales and operating profit is disclosed under the appropriate geographical segments in the following tables below at budgeted exchange rates.
Financial statements (continued)
(a) Segmental information for the consolidated income statement | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| North America | Europe | Asia
Pacific | Latin America and Caribbean | Africa | SC&P | Eliminate
inter-
segment
sales | Total
operating
segments | Corporate
and other | Total |
| £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million |
| 2023 | | | | | | | | | | |
| Sales | 7,382 | | 5,996 | | 5,403 | | 2,260 | | 2,386 | | 3,073 | | (3,073) | | 23,427 | | 88 | | 23,515 | |
| Net sales | | | | | | | | | | |
At budgeted exchange rates(1) | 6,052 | | 3,377 | | 3,084 | | 1,642 | | 1,631 | | 2,942 | | (2,876) | | 15,852 | | 87 | | 15,939 | |
| Acquisitions and disposals | 20 | | 20 | | 35 | | 3 | | 104 | | — | | — | | 182 | | — | | 182 | |
| SC&P allocation | 8 | | 38 | | 8 | | 9 | | 3 | | (66) | | — | | — | | — | | — | |
| Retranslation to actual exchange rates | 678 | | (41) | | 73 | | 145 | | (39) | | 197 | | (197) | | 816 | | 1 | | 817 | |
| Hyperinflation | — | | 175 | | — | | — | | — | | — | | — | | 175 | | — | | 175 | |
| Net sales | 6,758 | | 3,569 | | 3,200 | | 1,799 | | 1,699 | | 3,073 | | (3,073) | | 17,025 | | 88 | | 17,113 | |
| Operating profit/(loss) | | | | | | | | | | |
At budgeted exchange rates(1) | 2,337 | | 1,076 | | 886 | | 597 | | 347 | | (32) | | — | | 5,211 | | (292) | | 4,919 | |
| Acquisitions and disposals | (18) | | (13) | | 5 | | — | | 27 | | — | | — | | 1 | | (6) | | (5) | |
| SC&P allocation | 3 | | (24) | | (6) | | (3) | | (2) | | 32 | | — | | — | | — | | — | |
| Fair value remeasurements | 87 | | 25 | | — | | 1 | | — | | — | | — | | 113 | | — | | 113 | |
| | | | | | | | | | |
| Retranslation to actual exchange rates | 280 | | 18 | | 20 | | 66 | | (152) | | — | | — | | 232 | | (28) | | 204 | |
| Hyperinflation | — | | 23 | | — | | — | | — | | — | | — | | 23 | | — | | 23 | |
| Operating profit/(loss) before exceptional items | 2,689 | | 1,105 | | 905 | | 661 | | 220 | | — | | — | | 5,580 | | (326) | | 5,254 | |
| Exceptional operating items | (97) | | (8) | | (473) | | — | | (44) | | — | | — | | (622) | | — | | (622) | |
| Operating profit/(loss) | 2,592 | | 1,097 | | 432 | | 661 | | 176 | | — | | — | | 4,958 | | (326) | | 4,632 | |
| Non-operating items | | | | | | | | | | 328 | |
| Net finance charges | | | | | | | | | | (594) | |
| Share of after tax results of associates and joint ventures | | | | | | | | | | 370 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Profit before taxation | | | | | | | | | | 4,736 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | North America
£ million |
|
| Europe
and
Turkey
£ million |
|
| Africa
£ million |
|
| Latin America and Caribbean
£ million |
|
| Asia
Pacific
£ million |
|
| ISC
£ million |
|
| Eliminate
inter-
segment
sales
£ million |
|
| Total
operating
segments
£ million |
|
| Corporate
and other
£ million |
|
| Total
£ million |
|
| 2020 | | | | | | | | | | | | | | | | | | | | |
| Sales | | 5,222 |
| | 4,697 |
| | 1,911 |
| | 1,184 |
| | 4,645 |
| | 1,343 |
| | (1,343 | ) | | 17,659 |
| | 38 |
| | 17,697 |
|
| Net sales | | | | | | | | | | | | | | | | | | | | |
At budgeted exchange rates(i) | | 4,445 |
| | 2,501 |
| | 1,300 |
| | 944 |
| | 2,253 |
| | 1,439 |
| | (1,341 | ) | | 11,541 |
| | 38 |
| | 11,579 |
|
| Acquisitions and disposals | | 32 |
| | 10 |
| | 50 |
| | — |
| | 1 |
| | — |
| | — |
| | 93 |
| | — |
| | 93 |
|
| ISC allocation | | 11 |
| | 60 |
| | 4 |
| | 10 |
| | 12 |
| | (98 | ) | | — |
| | (1 | ) | | 1 |
| | — |
|
| Retranslation to actual exchange rates | | 135 |
| | (4 | ) | | (8 | ) | | (46 | ) | | 4 |
| | 2 |
| | (2 | ) | | 81 |
| | (1 | ) | | 80 |
|
| Net sales | | 4,623 |
| | 2,567 |
| | 1,346 |
| | 908 |
| | 2,270 |
| | 1,343 |
| | (1,343 | ) | | 11,714 |
| | 38 |
| | 11,752 |
|
| Operating profit/(loss) | | | | | | | | | | | | | | | | | | | | |
At budgeted exchange rates(i) | | 2,007 |
| | 730 |
| | 116 |
| | 254 |
| | 498 |
| | 45 |
| | — |
| | 3,650 |
| | (152 | ) | | 3,498 |
|
| Acquisitions and disposals | | (1 | ) | | (4 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
| ISC allocation | | 6 |
| | 26 |
| | 2 |
| | 5 |
| | 6 |
| | (45 | ) | | — |
| | — |
| | — |
| | — |
|
| Fair value remeasurement of contingent consideration | | (10 | ) | | (4 | ) | | — |
| | 7 |
| | — |
| | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) |
| Fair value remeasurement of biological assets | | — |
| | — |
| | — |
| | 9 |
| | — |
| | — |
| | — |
| | 9 |
| | — |
| | 9 |
|
| Retranslation to actual exchange rates | | 32 |
| | 9 |
| | (17 | ) | | (27 | ) | | (3 | ) | | — |
| | — |
| | (6 | ) | | 5 |
| | (1 | ) |
| Operating profit/(loss) before exceptional items | | 2,034 |
| | 757 |
| | 101 |
| | 248 |
| | 501 |
| | — |
| | — |
| | 3,641 |
| | (147 | ) | | 3,494 |
|
| Exceptional items | | 54 |
| | (62 | ) | | (145 | ) | | (6 | ) | | (1,198 | ) | | — |
| | — |
| | (1,357 | ) | | — |
| | (1,357 | ) |
| Operating profit/(loss) | | 2,088 |
| | 695 |
| | (44 | ) | | 242 |
| | (697 | ) | | — |
| | — |
| | 2,284 |
| | (147 | ) | | 2,137 |
|
| Non-operating items | | | | | | | | | | | | | | | | | | | | (23 | ) |
| Net finance charges | | | | | | | | | | | | | | | | | | | | (353 | ) |
| Share of after tax results of associates and joint ventures | | | | | | | | | | | | | | | | | | | | |
| Moët Hennessy | | | | | | | | | | | | | | | | | | | | 285 |
|
| Other | | | | | | | | | | | | | | | | | | | | (3 | ) |
| Profit before taxation | | | | | | | | | | | | | | | | | | | | 2,043 |
|
Financial statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| North America | Europe | Asia
Pacific | Latin America and Caribbean | Africa | SC&P | Eliminate
inter-
segment
sales | Total
operating
segments | Corporate
and other | Total |
| £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million |
| 2022 | | | | | | | | | | |
| Sales | 6,682 | | 5,740 | | 5,624 | | 1,945 | | 2,403 | | 2,010 | | (2,010) | | 22,394 | | 54 | | 22,448 | |
| Net sales | | | | | | | | | | |
At budgeted exchange rates(1) | 5,955 | | 3,258 | | 2,879 | | 1,486 | | 1,699 | | 2,095 | | (2,016) | | 15,356 | | 55 | | 15,411 | |
| Acquisitions and disposals | 34 | | 23 | | — | | 3 | | 15 | | — | | — | | 75 | | — | | 75 | |
| SC&P allocation | 9 | | 46 | | 9 | | 12 | | 3 | | (79) | | — | | — | | — | | — | |
| Retranslation to actual exchange rates | 97 | | (304) | | (4) | | 24 | | (35) | | (6) | | 6 | | (222) | | (1) | | (223) | |
| Hyperinflation | — | | 189 | | — | | — | | — | | — | | — | | 189 | | — | | 189 | |
| Net sales | 6,095 | | 3,212 | | 2,884 | | 1,525 | | 1,682 | | 2,010 | | (2,010) | | 15,398 | | 54 | | 15,452 | |
| Operating profit/(loss) | | | | | | | | | | |
At budgeted exchange rates(1) | 2,388 | | 1,086 | | 703 | | 528 | | 346 | | (22) | | — | | 5,029 | | (256) | | 4,773 | |
| Acquisitions and disposals | (28) | | 11 | | — | | — | | (10) | | — | | — | | (27) | | — | | (27) | |
| SC&P allocation | (1) | | (18) | | (2) | | — | | (1) | | 22 | | — | | — | | — | | — | |
| | | | | | | | | | |
| | | | | | | | | | |
| Fair value remeasurements | 32 | | 36 | | — | | (8) | | — | | — | | — | | 60 | | — | | 60 | |
| Retranslation to actual exchange rates | 63 | | (108) | | 10 | | 18 | | (20) | | — | | — | | (37) | | 18 | | (19) | |
| Hyperinflation | — | | 10 | | — | | — | | — | | — | | — | | 10 | | — | | 10 | |
| Operating profit/(loss) before exceptional items | 2,454 | | 1,017 | | 711 | | 538 | | 315 | | — | | — | | 5,035 | | (238) | | 4,797 | |
| Exceptional operating items | (1) | | (146) | | (241) | | — | | — | | — | | — | | (388) | | — | | (388) | |
| Operating profit/(loss) | 2,453 | | 871 | | 470 | | 538 | | 315 | | — | | — | | 4,647 | | (238) | | 4,409 | |
| Non-operating items | | | | | | | | | | (17) | |
| Net finance charges | | | | | | | | | | (422) | |
| Share of after tax results of associates and joint ventures | | | | | | | | | | 417 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Profit before taxation | | | | | | | | | | 4,387 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | North America
£ million |
| | Europe
and
Turkey
£ million |
| | Africa
£ million |
| | Latin America and Caribbean
£ million |
| | Asia
Pacific
£ million |
| | ISC
£ million |
| | Eliminate
inter-
segment
sales
£ million |
| | Total
operating
segments
£ million |
| | Corporate
and other
£ million |
| | Total
£ million |
|
| 2019 | | |
| | | | | | | | | | | | | | | | | |
| Sales | | 5,074 |
| | 5,132 |
| | 2,235 |
| | 1,444 |
| | 5,356 |
| | 1,739 |
| | (1,739 | ) | | 19,241 |
| | 53 |
| | 19,294 |
|
| Net sales | | | | | | | | | | | | | | | | | | | | |
At budgeted exchange rates(i) | | 4,034 |
| | 2,951 |
| | 1,529 |
| | 1,095 |
| | 2,656 |
| | 1,843 |
| | (1,738 | ) | | 12,370 |
| | 54 |
| | 12,424 |
|
| Acquisitions and disposals | | 88 |
| | 1 |
| | 1 |
| | 1 |
| | 1 |
| | — |
| | — |
| | 92 |
| | — |
| | 92 |
|
| ISC allocation | | 11 |
| | 63 |
| | 5 |
| | 15 |
| | 11 |
| | (105 | ) | | — |
| | — |
| | — |
| | — |
|
| Retranslation to actual exchange rates | | 327 |
| | (76 | ) | | 62 |
| | 19 |
| | 20 |
| | 1 |
| | (1 | ) | | 352 |
| | (1 | ) | | 351 |
|
| Net sales | | 4,460 |
| | 2,939 |
| | 1,597 |
| | 1,130 |
| | 2,688 |
| | 1,739 |
| | (1,739 | ) | | 12,814 |
| | 53 |
| | 12,867 |
|
| Operating profit/(loss) | | | | | | | | | | | | | | | | | | | | |
At budgeted exchange rates(i) | | 1,755 |
| | 972 |
| | 257 |
| | 312 |
| | 671 |
| | 139 |
| | — |
| | 4,106 |
| | (186 | ) | | 3,920 |
|
| Acquisitions and disposals | | 29 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | 28 |
| | — |
| | 28 |
|
| ISC allocation | | 13 |
| | 72 |
| | 6 |
| | 32 |
| | 16 |
| | (139 | ) | | — |
| | — |
| | — |
| | — |
|
| Retranslation to actual exchange rates | | 151 |
| | (29 | ) | | 12 |
| | 21 |
| | 16 |
| | — |
| | — |
| | 171 |
| | (3 | ) | | 168 |
|
| Operating profit/(loss) before exceptional items | | 1,948 |
| | 1,014 |
| | 275 |
| | 365 |
| | 703 |
| | — |
| | — |
| | 4,305 |
| | (189 | ) | | 4,116 |
|
| Exceptional items | | — |
| | (18 | ) | | — |
| | — |
| | (35 | ) | | — |
| | — |
| | (53 | ) | | (21 | ) | | (74 | ) |
| Operating profit/(loss) | | 1,948 |
| | 996 |
| | 275 |
| | 365 |
| | 668 |
| | — |
| | — |
| | 4,252 |
| | (210 | ) | | 4,042 |
|
| Non-operating items | | | | | | | | | | | | | | | | | | | | 144 |
| Net finance charges | | | | | | | | | | | | | | | | | | | | (263 | ) |
| Share of after tax results of associates and joint ventures | | | | | | | | | | | | | | | | | | | | |
| Moët Hennessy | | | | | | | | | | | | | | | | | | | | 310 |
|
| Other | | | | | | | | | | | | | | | | | | | | 2 |
|
| Profit before taxation | | | | | | | | | | | | | | | | | | | | 4,235 |
|
Financial statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| North America | Europe | Asia
Pacific | Latin America and Caribbean | Africa | SC&P | Eliminate
inter-
segment
sales | Total
operating
segments | Corporate
and other | Total |
| £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million |
| 2021 | | | | | | | | | | |
| Sales | 5,803 | | 4,795 | | 5,146 | | 1,369 | | 2,020 | | 1,537 | | (1,537) | | 19,133 | | 20 | | 19,153 | |
| Net sales | | | | | | | | | | |
At budgeted exchange rates(1) | 5,527 | | 2,579 | | 2,561 | | 1,176 | | 1,541 | | 1,627 | | (1,548) | | 13,463 | | 20 | | 13,483 | |
| Acquisitions and disposals | 28 | | 2 | | — | | — | | 5 | | — | | — | | 35 | | — | | 35 | |
| SC&P allocation | 9 | | 45 | | 9 | | 13 | | 3 | | (79) | | — | | — | | — | | — | |
| Retranslation to actual exchange rates | (355) | | (68) | | (82) | | (143) | | (137) | | (11) | | 11 | | (785) | | — | | (785) | |
| Net sales | 5,209 | | 2,558 | | 2,488 | | 1,046 | | 1,412 | | 1,537 | | (1,537) | | 12,713 | | 20 | | 12,733 | |
| Operating profit/(loss) | | | | | | | | | | |
At budgeted exchange rates(1) | 2,469 | | 728 | | 628 | | 422 | | 228 | | (97) | | — | | 4,378 | | (218) | | 4,160 | |
| Acquisitions and disposals | (18) | | (3) | | — | | — | | — | | — | | — | | (21) | | — | | (21) | |
| SC&P allocation | (30) | | (32) | | (5) | | (27) | | (3) | | 97 | | — | | — | | — | | — | |
| Fair value remeasurement of contingent consideration | (9) | | (27) | | — | | — | | — | | — | | — | | (36) | | — | | (36) | |
| | | | | | | | | | |
| Retranslation to actual exchange rates | (175) | | (31) | | (15) | | (92) | | (54) | | — | | — | | (367) | | 10 | | (357) | |
| Operating profit/(loss) before exceptional items | 2,237 | | 635 | | 608 | | 303 | | 171 | | — | | — | | 3,954 | | (208) | | 3,746 | |
| Exceptional operating items | — | | (15) | | — | | — | | — | | — | | — | | (15) | | — | | (15) | |
| Operating profit/(loss) | 2,237 | | 620 | | 608 | | 303 | | 171 | | — | | — | | 3,939 | | (208) | | 3,731 | |
| Non-operating items | | | | | | | | | | 14 | |
| Net finance charges | | | | | | | | | | (373) | |
| Share of after tax results of associates and joint ventures | | | | | | | | | | 334 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Profit before taxation | | | | | | | | | | 3,706 | |
(1) These items represent the IFRS 8 performance measures for the geographical and SC&P segments. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | North America
£ million |
| | Europe
and
Turkey
£ million |
| | Africa
£ million |
| | Latin America and Caribbean
£ million |
| | Asia
Pacific
£ million |
| | ISC
£ million |
| | Eliminate
inter-
segment
sales
£ million |
| | Total
operating
segments
£ million |
| | Corporate
and other
£ million |
| | Total
£ million |
|
| 2018 | | | | | | | | | | | | | | | | | | | | |
| Sales | | 4,671 |
| | 5,232 |
| | 2,083 |
| | 1,352 |
| | 5,042 |
| | 1,457 |
| | (1,457 | ) | | 18,380 |
| | 52 |
| | 18,432 |
|
| Net sales | | | | | | | | | | | | | | | | | | | | |
At budgeted exchange rates(i) | | 4,138 |
| | 2,821 |
| | 1,467 |
| | 1,064 |
| | 2,555 |
| | 1,512 |
| | (1,425 | ) | | 12,132 |
| | 48 |
| | 12,180 |
|
| Acquisitions and disposals | | 50 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 50 |
| | — |
| | 50 |
|
| ISC allocation | | 11 |
| | 53 |
| | 4 |
| | 11 |
| | 8 |
| | (87 | ) | | — |
| | — |
| | — |
| | — |
|
| Retranslation to actual exchange rates | | (83 | ) | | 58 |
| | 20 |
| | (6 | ) | | (60 | ) | | 32 |
| | (32 | ) | | (71 | ) | | 4 |
| | (67 | ) |
| Net sales | | 4,116 |
| | 2,932 |
| | 1,491 |
| | 1,069 |
| | 2,503 |
| | 1,457 |
| | (1,457 | ) | | 12,111 |
| | 52 |
| | 12,163 |
|
| Operating profit/(loss) | | | | | | | | | | | | | | | | | | | | |
At budgeted exchange rates(i) | | 1,925 |
| | 941 |
| | 180 |
| | 298 |
| | 588 |
| | 112 |
| | — |
| | 4,044 |
| | (160 | ) | | 3,884 |
|
| Acquisitions and disposals | | 4 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
| ISC allocation | | 14 |
| | 67 |
| | 5 |
| | 14 |
| | 12 |
| | (112 | ) | | — |
| | — |
| | — |
| | — |
|
| Retranslation to actual exchange rates | | (61 | ) | | 20 |
| | 6 |
| | (4 | ) | | (32 | ) | | — |
| | — |
| | (71 | ) | | 2 |
| | (69 | ) |
| Operating profit/(loss) before exceptional items | | 1,882 |
| | 1,028 |
| | 191 |
| | 308 |
| | 568 |
| | — |
| | — |
| | 3,977 |
| | (158 | ) | | 3,819 |
|
| Exceptional items | | — |
| | — |
| | (128 | ) | | — |
| | — |
| | — |
| | — |
| | (128 | ) | | — |
| | (128 | ) |
| Operating profit/(loss) | | 1,882 |
| | 1,028 |
| | 63 |
| | 308 |
| | 568 |
| | — |
| | — |
| | 3,849 |
| | (158 | ) | | 3,691 |
|
| Non-operating items | | | | | | | | | | | | | | | | | | | | — |
|
| Net finance charges | | | | | | | | | | | | | | | | | | | | (260 | ) |
| Share of after tax results of associates and joint ventures | | | | | | | | | | | | | | | | | | | | |
| Moët Hennessy | | | | | | | | | | | | | | | | | | | | 305 |
|
| Other | | | | | | | | | | | | | | | | | | | | 4 |
|
| Profit before taxation | | | | | | | | | | | | | | | | | | | | 3,740 |
|
| |
(i) | These items represent the IFRS 8 performance measures for the geographical and ISC segments.
|
(ii) The group’s net finance charges are managed centrally and are not attributable to individual operating segments.
| |
(1) | The net sales figures for ISC reported to the Executive Committee primarily comprise inter-segment sales and these are eliminated in a separate column in the above segmental analysis. Apart from sales by the ISC segment to the other operating segments, inter-segmental sales are not material.
|
| |
(2) | The group’s net finance charges are managed centrally and are not attributable to individual operating segments.
|
(3) Approximately 45%(iii) Approximately 38% of annual net sales occurred in the last four months of the calendar year 2019.2022.
(b) Other segmental information
| | | | North
America
£ million | Europe
£ million | Asia
Pacific
£ million | Latin
America
and
Caribbean
£ million | Africa
£ million | SC&P
£ million | Corporate
and other
£ million | Total
£ million |
| 2023 | | 2023 | |
| Purchase of property, plant and equipment and computer software | | Purchase of property, plant and equipment and computer software | 197 | | 209 | | 166 | | 121 | | 126 | | 356 | | 5 | | 1,180 | |
| Depreciation and intangible asset amortisation | | Depreciation and intangible asset amortisation | (95) | | (98) | | (61) | | (18) | | (80) | | (134) | | (10) | | (496) | |
| | Exceptional impairment of tangible assets | | Exceptional impairment of tangible assets | (52) | | 2 | | (22) | | — | | — | | — | | — | | (72) | |
| Exceptional impairment of intangible assets | | Exceptional impairment of intangible assets | (29) | | (25) | | (444) | | — | | — | | — | | — | | (498) | |
| 2022 | | 2022 | |
| Purchase of property, plant and equipment and computer software | | Purchase of property, plant and equipment and computer software | 230 | | 187 | | 146 | | 128 | | 139 | | 256 | | 11 | | 1,097 | |
| Depreciation and intangible asset amortisation | | Depreciation and intangible asset amortisation | (80) | | (93) | | (93) | | (16) | | (81) | | (116) | | (10) | | (489) | |
| Exceptional impairment of tangible assets | | Exceptional impairment of tangible assets | — | | (3) | | — | | — | | — | | — | | — | | (3) | |
| Exceptional impairment of intangible assets | | Exceptional impairment of intangible assets | — | | (96) | | (240) | | — | | — | | — | | — | | (336) | |
| | | | | North
America
£ million |
| | Europe and Turkey
£ million |
| | Africa
£ million |
| | Latin
America
and
Caribbean
£ million |
| | Asia
Pacific
£ million |
| | ISC
£ million |
| | Corporate
and other
£ million |
| | Total
£ million |
| |
| 2020 | | | | | | | | | | | | | | | | | |
| Capital expenditure | | 145 |
| | 24 |
| | 128 |
| | 48 |
| | 59 |
| | 191 |
| | 105 |
| | 700 |
| |
| 2021 | | 2021 | |
| Purchase of property, plant and equipment and computer software | | Purchase of property, plant and equipment and computer software | 153 | | 23 | | 56 | | 20 | | 125 | | 125 | | 124 | | 626 | |
| Depreciation and intangible asset amortisation | | (68 | ) | | (37 | ) | | (103 | ) | | (21 | ) | | (59 | ) | | (119 | ) | | (73 | ) | | (480 | ) | Depreciation and intangible asset amortisation | (76) | | (31) | | (60) | | (16) | | (79) | | (126) | | (59) | | (447) | |
| Underlying impairment | | — |
| | (7 | ) | | — |
| | (7 | ) | | — |
| | — |
| | — |
| | (14 | ) | |
| Exceptional impairment of tangible assets | | — |
| | — |
| | (139 | ) | | — |
| | (1 | ) | | — |
| | — |
| | (140 | ) | |
| Exceptional impairment of intangible assets | | — |
| | — |
| | — |
| | — |
| | (1,205 | ) | | — |
| | — |
| | (1,205 | ) | |
| 2019 | | | | | | | | | | | | | | | | | |
| Capital expenditure | | 150 |
| | 32 |
| | 160 |
| | 48 |
| | 40 |
| | 197 |
| | 44 |
| | 671 |
| |
| Depreciation and intangible asset amortisation | | (51 | ) | | (18 | ) | | (81 | ) | | (13 | ) | | (42 | ) | | (110 | ) | | (59 | ) | | (374 | ) | |
| 2018 | | | | | | | | | | | | | | | | | |
| Capital expenditure | | 132 |
| | 22 |
| | 163 |
| | 44 |
| | 44 |
| | 131 |
| | 48 |
| | 584 |
| |
| Depreciation and intangible asset amortisation | | (44 | ) | | (20 | ) | | (77 | ) | | (7 | ) | | (42 | ) | | (110 | ) | | (68 | ) | | (368 | ) | |
Exceptional impairment of tangible assets
| | — |
| | — |
| | (35 | ) | | — |
| | — |
| | — |
| | — |
| | (35 | ) | |
| Exceptional impairment of intangible assets | | — |
| | — |
| | (90 | ) | | — |
| | — |
| | — |
| | — |
| | (90 | ) | |
|
Financial statements (continued)
(c) Category and geographical analysis
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Category analysis | Geographic analysis |
| | Spirits
£ million | Beer
£ million | | | Ready to
drink
£ million | Other
£ million | Total
£ million | United
States
£ million | India
£ million | Great
Britain
£ million | | Rest of
World
£ million | Total
£ million |
| 2023 | | | | | | | | | | | | | |
Sales(1) | 19,004 | | 3,355 | | | | 899 | | 257 | | 23,515 | | 6,972 | | 2,751 | | 2,138 | | | 11,654 | | 23,515 | |
Non-current assets(2), (3) | | | | | | | | 5,816 | | 1,798 | | 2,909 | | | 11,204 | | 21,727 | |
| 2022 | | | | | | | | | | | | | |
Sales(1) | 18,164 | | 3,128 | | | | 882 | | 274 | | 22,448 | | 6,327 | | 3,219 | | 2,142 | | | 10,760 | | 22,448 | |
Non-current assets(2), (3) | | | | | | | | 5,899 | | 2,396 | | 2,413 | | | 10,861 | | 21,569 | |
| 2021 | | | | | | | | | | | | | |
Sales(1) | 15,634 | | 2,562 | | | | 741 | | 216 | | 19,153 | | 5,441 | | 3,011 | | 1,822 | | | 8,879 | | 19,153 | |
Non-current assets(2), (3) | | | | | | | | 4,320 | | 2,561 | | 2,119 | | | 10,063 | | 19,063 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Category analysis | | | Geographic analysis | |
| | Spirits
£ million |
| | Beer
£ million |
| | Ready to
drink
£ million |
| | Other
£ million |
| | Total
£ million |
| | Great
Britain
£ million |
| | United
States
£ million |
| | Nether-
lands
£ million |
| | India
£ million |
| | Rest of
World
£ million |
| | Total
£ million |
|
| 2020 | | | | | | | | | | | | | | | | | | | | | |
Sales(i) | 14,158 |
| | 2,342 |
| | 966 |
| | 231 |
| | 17,697 |
| | 1,684 |
| | 4,839 |
| | 62 |
| | 2,783 |
| | 8,329 |
| | 17,697 |
|
Non-current assets(ii), (iii) |
|
| |
|
| |
|
| |
|
| |
|
| | 1,911 |
| | 5,028 |
| | 2,661 |
| | 2,758 |
| | 7,563 |
| | 19,921 |
|
| 2019 | | | | | | | | | | | | | | | | | | | | | |
Sales(i) | 15,283 |
| | 2,758 |
| | 945 |
| | 308 |
| | 19,294 |
| | 1,706 |
| | 4,724 |
| | 70 |
| | 3,236 |
| | 9,558 |
| | 19,294 |
|
Non-current assets(ii), (iii) |
|
| |
|
| |
|
| |
|
| |
|
| | 1,637 |
| | 4,662 |
| | 2,525 |
| | 3,829 |
| | 7,668 |
| | 20,321 |
|
| 2018 | | | | | | | | | | | | | | | | | | | | | |
Sales(i) | 14,605 |
| | 2,647 |
| | 854 |
| | 326 |
| | 18,432 |
| | 1,630 |
| | 4,310 |
| | 63 |
| | 3,086 |
| | 9,343 |
| | 18,432 |
|
Non-current assets(ii), (iii) |
|
| |
|
| |
|
| |
|
| |
|
| | 1,717 |
| | 4,221 |
| | 2,367 |
| | 3,688 |
| | 7,792 |
| | 19,785 |
|
| |
(i) | The geographical analysis of sales is based on the location of third party customers.
|
| |
(ii) | The geographical analysis of non-current assets is based on the geographical location of the assets and comprises intangible assets, property, plant and equipment, biological assets, investments in associates and joint ventures, other investments and non-current other receivables.
|
(iii)(2) The geographical analysis of non-current assets is based on the geographical location of the assets and comprises intangible assets, property, plant and equipment, biological assets, investments in associates and joint ventures, other investments and non-current other receivables.
(3) The management information provided to the chief operating decision makerdecision-maker does not include an analysis of assets and liabilities by category and therefore is not disclosed.
3. Operating costs
| | | | | | | | | | | |
| 2023
£ million | 2022 £ million | 2021 £ million |
| Excise duties | 6,402 | | 6,996 | | 6,420 | |
| Cost of sales | 6,899 | | 5,973 | | 5,038 | |
| Marketing | 3,051 | | 2,721 | | 2,163 | |
| Other operating items | 2,531 | | 2,349 | | 1,801 | |
| 18,883 | | 18,039 | | 15,422 | |
| Comprising: | | | |
| Excise duties | | | |
| India | 1,625 | | 2,182 | | 2,127 | |
| Great Britain | 1,095 | | 1,172 | | 1,018 | |
| United States | 687 | | 614 | | 589 | |
| Other | 2,995 | | 3,028 | | 2,686 | |
| Increase in inventories | (513) | | (909) | | (293) | |
| Raw materials and consumables | 4,328 | | 4,017 | | 3,126 | |
| Marketing | 3,051 | | 2,721 | | 2,163 | |
| Other external charges | 2,747 | | 2,597 | | 1,978 | |
| Staff costs | 1,830 | | 1,795 | | 1,586 | |
| Depreciation, amortisation and impairment | 1,066 | | 828 | | 447 | |
| Gains on disposal of properties | (4) | | (2) | | (1) | |
| Net foreign exchange losses | 10 | | 10 | | 22 | |
| Other operating income | (34) | | (14) | | (26) | |
| 18,883 | | 18,039 | | 15,422 | |
|
| | | | | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| Excise duties | | 5,945 |
| | 6,427 |
| | 6,269 |
|
| Cost of sales | | 4,654 |
| | 4,866 |
| | 4,634 |
|
| Marketing | | 1,841 |
| | 2,042 |
| | 1,882 |
|
| Other operating items | | 3,120 |
| | 1,917 |
| | 1,956 |
|
| | 15,560 |
| | 15,252 |
| | 14,741 |
|
| Comprising: | |
| |
| |
|
| Excise duties | | | | | | |
| Great Britain | | 930 |
|
| 898 |
|
| 853 |
|
| United States | | 585 |
|
| 587 |
|
| 548 |
|
| India | | 1,927 |
|
| 2,202 |
| | 2,094 |
|
| Other | | 2,503 |
| | 2,740 |
| | 2,774 |
|
| Increase in inventories | | (275 | ) | | (446 | ) | | (296 | ) |
| Raw materials and consumables | | 2,842 |
| | 3,007 |
| | 3,052 |
|
| Marketing | | 1,841 |
| | 2,042 |
| | 1,882 |
|
| Other external charges | | 2,044 |
| | 2,285 |
| | 1,849 |
|
| Staff costs | | 1,404 |
| | 1,580 |
| | 1,509 |
|
| Depreciation, amortisation and impairment | | 1,839 |
| | 374 |
| | 493 |
|
| Gains on disposal of properties | | (2 | ) | | (5 | ) | | (9 | ) |
| Net foreign exchange losses/(gains) | | 15 |
| | (7 | ) | | 6 |
|
| Other operating income | | (93 | ) | | (5 | ) | | (14 | ) |
| | | 15,560 |
| | 15,252 |
| | 14,741 |
|
(a) Other external charges
Other external charges include research and development expenditure in respect of new drinks products and package design of £34£53 million (2019(2022 – £35£43 million; 20182021 – £36£40 million) and maintenance and repairs of £105£143 million (2019(2022 – £103£136 million; 20182021 – £117£107 million).
Financial statements (continued)
(b) AuditorAuditors fees
Other external charges include the fees of the principal auditorauditors of the group, PricewaterhouseCoopers LLP and its affiliates (PwC) and are analysed below.
| | | | | | | | | | | |
| | 2023
£ million | 2022
£ million | 2021
£ million |
| Audit of these financial statements | 5.2 | | 4.2 | | 3.8 | |
| Audit of financial statements of subsidiaries | 5.7 | | 6.1 | | 4.4 | |
Audit related assurance services(1) | 2.7 | | 2.5 | | 2.6 | |
| Total audit fees (Audit fees) | 13.6 | | 12.8 | | 10.8 | |
| | | |
Other assurance services (Audit related fees)(2) | 1.2 | | 0.7 | | 0.8 | |
| | | |
| 14.8 | | 13.5 | | 11.6 | |
|
| | | | | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| Audit of these financial statements | | 5.3 |
| | 3.8 |
| | 3.3 |
|
| Audit of financial statements of subsidiaries | | 3.6 |
| | 3.4 |
| | 3.3 |
|
Audit related assurance services(i) | | 2.4 |
| | 1.6 |
| | 1.6 |
|
| Total audit fees (Audit fees) | | 11.3 |
| | 8.8 |
| | 8.2 |
|
| Other services relevant to taxation (Tax fees) | | — |
| | — |
| | 0.1 |
|
Other assurance services (Audit related fees)(ii) | | 0.8 |
| | 0.7 |
| | 0.6 |
|
| All other non-audit fees (All other fees) | | — |
| | 0.2 |
| | 1.0 |
|
| | | 12.1 |
| | 9.7 |
| | 9.9 |
|
| |
(i) | (1) Audit related assurance services are in respect of reporting under section 404 of the US Sarbanes-Oxley Act and the review of the interim financial information. |
| |
(ii) | Other assurance services comprise the aggregate fees for assurance and related services that are in respect of the performance of the audit or review of the financial statements and are not reported under ‘total audit fees’.
|
| |
(1) | Disclosure requirements for auditor fees in the United States are different from those required in the United Kingdom. The terminology by category required in the United States is disclosed in brackets in the above table. All figures are the same for the disclosures in the United Kingdom and the United States apart from £0.4 million (2019 – £0.4 million; 2018 – £0.4 million) of the cost in respect of the review of the interim financial information which would be included in audit related fees in the United States rather than audit fees. |
(2) Other assurance services comprise the aggregate fees for assurance and related services that are not reported under ‘total audit fees’.
(i) Disclosure requirements for auditors fees in the United States are different from those required in the United Kingdom. The terminology by category required in the United States is disclosed in brackets in the above table.
Audit services provided by firms other than PwC for the year ended 30 June 20202023 were £0.1 million (2019(2022 – £0.1 million; 20182021 – £0.1 million). Further PwC fees for audit services in respect of employee pensionpost employment plans were £0.3£0.3 million for the year ended 30 June 2020 (20192023 (2022 – £0.3£0.2 million; 20182021 – £0.3£0.2 million).
(c) Staff costs and average number of employees
| | | | | | | | | | | |
| | 2023
£ million | 2022
£ million | 2021
£ million |
| Aggregate remuneration | | | |
| Wages and salaries | 1,548 | | 1,557 | | 1,336 | |
| Share-based incentive plans | 48 | | 59 | | 50 | |
| Employer’s social security | 115 | | 107 | | 83 | |
| Employer’s pension | | | |
| Defined benefit plans | 67 | | 36 | | 82 | |
| Defined contribution plans | 44 | | 33 | | 25 | |
| Other post employment plans | 8 | | 3 | | 10 | |
| 1,830 | | 1,795 | | 1,586 | |
|
| | | | | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| Aggregate remuneration | | | | | | |
| Wages and salaries | | 1,251 |
| | 1,344 |
| | 1,272 |
|
| Share-based incentive plans | | 3 |
| | 50 |
| | 40 |
|
| Employer’s social security | | 79 |
| | 96 |
| | 95 |
|
| Employer’s pension | | | | | | |
| Defined benefit plans | | 37 |
| | 61 |
| | 73 |
|
| Defined contribution plans | | 24 |
| | 19 |
| | 18 |
|
| Other post employment plans | | 10 |
| | 10 |
| | 11 |
|
| | | 1,404 |
| | 1,580 |
| | 1,509 |
|
Financial statements (continued)
The average number of employees on a full timefull-time equivalent basis (excluding employees of associates and joint ventures) was as follows:
| | | | | | | | | | | |
| | 2023 | 2022 | 2021 |
| North America | 2,884 | | 2,811 | | 2,562 | |
| Europe | 2,789 | | 3,014 | | 3,237 | |
| Asia Pacific | 6,856 | | 6,500 | | 6,474 | |
| Latin America and Caribbean | 1,495 | | 1,500 | | 1,505 | |
| Africa | 3,526 | | 4,061 | | 4,016 | |
| SC&P | 6,934 | | 5,025 | | 5,085 | |
| Corporate and other | 5,753 | | 5,076 | | 4,687 | |
| 30,237 | | 27,987 | | 27,566 | |
|
| | | | | | | | | |
| | | 2020 |
| | 2019 |
| | 2018 |
|
| North America | | 2,466 |
| | 2,410 |
| | 2,406 |
|
| Europe and Turkey | | 3,350 |
| | 3,609 |
| | 3,747 |
|
| Africa | | 4,003 |
| | 4,338 |
| | 4,625 |
|
| Latin America and Caribbean | | 1,549 |
| | 1,610 |
| | 2,536 |
|
| Asia Pacific | | 6,559 |
| | 7,038 |
| | 8,008 |
|
| ISC | | 4,908 |
| | 4,919 |
| | 4,227 |
|
| Corporate and other | | 4,940 |
| | 4,496 |
| | 4,368 |
|
| | | 27,775 |
| | 28,420 |
| | 29,917 |
|
At 30 June 20202023 on a full-time equivalent basis, the group had on a full time equivalent basis, 27,788 (201930,269(2022 – 28,150; 201828,558; 2021 – 29,362)27,783) employees. The average number of employees of the group, including part timepart-time employees, for the year was 28,490 (201930,419 (2022 – 29,402; 201828,137; 2021 – 30,761)28,025).
Financial statements (continued)
(d) Exceptional operating items
Included in otherthe table above are exceptional operating items are the following: as follows:
| | | | | | | | | | | |
| | 2023 £ million | 2022 £ million | 2021 £ million |
| Depreciation, amortisation and impairment | | | |
| Brand and goodwill impairment | 498 | | 336 | | — | |
| Tangible asset impairment and accelerated depreciation | 72 | | — | | — | |
| Staff costs | 10 | | — | | 5 | |
| Other external charges | 60 | | 52 | | 13 | |
| Other operating income | (18) | | — | | (3) | |
| Total exceptional operating items (note 4) | 622 | | 388 | | 15 | |
| Cost of sales | 67 | | — | | — | |
| Other operating expenses | 555 | | 388 | | 15 | |
|
| | | | | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| Staff costs | |
|
| |
|
| |
|
|
| Guaranteed minimum pension equalisation charge | | — |
| | 21 |
| | — |
|
| Other external charges | | 95 |
| | 53 |
| | — |
|
| Other operating income | | (83 | ) | | — |
| | — |
|
| Increase in inventories | | — |
| | — |
| | 3 |
|
| Depreciation, amortisation and impairment | | | | | | |
| Brand, goodwill, tangible and other assets impairment | | 1,345 |
| | — |
| | 125 |
|
| Total exceptional operating items (note 4) | | 1,357 |
| | 74 |
| | 128 |
|
4. Exceptional items
Accounting policies
Critical accounting judgements Exceptional items are those that in management’s judgement need to be disclosed separately. Such items are included within the income statement caption to which they relate. It is believedManagement believes that separate disclosure of exceptional items and the classification between operating and non-operating further helps investors to understand the performance of the group.
Changes in estimates and reversals in relation to items previously recognised as exceptional are presented consistently as exceptional in the current year.
Operating items Exceptional operating items are those that are considered to be material and unusual or non-recurring in nature and are part of the operating activities of the group, such as one-off global restructuring programmes which can be multi-year, impairment of intangible assets and fixed assets, indirect tax settlements, property disposals and changes in post employment plans.
Non-operating items Gains and losses on the sale or directly attributable to a prospective sale of businesses, brands or distribution rights, step up gains and losses that arise when an investment becomes an associate or an associate becomes a subsidiary and other material, unusual non-recurring items, that are not in respect of the production, marketing and distribution of premium drinks, are disclosed as exceptional non-operating exceptional items below operating profit in the consolidated income statement.
Taxation items Exceptional current and deferred tax items comprisingcomprise material and unusual or non-recurring items that impact taxation. Examples include direct tax provisions and settlements in respect of prior years and the remeasurement of deferred tax assets and liabilities following tax rate changes.
Financial statements (continued)
| | | | | | | | | | | |
| | 2023
£ million | 2022
£ million | 2021
£ million |
| Exceptional operating items | | | |
| Brand and goodwill impairment (1) | (498) | | (336) | | — | |
| Supply chain agility programme (2) | (100) | | — | | — | |
| Distribution termination fee (3) | (44) | | — | | — | |
| Winding down Russian operations (4) | 20 | | (50) | | — | |
| | | |
| Other exceptional operating items (5) | — | | (2) | | (15) | |
| (622) | | (388) | | (15) | |
| Non-operating items | | | |
| Sale of businesses and brands | | | |
| Guinness Cameroun S.A. (6) | 310 | | — | | — | |
| Archers brand (7) | 20 | | — | | — | |
| USL Popular brands (8) | 4 | | — | | — | |
| USL businesses (9) | 1 | | — | | 3 | |
| Tyku brand (10) | (3) | | — | | — | |
| Picon brand (11) | — | | 91 | | — | |
| Meta Abo Brewery (12) | — | | (95) | | — | |
| Windsor business (13) | — | | (19) | | — | |
| Step acquisition - Mr Black (14) | (8) | | — | | — | |
| Other non-operating exceptional items (15) | 4 | | 6 | | 11 | |
| 328 | | (17) | | 14 | |
| | | |
| Exceptional items before taxation | (294) | | (405) | | (1) | |
| Tax on exceptional items (note 7 (b)) | 186 | | 31 | | (84) | |
| | | |
| Total exceptional items | (108) | | (374) | | (85) | |
| Attributable to: | | | |
| Equity shareholders of the parent company | 33 | | (271) | | (86) | |
| Non-controlling interests | (141) | | (103) | | 1 | |
| Total exceptional items | (108) | | (374) | | (85) | |
|
| | | | | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| Exceptional operating items | | | | | | |
| Brand, goodwill, tangible and other assets impairment (a) | | (1,345 | ) | | — |
| | (128 | ) |
| Donations (b (i)) | | (89 | ) | | — |
| | — |
|
| Obsolete inventories (b (ii)) | | (30 | ) | | — |
| | — |
|
| Substitution drawback (b (iii)) | | 83 |
| | — |
| | — |
|
| Indirect tax in Korea (c) | | 24 |
| | (35 | ) | | — |
|
| Guaranteed minimum pension equalisation (d) | | — |
| | (21 | ) | | — |
|
| French tax audit penalty (note 7 (b) (ii)) | | — |
| | (18 | ) | | — |
|
| | | (1,357 | ) | | (74 | ) | | (128 | ) |
| Non-operating items | | | | | | |
| Step acquisitions (e) | | 8 |
| | — |
| | — |
|
| Sale of businesses and brands | | | | | | |
| United National Breweries (f) | | (32 | ) | | (9 | ) | | — |
|
| Loss on disposal of associate (g) | | (1 | ) | | — |
| | — |
|
| Portfolio of 19 brands (h) | | 2 |
| | 155 |
| | — |
|
| USL wine business (i) | | — |
| | (2 | ) | | — |
|
| | | (23 | ) | | 144 |
| | — |
|
| French tax audit interest (note 7 (b) (ii)) | | — |
| | (9 | ) | | — |
|
| | | | | | | |
| Exceptional items before taxation | | (1,380 | ) | | 61 |
| | (128 | ) |
| Items included in taxation (note 7 (b)) | | 154 |
| | (39 | ) | | 203 |
|
| Total exceptional items | | (1,226 | ) | | 22 |
| | 75 |
|
| Attributable to: | | | | | | |
| Equity shareholders of the parent company | | (1,157 | ) | | (4 | ) | | 75 |
|
| Non-controlling interests | | (69 | ) | | 26 |
| | — |
|
| Total exceptional items | | (1,226 | ) | | 22 |
| | 75 |
|
(a) 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(1) In the year ended 30 June 2020,2023, an impairment charge of £655£498 million was recognised in exceptional operating items mainly driven by the McDowell's brand in India.
In the year ended 30 June 2022, an impairment charge of £336 million was recognised in exceptional operating items in respect of the India cash-generating unit containingMcDowell's brand (£240 million), the IndiaBell's brand (£77 million) and goodwill was recognised in other 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 other operating items. Forecast cash flow assumptions were reduced principally duerelated 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 other 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.
Smirnov (£19 million).
For further information, see note 9 (d).
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 other 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.
Financial statements (continued)
An impairment of £55 million in respect of the group's Ethiopian tangible fixed assets was recognised in other 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.
For further information see note 10.
(2) In the year ended 30 June 2018,2023, an impairmentexceptional charge of £128£100 million was accounted for in respect of the Meta brand, Ethiopian tangible fixed assets, associated spare parts reportedsupply chain agility programme announced in inventoryJuly 2022. With this five-year spanning programme, Diageo expects to strengthen its supply chain, improve its resilience and goodwill allocated to the Africa Regional Markets cash-generating unit has been recognised in other operating items.
(b) In line with the group’s accounting policy, given the unusual natureagility, drive efficiencies, deliver additional productivity savings and magnitudemake its supply operations more sustainable. Total implementation cost of the belowprogramme is expected to be up to £500 million over the five-year period, which will comprise non-cash items theseand one-off expenses, the majority of which are reportedexpected to be recognised as exceptional operating items:
(i) Diageo has launcheditems. The exceptional charge for the “Raisingyear ended 30 June 2023 was primarily in respect of accelerated depreciation, being additional depreciation of assets in the Bar”period directly attributable to the programme, to support pubs and bars to welcome customers backimpairment of property, plant and recover following the Covid-19 pandemic. The programme includes a commitmentequipment in respect 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 citiesNorth America 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 £8India. Restructuring cash expenditure was £12 million in the year ended 30 June 2020.2023.
(ii)(3) In the year ended 30 June 2020, an exceptional charge2023, Diageo agreed with one of £30 million was recognisedits distributors in Africa to terminate the distribution license of one of its spirits brands, in respect of obsolete inventories that have been or will be destroyedwhich a provision of £44 million was provided for and was recognised as a direct consequence ofan operating exceptional charge. No payment was made in the Covid-19 pandemic. The amount comprises of a £23 million inventory provision and £7 million directly attributable to handling and destruction costs.period.
(iii)(4) In the year ended 30 June 2020, an estimated benefit2023, Diageo released unutilised provisions of $105£20 million (£83 million) for substitution drawback claims (netfrom the £50 million exceptional charge taken in the year ended 30 June 2022, in respect of legalwinding down its operations in Russia.
Financial statements (continued)
(5) Other exceptional operating items include subsequent gains and broker feescharges of $2 million (£2 million)) previously filed and to be filed with the US Government in relation to prior years wasitems that were originally recognised in other operating items. Following a recent court decision and a related legal assessment, the collection of the excise duty benefit has become virtually certain.
(c) as exceptional at inception. In the year ended 30 June 2019, the group has recognised2022, other exceptional operating items resulted in a provisionloss of £35£2 million for indirect tax in respect of certain channel accounts and regulatory change in Korea in respect of prior years.
An assessment was issueddriven by the Korea Tax Authorityreinvestment of 'Raising the Bar' corporate tax benefits. In the year ended 30 June 2021, other exceptional operating items were a loss of £15 million mainly driven by the charge of the ongoing litigation in Turkey.
(6) On 26 May 2023, Diageo announced the completion of the sale of its wholly owned subsidiary in Cameroon, Guinness Cameroun S.A., to the Castel Group for an aggregate consideration of £384 million resulting in an exceptional gain of £310 million, including cumulative translation gain in the amount of £17 million recycled to the income statement.
(7) On 26 October 2022, Diageo completed the sale of its Archers brand. The transaction resulted in an exceptional gain of £20 million.
(8) On 30 September 2022, Diageo announced the completion of the sale of the Popular brands of its United Spirits Limited (USL) business. The transaction resulted in an exceptional gain of £4 million.
(9) Certain subsidiaries of USL were sold in the year ended 30 June 2020 that has2023. The sale of these subsidiaries resulted in the reversalan exceptional gain of the prior year's provision in the amount of £24£1 million (2022 – nil; 2021 – £3 million).
(d) 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.
(e)(10) In the year ended 30 June 2020,2023, Diageo completedsold its Tyku brand. The transaction resulted in an exceptional loss of £3 million.
(11) In May 2022, Diageo sold its Picon brand. The sale resulted in an exceptional non-operating gain of £91 million, net of disposal costs.
(12) In the acquisitionyear ended 30 June 2022, a loss of Seedlip£95 million was recognised as a non-operating item attributable to the sale of Meta Abo Brewery Share Company in Ethiopia.
(13) On 25 March 2022, Diageo agreed to the sale of its Windsor business in Korea. At 30 June 2022, assets and Anna Seed 83liabilities attributable to Windsor business were classified as held for sale and were measured at the lower of their cost and fair value less cost of disposal. In the year ended 30 June 2022, a loss of £19 million was recognised as a non-operating item, mainly in relation to transaction and other costs directly attributable to the prospective sale of the business. The conditional agreement was terminated in the year ended 30 June 2023 as the buyer was unable to meet certain conditions to completion.
(14) On 29 September 2022, the group acquired controlling interests in certain Distill Ventures entities.the part of the entire issued share capital of Mr Black Spirits Pty Ltd, owner of Mr Black, the Australian premium cold brew coffee liqueur, that it did not already own. As a result of these entitiesMr Black becoming subsidiariesa subsidiary of the group in the year ended 30 June 2023, a gainloss of £8 million arose, being the difference between the book value of the associatesassociate prior to the transaction and theirits fair value. For further information see note 8 (a).value plus transaction costs.
(f) The disposal(15) Other exceptional non-operating items include subsequent gains and charges of United National Breweries was completed in the year ended 30 June 2020, which has resulted in an aggregateitems that were originally recognised as 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. at inception. In the year ended 30 June 2019 the group recognised an2023, other exceptional lossnon-operating items resulted in a net gain of £9£4 million (2022 – £6 million; 2021 – £11 million), mainly driven by the deferred consideration received in respect of the disposalsale of United National Breweries.
For further information on acquisition and sale of businesses and brands, see notes 8 (a) and 8 (b).
(g) In the year ended 30 June 2020, the disposal of an associate, Equal Parts, LLC resulted in an exceptional loss of £1 million.
Financial statements (continued)
(h) 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. The aggregate consideration for the disposal was $550 million (£435 million) resulting in a profit before taxation of $198 million (£155 million) in the year ended 30 June 2019.
See note 8 (b) for further information.
(i) In the year ended 30 June 2019, the disposal of the Indian wine business has resulted in an exceptional loss of £2 million.
Cash payments and receipts included in net cash inflow from operating activities in respect of exceptional items were as follows:
| | | | | | | | | | | |
| 2023 £ million | 2022 £ million | 2021 £ million |
| Thalidomide (note 15 (d) (i)) | (14) | | (16) | | (15) | |
| Winding down Russian operations | (13) | | (13) | | — | |
| Supply chain agility programme | (12) | | — | | — | |
| Donations | — | | (37) | | (50) | |
| Indirect tax in Korea | — | | — | | (10) | |
| Ongoing litigation in Turkey | — | | — | | (1) | |
| Substitution drawback | — | | — | | 60 | |
| Total cash payments | (39) | | (66) | | (16) | |
|
| | | | | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| French tax audit | | (88 | ) | | — |
| | — |
|
| Thalidomide | | (17 | ) | | (15 | ) | | (13 | ) |
| Donation | | (7 | ) | | — |
| | — |
|
| Substitution drawback | | 26 |
| | — |
| | — |
|
| UK transfer pricing settlement | | — |
| | — |
| | (143 | ) |
| Competition authority investigation in Turkey | | — |
| | — |
| | (4 | ) |
| Total cash payments | | (86 | ) | | (15 | ) | | (160 | ) |
5. Finance income and charges
Accounting policies
Net interest includes interest income and charges in respect of financial instruments and the results of hedging transactions used to manage interest rate risk.
Finance chargesdirectly attributable to the acquisition, construction or production of a qualifying asset, being an asset that necessarily takes a substantial period of time to get ready for its intended use or sale, are added to the cost of that asset. Borrowing costs which are not capitalised are recognised in the income statement based onusing the effective interest method. All other finance charges are recognised primarily in the income statement in the year in which they are incurred.
Net other finance chargesinclude items in respect of post employment plans, the discount unwind of long-term obligations and hyperinflation charges. The results of operations in hyperinflationary economies are adjusted to reflect the changes in the purchasing power of the local currency of the entity before being translated to sterling.
Financial statements (continued)
The impact of derivatives, excluding cash flow hedges that are in respect of commodity price risk management or those that are used to hedge the currency risk of highly probable future currency cash flows, is included in interest income or interest charge.
|
| | | | | | | | | |
| | | 2020 |
| | 2019 |
| | 2018 |
|
| | | £ million |
| | £ million |
| | £ million |
|
| Interest income | | 192 |
| | 232 |
| | 155 |
|
| Fair value gain on financial instruments | | 123 |
| | 155 |
| | 61 |
|
Total interest income(i) | | 315 |
| | 387 |
| | 216 |
|
Interest charge on bank loans, bonds and overdrafts(ii) | | (390 | ) | | (349 | ) | | (322 | ) |
Interest charge on leases classified as finance leases under the previous standard
| | (6 | ) | | (7 | ) | | (9 | ) |
Interest charge on leases (IFRS 16 adoption impact)(iii) | | (9 | ) | | — |
| | — |
|
Interest charge on all other borrowings(ii) | | (120 | ) | | (122 | ) | | (64 | ) |
| Fair value loss on financial instruments | | (123 | ) | | (157 | ) | | (62 | ) |
Total interest charges(i) | | (648 | ) | | (635 | ) | | (457 | ) |
| Net interest charges | | (333 | ) | | (248 | ) | | (241 | ) |
| Net finance income in respect of post employment plans in surplus (note 13) | | 26 |
| | 29 |
| | 9 |
|
| Hyperinflation adjustment in respect of Venezuela (note 1) | | 6 |
| | 10 |
| | 18 |
|
| Interest income in respect of direct and indirect tax | | 16 |
| | 16 |
| | — |
|
| Other finance income | | 3 |
| | — |
| | — |
|
| Total other finance income | | 51 |
| | 55 |
| | 27 |
|
| Net finance charge in respect of post employment plans in deficit (note 13) | | (17 | ) | | (22 | ) | | (20 | ) |
| Unwinding of discounts | | (24 | ) | | (17 | ) | | (14 | ) |
| Interest charge in respect of direct and indirect tax | | (22 | ) | | (11 | ) | | (10 | ) |
| Change in financial liability (Level 3) | | (6 | ) | | (8 | ) | | — |
|
Other finance charges (exceptional)(iv) | | — |
| | (9 | ) | | — |
|
| Guarantee fees | | (1 | ) | | — |
| | — |
|
| Other finance charges | | (1 | ) | | (3 | ) | | (2 | ) |
| Total other finance charges | | (71 | ) | | (70 | ) | | (46 | ) |
| Net other finance charges | | (20 | ) | | (15 | ) | | (19 | ) |
| |
(i) | Includes £46 million interest income and £(471) million interest charge in respect of financial assets and liabilities that are not measured at fair value through the income statement (2019 - £86 million income and £(439) million charge; 2018 - £73 million income and £(394) million charge). |
| |
(ii) | The presentation of the years ended 30 June 2019 and 30 June 2018 have been changed due to a reclassification to include £302 million (2018 - £269 million) of interest in respect of bonds formerly included previously in ‘interest charge on all other borrowings’.
|
| |
(iii) | Interest expense of £9 million for the year ended 30 June 2020 in respect of leases that in prior years were classified as operating leases under the previous accounting standard (and were charged to other external charges) and following the adoption of IFRS 16 have now been capitalised. |
| |
(iv) | In respect of the French tax audit settlement (see note 7(b)(ii)). |
Financial statements (continued)
| | | | | | | | | | | |
| 2023 £ million | 2022 £ million | 2021 £ million |
| Interest income | 160 | | 127 | | 119 | |
| Fair value gain on financial instruments | 103 | | 341 | | 124 | |
Total interest income(1) | 263 | | 468 | | 243 | |
| Interest charge on bank loans, bonds and overdrafts | (470) | | (371) | | (365) | |
| Interest charge on leases | (15) | | (12) | | (16) | |
| | | |
| Interest charge on other borrowings | (271) | | (92) | | (84) | |
| Fair value loss on financial instruments | (102) | | (346) | | (126) | |
Total interest charges(1) | (858) | | (821) | | (591) | |
| Net interest charges | (595) | | (353) | | (348) | |
| Net finance income in respect of post employment plans in surplus (note 14) | 59 | | 22 | | 18 | |
| Hyperinflation adjustment in respect of Turkey (note 1 (f)) | 10 | | — | | — | |
| Hyperinflation adjustment in respect of Venezuela (note 1 (f)) | — | | 1 | | 2 | |
| Interest income in respect of direct and indirect tax | 8 | | 2 | | 15 | |
| Unwinding of discounts | — | | 4 | | — | |
| | | |
| Total other finance income | 77 | | 29 | | 35 | |
| Net finance charge in respect of post employment plans in deficit (note 14) | (15) | | (12) | | (13) | |
| Hyperinflation adjustment in respect of Turkey (note 1 (f)) | — | | (34) | | — | |
| Hyperinflation adjustment in respect of Venezuela (note 1 (f)) | (2) | | — | | — | |
| Hyperinflation adjustment and foreign exchange revaluation of monetary items in respect of Lebanon (note 1 (f)) | — | | (3) | | (8) | |
| Unwinding of discounts | (13) | | (11) | | (20) | |
| Interest charge in respect of direct and indirect tax | (25) | | (16) | | (11) | |
| Change in financial liability (Level 3) | (8) | | (20) | | (7) | |
| | | |
| Guarantee fees | (1) | | (1) | | (1) | |
| Other finance charges | (12) | | (1) | | — | |
| Total other finance charges | (76) | | (98) | | (60) | |
| Net other finance income/(charges) | 1 | | (69) | | (25) | |
(1) Includes £81 million interest income and £(522) million interest charge in respect of financial assets and liabilities that are not measured at fair value through income statement (2022 – £27 million income and £(417) million charge; 2021 – £28 million income and £(429) million charge).
Financial statements (continued)
6. Investments in associates and joint ventures
Accounting policies
An associate is an undertaking in which the group has a long-term equity interest and over which it has the power to exercise significant influence. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. The group’s interest in the net assets of associates and joint ventures is reported in investments in the consolidated balance sheet and its interest in their results (net of tax) is included in the consolidated income statement below the group’s operating profit. Associates and joint ventures are initially recorded at cost including transaction costs. Investments in associates and joint ventures are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. The impairment review compares the net carrying value with the recoverable amount, where the recoverable amount is the higher of the value in use calculated as the present value of the group’s share of the associate’s future cash flows and its fair value less costs to sell.of disposal.
Diageo’s principal associate is Moët Hennessy of which Diageo owns 34%. Moët Hennessy is the wines and spirits and wine subsidiarydivision of LVMH Moët Hennessy – Louis Vuitton SA (LVMH). LVMH is based in France and is listed on the Paris Stock Exchange. Moët Hennessy is also based in France and is a producer and exporter of champagne and cognac brands.
A number of joint distribution arrangements have been established with LVMH in Asia Pacific and France, principally covering distribution of Diageo’s Scotch whisky and gin premium brands and Moët Hennessy’s champagne and cognac premium brands. Diageo and LVMH have each undertaken not to engage in any champagne or cognac activities competing with those of Moët Hennessy. The arrangements also contain certain provisions for the protection of Diageo as a non-controlling shareholder in Moët Hennessy.
(a) An analysis of the movement in the group’s investments in associates and joint ventures is as follows:
| | | | | | | | | | | |
| | Moët
Hennessy
£ million | Others
£ million | Total
£ million |
| Cost less provisions | | | |
| At 30 June 2021 | 3,128 | | 180 | | 3,308 | |
| Exchange differences | 48 | | 12 | | 60 | |
| Additions | — | | 65 | | 65 | |
| Share of profit/(loss) after tax | 425 | | (8) | | 417 | |
| | | |
| Dividends | (186) | | (4) | | (190) | |
| Share of movements in other comprehensive income and equity | (6) | | — | | (6) | |
| | | |
| | | |
| Impairment charged during the year | — | | (2) | | (2) | |
| | | |
| At 30 June 2022 | 3,409 | | 243 | | 3,652 | |
| Exchange differences | (51) | | (8) | | (59) | |
| Additions | — | | 93 | | 93 | |
| Share of profit/(loss) after tax | 379 | | (9) | | 370 | |
| Step acquisition | — | | (17) | | (17) | |
| Dividends | (214) | | (5) | | (219) | |
| Share of movements in other comprehensive income and equity | 36 | | — | | 36 | |
| | | |
| Transfer | — | | 1 | | 1 | |
| Impairment charged during the year | — | | (28) | | (28) | |
| At 30 June 2023 | 3,559 | | 270 | | 3,829 | |
(i) Investment in associates includes loans given to and preference shares invested in associates of £168 million (2022 – £163 million).
(ii) If certain performance targets are met by associates in the Distill Ventures programme, an additional £27 million (2022 – £22 million) will be invested in those associates.
|
| | | | | | | | | |
| | | Moët
Hennessy
£ million |
| | Others
£ million |
| | Total
£ million |
|
| Cost less provisions | | | | | | |
| At 30 June 2018 | | 2,875 |
| | 134 |
| | 3,009 |
|
| Exchange differences | | 16 |
| | 3 |
| | 19 |
|
| Additions | | — |
| | 32 |
| | 32 |
|
| Share of profit after tax | | 310 |
| | 2 |
| | 312 |
|
| Disposals | | — |
| | (3 | ) | | (3 | ) |
| Dividends | | (160 | ) | | (8 | ) | | (168 | ) |
| Share of movements in other comprehensive income and equity | | (1 | ) | | — |
| | (1 | ) |
| Step acquisitions | | — |
| | (7 | ) | | (7 | ) |
Other(i) | | — |
| | (20 | ) | | (20 | ) |
| At 30 June 2019 | | 3,040 |
| | 133 |
| | 3,173 |
|
| Exchange differences | | 78 |
| | 4 |
| | 82 |
|
| Additions | | — |
| | 47 |
| | 47 |
|
| Share of profit after tax | | 285 |
| | (3 | ) | | 282 |
|
| Disposals | | — |
| | (1 | ) | | (1 | ) |
| Dividends | | — |
| | (4 | ) | | (4 | ) |
| Share of movements in other comprehensive income and equity | | (8 | ) | | — |
| | (8 | ) |
| Step acquisitions | | — |
| | (11 | ) | | (11 | ) |
| Transfer | | — |
| | (2 | ) | | (2 | ) |
| Other | | — |
| | (1 | ) | | (1 | ) |
| At 30 June 2020 | | 3,395 |
| | 162 |
| | 3,557 |
|
| |
(i) | Other movements in the year ended 30 June 2019 comprise £20 million of advances promised to associates at 30 June 2019, on achieving certain performance targets which are now only recognised when those targets are achieved. There was a corresponding decrease of £20 million in other payables. |
| |
(1) | Investment in associates balance includes loans given to and preference shares invested in associates of £82 million (2019 – £55 million).
|
| |
(2) | If certain performance targets are met by associates in the Distill Ventures programmes, an additional £22 million (2019- £31 million) will be invested in those associates. |
Financial statements (continued)
(b) Income statement information for the three years ended 30 June 2020 and balance sheet information as at 30 June 2020 and 30 June 2019 of Moët Hennessy is as follows:
|
| | | | | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| Sales | | 4,425 |
| | 4,713 |
| | 4,445 |
|
| Profit for the year | | 838 |
| | 911 |
| | 897 |
|
| Total comprehensive income | | 765 |
| | 865 |
| | 799 |
|
Moët Hennessy prepares its financial statements under IFRS as endorsed by the EU in euros to 31 December each year. The results arewere adjusted for alignment towith Diageo accounting policies and are a major part of the Wines & Spirits division of LVMH. The results arewere translated at £1 = €1.14 (2019€1.15 (2022 – £1 = €1.13; 2018€1.18; 2021 – £1 = €1.13).
|
| | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
|
| Non-current assets | | 5,310 |
| | 4,413 |
|
| Current assets | | 8,352 |
| | 7,564 |
|
| Total assets | | 13,662 |
| | 11,977 |
|
| Non-current liabilities | | (1,480 | ) | | (1,008 | ) |
| Current liabilities | | (2,197 | ) | | (2,029 | ) |
| Total liabilities | | (3,677 | ) | | (3,037 | ) |
| Net assets | | 9,985 |
| | 8,940 |
|
| |
(1) | Including acquisition fair value adjustments principally in respect of Moët Hennessy’s brands and translated at £1 = €1.09 (2019 – £1 = €1.12).
|
Income statement information for the three years ended 30 June 2023 and balance sheet information as at 30 June 2023 and 30 June 2022 of Moët Hennessy are as follows:
| | | | | | | | | | | |
| | 2023
£ million | 2022
£ million | 2021
£ million |
| Sales | 6,003 | | 5,553 | | 4,819 | |
| Profit for the year | 1,117 | | 1,250 | | 985 | |
| Total comprehensive income | 1,161 | | 1,269 | | 999 | |
| | | | | | | | | |
| | 2023
£ million | 2022
£ million | |
| Non-current assets | 6,774 | | 5,957 | | |
| Current assets | 9,155 | | 8,447 | | |
| Total assets | 15,929 | | 14,404 | | |
| Non-current liabilities | (2,108) | | (1,791) | | |
| Current liabilities | (3,160) | | (2,415) | | |
| Total liabilities | (5,268) | | (4,206) | | |
| Net assets | 10,661 | | 10,198 | | |
(i) Including acquisition fair value adjustments principally in respect of Moët Hennessy’s brands and translated at £1 = €1.17 (2022 – £1 = €1.16).
(c) InformationInformation on transactions between the group and its associates and joint ventures is disclosed in note 20.
21.
(d) Investments in associates and joint ventures comprise the cost of shares less goodwill written off on acquisitions prior to 1 July 1998 of £1,312£1,384 million (2019(2022 – £1,249£1,340 million), plus the group’s share of post acquisition reserves of £2,245£2,445 million (2019(2022 – £1,924£2,312 million).
(e)(e) The associates and joint ventures have not reported any material contingent liabilities in their latest financial statements.
7. Taxation
Accounting policies
Current tax is based on taxable profit for the year. Taxable profit is different from accounting profit due to temporary differences between accounting and tax treatments, and due to items that are never taxable or tax deductible. Tax benefitstreatments are not recognised unless it is probable that a tax authority will accept the tax positions are sustainable.treatment. Once considered to be probable, tax benefitstreatments are reviewed each year to assess whether a provision should be taken against full recognition of the benefittreatment on the basis of potential settlement through negotiation and/or litigation.litigation with the relevant tax authorities. Tax provisions are included in current liabilities. Penalties and interest on tax liabilities are included in operating profit and finance charges, respectively.
Full provision for deferred tax is made for temporary differences between the carrying value of assets and liabilities for financial reporting purposes and their value for tax purposes.purposes, except for deferred tax provision arising on goodwill from business combinations. The amount of deferred tax reflects the expected recoverable amount and is based on the expected manner of recovery or settlement of the carrying amount of assets and liabilities, using the basis of taxation enacted or substantively enacted by the balance sheet date. Deferred tax assets are not recognised where it is more likely than not that the assets will not be realised in the future. No deferred tax liability is provided in respect of any future remittance of earnings of foreign subsidiaries where the group is able to control the remittance of earnings and it is probable that such earnings will not be remitted in the foreseeable future, or where no liability would arise on the remittance.
Financial statements (continued)
Critical accounting estimates and judgements
The group is required to estimate the corporate tax in each of the many jurisdictions in which it operates. Management is required to estimate the amount that should be recognised as a tax liability or tax asset in many countries which are subject to tax audits which by their nature are often complex and can take several years to resolve; current tax balances are based on such estimations. Tax provisions are based on management’s judgement and interpretation of country specific tax law and the likelihood of settlement. However, the actual tax liabilities could differ from the provision and in such event the group would be required to make an adjustment in a subsequent period which could have a material impact on the group’s profit for the year.
The evaluation of deferred tax asset recoverability requires estimates to be made regarding the availability of future taxable income. For brands with an indefinite life, management’s primary intention is to recover the book value through a potential sale in the future, and therefore the deferred tax on the brand value is generally recognised using the appropriate country capital gains tax rate. To the extent
Financial statements (continued)
brands with an indefinite life have been impaired, management considers this to be an indication of recovery through use and in such a case deferred tax on the brand value is recognised using the appropriate country corporate income tax rate.
(a) Analysis of taxation charge for the year
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | United Kingdom | Rest of world | Total |
| | 2023
£ million | 2022
£ million | 2021
£ million | 2023
£ million | 2022
£ million | 2021
£ million | 2023
£ million | 2022
£ million | 2021
£ million |
| Current tax | | | | | | | | | |
| Current year | 160 | | 174 | | 100 | | 879 | | 867 | | 684 | | 1,039 | | 1,041 | | 784 | |
| Adjustments in respect of prior years | 33 | | 10 | | 1 | | (39) | | 16 | | 28 | | (6) | | 26 | | 29 | |
| 193 | | 184 | | 101 | | 840 | | 883 | | 712 | | 1,033 | | 1,067 | | 813 | |
| Deferred tax | | | | | | | | | |
| Origination and reversal of temporary differences | 25 | | — | | 13 | | (70) | | 21 | | 18 | | (45) | | 21 | | 31 | |
| Changes in tax rates | — | | 2 | | 46 | | 11 | | 1 | | 32 | | 11 | | 3 | | 78 | |
| Adjustments in respect of prior years | 6 | | — | | 8 | | (35) | | (42) | | (23) | | (29) | | (42) | | (15) | |
| 31 | | 2 | | 67 | | (94) | | (20) | | 27 | | (63) | | (18) | | 94 | |
| Taxation on profit | 224 | | 186 | | 168 | | 746 | | 863 | | 739 | | 970 | | 1,049 | | 907 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | United Kingdom | | | Rest of world | | | Total | |
| | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
| | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
| | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| Current tax | | | | | | | | | | | | | | | | | |
| Current year | 108 |
| | 150 |
| | 131 |
| | 589 |
| | 713 |
| | 503 |
| | 697 |
| | 863 |
| | 634 |
|
| Adjustments in respect of prior years | 6 |
| | (3 | ) | | 71 |
| | (25 | ) | | 52 |
| | (2 | ) | | (19 | ) | | 49 |
| | 69 |
|
| | 114 |
| | 147 |
| | 202 |
| | 564 |
| | 765 |
| | 501 |
| | 678 |
| | 912 |
| | 703 |
|
| Deferred tax | | | | | | | | | | | | | | | | | |
| Origination and reversal of temporary differences | 24 |
| | 29 |
| | 40 |
| | (143 | ) | | (19 | ) | | 127 |
| | (119 | ) | | 10 |
| | 167 |
|
| Changes in tax rates | 6 |
| | (2 | ) | | (11 | ) | | 39 |
| | (52 | ) | | (360 | ) | | 45 |
| | (54 | ) | | (371 | ) |
| Adjustments in respect of prior years | — |
| | 5 |
| | 95 |
| | (15 | ) | | 25 |
| | 2 |
| | (15 | ) | | 30 |
| | 97 |
|
| | 30 |
| | 32 |
| | 124 |
| | (119 | ) | | (46 | ) | | (231 | ) | | (89 | ) | | (14 | ) | | (107 | ) |
| Taxation on profit | 144 |
| | 179 |
| | 326 |
| | 445 |
| | 719 |
| | 270 |
| | 589 |
| | 898 |
| | 596 |
|
Financial statements (continued)
(b) Exceptional tax (credits)/charges
The taxation charge includes the following exceptional items: | | | | | | | | | | | |
| | 2023
£ million | 2022
£ million | 2021
£ million |
Brand impairment(1) | (124) | | (55) | | — | |
US guarantee fee claim(2) | (57) | | — | | — | |
| Supply chain agility programme | (23) | | — | | — | |
| Distribution termination fee | (11) | | — | | — | |
Disposal of businesses and brands(3) | 29 | | 23 | | — | |
| | | |
| Winding down Russian operations | — | | 3 | | — | |
| | | |
Tax rate change in the United Kingdom(4) | — | | — | | 46 | |
Tax rate change in the Netherlands(5) | — | | — | | 42 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Other items | — | | (2) | | (4) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (186) | | (31) | | 84 | |
|
| | | | | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
Brand and tangible asset impairment(i) | | (165 | ) | | — |
| | (13 | ) |
| Substitution drawback | | 20 |
| | — |
| | — |
|
| Obsolete inventories | | (7 | ) | | — |
| | — |
|
| Other items | | (2 | ) | | — |
| | — |
|
French tax audit settlement(ii) | | — |
| | 61 |
| | — |
|
Tax rate change in the Netherlands(iii) | | — |
| | (51 | ) | | — |
|
| Sale of businesses and brands | | — |
| | 33 |
| | — |
|
| Guaranteed minimum pension equalisation | | — |
| | (4 | ) | | — |
|
US tax reform(iv) | | — |
| | — |
| | (354 | ) |
UK transfer pricing settlement(v) | | — |
| | — |
| | 143 |
|
| UK industrial building allowance | | — |
| | — |
| | 21 |
|
| | | (154 | ) | | 39 |
| | (203 | ) |
| |
(i) | Exceptional tax credit of £165 million consists of 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. |
(ii) As disclosed in(1) In the 2019 Annual Report, in July 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 includingyear ended 30 June 2017.
| |
(iii) | During the year ended 30 June 2019 the Dutch Senate agreed to a phased reduction in the Dutch corporate tax rate which is effective from 1 January 2020. An exceptional tax credit of £51 million principally arose from remeasuring the deferred tax liabilities in respect of the Ketel One vodka distribution rights from a then anticipated tax rate of 25% to 20.5%. The Dutch Senate subsequently agreed in a tax rate of 21.7% on 19 December 2019. The remeasurement of deferred tax liabilities in the year ended 30 June 2020 was recognised as a current tax charge. |
(iv) The exceptional tax credit of £354 million ($478 million) resulted from applying the Tax Cuts and Jobs Act (TCJA), enacted on 22 December 2017, in the United States. The credit principally arose on remeasuring the deferred tax liabilities in respect of intangibles and other assets for the change in the US Federal tax rate from 35% to 21%, resulting in2023, an exceptional tax credit of £363£124 million ($490 million)was recognised mainly in respect of the impairment of the McDowell's brand. In the year ended 30 June 2022, the exceptional tax credit of £55 million consists of tax impact on the impairment of the McDowell's and Bell's brands for £35 million and £20 million, respectively.
(2) In the year ended 30 June 2023, an exceptional tax credit of £57 million was recognised in respect of the deductibility of fees paid to Diageo plc for guaranteeing externally issued debt of US group entities. Following engagement with the tax authorities, guarantee fees for the periods ended 30 June 2012 to 30 June 2022 are fully deductible.
(3) In the year ended 30 June 2023, the exceptional net tax charge of £29 million mainly comprised of a tax charge of £42 million in respect of the sale of Guinness Cameroun S.A., which is partiallypartly offset by £9a tax credit of £10 million ($12 million)in respect of the sale of certain USL businesses. In the year ended 30 June 2022, a £23 million exceptional tax charge was recognised in respect of repatriationthe gain on the sale of untaxed foreign earnings.the Picon brand.
(4) On 24 May 2021, legislation was substantively enacted in the UK to increase the corporate tax rate to 25% with effect from 1 April 2023. As a result of the change, an exceptional tax charge of £46 million was recognised for the year ended 30 June 2021 in relation to the remeasurement of deferred tax assets and liabilities. In addition, there was a one-off charge of £11£48 million ($15 million) to other comprehensive income and equity, mainly in respect of the remeasurement of the deferred tax assetsliabilities on the post employment liabilities and share-based incentive plans asassets.
(5) On 15 December 2020, legislation was substantively enacted in the Netherlands to maintain the headline corporate tax rate at 25%, reversing a previously enacted reduction in the corporate tax rate to 21.7% from 2021. As a result of applying the provisionschange, an exceptional tax charge of the TCJA.
(v) During 2017 Diageo£42 million was in discussions with HMRC to seek clarity on Diageo’s transfer pricing and related issues, and in the first half ofrecognised for the year ending 30 June 2018 a preliminary assessment for diverted profits tax notice was issued. Final charging notices were issued in August 2017 and Diageo paid £107 million in respect of the two years ended 30 June 2016. Diageo agreed2021 in June 2018 with HMRC that diverted profitsrelation to the remeasurement of deferred tax does not apply and at the same time has reached resolution on the transfer pricing issues being discussed. The agreement in respect of transfer pricing covers the period from 1 July 2014 to 30 June 2017 and has resulted in an additional UK tax charge of £143 million.liabilities. In the year ended 30 June 20182022, the Dutch Senate enacted an additionalincreased tax chargerate of £47 million25.8%. The remeasurement of deferred tax liabilities was recognised in currentas an underlying tax which is based on the approach agreed with HMRC.charge.
| |
(1) | Diageo has launched the “Raising the Bar” programme to support pubs and bars to welcome customers back and recover following the Covid-19 pandemic including a commitment of £100 million (£81 million) over a period of up to two years from July 1, 2020. Due to current uncertainty on the precise nature of the spend, it cannot be determined whether the amounts will be deductible for tax purposes in future periods. As a result, no deferred tax asset has been recognized in respect of the provision at the year ended June 30, 2020. |
Financial statements (continued)
(c) Taxation rate reconciliation and factors that may affect future tax charges
| | | | | | | | | | | | | | | | | | | | |
| | 2023
£ million | 2023
% | 2022
£ million | 2022
% | 2021
£ million | 2021
% |
| Profit before taxation | 4,736 | | | 4,387 | | | 3,706 | | |
| Notional charge at UK corporation tax rate | 971 | | 20.5 | | 833 | | 19.0 | | 704 | | 19.0 | |
| Elimination of notional tax on share of after tax results of associates and joint ventures | (76) | | (1.6) | | (79) | | (1.8) | | (63) | | (1.7) | |
| Differences in overseas tax rates | 95 | | 2.0 | | 161 | | 3.7 | | 128 | | 3.5 | |
| | | | | | |
| | | | | | |
| | | | | | |
| Disposal of businesses and brands | (42) | | (0.9) | | 21 | | 0.5 | | (2) | | (0.1) | |
| Other items not chargeable | (63) | | (1.3) | | (49) | | (1.1) | | (52) | | (1.4) | |
| Impairment | (2) | | — | | 36 | | 0.8 | | — | | — | |
| | | | | | |
| | | | | | |
| Other items not deductible | 71 | | 1.5 | | 58 | | 1.3 | | 67 | | 1.8 | |
| Irrecoverable withholding taxes | 38 | | 0.8 | | 39 | | 0.9 | | 25 | | 0.7 | |
Movement in provision in respect of uncertain tax positions(1) | 27 | | 0.6 | | 42 | | 0.9 | | 1 | | — | |
Changes in tax rates(2) | 11 | | 0.2 | | 3 | | 0.1 | | 78 | | 2.1 | |
| | | | | | |
Adjustments in respect of prior years(3) | (60) | | (1.3) | | (16) | | (0.4) | | 21 | | 0.6 | |
| Taxation on profit | 970 | | 20.5 | | 1,049 | | 23.9 | | 907 | | 24.5 | |
| Tax rate before exceptional items | — | | 23.0 | | — | | 22.5 | | — | | 22.2 | |
|
| | | | | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| Profit before taxation | | 2,043 |
| | 4,235 |
| | 3,740 |
|
| Notional charge at UK corporation tax rate of 19% (2019 – 19%; 2018 – 19%) | | 388 |
| | 805 |
| | 711 |
|
| Elimination of notional tax on share of after tax results of associates and joint ventures | | (54 | ) | | (59 | ) | | (58 | ) |
| Differences in overseas tax rates | | 53 |
| | 106 |
| | 134 |
|
| Effect of intra-group financing | | (13 | ) | | (34 | ) | | (61 | ) |
| Non taxable gain on disposals of businesses | | — |
| | (3 | ) | | — |
|
| Step-up gain | | (2 | ) | | — |
| | — |
|
| Other tax rate and tax base differences | | (84 | ) | | (132 | ) | | (109 | ) |
| Other items not chargeable | | (62 | ) | | (54 | ) | | (79 | ) |
| Impairment | | 135 |
| | — |
| | 16 |
|
| Non deductible losses on disposal of businesses | | 6 |
| | — |
| | — |
|
| Other non deductible exceptional items | | — |
| | 12 |
| | 9 |
|
Other items not deductible(i) | | 211 |
| | 231 |
| | 238 |
|
Changes in tax rates(ii) | | 45 |
| | (54 | ) | | (371 | ) |
| Fair value adjustment in respect of assets held for sale | | — |
| | 1 |
| | — |
|
Adjustments in respect of prior years(iii) | | (34 | ) | | 79 |
| | 166 |
|
| Taxation on profit | | 589 |
| | 898 |
| | 596 |
|
| |
(i) | Other items not deductible include controlled foreign companies charge, irrecoverable withholding tax and additional state and local taxes.
|
| |
(ii) | Changes in tax rates for the year ended 30 June 2020 mainly due to the Netherlands, UK, India and Kenya. Changes in tax rates for the year ended 30 June 2019 principally arose from the tax rate change in the Netherlands. Changes in tax rates for the year ended 30 June 2018 was mainly due to the application of the TCJA.
|
| |
(iii) | Adjustment in respect of prior years for the year ended 30 June 2019 includes £61 million exceptional tax charge in respect of the French tax audit settlement. The £166 million prior year adjustment for the year ended 30 June 2018 is principally in respect of the exceptional tax charge in respect of the UK transfer pricing agreement. |
(1) Movement in provision in respect of uncertain tax positions includes both current and prior year uncertain tax position movements.
(2) Changes in tax rates for the year ended 30 June 2021 are mainly due to the tax rate change in the Netherlands and the United Kingdom.
(3) Excludes prior year movement in provisions. Also included an exceptional tax credit of £57 million in respect of the deductibility of fees paid to Diageo plc for guaranteeing externally issued debt of its US group entities.
The table above reconciles the notional taxation charge calculated at the UK tax rate, to the actual total tax charge. As a group operating in multiple countries, the actual tax rates applicable to profits in those countries are different from the UK tax rate. The impact is shown in the table above as differences in overseas tax rates. The group’s worldwide business leads to the consideration of a number of important factors which may affect future tax charges, such as:as the levels and mix of profitability in different jurisdictions, transfer pricing regulations, tax rates imposed and tax regime reforms, acquisitions, disposals, restructuring activities, and settlements or agreements with tax authorities.
Significant ongoing changes in the international tax environment and an increase in global tax audit activity means that tax uncertainties and associated risks have been gradually increasing. In the medium term, these risks could result in an increase in tax liabilities or adjustments to the carrying value of deferred tax assets and liabilities. See note 18 (h)19 (f).
The group has a number of ongoing tax audits worldwide for which provisions are recognised based onin line with the relevant accounting standard, taking into account best estimates and management’s judgements concerning the ultimate outcome of the audit. As attax audits. For the year ended 30 June 2020 the2023, ongoing audits that are provided for individually are not expected to result in a material tax liability. The current tax asset of £190£232 million (2019(30 June 2022 – £83£149 million) and tax liability of £246£135 million (2019(30 June 2022 – £378£252 million) includes £189include £173 million (2019 (30 June 2022 – £251 million)£156 million) of provisions for tax uncertainties.
The cash tax paid in the year ended 30 June 2023 amounts to £1,201 million (30 June 2022 – £949 million) and is £231 million higher than the current tax charge (30 June 2022 – £100 million lower). This arises as a result of timing differences between the accrual of income taxes, the movement in the provision for uncertain tax positions and the actual payment of cash.
In December 2021, the OECD released a framework for Pillar Two Model Rules which will introduce a global minimum corporate tax rate of 15% applicable to multinational enterprise groups with global revenue over €750 million. The legislation implementing the rules in the UK was substantively enacted on 20 June 2023 and will apply to Diageo from the financial year ending 30 June 2025 onwards. Diageo is reviewing this legislation and also monitoring the status of implementation of the model rules outside of the UK to understand the potential impact on the group. Diageo has applied the temporary exception under IAS 12 in relation to the accounting for deferred taxes arising from the implementation of the Pillar Two rules.
Financial statements (continued)
(d) Deferred tax assets and liabilities
The amounts of deferredDeferred tax accounted forrecognised in the consolidated balance sheet comprise the following net deferred tax assets/(liabilities):/assets:
| | | | | | | | | | | | | | | | | | | | |
| | Property,
plant and
equipment
£ million | Intangible
assets
£ million | Post
employment
plans
£ million | Tax losses
£ million | Other temporary differences(1) £ million | Total
£ million |
| At 30 June 2021 | (381) | | (1,636) | | (129) | | 57 | | 244 | | (1,845) | |
| Exchange differences | (21) | | (155) | | 3 | | 3 | | 17 | | (153) | |
| Recognised in income statement | (42) | | (3) | | (10) | | 2 | | 74 | | 21 | |
| Reclassification | 2 | | 40 | | — | | — | | (7) | | 35 | |
| Recognised in other comprehensive loss and equity | (20) | | (104) | | (103) | | — | | 20 | | (207) | |
| | | | | | |
| Tax rate change – recognised in income statement | (1) | | (3) | | — | | 1 | | — | | (3) | |
| Tax rate change – recognised in other comprehensive loss and equity | — | | — | | (22) | | — | | 2 | | (20) | |
| Acquisition of subsidiaries | — | | (31) | | — | | — | | — | | (31) | |
| Sale of businesses | (5) | | — | | — | | — | | 3 | | (2) | |
| At 30 June 2022 | (468) | | (1,892) | | (261) | | 63 | | 353 | | (2,205) | |
| Exchange differences | 33 | | 113 | | (3) | | 1 | | (10) | | 134 | |
| Recognised in income statement | (30) | | 93 | | 2 | | (15) | | 24 | | 74 | |
| | | | | | |
| Recognised in other comprehensive income and equity | (6) | | (30) | | 152 | | — | | (50) | | 66 | |
| Tax rate change – recognised in income statement | (1) | | (12) | | (1) | | — | | 3 | | (11) | |
| | | | | | |
| Acquisition of subsidiaries | — | | (71) | | — | | — | | — | | (71) | |
| Transfer from asset held for sale | (2) | | (37) | | — | | — | | 5 | | (34) | |
| Sale of businesses | 10 | | — | | (1) | | — | | (4) | | 5 | |
| At 30 June 2023 | (464) | | (1,836) | | (112) | | 49 | | 321 | | (2,042) | |
|
| | | | | | | | | | | | | | | | | |
| | Property, plant and equipment £ million |
| | Intangible assets £ million |
| | Post employment plans £ million |
| | Tax losses £ million |
| | Other temporary differences(i) £ million |
| | Total £ million |
|
| At 30 June 2018 | (292 | ) | | (1,812 | ) | | (27 | ) | | 32 |
| | 234 |
| | (1,865 | ) |
| Exchange differences | (7 | ) | | (47 | ) | | 2 |
| | 1 |
| | 4 |
| | (47 | ) |
| Recognised in income statement – continuing operations | (51 | ) | | 14 |
| | (17 | ) | | (14 | ) | | 28 |
| | (40 | ) |
| Reclassification | (2 | ) | | (3 | ) | | 12 |
| | 3 |
| | (10 | ) | | — |
|
| Recognised in other comprehensive income and equity | — |
| | — |
| | (8 | ) | | 5 |
| | (1 | ) | | (4 | ) |
| Tax rate change – recognised in income statement | 1 |
| | 51 |
| | (1 | ) | | 2 |
| | 1 |
| | 54 |
|
| Tax rate change – recognised in other comprehensive income and equity | — |
| | — |
| | 1 |
| | (5 | ) | | 8 |
| | 4 |
|
| Acquisition of subsidiaries | — |
| | (5 | ) | | — |
| | — |
| | — |
| | (5 | ) |
| Transfer to assets held for sale | 2 |
| | 7 |
| | — |
| | — |
| | — |
| | 9 |
|
| At 30 June 2019 | (349 | ) | | (1,795 | ) | | (38 | ) | | 24 |
| | 264 |
| | (1,894 | ) |
| Exchange differences | — |
| | 12 |
| | 1 |
| | (1 | ) | | (7 | ) | | 5 |
|
| Recognised in income statement – continuing operations | (10 | ) | | 115 |
| | (5 | ) | | 7 |
| | 27 |
| | 134 |
|
| Reclassification | 8 |
| | 6 |
| | — |
| | (3 | ) | | (11 | ) | | — |
|
| Recognised in other comprehensive income and equity | — |
| | (3 | ) | | (16 | ) | | 34 |
| | (33 | ) | | (18 | ) |
| Tax rate change – recognised in income statement | 11 |
| | (52 | ) | | 2 |
| | — |
| | (6 | ) | | (45 | ) |
| Tax rate change – recognised in other comprehensive income and equity | — |
| | — |
| | (16 | ) | | — |
| | — |
| | (16 | ) |
| Acquisition of subsidiaries | — |
| | (19 | ) | | — |
| | — |
| | — |
| | (19 | ) |
| At 30 June 2020 | (340 | ) | | (1,736 | ) | | (72 | ) | | 61 |
| | 234 |
| | (1,853 | ) |
| |
(i) | Deferred tax on other temporary differences includes fair value movement on cross-currency swaps, interest and finance costs, restructuring provisions, share-based payments and intra group sales of products.
|
After offsetting deferred tax assets and liabilities where appropriate within territories,that relate to taxes levied by the same taxation authority on the same taxable fiscal unit, the net deferred tax liability comprises:
| | | | | | | | |
| | 2023
£ million | 2022
£ million |
| Deferred tax assets | 141 | | 114 | |
| Deferred tax liabilities | (2,183) | | (2,319) | |
| (2,042) | | (2,205) | |
|
| | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
|
| Deferred tax assets | | 119 |
| | 138 |
|
| Deferred tax liabilities | | (1,972 | ) | | (2,032 | ) |
| | | (1,853 | ) | | (1,894 | ) |
The deferredDeferred tax assets of £119£141 million includes £66include £65 million (2019(2022 – £60£47 million) arising in jurisdictions with prior year taxable losses. The majority of the asset islosses, primarily in respect of Ireland, where the amounts arose from timing differences on pension funding payments.Germany and Brazil. It is considered more likely than not that there will be sufficient future taxable profits to realise these deferred tax assets, which for the most part arose on losses from a historic one-off transaction, and on existing provisions. The majority of whichdeferred tax assets can be carried forward indefinitely. From the total recognised tax losses of £49 million, it is expected that £10 million will be utilised in the year ending 30 June 2024.
(e) Unrecognised deferred tax assets
The following table shows the tax value of tax losses which has not been recognised due to uncertainty over their utilisation in future periods. The gross value of those losses is £632 million (2022 – £674 million).
| | | | | | | | |
| | 2023
£ million | 2022
£ million |
| Capital losses – indefinite | 98 | | 98 | |
| Trading losses – indefinite | 24 | | 25 | |
| Trading and capital losses – expiry dates up to 2032 | 39 | | 46 | |
| 161 | | 169 | |
Additionally, no deferred tax asset has been recognised in respect of certain temporary differences arising from brand valuations, as the group is not planning to sell those brands thus the benefit from the temporary differences is unlikely to be realised.
Financial statements (continued)
(e) Unrecognised deferred tax assets
Deferred tax assets have not been recognised in respect of the following tax losses:
|
| | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
|
| Capital losses - indefinite | | 76 |
| | 62 |
|
| Trading losses - indefinite | | 30 |
| | 70 |
|
| Trading losses - expiry dates up to 2029 | | 70 |
| | 53 |
|
| | | 176 |
| | 185 |
|
(f) Unrecognised deferred tax liabilities
UKRelevant legislation largely exempts overseas dividends remitted from UK tax. A tax liability is more likely to arise in respect of withholding taxes levied by the overseas jurisdiction. Deferred tax is provided where there is an intention to distribute earnings, and a tax liability arises. It is impractical to estimate the amount of unrecognised deferred tax liabilities in respect of these unremitted earnings.
The aggregate amount of temporary differences in respect of investments in subsidiaries, branches, interests in associates and joint ventures for which deferred tax liabilities have not been recognised is approximately £14.7£19.8 billion (2019(2022 – £13£21.0 billion). Comparatives were restated to include reclassifications between share premium, retained earnings and investments within the US group.
Financial statements (continued)
Operating assets and liabilities
Introduction
This section describes the assets used to generatein the group’s performanceoperations and the liabilities incurred. Liabilities relating to the group’s financing activities are included in section ‘Risk management and capital structure’ and balance sheet information in respect of associates, joint ventures and taxation are covered in section ‘Results for the year’. This section also provides detailed disclosures on the group’s recent acquisitions and disposals, performance and financial position of its defined benefit post employment plans.
8. Acquisition and sale of businesses and brands and purchase of non-controlling interests
Accounting policies
The consolidated financial statements include the results of the company and its subsidiaries together with the group’s attributable share of the results of associates and joint ventures. The results of subsidiaries acquired or sold are included in the income statement from, or up to, the date that control passes.
Business combinations are accounted for using the acquisition method. Identifiable assets, liabilities and contingent liabilities acquired are measured at fair value at acquisition date. The consideration payable is measured at fair value and includes the fair value of any contingent consideration. Among other factors, the group considers the nature of, and compensation for the selling shareholders' continuing employment to determine if any contingent payments are for post-combination employee services, which are excluded from consideration.
On the acquisition of a business, or of an interest in an associate or joint venture, fair values, reflecting conditions at the date of acquisition, are attributed to the net assets, including identifiable intangible assets and contingent liabilities acquired. Directly attributable acquisition costs in respect of subsidiary companies acquired are recognised in other external charges as incurred.
The non-controlling interests on the date of acquisition can be measured either at the fair value or at the non-controlling shareholder’s proportion of the net fair value of the identifiable assets assumed. This choice is made separately for each acquisition.
Where the group has issued a put option over shares held by a non-controlling interest, the group derecognises the non-controlling interests and instead recognises a contingent deferred consideration liability for the estimated amount likely to be paid to the non-controlling interest on the exercise of those options. Movements in the estimated liability in respect of put options are recognised in retained earnings.
Financial statements (continued)
Transactions with non-controlling interests are recorded directly in retained earnings.
For all entities in which the company directly or indirectly owns equity, a judgement is made to determine whether the investorit controls the investee and therefore should fully consolidate the investee. An assessment is carried out to determine whether the group has the exposure or rights to the variable returns of the investee and has the ability to affect those returns through its power over the investee. To establish control, an analysis is carried out of the substantive and protective rights that the group and the other investors hold. This assessment is dependent on the activities and purpose of the investee and the rights of the other shareholders, such as which party controls the board, executive committee and material policies of the investee. Determining whether the rights that the group holds are substantive, requires management judgement.
Where less than 50% of the equity of an investee is held, and the group holds significantly more voting rights than any other vote holder or organised group of vote holders, this may be an indicator of de facto control. An assessment is needed to determine all the factors relevant to the relationship with the investee to ascertain whether control has been established and whether the investee should be consolidated as a subsidiary. Where voting power and returns from an investment are split equally between two entities then the arrangement is accounted for as a joint venture.
On an acquisition, fair values are attributed to the assets and liabilities acquired. This may involve material judgement to determine these values.
Financial statements (continued)
(a) Acquisition of businesses
Fair value of net assets acquired and cash consideration paid in respect of the acquisition of subsidiaries in the three years ended 30 June 2023 were as follows:
| | | | | | | | | | | | | | | | | |
| | Net assets acquired and consideration |
| | Don Papa
£ million | Other
£ million | 2023
£ million | 2022
£ million | 2021
£ million |
| Brands and other intangibles | 293 | | 45 | | 338 | | 120 | | 334 | |
| Property, plant and equipment | 1 | | 24 | | 25 | | — | | 15 | |
| Inventories | 6 | | 21 | | 27 | | 6 | | 12 | |
| Other working capital | (2) | | (1) | | (3) | | 3 | | (3) | |
| Deferred tax | (67) | | (4) | | (71) | | (31) | | (15) | |
| Borrowings | — | | — | | — | | — | | (8) | |
| (Overdraft)/Cash | (1) | | 1 | | — | | 1 | | 4 | |
| Fair value of assets and liabilities | 230 | | 86 | | 316 | | 99 | | 339 | |
| Goodwill arising on acquisition | 64 | | 28 | | 92 | | 70 | | 274 | |
| Settlement of pre-existing relationship | — | | — | | — | | (1) | | — | |
| Step acquisitions | — | | (11) | | (11) | | (6) | | — | |
| Consideration payable | 294 | | 103 | | 397 | | 162 | | 613 | |
| Satisfied by: | | | | | |
| Cash consideration paid | (218) | | (98) | | (316) | | (88) | | (358) | |
| Contingent consideration payable | (72) | | (4) | | (76) | | (70) | | (253) | |
| Deferred consideration payable | (4) | | (1) | | (5) | | (4) | | (2) | |
| (294) | | (103) | | (397) | | (162) | | (613) | |
Cash consideration paid in respect of the acquisition of businesses and the purchase of shares of non-controlling interests in the three years ended 30 June 20202023 were as follows:
| | | | | | | | | | | |
| Consideration |
| 2023
£ million | 2022
£ million | 2021
£ million |
| Acquisitions in the year - subsidiaries | | | |
| Cash consideration paid | (316) | | (88) | | (358) | |
| Cash acquired | — | | 1 | | 4 | |
| Prior year acquisitions - subsidiaries | | | |
| Contingent consideration paid for Casamigos | — | | (83) | | (89) | |
| Other consideration | (26) | | (36) | | (7) | |
| | | |
| Investments in associates | | | |
| Cash consideration paid | (14) | | (4) | | — | |
| Capital injection | (79) | | (61) | | (38) | |
| | | |
| Net cash outflow on acquisition of businesses | (435) | | (271) | | (488) | |
| Purchase of shares of non-controlling interests | (146) | | — | | (42) | |
| Total net cash outflow | (581) | | (271) | | (530) | |
|
| | | | | | | | | |
| | | Net assets acquired and consideration | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| Brands and other intangibles | | 102 |
| | 25 |
| | 478 |
|
| Inventories | | 2 |
| | — |
| | 4 |
|
| Other working capital | | (3 | ) | | (2 | ) | | 2 |
|
| Deferred tax | | (19 | ) | | (5 | ) | | — |
|
| Cash | | 2 |
| | — |
| | 6 |
|
| Fair value of assets and liabilities | | 84 |
| | 18 |
| | 490 |
|
| Goodwill arising on acquisition | | 8 |
| | 10 |
| | 249 |
|
| Step acquisitions | | (23 | ) | | (7 | ) | | — |
|
| Consideration payable | | 69 |
| | 21 |
| | 739 |
|
| Satisfied by: | | | | | | |
| Cash consideration paid | | (27 | ) | | (6 | ) | | (555 | ) |
| Contingent consideration payable | | (42 | ) | | (15 | ) | | (184 | ) |
| | | (69 | ) | | (21 | ) | | (739 | ) |
| | | | | | | |
| Cash consideration paid for subsidiaries | | (27 | ) | | (6 | ) | | (6 | ) |
| Cash consideration paid for Casamigos | | (49 | ) | | (9 | ) | | (549 | ) |
| Cash consideration paid in respect of other prior year acquisitions | | (9 | ) | | (9 | ) | | (22 | ) |
| Cash consideration paid for investments in associates | | (6 | ) | | (15 | ) | | (12 | ) |
| Capital injection in associates | | (41 | ) | | (17 | ) | | (11 | ) |
| Cash acquired | | 2 |
| | — |
| | 6 |
|
| Net cash outflow on acquisition of businesses | | (130 | ) | | (56 | ) | | (594 | ) |
| Purchase of shares of non-controlling interests | | (62 | ) | | (784 | ) | | — |
|
| Total net cash outflow | | (192 | ) | | (840 | ) | | (594 | ) |
Financial statements (continued)
Acquisitions in the year
DuringOn 10 March 2023, Diageo completed the acquisition of Kanlaon Limited and Chat Noir Co. Inc., (the owner of Don Papa Rum) to support Diageo’s participation in the super-premium dark rum segment for upfront cash consideration of €246 million (£218 million), deferred consideration of €4 million (£4 million) and contingent consideration of up to €178 million (£158 million) through to 2028 subject to certain financial performance targets, reflecting the brand’s expected growth potential. The fair value of the contingent consideration of €82 million (£72 million) was estimated by calculating the present value of the future expected cash flows which is dependent on management’s estimates in respect of the forecasting of future cash flows and the discount rates applicable to the future cash flows. The goodwill arising on the acquisition of Don Papa Rum represents expected revenue synergies and the acquired workforce. Don Papa Rum contributed £10 million to net sales and £15 million operating loss to the period, out of which £15 million is related to acquisition transaction and integration costs in the year ended 30 June 2020,2023. The fair value measurement of assets and liabilities acquired is in progress. The fair values of assets and liabilities acquired are provisional and will be finalised in the year ending 30 June 2024. Diageo completed further acquisitions in the year ended 30 June 2023: (i) on 29 September 2022, the acquisition of the remaining issued share capital of Mr Black Spirits Pty Ltd, owner of Mr Black, the Australian premium cold brew coffee liqueur, that it did not already own; and (ii) on 2 November 2022, the acquisition of the entire issued share capital of Balcones Distilling, a numberTexas craft distiller and one of acquisitions, the largestleading producers of American single malt whiskey in the United States. The aggregate up-front cash consideration paid on completion of these were Seedlip Ltd and Anna Seed 83 Ltd,transactions in the brand owners of Seedlip and Aecorn distilled non-alcoholic spirits and aperitifs, both of which completed on 6 August 2019. The contingent consideration payable represents the present value of payments up to £60 million linked to certain performance targets and are expected to be paid over the next six years.year ended 30 June 2023 was £98 million.
Prior year acquisitions
On 28 September 2018,31 March 2022, Diageo acquired Copper Dog Whisky Limited.100% equity interest in 21Seeds, to support Diageo's participation in the super premium flavoured tequila segment, for a total consideration of £62 million upfront in cash and a contingent consideration of up to £61 million linked to performance targets.
Diageo completed further acquisitions in the year ended 30 June 2022, including (i) on 27 January 2022, the acquisition of Casa UM, to expand Reserve portfolio with premium artisanal mezcal brand, Mezcal Unión and (ii) on 29 June 2022, the acquisition of Vivanda, owner of the technology behind 'What's your Whisky' platform and the Journey of Flavour experience at Johnnie Walker Princes Street, to support Diageo's ambition to provide customised brand experiences across all channels. The aggregate upfront cash consideration paid on completion of these transactions in the year ended 30 June 2022 was £26 million. In addition, Diageo has made a number of smaller acquisitions of brands, distribution rights and equity interests in various drinks businesses and madethese transactions included provision for further contingent consideration paymentsof up to £18 million in respectaggregate, linked to performance targets and a further deferred consideration of prior year acquisitions.£4 million.
On 15 August 2017, Diageo completed the purchase of 100% of the share capital of Casamigos Tequila, LLC (Casamigos), a super premium tequila based in the United States, for $1,000 million (£777 million) of which $300 million (£233 million) was contingent on Casamigos achieving certain performance targets.
On 14 March 2018,30 September 2020, Diageo completed the acquisition of Belsazar GmbH,Aviation Gin LLC (Aviation Gin) and Davos Brands LLC (Davos Brands) to support Diageo's participation in the super-premium gin segment for a premium aperitif from Germany’s Black Forest.total consideration of $337 million (£263 million) upfront in cash and contingent consideration of up to $275 million (£214 million) linked to performance targets.
On 2 May 2018, Diageo acquired 100%also completed a number of additional acquisitions in the year ended 30 June 2021, comprising: (i) in February 2021, the acquisition of Chase Distillery Limited, to further support Diageo's participation in the premium-plus gin segment in the United Kingdom; (ii) in March 2021, the acquisition of Far West Spirits LLC, owner of the intellectual propertyLone River Ranch Water brand, to improve Diageo's participation in the ready to drink category in the United States; and (iii) in April 2021, the acquisition of Pierde Almas, an ultra premium mezcal.Sons of Liberty Spirits Company, to expand Diageo's spirits-based ready to drink portfolio with Loyal 9 Cocktails. The aggregate upfront cash consideration paid on completion of these three transactions in the year ended 30 June 2021 was £95 million. In addition, two of these transactions included provision for further contingent consideration of up to £86 million in aggregate, in each case linked to performance targets, and one of the transactions provided for a further £2 million of deferred consideration, of which £1 million was paid by 30 June 2021.
Purchase of shares of non-controlling interests
On 29 July 2019, East African Breweries Limited24 March 2023, Diageo completed the purchase of 4%14.97% of the share capital of Serengeti Breweries Limited for $3 million (£2 million). This increased Diageo’s effective economic interest from 39.2% to 40.2%.
In August 2019 and February 2020, in two separate purchases, Diageo acquired shares in United Spirits Limited (USL) for INR 5,495 million (£60 million) which increased Diageo’s percentage of shares owned in USL from 54.78% to 55.94% (excluding 2.38% owned by the USL Benefit Trust).
On 17 August 2018 and 9 April 2019, Diageo completed the purchase of 20.29% and 3.14% of the share capital of Sichuan Shuijingfang Company Limited (SJF)EABL for an aggregate consideration of RMB 6,774KES 22,732 million (£775142 million) in cash and transaction costs of £9£4 million. This took Diageo’s shareholding in SJFEABL from 39.71%50.03% to 63.14%65%. SJFEABL was already controlled and therefore consolidated prior to these transactions.this transaction.
In the year ended 30 June 2021, EABL, a Diageo subsidiary completed the acquisition of 30% of shares in Serengeti Breweries Limited for a consideration of $55 million (£42 million) in cash and £16 million in the form of shareholder loan from two Diageo subsidiaries in 2021, increasing Diageo's effective economic interest from 40.2% to 47.0%.
All transactions were recognised in retained earnings.
Financial statements (continued)
(b) Sale of businesses and brands
Cash consideration received and net assets disposed of in respect of sale of businesses and brands in the twothree years ended 30 June 2020:2023 were as follows:
| | | | | | | | | | | | | | | | | | | |
| Guinness Cameroun S.A.
£ million | | Other
£ million | 2023
£ million | 2022
£ million | 2021
£ million | |
| Sale consideration | | | | | | | |
| Cash received | 384 | | | 115 | | 499 | | 106 | | 14 | | |
| | | | | | | |
| (Cash)/overdraft disposed of | (13) | | | — | | (13) | | 2 | | — | | |
| Transaction and other directly attributable costs paid | (17) | | | (7) | | (24) | | (26) | | — | | |
| Net cash received | 354 | | | 108 | | 462 | | 82 | | 14 | | |
| Transaction costs payable | (8) | | | 3 | | (5) | | (16) | | 1 | | |
| 346 | | | 111 | | 457 | | 66 | | 15 | | |
| Net assets disposed of | | | | | | | |
| | | | | | | |
| Goodwill | — | | | — | | — | | (14) | | — | | |
| Property, plant and equipment | (103) | | | (3) | | (106) | | (11) | | (2) | | |
| | | | | | | |
| Assets and liabilities held for sale | — | | | (79) | | (79) | | — | | — | | |
| Inventories | (24) | | | (4) | | (28) | | (4) | | — | | |
| Other working capital | 69 | | | — | | 69 | | 15 | | 1 | | |
| Other borrowings | 2 | | | — | | 2 | | 1 | | — | | |
| Corporate tax | (3) | | | — | | (3) | | (5) | | — | | |
| Deferred tax | 5 | | | — | | 5 | | (2) | | — | | |
| Post employment benefit liabilities | 4 | | | — | | 4 | | — | | — | | |
| (50) | | | (86) | | (136) | | (20) | | (1) | | |
| Impairment charge recognised up until the date of sale | (3) | | | — | | (3) | | — | | — | | |
| Exchange recycled from other comprehensive income | 17 | | | 1 | | 18 | | (63) | | — | | |
| Gain/(loss) on disposal before taxation | 310 | | | 26 | | 336 | | (17) | | 14 | | |
| Taxation | (42) | | | 13 | | (29) | | (23) | | — | | |
| Gain/(loss) on disposal after taxation | 268 | | | 39 | | 307 | | (40) | | 14 | | |
|
| | | | | | | | | | | | |
| | | UNB |
| | Other |
| | Total |
| | 2019 |
|
| | | £ million |
| | £ million |
| | £ million |
| | £ million |
|
| Sale consideration | | | | | | | | |
| Cash received in year | | 10 |
| | 1 |
| | 11 |
| | 438 |
|
| Transaction and other directly attributable costs paid | | — |
| | — |
| | — |
| | (12 | ) |
| Net cash received | | 10 |
| | 1 |
| | 11 |
| | 426 |
|
| Transaction costs payable | | (1 | ) | | — |
| | (1 | ) | | (4 | ) |
| | 9 |
| | 1 |
| | 10 |
| | 422 |
|
| Net assets disposed of | |
| | | |
| |
|
| Brands | | — |
| | — |
| | — |
| | (230 | ) |
| Goodwill | | — |
| | — |
| | — |
| | (12 | ) |
| Property, plant and equipment | | — |
| | (1 | ) | | (1 | ) | | (6 | ) |
| Investment in associates | | — |
| | (1 | ) | | (1 | ) | | (3 | ) |
| Assets and liabilities held for sale | | (30 | ) | | — |
| | (30 | ) | | — |
|
| Inventories | | — |
| | — |
| | — |
| | (18 | ) |
| | (30 | ) | | (2 | ) | | (32 | ) | | (269 | ) |
| Impairment charge recognised up until the date of sale | | (7 | ) | | — |
| | (7 | ) | | — |
|
Exchange recycled from other comprehensive income
| | (4 | ) | | — |
| | (4 | ) | | — |
|
| (Loss)/gain on disposal before taxation | | (32 | ) | | (1 | ) | | (33 | ) | | 153 |
|
| Taxation | | — |
| | — |
| | — |
| | (33 | ) |
| (Loss)/gain on disposal after taxation | | (32 | ) | | (1 | ) | | (33 | ) | | 120 |
|
On 1 April 2020,26 May 2023, Diageo completed the sale of United National Breweries (UNB)Guinness Cameroun S.A., Diageo’s wholly owned sorghum beer businessits brewery in South Africa. Cameroon. The aggregate consideration for the disposal was £384 million, the disposed net asset of £63 million mainly included property, plant and equipment and trade and other payables. The transaction resulted in a non-operating exceptional gain of £310 million. The disposed Cameroon operations contributed net sales of £101 million (2022 – £124 million; 2021 – £113 million), operating profit of £26 million (2022– £27 million; 2021– £22 million) in the year ended 30 June 2023.
On 30 September 2022, Diageo completed the sale of the Popular brands of its USL business. The aggregate consideration for the disposal was £87 million, the disposed net assets included net working capital of £31 million and brands of £22 million, and £16 million goodwill was derecognised. The transaction resulted in a non-operating exceptional gain of £4 million. Popular brands contributed net sales of £34 million (2022– £139 million; 2021 – £148 million), operating profit of £5 million (2022– £26 million; 2021– £30 million) in the year ended 30 June 2023.
On 25 April 2022, Diageo sold its Ethiopian subsidiary, Meta Abo Brewery Share Company. A loss of £95 million was recognised as a non-operating item attributable to the sale, including cumulative translation losses in the amount of £63 million recycled to the income statement.
On 10 May 2022, Diageo completed the sale of the Picon brand for an upfront consideration of €117 million (£100 million). The gain of £91 million, net of disposal cost, was recognised as a non-operating item in the income statement.
In the year ended 30 June 2022, ZAR 133 million (£6 million) (2021 – £10 million) of deferred consideration was paid to Diageo in respect of the sale of United National Breweries. The disposal was completed on 1 April 2020 up untilfor an aggregate consideration of ZAR 600 million (£27 million) from which ZAR 378 million (£17 million) was deferred.
Prior year disposals further included the datesale of sale, UNB contributed net sales of £31 million (2019 - £43 million; 2018 - £49 million), operating profit of £nil (2019 - £1 million; 2018 - £6 million) and profit after taxation of £nil (2019 - £1 million; 2018 - £4 million).
Incertain USL subsidiaries in the year ended 30 June 2019, Diageo completed the sale of a portfolio of 19 brands to Sazerac2021 for an aggregate consideration of $550£3 million, (£435 million). Diageo continued to provide manufacturing services for all disposed brands until December 2019 with some extended up to June 2020 and for five brands will continue up to December 2028. which resulted in an exceptional gain of £3 million.
234
In the year ended 30 June 2018, there were no significant disposals completed by the group.
Financial statements (continued)
(c) Assets and liabilities held for sale
Assets and liabilities held for sale at 30 June 2022 included Diageo’s Windsor business in Korea and the portfolio of Popular brands of USL.
In March 2022, Diageo agreed to sell its Windsor business in Korea to Bayside/Metis Private Equity Consortium. On 27 September 2022, Diageo announced the termination of the conditional agreement. Consequently, the recoverable assets and liabilities attributable to the business were reclassified out of held for sale.
On 27 May 2022, USL reached agreement with Inbrew Beverages Pvt Limited for the sale of Popular brands. On 30 September 2022, Diageo announced the completion of the sale of the selected Popular brands, accordingly the assets and liabilities attributable to the business were disposed from held for sale.
Financial statements (continued)
9. Intangible assets
Accounting policies
Acquired intangible assets are held on the consolidated balance sheet at cost less accumulated amortisation and impairment losses. Acquired brands and other intangible assets are initially recognised at fair value whenif they are controlled through contractual or other legal rights, or are separable from the rest of the business, and the fair value can be reliably measured. Where these assets are regarded as having indefinite useful economic lives, they are not amortised.
Goodwill represents the excess of the aggregate of the consideration transferred, the value of any non-controlling interests and the fair value of any previously held equity interest in the subsidiary acquired over the fair value of the identifiable net assets acquired.assets. Goodwill arising on acquisitions prior to 1 July 1998 was eliminated against reserves, and this goodwill has not been reinstated. Goodwill arising subsequent to 1 July 1998 has been capitalised.
Amortisation and impairment of intangible assets is based on their useful economic lives and they are amortised on a straight-line basis over those lives and reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. Goodwill and intangible assets that are regarded as having indefinite useful economic lives are not amortised and are reviewed for impairment at least annually or when there is an indication that the assets may be impaired. Impairment reviews compare the net carrying value with the recoverable amount (where recoverable amount is the higher of fair value less costs of disposal and value in use). and in case the net carrying value exceeds the recoverable amount an impairment charge is recognised. Amortisation and any impairment write downs are charged to other operating expenses in the income statement.
Computer software is amortised on a straight-line basis to estimated residual value over its expected useful life. Residual values and useful lives are reviewed each year. Subject to these reviews, the estimated useful lives are up to eight years.
Critical accounting estimates and judgements
Assessment of the recoverable amount of an intangible asset and the useful economic life of an asset are based on management's estimates.
Impairment reviews are carried out to ensure that intangible assets, including brands, are not carried at above their recoverable amounts. Value in use and fair value less costs of disposal wereare both considered for these reviews and any impairment charge wasis based on these. The tests are dependent on management’s estimates in respect of the forecasting of future cash flows, the discount rates applicable to the future cash flows and what expected growth rates are reasonable. Judgement is required in determining the cash-generating units. Such estimates and judgements are subject to change as a result of changing economic conditions and actual cash flows may differ from forecasts.
Additional estimatesThe below additional considerations have been applied by management regarding the potential financial impacts of increasing inflationary pressures, recently observable worldwide:
–changes in the interest rate environment are taken into consideration when determining the discount rates;
–terminal growth rates do not exceed the long-term annual inflation rate of the country or region, thus excluding any increased inflation growth experienced in the short-term;
–additional sensitivity scenarios are applied for those markets or regions where the inflation and/or the exchange devaluation is considered significant based on management’s judgement.
Consideration of climate risk impact
The impact of climate risk on the Covid-19 pandemic across markets. In this regardfuture cash flows has also been considered for scenarios analysed in line with the climate change risk assessment. The climate change scenario analyses performed in 2023 – conducted in line with TCFD recommendations (‘Transition Scenario’ (RCP 2.6), a combination of‘Moderate Warming’ Scenario (RCP 4.5) and a ‘Severe Warming Scenario (RCP 8.5)) – identified no material financial impact to the following factors was considered in everycurrent year impairment model: assessments.
| |
– | the future development of the virus, including the duration, scale and geographic extent of the closures;
|
| |
– | the expected scale and duration of the economic recovery;
|
| |
– | the size of the on-trade channel in the market;
|
| |
– | the life cycle phase of the brand and the maturity of the market. |
Financial statements (continued)
| | | | | | | | | | | | | | | | | |
| | Brands
£ million | Goodwill
£ million | Other
intangibles
£ million | Computer
software
£ million | Total
£ million |
| Cost | | | | | |
| At 30 June 2021 | 8,458 | | 2,627 | | 1,421 | | 673 | | 13,179 | |
| Hyperinflation adjustment in respect of Turkey | 315 | | 208 | | — | | 1 | | 524 | |
| Exchange differences | 639 | | 145 | | 194 | | 28 | | 1,006 | |
| Additions | 109 | | 70 | | 55 | | 67 | | 301 | |
| Disposals | (23) | | (42) | | — | | (23) | | (88) | |
| Reclassification to asset held for sale | (560) | | — | | — | | (8) | | (568) | |
| At 30 June 2022 | 8,938 | | 3,008 | | 1,670 | | 738 | | 14,354 | |
| Hyperinflation adjustment in respect of Turkey | 81 | | 60 | | — | | — | | 141 | |
| Exchange differences | (531) | | (257) | | (64) | | (16) | | (868) | |
| Additions | 338 | | 92 | | 13 | | 155 | | 598 | |
| Disposals | — | | — | | — | | (26) | | (26) | |
| Reclassification from/(to) asset held for sale | 453 | | (29) | | — | | — | | 424 | |
| At 30 June 2023 | 9,279 | | 2,874 | | 1,619 | | 851 | | 14,623 | |
| Amortisation and impairment | | | | | |
| At 30 June 2021 | 1,097 | | 670 | | 80 | | 568 | | 2,415 | |
| Exchange differences | 51 | | 60 | | (1) | | 25 | | 135 | |
| Amortisation for the year | — | | — | | 7 | | 38 | | 45 | |
| Impairment | 317 | | 19 | | — | | — | | 336 | |
| Disposals | (23) | | (28) | | — | | (20) | | (71) | |
| Reclassification to asset held for sale | (400) | | — | | — | | (8) | | (408) | |
| At 30 June 2022 | 1,042 | | 721 | | 86 | | 603 | | 2,452 | |
| Exchange differences | (96) | | (61) | | (1) | | (15) | | (173) | |
| Amortisation for the year | — | | — | | 16 | | 40 | | 56 | |
| Impairment | 498 | | — | | — | | — | | 498 | |
| Disposals | — | | — | | — | | (24) | | (24) | |
| Reclassification from/(to) asset held for sale | 315 | | (13) | | — | | — | | 302 | |
| At 30 June 2023 | 1,759 | | 647 | | 101 | | 604 | | 3,111 | |
| Carrying amount | | | | | |
| At 30 June 2023 | 7,520 | | 2,227 | | 1,518 | | 247 | | 11,512 | |
| At 30 June 2022 | 7,896 | | 2,287 | | 1,584 | | 135 | | 11,902 | |
| At 30 June 2021 | 7,361 | | 1,957 | | 1,341 | | 105 | | 10,764 | |
|
| | | | | | | | | | | | | | | |
| | | Brands
£ million |
| | Goodwill
£ million |
| | Other
intangibles
£ million |
| | Computer
software
£ million |
| | Total
£ million |
|
| Cost | | | | | | | | | | |
| At 30 June 2018 | | 8,946 |
| | 2,788 |
| | 1,482 |
| | 604 |
| | 13,820 |
|
| Exchange differences | | 182 |
| | 28 |
| | 56 |
| | 8 |
| | 274 |
|
| Additions | | 25 |
| | 10 |
| | 2 |
| | 46 |
| | 83 |
|
Disposals(i) | | (230 | ) | | (12 | ) | | — |
| | (5 | ) | | (247 | ) |
Transfers to assets held for sale(ii) | | (28 | ) | | (19 | ) | | — |
| | — |
| | (47 | ) |
| At 30 June 2019 | | 8,895 |
| | 2,795 |
| | 1,540 |
| | 653 |
| | 13,883 |
|
| Exchange differences | | (74 | ) | | (139 | ) | | 44 |
| | — |
| | (169 | ) |
| Additions | | 102 |
| | 8 |
| | 3 |
| | 52 |
| | 165 |
|
| Disposals | | — |
| | — |
| | — |
| | (7 | ) | | (7 | ) |
| At 30 June 2020 | | 8,923 |
| | 2,664 |
| | 1,587 |
| | 698 |
| | 13,872 |
|
| Amortisation and impairment | | | | | | | | | | |
| At 30 June 2018 | | 616 |
| | 110 |
| | 75 |
| | 447 |
| | 1,248 |
|
| Exchange differences | | 5 |
| | 3 |
| | — |
| | 8 |
| | 16 |
|
| Amortisation for the year | | — |
| | — |
| | 3 |
| | 60 |
| | 63 |
|
| Disposals | | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| At 30 June 2019 | | 621 |
| | 113 |
| | 78 |
| | 514 |
| | 1,326 |
|
| Exchange differences | | (17 | ) | | (16 | ) | | (1 | ) | | 2 |
| | (32 | ) |
| Amortisation for the year | | — |
| | — |
| | 1 |
| | 62 |
| | 63 |
|
| Impairment | | 564 |
| | 655 |
| | — |
| | — |
| | 1,219 |
|
| Disposals | | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
| At 30 June 2020 | | 1,168 |
| | 752 |
| | 78 |
| | 574 |
| | 2,572 |
|
| Carrying amount | | | | | | | | | | |
| At 30 June 2020 | | 7,755 |
| | 1,912 |
| | 1,509 |
| | 124 |
| | 11,300 |
|
| At 30 June 2019 | | 8,274 |
| | 2,682 |
| | 1,462 |
| | 139 |
| | 12,557 |
|
| At 30 June 2018 | | 8,330 |
| | 2,678 |
| | 1,407 |
| | 157 |
| | 12,572 |
|
(i) In the year ended 30 June 2019 Diageo completed the sale of a portfolio of 19 brands to Sazerac. See note 8(b) for further information.
(ii) Transfers to assets held for sale in the year ended 30 June 2019 was in respect of United National Breweries (UNB).
Financial statements (continued)
(a) Brands
At 30 June 2020, theThe principal acquired brands, all of which are regarded as having indefinite useful economic lives, are as follows:
| | | | | | | | | | | |
| | Principal markets | 2023 £ million | 2022 £ million |
| Crown Royal whisky | United States | 1,162 | | 1,210 | |
| Captain Morgan rum | Global | 954 | 993 |
| Smirnoff vodka | Global | 654 | 681 |
| Johnnie Walker whisky | Global | 625 | 625 |
| Casamigos tequila | United States | 479 | 499 |
| McDowell's No.1 whisky, rum and brandy | India | 308 | 778 |
| Don Papa rum | Europe | 282 | — | |
| Yenì raki | Turkey | 249 | 294 | |
| Shui Jing Fang Chinese white spirit | Greater China | 246 | 279 |
| Don Julio tequila | United States | 235 | 207 |
| Aviation American gin | United States | 209 | 218 |
| Seagram's 7 Crown whiskey | United States | 177 | 184 |
| Signature whisky | India | 176 | 191 |
| Zacapa rum | Global | 152 | 158 |
| Black Dog whisky | India | 149 | 162 |
| Antiquity whisky | India | 145 | 158 |
| Windsor Premier whisky | Korea | 137 | — | |
| Gordon's gin | Europe | 119 | 119 |
| Bell's whisky | Europe | 102 | 102 |
| | | |
| | | |
| Other brands | | 960 | 1,038 |
| | 7,520 | | 7,896 | |
|
| | | | | | | | |
| | | Principal markets | | 2020
£ million |
| | 2019
£ million |
|
| Crown Royal whisky | | United States | | 1,190 |
| | 1,153 |
|
| McDowell's No.1 whisky, rum and brandy | | India | | 1,050 |
| | 1,112 |
|
| Captain Morgan rum | | Global | | 977 |
| | 946 |
|
| Smirnoff vodka | | Global | | 670 |
| | 648 |
|
| Johnnie Walker whisky | | Global | | 625 |
| | 625 |
|
| Casamigos tequila | | United States | | 491 |
| | 476 |
|
| Shui Jing Fang Chinese white spirit | | Greater China | | 260 |
| | 259 |
|
| Yenì Raki | | Turkey | | 202 |
| | 231 |
|
| Signature whisky | | India | | 197 |
| | 209 |
|
| Seagram's 7 Crown whiskey | | United States | | 181 |
| | 176 |
|
| Don Julio tequila | | United States | | 179 |
| | 209 |
|
| Bell's whisky | | Europe | | 179 |
| | 179 |
|
| Black Dog whisky | | India | | 167 |
| | 177 |
|
| Antiquity whisky | | India | | 163 |
| | 173 |
|
| Zacapa rum | | Global | | 156 |
| | 151 |
|
| Windsor Premier whisky | | Korea | | 154 |
| | 589 |
|
| Gordon's gin | | Europe | | 119 |
| | 119 |
|
| Old Parr whisky | | Global | | 110 |
| | 106 |
|
| Other brands | |
| | 685 |
| | 736 |
|
| | | | | 7,755 |
| | 8,274 |
|
The brands are protected by trademarks which are renewable indefinitely in all of the major markets where they are sold. There are not believed to be any legal, regulatory or contractual provisions that limit the useful lives of these brands. The nature of the premium drinks industry is that obsolescence is not a common issue, with indefinite brand lives being commonplace, and Diageo has a number of brands that were originally created more than 100 years ago. Accordingly, the Directors believe that it is appropriate that the brands are treated as having indefinite lives for accounting purposes and are therefore not amortised.
(b) Goodwill
For the purposes of impairment testing, goodwill has been attributed to the following cash-generating units:
| | | | | | | | |
| | 2023 £ million | 2022 £ million |
| North America | 767 | | 773 | |
| Europe | | |
| | |
| Turkey | 216 | | 255 | |
| Asia Pacific | | |
| Greater China | 124 | | 141 | |
| India | 673 | | 747 | |
| Latin America and Caribbean – Mexico | 161 | | 142 | |
| | |
| | |
| | |
| Other cash-generating units | 286 | | 229 | |
| 2,227 | | 2,287 | |
|
| | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
|
| North America | | 416 |
| | 403 |
|
| Europe and Turkey | |
| |
|
| Europe (excluding Turkey) | | 181 |
| | 172 |
|
| Turkey | | 205 |
| | 234 |
|
| Latin America and Caribbean – Mexico | | 123 |
| | 143 |
|
| Asia Pacific | |
| |
|
| Greater China | | 132 |
| | 131 |
|
| India | | 770 |
| | 1,511 |
|
| Other cash-generating units | | 85 |
| | 88 |
|
| | | 1,912 |
| | 2,682 |
|
Goodwill has arisen on the acquisition of businesses and includes synergies arising from cost savings, the opportunity to utilise Diageo’s distribution network to leverage marketing of the acquired products and the extension of the group’s portfolio of brands in new markets around the world.
Financial statements (continued)
(c) Other intangibles
Other intangibles principally comprise distribution rights. Diageo owns the global distribution rights for Ketel One vodka products in perpetuity, and the Directors believe that it is appropriate to treat these rights as having an indefinite life for accounting purposes. The carrying value at 30 June 20202023 was £1,464£1,428 million (2019(2022 – £1,418£1,488 million).
(d) Impairment testing
Impairment tests are performed annually, or more frequently if events or circumstances indicate that the carrying amount may not be recoverable. Recoverable amounts are calculated based on the value in use approach, also considering fair value less cost to sale.costs of disposal. The value in use calculations are based on discounted forecast cash flows using the assumption that cash flows continue in perpetuity at the terminal growth rate of each country or region. The individual brands, other intangibles with indefinite useful lives and theirthe associated tangible fixed assetsproperty, plant and equipment are aggregated as separate cash-generating units. Separate tests are carried out for each cash-generating unit and for each of the markets. Goodwill is attributed to each of the markets.
The key assumptions used for the value in use calculations are as follows:
Cash flows
Cash flows are forecastforecasted for each cash-generating unit for the financial year, which isyears based on management's approved by managementplans and reflect the following assumptions:
| |
– | Cash flows are projected based on the actual operating results and a three-year plan approved by the management. Cash flows are extrapolated up to five-years using expected growth rates in line with management’s best estimates. Growth rates reflect expectations of sales growth, operating costs and margin, based on past experience and external sources of information. Where applicable, multiple cash flow scenarios were populated to predict the potential outcome, considering the increased risk of uncertainty around the duration and severity of the Covid-19 pandemic in the different markets. A simple average of these projections served as the estimation of the recoverable amount of the cash-generating units including the goodwill of USL, Indian brands, Nigeria and Windsor Premier brand. Management has no information which would indicate that any of the scenarios are more likely than the others;
|
| |
– | The five-year forecast period is extended by up to an additional ten years at acquisition date for some intangible assets and goodwill when management believes that this period is justified by the maturity of the market and expects to achieve growth in excess of the terminal growth rate driven by Diageo’s sales, marketing and distribution expertise. Cash flows beyond the five-year period are projected using steady or progressively declining growth rates. These rates do not exceed the annual growth rate of the real gross domestic product (GDP) aggregated with the long-term annual inflation rate of the country or region;
|
| |
– | Cash flows for the subsequent years after–Cash flows are projected based on the actual operating results and a three-year strategic plan approved by management. Cash flows are extrapolated up to five years using expected growth rates in line with management’s best estimates. Growth rates reflect expectations of sales growth, operating costs and margin, based on past experience and external sources of information. A simple average of these projections serves as the estimation of the recoverable amount of the cash-generating units. Management has no information which would indicate that any of the scenarios are more likely than others; –The five-year forecast period is extended by up to an additional ten years at acquisition date for some intangible assets and goodwill when management believes that this period is justified by the maturity of the market and expects to achieve growth in excess of the terminal growth rate driven by Diageo’s sales, marketing and distribution expertise. These cash flows beyond the five-year period are projected using steady or progressively declining growth rates. The main exception is India and the USL brands, where the forecast period are extrapolated based on a terminal growth rate which does not exceed the long-term annual inflation rate of the country or region. |
The calculation of value in use as at 30 June 2020 is based on a five-year detailed plan for every cash-generating unit, except for India where the period is extended by an additional four years.one year of detailed forecasts;
–Cash flows for the subsequent years after the forecast period are extrapolated based on a terminal growth rate which does not exceed the long-term annual inflation rate of the country or region.
Discount rates
The discount rates used are the weighted average cost of capital which reflectsreflect the returns on government bonds and an equity risk premium adjusted for the drinks industry specific to the cash-generating units. Further risk premiums are applied according to management’s assessment of the risks in respect of the cash flows for a particular asset or cash-generating unit. The group applies post-tax discount rates to post-tax cash flows as the valuation calculated using this method closely approximates to applying pre-tax discount rates to pre-tax cash flows.
For goodwill, these assumptions are based on the cash-generating unit or group of units to which the goodwill is attributed. For brands, they are based on a weighted average taking into account the country or countries where sales are made.
Financial statements (continued)
The pre-tax discount rates, terminal and long-term growth rates used for impairment testing are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | |
| | Pre-tax discount rate
% | Terminal growth rate
% | Long-term growth rate
% | Pre-tax discount rate
% | Terminal growth rate
% | Long-term growth rate
% |
| North America – United States | 9 | | 2 | | 4 | | 8 | | 2 | | 4 | |
| Europe | | | | | | |
| United Kingdom | 9 | | 2 | | 5 | | 8 | | 2 | | 4 | |
| | | | | | |
| Turkey | 28 | | 16 | | 28 | | 31 | | 15 | | 25 | |
| | | | | | |
| Asia Pacific | | | | | | |
| Australia | 10 | | 3 | | 5 | | 7 | | 2 | | 5 | |
| Korea | 11 | | (2) | | 4 | | 7 | | 2 | | 5 | |
| India | 14 | | 4 | | 15 | | 14 | | 4 | | 11 | |
| Greater China | 11 | | 2 | | 6 | | 7 | | 2 | | 7 | |
| | | | | | |
| Latin America and Caribbean | | | | | | |
| Brazil | 16 | | 3 | | 6 | | 12 | | 3 | | 6 | |
| Mexico | 13 | | 3 | | 6 | | 14 | | 3 | | 6 | |
| Africa | | | | | | |
| Africa Emerging Markets | 35 | | 8 | | 18 | | 12 | | 5 | | 11 | |
| South Africa | 20 | | 5 | | 6 | | 16 | | — | | 6 | |
| Nigeria | 35 | | 5 | | 18 | | 24 | | 12 | | 15 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | 2020 | | | 2019 | |
| | | Pre-tax discount rate
% |
| | Terminal growth rate
% |
| | Long-term growth rate
% |
| | Pre-tax discount rate
% |
| | Terminal growth rate
% | | Long-term growth rate
% |
|
| North America – United States | | 8 |
| | 2 |
| | 4 |
| | 9 |
| | 2 | | 4 |
|
| Europe and Turkey | |
| |
| | | |
| |
| | |
| Europe (excluding Turkey) | | 7 |
| | 2 |
| | 4 |
| | 7 |
| | 2 | | 4 |
|
| Turkey | | 22 |
| | 11 |
| | 15 |
| | 25 |
| | 13 | | 16 |
|
| Africa | |
| |
| | | |
| |
| | |
| Ethiopia | | 21 |
| | 8 |
| | 17 |
| | 25 |
| | 8 | | 17 |
|
| South Africa | | 18 |
| | — |
| | 7 |
| | 18 |
| | — | | 7 |
|
| Latin America and Caribbean | |
|
| |
|
| | | |
|
| |
| | |
| Brazil | | 15 |
| | 3 |
| | 6 | | 16 |
| | 4 | | 6 |
| Mexico | | 16 |
| | 3 |
| | 5 |
| | 17 |
| | 3 | | 6 |
|
| Asia Pacific | |
|
| |
|
| | | |
|
| |
| | |
| Korea | | 10 |
| | (4 | ) | | — | | 8 |
| | 2 | | — |
| Greater China | | 9 |
| | 3 |
| | 8 | | 10 |
| | 3 | | 8 |
| India | | 12 |
| | 4 |
| | 12 | | 14 |
| | 5 | | 12 |
As a result of the impairment review, in the year ended 30 June 2023, an impairment charge of £420 million in respect of the McDowell's brand and £24 million in respect of the Director’s Special brand were recognised in exceptional operating items. Value in use calculation and fair value less costs of disposal methodologies were both considered to assess the recoverable amount ofamount. The value in use that was calculated exceeded 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 ondisposal. The charge is mainly driven by the value a third party may pay for a controlling stakeadverse inflationary environment and the reduction 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. In the year ended 30 June 2020, impairment charges of £78 million in respect of the Old Tavern brand and £38 million in respect of the Bagpiper brand in India were also recognised in exceptional operating items, based on their value in use. Forecastforecast 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 both negatively impacting demandin Lower Prestige and margins.Popular segments in India. The brand impairment reduced the deferred tax liability by £25 million.£111 million. The recoverable amount is £3,444£379 million in respect of the McDowell's brand and £11 million in respect of the Director’s Special brand cash-generating units.
As a result of the impairment review, in the year ended 30 June 2023, an additional impairment charge of £54 million was recognised in exceptional operating items in respect of some brands where book value was not recoverable. The charge is mainly driven by strategic change in some categories as a result of the challenging operating environment and premiumisation. Value in use and fair value less costs of disposal methodologies were both considered to assess the recoverable amount. The value in use that was calculated exceeded the fair value less costs of disposal. The brand impairment reduced the deferred tax liability by £13 million.
In the year ended 30 June 2022, an impairment charge of £240 million in respect of the India cash-generating unit, £20McDowell's brand was recognised in exceptional operating items, based on its value in use. The brand impairment reduced the deferred tax liability by £35 million.
Further, in the year ended 30 June 2022, an impairment charge of £77 million in respect of the Old TavernBell’s brand and £94 million in respect of the Bagpiper brand cash-generating units.
In the year ended 30 June 2020, an impairment charge of £434 million in respect of the Windsor Premier brand has beenwas recognised in exceptional operating items, based on its value in use. The impairment reduced the deferred tax liability attributable to the brand by £105 million resulting£20 million.
In the year ended 30 June 2022, Diageo decided to wind down its operations in Russia. As a net exceptional lossresult, an impairment charge of £329 million. 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. The recoverable amount is £164£19 million in respect of the Windsor PremierSmirnov goodwill was recognised in exceptional operating items.
The Turkish economy became hyperinflationary for the year ended 30 June 2022, and an impairment charge of TRY 3,760 million (£312 million) on the opening carrying amount of the Turkey cash-generating unit was recognised in retained earnings. From this impairment charge, TRY 1,627 million (£135 million) was directly attributable to the Yenì Raki brand cash-generating unit.and the remaining TRY 2,133 million (£177 million) impairment charge was recognised on the Turkey goodwill.
Financial statements (continued)
(e) Sensitivity to change in key assumptions
Impairment testing for the year ended 30 June 20202023 has identified the following cash-generating units as being sensitive to reasonably possible changes in assumptions.
The table below shows the headroom at 30 June 20202023 and the impairment charge that would be required if the assumptions in the calculation of their value in use were changed:
Financial statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Increase in discount rate | | Decrease in terminal growth rate | | Decrease in annual growth rate in forecast period 2024-2029 | | Decrease in cash flows(1) | | | | | | |
| Carrying value of CGU
£ million | Headroom
£ million | | Reasonably possible change | Potential impairment charge
£ million | | Reasonably possible change | Potential impairment charge
£ million | | Reasonably possible change | Potential impairment charge
£ million | | Reasonably possible change | Potential impairment charge
£ million | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| McDowell's | 379 | | — | | | 1ppt | (38) | | | 1ppt | (26) | | | 2ppt | (67) | | | 10 | % | (76) | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | Carrying value of CGU
£ million |
| | Headroom
£ million |
| | 1ppt increase in discount rate
£ million |
| | 2ppt decrease in annual growth rate in forecast period 2021-2029
£ million |
| | 0.5 - 1ppt reduction in the rate of price increase
£ million |
| | Covid-19 scenario
£ million |
|
India(i) | | 3,444 |
| | — |
| | (242 | ) | | (235 | ) | | (297 | ) | | (396 | ) |
Bagpiper brand(i) | | 94 |
| | — |
| | (11 | ) | | (16 | ) | | (19 | ) | | (17 | ) |
Antiquity brand(i) | | 166 |
| | 8 |
| | (15 | ) | | (18 | ) | | (13 | ) | | (25 | ) |
McDowell's No.1 brand(i) | | 1,179 |
| | 29 |
| | (121 | ) | | (173 | ) | | (216 | ) | | (234 | ) |
Windsor Premier brand(ii) | | 164 |
| | — |
| | — |
| | — |
| | — |
| | (30 | ) |
Bell's brand(iii) | | 225 |
| | 12 |
| | (11 | ) | | — |
| | — |
| | — |
|
| |
(i) | Reasonably possible changes in key assumptions that would result in an additional impairment of the India cash-generating unit, Bagpiper, Antiquity and McDowell's No.1 brands would be a 1ppt increase in discount rate or a 2ppt decrease in the annual growth rate in forecast period of 2021-2029 or a 0.5-1ppt reduction in the rate of price increase. Furthermore, due to the Covid-19 pandemic, a permanent delay of the F20 lost base recovery period is also considered to be a reasonably possible scenario due to the severity of measures taken in India and the introduction of unprecedented increase of taxes on alcohol. In the Covid-19 scenario above it was assumed that F19 base will be reached by F25.
|
| |
(ii) | Due to the high-level uncertainty of the Covid-19 pandemic, additional possible changes in volume growth rates are forecasted assuming permanent damage of local whisky category with no recovery to F19 levels based on latest outlook of IWSR reports, and the fact that the majority of sales are on-trade. |
(iii) The Bell's brand is disclosed as sensitive due to strong competition and challenging market conditions. The only change in the key assumptions considered(1) Including reasonably possible that would resultchanges in an impairment of the brand would be a 1ppt increase in discount rate.productivity saving assumptions.
(f) USL combination of popular brands
Following the acquisition of United Spirits Limited (USL) in 2014, all material brands together with the associated property, plant and equipment (the brands) were fair valued and capitalised. Each year since the acquisition, the brands were tested separately for impairment.
The long-term strategic priorities have continued to evolve for the Indian market with a greater emphasis on premium brands, operating margin expansion and generating marketing spend efficiencies. This has resulted in the management and marketing teams managing, reporting both internally and externally, and allocating resources to the popular category rather than to individual brands.
In the year ended 30 June 2020, the impairment tests have been carried out for the brands within the popular category as a single cash-generating unit and also at the individual brand level to ensure that the change in the definition of cash-generating units does not result in the understatement of an impairment charge. The impairment charge of £116 million on Old Tavern Whisky and Bagpiper was based on the individual brand level impairment models. For the year ending 30 June 2021 a single impairment test will be carried out at the popular category in accordance with how this category is now managed.
The principal USL brands in the popular category are Director's Special, Bagpiper, Old Tavern Whisky and White Mischief.
10. Property, plant and equipment
Accounting policies
Land and buildings are stated at cost less accumulated depreciation. Freehold land is not depreciated. Leaseholds are generally depreciated over the unexpired period of the lease. Other property, plant and equipment are depreciated on a straight-line basis to estimated residual values over their expected useful lives, and these values and lives are reviewed each year. Subject to these reviews, the estimated useful lives fall within the following ranges: buildings – 10 to 50 years; within plant and equipment casks and containers – 15 to 50 years; other plant and equipment – 5 to 2540 years; fixtures and fittings – 5 to 10 years; and returnable bottles and crates – 5 to 10 years.
Reviews are carried out if there is an indication that assets may be impaired, to ensure that property, plant and equipment are not carried at above their recoverable amounts.
Government grants
Government grants are not recognised until there is reasonable assurance that the group will comply with the conditions pursuant to which they have been granted and that the grants will be received. Government grants in respect of property, plant and equipment are deducted from the asset that they relate to, reducing the depreciation expense charged to the income statement.
Financial statements (continued)
|
| | | | | | | | | | | | | | | | | | |
| | | Land and
buildings
£ million |
| | Plant and
equipment
£ million |
| | Fixtures
and
fittings
£ million |
| | Returnable
bottles and
crates
£ million |
| | Under
construction
£ million |
| | Total
£ million |
|
| Cost | | | | | | | | | | | | |
| At 30 June 2018 | | 1,585 |
| | 4,102 |
| | 126 |
| | 534 |
| | 432 |
| | 6,779 |
|
| Exchange differences | | 16 |
| | 54 |
| | 1 |
| | 4 |
| | 10 |
| | 85 |
|
| Sale of businesses | | (2 | ) | | (7 | ) | | (1 | ) | | — |
| | — |
| | (10 | ) |
| Additions | | 42 |
| | 180 |
| | 9 |
| | 31 |
| | 383 |
| | 645 |
|
| Disposals | | (16 | ) | | (32 | ) | | (13 | ) | | (21 | ) | | (2 | ) | | (84 | ) |
| Transfers | | 87 |
| | 218 |
| | 3 |
| | 18 |
| | (329 | ) | | (3 | ) |
| At 30 June 2019 | | 1,712 |
| | 4,515 |
| | 125 |
| | 566 |
| | 494 |
| | 7,412 |
|
| Recognition of right-of-use asset on adoption of IFRS 16 | | 173 |
| | 63 |
| | — |
| | — |
| | — |
| | 236 |
|
| Adjusted balance at 1 July 2019 | | 1,885 |
| | 4,578 |
| | 125 |
| | 566 |
| | 494 |
| | 7,648 |
|
| Exchange differences | | (10 | ) | | (22 | ) | | — |
| | (1 | ) | | (9 | ) | | (42 | ) |
| Additions | | 202 |
| | 156 |
| | 13 |
| | 34 |
| | 439 |
| | 844 |
|
| Disposals | | (46 | ) | | (86 | ) | | (20 | ) | | (37 | ) | | (1 | ) | | (190 | ) |
| Transfers | | 110 |
| | 242 |
| | 9 |
| | 13 |
| | (374 | ) | | — |
|
| At 30 June 2020 | | 2,141 |
| | 4,868 |
| | 127 |
| | 575 |
| | 549 |
| | 8,260 |
|
| Depreciation | | | | | | | | | | | | |
| At 30 June 2018 | | 467 |
| | 1,761 |
| | 91 |
| | 371 |
| | — |
| | 2,690 |
|
| Exchange differences | | 4 |
| | 23 |
| | — |
| | 3 |
| | — |
| | 30 |
|
| Depreciation charge for the year | | 49 |
| | 216 |
| | 13 |
| | 33 |
| | — |
| | 311 |
|
| Sale of businesses | | — |
| | (4 | ) | | — |
| | — |
| | — |
| | (4 | ) |
| Disposals | | (9 | ) | | (25 | ) | | (12 | ) | | (17 | ) | | — |
| | (63 | ) |
| Transfers | | — |
| | (6 | ) | | (1 | ) | | — |
| | — |
| | (7 | ) |
| At 30 June 2019 | | 511 |
| | 1,965 |
| | 91 |
| | 390 |
| | — |
| | 2,957 |
|
| Exchange differences | | — |
| | (5 | ) | | (1 | ) | | (2 | ) | | — |
| | (8) |
| Depreciation charge for the year | | 106 |
| | 260 |
| | 15 |
| | 36 |
| | — |
| | 417 |
| Exceptional impairment | | 20 |
| | 114 |
| | — |
| | 6 |
| | — |
| | 140 |
| Disposals | | (40 | ) | | (78 | ) | | (19 | ) | | (35 | ) | | — |
| | (172) |
| At 30 June 2020 | | 597 |
| | 2,256 |
| | 86 |
| | 395 |
| | — |
| | 3,334 |
|
| Carrying amount | | | | | | | | | | | | |
| At 30 June 2020 | | 1,544 |
| | 2,612 |
| | 41 |
| | 180 |
| | 549 |
| | 4,926 |
|
| At 30 June 2019 | | 1,201 |
| | 2,550 |
| | 34 |
| | 176 |
| | 494 |
| | 4,455 |
|
| At 30 June 2018 | | 1,118 |
| | 2,341 |
| | 35 |
| | 163 |
| | 432 |
| | 4,089 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Land and
buildings
£ million | Plant and
equipment
£ million | Fixtures
and
fittings
£ million | Returnable
bottles and
crates
£ million | Under
construction
£ million | Total
£ million |
| Cost | | | | | | |
| At 30 June 2021 | 2,160 | | 4,714 | | 121 | | 528 | | 659 | | 8,182 | |
| | | | | | |
| | | | | | |
| Hyperinflation adjustment in respect of Turkey and Venezuela | 56 | | 32 | | 2 | | — | | 7 | | 97 | |
| Exchange differences | 107 | | 226 | | 1 | | 11 | | 45 | | 390 | |
| | | | | | |
| Sale of businesses | (4) | | (58) | | (3) | | (19) | | (1) | | (85) | |
| Additions | 230 | | 245 | | 8 | | 41 | | 612 | | 1,136 | |
| Disposals | (65) | | (122) | | (15) | | (32) | | (3) | | (237) | |
| Transfers | 177 | | 249 | | 10 | | 13 | | (449) | | — | |
| Reclassification to assets held for sale | (8) | | (25) | | — | | — | | — | | (33) | |
| At 30 June 2022 | 2,653 | | 5,261 | | 124 | | 542 | | 870 | | 9,450 | |
| | | | | | |
| | | | | | |
| Hyperinflation adjustment in respect of Turkey and Venezuela | 5 | | 10 | | 1 | | — | | 4 | | 20 | |
| Exchange differences | (166) | | (331) | | (6) | | (49) | | (30) | | (582) | |
| Acquisitions | 8 | | 14 | | — | | 3 | | — | | 25 | |
| Sale of businesses | (35) | | (147) | | (3) | | (55) | | (3) | | (243) | |
| Additions | 111 | | 214 | | 13 | | 50 | | 832 | | 1,220 | |
| Disposals | (64) | | (141) | | (12) | | (105) | | (2) | | (324) | |
| Transfers | 146 | | 238 | | 12 | | 28 | | (424) | | — | |
| Reclassification from assets held for sale | 2 | | — | | 1 | | — | | — | | 3 | |
| At 30 June 2023 | 2,660 | | 5,118 | | 130 | | 414 | | 1,247 | | 9,569 | |
| Depreciation | | | | | | |
| At 30 June 2021 | 658 | | 2,218 | | 86 | | 371 | | — | | 3,333 | |
| Exchange differences | 31 | | 94 | | 1 | | 9 | | — | | 135 | |
| Depreciation charge for the year | 125 | | 276 | | 14 | | 29 | | — | | 444 | |
| Exceptional impairment | 2 | | 1 | | — | | — | | — | | 3 | |
| Sale of businesses | (4) | | (50) | | (2) | | (18) | | — | | (74) | |
| Disposals | (62) | | (113) | | (13) | | (30) | | — | | (218) | |
| Transfers | 5 | | 4 | | (9) | | — | | — | | — | |
| Reclassification to assets held for sale | (5) | | (16) | | — | | — | | — | | (21) | |
| At 30 June 2022 | 750 | | 2,414 | | 77 | | 361 | | — | | 3,602 | |
| Exchange differences | (38) | | (176) | | (3) | | (27) | | — | | (244) | |
| Depreciation charge for the year | 125 | | 269 | | 13 | | 33 | | — | | 440 | |
| Exceptional accelerated depreciation and impairment | 31 | | 41 | | — | | — | | — | | 72 | |
| | | | | | |
| Sale of businesses | (21) | | (80) | | (2) | | (34) | | — | | (137) | |
| Disposals | (63) | | (130) | | (11) | | (103) | | — | | (307) |
| | | | | | |
| | | | | | |
| Reclassification from assets held for sale | — | | — | | 1 | | — | | — | | 1 |
| At 30 June 2023 | 784 | | 2,338 | | 75 | | 230 | | — | | 3,427 | |
| Carrying amount | | | | | | |
| At 30 June 2023 | 1,876 | | 2,780 | | 55 | | 184 | | 1,247 | | 6,142 | |
| At 30 June 2022 | 1,903 | | 2,847 | | 47 | | 181 | | 870 | | 5,848 | |
| At 30 June 2021 | 1,502 | | 2,496 | | 35 | | 157 | | 659 | | 4,849 | |
(a) The net book value of land and buildings comprises freeholds of £1,218£1,481 million (2019 (2022 – £1,162 million)£1,444 million), long leaseholds of £6£3 million (2019 (2022 – £21 million)£3 million) and short leaseholds of £320£389 million (2019 (2022 – £18 million)£410 million). Depreciation was not charged on £161£141 million (2019 (2022 – £164 million)£114 million) of land.
(b) Property, plant and equipment is net of a government grant of £150£147 million (2019(2022 – £143£153 million) received in prior years in respect of the construction of a rum distillery in the US Virgin Islands.
(c) In the year ended 30 June 2020, an impairment charge of £84 million in respect of the Nigeria tangible fixed asset has been recognised in exceptional operating items. The impairment reduced the deferred tax liability by £25 million resulting in a net exceptional loss of £59 million. 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. The recoverable amount is £140 million in respect of the Nigeria cash-generating unit based on the fair value of the assets applying the cost valuation technique and it is considered a Level 3 instrument within the fair value hierarchy as the assumptions used in the valuation are not observable in the market. The valuation is only sensitive to the cost of replacing the assets and if this was 10% less, the fair value of the assets would decrease by approximately £14 million.
Financial statements (continued)
11. Biological assets
(d) In
Accounting policies
Biological assets held by the year ended 30 June 2020, an impairment chargegroup consist of £55 million in respectagave (Agave Azul Tequilana Weber) plants. The harvested plants are used during the production of tequila.
Biological assets are measured at fair value less costs to sell on initial recognition and at the Ethiopia tangible fixed asset has been recognised in exceptional operating items. The impairment reduced the deferred tax liability by £10 million resulting in a net exceptional lossend of £45 million. The forecast cash flow assumptions were reduced principally due to the impact of recent excise duty increase and Covid-19 pandemic. The recoverable amount is £12 million in respect of the Ethiopia cash-generating uniteach reporting period based on the present value of future cash flows discounted at an appropriate rate for Mexico.
Agricultural produce is measured at fair value less costs to sell at the point of harvest which is used as the assets. cost of inventory when the harvested agave is transferred.
Changes in biological assets were as follows: 11. | | | | | |
| Biological
assets
£ million |
| Fair value | |
| At 30 June 2021 | 66 | |
| Exchange differences | 10 | |
| Transferred to inventories | (11) | |
| Fair value change | (5) | |
| Farming cost capitalised | 34 | |
| At 30 June 2022 | 94 | |
| Exchange differences | 15 | |
| |
| Transferred to inventories | (8) | |
| Fair value change | — | |
| Farming cost capitalised | 55 | |
| At 30 June 2023 | 156 | |
At 30 June 2023, the number of agave plants was approximately 37 million (2022 – 33 million), ranging from new plantations up to seven year-old plants.
12. Leases
Accounting policies
Where the group is the lessee, all leases are recognised on the balance sheet as right-of-use assets and depreciated on a straight-line basis with the charge recognised in cost of sales.sales or in other operating items depending on the nature of the costs. The liability, recognised as part of net borrowings, is measured at a discounted value and any interest is charged to finance charges.
The group recognises services associated with a lease as other operating expenses. Payments associated with leases where the value of the asset when it is new is lower than $5,000 (leases of low value assets) and leases with a lease term of twelve12 months or less (short term leases) are recognised as other operating expenses. A judgement in calculating the lease liability at initial recognition includes determining the lease term where extension or termination options exist. In such instances, any economic incentive to retain or end a lease are considered and extension periods are only included when it is considered reasonably certain that an option to extend a lease will be exercised.
For the years ended 30 June 2019 and 2018, where the group had substantially all the risks and rewards of ownership of an asset subject to a lease, the lease was treated as a finance lease. Assets held under finance leases were recognised as assets of the group at their fair value at the inception of the lease. The corresponding liability to the lessor was included in other financial liabilities on the consolidated balance sheet. Lease payments were apportioned between interest expense and a reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Other leases were treated as operating leases, with payments and receipts taken to the income statement on a straight-line basis over the life of the lease.
243
(a) Adoption of IFRS 16
Under the new standard, outstanding lease liabilities have been recognised at 1 July 2019, for leases previously classified as operating leases, at the present value of the future lease payments over their reasonably certain lease term. Right-of-use assets have been recognised equal to the net present value of the lease liabilities, adjusted for the amount of any prepaid or accrued lease payment, lease incentives and provisions for onerous leases. There was no impact on retained earnings as at 1 July 2019. The interest rate used to discount the future payments in the calculation of the lease liability is the incremental borrowing rate at 1 July 2019 taking into account the currency and duration of the lease. The weighted average incremental borrowing rate applied across all operating leases capitalised on 1 July 2019 was 3.2%.
For leases previously classified as finance leases the group recognised the carrying amount of the lease asset and lease liability immediately before transition as the carrying amount of the right-of-use asset and the lease liability at the date of adoption of IFRS 16, 1 July 2019. The re-measurement principles of IFRS 16 are only applied after that date.
The group has decided to reduce the complexity of implementation by taking advantage of a number of practical expedients on transition on 1 July 2019 namely:
| |
(i) | to not capitalise leases which expire within a year of 1 July 2019;
|
| |
(ii) | to apply a single discount rate to portfolios of leases with similar characteristics; and
|
| |
(iii) | to adjust the right-of-use asset by the amount of any provision for onerous leases recognised immediately before the date of initial application.
|
The group has not capitalised leases where the value of the asset when it is new is lower than $5,000 (low value assets).
Financial statements (continued)
(a) Movement in right-of-use assets
The impact of the adoption of IFRS 16 on affected lines of the consolidated balance sheet at 1 July 2019 is as follows:
|
| | | | | | | | | |
| | | 30 June 2019
£ million |
| | IFRS 16 impact
£ million |
| | 1 July 2019
£ million |
|
| Non-current assets | | | | | | |
| Property, plant and equipment | | 4,455 |
| | 236 |
| | 4,691 |
|
| Other financial assets | | 404 |
| | 1 |
| | 405 |
|
| Current assets | | | | | | |
| Trade and other receivables | | 2,694 |
| | (2 | ) | | 2,692 |
|
| | | | | | | |
| Current liabilities | | | | | | |
| Other financial liabilities | | (307 | ) | | (64 | ) | | (371 | ) |
| Trade and other payables | | (4,202 | ) | | 13 |
| | (4,189 | ) |
| Non-current liabilities | | | | | | |
| Other financial liabilities | | (124 | ) | | (187 | ) | | (311 | ) |
| Provisions | | (317 | ) | | 3 |
| | (314 | ) |
As a result of the adoption of IFRS 16, on 1 July 2019 the total assets increased by £235 million from £31,296 million to £31,531 million and total liabilities increased by £235 million from £21,140 million to £21,375 million. Thecompany principally leases (previously classified as operating leases) which have been recognised at adoption are principally in respect of warehouses, office buildings, plant and machinery, cars and distribution vehicles. There is no impact on deferred tax balances.vehicles in the ordinary course of business.
| | | | | | | | | | | | | | | | |
| Land and buildings
£ million | Plant and equipment
£ million | | | Under construction
£ million | Total
£ million |
| At 30 June 2021 | 230 | | 184 | | | | 29 | | 443 | |
| | | | | | |
| | | | | | |
| Exchange differences | 26 | | 14 | | | | — | | 40 | |
| Additions | 129 | | 56 | | | | — | | 185 | |
| Transfers | 29 | | — | | | | (29) | | — | |
| Reclassification to assets held for sale | (1) | | (1) | | | | — | | (2) | |
| Disposals | (6) | | — | | | | — | | (6) | |
| | | | | | |
| Depreciation | (54) | | (41) | | | | — | | (95) | |
| At 30 June 2022 | 353 | | 212 | | | | — | | 565 | |
| | | | | | |
| | | | | | |
| Exchange differences | (3) | | (23) | | | | — | | (26) | |
| Additions | 45 | | 37 | | | | — | | 82 | |
| | | | | | |
| | | | | | |
| Reclassification from assets held for sale | 1 | | 1 | | | | — | | 2 | |
| | | | | | |
| | | | | | |
| Derecognition due to disposal of business | (1) | | (1) | | | | — | | (2) | |
| Depreciation | (56) | | (39) | | | | — | | (95) | |
| At 30 June 2023 | 339 | | 187 | | | | — | | 526 | |
The adoption of IFRS 16 resulted in an immaterial benefit to operating profit and an immaterial increase in finance charges. Profit before tax, taxation and earnings per share have not been significantly impacted. The adoption of IFRS 16 has had no impact on the group’s net cash flows although a presentation change has been reflected whereby the principal element of the lease payments (for leases formerly classified as operating leases under IAS 17) of £74 million for the year ended 30 June 2020, are disclosed as part of cash flow from financing activities and the interest element is included in cash flow from operating activities. Under IAS 17 both the principal and interest cash flows from operating leases would have been disclosed as part of cash flows from operating activities.
A reconciliation of differences between the operating lease commitments disclosed under IAS 17 and disclosed in note 19(b) of Diageo’s 2019 Annual Report and the lease liabilities under IFRS 16, at 1 July 2019, is as follows:
|
| | | |
| | £ million |
|
Operating lease commitments at 30 June 2019 | | (321 | ) |
Leases expiring within a year of 1 July 2019 | | 19 |
|
Low value assets | | 11 |
|
Impact of discounting | | 40 |
|
Total additional lease liabilities recognised on adoption of IFRS 16 | | (251 | ) |
Finance lease liabilities at 30 June 2019 | | (128 | ) |
Total lease liabilities at 1 July 2019 | | (379 | ) |
Total lease liabilities at 1 July 2019 - current | | (107 | ) |
Total lease liabilities at 1 July 2019 - non-current | | (272 | ) |
Financial statements (continued)
b) Movement in right-of-use assets
|
| | | | | | | | | | | | |
| | | Land and buildings
£ million |
| | Plant and equipment
£ million |
| | Under construction
£ million |
| | Total
£ million |
|
At 30 June 2019(i) | | 2 |
| | 228 |
| | — |
| | 230 |
|
| Adoption of IFRS16 | | 173 |
| | 63 |
| | — |
| | 236 |
|
| Adjusted balance at 1 July 2019 | | 175 |
| | 291 |
| | — |
| | 466 |
|
| Exchange differences | | (3 | ) | | 2 |
| | — |
| | (1 | ) |
| Additions | | 150 |
| | 24 |
| | 32 |
| | 206 |
|
| Disposals | | (2 | ) | | — |
| | — |
| | (2 | ) |
Depreciation(ii) | | (51 | ) | | (41 | ) | | — |
| | (92 | ) |
| At 30 June 2020 | | 269 |
| | 276 |
| | 32 |
| | 577 |
|
(i) In the year ended 30 June 2019 and 30 June 2018, only leases that met the criteria of finance leases under IAS 17 - Leases were capitalised and included in property, plant and equipment.
(ii) In the year ended 30 June 2019 depreciation on assets held under finance leases was £12 million.
c)(b) Lease liabilities
| | | | | | | | |
| 2023
£ million | 2022
£ million |
| Current lease liabilities | (75) | | (85) | |
| Non-current lease liabilities | (373) | | (390) | |
| (448) | | (475) | |
|
| | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
|
| Current lease liabilities | | (106 | ) | | (43 | ) |
| Non-current lease liabilities | | (364 | ) | | (85 | ) |
| | | (470 | ) | | (128 | ) |
| |
(i) | In the year ended 30 June 2019, the group only recognised lease liabilities in relation to leases that were classified as finance leases under IAS 17 - Leases. The lease liabilities were presented as part of the group’s net borrowings in the year ended 30 June 2019.
|
The future cash outflows, which are not included in lease liabilities on the balance sheet, in respect of extension and termination options which are not reasonably expected to be exercised are estimated at £284 million. £261 million (2022 – £282 million).
d)(c) Amounts recognised in the consolidated income statement
In the year ended 30 June 20202023, other external charges (within other operating expenses (within other external charges)items) included £39 £57 million (2022 – £39 million) in respect of leases of low value assets and short term leases and £11£4 million (2022 – £9 million) in respect of variable lease payments. In the year ended 30 June 2019 other external charges included operating lease expenses in respect of plant and machinery of £19 million (2018 - £21 million) and other assets (mainly properties) of £101 million (2018 - £87 million). Refer to note 5 for further information relating to the interest expenses on lease liabilities.
The total cash outflow for leases in the year ended 30 June 20202023 was £180 million.£172 million (2022 – £154 million).
Financial statements (continued)
12.13. Other investments
Accounting policies
Other investments are such equity investments that are not classified as investments in associates or joint arrangements nor investments in subsidiaries. They are included in non-current assets. Subsequent to initial measurement, other investments are stated at fair value. Gains and losses arising from the changes in fair value are recognised in the income statement or in other comprehensive income on a case by case basis. Accumulated gains and losses included in other comprehensive income are not recycled to the income statement. Dividends from other investments are recognised in the consolidated income statement.
Loans receivable are non-derivative financial assets that are not classified as equity investments. They are subsequently measured either at amortised cost using the effective interest method less allowance for impairment or at fair value with gains and losses arising from changes in fair value recognised in the income statement or in other comprehensive income that are recycled to the income statement on the de-recognition of the asset. Allowances for expected credit losses are made based on the risk of non-payment taking into account ageing, previous experience, economic conditions and forward-looking data. Such allowances are measured as either 12-months expected credit losses or lifetime expected credit losses depending on changes in the credit quality of the counterparty.
| | | | | | | | | | | |
| Loans
£ million | Other investments
£ million | Total
£ million |
| Cost less allowances or fair value | | | |
| At 30 June 2021 | 10 | | 30 | | 40 | |
| Exchange differences | 2 | | 1 | | 3 | |
| Additions | 6 | | 9 | | 15 | |
| Repayments and disposals | (1) | | (1) | | (2) | |
| Fair value adjustment | — | | (13) | | (13) | |
| Step acquisitions | — | | (6) | | (6) | |
| Capitalised interest | 1 | | — | | 1 | |
| Transfer | — | | (1) | | (1) | |
| At 30 June 2022 | 18 | | 19 | | 37 | |
| Exchange differences | (1) | | — | | (1) | |
| Additions | 20 | | 9 | | 29 | |
| Repayments and disposals | (3) | | — | | (3) | |
| Fair value adjustment | — | | (4) | | (4) | |
| | | |
| | | |
| Capitalised interest | 1 | | — | | 1 | |
| Impairment charged during the year | — | | (2) | | (2) | |
| | | |
| At 30 June 2023 | 35 | | 22 | | 57 | |
|
| | | | | | | | | |
| | | Loans
£ million |
| | Others
£ million |
| | Total
£ million |
|
| Cost less allowances or fair value | | | | | | |
| At 30 June 2018 | | 35 |
| | 11 |
| | 46 |
|
| Additions | | 2 |
| | — |
| | 2 |
|
| Repayments and disposals | | (1 | ) | | — |
| | (1 | ) |
| Fair value adjustment | | — |
| | 2 |
| | 2 |
|
| Transfers | | (19 | ) | | 19 |
| | — |
|
| At 30 June 2019 | | 17 |
| | 32 |
| | 49 |
|
| Exchange differences | | 1 |
| | 1 |
| | 2 |
|
| Additions | | 3 |
| | — |
| | 3 |
|
| Repayments and disposals | | (1 | ) | | (2 | ) | | (3 | ) |
| Fair value adjustment | | — |
| | 2 |
| | 2 |
|
| Provision charged during the year | | (14 | ) | | — |
| | (14 | ) |
| Capitalised interest | | 1 |
| | — |
| | 1 |
|
| Transfer | | — |
| | 1 |
| | 1 |
|
| At 30 June 2020 | | 7 |
| | 34 |
| | 41 |
|
At 30 June 2020,2023, loans comprise £4£6 million (2019(2022 – £17£6 million; 20182021 – £35£3 million) of loans to customers and other third parties, after allowances of £127£121 million (2019(2022 – £111£129 million; 20182021 – £108£113 million), and £3£29 million (2019(2022 – £nil; 2018£12 million; 2021 – £nil)£7 million) of loans to associates.
Financial statements (continued)
13.14. Post employment benefits
Accounting policies
The group’s principal pensionpost employment funds are defined benefit plans. In addition, the group has defined contribution plans, unfunded post employment medical benefit liabilities and other unfunded defined benefit post employment liabilities. For post employment plans other than defined contribution plans, the amount charged to operating profit is the cost of accruing pension benefits promised to employees over the year, plus any changes arising on benefits granted to members by the group during the year. Net finance charges comprise the net deficit/assetsurplus on the plans at the beginning of the year, adjusted for cash flows in the year, multiplied by the discount rate for plan liabilities. The differences between the fair value of the plans’ assets and the present value of the plans’ liabilities are disclosed as an asset or liability on the consolidated balance sheet. Any differences due to changes in assumptions or experience are recognised in other comprehensive income. The amount of any pension fund asset recognised on the balance sheet is limited to any future refunds from the plan or the present value of reductions in future contributions to the plan.
Contributions payable by the group in respect of defined contribution plans are charged to operating profit as incurred.
Critical accounting estimates and judgements
Application of IAS 19 requires the exercise of estimate and judgement in relation to various assumptions.
Diageo determines the assumptions on a country by country basis in conjunction with its actuaries. Estimates are required in respect of uncertain future events, including the life expectancy of members of the funds, salary and pension increases, future inflation rates, discount rates and employee and pensioner demographics. The application of different assumptions could have a significant effect on the amounts reflected in the income statement, other comprehensive income and the balance sheet. There may be interdependencies between the assumptions.
Where there is an accounting surplus on a defined benefit plan, management judgement is necessary to determine whether the group can obtain economic benefits through a refund of the surplus or by reducing future contributions to the plan.
(a) Post employment benefit plans
The group operates a number of pension plans throughout the world, devised in accordance with local conditions and practices. OurDiageo's most significant plans are defined benefit plans and are funded by payments to separately administered trusts or insurance companies. The group also operates a number of plans that are generally unfunded, primarily in the United States, which provide to employees post employment medical benefits.
The principal plans are in the United Kingdom, Ireland and the United States where benefits are based on employees’ length of service and salary at retirement. All valuations were performed by independent actuaries using the projected unit credit method to determine pension costs.
The most recent funding valuations of the significant defined benefit plans were carried out as follows:
|
| | | | |
| Principal plans | | Date of valuation |
United Kingdom(i)(1) | | 1 April 20182021 |
Ireland(ii)(2) | | 31 December 20182021 |
| United States | | 1 January 20202022 |
| |
(i) | The Diageo Pension Scheme (DPS) closed to new members in November 2005. Employees who have joined Diageo in the United Kingdom since the defined benefit scheme closed had been eligible to become members of the Diageo Lifestyle Plan (a cash balance defined benefit pension plan) until 1 January 2018. Since then new employees have been eligible to become members of a Diageo administered defined contribution plan.
|
| |
(ii) | The Irish scheme closed to new members in May 2013. Employees who have joined Diageo in Ireland since the defined benefit scheme closed have been eligible to become members of Diageo administered(1) The Diageo Pension Scheme (DPS, the UK Scheme) closed to new members in November 2005. Employees who joined Diageo in the United Kingdom between November 2005 and January 2018, had been eligible to become members of the Diageo Lifestyle Plan (a cash balance defined benefit plan). Since then, new employees have been eligible to become members of a master trust defined contribution plans. |
(2) The Guinness Ireland Group Pension Scheme (GIGPS, the Irish scheme) closed to new members in May 2013. Employees who have joined Diageo in Ireland since the defined benefit scheme closed have been eligible to become members of a master trust defined contribution plans.
The assets of the UK and Irish pension plans are held in separate trusts administered by trustees who are required to act in the best interests of the plans’ beneficiaries. For DPS, the trustee is Diageo Pension Trust Limited. As required by legislation, one-third of the directors of the Trust are nominated by the members of the DPS, member nominated directors are appointed from both the pensioner member community and the active member community. For the Irish Scheme, Diageo Ireland makes four nominations and appoints three further candidates nominated by representative groupings.
Financial statements (continued)
The amounts charged to the consolidated income statement and statement of comprehensive income for the group’s defined benefit post employment plans and the consolidated statement of comprehensive income for the three years ended 30 June 20202023 are as follows:
| | | | | | | | | | | |
| | 2023
£ million | 2022
£ million | 2021
£ million |
| Current service cost and administrative expenses | (76) | | (107) | | (105) | |
| Past service (losses)/gains – ordinary activities | (1) | | 34 | | — | |
| Past service losses – exceptional | — | | — | | (5) | |
| Gains on curtailments and settlements | 2 | | 34 | | 18 | |
| Charge to operating profit | (75) | | (39) | | (92) | |
| Net finance income in respect of post employment plans | 44 | | 10 | | 5 | |
Charge before taxation(1) | (31) | | (29) | | (87) | |
| Actual returns less amounts included in finance income | (1,435) | | (1,432) | | (6) | |
| Experience (losses)/gains | (226) | | (35) | | 80 | |
| Changes in financial assumptions | 958 | | 2,133 | | 125 | |
| Changes in demographic assumptions | 53 | | (40) | | (183) | |
| Other comprehensive (loss)/income | (650) | | 626 | | 16 | |
| Changes in the surplus restriction | 7 | | (11) | | — | |
| Total other comprehensive (loss)/income | (643) | | 615 | | 16 | |
|
| | | | | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| Current service cost and administrative expenses | | (109 | ) | | (110 | ) | | (123 | ) |
| Past service gains - ordinary activities | | 50 |
| | 56 |
| | 33 |
|
| Past service losses - exceptional | | — |
| | (21 | ) | | — |
|
| Gains on curtailments and settlements | | 12 |
| | 4 |
| | 6 |
|
| Charge to operating profit | | (47 | ) | | (71 | ) | | (84 | ) |
| Net finance gain/(charge) in respect of post employment plans | | 9 |
| | 7 |
| | (11 | ) |
Charge before taxation(i) | | (38 | ) | | (64 | ) | | (95 | ) |
| Actual returns less amounts included in finance income | | 774 |
| | 438 |
| | 312 |
|
| Experience gains/(losses) | | 34 |
| | 113 |
| | (30 | ) |
| Changes in financial assumptions | | (754 | ) | | (514 | ) | | 108 |
|
| Changes in demographic assumptions | | (14 | ) | | (6 | ) | | 69 |
|
| Other comprehensive income | | 40 |
| | 31 |
| | 459 |
|
| Changes in the surplus restriction | | (2 | ) | | 2 |
| | (2 | ) |
| Total other comprehensive income | | 38 |
| | 33 |
| | 457 |
|
(1)(i) The year ended 30 June 20202022 includes past servicesettlement gains of £47£27 million in respect of the Enhanced Transfer Values (ETV) exercise carried out in the Irish Scheme following separate communications to the deferred members in respectSchemes and past service gains of changing their expectations of£28 million as a full pension prior to reaching the age of 65 and to pensioners in respect of future pension increases. (2019 - £54 million in respect of changes made to future pension increases for membersresult of the UK Scheme and changes toof the principalbenefits in the Irish Scheme.) The exceptional past service loss, in In the year ended 30 June 2019,2021, the exceptional past service loss of £21£5 million is in respect of the equalisation of Guaranteed Minimum Pension (GMP) benefits for men and women.
(i)(1) The charge/(charge)/income before taxation is in respect of the following countries is:countries:
| | | | | | | | | | | |
| 2023
£ million | 2022
£ million | 2021
£ million |
| United Kingdom | 15 | | (27) | | (46) | |
| Ireland | 1 | | 45 | | 4 | |
| United States | (32) | | (31) | | (28) | |
| Other | (15) | | (16) | | (17) | |
| (31) | | (29) | | (87) | |
|
| | | | | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| United Kingdom | | (23 | ) | | (3 | ) | | (49 | ) |
| Ireland | | 34 |
| | (13 | ) | | 1 |
|
| United States | | (30 | ) | | (30 | ) | | (29 | ) |
| Other | | (19 | ) | | (18 | ) | | (18 | ) |
| | | (38 | ) | | (64 | ) | | (95 | ) |
In addition to the charge in respect of defined benefit post employment plans, contributions to the group’s defined contribution plans were £24£44 million (2019(2022 – £19£33 million; 20182021 – £18£25 million).
Financial statements (continued)
The movementmovements in the net (deficit)/surplus for the two years ended 30 June 20202023 is set out below:
| | | | | | | | | | | |
| | Plan
assets
£ million | Plan
liabilities
£ million | Net
surplus
£ million |
| At 30 June 2021 | 9,892 | | (9,445) | | 447 | |
| Exchange differences | 93 | | (100) | | (7) | |
| Income/(charge) before taxation | 176 | | (205) | | (29) | |
Other comprehensive (loss)/income(1) | (1,432) | | 2,058 | | 626 | |
| Contributions by the group | 128 | | — | | 128 | |
Settlements paid(2) | (52) | | 52 | | — | |
| Employee contributions | 5 | | (5) | | — | |
| Benefits paid | (411) | | 411 | | — | |
| At 30 June 2022 | 8,399 | | (7,234) | | 1,165 | |
| Exchange differences | (49) | | 55 | | 6 | |
| Disposals | — | | 4 | | 4 | |
| Income/(charge) before taxation | 298 | | (329) | | (31) | |
Other comprehensive (loss)/income(1) | (1,435) | | 785 | | (650) | |
| Contributions by the group | 100 | | — | | 100 | |
| | | |
| Employee contributions | 5 | | (5) | | — | |
| Benefits paid | (472) | | 472 | | — | |
| At 30 June 2023 | 6,846 | | (6,252) | | 594 | |
|
| | | | | | | | | |
| | | Plan assets £ million |
| | Plan liabilities £ million |
| | Net (deficit)/surplus £ million |
|
| At 30 June 2018 | | 9,310 |
| | (9,244 | ) | | 66 |
|
| Exchange differences | | 45 |
| | (55 | ) | | (10 | ) |
| Charge before taxation | | 234 |
| | (298 | ) | | (64 | ) |
Other comprehensive income/(loss)(i) | | 438 |
| | (407 | ) | | 31 |
|
| Contributions by the group | | 192 |
| | — |
| | 192 |
|
| Employee contributions | | 5 |
| | (5 | ) | | — |
|
| Benefits paid | | (511 | ) | | 511 |
| | — |
|
| At 30 June 2019 | | 9,713 |
| | (9,498 | ) | | 215 |
|
| Exchange differences | | 65 |
| | (73 | ) | | (8 | ) |
| Charge before taxation | | 198 |
| | (236 | ) | | (38 | ) |
Other comprehensive income/(loss)(i) | | 774 |
| | (734 | ) | | 40 |
|
| Contributions by the group | | 156 |
| | — |
| | 156 |
|
| Employee contributions | | 5 |
| | (5 | ) | | — |
|
| Benefits paid | | (489 | ) | | 489 |
| | — |
|
| At 30 June 2020 | | 10,422 |
| | (10,057 | ) | | 365 |
|
(i)(1) Excludes surplus restriction.
(2) Includes settlement payment of £52 million on ETV exercise in Ireland.
The plan assets and liabilities by type of post employment benefit and country isare as follows:
| | | | | | | | | | | | | | |
| | 2023 | 2022 |
| | Plan
assets
£ million | Plan
liabilities
£ million | Plan
assets
£ million | Plan
liabilities
£ million |
| Pensions | | | | |
| United Kingdom | 4,578 | | (4,041) | | 6,041 | | (4,897) | |
| Ireland | 1,588 | | (1,310) | | 1,645 | | (1,409) | |
| United States | 441 | | (411) | | 453 | | (408) | |
| Other | 180 | | (194) | | 191 | | (212) | |
| Post employment medical | 2 | | (227) | | 2 | | (225) | |
| Other post employment | 57 | | (69) | | 67 | | (83) | |
| 6,846 | | (6,252) | | 8,399 | | (7,234) | |
|
| | | | | | | | | | | | |
| | | 2020 | | | 2019 | |
| | | Plan
assets
£ million |
| | Plan
liabilities
£ million |
| | Plan
assets
£ million |
| | Plan
liabilities
£ million |
|
| Pensions | | | | | | | | |
| United Kingdom | | 7,696 |
| | (6,831 | ) | | 7,115 |
| | (6,257 | ) |
| Ireland | | 1,810 |
| | (2,031 | ) | | 1,747 |
| | (2,098 | ) |
| United States | | 660 |
| | (578 | ) | | 593 |
| | (545 | ) |
| Other | | 183 |
| | (240 | ) | | 186 |
| | (234 | ) |
| Post employment medical | | 2 |
| | (288 | ) | | 1 |
| | (275 | ) |
| Other post employment | | 71 |
| | (89 | ) | | 71 |
| | (89 | ) |
| | | 10,422 |
| | (10,057 | ) | | 9,713 |
| | (9,498 | ) |
The balance sheet analysis of the post employment plans is as follows:
| | | | | | | | | | | | | | |
| | 2023 | 2022 |
| | Non-
current
assets(1)
£ million | Non-
current
liabilities
£ million | Non-
current
assets(1)
£ million | Non-
current
liabilities
£ million |
| Funded plans | 960 | | (132) | | 1,553 | | (144) | |
| Unfunded plans | — | | (241) | | — | | (258) | |
| 960 | | (373) | | 1,553 | | (402) | |
|
| | | | | | | | | | | | |
| | | 2020 | | | 2019 | |
| | | Non-
current
assets(i)
£ million |
| | Non-
current
liabilities
£ million |
| | Non-
current
assets(i)
£ million |
| | Non-
current
liabilities
£ million |
|
| Funded plans | | 1,111 |
| | (434 | ) | | 1,060 |
| | (547 | ) |
| Unfunded plans | | — |
| | (315 | ) | | — |
| | (299 | ) |
| | | 1,111 |
| | (749 | ) | | 1,060 |
| | (846 | ) |
(i)(1) Includes surplus restriction of £3£7 million (2019(2022 – £1£14 million).
The disclosures have been prepared in accordance with IFRIC 14. In particular, where the calculation for a plan results in a surplus, the recognised asset is limited to the present value of any available future refunds from the plan or reductions in future contributions to the plan, and any additional liabilities are recognised as required. The DPS atAt 30 June 20202023, the DPS had a net surplus of £934£589 million (2019 - £906(2022 – £1,174 million; 2018 - £8192021 – £840 million) and the GIGPS had a net surplus of £260 million (2022 a surplus of £221 million; 2021 a deficit of £79 million) and other schemes in a surplus totalled of £111 million (2022 – £158 million; 2021 – £178 million). This surplus hasBoth of these
Financial statements (continued)
surpluses have been recognised, with no provision made against it,them, as it isthey are expected to be recoverable through a combination of a reduction in future cash contributions or ultimately via a cash refund when the last member’s obligations have been met.
Financial statements (continued)
(b) Principal risks and assumptions
The material post employment plans are not exposed to any unusual, entity specificentity-specific or scheme specificscheme-specific risks but there are general risks:
Inflation – The majority of the plans’ obligations are linked to inflation. Higher inflation will lead to increased liabilities which is partially offset by the plans holding inflation linked gilts, swaps and caps against the level of inflationary increases.
Interest rate – The plan liabilities are determined using discount rates derived from yields on AA-rated corporate bonds. A decrease in corporate bond yields will increase plan liabilities though this will be partially offset by an increase in the value of the bonds held by the post employment plans.
Mortality – The majority of the obligations are to provide benefits for the life of the members and their partners, so any increase in life expectancy will result in an increase in the plans’ liabilities.
Asset returns – Assets held by the pension plans are invested in a diversified portfolio of equities, bonds and other assets. Volatility in asset values will lead to movements in the net deficit/surplus reported in the consolidated balance sheet for post employment plans which in addition will also impact the post employment expense in the consolidated income statement.
The following weighted average assumptions were used to determine the group’s deficit/surplus in the main post employment plans at 30 June in the relevant year. The assumptions used to calculate the charge/credit in the consolidated income statement for the year ending 30 June are based on the assumptions disclosed as at the previous 30 June.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | United Kingdom | Ireland | United States(1) |
| | 2023% | 2022% | 2021% | 2023% | 2022% | 2021% | 2023% | 2022% | 2021% |
Rate of general increase in salaries(2) | 3.7 | | 3.6 | | 3.4 | | 3.9 | | 3.8 | | 3.0 | | — | | — | | — | |
| Rate of increase to pensions in payment | 2.9 | | 2.9 | | 3.1 | | 2.3 | | 2.2 | | 1.7 | | — | | — | | — | |
| Rate of increase to deferred pensions | 2.7 | | 2.6 | | 2.5 | | 2.4 | | 2.3 | | 1.6 | | — | | — | | — | |
| Discount rate for plan liabilities | 5.2 | | 3.8 | | 1.9 | | 3.6 | | 3.2 | | 1.0 | | 4.9 | | 4.4 | | 2.7 | |
| Inflation – CPI | 2.7 | | 2.6 | | 2.5 | | 2.5 | | 2.4 | | 1.6 | | 2.2 | | 2.3 | | 2.3 | |
| Inflation - RPI | 3.2 | | 3.1 | | 3.0 | | — | | — | | — | | — | | — | | — | |
|
| | | | | | | | | | | | | | | | | | |
| | | United Kingdom | | Ireland | | United States(i) |
| | | 2020
% | | 2019
% | | 2018
% | | 2020
% | | 2019
% | | 2018
% | | 2020
% | | 2019
% | | 2018
% |
Rate of general increase in salaries(ii) | | 3.2 | | 3.6 | | 4.3 | | 2.6 | | 2.3 | | 3.2 | | — | | — | | — |
| Rate of increase to pensions in payment | | 3.0 | | 3.2 | | 3.3 | | 1.4 | | 1.5 | | 2.0 | | — | | — | | — |
| Rate of increase to deferred pensions | | 2.1 | | 2.2 | | 2.1 | | 1.2 | | 1.3 | | 1.8 | | — | | — | | — |
| Discount rate for plan liabilities | | 1.5 | | 2.3 | | 2.8 | | 1.2 | | 1.2 | | 1.7 | | 2.6 | | 3.4 | | 4.1 |
| Inflation - CPI | | 2.1 | | 2.2 | | 2.1 | | 1.2 | | 1.3 | | 1.8 | | 1.4 | | 1.7 | | 2.1 |
| Inflation - RPI | | 2.8 | | 3.2 | | 3.1 | | — | | — | | — | | — | | — | | — |
| |
(i) | The salary increase assumption in the United States is not a significant assumption as only a minimal amount of members’ pension entitlement is dependent on a member’s projected final salary.
|
(ii)(2) The salary increase assumptions include an allowance for age relatedage-related promotional salary increases.
For the principal UK and Irish pension funds, the table below illustrates the expected age at death of an average worker who retires currently at the age of 65, and one who is currently aged 45 and subsequently retires at the age of 65:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | United Kingdom(1) | Ireland(2) | United States |
| | 2023
Age | 2022
Age | 2021
Age | 2023
Age | 2022
Age | 2021
Age | 2023
Age | 2022
Age | 2021
Age |
| Retiring currently at age 65 | | | | | | | | | |
| Male | 86.8 | 87.1 | 87.2 | 87.2 | 87.7 | 86.9 | 85.6 | 85.5 | 85.4 |
| Female | 88.4 | 88.7 | 88.7 | 89.6 | 90.0 | 89.3 | 87.2 | 87.2 | 87.1 |
| Currently aged 45, retiring at age 65 | | | | | | | | | |
| Male | 88.1 | 88.5 | 88.6 | 88.8 | 89.3 | 88.6 | 87.1 | 87.0 | 86.9 |
| Female | 90.4 | 90.7 | 90.8 | 91.3 | 91.7 | 91.1 | 88.7 | 88.6 | 88.5 |
(1) Based on the CMI’s S3 mortality tables with scaling factors based on the experience of the plan and where people live, with suitable future improvements.
(2) Based on the CMI's S3 mortality tables with scaling factors based on the experience of the plan, with suitable future improvements.
|
| | | | | | | | | | | | | | | | | | |
| | | United Kingdom(i) | | Ireland(ii) | | United States |
| | | 2020
Age | | 2019
Age | | 2018
Age | | 2020
Age | | 2019
Age | | 2018
Age | | 2020
Age | | 2019
Age | | 2018
Age |
| Retiring currently at age 65 | | | | | | | | | | | | | | | | | | |
| Male | | 86.4 | | 86.2 | | 86.1 | | 86.6 | | 86.5 | | 86.4 | | 85.6 | | 85.7 | | 86.0 |
| Female | | 88.7 | | 88.5 | | 88.4 | | 89.3 | | 89.2 | | 89.2 | | 87.3 | | 87.7 | | 88.0 |
| Currently aged 45, retiring at age 65 | | | | | | | | | | | | | | | | | | |
| Male | | 88.5 | | 88.3 | | 88.2 | | 89.6 | | 89.5 | | 89.4 | | 87.2 | | 87.3 | | 87.6 |
| Female | | 90.8 | | 90.6 | | 90.5 | | 92.3 | | 92.2 | | 92.1 | | 88.9 | | 89.3 | | 89.6 |
| |
(i) | Based on the CMI’s S2 mortality tables with scaling factors based on the experience of the plan and where people live, with suitable future improvements.
|
| |
(ii) | Based on the ‘00’ series of mortality tables with scaling factors based on the experience of the plan and with suitable future improvements.
|
Financial statements (continued)
For the significant assumptions, the following sensitivity analyses estimate the potential impacts on the consolidated income statement for the year endedending 30 June 20212024 and on the plan liabilities at 30 June 20202023:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | United Kingdom | | | Ireland | | | United States and other | |
| Benefit/(cost) | | Operating
profit
£ million |
| | Profit
after
taxation
£ million |
| | Plan
liabilities(i)
£ million |
| | Operating
profit
£ million |
| | Profit
after
taxation
£ million |
| | Plan
liabilities(i)
£ million |
| | Operating
profit
£ million |
| | Profit
after
taxation
£ million |
| | Plan
liabilities(i)
£ million |
|
| Effect of 0.5% increase in discount rate | | 5 |
| | 17 |
| | 568 |
| | 2 |
| | 3 |
| | 174 |
| | 1 |
| | 2 |
| | 38 |
|
| Effect of 0.5% decrease in discount rate | | (6 | ) | | (14 | ) | | (644 | ) | | (2 | ) | | (2 | ) | | (202 | ) | | (2 | ) | | (2 | ) | | (42 | ) |
| Effect of 0.5% increase in inflation | | (5 | ) | | (9 | ) | | (405 | ) | | (1 | ) | | (3 | ) | | (152 | ) | | (1 | ) | | (1 | ) | | (14 | ) |
| Effect of 0.5% decrease in inflation | | 5 |
| | 10 |
| | 448 |
| | 1 |
| | 3 |
| | 126 |
| | 1 |
| | 1 |
| | 13 |
|
| Effect of one year increase in life expectancy | | (1 | ) | | (4 | ) | | (304 | ) | | — |
| | (1 | ) | | (86 | ) | | — |
| | (1 | ) | | (34 | ) |
| |
(i) | The estimated effect on the liabilities excludes the impact of any interest rate and inflation swaps held by the pension plans.
|
| |
(1) | The sensitivity analyses above have been determined based on reasonably possible changes of the respective assumptions and may not be representative of the actual change. Each sensitivity is calculated on a change in the key assumption while holding all other assumptions constant. The sensitivity to inflation includes the impact on all inflation linked assumptions (e.g. pension increases and salary increases where appropriate).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | United Kingdom | Ireland | United States |
| Benefit/(cost) | Operating
profit
£ million | Profit after
taxation
£ million | Plan
liabilities(1)
£ million | Operating
profit
£ million | Profit after
taxation
£ million | Plan
liabilities(1)
£ million | Operating
profit
£ million | Profit after
taxation
£ million | Plan
liabilities(1)
£ million |
| Effect of 0.5% increase in discount rate | 2 | | 15 | | 259 | | 1 | | 5 | | 85 | | 2 | | 2 | | 22 | |
| Effect of 0.5% decrease in discount rate | (2) | | (14) | | (267) | | (1) | | (4) | | (95) | | (2) | | (2) | | (24) | |
| Effect of 0.5% increase in inflation | (1) | | (8) | | (156) | | — | | (2) | | (49) | | — | | (1) | | (9) | |
| Effect of 0.5% decrease in inflation | 2 | | 8 | | 173 | | — | | 2 | | 50 | | — | | 1 | | 8 | |
| Effect of one year increase in life expectancy | — | | (6) | | (131) | | — | | (2) | | (55) | | — | | (1) | | (15) | |
(1) The estimated effect on the liabilities excludes the impact of any interest rate and inflation swaps held by the pension plans.
(i) The sensitivity analyses above have been determined based on reasonably possible changes of the respective assumptions and may not be representative of the actual change. Each sensitivity is calculated on a change in the key assumption while holding all other assumptions constant. The sensitivity to inflation includes the impact on all inflation linked assumptions (e.g. pension increases and salary increases where appropriate).
(c) Investment and hedging strategy
The investment strategy for the group’s funded post employment plans is determined locally by the trustees of the plan and/or Diageo, as appropriate, and takes account of the relevant statutory requirements. The objective of the investment strategy is to achieve a target rate of return in excess of the movement on the liabilities, whilst taking an acceptable level of investment risk relative to the liabilities. This objective is implemented by using the funds of the plans to invest in a variety ofasset classes that are expected over the long-term to deliver a target rate of return. The majority of the investment strategies have significant amounts allocated to equities, with the intention that this will result in the ongoing cost to the group of the post employment plans being lower over the long-term, within acceptable boundaries of risk. Significant amounts are invested in bonds, in order to provide a natural hedge against movements in the liabilities of the plans. At 30 June 2020,2023, approximately 82%97% and 90% (201998% (2022 – 56%100% and 78%103%) of the UK Scheme’splans’ liabilities measured on the Trustee's funding basis (gilts+50bp) were hedged against future movements in gilt based interest rates and RPI inflation, respectively, through the combined effect of bonds and swaps. At 30 June 2020,2023, approximately 48%92% and 112% (2022 – 70% (2019 – 44% and 71%76%) of the Irish Scheme’splans’ liabilities measured on the Trustee's funding basis (euro-swaps+50bp) were hedged against future movements in euro government bond based interest rates and euro inflation, respectively, through the combined effect of bonds and swaps.
The discount rates used are based on the yields of high qualityhigh-quality fixed income investments. For the UK plans, which represent approximately 68%65% of total plan liabilities, the discount rate is determined by reference to the yield curves of AA-rated corporate bonds for which the timing and amount of cash outflows are similar to those of the plans. A similar process is used to determine the discount rates used for the non-UK plans.
Financial statements (continued)
An analysis of the fair value of the plan assets is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 |
| United Kingdom
£ million | Ireland
£ million | United States and other
£ million | Total
£ million |
| Quoted | Unquoted | Quoted | Unquoted | Quoted | Unquoted | Quoted | Unquoted | Total |
| Equities | 12 | | 916 | | — | | 291 | | 64 | | 98 | | 76 | | 1,305 | | 1,381 | |
| Bonds | | | | | | | | | |
| Fixed-interest government | 18 | | 24 | | — | | 6 | | 48 | | 8 | | 66 | | 38 | | 104 | |
| Inflation-linked government | — | | — | | — | | 96 | | 2 | | 2 | | 2 | | 98 | | 100 | |
| Investment grade corporate | — | | 29 | | — | | 328 | | 21 | | 227 | | 21 | | 584 | | 605 | |
| Non-investment grade | 22 | | 289 | | 6 | | 186 | | 2 | | 133 | | 30 | | 608 | | 638 | |
| Loan securities | 13 | | 526 | | — | | 84 | | — | | — | | 13 | | 610 | | 623 | |
| Repurchase agreements | 2,351 | | 826 | | — | | — | | — | | — | | 2,351 | | 826 | | 3,177 | |
| Liability Driven Investment (LDI) | — | | — | | — | | 81 | | — | | — | | — | | 81 | | 81 | |
| Property | 29 | | 462 | | — | | 62 | | — | | 1 | | 29 | | 525 | | 554 | |
| Hedge funds | — | | — | | — | | 12 | | — | | 5 | | — | | 17 | | 17 | |
| Interest rate and inflation swaps | — | | (971) | | 102 | | (18) | | — | | — | | 102 | | (989) | | (887) | |
| Cash and other | 46 | | (14) | | 5 | | 347 | | — | | 69 | | 51 | | 402 | | 453 | |
| Total bid value of assets | 2,491 | | 2,087 | | 113 | | 1,475 | | 137 | | 543 | | 2,741 | | 4,105 | | 6,846 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | | 2019 | |
| | | United Kingdom
£ million |
| | Ireland
£ million |
| | United
States and
other
£ million |
| | Total
£ million |
| | United
Kingdom
£ million |
| | Ireland
£ million |
| | United
States and
other
£ million |
| | Total
£ million |
|
| Equities | | | | | | | | | | | | | | | | |
| Quoted | | 1 |
| | 315 |
| | 255 |
| | 571 |
| | 19 |
| | 294 |
| | 248 |
| | 561 |
|
| Unquoted and private equity | | 501 |
| | 1 |
| | 21 |
| | 523 |
| | 504 |
| | — |
| | 21 |
| | 525 |
|
| Bonds | | | | | | | | | | | | | | | | |
| Fixed-interest government | | 114 |
| | 124 |
| | 50 |
| | 288 |
| | 123 |
| | 129 |
| | 46 |
| | 298 |
|
| Inflation-linked government | | — |
| | 247 |
| | — |
| | 247 |
| | — |
| | 262 |
| | — |
| | 262 |
|
| Investment grade corporate | | 507 |
| | 306 |
| | 467 |
| | 1,280 |
| | 404 |
| | 337 |
| | 421 |
| | 1,162 |
|
| Non-investment grade | | 137 |
| | 77 |
| | 17 |
| | 231 |
| | 163 |
| | 74 |
| | 15 |
| | 252 |
|
| Loan securities | | 1,697 |
| | 328 |
| | — |
| | 2,025 |
| | 1,362 |
| | 331 |
| | — |
| | 1,693 |
|
| Repurchase agreements | | 4,809 |
| | — |
| | — |
| | 4,809 |
| | 4,629 |
| | — |
| | — |
| | 4,629 |
|
| Liability driven investment (LDI) | | 222 |
| | 64 |
| | — |
| | 286 |
| | 185 |
| | 40 |
| | — |
| | 225 |
|
Property - unquoted(i) | | 620 |
| | 85 |
| | 1 |
| | 706 |
| | 744 |
| | 84 |
| | 1 |
| | 829 |
|
| Hedge funds | | 92 |
| | 134 |
| | 4 |
| | 230 |
| | 75 |
| | 135 |
| | — |
| | 210 |
|
| Interest rate and inflation swaps | | (1,048 | ) | | 66 |
| | — |
| | (982 | ) | | (1,048 | ) | | 30 |
| | — |
| | (1,018 | ) |
| Cash and other | | 44 |
| | 63 |
| | 101 |
| | 208 |
| | (45 | ) | | 31 |
| | 99 |
| | 85 |
|
| Total bid value of assets | | 7,696 |
| | 1,810 |
| | 916 |
| | 10,422 |
| | 7,115 |
| | 1,747 |
| | 851 |
| | 9,713 |
|
| |
(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2022 | | United Kingdom
£ million | Ireland
£ million | United States and other
£ million | Total
£ million | | Quoted | Unquoted | Quoted | Unquoted | Quoted | Unquoted | Quoted | Unquoted | Total | | Equities | 23 | | 1,218 | | — | | 319 | | 70 | | 105 | | 93 | | 1,642 | | 1,735 | | | Bonds | | | | | | | | | | | Fixed-interest government | 2 | | 86 | | — | | 30 | | 49 | | 152 | | 51 | | 268 | | 319 | | | Inflation-linked government | — | | — | | — | | 199 | | 1 | | 1 | | 1 | | 200 | | 201 | | | Investment grade corporate | — | | 68 | | — | | 388 | | 25 | | 222 | | 25 | | 678 | | 703 | | | Non-investment grade | 44 | | 557 | | 2 | | 200 | | 1 | | 1 | | 47 | | 758 | | 805 | | | Loan securities | 11 | | 1,271 | | — | | 98 | | — | | — | | 11 | | 1,369 | | 1,380 | | | Repurchase agreements | 2,400 | | (215) | | — | | — | | — | | — | | 2,400 | | (215) | | 2,185 | | | Liability Driven Investment (LDI) | — | | 119 | | — | | 46 | | — | | — | | — | | 165 | | 165 | | | Property | 28 | | 716 | | — | | 74 | | — | | 1 | | 28 | | 791 | | 819 | | | Hedge funds | — | | 107 | | — | | 92 | | — | | 5 | | — | | 204 | | 204 | | | Interest rate and inflation swaps | — | | (900) | | — | | 37 | | — | | — | | — | | (863) | | (863) | | | Cash and other | 24 | | 481 | | 7 | | 154 | | — | | 80 | | 31 | | 715 | | 746 | | | Total bid value of assets | 2,532 | | 3,508 | | 9 | | 1,637 | | 146 | | 567 | | 2,687 | | 5,712 | | 8,399 | |
(i) The asset classes include some cash holdings that are temporary. This cash is likely to be invested imminently and so has been included in the asset class where it is anticipated to be invested in the long-term. |
(i) At 30 June 2020, the fair value of property assets of £331 millionwere subject to “material valuation uncertainty”. The external valuers have confirmed, the inclusion of the “material valuation uncertainty” declaration does not mean that valuations cannot be relied upon but instead in the current extraordinary circumstances less certainty can be attached to valuations than would otherwise be the case. The group considers the valueasset class where it is anticipated to be materially accurate oninvested in the basis that any short term impact of Covid-19 would not be reflective of the value of these long-term investments.long-term.
Total cash contributions by the group to all post employment plans in the year ending 30 June 20212024 are estimated to be approximately £140 million.£75 million ($95 million).
Financial statements (continued)
(d) Deficit funding arrangements
UK plans
In the year ended 30 June 2011 the group established a Pension Funding Partnership (PFP) in respect of the UK Scheme. Whisky inventory was transferred into the partnership but the group retains control over the partnership which at 30 June 20202023 held inventory with a book value of £586£732 million (2019(2022 – £661£561 million). The partnership is fully consolidated in the group financial statements. The UK Scheme has a limited interest in the partnership and, as a partner, is entitled to a distribution from the profits of the partnership. FollowingThe arrangement is expected to cease in 2030, and contributions to the finalisationUK scheme in any year will be dependent on the funding position of the trustee valuationUK scheme at 1 April 2018 the PFP was amended andprevious 31 March. Given the contributionsurplus funding position in the DPS, there were no contributions to the DPS in the yearyears ended 30 June 2020 was £11 million (2019 – £25 million). The last payment is expected to be in 2030.
2023 and 30 June 2022.
In 2030, the group will be required, dependent upon the funding position of the UK Scheme at that time, to pay an amount not greater than the actuarial deficit at that time, up to a maximum of £430 million in cash, to purchase the UK Scheme’s interest in the partnership. If the UK Scheme is in surplus at an actuarial triennial valuation excluding the value of the PFP, then the group can exit the PFP with the agreement of the trustees.
During the year ended 30 June 2023, following a remeasurement of the Diageo Lifestyle Plan, Diageo made a £16 million one-off deficit contribution to satisfy minimum funding requirement.
Financial statements (continued)
Irish plans
The group has agreed a deficit funding arrangement with the trustees31 December 2021 triennial actuarial valuation of the IrishGuinness Ireland Group Pension Scheme under which it contributeswas completed during the year ended 30 June 2023 showing the Scheme is fully funded on the Trustee’s ongoing funding basis and the statutory minimum funding standard basis. Given the fully funded position, no deficit contributions were payable in the year ended 30 June 2023 and the Trustee agreed to the Irish Scheme €23 million (£21 million) per annum untilcompany's request to terminate the year ending 30 June 2028. The agreement also provides for additional cash contributions into escrow of up to €135 million (£124 million) if the deficit is not reduced at each triennial valuation to agreed limits up to 2027. As part of this funding plan, Diageo has also granted to the Irish Scheme a contingent assetarrangements comprising mortgages over certain land and buildings and fixed and floating charges over certain receivables of the group up to a value of €200 million (£183 million). As a result of the actuarial triennial valuation as of 31 December 2015, the group made additional cash contributions of €9 million (£8 million) (2019 - €9 million; 2018 - €9171 million). The company has agreed with the Trustee conditional contributions of up to €35 million (£30 million) by 31 December 2018 triennial actuarial valuation did not result in any additional funding requirement.2024, €39 million (£33 million) by 31 December 2027 and €39 million (£33 million) by 31 December 2030 if a deficit is identified at those valuations.
(e) Timing of benefit payments
The following table provides information on the timing of the benefit payments and the average duration of the defined benefit obligations and the distribution of the timing of benefit payments:
| | | | | | | | | | | | | | | | | | | | |
| | United Kingdom | Ireland | United States |
| | 2023
£ million | 2022
£ million | 2023
£ million | 2022
£ million | 2023
£ million | 2022
£ million |
| Maturity analysis of benefits expected to be paid | | | | | | |
| Within one year | 303 | | 295 | | 73 | | 70 | | 57 | | 58 | |
| Between 1 to 5 years | 1,090 | | 1,082 | | 367 | | 353 | | 174 | | 187 | |
| Between 6 to 15 years | 2,439 | | 2,556 | | 727 | | 704 | | 331 | | 310 | |
| Between 16 to 25 years | 2,244 | | 2,252 | | 645 | | 634 | | 206 | | 183 | |
| Beyond 25 years | 2,664 | | 2,787 | | 747 | | 768 | | 187 | | 174 | |
| Total | 8,740 | | 8,972 | | 2,559 | | 2,529 | | 955 | | 912 | |
| years | years | years | years | years | years |
| Average duration of the defined benefit obligation | 14 | 15 | 14 | 15 | 9 | 9 |
|
| | | | | | | | | | | | | | | | | | |
| | | United Kingdom | | | Ireland | | | United States | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2020
£ million |
| | 2019
£ million |
| | 2020
£ million |
| | 2019
£ million |
|
| Maturity analysis of benefits expected to be paid | | | | | | | | | | | | |
| Within one year | | 346 |
| | 395 |
| | 76 |
| | 75 |
| | 56 |
| | 63 |
|
| Between 1 to 5 years | | 1,202 |
| | 1,197 |
| | 364 |
| | 367 |
| | 202 |
| | 202 |
|
| Between 6 to 15 years | | 2,556 |
| | 2,663 |
| | 691 |
| | 723 |
| | 357 |
| | 359 |
|
| Between 16 to 25 years | | 2,083 |
| | 2,078 |
| | 627 |
| | 657 |
| | 196 |
| | 207 |
|
| Beyond 25 years | | 2,648 |
| | 2,909 |
| | 918 |
| | 1,008 |
| | 173 |
| | 185 |
|
| Total | | 8,835 |
| | 9,242 |
| | 2,676 |
| | 2,830 |
| | 984 |
| | 1,016 |
|
| | | years |
| | years |
| | years |
| | years |
| | years |
| | years |
|
| Average duration of the defined benefit obligation | | 18 |
| | 17 |
| | 18 |
| | 18 |
| | 11 |
| | 10 |
|
The projected benefit payments are based on the assumptions underlying the assessment of the obligations, including inflation. They are disclosed undiscounted and therefore appear large relative to the discounted value of the plan liabilities recognised inon the consolidated balance sheet. They are in respect of benefits that have accrued at the balance sheet date and make no allowance for any benefits to be accrued subsequently.
(f) Related party disclosures
Information on transactions between the group and its pension plans is given in note 20.21.
Financial statements (continued)
14.15. Working capital
Accounting policies
Inventories are stated at the lower of cost and net realisable value. Cost includes raw materials, direct labour and expenses, an appropriate proportion of production and other overheads, but not borrowing costs. Cost is calculated at the weighted average cost incurred in acquiring inventories. Maturing inventories and raw materials which are retained for more than one year are classified as current assets, as they are expected to be realised in the normal operating cycle.
Trade and other receivables are initially recognised at fair value less transaction costs and subsequently carried at amortised cost less any allowance for discounts and doubtful debts. Trade receivables arise from contracts with customers, and are recognised when performance obligations are satisfied, and the consideration due is unconditional as only the passage of time is required before the payment is received. Allowance losses are calculated by reviewing lifetime expected credit losses using historic and forward-looking data on credit risk.
Trade and other payables are initially recognised at fair value including transaction costs and subsequently carried at amortised costs. Contingent considerationconsiderations recognised in business combinations are subsequently measured at fair value through income statement. The group evaluates supplier arrangements against a number of indicators to assess if the liability has the characteristics of a trade payable or should be classified as borrowings. These indicators includeThis assessment considers the commercial purpose of the facility, whether payment terms are similar to customary payment terms.terms, whether the group is legally discharged from its obligation towards suppliers before the end of the original payment term, and the group’s involvement in agreeing terms between banks and suppliers.
Provisions are liabilities of uncertain timing or amount. A provision is recognised if, as a result of a past event, the group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are calculated on a discounted basis. The carrying amounts of provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate.
(a) Inventories
| | | | | | | | |
| | 2023
£ million | 2022
£ million |
| Raw materials and consumables | 543 | | 489 | |
| Work in progress | 132 | | 86 | |
| Maturing inventories | 5,794 | | 5,229 | |
| Finished goods and goods for resale | 1,192 | | 1,290 | |
| 7,661 | | 7,094 | |
|
| | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
|
| Raw materials and consumables | | 363 |
| | 338 |
|
| Work in progress | | 48 |
| | 46 |
|
| Maturing inventories | | 4,562 |
| | 4,334 |
|
| Finished goods and goods for resale | | 799 |
| | 754 |
|
| | | 5,772 |
| | 5,472 |
|
Maturing inventories include whisk(e)y, rum, tequila and Chinese white spirits. The following amounts of inventories are expected to be utilised after more than one year:
| | | | | | | | |
| | 2023
£ million | 2022
£ million |
| Raw materials and consumables | 23 | | 15 | |
| Maturing inventories | 4,063 | | 3,713 | |
| 4,086 | | 3,728 | |
|
| | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
|
| Raw materials and consumables | | 18 |
| | 14 |
|
| Maturing inventories | | 3,740 |
| | 3,434 |
|
| | | 3,758 |
| | 3,448 |
|
Inventories are disclosed net of provisions for obsolescence, an analysis of which is as follows:
| | | | | | | | | | | |
| | 2023
£ million | 2022
£ million | 2021
£ million |
| Balance at beginning of the year | 94 | | 96 | | 98 | |
| Exchange differences | (27) | | 6 | | (8) | |
| Income statement charge | 55 | | 6 | | 20 | |
| Utilised | (19) | | (13) | | (14) | |
| Sale of businesses | (1) | | (1) | | — | |
| 102 | | 94 | | 96 | |
|
| | | | | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| Balance at beginning of the year | | 63 |
| | 71 |
| | 88 |
|
| Exchange differences | | — |
| | — |
| | (2 | ) |
Income statement charge/(release)(i) | | 47 |
| | (3 | ) | | — |
|
| Utilised | | (12 | ) | | (5 | ) | | (15 | ) |
| | | 98 |
| | 63 |
| | 71 |
|
(i) Income statement charge in the year ended 30 June 2020 comprise £23 million exceptional charge due to Covid-19.
Financial statements (continued)
(b) Trade and other receivables
| | | | | | | | | | | | | | |
| | 2023 | 2022 |
| | Current
assets
£ million | Non-current
assets
£ million | Current
assets
£ million | Non-current
assets
£ million |
| Trade receivables | 2,011 | | — | | 2,155 | | — | |
| Interest receivable | 12 | | — | | 18 | | — | |
| VAT recoverable and other prepaid taxes | 271 | | 15 | | 290 | | 15 | |
| Other receivables | 163 | | 13 | | 158 | | 13 | |
| Prepayments | 229 | | 3 | | 290 | | 9 | |
| Accrued income | 34 | | — | | 22 | | — | |
| 2,720 | | 31 | | 2,933 | | 37 | |
|
| | | | | | | | | | | | |
| | | 2020 | | | 2019 | |
| | | Current assets £ million |
| | Non-current assets £ million |
| | Current assets £ million |
| | Non-current assets £ million |
|
| Trade receivables | | 1,498 |
| | — |
| | 2,173 |
| | — |
|
| Interest receivable | | 29 |
| | — |
| | 25 |
| | — |
|
| VAT recoverable and other prepaid taxes | | 192 |
| | 13 |
| | 132 |
| | 14 |
|
| Other receivables | | 210 |
| | 31 |
| | 141 |
| | 31 |
|
| Prepayments | | 157 |
| | 2 |
| | 202 |
| | 8 |
|
| Accrued income | | 25 |
| | — |
| | 21 |
| | — |
|
| | | 2,111 |
| | 46 |
| | 2,694 |
| | 53 |
|
At 30 June 2020,2023, approximately 16%26%, 28%14% and 14%11% of the group’s trade receivables of £1,498£2,011 million are due from counterparties based in the United Kingdom, theStates, United StatesKingdom and India, respectively. Accrued income primarily represents amounts receivable from customers in respect of performance obligations satisfied but not yet invoiced.
The aged analysis of trade receivables, net of expected credit loss allowance, is as follows:
| | | | | | | | |
| | 2023
£ million | 2022
£ million |
| Not overdue | 1,967 | | 2,114 | |
| Overdue 1 – 30 days | 25 | | 19 | |
| Overdue 31 – 60 days | 7 | | 8 | |
| Overdue 61 – 90 days | 3 | | 5 | |
| Overdue 91 – 180 days | 6 | | 5 | |
| Overdue more than 180 days | 3 | | 4 | |
| 2,011 | | 2,155 | |
|
| | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
|
| Not overdue | | 1,379 |
| | 2,083 |
|
| Overdue 1 – 30 days | | 5 |
| | 27 |
|
| Overdue 31 – 60 days | | 23 |
| | 21 |
|
| Overdue 61 – 90 days | | 39 |
| | 13 |
|
| Overdue 91 – 180 days | | 39 |
| | 15 |
|
| Overdue more than 180 days | | 13 |
| | 14 |
|
| | | 1,498 |
| | 2,173 |
|
Trade and other receivables are disclosed net of expected credit loss allowance for doubtful debts, an analysis of which is as follows:
| | | | | | | | | | | |
| | 2023
£ million | 2022
£ million | 2021
£ million |
| Balance at beginning of the year | 118 | | 112 | | 160 | |
| Exchange differences | (12) | | 6 | | (13) | |
| Income statement (release)/charge | (3) | | 21 | | (15) | |
| Written off | (14) | | (21) | | (20) | |
| 89 | | 118 | | 112 | |
|
| | | | | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| Balance at beginning of the year | | 113 |
| | 97 |
| | 129 |
|
| Exchange differences | | (3 | ) | | 3 |
| | (4 | ) |
| Income statement charge | | 55 |
| | 23 |
| | 18 |
|
| Written off | | (5 | ) | | (10 | ) | | (46 | ) |
| | | 160 |
| | 113 |
| | 97 |
|
Due to the global financial uncertainty arising from the Covid-19 pandemic, management has considered the elevated credit risk on trade and other receivables. In addition, certain balances (where there was an objective evidence of credit impairment) have been provided for on an individual basis. This has resulted in a charge of £55 million for impairment provisions recognised in the income statement, out of which £29 millionexpected credit loss allowance is directly in relation to the current difficult trading environment.
Financial statements (continued)
(c) Trade and other payables
| | | | | | | | | | | | | | |
| | 2023 | 2022 |
| | Current
liabilities
£ million | Non-current
liabilities
£ million | Current
liabilities
£ million | Non-current
liabilities
£ million |
| Trade payables | 2,659 | | — | | 2,705 | | — | |
| Interest payable | 237 | | — | | 143 | | — | |
| Tax and social security excluding income tax | 632 | | — | | 696 | | — | |
| Other payables | 432 | | 368 | | 600 | | 380 | |
| Accruals | 1,229 | | — | | 1,635 | | — | |
| Deferred income | 73 | | — | | 90 | | — | |
| Dividend payable to non-controlling interests | 38 | | — | | 18 | | — | |
| 5,300 | | 368 | | 5,887 | | 380 | |
|
| | | | | | | | | | | | |
| | | 2020 | | | 2019 | |
| | | Current
liabilities
£ million |
| | Non-current
liabilities
£ million |
| | Current
liabilities
£ million |
| | Non-current
liabilities
£ million |
|
| Trade payables | | 1,333 |
| | — |
| | 1,694 |
| | — |
|
| Interest payable | | 152 |
| | — |
| | 127 |
| | — |
|
| Tax and social security excluding income tax | | 698 |
| | — |
| | 640 |
| | — |
|
| Other payables | | 420 |
| | 175 |
| | 565 |
| | 222 |
|
| Accruals | | 971 |
| | — |
| | 1,097 |
| | — |
|
| Deferred income | | 79 |
| | — |
| | 56 |
| | — |
|
| Dividend payable to non-controlling interests | | 30 |
| | — |
| | 23 |
| | — |
|
| | | 3,683 |
| | 175 |
| | 4,202 |
| | 222 |
|
Interest payable at 30 June 20202023 includes interest on non-derivative financial instruments of £148£217 million (2019(2022 – £124£141 million). Accruals at 30 June 2023 include £561 million (2022 – £613 million) accrued discounts attributed to sales recognised. Deferred income represents amounts paid by customers in respect of performance obligations not yet satisfied. Non-current liabilities include £110 million (2019 - £153 million) in respect of the net present value of contingent consideration in respect of the acquisition of Casamigos.
The amount of contract liabilities recognised as revenue in the current year is £56£90 million (2019(2022 – £37£72 million).
Non-current liabilities include the net present value of contingent consideration in respect of prior acquisitions of £293 million (2022 – £353 million). For further information on contingent consideration, please refer to note 16 (g).
Together with the group’s partner banks, supply chain financing (SCF) facilities are provided to our suppliers in certain countries. These arrangements enable suppliers to receive funding earlier than the invoice due date at their discretion and at their own cost. ThePayment terms continue to be agreed directly between the group settles trade payablesand suppliers, independently from the availability of SCF facilities. Liabilities are settled in accordance with agreed payment termsthe original due date of invoices. The group does not incur any fees or receive any rebates where the suppliers choose to utilise these facilities. The group has determined that it is appropriate to present amounts outstanding subject to SCF arrangements as trade payables. Consistent with this classification, cash flows are presented either as operating cash flows or cash flows from investing activities, when related to the supplier.acquisition of non-current assets. At 30 June 20202023, the amount that has been subject to SCF and accounted for as trade payables was £309£727 million (2019(2022 – £371£789 million).
(d) Provisions
| | | | | | | | | | Thalidomide
£ million | Other
£ million | Total
£ million |
| | | Thalidomide
£ million |
| | Other
£ million |
| | Total
£ million |
| |
| At 30 June 2019 | | 209 |
| | 207 |
| | 416 |
| |
| At 30 June 2022 | | At 30 June 2022 | 178 | | 239 | | 417 | |
| Exchange differences | | — |
| | (3 | ) | | (3 | ) | Exchange differences | (1) | | (26) | | (27) | |
| Disposal of businesses | | Disposal of businesses | — | | (2) | | (2) | |
| Provisions charged during the year | | — |
| | 120 |
| | 120 |
| Provisions charged during the year | — | | 31 | | 31 | |
| Provisions utilised during the year | | (17 | ) | | (20 | ) | | (37 | ) | Provisions utilised during the year | (14) | | (61) | | (75) | |
| Transfers to other payables | | — |
| | (27 | ) | | (27 | ) | |
| Transfers from other payables | | Transfers from other payables | — | | 12 | | 12 | |
| Unwinding of discounts | | 7 |
| | — |
| | 7 |
| Unwinding of discounts | 5 | | 1 | | 6 | |
| At 30 June 2020 | | 199 |
| | 277 |
| | 476 |
| |
| At 30 June 2023 | | At 30 June 2023 | 168 | | 194 | | 362 | |
| Current liabilities | | 17 |
| | 166 |
| | 183 |
| Current liabilities | 13 | | 106 | | 119 | |
| Non-current liabilities | | 182 |
| | 111 |
| | 293 |
| Non-current liabilities | 155 | | 88 | | 243 | |
| | | 199 |
| | 277 |
| | 476 |
| | 168 | | 194 | | 362 | |
(a) Provisions have been established in respect of the discounted value of the group’s commitment to the UK and Australian Thalidomide Trusts. These provisions will be utilised over the period of the commitments up to 2037.
(b) The largest item in other provisions at 30 June 20202023 is £81£51 million (2022 – £49 million) in respect of "Raisingemployee deferred compensation plans which will be utilised when employees leave the Bar" programme. In June 2020 Diageo launched this two years global programme to support pubs and bars to welcome customers back and recover following the Covid-19 pandemic.group.
Financial statements (continued)
Risk management and capital structure
Introduction
This section sets out the policies and procedures applied to manage the group’s capital structure and the financial risks the group is exposed to. Diageo considers the following components of its balance sheet to be capital: borrowings and equity. Diageo manages its capital structure to achieve capital efficiency, provide flexibility to invest through the economic cycle and give efficient access to debt markets at attractive cost levels.
15.16. Financial instruments and risk management
Accounting policies
Financial assets and liabilities are initially recorded at fair value including, where permitted by IFRS 9, any directly attributable transaction costs. For those financial assets that are not subsequently held at fair value, the group assesses whether there is evidence of impairment at each balance sheet date.
The group classifies its financial assets and liabilities into the following categories: financial assets and liabilities at amortised cost, financial assets and liabilities at fair value through profit and lossincome statement and financial assets at fair value through other comprehensive income.
The accounting policies for other investments and loansare described in note 12,13, for tradetrade and other receivables and payables in note 1415 and for cash and cash equivalents in note 16.17.
Financial assets and liabilities at fair value through profit or lossincome statement include derivative assets and liabilities. Where financial assets or liabilities are eligible to be carried at either amortised cost or fair value through other comprehensive income, the group does not apply the fair value option.
Derivative financial instruments are carried at fair value using a discounted cash flow model based on market data applied consistently for similar types of instruments. Gains and losses on derivatives that do not qualify for hedge accounting treatment are taken to the income statement as they arise.
Other financial liabilities are carried at amortised cost unless they are part of a fair value hedge relationship. The difference between the initial carrying amount of the financial liabilities and their redemption value is recognised in the income statement over the contractual terms using the effective interest rate method. TheFinancial liabilities in respect of the Zacapa related financial liabilitiesacquisition are recognised at fair value.
Hedge accounting
The group designates and documents certain derivatives as hedging instruments against changes in fair value of recognised assets and liabilities (fair value hedges), commodity price risk of highly probable forecast transactions, oras well as the cash flow risk from a change in exchange or interest rates (cash flow hedges) and hedges of net investments in foreign operations (net investment hedges). The designated portion of the hedging instruments is included in other financial assets and liabilities on the consolidated balance sheet. The effectiveness of such hedges is assessed at inception and at least on a quarterly basis, using prospective testing. Methods used for testing effectiveness include dollar offset, critical terms, regression analysis and hypothetical models.
Fair value hedges are used to manage the currency and/or interest rate risks to which the fair value of certain assets and liabilities are exposed. Changes in the fair value of the derivatives are recognised in the income statement, along with any changes in the relevant fair value of the underlying hedged asset or liability.
If such a hedge relationship no longer meets hedge accounting criteria, fair value movements on the derivative continue to be taken to the income statement while any fair value adjustments made to the underlying hedged item to that date are amortised through the income statement over its remaining life using the effective interest rate method.
Cash flow hedgeshedges are used to hedge the foreign currency risk of highly probable future foreign currency cash flows, the commodity price risk of highly probable future transactions, as well as the cash flow risk from changes in exchange or interest rates. The effective portion of the gain or loss on the hedges is recognised in other comprehensive income, while any ineffective part is recognised in the income statement. Amounts recorded in other comprehensive income are recycled to the income statement in the same period in which the underlying foreign currency, commodity exposure or interest exposure affects the income statement.
Financial statements (continued)
Net investment hedges take the form of either foreign currency borrowings or derivatives. Foreign exchange differences arising on translation of net investments are recorded in other comprehensive income and included in the exchange reserve. Liabilities used as hedging instruments are revalued at closing exchange rates and the resulting gains or losses are also recognised in other comprehensive income to the extent that they are effective, with any ineffectiveness taken to the income statement. Foreign exchangecurrency contracts hedging net investments are carried at fair value. Effective fair value movements are recognised in other comprehensive income, with any ineffectiveness taken to the income statement.
Financial statements (continued)
The group’s funding, liquidity and exposure to foreign currency and interest rate risks are managed by the group’s treasury department. The treasury department uses a range of financial instruments to manage these underlying risks.
Treasury operations are conducted within a framework of Board-approved policies and guidelines, which are recommended and monitored by the finance committee,Finance Committee, chaired by the Chief Financial Officer. The policies and guidelines include benchmark exposure and/or hedge cover levels for key areas of treasury risk which are periodically reviewed by the Board following, for example, significant business, strategic or accounting changes. The framework provides for limited defined levels of flexibility in execution to allow for the optimal application of the Board-approved strategies. Transactions arising from the application of this flexibility are carried at fair value, gains or losses are taken to the income statement as they arise and are separately monitored on a daily basis using Value at Risk analysis. In the years ended 30 June 20202023 and 30 June 20192022 gains and losses on these transactions were not material. The group does not use derivatives for speculative purposes. All transactions in derivative financial instruments are initially undertaken to manage the risks arising from underlying business activities.
The group purchases insurance for commercial or, where required, for legal or contractual reasons. In addition, the group retains insurable risk where external insurance is not considered an economic means of mitigating these risks.
The finance committeeFinance Committee receives a monthlyquarterly report on the key activities of the treasury department, which would identifyhowever any exposures which differ from the defined benchmarks shouldare reported as they arise.
(a) Currency risk
The group presents its consolidated financial statements in sterling and conducts business in many currencies. As a result, it is subject to foreign currency risk due to exchange rate movements, which will affect the group’s transactions and the translation of the results and underlying net assets of its operations. To manage the currency risk, the group uses certain financial instruments. Where hedge accounting is applied, hedges are documented and tested for effectiveness on an ongoing basis. The impact of the Covid-19 pandemic on the group's cash flow hedges has been considered to determine if the hedged forecast cash flows remain ‘highly probable’, in relation to forecasted sales transactions on the net US dollar exposure of the group and other hedged currency pairs. In making this assessment, the potential financial impact of the Covid-19 pandemic has been modelled in group's cash flow projections and stress tested. For the year ended 30 June 2020, no material ineffectiveness was recognized based on the group’s assessment, however if there was a reduction in foreign currency forecast transactions, any potential ineffectiveness would be recognized in the consolidated income statement.
Hedge of net investment in foreign operations
The group hedges a certain portion of its exposure to fluctuations in the sterling value of its foreign operations by designating borrowings held in foreign currencies and using foreign currency spots, forwards, swaps and other financial derivatives. For the year ended 30 June 20202023 the group’s guidanceintention was to maintain total net investment Value at Risk to total Net Assetnet asset value below 20%, where Value at Risk is defined as the maximum amount of loss over a one-yearperiod with a 95% probability probability confidence level.
At 30 June 20202023 foreign currency borrowings designated in net investment hedge relationships amounted to £9,127£10,627 million (2019 - £4,001 million,(2022 £8,742 million), including financial derivatives). derivatives.
Hedge of foreign currency debt
The group uses cross currency interest rate swaps to hedge the foreign currency risk associated with certain foreign currency denominated borrowings.
Transaction exposure hedging
The group’s policy is to hedge up to 24 months forecast transactional foreign currency risk on the net US dollar exposure of the groupmajor currency pair exposures up to 24 months, targeting 75% coverage for the current financial year, and on other currency exposures up to 18 months for other currency pairs.months. The group’s exposure to foreign currency risk arising principally on forecasted sales transactions is managed using forward agreements and options.
Financial statements (continued)
(b) Interest rate risk
The group has an exposure to interest rate risk, arising principally on changes in US dollar, euro and sterling interest rates. To manage interest rate risk, the group manages its proportion of fixed to floating rate borrowings within limits approved by the Board, primarily through issuing fixed and floating rate borrowings, and commercial paper, and by utilising interest rate swaps. These practices aim to minimise the group’s net finance charges with acceptable year-on-year volatility. To facilitate operational efficiency and effective hedge accounting, for the year ended 30 June 20202023 the group’s policy was to maintain fixed rate borrowings within a band of 40% to 60%90% of forecastedforecast net borrowings. In September 2019 the Board approved to temporarily amend the approved 40% - 60% fixed debt band to 40% - 70% for a period of 15 months until 31 December 2020. For these calculations, net borrowings exclude interest rate related fair value adjustments. The majority of the group’s existing interest rate derivatives are designated as hedges and are expected to be effective. Fair value of these derivatives is recognised in the income statement, along with any changes in the relevant fair value of the underlying hedged asset or liability. The group's net borrowings interest rate profile as at 30 June 2020 and 2019of the group's net borrowings is as follows:
| | | | | | | | | | | | | | |
| | 2023 | 2022 |
| | £ million | % | £ million | % |
| Fixed rate | 11,961 | | 77 | | 11,070 | | 78 | |
Floating rate(1) | 3,225 | | 21 | | 2,612 | | 19 | |
| Impact of financial derivatives and fair value adjustments | (93) | | (1) | | (20) | | — | |
| Lease liabilities | 448 | | 3 | | 475 | | 3 | |
| Net borrowings | 15,541 | | 100 | | 14,137 | | 100 | |
(1) The floating rate portion of net borrowings includes cash and cash equivalents, collaterals, floating rate loans and bonds and bank overdrafts.
Financial statements (continued)
|
| | | | | | | | | | | | |
| | | 2020 | | | 2019
(reclassification) | |
| | | £ million |
| | % |
| | £ million |
| | % |
|
| Fixed rate | | 9,213 |
| | 70 |
| | 6,181 |
| | 55 |
|
Floating rate(i) | | 3,746 |
| | 28 |
| | 5,071 |
| | 45 |
|
| Impact of financial derivatives and fair value adjustments | | (183 | ) | | (1 | ) | | (103 | ) | | (1 | ) |
Lease liabilities(ii) | | 470 |
| | 3 |
| | 128 |
| | 1 |
|
| Net borrowings | | 13,246 |
| | 100 |
| | 11,277 |
| | 100 |
|
| |
(i) | The floating rate portion of net borrowings includes cash and cash equivalents, collaterals, floating rate loans and bonds and bank overdrafts.
|
| |
(ii) | At 30 June 2019 the group reported lease liabilities of £128 million in respect of leases that met the criteria of ‘finance leases’ under IAS 17 - Leases, in the floating rate categorisation. As at 30 June 2020 Lease liabilities are disclosed separately. |
The table below sets out the average monthly net borrowings and effective interest rate:
| | | | | | | | | | | | | | | | | |
| Average monthly net borrowings | Effective interest rate |
2023 £ million | 2022 £ million | 2021 £ million | 2023 % | 2022 % | 2021 % |
| 15,244 | | 12,692 | | 12,702 | | 3.9 | 2.7 | 2.7 |
(i) For this calculation, net interest charge excludes fair value adjustments to derivative financial instruments and average monthly net borrowings include the impact of interest rate swaps that are no longer in a hedge relationship but exclude the market value adjustment for cross currency interest rate swaps.
IBOR reform
In accordance with the UK Financial Conduct Authority’s announcement on 5 March 2021, LIBOR benchmark rates were discontinued after 31 December 2021, except for the majority of the US dollar settings which are discontinued from 30 June 2023. There have been amendments to the contractual terms of IBOR-referenced interest rates and the corresponding update of the hedge designations. By 30 June 2022, changes required to systems and processes in relation to the fair valuation of financial instruments were implemented and the transition had no material tax or accounting implications. The group also evaluated the implications of the reference rate changes in relation to other valuation models and credit risk, and concluded that they were not material.
In line with the relief provided by the amendment, the group assumes that the interest rate benchmark on which the cash flows of the hedged item, the hedging instrument or the hedged risk are based are not altered by the IBOR reform. The derivative hedging instruments provide a close approximation to the extent and nature of the risk exposure the group manages through hedging relationships.
Included in floating rate net borrowings are interest rate swaps designated in fair value hedges, with a notional amount of £2,063 million (2022 – £2,893 million) whose interest rates are based on USD LIBOR. In preparation for the discontinuation of USD LIBOR, the group have amended these agreements to reference the Secured Overnight Financing Rate (SOFR) resulting in economically equivalent trades upon transition. The floating legs of the transitioned trades will become SOFR based subsequent to the last USD LIBOR based interest payments.
|
| | | | | | | | | | | | | |
| Average monthly net borrowings | | | Effective interest rate |
2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
| | 2020
% | | 2019
% | | 2018
% |
| 12,708 |
| | 10,393 |
| | 9,063 |
| | 2.6 | | 2.4 | | 2.6 |
| |
(1) | For this calculation, net interest charge excludes fair value adjustments to derivative financial instruments and borrowings and average monthly net borrowings includes the impact of interest rate swaps that are no longer in a hedge relationship but excludes the market value adjustment for cross currency interest rate swaps. |
(c) Commodity price risk
Commodity price risk is managed in line with the principles approved by the Board either through long-term purchase contracts with suppliers or, where appropriate, derivative contracts. The group policy is to maintain the Value at Risk of commodity price risk arisenarising from commodity exposures below 75 bps of forecast gross marginprofit in any given financial year. Where derivative contracts are used, the commodity price risk exposure is hedged up to 24 months of forecast volume through exchange-traded and over-the-counter contracts (futures, forwards and swaps) and cash flow hedge accounting is applied.
(d) Market risk sensitivity analysis
The group uses a sensitivity analysis that estimates the impacts on the consolidated income statement and other comprehensive income of either an instantaneous increase or decrease of 0.5% in market interest rates or a 10% strengthening or weakening in sterling against all other currencies, from the rates applicable at 30 June 2020 and 30 June 2019, for each class of financial instruments on the consolidated balance sheet at these dates with all other variables remaining constant. The sensitivity analysis excludes the impact of market risksrisk on the net post employment benefit liabilities and assets, and corporate tax payable. This analysis is for illustrative purposes only, as in practice interest and foreign exchange rates rarely change in isolation.
Financial statements (continued)
The sensitivity analysis estimates the impact of changes in interest and foreign exchange rates. All hedges are expected to be highly effective for this analysis and it considers the impact of all financial instruments including financial derivatives, cash and cash equivalents, borrowings and other financial assets and liabilities. The results of the sensitivity analysis should not be considered as projections of likely future events, gains or losses as actual results in the future may differ materially due to developments in the global financial markets which may cause fluctuations in interest and exchange rates to vary from the hypothetical amounts disclosed in the table below.
| | | | | | | | | | | | | | |
| | Impact on income
statement
gain/(loss) | Impact on consolidated
comprehensive income
gain/(loss)(1) (2) |
| 2023 | 2022 | 2023 | 2022 |
| £ million | £ million | £ million | £ million |
| 0.5% decrease in interest rates | 16 | | 13 | | 36 | | 31 | |
| 0.5% increase in interest rates | (16) | | (13) | | (35) | | (30) | |
| 10% weakening of sterling | (45) | | (33) | | (1,336) | | (1,125) | |
| 10% strengthening of sterling | 36 | | 28 | | 1,093 | | 922 | |
(1) The impact on foreign currency borrowings and derivatives in net investment hedges is largely offset by the foreign exchange difference arising on the translation of net investments.
(2) The impact on the consolidated statement of comprehensive income includes the impact on the income statement.
|
| | | | | | | | | | | | |
| | | Impact on income
statement
gain/(loss) | | | Impact on consolidated
comprehensive income
gain/(loss)(i) (ii) | |
| | | | | 2019 |
| | | | 2019 |
|
| | | 2020 |
| | (restated(iii)) |
| | 2020 |
| | (restated(iii)) |
|
| | | £ million |
| | £ million |
| | £ million |
| | £ million |
|
| 0.5% decrease in interest rates | | 19 |
| | 27 |
| | 45 |
| | 40 |
|
| 0.5% increase in interest rates | | (19 | ) | | (27 | ) | | (43 | ) | | (39 | ) |
| 10% weakening of sterling | | (26 | ) | | (17 | ) | | (1,384 | ) | | (1,001 | ) |
| 10% strengthening of sterling | | 22 |
| | 14 |
| | 1,132 |
| | 805 |
|
| |
(i) | The impact on foreign currency borrowings and derivatives in net investment hedges is largely offset by the foreign exchange difference arising on the translation of net investments.
Financial statements (continued) |
| |
(ii) | The impact on the consolidated statement of comprehensive income includes the impact on the income statement.
|
| |
(iii) | The year ended 30 June 2019 has been restated to reflect the increase or decrease of 0.5% in market interest rates from the rates applicable at 30 June 2019. |
(e) Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the group. Credit risk arises on cash balances (including bank deposits and cash and cash equivalents), derivative financial instruments and credit exposures to customers, including outstanding loans, trade and other receivables, financial guarantees and committed transactions.
The carrying amount of financial assets of £5,989£4,637 million (2019 - £3,950 (2022 – £5,445 million) represents the group’s exposure to credit risk at the balance sheet date as disclosed in section (i), excluding the impact of any collateral held or other credit enhancements. A financial asset is in default when the counterparty fails to pay its contractual obligations. Financial assets are written off when there is no reasonable expectation of recovery.
Credit risk is managed separately for financial and business related credit exposures.
Financial credit risk
Diageo aims to minimise its financial credit risk through the application of risk management policies approved and monitored by the Board. Counterparties are predominantly limited to majorinvestment grade banks and financial institutions, primarily with a long-term credit rating within the A band or better, and the policy restricts the exposure to any one counterparty by setting credit limits taking into account the credit quality of the counterparty. The group’s policy is designed to ensure that individual counterparty limits are adhered to and that there are no significant concentrations of credit risk. The Board also defines the types of financial instruments which may be transacted. The credit risk arising through the use of financial instruments for currency, and interest rate and commodity price risk management is estimated with reference to the fair value of contracts with a positive value, rather than the notional amount of the instruments themselves. Diageo annually reviews the credit limits applied and regularly monitors the counterparties’ credit quality reflecting market credit conditions.
When derivative transactions are undertaken with bank counterparties, the group may, where appropriate, enter into certain agreements with such bank counterparties whereby the parties agree to post cash collateral for the benefit of the other if the net valuations of the derivatives are above a predetermined threshold. At 30 June 2020,2023, the collateral held under these agreements amounted to $221$(19) million (£(15) million) (2022 – $23 million (£180 million) (2019 – $152 million (£12019 million)).
Business related credit risk
Loan,Exposures from loan, trade and other receivables exposures are managed locally in the operating units where they arise and active risk management is applied, focusing on country risk, credit limits, ongoing credit evaluation and monitoring procedures. There is no significant concentration of credit risk with respect to loans, trade and other receivables as the group has a large number of customers which are internationally dispersed.
Financial statements (continued)
(f) Liquidity risk
Liquidity risk is the risk thatof Diageo may encounterencountering difficulties in meeting its obligations associated with financial liabilities that are settled by delivering cash or other financial assets. The group uses short-term commercial paper to finance its day-to-day operations. The group’s policy with regard to the expected maturity profile of borrowings is to limit the amount of such borrowings maturing within 12 months to 50% of gross borrowings less money market demand deposits, and the level of commercial paper to 30% of gross borrowings less money market demand deposits. In addition, the group’s policy is to maintain backstop facilities with relationship banks to support commercial paper obligations.
The following tables provide an analysis of the anticipated contractual cash flows including interest payable for the group’s financial liabilities and derivative instruments on an undiscounted basis. Where interest payments are calculated at a floating rate, rates of each cash flow until maturity of the instruments are calculated based on the forward yield curve prevailing at the respective year ends. The gross cash flows of cross currency swaps are presented for the purposes of this table. All other derivative contracts are presented on a net basis. Financial assets and liabilities are presented gross in the consolidated balance sheet although, in practice, the group uses netting arrangements to reduce its liquidity requirements on these instruments.
Contractual cash flows
|
| | | | | | | | | | | | | | | | | | |
| | | Due within 1 year £ million |
| | Due between 1 and 3 years £ million |
| | Due between 3 and 5 years £ million |
| | Due after 5 years £ million |
| | Total £ million |
| | Carrying amount at balance sheet date £ million |
|
| 2020 | | | | | | | | | | | | |
Borrowings(i) | | (1,994 | ) | | (2,980 | ) | | (3,080 | ) | | (8,615 | ) | | (16,669 | ) | | (16,785 | ) |
Interest on borrowings(i)(iii) | | (466 | ) | | (669 | ) | | (541 | ) | | (1,741 | ) | | (3,417 | ) | | (148 | ) |
| Lease capital repayments | | (106 | ) | | (135 | ) | | (71 | ) | | (158 | ) | | (470 | ) | | (470 | ) |
| Lease future interest payments | | (9 | ) | | (13 | ) | | (9 | ) | | (31 | ) | | (62 | ) | | — |
|
Trade and other financial liabilities(ii) | | (2,833 | ) | | (127 | ) | | (48 | ) | | (35 | ) | | (3,043 | ) | | (3,006 | ) |
| Non-derivative financial liabilities | | (5,408 | ) | | (3,924 | ) | | (3,749 | ) | | (10,580 | ) | | (23,661 | ) | | (20,409 | ) |
| Cross currency swaps (gross) | | | | | | | | | | | | |
| Receivable | | 65 |
| | 902 |
| | 89 |
| | 1,506 |
| | 2,562 |
| | — |
|
| Payable | | (41 | ) | | (824 | ) | | (56 | ) | | (1,014 | ) | | (1,935 | ) | | — |
|
| Other derivative instruments (net) | | 21 |
| | 89 |
| | 45 |
| | 19 |
| | 174 |
| | — |
|
Derivative instruments(iii) | | 45 |
| | 167 |
| | 78 |
| | 511 |
| | 801 |
| | 610 |
|
| 2019 | | | | | | | | | | | | |
Borrowings(i) | | (1,957 | ) | | (2,942 | ) | | (2,845 | ) | | (4,748 | ) | | (12,492 | ) | | (12,555 | ) |
Interest on borrowings(i)(iii) | | (363 | ) | | (489 | ) | | (368 | ) | | (1,362 | ) | | (2,582 | ) | | (124 | ) |
Finance lease capital repayments(iv) | | (43 | ) | | (43 | ) | | (33 | ) | | (9 | ) | | (128 | ) | | (128 | ) |
Finance lease future interest payments(iv) | | (5 | ) | | (7 | ) | | (3 | ) | | — |
| | (15 | ) | | — |
|
Trade and other financial liabilities(ii) | | (3,305 | ) | | (233 | ) | | (3 | ) | | (11 | ) | | (3,552 | ) | | (3,524 | ) |
| Non-derivative financial liabilities | | (5,673 | ) | | (3,714 | ) | | (3,252 | ) | | (6,130 | ) | | (18,769 | ) | | (16,331 | ) |
| Cross currency swaps (gross) | | | | | | | | | | | | |
| Receivable | | 63 |
| | 125 |
| | 854 |
| | 1,503 |
| | 2,545 |
| | — |
|
| Payable | | (41 | ) | | (82 | ) | | (811 | ) | | (1,042 | ) | | (1,976 | ) | | — |
|
| Other derivative instruments (net) | | 70 |
| | 27 |
| | 30 |
| | 18 |
| | 145 |
| | — |
|
Derivative instruments(iii) | | 92 |
| | 70 |
| | 73 |
| | 479 |
| | 714 |
| | 400 |
|
| |
(i) | For the purpose of these tables above, borrowings are defined as gross borrowings excluding lease liabilities and fair value of derivative instruments as disclosed in note 16.
|
| |
(ii) | Primarily consists of trade and other payables that meet the definition of financial liabilities under IAS 32.
|
| |
(iii) | Carrying amount of interest on borrowings, interest on derivatives and interest on other payable is included within interest payable in note 14.
|
| |
(iv) | For the year ended 30 June 2019 lease liabilities only include liabilities that met the criteria of 'finance leases' under IAS 17 - Leases. |
Financial statements (continued)
Contractual cash flows
| | | | | | | | | | | | | | | | | | | | |
| | Due within
1 year
£ million | Due between
1 and 3 years
£ million | Due between
3 and 5 years
£ million | Due after
5 years
£ million | Total
£ million | Carrying
amount at
balance
sheet date
£ million |
| 2023 | | | | | | |
Borrowings(1) | (1,707) | | (3,615) | | (2,980) | | (8,652) | | (16,954) | | (16,502) | |
Interest on borrowings(1)(2) | (541) | | (750) | | (623) | | (1,503) | | (3,417) | | (217) | |
| Lease capital repayments | (75) | | (104) | | (69) | | (200) | | (448) | | (448) | |
| Lease future interest payments | (18) | | (28) | | (19) | | (37) | | (102) | | — | |
Trade and other financial liabilities(3) | (4,417) | | (231) | | (122) | | (96) | | (4,866) | | (4,782) | |
| Non-derivative financial liabilities | (6,758) | | (4,728) | | (3,813) | | (10,488) | | (25,787) | | (21,949) | |
| Cross currency swaps (gross) | | | | | | |
| Receivable | 43 | | 87 | | 87 | | 1,341 | | 1,558 | | |
| Payable | (28) | | (56) | | (56) | | (930) | | (1,070) | | |
| Other derivative instruments (net) | 19 | | (88) | | (79) | | (54) | | (202) | | |
Derivative instruments(2) | 34 | | (57) | | (48) | | 357 | | 286 | | 134 | |
| 2022 | | | | | | |
Borrowings(1) | (1,524) | | (2,842) | | (2,738) | | (9,276) | | (16,380) | | (16,020) | |
Interest on borrowings(1)(2) | (427) | | (626) | | (560) | | (1,622) | | (3,235) | | (141) | |
| Lease capital repayments | (85) | | (107) | | (61) | | (222) | | (475) | | (475) | |
| Lease future interest payments | (13) | | (20) | | (16) | | (44) | | (93) | | — | |
Trade and other financial liabilities(3) | (4,765) | | (123) | | (142) | | (126) | | (5,156) | | (5,145) | |
| Non-derivative financial liabilities | (6,814) | | (3,718) | | (3,517) | | (11,290) | | (25,339) | | (21,781) | |
| Cross currency swaps (gross) | | | | | | |
| Receivable | 851 | | 90 | | 90 | | 1,442 | | 2,473 | | |
| Payable | (783) | | (56) | | (56) | | (958) | | (1,853) | | |
| Other derivative instruments (net) | (86) | | (123) | | (78) | | (65) | | (352) | | |
Derivative instruments(2) | (18) | | (89) | | (44) | | 419 | | 268 | | 22 | |
(1) For the purpose of these tables, borrowings are defined as gross borrowings excluding lease liabilities and fair value of derivative instruments as disclosed in note 17.
(2) Carrying amount of interest on borrowings, interest on derivatives and interest on other payable is included within interest payable in note 15.
(3) Primarily consists of trade and other payables that meet the definition of financial liabilities under IAS 32.
The group had available undrawn committed bank facilities as follows:
| | | | | | | | |
| | 2023 £ million | 2022 £ million |
| Expiring within one year | 99 | | 793 | |
| Expiring between one and two years | 496 | | 103 | |
| Expiring after two years | 2,083 | | 1,893 | |
| 2,678 | | 2,789 | |
|
| | | | | |
| | 2020
£ million |
| | 2019
£ million |
|
Expiring within one year(i) | 2,439 |
| | — |
|
| Expiring between one and two years | 610 |
| | — |
|
| Expiring after two years | 2,236 |
| | 2,756 |
|
| | 5,285 |
| | 2,756 |
|
(i) Diageo has the rights to extend £813 million of the committed facilities expiring within one year to May 2022.
The facilities can be used for general corporate purposes and, together with cash and cash equivalents, support the group’s commercial paper programmes.
There are no financial covenants on the group’s material short- and long-term borrowings. Certain of these borrowings contain cross default provisions and negative pledges.
The committed bank facilities are subject to a single financial covenant, being minimum interest cover ratio of two times (defined as the ratio of operating profit before exceptional items, aggregated with share of after tax results of associates and joint ventures, to net interest)interest charges). They are also subject to pari passu ranking and negative pledge covenants.
Any non-compliance with covenants underlying Diageo’s financing arrangements could, if not waived, constitute an event of default with respect to any such arrangements, and any non-compliance with covenants may, in particular circumstances, lead to an acceleration of maturity on certain borrowings and the inability to access committed facilities. Diageo was in full compliance with its financial, pari passu ranking and negative pledge covenants in respect of its material shortshort- and long-term borrowings throughout each of the years presented.
Financial statements (continued)
(g) Fair value measurements
Fair value measurements of financial instruments are presented through the use of a three-level fair value hierarchy that prioritises the valuation techniques used in fair value calculations.
The group maintains policies and procedures to value instruments using the most relevant data available. If multiple inputs that fall into different levels of the hierarchy are used in the valuation of an instrument, the instrument is categorised on the basis of the most subjective input.
Foreign currency forwards and swaps, cross currency swaps and interest rate swaps are valued using discounted cash flow techniques. These techniques incorporate inputs at levels 1 and 2, such as foreign exchange rates and interest rates. These market inputs are used in the discounted cash flow calculation incorporating the instrument’s term, notional amount and discount rate, and taking credit risk into account. As significant inputs to the valuation are observable in active markets, these instruments are categorised as level 2 in the hierarchy.
Other financial liabilities include a put option, which does not have an expiry date, held by Industrias Licoreras de Guatemala (ILG) to sell the remaining 50% equity stake in Rum CreationsCreation & Products Inc,Inc., the owner of the Zacapa rum brand, to Diageo. The liability is fair valued using the discounted cash flow method and as at 30 June 20202023, an amount of £167£218 million (30 June 2019 - £1742022 – £216 million) is recognised as a liability with changes in the fair value of the put option included in retained earnings. As the valuation of this option uses assumptions not observable in the market, it is categorised as level 3 in the hierarchy. As at 30 June 20202023, because it is unknown when or if ILG will exercise the option, the liability is measured as if the exercise date is on the last day of the next financial year considering forecast future performance. The option is sensitive to reasonably possible changes in assumptions; if the option were to be exercised as at 30 June 2025, the fair value of the liability would increase by approximately £30 million.
Included in other financial liabilities, the contingent consideration on acquisition of businesses represents the present value of payments up to £283£422 million linked to certain performance targets, which are expected to be paid over the next 10 years.eight years.
Contingent considerations linked to certain volume targets at 30 June 2023 included £113 million in respect of the acquisition of Aviation Gin and Davos Brands (2022 – £157 million), £59 million in respect of the acquisition of 21Seeds (2022 – £59 million) and £18 million in respect of the acquisition of Lone River Ranch Water (2022 – £57 million). Contingent consideration of £70 million in respect of the acquisition of Don Papa Rum (2022 – £nil) is linked to certain financial performance targets. Contingent considerations are fair valued based on discounted cash flow method using assumptions not observable in the market. Contingent considerations are sensitive to possible changes in assumptions; a 10% increase or decrease in volume would increase or decrease the fair value of contingent considerations linked to certain volume targets by approximately £30 million and £50 million, respectively, and a 10% increase or decrease in cash flows would increase or decrease the fair value of contingent considerations linked to certain financial performance targets by approximately £25 million.
Financial statements (continued)
There were no significant changes in the measurement and valuation techniques, or significant transfers between the levels of the financial assets and liabilities in the year ended 30 June 2023.
The group’s financial assets and liabilities measured at fair value are categorised as follows:
| | | | | | | | |
| | 2023 £ million | 2022 £ million |
| Derivative assets | 594 | | 480 | |
| Derivative liabilities | (440) | | (456) | |
| Valuation techniques based on observable market input (Level 2) | 154 | | 24 | |
| Financial assets - other | 192 | | 184 | |
| Financial liabilities - other | (529) | | (587) | |
| Valuation techniques based on unobservable market input (Level 3) | (337) | | (403) | |
|
| | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
|
| Derivative assets | | 758 |
| | 531 |
|
| Derivative liabilities | | (145 | ) | | (129 | ) |
| Valuation techniques based on observable market input (Level 2) | | 613 |
| | 402 |
|
| Financial assets - other | | 116 |
| | 86 |
|
| Financial liabilities - other | | (416 | ) | | (401 | ) |
| Valuation techniques based on unobservable market input (Level 3) | | (300 | ) | | (315 | ) |
In the yearyears ended 30 June 2020,2023 and 30 June 2022, the increase in financial assets - other of £30 £8 million(2022 – £46 million) is principally due to additions. In the year ended 30 June 2019, the decrease in financial assets - otherrespect of £3 million was mainly due to additions offset by advances promised to associates recognised only when targets are achieved. acquisitions.
Financial statements (continued)
The movements in level 3 instruments, measured on a recurring basis, are as follows:
| | | | | | | | | | | | | | |
| | |
| | Zacapa
financial
liability | Contingent consideration recognised on acquisition of businesses | Zacapa
financial
liability | Contingent consideration recognised on acquisition of businesses |
| 2023 | 2023 | 2022 | 2022 |
| £ million | £ million | £ million | £ million |
| At the beginning of the year | (216) | | (371) | | (149) | | (429) | |
| Net (losses)/gains included in the income statement | (8) | | 117 | | (20) | | 62 | |
| Net gains/(losses) included in exchange in other comprehensive income | 9 | | 11 | | (26) | | (39) | |
| Net losses included in retained earnings | (16) | | — | | (34) | | — | |
| Acquisitions | — | | (76) | | — | | (70) | |
| Settlement of liabilities | 13 | | 8 | | 13 | | 105 | |
| At the end of the year | (218) | | (311) | | (216) | | (371) | |
|
| | | | | | | | | | | |
| | Zacapa financial liability |
| | Contingent consideration recognised on acquisition of businesses(i) |
| | Zacapa financial liability |
| | Contingent consideration recognised on acquisition of businesses |
|
| | 2020 |
| | 2020 |
| | 2019 |
| | 2019 |
|
| | £ million |
| | £ million |
| | £ million |
| | £ million |
|
| At the beginning of the year | (174 | ) | | (227 | ) | | (164 | ) | | (188 | ) |
| Net losses included in the income statement | (6 | ) | | (24 | ) | | (8 | ) | | (25 | ) |
| Net losses included in exchange in other comprehensive income | (5 | ) | | (5 | ) | | (8 | ) | | (8 | ) |
| Net gains/(losses) included in retained earnings | 9 |
| | — |
| | (3 | ) | | — |
|
| Additions | — |
| | (42 | ) | | — |
| | (15 | ) |
| Settlement of liabilities | 9 |
| | 49 |
| | 9 |
| | 9 |
|
| At the end of the year | (167 | ) | | (249 | ) | | (174 | ) | | (227 | ) |
(i) Included in the balance at 30 June 2020 is £173 million in respect of the acquisition of Casamigos (2019 - £197 million).
There were no transfers between levels during the two years ended 30 June 2020 and 30 June 2019.
(h) Results of hedge relationships
The group targets a one-to-one hedge ratio. StrengthsThe strength of the economic relationship between the hedged itemitems and the hedging instrumentinstruments is analysed on an ongoing basis. Ineffectiveness can arise from subsequent change in the forecast transactions as a result of differences in timing, cash flows or value except when the critical terms of the hedging instrument and hedged item are closely aligned. The change in the credit risk of the hedging instruments or the hedged items is not expected to be the primary factor in the economic relationship.
Financial statements (continued)
The notional amounts, contractual maturities and rates of the hedging instruments designated in hedging relationships as of 30 June 2020 by the main risk categories are as follows:
|
| | | | | | | | | | |
| | Notional amounts
£ million |
| | Maturity |
| | Range of hedged rates(i)(1) |
|
20202023 | | | | | | |
| Net investment hedges | | | | | | |
| Derivatives in net investment hedges of foreign operations | 637 | — |
July 2023 | US dollar 1.27 |
| Cash flow hedges | — |
| |
| Derivatives in cash flow hedge (foreign currency debt) | —873 |
| September 2036 - April 2043 | US dollar 1.60 - 1.88 |
| Derivatives in cash flow hedge (foreign currency risk) | 1,734 | | September 2023 - December 2024 | US dollar 1.05 - 1.33, Mexican peso 14.76 - 18.38 |
| Derivatives in cash flow hedge (commodity price risk) | 217 | | July 2023 - September 2024 | Feed Wheat: 183.75 - 240.00 USD/Bu LME Aluminium: 2,248 - 3,399 USD/Mt |
| Fair value hedges | | | |
| Derivatives in fair value hedge (interest rate risk) | 3,999 | | September 2023 - April 2030 | (0.01) - 3.09% |
| 2022 | | | |
| Net investment hedges | | | |
| Derivatives in net investment hedges of foreign operations | 11 | | July 2022 | Turkish lira 22.27 |
| Cash flow hedges | | | | | | |
| Derivatives in cash flow hedge (foreign currency debt) | 1,694 | 1,667 |
| | April 2023-April2023 - April 2043 |
| | US dollar 1.22-1.88 |
1.22 - 1.88 |
Derivatives in cash flow hedge (foreign currency exchange risk) | 1,874 | 1,428 |
| | September 2020-March 2022 |
| - June 2024 | US dollar 1.19-1.36,1.22 - 1.42, euro 1.06-1.18 |
1.13 - 1.17 |
| Derivatives in cash flow hedge (commodity price risk) | 234 | 133 |
July 2022 - March 2024 | | July 2020Natural Gas: 1.67 - February 2023 |
| | Corn: 3.453.57 GBP/therm(ec)LME Aluminium: 2,009 - 4.043,399 USD/Bu
Fuel Oil: 1.11 - 1.87 USD/gal |
Mt |
| Fair value hedges | | | | | | |
| Derivatives in fair value hedge (interest rate risk) | 4,444 | 6,092 |
| | July 2020-AprilSeptember 2022 - April 2030 |
| | (0.01)-4.83% |
|
2019 | | | | | | |
Net investment hedges | | | | | | |
Derivatives in net investment hedges of foreign operations | | 68 |
| | July 2019 |
| | Turkish lira 7.55 |
|
Cash flow hedges | | | | | | |
Derivatives in cash flow hedge (foreign currency debt) | | 1,614 |
| | April 2023-April 2043 |
| | US dollar 1.22-1.88 |
|
Derivatives in cash flow hedge (foreign currency exchange risk) | | 1,599 |
| | September 2019-February 2021 |
| | US dollar 1.28-1.47, euro 1.08-1.15 |
|
Derivatives in cash flow hedge (commodity price risk) | | 97 |
| | July 2019-May 2021 |
| | Wheat 148.75-171 GBP/t,
Aluminium 1971-2204 USD/MT |
|
Fair value hedges | | | | | | |
Derivatives in fair value hedge (interest rate risk) | | 4,063 |
| | May 2020-May 2028 |
| | (0.01)-3.09% |
- 3.09% |
(i)(1) In case of derivatives in cash flow hedgehedges (commodity price risk and foreign exchangecurrency risk), the range of the most significant contract’s hedged rates are presented.
For hedges of the cash flow risk from a change in forward exchange rates using cross currency interest rate swaps, the retranslation of the related bond principal to closing exchange rates and recognition of interest on the related bonds will affect the income statement in each year until the related bonds mature in 2023, 2036 and 2043. Exchange retranslation and the interest on the hedged bonds in the income statement are expected to offset those on the cross currency swaps in each of the years.
In respect of cash flow hedging instruments, a gain of £173£247 million (2019 - £79 (2022 – £124 million gain; 2018 - £572021 – £157 million loss) has beenwas recognised in other comprehensive income due to changes in fair value. A lossgain of £42£13 million has been was transferred out of other comprehensive income to other operating expenses and a gainloss of £75£54 million to other finance charges, respectively, (2019 -(2022 – a loss of £45£42 million and a gain of £82£239 million; 2018 -2021 – a gainloss of £7£10 million and a loss of £6£175 million) to offset the foreign exchange impact on the underlying transactions. A lossgain of £8£33 million (2019 - £nil, 2018 - £nil) has been (2022 – £46 million gain, 2021 – £2 million gain) was transferred out of other
Financial statements (continued)
comprehensive income to operating profit in relation to commodity hedges. The carrying amount of hedged items recognised in the statement of financial positionconsolidated balance sheet in relation to hedges of cash flow risk arising from foreign currency debts equals the notional value of the hedging instruments at 30 June 20202023 and are included within borrowings. The notional amount for cash flow hedges of foreign currency debt at 30 June 20202023 was £1,667£873 million (2019 - £1,614 (2022 – £1,694 million).
For cash flow hedges of forecast transactions at 30 June 2020,2023, based on year end interest and exchange rates, there is expected to be a lossgain to the income statement of £62£143 million in the year ending 30 June 20212024 and a gain of £4£20 million in the year ending 30 June 2022. 2025 is expected to be recognised.
ForIn respect of hedges of foreign currency borrowings that are no longer applicable at 30 June 2020,2023, a loss of £20£18 million (2019 - (2022 – a loss of £20£19 million) in respect of hedges of foreign currency borrowings iswas reported in reserves. There was no significant ineffectiveness on net investment and cash flow hedges during the year ended 30 June 2020. 2023.
The£3,999 million (2022 – £4,444 million) notional value of hedged items in fair value hedges equals to the notional value of hedging instruments designated in these relationships at 30 June 2023 and the carrying amount of hedged items recognised in the statement of financial position in relation to fair value hedges £6,092 million (2019 - £4,063 million) equals the notional value of the hedging instruments at 30 June 2020 and are included within borrowings.borrowings in the consolidated balance sheet.
For fair value hedges that are no longer applicable, the accumulated fair value changes shown on the statement of financial positionconsolidated balance sheet at 30 June 20202023 was £13 million (2019 - £21£nil (2022 – £1 million).
Financial statements (continued)
The following table sets out information regarding the effectiveness of hedging relationships designated by the Group,group, as well as the impacts on profit or lossthe income statement and other comprehensive income:
| | | | | | | | | | | | | | | | | |
| At the beginning of the year
£ million | Consolidated Income
statement
£ million | Consolidated statement of comprehensive income
£ million | Other
£ million | At the end
of the year
£ million |
| 2023 | | | | | |
| Net investment hedges | | | | | |
| Derivatives in net investment hedges of foreign operations | (1) | | — | | — | | 1 | | — | |
| Cash flow hedges | | | | | |
| Derivatives in cash flow hedge (foreign currency debt) | 367 | | (54) | | 60 | | (25) | | 348 | |
| Derivatives in cash flow hedge (foreign currency risk) | (77) | | (17) | | 260 | | 17 | | 183 | |
| Derivatives in cash flow hedge (commodity price risk) | 50 | | 33 | | (89) | | (19) | | (25) | |
| Fair value hedges | | | | | |
| Derivatives in fair value hedge (interest rate risk) | (283) | | (94) | | — | | — | | (377) | |
| Fair value hedge hedged item | 276 | | 96 | | — | | — | | 372 | |
| Instruments in fair value hedge relationship | (7) | | 2 | | — | | — | | (5) | |
| 2022 | | | | | |
| Net investment hedges | | | | | |
| Derivatives in net investment hedges of foreign operations | — | | — | | 5 | | (6) | | (1) | |
| Cash flow hedges | | | | | |
| Derivatives in cash flow hedge (foreign currency debt) | 154 | | 239 | | (6) | | (20) | | 367 | |
| Derivatives in cash flow hedge (foreign currency risk) | 53 | | (11) | | (130) | | 11 | | (77) | |
| Derivatives in cash flow hedge (commodity price risk) | 16 | | 46 | | 32 | | (44) | | 50 | |
| Fair value hedges | | | | | |
| Derivatives in fair value hedge (interest rate risk) | 63 | | (346) | | — | | — | | (283) | |
| Fair value hedge hedged item | (65) | | 341 | | — | | — | | 276 | |
| Instruments in fair value hedge relationship | (2) | | (5) | | — | | — | | (7) | |
|
| | | | | | | | | | | | | | | |
| | | At the beginning of the year
£ million |
| | Income statement
£ million |
| | Consolidated comprehensive income
£ million |
| | Other
£ million |
| | At the end
of the year
£ million |
|
| 2020 | | | | | | | | | | |
| Net investment hedges | | | | | | | | | | |
| Derivatives in net investment hedges of foreign operations | | (1 | ) | | — |
| | (1 | ) | | 2 |
| | — |
|
| Cash flow hedges | | | | | | | | | | |
| Derivatives in cash flow hedge (foreign currency debt) | | 271 |
| | 75 |
| | 146 |
| | (23 | ) | | 469 |
|
| Derivatives in cash flow hedge (foreign currency exchange risk) | | (57 | ) | | (47 | ) | | (1 | ) | | 47 |
| | (58 | ) |
| Derivatives in cash flow hedge (commodity price risk) | | (9 | ) | | (8 | ) | | (3 | ) | | 11 |
| | (9 | ) |
| Fair value hedges | | | | | | | | | | |
| Derivatives in fair value hedge (interest rate risk) | | 104 |
| | 85 |
| | — |
| | — |
| | 189 |
|
| Fair value hedge hedged item | | (103 | ) | | (86 | ) | | — |
| | — |
| | (189 | ) |
| Instruments in fair value hedge relationship | | 1 |
| | (1 | ) | | — |
| | — |
| | — |
|
| 2019 | | | | | | | | | | |
| Net investment hedges | | | | | | | | | | |
| Derivatives in net investment hedges of foreign operations | | (3 | ) | | — |
| | (25 | ) | | 27 |
| | (1 | ) |
| Cash flow hedges | | | | | | | | | | |
| Derivatives in cash flow hedge (foreign currency debt) | | 112 |
| | 82 |
| | 98 |
| | (21 | ) | | 271 |
|
| Derivatives in cash flow hedge (foreign currency exchange risk) | | (16 | ) | | (24 | ) | | (41 | ) | | 24 |
| | (57 | ) |
| Derivatives in cash flow hedge (commodity price risk) | | — |
| | — |
| | (9 | ) | | — |
| | (9 | ) |
| Fair value hedges | | | | | | | | | | |
| Derivatives in fair value hedge (interest rate risk) | | (15 | ) | | 119 |
| | — |
| | — |
| | 104 |
|
| Fair value hedge hedged item | | 17 |
| | (120 | ) | | — |
| | — |
| | (103 | ) |
| Instruments in fair value hedge relationship | | 2 |
| | (1 | ) | | — |
| | — |
| | 1 |
|
Financial statements (continued)
(i) Reconciliation of financial instruments
The table below sets out the group’s accounting classification of each class of financial assets and liabilities:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair value
through income
statement
£ million | Fair value through other comprehensive income
£ million | Assets and liabilities at amortised cost
£ million | Not categorised
as a financial
instrument
£ million | Total
£ million | Current
£ million | Non-current
£ million |
| 2023 | | | | | | | |
Other investments and loans(1) | 192 | | — | | 31 | | 2 | | 225 | | — | | 225 | |
| Trade and other receivables | — | | — | | 2,234 | | 517 | | 2,751 | | 2,720 | | 31 | |
| Cash and cash equivalents | — | | — | | 1,439 | | — | | 1,439 | | 1,439 | | — | |
| | | | | | | |
| Derivatives in cash flow hedge (foreign currency debt) | 348 | | — | | — | | — | | 348 | | — | | 348 | |
| Derivatives in cash flow hedge (foreign currency risk) | 192 | | — | | — | | — | | 192 | | 147 | | 45 | |
| Derivatives in cash flow hedge (commodity price risk) | 2 | | — | | — | | — | | 2 | | 2 | | — | |
| | | | | | | |
| Other instruments | 198 | | — | | — | | — | | 198 | | 198 | | — | |
| Leases | — | | — | | 1 | | — | | 1 | | — | | 1 | |
| Total other financial assets | 740 | | — | | 1 | | — | | 741 | | 347 | | 394 | |
| Total financial assets | 932 | | — | | 3,705 | | 519 | | 5,156 | | 4,506 | | 650 | |
Borrowings(2) | — | | — | | (16,502) | | — | | (16,502) | | (1,701) | | (14,801) | |
| Trade and other payables | (311) | | — | | (4,472) | | (885) | | (5,668) | | (5,300) | | (368) | |
| Derivatives in fair value hedge (interest rate risk) | (377) | | — | | — | | — | | (377) | | (6) | | (371) | |
| | | | | | | |
| Derivatives in cash flow hedge (foreign currency risk) | (9) | | — | | — | | — | | (9) | | (7) | | (2) | |
| Derivatives in cash flow hedge (commodity price risk) | (27) | | — | | — | | — | | (27) | | (26) | | (1) | |
| | | | | | | |
| Other instruments | (245) | | — | | — | | — | | (245) | | (245) | | — | |
| Leases | — | | — | | (448) | | — | | (448) | | (75) | | (373) | |
| Total other financial liabilities | (658) | | — | | (448) | | — | | (1,106) | | (359) | | (747) | |
| Total financial liabilities | (969) | | — | | (21,422) | | (885) | | (23,276) | | (7,360) | | (15,916) | |
| Total net financial (liabilities)/assets | (37) | | — | | (17,717) | | (366) | | (18,120) | | (2,854) | | (15,266) | |
| 2022 | | | | | | | |
Other investments and loans(1) | 180 | | 4 | | 15 | | 1 | | 200 | | — | | 200 | |
| Trade and other receivables | — | | — | | 2,365 | | 605 | | 2,970 | | 2,933 | | 37 | |
| Cash and cash equivalents | — | | — | | 2,285 | | — | | 2,285 | | 2,285 | | — | |
| Derivatives in fair value hedge (interest rate risk) | 1 | | — | | — | | — | | 1 | | — | | 1 | |
| Derivatives in cash flow hedge (foreign currency debt) | 367 | | — | | — | | — | | 367 | | 43 | | 324 | |
| Derivatives in cash flow hedge (foreign currency risk) | 32 | | — | | — | | — | | 32 | | 15 | | 17 | |
| Derivatives in cash flow hedge (commodity price risk) | 57 | | — | | — | | — | | 57 | | 57 | | — | |
| | | | | | | |
| Other instruments | 136 | | — | | — | | — | | 136 | | 136 | | — | |
| Leases | — | | — | | 3 | | — | | 3 | | — | | 3 | |
| Total other financial assets | 593 | | — | | 3 | | — | | 596 | | 251 | | 345 | |
| Total financial assets | 773 | | 4 | | 4,668 | | 606 | | 6,051 | | 5,469 | | 582 | |
Borrowings(2) | — | | — | | (16,020) | | — | | (16,020) | | (1,522) | | (14,498) | |
| Trade and other payables | (371) | | — | | (4,774) | | (1,122) | | (6,267) | | (5,887) | | (380) | |
| Derivatives in fair value hedge (interest rate risk) | (284) | | — | | — | | — | | (284) | | (1) | | (283) | |
| | | | | | | |
| Derivatives in cash flow hedge (foreign currency risk) | (109) | | — | | — | | — | | (109) | | (81) | | (28) | |
| Derivatives in cash flow hedge (commodity price risk) | (7) | | — | | — | | — | | (7) | | (5) | | (2) | |
| Derivatives in net investment hedge | (1) | | — | | — | | — | | (1) | | (1) | | — | |
| Other instruments | (271) | | — | | (117) | | — | | (388) | | (388) | | — | |
| Leases | — | | — | | (475) | | — | | (475) | | (85) | | (390) | |
| Total other financial liabilities | (672) | | — | | (592) | | — | | (1,264) | | (561) | | (703) | |
| Total financial liabilities | (1,043) | | — | | (21,386) | | (1,122) | | (23,551) | | (7,970) | | (15,581) | |
| Total net financial (liabilities)/assets | (270) | | 4 | | (16,718) | | (516) | | (17,500) | | (2,501) | | (14,999) | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Fair value
through income
statement
£ million |
| | Fair value through other comprehensive income
£ million |
| | Assets and liabilities at amortised cost
£ million |
| | Not categorised
as a financial
instrument
£ million |
| | Total
£ million |
| | Current
£ million |
| | Non-current
£ million |
|
| 2020 | | | | | | | | | | | | | | |
Other investments and loans(i) | | 96 |
| | 20 |
| | 5 |
| | 2 |
| | 123 |
| | — |
| | 123 |
|
| Trade and other receivables | | — |
| | — |
| | 1,784 |
| | 373 |
| | 2,157 |
| | 2,111 |
| | 46 |
|
| Cash and cash equivalents | | — |
| | — |
| | 3,323 |
| | — |
| | 3,323 |
| | 3,323 |
| | — |
|
| Derivatives in fair value hedge (interest rate risk) | | 189 |
| | — |
| | — |
| | — |
| | 189 |
| | — |
| | 189 |
|
| Derivatives in cash flow hedge (foreign currency debt) | | 469 |
| | — |
| | — |
| | — |
| | 469 |
| | — |
| | 469 |
|
| Derivatives in cash flow hedge (foreign currency exchange risk) | | 8 |
| | — |
| | — |
| | — |
| | 8 |
| | 1 |
| | 7 |
|
| Derivatives in cash flow hedge (commodity price risk) | | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
| | — |
|
| Other instruments | | 91 |
| | — |
| | — |
| | — |
| | 91 |
| | 73 |
| | 18 |
|
| Leases | | — |
| | — |
| | 3 |
| | — |
| | 3 |
| | — |
| | 3 |
|
| Total other financial assets | | 758 |
| | — |
| | 3 |
| | — |
| | 761 |
| | 75 |
| | 686 |
|
| Total financial assets | | 854 |
| | 20 |
| | 5,115 |
| | 375 |
| | 6,364 |
| | 5,509 |
| | 855 |
|
Borrowings(ii) | | — |
| | — |
| | (16,785 | ) | | — |
| | (16,785 | ) | | (1,995 | ) | | (14,790 | ) |
| Trade and other payables | | (249 | ) | | — |
| | (2,742 | ) | | (867 | ) | | (3,858 | ) | | (3,683 | ) | | (175 | ) |
| Derivatives in cash flow hedge (foreign currency exchange risk) | | (66 | ) | | — |
| | — |
| | — |
| | (66 | ) | | (52 | ) | | (14 | ) |
| Derivatives in cash flow hedge (commodity price risk) | | (10 | ) | | — |
| | — |
| | — |
| | (10 | ) | | (9 | ) | | (1 | ) |
| Other instruments | | (236 | ) | | — |
| | — |
| | — |
| | (236 | ) | | (222 | ) | | (14 | ) |
| Leases | | — |
| | — |
| | (470 | ) | | — |
| | (470 | ) | | (106 | ) | | (364 | ) |
| Total other financial liabilities | | (312 | ) | | — |
| | (470 | ) | | — |
| | (782 | ) | | (389 | ) | | (393 | ) |
| Total financial liabilities | | (561 | ) | | — |
| | (19,997 | ) | | (867 | ) | | (21,425 | ) | | (6,067 | ) | | (15,358 | ) |
| Total net financial assets/(liabilities) | | 293 |
| | 20 |
| | (14,882 | ) | | (492 | ) | | (15,061 | ) | | (558 | ) | | (14,503 | ) |
| 2019 | | | | | | | | | | | | | | |
Other investments and loans(i) | | 67 |
| | 19 |
| | 16 |
| | 2 |
| | 104 |
| | — |
| | 104 |
|
| Trade and other receivables | | — |
| | — |
| | 2,385 |
| | 362 |
| | 2,747 |
| | 2,694 |
| | 53 |
|
| Cash and cash equivalents | | — |
| | — |
| | 932 |
| | — |
| | 932 |
| | 932 |
| | — |
|
| Derivatives in fair value hedge (interest rate risk) | | 104 |
| | — |
| | — |
| | — |
| | 104 |
| | 2 |
| | 102 |
|
| Derivatives in cash flow hedge (foreign currency debt) | | 283 |
| | — |
| | — |
| | — |
| | 283 |
| | — |
| | 283 |
|
| Derivatives in cash flow hedge (foreign currency exchange risk) | | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
| | — |
|
| Other instruments at fair value | | 143 |
| | — |
| | — |
| | — |
| | 143 |
| | 124 |
| | 19 |
|
| Total other financial assets | | 531 |
| | — |
| | — |
| | — |
| | 531 |
| | 127 |
| | 404 |
|
| Total financial assets | | 598 |
| | 19 |
| | 3,333 |
| | 364 |
| | 4,314 |
| | 3,753 |
| | 561 |
|
Borrowings(ii) | | — |
| | — |
| | (12,555 | ) | | — |
| | (12,555 | ) | | (1,959 | ) | | (10,596 | ) |
| Trade and other payables | | (227 | ) | | — |
| | (3,251 | ) | | (946 | ) | | (4,424 | ) | | (4,202 | ) | | (222 | ) |
| Derivatives in cash flow hedge (foreign currency debt) | | (12 | ) | | — |
| | — |
| | — |
| | (12 | ) | | — |
| | (12 | ) |
| Derivatives in cash flow hedge (foreign currency exchange risk) | | (58 | ) | | — |
| | — |
| | — |
| | (58 | ) | | (41 | ) | | (17 | ) |
| Derivatives in cash flow hedge (commodity price risk) | | (9 | ) | | — |
| | — |
| | — |
| | (9 | ) | | (9 | ) | | — |
|
| Derivatives in net investment hedge | | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | | — |
|
| Other instruments | | (223 | ) | | — |
| | (26 | ) | | — |
| | (249 | ) | | (239 | ) | | (10 | ) |
Finance leases(iii) | | — |
| | — |
| | (128 | ) | | — |
| | (128 | ) | | (43 | ) | | (85 | ) |
| Total other financial liabilities | | (303 | ) | | — |
| | (154 | ) | | — |
| | (457 | ) | | (333 | ) | | (124 | ) |
| Total financial liabilities | | (530 | ) | | — |
| | (15,960 | ) | | (946 | ) | | (17,436 | ) | | (6,494 | ) | | (10,942 | ) |
| Total net financial liabilities | | 68 |
| | 19 |
| | (12,627 | ) | | (582 | ) | | (13,122 | ) | | (2,741 | ) | | (10,381 | ) |
| |
(i) | Other investments and loans are including those in respect of associates.
|
| |
(ii) | Borrowings are defined as gross borrowings excluding lease liabilities and the fair value of derivative instruments.
|
| |
(iii) | In the year ended 30 June 2019 lease liabilities only include liabilities that met the criteria of 'finance leases' under IAS 17 - Leases.
|
(1) Other investments and loans are including those in respect of associates.
(2) Borrowings are defined as gross borrowings excluding lease liabilities and the fair value of derivative instruments.
At 30 June 20202023 and 30 June 2019,2022, the carrying values of cash and cash equivalents, other financial assets and liabilities approximate to fair values. At 30 June 20202023, the fair value of borrowings, based on unadjusted quoted market data, was £18,175£15,641 million (2019 (2022 – £13,240£15,628 million).
Financial statements (continued)
(j) Capital management
The group’s management is committed to enhancing shareholder value in the long-term, both by investing in the business and brands so as to deliver continued improvement in the return from those investments and by managing the capital structure. Diageo manages
Financial statements (continued)
its capital structure to achieve capital efficiency, provide flexibility to invest through the economic cycle and give efficient access to debt markets at attractive cost levels. This is achieved by targeting an adjusted net borrowings (net borrowings aggregated with post employment benefit liabilities) to adjusted EBITDA leverage of 2.5 –- 3.0 times, this range for Diageo being currently broadly consistent with an A band credit rating. Diageo would consider operating outside of this range in order to effect strategic initiatives within its stated goals, which could have an impact on its rating. If Diageo’s leverage was to be negatively impacted by the financing of an acquisition, it would seek over time to return to the range of 2.5 – 3.0 times. The group regularly assesses its debt and equity capital levels against its stated policy for capital structure. As at 30 June 20202023, the adjusted net borrowings (£13,99515,914 million) to adjusted EBITDA ratio was 3.32.6 times. For this calculation, net borrowings are adjusted by post employment benefit liabilities before tax (£749373 million) whilst adjusted EBITDA (£4,2706,120 million) comprises operating profit excluding exceptional operating items and depreciation, amortisation and impairment and includes share of after tax results of associates and joint ventures.
16.17. Net borrowings
Accounting policies
Borrowings are initially recognised at fair value net of transaction costs and are subsequently reported at amortised cost. Certain bonds are designated in fair value hedge relationship. In these cases, the amortised cost is adjusted for the fair value of the risk being hedged, with changes in value recognised in the income statement. The fair value adjustment is calculated using a discounted cash flow technique based on unadjusted market data.
Bank overdraftsform an integral part of the group’s cash management and are included as a component of net cash and cash equivalents in the consolidated statement of cash flows.
Cash and cash equivalentscomprise cash in hand and deposits which are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value and have an original maturity of three months or less, including money market deposits, commercial paper and investments.
Net borrowingsare defined as gross borrowings (short-term borrowings and long-term borrowings plus lease liabilities plus interest rate hedging instruments, cross currency interest rate swaps and funding foreign currency forwards and swaps used to manage borrowings) less cash and cash equivalents.
As a result of the adoption of IFRS 16 on 1 July 2019, net borrowings include leases previously classified as operating leases under IAS 17. Comparative information has not been restated.
Financial statements (continued)
| | | | | | | | |
| | 2023 £ million | 2022 £ million |
| Bank overdrafts | 36 | | 74 | |
| Commercial paper | 198 | | — | |
| Bank and other loans | 121 | | 105 | |
| Credit support obligations | 15 | | (19) | |
$ 300 million 8% bonds due 2022(1) | — | | 248 | |
$ 1,350 million 2.625% bonds due 2023(2) | — | | 1,115 | |
| € 600 million 0.125% bonds due 2023 | 513 | | — | |
$ 500 million 3.5% bonds due 2023(2) | 397 | | — | |
| € 500 million 0.5% bonds due 2024 | 427 | | — | |
| Fair value adjustment to borrowings | (6) | | (1) | |
| Borrowings due within one year | 1,701 | | 1,522 | |
| | |
| | |
| € 600 million 0.125% bonds due 2023 | — | | 516 | |
$ 500 million 3.5% bonds due 2023(2) | — | | 413 | |
| € 500 million 0.5% bonds due 2024 | — | | 430 | |
$ 600 million 2.125% bonds due 2024(2) | 476 | | 495 | |
| € 500 million 1.75% bonds due 2024 | 427 | | 430 | |
$ 500 million 5.20% bonds due 2025(2) | 396 | | — | |
$ 750 million 1.375% bonds due 2025(2) | 594 | | 618 | |
| € 600 million 1% bonds due 2025 | 511 | | 515 | |
| € 500 million 3.5% bonds due 2025 | 427 | | — | |
| € 850 million 2.375% bonds due 2026 | 725 | | 731 | |
| £ 500 million 1.750% bonds due 2026 | 497 | | 498 | |
$ 750 million 5.3% bonds due 2027(2) | 593 | | — | |
| € 750 million 1.875% bonds due 2027 | 638 | | 643 | |
| € 500 million 1.5% bonds due 2027 | 426 | | 430 | |
| € 700 million 0.125% bonds due 2028 | 595 | | 600 | |
$ 500 million 3.875% bonds due 2028(2) | 395 | | 411 | |
| £ 300 million 2.375% bonds due 2028 | 298 | | 298 | |
$ 1,000 million 2.375% bonds due 2029(2) | 787 | | 819 | |
| £ 300 million 2.875% bonds due 2029 | 299 | | 298 | |
| € 750 million 1.15% bonds due 2029 | 640 | | 645 | |
$ 1,000 million 2% bonds due 2030(2) | 789 | | 821 | |
| € 1,000 million 2.5% bonds due 2032 | 850 | | 856 | |
$ 750 million 2.125% bonds due 2032(2) | 590 | | 614 | |
| £ 400 million 1.25% bonds due 2033 | 396 | | 395 | |
$ 750 million 5.5% bonds due 2033(2) | 590 | | — | |
| € 900 million 1.15% bonds due 2034 | 764 | | 770 | |
$ 400 million 7.45% bonds due 2035(1) | 317 | | 331 | |
$ 600 million 5.875% bonds due 2036(2) | 472 | | 491 | |
| £ 600 million 2.75% bonds due 2038 | 595 | | 595 | |
$ 500 million 4.250% bonds due 2042(1) | 393 | | 409 | |
$ 500 million 3.875% bonds due 2043(2) | 391 | | 407 | |
| Bank and other loans | 296 | | 293 | |
| Fair value adjustment to borrowings | (366) | | (274) | |
| Borrowings due after one year | 14,801 | 14,498 |
| Total borrowings before derivative financial instruments | 16,502 | 16,020 |
| Fair value of cross currency interest rate swaps | (348) | | (367) | |
| Fair value of foreign currency swaps and forwards | 1 | | 11 | |
| Fair value of interest rate hedging instruments | 377 | | 283 | |
| Lease liabilities | 448 | | 475 | |
| Gross borrowings | 16,980 | 16,422 |
| Less: Cash and cash equivalents | (1,439) | | (2,285) | |
| Net borrowings | 15,541 | 14,137 |
Financial statements (continued)
|
| | | | | |
| | 2020
£ million |
| | 2019
£ million |
|
| Bank overdrafts | 170 |
| | 211 |
|
| Commercial paper | — |
| | 649 |
|
| Bank and other loans | 367 |
| | 190 |
|
| Credit support obligations | 180 |
| | 120 |
|
| US$ 500 million floating bonds due 2020 | — |
| | 394 |
|
| US$ 500 million 3% bonds due 2020 | — |
| | 393 |
|
| € 775 million 0% bonds due 2020 | 711 |
| | — |
|
| US$ 696 million 4.828% bonds due 2020 | 566 |
| | — |
|
| Fair value adjustment to borrowings | 1 |
| | 2 |
|
| Borrowings due within one year | 1,995 |
| | 1,959 |
|
| € 775 million 0% bonds due 2020 | — |
| | 691 |
|
| US$ 696 million 4.828% bonds due 2020 | — |
| | 538 |
|
| € 900 million 0.25% bonds due 2021 | 825 |
| | 802 |
|
US$ 1,000 million 2.875% bonds due 2022(i) | 812 |
| | 785 |
|
US$ 300 million 8% bonds due 2022(i) | 243 |
| | 235 |
|
| US$ 1,350 million 2.625% bonds due 2023 | 1,096 |
| | 1,060 |
|
| € 600 million 0.125% bonds due 2023 | 548 |
| | 533 |
|
| US$ 500 million 3.5% bonds due 2023 | 405 |
| | 393 |
|
| US$ 600 million 2.125% bonds due 2024 | 487 |
| | — |
|
| € 500 million 1.75% bonds due 2024 | 456 |
| | 444 |
|
| € 500 million 0.5% bonds due 2024 | 456 |
| | 443 |
|
| US$ 750 million 1.375% bonds due 2025 | 606 |
| | — |
|
| € 600 million 1% bonds due 2025 | 546 |
| | 531 |
|
| € 850 million 2.375% bonds due 2026 | 776 |
| | 755 |
|
| £ 500 million 1.75% bonds due 2026 | 496 |
| | 496 |
|
| € 750 million 1.875% bonds due 2027 | 683 |
| | — |
|
| € 500 million 1.5% bonds due 2027 | 457 |
| | 445 |
|
| US$ 500 million 3.875% bonds due 2028 | 404 |
| | 391 |
|
| US$ 1,000 million 2.375% bonds due 2029 | 804 |
| | — |
|
| £ 300 million 2.875% bonds due 2029 | 298 |
| | — |
|
| US$ 1,000 million 2% bonds due 2030 | 807 |
| | — |
|
| € 1,000 million 2.5% bonds due 2032 | 911 |
| | — |
|
| US$ 750 million 2.125% bonds due 2032 | 603 |
| | — |
|
US$ 400 million 7.45% bonds due 2035(i) | 325 |
| | 315 |
|
| US$ 600 million 5.875% bonds due 2036 | 483 |
| | 468 |
|
US$ 500 million 4.25% bonds due 2042(i) | 402 |
| | 389 |
|
| US$ 500 million 3.875% bonds due 2043 | 400 |
| | 387 |
|
| Bank and other loans | 260 |
| | 373 |
|
| Fair value adjustment to borrowings | 201 |
| | 122 |
|
| Borrowings due after one year | 14,790 |
| | 10,596 |
|
| Total borrowings before derivative financial instruments | 16,785 |
| | 12,555 |
|
| Fair value of cross currency interest rate swaps | (469 | ) | | (271 | ) |
| Fair value of foreign exchange swaps and forwards | (28 | ) | | (99 | ) |
| Fair value of interest rate hedging instruments | (189 | ) | | (104 | ) |
Lease liabilities(ii) | 470 |
| | 128 |
|
| Gross borrowings | 16,569 |
| | 12,209 |
|
| Less: Cash and cash equivalents | (3,323 | ) | | (932 | ) |
| Net borrowings | 13,246 |
| | 11,277 |
|
| |
(2) SEC-registered debt issued on an unsecured basis by Diageo Capital plc, a 100% owned finance subsidiary of Diageo plc and fully and unconditionally guaranteed by Diageo plc. No other subsidiary of Diageo plc guarantees the security. (i) | SEC-registered debt issued on an unsecured basis by Diageo Investment Corporation, a 100% owned finance subsidiary of Diageo plc. |
| |
(ii) | In the year ended 30 June 2019 lease liabilities only includes leases that were classified as finance leases under IAS 17 - Leases. |
(1) The interest rates shown are those contracted on the underlying borrowings before taking into account any interest rate hedges (see note 15)16).
(2)(ii) Bonds are stated net of unamortised finance costs of £86£81 million (2019(2022 – £63 million; 2018 – £60£85 million).
(3) Bonds are reported above at amortised cost with a fair value adjustment shown separately.
(4)(iii) All bonds, medium-term notes and commercial paper issued on an unsecured basis by the group’s 100% owned subsidiaries are fully and unconditionally guaranteed on an unsecured basis by Diageo plc.plc and no other subsidiary of Diageo plc guarantees such securities.
Financial statements (continued)
Gross borrowings before derivative financial instruments are expected to mature as follows:
| | | | | | | | | | |
| | 2023 £ million | 2022 £ million | | |
| Within one year | 1,701 | | 1,522 | | | |
| Between one and three years | 3,522 | | 2,817 | | | |
| Between three and five years | 2,874 | | 2,625 | | | |
| Beyond five years | 8,405 | | 9,056 | | | |
| 16,502 | | 16,020 | | | |
|
| | | | | |
| | 2020
£ million |
| | 2019
£ million |
|
| Within one year | 1,995 |
| | 1,959 |
|
| Between one and three years | 3,013 |
| | 2,940 |
|
| Between three and five years | 3,134 |
| | 2,879 |
|
| Beyond five years | 8,643 |
| | 4,777 |
|
| | 16,785 |
| | 12,555 |
|
During the year, the following bonds were issued and repaid:
| | | | | | | | | | | |
| | 2023 £ million | 2022 £ million | 2021 £ million |
| Issued | | | |
| € denominated | 441 | | 1,371 | | 636 | |
| £ denominated | — | | 892 | | 395 | |
| $ denominated | 1,788 | | — | | — | |
| Repaid | | | |
| € denominated | — | | (769) | | (696) | |
| $ denominated | (1,340) | | (752) | | (551) | |
| 889 | 742 | (216) |
|
| | | | | | | | |
| | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| Issued | | | | | |
| € denominated | 1,594 |
| | 2,270 |
| | 1,136 |
|
| £ denominated | 298 |
| | 496 |
| | — |
|
| US$ denominated | 3,296 |
| | — |
| | 1,476 |
|
| Repaid | | | | | |
| € denominated | — |
| | (1,168 | ) | | — |
|
| US$ denominated | (820 | ) | | — |
| | (1,571 | ) |
| | 4,368 |
| | 1,598 |
| | 1,041 |
|
(a) Reconciliation of movement in net borrowings
| | | | | | | | |
| | 2023 £ million | 2022 £ million |
| At beginning of the year | 14,137 | | 12,109 | |
| Net decrease in cash and cash equivalents before exchange | 581 | | 665 | |
Net increase in bonds and other borrowings(1) | 950 | | 825 | |
| Increase in net borrowings from cash flows | 1,531 | | 1,490 | |
| Exchange differences on net borrowings | (159) | | 334 | |
Other non-cash items(2) | 32 | | 204 | |
| | |
| Net borrowings at end of the year | 15,541 | | 14,137 | |
(1) In the year ended 30 June 2023, net increase in bonds and other borrowings excludes £2 million cash outflow in respect of derivatives designated in forward point hedges (2022 – £4 million).
(2) In the year ended 30 June 2023, other non-cash items are principally in respect of fair value changes of cross currency interest rate swaps and interest rate swaps of £(34) million and lease liabilities of £(82) million, partially offset by the £84 million fair value change of borrowings. In the year ended 30 June 2022, other non-cash items are principally in respect of fair value changes of cross currency interest rate swaps and interest rate swaps of £(346) million and lease liabilities of £(183) million, partially offset by the £331 million fair value change of borrowings.
|
| | | | | |
| | 2020
£ million |
| | 2019
£ million |
|
| At beginning of the year | 11,277 |
| | 9,091 |
|
| Net increase in cash and cash equivalents before exchange | (2,552 | ) | | (54 | ) |
Net increase in bonds and other borrowings(i) | 4,089 |
| | 2,331 |
|
| Change in net borrowings from cash flows | 1,537 |
| | 2,277 |
|
| Exchange differences on net borrowings | 95 |
| | 22 |
|
Other non-cash items(ii) | 86 |
| | (113 | ) |
| Adoption of IFRS 16 | 251 |
| | — |
|
| Net borrowings at end of the year | 13,246 |
| | 11,277 |
|
| |
(i) | In the year ended 30 June 2020, net increase in bonds and other borrowings excludes £6 million cash outflow in respect of derivatives designated in forward point hedges (2019 - £12 million). |
| |
(ii) | In the years ended 30 June 2020 other non-cash items are principally in respect of leases of £206 million entered into in the period 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.
|
Financial statements (continued)
(b) Analysis of net borrowings by currency
| | | | | | | | | | | | | | |
| | 2023 | 2022 |
| | Cash and cash
equivalents
£ million | Gross
borrowings(1)
£ million | Cash and cash
equivalents
£ million | Gross
borrowings(1)
£ million |
| US dollar | 542 | | (5,751) | | 1,315 | | (3,260) | |
Euro(2) | 48 | | (3,864) | | 61 | | (2,943) | |
| Sterling | 46 | | (6,227) | | 67 | | (9,214) | |
| Indian rupee | 123 | | (31) | | 26 | | (74) | |
| Mexican peso | 25 | | (286) | | 14 | | (264) | |
| Hungarian forint | 3 | | (261) | | 2 | | (214) | |
| Kenyan shilling | 28 | | (253) | | 53 | | (254) | |
| Chinese yuan | 199 | | (63) | | 290 | | (75) | |
| Nigerian naira | 83 | | — | | 133 | | — | |
Other(2) | 342 | | (244) | | 324 | | (124) | |
| Total | 1,439 | | (16,980) | | 2,285 | | (16,422) | |
(1) Includes foreign currency forwards and swaps and leases.
(2) Includes £21 million (Euro) cash and cash equivalents in cash-pooling arrangements (2022 – £23 million (Turkish lira and Euro)).
18. Equity
|
| | | | | | | | | | | |
| | 2020 | | | 2019 | |
| | Cash and cash
equivalents
£ million |
| | Gross
borrowings(i)
£ million |
| | Cash and cash
equivalents
£ million |
| | Gross
borrowings(i)
£ million |
|
| US dollar | 2,649 |
| | (6,300 | ) | | 88 |
| | 525 |
|
| Euro | 57 |
| | (3,119 | ) | | 70 |
| | (2,910 | ) |
| Sterling | 19 |
| | (6,233 | ) | | 40 |
| | (9,308 | ) |
| Indian rupee | 13 |
| | (253 | ) | | 23 |
| | (247 | ) |
| Kenyan shilling | 28 |
| | (351 | ) | | 79 |
| | (223 | ) |
| Hungarian forint | 3 |
| | (239 | ) | | 4 |
| | 157 |
|
| Mexican peso | 16 |
| | (104 | ) | | 16 |
| | (78 | ) |
| South African rand | 1 |
| | (23 | ) | | 23 |
| | (35 | ) |
| Chinese yuan | 207 |
| | (1 | ) | | 249 |
| | 9 |
|
Other(ii) | 330 |
| | 54 |
| | 340 |
| | (99 | ) |
| Total | 3,323 |
| | (16,569 | ) | | 932 |
| | (12,209 | ) |
| |
(i) | Includes foreign currency forwards and swaps and leases.
|
| |
(ii) | Includes £100 million (Turkish lira) cash and cash equivalents in cash-pooling arrangements (2019 - £122 million (Turkish lira)). |
17. Equity
Accounting policies
Own sharesrepresent shares and share options of Diageo plc that are held in treasury or by employee share trusts for the purpose of fulfilling obligations in respect of various employee share plans or were acquired as part of a share buyback programme. Own shares are treated as a deduction from equity until the shares are cancelled, reissued or disposed of and when vest are transferred from own shares to retained earnings at their weighted average cost.
Share-based payments include share awards and options granted to directors and employees. The fair value of equity settled share options and share grants is initially measured at grant date based on the binomial or Monte Carlo and Black Scholes models and is charged to the income statement over the vesting period. For equity settled shares, the credit is included in retained earnings. Cancellations of share options are treated as an acceleration of the vesting period and any outstanding charge is recognised in operating profit immediately. Any surplus or deficit arising on the sale of the Diageo plc shares held by the group is included as a movement in equity.
Dividendsare includedrecognised in the financial statements in the year in which they are approved.
(a) Allotted and fully paid share capital – ordinary shares of 28101⁄108pence each
| | | | | | | | |
| | Number of shares
million | Nominal value
£ million |
| At 30 June 2023 | 2,460 | | 712 | |
| At 30 June 2022 | 2,498 | | 723 | |
| At 30 June 2021 | 2,559 | | 741 | |
|
| | | | | | |
| | | Number of shares million |
| | Nominal value £ million |
|
| At 30 June 2020 | | 2,562 |
| | 742 |
|
| At 30 June 2019 | | 2,601 |
| | 753 |
|
| At 30 June 2018 | | 2,695 |
| | 780 |
|
Financial statements (continued)
(b) Hedging and exchange reserve | | | | | | | | | | | |
| | Hedging
reserve
£ million | Exchange
reserve
£ million | Total
£ million |
| At 30 June 2020 | 93 | | (1,022) | | (929) | |
| Other comprehensive income/(loss) | 20 | | (672) | | (652) | |
| | | |
| | | |
| At 30 June 2021 | 113 | | (1,694) | | (1,581) | |
| Other comprehensive (loss)/income | (87) | | 622 | | 535 | |
| | | |
| At 30 June 2022 | 26 | | (1,072) | | (1,046) | |
| Other comprehensive income/(loss) | 216 | | (540) | | (324) | |
| | | |
| At 30 June 2023 | 242 | | (1,612) | | (1,370) | |
|
| | | | | | | | | |
| | | Hedging
reserve
£ million |
| | Exchange
reserve
£ million |
| | Total
£ million |
|
| At 30 June 2017 | | (21 | ) | | (432 | ) | | (453 | ) |
| Other comprehensive loss | | (44 | ) | | (530 | ) | | (574 | ) |
Adoption of IFRS 9 by associate
| | (3 | ) | | — |
| | (3 | ) |
| At 30 June 2018 | | (68 | ) | | (962 | ) | | (1,030 | ) |
| Other comprehensive income | | 31 |
| | 181 |
| | 212 |
|
| At 30 June 2019 | | (37 | ) | | (781 | ) | | (818 | ) |
| Other comprehensive income/(loss) | | 125 |
| | (241 | ) | | (116 | ) |
| Transfers from other retained earnings | | 5 |
| | — |
| | 5 |
|
| At 30 June 2020 | | 93 |
| | (1,022 | ) | | (929 | ) |
£30 million surplus (2019 – £1 million surplus, 2018 – £9 million deficit) out ofCurrency basis spreads included in the hedging reserve representsrepresent the cost of hedging arising as a result of imperfections of foreign exchange markets in the formmarkets. Exclusion of foreign currency basis spreads.spreads would result in a £20 million credit (2022 – £22 million credit, 2021 – £22 million credit) to the hedging reserve.
(c) Own shares
Movements in own shares | | | | | | | | |
| | Number
of shares
million | Purchase
consideration
£ million |
| At 30 June 2020 | 227 | | 1,936 | |
| Share trust arrangements | (1) | | (11) | |
| | |
| Shares used to satisfy options | (3) | | (48) | |
| Shares purchased - share buyback programme | 3 | | 109 | |
| Shares cancelled | (3) | | (109) | |
| At 30 June 2021 | 223 | | 1,877 | |
| Share trust arrangements | (2) | | (23) | |
| | |
| Shares used to satisfy options | (2) | | (16) | |
| Shares purchased - share buyback programme | 61 | | 2,284 | |
| Shares cancelled | (61) | | (2,284) | |
| At 30 June 2022 | 219 | | 1,838 | |
| Share trust arrangements | (1) | | (12) | |
| | |
| Shares used to satisfy options | (2) | | (12) | |
| Shares purchased - share buyback programme | 38 | | 1,381 | |
| Shares cancelled | (38) | | (1,381) | |
| At 30 June 2023 | 216 | | 1,814 | |
|
| | | | | | |
| | | Number
of shares
million |
| | Purchase
consideration
£ million |
|
| At 30 June 2017 | | 241 |
| | 2,176 |
|
| Share trust arrangements | | (1 | ) | | (9 | ) |
| Shares purchased - employee share plans | | 2 |
| | 66 |
|
| Shares used to satisfy options | | (4 | ) | | (89 | ) |
| Shares purchased - share buyback programme | | 59 |
| | 1,507 |
|
| Shares cancelled | | (59 | ) | | (1,507 | ) |
| At 30 June 2018 | | 238 |
| | 2,144 |
|
| Share trust arrangements | | (1 | ) | | (14 | ) |
| Shares used to satisfy options | | (5 | ) | | (104 | ) |
| Shares purchased - share buyback programme | | 95 |
| | 2,775 |
|
| Shares cancelled | | (95 | ) | | (2,775 | ) |
| At 30 June 2019 | | 232 |
| | 2,026 |
|
| Share trust arrangements | | (1 | ) | | (7 | ) |
| Shares used to satisfy options | | (4 | ) | | (83 | ) |
| Shares purchased - share buyback programme | | 39 |
| | 1,282 |
|
| Shares cancelled | | (39 | ) | | (1,282 | ) |
| At 30 June 2020 | | 227 |
| | 1,936 |
|
Share trust arrangements
At 30 June 20202023, the employee share trusts owned 23 million of ordinary shares in Diageo plc (the company) at a cost of £51£52 million and market value of £57£101 million (2019(2022 – 32 million shares at a cost of £58£25 million, market value £92£63 million; 20182021 – 42 million shares at a cost of £72£47 million, market value £106£74 million). Dividends receivable by the employee share trusts on the shares are waived and the trustee abstains from voting.
Purchase of own shares
Authorisation was given by shareholders on 19 September 20196 October 2022 to purchase a maximum of 237,177,623227,870,414 ordinary shares at a minimum price of 28101/108 pence and a maximum price of the higher of (a) 105% of the average market value of the middle market quotations for ancompany's ordinary shareshares for the five preceding business days prior to the day the purchase is made and (b) the higher of the price of the last independent trade and the highest current independent bid on the London Stock Exchange at the timetrading venue where the purchase is carried out. The programme expires at the conclusion of the next Annual General Meeting or on 18 December 20205 January 2024 , if earlier.earlier.
Diageo completed a total of £1.4 billion return of capital for the year ended 30 June 2023, which included £0.9 billion related to the successful completion of Diageo’s previous share buyback programme in which £4.5 billion of capital was returned to shareholders finalised in February 2023, and returned an additional £0.5 billion of capital to shareholders which was announced as a new share buyback programme on 16 February 2023 and completed on 2 June 2023.
Financial statements (continued)
During the year ended 30 June 20192023, the companygroup purchased call options over4 million shares at a cost of £14 millionto hedge employee share awards and share option grants. These are three-year call options, denominated in sterling. During the year ended 30 June 2018, as part of the employee share schemes, the company purchased 2.538 million ordinary shares nominal value of £1 million, representing approximately 0.1% of the issued ordinary share capital (excluding treasury shares).
On 25 July 2019, the Board approved a return of capital programme with up to £4.5 billion to be returned to shareholders over the three-year period to 30 June 2022. Under the first phase of the programme, which ended on 31 January 2020, the group returned £1.25 billion via share buybacks.
During the year ended 30 June 2020 the group purchased approximately 39 million ordinary shares (2019(2022 – 94.7 million, 201861 million; 2021 – 58.93 million), representing approximately 1.5% of the issued ordinary share capital (2019(2022 – 3.5%, 20182.4%; 2021 – 2.1%0.1%) at an average price of £32.433616 pence per share, and an aggregate cost of £1,282£1,381 million (including £7£13 million of transaction costs) (2019(2022 – £29.243709 pence per share, and an aggregate cost of £2,775£2,284 million, including £6£16 million of transaction costs, 2018costs; 2021 – £25.433407 pence per share, and an aggregate cost of £1,507£109 million, including £9£1 million of transaction costs) under the share buyback programme. 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.
The monthly breakdown of all shares purchased and the average price paid per share (excluding expenses) for the year ended 30 June 20202023 were as follows:
|
| | | | | | | | | | | | |
| Period | | Number of shares purchased under share buyback programme |
| | Total number of shares purchased |
| | Average price paid pence |
| | Authorised purchases unutilised at month end |
|
| July 2019 | | 270,502 |
| | 270,502 |
| | 3373 |
| | 162,912,211 |
|
| August 2019 | | 5,945,767 |
| | 5,945,767 |
| | 3422 |
| | 156,966,444 |
|
| 1-19 September 2019 | | 5,662,939 |
| | 5,662,939 |
| | 3514 |
| | 151,303,505 |
|
| 20-30 September 2019 | | 2,549,669 |
| | 2,549,669 |
| | 3249 |
| | 234,627,954 |
|
| October 2019 | | 9,959,084 |
| | 9,959,084 |
| | 3220 |
| | 224,668,870 |
|
| November 2019 | | 3,837,551 |
| | 3,837,551 |
| | 3099 |
| | 220,831,319 |
|
| December 2019 | | 6,597,406 |
| | 6,597,406 |
| | 3100 |
| | 214,233,913 |
|
| January 2020 | | 4,176,677 |
| | 4,176,677 |
| | 3165 |
| | 210,057,236 |
|
| Total | | 38,999,595 |
| | 38,999,595 |
| | 3243 |
| | 210,057,236 |
|
| | | | | | | | | | | | | | |
| Period | Number of shares
purchased under
share buyback
programme | Total number of
shares purchased | Average price paid pence | Authorised purchases unutilised at month end |
| July 2022 | 1,660,507 | | 1,660,507 | | 3567 | | 177,756,956 | |
| August 2022 | 1,646,883 | | 1,646,883 | | 3820 | | 176,110,073 | |
| September 2022 | 2,273,226 | | 2,273,226 | | 3744 | | 173,836,847 | |
| 1-6 October 2022 | 131,864 | | 131,864 | | 3702 | | 173,704,983 | |
7-31 October 2022 (1) | — | | — | | — | | 227,870,414 | |
| November 2022 | 4,497,414 | | 4,497,414 | | 3679 | | 223,373,000 | |
| December 2022 | 4,571,923 | | 4,571,923 | | 3710 | | 218,801,077 | |
| January 2023 | 7,989,915 | | 7,989,915 | | 3558 | | 210,811,162 | |
| February 2023 | 1,718,877 | | 1,718,877 | | 3577 | | 209,092,285 | |
| March 2023 | 4,353,777 | | 4,353,777 | | 3541 | | 204,738,508 | |
| April 2023 | 2,883,950 | | 2,883,950 | | 3672 | | 201,854,558 | |
| May 2023 | 5,196,558 | | 5,196,558 | | 3534 | | 196,658,000 | |
| June 2023 | 410,562 | | 410,562 | | 3348 | | 196,247,438 | |
| Total | 37,335,456 | | 37,335,456 | | 3617 | | 196,247,438 | |
In April 2020,(1) New maximum number of purchasable shares was authorised by shareholders at the Directors became aware that certain share buybacks and certain transactions related to the company’s employee share schemes with or for the benefit of the company’s employee benefit and share ownership trusts undertaken between 10 May 2019 and 9 August 2019, amounting to approximately £320 million (‘the affected transactions’), were undertaken contrary to the applicable provisions of the Companies Act 2006 as they were undertaken following utilisation in full of the company’s distributable reserves as set out in its balance sheet as at 30 June 2018. At the Annual General Meeting to beAGM held on 28 September 2020, a resolution will be proposed which will appropriate an equivalent amount of distributable profits of the company to the payments made in respect of the affected transactions and will implement arrangements to put all potentially affected parties, so far as possible, in the position in which they were intended to be had the affected transactions been undertaken in accordance with the applicable provisions of the Companies Act 2006. This resolution and the arrangements that it implements will, if approved by shareholders, constitute a related party transaction under IAS 24 and under the Listing Rules, as the Directors would benefit from the waiver of any claims that the company has or may have against them as a result of the affected transactions. These arrangements are not expected to have any effect on the company’s financial position as the company has not recorded or disclosed its right potentially to make claims against any person in respect of the affected transactions as an asset or contingent asset of the company.6 October 2022.
Financial statements (continued)
(d) Dividends
| | | | | | | | | | | |
| 2023 | 2022 | 2021 |
| | £ million | £ million | £ million |
| Amounts recognised as distributions to equity shareholders in the year | | | |
| Final dividend for the year ended 30 June 2022 | | | |
| 46.82 pence per share (2021 – 44.59 pence; 2020 – 42.47 pence) | 1,066 | | 1,040 | | 992 | |
| Interim dividend for the year ended 30 June 2023 | | | |
| 30.83 pence per share (2022 – 29.36 pence; 2021 – 27.96 pence) | 696 | | 680 | | 654 | |
| 1,762 | | 1,720 | | 1,646 | |
|
| | | | | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| Amounts recognised as distributions to equity shareholders in the year | | | | | | |
| Final dividend for the year ended 30 June 2019 | | | | | | |
| 42.47 pence per share (2018 – 40.4 pence; 2017 – 38.5 pence) | | 1,006 |
| | 993 |
| | 968 |
|
| Interim dividend for the year ended 30 June 2020 | | | | | | |
| 27.41 pence per share (2019 – 26.1 pence; 2018 – 24.9 pence) | | 640 |
| | 630 |
| | 613 |
|
| | | 1,646 |
| | 1,623 |
| | 1,581 |
|
The proposed final dividend of £992£1,113 million (42.47(49.17 pence per share) for the year ended 30 June 20202023 was approved by a duly authorised committee of the Board of Directors on 3 August 2020.31 July 2023. As this was after the balance sheet date and the dividend is subject to approval by shareholders at the Annual General Meeting, this dividend has not been included as a liability in these consolidated financial statements. There are no corporate tax consequences arising from this treatment.
Dividends are waived on all treasury shares owned by the company and all shares owned by the employee share trusts.
Financial statements (continued)
(e) Non-controlling interests
Diageo consolidates USL, a company incorporated in India, with a 42.73%42.79% non-controlling interest, Sichuan Shuijingfang Company Limited, a company incorporated in China, with a 36.83% non-controlling interest and has a 50% controlling interest in Ketel One Worldwide B.V. (Ketel One), a company incorporated in the Netherlands. All other consolidated subsidiaries are fully owned or the non-controlling interests are not material.
Summarised financial information for USL and other subsidiaries, after fair value adjustments on acquisition, and the amounts attributable to non-controlling interests are as follows:
| | | | | | | | | | | | | | | | | |
| | 2023 | 2022 | 2021 |
| | USL
£ million | Others
£ million | Total
£ million | Total
£ million | Total
£ million |
| Income statement | | | | | |
| Sales | 2,713 | | 2,628 | | 5,341 | | 5,797 | | 5,140 | |
| Net sales | 1,087 | | 2,051 | | 3,138 | | 3,055 | | 2,553 | |
(Loss)/profit for the year(1) | (215) | | 289 | | 74 | | 227 | | 298 | |
Other comprehensive (loss)/income(2) | (133) | | (154) | | (287) | | 333 | | (434) | |
| Total comprehensive (loss)/income | (348) | | 135 | | (213) | | 560 | | (136) | |
| Attributable to non-controlling interests | (149) | | 33 | | (116) | | 259 | | (35) | |
| Balance sheet | | | | | |
Non-current assets(3) | 1,074 | | 3,175 | | 4,249 | | 5,017 | | 4,669 | |
| Current assets | 790 | | 1,049 | | 1,839 | | 2,002 | | 1,492 | |
| Non-current liabilities | (151) | | (1,164) | | (1,315) | | (1,499) | | (1,356) | |
| Current liabilities | (384) | | (1,035) | | (1,419) | | (1,646) | | (1,335) | |
| Net assets | 1,329 | | 2,025 | | 3,354 | | 3,874 | | 3,470 | |
| Attributable to non-controlling interests | 568 | | 902 | | 1,470 | | 1,716 | | 1,534 | |
| Cash flow | | | | | |
| Net cash inflow from operating activities | 120 | | 383 | | 503 | | 690 | | 661 | |
| Net cash inflow/(outflow) from investing activities | 34 | | (231) | | (197) | | (289) | | (137) | |
| Net cash outflow from financing activities | (48) | | (93) | | (141) | | (322) | | (371) | |
| Net increase in cash and cash equivalents | 106 | | 59 | | 165 | | 79 | | 153 | |
| Exchange differences | (7) | | (77) | | (84) | | 52 | | (19) | |
| Dividends payable to non-controlling interests | — | | (97) | | (97) | | (72) | | (72) | |
(1) (Loss)/profit for the year includes exceptional operating expenses attributable to non-controlling interests.
(2) Other comprehensive (loss)/income is principally in respect of exchange on translating the subsidiaries to sterling.
(3) Non-current assets include the global distribution rights to distribute Ketel One vodka products throughout the world. The carrying value of the distribution rights at 30 June 2023 was £1,428 million (2022 – £1,488 million; 2021 – £1,295 million).
(i) On 31 December 2022, United Spirits Limited (USL) completed the merger with its subsidiary, Pioneer Distilleries Limited (PDL) 75% owned by USL. Under the terms, PDL's minority shareholders received additional shares in USL in exchange for their 25% interest in PDL and non-controlling interest increased from 42.73% to 42.79%.
(ii) On 24 March 2023, Diageo completed the purchase of an additional 14.97% of the share capital of EABL. This increased Diageo’s controlling shareholding position in EABL from 50.03% to 65.00%.
|
| | | | | | | | | | | | | | | |
| | | 2020 | | | 2019 |
| | 2018 |
|
| | | USL
£ million |
| | Others
£ million |
| | Total
£ million |
| | Total
£ million |
| | Total
£ million |
|
| Income statement | | | | | | | | | | |
| Sales | | 2,790 |
| | 1,898 |
| | 4,688 |
| | 5,346 |
| | 4,926 |
|
| Net sales | | 846 |
| | 1,468 |
| | 2,314 |
| | 2,656 |
| | 2,431 |
|
| (Loss)/profit for the year | | (53 | ) | | 138 |
| | 85 |
| | 383 |
| | 244 |
|
Other comprehensive (loss)/income(i) | | (112 | ) | | 16 |
| | (96 | ) | | 137 |
| | (163 | ) |
| Total comprehensive (loss)/income | | (165 | ) | | 154 |
| | (11 | ) | | 520 |
| | 81 |
|
| Attributable to non-controlling interests | | (71 | ) | | 79 |
| | 8 |
| | 234 |
| | 53 |
|
| Balance sheet | | | | | | | | | | |
Non-current assets(ii) | | 2,041 |
| | 3,129 |
| | 5,170 |
| | 5,313 |
| | 4,973 |
|
| Current assets | | 541 |
| | 739 |
| | 1,280 |
| | 1,469 |
| | 1,384 |
|
| Non-current liabilities | | (349 | ) | | (1,110 | ) | | (1,459 | ) | | (1,526 | ) | | (1,425 | ) |
| Current liabilities | | (466 | ) | | (722 | ) | | (1,188 | ) | | (1,204 | ) | | (1,183 | ) |
| Net assets | | 1,767 |
| | 2,036 |
| | 3,803 |
| | 4,052 |
| | 3,749 |
|
| Attributable to non-controlling interests | | 756 |
| | 912 |
| | 1,668 |
| | 1,795 |
| | 1,765 |
|
| Cash flow | | | | | | | | | | |
| Net cash inflow from operating activities | | 29 |
| | 204 |
| | 233 |
| | 542 |
| | 334 |
|
| Net cash outflow from investing activities | | (16 | ) | | (136 | ) | | (152 | ) | | (157 | ) | | (136 | ) |
| Net cash outflow from financing activities | | (34 | ) | | (175 | ) | | (209 | ) | | (266 | ) | | (164 | ) |
| Net (decrease)/increase in cash and cash equivalents | | (21 | ) | | (107 | ) | | (128 | ) | | 119 |
| | 34 |
|
| Exchange differences | | (1 | ) | | (2 | ) | | (3 | ) | | 3 |
| | (2 | ) |
| Dividends payable to non-controlling interests | | — |
| | (117 | ) | | (117 | ) | | (114 | ) | | (101 | ) |
| |
(i) | Other comprehensive income is principally in respect of exchange on translating the subsidiaries to sterling.
|
| |
(ii) | Non-current assets include the global distribution rights to distribute Ketel One vodka products throughout the world. The carrying value of the distribution rights at 30 June 2020 was £1,464 million (2019 – £1,418 million; 2018 – £1,363 million).
|
| |
(1) | On 29 July 2019 East African Breweries Limited completed a purchase of 4% of the share capital of Serengeti Breweries Limited. This increased Diageo’s effective economic interest from 39.2% to 40.2%. |
| |
(2) | On 20 August 2019 and 28 February 2020 Diageo completed the purchase of 0.46% and 0.7% of the share capital of United Spirits Limited (USL) respectively. This increased Diageo’s controlling shareholding position from 54.78% to 55.94%, excluding 2.38% owned by the USL Share Trust.
|
Financial statements (continued)
(f) Employee share compensation
The group uses a number of share award and option plans to grant to its directors and employees.
The annual fair value charge in respect of the equity settled plans for the three years ended 30 June 20202023 is as follows:
| | | | | | | | | | | |
| | 2023 £ million | 2022 £ million | 2021 £ million |
| Executive share award plans | 41 | | 51 | | 41 | |
| Executive share option plans | 4 | | 4 | | 4 | |
| Savings plans | 4 | | 4 | | 4 | |
| 49 | | 59 | | 49 | |
|
| | | | | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| Executive share award plans | | (3 | ) | | 41 |
| | 33 |
|
| Executive share option plans | | 2 |
| | 4 |
| | 3 |
|
| Savings plans | | 3 |
| | 4 |
| | 3 |
|
| | | 2 |
| | 49 |
| | 39 |
|
Executive share awards arehave been made primarily made under the Diageo 2014 Long Term Incentive Plan (DLTIP) from September 2014 onwards.onwards and delivered in conditional awards in the form of performance shares, performance share options, time-vesting restricted stock units (RSUs) and/or time-vesting share options (or cash-based equivalents in certain locations for regulatory reasons). Share options are granted at the market value at the time of grant. Prior to the introduction of the DLTIP, employees in associated companies were granted awards under the Diageo plc 2011 Associated Companies Share IncentivePlan (DACSIP). There wasIn the case of Executive Directors, conditional awards of time-vesting RSUs or forfeitable shares may be awarded under the 2020 Deferred Bonus Share Plan (DBSP), with vesting not subject to any performance conditions and not subject to a single grantpost-vesting retention period. The DLTIP plan rules will be presented for renewal at the AGM in September 20162023 and any future awards made post approval will be made under the Diageo Performance Incentive plan. Under all of these plans, conditional awards can be delivered in the form of restricted shares or share options at the market value at the time of grant. new plan rules.
Share awards normally vest and are released on the third anniversary of the grant date. Participants do not make a payment to receive the award at grant. Executive Directors are required to hold any vested shares awarded from 2014under DLTIP for a further two-year post-vesting holding period. Share options may normally be exercised between three and ten years after the grant date. Executives in North America and Latin America and Caribbean are granted awards over the company’s ADSsADRs (one ADSADR is equivalent to four ordinary shares).
Performance shares under the DLTIP (for awards in 2020 and thereafter) are subject to the achievement of three equally weighted performance tests:measures: 1) compound annual growth in profit before exceptional items over three years; 2) compound annual growth in organic net sales over three years; 3) cumulative free cash flow over a three-year period, measured at constant exchange rates. Shares awarded underenvironmental, social and governance (ESG) priorities, weighted 40%, 40% and 20% of the Diageo Performance Incentive plan (DPI)maximum respectively, as set out in September 2016 are subject to the achievement of two equally weighted performance tests over the three-year performance period. These were: 1) compound annual growth in organic net sales over three years; and 2) productivity savings over three years, with an assessment of line manager performance as an underpin.Directors’ remuneration report. Performance share options under the DLTIP are subject to the achievement of two equally weighted performance tests:measures: 1) a comparison of Diageo’s three-year TSR with a peer group; 2) compound annual growth in profit before exceptional itemscumulative free cash flow over three years.a three-year period, measured at constant exchange rates. Performance measures and targets are set annually by the Remuneration Committee. The vesting range is 20% or 25% (for for Executive Directors and 25%for other participants respectively) for achieving minimum performance targets, up to 100% for achieving the maximum target level. Retesting of the performance conditionmeasures is not permitted.
For performance shares under the DLTIP, dividends are accrued on awards and are given to participants to the extent that the awards actually vest at the end of the performance period. Dividends are normally paid out in the form of shares.
Savings plans are provided in the form of a savings-related share option plan. For UK employees, awards were made under the Diageo 2010 Sharesave plan (for options granted up until 2020) and the Diageo 2020 Sharesave plan (for options granted from 2021).
For Republic of Ireland (ROI) based employees, awards were made under the Diageo 2009 Irish Sharesave Scheme (for options granted up until 2019) and the Diageo 2019 Irish Sharesave Scheme (for options granted in 2020). These are HMRC and Irish Revenue approved all-employee savings plans.
For ROI employees, grants from 2021 and 2022 were made under the Diageo 2020 Sharesave plan which is not an approved plan in the Republic of Ireland. These plans are made available to UK and ROI employees who are employed on the annual results announcement date. Participants can save monthly, with deductions taken directly from net pay, for a period of 3 or 5 years.In return, employees are granted the option to buy Diageo shares using the savings accrued at the end of the relevant savings period and at a 20% discounted option price, which is set at the time of grant. Provided participants fulfil the terms set out within the relevant UK or ROI tax approved scheme rules, any gains from the option exercise are free from UK or ROI income tax. For the ROI Sharesave awards granted in 2021 and 2022, as these are not made under a Revenue tax approved plan, the gains from the option exercise are subject to ROI income tax.
For US employees, the awards are made under the Diageo plc 2017 United States Employee Stock Purchase Plan. Employees agree to make regular monthly savings for a period of one year and acquire American Depositary Receipts (ADRs) at 15% discounted price (which is set at the time of grant) using their contributions at the end of the plan cycle. They receive the benefit of tax relief if certain conditions are satisfied.
Financial statements (continued)
For the three years ended 30 June 2020,2023, the calculation of the fair value of each share award used the Monte Carlo and Black Scholes pricing model and the following assumptions:
| | | | | | | | | | | |
| | 2023 | 2022 | 2021 |
| Risk free interest rate | 3.1 | % | 0.4 | % | (0.1 | %) |
| Expected life of the awards | 35 months | 40 months | 36 months |
| Dividend yield | 2.0 | % | 2.1 | % | 2.7 | % |
| Weighted average share price | 3758 p | 3545 p | 2557 p |
| Weighted average fair value of awards granted in the year | 1992 p | 2729 p | 2107 p |
| Number of awards granted in the year | 1.7 million | 2.1 million | 2.1 million |
| Fair value of all awards granted in the year | £34 million | £57 million | £45 million |
|
| | | | | | |
| | | 2020 | | 2019 | | 2018 |
| Risk free interest rate | | 0.4% | | 0.8% | | 0.3% |
| Expected life of the awards | | 37 months | | 37 months | | 37 months |
| Dividend yield | | 1.9% | | 2.4% | | 2.6% |
| Weighted average share price | | 3501 p | | 2736 p | | 2573 p |
| Weighted average fair value of awards granted in the year | | 899 p | | 1941 p | | 1761 p |
| Number of awards granted in the year | | 1.7 million | | 2.5 million | | 2.3 million |
| Fair value of all awards granted in the year | | £16 million | | £48 million | | £41 million |
Financial statements (continued)
Transactions on schemes
Transactions on the executive share award plans for the three years ended 30 June 20202023 were as follows:
| | | | | | | | | | | | | | |
| | 2023
million | | 2022
million | | 2021
million | |
| Number of awards outstanding at 1 July | 5.2 | | | 5.3 | | | 5.6 | | |
| Granted | 1.7 | | | 2.1 | | | 2.1 | | |
| Awarded | (1.1) | | | (1.1) | | | (1.2) | | |
| | | | | | |
| Forfeited | (0.9) | | | (1.1) | | | (1.2) | | |
| Number of awards outstanding at 30 June | 4.9 | | | 5.2 | | | 5.3 | | |
|
| | | | | | | | | |
| | | 2020
Number of awards
million |
| | 2019
Number of awards
million |
| | 2018
Number of awards
million |
|
| Balance outstanding at 1 July | | 7.0 |
| | 7.8 |
| | 7.9 |
|
| Granted | | 1.8 |
| | 2.5 |
| | 2.3 |
|
| Awarded | | (2.5 | ) | | (2.1 | ) | | (0.7 | ) |
| Forfeited | | (0.7 | ) |
| (1.2 | ) |
| (1.7 | ) |
| Balance outstanding at 30 June | | 5.6 |
| | 7.0 |
| | 7.8 |
|
The exercise price of share options outstanding at 30 June 20202023 was in the range of 1080 pence-34831709 pence (2019 - 952 pence-27733864 pence (2022 – 1704 pence - 4024 pence; 20182021 – 1232 pence - 765 pence-26023483 pence).
At 30 June 2020, 3.82023, 2.5 million share options were exercisable at a weighted average exercise price of 19982443 pence. Weighted average remaining contractual life of share options was five years at 30 June 2023.
Financial statements (continued)
Other financial informationstatements disclosures
Introduction
This section includes additional financial information that are either required by the relevant accounting standards or management considers these to be material information for shareholders.
18.19. Contingent liabilities and legal proceedings
Accounting policies
Provision is made for the anticipated settlement costs of legal or other disputes against the group where it is considered to be probable that a liability exists and a reliable estimate can be made of the likely outcome. Where it is possible that a settlement may be reached or it is not possible to make a reliable estimate of the estimated financial effect, appropriate disclosure is made but no provision created.
Critical accounting judgements and estimates
Judgement is necessary in assessing the likelihood that a claim will succeed, or a liability will arise, and an estimate to quantify the possible range of any settlement. Due to the inherent uncertainty in this evaluation process, actual losses may be different from the liability originally estimated. The group may be involved in legal proceedings in respect of which it is not possible to make a reliable estimate of any expected settlement, if any.settlement. In such cases, appropriate disclosure is provided but no provision is made and no contingent liability is quantified.
(a) Guarantees and related matters
As of 30 June 2020,2023, the group has no material unprovided guarantees or indemnities in respect of liabilities of third parties.
(b) Acquisition of USL shares from UBHL winding-up petitions against UBHL and otherrelated proceedings in relation to the USL transaction
On 4 July 2013, Diageo completed its acquisition, under a share purchase agreement with United Breweries (Holdings) Limited (UBHL) and various other sellers (the SPA), of 21,767,749 shares (14.98%)representing 14.98% in United Spirits Limited (USL) for a total consideration of INR 31.3 billion (£349 million),USL, including 10,141,437 shares (6.98%)representing 6.98% from UBHL. The SPA was signed on 9 November 2012 and was as part of the transaction announced by Diageo in relation to USL on that day (the Original USL Transaction). Following a series of further transactions, as of 30 June 2020,2023, Diageo has a 55.94%55.88% investment in USL (excluding 2.38% owned by the USL Benefit Trust).
Prior to the acquisition from UBHL on 4 July 2013, the High Court of Karnataka (High Court) had granted leave to UBHL under sections 536 and 537 of the Indian Companies Act 1956 (the Leave Order) to enable the sale by UBHL to Diageo to take place (the UBHL Share Sale) notwithstanding the continued existence of fivecertain winding-up petitions that were pending against UBHL on 9 November 2012, being the date of the SPA. Additional winding-up petitions have been brought against UBHL since 9 November 2012, and the Leave Order did not extend to them. At the time of the completion of the UBHL Share Sale, the Leave Order remained subject to review on appeal. However, as stated by Diageo at the time of closing, on 4 July 2013, it was considered unlikely that any appeal process in respect of the Leave Order would definitively conclude on a timely basis and, accordingly, Diageo waived the conditionality under the SPA relating to the absence of insolvency proceedings in relation to UBHL and acquired the 10,141,4376.98% stake in USL shares from UBHL at that time.
Following closing of the UBHL Share Sale, appeals were filed by various petitionersappeal and counter-appeal in respect of the Leave Order. On 20 December 2013, the division bench of the High Court set aside the Leave Order, (the December 2013 Order). Following the December 2013 Order, Diageo filed special leave petitions (SLPs) in this matter is now beforethe Supreme Court of India against the December 2013 Order.
On 10 February 2014, the Supreme Court of Indiawhich has issued an order giving notice in respect of the SLPs and ordering that the status quo be maintained with regard to the UBHL Share Sale pending a hearing on the matter in the Supreme Court.before it. Following a number of adjournments, the next date for a substantive hearing of the SLPs (in respect of which leave has since been granted and which have been converted to civil appeals) is yet to be fixed.
Financial statements (continued)
In separate proceedings, the High Court passed a winding-up order against UBHL on 7 February 2017. On 4 March 2017, and appeals filed by UBHL appealed against thisthat order beforehave since been dismissed, initially by a division bench of the High Court. On 6 March 2020, the division bench of the High Court confirmed the winding up order dated 7 February 2017, and dismissed the appeal filedsubsequently by UBHL. On 30 June 2020, UBHL filed a special leave petition in the Supreme Court of India against the order of the division bench of the High Court. This petition is currently pending. India.
Diageo continues to believe that the acquisition price of INR 1,440 per share paid to UBHL for the USL shares is fair and reasonable as regards UBHL, UBHL’s shareholders and UBHL’s secured and unsecured creditors. However, adverse results for Diageo in the proceedings referred to above could, absent leave or relief in other proceedings, ultimately result in Diageo losing title to the 6.98% stake in USL acquired from UBHL (now represented by 50,707,185 USL shares following a share split).UBHL. Diageo believes, including by reason of its rights under USL’s articles of association to nominate USL’s CEO and CFO and the right to appoint, through USL, a majority of the directors on the boards of USL’s subsidiaries as well as its ability as promoter to nominate for appointment up to two-thirds of USL’s directors for so long as the chairperson of USL is an independent director, that it would remain in control of USL and would continue to be able to consolidate USL as a subsidiary for accounting purposes regardless of the outcome of this litigation.
There can be no certainty as to the outcome of the existing or any further related legal proceedings or the timeframetime frame within which they would be concluded.
Diageo also has the benefit of certain contractual undertakings and commitments from the relevant sellers in relation to potential challenges to its unencumbered title to the USL shares acquired on 4 July 2013, including relating to the winding-up petitions described above and/or certain losses and costs that may be incurred in the event of third party actions relating to the acquisition of the USL shares.
Financial statements (continued)
(c) Continuing matters relating to the resignation of Dr Vijay Mallya from USL and USL internal inquiries affiliates
On 25 February 2016, Diageo and USL each announced that they had entered into arrangements with Dr Mallya under which he had agreed to resign from his position as a director and as chairman of USL and from his positions in USL’s subsidiaries. As specified by Diageo in its announcement at that time, these arrangements ended its prior agreement with Dr Mallya regarding his position at USL, therefore bringing to an end the uncertainty relating to the governance of USL, and put in place a five-year global non-compete (excluding the United Kingdom), non-interference, non-solicitation and standstill arrangement with Dr Mallya. As part of those arrangements, USL, Diageo and Dr Mallya agreed a mutual release in relation to matters arising out of an inquiry into certain matters referred to in USL’s financial statements and the qualified auditor’s report for the year ended 31 March 2014 (the Initial Inquiry) which had revealed, among other things, certain diversions of USL funds. Dr Mallya also agreed not to pursue any claims against Diageo, USL and their affiliates (including under the prior agreement with Diageo). In evaluating entering into such arrangements, Diageo considered the impact of the arrangements on USL and all of USL’s shareholders, and came to the view that the arrangements were in the best interests of USL and its shareholders.
Diageo’s agreement with Dr Mallya (the February 2016 Agreement) provided for a payment of $75$75 million (£61 (£60 million) to Dr Mallya over a five yearfive-year period in consideration for the five-year global non-compete, non-interference, non-solicitation and standstill commitments referred to above, his resignation from USL and the termination of his USL-related appointment and governance rights, the relinquishing of rights and benefits attached to his position at USL, and his agreement not to pursue claims against Diageo and USL. The February 2016 Agreement also provided for the release of Dr Mallya’s personal obligations to indemnify (i) Diageo Holdings Netherlands B.V. (DHN) in respect of its earlier liability ($141which $40 million (£115 million)) under a backstop guarantee of certain borrowings of Watson Limited (Watson) (a company affiliated with Dr Mallya), and (ii) Diageo Finance plc in respect of its earlier liability (£30 million) under a guarantee of certain borrowings of United Breweries Overseas Limited, a subsidiary of UBHL. $40 million (£ (£32 million) of the $75 million (£61 million) amount) was paid on signing of the February 2016 Agreement with the balance being payable in equal instalments of $7$7 million (£ (£6 million)million) a year over five years (2017-2021). All payments were subject to and conditional on Dr Mallya’s compliance with certain terms of the agreement. The February 2016 Agreement also provided for the release of Dr Mallya’s personal obligations to indemnify Diageo Holdings Netherlands B.V. (DHN) in respect of its earlier liability ($141 million (£112 million)) under a backstop guarantee of certain borrowings of Watson Limited (Watson) (a company affiliated with Dr Mallya).
Financial statements (continued)
While the first four instalmentsOn account of $7 million (£6 million) each would have become due on 25 February 2017, 25 February 2018, 25 February 2019various breaches and 25 February 2020, respectively, owing to various reasons (including breaches committed byother provisions of agreements between Dr Mallya and certain persons connected with him of several provisions ofand Diageo and/or USL, Diageo did not make the February 2016 Agreement five instalment payments due during the five-year period between 2017 and agreements of the same date between2021. In addition, Diageo has also demanded that Dr Mallya and USL), Diageo believes that it was not liable to pay such amounts and did not do so. Diageo further believes that it is very unlikely to become liable to pay any future instalments, to Dr Mallya. By notice to Dr Mallya and certain persons connected with him on 24 February 2017, 3 November 2017, 23 February 2018, 22 August 2018, 22 February 2019 and 24 February 2020, Diageo and other group companies have demanded from Dr Mallyarepay the repayment of $40$40 million (£ (£32 million) which wasmillion) paid by Diageo on 25in February 2016 and also sought compensation from him for various losses incurred by the relevant members of the Diageo group on account of the breaches committed by him and certain persons connected with him. group.
On 16 November 2017, Diageo and other relevant members of the Diageo group commenced claims in the High Court of Justice in England and Wales (the English High Court) against Dr Mallya in relation to certain of the matters specified in those notices.these matters. At the same time DHN also commenced claims in the English High Court against Dr Mallya, his son Sidhartha Mallya, Watson (a company affiliated with Dr Mallya),and Continental Administration Services Limited (CASL) (a company affiliated with Dr Mallya and understood to hold assets on trust for him and certain persons affiliated with him) for in excess of $142$142 million (£115 million) (£113 million) (plus interest) in relation to Watson’s liability to DHN in respect of its borrowings referred to above and the breach of associated security documents. These additional claims are described in paragraph (d) below.
Dr Mallya, Sidhartha Mallya and the relevant affiliated companies filed a defence to suchthese claims, and the additional claims on 12 March 2018, and Dr Mallya also filed a counterclaim for payment of the two $7 million (£6 million) instalment payments withheldthat had by Diageothat time been withheld as described above. Diageo and the other relevant members of its group filed a reply to that defence and a defence to the counter-claim on 5 September 2018.
Diageo continues to prosecute its claims and to defend the counterclaim. As part of this, on 18 December 2018,these proceedings, Diageo and the other relevant members of its group filed an application for strike out and/or summary judgement in respect of certain aspects of the defence filed by Dr Mallya and the other defendants, including their defence in relation to Watson and CASL’s liability to repay DHN. ThatThe application was made by DHN on the basis that the defence filed by Dr Mallya and his co-defendantssuccessful resulting in relation to those matters had no real prospect of success.
DHN’s summary judgement and strike out application was heard by the English High Court on 24 May 2019. The court decided in favour of DHN that (i) Watson is liablebeing ordered to pay and has no defence against paying, $135approximately $135 million (£110107 million) plus interestvarious amounts in respect of $11 million (£9 million)interest to DHN, and (ii)with CASL isbeing held liable as co-surety to pay, and has no defence against paying, for 50% of any such amount unpaid by Watson, i.e. upWatson. These amounts were, contrary to $67.5 million (£55 million) plus interest of $5.5 million (£5 million) to DHN.the relevant orders, not paid by the relevant deadlines and Watson and CASLCASL’s remaining defences in the proceedings were ordered to pay such sums, as well as certain amounts in respect of DHN and Diageo’s costs, to DHN by 21 June 2019. Such amounts were not paid on that date by either Watson or CASL. Accordingly,struck out. Diageo and DHN have accordingly sought asset disclosure and are considering further enforcement steps against those companies,Watson and CASL, both in the United Kingdom and in other jurisdictions where they are present or hold assets.
TheA trial of the remaining elements of these claims was due to commence on 21 November 2022.However, on 26 July 2021 Dr Mallya was declared bankrupt by the English High Court pursuant to a bankruptcy petition presented by a consortium of Indian banks. Diageo and the relevant members of its group have informed the Trustee in Bankruptcy of their position as creditors in the bankruptcy and have engaged with the Trustee regarding their claims and the status of the current proceedings. An appeal by Dr Mallya against his bankruptcy (and an appeal by the bank consortium against orders made in the course of the bankruptcy proceedings) are pending. In light of the uncertainty posed by the ongoing bankruptcy proceedings, the trial of Diageo’s claim was initially relisted to take place in February 2024. However, Dr Mallya’s appeal against his bankruptcy and the banks’ cross appeal will not now be heard until April 2024, and thus the trial of Diageo’s claim has been deferred from February 2024 until after those appeals have been determined.
At this stage, it is not possible to assess the extent to which the various ongoing proceedings related to the bankruptcy will affect the remaining elements of the claims originally commenced on 16 November 2017 by Diageo and the relevant members of its group are now proceedinggroup.
Upon completion of an initial inquiry in April 2015 into past improper transactions which identified references to trial and following a case management conference on 6 December 2019, that trial is scheduled to take place from 11 October 2021 through 21 October 2021.
As previously announced by USL, the Initial Inquiry identified certain additional parties and matters, indicating the possible existence of other improper transactions. These transactions could not be fully analysed during the Initial Inquiry and, accordingly, USL as previously announced, mandated that its Managing Director and Chief Executive Officer conduct a furthercarried out an additional inquiry into thethese transactions involving the additional parties and the additional matters to determine whether they also suffered from improprieties (the Additional(Additional Inquiry). USL announced the results of the Additional Inquiry which was completed in a notice to the Indian Stock Exchange dated 9 July 2016. The mutual release in relation to the Initial Inquiry agreed by Diageo and USL with Dr Mallya announced on 25 February 2016 does not extend to matters arising out of the Additional Inquiry.
As stated in USL’s previous announcement, the Additional Inquiry, revealed further instancesprima facie, identified transactions indicating actual and potential diversion of actual or potential fund diversionsfunds from USL and its Indian and overseas subsidiaries to, in most cases, Indian and overseas entities in whichthat appeared to be affiliated or associated with Dr Mallya appears to have a material direct or indirect interest, as well as other potentially improper transactions involving USL and its Indian and overseas subsidiaries.
In connection with the matters identified by the Additional Inquiry, USL has, pursuant to a detailed review of each case of such fund diversion and after obtaining expert legal advice, where appropriate, filed civil suits for recovery of funds from certain parties, including Dr Mallya, before the relevant courts in India.
Financial statements (continued)
TheMallya. All amounts identified in the Additional Inquiry have been previously provided for or expensed in the financial statements of USL or its subsidiaries forin the respective prior periods. USL has filed recovery suits against relevant parities identified pursuant to the Additional Inquiry.
Further, at this stage, it is not possible for the management of USL to estimate the financial impact on USL, if any, arising out of potential non-compliance with applicable laws in relation to such fund diversions.
275
(d) Other continuing matters relating to Dr Mallya and affiliates
DHN issued a conditional backstop guarantee on 2 August 2013 to Standard Chartered Bank (Standard Chartered) pursuant to a guarantee commitment agreement (the Guarantee Agreement). The guarantee was in respect of the liabilities of Watson, a company affiliated with Dr Mallya, under a $135 million (£110 million) facility from Standard Chartered (the Facility Agreement). The Guarantee Agreement was entered into as part of the arrangements put in place and announced at the closing of the USL transaction on 4 July 2013.
DHN’s provision of the Guarantee Agreement enabled the refinancing of certain existing borrowings of Watson from a third party bank and facilitated the release by that bank of rights over certain USL shares that were to be acquired by Diageo as part of the USL transaction. The facility matured and entered into default in May 2015. In aggregate DHN paid Standard Chartered $141 million (£115 million) under this guarantee, i.e. including payments of default interest and various fees and expenses.
Watson remains liable for all amounts paid by DHN under the guarantee. Under the guarantee documentation with Standard Chartered, DHN is entitled to the benefit of the underlying security package for the loan, including: (a) certain shares in United Breweries Limited (UBL) held solely by Dr Mallya and certain other shares in UBL held by Dr Mallya jointly with his son Sidhartha Mallya, and (b) the shareholding in Watson.
Aspects of the security package are the subject of various proceedings in India in which third parties are alleging and asserting prior rights to certain assets comprised in the security package or otherwise seeking to restrain enforcement against certain assets by Standard Chartered and/or DHN. These proceedings are ongoing and DHN will continue to vigorously pursue these matters as part of its efforts for enforcement of the underlying security and recovery of outstanding amounts. Diageo believes that the existence of any prior rights or dispute in relation to the security would be in breach of representations and warranties given by Dr Mallya and others to Standard Chartered at the time the security was granted and further believes that certain actions taken by Dr Mallya in relation to the proceedings described above also breached his obligations to Standard Chartered. In addition to these third party proceedings, Dr Mallya is also subject to proceedings in India under the Prevention of Money Laundering Act and the Fugitive Economic Offenders Act in which the relevant Indian authority, the Directorate of Enforcement, is seeking confiscation of the UBL shares which were provided as security for Watson’s liabilities. DHN is participating in these proceedings in order to protect its security interest in respect of the UBL shares.
Under the terms of the guarantee and as a matter of law, there are arrangements to pass on to DHN the benefit of the security package upon payment by DHN under the guarantee of all amounts owed to Standard Chartered. Payment under the guarantee has now occurred as described above. To the extent possible in the context of the proceedings described above, DHN continues to work towards enforcement of the security package, including, when appropriate, in conjunction with Standard Chartered. DHN’s ability to assume or enforce security over some elements of the security package is also subject to regulatory consent. It is not at this stage possible to determine whether such consent would be forthcoming.
In addition to the Indian proceedings just described, certain of the assets comprised in the security package may also be affected by a worldwide freezing order of the English High Court granted on 24 November 2017 and continued on 8 December 2017 and 8 May 2018 in respect of the assets of Dr Mallya.
The agreement with Dr Mallya referenced in paragraph (c) above does not impact the security package. Watson remains liable for all amounts paid pursuant to the guarantee and DHN has the benefit of a counter-indemnity from Watson in respect of payments in connection with the guarantee, as well as a claim against CASL as a co-surety with DHN of Watson's obligations. The various security providers, including Dr Mallya and Watson, acknowledged in the February 2016 Agreement referred to in paragraph (c) above that DHN is entitled to the benefit of the security package underlying the Standard Chartered facility and have also undertaken to take all necessary actions in that regard. Further, Diageo believes that the existence of any prior rights or disputes in relation to the security package would be in breach of certain confirmations given to Diageo and DHN pursuant to that agreement by Dr Mallya, Watson and certain connected persons.
Financial statements (continued)
On 16 November 2017, DHN commenced various claims in the English High Court for, in aggregate, in excess of $142 million (£115 million) (plus interest) in relation to these matters, including the following: (i) a claim against Watson for $141 million (£115 million) (plus interest) under Watson’s counter-indemnity to DHN in respect of payments made by DHN to Standard Chartered under the guarantee referred to above; (ii) a claim against Dr Mallya and Sidhartha Mallya under various agreements creating or relating to the security package referred to above for (a) the costs incurred to date in the various Indian proceedings referred to above (plus interest), and (b) damages of $141 million (£115 million), being DHN’s loss as a result of those Indian proceedings which currently prevent enforcement of the security over shares in UBL (plus interest); and (iii) a claim against CASL, as a co-surety with DHN of Watson’s obligations under the Facility Agreement, for 50% of the difference between the amount claimed under (i) above and the amount (if any) that DHN is in fact able to recover from Watson, Dr Mallya and/or Sidhartha Mallya.
As noted in paragraph (c), Dr Mallya, Sidhartha Mallya and the relevant affiliated companies filed a defence to these claims on 12 March 2018. Diageo and the other relevant members of its group filed a reply to that defence on 5 September 2018.
DHN and Diageo continue to prosecute these claims. As part of that, on 18 December 2018, Diageo and the other relevant members of its group filed an application for strike out and/or summary judgment in respect of certain aspects of the defence filed by Dr Mallya, Sidhartha Mallya and the relevant affiliated companies, including in respect of Watson and CASL’s liability to repay DHN. The successful outcome of that application and the current status of other aspects of the claims are described in paragraph (c) above.
(e)(d) Other matters in relation to USL
Following USL’s earlier updates concerning the Initial Inquiry as well as in relation to the arrangements with Dr Mallya that were the subject of the 25 February 2016 announcement, USL and Diageo have received various notices from Indian regulatory authorities, including the Ministry of Corporate Affairs, Enforcement Directorate and Securities and Exchange Board of India (SEBI).
Diageo and USL are co-operating fully with the authorities in relation to these matters. Diageo and USL have also received notices from SEBI requesting information in relation to, and explanation of the reasons for, the arrangements with Dr Mallya that were the subject of the 25 February 2016 announcement as well as, in the case of USL, in relation to the Initial Inquiry and the Additional Inquiry, and, in the case of Diageo, whether such arrangements with Dr Mallya or the Watson backstop guarantee arrangements referred to in paragraphs (c) and (d) above were part of agreements previously made with Dr Mallya at the time of the Original USL Transaction announced on 9 November 2012 and the open offer made as part of the Original USL Transaction. Diageo and USL have complied with such information requests and Diageo has confirmed that, consistent with prior disclosures, the Watson backstop guarantee arrangements and the matters described in the 25 February 2016 announcement were not the subject of any earlier agreement with Dr Mallya. In respect of the Watson backstop guarantee arrangements, SEBIthe Securities and Exchange Board of India (SEBI) issued a further notice to Diageo on 16 June 2016 that if there is any net liability incurred by Diageo (after any recovery under relevant security or other arrangements, which matters remain pending) on account of the Watson backstop guarantee, such liability, if any, would be considered to be part of the price paid for the acquisition of USL shares under the SPA which formed part of the Original USL Transaction and that, in that case, additional equivalent payments would be required to be made to those shareholders (representing 0.04% of the shares in USL) who tendered in the open offer made as part of the Original USL Transaction. Diageo is clearbelieves that the Watson backstop guarantee arrangements were not part of the price paid or agreed to be paid for any USL shares under the Original USL Transaction and that therefore believes theSEBI's decision in the SEBI notice to be misconceived and wrong inwas not consistent with applicable law, and Diageo appealed against it before the Securities Appellate Tribunal, Mumbai (SAT). On 1 November 2017, SAT issued an order in respect of Diageo’s appeal in which, amongst other things, it observed that the relevant officer at SEBI had neither considered Diageo’s earlier reply nor provided Diageo with an opportunity to be heard, and accordingly directed SEBI to pass a fresh order after giving Diageo an opportunity to be heard. Following SAT’s order, Diageo made its further submissions in the matter, including at a personal hearing before a Deputy General Manager of SEBI. On 26 June 2019, SEBI issued an order reiterating the directions contained in its previous notice dated 16 June 2016. AsAs with the previous SEBI notice, Diageo believes that SEBI's latest order is not consistent with applicable law. Diageo appealed against this order before SAT and, after a hearing in March 2023, SAT allowed Diageo’s appeal on 26 July 2023. Accordingly, SEBI’s order dated 26 June 2019 stands quashed. Under applicable law, SEBI is entitled to be misconceived and wrong in law and has filedfile an appeal against SAT’s order before SAT against the order. ThisSupreme Court of India. Therefore, pending any appeal is currently pending. Diageo is unablewhich may be filed by SEBI, there can be no certainty as to assess ifits outcome or the notices or enquiries referred to above will result in enforcement action or, if this were to transpire, to quantify meaningfully the possible range of loss, if any, totimeframe within which any such action might give rise to if determined against Diageo or USL.appeal would be concluded.
In relation to the matters described in the 25 February 2016 announcement, Diageo had also responded to a show cause notice dated 12 May 2017 from SEBI arising out of the previous correspondence in this regard and made its further submissions in the matter, including at a personal hearing before a Whole Time Member of SEBI. On 6 September 2018, SEBI issued an order holding that Diageo had acquired sole control of USL following its earlier open offers, and that no fresh open offer was triggered by Diageo.
Financial statements (continued)
(f)(e) USL’s dispute with IDBI Bank Limited
Prior to the acquisition by Diageo of a controlling interest in USL, USL had prepaid a term loan of INR 6,280 million (£68 million)60 million) taken through IDBI Bank Limited (IDBI), an Indian bank, which was secured on certain fixed assets and brands of USL, as well as by a pledge of certain shares in USL held by the USL Benefit Trust (of which USL is the sole beneficiary). The maturity date of the loan was 31 March 2015. IDBI disputed the prepayment, following which USL filed a writ petition in November 2013 before the High Court of Karnataka (the High Court) challenging the bank’s actions.
Following the original maturity date of the loan, USL received notices from IDBI seeking to recall the loan, demanding a further sum of INR 459 million(£5 million)4 million) on account of the outstanding principal, accrued interest and other amounts, and also threatening to enforce the security in the event that USL did not make these further payments. Pursuant to an application filed by USL before the High Court in the writ proceedings, the High Court directed that, subject to USL depositing such further amount with the bank (which amount was duly deposited by USL), the bank should hold the amount in a suspense account and not deal with any of the secured assets including the shares until disposal of the original writ petition filed by USL before the High Court.
On 27 June 2019, a single judge bench of the High Court issued an order dismissing the writ petition filed by USL, amongst other things, on the basis that the matter involved an issue of breach of contract by USL and was therefore not maintainable in exercise of the court’s writ jurisdiction. USL has since filed an appeal against this order before a division bench of the High Court, which on 30 July 2019 has issued an interim order directing the bank to not deal with any of the secured assets until the next date of hearing. On 13 January 2020, the division bench of the High Court admitted the writ appeal and extended the interim stay. This appeal is currently pending. Based on the assessment of USL’s management supported by external legal opinions, USL continues to believe that it has a strong case on the merits and therefore continues to believe that the secured assets will be released to USL and the aforesaid amount of INR 459 million (£5 million)4 million) remains recoverable from IDBI.
(g) 2019 Moët Hennessy dividend(f) Tax
No dividend was received during the financial year ended 30 June 2020 in respect of Diageo’s 34% investment in Moët Hennessy SAS and Moët Hennessy International SAS (together MH). This investment is governed by a Partners’ Agreement with certain members of the LVMH Moët Hennessy - Louis Vuitton group (LVMH) which holds 66% of MH, which includes the dividend policy and minimum annual dividend requirements for MH. Diageo believes that non-payment by MH of the dividend in respect of the financial year ended 31 December 2019 constitutes a breach by LVMH of the Partners’ Agreement and that the minimum aggregate dividend that should have been received by Diageo in respect of that period was €181 million (£166 million). Diageo has commenced arbitration proceedings under the Partners’ Agreement in respect of this dispute.
(h) Tax
The international tax environment has seen increased scrutiny and rapid change over recent years bringing with it greater uncertainty for multinationals. Against this backdrop, Diageo has been monitoring developments and continues to engage transparently with the tax authorities in the countries where Diageo operates to ensure that the group manages its arrangements on a sustainable basis.
In April 2019, the European Commission issued its decision in a state aid investigation into the Group Financing Exemption in the UK controlled foreign company rules. The European Commission found that part of the Group Financing Exemption constitutes state aid. The Group Financing Exemption was introduced in legislation by the UK government in 2013. In common with other UK-based international companies whose arrangements are in line with current UK CFC legislation Diageo may be affected by the ultimate outcome of this investigation. The UK government and other UK-based international companies, including Diageo, have appealed to the General Court of the European Union against the decision. The UK government is required to commence collection proceedings and therefore it is expected that Diageo will have to make a payment in the year ending 30 June 2021 in respect of this case. At present it is not possible to determine the amount that the UK government will seek to collect. If the decision of the European Commission is upheld, Diageo calculates its maximum potential liability to be approximately £275 million. Based on its current assessment, Diageo believes that no provision is required in respect of this issue.
The group operates in a large number of markets with complex tax and legislative regimes that are open to subjective interpretation. Asinterpretation, and for which tax audits can take several years to resolve. In the context of these operations, it is possible that tax exposures which have not yet materialised (including those which could arise as a result of tax assessments) may result in losses to the group. In the circumstances where tax authorities have raised assessments, challenging interpretations which may lead to a possible material outflow, these have been included as contingent liabilities. Where the potential tax exposures are known to us and have not been assessed, the group considers disclosure of such matters taking into account their size and nature, relevant regulatory requirements and potential prejudice of the future resolution or assessment thereof.
Diageo has a large number of ongoing tax cases in Brazil and India. Since assessing an accurate value of contingent liabilities in these markets requires a high leveldegree of judgement, contingent liabilities are disclosed on the basis of the current known possible exposure from tax assessment values.
Financial statements (continued)
Diageo has reviewed its disclosures in relation to Brazil and India, where Diageo has a large number While not all of ongoing tax cases. While these cases are not individually significant, the current aggregate known possible exposure from tax assessment of the aggregate possible exposuresvalues is up to approximately £285£616 million for Brazil and up to approximately £150£90 million for India. The group believes that the likelihood that the tax authorities will ultimately prevail is lower than probable but higher than remote. Due to the
Financial statements (continued)
fiscal environment in Brazil and in India, the possibility of further tax assessments related to the same matters cannot be ruled out.out and the judicial processes may take extended periods to conclude. Based on its current assessment, Diageo believes that no provision is required in respect of these issues.
Payments were made under protest in India in respect of the periods 1 April 2006 to 31 March 20172019 in relation to tax assessments where the risk is considered to be remote or possible. These payments have to be made in order to be able to challenge the assessments and as such have been recognised as a receivable onin the consolidatedgroup's balance sheet. The total amount of payments under protest payments recognised as a receivable as at 30 June 20202023 is £117£116 million (corporate tax payments of £107£104 million and indirect tax payments of £10£12 million).
A lawsuit(g) Other disputes
On 31 May 2023, a complaint against Diageo North America, Inc (DNA) was filed on 15 April 2019in the Supreme Court of New York by the National AssociationCombs Wine and Spirits LLC (an entity associated with Mr Sean Combs) alleging, inter alia, breach of Manufacturers (NAM) against the United States Department of the Treasury (U.S. Treasury) and the United States Customs and Border Protection (CBP) on behalf of its affected industry members, including Diageo, to invalidate regulations published in February 2019 and to ensure that substitution drawback is permitted in accordance with 19 U.S.C.§ 1313(j)(2) as amended by the Trade Facilitation and Trade Enforcement Act of 2015, which was enacted on 24 February 2016 (TFTEA). Substitution drawback permits the refund, including of excise taxes, paid on imported merchandise when sufficiently similar substitute merchandise is exported. The United States Congress passed the TFTEA to, among other things, clarify and broaden the standard for what constitutes substitute merchandise. This change should entitle Diageo to obtain substitution drawbackcontract in respect of a joint venture agreement related to DeLeón tequila. DNA has also served notice of material breaches and termination to Mr Combs and his relevant associated entities of certain eligible product categories. Despite this changeagreements related to services provided by Mr Combs and these entities in respect of Cîroc, and notice of material breaches and an intent to arbitrate in respect of the DeLeón joint venture agreement. Diageo categorically denies the allegations that have been made by Mr Combs and his associated parties in the law, U.S. Treasurycomplaint and CBP issued final regulations in 2019 declaring that substitution drawback is not available for imports when substituted with an exportwill defend itself vigorously. Diageo will refrain from making any further disclosures given the inherent uncertainties of these matters and the prejudicial nature any such disclosures may have on which no tax was paid. The Court of International Trade issued a judgement in favour of NAM on 18 February 2020, denying the request by the U.S. Treasury and CBP for a stay of payment on 15 May 2020, and on 26 May 2020, ordered the immediate processing of claims. Current eligible claims of Diageo Americas Supply, Inc. are estimated at £95 million ($117 million), with a financial impact of £87 million ($110 million) for the year ended 30 June 2020 of which Diageo has received £26 million ($33 million). However, on 23 July 2020 the U.S. Treasury and CBP filed an appeal with the U.S. Federal Court of Appeal, and, although Diageo believes that the NAM is more likely than not to ultimately prevail, if they were to fail, the CBP could be permitted to recover these payments.potential outcomes related thereto or other associated matters.
(i)(h) Other
The group has extensive international operations and isroutinely makes judgements on a defendant in a numberrange of legal, customs and tax proceedingsmatters which are incidental to the group's operations. Some of these operations,judgements are or may become the subject of challenges and involve proceedings, the outcome of which cannot at present be foreseen. In particular, the group is currently a defendant in various customs proceedings that challenge the declared customs value of products imported by certain Diageo companies. Diageo continues to defend its position vigorously in these proceedings.
Save as disclosed above, neither Diageo, nor any member of the Diageo group, is or has been engaged in, nor (so far as Diageo is aware) is there pending or threatened by or against it, any legal or arbitration proceedings which may have a significant effect on the financial position of the Diageo group.
Financial statements (continued)
20. Commitments
19. Commitments
(a) Capital commitments
Commitments for expenditure on intangibles and property, plant and equipment not provided for in these consolidated financial statementsstatements are estimated at £312£599 million (2019 (2022 – £255£399 million; 20182021 – £161£263 million).
(b) Other commitments
The future minimum lease rentals payable in the year endingended 30 June 20202023 for short termshort-term leases and low value leases of low-value assets are estimated at £19 million.£36 million (2022 – £13 million; 2021 – £11 million). The total future cash outflows for leases that had not yet commenced, and not recognised as lease liabilities at 30 June 2020,2023, are estimated at £133 million. £11 million (2022 – £11 million; 2021 – £132 million).
20.21. Related party transactions
Transactions between the group and its related parties are made on terms equivalent to those that prevail in arm’s length transactions.
(a) Subsidiaries
Transactions between the company and its subsidiaries are eliminated on consolidation and therefore are not disclosed. Details of the principal group companies are given in note 21.22.
(b) Associates and joint ventures
Sales and purchases to and from associates and joint ventures are principally in respect of premium drinks products but also include the provision of management services.
Transactions and balances with associates and joint ventures are set out in the table below:
| | | | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
| | 2023 £ million | 2022 £ million | 2021 £ million |
| Income statement items | | | | | | | Income statement items | |
| Sales | | 9 |
| | 9 |
| | 10 |
| Sales | 10 | | 11 | | 8 | |
| Purchases | | 29 |
| | 28 |
| | 29 |
| Purchases | 13 | | 31 | | 23 | |
| Balance sheet items | | | | | | | Balance sheet items | |
| Group payables | | 2 |
| | 12 |
| | 3 |
| Group payables | 2 | | 2 | | 5 | |
| Group receivables | | 1 |
| | 2 |
| | 2 |
| Group receivables | 1 | | 2 | | 1 | |
| Loans payable | | 6 |
| | 6 |
| | 6 |
| Loans payable | — | | — | | 9 | |
| Loans receivable | | 82 |
| | 55 |
| | 59 |
| Loans receivable | 197 | | 175 | | 108 | |
| Cash flow items | | | | | | | Cash flow items | |
| Loans and equity contributions, net | | 47 |
| | 32 |
| | 37 |
| Loans and equity contributions, net | 93 | | 66 | | 38 | |
Other disclosures in respect of associates and joint ventures are included in note 6.
Financial statements (continued)
(c) Key management personnel
The key management of the group comprises the Executive and Non-Executive Directors, the members of the Executive Committee and the Company Secretary.
They are listed under ‘Board of Directors and Company Secretary’ and ‘Executive Committee’.
| | | | | | | | | | | |
| | 2023 | 2022 | 2021 |
| £ million | £ million | £ million |
| Salaries and short-term employee benefits | 11 | | 10 | | 9 | |
| Annual incentive plan | 6 | | 13 | | 13 | |
| Non-Executive Directors’ fees | 1 | | 1 | | 1 | |
Share-based payments(1) | 12 | | 19 | | 12 | |
| Post employment benefits | 2 | | 2 | | 1 | |
| Termination benefits | — | | — | | 2 | |
| 32 | | 45 | | 38 | |
|
| | | | | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| Salaries and short-term employee benefits | | 10 |
| | 10 |
| | 10 |
|
| Annual incentive plan | | — |
| | 10 |
| | 10 |
|
| Non-Executive Directors’ fees | | 1 |
| | 1 |
| | 1 |
|
Share-based payments(i) | | (11 | ) | | 20 |
| | 15 |
|
| Post employment benefits | | 2 |
| | 3 |
| | 2 |
|
Termination benefits(ii) | | 2 |
| | — |
| | — |
|
| | | 4 |
| | 44 |
| | 38 |
|
(i) (1) Time-apportioned fair value of unvested options and share awards.
(ii) £1 million of the termination benefits disclosed for 2020 have been paid in the year ended 30 June 2020; a further £1 million will be paid in the year ending 30 June 2021.
Non-Executive Directors do not receive share-based payments or post employment benefits. Details of
Financial statements (continued)
There were no transactions with these related parties during the individual Directors’ remuneration are givenyear ended 30 June 2023 on terms other than those that prevail in ’Single total figure of remuneration for Executive Directors’ and ’Non-Executive Directors’ remuneration’ in the Directors’ remuneration report.arm’s length transactions.
(d) Pension plans
In October 2022, Diageo plc provided an interim credit facility to Diageo Pension Trust Limited, consisting of £850 million for the Diageo Pension Scheme, to support temporary liquidity challenges until 29 December 2022. In December 2022, the maturity date was extended to 29 June 2023. The facility amount was reduced on 22 May 2023 to £350 million and on 14 June 2023 the maturity date was extended to 11 October 2023. The facility was subsequently cancelled on 25 July 2023.
The Diageo pension plans are recharged with the cost of administration services provided by the group to the pension plans and with professional fees paid by the group on behalf of the pension plans. The total amount recharged for the year was £nil (2019£0.1 million (2022 – £3£0.1 million; 20182021 – £14£0.1 million).
(e) Directors’ remuneration
| | | | | | | | | | | |
| | 2023 | 2022 | 2021 |
| £ million | £ million | £ million |
| Salaries and short-term employee benefits | 3 | | 3 | | 2 | |
| Annual incentive plan | 2 | | 4 | | 4 | |
| Non-Executive Directors' fees | 1 | | 1 | | 1 | |
Share option exercises(1) | — | | 4 | | — | |
Shares vesting(1) | 4 | | 3 | | 1 | |
| Post employment benefits | 1 | | — | | — | |
| 11 | | 15 | | 8 | |
|
| | | | | | | | | |
| | | 2020
£ million |
| | 2019
£ million |
| | 2018
£ million |
|
| Salaries and short-term employee benefits | | 2 |
| | 2 |
| | 2 |
|
| Annual incentive plan | | — |
| | 2 |
| | 3 |
|
| Non-Executive Directors' fees | | 1 |
| | 1 |
| | 1 |
|
Share option exercises(i) | | — |
| | 2 |
| | — |
|
Shares vesting(i) | | 11 |
| | 13 |
| | 1 |
|
| Post employment benefits | | 1 |
| | 1 |
| | 1 |
|
| | | 15 |
| | 21 |
| | 8 |
|
| |
(i) | (1) Gains on options realised in the year and the benefit from share awards, calculated by using the share price applicable on the date of exercise of the share options and release of the awards. |
Details of the individual Directors’ remuneration are given in ’Single total figureshare options and release of remuneration for Executive Directors’ and ’Non-Executive Directors’ remuneration’ in the Directors’ remuneration report.awards.
Financial statements (continued)279
Unaudited financial information
21.22. Principal group companies
The companies listed below include those which principally affect the profits and assets of the group. The operating companies listed below may carry on the business described in the countries listed in conjunction with their subsidiaries and other group companies.
|
| | | | | | | | | | | | | |
| | Country of incorporation | | Country of operation | | Percentage of equity owned(i)(1) |
| | Business description |
| Subsidiaries | | | | | | | | |
| Diageo Ireland Unlimited Company | | Republic of Ireland | | Worldwide | | 100 | % | 100% | Production, marketing and distribution of premium drinks |
| Diageo Great Britain Limited | | England | | Great Britain | | 100 | % | 100% | Marketing and distribution of premium drinks |
| Diageo Scotland Limited | | Scotland | | Worldwide | | 100 | % | 100% | Production, marketing and distribution of premium drinks |
| Diageo Brands B.V. | | Netherlands | | Worldwide | | 100 | % | 100% | Marketing and distribution of premium drinks |
| Diageo North America, Inc. | | United States | | Worldwide | | 100 | % | 100% | Production, importing, marketing and distribution of premium drinks |
United Spirits Limited(ii)(2) | | India | | India | | 55.94 | % | 55.88% | Production, importing, marketing and distribution of premium drinks |
Diageo Capital plc(iii)(3) | | Scotland | | United Kingdom | | 100 | % | 100% | Financing company for the group |
Diageo Capital B.V.(3) | Netherlands | Netherlands | 100% | Financing company for the group |
Diageo Finance plc(iii)(3) | | England | | United Kingdom | | 100 | % | 100% | Financing company for the group |
| Diageo Investment Corporation | United States | United States | | United States | | 100 | % | 100% | Financing company for the US group |
| Mey İçki Sanayi ve Ticaret A.Ş. | Turkey | Turkey | | Turkey | | 100 | % | 100% | Production, marketing and distribution of premium drinks |
| Associates | | | | | | | | |
Moët Hennessy, SAS(iv)(4) | | France | | France | | 34 | % | 34% | Production, marketing and distribution of premium drinks |
(1) All percentages, unless otherwise stated, are in respect of holdings of ordinary share capital and are equivalent to the percentages of voting rights held by the group.
(2) Percentage ownership excludes 2.38% owned by the USL Benefit Trust.
(3) Directly owned by Diageo plc.
(4) French limited liability company.
Unaudited financial information
23. Post balance sheet events
Starting 1 July 2023, in line with reporting requirements the functional currency of Diageo plc has changed from sterling to US dollar which is applied prospectively. This is because the group's share of net sales and expenses in the US and other countries whose currencies correlate closely with the US dollar has been increasing over the years, and that trend is expected to continue in line with the group's strategic focus. Diageo has also decided to change its presentation currency to US dollar with effect from 1 July 2023, applied retrospectively, as it believes that this change will provide better alignment of the reporting of performance with its business exposures.
Diageo will propose adopting new Articles of Association (New Articles) at the AGM to be held on 28 September 2023 which reflects the change in the functional currency of Diageo plc and presentation currency of the group from sterling to US dollar. The New Articles shall, among other things, empower the Board to declare and/or pay dividends in any currency or currencies and enable the Board to make provisions for shareholders to receive dividends in a different currency to the currency in which dividends were declared. Subject to the approval of the New Articles by shareholders at the AGM and commencing with the interim dividend that is expected to be declared in January 2024, Diageo’s future dividends will be declared in US dollar. Holders of ordinary shares will continue to receive their dividends in sterling but will have the option to elect to receive it in US dollar. Holders of ADRs will continue to receive dividends in US dollar.
On 31 July 2023, the Board approved plans for a further return of capital programme of $1.0 billion to shareholders.
Unaudited financial information
Definitions and reconciliation of non-GAAP measures to GAAP measures
Diageo’s strategic planning process is based on certain non-GAAP measures, including organic movements. These non-GAAP measures are chosen for planning and reporting, and some of them are used for incentive purposes. The group’s management believes that these measures provide valuable additional information for users of the financial statements in understanding the group’s performance. These non-GAAP measures should be viewed as complementary to, and not replacements for, the comparable GAAP measures and reported movements therein.
It is not possible to reconcile the forecast tax rate before exceptional items, forecast organic net sales growth and forecast organic operating profit growth to the most comparable GAAP measure as it is not possible to predict, without unreasonable effort, with reasonable certainty, the future impact of changes in exchange rates, acquisitions and disposals and potential exceptional items.
Volume
Volume is a performance indicator that is measured on an equivalent units basis to nine-litre cases of spirits. An equivalent unit represents one nine-litre case of spirits, which is approximately 272 servings. A serving comprises 33ml of spirits, 165ml of wine, or 330ml of ready to drink or beer. Therefore, to convert volume of products other than spirits to equivalent units, the following guide has been used: beer in hectolitres, divide by 0.9; wine in nine-litre cases, divide by five; ready to drink and certain pre-mixed products that are classified as ready to drink in nine-litre cases, divide by ten.
Organic movements
Organic information is presented using sterling amounts on a constant currency basis excluding the impact of exceptional items, certain fair value remeasurement, hyperinflation and acquisitions and disposals. Organic measures enable users to focus on the performance of the business which is common to both years and which represents those measures that local managers are most directly able to influence.
Calculation of organic movements
The organic movement percentage is the amount in the row titled ‘Organic movement’ in the tables below, expressed as a percentage of the relevant absolute amount in the row titled ‘2022 adjusted’. Organic operating margin is calculated by dividing operating profit before exceptional items by net sales after excluding the impact of exchange rate movements, certain fair value remeasurements, hyperinflation and acquisitions and disposals.
(a) Exchange rates
Exchange in the organic movement calculation reflects the adjustment to recalculate the reported results as if they had been generated at the prior period weighted average exchange rates.
Exchange impacts in respect of the external hedging of intergroup sales by the markets in a currency other than their functional currency and the intergroup recharging of services are also translated at prior period weighted average exchange rates and are allocated to the geographical segment to which they relate. Residual exchange impacts are reported as part of the Corporate segment. Results from hyperinflationary economies are translated at forward-looking rates.
(b) Acquisitions and disposals
For acquisitions in the current period, the post-acquisition results are excluded from the organic movement calculations. For acquisitions in the prior period, post-acquisition results are included in full in the prior period but are included in the organic movement calculation from the anniversary of the acquisition date in the current period. The acquisition row also eliminates the impact of transaction costs that have been charged to operating profit in the current or prior period in respect of acquisitions that, in management’s judgement, are expected to be completed.
Where a business, brand, brand distribution right or agency agreement was disposed of or terminated in the reporting period, the group, in the organic movement calculations, excludes the results for that business from the current and prior period. In the calculation of operating profit, the overheads included in disposals are only those directly attributable to the businesses disposed of, and do not result from subjective judgements of management.
(c) Exceptional items
Exceptional items are those that in management’s judgement need to be disclosed separately. Such items are included within the income statement caption to which they relate, and are excluded from the organic movement calculations. Management believes that that separate disclosure of exceptional items and the classification between operating and non-operating items further helps investors to understand the performance of the group. Changes in estimates and reversals in relation to items previously recognised as exceptional are presented consistently as exceptional in the current year.
Unaudited financial information
Exceptional operating items are those that are considered to be material and unusual or non-recurring in nature and are part of the operating activities of the group, such as one-off global restructuring programmes which can be multi-year, impairment of intangible assets and fixed assets, indirect tax settlements, property disposals and changes in post employment plans.
Gains and losses on the sale or directly attributable to a prospective sale of businesses, brands or distribution rights, step up gains and losses that arise when an investment becomes an associate or an associate becomes a subsidiary and other material, unusual non-recurring items that are not in respect of the production, marketing and distribution of premium drinks, are disclosed as exceptional non-operating items below operating profit in the income statement.
Exceptional current and deferred tax items comprise material and unusual or non-recurring items that impact taxation. Examples include direct tax provisions and settlements in respect of prior years and the remeasurement of deferred tax assets and liabilities following tax rate changes.
(d) Fair value remeasurement
Fair value remeasurement in the organic movement calculation reflects an adjustment to eliminate the impact of fair value changes in biological assets, earn-out arrangements that are accounted for as remuneration and fair value changes relating to contingent consideration liabilities and equity options that arose on acquisitions recognised in the income statement.
Growth on a constant basis
Growth on a constant basis is a measure used by the group to understand the trends of the business and its recovery towards pre-Covid-19 performance.
2019 to 2023 growth on a constant basis for volume, sales, net sales and operating profit before exceptional items is calculated by adding up the respective periods’ organic movement in the row titled ‘Organic movement’ in the tables below, expressed as a percentage of the relevant absolute amount in the row titled '2019 adjusted’. The most comparable GAAP financial measure is '2019 to 2023 reported movement %' in the tables below which is calculated by combining the reported movements for the respective periods, expressed as a percentage of the 2019 reported amount.
Adjustment in respect of hyperinflation
The group's experience is that hyperinflationary conditions result in price increases that include both normal pricing actions reflecting changes in demand, commodity and other input costs or considerations to drive commercial competitiveness, as well as hyperinflationary elements and that for the calculation of organic movements, the distortion from hyperinflationary elements should be excluded.
Cumulative inflation over 100% (2% per month compounded) over three years is one of the key indicators within IAS 29 to assess whether an economy is deemed to be hyperinflationary. As a result, the definition of 'Organic movements' includes price growth in markets deemed to be hyperinflationary economies, up to a maximum of 2% per month while also being on a constant currency basis. Corresponding adjustments have been made to all income statement related lines in the organic movement calculations.
In the tables presenting the calculation of organic movements, 'hyperinflation' is included as a reconciling item between reported and organic movements and that also includes the relevant IAS 29 adjustments.
Unaudited financial information
Organic movement calculations for the year ended 30 June 2023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| North America
million | Europe
million | Asia
Pacific
million | Latin America
and Caribbean
million | Africa
million | Corporate
million | Total
million |
| Volume (equivalent units) | | | | | | | |
| 2019 reported | 49.4 | | 45.4 | | 95.1 | | 22.4 | | 33.6 | | — | | 245.9 | |
| | | | | | | |
| Disposals | (2.1) | | (0.1) | | — | | — | | (2.7) | | — | | (4.9) | |
| 2019 adjusted | 47.3 | | 45.3 | | 95.1 | | 22.4 | | 30.9 | | — | | 241.0 | |
| | | | | | | |
| | | | | | | |
| Organic movement (2020) | 0.1 | | (5.2) | | (14.5) | | (3.4) | | (4.0) | | — | | (27.0) | |
| | | | | | | |
| | | | | | | |
| Organic movement (2021) | 5.1 | | 2.9 | | 7.0 | | 4.1 | | 4.8 | | — | | 23.9 | |
| | | | | | | |
| | | | | | | |
| Organic movement (2022) | 1.4 | | 8.5 | | 6.6 | | 4.0 | | 4.0 | | — | | 24.5 | |
| 2020, 2021 and 2022 movement on a constant basis | 6.6 | | 6.2 | | (0.9) | | 4.7 | | 4.8 | | — | | 21.4 | |
| | | | | | | |
| Volume (equivalent units) | | | | | | | |
| 2022 reported | 54.8 | 51.2 | 94.2 | 27.1 | 35.7 | — | | 263.0 |
| | | | | | | |
Disposals(2) | — | | (0.8) | | (23.3) | | — | | (1.9) | | — | | (26.0) | |
| 2022 adjusted | 54.8 | | 50.4 | | 70.9 | | 27.1 | | 33.8 | | — | | 237.0 | |
| | | | | | | |
| | | | | | | |
| Organic movement | (2.5) | | 0.1 | | 3.9 | | (0.9) | | (2.4) | | — | | (1.8) | |
| | | | | | | |
| | | | | | | |
Acquisitions and disposals(2) | 0.1 | | 0.8 | | 6.0 | | — | | 1.3 | | — | | 8.2 | |
| 2023 reported | 52.4 | | 51.3 | | 80.8 | | 26.2 | | 32.7 | | — | | 243.4 | |
| Organic movement % | (5) | | — | | 5 | | (3) | | (7) | | — | | (1) | |
| | | | | | | |
| | | | | | | |
| 2019 to 2023 reported growth % | 6 | | 13 | | (15) | | 17 | | (3) | | — | | (1) | |
| 2019 to 2023 growth on a constant basis % | 9 | | 14 | | 3 | | 17 | | 8 | | — | | 8 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| North America
£ million | Europe
£ million | Asia
Pacific
£ million | Latin America
and Caribbean
£ million | Africa
£ million | Corporate
£ million | Total
£ million |
| Sales | | | | | | | |
| 2022 reported | 6,682 | | 5,740 | | 5,624 | | 1,945 | | 2,403 | | 54 | | 22,448 | |
| Exchange | (51) | | (149) | | (4) | | (19) | | (1) | | — | | (224) | |
| | | | | | | |
Disposals(2) | — | | (36) | | (884) | | — | | (195) | | — | | (1,115) | |
| Hyperinflation | — | | (213) | | — | | — | | — | | — | | (213) | |
| 2022 adjusted | 6,631 | | 5,342 | | 4,736 | | 1,926 | | 2,207 | | 54 | | 20,896 | |
| | | | | | | |
| | | | | | | |
| Organic movement | (15) | | 553 | | 317 | | 132 | | 71 | | 33 | | 1,091 | |
| | | | | | | |
| | | | | | | |
Acquisitions and disposals(2) | 23 | | 22 | | 225 | | 6 | | 156 | | — | | 432 | |
| Exchange | 743 | | (205) | | 125 | | 196 | | (48) | | 1 | | 812 | |
| Hyperinflation | — | | 284 | | — | | — | | — | | — | | 284 | |
| 2023 reported | 7,382 | | 5,996 | | 5,403 | | 2,260 | | 2,386 | | 88 | | 23,515 | |
| Organic movement % | — | | 10 | | 7 | | 7 | | 3 | | 61 | | 5 | |
| | | | | | | |
Unaudited financial information
| | | | | | | | | | | | | | | | | | | | | | | |
| North America
£ million | Europe
£ million | Asia
Pacific
£ million | Latin America
and Caribbean
£ million | Africa
£ million | Corporate
£ million | Total
£ million |
| Net sales | | | | | | | |
| 2019 reported | 4,460 | | 2,939 | | 2,688 | | 1,130 | | 1,597 | | 53 | | 12,867 | |
| Exchange | (34) | | (19) | | 1 | | 4 | | (2) | | 2 | | (48) | |
| Reclassification | — | | — | | — | | (10) | | — | | — | | (10) | |
| Disposals | (75) | | (1) | | (1) | | (1) | | (91) | | — | | (169) | |
| 2019 adjusted | 4,351 | | 2,919 | | 2,688 | | 1,123 | | 1,504 | | 55 | | 12,640 | |
| | | | | | | |
| | | | | | | |
| Organic movement (2020) | 105 | | (358) | | (423) | | (169) | | (200) | | (16) | | (1,061) | |
| | | | | | | |
| | | | | | | |
| Organic movement (2021) | 929 | | 108 | | 308 | | 275 | | 258 | | (18) | | 1,860 | |
| | | | | | | |
| | | | | | | |
| Organic movement (2022) | 754 | | 766 | | 402 | | 451 | | 308 | | 35 | | 2,716 | |
| 2020, 2021 and 2022 movement on a constant basis | 1,788 | | 516 | | 287 | | 557 | | 366 | | 1 | | 3,515 | |
| | | | | | | |
| | | | | | | |
| Net sales | | | | | | | |
| 2022 reported | 6,095 | | 3,212 | | 2,884 | | 1,525 | | 1,682 | | 54 | | 15,452 | |
Exchange(1) | (46) | | (44) | | (8) | | (16) | | (1) | | — | | (115) | |
| | | | | | | |
Disposals(2) | — | | (29) | | (137) | | — | | (130) | | — | | (296) | |
| Hyperinflation | — | | (71) | | — | | — | | — | | — | | (71) | |
| 2022 adjusted | 6,049 | | 3,068 | | 2,739 | | 1,509 | | 1,551 | | 54 | | 14,970 | |
| | | | | | | |
| | | | | | | |
| Organic movement | 11 | | 347 | | 353 | | 142 | | 83 | | 33 | | 969 | |
| | | | | | | |
| | | | | | | |
Acquisitions and disposals(2) | 20 | | 20 | | 35 | | 3 | | 104 | | — | | 182 | |
Exchange(1) | 678 | | (41) | | 73 | | 145 | | (39) | | 1 | | 817 | |
| Hyperinflation | — | | 175 | | — | | — | | — | | — | | 175 | |
| 2023 reported | 6,758 | | 3,569 | | 3,200 | | 1,799 | | 1,699 | | 88 | | 17,113 | |
| Organic movement % | — | | 11 | | 13 | | 9 | | 5 | | 61 | | 6 | |
| | | | | | | |
| | | | | | | |
| 2019 to 2023 reported growth % | 52 | | 21 | | 19 | | 59 | | 6 | | 66 | | 33 | |
| 2019 to 2023 growth on a constant basis % | 41 | | 30 | | 24 | | 62 | | 30 | | 62 | | 35 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| North America
£ million | Europe
£ million | Asia
Pacific
£ million | Latin America
and Caribbean
£ million | Africa
£ million | Corporate
£ million | Total
£ million |
| Marketing | | | | | | | |
| 2022 reported | 1,200 | | 577 | | 490 | | 243 | | 199 | | 12 | | 2,721 | |
| Exchange | (12) | | 5 | | (2) | | (3) | | (2) | | (1) | | (15) | |
| | | | | | | |
| Fair value remeasurement of contingent considerations, equity option and earn out arrangements | 1 | | — | | — | | — | | — | | — | | 1 | |
Disposals(2) | — | | (1) | | — | | — | | (9) | | — | | (10) | |
| Hyperinflation | — | | (6) | | — | | — | | — | | — | | (6) | |
| 2022 adjusted | 1,189 | | 575 | | 488 | | 240 | | 188 | | 11 | | 2,691 | |
| | | | | | | |
| | | | | | | |
| Organic movement | 22 | | 42 | | 46 | | 34 | | 4 | | 4 | | 152 | |
| | | | | | | |
| | | | | | | |
Acquisitions and disposals(2) | 15 | | 3 | | — | | 1 | | 4 | | 2 | | 25 | |
| | | | | | | |
| Exchange | 134 | | (2) | | 12 | | 21 | | (1) | | 2 | | 166 | |
| Hyperinflation | — | | 17 | | — | | — | | — | | — | | 17 | |
| 2023 reported | 1,360 | | 635 | | 546 | | 296 | | 195 | | 19 | | 3,051 | |
| Organic movement % | 2 | | 7 | | 9 | | 14 | | 2 | | 36 | | 6 | |
| | | | | | | |
Unaudited financial information
| | | | | | | | | | | | | | | | | | | | | | | |
| Operating profit before exceptional items | North America
£ million | Europe
£ million | Asia
Pacific
£ million | Latin America
and Caribbean
£ million | Africa
£ million | Corporate
£ million | Total
£ million |
| 2019 reported | | | | | | | 4,116 | |
| | | | | | | |
| Disposal | | | | | | | (29) | |
| 2019 adjusted | | | | | | | 4,087 | |
| | | | | | | |
| | | | | | | |
| Organic movement (2020) | | | | | | | (589) | |
| | | | | | | |
| | | | | | | |
| Organic movement (2021) | | | | | | | 627 | |
| | | | | | | |
| | | | | | | |
| Organic movement (2022) | | | | | | | 995 | |
| 2020, 2021 and 2022 movement on a constant basis | | | | | | | 1,033 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Operating profit before exceptional items | | | | | | | |
| 2022 reported | 2,454 | | 1,017 | | 711 | | 538 | | 315 | | (238) | | 4,797 | |
Exchange(1) | (31) | | (13) | | (5) | | (14) | | 11 | | (30) | | (82) | |
| | | | | | | |
| Fair value remeasurement of contingent considerations and equity option | (32) | | (36) | | — | | 8 | | — | | — | | (60) | |
| | | | | | | |
Acquisitions and disposals(2) | 6 | | (18) | | (26) | | — | | (18) | | — | | (56) | |
| Hyperinflation | — | | (1) | | — | | — | | — | | — | | (1) | |
| 2022 adjusted | 2,397 | | 949 | | 680 | | 532 | | 308 | | (268) | | 4,598 | |
| | | | | | | |
| | | | | | | |
| Organic movement | (57) | | 103 | | 200 | | 62 | | 37 | | (24) | | 321 | |
| | | | | | | |
| | | | | | | |
Acquisitions and disposals(2) | (18) | | (13) | | 5 | | — | | 27 | | (6) | | (5) | |
| Fair value remeasurement of contingent considerations, equity option and earn out arrangements | 87 | | 25 | | — | | 1 | | — | | — | | 113 | |
| | | | | | | |
Exchange(1) | 280 | | 18 | | 20 | | 66 | | (152) | | (28) | | 204 | |
| Hyperinflation | — | | 23 | | — | | — | | — | | — | | 23 | |
| 2023 reported | 2,689 | | 1,105 | | 905 | | 661 | | 220 | | (326) | | 5,254 | |
| Organic movement % | (2) | | 11 | | 29 | | 12 | | 12 | | (9) | | 7 | |
| | | | | | | |
| | | | | | | |
Organic operating margin % (3) | | | | | | | |
| 2023 | 38.6 | | 30.8 | | 28.5 | | 36.0 | | 21.1 | | n/a | 30.9 | |
| 2022 | 39.6 | | 30.9 | | 24.8 | | 35.3 | | 19.9 | | n/a | 30.7 | |
| Margin movement (bps) | (101) | | (13) | | 363 | | 72 | | 126 | | n/a | 15 | |
| | | | | | | |
| 2019 to 2021 reported growth % | | | | | | | 28 | |
| 2019 to 2023 growth on a constant basis % | | | | | | | 33 | |
| | | | | | | |
(i) For the reconciliation of sales to net sales, see page 213.
(ii) Percentages and margin movements are calculated on rounded figures.
Notes: Information in respect of the organic movement calculations
(1) The impact of movements in exchange rates on reported figures for operating profit was principally in respect of the favourable exchange impact of the strengthening of the US dollar and Mexican peso against the sterling, partially offset by the weakening of the Nigerian naira, Ghanaian cedi and the Turkish lira.
(2) Acquisitions and disposals that had an effect on volume, sales, net sales, marketing and operating profit in the year ended 30 June 2023, are detailed on page 285.
(3) Organic operating margin calculated by dividing Operating profit before exceptional items by net sales.
Business review (continued)
In the year ended 30 June 2023, the acquisitions and disposals that affected volume, sales, net sales, marketing and operating profit were as follows, as per footnote (2) on the previous page:
| | | | | | | | | | | | | | | | | |
| | Volume
equ. units million | Sales
£ million | Net sales
£ million | Marketing
£ million | Operating
profit
£ million |
| Year ended 30 June 2022 | | | | | |
| Acquisitions | | | | | |
| | | | | |
| Chase Distillery | — | | — | | — | | — | | 1 | |
| Lone River Ranch Water | — | | — | | — | | — | | 6 | |
| | | | | |
| — | | — | | — | | — | | 7 | |
| Disposals | | | | | |
| USL Popular brands | (23.3) | | (884) | | (137) | | — | | (26) | |
| Archers brand | (0.1) | | (16) | | (10) | | — | | (7) | |
| Meta Abo Brewery | (0.3) | | (16) | | (12) | | (1) | | 8 | |
| Picon brand | (0.7) | | (20) | | (19) | | (1) | | (12) | |
| Guinness Cameroun S.A. | (1.6) | | (179) | | (118) | | (8) | | (26) | |
| (26.0) | | (1,115) | | (296) | | (10) | | (63) | |
| | | | | |
| Acquisitions and disposals | (26.0) | | (1,115) | | (296) | | (10) | | (56) | |
| | | | | |
| Year ended 30 June 2023 | | | | | |
| Acquisitions | | | | | |
| | | | | |
| Mr Black | — | | 8 | | 7 | | 3 | | (2) | |
| Balcones Distilling | — | | 4 | | 4 | | 4 | | (12) | |
| | | | | |
| Mezcal Unión | — | | 8 | | 4 | | 3 | | (1) | |
| 21Seeds | 0.1 | | 9 | | 8 | | 8 | | (9) | |
| Don Papa Rum | 0.1 | | 10 | | 10 | | 3 | | (15) | |
| 0.2 | | 39 | | 33 | | 21 | | (39) | |
| Disposal | | | | | |
| USL Popular brands | 6.0 | | 225 | | 35 | | — | | 5 | |
| Archers brand | 0.7 | | 12 | | 10 | | — | | 2 | |
| Guinness Cameroun S.A. | 1.3 | | 156 | | 104 | | 4 | | 27 | |
| 8.0 | | 393 | | 149 | | 4 | | 34 | |
| | | | | |
| | | | | |
| | | | | |
| Acquisitions and disposals | 8.2 | | 432 | | 182 | | 25 | | (5) | |
Business review (continued)
Earnings per share before exceptional items
Earnings per share before exceptional items is calculated by dividing profit attributable to equity shareholders of the parent company before exceptional items by the weighted average number of shares in issue.
Earnings per share before exceptional items for the year ended 30 June 2023 and 30 June 2022 are set out in the table below:
| | | | | | | | |
| | 2023 £ million | 2022 £ million |
| Profit attributable to equity shareholders of the parent company | 3,734 | | 3,249 | |
| Exceptional operating and non-operating items | 294 | | 405 | |
| | |
| Exceptional tax items and tax in respect of exceptional operating and non-operating items | (186) | | (31) | |
| Exceptional items attributable to non-controlling interests | (141) | | (103) | |
| Profit attributable to equity shareholders of the parent company before exceptional items | 3,701 | | 3,520 | |
| Weighted average number of shares | million | million |
| Shares in issue excluding own shares | 2,264 | | 2,318 | |
| Dilutive potential ordinary shares | 7 | | 7 | |
| Diluted shares in issue excluding own shares | 2,271 | | 2,325 | |
| | pence | pence |
| Basic earnings per share before exceptional items | 163.5 | | 151.9 | |
| Diluted earnings per share before exceptional items | 163.0 | | 151.4 | |
Free cash flow
Free cash flow comprises the net cash flow from operating activities aggregated with the net cash received/paid for working capital loans receivable, cash paid or received for investments and the net cash expenditure paid for property, plant and equipment and computer software that are included in net cash flow from investing activities.
The remaining components of net cash flow from investing activities that do not form part of free cash flow, as defined by the group’s management, are in respect of the acquisition and sale of businesses and non-working capital loans to and from associates.
The group’s management regards a portion of the purchase and disposal of property, plant and equipment and computer software as ultimately non-discretionary since ongoing investment in plant, machinery and technology is required to support the day-to-day operations, whereas acquisition and sale of businesses are discretionary.
Where appropriate, separate explanations are given for the impacts of acquisition and sale of businesses, dividends paid and the purchase of own shares, each of which arises from decisions that are independent from the running of the ongoing underlying business.
Free cash flow reconciliations for the years ended 30 June 2023 and 30 June 2022 are set out in the table below:
| | | | | | | | |
| | 2023 £ million | 2022 £ million |
| Net cash inflow from operating activities | 3,024 | | 3,935 | |
| Disposal of property, plant and equipment and computer software | 13 | | 17 | |
| Purchase of property, plant and equipment and computer software | (1,180) | | (1,097) | |
| Movements in loans and other investments | (57) | | (72) | |
| Free cash flow | 1,800 | | 2,783 | |
Business review (continued)
Operating cash conversion
Operating cash conversion is calculated by dividing cash generated from operations excluding cash inflows and outflows in respect of exceptional items, dividends received from associates, maturing inventories, provisions, other items and post employment payments in excess of the amount charged to operating profit by operating profit before depreciation, amortisation, impairment and exceptional operating items.
The measure is excluding any hyperinflation adjustment above the organic treatment of hyperinflationary economies. The ratio is stated at the budgeted exchange rates for the respective year and is expressed as a percentage.
Operating cash conversion for the years ended 30 June 2023 and 30 June 2022 were as follows:
| | | | | | | | |
| | 2023
£ million | 2022
£ million |
| Profit for the year | 3,766 | | 3,338 | |
| Taxation | 970 | | 1,049 | |
| Share of after tax results of associates and joint ventures | (370) | | (417) | |
| Net finance charges | 594 | | 422 | |
| Non-operating items | (328) | | 17 | |
| Operating profit | 4,632 | | 4,409 | |
| Exceptional operating items | 622 | | 388 | |
| Fair value remeasurement | (124) | | (60) | |
Depreciation, amortisation and impairment(1) | 496 | | 489 | |
| Hyperinflation adjustment | (28) | | (10) | |
| Retranslation to budgeted exchange rates | (198) | | 27 | |
| 5,400 | | 5,243 | |
| | |
| Cash generated from operations | 4,779 | | 5,212 | |
Net exceptional cash paid(2) | 25 | | 15 | |
Post employment payments less amounts included in operating profit(1) | 25 | | 89 | |
Net movement in maturing inventories(3) | 577 | | 360 | |
| Provision movement | 65 | | 58 | |
| Dividends received from associates | (219) | | (190) | |
Other items(1) | 14 | | (53) | |
| Hyperinflation adjustment | (29) | | (22) | |
| Retranslation to budgeted exchange rates | (198) | | 42 | |
| 5,039 | | 5,511 | |
| | |
| Operating cash conversion | 93.3 | % | 105.1 | % |
(1) Excluding exceptional items.
(2) Exceptional cash payments for winding down our Russian operations was £13 million (2022 – £13 million) and for Supply chain agility programme was £12 million (2022 - £nil). In the year ended 30 June 2022 exceptional cash payments for other donations were £2 million.
(3) Excluding non-cash movements such as exchange and the impact of acquisitions and disposals.
Business review (continued)
Return on average invested capital
Return on average invested capital is used by management to assess the return obtained from the group’s asset base and is calculated to aid evaluation of the performance of the business.
The profit used in assessing the return on average invested capital reflects operating profit before exceptional items attributable to equity shareholders of the parent company plus share of after tax results of associates and joint ventures after applying the tax rate before exceptional items for the fiscal year. Average invested capital is calculated using the average derived from the consolidated balance sheets at the beginning, middle and end of the year. Average capital employed comprises average net assets attributable to equity shareholders of the parent company for the year, excluding net post employment benefit assets/liabilities (net of deferred tax) and average net borrowings. This average capital employed is then aggregated with the average restructuring and integration costs net of tax, and goodwill written off to reserves at 1 July 2004, the date of transition to IFRS, to obtain the average total invested capital.
Calculations for the return on average invested capital for the years ended 30 June 2023 and 30 June 2022 are set out in the table below:
| | | | | | | | |
| | 2023 £ million | 2022 £ million |
| Operating profit | 4,632 | | 4,409 | |
| Exceptional operating items | 622 | | 388 | |
| Profit before exceptional operating items attributable to non-controlling interests | (173) | | (192) | |
| Share of after tax results of associates and joint ventures | 370 | | 417 | |
| Tax at the tax rate before exceptional items of 23.0% (2022 – 22.5%) | (1,294) | | (1,173) | |
| 4,157 | | 3,849 | |
| Average net assets (excluding net post employment benefit assets/liabilities) | 8,924 | | 8,428 | |
| Average non-controlling interests | (1,638) | | (1,641) | |
| Average net borrowings | 14,949 | | 12,859 | |
| Average integration and restructuring costs (net of tax) | 1,639 | | 1,639 | |
| Goodwill at 1 July 2004 | 1,562 | | 1,562 |
| Average invested capital | 25,436 | | 22,847 | |
| Return on average invested capital | 16.3% | 16.8% |
Business review (continued)
Adjusted net borrowings to adjusted EBITDA
Diageo manages its capital structure with the aim of achieving capital efficiency, providing flexibility to invest through the economic cycle and giving efficient access to debt markets at attractive cost levels. The group regularly assesses its debt and equity capital levels to enhance its capital structure by reviewing the ratio of adjusted net borrowings to adjusted EBITDA (earnings before exceptional operating items, non-operating items, interest, tax, depreciation, amortisation and impairment).
Calculations for the ratio of adjusted net borrowings to adjusted EBITDA for the years ended 30 June 2023 and 30 June 2022 are set out in the table below:
| | | | | | | | |
| | 2023 £ million | 2022 £ million |
| Borrowings due within one year | 1,701 | | 1,522 | |
| Borrowings due after one year | 14,801 | | 14,498 | |
| Fair value of foreign currency derivatives and interest rate hedging instruments | 30 | | (73) | |
| Lease liabilities | 448 | | 475 | |
| Less: Cash and cash equivalents | (1,439) | | (2,285) | |
| Net borrowings | 15,541 | | 14,137 | |
| Post employment benefit liabilities before tax | 373 | | 402 | |
| Adjusted net borrowings | 15,914 | | 14,539 | |
| Profit for the year | 3,766 | | 3,338 | |
| | |
| Taxation | 970 | | 1,049 | |
| Net finance charges | 594 | | 422 | |
| Depreciation, amortisation and impairment (excluding exceptional impairment) | 496 | | 492 | |
| Exceptional impairment | 570 | | 336 | |
| EBITDA | 6,396 | | 5,637 | |
| Exceptional operating items (excluding impairment) | 52 | | 49 | |
| Non-operating items | (328) | | 17 | |
| Adjusted EBITDA | 6,120 | | 5,703 | |
| Adjusted net borrowings to adjusted EBITDA | 2.6 | 2.5 |
Tax rate before exceptional items
Tax rate before exceptional items is calculated by dividing the total tax charge before tax charges and credits in respect of exceptional items, by profit before taxation adjusted to exclude the impact of exceptional operating and non-operating items, expressed as a percentage. The measure is used by management to assess the rate of tax applied to the group’s operations before tax on exceptional items.
The tax rates from operations before exceptional and after exceptional items for the years ended 30 June 2023 and 30 June 2022 are set out in the table below:
| | | | | | | | |
| | 2023 £ million | 2022 £ million |
| Taxation on profit (a) | 970 | | 1,049 | |
| Tax in respect of exceptional items | 129 | | 31 | |
| Exceptional tax credit | 57 | | — | |
| Tax before exceptional items (b) | 1,156 | | 1,080 | |
| Profit before taxation (c) | 4,736 | | 4,387 | |
| Non-operating items | (328) | | 17 | |
| | |
| Exceptional operating items | 622 | | 388 | |
| Profit before taxation and exceptional items (d) | 5,030 | | 4,792 | |
| Tax rate after exceptional items (a/c) | 20.5 | % | 23.9 | % |
| Tax rate before exceptional items (b/d) | 23.0 | % | 22.5 | % |
Other definitions
Volume share is a brand’s retail volume expressed as a percentage of the retail volume of all brands in its segment. Value share is a brand’s retail sales value expressed as a percentage of the retail sales value of all brands in its segment. Unless otherwise stated, share refers to value share.
Net sales are sales less excise duties. Diageo incurs excise duties throughout the world. In the majority of countries, excise duties are effectively a production tax which becomes payable when the product is removed from bonded premises and is not directly related to the value of sales. It is generally not included as a separate item on external invoices; increases in excise duties are not always passed on to the customer and where a customer fails to pay for a product received, the group cannot reclaim the excise duty. The group therefore recognises excise duty as a cost to the group.
Price/mix is the number of percentage points difference between the organic movement in net sales and the organic movement in volume. The difference arises because of changes in the composition of sales between higher and lower priced variants/markets or as price changes are implemented.
Shipments comprise the volume of products sold to Diageo’s immediate (first tier) customers. Depletions are the estimated volume of the onward sales made by Diageo's immediate customers. Both shipments and depletions are measured on an equivalent units basis.
References to emerging markets include Poland, Eastern Europe, Turkey, Latin America and Caribbean, Africa and Asia Pacific (excluding Australia, Korea and Japan).
References to reserve brands include, but are not limited to, Johnnie Walker Blue Label, Johnnie Walker Green Label, Johnnie Walker Gold Label Reserve, Johnnie Walker Aged 18 Years, John Walker & Sons Collection and other Johnnie Walker super and ultra-premium brands; The Singleton, Cardhu, Talisker, Lagavulin, Oban and other malt brands; Buchanan’s Special Reserve, Buchanan’s Red Seal; Haig Club whisky; Copper Dog whisky; Roe & Co; Bulleit Bourbon, Bulleit Rye; Orphan Barrel whiskey; Balcones whisky and rum; Tanqueray No. TEN and Tanqueray Malacca gin; Aviation, Chase, Jinzu and Villa Ascenti gin; Cîroc, Ketel One vodka, Ketel One Botanical; Don Julio, Casamigos, DeLeón and 21Seeds tequila; Mezcal Unión mezcal; Zacapa, Bundaberg Master Distillers' Collection, Pampero Aniversario and Don Papa rum; Shui Jing Fang, Seedlip, Belsazar and Pierde Almas.
References to global giants include the following brand families: Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Tanqueray and Guinness. Local stars include Buchanan’s, Bundaberg, Crown Royal, JεB, McDowell’s, Old Parr, Yenì Raki, Black & White, Shui Jing Fang, Windsor and Ypióca. Global giants and local stars exclude ready to drink, non-alcoholic variants and beer except Guinness. References to Shui Jing Fang represent total Chinese white spirits of which Shui Jing Fang is the predominant brand.
References to ready to drink also include ready to serve products, such as pre-mixed cans in some markets.
References to beer include cider, flavoured malt beverages and some non-alcoholic products such as Malta Guinness.
The results of Hop House 13 Lager are included in the Guinness figures.
There is no industry-agreed definition for price tiers and for data providers such as IWSR, definitions can vary by market. Diageo bases price tier definitions on a methodology that uses external metrics (including market pricing data from Nielsen, IRI etc., as well as the IWSR segmentation) for benchmarking and internal pricing metrics for a consistent segmentation.
References to the disposal of the USL Popular brands include non-exhaustively the Haywards, Old Tavern, White Mischief, Honey Bee, Green Label and Romanov brands.
References to the group include Diageo plc and its consolidated subsidiaries.
Non-financial reporting boundaries and methodologies
The non-financial reporting boundaries and methodologies outlined here relate to the social and environmental performance disclosures set out in the Annual Report and the ESG Reporting Index. We describe below the general reporting methodologies and boundaries related to both non-environmental and environmental reporting. Where there are exceptions to these general reporting methodologies and boundaries, these have been included with the specific metric in the tables that follow.
General reporting methodology and boundaries, covering both non-environmental and environmental metric reporting
I. Reporting period
Our reporting covers the financial year ended 30 June 2023 unless otherwise stated.
II. Scope
Unless otherwise stated(1), the boundaries for all non-financial information disclosed in the Annual Report and the ESG Reporting Index include the performance of the global operations of Diageo plc and its subsidiaries, together with the attributable share of the results of significant joint ventures and joint operations.
The reporting boundaries are based on the principles outlined by the non-financial reporting strategy of our management, the nature of each indicator and, in the case of our greenhouse gas (GHG) emissions metrics, the Greenhouse Gas Protocol.
Environmental data and health and safety data is collected and reported for all operational sites and office sites with more than 50 employees where we have operational control. The environmental impacts associated with leased facilities that do not meet the criteria already mentioned are excluded and considered immaterial to the company’s overall impacts. This scope is reviewed every year to assess the data and extent of impacts.
GHG emissions associated with leased vehicles under operational control are being reviewed and reassessed to determine material significance to overall emissions and extent of overlap with Scope 3 indirect emissions. This review will be concluded in fiscal 24; our current estimate indicates leased vehicles may contribute 4%-5% of Scope 1 emissions or <0.5% of Scope 3 emissions.
Material changes to environmental reporting methodologies are ratified at quarterly 2030 grain to glass Strategic Business Review meetings, chaired by the President, Global Supply Chain & Procurement and Chief Sustainability Officer.
Exceptions to and limitations of each indicator are explained in the following pages section of this document.
III. Baseline and targets
The financial year ended 30 June 2020 is our baseline year. It applies to the majority of our ‘Society 2030: Spirit of Progress‘ targets. Exceptions are described in the following pages. The baseline data is used as the basis for calculating progress against our targets.
We aim to achieve each target by fiscal 30, unless otherwise stated in the following pages of this document.
IV. Acquisitions and disposals
New acquisitions are included in the consolidated reporting for non-financial disclosure from the date when control passes or as soon as practically feasible, and no later than one year after assuming operational control.(2) This duration varies as each new acquisition has unique systems and processes that must be integrated. In case of disposals, data associated with the divestment is removed from the baseline, intervening years and current year unless otherwise stated in the following pages.
V. Restatements
We may have to restate historical data due to structural changes in our operations, including from acquisitions and divestments; improvements in data accuracy and calculation methodologies; material changes to relevant policies; and material changes in our non-financial reporting.
To determine whether we need to restate historical data, we examine whether the qualitative or quantitative impacts of the changes to our non-financial reporting are material enough to compromise the accuracy, consistency and relevance of the reported information. In case a restatement for environmental data is necessary, we restate the data for the baseline year and intervening years.
In case of our environmental data, we may need to adjust data to reflect updates to GHG emission factors, in line with the GHG Protocol recommendations; and any changes in reporting policy that result in a material change to the baseline of more than 1%. We also restate data where we can show that structural changes regarding outsourcing and insourcing have an impact of more than 1%. In certain cases, where historical data is unavailable, the environmental impacts for the baseline year and intervening years are extrapolated from current environmental impact data, based on production patterns.
In fiscal 23, the baseline year GHG emissions impacts were restated to reflect changes to CO2e emission factors and updated calorific values.
(1) Non-financial information, including baseline information, excludes the performance attributable to one of our business units in Greater China due to local regulatory restrictions. We believe the exclusion of this data does not materially impact our non-financial performance. We restate baseline and intervening years' non-financial information to reflect divestments, acquisitions, the exclusion of a business unit in China due to local regulatory restrictions, and any other changes that would otherwise compromise the accuracy, consistency and relevance of the reported information.
(2) We define operational control using the definition of accounting standards for most of our ESG metrics. For greenhouse gas emissions, our definition is aligned with the Greenhouse Gas Protocol.
VI. Reliability and accuracy of data
We have processes that govern the collection, review and validation of non-financial data included in this report, at market, regional and global levels. We have clear reporting lines and documentation of our processes; this report provides more detail about our reporting methodologies and calculation processes. Reporting methodologies are reviewed and updated each year by leadership teams.
While we make every effort to capture all information as accurately as possible, it is neither feasible nor practical to measure all data with absolute certainty. Where we have made estimates or exercised judgement, this is highlighted within the reporting methodologies.
Some of our listed subsidiaries also publish sustainability information either as standalone reports or as part of their annual report. Examples of sustainable information reporting are linked below:
•United Spirits Limited: https://media.diageo.com/diageo-corporate-media/media/wxaflz30/united-spirits-limited-esg-reporting-index-2022.pdf
•Sichuan Swellfun Co, Ltd: https://www.swellfun.com/ueditor/php/upload/file/20230426/1682490877231414.pdf
•East Africa Breweries PLC: https://www.eabl.com/sites/default/files/documents/EABL_Sustainability_Report-2022.pdf
•Guinness Nigeria plc: https://www.guinness-nigeria.com/PR1346/aws/media/14677/f22-sustainability-report.pdf
VII. Reporting systems
We use four main systems to collect, validate and analyse reported data.
•Human Resources data is reported at site level using Workday, our global information management systems. HR data is collected on a monthly basis for all Workday markets.(1) Non-Workday markets(2) data is manually captured offline via HR Directors and the points of contact only for annual reports. Both Workday and non-Workday markets data are then consolidated.
•Health and Safety information for performance measures is collected locally, on a monthly basis, using site held incident reports. This is collated and analysed using a web-based information management system and reported externally on an annual basis.
•Environmental data is collected on key measures of environmental performance every year. This is collated and analysed using a web-based environmental management system.
•Market-level ‘Society 2030: Spirit of Progress‘ data: Where ‘Society 2030: Spirit of Progress‘ programmes are managed at a local level, data is collated every quarter. The data is compiled at market, regional and global levels, alongside our other ‘Society 2030: Spirit of Progress‘ targets, and is reviewed by general managers, functional leadership teams, the 2030 grain to glass Strategic Business Review (SBR) and the Global Executive Committee during quarterly meetings.
This regular assessment of performance enables us to manage programme risks and opportunities and helps us ensure that we have the right level of resources to deliver on our commitments.
Scope and methodology of physical and transition climate risk scenario analysis reported on page 294.
Scenario analysis of physical risks
Important note on scenario analysis:
Climate risk scenario analysis has limitations: it is not a predictor of the future and it is limited by the assumptions used, which themselves are subject to uncertainty. No single scenario is likely to materialise in the coming decades, and we are all likely to be exposed to both physical and transition risks as the world continues to warm as a consequence of emissions already in the atmosphere. The pathway to reducing emissions is also highly variable, as governments and industry pursue a variety of means, such as introducing regulation and developing new technologies. Nevertheless, scenario analysis is a powerful tool to understand how our business could be impacted under certain plausible but severe future conditions, and it allows us to understand where risks and opportunities are most likely to materialise, to understand trends and to integrate these into our strategy.
Following the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), we conducted scenario analysis to determine the likely financial impact of the most important physical risks on our assets and operations. The physical risks we identified of most importance were:
1.Water supply: Inability to produce brands due to constrained water supply as a result of drought caused by chronic climate change.
2.Agricultural material supply: Increased cost of raw materials due to scarcity caused by changes in growing conditions caused by chronic climate change
3.Site integrity: Inability to produce products, or damage to stored products due to acute weather events (floods or storms)
4.Disruption to agricultural material supply: Inability to receive agricultural materials due to acute weather events (floods or storms).
Using the best available climate data and natural catastrophe-modelling techniques, our climate resilience partners calculated projected Estimated Annual Losses (EALs) and Value at Risk (VaR) for the present day and two future time periods (the 2030s and 2050s) under two climate scenarios. For most climate variables, these climate scenarios include a ‘moderate’ emissions reduction pathway (RCP4.5 or SSP245) and a ‘worst-case’ pathway (RCP 8.5 or SSP 585). The results were expressed as:
Present day and projected EALs driven by:
•The impact of drought, river floods and tropical windstorms on owned and third-party-operated production assets
•The impact of floods and tropical windstorms on supplier assets (glass and cans);
and present day and projected VaR associated with:
•The exposure of production assets to water stress
•The exposure of production and supplier assets to tropical windstorms.
Please see the diagram on page 294 for a summary of the scope of our physical and transition risk assessments and scenario analysis.)
(1) Markets using our Workday online Human Resource system
(2) Non-Workday markets refer to markets where the Workday online Human Resource System is not used.
A summary of the scope of our physical and transition risk assessments and scenario analysis
| | | | | | | | | | | | | | | | | | | | |
(i)Timeframe | Short term (0-5yrs) | Medium term (2030) | Long term (2050) |
| Geography | All Diageo and key third-party operations in North America, Scotland (fiscal 21); India, Africa, Mexico and Turkey (fiscal 22); and Asia Pacific, Europe and Latin America and Caribbean (fiscal 23). |
| Risk types | All percentages, unless otherwise stated, are in respect of holdings of ordinary share capitalPhysical risks
Water (availability, quality, temperature), temperature, flooding, landslide, wildfires, wind, humidity | Transition risks and are equivalentopportunities |
| Temperature scenarios | +4 to the percentages of voting rights held by the group.+5ºC (extreme)
RCP 8.5' | +2 to +3ºC (moderate)
RCP 4.5' | 1.5ºC to 2ºC (Paris agreement)
RCP 2.6' |
| Scope | | | | | | |
(ii)Raw materials 1,200+ suppliers' sites Key raw materials* (wheat, barley, maize, cane and beet sugar, vanilla, aniseed, grapes, broken rice, sorghum, agave, dairy, hops) *+4 to +5ºC scenario only | Percentage ownership excludes 2.38% owned by the USL Benefit Trust.
Processing Approximately 250 Diageo and third-party operations' sites Detailed assessments of 39 sites | Distribution Key road, rail routes Key sea ports (69) | Risks reviewed Policy and legal risks Technology risks Market risks Reputation risks | Opportunities Resource efficiency Energy source Products and services Markets |
Scenario analysis Energy Transport Packaging Raw materials | Scenario analysis Pack weight reduction Circular offerings |
Scenario analysis of transition risks
Over fiscal years 21-23, we have conducted scenario analysis of the impact on our financial performance of transition risks stemming from a Paris-aligned scenario. Our modelling envisages a successful transition to a low-carbon economy in time to keep the temperature rise to 1-2⁰C by 2100 and assumes a variety of decarbonisation challenges and opportunities relating to ingredients, energy, packaging and transport costs, and changes in demand for our products (to 2030 and 2050). Over consecutive years, we have refined the model and incorporated data relating to our entire business, including production volume, sales, raw materials and packaging costs, and projected growth rates by category and market to inform future scenarios.
In modelling the financial impact of a successful transition to a low-carbon economy, we considered two scenarios:
1.A baseline scenario which incorporates stated policies and national targets that are already in place and have detailed measures for their realisation; and
2.A transition scenario that assumes the world successfully reaches net zero emissions by 2050. This scenario considers necessary changes in the global energy sector and associated changes across all other sectors of the economy that can reasonably be modelled.
Both scenarios rely on a combination of internal assumptions (e.g., production costs, sales and margin growth rates, product mix, etc) and external factors (e.g., carbon pricing, greening of energy production, decarbonisation of industry). External models available from the International Energy Agency, the Intergovernmental Panel on Climate Change and other institutions were supplemented where necessary by our expert partners' internal models. Together, these models gave us a range of plausible assumptions designed to capture a trajectory of changes in demand, costs, prices, regulation, technology and capital investments in relevant markets and business segments, that could result in the world achieving net zero emissions by 2050. We looked at how combinations of these changes might affect us both positively (increased demand for sustainable products) and negatively (higher costs) and estimated the combined effect on our cash flow to both 2030 and 2050. Outlined in the table on page 295, below are the materials that most affect our input costs, which may go up or down depending on the situation. We have modelled costs based on our exposure to global versus local changes; so, for example, glass and aluminium are procured globally, while the cost of energy, for example, is always local. For each scenario, we then estimated the prices of major input costs, where relevant by geography, and modelled the impact they would have on our operating profit.
Input costs assessed in the scenario analysis by geography
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(iii)Region | Directly owned by Diageo plc.
Global | UK | US | Canada | Mexico | Turkey | India | Africa | Asia Pacific | LAC | Ireland |
| Glass | l | | | | | | | | | | |
(iv)Aluminium | l | | | | | | | | | | |
| Land transport | l | | | | | | | | | | |
| Ocean transport | l | | | | | | | | | | |
| Energy | | l | l | l | l | l | l | l | l | l | |
| Electricity | | l | l | l | l | l | l | l | l | l | |
| Raw materials: | | | | | | | | | | | |
| Barley | l | | | | | | | | | | |
| Wheat | l | | | | | | | | | | |
| Maize | l | | | | | | | | | | |
| Rice | l | | | | | | | | | | |
| Sorghum | l | | | | | | | | | | |
| Sugar | l | | | | | | | | | | |
| Vanilla | | | | | | | | l | | | |
| Aniseed | | | | | | l | | | | | |
| Agave | | | | | l | | | | | | |
| Grapes | | | | | | l | | | | | |
| Hops | l | | | | | | | | | | |
| Dairy | | | | | | | | | | | l |
Promote positive drinking
As a responsible business, we want to change the way people drink – for the better. This is why we promote moderate drinking and invest in education and programmes to discourage the harmful use of alcohol. Around the world, we reach audiences with messages that aim to change attitudes, whether it’s highlighting the harm of underage drinking or binge drinking, warning of the dangers of drink driving, or using our brands to highlight the importance of moderation.
Our work speaks to audiences across the globe. We continue to innovate and look for ways to improve as we strive to engage more and more people through our work to promote positive drinking. This desire to learn and improve extends to how we measure and evaluate the impact of our work and its effect on changing people’s attitudes.
We have reached our DRINKiQ target by launching it in all our markets where legally permissible, but we are determined to continue promoting DRINKiQ so that consumers have access to information that can increase their knowledge and awareness of the impact of harmful drinking.
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| Target | Champion health literacy and tackle harm through DRINKiQ in every market where we live, work, source and sell |
| Performance measure | Number of markets that have launched DRINKiQ |
| Definition | French limited liability company.•Markets required for DRINKiQ rollout were identified during the initial project scoping phase in fiscal 20. The baseline is the total number of Diageo markets where we live, work, source and sell.
•‘Launched’ means the DRINKiQ website is live and accessible by consumers in the market from November 2020. |
| Data preparation | •The Global Spirit of Progress team manages all aspects of DRINKiQ design, development and deployment (except China, where we had to use a local vendor for build due to firewall issues). •We engage and manage the global agency that is responsible for building and testing every website in every market throughout all stages of development, user acceptance testing and deployment. •The agency web developers who build the DRINKiQ website undertake a series of steps to deploy DRINKiQ to the production environment. Once the deployment is complete, the agency conducts testing to verify overall site performance and functionality is operating as intended. The completion of the testing concludes the deployment process, and the site/updates are deemed as ‘live’ since they are available on www.drinkiq.com. |
| Scope exception | Turkey is the only market in which we are unable to roll out DRINKiQ due to legal restrictions. Travel Retail Asia covers multiple geographical territories and is therefore not counted as an individual market in scope for delivering our DRINKiQ target. |
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| Target | Leverage Diageo marketing and innovation to make moderation the norm – reaching 1 billion people with dedicated responsible drinking messaging |
| Performance measure | Number of people reached through campaigns and training specifically designed to promote moderation |
| Definition | We deliver responsible drinking campaigns and training through social media, viral videos, events, traditional media campaigns and other forms of marketing by Diageo brands. |
| Scope exception | Markets are only included where we have verifiable media data provided by third-party partners. |
| Reporting period | 1 June to 31 May. Our baseline year for calculating cumulative progress is fiscal 21. |
| Data preparation | Data on how many people our campaigns reach is collected by our media agency partners and reported to us. Diageo’s media agency partners manage measurement and verification of this data through various industry-standard practices optimised for each media channel. •Digital media: Cookies/pixels provide unique consumer identifiers. These identifiers provide us with the ability to estimate how many people we reach across a single campaign. •Non-digital media: Utilising industry-standard audience measurement for each platform, we can estimate how many people our campaigns reach for any TV, radio, out of home or other non-digital channel. For example, we utilise industry-standard metrics, such as Nielsen, to estimate viewer audience for a TV programme during which we ran an ad. For out of home, industry-standard measurement of foot traffic, vetted through third-party organisations, is used to estimate the number of people who pass by a billboard. To attempt to prevent double counting, we also adjust the data in the context of the adult population for each market. Each market's total annual reach figure comprises either the highest number of people reached in any given quarter in that market, or the highest number of people reached by a specific campaign in that market, whichever is the greater. |
| Limitations | Reach data cannot be as accurately deduplicated over periods of time longer than a year. When reporting how many people we reach over time periods of longer than one fiscal year, figures for individual fiscal years are added together to provide a cumulative number. |
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| Target | Scale up our SMASHED partnership and educate 10 million young people, parents and teachers on the dangers of underage drinking |
| Performance measure | •Number of people educated on the dangers of underage drinking through a Diageo-supported education programme •Number of people who confirmed changed attitudes on the dangers of underage drinking following participation in a Diageo-supported education programme |
| Definition | SMASHED is our flagship underage drinking programme, developed and delivered in partnership with Collingwood Learning (Collingwood) and sponsored by Diageo. Our SMASHED partnership aims to change attitudes to underage drinking through live theatre performances and workshops and interactive online events. Live: A live or virtual theatre performance in schools or other community setting, with interactive workshops for students, resources for teachers and parents, and comprehensive evaluation. Online: An innovative and engaging e-learning course, telling the SMASHED story though filmed clips, with interactive learning tools, student assessment and teacher support. Offline: SMASHED Online can also be delivered offline through PowerPoint and video clips. People educated: Target age group (10-17), who have participated in the full 60-minute live or online learning experience. Completions for online are counted only on course completion, and live completion is counted when the number, as stated by the teacher, has completed the full 60-minute session, which is then confirmed by the local delivery partner. Changed attitudes: A young person who confirmed a changed attitude is someone who responds to the post-survey question by stating that they are less likely to drink underage. This is supported by evidenced progression through pre- and post-performance surveys against all other learning outcomes, with the ‘less likely to drink underage’ results as the core indicator. |
| Scope exception | Local adaptations: Collingwood has set criteria for partners – a local delivery partner, ministry of education (or similar) and sponsors – to support the success of local adaptations on the ground. Each delivery partner will culturally and linguistically adapt the storyline and interactive elements to suit the local audience, with guidance from Collingwood. Collingwood collaborates with delivery partners to ensure they comply with the original content while accommodating appropriate adaptations. This is also supported by programme sponsors and educational stakeholders to support links with existing curriculum. Evaluation questions remain consistent worldwide, both pre- and post-programme. Collingwood does not allow changes to the content or intent of the questions. The only adaptations made are for language translation. |
| Reporting period | The complexity of gathering data from hundreds of schools globally with different academic years means there is a lag in reporting information from our live programmes. Each financial year we include data from 1 June to 31 May. The baseline year for the reporting of cumulative progress towards our target is our financial year ended 30 June 2018; reporting is therefore cumulative progress from July 2018 onwards. |
Additional information for shareholders299
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| Target (continued) | Scale up our SMASHED partnership and educate 10 million young people, parents and teachers on the dangers of underage drinking |
| Data preparation | The number of people educated is supplied by in-country delivery partners to Collingwood. When SMASHED is delivered by a third-party and is partially funded by Diageo, we only claim the proportion of people educated that our funding contributes to. From September 2022, where an audience numbers over 500 students in one session, we have categorised these as ‘large-scale special events’. Where large-scale events are run if there are a sufficient number of facilitators (ratio 1:200) then the full number of people educated is included. If the number of facilitators present is below this ratio, then the number of people in attendance are capped at the large-scale event number. The number of people educated is calculated by adding together the number of people reached in each country. SMASHED Live operates pre- and post-evaluation surveys of at least 20% of the target audience of young learners as part of the programme on the day. This represents 20% of the participating schools on each tour. The following sampling criteria have been established to measure attitude change: •Assess 20% of programme participants through pre- and post-evaluation surveys. •The participants that make the 20% sample have to be selected randomly. •If the sample is less than 200 people, the same participants must take the pre- and post-evaluation surveys. •The sample has to be approximately 50% male and 50% female. The number of people who confirmed changed attitude is calculated by projecting the results of the survey, for those who have confirmed in the post-survey question that they are less likely to drink underage, to the total number of people educated for the events run. The data, alongside supporting evidence is supplied by delivery partners and then consolidated and reviewed by Collingwood before being shared with us for review and reporting. We have assumed that teachers are an impartial and accurate provider of student numbers, with clear knowledge of the groups allocated to SMASHED. We have also assumed that students participating in SMASHED Live and Online have adequate literacy skills to understand and complete written evaluation forms. |
| Limitation | We consider double counting to be highly unlikely, given the activity is only delivered once to any audience within the curricular requirements for the year. No unique personal identifiers are collected, for data privacy reasons. •We avoid having schools run SMASHED Live and Online concurrently by offering only a single option in the vast majority of countries. Where two programmes are available, we mitigate the risk of duplication by offering programmes strategically to different school areas. In the unlikely event a school uses SMASHED Online and SMASHED Live, we assume that the school will utilise courses for different student groups. We mitigate the risk further by checking participating school data quarterly and communicating with teachers. •We have assumed that the number of students expected to either repeat a year group or change secondary schools is negligible, based on the most recent statistics from third parties. |
Legal proceedings | | | | | |
| Target | Extend our UNITAR partnership, and promote changes in attitudes to drink driving, reaching five million people by 2030 |
| Performance measure | •Number of people educated about the dangers of drink driving •Number of people who confirmed attitudinal change on the dangers of drink driving through the Diageo supported programme •Number of law enforcement officers trained through the UNITAR High Visibility Enforcement (HVE) programme. |
| Definition | We run two programmes that aim to address the dangers of drink driving. Our Wrong Side of the Road (WSOTR) programme, primarily delivered online, is designed to help people understand the consequences of drink driving by listening to the repercussions for people who decided to get behind the wheel after drinking. All stories are real and aim to help prevent other people from making the same mistakes. The purpose is to show the effects that this decision can have on the individual and the people around them, helping viewers to consider what would happen if they were in a similar situation. We also partner with UNITAR on its high-visibility enforcement training programme, an online training course which aims to help government and law enforcement officials design and implement interventions that contribute to reducing the number of alcohol-related fatalities and injuries. Changed attitudes: A person who confirmed a changed attitude is someone who responds to the post-experience survey by stating that they are less likely to drink and drive because of participating in the Diageo learning experience. |
| Scope exception | For programmes that are partially funded by Diageo, we only claim the proportion of people educated that our funding contributes to. |
| Reporting period | 1 July to 30 June. Our baseline year is fiscal 22. |
| Data preparation | To measure attitude change, at least 20% of WSOTR participants are assessed through a pre- and post-programme survey as to whether they are less likely to drink and drive because of their participation. The different formats are reported in the following ways: •Online: The online completions are reported daily through a data report pulled from Diageo’s internal PowerBi system. •Online through third parties: Depending on the format, their numbers can either be generated by the main system through the daily report or through their own reports. They must provide back-up data, which is then validated by the Diageo global team. •Offline: In markets where internet access is a challenge, we have tailored the experience to be used offline at events or high-footfall locations. Completions are captured on forms that are then collated and input to a report. These reports are submitted quarterly and reviewed and verified by the global team. |
| Limitations | - |
In February 2020,
Doing business the right way
from grain to glass
We want to do business in the right way every day, everywhere. This is about ensuring our people and suppliers demonstrate integrity, live our values, and behave in an ethical way that underpins our Code of Conduct. We expect everyone who works for us and alongside us to uphold human rights and stand up for what is right, as we grow sustainably and responsibly.
Governance and ethics
Working with integrity is an important part of who we are and how we achieve our performance ambition to be the best performing, most trusted and respected consumer products company in the world.
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| Performance measure | Code of Business Conduct Mandatory Training |
| Definition | Annually, we request all Diageo employees to complete the Code of Business Conduct e-learning. This requires employees to confirm their commitment to their compliance and ethics accountabilities, and certify that they have read, understood, and complied with our Code of Business Conduct and supporting Global policies. |
| Scope exception | Employees on long-term leave e.g. family leave, sickness leave. |
| Data preparation | We deliver the Code of Business Conduct e-learning through our global online training tool, My Learning Hub, which holds a record of who has participated in and completed the course. Participation and completion records are reported to market and function leadership teams and reviewed by Business Integrity leads. |
| Limitation | - |
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| Performance measure | SpeakUp |
| Definition | We inform all employees and third parties about our SpeakUp whistleblowing telephone service and online portal, which is available in all 20 of our Code languages. The service is run by an independent external party 24 hours a day, 365 days a year. |
| Scope exception | - |
| Data preparation | We capture allegations reported either via SpeakUp or our internal channels in our global breach management tool. |
| Limitation | - |
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| Performance measure | Reported and substantiated breaches |
| Definition | Reported breaches are potential breaches of our Code of Business Conduct, policies or standards made known to the business, either via our SpeakUp service or brought to our attention internally. Substantiated breaches are those reports that ultimately result in sufficient evidence being gathered to support the concern raised. |
| Scope exception | - |
| Data preparation | We update the number of substantiated breaches and Code-related leavers from previous years to include the outcomes of those reports made in one financial year – but for which the investigation and any associated disciplinary actions are not closed until the following financial year, after the Annual Report has been published. This enables us to make a full and accurate year-on-year comparison. |
| Limitation | - |
Our people
At Diageo, resolved,we strive to create an environment where all our people feel they are treated fairly and with respect. We commit to understanding what it means to act with integrity in our roles, to ensure we are doing business in the right way, meeting external expectations and our own standards. Our global health and safety ambition and strategy are designed to ensure all our people are safe when working, on site, at home and on the road, every day, everywhere.
Employee profile data
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| Performance measure | Average number of employees by region by gender | Average number of employees by role by gender |
| Definition | Employees have been allocated to the region in which they reside. | Employees have been allocated to the role in which they occupy. We define Executive as a member of the Executive Committee; Senior Manager (SL, L2, L3) as those in top leadership positions excluding Executive Committee members; Line Manager as all Diageo employees (excluding Executive Committee members and Senior Managers) with one or more direct reports; and Supervised employee as all remaining Diageo employees (excluding Executive Committee members, Senior Managers and Line Managers) who have no direct reports. |
| Scope exception | All Diageo employees are in scope for this performance measure. However, people data from joint ventures and associates where Diageo does not have operational control are not included. | All Diageo employees are in scope for this performance measure. However, people data from joint ventures and associates where Diageo does not have operational control are not included. |
| Data preparation | Total employee data comprises our average number of FTE employees across 12 months. Employee data is captured globally through financial and HR information and reporting systems. Employee type includes Regular, Graduates and Fixed Term Contract (FTC) across all markets. Data from markets where Diageo has not implemented its global HR system is collected by local HR teams to form a total Diageo view. | Employee data comprises our average number of FTE employees across 12 months except Executives, which are reported as of 30 June 2023 because of the small population size. Employee data is captured globally through financial and HR information and reporting systems. Employee type includes Regular, Graduates and Fixed Term Contract (FTC) across all markets. Data from markets where Diageo has not implemented its global HR system is collected by local HR teams to form a total Diageo view. |
| Limitation | Joint operations are included but, where Diageo does not have operational control, only high-level regional data is available. Markets where our global HR system, Workday, is not in place are reliant on manual data collection or, in some cases, we may not be able to obtain data. These markets include Ypioca, Zacapa, United Spirits Limited – India (partial), Casamigos, Balcones, Davos, Vietnam Spirits and Wine, Don Papa Rum, Moet Hennessy Diageo, Korea (partial), Japan JWS, Angola and Northern Cyprus. | Joint operations are included but, where Diageo does not have operational control, only high-level regional data is available. Markets where our global HR system, Workday, is not in place are reliant on manual data collection or, in some cases, we may not be able to obtain data. These markets include Ypioca, Zacapa, United Spirits Limited – India (partial), Casamigos, Balcones, Davos, Vietnam Spirits and Wine, Don Papa Rum, Moet Hennessy Diageo, Korea (partial), Japan JWS, Angola and Northern Cyprus. |
Health and safety
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| Performance measure | Lost-time accident frequency rate (LTAFR) |
| Definition | The LTAFR is the number of lost-time accidents (LTAs) per 1,000 full-time employees (Occupational Health & Safety (OH&S) FTE). We define an LTA as any work-related incident resulting in injury or illness, where a healthcare professional or Diageo recommends one or more full days away from work, or where a job restriction or modification prevents the employee from conducting their routine tasks and activities and from working a full shift. We consider an injury or illness to be work-related when an event or exposure in the work environment (including people working at home) either caused or contributed to the resulting condition, or significantly aggravated a medically documented and treated pre-existing injury or illness. LTA numbers also include any OH&S FTE work-related fatalities. In line with industry best practice, for the purposes of calculating this KPI, we include all Diageo employees, as well as temporary staff and contractors who work under our direct day-to-day supervision in our definition of OH&S FTE. |
| Scope exception | We have looked closely into which home-working injuries should be in scope for reporting: for example, an injury would be in scope if caused by an activity involving work-related equipment, such as an employee injuring a finger by getting it trapped in a laptop cover. If the injured person did not report the accident on the same shift to their immediate line manager and/or Diageo point of contact, unless there are reasonable grounds, this accident is not in scope as work-related. |
| Data preparation | We collect and report safety data for all sites where we have full operational control, including all office sites. It includes newly acquired businesses as soon as resources and systems are in place, and no later than one year after we have assumed operational control. We exclude safety data associated with any divestments during the current reporting year from reporting in the current period. When an incident occurs at any site (operational, corporate office, remote commercial and remote home-working environments), the local line manager and local health and safety team will initiate an accident investigation and root-cause analysis. If the accident is classified as an LTA, then the local health and safety representative will escalate to the site leadership team, who will in turn escalate to regional, market and global leadership. Each month, sites are required to submit details associated with all incidents, accidents and LTAs, as well as OH&S FTE data for their site. OH&S FTE data is primarily obtained directly from the global HR/payroll system or estimated using employee numbers, average number of hours worked, absences and overtime information, if actual data is not readily available. Contractor agencies provide data on the hours worked by each contractor. This is then combined with Diageo employee data to calculate the total FTE data for the month. Safety data and OH&S FTE data is reported at site level using our global data management system. |
| Limitation | We do not report LTAFR for independent contractors because of the difficulty and administrative burden in accurately recording headcount. |
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| Performance measure | Total recordable accident frequency rate (TRAFR) less than 3.5 |
| Definition | TRAFR is the sum of all work-related accidents including OH&S FTE/non-FTE (contractors) fatalities on Diageo premises, OH&S FTE/non-FTE LTAs, OH&S FTE medical treatment cases (MTC), and non-FTE permanent location-based MTCs, expressed as rate per 1,000 OH&S FTEs plus permanent location-based non-FTEs. We consider an injury or illness to be work-related when an event or exposure in the work environment (including people working at home) either caused or contributed to the resulting condition, or significantly aggravated a medically documented and treated pre-existing injury or illness. |
| Scope exception | As under LTAFR |
| Data preparation | As under LTAFR |
| Limitation | We do not report MTCs for non-site-based contractors. |
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| Performance measure | Number of fatalities |
| Definition | A fatality includes any work-related fatality of an employee or contractor under our direct supervision in their day-to-day work environment (on or off our premises), or any work-related fatality suffered by a third-party or contractor (non-FTEs) while on our premises. We consider a fatality to be work-related when an event or exposure in the work environment (including people working at home) either caused or contributed to the event. |
| Scope exception | - |
| Data preparation | As under LTAFR |
| Limitation | - |
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| Performance measure | Lost-time injury frequency rate (LTIFR) |
| Definition | Lost-time injury frequency rate (LTIFR) is a standard Occupational Safety and Health Administration (OSHA) metric that measures the number of lost-time injuries occurring in a workplace per one million hours worked. |
| Scope exception | As under LTAFR |
| Data preparation | As under LTAFR |
| Limitation | We do not report LTIFR for independent contractors because of the difficulty and administrative burden in accurately recording headcount. |
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| Performance measure | Lost-time injury rate (LTIR) |
| Definition | LTIR is a standard OSHA metric that calculates the number of lost-time injuries occurring in a workplace per 200,000 hours worked. |
| Scope exception | As under LTAFR |
| Data preparation | As under LTAFR |
| Limitation | We do not report LTIR for independent contractors because of the difficulty and administrative burden in accurately recording headcount. |
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| Performance measure | Employee Engagement Index |
| Definition | The Employee Engagement Index is calculated as the percentage of respondents who answer positively to three questions in our Your Voice survey: I am proud to work for Diageo; I would recommend Diageo as a great place to work; I am extremely satisfied with Diageo as a place to work. |
| Scope exception | – |
| Reporting period | The data was collected between 6 and 31 March 2023, so the results are based on feedback from participants in that particular window. |
| Data preparation | The index is calculated from an anonymous annual survey run by an independent third-party. |
| Limitation | Contractors and employees on long-term leave are excluded. |
Champion inclusion and diversity
Championing inclusion and diversity is at the heart of what we do, and is crucial to our purpose of ‘celebrating life, every day, everywhere’.
We have set ourselves ambitious goals to drive progress, inside our business and beyond. They range from increasing representation of women and people from ethnically diverse backgrounds in our leadership, to using our media spend and influence to promote progressive portrayals in marketing, working with diverse creative teams and diverse-owned suppliers and supporting people in our local communities with hospitality and business skills.
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| Ambition | Champion gender diversity, with an ambition to achieve 50% representation of women in leadership roles by 2030 |
| Performance measure | Percentage of female leaders globally |
| Definition | Leadership roles comprise Executive Committee members (Exec), Senior Leaders (SL), Level 2 (L2) and Level 3 (L3) roles, some of which will be vacant at any point in time. Employee type includes those on regular and fixed-term contracts. |
| Scope exception | Non-Executive Directors and extended workers (agency workers, independent contractors, freelancers and consultants) are not in scope, nor are joint ventures, joint operations or associates where Diageo does not have operational control. |
| Data preparation | The KPI is calculated as the average of filled leadership roles at the end of each of the four quarters across the fiscal year. The total leadership population is calculated from markets that collect gender information through Workday, enabling all employees in scope to self-disclose this information. Gender data is disclosed by employees themselves on a voluntary basis on our online Human Resources system (Workday). All leaders in scope have the ability to disclose gender information on Workday. |
| Limitations | Where employees have chosen not to declare their gender, this information is excluded from the gender representation data. |
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| Ambition | Champion ethnic diversity with an ambition to increase representation of leaders from ethnically diverse backgrounds to 45% by 2030 |
| Performance measure | Percentage of ethnically diverse leaders globally |
| Definition | Leadership roles comprise Executive Committee members (Exec), Senior Leaders (SL), Level 2 (L2) and Level 3 (L3) roles, some of which will be vacant at any point in time. Employee type includes those on regular and fixed-term contracts. We define ethnically diverse as those ethnic groups who are, or were historically, systematically under-represented, disenfranchised and/or economically excluded. Ethnically diverse people can be a majority or a minority in a country. |
| Scope exception | Non-Executive Directors and extended workers (agency workers, independent contractors, freelancers and consultants) are not in scope, nor are joint ventures, joint operations or associates where Diageo does not have operational control. |
| Data preparation | The KPI is calculated as the average of filled leadership roles at the end of each of the four quarters across the fiscal year. Ethnicity data is disclosed by employees on a voluntary basis on Workday. The relevant ethnicity fields are based on the country in which the individual is employed to ensure all are culturally relevant. Ethnicity is selected by individuals within the Leadership population from a pre-defined list that encompasses those ethnic types most readily seen within the specific country, based on local census and governmental data. We determined eight categories of ethnicity, considering Diageo’s market footprint, historic under-representation and alignment across regions: Asian, Black, Hispanic/Latin American, Indian, Indigenous, Middle Eastern and Turkish, Mixed and Other Ethnic Groups. If an individual has identified as another type of local ethnicity, the people analytics team manually assign them to the closest fit, for the purposes of this data gathering exercise only. Although employees based in India (Diageo India and Diageo Global Business Operations) are on the Workday system, they do not submit ethnicity data through Workday due to cultural sensitivities. So, self-disclosure is not the basis for data capture. Nationality is obtained by the local HR team through official identification documents by employees during the onboarding process and disclosed on Workday. Indian nationals are recorded by HR as being of Indian ethnicity. For India-based employees not of Indian nationality, the local HR director confirms their ethnicity through a confidential conversation with the individual. Based on a third-party study commissioned by Diageo, ‘Hispanic/Latin American’ is adopted as a term to categorise all people originating from the Latin America and Caribbean (LAC) region, including both indigenous and historically migrant populations. For the purposes of this data gathering exercise, all employees identifying as White with a LAC nationality have been recorded as Hispanic/Latin American. Non-LAC nationals are mapped to their identified ethnicity. |
| Limitations | Employees who identify as White, declined to self-identify or have not disclosed their ethnicity are not counted as ethnically diverse. |
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| Ambition | Accelerate inclusion and diversity in our value chain, increasing the share of our global spend with diverse-owned and disadvantaged businesses to 15% by 2030 |
| Performance measure | Percentage of spend with diverse-owned and disadvantaged businesses |
| Definition | We define diverse-owned suppliers as for-profit businesses majority owned and operated by under-represented communities, including (but not limited to) women, ethnic minorities, LGBTQIA+, people with disabilities and other minority groups identified in the markets where we source. Although we try to define diverse businesses consistently across all our markets, we recognise that diversity can differ across geographical regions, cultures and communities. This means that we define ethnic minority groups on a local level rather than global. In addition, in some markets, we have identified other regionally specific under-represented groups to make sure we are as inclusive as possible. Disadvantaged businesses include smallholder farmers. The UN’s Food and Agriculture Organization describes a smallholder farmer as one who farms an area below the median threshold of their country. For the purposes of supplier diversity reporting, we consider a smallholder farmer in Africa to be one that farms an area of less than ten acres. In other markets, we use locally recognised guidance, such as for agave farmers in Mexico where the Consejo Regulador del Tequila defines this as 50,000 plants. These suppliers, which can be individuals or farm families, are widely considered to be disadvantaged because of factors including their size and exposure to global commodity markets. Where our direct suppliers are not diverse-owned, we will consider spend with disadvantaged businesses in their own value chains. This is considered as tier two direct diverse spend. |
| Scope exception | Spend from categories that are deemed as non-influenceable is excluded from our baseline spend and diverse spend calculations. Examples include customs charges, taxation and charitable donations. |
| Data preparation | Our total global spend is extracted from our global enterprise software, SAP, and also from other local market enterprise resource planning systems, with spend identified as non-influenceable deducted from this amount. Our spend with diverse-owned and disadvantaged suppliers is calculated as a percentage of this total spend, and is considered our tier 1 diverse spend total. We ask our direct suppliers who are not diverse-owned to report their spend with diverse-owned business in their supply chains, and we calculate our tier 2 diverse total from these submissions. Our tier 1 and tier 2 spend calculations are combined and are reflected in the total spend reported against this target. |
| Limitations | - |
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| Ambition | Provide business and hospitality skills to 200,000 people, increasing employability and improving livelihoods through Learning for Life and our other skills programmes |
| Performance measure | Number of people reached through Learning for Life and other skills programmes |
| Definition | Our business and hospitality skills training programmes, including Learning for Life, aim to increase participants’ employability, improve livelihoods and support a thriving hospitality sector that works for all. The core curriculum includes modules on technical skills, life skills and inclusion and diversity. |
| Scope exception | Only markets running business and hospitality programmes are in scope. Markets with no such programmes are Australia, South Korea, Turkey and Eastern Europe. For entrepreneurship programmes to be included, the metric owner determines that the initiatives are appropriate to be included under the definition of providing business or hospitality skills related to our value chain. |
| Data preparation | We collate the number of beneficiaries of Learning for Life and other skills programmes through participant programme completion records (collected face to face or via our online training systems) maintained by Diageo programme managers or third-party delivery partners. We make sure double counting is avoided through programme registration and completion records. |
| Limitation | Accuracy relies on the quality of data provided by our third-party delivery partners. |
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| Ambition | Through the Diageo Bar Academy (DBA), we will provide 1.5 million training sessions delivering skills and resources to help build a thriving hospitality sector that works for all |
| Performance measure | Number of participations in training sessions delivered through Diageo Bar Academy |
| Definition | We measure the number of participations in DBA training sessions. One individual could receive multiple training sessions and each training participation would count towards our target. The DBA delivers a range of hospitality skills training to owners, managers, bartenders and wait staff with the objective of raising professional standards in the industry and helping professionals and businesses to thrive. Examples of course content include alcohol category knowledge, drink preparation skills, serving skills including responsible serving, business and bar management skills. Training includes physical, virtual, e-learning and masterclass tutorials. |
| Scope exception | - |
| Data preparation | Participants in all these DBA trainings are included in this performance measure. Diageo obtains data on the number of participations in trainings delivered in different ways depending on the types of course, as outlined below: •Physical training: attendance number in face-to-face sessions delivered to groups of participants •Virtual training: attendance number in live online sessions •E-learning: number of completions of self-directed learning courses •Masterclass: number of attendances at Live Tutorials and number of viewers of the recorded sessions From fiscal 23 we include online training data from China, where different digital platforms are used. |
| Limitation | Accuracy of data in case of physical trainings relies on third-party delivery partners. |
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| Ambition | Ensure 50% of beneficiaries of our community programmes are women and that our community programmes are designed to enhance diversity and inclusion of under-represented groups |
| Performance measure | Percentage of beneficiaries of our community programmes who are women |
| Definition | For Learning for Life (or equivalent) programmes, we measure the number and percentage of women who have gained business and hospitality skills. |
| Scope exception | Our scope currently includes female beneficiaries of registered business and hospitality skills programmes. In future, the scope of this target will also include female representation on our water sanitation and hygiene (WASH) committees and women who benefit from initiatives such as our smallholder farmer programmes. |
| Data preparation | For Learning for Life programmes (and other skills programmes), we collect data on the number of female participants through training records managed by Diageo programme managers or third-party delivery partners. |
| Limitation | Accuracy relies on the quality of data provided by our third-party delivery partners. |
Pioneer grain-to-glass sustainability
Our continued long-term success depends on the people and planet around us. Our work to pioneer grain-to-glass sustainability is divided into three areas: preserve water for life, accelerate to a settlementlow-carbon world and become sustainable by design.
Our water stewardship strategy, ‘Preserve Water for Life’, outlines how we manage water in our supply chain, operations and communities, as well as advocate for collective action to improve water security. We started our decarbonisation journey in 2008, and we aim to reach net zero across our direct operations by 2030, using 100% renewable energy everywhere we operate. We are also committed to reducing our value chain carbon emissions by 50% by 2030. We are working to reduce our carbon footprint by reducing packaging, increasing recycled content and are focusing on regenerative agriculture.
Preserve water for life
Our strategy is based on best practice water stewardship in three areas: water accessibility, availability and quality. We are also working in partnership to better manage water globally and to lead collective action in critical water basins.
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| Target | Reduce water use in our operations with a 40% improvement in water-use efficiency in water-stressed areas and a 30% improvement across the company |
| Performance measure | Water use efficiency per litre of product packaged (Litres/Litre) |
| Additional performance measure | Percentage improvement in litres of water used per litre of product packaged from the prior year |
| Definition | We prepare and report water withdrawal (use) from sites where we have operational control, using internally developed reporting methodologies based on the GRI Standards. Water withdrawal includes water obtained from ground water, surface water, mains supply and water delivered to the site by tanker, less any clean water provided back to local communities directly from a site. Uncontaminated water abstracted and returned to the same source under local consent, water abstracted from the sea, and rainwater collection are excluded from reported water withdrawal data. For water-stressed only: We define water-stressed areas using the World Resources Institute (WRI) Aqueduct tool, UN definitions and internal survey information. During the reporting period, we identified 40 of our sites as located within water-stressed areas. An assessment of our sites located in water-stressed areas is completed every two years and includes any new-build or acquired sites and excludes any sites divested. |
| Scope exception | The volume of water used at Diageo-operated agricultural lands – in Brazil, Mexico and Turkey – is quantified and reported separately. |
| Data preparation | Water withdrawal(use) is measured primarily from meter readings and invoices. In limited cases, estimates are used. Water efficiency per litre of packaged product is calculated by dividing total water withdrawal by the total packaged volume. We use litres of packaged product as the measure for comparison, because this indicates how much water has been used relative to the amount of finished product that has been packaged. We measure litres of packaged product by site and aggregate them at group level. For fiscal 23, the total volume packaged used for the denominator in efficiency indicators is 3,801,239,185 litres. |
| Limitation | In limited cases (e.g., failure or malfunction of water meters), estimates are used for water withdrawals. |
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| Target | Replenish more water than we use for our operations for all of our sites in water-stressed areas by 2026 |
| Performance measure | Annual volumetric replenishment capacity of projects developed (m3) |
| Definition | This performance measure is total water replenishment capacity created in fiscal 23 in water-stressed areas. We define replenishment (or volumetric water benefit), in line with the WRI, as the volume of water resulting from water stewardship activities that modify the hydrology in a beneficial way and/or help reduce shared water challenges, improve water stewardship outcomes, and meet the targets of Sustainable Development Goal 6. Replenishment capacity created by replenishment projects is calculated by reference to Diageo’s Water Replenishment Implementation Guide and Technical Protocol. When projects are delivered by a third-party and partially funded by Diageo, to avoid double counting, we only claim the proportion of volumetric capacity attributable to Diageo. We define water-stressed areas using the WRI Aqueduct tool (at the Minor Basin level), UN definitions and internal survey information. During the reporting period, we identified 40 of our sites as located within water-stressed areas. An assessment of our sites located in water-stressed areas is completed every two years and includes any new-build or acquired sites and excludes any sites divested. In order to be considered within the annual volumetric replenishment capacity, replenishment projects need to be in a water-stressed area (i.e., a site’s water catchment and/or water-stressed water basins from which we source local raw materials). The methodology for calculating the volume of water replenished for Diageo’s Water Replenishment Programme is based on the WRI’s Volumetric Water Benefit Accounting: A Method For Implementing and Valuing Water Stewardship Activities (2019, www.wri.org/research/volumetric-water-benefit-accounting-vwba-method-implementing-and-valuing-water-stewardship), which is a “comprehensive, standardised and science-based methodology to calculate and evaluate the benefits of water stewardship activities.” We detail the approach adopted and mathematical calculations applied in the Diageo Water Replenishment Programme Technical Protocol (2019) and provide a step-by-step implementation guide for markets to ensure consistency and robust controls: Diageo Water Replenishment Implementation Guide (2022). |
| Scope exception | — |
| Reporting period | 1 June to 31 May (previously 16 June to 15 June; see under Limitation, below). |
| Data preparation | Data required to calculate the indicative volume of water replenished is collected by an implementation partner and confirmed on completion of the project. This data is then validated by an external validator, and confirmed by the Diageo global lead for water. The Diageo Water Replenishment Implementation Guide provides templates for calculating water volume replenished – the estimated volumes are pre-validated by the global team before the project is implemented. Volumes are then validated again after the commissioning of the project. The project volumes for fiscal 26 are restated every year to reflect latest estimates and previous fiscal actuals. |
| Limitation | The complexity of gathering data from multiple projects globally means there can be a delay in reporting information. This means we currently include data from projects completed by 31 May 2023 to allow us to consolidate data by fiscal year end. |
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| Target | Invest in improving access to clean water, sanitation and hygiene (WASH) in communities near our sites and local sourcing areas in all of our water-stressed markets |
| Performance measure | Percentage of water-stressed markets with investment in WASH |
| Definition | This target tracks funding committed and spent on new WASH facilities to improve local community access to clean water, sanitation or hygiene in communities within the same water basin as our sites and local sourcing areas. We usually define Diageo’s markets as countries or locations where we operate or sell our products. To ensure comprehensive coverage, this KPI instead defines each market as an individual country, as set out on page 40. This means that the KPI considers water stress and investment at a country level, rather than at a market level. We define water-stressed areas using the WRI Aqueduct tool at the minor basin level, UN definitions and internal survey information. During the reporting period, we identified 40 of our sites across 12 countries as located in water-stressed areas, with 34 of these locations currently operational and six non-operational. An assessment of our sites located in water-stressed areas is completed every two years and includes any new-build or acquired sites and excludes any sites divested. The KPI is calculated as a percentage of the number of water-stressed markets in which Diageo has invested in WASH programmes in the same minor water basin as the site, divided by the total number of (in scope) water-stressed markets in which Diageo operates. |
| Scope exception | The scope excludes water-stressed markets in which Diageo operates where there is no demand or requirement for new community WASH projects (Turkey, Indonesia, Seychelles). These exclusions are verified by an expert implementing partner, and are based on government, WRI or World Health Organization information on WASH risk and availability. It also excludes Diageo WASH projects in markets that are not assessed as water stressed or where we do not have direct operations (for example, Myanmar). |
| Reporting period | 1 June to 31 May |
| Data preparation | Data on the WASH programmes, including locations, clean water yield, and the number of people (including the number of women) who benefit is calculated by NGO delivery partners and validated by an external validator.
The KPI is calculated as a percentage, i.e., the total number of water-stressed markets in which Diageo has invested in WASH programmes divided by the total number of (in scope) water-stressed markets in which Diageo operates. |
| Limitation | The complexity of gathering data from multiple projects globally means there can be a delay in reporting information. This means we currently include data from projects completed by 31 May 2023 to allow us to consolidate data by fiscal year end. |
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| Target | Engage in collective action in all of our priority water basins to improve water accessibility, availability and quality and contribute to a net positive water impact |
| Performance measure | Percentage of priority water basins with collective action participation |
| Definition | We identify priority water basins using a Diageo criticality assessment (based on expert judgement and consumption volumes) and those facing high water risk, according to the WRI Aqueduct tool. These basins would benefit most from Diageo operational sites participating in collective action to address identified water challenges. Collective action in water stewardship includes multi-stakeholder water management initiatives or projects that involve interaction with government entities, local communities, NGOs and/or civil society organisations. |
| Scope exception | — |
| Data preparation | Priority water basins with collective action participation are reported at country level and tracked by the Diageo global metric owner. |
| Limitation | — |
Accelerating to a low-carbon world
We know that our planet needs significant, science-based action to create a sustainable future. We have set ourselves bold targets to reach net zero carbon across our operations and to work with our suppliers to reduce our value chain carbon emissions by 50% by 2030.
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| Target | Become net zero carbon in our direct operations (Scope 1 and 2) |
| Performance measure | Total direct and indirect carbon emissions by weight (market/net based) (1000 tonnes CO2e)
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| Additional performance measures | Percentage reduction in absolute carbon emissions (direct and indirect carbon emissions by weight (market/net based)) from the prior year
Market based (net) intensity ratio of GHG emissions (grams CO2e per litre of packaged product) |
| Definition | Scope 1 and 2 emissions are presented as the absolute GHG emissions (Direct – Scope 1 emissions from on-site energy consumption of fuel sources and Indirect – Scope 2 emissions from purchased electricity and heat) in 1000 tonnes CO2e using market-based reporting methodology. Market-based GHG emission intensity ratio is calculated as grammes per CO2e per litre, using direct operations packaged product volume in litres for fiscal 23. |
| Scope exception | We exclude minor quantities of Scope 1 emissions up to 0.5% of a site's emissions, to a maximum of 50 tonnes CO2e per emission source, as well as the carbon emissions associated with biogas flaring, since they are determined to be insignificant to our overall impacts. More details can be found in the Scope section of General Reporting methodology and boundaries, covering both non-environmental and environmental metric reporting. Biological/biogenic CO2 emissions from the combustion of bioenergy, and from direct operations processes such as fermentation to create alcohol are outside of scope and are reported separately. However, bioenergy CO2e emissions associated with methane and nitrous oxides that are not absorbed in bioenergy feedstock growth are included in Scope 1 emissions. We do not include carbon offsets or credits in the Scope 1 and 2 GHG emissions market-based approach. |
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| Data preparation | We calculate CO2e emissions data based on direct measurement of energy use (meter readings/invoices) for the majority of sites. Market-based emissions We externally report Scope 1 and 2 GHG emissions using metric tonnes of CO2e to compare the emissions from the seven main GHGs based on their global warming potential. We base our CO2e reduction targets and reporting protocols (since 2007) on market-based emissions. Direct (Scope 1) emissions We report fuel consumption by fuel type at site level using the environmental management system. Using calorific values, the fuel is then converted to energy consumption, in kilowatt hours (kWh), by fuel type, and is multiplied by the relevant CO2e emission factor to derive total CO2e emissions. Scope 1 emission factors for fuels are typically average fuel CO2e emissions factors and calorific values (the latest available at the end of the reporting year) from the UK Government Department for Energy Security and Net Zero. We apply product-specific factors, where available. Energy attribute certificates (EACs), derived from our distillery by-product feedstock and processed by a third-party to generate biomethane, form a component of our decarbonisation, together with purchased renewable gas EACs (i.e., from certificate-backed biomethane supplied indirectly through the natural gas grid). This is reflected in data preparation and aggregation. Indirect (Scope 2) emissions We report GHG emissions from electricity as market-based emissions in line with the WRI/WBCSD GHG Protocol Scope 2 guidance 2015. Electricity consumption recorded on our environmental management system is multiplied by emissions factors specified in EACs, contracts, power purchase agreements and supplier utility emissions, as detailed in the GHG Protocol’s Scope 2 guidance. We use GHG Protocol Scope 2 guidance to ensure EACs and associated contractual instruments meet the required standards. GHG emission factors relating to indirect emissions are updated with the latest available by end of the financial year. Fugitive and owned agricultural (Scope 1) emissions We calculate fugitive emissions based on the amount of emitted ozone-depleting substances and fluorinated gases, multiplied by the relevant emission factor to represent the global warming potential in tonnes of CO2e. Annually, each site reports the quantity (mass) of each material/gas emitted based any added/topped-up amount, reported via the environmental management system. The mass of each of emitted ozone-depleting substance and fluorinated gas is multiplied by the relevant emission factor and then added together to report the equivalent GHG emissions in tonnes of CO2e. We calculate agricultural emissions from direct operations owned and operated agricultural land only based on fertiliser use. The annual quantity (mass) of inorganic fertiliser is multiplied by the percentage of nitrogen content and by the relevant GHG emission and conversion factors (i.e., nitrogen to nitrous oxide, nitrous oxide GHG emission factor) to determine the equivalent tonnes CO2e emissions. Scope 1 and Scope 2 data aggregation Total direct and indirect carbon emissions by weight (market/net based) (1,000 tonnes CO2e) is the aggregation of Scope 1 and 2 GHG emissions with fugitive and owned agriculture emissions for external reporting annually. The percentage reduction in absolute carbon emissions (direct and indirect carbon emissions by weight (market/net based)) from the prior year is a percentage change calculation with reference to the corresponding prior year figure. Our net zero emissions target for 2030 remains consistent with earlier reporting protocols and is based on market-based emissions. GHG emission intensity ratios Total, aggregated direct operations market-based emissions (as detailed above) are divided, by the volume of direct operations packaged product reported in the same period. The market-based emissions are converted to grammes of CO2e and the volume of packaged product is reported in litres to generate relevant GHG emission intensity ratios in g CO2e/litre packaged. For fiscal 23, the total volume packaged used for the denominator in intensity indicators is 3,801,239,185 litres. |
| Limitation | Where invoices or site meter readings are not available – due, for example, to timing differences or metering issues – we estimate consumption. |
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| Target | Reduce our value chain (Scope 3) carbon emissions by 50% |
| Performance measure | Percentage reduction in absolute greenhouse gas emissions (ktCO2e) from the prior year |
| Definition | Scope 3 emissions are all indirect emissions that occur in the value chain of the reporting company, including both upstream and downstream emissions (but excluding Scope 2 emissions from purchased power and heat). The CO2e emissions relating to all categories of materials and services within our value chain include those from purchased raw materials, packaging, third-party manufacturers, consumer use and disposal. We aggregate emissions from upstream and downstream logistics and distribution, including Category 4 logistics emissions. In addition, we include Category 2 capital goods, Category 3 fuels and energy-related activities, Category 5 waste generated in operations, Category 6 business travel and Category 7 employee commuting. The emissions attributable to all categories of materials and services provide a total value chain, Scope 3 footprint. We do not include carbon offsets or credits in the Scope 3 GHG emissions market-based or location-based approach. |
| Scope exception | Any categories of Scope 3 emissions not listed in the definition above are not currently included in our external reporting. |
| Data preparation | We report Scope 3 GHG emissions using metric tonnes of CO2e to compare the emissions from the seven main GHGs based on their global warming potential. We base our CO2e reduction targets and reporting protocols on real consumption location-based emissions. We report in line with the WRI/WBCSD GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard, 2011. We calculate CO2e emissions data on the basis of the volume of materials purchased, services provided, capital equipment purchased and distances travelled for upstream/downstream logistics. Supplier-specific emission factors and/or emission factors from literature are then applied to the component type to derive an absolute CO2e emissions volume, in metric tonnes.
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| Limitation | — |
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| Target | Use 100% renewable energy across all our direct operations |
| Performance measure | Change in percentage of renewable energy across our direct operations |
| Definition | We report total energy use and renewable energy use in megawatt hours (MWh) and/or terajoules (TJ). Total energy and renewable energy use are determined from direct and indirect energy consumption; energy generated on our sites and purchased energy. We determine direct energy (renewable/non-renewable) from the quantity of different fuel types (in metric tonnes, litres) of renewable and non-renewable fuels, and by applying the relevant calorific value (either from BEIS or the supplier). We measure indirect energy (renewable/non-renewable) in MWh and/or TJ from energy utilities or suppliers and/or by applying the relevant EACs. For avoidance of doubt, we include directly connected renewable energy generated on or near our sites, where all energy is used on site and no EACs are created (e.g., roof-mounted solar panels with all generated renewable electricity used on site). |
| Scope exception | We exclude minor energy sources that account for less than 0.5% of a site's overall Scope 1 and 2 emissions, up to a maximum of 50 t CO2e of individual emission source. They are considered immaterial to our overall impact. |
| Data preparation | We report total energy and renewable energy in MWh and/or TJ. We calculate direct and indirect energy data based on the direct measurement of energy use (meter readings/invoices for volumes of fuel supplied) for the majority of sites. We report fuel consumption by fuel type at site level using the environmental management system. Using calorific values, the fuel is then converted to energy consumption, in kWh, by fuel type and classified as either renewable or non-renewable based on fuel type or source. EACs, derived from our distillery by-product feedstock and processed by a third-party to generate biogas, together with purchased renewable gas EACs, are applied to relevant natural gas supplied to sites via a common carrier pipeline/network. This is reflected in data preparation and aggregation. All indirect energy generated and used on site, along with purchased indirect energy supplied through the grid is classified as renewable by the allocation of EACs, contracts, power purchase agreements and supplier specific utility factors, where relevant. To achieve the percentage of renewable energy use, we divide total renewable energy into direct and indirect energy supplies (in MWh) by total energy use, comprising all reported energy sources (MWh). |
| Limitation | Energy data is calculated based on direct measurement of energy use (meter readings/invoices) for the majority of sites. Where invoices are not available – due, for example, to timing differences – consumption is estimated. These instances account for less than 1% of the total. |
Become sustainable by design
We have already made progress in reducing our environmental impact, and we continue to work hard to meet our ‘Society 2030: Spirit of Progress‘ targets and become sustainable by design by reducing packaging, increasing recycled content and eliminating waste.
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| Target | Achieve zero waste in our direct operations and zero waste to landfill in our supply chain |
| Performance measure | Percentage reduction in total waste sent to landfill from the prior year |
| Definition | We record the type and quantity of all waste to landfill using our internal environmental reporting methodologies and GRI Standards. The definition of waste to landfill includes all hazardous waste and all unwanted or discarded material produced in solid, sludge or liquid form from manufacturing and office sites, except asbestos waste and/or other waste required by national or state legislation to be landfilled in either specified registered sites or other landfill sites. The definition includes all refuse, garbage, construction debris, treatment and process sludge, and materials that a site has been unable to reclaim, reuse or recover.
We consider we have achieved zero waste to landfill if we have disposed of less than 0.2% of baseline waste-to-landfill volume during the year. Some 0.2% of baseline waste-to-landfill volume equates to 200 tonnes and excludes any waste we are required to dispose to landfill under local regulations. |
| Scope exception | — |
| Data preparation | Sites typically collect primary waste data from weighbridge tickets and invoices from waste handlers. Data is reported by waste type at site level using the environmental management system.
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| Limitation | Incidents may occur where small quantities of waste are sent to landfill by accident or because of operational changes, such as acquiring new sites, changing who handles our waste and issues with waste disposal suppliers. |
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| Target | Continue our work to reduce total packaging (delivering a 10% reduction in packaging weight) |
| Performance measure | Percentage reduction of total packaging (by weight) |
| Definition | We determine changes to packaging weight by quantifying the weight reduction in grammes multiplied by the number of product lines (SKUs) affected, on an annualised basis. |
| Scope exception | — |
| Data preparation | We collate packaging material volume data from enterprise software, including SAP and other sources, for total volume of packaging purchased and weight. We verify weight data through quarterly supplier questionnaires. |
| Limitation | Reporting relies on suppliers' technical information and supporting supplementary information. |
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| Target | Continue our work to increase recycled content on our packaging (increasing the percentage of recycled content of our packaging to 60%) |
| Performance measure | Change in percentage of recycled content (by weight) |
| Definition | We determine recycled content by establishing the percentage weight of non-virgin materials used to generate the packaging components. |
| Scope exception | — |
| Data preparation | We collate packaging material volume data from enterprise software, including SAP and other sources, for the total volume of packaging purchased. We collect recycled content data through quarterly supplier questionnaires and then consolidate and internally verify it. |
| Limitation | Reporting relies on suppliers' technical information and supporting supplementary information. |
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| Target | Ensure 100% of our packaging is widely recyclable (or reusable/compostable) |
| Performance measure | Percentage of packaging recyclable (by weight) |
| Definition | For fiscal 23, we are reporting our 'technically recyclable' number. This includes packaging that is technically possible to recycle, but does not take into account whether the collection, sorting and recycling of the package happens in practice, at scale and at viable cost. |
| Scope exception | — |
| Data preparation | Packaging material volume data is collated from enterprise software, including SAP (materials supplied) and other sources. It is then consolidated and internally verified, based on the best available information. |
| Limitation | Reporting relies on suppliers' technical information and supporting supplementary information. |
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| Target | Achieve 40% recycled content in our plastic bottles by 2025, and 100% by 2030 |
| Performance measure | Percentage of recycled content in our plastic bottles used |
| Definition | This is determined by quantifying the metric tonnes of non-virgin plastic in the total volume of all plastic bottles used at each site or market reported through a plastics database. |
| Scope exception | — |
| Data preparation | We collate plastic material volume data from enterprise software, including SAP and other sources, for the total volume of plastics purchased. We collect recycled content data through quarterly supplier questionnaires and then consolidate and internally verify it. |
| Limitation | Reporting relies on suppliers' technical information and supporting supplementary information. |
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| Target | Ensure 100% of our plastics are designed to be widely recyclable (or reusable/compostable) by 2025 |
| Performance measure | Percentage of recyclable (or reusable/compostable) plastic used |
| Definition | For fiscal 23, we are reporting our 'technically recyclable' number. This includes packaging that is technically possible to recycle, but does not take into account whether the collection, sorting and recycling of the package happens in practice, at scale and at viable cost. |
| Scope exception | — |
| Data preparation | Packaging material volume data is collated from enterprise software, including SAP (materials supplied) and other sources. It is then consolidated and internally verified, based on the best available information. |
| Limitation | Reporting relies on suppliers' technical information and supporting supplementary information. |
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| Target | Provide all of our local sourcing communities with agricultural skills and resources, building economic and environmental resilience (supporting 150,000 smallholder farmers) |
| Performance measure | Number of smallholder farmers in our supply chain supported by our smallholder farmer programme |
| Definition | We define a smallholder farmer as an individual or family farming an area of less than four hectares, for the primary markets in scope for this target. Our local sourcing communities are those where we engage directly with smallholder farmers, or indirectly through our suppliers. We define providing agricultural skills and inputs aimed at improving the methods and activities used by smallholder farmers to farm effectively and sustainably by providing training or providing or facilitating access to farm inputs such as certified seeds and mechanisation. Building economic and environmental resilience involves improving smallholders’ financial awareness, their family income and/or their understanding of how to act in a climate-smart way. |
| Scope exception | Our work with smallholder farmers is currently focussed around sorghum value chains in five countries in Africa. For Fiscal 23, we focussed efforts on Kenya. With this focus we have learned how to best deploy at scale. |
| Data preparation | Our sourcing teams and third-party partners track the number of smallholder farmers undergoing training and education or being provided with access to farm inputs both manually and directly into our new digital platform. The baseline year for our smallholder programmes is fiscal 22. The performance measure is refreshed each year, rather than accumulated over consecutive years, to evidence evolution of the number of smallholder supported on a year-by-year basis. |
| Limitation | Monitoring is likely to evolve over time, because collecting data at smallholder-farm level is complex, with a heavy reliance on individuals, a lack of publicly available high-impact datasets and a lack of real-time data. |
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| Target | Develop regenerative agriculture pilot programmes in five key sourcing landscapes |
| Performance measure | Number of regenerative agriculture pilot programmes initiated |
| Definition | We define our key sourcing landscapes as locations from which we source our most material crops, in terms of volumes sourced, product dependency (e.g., agave for tequila) and contribution to our Scope 3 GHG footprint. The programmes include: •On-the-ground programmes with farmers to test and integrate regenerative and low-carbon practices in crop production systems •On-farm measurements and data collection protocols to track improvements in soil health, soil carbon, biodiversity, water stewardship and farm profitability •Collaborative programmes with our suppliers, other commodity off-takers, expert agronomists, technology providers, NGOs or specialist organisations |
| Scope exception | — |
| Data preparation | Data is consolidated for each pilot programme, tracking KPIs and reporting on improvements against key outcomes. The baseline year is fiscal 23. The baseline year for assessing the results of our first pilot programme, Guinness barley, is fiscal 23. |
| Limitation | — |
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Other additional information |
Spirits are produced in distilleries located worldwide. The group owns 30 Scotch whisky distilleries in Scotland, two whisky distilleries in Canada and three in the United States. Diageo produces Smirnoff internationally. Ketel One and Cîroc vodkas are purchased as finished product from The Nolet Group and Maison Villevert, respectively. Gin distilleries are in both the United Kingdom and in Santa Vittoria, Italy. Baileys is produced in the Republic of Ireland and Northern Ireland. Irish whiskey is distilled at the Roe & Co distillery in Dublin. Rum is distilled in the US SecuritiesVirgin Islands and Exchange Commission, an inquiry regardingin Australia, Venezuela, and Guatemala and is blended and bottled in the United States, Canada, Italy and the United Kingdom. Raki is produced in Turkey, Chinese white spirits are produced in Chengdu, in the Sichuan province of China, cachaça is produced in Ceará State in Brazil and tequila in Mexico. The Chase Distillery in England produces vodka and gin.
Diageo’s maturing Scotch whisky is in warehouses in Scotland (Clackmannanshire area between Blackgrange, Cambus West and Menstrie, where we are holding approximately 50% of the group’s maturing Scotch whisky), its public disclosures relating tomaturing Canadian whisky in Valleyfield and Gimli in Canada, its salesmaturing American whiskey in Kentucky and Tennessee in the United States and maturing Chinese white spirits in certain other markets dating back to fiscal years 2014Chengdu, China.
There is a significant progress in our investment of £185 million in the Scotch whisky and 2015.
Informationtourism sectors in Scotland. This has included the creation of a major new Johnnie Walker global brand attraction in Edinburgh (Johnnie Walker Princes Street). The distillery visitor investment has focused on the legal proceedings‘Four Corners distilleries’, Glenkinchie, Caol Ila, Clynelish and Cardhu, celebrating the important role these single malts play in the flavours of Johnnie Walker. The new visitor experiences at Glenkinchie, Clynelish and Cardhu are now fully operational and Caol Ila opened in August 2022. The iconic lost distillery of Port Ellen is set outexpected to be back in note 18production in the summer of 2023.
In China, work continues with our $75 million investment in the Eryuan malt whisky distillery. It will produce our first China-origin, single malt whisky and be carbon-neutral on opening.
In North America, further capacity expansion projects are now underway to support future growth including the C$245 million construction of a carbon neutral Crown Royal distillery in Canada to supplement existing manufacturing operations.
Diageo’s end-to-end tequila production is in Mexico, and more than $500 million dollars is being invested to expand our manufacturing footprint through an investment in new facilities in the state of Jalisco to support growth. As part of our expansion and our investments in the tequila category, we have different digital transformation projects under implementation at the El Charcón production site to respond to the consolidated financial statements.growing demand in tequila and the expansion of our operations. Projects include additional technology support and automatisation of our new bottling line on site, which will be dedicated to Casamigos tequila. The use of technology will allow us to operate 24/7.
Diageo owns a controlling equity stake in United Spirits Limited (USL) which is one of the leading alcoholic beverage companies in India selling close to 66 million equivalent units (reported) in fiscal 23 of Indian-Made Foreign Liquor (IMFL) and imported liquors. USL has a significant market presence across India and operates 12 owned sites, as well as a network of leased and third-party manufacturing facilities in India. USL owns several Indian brands, such as McDowell’s (Indian whisky, rum, and brandy), Black Dog (scotch), Signature (Indian whisky), Royal Challenge (Indian whisky) and Antiquity (Indian whisky).
ArticlesDiageo’s principal brewing facility is at the St James’s Gate brewery in Dublin, Ireland. In addition, Diageo owns breweries in several African countries: Nigeria, Kenya, Ghana, Tanzania, Uganda, and the Seychelles. During the year ended 30 June 2023, Guinness Cameroun S.A. was sold to the Castel Group.
Guinness flavour extract is shipped from Ireland to all overseas Guinness brewing operations which use the flavour extract to brew beer locally. Guinness is transported from Ireland to Great Britain in bulk to the Runcorn facility which carries out the kegging of associationGuinness Draught.
Projects are underway to support future beer growth. In July 2022, Diageo announced plans to invest €200 million in Ireland’s first purpose-built carbon neutral brewery on a greenfield site in Littleconnell, Newbridge, Co. Kildare. A planning application for the new brewery was submitted in October 2022 and, if successful, brewing would commence in 2024. Furthermore, Diageo will also invest £21 million to build a new production area at St. James’s Gate and increase brewing capacity of Guinness 0.0, building on the
£41 million announced to expand and optimise capacity at its beer packaging facilities in Belfast and Runcorn. Work on these three projects is substantially complete with capacity coming onstream in 2023 calendar year.
The companyDiageo Beer Category Third-Party Operations Team are the technical brewers supporting the delivery of over two and a half million hectoliters of beer and ready to drink products supplied through over 50 partner breweries and beverage packaging facilities across the world. The team's focus is incorporated underupon assuring the nameconsistent quality of Diageo plc,brands produced at third-party facilities and on enhancing Diageo value through supporting the start-up of new partnerships and delivery of innovation projects. In addition to supporting Guinness and beer, the team has an expanding role in the support of third-party manufacturing of ready to drink and spirits in Asia-Pacific and Africa.
Flavoured malt beverages (FMB) are made from original base containing malt, but then stripped of malt character and flavoured. This product segment is implemented mainly in the United States, Canada and the Caribbean.
Ready to drink (RTD)
Diageo produces a range of ready to drink products mainly in the United Kingdom, Italy, across Africa, Australia, the United States and Canada.
Raw materials and supply agreements
The group has several long-term contracts in place for the purchase of raw materials, including glass, other packaging, spirits, cream, rum and grapes. Forward contracts are in place for the purchase of cereals and packaging materials to minimise the effects of short-term price fluctuations. The global ocean freight crisis coupled with volatile but strong consumer demand, change in consumer habits (for example, the increase in e-commerce, the energy crisis, residual impact of Covid-19 and impact of the conflict in Ukraine) are the key drivers of constraints that we are managing through.
Like other consumer goods companies, we keep stocks in markets to compensate for extended lead times and demand volatility. Diageo is managing well through the current levels of uncertainty and constraints in our supply chain through expansion of our supplier base and agility in our logistics networks.
Cereals, including barley, wheat, corn and sorghum are used in out scotch and beer production and in our spirits brand through purchased neutral spirit. Cream is the principal raw material used in the production of Irish cream liqueur and is registeredsourced from Ireland. Grapes and aniseed are used in Englandthe production of raki and Wales under registered number 23307.are sourced from suppliers in Turkey. Agave is a key raw material used in the production of our tequila brands and is sourced from Mexico. Other raw materials purchased in significant quantities to produce spirits and beer are molasses, sugar, and several flavours (such as juniper berries, agave, chocolate, and herbs). These are sourced from suppliers around the world.
Many products are supplied to customers in glass bottles. Glass in purchased from a variety of multinational and local suppliers. The largest suppliers are Ardagh Packaging in the United Kingdom and Owens-Illinois in the United States.
The following description summarises certain provisionsDiageo’s brands compete primarily on the basis of quality and price. Its business is built on getting the right product to the right consumer for the right occasion, and at the right price, including through taking into account ever evolving shopper landscapes, technologies and consumer preferences. Diageo also seeks to recruit and re-recruit consumers to its portfolio of brands, including through meaningful consumer engagement, sustainable innovation and investments in its brands.
In spirits, Diageo’s major global competitors are Pernod Ricard, Beam Suntory, Bacardi and Brown-Forman, each of which has several brands that compete directly with Diageo’s brands. In addition, Diageo faces competition from regional and local companies in the countries in which it operates.
In beer, Diageo also competes globally, as well as on a regional and local basis (with the profile varying between regions) with several competitors, including AB InBev, Molson Coors, Heineken, Constellation Brands and Carlsberg.
Research and development
Innovation forms an important part of Diageo’s articlesgrowth strategy, playing a key role in positioning its brands for continued growth in both developed and emerging markets. The strength and depth of association (as adoptedDiageo’s brand range also provides a solid platform from which to drive sustainable innovation that leads to new products and experiences for consumers, whether or not they choose to drink alcohol. Diageo focuses its innovation on its strategic priorities and the most significant consumer opportunities, including the development of global brand extensions and new-to-world products, and continuously invests to deepen its understanding of evolving trends and consumer socialising occasions to inform product and packaging development, ranging from global brand redesigns to cutting edge innovations. Supporting this, the Diageo group has ongoing programmes to develop new beverage products which are managed internally by special resolution at the Annual General Meetinginnovation and research and development function.
Trademarks and other intellectual property
Diageo produces, sells and distributes branded goods, and is therefore substantially dependent on 19 September 2019)the maintenance and applicable English law concerning companies (the Companies Acts),protection of its trademarks. All brand names mentioned in each casethis document are protected by trademarks. The Diageo group also holds trade secrets, as at 4 August 2020. This summarywell as has substantial trade knowledge related to its products. The group believes that its significant trademarks are registered and/or otherwise protected (insofar as legal protection is qualifiedavailable) in all material respects in its entirety by referencemost important markets. Diageo also owns valuable patents and trade secrets for technology and takes all reasonable steps to protect these rights.
Regulations and taxes
Diageo’s worldwide operations are subject to extensive regulatory requirements relating to production, product liability, distribution, importation, marketing, promotion, sales, pricing, labelling, packaging, advertising, antitrust, labour, pensions, compliance and control systems and environmental issues.
In the Companies ActsUnited States, the beverage alcohol industry is subject to strict federal and Diageo’s articles of association.
Investors can obtain copies of Diageo’s articles of association by contactingstate government regulations. At the Company Secretary at the.cosec@diageo.com.
Any amendment tofederal level, the articles of associationAlcohol and Tobacco Tax and Trade Bureau, or TTB, of the company may be madeUS Treasury Department oversees the US beverage alcohol industry, including through regulating and collecting taxes on the production of alcohol within the United States and regulating trade practices. In addition, individual US states, as well as some local authorities in accordance with the provisions of the Companies Act 2006, by way of special resolution.
Directors
Diageo’s articles of association provide for a Board of Directors, consisting (unless otherwise determined by an ordinary resolution of shareholders) of not fewer than three directors and not more than 25 directors, in which all powers to manage the business and affairs of Diageo are vested. Directors may be elected by the members in a general meeting or appointed by the Board of Diageo. At each annual general meeting, all the directors shall retire from office and may offer themselves for re-election by members. There is no age limit requirement in respect of directors. Directors may also be removed before the expiration of their term of office in accordance with the provisions of the Companies Acts.
Under Diageo’s articles of association, a director cannot vote in respect of any proposal in which the director has an interest. However, this restriction on voting does not apply where the interest cannot reasonably be regarded as giving rise to a conflict of interest, nor to resolutions (a) giving the director any guarantee, security or indemnity in respect of obligations or liabilities incurred for the benefit of Diageo, (b) giving any guarantee, security or indemnity to a third party in respect of obligations of Diageo for which the director has assumed responsibility under an indemnity or guarantee or by the giving of security, (c) relating to an offer of securities of Diageo in which the director participates or may participate as a holder of shares or other securities or in the underwriting, (d) relating to any contract in which the director is interested by virtue of the director’s interest in securities of Diageo or by reason of any other interest in or through Diageo, (e) concerning any other company in which the director is directly or indirectly interested, provided that the director does not have a relevant interest in that company, (f) relating to the arrangement of any employee benefit (including any retirement benefit plan) in which the director will share equally with other employees, (g) relating to any insurance that Diageo purchases or maintains for its directors or any group of people, including directors, (h) giving the director an indemnity where all the other directors are being offered indemnities on substantially the same terms, and (i) for the funding by Diageo of the director’s expenditure on defending proceedings or the doing by Diageo of anything to enable the director to avoid incurring such expenditure where all the other directors are being offered substantially the same arrangements. A director cannot vote in relation to any resolution of the board concerning his own appointment, or the settlement or variation of the terms or the termination of his own appointment, as the holder of any office or place of profit with Diageo or any companyUS jurisdictions in which Diageo is interested.sells or produces its products, administers and enforces industry-specific regulations and may apply additional excise taxes and, in many states, sales taxes. Federal,
Under Diageo’s articlesstate and local regulations cover virtually every aspect of association, compensation awardedDiageo's US operations, including production, importation, distribution, marketing, promotion, sales, pricing, labelling, packaging and advertising.
Spirits and beer are subject to directors may be decidednational import and excise duties in many markets around the world. Most countries impose excise duties on beverage alcohol products, although the form of such taxation varies significantly from a simple application to units of alcohol by volume, to advanced systems based on the Boardimported or any authorised committeewholesale value of the Board. The Remuneration Committeeproduct. Several countries impose additional import duty on distilled spirits, often discriminating between categories (such as Scotch whisky or bourbon) in the rate of such tariffs. Within the European Union, such products are subject to different rates of excise duty in each country, but within the overall European Union framework there are minimum rates of excise duties that must first be applied to each relevant category of beverage alcohol. Following its departure from the European Union, the UK is responsible for making recommendations to the Board concerning matters relating to remuneration policy. It is comprised of all the non-executive directors except for the chairman.
The directors are empowered to exercise all the powers of Diageo to borrow money,no longer subject to the limitation thatEuropean Union’s rules on excise duties and will introduce a new alcohol duty system from August 2023. The implementation of this system, which aims to simplify the aggregate amountprevious duty regime, could impact Diageo’s business activities.
Import and excise duties can have a significant impact on the final pricing of Diageo’s products to consumers. These duties can affect a product’s revenue or margin, both by reducing consumption and/or by encouraging consumers to switch to lower-taxed categories of beverages. The group devotes resources to encouraging the equitable taxation treatment of all net external borrowingsbeverage alcohol categories and to reducing government imposed barriers to fair trading.
The advertising, marketing and sale of alcohol are subject to various restrictions in markets around the world. These range from a complete prohibition of alcohol in certain cultures and jurisdictions, such as in certain states in India, to the prohibition of the group outstanding at any time shall not exceedimport into a certain jurisdiction of spirits and beer, and to restrictions on the advertising style, media and content. In a number of countries, television is a prohibited medium for the marketing of spirits brands, while in other countries, television advertising, while permitted, is carefully regulated. Many countries also strictly regulate the use of internet-based advertising and social media in connection with alcohol sales. Any further prohibitions imposed on advertising or marketing, particularly within Diageo’s most significant markets, could have an amount equaladverse impact on beverage alcohol sales.
Labelling of beverage alcohol products is also regulated in many markets, varying from the required inclusion of health warning labels to twicemanufacturer or importer identification, alcohol strength and other consumer information. As well as producer, importer or bottler identification, specific warning statements related to the aggregaterisks of the group’s adjusted capital and reserves calculated in the manner prescribed in Diageo’s articles of association, unless sanctioned by an ordinary resolution of Diageo’s shareholders.
Directorsdrinking beverage alcohol products are not required to hold any shares of Diageo as a qualification to act as a director.
Additional information for shareholders (continued)
Dividend rights
Holders of Diageo’s ordinary shares may, by ordinary resolution, declare dividends but may not declare dividends in excess of the amount recommended by the directors. The directors may also pay interim dividends or fixed rate dividends. No dividend may be paid other than out of profits available for distribution. All of Diageo’s ordinary shares rank equally for dividends, but the Board may withhold payment of all or any part of any dividends or other monies payable in respect of Diageo’s shares from a person with a 0.25% interest (as defined in Diageo’s articles of association) if such a person has been served with a restriction notice (as defined in Diageo’s articles of association) after failure to provide Diageo with information concerning interests in those shares required to be provided underincluded on all beverage alcohol products sold in the Companies Acts. DividendsUS, in certain countries within the EU, and in a number of other jurisdictions in which Diageo operates.
Spirits and beer are also regulated in distribution. In many countries, alcohol may only be paidsold through licensed outlets, both on- and off-trade, varying from government- or state-operated monopoly outlets (for example, in currencies other than sterlingthe off-trade channel in Norway, certain Canadian provinces, and such dividends will be calculated using an appropriate market exchange rate as determined bycertain US states) to the directorssystem of licensed on-trade outlets (for example, licensed bars and restaurants) which prevails in accordance with Diageo’s articles of association.
Diageo’s articles of association permit payment or satisfaction of a dividend wholly or partly by distribution of specific assets, including fully paid shares or debentures of any other company. Such action must be directed by the general meeting which declared the dividend and upon the recommendationmuch of the directors.
Voting rights
Voting on any resolution at any general meetingWestern world, including in the majority of US states, in the UK and in much of the company is byEU. In a shownumber of hands unlessstates in the US, wholesalers of alcoholic beverages must publish price lists periodically and/or must file price changes in some instances up to three months before they become effective. In a poll is duly demanded. On a show of hands, (a) every shareholder who is present in person at a general meeting,response to public health concerns, some governments have imposed or are considering imposing minimum pricing on beverage alcohol products and every proxy appointed by any one shareholder and present at a general meeting, has/have one vote regardless ofmay consider raising the legal drinking age, further limiting the number, type or opening hours of shares held by the shareholder (or, subject to (b), represented by the proxy),retail outlets and/or expanding retail licensing requirements.
Regulatory decisions and (b) every proxy present at a general meeting who has been appointed by more than one shareholder has one vote regardless of the number of shareholders who have appointed him or the number of shares held by those shareholders, unless he has been instructed to vote for a resolution by one or more shareholders and to vote against the resolution by one or more shareholders, in which case he has one vote for and one vote against the resolution. On a poll, every shareholder who is present in person or by proxy has one vote for every share held by that shareholder, but a shareholder or proxy entitled to more than one vote need not cast all his votes or cast them allchanges in the same way (the deadline for exercising voting rights by proxy is set out in the form of proxy).
A poll may be demanded by any of the following:
the chairman of the general meeting;
at least three shareholders entitled to vote on the relevant resolutionlegal and present in person or by proxy at the meeting;
any shareholder or shareholders present in person or by proxyregulatory environment could also increase Diageo’s costs and representing in the aggregate not less than one-tenth of the total voting rights of all shareholders entitled to vote on the relevant resolution; or
any shareholder or shareholders present in person or by proxy and holding shares conferring a right to vote on the relevant resolution on which there have been paid up sums in the aggregate equal to not less than one-tenth of the total sum paid up on all the shares conferring that right.
Diageo’s articles of association and the Companies Acts provide for matters to be transacted at general meetings of Diageo by the proposing and passing of two kinds of resolutions:
ordinary resolutions, which include resolutions for the election, re-election and removal of directors, the declaration of final dividends, the appointment and re-appointment of the external auditor, the remuneration report and remuneration policy, the increase of authorised share capital, and the grant of authority to allot shares; and
special resolutions, which include resolutions for the amendment of Diageo’s articles of association, resolutions relating to the disapplication of pre-emption rights, and resolutions modifying the rights of any class of Diageo’s shares at a meeting of the holders of such class.
An ordinary resolution requires the affirmative vote of a simple majority of the votes cast by those entitled to vote at a meeting at which there is a quorum in order to be passed. Special resolutions require the affirmative vote of not less than three-quarters of the votes cast by those entitled to vote at a meeting at which there is a quorum in order to be passed. The necessary quorum for a meeting of Diageo is a minimum of two shareholders present in person or by proxy and entitled to vote.
A shareholder is not entitled to vote at any general meeting or class meeting in respect of any share held by him if he has been served with a restriction notice (as defined in Diageo’s articles of association) after failure to provide Diageo with information concerning interests in those shares required to be provided under the Companies Acts.
Additional information for shareholders (continued)
Liquidation rights
In the event of the liquidation of Diageo, after payment of all liabilities and deductions taking priority in accordance with English law, the balance of assets available for distribution will be distributed among the holders of ordinary shares according to the amounts paid up on the shares held by them.
Pre-emption rights and new issues of shares
While holders of ordinary shares have no pre-emptive rights under Diageo’s articles of association, the ability of the directors to cause Diageo to issue shares, securities convertible into shares or rights to shares, otherwise than pursuant to an employee share scheme, is restricted. Under the Companies Acts, the directors of a company are, with certain exceptions, unable to allot any equity securities without express authorisation, which may be contained in a company’s articles of association or given by its shareholders in a general meeting, but which in either event cannot last for more than five years. Under the Companies Acts, Diageo may also not allot shares for cash (otherwise than pursuant to an employee share scheme) without first making an offer to existing shareholders to allot such shares to them on the same or more favourable terms in proportion to their respective shareholdings, unless this requirement is waived by a special resolution of the shareholders.
Disclosure of interests in Diageo’s shares
There are no provisions in Diageo’s articles of association whereby persons acquiring, holding or disposing of a certain percentage of Diageo’s shares are required to make disclosure of their ownership percentage, although there are such requirements under the Companies Acts. The basic disclosure requirement under Part 6 of the Financial Services and Markets Act 2000 and Rule 5 of the Disclosure Guidance and Transparency Rules made by the Financial Conduct Authority (successor to the UK Financial Services Authority) imposes a statutory obligation on a person to notify Diageo and the Financial Conduct Authority of the percentage of the voting rights in Diageo he directly or indirectly holds or controls, or has rights over, through his direct or indirect holding of certain financial instruments, if the percentage of those voting rights:
reaches, exceeds or falls below 3% and/or any subsequent whole percentage figure as a result of an acquisition or disposal of shares or financial instruments; orimpact on its business activities.
reaches, exceeds or falls below any such threshold as a result of any change in the breakdown or number of voting rights attached to shares in Diageo.
The Disclosure Guidance and Transparency Rules set out in detail the circumstances in which an obligation of disclosure will arise, as well as certain exemptions from those obligations for specified persons.
Under section 793 of the Companies Act 2006, Diageo may, by notice in writing, require a person that Diageo knows or has reasonable cause to believe is or was during the three years preceding the date of notice interested in Diageo’s shares to indicate whether or not that is the case and, if that person does or did hold an interest in Diageo’s shares, to provide certain information as set out in that Act.
Article 19 of the EU Market Abuse Regulation (2014/596) further requires persons discharging managerial responsibilities within Diageo (and their persons closely associated) to notify Diageo of transactions conducted on their own account in Diageo shares or derivatives or certain financial instruments relating to Diageo shares.
The City Code on Takeovers and Mergers also imposes strict disclosure requirements with regard to dealings in the securities of an offeror or offeree company on all parties to a takeover and also on their respective associates during the course of an offer period.
General meetings and notices
At least 21 clear days’ written notice of an annual general meeting is required. Any general meeting which is not an annual general meeting is called a ‘general meeting’. The minimum notice period for general meetings is 21 clear days.
An annual general meeting of shareholders must be held within six months of Diageo’s accounting reference date and at a time and place determined by the directors.
The chairman of any general meeting is entitled to refuse admission to (or eject from) that general meeting any person who fails to comply with any security arrangements or restrictions that the Board may impose.
Additional information for shareholders (continued)
Variation of rights
If, at any time, Diageo’s share capital is divided into different classes of shares, the rights attached to any class of shares may be varied, subject to the provisions of the Companies Acts, either with the consent in writing of the holders of not less than three-quarters in nominal value of the issued shares of that class or upon the adoption of a special resolution passed at a separate meeting of the holders of the shares of that class.
At every such separate meeting, all of the provisions of Diageo’s articles of association relating to proceedings at a general meeting apply, except that (a) the quorum is to be the number of persons (which must be at least two) who hold or represent by proxy not less than one-third in nominal value of the issued shares of the class (excluding any shares of that class held as treasury shares) or, if such quorum is not present on an adjourned meeting, one person who holds shares of the class regardless of the number of shares he holds, (b) any holder of shares of the class who is present in person or by proxy may demand a poll, and (c) each shareholder present in person or by proxy and entitled to vote will have one vote per share held in that particular class in the event a poll is taken.
Class rights are deemed not to have been varied by the creation or issue of new shares ranking equally with or subsequent to that class of shares in all respects or by the reduction of the capital paid up on such shares or by the purchase or redemption by Diageo of its own shares, in each case in accordance with the Companies Acts and Diageo’s articles of association.
Repurchase of shares
Subject to authorisation by shareholder resolution, Diageo may purchase its own shares in accordance with the Companies Acts. Any shares which have been bought back may be held as treasury shares or, if not so held, must be cancelled immediately upon completion of the purchase, thereby reducing the amount of Diageo’s issued share capital. Diageo currently has shareholder authority to buy back up to 237,177,623 ordinary shares during the period up to the next Annual General Meeting. The minimum price which must be paid for such shares is 28101/108 pence and the maximum price is the higher of (a) 5% above the average market value of Diageo’s ordinary shares for the five business days immediately preceding the day on which that ordinary share is contracted to be purchased and (b) the higher of the price of the last independent trade and the highest current independent purchase bid on the trading venue where the purchase is carried out.
Restrictions on transfers of shares
The Board may decline to register a transfer of a certificated Diageo share unless the instrument of transfer (a) is duly stamped or certified or otherwise shown to the satisfaction of the Board to be exempt from stamp duty and is accompanied by the relevant share certificate and such other evidence of the right to transfer as the Board may reasonably require, (b) is in respect of only one class of share and (c) if to joint transferees, is in favour of not more than four such transferees.
Registration of a transfer of an uncertificated share may be refused in the circumstances set out in the uncertificated securities rules (as defined in Diageo’s articles of association) and where, in the case of a transfer to joint holders, the number of joint holders to whom the uncertificated share is to be transferred exceeds four.
The Board may decline to register a transfer of any of Diageo’s certificated shares by a person with a 0.25% interest (as defined in Diageo’s articles of association) if such a person has been served with a restriction notice (as defined in Diageo’s articles of association) after failure to provide Diageo with information concerning interests in those shares required to be provided under the Companies Acts, unless the transfer is shown to the Board to be pursuant to an arm’s length sale (as defined in Diageo’s articles of association).
Additional information for shareholders (continued)
Exchange controls
Other than certain economic sanctions which may be in effect from time to time, there are currently no UK foreign exchange control restrictions on the payment of dividends, interest or other payments to holders of Diageo’s securities who are non-residents of the UK or on the conduct of Diageo’s operations.
There are no restrictions under the company’s articles of association or under English law that limit the right of non-resident or foreign owners to hold or vote the company’s ordinary shares.
Please refer to the ‘Taxation’ section below for details relating to the taxation of dividend payments.
Documents on display
The Annual Report on Form 20-F and any other documents filed by the company with the SEC are publicly available through the website maintained by SEC at www.sec.gov. The SEC website contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The company's internet address is www.diageo.com/en/investors.
Taxation
This section provides a descriptive summary of certain US federal income tax and UK tax consequences that are likely to be material to the holders of the ordinary shares or ADSs, but only those who hold their ordinary shares or ADSs as capital assets for tax purposes.
It does not purport to be a complete technical analysis or a listing of all potential tax effects relevant to the ownership of the ordinary shares andor ADSs. This section does not apply to any holder who is subject to special rules, including:
•a dealer in securities or foreign currency;
•a trader in securities that elects to use a mark-to-market method of accounting for securities holdings;
•a tax-exempt organisation;
•a life insurance company;
•a person liable for alternative minimum tax;
•a person that actually or constructively owns 10% or more of the combined voting power of voting stock of Diageo or of the total value of stock of Diageo;
•a person that holds ordinary shares or ADSs as part of a straddle or a hedging or conversion transaction;
•a person that holds ordinary shares or ADSs as part of a wash sale for tax purposes; or
•a US holder (as defined below) whose functional currency is not the US dollar.
If an entity or arrangement treated as a partnership for US federal income tax purposes holds ordinary shares or ADSs, the US federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership. A partner in a partnership holding ordinary shares or ADSs should consult its tax advisor with regard to the US federal income tax treatment of an investment in ordinary shares or ADSs.
For UK tax purposes, this section applies only to persons who are the absolute beneficial owners of theirordinary shares or ADSs and who hold their ordinary shares or ADSs as investments. It assumes that holders of ADSs will be treated as holders of the underlying ordinary shares. In addition to those persons mentioned above, this section does not apply to holders that are banks, regulated investment companies, other financial institutions, or to persons who have or are deemed to have acquired their ordinary shares or
ADSs in the course of an employment or trade. This summary does not apply to persons who are treated as non-domiciled and resident in the United Kingdom for the purposes of UK tax law.
This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, the laws of the United Kingdom and the practice of HerHis Majesty’s Revenue and Customs (HMRC), all as currently in effect, as well as on the Convention Between the Government of the United StatesKingdom of AmericaGreat Britain and Northern Ireland and the Government of the United KingdomStates of Great Britain and Northern IrelandAmerica for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to TaxTaxes on Income and Capital Gains (the Treaty). These laws are subject to change, possibly on a retroactive basis.
Additional information for shareholders (continued)
In addition, this section is based in part upon the representations of the Depositary and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms. In general, and taking into account this assumption, for US federal income tax purposes and for the purposes of the Treaty, holders of ADRs evidencing ADSs should be treated as the owner of the shares represented by those ADSs. Exchanges of shares for ADRs, and ADRs for shares, generally will not be subject to US federal income tax or to UK tax on profits or gains.
A US holder is a beneficial owner of ordinary shares or ADSs that is for US federal income tax purposes:
•a citizen or resident for tax purposes of the United States and who is not and has at no point been resident in the United Kingdom;
•a US domestic corporation;
•an estate whose income is subject to US federal income tax regardless of its source; or
•a trust if a US court can exercise primary supervision over the trust’s administration and one or more US persons are authorised to control all substantial decisions of the trust.
This section is not intended to provide specific advice and no action should be taken or omitted in reliance upon it. This section addresses only certain aspects of US federal income tax and UK income tax, corporation tax, capital gains tax, inheritance tax and stamp taxes. Holders of the ordinary shares or ADSs are urged to consult their own tax advisors regarding the US federal, state and local, and UK and other tax consequences of owning and disposing of the shares or ADSs in their respective circumstances. In particular, holders are encouraged to confirm with their advisor whether they are US holders eligible for the benefits of the Treaty.
Dividends
UK taxation
The company will not be required to withhold tax at source when paying a dividend.
All dividends received by an individual shareholder or ADS holder who is resident in the UK for tax purposes will, except to the extent that they are earned through an ISA or other regime which exempts the dividends from tax, form part of that individual’s total income for income tax purposes and will represent the highest part of that income.
A nil rate of income tax will apply to the first £2,000£1,000 of taxable dividend income received by an individual shareholder in athe 2023/2024 tax year, and to the first £500 of taxable dividend income received by an individual shareholder in the 2024/2025 tax year (the “NilNil Rate Amount”)Amount), regardless of what tax rate would otherwise apply to that dividend income.
Any taxable dividend income in excess of the Nil Rate Amount will be subject to income tax at the following special rates (as at the 2020/20212023/2024 tax year):
•at the rate of 7.5%8.75%, to the extent that the relevant dividend income falls below the threshold for the higher rate of income tax;
•at the rate of 32.5%33.75%, to the extent that the relevant dividend income falls above the threshold for the higher rate of income tax but below the threshold for the additional rate of income tax; and
•at the rate of 38.1%39.35%, to the extent that the relevant dividend income falls above the threshold for the additional rate of income tax.
In determining whether and, if so, to what extent the relevant dividend income falls above or below the threshold for the higher rate of income tax or, as the case may be, the additional rate of income tax, the individual’s total taxable dividend income for the tax year in question (including the part within the Nil Rate Amount) will, as noted above, be treated as the highest part of that individual’s total income for income tax purposes.
Shareholders within the charge to UK corporation tax which are small companies (for the purposes of the UK taxation of dividends) will not generally be subject to tax on dividends from the company. Other shareholders within the charge to UK corporation tax will not be subject to tax on dividends from the company so long as the dividends fall within an exempt class and certain conditions are met. In general, dividends paid on shares that are ordinary share capital for UK tax purposes and are not redeemable and dividends paid to a person holding less than 10% of the issued share capital of the payer (or any class of that share capital) are examples of dividends that fall within an exempt class.
Additional information for shareholders (continued)
US taxation
Under the US federal income tax laws, and subject to the passive foreign investment company (PFIC) rules discussed below, the gross amount of any distribution (other than certain pro rata distribution of ordinary shares) paid to a US holder by Diageo in respect of its ordinary shares or ADSs out of its current or accumulated earnings and profits (as determined for US federal income tax purposes) will be treated as a dividend that is subject to US federal income taxation.
Dividends paid to a non-corporate US holder that constitute qualified dividend income will be taxed at the preferential rates applicable to long-term capital gains, provided that the ordinary shares or ADSs are held for more than 60 days during the 121 day121-day period
beginning 60 days before the ex-dividend date and the holder meets other holding period requirements. Dividends paid by Diageo with respect to its ordinary shares or ADSs generally will be qualified dividend income to US holders that meet the holding period requirement, provided that, in the year that you receive the dividend, we are eligible for the benefits of the Treaty. We believe that we are currently eligible for the benefits of the Treaty and we therefore expect that dividends on the shares or ADSs will be qualified dividend income, but there can be no assurance that we will continue to be eligible for the benefits of the Treaty. Under UK law, dividends paid by the company are not subject to UK withholding tax. Therefore, the US holder will include in income for US federal income tax purposes the amount of the dividend received, and the receipt of a dividend will not entitle the US holder to a foreign tax credit.
The dividend must be included in income when the US holder, in the case of shares, or the Depositary, in the case of ADSs, receives the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to US corporations in respect of dividends received from other US corporations. Dividends will generally be income from sources outside the United States and will generally be ‘passive’ income for purposes of computing the foreign tax credit allowable to a US holder. The amount of the dividend distribution that must be included in income of a US holder will be the US dollar value of the pounds sterling payments made, determined at the spot pounds sterling/US dollar foreign exchange rate on the date of the dividend distribution, is included in income, regardless of whether the payment is in fact converted into US dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend payment is included in incomedistributed to the date the payment is converted into US dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for US federal income tax purposes, will be treated as a non-taxable return of capital to the extent of the holder’s basis in the ordinary shares or ADSs and thereafter as capital gain. However, Diageo does not expect to calculate earnings and profits in accordance with US federal income tax principles. Accordingly, a US holder should expect to generally treat distributions Diageo makes as dividends.
Taxation of capital gains
UK taxation
A citizen or resident (for tax purposes) of the United States who has at no time been resident in the United Kingdom will not be liable for UK tax on capital gains realised or accrued on the sale or other disposal of ordinary shares or ADSs, unless the ordinary shares or ADSs are held in connection with a trade or business carried on by the holder in the United Kingdom through a UK branch, agency or a permanent establishment. A disposal (or deemed disposal) of shares or ADSs by a holder who is resident in the United Kingdom may, depending on the holder’s particular circumstances, and subject to any available exemption or relief, give rise to a chargeable gain or an allowable loss for the purposes of UK tax on capital gains.
US taxation
Subject to the PFIC rules discussed below, a US holder who sells or otherwise disposes of ordinary shares or ADSs will recognise capital gain or loss for US federal income tax purposes equal to the difference between the US dollar value of the amount that is realised and the tax basis, determined in US dollars, in the ordinary shares or ADSs. Capital gain of a non-corporate US holder is generally taxed at preferential rates where the property is held for more than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
Additional information for shareholders (continued)
PFIC rules
Diageo believes that ordinary shares and ADSs should not currently be treated as stock of a PFIC for US federal income tax purposes, and we do not expect to become a PFIC in the foreseeable future. However this conclusion is a factual determination that is made annually and thus may be subject to change. It is therefore possible that we could become a PFIC in a future taxable year.
If treated as a PFIC, gain realised on the sale or other disposition of ordinary shares or ADSs would in general not be treated as capital gain. Instead, unless a US holder elects to be taxed annually on a mark-to-market basis with respect to the ordinary shares or ADSs, US holders would be treated as if the holder had realised such gain and certain ‘excess distributions’ pro-rated over the holder’s holding period for the ordinary shares or ADSs and would be taxed at the highest tax rate in effect for each such year to which the gain or distribution was allocated, together with an interest charge in respect of the tax attributable to each such year. With certain exceptions, a holder’s ordinary shares or ADSs will be treated as stock in a PFIC if Diageo were a PFIC at any time during the holding period in a holder’s ordinary shares or ADSs. In addition, dividends received from Diageo will not be eligible for the special tax rates applicable to qualified dividend income if Diageo is a PFIC (or is treated as a PFIC with respect to the holder) either in the taxable year of the distribution or the preceding taxable year, but instead will be taxable at rates applicable to ordinary income. If you own our shares or ADSs during any year that we are a PFIC with respect to you, you may be required to file IRS Form 8621.
UK inheritance tax
Subject to certain provisions relating to trusts or settlements, an ordinary share or ADS held by an individual shareholder who is domiciled in the United States for the purposes of the Convention between the United States and the United Kingdom relating to estate and gift taxes (the Convention) and who is neither domiciled in the UK nor (where certain conditions are met) a UK national (as
defined in the Convention), will generally not be subject to UK inheritance tax on the individual’s death (whether held on the date of death or gifted during the individual’s lifetime) except where the ordinary share or ADS is part of the business property of a UK permanent establishment of the individual or pertains to a UK fixed base of an individual who performs independent personal services. In a case where an ordinary share or ADS is subject both to UK inheritance tax and to US federal gift or estate tax, the Convention generally provides for inheritance tax paid in the United Kingdom to be credited against federal gift or estate tax payable in the United States, or for federal gift or estate tax paid in the United States to be credited against any inheritance tax payable in the United Kingdom, based on priority rules set forth in the Convention.
UK stamp duty and stamp duty reserve tax
Stamp duty and stamp reserve tax (SDRT) may arise upon the deposit of an underlying ordinary share with the Depositary, generally at the higher rate of 1.5% of its issue price or, as the case may be, of the consideration for transfer. The Depositary will pay the stamp duty or SDRT but will recover an amount in respect of such tax from the initial holders of ADSs. Following litigation, however, HMRC have confirmed that they will no longer seek to apply the 1.5% SDRT charge on an issue of shares to a depositary receipt issuer or to a person providing clearance services (or their nominee or agent) on the basis that this is not compatible with EU law. HMRC may continue to apply the 1.5% stamp duty or SDRT charge on transfers of shares to a depositary receipt issuer or to a person providing clearance services (or their nominee or agent) unless the transfer is an integral part of a raising of capital. It is not currently anticipatedHMRC's current practice states that HMRC will now seek to apply the 1.5% charge toon issues will remain disapplied following Brexit unless the stamp taxes on shares legislation is amended. However, since the UK is no longer bound by EU law, the position may change, possibly as a result of shares following Brexit.any changes in the status of retained EU law.
Based on HM Revenue & Custom’sHMRC’s published practice, no UK stamp duty will be payable on the acquisition or transfer of ADRs. Furthermore, an agreement to transfer ADSs in the form of ADRs will not give rise to a liability to SDRT.
Purchases of ordinary shares (as opposed to ADRs) will be subject to UK stamp duty, and/or SDRT as the case may be, at the rate of 0.5% of the price payable for the ordinary shares at the time of the transfer. Stamp duty applies where a physical instrument of transfer is used to effect the transfer. SDRT applies to any agreement to transfer ordinary shares (regardless of whether or not the transfer is effected electronically or by way of an instrument of transfer). However, where ordinary shares being acquired are transferred direct to the Depositary’s nominee, the only charge will generally be the higher charge of 1.5% of the price payable for the ordinary shares so acquired.
Any stamp duty payable (as opposed to SDRT) is rounded up to the nearest £5. No stamp duty (as opposed to SDRT) will be payable if the amount or value of the consideration is (and is certified to be) £1,000 or less. Stamp duty and SDRT are usually paid or borne by the purchaser.
Whilst stamp duty and SDRT may in certain circumstances both apply to the same transaction, in practice usually only one or other will need to be paid.
Additional information for shareholders (continued)
Annual General Meeting (AGM)
The AGM will be held at etc.venues St Paul's, 200 Aldersgate, London EC1A 4HD at 2.30 pm on Thursday, 28 September 2023.
Documents on display
The Annual Report on Form 20-F and any other documents filed by the company with the US Securities Exchange Commission (SEC) may be inspected at the SEC’s office of Investor Education and Advocacy located at 100 F Street, NE, Washington, DC 20549-0213, USA. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. Filings with the SEC are also available to the public from commercial document retrieval services, and from the website maintained by the US Securities and Exchange Commission at www.sec.gov.
Annual report to security holders
Pursuant to Item 10.J of Form 20-F, Exhibit 15.2 to this annual report on Form 20-F includes Diageo's annual report to security holders. None of such annual report is incorporated by reference into this annual report on Form 20-F. Such annual report is not deemed to be filed as part of this annual report on Form 20-F.
Warning to shareholders –- share fraud
Please beware of the share fraud of ‘boiler room’ scams, where shareholders are called ‘out of the blue’ by fraudsters (sometimes claiming to represent Diageo) attempting to obtain money or property dishonestly. Further information is available inon boiler room scams can be found on the investor section of Diageo’sFinancial Conduct Authority’s website (www.diageo.com)(https://www.fca.org.uk/ scamsmart/share-bond-boiler-room-scams) but in short, if in doubt, obtain appropriatetake proper professional advice before making any investment decision.
Electronic communications
Shareholders can register for an account to manage their shareholding online, including being able to: check the number of shares they own and the value of their shareholding; register for electronic communications; update their personal details; provide a dividend mandate instruction; access dividend confirmations; and use the online share dealing service. To register for an account, shareholders should visit www.diageoregistrars.com.
Dividend payments
Direct payment into bank account
Shareholders can have their cash dividend paid directly into their UK bank account on the dividend payment date. To register UK bank account details, shareholders can register for an online account at www.diageoregistrars.com or call the Registrar on +44 (0)371 277 1010* to request the relevant application form. For shareholders outside the UK, Link Group (a trading name of Link Market Services Limited and Link Market Services Trustees Limited) may be able to provide you with a range of services relating to your shareholding. To learn more about the services available to you please visit the shareholder portal at www.diageoregistrars.com or call +44 (0)371 277 1010*.
Dividend Reinvestment Plan
A Dividend Reinvestment Plan is offered by the Registrar, Link Market Services Trustees Limited, to give shareholders the opportunity to build up their shareholding in Diageo by using their cash dividends to purchase additional Diageo shares. To join the Dividend Reinvestment Plan, shareholders can call the Registrar, Link Group on
+44 (0)371 277 1010* to request the relevant application form.
Exchange controls
Other than certain economic sanctions which may be in effect from time to time, there are currently no UK foreign exchange control restrictions on the payment of dividends, interest or other payments to holders of Diageo’s securities who are non-residents of the UK or on the conduct of Diageo’s operations.
There are no restrictions under the company’s articles of association or under English law that limit the right of non-resident or foreign owners to hold or vote the company’s ordinary shares.
Please refer to the ‘Taxation’ section on page 320-322 for details relating to the taxation of dividend payments.
Useful contacts
The Registrar/Shareholder queries
Link Group acts as the company’s registrar and can be contacted as follows:
By email: Diageo@linkgroup.co.uk
By telephone: +44 (0) 371 277 1010*
In writing: Registrars – Link Group, Diageo Registrar, Central Square, 29 Wellington Street, Leeds, LS1 1DL.
* Calls are charged at the standard geographic rate and will vary by provider. Calls outside the United Kingdom will be charged at the applicable international rate. Lines are open 08:00 to 17:30 UK time, Monday to Friday, excluding public holidays in England and Wales.
Additional information for shareholders (continued)324
ADR administration
ExhibitsCitibank Shareholder Services acts as the company’s ADR administrator and can be contacted as follows:
By email: citibank@shareholders-online.com
By telephone: +1 866 253 0933/ (International) +1 781 575 4555*
In writing: Citibank Shareholder Services. PO Box 43077,
Providence, RI 02940-3077
* Lines are open Monday to Friday 8:30 to 18:00 EST
General Counsel and Company Secretary
Tom Shropshire
The.cosec@diageo.com
Investor Relations
investor.relations@diageo.com
Exhibits |
| | | | |
1.1 |
|
| 1.1 | |
|
| 2.1 |
| | Indenture, dated as of 3 August 1998, among Diageo Capital plc, Diageo plc and The Bank of New York Mellon (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form F-1 (File No. 333-8874) filed with the Securities and Exchange Commission on 24 July 1998 (pages 365 to 504 of paper filing)).(i) |
| 2.2 |
| | Indenture, dated as of 1 June 1999, among Diageo Investment Corporation, Diageo plc and The Bank of New York Mellon (incorporated by reference to Exhibit 2.2 to the Annual Report on Form 20-F (File No. 001-10691) filed with the Securities and Exchange Commission on 15 November 2001 (pages 241 to 317 of paper filing)).(i) |
| 2.3 |
| | |
| 2.4 |
| | |
4.1 |
| | |
4.24.1 |
| | |
4.34.2 |
| | |
4.44.3 |
| | |
4.54.4 |
| | |
4.64.5 |
| | |
4.74.6 |
| | |
4.84.7 |
| | |
4.94.8 |
| | |
4.104.9 |
| | |
4.11 |
| | |
4.12 |
| | |
4.13 |
| | |
4.14 |
| | |
4.15 |
| | |
Additional information for shareholders (continued)
|
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4.17 |
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|
4.184.11 |
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4.19 |
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4.20 |
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4.21 |
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4.22 |
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4.234.12 |
| | |
4.244.13 |
| | |
4.254.14 |
| | |
Glossary of terms and US equivalents
| | | | | |
4.264.15 |
| | |
| 6.1 |
| | |
| 8.1 |
| | |
| 12.1 |
| | |
| 12.2 |
| | |
| 13.1 |
| | |
| 13.2 |
| | |
| 15.1 |
| | |
101.INS15.2 |
| |
| 101.INS | Inline XBRL Instance Document |
| 101.SCH |
| | Inline XBRL Taxonomy Extension Schema |
| 101.CAL |
| | Inline XBRL Taxonomy Extension Schema Calculation Linkbase |
| 101.DEF |
| | Inline XBRL Taxonomy Extension Schema Definition Linkbase |
| 101.LAB |
| | Inline XBRL Taxonomy Extension Schema Label Linkbase |
| 101.PRE |
| | Inline XBRL Taxonomy Extension Schema Presentation Linkbase |
(i) Pursuant to an Agreement of Resignation, Appointment and Acceptance dated 16 October 2007 by and among Diageo plc, Diageo Capital plc, Diageo Finance BV, Diageo Investment Corporation, The Bank of New York and Citibank NA, The Bank of New York Mellon has become the successor trustee to Citibank NA under Diageo’s indentures dated 3 August 1998, 8 December 2003 and 1 June 1999.
Additional information for shareholders (continued)327
Glossary of terms and US equivalents (continued)
Signature
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorised.
| | |
|
| DIAGEO plc |
DIAGEO plc(REGISTRANT) |
(REGISTRANT) |
| /s/ Lavanya Chandrashekar |
/s/ Kathryn MikellsName: Lavanya Chandrashekar |
Name: Kathryn Mikells |
|
| Title: Chief Financial Officer |
|
73 August 20202023 |
Glossary of terms and US equivalents328
In this document the following words and expressions shall, unless the context otherwise requires, have the following meanings:
|
| | | | |
| | |
| Term used in UK annual report | | US equivalent or definition |
| Associates | | Entities accounted for under the equity method |
| American Depositary Receipt (ADR) | | Receipt evidencing ownership of an ADS |
| American Depositary Share (ADS) | | Registered negotiable security, listed on the New York Stock Exchange, representing four Diageo plc ordinary shares of 28101/108 pence each |
| Called up share capital | | Common stock |
| Capital redemption reserve | | Other additional capital |
| Company | | Diageo plc |
| CPI | | Consumer price index |
| Creditors | | Accounts payable and accrued liabilities |
| Debtors | | Accounts receivable |
| Employee share schemes | | Employee stock benefit plans |
| Employment or staff costs | | Payroll costs |
| Equivalent units | | An equivalent unit represents one nine-litre case of spirits, which is approximately 272 servings. A serving comprises 33ml of spirits, 165ml of wine, or 330ml of ready to drink or beer. To convert volume of products other than spirits to equivalent units: beer in hectolitres divide by 0.9, wine in nine-litre cases divide by five, ready to drink in nine-litre cases divide by 10, and certain pre-mixed products classified as ready to drink in nine-litre cases divide by five. |
| Euro, €, ¢ | | Euro currency |
| Exceptional items | | Items that, in management’s judgement, need to be disclosed separately by virtue of their size or nature |
| Excise duty | | Tax charged by a sovereign territory on the production, manufacture, sale or distribution of selected goods (including imported goods) within that territory. It is generally based on the quantity or alcohol content of goods, rather than their value, and is typically applied to alcohol products and fuels. |
| Finance lease | | Capital lease |
| Financial year | | Fiscal year |
| Free cash flow | | Net cash flow from operating activities aggregated with net purchase and disposal of property, plant and equipment and computer software and with movements in loans |
| Freehold | | Ownership with absolute rights in perpetuity |
| GAAP | | Generally accepted accounting principles |
| Group and Diageo | | Diageo plc and its consolidated subsidiaries |
| IFRS | | International Financial Reporting Standards as adopted for use in the European Union and International Financial Reporting Standards as issued by the International Accounting Standards Board |
| Impact Databank, IWSR, IRI, Beverage Information Group and Plato Logic | | Information source companies that research the beverage alcohol industry and are independent from industry participants |
| Net sales | | Sales after deducting excise duties |
| Noon buying rate | | Buying rate at noon in New York City for cable transfers in sterling as certified for customs purposes by the Federal Reserve Bank of New York |
| Operating profit | | Net operating income |
| Organic movement | | At level foreign exchange rates and after adjusting for exceptional items, acquisitions and disposals for continuing operations |
| Own shares | | Treasury stock |
| Pound sterling, sterling, £, pence, p | | UK currency |
| Price/mix | | Price/mix is the number of percentage points by which the organic movement in net sales exceeds the organic movement in volume. The difference arises because of changes in the composition of sales between higher and lower priced variants/markets or as price changes are implemented. |
| Profit | | Earnings |
Glossary of terms and US equivalents (continued)329
|
| | | | |
| | |
| Term used in UK annual report | | US equivalent or definition |
| Profit for the year | | Net income |
| Provisions | | Accruals for losses/contingencies |
| Reserves | | Accumulated earnings, other comprehensive income and additional paid in capital |
| RPI | | Retail price index |
| Ready to drink | | Ready to drink products. Ready to drink also include ready to serve products, such as pre-mix cans in some markets, and progressive adult beverages in the United States and certain markets supplied by the United States. |
| SEC | | US Securities and Exchange Commission |
| Share premium | | Additional paid in capital or paid in surplus |
| Shareholders’ funds | | Shareholders’ equity |
| Shareholders | | Stockholders |
| Shares | | Common stock |
| Shares and ordinary shares | | Diageo plc’s ordinary shares |
| Shares in issue | | Shares issued and outstanding |
| Trade and other payables | | Accounts payable and accrued liabilities |
| Trade and other receivables | | Accounts receivable |
| US dollar, US$, $, ¢ | | US currency |
Exhibit 2.4
DESCRIPTION OF SECURITIES
REGISTERED UNDER SECTION 12 OF THE EXCHANGE ACT
As of 30 June 2023 Diageo plc. (“Diageo,” the “Company,” “we,” “us,” and “our”) had the following series of securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| American Depositary Shares | DEO | New York Stock Exchange |
Ordinary shares of 28101/108 pence each | | New York Stock Exchange(i) |
(i) Not for trading, but only in connection with the registration of American Depositary Shares representing such ordinary shares, pursuant to the requirements of the Securities and Exchange Commission.
Capitalized terms used but not defined herein have the meanings given to them in Diageo’s annual report on Form 20-F for the fiscal year ended 30 June 2023.
ORDINARY SHARES
The following description of our ordinary shares is a summary and does not purport to be complete. It is subject to and qualified in its entirety by Diageo’s articles of association (as adopted by special resolution at the Annual General Meeting on 28 September 2020) and by the Companies Act 1985 and the Companies Act 2006 and any other applicable English law concerning companies, as amended from time to time.
A copy of Diageo’s articles of association is filed as an exhibit to Diageo’s annual report on Form 20-F for the fiscal year ended 30 June 2023, as Exhibit 1.1.
General
As at 30 June 2023 there were 2,459,843,065 ordinary shares of 28101/108 pence each in issue with a nominal value of £711,760,146.12 million.
On 25 July 2019 the Board of Diageo approved a return of capital program to return up to £4.5 billion to shareholders over the three-year period ending 30 June 2022. During the first phase, which completed on 31 January 2020, the group purchased 36.1 million ordinary shares.
On 9 April 2020 Diageo announced that it had not initiated the next phase of the return of capital programme and that it would not do so during the remainder of the year ended 30 June 2020. On 12 May 2021 it was announced that Diageo was recommencing the up to £4.5 billion programme, extending the original completion date by two years to 30 June 2024.
The final three phases of the £4.5 billion programme completed on 11 February 2022, 5 October 2022 and 1 February 2023 respectively, having announced in July 2022 that it would bring forward the final completion date to during the year ending 30 June 2023. Under these three additional phases Diageo purchased a further 88.1 million shares in total.
On 25 January 2023 the Board of Diageo approved an additional share buyback programme to return up to £0.5 billion to shareholders by the end of the year ending 30 June 2023. This new programme commenced on 16 February 2023 and completed on 2 June 2023 with Diageo having purchased 14 million shares.
All shares repurchased have been cancelled.
Our ordinary shares are listed on the London Stock Exchange (LSE). Diageo ADSs (as further described below), representing four Diageo ordinary shares each, are listed on the New York Stock Exchange (NYSE) under the symbol “DEO”.
All of Diageo’s ordinary shares are fully paid. Accordingly, no further contribution of capital may be required by Diageo from the holders of such shares. Diageo’s ordinary shares are represented in certificated form and also in uncertificated form under “CREST”. CREST is an electronic settlement system in the United Kingdom which enables Diageo’s ordinary shares to be evidenced other than by a physical certificate and transferred electronically rather than by delivery of a written stock transfer form. Diageo’s ordinary shares:
•may be represented by certificates in registered form issued (subject to the terms of issue of the shares) following issuance of the shares by Diageo or receipt of a form of transfer (bearing evidence of payment of the appropriate stamp duty) by Diageo Registrar, PO Box 521, Darlington, DL1 9XS; or
•may be in uncertificated form with the relevant CREST member account being credited with the ordinary shares issued or transferred.
Under English law, persons who are neither residents nor nationals of the United Kingdom may freely hold, vote and transfer Diageo ordinary shares in the same manner and under the same terms as UK residents or nationals.
Dividend rights
Holders of Diageo’s ordinary shares may, by ordinary resolution, declare dividends but may not declare dividends in excess of the amount recommended by the directors. The directors may also pay interim dividends or fixed rate dividends. No dividend may be paid other than out of profits available for distribution. All of Diageo’s ordinary shares rank equally for dividends, but the Board may withhold payment of all or any part of any dividends or other monies payable in respect of Diageo’s shares from a person with a 0.25% interest (as defined in Diageo’s articles of association) if such a person has been served with a restriction notice (as defined in Diageo’s articles of association) after failure to provide Diageo with information concerning interests in those shares required to be provided under the Companies Acts. Dividends may be paid in currencies other than sterling and such dividends will be calculated using an appropriate market exchange rate as determined by the directors in accordance with Diageo’s articles of association.
If a dividend has not been claimed, the directors may invest the dividend or use it in some other way for the benefit of Diageo until the dividend is claimed. If the dividend remains unclaimed for 12 years after the date such dividend was declared or became due for payment, it will be forfeited and will revert to Diageo (unless the directors decide otherwise). Diageo may stop sending cheques, warrants or similar financial instruments in payment of dividends by post in respect of any shares or may cease to employ any other means for payment of dividends if either (a) at least two consecutive payments have remained uncashed or are returned undelivered or that means of payment has failed, or (b) one payment remains uncashed or is returned undelivered or that means of payment has failed and reasonable enquiries have failed to establish any new postal address or account of the holder. Diageo must resume sending dividend cheques, warrants or similar financial instruments or employing that means of payment if the holder requests such resumption in writing.
Diageo’s articles of association permit payment or satisfaction of a dividend wholly or partly by distribution of specific assets, including fully paid shares or debentures of any other company. Such action is only permitted upon the recommendation of the board and must be approved by ordinary resolution by the general meeting which declared the dividend.
Voting rights
Voting on any resolution at any general meeting of the company is by a show of hands unless a poll is duly demanded. On a show of hands, (a) every shareholder who is present in person at a general meeting, and every proxy appointed by any one shareholder and present at a general meeting, has/have one vote regardless of the number of shares held by the shareholder (or, subject to (b), represented by the proxy), and (b) every proxy present at a general meeting who has been appointed by more than one shareholder has one vote regardless of the number of shareholders who have appointed him or the number of shares held by those shareholders, unless he has been instructed to vote for a resolution by one or more shareholders and to vote against the resolution by one or more shareholders, in which case he has one vote for and one vote against the resolution. On a poll, every shareholder who is present in person or by proxy has one vote for every share held by that shareholder, but a shareholder or proxy entitled to more than one vote need not cast all his votes or cast them all in the same way (the deadline for exercising voting rights by proxy is set out in the form of proxy).
A poll may be demanded by any of the following:
•the chairman of the general meeting;
•at least three shareholders entitled to vote on the relevant resolution and present in person or by proxy at the meeting;
•any shareholder or shareholders present in person or by proxy and representing in the aggregate not less than one-tenth of the total voting rights of all shareholders entitled to vote on the relevant resolution; or
•any shareholder or shareholders present in person or by proxy and holding shares conferring a right to vote on the relevant resolution on which there have been paid up sums in the aggregate equal to not less than one-tenth of the total sum paid up on all the shares conferring that right.
Diageo’s articles of association and the Companies Acts provide for matters to be transacted at general meetings of Diageo by the proposing and passing of two kinds of resolutions:
•ordinary resolutions, which include resolutions for the election, re-election and removal of directors, the declaration of final dividends, the appointment and re-appointment of the external auditor, the approval of the remuneration report and remuneration policy and the grant of authority to allot shares; and
•special resolutions, which include resolutions for the amendment of Diageo’s articles of association, resolutions relating to the disapplication of pre-emption rights, and resolutions modifying the rights of any class of Diageo’s shares at a meeting of the holders of such class.
An ordinary resolution requires the affirmative vote of a simple majority of the votes cast at a validly constituted shareholders’ meeting. Special resolutions require the affirmative vote of not less than three-quarters of the votes cast at a validly constituted shareholders’ meeting. The necessary quorum for a shareholders’ meeting of Diageo is a minimum of two shareholders present in person or by proxy and entitled to vote.
A shareholder is not entitled to vote at any general meeting or class meeting in respect of any share held by him if he has been served with a restriction notice (as defined in Diageo’s articles of association) after failure to provide Diageo with information concerning interests in those shares required to be provided under the Companies Acts.
Directors
Diageo’s articles of association provide for a Board of Directors, consisting (unless otherwise determined by an ordinary resolution of shareholders) of not fewer than three directors and not more than 25 directors, in which all powers to manage the business and affairs of Diageo are vested. Directors may be elected by the members in a general meeting or appointed by Diageo’s Board. At each annual general meeting, every director is required to retire and is then reconsidered for election/re-election by shareholders, assuming they wish to stand for election/re-election. There is no age limit requirement in respect of directors. Directors may also be removed before the expiration of their term of office in accordance with the provisions of the Companies Acts.
Liquidation rights
In the event of the liquidation of Diageo, after payment of all liabilities and deductions taking priority in accordance with English law, the balance of assets available for distribution will be distributed among the holders of ordinary shares according to the amounts paid up on the shares held by them.
Pre-emption rights and new issues of shares
While holders of ordinary shares have no pre-emptive rights under Diageo’s articles of association, the ability of the directors to cause Diageo to issue shares, securities convertible into shares or rights to shares, otherwise than pursuant to an employee share scheme, is restricted. Under the Companies Acts, the directors of a company are, with certain exceptions, unable to allot any equity securities without express authorisation, which may be contained in a company’s articles of association or given by its shareholders in a general meeting by way of an ordinary resolution, but which in either event cannot last for more than five years. Under the Companies Acts, Diageo may also not allot shares for cash (otherwise than pursuant to an employee share scheme) without first making an offer to existing shareholders to allot such shares to them on the same or more favourable terms in proportion to their respective shareholdings, unless this requirement is disapplied by a special resolution of the shareholders. However, Diageo has in the past sought authority from its shareholders to allot shares and disapply pre-emptive rights (in each case subject to certain limitations).
Disclosure of interests in Diageo’s shares
There are no provisions in Diageo’s articles of association whereby persons acquiring, holding or disposing of a certain percentage of Diageo’s shares are required to make disclosure of their ownership percentage, although there are such requirements under the Companies Acts. The basic disclosure requirement under Part 6 of the Financial Services and Markets Act 2000 and Rule 5 of the Disclosure Guidance and Transparency Rules made by the Financial Conduct Authority (successor to the UK Financial Services Authority) imposes a statutory obligation on a person to notify Diageo and the Financial Conduct Authority of the percentage of the voting rights in Diageo he directly or indirectly holds or controls, or has rights over, through his direct or indirect holding of certain financial instruments, if the percentage of those voting rights:
•reaches, exceeds or falls below 3% and/or any subsequent whole percentage figure as a result of an acquisition or disposal of shares or financial instruments; or
•reaches, exceeds or falls below any such threshold as a result of any change in the breakdown or number of voting rights attached to shares in Diageo.
The Disclosure Guidance and Transparency Rules set out in detail the circumstances in which an obligation of disclosure will arise, as well as certain exemptions from those obligations for specified persons.
Under section 793 of the Companies Act 2006, Diageo may, by notice in writing, require a person that Diageo knows or has reasonable cause to believe is or was during the three years preceding the date of notice interested in Diageo’s shares to indicate whether or not that is the case and, if that person does or did hold an interest in Diageo’s shares, to provide certain information as set out in that Act.
Article 19 of the EU Market Abuse Regulation (2014/596) (as it is incorporated into UK domestic law by virtue of the European Union (Withdrawal) Act 2018 and amended by The Market Abuse (Amendment) (EU Exit) Regulation 2019) further requires persons discharging managerial responsibilities within Diageo (and their persons closely associated) to notify Diageo of transactions conducted on their own account in Diageo shares or derivatives or certain financial instruments relating to Diageo shares.
The City Code on Takeovers and Mergers also imposes strict disclosure requirements with regard to dealings in the securities of an offeror or offeree company on all parties to a takeover and also on their respective associates during the course of an offer period.
Variation of rights
If, at any time, Diageo’s share capital is divided into different classes of shares, the rights attached to any class of shares may be varied, subject to the provisions of the Companies Acts, either with the consent in writing of the holders of not less than three-quarters in nominal value of the issued shares of that class or upon the adoption of a special resolution passed at a separate meeting of the holders of the shares of that class.
At every such separate meeting, all of the provisions of Diageo’s articles of association relating to proceedings at a general meeting apply, except that (a) the quorum is to be the number of persons (which must be at least two) who hold or represent by proxy not less than one-third in nominal value of the issued shares of the class (excluding any shares of that class held as treasury shares) or, if such quorum is not present on an adjourned meeting, one person who holds shares of the class regardless of the number of shares he holds, (b) any holder of shares of the class who is present in person or by proxy may demand a poll, and (c) each shareholder present in person or by proxy and entitled to vote will have one vote per share held in that particular class in the event a poll is taken.
Class rights are deemed not to have been varied by the creation or issue of new shares ranking equally with or subsequent to that class of shares in all respects or by the reduction of the capital paid up on such shares or by the purchase or redemption by Diageo of its own shares, in each case in accordance with the Companies Acts and Diageo’s articles of association.
Repurchase of shares
Subject to authorisation by shareholder resolution, Diageo may purchase its own shares in accordance with the Companies Acts. Any shares which have been bought back may be held as treasury shares or, if not so held, must be cancelled immediately upon completion of the purchase, thereby reducing the amount of Diageo’s issued share capital. At the Annual General Meeting held on October 6, 2022, Diageo’s shareholders gave it authority to repurchase up to 227,870,414 of its ordinary shares subject to additional conditions. The minimum price which must be paid for such shares is 28101/108 pence and the maximum price is the higher of (a) 5% above the average market value of Diageo’s ordinary shares for the five business days immediately preceding the day on which that ordinary share is contracted to be purchased and (b) the higher of the price of the last independent trade and the highest current independent purchase bid on the trading venue where the purchase is carried out.
Restrictions on transfers of shares
The Board may decline to register a transfer of a certificated Diageo share unless the instrument of transfer (a) is duly stamped or certified or otherwise shown to the satisfaction of the Board to be exempt from stamp duty and is accompanied by the relevant share certificate and such other evidence of the right to transfer as the Board may reasonably require, (b) is in respect of only one class of share and (c) if to joint transferees, is in favour of not more than four such transferees.
Registration of a transfer of an uncertificated share may be refused in the circumstances set out in the uncertificated securities rules (as defined in Diageo’s articles of association) and where, in the case of a transfer to joint holders, the number of joint holders to whom the uncertificated share is to be transferred exceeds four.
The Board may decline to register a transfer of any of Diageo’s certificated shares by a person with a 0.25% interest (as defined in Diageo’s articles of association) if such a person has been served with a restriction notice (as defined in Diageo’s articles of association) after failure to provide Diageo with information concerning interests in those shares required to be provided under the Companies Acts, unless the transfer is shown to the Board to be pursuant to an arm’s length sale (as defined in Diageo’s articles of association).
Substantive shareholder voting rights
The company’s substantial shareholders do not have different voting rights.
AMERICAN DEPOSITARY SHARES
General
The ordinary shares of Diageo may be issued in the form of American depositary shares, or ADSs. Each Diageo ADS represents four ordinary shares of Diageo.
Citibank, N.A. is the depositary with respect to Diageo’s ADSs, which are evidenced by American depositary receipts, or ADRs. Each ADS represents an ownership interest in four ordinary shares deposited with the custodian, as agent of the depositary, under the Deposit Agreement dated 14 February 2013 between Diageo, the Depositary and owners and beneficiaries of the ADRs (the “Deposit Agreement”). Each ADS also represents any other securities, cash or other property which may be held by Citibank, N.A. as depositary.
The principal executive office of Citibank, N.A. and the office at which the ADRs will be administered is currently located at 388 Greenwich Street, New York, New York 10013, United States. Citibank, N.A. is a national banking association organized under the laws of the United States. The custodian will be Citibank, N.A. (London Branch) and its duties will be administered from its principal London office, currently located at 25 Molesworth Street, Lewisham, London SE13 7EX, United Kingdom.
You may hold ADSs either directly or indirectly through your broker or other financial institution. If you hold ADSs directly, by having an ADS registered in your name on the books of the depositary, you are an ADR holder. If you hold the ADSs through your broker or financial institution nominee, you must rely on the procedures of such broker or financial institution to assert the rights of an
ADR holder described in this section. You should consult with your broker or financial institution to find out what those procedures are.
Diageo will not treat ADR holders as shareholders and ADR holders will not have shareholder rights. English law governs shareholder rights. The depositary will be the holder of the ordinary shares underlying your ADSs. As a holder of ADRs, you will have ADR holder rights, which are set out in the Deposit Agreement. The Deposit Agreement also sets out the rights and obligations of the depositary.
The following is a summary of the material terms of the Deposit Agreement. Because it is a summary, it does not contain all the information that may be important to you. For more complete information, you should read the entire form of Deposit Agreement and the form of ADR, which contain the terms of the ADSs. Please refer to Exhibit 99.A on Form F-6 (File No. 333-186400) filed with the Securities and Exchange Commission on 1 February 2013). Copies of the Deposit Agreement are also available for inspection at the offices of the depositary.
Share Dividends and Other Distributions
Diageo may make various types of distributions with respect to its securities. The depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities, after deducting its fees and expenses. You will receive these distributions in proportion to the number of underlying ordinary shares that your ADSs represent.
Except as stated below, to the extent the depositary is legally permitted it will deliver such distributions to ADR holders in proportion to their interests in the following manner:
•Cash. Upon receiving notice from Diageo that Diageo intends to distribute a cash dividend or other cash distribution, the depositary will establish a record date for such distribution. As promptly as practicable following the receipt of a cash dividend or other cash distribution from Diageo, the depositary will: (i) if at the time of receipt thereof any amounts received in a foreign currency can, in the judgment of the depositary, be converted on a practicable basis into U.S. dollars transferable into the United States, promptly convert or cause to be converted such cash dividend or cash distributions into U.S. dollars, (ii) if applicable, establish a record date for the distribution and (iii) distribute promptly such U.S. dollar amount, net of applicable fees, charges and expenses of the depositary and taxes withheld. The depositary shall distribute only such amount as can be distributed without attributing to any ADR holder a fraction of one cent. Any such fractional amounts shall be rounded to the nearest whole cent and so distributed to ADR holders entitled thereto. If the depositary cannot reasonably make such conversion or obtain any governmental approval or license necessary for the conversion, the depositary will hold any unconvertible foreign currency for your account without liability for any interest or, upon request, will distribute the foreign currency to you. If exchange rates fluctuate during a time when the depositary cannot convert a foreign currency, you may lose some or all of the value of the distribution.
•Shares. Upon receiving notice from Diageo that Diageo intends to distribute a share dividend or free distribution of ordinary shares, the depositary will establish a record date for such distribution. The depositary will then either (i) deliver additional ADSs representing such ordinary shares, or (ii) if additional ADSs are not so distributed, take all actions necessary so that each ADS issued and outstanding after the ADS record date shall, to the extent permissible by law, thenceforth also represent rights and interests in the additional ordinary shares distributed, in each case net of applicable fees, charges and expenses of the depositary and taxes withheld. Only whole ADSs will be issued. Any ordinary shares which would result in fractional ADSs will be sold and the net proceeds will be distributed to the ADR holders entitled to them.
•Rights to receive additional shares. Upon receiving notice from Diageo that Diageo intends to distribute rights to subscribe for additional ordinary shares or other rights and that Diageo wishes such rights to be made available to holders of ADSs, the depositary shall, after consultation with Diageo, have discretion as to the procedure for making such rights available to any ADR holders or in disposing of such rights on behalf of any ADR holders and making, as promptly as practicable, the net proceeds available to such ADR holders. If, by the terms of the offering of rights or for any other reason, the depositary may not either make such rights available to any ADR holders or dispose of such rights on behalf of any ADR holders and make the net proceeds available to such ADR holders, then the depositary shall allow such rights to lapse. If the depositary determines in its reasonable discretion that it is not lawful or practicable to make such rights available to all or certain ADR holders, if Diageo does not furnish such evidence or if the depositary determines it is not lawful or practicable to distribute such rights to all or some of the registered holders, the depositary may:
•distribute such rights only to the holders to whom the depositary has determined such distribution is lawful and practicable;
•if practicable, sell rights in proportion to the number of ADSs held by registered holders to whom the depositary has determined it may not lawfully or practicably make such rights available and distribute the net proceeds as cash; or
•allow rights in proportion to the number of ADSs held by registered holders to whom the depositary has determined it may not lawfully or practicably make such rights available to lapse, in which case such registered holders will receive nothing.
Diageo has no obligation to file a registration statement under the Securities Act of 1933, as amended, in order to make any rights available to ADR holders.
•Other Distributions. Upon receiving notice from Diageo that Diageo intends to distribute securities or property other than those described above and that Diageo wishes such rights to be made available to holders of ADSs, the depositary may distribute such securities or property in any manner it deems equitable and practicable. To the extent the depositary deems distribution of such securities or property not to be practicable, the depositary may, after consultation with Diageo, adopt any method that it reasonably deems to be equitable and practical, including but not limited to the sale of such securities or property and distribution of any net proceeds in the same way that cash is distributed.
The depositary may choose any practical method of distribution for any specific ADR holder, including the distribution of securities or property, or it may retain such items, without paying interest on or investing them, on behalf of the ADR holder as deposited property.
There can be no assurances that the depositary will be able to convert any currency at a specified exchange rate or sell any property, rights, shares or other securities at a specified price, nor that any of such transactions can be completed within a specified time period.
Deposit, Withdrawal and Cancellation
The depositary will deliver ADSs if you or your broker deposit ordinary shares or evidence of rights to receive ordinary shares with the custodian. In the case of the ADSs to be issued under a prospectus supplement, Diageo may arrange with the underwriters named therein to deposit such ordinary shares if and as provided in the prospectus supplement.
Ordinary shares deposited with the custodian must also be accompanied by certain documents, including (a) in the case of certificated shares, instruments showing that such ordinary shares have been properly transferred or endorsed and (b) in the case of book-entry shares, confirmation of book-entry transfer and recordation, in each case to the person on whose behalf the deposit is being made.
The custodian will hold all deposited ordinary shares for the account of the depositary. ADR holders thus have no direct ownership interest in the ordinary shares and have only such rights as are contained in the Deposit Agreement. The deposited shares and any other securities, property or cash received by the depositary or the custodian and held under the Deposit Agreement are referred to as deposited property.
Upon each deposit of ordinary shares, receipt of related delivery documentation and compliance with the other provisions of the Deposit Agreement, including the payment of the fees and charges of the depositary and any taxes or other fees or charges owing, the depositary will issue and deliver ADSs in the name of the person entitled thereto and, if applicable, issue ADRs evidencing the number of ADSs to which such person is entitled. ADRs will be delivered at the depositary’s principal office.
The depositary will make arrangements for the acceptance of ADSs for book-entry settlement through The Depository Trust Company, or DTC. All ADSs held through DTC will be registered in the name of Cede & Co., the nominee for DTC. Unless issued as uncertificated ADSs, the ADSs registered in the name of Cede & Co. will be evidenced by one or more receipt(s) in the form of a “Balance Certificate,” which will provide that it represents the aggregate number of ADSs from time to time indicated in the records of the depositary as being issued to DTC hereunder and that the aggregate number of ADSs represented thereby may from time to time be increased or decreased by making adjustments on such records of the depositary and of DTC or Cede & Co.
When you turn in your ADSs (and, if applicable, the ADRs evidencing the ADSs) at the depositary’s office, the depositary will, upon payment of certain applicable fees, charges and taxes, and upon receipt of proper instructions, deliver the underlying ordinary shares to you. At your risk, expense and request, the depositary will deliver (to the extent permitted by law) deposited property at the depositary’s principal office.
The depositary may restrict the withdrawal of deposited securities only in connection with:
•temporary delays caused by closing Diageo’s transfer books or those of the depositary or the deposit of ordinary shares in connection with voting at a shareholders’ meeting, or the payment of dividends;
•the payment of fees, taxes and similar charges; or
•compliance with any U.S. or foreign laws or governmental regulations relating to the ADSs or to the withdrawal of deposited securities.
This right of withdrawal may not be limited by any other provision of the Deposit Agreement.
Voting Rights
If you are an ADR holder and the depositary asks you to provide it with voting instructions, you may instruct the depositary how to exercise the voting rights for the ordinary shares which underlie your ADRs. After receiving voting materials from Diageo, the depositary will, if Diageo asks it to, notify the ADR holders of any shareholder meeting or solicitation of consents for proxies. This notice will describe how you may, subject to English law and the provisions of Diageo’s articles of association, instruct the depositary to exercise the voting rights for the ordinary shares which underlie your ADSs. For instructions to be valid, the depositary must receive them on or before the date specified. The depositary will try, as far as practical, subject to English law and the provisions of Diageo’s articles of association, to vote or to have its agents vote the shares or other deposited securities as you instruct. The depositary will not vote or attempt to exercise the right to vote that attaches to the shares or other deposited securities, other than in accordance with your instructions or deemed instructions. If the depositary does not receive instructions from you on or before the specified date and voting is by poll, the depositary will deem you to have instructed it to give a discretionary proxy to a person designated by Diageo to vote such deposited securities.
However, we cannot assure you that you will receive our voting materials in time for you to give the depositary instructions to vote any deposited securities. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions to vote the deposited securities, if, for example, the instructions are not received in time to vote the amount of the deposited securities or if English or other applicable laws prohibit such voting.
Notwithstanding anything contained in the Deposit Agreement or any ADR, the depositary may, to the extent not prohibited by law or regulations, or by the requirements of the stock exchange on which the ADSs are listed, in lieu of distribution of the materials provided to the depositary in connection with any meeting of, or solicitation of consents or proxies from, holders of deposited securities, distribute to ADR holders a notice that provides ADR holders with, or otherwise publicizes to ADR holders, instructions on how to retrieve such materials or receive such materials upon request (i.e., by reference to a website containing the materials for retrieval or a contact for requesting copies of the materials).
Notwithstanding anything else contained in the Deposit Agreement or any ADR, the depositary shall not have any obligation to take any action with respect to any meeting, or solicitation of consents or proxies, of holders of deposited securities if the taking of such action would violate applicable U.S. laws. Diageo has agreed to take any and all actions reasonably necessary and as permitted by English law to enable ADR holders and beneficial owners to exercise the voting rights accruing to the deposited securities.
Reports and Other Communications
The depositary will make available for inspection by ADR holders any reports and communications from Diageo that are both received by the depositary as holder of deposited property and made generally available by Diageo to the holders of deposited property. Upon the request of Diageo, the depositary will send to you copies of reports furnished by Diageo pursuant to the Deposit Agreement.
Reclassifications, Recapitalizations and Mergers
If Diageo takes actions that affect the deposited securities, including any change in par value, split-up, consolidation or other reclassification of deposited securities or any recapitalization, reorganization, merger, consolidation, sale of assets or other similar action, then the depositary may, and will if Diageo asks it to:
•distribute additional or amended ADRs;
•distribute cash, securities or other property it has received in connection with such actions; or
•sell any securities or property received and distribute the proceeds as cash.
If the depositary does not choose any of the above options, any of the cash, securities or other property it receives will constitute part of the deposited property and each ADS will then represent a proportionate interest in such property.
Amendment and Termination
Diageo may agree with the depositary to amend the Deposit Agreement and the ADSs without your consent for any reason. ADR holders must be given at least 30 days’ notice of any amendment that imposes or increases any fees or charges (except for taxes and other charges specifically payable by ADR holders under the Deposit Agreement), or affects any substantial existing right of ADR holders. If an ADR holder continues to hold ADRs when an amendment has become effective such ADR holder is deemed to agree to such amendment.
No amendment will impair your right to surrender your ADSs and receive the underlying securities except to comply with mandatory provisions of applicable law.
The depositary will terminate the Deposit Agreement if Diageo asks it to do so. The depositary may also terminate the Deposit Agreement if the depositary has told Diageo that it would like to resign and Diageo has not appointed a new depositary bank within 180 days. In either case, the depositary must notify you at least 90 days before termination. After termination, the depositary’s only responsibility will be (i) to advise you that the Deposit Agreement is terminated, (ii) to collect distributions on the deposited securities (iii) to sell rights and other property, and (iv) to deliver ordinary shares and other deposited securities upon cancellation of the ADRs. At any time from the termination date, the depositary may sell the deposited property which remains and hold the net proceeds of such sales and any other cash it is holding under the Deposit Agreement, without liability for interest, for the pro rata benefit of ADR holders who have not yet surrendered their ADRs. After making such sale, the depositary shall have no obligations except to account for such proceeds and other cash. The depositary will not be required to invest such proceeds or pay interest on them.
Limitations on Obligations and Liability to ADR Holders
The Deposit Agreement expressly limits the obligations and liability of the depositary, Diageo and their respective agents. Neither Diageo nor the depositary assumes any obligation nor shall either of them be subject to any liability under the Deposit Agreement to any ADR holder, except that they each agree to perform their respective obligations specifically set forth in the Deposit Agreement without negligence or bad faith. Neither Diageo nor the depositary will be liable if:
•law, regulation, the provisions of or governing any deposited securities, act of God, war or other circumstance beyond its control shall prevent, delay or subject to any civil or criminal penalty any act which the Deposit Agreement or the ADRs provide shall be done or performed by it;
•it exercises or fails to exercise discretion permitted under the Deposit Agreement or the ADR;
•it performs its obligations specifically set forth in the Deposit Agreement without negligence or bad faith; or
•it takes any action or inaction by it in reliance upon the advice of or information from legal counsel, accountants, any person presenting ordinary shares for deposit, any registered holder of ADRs, or any other person believed by it to be competent to give such advice or information.
In the Deposit Agreement, Diageo agrees to indemnify Citibank, N.A. for acting as depositary, except for losses caused by Citibank, N.A.’s own negligence or bad faith, and Citibank, N.A. agrees to indemnify Diageo for losses resulting from its negligence or bad faith.
The depositary will not be responsible for failing to carry out instructions to vote the deposited securities or for the manner in which the deposited securities are voted or the effect of the vote.
The depositary may own and deal in deposited securities and in ADSs.
Neither Diageo nor the depositary nor any of their respective directors, employees, agents or affiliates shall incur any liability for any consequential or punitive damages for any breach of the terms of the Deposit Agreement.
Books of Depositary
The depositary or its agent will maintain a register for the registration, registration of transfer, combination and split-up of ADSs and, if applicable, ADRs evidencing such ADSs. You may inspect such records at such office during regular business hours, but solely for the purpose of communicating with other holders in the interest of business matters relating to the Deposit Agreement.
The depositary will maintain facilities to record and process the issuance, cancellation, combination, split-up and transfer of ADSs. These facilities may be closed from time to time when the depositary considers it expedient to do so.
Exhibit 12.1
I, Debra Crew, certify that:
1.I have reviewed this annual report on Form 20-F of Diageo plc;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4.The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5.The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
Date: 3 August 2023
/s/ Debra Crew
Name: Debra Crew
Title: Chief Executive
(Principal Executive Officer)
Exhibit 12.2
I, Lavanya Chandrashekar, certify that:
1.I have reviewed this annual report on Form 20-F of Diageo plc;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4.The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5.The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.
Date: 3 August 2023
/s/ Lavanya Chandrashekar
Name: Lavanya Chandrashekar
Title: Chief Financial Officer
(Principal Financial Officer)
Exhibit 13.1
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of Diageo plc, a public limited company incorporated under the laws of England and Wales (the ‘Company’), hereby certifies, to such officer’s knowledge, that:
The Annual Report on Form 20-F for the year ended 30 June 2023 (the ‘Report’) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: 3 August 2023
/s/ Debra Crew
Name: Debra Crew
Title: Chief Executive
(Principal Executive Officer)
The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Report or as a separate disclosure document.
Exhibit 13.2
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of Diageo plc, a public limited company incorporated under the laws of England and Wales (the ‘Company’), hereby certifies, to such officer’s knowledge, that:
The Annual Report on Form 20-F for the year ended 30 June 2023 (the ‘Report’) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: 3 August 2023
/s/ Lavanya Chandrashekar
Name: Lavanya Chandrashekar
Title: Chief Financial Officer
(Principal Financial Officer)
The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Report or as a separate disclosure document.
Exhibit 15.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form F-3of Diageo plc (No.333-269929), Diageo Capital plc (No. 333-269929-01) and Diageo Investment Corporation (No. 333-269929-02), and Form S-8 (No. 333-153481, 333-162490, 333-169934, 333-182315, 333-206290 and 333-223071)of our report dated 3 August 2023 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 20-F.
/s/ PricewaterhouseCoopers LLP
London, United Kingdom
3 August 2023
