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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: 30 June 20212022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report
For the transition period from __ to __
Commission file number 1-10691
DIAGEO plc
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organisation)
Lakeside Drive, Park Royal,16 Great Marlborough Street, London NW10 7HQ,W1F 7HS, England
(Address of principal executive offices)
Siobhan Moriarty,Thomas B. Shropshire, Jr., General Counsel & Company Secretary
Tel: +44 20 8978 60007947 9100
E-mail: the.cosec@diageo.com
Lakeside Drive, Park Royal,16 Great Marlborough Street, London NW10 7HQ,W1F 7HS, England
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be 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) |
2.875% Guaranteed Notes due 2022 | DEO/22 | New York Stock Exchange |
8.000% Guaranteed Notes due 2022 | DEO/22A | New York Stock Exchange |
7.450% Guaranteed Notes due 2035 | DEO/35 | New York Stock Exchange |
4.250% Guaranteed Notes due 2042 | DEO/42 | New York Stock Exchange |
(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.
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report: 2,558,828,8242,497,679,997 ordinary shares of 28101/108 pence each.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No þ
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No þ
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ☐
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 :
| | | | | | | | | | | | | | | | | | | | | | | |
Large Accelerated Filer | þ | Accelerated Filer | ☐ | Non-Accelerated Filer | ☐ | Emerging growth company | ☐ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ¨
| | | | | |
† | The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| | | | | | | | | | | | | | |
U.S. GAAP ¨ | | International Financial Reporting Standards | | Other ¨ |
| | as issued by the International Accounting Standards Board | ☑ | |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. þ
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
| | | | | | | | |
| | |
5 | | | Cross reference to Form 20-F |
7 | | | Introduction |
9 | | | Recent trends |
10 | | | Historical information |
| |
1410 | | | Strategic report |
1410 | | | Business description |
1410 | | | Our brands |
1512 | | | Connecting purpose to performance |
1714 | | | Chairman’s statement |
2017 | | | Our investment proposition |
2219 | | | Chief Executive’s statement |
2622 | | | Our market dynamics |
3127 | | | Our business model |
39 | | | Stakeholder engagement |
4130 | | | Our people |
4332 | | | Our strategic priorities |
5947 | | | KeyMonitoring performance indicatorsand progress |
6450 | | | Sustainability performancePerforming against our 2030 targets |
7257 | | | Risk factorsOur ESG reporting approach |
8358 | | | Responding to climate-related risks |
80 | | | Cautionary statement concerning forward-looking statements |
8482 | | | Responding to climate-related risksRisk factors |
| | |
98 93 | | | Business review |
9893 | | | Operating results 20212022 compared with 20202021 |
136128 | | | Liquidity and capital resources |
138 | | | Contractual obligations and commitments |
138 | | | Off-balance sheet arrangements |
138 | | | Risk management |
139 | | | Critical accounting policies |
139 | | | New accounting standards |
140133 | | | Definitions and reconciliation of non-GAAP measures to GAAP measures |
| | |
154145 | | | Governance |
154145 | | | Board of Directors and Company Secretary |
157148 | | | Executive Committee |
159150 | | | Corporate governance report |
175167 | | | Audit Committee report |
180173 | | | Nomination Committee report |
183176 | | | Directors’ remuneration report |
215210 | | | Directors’ report |
| | | | | | | | |
| | |
219215 | | | Financial statements |
219215 | | | Report of independent registered public accounting firmIndependent Registered Public Accounting Firm - PCAOB ID 876 |
222218 | | | Consolidated income statement |
223219 | | | Consolidated statement of comprehensive income |
224220 | | | Consolidated balance sheet |
225221 | | | Consolidated statement of changes in equity |
226222 | | | Consolidated statement of cash flows |
227223 | | | Notes to the consolidated financial statements |
227223 | | | Accounting information and policies |
230226 | | | Results for the year |
246243 | | | Operating assets and liabilities |
267 | | | Risk management and capital structure |
285286 | | | Other financial statements disclosure |
| | |
293 | | Unaudited financial information |
| | |
294295 | | | Additional information for shareholders |
294 | | | Legal proceedings |
294 | | | Articles of association |
298 | | | Exchange controls |
298 | | | Documents on display |
298 | | | Taxation |
301 | | | Warning to shareholders - share fraud |
302303 | | | Exhibits |
304305 | | | Signature |
| |
305306 | | | Glossary of terms and US equivalents |
Cross reference to Form 20-F
| | | | | | | | | | |
| | | | |
Item | Required item in Form 20-F | Page(s) | | |
Part I | | | | |
1. | Identity of directors, senior management and advisers | Not applicable | | |
2. | Offer statistics and expected timetable | Not applicable | | |
3. | Key information | | | |
| A. Selected financial data[Reserved] | 10-13— | | |
| B. Capitalisation and indebtedness | Not applicable | | |
| C. Reason for the offer and use of proceeds | Not applicable | | |
| D. Risk factors | 72-8282-92 | | |
4. | Information on the company | | | |
| A. History and development of the company | 7, 12, 34-38, 105-107, 236-238, 240-241, 246-248, 247-248, 291, 298
101-105, 138, 232-235, 237-238, 243-247, 290, 295-297, 301
| | |
| B. Business overview | 7, 26-30, 34-38, 98-135, 230-234, 236-2398, 22-26, 40, 58, 59, 80, 81, 85-88, 90, 93-127, 133, 138, 226-231, 232-235, 243-252, 254, 295-301 | | |
| C. Organisational structure | 293291 | | |
| D. Property, plant and equipment | 34, 110, 114, 118, 122, 126, 135, 236, 253-254107, 111, 114-115, 117, 120, 127, 232-233, 252-255, 295, 296 | | |
4A. | Unresolved staff comments | Not applicable | | |
5. | Operating and financial review and prospects | | | |
| A. Operating results | 26-30, 36, 80-81, 98-135, 144, 227-234, 236-238, 26822-26, 36-37, 90-92, 93-127, 136-137, 223-236, 267-276, 297-301 | | |
| B. Liquidity and capital resources | 22-23, 62, 98, 102, 108, 136-137, 138, 148, 264-279, 291
19-20, 48, 93, 95-99, 104, 105, 128-132, 139, 264-276, 290
| | |
| C. Research and development, patents and licenses, etc. | 36297 | | |
| D. Trend information | 22, 26-30, 83-8419, 22-25, 80-81 | | |
| E. Off-balance sheet arrangementsCritical Accounting Estimates | 138 | | |
| F. Tabular disclosure of contractual obligations | 138 | | |
| G. Safe harbor | —Not applicable | | |
6. | Directors, senior management and employees | | | |
| A. Directors and senior management | 154-158, 199-200145-149 | | |
| B. Compensation | 187-209, 212,176-178, 185-189, 193-200, 206, 180-209, 257-263, 290, 291 | | |
| C. Board practices | 154-156, 175-179, 183-185, 196-197, 199-214
145-149, 168, 181, 190-192
| | |
| D. Employees | 235-23630, 31, 232 | | |
| E. Share ownership | 187-209, 283-284
201, 283-285
| | |
7. | Major shareholders and related party transactions | | | |
| A. Major shareholders | 216211 | | |
| B. Related party transactions | 214, 263, 291-292290-291 | | |
| C. Interests of experts and counsel | Not applicable | | |
8. | Financial information | | | |
| A. Consolidated statements and other financial information | 219-293215-294 | | |
| B. Significant changes | —292 | | |
9. | The offer and listing | | | |
| A. Offer and listing details | 1, 216-217211-212 | | |
| B. Plan of distribution | Not applicable | | |
| C. Markets | 216-217211-212 | | |
| D. Selling shareholders | Not applicable | | |
| E. Dilution | Not applicable | | |
| F. Expenses of the issue | Not applicable | | |
Cross reference to Form 20-F (continued)
| | | | | | | | |
| | |
Item | Required item in Form 20-F | Page(s) |
10. | Additional information | |
| A. Share capital | Not applicable |
| B. Memorandum and articles of association | 294-297212, 303 |
| C. Material contracts | 196, 283-284190, 283-285, 303, 304 |
| D. Exchange controls | 298302 |
| E. Taxation | 298-301 |
| F. Dividends and paying agents | Not applicable |
| G. Statement by experts | Not applicable |
| H. Documents on display | —301 |
| I. Subsidiary information | Not applicable |
11. | Quantitative and qualitative disclosures about market risk | 138,131, 267-276 |
12. | Description of securities other than equity securities | |
| A. Debt securities | Not applicable |
| B. Warrants and rights | Not applicable |
| C. Other securities | Not applicable |
| D. American depositary shares | 217211, 212 |
Part II | | |
13. | Defaults, dividend arrearages and delinquencies | Not applicable |
14. | Material modifications to the rights of security holders and use of proceeds | Not applicable |
15. | Controls and procedures | |
| A. Disclosure controls and procedures | 171168 |
| B. Management’s report on internal control over financial reporting | 173165 |
| C. Attestation report of the registered public accounting firm | 219-221215-217 |
| D. Changes in internal control over financial reporting | 173165 |
16A. | Audit committee financial expert | 178169 |
16B. | Code of ethics | 179170 |
16C. | Principal accountant fees and services | 177-178, 235168-169, 231 |
16D. | Exemptions from the listing standards for audit committees | Not applicable |
16E. | Purchases of equity securities by the issuer and affiliated purchasers | 13, 107, 137,103, 132, 276, 279-281 |
16F. | Change in registrant’s certifying accountant | Not applicable |
16G. | Corporate governance | 173-174166 |
16H. | Mine safety disclosure | Not applicable |
16I. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | Not applicable |
Part III | | |
17. | Financial statements | Not applicable |
18. | Financial statements | See Item 8 |
19. | Exhibits | 302-303303-304 |
Additional information | |
| Glossary of terms and US equivalents | 305-306306-307 |
Diageo is a global leader in the beverage alcohol industry with an outstanding collection of brands across spirits and beer. Its products are sold in more than 180 countries around the world and its brands include Johnnie Walker, Crown Royal, JεB Buchanan’s and WindsorBuchanan’s whiskies, Smirnoff, Cîroc and Ketel One vodkas, Captain Morgan, Baileys, Don Julio, Casamigos, Tanqueray and Guinness. Diageo’s Performance Ambition is to be one of the best performing, most trusted and respected consumer products companies in the world.
Diageo plc is incorporated as a public limited company in England and Wales. The company which is now Diageo plc was incorporated as Arthur Guinness Son and Company Limited on 21 October 1886. The Diageo group was formed by the merger of the Grand Metropolitan Public Limited Company and Guinness plc groups in December 1997. Diageo plc’s principal executive office is located at Lakeside Drive, Park Royal,16 Great Marlborough Street, London NW10 7HQW1F 7HS, England and its telephone number is +44+44 (0) 20 8978 6000.7947 9100. Diageo plc’s agent for service in the United States for the purposes of Diageo’s registration statement on Form F-3 (333-242234) is General Counsel, Diageo North America, Inc., 175 Greenwich Street, 3 World Trade Center, New York, NY 10007.
This is the Annual Report on Form 20-F of Diageo plc for the year ended 30 June 2021.2022. The information set out in this Form 20-F does not constitute Diageo plc’s statutory accounts under the UK Companies Act for the years ended 30 June 2021,2022, 30 June 20202021 and/or 30 June 2019.2020. The accounts for the years ended 30 June 20202021 and 30 June 20192020 have been delivered to the registrar of companies for England and Wales and those for the year ended 30 June 20212022 will be delivered to the registrar of companies for England and Wales in due course.
This document contains forward-looking statements that involve risk and uncertainty because they relate to, and are dependent upon, events and 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 beyond Diageo’s control. For more details, please refer to the Cautionary statement concerning forward-looking statements on pages 83-84.80-81.
The content of the company’s website (www.diageo.com) should not be considered to form a part of or be incorporated into this report. This report 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. In this report, the term ‘company’ refers to Diageo plc and terms ‘group’ and ‘Diageo’ refer to the company and its consolidated subsidiaries, except as the context otherwise requires. A glossary of terms used in this report is included at the end of the report.
On 31 December 2020, International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) at that date
were brought into UK law and became UK-adopted International Accounting Standards, with future changes being subject to
endorsement by the UK Endorsement Board. Diageo plc transitioned to UK-adopted International Accounting Standards in its consolidated financial statements on 1 July 2021. This change constitutes a change in accounting framework. However, there is no impact on recognition, measurement or disclosure in the period reported as a result of the change in framework.
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 adopted pursuant to Regulation (EC) No 1606/2002by the UK, IFRSs as it applies inadopted by the European UnionEU and IFRSIFRSs, as issued by the International Accounting Standards Board (IASB).IASB, including interpretations issued by the IFRS Interpretations Committee. IFRS as adopted by the UK and by the EU 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.
The financial performance expectations related to Diageo’s future organic net sales growth and organic operating profit growth, Diageo’s fiscal 23 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 related to Diageo’s performance expectations for the year ending 30 June 2023 or thereafter included in this document have been prepared by and are the responsibility of Diageo’s management.
PricewaterhouseCoopers LLP has not audited, reviewed, examined, compiled nor applied agreed-upon procedures with respect to the
financial performance expectations and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of
assurance with respect thereto. The PricewaterhouseCoopers LLP report included in this document relates to Diageo’s historical
financial statements. It does not extend to the financial performance expectations and should not be read to do so. The financial
performance expectations were not prepared with a view toward compliance with published guidelines of the Securities and Exchange
Commission or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation
of prospective financial information.
Information presented
Organic movements and organic operating margins are before exceptional items. Commentary, unless otherwise stated, refers to organic movements. Share, unless otherwise stated, refers to value share. For a definition of organic movementSee page 133 for explanation and reconciliationsreconciliation of non-GAAP measures, to GAAP measures see page 140.including organic net sales, organic operating profit, free cash flow, eps before exceptionals, ROIC, adjusted net debt, adjusted EBITDA and tax rate before exceptional items.
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.
Disclosures not included in Annual Report on Form 20-F
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:
•Disclosures under the heading ‘Recent trends’ on page 9.
•Disclosures under the heading ‘Our brands’ on page 14.10 to 11.
•Disclosures under the heading ‘Connecting purpose to performance’ on pages 1512 to 16.13.
•Disclosures under the headings ‘Creating a positive impact’‘Global environment’,‘Long-term view’, ‘Diageo in society – Society 2030: Spirit of Progress’‘Building an entrepreneurial culture’, ‘Stakeholders’‘Engaging Stakeholders’, ‘Creating value’, and ‘Looking ahead’ in the Chairman’s statement on pages 1714 to 19.16.
•Disclosures under the heading ‘Statement on Section 172 of the Companies Act 2006’ on page 19.16.
•Disclosures under the heading ‘Our investment proposition’ on pages 2017 to 21.18.
•Disclosures under the headings ‘Emerging stronger’, ‘Building a sustainable, responsible‘Another year of strong performance’ and inclusive business’, ‘We are committed to building a more sustainable, responsible and inclusive business and society’ and ‘Looking ahead’‘Outlook’ in the Chief Executive’s statement on pages 2219 to 25.
•Disclosures under the headings ‘Promote positive drinking’, ‘Champion diversity and inclusion’, ‘Pioneer grain to glass sustainability’ and ‘Doing business the right way from grain to glass’ on page 25.21.
•Disclosures under the heading ‘Our business model’ on pages 3127 to 33.
•Disclosures under the heading ‘Stakeholder engagement’ on pages 39 to 40.29.
•Disclosures under the headings ‘Delivering our Performance Ambition’, ‘Our strategic outcomes’, and ‘Our culture and values’, ‘4. Promote positive drinking’, ‘5. Champion inclusion and diversity’, and ‘6. Pioneer grain to glass sustainability’ in the section ‘Our strategic priorities’ on pages 43 to 58.
•Disclosures under the heading ‘Monitoring performance and progress’ of non-financial key performance indicators on pages 59 to 63.
•Disclosures under the heading ‘Sustainability performance’ on pages 64 to 67.page 32.
•Disclosures under the heading ‘Doing business the right way, from grain to glass’ on pages 6854 to 71.56.
•Disclosures under the headings ‘Society 2030: Spirit of Progress’ on pages 111,108, 112, 115, 118, 122117-118 and 127120-121 in relation to each reporting segment in the Business review.
•Disclosures under the heading ‘Stakeholder engagement’ on pages 156 to 159.
•Disclosures under the headings ‘Workforce engagement statement’, ‘Internal control and risk management’ and ‘Political donations’ on pages 169161 to 173.164.
•Disclosures under the headings ‘Disclosure of information to the auditor’ and ‘Corporate governance statement’ on page 215.210.
•Disclosures under the heading 'Unaudited financial information' on pages 293 to 294.
The following comments were made by Ivan Menezes, Chief Executive of Diageo, in Diageo’s preliminary results announcement on 29 July 2021:
I am very pleased with the strong financial results we have delivered in fiscal 21, while continuing to invest in long-term sustainable growth. We delivered organic net sales growth across all regions, led by a strong performance in North America, and we held or gained off-trade market share in over 85%(i) of our business. These results demonstrate the strength and relevance of our brands and the extraordinary efforts of our talented people. I would like to thank all of my colleagues for their dedication and resilience, and to express my deepest condolences to all who have lost loved ones this year due to the pandemic.
I believe that our foundation, built through outstanding brand-building, active portfolio management, consumer-led innovation, smart investment in data analytics tools and embedding a culture of everyday efficiency, has been a key competitive advantage for Diageo. We were well-positioned to successfully manage the challenges created by Covid-19, we have responded quickly to changing consumer trends and we have emerged stronger.
A key priority has been supporting the hospitality sector through the pandemic, including our $100 million global fund to enable the safe re-opening and recovery of pubs and bars. We have also built on our successful ESG track record with the launch of ‘Society 2030: Spirit of Progress’, our new 10-year action plan to shape a more sustainable and inclusive business.
While our business has recovered strongly in fiscal 21, with net sales growth on a constant basis ahead of fiscal 19 in three of our five regions, we expect near-term volatility in some markets. However, I remain optimistic about the growth prospects for our industry, with spirits continuing to gain share of total beverage alcohol globally and premiumisation trends remaining strong. I believe Diageo is very well positioned to capture these exciting opportunities to drive long-term sustainable growth and shareholder value.
(i) Source: Internal estimates incorporating AC Nielsen, Association of Canadian Distillers, Dichter & Neira, Frontline, Intage, IRI, ISCAM, NABCA, Scentia, State Monopolies, TRAC 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 off-trade share. India and Canada share data represents total trade. Measured markets indicates 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 21.
The following tables present selected consolidated financial data for Diageo for the five years ended 30 June 2021 and as at the respective year ends. The data presented below for the five years ended 30 June 2021 and the respective year ends has been derived from Diageo’s consolidated financial statements, audited by Diageo’s independent auditor, PricewaterhouseCoopers LLP for each of the five years ended 30 June 2021.
Income statement data
| | | | | | | | | | | | | | | | | |
| Year ended 30 June |
| 2021 £ million | 2020 £ million | 2019 £ million | 2018 £ million | 2017 £ million |
Sales | 19,153 | | 17,697 | | 19,294 | | 18,432 | | 18,114 | |
Excise duties | (6,420) | | (5,945) | | (6,427) | | (6,269) | | (6,064) | |
Net sales | 12,733 | | 11,752 | | 12,867 | | 12,163 | | 12,050 | |
Cost of sales | (5,038) | | (4,654) | | (4,866) | | (4,634) | | (4,680) | |
Gross profit | 7,695 | | 7,098 | | 8,001 | | 7,529 | | 7,370 | |
Marketing | (2,163) | | (1,841) | | (2,042) | | (1,882) | | (1,798) | |
Other operating items | (1,801) | | (3,120) | | (1,917) | | (1,956) | | (2,013) | |
Operating profit | 3,731 | | 2,137 | | 4,042 | | 3,691 | | 3,559 | |
Non-operating items | 14 | | (23) | | 144 | | — | | 20 | |
Net interest and other finance charges | (373) | | (353) | | (263) | | (260) | | (329) | |
Share of after tax results of associates and joint ventures | 334 | | 282 | | 312 | | 309 | | 309 | |
Profit before taxation | 3,706 | | 2,043 | | 4,235 | | 3,740 | | 3,559 | |
Taxation | (907) | | (589) | | (898) | | (596) | | (732) | |
Profit from continuing operations | 2,799 | | 1,454 | | 3,337 | | 3,144 | | 2,827 | |
Discontinued operations | — | | — | | — | | — | | (55) | |
Profit for the year | 2,799 | | 1,454 | | 3,337 | | 3,144 | | 2,772 | |
| | | | | |
Weighted average number of shares | million | million | million | million | million |
Shares in issue excluding own shares | 2,337 | | 2,346 | | 2,418 | | 2,484 | | 2,512 | |
Dilutive potential ordinary shares | 8 | | 8 | | 10 | | 11 | | 11 | |
| 2,345 | | 2,354 | | 2,428 | | 2,495 | | 2,523 | |
Per share data | pence | pence | pence | pence | pence |
Dividend per share | 72.55 | | 69.88 | | 68.57 | | 65.30 | | 62.20 | |
Basic earnings per share | | | | | |
Continuing operations | 113.8 | | 60.1 | | 130.7 | | 121.7 | | 108.2 | |
Discontinued operations | — | | — | | — | | — | | (2.2) | |
| 113.8 | | 60.1 | | 130.7 | | 121.7 | | 106.0 | |
Diluted earnings per share | | | | | |
Continuing operations | 113.4 | | 59.9 | | 130.1 | | 121.1 | | 107.7 | |
Discontinued operations | — | | — | | — | | — | | (2.2) | |
| 113.4 | | 59.9 | | 130.1 | | 121.1 | | 105.5 | |
Historical information (continued)
Balance sheet data
| | | | | | | | | | | | | | | | | |
| As at 30 June |
| 2021 £ million | 2020 £ million | 2019 £ million | 2018 £ million | 2017 £ million |
Non-current assets | 20,508 | | 21,837 | | 21,923 | | 21,024 | | 20,196 | |
Current assets | 11,445 | | 11,471 | | 9,373 | | 8,691 | | 8,652 | |
Total assets | 31,953 | | 33,308 | | 31,296 | | 29,715 | | 28,848 | |
Current liabilities | (7,142) | | (6,496) | | (7,003) | | (6,360) | | (6,660) | |
Non-current liabilities | (16,380) | | (18,372) | | (14,137) | | (11,642) | | (10,160) | |
Total liabilities | (23,522) | | (24,868) | | (21,140) | | (18,002) | | (16,820) | |
Net assets | 8,431 | | 8,440 | | 10,156 | | 11,713 | | 12,028 | |
Share capital | 741 | | 742 | | 753 | | 780 | | 797 | |
Share premium | 1,351 | | 1,351 | | 1,350 | | 1,349 | | 1,348 | |
Other reserves | 1,621 | | 2,272 | | 2,372 | | 2,133 | | 2,693 | |
Retained earnings | 3,184 | | 2,407 | | 3,886 | | 5,686 | | 5,475 | |
Equity attributable to equity shareholders of the parent company | 6,897 | | 6,772 | | 8,361 | | 9,948 | | 10,313 | |
Non-controlling interests | 1,534 | | 1,668 | | 1,795 | | 1,765 | | 1,715 | |
Total equity | 8,431 | | 8,440 | | 10,156 | | 11,713 | | 12,028 | |
Net borrowings | (12,109) | | (13,246) | | (11,277) | | (9,091) | | (7,892) | |
Historical information (continued)
Notes to the historical information
1. Accounting policies The consolidated financial statements for each of the five years ended 30 June 2021 have been prepared in accordance with IFRS. The IFRS accounting policies applied by the group to prepare the financial information in this document are disclosed in the notes to the consolidated financial statements.
The group adopted IFRS 16 with effect from 1 July 2019 by applying the modified retrospective method. Comparative periods have not been restated. The adoption of IFRS 16 resulted in an increase to net borrowings of £251 million at 1 July 2019. The impact on the income statement is not material.
2. 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 separately disclosed in the notes to the consolidated financial statements. An analysis of exceptional items is as follows:
| | | | | | | | | | | | | | | | | |
| Year ended 30 June |
| 2021 £ million | 2020 £ million | 2019 £ million | 2018 £ million | 2017 £ million |
Exceptional operating items | | | | | |
Ongoing litigation in Turkey | (15) | | — | | — | | — | | (33) | |
Guaranteed minimum pension equalisation | (5) | | — | | (21) | | — | | — | |
Donations | (5) | | (89) | | — | | — | | — | |
Obsolete inventories | 7 | | (30) | | — | | — | | — | |
Substitution drawback | 3 | | 83 | | — | | — | | — | |
Brand, goodwill, tangible and other assets impairment | — | | (1,345) | | — | | (128) | | — | |
Indirect tax in Korea | — | | 24 | | (35) | | — | | — | |
French tax audit penalty | — | | — | | (18) | | — | | — | |
Customer claim in India | — | | — | | — | | — | | (32) | |
Disengagement agreements relating to United Spirits Limited | — | | — | | — | | — | | 23 | |
| (15) | | (1,357) | | (74) | | (128) | | (42) | |
Non-operating items | | | | | |
Sale of businesses and brands | 14 | | (31) | | 144 | | — | | 20 | |
Step acquisitions | — | | 8 | | — | | — | | — | |
| | | | | |
| 14 | | (23) | | 144 | | — | | 20 | |
French tax audit interest | — | | — | | (9) | | — | | — | |
| | | | | |
Items included in taxation | | | | | |
Tax credit on exceptional operating items | 4 | | 154 | | 4 | | 13 | | 11 | |
Tax on sale of businesses | — | | — | | (33) | | — | | (7) | |
Tax rate change in the UK | (46) | | — | | — | | — | | — | |
Tax rate change in the Netherlands | (42) | | — | | 51 | | — | | — | |
French audit settlement | — | | — | | (61) | | — | | — | |
US tax reform | — | | — | | — | | 354 | | — | |
UK transfer pricing settlement | — | | — | | — | | (143) | | — | |
UK industrial building allowance | — | | — | | — | | (21) | | — | |
| (84) | | 154 | | (39) | | 203 | | 4 | |
Exceptional items in continuing operations | (85) | | (1,226) | | 22 | | 75 | | (18) | |
Discontinued operations net of taxation (note 3) | — | | — | | — | | — | | (55) | |
Exceptional items(i) | (85) | | (1,226) | | 22 | | 75 | | (73) | |
(i) For further details on exceptional items see pages 236-238.
3. Discontinued operations In the year ended 30 June 2017 discontinued operations of £55 million, net of £9 million deferred tax comprise additional amounts payable to the UK Thalidomide Trust following an agreement reached in December 2016, updates to the discount and inflation rates applied to the existing thalidomide provision and legal costs.
Historical information (continued)
4. Dividends Diageo paid an interim dividend in April and a final dividend in October of each past year. Approximately 40% of the total dividend in respect of any past financial year was paid as an interim dividend and approximately 60% as a final dividend. The payment of any future dividends, subject to shareholder approval, will depend upon Diageo’s earnings, financial condition and such other factors as the Board deems relevant. Proposed dividends are not considered to be a liability until they are approved by the Board for the interim dividend and by the shareholders at the Annual General Meeting for the final dividend.
The table below sets out the amounts of interim, final and total cash dividends paid by the company on each ordinary share. The dividends are translated into US dollars per ADS (each ADS representing four ordinary shares) at the actual rate on each of the respective dividend payment dates.
| | | | | | | | | | | | | | | | | | | | |
| | Year ended 30 June |
| | 2021 pence | 2020 pence | 2019 pence | 2018 pence | 2017 pence |
Per ordinary share | Interim | 27.96 | | 27.41 | | 26.10 | | 24.90 | | 23.70 | |
| Final | 44.59 | | 42.47 | | 42.47 | | 40.40 | | 38.50 | |
| Total | 72.55 | | 69.88 | | 68.57 | | 65.30 | | 62.20 | |
| | $ | $ | $ | $ | $ |
Per ADS | Interim | 1.53 | | 1.36 | | 1.36 | | 1.39 | | 1.18 | |
| Final | 2.48 | | 2.19 | | 2.11 | | 2.10 | | 2.02 | |
| Total | 4.01 | | 3.55 | | 3.47 | | 3.49 | | 3.20 | |
Note: Subject to shareholders’ approval the final dividend for the year ended 30 June 2021 will be paid on 7 October 2021, and payment to US ADR holders will be made on 13 October 2021. In the table above, an exchange rate of £1 = $1.39 has been assumed for this dividend, but the exact amount of the payment to US ADR holders will be determined by the rate of exchange on 13 October 2021.
5. Net borrowings are 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.
6. Share capital As at 30 June 2021 there were 2,559 million (2020 – 2,562 million, 2019 – 2,601 million, 2018 – 2,695 million, 2017 – 2,754 million) ordinary shares of 28101/108 pence each in issue with a nominal value of £741 million (2020 – £742 million, 2019 – £753 million, 2018 – £780 million, 2017 – £797 million).
During the year ended 30 June 2021 the group purchased 3.2 million ordinary shares (2020 – 39 million, 2019 – 94.7 million, 2018 – 58.9 million), representing approximately 0.1% of the issued ordinary share capital (2020 – 1.5%, 2019 – 3.5%, 2018 – 2.1%) at an average price of £34.07 per share, and an aggregate cost of £109 million (including £1 million of transaction costs) (2020 – £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. The shares purchased under the share buyback programmes were cancelled.
A financial liability of £91 million was established at 30 June 2021 representing the 2.6 million shares that were expected to be purchased before 29 July 2021.
7. Exchange rates A substantial portion of the group’s assets, liabilities, revenues and expenses are denominated in currencies other than sterling. For a discussion of the impact of exchange rate fluctuations on the group’s financial position and results of operations, see note 15 to the consolidated financial statements.
Strategic report
Business description
Our brands
With over 200 brands soldand sales in more than 180 countries, our portfolio offers something for every taste and celebration
Brand building expertiseA global giant with a local voice
PeopleJohnnie Walker is the world’s number one Scotch whisky brand.1 Following the celebration of the brand’s 200th year in 2020, this year we’ve taken the first bold steps into a new chapter of Johnnie Walker’s remarkable journey. We also welcomed over 235,000 visitors2 to Johnnie Walker Princes Street, our newly opened visitor experience in Edinburgh, and brands are atunveiled a new era of the very heart of Diageo. To develop, launch and grow a brand requires creativity, determination and belief. Arthur Guinness had belief – signing a 9,000-year leasebrand’s iconic ‘Keep Walking’ story.
During the pandemic, people around the world experienced dramatic shifts in their everyday lives. At Johnnie Walker, these changes, combined with our consumer insight, created an opportunity to instil the iconic ‘Keep Walking’ line with contemporary meaning, continuing to build this global giant through new, local connections. Hot on the St. James’s Gate Breweryheels of unveiling a bold new look for Johnnie Walker, we launched our new ‘Keep Walking’ campaign in Dublin. AlexanderOctober 2021. For more than 20 years, Johnnie Walker John's son,has inspired people with these two simple words, and this next chapter will continue to build cultural relevance for the brand among the next generation of whisky drinkers.
Our campaign burst onto screens, into venues, social feeds and advertising spaces, in over 50 countries. Through partnerships with local changemakers, including CL, the South Korean rapper; Burna Boy, the Nigerian singer, songwriter and performance artist; and DJ Alok, the Brazilian DJ and record producer, we reconnected people with the socialising spaces they had missed for so long. We broke away from more conventional communications, telling the story of African creativity in an award-winning documentary, ‘The Ones Who Keep Walking’, which was determined that their whiskies would be carried by every ship’s captain, ‘frommade with the four corners of Scotland to the four corners of the world’. Today,Forbes 30-under-30 director, Amarachi Nwosu. We shared inspiring quotes on progress from famous personalities, such as Grace Jones, Mark Twain and Mae West across city skylines and cultural hot spots. And our people share these attributes, combining their entrepreneurial flairtelevision and award-winning creativity, with deep understanding of consumer insightscinema advertisement ‘Anthem’ brought Johnnie Walker’s charismatic spirit and the latest datapower of ‘Keep Walking’ to nurturelife with energy and build our brands.optimism.
Global or local, every one of our brands has a story. Many benefit from bearing witness toJohnnie Walker organic net sales grew 34% this year, surpassing 21 million nine-litre cases. And the changing world over centuries while others are products of our world today. All have a unique purpose and role to play‘Keep Walking’ campaign’s success speaks for itself. We’re proud that, judged against 13,000 other advertisements, ‘Keep Walking’ won three top 10 places in creating enduring connections with people. While we honour the past, we are passionate about nurturing categories old and new, and about building authentically crafted, culturally relevant brands.
Innovation drives us forward to create new products, tastes and experiences for people to enjoy as part of celebrations big or small. We are obsessed with building brands that will stand the test of time and are continuously learning from our consumers, our partners and today’s entrepreneurs to ensure we are developing the brands of tomorrow. This requires focus, precision and investment in what we call a perfect blend of ‘creativity with precision’. This is our shorthand for the way we effectively combine data, insights and innovation with the creative flair our consumers expect from the custodian of some of the most iconic brands in the world.Kantar’s Creative Effectiveness Awards 2022.
2 out of 4:
We own Johnnie Walker and Smirnoff, two of the world’s four largest international spirits brands by retail sales value13
1. IWSR, 2020
Brand building expertise
We are driven to be the world’s best brand builder, leading the way in premium drinks. Global or local, every one of our brands has a story. Many bear witness to the changing world over centuries, while others are products of our world today. All have a purpose and role to play in creating enduring connections with people. While we honour the past, we’re passionate about nurturing categories old and new, and about building authentically crafted, culturally relevant brands.
From much-loved, established brands to the latest innovations, we move at pace with the latest trends, creating products, tastes and experiences for people to enjoy as part of celebrations big or small.
We are obsessed with building brands that will stand the test of time. This requires focus, precision and investment, in what we call a perfect blend of ‘creativity with precision’. It describes how we effectively combine data, insights and innovation with the creative flair our consumers expect from us, as the custodian of some of the most iconic brands in the world.
1. IWSR, 2021
2. Diageo internal data – 6 September 2021 to 30 June 2022
3. IWSR, 2021
Business description (continued)
Baileys: Halloween is for adults, too
Featuring three of the United Kingdom’s most popular drag queens making a deliciously wicked Baileys S’mores martini cocktail, Baileys’ ‘Witches’ campaign and television advertisement launched in over 10 countries in October 2021, celebrating Baileys as the ultimate adult Halloween treat. Developed in partnership with Diageo’s LGBTQ+ employee group, the Rainbow Network, the campaign put inclusivity at the heart of one of the biggest treating events of the year.
£6.1bn4
We are the global leader in super premium and above international spirits with retail sales value of over £4.5bn£6.1bn
2
Making connections, rootedIt’s not teatime – it’s T-Time
Tanqueray prides itself on its unique mix of ingenuity and heritage. And in culture
How do you buildMarch 2022, the brand found a 'global iconfitting creative partner in the Netflix Regency era-inspired series, Bridgerton. To mark the premiere of the hit show’s second season, fans were cordially invited to ‘Make it T-Time’.That is, teatime with a local heartbeat'? For us, it's about continually buildingmodern Tanqueray twist, with singer and Tanqueray brand partner, Joe Jonas.
Raising 'One for the Sea'
Made on the rich cultural heritagerugged shores of this outstanding, distinctivethe Isle of Skye, Talisker shares its spirit with the wildness and adventure of the sea. This is why the brand weaving it intohas partnered with Parley for the fabricOceans to ‘Rewild Our Seas’, committing to preserve and protect 100 million square metres of a local culture. That means understanding key moments in people's lives – and the meaningful role Guinness can play in those moments - and connecting with consumers in unforgettable ways.
This year, Guinness was the most talked about beer brand inmarine ecosystems around the world on social media,1 driven by the end of 2023. Through the ‘One for the Sea’ campaign, first launched in 2020, Talisker and Parley have reached millions with their message, underpinned by activations including a series of innovative campaigns that built on a long legacy of creative excellencecelebrity swim in Brighton and cultural relevance.limited-edition engraved bottles.
Guinness stands for optimism – after all, ’good things come to those who wait’ – and during Covid-19, we all needed to be reminded that the best is yet to come. So in Great Britain, where lockdown restrictions meant people were missing the shared communion of a pint in the pub, our ’Welcome Back’ campaign responded by celebrating that first pint back – back with friends and family, and back in the community.
Hope characterised our campaign in the United States too, which focussed on football, America’s most popular sport. In partnership with legendary quarterback Joe Montana, the ’Comeback Kid’, we delivered a message of optimism and resilience – that success is measured not only by your wins, but also by how you come back from a hard loss, or a hard year.
In Nigeria we found new ways to join the conversation. We partnered with Prince Nelson Enwerem, the hugely popular Big Brother Nigeria contestant, in a campaign that paid homage to the culture of East Nigeria. The campaign had over two million views in the first three days of launch, underlining the power of Guinness’s cultural ties.
1. Sprinklr, July 2020 to June4. IWSR, 2021
Business description (continued)
Connecting purpose to performance
Building a company that willcan prosper over the long term
WeToday, we are a global company built onone of the world’s leading companies. A business tuned to respond to the needs of all our stakeholders and sustained through innovation, creating new products, categories and experiences for consumers.
We are the stewards of iconic, purpose-led brands created by entrepreneurs like John and Alexander Walker,society at large. Arthur Guinness, Charles Tanqueray, Elizabeth Cumming, Charles Tanqueray, Arthur GuinnessJohn Walker and many more that havethose who followed in their footsteps. Today, we stand on their shouldersfootsteps, were incredible innovators and act with the same entrepreneurial spirit and determination.
entrepreneurs. They understood, as we do today, that our distilleries, breweries and the hospitality industry we serve are at the heart of local communities, and that our business will only thrive if it helps these communities prosper too. We haveThat’s why we believe that our responsibility and influence extend beyond our direct operations.
We’re building and nurturing some of the world’s most iconic brands, rooted in culture and local communities, which is why we’re focussed on creating an important role to playinclusive, sustainable business in ensuring we create shared value, deliver consistent performance and have a positive impact where we live, work, source and sell.its widest sense.
At the heart of everything we do
Celebrating life, every day, everywhere.
OurWe have an accessible purpose is about beingthat provides a holistic platform for us to be the best we can be at work, at home and in our communities. Our purpose is about celebrating life in its broadest sense and it goes hand-in-hand with performance: never one without the community. We are passionate aboutother.
Our culture is rooted in a deep sense of our purpose, the rolepersonal connections we have to our brands, playour relationships with each other and our passion to win in celebrating life the world over. marketplace.
At the core of our approach is a commitment to positive drinking through promoting moderation and addressing the harmful use of alcohol: doing so isalcohol. That’s good for consumers and good for business.
We believe that our responsibility and influence extend beyond our direct operations. Our ‘Society 2030: Spirit of Progress’ ESG action plan sets ambitious goals that support our commitment to shaping a more sustainable and inclusive business and society. We are building and nurturing some of the world’s most well-loved brands, rooted in culture and local communities. We take great care in building sustainable supply chains; in protecting the environment and the natural resources we all rely on; and in our commitment to skills development, empowerment, inclusion and diversity.
OUR AMBITION
To be one of the best performing, most trusted and respected consumer products companies in the world.
To be best performing, we need to deliver efficient growth and value creation for our shareholders. This means delivering quality sustainable growth in net sales,sales; steady margin expansionexpansion; and reliable cash flows year after year. To be mostWe don’t believe that we can become ‘best performing’ without also being ‘most trusted and respected,respected’. This means we must do business the right way, from grain to glass, and ensure our people are highly engaged and continuously learning.
Shaping the way we work.work
OUR VALUES AND CULTURE
Our culture is rooted in a deep sense of our purpose and values.
Our values underpin our business sitting at the heart ofand guide how we work.
We are passionate about our culturecustomers and guiding all our work:
–Passionate about consumers and customers
–Freedomwant to be the best. We give each other the freedom to succeed
–Proud and value each other. Pride is a source of energy for our company and we work hard so we can be proud of what we do
–Valuing each other
–Be the bestdo.
Business description (continued)
A roadmap for achieving our ambition
OUR STRATEGIC PRIORITIES
Our six inter-related and mutually reinforcing strategic priorities to drive our company forward.
They help us to deliver the strategic outcomes against which we measure our performance.
OUR STRATEGIC OUTCOMES
[EG] Efficient growth
[EP] Engaged peopleCT] Credibility and trust
[CVC] Consistent value creation
[CT] Credibility and trustEP] Engaged people
Read more on page 43.32.
| | | | | |
Aligned to stakeholders’ interests | Measuring our progress |
OUR STAKEHOLDERS | OUR KEY PERFORMANCE INDICATORS |
Our people | [EG] [CVC] Organic net sales growth |
Consumers | [EG] [CVC] Organic operating profit growth |
Customers | [EG] [CVC] Earnings per share before exceptional items |
Suppliers | [EG] [CVC] Free cash flow |
Communities | [CVC] Return on average invested capital |
Investors | [CVC] Total shareholder return |
Governments and regulators | [CVC] [CT] [EP] Percentage of ethnically diverse leaders globally |
| [CVC] [CT] [EP] Percentage of female leaders globally |
| [CT] [EP] Reach and impact of positive drinking programmes |
| [CT] [EP] Health and safety |
| [CT] [CVC] [EP] Water efficiency |
| [CT] [CVC] [EP] Carbon emissions |
| [CT] [EP] Employee engagement |
Read more on pages 39-40.156-159. | Read more on pages 59-63.47-53. |
Business description (continued)
Chairman’sChairman's statement
CreatingA strong platform for future growth
This has been a positive impact
Thechallenging year for all consumer goods categories, with continuing reverberations from the Covid-19 pandemic, has continued to pose unprecedented challenges for our peoplesignificant economic uncertainty and the communities where we operate.terrible conflict in Ukraine. Our employees have shown tremendous resilience and dedication, making major contributions to alleviate the public health emergency while supporting the hospitality industry around the world. I would like to express my thanks on behalf of the Board for their care to one another, tothoughts are with all those, including our suppliers, to our customers and to society at large.colleagues, affected by this conflict.
Throughout the pandemic, our first priority has been the health, safety and wellbeing of our employees. We believe the results of this year’s Your Voice survey, which continue to reflect high levels of employee engagement, also recognise the wellbeing programmes we have provided in response to Covid-19: 89% of respondents told us they are proud to work for Diageo and 81% would recommend Diageo as a great place to work.
1
Again this year, Diageo has displayed its culture of agility, moving at pace to adapt ways of working, capturing emerging opportunities with our consumers and trade partners, delivering further efficiencies and continuing to invest in the foundations of our long-term success.
Recommended final dividend per share
46.82p
2021: 44.59p ↑5%
2020
Total shareholder return
4%
2021: 32%
: 42.47p
Total dividend per share21
5% to 76.18p
2021: 72.55p ↑4%
2020: 69.88p
Total shareholder return
2021: 32%
2020: (19)%
1.85% of our global employees completed the survey
2.Includes1.Includes recommended final dividend of 44.59p.46.82p
Despite these challenges, I am pleased that Diageo has, once again, delivered strong performance. Employee engagement remains high and we continue to invest, for long-term growth, in societyour brands and in our portfolio. On behalf of the Board, I would like to thank our employees for their hard work and commitment to the company. Their focus and agility have enabled Diageo to navigate the volatility and finish the year a stronger business.
Global environment
We have again seen considerable instability in the global environment over the past year. Covid-19 continues to have unpredictable impacts in some countries, even as the easing of restrictions across most of the world has seen a welcome recovery for the on-trade in many regions. In June, we took the difficult decision to wind down our business in Russia – ’Societyafter having stopped shipments and sales in March. And our focus will remain on supporting our employees in the region, as we have done since this terrible conflict began.
Our supply chain has also been impacted by inflationary pressures. While high energy prices affect our suppliers and operations, they can also impact consumers’ disposable income. We have been agile in our response to this volatility, leveraging our supply chain capabilities and longstanding experience in managing the complexities of international trade.
Long-term view
In the face of these challenges, we continue to take a long-term view of our business, our portfolio and our brands. At our Capital Markets Day in November 2021, we set out our ambition to increase our value share of the total beverage alcohol (TBA) market by 50%, from 4% to 6%, by 2030. This ambition reflects our view of TBA as a long-cycle market with attractive fundamentals, including demand from a growing, global middle class. Hundreds of millions more consumers will be able to access premium brands, as they increasingly choose to trade up and ‘drink better, not more.’
Our sustained investment in brand-building and the active management of our portfolio continue to build equity and position us well to capture trends and occasions. We are responding to our consumers’ evolving tastes and demands with innovation, creativity and precision in our marketing. And we believe that investing in our brands, even in periods of volatility, is the right way to grow their long-term equity and our business. Our teams are building brands that are relevant today and which, we believe, consumers will choose for many years to come. You can read more about some of our brand building work over the last year on pages 10-11.
Building an entrepreneurial culture
I believe Diageo’s culture is a key source of competitive advantage. Our heritage is rooted in the vision of extraordinary entrepreneurs, such as John and Alexander Walker, Elizabeth Cumming, Don Julio González, Charles Tanqueray and Arthur Guinness, creating brands whose relationships with consumers have endured for centuries. Continuing that tradition, we are striving to become ever more entrepreneurial, as the proud custodians of exceptional brands, from iconic names to innovative newcomers, such as Bulleit Bourbon, Seedlip or Casamigos.
This entrepreneurial spirit is embedded across Diageo through an agile, purpose-driven culture, which demonstrated its value in our response to the challenges of the Covid-19 pandemic. We have grown market share while supporting the industry, our customers and each other.
Business description (continued)
Delivering 'Society 2030: Spirit of Progress’
The terrible tollI was delighted to see the launch of the pandemic has rightly brought even greater scrutiny to corporations’ social and environmental impacts and to their governance and reporting of non-financial performance. In November 2020, we were proud to launch our new 10-year sustainability action plan, ‘Society 2030: Spirit of Progress’. The plan builds on Diageo’s long and ambitious track record on environmental, social and governance (ESG) issues, with 25 new goals focussed in three core areas: promoting positive drinking; championing inclusion and diversity; and pioneering grain-to-glass sustainability.
Diageo is a business that has long been committed to ESG progress, delivering strong performance across our social and environmental targets to 2020. We have delivered a 50% absolute reduction in our direct carbon emissions since 2008. This places us among the leading companies in our peer set, with consistent inclusion in CDP’s A list for both climate change and water security over the last five years. We are pleased with the progress we are making on packaging and regenerative agriculture, building partnerships with cutting-edge innovators. This year, we launched Pulpex Limited with Pilot Lite, developing the world’s first ever 100% paper-based spirits bottle, which we anticipate will debut with Johnnie Walker in fiscal 23. We believe this innovation will transform the use of sustainable packaging at scale in the years to come.
Our 2030 goals represent a ‘whole of business’ agenda and accountability for them sits across the Board21 and the Executive Committee. For the first time,decision to link 20% of the shares granted tolong-term incentive plan (LTIP) grants for all our senior management underleaders, to performance against several of our ESG measures. I am encouraged by the Long-Term Incentive Plan (LTIP) will be linked to ESG measures across all three of the plan’s focus areas, creating direct accountability for our 2030 goals. We are among the first group of companies directly to incentivise delivery on societal impactenergy and progress I see in this way. Read more on pages 183-213.
Climate change is a significant issue and the transition to a low-carbon economy will create both risks and opportunities for all businesses. We have taken steps over many years to understand and address climate change impacts through our work to both decarbonisedeliver our business2030 goals.
We now have four carbon-neutral distilleries in Scotland and value chain, and championNorth America, with another four sites, globally, committed to achieving carbon neutrality. And we are proud that the Scotland-based Alliance for Water Stewardship (AWS), which sets a global benchmark for water stewardship. sustainability, awarded the International Water Stewardship Standard (AWS Standard) certification to 12 of our distilleries this year, including our largest distillery, Cameronbridge, in Scotland.
We continue to build our understanding of the impacts of climate change and have been reporting quantitative progress against our targets since 2009. We also continue to extend our assessment of climate change impacts, and our existing disclosures, on our journey to adopting all the recommendations ofincorporated the Task Force on Climate-related Financial Disclosures (TCFD).framework into our reporting. And this year, we have continued to extend the scope and sophistication of our climate risk assessments and the scenario analysis of climate change impacts. While our analysis indicates the financial impact will not be material to 2030, we know that managing the increasing climate risks we face, such as water stress, remains a priority. We expect to invest around £1 billion in environmental sustainability to reduce our impact and adapt to a changing climate, including decarbonisation of direct operations through biomass, bioenergy and electrification. Read more about our work on pages 84-97.44-46, 50-53 and 58-72.
Engaging stakeholders
Business description (continued)
Stakeholders
Our ambition is to be one of the best performing, most trusted and respected consumer products companies in the world and we know we can only achieve this through engagement and partnership with our stakeholders. We have responded to the hardship created by Covid-19 with support measures ranging from wellbeing initiatives, additional flexibility in working hours and healthcare support for our people, to our $100 million ‘Raising the Bar’ programme to help pubs and bars recover from the pandemic. Read more about our approach to stakeholder engagement on pages 39-40.
As designated Non-Executive Director for workforce engagement, I have had the pleasure of ‘virtually’very much enjoyed meeting a wide rangehundreds of employees aroundacross Diageo during the world this year. In these open, participativeMy Board colleagues and engaging sessions we discussedI have been delighted to see some of them face-to-face again, and I am encouraged by their pride in the company and their ambition for the future. I am very pleased by the results of the annual Your Voice survey, with engagement at 82%, and 90% of respondents2 proud to work for Diageo – 10 percentage points higher than our approach to developing talent, our culture, business strategy, innovation and, of course, our response to the pandemic. Our people continue to provide a rich source of ideas and perspectives which are invaluable to the Board.external benchmark.3 Read our workforce engagement statement on pages 169-170.
page 161-162.
Global environment
Although the economic disruption from Covid-19 has started to ease in some parts of the world, many countries continue to experience uncertainty and volatility. We have adapted quickly to shifts in consumer behaviour and have increased investment behind effective marketing and innovation to ensure Diageo emerges stronger from this terrible pandemic.
International trade is at the heart of our business. We were well prepared for the United Kingdom’s departure from the European Union and we see some potential longer-term opportunities for the United Kingdom to strike beneficial new trade deals for spirits. We were also pleased to see the United Kingdom, European Union and United States resolve their aerospace dispute involving Boeing and Airbus, with US tariffs on single malt scotch and liqueurs removed. We look forward to the United Kingdom utilising its newly independent trade policy to support spirits exports to key markets, with tariffs to be removed by Australia with the ratification of its new free trade agreement with the United Kingdom and the opening of trade talks with India this year.
Creating value
I am encouraged bypleased with the momentum and the performance Diageo has delivered in fiscal 21. The business has good momentum,22. We have built on solid foundations for future progress across the four areas of performance we measure: efficient growth, consistent value creation, credibility and trust, and engaged people. Return on invested capital was up 112331 basis points to 13.5%.16.8%, driven mainly by organic operating profit growth. Total shareholder return (TSR) was 32%4% this year andyear. And our 10-year annualised TSR is in the top quartile of our peer group.11%.
We continue to target dividend cover (the ratio of basic earnings per share before exceptional items to dividend per share) of between 1.8 and 2.2 times. The recommended final dividend is 44.5946.82 pence per share, an increase of 5%. This brings the recommended full-year dividend to 72.5576.18 pence per share and dividend cover to 1.62.0 times. Subject to shareholder approval, the final dividend will be paid to UKordinary shareholders on 720 October 2021.2022. Payment will be made to US ADR holders on 1325 October 2021. 2022.
On 9 April 2020, due to uncertainties related to Covid-19,21 February 2022, we announced that we would not initiate, in fiscal 20, the secondcommencement of the third phase of our fiscal 20 to fiscal 23 return of capital (ROC) programme approved byof up to £4.5 billion. Under the Board on 25 July 2019. On 12 May 2021, the Board approved the recommencement of this programme, extending the completion date to 30 June 2024. The second phasefirst two phases of the ROC programme, which willwere completed on 31 January 2020 and 11 February 2022 respectively, Diageo repurchased shares with an aggregate value of £2.25 billion. Under the third phase, due to complete no later than 5 October 2022, Diageo is seeking to return up to £1.0£1.7 billion to shareholders via share buybacks. As at 30 June 2022, £1.4 billion of phase three had been completed and the remaining £0.9 billion of the ROC programme is expected to be completed by 30 June 2022, and2023. During fiscal 22, the group hascompany purchased 3.261 million ordinary shares returning £108 million£2.3 billion to shareholders this year.shareholders.
Board changes
After eight years on the Board, Ho KwonPing stepped down on 28 September 2020. On behalf of all my Board colleagues, I would likeWe are delighted to thank him for the valuable contribution he made during his tenure on the Board.
From 1 October 2020, Sir John Manzoni, formerly Chief Executive of the Civil Service and Permanent Secretary to the Cabinet Office in the United Kingdom, washave appointed Non-Executive Director. Ireena Vittal, who brings experience in strategy, consumer insights and digital, with a particular focus on the Indian market, joined the BoardKaren Blackett, OBE, as a Non-Executivenon-executive Director on 2 October 2020. Valérie Chapoulaud-Floquet, the former CEO of Rémy Cointreau S.A., joined the Board onfrom 1 January 2021. Sir John, Ireena and Valérie allJune 2022. Karen joined the Audit, Nomination and Remuneration Committees on appointment.appointment, and brings 25 years’ experience of the media, marketing and creative industries. She is also a strong advocate for inclusion, diversity and creating opportunities for all.
In January 2021, we announced that Kathy Mikells, Chief Financial Officer, would be leaving Diageo and the Board at the end of June. My sincerest thanks go to Kathy for her dedicated contribution to Diageo over the past six years and her exceptional partnership with the Board. I was delighted to welcome Kathy’s successor, Lavanya Chandrashekar, to the Board from 1 July 2021. Her strong track record at Diageo and, previously, with leading consumer products companies, will ensure she makes a valuable contribution to both the Board and the Executive Committee.
Following Siobhán Moriarty, General Counsel and Company Secretary, will be retiring from DiageoMoriarty’s retirement on 30 September 2021, after a career at the company spanning over 20 years. I am very thankful to Siobhán for both heran outstanding contribution to the company and her support and wise counsel to the Board.over 20 years, Tom Shropshire, formerly a Partner & Global US Practice Head at Linklaters LLP, will succeedsucceeded Siobhán as General Counsel and Company Secretary, and the Board looks forward to working with him.Secretary.
Business description (continued)
Looking ahead
Diageo’s broad portfolioWe recognise that regulatory change to tackle the threat of climate change and geographic footprint,increased scrutiny of our expertiseown social and economic contribution will likely accelerate in years to come. And there is potential for increased volatility in our operating environment, including ongoing impacts from Covid-19, the conflict in Ukraine, inflationary pressures and disruption in our supply chains, as well as the potential for broader economic malaise, which could impact consumer demand in fiscal 23. Diageo is, however, well diversified, by category, price point and geography; our people are engaged and proud of Diageo; and we continue to invest for the future to sustain the momentum in our brands and deliver a positive impact on society. We have consistently shown resilience in the face of volatility in recent years and proven our ability to emerge stronger in these circumstances.
I believe that our strengths in brand building, our supply chain operations and execution, as well as our leadingculture, combined with the attractive fundamentals of the TBA market, positions, providegive us a solid foundation for sustainable growth. Throughout the year, the business has acted with agility, seizing opportunitiesstrong platform to invest prudently where we saw recovery and continuing to allocate capitalrealise our ambitions for the long term. Whilst uncertainty remains and travel retail is still severely impacted,future growth of Diageo, even in the long-term trends for our industry continue to be extremely attractive.face of continued volatility. Your Board and executive leadership team will ensure that Diageo continues to focusremain focussed on delivering long-term value creation for all our stakeholders.
Javier Ferrán
Chairman
2. 88% of our global employees completed the survey (fiscal 21: 85%)
3. Benchmark consists of over 30 fast moving consumer goods and manufacturing companies with similar global reach to Diageo
| | |
Statement on Section 172 of the Companies Act 2006 |
Section 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 the impact of the company’s activities on local communities, the environment, including climate change, and the group’s reputation. |
Read about: –Our stakeholder groups on pages 39-40
–How stakeholders were taken into account in decision-making on pages 165-167156-159 |
Business description (continued)
Our investment proposition
Positioned to win
Diageo is a global leaderthe number one player in the premium and aboveinternational spirits, segment – which is growing, globallypremiumising and gaining share.share of total beverage alcohol.1
And withour iconic global brand Guinness, at the heart of our beer portfolio, is well positioned for the majority of our beer business is positioned inkey growth trends within the category as a premium, flavourful beer segments, which are growing fastest.beer.2
In anA large, growing and attractive industry
Total beverage alcohol (TBA) has a strong record of value growth over the last 10 years, with international spirits, where Diageo is the number one player, growing faster than TBA.3 In both developed and emerging markets, growth is underpinned by attractive consumer fundamentals, including population growth, increased spirits penetration and premiumisation.
An additional 600 million consumers are expected to come of age by 2032, and the continued growth of the ‘middle class and above’ income bracket should enable 600 million more consumers to access our brands.4 Spirits penetration remains low and even in our largest market, the United States, only around 50% of households purchase spirits every year.5
Premiumisation has beenis a consistentlong-established trend, with the highest price tiers growing at more than double the international spirits category growth rate between 20152016 and 2020.2021.43 AndDiageo has the largest premium-plus business within international spirits3, and this segment now comprises over half of our Reservereported net sales value. Our super-premium plus portfolio, of exceptional brands, which is focussedfocusses on capturing the global luxury opportunity, grew 36%31% this year. While the current economic environment may create near-term volatility, we remain confident in continued premiumisation over the long term.
Spirits’ versatility providesIn beer, we have a differentiated and highly profitable business model, with exposure to attractive growth opportunities in both emerging and developed markets. Our iconic global brand, Guinness, is well-positioned for the flexibility to respond to evolving consumer tasteskey growth trends within the beer category as a premium, flavourful and occasions. differentiated beer.
With low spirits penetration in many emerging markets and only 4%4.6% of global TBA share,5share,3 we believe we have opportunitiessignificant headroom for sustainable, long-term growth, and our ambition is to grow in all regions. In beer,outperform the market and increase our geographic footprint and brand portfolio best position us for opportunities in premium and above segments, distinctive flavours and developing markets.TBA value share to 6% by 2030.
Read more on pages 26-30.22-26.
With a leadingan advantaged portfolio and geographic footprint and brand portfolio
Diageo ownsWe own over 200 brands, soldwith sales in more than 180 countries. Combined withcountries, including a market-leading position in international spirits in the United States3 and fast-growing businesses in India and China. The breadth and depth of our portfolio across attractive categories and price points, we have bothand our well-balanced position between developed and emerging markets, gives exposure to some of the greatestlargest consumer growth opportunities andwhile providing some resilience to global trading volatility.
We take anOur active and disciplined approach to managing our portfolio of brands. Through the acquisitionmanagement has shaped it towards higher-growth categories, including tequila, international whisky, scotch and gin. This has included acquisitions of premium-plus brands, in fast-growing categories, such as tequila brands Don Julio in 2015, and Casamigos in 2017, as well asAviation American Gin in 2020 and 21Seeds flavoured tequila in 2022. And through our majority stake in Sichuan Swellfun Co., Ltd. (ShuiJingFang), we are the only international spirits player to compete in the large, growing and rapidly premiumising baijiu market. We’ve also made strategic disposals, including the salea portfolio of our main US wine businesses in 2016 and 19 US brands in 2018, we have strengthened our2018; the Meta Abo Brewery in Ethiopia; and Picon in 2022. We also agreed to dispose of Windsor in Korea in 2022; and United Spirits Limited announced an agreement to sell and franchise a portfolio and geographic footprint.
We are experts in the art of brand building and in innovation, combining creativity with data and tools that deepen our understanding of consumers and customers. Strong organic growth of brands such as Crown Royal, Gordon’s and Baileys has been driven by creative, effective marketing and insights-driven innovation. It has also contributed to the strengthening of our portfolio in fast-growing categories, including US whiskey, Canadian whisky, baijiu, tequila and gin.
54% of our reported net sales are now generated from premium-plus products. Geographically, we continue to benefit from our market-leading position in North America and our exposure to India and China. China now accounts for just over 5% of our reported net sales.India.
Read more on pages 48 and 98-134.93-144.
AnWorld-class brand building and effective route to consumer
Our exceptional capabilities in brand building and innovation drive sustainable long-term growth of our brands. We needcombine our deep understanding of consumers with marketing creativity and we execute with precision. This is underpinned by smart investment in marketing effectiveness tools, such as Catalyst, Demand Radar and Sensor.
Our ability to have the right product in the right place at the right time in orderand at the right price, enables us to win with consumers. We haveWe've invested in transformational digital and data capabilities, thatincluding proprietary technology tools, to consistently deliver consistent ways of working and enable teams to bring a customer-first mindset to every interaction.mindset. Our suite of ‘Every Day Great Execution’ (EDGE) technology tools, such as Trax,including EDGE365 and Diageo One, givegives us deeper insights that enable us to improve the quality of our commercial execution and customer service and enhance our productivity. We areservice.
We're also building our e-commerce and direct-to-consumer capabilities, which further expand our sales reach to consumers.
In combination with the The strength of our on-trade customer relationships, which are enhanced through programmes such as Diageo Reserve World ClassTM and Diageo Bar Academy, inspire and educate bartenders in the craft of mixology while supporting advocacy and quality serves of our brands.
Our route to consumer is a key competitive advantage, underpinned by a supply chain that is resilient, agile, efficient and sustainable. We manage diverse supply chains, from gins and beers to aged whiskies and tequilas and we have an effective routea proven ability to our consumers that we continue to work to improve.respond at pace in complex and volatile environments.
Read more on pages 30 and 47.34-35.
1. IWSR, 2021 – retail sales value (RSV) CAGR 2011-2021
2. Global Data, 2021
3. IWSR, 2021
4. World Bank, 2022
5. Numerator
Business description (continued)
Financial strength and a culture of efficiency
A culture of efficiency and effectiveness is embedded across Diageo. We continueexpect to deliver progress onorganic net sales growth consistently in the range of 5% to 7%, and organic operating profit growth sustainably in the range of 6% to 9%, for fiscal 23 to fiscal 25. Sustainable top-line growth and productivity creating savings that fuelenable smart re-investment to drive long-term growth. These investments acrossinclude expanding our business. We continuously challenge ourselves to simplifyproduction capacity, such as new whiskey distilleries in North America and automate more ofChina; adding new consumer experiences, including the Johnnie Walker Princes Street visitor experience in Edinburgh; and strengthening our processes and systems, enabling faster and better decision-making.digital capabilities.
We have a consistent and disciplined approach to capital allocation, prioritising investment in the business to deliver sustainable and efficient organic growth, and pursuing acquisitions that further strengthen our exposure to attractive categories. Excess cash is returned to shareholders.
We have a track record of growing shareholder value, and have increased our full-year dividend per share every year since 2001, including during Covid-19. This means that overOver the last 20 years, our absolute dividend per share has increased 225%. Over220% and over the last fourfive years, we have returned £5.6£7.9 billion to shareholders through share buybacks.
Read more on pages 46-47.
Business description (continued)
22 and 23.
Highly engaged people and agile culture
Our people make the difference.and culture are key enablers in delivering our Performance Ambition. Our culture connects our people. And their shared purpose and passion for our brands drives ownership of performance. This year, 89%90% of respondents to our Your Voice survey told us they are proud to work for Diageo and 81% would recommend Diageo as a great place to work.Diageo.6
Read more on pages 41-42.30-31.
And a commitment to shaping a more sustainable future
ItDoing business in the right way is fundamental to our Performance Ambition thatAmbition. We want to create a positive impact on our company, within our communities and for our society. And we do business in the right way, which is whyare delivering this through our ‘Society 2030: Spirit of Progress’ ESG action plan is an integrated part ofplan. Our priorities in sustainability, inclusion and diversity, and promoting positive drinking reflect the most material issues affecting our strategic priorities.company, our people, our brands, our suppliers and our communities. We strongly believe therethat our ESG ambitions are a source of commercial benefits to our actions across a full range of ESG issues. These are not just about meeting regulatory requirementsadvantage and stakeholder expectations, but are fundamental to attracting and retaining the best talent, building deep consumer loyalty, creating new partnerships,increasing innovation, and increasing innovation,driving efficiency and resilience across our operations.
Read more on pages 43, 50-58 32, 38-49 and 64-71. 57.
1. IWSR, 2020 - retail sales value (RSV) CAGR 2010-2020
2. Global Data, 2019
3. IWSR, 2020
4. IWSR, 2020
5. IWSR, 2020
6. 85%88% of our global employees completed the survey (fiscal 21: 88%)
Business description (continued)
Chief Executive’sExecutive's statement
Emerging stronger
Another year of strong performance
I am very proud of how Diageo’s 27,650 employees have supported each other, our customers and the communities in which we live and work throughout this terrible pandemic. Our company is emerging stronger and I would like to thank all my colleagues for their dedication and resilience. I would also like to express my deepest condolences to the families of employees who lost their lives and to all who have lost loved ones this year due to the pandemic.
As we have faced the immediate challenges of the pandemic, we have also continued to focus on investing for the long term and on building a sustainable businesspleased with our ambitious 10-year ESG action plan, 'Society 2030: Spiritfiscal 22 results. In the face of Progress'. Diageo’s success rests on the commitmentunprecedented political and economic volatility, my 27,987 colleagues have worked tirelessly to deliver another year of my colleagues, the strength of our brands, and our determination to be a responsible, sustainable and inclusive business. The past year has demonstrated powerfully the importance and the strength of these foundations.strong performance.
| | | | | |
Reported volume movement 2021: 9.9%2022: 10.3%↑
2020:11.8% ↓2021:9.9% ↑
| Volume movement 2022: 10.3% ↑ 2021: 11.2% ↑ 2020: 11.2% ↓
|
Reported net sales movement 2022: 21.4% ↑ 2021: 8.3% ↑ 2020: 8.7% ↓
| Net sales movement 2022: 21.4% ↑ 2021: 16.0%↑ 2020: 8.4%↓
|
Reported operating profit movement 2022: 18.2%↑ 2021: 74.6%↑ 2020: 47.1%% ↓↑
| Operating profit movement 2022: 26.3% ↑ 2021: 17.7%↑ 2020: 14.4%↓
|
Performance
The operating environment was even more challenging in the second half with stronger headwinds from inflation, supply chain disruptions and geopolitical events. Diageo has responded to these challenges with agility and resilience, reflected in the strength of this year’s results.
Although there is more to do, I am proud of the progress we have made against our ‘Society 2030: Spirit of Progress’ ESG action plan, and the support we are giving to our colleagues, customers and the communities where we operate. Read more on pages 38-46 and 50-53.
As Javier notes, we are in the process of winding down our business in Russia. We have seen continued volatility in fiscal 21, with disruption caused by the closure of bars and restaurants in many countries; the severe impact on travel retail; the needare providing support to adapt quickly to an increase in demand through retail outlets and disruption in our supply chains; and significant changes to ways of working for our employees across our supply operationsthe region and doing what we can to assist the humanitarian effort, including pledging €2 million to aid organisations. Our thoughts are with everyone affected by the conflict in Ukraine, including all those concerned for those working from home. Notwithstanding this dynamicfamily, friends and challenging operating environment, we have delivered a strong set of results.colleagues.
Performance
For the full year, reported net sales increased 8.3% with21.4%, primarily driven by strong organic growth, partially offset by an adverse foreign exchange impact. Organic net sales werealso up 16%21.4%, following a decline in fiscal 20, with strong double-digit growth across all regions. Growth was driven byreflects continued recovery in the on-trade, resilient consumer demand in the off-trade channel (customer retail outlets) and a partial recoverymarket share gains. This performance was also underpinned by favourable industry trends of the on-trade channel (pubs, barsspirits taking share of total beverage alcohol (TBA) and restaurants) in key markets. Organicpremiumisation.1 Our premium-plus brands contributed 57% of reported net sales and drove 71% of organic net sales growth. Organic volume growth also benefittedwas 10.3% and price/mix was up 11.1%, reflecting positive mix from lapping a reduction of inventory levelsstrong performance in super-premium-plus brands, and mid-single digit price growth driven by our customers in fiscal 20, and the replenishment of stock levels by distributors and retailers in North America in fiscal 21. This was partially offset by continued destocking in Travel Retail.price increases across all regions. Overall, however, we heldgrew or grewheld off-trade market share in over 85% of total net sales value in measured markets, up from 65% last year.markets.12
Reported operating profit, increased 74.6%. Thisup 18.2%, was due toprimarily driven by a significant reduction in exceptional items and 17.7% growth26.3% increase in organic operating profit partially– with growth across all regions. Reported operating margin decreased 77 basis points (bps), driven by organic margin growth which was more than offset by an adverse foreign exchange impact. Followingexceptional operating items of £388 million. Despite increased cost inflation and 24.7% growth in organic marketing investment, we delivered a decline121bps improvement in fiscal 20, organic operating profit grewmargin. This reflected a strong recovery in all regions except Europe and Turkey. Organic operating margin increased 46 basis points (bps). This was driven by overhead efficiencies and the lapping of one-off expenses related to disruption in the operating environment, partially offset by a decline inorganic gross margin and increased marketing spend. Grossleverage on operating costs. Organic gross margin declined 40bpswas driven, primarily, by adversepositive mix especially in our Guinness beer business, which was impacted by channelfrom premiumisation and market mix.the recovery of the on-trade channel. It also benefitted from improved fixed cost absorption from volume growth. Price increases and supply productivity savings more than offset the absolute impact of cost inflation.
Reported and organic net sales were up across all key categories, with the exception of beer, where reportedparticularly strong growth in scotch, tequila and beer. Our global giants grew organic net sales were down 4%. Due to Covid-19, the on-trade channel was significantly restricted in many markets, particularly impacting beer in Europe.
Organic net sales of our global giant brands were up 9%by 22%, with all brands in growth other than Guinness. Guinness growth was flat due to restrictions in the on-trade channel, particularly in Great Britain and Ireland. Johnnie Walker up 34%. Our Reserve brands grew 31%, largely driven by Casamigos, up 90%, Don Julio, Johnnie Walker Reserve variants, Chinese white spirits and scotch malts.
Our local stars grew 17%14%, largely driven by double-digit growth in Buchanan’s, and growth in Chinese white spirits, Crown Royal Buchanan’s and McDowell’s No.1. Our Reserve brands grew 36%, largely driven by Don JulioOld Parr. Windsor and Casamigos, which grew 62% and 125% respectively. Ketel OneBundaberg organic net sales were flat.down 9% and 4%, respectively.
Basic earnings per share increased 23.2%, primarily driven by organic operating profit growth, partially offset by higher tax and exceptional items. Basic earnings per share before exceptional items increased 7.4%, primarily driven by an increase in organic operating profit, partially offset by unfavourable exchange and, to a lesser extent, increased tax.
29.3%. We delivered £3 billion in free cash flow of £2.8 billion this year, a decline of £0.3 billion, due to lapping an increase of £1.4 billion. This was driven by growth in operating profit,exceptionally strong working capital management and receipt of a delayed 2019 dividend from associates.benefit in fiscal 21.
During the year, we have continued to invest for the future, extending our brand portfolio and adapting to changing consumer tastes and occasions. We increased investment in marketing by 23%, ahead of our organic net sales growth, and also continued to invest in manufacturing capacity, digital capabilities, consumer experiences and sustainability.
We acquired two new premium and above portfolios: Aviation American Gin through the Davos Brands acquisition in the United States and Chase Distillery and brands in the United Kingdom. To support our ambitions in the rapidly growing ready to drink category, we made two further acquisitions in the United States, Lone River Ranch Water and Loyal 9 Cocktails, and announced an $80 million investment in our manufacturing footprint.
1. ISWR, 2021
2. Internal estimates incorporating AC Nielsen, Association of Canadian Distillers, Dichter &and Neira, Frontline, Intage, IRI, ISCAM, NABCA, Scentia, State Monopolies, TRAC, Ipsos and other third-party providers
Business description (continued)
NetReported net sales by category
| | | | | | | | | | | | | |
l | Scotch | | l | Liqueurs | |
l | Vodka | | l | Gin | |
l | US whiskey | | l | Tequila | |
l | Canadian whisky | | l | Beer | |
l | Rum | | l | Ready to drink | |
l | IMFL whisky | 3 | l | Other | |
Doing business the right way
I am also delightedfirmly believe that Diageo’s commitment to seesustainability, inclusivity, diversity and promoting positive drinking through our £185 million investment in Scotch whisky tourism in Scotland now coming on stream, with the re-opening of Glenkinchie, Clynelish, Cardhu and Brora distilleries and visitor centres this year, and the imminent opening of our flagship Johnnie Walker experience in Edinburgh.
We have innovated and created new offerings for consumers looking for convenience and celebration at home and we have increased both the visibility and ‘ease-of-shop’ of our brands for online purchase, as online sales of alcohol have rapidly accelerated this year. Consumers have also sought the reassurance of well-known and trusted brands during Covid-19. We have prioritised innovation for our global giants this year, launching, for example, Captain Morgan Tiki in Europe to access the growing early evening occasion with a lower alcohol by volume (ABV) variant; Guinness Nitro Cold Brew Coffee in North America; and Gordon’s 0.0% in Great Britain.
Building a sustainable, responsible and inclusive business
In 2015, we set ambitious environmental and social targets for 2020 and we are proud of the progress we made.2 We recognise, however, that there is much more to do. Our new 10-year ESG action plan, ‘Society 2030: Spirit of Progress’, challenges us to go further. Its 25 goals are built around ESG action plan is a source of commercial advantage, and ensures we attract and retain the most material issues affecting our businesstalented employees.
At Diageo, we want people who choose to drink, to ‘drink better, not more’. There is no alcoholic drink of moderation, only a practice of moderation, and we are informed by the lessons we have learned through the delivery of our previous targets.
It is fundamentaldetermined to our Performance Ambition that we do business in the right way, which is why ‘Society 2030: Spirit of Progress’ sits at the heart of our strategy. We take the same rigorous, data-driven approach to the delivery of our ESG goals as we take to the rest of our business. We understand the importance of measurement and transparency and are moving towards a fully integrated approach to reporting, with all our goals directly linked to our strategic priorities.
As one of the world’s leading distillers and brewers, the two most fundamental material inputs to our business, aside from raw materials, are heat and water. We have a longstanding commitment to preserving the natural resources on which we all depend and to working together to tackle climate change and water stress. In November 2020, Diageo was recognised for the third consecutive year in the Dow Jones World Sustainability Index 2020. We were an early adopter of absolute, rather than relative reductions in our carbon emissions, setting both our 2020 and 2030 targets in lineprovide consumers with the principles of the Science Based Targets initiative. And we have committed to achieving net zero carbon in our direct operations (Scopes 1 and 2) by 2030 and to being net zero across our full value chain by 2050 or sooner. Read more on pages 56-58.
2. Read more about our 2015-2020 targets and progress on diageo.com
Our response to Covid-19
Fiscal 21 has been an extraordinary year for our business and our customers, suppliers and partners, as the entire world has navigated through a very dynamic and volatile period. Covid-19 restrictions around the world meant the continued closure of pubs, bars and restaurants, leading to sharp increases in consumer purchases from retail outlets in some markets, such as Great Britain and the United States, and decreases in markets where consumers purchase more of our brands in pubs, bars and restaurants, such as Ireland. Restrictions also led to shifts in consumer behaviour and purchasing patterns, with a large increase in the ‘at home’ occasion and online shopping for our brands.
Business description (continued)
Throughout the pandemic, the health and wellbeing of our employees has been our priority and we have implemented a range of new policies, resources and support. These include additional flexibility to enable employees to manage family responsibilities, an enhanced Employee Assistance Programme, as well as a range of resources to support wellbeing and our new ways of working.
In addition to our immediate steps to donate masks, hygiene products and alcoholinformation they need to make more than 10 million bottles of hand sanitiser, last June, we launched ‘Raising the Bar’, our $100 million commitment to support the recovery of the hospitality sector around the world.informed choices. The fund has already benefitted over 39,000 venues that have received hygiene and sanitation kits, furniture for outdoor spaces and solutions for table reservations and contactless ordering. We have also trained over 37,000 bar staff on Covid-19-related protocols to ensure safe operations. Beyond our direct support to pubs, bars and restaurants, the funding has created an economic multiplier effect as over 60% of the procurement funded by ‘Raising the Bar’ has been local. In some countries, such as India, Brazil and China, nearly 100% of procurement spend was local. And we recently pledged £4.5 million to provide infrastructure and equipment in support of India’s Covid-19 response.
Diageo Bar Academy (DBA) is also helping bar owners and staff with training and content that addresses the challenges of adopting new operating models for their businesses, such as guidance on safe re-openings, wellbeing resources, online menus and ‘Cocktails to Go’. A record more than 1.5 million people used DBA this year, an increase of 50%.
We have also worked closely with our suppliers and partners this year, who have managed their businesses through similar supply chain challenges. Sourcing raw materials, such as glass and packaging, for example, led to industry shortages in the United States earlier this year. In working with our suppliers and partners to reduce disruption to their businesses and ours, we have provided support such as sharing our enhanced global supply site operating procedures to help protect the health and wellbeing of our suppliers’ employees. We have also launched our Diageo Supplier Service Hub, which provides a one-stop shop to simplify our ways of working with suppliers.
In the United States, ‘Raising the Bar’ is supporting 25 Historically Black Colleges and Universities with $10 million lifetime endowments for scholarships and grant programmes.
Promoting moderation and addressing the harmful use of alcohol is at the heart of our approach to responsible business and is a critical part of our premiumisation strategy. Although the prevalence of harmful drinking – including heavy-episodicheavy episodic, or binge drinking, and underage drinking – has been falling in many regions over the last decade, we know theredecade. There is, however, much more to do.do and all of us in the industry have an important role to play in reducing the harmful use of alcohol, in partnership with governments and civil society.
Wrong Side of the Road, a hard-hitting new programme to support changes in attitudes to drink driving globally, has reached over 500,000 people in 24 countries since it was launched in May 2021. And SMASHED, our award-winning programme focussed on tackling underage drinking, is now running in 26 countries and has educated over 607,374 people in fiscal 22. DRINKiQ, our responsible drinking tool, is now available in 73 countries and 23 languages, delivering early achievement of one of our 2030 goals.4 We also know there is no drink of moderation, only a practice of moderation. So we have set goalsmade significant progress against our target to reach one billion people with dedicated responsible drinking messages from our brands by 2030 and to educate people on the risks of the harmful use of alcohol through the further rollout of our DRINKiQ platform.
We have also set a goal to expand SMASHED, our award-winning alcohol education programme, and educate 10 million people on the dangers of underage drinking by 2030. This year, the development of SMASHED Online and its launch in Great Britain, Northern Ireland, India, Australia and Mexico means we are now able to reach more students virtually. Read more on pages 50-52. 38-40 and 50.
WeI’m also very proud that we continue to make progress in building a more inclusive and diverse company: 64% of Diageo’s Board are proud of the culture of inclusion and diversity we have built at Diageo and were ranked the number one FTSE company for female Board and leadership representation in the 2020 Hampton-Alexander Review. This year, we have increased female Board representation to 60% and the percentage of female leaders globally is now 42%44%. Our inclusive culture fuels our ability to attract and retain terrific talent around the world, with recent senior hires citing our approach to flexible working and inclusion and diversity as key drivers in their decision to join us.
We have now set new goals to ensure 50% of all leadership roles are held by women, as well as increasing the percentage of ethnically diverse leaders globally toAnd 45% by 2030. Today, 30% of our Board and 37%41% of our leaders globally, including theour Executive Committee, are ethnically diverse. Read more on pages 53-55. 41-43, 50-51 and 175.
We are committed to building a more sustainable, responsible and inclusive business and society.
To lead our business through the next decade,As Javier explains, we have set 25 ambitious goals which are aligned tomade progress this year in the United Nations’ Sustainable Development Goals. The issues facing society are complex and connected and we are focussed on the impact we can have throughout our value chain across communities, suppliers, our partners, customers and consumers. From our people to our brands and the way we promote our category, we will leverage the full breadth and reachdelivery of our businessgrain-to-glass sustainability goals, with a focus on preserving water for life, accelerating to shape market-leading policiesa low-carbon world and practices.
becoming sustainable by design. Read more on pages 50-5844-46 and 64-71.51-53.
In Ireland,Delivering growth
We have set new medium-term guidance for consistent and sustainable growth for fiscal 23 to fiscal 25, and an ambition to deliver a 50% increase in our value share of the TBA market, from 4% to 6%, by 2030. This ambition rests on our view of the attractive fundamentals of TBA combined with our determination to become the best brand builders in the world. I am pleased with the progress we have made towards this ambition, having increased our TBA share to 4.6% in 2021.5 This share gain was more than any of our peers and two times more than our largest competitor6.
I believe Diageo’s performance demonstrates the consistent delivery of our strategy: focussing on agility, efficiency, commercial execution, sustained investment, and above all, understanding and responding to our consumers through culturally relevant marketing, innovation and active portfolio management. During the year, we continued to invest for the future across production capacity, digital capabilities and consumer experiences, opening Johnnie Walker Princes Street in Edinburgh and announcing investments in Guinness launched a ‘Keep the Lights On’ campaign, which invited consumers to embrace their local pubsexperiences in Chicago and pay a visit when they re-opened.
London.
We are buildingalso continued to shape our portfolio towards attractive categories by acquiring 21Seeds and nurturing someMezcal Unión. We also acquired Vivanda, owner of the world’s most iconic brands, rootedflavour matching technology behind ‘What’s Your Whisky’ and the ‘Journey of Flavour’ at Johnnie Walker Princes Street in cultureEdinburgh. This acquisition supports our ambition to provide customised and local communities, which is why we are focussed on creating an inclusive, sustainable business in its widest sense. We believe that our responsibility and influence extend beyond our direct operations. We also want to help to build a thriving hospitality sector. Before the pandemic, the sector contributedinteractive experiences for consumers
Business description (continued)
nearly US$9 trillion to the world’s GDPacross all channels and accounted for one in ten jobs.3 If there is one positive to come from this pandemic, it is perhaps the broader appreciationpart of the vital roleacceleration of the digital transformation journey we embarked upon in 2017. We sold Picon and the Meta Abo Brewery, in Ethiopia, and announced an agreement to dispose of the Windsor business. And in May 2022, United Spirits Limited announced an agreement to sell and franchise a thriving hospitality sector playsportfolio of Indian Popular brands.
We are proud that, in communities asJune 2022, we captured eight of the top ten positions in the Drinks International ‘Millionaires’ Club’ – an annual list featuring the fastest growing spirits brands around the world, which achieve annual sales volumes exceeding one million nine-litre cases. Consistent investment in our brands has been a job creator, particularly for younger adults,key enabler of quality market share gains and as an engine for economic recovery and growth. Wewe will continue to play our partinvest in helping the sector to rebuild after the pandemic.
3. World Travel and Tourism Council, 2021their growth.
Outlook
Looking ahead to fiscal 23, we expect the operating environment to be challenging, with ongoing volatility related to Covid-19, significant cost inflation, a potential weakening of consumer spending power and global geopolitical and macroeconomic uncertainty. Notwithstanding these factors, I am confident in the resilience of our business and our ability to navigate headwinds.
I am very proudbelieve we have an advantaged portfolio with extraordinary brands across geographies, categories and price points. And we continue to actively shape our portfolio to fast-growing categories through innovation and acquisitions. We are staying close to our consumers, and our digital tools and data capabilities are enabling us to quickly understand trends and execute with precision. Continued smart re-investment is being fuelled by our culture of the financial resultseveryday efficiency. And our expertise in revenue growth management is enabling strategic pricing actions. In addition to our everyday efficiency savings, as we continue to build a more agile and sustainable business, we have initiated a new supply chain agility programme, spanning a five-year period from fiscal 23. We expect this programme to strengthen our supply chain, improve its resilience and agility, drive efficiencies, deliver additional productivity savings and make our supply operations more sustainable. The programme is expected to have a five-year payback period, with the majority of savings delivered in fiscal 21. These results demonstrate the strength25 and relevance ofbeyond.
We are executing our brands,strategic priorities, including our agile response to shifts in consumer behaviour and the extraordinary efforts of our talented people.
Our foundation, built on our brand-building expertise, active portfolio management, consumer-led innovation, investment in data and tools, as well as embedding a culture of everyday efficiency, helped position us to manage through the volatility and disruption caused by Covid-19 and emerge stronger.
While our business has performed strongly this year,ambitious 10-year ESG action plan. And I am confident that we expect near-term volatility in some markets. Notwithstanding this volatility, I remain optimistic about the growth prospects for our industry and believe Diageo isare well-positioned to capturedeliver our medium-term guidance for fiscal 23 to fiscal 25 of organic net sales growth consistently in the opportunitiesrange of 5% to drive long-term sustainable7% and organic operating profit growth and shareholder value.sustainably in the range of 6% to 9%.
Ivan Menezes
Chief Executive
3. Indian-Made Foreign Liquor (IMFL) whisky
4. Our promote positive drinking goal is to ‘Champion health literacy and tackle harm through DRINKiQ in every market where we live, work, source and sell’ (where it is legally permissible). Read more on page 50
| | | | | | | | |
PROMOTE POSITIVE DRINKING We want to change the way the world drinks for the better. | CHAMPION INCLUSION AND DIVERSITY We believe the most inclusive and diverse culture makes for a better business and a better world. | PIONEER GRAIN TO GLASS SUSTAINABILITY We are committed to preserving the natural resources on which we all depend. |
We will do this by celebrating moderation and continuing to address the harmful use of alcohol, expanding our programmes that tackle underage drinking, drink driving and binge drinking. | We will champion inclusion and diversity across our business, with our partners and communities, to celebrate diversity and help shape a tolerant society. | We will work in partnership to tackle climate change, water stress and biodiversity loss, and help create a more sustainable world. |
| | â |
| | |
| | |
PRESERVE WATER FOR LIFE Water is the basis of life and our most precious resource. | BECOME SUSTAINABLE BY DESIGN We all have a responsibility to restore the natural world on which life depends. | ACCELERATE TO A LOW CARBON WORLD The planet needs significant science-based action to create a sustainable low-carbon future. |
By 2030, every drink we make will use 30% less water than today and by 2026 we will replenish more water than we use in all our water-stressed areas. | We will do our bit by eliminating waste from our value chain, collaborating with farmers to regenerate landscapes and creating innovative solutions to grow sustainably.
| We will decarbonise our own operations by 2030 and work with our suppliers to halve theirs too. |
| | |
DOING BUSINESS THE RIGHT WAY FROM GRAIN TO GLASS We believe doing business the right way contributes to a fair and just society. |
We will create an environment where all our people feel they are treated fairly and with respect. We will act with integrity to ensure we are doing business in the right way, meeting external expectations and our own standards. |
5. Diageo retail sales value % share of TBA for calendar year 2021, IWSR, 20216. IWSR, 2021
Business description (continued)
Our market dynamics
An attractive industry with a runway for growth
Our markets are shaped by long-term consumer, economic, cultural and social trends, and the regulatory environment. Total beverage alcohol (TBA) is resilient, and we believe the long-term trends for our industry are attractive.
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 around the world.
Our markets are shaped by long-term consumer, economic, cultural and social trends, and the regulatory environment. Premium total beverage alcohol has remained resilient during Covid-19 and the long-term trends for our industry remain attractive.
Retail sales value of total global alcohol market1
£728865 billion
EquivalentTotal equivalent units of alcohol sold2
5 billion
New legal purchase age consumers expected to enter the market by 203120323
600 million
1. IWSR, 20202021
2. IWSR, 20202021
3. World Bank, 20212022
Read more about our strategic priorities on pages 43-58 and our Risk Factors on pages 72-82
CONSUMERS WANT TO ‘DRINK BETTER’
Consumers are seeking new experiences and higher quality products.products
When it comes to beverage alcohol, consumers are ‘drinking better, not more’1 – increasingly choosing brands and categories that offer superior quality, authenticity and taste. This premiumisation trend is supported by product innovation and fuelled by higher levels of prosperity and disposable income – and coupled with a greater desire to explore new experiences, ingredients and serves for social occasions.
Higher price spirits tiers grew 97 times faster than the total spirits category
IWSR, 2020,2021, volume CAGR for the period 20102011 to 20202021
Impact
Over the last 1510 years, brands in higher price tiers have consistently grown volume faster than those in lower price tiers.2 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 thisbrands – through focussed 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 able to influence the evolution of both mass and high-end luxury spirits across different categories and occasions, including super premium scotch and tequila.
We are also growing brands of the future, including no- and lower-alcohol choices. We do this through a combination of acquisition, by growingdeveloping our own brands, and by investing in entrepreneurs through the Diageo-backed accelerator programme, Distill Ventures.
This market dynamic aligns with these strategic priorities:
Sustain quality growth, Embed everyday efficiency, Invest smartly, Promote positive drinking, Pioneer grain-to-glass sustainability
Business description (continued)
CONSUMERS ARE INCREASINGLY CHOOSING SPIRITS
Consumers who drink alcohol are increasingly choosing spirits over beer and wine.wine
This is a long-term trend.trend we see occurring across the globe. 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 variety and new experiences.
+9%7% increase in spirits share of total beverage alcohol
IWSR, 2020, for the period 20102021, between 2011 to 20202021
Impact
Gin and ready to drink are examples of categories benefitting from switching.3In markets such as the United States, household penetration of spirits has grown ahead of wine and beer. And this trend has accelerated during the pandemic, withpandemic. This was driven by consumers increasingly choosing spirits in theadding cocktails more often to their ‘at home’ occasion.repertoires, whilst the spirit-based ready-to-drink category benefitted from increased consumption across more occasions.4 This year, in the United States, spirits penetration grew nearly three times as fast as beer and twice as fast as wine.53 In many emerging markets, spirits penetration is still low compared to developed markets, providing thewith potential for future growth.
1. IWSR, 2020 for 2015 to 2020
2. IWSR, 2020
3. Numerator, 2021
4. Numerator, 2021
5. Numerator, 2021
Our response
Our broad, global portfolio across categories and price points provides consumers with product choicechoices to suit different occasions and their disposable income. Our innovation is driven by our consumer insight on trends and occasions, ensuring we provide choices to suit evolving consumer attitudes and motivations.
This market dynamic aligns with these strategic priorities:
Sustain quality growth, Embed everyday efficiency, Invest smartly, Promote positive drinking
AN EMERGING MIDDLE CLASS WHO CAN AFFORD INTERNATIONAL-STYLE SPIRITS
Global population growth and economic development continue to driveis driving the emergence of consumers with a higher disposable income.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 illicit alcohol, which is estimated to account for around 25% of global alcohol sales despite the associated health risks and loss of tax revenue for governments.4
550m600m consumers expected to join 'middle class and above' income bracket by 20312032
Impact
Demand for international-style spirits is rising. Around 600 million new legal purchase age consumers5 are expected to enter the market globally by 2031.2032. Over the same period, we expect hundreds of millions of additional consumers to be able to afford international-style spirits.
Our response
We have built a portfolio of lower price point options, such as Smirnoff X1 in Africa, McDowell’s No. 1 in India and Black & White in Latin America. As emerging market consumers’ disposable incomeincomes rise, these products give them access to quality at affordable prices and enable us to help shape responsible drinking trends. This year, we launched our Chrome Gin innovation in Kenya, in response to rapidly growing interest in the gin category. Chrome Gin is a premium offering at a lower price point, which has proven popular with consumers.
This market dynamic aligns with these strategic priorities:priorities:
Sustain quality growth, Embed everyday efficiency, Invest smartly, Promote positive drinking
1. IWSR 2021
2. IWSR 2021
3. Numerator 2022
4. WHO 2021
5. World Bank 2021
Business description (continued)
CONSUMERS ARE CHANGING HOW THEY SOCIALISE
Consumers in developed markets are moving away from high-energy,towards lower-tempo, food-related occasions
As the on-trade has reopened following the pandemic, high-tempo, late-night occasions towards more informal, food-related occasions.
They are increasingly interested in drinks that fitrecovering. However, the long-term shift towards occasions before, during and after meals, and in choices that suit ‘at home’ and ‘outdoor’ occasions, which have grown significantly during Covid-19.persists.
+12%7% increase in spirits'lower-tempo share of 'with meal'TBA occasions in Great Britain
Kantar, 2021 for the period2022, between 2018 to 2021
2022
Impact
Spirits, which are versatile and adaptable, are benefitting from the trend away fromrecovery of high-tempo socialising, as consumers discoverwell as the long-term shifts in consumers’ discovery of new serves which are suitable for a broader range of occasions in which to enjoy our brands.occasions.
Our response
Our consumer insight enables us to innovate within existing brands, anticipate new consumer occasions and create new brands that meet emerging consumer demand. This insight is supported by our ability to develop and launch products and campaigns rapidly and effectively, reaching the right consumers fast. This year, whenwe launched Johnnie Walker Blonde in six markets globally to recruit new scotch consumers, were unableusing a refreshing long serve to visit their local pub forappeal to casual, lower-tempo occasions. After a pint, Guinness launched a campaignsuccessful launch, we’ll be extending Johnnie Walker Blonde to show how it could be enjoyedmore markets in any type of glassware, not just the iconic Guinness pint glass.
fiscal 23.
This market dynamic aligns with these strategic priorities:
Sustain quality growth, Embed everyday efficiency, Invest smartly,Promote positive drinking
CONSUMERS ARE CHANGING HOW THEY BUY
Alongside shifts in the way people socialise and consume, digitalDigital 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 iscontinues to be a fast-growing channel and hasthat dramatically accelerated during Covid-19.the pandemic. 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.products.
+45% increase in e-commerce
IWSR, 2020, global total beverage alcohol16% retail sales value 2020 vs 2019growth of global e-commerce TBA
IWSR, 2021
Impact
AsThe lines between channels are blurring as consumers expect a seamless omnichannel experience. And as regulations continue to evolve and e-commerce expands further, digital channels will play an ever-increasing role in bringing our products to consumers. This trend has been accelerated by the impact of Covid-19 and in some markets has favoured spirits. At the peak of the pandemic in 2020, spirits became the biggest beverage alcohol category for the first time on the American e-commerce site Drizly, a position which it has retained in 2021.1
1 Drizly, ‘One year post-lockdown: The new normal of Bev Alc’ 18 March 2021.
Our response
We have developedOur mission is to delight consumers across both digital and physical touchpoints, transforming our route to consumer approach through multiple channels. Continuedapproach. We continue to build strength on key platforms, such as Amazon in Europe and Drizly in the United States, whilst development of our owned e-commerce channels and capabilities has been a key global focus this year. We expanded the availability ofrolled out TheBar.com to Colombiafour new markets and Malts.com to Germany. We also launchedre-launched in one; upgraded and repositioned malts.com as the digital hub for our Scotland brand homes and distilleries; and extended Diageo Rare & Exceptional in Singapore and Australia and Party Central in Kenya and Uganda.to a global audience. These helpchannels enable us deepen our relationship with consumers, grow their understanding and knowledge of our brands andas well as help them find the right drink for the right occasion. In East Africa, Covid-19-related closures of neighbourhood bars and restaurants meant we needed new, fast and safe ways of getting our products to consumers. In Kenya and Uganda, consumers are now able to order through easy-to-use apps to ensure safe delivery of our brands to their doorstep via digitally enabled ‘boda boda’ motorbike delivery companies.
This market dynamic aligns with these strategic prioritiespriorities:
:Sustain quality growth, Invest smartly,Promote positive drinking
Sustain quality growth, Invest smartly, Promote positive drinking
Business description (continued)
Luxury tequila positioned for premiumisation in North America
In North America, tequila accounts for 15% of total spirits retail sales value and is gaining share. It continues to premiumise at pace, with premium price tiers growing the fastest.1
Our luxury tequila portfolio includes Don Julio 1942, which is the number one luxury spirit brand variant by retail sales value in the United States.2 Its success as a luxury icon has been driven by a combination of outstanding liquid and powerful brand building, deeply rooted in culture. We’ve built consumer desire over the past decade through targeted distribution, influencer partnerships and cultural collaborations.
This year, under the Don Julio brand, we launched two new luxury innovations in North America, both of which exceeded expectations on launch. This included Don Julio Primavera, a limited edition Reposado tequila finished in European casks which previously held wine infused with macerated orange peel; and Don Julio Ultima Reserva, a 36-month aged luxury Extra-Añejo tequila, making use of the final agave harvest planted by Don Julio González and his family in 2006. Both variants are built on key consumer insights. Don Julio Primavera drives relevance within informal and outdoor daytime occasions, whilst Don Julio Ultima Reserva delivers an authentic and credible brand experience, coupled with eye-catching packaging.
1. IWSR 2021
2. Nielsen + NABCA combined, 2021
A COMPLEX REGULATORY ENVIRONMENTENVIRONMENT.
The beverage alcohol industry is highly regulated.regulated
Regulation varies widely around the world, often evolving in response to changes in society. This year, for example, we have seen temporary restrictions introduced by some governments in response to Covid-19. Compliance with law and regulation wherever we operate is a minimum requirement, and we have long understood that a responsible alcohol company must go beyond mere compliance.
We are proud of our brands and we want them to be enjoyed responsibly. Through our work, we are aligned with the United Nations’ and the World Health Organization’s goal of reducing harmful drinking by 10% by 2025. We also advocate policies and industry standards, including minimum legal purchase age laws and maximum blood-alcoholblood–alcohol concentration driving limits, in countries where these are not already in place.
210,443
young
607,374 young people, parents and teachers educated on the dangers of underage drinking this year
Diageo, 2021fiscal 22
Business description (continued)Impact
Impact
While most people who choose to enjoy alcohol do so 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.
We want to offer consumers the opportunity to ‘drink better, not more’ – an approach that is rooted in our social values and aligns with our business model as a producer of premium drinks. We areWe're committed to promoting moderation while campaigning to reduce harmful drinking and improvingadvocating for better laws and industry standards. Our approach to positive drinking described on pages 50-52, includes ambitious targets for areas in which we can have the greatest impact in reducing harm: drink driving, underage drinking and binge drinking.
This market dynamic aligns with these strategic priorities:
Sustain quality growth, Embed everyday efficiency, Promote positive drinking
Business description (continued)
CONSUMERS EXPECT BUSINESSES TO ACT RESPONSIBLY
Consumers like all stakeholders, are increasingly challenging businesses to show how they make a positive impact across all aspects of society.society
They rightly expect to see that businesses are generating wealth, fostering inclusion and diversity, respecting human rights, supporting their communities and acting on important societal and environmental issues, including climate change and water stress.
89%
56% of people say companies and brands have a responsibilityglobal households expected to take care of the planet and its peoplebe 'Eco Actives' (the most environmentally conscious shoppers) by 2031
'Regeneration Rising'‘Who Cares, Who Does?’, Wunderman Thompson,Kantar, 2021
Impact
Earning trust and respect is fundamental to achieving our ambition. We know our brands must continue to play an active role in society to meet consumer demands. This must be underpinned by a business that reduces environmental impact and promotes inclusive economic growth, while making sure tothat we do business with integrity and respect for human rights.
The 25 goals in our ‘Society 2030: Spirit of Progress’ ESG action plan provide a platform for many of our global brands’ sustainability programmes, such as Johnnie Walker’s ‘Next Steps’ initiativeprogrammes. These include Baileys’ launch of the Sustainable Farming Academy in Ireland; Guinness’ regenerative agriculture plans; and Talisker’s partnershipa circular packaging pilot with Parley to rewild the oceans.Smirnoff and Captain Morgan in South East Asia. This year, inwe started removing cardboard gift boxes from our premium scotch portfolio, increased spend with diverse suppliers by more than 50%, and have trained over 190,000 hospitality workers through the Diageo Bar Academy. In response to Covid-19, we have supported increased investmentthe conflict in WASH (water, sanitationUkraine, we’ve pledged €2 million via The Red Cross and hygiene) programmesCare International UK for immediate humanitarian aid, and we have takenpivoted our commitmentLearning for Life programme in Europe to a thriving hospitality sector a step further through our $100 million ‘Raising the Bar’ fund, which includes our $20 million Community Fund in the United States in support of social justice initiatives.Ukrainian refugees into work.
This market dynamic aligns with these strategic priorities:
Sustain quality growth, Invest smartly, Promote positive drinking, Champion inclusion and diversity, Pioneer grain-to-glass sustainability
Scotch in China: positioned for premiumisation
Greater China has the largest and fastest-growing super premium and above spirits segment in the world1 – and our portfolio of super premium and luxury Scotch whiskies is helping us meet Chinese consumers’ desire to ‘drink better, not more’.2
Our super premium
Unlocking the omnichannel Scotch whisky opportunity through malts.com
We are actively building our omnichannel participation through a number of initiatives. In scotch, malts.com is our direct-from-distillery platform, offering consumers access to our scotch portfolio, connecting them with our community of whisky makers, and luxury Scotch portfolio includes Johnnie Walker, which is Greater China’s biggest Scotchproviding a central hub to plan visits and book tickets to our Scotland brand by volume and retail sales value.3 It also includes fast-growing brands such as Mortlach and Talisker, and The Singleton, which is Greater China’s largest single malt brand by volume.4
The growth of Johnnie Walker Blue Label over the last four years shows how we are harnessing the trend of premiumisation through the combination of an outstanding liquid, powerful brand building and innovation driven by insights into local culture.homes, wherever they are.
This year, we re-launched malts.com across five markets with a new look and feel to reflect the brand launchedchanging values of our growing audience. Designed with more than just an e-commerce platform in mind, we set out to create a series of eye-catching innovations, including the Forbidden City Editionpremium destination for experiences, exclusive and personalised products, gifts and events. This allows us to nurture a limited edition Chinese New Year bottle celebrating the Year of the Ox – both of which sold out quickly. These innovations combine Chinese consumers’ deep pride in their culturerelationship with their demand for unique products that suit giftingour consumers directly, whilst maintaining relevance with consumer trends and business entertainment occasions. They also trigger a desire to explore and learn about Scotch whisky. We are helping to grow that consumer interest, working with key customers and consumers on product education and mentoring events. For example, we have held 13 Whisky Summits across China and reached over 15,000 people through our Diageo Whisky Academy since 2017.behaviours.
1, 2, 3, 4. IWSR, 2020
Business description (continued)
Online, on-demand, on track: accelerating Diageo’s e-commerce strategy
The online market for alcohol sales has changed and we have accelerated our approach to digitalising our engagement with consumers all over the world. Our e-commerce retail sales are still relatively small - but they are growing rapidly, expanding by around 70% over the last year across 13 key markets, including the United Kingdom, Germany and China.
As well as building e-commerce opportunities with existing retail customers, we are developing new channels and partnerships, including on-demand.
On-demand platforms take consumers’ orders and find brick-and-mortar retailers to fulfil them in a fast delivery service model. Investing in partnerships with on-demand platforms at the right time can help give us first mover advantage. That is what we have done in the United States through our partnership with Drizly, a leading on-demand alcohol delivery service.
As well as increasing sales, channels like Drizly give us a greater ability to connect with consumers who are looking to discover more about our brands and who tend towards whiskeys, tequilas and higher-priced products. They also support brand building through features such as customised notifications and on-site marketing.
Our investment in e-commerce is driving results. Between July 2020 and June 2021, five Diageo brands were in the top ten spirits brands sold on Drizly, including two of the top three.1 And on China’s largest platform, T-Mall, Diageo is the market leader in whisky, with a 24% market share.2
1. Drizly, 2020
2. Smartpath, 2021
Business description (continued)
Our business model
Creating a truly sustainable business for the long term
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.
ThroughSince launching our ‘Society 2030: Spirit of Progress’ 10-yearESG action plan, we wantwe've set out to help create a more inclusive and sustainable world, creating a positive impact in our company, with our communities and for our society.
Our enablers
Our people
We areWe're proud of our people, whose passion, commitment and specialist skills make the difference. 27,65027,987 people
Our brands
We have a leading portfolio of iconic brands across spirits and beer.brands. Its breadth across categories and price points offers choice for every taste and celebration. 200+ brands
Our relationships
From grain to glass, strong, trusted relationships with all our stakeholders are essential to our business. 180+ countries
Our insight and know-how
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.
Our infrastructure
We have a global network of sites devoted to research and development, distillation, maturation, brewing, warehousing and packaging of spirits and beer. 138132 sites globally
Our financial strength
We believe attractive industry margins, a strong balance sheet and solid free cash flowsflow give us the financial strength to execute our strategic priorities and deliver strong stakeholdershareholder returns over the long term.
What sets us apart
Our brand portfolio and geographic footprint
We actively manage our leading brand portfolio to ensure we offer consumers a broad range of products across regions, 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- and long-term industry growth.
Our track record in innovation and brand building
To recruit consumers, we innovate across centuries-old brands such as Johnnie Walker, Tanqueray and Guinness, and develop, grow and growacquire new brands like Aviation American Ginsuch as Seedlip, Chase Distillery and Casamigos.21Seeds. We use our archives in Scotland and Ireland, two of the largest and most comprehensive in the drinks industry, to provide a rich source of inspiration for our brands. Our creative expertise is enhanced through the use of data and tools, which we use to develop a deep understanding of our consumers and customers. We call this combination ‘creativity with precision’.
Our relationships with the trade
In June 2020, we launched our $100 million ‘Raising the Bar’ programme to support the recovery, from Covid-19, of pubs, bars and restaurants in major hospitality centres around the world. Through Diageo Reserve World Class™ and Diageo Bar Academy programmes, we continue to build a network of relationships with bartenders, customers and distributors that provides us with a strong route to our consumers.
Business description (continued)
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.
Read more about our strategic priorities on pages 43-581932-46 and our Risk Factorsprincipal risks and risk management on pages 72-82.42 82-92.
1. Data points refer to fiscal 22 unless otherwise stated
2. 88% of global employees completed our Your Voice survey (fiscal 21: 85%)
3. Net promoter score is an internally generated metric that indicates the likelihood that suppliers surveyed would recommend Diageo as a preferred business partner, as of November 2021
4. Oxford Economics, 2022 for calendar year 2021
Business description (continued)
Our business activities
Consumer insights
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.
Sourcing
From smallholder farmers in Africa and Mexico to multinational companies, we work with our suppliers to procure high-quality raw materials and services.services, with environmental sustainability in mind. Where it is practicable, we source locally.
Marketing
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.
Innovation
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.
Distilling and brewing
We distil, brew, bottle and distribute our 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.
Selling
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.
The value we create1
For our people
We want our people to be the best they can be. We offer a diverse and inclusive workplace with opportunities for development and progression.
89%90% of respondents are proud to work for Diageo2
For our consumers
We are passionate about the role our brands play in celebrations globally. We are committed to promoting moderation and reducing alcohol misuse.
367456 million people reached with moderation messages from our brands
For our customers
We work closely with customers to build sustainable ways of working that help grow their businesses through great insight and execution.
1.63.3 million bar professionals used the Diageo Bar Academy website
For our communities
We help build thriving communities by making lasting contributions where we live, work, source and sell.
>63,000158,000 people benefitted from our community programmes
Business description (continued)
For our suppliers
We partner with suppliers to ensure long-term, mutually beneficial relationships. Respect for human rights is embedded throughout our global value chain.
+3839 supplier net promoter score3
Business description (continued)
For our investors
We aim to maximise long-term shareholder returns through consistent, efficientsustainable growth and a disciplined approach to capital allocation.
13%11% compound annual growth rate in total shareholder return over 10 years
For governments and regulators
We contribute to economic and development priorities and advocate laws that protect communities where these are not already in place.
£800,000 average amount900,000 estimated economic benefit generated for every £1m£1 million we contribute to national GDP4
Our relationships with the trade
Through Diageo Reserve World Class and Diageo Bar Academy programmes, we continue to build a network of relationships with bartenders, customers and distributors that provides us with a strong route to our consumers.
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.
1. Data points refer to fiscal 21 other than where indicated22 unless otherwise stated
2. 85%88% of our global employees completed our Your Voice survey
(fiscal 21: 85%)
3. Net promoter score is an internally generated metric that indicates the likelihood that suppliers surveyed would recommend Diageo as a preferred business partner, as of November 2021
4. Oxford Economics, 20212022 for calendar year 2020
Business description (continued)
Production
The company owns manufacturing production facilities across the globe, including malting, 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.
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 2021 are as follows:
| | | | | | | | | | | |
Location | Principal products | Production capacity in millions of equivalent units1 | Production volume in 2021 in millions of equivalent units |
United Kingdom (Spirits) | Scotch whisky, gin, vodka, rum, ready to drink | 96 | 56 |
United Kingdom, Ireland (Guinness) | Beer | 8 | 6 |
Ireland (Baileys) | Irish cream liqueur | 12 | 9 |
Italy (Santa Vittoria) | Vodka, rum, ready to drink | 11 | 7 |
Turkey | Raki, vodka, gin, liqueur, wine | 7 | 4 |
United States, Canada, US Virgin Islands | Vodka, gin, tequila, rum, Canadian whisky, American whiskey, progressive alcohol, ready to drink, Flavoured Malt Beverages | 52 | 37 |
Brazil | Cachaça, vodka | 10 | 4 |
Mexico | Tequila | 4 | 4 |
Australia | Rum, vodka, ready to drink | 4 | 3 |
Singapore | Finishing centre | 7 | 0 |
India | Rum, vodka, whisky, scotch, brandy, gin, wine | 64 | 33 |
Nigeria | Beer and spirits | 11 | 7 |
South Africa | Spirits | 4 | 3 |
East Africa (Uganda, Kenya, Tanzania) | Beer and spirits | 17 | 14 |
Africa Regional Markets (Ethiopia, Cameroon, Ghana, Seychelles) | Beer and spirits | 7 | 4 |
1.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 2021 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 and investments
Spirits are produced in distilleries located worldwide. The group owns 30 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 in warehouses in Scotland, 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 (end-to-end Tequila production) in Mexico to enable additional capacity to support growth. We continue to work on 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.
The £185 million Scotch investment program focusing on whisky tourism (Johnnie Walker Princes Street by £150 million investment and restoring the closed distilleries with £35 million).The additional£35 million investment focusing to reinstate the iconic “lost” distillery of Brora has been completed and the distillery official opened in May 2021. Work on the second iconic “lost” distillery, Port Ellen on the island of Islay, will recommence later this year.
The new visitor experience at Glenkinchie Distillery, the Lowland Home of Johnnie Walker, opened in October 2020 and the new visitor experiences at Clynelish Distillery, the Highland Home of Johnnie Walker, opened in April 2021. Work at Caol Ila Distillery, the Island Home of Johnnie Walker, will recommence later this year.
Johnnie Walker Princes Street, the centerpiece of the tourism investment, in Scotland’s capital city Edinburgh, continues to progress subject to necessary Covid-19 pandemic safety protocols and is expected to open later this year.
Business description (continued)
Capacity expansion projects are underway to support future growth in China (mainly Baijiu production) and North America (Bourbon and canning lines) as well as Scotch, International Whiskey, Tequila, Beer, Baijiu and Gin.
Diageo owns a controlling equity stake in United Spirits Limited (USL) which is one of the leading alcoholic beverage companies in India selling close to75 million equivalent cases in F21 of Indian-Made Foreign Liquor (IMFL). USL has a significant market presence across India and operates 15 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 No.1 (Indian Whisky, Rum, and Brandy), Black Dog (Scotch), Signature (Indian Whisky), Royal Challenge (Indian Whisky), Antiquity (Indian Whisky) and Bagpiper (Indian Whisky).
Beer and flavoured malt beverages (FMB)
Diageo’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, Cameroon, Ethiopia, Tanzania, Uganda, and the Seychelles.
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 Guinness Draught.
The Diageo Global Technical 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 46 partners globally while enhancing Diageo value through new partnerships and innovation projects. In addition to supporting Guinness and beer, the team has an expanding role in the support of licensed manufacturing of third-party ready to drink and mainstream spirits in Asia-Pacific and Africa.
Flavoured malt beverage (FMB), made from original base containing malt, but then stripped of malt character and then flavoured. This product segment is sold mainly in the USA, Canada and 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. Demand for these products has increased significantly particularly in United States and Canada. We are supporting this increase in demand as well as growth in FMB through third party production and are also investing in a new production facility in Plainfield, which is estimated to begin producing in fiscal 22.
Property, plant and equipment
As of 30 June 2021, Diageo’s land and buildings are included in the group’s consolidated balance sheet at a net book value of £1,502 million. Approximately 19% of the total net book value of land and buildings are properties on leases and approximately 81% are owned by Diageo. These include 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 minimize 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) and the impact of Covid-19 pandemic are the key drivers of constraints that we are managing through. Like other FMCG’s, we are increasing both stock in transit and stocks in markets to compensate for extended lead times and demand volatility. This is leading to a pull forward in production demand in already capacity constrained industries who are still struggling to operate at full efficiency due to Covid-19 pandemic. Diageo is managing well through the current levels of uncertainty and constraints in our supply chain relative to our peers through expansion of our supplier base and agility in our logistics networks.
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. 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, cereals, 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 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.
Business description (continued)
Competition
Diageo’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 growth strategy, playing a key role in positioning its brands for continued growth in both developed and emerging markets. The strength and depth of Diageo’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 the innovation and research and development function.
Trademarks and other intellectual property
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 protected by trademarks. The Diageo group also holds 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 US 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 US jurisdictions in which Diageo sells or produces its products, administers and enforces industry-specific regulations and may apply additional excise taxes and, in many states, sales taxes. Federal, state and local regulations cover virtually every aspect of Diageo's US operations, including production, importation, 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 to units of alcohol by volume, to advanced systems based on the imported or wholesale value of the product. 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 no longer subject to the European Union’s rules on excise duties and has commenced a review of its alcohol duty system. Any changes in the UK’s alcohol duty system could have an impact on 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 beverage alcohol categories and to reducing government imposed barriers to fair trading.
Business description (continued)
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 import 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 adverse 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 manufacturer or 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, in certain countries within the European Union, 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 sold through licensed outlets, both on and off-trade, varying from government- or state-operated monopoly outlets (for example, in the off-trade channel in Norway, certain Canadian provinces, and certain US states) to the system of licensed on-trade outlets (for example, licensed bars and restaurants) which prevails in much of the Western world, including in the majority of US states, in the United Kingdom and in much of the European Union. In a number of states in the United States, 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 response to public health concerns, some governments have imposed or are considering imposing minimum pricing on beverage alcohol products and may consider raising the legal drinking age, further limiting the number, type or opening hours of retail outlets and/or expanding retail licensing requirements.
In response to the Covid-19 pandemic, many governments across the world implemented restrictions on where and how people could gather, in an effort to curb transmission of the virus. The extent of these restrictions has varied from country to country (and, in the US, from state to state) and throughout the duration of the pandemic but, in many of the markets in which Diageo operates, they have resulted in, amongst other things, the temporary closure of or restricted opening hours for on-trade outlets.
Regulatory decisions and changes in the legal and regulatory environment could also increase Diageo’s costs and liabilities and/or impact on its business activities.
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 2018, see note 8 and note 15 (g), respectively to the consolidated financial statements.
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).
On 30 September 2020, Diageo completed the acquisition of Aviation Gin LLC (‘Aviation Gin’) and Davos Brands LLC (‘Davos Brands’) for a total consideration of $337 million (£263 million) in cash and contingent consideration of up to $275 million (£214 million) over a ten-year period linked to performance targets.
Business description (continued)
On 21 October 2020 and on 6 November 2020, East African Breweries Limited completed the acquisition of an additional 13.3% and 16.7%, respectively, of the share capital of Serengeti Breweries Limited for a total consideration of $55 million (£42 million) in cash and £16 million in the form of shareholder loans outstanding to East African Breweries Limited and Diageo Holdings Netherlands B.V. at the date of completion, further increasing Diageo's effective shareholding from 40.2% to 47.0%.
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. 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, including during Diageo's fiscal year ended 30 June 2021. However, as a result of Covid-19 related economic disruption, approximately 45% of Diageo’s annual net sales during 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.
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 dialogue helps us build trust and respect and make choices as a business that help shape the role we play in society.
The strength of our stakeholder relationships has never been more important than during Covid-19. We continue to be committed to actively supporting our people, our industry and our communities.
| | | | | | | | | | | |
| People | Consumers | Customers |
Why we engage | Our people and our brands are at the core of our business. We aim to build a trusting, respectful and inclusive culture where every individual feels highly engaged and fulfilled. We want our people to feel their human rights are respected and that they are treated with dignity at work. We are committed to creating opportunities for career growth and building 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 innovation. We make our products with pride and want them to be enjoyed responsibly. On occasions when consumers choose to drink alcohol, we want them to ‘drink better, not more’. | Our customers 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-trade, retailers, wholesalers and distributors, digital and e-commerce. Our passion is to ensure we nurture mutually beneficial relationships that deliver joint value and great outcomes for our consumers. |
Their 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 and nurturing 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/business resource groups
| –Broad portfolio of choices across categories and price points
–Insightful innovation that satisfies consumer preferences
–Responsible advertising and marketing that adheres to our 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 digital sales technology and best practice analytics to support our retailers and distributors
–Ongoing dialogue and account management support
–Physical and virtual sales calls and our new digital customer sales portal
–Development of joint business plans, including Covid-19 support for our on-trade and distributor customers
–Regular business updates
–Training and webinars through unique offerings such as Diageo Bar Academy
|
Read more about how our Board engages with our stakeholders on pages 165-167.
Business description (continued)
| | | | | | | | | | | |
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. Through collaboration 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 creating long-term value for the communities in which we live, work, source and sell. By ensuring we empower people, increase their access to opportunity and champion inclusion and diversity, we can help build thriving communities, shape a tolerant society 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 public health and our businesses, as well as on the broader environment and community.
|
–Strong, mutually beneficial partnerships
–Strategic alignment and growth opportunities
–Fair contract and payment terms
–Collaboration to realise innovation
–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
–Inclusion and diversity and tackling inequality in all forms
–Improved access to water, sanitation and hygiene
–Responsible use of natural resources
–Transparency and engagement
| –Strategic priorities
–Financial performance
–Corporate governance
–Leadership credentials, experience and succession
–Executive remuneration policy
–Shareholder returns
–Environmental, inclusion and diversity, and social commitments and progress
| –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 responsible drinking initiatives
–Climate change and wider sustainability agenda, including carbon reduction, human rights, environmental impacts, sustainable agriculture and support for communities
–Corporate behaviour
|
–Partnering with Suppliers standard, our code for working with suppliers, which incorporates our ’Society 2030: Spirit of Progress’ goals
–Supplier Service Hub, our portal for end-to-end supplier interactions, including real-time invoicing information
–Sharing of best practice and learnings, including Covid-19 safety protocols
–Global Supplier Diversity programme and access to DRINKiQ tools and information
–Confidential, independent whistleblowing helpline and website
–Supplier Connect sessions and regional supplier awards
–Supplier performance measurement and performance reviews with two-way feedback
–Standardised assessments through independent bodies
| –‘Raising the Bar’, our $100 million fund supporting the recovery of pubs, bars and restaurants in global hospitality centres
–Partnerships with local and global NGOs, such as Care International and WaterAid, and local raw material supply partnerships in Africa
–Providing skills and resources through initiatives such as Diageo Bar Academy and Learning for Life
–Inclusion and diversity embedded into community programme design
–Community water, sanitation and hygiene (WASH) programmes in Africa and India
| –Stock exchange announcements, including financial results
–Investor roadshows
–Meetings and calls
–Capital markets days
–Annual general meeting
–Succession planning, Board and Executive appointments
–Annual Report, Form 20-F and ESG Reporting Index
–Shareholder information on 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
–Support for communities and hospitality sector during Covid-19, including provision of hand sanitiser and personal protective equipment (PPE)
–Diageo Code of Business Conduct
|
Business description (continued)
Our people
AnHighly engaged people, and empowered workforceadvantaged culture
At the core of our Performance Ambition is a commitment to enable our 27,650 people to be the best they can be, have the freedom to succeed and feel valued for who they are. From the moment they join Diageo, we wantare committed to building an engaging and inclusive culture that empowers our people to feel engaged: passionate about our Performance Ambition, connected to our valuesthrive and motivated to achieve their potential.
We provide our people with robust career and development opportunities, competitive reward offerings, and an inclusive environment that harnesses their diversity. The health and wellbeing of our people continues to be our priority and we have implemented progressive policies and procedures to safeguard them and help them successfully navigate the Covid-19 pandemic.grow.
Staying engagedAdvantaged culture fuelled by our people’s passion for our brands and responsivebusiness
We pride ourselves onOur most valuable assets are the 27,9871 people who work in our uniquebusiness every day, with an incredible passion for our brands, strong ownership mindset and accountability for delivering our Performance Ambition. Diageo’s culture is rooted in athis deep sense of purpose, a passion for winning, and a personal connectionconnections to our brands and each other. Everyone at Diageo plays a part in creating this culture. Our bi-annual Your Voice survey, in addition to the regular pulse surveys we ran throughout the pandemic, provides us with valuable insights on employee engagement, what works well in the organisation, and what can be improved. The Your Voice survey results releasedgives us the opportunity to hear from our people on how they are experiencing work at Diageo; the output of which further shapes our culture. This year, our Employee Engagement Index increased by 1 percentage point to 82%, and our Employer Advocacy score for working at Diageo improved by 5% versus last year.
Commitment to our people’s wellbeing
We believe that our people are most productive when they are physically and mentally thriving, emotionally balanced, financially secure, and socially connected. Recently, we launched our Global Wellbeing Philosophy, outlining our commitment to creating an environment where people can thrive, along with practical frameworks and tools to support our people in May 2021 told us that 89% of respondentsmanaging their wellbeing. In addition to local wellbeing initiatives, such as free Wellbeing Day and Mental Health capability programmes, we are proud to work for Diageodesigning our new office spaces with wellbeing at the heart. For example, our new Global Headquarters in Soho, London is equipped with wellness and 81% would recommend Diageo as a great place to work. Across our business, the insights gained from the Your Voice and pulse surveys are used to develop meaningful action plans. We ran a Global Wellness week in February 2021, in response to the feedback from the pulse survey conducted on the impact of the pandemic on people’s wellbeing. The impact of this initiative can be seen in 78% of respondents telling us in this year’s Your Voice survey that they believefitness classes.
82% Employee Engagement Index2
(+1 vs 2021)
80% Diageo is sufficiently supporting theirmy health and wellbeing.wellbeing2
85% of our people completed the Your Voice survey
81% of respondents were identified as engaged(+2 vs 2021)
OverUnlocking the past year, it has become even more importantgrowth and potential of our people
Our talent strategy helps us to embed more flexible ways of getting work done, sodevelop the best talent for Diageo by providing our people can own how they deliver their best work. We call this our ‘Diageo Flex philosophy’ – a frameworkwith the right developmental experiences to grow and develop. During fiscal 22, the number of principles forinternational moves undertaken by our people and their line managers to discuss and agree on working patterns that best reflect each employee’s individual needs alongside business requirements. This framework continues to be a catalyst for stronger employee engagement and performance.
A commitment to human rights, including employees’ rights, underpins everything we do – see page 68.
Investing inincreased by 32%, demonstrating our people’s growth and development
Upskilling and reskilling our workforce is critical to future-proofing our organisation. We are embedding a continuous learning culture that gives our people learning opportunities that promote speed of performance and experimentation and helps to deliver business growth. Our learning management platform, My Learning Hub, offers rich experiential learning content that can be accessed anywhere, anytime. In the past year, we have increased ourcontinued investment in developing our people’s skillstalent and building a longer-term talent pipeline. We are making significant progress in acquiring the areasbest and most diverse talent externally, by digitising our recruitment processes and making it easy for our people to refer great talent. Similarly, our new offer and onboarding process has significantly reduced our ‘time to fill roles’, supporting us in attracting and accelerating the performance of digital marketing, e-commerce, datanew joiners.
Enabling a culture of agility and analytics, leadership,experimentation
To create speed and inclusion and diversity. Our people experienced over 466,000 hours of learning in the last financial year. We have also expanded the scope of offering on My Learning Hub to our extended workforce (temporary and fixed term contractors) to support their personal and professional growth.
Our leaders play a critical role in inspiring and influencing employee experience, culture and performance. In 2020, we launched our Accelerate programme to over 600 leaders in the organisation, aimed at providing them with world-class thinking and insights on how to leadagility in a continuously changing world. Our annual talent review approach continues to be a strength. Acrossdynamic and volatile environment, we are simplifying our markets, our leaders runinternal processes through the Radical Liberation programme – a series of talent investment meetings aimedinterventions to reduce and stop processes that get in the way of us performing at providing insights into our people, their strengthsbest. Also, we are forming more cross-functional, cross-market teams to leverage diversity, create a culture of experimentation and development needsprovide learning opportunities for our people. This has enabled us to quickly launch and actions needed to unlock their futurescale new initiatives, such as the pan-African Johnnie Walker ‘Keep Walking’ campaign which launched across Africa in fiscal 22 and delivered significant growth and development. Movement and progress of internal talent continues to be a focus of our talent reviews, providing employees with stretching opportunities to grow their careers.for the brand.
Strengthening our performance management
As the pace of change accelerates, we must continue to inject speed and simplification in our business and focus our resources on critical growth opportunities. Our performance management framework has been further strengthened with the shift from annual to quarterly goal setting, helping our teams adapt faster to changing consumer and business needs. Leaders work with their teams to set focussed priorities at the beginning of each quarter and meet regularly to review progress. This has allowed employees to have frequent performance feedback conversations. We are also seeing more areas of the business deliver rapid work through ‘sprints’ – cross-functional teams organised to work on critical business projects. Through sprints, our people gain new skills and collaborate across functions and regions to deliver against our biggest business priorities. | | | | | | | | | | | | | | | | | | | | | | | |
Average number of employees by region by gender3 |
Region5 | Men | % | Women | % | Not declared4 | % | Total |
North America | 1,719 | | 59% | 1,150 | | 40% | 28 | | 1% | 2,897 | |
Europe | 5,487 | | 58% | 3,914 | | 41% | 59 | | 1% | 9,460 | |
Asia Pacific | 5,634 | | 69% | 2,481 | | 30% | 89 | | 1% | 8,204 | |
Africa | 2,445 | | 67% | 1,185 | | 32% | 18 | | 0% | 3,647 | |
Latin America and Caribbean | 2,349 | | 62% | 1,398 | | 37% | 32 | | 1% | 3,779 | |
Total | 17,634 | | 63% | 10,127 | | 36% | 226 | | 1% | 27,987 | |
Our ESG Reporting Index includes further information, including data on our employees by region, role and gender and new hires and leavers by gender
Business description (continued)
| | | | | | | | | | | | | | | | | |
Average number of employees by region by gender1,2,3 |
Region | Men | % | Women | % | Total |
North America | 1,626 | | 60 | | 1,078 | | 40 | | 2,704 | |
Europe and Turkey | 5,885 | | 60 | | 3,915 | | 40 | | 9,800 | |
Africa | 2,862 | | 72 | | 1,109 | | 28 | | 3,971 | |
Latin America and Caribbean | 1,809 | | 62 | | 1,091 | | 38 | | 2,900 | |
Asia Pacific | 6,020 | | 73 | | 2,255 | | 27 | | 8,275 | |
Total | 18,202 | | 66 | | 9,448 | | 34 | | 27,650 | |
| | | | | | | | | | | | | | | | | |
Average number of employees by role by gender1,2 |
Role | Men | % | Women | % | Total |
Executive | 8 | 62 | | 5 | 38 | | 13 |
Senior manager4 | 312 | 58 | | 229 | 42 | | 541 |
Line manager5 | 2,263 | 69 | | 1,039 | 31 | | 3,302 |
Supervised employee6 | 15,619 | 66 | | 8,175 | 34 | | 23,794 |
Diageo (total) | 18,202 | 66 | | 9,448 | 34 | | 27,650 |
| | | | | | | | | | | | | | | | | | | | | | | |
Average number of employees by role by gender3 |
Role | Men | % | Women | % | Not declared4 | % | Total |
Executive | 8 | 62 | % | 5 | 38 | % | 0 | 0 | % | 13 |
Senior manager6 | 304 | 56 | % | 239 | 44 | % | 1 | 0 | % | 544 |
Line manager7 | 2,299 | 66 | % | 1,155 | 33 | % | 11 | 0 | % | 3,465 |
Supervised employee8 | 15,022 | 63 | % | 8,729 | 36 | % | 213 | 1 | % | 23,965 |
Diageo (total) | 17,634 | 63 | % | 10,127 | 36 | % | 226 | 1 | % | 27,987 |
1. This data is correct as of 30 June 20212022
2. This is based upon the respondents to the fiscal 22 Your Voice engagement survey
3. This data has been compiled based on answers provided by respondentsthe proportion of employees who have identified their gender identity as male, female or female,undisclosed, and will not be fully representative of the gender identity or diversity within our employee population
3.4. This data represents the proportion of employees who have chosen not to disclose their gender identity as male or female
5. Employees have been allocated to the region in which they reside
4.6. Top leadership positions in Diageo, excluding Executive Committee
5.7. All Diageo employees (non-senior managers) with one or more direct reports
6.8. All Diageo employees (non-senior managers) who have no direct reports
Business description (continued)
Our strategic priorities
Delivering our Performance Ambition
Our strategic priorities support the achievement of our ambition to be one of the best performing, most trusted and respected consumer products companies in the world. Through them, we deliver the strategic outcomes against which we measure our performance.
Our strategic priorities
OUR STRATEGIC OUTCOMES
[EG] Efficient growth
Consistently grow organic net sales, grow operating profit, deliver strong free cash flow
[CVC] Consistent value creation
Top-tier total shareholder returns, increase return on invested capital
[CT] Credibility and trust
Trusted by stakeholders for doing business the right way, from grain to glass
[EP] Engaged people
High-performing and engaged teams, continuous learning, inclusive culture
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 at their best.
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.
Business description (continued)
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.
Business description (continued)
1. Sustain quality growth
Creating sustainable and consistent quality growth is at the heart of our ambition to be ‘one of the best performing’. It means delivering consistent net sales and margin growth as well as top-tier shareholder returns.
Delivering our strategic outcomes
Sustained quality growth contributes to the delivery of our strategic outcomes of Efficient growth, Consistent value creation and Credibility and trust. [EG]
[EG] [CVC] [CT]
CreatingDelivering sustained, quality growth is not new to us. Brands such as Guinness, TanquerayJohnnie Walker and BaileysCrown Royal show how the right approach to quality, brand building, innovation and investing for the long term can build lasting value. This year,To sustain quality growth, we continued to focus on emerging from the pandemic stronger. We rapidly responded to increased consumer demand in the off-trade channel and also focussed on: developing the successful new brands of the future; on growing volume, price and mix – what we call Revenue Growth Management (RGM); on executing the most effective route to our consumers; and on 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.
Read more about how we are responding to our market dynamics on pages 26-30.22-26.
Progress in 2021fiscal 22
–•Leveraged RGM in challenging inflationary environment, upweighting strategic pricing capabilities
•Launched innovations across our global giant brandsincluding Johnnie Walker High Rye, Don Julio Ultima Reserva and Gordon’s Pink 0.0. Also launched Smirnoff Raspberry Crush Vodka Lemonade RTD, Cîroc Vodka Spritz, Bulleit Crafted Cocktails and Seedlip RTDs, supporting expansion of ready to recruit new consumers and unlock new occasions, including Guinness Nitro Cold Brew Coffee, Captain Morgan Sliced Apple, Smirnoff Seltzers and Baileys Apple Piedrink portfolio
–•Launched no-alcohol portfolio in additional markets
•Continued to actively manage our portfolio of brands, announcing: an agreement to sell the Windsor business; the sale of Picon, the French liqueur brand, and of the Meta Abo Brewery in Ethiopia; and an agreement by United Spirits Limited to dispose of and franchise select Popular brands in India
•Enhanced Guinness 0.0 product quality throughand relaunched malts.com as a digital hub for our Scotland brand homes and distilleries; relaunched TheBar.com, our flagship direct-to-consumer site, in Great Britain; and introduced it in the introduction of a new filtration processUnited States, Venezuela, Mexico and additional quality assurance measures, leading to product re-launch in Summer 2021
–Expanded no-and lower choices with launch of Tanqueray 0.0%, Gordon’s 0.0% and Baileys Deliciously Light
–Accelerated development of e-commerce capabilities, including further development of our direct to consumer e-commerce platforms, such as HaigClub.com, TheBar.com and Seedlip.comKenya
Looking ahead to 2022fiscal 23
–•Drive further improvements inContinue to drive quality market share
–•Continue to invest in brandsembed RGM plan globally to reduce impact of cost inflation and regions where we see the most attractive opportunitiessupport long-term growth
–•Continue to grow position in no-Accelerate the transformation and lower-alcohol,integration of our digital capabilities, tools and ready to drink categories
–Continue to build our e-commerce positionplatforms across marketing and expand physical and digital routes to our consumersglobal sales
Innovating to capture new opportunitiesBuilding the luxury opportunity
Driving sustainable growth, led by consumer insights, lies at the heartOur super-premium-plus portfolio of luxury brands grew 31% this year, contributing 27% of our innovation: we use purposeful innovationreported net sales.
As the premiumisation trend evolves, so too has the idea of luxury. And we're seizing the opportunity to recruitposition our brands for further sustained growth with a more diverse, luxury consumer looking for unique and personalised experiences.
The Singleton has introduced a new generation of consumers to our brandssingle malts through its accessible, fresh and access new occasions in which they can be enjoyed. This year, consumers sought the reassurance of well-knowndistinctive perspective. Its simplified portfolio and trusted brands as well as convenience and choices for 'at home' occasions.refreshed brand image are recruiting more diverse consumers.
Worth over US$13.9 billion in 2020,1 ready to drink (RTD) isIn China, the fastest growing total beverage alcohol categorysingle malt market1, we are building the brand at the high end of the luxury market. We have invested in unique innovations such as The Singleton 39-Year-Old (Epicurean Odyssey Series) and created experiences that highlight the brand’s most aged variants - contributing to an increase in share2.
In Great Britain, we launched our ‘This will be Good’ campaign in October 2021, including the brand’s first ever television advertisement, which brings to life the delicious taste of The Singleton. As part of the campaign, we partnered with celebrated tastemaker Monica Galetti to create delicious recipes and cocktails featuring The Singleton. Our plans are delivering results, with The Singleton now the fastest growing single malt in the United States, growing 42% between 2017 and 2020.2 Growth in RTDs has accelerated over the last year, driven by consumer interest in delicious, ready-made cocktails 'at home' and offerings that are ideal for at home celebrations.
Building on this exciting consumer opportunity, we have accelerated the development of our RTD portfolio, including the launch this year of Crown Royal ready to drink cocktails, Ketel One Botanical Vodka Spritz and Tanqueray Crafted Gin Cocktails. In creating these innovations, we leveraged our longstanding expertise in research and development and packaging design to deliver premium bar-quality cocktails.
Launched in three flavours, our Crown Royal RTD range quickly became the third largest spirits RTD cocktail in the United States,Kingdom3 even in limited distribution, and is the only RTD product in Nielsen’s Top Ten innovations for 2021.4.
1. Of top 15 single malt markets globally by retail sales value, IWSR, 20202021
2. IWSR, 2020SmartPath and Think&Do: rolling 12 months to 31 March 2022
3. Nielsen: week ending 11.07.20 to 19.06.21
4. Nielsen US Spirits Innovation Report: 11.07.20 to 19.06.21Of top 20 single malt brands by retail sales value, IWSR, 2021
Business description (continued)
Guinness: building for the long-term
Don Julio and Casamigos: how quality drives our growth
What does sustainableWhen it comes to quality growth, look like? One exampleGuinness is showing the successway. After a period of challenged performance followed by the closure of bars and pubs during Covid-19, the iconic brand is reaping the dividends of a strategy that builds on its legacy of ‘power, goodness and communion’, embedding its place in culture and attracting a more diverse consumer base.
Guinness is our Don Juliosecond biggest brand4 and Casamigos tequila brandsthe work we are doing to deliver its ambition of becoming the ‘most creative, innovative and sustainable beer in the United States, where the tequila categoryworld’ is growing more than twice as fast as total spirits.1
While consumer interest in tequila continues to grow, our insights and brand building are delivering more – with our brands gaining year-on-year tequila category market share in the United States.2
At the heart of that growth is the fact that Don Julio and Casamigos are well positioned to capture the benefits of wider changes in consumer preferences.
Consumers want higher quality products that stand out for authenticity, taste and cultural relevance – spurring demand for premium and luxury brands. At the same time, the appeal of tequila is broadening across generations and demographics, with a truly multi-cultural consumer base. And that increased demand is accompanied by a growing awareness of the many great ways in which tequila can be enjoyed – both in terms of serves and occasions.
Don Julio, for example, is contributing to this growing understanding, through high-quality liquid and inclusive marketing that has cemented it as a brand for a wide consumer base which is also suited to special yet relaxed occasions, such as dinner with friends.
Don Julio 1942, our luxury añejo tequila, has become renowned for its quality. It has steadily built cultural cachet among celebrities, influencers and discerning tequila fans to become the largest prestige and above spirits brand in the United States by volume andyielding results. This year, organic net sales value.3grew 32%.
The growth of Don Julio 1942 is just part of the wider progress of our tequila portfolio, which we believe has a clear runway for further sustained quality growth. As well as looking forward, we continue to recognise and support tequila’s deep roots in Mexican culture. Through initiatives such as the Tequila Don Julio fund, which celebrated Cinco de Mayo this year with a commitment of $1 million over the next four years, we are supporting approved charities whose missions help the restaurant and bar communities that have helped build Don Julio into the brand it is today.4. By organic net sales value
1. IWSR, 2020Coming alive in culture
2. Nielsen/NABCA, 2018Guinness’ distinctive voice is informed by deep consumer insight and powered by precision marketing to ensure it connects with key cultural moments. In August 2021, Guinness launched its first pan-African campaign in five years: Black Shines Brightest. Inspired by the bold and unique beer, Guinness Foreign Extra Stout, the campaign celebrates African creativity and ingenuity, and features some of the best-known local culture makers, including Ghanaian choreographer Incredible Zigi; Nigerian designer Adebayo Oke-Lawal, and Kenyan media personality Adelle Onyango. Proving that it resonated locally, Black Shines Brightest led to the recruitment of 1.5 million new Guinness drinkers across Africa during fiscal 22.
3. IWSR, 2020
Innovation for new consumer occasions
Our recent award-winning dispense innovations and our liquid innovations have been focussed on ensuring high-quality Guinness is accessible in emerging occasions at home and in new places and spaces, no matter their size or physical setup. Following the successful launch of Guinness MicroDraught in pubs, restaurants and bars, we launched a limited first release for consumers in Great Britain in December 2021. This launch delivered Guinness Draught on tap in consumers’ homes for the very first time. And we also introduced Guinness NitroSurge in Ireland this year. It provides an easy new way to experience the famous ‘surge and settle‘ at home, increasing the number of occasions in which consumers choose Guinness.
Investing for the long-term
In addition to our investments in innovation and marketing, we also announced, this year, investments in two, new Guinness visitor experiences that are due to open in Chicago and London in 2023. And to support our sustainability ambitions, in February we embarked on a three-year regenerative agriculture pilot in Ireland, to highlight opportunities to reduce the carbon emissions of barley production.
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.
Delivering our strategic outcomes
EmbedEmbedding everyday efficiency contributes to the delivery of our strategic outcomes of Efficient growth and Consistent value creation and Engaged people. [EG] [CVC] [EP]creation.
We are focussed on ensuringwant to ensure our resources are deployed where they are most effective. This means using technology and data analytics to make better, faster decisions and to 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 generates savings that we can reinvest smartly.
Read more about how we are responding to our market dynamics on pages 26-30.page 22-26.
Progress in 2021fiscal 22
–Tightly controlled discretionary spend and continued to drive efficiency and effectiveness
–Launched a value chain transformation programme across Supply and Procurement to increase digitisation and drive efficiency improvements
–•Continued to focus on opportunities to centralisescale efficiencies by embedding a new operating model across global supply and standardise our financial controls, reporting and analysis activitiesprocurement
–•Automated additional processes across functions, such as inventory procurement and logisticsRolled out Diageo One, our digital marketplace for customers, to seven further countries, now covering over 43,000 customers
–•Continued deploymentto improve process controls in our supply operation to reduce waste, optimise the use of back-office processesraw materials, and unlock efficiencies through the introduction of additional automation
–•Enhanced EDGE365 now availablecapabilities through the introduction of an automated contract management function in 14 countries across all our regionsthe application
Looking ahead to 2022fiscal 23
–•Enhance focus on everyday efficiency and productivity
•Initiate supply chain agility programme, spanning five years from fiscal 23, to strengthen our supply chain, improve its resilience and agility, drive efficiencies, deliver additional productivity savings and make our supply operations more sustainable. Programme expected to have a five-year payback period, with the majority of savings delivered in fiscal 25 and beyond
•Continue day-to-day focus onto innovate with EDGE365, adding capabilities to further improve customer service and efficiency and effectiveness throughout our value chain
–•AccelerationExtend usage of end-to-end Supply Chain and Procurement’s digital transformationDiageo One
–•Further progressAccelerate the development and rolloutprogress of the digitalisation of our marketing and sales operation's digitisation, including EDGE365 and Diageo Oneoperations
–•Continue investment in data analytics and automation
Business description (continued)
'Never Be Out’ products: improving customer serviceEDGE 365: digitalisation to enhance efficiency and supply chain agility by simplifyingsupport growth
EDGE365, our business
We are always looking for ways to make our supply and procurement operation more agile, efficient and effective. This year, our global product segmentation programme helped us move away fromdigital sales tool, delivers a ‘one size fits all’ approach to producing brands for our customers and markets, and towards a more agile model that helps us deliver the highest levelsglobally consistent way of tailored customer service, improves financial performanceselling and supports market share growth.
Through a sharper analytical focus on the products that drive the most volume andour ambition to be our customers’ preferred business partner. Launched in 2019, it’s used in 23 countries covering over 67% of our reported net sales, to add value for our customers – the pubs, bars, restaurants and stores that sell our markets, we identified over 1,200 priority products globallyproducts.
The tool provides real-time access to insights and analytics that we aimare tailored to ensure are never out of stock – what we call ‘Never Be Out’ stock keeping units (SKUs). This has never been more important, givensupport the volatility we have seen as a result of Covid-19.
‘Never Be Out’ SKUs typically represent the majority of volume and sales value in a market. They can also be higher-margin products, or strategically important products – for example recent innovations or Reserve brands.
Key to the successgrowth of our product segmentation programme has been greater alignment of priorities betweencustomers’ businesses. And it simplifies our sales and supply chain teams, who through more effective collaboration can ensure that supply chain resilience is being strengthened for the products that are most important to our customers and our business. In practice this can mean ensuring we always have enough materials for these critical SKUs, or proactively dedicating spare production capacity to making more.
This year, despite Covid-19-related volatility and disruption in our supply chains, we maintained high levels of service to our customers, demonstrating the importance of focussing on our priority products.
Transforming our execution: every customer, every day, everywhere
It makes clear business sense to put customersactivities by providing, at the hearttouch of our approach to execution. They are experts ina button, all the products they buy and sell, as well as in the experiences they create and deliver.
The continued deployment and development of our Every Day Great Execution (EDGE) suite of technologies and applications continues to enhance our ability to offer the right brands, in the right outlets, in the right way. They are making our execution simpler, more efficient and more effective. As they are increasingly embedded across the business,information our teams haveneed for their customer sales meetings. The efficiency delivered through EDGE365 means our people can spend more quality time to work with more customers. And itit’s delivering results: overall, since we began the digitalisation of our sales force three years ago, we have been able to call on 40% more customer outlets globally.
In Kenya, where over 1,000 salespeople use EDGE365, the tool recommends the most appropriate product assortment and promotional activities to support the growth of customers’ businesses. And for Diageo, the number of sales calls per day is creating clear business impactsup 14%1 since we introduced EDGE365 in Kenya in 2021. This is being achieved with the form of higher salessame resource and increased market share.working hours, and has led to a year-on-year reduction in our cost to serve.
1. From introduction in 2021 to 31 May 2022
Diageo One:Supporting supply chain visibility in volatile times
In fiscal 22, we shipped more than 100,000 product containers to over 130 countries around the world, working with more than 40 carriers. With this level of complexity, visibility is crucial – especially at a single portaltime of significant global supply chain volatility.
Our integrated logistics platform, the Luminate Control Tower (LCT), has transformed how we manage operations. It allows us to empowertrack global ocean freight movements in real time and make interventions that are driving cost efficiencies and improving customer service.
Prior to the LCT, tracking each shipment was challenging and time-consuming for our teams. Tracking relied on manual processes and third-party systems – meaning information was often out of date or inaccurate. We recognised that investing in a platform integrated with existing carrier infrastructure would transform the way we manage operations. And enable us to provide more accurate, timely updates to our customers, helping them to better manage their stock levels.
Launched this year, Diageo One provides a single, digital point of engagement with our customers. It gives themWith the powerLCT, we can now predict and plan warehouse capacity and efficiencies up to three months in advance, giving teams the time to manage their accountcommon challenges like port congestion. And we have reduced our spend on air freight, a costly remedy for shipping delays, by almost 90% this year.
The visibility the LCT delivers has allowed us to proactively respond to the changing logistics environment, anticipate potential delays, alert markets and access any Diageo content or services they need, on any device, anytime, anywhere. Diageo One is fully integrated with EDGE365,customers, and take fast remedial action – even in the most challenging situations. This was particularly evident during the Suez Canal obstruction in 2021, which disrupted worldwide shipping. Using the LCT, we were able to rapidly identify the markets and customers that would be impacted by both the immediate backlog of vessels and the broader disruption in shipping, which lasted for many months. As a customer-focussed Diageo application that integrates everythingresult, our sales forces needcolleagues and customers were able to act swiftly to manage their customer relationships, intothe disruption. Previously, it would have taken weeks to identify and notify markets of the impact of an issue of this scale.
The LCT now covers more than 96% of our ocean carrier network. It is helping drive a single mobile application. This means that we are ablemore future-focussed mindset, where our logistics planning is no longer reactive but predictive, enabling us to providemanage our customers with real-time access to brand content, promotional information, training materialsbusiness more efficiently and much more. Through this integrated solutioneffectively, and better support our customers have access to data, insights and analytics that help them to accelerate decision-making and ensure they have the right brands, activated in the right way, for their outlets and their consumers.
More engagement, more sales, more market share
We are deploying our Every Day Great Execution suite of technology, including EDGE365 and Diageo One quickly. These solutions have enabled an almost 20% increase in the number of outlets called on since the start of Covid-19 and they are also supporting off-trade market share growth in all regions.customers.
Business description (continued)
3. Invest smartly
We are investing in the future success of our business – but that investment needs to be ‘smart’ to support the delivery of consistent performance and enable sustainable, quality growth.
DELIVERING OUR STRATEGIC OUTCOMES
Investing smartly contributes to the delivery of our strategic outcomes of Efficient growth, Consistent value creation and Engaged people.
[EG] [CVC] [EP]
We focus our investment in areas in where we believe it 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).
Read more about how we are responding to our market dynamics on pages 26-30.22-26 and about people on page 30-31.
Progress in 2021fiscal 22
–Continued to invest for the long term, including: the acquisition of Davos Brands LLC; a new Customer Collaboration Center (United States); a water recovery plant (Uganda); carbon-neutral distilleries (Scotland); and biomass boilers (Uganda and Kenya)
–Upweighted our investment in A&P and delivered enhancements to our Catalyst suite of tools, enabling more effective short- and long-term A&P spend and improved insight into our return on investment
–•Invested in high-growth categories and enabling technologies, including the developmentacquisitions of 21Seeds, the super-premium flavoured tequila brand; Mezcal Unión, a premium artisinal mezcal brand; and Vivanda, the owners of FlavorPrint technology
•Opened Johnnie Walker Princes Street, our global visitor attraction in Edinburgh and the centrepiece of our ready to drink portfolio£185 million investment in North America through acquisition of the Lone River Ranch Water and Loyal 9 Cocktails brands, and an $80 million expansion of our manufacturing footprintwhisky tourism in Plainfield, IllinoisScotland
–•Received seven prestigious marketing effectiveness awards from the Institute of PractitionersOpened our first carbon-neutral distillery in Advertising (IPA)Lebanon, Kentucky
–•Co-developed a bespoke media planning platformAnnounced establishment of new research and development centre in Shanghai to further increase A&P efficiencyour ambitions in China
•Announced C$94 million joint investment with Hydro-Québec and the governments of Québec and Canada, to make our Salaberry-de-Valleyfield distillery carbon neutral by 2025
Looking ahead to 2022fiscal 23
–•Continue to develop our marketing effectivenessdata tools and embed analytics capabilities to further improve our return on investment, and enable faster decision makingdecision-making and execution across our marketing, sales and brand homes
–Continue to enhance and develop e-commerce and enabling technologies across the business
–•Continue to actively manage and invest in our portfolio of brands and brand experiences as well as capital expenditure to
•Accelerate investment in support the delivery of our 'Society 2030: Spirit of Progress' plan and long-term growth2030 carbon reduction targets
Scotch whisky tourism – supportingInvesting for the long term
Investing smartly means investing in the future success of our business. This supports the delivery of consistent performance and enables sustainable, quality growth. A core element of that growth withis investing in production capacity in fast-growing strategic categories.
In September 2021, we launched the right capitalexpansion of our tequila production capacity in Mexico through an investment of over US$500 million. With our tequila volumes growing 35% over the last five years1, this investment will support future category growth.
Despite Covid-19, we continuedWe’re also investing to invest smartly behind opportunities thatadd capacity for Crown Royal Canadian Whisky, North America’s most valuable whisk(e)y brand.2 A new carbon neutral facility in Canada, announced in March 2022, will support our goalgrowth ambitions.
To support growth plans for our ready to drink (RTD) portfolio of driving quality growth.premium drinks in North America, we opened our new canning facility in Illinois, in March 2022. It has capacity to produce over 25 million cases of RTD cocktails.
Our multi-year, £185In China, we broke ground on the Eryuan Malt Whisky Distillery. It will produce our first China-origin, single malt whisky and be carbon-neutral on opening. Also featuring an immersive visitor centre, our $75 million Scotch whisky tourism investment programmein this distillery is part of our long-term growth plans in this key strategic market – the world’s largest ever seenfor total beverage alcohol.3
And in Scotland – is creatingMarch 2022, to support the growth of Guinness, we announced a powerful platform£40.5 million investment in capacity expansion at our packaging facilities in Belfast, Northern Ireland, and Runcorn, England.
1. Volume CAGR fiscal 18 to engagefiscal 22
2. Retail sales value, IWSR, 2021
3. Volume and recruit new generations of consumers, as well as creating jobs and supporting our local communities. And as consumers seek once again to travel, they will want to visit the places where their favourite brands are made, meet the people who make them and experience the passion of those people and places.
At the centre of the programme is Johnnie Walker Princes Street, a new global visitor attraction in Edinburgh which celebrates scotch and more than 200 years of Johnnie Walker’s heritage. When it opens later this summer, visitors will experience a multi-sensory, immersive tour through Johnnie Walker’s history and world of flavour, whether in person or online. They will be able to catch live performances, shop for brand home exclusive bottles and soak up breathtaking views from two rooftop bars.
We are also well advanced in our work to transform the visitor experiences at four celebrated Diageo distilleries and in reopening the ‘ghost’ distilleries of Port Ellen and Brora. Glenkinchie, Clynelish, Cardhu and Brora successfully reopened this year and have all received Scotland’s most prestigious Green Tourism Gold Awards for sustainable practices in both the visitor experiences and distillery operations.retail sales value, IWSR, 2021
Business description (continued)
Building our portfolio for the long-term: strategic acquisitionsCreativity with precision: investing efficiently and effectively
Many of our iconic brandsWe have been built over decades, or even centuries. While never losing sight of the importancea track record of investing in our brands to support their long-term growth. We combine creativity with precision, to ensure that we’re maximising the growthimpact of these great brands,our investment. And with consumers increasingly looking for personalised and unique experiences, we’re bringing together data and analytics to reach more of the right consumers more often, at the right times and in the right places, with the right message for them.
By enhancing our data and analytics capabilities, our content and engagement better reflect consumers’ interests, improving their experience on the digital platforms where they interact with our brands. And we needuse data and analytics to optimise the consumer experience and the investment choices we make to support this work.
Taking this approach across our marketing activity, including our advertising campaigns, direct-to-consumer websites, digital brand channels and brand homes, while measuring our performance to improve our insight, creates a virtuous circle that supports more efficient and effective engagement with our consumers and better returns on investment.
In the United States, where progress on developing our data and analytics engine is most advanced, our work has delivered an improvement in return on investment of over 80% since fiscal 194. And it is supporting our ability to tailor our campaigns to the right consumers in the right digital channels. For example, this year, to amplify our multi-year sponsorship of the National Football League (NFL), we created 90 versions of Crown Royal video content using data and analytics to identify how we could make our content more relevant. These videos were deployed to coincide with various consumer occasions, such as football party preparations. We also used geolocation data to ensure content was more personalised and nurture the new brands thatspecifically targeted to consumers will enjoyin cities where we have individual NFL team sponsorships. Work such as this contributed to a 17% improvement in return on investment in Crown Royal’s digital media spend in the future. We do this through innovation, by investing in entrepreneurs with new ideas through the Diageo-backed accelerator programme, Distill Ventures, and through acquisitions.
We look to make acquisitionsfirst half of high-growth brands in fast-growing categories – such as those we have made in recent years in tequila, gin, no- and lower-alcohol and ready to drink. Super premium tequila brand Casamigos, which we acquired in 2017, grew net sales 125% this year and recently joined the ‘Millionaires’ Club’,1 having sold over one million cases in 2020.2
This year, we acquired Aviation American Gin and Chase Distillery: two fast-growing, premium plus gin brands with exciting growth potential. Aviation American Gin has disrupted the gin category in North America with its subtle juniper notes and modern craft credentials. It is the second largest and one of the fastest growing brands in the super premium gin segment in the United States.3
The acquisition of Chase Distillery, the producer of Chase GB Gin and a crafted portfolio of flavoured gin innovations, broadened our offering in the United Kingdom – the largest gin market in Europe.4 The flavoured gin category in the United Kingdom grew at a compound annual growth rate of over 140% between 2015 and 2020,fiscal 22.5 and Chase Distillery’s flavoured gin portfolio – with its fresh and zesty flavour combinations – is well positioned to benefit from this growth.
1. Drinks International, June 2021
2. IWSR, 2020
3. IWSR, 2020
4. IWSR, 2020Sensor: US Spirits portfolio measured media spend fiscal 19 to 31 December 2021.
5. IWSR, 2020Year-on-year comparison to first half of fiscal 21.
Business description (continued)
4. Promote positive drinking
We wantare determined to change the way the world drinks for the better. That means promotingWe will promote moderation and continuingcontinue to addressreduce the harmful use of alcohol by changingalcohol. As we reach more people with our programmes, we will change attitudes and expanding our programmes that tackle binge drinking, underage drinking and drink driving and binge drinking.driving.
Performance against all our ‘Society 2030: Spirit of Progress’ goals is described on pages 50-53.
Delivering our strategic outcomes
PromotingBy promoting positive drinking, contributes to the delivery of ourwe deliver against two strategic outcomes ofoutcomes: Credibility and trust and Engaged people.
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PromotingAt Diageo, we're committed to promoting moderation and addressing the harmful use of alcohol wherever we live, work, source and sell. This is not only the right thing to do – itwhy promoting positive drinking is an essential part of our Performance Ambition. Our
When we encourage people to ‘drink better, not more’ we also support our commercial success, depends on us creating a positive impact on society, wherever we live, work, source and sell. And, as a premium drinks company, we want people around the world who choose to drink alcohol to drink better, not more - and toconsumers trade up to our higher quality better-tasting drinks. We’re proud of our brands and know the best way to enjoy them is in moderation.
Our brands have been part of people’s celebrations for generations. We make them
Alignment with pride – and they are made to be enjoyed responsibly.the UN Sustainable Development Goals
Progress in 2021fiscal 22
–•Transformed DRINKiQ with new content, designhas been launched in all our markets, where legally permissible. It’s now launched in 21 markets, 73 countries and interactive tools23 languages
–•Launched SMASHED Online is now live in Great Britain, Northern Ireland, India, Australia23 countries and and MexicoSMASHED Live in 15 countries, educating 607,374 people on the dangers of underage drinking
–•Launched digital learning experience, 'The ‘Wrong Side of the Road’, to help is now active in 24 countries, reaching 500,415 people understand the consequences of drink drivingthis year
•Our brand moderation messages reached 456 million people
Looking ahead to 2030fiscal 23
We will continue to focus on making progress towards our ’Society 2030: Spirit of Progress’ ambition:
–•ChampionMaintain a focus on championing health literacy and tackletackling harm through DRINKiQ in every market where we live, work, source and sell (where it is legally permissible)
–•Scale up our SMASHED partnership, and educate 10 million young people, parents and teachers on the dangers of underage drinking
–•Extend our UNITAR partnership, and promote changes in attitudes to drink driving, reaching five million people
–•Leverage Diageo marketing and innovation to make moderation the norm – reaching one billion people with dedicated responsible drinking messaging by 2030
We want everyone at Diageo to be an advocate for positive drinking and we have long campaigned to reduce the harmful use of alcohol.
Emerging more determined
We know that for most people who chooseexcessive drinking can cause significant harm to drink, drinking responsibly is common sense – but we also know that harmful drinking causes significant issues for individuals, their families and society as a whole.society. We share our stakeholders’ concerns about that harmthis and we want to workare working with others as part of a whole-of-society approach to address it – which isit. It’s why promoting positive drinking is at the heart ofcentral to our 'Society‘Society 2030: Spirit of Progress' plan.Progress’ plan – and why, as we emerge from Covid-19, we are innovating, enhancing and increasing the scale of our programmes.
The right thingCommitted to do – for society, and our businessreducing harmful use
In 2015, Diageo was a founding member of IARD, the International Alliance for Responsible Drinking, a not-for-profit organisation comprising 1213 leading beer, wine and spirits companies. IARD members work together to actively support the WHO’s target within the Non-Communicable Diseases (NCD) Global Monitoring Framework of an ‘at least 10% relative reduction in the harmful use of alcohol’ by 2025.
Business description (continued)
Making moderation a business position
ToThis year we formed our Positive Drinking Council with representatives from across the business and began refreshing our ambition in this area. This whole-of-business approach will enable us to clarify the role of non-alcoholic drinks in promoting moderation; harness digital to enhance our insights; improve the effectiveness of our messaging; and define market and brand segmentation for our moderation campaigns. Alongside existing programmes, this approach will help us to meet our goaltarget of changing attitudes and reaching one billion people with dedicated responsible drinking messages, we are committed to reinforcing moderation in everything we do.messaging by 2030.
We want our people to be ambassadors for moderation and we are using the reach and influence of our brands to connect with consumers. For example, in MexicoGreat Britain we have reached over 4622 million people with messages of moderation throughthe Captain Morgan anti drink-drive campaign ‘A mate doesn’t let a cross-brand campaign on social media supported by Johnnie Walker,mate drink drive’, developed in collaboration with Think!. In the United States, Crown Royal, Captain Morgan and Smirnoff Don Julio, Buchanan’s and Black & White. Our brands also use major sponsorships to reinforcehad moderation messaging –and game activations throughout the National Football League (NFL) season.
Both through lockdowns and as Guinness does through its role as title sponsor and officialmarkets have been emerging from Covid-19, we’ve been investing in reaching more consumers with responsible drinking partnermessaging and are committed to continuing this work.
Empowering people to make responsible choices
Our enhanced DRINKiQ.com platform is a dedicated responsible drinking tool that provides facts about alcohol, the effects of drinking on the Guinness Six Nations rugby tournament.body and mind, and the impact of harmful drinking on individuals and society. It’s one of our most important tools in promoting positive drinking. DRINKiQ aims to inspire consumers to take action and empower them to achieve a balanced lifestyle – inviting them to change their attitudes to alcohol.
We designed the platform to complement resources offered by governments, charities and independent bodies. For example, our drinking self-assessment tool – which aligns with the WHO’s Alcohol Use Disorder Identification Test (AUDIT) tool – helps determine if someone is at risk of problem drinking.
We’ve now reached our 2030 goal to launch DRINKiQ in every market in which we live, work, source and sell. The DRINKiQ platform, which champions health literacy and tackles harm, has been launched in 21 markets and is available in 73 countries and 23 languages. This year, our campaigns around the world have engaged users with DRINKiQ. In South Korea, for example, a festive campaign in 2021 reached more than a million users in four weeks.
Tackling underage drinking
When it comes to those who are underage, it is never acceptable to consume alcohol, and we have a long track record ofFor many years, we’ve run ambitious campaigns and programmes to tackle underage drinking. We are committeddrinking – because it is never acceptable for somebody who is underage to educating 10 million people on the dangers of underage drinking by 2030. A key part of this approach is scaling up consume alcohol.
SMASHED, an award-winning alcohol education programme, developed by Collingwood Learning and sponsored by Diageo, through which we measureplays a key role in sharing this message – and measures changed attitudes as well as the number ofin young people we reach. Since launching in the United Kingdom more than 15 years ago,who participate. SMASHED has reached over 1.2 million people and is currently available in 16 countries. It beganstarted as a live theatre production presented by professional actors accompanied by interactive
Business description (continued)
workshops, evaluation and teaching resources for schools.production. As part of our jointa long-term strategy with Collingwood Learninggoal to reach a greater number of students, we developedwe’re pivoting to digital, developing SMASHED Online. This work was accelerated in response to Covid-19 and the closure of many schools. SMASHED Online launched in 2021 in Great Britain, Northern Ireland, India, Australia and Mexico. We plan to expand the programme next year with more localised versions for other markets.
This year we further extended the global scale of the programme. Despite ongoing challenges, including Covid-19 and adapting the programme for local governing bodies, we launched SMASHED Live in 15 countries and SMASHED Online in 18 new countries. In total, Diageo-supported education programmes educated 210,443607,374 people on the dangers of underage drinking through a Diageo supported education programme. 195,544– 491,128 of those people confirmed a changed attitude on the subject after taking part.
We remain committed to educating 10 million people on the dangers of underage drinking following participation.by 2030; SMASHED has educated more than 1.8 million people since it launched in 2018.
Changing attitudes; preventingPreventing drink driving by changing attitudes
Attitude change is also crucial in achieving another of our priorities:to preventing drink driving. For decades, we havewe’ve been addressing drink drivingthis issue through a range of interventions, including partnerships with police, local authorities and other agencies that support the enforcement of drink drive laws. We provide education for drivers and law enforcers and
Last year we support safe rides and public transportation.
Since 2016 we have partnered on this issuelaunched 'Wrong Side of the Road’ (WSOTR), which is now live in 24 countries. Developed in partnership with the United Nations Institute for Training and Research (UNITAR)., it’s our digital learning experience to help as many people as possible around the world understand the consequences of drink driving. In China, WSOTR launched alongside a national road traffic safety campaign, allowing us to reach 26,000 people in its first month. This year in India we reached 107,000 people within seven months, using a mix of online and offline learning in a classroom setting. We continue to look for ways to make the digital experience more effective, and scale the programme to engage more people with our positive drinking message post-pandemic.
We have partnered with UNITAR since 2016 to develop ways to prevent drink driving. Together we are supportingcontinue to support the second UN Decade of Action for Road Safety, and our 'SocietySafety. Our own ‘Society 2030: Spirit of Progress'Progress’ plan commits us to changing the attitudes of five million driverspeople towards drink driving by 2030. This year, together with UNITAR and ahead of UN Global Road Safety Week, we launched a digital learning experience to help people understand the consequences of drink driving ‘The Wrong Side of the Road’ allows people to have a conversation with a drink driver to help them understand the effects of alcohol, and the shame and stigma that come with drink driving. Launched in Great Britain in May 2021, the experience will be rolled out to more countries in the next 12 months.
We also collaborate with UNITAR on our flagship high visibility enforcement training programme to support government authorities and police officers in their work to reduce road traffic accidents as a result of drink driving.
Adapting and innovating in how we work
Promoting positive drinking during the Covid-19 pandemic has had its challenges – particularly for programmes such as SMASHED, which previously relied on live, in-person events. But by finding new ways to reach audiences and pivoting quickly to online solutions in many markets, we are opening up new opportunities for positive impact in the future.
Expanding our digital approach has given us more data insights, which we can use to increase engagement and measure impact. It will help us drive our industry-leading programmes to make an even greater difference in changing attitudes to avoid the harmful use of alcohol around the world.
Business description (continued)
Advocating improved laws and industry standards
As a minimum, we aim to comply with all laws and regulations whereverwhere we operate. We advocate effective new regulation based on evidence, including blood-alcohol volume driving limits, responsible digital marketing and legal purchase agelegal-purchase-age laws, equalisedequal for all categories of alcohol categories, in countries where these do notdon’t exist.
We have also joined in collective action with our industry. We support IARD’s commitments on digital marketing and commercial practices, and its package of measures to combat underage drinking. We havedrinking, including its new Influencer Guiding Principles –the first global standards to ensure responsible marketing of alcohol by social influencers. We've also committed to including an age-restriction symbol or equivalent words on all of our alcohol brand products in all markets by 2024.
We are also part of the newa global alliance formed between IARD and prominent online retailers and e-commerce and delivery platforms, to developdeveloping industry standards for this fast-growing channel to promote moderation and address the risk of alcohol being sold to people who are underage or intoxicated.
Responsible marketing
Our Diageo Marketing Code (DMC) and Digital Code set mandatory minimum standards for responsible marketing and wemarketing. We review the Codesthem 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 thanunderage.
We’ve also taken a leadership role in shaping safer online environments through our work with the legal purchase age.World Federation of Advertisers’ Global Alliance for Responsible Media (GARM) – a cross-industry programme, steadily progressing better and more consistent standards, controls, measurement and verification of harmful digital content. This year GARM launched its first report tracking the brand safety performance of digital platforms and setting a benchmark for progress.
Advertising complaints upheld by key industry bodies that report publicly
Across some of our markets, advertising monitoring and industry bodies publicly report breaches of self-regulatory alcohol marketing codes. This year one casecomplaint was upheld against Diageo’sDiageo, by the ABAC scheme in Australia. It was a ‘no-fault breach’ decision issued on 30 May 2022 against UDL, a ready-to-drink brand. A no-fault finding is defined as an instance where an alcohol marketer has acted properly and diligently in seeking to comply with its ABAC obligations, but a failure has occurred that was outside the reasonable control of the marketer or their advertising byagency.
In this instance, an agency placed a key industry body, by ABAC,billboard at a bus stop too close to a school, because of an error defining the advertising regulatorboundaries of the school’s premises in Australia.a location database. We accepted that the placement rule had been breached, and asked for a no-fault finding. We acted immediately to remove the advertising.
| | | | | | | | | | | | | | |
Country | Body | Industry complaints upheld | Complaints about Diageo brands upheld | Brand |
Australia | ABAC Scheme | 48 | 1 | UDL |
Ireland | Advertising Standards Authority for Ireland (ASAI) | 0 | 0 | |
United Kingdom | Advertising Standards Authority | 7 | 0 | |
| Portman Group | 8 | 0 | |
United States | Distilled Spirits Council of the United States (DISCUS) | 1 | 0 | |
Pivoting to digital at a time of global challenge
Due to Covid-19, promoting positive drinking remains challenging, particularly for programmes that rely on in-person events. By using online solutions in many markets, we continue to find new ways to reach audiences and deliver our most important messages. Expanding our digital approach has given us more data insights, which we are using to increase engagement and measure impact. It’s helping us to enhance our industry-leading programmes and change more attitudes towards the harmful use of alcohol.
Business description (continued)
We have set ourselves a set of stretching targets for changing attitudes and encouraging moderation, described in full on
page 64.
Advertising complaints upheld by key industry bodies that report publicly1
A complaint was upheld by ABAC on 8 January 2021 for the Baileys Original Irish Cream Liqueur Milk Glass Gift Pack. The complaint was upheld on the basis that the gift pack had strong and evident appeal to minors. It was noted that the desserts and milkshakes on pack were styled in a way that makes the imagery relatable to minors and creates an illusion of a smooth transition from non-alcoholic to alcoholic beverages.
As it was a complaint relating to packaging, Diageo had two opportunities to respond and provide our point of view. We responded to each question posed by ABAC, articulating why we did not feel that any of the elements of the packaging had strong and/or evident appeal to minors. It is important to note that the Baileys Original Irish Cream Liqueur Milk Glass Gift Pack was approved through ABAC’s pre-vetting system prior to going into production. Once the determination was upheld, we stopped selling the remaining stock to customers, destroyed the gift pack elements and sold the Baileys as standalone bottles.
| | | | | | | | | | | | | | |
Country | Body | Industry complaints upheld | Complaints about Diageo brands upheld | Brand |
Australia | ABAC Scheme | 71 | 1 | Baileys |
Ireland | Advertising Standards Authority for Ireland (ASAI) | 0 | 0 | |
United Kingdom | Advertising Standards Authority | 2 | 0 | |
| Portman Group | 4 | 0 | |
United States | Distilled Spirits Council of the United States (DISCUS) | 3 | 0 | |
1.From 1 July 2020 to 30 June 2021
DRINKiQ: championing consumer health literacy
Information is a critical component of empowering consumers to make responsible choices – and DRINKiQ is one of our most important tools in promoting moderation and addressing harmful drinking. DRINKiQ is a dedicated responsible drinking online platform that provides facts about alcohol, the effects of drinking on the body and the mind, and the impact of harmful drinking on individuals and society. DRINKiQ is currently available in 29 countries and we have plans to extend it to more than 35 countries by December 2021.
This year we transformed DRINKiQ with new content, design and interactive tools to redefine and improve the way we talk to people about drinking. DRINKiQ is designed to complement resources offered by governments, charities or independent bodies, not replace them.
The new DRINKiQ aims to inspire consumers to take action – inviting them to drink better, not more and to shape a long-term positive change in their attitudes to alcohol. We use tools to frame people’s relationship with alcohol and empower them to achieve a balanced lifestyle. One key new element is the drinking self-assessment tool, which aligns with the WHO’s AUDIT tool. ‘AUDIT’ stands for Alcohol Use Disorders Identification Test, which can help determine whether someone is at risk of problem drinking.
Business description (continued)
5. Champion inclusion and diversity
We believe that everybody should be able to thrive in an environment that values their contribution and celebrates what makes them unique. Across Diageo, we champion inclusion and diversity, from how we attract, recruit and develop our teams, to representation in our supply chain and the ways we portray the richness of society across our business: from the way we attract, develop, retain and recruit the very best diverse talent, to the way we source services and progressively portray diversity throughbrands.
Performance against all our brands. We are determined to remove barriers, while having a positive impact‘Society 2030: Spirit of Progress’ goals is described on our partners, suppliers and communities.pages 50-53.
DELIVERING OUR STRATEGIC OUTCOMES
ChampioningBy championing inclusion and diversity, contributes to the delivery of ourwe deliver against three strategic outcomes ofoutcomes: Consistent value creation, Credibility and trust and Engaged people.
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Alignment with the UN Sustainable Development Goals
We wantare committed to have world-leading employmentcreating the most inclusive and diverse culture, as well as shaping market-leading policies and practices that foster inclusion. Atpractices. This helps us attract the same time, we aim to usebest and most diverse talent – driving both innovation and commercial performance. Beyond our influence,workplace, through our partnerships, creative skills and media spend, towe help shape aeducate and make society more tolerant society.
An inclusiveequitable. Because championing inclusion and diverse culture has always beendiversity is central to our purpose of ‘Celebrating life, every day, everywhere’. As well as being – and it is simply the right thing to do, having the best and most diverse talent drives innovation and commercial performance.do.
Progress in 2021fiscal 22
–•Increased female representation across leadership, including our Executive Committee, to 44% and the ethnic diversity of our leadership population to 41%
•Announced ambitious goals to increase our supplier diversity spend with diverse-owned and disadvantaged businesses to 10% by 2025 and 15% by 2030
•Improved our Inclusion & Diversity Index in our leadership groupemployee survey by two percentage points year-on-year, to 42% (from 39% last year)84% ‘positive sentiment’
–•Developed a progressive Ethnic Diversity Framework, while setting an ambitionUpdated our Learning for Life programme to increase ethnically diverse representationtackle barriers to ethnic minorities working in our leadershiphospitality
–•Trained nearly 2,000 marketeersLaunched ‘Domestic and agencies around the world inFamily Abuse’ guidelines to support our four-part Progressive Portrayal programmepeople
•Leveraged our Employee Resource Groups (ERGs), collaborating with our marketing teams to create highly relevant and progressive advertising
Looking ahead to 2030fiscal 23
–ChampionWe have set a range of ambitious goals to help drive our performance in: championing gender diversity with an ambition to achieve 50% representation of women in leadership roles by 20301
–Championand ethnic diversity with an ambition to increase representation of leaders from ethnically diverse backgrounds to 45% by 20301
–Improvediversity; improving employability and livelihoods for 200,000 people through Learning for Life and other skills initiatives
–Deliver 1.5 million training sessions through Diageo Bar Academy providing skills and resources to help build a thriving hospitality sector that works for all
–Use our creative and media spend to supportspecialist training; supporting progressive voices measuring and increasing the percentage spend year on year
–Accelerate inclusiondiverse-owned and diversity indisadvantaged businesses, through our value chain, measuringspend; and increasing the percentage of Diageo suppliers from female- and minority-owned businesses year on year1
–Ensure 50% of beneficiaries fromensuring our community programmes are women andbenefit everyone equally. Performance against all our community programmes will be designed to enhance ethnic diversity and inclusion‘Society 2030: Spirit of underrepresented groupsProgress�� goals is described on pages
1. Statements on representation are an ambitionChampioning our people
Every individual who works for, or with, Diageo should feel they belong and should not be considered a target
Living our values
We aim to create an environment where every individual feels a sense of belonging andknow they can thrive and contribute to their fullest. That means embracingthrive. To achieve that, we embrace diversity in the broadestevery possible sense, including gender, ethnicity, ability, age, sexual orientation, neurodiversity, social class, education, experience and ways of thinking.
We have a globalGlobally we put significant focus on goalstwo areas: empowering women to flourish in two key areas: developing a strong pipeline of female talent for all roles, and increasing the representation of leadersthose from ethnically diverse backgrounds.
As with It is both the right thing to do and a numbercritical driver of our other ESG goals, we have'Society 2030: Spirit of Progress' ambitions, which is why we’ve backed up our ambition by directly linking our Long-Term Incentive Plan (LTIP) awards to delivering diversity in our leadership. Our LTIP is described in our Remuneration report on pages 212-213.leadership – see page 207.
Change atWomen in leadership: progress continues
Our goal is to see women represent 50%* of our leadership group by 2030. This year, representation reached 44%1∆, from 42% in 2021. We’re also proud to have 64% female Board representation, and be recognised for our gender equality work by the top: progress on women in leadership
FTSE Women Leaders Review, Bloomberg Equality Index, Equileap and others. We are committedcontinue to work towards our goals, with a deep commitment to supporting gender equality through representation, policy development and transparency. We are proud to have increased female Board representation by 10 percentage points to 60% this year. Through our continued focus and efforts we are strengthening female representation in our leadership group, increasing it from 39% to 42% over the last 12 months as we move towards our goal of 50% female representation by 2030.
Leading the FTSE100 on female leadership representation
Diageo was named the top FTSE100 company for female leadership representation of women at Board, Executive and leadership level in the 2020 Hampton-Alexander Review.
Business description (continued)
FocusA focus on ethnic diversity
We employ 27,650 people in over 70 countries, which means we already have a diverse workforce representing the markets in which we operate. However, we want to ensure we have ethnic diversity at every level of our business, with a focus on our leadership. Today 30% of our Board and 37% of our leadership population, including our Executive Committee, is ethnically diverse.
In 2020 we set up a global taskforce which developed a progressiveProgress requires ambition. Our Ethnic Diversity Framework to supportsupports markets in defining multi-year plans covering talent representation and development, supplier ethnic diversity, inclusive marketing – and inclusive marketing.
Since launching confidential ethnicity data collection in 2019 we now have a greater understanding of diversity in 61 countries. Wherewhere local law allows, we have invited all ourinvite employees to share their ethnicity voluntarily.ethnicity. In these markets more than 80%82% of our global workforce and 92%96% of our leadership population has confidentially disclosed their ethnic background, which has helped us setbackground. By 2030, we’re aiming to have increased representation of Diageo leaders from ethnically diverse backgrounds to 45%*. Today 45% of our goalBoard and 41%1∆ of our leadership population, including our Executive Committee, is ethnically diverse.
*Statements on leadership representation.representation should be considered an ambition for Diageo, not a target
1. This data is calculated as an average across the four quarters of fiscal 22
Creating an inclusive culture through progressive policies and employee resource groupsour Employee Resource Groups
Our progressive policies help us foster an inclusive environment that supports every employee. This year, we introduced ‘Domestic and Family Abuse’ guidelines, while continuing to embed our ‘Thriving through Menopause’ and ‘Gender Expression & Identity’ guidelines.
Supporting people affected by abuse
In November 2021, we introduced Domestic and Family Abuse guidelines, created in partnership with CARE International UK. These outline our zero-tolerance approach to all forms of domestic and family abuse, and provide guidance to employees and line managers on where to go for expert and confidential support.
Our network of employee resource groups (ERGs)Employee Resource Groups gives employeesour people the opportunity to support each other,one another, while helping leaders better understand the barriers and concerns of diverse communities.
Shaping a more equitable society
In February 2021 we established an innovative programme with Historically Black Colleges and Universities (HBCUs) in North America to develop future leaders. A $10 million pledge will fund permanent endowments at more than 20 HBCUs across the United States and create internship platforms to help drive diversity within the industry.
Our active 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 the United Kingdom,Europe; and our international Spirited Women and Rainbow Networks. Initiatives led by these networks and othersHighlights from this year include:
– 10,000 care packages for Americans serving overseas assembled by members of the Veterans and Friends of Veterans Resource Group and employees from their homes
– Six-month internship programme established across Scotland focussing on people with disabilities in•Our partnership with Queer Britain in London,the We Are All Able ERGUK’s first LGBT+ museum, celebrating 50 years of LGBTQ+ Pride in the UK, allowing meaningful connections to both past and present
– Fourth•Lighting up purple for International Day of People with Disabilitiesat our sites across the world, showing our commitment to supporting those with a disability
•Celebrating Black Heritage Month (US) and Race Equity Week (UK), with thought-provoking discussion, encouraging us to challenge our way of thinking and create meaningful action
•#MyNameIs global campaign as part of our annual inclusion ‘INC’inclusivity week, with over 30 sessions led by ERGs globally and 9,000 people tuning in livedesigned to educate others that the correct pronunciation of our names is central to championing inclusion
– 50•85 Diageo sites tooktaking part in our annual PridePRIDE flag-raising eventwhich saw the new Progress flag flown, representing marginalised LGBTQIA+ transgender and ethnically diverse communities.
We also support inclusion through progressive policies. Globally, all new mothers are entitled to 26 weeks’ fully-paid maternity leave, with all new fathers being entitled to a minimum of four weeks’ paid paternity leave. In the majority of our markets, we have fully equalised maternity and paternity leave to 26 weeks, regardless of how they become parents. This year, our people took more than 180,000 days of parental leave – and the average number of days taken by men was 99.communities
UsingChanging society through our reach and influence to drive 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. As advertisers of someone of the world’s most iconic brands, we know we can makelargest advertisers, we’re committed to an advertising and media environment where, from script to screen, everyone sees themselves represented.
We invest in progressive voices, measuring and increasing our percentage spend. This is unlocking opportunities in front of the camera, behind the camera and in who owns the camera.
The Baileys ‘Witches’ campaign for Halloween was a difference throughcelebration of how enjoying treats spans generations, ethnicities and sexualities, featuring three of the UK’s biggest drag queens. The campaign was created in partnership with our advertising – both in termsemployee Rainbow Network and consultancy, INvolve, to ensure it was a true representation of its content,drag, within the context of the wider LGBTQ+ community. Our Guinness ‘Black Shines Brightest’ campaign was created for and through how it is made.by African markets, to bring together passionate and creative individuals and celebrate the cultural diversity of Africa.
Supporting transgenderCelebrating and non-binarysupporting employees with disabilities
Across our manufacturing sites, our Youth4Jobs partnership in India has seen us hire more than 62 people with disabilities and our award-winning ‘We Are All Able’ internship programme at our Shieldhall packaging site is now in its third year. In partnershipKenya, we have partnered with our Rainbow Network we launched gender identity and gender expression guidelines across several marketsSightsavers to promote the inclusion of farmers with disabilities, working with more than 350 disabled farmers (of which 51% are female) in supportthe production of our transgender and non-binary employees. The guidelines included the introduction of voluntary and confidential self-disclosure of gender identity, sexual orientation and pronouns on our internal Workday system in order to progress our LGBTQIA+ inclusion agenda.Senator Keg beer.
Thriving through menopause
By 2025, there will be over one billion women experiencing menopause in the world – and this subject should not be taboo. In March 2021, we introduced our ‘Thriving Through Menopause’ guidelines, to raise awareness and understanding of menopause throughout our business, inspired by inputs from our Spirited Women network. The guidelines support increased flexibility (including changing working patterns, or access to sick pay entitlements to manage symptoms where appropriate) and access to counselling or mindfulness sessions through our Employee Assistance Programme.
Confronting racial bias
business. In 20212022, we launched ‘Confronting Racial Bias’ training for all our employees – a 30-minute interactive learning experience. 97% of our employees have completed the training, which is also part of our onboarding process. We have developed an e-learning programme for managers, the ‘Confronting Racial Bias Hiring Manager’, and adapted the programme for useworked with our agency, distributorpartner, Balance, to launch an employee app, that offers medical provision, advice and supplier partners.diagnosis to employees worldwide.
Business description (continued)
Performance against allFostering an inclusive culture
Improving our 'Society 2030: SpiritInclusion and Diversity Index to 84% (+2ppt vs 2021), as reported by our annual employee survey, keeps us ahead of Progress' goals is described on pagesglobal benchmarks – and highlights that our employees see this as a key driver of both our culture and commercial performance.
64-67.
We have trained almost 2,000 marketeers and agencies around the world in our four-part Progressive Portrayal programme, which breaks stereotypes in advertising in the areas of gender, race, sexuality and age and covers representation, perspective, characterisation and agency. We continueOur commitment to break boundaries in our creative work, while collaborating with inclusive talent that reflects our broad consumer base. For example, initiatives such as the Guinness ‘Never Settle’ campaign in May 2021, aimed to redress the imbalance of coverage of women’s rugby during the Guinness Six Nations.supplier diversity
By ensuring our supplyA value chain reflects our values ofbuilt on inclusion and diversity can create employment opportunities, economic advancement and greater representation in marginalised communities. This is why we believehave chosen to recognise supplier diversity as a business priority, committing to spend 10% with diverse-owned and disadvantaged suppliers and agencies by 2025, and 15% by 2030.
In the last year, we can have a much bigger impact on equality beyond our business, working closelyworked with our markets, advocacy organisations and peer companies to understand which groups were under-represented at a local level – and to align on what defines ‘supplier diversity’. We surveyed 1,500 suppliers, to advance sustainable economic impactcovering 80% of our global spend, establishing the baseline of diversity in diverse communities whereour existing value chain. This year we source. We continue to develop our Diverse Representation programme globally, championing equal employee representationspent £429 million with our suppliers,369 diverse-owned and helping to inspire greater diversity throughout their organisations.disadvantaged businesses, approximately 4.8% of global spend.
Working with diverse suppliers
In North America, our largest market, we have continued to increase diversity in our supply chain, increasing the proportion of diverse suppliers by over 15% in the last 12 months.
Supporting thrivingHelping communities thrive where we live, work, source and sell
We aimcontinue to promote sustainable growth through inclusive programmes that provide equal access for all to resources, skills and employment opportunities. Our longstanding community programmes include a focus on promoting gender equalityopportunities – including in business and empoweringhospitality training, safe water, sanitation and hygiene, and support for smallholder farmers. Each programme puts measures in place that reduce barriers to underrepresented groups who need to access these benefits.
This year, we reached 22,230 people from under-represented groups, alongside skills and entrepreneurship, and health and wellbeing. Our partnership with CARE International, for example, includes tackling barriers for women in smallholder farming, improving safety and inclusivity in the hospitality industry,our business and hospitality skills trainingprogrammes, 64% of whom were female. We also expanded our approach to tackling barriers to ethnic minorities in hospitality, including lack of access to essential education, skills and initiatives to support female entrepreneurs.
Ourinfrastructure; lack of safe, inclusive working spaces free from harassment and abuse; and unfair wages, informal contracts and inappropriate working hours. We’ve updated our Learning for Life (L4L) programme focusses oninclusive-by-design principles, and will be partnering with the Diageo Bar Academy, which itself has delivered 190,383 training insessions to help create an inclusive and thriving hospitality retail and entrepreneurship, while we also support communities by providing access to clean water, sanitation and hygiene (WASH) in water-stressed areas (see page 56).industry that works for all.
This year, we invested a total of £20.95£22 million in community initiatives, equivalent to 1%0.5% of operating profit (2020 – 1%). Seeprofit. See our ESG Reporting Index for more details of our community investments.
Equal opportunities for women
We make sure at least 50% of people trained by our community programmes are women, and that women’s needs are met at all stages of design, implementation and evaluation. We do this with CARE International UK, a leading NGO in gender equality. For example, in 2022, our Learning for Life programme in India reached 658 female beneficiaries (59% of programme attendees), through dedicated gender focussed engagement and education.
Gender representation of our leadership1
| Role | Role | Men | % | Women | % | Total | Role | Men | % | Women | % | Total |
Leadership population2 | Leadership population2 | 319 | 58 | | 234 | 42 | % | 553 3 | Leadership population2 | 312 | 56 | | 244 | 44 | % | 556 3 |
|
Ethnic representation of our leadership1,4
| Role | Role | Ethnically diverse | % | Non-ethnically diverse | % | Decline to self-identify | % | Not disclosed | % | Total | Role | Ethnically diverse | % | Non-ethnically diverse | % | Decline to self-identify | % | Not disclosed | % | Total |
Leadership population2 | Leadership population2 | 207 | 37 | % | 289 | 52 | % | 12 | 2 | % | 46 | 9 | % | 554 | Leadership population2 | 231 | 41 | % | 291 | 52 | % | 14 | 3 | % | 21 | 4 | % | 557 |
1. This1.This data is correctcalculated as an average across the four quarters of 30 June 2021fiscal 22
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 reporting boundaries and methodologies in our ESG Reporting Index, for more information on how data has been compiled, including standards and assumptions used. In particular, attention is drawn to page 90 of our ESG Reporting Index, which describes the exercise that was undertaken in the Latin America and Caribbean region to address the fact that the Hispanic/ Latin American ethnicity category is not available, at a local market level for selection in Workday.
Business description (continued)
6. Pioneer grain-to-glass sustainability
The climate is in crisis. We have always understood that formust increase our business to be sustainable, it needs to create enduring value – for us and for those around us. Our 'Society 2030: Spirit of Progress' ambitions take us further than ever in our driveefforts to preserve water for life, accelerate to a low carbonlow-carbon world and become sustainable by design.design – helping to create a better future for communities everywhere.
Performance against all our ‘Society 2030: Spirit of Progress’ goals is described on pages 50-53, with more detail about our performance in our ESG Reporting Index 2022.
Delivering our strategic outcomes
PioneeringBy pioneering grain-to-glass sustainability, contributes to the delivery of ourwe deliver against three strategic outcomes ofoutcomes: Consistent value creation, Credibility and trust and Engaged people.
[CVC] [CT] [EP]
'Society 2030: Spirit of Progress' is our 10-year action plan for contributing to the achievementThe urgency of the UN Sustainable Development Goals (SDGs). It sets out how we will build on our track record, pioneer new approaches,climate crisis requires us to do more, and work with others to make a difference in the critical period to 2030, while giving our business a platform for sustained and responsible quality growth.
Our long-term success depends on the people and planet around us. Poverty, inequality, climate change, waterquickly. Water stress, biodiversity loss, natural disasters, inequality and other challengespoverty threaten the environment and the prosperity of communities. The period to 2030 will be critical and difficult – as we manage both our impact on the planet, and mitigate and adapt to the effects of a changing climate.
We mustare acting. At COP26 we became a founding signatory of the Glasgow Declaration for Fair Water Footprints for climate-resilient, inclusive and sustainable development – and are part of the COP26 Business Leaders Group, stimulating business action to help accelerate delivery of the Glasgow Climate Pact ahead of COP27. We are vocal supporters of two key UN-backed global campaigns: Race to Zero and Race to Resilience. And we continue to pioneer innovative approaches from grain to glass, partnering with others to make sure thata difference – because we know our stakeholders and society at large all thrive as a result of our business. Ourlong-term commercial performance and effective stewardship of the environment go hand in hand, because sustainability ishand. Managing the risks and opportunities of a changing climate will be critical, toand we report on these in line with the efficiency and effectivenessrecommendations of our operations and our ability to maintain trust and respect.the Task Force on Climate-related Financial Disclosures on pages 58-79.
Alignment with the UN Sustainable Development Goals
Progress in 2021fiscal 22
–•Achieved 3.7% water efficiency improvement and generated the annual capacity to replenish 1,058,822m3 of water
•Reduced carbon emissions from our direct operations by 5.1%5.3% despite a year-on-year increase of 9.6% in packaged volume and 6.7% in distilled volume
–•Agreed a renewed five-year partnership with WaterAid to help transform lives through clean water, decent toilets and good hygieneThe Science Based Targets initiative validated our GHG targets as meeting the criteria for the 1.5°C warming pathway
–•Successfully pilotedLaunched our first regenerative agriculture programme with Guinness
•Launched our second round of Diageo Sustainable Solutions innovation challenges, this time focussed on enhancing the lowest carbon footprint glass bottles ever produced for a Scotch whisky brandsustainability of our packaging
Looking ahead to 2030fiscal 23
We•In the coming year we will continue to focus on the targets we have set a range of ambitious targets to help drive our performance in preserving water for life, accelerating to a low carbon world and becoming sustainable by design.
Achievement We report against all our 'Society 2030: Spirit of Progress' goals is describedtargets on pages 64-67. We describe our work on embedding human rights throughout our value chain on page 68 and our engagement with stakeholders on pages 39-40.50-53
Acting now, acting together
We work with our whole value chain – our employees, our suppliers, our communities, our customers and consumers – to look after the people and resources that contribute to our success, from grainsuccess. We’re engaging with suppliers to glass.identify common challenges and accelerate our journey to net zero together. As we grow, reducing emissions and the consumption of raw materials are among our biggest challenges. It’s why we take an integrated approach to sustainability – making improvements and launching initiatives that support climate, water and biodiversity.
Celebrating external recognition
In November 2020, Diageo was recognised for the third year in a row in the Dow Jones World Sustainability Index. In December 2020, we appeared on the CDP’s annual A list for water security and climate change. We were recognised as a CDP supplier engagement leader in February 2021.
'Our 'Society‘Society 2030: Spirit of Progress' ambitionsProgress’ ambition
Our plan mobilises usBy 2030 we expect to have invested around £1 billion of capital expenditure on improving our environmental performance. This investment will support our drive to be global champions for water stewardship and vocal advocates for a low carbon world. It also means going further in exploringstrong contributor to a low-carbon world – through using renewable energy, scaling circular economy approaches, so we can be ‘sustainable by design’. To achieve our ambitious goals, we expect to invest around £1 billion of capital expenditure over the next decade in environmental sustainability. Thissolutions and implementing regenerative agriculture approaches. These investments will help us to be more efficient, reduce our resource consumption, invest indevelop innovative solutions and buildensure a more secure and resilient supply chain. It will also drive the trust, respect and commercial success that define our Performance Ambition.
Preserving water for life
Business description (continued)
Water and the climate crisis
Water is a critical resource, as well as our most important ingredient. ButPreserving it is also a precious shared resource, which is coming under increasing pressure in many parts of the world. Preserving this critical resource, particularly in water-stressed areas, has beencrucial to our communities and business – and remains a strategic priority for many years. us, especially in water-stressed areas.
Our holisticupdated water stewardship strategy aims to address risks and drive towards a net positive‘Preserve Water for Life’ outlines how we’ll manage water impact in our priority water basins. It recognises the need for collective action and the many inter-dependencies between water and communities, our supply chain, climate changeoperations and communities, as well as advocate collective action to improve water outcomes. Our work on water efficiency continues, particularly in Africa, with another two water recovery plants in Nigeria – one recently commissioned and the environment.other being completed. As part of our water replenishment programme, this year we launched our first project in Turkey – conserving water through efficient drip irrigation for growing grapes, a core raw material of Yenì Raki. This will improve the climate resiliency of farmers while reducing our Scope 3 carbon emissions.
We know there is a connection between climate, water, people and regenerative agriculture. We continue to prioritise climate adaptation in the ‘Global South’ to support vulnerable local communities and strengthen the resilience of our supply chain, by addressing our most important climate risks. Our analysis shows we must do more on indirect water use, especially in our agricultural supply chains in water-stressed areas, which now include parts of Europe and Latin America (see map on page 62.) We are engaging in enhanced water efficiency and replenishment programmes in these areas. More investment in our regenerative agriculture programme is another key element of our integrated approach to climate adaptation.
Our grain-to-glass approach supports farmers, improves water-use efficiency in our own agricultural and production operations, replenishes water in water-stressedwater- stressed catchments and provides clean water to our communities. It also makes us strong advocates for moreIn India, Mexico and across Africa, we continue to take collective action forthrough supporting better water stewardship and increased water security.
Business description (continued)
Water in communitiesA key elementpart of our integrated strategyapproach is supporting communities by providingto provide access to clean water, sanitation and hygiene (WASH) in communities near our sites and in the water-stressed areas that supply our raw materials.
Our strategy contributes to SDG 6 (clean water and sanitation), while also helping to replenishincluding replenishing the water we use in our operations. We have supported WASH programmes for more than 20 years and, given the increased importance of WASH for individual and community wellbeing during the Covid-19 pandemic,This year we launched 15 additionalour first WASH projectsprogramme in Brazil. We reached 135,800 people with safe water and sanitation across Nigeria, Kenya, Tanzania, South Africa, during this year.Uganda, India and Ghana. In fiscal 23 we’ll also develop ways to ensure greater female representation in all WASH programmes.
We continue to recognise the importance of returning water to the environment safely and, at an equal or better quality than thea minimum, in compliance with regulations. As water we abstract,management relates to local ecosystems, we’ve adopted a context-based approach to managing wastewater informed by robust scientific assessment.
Leading and seek to improve our performance in this area. We describe our approach and performance in our ESG Reporting Index.
Committed to water stewardshipcollaborating
Advocacy and collaboration are essential to our ambitions for water stewardship. This year, as part of our collective action programme, we worked withcontinued to support the CEOUpper Tana Water Mandate,Fund in the catchment of our Tusker brewery in Nairobi and the Charco Bendito Water Action Hub in the Santiago Lerma basin in Mexico. We also initiated a new collective action collaboration in the Ganges basin near our Alwar distillery in Rajasthan; and continued to assess collective action opportunities as part of our engagement in the Water Resilience Coalition,Coalition. Twelve of our distilleries in Scotland have achieved formal water stewardship certification from the Alliance for Water Stewardship Wash4Work, CDP, WaterAid, and many local partners.
In December 2020, we agreed a renewed £4 million, five-year partnership with WaterAid to help transform lives with clean water, decent toilets and good hygiene in communities.
Supporting salmon; restoring Speyside
In collaboration with the Spey Fishery Board, in February we replaced a damaged weir and installed a fish pass in the river Dullan in Scotland – a part of the River Spey catchment that is crucial to the Scotch whisky industry.(AWS).
Accelerating to a low carbon world
Combatting climate changeWe started our decarbonisation journey in 2008, and its associated impacts – including those on water – is at the heart of our strategy. We have an ambitionwe aim to reach net zero carbon across our direct operations by 2030, harnessingusing 100% renewable energy everywhere we operate. This year we achieved a further 5.3% reduction in emissions from our direct operations. We have a clear path to follow. We have already halved the carbon emissions associated with our operations since 2008, and look beyond our own business, in our work to decarbonise our value chain and campaign for a low carbon world.
For our own operations, we are developing site-by-sitedeveloped decarbonisation roadmaps to carbon neutrality. Wereduce direct emissions from our existing sites and are investing in new carbon-neutral sites, such as our distillery for Crown Royal in Ontario, Canada and a new malt whisky distillery in China, which will operate using 100% renewable energy. We’re also working hard to achieve net zero carbon across our full supply chain (Scope 3), by 2050 or sooner, with an interim milestone to achievethe aim of achieving a 50% reduction by 2030. In line with our new targets, we
We are analysing the data and reporting methodology for our value chain emissions – which fall under our Scope 3 disclosuresemissions – including those from newrecent acquisitions. ThisSo far this has expanded the number of categories we report and has resulted in a significant increase in our reported Scope 3 emissions this year compared to our previous baseline (see page 66)52). Our Scope 3 footprint is largely based on currently available, standard emissions factors. As we work with our suppliers to gain more granular insights into our supply chain, we’ll further refine our footprint.
We willcan’t achieve net zero alone. In pursuit of our Scope 3 target, for example, we plan to partner with our suppliers in areas includingon renewable energy solutions, circular-designed products, increasing the recycled content of packaging and regenerative agriculture solutions in pursuitagriculture.
Our strong commercial growth has meant that we’ve increased our production volumes across many of our Scope 3 target.
Our approachmarkets. This has made it even more challenging to carbonmeet our absolute emissions reduction is described furthertargets – and meant that we’ve had to continue to use renewable energy certificates for direct energy, to supplement our decarbonisation projects. We’ve reviewed our decarbonisation roadmaps, looking at when projects will deliver emission reductions – and then adjusted our interim decarbonisation trajectory. We’ve also defined our key projects for the next three years, setting us up to meaningfully accelerate decarbonisation in Responding to climate-related risks on pages 84-97.the second half of the decade.
Pursuing science-based targets
Business description (continued)
We were an early adopterA move to biomass
Tusker and Kisumu breweries in Kenya are in the final stages of absolute rather than relative reductionscommissioning new biomass facilities, using sustainable local by-products to produce renewable energy. Our biomass investment in East Africa, and other projects like it, are critical enablers in reducing GHG emissions and using 100% renewable energy across all our carbon emissions, setting both our 2020 and 2030 targets in line with the principles of the Science Based Targets initiative.direct operations by 2030.
Performance against all our 'Society 2030: Spirit of Progress' goals is described on pages 64-67.
BecomingBeing sustainable by design
We have made important stridesWith the climate in crisis, we’re committed to reducing our environmental impact over decades of focus on waste, recyclingfootprint by reducing packaging and packaging. We aim to keep going until we have reduced our impact everywhere: cutting down packaging, increasing recycled contentcontent. We’re focussed on innovations that improve circularity and eliminating waste.reduce waste – for our business and the planet.
PartnershipsGiven we purchase much of our packaging materials, effective partnerships will be critical. Initiatives such ascritical to achieving our newambitions. One way we’re doing this is through Diageo Sustainable Solutions, programme, which enables us towhere we partner with innovators, to share ideas for growing brands sustainably, help us work together with customers, suppliers NGOs, research institutions and governmentsresearchers to help create a truly circular economy.identify and accelerate breakthrough technological solutions that address our biggest sustainability challenges, such as how to make packaging sustainable by design. We’re also improving internal awareness of the impact of different material choices through our newly defined Sustainable Packaging Strategy and internal guidance documents, which will build knowledge and capacity across the business.
Innovation drives progressReducing our footprint
In April 2021 we successfully piloted the lowest carbon footprint glass bottles ever produced for a Scotch whisky brand. Working with glass manufacturer Encirc and research and technology experts Glass Futures, we produced 173,000 bottles forWe continue to innovate to meet our Black & White brand with 100% recycled glasscommitments: thinking differently about waste, and using waste-based biofuel-powered furnaces. This reduced the carbon footprintright amount of the bottle by upright material to 90%.protect our product, with end-of-life considerations in mind. For example, in April 2022 we announced the phased removal of cardboard gift boxes from our premium scotch portfolio.
WorkingCollaborating with suppliers and farmers
OurWith a supply chain that connects us to communities all overaround the world, where we can have a positive social and environmental impact by creating economic opportunity, promoting human rights and improving agricultural and environmental practices.
This year we engaged our top 200 suppliers in various elements of our 2030 ambition: from providing DRINKiQ training, to collaborating on inclusion and diversity initiatives, to partnering on manufacturing pilots that delivered low carbon glass bottles.
Business description (continued)
We continue to work through ourOur Partnering with Suppliers standard which sets our minimum social, ethical and environmental expectations. We have updated it this year to reflectexpectations for our 'Society 2030 Spirit of Progress' ambition.suppliers. We also work through AIM-PROGRESS, a forum of leading consumer goods companies, and the not-for-profit organisation SEDEX. Our approach is described in more detail on our website. This year we have started to develop carbon reduction toolkits for our smallholder farmers.
Our Sustainable Agriculture Guidelines (SAG) set out the standardsprinciples we expect of suppliers of agricultural raw materials to adopt to improve on-farm sustainability. We work with our suppliers and farmers across our supply chains to implement sustainable and regenerative practices, and to increase our procured volumes of third-party verified and sustainably sourced raw materials. We use the Sustainable Agriculture InitiativeRaw materials are considered sustainably sourced if they are covered by sustainability standards and certifications equivalent to SAI Platform’s Farm Sustainability Assessment (FSA) tool,. Or our suppliers can demonstrate continuous improvement on the most relevant risks to their crops, and investment in farm-level programmes such as: emissions and post-harvest loss reduction, soil health improvements and adoption of regenerative agriculture practices. We are also working with FSA’s bronze rating (or benchmarked equivalent standard) being our minimum requirement. We work directlysuppliers to improve the traceability of raw materials.
Guinness – in partnership with nature
This year we launched one of the most ambitious regenerative agriculture pilots to take place in Ireland; a three-year, farm-based programme that aims to highlight opportunities for reducing the carbon emissions of barley production for Guinness. We’re taking an integrated landscape approach, working with farmers on sustainable agriculture projects, and we aimland managers to source locally where practicable. We also assist smallholder farmers, including providing access to training, seeds, fertilisersidentify and technology.implement regenerative practices that optimise carbon, water and biodiversity-based outcomes, while increasing farm resilience.
Blending traditional and modern practices
In our agricultural operations in Mexico we are putting our sustainable agriculture ambitions into action as we aim to significantly expand the number of our agave plants for our tequila brands. We use a blend of traditional and modern practices to care for our plants – including innovative drone technology, which currently is used to count the number of plants we have. In the future we plan to use this technology to analyse plant health and apply fertiliser with precision so that we can minimise our impact on the surrounding soil.
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 grew by 8.3%, driven by
strong organic growth, partially offset
by unfavourable foreign exchange.
| Reported operating profit increased 74.6%,
primarily due to a significant reduction in
exceptional operating items compared to fiscal
20, and growth in organic operating profit. This
was partially offset by the negative impact from
adverse exchange rate movements.
| Basic eps increased 53.7 pence due to
significantly lower exceptional items after tax
and an increase in organic operating profit. This
increase was partially offset by the impact from
unfavourable exchange and higher tax charges.
|
| | | | | |
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 £3,654
million, an increase of £1,334 million compared
to the prior period. This was driven by
an increase in operating profit, working capital
management and receipt of a delayed dividend
from Moët Hennessy. Working capital benefitted
from a large increase in creditors relative to the
end of June 2020, when the creditor balance was
particularly low as a result of reduced volumes
and lower discretionary spend. Creditors
increased in fiscal 21 due to improved business
performance and increased investment in
marketing. Debtors and inventory
levels also increased but to a lesser extent.
| The return on closing invested capital of 33.2%
for the year ended 30 June 2021, calculated as
profit for the year divided by net assets as of 30
June 2021, increased by 1600bps driven by
higher profit after tax.
|
Business description (continued)
Monitoring performance and progress
| | | | | | | | | | | | | | | | | |
Financial indicators | Financial indicators | Financial indicators |
Organic net sales growth (%) [EG] [R] | 16.0 | % | Organic operating profit growth (%) [EG] [R] | 17.7 | % | Earnings per share before exceptional items (pence) [EG] [R] | 117.5p |
| | | | | | | | |
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 growth of 16.0%, following a decline in fiscal 20, reflects organic volume growth of 11.2% and positive price mix of 4.8%. All regions grew organic net sales. | Organic operating profit grew 17.7% ahead of net sales, driven by growth in all regions except Europe and Turkey. | Eps before exceptional items increased 8.1 pence, primarily driven by an increase in organic operating profit, partially offset by unfavourable exchange and increased tax. |
More detail on page 100 | More detail on page 100 | More detail on page 101 |
Net sales growth (%) [REP]
Definition
Sales growth after deducting excise duties.
Business description (continued)
Organic net sales growth (%)1 [EG] [CVC] [R] [K] | | | | | | | | | | | | | | | | | |
Non-financial indicators | Non-financial indicators | Non-financial indicators |
Positive drinking [CT] [EP] [R] | Inclusion and diversity3 [CVC] [CT] [EP] [R] | Carbon emissions4 [CVC] [CT] [EP] [R] (1,000 tonnes CO2e) | 481 | |
By 2030 educate 10 million young people, parents and teachers on the dangers of underage drinking. | 210,443 Total to date: 1.2m2 | Percentage of female leaders globally | 42 | % | 2021: 481 2020: 507 2019: 552 |
By 2030 promote changes in attitudes to drink driving, reaching five million people. | 9,859 | | Percentage of ethnically diverse leaders globally | 37% |
By 2030 reach one billion people with dedicated responsible drinking messages | 367m | | |
↑21.4%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 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.
Performance
Reported net sales grew 21.4%, driven by strong organic growth. An unfavourable foreign exchange impact was partially offset by a hyperinflation adjustment in respect of Turkey. Organic net sales growth of 21.4% reflects organic volume growth of 10.3% and 11.1 percentage points of positive price/mix.
More detail on page 95
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 133-144
| | | | | | | | |
Definition | Definition | Definition |
We report against three indicators for positive drinking as defined above. | The percentage of women who are in Diageo leadership roles and the percentage of ethnically diverse individuals who are in Diageo leadership roles. | Absolute volume of Scope 1 and 2 carbon emissions, in 1,000 tonnes. |
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. | An inclusive and diverse culture is central to our purpose of ‘Celebrating life, every day, everywhere’. As well as being the right thing to do, having the best and most diverse talent drives innovation and commercial performance. | 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. |
Performance | Performance | Performance |
We launched a new approach to positive drinking in 2018 and we refreshed our targets in November 2020 as part of the launch of our ‘Society 2030: Spirit of Progress’ strategy. | This year 42% of our leadership roles were held by women, compared with 39% last year. This year we measured the percentage of ethnically diverse individuals in Diageo leadership roles for the first time. | Carbon emissions reduced by 5.1% in 2021. Ongoing displacement of fossil fuels and energy efficiency gains are the principal drivers of the reductions. |
More detail on page 64 | More detail on page 64 | More detail on page 66 |
Business description (continued)
| | | | | | | | | | | | | | | | | |
Financial indicators | Financial indicators | Financial indicators |
Free cash flow (£ million)1 [EG] [R] | 3,037m | Return on average invested capital (ROIC) (%) [CVC] | 13.5 | % | Total shareholder return (%) [CVC] [R] | 32% |
| | | | | | | | |
Definition | 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 increased by £1,403 million to £3,037 million, primarily driven by an increase in operating profit, working capital management and higher dividends from joint ventures and associates. | ROIC increased 113bps against the prior comparable period driven mainly by organic operating profit growth, partially offset by increased tax and unfavourable exchange. | TSR was up 32% over the past 12 months driven by the higher year on year share price. |
More detail on page 102 | More detail on page 103 | |
Business description (continued)
| | | | | | | | | | | | | | | | | |
Non-financial indicators | Non-financial indicators | Non-financial indicators |
Water efficiency5 (l/l) [CVC] [CT] [EP] [R] | 4.30l/l | Employee engagement6 (%) [CT] [EP] | 81% | Health and safety (lost-time accident per 1,000 full-time employees) [CT] [EP] | 1.03 |
| | | | | | | | |
Definition | Definition | Definition |
Ratio of the amount of water required to produce one litre of packaged product. | Measured through our Your Voice
survey; includes metrics for employee
satisfaction, advocacy and pride.7
| 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. |
Why we measure | Why we measure | Why we measure |
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. | 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. | Health and safety is a basic human right: everyone has the right to work in a safe and healthy environment, and our Zero Harm philosophy is that everyone should go home safe and healthy, every day, everywhere. |
Performance | Performance | Performance |
Water efficiency improved by 7.7% compared to 2020. This resulted from a fully commissioned water recovery and reuse plant at Uganda Brewery and overall improved water use rates in Nigeria and at a number of other locations. | This year 85% of our people completed our Your Voice survey. 81% were identified as engaged. 89% declared themselves proud to work for Diageo, 81% would recommend Diageo as a great place to work and 74% were extremely satisfied with Diageo as a place to work. | After sustaining less than one lost-time accident (LTA) per 1,000 employees in 2019 and 2020, this year the LTA frequency rate increased from 0.60 to 1.03, largely due to an increase in incidents at our sites in Europe. This year’s rate of 1.03 is broadly in line with our performance prior to 2020. The severity rate of these LTAs, which measures the seriousness of the incident and time off work, reduced by 11.9% globally. |
More detail on page 65 | More detail on pages 41-42 | More detail on pages 68-70 |
Our strategic outcomes:
[EG] Efficient growth [CT] Credibility and trust
[CVC] Consistent value creation [EP] Engaged people
[R] Remuneration: Some KPIs are used as a measure in the incentive plans for the remuneration of executives. See our Directors’ remuneration report from page 183 for more details.
1. For2.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 driversdrivers.
2.
Operating profit growth (%) [REP]
Definition
Operating profit growth including exceptional operating items.
Organic operating profit growth (%)1 [EG] [CVC] [R] [K]
↑26.3%
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 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.
Performance
Reported operating profit increased 18.2%, primarily driven by growth in organic operating profit. This was partially offset by the negative impact of exceptional operating items, which were mainly due to non-cash impairments related to India and Russia.
More detail on page 96
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 [EG] [CVC] [R] [K]
151.9p
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. It is a key measure for our shareholders.
Performance
Basic eps increased 26.4 pence, primarily driven by organic operating profit growth, partially offset by higher tax and exceptional items, primarily due to non-cash impairment charges related to India and Russia. Basic eps before exceptional items increased 34.4 pence.
More detail on page 97
Business description (continued)
Net cash from operating activities(£ million) Definition
Net cash from operating activities comprises the net cash flow from operating activities as disclosed on the face of the consolidated statement of cash flows.
Free cash flow (£ million)1,2 [EG] [CVC] [R] [K]
2,783m
Definition
Free cash flow comprises the net cash flow from operating activities aggregated with the net cash received/paid for working capital loans receivable and other investments, and the net cash expenditure paid for property, plant and equipment, and computer software.
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.
Performance
Net cash from operating activities increased by £281 million to £3,935 million. Free cash flow decrease of £254 million was driven by the impact of lapping a strong working capital benefit in fiscal 21 and increased capex, partially offset by a strong growth in operating profit.
MORE DETAIL ON PAGE 98
Return on closing invested capital (%)
Definition
Profit for the year divided by net assets at the end of the financial year.
Return on average invested capital (ROIC) (%)1 [CVC] [K]
16.8%
Definition
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 net post employment benefit assets/liabilities, net borrowings and non-controlling interests.
Why we measure
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.
Performance
ROIC increased 331bps, driven mainly by organic operating profit growth, partially offset by increased tax.
MORE DETAIL ON PAGE 99
Our strategic outcomes:
[EG] Efficient growth [CVC] Consistent value creation [CT] Credibility and trust [EP] Engaged people [R] Remuneration: Some KPIs are used as a measure in the incentives plans for the remuneration of executives. See our Directors’ remuneration report from page 176 for more detail. [K] KPI: Key Performance Indicator [REP] Reported
Total shareholder return (TSR) (%) [CVC] [R] [K]
4%
Definition
Percentage growth in the value of a Diageo share (assuming all dividends and capital distributions are re-invested).
Why we measure
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
TSR was up 4% over the past 12 months driven by the higher year-on year-share price.
Business description (continued)
Positive drinking [CT] [EP] [R] [K]
Number of people educated on the dangers of underage drinking through a Diageo supported education programme 607,374 (2021: 210,443) Total to date 1.81ml
Definition
Number of people educated on the dangers of underage drinking through a Diageo supported education programme.
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.
Performance
This year we implemented SMASHED Live in 15 countries and SMASHED Online in 18 countries. We educated 607,374 young people about the dangers of underage drinking.
More detail on page 50
Water efficiency2 [CVC] [CT] [EP] [R] [K] 4.13
Definition
Ratio of the amount of water required to produce one litre of packaged product.
Why we measure
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.
Performance
Water efficiency improved by 3.7% compared to 2021. This resulted from fully commissioned water recovery and reuse plants in Kenya and Uganda, and overall improved water use rates at a number of other locations.
More detail on page 51
Inclusion and diversity [CVC] [CT] [EP] [R] [K]
Percentage of female leaders globally 44% (2021: 42%)
Percentage of ethnically diverse leaders globally 41% (2021: 37%)
The percentage of women and the percentage of ethnically diverse individuals who are in Diageo leadership roles.
Nurturing an inclusive and diverse culture is the right thing to do, and having the most diverse talent drives commercial performance.
This year 44% of our leadership roles were held by women, compared with 42% last year and 41% of our leaders were ethnically diverse, compared with 37% last year.
More detail on page 50
Employee engagement4 (%) [CT] [EP] [K]
82%
Measured through our Your Voice survey; includes metrics for employee satisfaction, advocacy and pride.3
Employee engagement is a key enabler of our performance. The survey allows us to measure how far employees believe we are living our values.
This year 88% of our people completed our Your Voice survey. 82% were identified as engaged. 90% declared themselves proud to work for Diageo, 82% would recommend Diageo as a great place to work and 76% were extremely satisfied with Diageo as a place to work.
More detail on page 30
Carbon emissions2 447 [CVC] [CT] [EP] [R] [K]
Absolute volume of Scope 1 and 2 carbon emissions, in 1,000 tonnes.
Reducing our carbon emissions is a significant part of our efforts to mitigate climate change.
Carbon emissions reduced by 5.3% in 2022. The principal drivers of this were energy efficiency gains and the ongoing displacement of fossil fuels, including the use of renewable energy certificates.
More detail on page 52
Health and safety (LTA) [CT] [EP] [K] 0.92
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.
Health and safety is a basic human right; our Zero Harm philosophy is that everyone should go home safe and healthy, every day, everywhere.
This year’s rate of 0.92 is an improvement on fiscal 21 performance. The severity rate of these lost-time accidents (LTAs), which measures the seriousness of the incident and consequent absence from work, reduced by 13.9% globally.
More detail on page 54-56
1. The baseline year for our ‘Society 2030: Spirit of Progress’ goals is 2020 unless otherwise stated. For our target to educate 10 million young people, parents and teachers on the dangers of
underage drinking the baseline year is 2018.
3.In this section this year we have included two new non-financial key performance indicators on inclusion and diversity. These two measures demonstrate progress against our strategic priority to champion inclusion and diversity, which is also a core pillar of our ‘Society 2030: Spirit of Progress’ strategy. We have reported on the percentage of female leaders globally since 2016, the percentage of ethnically diverse leaders globally is being reported on for the first time this year.
4.2. In accordance with Diageo’s environmental reporting methodologies and, where relevant, WRI/WBCSD GHG Protocol, data for the baseline year 2020 and for the threetwo years in the period
ended 30 June 2019 has been restated where relevant.relevant
5. In accordance3. Last year we updated the way we measure employee engagement in our Your Voice survey to bring it in line with Diageo’s environmental reporting methodologies, data forstandard practice. When the baseline year 2020 and each of2019 employee engagement index score
from the Your Voice survey is recalculated based on the three yearsquestions we used in 2021 (satisfaction, advocacy and pride), as opposed to the period ended 30 Junefour we used in 2019 has been restated where relevant.(satisfaction,
6.advocacy, pride and loyalty), the difference is a one percentage point increase.
4. Because of the Covid-19 pandemic, in 2020 we did not run a full Your Voice survey. Instead we used a pulse survey tool to listen to employees’ feedback and learn from their experiences
of working during the pandemic. We therefore do not have a comparable employee engagement metric for 2020.
7. This year we updated the way we measure employee engagement in our Your Voice survey to bring it in line with standard practice. When the 2019 employee engagement index score from the Your Voice survey is recalculated based on the three questions we used in 2021 (satisfaction, advocacy and pride), as opposed to the four we used in 2019 (satisfaction, advocacy, pride and loyalty) the difference is a one percentage point increase.
Business description (continued)
Sustainability performance
Performing against our 2030 targets1
| | | | | | | | | | | | | | | | | | | | |
Target by 2030 | | KPIFiscal 22 progress | | Progress to date | | Commentary |
Promote positive drinking | | |
Champion health literacy and tackle harm through DRINKiQ in every market where we live, work, source and sell (where it is legally permissible) SDG alignment: 3.4; 3.5; 17.16 | | Number of markets that have launched DRINKiQ | |
29 | | We launched an updated versionOur enhanced DRINKiQ.com platform provides facts about alcohol, the effects of drinking on the mind and the body, and the impact of harmful drinking on individuals and society. This year we reached our 2030 target of launching DRINKiQ platformin every market where we live, work, source and sell, covering a total of 21 markets, 73 countries and 23 languages. Going forward we aim to drive traffic to and engagement with this year, with comprehensive information on alcohol and health and a new screening tool to identify whether users are drinking at higher risk levels. Byresource among adults above the end of fiscal 2021, we had 33 sites live in 29 geographies. Some countries have sites in more than one language, including the United States, where DRINKiQ is available in English and Spanish.legal purchase age. |
| 6 | | |
Scale up our SMASHED partnership, and educate 10 million young people, parents, and teachers on the dangers of underage drinking SDG alignment: 3.5; 12.8; 17.16 | | Number of people educated on the dangers of underage drinking through a Diageo supported education programme | |
210,443
| | SMASHED beganis our flagship underage drinking programme, developed in partnership with Collingwood Learning. It started as a live theatre-based education programme in 2005. We sponsored the development of2005, and we developed a digital version, SMASHED Online, thisin 2021, which is now live in 23 countries. This year to include interactive activities that help educatewe further extended the global scale of the programme, implementing SMASHED Live in 15 countries and launching SMASHED Online in 18 countries. In total, SMASHED educated 607,374 young people about the dangers of underage drinking. Where Covid-19 restrictions allowed, we ran SMASHED Live in a number of countries and this year we launched SMASHED Online in five countries, reaching 35,420 people so far. Surveydrinking, with survey data showsshowing that of the 210,443 educated this year, 195,544 or 93%491,128 confirmed changed attitudes on the dangers of underage drinking following participation in a Diageo supported educationthe programme. We haveWe’ve educated a total of 1.21.81 million people since our baseline year of 2018. |
| 607,374 | | |
Extend our UNITAR partnership and promote changes in attitudes to drink driving reaching five million people SDG alignment:3.5; 3.6; 12.8; 17.16 | | Number of people educated about the dangers of drink driving | | driving
9,859 | | This year we educated 9,859 people about the dangers of drink driving. We developed an innovative new drink drive online module which aims to change attitudes about drink driving. We launched ‘The ‘Wrong Side of the Road’ initiativeis our innovative anti-drink-drive experience, designed to change the attitudes of people to drink driving. Launched in Great Britain2021, the experience is live in May 2021. While Covid-19 delayed its roll out in many markets, we aim24 countries, reaching 500,415 people this year. ‘Wrong Side of the Road’ allows users to scalelearn from former impaired drivers through pre-recorded videos to understand the programme quickly overeffects of alcohol and driving, as well as the next 12 months.consequences of making the decision to drive while impaired. We have reached a total of 510,274 people with our programmes since 2020. |
| 500,415 | | |
Leverage Diageo marketing and innovation to make moderation the norm – reaching one billion people with dedicated responsible drinking messaging SDG alignment: 3.5; 12.8; 17.16 | | Number of people reached with responsible drinking messages from our brands | |
367m | | We reached 367456 million people this year, reflecting both significant progress towards our 2030 goalgoal. Notable campaigns include the Captain Morgan anti-drink-drive campaign ‘A mate doesn’t let a mate drink drive’ in Great Britain, developed in collaboration with Think!. In the United States, Crown Royal, Captain Morgan and enhanced data captureSmirnoff had responsible drinking messaging and measurement.game activations throughout the National Football League (NFL) season. During the festive period we accelerated brand-led responsible drinking campaigns to reach more people. This year we also began to explore the role non-alcoholic products play in offering consumers more choice, thus helping them moderate their alcohol intake. We moved promoted our 0.0 non-alcoholic spirits to a more systemic processtravellers across our Global Travel Channel with activations of measurement led by our media partners OMG, leading0.0 non-alcoholic spirits. We’ll use insights from our research into perceptions of non-alcoholic products to increased data capture, which has driven a significant increase ininform how we reach our reported performance.Setting market-level targets helped drive progress. A leading contribution came from Latin America, with Mexico delivering a cross-brand campaign from Smirnoff, Johnnie Walker, Don Julio and Black & White which reached over 462030 goals to promote moderation.
|
| 456 million consumers. | | |
Champion inclusion and diversity | | |
Champion gender diversity with an ambition to achieve 50% representation of women in leadership roles by 20302 20302 SDG alignment: 5.5; 8.1; 10.2; 10.4 | | Percentage of female leaders globally | |
42% | | We want to continue to build our reputation as an inclusive employer committed to advancing efforts to achieve gender equality. Each of our markets has stretching multi-year inclusion and diversity plans, which include a focus on developing a strong pipeline of female talent. We have exceeded our previous female leadership representation goals (35% by 2020 and 40% by 2025) and have set a further ambitious goal, aiming for 50% female leadership representation by 2030.empowering women to flourish in all roles. This year 42%44% of our leadership roles were held by women.women, up from 42% in 2021. Once again we’ve received external recognition – notably our fifth consecutive year in the Bloomberg Equality Index, where we see year-on-year positive shifts, and a number 14 ranking in the FTSE Women Leaders Review, recognising our commitment to improve the representation of females in Board and leadership roles. |
| +2ppt | | |
Champion ethnic diversity with an ambition to increase representation of leaders from ethnically diverse backgrounds to 45% by 2030220302 SDG alignment: 10.2 10.2; 10.4 | | Percentage of ethnically diverse leaders globally | |
37% | | We have identified ethnicity asEthnicity is a global inclusion and diversity priority, defining similarly ambitious goals forpriority. We’re deepening ethnic diversity as we have for gender. This year we created and launched a progressive Ethnic Diversity Framework to support our markets in creating plans that cover talent representation and development, supplier ethnic diversity and inclusive marketing. We aim to increase representationat every level of leaders fromour business, with 41% of our leadership population, including our Executive Committee, identifying as being ethnically diverse, backgrounds to 45% by 2030. Currentlyup from 37% in 2021. We collect voluntary ethnicity data collection is live in 6164 countries where it is legally permissible. Inlocal legislation allows. Across these countries, over 80%82% of employees acrossat all levels have disclosed their ethnicity information confidentially. 37% ofconfidentially and within our leadership roles are currently held by people from ethnically diverse backgrounds.population, 96% have disclosed their ethnicity. |
| +4ppt | | |
We will use our creative and media spend to support progressive voices, measuring and increasing the percentage spend year on year SDG alignment: 5.5; 5B; 10.2; 10.4 | | Measurement and evaluation framework under development | This year we updated our Progressive Portrayal framework to be at the forefront of breaking stereotypes in advertising for gender, race, sexuality and age, and have used the framework to train nearly 2,000 internal and external people so far.
| | | We continue to break boundaries and work with inclusive talent that reflects our broad consumer base – for instance with Guinness’s Never Settle campaign, which launched in May 2021 to redress the imbalance of coverage of women’s rugby.We continue to workpartner with our advertising agencies and partners to ensure our creative teams are as diverse as the consumers who enjoy our products. We areconsumers. We’re in the thirdfourth year of collecting insight about the makeupmake-up of our agency workforce and have now gone beyond gender to also look at ethnicity and age.workforce. We continue to partner with Creative Equals globally on the Creative Comeback programme and work with the Unstereotype Alliance.
We have committed to a multi-million sterlingcommit media investment over the next two years to media platforms and with publishers whothat are working to make mainstream media both more diverse and more inclusive. We are currently developingFor example, we have established a robust measurement and evaluation framework for this target and will be reporting quantitatively against itProgressive Programming strategy with Channel 4 in the future. United Kingdom, where we contextually support progressive content by picking our programming investment across linear TV and its on demand platform. We continue to make sure our advertising reaches a broad consumer base, including those living with disabilities. For example, Tusker Lager – a local jewel in East Africa – partnered with a media house that broadcasts exclusively in sign language to ensure the Tusker Milele campaign was translated to audiences during the Olympic Games. |
| | | |
1. All baselines for our 'Society‘Society 2030: Spirit of Progress'Progress’ 2030 targets and ambitions are 2020, unless otherwise stated
2. Statements on representation areshould be considered an ambition for Diageo, and should not be considered a target
Business description (continued)
| | | | | | | | | | | | | | | | | | | | |
Target by 2030 | | KPIFiscal 22 progress | | Progress to date | | Commentary |
Champion inclusion and diversity continued | | |
Accelerate inclusion and diversity in our value chain, measuring and increasing the percentage of spend with Diageo suppliers from femalediverse-owned and minority owneddisadvantaged businesses year on year2 SDG alignment: 5.5,5.5; 5B;10.2;10.4
| | Percentage of suppliersspend with female and minority ownership
N/A
| We aim to build a robust and sustainable supplier base that reflects the regions in which we operate. We are measuring and increasing the percentage of diverse-owned and -operated suppliers,disadvantaged businesses | | | | This year on year. We provide equal opportunities to all suppliers to compete for our projects. We are developingwe launched our Supplier Diversity programme globally and announced an ambitious goal to increase the share of our global spend with diverse-owned and disadvantaged businesses to 15% by leveraging2030.We have partnered with peer companies and advocacy organisations, as well as engaging our markets, to identify underrepresented groups at a regional level. We are confident that this will drive inclusion and diversity throughout our value chain – creating employment opportunities, economic advancement and greater representation in the best practice frommarginalised communities of regions where we source.At the end of fiscal 21, we surveyed 1,500 suppliers, representing around 80% of our workglobal spend, to establish a baseline of our diverse suppliers. We’re using this baseline to track the progress of diverse spend across our business.We’re proud that, in North America over the past six years (wherefirst year of the programme, we more than doubledhave increased our spend with diverse suppliers)businesses by more than 65% – and extending the programme and targets to all markets. We aim to report on this next year. We are also looking at ways to work collaboratively with suppliers and agencies to drive greater diversity within their organisations. We are currently developinghave been awarded gold by a robust measurement and evaluation framework for this ambition and will be reporting quantitatively against itpanel of leading advocacy organisations in the future.Top Global Champion Awards for Supplier Diversity and Inclusion. |
| 4.8% | | |
Provide business and hospitality skills to 200,000 people, increasing employability and improving livelihoods through Learning for Life (L4L) and our other skills programmes
SDG alignment: 4.4; 8.1; 8.6;10.2; 17.16 | | Number of people reached through L4L and other skills programmes | |
8,631
| | This year we reached 8,63122,230 people through our business and hospitality skills programmes. Covid-19 had a devastating effect on the hospitality sector, but we were able to continueWe continued to deliver our L4L programme where it was most needed. We pivoted our programmes to workin person and online, working in partnership with our network of charities and training providers,providers. We’ve engaged a specialist learning partner for social impact programmes to allow us to continue to provide effective support. The successenhance our training materials, platforms, and measurement and evaluation of the programme in helping to build careers in hospitality was highlighted with Bianca Lima, a 2019 L4L graduate becoming the champion of cocktail competition Diageo World Class™ in Brazil.our skills programmes. |
| 22,230 | | |
Through the Diageo Bar Academy we will deliver 1.5 million training sessions, providing skills and resources to help build a thriving hospitality sector that works for all SDG alignment: 4.4; 8.1; 8.6; 10.2; 17.16 | | Number of training sessions delivered through Diageo Bar Academy | |
113,447
| | We delivered 113,447over 190,000 skills training sessions to hospitality industry workers (owners,– owners, managers, bartenders and waiting staff)staff – through Diageo Bar Academy (DBA) this year. DBA has various waysdelivers a variety of courses, both online and in-person. This year, as pandemic restrictions eased, we returned to deliver courses (physicalface-to-face training in addition to virtual training, e-learnings and master classes). This year, virtual training became increasingly important and enabledallowing us to continue to reach people at scale and upskill people.with more intensive, hands-on learning experiences. We modified many of our courses to help address the unique challenges of continuedthe industry lockdowns and re-openings, including training for businesses on adapting their infrastructure to keep employees and customers safe.re-opening. DBA also supports the development of a more diverse and inclusive hospitality sector:sector; we have increasedcontinue to increase the participation of women, in DBA training, and run women-only training sessions in Africa and India. Our research this year showed that 84% of people surveyed said DBA presents a modern and progressive view of the bar community. In addition, 68% of women surveyed agreed that DBA actively supports the advancement of women in the industry. |
| 190,383 | | |
Ensure 50% of beneficiaries from our community programmes are women, and that our community programmes will beare designed to enhance ethnic diversity and inclusion of underrepresented groups SDG alignment: 5.5; 5A | | Percentage of beneficiaries of our community programmes who are women | |
51%
| | This year 51%64% of beneficiaries of our L4L programme were women, up from 51% last year. We have now defined our approach to ensuring women are proportionately represented in our community water and smallholder farmer programmes, were women. Currentlywhich we’ll start implementing next year with the support of our global NGO partners WaterAid and CARE International UK. L4L is gender inclusive by design, which means we include female beneficiaries from registeredput in place measures that reduce barriers to women accessing the skills, programmes, whereresources and opportunities we can accurately trackprovide. For example, we offer training at times of the gender of participantsday that don’t clash with childcare responsibilities, and also make it available online and on-demand. This year we conducted research to understand the barriers to ethnic minorities in hospitality, which led us to update L4L. The programme is also partnering with the Diageo Bar Academy to tackle barriers through their registrations. In the future, we plantraining, communications and customer partnerships – helping to use qualitative impact assessment protocols (QUIP) where it is currently challenging to accurately measure female beneficiaries, such ascreate an inclusive and thriving hospitality industry that works for water sanitation and hygiene programmes. We are also researching the best way to support people from ethnically diverse backgrounds in the hospitality sector.all. |
| 64% | | |
Pioneer grain-to-glass sustainability: Preserve water for life |
Reduce water use in our operations with a 40% improvement in water use efficiency in water-stressed areas and 30% improvement across the company SDG alignment: 6.46.4; 17.16 | | Percentage improvement in litres of water used per litre of packaged product 7.8% in water stressed areas | |
7.7% | | WeAcross the company, we delivered a 7.7%3.7% improvement in water efficiency this year and, cumulatively, water-use rates have improved by over 53% since10.8% versus our 2020 baseline.In water-stressed areas, water stewardship programme began in 2007.efficiency improved by 7.8% and 14.9% versus our 2020 baseline. In addition, the volume of water we recycled or reused in our own production ancillary processes was 843,115m3,1,132,367m3, representing 5%6.5% of total water withdrawals. The Our Africa region’s water stewardship work has been particularly successful this year. Key water recycling and reuseimpressive. Alongside three existing facilities are now operational in Kenya and Uganda, and we have begun constructionbegan delivering water efficiency improvements at our site in Lagos, Nigeria through a water recovery and recycling facility. This year we used 21,896m3 of water recycling facilities in both our Nigerian sites. This year, 33,830m3 of water were used for agricultural purposes on land under our operational control. We report this separately from water used in our direct operations.operations and do not include it in our water efficiency calculations. |
| 3.7% across the company | | | |
Replenish more water than we use for our operations for all of our sites in water-stressed areas by 2026 SDG alignment: 6.1; 6.2; 6.6;6B; 15.1 | | Percentage of water replenished in water-stressed areas | |
12.7% | | Our refreshed water replenishment programme had a strong year despite the challenges of implementation in areas under lockdown. We exceededIndia, where we completed 10 projects across 12 villages. This helped us to exceed our target for the year, completing, ain total, of 2034 projects in nine10 countries which replenished 583,656m3– and generating the annual capacity to replenish 1,058,822m3 of water, representing 12.7%water. This represents 15.3% of our target for 2026.Given the importance2026 and, cumulatively (fiscal 16 to fiscal 22), represents replenishing 43.2% of handwashing during the Covid-19 pandemic, we prioritised WASH projects (see below), but we also completed tree planting, dam desilting, drip irrigation and aquifer rechargeour estimated fiscal 26 volume. This year, replenishment projects in water-stressed catchments where we operate or where we source raw materials.materials included tree planting in Kenya; access to clean water and sanitation in Ghana, Uganda and Nigeria; aquifer recharge in India; and drip irrigation in Turkey and Seychelles.
|
| 15.3% | | |
1. Statements on representation should be considered an ambition for Diageo, not a target
Business description (continued)
| | | | | | | | | | | | | | | | | | | | |
Target by 2030 | | Fiscal 22 progress | | Progress to date | | Commentary |
Pioneer grain-to-glass sustainability: Preserve water for life continued |
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 SDG alignment: 6.1; 6.2; 6.6; 6A; 6B; 15.1 15.1; 17.16 | | Percentage of water-stressed markets with investment in WASH | |
89% | | The Covid-19continuing pandemic mademakes it an especially important year for implementing WASH projects in vulnerable communities. As part of our replenishment programme we completed 1322 WASH projects in seveneight countries: Tanzania,Brazil, India, Nigeria, Ghana, Uganda, Ethiopia, Kenya, Tanzania and South Africa.54,691 In total, 135,800 people benefitted from these WASH projects this year. We have now implemented WASH projects in eight of the nine water-stressed markets (countries) where access to clean drinking water and sanitation is a risk. |
1. All baselines for our 'Society 2030: Spirit of Progress' 2030 targets and ambitions are 2020, unless otherwise stated
2. Statements on representation are an ambition for Diageo and should not be considered a target
Business description (continued)
| 88.9% | | | | | | | |
Target by 2030 | KPI | Commentary |
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 SDG alignment: 6.1; 6.2; 6.5; 6.6; 6A; 6B6B; 15.1; 17.16 | | Percentage of priority water basins with collective action participation | |
15% | | We have built on our history of participation in collective action by creating a new,Our structured collective action programme that is fundamental to improving water security in our priority water basins, and how we’re adapting to climate change risk strategies. Our assessmentchange. Last year we identified 13 priority water basins in 11 countries on four continents,regions where we operate, based on water risk and strategic importance to our business. We have developed detailed guidance on collective action for our markets, consulting with key external stakeholders andThis year we have made our guidelines open source to encourage adoption by more companies. We are participatingengaged in collective action initiatives in another two priority basins in India (in the Ganges basin) and Kenya (in the Upper Tana basin), which means in total we’re participating in four initiatives in four of our 121 priority water basins. In the Santiago/Lerma basin in Mexico we joined a new initiative called ‘Charco Bendito’ comprising many food and beverage companies. In the Spey basin in Scotland we continued our support for the multi-stakeholder Spey Catchment Initiative. |
| 33.3% | | |
Pioneer grain-to-glass sustainability: Accelerate to a low carbon world |
Become net zero carbon in our direct operations (Scopes 1 and 2)2,3 SDG alignment: 7.2; 7.3; 12.6; 13.3 | | Percentage reduction in absolute GHG (ktCO(ktCO2e)2e) | |
5.1%
| | Diageo’s total direct and indirect carbon emissions (location/gross)1 this year were 691,999 tonnes (2020 – 702,204 tonnes), comprising direct emissions (Scope 1) of 549,469 tonnes (2020 – 568,720 tonnes), and indirect (Scope 2) emissions of 142,530 tonnes (2020 – 133,484 tonnes). The intensity ratio for this year was 177 grams per litre packaged (2020 – 195 grams per litre packaged).1
This year we reduced GHG emissions by 5.1%5.3%, building on our 20202021 achievement of a 50%4.0%4 reduction in absolute emissions. This emissions reduction was despite a year-on-year increase of 9.9%9.6% in packaged volume and 16.3%6.7% in distilled volume. As markets opened back up after lockdown restrictions, there have been some increased emissions associated with production growth, especially from sites in Africa, Mexico and the United Kingdom. ReductionsGHG emission reductions were driven by increased use of on-site renewable energy, particularlycontinuous improvement projects and an increase in India and the use of certificate-backed renewable energy attribute certificates, including through green gas certificates generated by converting distillery co-products. Some capital investments were delayed in this financial year due to lockdown restrictions but the associated benefits are on track to be deliveredat production sites in the next financial year.United Kingdom and Canada. Our facilities in Uganda and Kenya are in the final stage of commissioning new biomass facilities, which will be operational in early fiscal 23. The expected annual carbon saving is approximately 40,000–50,000 tonnes GHG. Our annual targetsWe continue to achieve net zero by 2030identify the right technologies to support our decarbonisation
journey across our global portfolio of sites. Given the varying maturity of renewable infrastructure across our markets, and the time it takes to build and commission large decarbonisation assets, we acknowledge the acceleration needed to deliver these projects in Scopes 1time for 2030. Using a location-based calculation approach5, this year our total direct and 2 indirect carbon emissions have been calculated in accordance with the principleswere 712,260 tonnes (2021 – 675,243 tonnes), comprising direct emissions (Scope 1) of Science Based Targets initiative (SBTi)554,476 tonnes (2021 – 536,963 tonnes), and have been submitted to the SBTiindirect (Scope 2) emissions of 157,784 tonnes (2021 – 138,280 tonnes). The intensity ratio for validation. Thisthis year we have made progress in line with our expectations and are on track to achieve this goal. Our Scope 3 target of net zero by 2050 is also aligned with the principles of the SBTi.was 168 grams per litre packaged (2021– 175 grams per litre packaged).5 |
| 5.3% | | |
Reduce our value chain (Scope 3) carbon emissions by 50%2,3 SDG alignment: 7.2; 7.3; 7A; 12.6; 13.3; 17.16
| | Percentage reduction in absolute GHG (ktCO2e)(ktCO2e)
| | (2.1)%
| | Our new target of reducing Scope 3 emissions by 50% by 2030 and achieving a net zero value chain by 2050 or sooner triggeredled to a comprehensive review of our total value chain footprint and associated emissions. Consequently, we re-setemissions last year. We reset our baseline, incorporating additional categories of Scope 3 upstream and downstream emissions.Scope 3 emissions.6 This year, our value chain Scope 3 emissions increased by 2.1%4.7%. This was mainly due to increased production and itsthe associated increased use of raw materials, packaging, third-party operations and neutral spirit sourcing, as well as a relatively depressed new baseline yearneutral-spirit sourcing. We recognise that this target is challenging given the complexities of 2020, which was affected by Covid-19. We remain committed to accelerating progress on reducing totalenabling impactful change up and down the value chain, emissions and working collaborativelythat we will not meet our target unless we work closely with our suppliers, peers and partners in future years. We have added the Scope 3 target to our Partnering with Suppliers standard, which is reflected in our procurement contracts.others. |
| (4.7)% | | |
Use 100% renewable energy across all our direct operations SDG alignment: 7.2; 7A; 17.16 | | Percentage of renewable energy across our direct operations | |
36.0% | Our
| Renewable energy represented 41.2% of our total renewable energy increased to 36%use this year, an increase of 2.6%up 4.6ppt on the priorlast year. The main drivers of this progress are programmes switching from fossil fuel to renewable sources, including widerThis was driven by increases in our use of biomassboth renewable electricity and renewable electricity.fuel and heat. 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, 66.4% of electricity consumed was from renewable sources such as wind, hydro and solar (2020: 66%), exceeding our 2025 interim target of 50%. In the United Kingdom, 100% of our electricity came from renewable sources.sources in the UK, Europe, Turkey and South Africa, and overall we achieved 83% (2021 – 66.4%), exceeding our interim 2025 target of 50% renewable electricity. This included sources such as solar, wind, hydro,geothermal and biomass, generated on site and off site. Our overall increase this year was due to the opening of a new distillery in Lebanon, North America, which is entirely powered by renewable electricity; moving to renewable-backed electricity supplies at our sites in Nigeria and Ghana; our operations in India and Indonesia now sourcing more than 95% of their total energy from renewable sources; and our new London head office being powered by 100% zero emission renewable energy. We are also continuing to invest in renewable electricity generation capacity, creating ‘additionality’, which means we can add renewable energy generation to the grid, and we have broken ground at our Leven packaging site in Scotland, where we’re in the process of installing 9,000 solar PV panels, approximately 4.1 MW of additional generation capacity. |
+4.6ppt | |
1. Due to the sale of Ethiopia business in fiscal 22, we now have 12 rather than 13 priority water basins
2. In line with our environmental reporting methodologies and the WRI/WBCSD GHG Protocol, baseline data for fiscal 20 and performance data for fiscal 21 have been restated to account
for acquisitions and divestments. Our reporting methodologies in the ESG Reporting Index outline how data has been compiled, including standards and assumptions used
3. Our targets to achieve net zero by 2030 in Scope 1 and 2 emissions, and our near-term Scope 3 target of 50% emissions reduction by 2030, were independently validated and approved
by the Science Based Targets initiative in September 2021.
4. The sale of our Ethiopia business in fiscal 22 means that our emissions reductions for fiscal 21 have been restated, changing from a 5.1% decrease in GHG emissions to a 4.0% decrease
5. Please refer to our reporting methodologies in the ESG Reporting Index for more information on how we calculate location-based versus market-based emissions.
6. A comprehensive review of Scope 3 categories has decreased the fiscal 20 baseline to 4.6 MtCO2e
Business description (continued)
| | | | | | | | | | | | | | | | | | | | |
Target by 2030 | | Fiscal 22 progress | | Progress to date | | Commentary |
Pioneer grain-to-glass sustainability: Become sustainable by design |
Achieve zero waste in our direct operations and zero waste to landfill in our supply chain SDG alignment: 12.5; 12.6 | | Percentage reduction in total waste to landfill in our direct operations (tonnes) | |
97.5% | | The total volume of waste diverted to landfill this year increased by 265% – to 168 tonnes (fiscal 21: 46 tonnes) – equivalent to 0.02% of all waste, co-products and by-products generated in our operations. At one of our facilities in Australia, waste material was incorrectly diverted to landfill by a third-party contractor. This issue was the principal cause of the year-on-year increase, and we are now working to address it with the contractor. Despite the increase, our performance remains within the de minimis threshold for zero waste and represents a 90.6% reduction on waste diverted to landfill since our fiscal 20 baseline. We maintainedcontinue to focus on and work hard to maintain zero waste to landfill2landfill1 at all our supply and office sites through continuous improvement, ongoing segregation of materials at our sites and close collaboration with partners. This year we started to identify and baseline our waste to landfill footprint in supply chains. We have also added the targetpartners. Turning to our Partnering with Suppliers standard, which is reflectedsupply chain, we also launched a global point-of-sale (POS) request for proposal this year, focused on delivering our 2030 objectives and making a shift in the industry. This should reduce the POS material we create and deliver a step change in how we reduce the potential for landfill in our procurement contracts.supply chain. |
Business description (continued)
| | | | | | (265)% | | |
Target by 2030 | KPI | Commentary |
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 recycled content of our packaging to 60%) SDG alignment: 12.5; 12.6 | | Percentage reduction of total packaging (by weight) | | | | In fiscal 22, packaging volume and weight increased because our global sales grew. Nonetheless we remain committed to our targets. As part of our Diageo Sustainable Solutions programme, we’re partnering with EXXERGY and Ardagh Group to pilot a glass coating that has the potential to ‘light-weight’ our bottles without compromising strength or shape – an industry first. We have also launched a programme to remove cardboard gift boxes from our premium scotch portfolio, on brands such as Johnnie Walker Black Label. In North America, we redesigned our corrugate cases, saving around 82 tonnes of corrugate a year – one example of the incremental improvements that we’re planning to roll out. |
| (16.2)% | | |
| Percentage of recycled content (by weight) | | | | While we have made some positive changes in our portfolio, our percentage of recycled content is down 2.6ppt to 40.2% because of a lack of available post-consumer materials. Global material recovery rates and recycling centres have not yet returned to their pre-Covid-19 operating levels, which has affected how much recycled content is available to our supply chain. We have a number of projects in the pipeline for fiscal 23 to help us address this issue. |
| (2.6)ppt | | |
Ensure 100% of our packaging is widely recyclable (or reusable/compostable)4 SDG alignment: 12.2; 12.6
| Percentage reduction of total packaging (by weight)
(3.6)%
| As a result of the on-trade closures due to Covid-19, there was an increase in the use of cans rather than returnable kegs which resulted in an increase in our overall packaging weight of 3.6%. Aside from this challenge, our work with Pulpex on a paper-based bottle has demonstrated the potential to reduce the packaging weight of a glass bottle by 95%. This and other innovative approaches will be central to delivering this target. |
Percentage of recycled content (by weight)
42.8%
| The recycled content in our packaging was 42.8%, a decrease of 3% compared with last year because less ‘cullet’ (recycled glass) was available in our main markets. Over 85% of our finished packaged product uses glass and glass recycling infrastructure has been severely impacted by Covid-19. |
Percentage of packaging recyclable (by weight) | |
99.5% | | The application of the ‘widely recyclable’ definition across all our markets will require some further work to embed a universal definition for subsequent years’ reporting. As lastThis year 99.5%99.9% of our packaging was recyclable using the definition we’ve applied historically – that is, recyclable by our previous definition.technically recyclable. The remaining non-recyclable components are currently either technically or operationally not replaceable, andalthough we continue to explore alternatives for these residual materials.alternatives. We’re working to create a universal definition of recyclable across the many markets we operate in. We are following changing global legislation closely and, in fiscal 23, will define a new approach to measuring recyclability that takes into account local practices and recycling systems in some of our largest markets. |
| 99.9% (Technically Recyclable) | |
Achieve 40% average recycled content in our plastic bottles by 2025 (and 100% by 2030)42 SDG alignment: 12.5; 12.6 | | Percentage of recycled content/percentage of plastics used | |
5.4% | | WeWhile our sales volumes have made solid progress with 5.4%increased, our overall percentage of PET used – 1.3% of our total packaging materials mix – has remained broadly constant, and this year the percentage of recycled content in all plastic (PET)our PET bottles globallyreduced to 3.2% (fiscal 21 - 5.4%). We are partnering with our suppliers to improve and we have moved certain formats toare conducting sampling trials in Great Britain and North America with bottles that contain 30%, 50% and 100% recycled content. While just 2% of our packaging is made from PET, we nonetheless consider this an important target.across multiple brands and formats. |
| (2.2)ppt | | |
Ensure 100% of our plastics is designed to be widely recyclable (or reusable/ compostable) by 2025420252 SDG alignment: 12.5; 12.6 | | Percentage of recyclable (or reusable/compostable)/ percentage of plastic used | |
66.8% | | We areWe’re encouraged by the innovative approachimprovement in recyclability of our South Africa market to ensure our Smirnoff and Captain Morgan PET formats were adapted to enable the PET bottles to be widely recyclable or reusable.plastics – now at 72% – which is an increase of 5.2ppt on last year. This contributesis primarily due to the PETCO initiativediscontinuation of single-use plastics in market where 56,500 tonnes of PET was collected for reuse. The remaining non-recyclable plastic components are challenging to displace, however we will continue to explore alternatives. This year, we created a set of Global POS (point-of-sale) Sustainable Guidelines for our marketing teams which will be fully implemented next year. We reducedcertain markets, and an increase in the use of single usewidely recyclable plastics versus other plastic cupstypes. In Ghana, we partnered with local authorities, investing in Europe, movedplastic buyback centres. Five centres were established this year, helping to 100% recycledbuild a local circular economy for plastic recycling – and recyclable paper in North America with our key POS supplier, and reduced material waste and obsolescence within our warehouses.they have already helped to recover 46 tonnes of plastic. |
| +5.2ppt | | |
Provide all of our local sourcing communities with agricultural skills and resources, building economic and environmental resilience (supporting (supporting 150,000 smallholder farmers) SDG alignment: 2.3; 2.4; 8.3; 12.2; 12.3 | | Number of smallholder farmers who we have provided with, or facilitated access to, initiatives providing agricultural skills and a minimum of three inputs
N/A
| On-farm practices in our supply chain supported by our smallholder farmer network vary widely in maturity. Some growers already use sustainableprogramme focused on improving economic, environmental and regenerative practices, while others still need to adapt. Moving to regenerative agriculture acrosssocial resilience | | | | In this network is a substantial step requiring understanding and planning, and we have focussed thisfirst year on building our strategy and engaging market teams through a new Regenerative Agriculture Community of Practice to share learnings and build capability. We are also building a baseline of supplier and market maturity and assessing the materiality of issues to create implementation plans for next year and beyond. We have developed a number of tools which will be rolled out to suppliers and farmers. We are currently developing a robust measurement and evaluation framework for this target and will be reporting quantitatively against itthis target, we supported 4,660 smallholder farmers through our programme, which focuses on improving their economic, environmental and social resilience. We do this by offering agricultural training and providing farming essentials, such as fertilisers and certified high-quality seeds. Where low yields and issues with quality significantly affect a smallholder farmer’s income, we work with our suppliers, technical partners and research organisations to build more resilient local supply chains. In Kenya and Ghana, for example, we’re conducting on-farm trials to develop more climate-resilient and higher yielding sorghum varieties adapted to Kenya and Ghana, as well as investing in the future.more research and development. |
| 4,660 | | |
Develop regenerative agriculture pilot programmes in five key sourcing landscapes SDG alignment: 15.2; 15.3; 15.5; 15A; 17.16 | | Number of regenerative agriculture pilot programmes active | |
N/A | To
| During fiscal 22, we launched one regenerative agriculture pilot programme. Our brand Guinness is working in Ireland with farmers of barley, one of our most important ingredients. The pilot is based on an approach to farming that works in harmony with nature. We expect this three-year farm-based programme to reveal opportunities to reduce our carbon emissions in barley production, alongside other benefits including enhanced biodiversity and soil health. We continue to develop roadmaps identifying where and how we can support more regenerative agriculture programmes in other parts of our agricultural supply chain. We're committed to partnerships with farmers to help suppliers and farmers overcome potential barriers, we will partner with them to implement regenerative on-the-ground projects that help test new farming approaches and practices, measure impacts and disseminate learnings.To make these initiatives effective, we are working on understanding where our current grower groups are operating, what practices they may be considering adopting, and where we can best support them in partnership and collaboration with others.
We are exploring new technologies that will allow us to plan, define and frame pilot programmes. One example is a collaboration project targeting our growers in Scotland and Ireland, which aims to gather on-farm data using satellite imagery and deep data analysis to establish a baseline of existing carbon footprint and other on-farm environmental metrics. We are currently developing a robust measurement and evaluation framework for this target and will be reporting quantitatively against it in the future.
|
| 1 | | |
1. 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
2. Please refer to ourthe reporting methodologies in our ESG Reporting Index for more information on how data has been compiled, including standards and assumptions used
3. Comprehensive review of Scope 3 categories have increased FY20 baseline to 4,87 MtCO2e
4. These targets2. Targets were introduced in 2018
Business description (continued)
Doing business the right way, from grain to glass
DoingAt Diageo, we always aim to do the right thing, in the right way, is the foundation of our business. That includes embedding our commitment to business integrity and respect forway. We embed human rights into the way we work, every day, everywhere.in our people’s working day. We consider health and safety as a fundamental human right – and at an operational level thestrive to improve health, safety and wellbeing, understanding that no level of our employeesaccidents is our highest priority.acceptable. And we make compliance and business integrity non-negotiable.
Making respect for human rights everyone’s business
Respect for human rights should be a– part of everyone’s working day. day
We aim to create an environment where people feel they are continuingtreated fairly and with respect. We work hard to embedensure we do not infringe their human rights, into every functionand that we’re not complicit with others who do. We expect everyone we work with to adopt our principles and to uphold our standards.
We have a well-developed policy framework that covers our responsibilities to protect the human rights of those working in our direct operations, as well as in our value chain and communities. Our policies are aligned to all relevant internationally recognised laws, regulations and voluntary guidelines.
As part of our business, in every market, as part of ourongoing 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 addresseswe’ve updated our human rights and our commitment to business integrity.governance framework in line with current best practice. We will not work with anyone who does not align with these standards. We use our comprehensivecontinue to embed human rights impact assessment (HRIA) process, which considersin our entire value chain,enterprise risk management processes and to enhance our Responsible Sourcing programmepolicies, standards and disclosures.
Strengthening our approach to human rights
As well as part ofadhering to the rights called out in the International Labour Organization’s (ILO) Declaration on Fundamental Principles and Rights at Work, our due diligence and risk monitoring process.
In line with the UNGP, we haveown Human Rights Impact Assessments (HRIAs) identified three external risks as particularly salient to our business:business and supply chain: 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, weWe have developed measures includingacted in response. For example, we’ve created awareness programmes focussed on child protection, and training for a variety of internal and external stakeholders on modern slavery risks, as well asrisks. We have also developed standards and training in all our markets, aimed at protecting brand promotion teams from harassment.
In addition, we have started to embed the detailed findings and recommendations from our market HRIAs into our routine enterprise risk management processes. This will help us to continue to intervene when required, and allow us to track emerging risks.
We measure the effectiveness of our human rights governance through monitoring breach allegation trends and root causes. We’re also enhancing our internal assurance framework to identify opportunities for strengthening our approach. And we’re using lessons learned from our interventions to drive continuous improvement. For example, we’re creating an online version of our Global Brand Promoter Standard training to make it easier for people to take part, and for us to track how many have completed it.
We describe our human rights approach and performance in more detail in our ESG Reporting Index. We publish our Modern Slavery Statement on our website.
Strengthening our approach
Embedding human rights is a continuous and evolving process. We have now carried out 19 HRIAs since we began our programme in 2015. In previous years we have conducted HRIAs in Kenya, Ghana, Mexico, Brazil, Thailand, Turkey, Uganda, Colombia, the United Kingdom, Guatemala, Tanzania, Nigeria, South Africa, China, North America (United States/Canada) and Australia. This year, we carried out HRIAs in the Middle East (second phase), PEBAC (Peru/Ecuador/Bolivia/ Argentina/Chile), and North Asia (South Korea/Japan), and the second phase in India was in progress as this report was published. These last four HRIAs were delayed from 2020 as a result of Covid-19.
During the pandemic we developed a robust desk-based approach to HRIAs. This included an in-depth review of the human rights context relevant to our operations and value chain in each country, a detailed scoping of our operations and value chain, and the development of an information gathering tool, and follow-up interviews as needed. All our HRIA reports include an action plan to address identified risks and an action plan for their delivery.
Following on from the completion of the extensive human rights due diligence across our business and value chain through the HRIA programme, we are now working to further embed our human rights approach across all aspects of our business. This year that included further embedding our 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.
Health and safety matters
Our global health and safety strategy aims to take a holistic approach to thefocusses on wellbeing as well as the safety, ofand safety. Critically, 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. We have a dedicated expert team that creates and frequently review our policies and standards – providing a roadmap that enables every employee, irrespective of their role, to work as safely as possible.
Last year we introduced a new, broaderOur total recordable accident frequency rate (TRAFR) metric,takes into account injuries that require more than first aid. We investigate each recordable incident thoroughly to establish the root cause, to provide insights that are used to mitigate the risk of further incidents and to reinforce our policies and standards. The learnings from each incident are shared with the aim of achieving a TRAFR performancegovernance and site leaders in dedicated sessions. This year we achieved our global target of 3.5 or less. Our TRAFR helps us identify and analyse the root causeslower, with a rate of all levels of accidents and near misses, which enables us to predict and prevent more serious accidents and illnesses.2.18. This is slightly higher than last year we have sustained a TRAFR performance of 1.98 at a global level, an improvement from 2.12 last year.(1.98).
We also report lost-time accident frequency rate (LTAFR). After sustaining lessmore than one lost-time accident (LTA)LTA per 1,000 employees in fiscal 21 for severalthe first time in three years, this year the LTA frequency rate increaseddecreased from 0.601.03 to 1.03, largely due to an increase0.92. We achieved this improvement by deploying focussed interventions in North America and Europe, which had a high level of incidents at our sites in Europe. This year’s rate of 1.03 is broadly in line with our performance prior to 2020.2021. The severity rate of these LTAs, which measuresis a measure of the seriousness of the incident and time offconsequent absence from work, reduceddecreased by 11.9%13.9% globally.
We‘Lagging indicators’ like TRAFRs and LTAFRs are traditional metrics used to indicate progress towards compliance with safety rules. The challenge with using only these to measure safety performance is that they don’t indicate how well we’re preventing incidents and accidents. To partially address this challenge we have introducedadopted a new global governance structurekey ‘leading indicator’, severe injury and approachfatality potential (SIFP), which specifically considers all incidents and near-misses and their potential to co-ordinatingcause life-threatening or life-altering outcomes. Every month senior management review performance of this indicator, as well as any learnings and improvements to help prevent similar incidents in future. Over the next three years, our healthfocus on both leading and safety strategy across the business. This blends local ownershiplagging indicators will provide more opportunities to prevent incidents and agility with global oversight of trends, enabling sharing of best practice and policies.accidents.
There is no acceptable level of accidents, andwhich is why we want to continue to encourage safe behaviour among all our people. A core part of our strategy isWe will continue to identify and leverageimplement the best available health and safety practices, technologies and systems to effectively interrogate data.
Business description (continued)
We continue to build– providing our people’s capabilities to provide thememployees with the most up-to-date health and safety skills and knowledge to consistentlyso that they can always carry out their roles safely.
Business description (continued)
We are alsoremain committed to working in partnership with our contractors and third-party providers to ensure they are equally committed to our Zero Harm ambition.ensuring everyone goes home safe and healthy, every day, everywhere.
We
Making health and safety an engaging experience
In 2022 we launched a new communication strategy for health and safety and now have taken a strategic approachdedicated intranet site with a learning channel. Our new Yammer social networking group enhances visibility of updates, meaning employees can access the latest health and safety news and are signposted to managing the ongoing Covid-19 pandemicexisting and successfully implemented new protocols and safe ways of workingcontent. These digital channels make it easier for us to share learnings across the business, including in offices, production facilities, commercial premises and among our new remote working population.
The global pandemic has beenhelping build a physical and emotional challenge for all our people for a variety of reasons. This year Diageo’s annual Your Voice survey included questions on wellbeing, which gave us additional insights into the progress we are making in this area, as described in Our people on pages 41-42.
We have also created a new, dedicatedbetter health and wellbeing channel insafety culture.
For this culture to succeed, employee engagement is critical. It’s why we’ve refreshed our learning management system, which provides toolshealth and resourcessafety brand and vision – to help our people manage their own specific needs.have a world-class, high-performing health and safety culture, where everyone, everywhere is safer together when working on site, at home and on the road.
20212022 safety data by region
| Region | Region | Employee LTA rate | Employee TRA rate | Independent contractor | LTAs1 | Fatalities2 | Region | Employee LTA rate | Employee TRA rate | Independent contractor LTAs1 | Employee LTAs | Fatalities2 |
North America | North America | 1.14 | 2.07 | 0 | 3 | 0 | North America | 1.85 | 4.33 | 1 | 5 | 0 |
Europe and Turkey | 2.44 | 3.21 | 3 | 25 | 0 | |
Europe | | Europe | 1.09 | 2.89 | 12 | 11 | 0 |
Asia Pacific | | Asia Pacific | 0.59 | 1.17 | 2 | 7 | 0 |
Africa | Africa | 0.25 | 1.12 | 5 | 2 | 0 | Africa | 1.01 | 1.75 | 8 | 0 |
Latin America and Caribbean | Latin America and Caribbean | 1.06 | 2.16 | 4 | 3 | 0 | Latin America and Caribbean | 0.61 | 3.44 | 4 | 2 | 0 |
Asia Pacific | 0.33 | 1.80 | 3 | 4 | 0 | |
Diageo (total) | Diageo (total) | 1.03 | 1.98 | 15 | 37 | 0 | Diageo (total) | 0.92 | 2.18 | 27 | 33 | 0 |
1. We do not report an LTA rate for independent contractors due to the difficulty and administrative burden in accurately recording headcount
2. 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
Our Life Saving Rules: 11 ways to make
Improving our people saferpeople’s safety on the roads
We want everyoneour employees everywhere to gobe safer when working on site, at home safe and healthy, every day, everywhere. That means constantly reinforcingon the behaviours that have made us an industry leader on safetyroad. Our Severe and Fatal Incident Prevention Programme – and going further until we reach our ambitiona core component of zero harm.
This year we found a new way to bring our health and safety culturestrategy – helps us to life forachieve that. It protects our people – throughand our Life Saving Rules programme. Launched in every market, Life Saving Rules focussesreputation by preventing serious injuries and fatalities across our business.
As part of our Driving on Roads programme, we focus on driver behaviour and capability. In Africa we’ve launched a bespoke driving capability programme featuring e-learning training modules around risks of driving on the 11 keyroad as well as business policies, standards and best practices. In Europe we’ve successfully embedded a best-in-class driver capability programme that identifies and tailors training based on an individual’s driving behaviour. The programme aims to prevent employees from becoming complacent with their driving. We anticipated that these initiatives will improve drivers' capabilities and behaviours that can prevent the worst kinds ofand ultimately reduce road traffic accidents – what are known as severe and fatal incidents.
The rules are built around the activities we have identified as highest risk, such as driving on roads, working at height, and entering confined spaces, and outline the key safe behaviour expectations for our employees to understand and adopt as part of their working day. We brought the message home through booklets, posters, t-shirts, display screens, videos, virtual engagements and face-to-face training, and teams at our local sites focus on communicating a specific rule each month.insurance premium rates.
Business integrity
We remain deeply committed to operating in the right way in everything we do. Compliance with our Code of Business Conduct and conducting our business with integrity are non-negotiables,non-negotiable, and our approach to risk and compliance helps us go beyond the basics to encourage the right behaviours and attitudes every day, everywhere.
Our global Code of Business Conduct, (Code), available in 20 languages, sets out what we stand for as a company and how we operate, to enableso all our employees to understand what is required of them in the conduct of our business across a range of compliance areas.working for Diageo. We undertake annual
mandatory global training on our Code of Business Conduct and key global policies, which includes an integrated Annual Certification of Compliance (ACC) for all managers and their direct reports, encompassing a total of 15,00215,522 eligible employees.
Global training is delivered to all Diageo employees in an easily accessible e-learning format, with classroom training delivered to those employees who do not have regular access to a computer.
Another area of potential compliance risk is our interactionsout interaction with third parties. Our Know Your Business Partner programme is designed to help us evaluate the risk of doing business with a third party prior tobefore entering a contractual relationship, as well as help us to monitor for any changes throughoutduring our interactions. This year we refreshed our third-party risk programme to include additional mitigations tomitigation of the increased risk of economic sanctions. We assess all our business partners for potential economic sanctions and compliance risks such as bribery and corruption, money laundering, facilitation of tax evasion, data privacy or other reputational red flags and implementflags. We carry out additional due diligence processes onfor those parties that pose a potentially higher risk. Central oversight is provided by ourOur global business integrity team which undertakes regularoversees the programme and regularly reviews on the effectiveness of the programme.its effectiveness.
Business description (continued)
We encourage our employees, and anyone we do business with, to raise concerns about potential breaches of our Code of Business Conduct or policies. Our confidential whistle-blowing help line,whistleblowing helpline, SpeakUp, is available via phone or web portal, enabling anyone in or beyond Diageo to report a concern. Additionally, we encourage employees to come forward to their line manager,manager; their legal or HR orpartners; risk and compliance andteams; or business integrity partners.
This year 484635 allegations of breaches were reported. Whilst on an annual basisWhile we saw a declinean increase in allegations versus last year, due to increased virtual working as a result of the pandemic, we are noting that the reporting levels are slowly going backrecovering to pre-pandemic levels.levels due to the return to offices. The substantiation rate of allegations has slightly increaseddecreased compared to last year, with 39%30% of cases confirmed as a breach.breach (versus 39% in fiscal 21).
All allegations are taken seriously and investigated, and action is taken where required consequence management is performed.necessary. We monitor all breaches to identify trends and root causes where further action may be required. This year 53causes.
As of the end of fiscal 22, 54 people exited the business as a result of breaches of our Code of Business Conduct or policies versus 78 people last year. The reduced number of breach leavers(fiscal 21: 63 people). This is due to a reduction in severity and type of breaches this year.
The number of leavers for fiscal 21 has been restated due to a number of open cases from fiscal 21 being concluded this year. At the end of fiscal 22, we had 113 open cases, which may lead to more people exiting the business.
Business description (continued)
Our ESG reporting approach
Reporting transparently on the environmental, social and governance (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, seize 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 at the year-end,year end, we also submit non-financial information to benchmarking and index organisations throughout the year, including those listed on page 3 ofin our ESG Reporting Index.
The non-financial reporting space is evolving quickly. We are committed to continual evaluation and improvement of our approach and to actively tracktracking emerging ESG 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.
Diageo.com Where, through the 'Society 2030: Spirit of progress' section, we give further details of our approach and performance, includingwith examples of our strategy in action.
ESG Reporting Index Where we give additional disclosures in line with the GRI Standards index and the UNGC advanced reporting criteria index,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 39-40.156-159.
Non-financial information statement
| | | | | | | | | | | |
Focus area | Relevant policies and standards | Read more in this report | Page |
Promote positive drinking | – Marketing and Digital Marketing Policy – Employee Alcohol Global Policy – Position papers | – Promote positive drinking – Performing against our 2030 targets | 50-5238-40
64-6750-53 |
Champion inclusion and diversity Our people | – Code of Business Conduct – 20202021 Gender Pay Gap Report – Human Rights Global Policy | – Champion inclusion and diversity – Our people – Performing against our 2030 targets | 53-5530-31
41-4241-43
64-6750-53 |
Pioneer grain-to-glass sustainability | – Environmental Global Policy – Sustainable Agriculture Guidelines – Sustainable Packaging Commitments – Partnering with Suppliers Standard – Deforestation Guidelines | – Pioneer grain-to-glass sustainability – Performing against our 2030 targets – Responding to climate-related risks | 56-5844-46
64-6750-53
84-9758-65 |
Human rights | – Human Rights Global Policy – Modern Slavery Statement – Global Brand Promoter Standard | – Doing business the right way from grain to glass | 68-7054-56 |
Health and safety | – Health, Safety and Wellbeing Global Policy | – Doing business the right way from grain to glass | 68-7054-56 |
Anti-bribery and corruption | – Code of Business Conduct | – Risk factors | 72-8282-92 |
Our contribution to the UN Sustainable Development Goals | | – Performing against our 2030 targets | 64-6750-53 |
Business description (continued)
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 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 global economic volatility or unfavourable economic developments 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 major markets, which include the United States, the United Kingdom, the countries that form the European Union, and certain countries within the Asia Pacific region such as India and China, and failure to react quickly enough to changes in those economies could have an adverse effect on financial performance.
The Covid-19 pandemic has created extreme economic volatility which has had a significant impact on the markets in which Diageo operates and Diageo’s business. The medium to long-term economic impact of the Covid-19 pandemic is still uncertain and the rate of economic recovery could vary significantly between and even within markets. Any future significant deterioration in economic conditions globally or in any of Diageo’s important markets (including any further deterioration as a result of the ongoing impact of the Covid-19 pandemic), including economic slowdowns, global, regional or local recessions or depressions, currency instability, increased unemployment levels, increased custom duties, tariffs and/or other tax rates, 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 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, 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 forecasting and/or 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, 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, such as has been recently experienced in South Africa. There is also a risk thatthe period of economic and political uncertainty and complexity surrounding the United Kingdom’s recent departure from the European Union could contribute to volatility in exchange rates, wider risks to supply chains and potentially ultimately lead to changes in market access or trading terms (including to customs duties, tariffs and/or industry-specific requirements and regulations), as well as generally increased legal and regulatory complexity and costs.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. 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.
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
Business description (continued)
June 2021. 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.
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, or by any other novel global public health threats or fear thereof
A novel strain of coronavirus (Covid-19) was first identified in Wuhan, China in late 2019, and, in March 2020, was declared a pandemic by the World Health Organization. This public health crisis precipitated by the pandemic, which subsequently spread globally, as well as measures taken by national governments, other regulatory bodies and businesses in response to the pandemic, have caused and are continuing to cause business slowdowns or shutdowns in affected areas, as well as general economic instability and disruption to Diageo's operations.
At this time, there is still some uncertainty as to the longer-term impact of the Covid-19 pandemic on Diageo's business and operations and it is possible that the future impact will be greater than expected if, for example, vaccination rollouts are slower than expected or if other preventative measures become less effective (including against any new variants of Covid-19 that are identified). To date, the direct impacts on Diageo's business from the Covid-19 pandemic have included, but are not limited to:
–the closure of and/or other restrictions being placed upon on-trade channels such as bars, restaurants and other hospitality venues in a significant number of Diageo's markets globally (including, in particular, in Europe and Turkey) as a result of government social distancing mandates and/or other factors, which have impacted the volume of Diageo's products sold via those channels (including Guinness, which has been significantly impacted by on-trade closures in the UK and Ireland) and which, in the longer-term, may lead to shifts in consumer behaviour and purchasing patterns;
–temporary disruptions to Diageo's ability to operate certain of its production and other facilities due to regulatory restrictions or other factors, as well as the implementation of heightened safety protocols in all of Diageo's facilities and offices worldwide leading to restrictions to access, reductions in activity levels, employees of Diageo and its suppliers and distributors not being able to work at all or work as efficiently due to home working, illness, quarantines or other factors, as well as other additional costs;
–wider disruptions to Diageo's supply chains and/or those of its suppliers, distributors and/or customers; and
–the imposition of travel restrictions by numerous jurisdictions combined with public concern about travel resulting in significant declines in passenger numbers, particularly for air travel, leading to a substantial reduction in net sales in Diageo's Travel Retail business.
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, and how quickly consumers choose to return to bars, restaurants and other hospitality venues, as well as resume international travel. However, even those regions that are beginning to experience business recovery or the scaling back of response measures, such as the United States and Europe, may experience further impacts from Covid-19 (including from any new variants of the Covid-19 virus that emerge), and economic activity in those regions may not recover quickly or at all, which could materially adversely impact global economic conditions. This could in turn lead to a further decline in discretionary spending by consumers.In addition, a global outbreak of another novel public health threat, or fear of such an event, could result in a resurgence of government restrictions and regulations and result in any of the impacts described above.
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, in some cases, already challenging economic conditions and/or other factors were exacerbated by the Covid-19 pandemic. Although there were no further material write-downs during the fiscal year ended 30 June 2021, further material write-downs or impairments may need to be recognised during future periods due to potential continuing impacts from the Covid-19 pandemic.
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
Business description (continued)
European and US shelf programmes during 2020and 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, either as a result of the Covid-19 pandemic or of the emergence of any other new international public health threat, 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.
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.
Risks related to Diageo’s industry
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 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 and vanilla. Severe weather events or changes in the frequency or intensity of weather events could also disrupt Diageo’s supply chain, which may affect production operations as well as delivery of our 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.
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, 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. 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 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 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 is expected to incur increased costs, including those associated with required improvements in agriculture, land practices and competition for land, the rising cost of energy, rising carbon prices (including in the European Union and United Kingdom) in the European Union and United Kingdom and the compliance and costs linked with packaging taxes. 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 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, 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 November 2020, Diageo announced its “Society 2030: Spirit of Progress” 10-year sustainability action plan, for contributing to the achievement of the UN Sustainable Development Goals. As part of this plan, Diageo is aiming to reach certain science-based carbon and water efficiency and replenishment targets. Diageo could suffer reputational 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 responsibly with respect to the environment or to effectively respond to regulatory requirements concerning climate change.
Business description (continued)
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. 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 (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 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.
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 launch of 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 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 ‘Additional information for shareholders - Legal proceedings’ and note 18 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 (including increases in tax rates as governments seek to fund their spending during the Covid-19 pandemic or in response to 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 and/or unexpected tax exposures, thus adversely affecting Diageo’s business and financial results.
Business description (continued)
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. For example, recently there has been increased demand for and restricted supply of agave suitable for use in tequila which has driven a marked increase in the cost of agave and, as a result, has impacted Diageo’s margins.
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 or create sufficient efficiencies to offset these increased costs without suffering reduced volumes of products sold and/or decreased operating profit.
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. Recent government bans on the sale of alcohol (such as in South Africa) and widespread enforced closure of on-trade venues introduced in response to the Covid-19 pandemic, including in many of the markets in which Diageo operates, have impacted, and may continue to impact, the sale of Diageo’s products in such 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.
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 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”)
Diageo incurred significant costs in connection with the implementation of the GDPR throughout the European Union, and the introduction of, or changes in, similar data privacy laws and regulations in other jurisdictions in which Diageo operates are likely
Business description (continued)
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 and the United Kingdom General Data Protection Regulation, 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 our 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 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), 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, 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 ‘Additional information for shareholders - Legal proceedings’ and note 18 to the consolidated financial statements.
Business description (continued)
Risks related to Diageo’s business
Diageo may be adversely affected by cyber-attacks or other disruption 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, 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 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 during the course of the Covid-19 pandemic. 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, 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 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.
Business description (continued)
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 our 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 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. 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 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 and reputation, as well as the price of Diageo’s securities.
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. 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, recent 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, 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’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. Diageo, its suppliers and/or its customers may also be adversely affected by staff unavailability due to the Covid-19 pandemic or ongoing measures designed to prevent spread of the virus . 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 Asia and Africa) 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.
As part of its growth strategy, Diageo also made several acquisitions in the US and UK 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. 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 (including with respect to the distribution of profits and dividends) or may make decisions different from those that Diageo itself may have made. or may make decisions different from those that Diageo itself may have made.
Similarly, there can be no assurance that the global productivity and simplification programmes implemented by Diageo in recent years 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.
Business description (continued)
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 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 a 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 42% of Diageo’s net sales in the year ended 30 June 2021 were in US dollars, approximately 9% were in euros and approximately 8% were in sterling. Movements in exchange rates used to translate foreign 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.
Business description (continued)
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, 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 the statements set forth in the ‘Fiscal 22 Outlook’ section and any other statements with respect to trends in results of operations, margins, growth rates, overall market trends, the impact of changes in interest or exchange rates, the availability or cost of financing to Diageo, anticipated cost savings or synergies, expected investments, the completion of any strategic transactions or restructuring programmes, anticipated tax rates, changes in the international tax environment, expected cash payments, outcomes of litigation or regulatory enquiries, anticipated changes in the value of assets and liabilities related to pension schemes and general economic conditions. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements, including factors that are outside Diageo’s control.
Factors that could cause actual results and developments to differ materially from those expressed or implied by forward-looking statements include, but are not limited to:
–economic, political, social or other developments in countries and markets in which Diageo operates (including as a result of the Covid-19 pandemic), which may contribute to a reduction in demand for Diageo’s products, adverse impacts on Diageo’s customer, supplier and/or financial counterparties, or the imposition of import, investment or currency restrictions (including the potential impact of any global, regional or local trade wars or any tariffs, duties or other restrictions or barriers imposed on the import or export of goods between territories, including but not limited to, imports into and exports from the United States and the European Union and/or the United Kingdom, as well as the United Kingdom’s recent departure from the European Union);
–the impact of the Covid-19 pandemic, or any other global or regional public health threats, on Diageo’s business, financial condition, cash flows and results of operation;
–the effects of climate change, or legal, regulatory or market measures intended to address climate change, on Diageo’s business or operations, including on the cost and supply of water;
–changes in consumer preferences and tastes, including as a result of disruptive market forces, changes in demographics, evolving social trends (including any shifts in consumer tastes towards at-home occasions, premiumisation, small-batch craft alcohol, lower or no alcohol, or other alternative products), changes in travel, holiday or leisure activity patterns, weather conditions, health concerns, pandemics and/or a downturn in economic conditions;
–changes in the domestic and international tax environment, including as a result of the OECD Base Erosion and Profit Shifting Initiative and EU anti-tax abuse measures, leading to uncertainty around the application of existing and new tax laws and unexpected tax exposures;
–changes in the cost of production, including as a result of increases in the cost of commodities, labour and/or energy or as a result of inflation;
–any litigation or other similar proceedings (including with tax, customs, competition, environmental, anti-corruption or other regulatory authorities), including litigation directed at the beverage alcohol industry generally or at Diageo in particular;
–legal and regulatory developments, including changes in regulations relating to production, distribution, importation, marketing, advertising, sales, pricing, labelling, packaging, product liability, antitrust, labour, compliance and control systems, environmental issues and/or data privacy;
–the consequences of any failure of internal controls, including those affecting compliance with existing or new accounting and/or disclosure requirements;
–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;
–cyber-attacks or any other disruptions to core business operations including manufacturing and supply, business service centres and/or information systems;
–contamination, counterfeiting or other circumstances which could harm the level of customer support for Diageo’s brands and adversely impact its sales;
–Diageo’s ability to maintain its brand image and corporate reputation or to adapt to a changing media environment;
–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;
–increased costs for, or shortages of, talent, as well as labour strikes or disputes;
Business description (continued)
–Diageo’s ability to derive the expected benefits from its business strategies, including in relation to expansion in emerging markets, acquisitions and/or disposals, cost savings and productivity initiatives or inventory forecasting;
–fluctuations in exchange rates and/or interest rates, which may impact the value of transactions and assets denominated in other currencies, increase Diageo’s financing costs or otherwise adversely affect Diageo’s financial results;
–movements in the value of the assets and liabilities related to Diageo’s pension plans;
–Diageo’s ability to renew supply, distribution, manufacturing or licence agreements (or related rights) and licences on favourable terms, or at all, when they expire; or
–any failure by Diageo to protect its intellectual property rights.
All oral and written forward-looking statements made on or after the date of this document and attributable to Diageo are expressly qualified in their entirety by the above factors and by the principal risks set out in the ‘Risk factors’ section above. Any forward-looking statements made by or on behalf of Diageo speak only as of the date they are made. Diageo does not undertake to update forward-looking statements to reflect any changes in Diageo’s expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. The reader should, however, consult any additional disclosures that Diageo may make in any documents which it publishes and/or files with the U.S. Securities and Exchange Commission (SEC). All readers, wherever located, should take note of these disclosures.
This document includes names of Diageo’s products, which constitute trademarks or trade names which Diageo owns, or which others own and license to Diageo for use. All rights reserved. © Diageo plc 2021.
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.
Responding to climate-related risks
CommittedAction to combattingcombat climate change
We haveClimate change is disruptive and accelerating.
It is a longstanding commitmentrisk we can, if we act swiftly and collectively, try to combattingmitigate. There are also opportunities for companies that recognise the challenge, and develop credible plans to adapt to changing circumstances.
Climate risk is disruptive and accelerating
The past year has seen climate change move dramatically up the global agenda. In August 2021, the Intergovernmental Panel on Climate Change (IPCC) published its Sixth Assessment Report, which paints a stark picture of the impact of climate change on our environment, and makes it clear that all parties need to act immediately if we are to avoid catastrophic implications for the planet. November 2021 saw most of the world’s leadership gathering for COP26, the UN’s climate change conference, which confirmed the Paris Agreement, a treaty made at COP21 in 2015, that governments must make every reasonable effort to ensure that the global temperature rises by no more than 1.5°C above pre-industrial levels. In January 2022, the World Economic Forum’s Global Risks Report stated: ‘Climate change continues to be perceived as the gravest threat to humanity. Global Risks Perception Survey respondents rate “climate action failure” as the risk with the potential to inflict the most damage at a global scale over the next decade.’1
Developments in corporate regulation
It is no surprise that climate change is of increasing concern to legislators, investors and analysts – as well as to employees and other corporate stakeholders. Global companies, with considerable economic and wider influence, are important actors in the world’s efforts to combat climate change. This concern is making itself felt through developments in regulation, for example, with the requirement in the United Kingdom this year for premium listed companies to report against the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). In the United States, the Securities and Exchange Commission (SEC) proposed rule changes that would require companies to include climate-related disclosures in their periodic reports. 2021 also saw the establishment by the IFRS Foundation of the International Sustainability Standards Board (ISSB), whose aim is to ‘deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.’
Committed to action
We welcome many of these developments, and particularly certain recommendations of the TCFD and the SEC, as important steps in increasing stakeholders’ and companies’ focus on climate change, and we are committed to playing our part and championing policies that support the Paris Agreement. We believe harmonisation of reporting frameworks will bring benefits to investors, as well as simplifying reporting requirements for companies. We support the establishment of a coordinated approach by regulators across jurisdictions, which reflects the reality that climate change is a cross-border issue, and we have actively engaged in consultations by organisations like the SEC to advocate such harmonisation.
Society 2030: Spirit of Progress
Since 2020, we have worked to incorporate the TCFD framework into our reporting, and have found it helpful in accelerating our efforts to decarbonise our value chain, mitigate and adapt to climate change risks and identify opportunities for transitioning quickly to a low-carbon future. We began our carbon reduction efforts in 2008, while also acting as a champion for water stewardship around the world to combat the related issue of water stress. Since 2008, we have been working to decarbonise
Today, our value chain, implementing adaptation measures and acting as champions for water stewardship around the world. This focus forms a key parton climate change is encapsulated in one of our six strategic priorities which support the achievement ofhelp us pursue our ambition to be one of the best performing, most trusted and respected consumer products companies in the world.
Committed The priority, ‘pioneer grain-to-glass sustainability’, also encompasses other important topical issues relating to action
The threats to oursustainability, such as water stress, biodiversity loss, poverty and inequality. Many of these issues are being exacerbated by climate change, and are threatening both the environment are urgent and growing, and the world must, as defined by the Paris Agreement, ensure that the global temperature rises no more than 1.5°C above pre-industrial levels. We are committedprosperity of communities everywhere, particularly those in low-income countries. In response to playingthese challenges, in 2020 we launched a bold, 10-year action plan, 'Society 2030: Spirit of Progress', which sets stretching targets, including our part and championing policies that support the Paris Agreement. We are proud to be a signatory to the Business Ambition for 1.5°C, which calls on companies to set ambitious science-based emissions reduction targets, and we are committedcommitment to 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.
We welcome the Task Force on Climate-related Financial Disclosures (TCFD) as an important step in increasing stakeholders’ and companies’ focus on climate change. We have incorporated the TCFD framework into our reporting and And we are accelerating effortsproud to mitigate climate change risks and identify opportunities for transitioning quickly to a low carbon future.
Climate change will be a major disruptorsignatory to the Business Ambition for decades1.5°C, which calls on companies to come. Both physical risks, such as changes in climate and acute weather events, and transition risks, such as impacts on economies, changes in consumer attitude, and regulatory developments, have the potential to affect all businesses, including our own. Many are difficult to quantify, but we are monitoring developments closely with the support of expert partners. There are also elements highly relevant to our business which are easier to assess now, such as water stress, the impact on the supply of raw materials and the viability of our manufacturing sites and key supplier sites.set ambitious science-based emissions reduction targets.
We know that we cannot separate climate change from other issues such as water stress, biodiversity loss, poverty and inequality; all are closely linked and threaten both the environment and the prosperity of communities everywhere. We created our bold 10-year ESG action plan, 'Society 2030: Spirit of Progress', in response to this challenge. It builds on the work we have done since 2008 to decarbonise our value chain and mitigate the impact of water stress, and forms a key part of our response to both mitigating and adapting to climate change risk.
For more details on our 'Society 2030: Spirit of Progress' strategy, see our CEO’s statement1.Global Risks Report, World Economic Forum, January 2022
Business description (continued)
GovernanceUnderstanding the impact of climate change on our business
Climate change presents various economic, businessis an important disruptive force, with potential to drive substantive changes in our operations and socialsupply chain in the short term (one to five years), medium term (five to 10 years), and long term (10 to 30 years). Many of the potential effects of climate change can be characterised as risks, whicheither physical risks to our environment, or risks associated with the transition to a low-carbon economy in pursuit of the Paris Agreement targets. Climate risk is therefore cross-cutting, with the potential to affect companies, financial institutions, households, countries and the financial system at large. There may, however, be opportunities as well as risks for those companies that enable the transition to a low-carbon economy.
Because there are so many different factors affecting how climate change will affectplay out in the world, it is difficult to quantify the precise timing and impact of climate risks on our business, overor indeed the short, mediumopportunities that may present themselves. Nonetheless, some modelling is possible, and longer term. so, with the support of expert partners, we are building our capability to assess both, and model their impact under various scenarios, as discussed in this report. From this modelling work, we estimate that, from what we know now, climate change is not expected to have a material impact on the results of our operations, or on our financial condition by 2030 (see page
Governance
We have adopted the TCFD’s recommendations for reporting on governance, summarised on page 72
Given its importance, and the potential severity of the risk it poses, we oversee climate change is overseen at the highest level of the company, and integratedhave governance processes in place intended to ensure that we consider and factor climate risk into our business processes.operations. We include climate risk as a principal risk in our risk register (page 84), now as well as in the short, medium and long term, and we assess and consider its impact carefully, including a formal review by the Executive Committee and the Board at least twice a year, and discussion at our Annual Strategy Conference.
TheBoard and management oversight of climate change
We believe governance of climate change risks and opportunities needs to be embedded at all levels of our organisation. This year, while our governance structure, described below, has not changed, we increased our investment in climate risk management and scenario analysis.
We believe that climate change is of such importance to us and our stakeholders that the Diageo Board and Executive Committee areshould be responsible for managing climate changeclimate-related risks and opportunities, withand do not delegate responsibility to a sub-committee. Executive sponsorship and responsibility is shared jointly between the President of Global Supply Chain and Procurement (Ewan Andrew) and the Corporate Relations Director.Director (Dan Mobley). At an operational level, they are supported by our cross-functional Climate Risk Steering Group, (see governance diagram onwith sub-groups dedicated to different areas such as supply, strategy, risk and so on.
The Steering Group meets up to twice monthly to oversee how we are managing climate risks and identifying opportunities. Within this, page).a sub-group from Supply and Procurement oversees physical risks, with other working groups responsible for addressing transition risks and opportunities, for example market and reputation, policy and legal, and technology.
Our Executive Committee discussesreviews updates on climate change-related updates at least quarterly,risks and opportunities from the Steering Group twice a year, and considers their implications for strategy and decision-making. The Executive Sponsors formally update the Board on climate risk quarterlyquarterly; including, where relevant, reviewing the outputs of our climate change risk assessments and scenario analyses, and overseeing any related decision-making. Any materialpotential financial implications of climate risk and potential impacts on Diageo’s accounts,consolidated financial statements, including performance and progress against non-financial metrics, are also shared with the Audit CommitteeCommittee.
Because of the Board.
Given the rapidly increasing understandingcritical importance of climate change, we have developed a range of communications and the riskstraining materials on sustainability issues for our employees on our digital learning platform. These include specialist training for leaders, and opportunities for business, weclimate-risk education programmes open to all.
We continue to engage externally, to monitor and promote good practice and keep pace with stakeholderstakeholders’ expectations in this critical area. We areof companies with regard to climate change. This includes being an active membersmember of the TCFD working group through the UN Global Compact and we also contributed to the consultation by the United Kingdom’s Financial Reporting Council on climate risk reporting.Compact.
Business description (continued)
Climate riskchange as part of remuneration
Given the importance of managing climate risk, factors relevant to it are considered as part ofchange, the remuneration of our senior leaders. Specifically, the performance share element of the Long-Term Incentive Planlong-term incentive plan (LTIP) for our senior leaders encourages and rewards performance against an ESG measure (introduced in 2020, for fiscal 202121 to 2023)23). It constitutes 20% of the performance share award, which is granted to the Executive Committee as well as other senior leaders across the business. This ESG measure includesOf this 20%, 10% (i.e. half of the share award) relates to targets onfor carbon emissions and water efficiency, which directly support mitigation of and adaptation to climate change risk. (See Directors' remuneration report from page 176.)
ForRisk management
We have adopted the TCFD’s recommendations for reporting on risk management, and include identification of risks in this section as they are easier to understand in this context.
Climate risk may be divided into two broad categories: physical risk and transition risk. Physical risks to our environment manifest themselves in two ways: chronic changes (sea level rise, temperature increases, changes in precipitation patterns), and acute events (such as floods, storms, heatwaves or other extreme weather events). While acute events can cause short-term damage, chronic changes are slower to materialise but can cause long-term, irreversible changes. Transition risks are those associated with the economic transformation needed to transition to a low-carbon economy: for example, policy and legal changes, such as introducing carbon taxes; technology changes such as developments to switch to renewable energy; or market changes such as consumer pressure for more details on how climate-related considerationssustainable solutions. As we have already seen in the last few years, the time lag between emissions increasing and the resulting change in the climate means that some physical risks are incorporated into incentive plans, seealready becoming a reality, and will continue to increase even while efforts to reduce emissions intensify.
Although they are interconnected, physical and transition risks are normally assessed separately, since they are amplified by different scenarios. In a world where carbon emissions continue to rise, physical risks become more likely, whereas in a world where we meet the Remuneration report, pages 183-212.
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Executive Sponsors President of Global Supply Chain and Procurement Corporate Relations Director |
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Brand Sustainability Council |
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Policy and Regulation Working Group |
goals of the Paris Agreement, transition risks - and opportunities - increase.
For more detailsHow we manage climate risk
As a global business with a broad portfolio of brands based on how the Board is engaged on climate risk, see our governance section, pages 84-97.
Strategyagricultural ingredients, and risk management
We have operations all over the worldproduction facilities in multiple geographies and locations, we are therefore exposed to a wide varietyrange of physicalclimate risks. However we believe we have a considerable measure of resilience, built up through decades of experience managing the effects on our raw material supply of normal variations in climatic conditions and transition risks. Our strategy is influenced by the findings ofagricultural yields. We do this through careful planning in our extensive climate change risk assessments and scenario analyses, which we continually improve as more data and insights become available. The geographical provenance of certain products, such as Scotch and tequila, is key to their identity, so it has always been critical for us to proactively manage risks to supply and production in these locations.
In adapting to the impacts of climate change, innovation is key,procurement function, and our company-widethrough supporting research and development programme incorporatesof high-yield, drought-resistant crops. Many of the regions in which we operate are water-stressed, and we have a strong track record of adaptation measures to support the sustainability of our operations in these areas. Climate risk has been integrated into our enterprise risk management processes for some time, particularly in our market, supply chain, procurement, and site and strategic risk management processes; and has been built into our strategic and business continuity plans.
Nevertheless, climate considerationsrisk is accelerating fast, so we must not be complacent – which is why it is included as a matterprincipal risk on our risk register. We take very seriously the risks climate change could pose – to the health and safety of course with sustainability built into the decision-making process. But we wantour people, to go beyond internal researchour reputation, and development, so this year we launched a new global programme, Diageo Sustainable Solutions, that invites innovators to work with usour ability to develop their ideasmeet our 'Society 2030: Spirit of Progress' goals. We are therefore prepared to take some risk ourselves in innovating to meet consumer needs for more sustainable products and climate-resilient technologiescombat climate change that way. And so, with the help of external partners, we have developed a much broader and practices across the supply chain. As partdeeper analysis of this initiative,climate-related risks, which will continue to evolve as scientific understanding develops, and as we will be looking particularly at renewable energy, water recycling technologies, novel packagingbuild our internal knowledge and regenerative agriculture.expertise.
Business description (continued)
Identifying our physical risks
Physical risks manifest themselves differently in different parts of the world, and so, for a global business like ours, with operations in many parts of the world, assessing them is a considerable task, requiring assessment not only of our own sites, but those of our many suppliers as well. Trying to do it all at once is challenging, and there is an advantage in doing the analysis over a couple of years because it means we can incorporate what we learn from earlier assessments into later ones. Nonetheless, we appreciate the urgency of understanding this risk, and are pleased with the coverage we’ve achieved since we began the process last year. We plan to complete the work with our remaining markets over the next two years.
We began our physical risk assessment in 2021 by focussing on those markets with the highest sales value – North America and Scotland – and followed that up this year with those geographies where physical climate risk is likely to be highest – Africa, India, Mexico and Turkey. Also in 2021 we carried out a global assessment of water stress, an activity we conduct routinely every two to three years.
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Activity before this yearRisks | | | |
Risk type | 2021 highlightsWater scarcity | 2022 prioritiesInput costs | 2023Consumer behaviour |
| Increasing water-stress and beyond prioritieswater scarcity negatively affects our ability to continue to produce beverages in areas of high water-stress | Policy changes (carbon taxation, shift to renewables) causes increases in input costs, particularly glass | Consumers shift purchasing behaviour towards more sustainable products, rejecting products perceived as unsustainable |
Strong commitment to cutting carbon emissions, increasing water efficiency and measuring and managing water stress. Climate change highlighted in our principal risks, sustainability and responsibility. Clear governance established for oversight of climate change risk.Category | Climate change risk assessment and scenario analyses in Scotland and North America, geographies which represent half of net sales value.Physical – chronic | Climate change risk assessment and scenario analysis in India and Africa, incorporating a more sophisticated approach building on work from 2021. Include Scope 3 emissions in our scenario analysis.Transition – policy/legal | Refresh 2021 and 2022 analyses and extend to other material regions, applying learnings gathered during previous years to increase sophistication of analyses.Transition – market |
Continuous processTimeframe | Short, medium, long | Short, medium | Short, medium, long |
Trajectory | Increasing | Increasing | Increasing |
Impact (if not mitigated) | Moderate1 | Moderate | Moderate |
Response examples | •Water use efficiency improvements •Water replenishment in 100% of improvement, increased sophisticationwater-stressed areas •Collective action programme to reduce water use in 'priority water basins' | •Supply chain decarbonisation •Engaging suppliers in alternative technologies for low-carbon operations •Exploring technologies for reducing packaging weight | •Pack weight reduction •Increased recycled content •Developing circular product offerings (refill, reuse) |
Opportunities | | | |
Opportunity type | Supply chain decarbonisation | Innovation in sustainable product offerings |
| Reducing our Scope 1, 2, and further embedding into core business decision-making3 emissions reduces our exposure to carbon taxes and risk managementrelated costs, and improves our reputation with customers and consumers | Developing more sustainable products (lighter weight, higher recycled content, more refillable and reusable containers) meets consumers’ increasing demands for more sustainable products |
Category | Transition – policy/legal | Transition – market |
Timeframe | Short, medium | Short, medium |
Trajectory | Increasing | Increasing |
Impact (if not mitigated) | Moderate | Moderate |
Response examples | •Society 2030 targets for Scope 1,2, and 3 emissions •Decarbonisation programme and capital investment •Renewable energy | •Society 2030 targets for sustainable packaging •Innovation to deliver more sustainable products |
Understanding1. ’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 which is absorbable by the business. ’High’ impact is defined as an inability to service a signifiacnt portion of our customer base, or major reputational damage.
Business description (continued)
Scope of assessment
We conducted assessments for our own sites and planningthose of key suppliers and logistics, over two timeframes (present to 2030 and to 2050), and for climate-related impactstwo warming scenarios: medium warming, 2-3⁰C (IPCC scenario RCP 4.5) and severe warming, 4-5⁰C (IPCC scenario RCP 8.5). The analysis we have done so far (see table on page 63) represents approximately three quarters of our volume produced globally.
Assessing climate-related
–Diageo sites: for our own and key third-party operator (TPO) sites, we analysed at a high level the risks to which they are likely to be exposed, and, for those that are either of greatest strategic importance or at greatest risk, we carried out more detailed assessments. In doing so, we developed a site-specific climate risk register, which will help us plan how best to report on them ismitigate the risks. At each location, we looked at a complex, multi-yearcombination of three things: the different activities carried out (e.g. malting, distilling, packaging and so on); the part of the process that must continuemight be affected (e.g. infrastructure, water supply, energy sources); and the physical risks that might occur (a total of 19). This level of detail is necessary because some activities are more sensitive to adapt tophysical risks (such as higher temperatures) than other activities at the riskssame site. In total, we analysed 316 site/activity combinations, which gave us an overall risk rating for each site.
–Supply chain and opportunities of transitioning to a low carbon world. We have gained experiencelogistics: in assessingeach location we analysed the factories and responding to climate change impacts as partwarehouses of our targets up to 2020.
In 2020, we highlighted climate-related risk within our principal risk, sustainability and responsibility (see pages 84-97). Our approach to managing our principal risks is holistic and integrated, with risk assessments built into annual plans at a global and market level. We develop mitigations based on these assessments, accompanied by internal controls to assure the quality of risk management. This year, we built on that by conducting the next phasekey suppliers (e.g. those of our most critical or specialised ingredients and components); key agricultural commodities; and our most critical upstream and downstream distribution routes (road and rail, and sea ports), to determine those which might be exposed to physical risk analysis and planning work on our global water footprint, and by carryingin the future. We carried out a detailed risk assessment and scenariothe same analysis of physical risks for our operations in Scotland and North America,supplier sites as discussed below. A key output is an approach that we will use to guide assessments in other markets and regions in 2022 and beyond.e will use to guide assessments in other markets and regions in 2022 and beyond.did for our own sites.
OurFocus on water stress
Because we rely so heavily on water as a raw material and in our processes, we have been regularly assessing our own production sites for water stress since 2008. The most recent assessment was in 2021, risk analysis and planning work
Guided by expertwe updated it in 2022 to reflect changes in our operations due to disposals. The assessment – and our classification of a site as ‘water-stressed’ – is based on external partners, we completed three key pieces of work this year:
1. We updated our analysis of water-stressed sites around the world.
2. We carried out climate change risk assessments in North America(WRI Aqueduct tool) and Scotland.
3. We carried out scenario analyses of selected risks identified from both assessments.internal site surveys covering physical, regulatory, and social and reputational considerations.
1. Global analysis of water-stressed sites
We have been conducting water risk assessments since 2008 and have taken extensive steps to mitigate risks to our water-stressed sites as part of our sustainability and responsibility targets up to 2020, including improving water use efficiency and replenishing the water we use in our final product. We have updated our water risk assessments five times since 2008, most recently this year, when we carried out a detailed examination of the effects of water stress on our own production and packaging facilities. The map on page 90 shows our current global water stress footprint.
2. Climate change risk assessments of our sites in North America and Scotland
We typically develop strategic plans, forecasts and viability statements for a three-year timeframe, sometimes longer in the case of major capital investments. However, climate risk requires a longer-term view, because its impacts tend to be felt more gradually, while the work needed to mitigate its effects – renewable energy for example – will take years to come to fruition. For our climate scenarios, therefore, we have chosen to use 2030 and 2050 as our timeframe.
We conducted a detailed climate change risk assessment (CCRA) this year in Scotland and North America. We chose these two regions for our first assessment, since they account for around half of our net sales value globally, are home to many of our manufacturing sites, and have extensive global raw material supply chains. We established a cross-functional team of Diageo leaders and worked with external partners to develop an approach that would also work for future climate change risk assessments of other regions. The CCRA considered both the physical and the transition risks of climate change, with more detail on local physical risks as described on page 87.
For physical risks, we looked at medium and high temperature scenarios for both 2030 and 2050. For transition risks, we examined the policy, technology, market and reputational impacts on our markets and supply chain. See the diagram on page 90 for more details on the process.
Business description (continued)
Operational scope of our physical risk assessments
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Region | Diageo and key TPO assets (detailed assessments) | Agricultural commodities | Supplier assets | Ports2 |
North America | 12 (4) | 8 | 86 | 6 |
Scotland | 47 (5) | 16 | 103 | 15 |
Africa | 48 (5) | 6 | 256 | 14 |
India | 46 (7) | 4 | 59 | 1 |
Mexico | 16 (4) | 1 | 68 | 2 |
Turkey | 9 (4) | 4 | 64 | 5 |
Total | 178 (29) | n/a1 | 636 | 43 |
1. We analysed some commodities in more than one location.2. Road and rail assessments were done at a country level and therefore not individually quantified.
Business description (continued)
Our physical risks – results
The assessments highlighted three key points:
1.Risk are high and increasing: the level of physical climate risk is already relatively high and is projected to increase in all regions, most severely in India, which accounts for the top 10 of our most ‘at risk’ activities. Risks ranged from medium to high in our top 10 most at risk sites in each region.
2.All agricultural ingredients are at risk: all those we assessed are subject to some degree of climate risk, with the risk set to increase for most under the scenarios we analysed.
3.Water scarcity and high temperatures: water stress, drought and high temperatures are our most significant risks.
Overall, out of the 316 site/activity combinations we analysed, two are currently classified as high risk, and 29 as medium-high. Under the worst-case scenario, i.e. a temperature rise of 4-5⁰C, this rises to 11 high-risk site/activity combinations by 2050, and 42 medium-high.
Trajectory of physical risk from 316 site/activity combinations3
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Scenario | Combined number of sites/activities at medium-high risk, including % of total site/activities | Combined number of sites/activities at high risk, including % of total site/activities |
Present day | 29 (9%) | 2 (1%) |
2030, 2-3°C (RCP 4.5) | 28 (9%) | 9 (3%) |
2050, 2-3°C (RCP 4.5) | 34 (11%) | 10 (3%) |
2030, 4-5°C (RCP 8.5) | 32 (10%) | 9 (3%) |
2050, 4-5°C (RCP 8.5) | 42 (13%) | 11 (3%) |
3. Scoring methodology
a) Relative risk score: the physical risk assessment results are reported as relative risk scores (in comparison to the full sample of Diageo sites assessed) to help us prioritise the sites for which we should create mitigation plans. High-risk sites are above the 99th percentile; medium-high are in the 90th to 99th percentile; and medium are in the 55th to 90th percentile.
b) Trajectory score: the risk assessment also produces trajectory scores for each of the hazards assessed, indicating how they are expected to worsen or improve in the scenario and timeframe in question.
Physical risks in our supply chain
We focussed on three main areas in assessing risks to our supply chain, with the results as follows:
•Suppliers’ assets: given the number and geographical spread of the sites we assessed, we found a greater range of risks than for our own sites. Nonetheless, as with our own sites, the most common risks, and those forecast to get worse, were water stress and higher temperatures. Other relevant risks, which may affect our packaging components, were humidity and wildfires. The information about our suppliers’ sites was also useful to our suppliers themselves, and means we can work together to develop mitigation plans where it makes sense to do so.
•Agricultural commodities: through the analysis, we produced a risk register for each commodity (chosen for their strategic importance), detailing possible risks, their severity, how we should respond (e.g. whether to mitigate or transfer the risks), and control measures to put in place. The map (on page 63) summarises the main climate hazards to which our key commodities are exposed. Some (barley, wheat, maize for example), are easier to procure in multiple locations than others (agave, for example); so the insights we’ve gained will help us find ways to adapt what we do for the most sensitive crops, and we will create contingency sourcing plans for the rest.
•Distribution routes: the analysis showed that in general, the risks to ports came from water stress and changing temperatures, while the risks to road networks were broader, including both chronic risks such as temperature increases and sea level rises, and acute risks, such as storms, floods or wildfires. Both acute and chronic risks were assessed to be higher in the warmer geographies (India, Africa, Mexico and Turkey). The insights from this review will help us plan effectively for any contingencies in our distribution routes that may become necessary.
Business description (continued)
Physical risksrisk results by region – Diageo and key third-party supply sites
Assessments
Incoming materials
189 supplier locationsOverall, the main physical hazards we are exposed to are high temperatures and 37water stress. High temperatures may cause risks to employees’ health and productivity, as well as affecting our processes (such as fermentation which is sensitive to temperature variations) and cost. For example, higher water temperatures mean higher costs of cooling to the temperature we need to use water in our sites. Here we summarise the key findings by region, which may affect both our own and our suppliers’ sites, and our agricultural commodities
– Raw and packaging materials (e.g. barley)
– Intermediates (e.g. grain neutral spirit)
– Processed commodities (e.g. flavours)
– Packaging materials (e.g. glass)sourced in those regions.
Diageo sites and locations
– Diageo owned and operated sites in Scotland (47) and North America (12) footprint including malting, distilling, maturation, packaging, office and engineering and coproduct plants (high level)
– Five sites of strategic importance in Scotland and four in North America (more detailed) | | | | | | | | |
Region | Risks increasing | Risks declining |
North America | •Wildfires •Storm winds •High temperatures •Water temperature | •Cold temperatures |
Mexico | •Water temperature •Water stress •Wildfires | •Cold temperatures |
Scotland | •Water temperature •Wildfires | •Cold temperatures |
Africa | •Water temperature •Cold temperatures •Rising sea level / coastal flooding | •Cold temperatures |
Turkey | •Water temperature •High temperatures •Rising sea level / coastal flooding | •Cold temperatures |
India | •Water stress •Extreme heat | •Cold temperatures |
Domestic product distribution
– Distribution of finished goods from Diageo sites including market distribution and warehousing
– Road, rail and ocean distribution routes in country of production
– Ports (15 United Kingdom, six North America)
Time horizons
Present day to 2030 to 2050
Temperature scenarios
Medium scenario
– +2°C to +3°C
– RCP14.5 pathway
High scenario
– +4°C to +5°C
– RCP18.5 pathway
Transition risks
Assessments
Upstream supply chain
– Agricultural materials
– Packaging materials
Diageo market and countries
– Production sites
Downstream supply chain
– Distribution
– Sales
Time horizons
Present day to 2025 to 2030
Temperature scenarios
– 1.5°C (Paris Agreement) RCP1 2.6
– 2°C (Government/policy)
Results of our CCRA
Physical While the assessments indicate that physical risks will increase, meaning that we are likely to see more frequent disruption to our operations in both regions, the overall risk of climate change to North America and Scotland is reasonably low, for both time horizons. Specifically, while we are more at risk of flooding, storms and higher temperatures in these regions, it is unlikely that any of our sites, or indeed our suppliers’ assets, will be unable to operate. These risks are ones we already manage, but the CCRA gave us
Business description (continued)
further insights into their severity and velocity, which allows usResponding to improve our mitigation plans. While climate change poses a risk to raw material yields in some regions, there is also some opportunity for increased yields in other regions.climate-related risks continued
Identifying our transition risks and opportunities
TransitionIn 2021, alongside our physical risk analysis for North America and Scotland, we also analysed, as defined by TCFD, the risks1 The mainand opportunities2 in those regions of transitioning to a low-carbon economy. In doing so, we found that there were some opportunities as well as risks, and we concluded that most of these risks/opportunities were generally applicable to other regions as well. This year, we reviewed that analysis based on the latest insights from our working groups, and concluded that overall, the risks/opportunities identified relate to increased costs of agricultural raw materials and packaging. Factors affectingin the former include, for example, increasing energy costs at farms, sustainable land practices, and competition for land from biofuel crops. Factors affecting the latter include the rising cost of natural gas, United Kingdom/European Union carbon prices, and compliance and quality costs linked with packaging taxes. There are opportunities, however; for example innovating to reduce the carbon footprint of our products to make them more appealing to consumers, who are increasingly interested in sustainable options.2021 assessment were still appropriate.
3. Scenario analysesOur transition risks and opportunities – results
The purpose of selectedcarrying out a transition risk assessment across our operations and value chain is to uncover our risks,
Using strengthen our resilience, capitalise on opportunities and, ultimately, in the findings fromface of the changing market dynamics as we transition to a low-carbon economy, help us both protect and grow our CCRAbusiness. The assessment examined our agricultural inputs, our production and packaging, and our distribution and sales channels. The greatest risks and opportunities were found to be in North Americapackaging and Scotland,sales respectively. In packaging, shifting to low-carbon production may well mean higher costs; we may also be subject to higher taxes, and need to meet requirements for more light-weighting, redesign, recycling and recycled content. On the resultspositive side, however, there are potential sales opportunities for those businesses that offer consumers more sustainable products, making greater use of our global analysis of water-stressed sites, we conducted climate change scenario analyses in line with TCFD recommendations, looking particularly at 2030.recycling, reuse and returnable products.
We used three scenarios inidentified 150 risks and opportunities overall, and assessed 105 that were relevant to our business. From this assessment: one focussed onlist we identified 24 that we need to manage, and of those 24 identified those with the impacts of a low carbon transition (RCP2.6: 1°C to 2°C temperature rise) and two focussed on the impacts of physical climate risk (RCP4.5: 2°C to 3°Ctemperature rise and RCP8.5: 4°C to 5°C temperature rise). For carbon pricing, we assessed themost potential impact on our Scopes 1business. These were:
•Policy and 2 emissions only.legal risks included carbon taxation, and legal and social considerations relating to land use, agricultural material use and water use.
•2Market and reputation risks and opportunities related to GDP reduction, consumer rejection of particular brands, categories, materials or supply chains due to their perceived environmental impact, and consumers switching to more sustainable products.
•Technology risks and opportunities related to the decarbonisation of our supply chain and those of our suppliers
Scope1.The TCFD’s definition of transition risks: policy and assumptionslegal, market, reputation, technology
The scenarios2.The TCFD’s definition of transition opportunities: resource efficiency, energy source, products/services, markets, resilience
Strategy
We have adopted the TCFD’s recommendations for reporting on strategy, although we have modelledincluded the identification of risks and opportunities in the risk management section since they are usefuleasier to understand in that context.
We have a long history of creating world-class drinks experiences for understandingconsumers across the potential impactsworld from a wide range of natural ingredients. Over the years, we have become more expert at managing scarce resources, particularly water, and adapting production of our drinks to use alternative ingredients when necessary. This is reflected in one of our six strategic priorities, ‘pioneering grain-to-glass sustainability’. The insights we’ve gained from our recent work to identify the risks and opportunities from climate change is informing our strategy through the next stage of the process – scenario analysis based on those risks and opportunities. This analysis, carried out with the help of external experts, aims to estimate the financial impact of climate change on our business, but there arebusiness. Because of the limitations – such impacts are systemic and unpredictable. Scenarioof climate risk scenario analysis, requiresany estimate will have limitations; in fact perhaps the greatest benefit of scenario analysis is that it helps us to pick specific factorsunderstand where risks and opportunities are most likely to materialise, to understand trends, and to integrate them into our strategy.
The limitations of climate change scenario analysis
Any scenario analysis is limited by the variables and assumptions included in the model, them using fixed assumptions. However, therebut it is particularly difficult with climate change. This is because of the considerable uncertainties in how the physical risks will play out under different temperature scenarios in different parts of the world, and the considerable uncertainties in how far and how quickly the world will be able to introduce the changes needed to limit the rise in temperature. No single scenario is likely to materialise in the coming decades by itself, and we are many wider potential impacts –including opportunities – that we cannot capture from one type of modelling. For this reason, we also look more broadly at possibleall 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 opportunitiesindustry pursue a variety of means, such as introducing regulation and developing new technologies. But whatever the pathway, we are committed to playing our business frompart in fighting climate change, and work to integrate climate insights intothrough delivering our strategy and decision-making processes.
Assumptions Our scenario modelling is underpinned by several key assumptions, principally that the risks assessed are based on a scenario without mitigation. The risks modelled under the different scenarios are mutually exclusive; we have not assessed a situation where physical and transition risks occur in parallel. The first iterationSociety 2030: Spirit of our scenario modelling assumes the business remains static (including our operating model, current sourcing practices and sourcing volumes), and we have not factored in rising costs, such as passing on costs to our customers.
Our assessment of carbon emission pricing was informed by the Global Energy Outlook 2020 report from the International Energy Agency (IEA). Based on IEA projections of the carbon price to limit warming to below 2°C for 2025 and 2040, we extrapolated a carbon price of $88.67/tCO2e for 2030, and used this price in evaluating the financial impacts of our Scopes 1 and 2 emissions.
Scope The scope of the scenario analysis was our assets and the key raw materials used in 59 sites owned and/or operated by Diageo in North America and Scotland. The agricultural raw materials assessed account for a large portion of our global raw material costs (barley, wheat, maize) or were identified as being most vulnerable to the effects of climate change (sugar cane/molasses, vanilla).
For the transition risk scenario analysis, we considered the impact of a carbon tax on the following emissions from the agricultural sector:
1. Nitrous oxide emissions from the use of synthetic fertiliser
2. Methane from flooded rice cultivation
3. Nitrous oxide and methane from the use of manure
4. Methane from enteric fermentation (digestive process by which carbohydrates are broken down by microorganisms).
For our global analysis of water stress, we assessed all operational production or packaging sites in water-stressed areas (see water stress map on page 90). To assess its financial impact in 2030, we used WRI water stress scores to estimate the probability and duration of increased downtime at water-stressed sites. Based on the predicted downtime we estimated the resulting lost sales.
1. A representative concentration pathway (RCP) is a way of expressing the impact of global warming relating to the degree of warming of the Earth’s surface. Four pathways were developed for climate research by the Intergovernmental Panel on Climate Change (IPCC) in 2014.
2. To measure and manage our carbon emissions, we follow the Greenhouse Gas Protocol global framework, which identifies three scopes of emissions. Scope 1 represents the direct emissions we create. Scope 2 represents the indirect emissions resulting from the use of electricity and energy to run our business. Scope 3 represents indirect emissions attributed to upstream and downstream activities involved in producing our brands.
Limitations of the scenario analysis
This exercise is not representative of the business as a whole and additional risks and opportunities are likely to be identified once further assessments have taken place. Nor can the results for Scotland and North America be extrapolated to the rest of our business due to the diversity of our portfolio and the climates in which we operate.Progress goals.
Summary of findingsscenario analysis results
InWe analysed three temperature increase scenarios. The first envisages a successful transition to a low-carbon economy in time to keep the low carbon transition scenario,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). The other two look at the main risk is carbon pricing leading to increased costs. In both physical impact temperature scenarios,likely effects of varying degrees of continued warming, and the main risksimpacts that will arise from water stress,the physical risks this presents (to 2030 and include potential disruption to production2050). We looked at a moderate warming scenario (temperature rise of 2-3⁰C), and increased costsa severe warming scenario (temperature rise of agricultural inputs and other materials. The scenario analyses undertaken this year did not identify any material financial impact.
Business description (continued)
Lack4-5⁰C). For both these warming scenarios, we assessed our assets, supply chain and critical ingredients for financial vulnerability to physical risk.
As discussed in detail below, the impacts of dataclimate change are broad, and in many cases difficult to predict with certainty; however, some consistent themes have emerged. First, it is highly likely that we will be exposed to both transition and physical risks, and therefore should be prepared for long-term storm patterns limitsboth; and second, that the main impacts on our business, under any of these scenarios, are likely to come from water stress, the cost of decarbonisation and consumer demand for more sustainable offerings, although none of these are expected to have a material impact on the results of our operations, or on our financial condition, by 2030. Our priorities should therefore continue to be to decarbonise our supply chain, adapt to water stress in water-stressed areas, and develop more sustainable products, to continue to reduce our impact on the environment. These will help us mitigate the risks and prevent them from becoming material to our financial performance.
The potential impacts of climate change are evolving all the time, and we need to stay on top of them in our planning. In the coming year, we aim to cover those countries we have not yet assessed; and we will continue to refresh our analysis of water stress and update our scenario analyses regularly. We will also continue to research consumers’ attitudes to sustainability, and develop more environmentally-friendly products – e.g. increasing the use of recycled content in packaging, and reducing the amount of packaging material we use.
As one example of a step change towards our ‘Society 2030: Spirit of Progress’ goals, in 2020 we launched Diageo Sustainable Solutions (DSS). This global programme involves partnering with early- to mid-stage technology businesses to find and apply cutting-edge technology in our supply chain – covering agriculture, energy, packaging, waste and water.
In looking for bigger, bolder ideas and solutions that can transform sustainability in all areas of our products, DSS allows us to do far more than we could do on our own. At the launch of the programme, we published four challenges, and received more than 280 applications of which we reviewed 30 pitches. We chose six partners for the first cohort, and are currently piloting their technologies. In December 2021, we published another four much more specific packaging challenges, around alternative formats and reusable technology, and received 73 applications. We shortlisted 27, and are currently finalising the choice of projects for pilots.
Results of analysis of warming scenarios – effects of physical risk
As discussed on the previous page, we analysed the likely effects of the physical risks of two warming scenarios on the financial performance of our business, projected to 2030 and 2050. To calculate the financial impact, we assessed the value of the assets at risk, the likely loss of either asset or sales value in a year as a result of a risk materialising, and then calculated the total loss in value in each of 2030 and 2050. Importantly, the scenarios assumed that we will have taken no mitigating actions in the meantime. The risks are characterised as acute or chronic. Chronic risks include changes in temperature and precipitation that may cause increased water stress, water scarcity, or decreased water quality, or may impact our ability to predict accuratelysource agricultural materials. Acute risks include floods and storms, which may impact our sites, or the likelihoodsupply of some more extreme weather events occurring. Nonetheless, we monitor changing weather patterns in the short term, and act to mitigate negative effects. We have well established contingency plans aimed at securing alternative key material supplies at short notice, to transfer or share production between manufacturing sites where possible, and to substitute materials in products and recipes where it is possible to do so without altering the nature of the product. We have a longstanding focus on building resiliency into our value chain including long-term inventory planning and flood prevention to ensure critical assets are protected. As we develop our understanding of the impact climate change may have on our business, we expect to extend this value chain resilience planning to other parts of our business.
Findings from scenario one: low carbon transition scenario, RCP2.6 (1°C to 2°C temperature rise)
Under this scenario we examined the impact of the transition to a low carbon economy on our assets and on the key raw materials outlined above. Here, the impact mainly relates to increased raw material prices resulting from the cost of low carbon land management practices and the increased cost of carbon emissions globally. We expect the impact of this scenario to increase when Scope 3 emissions are assessed and incorporated in the analysis.
Findings from scenario two: intermediate warming scenario, physical impact, RCP4.5 (2°C to 3°C temperature rise)
Under this scenario we examined the impact of a rise in temperature of 2-3⁰C on our assets in North America and Scotland as outlined above, and on all our water-stressed sites across the world.ingredients.
The key risks we identified to assets were physical – namely exposure to extreme weather events. Such events can have a wide range of impacts, all of whichresults showed that overall, our sites are likely to be exacerbated by climate change. Extremeresilient to acute weather can principally affect Diageo financially in two ways: first, through disrupting operations by damaging assets or increasing running costs,events, like floods and second through loss of potential revenue as a result of site closure or production disruption.
This analysis examined the financial impact from flood risk. While a quantitative assessment of storm impact was not possible duestorms, although we are more exposed to the lack of available climate data at the time of the report, the scenario analysis did highlight those sites most at risk. The only site deemed to be at highacute risk of storm damagedrought, and to chronic changes like water scarcity. Indeed, water scarcity is the biggest climate-related risk to our distillery in St Croix, an island, located in the Eastern Caribbean vulnerable to hurricanes.
Diageo’s productionfinancial performance, since we have many sites in water-stressed areas that may not be able to continue production at current levels should these temperature scenarios play out. Those sites most likely to be affected are in India, Mexico, Turkey and North America, with all of our production sites in Mexico likely to be exposed to potential disruption if demand forextremely high water exceedsstress.
Under the available amount during a certain period or if poor quality restricts its use. The potential impactmedium warming scenario, the number of our production sites and thus our sales exposed to extremely high water stress is unlikely to change from the situation today, either by 2030 or by 2050. But should the severe warming scenario occur, even though the number of such disruptions was assessed as losssites affected won’t change, those that are affected are likely to suffer even greater shortages of water, under both time frames. They will also have a greater impact on the health and wellbeing of employees at those sites. Flooding and storms are the next most likely physical risks to affect our financial performance, since they may 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 these scenarios. The only physical risk likely to affect our operations or financial condition in profitany material way is drought, given our reliance on water to make our products.
Modelling the financial impact of drought is particularly difficult because there are many factors at play, not least the probability of drought occurring, the length of time operations would have to be suspended, the impact of any adaptation or contingency measures, and so on. Nonetheless, we have modelled what we can, using both the standard external models and our own analyses, and considering severe but plausible assumptions (e.g. concurrent downtime in all water-stressed sites due to production downtime ordrought). We concluded that, by 2030, drought is not expected to have a material impact on efficiency, which may affect both volume and costs.the results of our operations or on our financial condition.
Beyond 2030 it is much harder to analyse, given the lengthy time frame; however, our models show that if we take no mitigating actions, by 2050 drought could have a material impact on the results of our operations, or on our financial condition. This is why it is so important that we focus on water stress in our strategic planning.
Findings fromHow we are mitigating physical risks
Our physical risk scenario three: Extreme warming scenario,analysis confirmed that, of all the physical impact, RCP8.5 (4°C to 5°C temperature rise)
Under this scenario we examined the impactrisks of an extreme rise in temperatures of 4-5⁰C on the same assets, raw materials and water-stressed sites outlined in scenario two.
Assets The financial modelling of acute weather and chronic climate change, on our assets under this scenario indicates a more severe impact than under scenario two.
Raw materials The results show an increase in the cost of those raw materials that would be less readily available in certain areas duewe are most exposed to the impact of climate change. We assumedwater stress, and that we would be ableare most exposed in India and Mexico, as well as North America, Turkey and Africa. This serves to substitutereinforce our commitments to using less water and replenishing more water than we use in areas of water stress. Water is a shared resource, so we cannot tackle water stress alone; this is why we launched the scarce materialDiageo Collective Action Programme in 2020. Through this programme, we are working with the same material obtained from a different area, at a higher price.1
Water-stressed sites For all our water-stressed sites, the results under this scenario were very similar to those observed under scenario two, because:
– The emissions trajectory of RCP4.5partners in ‘priority water basins’ (areas suffering particular water stress, and RCP8.5which are not significantly different until 2030
– The mitigation actions under RCP4.5 will only start to produce discernibly different outcomes after 2030
In the case of severe warming, we might expect a further risk owing to GDP reduction in the market resulting from factors such as migration due to climate change.
1. We manage commodity price risks through forward-buying of traded commodities and other hedging mechanisms. We also explore the use of alternative raw materials. For example sorghum, a crop more resilient to climate change than the more commonly-used barley, is the mainstay of our new brewery in Kenya.
strategically important)
Business description (continued)
where our sites are located, namely 14 sites across 12 priority water basins in 10 countries. For more on our water replenishment and collective action work, see pages 44-46.
Results of analysis of transition scenario – risks and opportunities
As discussed above, the successful transition to a low-carbon economy, which assumes we meet the Paris Agreement target of limiting global warming to 1-2⁰C, brings both risks and opportunities. To help us model the potential impacts on our financial performance, we worked with an external expert in this type of modelling.
Methodology for analysing the transition scenario
We looked at two potential scenarios, and compared the likely difference in cash flows to 2030 and 2050:
•Baseline scenario: some drivers of the transition scenario, such as policy intentions and national targets, are already in place. This scenario therefore aims to analyse what the effects of these elements would be, insofar as they are backed up by detailed measures for their realisation, as well as other market trends and expectations that can be inferred from available data and analysis.
•Transition scenario assuming we reach net zero emissions by 2050: this sets out a narrow but achievable pathway for the global energy sector to achieve net zero emissions by 2050, alongside necessary changes in all other sectors of the economy to limit global warming to 1-2⁰C.
Both scenarios are based on a combination of internal and external models and data.
•External models: we used a variety of scenarios developed by the International Energy Agency (IEA), the IPCC and various other institutions.
•Internal models: for each of our product categories, we looked at production costs and margins; sales and consumption by region; and expected growth. It was important to look at each product category separately because they are exposed to different types of transition risk.
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 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 cashflow to both 2030 and 2050.
Outlined in the table on page 68.are the materials that most affect our input costs, which may go up or down depending on the situation. We have modelled the 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.
Responding to climate-related risks continued
Input costs assessed in the scenario analysis by geography
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Impact to 2030Region | Transition riskGlobal | Physical riskUK | Physical riskUS | Canada | Mexico | Turkey | India | Africa |
Scenario analysis parametersGlass | 1 Low warming RCP2.6• | | | | | | | |
Aluminium | 2 Intermediate warming RCP4.5• | | | | | | | |
Land transport | 3 Extreme warming RCP8.5• | | | | | | | |
Ocean transport | • | | | | | | | |
Energy | | • | • | • | • | • | • | • |
Temperature riseElectricity | | • | 1°C to 2°C• | 2°C to 3°C• | 4°C to 5°C• | • | • | • |
ImpactRaw materials | | | | | | | | |
Barley | Directly-owned assets in Scotland and North America• | | | | | | | |
Wheat | • | | | | | | | |
Maize | • | | | | | | | |
Rice | • | | | | | | | |
Sorghum | | | | | | | | • |
| In scopeSugar | In scope• | | | | | | | |
In scopeVanilla | | | | | | | | • |
Anise | | | | | | Priority agricultural raw materials (Scotland and North America)• | | |
Agave | | | | | In scope• | N/A | In scope | |
Grapes | All water-stressed sites globally |
| | | | N/A• | In scope | In scope |
Future risk analysis and planning work
In the first half of next year we will explore opportunities to broaden the geographical reach of the risk analysis and scenario work we did this year, with assessments of our operations in India and Africa. From 2023, we aim to do the same in our remaining markets. We will also evaluate opportunities to increase the scope of our work and refine our scenario analysis model, including testing multiple scenarios, sensitivities and timeframes. This will enhance our risk management and climate change decision-making processes and inform our future strategy.
Researching consumers’ attitudesFor 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.
Business description (continued)
Transition risk and opportunity scenario analysis – findings
Transitioning to climate change
Beyonda low-carbon economy would generate both risks and opportunities for Diageo, and through our climate change riskscenario analysis we have estimated the impact on our operations and financial condition to 2030, concluding that it is unlikely to be material by that date, even assuming all changes in production costs were borne by us. This is reflected in our assessment of viability and impairment (see page 46 of the Annual Report). We have not calculated the financial impact to 2050 because there are too many variables and unknowns to make such a calculation meaningful. However, what we consider consumers’ attitudes throughdo know is what the workdrivers are – namely water stress, decarbonising our supply chain, and increasing demand from consumers for sustainable products. Within these drivers, the biggest cost comes from decarbonising the supply chain, and much of that comes from the price of glass, an important component of many of our Brand Sustainability Council. Our researchproducts’ packaging. The cost of glass is likely to date has identified a significant increase in consumers’ concerns aboutcontinue to rise, pushing unit production costs up, even while other costs may generally decline over the climate crisis. Concerns are translating into action, with a rise in consumers reducing, reusing and recycling packaging across all food and beverage categories, as well as consideringlonger term. While the impact on Diageo as modelled may not be material to 2030, the planet needs significant science-based action to create a sustainable low-carbon future. Therefore we have committed to decarbonising our own operations and partnering with our suppliers to halve the carbon emissions from our supply chain by 2030. For more on our plans to decarbonise our supply chain, please see the metrics and targets section(pages 69-71).
The scenario analysis gave us insights into which parts of their choicesour business would be most affected by transition risk. The markets most likely to be affected are India and Mexico, because of the high relative impact of packaging costs on overall profitability. Looking at product categories, Scotch whisky and tequila are most likely to be affected — because they can be produced only in terms of energyScotland and water used, transport and waste. ConsumersMexico respectively, but are motivated by what matters most to them through personal experience, such as pollution and packaging. Beyond their own actions, consumers expect businesses and governments to act to make the systemic changes needed forimported into many countries around the world, and are packaged mainly in glass. And today, consumers are increasingly sensitive to combat climate change. We are committed to continually improving the sustainabilityperceived environmental impacts of our brandsimported products. Although not financially quantified, these changes in consumer behaviour could potentially result in lost revenue and communicating their sustainability credentialsprofit, if we do not respond. However, there is an opportunity for companies that innovate, and that develop and produce drinks in clear, compelling ways.a more sustainable way, for example through packaging reduction, re use and recycling.
Metrics and targets1
We understand that managing climate change risk effectivelyhave adopted the TCFD’s recommendations for reporting on metrics and taking advantage of opportunitiestargets.
We are committed to playing our part in transitioning to a low carbonlow-carbon world means developing robust adaptation and mitigation plans. We also know we must be flexible and quick to adapt because regulatory and legal change ismaking a positive impact on the horizon, as governments consider questions such as further carbon taxes which could affect our financial performance.
environment. Our ‘Society 2030: Spirit of Progress’ strategyambition includes stretching goals which directly help us respondfor decarbonising our operations and supply chain, and for water efficiency and replenishment. The figure (on page 69) outlines our pathway to climate change risks and opportunities across our value chain. It is deliberately bold to prompt us to act decisively, and to give us the credibility to be an active advocate for climate action in the wider world.net zero carbon emissions. Our annual targets to achieve net zero by 2030 in our Scope 1 and 2 emissions have been calculated in accordance withvalidated by the principles of Science Based Targets initiative (SBTi). We have an interim target of a 50% reduction in Scope 3 emissions by 2030, and have been submitted to the SBTi for validation. This year we have made progress in line with our expectations and are on track to achieve this goal. Our Scope 3 target of net zero by 2050 ishas also aligned with the principles ofbeen validated by the SBTi.
Business description (continued)
Science-based targets for carbon targetsemissions
By 2030, we commit to:
| | | | | | | | |
Target | KPI | 20212022 performance |
Becoming carbon net zero carbon in our direct operationoperations (Scopes 1 and 2) | Percentage reduction in absolute GHG (kt CO(ktCO2e)2e) | 5.15.3 | % |
Reducing our value chain (Scope 3) emissionemissions by 50% | Percentage reduction in absolute GHG (kt CO(ktCO2e) | (4.7)%2e) | -2.1 | % |
Using 100% renewable energy across our direct operations | Percentage of renewable energy across our direct operations | 3641.2 | % |
We are working hardThis year we achieved a further 5.3% reduction in emissions from our direct operations which keeps us on track to deliver our plan to reach our Scopes 1 and 2achieve net zero carbon target by 2030. It includes capital investment plansHowever, increased production volumes across many of our markets is making it even more challenging to meet our net zero targets, so we reviewed our net zero roadmap and internaladjusted our interim decarbonisation trajectory accordingly. Our value chain Scope 3 emissions increased by 4.7%, mainly due to increased production and the associated increased use of raw materials, packaging, third-party operations and neutral-spirit sourcing. We recognise that this target is challenging given the complexities of enabling impactful change up and down the value chain, and we must work closely with suppliers, peers and others to ensure we meet this target.
Business description (continued)
| | | | | | | | | | | |
Carbon emissions (Scopes 1 and 2) by region by year (1,000 tonnes CO2e)3,4,5 |
Region | 2020 (baseline) | 2021 | 2022 |
North America | 128 | 127 | 100 |
Europe | 153 | 130 | 145 |
Asia Pacific | 37 | 15 | 14 |
Africa | 151 | 172 | 150 |
Latin America and Caribbean | 23 | 28 | 38 |
| | | |
Diageo (total) | 492 | 472 | 447 |
United Kingdom | 87 | 71 | 84 |
| | | |
1. Baseline year for ‘Society 2030: Spirit of Progress' targets is 2020 unless otherwise stated
2. For commentary on performance against this target, please see page 37 and refer to our reporting methodologies in the ESG Reporting Index for allmore information on how data has been compiled, including standards and assumptions used
3. CO2e figures are calculated using the WRI/WBCSD GHG Protocol guidance available at the beginning of our financial year; the kWh/CO2e conversion factor provided by energy suppliers; the relevant factors to the country of operation; or the International Energy Agency, as applicable
4. 2020 baseline data, and data for the periods ended 30 June 2021 and 2020, have been restated in accordance with the WRI/WBCSD GHG Protocol and Diageo’s environmental reporting methodologies
5. Diageo sites which are linked to senior leadership remuneration. We track progress against these targets internally each month,UK total direct and have strategic reviews twice a year, which are used to inform our planning.indirect carbon emissions were 8484ktCO2e, comprising direct emissions (Scope 1) of 84ktCO2e and indirect emissions (Scope 2) of 0. The intensity ratio was 80 grams/litre packaged. Total global energy consumption was 3,650,444MWh; total UK energy consumption was 1,091,403MWh, comprising 951,552MWh of direct energy and 139,851MWh of indirect energy.
Water efficiency and replenishment targets
As a beverage business, robust water stewardship is a critical part of adaptingif we are to adapt successfully to a changing climate, change. as outlined in the risk management sections on pages 82-92. We carry out global assessments of water stress every two to three years, and any sites newly classified as water-stressed are included in our more stretching targets for water efficiency and replenishment. The last assessment was conducted in fiscal 21.
We have set a number of water targets for 2030 or earlier, focussing particularly on water-stressed areas:
| | | | | | | | |
Target | KPI | 20212022 performance |
Reduce water use in our operations with a 40% improvement in water use efficiency in water-stressed areas and 30% improvement across the company | Percentage improvement in litres of water used per litre of packaged product | 7.7 | %3.7% across the company |
Replenish more water than we use for our operations in 100% of sites in water-stressed areas by 2026 | Percentage of water replenished in water-stressed areas | 12.715.3 | % |
Invest in improving access to clean water, sanitation, and hygiene (WASH) in communities near our sites and local sourcing areas in 100% of our water-stressed markets | Percentage of water-stressed markets with investment in WASH | 8988.9 | % |
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 | Percentage of priority water basins withparticipating in our collective action participationplans | 1533.3 | % |
Water stress is not a fixed state, however, so we will carry out global assessments every two to three years to make sure we are addressing the issue properly. Where sites are newly classified as water-stressed, they will be included in our more stretching targets for water efficiency and replenishment. This year, we added three countries to the list to those defined as water-stressed: Indonesia, Mexico and Turkey.
| | | | | | | | | | | |
Carbon emissions (Scopes 1 and 2) by region by year (1,000 tonnes CO2e)2,3,4 |
Region | 2019 | 2020 (baseline) | 2021 |
North America | 54 | 128 | 128 |
Europe and Turkey | 234 | 153 | 128 |
Africa | 198 | 166 | 182 |
Latin America and Caribbean | 18 | 23 | 27 |
Asia Pacific | 48 | 37 | 16 |
| | | |
Diageo (total) | 552 | 507 | 481 |
United Kingdom | 167 | 85 | 70 |
| | | |
Water efficiency by region by year3,5 |
Region | 2019 | 2020 (baseline) | 2021 |
North America | 5.29 | 5.33 | 4.91 |
Europe and Turkey | 5.31 | 5.10 | 5.10 |
Africa | 4.33 | 4.21 | 3.58 |
Latin America and Caribbean | 4.65 | 5.02 | 5.15 |
Asia Pacific | 3.56 | 3.95 | 3.58 |
| | | |
Diageo (total) | 4.71 | 4.66 | 4.3 |
| | | |
| | | | | | | | | | | |
Water efficiency (litres per litre packaged) by region by year1,2 |
Region | 2020 (baseline) | 2021 | 2022 |
North America | 5.33 | 4.91 | 5.06 |
Europe | 5.10 | 5.13 | 4.87 |
Asia Pacific | 3.95 | 3.58 | 3.57 |
Africa | 4.11 | 3.53 | 3.29 |
Latin America and Caribbean | 4.93 | 5.07 | 4.86 |
Diageo (total) | 4.63 | 4.29 | 4.13 |
1. Baseline year for ‘Society 2030: Spirit of Progress’ targets is 2020 unless otherwise stated
2. CO2e figures are calculated using the WRI/WBCSD GHG Protocol guidance available at the beginning of our financial year: the kWh/CO2e conversion factor provided by energy suppliers: the relevant factors to the country of operation: or the International Energy Agency, as applicable.
3. 2020 baseline data, and data for the periods ended 30 June 2020 and 2019,2021, have been restated in accordance with the WRI/WBCSD GHG Protocol and Diageo’s environmental reporting methodologies.methodologies
4. Diageo UK total direct and indirect carbon emissions were 69,748, comprising direct emissions (Scope 1) of 69,748 and indirect emissions (Scope 2) of 0. The intensity ratio was 69 grams/litre packaged. The UK total energy consumption was 1,055,666MWh, comprising 919,173MWh of direct energy and 136,493MWh of indirect energy.
5.2. In accordance with our environmental reporting methodologies, total water used excludes irrigation water for agricultural purposes on land under our operational control.control
Business description (continued)
This year we achieved a 7.8% improvement in water use efficiency in water-stressed areas and a 3.7% improvement across the company which are on track against our 2030 targets. We report on our performance against our ‘Society 2030: Spirit of Progress’ targets in full on pages 64-67.35-38. Our overall approach to risk management is described further on pages pages 72-82.42-45. A commitment to pioneering grain-to-glass sustainability is central to our strategy – read about our approach on pages 56-58 .30-31. Our ESG Reporting Index contains more detailed disclosures aligned with the GRI, SASB and UN Global Compact reporting frameworks.
Business description (continued)
How we have adopted the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)
This table outlines how we have reported in line with with the recommendations of TCFD and where we have more to do. Each year, with the help of expert partners, we expand the scope of our risk assessments and scenario analysis. The order of the table reflects the order in which we report on each recommendation.
| | | | | |
TCFD recommendation | Alignment |
Governance — see page 59 | |
a. Describe the board’s oversight of climate-related risks and opportunities | Yes |
b. Describe management’s role in assessing and managing climate-related risks and opportunities |
Risk management — see pages 59-66 | |
a. Describe the organisation’s processes for identifying and assessing climate-related risks | Yes |
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 66-69 | |
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 North America and Scotland (high value markets), and in India, Africa, Mexico and Turkey (geographies most exposed to physical risk), 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. We intend to extend this analysis to our remaining markets over the next two years, and include a quantitative analysis of the impact in our disclosure. |
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 and targets — see pages 69-70 | |
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 |
b. Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas (GHG) emissions and the related risks | Yes for Scopes 1, 2 and 3 |
c. Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets | Yes |
Business description (continued)
Reporting boundaries and methodologies
Reporting boundaries
Our reporting covers the global operations of Diageo plc in the financial year ended 30 June 2021.2022. Dates refer to financial years unless otherwise stated. Excluding the few exceptions below, the boundaries for all data disclosed in Form 20-Fthe Annual Report and the ESG Reporting Index include the results of the company and its subsidiaries, together with Diageo’sour attributable share of the results of significant joint ventures.
The reporting scope depends to a significant extent on the nature of each indicator, and we have explained exceptions and limitations
of each indicator in this document. When a business is acquired, or 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.
New acquisitions are included in the consolidated reporting for non-financial data as soon as practically possible, and no later than one year after assuming operational control. This covers environmental data and impacts from new operational sites. This duration varies as each new acquisition has unique systems and processes that must be integrated. Environmental data is collected and reported for all sites where Diageo haswe have operational control, including office sites with more than 50 employees. The reporting boundaries are based on The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (Revised Edition) from the World Resources Institute and World Business Council for Sustainable Development (WRI/ WBCSD Protocol).
The environmental impacts associated with leased facilities and the carbon emissions associated with company vehicles and leased cars are also excluded and considered immaterial to the company’s overall impacts. This is reviewed every three years to assess
the data and extent of impacts.
EXCEPTIONS
Environmental and safety data from joint ventures and associates where Diageo doeswe do not have operational control isare excluded.
DEFINITION OF DIAGEO MARKETS1,2
Diageo markets are defined as countries/ locations where we operate and/or sell our products. Our markets fall under five regions, and we report our performance across these regions. Our five regions and corresponding markets include:
• North America: Diageo North America comprises US Spirits, Diageo Beer Company USA (DBC USA) and Diageo Canada.
• Europe and Turkey: The region comprises of Great Britain, Ireland, Northern Europe, Eastern Europe, Southern Europe and Turkey. All these markets now operate with end-to-end accountability.
• Asia Pacific: 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, the Philippines, Indonesia, Malaysia, Singapore, Cambodia, Laos, Myanmar), North Asia (Korea and Japan) and Travel Retail Asia and Middle East.
• Africa: Africa region comprises East Africa (Kenya, Tanzania and Uganda), Africa Regional Markets (including Ghana, Cameroon, Ethiopia, Indian Ocean and Angola), Nigeria and South Africa.
• Latin America and Caribbean: Latin America and Caribbean (LAC) region comprises PUB (Paraguay, Uruguay and Brazil), Mexico, CCA (Central America and Caribbean), Andean (Colombia and Venezuela) and PEBAC (Peru, Ecuador, Bolivia, Argentina and Chile).
1. In the case of any organisational restructure these markets and their alignment to specific regions are subject to change.
2. In some cases the market definition varies according to the programme and will be specified within the programme reporting boundaries and methodologies
RESTATEMENTS OF DATA
Over the past three years, Diageo haswe have made a number of disposals, notably United National Breweries in South Africa in 2019, and
acquisitions of brands, distribution rights and equity interests in premium drinks businesses. Please seeSee Note 8 to the Financial statementsStatements in this reportthe Annual Report on pages 246-248,163-165 for details. Changes in our operations will result in restatement of historical data. Data associated with any divestments is removed from the baseline, intervening years and current year to ensure relevant comparisons and consistent performance tracking towards targets.
Restatement of baseline environmental data
Diageo restatesWe restate environmental data for the baseline year and intervening years to reflect changes in the company that would otherwise
compromise the accuracy, consistency and relevance of the reported information. Restatements are made in line with the protocols defined by the WRI/WBCSD Protocol and the Beverage Industry Greenhouse Gas (GHG) Emissions Sector Guidance (Version 3.0)4.2).
The baseline year environmental impact data, and data for intervening years, are adjusted to reflect acquisitions, divestments, updates to databases for CO2e emission factors, any errors in calculations, and any significant 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 the financial year ended 30 June 2021,2022, the baseline year environmental impacts were restated to reflect changes to CO2e emission factors and updated calorific values. Any restatements are carried out in accordance with the WRI/WBCSD Protocol, which defines the requirements for companies to restate environmental impacts for consistent tracking over time when they undergo significant structural changes. We deem this necessary to make meaningful historical comparisons.
The baseline year environmental impacts associated with acquisitions and bringing production in-house are primarily determined
directly from the historical data records for production volumes, energy, water use and waste generated for the baseline year and
intervening years. 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.
Business description (continued)
BASELINES
Diageo’sOur baseline year, set as the financial year ended 30 June 2020, applies to the majority of our 'SocietySociety 2030: Spirit of Progress'Progress targets. Where baselines differ, this has been described within each reporting boundary. The baseline data is used as the basis for calculating progress against Diageo’sour targets. Reporting methodologies are reviewed and updated on an annual basiseach year by leadership
Business description (continued)
teams. Material changes to the environmental reporting methodologies are ratified at the 2030 Grain to GlassGrain-to-Glass Strategic Business Review (SBR), quarterly meeting, chaired by the President, Global Supply and Procurement.
REPORTING SYSTEMS
There are three main systems used for collection, validation and analysis of reported data.
• Health and Safety dataand Human Resources data: :Health and Safety data and full-time employees (FTE)Human Resources data are reported at site level using theour global datainformation management system.systems.
• Environmental datadata: : We collect data on key measures of environmental performance every year. This is collated and analysed
using a web-based environmental management system. For the reporting period 1 July 20202021 to 30 June 2021, 1702022, 132 sites in 4023 countries reported environmental impact data.
–Denominator for efficiency indicators:To calculate efficiency ratios, we use litres of packaged product as the standard measure for comparison, because this measures the environmental impact associated with the production of our products. We measure litres of packaged product by site and aggregate them at group level. For fiscal 22, the total volume packaged used for the denominator in efficiency indicators is 4,239,215,340 litres.
•Local market Society 20302030: Spirit of Progress data:Where Society 20302030: Spirit of Progress programmes are managed at a local level, this performance data is collated on a quarterly basisevery quarter in our market reporting template. The data is compiled at a market, regional and global level, alongside our other Society 20302030: Spirit of Progress targets, and reviewed by general managers, functional leadership teams, at ourthe 2030 Grain-to-Glass Strategic Business Review (SBR), and with the Global Executive Committee during quarterly meetings. This regular assessment of performance enables us to manage programme risks and opportunities, and ensures that we have the right level of resources to deliver on our commitments.
Denominator for efficiency indicators
To calculate efficiency ratios, Diageo uses litres of packaged product as the standard measure for comparison, because this measures the environmental impact associated with the production of our products. We measure litres of packaged product by site and aggregate them at group level.
RELIABILITY AND ACCURACY OF DATA
We have processes governing the collection, review and validation of non-financial data included in this report, at market, regional
and global level. We have clear reporting lines and documentation of our processes; within this report we provide more detail of our reporting methodologies and calculation processes. 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. PwC provides limited assurance over selected indicators as described in our Annual Report and ESG Reporting Index.
PIONEER GRAIN-TO-GLASS SUSTAINABILITY
Our targets for 2030 are:
• Preserve water for life
–− 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
–− Replenish more water than we use for our operations for all of our of sites in water-stressed areas by 2026
–− 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
–− 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
• Accelerating to a low-carbon world
− Become net zero carbon in our direct operations (Scope 1 and 2)
− Reduce our value chain (Scope 3) carbon emissions by 50%
− Use 100% renewable energy across all our direct operations
• Become sustainable by design
− Achieve zero waste in our direct operations and zero waste to landfill in our supply chain
− 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 of our packaging to 60%)
− Ensure 100% of our packaging is widely recyclable (or reusable, compostable)
− Achieve 40% recycled content in our plastic bottles by 2025 – and 100% by 20301
− Ensure 100% of our plastics are designed to be widely recyclable (or reusable/ compostable) by 20251
− Provide all of our local sourcing communities with agricultural skills and resources, building economic and environmental resilience (supporting 150,000 smallholder farmers)
− Develop regenerative agriculture pilot programmes in five key sourcing landscapes.
1.These targets were introduced in 2018.
Business description (continued)
Preserve water for life
Target
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 measures (KPIs)
• Percentage improvement in litres of water used per litre of packaged product.
Diageo prepares We prepare and reportsreport water withdrawal data from the sites over which it haswhere we have operational control, using internally developed reporting methodologies based on the GRI Standards. In addition to tracking total water usage, Diageowe also preparesprepare and reportsreport water efficiency, meaning the ratio of the amount of water consumed to produce one litre of packaged product.
Definitions
Definitions
• Water-stressed locations and classification:
the World Resource Institute Aqueduct tool, UN Definitions and internal survey information are used to determine the number of our sites that are in water-stressed areas. For the financial year ended on 30 June 2021,2022, there are 4443 locations across 1412 countries that have been identified as water-stressed, with 3534 of these locations currently operational and 9nine non-operational. These sites are subject to more intense water stewardship measures over and above our target to improve water efficiency by 30% by 2030.
• Total quantity of water withdrawals: water obtained from ground water, surface water, mains supply and water delivered to the site
Business description (continued)
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 water usage data reported.
Scope
The scope includes Diageoour supply and office sites.
Data preparation and assumptions
Water withdrawals are measured primarily based on meter readsreadings and invoices for the majority of sites. In some limited instances estimations are used to calculate withdrawals. Water withdrawals are reported by source at site level using the environmental
management system.
Water efficiency (water use rate), per litre of packaged product, is calculated by converting the total water withdrawal in cubic metres to litres, then dividing by the total packaged volume in litres.
The extent of water use at Diageo-operated agricultural lands – in Brazil, Mexico and Turkey – is quantified and reported separately.
TargetTARGET
Replenish more water than we use for our operations for all of our sites in water-stressed areas by 2026
Performance measures (KPIs)
• Volume of water replenished (cubic metres mAnnual volumetric replenishment capacity (m3). of projects developed in fiscal 22.
Baseline
The baseline for ourDefinitions
This performance measure is total water replenishment target is financial year ending 30 June 2026 estimated annual consumptive water volumes at sites locatedcapacity created in fiscal 22 in water-stressed areas. The baselinecomplexity of gathering data on the ground from multiple projects globally, means there can be a delay in reporting information. So, each fiscal year (1 July – 30 June) we currently include data from projects completed by 15 June; to allow us to consolidate the numbers to reflect most of the projects delivered to the fiscal year end. Replenishment (or Volumetric Water Benefit) is recalculated annuallydefined by the World Resources Institute as “the volume of water resulting from water stewardship activities, relative to incorporate estimated financial years 2021-26a unit of time, 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 which is summarised below for ‘data preparation and assumptions’. When projects are delivered by a third party and partially funded by Diageo, we only claim the proportion of volumetric capacity attributable to Diageo to avoid double counting. E.g. If Diageo fund 25% of a project that creates capacity of 100,000 m3, we would only claim 25,000m3.
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). Water-stressed catchments/basins are defined using the WRI aqueduct tool at the Minor Basin level. Water-stressed areas and classification: the World Resource Institute Aqueduct tool, UN Definitions and internal survey information are used to determine the number of our sites that are in water-stressed areas. For fiscal 22, there are 43 Diageo sites across 12 countries that have been identified as water-stressed, with 34 of these locations currently operational and 9 non-operational. These sites are subject to more intense water stewardship measures, for example have a target to improve water efficiency improvements,by 40% by 2030. An assessment of our sites located in water recovery, zero liquid discharge, production volume growth,stressed areas is completed every two to three years and includes any new water-stressedbuild or acquired sites and acquisitions and divestments.
Definitions
Calculationexcludes any sites divested. For the purposes of measuring annual performance against our 2030 target, calculation of this performance measure is total water replenished
Business description (continued)
during financial years 2021-26fiscal 21-26 at sites located in water-stressed areas as a percentage of our estimated financial year ending 30 June 2026fiscal 26 total consumptive water at sites located in water-stressed areas. On an annual basis, we measure our annual cumulative water replenishment at water-stressed sites as a percentage of our financial year ending 30 Junefiscal 2026 estimated total consumptive water at sites located in water-stressed areas. This is not subject to assurance.
Scope
Replenishment projects include, but are not limited to, activities such as reforestation, wetland restoration, desilting ponds, aquifer recharge, rainwater harvesting, and clean water,
sanitation and hygiene (WASH) programmes.
Replenishment targetsSanitation activities, which account for a small proportion of total water replenished, are calculated based on all consumptive water used per site,not defined within the VWBA methodology but are tracked and reported by site, and consolidatedincluded within our replenishment volume in line with Water Benefit Standard method.
into a market target. Replenishment projects need to be in a water-stressed site’s water catchment and/or water stressed water basins from which we source local raw materials.
Scope
The scope is water-stressed markets only.in which Diageo is operational. For financial year ended 30 June 2021,fiscal 2022, there are 44 locations43 Diageo sites across 1412 countries that have been identified as water-stressed, with 3534 of these locations are currently operational and 9 non-operational.non-operational (excluded from scope). In fiscal 22, 34 projects were implemented in India, Turkey, Brazil, Nigeria, Kenya, Ghana, Tanzania, South Africa, Seychelles and Uganda.
Data preparation and assumptions
Indicative volume (m3) of water replenished data is collected by a deliveryan implementation partner and, on completion of the project, confirmed. The
Diageo global metric owner provides final validation. This data is then validated by an external validator.
validator, and then 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 willare then be validated again after commissioning of the project. The volumetric replenishment capacity (m3) created by each individual project completed in fiscal 22 is then added together to create the total reported annual volumetric replenishment capacity (m3) for fiscal 22. The recommended process for planning and implementing a market-level water replenishment programme is outlined below:
TargetStep 1.1: Identity water challenges and their causes and understand the catchment
• When: At the start of the replenishment program and on-going
• Who: Market Sustainability Managers, project developers and local water experts
Step 1.2: Understand catchment stakeholders and ongoing water stewardship activities. Consider selecting multi-year strategic partners (i.e., partnership selection ideally is not done annually)
• When: At the start of the replenishment program and on-going
• Who: Market Sustainability Managers, project developers and local water experts
Step 2.1: Select partners and project activities based on elements of good water stewardship
• When: July – September
• Who: Market Sustainability Managers, project developers
Step 2.2: Submission of key project indicators for pre-validation of expected replenishment figures (Recommended)
• When: October – January
• Who: Market sustainability managers, project developers, external validators
Step 3.1: Document baseline and select water replenishment and complementary indicators
• When: October – January
• Who: Market Sustainability Managers, Project developers
Step 3.2: Gather required data and calculate water replenishment and complementary indicator
• When: February – May
• Who: Market sustainability managers, project developers, external validators
Step 3.3: Submit validated replenishment volumes to Diageo Global and Enablon for annual reporting
• When: May – June
• Who: Market sustainability managers (supply), Global
Step 3.4: Annual ongoing project status check (for completed project only)
• When: July – December of the following fiscal/reporting year
• Who: Market sustainability managers, project developers, external validators
Robust controls for project data reporting are embedded into the programme and summarized as follows:
• Initial project information is provided for pre-validation
− Sustainability managers and project developers submit information to external validator
• Approved pre-validated information is inputted to the project tracker
− External validators inputs information based on data from sustainability managers
• Final validation template is submitted for validation
− Sustainability managers and project developers submit information to external validator
• Approved validated replenishment figures are inputted to the project tracker
− External validators input information based on data from sustainability managers
Business description (continued)
The methodology for calculating the volume of water replenished for Diageo’s Water Replenishment Programme is based on the World Resources Institute’s Volumetric Water Benefit Accounting: A Method For Implementing and Valuing Water Stewardship Activities (2019, www.wri.org/ research/volumetric-water-benefitaccounting- vwba-method-implementingand- valuing-water-stewardship ), which is a “comprehensive, standardized and science based methodology to calculate and valuate 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).
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 measures (KPIs)
• Percentage of water-stressed markets where we have investedwith investment in improving access to clean water, sanitation and hygiene near ourWASH.
sites and local sourcing areas.
Definitions
• NearThe reporting period for this KPI is for fiscal 22. We outline Diageo’s market structure on page 73. Diageo’s markets are defined as countries/locations where we operate and/ or sell our sitesproducts. The definition of market used in this KPI is different to the definition used elsewhere in this ESG Reporting Index. To ensure comprehensive coverage each market is instead defined as an individual country as set out on page 73. This means that the KPI considers water-stress and local sourcinginvestment at a country level, rather than at a market level as defined elsewhere in this document. Water-stressed areas for water-stressed markets: includes all people within 1km of the water source, where we
aim to provide a new WASH facility or an improved WASH facility.
• Water-stressed locations and classification: The World Resource Institute (WRI) Aqueduct tool, local consultancy insightUN Definitions and internal survey information are used to determine whichthe number of our sites are in water-stressed areas. If we acquire new sites that are in water-stressed areas. An assessment of our sites located in water stressed areas these would be included in scope. We apply this target for newlyis completed every two to three years and includes any new build or acquired sites and excludes any sites divested. ‘Invested’ is defined as soonfunding committed and spent on new WASH facilities. Improving access is defined by local community access to clean water, sanitation or hygiene, which has strengthened as practically possible, and no later than one year after assuming operational control.
Business description (continued)
To qualify for this target,a result of the investment must occur at least once in the period to 2030 in each water-stressed market where we have
new or improved WASH facility. Communities ‘near our sites and local sourcing areas.areas’ are defined as being within the same water basin. WASH projects – are defined as projects which deliver improved access to clean drinking water, sanitation and hygiene. Data on the WASH programmes including locations, clean water yield, and number of people and number of women benefitting from a WASH programme is calculated by NGO delivery partners and validated by an external validator.
Scope
The scope includes all water-stressed markets.markets in which Diageo is operational. For financial year ended 30 June 2021,fiscal 22, there are 4443 locations across 1412 countries that have been identified as water-stressed, with 3534 of these locations currently operational and 9 non-operational.
non-operational (excluded from scope). The scope excludes new water-stressed markets in which Diageo operates where there is no demand/requirement for new community WASH projects (for example, Turkey),. These exclusions are verified by an expert implementing partner, and based on government, WRI and WHO data.information on WASH risk/availability. It also excludes Diageo WASH projects in markets that are not assessed as water-stressed (for example, Cameroon) or where we do not have direct operations (for
example, Myanmar).
Data preparation and assumptions
WASH programme investment data is tracked at a market level. Data on the WASH programmes – including locations, number of people and number of women benefitting from a WASH programme is calculated by NGO delivery partners and
census data, and validated by an external validator. The total number of WASH programmes, locations and total beneficiaries
is summarised at a global level. 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.
TargetTARGET
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 measures (KPIs)
• %Percentage of Priority Water Basins with collective action participationparticipation.
Definitions
• Priority Water Basin: Diageo carried out an assessment to identify priority water basinsPriority Water Basins for its operational sites. This assessment was
based on a combination of:
− a Diageo criticality assessment (based on expert judgement and consumption volumes)
− high water risks scores (based on WRI Aqueduct indicators) for each site.
In combination, these two indicators allowed the identification of water basins where Diageo operational sites would benefit the most from taking collective action to address identified water challenges.
• Collective Action in water stewardship encompasses multi-stakeholder water management initiatives or projects that involve interaction with government entities, local communities, NGOs, and/or civil society organisations that ultimately benefit all actors and the health of the basin by addressing shared water challenges.
Scope
The scope includes markets with operational sites located in water-stressed areas.
Business description (continued)
Data preparation and assumptions
Priority water basins with collective action participation are reported at a local market level and tracked by the Diageo global metric owner.
Accelerating to a low-carbon world
Target
TARGET
Become net zero carbon in our direct operations (Scope 1 and 2)
Performance measures (KPIs)
• Percentage reduction in absolute greenhouse gas emissions (ktCo(ktCO2e).
Definitions
• Scope 1 emissions (direct CO2e emissions): those from on-site energy consumption of fuel sources, such as gas, fuel oil and diesel,
as well as fugitive and agricultural emissions. In keeping with WRI/WBCSD Protocol guidance relating to biofuels, Diageo reports
we report CO2e emissions attributable to CH4 and N2O only, and excludesexclude direct CO2 emissions for biomass, biogas and the biogenic element of biofuels.biofuels, because this is outside each scope and reported separately. Minor quantities, typically at office sites, to a maximum of 50 tonnes CO2e, are excluded, as are the carbon emissions
associated with biogas flaring and leased cars, since they are considered immaterial to the company’sour overall impacts. These areas
are routinely reviewed to reassess the materiality of the datadata.
• Scope 2 emissions (indirect CO2e emissions): those from purchased electricity and heat.
Scope
The scope includes Diageoour supply and office sites.
Data preparation and assumptions
CO2e emissions data is externally reported in metric tonnes and is the measure used to compare the emissions from the six main
greenhouse gases based on their global warming potential (GWP).potential. The CO2e emissions data is calculated based on direct measurement of energy use (meter reads/readings/invoices) for the majority of sites. In certain limited instances (<1%*), where invoices are not available – for example, due to timing differences – consumption is estimated. Fuel consumption is reported by fuel type at site level using the
Business description (continued)
environmental management system. It is then converted to energy consumption, in kWh, by fuel type and multiplied by the relevant CO2e emission factor to derive the total CO2e emissions.
Scope 1 emission factors for fuels are typically average fuel CO2e emissions factors and calorific values (the latest available at the start of the reporting year) from the United Kingdom’sUK Department for Business, Energy and Industrial Strategy (BEIS). However, where product specificproduct-specific factors are available, these are applied.
Energy attribute certificates (EACs), derived from our distillery by-products and processed by a third party to generate biogas, form a component of our decarbonisation, together with purchased renewable EACs. This is reflected in data preparation and aggregation. Carbon emissions from electricity (Scope 2) are reported as both market emissions and location emissions in line with the WRI/WBCSD Protocol Scope 2 amendment made in January 2015.
Diageo’s Our CO2e reduction targets and reporting protocols (since 2007), are based on market emissions, applying emissions factors specified in EACs, contracts, power purchase agreements and supplier utility emissions, as detailed in WRI/WBCSD Protocol Scope 2 guidance. Our net zero emissions target for 2030 remains consistent with earlier reporting protocols and is based on market emissions.
The reporting of location (gross) emissions has been added to Diageo’sour protocols (since financial year ended 30 June 2014). For location-based reporting of grid electricity consumption, regional or sub-national factors are used where available.
These include, for example, CER (Ireland), BEIS (United Kingdom), the National Inventory Report (Canada), US eGRID (United States) and the Indian power sector report (India). In all other cases, country or sub-regional factors are provided by the International Energy Agency (IEA).
* Energy estimates determined to be 0.59%, in aggregate – from assessment of 85% of total energy consumption infor the financial year ended 30 June 2020 and the <1% threshold – thereby seems reasonableseem reasonable.
TargetTARGET
Reduce our value chain (Scope 3) carbon emissions by 50%
Performance measures (KPIs)
• Percentage reduction in absolute greenhouse gas emissions (ktCO2e).
Definitions
Scope 3 emissions are all indirect emissions (not included in Scope 1 and 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions. The CO2eCO2e emissions relating to all categories of material and services to our supply chain
include purchased raw materials, packaging, capital equipment, third-party manufacturers, consumer use and disposal. Upstream and
downstream logistics and distribution, including Category 4 logistics emissions, are aggregated, with emissions attributable to all categories of materials and services providing a total value chain, Scope 3 footprint. Category 4, Scope 3 emissions (that is, indirect
CO2e emissions from upstream transportation and distribution) are independently assured. Carbon dioxide emissions from the fermentation process are excluded from our reported environmental data because these emissions are from a biological short-cycle
carbon source and are outside Scope 1, 2 and 3.
Business description (continued)
Scope
Diageo’sOur value chain emissions, upstream and downstream, are in scope.
Data preparation and assumptions
CO2e emissions data is externally reported in metric tonnes and is the measure used to compare the emissions from the sixseven main greenhouse gases based on their global warming potential (GWP).potential. The CO2eCO2e emissions data is calculated on the basis of 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 CO2eCO2e emissions volume, measured in metric tonnes.
TargetTARGET
Use 100% of renewable energy across all our direct operations
Performance measures (KPIs)
• TotalPercentage of renewable energy (MWh)/Total energy use (MWh) expressed as a percentageacross our direct operations
Definitions
Total energy and renewable energy are externally reported in MWh and/or TJ. Total energy and renewable energy use are determined from direct and indirect energy consumption. Direct energy (renewable/non-renewable) is determined from the quantity of different fuel types (metric tonnes, litres), of renewable and non-renewable fuels, and by applying the relevant calorific value (BEIS, supplier-specific). Indirect energy (renewable/non-renewable) is measured in MWh/TJ from energy/utilities suppliers and/or by applying the relevant EACs.
Scope
DiageoOur supply and office sites are in scope.
Business description (continued)
Data preparation and assumptions
Total energy and renewable energy are externally reported in MWh and/or TJ. The energy data – direct and indirect – is calculated based on direct measurement of energy use (meter reads/readings/invoices for volumes of fuel supplied) for the majority of sites. In certain limited instances (<1%*), where invoices are not available – for example, due to timing differences – consumption is estimated. Fuel consumption is reported by fuel type at site level using the environmental management system. It is then converted to energy consumption, in kWh, by fuel type, applying the relevant calorific values (BEIS, supplier-specific, International Energy Agency (IEA))Agency). Direct energy factors for fuels are typically United KingdomUK BEIS average fuel factors (latest available at the start of the reporting year). However, where product-specific factors are available, these are applied. Renewable direct energy is determined from the quantity of different fuel types (metric tonnes, litres), of renewable fuels and by applying the relevant calorific value (BEIS, supplier-specific). Indirect renewable energy is measured in MWh for energy/utilities
suppliers and/or by applying relevant EACs. * Energy estimates determined to be 0.59%, in aggregate – from assessment of 85% of total energy consumption for the financial year ended 30 June 2020 and the <1% threshold – thereby seem reasonable.
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 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 23 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 2023 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 as a result of the Covid-19 pandemic, geopolitical instability and/or inflationary pressures), 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 as well as the United Kingdom’s departure from the European Union); (ii) the impact of the Covid-19 pandemic, or any other global or regional public health threats, on Diageo’s business, financial condition, cash flows and results of operation; (iii) the elevated geopolitical instability as a result of Russia's invasion of Ukraine; (iv) 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; (v) changes in consumer preferences and tastes, including as a result of inflationary pressures, disruptive market forces, changes in demographics, evolving social trends, changes in travel, holiday or leisure activity patterns, weather conditions, health concerns, pandemics and/or a downturn in economic conditions; (vi) changes in the domestic and international tax environment, leading to uncertainty around the application of existing and new tax laws and unexpected tax exposures; (vii) changes in the cost of production, including as a result of increases in the cost of commodities and due to supply chain disruptions, labour and/or energy or as a result of inflationary pressures; (viii) 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; (ix) 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; (x) the consequences of any failure of internal controls, including those affecting compliance with existing or new accounting and/or disclosure requirements; (xi) 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; (xii) cyber-attacks or any other disruptions to core business operations including manufacturing and supply, business service centres and/or information systems; (xiii) contamination, counterfeiting or other circumstances which could harm the level of customer support for Diageo’s brands and adversely impact its sales; (xiv) Diageo’s ability to maintain its brand image and corporate reputation or to adapt to a changing media environment; (xv) 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; (xvi) increased costs for, or shortages of, talent, as well as labour strikes or disputes; (xvii) 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; (xviii) fluctuations in exchange rates and/or interest rates, which may impact the value of transactions and assets denominated in other currencies, increase Diageo’s financing costs or otherwise adversely affect Diageo’s financial results; (xix) a tightening of global financial conditions, including an extended period of constraint in the capital markets which Diageo may access; (xx) movements in the value of the assets and liabilities related to Diageo’s pension plans; (xxi) 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 (xxii) any failure by Diageo to protect its intellectual property rights.
All oral and written forward-looking statements made on or after the date of this document and attributable to Diageo are expressly qualified in their entirety by the 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.
Business description (continued)
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 2022.
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.
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 the Covid-19 pandemic, geopolitical instability increased by Russia’s invasion of Ukraine and/or inflationary pressures) in the countries in which it operates
Diageo’s products are sold in over 180 countries worldwide, and Diageo may be adversely affected by global economic volatility or unfavourable economic developments 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 major markets, which include the United States, the United Kingdom, the countries that form the European Union, and certain countries within the Asia Pacific region, such as India and China, and failure to react quickly enough to changes in those economies could have an adverse effect on financial performance.
The Covid-19 pandemic has created and continues to create economic volatility, significantly impacting the markets in which Diageo operates. While restrictions imposed in response to the pandemic in most countries around the world have gradually eased, the long-term economic impact of the pandemic is still uncertain and the rate of economic recovery could vary significantly between and even within markets. Similarly, Russia’s invasion of Ukraine and the escalating 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 rising inflation around the globe, which may have a significant adverse effect on economic activity and Diageo’s business.
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 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, 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 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, China, the United Kingdom, the European Union and/or Russia), 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 forecasting and/or 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, 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.
There is also a risk that the period of economic and political uncertainty and complexity surrounding the United Kingdom’s departure from the European Union could contribute to volatility in exchange rates, wider risks to supply chains and potentially ultimately lead to changes in market access or trading terms (including to customs duties, tariffs and/or industry-specific requirements and regulations), as well as generally increased legal and regulatory complexity and costs. 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. 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.
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 39% of Diageo’s net sales for the year ended 30 June 2022. 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.
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, or by any other novel global public health threats or fear thereof
Covid-19 was declared a pandemic by the World Health Organization in March 2020. Since then, government responses and measures adopted by other regulatory bodies in response to the pandemic have caused and continue to cause business slowdowns as well as general economic instability and disruption to Diageo’s operations. While restrictions in most countries around the world have gradually eased, the longer-term impacts of the Covid-19 pandemic on Diageo's business and operations remain uncertain. It is possible that vaccinations and other preventative measures become less effective over time, particularly if new variants of the Covid-19 virus emerge, leading governments to impose new or additional restrictions, which may adversely affect its business and operations.
To date, the direct impacts on Diageo's business from the Covid-19 pandemic have included, but have not been limited to:
–the closure of and/or other restrictions being placed upon on-trade channels such as bars, restaurants and other hospitality venues in a significant number of Diageo's markets globally as a result of government social distancing mandates and/or other factors, which have impacted the volume of Diageo's products sold via those channels;
–temporary disruptions to Diageo's ability to operate certain of its production and other facilities due to regulatory restrictions or other factors, as well as the implementation of heightened safety protocols in all of Diageo's facilities and offices worldwide leading to restrictions to access, reductions in activity levels, employees of Diageo and its suppliers and distributors not being able to work at all or work as efficiently due to home working, illness, quarantines or other factors, as well as other additional costs;
–wider disruptions to Diageo's supply chains and/or those of its suppliers, distributors and/or customers; and
–the imposition of travel restrictions by numerous jurisdictions combined with public concern about travel resulting in significant declines in passenger numbers, particularly for air travel.
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 and the impact of economic policies. While most countries around the world have gradually scaled back their Covid-19 response measures, any additional impacts related to Covid-19 (including those related to any new variants of the Covid-19 virus that may emerge) may affect economic recovery, which could materially adversely impact global economic conditions. This could in turn lead to a further decline in discretionary spending by consumers. In addition, a global outbreak of another novel public health threat, or fear of such an event, could result in a resurgence of government restrictions and regulations and result in any of the impacts described above.
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. Although no material write-downs relating to the impacts of the Covid-19 pandemic were recognised during the fiscal year ended 30 June 2022, there remains a risk that material write-downs or impairments may occur during future periods as a result of the Covid-19 pandemic.
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. A continuation or worsening of the levels of market disruption and volatility seen in the recent past, either as a result of the Covid-19 pandemic or of the emergence of any other new international public health threat, 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.
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.
Diageo’s business may be adversely impacted by the effects of Russia’s invasion of Ukraine
In response to Russia’s invasion of Ukraine in early March 2022, Diageo temporarily halted shipments and sales of its products in Russia and Ukraine while focusing on supporting its employees in the region. In June 2022, Diageo restarted shipments of Diageo’s products to Western Ukraine through local distributor networks and made the decision to wind down its business operations in Russia. Diageo expects this winding-down process to take approximately 6 months, during which time Diageo will continue to focus on supporting its employees and providing them with enhanced redundancy terms, while ensuring compliance with local regulations.
The Diageo group has historically derived only a small proportion of its revenue from the distribution of its products within Russia and Ukraine. For the fiscal years ended 30 June 2022 and 30 June 2021, Diageo’s business in Russia contributed less than 1% of reported net sales and of reported operating profit. In addition, Diageo has never produced any of its products in Ukraine. However, Diageo’s business and operations may be adversely impacted as a result of the broader geopolitical and economic consequences of the invasion, including due to elevated geopolitical instability, additional trade restrictions (as well as any retaliatory actions taken by Russia in response to sanctions and other restrictive measures imposed against it), disruptions to global supply chains, increases in commodity and energy prices with flow-on global inflationary impacts, adverse impacts on markets and a downturn in the global economy.
Risks related to Diageo’s industry
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 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 and vanilla, agave, rice, grapes, sorghum, and aniseed. Severe weather events or changes in the frequency or intensity of weather events could also 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. Diageo also has production facilities in water stressed areas which may be at increased risk of water stress in the future as a result of climate change.
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, 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. 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 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 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 is expected to incur increased costs, including those associated with required improvements to energy usage in agriculture and glass manufacturing, land practices and competition for land from bio-crops, the rising cost of natural gas, rising worldwide carbon prices and the compliance and costs linked with packaging taxes. 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 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, including complying with the European Union Emissions Trading Scheme. In addition, in March 2022 the US Securities and Exchange Commission announced proposed rules with respect to climate-related disclosures, including with respect to greenhouse gas emissions and certain climate- related financial statement metrics, which would apply to foreign private issuers listed on US national securities exchanges such as Diageo. Compliance with such reporting requirements (if they are adopted) or any similar requirements may be complex to comply with and Diageo may incur substantial costs as a result. If Diageo is unable to accurately measure and disclose required climate-related data in a timely manner, it could be subject to penalties in certain jurisdictions. In November 2020, Diageo announced its “Society 2030: Spirit of Progress” 10-year sustainability action plan, for contributing to the achievement of the UN Sustainable Development Goals. As part of this plan, Diageo is aiming to reach certain science-based carbon and water efficiency and replenishment targets. Diageo could suffer reputational 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 responsibly with respect to the environment or to effectively respond to regulatory requirements concerning climate change.
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 focussed 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 (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. 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 products. In particular, inflation, as measured by the consumer price index has recently increased in advanced and emerging market economies, including in Europe and the United States, driven mainly by supply chain issues (including input shortages, labour constrains, 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 at-home Guinness microdraught dispenser or the Crown Royal's ready-to-drink hard whisky cocktails), 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 ‘Additional information for shareholders – Legal proceedings’ and 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. For example, recently there has been increased demand for and restricted supply of agave suitable for use in tequila which has driven a marked increase in the cost of agave and, as a result, has impacted Diageo’s margins.
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, including certain continuing litigation in India arising from Diageo’s acquisition of USL, see ‘Additional information for shareholders - Legal proceedings’ and 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. Enforced closure of on-trade venues introduced in response to the Covid-19 pandemic, including in many of the markets in which Diageo operates, impacted the sale of Diageo’s products in such jurisdictions. While the general easing of restrictions across most of the world has seen a recovery for the on-trade in many regions, a re-introduction of any such measures in the future may have a further impact on the sale of Diageo's products, 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.
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. With the introduction of new data privacy laws, such as the PIPL, there is also an increased cost relating to monitoring and compliance, which may have an adverse impact on Diageo’s business and financial performance.
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 ‘Additional information for shareholders – Legal proceedings’ and note 19 to the consolidated financial statements.
Risks related to Diageo’s business
Diageo may be adversely affected by cyber-attacks or other disruption 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 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 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 and reputation, as well as the price of Diageo’s securities.
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. 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. Diageo, its suppliers and/or its customers may also be adversely affected by staff unavailability due, in part, to disruptions in the labour force due to increase in employee resignations in various regions during the Covid-19 pandemic. 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 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. The historical issues in USL detailed in note 19 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 (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. 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 may incur significant cost in connection with attempting to achieve its environmental, societal and governance (ESG) ambitions, and may be subject to increased scrutiny and reputational risk if it is unable to make sufficient progress 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 investment 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. 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. The occurrence of any of these events may have material adverse impact on Diageo’s financial condition, results of operations, reputation and/or 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 are presented in sterling. As a result, Diageo is subject to foreign currency risk due to exchange rate movements, which affect 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 42% of Diageo’s net sales in the year ended 30 June 2022 were in US dollars, approximately 10% were in euros and approximately 8% were in sterling. Movements in exchange rates used to translate foreign currencies into sterling may have a significant impact on Diageo’s reported results of operations from year to year. For example, the hyperinflationary environment in Turkey has significantly weakened the Turkish lira, which has had an unfavourable impact on Diageo's sales during the fiscal year ended 30 June 2022. 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. Accommodative monetary policy has generally made borrowing less expensive in the markets in which Diageo operates in recent years. However, the global economy has recently experienced high levels of inflation, while benchmark interest rates, such as the UK base rate, have begun to rise. 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, rising energy prices (particularly for oil and gas) and Covid-19. Supply chain disruptions are expected to continue in the markets which Diageo operates in and may worsen in the near term. 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 begin to rise further and faster than had been anticipated previously 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 constrain 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’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.
Operating results 20212022 compared with 20202021
Group financial review
| | |
Reported net sales increased 8.3%21.4% driven by organic growth. |
Reported operating profit was up 74.6%18.2% driven by growth in organic operating profit, and reduction inpartially offset by the negative impact of exceptional operating items.
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Organic results improved with volume growth of 11%10.3% |
Organic net sales growthgrowth1 of 16%21.4% |
Organic operating profit(1) grew 17.7%26.3% |
Net cash from operating activities was £3.7£3.9 bn |
Free cash flowflow1 was £3.0£2.8 bn |
Basic eps of 113.8 pence140.2p was up 89.4%23.2% |
Eps before exceptional itemsitems1 increased 7.4%29.3% to 117.5151.9 pence |
(1) See page 140 for thedefinitions and reconciliation of non-GAAP measures to GAAP measures.measures on pages 133-144
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Summary financial information | | 2022 | 2021 |
Volume | EUm | 263.0 | | 238.4 | |
Net sales | £ million | 15,452 | | 12,733 | |
Marketing | £ million | 2,721 | | 2,163 | |
Operating profit before exceptional items | £ million | 4,797 | | 3,746 | |
Exceptional operating items(1) | £ million | (388) | | (15) | |
Operating profit | £ million | 4,409 | | 3,731 | |
Share of associate and joint venture profit after tax | £ million | 417 | | 334 | |
Non-operating exceptional items(1) | £ million | (17) | | 14 | |
Net finance charges | £ million | (422) | | (373) | |
Exceptional taxation credit/(charge)(1) | £ million | 31 | | (84) | |
Tax rate including exceptional items | % | 23.9 | | 24.5 | |
Tax rate before exceptional items | % | 22.5 | | 22.2 | |
Profit attributable to parent company’s shareholders | £ million | 3,249 | | 2,660 | |
Basic earnings per share | pence | 140.2 | | 113.8 | |
Basic earnings per share before exceptional items | pence | 151.9 | | 117.5 | |
Recommended full year dividend | pence | 76.18 | | 72.55 | |
(1) For further details of exceptional items, see pages 101-102.
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| North America | | | Europe and Turkey | | | Asia Pacific | | | Africa | | | Latin America and Caribbean |
(i)1. Excluding corporate net sales of £54 million (2021 - £20 million (2020 - £38 million).
(ii)2. Excluding net corporate cost of £238 million (2021 - £208 million (2020 - £147 million).
(iii)3. Excluding exceptional operating charges of £15£388 million (2020(2021 - £1,357£15 million) and net corporate operating costs of £238 million (2021 - £208 million (2020 - £147 million).
| | | | | | | | | | | |
Summary financial information | | 2021 | 2020 |
Volume | EUm | 238.4 | | 217.0 | |
Net sales | £ million | 12,733 | | 11,752 | |
Marketing | £ million | 2,163 | | 1,841 | |
Operating profit before exceptional items | £ million | 3,746 | | 3,494 | |
Exceptional operating items(i) | £ million | (15) | | (1,357) | |
Operating profit | £ million | 3,731 | | 2,137 | |
Share of associate and joint venture profit after tax | £ million | 334 | | 282 | |
Non-operating exceptional items(i) | £ million | 14 | | (23) | |
Net finance charges | £ million | (373) | | (353) | |
Exceptional taxation (charge)/credit(i) | £ million | (84) | | 154 | |
Tax rate including exceptional items | % | 24.5 | | 28.8 | |
Tax rate before exceptional items | % | 22.2 | | 21.7 | |
Profit attributable to parent company’s shareholders | £ million | 2,660 | | 1,409 | |
Basic earnings per share | pence | 113.8 | | 60.1 | |
Basic earnings per share before exceptional items | pence | 117.5 | | 109.4 | |
Recommended full year dividend | pence | 72.6 | | 69.9 | |
(i) For further details of exceptional items see pages 105 and 236-238.
Business review (continued)
| Reported growth by region | Reported growth by region | Volume % | Sales % | Net sales % | Marketing % | Operating profit % | Operating profit before exceptional items % | Reported growth by region | Volume % | | Net sales % | Marketing % | Operating profit before exceptional items % | Operating profit1 % |
North America | North America | 10 | | 11 | | 13 | | 29 | | 7 | | 10 | | North America | 3 | | | 17 | | 28 | | 10 | | 10 | |
Europe and Turkey | 6 | | 2 | | — | | 11 | | (11) | | (16) | | |
Europe | | Europe | 20 | | | 26 | | 22 | | 60 | | 40 | |
Asia Pacific | | Asia Pacific | 8 | | | 16 | | 17 | | 17 | | (23) | |
Africa | Africa | 10 | | 6 | | 5 | | 5 | | 489 | | 69 | | Africa | 12 | | | 19 | | 18 | | 84 | | 84 | |
Latin America and Caribbean | Latin America and Caribbean | 22 | | 16 | | 15 | | 4 | | 25 | | 22 | | Latin America and Caribbean | 17 | | | 46 | | 51 | | 78 | | 78 | |
Asia Pacific | 9 | | 11 | | 10 | | 15 | | 187 | | 21 | | |
Diageo - reported growth by region(ii) | 10 | | 8 | | 8 | | 17 | | 75 | | 7 | | |
Diageo - reported growth by region1 | | Diageo - reported growth by region1 | 10 | | | 21 | | 26 | | 28 | | 18 | |
| Organic growth by region | Organic growth by region | Volume % | Sales % | Net sales % | Marketing % | | Operating profit(i) % | Organic growth by region | Volume % | | Net sales % | Marketing % | | Operating profit before exceptional items % |
North America | North America | 11 | | 19 | | 20 | | 34 | | | 17 | | North America | 3 | | | 14 | | 24 | | | 7 | |
Europe and Turkey | 7 | | 9 | | 4 | | 13 | | | (5) | | |
Europe | | Europe | 20 | | | 30 | | 26 | | | 64 | |
Asia Pacific | | Asia Pacific | 13 | | | 16 | | 16 | | | 16 | |
Africa | Africa | 18 | | 20 | | 20 | | 14 | | | 101 | | Africa | 17 | | | 22 | | 22 | | | 79 | |
Latin America and Caribbean | Latin America and Caribbean | 22 | | 31 | | 30 | | 18 | | | 63 | | Latin America and Caribbean | 8 | | | 43 | | 49 | | | 70 | |
Asia Pacific | 9 | | 16 | | 14 | | 16 | | | 22 | | |
Diageo - organic growth by region(ii) | 11 | | 16 | | 16 | | 23 | | | 18 | | |
Diageo - organic growth by region1 | | Diageo - organic growth by region1 | 10 | | | 21 | | 25 | | | 26 | |
|
(i)Before exceptional operating items.
(ii)(1) Includes Corporate. In the year ended 30 June 20212022, corporate net sales were £20£54 million (2020(2021 - £38£20 million). Net corporate operating costs were £208£238 million (2020(2021 - £147£208 million).
Business review (continued)
Key performance indicators
Reported net sales grew 8.3%21.4%
Organic net sales grew 16.0%21.4%
Reported net sales grew 21.4%, driven by strong organic growth. An unfavourable foreign exchange impact was partially offset by a hyperinflation adjustment in respect of Turkey.
Organic net sales growth of 21.4% reflects organic volume growth of 10.3% and 11.1 percentage points of positive price/mix. All regions delivered double-digit growth, reflecting the continued recovery of the on-trade channel, resilient consumer demand in the off-trade channel and market share gains. Growth was underpinned by favourable industry trends of spirits taking share of total beverage alcohol and premiumisation(1).
Price/mix drove 11.1 percentage points of growth, reflecting positive mix and mid-single digit price growth from price increases across all regions.
Positive mix was driven by strong growth of our super-premium-plus brands, particularly scotch, tequila and Chinese white spirits. It also reflects continued recovery of the on-trade channel in North America and Europe and the partial recovery of Travel Retail, partially offset by negative market mix due to the increased contribution to net sales from India.
Organic movement (i)(i
(1) IWSR, 2021.
(2) 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 2021, £14 million has been reclassified from cost(3) See pages 134 and 225-226 for details of goods sold to excise duties.
* Organic movementhyperinflation adjustment.
Reported net sales grew by 8.3%, driven by strong organic growth, partially offset by unfavourable foreign exchange.
Organic net sales growth of 16.0%, following a decline in fiscal 20, reflects organic volume growth of 11.2% and positive price mix of 4.8%. All regions grew organic net sales, driven by strong consumer demand in the off-trade channel and a partial recovery of the on-trade channel in key markets. Growth was particularly strong in North America. Positive price mix was primarily driven by strong premiumisation trends, particularly in North America and Greater China, and price increases in Latin America and Caribbean. Net sales benefitted from lapping a reduction in inventory levels by our customers in fiscal 20 and the replenishment of stock levels by distributors and retailers in North America in fiscal 21, partially offset by continued destocking in Travel Retail.
Business review (continued)
Operating profit (£ million)
Reported operating profit grew 74.6%18.2%
Organic operating profit grew 17.7%26.3%
Reported operating profit increased 74.6%18.2%, primarily due to a significant reduction in exceptional operating items compared to fiscal 20, anddriven by growth in organic operating profit. This was partially offset by the negative impact from adverse exchange rate movements.(i)of exceptional operating items, which were mainly due to non-cash impairments related to India and Russia.
Organic operating profit grew 17.7%26.3%, ahead of organic net sales growth, driven by growth inacross all regions except Europe and Turkey.regions.
(i) For further details on exchange rate movements see page 104.(ii)(1) For further details on exceptional operating items see pages 105 and 236-238.101-102.
(iii)(2) Fair value remeasurements. For further details see page 106.102.
(3) See pages 134 and 225-226 for details of hyperinflation adjustment.
Business review (continued)
Reported operating margin increased 1,112bpsdecreased 77bps
Organic operating margin increased 46121 bps
Reported operating margin decreased 77bps, with organic margin expansion more than offset by exceptional operating items of £388 million, primarily due to non-cash impairments related to India and Russia.(i)Organic operating margin increased 121bps, reflecting a strong recovery in gross margin and leverage on operating costs, while increasing marketing investment. Strong operating margin expansion in Latin America and Caribbean, Europe and Africa was partially offset by a decline in North America.
Organic gross margin increased 112bps, primarily driven by positive mix from premiumisation and the recovery of the on-trade channel. It also benefitted from improved fixed cost absorption from volume growth. Price increases and supply productivity savings more than offset the absolute impact of cost inflation, and mostly offset the adverse impact on gross margin.
Organic movement
121 bps
(1) For further details on exceptional operating items see pages 105101-102 and 236-238.233-236.
(ii)(2) Fair value remeasurements and reclassification. For the year ended 30 June 2021, £14 million has been reclassified from cost of goods sold to excise duties.hyperinflation adjustment. For further details on fair value remeasurements see page 106.102. See page 134 and 225-226 for details of hyperinflation adjustment.
Reported operating margin increased 1,112bps, mainly driven by a significant reduction in exceptional operating items compared to fiscal 20 and to a lesser extent by an increase in organic operating margin. This was partially offset by unfavourable exchange and fair value remeasurement.
Business review (continued)
Organic operating margin increased 46bps, driven by overhead efficiencies and lapping one-off expenses in fiscal 20 related to the operating environment disruption, partially offset by gross margin decline and upweighted marketing spend. In fiscal 21, we have upweighted marketing investment in the markets and categories with positive growth momentum, quickly responding to channel shifts and the increase in at-home occasions.
Gross margin declined 40bps driven by adverse mix, especially in our Guinness business, which was impacted by channel and market mix. Supply productivity and improved fixed cost absorption from volume growth largely offset inflation and one-off costs in the year.
Basic Earningsearnings per share (pence)
Basic eps increased 89.4%23.2% from 60.1113.8 pence to 113.8140.2 pence
Basic eps before exceptional items(1) increased 7.4%29.3% from 109.4117.5 pence to 117.5151.9 pence
(i) For further details on exceptional items see pages 105 and 236-238.
(ii) Includes finance charges net of tax.
(iii) Excludes finance charges related to acquisitions, disposals and share buyback.
(iv) Excludes tax related to acquisitions, disposals and share buyback.
(v) Fair value remeasurements. For further details see page 106.
Basic eps increased 53.726.4 pence, due to significantly lower exceptional items after tax and an increase inprimarily driven by organic operating profit. This increase wasprofit growth, partially offset by the impact from unfavourable exchange and higher tax charges.and exceptional items, primarily due to non-cash impairment charges related to India and Russia
Basic eps before exceptional items increased 8.1 pence, primarily driven by an increase in organic operating34.4 pence.
(i
(1) See page 133-134 for explanation of the calculation and use of non-GAAP measures.
(2) For further details on exceptional items see pages 101-102 and 233-236.
(3) Includes finance charges net of tax.
(4) Excludes finance charges related to acquisitions, disposals, share buybacks and includes finance charges related to hyperinflation adjustments (2022 – £(36) million; 2021 - £(6) million).
(5) Excludes tax related to acquisitions, disposals and share buybacks.
(6) Fair value remeasurements. For further details see page 102.
(7) Operating profit partially offset by unfavourable exchange andhyperinflation adjustment movement was £10 million compared to a lesser extent increased tax.fiscal 21 (2022 – £10 million; fiscal 2021 – £nil).
Business review (continued)
Net cash from operating activities and free cash flow (£ million)
Generated £3,654£3,935 million net cash from operating activities.activities(i)(1) and £2,783 million free cash flow.
Net cash from operating activities was £3,935 million, an increase of £281 million compared to fiscal 21. Free cash flow decreased by £254 million to £2,783 million.Free cash flow decreased as strong growth in operating profit was £3,037 million.more than offset by the impact of lapping an exceptionally strong working capital benefit in fiscal 21, increased capex investment, lower dividends from joint ventures and associates and higher cash tax paid.
The working capital benefit in fiscal 21 was due to a large increase in creditors as operating performance recovered during the year, following reduced volumes and cost control measures in the second half of fiscal 20.(i)Increased capex reflects investment in production capacity, sustainability, digital capabilities and consumer experiences, including projects delayed in fiscal 21 due to Covid-19.
The negative cash flow impact from ‘other’ items was due to lapping a delayed dividend payment of £82 million from Moët Hennessy, which was received in fiscal 21 for the year ended December 2019.
The increase in cash tax payments primarily reflects higher tax on increased earnings.
(1) Net cash from operating activities excludes net capex (2022 – £(1,080) million; 2021 – £(613) million) and movements in loans and other investments (2021 - £(617) million; 2020 - £(686) million).investments.
(ii)(2) Exchange on operating profit before exceptional items.
(iii)(3) Operating profit excludes exchange, depreciation and amortisation, post employment charges of £(53) million and other non-cash items.
(iv)(4) Working capital movement includes maturing inventory.
(v)(5) Other items include post employment payments, dividends received from associates and joint ventures, and movements in loans and other investments.investments and post employment payments.
Net cash from operating activities was £3,654 million, an increase of £1,334 million compared to fiscal 20. Free cash flow increased by £1,403 million to £3,037 million.
This was driven by an increase in operating profit, working capital management and receipt of a delayed 2019 dividend from associates, partially offset by an unfavourable movement in foreign exchange. Working capital benefitted from a large increase in creditors relative to the end of June 2020, when the creditor balance was particularly low as a result of reduced volumes and cost control measures. Creditors increased in fiscal 21 due to improved business performance and increased investment in marketing. Debtors and inventory levels also increased but to a lesser extent.
Business review (continued)
Return on invested capital (ROIC)%
Return on closing invested capital (%)
The return on closing invested capital of 33.2% for the year ended 30 June 2021, calculated as profit for the year divided by net assets as of 30 June 2021, increased by 1600bps driven by higher profit after tax.
Return on average invested capital (%)(i) (1)increased 112bps.
(i) ROIC calculation excludes exceptional operating items from operating profit.
ROIC increased 112bps against fiscal 20331bps
ROIC increased 331bps, driven mainly by organic operating profit growth, partially offset by increased tax and unfavourable exchange.higher tax.
(1) ROIC calculation excludes exceptional operating items from operating profit. For further details on ROIC see page 141.
Business review (continued)
Income statement
| | | 2020 £ million | Exchange (a) £ million | Acquisitions and disposals (b) £ million | Organic movement(i)
£ million | Fair value remeasurement (d) £ million | Reclassification(ii)
£ million | 2021 £ million | | 30 June 2021 £ million | Exchange (a) £ million | Acquisitions and disposals (b) £ million | Organic movement(1)
£ million | Fair value remeasurement (d) £ million | | Hyperinflation(1) £ million | 30 June 2022 £ million |
Sales | Sales | 17,697 | | (1,317) | | (105) | | 2,878 | | — | | — | | 19,153 | | Sales | 19,153 | | (838) | | 38 | | 3,567 | | — | | | 528 | | 22,448 | |
Excise duties | Excise duties | (5,945) | | 517 | | 40 | | (1,018) | | — | | (14) | | (6,420) | | Excise duties | (6,420) | | 617 | | (3) | | (851) | | — | | | (339) | | (6,996) | |
Net sales | Net sales | 11,752 | | (800) | | (65) | | 1,860 | | — | | (14) | | 12,733 | | Net sales | 12,733 | | (221) | | 35 | | 2,716 | | — | | | 189 | | 15,452 | |
Cost of sales | Cost of sales | (4,654) | | 325 | | 59 | | (773) | | (9) | | 14 | | (5,038) | | Cost of sales | (5,038) | | 127 | | (22) | | (901) | | (5) | | | (134) | | (5,973) | |
Gross profit | Gross profit | 7,098 | | (475) | | (6) | | 1,087 | | (9) | | — | | 7,695 | | Gross profit | 7,695 | | (94) | | 13 | | 1,815 | | (5) | | | 55 | | 9,479 | |
Marketing | Marketing | (1,841) | | 105 | | (9) | | (417) | | (1) | | — | | (2,163) | | Marketing | (2,163) | | 15 | | (25) | | (532) | | 1 | | | (17) | | (2,721) | |
Other operating items | Other operating items | (1,763) | | 64 | | (16) | | (43) | | (28) | | — | | (1,786) | | Other operating items | (1,786) | | 47 | | (4) | | (288) | | 98 | | | (28) | | (1,961) | |
Operating profit before exceptional items | Operating profit before exceptional items | 3,494 | | (306) | | (31) | | 627 | | (38) | | — | | 3,746 | | Operating profit before exceptional items | 3,746 | | (32) | | (16) | | 995 | | 94 | | | 10 | | 4,797 | |
Exceptional operating items (c) | Exceptional operating items (c) | (1,357) | | | (15) | | Exceptional operating items (c) | (15) | | | | | (388) | |
Operating profit | Operating profit | 2,137 | | | 3,731 | | Operating profit | 3,731 | | | | | 4,409 | |
Non-operating items (c) | Non-operating items (c) | (23) | | | 14 | | Non-operating items (c) | 14 | | | | | (17) | |
Net finance charges | Net finance charges | (353) | | | (373) | | Net finance charges | (373) | | | | | (422) | |
Share of after tax results of associates and joint ventures | Share of after tax results of associates and joint ventures | 282 | | | 334 | | Share of after tax results of associates and joint ventures | 334 | | | | | 417 | |
Profit before taxation | Profit before taxation | 2,043 | | | 3,706 | | Profit before taxation | 3,706 | | | | | 4,387 | |
Taxation (e) | Taxation (e) | (589) | | | (907) | | Taxation (e) | (907) | | | | | (1,049) | |
| Profit for the year | Profit for the year | 1,454 | | | 2,799 | | Profit for the year | 2,799 | | | | | 3,338 | |
(i)(1) For the definition of organic movement and hyperinflation see page 140.133-134.
(ii) In the year ended 30 June 2021, £14 million has been reclassified from cost of good sold to excise duties.
(a) Exchange
The impact of movements in exchange rates on reported figures for net sales and operating profit iswas principally in respect of the translation exchange impact of the strengthening of sterling against the US dollar, the Brazilian real, the Indian rupeeeuro and the Turkish lira, partially offset by the weakening of sterling against the euro.US dollar.
The effect of movements in exchange rates and other movements on profit before exceptional items and taxation for the year ended 30 June 20212022 is set out in the table below.
| | | | | |
| Gains/ (losses) £ million |
Translation impact | (207)(37) | |
Transaction impact | (99)5 | |
Operating profit before exceptional items | (306)(32) | |
Net finance charges – translation impact | 4 | |
Net finance charges – transaction impact | (3) | |
Net finance charges | 121 | |
Associates – translation impact | 4(19) | |
Profit before exceptional items and taxation | (290)(50) | |
| | | Year ended 30 June 2021 | Year ended 30 June 2020 | | Year ended 30 June 2022 | Year ended 30 June 2021 |
Exchange rates | Exchange rates | | Exchange rates | |
Translation £1 = | Translation £1 = | $1.35 | | $1.26 | | Translation £1 = | $1.33 | | $1.35 | |
Transaction £1 = | Transaction £1 = | $1.34 | | $1.35 | | Transaction £1 = | $1.29 | | $1.34 | |
Translation £1 = | Translation £1 = | €1.13 | | €1.14 | | Translation £1 = | €1.18 | | €1.13 | |
Transaction £1 = | Transaction £1 = | €1.14 | | €1.12 | | Transaction £1 = | €1.15 | | €1.14 | |
Business review (continued)
(b) Acquisitions and disposals
The acquisitions and disposals movement was primarily attributable to the acquisitiondisposal of Aviation Gin LLC (‘Aviation Gin’)the Picon brand and Davos Brands LLC (‘Davos Brands’)Meta Abo Brewery Share Company (Meta Abo Brewery) in the year ended 30 June 20212022 and to the impact of prior year's disposals.acquisitions.
See note 8 for further details.
Business review (continued)
(c) Exceptional items
Exceptional operating items in the year ended 30 June 20212022 were £15£388 million loss before tax (2020 - £1,357(2021 – £15 million).
In the year ended 30 June 2021, based2022, an impairment charge of £336 million was recognised in exceptional operating items in respect of the McDowell's No.1 brand (£240 million), Bell's brand (£77 million) and Smirnov related goodwill (£19 million).
For further information, see note 9 (d).
In March 2022, a decision was taken to suspend exporting to and selling in Russia and on recent developments,28 June 2022, Diageo decided that it would wind down its operations in Russia over the following six months. Losses of £50 million directly attributable to the wind down primarily include provisions for onerous contracts (£14 million) and redundancies (£13 million). Total impact of winding down operations in Russia resulted in a loss of £146 million, including impairment of the Bell’s brand (£77 million), Smirnov related goodwill (£19 million), and directly attributable items.
An exceptional charge of $3 million (£2 million) (2021 – £5 million) was recognised as part of the 'Raising the Bar' programme, in addition to the commitment of $100 million (£81 million) announced in the year ended 30 June 2020. The additional charge represents the re-investment of corporate tax benefit in the fund in certain markets, where a corporate tax deduction is available, and was recognised as an exceptional operating item, consistent with the initial commitment. Diageo also provided other forms of support to help our communities and the industry, which amounted to £8 million in the year ended 30 June 2020.
In the year ended 30 June 2021, an additional provision of TRY 156£15 million (£15 million) was recorded as an exceptional item in respect of ongoing litigation in Turkey, bringing the provision’s balance to TRY 272£23 million (£23 million) following a settlement of TRY 15£1 million (£1 million) during thethat year.
On 20 November 2020, the High Court of Justice of England and Wales issued a ruling that requires pension schemes to equalise pension benefits for men and women for the calculation of their guaranteed minimum pension liability (GMP) on historic transfers out, which resulted in an additional liability of £5 million.£5 million in the year ended 30 June 2021. The corresponding expense was recognised as an exceptional operating item consistentconsistently with the charge in relation to the initial GMP ruling in the year ended 30 June 2019.ruling.
An exceptional charge of $6 million (£5 million) was recognised as part of the 'Raising the Bar' programme, in addition to the commitment of $100 million (£81 million) announced in the year ended 30 June 2020. The additional charge represents the re-investment of corporate tax benefit in the fund in certain markets, where a corporate tax deduction is available.
In the year ended 30 June 2021, an inventory provision of £7£7 million was released (2020 - a charge of £30 million) in respect of obsolete inventories that had earlier been expected to be returned and destroyed as a direct consequence of the Covid-19 pandemic, resulting in an exceptional gain. GivenThe provision release was recognised as an exceptional operating item consistently with the original charge was classified as an exceptional item in the year ended 30 June 2020, the change to the provision was also classified as exceptional.2020.
In the year ended 30 June 2021, an additional gain of $4$4 million (£(£3 million) (2020 - £83 million)million) was recognised in exceptional operating items for excess receipts in respect of substitution drawback claims on prior year accruals.
In the year ended 30 June 2020, an impairment charge of £1,345 million was recognised in exceptional operating items, comprising of £655 million in respect of the India cash-generating unit containing the India goodwill, £116 million in respect of the USL popular brands category (Old Tavern brand £78 million and Bagpiper brand £38 million) and £1 million in respect of fixed assets in India; £434 million in respect of the Windsor Premier brand; £84 million in respect of the group's Nigerian tangible fixed assets; and £55 million in respect of the group's Ethiopian tangible fixed assets.
In line with the group’s accounting policy, given the unusual nature and magnitude of the below items, these were reported as exceptional operating items in the year ended 30 June 2020:
(i) Diageo launched the 'Raising the Bar' programme, including a commitment of $100 million (£81 million) over a period of up to two years from 1 July 2020, to support pubs and bars to recover following the Covid-19 pandemic. Diageo also provided other forms of support to help the communities and the industry which amounted to £8 million.
(ii) An exceptional charge of £30 million was recognised in respect of obsolete inventories that had been or were expected to be destroyed as a direct consequence of the Covid-19 pandemic. The amount comprised of a £23 million inventory provision and £7 million directly attributable to handling and destruction costs.
(iii) An estimated benefit of $105 million (£83 million) for substitution drawback claims that had been filed and were to be filed with the US Government in relation to prior years wasyears. The changes in estimates were recognised inas an exceptional operating items.
An assessment was issued byitem consistently with the Korea Tax Authorityinitial income of £83 million in the year ended 30 June 2020 that resulted in the reversal of the prior year's provision in the amount of £24 million. The corresponding income was recognised as an exceptional operating item, consistent with the charge in relation to the initial provision in the year ended 30 June 2019.2020.
Non-operating items in the year ended 30 June 20212022 were £17 million loss before tax (2021 – £14 million gain).
On 25 April 2022, Diageo completed the sale of 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 before tax (2020 - £23 million loss).statement.
On 25 March 2022, Diageo agreed to the sale of its Windsor business in Korea. At 30 June 2022, assets and liabilities 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 2021, 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. At 30 June 2022, cumulative translation gains recognised in exchange reserves were £141 million which will be recycled to the income statement on completion of the transaction, in the year ending 30 June 2023.
On 10 May 2022, Diageo sold its Picon brand. The sale resulted in an exceptional non-operating gain of £91 million, net of disposal costs. Disposal costs relating to the transaction amounted to £9 million.
In the year ended 30 June 2022, ZAR 209133 million (£106 million) of deferred consideration was paid to Diageo in respect of the sale of United National Breweries, the full amount of which represented a non-operating gain (2020 - loss(2021 – a gain of £32£10 million).
Certain subsidiaries of United Spirits Limited subsidiaries(USL) were sold in the year ended 30 June 2021. The sale of businessesthese subsidiaries resulted in an exceptional gain of £3 million.£3 million.
Business review (continued)
In the year ended 30 June 2021, the group reversed $2£1 million (£1 million) (2020 - £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 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.
In the year ended 30 June 2020, the disposal of an associate, Equal Parts, LLC resulted in an exceptional loss of £1 million.
See page 140101 for the definition of exceptional items.
Business review (continued)
(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 a £9£5 million gainloss for the year ended 30 June 2020.2022. The adjustments to marketing and other operating expenses arewere the elimination of fair value changes to contingent consideration liabilities and earn out arrangements in respect of prior year acquisitions of £36£65 million gain for the year ended 30 June 2022 and £34 million loss for the year ended 30 June 2021 and £7 million loss for the year ended 30 June 2020.2021.
(e) Taxation
The reported tax rate for the year ended 30 June 20212022 was 24.5%23.9% compared with 28.8%24.5% for the year ended 30 June 2020.2021.
The reported tax charge for the year ended 30 June 2022 included an exceptional tax credit of £31 million, mainly comprising exceptional tax credits on the impairment of the McDowell's and Bell's brands of £35 million and £20 million, respectively, offset by a £23 million exceptional tax charge in respect of the gain on the sale of the Picon brand and a further £3 million tax charge in respect of winding down operations in Russia.
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 £48 million to other comprehensive income and equity, mainly in respect of the remeasurement of the deferred tax liabilities on the post employment assets.
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% infrom 2021. As a result of the change, an exceptional tax charge of £42 million was recognised for the year ended 3130 June 2021 in relation to the remeasurement of deferred tax liabilities.
As disclosed in the 2020 Annual Report, Diageo 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 1 July 2020. Due to uncertainty about the precise nature of the spend, it could not be determined whether the amounts were deductible for tax purposes in future periods. As a result, no deferred tax asset was recognised in respect of the provision for the year ended 30 June 2020. In 2021, additional information regarding the nature of the spend was available and this has been re-assessed and a £5 million exceptional tax credit has been recognised, mainly in respect of amounts spent in the United States, United Kingdom and Ireland for the year ended 30 June 2021.
The reported tax charge for the year ended 30 June 2020 included 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.
The tax rate before exceptional items for the year ended 30 June 20212022 was 22.2%22.5% compared with 21.7%22.2% for the year ended 30 June 2020.2021.
We expect the tax rate before exceptional items for the year ending 30 June 20222023 to be in the range of 22%-24%.
(f) Dividend
The group aims to increase the dividend each year and theyear. 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 20212022 dividend cover is 1.62.0 times. The recommended final dividend for the year ended 30 June 2021,2022, to be put to the shareholders for approval at the Annual General Meeting is 44.5946.82 pence, an increase of 5% on the prior year final dividend. This brings the full year dividend to 72.5576.18 pence per share, an increase of 4%5% on the prior year. WeThe group will keep future returns of capital, including dividends, under review through the year ending 30 June 20222023 to ensure we allocate Diageo’s capital is allocated in the best way to maximizemaximise 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 register as of 2726 August 2021.2022. The ex-dividend date both for the holders of the ordinary shares and for US ADR holders is 2625 August 2021.The2022. The final dividend, once approved by shareholders, will be paid to shareholdersholders of ordinary shares on 720 October 20212022 and payment to US ADR holders will be made on 1325 October 2021.2022. A dividend reinvestment plan is available to holders of ordinary shares in respect of the final dividend and the plan notice date is 1623 September 2021.2022.
Business review (continued)
(g) Return of Capitalcapital
OnDiageo’s current return of capital programme, initially approved by the Board on 25 July 2019, the Board approved a return of capital programmeseeks to return up to £4.5 billion to shareholders over the three-year period from 1 July 2019and is expected to be completed by 30 June 2022, utilising the most appropriate mechanic of either share buybacks or special dividends depending on market conditions.
2023. Under the first phasetwo phases of the programme, which ended on 31 January 2020 and 11 February 2022 respectively, the company returned £1.25 billioncapital to shareholders via share buybacks.buyback, at a cost, excluding transaction costs, of £2.25 billion. On 9 April 2020, due to uncertainties related to Covid-19 pandemic, Diageo21 February 2022, the company announced that it had not initiated the next phase of the programme. On 12 May 2021, the Board approved recommencing the return of capital programme. Due to the impact of Covid-19, the original completion date for the programme has been extended by two years to 30 June 2024. The secondthird phase of the programme with a value of up to £1£1.7 billion returned to shareholders, via share buybacks, was also initiated on 12 May 2021 and itto be completed no later than 5 October 2022. At 30 June 2022, £1.4 billion had been completed as part of the third phase. The remaining £0.9 billion of the programme is expected to be completed by the end of the financial year ending 30 June 2022.2023.
Between 12 May 2021 andIn the year ended 30 June 2021,2022, the company purchased 3.261 million ordinary shares at a cost of £109£2,284 million (including £1 milliontransactions costs of transaction costs)£16 million). All shares purchased under the share buyback programmesprogramme were cancelled. A financial liability of £91£117 million was established at 30 June 20212022, representing the 2.63.3 million shares that were expected to be purchased before 29by 28 July 2021.2022.
Business review (continued)
Movement in net borrowings and equity
| | | | | | | | |
Movement in net borrowings | 2021 £ million | 2020 £ million |
Net borrowings at the beginning of the year | (13,246) | | (11,277) | |
Free cash flow (a) | 3,037 | | 1,634 | |
Acquisitions (b) | (488) | | (130) | |
Sale of businesses and brands | 14 | | 11 | |
Share buyback programme | (109) | | (1,282) | |
Proceeds from issue of share capital | — | | 1 | |
Net sale of own shares for share schemes (c) | 49 | | 54 | |
Dividends paid to non-controlling interests | (77) | | (111) | |
| | |
Net movements in bonds (d) | (216) | | 4,368 | |
Purchase of shares of non-controlling interests (e) | (42) | | (62) | |
Net movements in other borrowings (f) | (753) | | (285) | |
Equity dividends paid | (1,646) | | (1,646) | |
Net (decrease)/increase in cash and cash equivalents | (231) | | 2,552 | |
Net decrease/(increase) in bonds and other borrowings | 967 | | (4,089) | |
Exchange differences (g) | 598 | | (95) | |
| | |
Other non-cash items (h) | (197) | | (86) | |
Adoption of IFRS 16 | — | | (251) | |
Net borrowings at the end of the year | (12,109) | | (13,246) | |
| | | | | | | | |
Movements in net borrowings | 2022 £ million | 2021 £ million |
Net borrowings at the beginning of the year | (12,109) | | (13,246) | |
Free cash flow (a) | 2,783 | | 3,037 | |
Acquisitions (b) | (271) | | (488) | |
Sale of businesses and brands | 82 | | 14 | |
Share buyback programme (c) | (2,284) | | (109) | |
| | |
Net sale of own shares for share schemes (d) | 18 | | 49 | |
Purchase of treasury shares in respect of subsidiaries | (15) | | — | |
Dividend paid to non-controlling interests | (81) | | (77) | |
| | |
Net movements in bonds (e) | 742 | | (216) | |
Purchase of shares of non-controlling interests (f) | — | | (42) | |
Net movements in other borrowings (g) | 79 | | (753) | |
Equity dividend paid | (1,718) | | (1,646) | |
Net decrease in cash and cash equivalents | (665) | | (231) | |
Net (increase)/decrease in bonds and other borrowings | (825) | | 967 | |
Exchange differences (h) | (334) | | 598 | |
| | |
Other non-cash items (i) | (204) | | (197) | |
| | |
Net borrowings at the end of the year | (14,137) | | (12,109) | |
(a) See page 10298 for the analysis of free cash flow.
(b) OnDiageo completed a number of acquisitions in the year ended 30 September 2020, Diageo completedJune 2022, including: (i) on 27 January 2022, the acquisition of Aviation Gin LLC and Davos Brands LLCCasa UM, to expand its Reserve portfolio with the premium artisanal mezcal brand Mezcal Unión, (ii) on 31 March 2022, the acquisition of 21Seeds, to support Diageo's participation in the super premium ginflavoured tequila segment and (iii) 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 final earn-out payment in respect of the Casamigos acquisition amounting to $113 million (£83 million) was made on 17 September 2021.
Contingent consideration paid in respect of other prior year acquisitions is primarily attributable to Aviation Gin and Davos Brands.
In the year ended 30 June 2021, Diageo completed the acquisition of Aviation Gin and Davos Brands for a total consideration of $337 million (£263 million) upfront in cash and contingent consideration of up to $275 million (£214 million) over a 10-year period linked to performance targets. Diageo also completed a number of additional acquisitions for a total consideration of £95 million in the year ended 30 June 2021 comprising: (i) on 26 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) on 8 March 2021, the acquisition of Far West Spirits LLC, owner of the Lone River Ranch Water brand, to improve Diageo's participation in the ready to drink category in the United States;cash and (iii) on 14 April 2021, the acquisition of Sons of Liberty Spirits Company, to expand Diageo's spirits-based ready to drink portfolio with Loyal 9 Cocktails. The aggregate up-front 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 include provision for further contingent consideration of up to £86 million, in aggregate, in each case linked to performance targets, and onetargets.
(c) See page 103 for details of the transactions provides for a further £2 millionDiageo's return of deferred consideration, of which £1 million has been paid by 30 June 2021.capital programmes.
In the year ended 30 June 2020, Diageo acquired the remaining share capital of Seedlip Limited and Anna Seed 83 Limited (the brand owner of Aecorn) which it did not already own, and completed a number of smaller acquisitions.
In both financial years acquisitions also include additional investments as part of the Distill Ventures programme, as well as deferred and contingent consideration paid in respect of previous acquisitions.
(c)(d) Net sale of own shares comprised receipts from employees on the exercise of share options of £57£32 million (2020 - £56(2021 – £57 million) less purchase of treasuryown shares for the future settlement of obligations under the employee share option schemes of £14 million (2021 – £8 million).
(e) 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 (2020 - £2discount and fee) and repaid bonds of €900 million (£769 million) and $1000 million (£752 million).
(d) In the year ended 30 June 2021, the group issued bonds of €700 million (£636 million - net of discount and fee) and £395 million (including £5 million discount and fee) and repaid bonds of $696 million (£551 million) and €775 million (£696 million).
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).
(e)(f) In the year ended 30 June 2021, East African Breweries Limited, (EABL), a subsidiary of Diageo, completed the purchase of 30% of the share capital of Serengeti Breweries Limited for $55 million (£42 million).
(g) In the year ended 30 June 2020, Diageo acquired additional shares2022, the net movements in United Spirits Limited for INR 5,495 million (£60 million) which took Diageo’s percentageother borrowings principally arose from cash movement of shares owned in United Spirits Limited from 54.78% to 55.94% (excluding 2.38% ownedforeign currency swaps and forwards partially offset by the USL Benefit Trust). During the year ended 30 June 2020, EABL, a subsidiaryrepayment of Diageo, completed the purchase of 4% of the share capital of Serengeti Breweries Limited for $3 million (£2 million).lease liabilities.
(f) In the year ended 30 June 2021, the net movements in other borrowings principally arose from cash movement of foreign exchangecurrency swaps and forwards. In the year ended 30 June 2020, the net movements in other borrowings principally arose from foreign exchange swaps and forwards, partially offset by the cash movement on lease liabilities.
Business review (continued)
(g) The(h) In the year ended 30 June 2022, exchange differenceslosses arising on net borrowings of £334 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.
In the year ended 30 June 2021, exchange gains arising on net borrowings of £598 million iswere primarily driven by favourable exchange movements on US dollar and euro denominated borrowings, partially offset by an unfavourableadverse movement on cash and cash equivalents, foreign exchangecurrency swaps and forwards.
(i) In the year ended 30 June 20202022, other non-cash items were principally in respect of additional leases entered into during the £95 million exchange on net borrowings was 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.year.
(h) In the year ended 30 June 2021, other non-cash items are principally in respect of fair value changeslosses of cross currency interest rate swaps and interest rate swaps partially offset by the fair value changesgains of borrowings. In
| | | | | | | | |
Movements in equity | 2022 £ million | 2021 £ million |
Equity at the beginning of the year | 8,431 | | 8,440 | |
Adjustment to 2021 closing equity in respect of hyperinflation in Turkey (a) | 251 | | — | |
Adjusted equity at the beginning of the year | 8,682 | | 8,440 | |
Profit for the year | 3,338 | | 2,799 | |
Exchange adjustments (b) | 799 | | (836) | |
Remeasurement of post employment plans net of taxation | 497 | | (27) | |
Purchase of shares of non-controlling interests (c) | — | | (42) | |
| | |
Hyperinflation adjustments net of taxation (a) | 291 | | (12) | |
Associates' transactions with non-controlling interest | — | | (91) | |
Dividend to non-controlling interests | (72) | | (72) | |
Equity dividend paid | (1,718) | | (1,646) | |
Share buyback programme (d) | (2,310) | | (200) | |
Other reserve movements | 7 | | 118 | |
Equity at the end of the year | 9,514 | | 8,431 | |
(a) See page 134 for details of hyperinflation adjustment.
(b) Exchange movements in the year ended 30 June 2020, other non-cash items are principally in respect of leases of £206 million entered into in2022 primarily arose from exchange gains driven by the year,US dollar and the Indian rupee partially offset by the fair value changes of cross currency interest rate swaps.
| | | | | | | | |
Movement in equity | 2021 £ million | 2020 £ million |
Equity at the beginning of the year | 8,440 | | 10,156 | |
Profit for the year | 2,799 | | 1,454 | |
Exchange adjustments (a) | (836) | | (282) | |
Remeasurement of post employment plans net of taxation | (27) | | 3 | |
Purchase of shares of non-controlling interests (b) | (42) | | (62) | |
Associates' transactions with non-controlling interests | (91) | | — | |
| | |
Dividends to non-controlling interests | (72) | | (117) | |
Equity dividends paid | (1,646) | | (1,646) | |
Share buyback programme | (200) | | (1,256) | |
Other reserve movements | 106 | | 190 | |
Equity at the end of the year | 8,431 | | 8,440 | |
(a)Turkish lira. Exchange movementmovements in the year ended 30 June 2021 primarily arose from exchange losses driven by the Indian rupee, the US dollar and the Turkish lira.
(b)(c) In the year ended 30 June 2021, East African Breweries Limited completed the purchase of 30% of the share capital of Serengeti Breweries Limited for $55 million (£42 million).
In the year ended 30 June 2020, Diageo acquired additional shares in United Spirits Limited(d) See page 103 for INR 5,495 million (£60 million) and additional shares in Serengeti Breweries Limited for $3 million (£2 million).details of Diageo's return of capital programmes.
Post employment benefit plans
The net surplus of the group’s post employment benefit plans have increased by £82£707 million from £362 million at 30 June 2020 to £444 million at 30 June 2021.2021 to £1,151 million at 30 June 2022. The increase in net surplus iswas predominantly attributable to the favourable change in the discount rate changeassumptions in the United Kingdom and Ireland due to the increase in returns from ‘AA’ rated corporate bonds used to calculate the discount rates on the liabilities of the post employment plans (from 1.5%(UK from 1.9% to 1.9%3.8%; Ireland from 1.0% to 3.2%) that was partially offset by the unfavourable actual change in the market value of assets held by the post employment benefit plans in the United Kingdom and Ireland, and the change in inflation rate assumptions in the United Kingdom and Ireland (UK from 2.1%3.0% to 2.5%3.1%; Ireland from 1.2%1.6% to 1.6%2.4%). Following the experience analysis carried out for the Diageo Pension Scheme in the United Kingdom, demographic assumptions have been updated, having a further adverse impact on the net surplus.
The operating profit charge before exceptional items increaseddecreased by £40£48 million from £47 million for the year ended 30 June 2020 to £87 million for the year ended 30 June 2021. The operating profit charge2021 to £39 million for the year ended 30 June 20202022. The operating profit for the year ended 30 June 2022 includes past service gainsettlement gains of £47£27 million in respect of the Enhanced Transfer Values exercise carried out in the Guinness Ireland Group Pension Scheme (GIGPS), following communications to and the deferred members in respectGrand Metropolitan Pension Fund, and past service gain 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, and curtailment gains of £12 million mainly in respectresult of the Diageo Pension Scheme andchanges in the benefits of the GIGPS.
Total cash contributions by the group to all post employment benefit plans in the year ending 30 June 20222023 are estimated to be approximately £120£70 million.
Business review (continued)
North America
(i) Flavoured malt beverages have been reclassified from ready to drink to beer from 1 July 2020. This reflects the nature of these products and how management reviews performance. Movements reported in the table above are on a like for like basis.
| | | | | | | | | | | | | | | | | | | | | | | |
Key financials | 2020 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | Other(ii) £ million | 2021 £ million | Reported movement % |
Net sales | 4,623 | | (353) | | 10 | | 929 | | — | | 5,209 | | 13 | |
Marketing | 727 | | (52) | | 12 | | 248 | | 1 | | 936 | | 29 | |
Operating profit before exceptional items | 2,034 | | (131) | | (19) | | 352 | | 1 | | 2,237 | | 10 | |
Exceptional operating items(i) | 54 | | | | | | — | | |
Operating profit | 2,088 | | | | | | 2,237 | | 7 | |
(i) For further details on exceptional operating items see pages 105 and 236-238.
(ii) Fair value remeasurements. For further details see page 106.
North America remains the second largest beverage alcohol market worldwide1 and represents over one-third of our net sales.
With Our consumers are at the heart of our business, and our strategy is focussed on accelerating sustainable growth through smart investments in current and newour portfolio of brands, data-led insights, and executional excellence in our route to market. We have evolved oura well-positioned portfolio to leanof brands that leans into premiumisation, and recruit and re-recruit consumers. This year, we added toconsumers into the portfolio through sustainable innovation and meaningful consumer engagement, including on-promise re-opening in the past year. We are proud of our ready to drink portfolio, capitalised on the e-commerce channel opportunity and dialledprogress in our ‘Society 2030: Spirit of Progress’ goals, dialing up our purposefulness to make a positive impact in the communities where we live and work.
1.
Key financials
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | Exchange | Acquisitions and disposals | Organic movement | Other3 | 2022 | Reported movement |
| £ million | £ million | £ million | £ million | £ million | £ million | % |
Net sales | 5,209 | | 98 | | 34 | | 754 | | — | | 6,095 | | 17 | |
Marketing | 936 | | 19 | | 24 | | 222 | | (1) | | 1,200 | | 28 | |
Operating profit before exceptional items | 2,237 | | 49 | | (19) | | 148 | | 39 | | 2,454 | | 10 | |
Exceptional operating items2 | — | | | | | | (1) | | |
Operating profit | 2,237 | | | | | | 2,453 | | 10 |
Business review (continued)
| | | | | | | | | | | | | | |
| Organic volume movement | Reported volume movement | Organic net sales movement | Reported net sales movement |
Markets and categories | % | % | % | % |
North America | 3 | | 3 | | 14 | | 17 | |
| | | | |
US Spirits | 4 | | 4 | | 17 | | 19 | |
DBC USA(4),(5) | (2) | | — | | 2 | | 6 | |
Canada | (2) | | (2) | | 3 | | 6 | |
| | | | |
Spirits | 3 | | 3 | | 16 | | 18 | |
Beer | (4) | | (4) | | 1 | | 2 | |
Ready to drink(4) | 15 | | 40 | | 21 | | 49 | |
Global giants, local stars and reserve(6) | Organic volume movement(7) % | Organic net sales movement % | Reported net sales movement % |
Crown Royal | | 2 | | 6 | | 8 | |
Don Julio | | 30 | 36 | | 38 | |
Casamigos | | 81 | | 88 | | 91 | |
Johnnie Walker | | 9 | | 26 | | 28 | |
Smirnoff | | (4) | | (3) | | (2) | |
Captain Morgan | | (3) | | (5) | | (3) | |
Ketel One(8) | | 7 | | 12 | | 13 | |
Baileys | | (10) | | (8) | | (6) | |
Guinness | | 5 | | 7 | | 9 | |
Bulleit | | 10 | | 14 | | 16 | |
Cîroc vodka | | (4) | | — | | 1 | |
(1) IWSR, calendar year 20202021
(2) For further details on exceptional operating items see pages 101-102
(3) Fair value remeasurements. For further details see page 102
(4) Reported volume movement impacted by acquisitions. For further details see page 101
(5) Certain spirits-based ready to drink products in certain states are distributed through DBC USA and those net sales are captured within DBC USA
(6) Spirits brands excluding ready to drink and non-alcoholic variants
(7) Organic equals reported volume movement
(8) Ketel One includes Ketel One vodka and Ketel One Botanical
Our markets
Headquartered in New York, Diageo North America is comprised of US Spirits, Diageo Beer Company USA (DBC USA) and Diageo Canada, headquartered in Toronto.
Supply operations
With nine11 domestic production facilities across the United States, Canada and the US 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 classbest-in-class operations. To support the growth inof our business portfolio, we started up two new production sites, including a ready to drink portfolio, the manufacturing footprint is being expanded with the creation of a new RTD(RTD) facility in Plainfield with capacityand a Bulleit Bourbon Distillery in Lebanon, Kentucky. The Lebanon site is the first distillery in North America powered by 100% renewable energy. We recently announced plans for a carbon-neutral distillery in Ontario, Canada to produce over 25 million cases. The facility is due to be completed in summer 2021.support the growth ambitions for our Crown Royal Canadian whisky brand.
Route to consumer
The route to consumer in the United States is through the three-tier system across our spirits and beer/RTD portfolio. We have consolidated our US 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 and spirits-based RTD products and manages sales through two divisions focussed on Open (distribution through private distributors) and Control (distribution through governmental entities) States. DBC USA sells and markets brands, including Guinness and Smirnoff Ice into 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
Business review (continued)
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 focussed on developing competitive differentiation in both our brand
Business review (continued)
propositions and our route to consumer. This includes building key capabilities around commercial execution, Revenue Growth Management, e-commerce and robust performance management, all of which is underpinned by data and analytics.
'Society 2030: Spirit of Progress'
We are committedPromoting positive drinking remains a priority. Along with Black, Latino and Native American organisations, we established the Multicultural Consortium for Responsible Drinking – to supporting underrepresented communities, particularly in the areas of education and hospitality. This year, as partincrease awareness of the $20 million Diageo Community Fund, we funded permanent endowments at 25 Historically Black Collegesrisks of harmful use of alcohol and Universitiespromote moderation in diverse communities across the United States. We were also a founding contributorpartnered with road safety organisations, distributors and corporations in the country to stigmatise drink driving by educating nearly 39,000 people through our interactive learning experience ‘Wrong Side of the Road’. We also partnered with the Traffic Injury Research Foundation to create the Impaired Driving Coalition of Canada to tackle similar challenges. Several brands led responsible drinking campaigns reaching over 150 million consumers, including activations from Crown Royal and Captain Morgan through our Major League Soccer (MLS) and National Football League (NFL) partnerships.
We continue to promote diversity and equal representation through our work with Pronghorn, an initiative to cultivate the next generation of diverse founders, leaders and entrepreneurs within the industry. Our Learning Skills for Life (L4L) programme provided employability skills and hospitality training to 931 people through our partnerships, including Historically Black Colleges and Universities. We also donated $2.5 million to the Seattle ‘Raising the New York State Bar’ Restaurant Recovery Fundrecovery fund – to help businesses adjust to Covid-19 requirements,support Asian-American and we financially supported recovery efforts by Chicago neighbourhoods to create more public spaces. Our brands, including Bulleit, Don Julio and Guinness, also led various initiatives to help thePacific Islanders hospitality industry and those whose livelihoodscommunities. These groups were directlyparticularly affected by the pandemic. Promoting positive drinking is a priority forWe’ve surpassed our goal to double our spend with diverse-owned media companies, instead spending six times more than the companyprevious year, and we recently relaunched DRINKiQ site with DRINKiQ site with new content, design and interactive tools to redefine and improve the way we talk to people about drinking. Additionally, our brands – led by Crown Royal and its sports partnerships – reached 151 millioninvested 10% of media spend in programmes reaching multicultural consumers through responsible drinking campaigns. brand activations.
As part ofwell as opening our ongoing sustainability efforts, we have analysed water flows and consumption at some of our sites, identifying significant opportunities for saving water across our operations. Our net zero carbon whiskeyfirst carbon-neutral distillery atin Lebanon, Kentucky, will be powered by 100% renewable electricity; is designed for highly-efficient water usage; and will be operational later this year. Increasing recycled contentannouncing plans to build our first carbon-neutral distillery in our packaging is another key priority andOntario, Canada, this year we doubled the recycled materialsannounced plans to transition our Valleyfield manufacturing site in our plastic bottles (rPET) as we further our efforts supporting progress towards our target of 40% recycled contentQuebec to be carbon neutral by 2025. We’ve also made progress reusing treated wastewater in cooling processes at our US Virgin Islands operations, and with several initiatives at Plainfield, Illinois, to reduce water usage.
Performance 2021Regional performance
| | |
•Reported net sales grew 17%, primarily reflecting strong organic growth. There were favourable impacts from foreign exchange, mainly due to the strengthening of the US dollar, and from brand acquisitions. |
•Organic net sales increased 14%, building on strong growth in fiscal 21, largely driven by US Spirits. |
•US Spirits net sales grew 17%, reflecting the recovery of the on-trade channel and resilient consumer demand in the off-trade channel, market share gains and spirits taking share of total beverage alcohol, and replenishment of stock levels by distributors. We drove particularly strong growth in our super-premium-plus portfolio and increased prices. |
•US Spirits shipments were ahead of depletions, with a benefit of approximately three percentage points from the replenishment of stock levels by distributors, recovering from lower levels during Covid-19. It also reflects distributors increasing inventories of certain imported products due to longer product transit times in fiscal 22. |
•US Spirits growth was primarily driven by tequila, up 57%, as well as double-digit growth in scotch and US whiskey and growth in Canadian whisky. This more than offset declines in Baileys and rum. |
•Diageo Beer Company net sales increased 2%, reflecting increased sales of Guinness driven by the on-trade recovery and growth in ready to drink(1), partially offset by a decline in flavoured malt beverages. |
•Organic operating margin decreased by 295bps, as we continued to increase marketing investment, up 24%, ahead of net sales growth, to support growth momentum across key brands. Price increases and productivity savings partially offset cost inflation. |
Sales and net sales
Sales increased by £581 million, or 11%, to £5,803 million in the year ended 30 June 2021 from £5,222 million in the year ended 30 June 2020. Excise duties were £594 million in the year ended 30 June 2021 and £599 million in the year ended 30 June 2020, a decrease of £5 million.
Net sales (sales less excise duties) were £5,209 million in the year ended 30 June 2021 an increase of £586 million, or 13%, compared to net sales of £4,623 million in the year ended 30 June 2020. Net sales were favourably impacted by organic growth of £929 million (see further performance analysis below) and by the impact of acquired businesses of £28 million. This increase was partially offset by exchange rate movements of £353 million primarily due to the weakening of the US dollar against sterling and a decrease in net sales of £18 million generated by disposed businesses.
Operating profit
Operating profit was £2,237 million in the year ended 30 June 2021 an increase of £149 million compared to operating profit of £2,088 million in the year ended 30 June 2020. Operating profit increased by £352 million organic growth, by lapping of 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 £1 million charge in respect of a fair value reassessment of contingent consideration liabilities and earn out arrangements in respect of prior year acquisitions. This increase was partially offset by £131 million as a result of exchange rate movements primarily due to the weakening of the US dollar (£91 million translation and £40 million transactional exchange impact), by lapping of exceptional gain of £83 million with regards to substitution drawback on excise duties, by a £18 million impact from acquisitions and by a decrease in operating profit of £1 million generated by disposed businesses.
Performance 2020
Sales and net sales
Sales increased by £148 million, or 3%, to £5,222 million in the year ended 30 June 2020 from £5,074 million in the year ended 30 June 2019. Excise duties were £599 million in the year ended 30 June 2020 and £614 million in the year ended 30 June 2019, a decrease of £15 million.
Net sales (sales less excise duties) were £4,623 million in the year ended 30 June 2020 an increase of £163 million, or 4%, compared to net sales of £4,460 million in the year ended 30 June 2019. Net sales were favourably impacted by organic growth of £105 million, by exchange rate movements of £101 million primarily due to the strengthening of the US dollar against sterling and by the impact of acquired businesses of £4 million. This increase was partially offset by a decrease in net sales of £47 million generated by disposed businesses.
Operating profit
Operating profit was £2,088 million in the year ended 30 June 2020 an increase of £140 million compared to operating profit of £1,948 million in the year ended 30 June 2019. Operating profit increased by exceptional gain of £83 million with regards to substitution drawback on excise duties, by £80 million organic growth, by £44 million as a result of exchange rate movements primarily due to the strengthening of the US dollar (£83 million translation less £39 million transactional exchange impact) and by a £12 million impact from acquisitions (lapping the £15 million Casamigos provision reassessment impact from prior year, less the
Business review (continued)
£3 million operational loss generated by acquired businesses). This increase was partially offset by a decrease in operating profit of £40 million generated by disposed businesses, by exceptional losses of £29 million due to Covid-19 pandemic related implications (£16 million “Raising the Bar” provision, £9 million stock write-off and £4 million donation), and a £10 million charge in respect of a fair value reassessment of contingent consideration liabilities in respect of prior year acquisitions.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Regional performanceMarket highlights - US Spirits
•NetTequila net sales growthincreased 57%, with Casamigos growing 89% and Don Julio growing 36%, and both brands gained share of 20%, following slower growth of 2% in fiscal 20, driven primarily by US Spirits.
•Strong growththe spirits market and the tequila category. This primarily reflects resilient consumer demand, spirits category continuing to take share of total beverage alcoholstrong volume growth and the replenishment of stock levels by distributors and retailers.
•Spirits growth of 21% reflects particularly strong performance in tequila and broad-based growth across all other spirits categories supported by consumer led marketingthere was also a benefit from price increases and innovation.
•BeerCrown Royal net sales increased 7%, with double-digit growth in the core variant. However, supply constraints of aged liquid led to slower growth in certain variants and a decline in Crown Royal's share of the spirits market and the Canadian whisky category.
•Scotch grew 19% and gained share of the spirits market and the scotch category. Johnnie Walker net sales grew 23%, with double-digit growth in Johnnie Walker Blue Label and Johnnie Walker Black Label. Buchanan’s net sales increased 14% and it gained share of the scotch category. Scotch malts grew 8%.
•Vodka net sales grew 1%. Ketel One net sales increased 11%, driven by double-digit growth in the core variant, and slower growth of 10%Ketel One Botanical. Cîroc net sales declined 2%, lapping double-digit growth in fiscal 21, with growth from recent innovations more than offset by declines of other variants. Smirnoff net sales decreased 4%, due to declines in certain flavour variants, partially offset by growth from recent innovations; net sales of the core variant were flat.
•Captain Morgan net sales declined 6%, as the rum category continued to lose spirits market share, however, Captain Morgan gained share of the category.
•US whiskey sales grew 11%, primarily driven by flavoured malt beverages.Bulleit, up 14%. Bulleit lost share of the US whiskey category due to glass supply constraints, which have now been resolved.
•OrganicBaileys net sales declined 8%, following strong growth in fiscal 21.
•Spirits-based ready to drink(1) net sales grew 18%, primarily driven by strong performance of Crown Royal cocktails and the launch of Cîroc cocktails, partially offset by lower sales of Ketel One Botanical Spritz.
(1) Certain spirits-based ready to drink products in certain states are distributed through DBC USA and those net sales are captured within DBC USA
Business review (continued)
Europe
Across our Europe business, we are building further momentum behind our six-markets model, bringing marketing programmes closer to our consumers and customers, and optimising our routes to market to accelerate our growth strategy through international premium spirits and beer.
Key financials
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | Exchange | Acquisitions and disposals | Organic movement | Other(1) | Hyperinflation(2) | 2022 | Reported movement |
| £ million | £ million | £ million | £ million | £ million | £ million | £ million | % |
Net sales | 2,558 | | (304) | | 3 | | 766 | | — | | 189 | | 3,212 | | 26 | |
Marketing | 473 | | (35) | | — | | 122 | | — | | 17 | | 577 | | 22 | |
Operating profit before exceptional items | 635 | | (110) | | 1 | | 418 | | 63 | | 10 | | 1,017 | | 60 | |
Exceptional operating items(3) | (15) | | | | | | | (146) | | |
Operating profit | 620 | | | | | | | 871 | | 40 | |
Business review (continued)
| | | | | | | | | | | | | | |
Markets and categories | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % |
| | | | |
| | | | |
Europe | 20 | | 20 | | 30 | | 26 | |
| | | | |
Great Britain | 15 | | 15 | | 20 | | 20 | |
Northern Europe | 16 | | 16 | | 15 | | 10 | |
Southern Europe | 30 | | 27 | | 33 | | 26 | |
Ireland | 35 | | 35 | | 71 | | 65 | |
Eastern Europe | 7 | | 8 | | 18 | | 18 | |
Turkey | 18 | | 18 | | 49 | | 25 | |
| | | | |
Spirits | 18 | | 18 | | 24 | | 19 | |
Beer | 36 | | 36 | | 63 | | 60 | |
Ready to drink | 23 | | 23 | | 23 | | 22 | |
Global giants and local stars(4) | | Organic volume movement(5) % | Organic net sales movement % | Reported net sales movement % |
Guinness | | 42 | | 65 | | 62 | |
Johnnie Walker | | 22 | | 35 | | 31 | |
Baileys | | 20 | | 19 | | 16 | |
Smirnoff | | 35 | | 38 | | 35 | |
Captain Morgan | | 11 | | 12 | | 9 | |
Tanqueray | | 36 | | 37 | | 33 | |
Yenì Raki | | 9 | | 15 | | 14 | |
JεB | | 19 | | 26 | | 17 | |
(1) Fair value remeasurements. For further details see page 102
(2) See page 134 for details of hyperinflation adjustment
(3) Exceptional items are in respect of Diageo’s decision, announced on 28 June 2022, to wind down its operations in Russia over the following six months. For further details on exceptional operating margin decreased 124bps, primarily reflecting increased investment in marketing, adverse category mix and inflationary impact of agave.items see pages 101-102
| | | | | | | | | | | | | | |
Markets: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % |
North America(iii) | 11 | | 10 | | 20 | | 13 | |
| | | | |
US Spirits | 13 | | 14 | | 24 | | 16 | |
DBC USA | 10 | | 10 | | 12 | | 5 | |
Canada | 3 | | 3 | | 4 | | 1 | |
| | | | |
Spirits | 11 | | 10 | | 21 | | 13 | |
Beer(v) | 8 | | 8 | | 10 | | 3 | |
Ready to drink(v) | 55 | | 48 | | 101 | | 89 | |
Global giants, local stars and reserve(i): | Organic volume movement(ii) % | Organic net sales movement % | Reported net sales movement % |
Crown Royal | | 10 | | 12 | | 5 | |
Smirnoff | | 4 | | 4 | | (2) | |
Johnnie Walker | | 8 | | 15 | | 8 | |
Captain Morgan | | 6 | | 5 | | (1) | |
Don Julio | | 72 | | 68 | | 57 | |
Ketel One(iv) | | 9 | | 1 | | (6) | |
Guinness | | — | | 2 | | (4) | |
Baileys | | 16 | | 28 | | 21 | |
Bulleit | | 8 | | 9 | | 2 | |
Cîroc vodka | | 25 | | 26 | | 18 | |
Casamigos | | 115 | | 125 | | 110 | |
Tanqueray | | 5 | | 5 | | (1) | |
(i)(4) Spirits brands excluding ready to drink and non-alcoholic variants.
(ii)(5) Organic equals reported volume movement.
(iii) Reportedmovement, except for Smirnoff, which had reported volume and net sales growth include impacts from the disposalmovement of 36% due to a portfolio of 19 brands to Sazerac in a prior period and the acquisition of Aviation Gin LLC (‘Aviation American Gin’), Davos Brands LLC (‘Davos Brands’), Far West Spirits LLC (‘Lone River’) and Loyal 9 Cocktails in the year ended 30 June 2021.
(iv) Ketel One includes Ketel One vodka and Ketel One Botanical.
(v) Flavoured malt beverages have been reclassified from ready to drink to beer from 1 July 2020. This reflects the nature of these products and how management reviews performance. Movements reported in the table above are on a like for like basis.reclassification
Business review (continued)
Market highlights
US Spirits
Strong growth in tequila and broad based growth across all other categories
Net sales increased 24%, reflecting resilient consumer demand, spirits category continuing to take share of total beverage alcohol and lapping a softer fiscal 20. Shipments were ahead of depletions by approximately 5 percentage points, due to the replenishment of stock levels by distributors, following a reduction by distributors of inventories in fiscal 20.
The tequila category benefitted from strong growth with its broad occasion appeal. Net sales increased 87% with Don Julio growing 69% and Casamigos growing 126% with both gaining spirits market and tequila category share. The acceleration of growth in our tequila portfolio reflects some benefit of price increases on Casamigos. This strong performance was delivered despite constraints on the supply of certain aged variants of our brands.
Crown Royal net sales increased 13% largely driven by continued momentum in Crown Royal Peach, Crown Royal Regal Apple and Crown Royal Vanilla. Crown Royal gained category share but growth was impacted by constraints in the supply of aged liquid.
Scotch grew 18%. Johnnie Walker net sales grew 19% benefitting from premiumisation trends with strong growth in Johnnie Walker super deluxe variants as well as Johnnie Walker Black Label. Buchanan’s net sales increased 40% driven by commercial interventions in key states and a more effective media plan to recruit target consumers. Scotch malts declined 13%, lapping successful Game of Thrones innovations.
Vodka net sales grew 8%. Cîroc net sales increased 27% driven by strong growth in the core variant as well as key flavour variants resulting from refreshed activations to re-engage consumers. Smirnoff sales increased 5% as growth in new flavour variants including Smirnoff Pink Lemonade more than offset the decline in Smirnoff No.21 Red. Ketel One net sales increased 2% largely driven by Ketel One Botanical. Captain Morgan net sales grew 7%, largely driven by growth in Captain Morgan Spiced and the launch of Captain Morgan Sliced Apple.
Bulleit net sales increased 10% with upweighted marketing investment driving strong performance in the off-trade channel.
Baileys net sales grew 31% driven by strong volume growth, price increases on Baileys Original and the successful launches of Baileys Deliciously Light, Baileys Apple Pie limited time offer and Baileys Colada limited time offer.
Spirit based ready to drink innovations delivered a strong contribution driven primarily by the launch of Crown Royal Cocktails and Ketel One Botanical Vodka Spritz.
Diageo Beer Company USA
Continued growth of flavoured malt beverages
Net sales grew 12%. Flavoured malt beverages net sales increased 17%. Beer net sales, excluding flavoured malt beverages, increased 5% as off-trade beer sales growth more than offset lower keg sales from the on-trade slow down due to Covid-19.
Canada
Growing despite strong prior year performance
Net sales grew 4%, lapping a strong fiscal 20, with growth mainly in Baileys and ready to drink. This more than offset the decline in beer due to its higher on-trade exposure.
Marketing
Focussed investment in growth drivers
Marketing grew 34%, ahead of net sales, driven by investment across our brands behind opportunities in the off-trade and e-commerce channels, informed by our marketing analytics tools.
Business review (continued)
Europe and Turkey
(i) Flavoured malt beverages have been reclassified from ready to drink to beer from 1 July 2020. This reflects the nature of these products and how management reviews performance. Movements reported in the table above are on a like for like basis.
| | | | | | | | | | | | | | | | | | | | | | | |
Key financials | 2020 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement£ million | Other(i) £ million | 2021 £ million | Reported movement % |
Net sales | 2,567 | | (85) | | (32) | | 108 | | — | | 2,558 | | — | |
Marketing | 428 | | (9) | | (2) | | 56 | | — | | 473 | | 11 | |
Operating profit before exceptional items | 757 | | (49) | | (12) | | (38) | | (23) | | 635 | | (16) | |
Exceptional operating items(ii) | (62) | | | | | | (15) | | |
Operating profit | 695 | | | | | | 620 | | (11) | |
(i) Fair value remeasurements. For further details see page 106.
(ii) For further details on exceptional operating items see pages 105 and 236-238.
Across our Europe business we have brought our consumer marketing programmes closer to our consumers and customers as we have embedded our new operating model in F21. We continue to optimise our route to market and execute our strategy of growth through international premium spirits and beer through premiumisation.
Fiscal 21 saw the newOur six market operating model come into operation across Europe. It now comprises of GB, Ireland,markets are Great Britain, Northern Europe, Eastern Europe, Southern Europe, Ireland, Eastern Europe and Turkey. All of these markets nowTurkey, and operate 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 in the United Kingdom, Ireland, Italy and Italy.Turkey. The group owns 30 distilleries in Scotland, a Dublin based brewery, distillery, five distilleries in Turkey and maturation and packaging facilities in Scotland, England, Ireland, Italy and Italy.Turkey. The team leads all supply chain activities for Europe and manufactures whisky, vodka, gin, rum, beer, cream liqueurs, raki and other spirit-based drinks which are distributed in over 180 countries.
The company is currently investing £185 million in Scotch whisky and tourism in Scotland, to createincluding the creation of a major new Johnnie Walker global brand attraction in Edinburgh (Johnnie Walker Princes Street), to transformwhich opened its distillery visitor experiences and to bring the iconic lost distilleries of Brora and Port Ellen back into production.doors in September 2021. The distillery visitor investment will focusfocuses on the ‘Four Corners distilleries’, Glenkinchie, Caol Ila, Clynelish and Cardhu, celebrating the importantkey role these single malts play in the flavours of Johnnie Walker. Construction of Johnnie Walker Princes Street in Edinburgh will be completed later this year and we have already opened theThe new visitor experiences at Glenkinchie, Clynelish and Cardhu are already operational, and Caol Ila is expected to the public.open later in 2022. The revived Brora Distillery also beganiconic lost distillery of Port Ellen is expected to be back in production in May 2021.the summer of 2023.
Supporting our beer ambition, a £41 million investment has started at the Belfast and Runcorn beer packaging facilities, to expand capacity to support growth, with new capacity expected to be available during 2023. Also, we will be opening in autumn 2023 a £73 million Guinness microbrewery and culture hub to be built in Covent Garden, London.
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.
Business review (continued)
Route to consumer
In Great Britain, we sell and market our products through Diageo GB (spirits, beer and ready to drink) and Justerini & Brooks Fine Wines (wines, private clients and spirits). Products are distributed through independent wholesalers, directly to retailers and directly to consumers through thebar.com. 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 Northern Eastern and Southern Europe, we distribute our spirits brands primarily through our own inin-market companies (IMC). In the Eastern Europe market, companies (IMC), except in Europe Partner Markets where we typically usedistribute our spirits and beer brands both via IMC and 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.
'Society 2030: Spirit of Progress'
Promoting positive drinking, with a focusSustainability remains high on moderation, remains a key priority.our agenda. This year, weGuinness launched an updated versiona three-year regenerative agriculture pilot in Ireland and started the transition to electric vehicles of the Guinness Quality fleet. We launched our DRINKiQ platformfirst water replenishment project in key markets, includingTurkey – conserving water through efficient drip-irrigation in agriculture – which has provided capacity to replenish over 15,000m3 a year. At Santa Vittoria in Italy we’ll save around 30 tonnes of shrink film a year by replacing it with PEFC-certified cardboard in some multipacks.
We continue to promote positive drinking. In Southern Europe over 20,000 people took part in ‘Wrong Side of the Road’ through online, off-trade and on-trade activations. In Great Britain, Ireland, Spain, Belgium, and Germany. WeGordon’s 0.0% festive sampling campaign encouraged consumers to visit DRINKiQ.com. Brand campaigns reached more than 79over 80 million consumerspeople with responsible drinking messages throughmessaging. And finally, we delivered on our brands. We also launched a new drink driving e-learning module.SMASHED targets for the region, educating over 78,000 young people in total.
OurAs part of our commitment to inclusion and diversity, we adapted Learning for Life hospitality skills programme reached over 2,700 peopleto support Ukrainian refugees in Great Britain, Italy, Spain, Ireland, Portugal, the Netherlands, Belgium Germany and Greece.
Three of our distilleries in Scotland achieved carbon neutrality in their operations this year. Our Oban, Royal Lochnagar and Brora distilleries in Scotland use renewable liquid biofuel or renewable locally-sourced woodchip biomass – saving approximately 3,500 tonnes of carbon emissions per year.
Performance 2021
Sales and net sales
Sales increased by £98 million, or 2%, to £4,795 million in the year ended 30 June 2021 from £4,697 million in the year ended 30 June 2020. Excise duties were £2,237 million in the year ended 30 June 2021 and £2,130 million in the year ended 30 June 2020, an increase of £107 million.
Net sales (sales less excise duties) were £2,558 million for the year ended 30 June 2021 a decrease of £9 million, or 0.4%, compared to net sales of £2,567 million in the year ended 30 June 2020. Net sales were negatively impacted by unfavourable exchange rate movements of £85 million primarily due to the weakening of the Turkish lira and the Russian rouble against sterling and the impact of disposed businesses of £34 million. This decrease was partially offset by organic growth of £108 million (see further performance analysis below), and the impact of acquired businesses of £2 million.
Operating profit
Operating profit was £620 million in the year ended 30 June 2021 a decrease of £75 million compared to operating profit of £695 million in the year ended 30 June 2020. Operating profit decreased by unfavourable exchange rate movements of £49 million primarily due to the weakening of the Turkish lira and the Russian rouble against sterling (£32 million translational and £17 million transactional exchange loss impact), by organic decline of £38 million, by a £23 million charge in respect of a fair value reassessment of contingent consideration liabilities and earn out arrangements in respect of prior year acquisitions, by exceptional losses of £15 million (£15 million of ongoing litigation in Turkey, £5 million guaranteed minimum pension equalization and £2 million “Raising the Bar” provision partially offset by £7 million stock write-off reversal), by lapping £9 million of operating profit generated by disposed businesses and by a £3 million operational loss generated by acquired businesses. This decrease was partially offset by lapping 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).
Performance 2020
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, 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.
Business review (continued)
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 unfavourable 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.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.Poland.
Regional Performance
| | |
•Reported net sales increased 26%, driven by strong organic growth. Net sales were unfavourably impacted by foreign exchange, primarily due to the weakening of the Turkish lira, which was partially offset by a hyperinflation adjustment(1). |
•Organic net sales grew 30%, with strong double-digit growth across all markets and a partial recovery of Travel Retail Europe. |
•Growth reflects the recovery of the on-trade channel, particularly in Ireland, Great Britain and Southern Europe, as well as resilient consumer demand in the off-trade channel, where Diageo continued to gain market share. |
•Growth was also underpinned by the spirits category gaining share of total beverage alcohol, premiumisation, price increases and innovation. |
•Spirits net sales grew 24%, with broad-based growth across scotch, vodka, Baileys, gin, rum and raki. |
•Beer net sales grew 63%, following a 21% decline in fiscal 21, with strong growth in Guinness driven by the on-trade recovery in Ireland and Great Britain, as well as growth from innovation. |
•Strong improvement in organic operating margin of 671bps primarily reflects leverage on operating costs as net sales recovered strongly. Benefits from positive channel and product mix, price increases, productivity savings and improved fixed cost absorption more than offset cost inflation. |
•Marketing investment increased 26%, supporting the on-trade recovery and off-trade share momentum. |
Market highlights
•Net sales in Great Britain grew 20%, reflecting a strong recovery in the on-trade and resilient consumer demand in the off-trade. Spirits grew 12%, with growth across vodka, rum, Baileys and scotch, partially offset by a decline in gin. Guinness grew strongly, up 52%, driven by the on-trade recovery, as well as growth from innovation. Ready to drink grew double digits reflecting category momentum and innovation.
•Northern Europe net sales grew 15%, reflecting continued strong performance in the off-trade and recovery in the on-trade. Growth was broad-based across categories.
•Southern Europe net sales grew 33%, as a result of on-trade restrictions easing and a partial recovery of tourism. Scotch, gin, vodka, rum and Baileys all delivered strong double-digit growth.
•Ireland net sales increased 4%71%, followinglapping a significant decline in fiscal 20, primarily21, driven by strong growth in Guinness as the on-trade recovered.
•Eastern Europe net sales increased 18%, reflecting strong consumer demandcontinued momentum in the off-trade channel and market share gains. The on-trade remained impacted.recovery in the on-trade. Following an announcement in March 2022 to suspend exports to and sales in Russia, net sales in Russia declined in fiscal 22. Diageo announced on 28 June 2022 that it would wind down its operations in Russia over the following six months.
•Growth was primarily driven by Northern Europe, Turkey and Great Britain.
•Southern Europe experienced slower growth, and Ireland declined significantly, due to the higher exposure to the on-trade in those markets.
•Spirits net sales grew 11%, with broad-based growth across scotch, Baileys, rum, gin and raki.
•Beer net sales declined 21%increased 49%, driven by Guinnessprice increases in Irelandresponse to inflation, increases in excise duties and Great Britain,currency devaluation. Growth also reflects strong volume growth, up 18%, as on-trade restrictions eased, and premiumisation.
Business review (continued)
Asia Pacific
In Asia Pacific, our focus is to grow in both developed and emerging markets across our entire portfolio, ranging from international and local spirits to ready to drink formats and beer. We have a resultclear long-term strategy that enables us to allocate resources behind brands that win in key consumer occasions and categories. We manage our portfolio to meet the increasing demands of higher exposurethe growing middle class, 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 on-trade.region.
Key financials
| | | | | | | | | | | | | | | | | | | | | | |
| 2021 | Exchange | | Acquisitions and disposals | Organic movement | 2022 | Reported movement | |
| £ million | £ million | | £ million | £ million | £ million | % | |
Net sales | 2,488 | | (6) | | | — | | 402 | | 2,884 | | 16 | | |
Marketing | 418 | | 4 | | | — | | 68 | | 490 | | 17 | | |
Operating profit before exceptional items | 608 | | 5 | | | — | | 98 | | 711 | | 17 | | |
Exceptional operating items(1) | — | | | | | | (241) | | | |
Operating profit | 608 | | | | | | 470 | | (23) | | |
•Travel Retail Europe declined 56%, reflecting the continued restrictions on international travel.
•Operating margin declined 265bps due to the adverse mix impact from on-trade closures and growth in marketing investment ahead of net sales.
| | | | | | | | | | | | | | |
Markets: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % |
| | | | |
Europe and Turkey(iv) | 7 | | 6 | | 4 | | — | |
| | | | |
Great Britain | 13 | | 12 | | 7 | | 7 | |
Northern Europe | 17 | | 17 | | 22 | | 23 | |
Southern Europe | 1 | | 2 | | 1 | | 3 | |
Eastern Europe | 13 | | 12 | | 6 | | (4) | |
Ireland | (8) | | (17) | | (23) | | (30) | |
Turkey | 17 | | 17 | | 28 | | (3) | |
| | | | |
Spirits | 10 | | 9 | | 11 | | 7 | |
Beer(iii) | (12) | | (18) | | (21) | | (25) | |
Ready to drink(iii) | 13 | | 13 | | 14 | | 13 | |
Global giants and local stars(i): | | Organic volume movement(ii) % | Organic net sales movement % | Reported net sales movement % |
Guinness | | (11) | | (19) | | (19) | |
Johnnie Walker | | 12 | | 10 | | 4 | |
Baileys | | 17 | | 19 | | 19 | |
Smirnoff | | (4) | | (2) | | (3) | |
Captain Morgan | | 18 | | 17 | | 16 | |
Yenì Raki | | 2 | | (3) | | (24) | |
Tanqueray | | 14 | | 18 | | 18 | |
JεB | | — | | (1) | | (3) | |
Business review (continued)
(i) | | | | | | | | | | | | | | | |
Markets and categories | | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % |
Asia Pacific | | 8 | | 8 | | 16 | | 16 | |
| | | | | |
India | | 7 | | 7 | | 17 | | 16 | |
Greater China | | 6 | | 6 | | 13 | | 17 | |
Australia | | 2 | | 2 | | — | | (2) | |
South East Asia | | 14 | | 14 | | 20 | | 19 | |
North Asia | | (5) | | (5) | | 12 | | 6 | |
Travel Retail Asia and Middle East | | 135 | | 125 | | 178 | | 184 | |
| | | | | |
Spirits | | 8 | | 8 | | 17 | | 18 | |
Beer | | 4 | | 4 | | 9 | | 7 | |
Ready to drink | | 3 | | 3 | | 2 | | (1) | |
| | | | | |
Global giants and local stars(2) | | | Organic volume movement(3) % | Organic net sales movement % | Reported net sales movement % |
Johnnie Walker | | | 24 | | 28 | | 28 | |
Shui Jing Fang(4) | | | 16 | | 19 | | 24 | |
McDowell's | | | 5 | | 6 | | 4 | |
Guinness | | | 5 | | 9 | | 7 | |
The Singleton | | | 11 | | 16 | | 18 | |
Smirnoff | | | 13 | | 14 | | 14 | |
Baileys | | | 12 | | 13 | | 12 | |
Windsor | | | 1 | | (9) | | (13) | |
(1) For further details on exceptional operating items see pages 101-102
(2) Spirits brands excluding ready to drink and non-alcoholic variants.variants
(ii)(3) Organic equals reported volume movement.movement, except for Smirnoff, which had reported volume movement of 12% due to a reclassification
(iii) Flavoured malt beverages(4) Growth figures represent total Chinese white spirits of which Shui Jing Fang is the principal brand
(5) Indian-Made Foreign Liquor (IMFL) whisky
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 been reclassified fromdistilleries 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 15 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.
Route to beer from 1 July 2020. This reflects the nature of these productsconsumer
In India, we manufacture, market and how management reviews performance. Movements reportedsell Indian whisky, rum, brandy and other spirits through our 55.94% shareholding in the table aboveUSL. Diageo also sells its own brands through USL.
In Greater China our market presence is established through our 63.17% 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 onshared. Diageo operates a like for like basis.wholly owned subsidiary in Taiwan.
(iv) From 1 July 2020, EuropeIn Australia, we manufacture, market and Turkeysell 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, sales are managedthrough our wholly owned entity Diageo Japan, as six individual markets: Great Britain, Ireland, Northern Europe, Southern Europe, Eastern Europe and Turkey, each with end-to-end accountability. This reflects how management reviews performance.
Business review (continued)
Market highlightswell as through joint venture agreements with Moët Hennessy. 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.
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% 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.
'Society 2030: Spirit of Progress'
Our positive drinking programmes continued to deliver. This year we reached 86 million consumers with brand moderation messages across the region. In Korea, we reached 1.75 million DRINKiQ users by leveraging mobile applications. The Johnnie Walker #BeWhiskyWise campaign drove visits to DRINKiQ.com, especially through a campaign with Grab in the Philippines. ‘Wrong Side of the Road’, our flagship programme on drink driving, reached over 91,000 consumers in China across the year, and over 136,000 in India. This year we launched SMASHED Online in Australia, Cambodia, Indonesia and the Philippines. In total SMASHED educated over 202,000 young people about the dangers of underage drinking across the Asia Pacific region in fiscal 22.
With the ongoing pandemic, we adapted Learning for Life (L4L) material to work online. In Indonesia, we partnered with the British Chamber of Commerce in the Greater Jakarta region, and with Saraswati in Bali, to provide training in business, hospitality and ecotourism to 766 people. L4L further benefitted over 5,000 people across Thailand, India, China, Vietnam and Taiwan. To champion ethnic diversity in Australia, we launched a Reconciliation Action Plan – strengthening relationships with the First Nation peoples.
Moving towards sustainability, our facility in Bali, Indonesia is now certified as using 100% renewable energy. Our first single malt distillery in Yunnan, China will be carbon neutral when it opens.
In September 2021, we launched our spiced rum, Reeftip, in Australia. Working in partnership with the Coral Nurture Program (CNP), 10% of its profits will go towards regenerating the Great BritainBarrier Reef. This year Reeftip helped CNP propagate and plant more than 15,559 coral pieces across 12,400m2 of reef. In April 2022, we announced our partnership with ecoSPIRITS in Southeast Asia. Together we’ll pilot a sustainable packaging format for on-trade venues in fiscal 23.
Strong off-trade growth
Net
Regional performance
| | |
•Reported net sales grew 16%, primarily reflecting strong organic growth. |
•Organic net sales grew 16%, with strong growth in India and Greater China, and a partial recovery of Travel Retail Asia and Middle East. |
•Spirits grew 17%, mainly driven by scotch, Chinese white spirits and IMFL whisky(5). |
•Organic operating margin was flat. Benefits from the partial recovery of Travel Retail, positive category mix and price increases were offset by strategic investments in Greater China, cost inflation and one-off costs. |
•Marketing investment increased 16%, mainly driven by Greater China, across Chinese white spirits and scotch. |
Market highlights
•India net sales increased 7% primarilygrew 17%, driven by strong consumer demand in the off-trade.off-trade channel, recovery of the on-trade channel and strong premiumisation. The e-commerce channel experienced strong growth as consumption shifted to the at-home occasion. Spiritsprestige and above segment grew 22%, ahead of popular segment growth of 16% was driven by scotch, Baileys, vodka and gin, supported by innovation, including Gordon’s Sicilian Lemon and Captain Morgan Tiki. Beer declined 16% due to the significant impact of lost sales in the on-trade being only partially offset by3%. Scotch grew strong growth in the off-trade channel.
Northern Europe
Strong off-trade growth
Net sales increased 22%, reflecting strong off-trade growth primarily driven by scotch and Baileys. Baileys grew 30%, benefiting from innovation, including Baileys Salted Caramel. Scotch sales grew 24%double digits, driven by Johnnie Walker, and scotch malts.IMFL whisky grew 7%.
Southern Europe
Slower growth due to higher on-trade exposure•
NetGreater China net sales increased 1%. The slower pace13%, primarily driven by Chinese white spirits growth of recovery reflects18%, despite the continued impact of on-tradegovernment restrictions and reduced tourism. Growth was mainlyrelated to Covid-19. Scotch growth of 6% reflects double-digit growth in mainland China, driven by rum,the super-premium-plus segment, partially offset by a decline in vodka.
Taiwan.
Eastern Europe•(i)
Growth mainly driven by Russia
NetAustralia net sales increased 6%, mainly driven bywere flat, following strong double-digit growth in Russia, partially offset by decreased sales in Lebanon as a result of on-trade restrictions and political instability.fiscal 21.
•
Ireland
Severe on-trade restrictions droveSouth East Asia net sales decline
Net sales declined 23%, primarily due to a declinegrowth was impacted in Guinness net salesthe first half of 32% as a result of continuedthe year by on-trade restrictions. Spirits grew 14% driven by strong off-trade growth, particularly in Baileys and Gordon's.
Turkey
Strong scotch and raki performance
Net sales increased 28%, driven partially by inflation and excise-led price increases. Scotch sales grew 94% driven by strong off-trade momentum, particularly in Johnnie Walker. Raki grew 10%, driven by our more premium variant Tekirdağ Raki, partially offset by decreased sales of Yenì Raki, reflecting increased category premiumisation.
Travel Retail Europe
Significant impact fromrestrictions, international travel restrictions
Net sales declined 56%. and reduced tourism due to Covid-19, with performance improving in the second half.
Marketing
Increased investment behind growth drivers•
Investment increased 13%, ahead ofTravel Retail Asia and Middle East net sales grew triple digits, following a significant decline in fiscal 21. This reflects a partial recovery as international travel restrictions eased and was primarily driven by upweighted media spend and strong activation in the off-trade and e-commerce channels.
Johnnie Walker.
(i) The Diageo Eastern Europe market includes the Middle East and North Africa (MENA).
Business review (continued)
Africa
(i) Flavoured malt beverages have been reclassified from ready to drink to beer from 1 July 2020. This reflects the nature of these products and how management reviews performance. Movements reported in the table above are on a like for like basis.
| | | | | | | | | | | | | | | | | | | | | | |
Key financials | 2020 £ million | Exchange £ million | | | Acquisitions and disposals £ million | Organic movement£ million | 2021 £ million | Reported movement % |
Net sales | 1,346 | | (150) | | | | (42) | | 258 | | 1,412 | | 5 | |
Marketing | 160 | | (13) | | | | (1) | | 22 | | 168 | | 5 | |
Operating profit before exceptional items | 101 | | (43) | | | | — | | 113 | | 171 | | 69 | |
Exceptional operating items(i) | (145) | | | | | | | — | | |
Operating profit | (44) | | | | | | | 171 | | 489 | |
(i) For further details on exceptional operating items see pages 105 and 236-238.
In Africa, our strategy is to grow our beers fast and our spirits faster, through selective participation in beer, near beer and spirits,across categories, including ‘near beer’, leveraging the broad range of the global Diageo Portfolio.portfolio. Guinness, Malta Guinness and several local brands, including Tusker and Serengeti, 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 at the mid-level price range andpoint which are tailored to local tastes and flavours.flavour profiles. Our operating model buildsseeks to build resilience, agility and strength into our African businesses and weas they develop. We drive smart investments through local manufacturing, innovation and partnerships to unlock growth. Local sourcing is very important to our strategy, currently at 80%, directly supporting our commercial operations whilst bringing wider economic benefits to local communities, agricultural development and farmers.
Key financials
| | | | | | | | | | | | | | | | | | | | | | |
| 2021 | Exchange | | | Acquisitions and disposals | Organic movement | 2022 | Reported movement |
| £ million | £ million | | | £ million | £ million | £ million | % |
Net sales | 1,412 | | (33) | | | | (5) | | 308 | | 1,682 | | 19 | |
Marketing | 168 | | (5) | | | | — | | 36 | | 199 | | 18 | |
Operating profit | 171 | | (10) | | | | 2 | | 152 | | 315 | | 84 | |
| | | | | | | | |
| | | | | | | | |
Business review (continued)
| | | | | | | | | | | | | | |
| | | | |
| Organic volume movement | Reported volume movement | Organic net sales movement | Reported net sales movement |
Markets and categories | % | % | % | % |
Africa(1) | 13 | | 12 | | 22 | | 19 | |
| | | | |
East Africa | 22 | | 22 | | 25 | | 24 | |
Africa Regional Markets(1) | 9 | | 7 | | 14 | | 9 | |
Nigeria | 1 | | 1 | | 30 | | 26 | |
South Africa(1) | 6 | | 4 | | 12 | | 10 | |
| | | | |
Spirits | 12 | | 12 | | 21 | | 20 | |
Beer(1) | 14 | | 13 | | 22 | | 19 | |
Ready to drink(1) | 11 | | 5 | | 28 | | 20 | |
| | | | |
| | | | |
| | Organic volume movement(3) | Organic net sales movement | Reported net sales movement |
Global giants and local stars(2) | | % | % | % |
Guinness | | 4 | | 17 | | 13 | |
Johnnie Walker | | 16 | | 22 | | 22 | |
Smirnoff | | 9 | | 21 | | 21 | |
| | | | |
Other beer: | | | | |
Malta Guinness(1) | | 30 | | 53 | | 40 | |
Senator | | 38 | | 36 | | 33 | |
Tusker | | 14 | | 27 | | 26 | |
Serengeti | | 9 | | 9 | | 10 | |
(1) Reported volume movement impacted by disposals. For further details see page 138
(2) Spirits brands excluding ready to drink and non-alcoholic variants
(3) Organic equals reported volume movement, except for Malta Guinness, which had reported volume movement of 27%
Our markets
The region comprises East Africa (Kenya, Tanzania and Uganda), Africa Regional Markets (including Ghana, Cameroon, Ethiopia, Indian Ocean and Angola), Nigeria and South Africa.
Supply operations
We have 1312 breweries in Africa and ten12 facilities which provide blending, malting and bottling services. In addition, our beer and mainstream spirits brands are produced under licencelicense by third parties in 14 African countries, and we distribute beer and spirits through several third partythird-party relationships across the region.
Route to consumer
Diageo has wholly owned entities in South Africa Cameroon, Ethiopia, and Reunion.Cameroon. 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 almostmore than 30 countries.
'Society 2030: Spirit of Progress'
We continue to focus on campaigns and programmes to promote positive drinking, and have seen notable successes thisThis year, despite the disruption caused by Covid-19. For example, SMASHED reached nearly 69,932 people across the region.
At the same time,as we continued to workchampion inclusion and diversity, we invited 31 people with the many smallholdersdisabilities to our Diageo Bar Academy and farmers across Africa who supply usLearning for Life (L4L) programmes. We also worked with raw materials, and to make significant investments71 smallholder farmers in our breweries, wheresorghum-growing areas for the production of Senator Keg beer, and partnered with Sight Savers Kenya, an NGO promoting the inclusion of people with disabilities. Overall we are developing solar and biomass energy projects and water treatment plants.trained over 7,500 people in our value chain through our L4L programme, 68% of whom were women.
Business review (continued)
Driving is one of our employees’ most dangerous work-related activities. This year we refreshed our Driving on Roads programme across Africa, launching a bespoke safe-driving programme with e-learning modules. SMASHED educated over 188,000 people across the region on the dangers of underage drinking and, in South Africa, Wrong Side of The Road reached nearly 89,000 people.
Our partnership withbreweries in Kenya and Uganda are in the NGO WaterAid continuesfinal stage of commissioning new biomass facilities, which will be operational in early fiscal 23. In Ghana, meanwhile, as part of our efforts to bring cleanreduce plastic waste, we invested in 10 plastic buyback centres.
In Nigeria, a key water sanitationrecycling and hygiene (WASH) programmes to communities across Africa. These WASH projects were especially importantreuse site in Ogba began delivering benefits and we’re in the final stages of constructing another facility in Benin. Water recycling facilities are also operational in Kenya and Uganda.
We delivered a 6.5% improvement in water efficiency this year as hand washing plays a key preventative roleand, cumulatively, water use rates have improved by 19.7% against 2020 levels. The water volume we recycled or reused in addressing Covid-19 and we more than doubled our target for reaching beneficiaries. By the endown production is over 289,000m3, representing 5.1% of the year we had reached 54,691 people through initiatives such as our Budada project in Eastern Uganda, which involved the construction of a water reservoir and pump house and the laying of over three kilometres of pipelines to supply three standpipes which provide precious clean water to the community.total withdrawals.
This year water efficiency improved by 15% across the region, realising the benefits from our investments in water recovery and reuse in Uganda and Kenya. While the implementation of biomass installations in East Africa was delayed due to Covid-19 , the programme is now well advanced. Commissioning of the new facilities will start later this year as we switch from fossil to renewable fuels to power our breweries in the region. At our facility in Kisumu, Kenya, 8% of the site’s electricity consumption is now generated from onsite solar panels. On our journey, to net zeroalso reduced carbon emissions by 2030, we intend to12.7% on last year, despite a year-on-year increase our solar capacity at Kisumuof 12.2% in packaged volumes. These reductions were driven by increased energy efficiency, and extend this proven pilot project across Africa.the use of on-site renewable energy and renewable energy attribute certificates.
Performance 2021
Sales and net sales
Sales increased by £109 million, or 6%, to £2,020 million in the year ended 30 June 2021 from £1,911 million in the year ended 30 June 2020. Excise duties were £608 million in the year ended 30 June 2021 and £565 million in the year ended 30 June 2020, an increase of £43 million.
Net sales (sales less excise duties) were £1,412 million in the year ended 30 June 2021, an increase of £66 million, or 5%, compared to net sales of £1,346 million in the year ended 30 June 2020. Net sales were favourably impacted by organic growth of £258 million (see further performance analysis below). This increase was partially offset by exchange rate movements of £150 million primarily due to the weakening of the Kenyan shilling, the Nigerian naira, the Ghanaian cedi and the South African rand against sterling and by a reduction of £42 million of net sales generated by disposed businesses.
Operating profit
Operating profit was £171 million in the year ended 30 June 2021 an increase of £215 million compared to operating loss of £44 million in the year ended 30 June 2020. Operating profit increased by lapping exceptional charge of £139 million in respect of Nigeria and Ethiopia fixed asset impairment, by £113 million organic growth and by lapping exceptional losses of £6 million due to Covid-19 pandemic related implications (£4 million “Raising the Bar” provision and £2 million stock write-off). This increase was partially offset by £43 million primarily as a result of exchange rate movements due to the weakening of the Kenyan shilling, the Nigerian naira, the Ghanaian cedi and the South African rand (unfavourable £24 million translational and £19 million transactional exchange impact).
Performance 2020
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, 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 primarily 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.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Business review (continued)
Regional Performance
•Net sales grew 20%, following a decline in fiscal 20, driven by Nigeria, East Africa and Africa Regional Markets.
•Strong performance reflects resilience in consumer demand in the off-trade and partial recovery of the on-trade, despite ongoing Covid-19 restrictions.
•Slower growth in South Africa, due to trade restrictions and periodic bans on alcohol sales.
•Beer net sales grew 19% primarily driven by Guinness and Malta Guinness.
•Spirits net sales grew 21% mainly driven by growth in mainstream spirits.
•Operating margin improved 586bps, lapping a significant decline in fiscal 20. Margin improvement was driven by net sales recovery, positive price/mix and productivity initiatives, partially offset by market mix.
| | | | | | | | | | | | | | |
Markets: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % |
Africa(iii) | 18 | | 10 | | 20 | | 5 | |
| | | | |
East Africa | 13 | | 13 | | 13 | | 2 | |
Africa Regional Markets(iii) | 12 | | (12) | | 15 | | (2) | |
Nigeria | 39 | | 39 | | 57 | | 35 | |
South Africa(iii) | 13 | | 8 | | 11 | | (7) | |
| | | | |
Spirits | 20 | | 20 | | 21 | | 10 | |
Beer(iv) | 15 | | 15 | | 19 | | 7 | |
Ready to drink(iii) (iv) | 30 | | 7 | | 31 | | (2) | |
Global giants and local stars(i): | | Organic volume movement(ii) % | Organic net sales movement % | Reported net sales movement % |
Guinness | | 30 | | 32 | | 22 | |
Johnnie Walker | | (5) | | 4 | | (2) | |
Smirnoff | | 28 | | 20 | | 9 | |
| | | | |
Other beer: | | | | |
Malta Guinness | | 38 | | 35 | | 19 | |
Senator | | 2 | | 4 | | (7) | |
Tusker | | 8 | | 4 | | (6) | |
Serengeti | | 6 | | 7 | | (1) | |
(i) Spirits brands excluding ready to drink and non-alcoholic variants.
(ii) Organic equals reported volume movement.
(iii) Africa, Africa Regional Markets, South Africa and ready to drink reported volume movement impacted by disposals. For further details see page 147.
(iv) Flavoured malt beverages have been reclassified from ready to drink to beer from 1 July 2020. This reflects the nature of these products and how management reviews performance. Movements reported in the table above are on a like for like basis. | | |
•Reported net sales grew 19%, primarily driven by strong organic growth. There were unfavourable impacts from foreign exchange and the disposal of the Meta Abo Brewery in Ethiopia. |
•Organic net sales grew 22%, primarily driven by East Africa and Nigeria. All markets grew double digits. |
•Strong growth in East Africa and Nigeria was driven by the continued recovery of the on-trade channel, particularly in Kenya, as well as price increases and focused execution of our total beverage alcohol strategy. |
•Beer net sales grew 22%, primarily driven by Malta Guinness, Guinness and Senator. |
•Spirits net sales grew 21%, driven by double-digit growth in both mainstream and international spirits, particularly scotch, gin and vodka. |
•Organic operating margin improved 643bps, primarily driven by price increases and leverage on operating costs. The benefit from price increases and productivity savings more than offset cost inflation. |
•Marketing investment increased 22%, in line with organic net sales growth. Investment focused on key categories, as well as on e-commerce and new route to consumer opportunities. |
Market highlights
•
East Africa
Growth grew 25%, with double-digit growth in both beer and spirits across all marketsmarkets. This reflected the continued recovery of the on-trade, benefitting beer in particular, as well as price increases.
Net sales grew 13%, lapping a 10% decline in fiscal 20. Kenya grew 11%, with strong spirits growth, particularly in mainstream gin, and slower beer growth due to on-trade restrictions. Uganda grew 24% driven primarily by strong beer growth, benefiting from production capacity expansion. Tanzania•Nigeria net sales grew 10%30%, building on growth in fiscal 20.
Africa Regional Markets
Growthprimarily driven by strong Guinness performance
Net sales grew 15%, following a decline in fiscal 20 with good growth in Ghana and Cameroon, partially offset by continued decline in Ethiopia. Guinness grew 28%, benefiting from focussed strategic marketing investment andprice increases, as well as an improved supply capacity.
Business review (continued)
Nigeria
Strong broad based recovery
Net sales grew 57%, partially benefiting from lapping a soft comparative. Strong growth in beer,route to consumer for certain brands. Beer, mainstream spirits and international premium spirits reflects momentum in the off-trade and improved route to consumer across the business.all grew double digits. Growth in beer was primarily driven by Malta Guinness and Guinness.
•Africa Regional Markets net sales grew 14%, led by strong growth in Ghana. Double-digit growth in beer, particularly Malta Guinness, which also benefitted from partialwas driven by the recovery of the on-trade channel and innovation.price increases.
•South Africa
Market impacted by grew double digits. While restrictions related to Covid-19 related restrictions
Net sales grew 11%, following a disruptedeased compared to fiscal 20, despite on- and off-trade closures and periodic bans on sales and distribution of alcohol. Growth was primarily driven by scotch, followed by vodka and gin.
Marketing
Focussed investment in off-trade and new channels
Marketing spend grew 14%, behind net sales growth. Investment in21, the on-trade was selectively scaled back and spending was focussed on the off-trade, e-commerce and new route to consumer programmes.operating environment remained challenging.
Business review (continued)
Latin America and CaribbeanRegional Performance
| | |
•Reported net sales grew 19%, primarily driven by strong organic growth. There were unfavourable impacts from foreign exchange and the disposal of the Meta Abo Brewery in Ethiopia. |
•Organic net sales grew 22%, primarily driven by East Africa and Nigeria. All markets grew double digits. |
•Strong growth in East Africa and Nigeria was driven by the continued recovery of the on-trade channel, particularly in Kenya, as well as price increases and focused execution of our total beverage alcohol strategy. |
•Beer net sales grew 22%, primarily driven by Malta Guinness, Guinness and Senator. |
•Spirits net sales grew 21%, driven by double-digit growth in both mainstream and international spirits, particularly scotch, gin and vodka. |
•Organic operating margin improved 643bps, primarily driven by price increases and leverage on operating costs. The benefit from price increases and productivity savings more than offset cost inflation. |
•Marketing investment increased 22%, in line with organic net sales growth. Investment focused on key categories, as well as on e-commerce and new route to consumer opportunities. |
Market highlights
•East Africa grew 25%, with double-digit growth in both beer and spirits across all markets. This reflected the continued recovery of the on-trade, benefitting beer in particular, as well as price increases. (i) Flavoured malt beverages have been reclassified from ready•Nigeria net sales grew 30%, primarily driven by price increases, as well as an improved route to drinkconsumer for certain brands. Beer, mainstream spirits and international spirits all grew double digits. Growth in beer was primarily driven by Malta Guinness and Guinness.
•Africa Regional Markets net sales grew 14%, led by strong growth in Ghana. Double-digit growth in beer, particularly Malta Guinness, was driven by the recovery of the on-trade channel and price increases.
•South Africa grew double digits. While restrictions related to beer from 1 July 2020. This reflectsCovid-19 eased compared to fiscal 21, the nature of these products and how management reviews performance. Movements reported in the table above are on a like for like basis.operating environment remained challenging.
| | | | | | | | | | | | | | | | | | | | | | | | |
Key financials | 2020 £ million | Exchange£ million | | Acquisitions and disposals £ million | Organic movement£ million | Other(i) £ million | 2021 £ million | Reported movement % |
Net sales | 908 | | (137) | | | — | | 275 | | — | | 1,046 | | 15 | |
Marketing | 155 | | (22) | | | — | | 28 | | — | | 161 | | 4 | |
Operating profit before exceptional items | 248 | | (82) | | | — | | 153 | | (16) | | 303 | | 22 | |
Exceptional operating items(ii) | (6) | | | | | | | — | | |
Operating profit | 242 | | | | | | | 303 | | 25 | |
(i) Fair value remeasurements. For further details see page 106.
(ii) For further details on exceptional operating items see pages 105 and 236-238.
In Latin America 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 stance on responsible drinking and community development programmes.
Our markets
Our Latin America and Caribbean (LAC) business comprises five markets: PUB (Paraguay, Uruguay and Brazil), Mexico, CCA (Central America and Caribbean), Andean (Colombia and Venezuela) and 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.
Route to consumer
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, Peru, and Chile, we use hybrid models where Diageo sells directly to some key accounts while distributors are used to improve our products’ physical availability.
'Society 2030: Spirit of Progress'
As in other regions, we supported efforts to combat Covid-19 through donations. For example, in September 2020 we donated 8,000 480ml bottles of 70% liquid alcohol to the Brazilian Red Cross who distributed them to the vulnerable. The Diageo Institute also supported an initiative where women prisoners manufactured protective masks for use in the prison system – an extension of the
Business review (continued)
Tecendo o Futuro (Weaving the Future) programme, which promotes the employment and re-socialisation of inmates at the Auri Moura Costa Female Criminal Institute in Aquiraz, Brazil. We also became a signatory to the UN’s Women Empowerment Principles.
Our SMASHED programme educated over 38,000 people on the dangers of underage drinking. In 2021 we launched new versions of DRINKiQ in Brazil, Colombia, Uruguay, Peru and Mexico. Brands including Johnnie Walker, Smirnoff and Tanqueray launched social media campaigns which emphasised messages of responsible drinking, reaching 132 million people across the region.
Our ‘Raising The Bar’ and #BarResponsável Manifest programmes supported people in the hospitality industries in Mexico and Brazil in the face of the challenges brought by the Covid-19 pandemic. So far over 1,000 outlets have registered in our programme. Our Learning for Life skills programme moved some elements online in response to the pandemic, and reached over 2,500 people, including 129 in the Dominican Republic. The virtual part of the programme lasted for one month and culminated with practical sessions and internships adhering to Covid-19 safety protocols. More than 70% of participants were women. In Mexico, we began a collaboration with Mujer Emprende and Victoria147, the first online business academy in Latin America aimed at women.
We continue to make progress on grain-to-glass sustainability journey: 18% of our energy is now from renewable sources and in Brazil, 47% of all energy use is derived from renewable sources. Our new facility in Ceará state, Brazil, which brings together production from two existing sites, will use solar energy to further increase our use of renewable energy and will use water treatment and reuse facilities to reduce water consumption in beverage production by up to 40%.
Performance 2021
Sales and net sales
Sales increased by £185 million, or 16%, to £1,369 million in the year ended 30 June 2021 from £1,184 million in the year ended 30 June 2020.Excise duties were £323 million in the year ended 30 June 2021 and £276 million in the year ended 30 June 2020, an increase of £47 million.
Net sales (sales less excise duties) were £1,046 million in the year ended 30 June 2021 an increase of £138 million, or 15%, compared to net sales of £908 million in the year ended 30 June 2020. Net sales were favourably impacted by organic growth of £275 million (see further performance analysis below), partially offset by exchange rate movements of £137 million primarily due to the weakening of the Brazilian real, the Mexican peso and the Colombian peso against sterling.
Operating profit
Operating profit was £303 million in the year ended 30 June 2021 an increase of £61 million compared to operating profit of £242 million in the year ended 30 June 2020. Operating profit was favourably impacted by organic growth of £153 million and by lapping 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 increase was partially offset by unfavourable exchange rate movements of £82 million primarily due to the weakening of Brazilian real and the Mexican peso against sterling (£55 million translation impact and £27 million transactional exchange impact) and by a decrease 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 and earn out arrangements in respect of prior year acquisitions).
Performance 2020
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, by exchange rate movements of £42 million primarily 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 primarily 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
Business review (continued)
million biological assets fair value adjustment and £7 million of fair value remeasurement of contingent consideration liabilities in respect of prior year acquisitions).
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Regional Performance
•Net sales increased 30%, lapping a significant decline in fiscal 20, driven by growth in all markets.
•Growth reflects resilient consumer demand in the off-trade channel and price increases in key markets.
•Spirits grew 30% with strong growth across key categories, particularly scotch.
•Travel Retail Latin America and Caribbean declined 63% due to continued international travel restrictions.
•Operating margin improved by 674bps driven by net sales recovery, positive price interventions and productivity initiatives.
| | | | | | | | | | | | | | |
Markets: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % |
Latin America and Caribbean | 22 | | 22 | | 30 | | 15 | |
| | | | |
PUB | 24 | | 24 | | 50 | | 20 | |
Mexico | 10 | | 10 | | 24 | | 11 | |
CCA | 15 | | 15 | | 12 | | 8 | |
Andean | 27 | | 27 | | 33 | | 19 | |
PEBAC | 47 | | 47 | | 73 | | 62 | |
| | | | |
Spirits | 22 | | 22 | | 30 | | 15 | |
Beer(iii) | 11 | | 11 | | 17 | | 16 | |
Ready to drink(iii) | 24 | | 24 | | 38 | | 17 | |
Global giants and local stars(i): | Organic volume movement(ii) % | Organic net sales movement % | Reported net sales movement % |
Johnnie Walker | | 25 | | 29 | | 16 | |
Buchanan’s | | 18 | | 23 | | 11 | |
Old Parr | | 14 | | 16 | | 4 | |
Smirnoff | | 16 | | 25 | | 7 | |
Black & White | | 33 | | 44 | | 26 | |
Tanqueray | | 27 | | 34 | | 11 | |
Baileys | | 39 | | 44 | | 32 | |
Asia Pacific
(i) SpiritsIn Asia Pacific, our focus is to grow in both developed and beer brands excludingemerging markets across our entire portfolio, ranging from international and local spirits to ready to drink formats and flavoured malt beverages.
(ii) Organic equals reported volume movement.
(iii) Flavoured malt beveragesbeer. We have been reclassified from readya clear long-term strategy that enables us to allocate resources behind brands that win in key consumer occasions and categories. We manage our portfolio to meet the increasing demands of the growing middle class, and aim to inspire our consumers to drink to beer from 1 July 2020.better, not more. This reflectsstrategy ensures that we deliver consistent and efficient growth, with a key focus on developing our premium and super deluxe segments across the nature of these products and how management reviews performance. Movements reported in the table above are on a like for like basis.region.
Market highlightsKey financials
PUB (Paraguay, Uruguay and Brazil)
Strong broad based growth in key categories
Net sales increased 50%, primarily driven by scotch, as well as growth in gin, vodka and ready-to-drink. Scotch net sales increased 66%, with double-digit growth in Johnnie Walker and triple-digit growth in White Horse. Brazil net sales grew 62%, reflecting a recovery in consumption and pricing interventions, which more than offset a decline in duty free sales. | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | Exchange | | Acquisitions and disposals | Organic movement | 2022 | Reported movement | |
| £ million | £ million | | £ million | £ million | £ million | % | |
Net sales | 2,488 | | (6) | | | — | | 402 | | 2,884 | | 16 | | |
Marketing | 418 | | 4 | | | — | | 68 | | 490 | | 17 | | |
Operating profit before exceptional items | 608 | | 5 | | | — | | 98 | | 711 | | 17 | | |
Exceptional operating items(1) | — | | | | | | (241) | | | |
Operating profit | 608 | | | | | | 470 | | (23) | | |
Mexico
Market recovery supported by strong off-trade executionNet sales increased 24%, benefitting from lapping a reduction of inventory levels by distributors in fiscal 20 and growth in the off-trade channel in fiscal 21. Tequila grew 47% driven by Don Julio, supported by limited editions and a strong activation plan, resulting in share gains in the off-trade. Scotch sales grew 12% driven by Buchanan’s and Johnnie Walker.
Business review (continued)
CCA (Caribbean | | | | | | | | | | | | | | | |
Markets and categories | | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % |
Asia Pacific | | 8 | | 8 | | 16 | | 16 | |
| | | | | |
India | | 7 | | 7 | | 17 | | 16 | |
Greater China | | 6 | | 6 | | 13 | | 17 | |
Australia | | 2 | | 2 | | — | | (2) | |
South East Asia | | 14 | | 14 | | 20 | | 19 | |
North Asia | | (5) | | (5) | | 12 | | 6 | |
Travel Retail Asia and Middle East | | 135 | | 125 | | 178 | | 184 | |
| | | | | |
Spirits | | 8 | | 8 | | 17 | | 18 | |
Beer | | 4 | | 4 | | 9 | | 7 | |
Ready to drink | | 3 | | 3 | | 2 | | (1) | |
| | | | | |
Global giants and local stars(2) | | | Organic volume movement(3) % | Organic net sales movement % | Reported net sales movement % |
Johnnie Walker | | | 24 | | 28 | | 28 | |
Shui Jing Fang(4) | | | 16 | | 19 | | 24 | |
McDowell's | | | 5 | | 6 | | 4 | |
Guinness | | | 5 | | 9 | | 7 | |
The Singleton | | | 11 | | 16 | | 18 | |
Smirnoff | | | 13 | | 14 | | 14 | |
Baileys | | | 12 | | 13 | | 12 | |
Windsor | | | 1 | | (9) | | (13) | |
(1) For further details on exceptional operating items see pages 101-102
(2) Spirits brands excluding ready to drink and Central America)non-alcoholic variants
(3) Organic equals reported volume movement, except for Smirnoff, which had reported volume movement of 12% due to a reclassification
(4) Growth figures represent total Chinese white spirits of which Shui Jing Fang is the principal brand
(5) Indian-Made Foreign Liquor (IMFL) whisky
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 domestic consumptionChengdu, 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 15 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.
Net
Route to consumer
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 Greater China our market presence is established through our 63.17% 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 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, sales increased 12%are through our wholly owned entity Diageo Japan, as
Business review (continued)
well as through joint venture agreements with Moët Hennessy. 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.
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% 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.
'Society 2030: Spirit of Progress'
Our positive drinking programmes continued to deliver. This year we reached 86 million consumers with brand moderation messages across the region. In Korea, we reached 1.75 million DRINKiQ users by leveraging mobile applications. The Johnnie Walker #BeWhiskyWise campaign drove visits to DRINKiQ.com, especially through a campaign with Grab in the Philippines. ‘Wrong Side of the Road’, lappingour flagship programme on drink driving, reached over 91,000 consumers in China across the declineyear, and over 136,000 in India. This year we launched SMASHED Online in Australia, Cambodia, Indonesia and the Philippines. In total SMASHED educated over 202,000 young people about the dangers of underage drinking across the Asia Pacific region in fiscal 20 due22.
With the ongoing pandemic, we adapted Learning for Life (L4L) material to reduced levelswork online. In Indonesia, we partnered with the British Chamber of international tourismCommerce in the Greater Jakarta region, and with Saraswati in Bali, to provide training in business, hospitality and ecotourism to 766 people. L4L further benefitted over 5,000 people across Thailand, India, China, Vietnam and Taiwan. To champion ethnic diversity in Australia, we launched a Reconciliation Action Plan – strengthening relationships with the First Nation peoples.
Moving towards sustainability, our facility in Bali, Indonesia is now certified as using 100% renewable energy. Our first single malt distillery in Yunnan, China will be carbon neutral when it opens.
In September 2021, we launched our spiced rum, Reeftip, in Australia. Working in partnership with the Coral Nurture Program (CNP), 10% of its profits will go towards regenerating the Great Barrier Reef. This year Reeftip helped CNP propagate and plant more than 15,559 coral pieces across 12,400m2 of reef. In April 2022, we announced our partnership with ecoSPIRITS in Southeast Asia. Together we’ll pilot a sustainable packaging format for on-trade restrictions. Growthvenues in fiscal 23.
Regional performance
| | |
•Reported net sales grew 16%, primarily reflecting strong organic growth. |
•Organic net sales grew 16%, with strong growth in India and Greater China, and a partial recovery of Travel Retail Asia and Middle East. |
•Spirits grew 17%, mainly driven by scotch, Chinese white spirits and IMFL whisky(5). |
•Organic operating margin was flat. Benefits from the partial recovery of Travel Retail, positive category mix and price increases were offset by strategic investments in Greater China, cost inflation and one-off costs. |
•Marketing investment increased 16%, mainly driven by Greater China, across Chinese white spirits and scotch. |
Market highlights
•India net sales grew 17%, driven by domestic consumption supportedstrong consumer demand in the off-trade channel, recovery of the on-trade channel and strong premiumisation. The prestige and above segment grew 22%, ahead of popular segment growth of 3%. Scotch grew strong double digits, driven by "The Moment is Now" campaign. ScotchJohnnie Walker, and IMFL whisky grew 7%.
•Greater China net sales increased 13%, primarily driven by double digitChinese white spirits growth of Johnnie Walker, Buchanan’s and Old Parr.
Andean (Colombia and Venezuela)
Growth18%, despite the impact of government restrictions related to Covid-19. Scotch growth of 6% reflects double-digit growth in mainland China, driven by the super-premium-plus segment, partially offset by a decline in Taiwan.
•Australia net sales were flat, following strong scotch performance in Colombia
Net sales increased 33%, building ondouble-digit growth in fiscal 20, driven by Colombia. Growth was primarily driven by scotch with21.
•South East Asia net sales increasegrowth was impacted in the first half of 25% driventhe year by double-digit growthon-trade restrictions, international travel restrictions and reduced tourism due to Covid-19, with performance improving in Buchanan'sthe second half.
•Travel Retail Asia and triple-digit growth in Black & White.
PEBAC (Peru, Ecuador, Bolivia, Argentina and Chile)
Partial recoveryMiddle East net sales grew triple digits, following significant declines in fiscal 20
Net sales increased 73%, lapping a significant decline in fiscal 20 due to ongoing social21. This reflects a partial recovery as international travel restrictions eased and political instability across key markets and the impact of Covid-19. Growth in fiscal 21 was supported by strong execution through enhanced distribution partnerships. Scotch delivered double-digit net sales growth, primarily driven by Johnnie Walker.
Travel Retail Latin America and Caribbean
Persistent travel restrictions affect performance
Net sales decreased 63% due to continued international travel restrictions.
Marketing
Investment redeployed to off-trade and e-commerce
Investment increased 18%, behind net sales, following a decline in fiscal 20. On-trade marketing was redeployed to the off-trade and e-commerce in response to at-home consumption trends.
Business review (continued)
Africa
In Africa, our strategy is to grow our beers fast and our spirits faster, through selective participation across categories, including ‘near beer’, leveraging the broad range of the global Diageo portfolio. Guinness, Malta Guinness and several local brands, including Tusker and Serengeti, 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 at the mid-level price point which are tailored to local tastes and flavour profiles. Our operating model seeks to build resilience, agility and strength into our African businesses as they develop. We drive smart investments through local manufacturing, innovation and partnerships to unlock growth. Local sourcing is very important to our strategy, currently at 80%, directly supporting our commercial operations whilst bringing wider economic benefits to local communities, agricultural development and farmers.
Key financials
| | | | | | | | | | | | | | | | | | | | | | |
| 2021 | Exchange | | | Acquisitions and disposals | Organic movement | 2022 | Reported movement |
| £ million | £ million | | | £ million | £ million | £ million | % |
Net sales | 1,412 | | (33) | | | | (5) | | 308 | | 1,682 | | 19 | |
Marketing | 168 | | (5) | | | | — | | 36 | | 199 | | 18 | |
Operating profit | 171 | | (10) | | | | 2 | | 152 | | 315 | | 84 | |
| | | | | | | | |
| | | | | | | | |
Business review (continued)
| | | | | | | | | | | | | | |
| | | | |
| Organic volume movement | Reported volume movement | Organic net sales movement | Reported net sales movement |
Markets and categories | % | % | % | % |
Africa(1) | 13 | | 12 | | 22 | | 19 | |
| | | | |
East Africa | 22 | | 22 | | 25 | | 24 | |
Africa Regional Markets(1) | 9 | | 7 | | 14 | | 9 | |
Nigeria | 1 | | 1 | | 30 | | 26 | |
South Africa(1) | 6 | | 4 | | 12 | | 10 | |
| | | | |
Spirits | 12 | | 12 | | 21 | | 20 | |
Beer(1) | 14 | | 13 | | 22 | | 19 | |
Ready to drink(1) | 11 | | 5 | | 28 | | 20 | |
| | | | |
| | | | |
| | Organic volume movement(3) | Organic net sales movement | Reported net sales movement |
Global giants and local stars(2) | | % | % | % |
Guinness | | 4 | | 17 | | 13 | |
Johnnie Walker | | 16 | | 22 | | 22 | |
Smirnoff | | 9 | | 21 | | 21 | |
| | | | |
Other beer: | | | | |
Malta Guinness(1) | | 30 | | 53 | | 40 | |
Senator | | 38 | | 36 | | 33 | |
Tusker | | 14 | | 27 | | 26 | |
Serengeti | | 9 | | 9 | | 10 | |
(1) Reported volume movement impacted by disposals. For further details see page 138
(2) Spirits brands excluding ready to drink and non-alcoholic variants
(3) Organic equals reported volume movement, except for Malta Guinness, which had reported volume movement of 27%
Our markets
The region comprises East Africa (Kenya, Tanzania and Uganda), Africa Regional Markets (including Ghana, Cameroon, Indian Ocean and Angola), Nigeria and South Africa.
Supply operations
We have 12 breweries in Africa and 12 facilities which provide blending, malting and bottling services. In addition, our beer and mainstream spirits brands are produced under license by third parties in 14 African countries, and we distribute beer and spirits through several third-party relationships across the region.
Route to consumer
Diageo has wholly owned entities in South Africa and Cameroon. 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 more than 30 countries.
'Society 2030: Spirit of Progress'
This year, as we continued to champion inclusion and diversity, we invited 31 people with disabilities to our Diageo Bar Academy and Learning for Life (L4L) programmes. We also worked with 71 smallholder farmers in our sorghum-growing areas for the production of Senator Keg beer, and partnered with Sight Savers Kenya, an NGO promoting the inclusion of people with disabilities. Overall we trained over 7,500 people in our value chain through our L4L programme, 68% of whom were women.
Business review (continued)
Driving is one of our employees’ most dangerous work-related activities. This year we refreshed our Driving on Roads programme across Africa, launching a bespoke safe-driving programme with e-learning modules. SMASHED educated over 188,000 people across the region on the dangers of underage drinking and, in South Africa, Wrong Side of The Road reached nearly 89,000 people.
Our breweries in Kenya and Uganda are in the final stage of commissioning new biomass facilities, which will be operational in early fiscal 23. In Ghana, meanwhile, as part of our efforts to reduce plastic waste, we invested in 10 plastic buyback centres.
In Nigeria, a key water recycling and reuse site in Ogba began delivering benefits and we’re in the final stages of constructing another facility in Benin. Water recycling facilities are also operational in Kenya and Uganda.
We delivered a 6.5% improvement in water efficiency this year and, cumulatively, water use rates have improved by 19.7% against 2020 levels. The water volume we recycled or reused in our own production is over 289,000m3, representing 5.1% of our total withdrawals.
This year we also reduced carbon emissions by 12.7% on last year, despite a year-on-year increase of 12.2% in packaged volumes. These reductions were driven by increased energy efficiency, and the use of on-site renewable energy and renewable energy attribute certificates.
Asia Pacific
(i) Flavoured malt beverages have been reclassified from ready to drink to beer from 1 July 2020. This reflects the nature of these products and how management reviews performance. Movements reported in the table above are on a like for like basis.
| | | | | | | | | | | | | | | | | | | | | | | |
Key financials | 2020 £ million | Exchange £ million | Reclassification(i) £ million | Acquisitions and disposals £ million | Organic movement£ million | 2021 £ million | Reported movement % |
Net sales | 2,270 | | (75) | | (14) | | (1) | | 308 | | 2,488 | | 10 | |
Marketing | 365 | | (7) | | — | | — | | 60 | | 418 | | 15 | |
Operating profit before exceptional items | 501 | | (6) | | — | | — | | 113 | | 608 | | 21 | |
Exceptional operating items(ii) | (1,198) | | | | | | — | | |
Operating profit | (697) | | | | | | 608 | | 187 | |
(i) For fiscal 21, £14 million has been reclassified from cost of good sold to excise duties.
(ii) For further details on exceptional operating items see pages 105 and 236-238.
In Asia Pacific, our focus is to grow in both developed and emerging markets across our entire portfolio, ranging from international and local spirits to 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 occasions and categories. We manage our portfolio to meet the increasing demands of the growing middle class, 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.
Key financials
| | | | | | | | | | | | | | | | | | | | | | |
| 2021 | Exchange | | Acquisitions and disposals | Organic movement | 2022 | Reported movement | |
| £ million | £ million | | £ million | £ million | £ million | % | |
Net sales | 2,488 | | (6) | | | — | | 402 | | 2,884 | | 16 | | |
Marketing | 418 | | 4 | | | — | | 68 | | 490 | | 17 | | |
Operating profit before exceptional items | 608 | | 5 | | | — | | 98 | | 711 | | 17 | | |
Exceptional operating items(1) | — | | | | | | (241) | | | |
Operating profit | 608 | | | | | | 470 | | (23) | | |
Business review (continued)
| | | | | | | | | | | | | | | |
Markets and categories | | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % |
Asia Pacific | | 8 | | 8 | | 16 | | 16 | |
| | | | | |
India | | 7 | | 7 | | 17 | | 16 | |
Greater China | | 6 | | 6 | | 13 | | 17 | |
Australia | | 2 | | 2 | | — | | (2) | |
South East Asia | | 14 | | 14 | | 20 | | 19 | |
North Asia | | (5) | | (5) | | 12 | | 6 | |
Travel Retail Asia and Middle East | | 135 | | 125 | | 178 | | 184 | |
| | | | | |
Spirits | | 8 | | 8 | | 17 | | 18 | |
Beer | | 4 | | 4 | | 9 | | 7 | |
Ready to drink | | 3 | | 3 | | 2 | | (1) | |
| | | | | |
Global giants and local stars(2) | | | Organic volume movement(3) % | Organic net sales movement % | Reported net sales movement % |
Johnnie Walker | | | 24 | | 28 | | 28 | |
Shui Jing Fang(4) | | | 16 | | 19 | | 24 | |
McDowell's | | | 5 | | 6 | | 4 | |
Guinness | | | 5 | | 9 | | 7 | |
The Singleton | | | 11 | | 16 | | 18 | |
Smirnoff | | | 13 | | 14 | | 14 | |
Baileys | | | 12 | | 13 | | 12 | |
Windsor | | | 1 | | (9) | | (13) | |
(1) For further details on exceptional operating items see pages 101-102
(2) Spirits brands excluding ready to drink and non-alcoholic variants
(3) Organic equals reported volume movement, except for Smirnoff, which had reported volume movement of 12% due to a reclassification
(4) Growth figures represent total Chinese white spirits of which Shui Jing Fang is the principal brand
(5) Indian-Made Foreign Liquor (IMFL) whisky
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 Baijiubaijiu 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 1615 manufacturing sites across the country. In addition, USL and Diageo brands are also produced under licence by third partythird-party manufacturers. We have bottling plants in Thailand and Australia with ready to drink manufacturing capabilities.
Route to consumer
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 Greater China our market presence is established through our 63.17% 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 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, sales are through our wholly owned entity Diageo Japan, as
Business review (continued)
well as through joint venture agreements with Moët Hennessy. 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.
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.
'Society 2030: Spirit of Progress'
Our positive drinking programmes continued to deliver. This year we reached 86 million consumers with brand moderation messages across the region. In Korea, we reached 1.75 million DRINKiQ users by leveraging mobile applications. The Johnnie Walker #BeWhiskyWise campaign drove visits to DRINKiQ.com, especially through a campaign with Grab in the Philippines. ‘Wrong Side of the Road’, our flagship programme on drink driving, reached over 91,000 consumers in China across the year, and over 136,000 in India. This year we launched SMASHED Online in Australia, Cambodia, Indonesia and the Philippines. In total SMASHED educated over 202,000 young people about the dangers of underage drinking across the Asia Pacific region in fiscal 22.
With the ongoing pandemic, we adapted Learning for Life (L4L) material to work online. In Indonesia, we partnered with the British Chamber of Commerce in the Greater Jakarta region, and with Saraswati in Bali, to provide training in business, hospitality and ecotourism to 766 people. L4L further benefitted over 5,000 people across Thailand, India, China, Vietnam and Taiwan. To champion ethnic diversity in Australia, we launched a Reconciliation Action Plan – strengthening relationships with the First Nation peoples.
Moving towards sustainability, our facility in Bali, Indonesia is now certified as using 100% renewable energy. Our first single malt distillery in Yunnan, China will be carbon neutral when it opens.
In September 2021, we launched our spiced rum, Reeftip, in Australia. Working in partnership with the Coral Nurture Program (CNP), 10% of its profits will go towards regenerating the Great Barrier Reef. This year Reeftip helped CNP propagate and plant more than 15,559 coral pieces across 12,400m2 of reef. In April 2022, we announced our partnership with ecoSPIRITS in Southeast Asia. Together we’ll pilot a sustainable packaging format for on-trade venues in fiscal 23.
Regional performance
| | |
•Reported net sales grew 16%, primarily reflecting strong organic growth. |
•Organic net sales grew 16%, with strong growth in India and Greater China, and a partial recovery of Travel Retail Asia and Middle East. |
•Spirits grew 17%, mainly driven by scotch, Chinese white spirits and IMFL whisky(5). |
•Organic operating margin was flat. Benefits from the partial recovery of Travel Retail, positive category mix and price increases were offset by strategic investments in Greater China, cost inflation and one-off costs. |
•Marketing investment increased 16%, mainly driven by Greater China, across Chinese white spirits and scotch. |
Market highlights
•India net sales grew 17%, driven by strong consumer demand in the off-trade channel, recovery of the on-trade channel and strong premiumisation. The prestige and above segment grew 22%, ahead of popular segment growth of 3%. Scotch grew strong double digits, driven by Johnnie Walker, and IMFL whisky grew 7%.
•Greater China our market presence is established through our 63.14% equity investmentnet sales increased 13%, primarily driven by Chinese white spirits growth of 18%, despite the impact of government restrictions related to Covid-19. Scotch growth of 6% reflects double-digit growth in Sichuan Shuijingfang Company Limited which manufacturesmainland China, driven by the super-premium-plus segment, partially offset by a decline in Taiwan.
•Australia net sales were flat, following strong double-digit growth in fiscal 21.
•South East Asia net sales growth was impacted in the first half of the year by on-trade restrictions, international travel restrictions and sells baijiu,reduced tourism due to Covid-19, with performance improving in the second half.
•Travel Retail Asia and our wholly owned entity Diageo China Limited, which sells Diageo brands,Middle East net sales grew triple digits, following a significant decline in fiscal 21. This reflects a partial recovery as international travel restrictions eased and a joint venture arrangement with Moët Hennessy where administrative and distribution costs are shared. Diageo operates a wholly owned subsidiary in Taiwan.was primarily driven by Johnnie Walker.
Business review (continued)
Africa
In India,Africa, our strategy is to grow our beers fast and our spirits faster, through selective participation across categories, including ‘near beer’, leveraging the broad range of the global Diageo portfolio. Guinness, Malta Guinness and several local brands, including Tusker and Serengeti, lead our brewing portfolio, while Johnnie Walker and Smirnoff are at the heart of our international premium spirits offerings. Locally, we manufacture, marketproduce a range of mainstream spirits at the mid-level price point which are tailored to local tastes and sellflavour profiles. Our operating model seeks to build resilience, agility and strength into our African businesses as they develop. We drive smart investments through local manufacturing, innovation and partnerships to unlock growth. Local sourcing is very important to our strategy, currently at 80%, directly supporting our commercial operations whilst bringing wider economic benefits to local communities, agricultural development and farmers.
Key financials
| | | | | | | | | | | | | | | | | | | | | | |
| 2021 | Exchange | | | Acquisitions and disposals | Organic movement | 2022 | Reported movement |
| £ million | £ million | | | £ million | £ million | £ million | % |
Net sales | 1,412 | | (33) | | | | (5) | | 308 | | 1,682 | | 19 | |
Marketing | 168 | | (5) | | | | — | | 36 | | 199 | | 18 | |
Operating profit | 171 | | (10) | | | | 2 | | 152 | | 315 | | 84 | |
| | | | | | | | |
| | | | | | | | |
Business review (continued)
| | | | | | | | | | | | | | |
| | | | |
| Organic volume movement | Reported volume movement | Organic net sales movement | Reported net sales movement |
Markets and categories | % | % | % | % |
Africa(1) | 13 | | 12 | | 22 | | 19 | |
| | | | |
East Africa | 22 | | 22 | | 25 | | 24 | |
Africa Regional Markets(1) | 9 | | 7 | | 14 | | 9 | |
Nigeria | 1 | | 1 | | 30 | | 26 | |
South Africa(1) | 6 | | 4 | | 12 | | 10 | |
| | | | |
Spirits | 12 | | 12 | | 21 | | 20 | |
Beer(1) | 14 | | 13 | | 22 | | 19 | |
Ready to drink(1) | 11 | | 5 | | 28 | | 20 | |
| | | | |
| | | | |
| | Organic volume movement(3) | Organic net sales movement | Reported net sales movement |
Global giants and local stars(2) | | % | % | % |
Guinness | | 4 | | 17 | | 13 | |
Johnnie Walker | | 16 | | 22 | | 22 | |
Smirnoff | | 9 | | 21 | | 21 | |
| | | | |
Other beer: | | | | |
Malta Guinness(1) | | 30 | | 53 | | 40 | |
Senator | | 38 | | 36 | | 33 | |
Tusker | | 14 | | 27 | | 26 | |
Serengeti | | 9 | | 9 | | 10 | |
(1) Reported volume movement impacted by disposals. For further details see page 138
(2) Spirits brands excluding ready to drink and non-alcoholic variants
(3) Organic equals reported volume movement, except for Malta Guinness, which had reported volume movement of 27%
Our markets
The region comprises East Africa (Kenya, Tanzania and Uganda), Africa Regional Markets (including Ghana, Cameroon, Indian whisky, rum, brandyOcean and otherAngola), Nigeria and South Africa.
Supply operations
We have 12 breweries in Africa and 12 facilities which provide blending, malting and bottling services. In addition, our beer and mainstream spirits brands are produced under license by third parties in 14 African countries, and we distribute beer and spirits through our 55.94% shareholding in USL. several third-party relationships across the region.
Route to consumer
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 companyhas wholly owned entities in South Korea.Africa and Cameroon. 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 Japan, sales are through our wholly owned entityaddition, Diageo Japanhas contract brewing arrangements in several countries across the region, most notably with the Castel Group, as well as through joint venture agreements with Moët Hennessy. 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.spirits distribution contracts in more than 30 countries.
'Society 2030: Spirit of Progress'
We continueThis year, as we continued to promote positive drinking across the regionchampion inclusion and this year saw a number of new partnerships and approaches alongside our longstanding campaigns. In Taiwan, for example,diversity, we formed a partnership with local doctors to promote moderation and worked with the Mackay Memorial Hospital in Taipei to incorporate our DRINKiQ resources into the training materials used by local government vehicle authorities. In China we signed a memorandum of understanding with one of the country‘s largest e-commerce providers to promote responsible drinking and moderate consumption of alcohol among Chinese consumers. Our SMASHED programme, which educates people on the dangers of underage drinking, reached 52,189 people, and launched an online version in India and Australia. In India alone, we reached nine millioninvited 31 people with responsible drinking messages fromdisabilities to our brands. Through programmes such asDiageo Bar Academy and Learning for Life we reached 2,142(L4L) programmes. We also worked with 71 smallholder farmers in our sorghum-growing areas for the production of Senator Keg beer, and partnered with Sight Savers Kenya, an NGO promoting the inclusion of people with skills and empowerment training. Water efficiency improved by 9.4% this year anddisabilities. Overall we also began development work on a water replenishmenttrained over 7,500 people in our value chain through our L4L programme, in Bali. In India, we replenished 198,500m368% of water. Renewable energy accounts for 98% of our total energy consumption with onsite renewable electricity generation accounting for 54% of our total demand, in India. Consequently, GHG emissions reduced by 80% year-on-year and plans are in development to eliminate the residual emissions, on our journey to net zero by 2030.
Performance 2021
Sales and net sales
Sales increased by £501 million, or 11%, to £5,146 million in the year ended 30 June 2021 from £4,645 million in the year ended 30 June 2020. Excise dutieswhom were £2,658 million in the year ended 30 June 2021 and £2,375 million in the year ended 30 June 2020, an increase of £283 million.
Net sales (sales less excise duties) were £2,488 million in the year ended 30 June 2021 an increase of £218 million, or 10%, compared to net sales of £2,270 million in the year ended 30 June 2020. Net sales were favourably impacted by organic growth of £308 million (see further performance analysis below), partially offset by £75 million of unfavourable exchange rate movements primarily due to the weakening of the Indian rupee and the Japanese yen against sterling, by £14 million due to reclassification from cost of good sold to excise duties and a reduction of £1 million of net sales generated by disposed businesses.
Operating profit
Operating profit was £608 million in the year ended 30 June 2021 an increase of £1,305 million compared to operating loss of £697 million in the year ended 30 June 2020. Operating profit was favourably impacted by lapping of India goodwill and Windsor, Old Tavern and Bagpiper brand impairment losses of £1,205 million, by organic growth of £113 million, by lapping 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 lapping exceptional losses of £1 million due to fixed assets impairment in India. This increase was partially offset by lapping exceptional gain of £24 million in respect of indirect tax in Korea and by unfavourable exchange rate movements of £6 million primarily due to the weakening of Indian rupee and the Japanese yen (£11 million translation less £5 million transactional exchange impact).
Performance 2020
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 to net sales of £2,688 million in the year ended 30 June 2019. Net sales were unfavourably impacted by organic decline of £423 million, 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.
women.
Business review (continued)
Operating profitDriving is one of our employees’ most dangerous work-related activities. This year we refreshed our Driving on Roads programme across Africa, launching a bespoke safe-driving programme with e-learning modules. SMASHED educated over 188,000 people across the region on the dangers of underage drinking and, in South Africa, Wrong Side of The Road reached nearly 89,000 people.
Operating loss was £697 millionOur breweries in Kenya and Uganda are in the year ended 30 June 2020final stage of commissioning new biomass facilities, which will be operational in early fiscal 23. In Ghana, meanwhile, as part of our efforts to reduce plastic waste, we invested in 10 plastic buyback centres.
In Nigeria, a decrease of £1,365 million compared to operating profit of £668 millionkey water recycling and reuse site in Ogba began delivering benefits and we’re in the final stages of constructing another facility in Benin. Water recycling facilities are also operational in Kenya and Uganda.
We delivered a 6.5% improvement in water efficiency this year ended 30 June 2019. Operating profit was unfavourably impactedand, cumulatively, water use rates have improved by India goodwill and Windsor, Old Tavern and Bagpiper brand impairment losses19.7% against 2020 levels. The water volume we recycled or reused in our own production is over 289,000m3, representing 5.1% of £1,205 million,our total withdrawals.
This year we also reduced carbon emissions by organic decline12.7% on last year, despite a year-on-year increase of £207 million,12.2% in packaged volumes. These reductions were driven 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 yenincreased energy efficiency, and the Taiwan dollar (£7 million transactional less £2 million translation exchange impact).
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.use of on-site renewable energy and renewable energy attribute certificates.
Regional performancePerformance
| | |
•Reported net sales grew 19%, primarily driven by strong organic growth. There were unfavourable impacts from foreign exchange and the disposal of the Meta Abo Brewery in Ethiopia. |
•Organic net sales grew 22%, primarily driven by East Africa and Nigeria. All markets grew double digits. |
•Strong growth in East Africa and Nigeria was driven by the continued recovery of the on-trade channel, particularly in Kenya, as well as price increases and focused execution of our total beverage alcohol strategy. |
•Beer net sales grew 22%, primarily driven by Malta Guinness, Guinness and Senator. |
•Spirits net sales grew 21%, driven by double-digit growth in both mainstream and international spirits, particularly scotch, gin and vodka. |
•Organic operating margin improved 643bps, primarily driven by price increases and leverage on operating costs. The benefit from price increases and productivity savings more than offset cost inflation. |
•Marketing investment increased 22%, in line with organic net sales growth. Investment focused on key categories, as well as on e-commerce and new route to consumer opportunities. |
Market highlights
•NetEast Africa grew 25%, with double-digit growth in both beer and spirits across all markets. This reflected the continued recovery of the on-trade, benefitting beer in particular, as well as price increases.
•Nigeria net sales grew 30%, primarily driven by price increases, as well as an improved route to consumer for certain brands. Beer, mainstream spirits and international spirits all grew double digits. Growth in beer was primarily driven by Malta Guinness and Guinness.
•Africa Regional Markets net sales grew 14%, following a significant declineled by strong growth in fiscal 20,Ghana. Double-digit growth in beer, particularly Malta Guinness, was driven by Greater China, Indiathe recovery of the on-trade channel and Australia, partially offset by a continued significant decline in Travel Retail Asia and Middle East.price increases.
•Growth reflects strong recovery in China and off-trade momentum in most markets.
•Slower growth in North Asia and South East Asia reflects continuing impact of Covid-19.
•SpiritsAfrica grew 12% driven mainly by Chinese white spirits, IMFL whisky and scotch.
•Operating margin grew 169bps driven primarily by positive market mix, category mix anddouble digits. While restrictions related to Covid-19 eased compared to fiscal 21, the operating leverage driven by net sales recovery.environment remained challenging.
| | | | | | | | | | | | | | | |
Markets: | | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % |
Asia Pacific | | 9 | | 9 | | 14 | | 10 | |
| | | | | |
India | | 9 | | 9 | | 13 | | 4 | |
Greater China | | 24 | | 24 | | 38 | | 37 | |
Australia | | 21 | | 22 | | 23 | | 29 | |
South East Asia | | — | | (1) | | 7 | | (3) | |
North Asia | | 18 | | 16 | | 9 | | 4 | |
Travel Retail Asia and Middle East | | (57) | | (57) | | (63) | | (63) | |
| | | | | |
Spirits | | 9 | | 9 | | 12 | | 8 | |
Beer(iv) | | 9 | | 9 | | 9 | | (7) | |
Ready to drink(iv) | | 13 | | 13 | | 16 | | 20 | |
Global giants and local stars(i): | Organic volume movement(ii) % | Organic net sales movement % | Reported net sales movement % |
Johnnie Walker | 4 | | 3 | | 2 | |
McDowell's | 10 | | 10 | | 1 | |
Shui Jing Fang(iii) | 42 | | 51 | | 51 | |
Guinness | 8 | | 9 | | (8) | |
The Singleton | 6 | | 5 | | 5 | |
Smirnoff | — | | (4) | | (4) | |
Windsor | (16) | | (6) | | (8) | |
Bundaberg | | | 6 | | 4 | | 9 | |
Business review (continued)
Latin America and Caribbean
In Latin America and Caribbean (LAC) our strategic priority is to continue gaining share of TBA while expanding margin, driven by our vibrant scotch portfolio, with Johnnie Walker leading growth, as the most in-culture brand, and complemented by a broader base of brands and categories contributing to growth, such as Don Julio in tequila, Tanqueray in gin and Smirnoff in vodka, among others. This growth in share of TBA has been supported by a consumer-centric upweighted marketing investment that allows us to enter new occasions where non-spirit TBA categories have strong presence. To match our TBA growth agenda, we have upscaled our Society 2030 programs to achieve broader impact across a larger population base.
Key financials
| | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | Exchange | | Acquisitions and disposals | Organic movement | Other(1) | 2022 | Reported movement |
| £ million | £ million | | £ million | £ million | £ million | £ million | % |
Net sales | 1,046 | | 25 | | | 3 | | 451 | | — | | 1,525 | | 46 | |
Marketing | 161 | | 2 | | | 1 | | 79 | | — | | 243 | | 51 | |
Operating profit | 303 | | 25 | | | — | | 218 | | (8) | | 538 | | 78 | |
| | | | | | | | |
| | | | | | | | |
(i)
Business review (continued)
| | | | | | | | | | | | | | |
Markets and categories | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % |
Latin America and Caribbean | 17 | | 17 | | 43 | | 46 | |
| | | | |
PUB | 12 | | 12 | | 36 | | 41 | |
Mexico | 6 | | 7 | | 24 | | 28 | |
CCA | 34 | | 34 | | 56 | | 61 | |
Andean | 18 | | 18 | | 45 | | 38 | |
PEBAC | 31 | | 31 | | 64 | | 62 | |
| | | | |
Spirits | 17 | | 17 | | 45 | | 48 | |
Beer | 2 | | 2 | | 6 | | 2 | |
Ready to drink | 36 | | 36 | | 42 | | 45 | |
Global giants and local stars(2) | Organic volume movement(3) % | Organic net sales movement % | Reported net sales movement % |
Johnnie Walker | | 42 | | 59 | | 63 | |
Buchanan’s | | 48 | | 59 | | 60 | |
Don Julio | | 9 | | 34 | | 37 | |
Old Parr | | 47 | | 61 | | 62 | |
Smirnoff | | 22 | | 17 | | 18 | |
Black & White | | (3) | | 9 | | 10 | |
Baileys | | 20 | | 31 | | 32 | |
Tanqueray | | 37 | | 41 | | 45 | |
(1) Fair value remeasurements. For further details see page 102
(2) Spirits brands excluding ready to drink and non-alcoholic variants.variants
(ii)(3) Organic equals reported volume movement.movement
(iii) Growth figures represent total Chinese white spirits of which Shui Jing Fang is the principal brand.
(iv) Flavoured malt beverages have been reclassified from ready to drink to beerOur markets
Our Latin America and Caribbean (LAC) business comprises five markets: PUB (Paraguay, Uruguay and Brazil), Mexico, CCA (Central America and Caribbean), Andean (Colombia and Venezuela) and PEBAC (Peru, Ecuador, Bolivia, Argentina and Chile). Moving forward, from 1 July 2020.2022, Uruguay and Paraguay domestic will move from PUB to PEBAC. This reflects the naturewill drive simplification and allow us to become more consumer orientated and simplify ways of these products and how management reviews performance. Movements reported in the table above are on a like for like basis.working.
Supply operations
Many of the brands sold in the region are manufactured by Diageo’s Supply Chain & Procurement in Europe, but we also own manufacturing facilities in Mexico, Brazil and Guatemala. We also work with a wide array of local co-packers, bottlers, and licensed brewers throughout Latin America and Caribbean. We recently announced plans to expand our manufacturing footprint in Mexico, through an investment of more than US$500 million dollars in new facilities in the state of Jalisco. This investment will support the company’s growth in the tequila category by expanding production capacity.
Route to consumer
We drive an efficient route to consumer through differentiated models tailored to each market’s size and needs. In Mexico and Brazil, our in-market companies sell to a wide network of retailers, wholesalers and resellers, who make our product available to shoppers in both 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, Peru and Chile, we use hybrid models where Diageo sells directly to some key accounts while distributors are used to improve our products’ physical availability.
'Society 2030: Spirit of Progress'
Promoting positive drinking remains a priority. To continue to engage our teams around our ‘Society 2030: Spirit of Progress’ ambition in Latin America, we created a contest where almost 300 employees developed and presented their own projects and ideas to promote positive drinking. The two winning projects were ‘Derribando Mitos’, based on a successful experience educating people about responsible drinking and moderation in Peru and Argentina, with the aim to be expanded to other markets, and ‘SMASHED
Business review (continued)
Market highlightsEverywhere’, a regional effort to scale the award-winning alcohol education programme and implement it in all Latin American markets.
Our moderation messages reached 103 million consumers through a number of initiatives, these included ‘Derribando Mitos’; and the YouTube series ‘Wikitragos’ in Colombia, which reached more than 20 million people and features actors, journalists and influencers promoting responsible drinking.
To help prevent underage drinking in Brazil, we activated SMASHED in partnership with the Education Secretariat in the states of Ceará, Pernambuco, Paraíba, Bahia and in Brasilia – reaching more than 102,000 students from public schools. In Jalisco, Mexico we implemented the programme in partnership with the local government, reaching over 16,000 students. The programme also took place in Colombia and Peru, resulting in over 138,000 young people being educated in total across the region.
We launched ‘Wrong Side of the Road’, our programme to educate people around the world on the dangers of drink driving, in Colombia, Mexico, Venezuela, Dominican Republic, Costa Rica, Panamá and Brazil. It has reached more than 41,000 people, engaging our employees, partners, customers and communities.
We remain committed to providing education and opportunity to our communities. This year Learning for Life trained over 5,000 people to become bartenders and entrepreneurs across the region, including in Mexico, Dominican Republic, Panamá, Peru, Colombia, Venezuela and Brazil. The programme embraced our diversity and inclusion agenda and had special initiatives like ‘#HablemosDeEmpreendedoras’ in Mexico; and the launch of ‘Drinks por Elas’ in Brazil, an e-book to celebrate Women’s Day featuring special drinks created by former women students and educators of the programme.
Our sustainability journey continues. Through our WASH programme, the introduction of a system to supply safe drinking water has benefitted 421 people in the community of Manoel Dias in Ceará state, Brazil.
India
Partial recovery in a challenging environmentRegional performance
Net | | |
•Reported net sales grew 46%, primarily reflecting strong organic growth. A favourable currency impact primarily reflects the strengthening of the Brazilian real and Mexican peso. |
•Organic net sales increased 43%, following double-digit growth in fiscal 21, with strong double-digit growth in all markets, particularly PEBAC, CCA and Colombia. |
•Growth reflects further recovery of the on-trade channel and strong consumer demand in the off-trade channel, where Diageo continued to gain share in all markets except Mexico. |
•Strong price/mix was driven by price increases across all markets, and positive mix from the strong performance of premium-plus scotch across the region. |
•Spirits net sales grew 45%, primarily driven by strong double-digit scotch growth, as well as strong growth across other categories, particularly tequila and gin. |
•Organic operating margin improved by 564bps, primarily driven by price increases and premiumisation. This was partially offset by cost inflation and an increase in marketing investment. |
•Marketing investment increased 49%, ahead of net sales growth. |
Market highlights
•PUB (Paraguay, Uruguay and Brazil) net sales grew 13%increased 36%, lapping a significant decline in fiscal 20, despite the continued economic slowdown and the impact of Covid-19. Growth wasmainly driven by Brazil, up 32%, reflecting continued momentum in the off-trade momentum,channel, price increases, premiumisation and the occurrence of the Indian Premier League which was postponed from fiscal 20, partially offset by the contraction of business in Andhra Pradesh and restrictionsfurther recovery in the on-trade channel. The PrestigePUB growth was mainly driven by scotch, up 43%, as well as double-digit growth in ready to drink, gin and Above segmentvodka.
•Mexico net sales grew 12%24%, withdriven by scotch, up 29%, and tequila, up 25%. The strong performance in scotch and growth of the renovated McDowell’s No.1 whisky. Net sales in the popular brands segment declined 1%.
Greater China
Strong market recovery
Net sales increased 38%, lapping a decline in fiscal 20. Growth was driven by Chinese white spirits and scotch which grew 53% and 21%, respectively. Double-digitreflects double-digit growth in scotch malts andboth Johnnie Walker super deluxe was driven by focussed investment, innovation and route to market expansion, including increased city coverageBuchanan’s and new distribution channels.the benefit from price increases.
•
Australia
Strong growth across categories
Net sales increased 23%, building on mid-single digit growth in fiscal 20, benefiting from a strong spirits category, including spirits taking share of total beverage alcoholCCA (Central America and off-trade momentum. Growth was broad based across categories, with particularly strong performance in ready to drink. Ready to drinkCaribbean) net sales grew 27% supported by56%, primarily reflecting the Smirnoff Spiked Seltzers and Gordon's Pink Gin Premix innovations.
South East Asia
Soft growth due to Covid-19 impact
Net sales grew 7%, lapping significant decline in fiscal 20.recovery of the on-trade. Growth was mainly driven by scotch, up 62%.
•Andean (Colombia and Venezuela) net sales increased 45%, reflecting strong scotch performancegrowth in Vietnam, due to Johnnie Walker super deluxe variants and scotch malts. Key Accounts grew 11%, lapping double-digit decline in fiscal 20. However, Covid-19 related restrictions continued to impact tourism in many markets.
North Asia
Covid-19 continues to impact recovery
Net sales grew 9%, lapping double-digit decline in fiscal 20,Colombia. Growth was mainly driven by momentum in the off trade. Japanscotch, which benefitted from price increases.
•PEBAC (Peru, Ecuador, Bolivia, Argentina and Chile) net sales grew 8% benefiting from focussed investment in Johnnie Walkerincreased 64%, mainly driven by Chile and White Horse. Korea grew net sales 10%Peru, reflecting strong performance of the off-trade, price increases and the recovery of the on-trade channel. Growth was mainly driven by scotch, up 52%, primarily driven primarily by Johnnie Walker, partially offset by continuing decline in Windsor.
Travel Retail Asia and Middle East
Persistent travel restrictions continue to impact performance
Net sales declined 63%.
Marketing
Increased investment behind growth drivers
Investment increased 16%, mainly in Greater China, across Chinese white spirits and scotch. Australia and North Asia also invested ahead of net sales. Marketing investment was reduced in the more impacted markets of South East Asia and Travel Retail Asia and Middle East.Walker.
Business review (continued)
Corporate
Performance 2022
Sales and net sales
Corporate net sales principally arise from visitor centers and 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. Net sales were favorably impacted by an organic increase of £35 million partially 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 £39 million increase in costs in the year ended 30 June 2022 was principally a result of increased staff & IT costs, partially offset by favourable exchange rate movements of £9 million primarily due to the strengthening of the US dollar costs against sterling (£8 million transactional exchange impact and £1 million translation impact).
Performance 2021
Sales and net sales
Corporate sales principally arise in the Guinness visitor centre in Dublin, Ireland and the income from the global licensing of Diageo brands and trademarks. Corporate sales and net sales were £20 million in the year ended 30 June 2021 a decrease of £18 million compared to net sales of £38 million in the year ended 30 June 2020 due to organic decrease of £18 million as a result of lower visitor numbers due to Covid-19 pandemic.
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 £208 million in the year ended 30 June 2021 an increase of £61 million compared to operating costs of £147 million in the year ended 30 June 2020. The increase in costs in the year ended 30 June 2021 was principally a result of increased staff costs of £66 million, partially offset by favourable exchange rate movements of £5 million primarily due to the weakening of the US dollar costs against sterling (£6 million translation impact less £1 million transactional exchange impact).
Performance 2020
Sales and net sales
Corporate sales principally arise in the Guinness visitor centre in Dublin, Ireland and the income from the global licensing of Diageo brands and trademarks. Corporate sales and net sales were £38 million in the year ended 30 June 2020 a decrease of £15 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 exchange of £1 million.
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 SC&P. Operating costs were £147 million in the year ended 30 June 2020 a decrease of £63 million compared to operating costs of £210 million in the year ended 30 June 2019. The decrease in costs in the year ended 30 June 2020 was principally a result of decreased staff costs of £38 million, and lapping an exceptional item of £21 million in respect of guaranteed minimum pension equalisation and favourable exchange rate movements of £4 million primarily due to the weakening of EUR against sterling (£3 million translation impact and £1 million transactional exchange impact).
Business review (continued)
Category and brand review
| Key categories | Key categories | Organic volume movement(i) % | Organic net sales movement % | Reported net sales movement % | Key categories | Organic volume movement(1) % | Organic net sales movement % | Reported net sales movement % |
Spirits(ii) | 11 | | 18 | | 11 | | |
Spirits(2) | | Spirits(2) | 10 | | 21 | | 21 | |
Scotch | Scotch | 15 | | 15 | | 8 | | Scotch | 18 | | 29 | | 29 | |
Vodka(iii)(iv) | 7 | | 7 | | 1 | | |
Tequila | | Tequila | 47 | | 55 | | 57 | |
Vodka(3)(4) | | Vodka(3)(4) | 12 | | 11 | | 11 | |
Canadian whisky | Canadian whisky | 8 | | 12 | | 4 | | Canadian whisky | (1) | | 6 | | 7 | |
Rum(iii) | — | | 7 | | 1 | | |
Rum(3) | | Rum(3) | 5 | | 6 | | 6 | |
Liqueurs | Liqueurs | 15 | | 22 | | 18 | | Liqueurs | 11 | | 10 | | 8 | |
Gin(3) | | Gin(3) | 16 | | 18 | | 18 | |
Indian-Made Foreign Liquor (IMFL) whisky | Indian-Made Foreign Liquor (IMFL) whisky | 13 | | 12 | | 3 | | Indian-Made Foreign Liquor (IMFL) whisky | 5 | | 7 | | 5 | |
Tequila | 70 | | 79 | | 67 | | |
Gin(iii) | 14 | | 14 | | 12 | | |
US whiskey | US whiskey | 3 | | 7 | | 1 | | US whiskey | 5 | | 14 | | 16 | |
Beer(v) | Beer(v) | 8 | | 4 | | (4) | | Beer(v) | 14 | | 25 | | 22 | |
Ready to drink(v) | Ready to drink(v) | 24 | | 30 | | 21 | | Ready to drink(v) | 14 | | 18 | | 21 | |
(i)(1) Organic equals reported volume movement except for rum (1)%tequila 48%, liqueurs 14%, tequila 69%, gin 15%, US whiskey 4%10%, beer 7%13% and ready to drink 16%, which were impacted by acquisitions and disposals.15%.
(ii)(2) Spirits brands excluding ready to drink and non-alcoholic variants.
(iii)(3) Vodka, rum and gin includinginclude IMFL brands.variants.
(iv)(4) Vodka includes Ketel One Botanical.
(v) Flavoured malt beverages have been reclassified from ready to drink to beer from 1 July 2020. This reflects the nature of these products and how management reviews performance. Movements reported in the table above are on a like for like basis.
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
•Spirits grew 18%21%, lapping a softer fiscal 20, with particularly strong growth in scotch and tequila and broad-based growth across other key categories.categories, and particularly strong performance in scotch, tequila, vodka, gin and Chinese white spirits.
•Scotch grew 15%29%, andled by Johnnie Walker grew 12%up 34%, despite the category’s relatively high exposure to Travel Retail.with both growing strong double digits across all regions.
•Tequila grew 79%55%, with Don Julio and Casamigos growingcontinuing to gain share of the fast-growing tequila category within the fast growing tequila category in US Spirits.spirits market.
•Beer grew 4%25%, primarily due to the strong recovery of Guinness, up 32%, driven by Ireland and Great Britain as on-trade restrictions eased, as well as double-digit growth in flavoured malt beverages and Malta Guinness.Africa.
•Ready to drink grew 30%18%, with very strongdouble-digit growth in Northacross Europe, Africa, Latin America and Australia driven by increased consumer demand for convenient formats.Caribbean and North America.
Business review (continued)
Scotch
23%24% of Diageo’s reported net sales and grew 15%29%
Growth in•Strong double-digit growth across all regions, partially offset byparticularly in Latin America and Caribbean and Asia Pacific. Growth also reflects the impactpartial recovery of Covid-19 on Travel Retail.Retail where scotch grew strongly.
–•Johnnie Walker net sales increased 12%34%, with strong double-digit growth inacross all regions.
–Johnnie Walker ReserveBlack Label grew 23% mainly driven by US Spirits, Greater China, Vietnam39%, with double-digit growth across all regions.
–Johnnie Walker Blue Label grew 63%, with growth across all regions, particularly North America and South Korea.Asia Pacific.
–Johnnie Walker Red Label grew 19%22%, with strongdouble-digit growth in Brazil, PEBAC, Turkey, Northern Europe, and India driven by consumption recovery
–Johnnie Walker Black Label grew 6%, with growth in all regions except Africa.
–Primary scotch brands grew 27% driven by White Horse and Black & White in Latin America and Caribbean, and Bell's in Europe and Turkey.
–Scotch malts grew 11% driven by Asia Pacific, and Europe and Turkey partially offset by a decline in North America.
–•Buchanan’s net salesScotch malts grew 29%17%, primarily driven by strong growth in North AmericaAsia Pacific and Latin America and Caribbean.Europe.
–•Old ParrPrimary scotch brands grew 14%, primarily driven by double-digit growth of Black Dog and Black & White in India.
Tequila
10% of Diageo’s reported net sales increased 16% driven byand grew 55%
•Growth reflects the strong growth in Brazil.performance of Casamigos and Don Julio which continued to gain share of the fast-growing tequila category within the US spirits market.
Vodka
10% of Diageo’s reported net sales and grew 7%11%
•Growth inwas across all regions, except Asia Pacific.
–Cîroc grew 26% driven mainly by US Spirits on the back of refreshed activations to engage with Cîroc's consumer base.a particularly strong performance in Europe.
–•Smirnoff net sales increased 5%10%, with double-digit growth in all regions, except North America, where net sales declined.
•Ketel One grew 16%, primarily driven by North America, with double-digit growth in Smirnoff flavoursthe core variant.
•Cîroc grew 6%, with strong growth in Europe. Net sales were broadly flat in North America, Africa and Latin America and Caribbean partiallylapping double-digit growth in fiscal 21, with growth from recent innovations more than offset by declines in Europe and Turkey and Asia Pacific.other variants.
–Ketel One performance was flat with growth in North America offset by a decline in Europe and Turkey.
Tequila
8% of Diageo’s net sales and grew 79%
Growth was mainly driven by strong performance of Don Julio and Casamigos within the fast growing tequila category in North America which benefitted from its broad occasion appeal.
Canadian whisky
8%7% of Diageo’s reported net sales and grew 12%6%
•Growth ofwas driven by Crown Royal in North America, was largely driven by continued momentum on flavours with double-digit growth in the core variant.
•Supply constraints of aged liquid led to slower growth in certain variants and a decline in Crown Royal Regal Apple, Crown Royal PeachRoyal's share of spirits and Crown Royal Vanilla all growing strongly.the Canadian whisky category within the US spirits market.
Rum
6%5% of Diageo’s reported net sales and grew 7%6%
Growth was driven by •Captain Morgan ingrew across all regions except North America, Great Britain, Northern Europe and Southern Europe, with particularly strong growth in Europe.
•Zacapa grew in North America and Europe and Turkey, partially offset by a declineall regions, particularly in McDowell's No.1 in India.Europe.
Liqueurs
6%5% of Diageo’s reported net sales and grew 22%10%
•Growth was driven by Baileys which had broad-based growth across all regions. Performance was driven by Baileys Original the successful launches of Baileys Deliciously Lightin Europe and Baileys Apple Pie limited time offerLatin America and continued focus on Baileys' positioning as a year-round indulgent treat.Caribbean.
•
IMFL whisky
5% of Diageo’sBaileys net sales and grew 12%.
Thedeclined in North America, primarily due to lapping strong growth was driven by McDowell's No.1, McDowell's No.1 Luxury and Haywards Fine Whisky.in fiscal 21.
Gin
5% of Diageo’s reported net sales and grew 14%18%
•Growth was across all regions except North America, with strong double-digit growth in Europe, Africa, and Latin America and Caribbean.Caribbean and Asia Pacific.
–•Tanqueray grew double digits in Europe, Latin America and Caribbean and Asia Pacific.
•Gordon’s grew in all regions except North America.
•Growth in Africa was mainly driven by Gilbey’s in Kenya and broad-based growth of Gordon’s across the region.Gordon's.
–
IMFL whisky
4% of Diageo’s reported net sales and grew 7%
•Growth in Latin America and Caribbean was mainly driven by growth of TanquerayRoyal Challenge and Gordon’s in Brazil.
–Growth in Europe was mainly driven by Gordon's and Tanqueray in Great Britain and Tanqueray in Northern Europe.McDowell's No.1.
US whiskey
2%2% of Diageo’s reported net sales and grew 7%14%
•Performance was driven by strong growth in Bulleit and George Dickel in North America.America, despite glass supply constraints, which have now been resolved.
Business review (continued)
Beer
15%16% of Diageo’s reported net sales and grew 4%25%
–•Growth was primarily driven by Guinness, was overall flat withup 32%, particularly in Europe due to the on-trade recovery.
•Malta Guinness and Senator also grew strong growthdouble digits in Africa, particularly Nigeria following partialwith beer benefitting from the continued recovery of the on-trade, price increases and Cameroon duean improved route to improved supply capacity and improved recruitment, offset by declineconsumer in Europe and Turkey where sales decreased 19% due to the continuing impact of Covid-19 on the on-trade, particularly in Ireland and Great Britain.Nigeria.
–•Beer in Africa grew 19% driven by Guinness and Malta Guinness.
–Net sales of Smirnoff flavoured malt beverages decreased in Diageo Beer Company USA increased 17%.North America, with growth in Smirnoff Ice more than offset by a decline in Smirnoff seltzers.
Ready to drink
4% of Diageo’s reported net sales and grew 30%18%
•Growth was broad-baseddouble digit across all regions, particularly in the US SpiritsEurope, Africa, Latin America and Australia markets. US Spirits ready to drink performanceCaribbean and North America.
•Growth was driven by successful launches of Crown Royal Cocktails and Ketel One Botanical Vodka Spritz and Australia ready to drink performance wasprimarily driven by Smirnoff Bundaberg and Gordon's ready to drink variants.Ice, as well as strong double-digit growth in Crown Royal cocktails.
Business review (continued)
| Global giants, local stars and reserve(i): | Global giants, local stars and reserve(i): | Organic volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | Global giants, local stars and reserve(i): | Organic volume movement(2) % | Organic net sales movement % | Reported net sales movement % |
Global giants | Global giants | | Global giants | |
Johnnie Walker | Johnnie Walker | 11 | | 12 | | 6 | | Johnnie Walker | 25 | | 34 | | 35 | |
Guinness | | Guinness | 16 | | 32 | | 30 | |
Smirnoff | Smirnoff | 6 | | 5 | | (1) | | Smirnoff | 11 | | 11 | | 11 | |
Baileys | Baileys | 18 | | 24 | | 20 | | Baileys | 10 | | 9 | | 8 | |
Captain Morgan | Captain Morgan | 10 | | 9 | | 4 | | Captain Morgan | 3 | | 2 | | 2 | |
Tanqueray | Tanqueray | 10 | | 12 | | 6 | | Tanqueray | 18 | | 20 | | 20 | |
Guinness | 7 | | — | | (6) | | |
Local stars | Local stars | | Local stars | |
Crown Royal | Crown Royal | 9 | | 12 | | 5 | | Crown Royal | 1 | | 6 | | 8 | |
Shui Jing Fang(3) | | Shui Jing Fang(3) | 16 | | 19 | | 24 | |
McDowell's | | McDowell's | 5 | | 5 | | 4 | |
Buchanan’s | | Buchanan’s | 36 | | 39 | | 40 | |
JεB | | JεB | 17 | | 22 | | 16 | |
Old Parr | | Old Parr | 47 | | 59 | | 59 | |
Black & White | | Black & White | 7 | | 20 | | 20 | |
Yenì Raki | Yenì Raki | 2 | | (3) | | (24) | | Yenì Raki | 9 | | 15 | | 14 | |
Buchanan’s | 24 | | 29 | | 19 | | |
JƐB | 3 | | 3 | | (1) | | |
Windsor | Windsor | (16) | | (6) | | (8) | | Windsor | 1 | | (9) | | (13) | |
Old Parr | 14 | | 16 | | 5 | | |
Bundaberg | Bundaberg | 6 | | 5 | | 10 | | Bundaberg | 1 | | (4) | | (6) | |
Black & White | 24 | | 26 | | 12 | | |
Ypióca | Ypióca | 10 | | 9 | | (15) | | Ypióca | (9) | | 8 | | 12 | |
McDowell's | 10 | | 11 | | 1 | | |
Shui Jing Fang(iii) | 42 | | 51 | | 51 | | |
Reserve | Reserve | | Reserve | |
Don Julio | | Don Julio | 24 | | 36 | | 38 | |
Casamigos | | Casamigos | 83 | | 90 | | 93 | |
Scotch malts | Scotch malts | 10 | | 11 | | 9 | | Scotch malts | 14 | | 17 | | 16 | |
Cîroc vodka | Cîroc vodka | 23 | | 26 | | 19 | | Cîroc vodka | 4 | | 6 | | 7 | |
Ketel One(iv) | 6 | | — | | (6) | | |
Don Julio | 50 | | 62 | | 51 | | |
Ketel One(4) | | Ketel One(4) | 12 | | 12 | | 14 | |
Bulleit | Bulleit | 9 | | 10 | | 3 | | Bulleit | 12 | | 16 | | 17 | |
Casamigos | 114 | | 125 | | 110 | | |
(i) Spirits brands(1) Brands excluding ready to drink, non-alcoholic variants and non-alcoholic variants.beer except Guinness.
(ii)(2) Organic equals reported volume movement.
(iii)(3) Growth figures represent total Chinese white spirits of which Shui Jing Fang is the principal brand.
(iv)(4) Ketel One includes Ketel One vodka and Ketel One Botanical.
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
37% of Diageo’s reported net sales and grew by 9%22%
•All brands grewglobal giants delivered net sales apart from Guinnessgrowth, led by Johnnie Walker, up 34%, which was flat due to to restrictions on the on-trade channel, particularly in Great Britain and Ireland, which was offset by growth in Guinness Foreign Extra Stout and Guinness Extra Smooth in Africa and Guinness Draught in Can in Europe and Turkey.grew double digits across all regions.
Local stars
20%19% of Diageo’s reported net sales and grew 17%14%
Largely•Growth was largely driven by double-digit growth in net salesBuchanan's in Latin America and Caribbean and North America, Chinese white spirits in Asia Pacific,Greater China, Crown Royal in North America Buchanan'sand Old Parr in North America and Latin America and Caribbean and McDowell's No.1 in India.Caribbean.
Reserve
25%27% of Diageo’s reported net sales and grew 36%31%
Largely•Growth was largely driven by the strong net sales growthperformance of Casamigos and Don Julio in US Spirits, Chinese white spirits in Asia Pacific and Johnnie Walker Reserve variants in all regions.regions, Chinese white spirits in Greater China and scotch malts.
Business review (continued)
Operating results 20202021 compared with 20192020
For the discussion on our operating results for the year ended 30 June 2019,2020, including certain comparative discussion on our operating results for the years ended 30 June 20192020 and 2020,2021, please refer to 'Operating results 20202021 compared with 2019'2020' on pages 8198 to 116134 in our Annual Report on Form 20-F (File No. 001-10691) filed with the Securities and Exchange Commission on 75 August 2020.2021.
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. The group also issues short-term commercial paper regularly in order to finance its day-to-day operations.
30 June 2021 compared with 30 June 2020
Net cash from operating activities – see page 102
Movement in net borrowings – see page 108
Movement in equity – see page 109
Post employment net surplus – see page 109
2. Analysis of borrowings
a) Gross borrowings (excluding lease liabilities andThe table below sets forth the fair value of derivative instruments) are expected to mature as follows:
| | | | | | | | |
| 30 June 2021 | 30 June 2020 |
| £ million | £ million |
Within one year | 1,862 | | 1,995 | |
Between one and three years | 2,623 | | 3,013 | |
Between three and five years | 2,788 | | 3,134 | |
Beyond five years | 7,454 | | 8,643 | |
| 14,727 | | 16,785 | |
b) The following bonds were issued and repaid:
| | | | | | | | |
| 30 June 2021 | 30 June 2020 |
| £ million | £ million |
Issued | | |
€ denominated | 636 | | 1,594 | |
£ denominated | 395 | | 298 | |
US$ denominated | — | | 3,296 | |
Repaid | | |
€ denominated | (696) | | — | |
US$ denominated | (551) | | (820) | |
| (216) | | 4,368 | |
c) The group hadgroup’s available undrawn committed bank facilities as follows:at 30 June 2022 and 30 June 2021.
| | | | | | | | |
| 30 June 2021 | 30 June 2020 |
| £ million | £ million |
Expiring within one year | 540 | | 2,439 | |
Expiring between one and two years | 691 | | 610 | |
Expiring after two years | 1,287 | | 2,236 | |
| 2,518 | | 5,285 | |
| | | | | | | | |
| 30 June 2022 | 30 June 2021 |
| £ million | £ million |
Expiring within one year | 793 | | 540 | |
Expiring between one and two years | 103 | | 691 | |
Expiring after two years | 1,893 | | 1,287 | |
| 2,789 | | 2,518 | |
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 short- and long-term borrowings throughout each of the years presented.
Management believe that it has sufficient funding for its working capital requirements.
2. Analysis of cash flows
The table below sets forth the group’s cash flows for the year ended 30 June 2022 and 30 June 2021.
| | | | | | | | |
| 30 June 2022 | 30 June 2021 |
| £ million | £ million |
Net cash inflow from operating activities | 3,935 | | 3,654 | |
Net cash outflow from investing activities | (1,341) | | (1,091) | |
Net cash outflow from financing activities | (3,259) | | (2,794) | |
Net decrease in net cash and cash equivalents | (665) | | (231) | |
Exchange difference | 239 | | (285) | |
Net cash and cash equivalents at beginning of period | 2,637 | | 3,153 | |
Net cash and cash equivalents at end of period | 2,211 | | 2,637 | |
Net cash inflow from operating activities was £3,935 million, an increase of £281 million compared to the prior period, primarily driven by a strong growth in operating profit, which was partially offset by the impact of lapping an exceptionally strong working capital benefit in fiscal 21, lower dividends from joint ventures and associates and higher cash tax paid.
Net cash outflow from investing activities was £1,341 million, an increase of £250 million compared to 2021, mainly driven by an increased capex investment, which was partially offset by business acquisitions. In 2021 the acquisition of Aviation Gin was £261 million, and in 2022 there were no material business expansions.
Net cash outflow from financing activities was £3,259 million, an increase of £465 million compared to fiscal 21.This change was largely driven by the increased level of share buyback programme related cash flows of £2,284 million (2021 – £109 million), offset
Business review (continued)
by the £742 million net inflow in relation to bond issuances and repayments (2021 – £216m net outflow) and net cash inflow of FX forwards and swaps of £425 million compared to £411 million net outflow in fiscal 21.
The operating, investing and financing activities described above resulted in a decrease in net cash and cash equivalents of £426 million, from £2,637 million at 30 June 2021 to £2,211 million at 30 June 2022.
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 2022 and 30 June 2021.
| | | | | | | | |
| 30 June 2022 £ million | 30 June 2021 £ million |
Overdrafts | (74) | | (112) | |
Other borrowings due within one year | (1,448) | | (1,750) | |
Borrowings due within one year | (1,522) | | (1,862) | |
Borrowings due between one and three years | (2,817) | | (2,623) | |
Borrowings due between three and five years | (2,625) | | (2,788) | |
Borrowings due after five years | (9,056) | | (7,454) | |
Fair value of foreign currency forwards and swaps | 356 | | 169 | |
Fair value of interest rate hedging instruments | (283) | | 63 | |
Lease liabilities | (475) | | (363) | |
Gross borrowings | (16,422) | | (14,858) | |
Offset by: | | |
Cash and cash equivalents | 2,285 | | 2,749 | |
Net borrowings | (14,137) | | (12,109) | |
The table below sets forth the percentage of the group’s gross borrowings and cash and cash equivalents by currency as at 30 June 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | US dollar % | Sterling % | Euro % | Indian rupee % | Chinese yuan % | Nigerian naira % | Kenyan shilling % | Other % |
Gross borrowings | (16,422) | | 20.00 | % | 56.00 | % | 18.00 | % | — | % | — | % | — | % | 2.00 | % | 4.00 | % |
Cash and cash equivalents | 2,285 | | 58.00 | % | 3.00 | % | 3.00 | % | 1.00 | % | 12.00 | % | 6.00 | % | 2.00 | % | 15.00 | % |
Based on average monthly net borrowings and net interest charge, the effective interest rate for the year ended 30 June 2022 was 2.7%. 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 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 $1000 million (£752 million).
In the year ended 30 June 2021, the group issued bonds of €700 million (£636 million - net of discount and fee) and £395 million (including £5 million discount and fee) and repaid bonds of $696 million (£551 million) and €775 million (£696 million).
Business review (continued)
The principal components of the £2,028 million increase in net borrowings from 30 June 2021 to 30 June 2022 were mainly the £2,783 million of free cash flow, £742 million net movements in bonds and £239 million of exchange differences, partially offset by £1,720 million equity dividends and £271 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 condensed consolidated financial statements.
For information on the use of financial instruments including for hedging purposes, please see “Note 16 – Financial instruments” in the condensed 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 20212022 the adjusted net borrowings (£12,68314,539 million) to adjusted EBITDA ratio was 2.82.5 times. For this calculation net borrowings are adjusted by post employment benefit liabilities before tax (£574402 million) whilst adjusted EBITDA (£4,5275,703 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.ventures.See page 142 for the reconciliation and calculation of the adjusted net borrowing to adjusted EBITDA ratio.
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.
b) The following bonds were issued and repaid:
| | | | | | | | |
| 30 June 2022 | 30 June 2021 |
| £ million | £ million |
Issued | | |
€ denominated | 1,371 | | 636 | |
£ denominated | 892 | | 395 | |
| | |
Repaid | | |
€ denominated | (769) | | (696) | |
$ denominated | (752) | | (551) | |
| 742 | | (216) | |
4. Capital repayments
Authorisation was given by shareholders on 28 September 2020 to purchase a maximum of 232,820,888 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 27 December 2021 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. On 9 April 2020, due to uncertainties related to Covid-19 pandemic, Diageo announced that it had not initiated the next phase of the programme. On 12 May 2021, the Board approved recommencing the return of capital programme. Due to the impact of Covid-19, the original completion date for the programme has been extended by two years to 30 June 2024. The second phase of the programme of up to £1 billion to shareholders via share buybacks was also initiated on 12 May 2021 and it is expected to be completed by the end of the financial year ending 30 June 2022.
During the year ended 30 June 2021 the group purchased 3.2 million ordinary shares (2020 – 39 million; 2019 – 94.7 million), representing approximately 0.1% of the issued ordinary share capital (2020 – 1.5%; 2019 – 3.5%) at an average price of £34.07 per share, and an aggregate cost of £109 million (including £1 million of transaction costs) (2020 – £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) under the share buyback programme. The shares purchased under the share buyback programmes were cancelled.
A financial liability of £91 million was established at 30 June 2021 representing the 2.6 million shares that were expected to be purchased before 29 July 2021.
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 million to hedge employee share awards and share option grants. These are three-year call options, denominated in sterling.
Business review (continued)
4. Contractual obligations and other commitments
| | | Payments due by period | | Payments due by period |
As at 30 June 2021 | Less than 1 year £ million | 1-3 years £ million | 3-5 years £ million | More than 5 years £ million | Total £ million | |
As at 30 June 2022 | | As at 30 June 2022 | Less than 1 year £ million | 1-3 years £ million | 3-5 years £ million | More than 5 years £ million | Total £ million |
Long-term debt obligations | Long-term debt obligations | 1,649 | | 2,590 | | 2,788 | | 7,498 | | 14,525 | | Long-term debt obligations | 1,469 | | 2,842 | | 2,738 | | 9,276 | | 16,325 | |
Interest obligations | Interest obligations | 390 | | 552 | | 467 | | 1,375 | | 2,784 | | Interest obligations | 427 | | 626 | | 560 | | 1,622 | | 3,235 | |
Credit support obligations | Credit support obligations | 98 | | — | | — | | — | | 98 | | Credit support obligations | 19 | | — | | — | | — | | 19 | |
Purchase obligations | Purchase obligations | 1,303 | | 463 | | 94 | | 6 | | 1,866 | | Purchase obligations | 2,352 | | 792 | 427 | 75 | 3,646 | |
Commitments for short-term leases and leases of low-value assets | Commitments for short-term leases and leases of low-value assets | 10 | | 1 | | — | | — | | 11 | | Commitments for short-term leases and leases of low-value assets | 12 | | 1 | | — | | — | | 13 | |
Post employment benefits(i)(1) | Post employment benefits(i)(1) | 31 | | 61 | | 38 | | 38 | | 168 | | Post employment benefits(i)(1) | 23 | | 19 | | 9 | | — | | 51 | |
Provisions and other non-current payables | Provisions and other non-current payables | 140 | | 150 | | 220 | | 242 | | 752 | | Provisions and other non-current payables | 159 | | 183 | | 178 | | 276 | | 796 | |
Lease obligations | Lease obligations | 91 | | 104 | | 53 | | 169 | | 417 | | Lease obligations | 98 | | 127 | | 77 | | 266 | | 568 | |
Capital commitments | Capital commitments | 251 | | 12 | | — | | — | | 263 | | Capital commitments | 360 | | 39 | | — | | — | | 399 | |
Other financial liabilities | Other financial liabilities | 149 | | — | | — | | — | | 149 | | Other financial liabilities | 216 | | — | | — | | — | | 216 | |
Total | Total | 4,112 | | 3,933 | | 3,660 | | 9,328 | | 21,033 | | Total | 5,135 | | 4,629 | | 3,989 | | 11,515 | | 25,268 | |
(i)(1) For further information see note 1314 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. Post employment benefits contractual obligations comprise committed deficit contributions but exclude future service cost contributions. For certain provisions, discounted numbers are disclosed.
Corporate tax payable of £146£252 million and deferred tax liabilities of £2,319 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, liquidityFor more information on commitments 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, credit and liquidity riskscontingencies, please see note 15 to19 – Contingent liabilities and legal proceedings in the consolidated financial statements.
Business review (continued)
Critical accounting policies5. Capital repayments
Authorisation was given by shareholders on 30 September 2021 to purchase a maximum of 233,611,282 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 29 December 2022 if earlier.
Diageo’s current return of capital programme, initially approved by the Board on 25 July 2019, seeks to return up to £4.5 billion to shareholders and is expected to be completed by 30 June 2023. Under the first two phases of the programme, which ended on 31 January 2020 and 11 February 2022 respectively, the company returned capital to shareholders via share buyback, at a cost, excluding transaction costs, of £2.25 billion. On 21 February 2022, the company announced the third phase of the programme with a value of up to £1.7 billion returned to shareholders, via share buybacks, to be completed no later than 5 October 2022. At 30 June 2022, £1.4 billion had been completed as part of the third phase. The consolidatedremaining £0.9 billion of the programme is expected to be completed by 30 June 2023.
During the year ended 30 June 2022, the group purchased 61 million ordinary shares (2021 – 3 million; 2020 – 39 million), representing approximately 2.4% of the issued ordinary share capital (2021 – 0.1%; 2020 – 1.5%) at an average price of 3709 pence per share, and an aggregate cost of £2,284 million (including £16 million of transaction costs) (2021 – 3407 pence per share, and an aggregate cost of £109 million, including £1 million of transaction costs; 2020 – 3243 pence per share, and an aggregate cost of £1,282 million, including £7 million of transaction costs) under the share buyback programme. The shares purchased under the share buyback programmes were cancelled.
A financial statements are prepared in accordance with IFRS. Diageo’s accounting policies are set out inliability of £117 million was established at 30 June 2022, representing the notes3.3 million shares that were expected to be purchased by 28 July 2022.
For further details about the shares purchased and the average price paid per share please refer to note 18 in the consolidated financial statements. In applying these policies, the directors are required to make estimates and subjective judgements that may affect the reported amounts of assets and liabilities 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 236
–During the year ended 30 June 2022, Diageo sold call options on own shares for a consideration of Taxation - pages 241 and 285
–£13 millionBrands, goodwill and other intangibles - page 249
–Post employment benefits - page 257
–Contingent liabilities and legal proceedings - page 285
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 due to the group are discussed in note 1 to the consolidated financial statements on page 229.no longer being required for employee share plan hedging.
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 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 increase 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 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, 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 associated relevant row titled ‘2020‘2021 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 remeasurementremeasurements, hyperinflation and acquisitions and disposals.
(a) Exchange rates
'Exchange'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 respective years’ actualforward-looking rates starting from the year ending 30 June 2023. Reported results are recalculated as if they had been generated at those forward-looking rates.
(b) Acquisitions and disposals
For acquisitions in the current period, the post acquisitionpost-acquisition results are excluded from the organic movement calculations. For acquisitions in the prior period, post acquisitionpost-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. It is believed 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.
Business review (continued)
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 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.
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.
(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.
2019 to 2021 growthGrowth on a constant basis
In order to provide the reader with a better understanding of how our 2021 performance compares to a pre-Covid-19 environment we are disclosing the 2019 to 2021 growthGrowth on a constant basis. This measure is not used to incentivise management, however it has been used in 2021 to understand performance. Management believes that itbasis is a useful measure used by the group to understand the trends of ourthe business and its recovery towards our pre-Covid-19 performance. Management uses volume, net sales, operating profit as these give the most insight to understand the trends and recovery of the business. We continue to present an organic movement reconciliation for sales and marketing for 2020 to 2021 as in prior periods.
The 2019 adjusted base is an appropriate comparator for 2019fiscal 19 to 2021fiscal 22 growth calculation on a constant basis, as the rates used for 2020 constant currency calculations in fiscal 20 were not materially different from those used for 2021 constant currency calculations in fiscal 21 and fiscal 22, and there were no material acquisition or disposal related adjustments or accounting treatment changes in 2021 compared to 2020.the period.
2019 to 20212022 growth on a constant basis is calculated as adding up the respective years’periods’ organic movement in the row titled ‘Organic movement’ in the tables below, expressed as a percentage of the relevant absolute amount in the associated relevant row titled ‘2019 adjusted’. The most comparable GAAP financial measure is 2019'2019 to 20212022 reported movement %%' in the tables below which is calculated by combining the reported movementmovements for 2019-2020 and 2020-2021,the respective periods, expressed as a percentage of the 2019 reported amount.
Organic growth excluding Travel Retail and Guinness
The performance of the Travel Retail channel is dependent on the level of international travel and the performance of Guinness is highly dependent on the availability of the on-trade channel (particularly in Europe and Turkey).
Due to ongoing travel restrictions and market variability of on-trade recovery conditions brought about by the Covid-19 pandemic, we are experiencing slower recovery in Travel Retail and Guinness performance. Therefore, in order to provide additional insight on how these parts of our business and the performance of the remainder of our business have been impacted in each of fiscal 20 and fiscal 21 by Covid-19, additionalAdditional information has been provided about these components and on the performance of the business excluding Travel Retail and Guinness. Management uses this information to monitorGuinness was provided in prior years. However, the recovery of the on-trade for Guinness, particularly in Europe, and assess business performance and believes that having the additional information provides them with improved insight to manage the business, particularly related to rate of growth. Management also believes that such information will be similarly useful to the readers of this document.
The measures noted are calculated by excluding the performancepartial recovery of Travel Retail has made this measure redundant and Guinnesstherefore no additional information is disclosed for fiscal 22.
Adjustment in respect of hyperinflation
Before 2022, organic results from ‘2020 adjusted’hyperinflationary economies were translated at respective years’ actual rates which meant that organic movements were broadly in line with reported movements. A review of this methodology was completed in 2022 when Turkey became a hyperinflationary economy.
The group's experience is that hyperinflationary conditions result in price increases that include both normal pricing actions reflecting changes in demand, commodity and ‘Organic movement’ respectivelyother 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' has been updated to include price growth in markets deemed to be hyperinflationary economies, up to a maximum of 2% per month while also being on memoa constant currency basis. Corresponding adjustments are made to all income statement related lines and ‘Movement excluding Travel Retail and Guinness’ expressedin the organic movement calculations.
In the tables presenting the calculation of organic movements, 'hyperinflation' has been added as a percentage ofreconciling item between reported and organic movements that also includes the absolute amountrelevant IAS 29 adjustments. Organic movements for Argentina, Venezuela and Lebanon have not been recalculated in the associated relevant row titled ‘2020 adjusted excluding Travel Retail and Guinness’.
In respect of Global Travel, the decline inline with this channel due to the impact of Covid-19 travel restrictions will have also driven some level of incremental sales of our products in certain domestic markets, which would have a positive impact onmethodology as their reported results. Itcontribution is not possible to quantify the impact of any such incremental sales either at Diageo or an individual market level.significant.
Business review (continued)
Organic movement calculations for the year ended 30 June 20212022 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(vii) | (2.1) | | (0.1) | | (2.7) | | — | | — | | — | | (4.9) | |
2019 adjusted | 47.3 | | 45.3 | | 30.9 | | 22.4 | | 95.1 | | — | | 241.0 | |
memo: 2019 Travel Retail and Guinness | 2.1 | | 6.6 | | 3.9 | | 0.7 | | 3.8 | | — | | 17.1 | |
memo: 2019 adjusted excluding Travel Retail and Guinness | 45.2 | | 38.7 | | 27.0 | | 21.7 | | 91.3 | | — | | 223.9 | |
Organic movement | 0.1 | | (5.2) | | (4.0) | | (3.4) | | (14.5) | | — | | (27.0) | |
memo: 2020 Travel Retail and Guinness movement | (0.3) | | (1.5) | | (0.7) | | (0.1) | | (1.5) | | — | | (4.1) | |
memo: 2020 Movement excluding Travel Retail and Guinness | 0.4 | | (3.7) | | (3.3) | | (3.3) | | (13.0) | | — | | (22.9) | |
Acquisitions and disposals(vii) | 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) | |
memo: Organic movement % excluding Travel Retail and Guinness | 1 | | (10) | | (12) | | (15) | | (14) | | — | | (10) | |
| | | | | | | |
Volume (equivalent units) | | | | | | | |
2020 reported | 48.4 | 40.2 | 28.8 | 19.0 | 80.6 | — | | 217.0 |
| | | | | | | |
Disposals(viii) | (0.4) | | (0.4) | | (1.9) | | — | | — | | — | | (2.7) | |
2020 adjusted | 48.0 | | 39.8 | | 26.9 | | 19.0 | | 80.6 | | — | | 214.3 | |
memo: 2020 Travel Retail and Guinness | 1.8 | | 5.1 | | 3.2 | | 0.6 | | 2.3 | | — | | 13.0 | |
memo: 2020 adjusted excluding Travel Retail and Guinness | 46.2 | | 34.7 | | 23.7 | | 18.4 | | 78.3 | | — | | 201.3 | |
Organic movement | 5.1 | | 2.9 | | 4.8 | | 4.1 | | 7.0 | | — | | 23.9 | |
memo: 2021 Travel Retail and Guinness movement | (0.4) | | (1.4) | | 0.9 | | (0.1) | | (0.7) | | — | | (1.7) | |
memo: 2021 Movement excluding Travel Retail and Guinness | 5.5 | | 4.3 | | 3.9 | | 4.2 | | 7.7 | | — | | 25.6 | |
Acquisitions and disposals(viii) | 0.1 | | — | | 0.1 | | — | | — | | — | | 0.2 | |
2021 reported | 53.2 | | 42.7 | | 31.8 | | 23.1 | | 87.6 | | — | | 238.4 | |
Organic movement % | 11 | | 7 | | 18 | | 22 | | 9 | | — | | 11 | |
memo: Organic movement % excluding Travel Retail and Guinness | 12 | | 12 | | 16 | | 23 | | 10 | | — | | 13 | |
| | | | | | | |
2019 to 2021 reported growth % | 8 | | (6) | | (5) | | 3 | | (8) | | — | | (3) | |
2019 to 2021 growth on a constant basis % | 11 | | (5) | | 3 | | 3 | | (8) | | — | | (1) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| North America million | Europe million | Asia Pacific million | Africa million | Latin America and Caribbean million | Corporate million | Total million |
Volume (equivalent units) | | | | | | | |
2019 reported | 49.4 | | 45.4 | | 95.1 | | 33.6 | | 22.4 | | — | | 245.9 | |
| | | | | | | |
Disposals | (2.1) | | (0.1) | | — | | (2.7) | | — | | — | | (4.9) | |
2019 adjusted | 47.3 | | 45.3 | | 95.1 | | 30.9 | | 22.4 | | — | | 241.0 | |
| | | | | | | |
| | | | | | | |
Organic movement (2020) | 0.1 | | (5.2) | | (14.5) | | (4.0) | | (3.4) | | — | | (27.0) | |
| | | | | | | |
| | | | | | | |
Organic movement (2021) | 5.1 | | 2.9 | | 7.0 | | 4.8 | | 4.1 | | — | | 23.9 | |
| | | | | | | |
| | | | | | | |
2020 and 2021 movement on a constant basis | 5.2 | | (2.3) | | (7.5) | | 0.8 | | 0.7 | | — | | (3.1) | |
| | | | | | | |
Volume (equivalent units) | | | | | | | |
2020 reported | 53.2 | 42.7 | 87.6 | 31.8 | 23.1 | — | | 238.4 |
| | | | | | | |
Disposals(2) | — | | (0.7) | | — | | (0.4) | | — | | — | | (1.1) | |
2021 adjusted | 53.2 | | 42.0 | | 87.6 | | 31.4 | | 23.1 | | — | | 237.3 | |
| | | | | | | |
| | | | | | | |
Organic movement | 1.4 | | 8.5 | | 6.6 | | 4.0 | | 4.0 | | — | | 24.5 | |
| | | | | | | |
| | | | | | | |
Acquisitions and disposals(2) | 0.2 | | 0.7 | | — | | 0.3 | | — | | — | | 1.2 | |
2022 reported | 54.8 | | 51.2 | | 94.2 | | 35.7 | | 27.1 | | — | | 263.0 | |
Organic movement % | 3 | | 20 | | 8 | | 13 | | 17 | | — | | 10 | |
| | | | | | | |
| | | | | | | |
2019 to 2022 reported growth % | 11 | | 13 | | (1) | | 6 | | 21 | | — | | 7 | |
2019 to 2022 growth on a constant basis % | 13 | | 15 | | (1) | | 16 | | 21 | | — | | 9 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| North America £ million | Europe £ million | Asia Pacific £ million | Africa £ million | Latin America and Caribbean £ million | Corporate £ million | Total £ million |
Sales | | | | | | | |
2021 reported | 5,803 | | 4,795 | | 5,146 | | 2,020 | | 1,369 | | 20 | | 19,153 | |
Exchange | 1 | | (1) | | (8) | | 2 | | 3 | | — | | (3) | |
| | | | | | | |
Disposals(2) | — | | (21) | | — | | (30) | | — | | — | | (51) | |
2021 adjusted | 5,804 | | 4,773 | | 5,138 | | 1,992 | | 1,372 | | 20 | | 19,099 | |
| | | | | | | |
| | | | | | | |
Organic movement | 735 | | 1,298 | | 525 | | 433 | | 541 | | 35 | | 3,567 | |
| | | | | | | |
| | | | | | | |
Acquisitions and disposals(2) | 38 | | 26 | | — | | 20 | | 5 | | — | | 89 | |
Exchange | 105 | | (885) | | (39) | | (42) | | 27 | | (1) | | (835) | |
Hyperinflation | — | | 528 | | — | | — | | — | | — | | 528 | |
2022 reported | 6,682 | | 5,740 | | 5,624 | | 2,403 | | 1,945 | | 54 | | 22,448 | |
Organic movement % | 13 | | 27 | | 10 | | 22 | | 39 | | 175 | | 19 | |
| | | | | | | |
Business review (continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| North America £ million | Europe and Turkey £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | Corporate £ million | Total £ million |
Sales | | | | | | | |
2020 reported | 5,222 | | 4,697 | | 1,911 | | 1,184 | | 4,645 | | 38 | | 17,697 | |
Exchange | 3 | | (32) | | (22) | | 1 | | (5) | | — | | (55) | |
| | | | | | | |
Disposals(viii) | (26) | | (59) | | (60) | | — | | (1) | | — | | (146) | |
2020 adjusted | 5,199 | | 4,606 | | 1,829 | | 1,185 | | 4,639 | | 38 | | 17,496 | |
memo: 2020 Travel Retail and Guinness | 270 | | 673 | | 319 | | 42 | | 267 | | 26 | | 1,597 | |
memo: 2020 adjusted excluding Travel Retail and Guinness | 4,929 | | 3,933 | | 1,510 | | 1,143 | | 4,372 | | 12 | | 15,899 | |
Organic movement | 970 | | 436 | | 368 | | 366 | | 756 | | (18) | | 2,878 | |
memo: 2021 Travel Retail and Guinness movement | (22) | | (150) | | 88 | | (13) | | (78) | | (22) | | (197) | |
memo: 2021 Movement excluding Travel Retail and Guinness | 992 | | 586 | | 280 | | 379 | | 834 | | 4 | | 3,075 | |
Acquisitions and disposals(viii) | 30 | | 3 | | 8 | | — | | — | | — | | 41 | |
Exchange | (396) | | (250) | | (185) | | (182) | | (249) | | — | | (1,262) | |
2021 reported | 5,803 | | 4,795 | | 2,020 | | 1,369 | | 5,146 | | 20 | | 19,153 | |
Organic movement % | 19 | | 9 | | 20 | | 31 | | 16 | | (47) | | 16 | |
memo: Organic movement % excluding Travel Retail and Guinness | 20 | | 15 | | 19 | | 33 | | 19 | | 33 | | 19 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| North America £ million | Europe £ million | Asia Pacific £ million | Africa £ million | Latin America and Caribbean £ million | Corporate £ million | Total £ million |
Net sales | | | | | | | |
2019 reported | 4,460 | | 2,939 | | 2,688 | | 1,597 | | 1,130 | | 53 | | 12,867 | |
Exchange | (34) | | (19) | | 1 | | (2) | | 4 | | 2 | | (48) | |
Reclassification | — | | — | | — | | — | | (10) | | — | | (10) | |
Disposals | (75) | | (1) | | (1) | | (91) | | (1) | | — | | (169) | |
2019 adjusted | 4,351 | | 2,919 | | 2,688 | | 1,504 | | 1,123 | | 55 | | 12,640 | |
| | | | | | | |
| | | | | | | |
Organic movement (2020) | 105 | | (358) | | (423) | | (200) | | (169) | | (16) | | (1,061) | |
| | | | | | | |
| | | | | | | |
Organic movement (2021) | 929 | | 108 | | 308 | | 258 | | 275 | | (18) | | 1,860 | |
| | | | | | | |
| | | | | | | |
2020 and 2021 movement on a constant basis | 1,034 | | (250) | | (115) | | 58 | | 106 | | (34) | | 799 | |
| | | | | | | |
| | | | | | | |
Net sales | | | | | | | |
2021 reported | 5,209 | | 2,558 | | 2,488 | | 1,412 | | 1,046 | | 20 | | 12,733 | |
Exchange(1) | 1 | | — | | (2) | | 2 | | 1 | | — | | 2 | |
| | | | | | | |
Disposals(2) | — | | (20) | | — | | (20) | | — | | — | | (40) | |
2021 adjusted | 5,210 | | 2,538 | | 2,486 | | 1,394 | | 1,047 | | 20 | | 12,695 | |
| | | | | | | |
| | | | | | | |
Organic movement | 754 | | 766 | | 402 | | 308 | | 451 | | 35 | | 2,716 | |
| | | | | | | |
| | | | | | | |
Acquisitions and disposals(2) | 34 | | 23 | | — | | 15 | | 3 | | — | | 75 | |
Exchange(1) | 97 | | (304) | | (4) | | (35) | | 24 | | (1) | | (223) | |
Hyperinflation | — | | 189 | | — | | — | | — | | — | | 189 | |
2022 reported | 6,095 | | 3,212 | | 2,884 | | 1,682 | | 1,525 | | 54 | | 15,452 | |
Organic movement % | 14 | | 30 | | 16 | | 22 | | 43 | | 175 | | 21 | |
| | | | | | | |
| | | | | | | |
2019 to 2022 reported growth % | 37 | | 9 | | 7 | | 5 | | 35 | | 2 | | 20 | |
2019 to 2022 growth on a constant basis % | 41 | | 18 | | 11 | | 24 | | 50 | | 2 | | 28 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| North America £ million | Europe £ million | Asia Pacific £ million | Africa £ million | Latin America and Caribbean £ million | Corporate £ million | Total £ million |
Marketing | | | | | | | |
2021 reported | 936 | | 473 | | 418 | | 168 | | 161 | | 7 | | 2,163 | |
Exchange | — | | (1) | | 1 | | (3) | | — | | (1) | | (4) | |
| | | | | | | |
Disposals(2) | — | | (1) | | — | | (2) | | — | | — | | (3) | |
2021 adjusted | 936 | | 471 | | 419 | | 163 | | 161 | | 6 | | 2,156 | |
| | | | | | | |
| | | | | | | |
Organic movement | 222 | | 122 | | 68 | | 36 | | 79 | | 5 | | 532 | |
| | | | | | | |
| | | | | | | |
Acquisitions and disposals(2) | 24 | | 1 | | — | | 2 | | 1 | | — | | 28 | |
Fair value remeasurement of contingent considerations, equity option and earn out arrangements | (1) | | — | | — | | — | | — | | — | | (1) | |
Exchange | 19 | | (34) | | 3 | | (2) | | 2 | | 1 | | (11) | |
Hyperinflation | — | | 17 | | — | | — | | — | | — | | 17 | |
2022 reported | 1,200 | | 577 | | 490 | | 199 | | 243 | | 12 | | 2,721 | |
Organic movement % | 24 | | 26 | | 16 | | 22 | | 49 | | 83 | | 25 | |
| | | | | | | |
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(vii) | (75) | | (1) | | (91) | | (1) | | (1) | | — | | (169) | |
2019 adjusted | 4,351 | | 2,919 | | 1,504 | | 1,123 | | 2,688 | | 55 | | 12,640 | |
memo: 2019 Travel Retail and Guinness | 283 | | 622 | | 296 | | 52 | | 386 | | 42 | | 1,681 | |
memo: 2019 adjusted excluding Travel Retail and Guinness | 4,068 | | 2,297 | | 1,208 | | 1,071 | | 2,302 | | 13 | | 10,959 | |
Organic movement | 105 | | (358) | | (200) | | (169) | | (423) | | (16) | | (1,061) | |
memo: 2020 Travel Retail and Guinness movement | (33) | | (150) | | (50) | | (11) | | (135) | | (16) | | (395) | |
memo: 2020 Movement excluding Travel Retail and Guinness | 138 | | (208) | | (150) | | (158) | | (288) | | — | | (666) | |
Acquisitions and disposals(vii) | 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) | |
memo: Organic movement % excluding Travel Retail and Guinness | 3 | | (9) | | (12) | | (15) | | (13) | | — | | (6) | |
| | | | | | | |
Net sales | | | | | | | |
2020 reported | 4,623 | | 2,567 | | 1,346 | | 908 | | 2,270 | | 38 | | 11,752 | |
Exchange(v) | 2 | | (17) | | (13) | | 6 | | 7 | | — | | (15) | |
Reclassification(vi) | — | | — | | — | | — | | (14) | | — | | (14) | |
Disposals(viii) | (18) | | (34) | | (47) | | — | | (1) | | — | | (100) | |
2020 adjusted | 4,607 | | 2,516 | | 1,286 | | 914 | | 2,262 | | 38 | | 11,623 | |
memo: 2020 Travel Retail and Guinness | 258 | | 471 | | 245 | | 42 | | 241 | | 26 | | 1,283 | |
memo: 2020 adjusted excluding Travel Retail and Guinness | 4,349 | | 2,045 | | 1,041 | | 872 | | 2,021 | | 12 | | 10,340 | |
Organic movement | 929 | | 108 | | 258 | | 275 | | 308 | | (18) | | 1,860 | |
memo: 2021 Travel Retail and Guinness movement | (23) | | (119) | | 73 | | (13) | | (83) | | (22) | | (187) | |
memo: 2021 Movement excluding Travel Retail and Guinness | 952 | | 227 | | 185 | | 288 | | 391 | | 4 | | 2,047 | |
Acquisitions and disposals(viii) | 28 | | 2 | | 5 | | — | | — | | — | | 35 | |
Exchange(v) | (355) | | (68) | | (137) | | (143) | | (82) | | — | | (785) | |
2021 reported | 5,209 | | 2,558 | | 1,412 | | 1,046 | | 2,488 | | 20 | | 12,733 | |
Organic movement % | 20 | | 4 | | 20 | | 30 | | 14 | | (47) | | 16 | |
memo: Organic movement % excluding Travel Retail and Guinness | 22 | | 11 | | 18 | | 33 | | 19 | | 33 | | 20 | |
| | | | | | | |
2019 to 2021 reported growth % | 17 | | (13) | | (12) | | (7) | | (7) | | (62) | | (1) | |
2019 to 2021 growth on constant basis % | 24 | | (9) | | 4 | | 9 | | (4) | | (62) | | 6 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit before exceptional items | North America £ million | Europe £ million | Asia Pacific £ million | Africa £ million | Latin America and Caribbean £ million | Corporate £ million | Total £ million | |
2019 reported | | | | | | | 4,116 | | |
Exchange | | | | | | | — | | |
Disposal | | | | | | | (29) | | |
2019 adjusted | | | | | | | 4,087 | | |
| | | | | | | | |
| | | | | | | | |
Organic movement (2020) | | | | | | | (589) | | |
| | | | | | | | |
| | | | | | | | |
Organic movement (2021) | | | | | | | 627 | | |
| | | | | | | | |
| | | | | | | | |
2020 and 2021 movement on a constant basis | | | | | | | 38 | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Operating profit before exceptional items | | | | | | | | |
2021 reported | 2,237 | | 635 | | 608 | | 171 | | 303 | | (208) | | 3,746 | | |
Exchange(1) | (14) | | (2) | | (5) | | 10 | | 7 | | (9) | | (13) | | |
| | | | | | | | |
Fair value remeasurement of contingent considerations and equity option | 7 | | 27 | | — | | — | | — | | — | | 34 | | |
Fair value remeasurement of biological assets | — | | — | | — | | — | | — | | — | | — | | |
Acquisitions and disposals(2) | 9 | | (10) | | — | | 12 | | — | | — | | 11 | | |
2021 adjusted | 2,239 | | 650 | | 603 | | 193 | | 310 | | (217) | | 3,778 | | |
| | | | | | | | |
| | | | | | | | |
Organic movement | 148 | | 418 | | 98 | | 152 | | 218 | | (39) | | 995 | | |
| | | | | | | | |
| | | | | | | | |
Acquisitions and disposals(2) | (28) | | 11 | | — | | (10) | | — | | — | | (27) | | |
Fair value remeasurement of contingent considerations, equity option and earn out arrangements | 32 | | 36 | | — | | — | | (3) | | — | | 65 | | |
Fair value remeasurement of biological assets | — | | — | | — | | — | | (5) | | — | | (5) | | |
Exchange(1) | 63 | | (108) | | 10 | | (20) | | 18 | | 18 | | (19) | | |
Hyperinflation | — | | 10 | | — | | — | | — | | — | | 10 | | |
2022 reported | 2,454 | | 1,017 | | 711 | | 315 | | 538 | | (238) | | 4,797 | | |
Organic movement % | 7 | | 64 | | 16 | | 79 | | 70 | | (18) | | 26 | | |
| | | | | | | | |
| | | | | | | | |
Organic operating margin % (3) | | | | | | | | |
2022 | 40.0 | | 32.3 | | 24.3 | | 20.3 | | 35.2 | | n/a | 31.0 | | |
2021 | 43.0 | | 25.6 | | 24.3 | | 13.8 | | 29.6 | | n/a | 29.8 | | |
Margin movement (bps) | (295) | | 671 | | 2 | | 643 | | 564 | | n/a | 121 | | |
| | | | | | | | |
2019 to 2021 reported growth % | 123 | | 66 | | 74 | | 106 | | 112 | | (198) | | 17 | | |
2019 to 2022 growth on a constant basis % | 35 | | 48 | | 18 | | 92 | | 84 | | (75) | | 25 | | |
| | | | | | | | |
Business review (continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| North America £ million | Europe and Turkey £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | Corporate £ million | Total £ million |
Marketing | | | | | | | |
2020 reported | 727 | | 428 | | 160 | | 155 | | 365 | | 6 | | 1,841 | |
Exchange | 10 | | (5) | | (3) | | — | | 1 | | (3) | | — | |
| | | | | | | |
Disposals(viii) | — | | (2) | | (1) | | — | | — | | — | | (3) | |
2020 adjusted | 737 | | 421 | | 156 | | 155 | | 366 | | 3 | | 1,838 | |
memo: 2020 Travel Retail and Guinness | 58 | | 94 | | 33 | | 4 | | 40 | | — | | 229 | |
memo: 2020 adjusted excluding Travel Retail and Guinness | 679 | | 327 | | 123 | | 151 | | 326 | | 3 | | 1,609 | |
Organic movement | 248 | | 56 | | 22 | | 28 | | 60 | | 3 | | 417 | |
memo: 2021 Travel Retail and Guinness movement | 11 | | (17) | | 9 | | (1) | | (15) | | — | | (13) | |
memo: 2021 Movement excluding Travel Retail and Guinness | 237 | | 73 | | 13 | | 29 | | 75 | | 3 | | 430 | |
Acquisitions(viii) | 12 | | — | | — | | — | | — | | — | | 12 | |
Fair value remeasurement of contingent considerations, equity option and earn out arrangements | 1 | | — | | — | | — | | — | | — | | 1 | |
Exchange | (62) | | (4) | | (10) | | (22) | | (8) | | 1 | | (105) | |
2021 reported | 936 | | 473 | | 168 | | 161 | | 418 | | 7 | | 2,163 | |
Organic movement % | 34 | | 13 | | 14 | | 18 | | 16 | | 100 | | 23 | |
memo: Organic movement % excluding Travel Retail and Guinness | 35 | | 22 | | 11 | | 19 | | 23 | | 100 | | 27 | |
Business review (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit before exceptional items | North America £ million | | Europe and Turkey £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | Corporate £ million | Total £ million |
2019 reported | | | | | | | | 4,116 | |
Exchange(ii) | | | | | | | | — | |
Acquisition and disposal(vii) | | | | | | | | (29) | |
2019 adjusted | | | | | | | | 4,087 | |
memo: 2019 Travel Retail and Guinness | | | | | | | | 759 | |
memo: 2019 adjusted excluding Travel Retail and Guinness | | | | | | | | 3,328 | |
Organic movement | | | | | | | | (589) | |
memo: 2020 Travel Retail and Guinness movement | | | | | | | | (289) | |
memo: 2020 Movement excluding Travel Retail and Guinness | | | | | | | | (300) | |
Acquisitions and disposals(vii) | | | | | | | | (5) | |
Fair value remeasurement of contingent considerations and equity option(iv) | | | | | | | | (7) | |
Fair value remeasurement of biological assets | | | | | | | | 9 | |
Exchange(ii) | | | | | | | | (1) | |
2020 reported | | | | | | | | 3,494 | |
Organic movement % | | | | | | | | (14) | |
memo: Organic movement % excluding Travel Retail and Guinness | | | | | | | | (9) | |
| | | | | | | | |
Operating profit before exceptional items | | | | | | | | |
2020 reported | 2,034 | | | 757 | | 101 | | 248 | | 501 | | (147) | | 3,494 | |
Exchange(v) | 44 | | | (18) | | 11 | | 10 | | 9 | | (5) | | 51 | |
| | | | | | | | |
Fair value remeasurement of contingent considerations and equity option | 10 | | | 4 | | — | | (7) | | — | | — | | 7 | |
Fair value remeasurement of biological assets | — | | | — | | — | | (9) | | — | | — | | (9) | |
Disposals(viii) | (1) | | | (9) | | — | | — | | — | | — | | (10) | |
2020 adjusted | 2,087 | | | 734 | | 112 | | 242 | | 510 | | (152) | | 3,533 | |
memo: 2020 Travel Retail and Guinness | 80 | | | 185 | | 56 | | 24 | | 113 | | 20 | | 478 | |
memo: 2020 adjusted excluding Travel Retail and Guinness | 2,007 | | | 549 | | 56 | | 218 | | 397 | | (172) | | 3,055 | |
Organic movement | 352 | | | (38) | | 113 | | 153 | | 113 | | (66) | | 627 | |
memo: 2021 Travel Retail and Guinness movement | (27) | | | (76) | | 24 | | (8) | | (47) | | (13) | | (147) | |
memo: 2021 Movement excluding Travel Retail and Guinness | 379 | | | 38 | | 89 | | 161 | | 160 | | (53) | | 774 | |
Acquisitions(viii) | (18) | | | (3) | | — | | — | | — | | — | | (21) | |
Fair value remeasurement of contingent considerations, equity option and earn out arrangements | (9) | | | (27) | | — | | — | | — | | — | | (36) | |
| | | | | | | | |
Exchange(v) | (175) | | | (31) | | (54) | | (92) | | (15) | | 10 | | (357) | |
2021 reported | 2,237 | | | 635 | | 171 | | 303 | | 608 | | (208) | | 3,746 | |
Organic movement % | 17 | | | (5) | | 101 | | 63 | | 22 | | (43) | | 18 | |
memo: Organic movement % excluding Travel Retail and Guinness | 19 | | | 7 | | 159 | | 74 | | 40 | | (31) | | 25 | |
| | | | | | | | |
Organic operating margin % | | | | | | | | |
2021 | 44.1 | | | 26.5 | | 14.6 | | 33.2 | | 24.2 | | n/a | 30.9 | |
2020 | 45.3 | | | 29.2 | | 8.7 | | 26.5 | | 22.5 | | n/a | 30.4 | |
Margin movement (bps) | (124) | | | (265) | | 586 | | 674 | | 169 | | n/a | 46 | |
| | | | | | | | |
2019 to 2021 reported growth % | | | | | | | | (9) | |
2019 to 2021 growth on constant basis % | | | | | | | | 1 | |
| | | | | | | | |
(1)(i) For the reconciliation of sales to net sales, see page 104.100.
(2)(ii) 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 the year ended 30 June 2019.
(v)(1) The impact of movements in exchange rates on reported figures for net sales and operating profit arewas principally in respect of the translation exchange impact of the strengthening of sterling against the US dollar, the Brazilian real, the Indian rupeeeuro and the Turkish lira, partially offset by the weakening of sterling against the euro.US dollar
(vi) In(2) Acquisitions and disposals that had an effect on volume, sales, net sales, marketing and operating profit in the year ended 30 June 2021, £14 million has been reclassified from cost of goods sold to excise duties.2022, are detailed on page 138.
(3) Operating margin calculated by dividing Operating profit before exceptional items by net sales.
Business review (continued)
(vii) In the year ended 30 June 2020, the acquisitions and disposals that affected volume, net sales and operating profit were as follows: | | | | | | | | | | | | | |
| Volume equ. units million | | Net sales £ 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) | | | (79) | | | (42) | |
South African ready to drink | (0.5) | | | (43) | | | — | |
South African cider | — | | | (4) | | | (1) | |
UNB | (2.2) | | | (43) | | | (1) | |
| (4.9) | | | (169) | | | (44) | |
| | | | | |
Acquisitions and disposals | (4.9) | | | (169) | | | (29) | |
Year ended 30 June 2020 | | | | | |
Acquisition | | | | | |
Seedlip and Aecorn | 0.1 | | | 12 | | | (8) | |
| 0.1 | | | 12 | | | (8) | |
Disposals | | | | | |
Supply contracts in respect of the 19 brands sold to Sazerac | 1.1 | | | 31 | | | 3 | |
South African ready to drink | 0.3 | | | 19 | | | — | |
| | | | | |
UNB | 1.5 | | | 31 | | | — | |
| 2.9 | | | 81 | | | 3 | |
| | | | | |
Acquisitions and disposals | 3.0 | | | 93 | | | (5) | |
(viii) In the year ended 30 June 2021,2022, the acquisitions and disposals that affected volume, sales, net sales, marketing and operating profit were as follows: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 2020 | | |
| Disposals | | |
UNB | (1.5) | | (29) | | (29) | | (1) | | — | | |
Budweiser distribution license termination | (0.3) | | (57) | | (32) | | (2) | | (9) | | |
Supply contracts in respect of the 19 brands sold to Sazerac | (0.6) | | (29) | | (21) | | — | | (1) | | |
South African ready to drink | (0.3) | | (31) | | (18) | | — | | — | | |
| | (2.7) | | (146) | | (100) | | (3) | | (10) | | | | | | | | | | | | | | | | | | |
| | | Volume equ. units million | Sales £ million | Net sales £ million | Marketing £ million | Operating profit £ million |
Year ended 30 June 2021 | Year ended 30 June 2021 | | Year ended 30 June 2021 | |
Acquisitions | Acquisitions | | Acquisitions | |
Aviation Gin and Davos Brands | Aviation Gin and Davos Brands | 0.1 | | 26 | | 24 | | (9) | | (14) | | Aviation Gin and Davos Brands | — | | — | | — | | — | | 9 | |
Chase Distillery | Chase Distillery | — | | 3 | | 2 | | — | | (3) | | Chase Distillery | — | | — | | — | | — | | 2 | |
Lone River | — | | 3 | | 3 | | (2) | | (3) | | |
Lone River Ranch Water | | Lone River Ranch Water | — | | — | | — | | — | | — | |
Loyal 9 Cocktails | Loyal 9 Cocktails | — | | 1 | | 1 | | (1) | | (1) | | Loyal 9 Cocktails | — | | — | | — | | — | | — | |
|
| 0.1 | | 33 | | 30 | | (12) | | (21) | | | — | | — | | — | | — | | 11 | |
Disposals | | Disposals | |
South African ready to drink | | South African ready to drink | — | | (8) | | (4) | | — | | — | |
Meta Abo Brewery | | Meta Abo Brewery | (0.4) | | (22) | | (16) | | (2) | | 12 | |
Picon | | Picon | (0.7) | | (21) | | (20) | | (1) | | (12) | |
| | | (1.1) | | (51) | | (40) | | (3) | | — | |
| Acquisitions and disposals | | Acquisitions and disposals | (1.1) | | (51) | | (40) | | (3) | | 11 | |
| Year ended 30 June 2022 | | Year ended 30 June 2022 | |
Acquisitions | | Acquisitions | |
Aviation Gin and Davos Brands | | Aviation Gin and Davos Brands | — | | 6 | | 5 | | (4) | | (11) | |
Chase Distillery | | Chase Distillery | — | | 5 | | 3 | | (1) | | (2) | |
Lone River Ranch Water | | Lone River Ranch Water | 0.1 | | 14 | | 13 | | (13) | | (13) | |
Loyal 9 Cocktails | | Loyal 9 Cocktails | — | | 14 | | 11 | | (5) | | (2) | |
Mezcal Unión | | Mezcal Unión | 0.1 | | 6 | | 5 | | (1) | | 1 | |
21Seeds | | 21Seeds | — | | 3 | | 3 | | (2) | | (2) | |
| | | 0.2 | | 48 | | 40 | | (26) | | (29) | |
Disposal | Disposal | | Disposal | |
South African ready to drink | 0.1 | | 8 | | 5 | | — | | — | | |
Meta Abo Brewery | | Meta Abo Brewery | 0.3 | | 20 | | 15 | | (2) | | (10) | |
Picon | | Picon | 0.7 | | 21 | | 20 | | — | | 12 | |
| | | 1.0 | | 41 | | 35 | | (2) | | 2 | |
|
|
| 0.1 | | 8 | | 5 | | — | | — | | |
Acquisitions and disposals | Acquisitions and disposals | 0.2 | | 41 | | 35 | | (12) | | (21) | | Acquisitions and disposals | 1.2 | | 89 | | 75 | | (28) | | (27) | |
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 20212022 and 30 June 20202021 are set out in the table below:
| | | 2021 £ million | 2020 £ million | | 2022 £ million | 2021 £ million |
Profit attributable to equity shareholders of the parent company | Profit attributable to equity shareholders of the parent company | 2,660 | | 1,409 | | Profit attributable to equity shareholders of the parent company | 3,249 | | 2,660 | |
Exceptional operating and non-operating items | Exceptional operating and non-operating items | 1 | | 1,380 | | Exceptional operating and non-operating items | 405 | | 1 | |
Exceptional taxation charges/(benefits) | 88 | | — | | |
Exceptional tax charges | | Exceptional tax charges | — | | 88 | |
Tax in respect of exceptional operating and non-operating items | Tax in respect of exceptional operating and non-operating items | (4) | | (154) | | Tax in respect of exceptional operating and non-operating items | (31) | | (4) | |
Exceptional items attributable to non-controlling interests | Exceptional items attributable to non-controlling interests | 1 | | (69) | | Exceptional items attributable to non-controlling interests | (103) | | 1 | |
| | 2,746 | | 2,566 | | | 3,520 | | 2,746 | |
Weighted average number of shares | Weighted average number of shares | million | Weighted average number of shares | million |
Shares in issue excluding own shares | Shares in issue excluding own shares | 2,337 | | 2,346 | | Shares in issue excluding own shares | 2,318 | | 2,337 | |
Dilutive potential ordinary shares | Dilutive potential ordinary shares | 8 | | 8 | | Dilutive potential ordinary shares | 7 | | 8 | |
| | 2,345 | | 2,354 | | | 2,325 | | 2,345 | |
| | pence | | pence |
Basic earnings per share before exceptional items | Basic earnings per share before exceptional items | 117.5 | | 109.4 | | Basic earnings per share before exceptional items | 151.9 | | 117.5 | |
Diluted earnings per share before exceptional items | Diluted earnings per share before exceptional items | 117.1 | | 109.0 | | Diluted earnings per share before exceptional items | 151.4 | | 117.1 | |
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 costexpenditure 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 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 year ended 30 June 20212022 and 30 June 20202021 are set out in the table below:
| | | 2021 £ million | 2020 £ million | | 2022 £ million | 2021 £ million |
Net cash inflow from operating activities | Net cash inflow from operating activities | 3,654 | | 2,320 | | Net cash inflow from operating activities | 3,935 | | 3,654 | |
Disposal of property, plant and equipment and computer software | Disposal of property, plant and equipment and computer software | 13 | | 14 | | Disposal of property, plant and equipment and computer software | 17 | | 13 | |
Purchase of property, plant and equipment and computer software | Purchase of property, plant and equipment and computer software | (626) | | (700) | | Purchase of property, plant and equipment and computer software | (1,097) | | (626) | |
Movements in loans and other investments | Movements in loans and other investments | (4) | | — | | Movements in loans and other investments | (72) | | (4) | |
Free cash flow | Free cash flow | 3,037 | | 1,634 | | Free cash flow | 2,783 | | 3,037 | |
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 in line with management reporting and is expressed as a percentage.
Operating cash conversion for the year ended 30 June 20212022 and 30 June 20202021 were as follows:
| | | 2021 £ million | 2020 £ million | | 2022 £ million | 2021 £ million |
Profit for the year | Profit for the year | 2,799 | | 1,454 | | Profit for the year | 3,338 | | 2,799 | |
Taxation | Taxation | 907 | | 589 | | Taxation | 1,049 | | 907 | |
Share of after tax results of associates and joint ventures | Share of after tax results of associates and joint ventures | (334) | | (282) | | Share of after tax results of associates and joint ventures | (417) | | (334) | |
Net finance charges | Net finance charges | 373 | | 353 | | Net finance charges | 422 | | 373 | |
Non-operating items | Non-operating items | (14) | | 23 | | Non-operating items | 17 | | (14) | |
Operating profit | Operating profit | 3,731 | | 2,137 | | Operating profit | 4,409 | | 3,731 | |
Exceptional operating items | Exceptional operating items | 15 | | 1,357 | | Exceptional operating items | 388 | | 15 | |
Fair value remeasurement | Fair value remeasurement | 36 | | (2) | | Fair value remeasurement | (60) | | 36 | |
Depreciation and amortisation(i) | 447 | | 494 | | |
Depreciation, amortisation and impairment(1) | | Depreciation, amortisation and impairment(1) | 489 | | 447 | |
Hyperinflation adjustment | | Hyperinflation adjustment | (10) | | — | |
Retranslation to budgeted exchange rates | Retranslation to budgeted exchange rates | 375 | | (2) | | Retranslation to budgeted exchange rates | 27 | | 375 | |
| | 4,604 | | 3,984 | | | 5,243 | | 4,604 | |
Cash generated from operations | Cash generated from operations | 4,857 | | 3,529 | | Cash generated from operations | 5,212 | | 4,857 | |
Net exceptional cash received(ii) | (49) | | (1) | | |
Post employment payments less amounts included in operating profit(i) | 35 | | 109 | | |
Net movement in maturing inventories(iii) | 174 | | 262 | | |
Net exceptional cash paid/(received)(2) | | Net exceptional cash paid/(received)(2) | 15 | | (49) | |
Post employment payments less amounts included in operating profit(1) | | Post employment payments less amounts included in operating profit(1) | 89 | | 35 | |
Net movement in maturing inventories(3) | | Net movement in maturing inventories(3) | 360 | | 174 | |
Provision movement | Provision movement | 60 | | (22) | | Provision movement | 58 | | 60 | |
Dividends received from associates | Dividends received from associates | (290) | | (4) | | Dividends received from associates | (190) | | (290) | |
Other items(i) | (88) | | 14 | | |
Other items(1) | | Other items(1) | (53) | | (88) | |
Hyperinflation adjustment | | Hyperinflation adjustment | (22) | | — | |
Retranslation to budgeted exchange rates | Retranslation to budgeted exchange rates | 387 | | 12 | | Retranslation to budgeted exchange rates | 42 | | 387 | |
| | 5,086 | | 3,899 | | | 5,511 | | 5,086 | |
Operating cash conversion | Operating cash conversion | 110.5% | 97.9% | Operating cash conversion | 105.1 | % | 110.5 | % |
(i)(1) Excluding exceptional items.
(ii)(2) Exceptional cash payments for other donations was £2 million (2021 - £1 million) and for winding down Russian operations was £13 million (2021- £nil). For the year ended 30 June 2021, exceptional cash received for substitution drawback was £60 million (2020 - £26 million),and exceptional cash payments for other donations was £1 million (2020 - £7 million), for tax payments were £10 million (2020 - £18 million).million.
(iii)(3) Excluding non-cash movements such as exchange and the impact of acquisitions and disposals.
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 fiscal 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 net 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 20212022 and 30 June 20202021 are set out in the table below:
| | | 2021 £ million | 2020 £ million | | 2022 £ million | 2021 £ million |
Operating profit | Operating profit | 3,731 | | 2,137 | | Operating profit | 4,409 | | 3,731 | |
Exceptional operating items | Exceptional operating items | 15 | | 1,357 | | Exceptional operating items | 388 | | 15 | |
Profit before exceptional operating items attributable to non-controlling interests | Profit before exceptional operating items attributable to non-controlling interests | (138) | | (114) | | Profit before exceptional operating items attributable to non-controlling interests | (192) | | (138) | |
Share of after tax results of associates and joint ventures | Share of after tax results of associates and joint ventures | 334 | | 282 | | Share of after tax results of associates and joint ventures | 417 | | 334 | |
Tax at the tax rate before exceptional items of 22.2% (2020 – 21.7%) | (906) | | (795) | | |
Tax at the tax rate before exceptional items of 22.5% (2021 – 22.2%) | | Tax at the tax rate before exceptional items of 22.5% (2021 – 22.2%) | (1,173) | | (906) | |
| | 3,036 | | 2,867 | | | 3,849 | | 3,036 | |
Average net assets (excluding net post employment assets/liabilities) | 8,146 | | 9,063 | | |
Average net assets (excluding net post employment benefit assets/liabilities) | | Average net assets (excluding net post employment benefit assets/liabilities) | 8,428 | | 8,146 | |
Average non-controlling interests | Average non-controlling interests | (1,587) | | (1,723) | | Average non-controlling interests | (1,641) | | (1,587) | |
Average net borrowings | Average net borrowings | 12,672 | | 12,551 | | Average net borrowings | 12,859 | | 12,672 | |
Average integration and restructuring costs (net of tax) | Average integration and restructuring costs (net of tax) | 1,639 | | 1,639 | | Average integration and restructuring costs (net of tax) | 1,639 | | 1,639 | |
Goodwill at 1 July 2004 | Goodwill at 1 July 2004 | 1,562 | | 1,562 | Goodwill at 1 July 2004 | 1,562 | | 1,562 |
Average total invested capital | 22,432 | | 23,092 | | |
Return on average total invested capital | 13.5% | 12.4% | |
Average invested capital | | Average invested capital | 22,847 | | 22,432 | |
Return on average invested capital | | Return on average invested capital | 16.8% | 13.5% |
Business review (continued)
Adjusted net borrowings to earnings before exceptional operating items, interest, tax, depreciation, amortisation and impairment (adjusted EBITDA)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.EBITDA (earnings before exceptional operating items, interest, tax, depreciation, amortisation and impairment).
Calculations for the ratio of adjusted net borrowings to adjusted EBITDA at year ended30 June 2022 and 30 June 2021 and 30 June 2020 are set out in the table below:
| | | 2021 £ million | 2020 £ million | | 2022 £ million | 2021 £ million |
Borrowings due within one year | Borrowings due within one year | 1,862 | | 1,995 | | Borrowings due within one year | 1,522 | | 1,862 | |
Borrowings due after one year | Borrowings due after one year | 12,865 | | 14,790 | | Borrowings due after one year | 14,498 | | 12,865 | |
Fair value of foreign currency derivatives and interest rate hedging instruments | Fair value of foreign currency derivatives and interest rate hedging instruments | (232) | | (686) | | Fair value of foreign currency derivatives and interest rate hedging instruments | (73) | | (232) | |
Lease liabilities | Lease liabilities | 363 | | 470 | | Lease liabilities | 475 | | 363 | |
Less: Cash and cash equivalents | Less: Cash and cash equivalents | (2,749) | | (3,323) | | Less: Cash and cash equivalents | (2,285) | | (2,749) | |
Net borrowings | Net borrowings | 12,109 | | 13,246 | | Net borrowings | 14,137 | | 12,109 | |
Post employment benefit liabilities before tax | Post employment benefit liabilities before tax | 574 | | 749 | | Post employment benefit liabilities before tax | 402 | | 574 | |
Adjusted net borrowings | Adjusted net borrowings | 12,683 | | 13,995 | | Adjusted net borrowings | 14,539 | | 12,683 | |
Profit for the year | Profit for the year | 2,799 | | 1,454 | | Profit for the year | 3,338 | | 2,799 | |
| Taxation(i) | Taxation(i) | 907 | | 589 | | Taxation(i) | 1,049 | | 907 | |
Net finance charges | Net finance charges | 373 | | 353 | | Net finance charges | 422 | | 373 | |
Depreciation, amortisation and impairment (excluding exceptional items) | 447 | | 494 | | |
Exceptional impairment | — | | 1,345 | | |
Depreciation, amortisation and impairment (excluding exceptional intangible impairment) | | Depreciation, amortisation and impairment (excluding exceptional intangible impairment) | 492 | | 447 | |
Exceptional intangible impairment | | Exceptional intangible impairment | 336 | | — | |
EBITDA | EBITDA | 4,526 | | 4,235 | | EBITDA | 5,637 | | 4,526 | |
Exceptional operating items (excluding impairment) | Exceptional operating items (excluding impairment) | 15 | | 12 | | Exceptional operating items (excluding impairment) | 49 | | 15 | |
Non-operating items | Non-operating items | (14) | | 23 | | Non-operating items | 17 | | (14) | |
Adjusted EBITDA | Adjusted EBITDA | 4,527 | | 4,270 | | Adjusted EBITDA | 5,703 | | 4,527 | |
Adjusted net borrowings to adjusted EBITDA | Adjusted net borrowings to adjusted EBITDA | 2.8 | 3.3 | Adjusted net borrowings to adjusted EBITDA | 2.5 | 2.8 |
(i) For the year ended 30 June 2021 taxation includes £nil tax credit on exceptional impairment, £4 million tax credit on other exceptional operating items, £nil on non-operating items and £88 million exceptional tax charge (2020 - £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, respectively).
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 applied to the group’s continuing operations before tax on exceptional items.
The tax rates from operations before exceptional and after exceptional items for the year ended 30 June 20212022 and year ended 30 June 20202021 are set out in the table below:
| | | 2021 £ million | 2020 £ million | | 2022 £ million | 2021 £ million |
Tax before exceptional items (a) | Tax before exceptional items (a) | 823 | | 743 | | Tax before exceptional items (a) | 1,080 | | 823 | |
Tax in respect of exceptional items | Tax in respect of exceptional items | (4) | | (154) | | Tax in respect of exceptional items | (31) | | (4) | |
Exceptional tax charge | Exceptional tax charge | 88 | | — | | Exceptional tax charge | — | | 88 | |
Taxation on profit (b) | Taxation on profit (b) | 907 | | 589 | | Taxation on profit (b) | 1,049 | | 907 | |
Profit before taxation and exceptional items (c) | Profit before taxation and exceptional items (c) | 3,707 | | 3,423 | | Profit before taxation and exceptional items (c) | 4,792 | | 3,707 | |
Non-operating items | Non-operating items | 14 | | (23) | | Non-operating items | (17) | | 14 | |
| Exceptional operating items | Exceptional operating items | (15) | | (1,357) | | Exceptional operating items | (388) | | (15) | |
Profit before taxation (d) | Profit before taxation (d) | 3,706 | | 2,043 | | Profit before taxation (d) | 4,387 | | 3,706 | |
Tax rate before exceptional items (a/c) | Tax rate before exceptional items (a/c) | 22.2 | % | 21.7 | % | Tax rate before exceptional items (a/c) | 22.5 | % | 22.2 | % |
Tax rate after exceptional items (b/d) | Tax rate after exceptional items (b/d) | 24.5 | % | 28.8 | % | Tax rate after exceptional items (b/d) | 23.9 | % | 24.5 | % |
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.
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 by whichdifference between the organic movement in net sales differs toand 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 madesold 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, 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, 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; Tanqueray No. TEN, Tanqueray ready to drink, Tanqueray Malacca Gin; Aviation, Chase, Jinzu and Villa Ascenti gin; Cîroc, Ketel One vodka, Ketel One Botanical; Don Julio, Casamigos and DeLeón tequila; Zacapa, Bundaberg SDlx,Master Distillers' Collection and Pampero Aniversario rum; Shui Jing Fang, Jinzu gin, Haig Club whisky, Orphan Barrel whiskey and DeLeón; Villa Ascenti, Copper Dog whisky,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 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, 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.
References to
There is no industry-agreed definition for price tiers and for data providers such as IWSR, definitions can vary by market. Diageo bases internal price tier definitions on a segmentation most consistent with IWSR as the disposalIWSR taxonomy is widely accepted and provides the industry with a common point 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.reference.
References to the group include Diageo plc and its consolidated subsidiaries.
This Strategic Report, which has been approved by a duly appointed and authorised committee of the Board of Directors, was signed on its behalf by Siobhan Moriarty,Tom Shropshire, the Company Secretary, on 2827 July 2021.2022.
Board of Directors
Diversity, balanceLeadership and experience
Javier Ferrán [N*]
Chairman
ChairmanNationality: 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: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
Ivan Menezes [E*]
Chief Executive
Chief ExecutiveNationality: 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: M marketingarketing and strategy roles, Nestlé, Booz Allen Hamilton Inc. and Whirlpool
Lavanya Chandrashekar [E]
Chief Financial Officer
Nationality: 2| 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 and Global Head of Investor Relations
Previous relevant experienceexperience: : 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
Susan Kilsby [A] [N] [R*]
Senior Independent Director
Nationality: 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 Chair, Fortune Brands Home & Security, Inc.; Non-Executive Director, Unilever PLC, BHP Group Plc, BHP Group Limited;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
Melissa Bethell [A] [N] [R]
Non-Executive Director
Non-Executive DirectorNationality: 1 3 4 | 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:appointments: Managing Partner, Atairos Europe; Non-Executive Director, Tesco PLC, Exor N.V.; Trustee, Sadlers Wells
Previous relevant experienceexperience: : Managing Director and Senior Advisor, Private Equity, Bain Capital; Non-Executive Director, Atento S.A., Worldpay plc, Samsonite S.A.
Karen Blackett [A] [N] [R]
Non-Executive Director
Nationality: British
Appointed: Non-Executive Director: June 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 Country Manager, WPP plc; Chief Executive Officer, GroupM UK; Chancellor, University of Portsmouth; Founding Trustee, Black Equity Organisation; Non-Executive Director, Creative UK; Non-Executive Director, The MOBO Trust
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, MediaCom UK; Chief Operations Officer, MediaCom EMEA; Marketing Director, MediaCom
Valérie Chapoulaud-Floquet [A] [N] [R]
Non-Executive Director
Non-Executive DirectorNationality: 1 3 4 | Nationality: French
Appointed: Non-Executive Director: January 2021
Key strengthsstrengths: : 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 appointmentsappointments: : Non-Executive Director, Danone 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
Sir John Manzoni [A] [N] [R]
Non-Executive Director
Non-Executive DirectorNationality: 1 3 4 | 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 EstablishmentEstablishment; 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
Lady Mendelsohn [A] [N] [R]
Non-Executive Director
Non-Executive DirectorNationality: 1 3 4 | 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: Vice President, Facebook EMEA and Interim Head of the Global Business Group, Facebook;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
Alan Stewart [A*] [N] [R]
Non-Executive Director
Nationality: 1* 3 4 | Nationality: British
Appointed:Non-Executive Director: September 2014 (Appointed Chairman of the Audit Committee: January 2017)
Key strengthsstrengths: : 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 appointmentsappointments: : Member of the Advisory Board, Chartered Institute of Management AccountantsNon-Executive Director, Reckitt Benckiser Group PLC
Previous relevant experience:Chief FinanceFinancial 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
Ireena Vittal [A] [N] [R]
Non-Executive Director
Non-Executive DirectorNationality:1 3 4 | 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 well as broad experience in non-executive board roles in the UK and India
Current external appointments: Non-Executive Director, Compass Group PLC, Housing Development Finance Corporation Limited; Non-Executive and Lead Independent Director, Godrej Consumer Products Limited, Wipro Limited
Previous relevant experience:Head of Marketing and Sales, Hutchinson Max Telecom; Partner, McKinsey and Company; Non-Executive Director, Titan Company Limited, Tata Global Beverages Limited, Tata Industries, GlaxoSmithKline Consumer Healthcare
Other changes since 1 July 2020Board committees
– Siobhán Moriarty will retire as General Counsel & Company Secretary of Diageo plc with effect from the end of the Annual General Meeting to be held on 30 September 2021 and will be succeeded by Tom Shropshire.[A] Audit Committee
– Kathryn Mikells ceased to be Chief Financial Officer and[E] Executive Director on 30 June 2021.Committee
– Ho KwonPing ceased to be a Non-Executive Director on 28 September 2020.[N] Nomination Committee
[R] Remuneration Committee
| | | | | | | | | | | |
Board Committees |
1 | Audit Committee |
2 | Executive Committee |
3 | Nomination Committee |
4 | Remuneration Committee |
* | * Chairman of the committee |
Executive Committee
Broad skills,Expertise and diversity and expertise
Siobhán Moriarty1 Ewan Andrew,
General CounselPresident, Global Supply Chain & Company SecretaryProcurement and Chief Sustainability Officer
Nationality: Irish British
Appointed: July 2013September 2019
Previous Diageo roles: General Counsel Designate; Corporate M&A Counsel; Regional Counsel Ireland; General Counsel EuropeSupply 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: Member, Scotch Whisky Association Council , Scottish Business Climate Collaboration Board, One Planet Business for Biodiversity Board
2 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
3 Debra Crew,
President, North America & Global Supply
Nationality: American
Appointed: July 2020
Previous Diageo roles: Non-Executive Director, Friends Board of the Royal Academy of Arts; Board Member, European General Counsel AssociationDiageo plc
Current external appointments: Non-Executive Director, Stanley Black & Decker, Inc.
Previous relevant experience: Non-Executive Director, Newell Brands, Mondelēz International Inc.; President and CEO, Reynolds American, Inc; President, PepsiCo North America Nutrition, PepsiCo Americas Beverages, Western Europe Region; various positions in law firm private practice, Dublinwith Kraft Foods, Nestlé, S.A., and LondonMars
4 Cristina Diezhandino,
Chief Marketing Officer
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
5 John Kennedy,
President, Europe 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
6 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
7 Hina Nagarajan,
Managing DirectorBoard of Directors
Leadership and CEO of United Spirits Limitedexperience
Javier Ferrán [N*]
Chairman
Nationality: IndianSpanish
Appointed: Chairman and Chairman of the Nomination Committee: January 2017 (Appointed Chairman Designate and Non-Executive Director: July 20212016)
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
Ivan Menezes [E*]
Chief Executive
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: 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: CEO-Designate, United SpiritsChief 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
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 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
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 Home & Security, 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
Melissa Bethell [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: Managing Partner, Atairos Europe; Non-Executive Director, Tesco PLC, Exor N.V.; Trustee, Sadlers Wells
Previous relevant experience: Managing Director Africa Regional Marketsand Senior Advisor, Private Equity, Bain Capital; Non-Executive Director, Atento S.A., Worldpay plc, Samsonite S.A.
Karen Blackett [A] [N] [R]
Non-Executive Director
Nationality: British
Appointed: Non-Executive Director: June 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 Country Manager, WPP plc; Chief Executive Officer, GroupM UK; Chancellor, University of Portsmouth; Founding Trustee, Black Equity Organisation; Non-Executive Director, Creative UK; Non-Executive Director, The MOBO Trust
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, MediaCom UK; Chief Operations Officer, MediaCom EMEA; Marketing Director, MediaCom
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, Danone 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
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
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: ManagingExecutive Chairman, Karmarama; Deputy Chairman, Grey London; Board 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 IndiaBBH, 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
Daniel MobleyAlan Stewart [A*] [N] [R]
Global Corporate RelationsNon-Executive Director
Nationality:British
Appointed: June 2017Non-Executive Director: September 2014 (Appointed Chairman of the Audit Committee: January 2017)
Previous Diageo rolesKey strengths: : Corporate RelationsHas 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: Non-Executive Director, EuropeReckitt Benckiser Group PLC
Previous relevant experience: Regional Head of Corporate Affairs, IndiaChief Financial Officer, Tesco PLC; Non-Executive Director, Tesco Bank; Chief Financial Officer, Marks & South Asia, Regional Head of Corporate Affairs, Africa,Spencer Group plc, AWAS; Non-Executive Director, Games Workshop plc; Group Finance Director, WH Smith PLC; Chief Executive, Thomas Cook UK
Group Head of Government Relations, Standard Chartered; extensive government experience including in HM Treasury and Foreign & Commonwealth Office
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 well as broad experience in non-executive board roles in the UK and India
Current external appointments: Non-Executive Director, Compass Group PLC, Housing Development Finance Corporation Limited; Non-Executive and Lead Independent Director, Godrej Consumer Products Limited, Wipro Limited
Previous relevant experience: Head of Marketing and Sales, Hutchinson Max Telecom; Partner, McKinsey and Company; Non-Executive Director, Titan Company Limited, Tata Global Beverages Limited, Tata Industries, GlaxoSmithKline Consumer Healthcare
Board committees
[A] Audit Committee
[E] Executive Committee
[N] Nomination Committee
[R] Remuneration Committee
* Chairman of the committee
Executive Committee
Expertise and diversity
1 Ewan Andrew,
President, Global Supply Chain and& Procurement &and Chief Sustainability Officer
Nationality: British
Appointed: Appointed: September2019
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: appointments: Member, Scotch Whisky Association Council , Scottish Business Climate Collaboration Board, One Planet Business for Biodiversity Board
2 Alvaro Cardenas,
President, Latin America and Caribbean
Nationality: Nationality: Colombian
Appointed: Appointed: January 2021
Previous Diageo roles: 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
Mairéad Nayager
Chief HR Officer
Nationality: Irish
Appointed: October 2015
Previous Diageo roles: HR Director, Diageo Europe; HR Director, Brandhouse, South Africa; HR Director, Diageo Africa Regional Markets; Talent & Organisational Effectiveness Director, Diageo Africa; Employee Relations Manager, Diageo Ireland
Previous relevant experience: Irish Business and Employers’ Confederation
3 Debra Crew,
President, North America & Global Supply
Nationality: American
Appointed: July 2020
Previous Diageo roles: Non-Executive Director, Diageo plc
Current external appointments: Non-Executive Director, Stanley Black & Decker, Inc.
Previous relevant experience: Non-Executive Director, Newell Brands, Mondelēz International Inc.; 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
John Kennedy
President, Europe 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
Sam Fischer
President, Asia Pacific & Global Travel
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
Current external appointments: Non-Executive Director, Burberry Group Plc
Previous relevant experience: Senior management roles across Central Europe and Indochina, Colgate Palmolive
4 Cristina Diezhandino,
Chief Marketing Officer
Nationality: Spanish
Appointed: Appointed: July 2020
Previous Diageo roles: 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
5 John O’KeeffeKennedy,
President, Africa & BeerEurope and India
Nationality: Irish American
Appointed: July 20152016
Previous Diageo roles: CEO 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, Guinness Nigeria; Global Head, Innovation; Global Head, Beer and Baileys; Managing Director, Russia and Eastern Europe; various management and marketing positionsDiageo Ireland
Tom Shropshire
General Counsel & Company Secretary Designate
Nationality: American/British
Appointed: July 2021
Current external appointments: 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 Brand management roles, GlaxoSmithKline and Quaker Oats
Ivan Menezes and Lavanya Chandrashekar are also members of the Executive Committee.
Their biographies can be found on page154.
Letter from the Chairman of the Board of Directors
Robust and resilient governance
Dear Shareholder
On behalf of the Board, it is my great pleasure to present the corporate governance report for the year ended 30 June 2021, summarising the role of the Board in providing effective leadership in promoting the long-term sustainable success of Diageo.
The Board plays a critical role in ensuring that Diageo conducts its business in a manner which is consistent with the highest standards of corporate governance and ethical behaviour so that Diageo contributes positively to wider society. We take our legal and regulatory requirements very seriously and seek to demonstrate this through consistent compliance with those requirements and through evolving our processes to reflect the latest developments in best practice corporate governance. We are also very conscious that good governance is not simply a matter of regulatory compliance but encompasses multiple issues including transparency in reporting and accounting, fair remuneration and benefits, enabling better decision-making through inclusion and diversity, operating with integrity and honesty, and through use of ethical supply chains.
We therefore take the view that, together with our environmental and social action plans as exemplified by our ambitious 'Society 2030: Spirit of Progress' targets, companies such as Diageo must contribute to society through rolemodelling good governance in its broader sense. Maintaining our focus on sustainability and other ESG issues is not only entirely consistent with our values, but it will enhance Diageo’s ability to access capital, recruit the best people and retain the confidence of customers, consumers and the communities in which we operate. We are aware that to fulfil our Performance Ambition it is vital to build and reinforce trust consistently amongst all our stakeholders, being conscious of and giving consideration to the needs and interests of those stakeholders in our decision-making and stewardship of the business.
Diageo has a strong and long-established purpose, culture and set of values which collectively anchor our priorities, decision-making and actions even in very challenging circumstances such as those experienced since the outbreak of the Covid-19 pandemic. That Diageo is emerging strongly is in no small part due to the Board and Executive Committee adhering to uncompromising ethical standards, being led by our purpose, culture and values, and by taking swift and decisive action to respond with agility to anticipate and address changing circumstances, risks and opportunities.
Our robust and efficient governance processes, at Board level and throughout the company, make a critical contribution to Diageo’s ability to create sustainable long-term value for shareholders, especially during difficult external conditions. We recognise that our ambition of being one of the most trusted and respected consumer goods companies can only be achieved through demonstrable good governance in its broadest sense.
Javier Ferrán
Chairman
Compliance with the UK Corporate Governance Code
During the financial year ended 30 June 2021, Diageo has applied the Principles and complied with the Provisions of the UK Corporate Governance Code 2018 (the Code), with the exception of Provision 38 in respect of company pension contributions for incumbent Executive Directors, details of which are set out on page 192. Below are some examples of Diageo’s compliance with certain areas of the Code, together with cross-references to other sections of this Annual Report where further information can be found.
– Whistle-blowing mechanisms (Provision 6): SpeakUp is a confidential global service which can be used by the workforce or any third parties to raise concerns about anything relating to Diageo, including potential breaches of Diageo’s Code of Business Conduct, policies, standards or the law, or anything which might cause risk of harm to others or the environment. SpeakUp, which is administered by an independent service provider, can be accessed either online or by telephone and can, in countries where legally permitted, be used anonymously and reports kept confidential. Allegations are investigated by independent Diageo teams and progress on investigations monitored by the Business Integrity team. Where allegations are substantiated, appropriate disciplinary and corrective actions are taken. The Audit Committee receives and reviews regular reports on allegations, including trends information and investigation closure rates. Since all of Diageo’s non-executive directors attend the Audit Committee, all non-executive directors receive the same reports directly from the Business Integrity team. Further information is set out on page 178-179.
– Independence (Provisions 9, 10, 11 and 12): The Chairman was considered independent on his appointment, as assessed against the criteria set out in Provision 10 of the Code. The roles of chairman and chief executive are not exercised by the same person. Over half of the Directors are independent non-executives and none have served for longer than nine years. Susan Kilsby is our Senior Independent Director and meets with other non-executive directors, without the Chairman attending, twice yearly to appraise the performance of the Chairman. Further information about the structure of the Board is set out on pages 160-162.
– Board effectiveness evaluation (Provisions 21 and 22): A formal rigorous assessment and evaluation of the performance of the Board, its Committees, its processes and procedures, and of individual directors including the Chairman is undertaken each year. During this year, the evaluation was facilitated by an external professional reviewer, Independent Board Evaluation, which was appointed following a competitive tender process managed by Diageo’s procurement and company secretarial teams. Further details about this external Board evaluation exercise, its methodology, recommendations and actions are set out on pages 168-169.
6 Daniel Mobley,
Global Corporate governance reportRelations 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
Enabling our ambition7 Hina Nagarajan,
Corporate governance structure and division of responsibilities
| | | | | | | | |
Leadership | | Independent oversight and rigorous challenge |
Chief Financial Officer | | Non-Executive Directors |
Lavanya Chandrashekar | | Melissa Bethell, Valérie Chapoulaud- Floquet, Sir John Manzoni, Lady Mendelsohn, Alan Stewart and Ireena Vittal |
– 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 – Is a member of the Executive Committee | | 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. |
| |
Chief Executive | |
Ivan Menezes | |
– 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 his 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 | | Senior Independent Director |
Javier Ferrán | | Susan Kilsby |
– Responsible for the operation, leadership and governance of the Board – Ensures all Directors are fully 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 Directors – Designated Non-Executive Director for workforce engagement | | – 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 |
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 – Is a member of the Executive Committee as General Counsel |
Board of Directors
Composition
Leadership and experience
Javier Ferrán [N*]
Chairman
Nationality: Spanish
Appointed: Chairman and Chairman of the BoardNomination Committee: January 2017 (Appointed Chairman Designate and Non-Executive Director: July 2016)
TheKey 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 comprises
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
Ivan Menezes [E*]
Chief Executive
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: 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, twoDiageo 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
Lavanya Chandrashekar [E]
Chief Financial Officer
Nationality: American
Appointed: Chief Financial Officer and Executive Directors,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 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
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 Home & Security, Inc.; Non-Executive Director, Unilever PLC; NHS England; Member, the Takeover Panel
Previous relevant experience: Senior Independent Director and six independent Non- Executive Directors. The biographiesChair of all Directors are set out in this Annual Report on pages 154-156.
This year there have been a number of changes in Board membership, with Ho KwonPing retiring from his role asRemuneration 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, in September 2020 after eight years’ service and the appointments of new Non-Executive Directors Sir John Manzoni and Ireena Vittal in October 2020 and Valérie Chapoulaud-Floquet in January 2021. There has also been a recent change in Executive Directors with Lavanya Chandrashekar taking over from Kathryn Mikells as Chief Financial Officer with effect from 1 July 2021. The Board is very grateful to Kathy for the significant contribution she has made since she joined in November 2015, managing the company’s global productivity programme and capital allocation decisions, rationalising and refreshing our portfolio and enhancing Diageo’s reputation through returning value to shareholders. The Board is also pleased that Lavanya, a strong internal successor to Kathy, has stepped up to the role of Chief Financial Officer given her strong track record at Diageo and previously with other consumer goods companies. These new appointments enhance the diversity of skills, experiences and backgrounds of the Board and will result in different perspectives and approaches being expressed, firmly rooted in Diageo’s consistent purpose, culture and values.Goldman Sachs International, Keurig Green Mountain, L’Occitane International, Coca-Cola HBC
Inclusion and diversity
The Board sees championing inclusion and diversity as one of the key enablers for achieving Diageo’s ambition. It is also a core principle of the 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 performing business. As part of this, the Board has adopted a written Board Diversity Policy 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 director from a minority ethnic group. Currently, women make up 60% of the Board and there are four directors (40%) who self-disclose as being from minority ethnic groups. Further information can be found in the ‘Our people’ and ‘Champion inclusion and diversity’ sections of ‘Our strategic priorities’ on pages 41-42 and 53-55.
Outside interests
The Board has adopted guidelines for dealing with conflicts of interest, with directors' outside interests being regularly reviewed and responsibility for authorising conflicts of interest reserved for the Board. In the case of a 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 April 2021 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 on all governance matters. During the year, the Non-Executive Directors met without management present six times, and also without the Chairman present twice. The terms of reference of Board Committees are reviewed regularly, most recently in April 2021, and are available at https://www.diageo.com/en/our-business/corporate-governance.
Corporate governance requirements
The principal corporate governance rules applying to Diageo (as a UK company listed on the London Stock Exchange) for the year ended 30 June 2021 are contained in 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 2021 can be found on page 159. 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 Euronext Dublin Exchange, the Euronext Paris Exchange and the New York Stock Exchange (NYSE), and as such is subject to applicable rules of those exchanges and jurisdictions. 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. 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 https://www.diageo.com/en/our-business/corporate-governance.
Structure and division of responsibilities
The Board has established a corporate governance framework as shown on pages 160-161. This includes the three Board Committees (Audit Committee, Nomination Committee and Remuneration Committee), as well as management committees which report to the Chief Executive 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 approved 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 175 to 214, and details of the Executive Committee can be found on pages 157-158.
Board skills and experience
The Board is of the view that it is essential to have an appropriate mix of experience, expertise, diversity and independence. Such diverse attributes enable the Board as a whole to provide informed opinions and advice on strategy and relevant topics, thereby discharging its duty of oversight. Appointments to the Board are made following consideration of the experience and expertise of existing Directors, any 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 154-156, and a matrix of the Board’s current skills and experience is set out in the chart below.
| | | | | |
l | Finance |
l | Banking / corporate finance |
l | Consumer products |
l | Sales and marketing |
l | General management |
| |
| |
Elections
The Chairman has confirmed that the Non-Executive Directors standing for election or re-election at this year’s AGM continue to perform effectively, both individually and collectively as a Board, and that each Non-Executive Director demonstrates commitment to their 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 below, directors’ attendance levels have been consistently high throughout the year ended 30 June 2021 despite the impact of the pandemic and the consequent increased demands on their time.
Board attendance
Directors’ attendance record at the last AGM, scheduled Board meetings and Board Committee meetings, for the year ended 30 June 2021 is set out in the table below. The 2020 AGM was held as a 'closed meeting' under the provisions of the Corporate Insolvency and Governance Act 2020, with no directors other than the Chairman attending. 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 were encouraged to give their views to the Chairman of each respective meeting ahead of that meeting being held.
| | | | | | | | | | | | | | | | | |
| Annual General Meeting 2020, held as a “closed meeting” | Board (maximum 6) | Audit Committee (maximum 5) | Nomination Committee (maximum 5) | Remuneration Committee (maximum 8) |
Javier Ferrán | ü | 6/6 | 5/5 1
| 5/5 | 8/8 1
|
Ivan Menezes | N/A | 6/6 | 2/5 1
| 5/5 1
| 7/7 1
|
Lavanya Chandrashekar2
| N/A | N/A | N/A | N/A | N/A |
Susan Kilsby | N/A | 6/6 | 5/5 | 5/5 | 8/8 |
Melissa Bethell | N/A | 6/6 | 4/5 | 5/5 | 8/8 |
Valérie Chapoulaud-Floquet3
| N/A | 2/2 | 2/2 | 2/2 | 5/5 |
Sir John Manzoni4
| N/A | 5/5 | 4/4 | 4/4 | 7/7 |
Nicola Mendelsohn | N/A | 6/6 | 5/5 | 5/5 | 8/8 |
Alan Stewart | N/A | 6/6 | 5/5 | 5/5 | 8/8 |
Ireena Vittal5
| N/A | 4/4 | 4/4 | 3/3 | 7/7 |
Former Directors |
Ho KwonPing6
| N/A | 1/1 | 0/1 | 1/1 | 1/1 |
Kathryn Mikells7
| N/A | 6/6 | 5/5 1
| 0/0 1
| 6/6 1
|
1. Attended by invitation
2. Appointed to the Board on 1 July 2021
3. Appointed to the Board on 1 January 2021
4. Appointed to the Board on 1 October 2020
5. Appointed to the Board on 2 October 2020
6. Retired from the Board on 28 September 2020
7. Retired from the Board on 30 June 2021
Board activitiesMelissa Bethell [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: Managing Partner, Atairos Europe; Non-Executive Director, Tesco PLC, Exor N.V.; Trustee, Sadlers Wells
Previous relevant experience: Managing Director and Senior Advisor, Private Equity, Bain Capital; Non-Executive Director, Atento S.A., Worldpay plc, Samsonite S.A.
Details
Karen Blackett [A] [N] [R]
Non-Executive Director
Nationality: British
Appointed: Non-Executive Director: June 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 the main areasdifferent government, industry and public bodies
Current external appointments: UK Country Manager, WPP plc; Chief Executive Officer, GroupM UK; Chancellor, University of focus of the Board and its Committees during the year include those summarised below:Portsmouth; Founding Trustee, Black Equity Organisation; Non-Executive Director, Creative UK; Non-Executive Director, The MOBO Trust
| | | | | | | | | | | | | | |
Areas of focusPrevious relevant experience: UK Race Equality Business Champion, HM Government; Business Ambassador, Department for International Trade, HM Government; Chairwoman, MediaCom UK & Ireland, Chief Executive Officer, MediaCom UK; Chief Operations Officer, MediaCom EMEA; Marketing Director, MediaCom | Strategic priority | Strategic outcome | Stakeholders |
Strategic matters | – Held a two-day online Annual Strategy Conference focussing on key strategic matters, including emerging trends, consumer behaviour and future expectations, and developments in the consumer goods industry, including those driven or accelerated by the pandemic – Regularly reviewed the group’s performance against the strategy including actions taken in respect of managing the pandemic – Received reports on the financial performance of the group – Reviewed the group’s tax strategic planning – Received regular reports on the macro-economic environment, world events and emerging trends – Reviewed strategic topics including e-commerce, consumer attitudes and shifts, and inclusive marketing – Hosted external speakers on subjects including US / UK trade relations and consumer trends | 1 2 3 5 | EG CVC | CN CU CM IN |
Operational matters | – Reviewed and approved the annual funding plan, insurance, banking and capital expenditure requirements – Reviewed the impact of global trade developments and disputes – Regularly reviewed and approved the group’s M&A and 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 – Reviewed the company’s capital allocation, funding and liquidity positions, including those of its pension schemes, and approved interim and final dividends – Reviewed and approved the recommencement of the company’s share buyback programme – Reviewed the company’s succession planning and talent strategy | 1 2 3 | EG CVC EP | PE CN CU SU |
ESG matters | – Consulted with shareholders as to executive remuneration – Received reports on workforce engagement and wellbeing over the year – Reviewed the company’s sustainability and environmental strategy and approved approach as to 'Society 2030: Spirit of Progress', including targets and climate change risk disclosures – Hosted external speakers on topics including stewardship and the views of institutional investors on Diageo’s ESG initiatives – Received regular investor reports – During each quarter, received an update on ESG matters and progress towards 'Society 2030' targets – Agreed and tracked actions from the 2020 external evaluation of the Board’s performance – Approved the appointment of new Non-Executive Directors and CFO – Reviewed schedule of matters reserved for the Board and terms of reference of its committees | 3 4 5 6 | CVC CT EP | PE CM IN GR |
Assurance and risk management | – Received regular reports in relation to material legal matters, including disputes, regulatory and governance developments, and areas of legal or regulatory risk – Reviewed and approved the company’s risk footprint – Reviewed and approved the company’s filings, financial and non-financial reporting including interim and preliminary results announcements, US filings and Annual Report and Accounts – Renewed appointment of a committee of the Board authorised to approve actions to be taken in response to the Covid-19 pandemic | 1 3 5
| EG CVC CT | IN GR |
| | | | | | | | | | | | | | | | | |
Strategic priorities
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, Danone 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
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
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
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 well as board and committee level experience at industry institutions Current external appointments: Non-Executive Director, Reckitt Benckiser 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 | Strategic outcomes | Stakeholders |
1 | Embed everyday efficiency | [EG] | Efficient growth | [PE] | People |
2 | Invest smartly | [CVC] | Consistent value creation | [CN] | Consumers |
3 | Sustain quality growth | [CT] | Credibility and trust | [CU] | Customers |
4 | Champion inclusion and diversity | [EP] | Engaged people | [SU] | Suppliers |
5 | Pioneer grain-to-glass sustainability | | | [CM] | Communities |
6 | Promote positive drinking | | | [IN] | Investors |
| | | | [GR] | Governments and regulators |
Stakeholder engagement
The developmentIreena Vittal [A] [N] [R]
Non-Executive Director
Nationality: Indian
Appointed: Non-Executive Director: October 2020
Key strengths: Brings a wealth of strongFMCG experience from a career in executive consulting with a focus on consumer sectors and positive relationships between Diageo and its external stakeholders is an intrinsic part of Diageo’s purpose and culture, and reflective of the nature of the industryemerging markets, including India, as well as broad experience in which we operate. Diageo’s stakeholders, which are defined on pages 39 and 40, 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 notednon-executive board roles in the company’s statement on Section 172UK and India
Current external appointments: Non-Executive Director, Compass Group PLC, Housing Development Finance Corporation Limited; Non-Executive and Lead Independent Director, Godrej Consumer Products Limited, Wipro Limited
Previous relevant experience: Head of the Companies Act 2006 set out on page 19, in making their decisionsMarketing 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 some examples of how the Board has considered the viewsSales, Hutchinson Max Telecom; Partner, McKinsey and interests of different stakeholder groups when making its decisions during the year. See pages 165-167 for examples of how the Board considered different stakeholders in reaching decisions in relation to ‘Raising the Bar’ and return of value to shareholders.Company; Non-Executive Director, Titan Company Limited, Tata Global Beverages Limited, Tata Industries, GlaxoSmithKline Consumer Healthcare
How the Board is involved in and kept informed about stakeholder engagementcommittees
[A] Audit Committee
People[E] Executive Committee
The Board maintains an active dialogue with Diageo’s employees and wider workforce, including contractors and temporary staff. Although this year, the Board was unable to travel due to the restrictions related to the pandemic, it would otherwise have held an extended meeting during October at one of Diageo’s overseas locations. In prior years, the Board has visited the group’s offices and production sites in New York, US, Chengdu, China and Bangalore, India. These visits enable the Board to engage directly with local management and other employees during presentations, site and trade visits, as well as at social events. Indirect engagement with employees also takes place through works councils, employee and workforce forums, community groups, pulse surveys and town hall meetings, most of which have been conducted virtually this year. The global survey of employees known as Your Voice was carried out this year and its findings were reviewed by the Board. The[N] Nomination Committee
[R] Remuneration Committee
* Chairman has continued to engage personally with a wide spectrum of employees in different markets in his role as designated non-executive director for workforce engagement, which has been supplemented by various other non-executive directors also engaging directly in virtual meetings with employees over the year. These direct engagements have enabled a number of non-executive directors to have candid and constructive discussions with employees, to understand better their views and experiences of working at Diageo, including what works well and what needs improvement which has supplemented the engagement sessions by the Chairman. Common themes and feedback from these engagement sessions are reported by the Chairman and other participating directors to the rest of the Board. For example, the need to collaborate and further simplify internal decision-making processes across the business, in order to enable more pace and agility, had been identified through these engagements. Following this feedback, management encouraged the formation of cross-functional ’sprint teams’ to identify, focus on and swiftly address specific risks and opportunities for the business.
Diageo’s Workforce engagement statement is set out on pages 169-170.
Consumers
The Board is aware that the company’s continued success is dependent on having a deep understanding of our consumers, their behaviours and motivations and on the company’s ability to respond to those consumer insights by ensuring that it has an attractive portfolio of products across multiple categories, channels, markets and price points. The Board regularly reviews emerging consumer trends at the Annual Strategy Conference, held in April each year, during which the Board receives presentations from senior executives on emerging trends, the risks and opportunities resulting from those trends and how the company is responding to them. At this year’s Annual Strategy Conference, the Board reviewed various disruptive forces and how they might impact on consumer sentiment and activity. At other meetings during the year, the Board has reviewed the group’s innovation pipeline, its e-commerce strategy and digital capabilities, and new consumer attitudes and shifts resulting from the pandemic. The Board has consciously made capital allocation and strategic decisions based on these consumer insights, investing in vibrant brands in established categories, such as the acquisitions of Aviation Gin LLC in September 2020 and Chase Distillery Limited in February 2021, as well as of smaller brands in rapidly expanding categories, such as the hard seltzer brand Lone River Ranch Water purchased in March 2021 and the spirits-based ready to drink brand Loyal 9 Cocktails purchased in April 2021.
Customers
Maintaining a broad portfolio with consumer offerings at a variety of price points and categories is also a key priority for customers, as it is for consumers and therefore for Diageo. As highlighted above, the Board regularly reviews both innovation and inorganic opportunities to enhance the company's portfolio and to ensure that it has sufficient breadth and depth in its portfolio to meet consumer demand. During the year, the Board has considered and approved a number of acquisitions, as highlighted in the paragraph above, as well as continuing to invest in start-up brands through the Distill Ventures programme. Under the group’s internal governance framework, material distribution agreements with certain customers are also reviewed and approved by the Board.committee
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 glass bottles and cans, as well as approving a number of capital expenditure projects investing in certain of its production facilities. The Board has also reviewed management’s strategy in relation to sourcing certain key ingredients and components in order to ensure that the company is able to source sufficient production materials to meet projected consumer demand over a number of years. Robust and reliable forecasting processes are of particular importance for products which require maturing inventory to be held for a number of years before packaging, for example the company’s Scotch whisky, Canadian whisky, US whiskey, tequila and rum products. 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’.
Communities
The Board considers it to be critically important to maintain close and supportive relationships with the communities in which Diageo operates, especially given the impact that the pandemic has had on those communities during the year. Recognising the severity of the impact of the Covid-19 pandemic on many of the communities in which the group operates, the Board has focussed on actions to support those communities, including those working in the on-trade such as bartenders and hospitality employees.
Raising the Bar
A number of the Board’s principal decisions over the course of the year have been shaped and determined by the needs of those communities. In June 2020, the company announced its two year global programme to support bars and pubs welcome back consumers and recover from the pandemic, known as ‘Raising the Bar’. Through ‘Raising the Bar’, for two years from July 2020 Diageo will provide $100 million to support the recovery of major hospitality centres, such as New York, London, Edinburgh, Dublin, Belfast, Mexico City, Sao Paulo, Shanghai, Delhi, Mumbai, Bangalore, Nairobi, Dar es Salaam, Kampala and Sydney. The programme was developed by the company following a global survey of bar owners conducted through its website, DiageoBarAcademy.com, whose purpose was to identify what on-trade retailers needed most to reopen their outlets safely. The survey identified as priorities the provision of hygiene measures, digital support and practical equipment to transform outlets. The proposal was discussed by the Board during meetings in April and May 2020, and approved in June 2020. The programme is now being rolled out with on-trade retailers applying online for targeted support for the physical equipment needed for outlets to re-open. For example, in Great Britain, Diageo has been providing ‘hygiene kits’ with high-quality permanent sanitiser dispense units, medical-grade hand sanitiser and a range of personal protection equipment (such as masks and gloves); help to pubs and bars to establish partnerships with online reservations and cashless systems; mobile bars and outdoor equipment. The Board receives regular updates on progress of the ‘Raising the Bar’ programme from management.
Investors
The Board’s primary contact with institutional shareholders is through the Chief Executive and Chief Financial Officer, who are in regular contact with investors with the assistance of the investor relations department. In addition, other members of the Board participate in certain events with investors. For example, on 20 April 2021 the Chairman joined the Chief Executive and other senior executives hosting a webcast followed by live Q&A session with investors to discuss details of Diageo’s 'Society 2030: Spirit of Progress' 10-year ESG action plan, which had been launched in November 2020. In addition to helping Diageo explain in greater detail key aspects of 'Society 2030: Spirit of Progress', it also provided an opportunity for more dialogue with investors on this critically important aspect of our long-term ESG strategy. The Remuneration Committee chairman has also engaged with investors in relation to executive remuneration, as further described on page 189. The Board is also provided with monthly investor relations reports, which includes coverage of the company by sell-side analysts. The Board also ensures that all Directors develop an understanding 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 of the Board, the Chairman of the Audit Committee, the Chairman of the Remuneration Committee or any other Director. Shareholders are invited to write to the Company Secretary, Chairman or any other Director and express their views on any issues of concern at any time, including by way of email to a dedicated address for the Company Secretary and her team. The AGM also provides a regular opportunity for shareholders to put their questions in person and to hear other shareholders put their questions to the Board. Due to the pandemic, the 2020 AGM was held as a ‘closed meeting’ under the Corporate Insolvency and Governance Act 2020, such that shareholders were not able to attend; however, they were invited to submit questions in advance of the meeting to a dedicated email address. All questions submitted were individually answered prior to the meeting. We have also now amended our Articles of Association to enable ‘hybrid meetings’ thereby allowing shareholders choice to attend physically, as in traditional AGMs, or by remote or virtual means, while still being able to engage directly with the Board, asking questions and voting on resolutions.
Return of value
One of the principal decisions considered by the Board over the year has been in relation to returning value to shareholders. From feedback received over many years from a wide range of shareholders, including institutional investors, retail shareholders and pension funds, the Board is very conscious of the importance of regular and predictable shareholder returns. The Board is, however,
also aware that there are various other factors and interests which need to be considered and balanced as against shareholder returns including the status of the company’s pensions schemes, the company’s liquidity position, anticipated future expenditure and forecast trading. From early in 2020, the Board has also had to consider additional factors resulting from the Covid-19 pandemic, including its impact on different channels and different markets, the potential for successive waves of differing intensities, its potential impact on trading in certain markets due to changing consumption patterns and government actions. Given such uncertainties, the Board enabled quick action to ensure that the company’s liquidity position was secure, including reducing discretionary spending and ensuring adequate financing was available if necessary. As a result in early 2020, the Board decided that it would not initiate the next phase of the company’s three-year return of capital programme, which had been originally launched in July 2019, but decided that it was appropriate in April 2020 to pay the interim dividend originally proposed in January 2020 and a final dividend in October 2020 in respect of the year ended 30 June 2020. During the year ended 30 June 2021, with strong performance in the first half of the year and a return to organic net sales growth, the Board approved and paid in April 2021 an interim dividend of 27.96 pence per share, being an increase of 2% on the previous year’s interim dividend. Given continued improved trading and performance, on 12 May 2021 the Board announced that the company would recommence and extend the company’s return of capital programme and on 29 July 2021 announced that it would propose a final dividend of 44.59 pence per share, being an increase of 5% on the previous year’s final dividend, subject to approval at the 2021 AGM.
Government and regulators
The Board engages indirectly with government, regulators and policymakers 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 developments in relation to political developments, tariffs and international trade disputes. 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 year we have maintained an active dialogue with our stakeholders in particular to assess and respond to the impact that the Covid-19 pandemic has had on our business and that of our customers and suppliers. Local crisis management teams have continued to prioritise the safety and wellbeing of employees and wider workforce by ensuring that those who can work from home do so, using technology and systems, and that those who cannot work from home are able to work onsite, including in production facilities, in a safe manner with revised protocols and procedures. Ongoing communications and guidance has been provided to our people. We have also 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. During the year we have supported pubs, bars and restaurants in many markets through our global ‘Raising the Bar’ programme which supported our customers welcoming consumers back into their outlets in a safe manner, providing sanitiser and other equipment as well as best practice advice. We have also continued to engage directly with shareholders through press releases and regulatory announcements, including updates on developments in trading, virtual meetings with institutional investors, direct communications with individual shareholders and our investor engagement programme which is led by our investor relations team. Taking the safety of our shareholders and employees as the priority, we held our 2020 Annual General Meeting (AGM) as a 'closed meeting' in compliance with government guidelines and restrictions on gatherings, but provided alternative means for shareholders to submit questions in advance of the AGM. We have also continued engaging with and responding to the needs of the communities in which our business operates; for example, by pledging £4.5 million to provide medical equipment and infrastructure for Indian hospitals severely impacted by the Covid-19 pandemic.
Further information on our stakeholder considerations and activities throughout the year, including how the Board has taken such considerations into account in its decision-making can be found on pages 165-167.
Executive direction and control
Executive Committee
Expertise and diversity
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 & 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 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
3 Debra Crew,
President, North America & Global Supply
Nationality: American
Appointed: July 2020
Previous Diageo roles: Non-Executive Director, Diageo plc
Current external appointments: Non-Executive Director, Stanley Black & Decker, Inc.
Previous relevant experience: Non-Executive Director, Newell Brands, Mondelēz International Inc.; 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
4 Cristina Diezhandino,
Chief Marketing Officer
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
5 John Kennedy,
President, Europe 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
6 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
7 Hina Nagarajan,
Managing Director and CEO of United Spirits Limited
Nationality: Indian
Appointed: July 2021
Previous Diageo roles: CEO-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
8 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; Commerical Director, South Africa; Customer Marketing Director, South Africa; Key Account Director, South Africa
Previous relevant experience: Various positions, Heinz, Mars and Pick n Pay Retailers
9 John O'Keeffe,
President, Asia 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 management and marketing positions
10 Louise Prashad,
Chief HR Officer
Nationality: British
Appointed: January 2022
Previous Diageo roles: Global Talent Director; Talent Director, Africa; HR Director, Europe, West Latin America and Caribbean, Global Functions
Previous relevant experience: various HR roles, Diageo, Stakis Group and Hilton Hotels
11 Tom Shropshire,
General Counsel & Company Secretary
Nationality: American/British
Appointed: July 2021
Current external appointments: 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
Ivan Menezes and Lavanya Chandrashekar are also members of the Executive Committee.
Their biographies can be found on page 145.
Letter from the Chairman of the Board of Directors
Effective governance enabling growth
Dear Shareholder
I am delighted to present, on behalf of the Board, our corporate governance report for the year ended 30 June 2022, which summarises the role of the Board in providing effective leadership in promoting the long-term sustainable success of Diageo.
The Board is very conscious of the role that it plays in ensuring that Diageo operates in a manner which is consistent with the highest standards of corporate governance - doing business the right way, from grain to glass. A core element of this is the work that the Board has done over the year to ensure that Diageo contributes to wider society through sustainable, long-term practices as well as through our 2030 targets. This has included reviewing and adapting internal governance processes to ensure that ESG considerations are fully embedded within Diageo's decision-making, and that our planning and decisions can be fully informed by the environmental and societal implications of those decisions. This is of particular importance at a time when we are continuing to invest, for long-term growth, in our brands and portfolio.
Effective leadership is also dependent on a healthy, empowered and positive business culture. Diageo has a strong and long-established purpose, culture and set of values which collectively anchor our priorities and actions even in recent challenging years. The importance of culture has been particularly acute this year as our workforce adapts to new ways of working and is supported to accelerate growth of our business. Further details on how the Board has monitored and assessed culture can be found on pages 151 to 152. The Board has expanded its workforce engagement programme through all Directors directly participating in sessions with a broad cross-section of Diageo's workforce as well as through additional surveys and feedback received on the behavioural change and optimal culture required to achieve Diageo's ambition. Insights from this engagement programme have been used to inform the steps taken by the Board to simplify ways of working and to improve efficiency of systems and processes, with the goal of empowering our people through enabling more agility and speed in execution. More details of how we have engaged with and listened to our people is set out in our workforce engagement statement on page 161.
Diageo is performing strongly despite the challenges of the pandemic over the last few years, continued instability in the global environment and economic uncertainty, and current inflationary pressures on supply chains. Performance is dependent on the Board providing effective leadership and setting Diageo's strategic priorities, enabling swift execution by management underpinned by a transparent and values-based culture. We will continue to refine and develop our governance processes, to ensure robustness and efficiency, at Board level and throughout the company, in a way which enables the creation of sustainable long-term value for our shareholders and other stakeholders.
Javier Ferrán
(Chairman)
Corporate governance report
Enabling our ambition
Corporate governance structure and division of responsibilities
| | | | | | | | |
Leadership | | Independent oversight and rigorous challenge |
Chief Financial Officer | | Non-Executive Directors |
Lavanya Chandrashekar | | Melissa Bethell, Valérie Chapoulaud-Floquet, Sir John Manzoni, Lady Mendelsohn, Alan Stewart, Ireena Vittal and Karen Blackett |
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 Is a member of the Executive Committee | | 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. |
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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 Leads the Executive Committee Manages the company and the group Along with the Chief Financial Officer, leads discussions with investors Is supported in his role by the Executive Committee Is supported by the Finance Committee and Filings Assurance Committee in the management of financial reporting of the company | |
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Chairman | | Senior Independent Director |
Javier Ferrán | | Susan Kilsby |
Responsible for the operation, leadership and governance of the Board Ensures all Directors are fully 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 Directors Acts as designated Non-Executive Director for workforce engagement | | 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 |
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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 |
Board of Directors
Composition of the Board
The Board comprises the Non-Executive Chairman, two Executive Directors, the Senior Independent Director, and seven independent Non-Executive Directors. The biographies of all Directors are set out in this Annual Report on pages 145-147.
During the year, the composition of the Board has not changed other than for the appointment of Karen Blackett as an additional Non-Executive Director with effect from 1 June 2022. With the retirement of Siobhán Moriarty from the company, Tom Shropshire took over as General Counsel and Company Secretary on 30 September 2021.
Inclusion and diversity
The Board sees championing inclusion and diversity as one of the key enablers for achieving Diageo’s ambition. It is also a core principle of the 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 performing business. As part of this, the Board has adopted a written Board Diversity Policy 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 director from a minority ethnic group. Currently, women make up 64% of the Board and there are five directors (45%) who self-disclose as being from minority ethnic groups. Further information can be found in the ‘Our people’ and ‘Champion inclusion and diversity’ sections of ‘Our strategic priorities’ on pages 30-31 and 41-43.
The Board's Diversity Policy is available at https://www.diageo.com/en/our-business/corporate-governance/board-diversity-policy.
Outside interests and conflicts
The Board has adopted guidelines for dealing with conflicts of interest, with directors' outside interests being regularly reviewed and responsibility for authorising conflicts of interest reserved for the Board. In the case of a 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 2022 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 on all governance matters. During the year, the Non-Executive Directors met without management present five times, and also without the Chairman present twice. The terms of reference of Board Committees are reviewed regularly, most recently in July 2022, and are available at https://www.diageo.com/en/our-business/corporate-governance.
Corporate governance requirements
The principal corporate governance rules applying to Diageo (as a UK company listed on the London Stock Exchange) for the year ended 30 June 2022 are contained in 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 2022 can be found on page 166. 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 Euronext Dublin Exchange, the Euronext Paris Exchange and the New York Stock Exchange (NYSE), and as such is subject to applicable rules of those exchanges and jurisdictions. 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.
Structure and division of responsibilities
The Board is committed to the highest standards of corporate governance and risk management, which is demonstrated in its established corporate governance framework, illustrated on 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 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 approved 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.
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| FURTHER DETAILS ON THE BOARD COMMITTEES CAN BE FOUND IN THE SEPARATE REPORTS FROM EACH COMMITTEE ON PAGES 145-149, AND DETAILS OF THE EXECUTIVE COMMITTEE CAN BE FOUND ON PAGE 148 |
Board skills and experience
Having an appropriate mix of experience, expertise, diversity and independence is essential for Diageo's Board. Such diverse attributes enable 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 145-149, and a matrix of the Board’s current skills and experience is set out in the chart below.
Board attendance
Directors’ attendance record at the last AGM, scheduled Board meetings and Board Committee meetings, for the year ended 30 June 2022 is set out in the table below. 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 2021 AGM was held for the first time 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.
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| Annual General Meeting 2021 | Board (maximum 7) | Audit Committee (maximum 5) | Nomination Committee (maximum 6) | Remuneration Committee (maximum 5) |
Javier Ferrán | ü | 7/7 | 5/51 | 6/6 | 5/51 |
Ivan Menezes | ü | 7/7 | 3/51 | 6/61 | 5/51 |
Lavanya Chandrashekar | ü | 7/7 | 5/51 | 0/0 | 2/21 |
Susan Kilsby | ü | 7/7 | 5/5 | 6/6 | 5/5 |
Melissa Bethell | ü | 7/7 | 5/5 | 6/6 | 5/5 |
Karen Blackett2 | N/A | 0/0 | 0/0 | 0/0 | 1/1 |
Valérie Chapoulaud-Floquet | ü | 7/7 | 5/5 | 6/6 | 5/5 |
Sir John Manzoni | ü | 7/7 | 5/5 | 6/6 | 5/5 |
Nicola Mendelsohn | ü | 7/7 | 4/5 | 6/6 | 5/5 |
Alan Stewart | ü | 7/7 | 5/5 | 6/6 | 5/5 |
Ireena Vittal | ü | 6/7 | 5/5 | 6/6 | 5/5 |
1. Attended by invitation
2. Appointed to the Board on 1 June 2022
Elections
The Chairman has confirmed that the Non-Executive Directors standing for election or re-election at this year’s AGM continue to perform effectively, both individually and collectively as a Board, and that each Non-Executive Director demonstrates commitment to their 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 below, directors’ attendance levels have been consistently high throughout the year ended 30 June 2022.
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 focussing on key strategic matters, including the digital economy, reserve and luxury portfolios, disruptive consumer trends, ESG, culture and capabilities 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 regular reports on the macro-economic environment, world events and emerging trends Reviewed strategic topics including the group's beer and scotch whisky portfolios, tequila supply and resourcing strategy, potential post-pandemic tax and regulatory developments, e-commerce and digital strategy and the group's strategy in India | | | |
Operational matters | Reviewed and approved the annual funding plan, insurance, banking and capital expenditure requirements Reviewed the impact of global trade developments and disputes Regularly reviewed and approved the group’s M&A and business development activities, reorganisations and various other projects Reviewed and approved the group's supply chain activities, including supply footprint and capital expenditure investments, and various significant procurement, systems and other contracts Reviewed the company’s innovation pipeline Reviewed the company’s capital allocation, funding and liquidity positions, including those of its pension schemes, and approved interim and final dividends Reviewed and approved the recommencement of the company’s share buyback programme Acting through the Nomination Committee, reviewed the company’s succession planning and talent strategy | | | |
ESG matters | Carried out an investor perception survey and report to understand investor sentiment Received reports on workforce engagement over the year Received regular investor reports During each quarter, received an update 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 Approved the appointment of a new Non-Executive Director Reviewed schedule of matters reserved for the Board and terms of reference of its committees | | | |
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, including in relation to supply chain disruption 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 15, 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 their interests are and how the Board and company engages and responds.
How stakeholder engagement informs our decision-making
Our people
Our people are at the core of our business. We aim to build a trusting, respectful and inclusive culture where our people feel engaged and fulfilled. We want our people to feel that their human rights are respected and that they are treated with dignity at work.
What matters to them
Prioritisation of health, safety and wellbeing; Learning and development opportunities; Purpose, culture and benefits; Contributing to the growth of our brands and performance; Promotion of inclusion and diversity; Sustainability
How the Board engages and responds
The Board maintains an active dialogue with Diageo’s employees and wider workforce, including contractors and temporary staff. As travel restrictions were lifted during the year, Directors were able to resume travel and site tours including visits to the group’s offices in London, its consumer experience centres at Johnnie Walker Princes Street in Edinburgh and at the Guinness Storehouse in Dublin, and its production sites, distilleries, maturation facilities and packaging plants in Scotland and its brewery and distillation sites in Ireland. These visits enable the Board to engage directly with local management and other employees during presentations, site and trade visits, as well as at social events. Indirect engagement with employees also takes place through works councils, employee and workforce forums, community groups, pulse surveys and town hall meetings, most of which have been conducted virtually this year. The global survey of employees known as Your Voice is carried out annually and its findings are reviewed by the Board. This year our Non-Executive Directors have taken part in the Board's engagement programme, engaging directly with a wide range of employees in different markets, supporting the Chairman in his role as designated non-executive director for workforce engagement.
These direct engagements have enabled our Non-Executive Directors to have candid and constructive discussions with employees, to understand better their views and experiences of working at Diageo, including what works well and what needs improvement. Common themes and feedback from these engagement sessions are reported by the Chairman and other participating Directors to the rest of the Board. For example, the need to collaborate and further simplify internal decision-making processes across the business, in order to enable more pace and agility, had been identified through these engagements. Following this feedback, management encouraged the formation of cross-functional ’sprint teams’ to identify, focus on and swiftly address specific risks and opportunities for the business.
Diageo’s Workforce engagement statement is set out on pages 161-162.
Consumers
Understanding our consumers is critical for the long-term growth of our business. Consumer motivations, attitudes and behaviour form the basis of our brand marketing and innovation. We want our products to be enjoyed responsibly and for consumers to 'drink better, not more'.
What matters to them
Choice of brands for different occasions, including no- and lower-alcohol; Innovation in heritage brands and creation and nurturing of new brands; Responsible marketing; Great experiences; Product quality; Sustainability and societal credentials; Price
How the Board engages and responds
The Board is aware that the company’s continued success is dependent on having a deep understanding of our consumers, their behaviours and motivations and on the company’s ability to respond to those consumer insights by ensuring that it has an attractive portfolio of products across multiple categories, channels, markets and price points. The Board regularly reviews emerging consumer trends at the Annual Strategy Conference, during which the Board receives presentations from senior executives on emerging trends, the risks and opportunities resulting from those trends and how the company is responding to them. At this year’s Annual Strategy Conference held in May 2022, the Board reviewed in particular the digital economy, Reserve and luxury brand portfolios, disruptive
consumer trends, and the importance of ESG to consumers. At other meetings during the year, the Board has reviewed the group’s innovation pipeline, its e-commerce strategy and digital capabilities, new consumer attitudes and public policy priorities as economies recover from the pandemic. The Board has also reviewed the potential impact of inflationary pressures on consumer behaviour and on the ability of the company's supply chain to respond to evolving consumer trends. The Board has consciously made capital allocation and strategic decisions based on these consumer insights, investing in additional production capacity in growing categories such as tequila, consumer experience centres, including the Guinness microbrewery and culture hub in London, and actively managing the group's portfolio through acquisition and divestment.
Customers
We work with a wide range of customers, big 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 matters 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 engages and responds
Maintaining a broad portfolio with consumer offerings at a variety of price points and categories is also a key priority for customers, as it is for consumers and therefore for Diageo. The Board regularly reviews both innovation and inorganic opportunities to enhance the company's portfolio and to ensure that it has sufficient breadth and depth in its portfolio to meet consumer demand. During the year, the Board has continued to shape the group's portfolio of brands through disposals, including of brands such as Picon sold in May 2022 and acquisitions of brands such as the fast growing super-premium flavoured tequila brand 21Seeds. In addition to inorganic opportunities, during the year the Board has approved investment in new research and development facilities in Shanghai to further our product innovation capabilities, using insights into consumer behaviour and shopper trends to enable the development of new products which appeal to Chinese consumers and enhance our portfolio offering for local customers.
Suppliers
Our suppliers, service providers and agencies are experts in the goods and services we need to create and market our brands. We collaborate with them to deliver high quality products, marketed responsibly, and to improve our collective impact, ensure sustainable supply chains and make positive contributions to society.
What matters to them
Strong, mutually beneficial partnerships; Strategic alignment and growth opportunities; Fair contract and payment terms; Collaboration to realise innovation; Consistent performance measures; Joint risk assessment and mitigation; Sustainability and societal credentials
How the Board engages and responds
Ensuring resilient and robust supply chains has been a priority for the Board during the year. The Board has reviewed the group's supply footprints in key markets including North America with the aim of ensuring resilience and flexibility in its supply chain, responding to climate change risk and reducing its environmental impact as well as responding to emerging consumer trends in relation to convenience and the 'at home' occasion. The Board has also reviewed and approved a number of significant procurement agreements over the year, diversifying the sourcing of certain key raw materials and components such as glass bottles and cans, in order to procure sufficient production materials to meet projected consumer demand over a number of years. 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, compliance with Diageo’s ‘Partnering with Suppliers Standard’, working collaboratively to mitigate our impact on the environment through shared best practice and learnings in respect of ESG commitments such as our 'Society 2030: Spirit of Progress' goals.
Principal Board decision - Investing in tequila to support long-term growth
Over the past few years, tequila has been one of the fastest growing spirits categories with Diageo’s organic net sales having grown 25% in F20, 79% in F21, and 55% in F22, through brands such as Casamigos, Don Julio and DeLeón. Continued growth is expected in the tequila category as a result of strong demand from customers and consumers, especially in North America. Since tequila is produced from agave plants grown only in the Jalisco region in Mexico, usually with a maturity of six or more years old, securing availability of adequate volumes of high quality raw materials is of critical importance to ensure continued supply to meet the demands of consumers and our customers. The supply of agave is also largely dependent on a large number of small-scale growers with limited infrastructure and capability to supply large volumes of raw materials, resulting in a volatile commodity market. In addition, while Diageo had existing distillation, warehousing and maturation facilities at El Charcón in Atotonilco El Alto, Jalisco, these were insufficient to meet forecast volumes over the long-term. Recognising the need for both agility in securing adequate raw materials in the short-term and for strategic investment in the company’s production capacity over the long-term, in April 2021 the
Board approved a delegation of authority to a dedicated tequila supply council to make purchases of agave and liquid within certain parameters during the course of fiscal 22 while also authorising management to review various options to expand its production footprint in Jalisco including through acquisition or expansion. At subsequent Board meetings throughout the year, the Board monitored the levels of investment incurred on agave and liquid under that delegated authority while also approving plans to expand its manufacturing footprint in Mexico through an investment of more than $500 million. The Board also reviewed management’s supply chain and procurement strategy for tequila, which took into consideration management’s updated assessment as to the long-term volume growth of the category, the company’s approach to agave procurement and its capital investment requirements in direct operations and contracted supply. There were multiple factors which the Board took into consideration when making these decisions, including potential impacts on different stakeholder groups as required under s.172 of the Companies Act, for example:
• the potential demands of consumers and customers over a 10-year timescale, including under different growth scenarios, and the need for robust forecasts and modelling in demand and growth over such an extended period;
• the potential for surplus agave availability over that same period, given planting and growth cycles, and any consequent impact on pricing;
• implications of the expansion of existing production facilities or the construction of new facilities on the ability of the company to achieve its 'Society 2030: Spirit of Progress' targets, including incorporating sustainability by design into capital expenditure planning through, for example, investment in renewable energy, reduction of carbon emissions and efficiencies in water usage;
• assessing and balancing the impact of expanding our supply footprint on the local environment and communities including responsible water use in areas suffering from water-stress and the potential for increased employment and development opportunities in the local community, including through initiatives such as Hablemos de Emprendedoras, a skills programme for female entrepreneurs in Jalisco; and
• the ability of third party suppliers and contractors to meet Diageo's requirements, not only as to quality, volume, price and standards, but also as to compliance with our Partnering with Suppliers policy setting minimum standards in areas such as human rights, health and safety, inclusion and diversity, and environmental sustainability.
Communities
We aim to create long-term value for the communities in which we live, work, source and sell. By ensuring we empower people, increase their access to opportunities and champion inclusion and diversity, we can help build thriving communities and strengthen our business.
What matters 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 and sustainability; Transparency and engagement
How the Board engages and responds
The Board considers the maintenance of close and supportive relationships with the communities in which Diageo operates to be of particular importance to the company, especially given the impact of inflation and economic instability on communities recovering from the impact of the pandemic. During the year, the Board has regularly reviewed progress towards the company's 'Society 2030: Spirit of Progress' goals including in relation to those which impact on communities and broader society. The Board has also supervised the second year of the 'Raising the Bar' programme, Diageo's $100 million fund supporting the recovery of the on-trade and hospitality industry which concluded at the end of the financial year.
Investors
We 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 shares and the opportunities and risks of investing in our business.
What matters to them
Strategic priorities; 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 engages and responds
The Chief Executive and Chief Financial Officer are in regular contact with investors with the assistance of the investor relations department, and as such engage directly and most frequently with investors using a variety of different engagement methods. For example, in November 2021 the Chief Executive, Chief Financial Officer and other senior executives hosted a Capital Markets Day with investors which included sessions on brand building, supply chain, long-term sustainable growth and culture. The Board is also provided with monthly investor relations reports, which includes coverage of the company by sell-side analysts. The Board ensures that all Directors develop an understanding of the views of major institutional shareholders through a periodic independent survey of shareholder opinion, which was carried out this year. In addition, major shareholders are invited to raise any company matters of interest to them at meetings with the Chairman of the Board, the Chairman of the Audit Committee, the Chairman of the Remuneration Committee or any other Director. Shareholders are invited to write to the Company Secretary, Chairman or any other
Director and express their views on any issues of concern at any time, including by way of email to a dedicated address for the Company Secretary and his team. The AGM also provides a regular opportunity for shareholders to put their questions in person and to hear other shareholders put their questions to the Board. The 2021 AGM was held as the company's first 'hybrid' meeting with shareholders attending both physically, as in traditional AGMs, or by remote or virtual means, while still being able to engage directly with the Board, viewing the meeting online, asking questions and voting on resolutions through a portal.
Governments and regulators
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.
What matters to them
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 responsible drinking initiatives; Climate change and wider sustainability agenda, including carbon reduction, human rights, environmental impacts, sustainable agriculture and support for communities; Corporate behaviour
How the Board engages and responds
The Board engages indirectly with government, regulators and policymakers 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 the macro-economic environment, world events and emerging geopolitical trends. Management provided the Board with an analysis of potential developments in regulation and tax policy as countries recover from the pandemic. 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
Fiscal 22 has been another year of volatility and instability resulting from supply chain disruption, inflationary pressures and dislocation. Despite this instability, the Board and executive management have continued to engage with the company’s stakeholders and respond to their needs in a variety of ways, including:
• The company’s $100 million global ‘Raising the Bar’ programme, in its second year during fiscal 22, continued to support customers, pubs and bars recover from hardship resulting from the pandemic and enabling them to serve their consumers. The programme allows us to respond with flexibility to address specific issues faced in different markets; for example, in India this year the fund was used to support the vaccination of bar staff.
• With travel restrictions lifting in a number of markets, the Board has resumed physical meetings and visits to Diageo offices and production sites, enabling face-to-face engagement sessions with our workforce again. See page 96 for more details of our workforce engagement programme this year.
• Senior management travelled to meet and engage with key North American customers in New York and distributors from Asia-Pacific in Singapore.
• Executive directors and senior management hosted more physical meetings with investors and shareholders during the year, including in London and New York, while also continuing with virtual meetings where appropriate given the circumstances, including for example the Capital Markets Day in November 2021.
Further information on our stakeholders, what is important to them and how the Board engages and responds to them can be found on pages 156-159. A case study summarising how key stakeholder considerations were taken into account by the Board in relation to one of its principal decisions during fiscal 22 is set out on page 159.
Executive direction and control
Executive Committee
The Executive Committee, appointed and chaired by the Chief Executive, supports him in discharging his 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, Supply Chain and Procurement and Corporate. The Executive Committee focussesfocuses 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 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.
Performance evaluation
From September to December 2020, an externally facilitatedWith the assistance of the Company Secretary, the evaluation of the Board’sBoard's effectiveness, including the effectiveness of the ChairmanBoard's Committees and other Directors and the Board’s Committees,directors, was undertaken. The external facilitator was Ffion Hague of Independent Board Evaluation (IBE), a professional consultancy which specialises in board reviews and evaluations. Ffion Hague and IBE have no other connection with the company and were selected following a competitive tender process overseen by the Nomination Committee.
undertaken from December 2021 to January 2022. The purpose of the evaluation was to conduct a comprehensive 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 in accordance withProvisions 21, 22 and 23 of the UK Corporate Governance Code guidance. The evaluation also measured the Board against sector and market cap peers.Code.
2020 - external evaluation process
A comprehensive brief was given to the IBE assessment team by the Chairman in September 2020.
From September 2020, Ffion Hague conducted interviews with every Director and the Company Secretary. All participants were interviewed one to one for 1.5 hours. Feedback from non-board members who participate in Board and Committee meetings and external advisors was also gathered as part of the evaluation.
Ffion Hague observed the main Board and Committee meetings in October 2020 and was provided with access to supporting materials for briefing purposes.
A report was prepared by Ffion Hague and was discussed with the Chairman and subsequently the entire Board at its December 2020 meeting. Feedback was also provided to Committee chairmen on the performance of each Committee. The Board’s feedback for the Chairman was also discussed with the Senior Independent Director.
Tender and selection process
The last externally facilitated evaluation of the Board was carried out in 2017. After internal evaluations carried out in 2018 and 2019, in accordance with Provision 21 of the Code, another externally facilitated evaluation was conducted during the autumn of 2020.
At its meeting in April 2020, the Nomination Committee approved the initiation of a tender process for potential evaluators. With assistance from Diageo’s procurement function, the tender process was carried out during June and July 2020 with participants providing written proposals for review by the Company Secretarial team. The principals of two shortlisted reviewers gave presentations and Q&A sessions with a panel including Diageo’s Company Secretary and Chairman. Following completion of the process, IBE was selected as the preferred reviewer and a recommendation was made by the Nomination Committee to the Board to appoint IBE at its meeting in July 2020. This was the first time IBE has conducted a performance evaluation for the company. The evaluation procedure was agreed with IBE as part of the tendering and engagement process.
Comments and analysis
An important point of context of the review was that, in common with most boards, the Board had been meeting by video conference since the beginning of the Covid-19 global pandemic in March 2020. In addition, at the time of the review, the Board was in a state of transition with a long-standing executive team balanced by a non-executive group, which included three directors who had been recently appointed following the retirement of long-standing former directors at the expiry of their terms. The global situation made it difficult for Board members to visit the company’s offices, sites and plants as part of the induction process. However, underlying governance processes were seen as strong and gave members confidence in the culture and conduct of the business. Strong mutual respect was recognised between Board and management teams with an open approach to meeting between individual Board members and senior managers. The quality and depth of governance processes underpinning Board work was recognised as a source of pride for both Board members and the teams who support them.
The review identified opportunities for the Board and recommended areas of focus and action, several which are highlighted below.
SummaryDecember 2021 - Internal evaluation process
This year's evaluation process was performed internally, comprising of a questionnaire sub-divided into five sections focussing respectively on Board composition and processes, Board effectiveness, behaviours and performance, individual Directors’ performance and Committees’ 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 Board at its meeting in January 2022 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 2023 will be undertaken with the assistance of an external facilitator. 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 recommendations and actionsareas for focus highlighted by the December 2021 evaluation are set out in the table below.
Board evaluation
| | | | | |
Key recommendationsMain conclusions | Actions taken/to be takenKey actions for focus |
ChallengeBoard composition, membership and drive to actionappointment processes | |
– Ensure•Recent appointments of directors have ensured appropriate quality, experience, background and diversity on the Board
•Strong satisfaction that the Board is of sufficient private sessions between Executive Directorssize, balance, skills and Non-Executive Directorsdiversity to discharge its duties | •Review succession planning and adequate time allocation for discussion. – Assess effectiveness of Board’s input through more post-decision reviews. – Increase regular engagement between Boardpipeline at executive and local leaders in key markets. – Use Annual Strategy Conferencesenior management levels •Continue to identify and determine schedule of strategic and operational risks for review by Board or Audit Committee during following year. – Ensure rightthe balance of challengeskills, experience and support is provided, using external or alternative viewpointsknowledge of the Board •Continue to ensure robust decision-making processes. | – Ensure that there are regular private sessions between Non-Executive Directors. – Provide guidance to presentersreview and those drafting papersenhance induction programme for meetings. – Include more frequent feed back in relation to workforce engagement. – Consider extending post-completion reviews for other significant projects or decisions, in addition to existing business development review process. – Set up more frequent meetings per year for Non-Executive Directors with workforce and top talent. – Once travel is permitted, circulate the Chairman’s travel schedule to all Non-Executive Directors in case they are able to join him.new directors |
InductionBoard administration, meetings, agenda and developmentprovision of information | |
– Tailor induction programmes•Strong satisfaction for new Non-Executive Directors, using suggestions from Nomination Committee. – Consider introducing virtual toursthe layout and format of productionBoard papers
•Ensure adequate time is allocated for presentations, deep-dives and other facility sites while travel is difficult. – Once travel is permitted, consider refreshing induction programmesdiscussion during meetings •Ensure appropriate topics for those Non-Executive Directors who have joinedconsideration at meetings | •Continue to build Board’s awareness of analysts’ views of the industry by circulating key reports periodically •Enhance tracking and reporting of key issues and actions taken during pandemic. – Ensure new Non-Executive Directors’ development is supported through tailored educationthe year •Continue to improve Board papers and training.minutes processes | – Nomination Committee to provide recommendations as to induction sessions for newly appointed Non-Executive Directors. – Ensure that all Non-Executive Directors who have recently joined have the opportunity to visit production facilities and meet senior leaders once travel is permitted. – In the meantime, provide Non-Executive Directors access to virtual video tours of production and other sites. |
Succession planningBoard, Committee and Directors’ effectiveness and performance | |
– Ensure•Discussions amongst Directors are transparent, supportive and challenging
•Support for private sessions attended by Non-Executive Directors •Board has sufficient visibility and clarity as to wider stakeholder interests in its decision-making processes | •Focus on forecast volumes in investment and capital expenditure proposals •Increase focus on diversity continues. – Ensure regular structured engagement between Nomination Committee members and high potential internal candidates. | – External and internal talent searchESG matters to continue to have strong focusenable more detailed reviews on broad diversity. – Review and enhance meanstopics, including the 'Society 2030: Spirit of engagement between Nomination Committee members and high potential internal candidates.Progress' ambition, throughout the year |
Nomination CommitteeCulture, values and purpose | |
– Nomination Committee•Satisfaction with how values and expected behaviours have been communicated within the company and externally to be involved in tailoring induction programmes for new Non-Executive Directors. – Continue external talent search for executivestakeholders
•Strategy of the company is consistent with its purpose, values and senior leader roles as well as feeding into plans for developing internal talent.ambition •Demonstration of ethical leadership and display of the behaviours expected •Strong sense of understanding of the 'Society 2030: Spirit of Progress' ambition, its five pillars, targets and progress | – Nomination Committee•Use ‘Pulse’ surveys to provide recommendations for future induction programmes, tailored for specific new Non-Executive Directors dependinginitiate sessions on their background/experience. – Continue focus on executiveculture from employees and senior leader talent succession-planning topics during meetings.other stakeholders’ perceptions
|
Remuneration Committee | |
– Continue to ensure that executive remuneration remains benchmarked and competitive compared to peer groups. – Add regular private sessions for Non-Executive Directors at the end of each meeting. | – Robust benchmarking of executive remuneration to continue. – Agenda of each meeting to include private session between Non- Executive Directors only. |
Audit Committee | |
– Continue scheduling risk reviews and deep dives throughout annual cycle. – Continue existing practice of appointing a sub-committee with expertise to review early drafts of financial results and disclosures. | – Agree annual schedule of risk deep dives for review aligned with management risk reviews. |
Workforce engagement statement
OurAt Diageo we believe that our people are our most important asset and an inclusive and diverse culture is core not onlycritical to our purposecompany’s success. In support of ‘Celebrating life, every day, everywhere’ butthis, we strongly believe is also a source of competitive advantage for Diageo. Diversity of thought fuels growth and innovation in our organisation, attracts and retains the best talent, drives higherplace significant focus on sustaining high levels of employee engagement, and helpscreating an environment where our people feel listened to.
To help us better understand our customers and the communities whereemployees’ experience of working at Diageo, we operate.
Throughlisten to their views using both formal and informal engagement channels, we seek to understand our employees’ views on how they experience work at Diageo. These insights help shape our culture, policies, and practices to make Diageo an attractive place to work. Thechannels.
Diageo’s workforce engagement sessioninitiative is an important formal channel for our Chairman and Non-Executive Directors to gather employees’ viewsemployee insights and ideas as well as enabling usfeedback when it comes to explain someDiageo’s culture, strategy and ways of our governance processesworking. It is also an opportunity for employees to employees, including in relationhave direct access to executive remuneration.members of the Board.
On 1 July 2019, the Chairman was appointed the designated Non-Executive Director for workforce engagement on behalf of the Board.Board, with sessions taking place throughout the year.
Over the past year,In line with this, in fiscal 22 the Chairman hasand our Non-Executive Directors met with over 9001,435 Diageo employees in 1216 meetings, representing different levels, functions, and regions. These
Most of these open and constructive sessions which werehave been held virtually, duehowever following the easing of Covid-19 travel restrictions in many parts of the world, during the second half of the fiscal year, the Chairman was also able to Covid-19 related travel restrictions,conduct four of these in person.
Sessions have been highly engaging and the Chairman, has been impressed withas well as our Non-Executive Directors, have valued the levelconversations which have highlighted many of the strong positive engagement and candour in each discussion. This is particularly noteworthy given the challenging year that many people have experienced, both at home and at work. Employees at Diageo continue to demonstrate strong passion and pride in the company, its iconic brands, and our collaborativeaspects of Diageo’s culture.
The themes emerging from these workforce engagement discussions are:
– The importance•Diageo’s advantaged culture was called out as a strong positive - and a source of clearpride - in a number of sessions, with inclusion and timely communication of business prioritiesdiversity, global brands and trust in leadership called out as key reasons.
•Diageo’s leadership in response to Covid-19 and the actions neededsense of pride that this has generated amongst colleagues was highlighted in several sessions.
•As a business we are doing more to give colleagues opportunities to work cross-functionally, something that they would like to see continue. There is also appetite for Diageofurther exposure to win quality market share while investing in key brands. Employees have valued the regular updates from leaders on the “emerging stronger” themesglobal job opportunities.
•Some colleagues highlighted that we could do more to strengthen our culture of being bold and priority areas, focusing our employees on what matters most to the business.
– Employees are proud of the support that Diageo provided to its communities and partners during the global pandemic, including the ‘Raising the Bar’ programme of $100 million support to help pubs and bars reopen safely around the world,experimenting, for example by becoming better at discussing failures as well as over 8successes.
Governance (continued)
•Colleagues mentioned that they feel positive towards the efforts made to simplify systems, tools and processes. They also highlighted that there are further opportunities to simplify as part of Diageo’s Radical Liberation initiative.million bottles•Some colleagues highlighted positive changes in ways of hand sanitiser donated to health workers and those onworking since the front line tackling Covid-19. Employees felt very well supported throughoutoutbreak of the pandemic, especiallyincluding increased collaboration, flexibility and cross-functional working. However, it was also raised by some that workloads have felt increasingly demanding in the past two years.
•Our focus on 'Society 2030: Spirit of Progress' is seen as a positive. There is pride in how this not only enhances our reputation, but also how it provides Diageo with a platform to further engage with, and positively influence stakeholders in this space.
•It was acknowledged that Covid-19 has accelerated the focus on physicaldigital, data and mental health and well-being, reflecting management’s decision to give the highest priority to the health, safety, and wellbeing of employees.
– Diageo’s culture is described as positive, engaging, and inclusive. The launch of progressive policies such as the Flex Philosophy, a framework to support employees to work flexibly, and enhanced Parental Leave policies were some of the examples shared of how Diageo continues to foster an inclusive culture. The introduction of quarterly individual performance goal setting has ensured employees felt and contributed directly to greater pace in delivering the business’s priorities.e-commerce agendas within Diageo. There is also growing appetitea desire for continuous learning,the company to lead the way in this area in order to drive growth and meet our consumers’ and customers’ changing needs.
•Diageo’s drive for innovation was highlighted as a key strength in a number of markets and functions, with employees providing very positive feedback on the company’s learning platform, My Learning Hub,a desire to access and develop new skills in an easy and engaging way.
– Employees continue to feel a deep sense of pride in the company’s brand heritage, commitment to communities, and progress against inclusion and diversity. Diageo’s ‘Society 2030 Spirit of Progress’ goals reflect the company’s intent to make Diageo and the communities we serve truly sustainable and inclusive. Throughout the company, employees cited new examples of how the company is championing inclusion and diversity both internally and externally – from supporting Historically Black Colleges and Universities in the US to the support for farmers with disabilities in Kenya.do more.
– Employees shared ideas and opportunities for further simplification of systems and processes to enable even faster execution; reinforcing a risk-taking and experimental culture; and greater collaboration across markets, with a recognition of the progress already made in all these areas over the past 12 months.
These themes were also reflected in the strong set of results in the recent ‘Your Voice’ annual employee survey, where 89% of respondents stated they are proud to work for Diageo.
Feedback from workforce engagement sessions was discussed at the January 2021 and April 2021 Board meetings and theThe insights helped to inform broader Board and management decisions. As part of the consideration of appropriate annual and long-term incentive outcomes for executives and for the wider employee population, the Remuneration Committee took account of the company’s holistic performance through a period of extraordinary change, unpredictability and uncertainty, reflecting not only performance against financial metrics but also the actions taken by leaders and employees to protect the longer-term interests of the business. This included decisions taken to ensure quality market share gain and investment behind brands, but also the ways in which Diageo supported communities, customers, suppliers, and employees throughout the pandemic. Employee engagement has been exceptionally high (1% up on the already high score for the previous year), despite very challenging circumstances. The Remuneration Committee also considered the feedbackgathered from the workforce engagement sessions are reviewed and discussed periodically at Board meetings, something that employees believe that Diageo has actedhelps to protect their health, safetyinform key decisions. This year, insights were also discussed as part of a culture session during the Annual Strategy Conference in May.
Insights from the workforce engagement sessions and wellbeing, including through actions such as Time Off Benefits, Employee Assistance Programmes, Wellbeing Education and Flexible Working Policies.
In the coming year, the Chairman will continue to hold these sessions with a broad representation of employees. In addition, other Non-Executive Directors will continue to meet with employees through the year to increase further coverage of the workforce. The focusforms of engagement sessions in F22 will be aroundhave helped ensure we listen and respond to the progress made onperspectives of our employees and identify specific areas previously identified for improvement, deepening the workforce’s understanding of how executive pay decisions are made, and any other key topics employees believe the Board should consider.to further enhance our employee experience.
Purpose, values and culture
Diageo’s purpose has always been clear: to celebrate life, every day, everywhere. Our people andadvantaged culture at Diageo connects people's passion for our brands embrace thisand purpose, drives ownership for performance, and is a key enabler in everythingdelivering our company does, creating sustainable valuePerformance Ambition. The ongoing evolution of our culture and capabilities is fundamental to successful talent attainment, engagement and retention, and therefore critical to our performance and growth. We have built a strong reputation for allinclusion and diversity which, together with our stakeholders while ensuring'Society 2030: Spirit of Progress' goals, has helped establish Diageo as an employer of choice to attract the very best talent. Through the Covid-19 pandemic, we have a positive impact onbecome more agile and resilient, enabled by flexible resource allocation as well as fuelling more measured risk taking and experimentation across the communities where we live, work, source and sell. Our people strategy is to attract and retain the best talent in an inclusive, continuous learning environment, where employees can enjoy fulfilling careers. Ourorganisation. This culture is reinforced by Diageo’sDiageo's Code of Business Conduct which applies to all employees across the world and gives all our employees thethem tools and guidance to enable them to make the right choices and demonstrate the highest standards of integrity and make the right choices.integrity.
As set out in the schedule of matters reserved for the Board for decision, the Board is responsible for establishing Diageo’s purpose, values and culture. It therefore has a responsibility to monitor and assess how embedded these areDiageo's culture is and for ensuring that all policies and practices are aligned with them.its culture. There are a number of ways in which the Board monitors and assesses culture, including:
Site visits
Prior to the Covid-19 pandemic, Directors were encouraged wherever possible to visit the group’s offices, production facilities and sites so that they can get a better understanding of the business and interact with employees and the wider workforce. While during the pandemic travel has been recentlywas highly restricted, we anticipate thatin more recent months site visits by Directors will resumehave resumed: Directors visited the company's new headquarters in London as well as its production facilities in Scotland and Ireland where they allow Directorswere able to see Diageo’s safety and sustainability processes, to talk with local management and workforce and to assess how effectively Diageo’s culture is communicated and embedded at all levels. By virtueAs part of his role as designated non-executive director forthe Board's workforce engagement prior to the pandemicprogramme, the Chairman wouldand other Non-Executive Directors regularly travel tohold in-person and virtual meetings, townhalls and question and answer sessions with Diageo employees in different sites across the world. Other non-executive directors were provided with his travel schedule and were encouraged to join him.
Governance (continued)
locations.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 employee perceptionsand 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. This year, due to the dislocation caused by the pandemic, there have been a number of employee pulse surveys which have focussed on areas such as wellbeing, the results of which have been used to determine how to support the workforce better.
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 whistle-blowing service SpeakUp. These reports also include analyses of emerging trends, investigation status reports and closure rates, and summaries of actions taken. These reports enable directorsthe 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 pages 15955 and 178.163.
Workforce engagement programme
Insights drawn from the Chairman’s annual programme of workforce engagement are also used by the Board to monitor and assess the culture of the company. This yearIn recent years the engagement programme has been expanded to enable other non-executive directorsNon-Executive Directors to support the Chairman by directly engaging with employees from a variety of regions, functions and levels in the business. For more on workforce engagement, see pages 165-170.
Filings Assurance Committee
The Filings Assurance Committee of the company, which is chaired by the Chief Financial Officer and includes the Chief Executive, is responsible for implementing and monitoring the processes which are designed to ensure that the company complies with relevant UK, US and other regulatory reporting and filing provisions, including those imposed by the U.S. Sarbanes-Oxley Act of 2002 or derived from it. As at the end of the period covered by the Form 20-F for the year ended 30 June 2021, the Filings Assurance Committee of the company, with the participation of the Chief Executive 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 specified in the Commission’s rules and forms and include, without limitation, controls and procedures designed 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.161-162.
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 on Risk Management, Internal Control and Related Financial and Business 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 this Annual Report dealing with principal and emerging risks on pages 7282 to 82. 92.
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, 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 Board considered the nature and extent of the risks it was willing to take to achieve its strategic goals and reviewed the existing internal statement of risk appetite, (whichwhich had been updated this year by the Executive Audit & Risk Committee and which was then considered and recommended to the Board by boththe Audit Committee. The Audit Committee review the company's principal risks regularly throughout the year in accordance with a schedule proposed by management with each such risk being reviewed by management in the Audit & Risk Commitee prior to it being considered by the Audit Committee. The Board also regularly reviews emerging and disruptive risks as part of its Annual Strategy Conference, held this year in May, from which a number of topics are identified for more detailed review by either the Board or the Audit Committee over the 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. Further details of this are set out in the Audit Committee). Committee report on pages 167-172.
Viability statement
In accordance with the Code, 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 work of the Audit Committee which recommended the Viability statement to the Board. TheFor further information about how the Board has reviewed the long-term prospects of the group, see page 46 of the Annual Report.
Going concern
Management has prepared cash flow forecasts which have also reviewed emergingbeen sensitised to reflect severe but plausible downside scenarios taking into consideration the group's principal risks. In the base case scenario, management has included assumptions for mid-single digit net sales growth, operating margin improvement and disruptive risks, initiallyglobal TBA market share growth. In light of the ongoing geopolitical volatility, the base case outlook and plausible downside scenarios have incorporated considerations for a slower post-pandemic economic recovery, supply chain disruptions, higher inflation and further geopolitical deterioration. Even under these scenarios, the group’s cash position is still expected to remain strong, as partthe group's liquidity was protected by issuing €1,650 million of its Annual Strategy Conference,fixed rate euro and £900 million of fixed rate sterling denominated bonds in the year ended 30 June 2022. 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 and dividend payments in the 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 which a numberthe date of topics have been identified for more detailed review by eithersigning the Board or the Audit Committee over the following 12 months. The companygroup's consolidated financial statements.
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 consolidated financial statements is completed by management through the Filings Assurance Committee to ensure that the financial position and results of the group are appropriately reflected. Further details of this are set out in the Audit Committee report on pages 175-179.
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 £0.39£0.64 million during the year (2020(2021 – £0.38£0.39 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 concernDirectors' responsibilities in respect of the Annual Report, Form 20-F and financial statements
Management hasThe 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 regulation. Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have prepared cash flow forecasts whichthe 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 been sensitisedelected to reflect severe, but plausible downside scenarios taking into considerationcomply with International Financial Reporting Standards issued by the group's principal risks. In our base case scenario, we expect net sales momentumInternational Accounting Standards Board (IFRSs as issued by IASB). The group has also prepared its consolidated financial statements in accordance with international financial reporting standards adopted pursuant to continue into the year ending 30 June 2022, however, we expect near-term volatility to remain. The potential financial impact of a slower Covid-19 pandemic recovery has been modelledRegulation (EC) No 1606/2002 as it applies in the plausible downside scenarios. Even with these negative sensitivities for each region taken into account,European Union.
Under company law, the group’s cash position is still considered to remain strong, as we have protected our liquidity by launchingDirectors must not approve the financial statements unless they are satisfied that they give a true and pricing €700 million of fixed rate Euro and £400 million of fixed rate Sterling denominated bonds under Diageo’s European Debt Issuance Programme. Mitigating actions, should they be required, are all within management’s control and could include reductions in discretionary spending including acquisitions and capital expenditure, as well as a temporary suspensionfair view of the share buyback programmestate of affairs of the group and dividend payments inparent company and of the next 12 monthsprofit or drawdown on committed facilities. Having consideredloss of the outcome of these assessments,group and parent company for that period. In preparing the financial statements, the Directors are comfortablerequired to:
•select suitable accounting policies and then apply them consistently;
•state whether applicable UK-adopted international accounting standards, IFRSs issued by IASB and international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union 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 Company is going concerngroup 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 least 12 monthsany time the financial position of the group and parent company and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from the date of signing the company's consolidated financial statements.legislation in other jurisdictions.
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 IFRS as issued by the International Accounting Standards Board (IASB);, in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRS adopted by the UK, and IFRSs as adopted by the EU; 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 2021,2022, 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 219215 to 221217 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’ responsibilities in respect of the Annual Report 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
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.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 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 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 190.190 of the Annual Report.
–•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 (excluding the Chairman) are independent. As such, currently sevennine of Diageo’s teneleven directors are independent.
–•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, theDiageo has complied with these requirements with independent Non-Executive Directors, metincluding the Chairman, meeting without the Executive Directors present five times and independent Non-Executive Directors meeting without the Chairman present twice to appraise the Chairman’s performance and an externally 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 withoutor Executive Directors being present.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 (save that the Chairman of the Nomination Committee, Javier Ferrán, is not independent).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 discloses in its Annual Reporthas disclosed on page 161 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.report on pages 176-209.
–•Code of ethics: NYSE rules require a Code of Business Conduct and ethicsCode of Ethics to be adopted for directors, officers and employees and disclosure of any waivers for executive directors or officers. Diageo has adopted a codeCode of business conductBusiness Conduct for all directors, officers and employees, as well as a codeCode of ethicsEthics for Senior Financial Officers in accordance with the requirements of SOX. Currently, no waivers have been granted to directors or executive officers.See page 170 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.
Audit Committee report
Ensuring integrity across the business
Dear Shareholder
On behalf of the Audit Committee, I am pleased to present the Audit Committee’s report for the year ended 30 June 2021.2022.
The role of the Audit Committee ishas carried out its duties during the year effectively and to monitora high standard, providing independent oversight with the support of management and reviewexternal auditors.
During the year, the Committee discharged its role in monitoring and reviewing the integrity of the company’s financial statements and reporting, its internal control and risk management processes, its audit and risk activities, business conduct and integrity, whistleblowing and breach allegation investigations, and the appointment and performance of the external auditor. DuringThe Committee also reviewed the year ended 30 June 2021, the Committee has ensured that it has had oversight of all these areas while also focussing on a diverse range of risks, including bothcompany's principal and emerging risks such asand its approach to risk appetite and mitigations, focussing this year in particular on key risks including cyber security, climate change, data managementprivacy and privacy, frauddevelopments in international taxation. The Committee recommended the addition of a new principal risk relating to supply chain disruption, which the Board has approved. We also received and compliance risk, culture, bullying and harassment, third party risk, supply operations and product recall processes, pensions funding, and counterfeit risk. In addition to these risk reviews and deep dives, the Committee has receivedreviewed regular reports on internal audits, business integrity and controls assurance work, breach allegation and investigation processes, as well as updates on the steps being taken to address internal audit findings and controls issuesissues.
The Audit Committee has also been looking ahead towards potential future regulatory changes and investigations.developing best practice. In particular, we note the UK government's proposed reforms to the audit and corporate governance regime which were published on 31 May 2022 and which include the creation of a new regulator for the audit industry, requirements in relation to assurance of non-financial information and increased disclosure requirements in respect of internal controls. In anticipation of these reforms and under the supervision of the Committee, management has reviewed and implemented a number of changes in its approach to external reporting, including preliminary steps in determining the scope and contents of the company's audit and assurance policy. The Committee has also monitored initiatives of other regulatory authorities to provide investors with consistent, comparable and reliable information on climate-related and ESG matters. We are supportive of regulation which enables informed investment decisions and support efforts to encourage harmonisation across regulatory regimes.
All membersThe performance of the Audit Committee participated inwas evaluated this year as part of the externally facilitated performancebroader Board evaluation, carried out during the year, which concludedconcluding that the Audit Committee’s performance over the past year had been excellent and that its members were very well supported by management and external auditors.continued to be excellent. Further details of the evaluation, its recommendations and actions can be found on pages 168 and 169.
I am confident that the Audit Committee has carried out its161. We are committed to continue to focus on fulfilling our duties during the year effectively and to a high standard, providing independent oversight with the support of management and assurance from the external auditors.diligence.
Alan Stewart
Chairman of the Audit Committee
Role and composition of the Audit Committee
The Audit Committee is responsible for:
–monitoring the integrity of the financial statements, including a review of the significant financial reporting judgements contained in them;
–reviewing the effectiveness of the group’s internal control and risk management and of control over financial reporting;
–monitoring and reviewing the effectiveness of the global audit and risk function, including reviewing the programme of work undertaken by that function;
–reviewing the group’s policies and practices concerning business conduct and ethics, including whistleblowing;
–overseeing the group’s overall approach to securing compliance with laws, regulations and company policies in areas of risk; and
–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 out 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 comprises Alan Stewart (Committee Chairman), Melissa Bethell, Karen Blackett, Susan Kilsby, Valérie Chapoulaud-Floquet, Sir John Manzoni, Valérie Chapoulaud-Floquet, Lady Mendelsohn and 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 relevant financial experiencethe Head of GAR regularly during the year. During the course of the year, the Committee met five times and has competence in accounting and/or auditingits duly appointed subcommittee met once. Details of attendance of all Board and in the sector which the company operates, and that all membersCommittee meetings by Directors are financially literate and have experience of corporate financial matters.set out on page 154.
FinancialReporting and financial statements
TheDuring the year, the Audit Committee met five times (and a subcommittee met once) during the year and reviewed the interim results announcement, including the interim financial statements, the Annual Report and associated preliminary results announcement and 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. During the year, theThe Audit Committee has also focussed in particular on the company’s reporting onapproach to assurance, internal approvals processes, and developments in climate change risk including itsreporting. Building on the approach as regardstaken during the previous year in relation to reporting in compliance with the recommendations of the Task Force on Climate-related Financial Disclosures, during the year ended 30 June 2022 the company has undertaken further details of which arerisk assessments and scenario analyses, and accordingly increased its climate-related disclosures as further set out on pages 84-97.58-79.
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 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 GAR the Controls Assurance Director, and the Chief Business Integrity Officer, with theOfficer. The company’s external auditor also attends meetings of the FAC. As at the end of the period covered by the Form 20-F for the year ended 30 June 2022, the FAC, with the participation of the Chief Executive and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of disclosure controls and procedures. As of the date of the evaluation, the Chief Executive and 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 attendance.the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarised and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the Chief Executive and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. 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.
The
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 assessingmanagement in drafting, developing and reviewing the various elementscontents of the report,Annual Report, which have been designed to ensure the draftingrobustness and adequacy of the information contained in it, including review processes undertaken including by and input from senior executives, the company’scompany's advisors and through the internal approvals received.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’.
Activities of the Audit Committee
At its meetings, the Audit Committee reviewed reports from the Head of GAR, the Controls Assurance Director and the Chief Business Integrity Officer, as summarised on page 176, 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, data management and privacy, fraud and compliance risk, culture, bullying and harassment, third party risk, supply operations and product recall processes, pensions funding, and counterfeit risk.
The Committee also received regular updates from the General Counsel on significant litigation and from the Head of Tax on the group’s tax profile and key issues. 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 made a recommendation to the Board covering the nature and extent of the risks it was willing to take to achieve 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.
Significant issues and judgements that were considered in respect of the 2021 financial statements are set out below. Our consideration of issues included discussion of the key audit matters as outlined in the appendix to the independent auditors’ report. The Audit Committee:
•Considered 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 was appropriate based on management’s analysis, and concluded that it was.
•Discussed items that were to be presented as exceptional, and concluded that those items are in line with the group’s accounting policy, and that sufficient disclosure is provided in the financial statements (see note 4).
•Considered whether the carrying value of assets, in particular intangible assets, was supportable. The Audit Committee reviewed the key assumptions used in the impairment testing of intangible assets, including forecast cash flows, growth rates and the discount rate used in value in use calculations. The Audit Committee agreed that the recoverable amount of the company’s assets was in excess of their carrying value and that appropriate disclosure was provided with respect to assets whose value is more sensitive to changes in assumptions (see notes 6, 9 and 10).
•Discussed the group’s more significant tax exposures and the appropriateness of any related provisions and financial statement disclosures. 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 was reflected in the financial statements (see note 7).
•Considered the appropriateness of the valuation of post employment liabilities. Having reviewed management’s papers setting out key changes to actuarial assumptions, the Committee agreed that the assumptions used in the valuation of pension plan liabilities are appropriate, and that sufficient disclosures are provided in the financial statements (note 13).
•Considered significant legal matters impacting the group. The 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.
•Discussed the impact of climate change on the group’s financial reporting and financial statements. The Audit Committee agreed that the disclosures on pages 84 to 97 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 (note 1, note 10).
Through the activities of the Audit Committee described in this report, including its review of the reports regularly provided to the Audit Committee by internal audit, Business Integrity and Controls Assurance teams, and its related recommendations to the Board, the Board confirms that it has reviewed the effectiveness of the company’s systems of internal control and risk management and that there were no material failings identified and no significant failings identified which require disclosure in this Annual Report.
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. Richard Oldfield became the lead audit partner for the year ended 30 June 2021, following the rotation of the previous partner, and will remain as audit partner for the year ending 30 June 20222023 onwards. 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 and the quality of audit work, their geographical and professional capabilities, the Audit Committee does not currently anticipate that it will conduct an audit tender before it is required to do so in 2025. The Audit Committee considers this to be 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 the audit tender remains appropriate, taking into account the effectiveness and independence of the auditor.
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 2021.2022.
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 its effectiveness was provided through review meetings 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 includes consideration of the findings of the FRC's Audit Quality Review team, 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. This year, overall performance of the auditor was assessed as solid, and improved as compared to the prior year, with consistent strong feedback provided as to auditor independence, quality control processes, availability, opennessprofessional expertise, business knowledge and responsiveness,quality communication between auditors and technological expertise.management. Areas where continued focus was required included simplificationtimely review and feedback on audit matters, better alignment in internal communication, resource continuity and use, and pro-activity in driving efficiencies and reducing overruns. It was concluded that the relationship between auditor and management was strong and open, with good visibility of senior PwC team members.
During the external audit, the auditor challenged management during the course of drafting the Annual Report in relation to whether disclosures as to the impact of certain risks in the financial statements were sufficiently linked to the risks and disclosures set out in the Strategic Report and whether there was sufficient balance in the Strategic Report, on management's approach taken in relation to impairment processes, alignmenttesting and on other judgmental matters such as pensions valuations and actuarial assumptions. The Audit Committee assessed these challenges and sought additional evidence from management in support of communication between teams, and proactive efficiency driving.their assessments. For example, the Audit Committee requested that independent legal opinions were sought as to the treatment of potential surplus assets under the rules of the relevant scheme in light of relevant accounting standards.
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 2021.2022. This year there were minor changes to the policy’s contents, with amendments reflecting internal organizational changes and to clarify certain references.organisational 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 after it has properly assessed through its governance processes both complianceprocess the threats to independence and the safeguards applied in accordance with UKthe FRC Ethical Standard and US regulations in respect of the provision of services by the auditor, and safeguards under such regulations from any threat to auditor independence presented by the provision of non-audit services or prohibited services.Public Company Accounting Oversight Board rules. 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 (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 above the specified threshold which has been amended to £100,000 from £250,000 in July 2021.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-audit 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.
Directors.
'Financial expert’, recent and relevant 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, section 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 145-149 and 154 for details of relevant experience of Directors.
Internal audit and controls assurance
The 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 conclusion of each assignment, GAR issues a report on its findings which may also include an overall rating as to the status of the 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.
DueThis year GAR adapted its processes and audit design to undertake a number of audits of the Covid-19 pandemic, thisgroup's end-to-end processes and procedures in addition to more customary market or functional audits. Increasingly during the year, GAR undertook audits in person as travel restrictions were designed to be undertaken by GAR remotely and without compromising quality and effectiveness.lifted in a number of key markets. The Audit Committee assesses the effectiveness of GAR by reviewing its annual audit plan at the start of the financial year, monitoring its on-goingongoing quality throughout the year, and assessing completion rates and feedback provided following completion of the annual audit plan. In addition, following an external evaluationHaving 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. During this year, the oversight and responsibility for operating the global controls assurance programme was integrated with the internal audit processesfunction. The Committee also reviewed and function carried out in 2020, GAR’s audit planapproved changes to the principal risk descriptions and processes were adapted to reflectrisk footprint, including the external evaluator’s recommendations and suggested actions.elevation of Supply Chain Disruption as a separate principal risk, as further described on page 83.
Business Integrity and Controls Assurance 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.
Our Code of Business Conduct and other global policies are available at https://www.diageo.com/en/our-business/corporate-governance.
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 business, completion rates for training modules, launch and rollout of new programmes or policies, monitoring use of whistle-blowing mechanisms and investigating allegations of breaches. The Business Integrity function use systems and data to allow for more efficient breach management oversight, analysis and identification of root causes, overall trends and indicators, and to monitor investigation closure rates, which are reported to the Audit Committee.
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 assessments, awareness training provided to employees, testing results and trends analysis derived from the company’s integrated risk management system.
Senior financial officers’ code of ethics
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, certain minor amendments were made to, but 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/PR1346/aws/media/12719/code-of-ethics-for-ceo-cfo-sfos.pdf.en/our-business/corporate-governance. Both the Audit & Risk Committee and the Audit Committee regularly review the strategy and operation of the Business Integrity programme through the year.
Diageo will provide a hard copy of its Code of Ethics free of charge to any person upon request. Requests should be directed to Diageo plc, Company Secretariat, Lakeside Drive, London NW10 7HQ, United Kingdom or to The.Cosec@diageo.com.
Committee activities
Details of the main areas of focus of the Audit Committee during the year include those summarised below:
| | | | | | | | | | | |
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 | | |
Internal controls | •GAR updates •Business Integrity updates including breach and reporting update •Controls testing update and s. 404 assessment | | |
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 | | |
Risk management | •Principal and emerging risk reviews and tracking •Risk updates, including group risk footprint and risk appetite review and approvals •Litigation, cyber and tax risk reviews | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
Significant issues and judgements
Significant issues and judgements that were considered in respect of the 2022 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 and 10 of the Financial Statements. | | The Audit Committee reviewed the key assumptions and result of management's impairment assessments that were performed during the year, and the methodology applied in conducting impairment assessments. The Committee was provided with information about the carrying amounts and the key assumptions incorporated in management’s estimate of discounted cash flows. 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 regarding the McDowell’s No.1 and Bell’s brands, which resulted in the recognition of impairment of £317 million in the year ended 30 June 2022. 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 44 of 'Our principal risks and risk management' 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 rate, 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 judgments made in respect of the surplus restriction and concluded that those judgments 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 21Seeds on 31 March 2022 and completed a number of other smaller acquisitions during the year ended 30 June 2022, for an aggregate consideration of £162 million. As at the completion date of these acquisitions, Diageo performed valuation of the identifiable assets and liabilities and the resulting goodwill. The purchase price allocation exercises are subject to management’s judgment 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. |
The application of hyperinflationary accounting in Turkey. Refer to note 1 of the Financial Statements. | | Hyperinflationary accounting became applicable to Turkey in the year ended 30 June 2022. The Audit Committee agreed with management’s analysis of Turkey becoming a hyperinflationary economy. The Audit Committee reviewed and agreed with management’s assessment of the hyperinflation adjustments and the presentation and disclosures made. The Committee reviewed and agreed with the recognition of the restatement of non-monetary items at the beginning of the reporting period, including the impairment of the restated non-current assets recognised, within equity. The Committee reviewed the disclosures in respect of hyperinflationary accounting, and concluded they were appropriate. |
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 58 to 65 of 'Responding to climate-related risks' and note 1 and note 9 of the Financial Statements. | | The Audit Committee agreed that the disclosures on pages 58 to 65 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
On behalfI am pleased to provide the report of the Nomination Committee I am pleased to present its report for the year ended 30 June 2021. 2022.
The primary role of the Committee is to ensure that there isresponsible for succession planning for the Board, maintaining a pipeline of strong candidates for potential nomination as Non-Executive Directors and to reviewExecutive Directors, while also ensuring robust succession planning and talent strategy for Executive Directors and other members of the Executive Committee. There has been significant change in Board membershipDuring this year, with the Committee recommending the appointments of Sir John Manzoni, Ireena Vittal and Valérie Chapoulaud-Floquet as Non-Executive Directors andhas recommended the appointment of Lavanya ChandrashekarKaren Blackett as CFONon-Executive Director, who joined the Board on 1 June 2022. Karen brings to the Board her extensive experience of the media, marketing and Executive Director. These appointmentscreative industries, and is a passionate advocate for inclusion, diversity and creating opportunities for all. Karen's appointment had been made following a detailed market review assisted by Egon Zehnder, an independent executive search agency and, inagency.
As travel restrictions eased over the casecourse of the CFO and Executive Director appointment, an internal talent review and selection process involving internal and external candidates carried out by the Committee. Given the number of changes of Board membership this year, we have takenresumed office and production facility visits and tours for Board members, in particular those Directors who had joined the Board since the beginning of the pandemic, who had the opportunity to refresh our Board induction programme including adapting aspects of it to be more suitable to a remote working environment suchvisit key distilleries, packaging facilities, maturation sites and other production plants in Scotland as has been experienced recently.well as the Guinness Storehouse and brewery in Ireland.
This year the Committee has also had oversight ofmanaged the externally facilitated review and evaluation of the effectiveness of the Board, its Committees, members and processes. Further details, including the review’s conclusions, recommendations and actions as presented to the Board in December 2020,January 2022, are set out on pages 168-169.page 161.
The Committee has also been involved in reviewing talent planning and succession of Executive Committee membership, with a number of changes being approved during the year. Tom Shropshire assumed the role of General Counsel & Company Secretary in September 2021, Louise Prashad was appointed Chief HR Officer in January 2022 and Dayalan Nayager was appointed President, Africa following John O'Keeffe's appointment as President, Asia-Pacific in July 2022. More recently, we announced the appointment of Debra Crew as Chief Operating Officer with responsibility for driving continuing performance momentum across Diageo's markets and supply operations, and of Claudia Schubert as President, North America, effective 1 October 2022. I congratulate all those who have joined the Board or Executive Committee members. Overin the past year Alvaro Cardenas has been appointed as President, Latin America and Caribbean, and Hina Nagarajan has been appointed as MD & CEO, United Spirits Limited. Lastly, I wish to acknowledge the contribution and support of our General Counsel and Company Secretary, Siobhán Moriarty,those who will retire following the AGM in September after 24 years with the company. Siobhán will be succeeded by Tom Shropshire, who recently joined the company from international law firm Linklaters.do so shortly.
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 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 includes the development of a candidate profile and the engagement of Egon Zehnder, a professional search agency (which has no connection with the company other than acting as an executive search agency) specialising in the recruitment of high-calibre candidates for non-executive and executive roles. In the case of Executive Director or Executive Committee appointments, an executive leadership assessment is 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.
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. While 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 154.
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. For example, the Committee concluded that Karen Blackett had sufficient time to devote to the company due to the majority of her external appointments being with industry bodies, charitable or public institutions. 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. Any new Directors are appointed by theThe Board and, in accordance with the company’s articles of association, they must be elected at the next AGMhas concluded that each Non-Executive Director has sufficient time to continue in office. All existing Directors retire by rotation and stand for re-election every year. While the company’s policy is for all Directors to attend the AGM, due to the Covid-19 pandemic the 2020 AGM was helddischarge their duties as a ‘closed meeting’ in accordance with the Corporate Insolvency and Governance Act 2020 and, as a result, only the Chairman attended with the Company Secretary. Details of attendance of all Board and Committee meetings by Directors are set out on page 163.
More details on the roledirector 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.
Composition of the Nomination Committee
The Nomination Committee comprises Javier Ferrán (Committee Chairman), Melissa Bethell, Susan Kilsby, Valérie Chapoulaud-Floquet, Sir John Manzoni, Lady Mendelsohn, Alan Stewartcompany, taking into consideration their external appointments and Ireena Vittal.commitments.
The company has adapted its induction programme for new Directors appointedWith the easing of travel restrictions during the year, we have reverted to take account of social distancing requirements and restrictions on travel. As a consequence,more customary induction processes for newly appointed directors. In addition to individual meetings with Executive Committee members and other senior executives, which would ordinarilyDirectors who have been in personjoined the Board since the beginning of the pandemic have had the opportunity to take place through video conference systems and visits by the newly appointed Directors tovisit a number of the company’s production facilities and offices in London, Scotland and other sites aroundIreland. These include the group have been postponed.
Alternative ways of facilitating thorough induction programmes have been introduced, including a number which were recommended followingcompany's new head office in London, the externally facilitated Board effectiveness review carried out duringGuinness Storehouse and St James's Gate Brewery in Dublin, the first half of the year. For example instead of physical visits Directors have been provided with access to a number of recorded virtual tours of certain of the company’s sites and interviews with a range of employees from different backgrounds and markets. ‘Skip level’ video conference meetings are also being arranged between Non-Executive Directors and employees to enable broader interactions which will enhance Directors’ induction experiences as well as provide another means of engagement between the Board and the company’s workforce. All Directors who have been unable to travel over this period will have the opportunity to visit key sites, including the company’sgroup's spirits production facilities and archives in Scotland and elsewhere, and to meet executives face-to-face when travel restrictions are lifted.Scotland.
It is intended that future inductionInduction programmes for new Directors will also be moreare tailored to suit the particular background and experience of the individual Director, with the Committee advising on priorities for that individual and tracking induction activity. This willThese induction processes supplement existing practices whereby following the initial induction process, a continuing understanding of the business is developed through appropriate business engagements for Non-Executive Directors which would ordinarily includesuch as visits to customers, engagements with employees, and brand events worked 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 as part of 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. All Directors are also provided regular briefings 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.
Activities of the Nomination Committee
The principal activities of the Nomination Committee during the year were:
•the consideration of the talent pipeline for potential new appointments to the Board including the selection and recommendation as to the appointment of a new Executive Directors, Non-Executive Directors and the Company Secretary;Board member;
•the selection, scopingdesign and appointmentconduct of an external professional consultancy to conduct athe annual review of Board, committee and individual Director effectiveness and performance as part of the annual evaluation process, and a review of the findings of the consultancy’s reportreview and its recommendationsrecommended actions;
•consideration and approval of the report of the Committee in the company’s annual reportAnnual Report and accountsconsolidated financial statements for the year ended 30 June 20202022;
•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. This concluded that the Committee was effective and that the Board was satisfied with its performance, ofthat its remit and scope was sufficient, and that the Committee had continued to improve, with more formalised wayswas effective in maintaining a suitable pipeline of working. The emphasis is now on ensuring adequate timetalent for non-executive roles and focus on developing strongin monitoring succession plansplanning for executive director and to ensure all Board members remain informed as to the work of the Committee as the Board grows.senior management roles. Further details of the evaluation can be found on pages 168-169.page 161.
Diversity
The Board has a long-standinglongstanding commitment to prioritise diversity and supports the recommendations of the FTSE Women Leaders Review (previously the Hampton-Alexander ReviewReview) on gender diversity and the Parker Review on ethnic diversity. The Board Diversity Policy sets out specific objectives with parity between male and female members of the Board 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 is pleased to confirm that both these objectives have currently been met. The Board Diversity Policy also sets out the Board’s support for management’s actions to increase the proportion of senior leadership roles held by women and by people from minority backgrounds and other under-represented groups. As at 30 June 2021,2022, the percentage of women on the Executive Committee and their direct reports is 46%40%.
Non-Executive Director tenure
Gender diversity: Board of Directors
Gender diversity: Executive Committee
Executive Committee nationality
Ethnic diversity: Board of Directors
ETHNIC DIVERSITY DEFINITIONS
–• Directors are defined as all non-executive and executive directors appointed to the Board.
–• 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 data above is given as at the last practicable date prior to publication of this report, being 27 July 2021.2022.
Directors’ remuneration report
Annual statement by the Chairman of the Remuneration Committee
"It has been another year of robust performance for Diageo, with the organisation continuing to show resilience and creativity in an ongoing volatile environment."
Dear Shareholder
I am pleased to present to you the Directors' remuneration report for the year ended 30 June 2021,2022, which contains:
–•The current Directors’ remuneration policy, which was approved last year at the AGM on 28 September 2020; and
–•The annual remuneration report, describing how the policy has been put into practice during 2021,2022, and how the policy will be implemented in 2022.2023.
Exceptional
Business performance through exceptional times
As you’ve readmentioned elsewhere in the statements fromAnnual Report, Diageo has delivered a strong set of financial results for 2022. Organic net sales grew at double-digit rates and, in an environment of high-cost inflation, the Chairmancompany implemented strategic price increases across all regions while continuing to grow volume and market share. Operating margin expanded and cash generation continues to be robust, with £2.8 billion of free cash flow delivered in the Chief Executive, the results that have been delivered over the past year have been truly exceptional, despite continued challenging and uneven trading conditions, including the severe impact of the pandemican increase in return on Diageo’s travel retail business and significant restrictions on the on-trade (pubs, bars and restaurants) in many parts of the world. Even with this backdrop, Diageoinvested capital to 16.8%.
The organisation has continued to invest ahead on brands with improved marketing spend relative to pre-pandemic levels,show resilience, skill, creativity, focus and determination during what has capitalised on at-home occasions through strengthened e-commerce and digital capabilities to fuel further growth. As a result, Diageoremained an uncertain time. Employee engagement has delivered robust improvement in top and bottom line performance.
At the same time,remained very high, the company has continued to deliver strong returns to shareholders (~£23 billioninvest for long-term growth in its brands and portfolio and has maintained focus on delivering the key sustainability milestones underpinning ‘Society 2030: Spirit of value in share price growth, dividends and return of capital since 1 July 2018), has delivered sustained improvements in market share (continuing the off-trade share momentum confirmed at the interim results earlierProgress’. Again this year), while also providing unwavering support to employees, suppliers, customers and communities. You can read more about this on pages 23-24.
Diageo’s decisive leadership throughout the uncertainty of the past year, together with the hard work, resilience, ingenuity and commitment of our 27,650 employees around the world, have enabled Diageo to emerge from the pandemic in a strong position to drive long-term sustainable growth. Despite the challenges of the past year, employee engagement remains very high. Through the annual engagement survey, regular ‘pulse’ surveys on the company’s response to the pandemic and workforce engagement sessions led by the Chairman and other Non-Executive Directors during the year, our people report a strong sense of pride and fulfilment working for Diageo and have emphasised how supported they have felt during the pandemic. Unlike many other companies, Diageo has not participated in any furloughing schemes has notor initiated any large-scale restructuring andwidespread lay-offs as a result of ongoing impacts of the Covid-19 pandemic. The company has continued to provide practical, financial, and health and wellbeing support to its employees, throughoutcustomers and the pandemic.communities in which it operates.
Looking back at decisions made during the year
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 holistic performance. It assesses market share gains, financial performance 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, including the company’s TSR performance relative to our peer group.
Following this review, the Remuneration Committee concluded that the financial measure outcomes for both the annual and long-term incentives were fair reflections of overall business performance in testing market conditions during the relevant performance periods. Consequently, the Committee did not exercise discretion to alter the incentive outcomes.
In setting the 2022 annual incentive, the Committee returned to annual targets, having set two half-yearly targets for the previous year, which reflected the significant uncertainty and volatility facing the business at that time. The company’s performance in 2022 resulted in maximum achievement for all three financial measures despite the very stretching nature of performance required to achieve the maximum payouts - which reflected higher growth percentages than pre-Covid-19 pandemic levels for net sales and operating profit. The Individual Business Objective (IBO) outcomes for the CEO and CFO reflect an assessment of the achievement of critical business and ESG related milestones. Further detail is set out on page 186.
Overall annual incentive payouts were 93.75% of maximum for Ivan Menezes and 90.0% of maximum for Lavanya Chandrashekar, with one-third being deferred into Diageo shares for three years.
The 2019 long-term incentive plan targets were set in the summer of 2019 before the Covid-19 pandemic and therefore reflect the company’s growth plan at that time. Following an assessment of performance against the targets, the vesting outcome for the 2019 performance share awards, which will vest in September 2022, is 59.3% of maximum for the CEO and 59.8% of maximum for the CFO. Share options for the CEO will vest at 61.5% of maximum.
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 2022.
Looking forward to the year ahead
The Committee approved base salary increases of 3% for Ivan Menezes and Lavanya Chandrashekar, effective 1 October 2022. These increases reflect strong performance and are below the 2022 salary increase budgets for the UK and US for the wider employee population and are consistent with external market salary increases for executive directors in the current environment.
As previously communicated, Ivan Menezes’ pension contribution will reduce from 20% to 14% of salary effective 1 January 2023, ensuring full alignment of executive director pension contributions with the UK workforce. The CFO’s pension contribution has been 14% since joining the Board on 1 July 2021.
The structure of the annual incentive plan for Executive Directors for the year ended 30 June 2021 was designed to reflect the significant levels of uncertainty facing the business across the multiple markets in which Diageo operates. The target-setting process was managed in two half-year periods to ensure the right level of focus on critical deliverables and to enable swift response to the changing external environment. This designperformance measures for the annual incentive plan was outlined in the 2020 remuneration report and communicatedlong-term incentives remain unchanged for 2023 as these continue to participants in July 2020.
The targets for the first half of the year (1 July 2020 - 31 December 2020) were approved immediately before the announcement of Diageo’s final results in July 2020, and targets for the second half of the year (1 January 2021 - 30 June 2021) were approved immediately before the announcement of Diageo’s interim results in January 2021. Details ofalign with the company’s performance against targets in both the first and second halves of the year, as well as total results for the full year, are described in more detail on page 201.strategy.
The targets set in the second half of the year took account of better tha
n expected performance in the first half of the year, and enabled the Remuneration Committee to set more challenging targets than would have been possible had the Committee set full year targets at the beginning of the fiscal year.
As is the usual practice, each year the Remuneration Committee assesses Diageo’s holistic performance across the full financial year, in addition to the company’s performance against targets, to determine whether the level of bonus payout is appropriate, reflects underlying business performance and is aligned to the experience of shareholders. This year, the Committee undertook a comprehensive review of performance across a number of internal and external factors including:
– Market share gains - Diageo is holding or growing off-trade share in 85% of total net sales value in measured markets, an improvement of 20ppt on last year, with notably strong share gains in the US TBA (Total Beverage Alcohol);
– Performance relative to peer group - Diageo delivered broad-based outperformance at the top of the Alcoholic Beverages peer set and top quartile performance compared to our TSR peer group;
– Strategic delivery and reputation - Diageo has continued to provide support to customers and the communities within which it operates (see pages 23-24) as well as making positive progress on grain-to-glass sustainability and continued progress on inclusion and diversity. Diageo was also named the top company in both the FTSE100 and in the beverages sector for representation of women at board, executive and leadership level in the 2020 Hampton Alexander Review; and
– Employee engagement - remains very high at an overall score of 81% in 2021, 1% above already high levels prior to the pandemic and 10ppt higher than the external benchmark for similar sized companies in our sector. 89% of respondents are proud to work for Diageo and 81% would recommend working for Diageo.
Alignment of incentives with strategy / global market competitiveness
Our ambition is to be one of the best performing, most trusted and respected consumer companies in the world. Our strategic priorities to drive the company forward are unchanged: sustain quality growth, embed everyday efficiency, invest smartly, promote positive drinking, champion inclusion and diversity and pioneer grain-to-glass sustainability.
The Remuneration Committee concluded thatperformance measures in the formulaic outcomes of 93.8% of maximum for the Chief Executive, Ivan Menezes, and 91.3% of maximum for the outgoing Chief Financial Officer during the year, Kathryn Mikells, are justified given the exceptional nature of performance in challenging circumstances. In lineincentive plans align with the Directors’ remuneration policy, one-third ofstrategy and the Chief Executive's annual bonus will be deferred into Diageo shares to be heldkey performance indicators on pages 47-49. The financial measures for three years, with the balance paid in cash in September 2021.
Under the long-term incentive plan, 2018 performance share awards will vest in September 2021 at 29.3% of maximum and share option awards will vest at 10% of maximum, based on performance against the original targets set in 2018 (see page 203) for more detail), which was much higher than anticipated given the impact of the pandemic on a large proportion of the three-year performance period. At the start of 2021, on the basis that it was not clear that the awards would vest at all, the Committee explored the possibility of exercising its discretion to change the formulaic outcome of the 2018 award, considering the additional criteria that would need to be satisfied to warrant any vesting, as well as taking account of the views gathered from shareholders during consultation meetings.
The Committee was also mindful of the difficult decisions that had been taken on remuneration during fiscal 2020, with no annual salary review for employees and executives alike, no annual bonus payment for many employees (including the Executive Committee, as we exercised downward discretion to waive the earned payout against individual business objectives) as well as low long-term incentive vesting. The potential impact of such actions on motivation, engagement and retention, particularly for the wider group of senior leaders across the business who participate in the performance share element of the long-term incentive plan, continues to be a serious concern for the Remuneration Committee and will continue to be carefully monitored.
The final outcome under the 2018 long-term incentive plan based on performance against the original targets, while still relatively low in the context of the substantial returns to shareholders over the same period, is well above the level at which it was tracking earlier in the year. The Committee carefully considered financial performance under the annual incentive planfocus on net sales growth, operating profit (both of which represent critical measures of growth for Diageo) and determined that this payout, together withoperating cash conversion (which recognises the levelcriticality of vesting under the 2018 long-term incentive award, would provide fair recognition and reward of exceptionalstrong cash performance and leadership during thiscash containment, particularly in the current challenging period. As a result, the Committee decided not to apply discretion to the vesting outcome under the 2018 long-term incentive award.market conditions). The IBO component adds focus on key individual strategic and financial objectives.
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.
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 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-competitive pay in return for high performance against the company’s strategic objectives.
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Delivery of business strategy [1] |
Short-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 [2] |
A significant proportion of remuneration is delivered in variable pay linked to business and individual performance, focussedfocused 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 [3] |
Market-competitiveHaving 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 [4] |
Executives are focussedfocused on creating sustainable share price growth. The requirement to build significant personal shareholdings in Diageo, and to 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. |
CFO succession
As announced on 14 January 2021, Kathryn Mikells, Chief Financial Officer, left the company on 30 June 2021 to return to the United States after almost six years in role. Kathryn has been succeeded by Lavanya Chandrashekar, who was appointed to the Board on 1 July 2021. The remuneration arrangements for both the outgoing and incoming Chief Financial Officers have been implemented in accordance with the external announcement and the approved 2020 Directors’ remuneration policy.
Kathryn Mikells' service contract provided for a 12-month notice period. As part of an orderly succession plan, notice commenced on 13 January 2021 and Kathryn remained an employee and director of the company until 30 June 2021. Details of payments on termination are outlined on pages 199-200. Kathryn remains eligible for a paymentmeasures under the annual incentive plan for the year ended 30 June 2021, subject to the performance conditions in the normal way (see page 201-202 for more details). The Committee also
exercised its discretion, in accordance with the Plan Rules and the remuneration policy, to prorate to the leaving date all unvested long-term incentive awards. These awards remain subjectplans continue to performance conditions to be assessed at the end of the original performance periods in 2021, 2022 and 2023 with a subsequent two-year holding period. The new post employment shareholding requirement policy, which was introduced as part of the 2020 remuneration policy, will be applied for a period of two years post exit, requiring Kathryn to hold Diageo shares equal to 400% of salary until 30 June 2022 and 200% of salary for the 12-months thereafter. The policy will be implemented making use of a restricted nominee account, in which vested shares are already held in trust during the two-year post-vesting retention period. As at 30 June 2021, Kathryn held shares equivalent to 868% of salary.
The salary for the new Chief Financial Officer, Lavanya Chandrashekar, is 11% lower than that of her predecessor and the annual and long-term incentive opportunity is the same. Her pension contribution at 14% of salary is in line with the policy provision for the wider workforce in the United Kingdom. Further details on Lavanya Chandrashekar’s remuneration are shown on pages 212-213.
I would like to thank Kathryn for her service and valued contributions to Remuneration Committee discussions over the past six years and I look forward to working with Lavanya in the future.
Looking forward to the year ahead
There was no fee increase for Non-Executive Directors in the year ended 30 June 2021. The Chairman’s fee increase from £600,000 to £650,000 per annum, the first increase since his appointment in January 2017, had been approved prior to the outbreak of Covid-19 and planned to take effect on 1 January 2020. The Chairman asked to defer this fee increase until 2021 and it was implemented 18 months after the originally intended implementation date, on 1 July 2021. The fees for Non-Executive Directors will be reviewed in September 2021.
The Committee also reviewed annual base salaries for the Chief Executive and Executive Committee. As part of their review, the Committee considered the current position of pay relative to the external market as well as the strong performance context, the approach for the annual pay review for the wider workforce as well as wider societal and shareholder expectations. Taking account of the historical track record of modest salary increases over the years since being appointed Chief Executive in 2013 (0% in 2014 and 2015, 2% in 2016-2018, 3% in 2019 and 0% in 2020), the Committee approved a base salary increase of 3% for Ivan Menezes effective 1 October 2021, which is consistent with the merit budget for the wider workforce in the United Kingdom and the United States in 2021.
The Committee reviewed the annual incentive plan for Executive Directors in the year ended 30 June 2022 and decided to retain the same structure as the year before, with 80% based on financial measures (net sales, operating profit and operating cash conversion) and 20% on individual business objectives, with a return to full-year targets now that pandemic restrictions are easing in many parts of the world.
For long-term incentive awards to be granted in September 2021, the Committee reviewed the design and selection of performance measures and decided to retain the same measures and weightings as in 2020: net sales, profit before exceptional items and tax, cumulative free cash flow, relative total shareholder return and ESG (environmental, social and governance). These measures reflect the company’s strategic priorities and key drivers of long-term growth. I had the opportunity to discuss with a number of shareholders during the year our proposals on the ESG performance conditions,growth by incorporating organic net sales, organic profit before exceptional items and welcomed the constructive inputtax, free cash flow, TSR and appreciation for the progressive stance the company is taking on its approach to ESG. As a reminder, the ESG measure covers carbonkey Environmental, Social and Governance (ESG) measures (greenhouse gas reduction, water efficiency, positive drinking and inclusiongender and diversity, which are all strategic areasethnic diversity).
Global pay competitiveness is another key remuneration principle for the company. Attracting and retaining key talent is critical for our business and remuneration is an important aspect of focus under 'Diageo’s Society 2030: Spiritbeing able to meet our talent objectives. As we operate in a global talent market, the Committee takes into account global pay practices, including the US market, when reviewing executive pay. Global pay competitiveness has been considered by the Committee in the context of Progress', our 10-year action plan to help create an inclusive and sustainable world (see pages 64-71 for more detail).a number of changes in the Executive Committee during the year.
In summary Diageo has had an exceptional year of
Diageo’s strong performance and thatin ongoing challenging market conditions is reflected in the incentive outcomes and the decisions the Committee has made. I believe thatmade, which it considers are in line with the company’s philosophy of delivering market competitive pay in return for high performance against the company’s strategic objectives.
The Committee is interested in the views of shareholders and their representative bodies and values their ongoing engagement on remuneration matters. As our Directors’ remuneration policy supportsis due for renewal at the business strategy, drives pay for performance and meets the needs of our stakeholders in a balanced and considered way.2023 AGM, I would likelook forward to thank all of theengaging with shareholders and institutional advisors for their constructive input over the course of the year. I look forward to continuing to engage with shareholders in the coming months as Diageo builds on an exceptional year of performance.year.
I hope that you will join the Board in approving the advisory resolution on the annualDirectors' remuneration report on remuneration and voting in favour of the resolution at the AGM on 30 September 2021.6 October 2022.
Susan Kilsby
Non-Executive Director and Chair of the Remuneration Committee
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Remuneration at a glance |
| Salary | Allowances and benefits | Annual incentive | Long-term incentives | Shareholding requirement |
Purpose and link to strategy | – Supports the attraction and retention of the best global talent with the capability to deliver Diageo’s strategy | – Provision of market-competitive and cost-effective benefits supports attraction and retention of talent | – 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 | – 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 for new Executive Director appointments, which is aligned to the offering for new-hire employeesthe 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 – Executive Directors defer one-third of earned bonus payment into Diageo shares held for three years, which first takingtook effect on the bonus for the year ended 30 June 2021 – Remainder paid out in cash after the end of the financial year | – Annual grant of performance shares and share options – CEO award up to 500% of salary – 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 based on six-month average to 30 June preceding grant date | – Minimum shareholding requirement within five years of appointment: – CEO 500% of salary – CFO 400% of salary – 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 |
Planned for year ending 30 June 20222023 | – 3% salary increase for the CEO in line withand CFO, slightly below the annual salary budgetbudgets for the wider workforce in the United Kingdom and the United States
– New CFO appointment 1 July 2021 (salary 11% lower than previous incumbent) | – Allowances and benefits unchanged from prior year – Company pension contribution: – CEO 20% of salary until 1 January 2023, at which point the CEO's pension contribution will reduce to 14% of salary – CFO 14% of salary – Company intends to reduce CEO's pension contribution to 14% of salary by 1 January 2023 | – Targets will be set overfor the full year – For the year ending 30 June 2022,2023, measures on net sales growth, operating profit growth and operating cash conversion, 80% in total weighted equally, with remaining 20% on individual objectives | – Performance measures on net sales growth, relative TSR, cumulative free cash flow, profit before exceptional items and tax growth, and ESG – Size of long-term incentive award opportunity is unchanged from prior year | – Post-employmentNo change to shareholding requirement will be maintained |
Implementation in year ended 30 June 2022 | – 3% salary increase for the CEO in line with the policywider workforce in the caseUnited 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 | - Full year targets resumed for year ended 30 June 2022. – 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 Kathryn Mikells, who left the company onwas not in her current role in 2019 and does not hold a share option award for that year | – As at 30 June 20212022, CEO shareholding of 3,093% of salary – As at 30 June 2022, CFO (Lavanya Chandrashekar) shareholding of 31% of salary (has until 1 July 2026 to meet requirement) |
Implementation in year ended 30 June 2021 | – No salary increase for Executive Directors or Executive Committee members –members. Exceptional salary increases only (e.g. on promotion) for the wider workforce during 2020 | – Allowances and benefits unchanged from prior year – Company pension contribution: – CEO 20% of salary – CFO 20% of salary | – Targets set over two half-year periods – Payout of 100% of maximum for the financial element of the plan – Total payout of 93.8%93.75% of maximum for the CEO and 91.3% of maximum for the CFO | – Vesting of 2018 performance shares at 29.3% of maximum – Vesting of 2018 share options at 10% of maximum | – CEO shareholding 2,735% of salary – CFO (Kathryn Mikells) shareholding 868% of salary1 |
Implementation in year ended 30 June 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 United Kingdom and the United States in 2019) | – Company pension contribution: – CEO 20% of salary (reduced from 30% of salary effective 1 July 2019) – CFO 20% of salary | – No annual incentive payout for Executive Directors in 2020 | – Vesting of 2017 performance shares at 10% of maximum – Vesting of 2017 share options at 27.5% of maximum | – CEO shareholding 2,635% of salary
– CFO shareholding 791% of salary1
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1. This relates to Kathryn Mikells, who left the company on 30 June 2021
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.long-term. There is a three-year deferral of partone-third 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, retention and retentionclawback periods for each element of remuneration are outlined below.
Pay for performance at a glance
The charts below show performance outcomes against targets for the long-term and annual incentive 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 2019 to 30 June 2022)
HistoricalAnnual incentive(for the period 1 July 2021 to 30 June 2022)
Historic 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 20212022 is shown against the vesting outcome for the 20182019 long-term incentive awards vesting in 2021)2022). Outcomes against annual incentive financial measures are shown against organic operating profit growth for each respective financial year, as disclosed in prior-year annual reports.
Remuneration Committee governanceGovernance
Remuneration Committee
Over the year, the Remuneration Committee has consisted of the following independent Non-Executive Directors: Susan Kilsby, Melissa Bethell, Valérie Chapoulaud-Floquet, Ho KwonPing, Sir John Manzoni, Lady Mendelsohn, Alan Stewart and Ireena Vittal. Karen Blackett joined the Committee on 1 June 2022. Susan Kilsby is the Chair of the Remuneration Committee and also the Senior Independent Director. The Chairman of the Board and the Chief Executive may, by invitation, attend Remuneration Committee meetings except when their own remuneration is being discussed. Diageo’s 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. Information onsetting and incentive outcomes. Members of the Committee attended all meetings held and Director attendance isduring the year which they were eligible to attend - full details are disclosed in the corporate governance report.report on page 90.
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;
– •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 motivatingincentivising irresponsible behaviourbehaviour; and
– •reviewing workforce pay and related policies and the alignment of incentives with culture.
Full terms of reference for the Remuneration Committee are available atin the corporate governance section of the company's website 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: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 DLTIP post-vesting retention period, shareholding requirement, and bonus deferral into shares;shares and malus and clawback provisions;
Predictability-the pay opportunity under different performance scenarios areis set out on page 194188 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 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 2021,2022, 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 to 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: insights into external remuneration benchmarking survey data to support the salary review for the Executive Committee,trends and best practice, advice on the design of long-term incentives and the level of stretch in the long-term incentive targets and
periodic updates on the TSR of Diageo and its peer companies for outstanding DLTIP
performance cycles. The fees paid to Deloitte in relation tofiscal 22 for advice provided to the Committee were £249,355£130,500 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 £176,789.
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 and the annual report on remuneration at the 2020 AGM and the Directors' remuneration report (excluding the policy) at the 2021 AGM.
| | | For | Against | Total votes cast | Abstentions | | For | Against | Total votes cast | Abstentions |
Directors’ remuneration policy | 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 | |
Annual report on remuneration | Total number of votes | 1,715,489,143 | 51,495,925 | 1,766,985,068 | 2,229,889 | | |
Percentage of votes cast | 97.09 | % | 2.91 | % | 100 | % | n/a | |
Directors’ remuneration policy1 | | Directors’ remuneration policy1 | 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 | | Directors' remuneration report (excluding the policy)2 | Total number of votes | 1,661,293,734 | 68,483,076 | 1,729,776,810 | 23,650,135 | |
| Percentage of votes cast | 96.04 | % | 3.96 | % | 100 | % | n/a |
1.As shown on pages 89 – 94 of the 2020 Annual Report
2.As shown on pages 104 – 110 and 117 - 128 of the 2021 Annual Report
The Committee was pleased with the level of support shown for the Directors' remuneration policy and implementationDirectors' remuneration report, and appreciatedappreciates the active participation of shareholders and their representative advisory bodies in consulting on executive remuneration matters.matters
Remuneration Committee governance
Approach to stakeholder engagement
The Committee has taken into account stakeholderis interested in the views through consultationof investors and maintains an ongoing dialogue with a broad group of shareholders and institutional advisors throughouton remuneration matters. In July 2022, we wrote to our largest shareholders and the year, as well as throughproxy advisors about the implementation of the policy in fiscal 23 and the Committee Chairman is looking forward to engaging regarding the review of our Directors’ remuneration policy in advance of the 2023 AGM.
The Chairman leads global workforce engagement sessions led bythroughout the Chairman,year and there are focus group sessions with other Non-Executive Directors and feedbacknon-executive directors. Feedback from management and the wider workforce is received through the Your Voice employee engagement survey and ‘pulse’market specific pulse surveys. A broad group of Diageo’s top 20 shareholdersMore information on workforce engagement can be found on page 96 and key proxy advisors were engaged. page 118.
An overall review of wider workforce remuneration and policies is tabled as a discreteseparate agenda item at the Committee’s October meeting and relevant aspects of wider workforce remuneration are referenced in other agenda items during the year. This ensures
These activities ensure that shareholder views and interests, as well as the all-employee reward context at Diageo, are appropriately considered when making executive remuneration decisions.
Further details on pages 167-169.
FURTHER DETAILS ON PAGES 159-162
Allocation of time
The graph reflects an approximation of the allocated time for key agenda items at Remuneration Committee meetings throughout the year.
With no policy changes or significant changes to the implementation of policy in fiscal 22, there was less time spent engaging with shareholders this year than in recent years. This year, more time was spent on individual remuneration decisions as a result of Executive Committee changes. Given ongoing market volatility, the Committee also spent significant time on target setting and considering the impacts of the inflationary environment.
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Key decision | Link to Diageo remuneration principles | Link to corporate governance principles | Stakeholder engagement |
Manage the return to annual incentive plan target-setting process intarget-setting. In the previous year, performance was measured over two half-year periods to reflect the significant levels of uncertainty facing the business across multiple markets | [1] [2] [4] | The Committee considered the views of key shareholders and investor bodies (clarity). This decision enabledrepresents a return to incentivising executives to achieve stretching targets over an annual period. Targets are aligned to short-term critical milestones within the Remuneration Committeebroader business plan. (Proportionality) | As part of wider shareholder engagement, we noted the return to ensure relevant and robust incentive targets were set, aligned with shareholder interests (risk and proportionality). | The proposal was shared with a group of key shareholders, UK institutional bodies and US proxy agencies in May 2020 and the response was broadly supportive. A similar change inusual annual approach to target-setting was made for employees below the Executive Committee: annual incentive plan targets were set on a quarterly basis, in line with the financial planning cycle, with payments subject to a holistic year-end assessment process.target setting.
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ESGSetting targets for performance shares and share options granted under the Diageo Long Term Incentive Plan (DLTIP) in September 20202021 | [1] [2] [4] | The Committee engaged shareholders ondetermined that retaining the proposal for ESGmeasures already in place supported delivery of the business strategy, provided a balanced set of financial and non-financial measures, and targets ahead of publication (clarity). The purpose and strategic alignment of the measures and targets have been clearly laid out on page 205 of this report (simplicity). The ESG targets ensure focus on some of Diageo’s key non-financial objectives,supported our 'Society 2030: Spirits of Progress' ambition, with Diageo’s focus on inclusion and sustainability in the future interest of shareholders (risk and alignment with culture). Pay-out opportunity undercompany culture, particularly the ESG measures is set out in page 205 of this report (predictability).component. (Alignment with Strategy, Clarity, Simplicity) | In light of the significant impact of the pandemic on the business planning cycle and the company’s ability to forecast long-term performance, the Committee had delayed target-setting for 2020 long-term incentive targets for a period of six months. Shareholders were engaged aboutregarding the proposed ESG targets aheadperformance measures underpinning the 2021 plans. Through regular global communication platforms, employees are made aware of publicationthe business ambitions and focus, which aligns with how our executives are incentivised over the longer term. Those employees who also participate in February 2021, in line with the company’s intention to consult with shareholders on 2020 targets as signposted in the 2020 annual report. As part of this, the timeline for publishing financial targets was confirmed to shareholders.Through workforce engagement sessions and surveys, employees have shared theyperformance based long-term incentives are proud of Diageo’s focus on championing inclusion and diversity, and wider societal impact.regularly engaged regarding performance against targets. |
Payout under the annual incentive plan for the Executive Committee for the year ended 30 June 20212022 | [1] [2] [3] [4] | The company’s performance has resulted in strong returns to shareholders. By ensuring that executives are recognised for strong performance, the Remuneration Committee is able to motivate and retain the very best talent, which also creates shareholder value (risk).value. (Proportionality) | The Committee considers the experience of the wider workforce when making decisions on executive pay to ensure there is clear alignment in principles and practice. of principles. The annual incentive payout for employees below the Executive Committee also reflects strong holistic business performance.performance, and their bonus is derived from the same measures that underpin the Executive Directors' annual incentive. |
Vesting of performance shares and share options granted in September 20182019 in line with measured achievements, with no application of discretion | [1] [2] [4] | After considering carefully theThe company’s performance has resulted in strong returns to shareholders over the remuneration opportunity in totality as well as that of the wider workforce,three-year performance period and the Committee decided thatconsidered the annualformulaic vesting outcome a fair reflection of business performance which would appropriately reward what has been a challenging and uncertain three-year period. (Proportionality) | As the Remuneration Committee was not minded to exercise any discretion regarding the long-term incentive payout would provide appropriate recognition and reward of performance and leadership (proportionality). | Through conversations during the year, shareholders acknowledged the significant impact of the pandemicoutcome, there was no consultation on executive pay. The Committee reviewed the outlook for unvested 2018 DLTIP awards in the broader context of overall performance during the three-year vesting period ending 30 June 2021 and considered, but decided against, the application of upward discretion.this matter.
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Diageo’s remuneration principles | | Delivery of business strategy; | | Creating sustainable, long-term performance; | | Winning best talent; | | Consideration of stakeholder interests |
Diageo’s remuneration principles [1] Delivery of business strategy; [2] Creating sustainable, long-term performance;
[3] Winning best talent; [4] Consideration of stakeholder interests;
Directors’ remuneration policy
This section of the report summarisessets out the current policy for the remuneration of the company’s Directors. The policy was approved by shareholders at the AGM on 28 September 2020, in accordance with section 439A of the Companies Act 2006.2020. The policy approved in
September 2020 can be found on the company’s website at www.diageo.com/en/investors/financial-results-and-presentations/directors-remuneration-report-2020/.https://media.diageocms.com/diageo-corporate-media/media/c54dsk3z/256_directors-remuneration-report.pdf
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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 increases for other employees across the group.
• –Economic conditions and governance trends.
• –The individual’s performance, skills and responsibilities.
• –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’s home market.
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| 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 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. | |
| Operation | |
| • –The provision of benefits 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 cover, financial counselling and tax advice.
• –The Remuneration Committee has discretion to offer additional allowances, or benefits, to Executive Directors, if considered appropriate and reasonable. These may include relocation expenses, housing allowance and school fees where a Director is asked to relocate from his/her home location as part of their appointment.
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| Opportunity | |
| • –The benefits package is set at a level which the Remuneration Committee considers:
• –provides an appropriate level of benefits depending on the role and individual circumstances;
• –is appropriate in the context of the benefits offered to the wider workforce in the relevant market; and
• –is in line with comparable roles in companies of a similar size and complexity in the relevant market.
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l | Post-retirement provision | |
| Purpose and link to strategy | |
| Provides cost-effective, competitive post-retirement benefits. | |
| Operation | |
| • –Provision of market-competitive pension arrangements or a cash alternative based on a percentage of base salary. | |
| Opportunity | |
| • –The maximum company pension contribution under the 2020 remuneration policy 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 2021 were each2022 was 20% of base salary. The company contribution for Ivan Menezes was reduced from 40% to 30% effective 1 July 2016, and from 30% to 20% effective 1 July 2019.
• It is the company’s intention to–The company will reduce the pension contribution for Ivan Menezes to 14% of salary, in line with the maximum company contribution to new-hire employees in the United Kingdom, byon 1 January 2023.
• –The new CFO, Lavanya Chandrashekar, who was appointed on 1 July 2021, receives a pension contribution of 14% of salary.
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l | Annual Incentive Plan (AIP) | |
| Purpose and link to strategy | |
| Incentivises year-on-year delivery of Diageo’s financial and strategic targets over the year. Provides focus on key financial metrics and the individual’s contribution to the company’s performance. | |
| Operation | |
| • –Performance measures, weightings and targets are set by the Remuneration Committee. Appropriately stretching targets are set by reference to the 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 will normally be deferred into shares 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 be paid out in cash after the end of the financial year.
• –The 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 Committee has discretion to apply malus or clawback to bonus, i.e. the company may seek to recover bonus paid or deferral into shares, in exceptional circumstances, such as gross misconduct or gross negligence during the performance period.
• –Notional 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.
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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. | |
| 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, and 0%-30% on broader objectives based on strategic goals and/or individual contribution. | |
l | Diageo Long-Term Incentive Plan (DLTIP) | |
| Purpose and link to strategy | |
| Provides focus on delivering superior long-term returns to shareholders. | |
| 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 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 Committee has discretion to reduce the number of shares which vest (subject to HMRC rules regarding approved share options), for example 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 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.
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| 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 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 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 | |
| –The vesting of awards is linked to a range of measures which may include, but are not limited to: • –a growth measure (e.g. net sales growth, operating profit growth);
• –a measure of efficiency (e.g. operating margin, cumulative free cash flow, return on invested capital);
• –a measure of Diageo’s performance in relation to its peers (e.g. relative total shareholder return); and
• –a measure relating to ESG (environmental, social or governance) priorities.
• –Measures that apply to performance shares and market-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 | All-employee share plans |
| Purpose and link to strategy |
| To encourage broader employee share ownership through locally approved plans. |
| 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 |
| • –Limits for all-employee share plans are set by the tax authorities. The company may choose to set its own lower limits.
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| Performance conditions |
| • –Under the UK Share Incentive Plan, the annual award of Freeshares is based on Diageo plc financial measures which may include, but are not limited to, measures of sales, profit and cash.
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l | Shareholding requirement |
| Purpose and link to strategy |
| • –Ensures alignment between the interests of Executive Directors and shareholders.
|
| 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 expected to build up their in-employment shareholding within five years of their appointment to the Board. • –Executive Directors will be 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 holding 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 year after leaving the company. |
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l | Chairman of the Board and Non-Executive Directors |
| 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.
|
| Operation |
| • –Fees for the Chairman and Non-Executive Directors are normally reviewed every year. •
–A proportion of the Chairman’s annual fee is 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. The Chairman of the Board, Javier Ferrán, was re- appointedre-appointed on 10 October 2019 for a three-year term, terminable on three months’ notice by either party or, if terminated by the company, by payment of three months’ fees in lieu of notice. |
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| • –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 annual incentive plan for the year ending 30 June 20222023, as well as targets under the long-term incentive plan for awards to be made in September 2021,2022, and how they are aligned with company strategy and the creation of shareholder value, are set out in the annual report on remuneration, on pages 212-213.page 193.
Annual incentive targets will be disclosed retrospectively 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.
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 have been updated from the charts included in the 2021 Directors' remuneration report and reflect projected remuneration for the financial year ending 30 June 2022.2023.
Basis of calculation and assumptions:
The ‘Minimum’ scenario shows fixed remuneration only, i.e. base salary for the year ending 30 June 2022, total value of contractually agreed benefits for 2022,2023 2023, and the pension benefits to be accrued over the year ending 30 June 2022.2023. 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 above, plus a target payout of 50% of the maximum annual bonus and threshold performance vesting for long-term incentive awards at 20% of the maximum award.
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 in performance shares.
The amounts shown in sterling are converted using the cumulative weighted average exchange rate for the year ended 30 June 20212022 of £1 = $1.35.$1.33.
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 short-short-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 Director 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 Menezes Kathryn Mikells Lavanya Chandrashekar | 7 May 2013 1 October 2015 1 July |
Lavanya Chandrashekar | 13 January 2021 |
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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 equivalent to 12 months’ base salary and the cost to the company of providing contractual benefits (including pension contributions but excluding incentive plans). The service contracts also provide for the payment of outstanding pay and bonus if an Executive Directors leaves following a takeover, or other change of control of Diageo plc. If, on the termination date, the Executive Director has exceeded his/her 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). 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/her 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 may exercise its discretion to require 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. |
Annual Incentive 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. Where the Executive Director leaves for any other reason, no payment or bonus deferral will be made. The amount is subject to performance conditions 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 on departure, subject to any holding requirements under the post-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-employment shareholding requirement that ensures the Executive Director continues to be invested in the company’s longer-term interests. On a takeover or other corporate event, awards 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’s discretion during the financial year, awards vest on the original vesting date unless the Remuneration Committee decides otherwise (for example, in the case of death in service). When an Executive Director leaves for any other reason, all unvested awards generally lapse immediately. The retention period for vested awards continues for all leavers other than in cases of disability, ill healthill-health or death in service, unless the Remuneration Committee decides otherwise. 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 Committee decides otherwise (for example, in the case of death in service). On a takeover or other corporate event, awards vest subject to the extent to which the performance conditions are met and, unless the 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). |
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 will pay reasonable repatriation costs for leavers at the 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. |
Non-Executive Directors���Directors’ unexpired terms of appointment
All Non-Executive Directorsnon-executive directors are on three-year terms which are expected to be extended up to a total of nine years.Theyears. The date of initial appointment to the Board and the point at which the current letter of appointment expires for Non-Executive Directorsnon-executive directors are shown in the table below.
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Non-Executive Directors | Date of appointment to the Board | Current letter of appointment expires |
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Javier Ferrán | 22 July 2016 | AGM 2022 |
Susan Kilsby | 4 April 2018 | AGM 20212024 |
Melissa Bethell | 30 June 2020 | AGM 2023 |
Valérie Chapoulaud-Floquet | 1 January 2021 | AGM 2024 |
Sir John Manzoni | 1 October 2020 | AGM 2023 |
Lady Mendelsohn | 1 September 2014 | AGM 2023 |
Alan Stewart | 1 September 2014 | AGM 2023 |
Ireena Vittal | 2 October 2020 | AGM 2023 |
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 Director of the company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a Director of the company.
Remuneration for the wider workforce
The structure of the reward package for the wider employee population is based on the principle that it should be sufficient to attract 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 practice, as well as level of seniority and accountability, reflecting the global nature of Diageo’s business.
There is clear alignment in the pay structures for executivesExecutives and the wider workforce in the way that remuneration principles are followed, as 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 executivesExecutives and other eligible employees. There is a strong focus on performance-related pay, with appropriate levels of differentiation to ensure that reward is invested in the talent that will make the biggest contribution to 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 remuneration 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 framework, as well as throughout the year being informed about the context, challenges and opportunities relating to the remuneration of the wider workforce across the world, to enable the Committee to consider the broader employee context when making executive remuneration decisions.
In 2021,2022, the Remuneration Committee has considered:
– the impact of the pandemic•external factors impacting on business performance and reward outcomes;
– •the continued focus on appropriate and competitive pay positioning around the world, with an emphasis on key markets such as the US and China;world;
– •ongoing commitment to inclusion and diversity;diversity and achieving Diageo's broader ESG ambition; and
– •review of global benefits, with a consistent core benefit offering implemented across the world.
The Committee also considers the annual salary increase budgets for employees in key markets, as well as pay for the global senior management population.
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 impact of the pandemic on the vesting outcome for outstanding long-term incentives, the introduction of the new ESG measure under the long-term incentive plan and the setting of stretching and measurable targets under the annual and long-term incentive plans.
More detail on engagement with shareholders in 20212022 can be found in the Remuneration Committee governance section on page 190.182.
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 their own remuneration, working environment and workforce policies and practices. 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 20192019. In fiscal 22, the Chairman and throughout the year hasNon-Executive Directors met with a range of1,435 Diageo employees across allin 16 meetings, representing different levels, functions and regionsregions. The insights gathered from the sessions are reviewed and discussed periodically at Board meetings, something that helps to hear their viewsinform key board decisions. More detail on the company, cultureapproach and working environment. A number of Non-Executive Directors also met with employees around the world to broaden the reachimpact of workforce engagement activities. in the year ended 30 June 2022 is outlined in the Corporate Governance report on page 161.
As part of this engagement, the Chairman has taken the opportunity to explain to employees the role of the Board and its delegated Committees, including the role of the Remuneration Committee in setting executive pay. In theThe sessions this year ending 30 June 2022, it is intended that workforce engagement sessions will includeincluded a more detailed explanation ofdiscussion about the executive remuneration framework.
A workforce engagement statement has been sharedframework, executive remuneration principles and structure and how executive pay aligns with employees to feed back the key insights and outcomes from all of the engagement activities during 2021, and this included information on the way in which workforce engagement discussions on the management of employee health, safety and wellbeing during the pandemic provided valuable insights and contextpay for the Remuneration Committee’s decision making on the incentive plan outcomes for the year ended 30 June 2021 for executives and the wider workforce. More detail on the approach and impact of workforce engagement in the year ended 30 June 2021 is outlined in the governance report on pages 169-170.
Annual report on remuneration
The following section provides details of how the company’s 2020 remuneration policy was implemented during the year ended 30 June 2021,2022, and how the Remuneration Committee intends to implement the proposed remuneration policy in the year ending 30 June 2022.2023.
Single total figure of remuneration for Executive Directors
The table below details the Executive Directors’ remuneration for the year ended 30 June 2021.2022.
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| | Ivan Menezes1 | | | Kathryn Mikells1 |
Fixed pay | 2021 | 2021 | 2020 | 2020 | 2021 | 2021 | 2020 | 2020 |
| '000 | '000 | '000 | '000 | '000 | '000 | '000 | '000 |
Salary | £1,231 | $1,661 | £1,309 | $1,649 | £810 | $1,093 | £861 | $1,085 |
Benefit2 | £82 | $111 | £99 | $124 | £47 | $63 | £42 | $53 |
Pension3 | £306 | $413 | £281 | $354 | £172 | $232 | £176 | $221 |
Total fixed pay | £1,619 | $2,185 | £1,689 | $2,127 | £1,029 | $1,388 | £1,079 | $1,359 |
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Performance related pay |
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Annual incentive4 | £2,308 | $3,115 | £0 | $0 | £1,478 | $1,995 | £0 | $0 |
Long-term incentives 5 | £1,975 | $2,666 | £584 | $736 | £1,247 | $1,684 | £369 | $465 |
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Other incentives6 | £0 | $0 | £0 | $0 | £1 | $1 | £4 | $5 |
Total variable pay | £4,283 | $5,781 | £584 | $736 | £2,726 | $3,680 | £373 | $470 |
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Total single figure of remuneration | £5,902 | $7,966 | £2,273 | $2,863 | £3,755 | $5,068 | £1,452 | $1,829 |
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| Ivan Menezes1 | Lavanya Chandrashekar1 |
| 2022 | 2022 | 2021 | 2021 | 2022 | 2022 | 2021 | 2021 |
| £ '000 | $ '000 | £ 000 | $ 000 | £ '000 | $ '000 | '000 | '000 |
Salary | £1,277 | $1,699 | £1,231 | $1,661 | £733 | $975 | n/a | n/a |
Benefits2 | £133 | $177 | £82 | $111 | £429 | $571 | | |
Pension3 | £209 | $278 | £306 | $413 | £103 | $138 | | |
Total fixed pay6 | £1,619 | $2,153 | £1,619 | $2,185 | £1,265 | $1,684 | | |
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Performance related pay |
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Annual incentive4 | £2,413 | $3,209 | £2,308 | $3,115 | £1,320 | $1,755 | | |
Long-term incentives5 | £3,850 | $5,120 | £2,092 | $2,825 | £131 | $174 | | |
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Total variable pay6 | £6,262 | $8,329 | £4,400 | $5,940 | £1,450 | $1,929 | | |
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Total single figure of remuneration6 | £7,881 | $10,482 | £6,019 | $8,125 | £2,716 | $3,613 | | |
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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 2022 the exchange rate was £1 = $1.33 and for the year ended 30 June 2021 the exchange rate was £1 = $1.35 and for the year ended 30 June 2020 the exchange rate was £1 = $1.26.$1.35. Ivan Menezes and Kathryn MikellsLavanya Chandrashekar are both paid in US dollars. | |
2 | Benefits | The Benefits isnumber includes the gross value of all taxable benefits. For Ivan Menezes, these include medical insurance (£15k), company car allowance (£15k)16k), contracted car service (£11k)11.5k), financial counselling and tax return preparation (£38k)86k), product allowance, life and long-term disability cover. Kathryn Mikells’Lavanya Chandrashekar's benefits include flexible benefits allowance (£18k), financial counsellingtravel allowance (£19k), contracted car service (£3k), life cover (£6k)10k) and product allowance. £397k relates to one-time gross relocation costs following her relocation from the US to the UK in July 2021. | |
3 | Pension | Pension benefits earned during the year represent 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 been a deferred member of the 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 is nil. Kathryn MikellsLavanya Chandrashekar became a Director and started accruing benefits in the Supplemental Executive Retirement Plan (SERP) with effect from 9 November 2015.1 July 2021. | Pages 204-205Page 198 |
4 | Annual incentive | The maximum performance levellevels achieved for eachthe financial measure was exceededmeasures underpinning the annual incentive plan for the year ended 30 June 2021, resulting2022 resulted in an annual incentive outcome of 100% of maximum for the financial elementelements of the plan, which represented 80% of the maximum incentive opportunity. Taking account of performance against individual objectives, the annual incentive payout is 93.8%93.75% of maximum for Ivan Menezes and 91.3%90.00% of maximum for Kathryn Mikells.Lavanya Chandrashekar. In accordance with the 2020 remuneration policy, one-third of Executive Director AIP after tax will be deferred into Diageo shares that will be held for a period of three years in a nominee account. | Pages 201-202Page 194 |
5 | Long-term incentives | Long-term incentives represent the estimated gain 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. For 2022, long-term incentives comprise performance shares and share options awarded in 2019 and due to vest in September 2022 at 59.3% and 61.5% of maximum respectively for Ivan Menezes. Lavanya Chandrashekar became an Executive Director on 1 July 2021. In 2019, before she became an Executive Director, Lavanya Chandrashekar was awarded a 2019 PSP award, which is due to vest in September 2022 at 59.8%. £642k of the value reported above for Ivan Menezes and £11k for Lavanya Chandrashekar related to share price appreciation over the performance period. For 2021, long-term incentives comprise performance shares and share options awarded in 2018 and due to vestthat vested in September 2021 at 29.3% and 10% of maximum respectively. £576k of the value reported above for Ivan Menezes and £364k for Kathryn Mikells related to share price appreciation over the performance period. For 2020, long-term incentives comprise performance shares and share options awarded in 2017 that vested in September 2020 at 10% and 27.5% of maximum respectively, and dividend shares arising on performance shares that vested in September 2020.2021. Long-term incentives have been re-stated to reflect the share price on the vesting date ($133.25 compared toof $195.47 instead of the average three-month share price used in last year’s report of $137.21). The 2017 performance share award vested in September 2020 at 6.9% of maximum, as disclosed in the 2020 remuneration report, and a further 3.1% of the award vested in February 2021 following the resolution of the arbitration proceedings with Moët Hennessy SAS and Moët Hennessy International SAS in relation to the non-payment of a dividend payment for the year ended 31 December 2019.$186.00. | Page 203 196 |
6 | Other incentivesTotals | Other incentives includeSome figures and sub-totals add up to slightly different amounts than the face value of awards made under the all-employee share plans (number of shares multiplied by the share price on the date of grant). Awards do not have performance conditions attached.totals due to rounding. | |
Payments to former Directors
There were no payments to former Directors in the year ended 30 June 2021.
Payments for loss of office
There were no payments for loss of office to Executive Directors in the year ended 30 June 2021.
Kathryn Mikells left the company on 30 June 2021 as part of an orderly succession plan, with notice beginning on 13 January 2021 upon the announcement of her intended departure. In accordance with the approved 2020 remuneration policy and her service contract which provided for a 12-month notice period, Kathryn received half of the payment in lieu of the remainder of her notice period (six months and 12 days) in July 2021 in respect of salary, benefits and pension ($362,174). In accordance with her service contract,
Kathryn was entitled to the remaining half of the payment in lieu of notice in monthly instalments over a six-month period between January and June 2022, but these payments will no longer become payable as a result of Kathryn taking up alternative employment (announced on 19 July 2021). Kathryn remains eligible for an annual incentive payment for the year ended 30 June 2021, subject to the performance conditions in the usual way (see page 201 for more details). The Committee also exercised its discretion, in accordance with the plan rules and the remuneration policy, to prorate to the leaving date all unvested long-term incentive awards. These awards remain subject to performance conditions to be assessed at the end of the original performance periods in 2021, 2022 and 2023 with a subsequent two-year holding period. The post-employment shareholding requirement policy will be applied for a period of two years post-exit, requiring Kathryn to hold Diageo shares equal to 400% of salary until 30 June 2022 and 200% of salary until 30 June 2023. Kathryn is also entitled to receive pension payments under the SERP in line with the disclosure on pages 204-205. In line with internal policies and the remuneration policy, the company supported Kathryn with the cost of her repatriation back to the United States. This support amounted to £106,000 in addition to shipping costs of £23,507 and £7,640 in flights (amounts paid net of tax, with the company covering the cost of tax on top). The company has also paid £12,000 of legal support for Kathryn and will be providing tax return preparation support for a period of up to three years following her departure (up to a maximum cost of £15,000 per annum).
Looking back on 20212022
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Annual incentive plan (AIP) |
AIP payout for the year ended 30 June 20212022
AIP payouts for the Executive Directors 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.
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Group financial measures1 | | | | | | |
Measure | Weighting | Threshold | Target6 | Maximum | Actual | Payout (% of total AIP opportunity) |
Payout opportunity (% maximum) | | 25.0 | % | 50.0 | % | 100.00 | % | | |
Net sales (% growth)2 | 13.3 | % | (27.4) | % | (22.9) | % | (18.4) | % | 1.0 | % | 13.3 | % |
Operating profit (% growth)2 | 13.3 | % | (55.3) | % | (46.3) | % | (37.3) | % | (3.4) | % | 13.3 | % |
Operating cash conversion3 | 13.3 | % | 45.0 | % | 55.0 | % | 65.0 | % | 100.8 | % | 13.3 | % |
Half-year performance for 1 July 2020 - 31 December 2020 | 40.0 | % | | | | | 40.0 | % |
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Net sales (% growth)2 | 13.3 | % | 25.5 | % | 31.3 | % | 37.1 | % | 39.3 | % | 13.3 | % |
Operating profit (% growth)2 | 13.3 | % | 38.1 | % | 53.1 | % | 68.0 | % | 69.7 | % | 13.3 | % |
Operating cash conversion3 | 13.3 | % | 90.0 | % | 100.0 | % | 101.0 | % | 110.5 | % | 13.3 | % |
Half-year performance for 1 January 2021 - 30 June 2021 | 40.0 | % | | | | | 40.0 | % |
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Full-year net sales (% growth)2 | 16.0 | % | | | | | |
Full-year operating profit (% growth)2 | 17.7 | % | | | | | |
Full-year operating cash conversion3 | 110.5 | % | | | | | |
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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 | % | | 13.75 | % |
Global employee engagement Achieve consistent levels of employee engagement compared to 2019 levels, as measured by the 'Your Voice' survey | | The Chief Executive’s strong leadership in galvanising the company through unprecedented challenges over the past year has deepened employees’ sense of purpose, community and connection to Diageo, with the result that overall employee engagement at 81% was 1% higher than 2019. A strong response to pandemic included regular and effective employee communications, clear protocols on the return to office and trade as well as enhanced support to employees such as additional leave, flexible working practices and wellbeing resources. Employee engagement has been driven further through the focus on sustainability ('Society 2030: Spirit of Progress' ambition) and inclusion & diversity (e.g. support for the Black Lives Matter movement and International Women’s Day), all of which have been championed extensively within the organisation. | 6.25 | % |
Supporting communities and trade Support the recovery and build resilience from Covid-19 in communities and the hospitality industry | | Promotion of moderation and tackling harm in the home through DRINKiQ campaign, which reached 1.4m people (vs target of 600k). Tackled hospitality unemployment through the delivery of a business and hospitality skills training programme, which reached 8.6k people (vs target of 5.5k) across 21 markets and all 6 regions, despite Covid-19 restrictions. Delivered access to enhanced hygiene, sanitation and clean water through community WASH programme, which reached 54.7k people (vs target of 17.5k). | 7.50 | % |
Kathryn Mikells Chief Financial Officer | 20 | % | | 11.25 | % |
Organisation effectiveness Deliver effectiveness improvements in the technology and shared services functions | | Driven transformation within the technology and shared service functions, delivering operational efficiencies in areas such as the resolution of critical technology service incidents and strategic project deliverables as well as shared services effectiveness. | 5.00 | % |
Productivity Deliver productivity benefits | | Productivity benefits delivered in excess of target across supply, marketing, indirects and organisation effectiveness. | 6.25 | % |
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Group financial measures1 | | | | | | |
Measure | Weighting | Threshold | Target6 | Maximum | Actual | Payout (% of total AIP opportunity) |
Payout opportunity (% maximum) | | 25 | % | 50 | % | 100 | % | | |
Net sales (% growth)2 | 26.6 | % | 5.2 | % | 8.2 | % | 11.2 | % | 21.4 | % | 26.6 | % |
Operating profit (% growth)2 | 26.6 | % | 8.0 | % | 14.0 | % | 20.0 | % | 26.3 | % | 26.6 | % |
Operating cash conversion3 | 26.6 | % | 94.0 | % | 99.0 | % | 104.0 | % | 105.1 | % | 26.6 | % |
Full year performance for 1 July 2021 - 30 June 2022 | 80.0 | % | | | | | 80.0 | % |
| | | | | | |
Net sales (% growth)2 | 26.6 | % | 25.5 | % | 31.3 | % | 37.1 | % | 39.3 | % | 26.6 | % |
Operating profit (% growth)2 | 26.6 | % | 38.1 | % | 53.1 | % | 68.0 | % | 69.7 | % | 26.6 | % |
Operating cash conversion3 | 26.6 | % | 90.0 | % | 100.0 | % | 101.0 | % | 110.5 | % | 26.6 | % |
Half-year performance for 1 January 2021 - 30 June 2021 | 80.0 | % | | | | | 80.0 | % |
| | | | | | |
| Actual | | | | | |
Full-year net sales (% growth)2 | 16.0 | % | | | | | |
Full-year operating profit (% growth)2 | 17.7 | % | | | | | |
Full-year operating cash conversion3 | 110.5 | % | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Payout | | | | | | |
| Group (weighted 80%) | IBO (weighted 20%) | Total (% max) | Total (% salary) | Total (’000)4 | Total (’000) |
Ivan Menezes5 | 80.0 | % | 13.75 | % | 93.75 | % | 187.5 | % | £2,308 | | $3,115 | |
Kathryn Mikells | 80.0 | % | 11.25 | % | 91.25 | % | 182.5 | % | £1,478 | | $1,995 | |
| | | | | | | | | | | |
Individual business objectives | | | |
Measure (IBOs equally weighted) and target | Weighting | Result | Payout (% of total AIP opportunity) |
Ivan Menezes Chief Executive | 20 | % | | 13.75 | % |
Global Market Share Performance - Grow or hold off-trade market share in 2/3rds of total net sales in measured markets.
| | We grew or held off-trade market share in over 85% of total net sales in measured markets.6 | 7.50 | % |
Positive drinking Achieve improvement in Positive Drinking in fiscal 22 Launch revamped DRINKiQ platform in 46 countries and ensure campaigns to amplify awareness running in all markets. Launch and amplify Wrong Side of the Road (WSOTR) Programme and educate 375,000 people on the dangers of drink driving. Reach 450 million consumers with a dedicated responsible drinking message from Diageo and our brands. | | DRINKiQ (our responsible drinking tool) is now available in 73 countries in 23 languages, with amplification campaigns running around the world. This achievement means we have reached our 2030 target of launching DRINKiQ in all of our markets. WSOTR is a hard-hitting new programme to support changes in attitudes to drink driving globally. Despite the impacts from Covid-19 delaying and/or preventing campaign launches in multiple markets, the WSOTR Programme reached 500,415 people in 24 countries by the end of fiscal 22. By the end of fiscal 22, we reached 456 million people with messages of moderation. | 6.25 | % |
Lavanya Chandrashekar Chief Financial Officer | 20 | % | | 10.00 | % |
Global Operating Margin - Grow operating margin in line with overall AOP.
| | Achieved the overall financial performance of the company versus AOP in fiscal 22.
| 5.00 | % |
Transformation of Global Business Operations Reduce time taken to set up customers and suppliers to increase speed to market and support growth. Reduction of 30% in manual journal entries. Improve Service Level Agreement (SLA) performance by resolving 80% of critical and high priority incidents within the specified SLA timeframe. | | Significant progress made with the pilot market exceeding the target set and the global average time to set up customers substantially reduced from prior year. Technology solution designed to hit the target number of days to set up customers has been finalised and implementation was commenced in fiscal 22. Set up time for onboarding new suppliers has been reduced and the lead market has hit the supplier set up target in fiscal 22. Approximate reduction in manual journal entries of 75%, exceeding the target. Target exceeded, with 83% of combined critical and high priority incidents resolved within SLA timeframe in fiscal 22. | 5.00 | % |
| | | | | | | | | | | | | | | | | | | | |
Payout | | | | | | |
| Group (weighted 80%) | IBO (weighted 20%) | Total (% max) | Total (% salary) | Total (’000)4 GBP | Total (’000) USD |
Ivan Menezes4,5 | 80.0 | % | 13.75 | % | 93.75 | % | 187.50 | % | £2,413 | | $3,209 | |
Lavanya Chandrashekar4,5 | 80.0 | % | 10.00 | % | 90.00 | % | 180.00 | % | £1,320 | | $1,755 | |
1. Performance against the AIP measures is calculated using 20212022 budgeted exchange rates in line with management reporting and excludes the impact of exchange and any exceptional items.measured on a currency-neutral basis.
2. For AIP purposes, the net sales and operating profit measures are calculated on budgeted currency exchange rates, after adjustments for acquisitions and disposals at budgeted foreign exchange rates.and incorporate the new organic treatment of hyperinflationary economies.
3. For AIP purposes, operating cash conversionOperating 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 new organic treatment of hyperinflationary economies. The components of the ratio isare stated at the budgeted exchange rate for the year.
4. AIP payments are calculated using base salary as at 30 June 2021,2022, in line with the global policy that applies to other employees across the company.
5. In accordance with the 2020 remuneration policy, one-third of Ivan Menezes’ and Lavanya Chandrashekar's AIP payment after tax will be deferred into Diageo shares that will be held for a period of three years in a nominee account managed by the company’s trustees.account. These shares will be acquired in September 2021.2022. The number of shares will be disclosed in the 20222023 remuneration report.
6. The targets for the financial measures for the first half6 Internal estimates incorporating AC Nielsen, Association of the year (1 July 2020 - 31 December 2020) were set before the results announcement for fiscal 2020, at a time when there was extensive trade shutdown across many parts of the worldCanadian Distillers, Dichter and an unprecedented level of uncertainty for the year ahead. The targets for the first half are growth rates compared to the first half baseline of the prior year (1 July 2019 - 31 December 2019), which was unaffected by the Covid-19 pandemic. The targets for the second half of the year are growth rates compared to 1 January 2020 - 30 June 2020.Neira, Frontline, Intage, IRI, ISCAM, NABCA, Scentia, State Monopolies, TRAC, Ipsos and other third-party providers.
| | |
Long-term incentive plans (LTIPs) |
As approved by shareholders at the AGM in September 2014, long-termLong-term incentive awards are made under the Diageo Long-Term Incentive Plan (DLTIP)., which was approved shareholders at the AGM in September 2014. 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 deliveredgranted on an annual basis in both performance shares and share options. WithFor Executive Directors, 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 2018,2019, vesting in September 20212022
On 4In September 2018,2019, Ivan Menezes and Kathryn Mikells received share option awards under the DLTIP, with an exercise price of $140.89.$170.28. 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; and
– •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 | Heineken | Pernod Ricard |
Brown-Forman | Kimberly-Clark | Procter & Gamble |
Carlsberg | Mondelēz InternationalL'Oréal | Reckitt Benckiser |
The Coca-Cola Company | NestléMondelēz International | L'OréalUnilever |
Colgate-Palmolive | PepsiCoNestlé | Unilever |
Groupe Danone | PepsiCo | |
| | |
| | |
Performance shares – awarded in September 2018,2019, vesting in September 20212022
On 3In September 2018,2019, Ivan Menezes and Kathryn MikellsLavanya Chandrashekar (although not an Executive Director 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 equally weighted performance conditions outlined below:
– •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.
Notional dividends accrue on awards and are paid out either in cash or shares in accordance withon the vesting schedule.number of shares which vest.
Vesting outcome for 20182019 performance share and share option awards in September 20212022
The 2018For Ivan Menezes, the 2019 performance share award vested at 29.3%59.3% of maximum and the 20182019 share option award vested at 10%61.5% of the maximum, as detailed below: | Vesting of 2018 DLTIP | Weighting | Threshold | Midpoint | Maximum | Actual | Vesting (% maximum)5 | |
Vesting of 2019 DLTIP5 | | Vesting of 2019 DLTIP5 | Weighting | Threshold | Midpoint | Maximum | Actual | Vesting (% maximum)5 |
Vesting if performance achieved (% maximum) | Vesting if performance achieved (% maximum) | | 20 | % | 60 | % | 100 | % | | Vesting if performance achieved (% maximum) | | 20 | % | 60 | % | 100 | % | |
Organic net sales growth (CAGR)1 | Organic net sales growth (CAGR)1 | 33 | % | 3.75 | % | 4.875 | % | 6.0 | % | 4.125 | % | 11.1 | % | Organic net sales growth (CAGR)1 | 33 | % | 3.75 | % | 4.875 | % | 6.0 | % | 8.9 | % | 33.3 | % |
Adjusted profit before exceptional items and tax (CAGR)2 | Adjusted profit before exceptional items and tax (CAGR)2 | 33 | % | 4.5 | % | 7.5 | % | 10.5 | % | 3.1 | % | 0.0 | % | Adjusted profit before exceptional items and tax (CAGR)2 | 33 | % | 4.5 | % | 7.5 | % | 10.5 | % | 8.8 | % | 26.0 | % |
Cumulative free cash flow3 | Cumulative free cash flow3 | 33 | % | £7,400m | £8,050m | £8,700m | £7,962m | 18.2 | % | Cumulative free cash flow3 | 33 | % | £8,600m | £9,100m | £9,600m | £8,271m | 0.0 | % |
Vesting of performance shares (% maximum) | Vesting of performance shares (% maximum) | | 29.3 | % | Vesting of performance shares (% maximum) | | 59.3 | % |
Adjusted profit before exceptional items and tax (CAGR)2 | Adjusted profit before exceptional items and tax (CAGR)2 | 50 | % | 4.5 | % | 7.5 | % | 10.5 | % | 3.1 | % | 0.0 | % | Adjusted profit before exceptional items and tax (CAGR)2 | 50 | % | 4.5 | % | 7.5 | % | 10.5 | % | 8.8 | % | 39.0 | % |
Relative total shareholder return4 | Relative total shareholder return4 | 50 | % | 9th | – | 3rd | 9th | 10.0 | % | Relative total shareholder return4 | 50 | % | 9th | – | 3rd | 8th | 22.5 | % |
Vesting of share options (% maximum) | Vesting of share options (% maximum) | | 10.0 | % | Vesting of share options (% maximum) | | 61.5 | % |
1. The compound annual growth rate (CAGR) for organic net sales is based on the application of annual organic netNet sales growth rates in eachis calculated on an organic basis consistent with the methodology of external reporting which is presented on a constant currency basis excluding the individual years ended June 2019, June 2020impact of acquisitions and June 2021 (usingdisposals and excluding any hyperinflation impact above the year ended 30 June 2018 as a base)new organic treatment of hyperinflationary economies.
2. 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 2019,2020, June 20202021 and June 20212022 (using the year ended June 20182019 as a base) excluding the impact of exchange, exceptional items, acquisition and disposals, share buyback programmes, and the post employmentpost-employment net income/charges included incharges. The impact of hyperinflation on operating profit is considered under the same new organic methodology as for net sales while the impact on other financial chargeslines (primarily on finance charges) is excluded.
3. 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,
Governance (continued)
acquisition and disposals and incorporates the new organic treatment of hyperinflationary economies.4. Relative total shareholder returnTotal Shareholder Return (TSR) 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 returnTSR of thea peer group of 16 other international drinks and consumer goods companies,companies. TSR calculations are based on an averageaveraging period of six6 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 thresholdCalculation 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 thresholdperformed and maximum.provided by Deloitte.
5. No discretion was exercised by the Remuneration Committee in determining the long-term incentive outcomes.
Vesting outcome for 2019 performance share award in September 2022 - award made to Lavanya Chandrashekar
For Lavanya Chandrashekar, the 2019 performance share award vested at 59.8% for employees below Executive Director level, which Lavanya Chandrashekar was at the time of grant. The vesting outcome is different for Lavanya Chandrashekar (compared to Ivan Menezes) because below Executive Committee awards have a threshold vesting level of 25% for all measures apart from TSR. The midpoint is calculated on a straight-line basis from the threshold.
| | | | | | | | | | | | | | | | | | | | |
Vesting of 2019 DLTIP4 | Weighting | Threshold | Midpoint | Maximum | Actual | Vesting (% maximum)4 |
Vesting if performance achieved (% maximum) | | 25 | % | 62.5 | % | 100 | % | | |
Organic net sales growth (CAGR)1 | 33 | % | 3.75 | % | 4.875 | % | 6.0 | % | 8.9 | % | 33.3 | % |
Adjusted profit before exceptional items and tax (CAGR)2 | 33 | % | 4.5 | % | 7.5 | % | 10.5 | % | 8.8 | % | 26.5 | % |
Cumulative free cash flow3 | 33 | % | £8,600m | £9,100m | £9,600m | £8,271m | 0.0 | % |
Vesting of performance shares (% maximum) | | | | | | 59.8 | % |
1. Net sales growth is calculated on an organic basis consistent with the methodology of external reporting which is presented on a constant currency basis excluding the impact of acquisitions and disposals and excluding any hyperinflation impact above the new organic treatment of hyperinflationary economies.
2. The compound annual growth rate (CAGR) for profit before exceptional items and tax is based on the application of annual PBET growth rates in each of the individual years ended June 2020, June 2021 and June 2022 (using the year ended June 2019 as a base) excluding the impact of exchange, exceptional items, acquisition and disposals, share buyback programmes, and the post-employment net income/charges. The impact of hyperinflation on operating profit is considered under the same new organic methodology as for net sales while the impact on other lines (primarily on finance charges) is excluded.
3. 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, the interest cost on share buyback programmes, acquisition and disposals and incorporates the new organic treatment of hyperinflationary economie
4. No discretion was exercised by the Remuneration Committee in determining the long-term incentive outcomes
6.
Summary of performance share awards and options vesting for Ivan Menezes and Lavanya Chandrashekar
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | 02/09/2019 | 38,827 | | 59.3 | % | 23,024 | | — | | $190 | | 1,390 | $4,644 | | £3,492 |
| Share options | 02/09/2019 | 38,827 | | 61.5 | % | 23,878 | | $ | 170.28 | | $190 | | — | $476 | | £358 |
Lavanya Chandrashekar | Performance shares | 02/09/2019 | 1,444 | | 59.8 | % | 863 | | — | | $190 | | 52 | $174 | | £131 |
| | | | | | | | | | |
1. The value shown in the single figure of remuneration on page 199,119, outlined in more detail in the table below,above, is based on an average ADR price for the last three months of the financial yearyear.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Award | Award Date | Awarded (ADRs) | Vesting (% Max) | Vesting (ADRs) | Option price | ADR price | Dividend Equivalent share | Value ($ '000) | Value (£ '000) |
Ivan Menezes | Performance shares | 03/09/2018 | 42,848 | | 29.3 | % | 12,554 | | — | | $186 | | 740 | $2,473 | | £1,832 | |
| Share option | 03/09/2018 | 42,848 | | 10.0 | % | 4,284 | | $ | 140.89 | | $186 | | — | $193 | | £143 | |
Kathryn Mikells | Performance shares | 03/09/2018 | 27,062 | | 29.3 | % | 7,929 | | — | | $186 | | 467 | $1,562 | | £1,157 | |
| Share option | 03/09/2018 | 27,062 | | 10.0 | % | 2,706 | | $ | 140.89 | | $186 | | — | $122 | | £90 | |
Pension and benefits in the year ended 30 June 20212022
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 MikellsLavanya Chandrashekar are members of the Diageo North America Inc. Supplemental Executive Retirement Plan (SERP) with an accrual rate of 20% of base salary and 14% of base salary respectively during the year ended 30 June 2021.2022. The accrual rate for Ivan Menezes was reduced from 30% to 20% of salary with effect 1 July 2019 and, in accordance with the 2020 remuneration policy, it is the company’s intention tocompany will reduce the accrual rate further to 14% of salary byon 1 January 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, 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)Lavanya Chandrashekar). The balance may be withdrawn in either a lump sum or five equal annual instalments, depending on the size of the balance.
Both Ivan Menezes and Lavanya Chandrashekar participated in the US Cash Balance Plan and the Benefit Supplemental Plan (BSP) until August 2012 and hasJune 2021 respectively, and have 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 takehas reached his UK pension benefits fromnormal retirement 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.DPS.
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.Lavanya Chandrashekar.
The table below shows the pension benefits accrued by each Director to date. The accrued UKUnited Kingdom benefits for Ivan Menezes are annual pension amounts, whereas the accrued US benefits for Ivan Menezes and Kathryn MikellsLavanya Chandreshekar are one-off cash balance amounts. |
|
| 30 June 2021 | 30 June 2020 |
| 30 June 2022 | 30 June 2021 |
Executive Director | Executive Director | UK pension £'000 p.a. | US benefit £'000 | UK pension £'000 p.a. | US benefit £'000 | Executive Director | UK pension £'000 p.a. | US benefit £'000 | UK pension £'000 p.a. | US benefit £'000 |
Ivan Menezes1 | Ivan Menezes1 | 75 | 7,645 | 74 | 8,225 | Ivan Menezes1 | 75 | 9,251 | 75 | 7,645 |
Kathryn Mikells2 | Nil | 876 | Nil | 797 | |
Lavanya Chandrashekar2 | | Lavanya Chandrashekar2 | Nil | 302 | Nil | 160 |
1. Ivan Menezes' US benefits are lowerhigher at 30 June 2022 than at 30 June 2021 than at 30 June 2020 by £580k
–£333k£1,606k. £369k of which is due to pension benefits earned over the year (£306k209k of which is over and above the increase due to inflation – as reported in the single figure of remuneration, see page 199);
–£45k193). £57k of which is due to interest earned on his deferred US benefits over the year; and
–(£958k)year. 1,180k of which is due to exchange rate movements over the year.
2. Kathryn Mikells’Lavanya Chandrashekar's US benefits are higher at 30 June 20212022 than at 30 June 20202021 by £79k
(–£176k£142k. £103k of which is due to pension benefits earned over the year (£172k103k of which is over and above the increase due to inflation – as reported in the single figure of remuneration, see page 199);193). £4k of which is due to interest earned on her deferred US benefits over the year; and
–(£97k)35k of which is due to exchange rate movements over the year.
The normal retirement ageNormal 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 |
| | | | |
| | | | | | | | | | | | | | |
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 |
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 20212022
On 3 September 2020,2021, Ivan Menezes and Kathryn MikellsLavanya Chandrashekar received awards of performance shares and market-price share options under the DLTIP as a percentage of base salary as outlined below. The three-year period over which performance will be measured is 1 July 20202021 to 30 June 2023. The targets were not set at the time of the 2020 remuneration report due to the impact of the pandemic and were instead disclosed in full in an RNS announcement on 10 February 2021.2024.
The performance measures and targets for awards made in September 20202021 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 is 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 for the first time for this award in 2020, reinforces 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 areis the same as the 20212022 award, outlined in more detail on page 213.207.
| | | Performance shares | Share options | | Performance shares | | Share options |
2020 DLTIP | Organic net sales value growth | Organic profit before exceptional items and tax growth | Reduction in greenhouse gas emission | Improvement in water efficiency | Changed attitudes on dangers of underage drinking | % Female leaders | % Ethnically diverse leaders | Cumulative free cash flow | Relative TSR | |
2021 DLTIP | | 2021 DLTIP | Organic net sales growth | Organic profit before exceptional items and tax growth | Reduction in greenhouse gas emission | Improvement in water efficiency | Changed attitudes on dangers of underage drinking | % Female leaders | % Ethnically diverse leaders | | Cumulative free cash flow | Relative TSR |
Weighting | Weighting | 40 | % | 40 | % | 5 | % | 5 | % | 5 | % | 2.5 | % | 2.5 | % | 50 | % | 50 | % | Weighting | 40 | % | 40 | % | 5 | % | 5 | % | 5 | % | 2.5 | % | 2.5 | % | | 50 | % | 50 | % |
Target range | Target range | 4% - 8% | 4.5% - 12% | 6.3% - 14.3% | 5.8% - 11.2% | 0.75m - 1.25m | 41% - 43% | 38% - 40% | £6,200m - £8,200m | Median - upper quintile | Target range | 5% - 9% | 6.5% - 13.5% | 19.1% - 27.1% | 6.3% - 12.1% | 2.3m - 3.7m | 44% - 46% | 39% - 41% | | £7,450m - £9,250m | Median - upper quintile |
20% of DLTIP awards will vest at threshold, with vesting up to 100% if the maximum level of performance is achieved. As explained in the remuneration policy table, one performance share is deemed equal in value at grant to three share options.
| Executive Director | Executive Director | Date of grant | Plan | Share type | Awards made during the year | Exercise price | Face value '000 | Face value (% of salary) | Executive Director | Date of grant | Plan | Share type | Awards made during the year | Exercise price | Face value
The proportion of the awards outlined above that will vest is dependent uponon the achievement of performance conditions and continued employment, and the actual value may be nil. The vesting outcomes will be disclosed in the 20232024 Annual Report. The face value of each award has been calculated using the award price.
In accordance with the Plan Rules,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 ($143.63)174.97). 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 ($133.88)194.75). The ADR price on the date of grant was $133.70.$195.97.
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 2020 1 | Granted | Vested/exercised | Dividends awarded and released | Lapsed | Number of shares/options at 30 June 2021 | Ivan Menezes | | | | | | | | | | | | | DLTIP – share options3 | Sep 2015 | 2015-2018 | 2018 | ADR |
| $104.93 | 29,895 |
| |
|
| 29,895 | DLTIP – share options3 | Sep 2016 | 2016-2019 | 2019 | ADR |
| $113.66 | 39,734 |
|
|
| | 39,734 | DLTIP – share options3 | Sep 2017 | 2017-2020 | 2020 | ADR | | $134.06 | | 51,268 | | | | 37,170 | | 14,098 | Total vested but unexercised share options in Ords2 | | | | 334,908 | | | | | | | | | | | | | | DLTIP - share options4 | Sep 2018 | 2018-2021 | 2021 | ADR | | $140.89 | 42,848 | |
|
|
| 42,848 | DLTIP - share options5 | Sep 2019 | 2019-2022 | 2022 | ADR | | $170.28 | 38,827 | |
|
|
| 38,827 | DLTIP - share options | Sep 2020 | 2020-2023 | 2023 | ADR | | $133.88 | 0 | 43,377 |
|
|
| 43,377 | Total unvested share options subject to performance in Ords2 | | | | 500,208 | DLTIP - performance shares7 | Sep 2017 | 2017-2020 | 2020 | ADR | $134.83 | | 51,268 | | 5,126 | | 400 | | 46,142 | | 0 | DLTIP - performance shares4 | Sep 2018 | 2018-2021 | 2021 | ADR | $139.41 | | 42,848 | |
|
|
| 42,848 | DLTIP - performance shares5 | Sep 2019 | 2019-2022 | 2022 | ADR | $174.72 | | 38,827 | |
|
|
| 38,827 | DLTIP - performance shares11 | Sep 2020 | 2020-2023 | 2023 | ADR | $133.70 | | 0 | 43,377 |
|
|
| 43,377 | Total unvested shares subject to performance in Ords2 | | | | 500,208 | Kathryn Mikells9 | | | | | | | | | | | | | DLTIP – share options3,6,10 | Sep 2016 | 2016-2019 | 2019 | Ord | | 2113p | 93,752 | | 1,037 | |
|
| 92,715 | DLTIP – share options3 | Sep 2017 | 2017-2020 | 2020 | ADR | | $134.06 | 32,380 | | | | 23,476 | 8,904 | Total vested but unexercised share options in Ords2 | | | | 128,331 | | | | | | | | | | | | | | DLTIP – share options4,11 | Sep 2018 | 2018-2021 | 2021 | ADR | | $140.89 | 27,062 | |
|
|
| 27,062 | DLTIP – share options5,11 | Sep 2019 | 2019-2022 | 2022 | ADR | | $170.28 | 24,522 | |
|
| 8,167 | | 16,355 | DLTIP – share options11 | Sep 2020 | 2020-2023 | 2023 | ADR | | $133.88 | 0 | 27,396 | | | 18,264 | | 9,132 | Total unvested share options subject to performance in Ords2 | | | | 210,196 | DLTIP – performance shares8 | Sep 2017 | 2017-2020 | 2020 | ADR | $134.83 | | 32,380 | | 3,237 | | 252 | | 29,143 | | 0 | DLTIP – performance shares4,11 | Sep 2018 | 2018-2021 | 2021 | ADR | $139.41 | | 27,062 | |
|
|
| 27,062 | DLTIP – performance shares5,11 | Sep 2019 | 2019-2022 | 2022 | ADR | $174.72 | | 24,522 | |
|
| 8,167 | | 16,355 | DLTIP – performance shares11 | Sep 2020 | 2020-2023 | 2023 | ADR | $133.70 | | 0 | 27,396 |
|
| 18,264 | | 9,132 | Total unvested shares subject to performance in Ords2 | | | | 210,196 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 2021 1 | Granted | Vested/exercised | Dividend Equivalent Shares released | Lapsed | Number of shares/options at 30 June 2022 | Ivan Menezes | | | | | | | | | | | | | DLTIP – share options10 | Sep 2015 | 2015-2018 | 2018 | ADR |
| $104.93 | 29,895 |
| 29,895 | |
| | 0 | DLTIP – share options10 | Sep 2016 | 2016-2019 | 2019 | ADR |
| $113.66 | 39,734 |
| 39,734 | |
| | — | DLTIP – share options3 | Sep 2017 | 2017-2020 | 2020 | ADR | | $134.06 | | 14,098 | | | | | 14,098 | DLTIP – share options3 | Sep 2018 | 2018-2021 | 2021 | ADR | | $140.89 | | 42,848 | | | | 38,564 | | 4,284 | Total vested but unexercised share options in Ords2 | | | | 73,528 | | | | | | | | | | | | | | DLTIP - share options4,5 | Sep 2019 | 2019-2022 | 2022 | ADR | | $170.28 | 38,827 | |
|
| | 38,827 | DLTIP - share options6 | Sep 2020 | 2020-2023 | 2023 | ADR | | $133.88 | 43,377 | |
|
| | 43,377 | DLTIP - share options7 | Sep 2021 | 2021-2024 | 2024 | ADR | | $194.75 | 0 | 36,675 |
|
| | 36,675 | Total unvested share options subject to performance in Ords2 | | | | 475,516 | DLTIP - performance shares8 | Sep 2018 | 2018-2021 | 2021 | ADR | $139.41 | | 42,848 | | 12,554 | | 701 | | 30,294 | | 0 | DLTIP - performance shares4,5 | Sep 2019 | 2019-2022 | 2022 | ADR | $174.72 | | 38,827 | |
|
| | 38,827 | DLTIP - performance shares6 | Sep 2020 | 2020-2023 | 2023 | ADR | $133.70 | | 43,377 | |
|
| | 43,377 | DLTIP - performance shares7 | Sep 2021 | 2021-2024 | 2024 | ADR | $195.97 | | 0 | 36,675 |
|
| | 36,675 | Total unvested shares subject to performance in Ords2 | | | | 475,516 | Lavanya Chandrashekar | | | | | | | | | | | | | DLTIP – share options3 | Sep 2018 | 2018-2021 | 2021 | ADR | | $140.89 | 3,832 | | |
| | 3,832 | DLTIP – share options3 | Sep 2018 | 2018-2021 | 2021 | ADR | | $140.89 | 1,064 | | | | | 1,064 | Total vested but unexercised share options in Ords2 | | | | 19,584 | | | | | | | | | | | | | | DLTIP – share options7 | Sep 2021 | 2021-2024 | 2024 | ADR | | $194.75 | | 20,060 |
|
| | 20,060 | Total unvested share options subject to performance in Ords2 | | | | 80,240 | DLTIP – performance shares | Sep 2018 | 2018-2021 | 2021 | ADR | $139.41 | | 1,593 | | 503 | | 28 | | 1,090 | | 0 | DLTIP – performance shares4,5 | Sep 2019 | 2019-2022 | 2022 | ADR | $174.72 | | 1,444 | |
|
| | 1,444 | DLTIP – performance shares6 | Sep 2020 | 2020-2023 | 2023 | ADR | $133.70 | | 1,827 | |
|
| | 1,827 | DLTIP – performance shares7 | Sep 2021 | 2021-2024 | 2024 | ADR | $195.97 | | | 20,060 |
|
| | 20,060 | Total unvested shares subject to performance in Ords2 | | | | 93,324 | DLTIP – restricted stock units | Sep 2018 | 2018-2021 | 2021 | ADR | $139.41 | | 766 | | 766 | | | | 0 | DLTIP – restricted stock units | Sep 2018 | 2018-2021 | 2021 | ADR | $139.41 | | 1774 | | 1,774 | | | | 0 | DLTIP – restricted stock units | Sep 2019 | 2019-2022 | 2022 | ADR | $174.72 | | 1567 | | | | | 1,567 | DLTIP – restricted stock units | Sep 2020 | 2020-2023 | 2023 | ADR | $133.70 | | 2,635 | | | | | 2,635 | Total unvested shares not subject to performance in Ords2,9 | 16,808 |
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 optionsoptions. 3. The total number of share options granted under the DLTIP in September 2015, 20162017 and 2017 and2018 showing as outstanding as at 30 June 20212022 are vested but unexercised share optionsoptions. 4. Performance shares and share options granted under the DLTIP in September 20182019 and due to vest in September 20212022 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 page199, 193, since the performance period ended during the year ended 30 June 20212022. 5. Details of the performance conditions attached to DLTIP awards of performance shares and share options granted in 2019 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 (£8,600m-£9,600m) and relative total shareholder return (median-upper quintile). Full details 6. Details of the performance conditions were disclosedattached to DLTIP awards of performance shares and share options granted in Diageo’s 2019 annual report2020 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 remuneration. 6. 1,037 Ordsdangers of this award were delivered as tax-qualifiedunderage drinking (0.75m-1.25m), % of female leader (41% - 43%), ethnically diverse leaders (38% - 40%), cumulative free cash flow (£6,200m-£8,200m) and relative total shareholder return (median-upper quintile). 7. Details of the performance conditions attached to DLTIP awards of performance shares and share options
7. 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 leader (44% - 46%), ethnically diverse leaders (39% - 41%), cumulative free cash flow (£7,450m-£9,250m) and relative total shareholder return (median-upper quintile). 8. Ivan Menezes must retain 2,880 ADRs of the 5,126 ADRsnet shares resulting from the award that vested (including dividend equivalent shares) on 43 September 20202021 until 43 September 20222023 under the post-vestingpost vesting retention period
8. Kathryn Mikells must retain 1,844 ADRsperiod. 9. Lavanya Chandrashekar was granted a number of restricted stock units prior to her appointment as CFO and joining the 3,237 ADRs that vested on 4Board. 10. On 14 September 2020 until 42021, Ivan Menezes exercised 23,229 share options under his 2015 award. The option price was $104.93 and the share price at exercise was $193.55. On 15 September 20222021, Ivan Menezes exercised the remaining 6,666 share options under his 2015 award. The option price was $104.93 and the post-vesting retention period
9. Kathryn Mikellsshare price at exercise was $192.04. Ivan Menezes also holds 1,031 outstandingexercised 39,734 share options over ordinary shares under an all-employee2016 award - the option price was $113.66 and the share plan, which are not subject to performance and not included in this table
10. Kathryn Mikells exercised 1,037 tax-approved options on 24 June 2021price at a market price of £34.87 and exercise price of £21.13
11. Kathryn Mikells’ retained unvested performance share and share option awards, pro-rated for employment over the performance period, when she left the company on 30 June 2021.
These awards will vest, subject to the achievement of the performance conditions, on the normal vesting date, together with any accrued dividend equivalents.was $192.04.
| | | Directors’ shareholding requirements and share and other interests |
The beneficial interests of the Directors inwho held office atduring the year ended 30 June 20212022 (and their connected persons) in the ordinary shares (or ordinary share equivalents) of the company are shown in the table below. | | | | | | | | | | | | | | | | | | | | |
| Ordinary shares or equivalent1,2 |
|
|
| | 27 July 2021 | 30 June 2021(or date of departure, if earlier) | 30 June 2020 (or date of appointment if later) | Shareholding requirement (% salary)3 | Shareholding at 27 July 2021 (% salary)3 | Shareholding requirement met | Chairman | | | | | | | Javier Ferrán6 | 254,482 | 254,242 | 250,496 | — | — | — | Executive Directors | | | | | | | Ivan Menezes4,6 | 1,145,894 | 1,145,894 | 1,134,374 | 500 | % | 2,735 | % | Yes | Kathryn Mikells5,6,12,13 | 239,347 | 239,732 | 233,964 | 400 | % | 868 | % | Yes | Non-Executive Directors | | | | | | | Susan Kilsby6 | 2,600 | 2,600 | 2,600 | | | | Melissa Bethell7 | — | — | — | | | | Valérie Chapoulaud-Floquet8 | 2,017 | 2,017 | — | — | — | — | Sir John Manzoni9 | 2,816 | 2,816 | — | — | — | — | Lady Mendelsohn | 5,000 | 5,000 | 5,000 | | | | Alan Stewart | 7,069 | 7,069 | 6,905 | | | | Ireena Vittal10 | — | — | — | | | | Ho KwonPing11 | — | 4,649 | 4,649 | | | |
| | | | | | | | | | | | | | | | | | | | |
| Ordinary shares or equivalent1,2 |
|
|
| | 26 July 2022 | 30 June 2022(or date of departure, if earlier) | 30 June 2021 (or date of appointment if later) | Shareholding requirement (% salary)3 | Shareholding at 26 July 2022 (% salary)3 | Shareholding requirement met | Chairman | | | | | | | Javier Ferrán7,9 | 307,522 | 307,288 | 254,242 | | | | Executive Directors | | | | | | | Ivan Menezes4,5,7 | 1,078,566 | 1,078,566 | 1,145,894 | 500 | % | 3,093 | % | Yes | Lavanya Chandrashekar6,7 | 6,228 | 6,228 | | 400 | % | 31 | % | No - to be met by July 2026 | Non-Executive Directors | | | | | | | Susan Kilsby7 | 2,600 | 2,600 | 2,600 | | | | Melissa Bethell | 2,668 | 2,668 | | | | | Valérie Chapoulaud-Floquet | 2,055 | 2,055 | 2,017 | | | | Sir John Manzoni | 2,870 | 2,870 | 2,816 | | | | Lady Mendelsohn | 5,000 | 5,000 | 5,000 | | | | Alan Stewart | 7,120 | 7,120 | 7,069 | | | | Ireena Vittal | 0 | 0 | | | | | Karen Blackett8 | 0 | 0 | | | | |
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 20212022 and the last practicable date before publication of this report, being 2726 July 2021,2022, is outlined in the table above. The last practicable date is within one month of the AGM notice.
3. Both the shareholding requirement and shareholding at 2726 July 20212022 are expressed as a percentage of base salary on 30 June 20212022 and calculated using an average share price for the year ended 30 June 20212022 of 2938 pence£36.89. 4. In addition to the number of shares reported in the table above, Ivan Menezes holds 83,72773,528 vested but unexercised share options (over ADRs; equal to 334,908 ordinary shares)options. 5. Ivan Menezes 2021 Deferred Bonus Plan Shares (2,826 ADSs) is included in his total share interests shown above. 6. In addition to the number of shares reported in the table above, Kathryn MikellsLavanya Chandrashekar holds 92,71519,584 vested but unexercised share options (over ordinary shares) and 8,904 share options (over ADRs, equal to 128,331 ordinary shares)options. 6.7. Javier Ferrán, Ivan Menezes, Kathryn MikellsLavanya 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 equivalent 7. Melissa Bethell was appointed to the Board on 30 June 2020equivalents.
8. Valérie Chapoulaud-Floquet was appointed toKaren Blackett joined the Board on 1 January 2021June 2022. 9. Sir John Manzoni was appointedWith regard to Javier Ferrán, included in the Board on 1 October 2020 10. Ireena Vittal was appointednumber of shares reported in the table above are 180,000 ordinary shares which Javier Ferrán transferred to the Board on 2 October 2020
11. Ho Kwon Ping retired from the Board on 28 September 2020
12. Kathryn Mikells exercised 1,037 share optionshis daughters as a gift during the year ended 30 June 2020financial year. While his daughters are not his connected persons, he has a power of attorney to make investment decisions to buy and sell shares on behalf of his daughters.
13. Under the post-employment shareholding requirement policy, Kathryn Mikells is required to continue to hold Diageo shares equal in value to 400% of salary until 30 June 2022, reducing to 200% of salary until 30 June 2023. This requirement will be satisfied making use of a restricted nominee account, in which shares are already held in trust during the two-year post-vesting retention period.
Relative importance of spend on pay 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 20202021 to the year ended 30 June 2021 . The Committee considers that there2022. There are no other significant distributions or payments of profit or cash flow.flow Dividends have increased by 4% on the year before and the reduction in distributions to shareholders is a result of the suspension of the share buyback programme.
Relative importance of spend on pay – percentage change
Distributions to shareholders -39.6%127.3%
Staff pay 13.0%13.2%
Chief Executive total remuneration and TSR performance The graph below shows the total shareholder return for Diageo and the FTSE 100 Index since 30 June 20112012 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 F13 | Ivan Menezes1 £'000 F14 | Ivan Menezes1 £'000 F15 | Ivan Menezes1 £'000 F16 | Ivan Menezes1 £'000 F17 | Ivan Menezes1 £'000 F18 | Ivan Menezes1 £'000 F19 | Ivan Menezes1 £'000 F20 | Ivan Menezes1 £'000 F21 | Ivan Menezes1 £'000 F22 | Chief Executive total remuneration (includes legacy LTIP awards) | 15,557 | 7,312 | 3,888 | 4,156 | 3,399 | 8,995 | 11,776 | 2,273 | 6,019 | 7,881 | Annual incentive2 | 51 | % | 9 | % | 44 | % | 65 | % | 68 | % | 70 | % | 61.0 | % | 0 | % | 93.75 | % | 93.75 | % | Share options2 | 100 | % | 71 | % | 0 | % | 0 | % | 0 | % | 60 | % | 73.1 | % | 27.5 | % | 10.0 | % | 61.5 | % | Performance shares2 | 95 | % | 55 | % | 33 | % | 31 | % | 0 | % | 70 | % | 89.3 | % | 10.0 | % | 29.3 | % | 59.3 | % |
1. 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. 2. % of maximum opportunity
| | | Pay for Directors in the context of wider workforce remuneration |
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 salary 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 structure of the reward package for the wider employee population is based on the principle that it should enable Diageo to attract and retain the best talent within our broader industry. It is driven by local market practice, as well as 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 market practice and our diversity agenda.
CEO pay ratio In accordance with The Companies (Miscellaneous Reporting) Regulations 2018, the table belowon the next page sets out Diageo’s CEO pay ratios for the year ended 30 June 2021.2022. These CEO pay ratios provide a comparison of the Chief Executive’s total remuneration – converted into Sterlingsterling – 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. A second table outlinesAlso shown are the salary and total remuneration for each quartile employee, and the salary component within this.employee.
| | | | | | | | | | | | | | | Year | Method | 25th percentile pay ratio | Median pay ratio | 75th percentile pay ratio | 2019 | Option A2 | 265:1 | 208:1 | 166:1 | 2020 1 | Option A2 | 50:1 | 38:1 | 31:1 | 2021 | Option A2,32 | 125:127:1 | 98:100:1 | 77:79:1 | 20212022 | Option A2 | 157:1 | 122:1 | 96:1 | 2022 | Total pay and benefits | £47,24050,260 | | £60,09364,627 | | £76,32181,888 | | 20212022 | Salary | £32,14130,765 | | £42,57843,920 | | £48,55052,833 | |
1 20201. 2021 CEO pay ratios have been updated to reflect the value of the updated 20202021 single figure 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 2020 disclosure2021 disclosure.
22. 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.
3 The total remuneration for employees is based on actual earnings for the 11 months to 31 May 2021, and a projection for June 2021 which replicates the relevant items of the previous month’s earnings. This pragmatic approach allows us to calculate the ratios accurately, while mitigating the challenge of the limited timeframe between our year-end and the publishing of the Annual Report, and has been tested following our first disclosure of the CEO pay-ratios in 2019: analysis showed that the maximum resulting variance in the median pay ratio in any given year would be only 1 point, since pay changes from May to June would seldom be material.
Methodology Consistent with the approach for Diageo’s disclosure in previous years, the methodology used to identify the employees at each quartile for 20212022 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 199193 of this report). The total remuneration calculations were based on data as at 30 June 2022. 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 publication of the Annual Report, the Diageo Group Business Multiple – 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 20212022 Strong business performance in the year ended 30 June 20212022 is reflected in the payout under the annual incentive plans both for Diageo’s Chief Executive and the wider UK workforce. The annual incentive plan outcome is directly linked to awards made under the freesharesFreeshares scheme – in which all UK employees participate – and this further contributes to the 10% increase in median employee pay versus last year. In addition, the Manufacturing Incentive Plan was introduced for 2021, giving 1,800 manufacturing workers in Scotland and Northern Ireland an opportunityare eligible to participate in a bonus scheme incentivising and rewarding team and site performance.
in. The median remuneration and resulting pay ratio for 20212022 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 his total remuneration linked to business performance than other employees in the UK workforce, the ratio has increased versus last year. However, vesting of long-termyear due to a higher performance outcome under the 2019 long term incentive which vested this year compared to the 2018 awards is limited – reflecting the impact of the pandemic – and as a result the ratios remain lower than when first disclosed in 2019.which vested last year.
Looking afterSupporting our people and investing in talent
Our focus remains firmly on the wellbeing of our employees and in the year ended 30 June 2021,2022, we continued to provide stability and support to our workforce by safeguarding jobs, payworkforce. Recently, we launched our Global Wellbeing Philosophy, outlining our commitment to creating an environment where people can thrive, along with practical frameworks and benefits.tools to support our people in managing their wellbeing. In lineaddition to local wellbeing initiatives, such as free Wellbeing Day and Mental Health capability programmes, we are designing our new office spaces with this focus, Diageo’s benefits offeringWellbeing at the heart. For example, our new Global Headquarters in the healthSoho, London is equipped with wellness and wellbeing space has been significantly upgraded in the past few years to include, for example, access to cancer-screening, health care cash plansfitness classes and health-assessment for the wider workforce. The unionised population in Scotland will get access to private medical insurance in 2022, as part of a newly negotiated agreement.quiet multi-faith room. We remain committed to attracting and retaining the right talent. Although there was a needWe carefully monitor our total remuneration levels for all roles to exercise restraint inensure we are paying competitively and appropriately. Our incentive plans are designed to be easily understood and reward our people for supporting the year ended 30 June 2021, we continued to review our approach to remuneration and have made some bold changes to reward structures and principles that will enable us to invest in top talent in priority areas going forward.delivery of key strategic milestones. 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 remain key parts of our total reward offering. All UK employees can now also access their total reward statement through the new benefits portal launched at Towards the end of 2020, which provides people withfiscal 22, the Diageo Executive Committee considered the impact that the volatile macro-economic environment was having on the cost of living around the world. In addition to continuing to put in place support and tools to help employees be at their best and promote positive mental, physical and financial wellbeing, it was decided to give all Diageo employees below Executive Committee level a better understandingone-time, special recognition payment of £1,000 gross (capped at 15% of local equivalent annual salary) as a thank you for their benefits packagecontribution and commitment through challenging times. The Executive Committee will continue to monitor the choices available to them.macro-economic environment and impact on employees. Championing inclusion and diversity is one of Diageo’s strategic priorities and we want to leverage the broadest range of backgrounds and skills to create a fully inclusive, high-performing culture. Although we recognise that gender parity is just one measure of an inclusive workplace, we are proud that we have further reduced the gender pay gap across our UK businesses to +2.8%, among the lowest in the FTSE.
Change in pay for Directors compared to wider workforce 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 on the next pagebelow shows the percentage change in Directors’ remuneration and average remuneration of employees from the financial year 2020 to the financial year 2021, as well ason an update on last year’s disclosure.annual basis. Given the small size of Diageo plc’s workforce, data for all employees of the Groupgroup has also been included.
In the past year, limited salary increases have been implemented across the world, with changes implemented through a focussed approach in high-inflation markets or in other exceptional individual situations to support retention and business change. Although the table shows no change in the average global employee salary, this is in fact the result of the impact of currency conversion rates on calculations and, based on constant exchange rates, the year-on-year change in salary is +4.11%. The small number of people employed by the Diageo plc entity makes the reported year-on-year movement for this group more sensitive to individual anomalies and may be more volatile over time.
The year-on-year bonus increase for the average global employee is significant, as relatively few of our employees received a bonus for the year ended 30 June 2020 and many employees will be rewarded for their contributions to business performance through a strong bonus payout in the year ended 30 June 2021. We are focussed on making our benefit offering more inclusive and consistent globally and have reviewed our benefits landscape against newly established Standards of Care, to ensure we have best in class offerings supporting our diverse workforce. We continue to work with regional brokers to support us with driving improvements and efficiencies in our benefit offering. To support our employees during the pandemic we have focussed on employee assistance provision and consistent life insurance provision, as well as a more local focus on wellbeing. The year-on-year movement in salary for Executive Directors reflects the fact that for the first three months of the year ended 30 June 2020 they received a lower salary than in the year ended 30 June 2021, and the absence of a salary increase thereafter. Note that no year-on-year change in pay has been reported for Melissa Bethell, Valérie Chapoulaud-Floquet, Sir John Manzoni and Ireena Vittal as there is no comparable remuneration data for the year ended 30 June 2020. In previous years, benefits for Non-Executive Directors mostly related to travel expenses and the reported year-on-year decrease is therefore driven by the travel restrictions in place throughout 2020 and 2021.
| Year-on-year change in pay for Directors compared to the global average employee | Year-on-year change in pay for Directors compared to the global average employee | Year-on-year change in pay for Directors compared to the global average employee | | | | 2021 | 2020 | | 2022 | 2021 | 2020 | | | Salary | Bonus | Benefits | Salary | Bonus | Benefits | | Salary | Bonus | Benefits | Salary | Bonus | Benefits | Salary | Bonus | Benefits | Plc employee average1 | Plc employee average1 | 5.1 | % | N/A6 | 38.8 | % | 7.5 | % | -100 | % | 9.0 | % | Plc employee average1 | 11.1 | % | 25.8 | % | 10.5 | % | 5.1 | % | N/A | 38.8 | % | 7.5 | % | (100) | % | 9.0 | % | Average global employee2 | Average global employee2 | 0.0 | % | 278.8 | % | 12.6 | % | 5.3 | % | -67.8 | % | 6.9 | % | Average global employee2 | 6.4 | % | 38.4 | % | 11.7 | % | 0.0 | % | 278.8 | % | 12.6 | % | 5.3 | % | (68) | % | 6.9 | % | Calculated with constant FX rate | 4.11 | % | | 5.1 | % | | | Executive Directors3 | Executive Directors3 | | Executive Directors3 | | Ivan Menezes | 0.7 | % | N/A6 | -10.7 | % | 2.7 | % | -100 | % | 0.8 | % | | Kathryn Mikells | 0.7 | % | N/A6 | 17.9 | % | 2.8 | % | -100 | % | 55.9 | % | | Ivan Menezes8 | | Ivan Menezes8 | 2.3 | % | 4.4 | | 59.5 | % | 0.7 | % | N/A5 | (10.7) | % | 2.7 | % | (100) | % | 0.8 | % | Lavanya Chandrashekar | | Lavanya Chandrashekar | N/A5 | N/A5 | N/A | Non-Executive Directors4 | Non-Executive Directors4 | | Non-Executive Directors4 | | | Melissa Bethell | Melissa Bethell | — | | — | | — | | — | | — | | — | | Melissa Bethell | 2.3 | | — | | 16.0 | | N/A5 | — | | — | | — | | — | | — | | Valérie Chapoulaud-Floquet | — | | — | | — | | — | | — | | — | | | Valérie Chapoulaud-Floquet6 | | Valérie Chapoulaud-Floquet6 | — | | — | | — | | N/A5 | — | | — | | — | | — | | — | | Javier Ferrán (Chairman) | Javier Ferrán (Chairman) | 0.0 | % | — | | 0.0 | % | 0.0 | % | — | | 0.0 | % | Javier Ferrán (Chairman) | 8.3 | % | — | | 28.8 | % | 0.0 | % | — | | 0.0 | % | 0.0 | % | — | | 0.0 | % | Susan Kilsby | 9.6 | % | — | | -87.7 | % | 37.3 | % | — | | 68.9 | % | | Ho KwonPing5 | 3.2 | % | — | | -67.7 | % | 3.3 | % | — | | 93.3 | % | | Sir John Manzoni | — | | — | | — | | — | | — | | — | | | Susan Kilsby7 | | Susan Kilsby7 | 3.8 | % | — | | 300.0 | % | 9.6 | % | — | | (87.7) | % | 37.3 | % | — | | 68.9 | % | Sir John Manzoni6 | | Sir John Manzoni6 | — | | — | | — | | — | | — | | — | | — | | — | | — | | Lady Mendelsohn | Lady Mendelsohn | 3.2 | % | — | | 0.0 | % | 3.3 | % | — | | 0.0 | % | Lady Mendelsohn | 2.3 | % | — | | 0.0 | % | 3.2 | % | — | | 0.0 | % | 3.3 | % | — | | 0.0 | % | Alan Stewart | Alan Stewart | 2.4 | % | — | | 0.0 | % | 2.5 | % | — | | 0.0 | % | Alan Stewart | 4.7 | % | — | | 0.0 | % | 2.4 | % | — | | 0.0 | % | 2.5 | % | — | | 0.0 | % | Ireena Vittal | — | | — | | — | | — | | — | | — | | | Ireena Vittal6 | | Ireena Vittal6 | — | | — | | — | | — | | — | | — | | — | | — | | — | | Karen Blackett | | Karen Blackett | N/A5 | — | | N/A5 | — | | — | | — | | — | | — | | — | |
1. Around 50 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 statement under staff costs and average number of employees (note 3c) on page 235,233, 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 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 199)193) in US dollars, as both Ivan Menezes and Kathryn MikellsLavanya Chandrashekar are paid in this currency. 4. Calculated using the fees and taxable benefits disclosed under Non-Executive Directors’non-executive directors’ remuneration in the table below.on the next page. Taxable benefits for Non-Executive Directorsnon-executive directors comprise a product allowance as well as expense reimbursements relating to attendance at Board meetings, which may be variable year-on-year. In the year ended 30 June 2021, no travel expenses were incurred as travel was restricted as a result of the pandemic. 5. Ho KwonPing retired as Non-Executive Director on 28 September 2020. To provide a meaningful reflection of annual percentage increase for the year ended 30 June 2021, his 2021 fee was adjusted to reflect full-year appointment to the Board. 6. N/A refers to a nil value in the previous year, meaning that the year-on-year change cannot be calculated.
6. No year-on-year change in pay has been reported for Valérie Chapoulaud-Floquet, Sir John Manzoni and Ireena Vittal as there is no comparable remuneration data for the year ended 30 June 2021 as they joined the Board mid F21. 7. The percentage increase in benefits for Susan Kilsby reflects an increase travel expenses. 8. The percentage increase in benefits for Ivan Menezes reflects an increase in tax support services.
Payments to former Directors A payment was made to Kathryn Mikells at the start of the year ended 30 June 2022 as described below. These details were previously disclosed in the 2021 Directors' remuneration report. Payments for loss of office As reported last year, Kathryn Mikells left the company on 30 June 2021. In accordance with the approved 2020 remuneration policy and her service contract which provided for a 12-month notice period, Kathryn Mikells received half of the payment in lieu of the remainder of her notice period (six months and twelve days) in July 2021 in respect of salary, benefits and pension ($362,174). No further payments were made as a result of Kathryn Mikells taking up alternative employment (announced on 19 July 2021). 201The Committee also exercised its discretion, in accordance with the plan rules and the remuneration policy, to prorate to the leaving date all unvested long-term incentive awards. In September 2022, Kathryn's 2019 performance shares and share options are due to vest at 59.3% and 61.5% respectively with a total estimated value of $2.16m. These awards remain subject to a subsequent two-year holding period. The post-employment shareholding requirement policy applies for a period of two years post-exit, requiring Kathryn to hold Diageo shares equal to 400% of salary until 30 June 2022 and 200% of salary until 30 June 2023.s 204-205In line with internal policies and the remuneration policy, the company supported Kathryn Mikells with the cost of her repatriation back to the United States. This support amounted to a grossed up value of £200,000. Further costs included shipping costs of £23,507, £7,640 in flights and £12,000 of legal support. Kathryn Mikells will also be provided with tax return preparation support for a period of up to three years following her departure (up to a maximum cost of £15,000 per annum).
Fee policy Javier Ferrán’s fee as non-executive Chairman was increased from £600,000 per annum to £650,000 on 1 July 2021. This was a planned increase for 1 January 2020 that was deferred, at the Chairman’s request, due to the Covid-19 pandemic. There had been no prior increase since his appointment on 1 January 2017. The Chairman’s fee is appropriately positioned against our comparator group of FTSE 30 companies excluding financial services. There was no change to Non-Executive Director fees The Executive Directors and the Chairman also approved an increase in the year ended 30 June 2021. The next review is scheduledbase fee for non-executive directors of 3% (from £98,000 to £101,000) and an increase in the Audit and Remuneration Committee Chair fees from £30,000 to £35,000, effective 1 October 2021.
|
|
| January 2021 | January 2020 |
| January 2022 | January 2021 | Per annum fees | Per annum fees | £'000 | Per annum fees | £'000 | Chairman of the Board | Chairman of the Board | 600 | 600 | Chairman of the Board | 650 | 600 | Non-Executive Directors | Non-Executive Directors |
| Non-Executive Directors |
| Base fee | Base fee | 98 | 98 | Base fee | 101 | 98 | Senior Non-Executive Director | Senior Non-Executive Director | 30 | 30 | Senior Non-Executive Director | 30 | 30 | Chairman of the Audit Committee | Chairman of the Audit Committee | 30 | 30 | Chairman of the Audit Committee | 35 | 30 | Chairman of the Remuneration Committee | Chairman of the Remuneration Committee | 30 | 30 | Chairman of the Remuneration Committee | 35 | 30 |
Non-Executive Directors’ remuneration for the year ended 30 June 20212022
|
|
| Fees £'000 | Taxable benefits1 £'000 | Total £'000 |
| Fees £'000 | Taxable benefits1 £'000 | Total £'0004 |
|
| 2021 | 2020 | 2021 | 2020 | 2021 | 2020 |
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | Chairman | Chairman |
| Chairman |
| Javier Ferrán2 | Javier Ferrán2 | 600 | 600 | 1 | 1 | 601 | 601 | Javier Ferrán2 | 650 | 600 | 2 | 1 | 652 | 601 | Non-Executive Directors | Non-Executive Directors |
| Non-Executive Directors |
| Susan Kilsby | Susan Kilsby | 158 | 144 | 1 | 10 | 159 | 154 | Susan Kilsby | 164 | 158 | 5 | 1 | 169 | 159 | Melissa Bethell | Melissa Bethell | 98 | | — | 1 | — | 99 | — | Melissa Bethell | 100 | | 98 | 1 | 1 | 102 | 99 | Valérie Chapoulaud-Floquet5 | 49 | — | 1 | — | 50 | — | | Sir John Manzoni3 | 74 | — | 1 | — | 75 | — | | Valérie Chapoulaud-Floquet | | Valérie Chapoulaud-Floquet | 100 | 49 | 5 | 1 | 105 | 50 | Sir John Manzoni | | Sir John Manzoni | 100 | 74 | 1 | 1 | 102 | 75 | Lady Mendelsohn | Lady Mendelsohn | 98 | 95 | 1 | 1 | 99 | 96 | Lady Mendelsohn | 100 | 98 | 1 | 1 | 102 | 99 | Alan Stewart | Alan Stewart | 128 | 125 | 1 | 1 | 129 | 126 | Alan Stewart | 134 | 128 | 1 | 1 | 135 | 129 | Ireena Vittal4 | 73 | — | 1 | — | 74 | — | | Ho KwonPing6 | 24 | 95 | — | 4 | 24 | 99 | | Ireena Vittal | | Ireena Vittal | 100 | 73 | 1 | 1 | 102 | 74 | Karen Blackett3 | | Karen Blackett3 | 8 | n/a | — | n/a | 9 | n/a |
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 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 any tax gross-ups on the grossed-up cost of UK tax paidbenefits provided by the company on behalf of the Directors. Non-taxable expense reimbursements have not been included in the single figure of remuneration table above. 2. £100,000 of Javier Ferrán’s net remuneration in the year ended 30 June 20212022 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 reasonreason. 3. Sir John ManzoniKaren Blackett was appointed to the Board on 1 October 2020June 2022. 4. Ireena Vittal was appointedSome figures add up to the Board on 2 October 2020 5. Valérie Chapoulaud-Floquet was appointedslightly different totals due to the Board on 1 January 2021
6. Ho KwonPing retired from the Board on 28 September 2020rounding.
Looking ahead to 20222023
Salary increases for the year ending30 June 2022
As outlined in the 2020 annual report on remuneration, in light of the impact of the Covid-19 pandemic, there was no change to base salaries for the Chief Executive and Chief Financial Officer during the year ended 30 June 2021. | | | Salary increases and pension reductions for the year ending 30 June 2023 |
In April 2021,May 2022, the Remuneration Committee reviewed base salaries for senior management and agreed the following increaseincreases for the Chief Executive and Chief Financial Officer, effective 1 October 2022. On 1 January 2023, Ivan Menezes pension contribution will reduce from 20% of base salary to 14% in line with the merit budget for the wider workforce for the United Kingdom and the United States, effective 1 October 2021:workforce. |
|
| Ivan Menezes | Lavanya Chandrashekar |
| Ivan Menezes | Lavanya Chandrashekar | Salary at 1 October ('000) | Salary at 1 October ('000) | 2021 | 2020 | 2021 | 2020 | Salary at 1 October ('000) | 2022 | 2021 | 2022 | 2021 | Base salary | Base salary | $1,711 | $1,661 | $975 | — | Base salary | $1,763 | $1,711 | $1,004 | $975 | % increase (over previous year) | % increase (over previous year) | 3 | % | — | | — | | — | | % increase (over previous year) | 3 | % | 3 | % | 3 | % | — | |
Annual incentive design for the year ending 30 June 2022 | | | Annual incentive design for the year ending 30 June 2023 |
The measures and targets for the annual 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 plan design for Executive Directors in the year ending 30 June 20222023 will comprise the following performance measures and weightings, with targets set for the full financial year: –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; –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; 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 20222023 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.
Governance (continued)
| | | Long-term incentive awards to be made in the year ending 30 June 2023 |
Long-term incentive awards to be made in the year ending 30 June 2022
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 per last year, DLTIP awards made in September 20212022 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, assessed over a three-year performance period. The relative total shareholder return measure is based on the same constituent group and vesting schedule as outlined on page 203.196. 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 population comprising only members of the Executive Committee. One market price option is valued at one-third of a performance share. The ESG measure comprises four goals reflecting the 'Society 2030: Spirit of Progress' strategy, to make a positive impact on the environment and society, as referenced on pages 64-67.society. Each goal is weighted equally: –•reduction in greenhouse gas emissions;
–•improvement in water efficiency;
–•number of people who confirmed changed attitudes to the dangers of underage drinking, after participating in a Diageo supported education programme; and
–•inclusion and diversity metric (one measure on % female leaders globally, and another measure on % ethnically diverse leaders globally).
Awards are calculated on the basis of a six-month average share price for the period ending 30 June 2021.2022. It is intended that a DLTIP award of 500% of base salary will be made to Ivan Menezes in September 2021,2022, comprising 375% of salary in performance shares and 125% of salary in market-price share options (in performance share equivalents; one market price option is valued at one-third of a performance share). share options. It is intended that a DLTIP award of 480% of salary will be made to Lavanya Chandrashekar in September 2021,2022, comprising 360% of salary in performance shares and 120% of salary in market price share options (inoptions. In performance share equivalents).equivalents; one market price option is valued at one-third of a performance share.
The table below summarises the annual DLTIP awards to Ivan Menezes and Lavanya Chandrashekar to be made in September 2021.2022. | | | | | | | | | 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 20222023 | | | Performance shares | | Share options | | Performance shares | | Share options | | | | Organic profit before exceptional items and tax (CAGR) | Environmental, social & governance (ESG) | | | | | | Organic profit before exceptional items and tax (CAGR) | Environmental, social & governance (ESG) | | | | | | Organic net sales (CAGR) | Greenhouse gas reduction | Water efficiency | Positive drinking | % Female leaders | % Ethnically diverse leaders | Vesting schedule | | Relative Total Shareholder Return | Cumulative free cash flow (£m) | Vesting schedule | | Organic net sales (CAGR) | Greenhouse gas reduction1 | Water efficiency | Positive drinking | % Female leaders | % Ethnically diverse leaders | Vesting schedule | | Relative Total Shareholder Return | Cumulative free cash flow (£m) | Vesting schedule | Weighting (% total) | Weighting (% total) | 40 | % | 40 | % | 5 | % | 5 | % | 5 | % | 2.5 | % | 2.5 | % | 100 | % | | 50.0 | % | 50.0 | % | 100 | % | Weighting (% total) | 40 | % | 40 | % | 5 | % | 5 | % | 5 | % | 2.5 | % | 2.5 | % | 100 | % | | 50.0 | % | 50.0 | % | 100 | % | Maximum | Maximum | 9.0 | % | 13.5 | % | 27.1 | % | 12.1 | % | 3.7m | 46 | % | 41 | % | 100 | % | | 3rd and above | £9,250 | | 100 | % | Maximum | 8.5 | % | 12.0 | % | 17.6 | % | 12.1 | % | 4.0m | 47 | % | 44 | % | 100 | % | | 3rd and above | £9,450 | 100 | % | Midpoint | Midpoint | 7.0 | % | 10.0 | % | 23.1 | % | 9.2 | % | 3.0m | 45 | % | 40 | % | 60 | % | | — | | £8,350 | | 60 | % | Midpoint | 6.5 | % | 8.5 | % | 14.2 | % | 9.2 | % | 3.3m | 46 | % | 43 | % | 60 | % | | — | | £8,550 | 60 | % | Threshold | Threshold | 5.0 | % | 6.5 | % | 19.1 | % | 6.3 | % | 2.3m | 44 | % | 39 | % | 20 | % | | 9th and above | £7,450 | | 20 | % | Threshold | 4.5 | % | 5.0 | % | 10.7 | % | 6.3 | % | 2.6m | 45 | % | 42 | % | 20 | % | | 9th and above | £7,650 | 20 | % |
1.Further context for the 2022 long-term incentive greenhouse gas reduction targets is set out on page 45.
Additional information
Emoluments and share interests of senior management The total emoluments for the year ended 30 June 20212022 of the Executive Directors and 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 £24.9£23.9 million (2020(2021 – £12.1£24.9 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 £9.4£19.1 million. In addition, they were granted 819,702718,092 performance-based share options under the Diageo Long-Term Incentive Plan (DLTIP) during the year at a weighted average share price of 24933,609 pence, exercisable by 2030, and 29,522 options not subject to performance.2031. In addition, they were granted 597435 options over ordinary shares under the UK savings-related share options scheme (SAYE). They were also awarded 882,321680,438 performance shares under the DLTIP in September 2020,2021, which will vest in three years subject to the relevant performance conditions,conditions. A further award of 142,977 restricted shares subject to performance, and 13,779127,867 restricted shares not subject to performance.performance were also granted during the year. Senior management options over ordinary shares At 2726 July 2021,2022, the senior management had an aggregate beneficial interest in 1,474,6261,842,518 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 | | Number of options | Weighted average exercise price (£) | Exercise period | Ivan Menezes | Ivan Menezes | 835,116 | 25.15 | 2015-2025 | Ivan Menezes | 549,044 | 30.67 | 2020-2031 | Lavanya Chandrashekar | Lavanya Chandrashekar | 19,584 | 27.15 | 2018-2028 | Lavanya Chandrashekar | 99,824 | 33.73 | 2021-2031 | Other1 | Other1 | 1,742,559 | 25.6 | 2012-2030 | Other1 | 1,349,935 | 30.14 | 2015-2031 | |
1. 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 2021.2022.
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 2827 July 20212022 by Susan Kilsby who is Chair 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 annualDirectors' remuneration report on remuneration(excluding the policy) is subject to shareholder approval at the AGM on 30 September 2021;6 October 2022; terms defined in this remuneration report are used solely herein.
Directors’ report
The Directors present the Directors’ report for the year ended 30 June 2021.2022.
Company status Diageo 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 16 Great Marlborough Street, London W1F 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 pages 200-204 of the UK Annual Report.
Directors The Directors of the company who currently serve are shown in the section ‘Board of Directors’ on pages 154-156 145-146 and the names of former Directors who served during the year are listed on page 163. In147 in accordance with the UK Corporate Governance Code, all the Directors 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 20212022 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 section 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 Competitor 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.
Major shareholders At 30 June 2021,2022, the following substantial interests (3% or more) in the company’s ordinary share capital (voting securities) had been notified to the company.company: | Shareholder | Shareholder | Number of ordinary shares | Percentage of issued ordinary share capital (excluding treasury shares) | Date of notification of interest | 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) | BlackRock Investment Management (UK) Limited (indirect holding) | 147,296,928 | | 5.89 | % | 3 December 2009 | BlackRock Investment Management (UK) Limited (indirect holding) | 147,296,928 | 5.89 | % | 3 December 2009 | Capital Research and Management Company (indirect holding) | Capital Research and Management Company (indirect holding) | 124,653,096 | | 4.99 | % | 28 April 2009 | Capital Research and Management Company (indirect holding) | 124,653,096 | 4.99 | % | 28 April 2009 | Massachusetts Financial Services Company (indirect holding) | | Massachusetts Financial Services Company (indirect holding) | 114,036,646 | 4.95 | % | 1 June 2022 |
(i)On 29 January 2021,1 February 2022, BlackRock Inc. filed an Amendment to Schedule 13G with the SEC in respect of the calendar year ended 31 December 2010, reporting that, 166,483,849as of December 31, 2021, 173,739,088 ordinary shares representing 7.1%7.5% of the issued ordinary share capital were beneficially owned by BlackRock Inc. and its subsidiaries (including BlackRock Investment Management (UK) Limited). (ii)On 142 February 2021,2022, Massachusetts Financial Services Company filed a an Amendment to Schedule 13G with the SEC in respect of the calendar year ended 31 December 20202018, reporting that, 154,322,161as of December 31, 2021, 142,776,369 ordinary shares representing 6.6%6.1% 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 2021.2022. 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 3129 July 2021, 341,041,9892022, 321,284,915 ordinary shares, including those held through American Depositary Shares ("ADSs"), were held by approximately 2,6942,680 holders (including American Depositary Receipt ("ADR") holders) with registered addresses in the United States, representing approximately 14.60%12.68% of the outstanding ordinary shares (excluding treasury shares). At such date, 85,171,05880,253,313 ADSs were held by 2,2782,262 registered ADR holders. Since certain of such ordinary shares and ADSs are held by nominees or former GrandMet PLC or Guinness Group PLC 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, 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 Euronext and Paris StockEuronext Exchanges. Diageo ADSs, representing four Diageo ordinary shares each, are listed on the New York Stock Exchange (NYSE). 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, 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 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 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 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.
Articles of association 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 27 July 2022. 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 imperative
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. 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 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 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 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, data protection, 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; Financial StatementsConsolidated financial statements - note 2021 Related party transactions | Dividends | Group financial review; Financial StatementsConsolidated financial statements - Unaudited financial information | Engagement with employees | Corporate governance report - Workforce engagement statement | Engagement with suppliers, customers and others | Stakeholder engagement; Corporate governance report - Stakeholder engagement | Events post 30 June 20212022 | Not applicableConsolidated financial statements - note 23 Post balance sheet events | Financial risk management | FinancialConsolidated financial statements - note 1516 Financial instruments and risk management | Future developments | Chairman’s statement; Chief Executive’s statement; Our market dynamics | Greenhouse gas emissions | Sustainability performance; Responding to climate-related risks | 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; FinancialConsolidated financial statements - note 1718 Equity | Research and development | FinancialAdditional Disclosures - 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; Responding to climate-related risks; Business reviews | Share capital - structure, voting and other rights | FinancialConsolidated financial statements - note 1718 Equity | Share capital - employee share plan voting rights | FinancialConsolidated financial statements - note 1718 Equity | Shareholder waivers of dividends | FinancialConsolidated financial statements - note 1718 Equity | Shareholder waivers of future dividends | FinancialConsolidated financial statements - note 1718 Equity | Sustainability and responsibility | Sustainability performance; Responding to climate-related risks | 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 20212022 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 Siobhán Moriarty,Tom Shropshire, the Company Secretary, on 2827 July 2021.2022.
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 (the Company)“Company”) as of 30 June 20212022 and 2020,2021, and the related consolidated income statement and consolidated statement 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 2021,2022, including the related notes (collectively referred to as the consolidated“consolidated financial statements)statements”). We also have audited the Company's internal control over financial reporting as of 30 June 2021,2022, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of 30 June 20212022 and 2020, 2021, and the results of its operations and its cash flows for each of the three years in the period ended 30 June 2021 2022 i) in accordanceconformity with UK-adopted International Accounting Standards, ii) in conformity with the requirements of the Companies Act 2006, ii) as prepared in accordance with International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union, and iii) as prepared in accordanceconformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of 30 June 2021,2022, based on criteria established in Internal Control - Integrated Framework (2013)issued by the COSO.
Change in Accounting Principle
As discussed in Note 1(f) to the consolidated financial statements, the Company changed the manner in which it accountsBasis for leases in the period ended 30 June 2020 due to the adoption of IFRS 16.Opinions
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 Management’s Report on Internal Control over Financial Reporting appearing under ItemPart II. 15.B. Our responsibility is to express opinions on the Company’s consolidated financial 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 consolidated financial 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 consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial 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 consolidated financial 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 consolidated financial 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; (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 company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 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 beloware mattersarising 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
Financial statements (continued) disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
Financial statements (continued)
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial 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 assets and goodwill
As described in note 9 to the consolidated financial statements, the Company’s consolidated indefinite-lived brand intangibles balance and goodwill balance as at 30 June 20212022 were £7,361£7,896 million and £1,957£2,287 million respectively. Management conducts impairment tests for indefinite-lived brand intangibles and goodwill annually, or more frequently if events or circumstances indicate that the carrying amount may not be recoverable. An impairment charge of £336 million was recognised in the consolidated income statement in respect of the current year, and opening balance adjustments recognised in the consolidated statement of changes in equity included £312 million impairment as a result of hyperinflation adjustments in respect of Turkey. The individual brands, other intangibles with indefinite useful lives and their associated tangible fixed assets are aggregated and tested as separate cash-generating units. Goodwill is attributed to each of the markets. Separate tests are carried out for each cash-generating unit and for each of the markets. Judgment is required in determining the cash-generating units. 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. 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. Judgment is required in determining the cash-generating units. The value in use calculations areis 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 mainly 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 includeincludes significant management judgments and assumptions, including sales growth, operating costs, margin, discount rates and terminal growth rates.
The principal considerations for our determination that performing procedures related to the impairment assessment of indefinite-lived brand intangible assets and goodwill areis a critical audit matter is that there wasare the significant judgmentjudgments made by management when developing its assessment of the recoverable amount for the cash-generating units. This in turn led to a high degree of auditor judgment, subjectivity and effort in evaluating management’s significant assumptions, includingrelated to future cash flows, discount rates, and expected growth rates. In addition, 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 determination of recoverable amounts. These procedures also included, among others, testing management’s process for determining the recoverable amount of goodwill and indefinite-lived brand intangible assets, evaluating the appropriateness of the methodology used in the impairment models, testing the completeness, accuracy, and relevance of underlying data used in the models, and evaluating the significant assumptions used by management, including the forecasted cash flows, discount rates, and expected growth rates, as well as management’s sensitivities and related financial statement disclosures. Evaluating the reasonableness of management’s assumptions involved 1) evaluating key market-related assumptions (including the growth rates and discount rate and management’s estimates of the duration and severity of the impact of the Covid-19 pandemic on cash flows)rate) 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 with specialised skill and knowledge to assist in the evaluation of the discount rates.
Taxation – Provisions for tax uncertainties
As described in Note 7 and Note 1819 to the consolidated financial statements, 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 20212022 the current tax asset of £145£149 million and tax liability of £146£252 million includes £129£156 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. Tax provisions are based on management’s judgment and interpretation of country specific tax law and the likelihood 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 considerations for our determination that performing procedures related to the taxation - provision for tax uncertainties is a critical audit matter are that there wasthe significant judgmentjudgments made by management in determining the provisions for tax uncertainties, including
Financial statements (continued) 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 to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the timely identification and accurate
Financial statements (continued)
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, and the audit effort involved the use of professionals with specialised skill and knowledge to assist in 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 the identification 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. These procedures also included, among others, (i) testing the information used in the calculation of the liability for uncertain tax positions; (ii) testing the calculation of the liability for uncertain tax positions by jurisdiction, including management’s assessment of the technical merits 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; and (iv) evaluating the status and results of tax audits with the relevant tax authorities 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 completeness 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.
Post employment benefit obligations
As described in Note 1314 to the consolidated financial statements, the carrying value of defined benefit obligations was £9,445£7,234 million as at 30 June 2021.2022. Application of IAS 19 requires the exercise of estimation and judgment in relation to various assumptions. Management 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 plans, salary and pension increases, future inflation rates, and discount rates.
The principal considerations for our determination that post employment benefit obligations is a critical audit matter are that there wasthe significant judgmentjudgments made by management in selecting the assumptions used to develop its estimate of the present value of defined benefit obligations. This in turn led to a high degree of auditor judgment and effort in our evaluation of management’s significant assumptions, which were future inflation rates, discount rates and the life expectancy of members of the plans. In addition, 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 determination of the carrying value of defined benefit obligations, including future inflation rates, discount rates and the life expectancy of members of the plans. These procedures also included, among others, testing management’s process for determining the present value of the significant post employment benefit obligations, evaluating the appropriateness of the methodology used in the valuation models, testing the completeness, accuracy, and relevance of underlying data used in the models, and evaluating the significant assumptions used by management, including the future inflation rates, discount rates and the life expectancy of members of the plans, as well as management’s sensitivities and related financial statement disclosures. Evaluating the reasonableness of management’s assumptions involved i) comparing these assumptions to our independently compiled expected ranges based on market observable indices or relevant national and industry benchmarks, ii) performing sensitivity analyses, and iii) using professionals with specialised skill and knowledge to assist in the evaluation of the significant assumptions.
/s/ PricewaterhouseCoopers LLP London, United Kingdom 54 August 20212022
We have served as the Company's auditor since 2015.
Financial statements (continued)
Consolidated income statement | | | Notes | Year ended 30 June 2021 £ million | Year ended 30 June 2020 £ million | Year ended 30 June 2019 £ million | | Notes | Year ended 30 June 2022 £ million | Year ended 30 June 2021 £ million | Year ended 30 June 2020 £ million | Sales | Sales | 2 | | 19,153 | | 17,697 | | 19,294 | | Sales | 2 | | 22,448 | | 19,153 | | 17,697 | | Excise duties | Excise duties | 3 | | (6,420) | | (5,945) | | (6,427) | | Excise duties | 3 | | (6,996) | | (6,420) | | (5,945) | | Net sales | Net sales | 2 | | 12,733 | | 11,752 | | 12,867 | | Net sales | 2 | | 15,452 | | 12,733 | | 11,752 | | Cost of sales | Cost of sales | 3 | | (5,038) | | (4,654) | | (4,866) | | Cost of sales | 3 | | (5,973) | | (5,038) | | (4,654) | | Gross profit | Gross profit | | 7,695 | | 7,098 | | 8,001 | | Gross profit | | 9,479 | | 7,695 | | 7,098 | | Marketing | Marketing | 3 | | (2,163) | | (1,841) | | (2,042) | | Marketing | 3 | | (2,721) | | (2,163) | | (1,841) | | Other operating items | Other operating items | 3 | | (1,801) | | (3,120) | | (1,917) | | Other operating items | 3 | | (2,349) | | (1,801) | | (3,120) | | Operating profit | Operating profit | | 3,731 | | 2,137 | | 4,042 | | Operating profit | | 4,409 | | 3,731 | | 2,137 | | Non-operating items | Non-operating items | 4 | | 14 | | (23) | | 144 | | Non-operating items | 4 | | (17) | | 14 | | (23) | | Finance income | Finance income | 5 | | 278 | | 366 | | 442 | | Finance income | 5 | | 497 | | 278 | | 366 | Finance charges | Finance charges | 5 | | (651) | | (719) | | (705) | | Finance charges | 5 | | (919) | | (651) | | (719) | | Share of after tax results of associates and joint ventures | Share of after tax results of associates and joint ventures | 6 | | 334 | | 282 | | 312 | | Share of after tax results of associates and joint ventures | 6 | | 417 | | 334 | | 282 | | Profit before taxation | Profit before taxation | | 3,706 | | 2,043 | | 4,235 | | Profit before taxation | | 4,387 | | 3,706 | | 2,043 | | Taxation | Taxation | 7 | | (907) | | (589) | | (898) | | Taxation | 7 | | (1,049) | | (907) | | (589) | | | Profit for the year | Profit for the year | | 2,799 | | 1,454 | | 3,337 | | Profit for the year | | 3,338 | | 2,799 | | 1,454 | | Attributable to: | Attributable to: | | | Attributable to: | | | Equity shareholders of the parent company | Equity shareholders of the parent company | | 2,660 | | 1,409 | | 3,160 | | Equity shareholders of the parent company | | 3,249 | | 2,660 | | 1,409 | | | Non-controlling interests | Non-controlling interests | | 139 | | 45 | | 177 | | Non-controlling interests | | 89 | | 139 | | 45 | | | | 2,799 | | 1,454 | | 3,337 | | | 3,338 | | 2,799 | | 1,454 | | | | | million | | | million | Weighted average number of shares | Weighted average number of shares | | | Weighted average number of shares | | | Shares in issue excluding own shares | Shares in issue excluding own shares | | 2,337 | | 2,346 | | 2,418 | | Shares in issue excluding own shares | | 2,318 | | 2,337 | | 2,346 | | Dilutive potential ordinary shares | Dilutive potential ordinary shares | | 8 | | 8 | | 10 | | Dilutive potential ordinary shares | | 7 | | 8 | | 8 | | | | 2,345 | | 2,354 | | 2,428 | | | 2,325 | | 2,345 | | 2,354 | | | | | | pence | | | pence | Basic earnings per share | Basic earnings per share | | 113.8 | | 60.1 | | 130.7 | | Basic earnings per share | | 140.2 | | 113.8 | | 60.1 | | | Diluted earnings per share | Diluted earnings per share | | 113.4 | | 59.9 | | 130.1 | | Diluted earnings per share | | 139.7 | | 113.4 | | 59.9 | | |
The accompanying notes are an integral part of these consolidated financial statements.
Financial statements (continued) Consolidated statement of comprehensive income | | | Year ended 30 June 2021 £ million | Year ended 30 June 2020 £ million | Year ended 30 June 2019 £ million | | Notes | Year ended 30 June 2022 £ million | Year ended 30 June 2021 £ million | Year ended 30 June 2020 £ million | Other comprehensive income | Other comprehensive income | | Other comprehensive income | | Items that will not be recycled subsequently to the income statement | Items that will not be recycled subsequently to the income statement | | Items that will not be recycled subsequently to the income statement | | Net remeasurement of post employment plans | | | Net remeasurement of post employment benefit plans | | Net remeasurement of post employment benefit plans | | Group | Group | 16 | | 38 | | 33 | | Group | 14 | 616 | | 16 | | 38 | | Associates and joint ventures | Associates and joint ventures | 3 | | (14) | | 2 | | Associates and joint ventures | | 5 | | 3 | | (14) | | | Tax on post employment plans | (46) | | (21) | | 1 | | | Non-controlling interests | | Non-controlling interests | 14 | (1) | | — | | — | | Tax on post employment benefit plans | | Tax on post employment benefit plans | | (123) | | (46) | | (21) | | Changes in the fair value of equity investments at fair value through other comprehensive income | | Changes in the fair value of equity investments at fair value through other comprehensive income | | (12) | | — | | — | | | | (27) | | 3 | | 36 | | | 485 | | (27) | | 3 | | Items that may be recycled subsequently to the income statement | Items that may be recycled subsequently to the income statement | | Items that may be recycled subsequently to the income statement | | Exchange differences on translation of foreign operations | Exchange differences on translation of foreign operations | | Exchange differences on translation of foreign operations | | Group | Group | (1,233) | | (104) | | 274 | | Group | | 1,128 | | (1,233) | | (104) | | Associates and joint ventures | Associates and joint ventures | (240) | | 82 | | 19 | | Associates and joint ventures | 6 | 60 | | (240) | | 82 | | Non-controlling interests | Non-controlling interests | (173) | | (37) | | 55 | | Non-controlling interests | | 171 | | (173) | | (37) | | Net investment hedges | Net investment hedges | 810 | | (227) | | (93) | | Net investment hedges | | (623) | | 810 | | (227) | | Exchange loss recycled to the income statement | Exchange loss recycled to the income statement | | Exchange loss recycled to the income statement | | On translation of foreign operations | 0 | | 4 | | 0 | | | On disposal of foreign operations | | On disposal of foreign operations | 8 | 63 | | — | | 4 | | | Tax on exchange differences – group | Tax on exchange differences – group | (9) | | 4 | | (19) | | Tax on exchange differences – group | | (6) | | (9) | | 4 | | Tax on exchange differences – non-controlling interests | Tax on exchange differences – non-controlling interests | (1) | | 0 | | 0 | | Tax on exchange differences – non-controlling interests | | — | | (1) | | — | | Effective portion of changes in fair value of cash flow hedges | Effective portion of changes in fair value of cash flow hedges | | Effective portion of changes in fair value of cash flow hedges | | Hedge of foreign currency debt of the group | Hedge of foreign currency debt of the group | (298) | | 221 | | 180 | | Hedge of foreign currency debt of the group | | 233 | | (298) | | 221 | | Transaction exposure hedging of the group | Transaction exposure hedging of the group | 101 | | (43) | | (86) | | Transaction exposure hedging of the group | | (172) | | 101 | | (43) | | Hedges by associates and joint ventures | Hedges by associates and joint ventures | (1) | | 6 | | (6) | | Hedges by associates and joint ventures | | (15) | | (1) | | 6 | | Commodity price risk hedging of the group | Commodity price risk hedging of the group | 41 | | (11) | | (9) | | Commodity price risk hedging of the group | | 78 | | 41 | | (11) | | Recycled to income statement – hedge of foreign currency debt of the group | Recycled to income statement – hedge of foreign currency debt of the group | 175 | | (75) | | (82) | | Recycled to income statement – hedge of foreign currency debt of the group | | (239) | | 175 | | (75) | | Recycled to income statement – transaction exposure hedging of the group | Recycled to income statement – transaction exposure hedging of the group | 10 | | 42 | | 45 | | Recycled to income statement – transaction exposure hedging of the group | | 42 | | 10 | | 42 | | Recycled to income statement – commodity price risk hedging of the group | Recycled to income statement – commodity price risk hedging of the group | (2) | | 8 | | 0 | | Recycled to income statement – commodity price risk hedging of the group | | (46) | | (2) | | 8 | | | Tax on effective portion of changes in fair value of cash flow hedges | Tax on effective portion of changes in fair value of cash flow hedges | (6) | | (23) | | (11) | | Tax on effective portion of changes in fair value of cash flow hedges | | 32 | | (6) | | (23) | | | Hyperinflation adjustment | (17) | | (18) | | (22) | | | Tax on hyperinflation adjustment | 5 | | 4 | | 6 | | | Hyperinflation adjustments | | Hyperinflation adjustments | | 365 | | (17) | | (18) | | Tax on hyperinflation adjustments | | Tax on hyperinflation adjustments | | (74) | | 5 | | 4 | |
|
| (838) | | (167) | | 251 | |
| | 997 | | (838) | | (167) | | Other comprehensive (loss)/profit, net of tax, for the year | (865) | | (164) | | 287 | | | Other comprehensive income/(loss), net of tax, for the year | | Other comprehensive income/(loss), net of tax, for the year | | 1,482 | | (865) | | (164) | | Profit for the year | Profit for the year | 2,799 | | 1,454 | | 3,337 | | Profit for the year | | 3,338 | | 2,799 | | 1,454 | | Total comprehensive income for the year | Total comprehensive income for the year | 1,934 | | 1,290 | | 3,624 | | Total comprehensive income for the year | | 4,820 | | 1,934 | | 1,290 | | Attributable to: | Attributable to: | | Attributable to: | | | Equity shareholders of the parent company | Equity shareholders of the parent company | 1,969 | | 1,282 | | 3,392 | | Equity shareholders of the parent company | | 4,561 | | 1,969 | | 1,282 | | | Non-controlling interests | Non-controlling interests | (35) | | 8 | | 232 | | Non-controlling interests | 18 | 259 | | (35) | | 8 | | Total comprehensive income for the year | Total comprehensive income for the year | 1,934 | | 1,290 | | 3,624 | | Total comprehensive income for the year | | 4,820 | | 1,934 | | 1,290 | |
The accompanying notes are an integral part of these consolidated financial statements.
Financial statements (continued) Consolidated balance sheet | | | | 30 June 2021 | 30 June 2020 | | | 30 June 2022 | 30 June 2021 | | | Notes | £ million | | Notes | £ million | Non-current assets | Non-current assets | | Non-current assets | | Intangible assets | Intangible assets | 9 | 10,764 | | | 11,300 | | | Intangible assets | 9 | 11,902 | | | 10,764 | | | Property, plant and equipment | Property, plant and equipment | 10 | 4,849 | | | 4,926 | | | Property, plant and equipment | 10 | 5,848 | | | 4,849 | | | Biological assets | Biological assets |
| 66 | | | 51 | | | Biological assets | 11 | 94 | | | 66 | | | Investments in associates and joint ventures | Investments in associates and joint ventures | 6 | 3,308 | | | 3,557 | | | Investments in associates and joint ventures | 6 | 3,652 | | | 3,308 | | | Other investments | Other investments | 12 | 40 | | | 41 | | | Other investments | 13 | 37 | | | 40 | | | Other receivables | Other receivables | 14 | 36 | | | 46 | | | Other receivables | 15 | 37 | | | 36 | | | Other financial assets | Other financial assets | 15 | 327 | | | 686 | | | Other financial assets | 16 | 345 | | | 327 | | | Deferred tax assets | Deferred tax assets | 7 | 100 | | | 119 | | | Deferred tax assets | 7 | 114 | | | 100 | | | Post employment benefit assets | Post employment benefit assets | 13 | 1,018 | | | 1,111 | | | Post employment benefit assets | 14 | 1,553 | | | 1,018 | | | | | | 20,508 | | | 21,837 | | | | 23,582 | | | 20,508 | | Current assets | Current assets | | Current assets | | Inventories | Inventories | 14 | 6,045 | | | 5,772 | | | Inventories | 15 | 7,094 | | | 6,045 | | | Trade and other receivables | Trade and other receivables | 14 | 2,385 | | | 2,111 | | | Trade and other receivables | 15 | 2,933 | | | 2,385 | | | Corporate tax receivables | Corporate tax receivables | 7 | 145 | | | 190 | | | Corporate tax receivables | 7 | 149 | | | 145 | | | | Assets held for sale | | Assets held for sale | 8 | 222 | | | — | | | Other financial assets | Other financial assets | 15 | 121 | | | 75 | | | Other financial assets | 16 | 251 | | | 121 | | | Cash and cash equivalents | Cash and cash equivalents | 16 | 2,749 | | | 3,323 | | | Cash and cash equivalents | 17 | 2,285 | | | 2,749 | | | | | | 11,445 | | | 11,471 | | | | 12,934 | | | 11,445 | | Total assets | Total assets | | 31,953 | | | 33,308 | | Total assets | | 36,516 | | | 31,953 | | Current liabilities | Current liabilities | | | | | Current liabilities | | | | | Borrowings and bank overdrafts | Borrowings and bank overdrafts | 16 | (1,862) | | | (1,995) | | | Borrowings and bank overdrafts | 17 | (1,522) | | | (1,862) | | | Other financial liabilities | Other financial liabilities | 15 | (257) | | | (389) | | | Other financial liabilities | 16 | (444) | | | (257) | | | Share buyback liability | Share buyback liability | 17 | (91) | | | 0 | | | Share buyback liability | 18 | (117) | | | (91) | | | Trade and other payables | Trade and other payables | 14 | (4,648) | | | (3,683) | | | Trade and other payables | 15 | (5,887) | | | (4,648) | | | | Liabilities held for sale | | Liabilities held for sale | 8 | (61) | | | — | | | Corporate tax payables | Corporate tax payables | 7 | (146) | | | (246) | | | Corporate tax payables | 7 | (252) | | | (146) | | | Provisions | Provisions | 14 | (138) | | | (183) | | | Provisions | 15 | (159) | | | (138) | | | | | | (7,142) | | | (6,496) | | | | (8,442) | | | (7,142) | | Non-current liabilities | Non-current liabilities | | Non-current liabilities | | Borrowings | Borrowings | 16 | (12,865) | | | (14,790) | | | Borrowings | 17 | (14,498) | | | (12,865) | | | Other financial liabilities | Other financial liabilities | 15 | (384) | | | (393) | | | Other financial liabilities | 16 | (703) | | | (384) | | | Other payables | Other payables | 14 | (338) | | | (175) | | | Other payables | 15 | (380) | | | (338) | | | Provisions | Provisions | 14 | (274) | | | (293) | | | Provisions | 15 | (258) | | | (274) | | | Deferred tax liabilities | Deferred tax liabilities | 7 | (1,945) | | | (1,972) | | | Deferred tax liabilities | 7 | (2,319) | | | (1,945) | | | Post employment benefit liabilities | Post employment benefit liabilities | 13 | (574) | | | (749) | | | Post employment benefit liabilities | 14 | (402) | | | (574) | | | | | | (16,380) | | | (18,372) | | | | (18,560) | | | (16,380) | | Total liabilities | Total liabilities | | (23,522) | | | (24,868) | | Total liabilities | | (27,002) | | | (23,522) | | Net assets | Net assets | | 8,431 | | | 8,440 | | Net assets | | 9,514 | | | 8,431 | | Equity | Equity | | | | | Equity | | | | | Share capital | Share capital | 17 | 741 | | | 742 | | | Share capital | 18 | 723 | | | 741 | | | Share premium | Share premium |
| 1,351 | | | 1,351 | | | Share premium |
| 1,351 | | | 1,351 | | | Other reserves | Other reserves |
| 1,621 | | | 2,272 | | | Other reserves |
| 2,174 | | | 1,621 | | | Retained earnings | Retained earnings |
| 3,184 | | | 2,407 | | | Retained earnings |
| 3,550 | | | 3,184 | | | Equity attributable to equity shareholders of the parent company | Equity attributable to equity shareholders of the parent company | | | 6,897 | | | 6,772 | | Equity attributable to equity shareholders of the parent company | | | 7,798 | | | 6,897 | | Non-controlling interests | Non-controlling interests | 17 | | 1,534 | | | 1,668 | | Non-controlling interests | 18 | | 1,716 | | | 1,534 | | Total equity | Total equity | | 8,431 | | | 8,440 | | Total equity | | 9,514 | | | 8,431 | |
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 Menezes and Lavanya Chandrashekar, Directors and dated 54 August 2021.2022.
Financial statements (continued) Consolidated statement of changes in equity | | | | Other reserves | | Retained earnings/(deficit) | | | | | Other reserves | | Retained earnings/(deficit) | | | | 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 | | 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 2018 | 780 | | 1,349 | | 3,163 | | (1,030) | | | (2,144) | | 7,830 | | 5,686 | | 9,948 | | 1,765 | | 11,713 | | | At 30 June 2019 | | At 30 June 2019 | | 753 | | 1,350 | | 3,190 | | (818) | | | (2,026) | | 5,912 | | 3,886 | | 8,361 | | 1,795 | | 10,156 | | | Profit for the year | Profit for the year | — | | — | | — | | — | | | — | | 3,160 | | 3,160 | | 3,160 | | 177 | | 3,337 | | Profit for the year | | — | | — | | — | | — | | | — | | 1,409 | | 1,409 | | 1,409 | | 45 | | 1,454 | | Other comprehensive income | — | | — | | — | | 212 | | | — | | 20 | | 20 | | 232 | | 55 | | 287 | | | Total comprehensive income for the year | — | | — | | — | | 212 | | | — | | 3,180 | | 3,180 | | 3,392 | | 232 | | 3,624 | | | Other comprehensive loss | | Other comprehensive loss | | — | | — | | — | | (116) | | | — | | (11) | | (11) | | (127) | | (37) | | (164) | | Total comprehensive (loss)/ income for the year | | Total comprehensive (loss)/ income for the year | | — | | — | | — | | (116) | | | — | | 1,398 | | 1,398 | | 1,282 | | 8 | | 1,290 | | Employee share schemes | Employee share schemes | — | | — | | — | | — | | | 118 | | (49) | | 69 | | 69 | | — | | 69 | | Employee share schemes | | — | | — | | — | | — | | | 90 | | (36) | | 54 | | 54 | | — | | 54 | | Share-based incentive plans | Share-based incentive plans | — | | — | | — | | — | | | — | | 49 | | 49 | | 49 | | — | | 49 | | Share-based incentive plans | 18 | | — | | — | | — | | — | | | — | | 2 | | 2 | | 2 | | — | | 2 | | Share-based incentive plans in respect of associates | 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 | Tax on share-based incentive plans | — | | — | | — | | — | | | — | | 20 | | 20 | | 20 | | — | | 20 | | Tax on share-based incentive plans | | — | | — | | — | | — | | | — | | 1 | | 1 | | 1 | | — | | 1 | | Share-based payments and purchase of treasury shares in respect of subsidiaries | | Share-based payments and purchase of treasury shares in respect of subsidiaries | | — | | — | | — | | — | | | — | | (1) | | (1) | | (1) | | — | | (1) | | Shares issued | Shares issued | — | | 1 | | — | | — | | | — | | — | | — | | 1 | | — | | 1 | | Shares issued | | — | | 1 | | — | | — | | | — | | — | | — | | 1 | | — | | 1 | | Purchase of non-controlling interests (note 8) | — | | — | | — | | — | | | — | | (694) | | (694) | | (694) | | (90) | | (784) | | | Transfers | | Transfers | | — | | — | | — | | 5 | | | — | | (5) | | (5) | | — | | — | | — | | Purchase of non-controlling interests | | Purchase of non-controlling interests | 8 | | — | | — | | — | | — | | | — | | (39) | | (39) | | (39) | | (23) | | (62) | | | Non-controlling interest in respect of new subsidiary | Non-controlling interest in respect of new subsidiary | — | | — | | — | | — | | | — | | — | | — | | — | | 2 | | 2 | | Non-controlling interest in respect of new subsidiary | | — | | — | | — | | — | | | — | | — | | — | | — | | 5 | | 5 | | Change in fair value of put option | Change in fair value of put option | — | | — | | — | | — | | | — | | (3) | | (3) | | (3) | | — | | (3) | | Change in fair value of put option | | — | | — | | — | | — | | | — | | 9 | | 9 | | 9 | | — | | 9 | | Share buyback programme | Share buyback programme | (27) | | — | | 27 | | — | | | — | | (2,801) | | (2,801) | | (2,801) | | — | | (2,801) | | Share buyback programme | | (11) | | — | | 11 | | — | | | — | | (1,256) | | (1,256) | | (1,256) | | — | | (1,256) | | 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 | | | Profit for the year | — | | — | | — | | — | | | — | | 1,409 | | 1,409 | | 1,409 | | 45 | | 1,454 | | | Other comprehensive loss | — | | — | | — | | (116) | | | — | | (11) | | (11) | | (127) | | (37) | | (164) | | | Total comprehensive (loss)/income for the year | — | | — | | — | | (116) | | | — | | 1,398 | | 1,398 | | 1,282 | | 8 | | 1,290 | | | Employee share schemes | — | | — | | — | | — | | | 90 | | (36) | | 54 | | 54 | | — | | 54 | | | Share-based incentive plans | — | | — | | — | | — | | | — | | 2 | | 2 | | 2 | | — | | 2 | | | Share-based incentive plans in respect of associates | — | | — | | — | | — | | | — | | 4 | | 4 | | 4 | | — | | 4 | | | Tax on share-based incentive plans | — | | — | | — | | — | | | — | | 1 | | 1 | | 1 | | — | | 1 | | | 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) | | — | | — | | 0 | | | Purchase of non-controlling interests (note 8) | — | | — | | — | | — | | | — | | (39) | | (39) | | (39) | | (23) | | (62) | | | | Non-controlling interest in respect of new subsidiary | — | | — | | — | | — | | | — | | — | | — | | — | | 5 | | 5 | | | Change in fair value of put option | — | | — | | — | | — | | | — | | 9 | | 9 | | 9 | | — | | 9 | | | Share buyback programme | (11) | | — | | 11 | | — | | | — | | (1,256) | | (1,256) | | (1,256) | | — | | (1,256) | | | Dividends paid | — | | — | | — | | — | | | — | | (1,646) | | (1,646) | | (1,646) | | (117) | | (1,763) | | | Dividend declared for the year | | Dividend declared for the year | | — | | — | | — | | — | | | — | | (1,646) | | (1,646) | | (1,646) | | (117) | | (1,763) | | 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 | | At 30 June 2020 | | 742 | | 1,351 | | 3,201 | | (929) | | | (1,936) | | 4,343 | | 2,407 | | 6,772 | | 1,668 | | 8,440 | | | Profit for the year | Profit for the year | — | | — | | — | | — | | | — | | 2,660 | | 2,660 | | 2,660 | | 139 | | 2,799 | | Profit for the year | | — | | — | | — | | — | | | — | | 2,660 | | 2,660 | | 2,660 | | 139 | | 2,799 | | Other comprehensive loss | Other comprehensive loss | — | | — | | — | | (652) | | | — | | (39) | | (39) | | (691) | | (174) | | (865) | | Other comprehensive loss | | — | | — | | — | | (652) | | | — | | (39) | | (39) | | (691) | | (174) | | (865) | | Total comprehensive (loss)/income for the year | Total comprehensive (loss)/income for the year | — | | — | | — | | (652) | | | — | | 2,621 | | 2,621 | | 1,969 | | (35) | | 1,934 | | Total comprehensive (loss)/income for the year | | — | | — | | — | | (652) | | | — | | 2,621 | | 2,621 | | 1,969 | | (35) | | 1,934 | | Employee share schemes | Employee share schemes | — | | — | | — | | — | | | 59 | | (10) | | 49 | | 49 | | — | | 49 | | Employee share schemes | | — | | — | | — | | — | | | 59 | | (10) | | 49 | | 49 | | — | | 49 | | Share-based incentive plans | Share-based incentive plans | — | | — | | — | | — | | | — | | 49 | | 49 | | 49 | | — | | 49 | | Share-based incentive plans | 18 | | — | | — | | — | | — | | | — | | 49 | | 49 | | 49 | | — | | 49 | | Share-based incentive plans in respect of associates | Share-based incentive plans in respect of associates | — | | — | | — | | — | | | — | | 3 | | 3 | | 3 | | — | | 3 | | Share-based incentive plans in respect of associates | | — | | — | | — | | — | | | — | | 3 | | 3 | | 3 | | — | | 3 | | Tax on share-based incentive plans | Tax on share-based incentive plans | — | | — | | — | | — | | | — | | 9 | | 9 | | 9 | | — | | 9 | | Tax on share-based incentive plans | | — | | — | | — | | — | | | — | | 9 | | 9 | | 9 | | — | | 9 | | | Purchase of non-controlling interests (note 8) | — | | — | | — | | — | | | — | | (15) | | (15) | | (15) | | (27) | | (42) | | | Purchase of non-controlling interests | | Purchase of non-controlling interests | 8 | | — | | — | | — | | — | | | — | | (15) | | (15) | | (15) | | (27) | | (42) | | | Associates' transactions with non-controlling interests | Associates' transactions with non-controlling interests | — | | — | | — | | — | | | — | | (91) | | (91) | | (91) | | — | | (91) | | Associates' transactions with non-controlling interests | | — | | — | | — | | — | | | — | | (91) | | (91) | | (91) | | — | | (91) | | | Change in fair value of put option | Change in fair value of put option | — | | — | | — | | — | | | — | | (2) | | (2) | | (2) | | — | | (2) | | Change in fair value of put option | | — | | — | | — | | — | | | — | | (2) | | (2) | | (2) | | — | | (2) | | Share buyback programme | Share buyback programme | (1) | | — | | 1 | | — | | | — | | (200) | | (200) | | (200) | | — | | (200) | | Share buyback programme | | (1) | | — | | 1 | | — | | | — | | (200) | | (200) | | (200) | | — | | (200) | | Dividends declared | — | | — | | — | | — | | | — | | (1,646) | | (1,646) | | (1,646) | | (72) | | (1,718) | | | 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 | | 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 | | Profit for the year | | — | | — | | — | | — | | | — | | 3,249 | | 3,249 | | 3,249 | | 89 | | 3,338 | | Other comprehensive income | | Other comprehensive income | | — | | — | | — | | 535 | | | — | | 777 | | 777 | | 1,312 | | 170 | | 1,482 | | Total comprehensive income for the year | | Total comprehensive income for the year | | — | | — | | — | | 535 | | | — | | 4,026 | | 4,026 | | 4,561 | | 259 | | 4,820 | | Employee share schemes | | Employee share schemes | | — | | — | | — | | — | | | 39 | | 50 | | 89 | | 89 | | — | | 89 | | Share-based incentive plans | | Share-based incentive plans | 18 | | — | | — | | — | | — | | | — | | 59 | | 59 | | 59 | | — | | 59 | | Share-based incentive plans in respect of associates | | Share-based incentive plans in respect of associates | | — | | — | | — | | — | | | — | | 4 | | 4 | | 4 | | — | | 4 | | Tax on share-based incentive plans | | Tax on share-based incentive plans | | — | | — | | — | | — | | | — | | 9 | | 9 | | 9 | | — | | 9 | | 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 | | Change in fair value of put option | | — | | — | | — | | — | | | — | | (34) | | (34) | | (34) | | — | | (34) | | Share buyback programme | | Share buyback programme | | (18) | | — | | 18 | | — | | | — | | (2,310) | | (2,310) | | (2,310) | | — | | (2,310) | | 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 | |
The accompanying notes are an integral part of these consolidated financial statements.
Financial statements (continued) Consolidated statement of cash flows | | | | Year ended 30 June 2021 | Year ended 30 June 2020 | Year ended 30 June 2019 | | | Year ended 30 June 2022 | Year ended 30 June 2021 | Year ended 30 June 2020 | | | Notes | £ million | | Notes | £ million | Cash flows from operating activities | Cash flows from operating activities | | Cash flows from operating activities | | Profit for the year | Profit for the year | | 2,799 | | | 1,454 | | | 3,337 | | | Profit for the year | | 3,338 | | | 2,799 | | | 1,454 | | | | Taxation | Taxation | | 907 | | | 589 | | | 898 | | | Taxation | | 1,049 | | | 907 | | | 589 | | | Share of after tax results of associates and joint ventures | Share of after tax results of associates and joint ventures | | (334) | | | (282) | | | (312) | | | Share of after tax results of associates and joint ventures | | (417) | | | (334) | | | (282) | | | Net finance charges | Net finance charges | | 373 | | | 353 | | | 263 | | | Net finance charges | | 422 | | | 373 | | | 353 | | | Non-operating items | Non-operating items | | (14) | | | 23 | | | (144) | | | Non-operating items | | 17 | | | (14) | | | 23 | | | Operating profit | Operating profit | | | 3,731 | | | 2,137 | | | 4,042 | | Operating profit | | | 4,409 | | | 3,731 | | | 2,137 | | Increase in inventories | Increase in inventories | | (443) | | | (366) | | | (434) | | | Increase in inventories | | (740) | | | (443) | | | (366) | | | (Increase)/decrease in trade and other receivables | (Increase)/decrease in trade and other receivables | | (446) | | | 523 | | | 11 | | | (Increase)/decrease in trade and other receivables | | (378) | | | (446) | | | 523 | | | Increase/(decrease) in trade and other payables and provisions | Increase/(decrease) in trade and other payables and provisions | | 1,220 | | | (485) | | | 201 | | | Increase/(decrease) in trade and other payables and provisions | | 939 | | | 1,220 | | | (485) | | | Net decrease/(increase) in working capital | | | 331 | | | (328) | | | (222) | | | Net (increase)/decrease in working capital | | Net (increase)/decrease in working capital | | | (179) | | | 331 | | | (328) | | Depreciation, amortisation and impairment | Depreciation, amortisation and impairment | | 447 | | | 1,839 | | | 374 | | | Depreciation, amortisation and impairment | | 828 | | | 447 | | | 1,839 | | | Dividends received | Dividends received | | 290 | | | 4 | | | 168 | | | Dividends received | | 190 | | | 290 | | | 4 | | | Post employment payments less amounts included in operating profit | Post employment payments less amounts included in operating profit | (30) | | | (109) | | | (121) | | | Post employment payments less amounts included in operating profit | | (89) | | | (30) | | | (109) | | | Other items | Other items | | 88 | | | (14) | | | 64 | | | Other items | | 53 | | | 88 | | | (14) | | | | | | 795 | | | 1,720 | | | 485 | | | | 982 | | | 795 | | | 1,720 | | Cash generated from operations | Cash generated from operations | | 4,857 | | | 3,529 | | | 4,305 | | Cash generated from operations | | 5,212 | | | 4,857 | | | 3,529 | | Interest received | Interest received | | 89 | | | 185 | | | 216 | | | Interest received | | 110 | | | 89 | | | 185 | | | Interest paid | Interest paid | | (440) | | | (493) | | | (468) | | | Interest paid | | (438) | | | (440) | | | (493) | | | Taxation paid | Taxation paid | | (852) | | | (901) | | | (805) | | | Taxation paid | | (949) | | | (852) | | | (901) | | | | | | (1,203) | | | (1,209) | | | (1,057) | | | | (1,277) | | | (1,203) | | | (1,209) | | Net cash inflow from operating activities | Net cash inflow from operating activities | | 3,654 | | | 2,320 | | | 3,248 | | Net cash inflow from operating activities | | 3,935 | | | 3,654 | | | 2,320 | | Cash flows from investing activities | Cash flows from investing activities | | Cash flows from investing activities | | Disposal of property, plant and equipment and computer software | Disposal of property, plant and equipment and computer software | | 13 | | | 14 | | | 32 | | | Disposal of property, plant and equipment and computer software | | 17 | | | 13 | | | 14 | | | Purchase of property, plant and equipment and computer software | Purchase of property, plant and equipment and computer software | | (626) | | | (700) | | | (671) | | | Purchase of property, plant and equipment and computer software | | (1,097) | | | (626) | | | (700) | | | Movements in loans and other investments | Movements in loans and other investments | | (4) | | | 0 | | | (1) | | | Movements in loans and other investments | | (72) | | | (4) | | | — | | | Sale of businesses and brands | Sale of businesses and brands | 8 | 14 | | | 11 | | | 426 | | | Sale of businesses and brands | 8 | 82 | | | 14 | | | 11 | | | Acquisition of businesses | Acquisition of businesses | 8 | (488) | | | (130) | | | (56) | | | Acquisition of businesses | 8 | (271) | | | (488) | | | (130) | | | Net cash outflow from investing activities | Net cash outflow from investing activities | | | (1,091) | | | (805) | | | (270) | | Net cash outflow from investing activities | | | (1,341) | | | (1,091) | | | (805) | | Cash flows from financing activities | Cash flows from financing activities | | Cash flows from financing activities | | Share buyback programme | Share buyback programme | 17 | (109) | | | (1,282) | | | (2,775) | | | Share buyback programme | 18 | (2,284) | | | (109) | | | (1,282) | | | Proceeds from issue of share capital | Proceeds from issue of share capital | | 0 | | | 1 | | | 1 | | | Proceeds from issue of share capital | | — | | | — | | | 1 | | | Net sale of own shares for share schemes | Net sale of own shares for share schemes | | 49 | | | 54 | | | 50 | | | Net sale of own shares for share schemes | | 18 | | | 49 | | | 54 | | | Purchase of treasury shares in respect of subsidiaries | | Purchase of treasury shares in respect of subsidiaries | | (15) | | | — | | | — | | | Dividends paid to non-controlling interests | Dividends paid to non-controlling interests | | (77) | | | (111) | | | (112) | | | Dividends paid to non-controlling interests | | (81) | | | (77) | | | (111) | | | Proceeds from bonds | Proceeds from bonds | 16 | 1,031 | | | 5,188 | | | 2,766 | | | Proceeds from bonds | 17 | 2,263 | | | 1,031 | | | 5,188 | | | Repayment of bonds | Repayment of bonds | 16 | (1,247) | | | (820) | | | (1,168) | | | Repayment of bonds | 17 | (1,521) | | | (1,247) | | | (820) | | | Purchase of shares of non-controlling interests | Purchase of shares of non-controlling interests | 8 | (42) | | | (62) | | | (784) | | | Purchase of shares of non-controlling interests | 8 | — | | | (42) | | | (62) | | | | Net movements in other borrowings |
| (753) | | | (285) | | | 721 | | | | Cash inflow from other borrowings(1) | | Cash inflow from other borrowings(1) |
| 503 | | | 34 | | | 497 | | | Cash outflow from other borrowings(1) | | Cash outflow from other borrowings(1) | | (424) | | | (787) | | | (782) | | | Equity dividends paid | Equity dividends paid | 17 | (1,646) | | | (1,646) | | | (1,623) | | | Equity dividends paid | | (1,718) | | | (1,646) | | | (1,646) | | | | Net cash (outflow)/inflow from financing activities | Net cash (outflow)/inflow from financing activities | | | (2,794) | | | 1,037 | | | (2,924) | | Net cash (outflow)/inflow from financing activities | | | (3,259) | | | (2,794) | | | 1,037 | | Net (decrease)/increase in net cash and cash equivalents | Net (decrease)/increase in net cash and cash equivalents | 16 | | (231) | | | 2,552 | | | 54 | | Net (decrease)/increase in net cash and cash equivalents | 17 | | (665) | | | (231) | | | 2,552 | | Exchange differences | Exchange differences | | (285) | | | (120) | | | (26) | | Exchange differences | | 239 | | | (285) | | | (120) | | Net cash and cash equivalents at beginning of the year | Net cash and cash equivalents at beginning of the year | | 3,153 | | | 721 | | | 693 | | Net cash and cash equivalents at beginning of the year | | 2,637 | | | 3,153 | | | 721 | | Net cash and cash equivalents at end of the year | Net cash and cash equivalents at end of the year | | 2,637 | | | 3,153 | | | 721 | | Net cash and cash equivalents at end of the year | | 2,211 | | | 2,637 | | | 3,153 | | Net cash and cash equivalents consist of: | Net cash and cash equivalents consist of: | | | | | | | Net cash and cash equivalents consist of: | | | | | | | Cash and cash equivalents | Cash and cash equivalents | 16 | | 2,749 | | | 3,323 | | | 932 | | Cash and cash equivalents | 17 | | 2,285 | | | 2,749 | | | 3,323 | | Bank overdrafts | Bank overdrafts | 16 | | (112) | | | (170) | | | (211) | | Bank overdrafts | 17 | | (74) | | | (112) | | | (170) | | | | 2,637 | | | 3,153 | | | 721 | | | 2,211 | | | 2,637 | | | 3,153 | |
(1) For the years ended 30 June 2021 and 30 June 2020, the previously reported line item of “Net movements in other borrowings” has been replaced with “Cash inflow from other borrowings” and “Cash outflow from other borrowings” to gross up the amounts shown above within these lines which had previously been shown net.
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 specific to a note are included in the note to which they relate. Furthermore, the section details 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 On 31 December 2020, International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) at that date were brought into UK law and became UK-adopted International Accounting Standards, with future changes being subject to endorsement by the UK Endorsement Board. Diageo plc transitioned to UK-adopted International Accounting Standards in its consolidated financial statements on 1 July 2021. This change constitutes a change in accounting framework. However, there is no impact on recognition, measurement or disclosure in the period reported as a result of the change in framework. 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 adopted pursuant to Regulation (EC) No 1606/2002by the UK, IFRSs as it applies inadopted by the European UnionEU and IFRSIFRSs, as issued by the International Accounting Standards Board (IASB).IASB, including interpretations issued by the IFRS Interpretations Committee. IFRS as adopted by the UK and by the EU 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 Management has prepared cash flow forecasts which have also been sensitised to reflect severe but plausible downside scenarios taking into consideration the group's principal risks. In ourthe base case scenario, we expectmanagement has included assumptions for mid-single digit net sales momentum to continue intogrowth, operating margin improvement and global TBA market share growth. In light of the year ending 30 June 2022, however, we expect near-termongoing geopolitical volatility, to remain. The potential financial impact ofthe base case outlook and plausible downside scenarios have incorporated considerations for a slower Covid-19 pandemicpost-pandemic economic recovery, has been modelled in the plausible downside scenarios.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 position is still consideredexpected to remain strong, as we havethe group's liquidity was protected our liquidity by launching and pricing €700 million of fixed rate Euro and £400issuing €1,650 million of fixed rate Sterlingeuro and £900 million of fixed rate sterling denominated bonds under Diageo’s European Debt Issuance Programme.in the year ended 30 June 2022. Mitigating actions, should they be required, are all within management’s control and could include reductions in discretionary spending includingsuch as acquisitions and capital expenditure, as well as a temporary suspension of the share buyback programme and dividend payments in the next 12 months, or drawdowndrawdowns on committed facilities. Having considered the outcome of these assessments, the Directors are comfortable that the Companycompany is a going concern for at least 12 months from the date of signing the company'sgroup'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. The income statements and cash flows of non-sterling entities are translated into sterling at weighted average rates of exchange, except for subsidiaries in hyperinflationary economies that are translated with the closing rate at the end of the period and other than 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. 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
Financial statements (continued) 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 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.
Financial statements (continued)
The principal foreign exchange rates used in the translation of financial statements for the three years ended 30 June 2021,2022, expressed in US dollars and euros per £1, were as follows: | | | 2021 | 2020 | 2019 | | 2022 | 2021 | 2020 | US dollar | US dollar | | US dollar | | Income statement and cash flows(i)(1) | Income statement and cash flows(i)(1) | 1.35 | | 1.26 | | 1.29 | | Income statement and cash flows(i)(1) | 1.33 | | 1.35 | | 1.26 | | Assets and liabilities(ii) | 1.39 | | 1.23 | | 1.27 | | | Assets and liabilities(2) | | Assets and liabilities(2) | 1.21 | | 1.39 | | 1.23 | | Euro | Euro | | Euro | | Income statement and cash flows(i)(1) | Income statement and cash flows(i)(1) | 1.13 | | 1.14 | | 1.13 | | Income statement and cash flows(i)(1) | 1.18 | | 1.13 | | 1.14 | | Assets and liabilities(ii) | 1.17 | | 1.09 | | 1.12 | | | Assets and liabilities(2) | | Assets and liabilities(2) | 1.16 | | 1.17 | | 1.09 | |
(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 upon the financial statements are set out in the related notes as follows: –Exceptional items – management judgement whether exceptional or not – page 236233 –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 241239 and 285289 –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 249 –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 257 258 –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 285287
(f) Hyperinflationary accounting The group applied hyperinflationary accounting for its operations in Turkey, Venezuela and Lebanon. In March 2022, the three-year cumulative inflation in Turkey exceeded 100% and as a result, hyperinflationary accounting was applied for the year ended 30 June 2022 in respect of the group’s operations in Turkey. The group’s consolidated financial statements include the results and financial position of its Turkish operations restated to the measuring unit current at the end of the period, with hyperinflationary gains and losses in respect of monetary items being reported in finance 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 TRL 2,133 million (£177 million) recognised on the goodwill in the Turkey cash-generating unit and TRL 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 balances 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, TurkStat. The movement in the publicly available official price index for the year ended 30 June 2022 was 79% (2021 – 18%). Venezuela is a hyperinflationary 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/£ 236,878,083759 for the year ended 30 June 2021 (2020 -2022 (2021 – VES/£ 10,024,865)237). Movement in the price index for the year ended 30 June 20212022 was 268% (2021 – 1,991% (2020 - 2,464%). The.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, cash flow statement and net assets for the year ended 30 June 20212022 and 30 June 20202021 and with the amounts that would have resulted if the official DICOMreference exchange rate had been applied: | | | Year ended 30 June 2021 | Year ended 30 June 2020 | | Year ended 30 June 2022 | Year ended 30 June 2021 | | | At estimated exchange rate | At DICOM exchange rate | At estimated exchange rate | At DICOM exchange rate | | At estimated exchange rate | At official reference exchange rate | At estimated exchange rate(1) | At official reference exchange rate(1) | | | 236,878,083 VES/£ | 4,449,579 VES/£ | 10,024,865 VES/£ | 252,558 VES/£ | | 759 VES/£ | 7 VES/£ | 237 VES/£ | 4 VES/£ | | | £ million | | £ million | Net sales | Net sales | 0 | | 4 | | 0 | | 3 | | Net sales | — | | 15 | | — | | 4 | | Operating (loss)/profit | Operating (loss)/profit | (1) | | 11 | | 0 | | 10 | | Operating (loss)/profit | (1) | | (1) | | (1) | | 11 | | Other finance income - hyperinflation adjustment | Other finance income - hyperinflation adjustment | 2 | | 122 | | 6 | | 222 | | Other finance income - hyperinflation adjustment | 1 | | 157 | | 2 | | 122 | | Net cash inflow from operating activities | 0 | | 9 | | 0 | | 6 | | | Net cash (outflow)/inflow from operating activities | | Net cash (outflow)/inflow from operating activities | — | | (5) | | — | | 9 | | Net assets | Net assets | 38 | | 2,016 | | 48 | | 1,893 | | Net assets | 41 | | 4,606 | | 38 | | 2,016 | |
Lebanon became a hyperinflationary economy during1) Prior year rates have been restated to reflect the year ended 30 June 2021. Hyperinflationary accounting has been applied forCentral Bank of Venezuela's decision to cut six zeros from the group’s Lebanese operationsbolivar currency from 1 July 2020, with hyperinflationary gains and foreignOctober 2021.
Sterling amounts presented at the official reference exchange losses associated with monetary items being reported in finance charges. The impactrate are results of applying hyperinflationary accounting was immaterial.simple mathematical conversion.
The impact of hyperinflationary accounting for Lebanon was immaterial both in the current and comparative periods.
228
Financial statements (continued)
(f)(g) New accounting standards and interpretations
The following amendmentsamendment to the accounting standards, issued by the IASB which have beenand endorsed by the UK and EU, havehas been adopted by the group from 1 July 20202021 with no impact on the group’s consolidated results, financial position or disclosures: –Amendments to References to the Conceptual Framework in IFRS Standards –Amendments to IFRS 3 – Definition of a Business
–Amendments to IAS 1 and IAS 8 – Definition of Material
–Amendments to IFRS 16 – Covid-19 - Related Rent Concessionsrelated rent concessions beyond 30 June 2021
The following amendments and standardsamendment issued by the IASB which have beenand endorsed by the UK and EU, havehas been adopted by the group: Amendments to IFRS 9, IAS 39 and IFRS 7 – Interest rate benchmark reform (phase 1)2). The amendment to IFRS 9 provides temporary relief from applying specific hedge accounting and financial instrument derecognition requirements to hedging relationships directly affected by interbank offered rate (IBOR) reform. The reliefs haveBy applying the effect that IBOR reform shouldpractical expedient, Diageo is not generally cause hedge accountingrequired to terminate. The expectations are that the cash flows in relation todiscontinue its hedging relationships will not be altered byas a result of changes in reference rates due to IBOR reform. The amendment to IFRS 7 requires additional disclosure explaining the nature and extent of risk related to the reform and the derivative instruments usedprogress of the transition, see note 16. The adoption of Phase 2 Amendments in hedgerespect of disclosures and other accounting will still provide a close approximationmatters relating to Interest Rate Benchmark Reform had no material impact on its consolidated results or financial position and not resulted in any change to the extent of the managedentity’s risk exposures. management strategy. 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 in the year ended 30 June 2021 (2020 – £1 million).
IFRS 16 - Leases. The group adopted IFRS 16 from 1 July 2019 by applying the modified retrospective method. Comparative periods have not been restated. The impact of the adoption is included in Note 11.
The following amendment and standard issued by the IASB has been endorsed by the UK and EU and has not been adopted by the group: IFRS 17 – Insurance contracts (effective in(effective from the year ending 30 June 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 39 and IFRS 7 – Interest rate benchmark reform (phase 2). The amendment to IFRS 9 provides relief from applying specific hedge accounting and financial instrument derecognition requirements directly affected by interbank offered rate (IBOR) reform. By applying the practical expedient, Diageo will not be required to discontinue its hedging relationships as a result of changes in reference rates due to the IBOR reform. The amendment to IFRS 7 will require additional disclosure explaining the nature and extent of risk related to the reform and the progress of the transition.
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.
g)(h) Climate change considerations
The impact of climate change assessment and the stated net zero carbon emission on ourtarget for Diageo's direct operationoperations (scope 1 & 2) by 2030 has been considered as part of the assessment of estimates and judgements in preparing the group accounts. The climateclimate change scenario analyses performed in 2022 – 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)) – undertaken this year did not identify anyidentified no material financial impact.impact to these financial statements. The following considerations were made in respect of the financial statements: –•Impact of climate change is not expected to be material on the going concern period and the viability of the group over the next three years.
–•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 forecasted 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 pension assets.
–The impact of climate change on the carrying value of the fixedpost-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 2021.2022. 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 Sales comprise 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 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 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). 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 Supply 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, as well as comprises the global procurement management functions.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 SC&P. They also include rents receivable and payable in respect of properties not used by the group in the manufacture, sale or distribution of premium drinks.
Diageo uses shared services operations to deliver transaction processing activities for markets and operational entities. These centerscentres are located in India, Hungary, 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 HR services. The costs of shared services operations are recharged to the regions.regions. 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 exceptional 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’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 and Turkey | Africa | Latin America and Caribbean | Asia Pacific | SC&P | Eliminate inter- segment sales | Total operating segments | Corporate and other | Total | | North America | Europe | Asia Pacific | Africa | Latin America and Caribbean | SC&P | Eliminate inter- segment sales | Total operating segments | Corporate and other | Total | | | £ million | | £ million | 2021 | | | 2022 | | 2022 | | Sales | Sales | 5,803 | | 4,795 | | 2,020 | | 1,369 | | 5,146 | | 1,537 | | (1,537) | | 19,133 | | 20 | | 19,153 | | Sales | 6,682 | | 5,740 | | 5,624 | | 2,403 | | 1,945 | | 2,010 | | (2,010) | | 22,394 | | 54 | | 22,448 | | Net sales | Net sales | | Net sales | | At budgeted exchange rates(i) | 5,527 | | 2,579 | | 1,541 | | 1,176 | | 2,561 | | 1,627 | | (1,548) | | 13,463 | | 20 | | 13,483 | | | At budgeted exchange rates(1) | | At budgeted exchange rates(1) | 5,955 | | 3,258 | | 2,879 | | 1,699 | | 1,486 | | 2,095 | | (2,016) | | 15,356 | | 55 | | 15,411 | | Acquisitions and disposals | Acquisitions and disposals | 28 | | 2 | | 5 | | 0 | | 0 | | 0 | | 0 | | 35 | | 0 | | 35 | | Acquisitions and disposals | 34 | | 23 | | — | | 15 | | 3 | | — | | — | | 75 | | — | | 75 | | SC&P allocation | SC&P allocation | 9 | | 45 | | 3 | | 13 | | 9 | | (79) | | 0 | | 0 | | 0 | | 0 | | SC&P allocation | 9 | | 46 | | 9 | | 3 | | 12 | | (79) | | — | | — | | — | | — | | Retranslation to actual exchange rates | Retranslation to actual exchange rates | (355) | | (68) | | (137) | | (143) | | (82) | | (11) | | 11 | | (785) | | 0 | | (785) | | Retranslation to actual exchange rates | 97 | | (304) | | (4) | | (35) | | 24 | | (6) | | 6 | | (222) | | (1) | | (223) | | Hyperinflation | | Hyperinflation | — | | 189 | | — | | — | | — | | — | | — | | 189 | | — | | 189 | | Net sales | Net sales | 5,209 | | 2,558 | | 1,412 | | 1,046 | | 2,488 | | 1,537 | | (1,537) | | 12,713 | | 20 | | 12,733 | | Net sales | 6,095 | | 3,212 | | 2,884 | | 1,682 | | 1,525 | | 2,010 | | (2,010) | | 15,398 | | 54 | | 15,452 | | Operating profit/(loss) | Operating profit/(loss) | | Operating profit/(loss) | | At budgeted exchange rates(i) | 2,469 | | 728 | | 228 | | 422 | | 628 | | (97) | | — | | 4,378 | | (218) | | 4,160 | | | At budgeted exchange rates(1) | | At budgeted exchange rates(1) | 2,388 | | 1,086 | | 703 | | 346 | | 528 | | (22) | | — | | 5,029 | | (256) | | 4,773 | | Acquisitions and disposals | Acquisitions and disposals | (18) | | (3) | | 0 | | 0 | | 0 | | 0 | | — | | (21) | | 0 | | (21) | | Acquisitions and disposals | (28) | | 11 | | — | | (10) | | — | | — | | — | | (27) | | — | | (27) | | SC&P allocation | SC&P allocation | (30) | | (32) | | (3) | | (27) | | (5) | | 97 | | — | | 0 | | 0 | | 0 | | SC&P allocation | (1) | | (18) | | (2) | | (1) | | — | | 22 | | — | | — | | — | | — | | Fair value remeasurement of contingent considerations, equity option and earn out arrangements | Fair value remeasurement of contingent considerations, equity option and earn out arrangements | (9) | | (27) | | 0 | | 0 | | 0 | | 0 | | — | | (36) | | 0 | | (36) | | Fair value remeasurement of contingent considerations, equity option and earn out arrangements | 32 | | 36 | | — | | — | | (3) | | — | | — | | 65 | | — | | 65 | | Fair value remeasurement of biological assets | Fair value remeasurement of biological assets | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | — | | 0 | | 0 | | 0 | | Fair value remeasurement of biological assets | — | | — | | — | | — | | (5) | | — | | — | | (5) | | — | | (5) | | Retranslation to actual exchange rates | Retranslation to actual exchange rates | (175) | | (31) | | (54) | | (92) | | (15) | | 0 | | — | | (367) | | 10 | | (357) | | Retranslation to actual exchange rates | 63 | | (108) | | 10 | | (20) | | 18 | | — | | — | | (37) | | 18 | | (19) | | Hyperinflation | | Hyperinflation | — | | 10 | | — | | — | | — | | — | | — | | 10 | | — | | 10 | | Operating profit/(loss) before exceptional items | Operating profit/(loss) before exceptional items | 2,237 | | 635 | | 171 | | 303 | | 608 | | 0 | | — | | 3,954 | | (208) | | 3,746 | | Operating profit/(loss) before exceptional items | 2,454 | | 1,017 | | 711 | | 315 | | 538 | | — | | — | | 5,035 | | (238) | | 4,797 | | Exceptional items | Exceptional items | 0 | | (15) | | 0 | | 0 | | 0 | | 0 | | — | | (15) | | 0 | | (15) | | Exceptional items | (1) | | (146) | | (241) | | — | | — | | — | | — | | (388) | | — | | (388) | | Operating profit/(loss) | Operating profit/(loss) | 2,237 | | 620 | | 171 | | 303 | | 608 | | 0 | | — | | 3,939 | | (208) | | 3,731 | | Operating profit/(loss) | 2,453 | | 871 | | 470 | | 315 | | 538 | | — | | — | | 4,647 | | (238) | | 4,409 | | Non-operating items | Non-operating items | | 14 | | Non-operating items | | (17) | | Net finance charges | Net finance charges | | (373) | | Net finance charges | | (422) | | Share of after tax results of associates and joint ventures | Share of after tax results of associates and joint ventures | | Share of after tax results of associates and joint ventures | | Moët Hennessy | Moët Hennessy | | 335 | | Moët Hennessy | | 425 | | Other | Other | | (1) | | Other | | (8) | | Profit before taxation | Profit before taxation | | 3,706 | | Profit before taxation | | 4,387 | |
Financial statements (continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | North America | Europe and Turkey | Africa | Latin America and Caribbean | Asia Pacific | SC&P | Eliminate inter- segment sales | Total operating segments | Corporate and other | Total | | £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ 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 | | 0 | | 1 | | 0 | | 0 | | 93 | | 0 | | 93 | | SC&P allocation | 11 | | 60 | | 4 | | 10 | | 12 | | (98) | | 0 | | (1) | | 1 | | 0 | | 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) | | 0 | | 0 | | 0 | | 0 | | — | | (5) | | 0 | | (5) | | SC&P allocation | 6 | | 26 | | 2 | | 5 | | 6 | | (45) | | — | | 0 | | 0 | | 0 | | Fair value remeasurement of contingent consideration | (10) | | (4) | | 0 | | 7 | | 0 | | 0 | | — | | (7) | | 0 | | (7) | | Fair value remeasurement of biological assets | 0 | | 0 | | 0 | | 9 | | 0 | | 0 | | — | | 9 | | 0 | | 9 | | Retranslation to actual exchange rates | 32 | | 9 | | (17) | | (27) | | (3) | | 0 | | — | | (6) | | 5 | | (1) | | Operating profit/(loss) before exceptional items | 2,034 | | 757 | | 101 | | 248 | | 501 | | 0 | | — | | 3,641 | | (147) | | 3,494 | | Exceptional items | 54 | | (62) | | (145) | | (6) | | (1,198) | | 0 | | — | | (1,357) | | 0 | | (1,357) | | Operating profit/(loss) | 2,088 | | 695 | | (44) | | 242 | | (697) | | 0 | | — | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | North America | Europe | Asia Pacific | Africa | Latin America and Caribbean | 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 | | 2,020 | | 1,369 | | 1,537 | | (1,537) | | 19,133 | | 20 | | 19,153 | | Net sales | | | | | | | | | | | At budgeted exchange rates(1) | 5,527 | | 2,579 | | 2,561 | | 1,541 | | 1,176 | | 1,627 | | (1,548) | | 13,463 | | 20 | | 13,483 | | Acquisitions and disposals | 28 | | 2 | | — | | 5 | | — | | — | | — | | 35 | | — | | 35 | | SC&P allocation | 9 | | 45 | | 9 | | 3 | | 13 | | (79) | | — | | — | | — | | — | | Retranslation to actual exchange rates | (355) | | (68) | | (82) | | (137) | | (143) | | (11) | | 11 | | (785) | | — | | (785) | | Net sales | 5,209 | | 2,558 | | 2,488 | | 1,412 | | 1,046 | | 1,537 | | (1,537) | | 12,713 | | 20 | | 12,733 | | Operating profit/(loss) | | | | | | | | | | | At budgeted exchange rates(1) | 2,469 | | 728 | | 628 | | 228 | | 422 | | (97) | | — | | 4,378 | | (218) | | 4,160 | | Acquisitions and disposals | (18) | | (3) | | — | | — | | — | | — | | — | | (21) | | — | | (21) | | SC&P allocation | (30) | | (32) | | (5) | | (3) | | (27) | | 97 | | — | | — | | — | | — | | Fair value remeasurement of contingent considerations, equity option and earn out arrangements | (9) | | (27) | | — | | — | | — | | — | | — | | (36) | | — | | (36) | | | | | | | | | | | | | Retranslation to actual exchange rates | (175) | | (31) | | (15) | | (54) | | (92) | | — | | — | | (367) | | 10 | | (357) | | Operating profit/(loss) before exceptional items | 2,237 | | 635 | | 608 | | 171 | | 303 | | — | | — | | 3,954 | | (208) | | 3,746 | | Exceptional items | — | | (15) | | — | | — | | — | | — | | — | | (15) | | — | | (15) | | Operating profit/(loss) | 2,237 | | 620 | | 608 | | 171 | | 303 | | — | | — | | 3,939 | | (208) | | 3,731 | | Non-operating items | | | | | | | | | | 14 | | Net finance charges | | | | | | | | | | (373) | | Share of after tax results of associates and joint ventures | | | | | | | | | | | Moët Hennessy | | | | | | | | | | 335 | | Other | | | | | | | | | | (1) | | Profit before taxation | | | | | | | | | | 3,706 | |
Financial statements (continued) | | | North America | Europe and Turkey | Africa | Latin America and Caribbean | Asia Pacific | SC&P | Eliminate inter- segment sales | Total operating segments | Corporate and other | Total | | North America | Europe | Asia Pacific | Africa | Latin America and Caribbean | SC&P | Eliminate inter- segment sales | Total operating segments | Corporate and other | Total | | | £ million | | £ million | 2019 | | | 2020 | | 2020 | | Sales | Sales | 5,074 | | 5,132 | | 2,235 | | 1,444 | | 5,356 | | 1,739 | | (1,739) | | 19,241 | | 53 | | 19,294 | | Sales | 5,222 | | 4,697 | | 4,645 | | 1,911 | | 1,184 | | 1,343 | | (1,343) | | 17,659 | | 38 | | 17,697 | | Net sales | Net sales | | 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 | | | At budgeted exchange rates(1) | | At budgeted exchange rates(1) | 4,445 | | 2,501 | | 2,253 | | 1,300 | | 944 | | 1,439 | | (1,341) | | 11,541 | | 38 | | 11,579 | | Acquisitions and disposals | Acquisitions and disposals | 88 | | 1 | | 1 | | 1 | | 1 | | 0 | | 0 | | 92 | | 0 | | 92 | | Acquisitions and disposals | 32 | | 10 | | 1 | | 50 | | — | | — | | — | | 93 | | — | | 93 | | SC&P allocation | SC&P allocation | 11 | | 63 | | 5 | | 15 | | 11 | | (105) | | 0 | | 0 | | 0 | | 0 | | SC&P allocation | 11 | | 60 | | 12 | | 4 | | 10 | | (98) | | — | | (1) | | 1 | | — | | Retranslation to actual exchange rates | Retranslation to actual exchange rates | 327 | | (76) | | 62 | | 19 | | 20 | | 1 | | (1) | | 352 | | (1) | | 351 | | Retranslation to actual exchange rates | 135 | | (4) | | 4 | | (8) | | (46) | | 2 | | (2) | | 81 | | (1) | | 80 | | Net sales | Net sales | 4,460 | | 2,939 | | 1,597 | | 1,130 | | 2,688 | | 1,739 | | (1,739) | | 12,814 | | 53 | | 12,867 | | Net sales | 4,623 | | 2,567 | | 2,270 | | 1,346 | | 908 | | 1,343 | | (1,343) | | 11,714 | | 38 | | 11,752 | | Operating profit/(loss) | Operating profit/(loss) | | Operating profit/(loss) | | At budgeted exchange rates(i) | 1,755 | | 972 | | 257 | | 312 | | 671 | | 139 | | — | | 4,106 | | (186) | | 3,920 | | | At budgeted exchange rates(1) | | At budgeted exchange rates(1) | 2,007 | | 730 | | 498 | | 116 | | 254 | | 45 | | — | | 3,650 | | (152) | | 3,498 | | Acquisitions and disposals | Acquisitions and disposals | 29 | | (1) | | 0 | | 0 | | 0 | | 0 | | — | | 28 | | 0 | | 28 | | Acquisitions and disposals | (1) | | (4) | | — | | — | | — | | — | | — | | (5) | | — | | (5) | | SC&P allocation | SC&P allocation | 13 | | 72 | | 6 | | 32 | | 16 | | (139) | | — | | 0 | | 0 | | 0 | | SC&P allocation | 6 | | 26 | | 6 | | 2 | | 5 | | (45) | | — | | — | | — | | — | | Fair value remeasurement of contingent consideration | | Fair value remeasurement of contingent consideration | (10) | | (4) | | — | | — | | 7 | | — | | — | | (7) | | — | | (7) | | Fair value remeasurement of biological assets | | Fair value remeasurement of biological assets | — | | — | | — | | — | | 9 | | — | | — | | 9 | | — | | 9 | | Retranslation to actual exchange rates | Retranslation to actual exchange rates | 151 | | (29) | | 12 | | 21 | | 16 | | 0 | | — | | 171 | | (3) | | 168 | | Retranslation to actual exchange rates | 32 | | 9 | | (3) | | (17) | | (27) | | — | | — | | (6) | | 5 | | (1) | | Operating profit/(loss) before exceptional items | Operating profit/(loss) before exceptional items | 1,948 | | 1,014 | | 275 | | 365 | | 703 | | 0 | | — | | 4,305 | | (189) | | 4,116 | | Operating profit/(loss) before exceptional items | 2,034 | | 757 | | 501 | | 101 | | 248 | | — | | — | | 3,641 | | (147) | | 3,494 | | Exceptional items | Exceptional items | 0 | | (18) | | 0 | | 0 | | (35) | | 0 | | — | | (53) | | (21) | | (74) | | Exceptional items | 54 | | (62) | | (1,198) | | (145) | | (6) | | — | | — | | (1,357) | | — | | (1,357) | | Operating profit/(loss) | Operating profit/(loss) | 1,948 | | 996 | | 275 | | 365 | | 668 | | 0 | | — | | 4,252 | | (210) | | 4,042 | | Operating profit/(loss) | 2,088 | | 695 | | (697) | | (44) | | 242 | | — | | — | | 2,284 | | (147) | | 2,137 | | Non-operating items | Non-operating items | | 144 | | Non-operating items | | (23) | | Net finance charges | Net finance charges | | (263) | | Net finance charges | | (353) | | Share of after tax results of associates and joint ventures | Share of after tax results of associates and joint ventures | | Share of after tax results of associates and joint ventures | | Moët Hennessy | Moët Hennessy | | 310 | | Moët Hennessy | | 285 | | Other | Other | | 2 | | Other | | (3) | | Profit before taxation | Profit before taxation | | 4,235 | | Profit before taxation | | 2,043 | |
(i)(1) These items represent the IFRS 8 performance measures for the geographical and SC&P segments.
(1)(i) The net sales figures for SC&P 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 SC&P segment to the other operating segments, inter-segmental sales are not material.
(2)(ii) The group’s net finance charges are managed centrally and are not attributable to individual operating segments.
(3)(iii) Approximately 40%37% of annual net sales occurred in the last four months of the calendar year 2020.2021.
(b) Other segmental information
| | | | | | | | | | | | | | | | | | | | | | | | | | | | North America £ million | Europe and Turkey £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | SC&P £ million | Corporate and other £ million | Total £ million | 2021 | | | | | | | | | Capital expenditure | 153 | | 23 | | 125 | | 20 | | 56 | | 125 | | 124 | | 626 | | Depreciation and intangible asset amortisation | (76) | | (31) | | (79) | | (16) | | (60) | | (126) | | (59) | | (447) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 | | | | | | | | | Capital expenditure | 145 | | 24 | | 128 | | 48 | | 59 | | 191 | | 105 | | 700 | | Depreciation and intangible asset amortisation | (68) | | (37) | | (103) | | (21) | | (59) | | (119) | | (73) | | (480) | | Underlying impairment | 0 | | (7) | | 0 | | (7) | | 0 | | 0 | | 0 | | (14) | | Exceptional impairment of tangible assets | 0 | | 0 | | (139) | | 0 | | (1) | | 0 | | 0 | | (140) | | Exceptional impairment of intangible assets | 0 | | 0 | | 0 | | 0 | | (1,205) | | 0 | | 0 | | (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) | |
Financial statements (continued) (b) Other segmental information | | | | | | | | | | | | | | | | | | | | | | | | | | | | North America £ million | Europe £ million | Asia Pacific £ million | Africa £ million | Latin America and Caribbean £ million | SC&P £ million | Corporate and other £ million | Total £ million | 2022 | | | | | | | | | Capital expenditure | 230 | | 187 | | 146 | | 139 | | 128 | | 256 | | 11 | | 1,097 | | Depreciation and intangible asset amortisation | (80) | | (93) | | (93) | | (81) | | (16) | | (116) | | (10) | | (489) | | | | | | | | | | | Exceptional impairment of tangible assets | — | | (3) | | — | | — | | — | | — | | — | | (3) | | Exceptional impairment of intangible assets | — | | (96) | | (240) | | — | | — | | — | | — | | (336) | | 2021 | | | | | | | | | Capital expenditure | 153 | | 23 | | 56 | | 125 | | 20 | | 125 | | 124 | | 626 | | Depreciation and intangible asset amortisation | (76) | | (31) | | (60) | | (79) | | (16) | | (126) | | (59) | | (447) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 | | | | | | | | | Capital expenditure | 145 | | 24 | | 59 | | 128 | | 48 | | 191 | | 105 | | 700 | | Depreciation and intangible asset amortisation | (68) | | (37) | | (59) | | (103) | | (21) | | (119) | | (73) | | (480) | | Underlying impairment | — | | (7) | | — | | — | | (7) | | — | | — | | (14) | | Exceptional impairment of tangible assets | — | | — | | (1) | | (139) | | — | | — | | — | | (140) | | Exceptional impairment of intangible assets | — | | — | | (1,205) | | — | | — | | — | | — | | (1,205) | |
(c) Category and geographical analysis | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Category analysis | Geographic analysis | | Spirits £ million | Beer(iv) £ million | | | Ready to drink(iv) £ million | Other £ million | Total £ million | Great Britain £ million | United States £ million | Nether- lands £ million | India £ million | Rest of World £ million | Total £ million | 2021 | | | | | | | | | | | | | | Sales(i) | 15,634 | | 2,562 | | | | 741 | | 216 | | 19,153 | | 1,822 | | 5,441 | | 70 | | 3,011 | | 8,809 | | 19,153 | | Non-current assets(ii), (iii) | | | | | | | | 2,119 | | 4,320 | | 2,474 | | 2,561 | | 7,589 | | 19,063 | | 2020 (Restated) | | | | | | | | | | | | | | Sales(i), (iv) | 14,158 | | 2,687 | | | | 621 | | 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 (Restated) | | | | | | | | | | | | | | Sales(i), (iv) | 15,283 | | 3,041 | | | | 662 | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Category analysis | Geographic analysis | | Spirits £ million | Beer £ million | | | Ready to drink £ million | Other £ million | Total £ million | United States £ million | India £ million | Great Britain £ million | Nether- lands £ million | Rest of World £ million | Total £ million | 2022 | | | | | | | | | | | | | | Sales(1) | 18,164 | | 3,128 | | | | 882 | | 274 | | 22,448 | | 6,327 | | 3,219 | | 2,142 | | 89 | | 10,671 | | 22,448 | | Non-current assets(2), (3) | | | | | | | | 5,899 | | 2,396 | | 2,413 | | 2,600 | | 8,261 | | 21,569 | | 2021 | | | | | | | | | | | | | | Sales(1) | 15,634 | | 2,562 | | | | 741 | | 216 | | 19,153 | | 5,441 | | 3,011 | | 1,822 | | 70 | | 8,809 | | 19,153 | | Non-current assets(2), (3) | | | | | | | | 4,320 | | 2,561 | | 2,119 | | 2,474 | | 7,589 | | 19,063 | | 2020 | | | | | | | | | | | | | | Sales(1) | 14,158 | | 2,687 | | | | 621 | | 231 | | 17,697 | | 4,839 | | 2,783 | | 1,684 | | 62 | | 8,329 | | 17,697 | | Non-current assets(2), (3) | | | | | | | | 5,028 | | 2,758 | | 1,911 | | 2,661 | | 7,563 | | 19,921 | |
(i)(1) The geographical analysis of sales is based on the location of third partythird-party sales.
(ii)(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.
(iii)(3) The management information provided to the chief operating decision maker does not include an analysis of assets and liabilities by category and therefore is not disclosed.
(iv) Flavoured malt beverages have been reclassified from ready to drink to beer from 1 July 2020. This reporting is in line with the nature of these products and how management reviews the performance. Before the reclassification the beer sales would have been £2,188 million in 2021 (2020 – £2,342 million; 2019 – £2,758 million), and the ready to drink sales would have been £1,115 million in 2021 (2020 – £966 million; 2019 – £945 million).
Financial statements (continued) 3. Operating costs | | | 2021 £ million | 2020 £ million | 2019 £ million | | 2022 £ million | 2021 £ million | 2020 £ million | Excise duties | Excise duties | 6,420 | | 5,945 | | 6,427 | | Excise duties | 6,996 | | 6,420 | | 5,945 | | Cost of sales | Cost of sales | 5,038 | | 4,654 | | 4,866 | | Cost of sales | 5,973 | | 5,038 | | 4,654 | | Marketing | Marketing | 2,163 | | 1,841 | | 2,042 | | Marketing | 2,721 | | 2,163 | | 1,841 | | Other operating items | Other operating items | 1,801 | | 3,120 | | 1,917 | | Other operating items | 2,349 | | 1,801 | | 3,120 | |
|
| 15,422 | | 15,560 | | 15,252 | |
| 18,039 | | 15,422 | | 15,560 | | Comprising: | Comprising: | | Comprising: | | Excise duties | Excise duties | | Excise duties | | United States | | United States | 614 | | 589 | | 585 | | Great Britain | Great Britain | 1,018 | | 930 | | 898 | | Great Britain | 1,172 | | 1,018 | | 930 | | United States | 589 | | 585 | | 587 | | | India | India | 2,127 | | 1,927 | | 2,202 | | India | 2,182 | | 2,127 | | 1,927 | | Other | Other | 2,686 | | 2,503 | | 2,740 | | Other | 3,028 | | 2,686 | | 2,503 | | Increase in inventories | Increase in inventories | (293) | | (275) | | (446) | | Increase in inventories | (909) | | (293) | | (275) | | Raw materials and consumables | Raw materials and consumables | 3,126 | | 2,842 | | 3,007 | | Raw materials and consumables | 4,017 | | 3,126 | | 2,842 | | Marketing | Marketing | 2,163 | | 1,841 | | 2,042 | | Marketing | 2,721 | | 2,163 | | 1,841 | | Other external charges | Other external charges | 1,978 | | 2,044 | | 2,285 | | Other external charges | 2,597 | | 1,978 | | 2,044 | | Staff costs | Staff costs | 1,586 | | 1,404 | | 1,580 | | Staff costs | 1,795 | | 1,586 | | 1,404 | | Depreciation, amortisation and impairment | Depreciation, amortisation and impairment | 447 | | 1,839 | | 374 | | Depreciation, amortisation and impairment | 828 | | 447 | | 1,839 | | Gains on disposal of properties | Gains on disposal of properties | (1) | | (2) | | (5) | | Gains on disposal of properties | (2) | | (1) | | (2) | | Net foreign exchange losses/(gains) | 22 | | 15 | | (7) | | | Net foreign exchange losses | | Net foreign exchange losses | 10 | | 22 | | 15 | | Other operating income | Other operating income | (26) | | (93) | | (5) | | Other operating income | (14) | | (26) | | (93) | | | | 15,422 | | 15,560 | | 15,252 | | | 18,039 | | 15,422 | | 15,560 | |
(a) Other external charges Other external charges include research and development expenditure in respect of new drinks products and package design of £43 million (2021 – £40 million (2020million; 2020 – £34 million; 2019 – £35 million) and maintenance and repairs of £136 million (2021 – £107 million (2020million; 2020 – £105 million; 2019 – £103 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. | | | 2021 £ million | 2020 £ million | 2019 £ million | | 2022 £ million | 2021 £ million | 2020 £ million | Audit of these financial statements | Audit of these financial statements | 3.8 | | 5.3 | | 3.8 | | Audit of these financial statements | 4.2 | | 3.8 | | 5.3 | | Audit of financial statements of subsidiaries | Audit of financial statements of subsidiaries | 4.4 | | 3.6 | | 3.4 | | Audit of financial statements of subsidiaries | 6.1 | | 4.4 | | 3.6 | | Audit related assurance services(i)(1) | Audit related assurance services(i)(1) | 2.6 | | 2.4 | | 1.6 | | Audit related assurance services(i)(1) | 2.5 | | 2.6 | | 2.4 | | Total audit fees (Audit fees) | Total audit fees (Audit fees) | 10.8 | | 11.3 | | 8.8 | | Total audit fees (Audit fees) | 12.8 | | 10.8 | | 11.3 | | | Other assurance services (Audit related fees)(ii) | 0.8 | | 0.8 | | 0.7 | | | All other non-audit fees (All other fees) | 0 | | 0 | | 0.2 | | | Other assurance services (Audit related fees)(2) | | Other assurance services (Audit related fees)(2) | 0.7 | | 0.8 | | 0.8 | | | | 11.6 | | 12.1 | | 9.7 | | | | | | 13.5 | | 11.6 | | 12.1 | |
(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)(2) Other assurance services comprise the aggregate fees for assurance and related services that are not reported under ‘total audit fees’.
(1)(i) Disclosure requirements for auditorauditors 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£0.3 million (2020(2021 – £0.4 million; 20192020 – £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.
Audit services provided by firms other than PwC for the year ended 30 June 20212022 were £0.1 million (2020(2021 – £0.1 million; 20192020 – £0.1 million). Further PwC fees for audit services in respect of employee pensionpost employment plans were £0.2 million for the year ended 30 June 2021 (20202022 (2021 – £0.3£0.2 million; 20192020 – £0.3 million).
Financial statements (continued) (c) Staff costs and average number of employees | | | 2021 £ million | 2020 £ million | 2019 £ million | | 2022 £ million | 2021 £ million | 2020 £ million | Aggregate remuneration | Aggregate remuneration | | Aggregate remuneration | | Wages and salaries | Wages and salaries | 1,336 | | 1,251 | | 1,344 | | Wages and salaries | 1,557 | | 1,336 | | 1,251 | | Share-based incentive plans | Share-based incentive plans | 50 | | 3 | | 50 | | Share-based incentive plans | 59 | | 50 | | 3 | | Employer’s social security | Employer’s social security | 83 | | 79 | | 96 | | Employer’s social security | 107 | | 83 | | 79 | | Employer’s pension | Employer’s pension | | Employer’s pension | | Defined benefit plans | Defined benefit plans | 82 | | 37 | | 61 | | Defined benefit plans | 36 | | 82 | | 37 | | Defined contribution plans | Defined contribution plans | 25 | | 24 | | 19 | | Defined contribution plans | 33 | | 25 | | 24 | | Other post employment plans | Other post employment plans | 10 | | 10 | | 10 | | Other post employment plans | 3 | | 10 | | 10 | | | | 1,586 | | 1,404 | | 1,580 | | | 1,795 | | 1,586 | | 1,404 | |
The average number of employees on a full time equivalent basis (excluding employees of associates and joint ventures) was as follows: | | | 2021 | 2020 | 2019 | | 2022 | 2021 (Restated)(i) | 2020 (Restated)(i) | North America | North America | 2,616 | | 2,466 | | 2,410 | | North America | 2,811 | | 2,562 | | 2,459 | | Europe and Turkey | 3,267 | | 3,350 | | 3,609 | | | Europe | | Europe | 3,014 | | 3,237 | | 3,323 | | Asia Pacific | | Asia Pacific | 6,500 | | 6,474 | | 6,559 | | Africa | Africa | 4,016 | | 4,003 | | 4,338 | | Africa | 4,061 | | 4,016 | | 4,617 | | Latin America and Caribbean | Latin America and Caribbean | 1,505 | | 1,549 | | 1,610 | | Latin America and Caribbean | 1,500 | | 1,505 | | 1,549 | | Asia Pacific | 6,474 | | 6,559 | | 7,038 | | | SC&P | SC&P | 5,085 | | 4,908 | | 4,919 | | SC&P | 5,025 | | 5,085 | | 4,908 | | Corporate and other | Corporate and other | 4,687 | | 4,940 | | 4,496 | | Corporate and other | 5,076 | | 4,687 | | 4,940 | | | | 27,650 | | 27,775 | | 28,420 | | | 27,987 | | 27,566 | | 28,355 | |
(1) The impact of acquisitions and disposals was changed and now disclosed restated where relevant.
At 30 June 20212022 the group had, on a full time equivalent basis, 27,783 (202028,558(2021 – 27,788; 201927,783; 2020 – 28,150)27,788) employees. The average number of employees of the group, including part time employees, for the year was 28,025 (202028,137(2021 – 28,490; 201928,025; 2020 – 29,402)28,490).
Financial statements (continued)
(d) Exceptional operating items Included in other operating items are the following: | | | 2021 £ million | 2020 £ million | 2019 £ million | | 2022 £ million | 2021 £ million | 2020 £ million | Staff costs | Staff costs | | Staff costs | | Guaranteed minimum pension equalisation charge | Guaranteed minimum pension equalisation charge | 5 | | 0 | | 21 | | Guaranteed minimum pension equalisation charge | — | | 5 | | — | | Other external charges | Other external charges | 13 | | 95 | | 53 | | Other external charges | 52 | | 13 | | 95 | | Other operating income | Other operating income | (3) | | (83) | | 0 | | Other operating income | — | | (3) | | (83) | | | Depreciation, amortisation and impairment | Depreciation, amortisation and impairment | | Depreciation, amortisation and impairment | | Brand, goodwill, tangible and other assets impairment | Brand, goodwill, tangible and other assets impairment | 0 | | 1,345 | | 0 | | Brand, goodwill, tangible and other assets impairment | 336 | | — | | 1,345 | | Total exceptional operating items (note 4) | Total exceptional operating items (note 4) | 15 | | 1,357 | | 74 | | Total exceptional operating items (note 4) | 388 | | 15 | | 1,357 | |
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 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. 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 impairment of intangible assets and fixed assets, indirect tax settlements, property disposals and changes in post employment plans.
Financial statements (continued) 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 non-operating exceptional items below operating profit in the consolidated income statement. Taxation items Exceptional current and deferred tax items comprising 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)
| | | | | | | | | | | | | 2022 £ million | 2021 £ million | 2020 £ million | Exceptional operating items | | | | Brand, goodwill, tangible and other assets impairment (a) | (336) | | — | | (1,345) | | Winding down Russian operations (b) | (50) | | — | | — | | Donations (c) | (2) | | (5) | | (89) | | Ongoing litigation in Turkey (d) | — | | (15) | | — | | Guaranteed minimum pension equalisation (e) | — | | (5) | | — | | Obsolete inventories (f) | — | | 7 | | (30) | | Substitution drawback (g) | — | | 3 | | 83 | | Indirect tax in Korea (h) | — | | — | | 24 | | | | | | | (388) | | (15) | | (1,357) | | Non-operating items | | | | Sale of businesses and brands | | | | Meta Abo Brewery (i) | (95) | | — | | — | | Windsor business (j) | (19) | | — | | — | | Picon brand (k) | 91 | | — | | — | | United National Breweries (l) | 6 | | 10 | | (32) | | USL businesses (m) | — | | 3 | | — | | Portfolio of 19 brands (n) | — | | 1 | | 2 | | Loss on disposal of associate (o) | — | | — | | (1) | | Step acquisitions (p) | — | | — | | 8 | | | (17) | | 14 | | (23) | | | | | | Exceptional items before taxation | (405) | | (1) | | (1,380) | | Items included in taxation (note 7 (b)) | 31 | | (84) | | 154 | | | | | | Total exceptional items | (374) | | (85) | | (1,226) | | Attributable to: | | | | Equity shareholders of the parent company | (271) | | (86) | | (1,157) | | Non-controlling interests | (103) | | 1 | | (69) | | Total exceptional items | (374) | | (85) | | (1,226) | |
| | | | | | | | | | | | | 2021 £ million | 2020 £ million | 2019 £ million | Exceptional operating items | | | | Ongoing litigation in Turkey (a) | (15) | | 0 | | 0 | | Guaranteed minimum pension equalisation (b) | (5) | | 0 | | (21) | | Donations (c (i)) | (5) | | (89) | | 0 | | Obsolete inventories (c (ii)) | 7 | | (30) | | 0 | | Substitution drawback (c (iii)) | 3 | | 83 | | 0 | | Brand, goodwill, tangible and other assets impairment (d) | 0 | | (1,345) | | 0 | | Indirect tax in Korea (e) | 0 | | 24 | | (35) | | French tax audit penalty (note 7 (b) (v)) | 0 | | 0 | | (18) | | | (15) | | (1,357) | | (74) | | Non-operating items | | | | Sale of businesses and brands | | | | United National Breweries (f) | 10 | | (32) | | (9) | | USL businesses (g) | 3 | | 0 | | (2) | | Portfolio of 19 brands (h) | 1 | | 2 | | 155 | | Loss on disposal of associate (i) | 0 | | (1) | | 0 | | Step acquisitions (j) | 0 | | 8 | | 0 | | | 14 | | (23) | | 144 | | French tax audit interest (note 7 (b) (v)) | 0 | | 0 | | (9) | | | | | | Exceptional items before taxation | (1) | | (1,380) | | 61 | | Items included in taxation (note 7 (b)) | (84) | | 154 | | (39) | | Total exceptional items | (85) | | (1,226) | | 22 | | Attributable to: | | | | Equity shareholders of the parent company | (86) | | (1,157) | | (4) | | Non-controlling interests | 1 | | (69) | | 26 | | Total exceptional items | (85) | | (1,226) | | 22 | |
(a) In the year ended 30 June 2021, based on recent developments,2022, an additional provisionimpairment charge of TRY 156£336 million (£15 million) was recorded as anrecognised in exceptional itemoperating items in respect of ongoing litigation in Turkey, bringing the provision’s balance to TRY 272 millionMcDowell's No.1 brand (£23240 million) following a settlement of TRY 15 million, Bell's brand (£177 million) during the year. (b) On 20 November 2020, the High Court of Justice of England and Wales issued a ruling that requires schemes to equalise pension benefits for men and women for the calculation of their guaranteed minimum pension liability (GMP) on historic transfers out, which resulted in an additional liability of £5 millionSmirnov related goodwill (£19 million). The corresponding expense was recognised as an exceptional operating item, consistent with the charge of £21 million in relation to the initial GMP ruling in the year ended 30 June 2019.
(c) In line with the group’s accounting policy, given the unusual nature and magnitude of the below items, these were reported as exceptional operating items:
(i) An exceptional charge of $6 million (£5 million) was recognised as part of the 'Raising the Bar' programme in the year ended 30 June 2021. The additional charge represents the re-investment of corporate tax benefit in the fund in certain markets, where a corporate tax deduction is available.
In the year ended 30 June 2020, Diageo launched the 'Raising the Bar' programme, including a commitment of $100 million (£81 million) over a period of up to two years from 1 July 2020, to support pubs and bars to recover following the Covid-19 pandemic. Diageo also provided other forms of support to help the communities and the industry which amounted to £8 million. (ii) In the year ended 30 June 2021, an inventory provision of £7 million was released (2020 - a charge of £30 million) in respect of inventories that had earlier been expected to be returned and destroyed as a consequence of the Covid-19 pandemic, resulting in an exceptional gain. Given the original charge was classified as an exceptional item in the year ended 30 June 2020, the change to the provision was also classified as exceptional.
(iii) In the year ended 30 June 2021, an additional gain of $4 million (£3 million) was recognised in other operating items for excess receipts in respect of substitution drawback claims on prior year accruals.
In the year ended 30 June 2020, an estimated benefit of $105 million (£83 million) for substitution drawback claims that had been filed and were to be filed with the US Government in relation to prior years was recognised in other operating items.
Financial statements (continued)
(d) In the year ended 30 June 2020, an impairment charge of £1,345 million was recognised in exceptional operating items, comprising of £655 million in respect of the India cash-generating unit containing the India goodwill, £116 million in respect of the USL popular brands category (Old Tavern brand £78 million and Bagpiper brand £38 million) and £1 million in respect of fixed assets in India; £434 million in respect of the Windsor Premier brand; £84 million in respect of the group's Nigerian tangible fixed assets;property, plant and equipment in Nigeria; and £55 million in respect of the group's Ethiopian tangible fixed assets.property, plant and equipment in Ethiopia.
For further information, see notesnote 9 (d).
(b) In March 2022, a decision was taken to suspend exporting to and 10, respectively.selling in Russia and on 28 June 2022, Diageo decided that it would wind down its operations in Russia over the following six months. Losses of £50 million directly attributable to the wind down primarily include provisions for onerous contracts (£14 million) and redundancies (£13 million). Total impact of winding down
Financial statements (continued) operations in Russia resulted in a loss of £146 million, including impairment of the Bell’s brand (£77 million), Smirnov related goodwill (£19 million), and directly attributable items. (c) An exceptional charge of $3 million (£2 million) (2021 – £5 million) was recognised as part of the 'Raising the Bar' programme, in addition to the commitment of $100 million (£81 million) announced in the year ended 30 June 2020. The additional charge represents the re-investment of corporate tax benefit in the fund in certain markets, where a corporate tax deduction is available, and was recognised as an exceptional operating item, consistent with the initial commitment. Diageo also provided other forms of support to help our communities and the industry, which amounted to £8 million in the year ended 30 June 2020. (d)In the year ended 30 June 2019, the group recognised a2021, an additional provision of £35£15 million for indirect tax was recorded as an exceptional item in respect of certain channel accountsongoing litigation in Turkey, bringing the provision’s balance to £23 million following a settlement of £1 million during that year. (e) On 20 November 2020, the High Court of Justice of England and regulatory changeWales issued a ruling that requires pension schemes to equalise pension benefits for men and women for the calculation of their guaranteed minimum pension liability (GMP) on historic transfers out, which resulted in Koreaan additional liability of £5 million in the year ended 30 June 2021. The corresponding expense was recognised as an exceptional operating item consistently with the charge in relation to the initial GMP ruling. (f) In the year ended 30 June 2021, an inventory provision of £7 million (2020 - a charge of £30 million) was released in respect of obsolete inventories that had earlier been expected to be returned and destroyed as a direct consequence of the Covid-19 pandemic, resulting in an exceptional gain. The provision release was recognised as an exceptional operating item consistently with the original charge in the year ended 30 June 2020. (g) In the year ended 30 June 2021, an additional gain of $4 million(£3 million) was recognised in exceptional operating items for excess receipts in respect of substitution drawback claims that had been filed and were to be filed with the US Government in relation to prior years. The changes in estimates were recognised as an exceptional operating item consistently with the initial income of £83 million in the year ended 30 June 2020. (h) An assessment was issued by the Korea Tax Authority in the year ended 30 June 2020 that resulted in the reversal of the prior year's provision in the amount of £24 million. (f)(i) On 25 April 2022, Diageo completed the sale of 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.
(j) On 25 March 2022, Diageo agreed to the sale of its Windsor business in Korea. At 30 June 2022, assets and liabilities 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. At 30 June 2022, cumulative translation gains recognised in exchange reserves were £141 million which will be recycled to the income statement on completion of the transaction, in the year ending 30 June 2023. (k) On 10 May 2022, Diageo sold its Picon brand. The sale resulted in an exceptional non-operating gain of £91 million, net of disposal costs. Disposal costs relating to the transaction amounted to £9 million. (l) In the year ended 30 June 2021,2022, ZAR 209133 million (£10 million)(£6 million) of deferred consideration was paid to Diageo in respect of the sale of United National Breweries, the full amount of which represented a non-operating gain (2020(2021 – a gain of £10 million; 2020 - a loss of £32 million; 2019 - loss of £9 million ).million). (g) (m) Certain subsidiaries of United Spirits Limited subsidiaries(USL) were sold in the year ended 30 June 2021. The sale of businessesthese subsidiaries resulted in an exceptional gain of £3 million.
In the year ended 30 June 2019, the disposal of the Indian wine business resulted in an exceptional loss of £2 million.
(h)(n) In the year ended 30 June 2021, the group reversed $2£1 million (£1 million) (2020 - £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)(o) In the year ended 30 June 2020, the disposal of an associate, Equal Parts, LLC resulted in an exceptional loss of £1 million.£1 million.
(j)(p) 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.
For further information on acquisition and sale of businesses and brands, see note 8 (a) and 8 (b).
Financial statements (continued)
Cash payments and receipts included in net cash inflow from operating activities in respect of exceptional items were as follows: | | | 2021 £ million | 2020 £ million | 2019 £ million | | 2022 £ million | 2021 £ million | 2020 £ million | Substitution drawback | 60 | | 26 | | 0 | | | Donations | Donations | (50) | | (7) | | 0 | | Donations | (37) | | (50) | | (7) | | Thalidomide (note 14 (d) (a)) | (15) | | (17) | | (15) | | | Thalidomide (note 15 (d) (i)) | | Thalidomide (note 15 (d) (i)) | (16) | | (15) | | (17) | | Winding down Russian operations | | Winding down Russian operations | (13) | | — | | — | | Indirect tax in Korea | Indirect tax in Korea | (10) | | 0 | | 0 | | Indirect tax in Korea | — | | (10) | | — | | Ongoing litigation in Turkey | Ongoing litigation in Turkey | (1) | | 0 | | 0 | | Ongoing litigation in Turkey | — | | (1) | | — | | Substitution drawback | | Substitution drawback | — | | 60 | | 26 | | French tax audit | French tax audit | 0 | | (88) | | 0 | | French tax audit | — | | — | | (88) | | | Total cash payments | Total cash payments | (16) | | (86) | | (15) | | Total cash payments | (66) | | (16) | | (86) | |
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 charges directly 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 on 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 charges include 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. 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.
Financial statements (continued) | | | 2021 £ million | 2020 £ million | 2019 £ million | | 2022 £ million | 2021 £ million | 2020 £ million | Interest income | Interest income | 119 | | 192 | | 232 | | Interest income | 127 | | 119 | | 192 | | Fair value gain on financial instruments | Fair value gain on financial instruments | 124 | | 123 | | 155 | | Fair value gain on financial instruments | 341 | | 124 | | 123 | | Total interest income(i)(1) | Total interest income(i)(1) | 243 | | 315 | | 387 | | Total interest income(i)(1) | 468 | | 243 | | 315 | | Interest charge on bank loans, bonds and overdrafts | Interest charge on bank loans, bonds and overdrafts | (365) | | (390) | | (349) | | Interest charge on bank loans, bonds and overdrafts | (371) | | (365) | | (390) | | Interest charge on leases
| Interest charge on leases
| (16) | | (15) | | (7) | | Interest charge on leases | (12) | | (16) | | (15) | | | Interest charge on other borrowings | Interest charge on other borrowings | (84) | | (120) | | (122) | | Interest charge on other borrowings | (92) | | (84) | | (120) | | Fair value loss on financial instruments | Fair value loss on financial instruments | (126) | | (123) | | (157) | | Fair value loss on financial instruments | (346) | | (126) | | (123) | | Total interest charges(i)(1) | Total interest charges(i)(1) | (591) | | (648) | | (635) | | Total interest charges(i)(1) | (821) | | (591) | | (648) | | Net interest charges | Net interest charges | (348) | | (333) | | (248) | | Net interest charges | (353) | | (348) | | (333) | | Net finance income in respect of post employment plans in surplus (note 13) | 18 | | 26 | | 29 | | | Net finance income in respect of post employment plans in surplus (note 14) | | Net finance income in respect of post employment plans in surplus (note 14) | 22 | | 18 | | 26 | | Hyperinflation adjustment in respect of Venezuela (note 1) | Hyperinflation adjustment in respect of Venezuela (note 1) | 2 | | 6 | | 10 | | Hyperinflation adjustment in respect of Venezuela (note 1) | 1 | | 2 | | 6 | | Interest income in respect of direct and indirect tax | Interest income in respect of direct and indirect tax | 15 | | 16 | | 16 | | Interest income in respect of direct and indirect tax | 2 | | 15 | | 16 | | Unwinding of discounts | | Unwinding of discounts | 4 | | — | | — | | Other finance income | Other finance income | 0 | | 3 | | 0 | | Other finance income | — | | — | | 3 | | Total other finance income | Total other finance income | 35 | | 51 | | 55 | | Total other finance income | 29 | | 35 | | 51 | | Net finance charge in respect of post employment plans in deficit (note 13) | (13) | | (17) | | (22) | | | Net finance charge in respect of post employment plans in deficit (note 14) | | Net finance charge in respect of post employment plans in deficit (note 14) | (12) | | (13) | | (17) | | Hyperinflation adjustment and foreign exchange revaluation of monetary items in respect of Lebanon (note 1) | Hyperinflation adjustment and foreign exchange revaluation of monetary items in respect of Lebanon (note 1) | (8) | | 0 | | 0 | | Hyperinflation adjustment and foreign exchange revaluation of monetary items in respect of Lebanon (note 1) | (3) | | (8) | | — | | Unwinding of discounts | Unwinding of discounts | (20) | | (24) | | (17) | | Unwinding of discounts | (11) | | (20) | | (24) | | Interest charge in respect of direct and indirect tax | Interest charge in respect of direct and indirect tax | (11) | | (22) | | (11) | | Interest charge in respect of direct and indirect tax | (16) | | (11) | | (22) | | Change in financial liability (Level 3) | Change in financial liability (Level 3) | (7) | | (6) | | (8) | | Change in financial liability (Level 3) | (20) | | (7) | | (6) | | Hyperinflation adjustment in respect of Turkey (note 1) | | Hyperinflation adjustment in respect of Turkey (note 1) | (34) | | — | | — | | | Other finance charges (exceptional)(ii) | 0 | | 0 | | (9) | | | Guarantee fees | Guarantee fees | (1) | | (1) | | 0 | | Guarantee fees | (1) | | (1) | | (1) | | Other finance charges | Other finance charges | 0 | | (1) | | (3) | | Other finance charges | (1) | | — | | (1) | | Total other finance charges | Total other finance charges | (60) | | (71) | | (70) | | Total other finance charges | (98) | | (60) | | (71) | | Net other finance charges | Net other finance charges | (25) | | (20) | | (15) | | Net other finance charges | (69) | | (25) | | (20) | |
(i)(1) Includes £28£27 million interest income and £(429)£(417) million interest charge in respect of financial assets and liabilities that are not measured at fair value through the income statement (2020(2021 – £28 million income and £(429) million charge; 2020 – £46 million income and £(471) million charge; 2019 – £86 million income and £(439) million charge).
(ii) In respect of the French tax audit settlement (see note 7(b)(v)).
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 of disposal. Diageo’s principal associate is Moët Hennessy of which Diageo owns 34%. Moët Hennessy is the spiritswines and winespirits subsidiary 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 | | Moët Hennessy £ million | Others £ million | Total £ million | Cost less provisions | Cost less provisions | | Cost less provisions | | At 30 June 2019 | 3,040 | | 133 | | 3,173 | | | Exchange differences | 78 | | 4 | | 82 | | | Additions | 0 | | 47 | | 47 | | | Share of profit after tax | 285 | | (3) | | 282 | | | Disposals | 0 | | (1) | | (1) | | | Dividends | 0 | | (4) | | (4) | | | Share of movements in other comprehensive income and equity | (8) | | 0 | | (8) | | | Step acquisitions | 0 | | (11) | | (11) | | | Transfer | 0 | | (2) | | (2) | | | Other | 0 | | (1) | | (1) | | | At 30 June 2020 | At 30 June 2020 | 3,395 | | 162 | | 3,557 | | At 30 June 2020 | 3,395 | | 162 | | 3,557 | | Exchange differences | Exchange differences | (228) | | (12) | | (240) | | Exchange differences | (228) | | (12) | | (240) | | Additions | Additions | 0 | | 38 | | 38 | | Additions | — | | 38 | | 38 | | Share of profit after tax | 335 | | (1) | | 334 | | | Share of profit/(loss) after tax | | Share of profit/(loss) after tax | 335 | | (1) | | 334 | | | Dividends | Dividends | (289) | | (1) | | (290) | | Dividends | (289) | | (1) | | (290) | | Share of movements in other comprehensive income and equity | Share of movements in other comprehensive income and equity | (85) | | 0 | | (85) | | Share of movements in other comprehensive income and equity | (85) | | — | | (85) | | | Transfer | Transfer | 0 | | 2 | | 2 | | Transfer | — | | 2 | | 2 | | Impairment charged during the year | Impairment charged during the year | 0 | | (8) | | (8) | | Impairment charged during the year | — | | (8) | | (8) | | | At 30 June 2021 | At 30 June 2021 | 3,128 | | 180 | | 3,308 | | At 30 June 2021 | 3,128 | | 180 | | 3,308 | | Exchange differences | | Exchange differences | 48 | | 12 | | 60 | | Additions | | Additions | — | | 65 | | 65 | | Share of profit/(loss) after tax | | Share of profit/(loss) after tax | 425 | | (8) | | 417 | | | Dividends | | Dividends | (186) | | (4) | | (190) | | Share of movements in other comprehensive income and equity | | Share of movements in other comprehensive income and equity | (6) | | — | | (6) | | | Impairment charged during the year | | Impairment charged during the year | — | | (2) | | (2) | | At 30 June 2022 | | At 30 June 2022 | 3,409 | | 243 | | 3,652 | |
(1)(i) Investment in associates balance includes loans given to and preference shares invested in associates of £108£163 million (2020(2021 – £82£108 million).
(2)(ii) If certain performance targets are met by associates in the Distill Ventures programmes,programme, an additional £22 million (2021 – £33 million (2020 – £22 million)million) will be invested in those associates.
(b) Income statement information for the three years ended 30 June 2021 and balance sheet information as at 30 June 2021 and 30 June 2020 of Moët Hennessy is as follows: | | | | | | | | | | | | | 2021 £ million | 2020 £ million | 2019 £ million | Sales | 4,819 | | 4,425 | | 4,713 | | Profit for the year | 985 | | 838 | | 911 | | Total comprehensive income | 999 | | 765 | | 865 | |
Financial statements (continued)
Moët Hennessy prepares its financial statements under IFRS as endorsed by the EU in euros to 31 December each year. The results are adjusted for alignment to Diageo accounting policies and are a major part of the Wines & Spirits division of LVMH. The results are translated at £1 = €1.13 (2020€1.18 (2021 – £1£1 = €1.14; 2019€1.13; 2020 – £1£1 = €1.13)€1.14). | | | | | | | | | | | 2021 £ million | 2020 £ million | | Non-current assets | 5,320 | | 5,310 | | | Current assets | 7,800 | | 8,352 | | | Total assets | 13,120 | | 13,662 | | | Non-current liabilities | (1,665) | | (1,480) | | | Current liabilities | (2,256) | | (2,197) | | | Total liabilities | (3,921) | | (3,677) | | | Net assets | 9,199 | | 9,985 | | |
(1)Income statement information for the three years ended 30 June 2022 and balance sheet information as at 30 June 2022 and 30 June 2021 of Moët Hennessy is as follows:
| | | | | | | | | | | | | 2022 £ million | 2021 £ million | 2020 £ million | Sales | 5,553 | | 4,819 | | 4,425 | | Profit for the year | 1,250 | | 985 | | 838 | | Total comprehensive income | 1,269 | | 999 | | 765 | |
Financial statements (continued) | | | | | | | | | | | 2022 £ million | 2021 £ million | | Non-current assets | 5,957 | | 5,320 | | | Current assets | 8,447 | | 7,800 | | | Total assets | 14,404 | | 13,120 | | | Non-current liabilities | (1,791) | | (1,665) | | | Current liabilities | (2,415) | | (2,256) | | | Total liabilities | (4,206) | | (3,921) | | | Net assets | 10,198 | | 9,199 | | |
(i) Including acquisition fair value adjustments principally in respect of Moët Hennessy’s brands and translated at £1 = €1.17 (2020€1.16 (2021 – £1 = €1.09)€1.17).
(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 £1,254£1,340 million (2020(2021 – £1,312£1,254 million), plus the group’s share of post acquisition reserves of £2,054£2,312 million (2020(2021 – £2,245£2,054 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 benefits are not recognised unless it is probable that the tax positions are sustainable. Once considered to be probable, tax benefits are reviewed each year to assess whether a provision should be taken against full recognition of the benefit on the basis of potential settlement through negotiation and/or litigation. 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. 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.
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 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.
Financial statements (continued) (a) Analysis of taxation charge for the year | | | United Kingdom | Rest of world | Total | | United Kingdom | Rest of world | Total | | | 2021 £ million | 2020 £ million | 2019 £ million | 2021 £ million | 2020 £ million | 2019 £ million | 2021 £ million | 2020 £ million | 2019 £ million | | 2022 £ million | 2021 £ million | 2020 £ million | 2022 £ million | 2021 £ million | 2020 £ million | 2022 £ million | 2021 £ million | 2020 £ million | Current tax | Current tax | | Current tax | | Current year | Current year | 100 | | 108 | | 150 | | 684 | | 589 | | 713 | | 784 | | 697 | | 863 | | Current year | 174 | | 100 | | 108 | | 867 | | 684 | | 589 | | 1,041 | | 784 | | 697 | | Adjustments in respect of prior years | Adjustments in respect of prior years | 1 | | 6 | | (3) | | 28 | | (25) | | 52 | | 29 | | (19) | | 49 | | Adjustments in respect of prior years | 10 | | 1 | | 6 | | 16 | | 28 | | (25) | | 26 | | 29 | | (19) | | | | 101 | | 114 | | 147 | | 712 | | 564 | | 765 | | 813 | | 678 | | 912 | | | 184 | | 101 | | 114 | | 883 | | 712 | | 564 | | 1,067 | | 813 | | 678 | | Deferred tax | Deferred tax | | Deferred tax | | Origination and reversal of temporary differences | Origination and reversal of temporary differences | 13 | | 24 | | 29 | | 18 | | (143) | | (19) | | 31 | | (119) | | 10 | | Origination and reversal of temporary differences | — | | 13 | | 24 | | 21 | | 18 | | (143) | | 21 | | 31 | | (119) | | Changes in tax rates | Changes in tax rates | 46 | | 6 | | (2) | | 32 | | 39 | | (52) | | 78 | | 45 | | (54) | | Changes in tax rates | 2 | | 46 | | 6 | | 1 | | 32 | | 39 | | 3 | | 78 | | 45 | | Adjustments in respect of prior years | Adjustments in respect of prior years | 8 | | 0 | | 5 | | (23) | | (15) | | 25 | | (15) | | (15) | | 30 | | Adjustments in respect of prior years | — | | 8 | | — | | (42) | | (23) | | (15) | | (42) | | (15) | | (15) | | | | 67 | | 30 | | 32 | | 27 | | (119) | | (46) | | 94 | | (89) | | (14) | | | 2 | | 67 | | 30 | | (20) | | 27 | | (119) | | (18) | | 94 | | (89) | | Taxation on profit | Taxation on profit | 168 | | 144 | | 179 | | 739 | | 445 | | 719 | | 907 | | 589 | | 898 | | Taxation on profit | 186 | | 168 | | 144 | | 863 | | 739 | | 445 | | 1,049 | | 907 | | 589 | |
(b) Exceptional tax charges/(credits)/charges The taxation charge includes the following exceptional items: | | | | | | | | | | | | | 2021 £ million | 2020 £ million | 2019 £ million | Tax rate change in the United Kingdom(i) | 46 | | 0 | | 0 | | Tax rate change in the Netherlands(ii) | 42 | | 0 | | (51) | | | | | | Donations(iii) | (5) | | 0 | | 0 | | Obsolete inventories | 1 | | (7) | | 0 | | Substitution drawback | 1 | | 20 | | 0 | | Guaranteed minimum pension equalisation | (1) | | 0 | | (4) | | Brand and tangible asset impairment(iv) | 0 | | (165) | | 0 | | | | | | | | | | Other items | 0 | | (2) | | 0 | | French tax audit settlement(v) | 0 | | 0 | | 61 | | | | | | Sale of businesses and brands | 0 | | 0 | | 33 | | | | | | | | | | | | | | | | | | | | | | | 84 | | (154) | | 39 | |
| | | | | | | | | | | | | 2022 £ million | 2021 £ million | 2020 £ million | Brand and tangible asset impairment(1) | (55) | | — | | (165) | | Sale of Picon brand | 23 | | — | | — | | Winding down Russian operations | 3 | | — | | — | | Donations(2) | (2) | | (5) | | — | | Tax rate change in the United Kingdom(3) | — | | 46 | | — | | Tax rate change in the Netherlands(4) | — | | 42 | | — | | | | | | | | | | Obsolete inventories | — | | 1 | | (7) | | Substitution drawback | — | | 1 | | 20 | | Guaranteed minimum pension equalisation | — | | (1) | | — | | | | | | | | | | | | | | Other items | — | | — | | (2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (31) | | 84 | | (154) | |
(i) 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
(1) In the year ended 30 June 2021 in relation to2022, the remeasurement of deferred tax assets and liabilities. In addition, there was a one-off charge of £48 million to other comprehensive income and equity, mainly in respect of the remeasurement of the deferred tax liabilities on the post employment assets. (ii) 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 the change, an exceptional tax charge of £42 million was recognised for the year ended 30 June 2021 in relation to the remeasurement of deferred tax liabilities. During the year ended 30 June 2019 the Dutch Senate agreed to a phased reduction in the Dutch corporate tax rate which was expected to be effective from 1 January 2020. An exceptional tax credit of £51£55 million was recorded inconsists of tax impact on the year ended 30 June 2019 principally from the remeasurement of deferred tax liabilities in respectimpairment of the Ketel One vodka distribution rights from 25% to a then enacted tax rate of 20.5%. DuringMcDowell's and Bell's brand for £35 million and £20 million respectively. In the year ended 30 June 2020, the Dutch Senate enacted an increasedexceptional tax ratecredit of 21.7%, giving rise to a £12£165 million consisted of tax charge which was recognised as underlyingimpact on the impairment of the Windsor and USL brands for £105 million and £25 million, respectively, and exceptional tax charge.credits in respect of fixed assets impairments in Nigeria and Ethiopia of £25 million and £10 million, respectively.
(iii) As disclosed in(2) In the year ended 30 June 2020, Annual Report, Diageo 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 1 July 2020. Due to uncertainty on the precise nature of the spend, it could not be determined whether the amounts were deductible for tax purposes in future periods. As a result, no deferred tax asset was recognised in respect of the provision for the year ended 30 June 2020. In 2021,Based on additional information regarding the nature of the spend wasbecoming available and this has been re-assessed andfor re-assessment, a £2 million (30 June 2021 – £5 millionmillion) exceptional tax credit has beenwas recognised mainly in respect of spent in the United States, United Kingdom and Ireland for the year ended 30 June 2021.2022.
(iv)(3) 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 £48 million to other comprehensive income and equity, mainly in respect of the remeasurement of the deferred tax liabilities on the post employment assets.
(4) 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 the change, an exceptional tax charge of £42 million was recognised for the year ended 30 June 2021 in relation to the remeasurement of deferred tax liabilities. During the year ended 30 June 20202022, the exceptionalDutch Senate enacted an increased tax creditrate of £165 million consists25.8%. The remeasurement of the impairment of the Windsor and USL brands of £105 million and £25 million, respectively, exceptionaldeferred tax credits in respect of fixed assets impairments in Nigeria and Ethiopia of £25 million and £10 million, respectively. (v) As disclosed in the 2019 Annual Report, in July 2019 Diageo reached a resolution with the Frenchliabilities was recognised as an underlying 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.charge.
Financial statements (continued)
(c) Taxation rate reconciliation and factors that may affect future tax charges | | | 2021 £ million | 2021 % | 2020 £ million | 2020 % | 2019 £ million | 2019 % | | 2022 £ million | 2022 % | 2021 £ million | 2021 % | 2020 £ million | 2020 % | Profit before taxation | Profit before taxation | 3,706 | | | 2,043 | | | 4,235 | | | Profit before taxation | 4,387 | | | 3,706 | | | 2,043 | | | Notional charge at UK corporation tax rate | Notional charge at UK corporation tax rate | 704 | | 19.0 | | 388 | | 19.0 | | 805 | | 19.0 | | Notional charge at UK corporation tax rate | 833 | | 19.0 | | 704 | | 19.0 | | 388 | | 19.0 | | Elimination of notional tax on share of after tax results of associates and joint ventures | Elimination of notional tax on share of after tax results of associates and joint ventures | (63) | | (1.7) | | (54) | | (2.6) | | (59) | | (1.4) | | Elimination of notional tax on share of after tax results of associates and joint ventures | (79) | | (1.8) | | (63) | | (1.7) | | (54) | | (2.6) | | Differences in overseas tax rates | Differences in overseas tax rates | 128 | | 3.5 | | 53 | | 2.6 | | 106 | | 2.5 | | Differences in overseas tax rates | 161 | | 3.7 | | 128 | | 3.5 | | 53 | | 2.6 | | Effect of intra-group financing | Effect of intra-group financing | 0 | | 0 | | (13) | | (0.6) | | (34) | | (0.8) | | Effect of intra-group financing | — | | — | | — | | — | | (13) | | (0.6) | | Non taxable gain on disposals of businesses | (2) | | (0.1) | | 0 | | 0 | | (3) | | 0 | | | Non-taxable gain on disposals of businesses | | Non-taxable gain on disposals of businesses | — | | — | | (2) | | (0.1) | | — | | — | | Step-up gain | Step-up gain | 0 | | 0 | | (2) | | (0.1) | | 0 | | 0 | | Step-up gain | — | | — | | — | | — | | (2) | | (0.1) | | Other tax rate and tax base differences | Other tax rate and tax base differences | 0 | | 0 | | (47) | | (2.3) | | (79) | | (1.9) | | Other tax rate and tax base differences | — | | — | | — | | — | | (47) | | (2.3) | | Other items not chargeable | Other items not chargeable | (52) | | (1.4) | | (60) | | (3.0) | | (51) | | (1.2) | | Other items not chargeable | (49) | | (1.1) | | (52) | | (1.4) | | (60) | | (3.0) | | Impairment | Impairment | 0 | | 0 | | 135 | | 6.6 | | 0 | | 0 | | Impairment | 36 | | 0.8 | | — | | — | | 135 | | 6.6 | | Non deductible losses on disposals of businesses | 0 | | 0 | | 6 | | 0.3 | | 0 | | 0 | | | Non-deductible losses on disposals of businesses | | Non-deductible losses on disposals of businesses | 21 | | 0.5 | | — | | — | | 6 | | 0.3 | | | Other items not deductible(i)(1) | Other items not deductible(i)(1) | 67 | | 1.8 | | 115 | | 5.6 | | 122 | | 2.9 | | Other items not deductible(i)(1) | 58 | | 1.3 | | 67 | | 1.8 | | 115 | | 5.6 | | Irrecoverable withholding taxes | Irrecoverable withholding taxes | 25 | | 0.7 | | 36 | | 1.7 | | 24 | | 0.6 | | Irrecoverable withholding taxes | 39 | | 0.9 | | 25 | | 0.7 | | 36 | | 1.7 | | Movement in provision related to uncertain tax positions(ii) | 1 | | 0 | | 6 | | 0.3 | | 98 | | 2.3 | | | Changes in tax rates(iii) | 78 | | 2.1 | | 45 | | 2.2 | | (54) | | (1.3) | | | Fair value adjustment in respect of assets held for sale | 0 | | 0 | | 0 | | 0 | | 1 | | 0 | | | Adjustments in respect of prior years(iv) | 21 | | 0.6 | | (19) | | (0.9) | | 22 | | 0.5 | | | Movement in provision in respect of uncertain tax positions(2) | | Movement in provision in respect of uncertain tax positions(2) | 42 | | 0.9 | | 1 | | — | | 6 | | 0.3 | | Changes in tax rates(3) | | Changes in tax rates(3) | 3 | | 0.1 | | 78 | | 2.1 | | 45 | | 2.2 | | | Adjustments in respect of prior years(4) | | Adjustments in respect of prior years(4) | (16) | | (0.4) | | 21 | | 0.6 | | (19) | | (0.9) | | Taxation on profit | Taxation on profit | 907 | | 24.5 | | 589 | | 28.8 | | 898 | | 21.2 | | Taxation on profit | 1,049 | | 23.9 | | 907 | | 24.5 | | 589 | | 28.8 | | Tax rate before exceptional items | Tax rate before exceptional items | — | | 22.2 | | — | | 21.7 | | — | | 20.6 | | Tax rate before exceptional items | — | | 22.5 | | — | | 22.2 | | — | | 21.7 | |
(i)(1) Other items not deductible include additional state and local taxes and other expenses.
(ii)(2) Movement in provision related toin respect of uncertain tax positions includes both current and prior year related uncertain tax position movements. Movement in provision related to uncertain tax positions for the year ended 30 June 2019 includes £61 million exceptional tax charge in respect of the French tax audit settlement.
(iii)(3) 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. Changes in tax rates for the year ended 30 June 2020 are 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.
(iv)(4) Excludes prior year movement in provisions.
(1) As part of an exercise undertaken to amend the policy as to how items are presented, the tax rate reconciliation table has been restructured to separately show irrecoverable withholding tax and movements in provisions related to uncertain tax positions, previously reflected within other items not deductible, in order to provide more relevant information. The UK transfer pricing adjustments included for the years ended 2020 and 2019 have also been reclassified to other tax rate and tax base differences to better reflect their nature, previously included within other items not chargeable.
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 (g)19 (f). The group has a number of ongoing tax audits worldwide for which provisions are recognised in line with the relevant accounting standard taking into account best estimates and management’s judgements concerning the ultimate outcome of the tax audit. As at For the year ended 30 June 20212022, the ongoing audits that are provided for individually are not expected to result in a material tax liability. The current tax asset of £149 million (30 June 2021 – £145 million) and tax liability of £252 million (30 June 2021 – £146 million) include £145156 million (30 June 20202021 – £190129 million) of provisions for tax uncertainties. The cash tax paid for year ended 30 June 2022 amounts to £949 million (30 June 2021 – £852 million) and tax liability ofis £146100 million (30 June 2020 – £246 million) includes £129 million (30 June 2020 – £189 million) of provisions for tax uncertainties with the reductions mainly driven by audit payments and foreign exchange movements. The cash tax paid in the year 30 June 2021 amounts to £852 million (30 June 2020 – £901 million) and is £39 million higherlower than the current tax charge (30(30 June 20202021 – £223£39 million higher). This arises as a result of timing differences between the accrual of income taxes, and the actual payment of cash and the movement in the provision for uncertain tax positions.positions and the actual payment of cash.
On 20 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. In addition, on 20 July 2022, HM Treasury released draft UK legislation that would commence for accounting periods starting on or after 31 December 2023 (i.e. year ending 30 June 2025 for Diageo). Diageo is reviewing this draft legislation and monitoring the status of implementation outside of the UK to understand the potential impact on the group.
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 (liabilities)/assets:
| | | Property, plant and equipment £ million | Intangible assets £ million | Post employment plans £ million | Tax losses £ million | Other temporary differences(i) £ million | Total £ million | | 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 2019 | (349) | | (1,795) | | (38) | | 24 | | 264 | | (1,894) | | | At 30 June 2020 | | At 30 June 2020 | (340) | | (1,736) | | (72) | | 61 | | 234 | | (1,853) | | Exchange differences | Exchange differences | 0 | | 12 | | 1 | | (1) | | (7) | | 5 | | Exchange differences | 26 | | 176 | | (7) | | (5) | | (17) | | 173 | | Recognised in income statement – continuing operations | (10) | | 115 | | (5) | | 7 | | 27 | | 134 | | | Recognised in income statement | | Recognised in income statement | (28) | | (19) | | 2 | | — | | 29 | | (16) | | Reclassification | Reclassification | 8 | | 6 | | 0 | | (3) | | (11) | | 0 | | Reclassification | — | | 7 | | — | | — | | (7) | | — | | Recognised in other comprehensive loss and equity | Recognised in other comprehensive loss and equity | 0 | | (3) | | (16) | | 34 | | (33) | | (18) | | Recognised in other comprehensive loss and equity | — | | — | | (6) | | — | | (2) | | (8) | | | Tax rate change – recognised in income statement | Tax rate change – recognised in income statement | 11 | | (52) | | 2 | | 0 | | (6) | | (45) | | Tax rate change – recognised in income statement | (39) | | (48) | | (2) | | 1 | | 10 | | (78) | | Tax rate change – recognised in other comprehensive loss and equity | Tax rate change – recognised in other comprehensive loss and equity | 0 | | 0 | | (16) | | 0 | | 0 | | (16) | | Tax rate change – recognised in other comprehensive loss and equity | — | | — | | (44) | | — | | (4) | | (48) | | Acquisition of subsidiaries | Acquisition of subsidiaries | 0 | | (19) | | 0 | | 0 | | 0 | | (19) | | Acquisition of subsidiaries | — | | (16) | | — | | — | | 1 | | (15) | | | At 30 June 2020 | (340) | | (1,736) | | (72) | | 61 | | 234 | | (1,853) | | | At 30 June 2021 | | At 30 June 2021 | (381) | | (1,636) | | (129) | | 57 | | 244 | | (1,845) | | Exchange differences | Exchange differences | 26 | | 176 | | (7) | | (5) | | (17) | | 173 | | Exchange differences | (21) | | (155) | | 3 | | 3 | | 17 | | (153) | | Recognised in income statement – continuing operations | (28) | | (19) | | 2 | | 0 | | 29 | | (16) | | | Recognised in income statement | | Recognised in income statement | (42) | | (3) | | (10) | | 2 | | 74 | | 21 | | Reclassification | Reclassification | 0 | | 7 | | 0 | | 0 | | (7) | | 0 | | Reclassification | 2 | | 40 | | — | | — | | (7) | | 35 | | Recognised in other comprehensive loss and equity | Recognised in other comprehensive loss and equity | 0 | | 0 | | (6) | | 0 | | (2) | | (8) | | Recognised in other comprehensive loss and equity | (20) | | (104) | | (103) | | — | | 20 | | (207) | | Tax rate change – recognised in income statement | Tax rate change – recognised in income statement | (39) | | (48) | | (2) | | 1 | | 10 | | (78) | | Tax rate change – recognised in income statement | (1) | | (3) | | — | | 1 | | — | | (3) | | Tax rate change – recognised in other comprehensive loss and equity | Tax rate change – recognised in other comprehensive loss and equity | 0 | | 0 | | (44) | | 0 | | (4) | | (48) | | Tax rate change – recognised in other comprehensive loss and equity | — | | — | | (22) | | — | | 2 | | (20) | | Acquisition of subsidiaries | 0 | | (16) | | 0 | | 0 | | 1 | | (15) | | | Acquisition of businesses | | Acquisition of businesses | — | | (31) | | — | | — | | — | | (31) | | Sale of businesses | | Sale of businesses | (5) | | — | | — | | — | | 3 | | (2) | | | At 30 June 2021 | (381) | | (1,636) | | (129) | | 57 | | 244 | | (1,845) | | | At 30 June 2022 | | At 30 June 2022 | (468) | | (1,892) | | (261) | | 63 | | 353 | | (2,205) | |
(i)(1) Deferred tax on other temporary differences includes hyperinflation, fair value movement on cross-currency swaps, interest and finance costs, restructuring provisions, share-based payments and intra groupintra-group sales of products.
After offsetting deferred tax assets and liabilities where appropriate within territories, the net deferred tax liability comprises: | | | 2021 £ million | 2020 £ million | | 2022 £ million | 2021 £ million | Deferred tax assets | Deferred tax assets | 100 | | 119 | | Deferred tax assets | 114 | | 100 | | Deferred tax liabilities | Deferred tax liabilities | (1,945) | | (1,972) | | Deferred tax liabilities | (2,319) | | (1,945) | | | | (1,845) | | (1,853) | | | (2,205) | | (1,845) | |
The deferredDeferred tax assets of £100£114 million includes £48 include £47 million (20202021 – £84 million)£48 million) arising in jurisdictions with prior year taxable losses. The majority of the asset islosses, primarily in respect of Germany and Brazil. It is considered more likely than not that there will be sufficient future taxable profits to realise these deferred tax assets, the majority of which can be carried forward indefinitely.
(e) Unrecognised deferred tax assets The table below 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 £708£674 million (2020 (2021 – £809£708 million). | | | 2021 £ million | 2020 £ million | | 2022 £ million | 2021 £ million | Capital losses – indefinite | Capital losses – indefinite | 105 | | 76 | | Capital losses – indefinite | 98 | | 105 | | Trading losses – indefinite | Trading losses – indefinite | 23 | | 30 | | Trading losses – indefinite | 25 | | 23 | | Trading and Capital losses – expiry dates up to 2030 | 50 | | 70 | | | Trading and capital losses – expiry dates up to 2032 | | Trading and capital losses – expiry dates up to 2032 | 46 | | 50 | | | | 178 | | 176 | | | 169 | | 178 | |
Additionally, no deferred tax assets have notasset has been recognised in relation to deductiblerespect of certain temporary differences arising from brand valuations, as any benefit of this temporary difference would not be realised unless certain of the group's brands were sold, whichgroup is not currently expected.planning to sell those brands thus the benefit from the temporary differences is unlikely to be realised.
Financial statements (continued) (f) Unrecognised deferred tax liabilities Relevant legislation largely exempts overseas dividends remitted from 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 £16.4£21.0 billion (2020(2021 – £14.7£16.4 billion).
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. 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 20212022 were as follows: | | | Net assets acquired and consideration | | Net assets acquired and consideration | | | Aviation Gin and Davos Brands £ million | Other £ million | 2021 £ million | 2020 £ million | 2019 £ million | | 21Seeds £ million | | Other £ million | 2022 £ million | 2021 £ million | 2020 £ million | Brands and other intangibles | Brands and other intangibles | 206 | | 128 | | 334 | | 102 | | 25 | | Brands and other intangibles | 84 | | | 36 | | 120 | | 334 | | 102 | | Property, plant and equipment | Property, plant and equipment | 11 | | 4 | | 15 | | 0 | | 0 | | Property, plant and equipment | — | | | — | | — | | 15 | | — | | Inventories | Inventories | 7 | | 5 | | 12 | | 2 | | 0 | | Inventories | 4 | | | 2 | | 6 | | 12 | | 2 | | Other working capital | Other working capital | 0 | | (3) | | (3) | | (3) | | (2) | | Other working capital | — | | | 3 | | 3 | | (3) | | (3) | | Deferred tax | Deferred tax | 0 | | (15) | | (15) | | (19) | | (5) | | Deferred tax | (20) | | | (11) | | (31) | | (15) | | (19) | | Borrowings | Borrowings | (6) | | (2) | | (8) | | 0 | | 0 | | Borrowings | — | | | — | | — | | (8) | | — | | Cash | Cash | 2 | | 2 | | 4 | | 2 | | 0 | | Cash | 1 | | | — | | 1 | | 4 | | 2 | | Fair value of assets and liabilities | Fair value of assets and liabilities | 220 | | 119 | | 339 | | 84 | | 18 | | Fair value of assets and liabilities | 69 | | | 30 | | 99 | | 339 | | 84 | | Goodwill arising on acquisition | Goodwill arising on acquisition | 228 | | 46 | | 274 | | 8 | | 10 | | Goodwill arising on acquisition | 48 | | | 22 | | 70 | | 274 | | 8 | | | Settlement of pre-existing relationship | | Settlement of pre-existing relationship | — | | | (1) | | (1) | | — | | — | | Step acquisitions | Step acquisitions | 0 | | 0 | | 0 | | (23) | | (7) | | Step acquisitions | — | | | (6) | | (6) | | — | | (23) | | Consideration payable | Consideration payable | 448 | | 165 | | 613 | | 69 | | 21 | | Consideration payable | 117 | | | 45 | | 162 | | 613 | | 69 | | Satisfied by: | Satisfied by: | | Satisfied by: | | | | Cash consideration paid | Cash consideration paid | (263) | | (95) | | (358) | | (27) | | (6) | | Cash consideration paid | (62) | | | (26) | | (88) | | (358) | | (27) | | Contingent consideration payable | Contingent consideration payable | (185) | | (68) | | (253) | | (42) | | (15) | | Contingent consideration payable | (55) | | | (15) | | (70) | | (253) | | (42) | | Deferred consideration payable | Deferred consideration payable | 0 | | (2) | | (2) | | 0 | | 0 | | Deferred consideration payable | — | | | (4) | | (4) | | (2) | | — | | | | (448) | | (165) | | (613) | | (69) | | (21) | | | (117) | | | (45) | | (162) | | (613) | | (69) | |
Cash consideration paid in respect of the acquisition of businessbusinesses and purchase of shares of non-controlling interests in the three years ended 30 June 20212022 were as follows: | | | | | | | | | | | | | Consideration | | 2021 £ million | 2020 £ million | 2019 £ million | Cash consideration paid for subsidiaries | (358) | | (27) | | (6) | | Deferred consideration paid for subsidiaries | (1) | | 0 | | 0 | | Cash consideration paid for Casamigos | (89) | | (49) | | (9) | | Cash consideration paid in respect of other prior year acquisitions | (6) | | (9) | | (9) | | Cash consideration paid for investments in associates | 0 | | (6) | | (15) | | Capital injection in associates | (38) | | (41) | | (17) | | Cash acquired | 4 | | 2 | | 0 | | Net cash outflow on acquisition of businesses | (488) | | (130) | | (56) | | Purchase of shares of non-controlling interests | (42) | | (62) | | (784) | | Total net cash outflow | (530) | | (192) | | (840) | |
| | | | | | | | | | | | | Consideration | | 2022 £ million | 2021 £ million | 2020 £ million | Acquisitions in the year - subsidiaries | | | | Cash consideration paid | (88) | | (358) | | (27) | | | | | | Prior year acquisitions - subsidiaries | | | | Contingent consideration paid for Casamigos | (83) | | (89) | | (49) | | Other consideration | (36) | | (7) | | (9) | | Investments in associates | | | | Cash consideration paid | (4) | | — | | (6) | | Capital injection | (61) | | (38) | | (41) | | Cash acquired | 1 | | 4 | | 2 | | Net cash outflow on acquisition of businesses | (271) | | (488) | | (130) | | Purchase of shares of non-controlling interests | — | | (42) | | (62) | | Total net cash outflow | (271) | | (530) | | (192) | |
Financial statements (continued) Acquisitions in the year On 31 March 2022, Diageo acquired 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. The goodwill arising on the acquisition of 21Seeds represents expected revenue synergies and acquired workforce. The fair values of assets and liabilities acquired are provisional and will be finalised in the year ending 30 June 2023. 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, these transactions included provision for further contingent consideration of up to £18 million in aggregate, linked to performance targets and a further deferred consideration of £4 million.
Prior year acquisitions On 30 September 2020, Diageo completed the acquisition of Aviation Gin LLC (Aviation Gin) and Davos Brands LLC (Davos Brands) to support Diageo's participation in the super premiumsuper-premium gin segment for a total consideration of $337 million (£263 million) upfront in cash and contingent consideration of up to $275 million (£214 million) linked to performance targets. It is expected that the goodwill and brand will be deductible for tax purposes. The goodwill arising on the acquisition of Aviation Gin and Davos Brands represents expected revenue and cost synergies and acquired workforce. Aviation Gin and Davos Brands contributed $33 million (£26 million) to sales and $15 million (£11 million) loss to the period, out of which $9 million (£7 million) is related to acquisition transaction costs in the year ended 30 June 2021.
Diageo also completed a number of additional acquisitions in the year ended 30 June 2021, comprising: (i) on 26 February 2021, the acquisition of Chase Distillery Limited, to further support Diageo’sDiageo's participation in the premium-plus gin segment in the United Kingdom; (ii) on 8 March 2021, the acquisition of Far West Spirits LLC, owner of the Lone River Ranch Water brand, to improve Diageo's participation in the ready to drink category in the United States; and (iii) on 14 April 2021, the acquisition of Sons of Liberty Spirits Company, to expand Diageo's spirits-based ready to drink portfolio with Loyal 9 Cocktails. The aggregate up-frontupfront cash consideration paid on completion of these three3 transactions in the year ended 30 June 2021 was £95 million. In addition, two2 of these transactions includeincluded provision for further contingent consideration of up to £86 million in aggregate, in each case linked to
Financial statements (continued)
performance targets, and one of the transactions providesprovided for a further £2 million of deferred consideration, of which £1 million has beenwas paid by 30 June 2021.
PriorDuring the year ended 30 June 2020, Diageo completed a number of acquisitions, the largest of these were Seedlip Ltd and Anna Seed 83 Ltd, the brand owners of Seedlip and Æcorn distilled non-alcoholic spirits and aperitifs, both of which completed on 6 August 2019.
During the prior years Diageo completed a number of smaller acquisitions of brands, distribution rights and equity interests in various drinks businesses and made contingent consideration payments in respect of prior year acquisitions.
Purchase of shares of non-controlling interests On 21 OctoberIn the years ended 30 June 2021 and 2020, and on 6 November 2020, EABLEast African Breweries Ltd, a Diageo subsidiary completed the acquisition of 13.3%30% and 16.7%4%, respectively, of shares in Serengeti Breweries Limited for a total consideration of $55$55 million (£ (£42 million) and $3 million (£2 million) in cash, respectively and £16 million in the form of shareholder loans outstanding to EABL andloan from two Diageo Holdings Netherlands B.V. at the date of completion,subsidiaries in 2021, increasing Diageo's effective economic interest from 40.2%39.2% to 47.0%. BothAll transactions arewere recognised withinin retained earnings.
On 29 July 2019, East African Breweries Limited completed the purchase of 4% 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) for an aggregate consideration of RMB 6,774 million (£775 million) and transaction costs of £9 million. This took Diageo’s shareholding in SJF from 39.71% to 63.14%. SJF was already controlled and therefore consolidated prior to these transactions.
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 three years ended 30 June 2022 were as follows:
| | | | | | | | | | | | | | | | | | 2022 £ million | 2021 £ million | 2020 £ million | | Sale consideration | | | | | | | Cash received | | | 106 | | 14 | | 11 | | | Overdraft disposed of | | | 2 | | — | | — | | | Transaction and other directly attributable costs paid | | | (26) | | — | | — | | | Net cash received | | | 82 | | 14 | | 11 | | | Transaction costs payable | | | (16) | | 1 | | (1) | | | | | | 66 | | 15 | | 10 | | | Net assets disposed of | | | | | | | | | | | | | | Goodwill | | | (14) | | — | | — | | | Property, plant and equipment | | | (11) | | (2) | | (1) | | | Investment in associates | | | — | | — | | (1) | | | Assets and liabilities held for sale | | | — | | — | | (30) | | | Inventories | | | (4) | | — | | — | | | Other working capital | | | 15 | | 1 | | — | | | Other borrowings | | | 1 | | — | | — | | | Corporate tax | | | (5) | | — | | — | | | Deferred tax | | | (2) | | — | | — | | | | | | (20) | | (1) | | (32) | | | Impairment charge recognised up until the date of sale | | | — | | — | | (7) | | | Exchange recycled from other comprehensive income | | | (63) | | — | | (4) | | | (Loss)/gain on disposal before taxation | | | (17) | | 14 | | (33) | | | Taxation | | | (23) | | — | | — | | | (Loss)/gain on disposal after taxation | | | (40) | | 14 | | (33) | | |
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 2021, ZAR 2092022, ZAR133 million (£106 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 for an aggregate consideration of ZAR 600 million (£27 million) from which ZAR 378 million (£17 million) was deferred. CertainPrior year disposals further included the sale of certain United Spirits Limited subsidiaries were sold in the year ended 30 June 2021 for an aggregate consideration of £3 million, which has resulted in an exceptional gain of £3 million.
In
Financial statements (continued) (c) Assets and liabilities held for sale | | | | | | | | | | | | | Windsor business £ million | USL Popular brands £ million | 2022 £ million | Intangible assets | 145 | | 20 | | 165 | | Property, plant and equipment | 3 | | 9 | | 12 | | Other investments | 1 | | — | | 1 | | Inventories | 6 | | 15 | | 21 | | Trade and other receivables | 1 | | 22 | | 23 | | | | | | | | | | Assets held for sale | 156 | | 66 | | 222 | | Trade and other payables | (5) | | (13) | | (18) | | Corporation tax | (6) | | — | | (6) | | Deferred tax | (28) | | (7) | | (35) | | Leases | (2) | | — | | (2) | | Liabilities held for sale | (41) | | (20) | | (61) | | Total | 115 | | 46 | | 161 | |
Diageo signed a share purchase agreement on 25 March 2022 with Bayside/Metis Private Equity Consortium to dispose of the Windsor business in Korea. The sale is considered to be highly probable and it is anticipated to complete in the year endedending 30 June 2019, Diageo completed2023. Following the strategic review of its selected Popular brands, on 27 May 2022, United Spirits Limited reached agreement with Inbrew Beverages Pvt Limited for the sale of 32 brands, including Old Tavern and White Mischief. The sale covers the related contracts, permits, intellectual property rights, associated employees, working capital and a portfoliomanufacturing facility. The transaction is highly probable to be completed in the year ending 30 June 2023. It is unlikely that any significant change would take place to the plan to sell these asset groups, hence the impacted assets and liabilities were classified as held for sale at 30 June 2022. Assets and liabilities were measured at their cost as the lower of 19 brands to Sazerac for an aggregate considerationcost and fair value less cost 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 will continue up to December 2028.disposal.
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 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). 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 impactimpacts of the Covid-19 pandemic across markets. In this regard a combination of the following factors was considered in every impairment model:increasing inflationary pressures, recently observable worldwide:
–changes in the future development ofinterest rate environment are taken into consideration when determining the virus, including the duration, scale and geographic extent of the closures;discount rates; –terminal growth rates do not exceed the expected scale and durationlong-term annual inflation rate of the economic recovery;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 size ofinflation and/or the on-trade channel in the market; –the life cycle phase of the brand and the maturity of the market.exchange devaluation is considered significant based on management’s judgement.
Consideration of climate risk impact The impact of climate risk on the future cash flows has also been considered for scenarios analysed in line with the climate change risk assessment. The climate change scenario analyses -performed in 2022 – conducted in line with TCFD recommendations - undertaken this year did not identify any(‘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.impact to the current year impairment assessments.
Financial statements (continued) | | | | | | | | | | | | | | | | | | | Brands £ million | Goodwill £ million | Other intangibles £ million | Computer software £ million | Total £ million | Cost | | | | | | At 30 June 2020 | 8,923 | | 2,664 | | 1,587 | | 698 | | 13,872 | | Exchange differences | (799) | | (311) | | (174) | | (30) | | (1,314) | | Additions | 334 | | 274 | | 8 | | 32 | | 648 | | Disposals | — | | — | | — | | (27) | | (27) | | | | | | | | 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 | | Amortisation and impairment | | | | | | At 30 June 2020 | 1,168 | | 752 | | 78 | | 574 | | 2,572 | | Exchange differences | (71) | | (82) | | (3) | | (26) | | (182) | | Amortisation for the year | — | | — | | 5 | | 44 | | 49 | | | | | | | | Disposals | — | | — | | — | | (24) | | (24) | | 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 | | Carrying amount | | | | | | 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 | | At 30 June 2020 | 7,755 | | 1,912 | | 1,509 | | 124 | | 11,300 | |
Financial statements (continued) | | | | | | | | | | | | | | | | | | | Brands £ million | Goodwill £ million | Other intangibles £ million | Computer software £ million | Total £ million | Cost | | | | | | At 30 June 2019 | 8,895 | | 2,795 | | 1,540 | | 653 | | 13,883 | | Exchange differences | (74) | | (139) | | 44 | | 0 | | (169) | | Additions | 102 | | 8 | | 3 | | 52 | | 165 | | Disposals | 0 | | 0 | | 0 | | (7) | | (7) | | | | | | | | At 30 June 2020 | 8,923 | | 2,664 | | 1,587 | | 698 | | 13,872 | | Exchange differences | (799) | | (311) | | (174) | | (30) | | (1,314) | | Additions | 334 | | 274 | | 8 | | 32 | | 648 | | Disposals | 0 | | 0 | | 0 | | (27) | | (27) | | | | | | | | At 30 June 2021 | 8,458 | | 2,627 | | 1,421 | | 673 | | 13,179 | | Amortisation and impairment | | | | | | 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 | | 0 | | 0 | | 1,219 | | Disposals | 0 | | 0 | | 0 | | (4) | | (4) | | At 30 June 2020 | 1,168 | | 752 | | 78 | | 574 | | 2,572 | | Exchange differences | (71) | | (82) | | (3) | | (26) | | (182) | | Amortisation for the year | — | | — | | 5 | | 44 | | 49 | | | | | | | | Disposals | 0 | | 0 | | 0 | | (24) | | (24) | | At 30 June 2021 | 1,097 | | 670 | | 80 | | 568 | | 2,415 | | Carrying amount | | | | | | At 30 June 2021 | 7,361 | | 1,957 | | 1,341 | | 105 | | 10,764 | | 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 | |
(a) Brands At 30 June 2021,2022, the principal acquired brands, all of which are regarded as having indefinite useful economic lives, are as follows: | | | Principal markets | 2021 £ million | 2020 £ million | | Principal markets | 2022 £ million | 2021 £ million | Crown Royal whisky | Crown Royal whisky | United States | 1,053 | | 1,190 | | Crown Royal whisky | United States | 1,210 | | 1,053 | | Captain Morgan rum | | Captain Morgan rum | Global | 993 | | 864 | | McDowell's No.1 whisky, rum and brandy | McDowell's No.1 whisky, rum and brandy | India | 944 | | 1,050 | | McDowell's No.1 whisky, rum and brandy | India | 778 | | 944 | | Captain Morgan rum | Global | 864 | | 977 | | | Smirnoff vodka | | Smirnoff vodka | Global | 681 | | 593 | | Johnnie Walker whisky | Johnnie Walker whisky | Global | 625 | | 625 | | Johnnie Walker whisky | Global | 625 | | 625 | | Smirnoff vodka | Global | 593 | | 670 | | | Casamigos tequila | Casamigos tequila | United States | 434 | | 491 | | Casamigos tequila | United States | 499 | | 434 | | Yenì raki | | Yenì raki | Turkey | 294 | | 141 | | Shui Jing Fang Chinese white spirit | Shui Jing Fang Chinese white spirit | Greater China | 253 | | 260 | | Shui Jing Fang Chinese white spirit | Greater China | 279 | | 253 | | Aviation American gin | Aviation American gin | United States | 190 | | 0 | | Aviation American gin | United States | 218 | | 190 | | Don Julio tequila | Don Julio tequila | United States | 185 | | 179 | | Don Julio tequila | United States | 207 | | 185 | | Bell's whisky | Europe | 179 | | 179 | | | Signature whisky | Signature whisky | India | 177 | | 197 | | Signature whisky | India | 191 | | 177 | | Seagram's 7 Crown whiskey | Seagram's 7 Crown whiskey | United States | 160 | | 181 | | Seagram's 7 Crown whiskey | United States | 184 | | 160 | | Black Dog whisky | Black Dog whisky | India | 150 | | 167 | | Black Dog whisky | India | 162 | | 150 | | Antiquity whisky | Antiquity whisky | India | 147 | | 163 | | Antiquity whisky | India | 158 | | 147 | | Windsor Premier whisky | Korea | 145 | | 154 | | | Yenì Raki | Turkey | 141 | | 202 | | | Zacapa rum | Zacapa rum | Global | 138 | | 156 | | Zacapa rum | Global | 158 | | 138 | | Gordon's gin | Gordon's gin | Europe | 119 | | 119 | | Gordon's gin | Europe | 119 | | 119 | | Bell's whisky | | Bell's whisky | Europe | 102 | | 179 | | Windsor Premier whisky | | Windsor Premier whisky | Korea | — | | 145 | | | | Other brands | Other brands |
| 864 | | 795 | | Other brands |
| 1,038 | | 864 | | | | 7,361 | | 7,755 | | | 7,896 | | 7,361 | |
Financial statements (continued)
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: | | | | | | | | | | 2021 £ million | 2020 £ million | North America | 609 | | 416 | | Europe and Turkey(i) | | | | | | Turkey | 143 | | 205 | | Latin America and Caribbean – Mexico | 126 | | 123 | | Asia Pacific | | | Greater China | 128 | | 132 | | India | 693 | | 770 | | Other cash-generating units | 258 | | 266 | | | 1,957 | | 1,912 | |
(i) From 1 July 2020, the former Europe cash-generating unit has been structured as five individual cash-generating units: Great Britain, Ireland, Northern Europe, Eastern Europe and Southern Europe, included in other cash-generating units. | | | | | | | | | | 2022 £ million | 2021 £ million | North America | 773 | | 609 | | Europe | | | | | | Turkey | 255 | | 143 | | Asia Pacific | | | Greater China | 141 | | 128 | | India | 747 | | 693 | | Latin America and Caribbean – Mexico | 142 | | 126 | | | | | | | | | | | Other cash-generating units | 229 | | 258 | | | 2,287 | | 1,957 | |
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.
(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 20212022 was £1,295£1,488 million (2020(2021 – £1,464£1,295 million).
Financial statements (continued) (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 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 strategic 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 volatility with respect to the environment after the Covid-19 pandemic in the differentcertain 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 and the Windsor PremierBell's 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; –Cashexpertise. 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 is extended by an additional threetwo years of detailed forecasts;
Financial statements (continued)
–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 can be 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. The pre-tax discount rates, terminal and long-term growth rates used for impairment testing are as follows: | | | 2021 | | 2020 | | | 2022 | | 2021 | | | | Pre-tax discount rate % | Terminal growth rate % | Long-term growth rate % | Pre-tax discount rate % | Terminal growth rate % | Long-term growth rate % | | 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 | North America – United States | 7 | | 2 | | 4 | | 8 | | 2 | | 4 | | North America – United States | 8 | | 2 | | 4 | | 7 | | 2 | | 4 | | Europe and Turkey | | | Europe | | Europe | | United Kingdom | United Kingdom | 6 | | 2 | | 4 | | 5 | | 2 | | 4 | | United Kingdom | 8 | | 2 | | 4 | | 6 | | 2 | | 4 | | Spain | 5 | | 2 | | 4 | | 8 | | 2 | | 3 | | | | Turkey | Turkey | 22 | | 11 | | 16 | | 22 | | 11 | | 15 | | Turkey | 31 | | 15 | | 25 | | 22 | | 11 | | 16 | | Russia | 12 | | 4 | | 6 | | 12 | | 3 | | 6 | | | | Asia Pacific | | Asia Pacific | | Australia | | Australia | 7 | | 2 | | 5 | | 6 | | 2 | | 5 | | India | | India | 14 | | 4 | | 11 | | 12 | | 4 | | 11 | | | Africa | Africa | | Africa | | | South Africa | South Africa | 13 | | 0 | | 6 | | 18 | | 0 | | 7 | | South Africa | 16 | | — | | 6 | | 13 | | — | | 6 | | Nigeria | Nigeria | 19 | | 10 | | 14 | | 21 | | 11 | | 14 | | Nigeria | 24 | | 12 | | 15 | | 19 | | 10 | | 14 | | Africa Emerging Markets | 22 | | 4 | | 10 | | 26 | | 5 | | 11 | | | | Latin America and Caribbean | Latin America and Caribbean | | Latin America and Caribbean | | Brazil | Brazil | 11 | | 3 | | 6 | | 15 | | 3 | | 6 | | Brazil | 12 | | 3 | | 6 | | 11 | | 3 | | 6 | | Mexico | 17 | | 3 | | 6 | | 16 | | 3 | | 5 | | | Asia Pacific | | | Korea | 10 | | (4) | | 0 | | 10 | | (4) | | 0 | | | | India | 12 | | 4 | | 11 | | 12 | | 4 | | 12 | | | Global Travel | 7 | | 2 | | 5 | | 8 | | 2 | | 5 | | | |
InFollowing the announcement by USL of the sale and franchise agreements for selected Popular brands on 27 May 2022, the cash-generating unit structure of the USL brands has been revised, in order to reflect the strategic changes in the management and operation of USL's portfolio of the remaining brands. As a result, the former Popular brands category has been abandoned and the impairment reviews have been performed on an individual brand basis for the year ended 30 June 2020,2022.
Financial statements (continued) Value in use calculation and fair value less costs of disposal methodologies were both considered to assess the recoverable amount of the McDowell's No.1 cash-generating unit. The value in use that was calculated exceeded the fair value less costs of disposal. As a result of the impairment review, an impairment charge of £655£240 million in respect offor the India cash-generating unit containing the India goodwill, £78 million in respect of the Old Tavern brand and £38 million in respect of the Bagpiper brand in India wereyear ended 30 June 2022 was recognised in exceptional operating items basedin respect of the McDowell's No.1 brand. The charge was a result of higher discount rate reflecting the adverse inflationary and macroeconomic environment and of a reduction in forecast cash flow assumptions of McDowell’s No.1 Popular segment, which is reflective of USL’s stated position on their valueparticipation in use.the popular segment and aligned with the recently announced sale and franchising of the majority of the portfolio of Popular brands. The brand impairment reduced the deferred tax liability by £25£35 million. The recoverable amount of the McDowell's No.1 cash generating unit is £892 million. Further,Value in use calculation and fair value less costs of disposal methodologies were both considered to assess the recoverable amount of the Bell's cash-generating unit. The value in use that was calculated exceeded the fair value less costs of disposal. As a result of the impairment review, an impairment charge of £77 million for the year ended 30 June 2020, an impairment charge of £434 million in respect of the Windsor Premier brand2022 was recognised in exceptional operating items based on its value in use.respect of the Bell's brand. Forecast cash flow assumptions were reduced principally due to the wind down of the Russian operations, as well as the increase in discount rates due to the inflationary and higher macroeconomic risk environment in the world. The brand impairment reduced the deferred tax liability by £20 million. The recoverable amount of the Bell's cash-generating unit is £145 million.
In March 2022, a decision was taken to suspend exporting to and selling in Russia and on 28 June 2022, Diageo decided that it would wind down its operations in Russia over the following six months. As a result, an impairment charge of £19 million for the year ended 30 June 2022 in respect of the Smirnov goodwill was recognised in exceptional operating items. The Turkish economy became hyperinflationary for the year ended 30 June 2022, resulting in the recognition of hyperinflation adjustments on the Turkey cash-generating unit for the opening balances at 1 July 2021 and for the year-end balances at 30 June 2022. During the impairment review of the Turkey cash-generating unit, including goodwill and the Yenì Raki brand, value in use calculation 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. As a result of the impairment reviews, 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 and the remaining TRY 2,133 million (£177 million) impairment charge was recognised on the Turkey goodwill. The hyperinflation adjustment reduced by £105 million resulting inthe opening impairment charge has been reflected as a net exceptional lossamount within the movement table of £329 million.intangible assets in note 9.
Financial statements (continued)
(e) Sensitivity to change in key assumptions Impairment testing for the year ended 30 June 20212022 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 20212022 and the impairment charge that would be required if the assumptions in the calculation of their value in use were changed: | | | | | | | | | | | | | | | | | | | | | Carrying value of CGU £ million | Headroom £ million | 1ppt increase in discount rate £ million | | 2ppt decrease in annual growth rate in forecast period 2022-2029 £ million | | Category growth scenario £ million | India(i) | 2,997 | | 170 | | (116) | | | (114) | | | n/a | Antiquity brand(i) | 148 | | 0 | | (20) | | | (17) | | | n/a | USL Popular brands(i) | 448 | | 23 | | (28) | | | (35) | | | n/a | Windsor Premier brand(ii) | 152 | | 45 | | 0 | | | n/a | | (13) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Increase in discount rate | | Decrease in terminal growth rate | | Decrease in annual growth rate in forecast period 2023-2029 | | Decrease in cash flows | | Decrease in future volume forecast | | Further devaluation of local currency | | | | 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 | | Reasonably possible change | Potential impairment charge £ million | | Reasonably possible change | Potential impairment charge £ million | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | McDowell's No.1 | 892 | | — | | | 1ppt | (92) | | | n/a | n/a | | 2ppt | (121) | | | n/a | n/a | | n/a | n/a | | n/a | n/a | | | Bell's | 145 | | — | | | 3ppt | (27) | | | 1ppt | (9) | | | n/a | n/a | | 10 | % | (15) | | | n/a | n/a | | n/a | n/a | | | Yenì Raki | 346 | | 44 | | | 7ppt | (95) | | | n/a | n/a | | n/a | n/a | | n/a | n/a | | 4 | % | (20) | | | n/a | n/a | | | Turkey | 688 | | 14 | | | 7ppt | (249) | | | 1ppt | (13) | | | n/a | n/a | | 10 | % | (88) | | | 1 | % | (124) | | | 66 | % | (69) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(i) Reasonably possible changes in key assumptions that would result in an impairment of the India cash-generating unit, Antiquity and USL Popular brands would be a 1ppt increase in discount rate or a 2ppt decrease in the annual growth rate in the forecast period of 2022-2029.
(ii) The Windsor Premier brand is disclosed as sensitive due to challenging market conditions. The only change in key assumptions considered reasonably possible that would result in an impairment of the brand would be a scenario where 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.
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.
Financial statements (continued) 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 2019 | 1,712 | | 4,515 | | 125 | | 566 | | 494 | | 7,412 | | Recognition of right-of-use asset on adoption of IFRS 16 | 173 | | 63 | | 0 | | 0 | | 0 | | 236 | | Adjusted balance at 1 July 2019 | 1,885 | | 4,578 | | 125 | | 566 | | 494 | | 7,648 | | Exchange differences | (10) | | (22) | | 0 | | (1) | | (9) | | (42) | | | | | | | | | Additions | 202 | | 156 | | 13 | | 34 | | 439 | | 844 | | Disposals | (46) | | (86) | | (20) | | (37) | | (1) | | (190) | | Transfers | 110 | | 242 | | 9 | | 13 | | (374) | | 0 | | At 30 June 2020 | 2,141 | | 4,868 | | 127 | | 575 | | 549 | | 8,260 | | | | | | | | | | | | | | | | Exchange differences | (137) | | (322) | | (10) | | (55) | | (34) | | (558) | | Acquisitions | 9 | | 2 | | 0 | | 0 | | 4 | | 15 | | Sale of businesses | (1) | | (3) | | 0 | | 0 | | 0 | | (4) | | Additions | 95 | | 149 | | 9 | | 27 | | 367 | | 647 | | Disposals | (24) | | (126) | | (7) | | (21) | | 0 | | (178) | | Transfers | 77 | | 146 | | 2 | | 2 | | (227) | | 0 | | At 30 June 2021 | 2,160 | | 4,714 | | 121 | | 528 | | 659 | | 8,182 | | Depreciation | | | | | | | At 30 June 2019 | 511 | | 1,965 | | 91 | | 390 | | 0 | | 2,957 | | Exchange differences | 0 | | (5) | | (1) | | (2) | | 0 | | (8) | | Depreciation charge for the year | 106 | | 260 | | 15 | | 36 | | 0 | | 417 | | Exceptional impairment | 20 | | 114 | | 0 | | 6 | | 0 | | 140 | | | | | | | | | Disposals | (40) | | (78) | | (19) | | (35) | | 0 | | (172) | | | | | | | | | At 30 June 2020 | 597 | | 2,256 | | 86 | | 395 | | 0 | | 3,334 | | Exchange differences | (31) | | (167) | | (8) | | (39) | | 0 | | (245) | Depreciation charge for the year | 110 | | 244 | | 15 | | 29 | | 0 | | 398 | | | | | | | | | | | | | | | Sale of businesses | 0 | | (2) | | 0 | | 0 | | 0 | | (2) | | Disposals | (18) | | (113) | | (7) | | (14) | | 0 | | (152) | | | | | | | | At 30 June 2021 | 658 | | 2,218 | | 86 | | 371 | | 0 | | 3,333 | | Carrying amount | | | | | | | At 30 June 2021 | 1,502 | | 2,496 | | 35 | | 157 | | 659 | | 4,849 | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | 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 2020 | 2,141 | | 4,868 | | 127 | | 575 | | 549 | | 8,260 | | | | | | | | | | | | | | | | Exchange differences | (137) | | (322) | | (10) | | (55) | | (34) | | (558) | | Acquisitions | 9 | | 2 | | — | | — | | 4 | | 15 | | Sale of businesses | (1) | | (3) | | — | | — | | — | | (4) | | Additions | 95 | | 149 | | 9 | | 27 | | 367 | | 647 | | Disposals | (24) | | (126) | | (7) | | (21) | | — | | (178) | | Transfers | 77 | | 146 | | 2 | | 2 | | (227) | | — | | At 30 June 2021 | 2,160 | | 4,714 | | 121 | | 528 | | 659 | | 8,182 | | | | | | | | | | | | | | | | Hyperinflation adjustment in respect of Turkey | 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 | | Depreciation | | | | | | | 30 June 2020 | 597 | | 2,256 | | 86 | | 395 | | — | | 3,334 | | Exchange differences | (31) | | (167) | | (8) | | (39) | | — | | (245) | | Depreciation charge for the year | 110 | | 244 | | 15 | | 29 | | — | | 398 | | | | | | | | | Sale of businesses | — | | (2) | | — | | — | | — | | (2) | | Disposals | (18) | | (113) | | (7) | | (14) | | — | | (152) | | | | | | | | | At 30 June 2021 | 658 | | 2,218 | | 86 | | 371 | | — | | 3,333 | | Exchange differences | 31 | | 94 | | 1 | | 9 | | — | | 135 | Depreciation charge for the year | 127 | | 277 | | 14 | | 29 | | — | | 447 | | | | | | | | | | | | | | | 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 | | Carrying amount | | | | | | | 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 | | At 30 June 2020 | 1,544 | | 2,612 | | 41 | | 180 | | 549 | | 4,926 | |
(a) The net book value of land and buildings comprises freeholds of £1,218£1,444 million (2020(2021 – £1,218 million), long leaseholds of £3 million (2020(2021 – £6£3 million) and short leaseholds of £281£410 million (2020(2021 – £320£281 million). Depreciation was not charged on £180£114 million (2020(2021 – £161£180 million) of land. (b) Property, plant and equipment is net of a government grant of £133£153 million (2020(2021 – £150£133 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.
(d) In the year ended 30 June 2020, an impairment charge of £55 million in respect of 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 loss of £45 million.
Financial statements (continued) 11. Biological assets
Accounting policies Biological assets held by the group consist of agave (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 end of each 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 cost of inventory when the harvested agave is transferred.
Changes in biological assets were as follows: | | | | | | | Biological assets £ million | Fair value | | At 30 June 2020 | 51 | | Exchange differences | 2 | | Transferred to inventories | (7) | | Farming cost capitalised | 20 | | 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 | |
At 30 June 2022, the number of agave plants were approximately 33 million (2021 – 20 million), ranging from new plantations up to eight 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 twelve 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 year ended 30 June 2019, 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.
Financial statements (continued) (a) Movement in right-of-use assets The company principally leases warehouses, office buildings, plant and machinery, cars and distribution vehicles in the ordinary course of business. | | | Land and buildings £ million | Plant and equipment £ million | | Under construction £ million | Total £ million | | Land and buildings £ million | Plant and equipment £ million | | Under construction £ million | Total £ million | At 30 June 2019 | 2 | | 228 | | | 0 | | 230 | | | IFRS16 Transition | 173 | | 63 | | | 0 | | 236 | | | Adjusted balance at 1 July 2019 | 175 | | 291 | | | 0 | | 466 | | | Exchange differences | (3) | | 2 | | | 0 | | (1) | | | Additions | 150 | | 24 | | | 32 | | 206 | | | Disposals | (2) | | 0 | | | 0 | | (2) | | | Depreciation | (51) | | (41) | | | 0 | | (92) | | | At 30 June 2020 | At 30 June 2020 | 269 | | 276 | | | 32 | | 577 | | At 30 June 2020 | 269 | | 276 | | | 32 | | 577 | | | Exchange differences | Exchange differences | (21) | | (18) | | | 0 | | (39) | | Exchange differences | (21) | | (18) | | | — | | (39) | | Additions | Additions | 33 | | 23 | | | 0 | | 56 | | Additions | 33 | | 23 | | | — | | 56 | | Transfer | (1) | | (63) | | | (3) | | (67) | | | Transfers | | Transfers | (1) | | (63) | | | (3) | | (67) | | | Acquisitions | Acquisitions | 8 | | 0 | | | 0 | | 8 | | Acquisitions | 8 | | — | | | — | | 8 | | | Depreciation | Depreciation | (58) | | (34) | | | 0 | | (92) | | Depreciation | (58) | | (34) | | | — | | (92) | | At 30 June 2021 | At 30 June 2021 | 230 | | 184 | | | 29 | | 443 | | At 30 June 2021 | 230 | | 184 | | | 29 | | 443 | | | Exchange differences | | Exchange differences | 26 | | 14 | | | — | | 40 | | Additions | | Additions | 129 | | 56 | | | — | | 185 | | Transfers | | Transfers | 29 | | — | | | (29) | | — | | Reclassification to assets held for sale | | Reclassification to assets held for sale | (1) | | (1) | | | — | | (2) | | | Disposal | | Disposal | (6) | | — | | | — | | (6) | | Depreciation | | Depreciation | (54) | | (41) | | | — | | (95) | | At 30 June 2022 | | At 30 June 2022 | 353 | | 212 | | | — | | 565 | |
(b) Lease liabilities | | | 2021 £ million | 2020 £ million | | 2022 £ million | 2021 £ million | Current lease liabilities | Current lease liabilities | (82) | | (106) | | Current lease liabilities | (85) | | (82) | | Non-current lease liabilities | Non-current lease liabilities | (281) | | (364) | | Non-current lease liabilities | (390) | | (281) | | | | (363) | | (470) | | | (475) | | (363) | |
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 £282 million (£255 million.2021 – £255 million).
(c) Amounts recognised in the consolidated income statement In the year ended 30 June 20212022, other external charges (within other operating expenses (within other external charges)items) included £28£39 million (2020(2021 – £3928 million) in respect of leases of low value assets and short term leases and £3£9 million (2020(2021 – £11£3 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 and other assets (mainly properties) of £101 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 20212022 was £179£154 million (2020 - £180(2021 – £179 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 | Others £ million | Total £ million | | Loans £ million | Other investments £ million | Total £ million | Cost less allowances or fair value | Cost less allowances or fair value | | Cost less allowances or fair value | | At 30 June 2019 | 17 | | 32 | | 49 | | | Exchange differences | 1 | | 1 | | 2 | | | Additions | 3 | | 0 | | 3 | | | Repayments and disposals | (1) | | (2) | | (3) | | | Fair value adjustment | 0 | | 2 | | 2 | | | Provision charged during the year | (14) | | 0 | | (14) | | | Capitalised interest | 1 | | 0 | | 1 | | | Transfer | 0 | | 1 | | 1 | | | At 30 June 2020 | At 30 June 2020 | 7 | | 34 | | 41 | | At 30 June 2020 | 7 | | 34 | | 41 | | Exchange differences | Exchange differences | 0 | | (3) | | (3) | | Exchange differences | — | | (3) | | (3) | | Additions | Additions | 5 | | 0 | | 5 | | Additions | 5 | | — | | 5 | | Repayments and disposals | Repayments and disposals | (1) | | 0 | | (1) | | Repayments and disposals | (1) | | — | | (1) | | | Transfer | Transfer | (1) | | (1) | | (2) | | Transfer | (1) | | (1) | | (2) | | At 30 June 2021 | At 30 June 2021 | 10 | | 30 | | 40 | | At 30 June 2021 | 10 | | 30 | | 40 | | Exchange differences | | Exchange differences | 2 | | 1 | | 3 | | Additions | | Additions | 6 | | 9 | | 15 | | Repayments and disposals | | Repayments and disposals | (1) | | (1) | | (2) | | Fair value adjustment | | Fair value adjustment | — | | (13) | | (13) | | Step acquisitions | | Step acquisitions | — | | (6) | | (6) | | | Capitalised interest | | Capitalised interest | 1 | | — | | 1 | | Transfer | | Transfer | — | | (1) | | (1) | | At 30 June 2022 | | At 30 June 2022 | 18 | | 19 | | 37 | |
At 30 June 2021,2022, loans comprise £6 million (2021 – £3 million (2020million; 2020 – £4 million; 2019 – £17 million) of loans to customers and other third parties, after allowances of £129 million (2021 – £113 million (2020million; 2020 – £127 million; 2019 – £111 million), and £12 million (2021 – £7 million (2020million; 2020 – £3 million; 2019 – £NaN)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/asset 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 2018 | United States | 1 January 2021 |
(i) The triennial valuation of the Diageo Pension Scheme (the UK Scheme) as at 1 April 2021 is in progress and the results of this valuation are expected to be agreed by Diageo and the trustee later in calendar year 2021.(1) 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 closedbetween November 2005 and January 2018, 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)(2) 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 defined contribution plans. The triennial valuation of the Guinness Ireland Group Pension Scheme in Ireland (the Irish Scheme) is in progress and the results of this valuation are expected to be agreed by Diageo and the trustee later in calendar year 2022.
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 20212022 are as follows: | | | 2021 £ million | 2020 £ million | 2019 £ million | | 2022 £ million | 2021 £ million | 2020 £ million | Current service cost and administrative expenses | Current service cost and administrative expenses | (105) | | (109) | | (110) | | Current service cost and administrative expenses | (107) | | (105) | | (109) | | Past service gains – ordinary activities | Past service gains – ordinary activities | 0 | | 50 | | 56 | | Past service gains – ordinary activities | 34 | | — | | 50 | | Past service losses – exceptional | Past service losses – exceptional | (5) | | 0 | | (21) | | Past service losses – exceptional | — | | (5) | | — | | Gains on curtailments and settlements | Gains on curtailments and settlements | 18 | | 12 | | 4 | | Gains on curtailments and settlements | 34 | | 18 | | 12 | | Charge to operating profit | Charge to operating profit | (92) | | (47) | | (71) | | Charge to operating profit | (39) | | (92) | | (47) | | Net finance gain in respect of post employment plans | Net finance gain in respect of post employment plans | 5 | | 9 | | 7 | | Net finance gain in respect of post employment plans | 10 | | 5 | | 9 | | Charge before taxation(i)(1) | Charge before taxation(i)(1) | (87) | | (38) | | (64) | | Charge before taxation(i)(1) | (29) | | (87) | | (38) | | Actual returns less amounts included in finance income | Actual returns less amounts included in finance income | (6) | | 774 | | 438 | | Actual returns less amounts included in finance income | (1,432) | | (6) | | 774 | | Experience gains | 80 | | 34 | | 113 | | | Experience (losses)/gains | | Experience (losses)/gains | (35) | | 80 | | 34 | | Changes in financial assumptions | Changes in financial assumptions | 125 | | (754) | | (514) | | Changes in financial assumptions | 2,133 | | 125 | | (754) | | Changes in demographic assumptions | Changes in demographic assumptions | (183) | | (14) | | (6) | | Changes in demographic assumptions | (40) | | (183) | | (14) | | Other comprehensive income | Other comprehensive income | 16 | | 40 | | 31 | | Other comprehensive income | 626 | | 16 | | 40 | | Changes in the surplus restriction | Changes in the surplus restriction | 0 | | (2) | | 2 | | Changes in the surplus restriction | (11) | | — | | (2) | | Total other comprehensive income | Total other comprehensive income | 16 | | 38 | | 33 | | Total other comprehensive income | 615 | | 16 | | 38 | |
(1)(i) The year ended 30 June 2022 includes settlement gains of £27 million in respect of the Enhanced Transfer Values exercise carried out in the Irish Schemes and past service gains of £28 million as a result of the changes of the benefits in the Irish Scheme. In the year ended 30 June 2021, the exceptional past service loss of £5 million is in respect of the equalisation of Guaranteed Minimum Pension (GMP) benefits for men and women. (2019 - £21 million)women). The year ended 30 June 2020 includes a past service gain of £47 million in respect of the Irish Scheme following 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. The year ended 30 June 2019 includes credits of £54 million in respect of changes made to future pension increases for members of the UK Scheme and changes to the principal Irish Scheme.
(i)(1) The (charge)/income before taxation is in respect of the following countries is:countries:
| | | 2021 £ million | 2020 £ million | 2019 £ million | | 2022 £ million | 2021 £ million | 2020 £ million | United Kingdom | United Kingdom | (46) | | (23) | | (3) | | United Kingdom | (27) | | (46) | | (23) | | Ireland | Ireland | 4 | | 34 | | (13) | | Ireland | 45 | | 4 | | 34 | | United States | United States | (28) | | (30) | | (30) | | United States | (31) | | (28) | | (30) | | Other | Other | (17) | | (19) | | (18) | | Other | (16) | | (17) | | (19) | | | | (87) | | (38) | | (64) | | | (29) | | (87) | | (38) | |
In addition to the charge in respect of defined benefit post employment plans, contributions to the group’s defined contribution plans were £33 million (2021 - £25 million (2020million; 2020 – £24 million; 2019 – £19 million).
Financial statements (continued) The movement in the net surplus for the two years ended 30 June 20212022 is set out below: | | | Plan assets £ million | Plan liabilities £ million | Net surplus £ million | | Plan assets £ million | Plan liabilities £ million | Net surplus £ million | At 30 June 2019 | 9,713 | | (9,498) | | 215 | | | At 30 June 2020 | | At 30 June 2020 | 10,422 | | (10,057) | | 365 | | Exchange differences | Exchange differences | 65 | | (73) | | (8) | | Exchange differences | (214) | | 245 | | 31 | | Charge before taxation(1) | Charge before taxation(1) | 198 | | (236) | | (38) | | Charge before taxation(1) | 149 | | (236) | | (87) | | Other comprehensive income/(loss)(i)(2) | Other comprehensive income/(loss)(i)(2) | 774 | | (734) | | 40 | | Other comprehensive income/(loss)(i)(2) | (6) | | 22 | | 16 | | Contributions by the group | Contributions by the group | 156 | | 0 | | 156 | | Contributions by the group | 122 | | — | | 122 | | Employee contributions | 5 | | (5) | | 0 | | | Benefits paid | (489) | | 489 | | 0 | | | At 30 June 2020 | 10,422 | | (10,057) | | 365 | | | Exchange differences | (214) | | 245 | | 31 | | | Charge before taxation(ii) | 149 | | (236) | | (87) | | | Other comprehensive income/(loss)(i) | (6) | | 22 | | 16 | | | Contributions by the group | 122 | | 0 | | 122 | | | Settlements paid(iii) | (169) | | 169 | | 0 | | | Settlements paid(3) | | Settlements paid(3) | (169) | | 169 | | — | | Employee contributions | Employee contributions | 4 | | (4) | | 0 | | Employee contributions | 4 | | (4) | | — | | Benefits paid | Benefits paid | (416) | | 416 | | 0 | | Benefits paid | (416) | | 416 | | — | | At 30 June 2021 | At 30 June 2021 | 9,892 | | (9,445) | | 447 | | At 30 June 2021 | 9,892 | | (9,445) | | 447 | | Exchange differences | | Exchange differences | 93 | | (100) | | (7) | | Charge before taxation(1) | | Charge before taxation(1) | 176 | | (205) | | (29) | | Other comprehensive income/(loss)(2) | | Other comprehensive income/(loss)(2) | (1,432) | | 2,058 | | 626 | | Contributions by the group | | Contributions by the group | 128 | | — | | 128 | | Settlements paid(3) | | Settlements paid(3) | (52) | | 52 | | — | | Employee contributions | | Employee contributions | 5 | | (5) | | — | | Benefits paid | | Benefits paid | (411) | | 411 | | — | | At 30 June 2022 | | At 30 June 2022 | 8,399 | | (7,234) | | 1,165 | |
(i) Excludes surplus restriction. (ii)(1) Includes net settlement gain of £27 million (F21 - £14 million.million) and past service gain of £28 million.
(iii)(2) Excludes surplus restriction.
(3) Includes settlement payment of £52 million on ETV exercise in Ireland (F21 – £151 million in respect of a settlement in the US Cash Balance plan.plan).
The plan assets and liabilities by type of post employment benefit and country is as follows:
| | | 2021 | 2020 | | 2022 | 2021 | | | Plan assets £ million | Plan liabilities £ million | Plan assets £ million | Plan liabilities £ million | | Plan assets £ million | Plan liabilities £ million | Plan assets £ million | Plan liabilities £ million | Pensions | Pensions | | Pensions | | United Kingdom | United Kingdom | 7,341 | | (6,580) | | 7,696 | | (6,831) | | United Kingdom | 6,041 | | (4,897) | | 7,341 | | (6,580) | | Ireland | Ireland | 1,826 | | (1,926) | | 1,810 | | (2,031) | | Ireland | 1,645 | | (1,409) | | 1,826 | | (1,926) | | United States | United States | 470 | | (373) | | 660 | | (578) | | United States | 453 | | (408) | | 470 | | (373) | | Other | Other | 186 | | (225) | | 183 | | (240) | | Other | 191 | | (212) | | 186 | | (225) | | Post employment medical | Post employment medical | 2 | | (262) | | 2 | | (288) | | Post employment medical | 2 | | (225) | | 2 | | (262) | | Other post employment | Other post employment | 67 | | (79) | | 71 | | (89) | | Other post employment | 67 | | (83) | | 67 | | (79) | | | | 9,892 | | (9,445) | | 10,422 | | (10,057) | | | 8,399 | | (7,234) | | 9,892 | | (9,445) | |
The balance sheet analysis of the post employment plans is as follows: | | | 2021 | 2020 | | 2022 | 2021 | | | Non- current assets(i) £ million | Non- current liabilities £ million | Non- current assets(i) £ million | Non- current liabilities £ million | | Non- current assets(1) £ million | Non- current liabilities £ million | Non- current assets(1) £ million | Non- current liabilities £ million | Funded plans | Funded plans | 1,018 | | (279) | | 1,111 | | (434) | | Funded plans | 1,553 | | (144) | | 1,018 | | (279) | | Unfunded plans | Unfunded plans | — | | (295) | | — | | (315) | | Unfunded plans | — | | (258) | | — | | (295) | | | | 1,018 | | (574) | | 1,111 | | (749) | | | 1,553 | | (402) | | 1,018 | | (574) | |
(i)(1) Includes surplus restriction of £3£14 million (2020(2021 – £3 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 20212022, the DPS had a net surplus of £1,174 million (2021
Financial statements (continued) – £840 million (2020million; 2020 – £934 million) and the GIGPS had a net surplus of £221 million (2021 a deficit of £79 million; 20192020 a deficit of £174 million) and other schemes in a net surplus totaled of £158 million (2021 – £906£178 million; 2020 - £177 million). This surplus hasBoth of these 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(i) | | United Kingdom | Ireland | United States(1) | | | 2021% | 2020% | 2019% | 2021% | 2020% | 2019% | 2021% | 2020% | 2019% | | 2022% | 2021% | 2020% | 2022% | 2021% | 2020% | 2022% | 2021% | 2020% | Rate of general increase in salaries(ii) | 3.4 | | 3.2 | | 3.6 | | 3.0 | | 2.6 | | 2.3 | | — | | 0 | | 0 | | | Rate of general increase in salaries(2) | | Rate of general increase in salaries(2) | 3.6 | | 3.4 | | 3.2 | | 3.8 | | 3.0 | | 2.6 | | — | | — | | — | | Rate of increase to pensions in payment | Rate of increase to pensions in payment | 3.1 | | 3.0 | | 3.2 | | 1.7 | | 1.4 | | 1.5 | | 0 | | 0 | | 0 | | Rate of increase to pensions in payment | 2.9 | | 3.1 | | 3.0 | | 2.2 | | 1.7 | | 1.4 | | — | | — | | — | | Rate of increase to deferred pensions | Rate of increase to deferred pensions | 2.5 | | 2.1 | | 2.2 | | 1.6 | | 1.2 | | 1.3 | | 0 | | 0 | | 0 | | Rate of increase to deferred pensions | 2.6 | | 2.5 | | 2.1 | | 2.3 | | 1.6 | | 1.2 | | — | | — | | — | | Discount rate for plan liabilities | Discount rate for plan liabilities | 1.9 | | 1.5 | | 2.3 | | 1.0 | | 1.2 | | 1.2 | | 2.7 | | 2.6 | | 3.4 | | Discount rate for plan liabilities | 3.8 | | 1.9 | | 1.5 | | 3.2 | | 1.0 | | 1.2 | | 4.4 | | 2.7 | | 2.6 | | Inflation – CPI | Inflation – CPI | 2.5 | | 2.1 | | 2.2 | | 1.6 | | 1.2 | | 1.3 | | 2.3 | | 1.4 | | 1.7 | | Inflation – CPI | 2.6 | | 2.5 | | 2.1 | | 2.4 | | 1.6 | | 1.2 | | 2.3 | | 2.3 | | 1.4 | | Inflation - RPI | Inflation - RPI | 3.0 | | 2.8 | | 3.2 | | — | | — | | — | | — | | — | | — | | Inflation - RPI | 3.1 | | 3.0 | | 2.8 | | — | | — | | — | | — | | — | | — | |
(i)(1) 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(i) | Ireland(ii) | United States | | United Kingdom(1) | Ireland(2) | United States | | | 2021 Age | 2020 Age | 2019 Age | 2021 Age | 2020 Age | 2019 Age | 2021 Age | 2020 Age | 2019 Age | | 2022 Age | 2021 Age | 2020 Age | 2022 Age | 2021 Age | 2020 Age | 2022 Age | 2021 Age | 2020 Age | Retiring currently at age 65 | Retiring currently at age 65 | | Retiring currently at age 65 | | Male | Male | 87.2 | 86.4 | 86.2 | 86.9 | 86.6 | 86.5 | 85.4 | 85.6 | 85.7 | Male | 87.1 | 87.2 | 86.4 | 87.7 | 86.9 | 86.6 | 85.5 | 85.4 | 85.6 | Female | Female | 88.7 | 88.7 | 88.5 | 89.3 | 89.3 | 89.2 | 87.1 | 87.3 | 87.7 | Female | 88.7 | 88.7 | 90.0 | 89.3 | 87.2 | 87.1 | 87.3 | Currently aged 45, retiring at age 65 | Currently aged 45, retiring at age 65 | | Currently aged 45, retiring at age 65 | | Male | Male | 88.6 | 88.5 | 88.3 | 88.6 | 89.6 | 89.5 | 86.9 | 87.2 | 87.3 | Male | 88.5 | 88.6 | 88.5 | 89.3 | 88.6 | 89.6 | 87.0 | 86.9 | 87.2 | Female | Female | 90.8 | 90.8 | 90.6 | 91.1 | 92.3 | 92.2 | 88.5 | 88.9 | 89.3 | Female | 90.7 | 90.8 | 91.7 | 91.1 | 92.3 | 88.6 | 88.5 | 88.9 |
(i)(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.
(ii)(2) Based on the ‘00’ series ofCMI's S3 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 20222023 and on the plan liabilities at 30 June 20212022: | | | United Kingdom | Ireland | United States and other | | United Kingdom | Ireland | United States | Benefit/(cost) | 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 | 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 | Effect of 0.5% increase in discount rate | 5 | | 18 | | 532 | | 2 | | 3 | | 159 | | 1 | | 2 | | 26 | | Effect of 0.5% increase in discount rate | 2 | | 19 | | 336 | | 1 | | 4 | | 96 | | 1 | | 3 | | 22 | | Effect of 0.5% decrease in discount rate | Effect of 0.5% decrease in discount rate | (5) | | (15) | | (611) | | (2) | | (3) | | (183) | | (1) | | (2) | | (29) | | Effect of 0.5% decrease in discount rate | (3) | | (17) | | (374) | | (1) | | (4) | | (108) | | (1) | | (3) | | (23) | | Effect of 0.5% increase in inflation | Effect of 0.5% increase in inflation | (4) | | (11) | | (466) | | (1) | | (2) | | (109) | | (1) | | (1) | | (12) | | Effect of 0.5% increase in inflation | (2) | | (9) | | (246) | | (1) | | (3) | | (59) | | — | | (1) | | (10) | | Effect of 0.5% decrease in inflation | Effect of 0.5% decrease in inflation | 5 | | 10 | | 351 | | 1 | | 2 | | 131 | | 1 | | 1 | | 12 | | Effect of 0.5% decrease in inflation | 2 | | 10 | | 260 | | 1 | | 3 | | 57 | | — | | 1 | | 9 | | Effect of 1 year increase in life expectancy | Effect of 1 year increase in life expectancy | (1) | | (5) | | (279) | | 0 | | (1) | | (87) | | 0 | | (1) | | (19) | | Effect of 1 year increase in life expectancy | — | | (6) | | (171) | | — | | (2) | | (56) | | — | | (1) | | (17) | |
(i)(1) The estimated effect on the liabilities excludes the impact of any interest rate and inflation swaps held by the pension plans.
(1)(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 of asset 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 2021,2022, approximately 86%88% and 90% (2020(2021 – 82%86% and 90%) of the UK Scheme’splans’ liabilities measured on the Trustee's funding basis 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 2021,2022, approximately 70% and 76% (2021 – 62% and 76% (2020 – 48% and 70%) of the Irish Scheme’splans’ liabilities measured on the Trustee's funding basis 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-quality fixed income investments. For the UK plans, which represent approximately 70%68% 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: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2022 | | | 2021 | 2020 | | United Kingdom £ million | Ireland £ million | United States and other £ million | Total £ million | | | United Kingdom £ million | Ireland £ million | United States and other £ million | Total £ million | United Kingdom £ million | Ireland £ million | United States and other £ million | Total £ million | | Quoted | Unquoted | Quoted | Unquoted | Quoted | Unquoted | Quoted | Unquoted | Total | Equities | Equities | | Equities | 23 | | 1,218 | | — | | 319 | | 70 | | 105 | | 93 | | 1,642 | | 1,735 | | Quoted | 0 | | 308 | | 158 | | 466 | | 1 | | 315 | | 255 | | 571 | | | Unquoted and private equity | 604 | | 0 | | 18 | | 622 | | 501 | | 1 | | 21 | | 523 | | | Bonds | Bonds | | Bonds | | Fixed-interest government | Fixed-interest government | 147 | | 81 | | 51 | | 279 | | 114 | | 124 | | 50 | | 288 | | Fixed-interest government | 2 | | 86 | | — | | 30 | | 49 | | 152 | | 51 | | 268 | | 319 | | Inflation-linked government | Inflation-linked government | 0 | | 239 | | 0 | | 239 | | 0 | | 247 | | 0 | | 247 | | Inflation-linked government | — | | — | | — | | 199 | | 1 | | 1 | | 1 | | 200 | | 201 | | Investment grade corporate | Investment grade corporate | 512 | | 355 | | 391 | | 1,258 | | 507 | | 306 | | 467 | | 1,280 | | Investment grade corporate | — | | 68 | | — | | 388 | | 25 | | 222 | | 25 | | 678 | | 703 | | Non-investment grade | Non-investment grade | 151 | | 117 | | 12 | | 280 | | 137 | | 77 | | 17 | | 231 | | Non-investment grade | 44 | | 557 | | 2 | | 200 | | 1 | | 1 | | 47 | | 758 | | 805 | | Loan securities | Loan securities | 1,789 | | 279 | | 0 | | 2,068 | | 1,697 | | 328 | | 0 | | 2,025 | | Loan securities | 11 | | 1,271 | | — | | 98 | | — | | — | | 11 | | 1,369 | | 1,380 | | Repurchase agreements | Repurchase agreements | 3,608 | | 0 | | 0 | | 3,608 | | 4,809 | | 0 | | 0 | | 4,809 | | Repurchase agreements | 2,400 | | (215) | | — | | — | | — | | — | | 2,400 | | (215) | | 2,185 | | Liability driven investment (LDI) | 212 | | 66 | | 0 | | 278 | | 222 | | 64 | | 0 | | 286 | | | Property - unquoted | 685 | | 72 | | 1 | | 758 | | 620 | | 85 | | 1 | | 706 | | | Liability Driven Investment (LDI) | | Liability Driven Investment (LDI) | — | | 119 | | — | | 46 | | — | | — | | — | | 165 | | 165 | | Property | | Property | 28 | | 716 | | — | | 74 | | — | | 1 | | 28 | | 791 | | 819 | | Hedge funds | Hedge funds | 101 | | 139 | | 4 | | 244 | | 92 | | 134 | | 4 | | 230 | | Hedge funds | — | | 107 | | — | | 92 | | — | | 5 | | — | | 204 | | 204 | | Interest rate and inflation swaps | Interest rate and inflation swaps | (994) | | 108 | | 0 | | (886) | | (1,048) | | 66 | | 0 | | (982) | | Interest rate and inflation swaps | — | | (900) | | — | | 37 | | — | | — | | — | | (863) | | (863) | | Cash and other | Cash and other | 526 | | 62 | | 90 | | 678 | | 44 | | 63 | | 101 | | 208 | | Cash and other | 24 | | 481 | | 7 | | 154 | | — | | 80 | | 31 | | 715 | | 746 | | Total bid value of assets | Total bid value of assets | 7,341 | | 1,826 | | 725 | | 9,892 | | 7,696 | | 1,810 | | 916 | | 10,422 | | Total bid value of assets | 2,532 | | 3,508 | | 9 | | 1,637 | | 146 | | 567 | | 2,687 | | 5,712 | | 8,399 | |
(1)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2021 | | United Kingdom £ million | Ireland £ million | United States and other £ million | Total £ million | | Quoted | Unquoted | Quoted | Unquoted | Quoted | Unquoted | Quoted | Unquoted | Total | Equities | — | | 604 | | 2 | | 306 | | 70 | | 106 | | 72 | | 1,016 | | 1,088 | | Bonds | | | | | | | | | | Fixed-interest government | 86 | | 61 | | — | | 81 | | 47 | | 4 | | 133 | | 146 | | 279 | | Inflation-linked government | — | | — | | — | | 239 | | — | | — | | — | | 239 | | 239 | | Investment grade corporate | 13 | | 499 | | — | | 355 | | 24 | | 367 | | 37 | | 1,221 | | 1,258 | | Non-investment grade | 17 | | 134 | | 2 | | 115 | | 2 | | 10 | | 21 | | 259 | | 280 | | Loan securities | 58 | | 1,731 | | 1 | | 278 | | — | | — | | 59 | | 2,009 | | 2,068 | | Repurchase agreements | 4,512 | | (904) | | — | | — | | — | | — | | 4,512 | | (904) | | 3,608 | | Liability Driven Investment (LDI) | 2 | | 210 | | — | | 66 | | — | | — | | 2 | | 276 | | 278 | | Property | — | | 685 | | — | | 72 | | — | | 1 | | — | | 758 | | 758 | | Hedge funds | — | | 101 | | — | | 139 | | — | | 4 | | — | | 244 | | 244 | | Interest rate and inflation swaps | — | | (994) | | — | | 108 | | — | | — | | — | | (886) | | (886) | | Cash and other | 12 | | 514 | | 2 | | 60 | | — | | 90 | | 14 | | 664 | | 678 | | Total bid value of assets | 4,700 | | 2,641 | | 7 | | 1,819 | | 143 | | 582 | | 4,850 | | 5,042 | | 9,892 | |
(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.
Total cash contributions by the group to all post employment plans in the year ending 30 June 20222023 are estimated to be approximately £120£70 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 20212022 held inventory with a book value of £564£561 million (2020(2021 – £586£564 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. Following the finalisation of the trustee valuation at 1 April 2018 the PFP was amended and the contribution to the DPS in the year ended 30 June 2021 was NaN (2020 – £11 million). The arrangement is expected to cease in 2030, and contributions to the UK scheme in any year will be dependent on the funding position of the UK scheme at the previous 31 March. Given the surplus funding position in the DPS, the contribution to the DPS in the year ended 30 June 2022 was nil (2021 - nil). 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.
Irish plans The group has agreed a deficit funding arrangement with the trustees of the Irish Scheme under which it contributes to the Irish Scheme €23 million (£20 million) per annum until the year ending 30 June 2028. The agreement also provides for additional cash contributions up to €106 million (£91 million) if the deficit is not reduced at each triennial valuation in line with agreed deficit targets up to 2027. As part of this funding plan, Diageo has also granted to the Irish Scheme a contingent asset, 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 (£171172 million) or the amount of the deficit at each triennial valuation if less. The 31 December 20182021 triennial actuarial valuation did not result in any additional funding requirement.is currently underway and it will be agreed by Diageo and the trustee by the end of September.
(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:
Financial statements (continued)
| | | United Kingdom | Ireland | United States | | United Kingdom | Ireland | United States | | | 2021 £ million | 2020 £ million | 2021 £ million | 2020 £ million | 2021 £ million | 2020 £ million | | 2022 £ million | 2021 £ million | 2022 £ million | 2021 £ million | 2022 £ million | 2021 £ million | Maturity analysis of benefits expected to be paid | Maturity analysis of benefits expected to be paid | | Maturity analysis of benefits expected to be paid | | Within one year | Within one year | 288 | | 346 | | 84 | | 76 | | 52 | | 56 | | Within one year | 295 | | 288 | | 70 | | 84 | | 58 | | 52 | | Between 1 to 5 years | Between 1 to 5 years | 1,112 | | 1,202 | | 338 | | 364 | | 145 | | 202 | | Between 1 to 5 years | 1,082 | | 1,112 | | 353 | | 338 | | 187 | | 145 | | Between 6 to 15 years | Between 6 to 15 years | 2,606 | | 2,556 | | 656 | | 691 | | 247 | | 357 | | Between 6 to 15 years | 2,556 | | 2,606 | | 704 | | 656 | | 310 | | 247 | | Between 16 to 25 years | Between 16 to 25 years | 2,314 | | 2,083 | | 588 | | 627 | | 145 | | 196 | | Between 16 to 25 years | 2,252 | | 2,314 | | 634 | | 588 | | 183 | | 145 | | Beyond 25 years | Beyond 25 years | 2,840 | | 2,648 | | 746 | | 918 | | 138 | | 173 | | Beyond 25 years | 2,787 | | 2,840 | | 768 | | 746 | | 174 | | 138 | | Total | Total | 9,160 | | 8,835 | | 2,412 | | 2,676 | | 727 | | 984 | | Total | 8,972 | | 9,160 | | 2,529 | | 2,412 | | 912 | | 727 | | | | years | | years | Average duration of the defined benefit obligation | Average duration of the defined benefit obligation | 18 | 18 | 18 | 18 | 11 | 11 | Average duration of the defined benefit obligation | 15 | 18 | 15 | 18 | 9 | 11 |
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 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 | | | 2021 £ million | 2020 £ million | | 2022 £ million | 2021 £ million | Raw materials and consumables | Raw materials and consumables | 348 | | 363 | | Raw materials and consumables | 489 | | 348 | | Work in progress | Work in progress | 60 | | 48 | | Work in progress | 86 | | 60 | | Maturing inventories | Maturing inventories | 4,668 | | 4,562 | | Maturing inventories | 5,229 | | 4,668 | | Finished goods and goods for resale | Finished goods and goods for resale | 969 | | 799 | | Finished goods and goods for resale | 1,290 | | 969 | | | | 6,045 | | 5,772 | | | 7,094 | | 6,045 | |
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: | | | 2021 £ million | 2020 £ million | | 2022 £ million | 2021 £ million | Raw materials and consumables | Raw materials and consumables | 17 | | 18 | | Raw materials and consumables | 15 | | 17 | | Maturing inventories | Maturing inventories | 3,296 | | 3,740 | | Maturing inventories | 3,713 | | 3,296 | | | | 3,313 | | 3,758 | | | 3,728 | | 3,313 | |
Inventories are disclosed net of provisions for obsolescence, an analysis of which is as follows: | | | 2021 £ million | 2020 £ million | 2019 £ million | | 2022 £ million | 2021 £ million | 2020 £ million | Balance at beginning of the year | Balance at beginning of the year | 98 | | 63 | | 71 | | Balance at beginning of the year | 96 | | 98 | | 63 | | Exchange differences | Exchange differences | (8) | | 0 | | 0 | | Exchange differences | 6 | | (8) | | — | | Income statement charge/(release)(i) | 20 | | 47 | | (3) | | | Income statement charge | | Income statement charge | 6 | | 20 | | 47 | | Utilised | Utilised | (14) | | (12) | | (5) | | Utilised | (13) | | (14) | | (12) | | Sale of businesses | | Sale of businesses | (1) | | — | | — | | | | | 94 | | 96 | | 98 | | | 96 | | 98 | | 63 | | |
(i) Income statement charge in the year ended 30 June 2021 includes a release of £4 million exceptional gain (2020 – exceptional charge of £23 million) due to Covid-19 pandemic.
Financial statements (continued) (b) Trade and other receivables
| | | 2021 | 2020 | | 2022 | 2021 | | | Current assets £ million | Non-current assets £ million | Current assets £ million | Non-current assets £ million | | Current assets £ million | Non-current assets £ million | Current assets £ million | Non-current assets £ million | Trade receivables | Trade receivables | 1,817 | | 0 | | 1,498 | | 0 | | Trade receivables | 2,155 | | — | | 1,817 | | — | | Interest receivable | Interest receivable | 35 | | 0 | | 29 | | 0 | | Interest receivable | 18 | | — | | 35 | | — | | VAT recoverable and other prepaid taxes | VAT recoverable and other prepaid taxes | 216 | | 18 | | 192 | | 13 | | VAT recoverable and other prepaid taxes | 290 | | 15 | | 216 | | 18 | | Other receivables | Other receivables | 148 | | 18 | | 210 | | 31 | | Other receivables | 158 | | 13 | | 148 | | 18 | | Prepayments | Prepayments | 150 | | 0 | | 157 | | 2 | | Prepayments | 290 | | 9 | | 150 | | — | | Accrued income | Accrued income | 19 | | 0 | | 25 | | 0 | | Accrued income | 22 | | — | | 19 | | — | | | | 2,385 | | 36 | | 2,111 | | 46 | | | 2,933 | | 37 | | 2,385 | | 36 | |
At 30 June 2021,2022, approximately 15%29%, 28%15% and 9% of the group’s trade receivables of £1,817£2,155 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: | | | 2021 £ million | 2020 £ million | | 2022 £ million | 2021 £ million | Not overdue | Not overdue | 1,771 | | 1,379 | | Not overdue | 2,114 | | 1,771 | | Overdue 1 – 30 days | Overdue 1 – 30 days | 15 | | 5 | | Overdue 1 – 30 days | 19 | | 15 | | Overdue 31 – 60 days | Overdue 31 – 60 days | 8 | | 23 | | Overdue 31 – 60 days | 8 | | 8 | | Overdue 61 – 90 days | Overdue 61 – 90 days | 6 | | 39 | | Overdue 61 – 90 days | 5 | | 6 | | Overdue 91 – 180 days | Overdue 91 – 180 days | 7 | | 39 | | Overdue 91 – 180 days | 5 | | 7 | | Overdue more than 180 days | Overdue more than 180 days | 10 | | 13 | | Overdue more than 180 days | 4 | | 10 | | | | 1,817 | | 1,498 | | | 2,155 | | 1,817 | |
Trade and other receivables are disclosed net of expected credit loss allowance for doubtful debts, an analysis of which is as follows: | | | 2021 £ million | 2020 £ million | 2019 £ million | | 2022 £ million | 2021 £ million | 2020 £ million | Balance at beginning of the year | Balance at beginning of the year | 160 | | 113 | | 97 | | Balance at beginning of the year | 112 | | 160 | | 113 | | Exchange differences | Exchange differences | (13) | | (3) | | 3 | | Exchange differences | 6 | | (13) | | (3) | | Income statement (income)/charge | (15) | | 55 | | 23 | | | Income statement charge/(release) | | Income statement charge/(release) | 21 | | (15) | | 55 | | Written off | Written off | (20) | | (5) | | (10) | | Written off | (21) | | (20) | | (5) | | | | 112 | | 160 | | 113 | | | 118 | | 112 | | 160 | |
Management has considered the elevated credit risk on trade and other receivables. At 30 June 2020,2022, this resulted in a charge of £55£21 million for impairment provisions recognised in the income statementstatement. At 30 June 2020, £29 million out of which £29the charge of £55 million was related to the expected credit loss allowance was due to the global financial uncertainty arising from the Covid-19 pandemic.
Financial statements (continued) (c) Trade and other payables | | | 2021 | 2020 | | 2022 | 2021 | | | Current liabilities £ million | Non-current liabilities £ million | Current liabilities £ million | Non-current liabilities £ million | | Current liabilities £ million | Non-current liabilities £ million | Current liabilities £ million | Non-current liabilities £ million | Trade payables | Trade payables | 2,014 | | 0 | | 1,333 | | 0 | | Trade payables | 2,705 | | — | | 2,014 | | — | | Interest payable | Interest payable | 124 | | 0 | | 152 | | 0 | | Interest payable | 143 | | — | | 124 | | — | | Tax and social security excluding income tax | Tax and social security excluding income tax | 656 | | 0 | | 698 | | 0 | | Tax and social security excluding income tax | 696 | | — | | 656 | | — | | Other payables | Other payables | 606 | | 338 | | 420 | | 175 | | Other payables | 600 | | 380 | | 606 | | 338 | | Accruals | Accruals | 1,152 | | 0 | | 971 | | 0 | | Accruals | 1,635 | | — | | 1,152 | | — | | Deferred income | Deferred income | 72 | | 0 | | 79 | | 0 | | Deferred income | 90 | | — | | 72 | | — | | Dividend payable to non-controlling interests | Dividend payable to non-controlling interests | 24 | | 0 | | 30 | | 0 | | Dividend payable to non-controlling interests | 18 | | — | | 24 | | — | | | | 4,648 | | 338 | | 3,683 | | 175 | | | 5,887 | | 380 | | 4,648 | | 338 | |
Interest payable at 30 June 20212022 includes interest on non-derivative financial instruments of £122£141 million (2020(2021 – £148£122 million). Accruals at 30 June 20212022 include £455£613 million (2020(2021 – £359£455 million) accrued discounts attributed to sales recognised. Deferred income represents amounts paid by customers in respect of performance obligations not yet satisfied. The amount of contract liabilities recognised as revenue in the current year is £79£72 million (2020(2021 – £5679 million). Non-current liabilities include net present value of contingent consideration in respect of prior acquisitions forof £353 million (2021 – £320 million (2020 – £156 million). For further information on contingent consideration, please refer to note 15g.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 2021,2022, the amount that has been subject to SCF and accounted for as trade payables was £465£750 million (2020(2021 – £309£465 million).
(d) Provisions | | | Thalidomide £ million | Other £ million | Total £ million | | Thalidomide £ million | Other £ million | Total £ million | At 30 June 2020 | 199 | | 277 | | 476 | | | At 30 June 2021 | | At 30 June 2021 | 190 | | 222 | | 412 | | Exchange differences | Exchange differences | (1) | | (30) | | (31) | | Exchange differences | — | | 18 | | 18 | | | Disposal of businesses | | Disposal of businesses | — | | (6) | | (6) | | Provisions charged during the year | Provisions charged during the year | 0 | | 80 | | 80 | | Provisions charged during the year | — | | 65 | | 65 | | Provisions utilised during the year | Provisions utilised during the year | (15) | | (105) | | (120) | | Provisions utilised during the year | (16) | | (73) | | (89) | | | Transfers from other payables | | Transfers from other payables | — | | 12 | | 12 | | Unwinding of discounts | Unwinding of discounts | 7 | | 0 | | 7 | | Unwinding of discounts | 4 | | 1 | | 5 | | At 30 June 2021 | 190 | | 222 | | 412 | | | At 30 June 2022 | | At 30 June 2022 | 178 | | 239 | | 417 | | Current liabilities | Current liabilities | 15 | | 123 | | 138 | | Current liabilities | 12 | | 147 | | 159 | | Non-current liabilities | Non-current liabilities | 175 | | 99 | | 274 | | Non-current liabilities | 166 | | 92 | | 258 | | | | 190 | | 222 | | 412 | | | 178 | | 239 | | 417 | |
(a)(i) 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)(ii) The largest itemsitem in other provisions at 30 June 2021 are2022 is £49 million (2021 – £45 million (2020 - £47 million) in respect of employee deferred compensation plans which will be utilised when employees leave the group and £33 million (2020 - £81 million) in respect of 'Raising the Bar' programme launched in June 2020, a two-year 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 loans are described in note 12,13, for trade 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), highly probable forecast transactions or 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 hedges 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. 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 20212022 and 30 June 20202021 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 the group's cash flow projections and stress tested. For the year ended 30 June 2021, 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 20212022 the group’s guidance 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 20212022 foreign currency borrowings designated in net investment hedge relationships amounted to £7,780£8,742 million (2020 £9,127(2021 £7,780 million), including financial 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 group24 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 20212022 the group’s policy was to maintain fixed rate borrowings within a band of 40% to 60% of forecast net borrowings. In July 2020 the Board approved to temporarily amend the approved 40% - 60% fixed debt band to 40% - 80% and subsequently in December 2020 the Board approved to temporarily increase the band range to 40% - 90% for a period of 3 years until 31 December 2023.. 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 20212022 and 20202021 is as follows: | | | 2021 | 2020 | | 2022 | 2021 | | | £ million | % | £ million | % | | £ million | % | £ million | % | Fixed rate | Fixed rate | 9,278 | | 77 | | 9,213 | | 70 | | Fixed rate | 11,070 | | 78 | | 9,278 | | 77 | | Floating rate(i)(1) | Floating rate(i)(1) | 2,521 | | 21 | | 3,746 | | 28 | | Floating rate(i)(1) | 2,612 | | 19 | | 2,521 | | 21 | | Impact of financial derivatives and fair value adjustments | Impact of financial derivatives and fair value adjustments | (53) | | (1) | | (183) | | (1) | | Impact of financial derivatives and fair value adjustments | (20) | | — | | (53) | | (1) | | Lease liabilities | Lease liabilities | 363 | | 3 | | 470 | | 3 | | Lease liabilities | 475 | | 3 | | 363 | | 3 | | Net borrowings | Net borrowings | 12,109 | | 100 | | 13,246 | | 100 | | Net borrowings | 14,137 | | 100 | | 12,109 | | 100 | |
(i)(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) The table below sets out the average monthly net borrowings and effective interest rate: | | | | | | | | | | | | | | | | | | Average monthly net borrowings | Effective interest rate | 2021 £ million | 2020 £ million | 2019 £ million | 2021 % | 2020 % | 2019 % | 12,702 | | 12,708 | | 10,393 | | 2.7 | 2.6 | 2.4 |
| | | | | | | | | | | | | | | | | | Average monthly net borrowings | Effective interest rate | 2022 £ million | 2021 £ million | 2020 £ million | 2022 % | 2021 % | 2020 % | 12,692 | | 12,702 | | 12,708 | | 2.7 | 2.7 | 2.6 |
(1)(i) For this calculation, net interest charge excludes fair value adjustments to derivative financial instruments and borrowings and average monthly net borrowings includesinclude the impact of interest rate swaps that are no longer in a hedge relationship but excludesexclude 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 will bewere discontinued after 31 December 2021, except for the majority of the US dollar settings which will be discontinued after 30 June 2023. There will behave been amendments to the contractual terms of IBOR-referenced interest rates and the corresponding update of the hedge designations. The changed reference rate may also affect otherBy 30 June 2022, changes required to systems and processes risks andin relation to the fair valuation of financial instruments howeverwere 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 doassumes 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 expect material taxaltered by the IBOR reform. The derivative hedging instruments provide a close approximation to the extent and accounting implications.nature of the risk exposure the group manages through hedging relationships. Included in the floating rate net borrowings are interest rate swaps designated in fair value hedges, with a notional amount of £2,338£2,893 million (2020: £3,156(2021: £2,338 million) whose interest rates are based on USD LIBOR. In preparation for the discontinuation of USD LIBOR, the group will amend these agreements to either reference the Secured Overnight Financing Rate or include mechanics for selecting an alternative rate ensuring that subsequent to the amendments the agreements will be economically equivalent on transition date.
(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 20212022 and 30 June 2020,2021, 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. 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
Financial statements (continued)
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)(i) (ii) | | Impact on income statement gain/(loss) | Impact on consolidated comprehensive income gain/(loss)(1) (2) | | | 2021 | 2020 | 2021 | 2020 | | 2022 | 2021 | 2022 | 2021 | | | £ million | | £ million | 0.5% decrease in interest rates | 0.5% decrease in interest rates | 13 | | 19 | | 23 | | 45 | | 0.5% decrease in interest rates | 13 | | 13 | | 31 | | 23 | | 0.5% increase in interest rates | 0.5% increase in interest rates | (13) | | (19) | | (22) | | (43) | | 0.5% increase in interest rates | (13) | | (13) | | (30) | | (22) | | 10% weakening of sterling | 10% weakening of sterling | (32) | | (26) | | (1,008) | | (1,384) | | 10% weakening of sterling | (33) | | (32) | | (1,125) | | (1,008) | | 10% strengthening of sterling | 10% strengthening of sterling | 27 | | 22 | | 825 | | 1,132 | | 10% strengthening of sterling | 28 | | 27 | | 922 | | 825 | |
(i)(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.
(ii)(2) The impact on the consolidated statement of comprehensive income includes the impact on the income statement.
Financial statements (continued) (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 £5,360£5,445 million (2020(2021 – £5,989£5,360 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 2021,2022, the collateral held under these agreements amounted to $23 million (£19 million) (2021 – $136 million (£98 million) (2020 – $221 million (£180 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.
(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.
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 | | 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 | 2021 | | | 2022 | | 2022 | | Borrowings(i)(1) | Borrowings(i)(1) | (1,859) | | (2,590) | | (2,788) | | (7,498) | | (14,735) | | (14,727) | | Borrowings(i)(1) | (1,524) | | (2,842) | | (2,738) | | (9,276) | | (16,380) | | (16,020) | | Interest on borrowings(i)(iii) | (390) | | (552) | | (467) | | (1,375) | | (2,784) | | (122) | | | Interest on borrowings(1)(2) | | Interest on borrowings(1)(2) | (427) | | (626) | | (560) | | (1,622) | | (3,235) | | (141) | | Lease capital repayments | Lease capital repayments | (82) | | (92) | | (45) | | (144) | | (363) | | (363) | | Lease capital repayments | (85) | | (107) | | (61) | | (222) | | (475) | | (475) | | Lease future interest payments | Lease future interest payments | (9) | | (12) | | (8) | | (25) | | (54) | | 0 | | Lease future interest payments | (13) | | (20) | | (16) | | (44) | | (93) | | — | | Trade and other financial liabilities(ii) | (3,800) | | (71) | | (108) | | (191) | | (4,170) | | (4,125) | | | Trade and other financial liabilities(3) | | Trade and other financial liabilities(3) | (4,765) | | (123) | | (142) | | (126) | | (5,156) | | (5,145) | | Non-derivative financial liabilities | Non-derivative financial liabilities | (6,140) | | (3,317) | | (3,416) | | (9,233) | | (22,106) | | (19,337) | | Non-derivative financial liabilities | (6,814) | | (3,718) | | (3,517) | | (11,290) | | (25,339) | | (21,781) | | Cross currency swaps (gross) | Cross currency swaps (gross) | | Cross currency swaps (gross) | | Receivable | Receivable | 57 | | 780 | | 79 | | 1,294 | | 2,210 | | 0 | | Receivable | 851 | | 90 | | 90 | | 1,442 | | 2,473 | | — | | Payable | Payable | (41) | | (811) | | (56) | | (986) | | (1,894) | | 0 | | Payable | (783) | | (56) | | (56) | | (958) | | (1,853) | | — | | Other derivative instruments (net) | Other derivative instruments (net) | 143 | | 54 | | 0 | | (23) | | 174 | | 0 | | Other derivative instruments (net) | (86) | | (123) | | (78) | | (65) | | (352) | | — | | Derivative instruments(iii) | 159 | | 23 | | 23 | | 285 | | 490 | | 312 | | | 2020 | | | Derivative instruments(2) | | Derivative instruments(2) | (18) | | (89) | | (44) | | 419 | | 268 | | 22 | | 2021 | | 2021 | | Borrowings(i)(1) | Borrowings(i)(1) | (1,994) | | (2,980) | | (3,080) | | (8,615) | | (16,669) | | (16,785) | | Borrowings(i)(1) | (1,859) | | (2,590) | | (2,788) | | (7,498) | | (14,735) | | (14,727) | | Interest on borrowings(i)(iii) | (466) | | (669) | | (541) | | (1,741) | | (3,417) | | (148) | | | Interest on borrowings(1)(2) | | Interest on borrowings(1)(2) | (390) | | (552) | | (467) | | (1,375) | | (2,784) | | (122) | | Lease capital repayments | Lease capital repayments | (106) | | (135) | | (71) | | (158) | | (470) | | (470) | | Lease capital repayments | (82) | | (92) | | (45) | | (144) | | (363) | | (363) | | Lease future interest payments | Lease future interest payments | (9) | | (13) | | (9) | | (31) | | (62) | | 0 | | Lease future interest payments | (9) | | (12) | | (8) | | (25) | | (54) | | — | | Trade and other financial liabilities(ii) | (2,833) | | (127) | | (48) | | (35) | | (3,043) | | (3,006) | | | Trade and other financial liabilities(3) | | Trade and other financial liabilities(3) | (3,800) | | (71) | | (108) | | (191) | | (4,170) | | (4,125) | | Non-derivative financial liabilities | Non-derivative financial liabilities | (5,408) | | (3,924) | | (3,749) | | (10,580) | | (23,661) | | (20,409) | | Non-derivative financial liabilities | (6,140) | | (3,317) | | (3,416) | | (9,233) | | (22,106) | | (19,337) | | Cross currency swaps (gross) | Cross currency swaps (gross) | | Cross currency swaps (gross) | | Receivable | Receivable | 65 | | 902 | | 89 | | 1,506 | | 2,562 | | 0 | | Receivable | 57 | | 780 | | 79 | | 1,294 | | 2,210 | | — | | Payable | Payable | (41) | | (824) | | (56) | | (1,014) | | (1,935) | | 0 | | Payable | (41) | | (811) | | (56) | | (986) | | (1,894) | | — | | Other derivative instruments (net) | Other derivative instruments (net) | 21 | | 89 | | 45 | | 19 | | 174 | | 0 | | Other derivative instruments (net) | 143 | | 54 | | — | | (23) | | 174 | | — | | Derivative instruments(iii) | 45 | | 167 | | 78 | | 511 | | 801 | | 610 | | | Derivative instruments(2) | | Derivative instruments(2) | 159 | | 23 | | 23 | | 285 | | 490 | | 312 | |
(i)(1) 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 16.17.
(ii) Primarily consists of trade and other payables that meet the definition of financial liabilities under IAS 32.
(iii)(2) Carrying amount of interest on borrowings, interest on derivatives and interest on other payable is included within interest payable in note 14.15.
(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: | | | 2021 £ million | 2020 £ million | | 2022 £ million | 2021 £ million | Expiring within one year | Expiring within one year | 540 | | 2,439 | | Expiring within one year | 793 | | 540 | | Expiring between one and two years | Expiring between one and two years | 691 | | 610 | | Expiring between one and two years | 103 | | 691 | | Expiring after two years | Expiring after two years | 1,287 | | 2,236 | | Expiring after two years | 1,893 | | 1,287 | | | | 2,518 | | 5,285 | | | 2,789 | | 2,518 | |
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 short- 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 and as at 30 June 20212022 an amount of £149£216 million (30 June 2020 - £1672021 – £149 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 2021,2022, 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 2023,2024, the fair value of the liability would increase by approximately £4£69 million. Included in other financial liabilities, the contingent consideration on acquisition of businesses represents the present value of payments up to £474£381 million linked to certain performance targets which are expected to be paid over the next 10eight years. 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 2021.2022. The group’s financial assets and liabilities measured at fair value are categorised as follows: | | | 2021 £ million | 2020 £ million | | 2022 £ million | 2021 £ million | Derivative assets | Derivative assets | 443 | | 758 | | Derivative assets | 480 | | 443 | | Derivative liabilities | Derivative liabilities | (129) | | (145) | | Derivative liabilities | (456) | | (129) | | Valuation techniques based on observable market input (Level 2) | Valuation techniques based on observable market input (Level 2) | 314 | | 613 | | Valuation techniques based on observable market input (Level 2) | 24 | | 314 | | Financial assets - other | Financial assets - other | 138 | | 116 | | Financial assets - other | 184 | | 138 | | Financial liabilities - other | Financial liabilities - other | (578) | | (416) | | Financial liabilities - other | (587) | | (578) | | Valuation techniques based on unobservable market input (Level 3) | Valuation techniques based on unobservable market input (Level 3) | (440) | | (300) | | Valuation techniques based on unobservable market input (Level 3) | (403) | | (440) | |
In the years ended 30 June 20212022 and 30 June 2020,2021, the increase in financial assets - other of £22£46 million (2020 - £30(2021 – £22 million) is principally due toin respect of acquisitions. The movements in level 3 instruments, measured on a recurring basis, are as follows: | | | | Zacapa financial liability | Contingent consideration recognised on acquisition of businesses(i) | Zacapa financial liability | Contingent consideration recognised on acquisition of businesses | | Zacapa financial liability | Contingent consideration recognised on acquisition of businesses(1) | Zacapa financial liability | Contingent consideration recognised on acquisition of businesses(1) | | | 2021 | 2020 | | 2022 | 2021 | | | £ million | £ million | | £ million | £ million | At the beginning of the year | At the beginning of the year | (167) | | (249) | | (174) | | (227) | | At the beginning of the year | (149) | | (429) | | (167) | | (249) | | Net losses included in the income statement | (7) | | (47) | | (6) | | (24) | | | Net gains/(losses) included in exchange in other comprehensive income | 21 | | 31 | | (5) | | (5) | | | Net (losses)/gains included in retained earnings | (2) | | 0 | | 9 | | 0 | | | Net (losses)/gains included in the income statement | | Net (losses)/gains included in the income statement | (20) | | 62 | | (7) | | (47) | | Net (losses)/gains included in exchange in other comprehensive income | | Net (losses)/gains included in exchange in other comprehensive income | (26) | | (39) | | 21 | | 31 | | Net losses included in retained earnings | | Net losses included in retained earnings | (34) | | — | | (2) | | — | | Acquisitions | Acquisitions | 0 | | (253) | | 0 | | (42) | | Acquisitions | — | | (70) | | — | | (253) | | Settlement of liabilities | Settlement of liabilities | 6 | | 89 | | 9 | | 49 | | Settlement of liabilities | 13 | | 105 | | 6 | | 89 | | At the end of the year | At the end of the year | (149) | | (429) | | (167) | | (249) | | At the end of the year | (216) | | (371) | | (149) | | (429) | |
(i)(1) Included in the balance at 30 June 20212022 is £80 million in respect of the acquisition of Casamigos (30 June 2020 - £173 million), and £177£157 million in respect of the acquisition of Aviation Gin and Davos Brands.Brands (2021 – £177 million), £59 million in respect of the acquisition of 21Seeds, £57 million in respect of the acquisition of Lone River Ranch Water (2021 – £49 million) and £nil in respect of the acquisition of Casamigos as it was fully repaid on 17 September 2021 (2021- £80 million).
(h) Results of hedge relationships The group targets a one-to-one hedge ratio. StrengthsStrength of the economic relationship between the hedged itemitems and the hedging instrument isinstruments are analysed on an ongoing basis. Ineffectiveness can arise from subsequent change in the forecast transactions as a result of altered timing, cash flows or value except when the critical terms of the hedging instrument and hedged item are closely aligned.
Financial statements (continued) 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 2022 and 30 June 2021 by the main risk categories are as follows: | | | | | | | | | | | | | Notional amounts £ million | Maturity | Range of hedged rates(i)(1) | 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 | | April 2023 - April 2043 | US dollar 1.22 - 1.88 | Derivatives in cash flow hedge (foreign currency risk) | 1,874 | | September 2022 - June 2024 | US dollar 1.22 - 1.42, euro 1.13 - 1.17 | Derivatives in cash flow hedge (commodity price risk) | 234 | | July 2022 - March 2024 | Natural Gas: 1.67 - 3.57 GBP/therm(ec) LME Aluminium: 2,009 - 3,399 USD/Mt | Fair value hedges | | | | Derivatives in fair value hedge (interest rate risk) | 4,444 | | September 2022 - April 2043 | (0.01) - 3.09% | 2021 | | | | Net investment hedges | | | | Derivatives in net investment hedges of foreign operations | 11 | | July 2021 | Turkish lira 11.86 - 12.22 | Cash flow hedges | | | | Derivatives in cash flow hedge (foreign currency debt) | 1,475 | | April 2023 - April 2043 | US dollar 1.22 - 1.88 | Derivatives in cash flow hedge (foreign currency exchange risk) | 1,303 | | September 2021 - December 2022 | US dollar 1.19 - 1.42, euro 1.07 - 1.16 | Derivatives in cash flow hedge (commodity price risk) | 93 | | July 2021 - May 2023 | Corn: 3.63 - 5.17 USD/Bu LME Aluminium: 1,631 - 2,421 USD/Mt | Fair value hedges | | | | Derivatives in fair value hedge (interest rate risk) | 4,646 | | October 2021 - April 2030 | (0.01) - 3.09% | 2020 | | | | | | | | | | | | Cash flow hedges | | | | Derivatives in cash flow hedge (foreign currency debt) | 1,667 | | April 2023 - April 2043 | US dollar 1.22 - 1.88 | Derivatives in cash flow hedge (foreign currency exchange risk) | 1,428 | | September 2020 - March 2022 | US dollar 1.19 - 1.36, euro 1.06 - 1.18 | Derivatives in cash flow hedge (commodity price risk) | 133 | | July 2020 - February 2023 | Corn: 3.45 - 4.04 USD/Bu
Fuel Oil: 1.11 - 1.87 USD/gal
| Fair value hedges | | | | Derivatives in fair value hedge (interest rate risk) | 6,092 | | July 2020 - April 2030 | (0.01) - 4.83% |
(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 lossgain of £124 million (2021 – £157 million (2020loss; 2020 – £173 million gain; 2019 – £79 million gain) has beenwas recognised in other comprehensive income due to changes in fair value. A loss of £10£42 million has beenwas transferred out of other comprehensive income to other operating expenses and a lossgain of £175£239 million to other finance charges, respectively, (2020(2021 – a loss of £10 million and a loss of £175 million; 2020 – a loss of £42 million and a gain of £75 million; 2019 – a loss of £45 million and a gain of £82 million) to offset the foreign exchange impact on the underlying transactions. A gain of £46 million (2021 – £2 million (2020gain, 2020 – £8 million loss, 2019 – £NaN) has beenloss) was transferred out of other 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 20212022 and are included within borrowings. The notional amount for cash flow hedges of foreign currency debt at 30 June 20212022 was £1,475£1,694 million (2020(2021 – £1,667£1,475 million). For cash flow hedges of forecast transactions at 30 June 2021,2022, based on year end interest and exchange rates, there is expected to be a gain to the income statement of £66£18 million in the year ending 30 June 20222023 and a loss of £48£7 million in the year ending 30 June 2023.2024 is expected to be recognised. ForIn respect of hedges of foreign currency borrowings that are no longer applicable at 30 June 2021,2022, a loss of £20£19 million (2020(2021 – a loss of £20 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 2021.2022.
The £4,646£4,444 million (2020(2021 – £6,092£4,646 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 20212022 and the carrying amount of hedged items are included within borrowings in the statement of financial position.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 20212022 was £5£1 million (2020(2021 – £13£5 million).
Financial statements (continued) The following table sets out information regarding the effectiveness of hedging relationships designated by the group, as well as the impacts on profit or lossthe income statement and other comprehensive income: | | | At the beginning of the year £ million | Income statement £ million | Consolidated statement of comprehensive income £ million | Other £ million | At the end of the year £ million | | 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 | 2022 | | 2022 | | Net investment hedges | | Net investment hedges | | Derivatives in net investment hedges of foreign operations | | Derivatives in net investment hedges of foreign operations | — | | — | | 5 | | (6) | | (1) | | Cash flow hedges | | Cash flow hedges | | Derivatives in cash flow hedge (foreign currency debt) | | Derivatives in cash flow hedge (foreign currency debt) | 154 | | 239 | | (6) | | (20) | | 367 | | Derivatives in cash flow hedge (foreign currency risk) | | Derivatives in cash flow hedge (foreign currency risk) | 53 | | (11) | | (130) | | 11 | | (77) | | Derivatives in cash flow hedge (commodity price risk) | | Derivatives in cash flow hedge (commodity price risk) | 16 | | 46 | | 32 | | (44) | | 50 | | Fair value hedges | | Fair value hedges | | Derivatives in fair value hedge (interest rate risk) | | Derivatives in fair value hedge (interest rate risk) | 63 | | (346) | | — | | — | | (283) | | Fair value hedge hedged item | | Fair value hedge hedged item | (65) | | 341 | | — | | — | | 276 | | Instruments in fair value hedge relationship | | Instruments in fair value hedge relationship | (2) | | (5) | | — | | — | | (7) | | 2021 | 2021 | | 2021 | | Net investment hedges | Net investment hedges | | Net investment hedges | | Derivatives in net investment hedges of foreign operations | Derivatives in net investment hedges of foreign operations | 0 | | 0 | | 3 | | (3) | | 0 | | Derivatives in net investment hedges of foreign operations | — | | — | | 3 | | (3) | | — | | Cash flow hedges | Cash flow hedges | | Cash flow hedges | | Derivatives in cash flow hedge (foreign currency debt) | Derivatives in cash flow hedge (foreign currency debt) | 469 | | (175) | | (123) | | (17) | | 154 | | Derivatives in cash flow hedge (foreign currency debt) | 469 | | (175) | | (123) | | (17) | | 154 | | Derivatives in cash flow hedge (foreign currency exchange risk) | (58) | | (26) | | 111 | | 26 | | 53 | | | Derivatives in cash flow hedge (foreign currency risk) | | Derivatives in cash flow hedge (foreign currency risk) | (58) | | (26) | | 111 | | 26 | | 53 | | Derivatives in cash flow hedge (commodity price risk) | Derivatives in cash flow hedge (commodity price risk) | (9) | | 2 | | 39 | | (16) | | 16 | | Derivatives in cash flow hedge (commodity price risk) | (9) | | 2 | | 39 | | (16) | | 16 | | Fair value hedges | Fair value hedges | | Fair value hedges | | Derivatives in fair value hedge (interest rate risk) | Derivatives in fair value hedge (interest rate risk) | 189 | | (126) | | — | | — | | 63 | | Derivatives in fair value hedge (interest rate risk) | 189 | | (126) | | — | | — | | 63 | | Fair value hedge hedged item | Fair value hedge hedged item | (189) | | 124 | | — | | — | | (65) | | Fair value hedge hedged item | (189) | | 124 | | — | | — | | (65) | | Instruments in fair value hedge relationship | Instruments in fair value hedge relationship | 0 | | (2) | | — | | — | | (2) | | Instruments in fair value hedge relationship | — | | (2) | | — | | — | | (2) | | 2020 | | | Net investment hedges | | | Derivatives in net investment hedges of foreign operations | (1) | | 0 | | (1) | | 2 | | 0 | | | 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) | | — | | — | | 0 | | |
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 | | 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 | 2021 | | | Other investments and loans(i) | 121 | | 17 | | 8 | | 2 | | 148 | | — | | 148 | | | 2022 | | 2022 | | Other investments and loans(1) | | Other investments and loans(1) | 180 | | 4 | | 15 | | 1 | | 200 | | — | | 200 | | Trade and other receivables | Trade and other receivables | — | | — | | 2,017 | | 404 | | 2,421 | | 2,385 | | 36 | | Trade and other receivables | — | | — | | 2,365 | | 605 | | 2,970 | | 2,933 | | 37 | | Cash and cash equivalents | Cash and cash equivalents | — | | — | | 2,749 | | — | | 2,749 | | 2,749 | | — | | Cash and cash equivalents | — | | — | | 2,285 | | — | | 2,285 | | 2,285 | | — | | Derivatives in fair value hedge (interest rate risk) | Derivatives in fair value hedge (interest rate risk) | 106 | | — | | — | | — | | 106 | | 4 | | 102 | | Derivatives in fair value hedge (interest rate risk) | 1 | | — | | — | | — | | 1 | | — | | 1 | | Derivatives in cash flow hedge (foreign currency debt) | Derivatives in cash flow hedge (foreign currency debt) | 205 | | — | | — | | — | | 205 | | — | | 205 | | Derivatives in cash flow hedge (foreign currency debt) | 367 | | — | | — | | — | | 367 | | 43 | | 324 | | Derivatives in cash flow hedge (foreign currency exchange risk) | 61 | | — | | — | | — | | 61 | | 57 | | 4 | | | Derivatives in cash flow hedge (foreign currency risk) | | Derivatives in cash flow hedge (foreign currency risk) | 32 | | — | | — | | — | | 32 | | 15 | | 17 | | Derivatives in cash flow hedge (commodity price risk) | Derivatives in cash flow hedge (commodity price risk) | 16 | | — | | — | | — | | 16 | | 14 | | 2 | | Derivatives in cash flow hedge (commodity price risk) | 57 | | — | | — | | — | | 57 | | 57 | | — | | | Other instruments | Other instruments | 55 | | — | | — | | — | | 55 | | 46 | | 9 | | Other instruments | 136 | | — | | — | | — | | 136 | | 136 | | — | | Leases | Leases | — | | — | | 5 | | — | | 5 | | — | | 5 | | Leases | — | | — | | 3 | | — | | 3 | | — | | 3 | | Total other financial assets | Total other financial assets | 443 | | — | | 5 | | — | | 448 | | 121 | | 327 | | Total other financial assets | 593 | | — | | 3 | | — | | 596 | | 251 | | 345 | | Total financial assets | Total financial assets | 564 | | 17 | | 4,779 | | 406 | | 5,766 | | 5,255 | | 511 | | Total financial assets | 773 | | 4 | | 4,668 | | 606 | | 6,051 | | 5,469 | | 582 | | Borrowings(ii) | — | | — | | (14,727) | | — | | (14,727) | | (1,862) | | (12,865) | | | Borrowings(2) | | Borrowings(2) | — | | — | | (16,020) | | — | | (16,020) | | (1,522) | | (14,498) | | Trade and other payables | | Trade and other payables | (371) | | — | | (4,774) | | (1,122) | | (6,267) | | (5,887) | | (380) | | Derivatives in fair value hedge (interest rate risk) | | Derivatives in fair value hedge (interest rate risk) | (284) | | — | | — | | — | | (284) | | (1) | | (283) | | | Derivatives in cash flow hedge (foreign currency risk) | | Derivatives in cash flow hedge (foreign currency risk) | (109) | | — | | — | | — | | (109) | | (81) | | (28) | | Derivatives in cash flow hedge (commodity price risk) | | Derivatives in cash flow hedge (commodity price risk) | (7) | | — | | — | | — | | (7) | | (5) | | (2) | | Derivatives in net investment hedge | | Derivatives in net investment hedge | (1) | | — | | — | | — | | (1) | | (1) | | — | | Other instruments | | Other instruments | (271) | | — | | (117) | | — | | (388) | | (388) | | — | | Leases | | Leases | — | | — | | (475) | | — | | (475) | | (85) | | (390) | | Total other financial liabilities | | Total other financial liabilities | (672) | | — | | (592) | | — | | (1,264) | | (561) | | (703) | | Total financial liabilities | | Total financial liabilities | (1,043) | | — | | (21,386) | | (1,122) | | (23,551) | | (7,970) | | (15,581) | | Total net financial (liabilities)/assets | | Total net financial (liabilities)/assets | (270) | | 4 | | (16,718) | | (516) | | (17,500) | | (2,501) | | (14,999) | | 2021 | | 2021 | | Other investments and loans(1) | | Other investments and loans(1) | 121 | | 17 | | 8 | | 2 | | 148 | | — | | 148 | | Trade and other receivables | | Trade and other receivables | — | | — | | 2,017 | | 404 | | 2,421 | | 2,385 | | 36 | | Cash and cash equivalents | | Cash and cash equivalents | — | | — | | 2,749 | | — | | 2,749 | | 2,749 | | — | | Derivatives in fair value hedge (interest rate risk) | | Derivatives in fair value hedge (interest rate risk) | 106 | | — | | — | | — | | 106 | | 4 | | 102 | | Derivatives in cash flow hedge (foreign currency debt) | | Derivatives in cash flow hedge (foreign currency debt) | 205 | | — | | — | | — | | 205 | | — | | 205 | | Derivatives in cash flow hedge (foreign currency risk) | | Derivatives in cash flow hedge (foreign currency risk) | 61 | | — | | — | | — | | 61 | | 57 | | 4 | | Derivatives in cash flow hedge (commodity price risk) | | Derivatives in cash flow hedge (commodity price risk) | 16 | | — | | — | | — | | 16 | | 14 | | 2 | | | Other instruments | | Other instruments | 55 | | — | | — | | — | | 55 | | 46 | | 9 | | Leases | | Leases | — | | — | | 5 | | — | | 5 | | — | | 5 | | Total other financial assets | | Total other financial assets | 443 | | — | | 5 | | — | | 448 | | 121 | | 327 | | Total financial assets | | Total financial assets | 564 | | 17 | | 4,779 | | 406 | | 5,766 | | 5,255 | | 511 | | Borrowings(2) | | Borrowings(2) | — | | — | | (14,727) | | — | | (14,727) | | (1,862) | | (12,865) | | Trade and other payables | Trade and other payables | (429) | | — | | (3,580) | | (977) | | (4,986) | | (4,648) | | (338) | | Trade and other payables | (429) | | — | | (3,580) | | (977) | | (4,986) | | (4,648) | | (338) | | Derivatives in fair value hedge (interest rate risk) | Derivatives in fair value hedge (interest rate risk) | (43) | | — | | — | | — | | (43) | | 0 | | (43) | | Derivatives in fair value hedge (interest rate risk) | (43) | | — | | — | | — | | (43) | | — | | (43) | | Derivatives in cash flow hedge (foreign currency debt) | Derivatives in cash flow hedge (foreign currency debt) | (51) | | — | | — | | — | | (51) | | — | | (51) | | Derivatives in cash flow hedge (foreign currency debt) | (51) | | — | | — | | — | | (51) | | — | | (51) | | Derivatives in cash flow hedge (foreign currency exchange risk) | (8) | | — | | — | | — | | (8) | | (5) | | (3) | | | Derivatives in cash flow hedge (foreign currency risk) | | Derivatives in cash flow hedge (foreign currency risk) | (8) | | — | | — | | — | | (8) | | (5) | | (3) | | | Other instruments | Other instruments | (176) | | — | | (91) | | — | | (267) | | (261) | | (6) | | Other instruments | (176) | | — | | (91) | | — | | (267) | | (261) | | (6) | | Leases | Leases | — | | — | | (363) | | — | | (363) | | (82) | | (281) | | Leases | — | | — | | (363) | | — | | (363) | | (82) | | (281) | | Total other financial liabilities | Total other financial liabilities | (278) | | — | | (454) | | — | | (732) | | (348) | | (384) | | Total other financial liabilities | (278) | | — | | (454) | | — | | (732) | | (348) | | (384) | | Total financial liabilities | Total financial liabilities | (707) | | — | | (18,761) | | (977) | | (20,445) | | (6,858) | | (13,587) | | Total financial liabilities | (707) | | — | | (18,761) | | (977) | | (20,445) | | (6,858) | | (13,587) | | Total net financial (liabilities)/assets | Total net financial (liabilities)/assets | (143) | | 17 | | (13,982) | | (571) | | (14,679) | | (1,603) | | (13,076) | | Total net financial (liabilities)/assets | (143) | | 17 | | (13,982) | | (571) | | (14,679) | | (1,603) | | (13,076) | | 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 | | 0 | | 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 | | 0 | | | | 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) | | — | | 0 | | — | | (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) | | |
(i)(1) Other investments and loans are including those in respect of associates.
(ii)(2) Borrowings are defined as gross borrowings excluding lease liabilities and the fair value of derivative instruments.
At 30 June 20212022 and 30 June 2020,2021, the carrying values of cash and cash equivalents, other financial assets and liabilities approximate to fair values. At 30 June 20212022 the fair value of borrowings, based on unadjusted quoted market data, was £15,895£15,628 million (2020(2021 – £18,175£15,895 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 its capital structure to achieve capital efficiency, provide flexibility to invest through the economic cycle and give efficient access to
Financial statements (continued)
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 20212022 the adjusted net borrowings (£12,68314,539 million) to adjusted EBITDA ratio was 2.82.5 times. For this calculation net borrowings are adjusted by post employment benefit liabilities before tax (£574402 million) whilst adjusted EBITDA (£4,5275,703 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 overdrafts form 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 equivalents comprise 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 borrowings are 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.
Financial statements (continued) | | | 2021 £ million | 2020 £ million | | 2022 £ million | 2021 £ million | Bank overdrafts | Bank overdrafts | 112 | | 170 | | Bank overdrafts | 74 | | 112 | | | Bank and other loans | Bank and other loans | 160 | | 367 | | Bank and other loans | 105 | | 160 | | Credit support obligations | Credit support obligations | 98 | | 180 | | Credit support obligations | (19) | | 98 | | € 775 million 0% bonds due 2020 | 0 | | 711 | | | US$ 696 million 4.828% bonds due 2020 | 0 | | 566 | | | € 900 million 0.25% bonds due 2021 | € 900 million 0.25% bonds due 2021 | 769 | | 0 | | € 900 million 0.25% bonds due 2021 | — | | 769 | | US$ 1,000 million 2.875% bonds due 2022(i) | 719 | | 0 | | | $ 300 million 8% bonds due 2022(1) | | $ 300 million 8% bonds due 2022(1) | 248 | | — | | $ 1,000 million 2.875% bonds due 2022(1) | | $ 1,000 million 2.875% bonds due 2022(1) | — | | 719 | | $ 1,350 million 2.625% bonds due 2023 | | $ 1,350 million 2.625% bonds due 2023 | 1,115 | | — | | Fair value adjustment to borrowings | Fair value adjustment to borrowings | 4 | | 1 | | Fair value adjustment to borrowings | (1) | | 4 | | Borrowings due within one year | Borrowings due within one year | 1,862 | | 1,995 | | Borrowings due within one year | 1,522 | | 1,862 | | € 900 million 0.25% bonds due 2021 | 0 | | 825 | | | US$ 1,000 million 2.875% bonds due 2022(i) | 0 | | 812 | | | US$ 300 million 8% bonds due 2022(i) | 215 | | 243 | | | US$ 1,350 million 2.625% bonds due 2023 | 970 | | 1,096 | | | | $ 300 million 8% bonds due 2022(1) | | $ 300 million 8% bonds due 2022(1) | — | | 215 | | $ 1,350 million 2.625% bonds due 2023 | | $ 1,350 million 2.625% bonds due 2023 | — | | 970 | | € 600 million 0.125% bonds due 2023 | € 600 million 0.125% bonds due 2023 | 511 | | 548 | | € 600 million 0.125% bonds due 2023 | 516 | | 511 | | US$ 500 million 3.5% bonds due 2023 | 360 | | 405 | | | US$ 600 million 2.125% bonds due 2024 | 431 | | 487 | | | $ 500 million 3.5% bonds due 2023 | | $ 500 million 3.5% bonds due 2023 | 413 | | 360 | | $ 600 million 2.125% bonds due 2024 | | $ 600 million 2.125% bonds due 2024 | 495 | | 431 | | € 500 million 1.75% bonds due 2024 | € 500 million 1.75% bonds due 2024 | 426 | | 456 | | € 500 million 1.75% bonds due 2024 | 430 | | 426 | | € 500 million 0.5% bonds due 2024 | € 500 million 0.5% bonds due 2024 | 425 | | 456 | | € 500 million 0.5% bonds due 2024 | 430 | | 425 | | US$ 750 million 1.375% bonds due 2025 | 537 | | 606 | | | $ 750 million 1.375% bonds due 2025 | | $ 750 million 1.375% bonds due 2025 | 618 | | 537 | | € 600 million 1% bonds due 2025 | € 600 million 1% bonds due 2025 | 510 | | 546 | | € 600 million 1% bonds due 2025 | 515 | | 510 | | € 850 million 2.375% bonds due 2026 | € 850 million 2.375% bonds due 2026 | 723 | | 776 | | € 850 million 2.375% bonds due 2026 | 731 | | 723 | | £ 500 million 1.75% bonds due 2026 | £ 500 million 1.75% bonds due 2026 | 497 | | 496 | | £ 500 million 1.75% bonds due 2026 | 498 | | 497 | | € 750 million 1.875% bonds due 2027 | € 750 million 1.875% bonds due 2027 | 637 | | 683 | | € 750 million 1.875% bonds due 2027 | 643 | | 637 | | € 500 million 1.5% bonds due 2027 | € 500 million 1.5% bonds due 2027 | 426 | | 457 | | € 500 million 1.5% bonds due 2027 | 430 | | 426 | | € 700 million 0.125% bonds due 2028 | € 700 million 0.125% bonds due 2028 | 594 | | 0 | | € 700 million 0.125% bonds due 2028 | 600 | | 594 | | US$ 500 million 3.875% bonds due 2028 | 358 | | 404 | | | US$ 1,000 million 2.375% bonds due 2029 | 711 | | 804 | | | $ 500 million 3.875% bonds due 2028 | | $ 500 million 3.875% bonds due 2028 | 411 | | 358 | | £ 300 million 2.375% bonds due 2028 | | £ 300 million 2.375% bonds due 2028 | 298 | | — | | $ 1,000 million 2.375% bonds due 2029 | | $ 1,000 million 2.375% bonds due 2029 | 819 | | 711 | | £ 300 million 2.875% bonds due 2029 | £ 300 million 2.875% bonds due 2029 | 298 | | 298 | | £ 300 million 2.875% bonds due 2029 | 298 | | 298 | | US$ 1,000 million 2% bonds due 2030 | 714 | | 807 | | | € 750 million 1.15% bonds due 2029 | | € 750 million 1.15% bonds due 2029 | 645 | | — | | $ 1,000 million 2% bonds due 2030 | | $ 1,000 million 2% bonds due 2030 | 821 | | 714 | | € 1,000 million 2.5% bonds due 2032 | € 1,000 million 2.5% bonds due 2032 | 850 | | 911 | | € 1,000 million 2.5% bonds due 2032 | 856 | | 850 | | US$ 750 million 2.125% bonds due 2032 | 534 | | 603 | | | $ 750 million 2.125% bonds due 2032 | | $ 750 million 2.125% bonds due 2032 | 614 | | 534 | | £ 400 million 1.25% bonds due 2033 | £ 400 million 1.25% bonds due 2033 | 395 | | 0 | | £ 400 million 1.25% bonds due 2033 | 395 | | 395 | | US$ 400 million 7.45% bonds due 2035(i) | 288 | | 325 | | | US$ 600 million 5.875% bonds due 2036 | 427 | | 483 | | | US$ 500 million 4.25% bonds due 2042(i) | 356 | | 402 | | | US$ 500 million 3.875% bonds due 2043 | 353 | | 400 | | | € 900 million 1.15% bonds due 2034 | | € 900 million 1.15% bonds due 2034 | 770 | | — | | $ 400 million 7.45% bonds due 2035(1) | | $ 400 million 7.45% bonds due 2035(1) | 331 | | 288 | | $ 600 million 5.875% bonds due 2036 | | $ 600 million 5.875% bonds due 2036 | 491 | | 427 | | £ 600 million 2.75% bonds due 2038 | | £ 600 million 2.75% bonds due 2038 | 595 | | — | | $ 500 million 4.25% bonds due 2042(1) | | $ 500 million 4.25% bonds due 2042(1) | 409 | | 356 | | $ 500 million 3.875% bonds due 2043 | | $ 500 million 3.875% bonds due 2043 | 407 | | 353 | | Bank and other loans | Bank and other loans | 253 | | 260 | | Bank and other loans | 293 | | 253 | | Fair value adjustment to borrowings | Fair value adjustment to borrowings | 66 | | 201 | | Fair value adjustment to borrowings | (274) | | 66 | | Borrowings due after one year | Borrowings due after one year | 12,865 | | 14,790 | | Borrowings due after one year | 14,498 | | 12,865 | | Total borrowings before derivative financial instruments | Total borrowings before derivative financial instruments | 14,727 | | 16,785 | | Total borrowings before derivative financial instruments | 16,020 | | 14,727 | | Fair value of cross currency interest rate swaps | Fair value of cross currency interest rate swaps | (154) | | (469) | | Fair value of cross currency interest rate swaps | (367) | | (154) | | Fair value of foreign exchange swaps and forwards | (15) | | (28) | | | Fair value of foreign currency swaps and forwards | | Fair value of foreign currency swaps and forwards | 11 | | (15) | | Fair value of interest rate hedging instruments | Fair value of interest rate hedging instruments | (63) | | (189) | | Fair value of interest rate hedging instruments | 283 | | (63) | | Lease liabilities | Lease liabilities | 363 | | 470 | | Lease liabilities | 475 | | 363 | | Gross borrowings | Gross borrowings | 14,858 | | 16,569 | | Gross borrowings | 16,422 | | 14,858 | | Less: Cash and cash equivalents | Less: Cash and cash equivalents | (2,749) | | (3,323) | | Less: Cash and cash equivalents | (2,285) | | (2,749) | | Net borrowings | Net borrowings | 12,109 | | 13,246 | | Net borrowings | 14,137 | | 12,109 | |
(i)(1) SEC-registered debt issued on an unsecured basis by Diageo Investment Corporation, a 100% owned finance subsidiary of Diageo plc.
(1)(i) 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 £85 million (2021 – £78 million (2020million; 2020 – £86 million; 2019 – £63 million).
(3)(iii) Bonds are reported above at amortised cost with a fair value adjustment shown separately.
(4)(iv) 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.
Financial statements (continued) Gross borrowings before derivative financial instruments are expected to mature as follows: | | | 2021 £ million | 2020 £ million | | | 2022 £ million | 2021 £ million | | Within one year | Within one year | 1,862 | | 1,995 | | | Within one year | 1,522 | | 1,862 | | | Between one and three years | Between one and three years | 2,623 | | 3,013 | | | Between one and three years | 2,817 | | 2,623 | | | Between three and five years | Between three and five years | 2,788 | | 3,134 | | | Between three and five years | 2,625 | | 2,788 | | | Beyond five years | Beyond five years | 7,454 | | 8,643 | | | Beyond five years | 9,056 | | 7,454 | | | | | 14,727 | | 16,785 | | | | 16,020 | | 14,727 | | |
During the year, the following bonds were issued and repaid: | | | 2021 £ million | 2020 £ million | 2019 £ million | | 2022 £ million | 2021 £ million | 2020 £ million | Issued | Issued | | Issued | | € denominated | € denominated | 636 | | 1,594 | | 2,270 | | € denominated | 1,371 | | 636 | | 1,594 | | £ denominated | £ denominated | 395 | | 298 | | 496 | | £ denominated | 892 | | 395 | | 298 | | US$ denominated | 0 | | 3,296 | | 0 | | | $ denominated | | $ denominated | — | | — | | 3,296 | | Repaid | Repaid | | Repaid | | € denominated | € denominated | (696) | | 0 | | (1,168) | | € denominated | (769) | | (696) | | — | | US$ denominated | (551) | | (820) | | 0 | | | $ denominated | | $ denominated | (752) | | (551) | | (820) | | | | (216) | | 4,368 | | 1,598 | | | 742 | | (216) | | 4,368 | |
(a) Reconciliation of movement in net borrowings | | | | | | | | | | 2021 £ million | 2020 £ million | At beginning of the year | 13,246 | | 11,277 | | Net decrease/(increase) in cash and cash equivalents before exchange | 231 | | (2,552) | | Net (decrease)/increase in bonds and other borrowings(i) | (967) | | 4,089 | | Change in net borrowings from cash flows | (736) | | 1,537 | | Exchange differences on net borrowings | (598) | | 95 | | Other non-cash items(ii) | 197 | | 86 | | Adoption of IFRS 16 | 0 | | 251 | | Net borrowings at end of the year | 12,109 | | 13,246 | |
| | | | | | | | | | 2022 £ million | 2021 £ million | At beginning of the year | 12,109 | | 13,246 | | Net decrease in cash and cash equivalents before exchange | 665 | | 231 | | Net increase/(decrease) in bonds and other borrowings(1) | 825 | | (967) | | Increase/(decrease) in net borrowings from cash flows | 1,490 | | (736) | | Exchange differences on net borrowings | 334 | | (598) | | Other non-cash items(2) | 204 | | 197 | | | | | Net borrowings at end of the year | 14,137 | | 12,109 | |
(i)(1) In the year ended 30 June 2021,2022, net decreaseincrease in bonds and other borrowings excludes £2£4 million cash outflow in respect of derivatives designated in forward point hedges (2020 - £6(2021 – £2 million).
(ii)(2) 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 £(183) million partially offset by the £331 million fair value change of borrowings. In the year ended 30 June 2021, other non-cash items are principally in respect of fair value changes of cross currency interest rate swaps and interest rate swaps of £249 million, partially offset by the £(111) million fair value changeschange of borrowings. 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.
Financial statements (continued) (b) Analysis of net borrowings by currency | | | 2021 | 2020 | | 2022 | 2021 | | | Cash and cash equivalents £ million | Gross borrowings(i) £ million | Cash and cash equivalents £ million | Gross borrowings(i) £ million | | Cash and cash equivalents £ million | Gross borrowings(1) £ million | Cash and cash equivalents £ million | Gross borrowings(1) £ million | US dollar | US dollar | 1,890 | | (4,001) | | 2,649 | | (6,300) | | US dollar | 1,315 | | (3,260) | | 1,890 | | (4,001) | | Euro | Euro | 82 | | (2,841) | | 57 | | (3,119) | | Euro | 61 | | (2,943) | | 82 | | (2,841) | | Sterling | Sterling | 38 | | (7,279) | | 19 | | (6,233) | | Sterling | 67 | | (9,214) | | 38 | | (7,279) | | Indian rupee | Indian rupee | 26 | | (109) | | 13 | | (253) | | Indian rupee | 26 | | (74) | | 26 | | (109) | | Mexican peso | | Mexican peso | 14 | | (264) | | 9 | | (102) | | Kenyan shilling | Kenyan shilling | 16 | | (293) | | 28 | | (351) | | Kenyan shilling | 53 | | (254) | | 16 | | (293) | | Hungarian forint | Hungarian forint | 3 | | (241) | | 3 | | (239) | | Hungarian forint | 2 | | (214) | | 3 | | (241) | | Mexican peso | 9 | | (102) | | 16 | | (104) | | | Chinese yuan | Chinese yuan | 255 | | (20) | | 207 | | (1) | | Chinese yuan | 290 | | (75) | | 255 | | (20) | | Nigerian naira | Nigerian naira | 60 | | (1) | | 6 | | (15) | | Nigerian naira | 133 | | — | | 60 | | (1) | | Other(ii) | 370 | | 29 | | 325 | | 46 | | | Other(2) | | Other(2) | 324 | | (124) | | 370 | | 29 | | Total | Total | 2,749 | | (14,858) | | 3,323 | | (16,569) | | Total | 2,285 | | (16,422) | | 2,749 | | (14,858) | |
(i)(1) Includes foreign currency forwards and swaps and leases.
(ii)(2) Includes £31£23 million (Turkish lira)lira and Euro) cash and cash equivalents in cash-pooling arrangements (2020(2021 – £100£31 million (Turkish lira)).
17.
18. Equity
Accounting policies
Own shares represent 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. Dividends are included in the financial statements in the year in which they are approved. (a) Allotted and fully paid share capital – ordinary shares of 28101⁄108 pence each | | | | | | | | | | Number of shares million | Nominal value £ million | At 30 June 2021 | 2,559 | | 741 | | At 30 June 2020 | 2,562 | | 742 | | At 30 June 2019 | 2,601 | | 753 | |
(b) Hedging and exchange reserve
| | | | | | | | | | | | | Hedging reserve £ million | Exchange reserve £ million | Total £ million | 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 | | 0 | | 5 | | At 30 June 2020 | 93 | | (1,022) | | (929) | | Other comprehensive income/(loss) | 20 | | (672) | | (652) | | | | | | At 30 June 2021 | 113 | | (1,694) | | (1,581) | |
| | | | | | | | | | Number of shares million | Nominal value £ million | At 30 June 2022 | 2,498 | | 723 | | At 30 June 2021 | 2,559 | | 741 | | At 30 June 2020 | 2,562 | | 742 | |
Financial statements (continued) (b) Hedging and exchange reserve | | | | | | | | | | | | | Hedging reserve £ million | Exchange reserve £ million | Total £ million | 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) | | 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) | |
Currency basis spreads included in the hedging reserve represent the cost of hedging arising as a result of imperfections of foreign exchange markets. Exclusion of currency basis spreads would result in a surplus £22 million (2020(2021 – £22 million, 2020 – £30 million surplus, 2019 – £1 million surplus) in themillion) credit to hedging reserve.
(c) Own shares Movements in own shares | | | Number of shares million | Purchase consideration £ million | | Number of shares million | Purchase consideration £ million | 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 | At 30 June 2019 | 232 | | 2,026 | | At 30 June 2019 | 232 | | 2,026 | | Share trust arrangements | Share trust arrangements | (1) | | (7) | | Share trust arrangements | (1) | | (7) | | | Shares used to satisfy options | Shares used to satisfy options | (4) | | (83) | | Shares used to satisfy options | (4) | | (83) | | Shares purchased - share buyback programme | Shares purchased - share buyback programme | 39 | | 1,282 | | Shares purchased - share buyback programme | 39 | | 1,282 | | Shares cancelled | Shares cancelled | (39) | | (1,282) | | Shares cancelled | (39) | | (1,282) | | At 30 June 2020 | At 30 June 2020 | 227 | | 1,936 | | At 30 June 2020 | 227 | | 1,936 | | Share trust arrangements | Share trust arrangements | (1) | | (11) | | Share trust arrangements | (1) | | (11) | | | Shares used to satisfy options | Shares used to satisfy options | (3) | | (48) | | Shares used to satisfy options | (3) | | (48) | | Shares purchased - share buyback programme | Shares purchased - share buyback programme | 3 | | 109 | | Shares purchased - share buyback programme | 3 | | 109 | | Shares cancelled | Shares cancelled | (3) | | (109) | | Shares cancelled | (3) | | (109) | | At 30 June 2021 | At 30 June 2021 | 223 | | 1,877 | | At 30 June 2021 | 223 | | 1,877 | | Share trust arrangements | | Share trust arrangements | (2) | | (23) | | | Shares used to satisfy options | | Shares used to satisfy options | (2) | | (16) | | Shares purchased - share buyback programme | | Shares purchased - share buyback programme | 61 | | 2,284 | | Shares cancelled | | Shares cancelled | (61) | | (2,284) | | At 30 June 2022 | | At 30 June 2022 | 219 | | 1,838 | |
Share trust arrangements At 30 June 20212022, the employee share trusts owned 2 million of ordinary shares in Diageo plc (the company) at a cost of £47£25 million and market value of £63 million (2021 – 2 million shares at a cost of £47 million, market value £74 million (2020million; 2020 – 2 million shares at a cost of £51 million, market value £57 million; 2019 – 3 million shares at a cost of £58 million, market value £92 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 2830 September 20202021 to purchase a maximum of 232,820,888233,611,282 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 2729 December 20212022 if earlier. During the year ended 30 June 2019 the company purchased2022, Diageo sold call options overon own shares for a consideration of £13 million 4 million shares at a cost of £14 milliondue to hedgeno longer being required for employee share awards and share option grants. These are three-year call options, denominated in sterling.plan hedging. On 25 July 2019, the Board approved aDiageo’s current return of capital programme, withinitially approved by the Board on 25 July 2019, seeks to return up to £4.5 billion to shareholders and is expected to be returned to shareholders over the three-year period tocompleted by 30 June 2022.2023. Under the first phasetwo phases of the programme, which ended on 31 January 2020 and 11 February 2022 respectively, the groupcompany returned £1.25 billioncapital to shareholders via share buybacks.buyback, at a cost, excluding
Financial statements (continued) transaction costs, of £2.25 billion. On 9 April 2020, due to uncertainties related to Covid-19 pandemic, Diageo21 February 2022, the company announced that it had not initiated the next phase of the programme. On 12 May 2021, the Board approved recommencing the return of capital programme. Due to the impact of Covid-19, the original completion date for the programme has been extended by two years to 30 June 2024. The secondthird phase of the programme with a value of up to £1£1.7 billion returned to shareholders, via share buybacks, was also initiated on 12 May 2021 and itto be completed no later than 5 October 2022. At 30 June 2022, £1.4 billion had been completed as part of the third phase. The remaining £0.9 billion of the programme is expected to be completed by the end of the financial year ending 30 June 2022.2023. During the year ended 30 June 20212022, the group purchased 3.261 million ordinary shares (2020(2021 – 393.2 million; 20192020 – 94.739 million), representing approximately 0.1%2.4% of the issued ordinary share capital (2020(2021 – 1.5%0.1%; 20192020 – 3.5%1.5%) at an average price of £34.073709 pence per share, and an aggregate cost of £2,284 million (including £16 million of transaction costs) (2021 – 3407 pence per share, and an aggregate cost of £109 million, (includingincluding £1 million of transaction costs) (2020costs; 2020 – £32.433243 pence 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) under the share buyback programme. The shares purchased under the share buyback programmes were cancelled.
Financial statements (continued)
A financial liability of £91£117 million was established at 30 June 20212022, representing the 2.63.3 million shares that were expected to be purchased before 29by 28 July 2021.2022. The monthly breakdown of all shares purchased and the average price paid per share (excluding expenses) for the year ended 30 June 20212022 were as follows:
| Period | Period | Number of shares purchased under share buyback programme | Total number of shares purchased | Average price paid pence | Authorised purchases unutilised at month end | 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 2021 | | July 2021 | 1,728,254 | | 1,728,254 | | 3457 | | 227,758,747 | | August 2021 | | August 2021 | 2,396,223 | | 2,396,223 | | 3538 | | 225,362,524 | | September 2021 | | September 2021 | 3,175,936 | | 3,175,936 | | 3493 | | 222,186,588 | | | May 2021 | 1,484,935 | | 1,484,935 | | 3360 | | 231,335,953 | | | June 2021 | 1,848,952 | | 1,848,952 | | 3453 | | 229,487,001 | | | October 2021(1) | | October 2021(1) | 1,565,980 | | 1,565,980 | | 3550 | | 232,045,302 | | November 2021 | | November 2021 | 1,375,946 | | 1,375,946 | | 3785 | | 230,669,356 | | December 2021 | | December 2021 | 4,423,031 | | 4,423,031 | | 3960 | | 226,246,325 | | January 2022 | | January 2022 | 5,822,743 | | 5,822,743 | | 3797 | | 220,423,582 | | February 2022 | | February 2022 | 5,865,710 | | 5,865,710 | | 3714 | | 214,557,872 | | March 2022 | | March 2022 | 8,480,736 | | 8,480,736 | | 3588 | | 206,077,136 | | April 2022 | | April 2022 | 7,260,564 | | 7,260,564 | | 3935 | | 198,816,572 | | May 2022 | | May 2022 | 12,627,704 | | 12,627,704 | | 3724 | | 186,188,868 | | June 2022 | | June 2022 | 6,771,405 | | 6,771,405 | | 3584 | | 179,417,463 | | Total | Total | 3,333,887 | | 3,333,887 | | 3411 | | 229,487,001 | | Total | 61,494,232 | | 61,494,232 | | 3708 | | 179,417,463 | | |
(1) New maximum number of purchasable shares was authorised by shareholders at the AGM held on 30 September 2021
(d) Dividends | | | | | | | | | | | | | 2021 | 2020 | 2019 | | £ million | £ million | £ million | Amounts recognised as distributions to equity shareholders in the year | | | | Final dividend for the year ended 30 June 2020 | | | | 42.47 pence per share (2019 – 42.47 pence; 2018 – 40.4 pence) | 992 | | 1,006 | | 993 | | Interim dividend for the year ended 30 June 2021 | | | | 27.96 pence per share (2020 – 27.41 pence; 2019 – 26.1 pence) | 654 | | 640 | | 630 | | | 1,646 | | 1,646 | | 1,623 | |
| | | | | | | | | | | | | 2022 | 2021 | 2020 | | £ million | £ million | £ million | Amounts recognised as distributions to equity shareholders in the year | | | | Final dividend for the year ended 30 June 2021 | | | | 44.59 pence per share (2020 – 42.47 pence; 2019 – 42.47 pence) | 1,040 | | 992 | | 1,006 | | Interim dividend for the year ended 30 June 2022 | | | | 29.36 pence per share (2021 – 27.96 pence; 2020 – 27.41 pence) | 680 | | 654 | | 640 | | | 1,720 | | 1,646 | | 1,646 | |
The proposed final dividenddividend of £1,0421,067 million (44.59 (46.82 pence per share) for the year ended 30 June 20212022 was approved by the Board of Directors on 27 July 202228 July 2021.. 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% 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, including Ketel One, 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: | | | 2021 | 2020 | 2019 | | 2022 | 2021 | 2020 | | | USL £ million | Others £ million | Total £ million | | USL £ million | Others £ million | Total £ million | Income statement | Income statement | | Income statement | | Sales | Sales | 3,005 | | 2,135 | | 5,140 | | 4,688 | | 5,346 | | Sales | 3,194 | | 2,603 | | 5,797 | | 5,140 | | 4,688 | | Net sales | Net sales | 877 | | 1,676 | | 2,553 | | 2,314 | | 2,656 | | Net sales | 1,013 | | 2,042 | | 3,055 | | 2,553 | | 2,314 | | Profit for the year | 85 | | 213 | | 298 | | 85 | | 383 | | | Other comprehensive (loss)/income(i) | (182) | | (252) | | (434) | | (96) | | 137 | | | Total comprehensive (loss)/income | (97) | | (39) | | (136) | | (11) | | 520 | | | (Loss)/profit for the year | | (Loss)/profit for the year | (127) | | 354 | | 227 | | 298 | | 85 | | Other comprehensive income/(loss)(1) | | Other comprehensive income/(loss)(1) | 134 | | 199 | | 333 | | (434) | | (96) | | Total comprehensive income/(loss) | | Total comprehensive income/(loss) | 7 | | 553 | | 560 | | (136) | | (11) | | Attributable to non-controlling interests | Attributable to non-controlling interests | (42) | | 7 | | (35) | | 8 | | 234 | | Attributable to non-controlling interests | 3 | | 256 | | 259 | | (35) | | 8 | | Balance sheet | Balance sheet | | Balance sheet | | Non-current assets(ii) | 1,823 | | 2,846 | | 4,669 | | 5,170 | | 5,313 | | | Non-current assets(2) | | Non-current assets(2) | 1,668 | | 3,349 | | 5,017 | | 4,669 | | 5,170 | | Current assets | Current assets | 584 | | 908 | | 1,492 | | 1,280 | | 1,469 | | Current assets | 727 | | 1,275 | | 2,002 | | 1,492 | | 1,280 | | Non-current liabilities | Non-current liabilities | (302) | | (1,054) | | (1,356) | | (1,459) | | (1,526) | | Non-current liabilities | (275) | | (1,224) | | (1,499) | | (1,356) | | (1,459) | | Current liabilities | Current liabilities | (433) | | (902) | | (1,335) | | (1,188) | | (1,204) | | Current liabilities | (441) | | (1,205) | | (1,646) | | (1,335) | | (1,188) | | Net assets | Net assets | 1,672 | | 1,798 | | 3,470 | | 3,803 | | 4,052 | | Net assets | 1,679 | | 2,195 | | 3,874 | | 3,470 | | 3,803 | | Attributable to non-controlling interests | Attributable to non-controlling interests | 714 | | 820 | | 1,534 | | 1,668 | | 1,795 | | Attributable to non-controlling interests | 717 | | 999 | | 1,716 | | 1,534 | | 1,668 | | Cash flow | Cash flow | | Cash flow | | Net cash inflow from operating activities | Net cash inflow from operating activities | 149 | | 512 | | 661 | | 233 | | 542 | | Net cash inflow from operating activities | 149 | | 541 | | 690 | | 661 | | 233 | | Net cash outflow from investing activities | Net cash outflow from investing activities | (10) | | (127) | | (137) | | (152) | | (157) | | Net cash outflow from investing activities | (74) | | (215) | | (289) | | (137) | | (152) | | Net cash outflow from financing activities | Net cash outflow from financing activities | (142) | | (229) | | (371) | | (209) | | (266) | | Net cash outflow from financing activities | (72) | | (250) | | (322) | | (371) | | (209) | | Net increase/(decrease) in cash and cash equivalents | Net increase/(decrease) in cash and cash equivalents | (3) | | 156 | | 153 | | (128) | | 119 | | Net increase/(decrease) in cash and cash equivalents | 3 | | 76 | | 79 | | 153 | | (128) | | Exchange differences | Exchange differences | 0 | | (19) | | (19) | | (3) | | 3 | | Exchange differences | — | | 52 | | 52 | | (19) | | (3) | | Dividends payable to non-controlling interests | Dividends payable to non-controlling interests | 0 | | (72) | | (72) | | (117) | | (114) | | Dividends payable to non-controlling interests | — | | (72) | | (72) | | (72) | | (117) | |
(i)(1) Other comprehensive income is principally in respect of exchange on translating the subsidiaries to sterling.
(ii)(2) 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 20212022 was £1,488 million (2021 – £1,295 million (2020million; 2020 – £1,464 million; 2019 – £1,418 million).
(1) On 21 October 2020 and on 6 November 2020, East African Breweries Limited completed the purchase of 13.3% and 16.7% of the share capital of Serengeti Breweries Limited, respectively. This increased Diageo’s effective economic interest from 40.2% to 47.0%.
(2) During the financial year, Diageo's fully consolidated subsidiary, Shui Jing Fang, completed treasury share purchase of 0.02%. This increased Diageo's controlling interest from 63.14% to 63.17%.
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 20212022 is as follows: | | | 2021 £ million | 2020 £ million | 2019 £ million | | 2022 £ million | 2021 £ million | 2020 £ million | Executive share award plans | Executive share award plans | 41 | | (3) | | 41 | | Executive share award plans | 51 | | 41 | | (3) | | Executive share option plans | Executive share option plans | 4 | | 2 | | 4 | | Executive share option plans | 4 | | 4 | | 2 | | Savings plans | Savings plans | 4 | | 3 | | 4 | | Savings plans | 4 | | 4 | | 3 | | | | 49 | | 2 | | 49 | | | 59 | | 49 | | 2 | |
Executive share awards arehave been made primarily made under the Diageo 2014 Long Term Incentive Plan (DLTIP) from September 2014 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 Incentive Plan (DACSIP). In the case of Executive Directors, conditional awards of time-vesting RSUs or Forfeitableforfeitable 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 post-vesting retention period. The 2020 DBSP was approved by shareholders in September 2020. 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 2014 under the 2014 DLTIP for a further two-year post-vesting retentionholding 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 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) environmental, social and governance (ESG) priorities, weighted 40%, 40% and 20% of the maximum respectively, as set out in the 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) cumulative free cash flow over 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 arewere made under the Diageo 2010 Sharesave plan.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 arewere 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, any grants from 2021 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. Inyears.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 ROI Sharesave awards granted from 2021, 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 2021,2022, the calculation of the fair value of each share award used the Monte Carlo and Black Scholes pricing model and the following assumptions: | | | | | | | | | | | | | 2021 | 2020 | 2019 | Risk free interest rate | (0.1 | %) | 0.4 | % | 0.8 | % | Expected life of the awards | 36 months | 37 months | 37 months | Dividend yield | 2.7 | % | 1.9 | % | 2.4 | % | Weighted average share price | 2557 p | 3501 p | 2736 p | Weighted average fair value of awards granted in the year | 2107 p | 899 p | 1941 p | Number of awards granted in the year | 2.1 million | 1.7 million | 2.5 million | Fair value of all awards granted in the year | £45 million | £16 million | £48 million |
| | | | | | | | | | | | | 2022 | 2021 | 2020 | Risk free interest rate | 0.4 | % | (0.1 | %) | 0.4 | % | Expected life of the awards | 40 months | 36 months | 37 months | Dividend yield | 2.1 | % | 2.7 | % | 1.9 | % | Weighted average share price | 3545 p | 2557 p | 3501 p | Weighted average fair value of awards granted in the year | 2729 p | 2107 p | 899 p | Number of awards granted in the year | 2.1 million | 2.1 million | 1.7 million | Fair value of all awards granted in the year | £57 million | £45 million | £16 million |
Financial statements (continued) Transactions on schemes Transactions on the executive share award plans for the three years ended 30 June 20212022 were as follows: | | | 2021 Number of awards million | | 2020 Number of awards million | | 2019 Number of awards million | | | 2022 Number of awards million | | 2021 Number of awards million | | 2020 Number of awards million | | Balance outstanding at 1 July | Balance outstanding at 1 July | 5.6 | | | 7.0 | | | 7.8 | | | Balance outstanding at 1 July | 5.3 | | | 5.6 | | | 7.0 | | | Granted | Granted | 2.1 | | | 1.8 | | | 2.5 | | | Granted | 2.1 | | | 2.1 | | | 1.8 | | | Awarded | Awarded | (1.2) | | | (2.5) | | | (2.1) | | | Awarded | (1.1) | | | (1.2) | | | (2.5) | | | | Forfeited | Forfeited | (1.2) | | | (0.7) | | | (1.2) | | | Forfeited | (1.1) | | | (1.2) | | | (0.7) | | | Balance outstanding at 30 June | Balance outstanding at 30 June | 5.3 | | | 5.6 | | | 7.0 | | | Balance outstanding at 30 June | 5.2 | | | 5.3 | | | 5.6 | | |
The exercise price of share options outstanding at 30 June 20212022 was in the range of 1704 pence-4024 pence (2021 – 1232 pence-3483 pence (2020pence; 2020 – 1080 pence-3483 pence; 2019 – 952 pence-2773 pence).pence.) At 30 June 2021, 3.22022, 2.2 million share options were exercisable at a weighted average exercise price of 20502394 pence. Weighted average remaining contractual life of share options was five years at 30 June 2022.
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 2021,2022, 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 wasas 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 2021,2022, Diageo has a 55.94% 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 5certain 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) inthis matter is now before the 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.
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. On 26 October 2020, the Supreme Court of India dismissed the petition filed by UBHL.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
Financial statements (continued)
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 inquiriesaffiliates On 25 February 2016, Diageo and USL each announced that they had entered into arrangements with Dr Mallya under which he had agreed to resign from his position as a director and as chairman of USL and from his positions in USL’s subsidiaries. As specified by Diageo in its announcement at that time, these arrangements ended its prior agreement with Dr Mallya regarding his position at USL, therefore bringing to an end the uncertainty relating to the governance of USL, and put in place a five-year global non-compete (excluding the United Kingdom), non-interference, non-solicitation and standstill arrangement with Dr Mallya. As part of those arrangements, USL, Diageo and Dr Mallya agreed a mutual release in relation to matters arising out of an inquiry into certain matters referred to in USL’s financial statements and the qualified auditor’s report for the year ended 31 March 2014 (the Initial Inquiry) which had revealed, among other things, certain diversions of USL funds. Dr Mallya also agreed not to pursue any claims against Diageo, USL and their affiliates (including under the prior agreement with Diageo). In evaluating entering into such arrangements, Diageo considered the impact of the arrangements on USL and all of USL’s shareholders, and came to the view that the arrangements were in the best interests of USL and its shareholders.
Diageo’s agreement with Dr Mallya (the February 2016 Agreement) provided for a payment of $75 million (£5362 million) to Dr Mallya over a five-year period of which $40 million (£33 million) was paid on signing of the February 2016 Agreement with the balance being payable in consideration forequal instalments of $7 million (£6 million) a year over five years (2017-2021). All payments were subject to and conditional on Dr Mallya’s compliance with 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.agreement. The February 2016 Agreement also provided for the release of Dr Mallya’s personal obligations to indemnify (i) Diageo Holdings Netherlands B.V. (DHN) in respect of its earlier liability ($141 million (£96117 million)) under a backstop guarantee of certain borrowings of Watson Limited (Watson) (a company affiliated with Dr Mallya),.
On account of various breaches and (ii)other provisions of agreements between Dr Mallya and persons connected with him and 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 (£28 million) of the $75 million (£53 million) amount was paid on signing of the February 2016 Agreement with the balance being payable in equal instalments of $7 million (£5 million) a year over five years, subject to and conditional on Dr Mallya’s compliance with certain terms of the agreement. Whileand/or USL, Diageo did not make the 5 instalment payments of $7 million (£5 million) would have become due on 25 Februaryduring the five-year period between 2017 25 February 2018, 25 February 2019 25 February 2020 and 25 February 2021, respectively, owing to various reasons (including breaches committed by2021. In addition, Diageo has also demanded that Dr Mallya and certain persons connected with him of several provisions ofrepay the February 2016 Agreement and agreements of the same date between Dr Mallya and USL), Diageo believes that it was not liable to pay such amounts and did not do so. 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, 24 February 2020 and 22 February 2021, Diageo and other group companies have demanded from Dr Mallya the repayment of $40 million (£2833 million) which was 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 million (£105117 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 2 $7 million (£5 million) instalment payments that had thenby that time been withheld by Diageo as described above. Diageo and the other relevant members of its group filed a reply to that defence and a defence to the counterclaim 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. That application was made by DHN on the basis that the defence filed by Dr Mallya and his co-defendants in relation to those matters had no real prospect of success. As described in paragraph (d) below, thisThe application was successful resulting in relationWatson being ordered to pay approximately $135 million (£112 million) plus various amounts in respect of interest to DHN, with CASL being held liable as co-surety for 50% of any such amount unpaid by Watson. These amounts were, contrary to the predominant part ofrelevant orders, not paid by the relevant deadlines and Watson and CASL’s liability to repay DHN and, since that application, Watson and CASL’s defenceremaining defences in relation to the remaining part of this liability has
Financial statements (continued)
also beenproceedings were struck out. Accordingly, Diageo and DHN have accordingly sought asset disclosure and are considering further enforcement steps against Watson and CASL, both in the United Kingdom and in other jurisdictions where they are present or hold assets.
A 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. Dr Mallya has applied for permission to appeal the bankruptcy order and a prior order of the English High Court related to the bankruptcy. The consortium of Indian banks has also applied for permission to appeal a prior order of the English High Court related to the bankruptcy. The bankruptcy proceedings are ongoing. In light of the uncertainty posed by the ongoing bankruptcy proceedings the trial has been vacated to allow time for discussions between the parties regarding the future status and management of the proceedings in light of the bankruptcy and pending appeal to take place.
At this stage, it is not possible to assess the extent to which the various proceedings related to these bankruptcy matters will affect the remaining elements of the claims originally commenced on 16 November 2017 by Diageo and the relevant members of its group are proceedinggroup.
Upon completion of an initial inquiry in April 2015 into past improper transactions which identified references to a trial, which is scheduled to take place from 21 November 2021 through 30 November 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.
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.
(d) Other continuing matters relating to Dr Mallya and affiliates
DHN issued a conditional backstop guarantee on 2 August 2013 to Standard Chartered Bank (Standard Chartered) pursuant to a guarantee commitment agreement (the Guarantee Agreement). The guarantee was in respect of the liabilities of Watson, a company affiliated with Dr Mallya, under a $135 million (£92 million) facility from Standard Chartered (the Facility Agreement). The Guarantee Agreement was entered into as part of the arrangements put in place and announced at the closing of the USL transaction on 4 July 2013.
DHN’s provision of the Guarantee Agreement enabled the refinancing of certain existing borrowings of Watson from a third party bank and facilitated the release by that bank of rights over certain USL shares that were to be acquired by Diageo as part of the USL transaction. The facility matured and entered into default in May 2015. In aggregate DHN paid Standard Chartered $141 million (£101 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 proceedings under the Prevention of Money Laundering Act, the Special Court passed an order on 24 May 2021 directing, among other things, the release of certain assets of Dr Mallya including the UBL shares in favour of third party banks. DHN has subsequently filed a writ petition before the Bombay High Court challenging this order of the Special Court insofar as it relates to 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.
Financial statements (continued) 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.
On 16 November 2017, DHN commenced various claims in the English High Court for, in aggregate, in excess of $142 million (£105 million) (plus interest) in relation to these matters, including the following: (i) a claim against Watson for $141 million (£101 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 (£101 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.
This 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 liable to pay, and has no defence against paying, $135 million (£92 million) plus interest of $11 million (£8 million) to DHN, and (ii) CASL is liable, as co-surety, to pay, and has no defence against paying, 50% of any such amount unpaid by Watson, i.e. up to $67.5 million (£49 million) plus interest of $5.5 million (£4 million) to DHN. Watson and CASL 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.
On 15 October 2020, as a result of applications made by DHN to recover certain outstanding costs owed by Watson and CASL (being approximately £260,000 plus interest, which remained unpaid), Dr Mallya and Sidhartha Mallya were ordered to pay those amounts by 27 November 2020. As Dr Mallya and Sidhartha Mallya, in default of the Court order, failed to make the required payments to DHN: (i) Watson and CASL’s defence to DHN’s remaining claim for payment of approximately $6 million (£4 million) (plus interest) has been struck out, with further judgment in DHN’s favour being entered which will be pursued along with the original judgment as set out above, and (ii) DHN is pursuing enforcement against Dr Mallya and Sidhartha Mallya for the judgment debt of approximately £260,000 plus interest.
(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).
Financial statements (continued)
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 therefore believes thethat SEBI's decision in the SEBI notice to be misconceivedwas not consistent with applicable law, and wrong in law andDiageo 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. As with the previous SEBI notice, Diageo believes that SEBI's latest order to be misconceived and wrong inis not consistent with applicable law and has filed ananother appeal before the SAT against the order. ThisDiageo's appeal is currently pending. Diageo is unable to assess if the notices or enquiries referred to above will result in enforcement action or, if this were to transpire, to quantify meaningfully the possible range of loss, if any, to which any such action might give rise to if determined against Diageo or USL.
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.
(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 (£6166 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 (£4 million) (£5 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 (£45 million) remains recoverable from IDBI.
(g)(f) 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 (CFC) 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 could have been affected by the ultimate outcome of this investigation. The UK government and other UK-based international companies, including
Financial statements (continued)
Diageo which calculated its maximum potential liability to be approximately £277 million, appealed to the General Court of the European Union against the decision. In February 2021, HMRC completed its review of the specific facts relating to Diageo and confirmed that Diageo was not a beneficiary of state aid and that no assessment would be issued.
The group operates in a large number of markets with complex tax and legislative regimes that are open to subjective interpretation. AsIn 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. Diageo has reviewed its disclosures in relation to Brazil and India, where Diageo has a large number of ongoing tax cases. While not all of these cases are individually significant, the current aggregate known possible exposure from tax assessment of the aggregate possible exposuresvalues is up to approximately £449£545 million for Brazil and up to approximately £140£131 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 20212022 is £106£120 million (corporate tax payments of £96£108 million and indirect tax payments of £10£12 million).
In the United States, a lawsuit was filed on 15 April 2019 by the National Association of Manufacturers (NAM) against the United States Department of the Treasury (US 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 USC § 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 drawback in respect of certain eligible product categories. Despite this change in the law, the US Treasury and CBP issued final regulations in 2019 declaring that substitution drawback is not available for imports when substituted with an export on which no tax was paid. The Court of International Trade issued a judgementjudgment in favour of NAM on 18 February 2020, denying the request by the US Treasury and CBP for a stay of payment on 15 May 2020, and on 26 May 2020, ordered the immediate processing of claims. Total payments of $129 million (£94 million) had been received as of 30 June 2021 in respect of this matter, with approximately $33 million (£26 million) of this amount received during the year ended 30 June 2020 and another $96 million (£68 million) received during the year ended 30 June 2021. Remaining eligible outstanding claims of Diageo Americas Supply, Inc. are estimated at $12 million (£8 million). However, theThe US Treasury and CBP has filed an appeal with the US Federal Court of Appeals which is now fully briefed. Although Diageo believes thatfor the NAM is more likely than notFederal Circuit in 2021. During the year ended 30 June 2022, the US Court of Appeals dismissed the appeal, confirming the decision of the Court of International Trade. The deadline for the US Treasury and CBP to ultimately prevail, if they were to fail,seek a review at the CBP could be permitted to recover these payments.US Supreme Court level has passed and, as a result, this matter has been resolved.
(h)(g) Information request
Diageo has received an inquiry from the US Securities and Exchange Commission requesting information relating to Diageo’s business operations in certain markets and to its policies, procedures and compliance environment. Diageo is responding to this information request but is currently unable to assess whether the inquiry will evolve into any enforcement action or, if this were to transpire, to quantify meaningfully the possible loss or range of loss, if any, to which any such action might give rise.
(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) 19.20. 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 £399 million (2021 – £263 million (2020million; 2020 – £312 million; 2019 – £255 million).
(b) Other commitments The minimum lease rentals payable in the year ended 30 June 20212022 for short-term leases and leases of low-value assets are estimated at £13 million (2021 – £11 million (2020 –million; 2020 - £19 million). The total future cash outflows for leases that had not yet commenced, and not recognised as lease liabilities at 30 June 2021,2022, are estimated at £11 million (2021 – £132 million (2020 –million; 2020 - £133 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: | | | 2021 £ million | 2020 £ million | 2019 £ million | | 2022 £ million | 2021 £ million | 2020 £ million | Income statement items | Income statement items | | Income statement items | | Sales | Sales | 8 | | 9 | | 9 | | Sales | 11 | | 8 | | 9 | | Purchases | Purchases | 23 | | 29 | | 28 | | Purchases | 31 | | 23 | | 29 | | Balance sheet items | Balance sheet items | | Balance sheet items | | Group payables | Group payables | 5 | | 2 | | 12 | | Group payables | 2 | | 5 | | 2 | | Group receivables | Group receivables | 1 | | 1 | | 2 | | Group receivables | 2 | | 1 | | 1 | | Loans payable | Loans payable | 9 | | 6 | | 6 | | Loans payable | — | | 9 | | 6 | | Loans receivable | Loans receivable | 108 | | 82 | | 55 | | Loans receivable | 175 | | 108 | | 82 | | Cash flow items | Cash flow items | | Cash flow items | | Loans and equity contributions, net | Loans and equity contributions, net | 38 | | 47 | | 32 | | Loans and equity contributions, net | 66 | | 38 | | 47 | |
Other disclosures in respect of associates and joint ventures are included in note 6.
(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’. | | | 2021 £ million | 2020 £ million | 2019 £ million | | 2022 £ million | 2021 £ million | 2020 £ million | Salaries and short-term employee benefits | Salaries and short-term employee benefits | 9 | | 10 | | 10 | | Salaries and short-term employee benefits | 10 | | 9 | | 10 | | Annual incentive plan | Annual incentive plan | 13 | | 0 | | 10 | | Annual incentive plan | 13 | | 13 | | — | | Non-Executive Directors’ fees | Non-Executive Directors’ fees | 1 | | 1 | | 1 | | Non-Executive Directors’ fees | 1 | | 1 | | 1 | | Share-based payments(i)(1) | Share-based payments(i)(1) | 12 | | (11) | | 20 | | Share-based payments(i)(1) | 19 | | 12 | | (11) | | Post employment benefits | Post employment benefits | 1 | | 2 | | 3 | | Post employment benefits | 2 | | 1 | | 2 | | Termination benefits(ii) | 2 | | 2 | | 0 | | | Termination benefits | | Termination benefits | — | | 2 | | 2 | | | | 38 | | 4 | | 44 | | | 45 | | 38 | | 4 | |
(i)(1) Time-apportioned fair value of unvested options and share awards.
(ii) £1 million of the termination benefits disclosed for 2021 have been paid in the year ended 30 June 2021; a further £1 million will be paid in the year ending 30 June 2022.
Non-Executive Directors do not receive share-based payments or post employment benefits.
Financial statements (continued) In April 2020, the Directors became aware that certain purchases by Diageo of its own shares and certain transactions related to Diageo’s employee share schemes between 10 May 2019 and 9 August 2019, amounting to approximately £320 million (‘the affected transactions’),There were undertaken contrary to the applicable provisions of the Companies Act 2006 as they were undertaken following utilisation in full of Diageo plc's distributable reserves as set out in its balance sheet as at 30 June 2018. At the Annual General Meeting on 28 September 2020, a resolution was passed to appropriate an equivalent amount of distributable profits of the company to the payments made in respect of the affected transactions and 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 has implemented constituted a related party transaction under IAS 24 and under the Listing Rules, as the Directors benefitted from the waiver of any claims that the company had or may have had against them as a result of the affected transactions.
There have been no other transactions with these related parties during the year ended 30 June 20212022 on terms other than those that prevail in arm’s length transactions.
(d) Pension plans 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 £NaN (2020£0.1 million (2021 – £NaN£0.1 million; 20192020 – £3£0.1 million).
(e) Directors’ remuneration | | | 2021 £ million | 2020 £ million | 2019 £ million | | 2022 £ million | 2021 £ million | 2020 £ million | Salaries and short-term employee benefits | Salaries and short-term employee benefits | 2 | | 2 | | 2 | | Salaries and short-term employee benefits | 3 | | 2 | | 2 | | Annual incentive plan | Annual incentive plan | 4 | | 0 | | 2 | | Annual incentive plan | 4 | | 4 | | — | | Non-Executive Directors' fees | Non-Executive Directors' fees | 1 | | 1 | | 1 | | Non-Executive Directors' fees | 1 | | 1 | | 1 | | Share option exercises(i)(1) | Share option exercises(i)(1) | 0 | | 0 | | 2 | | Share option exercises(i)(1) | 4 | | — | | — | | Shares vesting(i)(1) | Shares vesting(i)(1) | 1 | | 11 | | 13 | | Shares vesting(i)(1) | 3 | | 1 | | 11 | | Post employment benefits | Post employment benefits | 0 | | 1 | | 1 | | Post employment benefits | — | | — | | 1 | | | | 8 | | 15 | | 21 | | | 15 | | 8 | | 15 | |
(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.
Financial statements (continued)
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 | 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 | %55.94% | 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 | 100 | %100% | Financing company for the US group | Mey İçki Sanayi ve Ticaret A.Ş. | 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 |
(i)(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.
(ii)(2) Percentage ownership excludes 2.38% owned by the USL Benefit Trust.
(iii)(3) Directly owned by Diageo plc.
(iv)(4) French limited liability company.
Financial statements (continued) 23. Post balance sheet events On 14 July 2022, Diageo announced that it had agreed to sell Guinness Cameroun S.A., its brewery in Cameroon, to Castel Group for £389 million. The transaction is expected to be completed in the first half of the year ending 30 June 2023, subject to regulatory clearances. As per management’s judgement, the criteria to classify the business of Guinness Cameroun S.A. as held for sale are not met, hence such classification was not applied on 30 June 2022 in respect of this business.
Unaudited financial information
1. Five years financial information The following tables present selected consolidated financial data for Diageo for the five years ended 30 June 2022 and as at the respective year ends. The data presented below for the five years ended 30 June 2022 and the respective year ends has been derived from Diageo’s consolidated financial statements.
| | | | | | | | | | | | | | | | | | | Year ended 30 June | | 2022 | 2021 | 2020 | 2019 | 2018 | Income statement data | £ million | £ million | £ million | £ million | £ million | Sales | 22,448 | | 19,153 | | 17,697 | | 19,294 | | 18,432 | | Excise duties | (6,996) | | (6,420) | | (5,945) | | (6,427) | | (6,269) | | Net sales | 15,452 | | 12,733 | | 11,752 | | 12,867 | | 12,163 | | Cost of sales | (5,973) | | (5,038) | | (4,654) | | (4,866) | | (4,634) | | Gross profit | 9,479 | | 7,695 | | 7,098 | | 8,001 | | 7,529 | | Marketing | (2,721) | | (2,163) | | (1,841) | | (2,042) | | (1,882) | | Other operating items | (2,349) | | (1,801) | | (3,120) | | (1,917) | | (1,956) | | Operating profit | 4,409 | | 3,731 | | 2,137 | | 4,042 | | 3,691 | | Non-operating items | (17) | | 14 | | (23) | | 144 | | — | | Net interest and other finance charges | (422) | | (373) | | (353) | | (263) | | (260) | | Share of after tax results of associates and joint ventures | 417 | | 334 | | 282 | | 312 | | 309 | | Profit before taxation | 4,387 | | 3,706 | | 2,043 | | 4,235 | | 3,740 | | Tax before exceptional items | (1,080) | | (823) | | (743) | | (859) | | (799) | | Exceptional taxation | 31 | | (84) | | 154 | | (39) | | 203 | | | | | | | | | | | | | | Profit for the year | 3,338 | | 2,799 | | 1,454 | | 3,337 | | 3,144 | | | | | | | | Weighted average number of shares | million | million | million | million | million | Shares in issue excluding own shares | 2,318 | | 2,337 | | 2,346 | | 2,418 | | 2,484 | | Dilutive potential ordinary shares | 7 | | 8 | | 8 | | 10 | | 11 | | | 2,325 | | 2,345 | | 2,354 | | 2,428 | | 2,495 | | | | | | | | Per share data | pence | pence | pence | pence | pence | Basic earnings per share | 140.2 | | 113.8 | | 60.1 | | 130.7 | | 121.7 | | Diluted earnings per share | 139.7 | | 113.4 | | 59.9 | | 130.1 | | 121.1 | | | | | | | | Dividend per share | 76.18 | | 72.55 | | 69.88 | | 68.57 | | 65.30 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unaudited financial information | | | | | | | | | | | | | | | | | | | As at 30 June | | 2022 | 2021 | 2020 | 2019 | 2018 | Balance sheet data | £ million | £ million | £ million | £ million | £ million | Non-current assets | 23,582 | | 20,508 | | 21,837 | | 21,923 | | 21,024 | | Current assets | 12,934 | | 11,445 | | 11,471 | | 9,373 | | 8,691 | | Total assets | 36,516 | | 31,953 | | 33,308 | | 31,296 | | 29,715 | | Current liabilities | (8,442) | | (7,142) | | (6,496) | | (7,003) | | (6,360) | | Non-current liabilities | (18,560) | | (16,380) | | (18,372) | | (14,137) | | (11,642) | | Total liabilities | (27,002) | | (23,522) | | (24,868) | | (21,140) | | (18,002) | | Net assets | 9,514 | | 8,431 | | 8,440 | | 10,156 | | 11,713 | | Share capital | 723 | | 741 | | 742 | | 753 | | 780 | | Share premium | 1,351 | | 1,351 | | 1,351 | | 1,350 | | 1,349 | | Other reserves | 2,174 | | 1,621 | | 2,272 | | 2,372 | | 2,133 | | Retained earnings | 3,550 | | 3,184 | | 2,407 | | 3,886 | | 5,686 | | Equity attributable to equity shareholders of the parent company | 7,798 | | 6,897 | | 6,772 | | 8,361 | | 9,948 | | Non-controlling interests | 1,716 | | 1,534 | | 1,668 | | 1,795 | | 1,765 | | Total equity | 9,514 | | 8,431 | | 8,440 | | 10,156 | | 11,713 | | Net borrowings | (14,137) | | (12,109) | | (13,246) | | (11,277) | | (9,091) | |
Additional information for shareholders
Production
The company owns manufacturing production facilities across the globe, including malting facilities, 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 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. Legal proceedingsThe major facilities with locations, principal activities, products represented in the below table:
| | | | | | | | | Location | Principal activities | Products | United Kingdom | distilling, bottling, warehousing, RTD canning, Filling/Disgorging, cooperage, visitor centre | beer, scotch whisky, gin, vodka, rum, RTD | Ireland | liquid production, blending, brewing, bottling, packaging, warehousing | beer and Baileys | Italy | distilling, bottling, warehousing | vodka, rum, RTD, non-alcoholic | Mexico | distilling, bottling, warehousing | tequila | India | distilling, bottling, warehousing, trading | rum, vodka, whisky, scotch, brandy, gin | United States, Canada, US Virgin Islands | distilling, bottling, warehousing, shipping, RTD canning, visitor centre | vodka, gin, tequila, rum, Canadian whisky, American whiskey, progressive adult beverages, RTD | East Africa (Uganda, Kenya, Tanzania) | distilling, brewing, bottling, packaging, warehousing | beer and spirits | Nigeria | distilling, brewing, bottling, packaging, warehousing | beer and spirits | South Africa | distilling, bottling, warehousing | spirits | Africa Regional Markets (Cameroon, Ghana, Seychelles) | distilling, brewing, bottling, warehousing | beer and spirits | Turkey | distilling, bottling, warehousing | raki, vodka, gin, liqueur, wine | Brazil | distilling, bottling, RTD canning, warehousing | cachaça, vodka, RTD | Australia | distilling, bottling, warehousing, RTD canning & bottling | rum, vodka, gin, RTD |
Information
Spirits and investments Spirits are produced in distilleries located worldwide. The group owns 30 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 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 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. We are currently investing £185 million in Scotch whisky and tourism in Scotland. This has included the creation of a major new Johnnie Walker global brand attraction in Edinburgh (Johnnie Walker Princes Street) which opened its doors to visitors in September 2021. The distillery visitor investment focuses on the legal proceedings‘Four Corners distilleries’, Glenkinchie, Caol Ila, Clynelish and Cardhu, celebrating the important role these single malts play in the flavors of Johnnie Walker. The new visitor experiences at Glenkinchie, Clynelish and Cardhu are already operational and Caol Ila is set outexpected to open in note 18summer 2022. The iconic lost distillery of Port Ellen is expected to be back in production in the summer of 2023. Following a $130 million investment, the Lebanon Distillery in Kentucky opened and is Diageo’s first carbon neutral whiskey distillery. One of the largest of its kind in North America, the new distillery operates using 100% renewable electricity, zero fossil fuels for production and virtual metering technology.
Additional information for shareholders (continued) In China, we broke ground with a $75 million investment to the consolidated financial statements.Eryuan Malt Whisky Distillery. It will produce our first China-origin, single malt whisky and be carbon-neutral on opening. Further capacity expansion projects are now underway to support future growth. C$245 million, in the construction of a carbon neutral Crown Royal Distillery in Canada to supplement existing manufacturing operations in Canada; $75 million to build a distillery to produce our first China-origin, single malt whisky in Yunnan Province. Diageo’s end-to-end Tequila production is in Mexico and more than $500 million dollars to expand our manufacturing footprint in Mexico through an investment of in new facilities in the State of Jalisco to support the growth of Tequila. 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 $80 million equivalent cases in fiscal 22 of Indian Made Foreign Liquor (IMFL) and Imported Liquors. USL has a significant market presence across India and operates 15 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 and investments 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, Cameroon, Tanzania, Uganda, and the Seychelles. Meta Abo Brewery in Ethiopia was sold during the year ended 30 June 2022.
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 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. Furthermore a £41 million investment at the Belfast and Runcorn beer packaging facilities to expand capacity to support growth, with additional capacity expected to be available during 2023; and a £73 million investment in ‘Guinness at Old Brewer’s Yard’, a new microbrewery and culture hub in Covent Garden, London, set to open in autumn 2023. The Diageo Global Technical Third-Party Partnerships Team are the technical brewers supporting the delivery of over two million hectolitres of beer through partner breweries. The team's focus is upon sustaining consistent quality of our brands through 48 partners globally while enhancing Diageo value through new partnerships and innovation projects. In addition to supporting Guinness and beer, the team has an expanding role in the support of licensed manufacturing of third-party ready to drink and mainstream spirits in Asia-Pacific and Africa.
The companyFlavoured Malt Beverages (FMB) are made from original base containing malt, but then stripped of malt character and flavoured. This product segment is incorporated underimplemented mainly in the name Diageo plc,US, Canada 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 4 August 2021. 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.Caribbean.
DirectorsReady to drink (RTD)
Diageo’s articlesDiageo produces a range of association provideready to drink products mainly in the United Kingdom, Italy, across Africa, Australia, the United States and Canada. Demand for a Board of Directors, consisting (unless otherwise determined by an ordinary resolution of shareholders) of not fewer than three directorsthese products has increased significantly particularly in United States and not more than 25 directors,Canada with volumes increased 15%. We are supporting this increase in which all powers to manage the businessdemand through third-party production and affairs of Diageo are vested. Directors may be elected by the membersalso investing 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 requirementnew production facility in respect of directors. Directors may also be removed before the expiration of their term of officePlainfield, which opened 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 company in which Diageo is interested.
Under Diageo’s articles of association, compensation awarded to directors may be decided by the Board or any authorised committee of the Board. The Remuneration Committee 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, subject to the limitation that the aggregate amount of all net external borrowings of the group outstanding at any time shall not exceed an amount equal to twice the aggregate 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.
Directors are not required to hold any shares of Diageo as a qualification to act as a director.March 2022.
Dividend rightsRaw materials and supply agreements
HoldersThe group has several long-term contracts in place for the purchase of Diageo’s ordinary shares may, by ordinary resolution, declare dividendsraw 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. The global ocean freight crisis coupled with volatile but may not declare dividendsstrong consumer demand, change in excessconsumer habits (for example, the increase in e-commerce) continued impact of Covid-19 and emerging impact of the amount recommended byconflict in Ukraine are the directors. The directors may also pay interim dividends or fixed rate dividends. No dividend may be paidkey drivers of constraints that we are managing through.
Like other than outconsumer 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 profits available for distribution. Alluncertainty and constraints in our supply chain through expansion of Diageo’s ordinary shares rank equally for dividends, butour supplier base and agility in our logistics networks. Cream is the Board may withhold paymentprincipal raw material used in the production of all or any partIrish cream liqueur and is sourced from Ireland. Grapes and aniseed are used in the production of any dividends or other monies payableraki and are sourced from suppliers in respectTurkey. Agave is a key raw material used in the production of Diageo’s sharesour tequila brands and is sourced from Mexico. Other raw materials purchased in significant quantities to produce spirits and beer are molasses, cereals, 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 is purchased from a person with a 0.25% interest (as definedvariety of multinational and local suppliers. The largest suppliers are Ardagh Packaging in Diageo’s articles of association) if such a person has been served with a restriction notice (as definedthe United Kingdom and Owens-Illinois 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.United States.
Additional information for shareholders (continued) Competition Diageo’s articlesbrands compete primarily on the basis of association permit payment or satisfactionquality 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 dividend wholly or partly by distribution of specific assets,regional and local basis (with the profile varying between regions) with several competitors, including fully paid shares or debentures of any other company. Such action must be directed by the general meeting which declared the dividendAB InBev, Molson Coors, Heineken, Constellation Brands and upon the recommendation of the directors.Carlsberg.
Voting rightsResearch and development
VotingInnovation forms an important part of Diageo’s growth strategy, playing a key role in positioning its brands for continued growth in both developed and emerging markets. The strength and depth of Diageo’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 any resolution at any general meetingits 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 the innovation and research and development function.
Trademarks and other intellectual property 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 protected by trademarks. The Diageo group also holds trade secrets, as well 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 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 company is by a showUS Treasury Department oversees the US beverage alcohol industry, including through regulating and collecting taxes on the production of hands unless a poll is duly demanded. On a showalcohol within the United States and regulating trade practices. In addition, individual US states, as well as some local authorities in US jurisdictions in which Diageo sells or produces its products, administers and enforces industry-specific regulations and may apply additional excise taxes and, in many states, sales taxes. Federal, state and local regulations cover virtually every aspect of hands, (a) every shareholder who is present in person at a general meeting,Diageo's US operations, including production, importation, distribution, marketing, promotion, sales, pricing, labelling, packaging and every proxy appointed by any one shareholderadvertising. Spirits and present at a general meeting, has/have one vote regardless of the number of shares held by the shareholder (or,beer are subject to (b), represented bynational import and excise duties in many markets around 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 inworld. Most countries impose excise duties on beverage alcohol products, although the form of proxy). A poll may be demandedsuch taxation varies significantly from a simple application to units of alcohol by anyvolume, to advanced systems based on the imported or wholesale value of the following:product. 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 no longer subject to the European Union’s rules on excise duties and has undertaken a review of its alcohol duty system. Any changes in the UK’s alcohol duty system could have an impact on Diageo’s business activities.
•Import and excise duties can have a significant impact on the chairmanfinal 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 beverage 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 general meeting; •at least three shareholders entitledimport into a certain jurisdiction of spirits and beer, and to voterestrictions on the relevant resolutionadvertising style, media 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-tenthcontent. In a number 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 conferringcountries, television is 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 resolutionsprohibited medium for the election, re-electionmarketing 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 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 ofsocial media in connection with alcohol sales. Any further prohibitions imposed on advertising or marketing, particularly within 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.
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 upmost significant markets, could have an adverse impact 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.
beverage alcohol sales.
Additional information for shareholders (continued) DisclosureLabelling of interestsbeverage alcohol products is also regulated in Diageo’s shares
There are no provisions in Diageo’s articlesmany markets, varying from the required inclusion of association whereby persons acquiring, holdinghealth warning labels to manufacturer or disposingimporter identification, alcohol strength and other consumer information. As well as producer, importer or bottler identification, specific warning statements related to the risks of a certain percentage of Diageo’s sharesdrinking beverage alcohol products are required to make disclosurebe included on all beverage alcohol products sold in the US, in certain countries within the EU, and in a number of their ownership percentage, although thereother jurisdictions in which Diageo operates.
Spirits and beer are such requirements underalso 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 the Companies Acts. The basic disclosure requirement under Part 6off-trade channel in Norway, certain Canadian provinces, and certain US states) to the system of licensed on-trade outlets (for example, licensed bars and restaurants) which prevails in much of the Financial ServicesWestern world, including in the majority of US states, in the UK and Markets Act 2000 and Rule 5in much of the Disclosure GuidanceEU. In a number of states 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 response to public health concerns, some governments have imposed or are considering imposing minimum pricing on beverage alcohol products and Transparency Rules made bymay consider raising the Financial Conduct Authority (successorlegal drinking age, further limiting the number, type or opening hours of retail outlets and/or expanding retail licensing requirements. In response to the UK Financial Services Authority) imposes a statutory obligationCovid-19 pandemic, many governments across the world implemented restrictions on a personwhere and how people could gather, in an effort to notify Diageo and the Financial Conduct Authoritycurb transmission of the percentagevirus. The extent of these restrictions has varied from country to country (and, in the US, from state to state) and throughout the duration of the voting rightspandemic but, in many of the markets in which Diageo he directlyoperates, they have resulted in, amongst other things, the temporary closure of 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:restricted opening hours for on-trade outlets. •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 changeRegulatory decisions and changes in the breakdown legal and regulatory environment could also increase Diageo’s costs and liabilities and/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 incorporated into UK domestic law by the European Union (Withdrawal) Act 2018, further requires persons discharging managerial responsibilities within Diageo (and their persons closely associated) to notify Diageo of transactions conductedimpact 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.
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 232,820,888 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.
Additional information for shareholders (continued)
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.activities.
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 Her Majesty’s Revenue and Customs, 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
Additional information for shareholders (continued) 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 of taxable dividend income received by an individual shareholder in a 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 2020/20212022/2023 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')(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
Additional information for shareholders (continued) 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 anticipated that HMRC will now seek to apply the 1.5% charge to issues of shares following Brexit. Based on HM Revenue & Custom’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.
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, 6 October 2022.
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.
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.
Additional information for shareholders (continued) 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 238 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, 10th Floor, 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, Monday to Friday, excluding public holidays in England and Wales.
ADR administration Citibank 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
Additional information for shareholders (continued) Exhibits | | | | | | | | 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 | | | 4.2 | | | 4.3 | | | 4.4 | | | 4.54.4 | | | 4.64.5 | | | 4.74.6 | | | 4.84.7 | | | 4.94.8 | | | 4.104.9 | | | 4.114.10 | | | 4.124.11 | | | 4.134.12 | | | 4.144.13 | | | 4.154.14 | | |
Additional information for shareholders (continued)
Additional information for shareholders (continued)
| | | | | | 4.174.16 | |
| 4.184.17 | | | 4.194.18 | | | 4.204.19 | | | 4.214.20 | | | 4.224.21 | | | 4.234.22 | | | 4.244.23 | | | 4.254.24 | | | 4.264.25 | | | 4.274.26 | | | 6.1 | | | 8.1 | | | 12.1 | | | 12.2 | | | 13.1 | | | 13.2 | | | 15.1 | | | 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) 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 | (REGISTRANT) | | /s/ Lavanya Chandrashekar | Name: Lavanya Chandrashekar | | Title: Chief Financial Officer | | 54 August 20212022 |
Glossary of terms and US equivalents 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) | | | | | | | | 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 |
000 | Face value (% of salary) |
Ivan Menezes | Ivan Menezes | 03/09/2020 | DLTIP - share options | ADR | 43,377 | $133.88 | $6,230 | 375 | % | Ivan Menezes | 03/09/2021 | DLTIP - share options | ADR | 36,675 | $194.75 | $6,417 | 375 | % |
Ivan Menezes | Ivan Menezes | 03/09/2020 | DLTIP - performance shares | ADR | 43,377 | — | $6,230 | 375 | % | Ivan Menezes | 03/09/2021 | DLTIP - performance shares | ADR | 36,675 | — | $6,417 | 375 | % |
Kathryn Mikells | 03/09/2020 | DLTIP - share options | ADR | 27,396 | $133.88 | $3,935 | 360 | % | |
Kathryn Mikells | 03/09/2020 | DLTIP - performance shares | ADR | 27,396 | — | $3,935 | 360 | % | |
Lavanya Chandrashekar | | Lavanya Chandrashekar | 03/09/2021 | DLTIP - share options | ADR | 20,060 | $194.75 | $3,510 | 360 | % |
Lavanya Chandrashekar | | Lavanya Chandrashekar | 03/09/2021 | DLTIP - performance shares | ADR | 20,060 | — | $3,510 | 360 | % |
The proportion of the awards outlined above that will vest is dependent uponon the achievement of performance conditions and continued employment, and the actual value may be nil. The vesting outcomes will be disclosed in the 20232024 Annual Report.
The face value of each award has been calculated using the award price.
In accordance with the Plan Rules,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 ($143.63)174.97). 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 ($133.88)194.75).
The ADR price on the date of grant was $133.70.$195.97.
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 2020 1 | Granted | Vested/exercised | Dividends awarded and released | Lapsed | Number of shares/options at 30 June 2021 |
Ivan Menezes | | | | | | | | | | | | |
DLTIP – share options3 | Sep 2015 | 2015-2018 | 2018 | ADR |
| $104.93 | 29,895 |
| |
|
| 29,895 |
DLTIP – share options3 | Sep 2016 | 2016-2019 | 2019 | ADR |
| $113.66 | 39,734 |
|
|
| | 39,734 |
DLTIP – share options3 | Sep 2017 | 2017-2020 | 2020 | ADR | | $134.06 | | 51,268 | | | | 37,170 | | 14,098 |
Total vested but unexercised share options in Ords2 | | | | 334,908 |
| | | | | | | | | | | | |
DLTIP - share options4 | Sep 2018 | 2018-2021 | 2021 | ADR | | $140.89 | 42,848 | |
|
|
| 42,848 |
DLTIP - share options5 | Sep 2019 | 2019-2022 | 2022 | ADR | | $170.28 | 38,827 | |
|
|
| 38,827 |
DLTIP - share options | Sep 2020 | 2020-2023 | 2023 | ADR | | $133.88 | 0 | 43,377 |
|
|
| 43,377 |
Total unvested share options subject to performance in Ords2 | | | | 500,208 |
DLTIP - performance shares7 | Sep 2017 | 2017-2020 | 2020 | ADR | $134.83 | | 51,268 | | 5,126 | | 400 | | 46,142 | | 0 |
DLTIP - performance shares4 | Sep 2018 | 2018-2021 | 2021 | ADR | $139.41 | | 42,848 | |
|
|
| 42,848 |
DLTIP - performance shares5 | Sep 2019 | 2019-2022 | 2022 | ADR | $174.72 | | 38,827 | |
|
|
| 38,827 |
DLTIP - performance shares11 | Sep 2020 | 2020-2023 | 2023 | ADR | $133.70 | | 0 | 43,377 |
|
|
| 43,377 |
Total unvested shares subject to performance in Ords2 | | | | 500,208 |
Kathryn Mikells9 | | | | | | | | | | | | |
DLTIP – share options3,6,10 | Sep 2016 | 2016-2019 | 2019 | Ord | | 2113p | 93,752 | | 1,037 | |
|
| 92,715 |
DLTIP – share options3 | Sep 2017 | 2017-2020 | 2020 | ADR | | $134.06 | 32,380 | | | | 23,476 | 8,904 |
Total vested but unexercised share options in Ords2 | | | | 128,331 |
| | | | | | | | | | | | |
DLTIP – share options4,11 | Sep 2018 | 2018-2021 | 2021 | ADR | | $140.89 | 27,062 | |
|
|
| 27,062 |
DLTIP – share options5,11 | Sep 2019 | 2019-2022 | 2022 | ADR | | $170.28 | 24,522 | |
|
| 8,167 | | 16,355 |
DLTIP – share options11 | Sep 2020 | 2020-2023 | 2023 | ADR | | $133.88 | 0 | 27,396 | | | 18,264 | | 9,132 |
Total unvested share options subject to performance in Ords2 | | | | 210,196 |
DLTIP – performance shares8 | Sep 2017 | 2017-2020 | 2020 | ADR | $134.83 | | 32,380 | | 3,237 | | 252 | | 29,143 | | 0 |
DLTIP – performance shares4,11 | Sep 2018 | 2018-2021 | 2021 | ADR | $139.41 | | 27,062 | |
|
|
| 27,062 |
DLTIP – performance shares5,11 | Sep 2019 | 2019-2022 | 2022 | ADR | $174.72 | | 24,522 | |
|
| 8,167 | | 16,355 |
DLTIP – performance shares11 | Sep 2020 | 2020-2023 | 2023 | ADR | $133.70 | | 0 | 27,396 |
|
| 18,264 | | 9,132 |
Total unvested shares subject to performance in Ords2 | | | | 210,196 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 2021 1 | Granted | Vested/exercised | Dividend Equivalent Shares released | Lapsed | Number of shares/options at 30 June 2022 |
Ivan Menezes | | | | | | | | | | | | |
DLTIP – share options10 | Sep 2015 | 2015-2018 | 2018 | ADR |
| $104.93 | 29,895 |
| 29,895 | |
| | 0 |
DLTIP – share options10 | Sep 2016 | 2016-2019 | 2019 | ADR |
| $113.66 | 39,734 |
| 39,734 | |
| | — |
DLTIP – share options3 | Sep 2017 | 2017-2020 | 2020 | ADR | | $134.06 | | 14,098 | | | | | 14,098 |
DLTIP – share options3 | Sep 2018 | 2018-2021 | 2021 | ADR | | $140.89 | | 42,848 | | | | 38,564 | | 4,284 |
Total vested but unexercised share options in Ords2 | | | | 73,528 |
| | | | | | | | | | | | |
DLTIP - share options4,5 | Sep 2019 | 2019-2022 | 2022 | ADR | | $170.28 | 38,827 | |
|
| | 38,827 |
DLTIP - share options6 | Sep 2020 | 2020-2023 | 2023 | ADR | | $133.88 | 43,377 | |
|
| | 43,377 |
DLTIP - share options7 | Sep 2021 | 2021-2024 | 2024 | ADR | | $194.75 | 0 | 36,675 |
|
| | 36,675 |
Total unvested share options subject to performance in Ords2 | | | | 475,516 |
DLTIP - performance shares8 | Sep 2018 | 2018-2021 | 2021 | ADR | $139.41 | | 42,848 | | 12,554 | | 701 | | 30,294 | | 0 |
DLTIP - performance shares4,5 | Sep 2019 | 2019-2022 | 2022 | ADR | $174.72 | | 38,827 | |
|
| | 38,827 |
DLTIP - performance shares6 | Sep 2020 | 2020-2023 | 2023 | ADR | $133.70 | | 43,377 | |
|
| | 43,377 |
DLTIP - performance shares7 | Sep 2021 | 2021-2024 | 2024 | ADR | $195.97 | | 0 | 36,675 |
|
| | 36,675 |
Total unvested shares subject to performance in Ords2 | | | | 475,516 |
Lavanya Chandrashekar | | | | | | | | | | | | |
DLTIP – share options3 | Sep 2018 | 2018-2021 | 2021 | ADR | | $140.89 | 3,832 | | |
| | 3,832 |
DLTIP – share options3 | Sep 2018 | 2018-2021 | 2021 | ADR | | $140.89 | 1,064 | | | | | 1,064 |
Total vested but unexercised share options in Ords2 | | | | 19,584 |
| | | | | | | | | | | | |
DLTIP – share options7 | Sep 2021 | 2021-2024 | 2024 | ADR | | $194.75 | | 20,060 |
|
| | 20,060 |
Total unvested share options subject to performance in Ords2 | | | | 80,240 |
DLTIP – performance shares | Sep 2018 | 2018-2021 | 2021 | ADR | $139.41 | | 1,593 | | 503 | | 28 | | 1,090 | | 0 |
DLTIP – performance shares4,5 | Sep 2019 | 2019-2022 | 2022 | ADR | $174.72 | | 1,444 | |
|
| | 1,444 |
DLTIP – performance shares6 | Sep 2020 | 2020-2023 | 2023 | ADR | $133.70 | | 1,827 | |
|
| | 1,827 |
DLTIP – performance shares7 | Sep 2021 | 2021-2024 | 2024 | ADR | $195.97 | | | 20,060 |
|
| | 20,060 |
Total unvested shares subject to performance in Ords2 | | | | 93,324 |
DLTIP – restricted stock units | Sep 2018 | 2018-2021 | 2021 | ADR | $139.41 | | 766 | | 766 | | | | 0 |
DLTIP – restricted stock units | Sep 2018 | 2018-2021 | 2021 | ADR | $139.41 | | 1774 | | 1,774 | | | | 0 |
DLTIP – restricted stock units | Sep 2019 | 2019-2022 | 2022 | ADR | $174.72 | | 1567 | | | | | 1,567 |
DLTIP – restricted stock units | Sep 2020 | 2020-2023 | 2023 | ADR | $133.70 | | 2,635 | | | | | 2,635 |
Total unvested shares not subject to performance in Ords2,9 | 16,808 |
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 optionsoptions.
3. The total number of share options granted under the DLTIP in September 2015, 20162017 and 2017 and2018 showing as outstanding as at 30 June 20212022 are vested but unexercised share optionsoptions.
4. Performance shares and share options granted under the DLTIP in September 20182019 and due to vest in September 20212022 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 page199, 193, since the performance period ended during the year ended 30 June 20212022.
5. Details of the performance conditions attached to DLTIP awards of performance shares and share options granted in 2019 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 (£8,600m-£9,600m) and relative total shareholder return (median-upper quintile). Full details
6. Details of the performance conditions were disclosedattached to DLTIP awards of performance shares and share options granted in Diageo’s 2019 annual report2020 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 remuneration.
6. 1,037 Ordsdangers of this award were delivered as tax-qualifiedunderage drinking (0.75m-1.25m), % of female leader (41% - 43%), ethnically diverse leaders (38% - 40%), cumulative free cash flow (£6,200m-£8,200m) and relative total shareholder return (median-upper quintile).
7. Details of the performance conditions attached to DLTIP awards of performance shares and share options
7. 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 leader (44% - 46%), ethnically diverse leaders (39% - 41%), cumulative free cash flow (£7,450m-£9,250m) and relative total shareholder return (median-upper quintile).
8. Ivan Menezes must retain 2,880 ADRs of the 5,126 ADRsnet shares resulting from the award that vested (including dividend equivalent shares) on 43 September 20202021 until 43 September 20222023 under the post-vestingpost vesting retention period
8. Kathryn Mikells must retain 1,844 ADRsperiod.
9. Lavanya Chandrashekar was granted a number of restricted stock units prior to her appointment as CFO and joining the 3,237 ADRs that vested on 4Board.
10. On 14 September 2020 until 42021, Ivan Menezes exercised 23,229 share options under his 2015 award. The option price was $104.93 and the share price at exercise was $193.55. On 15 September 20222021, Ivan Menezes exercised the remaining 6,666 share options under his 2015 award. The option price was $104.93 and the post-vesting retention period
9. Kathryn Mikellsshare price at exercise was $192.04. Ivan Menezes also holds 1,031 outstandingexercised 39,734 share options over ordinary shares under an all-employee2016 award - the option price was $113.66 and the share plan, which are not subject to performance and not included in this table
10. Kathryn Mikells exercised 1,037 tax-approved options on 24 June 2021price at a market price of £34.87 and exercise price of £21.13
11. Kathryn Mikells’ retained unvested performance share and share option awards, pro-rated for employment over the performance period, when she left the company on 30 June 2021.
These awards will vest, subject to the achievement of the performance conditions, on the normal vesting date, together with any accrued dividend equivalents.was $192.04.
| | |
Directors’ shareholding requirements and share and other interests |
The beneficial interests of the Directors inwho held office atduring the year ended 30 June 20212022 (and their connected persons) in the ordinary shares (or ordinary share equivalents) of the company are shown in the table below.
| | | | | | | | | | | | | | | | | | | | |
| Ordinary shares or equivalent1,2 |
|
|
|
| 27 July 2021 | 30 June 2021(or date of departure, if earlier) | 30 June 2020 (or date of appointment if later) | Shareholding requirement (% salary)3 | Shareholding at 27 July 2021 (% salary)3 | Shareholding requirement met |
Chairman | | | | | | |
Javier Ferrán6 | 254,482 | 254,242 | 250,496 | — | — | — |
Executive Directors | | | | | | |
Ivan Menezes4,6 | 1,145,894 | 1,145,894 | 1,134,374 | 500 | % | 2,735 | % | Yes |
Kathryn Mikells5,6,12,13 | 239,347 | 239,732 | 233,964 | 400 | % | 868 | % | Yes |
Non-Executive Directors | | | | | | |
Susan Kilsby6 | 2,600 | 2,600 | 2,600 | | | |
Melissa Bethell7 | — | — | — | | | |
Valérie Chapoulaud-Floquet8 | 2,017 | 2,017 | — | — | — | — |
Sir John Manzoni9 | 2,816 | 2,816 | — | — | — | — |
Lady Mendelsohn | 5,000 | 5,000 | 5,000 | | | |
Alan Stewart | 7,069 | 7,069 | 6,905 | | | |
Ireena Vittal10 | — | — | — | | | |
Ho KwonPing11 | — | 4,649 | 4,649 | | | |
| | | | | | | | | | | | | | | | | | | | |
| Ordinary shares or equivalent1,2 |
|
|
|
| 26 July 2022 | 30 June 2022(or date of departure, if earlier) | 30 June 2021 (or date of appointment if later) | Shareholding requirement (% salary)3 | Shareholding at 26 July 2022 (% salary)3 | Shareholding requirement met |
Chairman | | | | | | |
Javier Ferrán7,9 | 307,522 | 307,288 | 254,242 | | | |
Executive Directors | | | | | | |
Ivan Menezes4,5,7 | 1,078,566 | 1,078,566 | 1,145,894 | 500 | % | 3,093 | % | Yes |
Lavanya Chandrashekar6,7 | 6,228 | 6,228 | | 400 | % | 31 | % | No - to be met by July 2026 |
Non-Executive Directors | | | | | | |
Susan Kilsby7 | 2,600 | 2,600 | 2,600 | | | |
Melissa Bethell | 2,668 | 2,668 | | | | |
Valérie Chapoulaud-Floquet | 2,055 | 2,055 | 2,017 | | | |
Sir John Manzoni | 2,870 | 2,870 | 2,816 | | | |
Lady Mendelsohn | 5,000 | 5,000 | 5,000 | | | |
Alan Stewart | 7,120 | 7,120 | 7,069 | | | |
Ireena Vittal | 0 | 0 | | | | |
Karen Blackett8 | 0 | 0 | | | | |
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 20212022 and the last practicable date before publication of this report, being 2726 July 2021,2022, is outlined in the table above.
The last practicable date is within one month of the AGM notice.
3. Both the shareholding requirement and shareholding at 2726 July 20212022 are expressed as a percentage of base salary on 30 June 20212022 and calculated using an average share price for the year ended 30 June 20212022 of 2938 pence£36.89.
4. In addition to the number of shares reported in the table above, Ivan Menezes holds 83,72773,528 vested but unexercised share options (over ADRs; equal to 334,908 ordinary shares)options.
5. Ivan Menezes 2021 Deferred Bonus Plan Shares (2,826 ADSs) is included in his total share interests shown above.
6. In addition to the number of shares reported in the table above, Kathryn MikellsLavanya Chandrashekar holds 92,71519,584 vested but unexercised share options (over ordinary shares) and 8,904 share options (over ADRs, equal to 128,331 ordinary shares)options.
6.7. Javier Ferrán, Ivan Menezes, Kathryn MikellsLavanya 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 equivalent
7. Melissa Bethell was appointed to the Board on 30 June 2020equivalents.
8. Valérie Chapoulaud-Floquet was appointed toKaren Blackett joined the Board on 1 January 2021June 2022.
9. Sir John Manzoni was appointedWith regard to Javier Ferrán, included in the Board on 1 October 2020
10. Ireena Vittal was appointednumber of shares reported in the table above are 180,000 ordinary shares which Javier Ferrán transferred to the Board on 2 October 2020
11. Ho Kwon Ping retired from the Board on 28 September 2020
12. Kathryn Mikells exercised 1,037 share optionshis daughters as a gift during the year ended 30 June 2020financial year. While his daughters are not his connected persons, he has a power of attorney to make investment decisions to buy and sell shares on behalf of his daughters.
13. Under the post-employment shareholding requirement policy, Kathryn Mikells is required to continue to hold Diageo shares equal in value to 400% of salary until 30 June 2022, reducing to 200% of salary until 30 June 2023. This requirement will be satisfied making use of a restricted nominee account, in which shares are already held in trust during the two-year post-vesting retention period.
Relative importance of spend on pay
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 20202021 to the year ended 30 June 2021 . The Committee considers that there2022. There are no other significant distributions or payments of profit or cash flow.flow
Dividends have increased by 4% on the year before and the reduction in distributions to shareholders is a result of the suspension of the share buyback programme.
Relative importance of spend on pay – percentage change
Distributions to shareholders
-39.6%127.3%
Staff pay
13.0%13.2%
Chief Executive total remuneration and TSR performance
The graph below shows the total shareholder return for Diageo and the FTSE 100 Index since 30 June 20112012 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 F13 | Ivan Menezes1 £'000 F14 | Ivan Menezes1 £'000 F15 | Ivan Menezes1 £'000 F16 | Ivan Menezes1 £'000 F17 | Ivan Menezes1 £'000 F18 | Ivan Menezes1 £'000 F19 | Ivan Menezes1 £'000 F20 | Ivan Menezes1 £'000 F21 | Ivan Menezes1 £'000 F22 |
Chief Executive total remuneration (includes legacy LTIP awards) | 15,557 | 7,312 | 3,888 | 4,156 | 3,399 | 8,995 | 11,776 | 2,273 | 6,019 | 7,881 |
Annual incentive2 | 51 | % | 9 | % | 44 | % | 65 | % | 68 | % | 70 | % | 61.0 | % | 0 | % | 93.75 | % | 93.75 | % |
Share options2 | 100 | % | 71 | % | 0 | % | 0 | % | 0 | % | 60 | % | 73.1 | % | 27.5 | % | 10.0 | % | 61.5 | % |
Performance shares2 | 95 | % | 55 | % | 33 | % | 31 | % | 0 | % | 70 | % | 89.3 | % | 10.0 | % | 29.3 | % | 59.3 | % |
1. 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.
2. % of maximum opportunity
| | |
Pay for Directors in the context of wider workforce remuneration |
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 salary 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 structure of the reward package for the wider employee population is based on the principle that it should enable Diageo to attract and retain the best talent within our broader industry. It is driven by local market practice, as well as 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 market practice and our diversity agenda.
CEO pay ratio
In accordance with The Companies (Miscellaneous Reporting) Regulations 2018, the table belowon the next page sets out Diageo’s CEO pay ratios for the year ended 30 June 2021.2022. These CEO pay ratios provide a comparison of the Chief Executive’s total remuneration – converted into Sterlingsterling – 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. A second table outlinesAlso shown are the salary and total remuneration for each quartile employee, and the salary component within this.employee.
| | | | | | | | | | | | | | |
Year | Method | 25th percentile pay ratio | Median pay ratio | 75th percentile pay ratio |
2019 | Option A2 | 265:1 | 208:1 | 166:1 |
2020 1 | Option A2 | 50:1 | 38:1 | 31:1 |
2021 | Option A2,32 | 125:127:1 | 98:100:1 | 77:79:1 |
20212022 | Option A2 | 157:1 | 122:1 | 96:1 |
2022 | Total pay and benefits | £47,24050,260 | | £60,09364,627 | | £76,32181,888 | |
20212022 | Salary | £32,14130,765 | | £42,57843,920 | | £48,55052,833 | |
1 20201. 2021 CEO pay ratios have been updated to reflect the value of the updated 20202021 single figure 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 2020 disclosure2021 disclosure.
22. 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.
3 The total remuneration for employees is based on actual earnings for the 11 months to 31 May 2021, and a projection for June 2021 which replicates the relevant items of the previous month’s earnings. This pragmatic approach allows us to calculate the ratios accurately, while mitigating the challenge of the limited timeframe between our year-end and the publishing of the Annual Report, and has been tested following our first disclosure of the CEO pay-ratios in 2019: analysis showed that the maximum resulting variance in the median pay ratio in any given year would be only 1 point, since pay changes from May to June would seldom be material.
Methodology
Consistent with the approach for Diageo’s disclosure in previous years, the methodology used to identify the employees at each quartile for 20212022 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 199193 of this report). The total remuneration calculations were based on data as at 30 June 2022. 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 publication of the Annual Report, the Diageo Group Business Multiple – 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 20212022
Strong business performance in the year ended 30 June 20212022 is reflected in the payout under the annual incentive plans both for Diageo’s Chief Executive and the wider UK workforce. The annual incentive plan outcome is directly linked to awards made under the freesharesFreeshares scheme – in which all UK employees participate – and this further contributes to the 10% increase in median employee pay versus last year. In addition, the Manufacturing Incentive Plan was introduced for 2021, giving 1,800 manufacturing workers in Scotland and Northern Ireland an opportunityare eligible to participate in a bonus scheme incentivising and rewarding team and site performance.
in. The median remuneration and resulting pay ratio for 20212022 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 his total remuneration linked to business performance than other employees in the UK workforce, the ratio has increased versus last year. However, vesting of long-termyear due to a higher performance outcome under the 2019 long term incentive which vested this year compared to the 2018 awards is limited – reflecting the impact of the pandemic – and as a result the ratios remain lower than when first disclosed in 2019.which vested last year.
Looking afterSupporting our people and investing in talent
Our focus remains firmly on the wellbeing of our employees and in the year ended 30 June 2021,2022, we continued to provide stability and support to our workforce by safeguarding jobs, payworkforce. Recently, we launched our Global Wellbeing Philosophy, outlining our commitment to creating an environment where people can thrive, along with practical frameworks and benefits.tools to support our people in managing their wellbeing. In lineaddition to local wellbeing initiatives, such as free Wellbeing Day and Mental Health capability programmes, we are designing our new office spaces with this focus, Diageo’s benefits offeringWellbeing at the heart. For example, our new Global Headquarters in the healthSoho, London is equipped with wellness and wellbeing space has been significantly upgraded in the past few years to include, for example, access to cancer-screening, health care cash plansfitness classes and health-assessment for the wider workforce. The unionised population in Scotland will get access to private medical insurance in 2022, as part of a newly negotiated agreement.quiet multi-faith room.
We remain committed to attracting and retaining the right talent. Although there was a needWe carefully monitor our total remuneration levels for all roles to exercise restraint inensure we are paying competitively and appropriately. Our incentive plans are designed to be easily understood and reward our people for supporting the year ended 30 June 2021, we continued to review our approach to remuneration and have made some bold changes to reward structures and principles that will enable us to invest in top talent in priority areas going forward.delivery of key strategic milestones. 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 remain key parts of our total reward offering. All UK employees can now also access their total reward statement through the new benefits portal launched at
Towards the end of 2020, which provides people withfiscal 22, the Diageo Executive Committee considered the impact that the volatile macro-economic environment was having on the cost of living around the world. In addition to continuing to put in place support and tools to help employees be at their best and promote positive mental, physical and financial wellbeing, it was decided to give all Diageo employees below Executive Committee level a better understandingone-time, special recognition payment of £1,000 gross (capped at 15% of local equivalent annual salary) as a thank you for their benefits packagecontribution and commitment through challenging times. The Executive Committee will continue to monitor the choices available to them.macro-economic environment and impact on employees.
Championing inclusion and diversity is one of Diageo’s strategic priorities and we want to leverage the broadest range of backgrounds and skills to create a fully inclusive, high-performing culture. Although we recognise that gender parity is just one measure of an inclusive workplace, we are proud that we have further reduced the gender pay gap across our UK businesses to +2.8%, among the lowest in the FTSE.
Change in pay for Directors compared to wider workforce
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 on the next pagebelow shows the percentage change in Directors’ remuneration and average remuneration of employees from the financial year 2020 to the financial year 2021, as well ason an update on last year’s disclosure.annual basis. Given the small size of Diageo plc’s workforce, data for all employees of the Groupgroup has also been included.
In the past year, limited salary increases have been implemented across the world, with changes implemented through a focussed approach in high-inflation markets or in other exceptional individual situations to support retention and business change. Although the table shows no change in the average global employee salary, this is in fact the result of the impact of currency conversion rates on calculations and, based on constant exchange rates, the year-on-year change in salary is +4.11%. The small number of people employed by the Diageo plc entity makes the reported year-on-year movement for this group more sensitive to individual anomalies and may be more volatile over time.
The year-on-year bonus increase for the average global employee is significant, as relatively few of our employees received a bonus for the year ended 30 June 2020 and many employees will be rewarded for their contributions to business performance through a strong bonus payout in the year ended 30 June 2021. We are focussed on making our benefit offering more inclusive and consistent globally and have reviewed our benefits landscape against newly established Standards of Care, to ensure we have best in class offerings supporting our diverse workforce. We continue to work with regional brokers to support us with driving improvements and efficiencies in our benefit offering. To support our employees during the pandemic we have focussed on employee assistance provision and consistent life insurance provision, as well as a more local focus on wellbeing. The year-on-year movement in salary for Executive Directors reflects the fact that for the first three months of the year ended 30 June 2020 they received a lower salary than in the year ended 30 June 2021, and the absence of a salary increase thereafter. Note that no year-on-year change in pay has been reported for Melissa Bethell, Valérie Chapoulaud-Floquet, Sir John Manzoni and Ireena Vittal as there is no comparable remuneration data for the year ended 30 June 2020. In previous years, benefits for Non-Executive Directors mostly related to travel expenses and the reported year-on-year decrease is therefore driven by the travel restrictions in place throughout 2020 and 2021.
| | | | | | | | | | | | | | | | | | | | |
Year-on-year change in pay for Directors compared to the global average employee |
| 2021 | 2020 |
| Salary | Bonus | Benefits | Salary | Bonus | Benefits |
Plc employee average1 | 5.1 | % | N/A6 | 38.8 | % | 7.5 | % | -100 | % | 9.0 | % |
Average global employee2 | 0.0 | % | 278.8 | % | 12.6 | % | 5.3 | % | -67.8 | % | 6.9 | % |
Calculated with constant FX rate | 4.11 | % | | | 5.1 | % | | |
Executive Directors3 | | | | | | |
Ivan Menezes | 0.7 | % | N/A6 | -10.7 | % | 2.7 | % | -100 | % | 0.8 | % |
Kathryn Mikells | 0.7 | % | N/A6 | 17.9 | % | 2.8 | % | -100 | % | 55.9 | % |
Non-Executive Directors4 | | | | | | |
Melissa Bethell | — | | — | | — | | — | | — | | — | |
Valérie Chapoulaud-Floquet | — | | — | | — | | — | | — | | — | |
Javier Ferrán (Chairman) | 0.0 | % | — | | 0.0 | % | 0.0 | % | — | | 0.0 | % |
Susan Kilsby | 9.6 | % | — | | -87.7 | % | 37.3 | % | — | | 68.9 | % |
Ho KwonPing5 | 3.2 | % | — | | -67.7 | % | 3.3 | % | — | | 93.3 | % |
Sir John Manzoni | — | | — | | — | | — | | — | | — | |
Lady Mendelsohn | 3.2 | % | — | | 0.0 | % | 3.3 | % | — | | 0.0 | % |
Alan Stewart | 2.4 | % | — | | 0.0 | % | 2.5 | % | — | | 0.0 | % |
Ireena Vittal | — | | — | | — | | — | | — | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year-on-year change in pay for Directors compared to the global average employee | |
| 2022 | 2021 | 2020 |
| Salary | Bonus | Benefits | Salary | Bonus | Benefits | Salary | Bonus | Benefits |
Plc employee average1 | 11.1 | % | 25.8 | % | 10.5 | % | 5.1 | % | N/A | 38.8 | % | 7.5 | % | (100) | % | 9.0 | % |
Average global employee2 | 6.4 | % | 38.4 | % | 11.7 | % | 0.0 | % | 278.8 | % | 12.6 | % | 5.3 | % | (68) | % | 6.9 | % |
Executive Directors3 | | | | | | | | | |
Ivan Menezes8 | 2.3 | % | 4.4 | | 59.5 | % | 0.7 | % | N/A5 | (10.7) | % | 2.7 | % | (100) | % | 0.8 | % |
Lavanya Chandrashekar | N/A5 | N/A5 | N/A5 | N/A5 | N/A5 | N/A | N/A | N/A | N/A |
Non-Executive Directors4 | | | | | | | | | |
Melissa Bethell | 2.3 | | — | | 16.0 | | N/A5 | — | | — | | — | | — | | — | |
Valérie Chapoulaud-Floquet6 | — | | — | | — | | N/A5 | — | | — | | — | | — | | — | |
Javier Ferrán (Chairman) | 8.3 | % | — | | 28.8 | % | 0.0 | % | — | | 0.0 | % | 0.0 | % | — | | 0.0 | % |
Susan Kilsby7 | 3.8 | % | — | | 300.0 | % | 9.6 | % | — | | (87.7) | % | 37.3 | % | — | | 68.9 | % |
Sir John Manzoni6 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Lady Mendelsohn | 2.3 | % | — | | 0.0 | % | 3.2 | % | — | | 0.0 | % | 3.3 | % | — | | 0.0 | % |
Alan Stewart | 4.7 | % | — | | 0.0 | % | 2.4 | % | — | | 0.0 | % | 2.5 | % | — | | 0.0 | % |
Ireena Vittal6 | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Karen Blackett | N/A5 | — | | N/A5 | — | | — | | — | | — | | — | | — | |
1. Around 50 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 statement under staff costs and average number of employees (note 3c) on page 235,233, 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 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 199)193) in US dollars, as both Ivan Menezes and Kathryn MikellsLavanya Chandrashekar are paid in this currency.
4. Calculated using the fees and taxable benefits disclosed under Non-Executive Directors’non-executive directors’ remuneration in the table below.on the next page. Taxable benefits for Non-Executive Directorsnon-executive directors comprise a product allowance as well as expense reimbursements relating to attendance at Board meetings, which may be variable year-on-year. In the year ended 30 June 2021, no travel expenses were incurred as travel was restricted as a result of the pandemic.
5. Ho KwonPing retired as Non-Executive Director on 28 September 2020. To provide a meaningful reflection of annual percentage increase for the year ended 30 June 2021, his 2021 fee was adjusted to reflect full-year appointment to the Board.
6. N/A refers to a nil value in the previous year, meaning that the year-on-year change cannot be calculated.
6. No year-on-year change in pay has been reported for Valérie Chapoulaud-Floquet, Sir John Manzoni and Ireena Vittal as there is no comparable remuneration data for the year ended 30 June 2021 as they joined the Board mid F21.
7. The percentage increase in benefits for Susan Kilsby reflects an increase travel expenses.
8. The percentage increase in benefits for Ivan Menezes reflects an increase in tax support services.
Payments to former Directors
A payment was made to Kathryn Mikells at the start of the year ended 30 June 2022 as described below. These details were previously disclosed in the 2021 Directors' remuneration report.
Payments for loss of office
As reported last year, Kathryn Mikells left the company on 30 June 2021. In accordance with the approved 2020 remuneration policy and her service contract which provided for a 12-month notice period, Kathryn Mikells received half of the payment in lieu of the remainder of her notice period (six months and twelve days) in July 2021 in respect of salary, benefits and pension ($362,174). No further payments were made as a result of Kathryn Mikells taking up alternative employment (announced on 19 July 2021). 201The Committee also exercised its discretion, in accordance with the plan rules and the remuneration policy, to prorate to the leaving date all unvested long-term incentive awards. In September 2022, Kathryn's 2019 performance shares and share options are due to vest at 59.3% and 61.5% respectively with a total estimated value of $2.16m. These awards remain subject to a subsequent two-year holding period. The post-employment shareholding requirement policy applies for a period of two years post-exit, requiring Kathryn to hold Diageo shares equal to 400% of salary until 30 June 2022 and 200% of salary until 30 June 2023.s 204-205In line with internal policies and the remuneration policy, the company supported Kathryn Mikells with the cost of her repatriation back to the United States. This support amounted to a grossed up value of £200,000. Further costs included shipping costs of £23,507, £7,640 in flights and £12,000 of legal support. Kathryn Mikells will also be provided with tax return preparation support for a period of up to three years following her departure (up to a maximum cost of £15,000 per annum).
Fee policy
Javier Ferrán’s fee as non-executive Chairman was increased from £600,000 per annum to £650,000 on 1 July 2021. This was a planned increase for 1 January 2020 that was deferred, at the Chairman’s request, due to the Covid-19 pandemic. There had been no prior increase since his appointment on 1 January 2017. The Chairman’s fee is appropriately positioned against our comparator group of FTSE 30 companies excluding financial services.
There was no change to Non-Executive Director fees The Executive Directors and the Chairman also approved an increase in the year ended 30 June 2021. The next review is scheduledbase fee for non-executive directors of 3% (from £98,000 to £101,000) and an increase in the Audit and Remuneration Committee Chair fees from £30,000 to £35,000, effective 1 October 2021.
| | | | | | | | |
| January 2021 | January 2020 |
Per annum fees | £'000 | £'000 |
Chairman of the Board | 600 | 600 |
Non-Executive Directors |
|
|
Base fee | 98 | 98 |
Senior Non-Executive Director | 30 | 30 |
Chairman of the Audit Committee | 30 | 30 |
Chairman of the Remuneration Committee | 30 | 30 |
| | | | | | | | |
| January 2022 | January 2021 |
Per annum fees | £'000 | £'000 |
Chairman of the Board | 650 | 600 |
Non-Executive Directors |
|
|
Base fee | 101 | 98 |
Senior Non-Executive Director | 30 | 30 |
Chairman of the Audit Committee | 35 | 30 |
Chairman of the Remuneration Committee | 35 | 30 |
Non-Executive Directors’ remuneration for the year ended 30 June 20212022
| | | | | | | | | | | | | | | | | | | | |
| Fees £'000 | Taxable benefits1 £'000 | Total £'000 |
| 2021 | 2020 | 2021 | 2020 | 2021 | 2020 |
Chairman |
|
|
|
|
|
|
Javier Ferrán2 | 600 | 600 | 1 | 1 | 601 | 601 |
Non-Executive Directors |
|
|
|
|
|
|
Susan Kilsby | 158 | 144 | 1 | 10 | 159 | 154 |
Melissa Bethell | 98 | | — | 1 | — | 99 | — |
Valérie Chapoulaud-Floquet5 | 49 | — | 1 | — | 50 | — |
Sir John Manzoni3 | 74 | — | 1 | — | 75 | — |
Lady Mendelsohn | 98 | 95 | 1 | 1 | 99 | 96 |
Alan Stewart | 128 | 125 | 1 | 1 | 129 | 126 |
Ireena Vittal4 | 73 | — | 1 | — | 74 | — |
Ho KwonPing6 | 24 | 95 | — | 4 | 24 | 99 |
| | | | | | | | | | | | | | | | | | | | |
| Fees £'000 | Taxable benefits1 £'000 | Total £'0004 |
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 |
Chairman |
|
|
|
|
|
|
Javier Ferrán2 | 650 | 600 | 2 | 1 | 652 | 601 |
Non-Executive Directors |
|
|
|
|
|
|
Susan Kilsby | 164 | 158 | 5 | 1 | 169 | 159 |
Melissa Bethell | 100 | | 98 | 1 | 1 | 102 | 99 |
Valérie Chapoulaud-Floquet | 100 | 49 | 5 | 1 | 105 | 50 |
Sir John Manzoni | 100 | 74 | 1 | 1 | 102 | 75 |
Lady Mendelsohn | 100 | 98 | 1 | 1 | 102 | 99 |
Alan Stewart | 134 | 128 | 1 | 1 | 135 | 129 |
Ireena Vittal | 100 | 73 | 1 | 1 | 102 | 74 |
Karen Blackett3 | 8 | n/a | — | n/a | 9 | n/a |
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 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 any tax gross-ups on the grossed-up cost of UK tax paidbenefits provided by the company on behalf of the Directors. Non-taxable expense reimbursements have not been included in the single figure of remuneration table above.
2. £100,000 of Javier Ferrán’s net remuneration in the year ended 30 June 20212022 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 reasonreason.
3. Sir John ManzoniKaren Blackett was appointed to the Board on 1 October 2020June 2022.
4. Ireena Vittal was appointedSome figures add up to the Board on 2 October 2020
5. Valérie Chapoulaud-Floquet was appointedslightly different totals due to the Board on 1 January 2021
6. Ho KwonPing retired from the Board on 28 September 2020rounding.
Looking ahead to 20222023
Salary increases for the year ending30 June 2022
As outlined in the 2020 annual report on remuneration, in light of the impact of the Covid-19 pandemic, there was no change to base salaries for the Chief Executive and Chief Financial Officer during the year ended 30 June 2021. | | |
Salary increases and pension reductions for the year ending 30 June 2023 |
In April 2021,May 2022, the Remuneration Committee reviewed base salaries for senior management and agreed the following increaseincreases for the Chief Executive and Chief Financial Officer, effective 1 October 2022.
On 1 January 2023, Ivan Menezes pension contribution will reduce from 20% of base salary to 14% in line with the merit budget for the wider workforce for the United Kingdom and the United States, effective 1 October 2021:workforce.
| | | | | | | | | | | | | | |
| Ivan Menezes | Lavanya Chandrashekar |
Salary at 1 October ('000) | 2021 | 2020 | 2021 | 2020 |
Base salary | $1,711 | $1,661 | $975 | — |
% increase (over previous year) | 3 | % | — | | — | | — | |
| | | | | | | | | | | | | | |
| Ivan Menezes | Lavanya Chandrashekar |
Salary at 1 October ('000) | 2022 | 2021 | 2022 | 2021 |
Base salary | $1,763 | $1,711 | $1,004 | $975 |
% increase (over previous year) | 3 | % | 3 | % | 3 | % | — | |
Annual incentive design for the year ending 30 June 2022 | | |
Annual incentive design for the year ending 30 June 2023 |
The measures and targets for the annual 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 plan design for Executive Directors in the year ending 30 June 20222023 will comprise the following performance measures and weightings, with targets set for the full financial year:
–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;
–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; 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 20222023 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.
Governance (continued)
| | |
Long-term incentive awards to be made in the year ending 30 June 2023 |
Long-term incentive awards to be made in the year ending 30 June 2022
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 per last year, DLTIP awards made in September 20212022 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, assessed over a three-year performance period. The relative total shareholder return measure is based on the same constituent group and vesting schedule as outlined on page 203.196.
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 population comprising only members of the Executive Committee. One market price option is valued at one-third of a performance share.
The ESG measure comprises four goals reflecting the 'Society 2030: Spirit of Progress' strategy, to make a positive impact on the environment and society, as referenced on pages 64-67.society. Each goal is weighted equally:
–•reduction in greenhouse gas emissions;
–•improvement in water efficiency;
–•number of people who confirmed changed attitudes to the dangers of underage drinking, after participating in a Diageo supported education programme; and
–•inclusion and diversity metric (one measure on % female leaders globally, and another measure on % ethnically diverse leaders globally).
Awards are calculated on the basis of a six-month average share price for the period ending 30 June 2021.2022.
It is intended that a DLTIP award of 500% of base salary will be made to Ivan Menezes in September 2021,2022, comprising 375% of salary in performance shares and 125% of salary in market-price share options (in performance share equivalents; one market price option is valued at one-third of a performance share).
share options. It is intended that a DLTIP award of 480% of salary will be made to Lavanya Chandrashekar in September 2021,2022, comprising 360% of salary in performance shares and 120% of salary in market price share options (inoptions. In performance share equivalents).equivalents; one market price option is valued at one-third of a performance share.
The table below summarises the annual DLTIP awards to Ivan Menezes and Lavanya Chandrashekar to be made in September 2021.2022.
| | | | | | | | |
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 20222023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | Positive drinking | % Female leaders | % Ethnically diverse leaders | Vesting schedule | | Relative Total Shareholder Return | Cumulative free cash flow (£m) | Vesting schedule |
Weighting (% total) | 40 | % | 40 | % | 5 | % | 5 | % | 5 | % | 2.5 | % | 2.5 | % | 100 | % | | 50.0 | % | 50.0 | % | 100 | % |
Maximum | 9.0 | % | 13.5 | % | 27.1 | % | 12.1 | % | 3.7m | 46 | % | 41 | % | 100 | % | | 3rd and above | £9,250 | | 100 | % |
Midpoint | 7.0 | % | 10.0 | % | 23.1 | % | 9.2 | % | 3.0m | 45 | % | 40 | % | 60 | % | | — | | £8,350 | | 60 | % |
Threshold | 5.0 | % | 6.5 | % | 19.1 | % | 6.3 | % | 2.3m | 44 | % | 39 | % | 20 | % | | 9th and above | £7,450 | | 20 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Performance shares | | Share options |
| | Organic profit before exceptional items and tax (CAGR) | Environmental, social & governance (ESG) | | | | | |
| Organic net sales (CAGR) | Greenhouse gas reduction1 | Water efficiency | Positive drinking | % Female leaders | % Ethnically diverse leaders | Vesting schedule | | Relative Total Shareholder Return | Cumulative free cash flow (£m) | Vesting schedule |
Weighting (% total) | 40 | % | 40 | % | 5 | % | 5 | % | 5 | % | 2.5 | % | 2.5 | % | 100 | % | | 50.0 | % | 50.0 | % | 100 | % |
Maximum | 8.5 | % | 12.0 | % | 17.6 | % | 12.1 | % | 4.0m | 47 | % | 44 | % | 100 | % | | 3rd and above | £9,450 | 100 | % |
Midpoint | 6.5 | % | 8.5 | % | 14.2 | % | 9.2 | % | 3.3m | 46 | % | 43 | % | 60 | % | | — | | £8,550 | 60 | % |
Threshold | 4.5 | % | 5.0 | % | 10.7 | % | 6.3 | % | 2.6m | 45 | % | 42 | % | 20 | % | | 9th and above | £7,650 | 20 | % |
1.Further context for the 2022 long-term incentive greenhouse gas reduction targets is set out on page 45.
Additional information
Emoluments and share interests of senior management
The total emoluments for the year ended 30 June 20212022 of the Executive Directors and 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 £24.9£23.9 million (2020(2021 – £12.1£24.9 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 £9.4£19.1 million. In addition, they were granted 819,702718,092 performance-based share options under the Diageo Long-Term Incentive Plan (DLTIP) during the year at a weighted average share price of 24933,609 pence, exercisable by 2030, and 29,522 options not subject to performance.2031. In addition, they were granted 597435 options over ordinary shares under the UK savings-related share options scheme (SAYE). They were also awarded 882,321680,438 performance shares under the DLTIP in September 2020,2021, which will vest in three years subject to the relevant performance conditions,conditions. A further award of 142,977 restricted shares subject to performance, and 13,779127,867 restricted shares not subject to performance.performance were also granted during the year.
Senior management options over ordinary shares
At 2726 July 2021,2022, the senior management had an aggregate beneficial interest in 1,474,6261,842,518 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 | 835,116 | 25.15 | 2015-2025 |
Lavanya Chandrashekar | 19,584 | 27.15 | 2018-2028 |
Other1 | 1,742,559 | 25.6 | 2012-2030 |
| | | |
| | | | | | | | | | | |
| Number of options | Weighted average exercise price (£) | Exercise period |
Ivan Menezes | 549,044 | 30.67 | 2020-2031 |
Lavanya Chandrashekar | 99,824 | 33.73 | 2021-2031 |
Other1 | 1,349,935 | 30.14 | 2015-2031 |
| | | |
1. 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 2021.2022.
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 2827 July 20212022 by Susan Kilsby who is Chair 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 annualDirectors' remuneration report on remuneration(excluding the policy) is subject to shareholder approval at the AGM on 30 September 2021;6 October 2022; terms defined in this remuneration report are used solely herein.
Directors’ report
The Directors present the Directors’ report for the year ended 30 June 2021.2022.
Company status
Diageo 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 16 Great Marlborough Street, London W1F 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 pages 200-204 of the UK Annual Report.
Directors
The Directors of the company who currently serve are shown in the section ‘Board of Directors’ on pages 154-156 145-146
and the names of former Directors who served during the year are listed on page 163. In147 in accordance with the UK Corporate Governance Code, all the Directors 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 20212022 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 section 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 Competitor 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.
Major shareholders
At 30 June 2021,2022, 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 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 |
| | | | | | | | | | | |
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 |
(i)On 29 January 2021,1 February 2022, BlackRock Inc. filed an Amendment to Schedule 13G with the SEC in respect of the calendar year ended 31 December 2010, reporting that, 166,483,849as of December 31, 2021, 173,739,088 ordinary shares representing 7.1%7.5% of the issued ordinary share capital were beneficially owned by BlackRock Inc. and its subsidiaries (including BlackRock Investment Management (UK) Limited).
(ii)On 142 February 2021,2022, Massachusetts Financial Services Company filed a an Amendment to Schedule 13G with the SEC in respect of the calendar year ended 31 December 20202018, reporting that, 154,322,161as of December 31, 2021, 142,776,369 ordinary shares representing 6.6%6.1% 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 2021.2022. 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 3129 July 2021, 341,041,9892022, 321,284,915 ordinary shares, including those held through American Depositary Shares ("ADSs"), were held by approximately 2,6942,680 holders (including American Depositary Receipt ("ADR") holders) with registered addresses in the United States, representing approximately 14.60%12.68% of the outstanding ordinary shares (excluding treasury shares). At such date, 85,171,05880,253,313 ADSs were held by 2,2782,262 registered ADR holders. Since certain of such ordinary shares and ADSs are held by nominees or former GrandMet PLC or Guinness Group PLC 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, 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 Euronext and Paris StockEuronext Exchanges. Diageo ADSs, representing four Diageo ordinary shares each, are listed on the New York Stock Exchange (NYSE).
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, 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 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 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 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.
Articles of association
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 27 July 2022. 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 imperative
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. 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 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 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 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, data protection, 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; Financial StatementsConsolidated financial statements - note 2021 Related party transactions |
Dividends | Group financial review; Financial StatementsConsolidated financial statements - Unaudited financial information |
Engagement with employees | Corporate governance report - Workforce engagement statement |
Engagement with suppliers, customers and others | Stakeholder engagement; Corporate governance report - Stakeholder engagement |
Events post 30 June 20212022 | Not applicableConsolidated financial statements - note 23 Post balance sheet events |
Financial risk management | FinancialConsolidated financial statements - note 1516 Financial instruments and risk management |
Future developments | Chairman’s statement; Chief Executive’s statement; Our market dynamics |
Greenhouse gas emissions | Sustainability performance; Responding to climate-related risks |
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; FinancialConsolidated financial statements - note 1718 Equity |
Research and development | FinancialAdditional Disclosures - 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; Responding to climate-related risks; Business reviews |
Share capital - structure, voting and other rights | FinancialConsolidated financial statements - note 1718 Equity |
Share capital - employee share plan voting rights | FinancialConsolidated financial statements - note 1718 Equity |
Shareholder waivers of dividends | FinancialConsolidated financial statements - note 1718 Equity |
Shareholder waivers of future dividends | FinancialConsolidated financial statements - note 1718 Equity |
Sustainability and responsibility | Sustainability performance; Responding to climate-related risks |
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 20212022 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 Siobhán Moriarty,Tom Shropshire, the Company Secretary, on 2827 July 2021.2022.
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 (the Company)“Company”) as of 30 June 20212022 and 2020,2021, and the related consolidated income statement and consolidated statement 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 2021,2022, including the related notes (collectively referred to as the consolidated“consolidated financial statements)statements”). We also have audited the Company's internal control over financial reporting as of 30 June 2021,2022, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of 30 June 20212022 and 2020, 2021, and the results of its operations and its cash flows for each of the three years in the period ended 30 June 2021 2022 i) in accordanceconformity with UK-adopted International Accounting Standards, ii) in conformity with the requirements of the Companies Act 2006, ii) as prepared in accordance with International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union, and iii) as prepared in accordanceconformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of 30 June 2021,2022, based on criteria established in Internal Control - Integrated Framework (2013)issued by the COSO.
Change in Accounting Principle
As discussed in Note 1(f) to the consolidated financial statements, the Company changed the manner in which it accountsBasis for leases in the period ended 30 June 2020 due to the adoption of IFRS 16.Opinions
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 Management’s Report on Internal Control over Financial Reporting appearing under ItemPart II. 15.B. Our responsibility is to express opinions on the Company’s consolidated financial 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 consolidated financial 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 consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial 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 consolidated financial 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 consolidated financial 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; (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 company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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 beloware mattersarising 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
Financial statements (continued)
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
Financial statements (continued)
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial 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 assets and goodwill
As described in note 9 to the consolidated financial statements, the Company’s consolidated indefinite-lived brand intangibles balance and goodwill balance as at 30 June 20212022 were £7,361£7,896 million and £1,957£2,287 million respectively. Management conducts impairment tests for indefinite-lived brand intangibles and goodwill annually, or more frequently if events or circumstances indicate that the carrying amount may not be recoverable. An impairment charge of £336 million was recognised in the consolidated income statement in respect of the current year, and opening balance adjustments recognised in the consolidated statement of changes in equity included £312 million impairment as a result of hyperinflation adjustments in respect of Turkey. The individual brands, other intangibles with indefinite useful lives and their associated tangible fixed assets are aggregated and tested as separate cash-generating units. Goodwill is attributed to each of the markets. Separate tests are carried out for each cash-generating unit and for each of the markets. Judgment is required in determining the cash-generating units. 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. 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. Judgment is required in determining the cash-generating units. The value in use calculations areis 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 mainly 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 includeincludes significant management judgments and assumptions, including sales growth, operating costs, margin, discount rates and terminal growth rates.
The principal considerations for our determination that performing procedures related to the impairment assessment of indefinite-lived brand intangible assets and goodwill areis a critical audit matter is that there wasare the significant judgmentjudgments made by management when developing its assessment of the recoverable amount for the cash-generating units. This in turn led to a high degree of auditor judgment, subjectivity and effort in evaluating management’s significant assumptions, includingrelated to future cash flows, discount rates, and expected growth rates. In addition, 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 determination of recoverable amounts. These procedures also included, among others, testing management’s process for determining the recoverable amount of goodwill and indefinite-lived brand intangible assets, evaluating the appropriateness of the methodology used in the impairment models, testing the completeness, accuracy, and relevance of underlying data used in the models, and evaluating the significant assumptions used by management, including the forecasted cash flows, discount rates, and expected growth rates, as well as management’s sensitivities and related financial statement disclosures. Evaluating the reasonableness of management’s assumptions involved 1) evaluating key market-related assumptions (including the growth rates and discount rate and management’s estimates of the duration and severity of the impact of the Covid-19 pandemic on cash flows)rate) 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 with specialised skill and knowledge to assist in the evaluation of the discount rates.
Taxation – Provisions for tax uncertainties
As described in Note 7 and Note 1819 to the consolidated financial statements, 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 20212022 the current tax asset of £145£149 million and tax liability of £146£252 million includes £129£156 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. Tax provisions are based on management’s judgment and interpretation of country specific tax law and the likelihood 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 considerations for our determination that performing procedures related to the taxation - provision for tax uncertainties is a critical audit matter are that there wasthe significant judgmentjudgments made by management in determining the provisions for tax uncertainties, including
Financial statements (continued)
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 to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the timely identification and accurate
Financial statements (continued)
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, and the audit effort involved the use of professionals with specialised skill and knowledge to assist in 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 the identification 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. These procedures also included, among others, (i) testing the information used in the calculation of the liability for uncertain tax positions; (ii) testing the calculation of the liability for uncertain tax positions by jurisdiction, including management’s assessment of the technical merits 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; and (iv) evaluating the status and results of tax audits with the relevant tax authorities 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 completeness 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.
Post employment benefit obligations
As described in Note 1314 to the consolidated financial statements, the carrying value of defined benefit obligations was £9,445£7,234 million as at 30 June 2021.2022. Application of IAS 19 requires the exercise of estimation and judgment in relation to various assumptions. Management 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 plans, salary and pension increases, future inflation rates, and discount rates.
The principal considerations for our determination that post employment benefit obligations is a critical audit matter are that there wasthe significant judgmentjudgments made by management in selecting the assumptions used to develop its estimate of the present value of defined benefit obligations. This in turn led to a high degree of auditor judgment and effort in our evaluation of management’s significant assumptions, which were future inflation rates, discount rates and the life expectancy of members of the plans. In addition, 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 determination of the carrying value of defined benefit obligations, including future inflation rates, discount rates and the life expectancy of members of the plans. These procedures also included, among others, testing management’s process for determining the present value of the significant post employment benefit obligations, evaluating the appropriateness of the methodology used in the valuation models, testing the completeness, accuracy, and relevance of underlying data used in the models, and evaluating the significant assumptions used by management, including the future inflation rates, discount rates and the life expectancy of members of the plans, as well as management’s sensitivities and related financial statement disclosures. Evaluating the reasonableness of management’s assumptions involved i) comparing these assumptions to our independently compiled expected ranges based on market observable indices or relevant national and industry benchmarks, ii) performing sensitivity analyses, and iii) using professionals with specialised skill and knowledge to assist in the evaluation of the significant assumptions.
/s/ PricewaterhouseCoopers LLP
London, United Kingdom
54 August 20212022
We have served as the Company's auditor since 2015.
Financial statements (continued)
Consolidated income statement
| | | | | | | | | | | | | | |
| Notes | Year ended 30 June 2021 £ million | Year ended 30 June 2020 £ million | Year ended 30 June 2019 £ million |
Sales | 2 | | 19,153 | | 17,697 | | 19,294 | |
Excise duties | 3 | | (6,420) | | (5,945) | | (6,427) | |
Net sales | 2 | | 12,733 | | 11,752 | | 12,867 | |
Cost of sales | 3 | | (5,038) | | (4,654) | | (4,866) | |
Gross profit | | 7,695 | | 7,098 | | 8,001 | |
Marketing | 3 | | (2,163) | | (1,841) | | (2,042) | |
Other operating items | 3 | | (1,801) | | (3,120) | | (1,917) | |
Operating profit | | 3,731 | | 2,137 | | 4,042 | |
Non-operating items | 4 | | 14 | | (23) | | 144 | |
Finance income | 5 | | 278 | | 366 | | 442 | |
Finance charges | 5 | | (651) | | (719) | | (705) | |
Share of after tax results of associates and joint ventures | 6 | | 334 | | 282 | | 312 | |
Profit before taxation | | 3,706 | | 2,043 | | 4,235 | |
Taxation | 7 | | (907) | | (589) | | (898) | |
| | | | |
| | | | |
Profit for the year | | 2,799 | | 1,454 | | 3,337 | |
Attributable to: | | | | |
Equity shareholders of the parent company | | 2,660 | | 1,409 | | 3,160 | |
| | | | |
Non-controlling interests | | 139 | | 45 | | 177 | |
| | 2,799 | | 1,454 | | 3,337 | |
| | million | million | million |
Weighted average number of shares | | | | |
Shares in issue excluding own shares | | 2,337 | | 2,346 | | 2,418 | |
Dilutive potential ordinary shares | | 8 | | 8 | | 10 | |
| | 2,345 | | 2,354 | | 2,428 | |
| | | | |
| | pence | pence | pence |
Basic earnings per share | | 113.8 | | 60.1 | | 130.7 | |
| | | | |
| | | | |
| | | | |
Diluted earnings per share | | 113.4 | | 59.9 | | 130.1 | |
| | | | |
| | | | |
| | | | |
| | | | | | | | | | | | | | |
| Notes | Year ended 30 June 2022 £ million | Year ended 30 June 2021 £ million | Year ended 30 June 2020 £ million |
Sales | 2 | | 22,448 | | 19,153 | | 17,697 | |
Excise duties | 3 | | (6,996) | | (6,420) | | (5,945) | |
Net sales | 2 | | 15,452 | | 12,733 | | 11,752 | |
Cost of sales | 3 | | (5,973) | | (5,038) | | (4,654) | |
Gross profit | | 9,479 | | 7,695 | | 7,098 | |
Marketing | 3 | | (2,721) | | (2,163) | | (1,841) | |
Other operating items | 3 | | (2,349) | | (1,801) | | (3,120) | |
Operating profit | | 4,409 | | 3,731 | | 2,137 | |
Non-operating items | 4 | | (17) | | 14 | | (23) | |
Finance income | 5 | | 497 | | 278 | | 366 |
Finance charges | 5 | | (919) | | (651) | | (719) | |
Share of after tax results of associates and joint ventures | 6 | | 417 | | 334 | | 282 | |
Profit before taxation | | 4,387 | | 3,706 | | 2,043 | |
Taxation | 7 | | (1,049) | | (907) | | (589) | |
| | | | |
| | | | |
Profit for the year | | 3,338 | | 2,799 | | 1,454 | |
Attributable to: | | | | |
Equity shareholders of the parent company | | 3,249 | | 2,660 | | 1,409 | |
| | | | |
Non-controlling interests | | 89 | | 139 | | 45 | |
| | 3,338 | | 2,799 | | 1,454 | |
| | million | million | million |
Weighted average number of shares | | | | |
Shares in issue excluding own shares | | 2,318 | | 2,337 | | 2,346 | |
Dilutive potential ordinary shares | | 7 | | 8 | | 8 | |
| | 2,325 | | 2,345 | | 2,354 | |
| | | | |
| | pence | pence | pence |
Basic earnings per share | | 140.2 | | 113.8 | | 60.1 | |
| | | | |
| | | | |
| | | | |
Diluted earnings per share | | 139.7 | | 113.4 | | 59.9 | |
| | | | |
| | | | |
| | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Financial statements (continued)
Consolidated statement of comprehensive income
| | | | | | | | | | | |
| Year ended 30 June 2021 £ million | Year ended 30 June 2020 £ million | Year ended 30 June 2019 £ million |
Other comprehensive income | | | |
Items that will not be recycled subsequently to the income statement | | | |
Net remeasurement of post employment plans | | | |
Group | 16 | | 38 | | 33 | |
Associates and joint ventures | 3 | | (14) | | 2 | |
| | | |
Tax on post employment plans | (46) | | (21) | | 1 | |
| (27) | | 3 | | 36 | |
Items that may be recycled subsequently to the income statement | | | |
Exchange differences on translation of foreign operations | | | |
Group | (1,233) | | (104) | | 274 | |
Associates and joint ventures | (240) | | 82 | | 19 | |
Non-controlling interests | (173) | | (37) | | 55 | |
Net investment hedges | 810 | | (227) | | (93) | |
Exchange loss recycled to the income statement | | | |
On translation of foreign operations | 0 | | 4 | | 0 | |
| | | |
Tax on exchange differences – group | (9) | | 4 | | (19) | |
Tax on exchange differences – non-controlling interests | (1) | | 0 | | 0 | |
Effective portion of changes in fair value of cash flow hedges | | | |
Hedge of foreign currency debt of the group | (298) | | 221 | | 180 | |
Transaction exposure hedging of the group | 101 | | (43) | | (86) | |
Hedges by associates and joint ventures | (1) | | 6 | | (6) | |
Commodity price risk hedging of the group | 41 | | (11) | | (9) | |
Recycled to income statement – hedge of foreign currency debt of the group | 175 | | (75) | | (82) | |
Recycled to income statement – transaction exposure hedging of the group | 10 | | 42 | | 45 | |
Recycled to income statement – commodity price risk hedging of the group | (2) | | 8 | | 0 | |
| | | |
Tax on effective portion of changes in fair value of cash flow hedges | (6) | | (23) | | (11) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Hyperinflation adjustment | (17) | | (18) | | (22) | |
Tax on hyperinflation adjustment | 5 | | 4 | | 6 | |
| (838) | | (167) | | 251 | |
Other comprehensive (loss)/profit, net of tax, for the year | (865) | | (164) | | 287 | |
Profit for the year | 2,799 | | 1,454 | | 3,337 | |
Total comprehensive income for the year | 1,934 | | 1,290 | | 3,624 | |
Attributable to: | | | |
Equity shareholders of the parent company | 1,969 | | 1,282 | | 3,392 | |
| | | |
Non-controlling interests | (35) | | 8 | | 232 | |
Total comprehensive income for the year | 1,934 | | 1,290 | | 3,624 | |
| | | | | | | | | | | | | | |
| Notes | Year ended 30 June 2022 £ million | Year ended 30 June 2021 £ million | Year ended 30 June 2020 £ million |
Other comprehensive income | | | | |
Items that will not be recycled subsequently to the income statement | | | | |
Net remeasurement of post employment benefit plans | | | | |
Group | 14 | 616 | | 16 | | 38 | |
Associates and joint ventures | | 5 | | 3 | | (14) | |
Non-controlling interests | 14 | (1) | | — | | — | |
Tax on post employment benefit plans | | (123) | | (46) | | (21) | |
Changes in the fair value of equity investments at fair value through other comprehensive income | | (12) | | — | | — | |
| | 485 | | (27) | | 3 | |
Items that may be recycled subsequently to the income statement | | | | |
Exchange differences on translation of foreign operations | | | | |
Group | | 1,128 | | (1,233) | | (104) | |
Associates and joint ventures | 6 | 60 | | (240) | | 82 | |
Non-controlling interests | | 171 | | (173) | | (37) | |
Net investment hedges | | (623) | | 810 | | (227) | |
Exchange loss recycled to the income statement | | | | |
On disposal of foreign operations | 8 | 63 | | — | | 4 | |
| | | | |
Tax on exchange differences – group | | (6) | | (9) | | 4 | |
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 | | 233 | | (298) | | 221 | |
Transaction exposure hedging of the group | | (172) | | 101 | | (43) | |
Hedges by associates and joint ventures | | (15) | | (1) | | 6 | |
Commodity price risk hedging of the group | | 78 | | 41 | | (11) | |
Recycled to income statement – hedge of foreign currency debt of the group | | (239) | | 175 | | (75) | |
Recycled to income statement – transaction exposure hedging of the group | | 42 | | 10 | | 42 | |
Recycled to income statement – commodity price risk hedging of the group | | (46) | | (2) | | 8 | |
| | | | |
Tax on effective portion of changes in fair value of cash flow hedges | | 32 | | (6) | | (23) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Hyperinflation adjustments | | 365 | | (17) | | (18) | |
Tax on hyperinflation adjustments | | (74) | | 5 | | 4 | |
| | 997 | | (838) | | (167) | |
Other comprehensive income/(loss), net of tax, for the year | | 1,482 | | (865) | | (164) | |
Profit for the year | | 3,338 | | 2,799 | | 1,454 | |
Total comprehensive income for the year | | 4,820 | | 1,934 | | 1,290 | |
Attributable to: | | | | |
Equity shareholders of the parent company | | 4,561 | | 1,969 | | 1,282 | |
| | | | |
Non-controlling interests | 18 | 259 | | (35) | | 8 | |
Total comprehensive income for the year | | 4,820 | | 1,934 | | 1,290 | |
The accompanying notes are an integral part of these consolidated financial statements.
Financial statements (continued)
Consolidated balance sheet
| | | | | | | | | | | | | | | | | |
| | 30 June 2021 | 30 June 2020 |
| Notes | £ million | £ million | £ million | £ million |
Non-current assets | | | | | |
Intangible assets | 9 | 10,764 | | | 11,300 | | |
Property, plant and equipment | 10 | 4,849 | | | 4,926 | | |
Biological assets |
| 66 | | | 51 | | |
Investments in associates and joint ventures | 6 | 3,308 | | | 3,557 | | |
Other investments | 12 | 40 | | | 41 | | |
Other receivables | 14 | 36 | | | 46 | | |
Other financial assets | 15 | 327 | | | 686 | | |
Deferred tax assets | 7 | 100 | | | 119 | | |
Post employment benefit assets | 13 | 1,018 | | | 1,111 | | |
| | | 20,508 | | | 21,837 | |
Current assets | | | | | |
Inventories | 14 | 6,045 | | | 5,772 | | |
Trade and other receivables | 14 | 2,385 | | | 2,111 | | |
Corporate tax receivables | 7 | 145 | | | 190 | | |
| | | | | |
Other financial assets | 15 | 121 | | | 75 | | |
Cash and cash equivalents | 16 | 2,749 | | | 3,323 | | |
| | | 11,445 | | | 11,471 | |
Total assets | | | 31,953 | | | 33,308 | |
Current liabilities | | | | | |
Borrowings and bank overdrafts | 16 | (1,862) | | | (1,995) | | |
Other financial liabilities | 15 | (257) | | | (389) | | |
Share buyback liability | 17 | (91) | | | 0 | | |
Trade and other payables | 14 | (4,648) | | | (3,683) | | |
| | | | | |
Corporate tax payables | 7 | (146) | | | (246) | | |
Provisions | 14 | (138) | | | (183) | | |
| | | (7,142) | | | (6,496) | |
Non-current liabilities | | | | | |
Borrowings | 16 | (12,865) | | | (14,790) | | |
Other financial liabilities | 15 | (384) | | | (393) | | |
Other payables | 14 | (338) | | | (175) | | |
Provisions | 14 | (274) | | | (293) | | |
Deferred tax liabilities | 7 | (1,945) | | | (1,972) | | |
Post employment benefit liabilities | 13 | (574) | | | (749) | | |
| | | (16,380) | | | (18,372) | |
Total liabilities | | | (23,522) | | | (24,868) | |
Net assets | | | 8,431 | | | 8,440 | |
Equity | | | | | |
Share capital | 17 | 741 | | | 742 | | |
Share premium |
| 1,351 | | | 1,351 | | |
Other reserves |
| 1,621 | | | 2,272 | | |
Retained earnings |
| 3,184 | | | 2,407 | | |
Equity attributable to equity shareholders of the parent company | | | 6,897 | | | 6,772 | |
Non-controlling interests | 17 | | 1,534 | | | 1,668 | |
Total equity | | | 8,431 | | | 8,440 | |
| | | | | | | | | | | | | | | | | |
| | 30 June 2022 | 30 June 2021 |
| Notes | £ million | £ million | £ million | £ million |
Non-current assets | | | | | |
Intangible assets | 9 | 11,902 | | | 10,764 | | |
Property, plant and equipment | 10 | 5,848 | | | 4,849 | | |
Biological assets | 11 | 94 | | | 66 | | |
Investments in associates and joint ventures | 6 | 3,652 | | | 3,308 | | |
Other investments | 13 | 37 | | | 40 | | |
Other receivables | 15 | 37 | | | 36 | | |
Other financial assets | 16 | 345 | | | 327 | | |
Deferred tax assets | 7 | 114 | | | 100 | | |
Post employment benefit assets | 14 | 1,553 | | | 1,018 | | |
| | | 23,582 | | | 20,508 | |
Current assets | | | | | |
Inventories | 15 | 7,094 | | | 6,045 | | |
Trade and other receivables | 15 | 2,933 | | | 2,385 | | |
Corporate tax receivables | 7 | 149 | | | 145 | | |
Assets held for sale | 8 | 222 | | | — | | |
Other financial assets | 16 | 251 | | | 121 | | |
Cash and cash equivalents | 17 | 2,285 | | | 2,749 | | |
| | | 12,934 | | | 11,445 | |
Total assets | | | 36,516 | | | 31,953 | |
Current liabilities | | | | | |
Borrowings and bank overdrafts | 17 | (1,522) | | | (1,862) | | |
Other financial liabilities | 16 | (444) | | | (257) | | |
Share buyback liability | 18 | (117) | | | (91) | | |
Trade and other payables | 15 | (5,887) | | | (4,648) | | |
Liabilities held for sale | 8 | (61) | | | — | | |
Corporate tax payables | 7 | (252) | | | (146) | | |
Provisions | 15 | (159) | | | (138) | | |
| | | (8,442) | | | (7,142) | |
Non-current liabilities | | | | | |
Borrowings | 17 | (14,498) | | | (12,865) | | |
Other financial liabilities | 16 | (703) | | | (384) | | |
Other payables | 15 | (380) | | | (338) | | |
Provisions | 15 | (258) | | | (274) | | |
Deferred tax liabilities | 7 | (2,319) | | | (1,945) | | |
Post employment benefit liabilities | 14 | (402) | | | (574) | | |
| | | (18,560) | | | (16,380) | |
Total liabilities | | | (27,002) | | | (23,522) | |
Net assets | | | 9,514 | | | 8,431 | |
Equity | | | | | |
Share capital | 18 | 723 | | | 741 | | |
Share premium |
| 1,351 | | | 1,351 | | |
Other reserves |
| 2,174 | | | 1,621 | | |
Retained earnings |
| 3,550 | | | 3,184 | | |
Equity attributable to equity shareholders of the parent company | | | 7,798 | | | 6,897 | |
Non-controlling interests | 18 | | 1,716 | | | 1,534 | |
Total equity | | | 9,514 | | | 8,431 | |
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 Menezes and Lavanya Chandrashekar, Directors and dated 54 August 2021.2022.
Financial statements (continued)
Consolidated statement of changes in equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Other reserves | | Retained earnings/(deficit) | | | |
| 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 2018 | 780 | | 1,349 | | 3,163 | | (1,030) | | | (2,144) | | 7,830 | | 5,686 | | 9,948 | | 1,765 | | 11,713 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Profit for the year | — | | — | | — | | — | | | — | | 3,160 | | 3,160 | | 3,160 | | 177 | | 3,337 | |
Other comprehensive income | — | | — | | — | | 212 | | | — | | 20 | | 20 | | 232 | | 55 | | 287 | |
Total comprehensive income for the year | — | | — | | — | | 212 | | | — | | 3,180 | | 3,180 | | 3,392 | | 232 | | 3,624 | |
Employee share schemes | — | | — | | — | | — | | | 118 | | (49) | | 69 | | 69 | | — | | 69 | |
Share-based incentive plans | — | | — | | — | | — | | | — | | 49 | | 49 | | 49 | | — | | 49 | |
Share-based incentive plans in respect of associates | — | | — | | — | | — | | | — | | 3 | | 3 | | 3 | | — | | 3 | |
Tax on share-based incentive plans | — | | — | | — | | — | | | — | | 20 | | 20 | | 20 | | — | | 20 | |
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 | |
Change in fair value of put option | — | | — | | — | | — | | | — | | (3) | | (3) | | (3) | | — | | (3) | |
Share buyback programme | (27) | | — | | 27 | | — | | | — | | (2,801) | | (2,801) | | (2,801) | | — | | (2,801) | |
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 | |
Profit for the year | — | | — | | — | | — | | | — | | 1,409 | | 1,409 | | 1,409 | | 45 | | 1,454 | |
Other comprehensive loss | — | | — | | — | | (116) | | | — | | (11) | | (11) | | (127) | | (37) | | (164) | |
Total comprehensive (loss)/income for the year | — | | — | | — | | (116) | | | — | | 1,398 | | 1,398 | | 1,282 | | 8 | | 1,290 | |
Employee share schemes | — | | — | | — | | — | | | 90 | | (36) | | 54 | | 54 | | — | | 54 | |
Share-based incentive plans | — | | — | | — | | — | | | — | | 2 | | 2 | | 2 | | — | | 2 | |
Share-based incentive plans in respect of associates | — | | — | | — | | — | | | — | | 4 | | 4 | | 4 | | — | | 4 | |
Tax on share-based incentive plans | — | | — | | — | | — | | | — | | 1 | | 1 | | 1 | | — | | 1 | |
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) | | — | | — | | 0 | |
Purchase of non-controlling interests (note 8) | — | | — | | — | | — | | | — | | (39) | | (39) | | (39) | | (23) | | (62) | |
| | | | | | | | | | | |
Non-controlling interest in respect of new subsidiary | — | | — | | — | | — | | | — | | — | | — | | — | | 5 | | 5 | |
Change in fair value of put option | — | | — | | — | | — | | | — | | 9 | | 9 | | 9 | | — | | 9 | |
Share buyback programme | (11) | | — | | 11 | | — | | | — | | (1,256) | | (1,256) | | (1,256) | | — | | (1,256) | |
Dividends paid | — | | — | | — | | — | | | — | | (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 | |
| | | | | | | | | | | |
Profit for the year | — | | — | | — | | — | | | — | | 2,660 | | 2,660 | | 2,660 | | 139 | | 2,799 | |
Other comprehensive loss | — | | — | | — | | (652) | | | — | | (39) | | (39) | | (691) | | (174) | | (865) | |
Total comprehensive (loss)/income for the year | — | | — | | — | | (652) | | | — | | 2,621 | | 2,621 | | 1,969 | | (35) | | 1,934 | |
Employee share schemes | — | | — | | — | | — | | | 59 | | (10) | | 49 | | 49 | | — | | 49 | |
Share-based incentive plans | — | | — | | — | | — | | | — | | 49 | | 49 | | 49 | | — | | 49 | |
Share-based incentive plans in respect of associates | — | | — | | — | | — | | | — | | 3 | | 3 | | 3 | | — | | 3 | |
Tax on share-based incentive plans | — | | — | | — | | — | | | — | | 9 | | 9 | | 9 | | — | | 9 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Purchase of non-controlling interests (note 8) | — | | — | | — | | — | | | — | | (15) | | (15) | | (15) | | (27) | | (42) | |
Associates' transactions with non-controlling interests | — | | — | | — | | — | | | — | | (91) | | (91) | | (91) | | — | | (91) | |
| | | | | | | | | | | |
Change in fair value of put option | — | | — | | — | | — | | | — | | (2) | | (2) | | (2) | | — | | (2) | |
Share buyback programme | (1) | | — | | 1 | | — | | | — | | (200) | | (200) | | (200) | | — | | (200) | |
Dividends declared | — | | — | | — | | — | | | — | | (1,646) | | (1,646) | | (1,646) | | (72) | | (1,718) | |
At 30 June 2021 | 741 | | 1,351 | | 3,202 | | (1,581) | | | (1,877) | | 5,061 | | 3,184 | | 6,897 | | 1,534 | | 8,431 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 2019 | | 753 | | 1,350 | | 3,190 | | (818) | | | (2,026) | | 5,912 | | 3,886 | | 8,361 | | 1,795 | | 10,156 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Profit for the year | | — | | — | | — | | — | | | — | | 1,409 | | 1,409 | | 1,409 | | 45 | | 1,454 | |
Other comprehensive loss | | — | | — | | — | | (116) | | | — | | (11) | | (11) | | (127) | | (37) | | (164) | |
Total comprehensive (loss)/ income for the year | | — | | — | | — | | (116) | | | — | | 1,398 | | 1,398 | | 1,282 | | 8 | | 1,290 | |
Employee share schemes | | — | | — | | — | | — | | | 90 | | (36) | | 54 | | 54 | | — | | 54 | |
Share-based incentive plans | 18 | | — | | — | | — | | — | | | — | | 2 | | 2 | | 2 | | — | | 2 | |
Share-based incentive plans in respect of associates | | — | | — | | — | | — | | | — | | 4 | | 4 | | 4 | | — | | 4 | |
Tax on share-based incentive plans | | — | | — | | — | | — | | | — | | 1 | | 1 | | 1 | | — | | 1 | |
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 | 8 | | — | | — | | — | | — | | | — | | (39) | | (39) | | (39) | | (23) | | (62) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Non-controlling interest in respect of new subsidiary | | — | | — | | — | | — | | | — | | — | | — | | — | | 5 | | 5 | |
Change in fair value of put option | | — | | — | | — | | — | | | — | | 9 | | 9 | | 9 | | — | | 9 | |
Share buyback programme | | (11) | | — | | 11 | | — | | | — | | (1,256) | | (1,256) | | (1,256) | | — | | (1,256) | |
Dividend declared for the year | | — | | — | | — | | — | | | — | | (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 | |
Profit for the year | | — | | — | | — | | — | | | — | | 2,660 | | 2,660 | | 2,660 | | 139 | | 2,799 | |
Other comprehensive loss | | — | | — | | — | | (652) | | | — | | (39) | | (39) | | (691) | | (174) | | (865) | |
Total comprehensive (loss)/income for the year | | — | | — | | — | | (652) | | | — | | 2,621 | | 2,621 | | 1,969 | | (35) | | 1,934 | |
Employee share schemes | | — | | — | | — | | — | | | 59 | | (10) | | 49 | | 49 | | — | | 49 | |
Share-based incentive plans | 18 | | — | | — | | — | | — | | | — | | 49 | | 49 | | 49 | | — | | 49 | |
Share-based incentive plans in respect of associates | | — | | — | | — | | — | | | — | | 3 | | 3 | | 3 | | — | | 3 | |
Tax on share-based incentive plans | | — | | — | | — | | — | | | — | | 9 | | 9 | | 9 | | — | | 9 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Purchase of non-controlling interests | 8 | | — | | — | | — | | — | | | — | | (15) | | (15) | | (15) | | (27) | | (42) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Associates' transactions with non-controlling interests | | — | | — | | — | | — | | | — | | (91) | | (91) | | (91) | | — | | (91) | |
Change in fair value of put option | | — | | — | | — | | — | | | — | | (2) | | (2) | | (2) | | — | | (2) | |
Share buyback programme | | (1) | | — | | 1 | | — | | | — | | (200) | | (200) | | (200) | | — | | (200) | |
Dividend declared for the year | 18 | | — | | — | | — | | — | | | — | | (1,646) | | (1,646) | | (1,646) | | (72) | | (1,718) | |
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 | | — | | — | | — | | — | | | — | | 251 | | 251 | | 251 | | — | | 251 | |
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 | | — | | — | | — | | — | | | — | | 3,249 | | 3,249 | | 3,249 | | 89 | | 3,338 | |
Other comprehensive income | | — | | — | | — | | 535 | | | — | | 777 | | 777 | | 1,312 | | 170 | | 1,482 | |
Total comprehensive income for the year | | — | | — | | — | | 535 | | | — | | 4,026 | | 4,026 | | 4,561 | | 259 | | 4,820 | |
Employee share schemes | | — | | — | | — | | — | | | 39 | | 50 | | 89 | | 89 | | — | | 89 | |
Share-based incentive plans | 18 | | — | | — | | — | | — | | | — | | 59 | | 59 | | 59 | | — | | 59 | |
Share-based incentive plans in respect of associates | | — | | — | | — | | — | | | — | | 4 | | 4 | | 4 | | — | | 4 | |
Tax on share-based incentive plans | | — | | — | | — | | — | | | — | | 9 | | 9 | | 9 | | — | | 9 | |
Share-based payments and purchase of own shares in respect of subsidiaries | | — | | — | | — | | — | | | — | | (11) | | (11) | | (11) | | (6) | | (17) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Unclaimed dividend | | — | | — | | — | | — | | | — | | 3 | | 3 | | 3 | | 1 | | 4 | |
Change in fair value of put option | | — | | — | | — | | — | | | — | | (34) | | (34) | | (34) | | — | | (34) | |
Share buyback programme | | (18) | | — | | 18 | | — | | | — | | (2,310) | | (2,310) | | (2,310) | | — | | (2,310) | |
Dividend declared for the year | 18 | | — | | — | | — | | — | | | — | | (1,720) | | (1,720) | | (1,720) | | (72) | | (1,792) | |
At 30 June 2022 | | 723 | | 1,351 | | 3,220 | | (1,046) | | | (1,838) | | 5,388 | | 3,550 | | 7,798 | | 1,716 | | 9,514 | |
The accompanying notes are an integral part of these consolidated financial statements.
Financial statements (continued)
Consolidated statement of cash flows
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended 30 June 2021 | Year ended 30 June 2020 | Year ended 30 June 2019 |
| Notes | £ million | £ million | £ million | £ million | £ million | £ million |
Cash flows from operating activities | | | | | | | |
Profit for the year | | 2,799 | | | 1,454 | | | 3,337 | | |
| | | | | | | |
Taxation | | 907 | | | 589 | | | 898 | | |
Share of after tax results of associates and joint ventures | | (334) | | | (282) | | | (312) | | |
Net finance charges | | 373 | | | 353 | | | 263 | | |
Non-operating items | | (14) | | | 23 | | | (144) | | |
Operating profit | | | 3,731 | | | 2,137 | | | 4,042 | |
Increase in inventories | | (443) | | | (366) | | | (434) | | |
(Increase)/decrease in trade and other receivables | | (446) | | | 523 | | | 11 | | |
Increase/(decrease) in trade and other payables and provisions | | 1,220 | | | (485) | | | 201 | | |
Net decrease/(increase) in working capital | | | 331 | | | (328) | | | (222) | |
Depreciation, amortisation and impairment | | 447 | | | 1,839 | | | 374 | | |
Dividends received | | 290 | | | 4 | | | 168 | | |
Post employment payments less amounts included in operating profit | (30) | | | (109) | | | (121) | | |
Other items | | 88 | | | (14) | | | 64 | | |
| | | 795 | | | 1,720 | | | 485 | |
Cash generated from operations | | | 4,857 | | | 3,529 | | | 4,305 | |
Interest received | | 89 | | | 185 | | | 216 | | |
Interest paid | | (440) | | | (493) | | | (468) | | |
Taxation paid | | (852) | | | (901) | | | (805) | | |
| | | (1,203) | | | (1,209) | | | (1,057) | |
Net cash inflow from operating activities | | | 3,654 | | | 2,320 | | | 3,248 | |
Cash flows from investing activities | | | | | | | |
Disposal of property, plant and equipment and computer software | | 13 | | | 14 | | | 32 | | |
Purchase of property, plant and equipment and computer software | | (626) | | | (700) | | | (671) | | |
Movements in loans and other investments | | (4) | | | 0 | | | (1) | | |
Sale of businesses and brands | 8 | 14 | | | 11 | | | 426 | | |
Acquisition of businesses | 8 | (488) | | | (130) | | | (56) | | |
Net cash outflow from investing activities | | | (1,091) | | | (805) | | | (270) | |
Cash flows from financing activities | | | | | | | |
Share buyback programme | 17 | (109) | | | (1,282) | | | (2,775) | | |
Proceeds from issue of share capital | | 0 | | | 1 | | | 1 | | |
Net sale of own shares for share schemes | | 49 | | | 54 | | | 50 | | |
Dividends paid to non-controlling interests | | (77) | | | (111) | | | (112) | | |
Proceeds from bonds | 16 | 1,031 | | | 5,188 | | | 2,766 | | |
Repayment of bonds | 16 | (1,247) | | | (820) | | | (1,168) | | |
Purchase of shares of non-controlling interests | 8 | (42) | | | (62) | | | (784) | | |
| | | | | | | |
Net movements in other borrowings |
| (753) | | | (285) | | | 721 | | |
Equity dividends paid | 17 | (1,646) | | | (1,646) | | | (1,623) | | |
| | | | | | | |
Net cash (outflow)/inflow from financing activities | | | (2,794) | | | 1,037 | | | (2,924) | |
Net (decrease)/increase in net cash and cash equivalents | 16 | | (231) | | | 2,552 | | | 54 | |
Exchange differences | | | (285) | | | (120) | | | (26) | |
Net cash and cash equivalents at beginning of the year | | | 3,153 | | | 721 | | | 693 | |
Net cash and cash equivalents at end of the year | | | 2,637 | | | 3,153 | | | 721 | |
Net cash and cash equivalents consist of: | | | | | | | |
Cash and cash equivalents | 16 | | 2,749 | | | 3,323 | | | 932 | |
Bank overdrafts | 16 | | (112) | | | (170) | | | (211) | |
| | | 2,637 | | | 3,153 | | | 721 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended 30 June 2022 | Year ended 30 June 2021 | Year ended 30 June 2020 |
| Notes | £ million | £ million | £ million | £ million | £ million | £ million |
Cash flows from operating activities | | | | | | | |
Profit for the year | | 3,338 | | | 2,799 | | | 1,454 | | |
| | | | | | | |
Taxation | | 1,049 | | | 907 | | | 589 | | |
Share of after tax results of associates and joint ventures | | (417) | | | (334) | | | (282) | | |
Net finance charges | | 422 | | | 373 | | | 353 | | |
Non-operating items | | 17 | | | (14) | | | 23 | | |
Operating profit | | | 4,409 | | | 3,731 | | | 2,137 | |
Increase in inventories | | (740) | | | (443) | | | (366) | | |
(Increase)/decrease in trade and other receivables | | (378) | | | (446) | | | 523 | | |
Increase/(decrease) in trade and other payables and provisions | | 939 | | | 1,220 | | | (485) | | |
Net (increase)/decrease in working capital | | | (179) | | | 331 | | | (328) | |
Depreciation, amortisation and impairment | | 828 | | | 447 | | | 1,839 | | |
Dividends received | | 190 | | | 290 | | | 4 | | |
Post employment payments less amounts included in operating profit | | (89) | | | (30) | | | (109) | | |
Other items | | 53 | | | 88 | | | (14) | | |
| | | 982 | | | 795 | | | 1,720 | |
Cash generated from operations | | | 5,212 | | | 4,857 | | | 3,529 | |
Interest received | | 110 | | | 89 | | | 185 | | |
Interest paid | | (438) | | | (440) | | | (493) | | |
Taxation paid | | (949) | | | (852) | | | (901) | | |
| | | (1,277) | | | (1,203) | | | (1,209) | |
Net cash inflow from operating activities | | | 3,935 | | | 3,654 | | | 2,320 | |
Cash flows from investing activities | | | | | | | |
Disposal of property, plant and equipment and computer software | | 17 | | | 13 | | | 14 | | |
Purchase of property, plant and equipment and computer software | | (1,097) | | | (626) | | | (700) | | |
Movements in loans and other investments | | (72) | | | (4) | | | — | | |
Sale of businesses and brands | 8 | 82 | | | 14 | | | 11 | | |
Acquisition of businesses | 8 | (271) | | | (488) | | | (130) | | |
Net cash outflow from investing activities | | | (1,341) | | | (1,091) | | | (805) | |
Cash flows from financing activities | | | | | | | |
Share buyback programme | 18 | (2,284) | | | (109) | | | (1,282) | | |
Proceeds from issue of share capital | | — | | | — | | | 1 | | |
Net sale of own shares for share schemes | | 18 | | | 49 | | | 54 | | |
Purchase of treasury shares in respect of subsidiaries | | (15) | | | — | | | — | | |
Dividends paid to non-controlling interests | | (81) | | | (77) | | | (111) | | |
Proceeds from bonds | 17 | 2,263 | | | 1,031 | | | 5,188 | | |
Repayment of bonds | 17 | (1,521) | | | (1,247) | | | (820) | | |
Purchase of shares of non-controlling interests | 8 | — | | | (42) | | | (62) | | |
| | | | | | | |
Cash inflow from other borrowings(1) |
| 503 | | | 34 | | | 497 | | |
Cash outflow from other borrowings(1) | | (424) | | | (787) | | | (782) | | |
Equity dividends paid | | (1,718) | | | (1,646) | | | (1,646) | | |
| | | | | | | |
Net cash (outflow)/inflow from financing activities | | | (3,259) | | | (2,794) | | | 1,037 | |
Net (decrease)/increase in net cash and cash equivalents | 17 | | (665) | | | (231) | | | 2,552 | |
Exchange differences | | | 239 | | | (285) | | | (120) | |
Net cash and cash equivalents at beginning of the year | | | 2,637 | | | 3,153 | | | 721 | |
Net cash and cash equivalents at end of the year | | | 2,211 | | | 2,637 | | | 3,153 | |
Net cash and cash equivalents consist of: | | | | | | | |
Cash and cash equivalents | 17 | | 2,285 | | | 2,749 | | | 3,323 | |
Bank overdrafts | 17 | | (74) | | | (112) | | | (170) | |
| | | 2,211 | | | 2,637 | | | 3,153 | |
(1) For the years ended 30 June 2021 and 30 June 2020, the previously reported line item of “Net movements in other borrowings” has been replaced with “Cash inflow from other borrowings” and “Cash outflow from other borrowings” to gross up the amounts shown above within these lines which had previously been shown net.
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 specific to a note are included in the note to which they relate. Furthermore, the section details 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
On 31 December 2020, International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) at that date
were brought into UK law and became UK-adopted International Accounting Standards, with future changes being subject to
endorsement by the UK Endorsement Board. Diageo plc transitioned to UK-adopted International Accounting Standards in its consolidated financial statements on 1 July 2021. This change constitutes a change in accounting framework. However, there is no impact on recognition, measurement or disclosure in the period reported as a result of the change in framework.
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 adopted pursuant to Regulation (EC) No 1606/2002by the UK, IFRSs as it applies inadopted by the European UnionEU and IFRSIFRSs, as issued by the International Accounting Standards Board (IASB).IASB, including interpretations issued by the IFRS Interpretations Committee. IFRS as adopted by the UK and by the EU 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
Management has prepared cash flow forecasts which have also been sensitised to reflect severe but plausible downside scenarios taking into consideration the group's principal risks. In ourthe base case scenario, we expectmanagement has included assumptions for mid-single digit net sales momentum to continue intogrowth, operating margin improvement and global TBA market share growth. In light of the year ending 30 June 2022, however, we expect near-termongoing geopolitical volatility, to remain. The potential financial impact ofthe base case outlook and plausible downside scenarios have incorporated considerations for a slower Covid-19 pandemicpost-pandemic economic recovery, has been modelled in the plausible downside scenarios.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 position is still consideredexpected to remain strong, as we havethe group's liquidity was protected our liquidity by launching and pricing €700 million of fixed rate Euro and £400issuing €1,650 million of fixed rate Sterlingeuro and £900 million of fixed rate sterling denominated bonds under Diageo’s European Debt Issuance Programme.in the year ended 30 June 2022. Mitigating actions, should they be required, are all within management’s control and could include reductions in discretionary spending includingsuch as acquisitions and capital expenditure, as well as a temporary suspension of the share buyback programme and dividend payments in the next 12 months, or drawdowndrawdowns on committed facilities. Having considered the outcome of these assessments, the Directors are comfortable that the Companycompany is a going concern for at least 12 months from the date of signing the company'sgroup'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.
The income statements and cash flows of non-sterling entities are translated into sterling at weighted average rates of exchange, except for subsidiaries in hyperinflationary economies that are translated with the closing rate at the end of the period and other than 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.
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
Financial statements (continued)
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 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.
Financial statements (continued)
The principal foreign exchange rates used in the translation of financial statements for the three years ended 30 June 2021,2022, expressed in US dollars and euros per £1, were as follows:
| | | | | | | | | | | |
| 2021 | 2020 | 2019 |
US dollar | | | |
Income statement and cash flows(i) | 1.35 | | 1.26 | | 1.29 | |
Assets and liabilities(ii) | 1.39 | | 1.23 | | 1.27 | |
Euro | | | |
Income statement and cash flows(i) | 1.13 | | 1.14 | | 1.13 | |
Assets and liabilities(ii) | 1.17 | | 1.09 | | 1.12 | |
| | | | | | | | | | | |
| 2022 | 2021 | 2020 |
US dollar | | | |
Income statement and cash flows(1) | 1.33 | | 1.35 | | 1.26 | |
Assets and liabilities(2) | 1.21 | | 1.39 | | 1.23 | |
Euro | | | |
Income statement and cash flows(1) | 1.18 | | 1.13 | | 1.14 | |
Assets and liabilities(2) | 1.16 | | 1.17 | | 1.09 | |
(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 upon the financial statements are set out in the related notes as follows:
–Exceptional items – management judgement whether exceptional or not – page 236233
–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 241239 and 285289
–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 249
–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 257 258
–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 285287
(f) Hyperinflationary accounting
The group applied hyperinflationary accounting for its operations in Turkey, Venezuela and Lebanon.
In March 2022, the three-year cumulative inflation in Turkey exceeded 100% and as a result, hyperinflationary accounting was applied for the year ended 30 June 2022 in respect of the group’s operations in Turkey. The group’s consolidated financial statements include the results and financial position of its Turkish operations restated to the measuring unit current at the end of the period, with hyperinflationary gains and losses in respect of monetary items being reported in finance 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 TRL 2,133 million (£177 million) recognised on the goodwill in the Turkey cash-generating unit and TRL 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 balances 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, TurkStat. The movement in the publicly available official price index for the year ended 30 June 2022 was 79% (2021 – 18%).
Venezuela is a hyperinflationary 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/£ 236,878,083759 for the year ended 30 June 2021 (2020 -2022 (2021 – VES/£ 10,024,865)237). Movement in the price index for the year ended 30 June 20212022 was 268% (2021 – 1,991% (2020 - 2,464%). The.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, cash flow statement and net assets for the year ended 30 June 20212022 and 30 June 20202021 and with the amounts that would have resulted if the official DICOMreference exchange rate had been applied:
| | | | | | | | | | | | | | |
| Year ended 30 June 2021 | Year ended 30 June 2020 |
| At estimated exchange rate | At DICOM exchange rate | At estimated exchange rate | At DICOM exchange rate |
| 236,878,083 VES/£ | 4,449,579 VES/£ | 10,024,865 VES/£ | 252,558 VES/£ |
| £ million | £ million | £ million | £ million |
Net sales | 0 | | 4 | | 0 | | 3 | |
Operating (loss)/profit | (1) | | 11 | | 0 | | 10 | |
Other finance income - hyperinflation adjustment | 2 | | 122 | | 6 | | 222 | |
Net cash inflow from operating activities | 0 | | 9 | | 0 | | 6 | |
Net assets | 38 | | 2,016 | | 48 | | 1,893 | |
| | | | | | | | | | | | | | |
| Year ended 30 June 2022 | Year ended 30 June 2021 |
| At estimated exchange rate | At official reference exchange rate | At estimated exchange rate(1) | At official reference exchange rate(1) |
| 759 VES/£ | 7 VES/£ | 237 VES/£ | 4 VES/£ |
| £ million | £ million | £ million | £ million |
Net sales | — | | 15 | | — | | 4 | |
Operating (loss)/profit | (1) | | (1) | | (1) | | 11 | |
Other finance income - hyperinflation adjustment | 1 | | 157 | | 2 | | 122 | |
Net cash (outflow)/inflow from operating activities | — | | (5) | | — | | 9 | |
Net assets | 41 | | 4,606 | | 38 | | 2,016 | |
Lebanon became a hyperinflationary economy during1) Prior year rates have been restated to reflect the year ended 30 June 2021. Hyperinflationary accounting has been applied forCentral Bank of Venezuela's decision to cut six zeros from the group’s Lebanese operationsbolivar currency from 1 July 2020, with hyperinflationary gains and foreignOctober 2021.
Sterling amounts presented at the official reference exchange losses associated with monetary items being reported in finance charges. The impactrate are results of applying hyperinflationary accounting was immaterial.simple mathematical conversion.
The impact of hyperinflationary accounting for Lebanon was immaterial both in the current and comparative periods.
228
Financial statements (continued)
(f)(g) New accounting standards and interpretations
The following amendmentsamendment to the accounting standards, issued by the IASB which have beenand endorsed by the UK and EU, havehas been adopted by the group from 1 July 20202021 with no impact on the group’s consolidated results, financial position or disclosures:
–Amendments to References to the Conceptual Framework in IFRS Standards
–Amendments to IFRS 3 – Definition of a Business
–Amendments to IAS 1 and IAS 8 – Definition of Material
–Amendments to IFRS 16 – Covid-19 - Related Rent Concessionsrelated rent concessions beyond 30 June 2021
The following amendments and standardsamendment issued by the IASB which have beenand endorsed by the UK and EU, havehas been adopted by the group:
Amendments to IFRS 9, IAS 39 and IFRS 7 – Interest rate benchmark reform (phase 1)2). The amendment to IFRS 9 provides temporary relief from applying specific hedge accounting and financial instrument derecognition requirements to hedging relationships directly affected by interbank offered rate (IBOR) reform. The reliefs haveBy applying the effect that IBOR reform shouldpractical expedient, Diageo is not generally cause hedge accountingrequired to terminate. The expectations are that the cash flows in relation todiscontinue its hedging relationships will not be altered byas a result of changes in reference rates due to IBOR reform. The amendment to IFRS 7 requires additional disclosure explaining the nature and extent of risk related to the reform and the derivative instruments usedprogress of the transition, see note 16. The adoption of Phase 2 Amendments in hedgerespect of disclosures and other accounting will still provide a close approximationmatters relating to Interest Rate Benchmark Reform had no material impact on its consolidated results or financial position and not resulted in any change to the extent of the managedentity’s risk exposures. management strategy.
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 in the year ended 30 June 2021 (2020 – £1 million).
IFRS 16 - Leases. The group adopted IFRS 16 from 1 July 2019 by applying the modified retrospective method. Comparative periods have not been restated. The impact of the adoption is included in Note 11.
The following amendment and standard issued by the IASB has been endorsed by the UK and EU and has not been adopted by the group:
IFRS 17 – Insurance contracts (effective in(effective from the year ending 30 June 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 39 and IFRS 7 – Interest rate benchmark reform (phase 2). The amendment to IFRS 9 provides relief from applying specific hedge accounting and financial instrument derecognition requirements directly affected by interbank offered rate (IBOR) reform. By applying the practical expedient, Diageo will not be required to discontinue its hedging relationships as a result of changes in reference rates due to the IBOR reform. The amendment to IFRS 7 will require additional disclosure explaining the nature and extent of risk related to the reform and the progress of the transition.
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.
g)(h) Climate change considerations
The impact of climate change assessment and the stated net zero carbon emission on ourtarget for Diageo's direct operationoperations (scope 1 & 2) by 2030 has been considered as part of the assessment of estimates and judgements in preparing the group accounts.
The climateclimate change scenario analyses performed in 2022 – 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)) – undertaken this year did not identify anyidentified no material financial impact.impact to these financial statements.
The following considerations were made in respect of the financial statements:
–•Impact of climate change is not expected to be material on the going concern period and the viability of the group over the next three years.
–•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 forecasted 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 pension assets.
–The impact of climate change on the carrying value of the fixedpost-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 2021.2022. 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
Sales comprise 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 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 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).
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 Supply 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, as well as comprises the global procurement management functions.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 SC&P. They also include rents receivable and payable in respect of properties not used by the group in the manufacture, sale or distribution of premium drinks.
Diageo uses shared services operations to deliver transaction processing activities for markets and operational entities. These centerscentres are located in India, Hungary, 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 HR services. The costs of shared services operations are recharged to the regions.regions.
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 exceptional 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’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 and Turkey | Africa | Latin America and Caribbean | Asia Pacific | 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 | | 2,020 | | 1,369 | | 5,146 | | 1,537 | | (1,537) | | 19,133 | | 20 | | 19,153 | |
Net sales | | | | | | | | | | |
At budgeted exchange rates(i) | 5,527 | | 2,579 | | 1,541 | | 1,176 | | 2,561 | | 1,627 | | (1,548) | | 13,463 | | 20 | | 13,483 | |
Acquisitions and disposals | 28 | | 2 | | 5 | | 0 | | 0 | | 0 | | 0 | | 35 | | 0 | | 35 | |
SC&P allocation | 9 | | 45 | | 3 | | 13 | | 9 | | (79) | | 0 | | 0 | | 0 | | 0 | |
Retranslation to actual exchange rates | (355) | | (68) | | (137) | | (143) | | (82) | | (11) | | 11 | | (785) | | 0 | | (785) | |
Net sales | 5,209 | | 2,558 | | 1,412 | | 1,046 | | 2,488 | | 1,537 | | (1,537) | | 12,713 | | 20 | | 12,733 | |
Operating profit/(loss) | | | | | | | | | | |
At budgeted exchange rates(i) | 2,469 | | 728 | | 228 | | 422 | | 628 | | (97) | | — | | 4,378 | | (218) | | 4,160 | |
Acquisitions and disposals | (18) | | (3) | | 0 | | 0 | | 0 | | 0 | | — | | (21) | | 0 | | (21) | |
SC&P allocation | (30) | | (32) | | (3) | | (27) | | (5) | | 97 | | — | | 0 | | 0 | | 0 | |
Fair value remeasurement of contingent considerations, equity option and earn out arrangements | (9) | | (27) | | 0 | | 0 | | 0 | | 0 | | — | | (36) | | 0 | | (36) | |
Fair value remeasurement of biological assets | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | — | | 0 | | 0 | | 0 | |
Retranslation to actual exchange rates | (175) | | (31) | | (54) | | (92) | | (15) | | 0 | | — | | (367) | | 10 | | (357) | |
Operating profit/(loss) before exceptional items | 2,237 | | 635 | | 171 | | 303 | | 608 | | 0 | | — | | 3,954 | | (208) | | 3,746 | |
Exceptional items | 0 | | (15) | | 0 | | 0 | | 0 | | 0 | | — | | (15) | | 0 | | (15) | |
Operating profit/(loss) | 2,237 | | 620 | | 171 | | 303 | | 608 | | 0 | | — | | 3,939 | | (208) | | 3,731 | |
Non-operating items | | | | | | | | | | 14 | |
Net finance charges | | | | | | | | | | (373) | |
Share of after tax results of associates and joint ventures | | | | | | | | | | |
Moët Hennessy | | | | | | | | | | 335 | |
Other | | | | | | | | | | (1) | |
Profit before taxation | | | | | | | | | | 3,706 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| North America | Europe | Asia Pacific | Africa | Latin America and Caribbean | 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 | | 2,403 | | 1,945 | | 2,010 | | (2,010) | | 22,394 | | 54 | | 22,448 | |
Net sales | | | | | | | | | | |
At budgeted exchange rates(1) | 5,955 | | 3,258 | | 2,879 | | 1,699 | | 1,486 | | 2,095 | | (2,016) | | 15,356 | | 55 | | 15,411 | |
Acquisitions and disposals | 34 | | 23 | | — | | 15 | | 3 | | — | | — | | 75 | | — | | 75 | |
SC&P allocation | 9 | | 46 | | 9 | | 3 | | 12 | | (79) | | — | | — | | — | | — | |
Retranslation to actual exchange rates | 97 | | (304) | | (4) | | (35) | | 24 | | (6) | | 6 | | (222) | | (1) | | (223) | |
Hyperinflation | — | | 189 | | — | | — | | — | | — | | — | | 189 | | — | | 189 | |
Net sales | 6,095 | | 3,212 | | 2,884 | | 1,682 | | 1,525 | | 2,010 | | (2,010) | | 15,398 | | 54 | | 15,452 | |
Operating profit/(loss) | | | | | | | | | | |
At budgeted exchange rates(1) | 2,388 | | 1,086 | | 703 | | 346 | | 528 | | (22) | | — | | 5,029 | | (256) | | 4,773 | |
Acquisitions and disposals | (28) | | 11 | | — | | (10) | | — | | — | | — | | (27) | | — | | (27) | |
SC&P allocation | (1) | | (18) | | (2) | | (1) | | — | | 22 | | — | | — | | — | | — | |
Fair value remeasurement of contingent considerations, equity option and earn out arrangements | 32 | | 36 | | — | | — | | (3) | | — | | — | | 65 | | — | | 65 | |
Fair value remeasurement of biological assets | — | | — | | — | | — | | (5) | | — | | — | | (5) | | — | | (5) | |
Retranslation to actual exchange rates | 63 | | (108) | | 10 | | (20) | | 18 | | — | | — | | (37) | | 18 | | (19) | |
Hyperinflation | — | | 10 | | — | | — | | — | | — | | — | | 10 | | — | | 10 | |
Operating profit/(loss) before exceptional items | 2,454 | | 1,017 | | 711 | | 315 | | 538 | | — | | — | | 5,035 | | (238) | | 4,797 | |
Exceptional items | (1) | | (146) | | (241) | | — | | — | | — | | — | | (388) | | — | | (388) | |
Operating profit/(loss) | 2,453 | | 871 | | 470 | | 315 | | 538 | | — | | — | | 4,647 | | (238) | | 4,409 | |
Non-operating items | | | | | | | | | | (17) | |
Net finance charges | | | | | | | | | | (422) | |
Share of after tax results of associates and joint ventures | | | | | | | | | | |
Moët Hennessy | | | | | | | | | | 425 | |
Other | | | | | | | | | | (8) | |
Profit before taxation | | | | | | | | | | 4,387 | |
Financial statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| North America | Europe and Turkey | Africa | Latin America and Caribbean | Asia Pacific | SC&P | Eliminate inter- segment sales | Total operating segments | Corporate and other | Total |
| £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ 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 | | 0 | | 1 | | 0 | | 0 | | 93 | | 0 | | 93 | |
SC&P allocation | 11 | | 60 | | 4 | | 10 | | 12 | | (98) | | 0 | | (1) | | 1 | | 0 | |
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) | | 0 | | 0 | | 0 | | 0 | | — | | (5) | | 0 | | (5) | |
SC&P allocation | 6 | | 26 | | 2 | | 5 | | 6 | | (45) | | — | | 0 | | 0 | | 0 | |
Fair value remeasurement of contingent consideration | (10) | | (4) | | 0 | | 7 | | 0 | | 0 | | — | | (7) | | 0 | | (7) | |
Fair value remeasurement of biological assets | 0 | | 0 | | 0 | | 9 | | 0 | | 0 | | — | | 9 | | 0 | | 9 | |
Retranslation to actual exchange rates | 32 | | 9 | | (17) | | (27) | | (3) | | 0 | | — | | (6) | | 5 | | (1) | |
Operating profit/(loss) before exceptional items | 2,034 | | 757 | | 101 | | 248 | | 501 | | 0 | | — | | 3,641 | | (147) | | 3,494 | |
Exceptional items | 54 | | (62) | | (145) | | (6) | | (1,198) | | 0 | | — | | (1,357) | | 0 | | (1,357) | |
Operating profit/(loss) | 2,088 | | 695 | | (44) | | 242 | | (697) | | 0 | | — | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| North America | Europe | Asia Pacific | Africa | Latin America and Caribbean | 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 | | 2,020 | | 1,369 | | 1,537 | | (1,537) | | 19,133 | | 20 | | 19,153 | |
Net sales | | | | | | | | | | |
At budgeted exchange rates(1) | 5,527 | | 2,579 | | 2,561 | | 1,541 | | 1,176 | | 1,627 | | (1,548) | | 13,463 | | 20 | | 13,483 | |
Acquisitions and disposals | 28 | | 2 | | — | | 5 | | — | | — | | — | | 35 | | — | | 35 | |
SC&P allocation | 9 | | 45 | | 9 | | 3 | | 13 | | (79) | | — | | — | | — | | — | |
Retranslation to actual exchange rates | (355) | | (68) | | (82) | | (137) | | (143) | | (11) | | 11 | | (785) | | — | | (785) | |
Net sales | 5,209 | | 2,558 | | 2,488 | | 1,412 | | 1,046 | | 1,537 | | (1,537) | | 12,713 | | 20 | | 12,733 | |
Operating profit/(loss) | | | | | | | | | | |
At budgeted exchange rates(1) | 2,469 | | 728 | | 628 | | 228 | | 422 | | (97) | | — | | 4,378 | | (218) | | 4,160 | |
Acquisitions and disposals | (18) | | (3) | | — | | — | | — | | — | | — | | (21) | | — | | (21) | |
SC&P allocation | (30) | | (32) | | (5) | | (3) | | (27) | | 97 | | — | | — | | — | | — | |
Fair value remeasurement of contingent considerations, equity option and earn out arrangements | (9) | | (27) | | — | | — | | — | | — | | — | | (36) | | — | | (36) | |
| | | | | | | | | | |
Retranslation to actual exchange rates | (175) | | (31) | | (15) | | (54) | | (92) | | — | | — | | (367) | | 10 | | (357) | |
Operating profit/(loss) before exceptional items | 2,237 | | 635 | | 608 | | 171 | | 303 | | — | | — | | 3,954 | | (208) | | 3,746 | |
Exceptional items | — | | (15) | | — | | — | | — | | — | | — | | (15) | | — | | (15) | |
Operating profit/(loss) | 2,237 | | 620 | | 608 | | 171 | | 303 | | — | | — | | 3,939 | | (208) | | 3,731 | |
Non-operating items | | | | | | | | | | 14 | |
Net finance charges | | | | | | | | | | (373) | |
Share of after tax results of associates and joint ventures | | | | | | | | | | |
Moët Hennessy | | | | | | | | | | 335 | |
Other | | | | | | | | | | (1) | |
Profit before taxation | | | | | | | | | | 3,706 | |
Financial statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| North America | Europe and Turkey | Africa | Latin America and Caribbean | Asia Pacific | SC&P | Eliminate inter- segment sales | Total operating segments | Corporate and other | Total |
| £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ 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 | | 0 | | 0 | | 92 | | 0 | | 92 | |
SC&P allocation | 11 | | 63 | | 5 | | 15 | | 11 | | (105) | | 0 | | 0 | | 0 | | 0 | |
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) | | 0 | | 0 | | 0 | | 0 | | — | | 28 | | 0 | | 28 | |
SC&P allocation | 13 | | 72 | | 6 | | 32 | | 16 | | (139) | | — | | 0 | | 0 | | 0 | |
Retranslation to actual exchange rates | 151 | | (29) | | 12 | | 21 | | 16 | | 0 | | — | | 171 | | (3) | | 168 | |
Operating profit/(loss) before exceptional items | 1,948 | | 1,014 | | 275 | | 365 | | 703 | | 0 | | — | | 4,305 | | (189) | | 4,116 | |
Exceptional items | 0 | | (18) | | 0 | | 0 | | (35) | | 0 | | — | | (53) | | (21) | | (74) | |
Operating profit/(loss) | 1,948 | | 996 | | 275 | | 365 | | 668 | | 0 | | — | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| North America | Europe | Asia Pacific | Africa | Latin America and Caribbean | SC&P | Eliminate inter- segment sales | Total operating segments | Corporate and other | Total |
| £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million |
2020 | | | | | | | | | | |
Sales | 5,222 | | 4,697 | | 4,645 | | 1,911 | | 1,184 | | 1,343 | | (1,343) | | 17,659 | | 38 | | 17,697 | |
Net sales | | | | | | | | | | |
At budgeted exchange rates(1) | 4,445 | | 2,501 | | 2,253 | | 1,300 | | 944 | | 1,439 | | (1,341) | | 11,541 | | 38 | | 11,579 | |
Acquisitions and disposals | 32 | | 10 | | 1 | | 50 | | — | | — | | — | | 93 | | — | | 93 | |
SC&P allocation | 11 | | 60 | | 12 | | 4 | | 10 | | (98) | | — | | (1) | | 1 | | — | |
Retranslation to actual exchange rates | 135 | | (4) | | 4 | | (8) | | (46) | | 2 | | (2) | | 81 | | (1) | | 80 | |
Net sales | 4,623 | | 2,567 | | 2,270 | | 1,346 | | 908 | | 1,343 | | (1,343) | | 11,714 | | 38 | | 11,752 | |
Operating profit/(loss) | | | | | | | | | | |
At budgeted exchange rates(1) | 2,007 | | 730 | | 498 | | 116 | | 254 | | 45 | | — | | 3,650 | | (152) | | 3,498 | |
Acquisitions and disposals | (1) | | (4) | | — | | — | | — | | — | | — | | (5) | | — | | (5) | |
SC&P allocation | 6 | | 26 | | 6 | | 2 | | 5 | | (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 | | (3) | | (17) | | (27) | | — | | — | | (6) | | 5 | | (1) | |
Operating profit/(loss) before exceptional items | 2,034 | | 757 | | 501 | | 101 | | 248 | | — | | — | | 3,641 | | (147) | | 3,494 | |
Exceptional items | 54 | | (62) | | (1,198) | | (145) | | (6) | | — | | — | | (1,357) | | — | | (1,357) | |
Operating profit/(loss) | 2,088 | | 695 | | (697) | | (44) | | 242 | | — | | — | | 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 | |
(i)(1) These items represent the IFRS 8 performance measures for the geographical and SC&P segments.
(1)(i) The net sales figures for SC&P 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 SC&P segment to the other operating segments, inter-segmental sales are not material.
(2)(ii) The group’s net finance charges are managed centrally and are not attributable to individual operating segments.
(3)(iii) Approximately 40%37% of annual net sales occurred in the last four months of the calendar year 2020.2021.
(b) Other segmental information
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| North America £ million | Europe and Turkey £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | SC&P £ million | Corporate and other £ million | Total £ million |
2021 | | | | | | | | |
Capital expenditure | 153 | | 23 | | 125 | | 20 | | 56 | | 125 | | 124 | | 626 | |
Depreciation and intangible asset amortisation | (76) | | (31) | | (79) | | (16) | | (60) | | (126) | | (59) | | (447) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
2020 | | | | | | | | |
Capital expenditure | 145 | | 24 | | 128 | | 48 | | 59 | | 191 | | 105 | | 700 | |
Depreciation and intangible asset amortisation | (68) | | (37) | | (103) | | (21) | | (59) | | (119) | | (73) | | (480) | |
Underlying impairment | 0 | | (7) | | 0 | | (7) | | 0 | | 0 | | 0 | | (14) | |
Exceptional impairment of tangible assets | 0 | | 0 | | (139) | | 0 | | (1) | | 0 | | 0 | | (140) | |
Exceptional impairment of intangible assets | 0 | | 0 | | 0 | | 0 | | (1,205) | | 0 | | 0 | | (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) | |
Financial statements (continued)
(b) Other segmental information
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| North America £ million | Europe £ million | Asia Pacific £ million | Africa £ million | Latin America and Caribbean £ million | SC&P £ million | Corporate and other £ million | Total £ million |
2022 | | | | | | | | |
Capital expenditure | 230 | | 187 | | 146 | | 139 | | 128 | | 256 | | 11 | | 1,097 | |
Depreciation and intangible asset amortisation | (80) | | (93) | | (93) | | (81) | | (16) | | (116) | | (10) | | (489) | |
| | | | | | | | |
Exceptional impairment of tangible assets | — | | (3) | | — | | — | | — | | — | | — | | (3) | |
Exceptional impairment of intangible assets | — | | (96) | | (240) | | — | | — | | — | | — | | (336) | |
2021 | | | | | | | | |
Capital expenditure | 153 | | 23 | | 56 | | 125 | | 20 | | 125 | | 124 | | 626 | |
Depreciation and intangible asset amortisation | (76) | | (31) | | (60) | | (79) | | (16) | | (126) | | (59) | | (447) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
2020 | | | | | | | | |
Capital expenditure | 145 | | 24 | | 59 | | 128 | | 48 | | 191 | | 105 | | 700 | |
Depreciation and intangible asset amortisation | (68) | | (37) | | (59) | | (103) | | (21) | | (119) | | (73) | | (480) | |
Underlying impairment | — | | (7) | | — | | — | | (7) | | — | | — | | (14) | |
Exceptional impairment of tangible assets | — | | — | | (1) | | (139) | | — | | — | | — | | (140) | |
Exceptional impairment of intangible assets | — | | — | | (1,205) | | — | | — | | — | | — | | (1,205) | |
(c) Category and geographical analysis
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Category analysis | Geographic analysis |
| Spirits £ million | Beer(iv) £ million | | | Ready to drink(iv) £ million | Other £ million | Total £ million | Great Britain £ million | United States £ million | Nether- lands £ million | India £ million | Rest of World £ million | Total £ million |
2021 | | | | | | | | | | | | | |
Sales(i) | 15,634 | | 2,562 | | | | 741 | | 216 | | 19,153 | | 1,822 | | 5,441 | | 70 | | 3,011 | | 8,809 | | 19,153 | |
Non-current assets(ii), (iii) | | | | | | | | 2,119 | | 4,320 | | 2,474 | | 2,561 | | 7,589 | | 19,063 | |
2020 (Restated) | | | | | | | | | | | | | |
Sales(i), (iv) | 14,158 | | 2,687 | | | | 621 | | 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 (Restated) | | | | | | | | | | | | | |
Sales(i), (iv) | 15,283 | | 3,041 | | | | 662 | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Category analysis | Geographic analysis |
| Spirits £ million | Beer £ million | | | Ready to drink £ million | Other £ million | Total £ million | United States £ million | India £ million | Great Britain £ million | Nether- lands £ million | Rest of World £ million | Total £ million |
2022 | | | | | | | | | | | | | |
Sales(1) | 18,164 | | 3,128 | | | | 882 | | 274 | | 22,448 | | 6,327 | | 3,219 | | 2,142 | | 89 | | 10,671 | | 22,448 | |
Non-current assets(2), (3) | | | | | | | | 5,899 | | 2,396 | | 2,413 | | 2,600 | | 8,261 | | 21,569 | |
2021 | | | | | | | | | | | | | |
Sales(1) | 15,634 | | 2,562 | | | | 741 | | 216 | | 19,153 | | 5,441 | | 3,011 | | 1,822 | | 70 | | 8,809 | | 19,153 | |
Non-current assets(2), (3) | | | | | | | | 4,320 | | 2,561 | | 2,119 | | 2,474 | | 7,589 | | 19,063 | |
2020 | | | | | | | | | | | | | |
Sales(1) | 14,158 | | 2,687 | | | | 621 | | 231 | | 17,697 | | 4,839 | | 2,783 | | 1,684 | | 62 | | 8,329 | | 17,697 | |
Non-current assets(2), (3) | | | | | | | | 5,028 | | 2,758 | | 1,911 | | 2,661 | | 7,563 | | 19,921 | |
(i)(1) The geographical analysis of sales is based on the location of third partythird-party sales.
(ii)(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.
(iii)(3) The management information provided to the chief operating decision maker does not include an analysis of assets and liabilities by category and therefore is not disclosed.
(iv) Flavoured malt beverages have been reclassified from ready to drink to beer from 1 July 2020. This reporting is in line with the nature of these products and how management reviews the performance. Before the reclassification the beer sales would have been £2,188 million in 2021 (2020 – £2,342 million; 2019 – £2,758 million), and the ready to drink sales would have been £1,115 million in 2021 (2020 – £966 million; 2019 – £945 million).
Financial statements (continued)
3. Operating costs
| | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
Excise duties | 6,420 | | 5,945 | | 6,427 | |
Cost of sales | 5,038 | | 4,654 | | 4,866 | |
Marketing | 2,163 | | 1,841 | | 2,042 | |
Other operating items | 1,801 | | 3,120 | | 1,917 | |
| 15,422 | | 15,560 | | 15,252 | |
Comprising: | | | |
Excise duties | | | |
Great Britain | 1,018 | | 930 | | 898 | |
United States | 589 | | 585 | | 587 | |
India | 2,127 | | 1,927 | | 2,202 | |
Other | 2,686 | | 2,503 | | 2,740 | |
Increase in inventories | (293) | | (275) | | (446) | |
Raw materials and consumables | 3,126 | | 2,842 | | 3,007 | |
Marketing | 2,163 | | 1,841 | | 2,042 | |
Other external charges | 1,978 | | 2,044 | | 2,285 | |
Staff costs | 1,586 | | 1,404 | | 1,580 | |
Depreciation, amortisation and impairment | 447 | | 1,839 | | 374 | |
Gains on disposal of properties | (1) | | (2) | | (5) | |
Net foreign exchange losses/(gains) | 22 | | 15 | | (7) | |
Other operating income | (26) | | (93) | | (5) | |
| 15,422 | | 15,560 | | 15,252 | |
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
Excise duties | 6,996 | | 6,420 | | 5,945 | |
Cost of sales | 5,973 | | 5,038 | | 4,654 | |
Marketing | 2,721 | | 2,163 | | 1,841 | |
Other operating items | 2,349 | | 1,801 | | 3,120 | |
| 18,039 | | 15,422 | | 15,560 | |
Comprising: | | | |
Excise duties | | | |
United States | 614 | | 589 | | 585 | |
Great Britain | 1,172 | | 1,018 | | 930 | |
India | 2,182 | | 2,127 | | 1,927 | |
Other | 3,028 | | 2,686 | | 2,503 | |
Increase in inventories | (909) | | (293) | | (275) | |
Raw materials and consumables | 4,017 | | 3,126 | | 2,842 | |
Marketing | 2,721 | | 2,163 | | 1,841 | |
Other external charges | 2,597 | | 1,978 | | 2,044 | |
Staff costs | 1,795 | | 1,586 | | 1,404 | |
Depreciation, amortisation and impairment | 828 | | 447 | | 1,839 | |
Gains on disposal of properties | (2) | | (1) | | (2) | |
Net foreign exchange losses | 10 | | 22 | | 15 | |
Other operating income | (14) | | (26) | | (93) | |
| 18,039 | | 15,422 | | 15,560 | |
(a) Other external charges
Other external charges include research and development expenditure in respect of new drinks products and package design of £43 million (2021 – £40 million (2020million; 2020 – £34 million; 2019 – £35 million) and maintenance and repairs of £136 million (2021 – £107 million (2020million; 2020 – £105 million; 2019 – £103 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.
| | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
Audit of these financial statements | 3.8 | | 5.3 | | 3.8 | |
Audit of financial statements of subsidiaries | 4.4 | | 3.6 | | 3.4 | |
Audit related assurance services(i) | 2.6 | | 2.4 | | 1.6 | |
Total audit fees (Audit fees) | 10.8 | | 11.3 | | 8.8 | |
| | | |
Other assurance services (Audit related fees)(ii) | 0.8 | | 0.8 | | 0.7 | |
All other non-audit fees (All other fees) | 0 | | 0 | | 0.2 | |
| 11.6 | | 12.1 | | 9.7 | |
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
Audit of these financial statements | 4.2 | | 3.8 | | 5.3 | |
Audit of financial statements of subsidiaries | 6.1 | | 4.4 | | 3.6 | |
Audit related assurance services(1) | 2.5 | | 2.6 | | 2.4 | |
Total audit fees (Audit fees) | 12.8 | | 10.8 | | 11.3 | |
| | | |
Other assurance services (Audit related fees)(2) | 0.7 | | 0.8 | | 0.8 | |
| | | |
| 13.5 | | 11.6 | | 12.1 | |
(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)(2) Other assurance services comprise the aggregate fees for assurance and related services that are not reported under ‘total audit fees’.
(1)(i) Disclosure requirements for auditorauditors 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£0.3 million (2020(2021 – £0.4 million; 20192020 – £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.
Audit services provided by firms other than PwC for the year ended 30 June 20212022 were £0.1 million (2020(2021 – £0.1 million; 20192020 – £0.1 million). Further PwC fees for audit services in respect of employee pensionpost employment plans were £0.2 million for the year ended 30 June 2021 (20202022 (2021 – £0.3£0.2 million; 20192020 – £0.3 million).
Financial statements (continued)
(c) Staff costs and average number of employees
| | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
Aggregate remuneration | | | |
Wages and salaries | 1,336 | | 1,251 | | 1,344 | |
Share-based incentive plans | 50 | | 3 | | 50 | |
Employer’s social security | 83 | | 79 | | 96 | |
Employer’s pension | | | |
Defined benefit plans | 82 | | 37 | | 61 | |
Defined contribution plans | 25 | | 24 | | 19 | |
Other post employment plans | 10 | | 10 | | 10 | |
| 1,586 | | 1,404 | | 1,580 | |
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
Aggregate remuneration | | | |
Wages and salaries | 1,557 | | 1,336 | | 1,251 | |
Share-based incentive plans | 59 | | 50 | | 3 | |
Employer’s social security | 107 | | 83 | | 79 | |
Employer’s pension | | | |
Defined benefit plans | 36 | | 82 | | 37 | |
Defined contribution plans | 33 | | 25 | | 24 | |
Other post employment plans | 3 | | 10 | | 10 | |
| 1,795 | | 1,586 | | 1,404 | |
The average number of employees on a full time equivalent basis (excluding employees of associates and joint ventures) was as follows:
| | | | | | | | | | | |
| 2021 | 2020 | 2019 |
North America | 2,616 | | 2,466 | | 2,410 | |
Europe and Turkey | 3,267 | | 3,350 | | 3,609 | |
Africa | 4,016 | | 4,003 | | 4,338 | |
Latin America and Caribbean | 1,505 | | 1,549 | | 1,610 | |
Asia Pacific | 6,474 | | 6,559 | | 7,038 | |
SC&P | 5,085 | | 4,908 | | 4,919 | |
Corporate and other | 4,687 | | 4,940 | | 4,496 | |
| 27,650 | | 27,775 | | 28,420 | |
| | | | | | | | | | | |
| 2022 | 2021 (Restated)(i) | 2020 (Restated)(i) |
North America | 2,811 | | 2,562 | | 2,459 | |
Europe | 3,014 | | 3,237 | | 3,323 | |
Asia Pacific | 6,500 | | 6,474 | | 6,559 | |
Africa | 4,061 | | 4,016 | | 4,617 | |
Latin America and Caribbean | 1,500 | | 1,505 | | 1,549 | |
SC&P | 5,025 | | 5,085 | | 4,908 | |
Corporate and other | 5,076 | | 4,687 | | 4,940 | |
| 27,987 | | 27,566 | | 28,355 | |
(1) The impact of acquisitions and disposals was changed and now disclosed restated where relevant.
At 30 June 20212022 the group had, on a full time equivalent basis, 27,783 (202028,558(2021 – 27,788; 201927,783; 2020 – 28,150)27,788) employees. The average number of employees of the group, including part time employees, for the year was 28,025 (202028,137(2021 – 28,490; 201928,025; 2020 – 29,402)28,490).
Financial statements (continued)
(d) Exceptional operating items
Included in other operating items are the following:
| | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
Staff costs | | | |
Guaranteed minimum pension equalisation charge | 5 | | 0 | | 21 | |
Other external charges | 13 | | 95 | | 53 | |
Other operating income | (3) | | (83) | | 0 | |
| | | |
Depreciation, amortisation and impairment | | | |
Brand, goodwill, tangible and other assets impairment | 0 | | 1,345 | | 0 | |
Total exceptional operating items (note 4) | 15 | | 1,357 | | 74 | |
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
Staff costs | | | |
Guaranteed minimum pension equalisation charge | — | | 5 | | — | |
Other external charges | 52 | | 13 | | 95 | |
Other operating income | — | | (3) | | (83) | |
| | | |
Depreciation, amortisation and impairment | | | |
Brand, goodwill, tangible and other assets impairment | 336 | | — | | 1,345 | |
Total exceptional operating items (note 4) | 388 | | 15 | | 1,357 | |
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 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.
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 impairment of intangible assets and fixed assets, indirect tax settlements, property disposals and changes in post employment plans.
Financial statements (continued)
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 non-operating exceptional items below operating profit in the consolidated income statement.
Taxation items Exceptional current and deferred tax items comprising 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)
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
Exceptional operating items | | | |
Brand, goodwill, tangible and other assets impairment (a) | (336) | | — | | (1,345) | |
Winding down Russian operations (b) | (50) | | — | | — | |
Donations (c) | (2) | | (5) | | (89) | |
Ongoing litigation in Turkey (d) | — | | (15) | | — | |
Guaranteed minimum pension equalisation (e) | — | | (5) | | — | |
Obsolete inventories (f) | — | | 7 | | (30) | |
Substitution drawback (g) | — | | 3 | | 83 | |
Indirect tax in Korea (h) | — | | — | | 24 | |
| | | |
| (388) | | (15) | | (1,357) | |
Non-operating items | | | |
Sale of businesses and brands | | | |
Meta Abo Brewery (i) | (95) | | — | | — | |
Windsor business (j) | (19) | | — | | — | |
Picon brand (k) | 91 | | — | | — | |
United National Breweries (l) | 6 | | 10 | | (32) | |
USL businesses (m) | — | | 3 | | — | |
Portfolio of 19 brands (n) | — | | 1 | | 2 | |
Loss on disposal of associate (o) | — | | — | | (1) | |
Step acquisitions (p) | — | | — | | 8 | |
| (17) | | 14 | | (23) | |
| | | |
Exceptional items before taxation | (405) | | (1) | | (1,380) | |
Items included in taxation (note 7 (b)) | 31 | | (84) | | 154 | |
| | | |
Total exceptional items | (374) | | (85) | | (1,226) | |
Attributable to: | | | |
Equity shareholders of the parent company | (271) | | (86) | | (1,157) | |
Non-controlling interests | (103) | | 1 | | (69) | |
Total exceptional items | (374) | | (85) | | (1,226) | |
| | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
Exceptional operating items | | | |
Ongoing litigation in Turkey (a) | (15) | | 0 | | 0 | |
Guaranteed minimum pension equalisation (b) | (5) | | 0 | | (21) | |
Donations (c (i)) | (5) | | (89) | | 0 | |
Obsolete inventories (c (ii)) | 7 | | (30) | | 0 | |
Substitution drawback (c (iii)) | 3 | | 83 | | 0 | |
Brand, goodwill, tangible and other assets impairment (d) | 0 | | (1,345) | | 0 | |
Indirect tax in Korea (e) | 0 | | 24 | | (35) | |
French tax audit penalty (note 7 (b) (v)) | 0 | | 0 | | (18) | |
| (15) | | (1,357) | | (74) | |
Non-operating items | | | |
Sale of businesses and brands | | | |
United National Breweries (f) | 10 | | (32) | | (9) | |
USL businesses (g) | 3 | | 0 | | (2) | |
Portfolio of 19 brands (h) | 1 | | 2 | | 155 | |
Loss on disposal of associate (i) | 0 | | (1) | | 0 | |
Step acquisitions (j) | 0 | | 8 | | 0 | |
| 14 | | (23) | | 144 | |
French tax audit interest (note 7 (b) (v)) | 0 | | 0 | | (9) | |
| | | |
Exceptional items before taxation | (1) | | (1,380) | | 61 | |
Items included in taxation (note 7 (b)) | (84) | | 154 | | (39) | |
Total exceptional items | (85) | | (1,226) | | 22 | |
Attributable to: | | | |
Equity shareholders of the parent company | (86) | | (1,157) | | (4) | |
Non-controlling interests | 1 | | (69) | | 26 | |
Total exceptional items | (85) | | (1,226) | | 22 | |
(a) In the year ended 30 June 2021, based on recent developments,2022, an additional provisionimpairment charge of TRY 156£336 million (£15 million) was recorded as anrecognised in exceptional itemoperating items in respect of ongoing litigation in Turkey, bringing the provision’s balance to TRY 272 millionMcDowell's No.1 brand (£23240 million) following a settlement of TRY 15 million, Bell's brand (£177 million) during the year.
(b) On 20 November 2020, the High Court of Justice of England and Wales issued a ruling that requires schemes to equalise pension benefits for men and women for the calculation of their guaranteed minimum pension liability (GMP) on historic transfers out, which resulted in an additional liability of £5 millionSmirnov related goodwill (£19 million). The corresponding expense was recognised as an exceptional operating item, consistent with the charge of £21 million in relation to the initial GMP ruling in the year ended 30 June 2019.
(c) In line with the group’s accounting policy, given the unusual nature and magnitude of the below items, these were reported as exceptional operating items:
(i) An exceptional charge of $6 million (£5 million) was recognised as part of the 'Raising the Bar' programme in the year ended 30 June 2021. The additional charge represents the re-investment of corporate tax benefit in the fund in certain markets, where a corporate tax deduction is available.
In the year ended 30 June 2020, Diageo launched the 'Raising the Bar' programme, including a commitment of $100 million (£81 million) over a period of up to two years from 1 July 2020, to support pubs and bars to recover following the Covid-19 pandemic. Diageo also provided other forms of support to help the communities and the industry which amounted to £8 million.
(ii) In the year ended 30 June 2021, an inventory provision of £7 million was released (2020 - a charge of £30 million) in respect of inventories that had earlier been expected to be returned and destroyed as a consequence of the Covid-19 pandemic, resulting in an exceptional gain. Given the original charge was classified as an exceptional item in the year ended 30 June 2020, the change to the provision was also classified as exceptional.
(iii) In the year ended 30 June 2021, an additional gain of $4 million (£3 million) was recognised in other operating items for excess receipts in respect of substitution drawback claims on prior year accruals.
In the year ended 30 June 2020, an estimated benefit of $105 million (£83 million) for substitution drawback claims that had been filed and were to be filed with the US Government in relation to prior years was recognised in other operating items.
Financial statements (continued)
(d) In the year ended 30 June 2020, an impairment charge of £1,345 million was recognised in exceptional operating items, comprising of £655 million in respect of the India cash-generating unit containing the India goodwill, £116 million in respect of the USL popular brands category (Old Tavern brand £78 million and Bagpiper brand £38 million) and £1 million in respect of fixed assets in India; £434 million in respect of the Windsor Premier brand; £84 million in respect of the group's Nigerian tangible fixed assets;property, plant and equipment in Nigeria; and £55 million in respect of the group's Ethiopian tangible fixed assets.property, plant and equipment in Ethiopia.
For further information, see notesnote 9 (d).
(b) In March 2022, a decision was taken to suspend exporting to and 10, respectively.selling in Russia and on 28 June 2022, Diageo decided that it would wind down its operations in Russia over the following six months. Losses of £50 million directly attributable to the wind down primarily include provisions for onerous contracts (£14 million) and redundancies (£13 million). Total impact of winding down
Financial statements (continued)
operations in Russia resulted in a loss of £146 million, including impairment of the Bell’s brand (£77 million), Smirnov related goodwill (£19 million), and directly attributable items.
(c) An exceptional charge of $3 million (£2 million) (2021 – £5 million) was recognised as part of the 'Raising the Bar' programme, in addition to the commitment of $100 million (£81 million) announced in the year ended 30 June 2020. The additional charge represents the re-investment of corporate tax benefit in the fund in certain markets, where a corporate tax deduction is available, and was recognised as an exceptional operating item, consistent with the initial commitment. Diageo also provided other forms of support to help our communities and the industry, which amounted to £8 million in the year ended 30 June 2020.
(d)In the year ended 30 June 2019, the group recognised a2021, an additional provision of £35£15 million for indirect tax was recorded as an exceptional item in respect of certain channel accountsongoing litigation in Turkey, bringing the provision’s balance to £23 million following a settlement of £1 million during that year.
(e) On 20 November 2020, the High Court of Justice of England and regulatory changeWales issued a ruling that requires pension schemes to equalise pension benefits for men and women for the calculation of their guaranteed minimum pension liability (GMP) on historic transfers out, which resulted in Koreaan additional liability of £5 million in the year ended 30 June 2021. The corresponding expense was recognised as an exceptional operating item consistently with the charge in relation to the initial GMP ruling.
(f) In the year ended 30 June 2021, an inventory provision of £7 million (2020 - a charge of £30 million) was released in respect of obsolete inventories that had earlier been expected to be returned and destroyed as a direct consequence of the Covid-19 pandemic, resulting in an exceptional gain. The provision release was recognised as an exceptional operating item consistently with the original charge in the year ended 30 June 2020.
(g) In the year ended 30 June 2021, an additional gain of $4 million(£3 million) was recognised in exceptional operating items for excess receipts in respect of substitution drawback claims that had been filed and were to be filed with the US Government in relation to prior years. The changes in estimates were recognised as an exceptional operating item consistently with the initial income of £83 million in the year ended 30 June 2020.
(h) An assessment was issued by the Korea Tax Authority in the year ended 30 June 2020 that resulted in the reversal of the prior year's provision in the amount of £24 million.
(f)(i) On 25 April 2022, Diageo completed the sale of 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.
(j) On 25 March 2022, Diageo agreed to the sale of its Windsor business in Korea. At 30 June 2022, assets and liabilities 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. At 30 June 2022, cumulative translation gains recognised in exchange reserves were £141 million which will be recycled to the income statement on completion of the transaction, in the year ending 30 June 2023.
(k) On 10 May 2022, Diageo sold its Picon brand. The sale resulted in an exceptional non-operating gain of £91 million, net of disposal costs. Disposal costs relating to the transaction amounted to £9 million.
(l) In the year ended 30 June 2021,2022, ZAR 209133 million (£10 million)(£6 million) of deferred consideration was paid to Diageo in respect of the sale of United National Breweries, the full amount of which represented a non-operating gain (2020(2021 – a gain of £10 million; 2020 - a loss of £32 million; 2019 - loss of £9 million ).million).
(g) (m) Certain subsidiaries of United Spirits Limited subsidiaries(USL) were sold in the year ended 30 June 2021. The sale of businessesthese subsidiaries resulted in an exceptional gain of £3 million.
In the year ended 30 June 2019, the disposal of the Indian wine business resulted in an exceptional loss of £2 million.
(h)(n) In the year ended 30 June 2021, the group reversed $2£1 million (£1 million) (2020 - £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)(o) In the year ended 30 June 2020, the disposal of an associate, Equal Parts, LLC resulted in an exceptional loss of £1 million.£1 million.
(j)(p) 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.
For further information on acquisition and sale of businesses and brands, see note 8 (a) and 8 (b).
Financial statements (continued)
Cash payments and receipts included in net cash inflow from operating activities in respect of exceptional items were as follows:
| | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
Substitution drawback | 60 | | 26 | | 0 | |
Donations | (50) | | (7) | | 0 | |
Thalidomide (note 14 (d) (a)) | (15) | | (17) | | (15) | |
Indirect tax in Korea | (10) | | 0 | | 0 | |
Ongoing litigation in Turkey | (1) | | 0 | | 0 | |
French tax audit | 0 | | (88) | | 0 | |
| | | |
| | | |
Total cash payments | (16) | | (86) | | (15) | |
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
Donations | (37) | | (50) | | (7) | |
Thalidomide (note 15 (d) (i)) | (16) | | (15) | | (17) | |
Winding down Russian operations | (13) | | — | | — | |
Indirect tax in Korea | — | | (10) | | — | |
Ongoing litigation in Turkey | — | | (1) | | — | |
Substitution drawback | — | | 60 | | 26 | |
French tax audit | — | | — | | (88) | |
Total cash payments | (66) | | (16) | | (86) | |
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 charges directly 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 on 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 charges include 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.
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.
Financial statements (continued)
| | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
Interest income | 119 | | 192 | | 232 | |
Fair value gain on financial instruments | 124 | | 123 | | 155 | |
Total interest income(i) | 243 | | 315 | | 387 | |
Interest charge on bank loans, bonds and overdrafts | (365) | | (390) | | (349) | |
Interest charge on leases
| (16) | | (15) | | (7) | |
| | | |
Interest charge on other borrowings | (84) | | (120) | | (122) | |
Fair value loss on financial instruments | (126) | | (123) | | (157) | |
Total interest charges(i) | (591) | | (648) | | (635) | |
Net interest charges | (348) | | (333) | | (248) | |
Net finance income in respect of post employment plans in surplus (note 13) | 18 | | 26 | | 29 | |
Hyperinflation adjustment in respect of Venezuela (note 1) | 2 | | 6 | | 10 | |
Interest income in respect of direct and indirect tax | 15 | | 16 | | 16 | |
Other finance income | 0 | | 3 | | 0 | |
Total other finance income | 35 | | 51 | | 55 | |
Net finance charge in respect of post employment plans in deficit (note 13) | (13) | | (17) | | (22) | |
Hyperinflation adjustment and foreign exchange revaluation of monetary items in respect of Lebanon (note 1) | (8) | | 0 | | 0 | |
Unwinding of discounts | (20) | | (24) | | (17) | |
Interest charge in respect of direct and indirect tax | (11) | | (22) | | (11) | |
Change in financial liability (Level 3) | (7) | | (6) | | (8) | |
| | | |
Other finance charges (exceptional)(ii) | 0 | | 0 | | (9) | |
Guarantee fees | (1) | | (1) | | 0 | |
Other finance charges | 0 | | (1) | | (3) | |
Total other finance charges | (60) | | (71) | | (70) | |
Net other finance charges | (25) | | (20) | | (15) | |
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
Interest income | 127 | | 119 | | 192 | |
Fair value gain on financial instruments | 341 | | 124 | | 123 | |
Total interest income(1) | 468 | | 243 | | 315 | |
Interest charge on bank loans, bonds and overdrafts | (371) | | (365) | | (390) | |
Interest charge on leases | (12) | | (16) | | (15) | |
| | | |
Interest charge on other borrowings | (92) | | (84) | | (120) | |
Fair value loss on financial instruments | (346) | | (126) | | (123) | |
Total interest charges(1) | (821) | | (591) | | (648) | |
Net interest charges | (353) | | (348) | | (333) | |
Net finance income in respect of post employment plans in surplus (note 14) | 22 | | 18 | | 26 | |
Hyperinflation adjustment in respect of Venezuela (note 1) | 1 | | 2 | | 6 | |
Interest income in respect of direct and indirect tax | 2 | | 15 | | 16 | |
Unwinding of discounts | 4 | | — | | — | |
Other finance income | — | | — | | 3 | |
Total other finance income | 29 | | 35 | | 51 | |
Net finance charge in respect of post employment plans in deficit (note 14) | (12) | | (13) | | (17) | |
Hyperinflation adjustment and foreign exchange revaluation of monetary items in respect of Lebanon (note 1) | (3) | | (8) | | — | |
Unwinding of discounts | (11) | | (20) | | (24) | |
Interest charge in respect of direct and indirect tax | (16) | | (11) | | (22) | |
Change in financial liability (Level 3) | (20) | | (7) | | (6) | |
Hyperinflation adjustment in respect of Turkey (note 1) | (34) | | — | | — | |
| | | |
Guarantee fees | (1) | | (1) | | (1) | |
Other finance charges | (1) | | — | | (1) | |
Total other finance charges | (98) | | (60) | | (71) | |
Net other finance charges | (69) | | (25) | | (20) | |
(i)(1) Includes £28£27 million interest income and £(429)£(417) million interest charge in respect of financial assets and liabilities that are not measured at fair value through the income statement (2020(2021 – £28 million income and £(429) million charge; 2020 – £46 million income and £(471) million charge; 2019 – £86 million income and £(439) million charge).
(ii) In respect of the French tax audit settlement (see note 7(b)(v)).
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 of disposal.
Diageo’s principal associate is Moët Hennessy of which Diageo owns 34%. Moët Hennessy is the spiritswines and winespirits subsidiary 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 2019 | 3,040 | | 133 | | 3,173 | |
Exchange differences | 78 | | 4 | | 82 | |
Additions | 0 | | 47 | | 47 | |
Share of profit after tax | 285 | | (3) | | 282 | |
Disposals | 0 | | (1) | | (1) | |
Dividends | 0 | | (4) | | (4) | |
Share of movements in other comprehensive income and equity | (8) | | 0 | | (8) | |
Step acquisitions | 0 | | (11) | | (11) | |
Transfer | 0 | | (2) | | (2) | |
Other | 0 | | (1) | | (1) | |
At 30 June 2020 | 3,395 | | 162 | | 3,557 | |
Exchange differences | (228) | | (12) | | (240) | |
Additions | 0 | | 38 | | 38 | |
Share of profit after tax | 335 | | (1) | | 334 | |
| | | |
Dividends | (289) | | (1) | | (290) | |
Share of movements in other comprehensive income and equity | (85) | | 0 | | (85) | |
| | | |
Transfer | 0 | | 2 | | 2 | |
Impairment charged during the year | 0 | | (8) | | (8) | |
At 30 June 2021 | 3,128 | | 180 | | 3,308 | |
| | | | | | | | | | | |
| Moët Hennessy £ million | Others £ million | Total £ million |
Cost less provisions | | | |
At 30 June 2020 | 3,395 | | 162 | | 3,557 | |
Exchange differences | (228) | | (12) | | (240) | |
Additions | — | | 38 | | 38 | |
Share of profit/(loss) after tax | 335 | | (1) | | 334 | |
| | | |
Dividends | (289) | | (1) | | (290) | |
Share of movements in other comprehensive income and equity | (85) | | — | | (85) | |
| | | |
Transfer | — | | 2 | | 2 | |
Impairment charged during the year | — | | (8) | | (8) | |
| | | |
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 | |
(1)(i) Investment in associates balance includes loans given to and preference shares invested in associates of £108£163 million (2020(2021 – £82£108 million).
(2)(ii) If certain performance targets are met by associates in the Distill Ventures programmes,programme, an additional £22 million (2021 – £33 million (2020 – £22 million)million) will be invested in those associates.
(b) Income statement information for the three years ended 30 June 2021 and balance sheet information as at 30 June 2021 and 30 June 2020 of Moët Hennessy is as follows:
| | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
Sales | 4,819 | | 4,425 | | 4,713 | |
Profit for the year | 985 | | 838 | | 911 | |
Total comprehensive income | 999 | | 765 | | 865 | |
Financial statements (continued)
Moët Hennessy prepares its financial statements under IFRS as endorsed by the EU in euros to 31 December each year. The results are adjusted for alignment to Diageo accounting policies and are a major part of the Wines & Spirits division of LVMH. The results are translated at £1 = €1.13 (2020€1.18 (2021 – £1£1 = €1.14; 2019€1.13; 2020 – £1£1 = €1.13)€1.14). | | | | | | | | | |
| 2021 £ million | 2020 £ million | |
Non-current assets | 5,320 | | 5,310 | | |
Current assets | 7,800 | | 8,352 | | |
Total assets | 13,120 | | 13,662 | | |
Non-current liabilities | (1,665) | | (1,480) | | |
Current liabilities | (2,256) | | (2,197) | | |
Total liabilities | (3,921) | | (3,677) | | |
Net assets | 9,199 | | 9,985 | | |
(1)Income statement information for the three years ended 30 June 2022 and balance sheet information as at 30 June 2022 and 30 June 2021 of Moët Hennessy is as follows:
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
Sales | 5,553 | | 4,819 | | 4,425 | |
Profit for the year | 1,250 | | 985 | | 838 | |
Total comprehensive income | 1,269 | | 999 | | 765 | |
Financial statements (continued)
| | | | | | | | | |
| 2022 £ million | 2021 £ million | |
Non-current assets | 5,957 | | 5,320 | | |
Current assets | 8,447 | | 7,800 | | |
Total assets | 14,404 | | 13,120 | | |
Non-current liabilities | (1,791) | | (1,665) | | |
Current liabilities | (2,415) | | (2,256) | | |
Total liabilities | (4,206) | | (3,921) | | |
Net assets | 10,198 | | 9,199 | | |
(i) Including acquisition fair value adjustments principally in respect of Moët Hennessy’s brands and translated at £1 = €1.17 (2020€1.16 (2021 – £1 = €1.09)€1.17).
(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 £1,254£1,340 million (2020(2021 – £1,312£1,254 million), plus the group’s share of post acquisition reserves of £2,054£2,312 million (2020(2021 – £2,245£2,054 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 benefits are not recognised unless it is probable that the tax positions are sustainable. Once considered to be probable, tax benefits are reviewed each year to assess whether a provision should be taken against full recognition of the benefit on the basis of potential settlement through negotiation and/or litigation. 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. 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.
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 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.
Financial statements (continued)
(a) Analysis of taxation charge for the year
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| United Kingdom | Rest of world | Total |
| 2021 £ million | 2020 £ million | 2019 £ million | 2021 £ million | 2020 £ million | 2019 £ million | 2021 £ million | 2020 £ million | 2019 £ million |
Current tax | | | | | | | | | |
Current year | 100 | | 108 | | 150 | | 684 | | 589 | | 713 | | 784 | | 697 | | 863 | |
Adjustments in respect of prior years | 1 | | 6 | | (3) | | 28 | | (25) | | 52 | | 29 | | (19) | | 49 | |
| 101 | | 114 | | 147 | | 712 | | 564 | | 765 | | 813 | | 678 | | 912 | |
Deferred tax | | | | | | | | | |
Origination and reversal of temporary differences | 13 | | 24 | | 29 | | 18 | | (143) | | (19) | | 31 | | (119) | | 10 | |
Changes in tax rates | 46 | | 6 | | (2) | | 32 | | 39 | | (52) | | 78 | | 45 | | (54) | |
Adjustments in respect of prior years | 8 | | 0 | | 5 | | (23) | | (15) | | 25 | | (15) | | (15) | | 30 | |
| 67 | | 30 | | 32 | | 27 | | (119) | | (46) | | 94 | | (89) | | (14) | |
Taxation on profit | 168 | | 144 | | 179 | | 739 | | 445 | | 719 | | 907 | | 589 | | 898 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| United Kingdom | Rest of world | Total |
| 2022 £ million | 2021 £ million | 2020 £ million | 2022 £ million | 2021 £ million | 2020 £ million | 2022 £ million | 2021 £ million | 2020 £ million |
Current tax | | | | | | | | | |
Current year | 174 | | 100 | | 108 | | 867 | | 684 | | 589 | | 1,041 | | 784 | | 697 | |
Adjustments in respect of prior years | 10 | | 1 | | 6 | | 16 | | 28 | | (25) | | 26 | | 29 | | (19) | |
| 184 | | 101 | | 114 | | 883 | | 712 | | 564 | | 1,067 | | 813 | | 678 | |
Deferred tax | | | | | | | | | |
Origination and reversal of temporary differences | — | | 13 | | 24 | | 21 | | 18 | | (143) | | 21 | | 31 | | (119) | |
Changes in tax rates | 2 | | 46 | | 6 | | 1 | | 32 | | 39 | | 3 | | 78 | | 45 | |
Adjustments in respect of prior years | — | | 8 | | — | | (42) | | (23) | | (15) | | (42) | | (15) | | (15) | |
| 2 | | 67 | | 30 | | (20) | | 27 | | (119) | | (18) | | 94 | | (89) | |
Taxation on profit | 186 | | 168 | | 144 | | 863 | | 739 | | 445 | | 1,049 | | 907 | | 589 | |
(b) Exceptional tax charges/(credits)/charges
The taxation charge includes the following exceptional items: | | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
Tax rate change in the United Kingdom(i) | 46 | | 0 | | 0 | |
Tax rate change in the Netherlands(ii) | 42 | | 0 | | (51) | |
| | | |
Donations(iii) | (5) | | 0 | | 0 | |
Obsolete inventories | 1 | | (7) | | 0 | |
Substitution drawback | 1 | | 20 | | 0 | |
Guaranteed minimum pension equalisation | (1) | | 0 | | (4) | |
Brand and tangible asset impairment(iv) | 0 | | (165) | | 0 | |
| | | |
| | | |
Other items | 0 | | (2) | | 0 | |
French tax audit settlement(v) | 0 | | 0 | | 61 | |
| | | |
Sale of businesses and brands | 0 | | 0 | | 33 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 84 | | (154) | | 39 | |
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
Brand and tangible asset impairment(1) | (55) | | — | | (165) | |
Sale of Picon brand | 23 | | — | | — | |
Winding down Russian operations | 3 | | — | | — | |
Donations(2) | (2) | | (5) | | — | |
Tax rate change in the United Kingdom(3) | — | | 46 | | — | |
Tax rate change in the Netherlands(4) | — | | 42 | | — | |
| | | |
| | | |
Obsolete inventories | — | | 1 | | (7) | |
Substitution drawback | — | | 1 | | 20 | |
Guaranteed minimum pension equalisation | — | | (1) | | — | |
| | | |
| | | |
| | | |
Other items | — | | — | | (2) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (31) | | 84 | | (154) | |
(i) 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
(1) In the year ended 30 June 2021 in relation to2022, the remeasurement of deferred tax assets and liabilities. In addition, there was a one-off charge of £48 million to other comprehensive income and equity, mainly in respect of the remeasurement of the deferred tax liabilities on the post employment assets.
(ii) 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 the change, an exceptional tax charge of £42 million was recognised for the year ended 30 June 2021 in relation to the remeasurement of deferred tax liabilities. During the year ended 30 June 2019 the Dutch Senate agreed to a phased reduction in the Dutch corporate tax rate which was expected to be effective from 1 January 2020. An exceptional tax credit of £51£55 million was recorded inconsists of tax impact on the year ended 30 June 2019 principally from the remeasurement of deferred tax liabilities in respectimpairment of the Ketel One vodka distribution rights from 25% to a then enacted tax rate of 20.5%. DuringMcDowell's and Bell's brand for £35 million and £20 million respectively. In the year ended 30 June 2020, the Dutch Senate enacted an increasedexceptional tax ratecredit of 21.7%, giving rise to a £12£165 million consisted of tax charge which was recognised as underlyingimpact on the impairment of the Windsor and USL brands for £105 million and £25 million, respectively, and exceptional tax charge.credits in respect of fixed assets impairments in Nigeria and Ethiopia of £25 million and £10 million, respectively.
(iii) As disclosed in(2) In the year ended 30 June 2020, Annual Report, Diageo 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 1 July 2020. Due to uncertainty on the precise nature of the spend, it could not be determined whether the amounts were deductible for tax purposes in future periods. As a result, no deferred tax asset was recognised in respect of the provision for the year ended 30 June 2020. In 2021,Based on additional information regarding the nature of the spend wasbecoming available and this has been re-assessed andfor re-assessment, a £2 million (30 June 2021 – £5 millionmillion) exceptional tax credit has beenwas recognised mainly in respect of spent in the United States, United Kingdom and Ireland for the year ended 30 June 2021.2022.
(iv)(3) 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 £48 million to other comprehensive income and equity, mainly in respect of the remeasurement of the deferred tax liabilities on the post employment assets.
(4) 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 the change, an exceptional tax charge of £42 million was recognised for the year ended 30 June 2021 in relation to the remeasurement of deferred tax liabilities. During the year ended 30 June 20202022, the exceptionalDutch Senate enacted an increased tax creditrate of £165 million consists25.8%. The remeasurement of the impairment of the Windsor and USL brands of £105 million and £25 million, respectively, exceptionaldeferred tax credits in respect of fixed assets impairments in Nigeria and Ethiopia of £25 million and £10 million, respectively.
(v) As disclosed in the 2019 Annual Report, in July 2019 Diageo reached a resolution with the Frenchliabilities was recognised as an underlying 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.charge.
Financial statements (continued)
(c) Taxation rate reconciliation and factors that may affect future tax charges
| | | | | | | | | | | | | | | | | | | | |
| 2021 £ million | 2021 % | 2020 £ million | 2020 % | 2019 £ million | 2019 % |
Profit before taxation | 3,706 | | | 2,043 | | | 4,235 | | |
Notional charge at UK corporation tax rate | 704 | | 19.0 | | 388 | | 19.0 | | 805 | | 19.0 | |
Elimination of notional tax on share of after tax results of associates and joint ventures | (63) | | (1.7) | | (54) | | (2.6) | | (59) | | (1.4) | |
Differences in overseas tax rates | 128 | | 3.5 | | 53 | | 2.6 | | 106 | | 2.5 | |
Effect of intra-group financing | 0 | | 0 | | (13) | | (0.6) | | (34) | | (0.8) | |
Non taxable gain on disposals of businesses | (2) | | (0.1) | | 0 | | 0 | | (3) | | 0 | |
Step-up gain | 0 | | 0 | | (2) | | (0.1) | | 0 | | 0 | |
Other tax rate and tax base differences | 0 | | 0 | | (47) | | (2.3) | | (79) | | (1.9) | |
Other items not chargeable | (52) | | (1.4) | | (60) | | (3.0) | | (51) | | (1.2) | |
Impairment | 0 | | 0 | | 135 | | 6.6 | | 0 | | 0 | |
Non deductible losses on disposals of businesses | 0 | | 0 | | 6 | | 0.3 | | 0 | | 0 | |
| | | | | | |
Other items not deductible(i) | 67 | | 1.8 | | 115 | | 5.6 | | 122 | | 2.9 | |
Irrecoverable withholding taxes | 25 | | 0.7 | | 36 | | 1.7 | | 24 | | 0.6 | |
Movement in provision related to uncertain tax positions(ii) | 1 | | 0 | | 6 | | 0.3 | | 98 | | 2.3 | |
Changes in tax rates(iii) | 78 | | 2.1 | | 45 | | 2.2 | | (54) | | (1.3) | |
Fair value adjustment in respect of assets held for sale | 0 | | 0 | | 0 | | 0 | | 1 | | 0 | |
Adjustments in respect of prior years(iv) | 21 | | 0.6 | | (19) | | (0.9) | | 22 | | 0.5 | |
Taxation on profit | 907 | | 24.5 | | 589 | | 28.8 | | 898 | | 21.2 | |
Tax rate before exceptional items | — | | 22.2 | | — | | 21.7 | | — | | 20.6 | |
| | | | | | | | | | | | | | | | | | | | |
| 2022 £ million | 2022 % | 2021 £ million | 2021 % | 2020 £ million | 2020 % |
Profit before taxation | 4,387 | | | 3,706 | | | 2,043 | | |
Notional charge at UK corporation tax rate | 833 | | 19.0 | | 704 | | 19.0 | | 388 | | 19.0 | |
Elimination of notional tax on share of after tax results of associates and joint ventures | (79) | | (1.8) | | (63) | | (1.7) | | (54) | | (2.6) | |
Differences in overseas tax rates | 161 | | 3.7 | | 128 | | 3.5 | | 53 | | 2.6 | |
Effect of intra-group financing | — | | — | | — | | — | | (13) | | (0.6) | |
Non-taxable gain on disposals of businesses | — | | — | | (2) | | (0.1) | | — | | — | |
Step-up gain | — | | — | | — | | — | | (2) | | (0.1) | |
Other tax rate and tax base differences | — | | — | | — | | — | | (47) | | (2.3) | |
Other items not chargeable | (49) | | (1.1) | | (52) | | (1.4) | | (60) | | (3.0) | |
Impairment | 36 | | 0.8 | | — | | — | | 135 | | 6.6 | |
Non-deductible losses on disposals of businesses | 21 | | 0.5 | | — | | — | | 6 | | 0.3 | |
| | | | | | |
Other items not deductible(1) | 58 | | 1.3 | | 67 | | 1.8 | | 115 | | 5.6 | |
Irrecoverable withholding taxes | 39 | | 0.9 | | 25 | | 0.7 | | 36 | | 1.7 | |
Movement in provision in respect of uncertain tax positions(2) | 42 | | 0.9 | | 1 | | — | | 6 | | 0.3 | |
Changes in tax rates(3) | 3 | | 0.1 | | 78 | | 2.1 | | 45 | | 2.2 | |
| | | | | | |
Adjustments in respect of prior years(4) | (16) | | (0.4) | | 21 | | 0.6 | | (19) | | (0.9) | |
Taxation on profit | 1,049 | | 23.9 | | 907 | | 24.5 | | 589 | | 28.8 | |
Tax rate before exceptional items | — | | 22.5 | | — | | 22.2 | | — | | 21.7 | |
(i)(1) Other items not deductible include additional state and local taxes and other expenses.
(ii)(2) Movement in provision related toin respect of uncertain tax positions includes both current and prior year related uncertain tax position movements. Movement in provision related to uncertain tax positions for the year ended 30 June 2019 includes £61 million exceptional tax charge in respect of the French tax audit settlement.
(iii)(3) 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. Changes in tax rates for the year ended 30 June 2020 are 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.
(iv)(4) Excludes prior year movement in provisions.
(1) As part of an exercise undertaken to amend the policy as to how items are presented, the tax rate reconciliation table has been restructured to separately show irrecoverable withholding tax and movements in provisions related to uncertain tax positions, previously reflected within other items not deductible, in order to provide more relevant information. The UK transfer pricing adjustments included for the years ended 2020 and 2019 have also been reclassified to other tax rate and tax base differences to better reflect their nature, previously included within other items not chargeable.
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 (g)19 (f).
The group has a number of ongoing tax audits worldwide for which provisions are recognised in line with the relevant accounting standard taking into account best estimates and management’s judgements concerning the ultimate outcome of the tax audit. As at For the year ended 30 June 20212022, the ongoing audits that are provided for individually are not expected to result in a material tax liability. The current tax asset of £149 million (30 June 2021 – £145 million) and tax liability of £252 million (30 June 2021 – £146 million) include £145156 million (30 June 20202021 – £190129 million) of provisions for tax uncertainties.
The cash tax paid for year ended 30 June 2022 amounts to £949 million (30 June 2021 – £852 million) and tax liability ofis £146100 million (30 June 2020 – £246 million) includes £129 million (30 June 2020 – £189 million) of provisions for tax uncertainties with the reductions mainly driven by audit payments and foreign exchange movements.
The cash tax paid in the year 30 June 2021 amounts to £852 million (30 June 2020 – £901 million) and is £39 million higherlower than the current tax charge (30(30 June 20202021 – £223£39 million higher). This arises as a result of timing differences between the accrual of income taxes, and the actual payment of cash and the movement in the provision for uncertain tax positions.positions and the actual payment of cash.
On 20 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. In addition, on 20 July 2022, HM Treasury released draft UK legislation that would commence for accounting periods starting on or after 31 December 2023 (i.e. year ending 30 June 2025 for Diageo). Diageo is reviewing this draft legislation and monitoring the status of implementation outside of the UK to understand the potential impact on the group.
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 (liabilities)/assets:
| | | | | | | | | | | | | | | | | | | | |
| 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 2019 | (349) | | (1,795) | | (38) | | 24 | | 264 | | (1,894) | |
Exchange differences | 0 | | 12 | | 1 | | (1) | | (7) | | 5 | |
Recognised in income statement – continuing operations | (10) | | 115 | | (5) | | 7 | | 27 | | 134 | |
Reclassification | 8 | | 6 | | 0 | | (3) | | (11) | | 0 | |
Recognised in other comprehensive loss and equity | 0 | | (3) | | (16) | | 34 | | (33) | | (18) | |
| | | | | | |
Tax rate change – recognised in income statement | 11 | | (52) | | 2 | | 0 | | (6) | | (45) | |
Tax rate change – recognised in other comprehensive loss and equity | 0 | | 0 | | (16) | | 0 | | 0 | | (16) | |
Acquisition of subsidiaries | 0 | | (19) | | 0 | | 0 | | 0 | | (19) | |
| | | | | | |
At 30 June 2020 | (340) | | (1,736) | | (72) | | 61 | | 234 | | (1,853) | |
Exchange differences | 26 | | 176 | | (7) | | (5) | | (17) | | 173 | |
Recognised in income statement – continuing operations | (28) | | (19) | | 2 | | 0 | | 29 | | (16) | |
Reclassification | 0 | | 7 | | 0 | | 0 | | (7) | | 0 | |
Recognised in other comprehensive loss and equity | 0 | | 0 | | (6) | | 0 | | (2) | | (8) | |
Tax rate change – recognised in income statement | (39) | | (48) | | (2) | | 1 | | 10 | | (78) | |
Tax rate change – recognised in other comprehensive loss and equity | 0 | | 0 | | (44) | | 0 | | (4) | | (48) | |
Acquisition of subsidiaries | 0 | | (16) | | 0 | | 0 | | 1 | | (15) | |
| | | | | | |
| | | | | | |
At 30 June 2021 | (381) | | (1,636) | | (129) | | 57 | | 244 | | (1,845) | |
| | | | | | | | | | | | | | | | | | | | |
| 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 2020 | (340) | | (1,736) | | (72) | | 61 | | 234 | | (1,853) | |
Exchange differences | 26 | | 176 | | (7) | | (5) | | (17) | | 173 | |
Recognised in income statement | (28) | | (19) | | 2 | | — | | 29 | | (16) | |
Reclassification | — | | 7 | | — | | — | | (7) | | — | |
Recognised in other comprehensive loss and equity | — | | — | | (6) | | — | | (2) | | (8) | |
| | | | | | |
Tax rate change – recognised in income statement | (39) | | (48) | | (2) | | 1 | | 10 | | (78) | |
Tax rate change – recognised in other comprehensive loss and equity | — | | — | | (44) | | — | | (4) | | (48) | |
Acquisition of subsidiaries | — | | (16) | | — | | — | | 1 | | (15) | |
| | | | | | |
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 businesses | — | | (31) | | — | | — | | — | | (31) | |
Sale of businesses | (5) | | — | | — | | — | | 3 | | (2) | |
| | | | | | |
At 30 June 2022 | (468) | | (1,892) | | (261) | | 63 | | 353 | | (2,205) | |
(i)(1) Deferred tax on other temporary differences includes hyperinflation, fair value movement on cross-currency swaps, interest and finance costs, restructuring provisions, share-based payments and intra groupintra-group sales of products.
After offsetting deferred tax assets and liabilities where appropriate within territories, the net deferred tax liability comprises:
| | | | | | | | |
| 2021 £ million | 2020 £ million |
Deferred tax assets | 100 | | 119 | |
Deferred tax liabilities | (1,945) | | (1,972) | |
| (1,845) | | (1,853) | |
| | | | | | | | |
| 2022 £ million | 2021 £ million |
Deferred tax assets | 114 | | 100 | |
Deferred tax liabilities | (2,319) | | (1,945) | |
| (2,205) | | (1,845) | |
The deferredDeferred tax assets of £100£114 million includes £48 include £47 million (20202021 – £84 million)£48 million) arising in jurisdictions with prior year taxable losses. The majority of the asset islosses, primarily in respect of Germany and Brazil. It is considered more likely than not that there will be sufficient future taxable profits to realise these deferred tax assets, the majority of which can be carried forward indefinitely.
(e) Unrecognised deferred tax assets
The table below 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 £708£674 million (2020 (2021 – £809£708 million).
| | | | | | | | |
| 2021 £ million | 2020 £ million |
Capital losses – indefinite | 105 | | 76 | |
Trading losses – indefinite | 23 | | 30 | |
Trading and Capital losses – expiry dates up to 2030 | 50 | | 70 | |
| 178 | | 176 | |
| | | | | | | | |
| 2022 £ million | 2021 £ million |
Capital losses – indefinite | 98 | | 105 | |
Trading losses – indefinite | 25 | | 23 | |
Trading and capital losses – expiry dates up to 2032 | 46 | | 50 | |
| 169 | | 178 | |
Additionally, no deferred tax assets have notasset has been recognised in relation to deductiblerespect of certain temporary differences arising from brand valuations, as any benefit of this temporary difference would not be realised unless certain of the group's brands were sold, whichgroup is not currently expected.planning to sell those brands thus the benefit from the temporary differences is unlikely to be realised.
Financial statements (continued)
(f) Unrecognised deferred tax liabilities
Relevant legislation largely exempts overseas dividends remitted from 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 £16.4£21.0 billion (2020(2021 – £14.7£16.4 billion).
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.
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 20212022 were as follows:
| | | | | | | | | | | | | | | | | |
| Net assets acquired and consideration |
| Aviation Gin and Davos Brands £ million | Other £ million | 2021 £ million | 2020 £ million | 2019 £ million |
Brands and other intangibles | 206 | | 128 | | 334 | | 102 | | 25 | |
Property, plant and equipment | 11 | | 4 | | 15 | | 0 | | 0 | |
Inventories | 7 | | 5 | | 12 | | 2 | | 0 | |
Other working capital | 0 | | (3) | | (3) | | (3) | | (2) | |
Deferred tax | 0 | | (15) | | (15) | | (19) | | (5) | |
Borrowings | (6) | | (2) | | (8) | | 0 | | 0 | |
Cash | 2 | | 2 | | 4 | | 2 | | 0 | |
Fair value of assets and liabilities | 220 | | 119 | | 339 | | 84 | | 18 | |
Goodwill arising on acquisition | 228 | | 46 | | 274 | | 8 | | 10 | |
Step acquisitions | 0 | | 0 | | 0 | | (23) | | (7) | |
Consideration payable | 448 | | 165 | | 613 | | 69 | | 21 | |
Satisfied by: | | | | | |
Cash consideration paid | (263) | | (95) | | (358) | | (27) | | (6) | |
Contingent consideration payable | (185) | | (68) | | (253) | | (42) | | (15) | |
Deferred consideration payable | 0 | | (2) | | (2) | | 0 | | 0 | |
| (448) | | (165) | | (613) | | (69) | | (21) | |
| | | | | | | | | | | | | | | | | | |
| Net assets acquired and consideration |
| 21Seeds £ million | | Other £ million | 2022 £ million | 2021 £ million | 2020 £ million |
Brands and other intangibles | 84 | | | 36 | | 120 | | 334 | | 102 | |
Property, plant and equipment | — | | | — | | — | | 15 | | — | |
Inventories | 4 | | | 2 | | 6 | | 12 | | 2 | |
Other working capital | — | | | 3 | | 3 | | (3) | | (3) | |
Deferred tax | (20) | | | (11) | | (31) | | (15) | | (19) | |
Borrowings | — | | | — | | — | | (8) | | — | |
Cash | 1 | | | — | | 1 | | 4 | | 2 | |
Fair value of assets and liabilities | 69 | | | 30 | | 99 | | 339 | | 84 | |
Goodwill arising on acquisition | 48 | | | 22 | | 70 | | 274 | | 8 | |
| | | | | | |
Settlement of pre-existing relationship | — | | | (1) | | (1) | | — | | — | |
Step acquisitions | — | | | (6) | | (6) | | — | | (23) | |
Consideration payable | 117 | | | 45 | | 162 | | 613 | | 69 | |
Satisfied by: | | | | | | |
Cash consideration paid | (62) | | | (26) | | (88) | | (358) | | (27) | |
Contingent consideration payable | (55) | | | (15) | | (70) | | (253) | | (42) | |
Deferred consideration payable | — | | | (4) | | (4) | | (2) | | — | |
| (117) | | | (45) | | (162) | | (613) | | (69) | |
Cash consideration paid in respect of the acquisition of businessbusinesses and purchase of shares of non-controlling interests in the three years ended 30 June 20212022 were as follows:
| | | | | | | | | | | |
| Consideration |
| 2021 £ million | 2020 £ million | 2019 £ million |
Cash consideration paid for subsidiaries | (358) | | (27) | | (6) | |
Deferred consideration paid for subsidiaries | (1) | | 0 | | 0 | |
Cash consideration paid for Casamigos | (89) | | (49) | | (9) | |
Cash consideration paid in respect of other prior year acquisitions | (6) | | (9) | | (9) | |
Cash consideration paid for investments in associates | 0 | | (6) | | (15) | |
Capital injection in associates | (38) | | (41) | | (17) | |
Cash acquired | 4 | | 2 | | 0 | |
Net cash outflow on acquisition of businesses | (488) | | (130) | | (56) | |
Purchase of shares of non-controlling interests | (42) | | (62) | | (784) | |
Total net cash outflow | (530) | | (192) | | (840) | |
| | | | | | | | | | | |
| Consideration |
| 2022 £ million | 2021 £ million | 2020 £ million |
Acquisitions in the year - subsidiaries | | | |
Cash consideration paid | (88) | | (358) | | (27) | |
| | | |
Prior year acquisitions - subsidiaries | | | |
Contingent consideration paid for Casamigos | (83) | | (89) | | (49) | |
Other consideration | (36) | | (7) | | (9) | |
Investments in associates | | | |
Cash consideration paid | (4) | | — | | (6) | |
Capital injection | (61) | | (38) | | (41) | |
Cash acquired | 1 | | 4 | | 2 | |
Net cash outflow on acquisition of businesses | (271) | | (488) | | (130) | |
Purchase of shares of non-controlling interests | — | | (42) | | (62) | |
Total net cash outflow | (271) | | (530) | | (192) | |
Financial statements (continued)
Acquisitions in the year
On 31 March 2022, Diageo acquired 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. The goodwill arising on the acquisition of 21Seeds represents expected revenue synergies and acquired workforce. The fair values of assets and liabilities acquired are provisional and will be finalised in the year ending 30 June 2023.
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, these transactions included provision for further contingent consideration of up to £18 million in aggregate, linked to performance targets and a further deferred consideration of £4 million.
Prior year acquisitions
On 30 September 2020, Diageo completed the acquisition of Aviation Gin LLC (Aviation Gin) and Davos Brands LLC (Davos Brands) to support Diageo's participation in the super premiumsuper-premium gin segment for a total consideration of $337 million (£263 million) upfront in cash and contingent consideration of up to $275 million (£214 million) linked to performance targets.
It is expected that the goodwill and brand will be deductible for tax purposes. The goodwill arising on the acquisition of Aviation Gin and Davos Brands represents expected revenue and cost synergies and acquired workforce. Aviation Gin and Davos Brands contributed $33 million (£26 million) to sales and $15 million (£11 million) loss to the period, out of which $9 million (£7 million) is related to acquisition transaction costs in the year ended 30 June 2021.
Diageo also completed a number of additional acquisitions in the year ended 30 June 2021, comprising: (i) on 26 February 2021, the acquisition of Chase Distillery Limited, to further support Diageo’sDiageo's participation in the premium-plus gin segment in the United Kingdom; (ii) on 8 March 2021, the acquisition of Far West Spirits LLC, owner of the Lone River Ranch Water brand, to improve Diageo's participation in the ready to drink category in the United States; and (iii) on 14 April 2021, the acquisition of Sons of Liberty Spirits Company, to expand Diageo's spirits-based ready to drink portfolio with Loyal 9 Cocktails. The aggregate up-frontupfront cash consideration paid on completion of these three3 transactions in the year ended 30 June 2021 was £95 million. In addition, two2 of these transactions includeincluded provision for further contingent consideration of up to £86 million in aggregate, in each case linked to
Financial statements (continued)
performance targets, and one of the transactions providesprovided for a further £2 million of deferred consideration, of which £1 million has beenwas paid by 30 June 2021.
PriorDuring the year ended 30 June 2020, Diageo completed a number of acquisitions, the largest of these were Seedlip Ltd and Anna Seed 83 Ltd, the brand owners of Seedlip and Æcorn distilled non-alcoholic spirits and aperitifs, both of which completed on 6 August 2019.
During the prior years Diageo completed a number of smaller acquisitions of brands, distribution rights and equity interests in various drinks businesses and made contingent consideration payments in respect of prior year acquisitions.
Purchase of shares of non-controlling interests
On 21 OctoberIn the years ended 30 June 2021 and 2020, and on 6 November 2020, EABLEast African Breweries Ltd, a Diageo subsidiary completed the acquisition of 13.3%30% and 16.7%4%, respectively, of shares in Serengeti Breweries Limited for a total consideration of $55$55 million (£ (£42 million) and $3 million (£2 million) in cash, respectively and £16 million in the form of shareholder loans outstanding to EABL andloan from two Diageo Holdings Netherlands B.V. at the date of completion,subsidiaries in 2021, increasing Diageo's effective economic interest from 40.2%39.2% to 47.0%. BothAll transactions arewere recognised withinin retained earnings.
On 29 July 2019, East African Breweries Limited completed the purchase of 4% 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) for an aggregate consideration of RMB 6,774 million (£775 million) and transaction costs of £9 million. This took Diageo’s shareholding in SJF from 39.71% to 63.14%. SJF was already controlled and therefore consolidated prior to these transactions.
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 three years ended 30 June 2022 were as follows:
| | | | | | | | | | | | | | |
| | | 2022 £ million | 2021 £ million | 2020 £ million | |
Sale consideration | | | | | | |
Cash received | | | 106 | | 14 | | 11 | | |
Overdraft disposed of | | | 2 | | — | | — | | |
Transaction and other directly attributable costs paid | | | (26) | | — | | — | | |
Net cash received | | | 82 | | 14 | | 11 | | |
Transaction costs payable | | | (16) | | 1 | | (1) | | |
| | | 66 | | 15 | | 10 | | |
Net assets disposed of | | | | | | |
| | | | | | |
Goodwill | | | (14) | | — | | — | | |
Property, plant and equipment | | | (11) | | (2) | | (1) | | |
Investment in associates | | | — | | — | | (1) | | |
Assets and liabilities held for sale | | | — | | — | | (30) | | |
Inventories | | | (4) | | — | | — | | |
Other working capital | | | 15 | | 1 | | — | | |
Other borrowings | | | 1 | | — | | — | | |
Corporate tax | | | (5) | | — | | — | | |
Deferred tax | | | (2) | | — | | — | | |
| | | (20) | | (1) | | (32) | | |
Impairment charge recognised up until the date of sale | | | — | | — | | (7) | | |
Exchange recycled from other comprehensive income | | | (63) | | — | | (4) | | |
(Loss)/gain on disposal before taxation | | | (17) | | 14 | | (33) | | |
Taxation | | | (23) | | — | | — | | |
(Loss)/gain on disposal after taxation | | | (40) | | 14 | | (33) | | |
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 2021, ZAR 2092022, ZAR133 million (£106 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 for an aggregate consideration of ZAR 600 million (£27 million) from which ZAR 378 million (£17 million) was deferred.
CertainPrior year disposals further included the sale of certain United Spirits Limited subsidiaries were sold in the year ended 30 June 2021 for an aggregate consideration of £3 million, which has resulted in an exceptional gain of £3 million.
In
Financial statements (continued)
(c) Assets and liabilities held for sale | | | | | | | | | | | |
| Windsor business £ million | USL Popular brands £ million | 2022 £ million |
Intangible assets | 145 | | 20 | | 165 | |
Property, plant and equipment | 3 | | 9 | | 12 | |
Other investments | 1 | | — | | 1 | |
Inventories | 6 | | 15 | | 21 | |
Trade and other receivables | 1 | | 22 | | 23 | |
| | | |
| | | |
Assets held for sale | 156 | | 66 | | 222 | |
Trade and other payables | (5) | | (13) | | (18) | |
Corporation tax | (6) | | — | | (6) | |
Deferred tax | (28) | | (7) | | (35) | |
Leases | (2) | | — | | (2) | |
Liabilities held for sale | (41) | | (20) | | (61) | |
Total | 115 | | 46 | | 161 | |
Diageo signed a share purchase agreement on 25 March 2022 with Bayside/Metis Private Equity Consortium to dispose of the Windsor business in Korea. The sale is considered to be highly probable and it is anticipated to complete in the year endedending 30 June 2019, Diageo completed2023.
Following the strategic review of its selected Popular brands, on 27 May 2022, United Spirits Limited reached agreement with Inbrew Beverages Pvt Limited for the sale of 32 brands, including Old Tavern and White Mischief. The sale covers the related contracts, permits, intellectual property rights, associated employees, working capital and a portfoliomanufacturing facility. The transaction is highly probable to be completed in the year ending 30 June 2023.
It is unlikely that any significant change would take place to the plan to sell these asset groups, hence the impacted assets and liabilities were classified as held for sale at 30 June 2022. Assets and liabilities were measured at their cost as the lower of 19 brands to Sazerac for an aggregate considerationcost and fair value less cost 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 will continue up to December 2028.disposal.
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 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). 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 impactimpacts of the Covid-19 pandemic across markets. In this regard a combination of the following factors was considered in every impairment model:increasing inflationary pressures, recently observable worldwide:
–changes in the future development ofinterest rate environment are taken into consideration when determining the virus, including the duration, scale and geographic extent of the closures;discount rates;
–terminal growth rates do not exceed the expected scale and durationlong-term annual inflation rate of the economic recovery;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 size ofinflation and/or the on-trade channel in the market;
–the life cycle phase of the brand and the maturity of the market.exchange devaluation is considered significant based on management’s judgement.
Consideration of climate risk impact
The impact of climate risk on the future cash flows has also been considered for scenarios analysed in line with the climate change risk assessment. The climate change scenario analyses -performed in 2022 – conducted in line with TCFD recommendations - undertaken this year did not identify any(‘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.impact to the current year impairment assessments.
Financial statements (continued)
| | | | | | | | | | | | | | | | | |
| Brands £ million | Goodwill £ million | Other intangibles £ million | Computer software £ million | Total £ million |
Cost | | | | | |
At 30 June 2020 | 8,923 | | 2,664 | | 1,587 | | 698 | | 13,872 | |
Exchange differences | (799) | | (311) | | (174) | | (30) | | (1,314) | |
Additions | 334 | | 274 | | 8 | | 32 | | 648 | |
Disposals | — | | — | | — | | (27) | | (27) | |
| | | | | |
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 | |
Amortisation and impairment | | | | | |
At 30 June 2020 | 1,168 | | 752 | | 78 | | 574 | | 2,572 | |
Exchange differences | (71) | | (82) | | (3) | | (26) | | (182) | |
Amortisation for the year | — | | — | | 5 | | 44 | | 49 | |
| | | | | |
Disposals | — | | — | | — | | (24) | | (24) | |
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 | |
Carrying amount | | | | | |
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 | |
At 30 June 2020 | 7,755 | | 1,912 | | 1,509 | | 124 | | 11,300 | |
Financial statements (continued)
| | | | | | | | | | | | | | | | | |
| Brands £ million | Goodwill £ million | Other intangibles £ million | Computer software £ million | Total £ million |
Cost | | | | | |
At 30 June 2019 | 8,895 | | 2,795 | | 1,540 | | 653 | | 13,883 | |
Exchange differences | (74) | | (139) | | 44 | | 0 | | (169) | |
Additions | 102 | | 8 | | 3 | | 52 | | 165 | |
Disposals | 0 | | 0 | | 0 | | (7) | | (7) | |
| | | | | |
At 30 June 2020 | 8,923 | | 2,664 | | 1,587 | | 698 | | 13,872 | |
Exchange differences | (799) | | (311) | | (174) | | (30) | | (1,314) | |
Additions | 334 | | 274 | | 8 | | 32 | | 648 | |
Disposals | 0 | | 0 | | 0 | | (27) | | (27) | |
| | | | | |
At 30 June 2021 | 8,458 | | 2,627 | | 1,421 | | 673 | | 13,179 | |
Amortisation and impairment | | | | | |
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 | | 0 | | 0 | | 1,219 | |
Disposals | 0 | | 0 | | 0 | | (4) | | (4) | |
At 30 June 2020 | 1,168 | | 752 | | 78 | | 574 | | 2,572 | |
Exchange differences | (71) | | (82) | | (3) | | (26) | | (182) | |
Amortisation for the year | — | | — | | 5 | | 44 | | 49 | |
| | | | | |
Disposals | 0 | | 0 | | 0 | | (24) | | (24) | |
At 30 June 2021 | 1,097 | | 670 | | 80 | | 568 | | 2,415 | |
Carrying amount | | | | | |
At 30 June 2021 | 7,361 | | 1,957 | | 1,341 | | 105 | | 10,764 | |
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 | |
(a) Brands
At 30 June 2021,2022, the principal acquired brands, all of which are regarded as having indefinite useful economic lives, are as follows:
| | | | | | | | | | | |
| Principal markets | 2021 £ million | 2020 £ million |
Crown Royal whisky | United States | 1,053 | | 1,190 | |
McDowell's No.1 whisky, rum and brandy | India | 944 | | 1,050 | |
Captain Morgan rum | Global | 864 | | 977 | |
Johnnie Walker whisky | Global | 625 | | 625 | |
Smirnoff vodka | Global | 593 | | 670 | |
Casamigos tequila | United States | 434 | | 491 | |
Shui Jing Fang Chinese white spirit | Greater China | 253 | | 260 | |
Aviation American gin | United States | 190 | | 0 | |
Don Julio tequila | United States | 185 | | 179 | |
Bell's whisky | Europe | 179 | | 179 | |
Signature whisky | India | 177 | | 197 | |
Seagram's 7 Crown whiskey | United States | 160 | | 181 | |
Black Dog whisky | India | 150 | | 167 | |
Antiquity whisky | India | 147 | | 163 | |
Windsor Premier whisky | Korea | 145 | | 154 | |
Yenì Raki | Turkey | 141 | | 202 | |
Zacapa rum | Global | 138 | | 156 | |
Gordon's gin | Europe | 119 | | 119 | |
| | | |
Other brands |
| 864 | | 795 | |
| | 7,361 | | 7,755 | |
| | | | | | | | | | | |
| Principal markets | 2022 £ million | 2021 £ million |
Crown Royal whisky | United States | 1,210 | | 1,053 | |
Captain Morgan rum | Global | 993 | | 864 | |
McDowell's No.1 whisky, rum and brandy | India | 778 | | 944 | |
Smirnoff vodka | Global | 681 | | 593 | |
Johnnie Walker whisky | Global | 625 | | 625 | |
Casamigos tequila | United States | 499 | | 434 | |
Yenì raki | Turkey | 294 | | 141 | |
Shui Jing Fang Chinese white spirit | Greater China | 279 | | 253 | |
Aviation American gin | United States | 218 | | 190 | |
Don Julio tequila | United States | 207 | | 185 | |
Signature whisky | India | 191 | | 177 | |
Seagram's 7 Crown whiskey | United States | 184 | | 160 | |
Black Dog whisky | India | 162 | | 150 | |
Antiquity whisky | India | 158 | | 147 | |
Zacapa rum | Global | 158 | | 138 | |
Gordon's gin | Europe | 119 | | 119 | |
Bell's whisky | Europe | 102 | | 179 | |
Windsor Premier whisky | Korea | — | | 145 | |
| | | |
| | | |
Other brands |
| 1,038 | | 864 | |
| | 7,896 | | 7,361 | |
Financial statements (continued)
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:
| | | | | | | | |
| 2021 £ million | 2020 £ million |
North America | 609 | | 416 | |
Europe and Turkey(i) | | |
| | |
Turkey | 143 | | 205 | |
Latin America and Caribbean – Mexico | 126 | | 123 | |
Asia Pacific | | |
Greater China | 128 | | 132 | |
India | 693 | | 770 | |
Other cash-generating units | 258 | | 266 | |
| 1,957 | | 1,912 | |
(i) From 1 July 2020, the former Europe cash-generating unit has been structured as five individual cash-generating units: Great Britain, Ireland, Northern Europe, Eastern Europe and Southern Europe, included in other cash-generating units. | | | | | | | | |
| 2022 £ million | 2021 £ million |
North America | 773 | | 609 | |
Europe | | |
| | |
Turkey | 255 | | 143 | |
Asia Pacific | | |
Greater China | 141 | | 128 | |
India | 747 | | 693 | |
Latin America and Caribbean – Mexico | 142 | | 126 | |
| | |
| | |
| | |
Other cash-generating units | 229 | | 258 | |
| 2,287 | | 1,957 | |
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.
(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 20212022 was £1,295£1,488 million (2020(2021 – £1,464£1,295 million).
Financial statements (continued)
(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 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 strategic 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 volatility with respect to the environment after the Covid-19 pandemic in the differentcertain 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 and the Windsor PremierBell's 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;
–Cashexpertise. 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 is extended by an additional threetwo years of detailed forecasts;
Financial statements (continued)
–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 can be 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.
The pre-tax discount rates, terminal and long-term growth rates used for impairment testing are as follows:
| | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | |
| 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 | 7 | | 2 | | 4 | | 8 | | 2 | | 4 | |
Europe and Turkey | | | | | | |
United Kingdom | 6 | | 2 | | 4 | | 5 | | 2 | | 4 | |
Spain | 5 | | 2 | | 4 | | 8 | | 2 | | 3 | |
Turkey | 22 | | 11 | | 16 | | 22 | | 11 | | 15 | |
Russia | 12 | | 4 | | 6 | | 12 | | 3 | | 6 | |
Africa | | | | | | |
| | | | | | |
South Africa | 13 | | 0 | | 6 | | 18 | | 0 | | 7 | |
Nigeria | 19 | | 10 | | 14 | | 21 | | 11 | | 14 | |
Africa Emerging Markets | 22 | | 4 | | 10 | | 26 | | 5 | | 11 | |
Latin America and Caribbean | | | | | | |
Brazil | 11 | | 3 | | 6 | | 15 | | 3 | | 6 | |
Mexico | 17 | | 3 | | 6 | | 16 | | 3 | | 5 | |
Asia Pacific | | | | | | |
Korea | 10 | | (4) | | 0 | | 10 | | (4) | | 0 | |
| | | | | | |
India | 12 | | 4 | | 11 | | 12 | | 4 | | 12 | |
Global Travel | 7 | | 2 | | 5 | | 8 | | 2 | | 5 | |
| | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | |
| 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 | | 7 | | 2 | | 4 | |
Europe | | | | | | |
United Kingdom | 8 | | 2 | | 4 | | 6 | | 2 | | 4 | |
| | | | | | |
Turkey | 31 | | 15 | | 25 | | 22 | | 11 | | 16 | |
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Asia Pacific | | | | | | |
Australia | 7 | | 2 | | 5 | | 6 | | 2 | | 5 | |
India | 14 | | 4 | | 11 | | 12 | | 4 | | 11 | |
| | | | | | |
Africa | | | | | | |
| | | | | | |
South Africa | 16 | | — | | 6 | | 13 | | — | | 6 | |
Nigeria | 24 | | 12 | | 15 | | 19 | | 10 | | 14 | |
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Latin America and Caribbean | | | | | | |
Brazil | 12 | | 3 | | 6 | | 11 | | 3 | | 6 | |
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InFollowing the announcement by USL of the sale and franchise agreements for selected Popular brands on 27 May 2022, the cash-generating unit structure of the USL brands has been revised, in order to reflect the strategic changes in the management and operation of USL's portfolio of the remaining brands. As a result, the former Popular brands category has been abandoned and the impairment reviews have been performed on an individual brand basis for the year ended 30 June 2020,2022.
Financial statements (continued)
Value in use calculation and fair value less costs of disposal methodologies were both considered to assess the recoverable amount of the McDowell's No.1 cash-generating unit. The value in use that was calculated exceeded the fair value less costs of disposal. As a result of the impairment review, an impairment charge of £655£240 million in respect offor the India cash-generating unit containing the India goodwill, £78 million in respect of the Old Tavern brand and £38 million in respect of the Bagpiper brand in India wereyear ended 30 June 2022 was recognised in exceptional operating items basedin respect of the McDowell's No.1 brand. The charge was a result of higher discount rate reflecting the adverse inflationary and macroeconomic environment and of a reduction in forecast cash flow assumptions of McDowell’s No.1 Popular segment, which is reflective of USL’s stated position on their valueparticipation in use.the popular segment and aligned with the recently announced sale and franchising of the majority of the portfolio of Popular brands. The brand impairment reduced the deferred tax liability by £25£35 million. The recoverable amount of the McDowell's No.1 cash generating unit is £892 million.
Further,Value in use calculation and fair value less costs of disposal methodologies were both considered to assess the recoverable amount of the Bell's cash-generating unit. The value in use that was calculated exceeded the fair value less costs of disposal. As a result of the impairment review, an impairment charge of £77 million for the year ended 30 June 2020, an impairment charge of £434 million in respect of the Windsor Premier brand2022 was recognised in exceptional operating items based on its value in use.respect of the Bell's brand. Forecast cash flow assumptions were reduced principally due to the wind down of the Russian operations, as well as the increase in discount rates due to the inflationary and higher macroeconomic risk environment in the world. The brand impairment reduced the deferred tax liability by £20 million. The recoverable amount of the Bell's cash-generating unit is £145 million.
In March 2022, a decision was taken to suspend exporting to and selling in Russia and on 28 June 2022, Diageo decided that it would wind down its operations in Russia over the following six months. As a result, an impairment charge of £19 million for the year ended 30 June 2022 in respect of the Smirnov goodwill was recognised in exceptional operating items.
The Turkish economy became hyperinflationary for the year ended 30 June 2022, resulting in the recognition of hyperinflation adjustments on the Turkey cash-generating unit for the opening balances at 1 July 2021 and for the year-end balances at 30 June 2022. During the impairment review of the Turkey cash-generating unit, including goodwill and the Yenì Raki brand, value in use calculation 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. As a result of the impairment reviews, 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 and the remaining TRY 2,133 million (£177 million) impairment charge was recognised on the Turkey goodwill. The hyperinflation adjustment reduced by £105 million resulting inthe opening impairment charge has been reflected as a net exceptional lossamount within the movement table of £329 million.intangible assets in note 9.
Financial statements (continued)
(e) Sensitivity to change in key assumptions
Impairment testing for the year ended 30 June 20212022 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 20212022 and the impairment charge that would be required if the assumptions in the calculation of their value in use were changed:
| | | | | | | | | | | | | | | | | | | |
| Carrying value of CGU £ million | Headroom £ million | 1ppt increase in discount rate £ million | | 2ppt decrease in annual growth rate in forecast period 2022-2029 £ million | | Category growth scenario £ million |
India(i) | 2,997 | | 170 | | (116) | | | (114) | | | n/a |
Antiquity brand(i) | 148 | | 0 | | (20) | | | (17) | | | n/a |
USL Popular brands(i) | 448 | | 23 | | (28) | | | (35) | | | n/a |
Windsor Premier brand(ii) | 152 | | 45 | | 0 | | | n/a | | (13) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Increase in discount rate | | Decrease in terminal growth rate | | Decrease in annual growth rate in forecast period 2023-2029 | | Decrease in cash flows | | Decrease in future volume forecast | | Further devaluation of local currency | | |
| 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 | | Reasonably possible change | Potential impairment charge £ million | | Reasonably possible change | Potential impairment charge £ million | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
McDowell's No.1 | 892 | | — | | | 1ppt | (92) | | | n/a | n/a | | 2ppt | (121) | | | n/a | n/a | | n/a | n/a | | n/a | n/a | | |
Bell's | 145 | | — | | | 3ppt | (27) | | | 1ppt | (9) | | | n/a | n/a | | 10 | % | (15) | | | n/a | n/a | | n/a | n/a | | |
Yenì Raki | 346 | | 44 | | | 7ppt | (95) | | | n/a | n/a | | n/a | n/a | | n/a | n/a | | 4 | % | (20) | | | n/a | n/a | | |
Turkey | 688 | | 14 | | | 7ppt | (249) | | | 1ppt | (13) | | | n/a | n/a | | 10 | % | (88) | | | 1 | % | (124) | | | 66 | % | (69) | | | |
| | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
(i) Reasonably possible changes in key assumptions that would result in an impairment of the India cash-generating unit, Antiquity and USL Popular brands would be a 1ppt increase in discount rate or a 2ppt decrease in the annual growth rate in the forecast period of 2022-2029.
(ii) The Windsor Premier brand is disclosed as sensitive due to challenging market conditions. The only change in key assumptions considered reasonably possible that would result in an impairment of the brand would be a scenario where 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.
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.
Financial statements (continued)
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 2019 | 1,712 | | 4,515 | | 125 | | 566 | | 494 | | 7,412 | |
Recognition of right-of-use asset on adoption of IFRS 16 | 173 | | 63 | | 0 | | 0 | | 0 | | 236 | |
Adjusted balance at 1 July 2019 | 1,885 | | 4,578 | | 125 | | 566 | | 494 | | 7,648 | |
Exchange differences | (10) | | (22) | | 0 | | (1) | | (9) | | (42) | |
| | | | | | |
Additions | 202 | | 156 | | 13 | | 34 | | 439 | | 844 | |
Disposals | (46) | | (86) | | (20) | | (37) | | (1) | | (190) | |
Transfers | 110 | | 242 | | 9 | | 13 | | (374) | | 0 | |
At 30 June 2020 | 2,141 | | 4,868 | | 127 | | 575 | | 549 | | 8,260 | |
| | | | | | |
| | | | | | |
Exchange differences | (137) | | (322) | | (10) | | (55) | | (34) | | (558) | |
Acquisitions | 9 | | 2 | | 0 | | 0 | | 4 | | 15 | |
Sale of businesses | (1) | | (3) | | 0 | | 0 | | 0 | | (4) | |
Additions | 95 | | 149 | | 9 | | 27 | | 367 | | 647 | |
Disposals | (24) | | (126) | | (7) | | (21) | | 0 | | (178) | |
Transfers | 77 | | 146 | | 2 | | 2 | | (227) | | 0 | |
At 30 June 2021 | 2,160 | | 4,714 | | 121 | | 528 | | 659 | | 8,182 | |
Depreciation | | | | | | |
At 30 June 2019 | 511 | | 1,965 | | 91 | | 390 | | 0 | | 2,957 | |
Exchange differences | 0 | | (5) | | (1) | | (2) | | 0 | | (8) | |
Depreciation charge for the year | 106 | | 260 | | 15 | | 36 | | 0 | | 417 | |
Exceptional impairment | 20 | | 114 | | 0 | | 6 | | 0 | | 140 | |
| | | | | | |
Disposals | (40) | | (78) | | (19) | | (35) | | 0 | | (172) | |
| | | | | | |
At 30 June 2020 | 597 | | 2,256 | | 86 | | 395 | | 0 | | 3,334 | |
Exchange differences | (31) | | (167) | | (8) | | (39) | | 0 | | (245) |
Depreciation charge for the year | 110 | | 244 | | 15 | | 29 | | 0 | | 398 |
| | | | | | |
| | | | | | |
Sale of businesses | 0 | | (2) | | 0 | | 0 | | 0 | | (2) | |
Disposals | (18) | | (113) | | (7) | | (14) | | 0 | | (152) |
| | | | | | |
At 30 June 2021 | 658 | | 2,218 | | 86 | | 371 | | 0 | | 3,333 | |
Carrying amount | | | | | | |
At 30 June 2021 | 1,502 | | 2,496 | | 35 | | 157 | | 659 | | 4,849 | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
| 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 2020 | 2,141 | | 4,868 | | 127 | | 575 | | 549 | | 8,260 | |
| | | | | | |
| | | | | | |
Exchange differences | (137) | | (322) | | (10) | | (55) | | (34) | | (558) | |
Acquisitions | 9 | | 2 | | — | | — | | 4 | | 15 | |
Sale of businesses | (1) | | (3) | | — | | — | | — | | (4) | |
Additions | 95 | | 149 | | 9 | | 27 | | 367 | | 647 | |
Disposals | (24) | | (126) | | (7) | | (21) | | — | | (178) | |
Transfers | 77 | | 146 | | 2 | | 2 | | (227) | | — | |
At 30 June 2021 | 2,160 | | 4,714 | | 121 | | 528 | | 659 | | 8,182 | |
| | | | | | |
| | | | | | |
Hyperinflation adjustment in respect of Turkey | 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 | |
Depreciation | | | | | | |
30 June 2020 | 597 | | 2,256 | | 86 | | 395 | | — | | 3,334 | |
Exchange differences | (31) | | (167) | | (8) | | (39) | | — | | (245) | |
Depreciation charge for the year | 110 | | 244 | | 15 | | 29 | | — | | 398 | |
| | | | | | |
Sale of businesses | — | | (2) | | — | | — | | — | | (2) | |
Disposals | (18) | | (113) | | (7) | | (14) | | — | | (152) | |
| | | | | | |
At 30 June 2021 | 658 | | 2,218 | | 86 | | 371 | | — | | 3,333 | |
Exchange differences | 31 | | 94 | | 1 | | 9 | | — | | 135 |
Depreciation charge for the year | 127 | | 277 | | 14 | | 29 | | — | | 447 |
| | | | | | |
| | | | | | |
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 | |
Carrying amount | | | | | | |
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 | |
At 30 June 2020 | 1,544 | | 2,612 | | 41 | | 180 | | 549 | | 4,926 | |
(a) The net book value of land and buildings comprises freeholds of £1,218£1,444 million (2020(2021 – £1,218 million), long leaseholds of £3 million (2020(2021 – £6£3 million) and short leaseholds of £281£410 million (2020(2021 – £320£281 million). Depreciation was not charged on £180£114 million (2020(2021 – £161£180 million) of land.
(b) Property, plant and equipment is net of a government grant of £133£153 million (2020(2021 – £150£133 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.
(d) In the year ended 30 June 2020, an impairment charge of £55 million in respect of 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 loss of £45 million.
Financial statements (continued)
11. Biological assets
Accounting policies
Biological assets held by the group consist of agave (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 end of each 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 cost of inventory when the harvested agave is transferred.
Changes in biological assets were as follows:
| | | | | |
| Biological assets £ million |
Fair value | |
At 30 June 2020 | 51 | |
Exchange differences | 2 | |
Transferred to inventories | (7) | |
Farming cost capitalised | 20 | |
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 | |
At 30 June 2022, the number of agave plants were approximately 33 million (2021 – 20 million), ranging from new plantations up to eight 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 twelve 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 year ended 30 June 2019, 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.
Financial statements (continued)
(a) Movement in right-of-use assets
The company principally leases warehouses, office buildings, plant and machinery, cars and distribution vehicles in the ordinary course of business.
| | | | | | | | | | | | | | | | |
| Land and buildings £ million | Plant and equipment £ million | | | Under construction £ million | Total £ million |
At 30 June 2019 | 2 | | 228 | | | | 0 | | 230 | |
IFRS16 Transition | 173 | | 63 | | | | 0 | | 236 | |
Adjusted balance at 1 July 2019 | 175 | | 291 | | | | 0 | | 466 | |
Exchange differences | (3) | | 2 | | | | 0 | | (1) | |
Additions | 150 | | 24 | | | | 32 | | 206 | |
Disposals | (2) | | 0 | | | | 0 | | (2) | |
Depreciation | (51) | | (41) | | | | 0 | | (92) | |
At 30 June 2020 | 269 | | 276 | | | | 32 | | 577 | |
| | | | | | |
| | | | | | |
Exchange differences | (21) | | (18) | | | | 0 | | (39) | |
Additions | 33 | | 23 | | | | 0 | | 56 | |
Transfer | (1) | | (63) | | | | (3) | | (67) | |
Acquisitions | 8 | | 0 | | | | 0 | | 8 | |
| | | | | | |
Depreciation | (58) | | (34) | | | | 0 | | (92) | |
At 30 June 2021 | 230 | | 184 | | | | 29 | | 443 | |
| | | | | | | | | | | | | | | | |
| Land and buildings £ million | Plant and equipment £ million | | | Under construction £ million | Total £ million |
At 30 June 2020 | 269 | | 276 | | | | 32 | | 577 | |
| | | | | | |
| | | | | | |
Exchange differences | (21) | | (18) | | | | — | | (39) | |
Additions | 33 | | 23 | | | | — | | 56 | |
Transfers | (1) | | (63) | | | | (3) | | (67) | |
| | | | | | |
Acquisitions | 8 | | — | | | | — | | 8 | |
Depreciation | (58) | | (34) | | | | — | | (92) | |
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) | |
| | | | | | |
Disposal | (6) | | — | | | | — | | (6) | |
Depreciation | (54) | | (41) | | | | — | | (95) | |
At 30 June 2022 | 353 | | 212 | | | | — | | 565 | |
(b) Lease liabilities
| | | | | | | | |
| 2021 £ million | 2020 £ million |
Current lease liabilities | (82) | | (106) | |
Non-current lease liabilities | (281) | | (364) | |
| (363) | | (470) | |
| | | | | | | | |
| 2022 £ million | 2021 £ million |
Current lease liabilities | (85) | | (82) | |
Non-current lease liabilities | (390) | | (281) | |
| (475) | | (363) | |
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 £282 million (£255 million.2021 – £255 million).
(c) Amounts recognised in the consolidated income statement
In the year ended 30 June 20212022, other external charges (within other operating expenses (within other external charges)items) included £28£39 million (2020(2021 – £3928 million) in respect of leases of low value assets and short term leases and £3£9 million (2020(2021 – £11£3 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 and other assets (mainly properties) of £101 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 20212022 was £179£154 million (2020 - £180(2021 – £179 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 | Others £ million | Total £ million |
Cost less allowances or fair value | | | |
At 30 June 2019 | 17 | | 32 | | 49 | |
Exchange differences | 1 | | 1 | | 2 | |
Additions | 3 | | 0 | | 3 | |
Repayments and disposals | (1) | | (2) | | (3) | |
Fair value adjustment | 0 | | 2 | | 2 | |
Provision charged during the year | (14) | | 0 | | (14) | |
Capitalised interest | 1 | | 0 | | 1 | |
Transfer | 0 | | 1 | | 1 | |
At 30 June 2020 | 7 | | 34 | | 41 | |
Exchange differences | 0 | | (3) | | (3) | |
Additions | 5 | | 0 | | 5 | |
Repayments and disposals | (1) | | 0 | | (1) | |
| | | |
| | | |
| | | |
Transfer | (1) | | (1) | | (2) | |
At 30 June 2021 | 10 | | 30 | | 40 | |
| | | | | | | | | | | |
| Loans £ million | Other investments £ million | Total £ million |
Cost less allowances or fair value | | | |
At 30 June 2020 | 7 | | 34 | | 41 | |
Exchange differences | — | | (3) | | (3) | |
Additions | 5 | | — | | 5 | |
Repayments and disposals | (1) | | — | | (1) | |
| | | |
| | | |
| | | |
Transfer | (1) | | (1) | | (2) | |
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 | |
At 30 June 2021,2022, loans comprise £6 million (2021 – £3 million (2020million; 2020 – £4 million; 2019 – £17 million) of loans to customers and other third parties, after allowances of £129 million (2021 – £113 million (2020million; 2020 – £127 million; 2019 – £111 million), and £12 million (2021 – £7 million (2020million; 2020 – £3 million; 2019 – £NaN)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/asset 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 2018 |
United States | 1 January 2021 |
(i) The triennial valuation of the Diageo Pension Scheme (the UK Scheme) as at 1 April 2021 is in progress and the results of this valuation are expected to be agreed by Diageo and the trustee later in calendar year 2021.(1) 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 closedbetween November 2005 and January 2018, 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)(2) 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 defined contribution plans. The triennial valuation of the Guinness Ireland Group Pension Scheme in Ireland (the Irish Scheme) is in progress and the results of this valuation are expected to be agreed by Diageo and the trustee later in calendar year 2022.
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 20212022 are as follows:
| | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
Current service cost and administrative expenses | (105) | | (109) | | (110) | |
Past service gains – ordinary activities | 0 | | 50 | | 56 | |
Past service losses – exceptional | (5) | | 0 | | (21) | |
Gains on curtailments and settlements | 18 | | 12 | | 4 | |
Charge to operating profit | (92) | | (47) | | (71) | |
Net finance gain in respect of post employment plans | 5 | | 9 | | 7 | |
Charge before taxation(i) | (87) | | (38) | | (64) | |
Actual returns less amounts included in finance income | (6) | | 774 | | 438 | |
Experience gains | 80 | | 34 | | 113 | |
Changes in financial assumptions | 125 | | (754) | | (514) | |
Changes in demographic assumptions | (183) | | (14) | | (6) | |
Other comprehensive income | 16 | | 40 | | 31 | |
Changes in the surplus restriction | 0 | | (2) | | 2 | |
Total other comprehensive income | 16 | | 38 | | 33 | |
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
Current service cost and administrative expenses | (107) | | (105) | | (109) | |
Past service gains – ordinary activities | 34 | | — | | 50 | |
Past service losses – exceptional | — | | (5) | | — | |
Gains on curtailments and settlements | 34 | | 18 | | 12 | |
Charge to operating profit | (39) | | (92) | | (47) | |
Net finance gain in respect of post employment plans | 10 | | 5 | | 9 | |
Charge before taxation(1) | (29) | | (87) | | (38) | |
Actual returns less amounts included in finance income | (1,432) | | (6) | | 774 | |
Experience (losses)/gains | (35) | | 80 | | 34 | |
Changes in financial assumptions | 2,133 | | 125 | | (754) | |
Changes in demographic assumptions | (40) | | (183) | | (14) | |
Other comprehensive income | 626 | | 16 | | 40 | |
Changes in the surplus restriction | (11) | | — | | (2) | |
Total other comprehensive income | 615 | | 16 | | 38 | |
(1)(i) The year ended 30 June 2022 includes settlement gains of £27 million in respect of the Enhanced Transfer Values exercise carried out in the Irish Schemes and past service gains of £28 million as a result of the changes of the benefits in the Irish Scheme. In the year ended 30 June 2021, the exceptional past service loss of £5 million is in respect of the equalisation of Guaranteed Minimum Pension (GMP) benefits for men and women. (2019 - £21 million)women). The year ended 30 June 2020 includes a past service gain of £47 million in respect of the Irish Scheme following 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. The year ended 30 June 2019 includes credits of £54 million in respect of changes made to future pension increases for members of the UK Scheme and changes to the principal Irish Scheme.
(i)(1) The (charge)/income before taxation is in respect of the following countries is:countries:
| | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
United Kingdom | (46) | | (23) | | (3) | |
Ireland | 4 | | 34 | | (13) | |
United States | (28) | | (30) | | (30) | |
Other | (17) | | (19) | | (18) | |
| (87) | | (38) | | (64) | |
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
United Kingdom | (27) | | (46) | | (23) | |
Ireland | 45 | | 4 | | 34 | |
United States | (31) | | (28) | | (30) | |
Other | (16) | | (17) | | (19) | |
| (29) | | (87) | | (38) | |
In addition to the charge in respect of defined benefit post employment plans, contributions to the group’s defined contribution plans were £33 million (2021 - £25 million (2020million; 2020 – £24 million; 2019 – £19 million).
Financial statements (continued)
The movement in the net surplus for the two years ended 30 June 20212022 is set out below:
| | | | | | | | | | | |
| Plan assets £ million | Plan liabilities £ million | Net surplus £ million |
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 | | 0 | | 156 | |
Employee contributions | 5 | | (5) | | 0 | |
Benefits paid | (489) | | 489 | | 0 | |
At 30 June 2020 | 10,422 | | (10,057) | | 365 | |
Exchange differences | (214) | | 245 | | 31 | |
Charge before taxation(ii) | 149 | | (236) | | (87) | |
Other comprehensive income/(loss)(i) | (6) | | 22 | | 16 | |
Contributions by the group | 122 | | 0 | | 122 | |
Settlements paid(iii) | (169) | | 169 | | 0 | |
Employee contributions | 4 | | (4) | | 0 | |
Benefits paid | (416) | | 416 | | 0 | |
At 30 June 2021 | 9,892 | | (9,445) | | 447 | |
| | | | | | | | | | | |
| Plan assets £ million | Plan liabilities £ million | Net surplus £ million |
At 30 June 2020 | 10,422 | | (10,057) | | 365 | |
Exchange differences | (214) | | 245 | | 31 | |
Charge before taxation(1) | 149 | | (236) | | (87) | |
Other comprehensive income/(loss)(2) | (6) | | 22 | | 16 | |
Contributions by the group | 122 | | — | | 122 | |
Settlements paid(3) | (169) | | 169 | | — | |
Employee contributions | 4 | | (4) | | — | |
Benefits paid | (416) | | 416 | | — | |
At 30 June 2021 | 9,892 | | (9,445) | | 447 | |
Exchange differences | 93 | | (100) | | (7) | |
Charge before taxation(1) | 176 | | (205) | | (29) | |
Other comprehensive income/(loss)(2) | (1,432) | | 2,058 | | 626 | |
Contributions by the group | 128 | | — | | 128 | |
Settlements paid(3) | (52) | | 52 | | — | |
Employee contributions | 5 | | (5) | | — | |
Benefits paid | (411) | | 411 | | — | |
At 30 June 2022 | 8,399 | | (7,234) | | 1,165 | |
(i) Excludes surplus restriction.
(ii)(1) Includes net settlement gain of £27 million (F21 - £14 million.million) and past service gain of £28 million.
(iii)(2) Excludes surplus restriction.
(3) Includes settlement payment of £52 million on ETV exercise in Ireland (F21 – £151 million in respect of a settlement in the US Cash Balance plan.plan).
The plan assets and liabilities by type of post employment benefit and country is as follows:
| | | | | | | | | | | | | | |
| 2021 | 2020 |
| Plan assets £ million | Plan liabilities £ million | Plan assets £ million | Plan liabilities £ million |
Pensions | | | | |
United Kingdom | 7,341 | | (6,580) | | 7,696 | | (6,831) | |
Ireland | 1,826 | | (1,926) | | 1,810 | | (2,031) | |
United States | 470 | | (373) | | 660 | | (578) | |
Other | 186 | | (225) | | 183 | | (240) | |
Post employment medical | 2 | | (262) | | 2 | | (288) | |
Other post employment | 67 | | (79) | | 71 | | (89) | |
| 9,892 | | (9,445) | | 10,422 | | (10,057) | |
| | | | | | | | | | | | | | |
| 2022 | 2021 |
| Plan assets £ million | Plan liabilities £ million | Plan assets £ million | Plan liabilities £ million |
Pensions | | | | |
United Kingdom | 6,041 | | (4,897) | | 7,341 | | (6,580) | |
Ireland | 1,645 | | (1,409) | | 1,826 | | (1,926) | |
United States | 453 | | (408) | | 470 | | (373) | |
Other | 191 | | (212) | | 186 | | (225) | |
Post employment medical | 2 | | (225) | | 2 | | (262) | |
Other post employment | 67 | | (83) | | 67 | | (79) | |
| 8,399 | | (7,234) | | 9,892 | | (9,445) | |
The balance sheet analysis of the post employment plans is as follows:
| | | | | | | | | | | | | | |
| 2021 | 2020 |
| Non- current assets(i) £ million | Non- current liabilities £ million | Non- current assets(i) £ million | Non- current liabilities £ million |
Funded plans | 1,018 | | (279) | | 1,111 | | (434) | |
Unfunded plans | — | | (295) | | — | | (315) | |
| 1,018 | | (574) | | 1,111 | | (749) | |
| | | | | | | | | | | | | | |
| 2022 | 2021 |
| Non- current assets(1) £ million | Non- current liabilities £ million | Non- current assets(1) £ million | Non- current liabilities £ million |
Funded plans | 1,553 | | (144) | | 1,018 | | (279) | |
Unfunded plans | — | | (258) | | — | | (295) | |
| 1,553 | | (402) | | 1,018 | | (574) | |
(i)(1) Includes surplus restriction of £3£14 million (2020(2021 – £3 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 20212022, the DPS had a net surplus of £1,174 million (2021
Financial statements (continued)
– £840 million (2020million; 2020 – £934 million) and the GIGPS had a net surplus of £221 million (2021 a deficit of £79 million; 20192020 a deficit of £174 million) and other schemes in a net surplus totaled of £158 million (2021 – £906£178 million; 2020 - £177 million). This surplus hasBoth of these 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(i) |
| 2021% | 2020% | 2019% | 2021% | 2020% | 2019% | 2021% | 2020% | 2019% |
Rate of general increase in salaries(ii) | 3.4 | | 3.2 | | 3.6 | | 3.0 | | 2.6 | | 2.3 | | — | | 0 | | 0 | |
Rate of increase to pensions in payment | 3.1 | | 3.0 | | 3.2 | | 1.7 | | 1.4 | | 1.5 | | 0 | | 0 | | 0 | |
Rate of increase to deferred pensions | 2.5 | | 2.1 | | 2.2 | | 1.6 | | 1.2 | | 1.3 | | 0 | | 0 | | 0 | |
Discount rate for plan liabilities | 1.9 | | 1.5 | | 2.3 | | 1.0 | | 1.2 | | 1.2 | | 2.7 | | 2.6 | | 3.4 | |
Inflation – CPI | 2.5 | | 2.1 | | 2.2 | | 1.6 | | 1.2 | | 1.3 | | 2.3 | | 1.4 | | 1.7 | |
Inflation - RPI | 3.0 | | 2.8 | | 3.2 | | — | | — | | — | | — | | — | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| United Kingdom | Ireland | United States(1) |
| 2022% | 2021% | 2020% | 2022% | 2021% | 2020% | 2022% | 2021% | 2020% |
Rate of general increase in salaries(2) | 3.6 | | 3.4 | | 3.2 | | 3.8 | | 3.0 | | 2.6 | | — | | — | | — | |
Rate of increase to pensions in payment | 2.9 | | 3.1 | | 3.0 | | 2.2 | | 1.7 | | 1.4 | | — | | — | | — | |
Rate of increase to deferred pensions | 2.6 | | 2.5 | | 2.1 | | 2.3 | | 1.6 | | 1.2 | | — | | — | | — | |
Discount rate for plan liabilities | 3.8 | | 1.9 | | 1.5 | | 3.2 | | 1.0 | | 1.2 | | 4.4 | | 2.7 | | 2.6 | |
Inflation – CPI | 2.6 | | 2.5 | | 2.1 | | 2.4 | | 1.6 | | 1.2 | | 2.3 | | 2.3 | | 1.4 | |
Inflation - RPI | 3.1 | | 3.0 | | 2.8 | | — | | — | | — | | — | | — | | — | |
(i)(1) 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(i) | Ireland(ii) | United States |
| 2021 Age | 2020 Age | 2019 Age | 2021 Age | 2020 Age | 2019 Age | 2021 Age | 2020 Age | 2019 Age |
Retiring currently at age 65 | | | | | | | | | |
Male | 87.2 | 86.4 | 86.2 | 86.9 | 86.6 | 86.5 | 85.4 | 85.6 | 85.7 |
Female | 88.7 | 88.7 | 88.5 | 89.3 | 89.3 | 89.2 | 87.1 | 87.3 | 87.7 |
Currently aged 45, retiring at age 65 | | | | | | | | | |
Male | 88.6 | 88.5 | 88.3 | 88.6 | 89.6 | 89.5 | 86.9 | 87.2 | 87.3 |
Female | 90.8 | 90.8 | 90.6 | 91.1 | 92.3 | 92.2 | 88.5 | 88.9 | 89.3 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| United Kingdom(1) | Ireland(2) | United States |
| 2022 Age | 2021 Age | 2020 Age | 2022 Age | 2021 Age | 2020 Age | 2022 Age | 2021 Age | 2020 Age |
Retiring currently at age 65 | | | | | | | | | |
Male | 87.1 | 87.2 | 86.4 | 87.7 | 86.9 | 86.6 | 85.5 | 85.4 | 85.6 |
Female | 88.7 | 88.7 | 88.7 | 90.0 | 89.3 | 89.3 | 87.2 | 87.1 | 87.3 |
Currently aged 45, retiring at age 65 | | | | | | | | | |
Male | 88.5 | 88.6 | 88.5 | 89.3 | 88.6 | 89.6 | 87.0 | 86.9 | 87.2 |
Female | 90.7 | 90.8 | 90.8 | 91.7 | 91.1 | 92.3 | 88.6 | 88.5 | 88.9 |
(i)(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.
(ii)(2) Based on the ‘00’ series ofCMI's S3 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 20222023 and on the plan liabilities at 30 June 20212022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | 18 | | 532 | | 2 | | 3 | | 159 | | 1 | | 2 | | 26 | |
Effect of 0.5% decrease in discount rate | (5) | | (15) | | (611) | | (2) | | (3) | | (183) | | (1) | | (2) | | (29) | |
Effect of 0.5% increase in inflation | (4) | | (11) | | (466) | | (1) | | (2) | | (109) | | (1) | | (1) | | (12) | |
Effect of 0.5% decrease in inflation | 5 | | 10 | | 351 | | 1 | | 2 | | 131 | | 1 | | 1 | | 12 | |
Effect of 1 year increase in life expectancy | (1) | | (5) | | (279) | | 0 | | (1) | | (87) | | 0 | | (1) | | (19) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | 19 | | 336 | | 1 | | 4 | | 96 | | 1 | | 3 | | 22 | |
Effect of 0.5% decrease in discount rate | (3) | | (17) | | (374) | | (1) | | (4) | | (108) | | (1) | | (3) | | (23) | |
Effect of 0.5% increase in inflation | (2) | | (9) | | (246) | | (1) | | (3) | | (59) | | — | | (1) | | (10) | |
Effect of 0.5% decrease in inflation | 2 | | 10 | | 260 | | 1 | | 3 | | 57 | | — | | 1 | | 9 | |
Effect of 1 year increase in life expectancy | — | | (6) | | (171) | | — | | (2) | | (56) | | — | | (1) | | (17) | |
(i)(1) The estimated effect on the liabilities excludes the impact of any interest rate and inflation swaps held by the pension plans.
(1)(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 of asset 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 2021,2022, approximately 86%88% and 90% (2020(2021 – 82%86% and 90%) of the UK Scheme’splans’ liabilities measured on the Trustee's funding basis 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 2021,2022, approximately 70% and 76% (2021 – 62% and 76% (2020 – 48% and 70%) of the Irish Scheme’splans’ liabilities measured on the Trustee's funding basis 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-quality fixed income investments. For the UK plans, which represent approximately 70%68% 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | 2020 |
| 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 | 0 | | 308 | | 158 | | 466 | | 1 | | 315 | | 255 | | 571 | |
Unquoted and private equity | 604 | | 0 | | 18 | | 622 | | 501 | | 1 | | 21 | | 523 | |
Bonds | | | | | | | | |
Fixed-interest government | 147 | | 81 | | 51 | | 279 | | 114 | | 124 | | 50 | | 288 | |
Inflation-linked government | 0 | | 239 | | 0 | | 239 | | 0 | | 247 | | 0 | | 247 | |
Investment grade corporate | 512 | | 355 | | 391 | | 1,258 | | 507 | | 306 | | 467 | | 1,280 | |
Non-investment grade | 151 | | 117 | | 12 | | 280 | | 137 | | 77 | | 17 | | 231 | |
Loan securities | 1,789 | | 279 | | 0 | | 2,068 | | 1,697 | | 328 | | 0 | | 2,025 | |
Repurchase agreements | 3,608 | | 0 | | 0 | | 3,608 | | 4,809 | | 0 | | 0 | | 4,809 | |
Liability driven investment (LDI) | 212 | | 66 | | 0 | | 278 | | 222 | | 64 | | 0 | | 286 | |
Property - unquoted | 685 | | 72 | | 1 | | 758 | | 620 | | 85 | | 1 | | 706 | |
Hedge funds | 101 | | 139 | | 4 | | 244 | | 92 | | 134 | | 4 | | 230 | |
Interest rate and inflation swaps | (994) | | 108 | | 0 | | (886) | | (1,048) | | 66 | | 0 | | (982) | |
Cash and other | 526 | | 62 | | 90 | | 678 | | 44 | | 63 | | 101 | | 208 | |
Total bid value of assets | 7,341 | | 1,826 | | 725 | | 9,892 | | 7,696 | | 1,810 | | 916 | | 10,422 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
(1)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| United Kingdom £ million | Ireland £ million | United States and other £ million | Total £ million |
| Quoted | Unquoted | Quoted | Unquoted | Quoted | Unquoted | Quoted | Unquoted | Total |
Equities | — | | 604 | | 2 | | 306 | | 70 | | 106 | | 72 | | 1,016 | | 1,088 | |
Bonds | | | | | | | | | |
Fixed-interest government | 86 | | 61 | | — | | 81 | | 47 | | 4 | | 133 | | 146 | | 279 | |
Inflation-linked government | — | | — | | — | | 239 | | — | | — | | — | | 239 | | 239 | |
Investment grade corporate | 13 | | 499 | | — | | 355 | | 24 | | 367 | | 37 | | 1,221 | | 1,258 | |
Non-investment grade | 17 | | 134 | | 2 | | 115 | | 2 | | 10 | | 21 | | 259 | | 280 | |
Loan securities | 58 | | 1,731 | | 1 | | 278 | | — | | — | | 59 | | 2,009 | | 2,068 | |
Repurchase agreements | 4,512 | | (904) | | — | | — | | — | | — | | 4,512 | | (904) | | 3,608 | |
Liability Driven Investment (LDI) | 2 | | 210 | | — | | 66 | | — | | — | | 2 | | 276 | | 278 | |
Property | — | | 685 | | — | | 72 | | — | | 1 | | — | | 758 | | 758 | |
Hedge funds | — | | 101 | | — | | 139 | | — | | 4 | | — | | 244 | | 244 | |
Interest rate and inflation swaps | — | | (994) | | — | | 108 | | — | | — | | — | | (886) | | (886) | |
Cash and other | 12 | | 514 | | 2 | | 60 | | — | | 90 | | 14 | | 664 | | 678 | |
Total bid value of assets | 4,700 | | 2,641 | | 7 | | 1,819 | | 143 | | 582 | | 4,850 | | 5,042 | | 9,892 | |
(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.
Total cash contributions by the group to all post employment plans in the year ending 30 June 20222023 are estimated to be approximately £120£70 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 20212022 held inventory with a book value of £564£561 million (2020(2021 – £586£564 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. Following the finalisation of the trustee valuation at 1 April 2018 the PFP was amended and the contribution to the DPS in the year ended 30 June 2021 was NaN (2020 – £11 million). The arrangement is expected to cease in 2030, and contributions to the UK scheme in any year will be dependent on the funding position of the UK scheme at the previous 31 March. Given the surplus funding position in the DPS, the contribution to the DPS in the year ended 30 June 2022 was nil (2021 - nil).
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.
Irish plans
The group has agreed a deficit funding arrangement with the trustees of the Irish Scheme under which it contributes to the Irish Scheme €23 million (£20 million) per annum until the year ending 30 June 2028. The agreement also provides for additional cash contributions up to €106 million (£91 million) if the deficit is not reduced at each triennial valuation in line with agreed deficit targets up to 2027. As part of this funding plan, Diageo has also granted to the Irish Scheme a contingent asset, 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 (£171172 million) or the amount of the deficit at each triennial valuation if less. The 31 December 20182021 triennial actuarial valuation did not result in any additional funding requirement.is currently underway and it will be agreed by Diageo and the trustee by the end of September.
(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:
Financial statements (continued)
| | | | | | | | | | | | | | | | | | | | |
| United Kingdom | Ireland | United States |
| 2021 £ million | 2020 £ million | 2021 £ million | 2020 £ million | 2021 £ million | 2020 £ million |
Maturity analysis of benefits expected to be paid | | | | | | |
Within one year | 288 | | 346 | | 84 | | 76 | | 52 | | 56 | |
Between 1 to 5 years | 1,112 | | 1,202 | | 338 | | 364 | | 145 | | 202 | |
Between 6 to 15 years | 2,606 | | 2,556 | | 656 | | 691 | | 247 | | 357 | |
Between 16 to 25 years | 2,314 | | 2,083 | | 588 | | 627 | | 145 | | 196 | |
Beyond 25 years | 2,840 | | 2,648 | | 746 | | 918 | | 138 | | 173 | |
Total | 9,160 | | 8,835 | | 2,412 | | 2,676 | | 727 | | 984 | |
| years | years | years | years | years | years |
Average duration of the defined benefit obligation | 18 | 18 | 18 | 18 | 11 | 11 |
| | | | | | | | | | | | | | | | | | | | |
| United Kingdom | Ireland | United States |
| 2022 £ million | 2021 £ million | 2022 £ million | 2021 £ million | 2022 £ million | 2021 £ million |
Maturity analysis of benefits expected to be paid | | | | | | |
Within one year | 295 | | 288 | | 70 | | 84 | | 58 | | 52 | |
Between 1 to 5 years | 1,082 | | 1,112 | | 353 | | 338 | | 187 | | 145 | |
Between 6 to 15 years | 2,556 | | 2,606 | | 704 | | 656 | | 310 | | 247 | |
Between 16 to 25 years | 2,252 | | 2,314 | | 634 | | 588 | | 183 | | 145 | |
Beyond 25 years | 2,787 | | 2,840 | | 768 | | 746 | | 174 | | 138 | |
Total | 8,972 | | 9,160 | | 2,529 | | 2,412 | | 912 | | 727 | |
| years | years | years | years | years | years |
Average duration of the defined benefit obligation | 15 | 18 | 15 | 18 | 9 | 11 |
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 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
| | | | | | | | |
| 2021 £ million | 2020 £ million |
Raw materials and consumables | 348 | | 363 | |
Work in progress | 60 | | 48 | |
Maturing inventories | 4,668 | | 4,562 | |
Finished goods and goods for resale | 969 | | 799 | |
| 6,045 | | 5,772 | |
| | | | | | | | |
| 2022 £ million | 2021 £ million |
Raw materials and consumables | 489 | | 348 | |
Work in progress | 86 | | 60 | |
Maturing inventories | 5,229 | | 4,668 | |
Finished goods and goods for resale | 1,290 | | 969 | |
| 7,094 | | 6,045 | |
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:
| | | | | | | | |
| 2021 £ million | 2020 £ million |
Raw materials and consumables | 17 | | 18 | |
Maturing inventories | 3,296 | | 3,740 | |
| 3,313 | | 3,758 | |
| | | | | | | | |
| 2022 £ million | 2021 £ million |
Raw materials and consumables | 15 | | 17 | |
Maturing inventories | 3,713 | | 3,296 | |
| 3,728 | | 3,313 | |
Inventories are disclosed net of provisions for obsolescence, an analysis of which is as follows:
| | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
Balance at beginning of the year | 98 | | 63 | | 71 | |
Exchange differences | (8) | | 0 | | 0 | |
Income statement charge/(release)(i) | 20 | | 47 | | (3) | |
Utilised | (14) | | (12) | | (5) | |
| | | |
| 96 | | 98 | | 63 | |
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
Balance at beginning of the year | 96 | | 98 | | 63 | |
Exchange differences | 6 | | (8) | | — | |
Income statement charge | 6 | | 20 | | 47 | |
Utilised | (13) | | (14) | | (12) | |
Sale of businesses | (1) | | — | | — | |
| 94 | | 96 | | 98 | |
(i) Income statement charge in the year ended 30 June 2021 includes a release of £4 million exceptional gain (2020 – exceptional charge of £23 million) due to Covid-19 pandemic.
Financial statements (continued)
(b) Trade and other receivables
| | | | | | | | | | | | | | |
| 2021 | 2020 |
| Current assets £ million | Non-current assets £ million | Current assets £ million | Non-current assets £ million |
Trade receivables | 1,817 | | 0 | | 1,498 | | 0 | |
Interest receivable | 35 | | 0 | | 29 | | 0 | |
VAT recoverable and other prepaid taxes | 216 | | 18 | | 192 | | 13 | |
Other receivables | 148 | | 18 | | 210 | | 31 | |
Prepayments | 150 | | 0 | | 157 | | 2 | |
Accrued income | 19 | | 0 | | 25 | | 0 | |
| 2,385 | | 36 | | 2,111 | | 46 | |
| | | | | | | | | | | | | | |
| 2022 | 2021 |
| Current assets £ million | Non-current assets £ million | Current assets £ million | Non-current assets £ million |
Trade receivables | 2,155 | | — | | 1,817 | | — | |
Interest receivable | 18 | | — | | 35 | | — | |
VAT recoverable and other prepaid taxes | 290 | | 15 | | 216 | | 18 | |
Other receivables | 158 | | 13 | | 148 | | 18 | |
Prepayments | 290 | | 9 | | 150 | | — | |
Accrued income | 22 | | — | | 19 | | — | |
| 2,933 | | 37 | | 2,385 | | 36 | |
At 30 June 2021,2022, approximately 15%29%, 28%15% and 9% of the group’s trade receivables of £1,817£2,155 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:
| | | | | | | | |
| 2021 £ million | 2020 £ million |
Not overdue | 1,771 | | 1,379 | |
Overdue 1 – 30 days | 15 | | 5 | |
Overdue 31 – 60 days | 8 | | 23 | |
Overdue 61 – 90 days | 6 | | 39 | |
Overdue 91 – 180 days | 7 | | 39 | |
Overdue more than 180 days | 10 | | 13 | |
| 1,817 | | 1,498 | |
| | | | | | | | |
| 2022 £ million | 2021 £ million |
Not overdue | 2,114 | | 1,771 | |
Overdue 1 – 30 days | 19 | | 15 | |
Overdue 31 – 60 days | 8 | | 8 | |
Overdue 61 – 90 days | 5 | | 6 | |
Overdue 91 – 180 days | 5 | | 7 | |
Overdue more than 180 days | 4 | | 10 | |
| 2,155 | | 1,817 | |
Trade and other receivables are disclosed net of expected credit loss allowance for doubtful debts, an analysis of which is as follows:
| | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
Balance at beginning of the year | 160 | | 113 | | 97 | |
Exchange differences | (13) | | (3) | | 3 | |
Income statement (income)/charge | (15) | | 55 | | 23 | |
Written off | (20) | | (5) | | (10) | |
| 112 | | 160 | | 113 | |
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
Balance at beginning of the year | 112 | | 160 | | 113 | |
Exchange differences | 6 | | (13) | | (3) | |
Income statement charge/(release) | 21 | | (15) | | 55 | |
Written off | (21) | | (20) | | (5) | |
| 118 | | 112 | | 160 | |
Management has considered the elevated credit risk on trade and other receivables. At 30 June 2020,2022, this resulted in a charge of £55£21 million for impairment provisions recognised in the income statementstatement. At 30 June 2020, £29 million out of which £29the charge of £55 million was related to the expected credit loss allowance was due to the global financial uncertainty arising from the Covid-19 pandemic.
Financial statements (continued)
(c) Trade and other payables
| | | | | | | | | | | | | | |
| 2021 | 2020 |
| Current liabilities £ million | Non-current liabilities £ million | Current liabilities £ million | Non-current liabilities £ million |
Trade payables | 2,014 | | 0 | | 1,333 | | 0 | |
Interest payable | 124 | | 0 | | 152 | | 0 | |
Tax and social security excluding income tax | 656 | | 0 | | 698 | | 0 | |
Other payables | 606 | | 338 | | 420 | | 175 | |
Accruals | 1,152 | | 0 | | 971 | | 0 | |
Deferred income | 72 | | 0 | | 79 | | 0 | |
Dividend payable to non-controlling interests | 24 | | 0 | | 30 | | 0 | |
| 4,648 | | 338 | | 3,683 | | 175 | |
| | | | | | | | | | | | | | |
| 2022 | 2021 |
| Current liabilities £ million | Non-current liabilities £ million | Current liabilities £ million | Non-current liabilities £ million |
Trade payables | 2,705 | | — | | 2,014 | | — | |
Interest payable | 143 | | — | | 124 | | — | |
Tax and social security excluding income tax | 696 | | — | | 656 | | — | |
Other payables | 600 | | 380 | | 606 | | 338 | |
Accruals | 1,635 | | — | | 1,152 | | — | |
Deferred income | 90 | | — | | 72 | | — | |
Dividend payable to non-controlling interests | 18 | | — | | 24 | | — | |
| 5,887 | | 380 | | 4,648 | | 338 | |
Interest payable at 30 June 20212022 includes interest on non-derivative financial instruments of £122£141 million (2020(2021 – £148£122 million). Accruals at 30 June 20212022 include £455£613 million (2020(2021 – £359£455 million) accrued discounts attributed to sales recognised. Deferred income represents amounts paid by customers in respect of performance obligations not yet satisfied. The amount of contract liabilities recognised as revenue in the current year is £79£72 million (2020(2021 – £5679 million). Non-current liabilities include net present value of contingent consideration in respect of prior acquisitions forof £353 million (2021 – £320 million (2020 – £156 million). For further information on contingent consideration, please refer to note 15g.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 2021,2022, the amount that has been subject to SCF and accounted for as trade payables was £465£750 million (2020(2021 – £309£465 million).
(d) Provisions
| | | | | | | | | | | |
| Thalidomide £ million | Other £ million | Total £ million |
At 30 June 2020 | 199 | | 277 | | 476 | |
Exchange differences | (1) | | (30) | | (31) | |
| | | |
Provisions charged during the year | 0 | | 80 | | 80 | |
Provisions utilised during the year | (15) | | (105) | | (120) | |
| | | |
Unwinding of discounts | 7 | | 0 | | 7 | |
At 30 June 2021 | 190 | | 222 | | 412 | |
Current liabilities | 15 | | 123 | | 138 | |
Non-current liabilities | 175 | | 99 | | 274 | |
| 190 | | 222 | | 412 | |
| | | | | | | | | | | |
| Thalidomide £ million | Other £ million | Total £ million |
At 30 June 2021 | 190 | | 222 | | 412 | |
Exchange differences | — | | 18 | | 18 | |
Disposal of businesses | — | | (6) | | (6) | |
Provisions charged during the year | — | | 65 | | 65 | |
Provisions utilised during the year | (16) | | (73) | | (89) | |
Transfers from other payables | — | | 12 | | 12 | |
Unwinding of discounts | 4 | | 1 | | 5 | |
At 30 June 2022 | 178 | | 239 | | 417 | |
Current liabilities | 12 | | 147 | | 159 | |
Non-current liabilities | 166 | | 92 | | 258 | |
| 178 | | 239 | | 417 | |
(a)(i) 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)(ii) The largest itemsitem in other provisions at 30 June 2021 are2022 is £49 million (2021 – £45 million (2020 - £47 million) in respect of employee deferred compensation plans which will be utilised when employees leave the group and £33 million (2020 - £81 million) in respect of 'Raising the Bar' programme launched in June 2020, a two-year 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 loans are described in note 12,13, for trade 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), highly probable forecast transactions or 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 hedges 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.
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 20212022 and 30 June 20202021 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 the group's cash flow projections and stress tested. For the year ended 30 June 2021, 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 20212022 the group’s guidance 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 20212022 foreign currency borrowings designated in net investment hedge relationships amounted to £7,780£8,742 million (2020 £9,127(2021 £7,780 million), including financial 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 group24 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 20212022 the group’s policy was to maintain fixed rate borrowings within a band of 40% to 60% of forecast net borrowings. In July 2020 the Board approved to temporarily amend the approved 40% - 60% fixed debt band to 40% - 80% and subsequently in December 2020 the Board approved to temporarily increase the band range to 40% - 90% for a period of 3 years until 31 December 2023.. 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 20212022 and 20202021 is as follows:
| | | | | | | | | | | | | | |
| 2021 | 2020 |
| £ million | % | £ million | % |
Fixed rate | 9,278 | | 77 | | 9,213 | | 70 | |
Floating rate(i) | 2,521 | | 21 | | 3,746 | | 28 | |
Impact of financial derivatives and fair value adjustments | (53) | | (1) | | (183) | | (1) | |
Lease liabilities | 363 | | 3 | | 470 | | 3 | |
Net borrowings | 12,109 | | 100 | | 13,246 | | 100 | |
| | | | | | | | | | | | | | |
| 2022 | 2021 |
| £ million | % | £ million | % |
Fixed rate | 11,070 | | 78 | | 9,278 | | 77 | |
Floating rate(1) | 2,612 | | 19 | | 2,521 | | 21 | |
Impact of financial derivatives and fair value adjustments | (20) | | — | | (53) | | (1) | |
Lease liabilities | 475 | | 3 | | 363 | | 3 | |
Net borrowings | 14,137 | | 100 | | 12,109 | | 100 | |
(i)(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)
The table below sets out the average monthly net borrowings and effective interest rate:
| | | | | | | | | | | | | | | | | |
Average monthly net borrowings | Effective interest rate |
2021 £ million | 2020 £ million | 2019 £ million | 2021 % | 2020 % | 2019 % |
12,702 | | 12,708 | | 10,393 | | 2.7 | 2.6 | 2.4 |
| | | | | | | | | | | | | | | | | |
Average monthly net borrowings | Effective interest rate |
2022 £ million | 2021 £ million | 2020 £ million | 2022 % | 2021 % | 2020 % |
12,692 | | 12,702 | | 12,708 | | 2.7 | 2.7 | 2.6 |
(1)(i) For this calculation, net interest charge excludes fair value adjustments to derivative financial instruments and borrowings and average monthly net borrowings includesinclude the impact of interest rate swaps that are no longer in a hedge relationship but excludesexclude 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 will bewere discontinued after 31 December 2021, except for the majority of the US dollar settings which will be discontinued after 30 June 2023. There will behave been amendments to the contractual terms of IBOR-referenced interest rates and the corresponding update of the hedge designations. The changed reference rate may also affect otherBy 30 June 2022, changes required to systems and processes risks andin relation to the fair valuation of financial instruments howeverwere 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 doassumes 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 expect material taxaltered by the IBOR reform. The derivative hedging instruments provide a close approximation to the extent and accounting implications.nature of the risk exposure the group manages through hedging relationships.
Included in the floating rate net borrowings are interest rate swaps designated in fair value hedges, with a notional amount of £2,338£2,893 million (2020: £3,156(2021: £2,338 million) whose interest rates are based on USD LIBOR. In preparation for the discontinuation of USD LIBOR, the group will amend these agreements to either reference the Secured Overnight Financing Rate or include mechanics for selecting an alternative rate ensuring that subsequent to the amendments the agreements will be economically equivalent on transition date.
(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 20212022 and 30 June 2020,2021, 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.
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
Financial statements (continued)
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)(i) (ii) |
| 2021 | 2020 | 2021 | 2020 |
| £ million | £ million | £ million | £ million |
0.5% decrease in interest rates | 13 | | 19 | | 23 | | 45 | |
0.5% increase in interest rates | (13) | | (19) | | (22) | | (43) | |
10% weakening of sterling | (32) | | (26) | | (1,008) | | (1,384) | |
10% strengthening of sterling | 27 | | 22 | | 825 | | 1,132 | |
| | | | | | | | | | | | | | |
| Impact on income statement gain/(loss) | Impact on consolidated comprehensive income gain/(loss)(1) (2) |
| 2022 | 2021 | 2022 | 2021 |
| £ million | £ million | £ million | £ million |
0.5% decrease in interest rates | 13 | | 13 | | 31 | | 23 | |
0.5% increase in interest rates | (13) | | (13) | | (30) | | (22) | |
10% weakening of sterling | (33) | | (32) | | (1,125) | | (1,008) | |
10% strengthening of sterling | 28 | | 27 | | 922 | | 825 | |
(i)(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.
(ii)(2) The impact on the consolidated statement of comprehensive income includes the impact on the income statement.
Financial statements (continued)
(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 £5,360£5,445 million (2020(2021 – £5,989£5,360 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 2021,2022, the collateral held under these agreements amounted to $23 million (£19 million) (2021 – $136 million (£98 million) (2020 – $221 million (£180 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.
(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.
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 |
2021 | | | | | | |
Borrowings(i) | (1,859) | | (2,590) | | (2,788) | | (7,498) | | (14,735) | | (14,727) | |
Interest on borrowings(i)(iii) | (390) | | (552) | | (467) | | (1,375) | | (2,784) | | (122) | |
Lease capital repayments | (82) | | (92) | | (45) | | (144) | | (363) | | (363) | |
Lease future interest payments | (9) | | (12) | | (8) | | (25) | | (54) | | 0 | |
Trade and other financial liabilities(ii) | (3,800) | | (71) | | (108) | | (191) | | (4,170) | | (4,125) | |
Non-derivative financial liabilities | (6,140) | | (3,317) | | (3,416) | | (9,233) | | (22,106) | | (19,337) | |
Cross currency swaps (gross) | | | | | | |
Receivable | 57 | | 780 | | 79 | | 1,294 | | 2,210 | | 0 | |
Payable | (41) | | (811) | | (56) | | (986) | | (1,894) | | 0 | |
Other derivative instruments (net) | 143 | | 54 | | 0 | | (23) | | 174 | | 0 | |
Derivative instruments(iii) | 159 | | 23 | | 23 | | 285 | | 490 | | 312 | |
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) | | 0 | |
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 | | 0 | |
Payable | (41) | | (824) | | (56) | | (1,014) | | (1,935) | | 0 | |
Other derivative instruments (net) | 21 | | 89 | | 45 | | 19 | | 174 | | 0 | |
Derivative instruments(iii) | 45 | | 167 | | 78 | | 511 | | 801 | | 610 | |
| | | | | | | | | | | | | | | | | | | | |
| 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 |
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 | |
2021 | | | | | | |
Borrowings(1) | (1,859) | | (2,590) | | (2,788) | | (7,498) | | (14,735) | | (14,727) | |
Interest on borrowings(1)(2) | (390) | | (552) | | (467) | | (1,375) | | (2,784) | | (122) | |
Lease capital repayments | (82) | | (92) | | (45) | | (144) | | (363) | | (363) | |
Lease future interest payments | (9) | | (12) | | (8) | | (25) | | (54) | | — | |
Trade and other financial liabilities(3) | (3,800) | | (71) | | (108) | | (191) | | (4,170) | | (4,125) | |
Non-derivative financial liabilities | (6,140) | | (3,317) | | (3,416) | | (9,233) | | (22,106) | | (19,337) | |
Cross currency swaps (gross) | | | | | | |
Receivable | 57 | | 780 | | 79 | | 1,294 | | 2,210 | | — | |
Payable | (41) | | (811) | | (56) | | (986) | | (1,894) | | — | |
Other derivative instruments (net) | 143 | | 54 | | — | | (23) | | 174 | | — | |
Derivative instruments(2) | 159 | | 23 | | 23 | | 285 | | 490 | | 312 | |
(i)(1) 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 16.17.
(ii) Primarily consists of trade and other payables that meet the definition of financial liabilities under IAS 32.
(iii)(2) Carrying amount of interest on borrowings, interest on derivatives and interest on other payable is included within interest payable in note 14.15.
(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:
| | | | | | | | |
| 2021 £ million | 2020 £ million |
Expiring within one year | 540 | | 2,439 | |
Expiring between one and two years | 691 | | 610 | |
Expiring after two years | 1,287 | | 2,236 | |
| 2,518 | | 5,285 | |
| | | | | | | | |
| 2022 £ million | 2021 £ million |
Expiring within one year | 793 | | 540 | |
Expiring between one and two years | 103 | | 691 | |
Expiring after two years | 1,893 | | 1,287 | |
| 2,789 | | 2,518 | |
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 short- 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 and as at 30 June 20212022 an amount of £149£216 million (30 June 2020 - £1672021 – £149 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 2021,2022, 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 2023,2024, the fair value of the liability would increase by approximately £4£69 million.
Included in other financial liabilities, the contingent consideration on acquisition of businesses represents the present value of payments up to £474£381 million linked to certain performance targets which are expected to be paid over the next 10eight years.
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 2021.2022.
The group’s financial assets and liabilities measured at fair value are categorised as follows:
| | | | | | | | |
| 2021 £ million | 2020 £ million |
Derivative assets | 443 | | 758 | |
Derivative liabilities | (129) | | (145) | |
Valuation techniques based on observable market input (Level 2) | 314 | | 613 | |
Financial assets - other | 138 | | 116 | |
Financial liabilities - other | (578) | | (416) | |
Valuation techniques based on unobservable market input (Level 3) | (440) | | (300) | |
| | | | | | | | |
| 2022 £ million | 2021 £ million |
Derivative assets | 480 | | 443 | |
Derivative liabilities | (456) | | (129) | |
Valuation techniques based on observable market input (Level 2) | 24 | | 314 | |
Financial assets - other | 184 | | 138 | |
Financial liabilities - other | (587) | | (578) | |
Valuation techniques based on unobservable market input (Level 3) | (403) | | (440) | |
In the years ended 30 June 20212022 and 30 June 2020,2021, the increase in financial assets - other of £22£46 million (2020 - £30(2021 – £22 million) is principally due toin respect of acquisitions.
The movements in level 3 instruments, measured on a recurring basis, are as follows:
| | | | | | | | | | | | | | |
| | |
| Zacapa financial liability | Contingent consideration recognised on acquisition of businesses(i) | Zacapa financial liability | Contingent consideration recognised on acquisition of businesses |
| 2021 | 2021 | 2020 | 2020 |
| £ million | £ million | £ million | £ million |
At the beginning of the year | (167) | | (249) | | (174) | | (227) | |
Net losses included in the income statement | (7) | | (47) | | (6) | | (24) | |
Net gains/(losses) included in exchange in other comprehensive income | 21 | | 31 | | (5) | | (5) | |
Net (losses)/gains included in retained earnings | (2) | | 0 | | 9 | | 0 | |
Acquisitions | 0 | | (253) | | 0 | | (42) | |
Settlement of liabilities | 6 | | 89 | | 9 | | 49 | |
At the end of the year | (149) | | (429) | | (167) | | (249) | |
| | | | | | | | | | | | | | |
| | |
| Zacapa financial liability | Contingent consideration recognised on acquisition of businesses(1) | Zacapa financial liability | Contingent consideration recognised on acquisition of businesses(1) |
| 2022 | 2022 | 2021 | 2021 |
| £ million | £ million | £ million | £ million |
At the beginning of the year | (149) | | (429) | | (167) | | (249) | |
Net (losses)/gains included in the income statement | (20) | | 62 | | (7) | | (47) | |
Net (losses)/gains included in exchange in other comprehensive income | (26) | | (39) | | 21 | | 31 | |
Net losses included in retained earnings | (34) | | — | | (2) | | — | |
Acquisitions | — | | (70) | | — | | (253) | |
Settlement of liabilities | 13 | | 105 | | 6 | | 89 | |
At the end of the year | (216) | | (371) | | (149) | | (429) | |
(i)(1) Included in the balance at 30 June 20212022 is £80 million in respect of the acquisition of Casamigos (30 June 2020 - £173 million), and £177£157 million in respect of the acquisition of Aviation Gin and Davos Brands.Brands (2021 – £177 million), £59 million in respect of the acquisition of 21Seeds, £57 million in respect of the acquisition of Lone River Ranch Water (2021 – £49 million) and £nil in respect of the acquisition of Casamigos as it was fully repaid on 17 September 2021 (2021- £80 million).
(h) Results of hedge relationships
The group targets a one-to-one hedge ratio. StrengthsStrength of the economic relationship between the hedged itemitems and the hedging instrument isinstruments are analysed on an ongoing basis. Ineffectiveness can arise from subsequent change in the forecast transactions as a result of altered timing, cash flows or value except when the critical terms of the hedging instrument and hedged item are closely aligned.
Financial statements (continued)
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 2022 and 30 June 2021 by the main risk categories are as follows:
| | | | | | | | | | | |
| Notional amounts £ million | Maturity | Range of hedged rates(i)(1) |
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 | | April 2023 - April 2043 | US dollar 1.22 - 1.88 |
Derivatives in cash flow hedge (foreign currency risk) | 1,874 | | September 2022 - June 2024 | US dollar 1.22 - 1.42, euro 1.13 - 1.17 |
Derivatives in cash flow hedge (commodity price risk) | 234 | | July 2022 - March 2024 | Natural Gas: 1.67 - 3.57 GBP/therm(ec) LME Aluminium: 2,009 - 3,399 USD/Mt |
Fair value hedges | | | |
Derivatives in fair value hedge (interest rate risk) | 4,444 | | September 2022 - April 2043 | (0.01) - 3.09% |
2021 | | | |
Net investment hedges | | | |
Derivatives in net investment hedges of foreign operations | 11 | | July 2021 | Turkish lira 11.86 - 12.22 |
Cash flow hedges | | | |
Derivatives in cash flow hedge (foreign currency debt) | 1,475 | | April 2023 - April 2043 | US dollar 1.22 - 1.88 |
Derivatives in cash flow hedge (foreign currency exchange risk) | 1,303 | | September 2021 - December 2022 | US dollar 1.19 - 1.42, euro 1.07 - 1.16 |
Derivatives in cash flow hedge (commodity price risk) | 93 | | July 2021 - May 2023 | Corn: 3.63 - 5.17 USD/Bu LME Aluminium: 1,631 - 2,421 USD/Mt |
Fair value hedges | | | |
Derivatives in fair value hedge (interest rate risk) | 4,646 | | October 2021 - April 2030 | (0.01) - 3.09% |
2020 | | | |
| | | |
| | | |
Cash flow hedges | | | |
Derivatives in cash flow hedge (foreign currency debt) | 1,667 | | April 2023 - April 2043 | US dollar 1.22 - 1.88 |
Derivatives in cash flow hedge (foreign currency exchange risk) | 1,428 | | September 2020 - March 2022 | US dollar 1.19 - 1.36, euro 1.06 - 1.18 |
Derivatives in cash flow hedge (commodity price risk) | 133 | | July 2020 - February 2023 | Corn: 3.45 - 4.04 USD/Bu
Fuel Oil: 1.11 - 1.87 USD/gal
|
Fair value hedges | | | |
Derivatives in fair value hedge (interest rate risk) | 6,092 | | July 2020 - April 2030 | (0.01) - 4.83% |
(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 lossgain of £124 million (2021 – £157 million (2020loss; 2020 – £173 million gain; 2019 – £79 million gain) has beenwas recognised in other comprehensive income due to changes in fair value. A loss of £10£42 million has beenwas transferred out of other comprehensive income to other operating expenses and a lossgain of £175£239 million to other finance charges, respectively, (2020(2021 – a loss of £10 million and a loss of £175 million; 2020 – a loss of £42 million and a gain of £75 million; 2019 – a loss of £45 million and a gain of £82 million) to offset the foreign exchange impact on the underlying transactions. A gain of £46 million (2021 – £2 million (2020gain, 2020 – £8 million loss, 2019 – £NaN) has beenloss) was transferred out of other 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 20212022 and are included within borrowings. The notional amount for cash flow hedges of foreign currency debt at 30 June 20212022 was £1,475£1,694 million (2020(2021 – £1,667£1,475 million).
For cash flow hedges of forecast transactions at 30 June 2021,2022, based on year end interest and exchange rates, there is expected to be a gain to the income statement of £66£18 million in the year ending 30 June 20222023 and a loss of £48£7 million in the year ending 30 June 2023.2024 is expected to be recognised.
ForIn respect of hedges of foreign currency borrowings that are no longer applicable at 30 June 2021,2022, a loss of £20£19 million (2020(2021 – a loss of £20 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 2021.2022.
The £4,646£4,444 million (2020(2021 – £6,092£4,646 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 20212022 and the carrying amount of hedged items are included within borrowings in the statement of financial position.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 20212022 was £5£1 million (2020(2021 – £13£5 million).
Financial statements (continued)
The following table sets out information regarding the effectiveness of hedging relationships designated by the group, as well as the impacts on profit or lossthe income statement and other comprehensive income:
| | | | | | | | | | | | | | | | | |
| At the beginning of the year £ million | Income statement £ million | Consolidated statement of comprehensive income £ million | Other £ million | At the end of the year £ million |
2021 | | | | | |
Net investment hedges | | | | | |
Derivatives in net investment hedges of foreign operations | 0 | | 0 | | 3 | | (3) | | 0 | |
Cash flow hedges | | | | | |
Derivatives in cash flow hedge (foreign currency debt) | 469 | | (175) | | (123) | | (17) | | 154 | |
Derivatives in cash flow hedge (foreign currency exchange risk) | (58) | | (26) | | 111 | | 26 | | 53 | |
Derivatives in cash flow hedge (commodity price risk) | (9) | | 2 | | 39 | | (16) | | 16 | |
Fair value hedges | | | | | |
Derivatives in fair value hedge (interest rate risk) | 189 | | (126) | | — | | — | | 63 | |
Fair value hedge hedged item | (189) | | 124 | | — | | — | | (65) | |
Instruments in fair value hedge relationship | 0 | | (2) | | — | | — | | (2) | |
2020 | | | | | |
Net investment hedges | | | | | |
Derivatives in net investment hedges of foreign operations | (1) | | 0 | | (1) | | 2 | | 0 | |
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) | | — | | — | | 0 | |
| | | | | | | | | | | | | | | | | |
| 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 |
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) | |
2021 | | | | | |
Net investment hedges | | | | | |
Derivatives in net investment hedges of foreign operations | — | | — | | 3 | | (3) | | — | |
Cash flow hedges | | | | | |
Derivatives in cash flow hedge (foreign currency debt) | 469 | | (175) | | (123) | | (17) | | 154 | |
Derivatives in cash flow hedge (foreign currency risk) | (58) | | (26) | | 111 | | 26 | | 53 | |
Derivatives in cash flow hedge (commodity price risk) | (9) | | 2 | | 39 | | (16) | | 16 | |
Fair value hedges | | | | | |
Derivatives in fair value hedge (interest rate risk) | 189 | | (126) | | — | | — | | 63 | |
Fair value hedge hedged item | (189) | | 124 | | — | | — | | (65) | |
Instruments in fair value hedge relationship | — | | (2) | | — | | — | | (2) | |
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 |
2021 | | | | | | | |
Other investments and loans(i) | 121 | | 17 | | 8 | | 2 | | 148 | | — | | 148 | |
Trade and other receivables | — | | — | | 2,017 | | 404 | | 2,421 | | 2,385 | | 36 | |
Cash and cash equivalents | — | | — | | 2,749 | | — | | 2,749 | | 2,749 | | — | |
Derivatives in fair value hedge (interest rate risk) | 106 | | — | | — | | — | | 106 | | 4 | | 102 | |
Derivatives in cash flow hedge (foreign currency debt) | 205 | | — | | — | | — | | 205 | | — | | 205 | |
Derivatives in cash flow hedge (foreign currency exchange risk) | 61 | | — | | — | | — | | 61 | | 57 | | 4 | |
Derivatives in cash flow hedge (commodity price risk) | 16 | | — | | — | | — | | 16 | | 14 | | 2 | |
| | | | | | | |
Other instruments | 55 | | — | | — | | — | | 55 | | 46 | | 9 | |
Leases | — | | — | | 5 | | — | | 5 | | — | | 5 | |
Total other financial assets | 443 | | — | | 5 | | — | | 448 | | 121 | | 327 | |
Total financial assets | 564 | | 17 | | 4,779 | | 406 | | 5,766 | | 5,255 | | 511 | |
Borrowings(ii) | — | | — | | (14,727) | | — | | (14,727) | | (1,862) | | (12,865) | |
Trade and other payables | (429) | | — | | (3,580) | | (977) | | (4,986) | | (4,648) | | (338) | |
Derivatives in fair value hedge (interest rate risk) | (43) | | — | | — | | — | | (43) | | 0 | | (43) | |
Derivatives in cash flow hedge (foreign currency debt) | (51) | | — | | — | | — | | (51) | | — | | (51) | |
Derivatives in cash flow hedge (foreign currency exchange risk) | (8) | | — | | — | | — | | (8) | | (5) | | (3) | |
| | | | | | | |
| | | | | | | |
Other instruments | (176) | | — | | (91) | | — | | (267) | | (261) | | (6) | |
Leases | — | | — | | (363) | | — | | (363) | | (82) | | (281) | |
Total other financial liabilities | (278) | | — | | (454) | | — | | (732) | | (348) | | (384) | |
Total financial liabilities | (707) | | — | | (18,761) | | (977) | | (20,445) | | (6,858) | | (13,587) | |
Total net financial (liabilities)/assets | (143) | | 17 | | (13,982) | | (571) | | (14,679) | | (1,603) | | (13,076) | |
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 | | 0 | | 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 | | 0 | |
| | | | | | | |
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) | | — | | 0 | | — | | (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) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
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) | |
2021 | | | | | | | |
Other investments and loans(1) | 121 | | 17 | | 8 | | 2 | | 148 | | — | | 148 | |
Trade and other receivables | — | | — | | 2,017 | | 404 | | 2,421 | | 2,385 | | 36 | |
Cash and cash equivalents | — | | — | | 2,749 | | — | | 2,749 | | 2,749 | | — | |
Derivatives in fair value hedge (interest rate risk) | 106 | | — | | — | | — | | 106 | | 4 | | 102 | |
Derivatives in cash flow hedge (foreign currency debt) | 205 | | — | | — | | — | | 205 | | — | | 205 | |
Derivatives in cash flow hedge (foreign currency risk) | 61 | | — | | — | | — | | 61 | | 57 | | 4 | |
Derivatives in cash flow hedge (commodity price risk) | 16 | | — | | — | | — | | 16 | | 14 | | 2 | |
| | | | | | | |
Other instruments | 55 | | — | | — | | — | | 55 | | 46 | | 9 | |
Leases | — | | — | | 5 | | — | | 5 | | — | | 5 | |
Total other financial assets | 443 | | — | | 5 | | — | | 448 | | 121 | | 327 | |
Total financial assets | 564 | | 17 | | 4,779 | | 406 | | 5,766 | | 5,255 | | 511 | |
Borrowings(2) | — | | — | | (14,727) | | — | | (14,727) | | (1,862) | | (12,865) | |
Trade and other payables | (429) | | — | | (3,580) | | (977) | | (4,986) | | (4,648) | | (338) | |
Derivatives in fair value hedge (interest rate risk) | (43) | | — | | — | | — | | (43) | | — | | (43) | |
Derivatives in cash flow hedge (foreign currency debt) | (51) | | — | | — | | — | | (51) | | — | | (51) | |
Derivatives in cash flow hedge (foreign currency risk) | (8) | | — | | — | | — | | (8) | | (5) | | (3) | |
| | | | | | | |
| | | | | | | |
Other instruments | (176) | | — | | (91) | | — | | (267) | | (261) | | (6) | |
Leases | — | | — | | (363) | | — | | (363) | | (82) | | (281) | |
Total other financial liabilities | (278) | | — | | (454) | | — | | (732) | | (348) | | (384) | |
Total financial liabilities | (707) | | — | | (18,761) | | (977) | | (20,445) | | (6,858) | | (13,587) | |
Total net financial (liabilities)/assets | (143) | | 17 | | (13,982) | | (571) | | (14,679) | | (1,603) | | (13,076) | |
(i)(1) Other investments and loans are including those in respect of associates.
(ii)(2) Borrowings are defined as gross borrowings excluding lease liabilities and the fair value of derivative instruments.
At 30 June 20212022 and 30 June 2020,2021, the carrying values of cash and cash equivalents, other financial assets and liabilities approximate to fair values. At 30 June 20212022 the fair value of borrowings, based on unadjusted quoted market data, was £15,895£15,628 million (2020(2021 – £18,175£15,895 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 its capital structure to achieve capital efficiency, provide flexibility to invest through the economic cycle and give efficient access to
Financial statements (continued)
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 20212022 the adjusted net borrowings (£12,68314,539 million) to adjusted EBITDA ratio was 2.82.5 times. For this calculation net borrowings are adjusted by post employment benefit liabilities before tax (£574402 million) whilst adjusted EBITDA (£4,5275,703 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 overdrafts form 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 equivalents comprise 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 borrowings are 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.
Financial statements (continued)
| | | | | | | | |
| 2021 £ million | 2020 £ million |
Bank overdrafts | 112 | | 170 | |
| | |
Bank and other loans | 160 | | 367 | |
Credit support obligations | 98 | | 180 | |
€ 775 million 0% bonds due 2020 | 0 | | 711 | |
US$ 696 million 4.828% bonds due 2020 | 0 | | 566 | |
€ 900 million 0.25% bonds due 2021 | 769 | | 0 | |
US$ 1,000 million 2.875% bonds due 2022(i) | 719 | | 0 | |
Fair value adjustment to borrowings | 4 | | 1 | |
Borrowings due within one year | 1,862 | | 1,995 | |
€ 900 million 0.25% bonds due 2021 | 0 | | 825 | |
US$ 1,000 million 2.875% bonds due 2022(i) | 0 | | 812 | |
US$ 300 million 8% bonds due 2022(i) | 215 | | 243 | |
US$ 1,350 million 2.625% bonds due 2023 | 970 | | 1,096 | |
€ 600 million 0.125% bonds due 2023 | 511 | | 548 | |
US$ 500 million 3.5% bonds due 2023 | 360 | | 405 | |
US$ 600 million 2.125% bonds due 2024 | 431 | | 487 | |
€ 500 million 1.75% bonds due 2024 | 426 | | 456 | |
€ 500 million 0.5% bonds due 2024 | 425 | | 456 | |
US$ 750 million 1.375% bonds due 2025 | 537 | | 606 | |
€ 600 million 1% bonds due 2025 | 510 | | 546 | |
€ 850 million 2.375% bonds due 2026 | 723 | | 776 | |
£ 500 million 1.75% bonds due 2026 | 497 | | 496 | |
€ 750 million 1.875% bonds due 2027 | 637 | | 683 | |
€ 500 million 1.5% bonds due 2027 | 426 | | 457 | |
€ 700 million 0.125% bonds due 2028 | 594 | | 0 | |
US$ 500 million 3.875% bonds due 2028 | 358 | | 404 | |
US$ 1,000 million 2.375% bonds due 2029 | 711 | | 804 | |
£ 300 million 2.875% bonds due 2029 | 298 | | 298 | |
US$ 1,000 million 2% bonds due 2030 | 714 | | 807 | |
€ 1,000 million 2.5% bonds due 2032 | 850 | | 911 | |
US$ 750 million 2.125% bonds due 2032 | 534 | | 603 | |
£ 400 million 1.25% bonds due 2033 | 395 | | 0 | |
US$ 400 million 7.45% bonds due 2035(i) | 288 | | 325 | |
US$ 600 million 5.875% bonds due 2036 | 427 | | 483 | |
US$ 500 million 4.25% bonds due 2042(i) | 356 | | 402 | |
US$ 500 million 3.875% bonds due 2043 | 353 | | 400 | |
Bank and other loans | 253 | | 260 | |
Fair value adjustment to borrowings | 66 | | 201 | |
Borrowings due after one year | 12,865 | | 14,790 | |
Total borrowings before derivative financial instruments | 14,727 | | 16,785 | |
Fair value of cross currency interest rate swaps | (154) | | (469) | |
Fair value of foreign exchange swaps and forwards | (15) | | (28) | |
Fair value of interest rate hedging instruments | (63) | | (189) | |
Lease liabilities | 363 | | 470 | |
Gross borrowings | 14,858 | | 16,569 | |
Less: Cash and cash equivalents | (2,749) | | (3,323) | |
Net borrowings | 12,109 | | 13,246 | |
| | | | | | | | |
| 2022 £ million | 2021 £ million |
Bank overdrafts | 74 | | 112 | |
| | |
Bank and other loans | 105 | | 160 | |
Credit support obligations | (19) | | 98 | |
€ 900 million 0.25% bonds due 2021 | — | | 769 | |
$ 300 million 8% bonds due 2022(1) | 248 | | — | |
$ 1,000 million 2.875% bonds due 2022(1) | — | | 719 | |
$ 1,350 million 2.625% bonds due 2023 | 1,115 | | — | |
Fair value adjustment to borrowings | (1) | | 4 | |
Borrowings due within one year | 1,522 | | 1,862 | |
| | |
| | |
$ 300 million 8% bonds due 2022(1) | — | | 215 | |
$ 1,350 million 2.625% bonds due 2023 | — | | 970 | |
€ 600 million 0.125% bonds due 2023 | 516 | | 511 | |
$ 500 million 3.5% bonds due 2023 | 413 | | 360 | |
$ 600 million 2.125% bonds due 2024 | 495 | | 431 | |
€ 500 million 1.75% bonds due 2024 | 430 | | 426 | |
€ 500 million 0.5% bonds due 2024 | 430 | | 425 | |
$ 750 million 1.375% bonds due 2025 | 618 | | 537 | |
€ 600 million 1% bonds due 2025 | 515 | | 510 | |
€ 850 million 2.375% bonds due 2026 | 731 | | 723 | |
£ 500 million 1.75% bonds due 2026 | 498 | | 497 | |
€ 750 million 1.875% bonds due 2027 | 643 | | 637 | |
€ 500 million 1.5% bonds due 2027 | 430 | | 426 | |
€ 700 million 0.125% bonds due 2028 | 600 | | 594 | |
$ 500 million 3.875% bonds due 2028 | 411 | | 358 | |
£ 300 million 2.375% bonds due 2028 | 298 | | — | |
$ 1,000 million 2.375% bonds due 2029 | 819 | | 711 | |
£ 300 million 2.875% bonds due 2029 | 298 | | 298 | |
€ 750 million 1.15% bonds due 2029 | 645 | | — | |
$ 1,000 million 2% bonds due 2030 | 821 | | 714 | |
€ 1,000 million 2.5% bonds due 2032 | 856 | | 850 | |
$ 750 million 2.125% bonds due 2032 | 614 | | 534 | |
£ 400 million 1.25% bonds due 2033 | 395 | | 395 | |
€ 900 million 1.15% bonds due 2034 | 770 | | — | |
$ 400 million 7.45% bonds due 2035(1) | 331 | | 288 | |
$ 600 million 5.875% bonds due 2036 | 491 | | 427 | |
£ 600 million 2.75% bonds due 2038 | 595 | | — | |
$ 500 million 4.25% bonds due 2042(1) | 409 | | 356 | |
$ 500 million 3.875% bonds due 2043 | 407 | | 353 | |
Bank and other loans | 293 | | 253 | |
Fair value adjustment to borrowings | (274) | | 66 | |
Borrowings due after one year | 14,498 | | 12,865 | |
Total borrowings before derivative financial instruments | 16,020 | | 14,727 | |
Fair value of cross currency interest rate swaps | (367) | | (154) | |
Fair value of foreign currency swaps and forwards | 11 | | (15) | |
Fair value of interest rate hedging instruments | 283 | | (63) | |
Lease liabilities | 475 | | 363 | |
Gross borrowings | 16,422 | | 14,858 | |
Less: Cash and cash equivalents | (2,285) | | (2,749) | |
Net borrowings | 14,137 | | 12,109 | |
(i)(1) SEC-registered debt issued on an unsecured basis by Diageo Investment Corporation, a 100% owned finance subsidiary of Diageo plc.
(1)(i) 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 £85 million (2021 – £78 million (2020million; 2020 – £86 million; 2019 – £63 million).
(3)(iii) Bonds are reported above at amortised cost with a fair value adjustment shown separately.
(4)(iv) 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.
Financial statements (continued)
Gross borrowings before derivative financial instruments are expected to mature as follows:
| | | | | | | | | | |
| 2021 £ million | 2020 £ million | | |
Within one year | 1,862 | | 1,995 | | | |
Between one and three years | 2,623 | | 3,013 | | | |
Between three and five years | 2,788 | | 3,134 | | | |
Beyond five years | 7,454 | | 8,643 | | | |
| 14,727 | | 16,785 | | | |
| | | | | | | | | | |
| 2022 £ million | 2021 £ million | | |
Within one year | 1,522 | | 1,862 | | | |
Between one and three years | 2,817 | | 2,623 | | | |
Between three and five years | 2,625 | | 2,788 | | | |
Beyond five years | 9,056 | | 7,454 | | | |
| 16,020 | | 14,727 | | | |
During the year, the following bonds were issued and repaid:
| | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
Issued | | | |
€ denominated | 636 | | 1,594 | | 2,270 | |
£ denominated | 395 | | 298 | | 496 | |
US$ denominated | 0 | | 3,296 | | 0 | |
Repaid | | | |
€ denominated | (696) | | 0 | | (1,168) | |
US$ denominated | (551) | | (820) | | 0 | |
| (216) | | 4,368 | | 1,598 | |
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
Issued | | | |
€ denominated | 1,371 | | 636 | | 1,594 | |
£ denominated | 892 | | 395 | | 298 | |
$ denominated | — | | — | | 3,296 | |
Repaid | | | |
€ denominated | (769) | | (696) | | — | |
$ denominated | (752) | | (551) | | (820) | |
| 742 | | (216) | | 4,368 | |
(a) Reconciliation of movement in net borrowings
| | | | | | | | |
| 2021 £ million | 2020 £ million |
At beginning of the year | 13,246 | | 11,277 | |
Net decrease/(increase) in cash and cash equivalents before exchange | 231 | | (2,552) | |
Net (decrease)/increase in bonds and other borrowings(i) | (967) | | 4,089 | |
Change in net borrowings from cash flows | (736) | | 1,537 | |
Exchange differences on net borrowings | (598) | | 95 | |
Other non-cash items(ii) | 197 | | 86 | |
Adoption of IFRS 16 | 0 | | 251 | |
Net borrowings at end of the year | 12,109 | | 13,246 | |
| | | | | | | | |
| 2022 £ million | 2021 £ million |
At beginning of the year | 12,109 | | 13,246 | |
Net decrease in cash and cash equivalents before exchange | 665 | | 231 | |
Net increase/(decrease) in bonds and other borrowings(1) | 825 | | (967) | |
Increase/(decrease) in net borrowings from cash flows | 1,490 | | (736) | |
Exchange differences on net borrowings | 334 | | (598) | |
Other non-cash items(2) | 204 | | 197 | |
| | |
Net borrowings at end of the year | 14,137 | | 12,109 | |
(i)(1) In the year ended 30 June 2021,2022, net decreaseincrease in bonds and other borrowings excludes £2£4 million cash outflow in respect of derivatives designated in forward point hedges (2020 - £6(2021 – £2 million).
(ii)(2) 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 £(183) million partially offset by the £331 million fair value change of borrowings. In the year ended 30 June 2021, other non-cash items are principally in respect of fair value changes of cross currency interest rate swaps and interest rate swaps of £249 million, partially offset by the £(111) million fair value changeschange of borrowings. 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.
Financial statements (continued)
(b) Analysis of net borrowings by currency
| | | | | | | | | | | | | | |
| 2021 | 2020 |
| Cash and cash equivalents £ million | Gross borrowings(i) £ million | Cash and cash equivalents £ million | Gross borrowings(i) £ million |
US dollar | 1,890 | | (4,001) | | 2,649 | | (6,300) | |
Euro | 82 | | (2,841) | | 57 | | (3,119) | |
Sterling | 38 | | (7,279) | | 19 | | (6,233) | |
Indian rupee | 26 | | (109) | | 13 | | (253) | |
Kenyan shilling | 16 | | (293) | | 28 | | (351) | |
Hungarian forint | 3 | | (241) | | 3 | | (239) | |
Mexican peso | 9 | | (102) | | 16 | | (104) | |
Chinese yuan | 255 | | (20) | | 207 | | (1) | |
Nigerian naira | 60 | | (1) | | 6 | | (15) | |
Other(ii) | 370 | | 29 | | 325 | | 46 | |
Total | 2,749 | | (14,858) | | 3,323 | | (16,569) | |
| | | | | | | | | | | | | | |
| 2022 | 2021 |
| Cash and cash equivalents £ million | Gross borrowings(1) £ million | Cash and cash equivalents £ million | Gross borrowings(1) £ million |
US dollar | 1,315 | | (3,260) | | 1,890 | | (4,001) | |
Euro | 61 | | (2,943) | | 82 | | (2,841) | |
Sterling | 67 | | (9,214) | | 38 | | (7,279) | |
Indian rupee | 26 | | (74) | | 26 | | (109) | |
Mexican peso | 14 | | (264) | | 9 | | (102) | |
Kenyan shilling | 53 | | (254) | | 16 | | (293) | |
Hungarian forint | 2 | | (214) | | 3 | | (241) | |
Chinese yuan | 290 | | (75) | | 255 | | (20) | |
Nigerian naira | 133 | | — | | 60 | | (1) | |
Other(2) | 324 | | (124) | | 370 | | 29 | |
Total | 2,285 | | (16,422) | | 2,749 | | (14,858) | |
(i)(1) Includes foreign currency forwards and swaps and leases.
(ii)(2) Includes £31£23 million (Turkish lira)lira and Euro) cash and cash equivalents in cash-pooling arrangements (2020(2021 – £100£31 million (Turkish lira)).
17.
18. Equity
Accounting policies
Own shares represent 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.
Dividends are included in the financial statements in the year in which they are approved.
(a) Allotted and fully paid share capital – ordinary shares of 28101⁄108 pence each
| | | | | | | | |
| Number of shares million | Nominal value £ million |
At 30 June 2021 | 2,559 | | 741 | |
At 30 June 2020 | 2,562 | | 742 | |
At 30 June 2019 | 2,601 | | 753 | |
(b) Hedging and exchange reserve
| | | | | | | | | | | |
| Hedging reserve £ million | Exchange reserve £ million | Total £ million |
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 | | 0 | | 5 | |
At 30 June 2020 | 93 | | (1,022) | | (929) | |
Other comprehensive income/(loss) | 20 | | (672) | | (652) | |
| | | |
At 30 June 2021 | 113 | | (1,694) | | (1,581) | |
| | | | | | | | |
| Number of shares million | Nominal value £ million |
At 30 June 2022 | 2,498 | | 723 | |
At 30 June 2021 | 2,559 | | 741 | |
At 30 June 2020 | 2,562 | | 742 | |
Financial statements (continued)
(b) Hedging and exchange reserve
| | | | | | | | | | | |
| Hedging reserve £ million | Exchange reserve £ million | Total £ million |
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) | |
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) | |
Currency basis spreads included in the hedging reserve represent the cost of hedging arising as a result of imperfections of foreign exchange markets. Exclusion of currency basis spreads would result in a surplus £22 million (2020(2021 – £22 million, 2020 – £30 million surplus, 2019 – £1 million surplus) in themillion) credit to hedging reserve.
(c) Own shares
Movements in own shares | | | | | | | | |
| Number of shares million | Purchase consideration £ million |
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 | (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 | |
| | | | | | | | |
| Number of shares million | Purchase consideration £ million |
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 | (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
At 30 June 20212022, the employee share trusts owned 2 million of ordinary shares in Diageo plc (the company) at a cost of £47£25 million and market value of £63 million (2021 – 2 million shares at a cost of £47 million, market value £74 million (2020million; 2020 – 2 million shares at a cost of £51 million, market value £57 million; 2019 – 3 million shares at a cost of £58 million, market value £92 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 2830 September 20202021 to purchase a maximum of 232,820,888233,611,282 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 2729 December 20212022 if earlier.
During the year ended 30 June 2019 the company purchased2022, Diageo sold call options overon own shares for a consideration of £13 million 4 million shares at a cost of £14 milliondue to hedgeno longer being required for employee share awards and share option grants. These are three-year call options, denominated in sterling.plan hedging.
On 25 July 2019, the Board approved aDiageo’s current return of capital programme, withinitially approved by the Board on 25 July 2019, seeks to return up to £4.5 billion to shareholders and is expected to be returned to shareholders over the three-year period tocompleted by 30 June 2022.2023. Under the first phasetwo phases of the programme, which ended on 31 January 2020 and 11 February 2022 respectively, the groupcompany returned £1.25 billioncapital to shareholders via share buybacks.buyback, at a cost, excluding
Financial statements (continued)
transaction costs, of £2.25 billion. On 9 April 2020, due to uncertainties related to Covid-19 pandemic, Diageo21 February 2022, the company announced that it had not initiated the next phase of the programme. On 12 May 2021, the Board approved recommencing the return of capital programme. Due to the impact of Covid-19, the original completion date for the programme has been extended by two years to 30 June 2024. The secondthird phase of the programme with a value of up to £1£1.7 billion returned to shareholders, via share buybacks, was also initiated on 12 May 2021 and itto be completed no later than 5 October 2022. At 30 June 2022, £1.4 billion had been completed as part of the third phase. The remaining £0.9 billion of the programme is expected to be completed by the end of the financial year ending 30 June 2022.2023.
During the year ended 30 June 20212022, the group purchased 3.261 million ordinary shares (2020(2021 – 393.2 million; 20192020 – 94.739 million), representing approximately 0.1%2.4% of the issued ordinary share capital (2020(2021 – 1.5%0.1%; 20192020 – 3.5%1.5%) at an average price of £34.073709 pence per share, and an aggregate cost of £2,284 million (including £16 million of transaction costs) (2021 – 3407 pence per share, and an aggregate cost of £109 million, (includingincluding £1 million of transaction costs) (2020costs; 2020 – £32.433243 pence 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) under the share buyback programme. The shares purchased under the share buyback programmes were cancelled.
Financial statements (continued)
A financial liability of £91£117 million was established at 30 June 20212022, representing the 2.63.3 million shares that were expected to be purchased before 29by 28 July 2021.2022.
The monthly breakdown of all shares purchased and the average price paid per share (excluding expenses) for the year ended 30 June 20212022 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 |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
May 2021 | 1,484,935 | | 1,484,935 | | 3360 | | 231,335,953 | |
June 2021 | 1,848,952 | | 1,848,952 | | 3453 | | 229,487,001 | |
Total | 3,333,887 | | 3,333,887 | | 3411 | | 229,487,001 | |
| | | | |
| | | | | | | | | | | | | | |
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 2021 | 1,728,254 | | 1,728,254 | | 3457 | | 227,758,747 | |
August 2021 | 2,396,223 | | 2,396,223 | | 3538 | | 225,362,524 | |
September 2021 | 3,175,936 | | 3,175,936 | | 3493 | | 222,186,588 | |
| | | | |
October 2021(1) | 1,565,980 | | 1,565,980 | | 3550 | | 232,045,302 | |
November 2021 | 1,375,946 | | 1,375,946 | | 3785 | | 230,669,356 | |
December 2021 | 4,423,031 | | 4,423,031 | | 3960 | | 226,246,325 | |
January 2022 | 5,822,743 | | 5,822,743 | | 3797 | | 220,423,582 | |
February 2022 | 5,865,710 | | 5,865,710 | | 3714 | | 214,557,872 | |
March 2022 | 8,480,736 | | 8,480,736 | | 3588 | | 206,077,136 | |
April 2022 | 7,260,564 | | 7,260,564 | | 3935 | | 198,816,572 | |
May 2022 | 12,627,704 | | 12,627,704 | | 3724 | | 186,188,868 | |
June 2022 | 6,771,405 | | 6,771,405 | | 3584 | | 179,417,463 | |
Total | 61,494,232 | | 61,494,232 | | 3708 | | 179,417,463 | |
(1) New maximum number of purchasable shares was authorised by shareholders at the AGM held on 30 September 2021
(d) Dividends
| | | | | | | | | | | |
| 2021 | 2020 | 2019 |
| £ million | £ million | £ million |
Amounts recognised as distributions to equity shareholders in the year | | | |
Final dividend for the year ended 30 June 2020 | | | |
42.47 pence per share (2019 – 42.47 pence; 2018 – 40.4 pence) | 992 | | 1,006 | | 993 | |
Interim dividend for the year ended 30 June 2021 | | | |
27.96 pence per share (2020 – 27.41 pence; 2019 – 26.1 pence) | 654 | | 640 | | 630 | |
| 1,646 | | 1,646 | | 1,623 | |
| | | | | | | | | | | |
| 2022 | 2021 | 2020 |
| £ million | £ million | £ million |
Amounts recognised as distributions to equity shareholders in the year | | | |
Final dividend for the year ended 30 June 2021 | | | |
44.59 pence per share (2020 – 42.47 pence; 2019 – 42.47 pence) | 1,040 | | 992 | | 1,006 | |
Interim dividend for the year ended 30 June 2022 | | | |
29.36 pence per share (2021 – 27.96 pence; 2020 – 27.41 pence) | 680 | | 654 | | 640 | |
| 1,720 | | 1,646 | | 1,646 | |
The proposed final dividenddividend of £1,0421,067 million (44.59 (46.82 pence per share) for the year ended 30 June 20212022 was approved by the Board of Directors on 27 July 202228 July 2021.. 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% 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, including Ketel One, 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:
| | | | | | | | | | | | | | | | | |
| 2021 | 2020 | 2019 |
| USL £ million | Others £ million | Total £ million | Total £ million | Total £ million |
Income statement | | | | | |
Sales | 3,005 | | 2,135 | | 5,140 | | 4,688 | | 5,346 | |
Net sales | 877 | | 1,676 | | 2,553 | | 2,314 | | 2,656 | |
Profit for the year | 85 | | 213 | | 298 | | 85 | | 383 | |
Other comprehensive (loss)/income(i) | (182) | | (252) | | (434) | | (96) | | 137 | |
Total comprehensive (loss)/income | (97) | | (39) | | (136) | | (11) | | 520 | |
Attributable to non-controlling interests | (42) | | 7 | | (35) | | 8 | | 234 | |
Balance sheet | | | | | |
Non-current assets(ii) | 1,823 | | 2,846 | | 4,669 | | 5,170 | | 5,313 | |
Current assets | 584 | | 908 | | 1,492 | | 1,280 | | 1,469 | |
Non-current liabilities | (302) | | (1,054) | | (1,356) | | (1,459) | | (1,526) | |
Current liabilities | (433) | | (902) | | (1,335) | | (1,188) | | (1,204) | |
Net assets | 1,672 | | 1,798 | | 3,470 | | 3,803 | | 4,052 | |
Attributable to non-controlling interests | 714 | | 820 | | 1,534 | | 1,668 | | 1,795 | |
Cash flow | | | | | |
Net cash inflow from operating activities | 149 | | 512 | | 661 | | 233 | | 542 | |
Net cash outflow from investing activities | (10) | | (127) | | (137) | | (152) | | (157) | |
Net cash outflow from financing activities | (142) | | (229) | | (371) | | (209) | | (266) | |
Net increase/(decrease) in cash and cash equivalents | (3) | | 156 | | 153 | | (128) | | 119 | |
Exchange differences | 0 | | (19) | | (19) | | (3) | | 3 | |
Dividends payable to non-controlling interests | 0 | | (72) | | (72) | | (117) | | (114) | |
| | | | | | | | | | | | | | | | | |
| 2022 | 2021 | 2020 |
| USL £ million | Others £ million | Total £ million | Total £ million | Total £ million |
Income statement | | | | | |
Sales | 3,194 | | 2,603 | | 5,797 | | 5,140 | | 4,688 | |
Net sales | 1,013 | | 2,042 | | 3,055 | | 2,553 | | 2,314 | |
(Loss)/profit for the year | (127) | | 354 | | 227 | | 298 | | 85 | |
Other comprehensive income/(loss)(1) | 134 | | 199 | | 333 | | (434) | | (96) | |
Total comprehensive income/(loss) | 7 | | 553 | | 560 | | (136) | | (11) | |
Attributable to non-controlling interests | 3 | | 256 | | 259 | | (35) | | 8 | |
Balance sheet | | | | | |
Non-current assets(2) | 1,668 | | 3,349 | | 5,017 | | 4,669 | | 5,170 | |
Current assets | 727 | | 1,275 | | 2,002 | | 1,492 | | 1,280 | |
Non-current liabilities | (275) | | (1,224) | | (1,499) | | (1,356) | | (1,459) | |
Current liabilities | (441) | | (1,205) | | (1,646) | | (1,335) | | (1,188) | |
Net assets | 1,679 | | 2,195 | | 3,874 | | 3,470 | | 3,803 | |
Attributable to non-controlling interests | 717 | | 999 | | 1,716 | | 1,534 | | 1,668 | |
Cash flow | | | | | |
Net cash inflow from operating activities | 149 | | 541 | | 690 | | 661 | | 233 | |
Net cash outflow from investing activities | (74) | | (215) | | (289) | | (137) | | (152) | |
Net cash outflow from financing activities | (72) | | (250) | | (322) | | (371) | | (209) | |
Net increase/(decrease) in cash and cash equivalents | 3 | | 76 | | 79 | | 153 | | (128) | |
Exchange differences | — | | 52 | | 52 | | (19) | | (3) | |
Dividends payable to non-controlling interests | — | | (72) | | (72) | | (72) | | (117) | |
(i)(1) Other comprehensive income is principally in respect of exchange on translating the subsidiaries to sterling.
(ii)(2) 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 20212022 was £1,488 million (2021 – £1,295 million (2020million; 2020 – £1,464 million; 2019 – £1,418 million).
(1) On 21 October 2020 and on 6 November 2020, East African Breweries Limited completed the purchase of 13.3% and 16.7% of the share capital of Serengeti Breweries Limited, respectively. This increased Diageo’s effective economic interest from 40.2% to 47.0%.
(2) During the financial year, Diageo's fully consolidated subsidiary, Shui Jing Fang, completed treasury share purchase of 0.02%. This increased Diageo's controlling interest from 63.14% to 63.17%.
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 20212022 is as follows:
| | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
Executive share award plans | 41 | | (3) | | 41 | |
Executive share option plans | 4 | | 2 | | 4 | |
Savings plans | 4 | | 3 | | 4 | |
| 49 | | 2 | | 49 | |
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
Executive share award plans | 51 | | 41 | | (3) | |
Executive share option plans | 4 | | 4 | | 2 | |
Savings plans | 4 | | 4 | | 3 | |
| 59 | | 49 | | 2 | |
Executive share awards arehave been made primarily made under the Diageo 2014 Long Term Incentive Plan (DLTIP) from September 2014 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 Incentive Plan (DACSIP). In the case of Executive Directors, conditional awards of time-vesting RSUs or Forfeitableforfeitable 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 post-vesting retention period. The 2020 DBSP was approved by shareholders in September 2020.
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 2014 under the 2014 DLTIP for a further two-year post-vesting retentionholding 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 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) environmental, social and governance (ESG) priorities, weighted 40%, 40% and 20% of the maximum respectively, as set out in the 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) cumulative free cash flow over 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 arewere made under the Diageo 2010 Sharesave plan.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 arewere 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, any grants from 2021 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. Inyears.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 ROI Sharesave awards granted from 2021, 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 2021,2022, the calculation of the fair value of each share award used the Monte Carlo and Black Scholes pricing model and the following assumptions:
| | | | | | | | | | | |
| 2021 | 2020 | 2019 |
Risk free interest rate | (0.1 | %) | 0.4 | % | 0.8 | % |
Expected life of the awards | 36 months | 37 months | 37 months |
Dividend yield | 2.7 | % | 1.9 | % | 2.4 | % |
Weighted average share price | 2557 p | 3501 p | 2736 p |
Weighted average fair value of awards granted in the year | 2107 p | 899 p | 1941 p |
Number of awards granted in the year | 2.1 million | 1.7 million | 2.5 million |
Fair value of all awards granted in the year | £45 million | £16 million | £48 million |
| | | | | | | | | | | |
| 2022 | 2021 | 2020 |
Risk free interest rate | 0.4 | % | (0.1 | %) | 0.4 | % |
Expected life of the awards | 40 months | 36 months | 37 months |
Dividend yield | 2.1 | % | 2.7 | % | 1.9 | % |
Weighted average share price | 3545 p | 2557 p | 3501 p |
Weighted average fair value of awards granted in the year | 2729 p | 2107 p | 899 p |
Number of awards granted in the year | 2.1 million | 2.1 million | 1.7 million |
Fair value of all awards granted in the year | £57 million | £45 million | £16 million |
Financial statements (continued)
Transactions on schemes
Transactions on the executive share award plans for the three years ended 30 June 20212022 were as follows:
| | | | | | | | | | | | | | |
| 2021 Number of awards million | | 2020 Number of awards million | | 2019 Number of awards million | |
Balance outstanding at 1 July | 5.6 | | | 7.0 | | | 7.8 | | |
Granted | 2.1 | | | 1.8 | | | 2.5 | | |
Awarded | (1.2) | | | (2.5) | | | (2.1) | | |
| | | | | | |
Forfeited | (1.2) | | | (0.7) | | | (1.2) | | |
Balance outstanding at 30 June | 5.3 | | | 5.6 | | | 7.0 | | |
| | | | | | | | | | | | | | |
| 2022 Number of awards million | | 2021 Number of awards million | | 2020 Number of awards million | |
Balance outstanding at 1 July | 5.3 | | | 5.6 | | | 7.0 | | |
Granted | 2.1 | | | 2.1 | | | 1.8 | | |
Awarded | (1.1) | | | (1.2) | | | (2.5) | | |
| | | | | | |
Forfeited | (1.1) | | | (1.2) | | | (0.7) | | |
Balance outstanding at 30 June | 5.2 | | | 5.3 | | | 5.6 | | |
The exercise price of share options outstanding at 30 June 20212022 was in the range of 1704 pence-4024 pence (2021 – 1232 pence-3483 pence (2020pence; 2020 – 1080 pence-3483 pence; 2019 – 952 pence-2773 pence).pence.)
At 30 June 2021, 3.22022, 2.2 million share options were exercisable at a weighted average exercise price of 20502394 pence. Weighted average remaining contractual life of share options was five years at 30 June 2022.
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 2021,2022, 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 wasas 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 2021,2022, Diageo has a 55.94% 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 5certain 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) inthis matter is now before the 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.
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. On 26 October 2020, the Supreme Court of India dismissed the petition filed by UBHL.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
Financial statements (continued)
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 inquiriesaffiliates
On 25 February 2016, Diageo and USL each announced that they had entered into arrangements with Dr Mallya under which he had agreed to resign from his position as a director and as chairman of USL and from his positions in USL’s subsidiaries. As specified by Diageo in its announcement at that time, these arrangements ended its prior agreement with Dr Mallya regarding his position at USL, therefore bringing to an end the uncertainty relating to the governance of USL, and put in place a five-year global non-compete (excluding the United Kingdom), non-interference, non-solicitation and standstill arrangement with Dr Mallya. As part of those arrangements, USL, Diageo and Dr Mallya agreed a mutual release in relation to matters arising out of an inquiry into certain matters referred to in USL’s financial statements and the qualified auditor’s report for the year ended 31 March 2014 (the Initial Inquiry) which had revealed, among other things, certain diversions of USL funds. Dr Mallya also agreed not to pursue any claims against Diageo, USL and their affiliates (including under the prior agreement with Diageo). In evaluating entering into such arrangements, Diageo considered the impact of the arrangements on USL and all of USL’s shareholders, and came to the view that the arrangements were in the best interests of USL and its shareholders.
Diageo’s agreement with Dr Mallya (the February 2016 Agreement) provided for a payment of $75 million (£5362 million) to Dr Mallya over a five-year period of which $40 million (£33 million) was paid on signing of the February 2016 Agreement with the balance being payable in consideration forequal instalments of $7 million (£6 million) a year over five years (2017-2021). All payments were subject to and conditional on Dr Mallya’s compliance with 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.agreement. The February 2016 Agreement also provided for the release of Dr Mallya’s personal obligations to indemnify (i) Diageo Holdings Netherlands B.V. (DHN) in respect of its earlier liability ($141 million (£96117 million)) under a backstop guarantee of certain borrowings of Watson Limited (Watson) (a company affiliated with Dr Mallya),.
On account of various breaches and (ii)other provisions of agreements between Dr Mallya and persons connected with him and 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 (£28 million) of the $75 million (£53 million) amount was paid on signing of the February 2016 Agreement with the balance being payable in equal instalments of $7 million (£5 million) a year over five years, subject to and conditional on Dr Mallya’s compliance with certain terms of the agreement.
Whileand/or USL, Diageo did not make the 5 instalment payments of $7 million (£5 million) would have become due on 25 Februaryduring the five-year period between 2017 25 February 2018, 25 February 2019 25 February 2020 and 25 February 2021, respectively, owing to various reasons (including breaches committed by2021. In addition, Diageo has also demanded that Dr Mallya and certain persons connected with him of several provisions ofrepay the February 2016 Agreement and agreements of the same date between Dr Mallya and USL), Diageo believes that it was not liable to pay such amounts and did not do so. 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, 24 February 2020 and 22 February 2021, Diageo and other group companies have demanded from Dr Mallya the repayment of $40 million (£2833 million) which was 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 million (£105117 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 2 $7 million (£5 million) instalment payments that had thenby that time been withheld by Diageo as described above. Diageo and the other relevant members of its group filed a reply to that defence and a defence to the counterclaim 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. That application was made by DHN on the basis that the defence filed by Dr Mallya and his co-defendants in relation to those matters had no real prospect of success.
As described in paragraph (d) below, thisThe application was successful resulting in relationWatson being ordered to pay approximately $135 million (£112 million) plus various amounts in respect of interest to DHN, with CASL being held liable as co-surety for 50% of any such amount unpaid by Watson. These amounts were, contrary to the predominant part ofrelevant orders, not paid by the relevant deadlines and Watson and CASL’s liability to repay DHN and, since that application, Watson and CASL’s defenceremaining defences in relation to the remaining part of this liability has
Financial statements (continued)
also beenproceedings were struck out. Accordingly, Diageo and DHN have accordingly sought asset disclosure and are considering further enforcement steps against Watson and CASL, both in the United Kingdom and in other jurisdictions where they are present or hold assets.
A 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. Dr Mallya has applied for permission to appeal the bankruptcy order and a prior order of the English High Court related to the bankruptcy. The consortium of Indian banks has also applied for permission to appeal a prior order of the English High Court related to the bankruptcy. The bankruptcy proceedings are ongoing. In light of the uncertainty posed by the ongoing bankruptcy proceedings the trial has been vacated to allow time for discussions between the parties regarding the future status and management of the proceedings in light of the bankruptcy and pending appeal to take place.
At this stage, it is not possible to assess the extent to which the various proceedings related to these bankruptcy matters will affect the remaining elements of the claims originally commenced on 16 November 2017 by Diageo and the relevant members of its group are proceedinggroup.
Upon completion of an initial inquiry in April 2015 into past improper transactions which identified references to a trial, which is scheduled to take place from 21 November 2021 through 30 November 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.
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.
(d) Other continuing matters relating to Dr Mallya and affiliates
DHN issued a conditional backstop guarantee on 2 August 2013 to Standard Chartered Bank (Standard Chartered) pursuant to a guarantee commitment agreement (the Guarantee Agreement). The guarantee was in respect of the liabilities of Watson, a company affiliated with Dr Mallya, under a $135 million (£92 million) facility from Standard Chartered (the Facility Agreement). The Guarantee Agreement was entered into as part of the arrangements put in place and announced at the closing of the USL transaction on 4 July 2013.
DHN’s provision of the Guarantee Agreement enabled the refinancing of certain existing borrowings of Watson from a third party bank and facilitated the release by that bank of rights over certain USL shares that were to be acquired by Diageo as part of the USL transaction. The facility matured and entered into default in May 2015. In aggregate DHN paid Standard Chartered $141 million (£101 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 proceedings under the Prevention of Money Laundering Act, the Special Court passed an order on 24 May 2021 directing, among other things, the release of certain assets of Dr Mallya including the UBL shares in favour of third party banks. DHN has subsequently filed a writ petition before the Bombay High Court challenging this order of the Special Court insofar as it relates to 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.
Financial statements (continued)
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.
On 16 November 2017, DHN commenced various claims in the English High Court for, in aggregate, in excess of $142 million (£105 million) (plus interest) in relation to these matters, including the following: (i) a claim against Watson for $141 million (£101 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 (£101 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.
This 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 liable to pay, and has no defence against paying, $135 million (£92 million) plus interest of $11 million (£8 million) to DHN, and (ii) CASL is liable, as co-surety, to pay, and has no defence against paying, 50% of any such amount unpaid by Watson, i.e. up to $67.5 million (£49 million) plus interest of $5.5 million (£4 million) to DHN. Watson and CASL 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.
On 15 October 2020, as a result of applications made by DHN to recover certain outstanding costs owed by Watson and CASL (being approximately £260,000 plus interest, which remained unpaid), Dr Mallya and Sidhartha Mallya were ordered to pay those amounts by 27 November 2020. As Dr Mallya and Sidhartha Mallya, in default of the Court order, failed to make the required payments to DHN: (i) Watson and CASL’s defence to DHN’s remaining claim for payment of approximately $6 million (£4 million) (plus interest) has been struck out, with further judgment in DHN’s favour being entered which will be pursued along with the original judgment as set out above, and (ii) DHN is pursuing enforcement against Dr Mallya and Sidhartha Mallya for the judgment debt of approximately £260,000 plus interest.
(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).
Financial statements (continued)
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 therefore believes thethat SEBI's decision in the SEBI notice to be misconceivedwas not consistent with applicable law, and wrong in law andDiageo 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. As with the previous SEBI notice, Diageo believes that SEBI's latest order to be misconceived and wrong inis not consistent with applicable law and has filed ananother appeal before the SAT against the order. ThisDiageo's appeal is currently pending. Diageo is unable to assess if the notices or enquiries referred to above will result in enforcement action or, if this were to transpire, to quantify meaningfully the possible range of loss, if any, to which any such action might give rise to if determined against Diageo or USL.
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.
(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 (£6166 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 (£4 million) (£5 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 (£45 million) remains recoverable from IDBI.
(g)(f) 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 (CFC) 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 could have been affected by the ultimate outcome of this investigation. The UK government and other UK-based international companies, including
Financial statements (continued)
Diageo which calculated its maximum potential liability to be approximately £277 million, appealed to the General Court of the European Union against the decision. In February 2021, HMRC completed its review of the specific facts relating to Diageo and confirmed that Diageo was not a beneficiary of state aid and that no assessment would be issued.
The group operates in a large number of markets with complex tax and legislative regimes that are open to subjective interpretation. AsIn 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.
Diageo has reviewed its disclosures in relation to Brazil and India, where Diageo has a large number of ongoing tax cases. While not all of these cases are individually significant, the current aggregate known possible exposure from tax assessment of the aggregate possible exposuresvalues is up to approximately £449£545 million for Brazil and up to approximately £140£131 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 20212022 is £106£120 million (corporate tax payments of £96£108 million and indirect tax payments of £10£12 million).
In the United States, a lawsuit was filed on 15 April 2019 by the National Association of Manufacturers (NAM) against the United States Department of the Treasury (US 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 USC § 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 drawback in respect of certain eligible product categories. Despite this change in the law, the US Treasury and CBP issued final regulations in 2019 declaring that substitution drawback is not available for imports when substituted with an export on which no tax was paid. The Court of International Trade issued a judgementjudgment in favour of NAM on 18 February 2020, denying the request by the US Treasury and CBP for a stay of payment on 15 May 2020, and on 26 May 2020, ordered the immediate processing of claims. Total payments of $129 million (£94 million) had been received as of 30 June 2021 in respect of this matter, with approximately $33 million (£26 million) of this amount received during the year ended 30 June 2020 and another $96 million (£68 million) received during the year ended 30 June 2021. Remaining eligible outstanding claims of Diageo Americas Supply, Inc. are estimated at $12 million (£8 million). However, theThe US Treasury and CBP has filed an appeal with the US Federal Court of Appeals which is now fully briefed. Although Diageo believes thatfor the NAM is more likely than notFederal Circuit in 2021. During the year ended 30 June 2022, the US Court of Appeals dismissed the appeal, confirming the decision of the Court of International Trade. The deadline for the US Treasury and CBP to ultimately prevail, if they were to fail,seek a review at the CBP could be permitted to recover these payments.US Supreme Court level has passed and, as a result, this matter has been resolved.
(h)(g) Information request
Diageo has received an inquiry from the US Securities and Exchange Commission requesting information relating to Diageo’s business operations in certain markets and to its policies, procedures and compliance environment. Diageo is responding to this information request but is currently unable to assess whether the inquiry will evolve into any enforcement action or, if this were to transpire, to quantify meaningfully the possible loss or range of loss, if any, to which any such action might give rise.
(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)
19.20. 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 £399 million (2021 – £263 million (2020million; 2020 – £312 million; 2019 – £255 million).
(b) Other commitments
The minimum lease rentals payable in the year ended 30 June 20212022 for short-term leases and leases of low-value assets are estimated at £13 million (2021 – £11 million (2020 –million; 2020 - £19 million). The total future cash outflows for leases that had not yet commenced, and not recognised as lease liabilities at 30 June 2021,2022, are estimated at £11 million (2021 – £132 million (2020 –million; 2020 - £133 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:
| | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
Income statement items | | | |
Sales | 8 | | 9 | | 9 | |
Purchases | 23 | | 29 | | 28 | |
Balance sheet items | | | |
Group payables | 5 | | 2 | | 12 | |
Group receivables | 1 | | 1 | | 2 | |
Loans payable | 9 | | 6 | | 6 | |
Loans receivable | 108 | | 82 | | 55 | |
Cash flow items | | | |
Loans and equity contributions, net | 38 | | 47 | | 32 | |
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
Income statement items | | | |
Sales | 11 | | 8 | | 9 | |
Purchases | 31 | | 23 | | 29 | |
Balance sheet items | | | |
Group payables | 2 | | 5 | | 2 | |
Group receivables | 2 | | 1 | | 1 | |
Loans payable | — | | 9 | | 6 | |
Loans receivable | 175 | | 108 | | 82 | |
Cash flow items | | | |
Loans and equity contributions, net | 66 | | 38 | | 47 | |
Other disclosures in respect of associates and joint ventures are included in note 6.
(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’.
| | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
Salaries and short-term employee benefits | 9 | | 10 | | 10 | |
Annual incentive plan | 13 | | 0 | | 10 | |
Non-Executive Directors’ fees | 1 | | 1 | | 1 | |
Share-based payments(i) | 12 | | (11) | | 20 | |
Post employment benefits | 1 | | 2 | | 3 | |
Termination benefits(ii) | 2 | | 2 | | 0 | |
| 38 | | 4 | | 44 | |
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
Salaries and short-term employee benefits | 10 | | 9 | | 10 | |
Annual incentive plan | 13 | | 13 | | — | |
Non-Executive Directors’ fees | 1 | | 1 | | 1 | |
Share-based payments(1) | 19 | | 12 | | (11) | |
Post employment benefits | 2 | | 1 | | 2 | |
Termination benefits | — | | 2 | | 2 | |
| 45 | | 38 | | 4 | |
(i)(1) Time-apportioned fair value of unvested options and share awards.
(ii) £1 million of the termination benefits disclosed for 2021 have been paid in the year ended 30 June 2021; a further £1 million will be paid in the year ending 30 June 2022.
Non-Executive Directors do not receive share-based payments or post employment benefits.
Financial statements (continued)
In April 2020, the Directors became aware that certain purchases by Diageo of its own shares and certain transactions related to Diageo’s employee share schemes between 10 May 2019 and 9 August 2019, amounting to approximately £320 million (‘the affected transactions’),There were undertaken contrary to the applicable provisions of the Companies Act 2006 as they were undertaken following utilisation in full of Diageo plc's distributable reserves as set out in its balance sheet as at 30 June 2018. At the Annual General Meeting on 28 September 2020, a resolution was passed to appropriate an equivalent amount of distributable profits of the company to the payments made in respect of the affected transactions and 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 has implemented constituted a related party transaction under IAS 24 and under the Listing Rules, as the Directors benefitted from the waiver of any claims that the company had or may have had against them as a result of the affected transactions.
There have been no other transactions with these related parties during the year ended 30 June 20212022 on terms other than those that prevail in arm’s length transactions.
(d) Pension plans
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 £NaN (2020£0.1 million (2021 – £NaN£0.1 million; 20192020 – £3£0.1 million).
(e) Directors’ remuneration
| | | | | | | | | | | |
| 2021 £ million | 2020 £ million | 2019 £ million |
Salaries and short-term employee benefits | 2 | | 2 | | 2 | |
Annual incentive plan | 4 | | 0 | | 2 | |
Non-Executive Directors' fees | 1 | | 1 | | 1 | |
Share option exercises(i) | 0 | | 0 | | 2 | |
Shares vesting(i) | 1 | | 11 | | 13 | |
Post employment benefits | 0 | | 1 | | 1 | |
| 8 | | 15 | | 21 | |
| | | | | | | | | | | |
| 2022 £ million | 2021 £ million | 2020 £ million |
Salaries and short-term employee benefits | 3 | | 2 | | 2 | |
Annual incentive plan | 4 | | 4 | | — | |
Non-Executive Directors' fees | 1 | | 1 | | 1 | |
Share option exercises(1) | 4 | | — | | — | |
Shares vesting(1) | 3 | | 1 | | 11 | |
Post employment benefits | — | | — | | 1 | |
| 15 | | 8 | | 15 | |
(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.
Financial statements (continued)
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 | 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 | %55.94% | 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 | 100 | %100% | Financing company for the US group |
Mey İçki Sanayi ve Ticaret A.Ş. | 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 |
(i)(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.
(ii)(2) Percentage ownership excludes 2.38% owned by the USL Benefit Trust.
(iii)(3) Directly owned by Diageo plc.
(iv)(4) French limited liability company.
Financial statements (continued)
23. Post balance sheet events
On 14 July 2022, Diageo announced that it had agreed to sell Guinness Cameroun S.A., its brewery in Cameroon, to Castel Group for £389 million. The transaction is expected to be completed in the first half of the year ending 30 June 2023, subject to regulatory clearances. As per management’s judgement, the criteria to classify the business of Guinness Cameroun S.A. as held for sale are not met, hence such classification was not applied on 30 June 2022 in respect of this business.
Unaudited financial information
1. Five years financial information
The following tables present selected consolidated financial data for Diageo for the five years ended 30 June 2022 and as at the respective year ends. The data presented below for the five years ended 30 June 2022 and the respective year ends has been derived from Diageo’s consolidated financial statements.
| | | | | | | | | | | | | | | | | |
| Year ended 30 June |
| 2022 | 2021 | 2020 | 2019 | 2018 |
Income statement data | £ million | £ million | £ million | £ million | £ million |
Sales | 22,448 | | 19,153 | | 17,697 | | 19,294 | | 18,432 | |
Excise duties | (6,996) | | (6,420) | | (5,945) | | (6,427) | | (6,269) | |
Net sales | 15,452 | | 12,733 | | 11,752 | | 12,867 | | 12,163 | |
Cost of sales | (5,973) | | (5,038) | | (4,654) | | (4,866) | | (4,634) | |
Gross profit | 9,479 | | 7,695 | | 7,098 | | 8,001 | | 7,529 | |
Marketing | (2,721) | | (2,163) | | (1,841) | | (2,042) | | (1,882) | |
Other operating items | (2,349) | | (1,801) | | (3,120) | | (1,917) | | (1,956) | |
Operating profit | 4,409 | | 3,731 | | 2,137 | | 4,042 | | 3,691 | |
Non-operating items | (17) | | 14 | | (23) | | 144 | | — | |
Net interest and other finance charges | (422) | | (373) | | (353) | | (263) | | (260) | |
Share of after tax results of associates and joint ventures | 417 | | 334 | | 282 | | 312 | | 309 | |
Profit before taxation | 4,387 | | 3,706 | | 2,043 | | 4,235 | | 3,740 | |
Tax before exceptional items | (1,080) | | (823) | | (743) | | (859) | | (799) | |
Exceptional taxation | 31 | | (84) | | 154 | | (39) | | 203 | |
| | | | | |
| | | | | |
Profit for the year | 3,338 | | 2,799 | | 1,454 | | 3,337 | | 3,144 | |
| | | | | |
Weighted average number of shares | million | million | million | million | million |
Shares in issue excluding own shares | 2,318 | | 2,337 | | 2,346 | | 2,418 | | 2,484 | |
Dilutive potential ordinary shares | 7 | | 8 | | 8 | | 10 | | 11 | |
| 2,325 | | 2,345 | | 2,354 | | 2,428 | | 2,495 | |
| | | | | |
Per share data | pence | pence | pence | pence | pence |
Basic earnings per share | 140.2 | | 113.8 | | 60.1 | | 130.7 | | 121.7 | |
Diluted earnings per share | 139.7 | | 113.4 | | 59.9 | | 130.1 | | 121.1 | |
| | | | | |
Dividend per share | 76.18 | | 72.55 | | 69.88 | | 68.57 | | 65.30 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Unaudited financial information
| | | | | | | | | | | | | | | | | |
| As at 30 June |
| 2022 | 2021 | 2020 | 2019 | 2018 |
Balance sheet data | £ million | £ million | £ million | £ million | £ million |
Non-current assets | 23,582 | | 20,508 | | 21,837 | | 21,923 | | 21,024 | |
Current assets | 12,934 | | 11,445 | | 11,471 | | 9,373 | | 8,691 | |
Total assets | 36,516 | | 31,953 | | 33,308 | | 31,296 | | 29,715 | |
Current liabilities | (8,442) | | (7,142) | | (6,496) | | (7,003) | | (6,360) | |
Non-current liabilities | (18,560) | | (16,380) | | (18,372) | | (14,137) | | (11,642) | |
Total liabilities | (27,002) | | (23,522) | | (24,868) | | (21,140) | | (18,002) | |
Net assets | 9,514 | | 8,431 | | 8,440 | | 10,156 | | 11,713 | |
Share capital | 723 | | 741 | | 742 | | 753 | | 780 | |
Share premium | 1,351 | | 1,351 | | 1,351 | | 1,350 | | 1,349 | |
Other reserves | 2,174 | | 1,621 | | 2,272 | | 2,372 | | 2,133 | |
Retained earnings | 3,550 | | 3,184 | | 2,407 | | 3,886 | | 5,686 | |
Equity attributable to equity shareholders of the parent company | 7,798 | | 6,897 | | 6,772 | | 8,361 | | 9,948 | |
Non-controlling interests | 1,716 | | 1,534 | | 1,668 | | 1,795 | | 1,765 | |
Total equity | 9,514 | | 8,431 | | 8,440 | | 10,156 | | 11,713 | |
Net borrowings | (14,137) | | (12,109) | | (13,246) | | (11,277) | | (9,091) | |
Additional information for shareholders
Production
The company owns manufacturing production facilities across the globe, including malting facilities, 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 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.
Legal proceedingsThe major facilities with locations, principal activities, products represented in the below table:
| | | | | | | | |
Location | Principal activities | Products |
United Kingdom | distilling, bottling, warehousing, RTD canning, Filling/Disgorging, cooperage, visitor centre | beer, scotch whisky, gin, vodka, rum, RTD |
Ireland | liquid production, blending, brewing, bottling, packaging, warehousing | beer and Baileys |
Italy | distilling, bottling, warehousing | vodka, rum, RTD, non-alcoholic |
Mexico | distilling, bottling, warehousing | tequila |
India | distilling, bottling, warehousing, trading | rum, vodka, whisky, scotch, brandy, gin |
United States, Canada, US Virgin Islands | distilling, bottling, warehousing, shipping, RTD canning, visitor centre | vodka, gin, tequila, rum, Canadian whisky, American whiskey, progressive adult beverages, RTD |
East Africa (Uganda, Kenya, Tanzania) | distilling, brewing, bottling, packaging, warehousing | beer and spirits |
Nigeria | distilling, brewing, bottling, packaging, warehousing | beer and spirits |
South Africa | distilling, bottling, warehousing | spirits |
Africa Regional Markets (Cameroon, Ghana, Seychelles) | distilling, brewing, bottling, warehousing | beer and spirits |
Turkey | distilling, bottling, warehousing | raki, vodka, gin, liqueur, wine |
Brazil | distilling, bottling, RTD canning, warehousing | cachaça, vodka, RTD |
Australia | distilling, bottling, warehousing, RTD canning & bottling | rum, vodka, gin, RTD |
Information
Spirits and investments
Spirits are produced in distilleries located worldwide. The group owns 30 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 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 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.
We are currently investing £185 million in Scotch whisky and tourism in Scotland. This has included the creation of a major new Johnnie Walker global brand attraction in Edinburgh (Johnnie Walker Princes Street) which opened its doors to visitors in September 2021. The distillery visitor investment focuses on the legal proceedings‘Four Corners distilleries’, Glenkinchie, Caol Ila, Clynelish and Cardhu, celebrating the important role these single malts play in the flavors of Johnnie Walker. The new visitor experiences at Glenkinchie, Clynelish and Cardhu are already operational and Caol Ila is set outexpected to open in note 18summer 2022. The iconic lost distillery of Port Ellen is expected to be back in production in the summer of 2023.
Following a $130 million investment, the Lebanon Distillery in Kentucky opened and is Diageo’s first carbon neutral whiskey distillery. One of the largest of its kind in North America, the new distillery operates using 100% renewable electricity, zero fossil fuels for production and virtual metering technology.
Additional information for shareholders (continued)
In China, we broke ground with a $75 million investment to the consolidated financial statements.Eryuan Malt Whisky Distillery. It will produce our first China-origin, single malt whisky and be carbon-neutral on opening.
Further capacity expansion projects are now underway to support future growth. C$245 million, in the construction of a carbon neutral Crown Royal Distillery in Canada to supplement existing manufacturing operations in Canada; $75 million to build a distillery to produce our first China-origin, single malt whisky in Yunnan Province.
Diageo’s end-to-end Tequila production is in Mexico and more than $500 million dollars to expand our manufacturing footprint in Mexico through an investment of in new facilities in the State of Jalisco to support the growth of Tequila.
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 $80 million equivalent cases in fiscal 22 of Indian Made Foreign Liquor (IMFL) and Imported Liquors. USL has a significant market presence across India and operates 15 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 and investments
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, Cameroon, Tanzania, Uganda, and the Seychelles. Meta Abo Brewery in Ethiopia was sold during the year ended 30 June 2022.
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 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.
Furthermore a £41 million investment at the Belfast and Runcorn beer packaging facilities to expand capacity to support growth, with additional capacity expected to be available during 2023; and a £73 million investment in ‘Guinness at Old Brewer’s Yard’, a new microbrewery and culture hub in Covent Garden, London, set to open in autumn 2023.
The Diageo Global Technical Third-Party Partnerships Team are the technical brewers supporting the delivery of over two million hectolitres of beer through partner breweries. The team's focus is upon sustaining consistent quality of our brands through 48 partners globally while enhancing Diageo value through new partnerships and innovation projects. In addition to supporting Guinness and beer, the team has an expanding role in the support of licensed manufacturing of third-party ready to drink and mainstream spirits in Asia-Pacific and Africa.
The companyFlavoured Malt Beverages (FMB) are made from original base containing malt, but then stripped of malt character and flavoured. This product segment is incorporated underimplemented mainly in the name Diageo plc,US, Canada 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 4 August 2021. 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.Caribbean.
DirectorsReady to drink (RTD)
Diageo’s articlesDiageo produces a range of association provideready to drink products mainly in the United Kingdom, Italy, across Africa, Australia, the United States and Canada. Demand for a Board of Directors, consisting (unless otherwise determined by an ordinary resolution of shareholders) of not fewer than three directorsthese products has increased significantly particularly in United States and not more than 25 directors,Canada with volumes increased 15%. We are supporting this increase in which all powers to manage the businessdemand through third-party production and affairs of Diageo are vested. Directors may be elected by the membersalso investing 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 requirementnew production facility in respect of directors. Directors may also be removed before the expiration of their term of officePlainfield, which opened 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 company in which Diageo is interested.
Under Diageo’s articles of association, compensation awarded to directors may be decided by the Board or any authorised committee of the Board. The Remuneration Committee 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, subject to the limitation that the aggregate amount of all net external borrowings of the group outstanding at any time shall not exceed an amount equal to twice the aggregate 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.
Directors are not required to hold any shares of Diageo as a qualification to act as a director.March 2022.
Dividend rightsRaw materials and supply agreements
HoldersThe group has several long-term contracts in place for the purchase of Diageo’s ordinary shares may, by ordinary resolution, declare dividendsraw 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. The global ocean freight crisis coupled with volatile but may not declare dividendsstrong consumer demand, change in excessconsumer habits (for example, the increase in e-commerce) continued impact of Covid-19 and emerging impact of the amount recommended byconflict in Ukraine are the directors. The directors may also pay interim dividends or fixed rate dividends. No dividend may be paidkey drivers of constraints that we are managing through.
Like other than outconsumer 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 profits available for distribution. Alluncertainty and constraints in our supply chain through expansion of Diageo’s ordinary shares rank equally for dividends, butour supplier base and agility in our logistics networks.
Cream is the Board may withhold paymentprincipal raw material used in the production of all or any partIrish cream liqueur and is sourced from Ireland. Grapes and aniseed are used in the production of any dividends or other monies payableraki and are sourced from suppliers in respectTurkey. Agave is a key raw material used in the production of Diageo’s sharesour tequila brands and is sourced from Mexico. Other raw materials purchased in significant quantities to produce spirits and beer are molasses, cereals, 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 is purchased from a person with a 0.25% interest (as definedvariety of multinational and local suppliers. The largest suppliers are Ardagh Packaging in Diageo’s articles of association) if such a person has been served with a restriction notice (as definedthe United Kingdom and Owens-Illinois 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.United States.
Additional information for shareholders (continued)
Competition
Diageo’s articlesbrands compete primarily on the basis of association permit payment or satisfactionquality 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 dividend wholly or partly by distribution of specific assets,regional and local basis (with the profile varying between regions) with several competitors, including fully paid shares or debentures of any other company. Such action must be directed by the general meeting which declared the dividendAB InBev, Molson Coors, Heineken, Constellation Brands and upon the recommendation of the directors.Carlsberg.
Voting rightsResearch and development
VotingInnovation forms an important part of Diageo’s growth strategy, playing a key role in positioning its brands for continued growth in both developed and emerging markets. The strength and depth of Diageo’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 any resolution at any general meetingits 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 the innovation and research and development function.
Trademarks and other intellectual property
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 protected by trademarks. The Diageo group also holds trade secrets, as well 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 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 company is by a showUS Treasury Department oversees the US beverage alcohol industry, including through regulating and collecting taxes on the production of hands unless a poll is duly demanded. On a showalcohol within the United States and regulating trade practices. In addition, individual US states, as well as some local authorities in US jurisdictions in which Diageo sells or produces its products, administers and enforces industry-specific regulations and may apply additional excise taxes and, in many states, sales taxes. Federal, state and local regulations cover virtually every aspect of hands, (a) every shareholder who is present in person at a general meeting,Diageo's US operations, including production, importation, distribution, marketing, promotion, sales, pricing, labelling, packaging and every proxy appointed by any one shareholderadvertising.
Spirits and present at a general meeting, has/have one vote regardless of the number of shares held by the shareholder (or,beer are subject to (b), represented bynational import and excise duties in many markets around 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 inworld. Most countries impose excise duties on beverage alcohol products, although the form of proxy).
A poll may be demandedsuch taxation varies significantly from a simple application to units of alcohol by anyvolume, to advanced systems based on the imported or wholesale value of the following:product. 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 no longer subject to the European Union’s rules on excise duties and has undertaken a review of its alcohol duty system. Any changes in the UK’s alcohol duty system could have an impact on Diageo’s business activities.
•Import and excise duties can have a significant impact on the chairmanfinal 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 beverage 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 general meeting;
•at least three shareholders entitledimport into a certain jurisdiction of spirits and beer, and to voterestrictions on the relevant resolutionadvertising style, media 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-tenthcontent. In a number 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 conferringcountries, television is 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 resolutionsprohibited medium for the election, re-electionmarketing 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 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 ofsocial media in connection with alcohol sales. Any further prohibitions imposed on advertising or marketing, particularly within 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.
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 upmost significant markets, could have an adverse impact 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.
beverage alcohol sales.
Additional information for shareholders (continued)
DisclosureLabelling of interestsbeverage alcohol products is also regulated in Diageo’s shares
There are no provisions in Diageo’s articlesmany markets, varying from the required inclusion of association whereby persons acquiring, holdinghealth warning labels to manufacturer or disposingimporter identification, alcohol strength and other consumer information. As well as producer, importer or bottler identification, specific warning statements related to the risks of a certain percentage of Diageo’s sharesdrinking beverage alcohol products are required to make disclosurebe included on all beverage alcohol products sold in the US, in certain countries within the EU, and in a number of their ownership percentage, although thereother jurisdictions in which Diageo operates.
Spirits and beer are such requirements underalso 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 the Companies Acts. The basic disclosure requirement under Part 6off-trade channel in Norway, certain Canadian provinces, and certain US states) to the system of licensed on-trade outlets (for example, licensed bars and restaurants) which prevails in much of the Financial ServicesWestern world, including in the majority of US states, in the UK and Markets Act 2000 and Rule 5in much of the Disclosure GuidanceEU. In a number of states 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 response to public health concerns, some governments have imposed or are considering imposing minimum pricing on beverage alcohol products and Transparency Rules made bymay consider raising the Financial Conduct Authority (successorlegal drinking age, further limiting the number, type or opening hours of retail outlets and/or expanding retail licensing requirements.
In response to the UK Financial Services Authority) imposes a statutory obligationCovid-19 pandemic, many governments across the world implemented restrictions on a personwhere and how people could gather, in an effort to notify Diageo and the Financial Conduct Authoritycurb transmission of the percentagevirus. The extent of these restrictions has varied from country to country (and, in the US, from state to state) and throughout the duration of the voting rightspandemic but, in many of the markets in which Diageo he directlyoperates, they have resulted in, amongst other things, the temporary closure of 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:restricted opening hours for on-trade outlets.
•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 changeRegulatory decisions and changes in the breakdown legal and regulatory environment could also increase Diageo’s costs and liabilities and/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 incorporated into UK domestic law by the European Union (Withdrawal) Act 2018, further requires persons discharging managerial responsibilities within Diageo (and their persons closely associated) to notify Diageo of transactions conductedimpact 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.
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 232,820,888 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.
Additional information for shareholders (continued)
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.activities.
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 Her Majesty’s Revenue and Customs, 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
Additional information for shareholders (continued)
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 of taxable dividend income received by an individual shareholder in a 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 2020/20212022/2023 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')(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
Additional information for shareholders (continued)
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 anticipated that HMRC will now seek to apply the 1.5% charge to issues of shares following Brexit.
Based on HM Revenue & Custom’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.
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, 6 October 2022.
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.
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.
Additional information for shareholders (continued)
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 238 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, 10th Floor, 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, Monday to Friday, excluding public holidays in England and Wales.
ADR administration
Citibank 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
Additional information for shareholders (continued)
Exhibits | | | | | |
| |
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 | | |
4.2 | | |
4.3 | | |
4.4 | | |
4.54.4 | | |
4.64.5 | | |
4.74.6 | | |
4.84.7 | | |
4.94.8 | | |
4.104.9 | | |
4.114.10 | | |
4.124.11 | | |
4.134.12 | | |
4.144.13 | | |
4.154.14 | | |
Additional information for shareholders (continued)
Additional information for shareholders (continued)
| | | | | |
4.174.16 | |
|
4.184.17 | | |
4.194.18 | | |
4.204.19 | | |
4.214.20 | | |
4.224.21 | | |
4.234.22 | | |
4.244.23 | | |
4.254.24 | | |
4.264.25 | | |
4.274.26 | | |
6.1 | | |
8.1 | | |
12.1 | | |
12.2 | | |
13.1 | | |
13.2 | | |
15.1 | | |
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)
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.
| | |
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DIAGEO plc |
(REGISTRANT) |
|
/s/ Lavanya Chandrashekar |
Name: Lavanya Chandrashekar |
|
Title: Chief Financial Officer |
|
54 August 20212022 |
Glossary of terms and US equivalents
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)
| | | | | |
| |
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 |