UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: 30 June 20152016
Commission file number1-10691
DIAGEO plc
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organisation)
Lakeside Drive, Park Royal, London NW10 7HQ, England
(Address of principal executive offices)
Paul Tunnacliffe,David Harlock, Company Secretary
Tel: +44 20 8978 6000
E-mail: the.cosec@diageo.com
Lakeside Drive, Park Royal, London NW10 7HQ, 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 | Name of each exchange on which registered | |
American Depositary Shares Ordinary shares of 28101 | New York Stock Exchange New York Stock Exchange(i) | |
2.875% Guaranteed Notes due 2022 8.000% Guaranteed Notes due 2022
7.450% Guaranteed Notes due 2035
4.250% Guaranteed Notes due 2042
|
New York Stock Exchange New York Stock Exchange New York Stock Exchange 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: 2,754,308,4002,754,380,836 ordinary shares of 28101/108 pence each.
Indicate by check mark if each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No ¨
If this report is an annual or transition report, indicate by check mark if each registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
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. Yesx No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ¨ No ¨
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer x Accelerated Filer¨ Non-Accelerated Filer¨ |
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 as issued by the International Accounting Standards Boardx | Other ¨ |
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 ¨
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 x
This document comprises the annual report on Form 20-F and the annual report to shareholders for the year ended 30 June 20152016 of Diageo plc (the 20152016 Form 20-F).
Contents
5 | Introduction | |
7 | Recent trends | |
8 | Historical information | |
12 | Strategic report | |
12 | Business description | |
12 | Our business | |
17 | Our global reach | |
18 | Our brands | |
19 | ||
20 | Our | |
21 | Our business model | |
| ||
| ||
| How we measure performance: key performance indicators | |
28 | Chairman’s statement | |
32 | Chief Executive’s statement | |
35 | Market dynamics | |
| How we will deliver our Performance Ambition | |
| Risk factors | |
| Cautionary statement concerning forward-looking statements | |
| Business review | |
| Operating results 2016 compared with 2015 | |
80 | Operating results 2015 compared with 2014 | |
| ||
| Liquidity and capital resources | |
| Contractual obligations and commitments | |
| Off-balance sheet arrangements | |
| Risk management | |
| Critical accounting policies | |
| New accounting standards | |
| ||
| Definitions and | |
| Governance | |
| Board of Directors and Company Secretary | |
| Executive Committee | |
| Corporate governance report | |
| Report of the Audit Committee | |
| Directors’ remuneration report | |
| Directors’ report |
3
Contents (continued)
| Financial statements | |
| Reports of independent registered public accounting firms | |
| Consolidated income statement | |
| Consolidated statement of comprehensive income | |
| Consolidated balance sheet | |
| Consolidated statement of changes in equity | |
| Consolidated statement of cash flows | |
204 | Notes to the consolidated financial statements | |
| Accounting information and policies | |
| Results for the year | |
| Operating assets and liabilities | |
| Risk management and capital structure | |
| Other financial information | |
| ||
| Unaudited computation of ratio of earnings to fixed charges | |
| Additional information for shareholders | |
| Legal proceedings | |
| Related party transactions | |
| Share capital | |
| American depositary shares | |
| Articles of association | |
| Exchange controls | |
| Documents on display | |
| Taxation | |
| Warning to shareholders - share fraud | |
| Signature | |
| Exhibits | |
| Cross reference to Form 20-F | |
| Glossary of terms and US equivalents |
4
Introduction
Diageo is the world’s leading premium drinks business. Its geographic breadth and range of industry leading brands across categories and price points is unparalleled.
Diageo plc is incorporated as a public limited company in England and Wales. Diageo was incorporated as Arthur Guinness Son and Company Limited on 21 October 1886. The group was formed by the merger of Grand Metropolitan Public Limited Company (GrandMet) and Guinness PLCplc (the Guinness Group) in December 1997. Diageo plc’s principal executive office is located at Lakeside Drive, Park Royal, London NW10 7HQ and its telephone number is +44 (0) 20 8978 6000. Diageo plc’s agent for service of process in the United States is General Counsel, Diageo North America, Inc., 801 Main Avenue (6078-06), Norwalk, CT 06851.
This is the Annual Report on Form 20-F of Diageo plc for the year ended 30 June 2015.2016. The information set out in thisForm 20-F does not constitute Diageo plc’s statutory accounts under the UK Companies Acts for the years ended 30 June 2016, 2015 2014 or 2013.2014. PricewaterhouseCoopers LLP has reported on the accounts for the year ended 30 June 2016 and the group’s former auditors, KPMG LLP has reported on the accounts for the year ended 30 June 2015 and 2014 and KPMG Audit Plc has reported on the accounts for the year ended 30 June 2013;2014; their respective audit reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006 in respect of the accounts for the years ended 30 June 2016, 2015 2014 or 2013.2014. The accounts for 20142015 and 20132014 have been delivered to the registrar of companies for England and Wales and those for 20152016 will be delivered in due course.
This document contains forward-looking statements that involve risk and uncertainty. 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 42-43.46-47.
The content of the company’s website (www.diageo.com) or any other documents referred to herein 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.
Diageo’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed and adopted for use in the European Union (EU) and IFRS as issued by the International Accounting Standards Board (IASB). References to IFRS hereafter should be construed as references to both IFRS as adopted by the EU and IFRS as issued by the IASB. Unless otherwise indicated, all financial information contained in this document has been prepared in accordance with IFRS.
Information presented
Unless otherwise stated in this document, percentageOrganic movements areand organic movements. These movements and operating margins are before exceptional items. Commentary, unless otherwise stated, refers to organic movements. Share, unless otherwise stated, refers to value share. See the ‘DefinitionsFor a definition of organic movement and reconciliations of non-GAAP measures to GAAP measures’ for an explanation of organic movement calculationsmeasures see on page 120.133.
The brand ranking information presented in this report, when comparing information with competitors, reflects data published by sourcesources such as IWSR, Impact Databank, Nielsen, Beverage Information Group and Plato Logic. Market data information and competitive set classifications are taken from independent industry sources in the markets in which Diageo operates.
Disclosures not incorporated by reference
The following pages and sections of the Annual Report of Diageo plc for the year ended 30 June 2015,2016, are not incorporated by reference into this report on Form 20-F and are furnished to the United States Securities and Exchange Commission (SEC) for information only:
5
Introduction (continued)
5
Introduction (continued)
6
Recent trends
The following comments were made by Ivan Menezes, Chief Executive of Diageo, in Diageo’s preliminary results announcement on 3028 July 2015:2016:
“Our F15This is a good set of results delivering what we set out to achieve this time last year and demonstrating our momentum.
This better performance reflects the challengeswork we have done to strengthen our big brands through marketing and innovation, as well as expanding our distribution reach. Our six global brands and our US spirits business are all back in growth and we have seen a significant improvement in the performance of our scotch and beer portfolios. The delivery of volume growth; organic margin expansion; increased free cash flow; and the disposal of £1bn in non-core assets, comes from an everyday focus on top line growth. However, it does not diminish my confidenceefficiency in what we can achieve in F16 and even more so beyond that. Diageo has an enviable position, by geography, by brand and by category range, in an attractive consumer market place with strong long term growth drivers. This year we made further changes to build strong, sustained performance including embeddingeach aspect of our sell out discipline, improving cash conversion and strengthening our route to consumer.business. We have consistently appliedalso made significant progress this year in our aim to improve the role of alcohol in society, partner with our communities and reduce our environmental impact.
These results position us well to deliver a long term perspectivestronger performance in making these changes, despite the short term challenges we have faced from an external environment where currency volatility continues to impact the emerging market consumer.
We acquired control of United Spirits in the year giving Diageo unparalleled access to one of the world’s most attractive spirits markets. We have enhanced our position in tequila by acquiring the remaining 50% of Don Julio, a brand that is already growing net sales double digit and for which I see significant potential now we have full control. Our participation strategy is clear by market and category.F17. We are focused onconfident of achieving our core and have a more proactive approach to our portfolio. We sold Gleneagles in the year, and since the year end, have sold the shares USL owned in United Breweries and we restructured our South African operations to focus on spirits and monetise investments worth £125 million.
We are delivering the change which will further strengthen this business and deliver our performance ambition. In F16 we believe stronger volume growth will deliver an improved top line performance. As we achieve our productivity gains from F17 we expect to deliver mid singleobjective of mid-single digit organic top line growth, on a sustained basis and in the three years ending F19 delivering 100bps of organic operating margin expansion of 100 basis points over 3 years. Our brands, our global footprint and our people give me confidence that Diageo can deliver strong and sustained performance.improvement.”
7
Historical information
The following tables present selected consolidated financial data for Diageo for the five years ended 30 June 20152016 and as at the respective year ends. The data presented below for the fourfive years ended 30 June 20152016 and the respective year ends has been derived from Diageo’s consolidated financial statements, audited by Diageo’s independent auditor. The group’s former auditors, KPMG LLP and its affiliates (KPMG) reported on the financial informationstatements for the yearfour years ended 30 June 2011 has been derived from Diageo’s financial statements, audited by Diageo’s independent auditor, and restated in the year 30 June 2014 to reflect the adjustments resulting from the adoption of IFRS 11 and the amendment to IAS 19.
Income statement data2015.
Year ended 30 June | ||||||||||||||||||||||||||||||||||||||||
Income statement data | Year ended 30 June | |||||||||||||||||||||||||||||||||||||||
2015 £ million | 2014 £ million | 2013 £ million | 2012 £ million | 2011 £ million | 2016 £ million | 2015 £ million | 2014 £ million | 2013 £ million | 2012 £ million | |||||||||||||||||||||||||||||||
Sales | 15,966 | 13,980 | 15,276 | 14,392 | 13,043 | 15,641 | 15,966 | 13,980 | 15,276 | 14,392 | ||||||||||||||||||||||||||||||
Excise duties | (5,153 | ) | (3,722 | ) | (3,973 | ) | (3,753 | ) | (3,224 | ) | (5,156 | ) | (5,153 | ) | (3,722 | ) | (3,973 | ) | (3,753 | ) | ||||||||||||||||||||
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Net sales | 10,813 | 10,258 | 11,303 | 10,639 | 9,819 | 10,485 | 10,813 | 10,258 | 11,303 | 10,639 | ||||||||||||||||||||||||||||||
Cost of sales | (4,610 | ) | (4,029 | ) | (4,416 | ) | (4,208 | ) | (3,958 | ) | (4,251 | ) | (4,610 | ) | (4,029 | ) | (4,416 | ) | (4,208 | ) | ||||||||||||||||||||
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Gross profit | 6,203 | 6,229 | 6,887 | 6,431 | 5,861 | 6,234 | 6,203 | 6,229 | 6,887 | 6,431 | ||||||||||||||||||||||||||||||
Marketing | (1,629 | ) | (1,620 | ) | (1,769 | ) | (1,671 | ) | (1,520 | ) | (1,562 | ) | (1,629 | ) | (1,620 | ) | (1,769 | ) | (1,671 | ) | ||||||||||||||||||||
Other operating expenses | (1,777 | ) | (1,902 | ) | (1,738 | ) | (1,652 | ) | (1,789 | ) | (1,831 | ) | (1,777 | ) | (1,902 | ) | (1,738 | ) | (1,652 | ) | ||||||||||||||||||||
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Operating profit | 2,797 | 2,707 | 3,380 | 3,108 | 2,552 | 2,841 | 2,797 | 2,707 | 3,380 | 3,108 | ||||||||||||||||||||||||||||||
Non-operating items | 373 | 140 | (83 | ) | 147 | (14 | ) | 123 | 373 | 140 | (83 | ) | 147 | |||||||||||||||||||||||||||
Net interest and other finance charges | (412 | ) | (388 | ) | (457 | ) | (441 | ) | (449 | ) | ||||||||||||||||||||||||||||||
Share of after tax results of associates and joint ventures | 175 | 252 | 217 | 229 | 192 | |||||||||||||||||||||||||||||||||||
Net interest and other financial charges | (327 | ) | (412 | ) | (388 | ) | (457 | ) | (441 | ) | ||||||||||||||||||||||||||||||
Share of other tax results of associates and joint ventures | 221 | 175 | 252 | 217 | 229 | |||||||||||||||||||||||||||||||||||
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Profit before taxation | 2,933 | 2,711 | 3,057 | 3,043 | 2,281 | 2,858 | 2,933 | 2,711 | 3,057 | 3,043 | ||||||||||||||||||||||||||||||
Taxation | (466 | ) | (447 | ) | (507 | ) | (1,011 | ) | (321 | ) | (496 | ) | (466 | ) | (447 | ) | (507 | ) | (1,011 | ) | ||||||||||||||||||||
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Profit from continuing operations | 2,467 | 2,264 | 2,550 | 2,032 | 1,960 | 2,362 | 2,467 | 2,264 | 2,550 | 2,032 | ||||||||||||||||||||||||||||||
Discontinued operations | — | (83 | ) | — | (11 | ) | — | — | — | (83 | ) | — | (11 | ) | ||||||||||||||||||||||||||
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Profit for the year | 2,467 | 2,181 | 2,550 | 2,021 | 1,960 | 2,362 | 2,467 | 2,181 | 2,550 | 2,021 | ||||||||||||||||||||||||||||||
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Weighted average number of shares | million | million | million | million | million | |||||||||||||||||||||||||||||||||||
Shares in issue excluding own shares | 2,508 | 2,505 | 2,506 | 2,502 | 2,495 | |||||||||||||||||||||||||||||||||||
Dilutive potential ordinary shares | 10 | 12 | 11 | 15 | 14 | |||||||||||||||||||||||||||||||||||
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2,518 | 2,517 | 2,517 | 2,517 | 2,509 | ||||||||||||||||||||||||||||||||||||
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Per share data | pence | pence | pence | pence | pence | pence | pence | pence | pence | pence | ||||||||||||||||||||||||||||||
Dividend per share | 56.4 | 51.7 | 47.4 | 43.5 | 40.4 | 59.2 | 56.4 | 51.7 | 47.4 | 43.5 | ||||||||||||||||||||||||||||||
Earnings per share | ||||||||||||||||||||||||||||||||||||||||
Basic | ||||||||||||||||||||||||||||||||||||||||
Continuing operations | 95.0 | 93.0 | 98.0 | 76.6 | 74.3 | 89.5 | 95.0 | 93.0 | 98.0 | 76.6 | ||||||||||||||||||||||||||||||
Discontinued operations | — | (3.3 | ) | — | (0.4 | ) | — | — | — | (3.3 | ) | — | (0.4 | ) | ||||||||||||||||||||||||||
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Basic earnings per share | 95.0 | 89.7 | 98.0 | 76.2 | 74.3 | 89.5 | 95.0 | 89.7 | 98.0 | 76.2 | ||||||||||||||||||||||||||||||
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Diluted | ||||||||||||||||||||||||||||||||||||||||
Continuing operations | 94.6 | 92.6 | 97.4 | 76.2 | 74.1 | 89.1 | 94.6 | 92.6 | 97.4 | 76.2 | ||||||||||||||||||||||||||||||
Discontinued operations | — | (3.3 | ) | — | (0.4 | ) | — | — | — | (3.3 | ) | — | (0.4 | ) | ||||||||||||||||||||||||||
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Diluted earnings per share | 94.6 | 89.3 | 97.4 | 75.8 | 74.1 | 89.1 | 94.6 | 89.3 | 97.4 | 75.8 | ||||||||||||||||||||||||||||||
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million | million | million | million | million | ||||||||||||||||||||||||||||||||||||
Weighted average number of shares | 2,505 | 2,506 | 2,502 | 2,495 | 2,493 |
8
Historical information (continued)
Balance sheet data
As at 30 June | As at 30 June | |||||||||||||||||||||||||||||||||||||||
2015 £ million | 2014 £ million | 2013 £ million | 2012 £ million | 2011 £ million | 2016 £ million | 2015 £ million | 2014 £ million | 2013 £ million | 2012 £ million | |||||||||||||||||||||||||||||||
Non-current assets | 18,134 | 15,495 | 16,481 | 15,098 | 12,633 | 19,639 | 18,134 | 15,495 | 16,481 | 15,098 | ||||||||||||||||||||||||||||||
Current assets | 7,670 | 7,469 | 8,510 | 7,171 | 7,087 | 8,852 | 7,670 | 7,469 | 8,510 | 7,171 | ||||||||||||||||||||||||||||||
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Total assets | 25,804 | 22,964 | 24,991 | 22,269 | 19,720 | 28,491 | 25,804 | 22,964 | 24,991 | 22,269 | ||||||||||||||||||||||||||||||
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Current liabilities | (5,290 | ) | (4,851 | ) | (5,519 | ) | (4,762 | ) | (4,903 | ) | (6,187 | ) | (5,290 | ) | (4,851 | ) | (5,519 | ) | (4,762 | ) | ||||||||||||||||||||
Non-current liabilities | (11,258 | ) | (10,523 | ) | (11,384 | ) | (10,715 | ) | (8,858 | ) | (12,124 | ) | (11,258 | ) | (10,523 | ) | (11,384 | ) | (10,715 | ) | ||||||||||||||||||||
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Total liabilities | (16,548 | ) | (15,374 | ) | (16,903 | ) | (15,477 | ) | (13,761 | ) | (18,311 | ) | (16,548 | ) | (15,374 | ) | (16,903 | ) | (15,477 | ) | ||||||||||||||||||||
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Net assets | 9,256 | 7,590 | 8,088 | 6,792 | 5,959 | 10,180 | 9,256 | 7,590 | 8,088 | 6,792 | ||||||||||||||||||||||||||||||
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Share capital | 797 | 797 | 797 | 797 | 797 | 797 | 797 | 797 | 797 | 797 | ||||||||||||||||||||||||||||||
Share premium | 1,346 | 1,345 | 1,344 | 1,344 | 1,343 | 1,347 | 1,346 | 1,345 | 1,344 | 1,344 | ||||||||||||||||||||||||||||||
Other reserves | 1,994 | 2,243 | 3,154 | 3,213 | 3,300 | 2,625 | 1,994 | 2,243 | 3,154 | 3,213 | ||||||||||||||||||||||||||||||
Retained earnings/(deficit) | 3,634 | 2,438 | 1,741 | 234 | (195 | ) | ||||||||||||||||||||||||||||||||||
Retained earnings | 3,761 | 3,634 | 2,438 | 1,741 | 234 | |||||||||||||||||||||||||||||||||||
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Equity attributable of equity shareholders of the parent company | 7,771 | 6,823 | 7,036 | 5,588 | 5,245 | |||||||||||||||||||||||||||||||||||
Equity attributable to equity shareholders of the parent company | 8,530 | 7,771 | 6,823 | 7,036 | 5,588 | |||||||||||||||||||||||||||||||||||
Non-controlling interests | 1,485 | 767 | 1,052 | 1,204 | 714 | 1,650 | 1,485 | 767 | 1,052 | 1,204 | ||||||||||||||||||||||||||||||
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Total equity | 9,256 | 7,590 | 8,088 | 6,792 | 5,959 | 10,180 | 9,256 | 7,590 | 8,088 | 6,792 | ||||||||||||||||||||||||||||||
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Net borrowings | (9,527 | ) | (8,850 | ) | (8,403 | ) | (7,573 | ) | (6,480 | ) | (8,635 | ) | (9,527 | ) | (8,850 | ) | (8,403 | ) | (7,573 | ) | ||||||||||||||||||||
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Notes to the historical information
1. Accounting policiesThe consolidated financial statements for the five years ended 30 June 20152016 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.
9
Historical information (continued)
2. Exceptional itemsExceptional items are those that in management’s judgement need to be disclosed by virtue of their size or nature. 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 | ||||||||||||||||||||
2015 £ million | 2014 £ million | 2013 £ million | 2012 £ million | 2011 £ million | ||||||||||||||||
Items included in operating profit | ||||||||||||||||||||
Restructuring programmes | (82 | ) | (163 | ) | (69 | ) | (96 | ) | (111 | ) | ||||||||||
Duty settlements | (146 | ) | — | — | — | (127 | ) | |||||||||||||
Associate impairment | (41 | ) | — | — | — | — | ||||||||||||||
Brand and tangible asset impairment | — | (264 | ) | (50 | ) | (59 | ) | (39 | ) | |||||||||||
Pension changes – past service credits | — | — | 20 | 115 | — | |||||||||||||||
SEC settlement | — | — | — | — | (12 | ) | ||||||||||||||
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(269 | ) | (427 | ) | (99 | ) | (40 | ) | (289 | ) | |||||||||||
Non-operating items | 373 | 140 | (83 | ) | 147 | (14 | ) | |||||||||||||
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Items included in taxation | ||||||||||||||||||||
Tax on exceptional operating items | 51 | 99 | 27 | 19 | 51 | |||||||||||||||
Tax on sale of businesses | — | — | 28 | — | 3 | |||||||||||||||
Loss of future tax amortisation | — | — | — | (524 | ) | — | ||||||||||||||
Settlements with tax authorities | — | — | — | — | 66 | |||||||||||||||
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51 | 99 | 55 | (505 | ) | 120 | |||||||||||||||
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Exceptional items in continuing operations | 155 | (188 | ) | (127 | ) | (398 | ) | (183 | ) | |||||||||||
Discontinued operations net of taxation (note 3) | — | (83 | ) | — | (11 | ) | — | |||||||||||||
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Exceptional items | 155 | (271 | ) | (127 | ) | (409 | ) | (183 | ) | |||||||||||
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Historical information (continued)
Year ended 30 June | ||||||||||||||||||||
2016 £ million | 2015 £ million | 2014 £ million | 2013 £ million | 2012 £ million | ||||||||||||||||
Items included in operating profit | ||||||||||||||||||||
Brand, goodwill and tangible asset impairment | (118 | ) | — | (264 | ) | (50 | ) | (59 | ) | |||||||||||
Restructuring programmes | — | (82 | ) | (163 | ) | (69 | ) | (96 | ) | |||||||||||
Duty settlements | — | (146 | ) | — | — | — | ||||||||||||||
Associate impairment | — | (41 | ) | — | — | — | ||||||||||||||
Pension changes – past service credits | — | — | — | 20 | 115 | |||||||||||||||
Disengagement agreements relating to United Spirits Limited | (49 | ) | — | — | — | — | ||||||||||||||
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(167 | ) | (269 | ) | (427 | ) | (99 | ) | (40 | ) | |||||||||||
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Gains/(losses) on sale of businesses | 215 | 247 | — | (83 | ) | 23 | ||||||||||||||
Step up gains | — | 156 | 140 | — | 124 | |||||||||||||||
Other non-operating items | (92 | ) | (30 | ) | — | — | — | |||||||||||||
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123 | 373 | 140 | (83 | ) | 147 | |||||||||||||||
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Tax credit on exceptional operating items | 7 | 51 | 99 | 27 | 19 | |||||||||||||||
Tax on sale of businesses | 49 | — | — | 28 | — | |||||||||||||||
Loss of future tax amortisation | — | — | — | — | (524 | ) | ||||||||||||||
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56 | 51 | 99 | 55 | (505 | ) | |||||||||||||||
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Exceptional items in continuing operations | 12 | 155 | (188 | ) | (127 | ) | (398 | ) | ||||||||||||
Discontinued operations net of taxation (note 3) | — | — | (83 | ) | — | (11 | ) | |||||||||||||
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Exceptional items | 12 | 155 | (271 | ) | (127 | ) | (409 | ) | ||||||||||||
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3. Discontinued operationsin the year ended 30 June 2014 comprised a charge after taxation of £83 million (£91 million less tax of £8 million) (2012 - £16 million less deferred tax of £5 million) in respect of the settlement of thalidomide litigation in Australia and New Zealand and anticipated future payments to thalidomide organisations.
4. DividendsThe Board expects that Diageo will pay an interim dividend in April and a final dividend in October of each year. Approximately 40% of the total dividend in respect of any financial year is expected to be paid as an interim dividend and approximately 60% as a final dividend. The payment of any future dividends, subject to shareholder approval, will depend upon Diageo’s earnings, financial condition and such other factors as the Board deems relevant. Proposed dividends are not considered to be a liability until they are approved by the Board for the interim dividend and by the shareholders at the annual general meeting for the final dividend.
The table below sets out the amounts of interim, final and total cash dividends paid by the company on each ordinary share. The dividends are translated into US dollars per ADS (each ADS representing four ordinary shares) at the actual rate on each of the respective dividend payment dates.
Year ended 30 June | ||||||||||||||||||||||||||||||||||||||||||||||||
Year ended 30 June | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||||||||||||||||||
2015 pence | 2014 pence | 2013 pence | 2012 pence | 2011 pence | pence | pence | pence | pence | pence | |||||||||||||||||||||||||||||||||||||||
Per ordinary share | Interim | 21.50 | 19.70 | 18.10 | 16.60 | 15.50 | Interim | 22.60 | 21.50 | 19.70 | 18.10 | 16.60 | ||||||||||||||||||||||||||||||||||||
Final | 34.90 | 32.00 | 29.30 | 26.90 | 24.90 | Final | 36.60 | 34.90 | 32.00 | 29.30 | 26.90 | |||||||||||||||||||||||||||||||||||||
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Total | 56.40 | 51.70 | 47.40 | 43.50 | 40.40 | Total | 59.20 | 56.40 | 51.70 | 47.40 | 43.50 | |||||||||||||||||||||||||||||||||||||
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$ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Per ADS | Interim | 1.28 | 1.31 | 1.10 | 1.05 | 1.01 | Interim | 1.27 | 1.28 | 1.31 | 1.10 | 1.05 | ||||||||||||||||||||||||||||||||||||
Final | 2.18 | 2.06 | 1.89 | 1.72 | 1.59 | Final | 1.95 | 2.14 | 2.06 | 1.89 | 1.72 | |||||||||||||||||||||||||||||||||||||
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Total | 3.46 | 3.37 | 2.99 | 2.77 | 2.60 | Total | 3.22 | 3.42 | 3.37 | 2.99 | 2.77 | |||||||||||||||||||||||||||||||||||||
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10
Historical information (continued)
Note: Subject to shareholders’ approval the final dividend for the year ended 30 June 20152016 will be paid on 86 October 2015,2016, and payment to US ADR holders will be made on 1412 October 2015.2016. In the table above, an exchange rate of £1 = $1.56$1.33 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 86 October 2015.2016.
5. Net borrowingsNet borrowings are defined as gross borrowings (short term borrowings and long term borrowings plus finance lease liabilities plus interest rate hedging instruments, cross currency interest rate swaps and funding foreign currency forwards and swaps used to manage borrowings) less cash and cash equivalents.
6. Share capital There were 2,754 million ordinary sharesshare of 28 101⁄108 pence each in issue with a nominal value of £797 million throughout the five year period ended 30 June 2015.2016.
7. Exchange ratesA 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.
The following table shows year end and average US dollar/pound sterling noon buying exchange rates, for the periods indicated, expressed in US dollars per £1.
Year ended 30 June | Year ended 30 June | |||||||||||||||||||||||||||||||||||||||
2015 $ | 2014 $ | 2013 $ | 2012 $ | 2011 $ | 2016 $ | 2015 $ | 2014 $ | 2013 $ | 2012 $ | |||||||||||||||||||||||||||||||
Year end | 1.57 | 1.71 | 1.52 | 1.57 | 1.61 | 1.32 | 1.57 | 1.71 | 1.52 | 1.57 | ||||||||||||||||||||||||||||||
Average rate (i) | 1.57 | 1.64 | 1.57 | 1.59 | 1.59 | 1.47 | 1.57 | 1.64 | 1.57 | 1.59 |
(i) | The average of the noon buying rates on the last business day of each month during the year ended 30 June. |
10
Historical information (continued)
The following table shows period end, high, low and average US dollar/pound sterling noon buying exchange rates by month, for the six month period to 31 July 2015,2016, expressed in US dollars per £1. The information in respect of the month of July is for the period up to and including 31 July 2015.
2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
2015 | July | June | May | April | March | February | ||||||||||||||||||||||||||||||||||||||||||
July $ | June $ | May $ | April $ | March $ | February $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
Month end | 1.56 | 1.57 | 1.53 | 1.53 | 1.49 | 1.54 | 1.33 | 1.32 | 1.45 | 1.46 | 1.44 | 1.39 | ||||||||||||||||||||||||||||||||||||
Month high | 1.56 | 1.59 | 1.58 | 1.55 | 1.54 | 1.55 | 1.33 | 1.48 | 1.47 | 1.46 | 1.45 | 1.46 | ||||||||||||||||||||||||||||||||||||
Month low | 1.54 | 1.52 | 1.51 | 1.46 | 1.47 | 1.50 | 1.29 | 1.32 | 1.44 | 1.41 | 1.39 | 1.39 | ||||||||||||||||||||||||||||||||||||
Average rate(i) | 1.56 | 1.56 | 1.55 | 1.50 | 1.50 | 1.53 | 1.31 | 1.42 | 1.45 | 1.43 | 1.42 | 1.43 |
(i) | The average of the noon buying rates on each business day of the month. |
The noon buying exchange rate as at 31 July 2015 was £1 = $1.56.
The noon buying exchange rate as at 29 July 2016 was £1 = $1.33. |
These rates have been provided for information only. They are not necessarily the rates that have been used in this document for currency translations or in the preparation of the consolidated financial statements. See note 1 to the consolidated financial statements for the actual rates used in the preparation of the consolidated financial statements.
11
Strategic report
Business description
OUR BUSINESS
Diageo is a global leader in beverage alcohol with iconic brands across spirits and beer. We truly understand the consumer and have world-class marketing and innovation skills to build powerful brands that play a positive role in spirits, beer and wine. We provide consumers with choice and quality across categories and price points.society.
Diageo has built a strong platform for growthgrowth. We have grown through investinginvestment in our brands, and routeby acquisition to consumer. Over the last five years we have made acquisitions in brandsbroaden our geographical footprint and local distribution while doubling the size of our luxury business. We have also made changes to our operating modelcategory depth and culture aligning Diageo behind the need for greater agility and responsiveness, creating a business that is closer to the consumer.range.
Our 21 market model(i) has established strong local business units, well positioned to win in increasingly competitive and fast paced operating environments.
We knowwant to make a positive contribution – to society, to communities, to individuals, and to the environment – while continuing to prosper as a business. We actively create the shared value that we must earn the trustis part of our heritage, and respect of everyone that comes into contact withessential to our company. We must be transparentfuture.
Strength through global reach and authentic, demonstrating good citizenship every day, everywhere.
STRENGTH IN GLOBAL REACH AND ICONIC BRANDSiconic brands
We build global brands alongside local stars. These brands have outstanding breadth and depth in our portfolio, with brandsbroad consumer appeal across price points and categoriesgeographies to meet consumer demand now and in the future.
DOING BUSINESS THE RIGHT WAYDoing business the right way
For us, standards are everything, from how we produce and market our brands, to how we innovate and sell, and in governance and ethics as codified in our Code of Business Conduct.
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We produce our brands from more than | Innovation is a mindset driving everything we do and an important growth engine for our business. We | For decades our brands have been at the forefront of marketing innovation and the same remains true today. We invest in world-class marketing to build our brands, focused on programmes which recruit and re-recruit consumers. We take | Everyone at Diageo sells or understands how they can help sell. This is just one expression of the sales-led organisation we are building. |
CREATING SHARED VALUEOur role in society
Everywhere we operate, we set out to have a positive impact on the world around us. Doing so is good for our business, for our communities and for our consumers.
At the core of our approach is a commitment to create a positive role for alcohol in society. This is fundamental to our purpose – celebrating life, every day, everywhere. We are also committed to tackling alcohol misuse through effective programmes that prevent and reduce alcohol misuse, and work with others to raise awareness and change people’s attitudes and behaviour. We market our products responsibly and provide the information consumers need to make informed decisions.
Our distilleries breweries and wineriesbreweries are at the very heart of the communities wherein which we work. We have a responsibilitywork, which gives us an opportunity to create shared value – for our shareholders, our people,value. To do this, we work hard to increase access to opportunity through: enabling entrepreneurship, employability and for the societies that enable our business to grow. Within the community, we are proud of our work to address development challenges, including skills, social enterprise andskills; improving access to clean water, sanitation and hygiene; and helping to encourage responsible drinking.empower women.
Our values underpinBy reducing carbon packaging, water and waste now, we are reducing our business and guide us. We are passionate about our customers and consumers and wantenvironmental impact to be the best. We give our people the freedom to do the best work of their careers and value everyone’s contribution. We are proud of what we do, and how we do it.
Our purpose, celebrating life, every day, everywhere, is to make the most of life – to be the best at work, at home, with friends, in the community, and for the community. For our brands to be part of celebrations big and small.support future opportunities.
(i) | Throughout this |
12
Business description (continued)
Production
Diageo owns manufacturing production facilities across the globe, including maltings, distilleries, breweries, packaging plants, maturation warehouses, cooperages vineyards, wineries and distribution warehouses. Diageo’s brands are also produced at plants owned and operated by third parties and joint ventures at a number of locations internationally.
Diageo has been investing over the last few years in a number of restructuring programmes thatto increase the efficiency of its supply operations. The most significant programmes are referred toThis has resulted in note 4 toimprovements and changes in the consolidated financial statements.group’s supply operations principally in North America, Scotland and Ireland.
The locations, principal activities, products, packaging production capacity and packaging production volume of Diageo’s principal production centres in the year ended 30 June 2015 are2016 were as follows:
Location | Principal products | Production capacity in millions of equivalents units(i) | Production volume in 2015 in millions of equivalent units | Principal products | Production capacity in millions of equivalent units(i) | Production volume in 2016 in millions of equivalent units | ||||||||||||||
United Kingdom (Spirits) | Scotch whisky, Irish whiskey, gin, vodka, rum, ready to drink | 91 | 51 | Scotch whisky, gin, vodka, rum, ready to drink | 96 | 52 | ||||||||||||||
UK, Ireland (Guinness) | Beer | 8 | 7 | Beer | 8 | 7 | ||||||||||||||
Ireland (Baileys) | Irish cream liqueur | 12 | 7 | Irish cream liqueur | 12 | 7 | ||||||||||||||
Italy (Santa Vittoria) | Vodka, wine, rum, ready to drink | 11 | 5 | Vodka, wine, rum, ready to drink | 11 | 4 | ||||||||||||||
Turkey | Raki, vodka, gin, liqueur, wine | 8 | 6 | Raki, vodka, gin, liqueur, wine | 8 | 6 | ||||||||||||||
United States, Canada, US Virgin Islands | Vodka, gin, tequila, rum, wine, Canadian whisky, American whiskey, progressive adult beverages, ready to drink | 44 | 33 | Vodka, gin, tequila, rum, Canadian whisky, American whiskey, progressive adult beverages, ready to drink | 43 | 34 | ||||||||||||||
United States | Wine | 2 | 1 | |||||||||||||||||
Brazil | Cachaça, vodka | 9 | 7 | Cachaça, vodka | 11 | 8 | ||||||||||||||
Jamaica | Beer | 1 | 1 | |||||||||||||||||
Mexico | Tequila | 1 | 1 | Tequila | 1 | 1 | ||||||||||||||
Australia | Rum, vodka, ready to drink | 4 | 2 | Rum, vodka, ready to drink | 4 | 2 | ||||||||||||||
Singapore | Finishing centre | 4 | 1 | Finishing centre | 7 | 1 | ||||||||||||||
India | Rum, vodka, whisky, scotch, brandy, gin, wine | 161 | 117 | Rum, vodka, whisky, scotch, brandy, gin, wine | 160 | 111 | ||||||||||||||
Nigeria | Beer | 7 | 5 | Beer | 7 | 5 | ||||||||||||||
South Africa(ii) | Beer and spirits | 4 | 3 | |||||||||||||||||
South Africa | Beer, spirits and ready to drink | 8 | 6 | |||||||||||||||||
East Africa (Uganda, Kenya, Tanzania) | Beer and spirits | 13 | 8 | Beer and spirits | 13 | 11 | ||||||||||||||
Africa Regional Markets (Ethiopia, Cameroon, Ghana, Seychelles) | Beer | 5 | 4 | Beer | 7 | 4 |
(i) | Capacity represents ongoing production capacity. The production capacities quoted in the table are based on actual production levels for the year ended 30 June |
Spirits
Spirits are produced in distilleries located worldwide. The group owns 29 Scotch whisky distilleries in Scotland, two whisky distilleries in Canada and aone whiskey distillery in the United States. Diageo produces Smirnoff internationally. Ketel One and Cîroc vodkas are purchased as finished product from The Nolet Group and Eurowinegate, respectively. Gin distilleries are located in both the United Kingdom and the United States. 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 and blended in the US Virgin Islands and in Australia, Venezuela and Guatemala. Raki is produced in Turkey, Chinese spirits are produced in Chengdu, in the Sichuan province of China, and cachaça is produced in Ceará State in Brazil. Brazil and Don Julio tequila in Mexico.
13
Business description (continued)
Diageo’s maturing Scotch whisky is located in warehouses in Scotland (the largest at Blackgrange holding approximately 50% of the group’s maturing Scotch whisky), its maturing Canadian whisky in La Salle and Gimli in Canada and its maturing American whiskey in Kentucky and Tennessee in the United States. In May 2014 the company announced its intention to invest approximately $115 million (£7386 million) over three years to build a distillery and six barrel storage warehouses in Shelby County, Kentucky. The new distillery is expected to be in operation by the end of calendar year 2016.
In June 2012, the company announced a multi-year investment plan in Scotch whisky production and inventory and has spent approximately £1 billion to date. The investment program was completed in the year ended 30 June 2016. In February 2015 Investments made during the year ended 30 June 2016 in Clynelish and increases in warehousing capacity to support distilling and maturing activities are intended to provide for long term Scotch sales growth.
Diageo sold its Bushmills distilleryowns a controlling equity stake in Northern Ireland to the Cuervo Group.
13
Business description (continued)
From 2 July 2014 the group accounted for United Spirits Limited (USL) as a subsidiary with a 54.78% equity interest. USLwhich is the leading alcoholic beverage company in India selling over 90 million equivalent cases of Indian MadeIndian-Made Foreign Liquor (IMFL). ItUSL has a significant market presence across India and presently has 30operates 26 owned, 1517 leased and 4339 third party manufacturing facilities in India and Nepal. USL also operates spirit distillation plants for neutral alcohol, malt spirit, grape spirit and rum spirit with accompanying maturation facilities. USL has many leading Indian brands such as McDowell’s (Indian whisky, rum and brandy), Black Dog (scotch), Signature (Indian whisky), Antiquity (Indian whisky) and Bagpiper (Indian whisky).
On 27 February 2015, Diageo acquired the 50% of Don Julio B.V. that it did not already own. Don Julio owns a distillery (located near Guadalajara, Mexico), maturing tequila inventory, bulk storage and bottling assets, as well as 6 million agave plants. Diageo’s intent is to invest in the short term in house bottling capacity and agricultural operations and in the medium and long term in expanding distillation capacity.
In June 2012, the company announced a multi-year investment plan in Scotch whisky production and inventory. To date the spend is approximately £0.8billion and the programme is expected to be completed by 30 June 2017.
During the year to 30 June 2015, the company completed major expansions in Scotland at Glen Ord and Teaninich distilleries doubling the capacity at both sites as well as completing the second phase of seven warehouse builds at the new warehousing facility at Cluny near Kirkcaldy. On Speyside, the new bioenergy plant at Glendullan which treats by-products and generates biogas to be used as renewable energy by the distillery was completed.
Current maturing whisky inventory levels have allowed the commencement of the announced expansions at Clynelish and Mortlach distilleries to be delayed, however work has commenced on upgrading both distilleries.
Beer
Diageo’s principal brewing facility is at the St James’s Gate brewery in Dublin where the capacity was recently expanded to brew all beers sold in Western Europe and for global exports in particular to the United States. The Dundalk, Kilkenny and Waterford operations were closed in 2013. Diageo has breweries in a number of African countries;countries: Nigeria, Kenya, Ghana, Cameroon, Ethiopia, Tanzania, Uganda Seychelles, and brews Red Stripe in Jamaica. In the last six yearsSeychelles.
On 1 December 2015, Diageo has invested heavily in order to increase brewing capacity in Nigeria, Ghana, Cameroon, Kenya and in Ethiopia. The African businesses have also been investing in launching mainstream spirits in Africa, and have utilised a numberdisposed of revolutionary portable spirits production units.
In addition, Diageo owns a 25.5% effective interest in Guinness Anchor Berhard which operates a brewery in Malaysia, and aits 25% equity intereststake in Sedibeng Brewery (Pty) Limited, which owned a brewery in South Africa. On 28 July7 October 2015, it was announced thatDiageo also completed the company agreed to disposedisposal of its 25% interest57.87% shareholding in SedibengDesnoes & Geddes (Jamaican Red Stripe business) and its 49.99% stake in GAPL Pte Limited (Singapore and Malaysian beer business) to Heineken. GAPL owns 51% of Guinness Anchor Berhad, operating in Malaysia, which was also disposed of.
Guinness is also brewed by over 50 third parties around the world under licence arrangements. Guinness flavour extract is shipped from Ireland to all overseas Guinness brewing operations which use the flavour extract to brew Guinness locally. Guinness Draught in cans and bottles is packaged at Runcorn and Belfast in the United Kingdom. The Runcorn facility performs the kegging of Guinness Draught which is transported to Great Britain in bulk.
Wine
Diageo’s principal wineries are in the United States but the group also has operations in Argentina, Turkey and India. For European markets, wines are mainly bottled in Diageo’s facilities in Italy. Wines are sold both in their local markets and overseas.
Ready to drink
Diageo produces a range of ready to drink products mainly in the United Kingdom, Italy, South Africa, Australia, the United States and Canada.
Property, plant and equipment
Diageo owns approximately 93%95% of the manufacturing, distilling, brewing, bottling and administration facilities it uses across the group’s worldwide operations. It holds approximately 2%3% of properties on leases in excess of 50 years. The principal production facilities are described above. As at 30 June 2015,2016, Diageo’s land and buildings are included in the group’s consolidated balance sheet
14
Business description (continued)
at a net book value of £1,044£1,083 million. Diageo’s two largest individual facilities, in terms of book value, are the Leven bottling, blending and warehousing facility in Scotland and St James’s Gate brewery in Dublin. Approximately 38% of the net book value of Diageo’s land and buildings are properties located in Great Britain, 14% in Ireland, 13%India, and 12% both in the United States and 8% in India.Ireland.
14
Business description (continued)
Raw materials and supply agreements
The group has a number of 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 to minimise the effects of short term price fluctuations.
Cream is the principal raw material used in the production of Irish cream liqueur and is sourced from Ireland. Grapes are used in the production of wine and raki and are sourced from suppliers in the United States, Argentina and Turkey. Other raw materials purchased in significant quantities for the production of spirits and beer are molasses, cereals, sugar and a number of flavours (such as juniper berries, agave, aniseed, chocolate and herbs). These are sourced from suppliers around the world.
The majority of products are supplied to customers in glass bottles. Glass is purchased from a variety of multinational and local suppliers; the largest suppliers are Ardagh Packaging in the United Kingdom and Owens Illinois in the United States.
Competition
Diageo’s brands compete on the basis of consumer loyalty, quality and price.
In spirits, Diageo’s major global competitors are Pernod Ricard, Beam Suntory, Bacardi and Brown-Forman,Brown Forman, each of which has several brands that compete directly with Diageo’s brands. In addition, Diageo faces competition from local and regional companies in the countries in which it operates.
In beer, Diageo competes globally as well as on a regional and local basis (with the profile varying between regions) with several competitors, including AB InBev, Heineken, SABMiller, Molson Coors and Carlsberg.
In wine, the market is fragmented with many producers and distributors.
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 the developed and emerging markets. The strength and depth of Diageo’s brand range provides a solid platform from which to drive innovation. Diageo continuously invests to deepen its understanding of shopper trends and changing consumer habits to inform product and packaging development. Supporting this, the group has ongoing programmes to develop new products across beverage alcohol categories which are managed internally by the innovation and research and development function, which also takes advantage of a substantial open innovation network.
In the year ended 30 June 2015,2016, the group’s research and development expenditure amounted to £28 million (2015 — £26 million (2014million; 2014 — £24 million; 2013 — £21 million), representing principally the cost of developing new products, from idea generation through to full product development. Research and development expenditure is generally written off in the year in which it is incurred.
Trademarks
Diageo produces, sells and distributes branded goods and is therefore substantially dependent on the maintenance and protection of its trademarks. All brand names mentioned in this document are trademarks. The group also holds numerous licences and trade secrets, as well as having substantial trade knowledge related to its products. The group believes that its significant trademarks are registered and/or otherwise protected (insofar as legal protection is available) in all material respects in its most important markets. Diageo also owns valuable patents and trade secrets for technology and takes all reasonable steps to protect these rights.
Regulations and taxes
Diageo’s worldwide operations are subject to extensive regulatory requirements regarding production, product liability, distribution, importation, marketing, promotion, sales, pricing, labelling, packaging, advertising, 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 of the U.S. Treasury Department oversees the industry, and each state as well as some local authorities in jurisdictions in which Diageo sells or produces products, have regulations. Federal, state and local regulations coveringcover virtually every aspect of its operations, including production, distribution, marketing, promotion, sales, pricing, labelling, packaging and advertising.
15
Business description (continued)
Spirits, beer and wine 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 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 an overall European Union framework, there are minimum rates of excise duties that can be applied.
Import and excise duties can have a significant impact on the final pricing of Diageo’s products to consumers. These duties have an impact on the competitive position as compared to other brands. The group devotes resources to encouraging the equitable taxation treatment of all beverage alcohol categories and to reducing government-imposed barriers to fair trading.
Advertising, marketing and sales of alcohol are subject to various restrictions in markets around the world. These range from a complete prohibition of alcohol in certain cultures and countries, such as in certain states in India, and cultures, through the prohibition of the import of spirits, wine and beer, to restrictions on the advertising style, media and messages used. In a number of countries, television is a prohibited medium for spirits brands and in other countries, television advertising, while permitted, is carefully regulated. Many countries also regulate the use of internet-based advertising and social media in connection with alcohol sales.
Spirits, beer and wine 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, Canada, Norway and certain US states) to the common system of licensed on trade outlets (for example, licensed bars and restaurants) which prevails in much of the Western world (for example, most US states and the European Union). In about one-third of the states in the United States, price changes must be filed or published 30 days to three months, depending on the state, before they become effective.
Labelling of beverage alcohol products is also regulated in many markets, varying from health warning labels to importer identification, alcohol strength and other consumer information. As well as producer, importer or bottler identification, specific warning statements related to the risks of drinking beverage alcohol products are required to be included on all beverage alcohol products sold in the United States and in other countries where Diageo operates. Expressions of political concern signify the uncertain future of beverage alcohol products advertising on network television in the United States. Any prohibitions on advertising or marketing could have an adverse impact on sales of the group.
Regulatory decisions and changes in the legal and regulatory environment could increase Diageo’s costs and liabilities or impact on its business activities.
Acquisitions and disposals
Diageo has made a numberdisposed of acquisitions of brands, distribution rightsits wines and equity interests and disposalscertain beer assets in premium drinks businesses.the year ended 30 June 2016. For a description of principal acquisitions and disposals since 1 July 2012,2013, see note 9 to the consolidated financial statements.
Seasonality
Approximately 40% of Diageo’s annual net sales occur in the last four months of each calendar year.
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Business description (continued)
OUR GLOBAL REACH
OneDiageo is the leading spirits player in every region of Diageo’s key strengths is its geographic reach.the world. This regional profile provides us with exposure to the greatest consumer growth opportunities in our sector. We operate as 21 geographically based markets around the world and have a presence in over 180 countries. We employ more than 33,00032,000 talented people across our global business. 43% of Diageo’s business is in the emerging markets in Latin America, Asia, Africa, Eastern Europe and Turkey. This presence is balanced through our strong businesses in the world’s most profitable beverage alcohol market, the United States, and an integrated Western European business.
% SHARE OF NET SALES BY OUR 21 MARKETS
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Based on reported net sales for the year ended 30 June 2015.
(i) On 1 July 2015, Russia became a standalone market and Eastern Europe was merged with Western Europe to create a Diageo Europe market.
DIAGEO REPORTS AS FIVE REGIONSreports as five regions
North America | Europe | Africa | Latin America and Caribbean | Asia Pacific | ||||||||||||||||
% SHARE BY REGION | ||||||||||||||||||||
Volume (%) | 19.2 | 17.9 | 10.6 | 8.8 | 43.5 | |||||||||||||||
Net sales(i)(%) | 32.2 | 24.4 | 13.2 | 9.6 | 20.6 | |||||||||||||||
Operating profit(ii)(%) | 45.4 | 25.2 | 10.0 | 8.2 | 11.2 | |||||||||||||||
Number of responsible drinking programmes(iii)(%) | 21.1 | 24.5 | 14.1 | 19.8 | 20.5 | |||||||||||||||
Water withdrawals(iii)(%) | 11.1 | 45.3 | 37.2 | 4.5 | 1.9 | |||||||||||||||
Carbon emissions(iii)(%) | 8.5 | 51.8 | 35.0 | 3.2 | 1.5 | |||||||||||||||
Number of employees(iv)(%) | 9.8 | 33.0 | 16.5 | 8.8 | 31.9 |
North America | Europe, Russia and Turkey | Africa | Latin America and Caribbean | Asia Pacific | ||||||||||||||||
% Share by region | ||||||||||||||||||||
Volume (%) | 19.1 | 17.8 | 12.7 | 8.4 | 42.0 | |||||||||||||||
Net sales(i)(%) | 34.1 | 24.3 | 13.4 | 8.3 | 19.9 | |||||||||||||||
Operating profit before exceptional items(ii)(%) | 49.1 | 25.4 | 6.7 | 6.3 | 12.5 | |||||||||||||||
Operating profit(iii)(%) | 51.8 | 26.8 | 7.1 | 2.7 | 11.6 | |||||||||||||||
Number of responsible drinking programmes (%) | 21.2 | 25.4 | 15.6 | 15.7 | 22.1 | |||||||||||||||
Water withdrawals(iv)(%) | 10.0 | 38.2 | 37.8 | 1.8 | 12.2 | |||||||||||||||
Carbon emissions(iv)(%) | 6.7 | 42.7 | 37.4 | 2.3 | 10.9 | |||||||||||||||
Number of employees(v)(%) | 9.0 | �� | 33.5 | 16.5 | 9.8 | 31.2 |
(i) |
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Business description (continued)
OUR BRANDS
Our 21global reach is matched by our broad portfolio of international and local brands. We own the top two largest spirits brands in the world, Johnnie Walker and Smirnoff, and 20 of the world’s top 100 spirits brands.
Our portfolio spans consumer drinking occasions. Using local market model affords each market the flexibilityinsights, our teams are able to select the rightmost relevant brands from our global portfolio to meet the consumer opportunity in their market. All of brandsour marketing activities adhere to capture the unique consumer opportunities that exist in that market and place resources directly against our biggest growth opportunities.
Our 21 market structure means we now look atDiageo Marketing Code to ensure our brands through the lens of global giants and local stars, alongside our leading reserve brands. Our in-market local star brands can be individual to any one market, and provide a platform to accelerate the growth of our international premium spirits.are marketed responsibly. A selection of theseour brands are included in the table below.
Global giants(i) | ||||||||||
Our business is anchored around our six biggest global brands. | ||||||||||
Johnnie Walker | Smirnoff | Captain Morgan | Baileys | Tanqueray | Guinness | |||||
Local stars | Reserve | |||||||||
Can be individual to any one market, and provide a platform for our business to grow. | Exceptional spirits brands at above-premium price points to capture the global luxury opportunity. | |||||||||
Crown Royal | Yenì Raki | JeB | Johnnie Walker | Johnnie Walker King George V | ||||||
Buchanan’s | Windsor | Grand Old Parr | The Singleton of Glen Ord | |||||||
Bundaberg | Bell’s | McDowell’s No. 1 | Cîroc | Ketel One vodka | Tanqueray No. TEN | |||||
Ypióca | Cacique | Shui Jing Fang | Ron Zacapa Centenario XO | Tequila Reserva de Don Juilo | Bulleit Bourbon |
Source: Impact Databank Value Ratings, May 2016. (i) Global giants represent 40% of Diageo net sales.
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Business description (continued)
OUTSTANDING BREADTH AND DEPTH ACROSS PRICE POINTS
In ourOur portfolio, we have brands at almost everywell diversified across price tier of every category. The range of ourtiers, enables us to participate where the consumer opportunity is greatest, and to capture shifts in consumer preference.
We hold strong positions across all key international spirits categories to serve consumer occasions and price points means we are able to capture consumption shifts acrosswith our brands. Our most strategically important category is scotch. We have also established footholds in key emerging markets through participation in local spirits categories: raki in Turkey, cachaça in Brazil, local whisky in India, and a small position in the price spectrum. The breadth and depth of our business provide resilience, and enable us to sustain our performance over time.baiju category in China.
Ultra premium | Super premium | Premium | Standard | Value | ||||||||
Scotch whisky | Johnnie Walker Blue Label | The Singleton of Glen Ord | Buchanan’s | Johnnie Walker Red Label | VAT 69 | |||||||
Crown Royal Extra Rare | Bulleit Bourbon | Crown Royal | Seagram’s 7 Crown | |||||||||
Vodka | Cîroc | Ketel One vodka | Smirnoff | Smirnoff | Istanblue | |||||||
Rum | Ron Zacapa Centenario XO | Pampero Aniversario Ron Extra Añejo | Captain Morgan Private Stock | Captain Morgan | ||||||||
Liqueur | Sheridan’s Original Layered Liqueur | Baileys | Emmets | |||||||||
Tequila | Tequila Reserva de Don Juilo | Peligroso Tequila | ||||||||||
Gin | Tanqueray No. TEN | Jinzu | Tanqueray | Gordon’s | Gilbey’s | |||||||
Local spirits | Shui Jing Fang | Yenì Raki | Ypióca | McDowell’s No. 1 | ||||||||
Beer | Kilkenny | Guinness | Dubic Extra Lager |
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Business description (continued)
OUR PERFORMANCE AMBITIONSTRATEGY
Diageo’sWe pursue the following strategy to deliver our Performance AmbitionAmbition:
We aim to grow our participation in international premium spirits, driven by growth in both populations and incomes, and the increasing penetration of spirits in emerging markets. To support this, we participate in both beer and mainstream spirits selectively to deliver organisational scale and distribution reach, and to shape responsible drinking trends in markets where international premium spirits is an emerging category.
Our intent is to create one ofbuild breadth and depth across drinking occasions by shaping consumer demand for our international premium spirits brands. In developed markets our strategy is to drive premiumisation through spirits price tiers up to our reserve portfolio. In emerging markets our strategy is to develop from an import-based premium spirits model to become a local player where appropriate, participating in categories that give us the best performing, most trustedscale and respected consumer products companiesaccess to the fast growing middle-class consumer. Everywhere we operate, we do so in the world.a responsible and sustainable way.
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The brands at the core of our business that provide both scale and strong margin contribution. | Spirits-based brands priced at a similar amount per serve to mainstream beer or local spirits that enable us to shape local spirits consumption. | Provides local scale and route to consumer, with focused participation in markets where we have leadership positions. |
(i) Spirits include ready to drink (RTDs).
Outcomes of our strategy | ||||||
① Efficient growth | ③ Credibility and trust | |||||
② Consistent value creation | ④ Motivated people |
We measure progress against our | ||||||
Organic net sales | Return on average | Reach and impact of | Health and safety ③ ④ | |||
Organic operating margin | invested capital ② | responsible drinking | Employee | |||
improvement ① | Total shareholder return ② | programmes ③ ④ | engagement index ③ ④ | |||
Earnings per share before | Water efficiency ① ③ | |||||
exceptional items ① | Carbon emissions ① ③ | |||||
Free cash flow ① |
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See our key performance indicators (KPIs) on pages 28–31.pages: 23–27.
(i) | Spirits include ready to drinks (RTDs). |
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Business description (continued)
OUR BUSINESS MODEL
Diageo has grown through investment inFrom our brands and route to consumer, and by acquisitions to broaden our geographical footprint and our category depth and range. Our business model is designed to driveposition as a global leader, we deliver returns for shareholders, while creating value for our customers employees and employees. In everything we do, we set out to make a positive contribution to society.
We have structured our organisation into a 21 market business model, applying country-specific strategies to meet local consumer and customer needs. This business model enables us to identify and execute against the communities in which we operate.most valuable growth opportunities, and also to supply our brands efficiently and effectively using our global expertise, while sourcing and producing locally where optimal to do so. This market-driven business model helps us to capture consumer trends early to deliver sustainable performance.
Broad portfolio | 21 markets | Performance drivers | ||
Global reach | Consumer insights | Read more: page 38. | ||
Financial strength | Participation strategy | Sustainability and responsibility | ||
Efficient supply and procurement | Supply resources | priorities | ||
Leading capabilities | Global functions | Read more: page 38 | ||
Values | ||||
Our role in society | ||||
Broad | Performance execution and achieving our | |||
the breadth and depth of our global and local brands. | Participation | Sustainability : every business decision, every operation, and every programme and initiative must work towards our three sustainability and responsibility priorities:
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Financial | Supply designated as import markets, import and third party production markets, or import and local production markets. Where we have dedicated in-market supply resource it increases the speed with which we can respond to local consumer demand and helps to protect our supply chain from political and economic volatility. |
Our performance drivers and | ||
Efficient supply and the world we have efficiency in supply and procurement, with | ||||
Global supported by a global structure and shared services designed to leverage scale, drive efficiency, share best practice, impart knowledge and help build capability at a local level, as well as apply governance of controls, compliance and ethics. |
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Business description (continued)
Leading capabilities:our focus is on brilliant execution including cutting-edge consumer insights and marketing, scalable innovation, and winning relationships with our customers through distribution and sales. | ||||
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Business description (continued)
CHAIRMAN’S STATEMENT:
WE ARE CREATING ONE OF THE BEST PERFORMING, MOST TRUSTED AND RESPECTED CONSUMER PRODUCTS COMPANIES.
“Over the last two years we have taken the necessary steps to strengthen Diageo, to position our company to drive sustainable growth and value for you, our shareholders, and to ensure we are a trusted and respected partner to all our stakeholders around the world.”
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6% 26% 17% 35% 10% 6% Global volume share of premium spirits (%) Diageo Pernod Ricard Bacardi Brown-Forman Beam Santony Others Source: Impact Databank, February 2015
Diageo is a leader in beverage alcohol, one of the most attractive growth sectors in consumer products. With our portfolio of global and local brands, and the presence we have built in developed and emerging markets, we are well positioned to capture this growth.
Performance and dividend
In a volatile global environment, our commitment to being one of the best performing, most trusted and respected consumer products companies is as strong as ever. Ivan and the Executive Committee have taken actions to strengthen the business to deliver operational and cultural change, greater agility and responsiveness. Performance this year reflects these actions and continued tough conditions in some markets. In addition, currency volatility affected trading, especially in some of our scotch markets where currency devaluation impacted the price of imported goods for local consumers.
We are more focused than ever on managing cost and delivering cash, and I am pleased that we achieved strong cash conversion, over 100%, during the year. This, together with the actions we are taking to realise our full potential, has enabled the Board to recommend a final dividend of 34.9 pence per share. This would bring the total dividend for the year to 56.4 pence per share, an increase of 9% over the prior year. The final dividend will be paid to shareholders on 8 October 2015. Earnings per share to dividend cover at 1.6 times is now outside our cover ratio, and we will look to rebuild cover over time, maintaining dividend increases at a mid-single digit rate until we are back in range.
Strategic progress
Diageo’s strategy is delivered through a market focus. In individual markets, we compete with our iconic global brands and local stars while building strong routes to consumer. Our in-market teams are accountable for delivering holistic performance and are empowered to act with speed and agility, supported by the scale and expertise of our global business.
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Business description (continued)
As a business we have been focused on organic growth while capturing inorganic opportunities. For example, we have been capitalising on North American whisk(e)y trends with the launch of Crown Royal Regal Apple and the continuing success of Bulleit and our other craft bourbons. We have also been broadening our participation in new categories and across price points, with the Orijin brand in Nigeria and Haig Club, a single grain Scotch whisky.HOW WE MEASURE PERFORMANCE: Key performance indicators
Diageo acquired a majority stake in United Spirits Limited (USL) in India in July 2014, consolidating Diageo’s position as a local leader in spirits in this exciting growth market. We are now moving into the next phase of integration, prioritising brand investment, driving efficiencies and continuing the implementation of Diageo’s operational and governance standards across the business, while putting in place a route to consumer team to further develop USL’s already impressive market coverage.
In February 2015, we completed the acquisition of the remaining 50% of tequila brand, Don Julio. In gaining full global ownership and management control of the brand and its supply assets, we enhance our position in the high growth segments of super and ultra premium tequila. With this deal we also repatriated the Smirnoff brand into our in-market company in Mexico which will allow us to extend our leading position in spirits in this attractive market.
We remain committed to reviewing our portfolio to ensure that we are the best owners of our assets. We realised full management control of Don Julio through the sale of Bushmills. While Bushmills is a good brand, this was the right strategic decision for Diageo as we invest behind the biggest growth opportunities. The sale of Gleneagles Hotels Limited is another example of Diageo’s decision to focus on key priorities. Following the success of the Ryder Cup we felt it was an appropriate time to realise value through this sale. We are pleased that the new owner of Gleneagles has committed to be a significant inward investor in Scottish tourism and will work closely with the local community to make a positive contributionGAAP measures - Financial GAAP performance measures similar to the visitor industry and the Scottish economy.financial non-GAAP key performance indicators are presented below.
Sustainability and responsibility
NET SALES GROWTH (%) | OPERATING MARGIN IMPROVEMENT (BPS) | BASIC EARNINGS PER SHARE (PENCE) | ||
Net sales growth (%) 2016 (3.0) 2015 5.4 2014 (9.2) | Operating margin improvement (BPS) 2016 123 2015 (52) 2014 (351) | Basic earnings per share 2016 89.5 2015 95.0 2014 89.7 | ||
Definition | Definition | Definition | ||
Sales growth after deducting excise duties. | The percentage point movement in operating profit, divided by net sales. | Profit attributable to equity shareholders of the parent company, divided by the weighted average number of shares in issue. | ||
Performance | Performance | Performance | ||
Net sales declined by 3% due to disposals and adverse exchange, partially offset by organic growth and acquisitions. | Operating margin improved by 123bps mainly driven by lower exceptional operating charges. | Basic eps of 89.5 pence reduced by 5.5 pence principally due to the change in net exceptional charges from a charge of £44 millon in the year ended 30 June 2016 compared with a net gain of £104 million in the year ended 30 June 2015. |
Diageo has a long history of working within the communities where our products are enjoyed, and we understand that the role and impact of alcohol within society must be our primary focus. Our work to promote responsible drinking and reduce alcohol-related harm remains central to our purpose of celebrating life every day, everywhere, and we share the goal of the World Health Organization (WHO) to reduce the harmful use of alcohol by 10% by 2025. In line with the industry’s commitments, during the year progress was made on underage drinking, reducing drink driving and strengthening marketing codes.
We are proud of the broad contribution we are making to society, through our economic contribution and through our three community programmes: Learning for Life, Water of Life and Plan W. These programmes have: provided training and skills to more than 100,000 people in the Americas and Britain to help them secure new jobs; delivered access to clean water and sanitation to more than ten million people in Africa supporting better health; and empowered around 100,000 women across Asia. And within Diageo, we continue to champion diversity and inclusivity. One example of this is the level of female representation at Board and Executive Committee level, at 45% and 40% respectively.
Business environment
With our strong portfolio of Scotch whisky brands, we have a deep commitment to Scotland built on the heritage of some of the industry’s greatest entrepreneurs. The current debate over the United Kingdom’s role within the European Union is one in which Diageo is actively engaged. We want our Scotch whisky business, which makes a considerable contribution to the British economy, to remain competitive in the global marketplace and believe that the best interests of the whole industry are served by the United Kingdom remaining within a strong, reformed European Union.
Board changes
Having been on the Board for nine years, Laurence Danon will step down at the upcoming Annual General Meeting. On your behalf I would like to thank Laurence for her contribution over a period of progress and growth for Diageo. In July 2015, we announced that Emma Walmsley will join the Board as a Non-Executive Director effective 1 January 2016. Emma is currently Chief Executive Officer of GSK Consumer Healthcare.
Our people
Diageo’s success is in the hands of our 33,000 employees around the world. I would like to thank them all for their dedication and hard work during the year. We must create an environment that stretches and challenges our people and enables them to do their best work, living our values each and every day. I am committed to continuing to build such an environment, and look forward to working with my colleagues on the Board and throughout the business to make sure that we do.
NET CASH FROM OPERATING ACTIVITIES (£ MILLION) | RETURN ON CLOSING INVESTED CAPITAL (%) | |||
Net cash from operating activities (£ million) 2016 2,548 2015 2,551 2014 1,790 | Return on closing invested capital 2016 23.2 2015 26.7 2014 28.7 | |||
Definition Net cash from operating activities comprises the net cash flow from operating activities as disclosed on the face of the cash flow statement. | Definition Profit for the year divided by net assets at the end of the financial year. | |||
Performance Net cash from operating activities was flat. Adverse movements in working capital and translation exchange were offset by higher operating profit. | Performance Return on closing invested capital decreased by 350bps due to the increase in net assets driven by the weakening of sterling, partially offset by an increase in post employment liabilities. |
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Business description (continued)
Looking aheadWe use the following 11 key performance indicators (KPIs) to measure our financial and non-financial performance.
Your They measure progress against our strategy and our performance against our KPIs are explained below:
Relevance to strategy
#1 Efficient growth
#2 Consistent value creation
#3 Credibility and trust
#4 Motivated people
Financial ® | Financial ® | Financial ® | ||
Organic net sales growth (%) #1 | Organic operating margin improvement (bps) #1 | Earnings per share before exceptional items (pence)(i) #1 | ||
Definition | Definition | Definition | ||
Sales growth after deducting excise duties, excluding the impact of exchange rate movements, acquisitions and disposals. | The percentage point movement in operating profit before exceptional items, divided by net sales after excluding the impact of exchange rate movements 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 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. | Why we measure The movement in operating margin measures the efficiency of the business. Consistent operating margin improvement is a business imperative, driven by investment choices, our focus on driving out costs across the business and improving mix. | 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 Volume growth of 1.3% driven by North America and Europe combined with positive price/mix, primarily mix effect resulted in an organic net sales growth of 2.8%. | Performance Organic operating margin improvement was driven by favourable mix effect which helped gross margin increase combined with procurement efficiencies in marketing activity offset by higher overheads. | Performance Earnings per share before exceptional items increased 0.6 pence largely driven byoperating profit growth, higher associate income and lower finance charges partially offset by adverse exchange effects and the impact of disposals. | ||
More detail: see pages 49 | More detail: see pages 50-51 | More detail: see pages 51 |
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Business description (continued)
Non-Financial | Non-Financial | Non-Financial | ||
Alcohol in society(ii)(reach and impact of responsible drinking programmes) #3, #4 | Health and safety(lost-time accident frequency per 1,000 employees) #3, #4 | Water use efficiency(iv) (l/l) #1 | ||
Definition | Definition | Definition | ||
Number of programmes supported by Diageo that aim to reduce harmful drinking. | Number of accidents per 1,000 full-time employees and directly supervised contractors resulting in time lost from work of one calendar day or more. | Ratio of the amount of water required to produce one litre of packaged product. | ||
Why we measure We put our resources and skills into programmes that encourage a responsible attitude to alcohol and are effective in preventing and reducing alcohol misuse, working with others to maximise impact. These programmes address the risk of harm to consumers or communities and help us deliver our Performance Ambition. | Why we measure Safety is a basic human right: everyone has the right to work in a safe environment, and our Zero Harm safety philosophy is that everyone should go home safe, every day, everywhere. | Why we measure Water is the main ingredient in all of our brands. To sustain production growth and respond to the growing global demand for water, we aim to improve efficiency, minimising our water use, particularly in water-stressed areas. | ||
Performance We seek to broaden the reach of programmes, but we are prioritising the impact they have. This involves supporting projects that are effective in meeting their objectives. We share case studies showing impact evaluation on www.diageo.com. | Performance In 2016, we improved our performance with a reduction in LTAs of 13% compared with 2015. This was driven by a strong focus on embedding standards into newer markets to reduce accident levels and leveraging best practice safety management tools. In some of our more established markets, this enabled us to get close to our target of zero accidents. | Performance 12.1% improvement on 2015, resulting from process optimisations and improvements across all sites and in particularly at our Tusker Brewery in Kenya and our Gimli Distillery in Canada. | ||
More detail: see pages 115-117 | More detail: see pages 120-121 | More detail: see pages 125-128 |
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Business description (continued)
Financial ® | Financial | Financial ® | ||
Free cash flow (£ million) #1 | Return on average invested capital (ROIC) (%) #2 | Total shareholder return (%) #2 | ||
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 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. | 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. | 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 Improvement was driven by lower capex, increased operating profit and lower interest payments partially offset by adverse working capital impact mainly driven by prior year improvement in debtor collection. | Performance Adverse exchange led in a decline of ROIC partially offset by the increased return from growth in operating profit and income from associates. | Performance Diageo delivered total shareholder return of 17% as dividends paid increased by 5% and share price increased driven by underlying business improvement and exchange. | ||
More detail: see page 52 | More detail: see page 53 |
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Business description (continued)
Non-Financial | Non-Financial | Remuneration Some KPIs are used as a measure in the incentives plans for the remuneration of executives. These are identified with the symbol®. | ||
Carbon emissions(v) (1,000 tonnes CO2e) #1, #3 | Employee engagement index(vi) % #3, #4 | |||
Definition Absolute volume of carbon emissions, in 1,000 tonnes. | Definition Measured through our Values Survey; includes metrics for employee satisfaction, loyalty, advocacy and pride. | See our Directors’ remuneration report from page 165 for more detail. | ||
Why we measure Carbon emissions are a key element of our environmental impact and the impact of the industry. We recognise the importance of reducing our carbon emissions to mitigate climate change and position us well for a low-carbon economy in the future, as well as creating efficiencies and savings now. | Why we measure 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. The results inform our ways of working, engagement strategies and leadership development. | |||
Performance 7.7% reduction in total carbon emissions resulting from cumulative impacts of multiple energy efficiency initiatives and switches to renewable fuels, predominately biogas recovery and reuse and displacement of fossil fuels. | Performance This year, 97% of our people participated in our Values Survey (24,843 out of the 25,712 able to participate). 77% of our people were identified as engaged, with 80% feeling they were ‘enabled to perform’. Our survey scores have improved each year since 2014. | |||
More detail: see pages 128-129 | More detail: see pages 121-123 |
(i) | For reward purposes this measure is further adjusted for the impact of exchange rates and other factors not controlled by management, to ensure focus on our underlying performance drivers. |
(ii) | Alcohol in society KPI has been redesigned to measure reach and impact of programmes. See more details on page 116. |
(iii) | Non-financial KPIs for the year ended 30 June 2015 include United Spirits Limited, except health and safety (see pages120-121). |
(iv) | In accordance with Diageo’s environmental reporting methodologies, data for each of the four years in the period ended 30 June 2015 has been restated and total water used excludes irrigation water for agricultural purposes on land under the operational control of the company. |
(v) | Data for each of the four years in the period ended 30 June 2015 has been restated in accordance with the WRI/WBCSD GHG Protocol and Diageo’s environmental reporting methodology. |
(vi) | In 2014, we reviewed our overall approach to measuring engagement, and adopted a revised index. The new index allows us to compare our results with other best-in-class organisations, and sets us a more stretching benchmark for employee engagement. |
See reconciliation of non-GAAP measures to GAAP measures on page 133.
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Business description (continued)
CHAIRMAN’S STATEMENT
Diageo is a global leader in an industry that is growing and financially attractive. As we deliver on our future opportunities with our brands and geographic reach, we will continue to promote responsible drinking as part of a balanced lifestyle. This is at the centre of Diageo’s purpose to celebrate life every day, everywhere.
Recommended final dividend per share |
2016: 36.6ph5% |
2015: 34.9p |
Total dividend per share(i) |
2016: 59.2ph5% |
2015: 56.4p |
Total shareholder return (%) |
2016:h17% |
2015:h2% |
(i) | Includes recommended final dividend. |
A stronger, more competitive business
I am pleased with the performance Diageo has delivered this year, my last as Chairman. We are a stronger business and have returned to growth, and I would like to thank our Chief Executive, Ivan Menezes, and the Diageo Executive team for leading this progress. Diageo has positioned the consumer at the heart of the business, through marketing, innovation, local participation strategies and now has the consumer-facing culture required to succeed in today’s competitive marketplace.
Diageo’s opportunity for growth lies in positive global demographics and income growth, and the increasing penetration of spirits in emerging markets. Our footprint is made up of enviable positions in key geographies: in Africa and India, which together represent almost half of the global growth opportunity for our industry, and also a leading competitive position in North America, the biggest driver of developed market growth. In each of these markets we have a strong portfolio of brands, a proven capability in identifying and acting on consumer insights, leading skills in marketing and innovation, and a reputation for operating in a responsible and sustainable way.
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Business development
Responsiveness and agility are key drivers of performance and the Diageo Executive team have enhanced these capabilities in several areas during the year, including: a continued focus on building a world-class sales organisation, investment in local production, and building the capability of local talent. Alongside the continued focus on organic growth, Diageo released £1 billion from the sale of non-core assets through a more proactive approach to managing our portfolio. This included the sale of our wine interests – primarily the US-based Chateau and Estate Wines and the UK-based Percy Fox businesses to Treasury Wine Estates – and the sale of non-core beer assets in Jamaica and Malaysia. These transactions followed the restructuring of our business in Southern Africa, having achieved our goal of leadership in spirits and growth in the beer business through the successful brandhouse joint venture with Heineken and Namibia Breweries. Diageo now has the scale to move to the next stage of growth in South Africa with a focused, simplified ownership structure.
Our investment in United Spirits Limited (USL) in India offers Diageo a transformational growth opportunity in one of the most attractive spirits markets in the world. India is set to become the second country after China with a population of more than one billion consumers of legal purchase age, with the expected growth of 18–19 million legal purchase age consumers per year.
Since Diageo became the principal shareholder in USL in India in July 2013, we have been determined to capture the significant growth opportunity of one of the largest spirits markets in the world. On 25 February 2016, Diageo announced that it had entered into an agreement with Dr Vijay Mallya under which he resigned from his position as Chairman and Non-Executive Director of USL and from the boards of other USL group companies. The agreement brought 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 and standstill arrangement with Dr Mallya.
Value creation and dividend
We measure our progress towards achieving our Performance Ambition through four areas: efficient growth, value creation, credibility and trust, and motivated people. We improved against each of our efficient growth metrics, and Ivan will discuss these in his statement. Our value creation measures also improved. Return on average invested capital (ROIC) was broadly flat against a decline last year and our total shareholder return (TSR) performance has improved on last year, up 17%.
Diageo targets dividend cover (basic earnings per share before exceptional items/ dividend per share) within the range of 1.8 to 2.2 times. The recommended final dividend for the year ended 30 June 2016 is 36.6 pence per share, an increase of 5% over the prior year in line with our policy to rebuild dividend cover to our targeted range. This brings the full year dividend to 59.2 pence per share and dividend cover to 1.5 times. Subject to approval by shareholders, the final dividend will be paid to shareholders on 6 October 2016. Payment to US ADR holders will be made on 12 October 2016.
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Our role in society
Ensuring we make a positive contribution to society has always been a priority for Diageo and is at the core of our Performance Ambition. Doing so is good for our business, good for our communities and good for our consumers, and it is also true to our values and our people. The Diageo Code of Business Conduct defines these values and helps our employees live by them every day.
We put our resources and skills into hundreds of programmes around the world that reduce alcohol misuse, working closely with other stakeholders to raise awareness and change people’s attitudes and behaviour. This forms part of our support of the industry’s Global Producers’ Commitments to Reduce the Harmful Use of Alcohol, now in their fourth year, which are making a tangible difference in areas such as reducing drink driving and tackling underage drinking. We are also proud that we are supporting skills and social enterprise in the community, through programmes like Learning for Life, bringing opportunities for training and careers in the hospitality industry, and Plan W, empowering women through learning. And we are working hard, including with our suppliers, to reduce our environmental impact, setting ourselves new, challenging targets around water, carbon and waste for 2020. These priorities represent an interlinked, holistic approach to understanding and managing our impact on society.
Partnerships are key to delivering positive outcomes, and we have recently announced a global strategic partnership with the NGO WaterAid, building on our efforts to improve access to safe water across Africa. Also this year, through a partnership with the United States Agency for International Development, we have extended our work on skills as part of their programme in Colombia, and have set up a new farming supply chain in South Sudan, supporting livelihoods for hundreds of people. These partnerships, with more to follow, increase the reach of our programmes and help us contribute to the UN Global Goals.
Managing geo-political risks and opportunities
Political and other volatility continues to be a growing feature of the global economy and many of the markets in which we operate. We are continually improving our ability to understand and interpret it; and to evaluate and act against the potential risks and the opportunities for the business. We have integrated the work of our strategy, risk and public affairs teams and also improved our in-depth analysis of, and scenario planning for, priority markets. I am confident this will further enhance our resilience and growth potential.
It is too early to assess the implications of the United Kingdom’s decision to leave the European Union for our business and operations over the longer term. We believe, however, that with our proven record of managing trade and operating globally, Diageo remains well placed to deliver its Performance Ambition.
Board ischanges
In November 2015, Deirdre Mahlan stepped down from the Board, as she moved from her role as Chief Financial Officer to take up the role of President, Diageo North America. I wish to thank Deirdre most sincerely for her excellent contribution to the Board and am pleased that she continues to play a pivotal role in leading this important business for Diageo. I am also delighted to have welcomed Kathryn Mikells to the Board as Chief Financial Officer, effective 9 November 2015. Kathryn joined us with a track record for capital discipline and for developing strong cost cultures to create efficient, agile organisations.
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Business description (continued)
Diageo announced on 18 May 2016, that Javier Ferrán would be appointed to the Board as a Non-Executive Director from 22 July 2016. On my retirement from the Board on 31 December 2016, Javier will take over as Chairman from 1 January 2017. On behalf of the Board, I would like to welcome Javier to Diageo and say how delighted I am that he has agreed to be the next Chairman. Through his roles at Lion Capital and Bacardi, Javier has a wealth of experience across the consumer goods sector and brings a strong set of skills to the role of Chairman.
Global volume share of premium spirits (%) Diageo 25% Beam Suntory 6% Pernod Ricard 16% Brown-Forman 7% Bacardi 9% Others 37% Source: Impact Databank, March 2016
A global leader
It has been an honour to serve as your Chairman. During the past eight years Diageo has become a truly global leader, with the assets and consumer-facing culture required to succeed. Diageo’s values are deeply rooted in the principle of always doing the right thing. I am therefore confident that Diageo will delivercontinue to prosper, and succeed in delivering its Performance Ambition. Over the last two years we have taken the necessary steps to strengthen Diageo, to position our company to drive sustainable growth and valueAmbition for you, our shareholders, and to ensure we are a trusted and respected partner to all our stakeholders around the world.
Dr Franz B Humer
Chairman
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CHIEF EXECUTIVE’S STATEMENT:STATEMENT
WE HAVE DELIVERED CHANGES WHICH WILL BUILD STRONG, SUSTAINED PERFORMANCE.This has been a year of significant progress for Diageo. Our performance demonstrates our focus on disciplined execution in everything we do. It is this focus which has delivered volume growth, our fifth consecutive year of organic margin improvement and strong cash conversion. I am confident we now have the platform to deliver sustainable growth.
“
Reported volume movement | Organic volume movement | |
2016:h0.1% 2015:h58% | 2016:h1.3% 2015:i1% | |
Reported net sales movement | Organic net sales movement | |
2016:i3.0% 2015:h5% | 2016:h2.8% 2015: flat | |
Reported operating profit movement | Organic operating profit movement | |
2016:h1.6% 2015:h3% | 2016:h3.5% 2015:h1% |
Performance
We have a clear strategy, consistently applied which has returned Diageo to both organic volume and organic net sales growth, delivered margin improvement and a strong cash performance.
This year we delivered organic volume up 1.3%, and organic net sales up 2.8%, with a stronger performance across both in the second half. The fundamentals for futureimprovement in organic net sales has been driven by a return to volume growth, remain strong: Diageo will benefit fromand a significant turnaround in US Spirits.
We are a more focused company following the increasing penetrationdisposal of spirits in emerging markets, innovationnon-core businesses. These disposals, along with adverse exchange, did however impact reported net sales, which declined 3.0%.
We have sustained positive price/mix despite a weaker pricing environment globally, and the growing appetite for luxury spirits around the world.”
In the next decade one billion new consumers will be able to affordwe have strengthened our leadership position and brought our brands to an increasing number of consumers. Our beer business has grown for seven successive quarters and an additional 800 million consumers will reach levels of income where luxurycontinues to provide a strong distribution platform for our spirits ambitions in Africa.
All six global giant brands are affordable. Diageo has the leading positionreported improved organic performance this year. Smirnoff’s and Captain Morgan’s improvement was driven by their performance in the United States an integrated Western Europe business, a strong beer platformcombined with continued good growth in Europe. Guinness’ momentum continues with the brand growing in Africa and in Great Britain and Ireland, supported by innovations from which to build spirits, the leading spirits businessThe Brewers Project.
North America delivered organic net sales growth of 3%. This performance is in India, and a strong presence in the growth markets of Latin America and Asia.
This year we improved cash conversion, strengthenedline with our route to consumer, delivered industry leading innovation at scale, extended our leadership in reserve and accelerated delivery of our programmed cost savings. We have further sharpened our marketing to better navigate changing consumer trends. So, while some markets have been challenging, we remain confident in the long term global demographics and our ability to deliver growth through the business transformation we are effecting.
Driving operational and cultural change
In the past year we have implemented some important changes to strengthen our business. These changes are aimed at providing greater visibility and will allow us to react more quickly to changes in the marketplace, consumer sentiment and demand.
Results
Organicorganic net sales were flat. Volume declined 1% reflecting a destockimprovement being that our biggest brands are back in South East Asia, lower shipments in the United States and improving price/mix led by the growth of reserve brands.growth.
Organic operating margin was up, 24driven by favourable mix effect and marketing efficiency. Operating profit grew 3.5% on an organic basis. On a reported basis, points deliveredoperating profit was up 1.6%, negatively impacted by cost savingsexchange and efficiencies, whichdisposals. Earnings per share before exceptional items was up 1% as profit growth, higher associates income and lower finance charges more than offset the impact of cost inflationexchange and negative market mix. Our global efficiency programme identified £200 milliondisposals.
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2016 net sales by category (%) Scotch 24% IMFL Whisky 5% Beer 18% Liqueurs 5% Vodka 13% Gin 3% NAM Whisk(e)y 8% Tequila 1% Rum 7% Other 10% Ready to drink 6%
We continue to drive productivity and cash conversion, delivering over 100% cash conversion for a second year and free cash flow improved by £134 million.
Business transformation
Over the past three years, my goal has been to put the consumer at the heart of cost savingsour business. Consumer trends are moving faster than ever before and companies that can interpret and deliver quickly against consumer insights will thrive. The renewed momentum we have in the business is because we have the consumer-facing culture required to succeed and the agility to move at pace.
We have shifted the focus of our marketing to be deliveredcentred on the recruitment and re-recruitment of consumers and on what drives consumption occasions, and we are introducing more rigour around the evaluation of the effectiveness of our spend. We continue to uphold the highest standards of responsibility, ensuring that all our marketing activities adhere to our strict Diageo Marketing Code.
Our role in society
We know that the issues that are most material to our business and stakeholders are:
Our strategy recognises that these issues are connected to our opportunities as a business, as well as the UN Global Goals launched in 2015. Our strategy also reflects how the elements of our value chain are interdependent, and how contributing to society, to communities, and to the environment strengthens our business.
We are passionate about ensuring alcohol has a positive role in society as part of a balanced lifestyle and are committed to tackling misuse. We do this through our implementation of the Global Producers’ Commitments to Reduce the Harmful Use of Alcohol, an unprecedented partnership of the world’s largest alcohol companies coming together to tackle harmful drinking – and, as an industry, we are seeing good progress against the targets we set ourselves for 2017. We welcome the trends we are seeing, such as consumers, and particularly young adults, drinking better not more, and the significant fall in the number of alcohol-related road traffic fatalities in many countries. This suggests that initiatives such as the multi-stakeholder approach advocated by the end of fiscal 2017. We delivered £127 million this year, and as planned reinvested £30 million of the savings.
Free cash flow was up over £700 million this year, to almost £2 billion, as I made cashGlobal Producers’ Commitments are having a clear priority for improvement. To deliver this, incentive programmes were changed and we set clear targets for each market. This focus has led to many examples across markets where we have improved processes and ways of working to reduce our working capital. The sales of the Bushmills brand and the Gleneagles Hotel also generated cash in the year.positive impact.
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EarningsWe are not complacent and there is more to do. This year, we signed a strategic partnership agreement with the United Nations Institute for Training and Research (UNITAR) which, over the next two years, will work towards reducing traffic death and injuries, and improve road safety globally. I was proud to learn that we were approached to partner with UNITAR on the basis of our strong track record in supporting programmes and policies to address drink driving.
We are long-standing leaders in providing consumer information to help people make informed choices as part of a balanced lifestyle, and recently announced that Johnnie Walker Red Label will be the first global brand to provide per share before exceptionals fell 7%serving alcohol content and nutritional information on-pack. The new labels are designed to 88.8 pence largelyhelp consumers understand what’s in their glass, and conform to the new Diageo Consumer Information Standards which came into force on 1 July 2016 and applies to all Diageo brands.
During the year, I also had the opportunity to launch our new DRINKiQ exhibit at the Guinness Storehouse in Dublin, Ireland, which is one example of our work to help people make informed decisions. This exhibit supports our global responsible drinking website, DRINKiQ.com, which was relaunched in January this year in 12 languages.
United Kingdom (UK) and the European Union (EU)
Following the UK’s vote to leave the EU on 23 June 2016, we are working closely with government and our industry bodies to ensure our views are reflected in the transition process. We welcome the formation of a specialist international trade department, as a resultit is
important for Diageo that the UK continues to benefit from open access to the EU as well as favourable international trade agreements. We believe that the outcome of adverse exchange movements and lower income from associates and joint ventures, offset by underlying improvements.
2015 net sales by category (%)7% 18% 24% 12% 5% 4% 1% 8% 5% 6% 3% 7% Scotch NAM Whisk(e)y Vodka Rum Liqueur Tequila Gin Beer Wine Ready to drink IMFL Other
Sustainability and responsibility
In December 2014 we launched our 2020 Sustainability & Responsibility targets. Stretching and industry leading, our 2020 targets address our mostthis referendum will not have any material issues: leadership in alcohol in society; building thriving communities; and reducing our environmental impact. The 2020 targets drawnear-term impact on our achievements to datebusiness and are aligned with the new, emerging United Nations Sustainable Development Goals.
With these targets, we are going beyond the establishment of programmes on responsible drinking, community development and environmental performance,well placed to focus on measuring their impact, challenging ourselves to strengthen their value, impact and scale. In doing so, we will work in partnership with governments, civil society, individuals, NGOs and other companies to put in place programmes with quantifiable outcomes. We continue to support fully the Global Producers’ Commitments, a co-ordinated industry response to support the World Health Organization’s (WHO) Global Strategy to Reduce the Harmful Use of Alcohol.
In April this year we announced an ambitious strategy for water stewardship. With water a pressingour global business and global issue, our Water Blueprint recognises the responsibilities of operating in water-stressed areas and explains how we will support the sustainability of the water resources on which we and those around us rely. Our Water Blueprint and our progress towards all of our targets are essential parts of our long term plan, not just in enabling sustainable operations but also in creating opportunities for growth.without significant disruption.
Our people
It is a privilegeI would like to work with Diageo teams acrossthank all our 32,000 people for their energy and dedication during the world.year. I feel honouredam fortunate to lead a company where purpose and values are deeply ingrained. The commitment of our people to get behindbusiness with motivated, committed teams around the decisions taken during the year is encouraging.world. This was demonstrated in the results of ourby this year’s annual employee Values Survey, which showed another year of improving engagement scores. Our results compare very well with employee engagement improving throughthose of other multinational companies, which I see as a tough performance period. This evidencereal competitive advantage for Diageo.
Franz, in his statement, highlighted that Javier Ferrán, who joined the Board as a Non-Executive Director on 22 July 2016, will succeed him as Chairman on 1 January 2017. I would like to extend my thanks to Franz for his role in making Diageo the strong business it is today, and for his stewardship of the passion and commitment all of us hold for Diageo is the perfect fuel to drive future growth, andBoard during his eight years as Chairman. I look forward to working with Javier as we build on Diageo’s leadership position.
Outlook
Diageo has an enviable portfolio of brands, a truly global footprint and exposure to the fastest growing opportunities in our teams acrosssector. The business is now able to respond faster to consumer insights, to shape trends and to deliver. We have been embedding a productivity culture, and are committed to sustainable efficiency in every area of our cost base to achieve £500 million in savings in the coming three years. Two-thirds of the efficiencies identified will be re-invested back into the business implementing the exciting plans we have for the year ahead.
Larry Schwartz, President Diageo North America, will retire at the endto drive growth. We are confident of this calendar year. Larry has many achievements in a 40-year career in the industry, not least his commitment to deliver growth for Diageo and buildachieving our strong North American platform. Deirdre Mahlan, currently Chief Financial Officer and the incoming leaderobjective of this business, will have this platform to build on as she drives the next stage of Diageo North America’s growth.
Productivity
At the end of July 2015, we announced our intention to deliver productivity gains of a further £500 million over three years from fiscal 2017 to invest in growth and improve margin. As we achieve our productivity gains we expect to deliver mid-single digit organic top linenet sales growth, on a sustained basis and operating margin expansion ofin the three financial years ending 2019 delivering 100 basis points overof organic operating margin improvement.
I am also confident that, with the same three year period.consumer at the heart of our business, we will extend our leadership position and become one of the most trusted and respected consumer products companies in the world.
Ivan Menezes
Chief Executive
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Outlook
The fundamentals for future growth remain strong: Diageo will benefit from the increasing penetration of spirits in emerging markets, innovation and the growing appetite for luxury spirits around the world.
We have taken some tough decisions over the last couple of years to set Diageo up to deliver strong, sustained performance. Today we are closer to the consumer, more agile, and focused on productivity, with the people, skills and capabilities to deliver on the opportunity. We are at an exciting point on our journey. In 2016, we believe stronger volume growth will deliver an improved top line performance.
Ivan Menezes
Chief Executive
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HOW WE MEASURE PERFORMANCE: KEY PERFORMANCE INDICATORS
We use the following 11 key performance indicators (KPIs) to measure our financial and non-financial performance.
Their relevance to our strategy and our performance against these measures are explained below:
Relevance to strategy
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MARKET DYNAMICS
The global beverage alcohol market is large and diverse, with an estimated six billion(i) equivalent units of alcohol sold each year, generating £300£260 billion(i) of net sales. It is also one of the most regulated in the world, andLike other consumer goods companies, beverage alcohol companies operate in thea context of a rangeincreasing stakeholder expectation – with the added element of stakeholder expectationshigh, and demands.highly diverse, levels of regulation. This environment presents opportunities for a business like Diageo, with our global scale,reach, our diverse range of leadingiconic brands across price tiers, and our high standards ofapproach to responsibility, sustainability, governance and ethics.
A market that is profitable and expanding
A growing globalThe beverage alcohol market
Beverage alcohol is a profitable, growing and attractive market in which to participate. Margins are significantly higher than for the overall consumer goods market, while, overattractive. Over the medium term, the industry is expected to grow overall in both volume and value. WhileThis is driven by consumer fundamentals including a rise in global incomes and a growing legal purchase age population. At the globalsame time, margins remain significantly higher than for the overall consumer goods market.
The market for beverage alcohol is also highly diverse, with significant variations in culture and conditions between, and within, individual countries and regions. It is broadly split almost equally between emergingdeveloped and developed markets, emerging markets, are expected to grow at a faster rate.
Within emerging markets and developed markets, everybut each individual market presents different consumer dynamics and a different outlook determined by specific local conditions. Our 21-market operating model, coupled with tailored local strategies, enables usoutlook. This diversity presents opportunities to meet the specific needs of consumers across different geographies.agile businesses that can act on consumer insight and deliver trusted, competitive products.
Opportunities in developed marketsDeveloped market opportunities
InTypically, developed markets, the population ismarket populations are ageing and in aggregate is growing more slowly than those in emerging markets – in some countries it is shrinking.markets. Overall, wealth is fairly static but is increasingly polarised as growth is skewed towards the most affluent. The opportunities in developed markets are therefore very different from emerging markets. Given the higher levels of disposable income are higher, and the importance of branding, in developed markets consumers are often prepared to pay morea premium for high quality brands with heritage and provenance. Our keyWe see consumption occasions as opportunities are to offer beer customers other products, particularlypromote our international spirits brands, and, as tastes evolve,within those brands, to encourage consumers to trade up within spirits brands.to our reserve portfolio.
Emerging market opportunities
Opportunities in emerging markets are driven by growth in both populations and wealth. Each country is different, and growth occurs at different price points depending on wealth and local conditions. An understanding of local consumers and the categories, brands and price points they are seeking is vital to accessing this growth.
The emerging middle-class plays an important role. These relatively affluent consumers already drink beer or local spirits, and the opportunity is to further access this existing consumption pool with our brands and to offer an opportunity to trade up to our international spirits brands for certain occasions. Outside this group, an estimated 25% of global alcohol consumption is from non-commercial or illicit products. Capturing market share in this consumer segment by offering legitimate, safe, attractive brands that deliver quality at an affordable price is an important opportunity.
There is also a significant and growing number of globally affluent consumers in the emerging markets, who represent an opportunity for our reserve portfolio.
Geo-political volatility
Growth of beverage alcohol consumption in emerging markets is driven by strong, underlying consumer fundamentals. The number of people of legal purchasing age is growing worldwide, and is set to increase by over 450 million over the next decade. Wealth is increasing, with the middle class growing. This means more consumersWhile there are buying brands and they have more money to spend on them. There is a good opportunity for growth for spirits, as consumer tastes shift and disposable incomes rise.
Factors affecting consumer choices
Whilepositive medium-term prospects for the beverage alcohol are robust and positive for the reasons described above, in the short term there are particular challenges that faceindustry, all consumer goods businesses.businesses, including beverage alcohol businesses, continue to navigate a volatile global economy. Our Chief Executive discusses the United Kingdom’s referendum vote to leave the European Union on 23 June 2016 on page 34.
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EconomicThe slowdown in the Chinese economy, oil price shocks, persistent conflicts in many parts of the world, and political instability
Suddenterrorist attacks in Europe are just some of the events and trends that have contributed to an unpredictable environment. The resulting uncertainty, changes to economic variables such as exchange rates and commodity prices, or changesand fluctuations in levels of political security can all reduce consumer confidence and spending power. Over the last year alone we have witnessed considerable economic, social and political upheaval in many places: huge currency devaluations in Venezuela; geo-political conflict in Russia and Ukraine; the Ebola outbreak; and terrorist threats in Nigeria and Kenya, to name some examples. The general operating environment will continue to be a turbulent and unpredictable one in which to compete.
Our approach is based on broad participation across geographies, categories and price tiers which providesacts as a natural hedge against individual market volatility, while tailored strategies forwe retain the flexibility in each market allow us to respond quickly to local dynamics. Operationally, we continue todynamics through our 21 market business model. Continued focus on improving ourlocal sourcing of ingredients, scenario planning and risk management, processes, while our 21-market operating model enables our marketsand management of foreign exchange exposure all work to respond quickly to local events and trends. Our renewed focus on managingprotect the business accordingagainst the challenges of volatility.
(i) | Diageo estimates. |
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Business description (continued)
Earning the trust and respect which support performance
Our ambition is to be one of the best performing, most trusted and respected consumer products companies in the world – ensuring we play a positive role in society is at the heart of this. Operating in a responsible and sustainable way every day, everywhere, not only helps us be a trusted and respected business, it also helps drive our performance.
The launch of the UN Global Goals in September 2015 and the Paris Agreement on climate change in December 2015 represent an important milestones in what is actually bought bywas arguably an unprecedented period of concerted action to address global issues. These initiatives both reflect and drive a wider trend in which stakeholders of all kinds, including consumers rather than what we sell to our customers will also help to improve the consistency of our performance across markets.
Increasing expectations of businesses and brands
Consumers today – particularlyin particular millennials, – have increasing expectations of thethat businesses behind the brands they love. It is not enough to provide a great product and brand experience: companies must make a contribution that goescreate value beyond their economic benefits, to encompass environmental andcontribution.
Delivering measurable social benefits, as well.
This is reflected in the developing regulatory framework for listed companies, which are expected to be transparent about their key social and environmental issues, and, through reporting, to demonstrate progress. Going beyond what is mandatory has become the norm for global businesses, which are adopting various voluntary frameworks. These include the International Integrated Reporting Framework, published last year, the Global Reporting Initiative Guidelines, launched in 2000 and updated last year, and the United Nations Global Compact principles, established in 2006, all of which we follow in our reporting.
This high and growing level of regulation and scrutiny can be an advantage to companies withtackling alcohol misuse, demonstrating good corporate governance and the right approach toreducing environmental impacts in line with a clear sustainable development strategy are, more than ever, business imperatives which drive performance.
We have built on our long history of sustainability and responsibility.responsibility programmes by developing a strategy that is aligned with the UN Global Goals and Paris Agreement and focuses on the three areas that are most material to us and our stakeholders: creating a positive role for alcohol in society; building thriving communities; and reducing our environmental impact. We have set ourselves targets to achieve in each of these areas by 2020.
Creating a positive role for alcohol in society
Alcohol has been enjoyed for centuries and is part of celebrations around the world. Whether people drink beer, wine or spirits, alcohol is alcohol, and the vast majority of people who choose to enjoy it, do so moderately and responsibly. We respect that some people choose not to drink, and recognise that the misuse of alcohol can be harmful to individuals and society. Putting our resources and skills into programmes that prevent and reduce alcohol misuse and working with others to raise awareness and change attitudes and behaviour is good for society and good for the long-term future of our business.
Support for effective alcohol policies
The beverage alcohol industry is one of the most highly regulated in the world, with regulation varying widely between countries and jurisdictions. Diageo has always believed that creating a positive role for alcohol in society is about working in partnershipcomplies with all the relevant stakeholders, through concerted industry initiatives.laws and regulations, wherever we operate, as a minimum requirement. We are one of 13 global producers of beer, wine and spirits which, in 2013, launched a set of commitments designed to support Member States’ implementation of the World Health Organization’s (WHO) global strategy to reduce the harmful use of alcohol. They include a focus on reducing underage drinking, strengthening and expanding marketing codes of practice, providing consumer information and responsible product innovation, reducing drink driving, and enlisting the support of retailers to reduce harmful drinking.
Diageo also believes that the mostadvocate effective alcohol policies that are evidence-based, account for drinking patterns, target at-risk groups, treat all forms of alcohol equally, and involve all stakeholders. Such policies include mandating a minimum legal purchasing age of not less than 18; a maximum blood alcohol concentration (BAC) level for drivers of no more than 0.08mg; and lower BACs for novice and commercial drivers. Also effective are high-visibility enforcement campaigns of drink-driving laws and alcohol interlock devices for convicted drink drivers.
Diageo advocates these policies while opposingHowever, we advocate against measures that are not based on evidence andor are likely to have unintended consequences. For example the use of high taxes to control consumption canconsequences in some caseswhat are often complex markets. A particular concern is policies that inadvertently push consumers totowards unregulated alcohol markets. These are potentially dangerous for consumers – what little is known about this ‘unrecorded’or illicit alcohol, which the WHO estimates accounts for 25% of alcohol consumed, suggests that some maycan be contaminated, some toxic, and a risk to public health.
Factors affectingIndustry collaboration
We are one of 12 global producers of beer, wine and spirits which, in 2013, launched a set of commitments designed to support Member States’ implementation of the operational environment
The developments in reporting social and environmental issues noted above are a reflectionWorld Health Organization’s (WHO) global strategy to Reduce the Harmful Use of their importance to business performance. The interdependence of companies and their local environments, communities and economies is a growing phenomenon, which Diageo has long recognised through our sustainability and responsibility programmes. In December 2014 we launched our 2020 Sustainability & Responsibility targets, whichAlcohol. These commitments focus on three imperatives: leadershipreducing underage drinking, strengthening and expanding marketing codes of practice, providing consumer information and responsible product innovation, reducing drink driving, and enlisting the support of retailers to reduce harmful drinking. Diageo goes beyond industry collaboration and works in alcohol in society; building thriving communities;partnership with governments, law enforcement, educators and reducing our environmental impact.civil society to support campaigns to reduce harmful drinking.
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Building thriving communities
We can add significantly to the contribution we make to communities through direct and indirect employment, taxes, and community investment efforts by working to leverage the economic and social impact of our entire value chain. Helping communities thrive within the supply chain also builds resilience within our business. We build trust with government and other stakeholders by focusing on human rights throughout our value chain, and through local sourcing initiatives, particularly in Africa where we aim to source 80% of agricultural materials for use in local markets by 2020. This helps secure supply, and delivers wider benefits to the local community.
Climate change and water scarcity
Companies –All businesses, particularly those that rely on agricultural raw materials, – are increasingly being affected byexposed to a variety of environmental issues associated with climate change, such as extreme weather events, water scarcitydroughts, floods and biodiversity loss.
For These issues can affect a business’ operations directly, or indirectly as a result of their impact on the alcohol industry, waterwider value chain and associated communities. Water scarcity demands particular attention given thatis particularly important to us because water is theour main ingredient in all alcoholic beverages. The World Bank expects water scarcity to affect 2.8 billion people directly by 2025, and the increasing importance of water as a global issue is recognised in ouringredient. Our Water Blueprint, launched in April 2015, which defines our strategic approach to water stewardship, acrossand focuses specifically on stewardship in the value chain. The map below shows our sites located in water-stressed areas whereshown in the map below.
Trust and transparency
As part of the process of creating value, we are increasingly expected to be transparent about our most material social and environmental issues. This is delivered through reporting frameworks such as the International Integrated Reporting Framework, the Global Reporting Initiative Guidelines, and the United Nations Global Compact principles. We report against all three of these, and believe that this regulation and scrutiny can be an advantage to companies with good corporate governance and the right approach to water stewardship is particularly important.
Local communitiessustainability and supply chains
Alcohol beverage companies contribute to the economic development of their communities in a variety of ways, whether through direct or indirect employment, taxes or community investment efforts. However, companies can further contribute by leveraging the economic impact of their entire value chain in the way they work with suppliers and customers – and doing so is an increasing expectation of the private sector by government and international development institutions. One powerful trend in the food and beverage industry is a focus on local sourcing in markets with an agricultural economy or the potential for one, and, in Africa, we have a target of sourcing 80% of agricultural materials locally (sourced within Africa and used by our African markets). This helps build trust with government and other stakeholders, can help secure supply, and it delivers wider benefits to the local community.responsibility.
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HOW WE WILL DELIVER OUR PERFORMANCE AMBITION
Diageo’s performance drivers and Sustainability & Responsibility imperativessustainability and responsibility priorities are key to achieving our Performance Ambition.aims. Each of our 21 markets focuses on the priorities that are most relevant to driving growth and creating shared value in that market.
OUR SIX PERFORMANCE DRIVERSOur six performance drivers
1.1 Strengthen and accelerate growth of our premium core brands
Our premium core brands are sold in more than 180 countries around the world. They are enjoyed by consumers in the developed markets and have wide appeal in emerging markets. They include iconic brands like Johnnie Walker, Smirnoff, Captain Morgan and Baileys.
2.2 Win in reserve in every market
OurSeven years ago we shifted our approach to luxury spirits and made reserve or luxury portfolio accounts for 13% of our total net sales. Over the last six years we have transformed our luxury branda strategic priority. The results demonstrate what building capabilitiescapability and are now the industry leader in the super and ultra premium segments.having focus can do.
3.3 Innovate at scale to meet new consumer needs
Our abilityWe are a company built and sustained through innovation, which gives us the drive to innovate is a competitive advantage. A proven drivercreate new products, new categories and new experiences for consumers. We are the leaders in our industry, inventing today for tomorrow, staying on the edge of, growth, it is critical to the performance in each of our markets. Since 2009, innovation has accounted for at least half of Diageo’s sales growth, growing double-digit each year.and anticipating, consumer behaviour.
4.4 Build and then constantly extend our advantage in route to consumer
We have put the consumer at the centre of our business. Our global programmeroute to consumer transformation has driven a clear understanding of what success looks at how we can profitably extend wherelike in a store, in a bar and in the hands of our brands appear and improveconsumers. We now have the quality of how they appear at every appropriate drinking or buying occasion, achieving higher rates of sale in an efficient way.consumer-facing culture to succeed.
5.5 Drive out costs to invest in profitable growth
Increasing productivityWe want to continuously get more efficient and efficiency within Diageo will improve profitability and alloweffective in everything we do to further enable us to invest back intoin growth for our business, our people and our brands. We have set a goal to deliver productivity savings of £500 million over the business to drivenext three years, with two-thirds of this re-invested for growth.
6.6 Ensure we have the talent to deliver our Performance Ambition
We employ bright, collaborative people at all levels in our business, and must continue to do so if we are to achieve our Performance Ambition. Ensuring that we haveaims. Our people, culture and values are what will make the best talent – nowdifference.
Our three sustainability and in the future – is one of our biggest challenges and one of our greatest opportunities.responsibility priorities
OUR THREE SUSTAINABILITY & RESPONSIBILITY IMPERATIVES
1. Leadership in alcohol in society
Creating1 Create a positive role for alcohol in society is
We are committed to maintaining our primary focus,leadership position by ensuring we make a positive contribution to society and over the last decade we have supported hundreds of programmeswork to tackle harmful drinking and encourage responsibility.alcohol misuse alongside the industry. We will continue these efforts withto operate in a responsible way every day, everywhere, to remain a trusted and respected business and drive our various stakeholder partners as well as focusperformance. We remain focused on delivering the five Global Producers’ Commitments. and our own stretching 2020 targets.
2.2 Building thriving communities
Our distilleries, breweriesWe create value for millions of people as a buyer of goods and wineries are atservices, as an employer, as corporate citizens, and as producers of some of the heart of ourworld’s best-loved brands. We want to continue to help those communities thrive, by making Diageo a great, safe, and we have a responsibilitydiverse place to create shared value throughout our supply chain. Our targets commit us to further partnerships with local farmers and agricultural communities to develop morework, by building sustainable supply chains, and secure our raw material supply.through programmes that empower communities and individuals.
3.3 Reducing our environmental impactimpacts
Recognising that our impactWe’re dependent on the natural resources we share with the communities around us, and with the wider world. We want to use those resources responsibly, and make a net positive contribution to the environment is not limited tothrough our own sites, our targets reflect the need to better manage water stewardshipoperations and carbon emissions across our whole supply chain. We will work increasingly with suppliers, strivingare working to decouplereduce our impacts in the growthareas of our business from our impact on the environment.water, carbon, packaging, and waste.
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Risk factors
Diageo believes the following to be the principal risks and uncertainties facing the group. If any of these risks occur, Diageo’s business, financial condition and performance could suffer and the trading price and liquidity of securities could decline.
In Because any global business of the ongoing uncertain economic environment, certainkind Diageo is engaged in is inherently exposed to risks may gain more prominence either individuallythat become apparent only with the benefit of hindsight, risks of which Diageo is not presently aware or when taken together. For example, demand for beverage alcohol products, in particular luxury or super premium products, may decrease with a reduction in consumer spending levels. Costs of operations may increase if inflation were to become prevalent, or upon an increase in the costs of raw materials. These conditions may also lead to intensified competition for market share, with potentially adverse effects on volume and prices. The financial and economic situation may have a negative impact on third parties with whomwhich Diageo does or may do, business. Any ofnot currently consider to be material could also impact Diageo’s ability to execute its strategy. In addition, these factors mayrisks could affect the group’s performance,Diageo’s business, financial condition and liquidity. Diageo has takenperformance and may take further steps to manage its business through this challenging economic environmentthe trading price and to position its business to benefit from economic recovery as and when that may occur in the markets in which Diageo operates, but there can be no assurance that the steps taken will have the intended results.
Diageo’s ability to fund its long term strategies may be adversely affected if there is an extended periodliquidity of constraint in the capital markets, particularly the debt markets, at the same time that cash flows from Diageo’s business are under pressure. Such developments may adversely affect shareholder returns or share price. Additionally, continued volatility in exchange rates used to translate foreign currencies into pounds sterling may have a significant impact on Diageo’s reported results. Changes in the trustees’ valuationssecurities. The order of presentation of the assets and liabilitiesrisk factors below does not indicate the likelihood of Diageo’s pension plans may also increase pension funding requirements.their occurrence or the potential magnitude of their consequences.
Risks related to the global economy
Diageo’s business may be adversely impacted by unfavourable economic, conditions or political, social or other developments and risks in the countries in which it operates
Diageo may be adversely affected by political, economic or social developments in any of the countries where it has distribution networks, production facilities or marketing companies. In particular, Diageo’s business is dependent on general economic conditions in its most important markets, including the United States and the countries that form the European Union and other important markets.
Union. If the economy in any of these markets does not recover as forecast, or if there is a significant deterioration in the economic conditions in any of Diageo’s important markets, including any resulting social unrest,it may contribute to reduced demand for Diageo’s products, reduction in consumer confidence and spending levels generally, customer destocking, the failure ofnegative impacts on Diageo’s customer, supplier or financial counterparties or a reduction in the availability of, or an increase in the cost of financing to, Diageo, it could have a material adverse effect onDiageo. Diageo’s business and performance. Any suchis also affected by other economic developments may lead to reduced economic growth and, in turn, reduced demand for Diageo’s products, in Europe and other markets in which Diageo operates. This could have a material adverse effect on Diageo’s business.
Diageo is headquartered in the United Kingdom and has significant production and investment in Scotland. Following the result of the Scottish independence referendum in 2014 and the UK general election in 2015, legislation to grant more devolved powers to the Scottish parliament has been introduced. Diageo will monitor the passage of this Bill. Amendments granting additional devolved powers may be proposed, and these could result in a further period of political unceratinty that may adversely affect Diageo’s business. Regarding Britain’s place in Europe, by the end of 2017, the current government in the United Kingdom has undertaken to conduct a referendum on the UK’s continued membership of the European Union. The UK’s withdrawal from the EU would involve a sustained period of uncertainty and complexity which could have an adverse effect on our operations and profitability. In addition, Diageo’s operations are also subject to a variety of other risks and uncertainties related to trading in numerous foreign countries, including political or economic upheaval andsuch as the imposition of any import, investment or currency restrictions, including tariffs and import quotas or any restrictions on the repatriation of earnings and capital. Any of these developments may have a material adverse effect on Diageo’s business and financial results.
Diageo’s operations are also subject to a variety of other risks and uncertainties related to its global operations, including adverse political, social or other developments. Political and/or social unrest, potential health issues, natural disasters, politically-motivated violence and terrorist threats and/or acts, including those which are specifically directed at the alcohol industry, may also occur in various places aroundcountries where Diageo has operations. Any of the world, which willforegoing could have an impacta material adverse effect on trade, tourismDiageo’s business and travel. performance.
Many of these risks are heightened, or occur more frequently, in emerging markets. These disruptions can affect Diageo’s ability to import or export products and to repatriate funds, as well as affecting the 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. A substantial portion of Diageo’s operations representingare conducted in emerging markets, and emerging markets represented approximately 43%42% of Diageo’s net sales for the year ended 30 June 2015, are carried out in emerging markets.2016. Emerging markets are also generally exposed to relatively higher risk of liquidity constraints, inflation, devaluation, price volatility, currency convertibility, sovereign default, as well as additional legal and sovereign default. Due to Diageo’s specific exposures, any or allregulatory risks and uncertainties. Any of the aforementionedthese factors may affect Diageo disproportionately or in a different manner as compared to its competitors.competitors, depending on Diageo’s specific exposure to any particular emerging markets, and could have a material adverse effect on Diageo’s business and financial results.
The results of the United Kingdom’s referendum to leave the European Union may result in economic and political uncertainty and complexity, have a negative effect on economic conditions in Europe and adversely affect Diageo’s business and financial performance
Diageo is headquartered in the United Kingdom and has significant production and investment in Scotland. In June 2016, the United Kingdom voted by referendum to leave the European Union. Although it remains too early to assess the potential impact of this vote for Diageo, may lead to a sustained period of economic and political uncertainty and complexity until the detailed terms of the United Kingdom’s exit from the European Union are finalised and as the United Kingdom negotiates and concludes any successor trading arrangement with other countries. The decision in the referendum that the United Kingdom should leave the European Union could also negatively impact economic conditions in Europe more generally and may have adverse effects on Diageo’s business and financial performance. For instance, the referendum may contribute to volatility in exchange rates, risk to supply chains across the EU, restrictions on the mobility of employees, possible changes to customs duties and tariffs and/or industry specific requirement and regulations.
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PartThe United Kingdom’s referendum vote to leave the European Union could also have further implications for the constitutional makeup of the United Kingdom and issues around independence and devolved government in Scotland and Northern Ireland, which could result in a further period of political uncertainty in the United Kingdom and may otherwise adversely affect Diageo’s business and financial results, particularly in light of Diageo’s growth strategy includes expanding its businesssubstantial inventory and operations located in certain countries where consumer spending in general, and spending on Diageo’s products in particular, has not historically been as great but where there are strong prospects for growth. There is no guarantee that this strategy will be successful and some of these markets represent a higher risk in terms of their changing regulatory environments and higher degree of uncertainty over levels of consumer spending.Scotland.
Risks related to the industry
Demand for Diageo’s products may be adversely affected by many factors, including changes in consumer preferences and tastes and adverse impacts of a declining economy
Diageo’s collection of brands includes some of the world’s leading beverage alcohol brands, as well as brands of local prominence. Maintaining Diageo’s competitive position depends on its continued ability to offer products that have a strong appeal to consumers. Consumer preferences may shift due to a variety of factors including changes in demographic and social trends, public health regulations, changes in travel, vacation or leisure activity patterns, weather effects and a downturn in economic conditions, which may reduce consumers’ willingness to purchase luxury or premium branded products. Continued economic pressures could also lead to consumers selecting products at lower price points, whether Diageo’s or those of its competitors, which may have an adverse effect on Diageo’s profitability.business and financial results. The competitive position of Diageo’s brands could also be affected adversely by any failure by Diageo to achieve consistent, reliable quality in the productits products or in its service levels to customers.
In addition, the social acceptability of Diageo’s products may decline due to public concerns about alcohol consumption. These concerns could also result in regulatory action, litigation or customer complaints against companies in the industry and may have an adverse effect on Diageo’s profitability.business and financial results.
Growth in Diageo’s business has benefited from both the launch of new products, and the creation of brand extensions and product innovation remains a significant element of Diageo’s growth plans. The launch and ongoing success of new products is inherently uncertain, especially as to their appeal to consumers. The failure to launch successfully a new product can give rise to inventory write-offs and other costs and can affect consumer perception and 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 of the profitable lifespan of newly or recently developed products.
Diageo is subject to litigation directed at the beverage alcohol industry and other litigation
Companies in the beverage alcohol industry are, from time to time, exposed to class action or other litigation relating to alcohol advertising, product liability, alcohol abuse problems or health consequences from the misuse of alcohol. 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. Diageo is further subject to the risk of litigation by tax, customs and other regulatory authorities, including with respect to the methodology for assessing importation value, transfer pricing or compliance matters.
Changes in the political and economic climate have resulted in an increased focus on tax collection in recent years, and tax authorities are showing an increased appetite to challenge the methodology used by multinational enterprises, even where it is complianta 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, could also result in litigation or other actions by relevant tax authorities. Any such 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, Diageo’s business and financial results could be materially adversely affected. For additional information with respect to legal proceedings, see ‘Additional information for shareholders — Legal proceedings’ and note 18 to the consolidated financial statements.
Climate change, or legal, regulatory or market measures to address climate change, may negatively affect Diageo’s business or operations, and water scarcity or poor water quality could negatively impact Diageo’s production costs and capacity
There is a growing concern that carbon dioxide and other so-called ‘greenhouse’ gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. In the event that such climate change has a negative effect on agricultural productivity, Diageo may be subject to decreased availability or increased pricing for certain raw materials that are necessary for Diageo’s products, such as sugar, cereals, hops, agave and grapes. Water is the main ingredient in substantially all of Diageo’s products and it is also a limited resource in many parts of the world.
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As demand for water continues to increase, and as water becomes scarcer and the quality of available water deteriorates, Diageo may be affected by increasing production costs or capacity constraints, which could adversely affect Diageo’s operationsbusiness and profitability.
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financial results.
An increase in the cost of raw materials or energyproduction could affect Diageo’s profitability
The components that Diageo uses for the production of its beverage products are largely commodities that are subject to price volatility caused by changes in global supply and demand, weather conditions, agricultural uncertainty and/or governmental controls. Commodity price changes may result in unexpected increases in the cost of raw materials, glass bottles, flavours and other packaging materials and Diageo’s beverage products. Diageo may also be adversely affected by shortages of such materials, or by increases in energy costs resulting in higher transportation, freight and other operating costs.costs or by inflation. Diageo may not be able to increase its prices to offset these increased costs without suffering reduced volume, sales and operating profit.
Risks related to regulation
Regulatory decisions and changes in the legal, tax 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, promotion, sales, pricing, labelling, packaging, product liability, labour, pensions, antitrust, compliance and control systems, and environmental issues. Changes in 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 countries where Diageo operates may impose new labelling, product or production requirements, limitations on the marketing, advertising and/or promotion activities used to market beverage alcohol, restrictions on retail outlets, restrictions on importation and distribution or other restrictions on the locations or occasions where beverage alcohol is sold which directly or indirectly limit the sales of Diageo products. For example, in 2015 two of the major states (in terms of population and per capita alcohol consumption) of the Republic of India, the State of Kerala and the State of Bihar, announced the imposition of a total ban on alcohol consumption. These regulatory measures could impact the sale and distribution of Diageo’s products in India, which 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 recall, seizure of products or other sanctions which could have an adverse effect on Diageo sales or damage its reputation. Any changes to the regulatory environment in which Diageo operates could cause Diageo to incur material additional costs or liabilities, which could adversely affect Diageo’s performance.
Beverage alcohol products are also subject to national excise, import duty and other duties in most countries around the world. An increase in any such duties could have a significant adverse effect on Diageo’s sales revenue or margin, both through reducing overall consumption and by encouraging consumers to switch to lower-taxed categories of beverage alcohol.
Diageo’s reported after tax income is calculated based on extensive tax and accounting requirements in each of its relevant jurisdictions of operation.operation and this may be subject to change following 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. Changes in tax law (including tax rates), tax treaties, accounting policies and accounting standards could materially reduceincrease the cost of doing business and lead to rise in Diageo’s reported aftereffective tax income.rate.
Diageo is subject to increasing costsdata privacy regulations in many of monitoringthe markets in which it operates, and maintaining compliancelaws and regulations in this area are developing and changing on a continual basis, including, for example, the new General Data Protection Regulation adopted in the European Union in April 2016. Breach of any of these laws or regulations can lead to significant fines and/or damage to Diageo’s reputation as well as significantly restricting its ability to deliver or digital productivity and growth plans.
Failure by Diageo to comply with anti-corruption laws; and a breach of such laws or failure of Diageo’s related internal policies and procedures to comply with applicable law may have a material adverse effect on itsDiageo’s business and financial results
Certain countries in which Diageo operates a global business, including in certain countries which are reported to have high levels of corruption.corruption risk (i.e., countries in which the Transparency International index of perceived levels of public sector corruption is less than or equal to fifty). There is increasing scrutiny and enforcement by regulators in many jurisdictions of anti-bribery laws, including pursuant to the US Foreign Corrupt Practices Act and the UK Bribery Act. This oversightSuch 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.
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While Diageo has implemented and maintains internal practices, procedures and controls designed to ensure compliance with anti-bribery legislation 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.
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 ourDiageo’s personnel, including senior management, from ourits business. Adverse publicity, governmental scrutiny and legal and enforcement proceedings can also have a negative impact on ourDiageo’s reputation and on the morale and performance of ourits employees. To the extent that violations of anti-corruption laws and/or Diageo’s internal policies and procedures are found, or Diageo’s internal policies and procedures are found not to comply with applicable law, possible regulatory sanctions and fines and other consequences may also be material.
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Risks related to Diageo’s business
The value of Diageo’s brands and its net sales may be negatively affected by its failure to maintain its brand image and corporate reputation or adapt to a changing media environment
The value of Diageo’s brands and its profitability depends heavily on its ability to maintain its brand image and corporate reputation. Adverse publicity, whether or not justified, may tarnish Diageo’s reputation and cause consumers to choose products offered by its competitors. 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 the failures of internal controls or compliance breaches leading to a breach of Diageo’s Code of Business Conduct, its other key policies or of the laws or regulations in the jurisdictions in which it operates.
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 also maintains an online presence as part of its business operations.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 proliferationgrowing use of new methods of mass communication facilitated bysocial and digital media increases the internet makes it easier for falsespeed and extent that information or unfounded allegationsmisinformation 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 adversely affectmaintain, extend, and expand Diageo’s brand image or adapt to a changing media environment may have an adverse effect on Diageo’s business and reputation, which may in turn affect Diageo’s profitability.financial results.
Diageo faces competition that may reduce its market share and margins
Diageo faces substantial competition from several international companies as well as local and regional companies in the countries in which it operates and competes with drinks companies across a wide range of consumer drinking occasions. Within a number of categories, the beverage industry has been experiencing continuing consolidation or realignment is still possible.among major global producers, as evidenced by several business combinations of substantial value carried out by significant competitors in 2015. Consolidation is also taking place among Diageo’s customers in many countries andcountries. These trends may lead to stronger competitors, increased competition by competitors orcompetitive pressure from customers, could lead tonegative impacts on Diageo’s distribution network, 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,categories. 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 volume and price. Any of these factors may adversely affecting Diageo’s results and growth potential.
Diageo may not be able to derive the expected benefits from its strategybusiness strategies, including in relation to focus on premium drinksexpansion in emerging markets, acquisitions, productivity initiatives or from its acquisitions or cost saving and restructuring programmes designed to enhance earnings
Diageo’s strategy is to focus on premium drinks and to grow its business through organic sales, operating profit growth and the acquisition of premium drinks brands that add value for shareholders.inventory forecasting
There can be no assurance that Diageo’s strategic focus on premium drinksbusiness 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 consumer spending in general, and spending on Diageo’s products in particular, has not historically been as great 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 a higher degree of uncertainty over levels of consumer spending.
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It is also possible that the pursuit of this strategic focus on premium drinksDiageo’s business strategies could give rise to further business combinations, acquisitions, disposals, joint ventures and/or partnerships (including any associated financing or the assumption of actual or potential liabilities, depending on the transaction contemplated). There can be no assurance that any transaction will be completed or that any such transaction would deliver the anticipated benefits, cost savings or synergies. The success of any transaction will depend in part on Diageo’s ability to successfully integrate new businesses with Diageo’s existing operations and realise the anticipated benefits. 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 current and ongoing issues in USL detailed in note 18 to the consolidated financial statements provide an example of integration and legal challenges.
Similarly, there can be no assurance that the cost saving or restructuring programmesproductivity initiatives implemented by Diageo in order to improve efficiencies and deliver cost savings will deliver the expected benefits.benefits, and such programmes may result in significant costs to Diageo or may have other adverse impacts on the business and operations of the Group. Diageo continues to undertake change programmes designed to improve the effectiveness and efficiency of end-to-end operations, including changes to organisational structures, business processes and business systems. Disruption caused to business processes as a result of such change which could impact Diageo operations and lead to adverse customer or consumer reaction. There may also be a a risk of impairment charges on goodwill or other intangible assets and failure to meet financial targets. Any of the foregoing may have an adverse effect on Diageo’s business and financial results.
Certain of Diageo’s aged product categories may mature over significant periods of up to 30 years, and forecasts of demand for such products in future periods are subject to significant uncertainty. There is an inherent risk of forecasting error in determining the quantity of maturing stock to lay down in a given year for future consumption as a result of changes in business strategy, market demand and preferences, macroeconomic conditions, introductions of competing products and other changes in market conditions. Any forecasting error could lead to Diageo being unable to meet the objectives of its business strategy, future demand or lead to a future surplus of inventory and consequent write down in value of maturing stocks. If Diageo is unable to accurately forecast demand for its products or efficiently manage its inventory, this may have a material adverse effect on Diageo’s business and financial results.
Contamination, counterfeiting or other events could harm the integrity of customer support for Diageo’s brands and adversely affect the sales of those brands
The success of Diageo’s brands depends upon the positive image that consumers have of those brands, and contamination, whether arising accidentally, or through deliberate third party action, or other events that harm the integrity of or consumer support for those brands, could adversely affect their sales. Diageo purchases most of the raw materials for the production and packaging of its products from third party producers or on the open market. Diageo may be subject to liability if contaminants in those raw materials or defects in the distillation, fermentation or bottling process lead to low beverage quality or illness among, or injury to, Diageo’s consumers.
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Business description (continued)
Diageo may recall products in the event of contamination or damage. A significant product liability judgement or a widespread product recall may negatively impact sales and profitability of the affected brand or all Diageo 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 and its corporate and 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 them. A bad consumer experience with such a product could cause them to refrain from purchasing Diageo brands in the future and in turn could impair brand equity, adversely affecting Diageo’s business.
Diageo’s operating resultsbusiness may be adversely affected by increased costs or shortages of talent
Diageo’s operating resultsbusiness 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’s success is dependent on the capability of its employees. There is no guarantee that Diageo will continue to be able to recruit, retain and develop the capabilities 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 the businessDiageo’s operations and could adversely affect Diageo’s operationsbusiness and financial results.
Diageo’s operating results
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Business description (continued)
Diageo may be adversely affected by disruption to production facilities, business service centres or information systems (including cyber-attack)
Diageo would be affected if there was a catastrophic failure of its major production facilities or business service centres. Diageo operates production facilities around the world. If there was a technical failure in Diageo production facilities, or fire or explosion at one of Diageo’s production facilities, it could result in damage to the facilities, plant or equipment, their surroundings and/or the local environment.environment and/or injury or loss of life. Such an event could lead to a loss in production capacity, or could result in regulatory action, legal liability or damage to Diageo’s reputation.
Diageo has a substantial inventory of aged product categories, principally Scotch whisky and Canadian whisky, which may mature over periods of up to 30 years or more. The maturing inventory is stored primarily 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 it arises. There can be no assurance that insurance proceeds would cover the replacement value of Diageo’s maturing inventory or other assets, were such assets to be lost due to contamination, fire or natural disasters, or destruction resulting from negligence or the acts of third parties. In addition, 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. A forecasting error could lead to Diageo being unable to meet future demandparties, or lead to a future surplus of inventory and consequent write down in value of maturing stocks. Any failure of information systems or Diageo’s data infrastructure could adversely impact Diageo’s ability to operate. infrastructure.
As with all large systems, Diageo’s information systems could be penetratedsubject to cyber-attack by outside parties’ intent on extracting information, corrupting information or disrupting business processes. Such unauthorised access could disrupt Diageo’s business and/or lead to loss of assets or to outside parties having access to confidential information, including privileged data or strategic information of Diageo and its employees, customers and consumers, or to making such information public in a manner that harms Diageo’s reputation. The concentration of processes in business service centres also means that any sustained disruption to the facility or issue impacting the reliability of the information systems used could impact a large portion of Diageo’s business operations and in some circumstances, could result in property damage, breaches of regulations, litigation, legal liabilities and reparation costs.
Diageo’s operations and financial results may be adversely affected by movements in the value of its pension funds, fluctuations in exchange rates and fluctuations in interest rates
Diageo hasis 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 will 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 31.9% of Diageo’s net sales in the year ended 30 June 2016 were in US dollars, approximately 11% were in euros and approximately 14.9% 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. Diageo may also 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 funds. These fundsplans
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. For example, Diageo’s deficit in respect of post-employment plans before taxation increased by £934 million from £259 million at 30 June 2015 to £1,193 million at 30 June 2016, primarily as a result of a decrease in returns from corporate bonds used to calculate the discount rates on plan liabilities. 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 significant contributions to the pension funds in the future.
40
44
Business description (continued)
Furthermore, if the market values of the assets held by Diageo’s pension funds decline, or if the valuations of those assets by the pension trustees decline or the valuation of liabilities in connection with pension expensesplans increase, then company cash contributions 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, or that pension fund assets can earn the assumed rate of return annually;annually or that the value of liabilities will not fluctuate; Diageo’s actual experience may be significantly more negative than the assumptions used.
Diageo may be adversely affected by fluctuations in exchange rates. In particular, any redenomination of the euro or its constituent parts could materially adversely affect Diageo. The results of operations of Diageo are accounted for in pounds sterling. Approximately 30% of Diageo’s net sales in the year ended 30 June 2015 were in US dollars, approximately 11% were in euros and approximately 16% were in sterling. Movements in exchange rates used to translate foreign currencies into pounds sterling may have a significant impact on Diageo’s reported results of operations from year to year. Diageo may also be adversely impacted by fluctuations in interest rates, mainly through an increased interest expense.
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 could have an adverse impact on Diageo’s salesbusiness and operating profit.financial results. In addition, Diageo’s salesbusiness and operating profitfinancial results may be adversely affected by any disputes with distributors of its products or with suppliers of raw materials.
Diageo may not be able to protect its intellectual property rights
Given the importance of brand recognition to its business, Diageo has invested considerable effort in protecting its intellectual property rights, including trademark registration and domain names. Diageo’s patents cover some of its process technology, including some aspects of its bottle marking technology. Diageo also uses security measures and agreements to protect its confidential information and trade secrets. However, Diageo cannot be certain that the steps it has taken will be sufficient or that third parties will not infringe on or misappropriate its intellectual property rights in its brands or products. Moreover, some of the countries in which Diageo operates offer less intellectual property protection than Europe or North America. Given the attractiveness of Diageo’s brands to consumers, it is not uncommon for counterfeit products to be manufactured and traded. 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 the directors of Diageo
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 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 judgements of US courts against Diageo or these persons based on the civil liability provisions of the US federal securities laws. There is doubt as to the enforceability in England and Wales, in original actions or in actions for enforcement of judgements 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.
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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 and projections with respect to future matters, including trends in resultsmatters. Examples of operations, margins, growthforward-looking statements include statements regarding exchange rates, overall market trends, the impact of changes in interest or exchange rates, the availability or cost of financing to Diageo, anticipatedsocial, political and environmental developments, consumer trends, preferences and purchasing power, overall market trends, the consequences of the referendum on the UK’s membership in the EU, and their impact on Diageo’s business operations and financial condition; statements made about Diageo’s strategy, trends in results of operations, margins, and growth rates and growth rate objectives; estimates of Diageo’s cash flows, effective interest rates, effective tax rates, cost savings, or synergies, expected investments, the completionresults of Diageo’s strategic transactionshedging instruments, cash contributions in post-employment plans, impacts of exchange rates, dividend policies and restructuring programmes, anticipated tax rates, expected cash payments,shareholders return objectives, executive compensation levels, outcomes of litigation, anticipated deficit reductions in relation to pension schemes and general economic conditions.the impact of new accounting policies on Diageo’s consolidated results and financial position. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements, including factors that are outside Diageo’s control.
These factors include, but are not limited to:
��
46
Business description (continued)
42
Business description (continued)
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 US Securities and Exchange Commission (SEC). All readers, wherever located, should take note of these disclosures.
This document includes names of Diageo’s products, which constitute trademarks or trade names which Diageo owns, or which others own and licence to Diageo for use. All rights reserved.© Diageo plc 2015.2016.
The information in this document does not constitute an offer to sell or an invitation to buy shares in Diageo plc or an invitation or inducement to engage in any other investment activities.
This document includes information about Diageo’s target debt rating. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organisation. Each rating should be evaluated independently of any other rating.
Past performance cannot be relied upon as a guide to future performance.
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Business review
Operating results 20152016 compared with 2014
1. INCOME STATEMENT
Sales and net sales
For the impact of exchange rate movements and acquisitions and disposals see pages 50–51. See ‘Group Financial Review — Key Performance Indicators — Net sales growth’ on page 47 in respect of ‘organic’ movements.
Operating costs before exceptional items and operating profit
Operating costs before exceptional items comprise cost of sales, marketing and other operating expenses. For the impact of exchange rate movements and acquisitions and disposals see pages 50–51. See ‘Group Financial Review — Key Performance Indicators — Change in operating margin’ on page 47 in respect of ‘organic’ movements.
Net finance charges, taxation and associates and joint ventures
See ‘Group Financial Review — Key Performance Indicators — Earnings per share before exceptional items’ on page 48.
Post employment plans
See ‘Group Financial Review — Key Performance Indicators — Free cash flow’ on page 49.
Exceptional items, exchange and dividend
Exceptional items comprise exceptional operating items, non-operating items and discontinued operations. See ‘Group Financial Review — Exceptional items’ on pages 51-52.
2. ANALYSIS BY REPORTING SEGMENTS
North America — see page 54
Europe — see page 58
Africa— see page 62
Latin America and Caribbean — see page 65
Asia Pacific — see page 68
Corporate — see ‘Group Financial Review — Organic growth by region’ page 46
3. CATEGORY REVIEW — PAGES 72 TO 74
44
Business review (continued)
2015
GROUP FINANCIAL REVIEW
“This is a good set of results and reflects better execution across the business. Our improved performance this year reflected bothwas driven by the volatilereturn to growth of each of our six global consumerbrands and economic environmentour US spirits business. The delivery of volume growth; 19bps of organic margin expansion; increased free cash flow; and the actions we tookdisposal of £1 billion in non-core assets, comes from driving efficiency in every aspect of the business and across every expense item to strengthen the business. Reported net sales were up with the integration of USLfuel future growth. I believe this consistent approach to growth, productivity and organic net sales flat driven by currency related challenges in specific emerging markets and embedding our sell out discipline. Our focus on cost delivered savings and drove margin expansion, prioritising cash resulted in a marked cash flow improvement and we continued to invest for the future.”will drive better value creation.
Deirdre Mahlan,Kathryn Mikells,
Chief Financial Officer
HIGHLIGHTS OF THE YEAR
Net sales declined 3.0% as organic growth in each region and acquisitions were more than offset by adverse exchange and disposals |
|
Organic net sales |
Operating profit grew 1.6% with |
Organic operating profit growth of |
Net cash from operating activities was flat, £2.5bn |
Free cash flow |
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Basic eps |
Eps before exceptional items |
Volume Net sales(i) Operating profit(ii) Operating profit before exceptionals(iii) North America Europe Africa Latin America and Caribbean Asia Pacific |
(i) | Excluding corporate net |
(ii) | Excluding corporate and ISC costs of £150 million (2015 - £139 million). |
(iii) | Excluding exceptional operating charges of £167 million (2015 - £269 million) and corporate and ISC costs before exceptional items |
Summary financial information | 2016 | 2015 | ||||||||||
Volume | EUm | 246.4 | 246.2 | |||||||||
Net sales | £million | 10,485 | 10,813 | |||||||||
Marketing | £million | 1,562 | 1,629 | |||||||||
Operating profit before exceptional items | £million | 3,008 | 3,066 | |||||||||
Exceptional operating items | £million | (167 | ) | (269 | ) | |||||||
Operating profit | £million | 2,841 | 2,797 | |||||||||
Share of associates and joint ventures profit after tax | £million | 221 | 175 | |||||||||
Non-operating items | £million | 123 | 373 | |||||||||
Net finance charges | £million | 327 | 412 | |||||||||
Tax rate | % | 17.4 | 15.9 | |||||||||
Tax rate before exceptional items | % | 19.0 | 18.3 | |||||||||
Profit attributable to parent company’s shareholders | £million | 2,244 | 2,381 | |||||||||
Basic earnings per share | pence | 89.5 | 95.0 | |||||||||
Earnings per share before exceptional items | pence | 89.4 | 88.8 | |||||||||
Recommended full year dividend | pence | 59.2 | 56.4 |
45
48
Business review (continued)
Key performance indicators | 2015 | 2014 | ||||||||
Organic net sales growth | % | — | — | |||||||
Organic operating margin improvement | basis points | 24 | 77 | |||||||
Earnings per share before exceptional items | pence | 88.8 | 95.5 | |||||||
Free cash flow | £ million | 1,963 | 1,235 | |||||||
Return on average invested capital (ROIC)(i) | % | 12.3 | 14.1 |
Growth by region | Volume | Net Sales | Marketing | Operating profit | ||||||||||||
% | % | % | % | |||||||||||||
North America | (1 | ) | 3 | – | 9 | |||||||||||
Europe, Russia and Turkey | – | (3 | ) | 4 | 2 | |||||||||||
Africa | 19 | (1 | ) | (3 | ) | (32 | ) | |||||||||
Latin America and Caribbean | (5 | ) | (16 | ) | (14 | ) | (69 | ) | ||||||||
Asia Pacific | (3 | ) | (6 | ) | (13 | ) | 112 | |||||||||
Diageo(i) | – | (3 | ) | (4 | ) | 2 |
Other financial information | 2015 reported | 2014 reported | ||||||||
Volume | EUm | 246.2 | 156.1 | |||||||
Net sales | £ million | 10,813 | 10,258 | |||||||
Marketing spend | £ million | 1,629 | 1,620 | |||||||
Operating profit before exceptional items | £ million | 3,066 | 3,134 | |||||||
Operating profit | £ million | 2,797 | 2,707 | |||||||
Share of associates and joint ventures profit after tax | £ million | 175 | 252 | |||||||
Non-operating items | £ million | 373 | 140 | |||||||
Net finance charges | £ million | 412 | 388 | |||||||
Reported tax rate | % | 15.9 | 16.5 | |||||||
Reported tax rate before exceptional items | % | 18.3 | 18.2 | |||||||
Profit attributable to parent company’s shareholders | £ million | 2,381 | 2,248 | |||||||
Basic earnings per share | pence | 95.0 | 89.7 | |||||||
Recommended full year dividend | pence | 56.4 | 51.7 |
Organic growth by region | Volume % | Net sales % | Marketing spend % | Operating profit(ii) % | Volume % | Net sales % | Marketing % | Operating profit(ii) % | ||||||||||||||||||||||||
North America | (3 | ) | (1 | ) | (4 | ) | (2 | ) | 1 | 3 | (2 | ) | 4 | |||||||||||||||||||
Europe | — | — | 2 | 3 | ||||||||||||||||||||||||||||
Europe, Russia and Turkey | 2 | 4 | 5 | 6 | ||||||||||||||||||||||||||||
Africa | 7 | 6 | 4 | 10 | 9 | 3 | 1 | (11 | ) | |||||||||||||||||||||||
Latin America and Caribbean | (7 | ) | (1 | ) | 6 | (3 | ) | (2 | ) | 1 | – | (1 | ) | |||||||||||||||||||
Asia Pacific | (3 | ) | (2 | ) | (8 | ) | 7 | – | 2 | (12 | ) | 13 | ||||||||||||||||||||
Diageo(iii) | (1 | ) | — | (1 | ) | 1 | ||||||||||||||||||||||||||
Diageo(i) | 1 | 3 | (2 | ) | 3 |
(i) |
(ii) | Before exceptional items. |
46
Business review (continued)
KEY PERFORMANCE INDICATORS
Net sales growth (£ million)
Net sales declined 3.0%. Organic net sales growth of 2.8% driven by volume and mix.
10,813 145 90 131 10,485 (172) (122) (400) Organic movement 2015 2016 Exchange(i) Volume Disposals Price/mix Acquisitions Asia Pacific net sales adjustment(ii)
(i) | Exchange rate movements reflect the translation of prior year reported results at current exchange rates. |
(ii) | Diageo has reflected the full year impact of an accounting change USL made in its most recent quarterly results to account for sales by third party manufacturers on a net sales basis. See page 54 for more details. |
Net sales declined 3.0%. Adverse impact of exchange and disposals reduced net sales by 5.3%. These movements were partially offset by organic net sales growth of 2.8% with volume growth of 1.3% and positive price/mix, primarily mix.
Net sales and operating profit were impacted by adverse exchange movements driven by the weakness of a number of currencies against sterling, in particular the Nigerian naira, the South African rand, the Venezuelan bolivar, the Brazilian real and the Turkish lira, partially offset by the strengthening of the US dollar.
49
Business review (continued)
Operating profit growth (£ million)
Operating profit growth of 1.6%. Organic operating profit growth of 3.5%.
102 99 2,841 2,797 22 (83) (96) 2015 2016 Exceptional operating items Acquisitions Exchange Organic movement Disposals
Operating profit growth of 1.6% was driven by organic growth, acquisitions and lower exceptional operating charges (£167 million in 2016; £269 million in 2015). These movements were partially offset by adverse exchange and the impact of disposals.
Acquisitions and disposals
Acquisitions made in 2015 increased net sales in the year ended 30 June 2016 by £90 million and operating profit by £22 million, largely due to the acquisition of the remaining 50% shareholdings in Don Julio and United National Breweries.
Businesses which were disposed of in the year ended 30 June 2015, primarily Bushmills and Gleneagles, and those disposed of in the year ended 30 June 2016, the sale of wines and certain beer assets, contributed net sales of £655 million and operating profit of £121 million in the period ended 30 June 2015, and contributed net sales of £255 million and operating profit of £25 million in the period ended 30 June 2016. The year on year movement on net sales was £400 million and £96 million on operating profit.
Operating margin (%)
Operating margin improved by 123bps. Organic margin improved by 19bps.
78bps 55bps 33bps 27.10% 89bps 14bps 25.87% (114)bps (32)bps Organic movement 2015 2016 Exceptional operating items Marketing Exchange Overheads Acquisitions and disposals Asia Pacific net sales adjustment(i) Gross margin
(i) | Diageo has reflected the full year impact of an accounting change USL made in its most recent quarterly results to account for sales by third party manufacturers on a net sales basis. It has no impact on gross profit or operating profit. See page 54 for more details. |
50
Business review (continued)
Operating margin improved by 123bps mainly driven by lower exceptional operating charges, a 19bps improvement in organic margin and the net sales adjustment in Asia Pacific. These movements were partially offset by an adverse exchange impact. Organic operating margin improvement was driven by favourable mix, including the return to growth in North America which drove gross margin improvement, as well as net procurement efficiencies after reinvestment in increased marketing activity. These benefits were partially offset by higher overheads driven by a year on year increase in annual incentive plan costs and inflation.
Basic earnings per share (pence)
Eps decreased to 89.5 pence. Eps before exceptional items increased from 88.8 pence to 89.4 pence
95.0 3.39 89.5 3.95 1.83 (6.14) (1.37) (0.82) (3.33) (2.97) 2015 2016 Exceptional items(i) Associates and joint ventures Exchange on operating profit Finance charges Acquisitions and disposals Tax Operating profit excluding Non-controlling interests exchange 950339895395183(614)(137)(082)(333)(297)20152016Exceptionalitems(i)AssociatesandjointventuresExchangeonoperatingprofitFinancechargesAcquisitionsanddisposalsTaxOperatingprofitexcludingNon-controllinginterestsexchange
(i) | Exceptional items net of tax and non-controlling interests. |
Lower exceptional income (net of tax and non-controlling interests) (£2 million in 2016; £156 million in 2015) reduced basic earnings per share by 6.1 pence. Pre-exceptionals eps was up 0.6 pence as adverse exchange, net impact of acquisitions and disposals, a higher tax rate and the increase in non-controlling interests from higher operating profit in USL, were more than offset by organic operating profit growth, higher associate income and lower finance charges. Finance charges were lower on the fall in both net interest charge and other financing charges. Net interest charges declined from debt reduction and lower interest rates. Other finance charges dropped due to lower hyperinflation charge for Venezuela as we moved to a consolidation rate which recognised the impact of the inflation rate as well as the impact of lapping a £13 million charge in 2015 in respect of an increase in value of Zacapa related financial liabilities.
Movement in net finance charges | £ million | |||||||
2015 |
| 412 | ||||||
Net interest charge reduction |
| (51 | ) | |||||
Reduction in other finance charges |
| (34 | ) | |||||
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2016 |
| 327 | ||||||
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2016 | 2015 | |||||||
Average monthly net borrowings (£ million) | 9,245 | 10,459 | ||||||
Effective interest rate(i) | 3.3 | % | 3.5 | % |
(i) | For the calculation of the effective interest rate, the net interest charge excludes fair value adjustments to derivative financial instruments and borrowings. Average monthly net borrowings include the impact of interest rate swaps that are no longer in a hedge relationship but excludes the market value adjustment for cross currency interest rate swaps. |
The fall in average monthly net borrowings arose from disposals proceeds and continued strong cash flow. The effective interest rate reduced in the year ended 30 June 2016 largely driven by changes in financing in USL together with the repayment of Diageo bonds with a higher interest rate.
51
Business review (continued)
Net cash from operating activities and free cash flow (£ million)
Net cash from operating activities(i) was £2,548 million in 2016 a decline of £3 million on £2,551 million in 2015.
2,551 (83) 152 (170) 93 5 2,548 2015 2016 Exchange(ii) Operating profit(iii) Working capital Interest and tax Other(iv)
Free cash flow was £2,097 million in 2016 an increase of £134 million.
1,963 137 152 93 5 2,097 (83) (170) 2015 2016 Capex Working capital movement Exchange (ii) Interest and tax Operating profit (iii) Other (iv)
(i) | Net cash from operating activities excludes capex, loans and other investments (collectively £(451) million in 2016 – £(588) million in 2015). |
(ii) | Exchange – on operating profit before exceptional items. |
(iii) | Operating profit excluding exchange, depreciation and amortisation, post employment payments and non-cash items but including operating exceptional items. |
(iv) | Other items include post employment payments, dividends received from associates and joint ventures. |
Net cash from operating activities declined by £3 million driven by negative working capital movement, partially offset by increased operating profit and lower interest payments.
The negative working capital movement was driven by the year on year comparison to a significant reduction in receivables in 2015. This was partially offset by a favourable movement on inventory and payables.
Free cash flow improved £134 million driven by lower capex, increased operating profit before exchange, and lower interest payments, partially offset by negative working capital movement.
52
Business review (continued)
Return on invested capital (%)
The return on closing invested capital of 23.2% for the year ended 30 June 2016, calculated as profit for the year divided by net assets as of 30 June 2016, decreased by 350bps principally due to the increase in net assets driven by the weakening of sterling against a number of currencies partially offset by an increase in post employment liabilities.
Return on average invested capital (ROIC)(i) decreased 22bps
12.3% 14bps 12.1% 3bps 47bps (8)bps (62)bps (16)bps 2015 2016 Exchange Associates and joint ventures Acquisitions and disposals Non-controlling interests Operating profit excluding Other exchange
(i) | ROIC calculation excludes exceptional items. |
ROIC before exceptional items decreased 22bps driven mainly due to the adverse impact of exchange which was partially offset by the increased return from growth in operating profit and income from associates.
53
Business review (continued)
Income statement
2015 £ million | Exchange (a) £ million | Acquisitions and disposals (b) £ million | Organic movement(ii) £ million | Reclassifi- cation(iii) £ million | 2016 £ million | |||||||||||||||||||
Sales | 15,966 | (360 | ) | (362 | ) | 397 | – | 15,641 | ||||||||||||||||
Excise duties | (5,153 | ) | 188 | 52 | (121 | ) | (122 | ) | (5,156 | ) | ||||||||||||||
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Net sales | 10,813 | (172 | ) | (310 | ) | 276 | (122 | ) | 10,485 | |||||||||||||||
Cost of sales(i) | (4,585 | ) | 68 | 200 | (56 | ) | 122 | (4,251 | ) | |||||||||||||||
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Gross profit | 6,228 | (104 | ) | (110 | ) | 220 | – | 6,234 | ||||||||||||||||
Marketing | (1,629 | ) | 13 | 17 | 37 | – | (1,562 | ) | ||||||||||||||||
Other operating expenses(i) | (1,533 | ) | 8 | 19 | (158 | ) | – | (1,664 | ) | |||||||||||||||
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Operating profit before exceptional items | 3,066 | (83 | ) | (74 | ) | 99 | – | 3,008 | ||||||||||||||||
Exceptional operating items (c) | (269 | ) | (167 | ) | ||||||||||||||||||||
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Operating profit | 2,797 | 2,841 | ||||||||||||||||||||||
Non-operating items (c) | 373 | 123 | ||||||||||||||||||||||
Net finance charges | (412 | ) | (327 | ) | ||||||||||||||||||||
Share of after tax results of associates and joint ventures | 175 | 221 | ||||||||||||||||||||||
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Profit before taxation | 2,933 | 2,858 | ||||||||||||||||||||||
Taxation (d) | (466 | ) | (496 | ) | ||||||||||||||||||||
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Profit for the year | 2,467 | 2,362 | ||||||||||||||||||||||
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(i) | Before exceptional operating items, see pages 55-56. |
(ii) | For the definition of organic movement see page 133. |
(iii) | Following a review of the third party production arrangements in India it was determined to be more appropriate to ensure consistent reporting by reclassifying the excise duties payable by the third party production companies as excise duties. This change was implemented by USL in its first three months of its financial year ended 30 June 2016, and resulted in net sales for the year ended 30 June 2016 reducing by £122 million with a corresponding decrease in cost of sales. There was no impact on gross or operating profit. |
(a) Exchange
The impact of movements in exchange rates on reported figures is principally in respect of the Nigerian naira, the South African rand, the Venezuelan bolivar, the Brazilian real and the Turkish lira, partially offset by the US dollar.
Venezuela is a hyper-inflationary economy where the government maintains a regime of strict currency controls with multiple foreign currency rate systems. Access to US dollar 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 (VEF) at the rate they are expected to be settled, applying the most appropriate official exchange rate. For consolidation purposes, the group converts its Venezuelan operations using management’s estimate of the exchange rate that capital and dividend repatriations are expected to be realised. The consolidation exchange rate and the accounting treatment are monitored and reviewed depending on the economic and regulatory developments in the country.
The effect of movements in exchange rates and other movements on profit before exceptional items and taxation for the year ended 30 June 2016 is set out in the table below.
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Business review (continued)
Gains/ (losses) £ million | ||||
Translation impact | (13 | ) | ||
Transaction impact | (70 | ) | ||
Operating profit before exceptional items | (83 | ) | ||
Net finance charges – translation impact | (17 | ) | ||
Mark to market impact of IAS 39 on interest expense | (9 | ) | ||
Impact of IAS 21 and IAS 39 on net other finance charges | 2 | |||
Net finance charges | (24 | ) | ||
Associates – translation impact | (4 | ) | ||
Profit before exceptional items and taxation | (111 | ) | ||
Year ended 30 June 2016 | Year ended 30 June 2015 | |||||||
Exchange rates | ||||||||
Translation £1 = | $1.48 | $1.57 | ||||||
Transaction £1 = | $1.55 | $1.58 | ||||||
Translation £1 = | €1.34 | €1.31 | ||||||
Transaction £1 = | €1.28 | €1.23 |
(b) Acquisitions and disposals
The impact of acquisitions and disposals on the reported figures was primarily attributable to the disposals of The Old Bushmills Distillery Company Limited on 27 February 2015, Gleneagles Hotels Limited on 30 June 2015, Desnoes & Geddes Limited (D&G) on 7 October 2015, the wine businesses in the United States and the UK Percy Fox wine business on 1 January 2016, which were partially offset by the acquisition of 50% equity interests, that the group did not own, in both Don Julio in Mexico on 27 February 2015 and a joint venture in South Africa on 29 May 2015.
(c) Exceptional items
Exceptional operating charges in the year ended 30 June 2016 totalled £167 million before tax, a decrease of £102 million against last year.
Exceptional operating charges in the year ended 30 June 2016 included an impairment charge in respect of the Ypióca brand and related tangible fixed assets and goodwill allocated to the Paraguay, Uruguay and Brazil (PUB) cash-generating unit of £62 million, £14 million and £42 million, respectively. Forecast cash flow assumptions have been reduced principally due to a challenging economic environment in Brazil and significant adverse changes in local tax regulation.
On 25 February 2016 the group incurred an exceptional operating charge of £49 million including a $75 million
(£53 million) payment to Dr Vijay Mallya over a five year period in consideration for (i) his resignation and the termination of his appointment and governance rights and his relinquishing of the rights and benefits attached to his position as Chairman and Non-Executive Director of United Spirits Limited (USL); (ii) his agreement to five-year global non-compete (excluding the United Kingdom), non-interference, non-solicitation and standstill undertakings; and (iii) his agreement that he and his affiliates will not pursue any claims against Diageo, USL and their affiliates. In addition to the amount Diageo agreed to pay Dr Vijay Mallya there was net gain of £4 million arising from the termination of certain related agreements, that were previously provided for less legal fees directly attributable to the settlement.
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Business review (continued)
In the year ended 30 June 2015 exceptional operating charges were £269 million before tax which comprised £146 million in respect of a settlement agreement of disputes with the Korean customs authorities, £82 million in respect of restructuring programmes and an exceptional impairment charge of £41 million in respect of the group’s 45.56% equity investment in Hanoi Liquor Joint Stock Company.
Non-operating items in the year ended 30 June 2016 were a net gain of £123 million before tax compared to a gain of £373 million before tax last year, a decrease of £250 million against last year.
The year ended 30 June 2016 included an exceptional gain before taxation of £457 million in respect of the sale of Diageo’s 57.87% shareholding in D&G (Jamaican Red Stripe business) and a 49.99% stake in GAPL Pte Limited (Singapore and Malaysian beer businesses) to Heineken, which completed on 7 October 2015. The gain is net of a £13 million cumulative exchange loss, in respect of prior years, recycled from other comprehensive income and transaction costs of £7 million. As part of the transaction, Diageo purchased an additional 20% shareholding in Guinness Ghana Breweries Limited (GGBL) from Heineken which increased Diageo’s shareholding in GGBL to 72.42%.
On 1 January 2016, Diageo completed the sale of the majority of its wine interests in the United States and its UK based Percy Fox businesses to Treasury Wine Estates. Together with the sale of the group’s other wine interests in the United States the transactions resulted in a loss before taxation on disposal of £191 million including an estimated provision for the settlement of a guarantee given in respect of the lease payments due to Realty Income Corporation, the lessor of the vineyards. The loss is net of an exchange gain of £12 million, in respect of prior years, recycled from other comprehensive income and transaction costs of £8 million.
On 29 January 2016, Diageo disposed of its interests in Argentina to Grupo Peñaflor. The transaction resulted in a loss before taxation of £38 million including a cumulative exchange loss of £20 million, in respect of prior years, recycled from other comprehensive income and other directly attributable costs of £7 million.
On 1 December 2015, Diageo disposed of its 42.25% equity interests in DHN Drinks, its 25% equity stake in Sedibeng Breweries Limited and its 15.01% equity stake in Namibia Breweries Limited (South African associate interests) to Heineken. The net cash consideration received was £120 million, which included the repayment of £31 million in respect of loans previously made to DHN Drinks and Sedibeng Breweries Limited. A loss before taxation of £27 million, including a £30 million cumulative exchange loss, in respect of prior years, recycled from other comprehensive income, was accounted for in the income statement.
On 30 September 2015, the group completed the disposal of its shareholding in Central Glass Industries Limited (CGI), a Kenyan glass bottle manufacturer, resulting in a gain before taxation of £14 million, net of £1 million transaction costs. £7 million of the gain is attributable to non-controlling interests.
A guarantee provided by Diageo for a loan of $135 million (£92 million) given by Standard Chartered Bank (SCB) to Watson Limited was called and $135 million paid to SCB during the year. The underlying security package for the loan remains in place. A provision of $135 million has been made. Further details are set out in note 18.
In the year ended 30 June 2015 non-operating items included a gain of £63 million as a result of Don Julio becoming a subsidiary of the group and as part of the transaction, Diageo sold its wholly owned subsidiary, The Old Bushmills Distillery Company Limited to the Cuervo group, resulting in a gain of £174 million. A gain of £103 million arose on the increase of the group’s investment in United Spirits Limited (USL) from 25.02% to 54.78% (excluding the 2.38% interest owned by USL Benefit Trust). On 30 June 2015, Diageo completed the disposal of Gleneagles Hotel Limited to the Ennismore group resulting in an exceptional gain of £73 million. In addition a provision of £30 million was charged to the income statement in respect of a guarantee provided to a third party financial institution.
Cash payments in the year ended 30 June 2016 for exceptional restructuring, for the payment in respect of the Watson guarantee (reported in ’movements in loans and other investments’ in the consolidated statement of cash flows), for disengagement agreements relating to United Spirits Limited and for thalidomide were £52 million, £92 million, £28 million and £12 million, respectively. In the comparable period the cash expenditure for exceptional restructuring, for the legal settlement in Korea, for the guarantee and for thalidomide were £117 million, £74 million, £30 million and £19 million, respectively.
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Business review (continued)
(d) Taxation
The reported tax rate for the year ended 30 June 2016 was 17.4% compared with 15.9% for the year ended 30 June 2015. The tax rate before exceptional items for the year ended 30 June 2016 was 19.0% compared with 18.3% in the prior year. It is expected that the tax rate before exceptional items for the year ending 30 June 2017 will be 21%.
(e) Dividend
The group aims to increase the dividend at each half-year and the decision as to the rate of the dividend increase is made with reference to dividend cover as well as the current performance trends including top and bottom line together with cash generation. Diageo targets dividend cover (the ratio of basic earnings per share before exceptional items to dividend per share) within the range of 1.8-2.2 times. For the year ended 30 June 2015 dividend cover was 1.6 times. Beginning with the interim dividend for the year ended 30 June 2016 we slowed growth to 5% consistent with our focus on stabilising and rebuilding dividend cover. The recommended final dividend for the year ended 30 June 2016 is 36.6 pence, an increase of 5% consistent with our interim dividend. This brings the full year dividend to 59.2 pence per share and dividend cover to 1.5 times. We would expect to maintain dividend increases at roughly a mid-single digit rate until cover is back in range.
Subject to approval by shareholders, the final dividend will be paid to holders of ordinary shares and ADRs on the register as of 12 August 2016. The ex-dividend date for the holders of the ordinary shares is 11 August 2016, and 10 August 2016 for US ADR holders. The final dividend will be paid to shareholders on 6 October 2016. Payment to US ADR holders will be made on 12 October 2016. A dividend reinvestment plan is available to holders of ordinary shares in respect of the final dividend and the plan notice date is 15 September 2016.
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Business review (continued)
Movements in net borrowings and equity
Movement in net borrowings | 2016 £ million | 2015 £ million | ||||||
Net borrowings at the beginning of the year | (9,527 | ) | (8,850 | ) | ||||
Free cash flow (a) | 2,097 | 1,963 | ||||||
Acquisition and sale of businesses (b) | 1,047 | (306 | ) | |||||
Proceeds from issue of share capital | 1 | 1 | ||||||
Net purchase of own shares for share schemes (c) | (1 | ) | (8 | ) | ||||
Dividends paid to non-controlling interests | (101 | ) | (72 | ) | ||||
Purchase of shares of non-controlling interests (d) | (21 | ) | – | |||||
Disposal of non- controlling interests | – | 1 | ||||||
Net movements in bonds (e) | (1,003 | ) | (701 | ) | ||||
Net movements in other borrowings (f) | (233 | ) | 386 | |||||
Equity dividends paid | (1,443 | ) | (1,341 | ) | ||||
|
|
|
| |||||
Net increase/(decrease) in cash and cash equivalents | 343 | (77 | ) | |||||
Net decrease in bonds and other borrowings | 1,236 | 315 | ||||||
Exchange differences (g) | (725 | ) | (7 | ) | ||||
Borrowings on acquisition of businesses | – | (869 | ) | |||||
Borrowings disposed through sale of businesses | 14 | – | ||||||
Other non-cash items | 24 | (39 | ) | |||||
|
|
|
| |||||
Net borrowings at the end of the year | (8,635 | ) | (9,527 | ) | ||||
|
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|
(a) See page 138 for the analysis of free cash flow.
(b) Acquisitions and sale of businesses include the disposal of the group’s shareholdings in D&G and GAPL on 7 October 2015 for a net cash consideration, including disposal costs, of $783 million (£510 million); the disposal of the group’s equity stake in its South African associate interests on 1 December 2015 for a cash consideration of ZAR 2,517 million (£119 million), net of disposal costs; the disposal of the group’s wine interests in the United States and its UK based Percy Fox for a cash consideration of $551 million (£375 million), net of disposal costs; and the proceeds from the sale of CGI, a Kenyan glass manufacturer, for KES 3,931 million (£25 million), net of disposal costs.
In the year ended 30 June 2015 cash payments primarily comprised £1,118 million in respect of the acquisition of additional 26% investment in USL and £192 million for the 50% equity interest in Don Julio BV that it did not already own, partially offset by cash received of £391 million in respect of sale of the Whyte and Mackay Group and £456 million on the sale of equity share capital in The Old Bushmills Distillery Company Limited.
(c) Net purchase of own shares comprised purchase of treasury shares for the future settlement of obligations under the employee share option schemes of £47 million (2015 – £75 million) less receipts from employees on the exercise of share options of £46 million (2015 – £67 million).
(d) In the year ended 30 June 2016 Diageo purchased an additional 20% shareholding in Guinness Ghana Breweries Limited for £21 million.
(e) In the year ended 30 June 2016, the group repaid bonds of $1,500 million (£1,003 million). In the comparable period, the group repaid bonds of €1,000 million (£792 million) and $500 million (£330 million), issued bonds of €1,000 million (£791 million), and a bond of £370 million acquired on the purchase of USL was repaid using the proceeds from the sale of the Whyte and Mackay Group.
(f) Net movements in other borrowings are driven by the net repayment of short term commercial paper.
(g) Net borrowings increased because of unfavourable exchange differences primarily on the US dollar and euro denominated borrowings partially offset by a favourable movement on foreign exchange swaps and forwards.
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Business review (continued)
Movement in equity | 2016 £ million | 2015 £ million | ||||||
Equity at the beginning of the year | 9,256 | 7,590 | ||||||
Profit for the year | 2,362 | 2,467 | ||||||
Exchange adjustments (a) | 875 | (225 | ) | |||||
Net remeasurement of post employment plans | (856 | ) | 113 | |||||
Tax on post employment plans | 166 | (11 | ) | |||||
Exchange recycled to the income statement (b) | 51 | 88 | ||||||
Fair value movements on available-for-sale investments | (20 | ) | 20 | |||||
Non-controlling interests acquired (b) | — | 641 | ||||||
Purchase of shares of non-controlling interests | (21 | ) | — | |||||
Disposal of non- controlling interest | (24 | ) | — | |||||
Dividends to non- controlling interests | (101 | ) | (72 | ) | ||||
Dividends paid | (1,443 | ) | (1,341 | ) | ||||
Other reserve movements | (65 | ) | (14 | ) | ||||
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Equity at the end of the year | 10,180 | 9,256 | ||||||
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(a) Movement in the year ended 30 June 2016 primarily arose from exchange gains in respect of the Indian rupee, Turkish lira, US dollar and euro.
(b) In the year ended 30 June 2016 exchange losses of £51 million were recycled to the income statement in respect of disposals.
In the year ended 30 June 2015 following the acquisition of majority equity stakes in USL, 50% equity interest in Don Julio and one of the group’s joint ventures in South Africa that it did not already own exchange losses of £88 million were recycled to the income statement and on the acquisition of USL a 43.91% non-controlling interest of £641 million was recognised.
Post employment plans
The deficit in respect of post employment plans before taxation increased by £934 million from £259 million at 30 June 2015 to £1,193 million at 30 June 2016. The increase primarily arose due to a decrease in returns from ‘AA’ rated corporate bonds used to calculate the discount rates on the liabilities of the post employment plans (United Kingdom reduced from 3.8% to 2.9% and Ireland from 2.6% to 1.4%) partially offset by a reduction in long term inflation rates (UK RPI from 3.2% to 2.8%, UK CPI from 2.2% to 1.8% and Ireland CPI from 1.6% to 1.4%). Total cash contributions by the group to all post employment plans in the year ending
30 June 2017 are estimated to be approximately £200 million.
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Business review (continued)
NORTH AMERICA
North America, the largest market for premium drinks in the world, accounts for about a third of our net sales and around half of operating profit. North America continues to be a very vibrant market and we are focused on setting the business up for long-term growth. In the year, we disposed of our wine assets in the United States, and our new management team have made a number of changes to refocus marketing activity, upweight on premise activity, and enhance distributor relationships.
Net sales by markets Net sales by categories Net sales by price points (%) (%) (%) US Spirits Canada Spirits(i) RTDs Value Super premium and Wines Other Beer Other Standard Ultra premium DGUSA Wine Premium (i) excluding RTDs |
(i) excluding RTDs
Key financials | 2015 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2016 £ million | Reported movement % | ||||||||||||||||||
Net sales | 3,455 | 172 | (159 | ) | 97 | 3,565 | 3 | |||||||||||||||||
Marketing | 542 | 23 | (14 | ) | (10 | ) | 541 | — | ||||||||||||||||
Operating profit before exceptional items | 1,448 | 77 | (30 | ) | 56 | 1,551 | 7 | |||||||||||||||||
Exceptional operating items | (28 | ) | — | |||||||||||||||||||||
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Operating profit | 1,420 | 1,551 | 9 | |||||||||||||||||||||
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Our markets
North America business is headquartered in Norwalk, Connecticut, and comprises US Spirits, Diageo Guinness USA (DGUSA) and Diageo Canada.
Supply operations
We have nine bottling, distilling, blending and maturation sites including operations in Plainfield, Illinois; Amherstburg, Ontario; Valleyfield, Quebec; Relay, Maryland; Gimli, Manitoba; Tullahoma, Tennessee and Louisville, Kentucky. Over the last five years, we have made significant changes to our supply footprint in North America as we focus on continuously improving efficiency across our supply chain. Since 2010 we have invested more than $250 million (£160 million) in our network and people to deliver world-class manufacturing and packaging operations.
Route to consumer
Route to consumer in the United States is through the three-tier system and we distribute our products through approximately 40 spirits distributors and brokers, and more than 400 beer distributors. We have a unique route to consumer for our spirits business in the United States, with approximately 3,000 dedicated distributor sales people focused only on Diageo and Moët Hennessy spirits brands. We consolidate our US Spirits business into a single distributor or broker in 41 states and the District of Columbia, representing more than 80% of our US Spirits volume.
The US Spirits business operates through three divisions in open states where we sell to distributors who then sell to retailers, and through two division in control states where we sell to the state, which in turn sells to state or agency stores and on premise retailers. DGUSA sells and markets brands including Guinness and Smirnoff Ice. Beer distribution generally follows the three-tier open state regulations across the United States. Diageo Canada distributes our collection of spirits and beer brands across all Canadian provinces, which generally operate through a provincial control system. Diageo Canada operates through a single broker with a dedicated sales force handling our brands in the country. National brand strategy, strategic accounts marketing and corporate functions are managed at the North America level.
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Business review (continued)
Sustainability and responsibility
Through our focus on responsible drinking we have built a reputation as a leading voice in the industry in North America, our largest market. 2015 saw the successful culmination of our 12-year campaign for alcohol companies to be allowed to include alcohol content and nutritional information per serve on packaging. In October we followed this by putting macro nutritional labels on our Crown Royal packaging – a first for any alcohol company.
Operational sustainability is another key issue for us. We have introduced rigorous water management procedures across our North America sites. For example, at our George Dickel distillery in Tullahoma, Tennessee, all water is either reused or returned to the local water source without impact, resulting in zero wastewater leaving the site. Our focus on improving energy efficiency and reducing carbon emissions has made North America Diageo’s best-performing region for this metric.
Performance
Net sales
Net sales were £3,565 million in the year ended 30 June 2016 an increase of £110 million compared to net sales of £3,455 million in the year ended 30 June 2015. Net sales were favourably impacted by exchange rate movements of £172 million primarily due to the strength of the US dollar against sterling and organic growth of £97 million (see further performance analysis below) partially offset by the loss of £159 million of net sales due to disposal of the wine businesses in the United States in January 2016 and Bushmills in February 2015.
Operating profit
Operating profit was £1,551 million in the year ended 30 June 2016 an increase of £131 million compared to operating profit of £1,420 million in the year ended 30 June 2015. Operating profit benefited £77 million from exchange rate movements due to the strength of the US dollar and organic growth of £56 million, partially offset by the loss of £30 million operating profit on the disposal of the wine businesses in the United States in January 2016 and Bushmills in February 2015. No exceptional operating charges were recorded in the year ended 30 June 2016 compared to £28 million restructuring cost in the year ended 30 June 2015.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
North America delivered net sales growth of 3%, following the expected strong performance in the second half in US Spirits. Full year depletion and net sales growth in US Spirits was 3%. Growth in North American whisk(e)y, scotch and tequila drove positive mix. North American whisk(e)y, with net sales up 6%, was the main driver of net sales growth as Crown Royal and Bulleit continued to gain share in the category. Performance of Smirnoff and Captain Morgan improved, with net sales up 2% for both brands. In scotch, Johnnie Walker and Buchanan’s both performed well, with net sales up 7% and 9%, respectively. Reserve brands performance also improved, with net sales up 5%, driven by Johnnie Walker reserve variants, Bulleit, Don Julio and Ketel One vodka. Elsewhere in the region DGUSA net sales grew 1%, with growth in ready to drink offsetting a decline in beer, and in Canada net sales were up 4%. Marketing in North America was down 2% as a result of procurement efficiencies and more focused spend on innovation. Operating margin increased 39bps for the year, as improvement in gross margin and lower marketing more than offset higher overheads.
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
North America | 1 | (1 | ) | 3 | 3 | |||||||||||
US Spirits | 1 | (1 | ) | 3 | 4 | |||||||||||
DGUSA | — | (3 | ) | 1 | 5 | |||||||||||
Canada | 2 | 2 | 4 | (5 | ) | |||||||||||
Spirits(i) | 1 | 1 | 3 | 8 | ||||||||||||
Beer | (3 | ) | (7 | ) | (2 | ) | (2 | ) | ||||||||
Ready to drink | 4 | 1 | 5 | 7 |
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Business review (continued)
Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Crown Royal | 6 | 6 | 12 | |||||||||||||
Smirnoff | 1 | 2 | 6 | |||||||||||||
Captain Morgan | 3 | 2 | 6 | |||||||||||||
Johnnie Walker | — | 5 | 10 | |||||||||||||
Ketel One vodka | 2 | 4 | 10 | |||||||||||||
Cîroc | (6 | ) | (7 | ) | (1 | ) | ||||||||||
Baileys | (2 | ) | — | 4 | ||||||||||||
Guinness | — | — | 5 | |||||||||||||
Tanqueray | 5 | 7 | 13 | |||||||||||||
Don Julio | 30 | 34 | 42 | |||||||||||||
Bulleit | 25 | 28 | 36 | |||||||||||||
Buchanan’s | 3 | 9 | 16 |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement. |
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Business review (continued)
EUROPE, RUSSIA AND TURKEY
Diageo is the largest premium drinks business in Europe. Within the geography of Europe there are three markets: Europe, Russia and Turkey. In Europe consumer marketing programmes are developed at a market level to drive consistency, efficiency and scale across all countries. In Russia we are driving our premium core, standard and value brands and reserve portfolio, whilst in Turkey, we use our local businesses’ strong route to consumer to drive accelerated growth in international premium spirits. In Europe our reputation as a trusted and respected company and for groundbreaking innovation, is key to our ability to attract and retain the people we need to deliver our Performance Ambition.
Net sales by markets Net sales by categories Net sales by price points (%) (%) (%) Europe Turkey Spirits(i) RTDs Value Super premium Russia Other Beer Other Standard Ultra premium Wine Premium (i) excluding RTDs |
(i) excluding | RTDs |
Key financials | 2015 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2016 £ million | Reported movement % | ||||||||||||||||||
Net sales | 2,617 | (87 | ) | (88 | ) | 102 | 2,544 | (3 | ) | |||||||||||||||
Marketing | 388 | 1 | (5 | ) | 20 | 404 | 4 | |||||||||||||||||
Operating profit before exceptional items | 804 | (24 | ) | (24 | ) | 45 | 801 | — | ||||||||||||||||
Exceptional operating items | (20 | ) | — | |||||||||||||||||||||
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Operating profit | 784 | 801 | 2 | |||||||||||||||||||||
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Our markets
Europe comprises Great Britain, Ireland and Continental Europe (including Iberia, France, Germany and the Europe Partner markets distribution businesses), while Russia and Turkey are standalone markets. Europe is managed as a single market with country teams focusing on sales and customer marketing execution.
Supply operations
The International Supply Centre (ISC) comprises the supply operations in the United Kingdom, Ireland and Italy. The group owns 29 whisky distilleries in Scotland, a Dublin based brewery, maturation and packaging facilities in Scotland, England, Ireland and Italy. The ISC ships whisky, vodka, gin, rum, beer, wine, cream liqueurs, and other spirit-based drinks to over 180 countries. Through our £1 billion investment in Scotch whisky production and inventory, announced in 2012, distilling capacity has increased by over 25%. Raki, vodka and wine are produced at a number of sites in Turkey and Smirnov vodka and other local brands are produced in Russia.
Route to consumer
In Great Britain we sell and market our products through Diageo GB (spirits, beer and ready to drink) and Justerini & Brooks Retail (wines private clients). Products are distributed through independent wholesalers and directly to retailers. In the on-trade, products are sold through major brewers, multiple retail groups and smaller regional independent brewers and wholesalers. On 1 January 2016 we sold our Percy Fox wines distribution business.
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.
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Business review (continued)
In Continental Europe, we distribute our spirits brands primarily through our own distribution companies, apart from France where products are sold through a joint venture arrangement with Moët Hennessy and Europe Partner markets where we use third party distributors.
Europe Partner Markets distributes our beer brands in mainland Europe, focusing on Germany, Russia and France, our largest mainland European beer markets.
In Russia we operate through wholly owned subsidiaries.
In Turkey, we sell our products via the distribution network of Mey İçki, our wholly owned subsidiary. Mey İçki distributes both local brands (raki, other spirits and wine) and Diageo’s global spirits brands.
Sustainability and responsibility
Promoting responsible drinking is both a key issue and a key strength for us, in a region where concern over harmful drinking is high on the public agenda. The work we are doing in support of the Global Producers’ Commitments includes partnering with industry colleagues on a responsible marketing pact, as well as our own responsible drinking programmes. This work makes an important contribution to the promotion of alcohol as part of a balanced lifestyle, while also enhancing our reputation.
This reputational aspect is essential in a region where people increasingly want to work for companies that they believe make a positive social and environmental, as well as economic, contribution. Our manufacturing operations, notably our distilleries in Scotland and our Guinness brewery in Ireland, aim for leadership in safety standards and environmental sustainability.
Performance
Net sales
Net sales were £2,544 million for the year ended 30 June 2016 a decrease of £73 million compared to net sales of £2,617 million in the year ended 30 June 2015. Net sales were adversely impacted by £87 million exchange rate movements driven mainly by the Turkish lira, euro and Russian rouble, and £88 million following the disposal of the Percy Fox wine business in January 2016 and Bushmills in February 2015, partially offset by organic growth of £102 million (see further performance analysis below).
Operating profit
Operating profit was £801 million in the year ended 30 June 2016 an increase of £17 million compared to operating profit of £784 million in the year ended 30 June 2015. Operating profit was negatively impacted by £24 million exchange rate movements principally due to the weakening of the Turkish lira, euro and Russian rouble against sterling and £24 million loss due to the disposal of the Percy Fox wine business in January 2016 and Bushmills in February 2015 offset by organic growth of £45 million. No exceptional operating charges were recorded in the year ended 30 June 2016 compared to £20 million restructuring costs in the year ended 30 June 2015.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
The region’s performance reflects momentum in Europe, strong net sales growth in Russia driven by price increases in a tough economic and exchange environment and good growth in Turkey. In Europe, net sales were up 3% with Great Britain and Continental Europe the main contributors and with share gains across the market. Baileys performed strongly driven by execution against core growth drivers, especially sampling. Guinness net sales were up 2% supported by innovations from ‘The Brewers Project’ and Tanqueray grew net sales double digit in most countries across Europe. Reserve brands continued to perform well also growing
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Business review (continued)
double digit. In Russia, price increases led to net sales increase of 27% while volume was down 9%, with share gains in rum but share losses in scotch in the face of increased competition. In Turkey net sales were up 6% driven by Johnnie Walker underpinned by steady growth in raki at 3%. Gross margins were up in both Europe and Russia. Overall region operating margins improved by 51bps. In Europe procurement savings offset increased marketing and overheads leaving margin improvement in Russia to drive the region’s increase.
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
Europe, Russia and Turkey | 2 | — | 4 | (3 | ) | |||||||||||
Europe | 4 | — | 3 | (2 | ) | |||||||||||
Russia | (9 | ) | (12 | ) | 27 | (12 | ) | |||||||||
Turkey | (2 | ) | (2 | ) | 6 | (7 | ) | |||||||||
Spirits(i) | 2 | 1 | 6 | — | ||||||||||||
Beer | 2 | — | — | (2 | ) | |||||||||||
Ready to drink | 2 | 2 | (3 | ) | (2 | ) | ||||||||||
Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Guinness | 4 | 2 | 1 | |||||||||||||
Johnnie Walker | 3 | 7 | 3 | |||||||||||||
Smirnoff | — | 1 | — | |||||||||||||
Baileys | 5 | 9 | 6 | |||||||||||||
Yenì Raki | 1 | 4 | (9 | ) | ||||||||||||
Captain Morgan | 8 | 9 | 5 | |||||||||||||
JeB | (3 | ) | (4 | ) | (6 | ) |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement. |
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Business review (continued)
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Business review (continued)
AFRICA
In Africa our strategy is to grow Diageo’s leadership across beer and spirits by providing brand choice across a broad range of consumer motivations, profiles, and occasions. We are focused on growing beer faster than the market and accelerating the growth of spirits through continued investment in infrastructure and brands with mainstream spirits being critical to realising the potential of the region. Local sourcing is a key element of our strategy in Africa: it directly supports our commercial operations, while indirectly supporting our position by bringing wider benefits to society as a whole.
Net sales by markets Net sales by categories Net sales by price points (%) (%) (%) Nigeria South Africa Spirits(i) RTDs Value Super premium East Africa Other Beer Other Standard Ultra premium Africa Regional Premium Markets (i) excluding RTDs |
(i) excluding RTDs
Key financials | 2015 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2016 £ million | Reported movement % | ||||||||||||||||||
Net sales | 1,415 | (102 | ) | 54 | 34 | 1,401 | (1 | ) | ||||||||||||||||
Marketing | 147 | (11 | ) | 6 | 1 | 143 | (3 | ) | ||||||||||||||||
Operating profit before exceptional items | 318 | (67 | ) | (12 | ) | (27 | ) | 212 | (33 | ) | ||||||||||||||
Exceptional operating items | (7 | ) | — | |||||||||||||||||||||
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Operating profit | 311 | 212 | (32 | ) | ||||||||||||||||||||
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Our markets
The region comprises Nigeria, East Africa (Kenya, Tanzania, Uganda, Burundi, Rwanda and South Sudan), Africa Regional Markets (including Ghana, Cameroon, Ethiopia, Angola and a sorghum beer business in South Africa) and South Africa (including Republic of South Africa and Mozambique).
Supply operations
We operate 12 breweries in Africa, four sites that produce sorghum beer in South Africa, cider plants and five facilities which provide blending and malting services. In addition, our beer and spirits brands are produced under licence by third-parties in 19 African countries. In the year ended 30 June 2016 we sold our 25% interest in a brewery in South Africa.
Route to consumer
In Africa our largest businesses are in Nigeria, where we own 54.3% of a listed company whose principal brands are Guinness, Orijin, Harp and Malta, and in East Africa, where we own 50.03% of East African Breweries Limited (EABL). EABL produces and distributes beer and spirits brands to a range of consumers in Kenya and Uganda, and owns a 51% equity in Serengeti Breweries Limited located in Tanzania. Within Africa Regional Markets, we have wholly owned subsidiaries in Cameroon, Ethiopia and Reunion and majority-owned subsidiaries in Ghana and the Seychelles. Angola is supplied via a third party distributor. In South Africa and Mozambique we sell spirits, beer, cider and ready to drink products through wholly owned subsidiaries, following the termination of the agreement with Heineken and Namibia Breweries Limited in December 2015. Diageo has agreements with the Castel Group who license, brew and distribute Guinness in the Democratic Republic of Congo, Gambia, Gabon, Ivory Coast, Togo, Benin, Burkina Faso, Chad, Mali and Guinea. Diageo sells spirits through distributors in the majority of other sub-Saharan countries.
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Business review (continued)
Sustainability and responsibility
The issues we address differ between markets but a key issue in many is illicit alcohol. We work closely with governments and regulators on this significant public health issue and specific local issues, such as drink driving in South Africa or bringing in a minimum legal drinking age in Ghana. Our aim everywhere is to promote responsible drinking as part of a balanced lifestyle.
Our overall approach is to consider the broader context of our contribution as a local taxpayer, employer and member of the community. Our recent work to assess human rights impacts throughout the value chain was piloted in Kenya. We source 73% of agricultural materials locally and we work with more than 50,000 local farmers for our agricultural inputs. Fifteen of our production sites in Africa are in water-stressed areas, so we focus closely on managing water efficiently and enhancing access to clean water to surrounding communities through our pan-African Water of Life programme. This year we launched the Water Blueprint in East Africa, to address water stewardship in this water-stressed area. Our new Sustainable Agriculture Strategy will play an important part in strengthening our longstanding and mutually beneficial relationships with farmers and communities.
Performance
Net sales
Net sales were £1,401 million in the year ended 30 June 2016 a decrease of £14 million compared to net sales of £1,415 million in the year ended 30 June 2015. Net sales were adversely impacted by £102 million exchange rate movements primarily due to the weakness of the South African rand, Nigerian naira, South Sudanese pound and Kenyan schilling against sterling, partially offset by £54 million arising from the acquisition of the 50% of United National Breweries that the group did not own in South Africa and the restructuring of the South African operations and organic growth of £34 million (see further performance analysis below).
Operating profit
Operating profit was £212 million in the year ended 30 June 2016 a decrease of £99 million compared to operating profit of £311 million in the year ended 30 June 2015. Operating profit was reduced because of exchange rate movements of £67 million driven by the weak South African rand, Nigerian naira, South Sudanese pound and Kenyan schilling. In addition operating profit declined by £12 million due to the acquisition of United National Breweries and the restructuring of the South African operations and an organic reduction of £27 million. No exceptional operating charges were recorded in the year ended 30 June 2016 compared to £7 million restructuring costs in the year ended 30 June 2015.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Net sales increased 3% with growth in all markets except Nigeria where net sales declined 15%. In East Africa, the recovery of Senator in Kenya following the duty change and double digit growth in rum and vodka led to strong net sales growth. Net sales in Africa Regional Markets grew 9%, led by beer which was underpinned by the ‘Made of Black’ Guinness campaign, innovation with Guinness Africa Special, sustained growth of Malta Guinness and the roll out of Orijin in Ghana. Vodka, particularly Smirnoff 1818, continued to be the engine of growth in South Africa. Across the region, spirits net sales grew 4%, with reserve brands up 35% on the back of Cîroc and Johnnie Walker reserve brands which benefited from the enhanced route to consumer and the launch of Johnnie Walker Green Label. Operating margin decreased 252bps due primarily to the impact of adverse mix and volume decline in Nigeria as well as weaker mix in East Africa. This was partially offset by procurement savings delivered across the region.
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
Africa | 9 | 19 | 3 | (1 | ) | |||||||||||
Nigeria | (11 | ) | (11 | ) | (15 | ) | (19 | ) | ||||||||
East Africa | 25 | 25 | 16 | 3 | ||||||||||||
Africa Regional Markets | 11 | 57 | 9 | 23 | ||||||||||||
South Africa | 1 | 5 | 5 | (6 | ) | |||||||||||
Spirits(i) | 2 | 2 | 4 | (7 | ) | |||||||||||
Beer | 20 | 39 | 11 | 9 | ||||||||||||
Ready to drink | (37 | ) | (23 | ) | (43 | ) | (35 | ) |
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Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Guinness | 6 | 6 | 1 | |||||||||||||
Malta Guinness | 14 | 13 | 10 | |||||||||||||
Tusker | (15 | ) | (11 | ) | (27 | ) | ||||||||||
Senator | 151 | 157 | 134 | |||||||||||||
Harp | (23 | ) | (26 | ) | (28 | ) | ||||||||||
Johnnie Walker | (10 | ) | 1 | (7 | ) | |||||||||||
Smirnoff | 6 | 12 | (4 | ) |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement. |
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Business review (continued)
LATIN AMERICA AND CARIBBEAN
In Latin America and Caribbean the strategic priority is continued leadership in scotch, while broadening our category range through vodka, rum, liqueurs and local spirits. We continue to invest in routes to market and in the breadth and depth of our portfolio of leading brands. We are also enhancing our supply structure to enable the business to provide both the emerging middle class and an increasing number of wealthy consumers with the premium brands they aspire to. In this region’s changing regulatory landscape, our presence is supported by our reputation as a trusted and respected business, based on our stance on responsible drinking, and community development programmes like Learning for Life.
Net sales by markets Net sales by categories Net sales by price points (%) (%) (%) PUB Mexico Spirits RTDs Value Super premium Venezuela West LAC Beer Other Standard Ultra premium Colombia Other Wine Premium |
Key financials | 2015 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2016 £ million | Reported movement % | ||||||||||||||||||
Net sales | 1,033 | (134 | ) | (41 | ) | 5 | 863 | (16 | ) | |||||||||||||||
Marketing | 194 | (26 | ) | (1 | ) | — | 167 | (14 | ) | |||||||||||||||
Operating profit before exceptional items | 263 | (57 | ) | (5 | ) | (2 | ) | 199 | (24 | ) | ||||||||||||||
Exceptional operating items(i) | (5 | ) | (118 | ) | ||||||||||||||||||||
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Operating profit | 258 | 81 | (69 | ) | ||||||||||||||||||||
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(i) In the year ended 30 June 2016 exceptional operating item of £118 million was in respect of the impairment of Ypióca.
Our markets
Our Latin America and Caribbean (LAC) business comprises five markets: PUB (Paraguay, Uruguay and Brazil), Venezuela, Colombia, Mexico and West LAC (Central America and Caribbean, Argentina, Chile, Peru, Ecuador and Bolivia).
Supply operations
The majority of brands sold in the region are manufactured by our International Supply Centre in Europe. In recent years, we have acquired a number of supply operations and expanded our co-packer network across the region. In 2015 we acquired the remaining 50% equity interest in Tequila Don Julio in Mexico, which resulted in full ownership of the brand and its production facilities. In 2012 we acquired Ypióca in Brazil, including its cachaça production site, and in 2011 we acquired a controlling interest in Anejos de Altura (Guatemala) which produces Zacapa. We also have partnerships with over 12 brewers and over 20 co-packing partners.
Route to consumer
We sell our products through a combination of subsidiary companies and third party distributors. In Brazil, our in-market company sells directly to key accounts and distributors.
All products in Venezuela are sold through dedicated distributors. In Colombia we sell directly to key accounts, and serve all other retailers and channels through distributors.
In Mexico, Diageo sells directly to large retailers and wholesalers.
In selected markets in West LAC, we sell to wholesalers or distributors, while in key markets, such as Costa Rica, Dominican Republic, Jamaica and Argentina we use exclusive distributors.
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Sustainability and responsibility
Diageo is known throughout Latin America for our commitment to developing an industry that can bring economic and social value to society. Our work includes programmes to combat key issues such as underage drinking and drink driving – two of the five Global Producers’ Commitments – and illicit alcohol. Programmes such as Actuando Mejor in Mexico and Today I don’t drive in Brazil are making a tangible difference in reducing alcohol-related harm. In the Dominican Republic, we are also working closely with the industry and government to tackle drink driving. This social commitment is echoed in our focus throughout the region on employability, skills and empowerment. Our flagship community re-investment programme, Learning for Life, is providing skills and training – including responsible service – to more than 100,000 people across the region.
Performance
Net sales
Net sales were £863 million in the year ended 30 June 2016 a decrease of £170 million compared to net sales of £1,033 million in the year ended 30 June 2015. Adverse exchange rate movements due to the weakening of the Brazilian real, Venezuelan bolivar, Mexican peso and Colombian peso negatively impacted net sales by £134 million and the disposals of the Jamaican operation and wines in Argentina, partially offset by the tequila Don Julio acquisition, reduced net sales by £41 million. Organic growth was £5 million (see further performance analysis below).
Operating profit
Operating profit was £81 million in the year ended 30 June 2016 a decrease of £177 million compared to operating profit of £258 million in the year ended 30 June 2015. Operating profit was adversely impacted by exchange rate movements of £57 million mainly driven by the Brazilian real, Venezuelan bolivar, Mexican peso and Colombian peso. In addition, operating profit was impacted by exceptional operating charges of £118 million in the year ended 30 June 2016 compared to operating charges of £5 million in the year ended 30 June 2015. In the year ended 30 June 2016 the group impaired the Ypióca brand and related tangible fixed assets and goodwill allocated to the Paraguay, Uruguay and Brazil (PUB) cash-generating unit. Organic decline was £2 million.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Net sales grew 1% in LAC. Growth in Mexico, Colombia and the domestic markets of West LAC was partially offset by the decline in Brazil, travel retail and the export channels. In Brazil, performance was impacted by subdued consumer confidence, a tax increase and significant slowdown in the travel retail channel, which resulted in a 7% decline in net sales. Performance in Mexico and Colombia was strong with net sales up 10% and 28% respectively, led by scotch and vodka. Currency weakness and lower underlying demand continued to impact the West LAC export channels. Diageo’s strategy in LAC is to expand our leadership position in scotch and broaden our portfolio. Scotch net sales grew 2%, led by Buchanan’s and Black and White, with share gains in most markets. Net sales of Johnnie Walker declined with weakness in PUB and West LAC partially offset by strong growth in Mexico and Colombia. Vodka net sales grew 8% driven primarily by growth in Mexico, Colombia and the domestic markets in West LAC. Don Julio gained share supported by increased activity to build brand awareness and drive recruitment in Mexico. Gross margin improved, benefitting from mix as well as procurement savings across logistics and production. This was offset by higher overheads resulting in operating margin decline of 39bps.
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
Latin America and Caribbean | (2 | ) | (5 | ) | 1 | (16 | ) | |||||||||
PUB | (5 | ) | (5 | ) | (9 | ) | (27 | ) | ||||||||
Colombia | 9 | 9 | 28 | — | ||||||||||||
Mexico | 10 | 19 | 10 | 7 | ||||||||||||
West LAC | (2 | ) | (17 | ) | (3 | ) | (20 | ) | ||||||||
Venezuela | 4 | 3 | 173 | (69 | ) | |||||||||||
Spirits(i) | (2 | ) | (2 | ) | 1 | (12 | ) | |||||||||
Beer | 23 | (41 | ) | 14 | (60 | ) | ||||||||||
Ready to drink | (11 | ) | (12 | ) | — | (20 | ) |
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Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Johnnie Walker | (8 | ) | (4 | ) | (15 | ) | ||||||||||
Buchanan’s | (5 | ) | 9 | (7 | ) | |||||||||||
Smirnoff | — | 6 | (19 | ) | ||||||||||||
Old Parr | (15 | ) | (1 | ) | (17 | ) | ||||||||||
Baileys | (3 | ) | (1 | ) | (14 | ) | ||||||||||
Ypióca | (6 | ) | (6 | ) | (28 | ) | ||||||||||
Black and White | 48 | 63 | 34 |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement except for Smirnoff 4%. |
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Business review (continued)
ASIA PACIFIC
Our strategy in Asia Pacific, which encompasses both developed and emerging markets, is to operate across categories in international spirits, local spirits, ready to drink formats and beer. We focus on the highest growth categories and consumer opportunities, driving continued development of super and ultra premium scotch, and leveraging the emerging middle class opportunity through a combination of organic growth and selective acquisitions.
Net sales by markets Net sales by categories Net sales by price points (%) (%) (%) South East Asia Global Travel, Spirits(i) RTDs Value Super premium Greater China Asia East and Middle Beer Other Standard Ultra premium India Wine Premium Australia North Asia (i) excluding RTDs |
(i) excluding | RTDs |
Key financials | 2015 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | Net sales adjustment(ii) | 2016 £ million | Reported movement % | |||||||||||||||||||||
Net sales | 2,213 | (21 | ) | (28 | ) | 34 | (122 | ) | 2,076 | (6 | ) | |||||||||||||||||
Marketing | 344 | — | (1 | ) | (42 | ) | — | 301 | (13 | ) | ||||||||||||||||||
Operating profit before exceptional items | 356 | (5 | ) | — | 44 | — | 395 | 11 | ||||||||||||||||||||
Exceptional operating items(i) | (193 | ) | (49 | ) | ||||||||||||||||||||||||
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Operating profit | 163 | 346 | 112 | |||||||||||||||||||||||||
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(i) | In the year ended 30 June 2016 exceptional operating items of £49 million was in respect of the disengagement agreement relating to USL (2015 - £146 million was in respect of settlement of several disputes with the Korean tax authorities and £41 million in respect of the group’s 45.56% equity investment in Hanoi Liquor Joint Stock Company). |
(ii) | For further detail see page 54. |
Our markets
Asia Pacific comprises South East Asia (Vietnam, Thailand, Philippines, Indonesia, Malaysia, Singapore, Cambodia, Laos, Myanmar, Nepal and Sri Lanka), Greater China (China, Taiwan, Hong Kong and Macau), India, Global Travel Asia and Middle East, Australia (including New Zealand), and North Asia (Korea and Japan).
Supply operations
We have distilleries at Chengdu, in China that produce Chinese white spirit and in Bundaberg, Australia that produce rum. United Spirits Limited (USL) operates 27 owned manufacturing facilities in India including one in Nepal, leases 13 facilities in India and further 34 are licensed to produce USL and Diageo brands. In addition, we have bottling plants in Korea, Thailand, Indonesia and Australia with ready to drink manufacturing capabilities.
Route to consumer
In South East Asia, spirits and beer are sold through a combination of Diageo companies, joint venture arrangements, and third party distributors. In Thailand, Malaysia and Singapore, we have joint venture arrangements with Moët Hennessy, sharing administrative and distribution costs. Diageo operates wholly owned subsidiaries in the Philippines and Vietnam. In Vietnam we own a 45.56% equity stake in Hanoi Liquor Joint Stock Company. In Indonesia, Guinness is brewed by, and distributed through, third party arrangements.
In Greater China the majority of our brands are now sold through our wholly owned subsidiary. Some brands are distributed through a joint venture arrangement with Moët Hennessy. In addition, we are the sole distributor of Shui Jing Fang, a super premium Chinese white spirit, through our controlling 39.71% equity stake in a listed company. Diageo operates a wholly owned subsidiary in Taiwan.
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Business review (continued)
In India, we manufacture, market and sell Indian whisky, rum, brandy and other spirits through our 54.78% shareholding in USL. Diageo also sells its own brands through USL.
In Australia, we manufacture, market and sell the Diageo products and in New Zealand we operate through third party distributors.
In North Asia, we have our own distribution company in South Korea, whilst in Japan, the majority of sales are through joint venture agreements with Moët Hennessy and Kirin.
Airport shops and airline operators are serviced through a dedicated Diageo sales and marketing organisation. In the Middle East, we sell our products through third party distributors.
Sustainability and responsibility
Asia Pacific is a region of many and varied markets, and our 21-market business model enables us to address key issues and opportunities by market. Within the context of the Global Producers’ Commitments, our responsible drinking programmes focus on the issues highest on the agenda in each country. For example, in Indonesia and Vietnam we focus particularly on illicit alcohol; in India on drink driving; in Australia on consumer information and preventing underage and binge drinking. Our new DRINKiQ site, launched in January 2016, was particularly well received in Australia.
Likewise we tailor our sustainability programmes to each market. Our operations in India have the highest concentration of sites in water-stressed areas, so water, and the wider ‘WASH’ agenda is a key focus there. In Thailand and China, female empowerment is a significant issue, which we address directly through our ‘Plan W’ programme.
Performance
Net sales
Net sales were £2,076 million in the year ended 30 June 2016 a decrease of £137 million compared to net sales of £2,213 million in the year ended 30 June 2015. Net sales were adversely impacted by exchange rate movements of £21 million due to weak Australian dollar and Indian rupee against sterling and a £28 million loss due to disposal of the Bouvet wine business and transition of a number of operations in India to a franchise or royalty model, partially offset by organic growth of £34 million (see further performance analysis below). The full year impact of an accounting change for USL to account for the excise duties paid by third party manufacturers reduced net sales by £122 million.
Operating profit
Operating profit was £346 million in the year ended 30 June 2016 an increase of by £183 million compared to operating profit of £163 million in the year ended 30 June 2015. Organic growth improved operating profit by £44 million, partially offset by adverse exchange rate movements of £5 million mainly driven by the Australian dollar. Operating profit for the year ended 30 June 2016 was impacted by an exceptional operating charge of £49 million in respect of disengagement agreements relating to United Spirits Limited. Exceptional operating charges of £193 million in the year ended 30 June 2015 included a charge in respect of settlement of several disputes with the Korean tax authorities regarding the transfer pricing methodology applicable for imported products and an impairment charge in respect of the group’s 45.56% equity investment in Hanoi Liquor Joint Stock Company in Vietnam.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Net sales in Asia Pacific grew 2% as a result of growth in India, South East Asia and Australia. In China, Chinese white spirits grew while scotch declined and the shift towards lower ABV products in Korea led to a decline in net sales. Global Travel Asia and Middle East business declined primarily due to the geopolitical developments in the Middle East. The changes made to improve performance in USL led to net sales growth of 5% in India, largely driven by growth in IMFL whisky and scotch. Net sales in South East Asia grew 16% as the inventory reduction experienced last year ended. Australia net sales grew 2% driven by scotch and Guinness. Reserve brands net sales grew 4% largely driven by the strong performance of Shui Jing Fang in China and Johnnie Walker in South East Asia. Margin improved 176bps as a result of reducing marketing in India with the termination of USL related party agreements, and for Johnnie Walker Black Label and Johnnie Walker Blue Label in China. The sale by USL of United Breweries Limited shares also contributed to operating margin expansion.
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Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
Asia Pacific | — | (3 | ) | 2 | (6 | ) | ||||||||||
India | — | (4 | ) | 5 | (11 | ) | ||||||||||
South East Asia | 3 | 3 | 16 | 15 | ||||||||||||
Greater China | (5 | ) | (5 | ) | (2 | ) | — | |||||||||
Global Travel Asia and Middle East | (9 | ) | (9 | ) | (15 | ) | (14 | ) | ||||||||
Australia | 2 | 2 | 2 | (5 | ) | |||||||||||
North Asia | 6 | 6 | (5 | ) | (6 | ) | ||||||||||
Spirits(i) | — | (3 | ) | 1 | (7 | ) | ||||||||||
Beer | 8 | 8 | 7 | 4 | ||||||||||||
Ready to drink | (3 | ) | (3 | ) | (3 | ) | (8 | ) | ||||||||
Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Johnnie Walker | (4 | ) | (2 | ) | (2 | ) | ||||||||||
McDowell’s | (2 | ) | — | (16 | ) | |||||||||||
Windsor | (4 | ) | (10 | ) | (12 | ) | ||||||||||
Smirnoff | (4 | ) | (7 | ) | (9 | ) | ||||||||||
Guinness | 8 | 7 | 4 | |||||||||||||
Bundaberg | (5 | ) | (3 | ) | (10 | ) | ||||||||||
Shui Jing Fang | 55 | 20 | 22 |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement except for McDowell’s 0%. |
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CATEGORY REVIEW
Volume Net sales Marketing spend Scotch American North Rum Liqueurs Tequila to Ready drink Other Vodka Indian Made Gin Beer whisk(e)y Foreign Liquor (IMFL) |
Key categories | Reported volume movement(iii) % | Organic net sales movement % | Reported net sales movement % | |||||||||
Spirits(i) | (1 | ) | 3 | (1 | ) | |||||||
Scotch | (3 | ) | — | (4 | ) | |||||||
Vodka(ii) | — | 1 | 2 | |||||||||
North American whisk(e)y | 4 | 6 | 12 | |||||||||
Rum(ii) | 2 | 3 | (3 | ) | ||||||||
Indian-Made Foreign Liquor (IMFL) whisky | (5 | ) | 3 | (11 | ) | |||||||
Liqueurs | 1 | 3 | 2 | |||||||||
Gin(ii) | 3 | 8 | 6 | |||||||||
Tequila | 15 | 8 | 28 | |||||||||
Beer | 21 | 6 | 1 | |||||||||
Ready to drink | (9 | ) | (11 | ) | (11 | ) |
(i) | Spirits brands excluding ready to drink. |
(ii) | Vodka, rum, gin including IMFL brands. |
(iii) | Reported equals organic volume movement except for IMFL whisky (1)%, tequila (17)%, beer 13% and ready to drink (13)%. |
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Business review (continued)
Global giants, local stars and reserve(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||
Global giants | ||||||||||||
Johnnie Walker | (4 | ) | 1 | (3 | ) | |||||||
Smirnoff | 1 | 2 | — | |||||||||
Baileys | 2 | 4 | 3 | |||||||||
Captain Morgan | 4 | 3 | 5 | |||||||||
Tanqueray | 11 | 12 | 15 | |||||||||
Guinness | 4 | 4 | 2 | |||||||||
Local stars | ||||||||||||
Crown Royal | 5 | 6 | 11 | |||||||||
Yenì Raki | 1 | 4 | (9 | ) | ||||||||
Buchanan’s | (2 | ) | 10 | 1 | ||||||||
JeB | (6 | ) | (9 | ) | (12 | ) | ||||||
Windsor | (4 | ) | (10 | ) | (12 | ) | ||||||
Old Parr | (13 | ) | 1 | (14 | ) | |||||||
Bundaberg | (6 | ) | (3 | ) | (10 | ) | ||||||
Bell’s | — | (1 | ) | (10 | ) | |||||||
White Horse | (11 | ) | 6 | (15 | ) | |||||||
Ypióca | (6 | ) | (6 | ) | (28 | ) | ||||||
Cacique | 25 | 9 | (24 | ) | ||||||||
McDowell’s | (2 | ) | — | (16 | ) | |||||||
Shui Jing Fang | 55 | 20 | 22 | |||||||||
Reserve | ||||||||||||
Scotch malts | 8 | 7 | 6 | |||||||||
Cîroc | (2 | ) | (3 | ) | 2 | |||||||
Ketel One vodka | 4 | 4 | 10 | |||||||||
Don Julio | 25 | 18 | 40 | |||||||||
Bulleit | 27 | 29 | 36 |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement except for White Horse (9)%, Don Julio (13)% and McDowell’s 0%. |
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
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Business review (continued)
Operating results 2015 compared with 2014
GROUP FINANCIAL REVIEW
The following comments were made by Deirdre Mahlan, Chief Financial Officer, in Diageo’s Annual Report for the year ended 30 June 2015:
“Our performance this year reflected both the volatile global consumer and economic environment and the actions we took to strengthen the business. Reported net sales were up with the integration of USL and organic net sales flat driven by currency related challenges in specific emerging markets and embedding our sell out discipline. Our focus on cost delivered savings and drove margin expansion, prioritising cash resulted in a marked cash flow improvement and we continued to invest for the future.”
Net sales up 5% with full consolidation of United Spirits |
Organic net sales flat |
Net cash from operating activities of £2.6 billion up £0.8 billion |
Free cash flow of £2 billion up £0.7 billion |
9% final dividend increase, full year dividend was 56.4 pence |
Operating margin down 52bps |
Organic operating margin up 24bps |
Shipment volume down 1% |
Depletion volume was estimated to be up 1% |
Basic eps 95.0 pence up 6% |
Eps before exceptional items 88.8 pence due to adverse exchange and associates, offset by underlying improvements |
Volume Net sales(i) Operating before exceptional items(ii) Operating profit(iii) North America Europe Africa Latin America and Caribbean Asia Pacific |
(i) | Excluding corporate net sales of £80 million (2014 – £79 million). |
(ii) | Excluding exceptional operating charges of £269 (2014 – £427 million) and corporate and ISC costs before exceptional items of £123 million (2014 – £189 million). |
(iii) | Excluding corporate and ISC costs of £139 million (2014 – £130 million). |
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Summary financial information | 2015 | 2014 | ||||||||
Volume | EUm | 246.2 | 156.1 | |||||||
Net sales | £ million | 10,813 | 10,258 | |||||||
Marketing | £ million | 1,629 | 1,620 | |||||||
Operating profit before exceptional items | £ million | 3,066 | 3,134 | |||||||
Exceptional operating items | £ million | (269 | ) | (427 | ) | |||||
Operating profit | £ million | 2,797 | 2,707 | |||||||
Share of associates and joint ventures profit after tax | £ million | 175 | 252 | |||||||
Exceptional non-operating items | £ million | 373 | 140 | |||||||
Net finance charges | £ million | 412 | 388 | |||||||
Tax rate | % | 15.9 | 16.5 | |||||||
Tax rate before exceptional items | % | 18.3 | 18.2 | |||||||
Profit attributable to parent company’s shareholders | £ million | 2,381 | 2,248 | |||||||
Basic earnings per share | pence | 95.0 | 89.7 | |||||||
Earnings per share before exceptional items | pence | 88.8 | 95.5 | |||||||
Full year dividend | pence | 56.4 | 51.7 |
Volume | Net sales | Marketing | Operating profit | |||||||||||||
Growth by region | % | % | % | % | ||||||||||||
North America | (4 | ) | — | — | — | |||||||||||
Europe, Russia and Turkey | — | (7 | ) | (6 | ) | (6 | ) | |||||||||
Africa | 7 | (1 | ) | (3 | ) | (2 | ) | |||||||||
Latin America and Caribbean | (6 | ) | (10 | ) | (4 | ) | (18 | ) | ||||||||
Asia Pacific | 622 | 64 | 13 | 2,229 | ||||||||||||
Diageo(i) | 58 | 5 | 1 | 3 | ||||||||||||
Volume | Net sales | Marketing | Operating profit(ii) | |||||||||||||
Organic growth by region | % | % | % | % | ||||||||||||
North America | (3 | ) | (1 | ) | (4 | ) | (2 | ) | ||||||||
Europe, Russia and Turkey | — | — | 2 | 3 | ||||||||||||
Africa | 7 | 6 | 4 | 10 | ||||||||||||
Latin America and Caribbean | (7 | ) | (1 | ) | 6 | (3 | ) | |||||||||
Asia Pacific | (3 | ) | (2 | ) | (8 | ) | 7 | |||||||||
Diageo(i) | (1 | ) | — | (1 | ) | 1 |
(i) | Includes Corporate. In the year ended 30 June 2015 Corporate reported net sales, net operating charges before exceptional items and net operating charges were £90 million (2014 — £79 million), £123 million (2014 — £130 million) and £133 million (2014 — £142 million), respectively. |
(ii) | Before exceptional items |
81
Business review (continued)
KEY PERFORMANCE INDICATORS
Net sales (£ million)
The full consolidation of USL, partly offset by adverse exchange delivered reported net sales growth of 5%. Organic net sales flatflat.
10,258 896 (337) Organic movement Organic(127) 123 10,813 (337) 10,258 (127) 2014 2015 Reported Reported Acquisitions and disposals(i) Exchange Price/mix disposals(i) Volume
(i) | Impact of acquisitions and disposals on 2014 and 2015. See page |
Reported net sales were up 5%, largely driven by the full consolidation of USL, which contributed £921 million of net sales. Currency weakness, other than the US dollar, had an adverse impact on net sales. Organic volume decline was largely driven by lower shipments in the United States, reduction in inventory levels in South East Asia and West LAC, and the impact of pricing in Venezuela and Brazil. While these price increases contributed to positive price, the main driver of organic price/mix was positive mix, led by growth of reserve and Crown Royal.
ChangeOperating profit (£ million)
2,707 158 (161) 4 67 22 2,797 2014 2015 Exceptional operating items Acquisitions Exchange Organic movement Disposals
Reported operating profit increased by £90 million primarily due to lower impairment charges of £223 million, lower exceptional restructuring costs of £81 million and the benefit from acquisitions of £67 million partly offset by the exceptional charge of £146 million in respect of settlement of several disputes with the Korean tax authorities in the year ended 30 June 2015 and adverse exchange rate movements of £161 million. Organic operating profit growth was £22 million (0.7%).
82
Business review (continued)
Operating margin (%)
Full consolidation of USL rebased operating margin by c200bps. Organic operating margin improved 24bps24bps.
30.55% 52bps 28.35% 36bps (183)
26.39% 168bps (61)bps (61)bps(64)(183)bps Organic movement (64)bps 36bps 52bps 25.87% 2014 movement(i) 2015 Reported ReportedExceptional operating items Gross margin Exchange Marketing Acquisitions and disposals Marketing spend Exchange Other operating Gross margin expenses
(i) | Exchange impacts in respect of profit on intergroup sales of products and the intergroup recharges have been re-allocated to the respective |
Operating margin was 25.87% in the year ended 30 June 2015 (2014 – 26.39%). Excluding the impact of lower exceptional charges which benefited operating margin by 168bps, operating margin decreased 220bps from 30.55% to 28.35%).
The full consolidation of USL lowered reported operating margin for the group. The organic improvement in margin was largely as a result of cost savings and efficiencies, which more than offset the impact of cost inflation and negative market mix.
47
Business review (continued)
EarningsBasic earnings per share (pence)
Eps increased to 95.0 pence from 89.7 pence. Eps before exceptional items (pence)
Eps before exceptionals impacted by adverse exchange and decrease in associate profitfell 6.7 pence.
95.5
89.7 12 1.6 (6.4) (3.1) 1.4 1.5 88.8 (6.4) (3.1) (1.3) (0.4) profit Operating (4.8)95.0 2014 2015 Reported ReportedExceptional items(i) Operating profit excluding FX Tax Exchange on operating profit Non-controlling interests Associates and joint ventures Finance charges Tax Non-controlling interests Other including USL(i) Finance chargesUSL(ii)
(i) | Exceptional items net of tax and non-controlling interests. |
(ii) | The organic impact of fully consolidating USL results is included in other. The movements for operating profit, finance charges, tax and non-controlling interests, all exclude USL. |
Earnings per share was 95.0 pence in the year ended 30 June 2015 (2014 – 89.7 pence), with an exceptional gain after tax of £155 million, compared to an exceptional loss after tax of £271 million in the prior year, benefiting eps by 12 pence. Eps before exceptional items of 88.8 for the year ended 30 June 2015 fell 6.7 pence as compared to 95.5 pence for the year ended 30 June 2014 largely as a result of adverse exchange movements and lower income from associates and joint ventures. Organic growth in operating profit had a positive impact on eps. Net finance charges excluding acquired debt in USL reduced due to lower interest rates which benefited eps. Basic eps was 95.0 pence (year ended 30 June 2014 — 89.7 pence), with exceptional items increasing eps by 6.2 pence (year ended 30 June 2014 — 5.8 pence unfavourable).
Movement in net finance charges | Movement in net finance charges | £ million | £ million | |||||||||
2014 Reported |
| 388 | ||||||||||
2014 | 388 | |||||||||||
Net interest charge decrease | Net interest charge decrease |
| (48 | ) | (48 | ) | ||||||
Consolidation of net borrowings acquired in USL | Consolidation of net borrowings acquired in USL |
| 60 | 60 | ||||||||
Movement in other finance charges | Movement in other finance charges |
| 12 | 12 | ||||||||
|
| |||||||||||
2015 Reported | 412 | |||||||||||
2015 | 412 | |||||||||||
|
| |||||||||||
2015 | 2014 | |||||||||||
Average monthly net borrowings (£ million) | 10,459 | 9,174 | ||||||||||
Effective interest rate(i) | 3.5 | % | 3.8 | % |
83
Business review (continued)
2015 | 2014 | |||||||
Average monthly net borrowings (£ million) | 10,459 | 9,174 | ||||||
Effective interest rate(i) | 3.5 | % | 3.8 | % |
(i) | For the calculation of the effective interest rate, the net interest charge excludes fair value adjustments to derivative financial instruments and borrowings. Average monthly net borrowings include the impact of interest rate swaps that are no longer in a hedge relationship but excludes the market value adjustment for cross currency interest rate swaps. |
The increase in average net borrowings was principally the result of the acquisition of the controlling interest in USL, completed on 2 July 2014, and the consolidation of USL’s net borrowings. The effective interest rate decreased in the year ended 30 June 2015 as the negative impact of consolidating USL’s net borrowings was more than offset by lower interest rates on new debt issued and an increase in the proportion of floating rate debt through the use of swaps.
4884
Business review (continued)
FreeNet cash from operating activities and free cash flow (£ million)
Positive working capital movement drove improvement in freeNet cash flowfrom operating activities increased from £1,790 million to £2,551 million.
1,790 (40) 76 (156) 734 79 68 2,551 2014 2015 USL OCF(i) Operating profit(ii) Exchange(iii) Working capital movement Interest tax Other operating items(iv)
(i) | USL net cash from operating activities is shown separately and is excluded from the other line items shown above. |
(ii) | Operating profit after operating exceptional items adjusted for non-cash items including depreciation and amortisation, excluding exchange. |
(iii) | Includes £5 million relating to translation exchange impact of exceptional operating items. |
(iv) | Other operating items includes pension related payments, dividends received from associates and joint ventures, and payments in respect of the settlement of Thalidomide |
Free cash flow was £1,963 million in 2015 an increase of £728 million.
1,235 (7) (57) Operating profit 76 (156) 734 (7) 79 59 1,963 pro_t 734 (57) (7) 1,235 76 (156) 2014 2015 Reported Reported USL free cash flow(i) Operating profit excluding exchange(ii) Exchange Working capital movement Net capex fiow(i) Working movement Operating capital Interest and tax profit excluding movement Other operating exchange(ii) items(iii)
(i) | USL free cash flow is shown separately and is excluded from the other line items shown above. |
(ii) | Operating profit adjusted for non-cash items including depreciation and amortisation. |
(iii) | Other operating items includes pension related payments, dividends received from associates and joint ventures, |
The increase in freenet cash flowfrom operating activities was primarily driven by the positive working capital movement. This was largely due to lower debtors as a result of phasing of shipments, with days sales outstanding 6 days lower than last year. This compares with an increase in debtors in the prior year.year
85
Business review (continued)
Return on average invested capital (%)(i)
The return on closing invested capital of 26.7% for the year ended 30 June 2015, calculated as reported profit for the year divided by net assets as of 30 June 2015, decreased by 200bps compared to return on closing invested capital of 28.7%, for the year ended 30 June 2014 driven by the acquisition of USL, the partially offset by the impacts of exceptional gains on the sale of businesses in 2015 and lower exceptional operating charges.
The investment in USL has rebased ROIC.return on average invested capital (ROIC)(i). Adverse exchange and lower income from associates reduced ROIC in the year
14.1% 0.2pps (1.1)pps 12.3%0.2pps (0.4)pps (0.3)pps(0.2)pps 2014 2015 Reported(ii) Reported(iii)(0.2)pps 12.3% 2014(ii) 2015(ii) USL Exchange Other Operating profit after tax Exchange Associates and after tax joint ventures including FX Other
(i) | ROIC calculation excludes exceptional items. |
(ii) |
For the years ended 30 June 2014 and 30 June 2015 average net assets were adjusted for the inclusion of USL as though it was owned throughout the year as it became an associate on 4 July 2013 and a subsidiary on 2 July 2014. |
The additional investment in USL and full consolidation of its results reduced ROIC by 1.1pps. Exchange movements reduced operating profit, but the impact on ROIC was partially offset by exchange reducing invested capital. Lower income from associates reduced ROIC in the year.
49
86
Business review (continued)
INCOME STATEMENTIncome statement
2014 £ million | Exchange (a) £ million | Acquisitions and disposals (b) £ million | Organic movement £ million | 2015 £ million | ||||||||||||||||
Sales | 13,980 | (509 | ) | 2,321 | 174 | 15,966 | ||||||||||||||
Excise duties | (3,722 | ) | 172 | (1,425 | ) | (178 | ) | (5,153 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net sales | 10,258 | (337 | ) | 896 | (4 | ) | 10,813 | |||||||||||||
Cost of sales(i) | (4,006 | ) | 61 | (666 | ) | 26 | (4,585 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Gross profit | 6,252 | (276 | ) | 230 | 22 | 6,228 | ||||||||||||||
Marketing | (1,620 | ) | 47 | (74 | ) | 18 | (1,629 | ) | ||||||||||||
Other operating expenses(i) | (1,498 | ) | 68 | (85 | ) | (18 | ) | (1,533 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Operating profit before exceptional items | 3,134 | (161 | ) | 71 | 22 | 3,066 | ||||||||||||||
Exceptional operating items (c) | (427 | ) | (269 | ) | ||||||||||||||||
|
|
|
| |||||||||||||||||
Operating profit | 2,707 | 2,797 | ||||||||||||||||||
Non-operating items (c) | 140 | 373 | ||||||||||||||||||
Net finance charges | (388 | ) | (412 | ) | ||||||||||||||||
Share of after tax results of associates and joint ventures | 252 | 175 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
Profit before taxation | 2,711 | 2,933 | ||||||||||||||||||
Taxation | (447 | ) | (466 | ) | ||||||||||||||||
|
|
|
| |||||||||||||||||
Profit from continuing operations | 2,264 | 2,467 | ||||||||||||||||||
Discontinued operations (c) | (83 | ) | — | |||||||||||||||||
|
|
|
| |||||||||||||||||
Profit for the year | 2,181 | 2,467 | ||||||||||||||||||
|
|
|
|
2014 £ million | Exchange (a) £ million | Acquisitions and disposals (b) £ million | Organic movement £ million | 2015 £ million | ||||||||||||||||
Sales | 13,980 | (509 | ) | 2,321 | 174 | 15,966 | ||||||||||||||
Excise duties | (3,722 | ) | 172 | (1,425 | ) | (178 | ) | (5,153 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net sales | 10,258 | (337 | ) | 896 | (4 | ) | 10,813 | |||||||||||||
Cost of sales(i) | (4,006 | ) | 61 | (666 | ) | 26 | (4,585 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Gross profit | 6,252 | (276 | ) | 230 | 22 | 6,228 | ||||||||||||||
Marketing | (1,620 | ) | 47 | (74 | ) | 18 | (1,629 | ) | ||||||||||||
Other operating expenses(i) | (1,498 | ) | 68 | (85 | ) | (18 | ) | (1,533 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Operating profit before exceptional items | 3,134 | (161 | ) | 71 | 22 | 3,066 | ||||||||||||||
Exceptional operating items (c) | (427 | ) | (269 | ) | ||||||||||||||||
|
|
|
| |||||||||||||||||
Operating profit | 2,707 | 2,797 | ||||||||||||||||||
Non-operating items (c) | 140 | 373 | ||||||||||||||||||
Net finance charges | (388 | ) | (412 | ) | ||||||||||||||||
Share of after tax results of associates and joint ventures | 252 | 175 | ||||||||||||||||||
|
|
|
| |||||||||||||||||
Profit before taxation | 2,711 | 2,933 | ||||||||||||||||||
Taxation | (447 | ) | (466 | ) | ||||||||||||||||
|
|
|
| |||||||||||||||||
Profit from continuing operations | 2,264 | 2,467 | ||||||||||||||||||
Discontinued operations (c) | (83 | ) | — | |||||||||||||||||
|
|
|
| |||||||||||||||||
Profit for the year | 2,181 | 2,467 | ||||||||||||||||||
|
|
|
|
(i) | Before exceptional operating |
(a) Exchange
The impact of movements in exchange rates on reported figures iswas principally in respect of the Venezuelan bolivar, the euro, the Russian rouble and the US dollar.
In February 2015, the Central Bank of Venezuela opened a new mechanism (known as SIMADI) that allows private and public companies to trade foreign currency with fewer restrictions than other mechanisms in Venezuela. As a result, the group has
used the SIMADI exchange rate to consolidate its Venezuelan operations for the year ended 30 June 2015. For the year ended 30 June 2014, the group applied the Sicad II exchange rate to consolidate its operations in Venezuela.
Applying the SIMADI consolidation rate of $1 = VEF197.30 (£1 = VEF309.76) compared to the Sicad II rate of $1 = VEF49.98 (£1 = VEF85.47) would have reduced net assets and cash and cash equivalents as at 1 July 2014 by £60 million and £52 million, respectively, and would have reduced the previously reported net sales and operating profit for the year ended 30 June 2014 by £57 million and £36 million, respectively.
87
Business review (continued)
The effect of movements in exchange rate and other movements on profit before exceptional items and taxation for the year ended 30 June 2015 is set out in the table below.
Year ended 30 June 2015 | Year ended 30 June 2014 | |||||||
Exchange rates | ||||||||
Translation £1 = | $1.57 | $1.63 | ||||||
Transaction £1 = | $1.58 | $1.59 | ||||||
Translation £1 = | €1.31 | €1.20 | ||||||
Transaction £1 = | €1.23 | €1.26 |
50
Business review (continued)
Gains/ (losses) £ million | ||||
Translation impact | (72 | ) | ||
Transaction impact | (89 | ) | ||
|
| |||
Operating profit before exceptional items | (161 | ) | ||
Net finance charges | (7 | ) | ||
Mark to market impact of IAS 39 on interest expense | 8 | |||
Impact of IAS 21 and IAS 39 on net other finance charges | 1 | |||
|
| |||
Interest and other finance charges | 2 | |||
Associates | (20 | ) | ||
|
| |||
Profit before exceptional items and taxation | (179 | ) | ||
|
|
Year ended 30 June 2015 | Year ended 30 June 2014 | |||||||
Exchange rates | ||||||||
Translation £1 = | $1.57 | $1.63 | ||||||
Transaction £1 = | $1.58 | $1.59 | ||||||
Translation £1 = | €1.31 | €1.20 | ||||||
Transaction £1 = | €1.23 | €1.26 |
88
Business review (continued)
(b) Acquisitions and disposals
The impact of acquisitions and disposals on the reported figures was primarily attributable to the full consolidation of United Spirits Limited (USL) from 2 July 2014 and the acquisition of the Mexican distribution rights of Don Julio, partially offset by the disposal of The Old Bushmills Distillery Company Limited on 27 February 2015 and Gleneagles Hotels Limited on 30 June 2015. See page 123 for further details.
(c) Exceptional items
Exceptional operating charges of £269 million (2014 — £427 million) in the year ended 30 June 2015 comprise:comprised:
In the year ended 30 June 2014 an exceptional impairment loss of £260 million in respect of the Shui Jing Fang brand and £4 million in respect of tangible fixed assets was charged to other operating expenses.
Non-operating itemsin the year ended 30 June 2015 include a gain of £103 million (2014 —– £140 million) following the acquisition of additional equity shares in USL which increased the group’s investment in USL from 25.02% to 54.78%, excluding
the 2.38% interest owned by the USL Benefit Trust (2014 —– 10.04% to 25.02%). On 2 July 2014 when USL became a subsidiary of the group a gain was recognised on the difference between the book value of the 25.02% investment and the fair value. The gain is net of a £79 million cumulative exchange loss recycled from other comprehensive income and £10 million transaction costs.
On 27 February 2015, the group completed the purchase of the 50% equity interest in Don Julio B.V. that it did not already own (giving Diageo 100% ownership of the brand and production facility) and the Mexican distribution business of Don Julio. As a result of Don Julio becoming a subsidiary of the group a gain of £63 million arose, being the difference between the book value of the joint venture on the date of the transaction and the fair value. In addition, the group reacquired the production and distribution for Smirnoff and Popov in Mexico. As part of the transaction, Diageo also agreed to sell 100% of the equity share capital in The Old Bushmills Distillery Company Limited resulting in an exceptional gain of £174 million.
On 30 June 2015, Diageo completed the disposal of Gleneagles Hotels Limited to the Ennismore group resulting in an exceptional gain of £73 million.
In the year ended 30 June 2015 a provision of £30 million was charged to non-operating items in respect of a guarantee provided to a third party financial institution.
51
Business review (continued)
Discontinued operationsoperations in the year ended 30 June 2014 comprised a charge after taxation of £83 million (£91 million less tax of £8 million) in respect of the settlement of thalidomide litigation in Australia and New Zealand and anticipated future payments to thalidomide organisations.
Cash payments in the year ended 30 June 2015 for exceptional restructuring items, the legal settlement in Korea, the guarantee and thalidomide were £117 million (2014 —– £104 million), £74 million (2014 —– £nil), £30 million (2014 —– £nil) and £19 million (2014 —– £59 million), respectively.
Dividend
The directors recommend a final dividend ofwas 34.9 pence per share, an increase of 9% from the year ended 30 June 2014. The full dividend willwas therefore be 56.4 pence per share, an increase of 9% from the year ended 30 June 2014. Subject toFollowing the approval by shareholders, the final dividend will bewas paid on 8 October 2015 to shareholders on the register on 14 August 2015. The ex-dividend date iswas 13 August 2015. Payment to US ADR holders will bewas made on 14 October 2015. A dividend reinvestment plan is available to holders of ordinary shares in respect of the final dividend and the plan notice date is 17 September 2015.
The recommended final dividend increase is 9%, in line with the increase in the interim dividend. This rate of increase recognises that while eps has declined, the decline was mainly driven by the impact of exchange movements in a year when free cash flow has improved strongly. Eps to dividend cover at 1.6 times is however now outside management’s coverage ratio, and the group will look to rebuild cover over time, maintaining dividend increases at a mid-single digit rate until it is back in range.
89
Business review (continued)
MOVEMENTS IN NET BORROWINGS AND EQUITY
Movement in net borrowings | 2015 £ million | 2014 £ million | ||||||
Net borrowings at the beginning of the year | (8,850 | ) | (8,403 | ) | ||||
Free cash flow (a) | 1,963 | 1,235 | ||||||
Acquisition and sale of businesses (b) | (306 | ) | (534 | ) | ||||
Net purchase of own shares for share schemes (c) | (8 | ) | (113 | ) | ||||
Dividends paid to non-controlling interests | (72 | ) | (88 | ) | ||||
Purchase of shares of non-controlling interests (d) | — | (37 | ) | |||||
Net movements in bonds and other borrowings | (315 | ) | (157 | ) | ||||
Equity dividends paid | (1,341 | ) | (1,228 | ) | ||||
Other movements | 2 | 1 | ||||||
|
|
|
| |||||
Net decrease in cash and cash equivalents | (77 | ) | (921 | ) | ||||
Net decrease in bonds and other borrowings | 315 | 157 | ||||||
Exchange differences (e) | (7 | ) | 349 | |||||
Borrowings on acquisition of businesses | (869 | ) | — | |||||
Other non-cash items | (39 | ) | (32 | ) | ||||
|
|
|
| |||||
Net borrowings at the end of the year | (9,527 | ) | (8,850 | ) | ||||
|
|
|
|
Movement in net borrowings | 2015 £ million | 2014 £ million | ||||||
Net borrowings at the beginning of the year | (8,850 | ) | (8,403 | ) | ||||
Free cash flow (a) | 1,963 | 1,235 | ||||||
Acquisition and sale of businesses (b) | (306 | ) | (534 | ) | ||||
Net purchase of own shares for share schemes (c) | (8 | ) | (113 | ) | ||||
Dividends paid to non-controlling interests | (72 | ) | (88 | ) | ||||
Purchase of shares of non-controlling interests (d) | — | (37 | ) | |||||
Net movements in bonds and other borrowings | (315 | ) | (157 | ) | ||||
Equity dividends paid | (1,341 | ) | (1,228 | ) | ||||
Other movements | 2 | 1 | ||||||
|
|
|
| |||||
Net decrease in cash and cash equivalents | (77 | ) | (921 | ) | ||||
Net decrease in bonds and other borrowings | 315 | 157 | ||||||
Exchange differences (e) | (7 | ) | 349 | |||||
Borrowings on acquisition of businesses | (869 | ) | — | |||||
Other non-cash items | (39 | ) | (32 | ) | ||||
|
|
|
| |||||
Net borrowings at the end of the year | (9,527 | ) | (8,850 | ) | ||||
|
|
|
|
(a) See page 4985 for the analysis of free cash flow.
(b) On 2 July 2014 the group acquired an additional 26% investment in USL for INR 114.5 billion (£1,118 million). On 31 October 2014 the sale of the Whyte and Mackay Group by USL resulted in a net cash receipt of £391 million. On 27 February 2015, Diageo paid $293 million (£192 million) for the 50% equity interest in Don Julio B.V. that it did not already own and for the Mexican distribution rights for Don Julio. As part of the transaction, Diageo also agreed to sell the equity share capital in The Old Bushmills Distillery Company Limited. The net cash consideration received for Bushmills amounted to $709 million (£456 million).
In the year ended 30 June 2014 cash payments primarily comprised £474 million in respect of the acquisition of a 18.74% investment in USL.
52
Business review (continued)
(c) Net purchase of own shares comprised purchase of treasury shares for the future settlement of obligations under the employee share option schemes of £75 million (2014 —– £208 million) less receipts from employees on the exercise of share options of £67 million (2014 —– £95 million).
(d) In the year ended 30 June 2014 Diageo purchased the remaining 7% equity stake in Sichuan Chengdu Shuijingfang Group Co., Ltd.
(e) Exchange differences primarily arose on US dollar and euro denominated borrowings partially offset by the favourable change on foreign exchange swaps and forwards.
Movement in equity | 2015 £ million | 2014 £ million | ||||||
Equity at the beginning of the year | 7,590 | 8,088 | ||||||
Profit for the year | 2,467 | 2,181 | ||||||
Exchange adjustments (a) | (225 | ) | (1,133 | ) | ||||
Net remeasurement of post employment plans | 113 | (167 | ) | |||||
Exchange recycled to the income statement (b) | 88 | — | ||||||
Fair value movements on available-for-sale investments (b) | 20 | (85 | ) | |||||
Non-controlling interests acquired | 641 | 8 | ||||||
Purchase of shares of non-controlling interests | — | (37 | ) | |||||
Dividends to non-controlling interests | (72 | ) | (88 | ) | ||||
Dividends paid | (1,341 | ) | (1,228 | ) | ||||
Other reserve movements | (25 | ) | 51 | |||||
|
|
|
| |||||
Equity at the end of the year | 9,256 | 7,590 | ||||||
|
|
|
|
90
Business review (continued)
Movement in equity | 2015 £ million | 2014 £ million | ||||||
Equity at the beginning of the year | 7,590 | 8,088 | ||||||
Profit for the year | 2,467 | 2,181 | ||||||
Exchange adjustments (a) | (225 | ) | (1,133 | ) | ||||
Net remeasurement of post employment plans | 113 | (167 | ) | |||||
Exchange recycled to the income statement (b) | 88 | — | ||||||
Fair value movements on available-for-sale investments (b) | 20 | (85 | ) | |||||
Non-controlling interests acquired | 641 | 8 | ||||||
Purchase of shares of non-controlling interests | — | (37 | ) | |||||
Dividends to non-controlling interests | (72 | ) | (88 | ) | ||||
Dividends paid | (1,341 | ) | (1,228 | ) | ||||
Other reserve movements | (25 | ) | 51 | |||||
|
|
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| |||||
Equity at the end of the year | 9,256 | 7,590 | ||||||
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(a) Movement in the year ended 30 June 2015 primarily arose from the exchange loss on Turkish lira, Brazilian real and euro denominated net investments.
(b) Following the acquisition of majority equity stakes in USL, 50% equity interest in Don Julio and one of the group’s joint ventures in South Africa that it did not already own exchange losses of £88 million were recycled to the income statement.
On the acquisition of USL on 2 July 2014 a 43.91% (£641 million) non-controlling interest was recognised. In the year ended 30 June 2014 a gain of £85 million, in respect of USL, was recycled to the income statement reflecting the step up from available-for-sale investment to associate.
Post employment plans
The deficit in respect of post employment plans before taxation decreased by £216 million from £475 million at 30 June 2014 to £259 million at 30 June 2015. The reduction was primarily due to strong asset return and a reduction in long term inflation rates partially offset by a decrease in returns from AA – ratedAA-rated corporate bonds used to calculate the discount rates on the liabilities of the post employment plans (United Kingdom reduced from 4.2% to 3.8% and Ireland from 3.0% to 2.6%). Total cash contributions by the group to all post employment plans in the year ending 30 June 2016 are estimated to be approximately £180 million.
5391
Business review (continued)
NORTH AMERICA
North America accounts for about a third of ourPerformance
Netsalesbymarkets(%)Netsalesbycategories(%)Netsalesbypricepoints(%)USSpiritsCanadaandWinesOtherDGUSASpiritsWineOtherBeerRTDsValueSuperpremiumStandardUltrapremiumPremium |
Key financials | 2014 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 £ million | Reported movement % | ||||||||||||||||||
Net sales | 3,444 | 97 | (37 | ) | (49 | ) | 3,455 | — | ||||||||||||||||
Marketing | 540 | 16 | 7 | (21 | ) | 542 | — | |||||||||||||||||
Operating profit before exceptional items | 1,460 | 27 | (2 | ) | (37 | ) | 1,448 | (1 | ) | |||||||||||||||
Exceptional operating items | (35 | ) | (28 | ) | ||||||||||||||||||||
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Operating profit | 1,425 | 1,420 | — | |||||||||||||||||||||
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Net sales
Net sales were £3,455 million in the year ended 30 June 2015, flat compared to net sales of £3,444 million in the year ended 30 June 2014. Net sales were impacted by favourable exchange rate movements of £97 million primarily due to the strength of the US dollar against sterling, offset by the loss of the net sales of £37 million on termination of the transitional arrangements in respect of Jose Cuervo and around 45%the disposal of Bushmills in February 2015 and organic net sales decline of £49 million (see further performance analysis below).
Operating profit
Operating profit was £1,420 million in the year ended 30 June 2015 a decrease of £5 million compared to operating profit and is the largest market for premium drinksof £1,425 million in the world. Continuing economic uncertainty has adverselyyear ended 30 June 2014. Operating profit benefitted from favourable exchange rate movements of £27 million (primarily due to the strength of the US dollar partially offset by the euro) offset by an organic decline of £37 million. Operating profit was impacted consumer spendingby exceptional operating charges of £28 million in the region, but dueyear ended 30 June 2015 a decrease of £7 million compared to our leadership in innovation, strong route to consumer and solid marketing investment in key brands, we continue to be well positioned. We are promoting responsible drinking, and this year the US government approved our request to include serving fact information on beverage alcohol products.
Key financials | 2014 Reported £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 Reported £ million | Reported movement % | ||||||||||||||||||
Net sales | 3,444 | 97 | (37 | ) | (49 | ) | 3,455 | – | ||||||||||||||||
Marketing spend | 540 | 16 | 7 | (21 | ) | 542 | – | |||||||||||||||||
Operating profit before exceptional items | 1,460 | 27 | (2 | ) | (37 | ) | 1,448 | (1 | ) | |||||||||||||||
Exceptional items | (35 | ) | (28 | ) | ||||||||||||||||||||
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Operating profit | 1,425 | 1,420 | – | |||||||||||||||||||||
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Our markets
Our North America business comprises US Spirits and Wines, Diageo Guinness USA (DGUSA) and Diageo Canada, headquartered in Norwalk, Connecticut.
54
Business review (continued)
Route to market
Route to market£35 million in the United States is through the three-tier system and we distribute our products through more than 100 spirits and wines distributors and brokers, and more than 400 beer distributors. We haveyear ended 30 June 2014, as a unique routeresult of lower of restructuring costs.
Further performance analysis
Unless otherwise stated percentage movements refer to market for our spirits and wine businessorganic movements in the United States, with more than 3,000 dedicated distributor sales people focused only on Diageo and Moët Hennessy spirits and wine brands. Diageo consolidates its US Spirits and Wines business into a single state-wide distributor in 41 states and the District of Columbia, representing more than 80% of the company’s US Spirits and Wines volume.
US Spirits and Wines business operates through five divisions in Open States where we sell to distributors who then sell to retailers, and through two divisions in Control States where mostly we sell to the state, which in turn sells to state or agency stores and on premise retailers. US Spirits and Wines sells the vast majority of the Californian and imported wines we own and represent, with the remaining small portion of sales coming from winery visitor centres and online sales.
DGUSA sells and markets brands including Guinness, Smirnoff Ice and Red Stripe. Beer distribution generally follows the three-tier open state regulations across the United States.
Diageo Canada distributes our collection of spirits, beer and wine brands across all Canadian provinces, which generally operate through a provincial control system. Diageo Canada operates through a single broker with a dedicated sales force handling our brands in the country.
National brand strategy, strategic accounts marketing and corporate functions are managed at the North America level. In North America, we market a total beverage alcohol portfolio.
Supply operations
We have 11 bottling, distilling, blending and maturation sites including operations in Plainfield, Illinois; Amherstburg, Ontario; Valleyfield, Quebec; Relay, Maryland; Gimli, Manitoba; Tullahoma, Tennessee; Louisville, Kentucky; and seven wineries and wine bottling operations in California. Focusing on continuously improving efficiency across our supply chain we made significant investments during the year and announced plans to cease bottling operations in Relay, Maryland.
Sustainability and responsibility
As our largest market, with many millions of consumers, our focus on responsible drinking in North America is particularly important, and we have built a reputation as a leading voice in the industry. After 12 years of advocating with a coalition of consumer and public health advocates, the US government recently allowed alcohol companies to include alcohol content and nutritional information per typical serve on packaging. In March we followed this by announcing our commitment to provide consumers around the world with this information – a first for any alcohol company. Another key issue for us is operational sustainability – our Californian vineyards and wineries are in a water-stressed area, and we have responded by creating ‘Blue Teams’ to scale up our focus on reducing water use in our operations and identifying opportunities in our wine growers’ supply chain.
Performancefollowing analysis.
In North America, US Spirits has delivered improved depletion performance through the year with the value of distributor depletions, up 3% in the first half and up 4% for the full year. Shipments were broadly in line with depletions and therefore net sales were down 2% year on year as last year shipments were higher than depletions mainly driven by innovation launches. Beer net sales were in line with last year, ready to drink and wine were down slightly and in Canada net sales grew 2%. Volume growth of the reserve portfolio was the main driver of the 1.5pps of increased price/mix as price premiums against the competition, for brands such as Smirnoff and Captain Morgan, were narrowed. This led to lower achieved price year on year but did drive improved share positions. Our innovation agenda continued to lead the industry in North America and this year was a key driver of our net sales. Advertising spend was down as we drove procurement savings on media and agency fees in marketing while maintaining our share of voice. Adjusting for these savings, marketing as a percentage of net sales was roughly flat. Overheads were flat but operating margin declined 47 basis points driven by soft volume and lower net sales of spirits in the United States.
5592
Business review (continued)
Markets: | Organic volume movement(i) % | Organic net sales movement % | Reported net sales movement % | |||||||||
North America | (3 | ) | (1 | ) | — | |||||||
US Spirits and Wines | (3 | ) | (2 | ) | 1 | |||||||
DGUSA | (3 | ) | (1 | ) | 3 | |||||||
Canada | 3 | 2 | (4 | ) | ||||||||
Spirits(ii) | (3 | ) | (1 | ) | 1 | |||||||
Beer | — | (1 | ) | 1 | ||||||||
Wine | (2 | ) | (2 | ) | 2 | |||||||
Ready to drink | (3 | ) | (1 | ) | (14 | ) | ||||||
Global giants and local stars(ii): | ||||||||||||
Smirnoff | (2 | ) | (3 | ) | (1 | ) | ||||||
Captain Morgan | (10 | ) | (12 | ) | (10 | ) | ||||||
Johnnie Walker | (8 | ) | (15 | ) | (12 | ) | ||||||
Guinness | 2 | 2 | 4 | |||||||||
Baileys | (5 | ) | (5 | ) | (3 | ) | ||||||
Tanqueray | (2 | ) | (2 | ) | 1 | |||||||
Crown Royal | 13 | 12 | 15 | |||||||||
Cîroc | 4 | 4 | 8 | |||||||||
Ketel One vodka | (2 | ) | (2 | ) | 1 | |||||||
Bulleit | 32 | 36 | 41 | |||||||||
Don Julio | 5 | 9 | 13 | |||||||||
Buchanan’s | 17 | 18 | 23 |
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
North America | (3 | ) | (4 | ) | (1 | ) | — | |||||||||
US Spirits and Wines | (3 | ) | (5 | ) | (2 | ) | 1 | |||||||||
DGUSA | (3 | ) | (3 | ) | (1 | ) | 3 | |||||||||
Canada | 3 | 3 | 2 | (4 | ) | |||||||||||
Spirits(i) | (3 | ) | (3 | ) | (1 | ) | 1 | |||||||||
Beer | — | — | (1 | ) | 1 | |||||||||||
Wine | (2 | ) | (2 | ) | (2 | ) | 2 | |||||||||
Ready to drink | (3 | ) | (25 | ) | (1 | ) | (14 | ) | ||||||||
Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Smirnoff | (2 | ) | (3 | ) | (1 | ) | ||||||||||
Captain Morgan | (10 | ) | (12 | ) | (10 | ) | ||||||||||
Johnnie Walker | (8 | ) | (15 | ) | (12 | ) | ||||||||||
Guinness | 2 | 2 | 4 | |||||||||||||
Baileys | (5 | ) | (5 | ) | (3 | ) | ||||||||||
Tanqueray | (2 | ) | (2 | ) | 1 | |||||||||||
Crown Royal | 13 | 12 | 15 | |||||||||||||
Cîroc | 4 | 4 | 8 | |||||||||||||
Ketel One vodka | (2 | ) | (2 | ) | 1 | |||||||||||
Bulleit | 32 | 36 | 41 | |||||||||||||
Don Julio | 5 | 9 | 13 | |||||||||||||
Buchanan’s | 17 | 18 | 23 |
(i) |
Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement. |
5693
Business review (continued)
KEY HIGHLIGHTS
5794
Business review (continued)
EUROPE, RUSSIA AND TURKEY
Diageo is the largest premium drinks business in Western Europe. Consumer marketing programmes are developed at a market level to drive consistency, efficiency and scale across all countries. In Russia and Eastern Europe we are driving our premium core, standard and value brands and reserve portfolio, whilst in Turkey, we use our local businesses’ strong route to consumer to drive accelerated growth in international premium spirits. In Europe, where competition for talent is particularly strong, our reputation as a trusted and respected company and for ground-breaking innovation, is key to our ability to attract and retain the people we need to deliver our Performance Ambition.
Key financials | 2014 Reported (restated)(i) £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 Reported £ million | Reported movement % | ||||||||||||||||||
Net sales | 2,814 | (186 | ) | (13 | ) | 2 | 2,617 | (7 | ) | |||||||||||||||
Marketing spend | 413 | (30 | ) | (1 | ) | 6 | 388 | (6 | ) | |||||||||||||||
Operating profit before exceptional items | 853 | (67 | ) | (2 | ) | 20 | 804 | (6 | ) | |||||||||||||||
Exceptional items | (20 | ) | (20 | ) | ||||||||||||||||||||
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Operating profit | 833 | 784 | (6 | ) | ||||||||||||||||||||
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Net sales by markets (%) Net sales by categories (%) Net sales by price points Europe Turkey Russia Other Spirits RTDs Wine Beer Other Value Super premium Premium Standard Ultra premium |
Our markets
Key financials | 2014 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 £ million | Reported movement % | ||||||||||||||||||
Net sales | 2,814 | (186 | ) | (13 | ) | 2 | 2,617 | (7 | ) | |||||||||||||||
Marketing | 413 | (30 | ) | (1 | ) | 6 | 388 | (6 | ) | |||||||||||||||
Operating profit before exceptional items | 853 | (67 | ) | (2 | ) | 20 | 804 | (6 | ) | |||||||||||||||
Exceptional operating items | (20 | ) | (20 | ) | ||||||||||||||||||||
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Operating profit | 833 | 784 | (6 | ) | ||||||||||||||||||||
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Net sales
Europe comprises Western Net sales were £2,617 million in the year ended 30 June 2015 a decrease of £197 million compared to net sales of £2,814 million in the year ended 30 June 2014. Net sales were impacted by adverse exchange rate movements of £186 million, principally because of the weakness of the euro, Russian rouble and Turkish lira and the loss of net sales of £13 million on the disposal of Bushmills in February 2015. Organic growth improved net sales by £2 million (see further performance analysis below).
Operating profit
Operating profit was £784 million in the year ended 30 June 2015 a decrease of £49 million compared to operating profit of £833 million in the year ended 30 June 2014. Operating profit was impacted by adverse exchange rate movements of £67 million because of the weakness of the euro, Russian rouble and Turkish lira partially offset by organic growth of £20 million. Operating profit was impacted by exceptional operating charges in respect of restructuring costs of £20 million in the year ended 30 June 2015 and the year ended 30 June 2014.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Europe, Russia and Eastern Europe and Turkey. Western Europe is managed as a single market with country teams focusing on sales and customer marketing execution. It includes Great Britain, Ireland, Iberia, France, Germany and Diageo Guinness Continental Europe beer business. Eastern Europe includes Poland, Bulgaria, Romania and Israel.
On 1 July 2015, Russia became a standalone market while Eastern Europe was merged with Western Europe creating Diageo Europe. Turkey remained unchanged.
58
Business review (continued)
Route to market
In Great Britain we sell and market our products through Diageo GB (spirits, beer and ready to drink), Percy Fox & Co (wines) and Justerini & Brooks Retail (wines private clients). Products are distributed through independent wholesalers and directly to retailers. In the on trade, products are sold through major brewers, multiple retail groups and smaller regional independent brewers and wholesalers.
In the Republic of Ireland and Northern Ireland, Diageo sells and distributes directly to the on trade and the off trade via a telesales operation.
Across the remainder of Western Europe, we distribute our spirits brands primarily through our own distribution companies, except for France where products are sold through a joint venture arrangement with Moët Hennessy.
Diageo Guinness Continental Europe distributes our beer brands in mainland Europe, focusing in Germany, Russia and France, our largest mainland European beer markets.
In Russia and Poland we operate through wholly owned subsidiaries, while in other Eastern Europe countries we use third party 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.
Supply operations
The International Supply Centre (ISC) comprises the supply operations in the United Kingdom, Ireland and Italy. The group owns 29 whisky distilleries in Scotland, a Dublin based beer brewery and maturing and packaging facilities in Scotland, England, Ireland and Italy. The ISC ships whisk(e)y, vodka, gin, rum, beer, wine, cream liqueurs, and other spirit-based drinks to over 180 countries. Through our £1 billion investment in Scotch whisky production and inventory, announced in 2012, distilling capacity has increased by over 25%.
Raki, vodka and wine are produced in Turkey at a number of sites and Smirnov vodka is produced in Russia.
Sustainability and responsibility
People today increasingly want to work for companies that they believe make a positive social and environmental, as well as economic, contribution. Our leadership in responsible drinking, through programmes and partnerships, and our contribution to the communities in which we operate, support our reputation and ability to attract and retain employees. Our responsible drinking programme, NOFAS, aims to tackle foetal alcohol syndrome by training midwives and health professionals – to date we have reached around 300,000 pregnant women in the UK. In the last few years, we have launched our Learning for Life community programme in a number of European countries, including a major investment in Scotland, as part of a five-year effort targeted towards young people.
Performance
Europe’sTurkey’s performance reflected an improved momentuma flat performance in Western Europe, growth in Turkey and a challenging environment in Russia. In Western Europe, net sales were up 1%, asalthough performance improved in more than half of our markets. Reserve brands delivered another strong performance with net sales up 20% and growing double digit even in the more challenging economies in Southern Europe. Innovation remained a key performance driver with net sales up 30% driven by successes such as ‘The Brewers Project’ which helped put Guinness back in growth in both Great Britain and Ireland. We continued to invest in our route to consumer, increasing the number of sales people by 30% and the number of outlets we cover by 60%. In Russia, which continued to be impacted by economic volatility, consumers traded down and customers reduced inventory levels while Diageo gained share in scotch and rum. Turkey net sales were up 3% driving premiumisation in the raki category and gained share in scotch and vodka. Total operating margin for the region improved 75bps largely driven by gross margin improvement in Turkey, and overhead cost reduction in Western Europe, which was partially reinvested in marketing spend and route to consumer.
5995
Business review (continued)
Markets: | Organic volume movement(i) % | Organic net sales movement % | Reported net sales movement % | |||||||||
Europe | — | — | (7 | ) | ||||||||
Western Europe | 1 | 1 | (5 | ) | ||||||||
Russia and Eastern Europe | (8 | ) | (9 | ) | (26 | ) | ||||||
Turkey | — | 3 | (5 | ) | ||||||||
Spirits(ii) | (1 | ) | 1 | (8 | ) | |||||||
Beer | 1 | 1 | (4 | ) | ||||||||
Wine | — | (1 | ) | (4 | ) | |||||||
Ready to drink | (6 | ) | (2 | ) | (5 | ) | ||||||
Global giants and local stars(ii): | ||||||||||||
Guinness | 1 | 2 | (2 | ) | ||||||||
Smirnoff | (2 | ) | (4 | ) | (7 | ) | ||||||
Johnnie Walker | (5 | ) | (7 | ) | (15 | ) | ||||||
Baileys | (3 | ) | (4 | ) | (10 | ) | ||||||
Captain Morgan | 9 | 10 | 1 | |||||||||
Yenì Raki | (4 | ) | 4 | (6 | ) | |||||||
JeB | (1 | ) | (3 | ) | (10 | ) |
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
Europe, Russia and Turkey | — | — | — | (7 | ) | |||||||||||
Europe | (1 | ) | (1 | ) | — | (5 | ) | |||||||||
Russia | (12 | ) | (12 | ) | (14 | ) | (42 | ) | ||||||||
Turkey | — | — | 3 | (5 | ) | |||||||||||
Spirits(i) | (1 | ) | (1 | ) | 1 | (8 | ) | |||||||||
Beer | 1 | 1 | 1 | (4 | ) | |||||||||||
Wine | — | — | (1 | ) | (4 | ) | ||||||||||
Ready to drink | (6 | ) | (6 | ) | (2 | ) | (5 | ) | ||||||||
Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Guinness | 1 | 2 | (2 | ) | ||||||||||||
Smirnoff | (2 | ) | (4 | ) | (7 | ) | ||||||||||
Johnnie Walker | (5 | ) | (7 | ) | (15 | ) | ||||||||||
Baileys | (3 | ) | (4 | ) | (10 | ) | ||||||||||
Captain Morgan | 9 | 10 | 1 | |||||||||||||
Yenì Raki | (4 | ) | 4 | (6 | ) | |||||||||||
JeB | (1 | ) | (3 | ) | (10 | ) |
(i) |
Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement. |
6096
Business review (continued)
KEY HIGHLIGHTS
6197
Business review (continued)
AFRICA
In Africa our strategy is to grow Diageo’s leadership across beer and spirits by providing brand choice across a broad range of consumer motivations, profiles, and occasions. We are focused on growing beer faster than the market and accelerating the growth of spirits through continued investment in infrastructure and brands. Local sourcing is a key element of our strategy in Africa: it directly supports our commercial operations, while indirectly supporting our position by bringing wider benefits to society as a whole.Performance
Key financials | 2014 Reported (restated)(i) £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 Reported £ million | Reported movement % | ||||||||||||||||||
Net sales | 1,430 | (100 | ) | — | 85 | 1,415 | (1 | ) | ||||||||||||||||
Marketing spend | 152 | (10 | ) | — | 5 | 147 | (3 | ) | ||||||||||||||||
Operating profit before exceptional items | 340 | (52 | ) | 1 | 29 | 318 | (6 | ) | ||||||||||||||||
Exceptional items | (23 | ) | (7 | ) | ||||||||||||||||||||
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Operating profit | 317 | 311 | (2 | ) | ||||||||||||||||||||
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Netsalesbymarkets(%)Netsalesbycategories(%)Netsalesbypricepoints(%)NigeriaSouthAfricaEastAfricaOtherAfricaRegionalMarketsSpiritsWineOtherBeerRTDsValueSuperpremiumStandardUltrapremiumPremium |
Our markets
Key financials | 2014 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 £ million | Reported movement % | ||||||||||||||||||
Net sales | 1,430 | (100 | ) | — | 85 | 1,415 | (1 | ) | ||||||||||||||||
Marketing | 152 | (10 | ) | — | 5 | 147 | (3 | ) | ||||||||||||||||
Operating profit before exceptional items | 340 | (52 | ) | 1 | 29 | 318 | (6 | ) | ||||||||||||||||
Exceptional operating items | (23 | ) | (7 | ) | ||||||||||||||||||||
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Operating profit | 317 | 311 | (2 | ) | ||||||||||||||||||||
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Net sales
The region comprises Nigeria, East Africa (Kenya, Tanzania, Uganda, Burundi, RwandaNet sales were £1,415 million in the year ended 30 June 2015 a decrease of £15 million compared to net sales of £1,430 million in the year ended 30 June 2014. Net sales were impacted by adverse exchange rate movements of £100 million primarily driven by the weak Nigerian naira, Ghana cedi and South Sudan), Africa Regional Markets (includingAfrican rand mainly offset by organic growth of £85 million (see further performance analysis below).
Operating profit
Operating profit was £311 million in the year ended 30 June 2015 a decrease of £6 million compared to operating profit of £317 million in the year ended 30 June 2014. Operating profit was adversely impacted by £52 million exchange rate movements driven by the weak Nigerian naira, Ghana Cameroon, Ethiopia, Angola, Mozambique and a sorghum beer business in South Africa)cedi and South Africa (all other products).
Route to market
In Africa our largest businesses areAfrican rand partially offset by organic growth of £29 million. Operating profit was impacted by exceptional operating charges in Nigeria, where we own 54.3%respect of a listed company whose principal brands are Guinness, Harp and Malta, and in East Africa, where we own 50.03%restructuring costs of East African Breweries Limited (EABL). EABL produces and distributes beer and spirits brands to a range of consumers in Kenya and Uganda, and has a 51% equity interest in Serengeti Breweries Limited, Tanzania. Within Africa Regional Markets, we have wholly owned subsidiaries in Cameroon, Ethiopia, Mozambique and Réunion and majority owned subsidiaries in Ghana and the Seychelles. Angola is supplied via a third party distributor. In South Africa we sell spirits and sorghum beer through wholly owned subsidiaries and currently sell our beer, cider and ready to drink products through our 42.25% stake in DHN Drinks Ltd, a joint venture with Heineken and Namibia Breweries Ltd. On 28 July 2015, Diageo announced the agreement to dispose of its equity interest in DHN Drinks Ltd. Diageo has brewing arrangements with the Castel Group who license, brew and distribute Guinness£7 million in the Democratic Republic of Congo, Gambia, Gabon, Ivory Coast, Togo, Benin, Burkina Faso, Chad, Mali and Guinea. Diageo sells spirits through distributorsyear ended 30 June 2015, compared to £23 million for the year ended 30 June 2014.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the majority of other sub-Saharan countries.
Supply operations
We have 14 breweries in Africa, including the brewery owned by Sedibeng in South Africa in which we own a 25% equity stake.
In addition, our beer and spirits brands are produced by third parties under licence in 20 other African countries. We also own five manufacturing facilities including blending, malting and cider plants.
62
Business review (continued)
Sustainability and responsibility
In Africa we create wealth both directly through our operations and indirectly through our broader network, particularly of agricultural suppliers. We source 70% of agricultural and packaging materials locally and we work with more than 50,000 local farmers for our agricultural inputs. Thirteen of our production sites in Africa are in water-stressed areas, so much of our focus is on managing water use in our operations effectively and enhancing access to clean water to surrounding communities through our pan-African Water of Life programme. Since we began the programme in 2006, we have brought safe drinking water to more than ten million people. The launch of our Water Blueprint strategy this year will help us focus further on water use in the supply chain, with one of our key targets being to equip our suppliers with the tools to protect water sources in water-stressed areas. We also support many responsible drinking programmes throughout the continent. We tackle issues like drink driving through programmes such as Dry Drive in South Africa, and underage consumption through the Red Card initiative in Uganda, and through advocating stronger legal purchase age laws in Ghana. Our training programmes have also created close to 40,000 responsible drinking ambassadors across Africa this year.
Performancefollowing analysis.
Good performances in both beer and spirits led to net sales up 6% in Africa. Investments in route to consumer together with innovation drove an 8% increase in beer and led to double digit growth in spirits. The mainstream beer market in Nigeria remained challenged as consumers moved towards more value products, impacting the performance of Guinness and Harp. However the national rollout of Orijin and renovation of Satzenbrau drove an increase in beer net sales of 9%. Investment in Guinness marketing has stabilised volume share in the brand. Good progress in route to consumer led to strong net sales growth in Ghana, and in Cameroon, strong marketing campaigns delivered net sales and share gains in Guinness. In South Africa, spirits growth was underpinned by the continued strong performances of Smirnoff 1818, which is now a two million case brand, and Johnnie Walker, while overall growth was impacted by a decline in ready to drink. Reserve brands grew 26% with double digit increases in South Africa, East Africa and Nigeria. Increased sales of mainstream brands, which have lower costs per case, together with procurement and supply efficiencies were partially offset by an increase in marketing spend and route to consumer investments leading to organic operating margin improvement of 75 basis points.
Markets: | Organic volume movement(i) % | Organic net sales movement % | Reported net sales movement % | |||||||||
Africa | 7 | 6 | (1 | ) | ||||||||
Nigeria | 13 | 6 | (3 | ) | ||||||||
East Africa | 7 | 9 | 6 | |||||||||
Africa Regional Markets | 14 | 15 | 1 | |||||||||
South Africa | (2 | ) | (7 | ) | (12 | ) | ||||||
Spirits(ii) | 17 | 13 | 7 | |||||||||
Beer | 4 | 8 | (1 | ) | ||||||||
Ready to drink | (34 | ) | (28 | ) | (33 | ) | ||||||
Global giants and local stars(ii): | ||||||||||||
Guinness | (5 | ) | (7 | ) | (15 | ) | ||||||
Johnnie Walker | 3 | 7 | 2 | |||||||||
Smirnoff | 22 | 22 | 16 | |||||||||
Tusker | (6 | ) | 3 | 1 | ||||||||
Malta | (8 | ) | (5 | ) | (17 | ) | ||||||
Senator | (11 | ) | (16 | ) | (20 | ) | ||||||
Harp | (40 | ) | (46 | ) | (50 | ) |
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Business review (continued)
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
Africa | 7 | 7 | 6 | (1 | ) | |||||||||||
Nigeria | 13 | 13 | 6 | (3 | ) | |||||||||||
East Africa | 7 | 7 | 9 | 6 | ||||||||||||
Africa Regional Markets | 14 | 14 | 15 | 1 | ||||||||||||
South Africa | (2 | ) | (2 | ) | (7 | ) | (12 | ) | ||||||||
Spirits(i) | 17 | 17 | 13 | 7 | ||||||||||||
Beer | 4 | 4 | 8 | (1 | ) | |||||||||||
Ready to drink | (34 | ) | (34 | ) | (28 | ) | (33 | ) | ||||||||
Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Guinness | (5 | ) | (7 | ) | (15 | ) | ||||||||||
Johnnie Walker | 3 | 7 | 2 | |||||||||||||
Smirnoff | 22 | 22 | 16 | |||||||||||||
Tusker | (6 | ) | 3 | 1 | ||||||||||||
Malta | (8 | ) | (5 | ) | (17 | ) | ||||||||||
Senator | (11 | ) | (16 | ) | (20 | ) | ||||||||||
Harp | (40 | ) | (46 | ) | (50 | ) |
KEY HIGHLIGHTS
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement. |
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Business review (continued)
• | Marketing investment in Africa increased 4%. In Nigeria spend on beer was refocused from Harp to support the growth of Orijin(i) and value beers, while in East Africa, the decline in Senator volume also led to a reduction in spend. Spend increased behind vodka, notably Smirnoff 1818 in South Africa in support of pack innovations and promotional activity and investment behind Johnnie Walker grew in South Africa and East Africa. Ready to drink investment increased as Smirnoff Ice Double Black & Guarana launched in East Africa and Nigeria. |
(i) | In the year ended 30 June 2015 Orijin was reported as beer while in the year ended 30 June 2016 as ready to drink. |
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Business review (continued)
LATIN AMERICA AND CARIBBEAN
In Latin America and Caribbean the strategic priority is continued leadership in scotch, while broadening the category range to include vodka, rum, liqueurs and local spirits. We are continuing to invest in routes to market andPerformance
Netsalesbymarkets(%)Netsalesbycategories(%)Netsalesbypricepoints(%)Paraguay,MexicoUruguayandBrazilWestLACVenezuelaOtherColombiaSpiritsWineOtherBeerRTDsValueSuperpremiumStandardUltrapremiumPremium |
Key financials | 2014 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 £ million | Reported movement % | ||||||||||||||||||
Net sales | 1,144 | (123 | ) | 23 | (11 | ) | 1,033 | (10 | ) | |||||||||||||||
Marketing | 203 | (22 | ) | 3 | 10 | 194 | (4 | ) | ||||||||||||||||
Operating profit before exceptional items | 328 | (60 | ) | 2 | (7 | ) | 263 | (20 | ) | |||||||||||||||
Exceptional operating items | (14 | ) | (5 | ) | ||||||||||||||||||||
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Operating profit | 314 | 258 | (18 | ) | ||||||||||||||||||||
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Net sales
Net sales were £1,033 million in the rangeyear ended 30 June 2015 a decrease of £111 million compared to net sales of £1,144 million in the year ended 30 June 2014. Net sales reduced by £123 million due to adverse exchange rate movements primarily in respect of the decline in value of the Venezuelan bolivar and depth of our portfolio of leading brands. We are also enhancing our supply structure to enable the business to provide the emerging middle classBrazilian real and an increasing numberorganic decline of wealthy consumers with£11 million (see further performance analysis below). These impacts were partially mitigated by additional net sales of £23 million attributable to the premium brands they aspire to. In this region’s changing regulatory landscape, our presence is supported by our reputation asacquisition of a trusted and respected business, based on our stance on responsible drinking, and community development programmes like Learning for Life.
Key financials | 2014 Reported £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 Reported £ million | Reported movement % | ||||||||||||||||||
Net sales | 1,144 | (123 | ) | 23 | (11 | ) | 1,033 | (10 | ) | |||||||||||||||
Marketing spend | 203 | (22 | ) | 3 | 10 | 194 | (4 | ) | ||||||||||||||||
Operating profit before exceptional items | 328 | (60 | ) | 2 | (7 | ) | 263 | (20 | ) | |||||||||||||||
Exceptional items | (14 | ) | (5 | ) | ||||||||||||||||||||
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Operating profit | 314 | 258 | (18 | ) | ||||||||||||||||||||
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Our markets
Our Latin America and Caribbean (LAC) business comprises Paraguay, Uruguay and Brazil (PUB), Venezuela, Colombia, Mexico and West LAC (Central America and Caribbean, Argentina, Chile, Peru, Ecuador and Bolivia).
Route to market
We sell our products through a combination of our own subsidiary companies and third party distributors. In Brazil, sales are primarily made directly to international retailers and distributors. In addition to Diageo Brazil, Diageo owns 100% of Ypióca, a leading cachaça producer and distributor. In Uruguay, Diageo manages distribution both directly and through distributors.
All products in Venezuela are sold through dedicated third party distributors. In Colombia we sell directly to major grocers, serving all other accounts and channels through distributors.
In Mexico our brands are sold directly by Diageo, either through direct sales to international accounts or through wholesalers and distributors.
In selected markets in West LAC, we sell directly to consumers, while in key markets, such as Costa Rica and the Dominican Republic, we use exclusive distributors. In Jamaica, we own a 58% controlling interest in Desnoes & Geddes Limited, the Jamaican brewer of Red Stripe lager.
In Argentina, we sell directly to major grocers, and other businesses are managed through a combination of wholesalers and distributors outside of major grocers, to whom we sell directly.
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Business review (continued)
Supply operations
The majority of brands sold in the region are manufactured in our International Supply Centre in Europe. However in recent years we have acquired a number of local manufacturers. This year we acquired the remaining 50% equity interest in Don Julio giving full ownershipthat the group did not already own.
Operating profit
Operating profit was £258 million in the year ended 30 June 2015 a decrease of £56 million compared to operating profit of £314 million in the brand and production facilities. In 2012 we acquired 100%year ended 30 June 2014. Operating profit was impacted by adverse exchange rate movements of Ypióca in Brazil which produces cachaça and in 2011 we acquired a controlling interest in a company in Guatemala (Añejos de Altura) producing Zacapa. In addition, we have controlling interest in a brewery in Jamaica (Red Stripe), and the Navarro Correas winery in Mendoza, Argentina. We also partner with more than 12 brewers and over 20 co-pack partners to manufacture brands and package products under strict quality assurance protocols.
Sustainability and responsibility
In this region, we have built a name for ourselves as a company that is committed£60 million primarily due to the long term developmentVenezuelan bolivar, Brazilian real and Mexican peso and an organic decline of an industry that can bring economic and social value£7 million. Operating profit was impacted by exceptional restructuring costs of £5 million for the year ended 30 June 2015 a decrease of £9 million compared to society. Our responsible drinking programmes, such as Actuando Mejora £14 million in Mexico, and Drink Rightthe year ended 30 June 2014.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in Jamaica, are making a tangible difference in reducing alcohol-related harm, and this year contributed to creating more than 240,000 responsible drinking ambassadors. Our flagship community reinvestment programme, Learning for Life, is providing skills and training to over 100,000 people across the region. Some of our sites in Brazil are located in water-stressed areas, and we are developing environmental programmes, for example through our Ypióca business, which are helping ease the pressure on this shared resource.
Performancefollowing analysis.
Good performances in the domestic markets in LAC were offset by a significant net sales decline in export channels due to currency volatility. The levels of stock held by these customers has reduced, which together with lower depletions, impacted growth in the region by five percentage points. Net sales in domestic markets increased 5% as we expanded our leading positions in scotch and broadened our business into other categories. In Brazil, performance has been affected by a weaker economy and a tougher competitive environment, but we have invested in route to consumer and recruited new consumers into our portfolio through innovation. In Venezuela, there was good growth in local spirits and scotch. Performance in Colombia benefited from investments in route to consumer and innovation, while our strength in scotch drove good net sales growth in Mexico. In Peru and Jamaica, we delivered good growth from our investments in route to consumer and, while net sales were down in Argentina, we moved quickly to offset import levies with local production driving share gains. While significant cost efficiencies were achieved, especially in Brazil, negative market mix and increased marketing investment led to a decrease of 41 basis points in organic operating margin.
Markets: | Organic volume movement(i) % | Organic net sales movement % | Reported net sales movement % | |||||||||
Latin America and Caribbean | (7 | ) | (1 | ) | (10 | ) | ||||||
PUB | (8 | ) | (2 | ) | (12 | ) | ||||||
Venezuela | (38 | ) | 41 | (60 | ) | |||||||
Colombia | 10 | 10 | (2 | ) | ||||||||
Mexico | 14 | 13 | 19 | |||||||||
West LAC | (5 | ) | (9 | ) | (12 | ) | ||||||
Spirits(ii) | (8 | ) | (3 | ) | (12 | ) | ||||||
Beer | 5 | 17 | 11 | |||||||||
Wine | 1 | 17 | (1 | ) | ||||||||
Ready to drink | (7 | ) | 9 | (6 | ) | |||||||
Global giants and local stars(ii): | ||||||||||||
Johnnie Walker | (6 | ) | (5 | ) | (11 | ) | ||||||
Smirnoff | (12 | ) | 5 | (7 | ) | |||||||
Baileys | (4 | ) | 8 | — | ||||||||
Buchanan’s | (17 | ) | (12 | ) | (24 | ) | ||||||
Old Parr | (9 | ) | (10 | ) | (22 | ) | ||||||
Ypióca | (5 | ) | (3 | ) | (14 | ) | ||||||
Black & White | 17 | 27 | 6 |
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Business review (continued)
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
Latin America and Caribbean | (7 | ) | (6 | ) | (1 | ) | (10 | ) | ||||||||
PUB | (8 | ) | (8 | ) | (2 | ) | (12 | ) | ||||||||
Venezuela | (38 | ) | (38 | ) | 41 | (60 | ) | |||||||||
Colombia | 10 | 9 | 10 | (2 | ) | |||||||||||
Mexico | 14 | 29 | 13 | 19 | ||||||||||||
West LAC | (5 | ) | (5 | ) | (9 | ) | (12 | ) | ||||||||
Spirits(i) | (8 | ) | (7 | ) | (3 | ) | (12 | ) | ||||||||
Beer | 5 | 5 | 17 | 11 | ||||||||||||
Wine | 1 | 1 | 17 | (1 | ) | |||||||||||
Ready to drink | (7 | ) | (7 | ) | 9 | (6 | ) | |||||||||
Global giants and local stars(ii): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Johnnie Walker | (6 | ) | (5 | ) | (11 | ) | ||||||||||
Smirnoff | (12 | ) | 5 | (7 | ) | |||||||||||
Bailey’s | (4 | ) | 8 | — | ||||||||||||
Buchanan’s | (17 | ) | (12 | ) | (24 | ) | ||||||||||
Old Parr | (9 | ) | (10 | ) | (22 | ) | ||||||||||
Ypióca | (5 | ) | (3 | ) | (14 | ) | ||||||||||
Black & White | 17 | 27 | 6 |
KEY HIGHLIGHTS
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement. |
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Business review (continued)
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Business review (continued)
ASIA PACIFIC
Our strategyPerformance
Netsalesbymarkets(%)Netsalesbycategories(%)Netsalesbypricepoints(%)SouthEastAsiaGlobalTravel,AsiaGreaterChinaandMiddleEastIndiaAustraliaNorthAsiaSpiritsWineOtherBeerRTDsValueSuperpremiumStandardUltrapremiumPremium |
Key financials | 2014 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 £ million | Reported movement % | ||||||||||||||||||
Net sales | 1,347 | (22 | ) | 920 | (32 | ) | 2,213 | 64 | ||||||||||||||||
Marketing | 305 | (1 | ) | 65 | (25 | ) | 344 | 13 | ||||||||||||||||
Operating profit before exceptional items | 283 | (13 | ) | 66 | 20 | 356 | 26 | |||||||||||||||||
Exceptional operating items | (276 | ) | (193 | ) | ||||||||||||||||||||
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Operating profit | 7 | 163 | 2,229 | |||||||||||||||||||||
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Net sales
Net sales were £2,213 million in Asia Pacific, which encompasses both developed and emerging markets, isthe year ended 30 June 2015 an increase of £866 million compared to operate across categoriesnet sales of £1,347 million in international spirits, local spirits and beer. We focus on the highest growth categories and consumer opportunities, driving continued developmentyear ended 30 June 2014. The acquisition of super and ultra premium scotch, and leveraging the emerging middle class opportunity through a combination of organic growth and selective acquisitions. In the financial year we acquired a controlling stakeinterest in United Spirits Limited (USL), positioning us as leaders in spirits in an attractive market, and giving us a significantly expanded operational footprint in India.
Key financials | 2014 Reported £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 Reported £ million | Reported movement % | ||||||||||||||||||
Net sales | 1,347 | (22 | ) | 920 | (32 | ) | 2,213 | 64 | ||||||||||||||||
Marketing spend | 305 | (1 | ) | 65 | (25 | ) | 344 | 13 | ||||||||||||||||
Operating profit before exceptional items | 283 | (13 | ) | 66 | 20 | 356 | 26 | |||||||||||||||||
Exceptional items | (276 | ) | (193 | ) | ||||||||||||||||||||
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Operating profit | 7 | 163 | 2,229 | |||||||||||||||||||||
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Our markets
Asia Pacific comprises South East Asia (Vietnam, Thailand, Philippines, Indonesia, Malaysia, Singapore, Cambodia, Laos, Myanmar, Nepal and Sri Lanka), Greater China (China, Taiwan, Hong Kong and Macau), India, Global Travel, Asia and Middle East, Australia and North Asia (Korea and Japan).
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Business review (continued)
Route to market
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 has wholly owned subsidiaries in the Philippines and Vietnam. In Vietnam we also have a 45.56% equity stake in Hanoi Liquor Joint Stock Company. In Malaysia, Diageo’s own and third party beers are brewed and distributed by a listed company, Guinness Anchor Berhad, in which we have an effective 25.5% equity interest. In Indonesia, Guinness is brewed by, and distributed through, third party arrangements.
In Greater China, part of our spirits business is conducted through a joint venture arrangement with Moët Hennessy. The remainder of our spirits are sold through a wholly owned subsidiary. In addition, we are the sole distributor of Shui Jing Fang, a super premium Chinese white spirit, through our controlling 39.71% equity stake in a listed company.
In India, we further extended our route to market through the integration of USL the leading spirits company in India. Diageo consolidated USL fromon 2 July 2014 followingcontributed £920 million to net sales, partially offset by adverse exchange rate movements of £22 million mainly driven by the acquisitionAustralian dollar and an organic net sales reduction of £32 million (see further performance analysis below).
Operating profit
Operating profit was £163 million in the year ended 30 June 2015 an additional 26% investmentincrease of £156 million compared to operating profit of £7 million in USL, becoming the largest shareholder with a 54.78% controlling stake.
In Australia, we produce and distribute the group’s products and in New Zealand we operate through third party distributors.
In North Asia, we have our own distribution company in South Korea, whilst in Japan, the majority of sales are through joint venture agreements with Moët Hennessy and Kirin.
Airport shops and airline customers are serviced through a dedicated Diageo sales and marketing organisation. In the Middle East, we sell our products through third party distributors.
Supply operations
We have distilleries at Chengdu in China that produce Chinese white spirit and in Bundaberg, Australia that produce rum.
USL owns 33 manufacturing facilities in India and Nepal, leases 10 further manufacturing facilities in India and 46 facilities are licensed to produce USL products. In addition, we have bottling plants in Korea and Australia with ready to drink manufacturing capabilities.
Sustainability and responsibility
Promoting responsible drinking has always been a particular focus for us, as it is in many parts of the world. We run programmes to address drink driving, to train bartenders and promotional staff on how to serve alcohol responsibly, and to raise awareness of alcohol and its effects. We also focus on empowering women through our Plan W programme. Withyear ended 30 June 2014. Operating profit growth was driven by the acquisition of USL our supply footprint has increased significantly, almost doubling the number of sites we operate in water-stressed areas. We believe that our approach, set outwhich contributed £66 million in the Water Blueprint strategy, will bring benefitsyear ended 30 June 2015 and an organic increase of £20 million partially offset by adverse exchange movements of £13 million mainly driven by Australian dollar. Exceptional operating charges decreased by £83 million from £276 million in the year ended 30 June 2014 to local water sources, while our compliance£193 million in the year ended 30 June 2015, principally due to lower impairment charges (£41 million in the year ended 30 June 2015 compared with £264 million in the year ended 30 June 2014) and ethics and Zero Harm safety programmes are helping colleagues at USL improvea charge in these areas.the year ended 30 June 2015 of £146 million in respect of settlement of several disputes with the Korean tax authorities regarding the transfer pricing methodology applicable for imported products.
PerformanceFurther performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Asia Pacific performance reflects inventory reductions in South East Asia, and disruptions in Indonesia due to new restrictions on the sale of beer and ready to drink in some channels. All other markets delivered growth, including China led by Chinese white spirits. Reserve sales were up 30%, led by Scotch malts, with particularly strong performance from The Singleton. Innovation responding to changing trends played an important role, with the launch of Haig Club, W ICE by Windsor in Korea, Guinness Zero in Indonesia, and new ready to drink offerings. We reduced marketing investment, largely in China and South East Asia, where the consumer environment was challenged. Performance, primarily the reduction in stock levels, in South East Asia resulted in a significant operating loss for that market. Our Chinese white spirits business regained profitability after a loss last year. This return to profitability, along with cost savings, resulted in an overall margin improvement for Asia Pacific of two percentage points. The full consolidation of USL added £921m of net sales and £53m of operating profit to reported performance for the region.
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Business review (continued)
Markets: | Organic volume movement(i) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||||||||||||||
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||||||||||||||
Asia Pacific | (3 | ) | (2 | ) | 64 | (3 | ) | 622 | (2 | ) | 64 | |||||||||||||||||
South East Asia | (24 | ) | (28 | ) | (28 | ) | (24 | ) | (24 | ) | (28 | ) | (28 | ) | ||||||||||||||
Greater China | 3 | 15 | 17 | 3 | 3 | 15 | 17 | |||||||||||||||||||||
India | 5 | 3 | 1,732 | 5 | 6,347 | 3 | 1,732 | |||||||||||||||||||||
Global Travel, Asia and Middle East | 5 | 4 | 3 | 5 | 5 | 4 | 3 | |||||||||||||||||||||
Australia | 1 | 2 | (5 | ) | 1 | 1 | 2 | (5 | ) | |||||||||||||||||||
North Asia | 1 | 1 | (1 | ) | 1 | 1 | 1 | (1 | ) | |||||||||||||||||||
Spirits(ii) | (3 | ) | (3 | ) | 83 | |||||||||||||||||||||||
Spirits(i) | (3 | ) | 710 | (3 | ) | 83 | ||||||||||||||||||||||
Beer | (13 | ) | (12 | ) | (16 | ) | (13 | ) | (13 | ) | (12 | ) | (16 | ) | ||||||||||||||
Ready to drink | (2 | ) | 1 | (5 | ) | (2 | ) | (2 | ) | 1 | (5 | ) | ||||||||||||||||
Global giants and local stars(ii): | ||||||||||||||||||||||||||||
Global giants and local stars(i): | Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | ||||||||||||||||||||||||
Johnnie Walker | (10 | ) | (14 | ) | (14 | ) | (10 | ) | (14 | ) | (14 | ) | ||||||||||||||||
Smirnoff | (3 | ) | (7 | ) | (9 | ) | (3 | ) | (7 | ) | (9 | ) | ||||||||||||||||
Guinness | (13 | ) | (12 | ) | (16 | ) | (13 | ) | (12 | ) | (16 | ) | ||||||||||||||||
Captain Morgan | — | 11 | 8 | — | 11 | 8 | ||||||||||||||||||||||
Baileys | (4 | ) | (13 | ) | (16 | ) | (4 | ) | (13 | ) | (16 | ) | ||||||||||||||||
Windsor | (10 | ) | (10 | ) | (8 | ) | (10 | ) | (10 | ) | (8 | ) | ||||||||||||||||
Bundaberg | (5 | ) | (7 | ) | (13 | ) | (5 | ) | (7 | ) | (13 | ) | ||||||||||||||||
Shui Jing Fang | 275 | 239 | 245 | 275 | 239 | 245 |
(i) |
Spirits brands excluding ready to drink. |
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Business review (continued)
KEY HIGHLIGHTS
(ii) | Reported equals organic volume movement. |
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Business review (continued)
ASIA PACIFIC
Our strategy in Asia Pacific, which encompasses both developed and emerging markets, is to operate across categories in international spirits, local spirits, ready to drink formats and beer. We focus on the highest growth categories and consumer opportunities, driving continued development of super and ultra premium scotch, and leveraging the emerging middle class opportunity through a combination of organic growth and selective acquisitions.
Net sales by markets Net sales by categories Net sales by price points (%) (%) (%) South East Asia Global Travel, Spirits(i) RTDs Value Super premium Greater China Asia East and Middle Beer Other Standard Ultra premium India Wine Premium Australia North Asia (i) excluding RTDs |
(i) excluding | RTDs |
Key financials | 2015 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | Net sales adjustment(ii) | 2016 £ million | Reported movement % | |||||||||||||||||||||
Net sales | 2,213 | (21 | ) | (28 | ) | 34 | (122 | ) | 2,076 | (6 | ) | |||||||||||||||||
Marketing | 344 | — | (1 | ) | (42 | ) | — | 301 | (13 | ) | ||||||||||||||||||
Operating profit before exceptional items | 356 | (5 | ) | — | 44 | — | 395 | 11 | ||||||||||||||||||||
Exceptional operating items(i) | (193 | ) | (49 | ) | ||||||||||||||||||||||||
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Operating profit | 163 | 346 | 112 | |||||||||||||||||||||||||
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(i) | In the year ended 30 June 2016 exceptional operating items of £49 million was in respect of the disengagement agreement relating to USL (2015 - £146 million was in respect of settlement of several disputes with the Korean tax authorities and £41 million in respect of the group’s 45.56% equity investment in Hanoi Liquor Joint Stock Company). |
(ii) | For further detail see page 54. |
Our markets
Asia Pacific comprises South East Asia (Vietnam, Thailand, Philippines, Indonesia, Malaysia, Singapore, Cambodia, Laos, Myanmar, Nepal and Sri Lanka), Greater China (China, Taiwan, Hong Kong and Macau), India, Global Travel Asia and Middle East, Australia (including New Zealand), and North Asia (Korea and Japan).
Supply operations
We have distilleries at Chengdu, in China that produce Chinese white spirit and in Bundaberg, Australia that produce rum. United Spirits Limited (USL) operates 27 owned manufacturing facilities in India including one in Nepal, leases 13 facilities in India and further 34 are licensed to produce USL and Diageo brands. In addition, we have bottling plants in Korea, Thailand, Indonesia and Australia with ready to drink manufacturing capabilities.
Route to consumer
In South East Asia, spirits and beer are sold through a combination of Diageo companies, joint venture arrangements, and third party distributors. In Thailand, Malaysia and Singapore, we have joint venture arrangements with Moët Hennessy, sharing administrative and distribution costs. Diageo operates wholly owned subsidiaries in the Philippines and Vietnam. In Vietnam we own a 45.56% equity stake in Hanoi Liquor Joint Stock Company. In Indonesia, Guinness is brewed by, and distributed through, third party arrangements.
In Greater China the majority of our brands are now sold through our wholly owned subsidiary. Some brands are distributed through a joint venture arrangement with Moët Hennessy. In addition, we are the sole distributor of Shui Jing Fang, a super premium Chinese white spirit, through our controlling 39.71% equity stake in a listed company. Diageo operates a wholly owned subsidiary in Taiwan.
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Business review (continued)
In India, we manufacture, market and sell Indian whisky, rum, brandy and other spirits through our 54.78% shareholding in USL. Diageo also sells its own brands through USL.
In Australia, we manufacture, market and sell the Diageo products and in New Zealand we operate through third party distributors.
In North Asia, we have our own distribution company in South Korea, whilst in Japan, the majority of sales are through joint venture agreements with Moët Hennessy and Kirin.
Airport shops and airline operators are serviced through a dedicated Diageo sales and marketing organisation. In the Middle East, we sell our products through third party distributors.
Sustainability and responsibility
Asia Pacific is a region of many and varied markets, and our 21-market business model enables us to address key issues and opportunities by market. Within the context of the Global Producers’ Commitments, our responsible drinking programmes focus on the issues highest on the agenda in each country. For example, in Indonesia and Vietnam we focus particularly on illicit alcohol; in India on drink driving; in Australia on consumer information and preventing underage and binge drinking. Our new DRINKiQ site, launched in January 2016, was particularly well received in Australia.
Likewise we tailor our sustainability programmes to each market. Our operations in India have the highest concentration of sites in water-stressed areas, so water, and the wider ‘WASH’ agenda is a key focus there. In Thailand and China, female empowerment is a significant issue, which we address directly through our ‘Plan W’ programme.
Performance
Net sales
Net sales were £2,076 million in the year ended 30 June 2016 a decrease of £137 million compared to net sales of £2,213 million in the year ended 30 June 2015. Net sales were adversely impacted by exchange rate movements of £21 million due to weak Australian dollar and Indian rupee against sterling and a £28 million loss due to disposal of the Bouvet wine business and transition of a number of operations in India to a franchise or royalty model, partially offset by organic growth of £34 million (see further performance analysis below). The full year impact of an accounting change for USL to account for the excise duties paid by third party manufacturers reduced net sales by £122 million.
Operating profit
Operating profit was £346 million in the year ended 30 June 2016 an increase of by £183 million compared to operating profit of £163 million in the year ended 30 June 2015. Organic growth improved operating profit by £44 million, partially offset by adverse exchange rate movements of £5 million mainly driven by the Australian dollar. Operating profit for the year ended 30 June 2016 was impacted by an exceptional operating charge of £49 million in respect of disengagement agreements relating to United Spirits Limited. Exceptional operating charges of £193 million in the year ended 30 June 2015 included a charge in respect of settlement of several disputes with the Korean tax authorities regarding the transfer pricing methodology applicable for imported products and an impairment charge in respect of the group’s 45.56% equity investment in Hanoi Liquor Joint Stock Company in Vietnam.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Net sales in Asia Pacific grew 2% as a result of growth in India, South East Asia and Australia. In China, Chinese white spirits grew while scotch declined and the shift towards lower ABV products in Korea led to a decline in net sales. Global Travel Asia and Middle East business declined primarily due to the geopolitical developments in the Middle East. The changes made to improve performance in USL led to net sales growth of 5% in India, largely driven by growth in IMFL whisky and scotch. Net sales in South East Asia grew 16% as the inventory reduction experienced last year ended. Australia net sales grew 2% driven by scotch and Guinness. Reserve brands net sales grew 4% largely driven by the strong performance of Shui Jing Fang in China and Johnnie Walker in South East Asia. Margin improved 176bps as a result of reducing marketing in India with the termination of USL related party agreements, and for Johnnie Walker Black Label and Johnnie Walker Blue Label in China. The sale by USL of United Breweries Limited shares also contributed to operating margin expansion.
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Business review (continued)
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
Asia Pacific | — | (3 | ) | 2 | (6 | ) | ||||||||||
India | — | (4 | ) | 5 | (11 | ) | ||||||||||
South East Asia | 3 | 3 | 16 | 15 | ||||||||||||
Greater China | (5 | ) | (5 | ) | (2 | ) | — | |||||||||
Global Travel Asia and Middle East | (9 | ) | (9 | ) | (15 | ) | (14 | ) | ||||||||
Australia | 2 | 2 | 2 | (5 | ) | |||||||||||
North Asia | 6 | 6 | (5 | ) | (6 | ) | ||||||||||
Spirits(i) | — | (3 | ) | 1 | (7 | ) | ||||||||||
Beer | 8 | 8 | 7 | 4 | ||||||||||||
Ready to drink | (3 | ) | (3 | ) | (3 | ) | (8 | ) | ||||||||
Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Johnnie Walker | (4 | ) | (2 | ) | (2 | ) | ||||||||||
McDowell’s | (2 | ) | — | (16 | ) | |||||||||||
Windsor | (4 | ) | (10 | ) | (12 | ) | ||||||||||
Smirnoff | (4 | ) | (7 | ) | (9 | ) | ||||||||||
Guinness | 8 | 7 | 4 | |||||||||||||
Bundaberg | (5 | ) | (3 | ) | (10 | ) | ||||||||||
Shui Jing Fang | 55 | 20 | 22 |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement except for McDowell’s 0%. |
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Business review (continued)
7176
Business review (continued)
CATEGORY REVIEW
Volume Net sales Marketing spend Scotch American North Rum Liqueurs Tequila to Ready drink Other Vodka Indian Made Gin Beer whisk(e)y Foreign Liquor (IMFL) |
Key categories | Organic volume movement(i) % | Organic net sales movement % | Reported net sales movement % | Reported volume movement(iii) % | Organic net sales movement % | Reported net sales movement % | ||||||||||||||||||
Spirits(ii) | (2 | ) | (1 | ) | 10 | |||||||||||||||||||
Spirits(i) | (1 | ) | 3 | (1 | ) | |||||||||||||||||||
Scotch | (4 | ) | (5 | ) | �� | (9 | ) | (3 | ) | — | (4 | ) | ||||||||||||
Vodka | — | 1 | 1 | |||||||||||||||||||||
Vodka(ii) | — | 1 | 2 | |||||||||||||||||||||
North American whisk(e)y | 10 | 12 | 15 | 4 | 6 | 12 | ||||||||||||||||||
Rum | (3 | ) | (3 | ) | (6 | ) | ||||||||||||||||||
Rum(ii) | 2 | 3 | (3 | ) | ||||||||||||||||||||
Indian-Made Foreign Liquor (IMFL) whisky | (5 | ) | 3 | (11 | ) | |||||||||||||||||||
Liqueurs | (1 | ) | (4 | ) | (8 | ) | 1 | 3 | 2 | |||||||||||||||
Gin | 4 | 5 | 3 | |||||||||||||||||||||
Gin(ii) | 3 | 8 | 6 | |||||||||||||||||||||
Tequila | 10 | 14 | 38 | 15 | 8 | 28 | ||||||||||||||||||
Beer | 3 | 4 | (2 | ) | 21 | 6 | 1 | |||||||||||||||||
Ready to drink | (11 | ) | (4 | ) | (13 | ) | (9 | ) | (11 | ) | (11 | ) | ||||||||||||
Wine | (1 | ) | (1 | ) | (1 | ) | ||||||||||||||||||
Total | (1 | ) | — | 5 |
(i) |
Spirits brands excluding ready to drink. |
(ii) | Vodka, rum, gin including IMFL brands. |
(iii) | Reported equals organic volume movement except for IMFL whisky (1)%, tequila (17)%, beer 13% and ready to drink (13)%. |
7277
Business review (continued)
Organic volume movement(i) % | Organic net sales movement % | Reported net sales movement % | ||||||||||||||||||||||
Global giants, local stars and reserve(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||||||||||
Global giants | ||||||||||||||||||||||||
Johnnie Walker | (6 | ) | (9 | ) | (12 | ) | (4 | ) | 1 | (3 | ) | |||||||||||||
Smirnoff | (1 | ) | (2 | ) | (3 | ) | 1 | 2 | — | |||||||||||||||
Baileys | 2 | 4 | 3 | |||||||||||||||||||||
Captain Morgan | (4 | ) | (6 | ) | (7 | ) | 4 | 3 | 5 | |||||||||||||||
Baileys | (4 | ) | (4 | ) | (8 | ) | ||||||||||||||||||
Tanqueray | 6 | 5 | 5 | 11 | 12 | 15 | ||||||||||||||||||
Guinness | (2 | ) | — | (5 | ) | 4 | 4 | 2 | ||||||||||||||||
Local stars | ||||||||||||||||||||||||
Crown Royal | 13 | 12 | 15 | 5 | 6 | 11 | ||||||||||||||||||
Yenì Raki | (4 | ) | 4 | (6 | ) | 1 | 4 | (9 | ) | |||||||||||||||
Buchanan’s | (2 | ) | 10 | 1 | ||||||||||||||||||||
JeB | (2 | ) | (4 | ) | (9 | ) | (6 | ) | (9 | ) | (12 | ) | ||||||||||||
Buchanan’s | (9 | ) | (3 | ) | (12 | ) | ||||||||||||||||||
Windsor | (10 | ) | (10 | ) | (8 | ) | (4 | ) | (10 | ) | (12 | ) | ||||||||||||
Old Parr | (13 | ) | (14 | ) | (24 | ) | (13 | ) | 1 | (14 | ) | |||||||||||||
Bundaberg | (5 | ) | (7 | ) | (13 | ) | (6 | ) | (3 | ) | (10 | ) | ||||||||||||
Bell’s | (3 | ) | (5 | ) | (14 | ) | — | (1 | ) | (10 | ) | |||||||||||||
White Horse | (5 | ) | (7 | ) | (26 | ) | (11 | ) | 6 | (15 | ) | |||||||||||||
Ypióca | (5 | ) | (3 | ) | (14 | ) | (6 | ) | (6 | ) | (28 | ) | ||||||||||||
Cacique | (37 | ) | 3 | (32 | ) | 25 | 9 | (24 | ) | |||||||||||||||
McDowell’s | (2 | ) | — | (16 | ) | |||||||||||||||||||
Shui Jing Fang | 268 | 235 | 241 | 55 | 20 | 22 | ||||||||||||||||||
Reserve | ||||||||||||||||||||||||
Scotch malts | 11 | 16 | 12 | 8 | 7 | 6 | ||||||||||||||||||
Cîroc | 6 | 6 | 9 | (2 | ) | (3 | ) | 2 | ||||||||||||||||
Ketel One vodka | (3 | ) | (2 | ) | 1 | 4 | 4 | 10 | ||||||||||||||||
Don Julio | 8 | 12 | 43 | 25 | 18 | 40 | ||||||||||||||||||
Bulleit | 34 | 38 | 42 | 27 | 29 | 36 |
(i) |
Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement except for White Horse (9)%, Don Julio (13)% and McDowell’s 0%. |
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
7378
Business review (continued)
Other Key Highlights
7479
Business review (continued)
Operating results 20142015 compared with 20132014
GROUP FINANCIAL REVIEW
The following comments were made by Deirdre Mahlan, Chief Financial Officer, in Diageo’s Annual Report for the year ended 30 June 2014:2015:
“ThisOur performance this year was tougher than anticipatedreflected both the volatile global consumer and economic environment and the actions we took to strengthen the business. Reported net sales were up with mixed regional performance as North America delivered top-line growththe integration of USL and significant margin expansion; Western Europe was stable and performanceorganic net sales flat driven by currency related challenges in specific emerging markets reflected economic weakness and market specific challenges. Despite this tougher environment we have gained shareembedding our sell out discipline. Our focus on cost delivered savings and drove margin expansion, prioritising cash resulted in a number of markets, investedmarked cash flow improvement and we continued to invest for the future, expanded margins and simplified the organisation.future.”
HIGHLIGHTS OF THE YEAR
Net sales up 5% with full consolidation of United Spirits |
Organic net sales flat |
Net cash from operating activities of £2.6 billion up £0.8 billion |
Free cash flow of £2 billion up £0.7 billion |
9% final dividend increase, full year dividend was 56.4 pence |
Operating margin down 52bps |
Organic operating margin up 24bps |
Shipment volume down 1% |
Depletion volume was estimated to be up 1% |
Basic eps 95.0 pence up 6% |
Eps before exceptional items 88.8 pence due to adverse exchange and associates, offset by underlying improvements |
Volume Net |
Excluding exceptional operating charges of £269 (2014 – £427 million) and corporate and ISC costs before exceptional items of £123 million (2014 – £189 million). |
(iii) | ||
7580
Business review (continued)
Key performance indicators | 2014 | 2013 | ||||||||
Organic net sales growth | % | — | 5 | |||||||
Organic operating margin improvement | basis points | 77 | 78 | |||||||
Earnings per share before exceptional items | pence | 95.5 | 103.1 | |||||||
Free cash flow | £ million | 1,235 | 1,452 | |||||||
Return on average invested capital (i) | % | 14.1 | 16.5 |
Summary financial information | 2015 | 2014 | ||||||||
Volume | EUm | 246.2 | 156.1 | |||||||
Net sales | £ million | 10,813 | 10,258 | |||||||
Marketing | £ million | 1,629 | 1,620 | |||||||
Operating profit before exceptional items | £ million | 3,066 | 3,134 | |||||||
Exceptional operating items | £ million | (269 | ) | (427 | ) | |||||
Operating profit | £ million | 2,797 | 2,707 | |||||||
Share of associates and joint ventures profit after tax | £ million | 175 | 252 | |||||||
Exceptional non-operating items | £ million | 373 | 140 | |||||||
Net finance charges | £ million | 412 | 388 | |||||||
Tax rate | % | 15.9 | 16.5 | |||||||
Tax rate before exceptional items | % | 18.3 | 18.2 | |||||||
Profit attributable to parent company’s shareholders | £ million | 2,381 | 2,248 | |||||||
Basic earnings per share | pence | 95.0 | 89.7 | |||||||
Earnings per share before exceptional items | pence | 88.8 | 95.5 | |||||||
Full year dividend | pence | 56.4 | 51.7 |
Other financial information | 2014 reported | 2013 reported | ||||||||
Volume | EUm | 156.1 | 164.2 | |||||||
Net sales | £ million | 10,258 | 11,303 | |||||||
Marketing spend | £ million | 1,620 | 1,769 | |||||||
Operating profit before exceptional items | £ million | 3,134 | 3,479 | |||||||
Operating profit | £ million | 2,707 | 3,380 | |||||||
Reported tax rate | % | 16.5 | 16.6 | |||||||
Reported tax rate before exceptional items | % | 18.2 | 17.4 | |||||||
Profit attributable to parent company’s shareholders | £ million | 2,248 | 2,452 | |||||||
Basic earnings per share | pence | 89.7 | 98.0 | |||||||
Recommended full year dividend | pence | 51.70 | 47.40 |
Volume | Net sales | Marketing | Operating profit | |||||||||||||||||||||||||||||
Growth by region | % | % | % | % | ||||||||||||||||||||||||||||
North America | (4 | ) | — | — | — | |||||||||||||||||||||||||||
Europe, Russia and Turkey | — | (7 | ) | (6 | ) | (6 | ) | |||||||||||||||||||||||||
Africa | 7 | (1 | ) | (3 | ) | (2 | ) | |||||||||||||||||||||||||
Latin America and Caribbean | (6 | ) | (10 | ) | (4 | ) | (18 | ) | ||||||||||||||||||||||||
Asia Pacific | 622 | 64 | 13 | 2,229 | ||||||||||||||||||||||||||||
Diageo(i) | 58 | 5 | 1 | 3 | ||||||||||||||||||||||||||||
Volume | Net sales | Marketing spend | Operating profit(ii) | Volume | Net sales | Marketing | Operating profit(ii) | |||||||||||||||||||||||||
Organic growth by region | % | % | % | % | % | % | % | % | ||||||||||||||||||||||||
North America | (1 | ) | 3 | 2 | 8 | (3 | ) | (1 | ) | (4 | ) | (2 | ) | |||||||||||||||||||
Europe | (1 | ) | 1 | (1 | ) | 1 | ||||||||||||||||||||||||||
Europe, Russia and Turkey | — | — | 2 | 3 | ||||||||||||||||||||||||||||
Africa | (6 | ) | — | 3 | (2 | ) | 7 | 6 | 4 | 10 | ||||||||||||||||||||||
Latin America and Caribbean | (1 | ) | 2 | 1 | 3 | (7 | ) | (1 | ) | 6 | (3 | ) | ||||||||||||||||||||
Asia Pacific | (5 | ) | (7 | ) | (7 | ) | (13 | ) | (3 | ) | (2 | ) | (8 | ) | 7 | |||||||||||||||||
Diageo(iii) | (2 | ) | — | (1 | ) | 3 | ||||||||||||||||||||||||||
Diageo(i) | (1 | ) | — | (1 | ) | 1 |
(i) |
(ii) | Before exceptional items |
KEY PERFORMANCE INDICATORS
Net sales growth (£ million)
Reported net sales were adversely impacted by foreign exchange, while sustained performance in North America offset emerging market weakness
11,303 (290) (797) (235) (277) Organk movement 10,258 Acquisitions and disposals(a) Volume Exchange(a) Price/mix
Organic volume growth in reserve brands was largely offset by decline in beer and in scotch in emerging markets. The strong performance of reserve brands and selective price increases drove positive price/mix.
7681
Business review (continued)
Change in operating marginKEY PERFORMANCE INDICATORS
Net sales (£ million)
Focus on costs and driving efficienciesThe full consolidation of USL, partly offset by adverse exchange delivered 77bpsreported net sales growth of margin improvement5%. Organic net sales flat.
30.78% 2013 Reported (0.15)ppt (0.10)ppt 0.16ppt
10,258 896 (337) Organic movement 0.71ppt (0.49)ppt 30.55%(127) 123 10,813 2014 Reported F13 inorganic movements Gross margin Marketing spend Other operating expenses F14 inorganic movements
Significant supply chain savings2015 Acquisitions and positive price/disposals(i) Exchange Price/mix from growth of reserve brands was offset by cost inflation and under recovery of fixed costs in Africa due to weaker beer volume. The organic increase in operating margin was primarily driven by an increased focus on costs and efficiencies across the business and by procurement savings on marketing spend.Volume
Earnings per share before exceptional items (pence)
Eps before exceptionals impacted by adverse foreign exchange
103.1 2013 Reported (13.9) 1.4 2.8 0.7 1.6 (0.2) 95.5 2014 Reported Operating Profit Assocates and joint ventures(1) Net finance charges Taxation Non-controlling interests
Reduction in eps due to lower operating profit wasReported net sales were up 5%, largely as a resultdriven by the full consolidation of USL, which contributed £921 million of net sales. Currency weakness, other than the US dollar, had an adverse foreign exchange movements. Increased income from associates and joint ventures and lowerimpact on net finance charges partly mitigated the impact of reduced operating profit. The reduction in non-controlling interestssales. Organic volume decline was largely driven by lower shipments in the operating loss that has been reported by Shuijingfang.
Basic eps was 89.7 pence (2013 — 98.0 pence), with exceptionals reducing eps by 5.8 pence (2013 — 5.1 pence).
For movementsUnited States, reduction in net finance charges see below:
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Business review (continued)
2014 Reported | 2013 Reported | |||||||
Average monthly net borrowings (£ million) | 9,174 | 8,267 | ||||||
Effective interest rate (%) | 3.8 | 4.9 |
For the calculation of the effective interest rate, the net interest charge excludes fair value adjustments to derivative financial instrumentsinventory levels in South East Asia and borrowings. Average monthly net borrowings includeWest LAC, and the impact of interest rate swaps that are no longerpricing in a hedge relationship but excludesVenezuela and Brazil. While these price increases contributed to positive price, the market value adjustment for cross currency interest rate swaps.main driver of organic price/mix was positive mix, led by growth of reserve and Crown Royal.
The increase in average net borrowings was principally a resultOperating profit (£ million)
2,707 158 (161) 4 67 22 2,797 2014 2015 Exceptional operating items Acquisitions Exchange Organic movement Disposals
Reported operating profit increased by £90 million primarily due to lower impairment charges of the acquisition£223 million, lower exceptional restructuring costs of shares in USL, completed on 4 July 2013,£81 million and the one off pension contribution tobenefit from acquisitions of £67 million partly offset by the UK pension planexceptional charge of £146 million in respect of settlement of several disputes with the Korean tax authorities in the year ended 30 June 20132015 and a €100 million (£85 million) contribution to the Irish pension plans in the year ended 30 June 2014. Despite the increase in debt, the interest charge decreased in the year driven by lower interest rates on new debt issues and proportionally higher commercial paper balances.
The positive impact on post employment charges was mainly driven by the reduction of the pension deficit as a result of the one off contributions mentioned above.
Free cash flow (£ million)
Lower pension contributions and capex partly offset the impact of reduced operating profit on cash flow
1,452 2013 Reported (534) (45) 35 70 315 (58) 1,235 2014 Reported Operating profit(a) Working Capital movement Net capex Net interest and tax One off pension contributions Other movements (b)
The decrease in free cash flow was primarily driven by lower operating profit due to the adverse impact of exchange rate movements and restructuring exceptional charges during the year. The reduction attributable to the termination of the distribution agreement with Jose Cuervo£161 million. Organic operating profit growth was largely offset by organic growth. The negative working capital movement arose in respect of lower creditors driven by reductions in overhead spend, bonus accruals and phasing of marketing spend. One off contributions to pension plans in the year ended 30 June 2014 were lower than in the year ended 30 June 2013, resulting in a favourable cash movement.£22 million (0.7%).
7882
Business review (continued)
Operating margin (%)
Full consolidation of USL rebased operating margin by c200bps. Organic operating margin improved 24bps.
26.39% 168bps (61)bps (183)bps Organic movement (64)bps 36bps 52bps 25.87% 2014 2015 Exceptional operating items Gross margin Exchange Marketing Acquisitions and disposals Other operating expenses
(i) | Exchange impacts in respect of profit on intergroup sales of products and the intergroup recharges have been re-allocated to the respective income statement categories for the purposes of calculating margin impacts only. |
Operating margin was 25.87% in the year ended 30 June 2015 (2014 – 26.39%). Excluding the impact of lower exceptional charges which benefited operating margin by 168bps, operating margin decreased 220bps from 30.55% to 28.35%).
The full consolidation of USL lowered reported operating margin for the group. The organic improvement in margin was largely as a result of cost savings and efficiencies, which more than offset the impact of cost inflation and negative market mix.
Basic earnings per share (pence)
Eps increased to 95.0 pence from 89.7 pence. Eps before exceptional items fell 6.7 pence.
89.7 12 1.6 (6.4) (3.1) 1.4 1.5 (1.3) (0.4) 95.0 2014 2015 Exceptional items(i) Operating profit excluding FX Exchange on operating profit Associates and joint ventures Finance charges Tax Non-controlling interests Other including USL(ii)
(i) | Exceptional items net of tax and non-controlling interests. |
(ii) | The organic impact of fully consolidating USL results is included in other. The movements for operating profit, finance charges, tax and non-controlling interests, all exclude USL. |
Earnings per share was 95.0 pence in the year ended 30 June 2015 (2014 – 89.7 pence), with an exceptional gain after tax of £155 million, compared to an exceptional loss after tax of £271 million in the prior year, benefiting eps by 12 pence. Eps before exceptional items of 88.8 for the year ended 30 June 2015 fell 6.7 pence as compared to 95.5 pence for the year ended 30 June 2014 largely as a result of adverse exchange movements and lower income from associates and joint ventures. Organic growth in operating profit had a positive impact on eps. Net finance charges excluding acquired debt in USL reduced due to lower interest rates which benefited eps.
Movement in net finance charges | £ million | |||
2014 | 388 | |||
Net interest charge decrease | (48 | ) | ||
Consolidation of net borrowings acquired in USL | 60 | |||
Movement in other finance charges | 12 | |||
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2015 | 412 | |||
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Business review (continued)
2015 | 2014 | |||||||
Average monthly net borrowings (£ million) | 10,459 | 9,174 | ||||||
Effective interest rate(i) | 3.5 | % | 3.8 | % |
(i) | For the calculation of the effective interest rate, the net interest charge excludes fair value adjustments to derivative financial instruments and borrowings. Average monthly net borrowings include the impact of interest rate swaps that are no longer in a hedge relationship but excludes the market value adjustment for cross currency interest rate swaps. |
The increase in average net borrowings was principally the result of the acquisition of the controlling interest in USL, completed on 2 July 2014, and the consolidation of USL’s net borrowings. The effective interest rate decreased in the year ended 30 June 2015 as the negative impact of consolidating USL’s net borrowings was more than offset by lower interest rates on new debt issued and an increase in the proportion of floating rate debt through the use of swaps.
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Business review (continued)
Net cash from operating activities and free cash flow (£ million)
Net cash from operating activities increased from £1,790 million to £2,551 million.
1,790 (40) 76 (156) 734 79 68 2,551 2014 2015 USL OCF(i) Operating profit(ii) Exchange(iii) Working capital movement Interest tax Other operating items(iv)
(i) | USL net cash from operating activities is shown separately and is excluded from the other line items shown above. |
(ii) | Operating profit after operating exceptional items adjusted for non-cash items including depreciation and amortisation, excluding exchange. |
(iii) | Includes £5 million relating to translation exchange impact of exceptional operating items. |
(iv) | Other operating items includes pension related payments, dividends received from associates and joint ventures, and payments in respect of the settlement of Thalidomide |
Free cash flow was £1,963 million in 2015 an increase of £728 million.
1,235 (7) (57) Operating profit 76 (156) 734 (7) 79 59 1,963 2014 2015 USL free cash flow(i) Operating profit excluding exchange(ii) Exchange Working capital movement Net capex movement Interest and tax Other operating items(iii)
(i) | USL free cash flow is shown separately and is excluded from the other line items shown above. |
(ii) | Operating profit adjusted for non-cash items including depreciation and amortisation. |
(iii) | Other operating items includes pension related payments, dividends received from associates and joint ventures, and payments in respect of the settlement of Thalidomide. |
The increase in net cash from operating activities was primarily driven by the positive working capital movement. This was largely due to lower debtors as a result of phasing of shipments, with days sales outstanding 6 days lower than last year. This compares with an increase in debtors in the prior year
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Business review (continued)
Return on invested capital (%)
The return on closing invested capital of 26.7% for the year ended 30 June 2015, calculated as reported profit for the year divided by net assets as of 30 June 2015, decreased by 200bps compared to return on closing invested capital of 28.7%, for the year ended 30 June 2014 driven by the acquisition of USL, the partially offset by the impacts of exceptional gains on the sale of businesses in 2015 and lower exceptional operating charges.
The investment in USL has rebased return on average invested capital (ROIC)(i)
. Adverse foreign exchange movements and investmentlower income from associates reduced ROIC in USL led to a reduction in ROICthe year
Adverse foreign exchange movements and investment in USL led to a reduction in ROIC 16.5% (1.4)ppt 0.4ppt (0.2(ppt 0.4ppt (0.5)ppt (0.3)ppt (0.4)ppt
14.1% 2013 Reported(ii) (restated) 2014 Reported(ii),(iii) (restated)(1.1)pps 0.2pps (0.4)pps (0.3)pps (0.2)pps 12.3% 2014(ii) 2015(ii) USL Operating profit after tax (excluding FX) Movement in tax rate Exchange movement on invested capital Investment in USL Working Capital Other Iincluding associatesAssociates and joint ventures)ventures including FX Other
(i) | ROIC calculation excludes exceptional |
(ii) |
Lower operating profitThe additional investment in USL and full consolidation of its results reduced ROIC by 1.4pps primarily due to adverse1.1pps. Exchange movements reduced operating profit, but the impact on ROIC was partially offset by exchange movements. Averagereducing invested capital increased as a result of our acquisition of sharescapital. Lower income from associates reduced ROIC in USL. The negative movement in working capital is partly accounted for by increased maturing inventory.
INCOME STATEMENTthe year.
2013 £ million | Exchange (a) £ million | Acquisitions and disposals (b) £ million | Organic movement £ million | 2014 £ million | ||||||||||||||||
Sales | 15,276 | (1,082 | ) | (368 | ) | 154 | 13,980 | |||||||||||||
Excise duties | (3,973 | ) | 285 | 78 | (112 | ) | (3,722 | ) | ||||||||||||
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Net sales | 11,303 | (797 | ) | (290 | ) | 42 | 10,258 | |||||||||||||
Cost of sales(i) | (4,389 | ) | 243 | 167 | (27 | ) | (4,006 | ) | ||||||||||||
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Gross profit | 6,914 | (554 | ) | (123 | ) | 15 | 6,252 | |||||||||||||
Marketing | (1,769 | ) | 108 | 31 | 10 | (1,620 | ) | |||||||||||||
Other operating expenses(i) | (1,666 | ) | 110 | (8 | ) | 66 | (1,498 | ) | ||||||||||||
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Operating profit before exceptional items | 3,479 | (336 | ) | (100 | ) | 91 | 3,134 | |||||||||||||
Exceptional operating items (c) | (99 | ) | (427 | ) | ||||||||||||||||
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Operating profit | 3,380 | 2,707 | ||||||||||||||||||
Non-operating items (c) | (83 | ) | 140 | |||||||||||||||||
Net finance charges | (457 | ) | (388 | ) | ||||||||||||||||
Share of after tax results of associates and joint ventures | 217 | 252 | ||||||||||||||||||
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Profit before taxation | 3,057 | 2,711 | ||||||||||||||||||
Taxation | (507 | ) | (447 | ) | ||||||||||||||||
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Profit from continuing operations | 2,550 | 2,264 | ||||||||||||||||||
Discontinued operations (c) | — | (83 | ) | |||||||||||||||||
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Profit for the year | 2,550 | 2,181 | ||||||||||||||||||
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86
Business review (continued)
Income statement
2014 £ million | Exchange (a) £ million | Acquisitions and disposals (b) £ million | Organic movement £ million | 2015 £ million | ||||||||||||||||
Sales | 13,980 | (509 | ) | 2,321 | 174 | 15,966 | ||||||||||||||
Excise duties | (3,722 | ) | 172 | (1,425 | ) | (178 | ) | (5,153 | ) | |||||||||||
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Net sales | 10,258 | (337 | ) | 896 | (4 | ) | 10,813 | |||||||||||||
Cost of sales(i) | (4,006 | ) | 61 | (666 | ) | 26 | (4,585 | ) | ||||||||||||
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Gross profit | 6,252 | (276 | ) | 230 | 22 | 6,228 | ||||||||||||||
Marketing | (1,620 | ) | 47 | (74 | ) | 18 | (1,629 | ) | ||||||||||||
Other operating expenses(i) | (1,498 | ) | 68 | (85 | ) | (18 | ) | (1,533 | ) | |||||||||||
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Operating profit before exceptional items | 3,134 | (161 | ) | 71 | 22 | 3,066 | ||||||||||||||
Exceptional operating items (c) | (427 | ) | (269 | ) | ||||||||||||||||
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Operating profit | 2,707 | 2,797 | ||||||||||||||||||
Non-operating items (c) | 140 | 373 | ||||||||||||||||||
Net finance charges | (388 | ) | (412 | ) | ||||||||||||||||
Share of after tax results of associates and joint ventures | 252 | 175 | ||||||||||||||||||
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Profit before taxation | 2,711 | 2,933 | ||||||||||||||||||
Taxation | (447 | ) | (466 | ) | ||||||||||||||||
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Profit from continuing operations | 2,264 | 2,467 | ||||||||||||||||||
Discontinued operations (c) | (83 | ) | — | |||||||||||||||||
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Profit for the year | 2,181 | 2,467 | ||||||||||||||||||
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(i) | Before exceptional operating items |
79
Business review (continued)
(a) Exchange
The impact of movements in exchange rates movements on reported figures was principally in respect of the Venezuelan bolivar, the US dollar,euro, the Turkish liraRussian rouble and the South African rand.US dollar.
In March 2014,February 2015, the Central Bank of Venezuela opened the Second Ancillary Foreign Currency Administration System (Sicad II)a new mechanism (known as SIMADI) that allows private and public companies to trade foreign currency at a higher exchange ratewith fewer restrictions than the official exchange rate.other mechanisms in Venezuela. As a result, the group has
used the SIMADI exchange rate to consolidate its Venezuelan operations for the year ended 30 June 2015. For the year ended 30 June 2014, the group applied athe Sicad II exchange rate to consolidate its operations in Venezuela.
Applying the SIMADI consolidation rate of $1 = VEF197.30 (£1 = VEF309.76) compared to the Sicad II rate of $1 = VEF49.98 (£1 = VEF85.47) for its Venezuelan operations forwould have reduced net assets and cash and cash equivalents as at 1 July 2014 by £60 million and £52 million, respectively, and would have reduced the year ended 30 June 2014. For the year ended 30 June 2013 a rate of $1 = VEF9 (£1 = VEF13.68) was used. The change in the exchange ratepreviously reported net sales and operating profit for the year ended 30 June 2014 reduced net sales by £358 million, operating profit by £229 million, cash and cash equivalents by £329£57 million and net assets by £378 million.£36 million, respectively.
87
Business review (continued)
The estimated effect of movements in exchange rate and other movements on profit before exceptional items and taxation for the year ended 30 June 20142015 is set out in the table below.
Gains/ (losses) £ million | ||||
Translation impact | ( | ) | ||
Transaction impact | ( | ) | ||
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Operating profit before exceptional items | ( | ) | ||
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Net finance charges — translation impact | ) | |||
Mark to market impact of IAS 39 on interest expense | ||||
Impact of IAS 21 and IAS 39 on net other finance charges | ||||
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Interest and other finance charges | ||||
Associates — translation impact | ) | |||
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Profit before exceptional items and taxation | ( | ) | ||
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2014 | 2013 | Year ended 30 June 2015 | Year ended 30 June 2014 | |||||||||||||
Exchange rates | ||||||||||||||||
Translation £1 = | $1.63 | $1.57 | $1.57 | $1.63 | ||||||||||||
Transaction £1 = | $1.59 | $1.57 | $1.58 | $1.59 | ||||||||||||
Translation £1 = | €1.20 | €1.21 | €1.31 | €1.20 | ||||||||||||
Transaction £1 = | €1.26 | €1.18 | €1.23 | €1.26 |
88
Business review (continued)
(b) Acquisitions and disposals
The impact of acquisitions and disposals on the reported figures was primarily attributable to the terminationfull consolidation of United Spirits Limited (USL) from 2 July 2014 and the acquisition of the Mexican distribution agreement with Jose Cuervo. See page 131 for further details.rights of Don Julio, partially offset by the disposal of The Old Bushmills Distillery Company Limited on 27 February 2015 and Gleneagles Hotels Limited on 30 June 2015.
(c) Exceptional items
Exceptional operating chargesof £427£269 million (2013(2014 — £99£427 million) in the year ended 30 June 20142015 comprised:
80
Business review (continued)
In the year ended 30 June 20132014 exceptional operating items also included a gainimpairment loss of £20£260 million in respect of changesthe Shui Jing Fang brand and £4 million in respect of tangible fixed assets was charged to future pension increases for the Diageo Guinness Ireland Group Pension Scheme.other operating expenses.
Non-operating itemsin the year ended 30 June 2014 comprised2015 include a gain of £103 million (2014 – £140 millionmillion) following the acquisition of additional investmentequity shares in United Spirits Limited (USL)USL which increased the group’s investment in USL from 25.02% to 54.78%, excluding
the 2.38% interest owned by the USL Benefit Trust (2014 – 10.04% to 25.02%). On 2 July 2014 when USL became a subsidiary of the group a gain was recognised on 4 July 2013 and triggered a change in accounting from available-for-sale investments to associates. As a result, the difference between the original costbook value of the 25.02% investment and itsthe fair value. The gain is net of a £79 million cumulative exchange loss recycled from other comprehensive income and £10 million transaction costs.
On 27 February 2015, the group completed the purchase of the 50% equity interest in Don Julio B.V. that it did not already own (giving Diageo 100% ownership of the brand and production facility) and the Mexican distribution business of Don Julio. As a result of Don Julio becoming a subsidiary of the group a gain of £63 million arose, being the difference between the book value had been includedof the joint venture on the date of the transaction and the fair value. In addition, the group reacquired the production and distribution for Smirnoff and Popov in Mexico. As part of the income statement. transaction, Diageo also agreed to sell 100% of the equity share capital in The Old Bushmills Distillery Company Limited resulting in an exceptional gain of £174 million.
On 30 June 2015, Diageo completed the disposal of Gleneagles Hotels Limited to the Ennismore group resulting in an exceptional gain of £73 million.
In the year ended 30 June 2013 exceptional2015 a provision of £30 million was charged to non-operating items comprised a loss of £83 million in respect of the Nuvo disposal.a guarantee provided to a third party financial institution.
Discontinued operations in the year ended 30 June 2014 representcomprised a charge after taxation of £83 million (2013 — £nil)(£91 million less tax of £8 million) in respect of the settlement of thalidomide litigation in Australia and New Zealand and anticipated future payments to thalidomide organisations.
Cash payments in the year ended 30 June 2014 in respect of2015 for exceptional restructuring items, the legal settlement in Korea, the guarantee and thalidomide were £117 million (2014 – £104 million), £74 million (2013 — £61 million)(2014 – £nil), £30 million (2014 – £nil) and £59£19 million (2013 — £23(2014 – £59 million), respectively.
Dividend
The final dividend was 32.034.9 pence per share, an increase of 9% from the year ended 30 June 2013.2014. The full dividend was therefore 51.756.4 pence per share, an increase of 9% from the year ended 30 June 2013.2014. Following of the approval by shareholders, the final dividend was paid on 28 October 20142015 to shareholders on the register on 1514 August 2014.2015. The ex-dividend date was 13 August 2015. Payment to US ADR holders was made on 714 October 2014.2015.
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Business review (continued)
MOVEMENTS IN NET BORROWINGS AND EQUITY
Movement in net borrowings | 2014 £ million | 2013 £ million | 2015 £ million | 2014 £ million | ||||||||||||
Net borrowings at the beginning of the year | (8,403 | ) | (7,573 | ) | (8,850 | ) | (8,403 | ) | ||||||||
Free cash flow (a) | 1,235 | 1,452 | 1,963 | 1,235 | ||||||||||||
Acquisition and sale of businesses (b) | (534 | ) | (660 | ) | (306 | ) | (534 | ) | ||||||||
Proceeds from issue of share capital | 1 | — | ||||||||||||||
Net purchase of own shares for share schemes (c) | (113 | ) | (11 | ) | (8 | ) | (113 | ) | ||||||||
Dividends paid to non-controlling interests | (88 | ) | (100 | ) | (72 | ) | (88 | ) | ||||||||
Purchase of shares of non-controlling interests (d) | (37 | ) | (200 | ) | — | (37 | ) | |||||||||
Net (decrease)/increase in bonds (e) | (93 | ) | 1,231 | |||||||||||||
Net movements on other borrowings | (64 | ) | 7 | |||||||||||||
Net movements in bonds and other borrowings | (315 | ) | (157 | ) | ||||||||||||
Equity dividends paid | (1,228 | ) | (1,125 | ) | (1,341 | ) | (1,228 | ) | ||||||||
Other movements | 2 | 1 | ||||||||||||||
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Net (decrease)/increase in cash and cash equivalents | (921 | ) | 594 | |||||||||||||
Net decrease/(increase) in bonds and other borrowings | 157 | (1,238 | ) | |||||||||||||
Exchange differences (f) | 349 | (116 | ) | |||||||||||||
Net decrease in cash and cash equivalents | (77 | ) | (921 | ) | ||||||||||||
Net decrease in bonds and other borrowings | 315 | 157 | ||||||||||||||
Exchange differences (e) | (7 | ) | 349 | |||||||||||||
Borrowings on acquisition of businesses | (869 | ) | — | |||||||||||||
Other non-cash items | (32 | ) | (70 | ) | (39 | ) | (32 | ) | ||||||||
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| |||||||||||||
Net borrowings at the end of the year | (8,850 | ) | (8,403 | ) | (9,527 | ) | (8,850 | ) | ||||||||
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|
(a) See page 7885 for the analysis of free cash flow.
(b) Primarily includes cash payments of £474 million in respect of the acquisition of an additional 18.74% investment in USL. On 2 July 2014 the group acquired an additional 26% investment in USL for INR 114.5 billion (£1,118 million) taking its aggregate investment to 54.78% (excluding 2.38%. On 31 October 2014 the sale of the shares ownedWhyte and Mackay Group by USL resulted in a net cash receipt of £391 million. On 27 February 2015, Diageo paid $293 million (£192 million) for the USL Benefit Trust on behalf50% equity interest in Don Julio B.V. that it did not already own and for the Mexican distribution rights for Don Julio. As part of USL). From 2 July 2014 the group accountstransaction, Diageo also agreed to sell the equity share capital in The Old Bushmills Distillery Company Limited. The net cash consideration received for USL as a subsidiary with a 43.91% non-controlling interest.Bushmills amounted to $709 million (£456 million).
In the year ended 30 June 20132014 cash payments principally included £284primarily comprised £474 million in respect of 100% equity stake in Ypióca Bebidas S.A. (Ypióca) and £274 million in respectthe acquisition of a 10.04%18.74% investment in USL.
81
Business review (continued)
(c) Net purchase of own shares comprised purchase of treasury shares for the future settlement of obligations under the employee share option schemes of £208£75 million (2013 — £143(2014 – £208 million) less receipts from employees on the exercise of share options of £95£67 million (2013 — £132(2014 – £95 million).
(d) Primarily comprisesIn the purchase ofyear ended 30 June 2014 Diageo purchased the remaining 7% (2013 — purchase of 40%) equity stake in Sichuan Chengdu Shuijingfang Group Co., Ltd.
(e) In the year ended 30 June 2014 the group issued bonds of €1,700 million (£1,378 million) and repaid bonds of €1,150 million (£983 million) and $804 million (£488 million). In the year ended 30 June 2013, the group issued bonds of $3,250 million (£2,100 million) and repaid bonds of $1,350 million (£869 million).
(f) PrimarilyExchange differences primarily arose on US dollar and euro denominated borrowings partially offset by adversethe favourable change on foreign exchange rate movement on cashswaps and cash equivalents held in Venezuela.forwards.
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90
Business review (continued)
Movement in equity | 2015 £ million | 2014 £ million | ||||||
Equity at the beginning of the year | 7,590 | 8,088 | ||||||
Profit for the year | 2,467 | 2,181 | ||||||
Exchange adjustments (a) | (225 | ) | (1,133 | ) | ||||
Net remeasurement of post employment plans | 113 | (167 | ) | |||||
Exchange recycled to the income statement (b) | 88 | — | ||||||
Fair value movements on available-for-sale investments (b) | 20 | (85 | ) | |||||
Non-controlling interests acquired | 641 | 8 | ||||||
Purchase of shares of non-controlling interests | — | (37 | ) | |||||
Dividends to non-controlling interests | (72 | ) | (88 | ) | ||||
Dividends paid | (1,341 | ) | (1,228 | ) | ||||
Other reserve movements | (25 | ) | 51 | |||||
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Equity at the end of the year | 9,256 | 7,590 | ||||||
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(a) PrimarilyMovement in the year ended 30 June 2015 primarily arose onfrom the US dollar, the euro, theexchange loss on Turkish lira, Brazilian real and the Venezuelan bolivareuro denominated intangible assets, investments and borrowings.net investments.
(b) Mainly driven byFollowing the decreaseacquisition of majority equity stakes in discount rate assumptions used to calculate the net post employment liabilities partly offset by the actual return on the plan assets being higher than the discount rate.
(c) Comprises the net recyclingUSL, 50% equity interest in Don Julio and one of the cumulative fair market value adjustment on the group’s investmentjoint ventures in USL dueSouth Africa that it did not already own exchange losses of £88 million were recycled to the changeincome statement.
On the acquisition of USL on 2 July 2014 a 43.91% (£641 million) non-controlling interest was recognised. In the year ended 30 June 2014 a gain of £85 million, in accountingrespect of USL, was recycled to the income statement reflecting the step up from available-for-sale investment to associate.
Post employment deficitplans
The deficit in respect of post employment plans before taxation decreased by £66£216 million from £541 million at 30 June 2013 to £475 million at 30 June 2014.2014 to £259 million at 30 June 2015. The decreasereduction was primarily due to strong asset return and a reduction in long term inflation rates partially offset by a decrease in returns from AA-rated corporate bonds used to calculate the cash contributionsdiscount rates on the liabilities of £288 million (2013 — £591 million) made into the post employment plans which included a one off €100 million (£85 million) payment into the Irish pension plans, partially offset by the net remeasurement of post employment plans.(United Kingdom reduced from 4.2% to 3.8% and Ireland from 3.0% to 2.6%).
8291
Business review (continued)
SEGMENT REVIEW
NORTH AMERICA
Performance
Netsalesbymarkets(%)Netsalesbycategories(%)Netsalesbypricepoints(%)USSpiritsCanadaandWinesOtherDGUSASpiritsWineOtherBeerRTDsValueSuperpremiumStandardUltrapremiumPremium |
Key financials | 2013 Reported £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2014 Reported £ million | Reported movement % | 2014 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 £ million | Reported movement % | ||||||||||||||||||||||||||||||||||||
Net sales | 3,723 | (156 | ) | (231 | ) | 108 | 3,444 | (7 | ) | 3,444 | 97 | (37 | ) | (49 | ) | 3,455 | — | |||||||||||||||||||||||||||||||
Marketing spend | 581 | (27 | ) | (24 | ) | 10 | 540 | (7 | ) | |||||||||||||||||||||||||||||||||||||||
Marketing | 540 | 16 | 7 | (21 | ) | 542 | — | |||||||||||||||||||||||||||||||||||||||||
Operating profit before exceptional items | 1,478 | (54 | ) | (71 | ) | 107 | 1,460 | (1 | ) | 1,460 | 27 | (2 | ) | (37 | ) | 1,448 | (1 | ) | ||||||||||||||||||||||||||||||
Exceptional items | — | (35 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Exceptional operating items | (35 | ) | (28 | ) | ||||||||||||||||||||||||||||||||||||||||||||
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Operating profit | 1,478 | 1,425 | (4 | ) | 1,425 | 1,420 | — | |||||||||||||||||||||||||||||||||||||||||
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North America, our biggestNet sales
Net sales were £3,455 million in the year ended 30 June 2015, flat compared to net sales of £3,444 million in the year ended 30 June 2014. Net sales were impacted by favourable exchange rate movements of £97 million primarily due to the strength of the US dollar against sterling, offset by the loss of the net sales of £37 million on termination of the transitional arrangements in respect of Jose Cuervo and most profitable region given our brandthe disposal of Bushmills in February 2015 and marketorganic net sales decline of £49 million (see further performance analysis below).
Operating profit
Operating profit was £1,420 million in the year ended 30 June 2015 a decrease of £5 million compared to operating profit of £1,425 million in the year ended 30 June 2014. Operating profit benefitted from favourable exchange rate movements of £27 million (primarily due to the strength and its consistent strong performance, again delivered top line growth, drivenof the US dollar partially offset by 5% growththe euro) offset by an organic decline of £37 million. Operating profit was impacted by exceptional operating charges of £28 million in US Spirits and Wines, and margin expansionthe year ended 30 June 2015 a decrease of 183bps£7 million compared to £35 million in the year ended 30 June 2014, as a result of gross margin expansion and cost reduction. Economic recoverylower of restructuring costs.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
In North America, US is uneven and this is reflectedSpirits has delivered improved depletion performance through the year with the value of distributor depletions, up 3% in the consumer trends seenfirst half and up 4% for the full year. Shipments were broadly in US spiritsline with overall spirits category growth slowingdepletions and premiumtherefore net sales were down 2% year on year as last year shipments were higher than depletions mainly driven by innovation launches. Beer net sales were in line with last year, ready to drink and above price points driving category growth. Our growth reflects this with scotch, North American whisk(e)ywine were down slightly and tequila leading the growth. Our strength in innovation has continued. Launches of super and ultra premium variants have accelerated growth of our reserve brands, which grew 14%, and innovations against our premium core brands have driven brand relevance and recruited new consumers. However, performance in vodka was weak as Smirnoff volume has been impacted as its price premium has been maintained for another year. In Canada the spirits market is softer than the US and net sales grew 1%2%. Volume growth of the reserve portfolio was the main driver of the 1.5pps of increased price/mix as price premiums against the competition, for brands such as Smirnoff and Captain Morgan, were narrowed. This led to lower achieved price year on year but did drive improved share positions. Our DGUSA businessinnovation agenda continued to lead the industry in North America and this year was a key driver of our net sales. Advertising spend was down as we drove procurement savings on media and agency fees in marketing while maintaining our share of voice. Adjusting for these savings, marketing as a percentage of net sales was roughly flat. Overheads were flat but operating margin declined 7% mainly reflecting reduced focus on47 basis points driven by soft volume and lower net sales of spirits in the pouches segment.United States.
Organic volume movement (i) % | Organic net sales movement % | Reported net sales movement % | ||||||||||
Key markets and categories: | ||||||||||||
North America | (1 | ) | 3 | (7 | ) | |||||||
US Spirits and Wines | (1 | ) | 5 | (7 | ) | |||||||
DGUSA | (5 | ) | (7 | ) | (11 | ) | ||||||
Canada | (2 | ) | 1 | (17 | ) | |||||||
Spirits(ii) | (1 | ) | 4 | (7 | ) | |||||||
Beer | (7 | ) | (5 | ) | (9 | ) | ||||||
Wine | (1 | ) | 6 | 2 | ||||||||
Ready to drink | (5 | ) | (9 | ) | (24 | ) | ||||||
8392
Business review (continued)
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||||||||||||||
North America | (3 | ) | (4 | ) | (1 | ) | — | |||||||||||||||||||||
Organic volume movement (i) % | Organic net sales movement % | Reported net sales movement % | ||||||||||||||||||||||||||
Global and local leaders(ii): | ||||||||||||||||||||||||||||
US Spirits and Wines | (3 | ) | (5 | ) | (2 | ) | 1 | |||||||||||||||||||||
DGUSA | (3 | ) | (3 | ) | (1 | ) | 3 | |||||||||||||||||||||
Canada | 3 | 3 | 2 | (4 | ) | |||||||||||||||||||||||
Spirits(i) | (3 | ) | (3 | ) | (1 | ) | 1 | |||||||||||||||||||||
Beer | — | — | (1 | ) | 1 | |||||||||||||||||||||||
Wine | (2 | ) | (2 | ) | (2 | ) | 2 | |||||||||||||||||||||
Ready to drink | (3 | ) | (25 | ) | (1 | ) | (14 | ) | ||||||||||||||||||||
Global giants and local stars(i): | Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | ||||||||||||||||||||||||
Smirnoff | (2 | ) | (3 | ) | (1 | ) | ||||||||||||||||||||||
Captain Morgan | (10 | ) | (12 | ) | (10 | ) | ||||||||||||||||||||||
Johnnie Walker | — | 6 | 2 | (8 | ) | (15 | ) | (12 | ) | |||||||||||||||||||
Crown Royal | (4 | ) | — | (4 | ) | |||||||||||||||||||||||
Buchanan’s | 22 | 24 | 19 | |||||||||||||||||||||||||
Bulleit | 69 | 69 | 63 | |||||||||||||||||||||||||
Smirnoff | (4 | ) | (2 | ) | (6 | ) | ||||||||||||||||||||||
Ketel One vodka | 1 | 4 | — | |||||||||||||||||||||||||
Cîroc | (3 | ) | (3 | ) | (7 | ) | ||||||||||||||||||||||
Captain Morgan | 2 | 5 | — | |||||||||||||||||||||||||
Guinness | 2 | 2 | 4 | |||||||||||||||||||||||||
Baileys | (1 | ) | 2 | (3 | ) | (5 | ) | (5 | ) | (3 | ) | |||||||||||||||||
Tanqueray | (1 | ) | 1 | (3 | ) | (2 | ) | (2 | ) | 1 | ||||||||||||||||||
Crown Royal | 13 | 12 | 15 | |||||||||||||||||||||||||
Cîroc | 4 | 4 | 8 | |||||||||||||||||||||||||
Ketel One vodka | (2 | ) | (2 | ) | 1 | |||||||||||||||||||||||
Bulleit | 32 | 36 | 41 | |||||||||||||||||||||||||
Don Julio | 26 | 26 | 22 | 5 | 9 | 13 | ||||||||||||||||||||||
Guinness | (6 | ) | (3 | ) | (8 | ) | ||||||||||||||||||||||
Buchanan’s | 17 | 18 | 23 |
(i) |
Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement. |
Key highlights
93
Business review (continued)
8494
Business review (continued)
EUROPE, RUSSIA AND TURKEY
Performance
Net sales by markets (%) Net sales by categories (%) Net sales by price points Europe Turkey Russia Other Spirits RTDs Wine Beer Other Value Super premium Premium Standard Ultra premium |
Key financials | 2013 Reported £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2014 Reported £ million | Reported movement % | 2014 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 £ million | Reported movement % | ||||||||||||||||||||||||||||||||||||
Net sales | 2,915 | (77 | ) | (41 | ) | 17 | 2,814 | (3 | ) | 2,814 | (186 | ) | (13 | ) | 2 | 2,617 | (7 | ) | ||||||||||||||||||||||||||||||
Marketing spend | 431 | (10 | ) | (5 | ) | (3 | ) | 413 | (4 | ) | ||||||||||||||||||||||||||||||||||||||
Marketing | 413 | (30 | ) | (1 | ) | 6 | 388 | (6 | ) | |||||||||||||||||||||||||||||||||||||||
Operating profit before exceptional items | 903 | (49 | ) | (9 | ) | 8 | 853 | (6 | ) | 853 | (67 | ) | (2 | ) | 20 | 804 | (6 | ) | ||||||||||||||||||||||||||||||
Exceptional items | (31 | ) | (20 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Exceptional operating items | (20 | ) | (20 | ) | ||||||||||||||||||||||||||||||||||||||||||||
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Operating profit | 872 | 833 | (4 | ) | 833 | 784 | (6 | ) | ||||||||||||||||||||||||||||||||||||||||
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Western Europe still has weak economiesNet sales
Net sales were £2,617 million in the year ended 30 June 2015 a decrease of £197 million compared to net sales of £2,814 million in the year ended 30 June 2014. Net sales were impacted by adverse exchange rate movements of £186 million, principally because of the weakness of the euro, Russian rouble and fragile consumer confidence but there has been steady improvement and our business has stabilised year on year, gaining share of spirits. There was modest growth in Great Britain, Benelux, FranceTurkish lira and the Nordics which counter-balanced the slowing declines in Southern Europe and Ireland. Germany was weaker due to higher trade investment and an increasingly price competitive off trade. Marketing was targeted more effectively, and we kept our investment as a percentageloss of net sales of £13 million on the disposal of Bushmills in February 2015. Organic growth improved net sales by £2 million (see further performance analysis below).
Operating profit
Operating profit was £784 million in the year ended 30 June 2015 a decrease of £49 million compared to operating profit of £833 million in the year ended 30 June 2014. Operating profit was impacted by adverse exchange rate movements of £67 million because of the weakness of the euro, Russian rouble and Turkish lira partially offset by organic growth of £20 million. Operating profit was impacted by exceptional operating charges in respect of restructuring costs of £20 million in the year ended 30 June 2015 and the year ended 30 June 2014.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Europe, Russia and Turkey’s performance reflected a flat while prioritising higherperformance in Europe, growth in Turkey and margin brands. We have focused on fewer, bigger pan-regional innovation launches with Baileys Chocolat Luxe, Smirnoff Gold, frozen pouches and premix, anda challenging environment in Russia. In Europe, although performance improved in half of our reserve business wasmarkets. Reserve brands delivered another strong performance with net sales up 15%20% and growing double digit even in the more challenging economies in Southern Europe. Innovation remained a key performance driver with net sales up 30% driven by the scotch malts, Cîroc, Zacapasuccesses such as ‘The Brewers Project’ which helped put Guinness back in growth in both Great Britain and Johnnie Walker. Operating margin expansion of nearly 20bps was driven by product optimisation and reductionsIreland. We continued to invest in warehousing and logistic costs. Ourour route to consumer, programme focused on efficiency, effectiveness and expansion, increasing the focusnumber of our sales people improving their capabilitiesby 30% and putting more feet on the street,number of outlets we cover by 60%. In Russia, which has given us a strong platform as we move into next year. Netcontinued to be impacted by economic volatility, consumers traded down and customers reduced inventory levels while Diageo gained share in scotch and rum. Turkey net sales growth in Russia and Eastern Europe slowed this year to 2%. Following a much improved performancewere up 3% driving premiumisation in the second half, net salesraki category and gained share in scotch and vodka. Total operating margin for the region improved 75bps largely driven by gross margin improvement in Turkey, grew 5%.and overhead cost reduction in Europe, which was partially reinvested in marketing and route to consumer.
Organic volume movement (i) % | Organic net sales movement % | Reported net sales movement % | ||||||||||
Key markets and categories: | ||||||||||||
Europe | (1 | ) | 1 | (3 | ) | |||||||
Western Europe | — | — | (2 | ) | ||||||||
Russia and Eastern Europe | (1 | ) | 2 | (7 | ) | |||||||
Turkey | (3 | ) | 5 | (12 | ) | |||||||
Spirits(ii) | — | — | (5 | ) | ||||||||
Beer | (5 | ) | (3 | ) | (3 | ) | ||||||
Wine | (3 | ) | (2 | ) | (10 | ) | ||||||
Ready to drink | 1 | 5 | 4 | |||||||||
8595
Business review (continued)
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||||||||||||||
Europe, Russia and Turkey | — | — | — | (7 | ) | |||||||||||||||||||||||
Organic volume movement (i) % | Organic net sales movement % | Reported net sales movement % | ||||||||||||||||||||||||||
Global and local leaders(ii): | ||||||||||||||||||||||||||||
Europe | (1 | ) | (1 | ) | — | (5 | ) | |||||||||||||||||||||
Russia | (12 | ) | (12 | ) | (14 | ) | (42 | ) | ||||||||||||||||||||
Turkey | — | — | 3 | (5 | ) | |||||||||||||||||||||||
Spirits(i) | (1 | ) | (1 | ) | 1 | (8 | ) | |||||||||||||||||||||
Beer | 1 | 1 | 1 | (4 | ) | |||||||||||||||||||||||
Wine | — | — | (1 | ) | (4 | ) | ||||||||||||||||||||||
Ready to drink | (6 | ) | (6 | ) | (2 | ) | (5 | ) | ||||||||||||||||||||
Global giants and local stars(i): | Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | ||||||||||||||||||||||||
Guinness | 1 | 2 | (2 | ) | ||||||||||||||||||||||||
Smirnoff | (2 | ) | (4 | ) | (7 | ) | ||||||||||||||||||||||
Johnnie Walker | — | (2 | ) | (4 | ) | (5 | ) | (7 | ) | (15 | ) | |||||||||||||||||
Baileys | (3 | ) | (4 | ) | (10 | ) | ||||||||||||||||||||||
Captain Morgan | 9 | 10 | 1 | |||||||||||||||||||||||||
Yenì Raki | (4 | ) | 4 | (6 | ) | |||||||||||||||||||||||
JeB | (8 | ) | (9 | ) | (10 | ) | (1 | ) | (3 | ) | (10 | ) | ||||||||||||||||
Smirnoff | — | (5 | ) | (6 | ) | |||||||||||||||||||||||
Captain Morgan | 18 | 10 | 8 | |||||||||||||||||||||||||
Baileys | (4 | ) | (2 | ) | (3 | ) | ||||||||||||||||||||||
Guinness | (4 | ) | (3 | ) | (2 | ) |
(i) |
Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement. |
Key highlights
96
Business review (continued)
8697
Business review (continued)
AFRICA
Performance
Netsalesbymarkets(%)Netsalesbycategories(%)Netsalesbypricepoints(%)NigeriaSouthAfricaEastAfricaOtherAfricaRegionalMarketsSpiritsWineOtherBeerRTDsValueSuperpremiumStandardUltrapremiumPremium |
Key financials | 2013 Reported £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2014 Reported £ million | Reported movement % | 2014 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 £ million | Reported movement % | ||||||||||||||||||||||||||||||||||||
Net sales | 1,564 | (124 | ) | (3 | ) | (7 | ) | 1,430 | (9 | ) | 1,430 | (100 | ) | — | 85 | 1,415 | (1 | ) | ||||||||||||||||||||||||||||||
Marketing spend | 162 | (14 | ) | — | 4 | 152 | (6 | ) | ||||||||||||||||||||||||||||||||||||||||
Marketing | 152 | (10 | ) | — | 5 | 147 | (3 | ) | ||||||||||||||||||||||||||||||||||||||||
Operating profit before exceptional items | 400 | (51 | ) | (1 | ) | (8 | ) | 340 | (15 | ) | 340 | (52 | ) | 1 | 29 | 318 | (6 | ) | ||||||||||||||||||||||||||||||
Exceptional items | (5 | ) | (23 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Exceptional operating items | (23 | ) | (7 | ) | ||||||||||||||||||||||||||||||||||||||||||||
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Operating profit | 395 | 317 | (20 | ) | 317 | 311 | (2 | ) | ||||||||||||||||||||||||||||||||||||||||
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InNet sales
Net sales were £1,415 million in the year ended 30 June 2015 a tough year and despite facing significant challenges,decrease of £15 million compared to net sales were flat as the region responded to the specific market challenges that it faced. In Nigeria, where beer performance was weak, we adjusted prices and increased our presenceof £1,430 million in the growing value segment. Innovationyear ended 30 June 2014. Net sales were impacted by adverse exchange rate movements of £100 million primarily driven by the weak Nigerian naira, Ghana cedi and South African rand mainly offset by organic growth of £85 million (see further performance analysis below).
Operating profit
Operating profit was £311 million in the year ended 30 June 2015 a key enablerdecrease of £6 million compared to operating profit of £317 million in the year ended 30 June 2014. Operating profit was adversely impacted by £52 million exchange rate movements driven by the weak Nigerian naira, Ghana cedi and South African rand partially offset by organic growth of £29 million. Operating profit was impacted by exceptional operating charges in respect of restructuring costs of £7 million in the year ended 30 June 2015, compared to £23 million for respondingthe year ended 30 June 2014.
Further performance analysis
Unless otherwise stated percentage movements refer to changing consumer trends through new formatsorganic movements in the following analysis.
Good performances in both beer and brands and the region delivered the highest growth rate for innovation through the success of brands such as Snappspirits led to net sales up 6% in Nigeria, JebelAfrica. Investments in Kenya, Smirnoff Black Ice in Cameroon and Ghana. We have expanded our route to consumer revitalisedtogether with innovation drove an 8% increase in beer and led to double digit growth in spirits. The mainstream beer market in Nigeria remained challenged as consumers moved towards more value products, impacting the performance of Guinness and Harp. However the national rollout of Orijin and renovation of Satzenbrau drove an increase in beer net sales of 9%. Investment in Guinness marketing has stabilised volume share in the brand. Good progress in route to consumer led to strong net sales growth in Ghana, and in Cameroon, strong marketing campaigns delivered net sales and share gains in Guinness. In South Africa, spirits growth was underpinned by the continued strong performances of Smirnoff 1818, which is now a two million case brand, across its key marketsand Johnnie Walker, while overall growth was impacted by a decline in ready to drink. Reserve brands grew 26% with double digit increases in South Africa, East Africa and reserveNigeria. Increased sales of mainstream brands, grew 34%. Under recovery of fixedwhich have lower costs per case, together with procurement and supply efficiencies were partially offset by an increase in supply duemarketing and route to lower beer volumes and cost and salary inflation drove an overall reduction inconsumer investments leading to organic operating margin although significant procurement and supply chain savings partly mitigated this impact.improvement of 75 basis points.
Organic volume movement (i) % | Organic net sales movement % | Reported net sales movement % | ||||||||||
Key markets and categories: | ||||||||||||
Africa | (6 | ) | — | (9 | ) | |||||||
Nigeria | (9 | ) | (9 | ) | (14 | ) | ||||||
East Africa | (12 | ) | 2 | (2 | ) | |||||||
Africa Regional Markets | (3 | ) | 2 | (8 | ) | |||||||
South Africa | 4 | 12 | (9 | ) | ||||||||
Spirits(ii) | 7 | 3 | (10 | ) | ||||||||
Beer | (16 | ) | (5 | ) | (11 | ) | ||||||
Ready to drink | 46 | 36 | 23 | |||||||||
Global and local leaders(ii): | ||||||||||||
Johnnie Walker | 1 | 2 | (6 | ) | ||||||||
JeB | (4 | ) | (4 | ) | (16 | ) | ||||||
Smirnoff | (6 | ) | (5 | ) | (21 | ) | ||||||
Captain Morgan | 2 | 4 | (14 | ) | ||||||||
Baileys | (9 | ) | (6 | ) | (12 | ) | ||||||
Guinness | (7 | ) | 1 | (5 | ) |
8798
Business review (continued)
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
Africa | 7 | 7 | 6 | (1 | ) | |||||||||||
Nigeria | 13 | 13 | 6 | (3 | ) | |||||||||||
East Africa | 7 | 7 | 9 | 6 | ||||||||||||
Africa Regional Markets | 14 | 14 | 15 | 1 | ||||||||||||
South Africa | (2 | ) | (2 | ) | (7 | ) | (12 | ) | ||||||||
Spirits(i) | 17 | 17 | 13 | 7 | ||||||||||||
Beer | 4 | 4 | 8 | (1 | ) | |||||||||||
Ready to drink | (34 | ) | (34 | ) | (28 | ) | (33 | ) | ||||||||
Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Guinness | (5 | ) | (7 | ) | (15 | ) | ||||||||||
Johnnie Walker | 3 | 7 | 2 | |||||||||||||
Smirnoff | 22 | 22 | 16 | |||||||||||||
Tusker | (6 | ) | 3 | 1 | ||||||||||||
Malta | (8 | ) | (5 | ) | (17 | ) | ||||||||||
Senator | (11 | ) | (16 | ) | (20 | ) | ||||||||||
Harp | (40 | ) | (46 | ) | (50 | ) |
(i) |
Spirits brands excluding ready to drink. |
Key highlights
(ii) | Reported equals organic volume movement. |
99
Business review (continued)
• | Marketing investment in Africa increased 4%. In Nigeria spend on beer was refocused from Harp to support the growth of Orijin(i) and value beers, while in East Africa, the decline in Senator volume also led to a reduction in spend. Spend increased behind vodka, notably Smirnoff 1818 in South Africa in support of pack innovations and promotional activity and investment behind Johnnie Walker grew in South Africa and East Africa. Ready to drink investment increased as Smirnoff Ice Double Black & Guarana launched in East Africa and Nigeria. |
(i) | In the year ended 30 June 2015 Orijin was reported as beer while in the year ended 30 June 2016 as ready to drink. |
88100
Business review (continued)
LATIN AMERICA AND CARIBBEAN
Performance
Netsalesbymarkets(%)Netsalesbycategories(%)Netsalesbypricepoints(%)Paraguay,MexicoUruguayandBrazilWestLACVenezuelaOtherColombiaSpiritsWineOtherBeerRTDsValueSuperpremiumStandardUltrapremiumPremium |
Key financials | 2013 Reported £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2014 Reported £ million | Reported movement % | 2014 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 £ million | Reported movement % | ||||||||||||||||||||||||||||||||||||
Net sales | 1,453 | (328 | ) | (8 | ) | 27 | 1,144 | (21 | ) | 1,144 | (123 | ) | 23 | (11 | ) | 1,033 | (10 | ) | ||||||||||||||||||||||||||||||
Marketing spend | 233 | (30 | ) | (2 | ) | 2 | 203 | (13 | ) | |||||||||||||||||||||||||||||||||||||||
Marketing | 203 | (22 | ) | 3 | 10 | 194 | (4 | ) | ||||||||||||||||||||||||||||||||||||||||
Operating profit before exceptional items | 468 | (151 | ) | 2 | 9 | 328 | (30 | ) | 328 | (60 | ) | 2 | (7 | ) | 263 | (20 | ) | |||||||||||||||||||||||||||||||
Exceptional items | — | (14 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Exceptional operating items | (14 | ) | (5 | ) | ||||||||||||||||||||||||||||||||||||||||||||
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Operating profit | 468 | 314 | (33 | ) | 314 | 258 | (18 | ) | ||||||||||||||||||||||||||||||||||||||||
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Our Latin AmericaNet sales
Net sales were £1,033 million in the year ended 30 June 2015 a decrease of £111 million compared to net sales of £1,144 million in the year ended 30 June 2014. Net sales reduced by £123 million due to adverse exchange rate movements primarily in respect of the decline in value of the Venezuelan bolivar and CaribbeanBrazilian real and an organic decline of £11 million (see further performance analysis below). These impacts were partially mitigated by additional net sales of £23 million attributable to the acquisition of a 50% equity interest in Don Julio that the group did not already own.
Operating profit
Operating profit was £258 million in the year ended 30 June 2015 a decrease of £56 million compared to operating profit of £314 million in the year ended 30 June 2014. Operating profit was impacted by adverse exchange rate movements of £60 million primarily due to the Venezuelan bolivar, Brazilian real and Mexican peso and an organic decline of £7 million. Operating profit was impacted by exceptional restructuring costs of £5 million for the year ended 30 June 2015 a decrease of £9 million compared to a £14 million in the year ended 30 June 2014.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Good performances in the domestic markets in LAC were offset by a significant net sales decline in export channels due to currency volatility. The levels of stock held by these customers has reduced, which together with lower depletions, impacted growth in the region by five percentage points. Net sales in domestic markets increased 5% as we expanded our leading positions in scotch and broadened our business into other categories. In Brazil, performance has been affected by a weaker economy and a tougher competitive environment, but we have invested in route to consumer and recruited new consumers into our portfolio through innovation. In Venezuela, there was good growth in local spirits and scotch. Performance in Colombia benefited from investments in route to consumer and innovation, while our strength in scotch drove good net sales growth in Mexico. In Peru and Jamaica, we delivered a good set of results despite mixed performancegrowth from our investments in individual countries. In West LAC, our biggest market,route to consumer and, while net sales were down 8% following a destocking in the border zones. Both Brazil and Colombia delivered solid performance, benefiting from changes in the routeArgentina, we moved quickly to consumer and,offset import levies with local production driving share gains. While significant cost efficiencies were achieved, especially in Brazil, from synergy with Ypióca. In a challenging operating environment Venezuela net sales grew 78%, with slower growth in the second half as high inflation and currency devaluation has affected demand and the affordability of imported products. Mexico was weak as tax reforms and a general economic slowdown impacted consumers’ discretionary spend. While scotch remains the largest category in the region, growth came from the investment we made to widen participation to categories such as vodka, cachaça, liqueurs and to capture the growing affluent and emerging middle class. Despite the negative country mix from weakness in West LAC and Mexico, total operating margin for the region improved 18bps driven by strong price/market mix and increased marketing investment led to a focus on overhead cost reductions.decrease of 41 basis points in organic operating margin.
89101
Business review (continued)
Organic volume movement (i) % | Organic net sales movement % | Reported net sales movement % | ||||||||||||||||||||||||||
Key markets and categories: | ||||||||||||||||||||||||||||
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||||||||||||||
Latin America and Caribbean | (1 | ) | 2 | (21 | ) | (7 | ) | (6 | ) | (1 | ) | (10 | ) | |||||||||||||||
PUB | 9 | 10 | (4 | ) | (8 | ) | (8 | ) | (2 | ) | (12 | ) | ||||||||||||||||
Venezuela | (17 | ) | 78 | (71 | ) | (38 | ) | (38 | ) | 41 | (60 | ) | ||||||||||||||||
Colombia | 5 | 8 | (7 | ) | 10 | 9 | 10 | (2 | ) | |||||||||||||||||||
Mexico | (1 | ) | (4 | ) | (10 | ) | 14 | 29 | 13 | 19 | ||||||||||||||||||
West LAC | (9 | ) | (8 | ) | (15 | ) | (5 | ) | (5 | ) | (9 | ) | (12 | ) | ||||||||||||||
Spirits(ii) | (1 | ) | 1 | (23 | ) | |||||||||||||||||||||||
Spirits(i) | (8 | ) | (7 | ) | (3 | ) | (12 | ) | ||||||||||||||||||||
Beer | 5 | 10 | (3 | ) | 5 | 5 | 17 | 11 | ||||||||||||||||||||
Wine | (19 | ) | 2 | (24 | ) | 1 | 1 | 17 | (1 | ) | ||||||||||||||||||
Ready to drink | 6 | 16 | (11 | ) | (7 | ) | (7 | ) | 9 | (6 | ) | |||||||||||||||||
Global and local leaders(ii): | ||||||||||||||||||||||||||||
Global giants and local stars(ii): | Global giants and local stars(ii): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | ||||||||||||||||||||||||
Johnnie Walker | (7 | ) | (4 | ) | (15 | ) | (6 | ) | (5 | ) | (11 | ) | ||||||||||||||||
Smirnoff | (12 | ) | 5 | (7 | ) | |||||||||||||||||||||||
Bailey’s | (4 | ) | 8 | — | ||||||||||||||||||||||||
Buchanan’s | (20 | ) | 1 | (32 | ) | (17 | ) | (12 | ) | (24 | ) | |||||||||||||||||
Smirnoff | 12 | 18 | (1 | ) | ||||||||||||||||||||||||
Baileys | — | 9 | (6 | ) | ||||||||||||||||||||||||
Old Parr | (9 | ) | (10 | ) | (22 | ) | ||||||||||||||||||||||
Ypióca | (5 | ) | (3 | ) | (14 | ) | ||||||||||||||||||||||
Black & White | 17 | 27 | 6 |
(i) |
Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement. |
90102
Business review (continued)
103
Business review (continued)
Key highlightsASIA PACIFIC
Performance
Netsalesbymarkets(%)Netsalesbycategories(%)Netsalesbypricepoints(%)SouthEastAsiaGlobalTravel,AsiaGreaterChinaandMiddleEastIndiaAustraliaNorthAsiaSpiritsWineOtherBeerRTDsValueSuperpremiumStandardUltrapremiumPremium |
Key financials | 2014 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 £ million | Reported movement % | ||||||||||||||||||
Net sales | 1,347 | (22 | ) | 920 | (32 | ) | 2,213 | 64 | ||||||||||||||||
Marketing | 305 | (1 | ) | 65 | (25 | ) | 344 | 13 | ||||||||||||||||
Operating profit before exceptional items | 283 | (13 | ) | 66 | 20 | 356 | 26 | |||||||||||||||||
Exceptional operating items | (276 | ) | (193 | ) | ||||||||||||||||||||
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Operating profit | 7 | 163 | 2,229 | |||||||||||||||||||||
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Net sales
Net sales were £2,213 million in route to consumer, synergy with Ypióca and a favourable comparison versus the year ended 30 June 2013 contributed2015 an increase of £866 million compared to net sales growthof £1,347 million in every category. Strong growth from Old Parr, White Horse and Black & White, and 5%the year ended 30 June 2014. The acquisition of a controlling interest in USL on 2 July 2014 contributed £920 million to net sales, growth in Johnnie Walker, with halfpartially offset by adverse exchange rate movements of £22 million mainly driven by the growth coming from superAustralian dollar and ultra premium segments, drove 13%an organic net sales reduction of £32 million (see further performance analysis below).
Operating profit
Operating profit was £163 million in the year ended 30 June 2015 an increase of £156 million compared to operating profit of £7 million in scotchthe year ended 30 June 2014. Operating profit growth was driven by the acquisition of USL which contributed £66 million in the year ended 30 June 2015 and Diageo Brazil gained sharean organic increase of £20 million partially offset by adverse exchange movements of £13 million mainly driven by Australian dollar. Exceptional operating charges decreased by £83 million from £276 million in scotch. Ypióca again grew stronglythe year ended 30 June 2014 to £193 million in the year ended 30 June 2015, principally due to lower impairment charges (£41 million in the year ended 30 June 2015 compared with net sales up 21%£264 million in the year ended 30 June 2014) and a charge in the year ended 30 June 2015 of £146 million in respect of settlement of several disputes with the Korean tax authorities regarding the transfer pricing methodology applicable for imported products.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Asia Pacific performance reflects inventory reductions in South East Asia, and disruptions in Indonesia due to new restrictions on the backsale of the ‘Vamos Brazilizar’ campaignbeer and ready to drink in some channels. All other markets delivered growth, including China led by Chinese white spirits. Reserve sales were up 30%, led by Scotch malts, with particularly strong performance from The Singleton. Innovation responding to changing trends played an important role, with the launch of Haig Club, W ICE by Windsor in Korea, Guinness Zero in Indonesia, and new packagingready to upgradedrink offerings. We reduced marketing investment, largely in China and South East Asia, where the brand perception. Vodkaconsumer environment was backchallenged. Performance, primarily the reduction in growthstock levels, in South East Asia resulted in a significant operating loss for that market. Our Chinese white spirits business regained profitability after a loss last year. This return to profitability, along with cost savings, resulted in an overall margin improvement for Asia Pacific of two percentage points. The full consolidation of USL added £921m of net sales increasing 15% driven by Smirnoff which gained share inand £53m of operating profit to reported performance for the standard vodka segment. region.
104
Business review (continued)
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
Asia Pacific | (3 | ) | 622 | (2 | ) | 64 | ||||||||||
South East Asia | (24 | ) | (24 | ) | (28 | ) | (28 | ) | ||||||||
Greater China | 3 | 3 | 15 | 17 | ||||||||||||
India | 5 | 6,347 | 3 | 1,732 | ||||||||||||
Global Travel, Asia and Middle East | 5 | 5 | 4 | 3 | ||||||||||||
Australia | 1 | 1 | 2 | (5 | ) | |||||||||||
North Asia | 1 | 1 | 1 | (1 | ) | |||||||||||
Spirits(i) | (3 | ) | 710 | (3 | ) | 83 | ||||||||||
Beer | (13 | ) | (13 | ) | (12 | ) | (16 | ) | ||||||||
Ready to drink | (2 | ) | (2 | ) | 1 | (5 | ) | |||||||||
Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Johnnie Walker | (10 | ) | (14 | ) | (14 | ) | ||||||||||
Smirnoff | (3 | ) | (7 | ) | (9 | ) | ||||||||||
Guinness | (13 | ) | (12 | ) | (16 | ) | ||||||||||
Captain Morgan | — | 11 | 8 | |||||||||||||
Baileys | (4 | ) | (13 | ) | (16 | ) | ||||||||||
Windsor | (10 | ) | (10 | ) | (8 | ) | ||||||||||
Bundaberg | (5 | ) | (7 | ) | (13 | ) | ||||||||||
Shui Jing Fang | 275 | 239 | 245 |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement. |
9172
Business review (continued)
ASIA PACIFIC
Performance
Key financials | 2013 Reported £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2014 Reported £ million | Reported movement % | ||||||||||||||||||
Net sales | 1,572 | (112 | ) | (7 | ) | (106 | ) | 1,347 | (14 | ) | ||||||||||||||
Marketing spend | 356 | (27 | ) | — | (24 | ) | 305 | (14 | ) | |||||||||||||||
Operating profit before exceptional items | 381 | (35 | ) | (19 | ) | (44 | ) | 283 | (26 | ) | ||||||||||||||
Exceptional items | (1 | ) | (276 | ) | ||||||||||||||||||||
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Operating profit | 380 | 7 | (98 | ) | ||||||||||||||||||||
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PerformanceOur strategy in Asia Pacific, was impacted by a weaker trading environmentwhich encompasses both developed and emerging markets, is to operate across categories in Chinainternational spirits, local spirits, ready to drink formats and South East Asiabeer. We focus on the highest growth categories and this top line weakness and negative country mix impacted operating margin, which, despite a reduction in overheads, decreased 136bps. In China the effectsconsumer opportunities, driving continued development of the government’s anti extravagance campaign severely impacted the on trade channel, and continued to affect performance of both our Chinese white spirits and scotch businesses, while South East Asia was impacted by tax increases and social unrest in Thailand and destocking in other markets and channels. Despite the challenging trading environment we gained share in scotch in both Thailand and China. Elsewhere, Korea, Japan, GTME, Taiwan and India delivered good growth and we gained share in scotch across the countries. Strong growth of scotch malts in Taiwan and successful innovation launches in super and ultra premium scotch, segments contributed to another yearand leveraging the emerging middle class opportunity through a combination of double digitorganic growth of the reserve brands.and selective acquisitions.
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Business review (continued)
Organic volume movement (i) % | Organic net sales movement % | Reported net sales movement % | ||||||||||
Key markets and categories: | ||||||||||||
Asia Pacific | (5 | ) | (7 | ) | (14 | ) | ||||||
South East Asia | (25 | ) | (19 | ) | (25 | ) | ||||||
Greater China | (20 | ) | (31 | ) | (33 | ) | ||||||
India | 22 | 42 | 8 | |||||||||
Global Travel Asia and Middle East | 18 | 19 | 15 | |||||||||
Australia hub | (2 | ) | (3 | ) | (17 | ) | ||||||
North Asia | 2 | 4 | (2 | ) | ||||||||
Spirits(ii) | (5 | ) | (11 | ) | (15 | ) | ||||||
Beer | (1 | ) | 2 | (9 | ) | |||||||
Ready to drink | 1 | (1 | ) | (14 | ) | |||||||
Global and local leaders(ii): | ||||||||||||
Johnnie Walker | (13 | ) | (11 | ) | (14 | ) | ||||||
Windsor | (5 | ) | 1 | 1 | ||||||||
Smirnoff | 4 | (3 | ) | (13 | ) | |||||||
Baileys | 12 | 11 | 3 | |||||||||
Guinness | (1 | ) | 3 | (9 | ) |
Net sales by markets Net sales by categories Net sales by price points (%) (%) (%) South East Asia Global Travel, Spirits(i) RTDs Value Super premium Greater China Asia East and Middle Beer Other Standard Ultra premium India Wine Premium Australia North Asia (i) excluding RTDs |
(i) excluding |
Key financials | 2015 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | Net sales adjustment(ii) | 2016 £ million | Reported movement % | |||||||||||||||||||||
Net sales | 2,213 | (21 | ) | (28 | ) | 34 | (122 | ) | 2,076 | (6 | ) | |||||||||||||||||
Marketing | 344 | — | (1 | ) | (42 | ) | — | 301 | (13 | ) | ||||||||||||||||||
Operating profit before exceptional items | 356 | (5 | ) | — | 44 | — | 395 | 11 | ||||||||||||||||||||
Exceptional operating items(i) | (193 | ) | (49 | ) | ||||||||||||||||||||||||
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Operating profit | 163 | 346 | 112 | |||||||||||||||||||||||||
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(i) | In the |
(ii) |
Our markets
93Asia Pacific comprises South East Asia (Vietnam, Thailand, Philippines, Indonesia, Malaysia, Singapore, Cambodia, Laos, Myanmar, Nepal and Sri Lanka), Greater China (China, Taiwan, Hong Kong and Macau), India, Global Travel Asia and Middle East, Australia (including New Zealand), and North Asia (Korea and Japan).
Supply operations
We have distilleries at Chengdu, in China that produce Chinese white spirit and in Bundaberg, Australia that produce rum. United Spirits Limited (USL) operates 27 owned manufacturing facilities in India including one in Nepal, leases 13 facilities in India and further 34 are licensed to produce USL and Diageo brands. In addition, we have bottling plants in Korea, Thailand, Indonesia and Australia with ready to drink manufacturing capabilities.
Route to consumer
In South East Asia, spirits and beer are sold through a combination of Diageo companies, joint venture arrangements, and third party distributors. In Thailand, Malaysia and Singapore, we have joint venture arrangements with Moët Hennessy, sharing administrative and distribution costs. Diageo operates wholly owned subsidiaries in the Philippines and Vietnam. In Vietnam we own a 45.56% equity stake in Hanoi Liquor Joint Stock Company. In Indonesia, Guinness is brewed by, and distributed through, third party arrangements.
In Greater China the majority of our brands are now sold through our wholly owned subsidiary. Some brands are distributed through a joint venture arrangement with Moët Hennessy. In addition, we are the sole distributor of Shui Jing Fang, a super premium Chinese white spirit, through our controlling 39.71% equity stake in a listed company. Diageo operates a wholly owned subsidiary in Taiwan.
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Business review (continued)
Key highlightsIn India, we manufacture, market and sell Indian whisky, rum, brandy and other spirits through our 54.78% shareholding in USL. Diageo also sells its own brands through USL.
In Australia, we manufacture, market and sell the Diageo products and in New Zealand we operate through third party distributors.
In North Asia, we have our own distribution company in South Korea, whilst in Japan, the majority of sales are through joint venture agreements with Moët Hennessy and Kirin.
Airport shops and airline operators are serviced through a dedicated Diageo sales and marketing organisation. In the Middle East, we sell our products through third party distributors.
Sustainability and responsibility
Asia Pacific is a region of many and varied markets, and our 21-market business model enables us to address key issues and opportunities by market. Within the context of the Global Producers’ Commitments, our responsible drinking programmes focus on the issues highest on the agenda in each country. For example, in Indonesia and Vietnam we focus particularly on illicit alcohol; in India on drink driving; in Australia on consumer information and preventing underage and binge drinking. Our new DRINKiQ site, launched in January 2016, was particularly well received in Australia.
Likewise we tailor our sustainability programmes to each market. Our operations in India have the highest concentration of sites in water-stressed areas, so water, and the wider ‘WASH’ agenda is a key focus there. In Thailand and China, female empowerment is a significant issue, which we address directly through our ‘Plan W’ programme.
Performance
Net sales
Net sales were £2,076 million in the year ended 30 June 2016 a decrease of £137 million compared to net sales of £2,213 million in the year ended 30 June 2015. Net sales were adversely impacted by exchange rate movements of £21 million due to weak Australian dollar and Indian rupee against sterling and a £28 million loss due to disposal of the Bouvet wine business and transition of a number of operations in India to a franchise or royalty model, partially offset by organic growth of £34 million (see further performance analysis below). The full year impact of an accounting change for USL to account for the excise duties paid by third party manufacturers reduced net sales by £122 million.
Operating profit
Operating profit was £346 million in the year ended 30 June 2016 an increase of by £183 million compared to operating profit of £163 million in the year ended 30 June 2015. Organic growth improved operating profit by £44 million, partially offset by adverse exchange rate movements of £5 million mainly driven by the Australian dollar. Operating profit for the year ended 30 June 2016 was impacted by an exceptional operating charge of £49 million in respect of disengagement agreements relating to United Spirits Limited. Exceptional operating charges of £193 million in the year ended 30 June 2015 included a charge in respect of settlement of several disputes with the Korean tax authorities regarding the transfer pricing methodology applicable for imported products and an impairment charge in respect of the group’s 45.56% equity investment in Hanoi Liquor Joint Stock Company in Vietnam.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Net sales in Asia Pacific grew 2% as a result of growth in India, South East Asia and Australia. In China, Chinese white spirits grew while scotch declined and the shift towards lower ABV products in Korea led to a decline in net sales. Global Travel Asia and Middle East business declined primarily due to the geopolitical developments in the Middle East. The changes made to improve performance in USL led to net sales growth of 5% in India, largely driven by growth in IMFL whisky and scotch. Net sales in South East Asia grew 16% as the inventory reduction experienced last year ended. Australia net sales grew 2% driven by scotch and Guinness. Reserve brands net sales grew 4% largely driven by the strong performance of Shui Jing Fang in China and Johnnie Walker in South East Asia. Margin improved 176bps as a result of reducing marketing in India with the termination of USL related party agreements, and for Johnnie Walker Black Label and Johnnie Walker Blue Label in China. The sale by USL of United Breweries Limited shares also contributed to operating margin expansion.
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Business review (continued)
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
Asia Pacific | — | (3 | ) | 2 | (6 | ) | ||||||||||
India | — | (4 | ) | 5 | (11 | ) | ||||||||||
South East Asia | 3 | 3 | 16 | 15 | ||||||||||||
Greater China | (5 | ) | (5 | ) | (2 | ) | — | |||||||||
Global Travel Asia and Middle East | (9 | ) | (9 | ) | (15 | ) | (14 | ) | ||||||||
Australia | 2 | 2 | 2 | (5 | ) | |||||||||||
North Asia | 6 | 6 | (5 | ) | (6 | ) | ||||||||||
Spirits(i) | — | (3 | ) | 1 | (7 | ) | ||||||||||
Beer | 8 | 8 | 7 | 4 | ||||||||||||
Ready to drink | (3 | ) | (3 | ) | (3 | ) | (8 | ) | ||||||||
Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Johnnie Walker | (4 | ) | (2 | ) | (2 | ) | ||||||||||
McDowell’s | (2 | ) | — | (16 | ) | |||||||||||
Windsor | (4 | ) | (10 | ) | (12 | ) | ||||||||||
Smirnoff | (4 | ) | (7 | ) | (9 | ) | ||||||||||
Guinness | 8 | 7 | 4 | |||||||||||||
Bundaberg | (5 | ) | (3 | ) | (10 | ) | ||||||||||
Shui Jing Fang | 55 | 20 | 22 |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement except for McDowell’s 0%. |
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Business review (continued)
9476
Business review (continued)
CATEGORY REVIEW
Volume Net sales Marketing spend Scotch American North Rum Liqueurs Tequila to Ready drink Other Vodka Indian Made Gin Beer whisk(e)y Foreign Liquor (IMFL) |
Key markets and categories: | Organic volume movement (i) % | Organic net sales movement % | Reported net sales movement % | |||||||||
Spirits(ii) | (1 | ) | — | (10 | ) | |||||||
Whisk(e)y | (4 | ) | — | (8 | ) | |||||||
Johnnie Walker | (6 | ) | (4 | ) | (9 | ) | ||||||
Crown Royal | (4 | ) | 1 | (3 | ) | |||||||
JeB | (7 | ) | (8 | ) | (11 | ) | ||||||
Buchanan’s | (13 | ) | 6 | (24 | ) | |||||||
Windsor | (5 | ) | 1 | 1 | ||||||||
Bushmills | 8 | 7 | 4 | |||||||||
Bulleit | 66 | 69 | 62 | |||||||||
Vodka | (1 | ) | — | (5 | ) | |||||||
Smirnoff | (1 | ) | (2 | ) | (7 | ) | ||||||
Ketel One vodka | 3 | 6 | 2 | |||||||||
Cîroc | 2 | 2 | (2 | ) | ||||||||
Rum | 9 | 7 | (4 | ) | ||||||||
Captain Morgan | 6 | 6 | 1 | |||||||||
Liqueurs | (2 | ) | — | (7 | ) | |||||||
Baileys | (2 | ) | 1 | (3 | ) | |||||||
Tequila | 43 | 34 | (71 | ) | ||||||||
Don Julio | 27 | 27 | 22 | |||||||||
Gin | 3 | 3 | (1 | ) | ||||||||
Tanqueray | 4 | 6 | 3 | |||||||||
Beer | (11 | ) | (3 | ) | (8 | ) | ||||||
Guinness | (5 | ) | (1 | ) | (5 | ) | ||||||
Wine | (4 | ) | 1 | (6 | ) | |||||||
Ready to drink | 8 | 4 | (11 | ) | ||||||||
Total | (2 | ) | — | (9 | ) |
Key categories | Reported volume movement(iii) % | Organic net sales movement % | Reported net sales movement % | |||||||||
Spirits(i) | (1 | ) | 3 | (1 | ) | |||||||
Scotch | (3 | ) | — | (4 | ) | |||||||
Vodka(ii) | — | 1 | 2 | |||||||||
North American whisk(e)y | 4 | 6 | 12 | |||||||||
Rum(ii) | 2 | 3 | (3 | ) | ||||||||
Indian-Made Foreign Liquor (IMFL) whisky | (5 | ) | 3 | (11 | ) | |||||||
Liqueurs | 1 | 3 | 2 | |||||||||
Gin(ii) | 3 | 8 | 6 | |||||||||
Tequila | 15 | 8 | 28 | |||||||||
Beer | 21 | 6 | 1 | |||||||||
Ready to drink | (9 | ) | (11 | ) | (11 | ) |
(i) |
Spirits brands excluding ready to drink. |
(ii) | Vodka, rum, gin including IMFL brands. |
(iii) | Reported equals organic volume movement except for IMFL whisky (1)%, tequila (17)%, beer 13% and ready to drink (13)%. |
77
SpiritsBusiness review (continued)
Global giants, local stars and reserve(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||
Global giants | ||||||||||||
Johnnie Walker | (4 | ) | 1 | (3 | ) | |||||||
Smirnoff | 1 | 2 | — | |||||||||
Baileys | 2 | 4 | 3 | |||||||||
Captain Morgan | 4 | 3 | 5 | |||||||||
Tanqueray | 11 | 12 | 15 | |||||||||
Guinness | 4 | 4 | 2 | |||||||||
Local stars | ||||||||||||
Crown Royal | 5 | 6 | 11 | |||||||||
Yenì Raki | 1 | 4 | (9 | ) | ||||||||
Buchanan’s | (2 | ) | 10 | 1 | ||||||||
JeB | (6 | ) | (9 | ) | (12 | ) | ||||||
Windsor | (4 | ) | (10 | ) | (12 | ) | ||||||
Old Parr | (13 | ) | 1 | (14 | ) | |||||||
Bundaberg | (6 | ) | (3 | ) | (10 | ) | ||||||
Bell’s | — | (1 | ) | (10 | ) | |||||||
White Horse | (11 | ) | 6 | (15 | ) | |||||||
Ypióca | (6 | ) | (6 | ) | (28 | ) | ||||||
Cacique | 25 | 9 | (24 | ) | ||||||||
McDowell’s | (2 | ) | — | (16 | ) | |||||||
Shui Jing Fang | 55 | 20 | 22 | |||||||||
Reserve | ||||||||||||
Scotch malts | 8 | 7 | 6 | |||||||||
Cîroc | (2 | ) | (3 | ) | 2 | |||||||
Ketel One vodka | 4 | 4 | 10 | |||||||||
Don Julio | 25 | 18 | 40 | |||||||||
Bulleit | 27 | 29 | 36 |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement except for White Horse (9)%, Don Julio (13)% and McDowell’s 0%. |
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
78
Business review (continued)
79
Business review (continued)
Operating results 2015 compared with 2014
GROUP FINANCIAL REVIEW
The following comments were made by Deirdre Mahlan, Chief Financial Officer, in Diageo’s Annual Report for the year ended 30 June 2015:
“Our performance this year reflected both the volatile global consumer and economic environment and the actions we took to strengthen the business. Reported net sales were up with the integration of USL and organic net sales flat driven by currency related challenges in specific emerging markets and embedding our sell out discipline. Our focus on cost delivered savings and drove margin expansion, prioritising cash resulted in a marked cash flow improvement and we continued to invest for the future.”
Net sales up 5% with full consolidation of United Spirits |
Organic net sales flat |
Net cash from operating activities of £2.6 billion up £0.8 billion |
Free cash flow of £2 billion up £0.7 billion |
9% final dividend increase, full year dividend was 56.4 pence |
Operating margin down 52bps |
Organic operating margin up 24bps |
Shipment volume down 1% |
Depletion volume was estimated to be up 1% |
Basic eps 95.0 pence up 6% |
Eps before exceptional items 88.8 pence due to adverse exchange and associates, offset by underlying improvements |
Volume Net sales(i) Operating before exceptional items(ii) Operating profit(iii) North America Europe Africa Latin America and Caribbean Asia Pacific |
(i) | Excluding corporate net sales of £80 million (2014 – £79 million). |
(ii) | Excluding exceptional operating charges of £269 (2014 – £427 million) and corporate and ISC costs before exceptional items of £123 million (2014 – £189 million). |
(iii) | Excluding corporate and ISC costs of £139 million (2014 – £130 million). |
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Business review (continued)
Summary financial information | 2015 | 2014 | ||||||||
Volume | EUm | 246.2 | 156.1 | |||||||
Net sales | £ million | 10,813 | 10,258 | |||||||
Marketing | £ million | 1,629 | 1,620 | |||||||
Operating profit before exceptional items | £ million | 3,066 | 3,134 | |||||||
Exceptional operating items | £ million | (269 | ) | (427 | ) | |||||
Operating profit | £ million | 2,797 | 2,707 | |||||||
Share of associates and joint ventures profit after tax | £ million | 175 | 252 | |||||||
Exceptional non-operating items | £ million | 373 | 140 | |||||||
Net finance charges | £ million | 412 | 388 | |||||||
Tax rate | % | 15.9 | 16.5 | |||||||
Tax rate before exceptional items | % | 18.3 | 18.2 | |||||||
Profit attributable to parent company’s shareholders | £ million | 2,381 | 2,248 | |||||||
Basic earnings per share | pence | 95.0 | 89.7 | |||||||
Earnings per share before exceptional items | pence | 88.8 | 95.5 | |||||||
Full year dividend | pence | 56.4 | 51.7 |
Volume | Net sales | Marketing | Operating profit | |||||||||||||
Growth by region | % | % | % | % | ||||||||||||
North America | (4 | ) | — | — | — | |||||||||||
Europe, Russia and Turkey | — | (7 | ) | (6 | ) | (6 | ) | |||||||||
Africa | 7 | (1 | ) | (3 | ) | (2 | ) | |||||||||
Latin America and Caribbean | (6 | ) | (10 | ) | (4 | ) | (18 | ) | ||||||||
Asia Pacific | 622 | 64 | 13 | 2,229 | ||||||||||||
Diageo(i) | 58 | 5 | 1 | 3 | ||||||||||||
Volume | Net sales | Marketing | Operating profit(ii) | |||||||||||||
Organic growth by region | % | % | % | % | ||||||||||||
North America | (3 | ) | (1 | ) | (4 | ) | (2 | ) | ||||||||
Europe, Russia and Turkey | — | — | 2 | 3 | ||||||||||||
Africa | 7 | 6 | 4 | 10 | ||||||||||||
Latin America and Caribbean | (7 | ) | (1 | ) | 6 | (3 | ) | |||||||||
Asia Pacific | (3 | ) | (2 | ) | (8 | ) | 7 | |||||||||
Diageo(i) | (1 | ) | — | (1 | ) | 1 |
(i) | Includes Corporate. In the year ended 30 June 2015 Corporate reported net sales, net operating charges before exceptional items and net operating charges were £90 million (2014 — £79 million), £123 million (2014 — £130 million) and £133 million (2014 — £142 million), respectively. |
(ii) | Before exceptional items |
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Business review (continued)
KEY PERFORMANCE INDICATORS
Net sales (£ million)
The full consolidation of USL, partly offset by adverse exchange delivered reported net sales growth of 5%. Organic net sales flat.
10,258 896 (337) Organic movement (127) 123 10,813 2014 2015 Acquisitions and disposals(i) Exchange Price/mix Volume
(i) | Impact of acquisitions and disposals on 2014 and 2015. See page 89 for further details. |
Reported net sales were up 5%, largely driven by the full consolidation of USL, which contributed £921 million of net sales. Currency weakness, other than the US dollar, had an adverse impact on net sales. Organic volume decline was largely driven by lower shipments in the United States, reduction in inventory levels in South East Asia and West LAC, and the impact of pricing in Venezuela and Brazil. While these price increases contributed to positive price, the main driver of organic price/mix was positive mix, led by growth of reserve and Crown Royal.
Operating profit (£ million)
2,707 158 (161) 4 67 22 2,797 2014 2015 Exceptional operating items Acquisitions Exchange Organic movement Disposals
Reported operating profit increased by £90 million primarily due to lower impairment charges of £223 million, lower exceptional restructuring costs of £81 million and the benefit from acquisitions of £67 million partly offset by the exceptional charge of £146 million in respect of settlement of several disputes with the Korean tax authorities in the year ended 30 June 2015 and adverse exchange rate movements of £161 million. Organic operating profit growth was £22 million (0.7%).
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Business review (continued)
Operating margin (%)
Full consolidation of USL rebased operating margin by c200bps. Organic operating margin improved 24bps.
26.39% 168bps (61)bps (183)bps Organic movement (64)bps 36bps 52bps 25.87% 2014 2015 Exceptional operating items Gross margin Exchange Marketing Acquisitions and disposals Other operating expenses
(i) | Exchange impacts in respect of profit on intergroup sales of products and the intergroup recharges have been re-allocated to the respective income statement categories for the purposes of calculating margin impacts only. |
Operating margin was 25.87% in the year ended 30 June 2015 (2014 – 26.39%). Excluding the impact of lower exceptional charges which benefited operating margin by 168bps, operating margin decreased 220bps from 30.55% to 28.35%).
The full consolidation of USL lowered reported operating margin for the group. The organic improvement in margin was largely as a result of cost savings and efficiencies, which more than offset the impact of cost inflation and negative market mix.
Basic earnings per share (pence)
Eps increased to 95.0 pence from 89.7 pence. Eps before exceptional items fell 6.7 pence.
89.7 12 1.6 (6.4) (3.1) 1.4 1.5 (1.3) (0.4) 95.0 2014 2015 Exceptional items(i) Operating profit excluding FX Exchange on operating profit Associates and joint ventures Finance charges Tax Non-controlling interests Other including USL(ii)
(i) | Exceptional items net of tax and non-controlling interests. |
(ii) | The organic impact of fully consolidating USL results is included in other. The movements for operating profit, finance charges, tax and non-controlling interests, all exclude USL. |
Earnings per share was 95.0 pence in the year ended 30 June 2015 (2014 – 89.7 pence), with an exceptional gain after tax of £155 million, compared to an exceptional loss after tax of £271 million in the prior year, benefiting eps by 12 pence. Eps before exceptional items of 88.8 for the year ended 30 June 2015 fell 6.7 pence as compared to 95.5 pence for the year ended 30 June 2014 largely as a result of adverse exchange movements and lower income from associates and joint ventures. Organic growth in operating profit had a positive impact on eps. Net finance charges excluding acquired debt in USL reduced due to lower interest rates which benefited eps.
Movement in net finance charges | £ million | |||
2014 | 388 | |||
Net interest charge decrease | (48 | ) | ||
Consolidation of net borrowings acquired in USL | 60 | |||
Movement in other finance charges | 12 | |||
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2015 | 412 | |||
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Business review (continued)
2015 | 2014 | |||||||
Average monthly net borrowings (£ million) | 10,459 | 9,174 | ||||||
Effective interest rate(i) | 3.5 | % | 3.8 | % |
(i) | For the calculation of the effective interest rate, the net interest charge excludes fair value adjustments to derivative financial instruments and borrowings. Average monthly net borrowings include the impact of interest rate swaps that are no longer in a hedge relationship but excludes the market value adjustment for cross currency interest rate swaps. |
The increase in average net borrowings was principally the result of the acquisition of the controlling interest in USL, completed on 2 July 2014, and the consolidation of USL’s net borrowings. The effective interest rate decreased in the year ended 30 June 2015 as the negative impact of consolidating USL’s net borrowings was more than offset by lower interest rates on new debt issued and an increase in the proportion of floating rate debt through the use of swaps.
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Business review (continued)
Net cash from operating activities and free cash flow (£ million)
Net cash from operating activities increased from £1,790 million to £2,551 million.
1,790 (40) 76 (156) 734 79 68 2,551 2014 2015 USL OCF(i) Operating profit(ii) Exchange(iii) Working capital movement Interest tax Other operating items(iv)
(i) | USL net cash from operating activities is shown separately and is excluded from the other line items shown above. |
(ii) | Operating profit after operating exceptional items adjusted for non-cash items including depreciation and amortisation, excluding exchange. |
(iii) | Includes £5 million relating to translation exchange impact of exceptional operating items. |
(iv) | Other operating items includes pension related payments, dividends received from associates and joint ventures, and payments in respect of the settlement of Thalidomide |
Free cash flow was £1,963 million in 2015 an increase of £728 million.
1,235 (7) (57) Operating profit 76 (156) 734 (7) 79 59 1,963 2014 2015 USL free cash flow(i) Operating profit excluding exchange(ii) Exchange Working capital movement Net capex movement Interest and tax Other operating items(iii)
(i) | USL free cash flow is shown separately and is excluded from the other line items shown above. |
(ii) | Operating profit adjusted for non-cash items including depreciation and amortisation. |
(iii) | Other operating items includes pension related payments, dividends received from associates and joint ventures, and payments in respect of the settlement of Thalidomide. |
The increase in net cash from operating activities was primarily driven by the positive working capital movement. This was largely due to lower debtors as a result of phasing of shipments, with days sales outstanding 6 days lower than last year. This compares with an increase in debtors in the prior year
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Business review (continued)
Return on invested capital (%)
The return on closing invested capital of 26.7% for the year ended 30 June 2015, calculated as reported profit for the year divided by net assets as of 30 June 2015, decreased by 200bps compared to return on closing invested capital of 28.7%, for the year ended 30 June 2014 driven by the acquisition of USL, the partially offset by the impacts of exceptional gains on the sale of businesses in 2015 and lower exceptional operating charges.
The investment in USL has rebased return on average invested capital (ROIC)(i). Adverse exchange and lower income from associates reduced ROIC in the year
14.1% (1.1)pps 0.2pps (0.4)pps (0.3)pps (0.2)pps 12.3% 2014(ii) 2015(ii) USL Operating profit after tax Exchange Associates and joint ventures including FX Other
(i) | ROIC calculation excludes exceptional items. |
(ii) | For the years ended 30 June 2014 and 30 June 2015 average net assets were adjusted for the inclusion of USL as though it was owned throughout the year as it became an associate on 4 July 2013 and a subsidiary on 2 July 2014. |
The additional investment in USL and full consolidation of its results reduced ROIC by 1.1pps. Exchange movements reduced operating profit, but the impact on ROIC was partially offset by exchange reducing invested capital. Lower income from associates reduced ROIC in the year.
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Business review (continued)
Income statement
2014 £ million | Exchange (a) £ million | Acquisitions and disposals (b) £ million | Organic movement £ million | 2015 £ million | ||||||||||||||||
Sales | 13,980 | (509 | ) | 2,321 | 174 | 15,966 | ||||||||||||||
Excise duties | (3,722 | ) | 172 | (1,425 | ) | (178 | ) | (5,153 | ) | |||||||||||
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Net sales | 10,258 | (337 | ) | 896 | (4 | ) | 10,813 | |||||||||||||
Cost of sales(i) | (4,006 | ) | 61 | (666 | ) | 26 | (4,585 | ) | ||||||||||||
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Gross profit | 6,252 | (276 | ) | 230 | 22 | 6,228 | ||||||||||||||
Marketing | (1,620 | ) | 47 | (74 | ) | 18 | (1,629 | ) | ||||||||||||
Other operating expenses(i) | (1,498 | ) | 68 | (85 | ) | (18 | ) | (1,533 | ) | |||||||||||
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Operating profit before exceptional items | 3,134 | (161 | ) | 71 | 22 | 3,066 | ||||||||||||||
Exceptional operating items (c) | (427 | ) | (269 | ) | ||||||||||||||||
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Operating profit | 2,707 | 2,797 | ||||||||||||||||||
Non-operating items (c) | 140 | 373 | ||||||||||||||||||
Net finance charges | (388 | ) | (412 | ) | ||||||||||||||||
Share of after tax results of associates and joint ventures | 252 | 175 | ||||||||||||||||||
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Profit before taxation | 2,711 | 2,933 | ||||||||||||||||||
Taxation | (447 | ) | (466 | ) | ||||||||||||||||
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Profit from continuing operations | 2,264 | 2,467 | ||||||||||||||||||
Discontinued operations (c) | (83 | ) | — | |||||||||||||||||
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Profit for the year | 2,181 | 2,467 | ||||||||||||||||||
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(i) | Before exceptional operating items |
(a) Exchange
The impact of movements in exchange rates on reported figures was principally in respect of the Venezuelan bolivar, the euro, the Russian rouble and the US dollar.
In February 2015, the Central Bank of Venezuela opened a new mechanism (known as SIMADI) that allows private and public companies to trade foreign currency with fewer restrictions than other mechanisms in Venezuela. As a result, the group has
used the SIMADI exchange rate to consolidate its Venezuelan operations for the year ended 30 June 2015. For the year ended 30 June 2014, the group applied the Sicad II exchange rate to consolidate its operations in Venezuela.
Applying the SIMADI consolidation rate of $1 = VEF197.30 (£1 = VEF309.76) compared to the Sicad II rate of $1 = VEF49.98 (£1 = VEF85.47) would have reduced net assets and cash and cash equivalents as at 1 July 2014 by £60 million and £52 million, respectively, and would have reduced the previously reported net sales and operating profit for the year ended 30 June 2014 by £57 million and £36 million, respectively.
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Business review (continued)
The effect of movements in exchange rate and other movements on profit before exceptional items and taxation for the year ended 30 June 2015 is set out in the table below.
Gains/ (losses) £ million | ||||
Translation impact | (72 | ) | ||
Transaction impact | (89 | ) | ||
Operating profit before exceptional items | (161 | ) | ||
Net finance charges — translation impact | (7 | ) | ||
Mark to market impact of IAS 39 on interest expense | 8 | |||
Impact of IAS 21 and IAS 39 on net other finance charges | 1 | |||
Interest and other finance charges | 2 | |||
Associates — translation impact | (20 | ) | ||
Profit before exceptional items and taxation | (179 | ) | ||
Year ended 30 June 2015 | Year ended 30 June 2014 | |||||||
Exchange rates | ||||||||
Translation £1 = | $1.57 | $1.63 | ||||||
Transaction £1 = | $1.58 | $1.59 | ||||||
Translation £1 = | €1.31 | €1.20 | ||||||
Transaction £1 = | €1.23 | €1.26 |
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Business review (continued)
(b) Acquisitions and disposals
The impact of acquisitions and disposals on the reported figures was primarily attributable to the full consolidation of United Spirits Limited (USL) from 2 July 2014 and the acquisition of the Mexican distribution rights of Don Julio, partially offset by the disposal of The Old Bushmills Distillery Company Limited on 27 February 2015 and Gleneagles Hotels Limited on 30 June 2015.
(c) Exceptional items
Exceptional operating charges of £269 million (2014 — £427 million) in the year ended 30 June 2015 comprised:
In the year ended 30 June 2014 exceptional impairment loss of £260 million in respect of the Shui Jing Fang brand and £4 million in respect of tangible fixed assets was charged to other operating expenses.
Non-operating itemsin the year ended 30 June 2015 include a gain of £103 million (2014 – £140 million) following the acquisition of additional equity shares in USL which increased the group’s investment in USL from 25.02% to 54.78%, excluding
the 2.38% interest owned by the USL Benefit Trust (2014 – 10.04% to 25.02%). On 2 July 2014 when USL became a subsidiary of the group a gain was recognised on the difference between the book value of the 25.02% investment and the fair value. The gain is net of a £79 million cumulative exchange loss recycled from other comprehensive income and £10 million transaction costs.
On 27 February 2015, the group completed the purchase of the 50% equity interest in Don Julio B.V. that it did not already own (giving Diageo 100% ownership of the brand and production facility) and the Mexican distribution business of Don Julio. As a result of Don Julio becoming a subsidiary of the group a gain of £63 million arose, being the difference between the book value of the joint venture on the date of the transaction and the fair value. In addition, the group reacquired the production and distribution for Smirnoff and Popov in Mexico. As part of the transaction, Diageo also agreed to sell 100% of the equity share capital in The Old Bushmills Distillery Company Limited resulting in an exceptional gain of £174 million.
On 30 June 2015, Diageo completed the disposal of Gleneagles Hotels Limited to the Ennismore group resulting in an exceptional gain of £73 million.
In the year ended 30 June 2015 a provision of £30 million was charged to non-operating items in respect of a guarantee provided to a third party financial institution.
Discontinued operations in the year ended 30 June 2014 comprised a charge after taxation of £83 million (£91 million less tax of £8 million) in respect of the settlement of thalidomide litigation in Australia and New Zealand and anticipated future payments to thalidomide organisations.
Cash payments in the year ended 30 June 2015 for exceptional restructuring items, the legal settlement in Korea, the guarantee and thalidomide were £117 million (2014 – £104 million), £74 million (2014 – £nil), £30 million (2014 – £nil) and £19 million (2014 – £59 million), respectively.
Dividend
The final dividend was 34.9 pence per share, an increase of 9% from the year ended 30 June 2014. The full dividend was therefore 56.4 pence per share, an increase of 9% from the year ended 30 June 2014. Following the approval by shareholders, the final dividend was paid on 8 October 2015 to shareholders on the register on 14 August 2015. The ex-dividend date was 13 August 2015. Payment to US ADR holders was made on 14 October 2015.
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Business review (continued)
MOVEMENTS IN NET BORROWINGS AND EQUITY
Movement in net borrowings | 2015 £ million | 2014 £ million | ||||||
Net borrowings at the beginning of the year | (8,850 | ) | (8,403 | ) | ||||
Free cash flow (a) | 1,963 | 1,235 | ||||||
Acquisition and sale of businesses (b) | (306 | ) | (534 | ) | ||||
Net purchase of own shares for share schemes (c) | (8 | ) | (113 | ) | ||||
Dividends paid to non-controlling interests | (72 | ) | (88 | ) | ||||
Purchase of shares of non-controlling interests (d) | — | (37 | ) | |||||
Net movements in bonds and other borrowings | (315 | ) | (157 | ) | ||||
Equity dividends paid | (1,341 | ) | (1,228 | ) | ||||
Other movements | 2 | 1 | ||||||
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Net decrease in cash and cash equivalents | (77 | ) | (921 | ) | ||||
Net decrease in bonds and other borrowings | 315 | 157 | ||||||
Exchange differences (e) | (7 | ) | 349 | |||||
Borrowings on acquisition of businesses | (869 | ) | — | |||||
Other non-cash items | (39 | ) | (32 | ) | ||||
|
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| |||||
Net borrowings at the end of the year | (9,527 | ) | (8,850 | ) | ||||
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(a) See page 85 for the analysis of free cash flow.
(b) On 2 July 2014 the group acquired an additional 26% investment in USL for INR 114.5 billion (£1,118 million). On 31 October 2014 the sale of the Whyte and Mackay Group by USL resulted in a net cash receipt of £391 million. On 27 February 2015, Diageo paid $293 million (£192 million) for the 50% equity interest in Don Julio B.V. that it did not already own and for the Mexican distribution rights for Don Julio. As part of the transaction, Diageo also agreed to sell the equity share capital in The Old Bushmills Distillery Company Limited. The net cash consideration received for Bushmills amounted to $709 million (£456 million).
In the year ended 30 June 2014 cash payments primarily comprised £474 million in respect of the acquisition of a 18.74% investment in USL.
(c) Net purchase of own shares comprised purchase of treasury shares for the future settlement of obligations under the employee share option schemes of £75 million (2014 – £208 million) less receipts from employees on the exercise of share options of £67 million (2014 – £95 million).
(d) In the year ended 30 June 2014 Diageo purchased the remaining 7% equity stake in Sichuan Chengdu Shuijingfang Group Co., Ltd.
(e) Exchange differences primarily arose on US dollar and euro denominated borrowings partially offset by the favourable change on foreign exchange swaps and forwards.
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Business review (continued)
Movement in equity | 2015 £ million | 2014 £ million | ||||||
Equity at the beginning of the year | 7,590 | 8,088 | ||||||
Profit for the year | 2,467 | 2,181 | ||||||
Exchange adjustments (a) | (225 | ) | (1,133 | ) | ||||
Net remeasurement of post employment plans | 113 | (167 | ) | |||||
Exchange recycled to the income statement (b) | 88 | — | ||||||
Fair value movements on available-for-sale investments (b) | 20 | (85 | ) | |||||
Non-controlling interests acquired | 641 | 8 | ||||||
Purchase of shares of non-controlling interests | — | (37 | ) | |||||
Dividends to non-controlling interests | (72 | ) | (88 | ) | ||||
Dividends paid | (1,341 | ) | (1,228 | ) | ||||
Other reserve movements | (25 | ) | 51 | |||||
|
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| |||||
Equity at the end of the year | 9,256 | 7,590 | ||||||
|
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|
(a) Movement in the year ended 30 June 2015 primarily arose from the exchange loss on Turkish lira, Brazilian real and euro denominated net investments.
(b) Following the acquisition of majority equity stakes in USL, 50% equity interest in Don Julio and one of the group’s joint ventures in South Africa that it did not already own exchange losses of £88 million were recycled to the income statement.
On the acquisition of USL on 2 July 2014 a 43.91% (£641 million) non-controlling interest was recognised. In the year ended 30 June 2014 a gain of £85 million, in respect of USL, was recycled to the income statement reflecting the step up from available-for-sale investment to associate.
Post employment plans
The deficit in respect of post employment plans before taxation decreased by £216 million from £475 million at 30 June 2014 to £259 million at 30 June 2015. The reduction was primarily due to strong asset return and a reduction in long term inflation rates partially offset by a decrease in returns from AA-rated corporate bonds used to calculate the discount rates on the liabilities of the post employment plans (United Kingdom reduced from 4.2% to 3.8% and Ireland from 3.0% to 2.6%).
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Business review (continued)
NORTH AMERICA
Performance
Netsalesbymarkets(%)Netsalesbycategories(%)Netsalesbypricepoints(%)USSpiritsCanadaandWinesOtherDGUSASpiritsWineOtherBeerRTDsValueSuperpremiumStandardUltrapremiumPremium |
Key financials | 2014 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 £ million | Reported movement % | ||||||||||||||||||
Net sales | 3,444 | 97 | (37 | ) | (49 | ) | 3,455 | — | ||||||||||||||||
Marketing | 540 | 16 | 7 | (21 | ) | 542 | — | |||||||||||||||||
Operating profit before exceptional items | 1,460 | 27 | (2 | ) | (37 | ) | 1,448 | (1 | ) | |||||||||||||||
Exceptional operating items | (35 | ) | (28 | ) | ||||||||||||||||||||
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| |||||||||||||||||||||
Operating profit | 1,425 | 1,420 | — | |||||||||||||||||||||
|
|
|
|
Net sales
Net sales were £3,455 million in the year ended 30 June 2015, flat compared to net sales of £3,444 million in the year ended 30 June 2014. Net sales were impacted by favourable exchange rate movements of £97 million primarily due to the strength of the US dollar against sterling, offset by the loss of the net sales of £37 million on termination of the transitional arrangements in respect of Jose Cuervo and the disposal of Bushmills in February 2015 and organic net sales decline of £49 million (see further performance analysis below).
Operating profit
Operating profit was £1,420 million in the year ended 30 June 2015 a decrease of £5 million compared to operating profit of £1,425 million in the year ended 30 June 2014. Operating profit benefitted from favourable exchange rate movements of £27 million (primarily due to the strength of the US dollar partially offset by the euro) offset by an organic decline of £37 million. Operating profit was impacted by exceptional operating charges of £28 million in the year ended 30 June 2015 a decrease of £7 million compared to £35 million in the year ended 30 June 2014, as a result of lower of restructuring costs.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
In North America, US Spirits has delivered improved depletion performance through the year with the value of distributor depletions, up 3% in the first half and up 4% for the full year. Shipments were broadly in line with depletions and therefore net sales were down 2% year on year as last year shipments were higher than depletions mainly driven by innovation launches. Beer net sales were in line with last year, ready to drink and wine were down slightly and in Canada net sales grew 2%. Volume growth of the reserve portfolio was the main driver of the 1.5pps of increased price/mix as price premiums against the competition, for brands such as Smirnoff and Captain Morgan, were narrowed. This led to lower achieved price year on year but did drive improved share positions. Our innovation agenda continued to lead the industry in North America and this year was a key driver of our net sales. Advertising spend was down as we drove procurement savings on media and agency fees in marketing while maintaining our share of voice. Adjusting for these savings, marketing as a percentage of net sales was roughly flat. Overheads were flat but operating margin declined 47 basis points driven by soft volume and lower net sales of spirits in the United States.
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Business review (continued)
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
North America | (3 | ) | (4 | ) | (1 | ) | — | |||||||||
US Spirits and Wines | (3 | ) | (5 | ) | (2 | ) | 1 | |||||||||
DGUSA | (3 | ) | (3 | ) | (1 | ) | 3 | |||||||||
Canada | 3 | 3 | 2 | (4 | ) | |||||||||||
Spirits(i) | (3 | ) | (3 | ) | (1 | ) | 1 | |||||||||
Beer | — | — | (1 | ) | 1 | |||||||||||
Wine | (2 | ) | (2 | ) | (2 | ) | 2 | |||||||||
Ready to drink | (3 | ) | (25 | ) | (1 | ) | (14 | ) | ||||||||
Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Smirnoff | (2 | ) | (3 | ) | (1 | ) | ||||||||||
Captain Morgan | (10 | ) | (12 | ) | (10 | ) | ||||||||||
Johnnie Walker | (8 | ) | (15 | ) | (12 | ) | ||||||||||
Guinness | 2 | 2 | 4 | |||||||||||||
Baileys | (5 | ) | (5 | ) | (3 | ) | ||||||||||
Tanqueray | (2 | ) | (2 | ) | 1 | |||||||||||
Crown Royal | 13 | 12 | 15 | |||||||||||||
Cîroc | 4 | 4 | 8 | |||||||||||||
Ketel One vodka | (2 | ) | (2 | ) | 1 | |||||||||||
Bulleit | 32 | 36 | 41 | |||||||||||||
Don Julio | 5 | 9 | 13 | |||||||||||||
Buchanan’s | 17 | 18 | 23 |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement. |
93
Business review (continued)
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Business review (continued)
EUROPE, RUSSIA AND TURKEY
Performance
Net sales by markets (%) Net sales by categories (%) Net sales by price points Europe Turkey Russia Other Spirits RTDs Wine Beer Other Value Super premium Premium Standard Ultra premium |
Key financials | 2014 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 £ million | Reported movement % | ||||||||||||||||||
Net sales | 2,814 | (186 | ) | (13 | ) | 2 | 2,617 | (7 | ) | |||||||||||||||
Marketing | 413 | (30 | ) | (1 | ) | 6 | 388 | (6 | ) | |||||||||||||||
Operating profit before exceptional items | 853 | (67 | ) | (2 | ) | 20 | 804 | (6 | ) | |||||||||||||||
Exceptional operating items | (20 | ) | (20 | ) | ||||||||||||||||||||
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| |||||||||||||||||||||
Operating profit | 833 | 784 | (6 | ) | ||||||||||||||||||||
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|
Net sales
Net sales were £2,617 million in the year ended 30 June 2015 a decrease of £197 million compared to net sales of £2,814 million in the year ended 30 June 2014. Net sales were impacted by adverse exchange rate movements of £186 million, principally because of the weakness of the euro, Russian rouble and Turkish lira and the loss of net sales of £13 million on the disposal of Bushmills in February 2015. Organic growth improved net sales by £2 million (see further performance analysis below).
Operating profit
Operating profit was £784 million in the year ended 30 June 2015 a decrease of £49 million compared to operating profit of £833 million in the year ended 30 June 2014. Operating profit was impacted by adverse exchange rate movements of £67 million because of the weakness of the euro, Russian rouble and Turkish lira partially offset by organic growth of £20 million. Operating profit was impacted by exceptional operating charges in respect of restructuring costs of £20 million in the year ended 30 June 2015 and the year ended 30 June 2014.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Europe, Russia and Turkey’s performance reflected a flat performance in Europe, growth in Turkey and a challenging environment in Russia. In Europe, although performance improved in half of our markets. Reserve brands delivered another strong performance with net sales up 20% and growing double digit even in the strongestmore challenging economies in Southern Europe. Innovation remained a key performance driver with net sales up 30% driven by successes such as ‘The Brewers Project’ which helped put Guinness back in growth in both Great Britain and Ireland. We continued to invest in our route to consumer, increasing the number of sales people by 30% and the number of outlets we cover by 60%. In Russia, which continued to be impacted by economic volatility, consumers traded down and customers reduced inventory levels while Diageo gained share in scotch and rum. Turkey net sales were up 14%, with 5pps of positive price/mix.3% driving premiumisation in the raki category and gained share in scotch and vodka. Total operating margin for the region improved 75bps largely driven by gross margin improvement in Turkey, and overhead cost reduction in Europe, which was partially reinvested in marketing and route to consumer.
95
Business review (continued)
Whisk(e)y,our largest spirits category, performed broadly in line with overall spirits, and again strong performance in North America offset weak performance in emerging markets. Consequently scotch net sales declined 1%, largely Johnnie Walker, given its strong presence in emerging markets.
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
Europe, Russia and Turkey | — | — | — | (7 | ) | |||||||||||
Europe | (1 | ) | (1 | ) | — | (5 | ) | |||||||||
Russia | (12 | ) | (12 | ) | (14 | ) | (42 | ) | ||||||||
Turkey | — | — | 3 | (5 | ) | |||||||||||
Spirits(i) | (1 | ) | (1 | ) | 1 | (8 | ) | |||||||||
Beer | 1 | 1 | 1 | (4 | ) | |||||||||||
Wine | — | — | (1 | ) | (4 | ) | ||||||||||
Ready to drink | (6 | ) | (6 | ) | (2 | ) | (5 | ) | ||||||||
Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Guinness | 1 | 2 | (2 | ) | ||||||||||||
Smirnoff | (2 | ) | (4 | ) | (7 | ) | ||||||||||
Johnnie Walker | (5 | ) | (7 | ) | (15 | ) | ||||||||||
Baileys | (3 | ) | (4 | ) | (10 | ) | ||||||||||
Captain Morgan | 9 | 10 | 1 | |||||||||||||
Yenì Raki | (4 | ) | 4 | (6 | ) | |||||||||||
JeB | (1 | ) | (3 | ) | (10 | ) |
(i) |
Vodka net sales were broadly flat, with strong growth in reserve offsetting the decline in standard and value segments. In the United States volume declined in the value and standard price segments due to a challenging price environment and lapping of innovations of the year ended 30 June 2013. Growth in Latin America was strong, driven by Brazil and Argentina.
(ii) | Reported equals organic volume movement. |
96
Business review (continued)
Cîroc more than trebled net sales. In Greece, performance was impacted by the deterioration of economic environment in the last quarter, which resulted in a 4% net sales decline. InRumGermany andAustria, net sales grew 7% driven by Captain Morgan, Zacapa and Cacique.
Liqueurs performance was driven by Baileys, which represents over 85% of the category.
Tequilanet sales grew 34% driven by strong performance ofDon Julio, with strong growth and share gains in the United States, its primary market. This was driven by a significant increase in marketing spend to support new brand positioning and commercial activation around the summer programme, ‘Elevate your Summer’ and ‘Your Margarita Crafted’. Don Julio continued to perform strongly outside of the United States, growing net sales 34%, with particularly strong growth in Western Europe and Australia.
GinTurkey net sales grew 3%, with strong growth despite an excise duty increase in Western Europe, Africa, and Latin America partly offset by a decline in Asia Pacific.
Beer net sales declined 3%. In Nigeria consumers traded down to value beer resulting in share losses, duty changes had a negative impact on Senator keg in Kenya, and there were continued challenges in Ireland and Great Britain.
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Business review (continued)
AFRICA
Performance
Netsalesbymarkets(%)Netsalesbycategories(%)Netsalesbypricepoints(%)NigeriaSouthAfricaEastAfricaOtherAfricaRegionalMarketsSpiritsWineOtherBeerRTDsValueSuperpremiumStandardUltrapremiumPremium |
Key financials | 2014 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 £ million | Reported movement % | ||||||||||||||||||
Net sales | 1,430 | (100 | ) | — | 85 | 1,415 | (1 | ) | ||||||||||||||||
Marketing | 152 | (10 | ) | — | 5 | 147 | (3 | ) | ||||||||||||||||
Operating profit before exceptional items | 340 | (52 | ) | 1 | 29 | 318 | (6 | ) | ||||||||||||||||
Exceptional operating items | (23 | ) | (7 | ) | ||||||||||||||||||||
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Operating profit | 317 | 311 | (2 | ) | ||||||||||||||||||||
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Net sales
Net sales were £1,415 million in the year ended 30 June 2015 a decrease of local African beers was negatively£15 million compared to net sales of £1,430 million in the year ended 30 June 2014. Net sales were impacted by adverse exchange rate movements of £100 million primarily driven by the declineweak Nigerian naira, Ghana cedi and South African rand mainly offset by organic growth of Harp which£85 million (see further performance analysis below).
Operating profit
Operating profit was £311 million in the year ended 30 June 2015 a decrease of £6 million compared to operating profit of £317 million in the year ended 30 June 2014. Operating profit was adversely impacted by £52 million exchange rate movements driven by the weak Nigerian naira, Ghana cedi and South African rand partially offset by organic growth of £29 million. Operating profit was impacted by pricing pressureexceptional operating charges in respect of restructuring costs of £7 million in the year ended 30 June 2015, compared to £23 million for the year ended 30 June 2014.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Good performances in both beer and spirits led to net sales up 6% in Africa. Investments in route to consumer together with innovation drove an 8% increase in beer and led to double digit growth in spirits. The mainstream beer market in Nigeria remained challenged as consumers moved towards more value products, impacting the performance of Guinness and Senator keg which declined driven by October’s excise dutyHarp. However the national rollout of Orijin and renovation of Satzenbrau drove an increase in Kenya. These challengesbeer net sales of 9%. Investment in Guinness marketing has stabilised volume share in the brand. Good progress in route to consumer led to strong net sales growth in Ghana, and in Cameroon, strong marketing campaigns delivered net sales and share gains in Guinness. In South Africa, spirits growth was underpinned by the continued strong performances of Smirnoff 1818, which is now a two million case brand, and Johnnie Walker, while overall growth was impacted by a decline in ready to drink. Reserve brands grew 26% with double digit increases in South Africa, East Africa and Nigeria. Increased sales of mainstream brands, which have lower costs per case, together with procurement and supply efficiencies were partially offset by an increase in partmarketing and route to consumer investments leading to organic operating margin improvement of 75 basis points.
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Business review (continued)
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
Africa | 7 | 7 | 6 | (1 | ) | |||||||||||
Nigeria | 13 | 13 | 6 | (3 | ) | |||||||||||
East Africa | 7 | 7 | 9 | 6 | ||||||||||||
Africa Regional Markets | 14 | 14 | 15 | 1 | ||||||||||||
South Africa | (2 | ) | (2 | ) | (7 | ) | (12 | ) | ||||||||
Spirits(i) | 17 | 17 | 13 | 7 | ||||||||||||
Beer | 4 | 4 | 8 | (1 | ) | |||||||||||
Ready to drink | (34 | ) | (34 | ) | (28 | ) | (33 | ) | ||||||||
Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Guinness | (5 | ) | (7 | ) | (15 | ) | ||||||||||
Johnnie Walker | 3 | 7 | 2 | |||||||||||||
Smirnoff | 22 | 22 | 16 | |||||||||||||
Tusker | (6 | ) | 3 | 1 | ||||||||||||
Malta | (8 | ) | (5 | ) | (17 | ) | ||||||||||
Senator | (11 | ) | (16 | ) | (20 | ) | ||||||||||
Harp | (40 | ) | (46 | ) | (50 | ) |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement. |
Winegrew net sales 1% with growth largely driven by the United States, as a result of price increases and innovation.
ReadyTanzania Kibo Gold, positioned to drink grew 4% driven by South Africa, Great Britain, Venezuela, and Japan, partlycapture consumers trading down, offset by a decline in Senator due to excise duty changes in Kenya in the United Statesfirst half last year. In spirits, growth was led by mainstream spirits brands and Australia. In South Africa, strong performance reflectsgood performances from Johnnie Walker and Smirnoff. Success in mainstream spirits was driven by Kane Extra and Liberty in Kenya, which benefited from improvements in route to consumer, including the production and saleintroduction of motorcycles to DHN Drinksincrease sales coverage of mainstream outlets. Johnnie Walker net sales grew 60% driven by recruitment activities, while the launch of Smirnoff Ice Double Black and Guarana also contributed to resolve short term capacity issues. East Africa’s growth.
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Business review (continued)
• | Marketing investment in Africa increased 4%. In Nigeria spend on beer was refocused from Harp to support the growth of Orijin(i) and value beers, while in East Africa, the decline in Senator volume also led to a reduction in spend. Spend increased behind vodka, notably Smirnoff 1818 in South Africa in support of pack innovations and promotional activity and investment behind Johnnie Walker grew in South Africa and East Africa. Ready to drink investment increased as Smirnoff Ice Double Black & Guarana launched in East Africa and Nigeria. |
(i) | In the year ended 30 June 2015 Orijin was reported as beer while in the year ended 30 June 2016 as ready to drink. |
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Business review (continued)
LATIN AMERICA AND CARIBBEAN
Performance
Netsalesbymarkets(%)Netsalesbycategories(%)Netsalesbypricepoints(%)Paraguay,MexicoUruguayandBrazilWestLACVenezuelaOtherColombiaSpiritsWineOtherBeerRTDsValueSuperpremiumStandardUltrapremiumPremium |
Key financials | 2014 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 £ million | Reported movement % | ||||||||||||||||||
Net sales | 1,144 | (123 | ) | 23 | (11 | ) | 1,033 | (10 | ) | |||||||||||||||
Marketing | 203 | (22 | ) | 3 | 10 | 194 | (4 | ) | ||||||||||||||||
Operating profit before exceptional items | 328 | (60 | ) | 2 | (7 | ) | 263 | (20 | ) | |||||||||||||||
Exceptional operating items | (14 | ) | (5 | ) | ||||||||||||||||||||
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Operating profit | 314 | 258 | (18 | ) | ||||||||||||||||||||
|
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|
|
Net sales
Net sales were £1,033 million in the year ended 30 June 2015 a decrease of £111 million compared to net sales of £1,144 million in the year ended 30 June 2014. Net sales reduced by £123 million due to adverse exchange rate movements primarily in respect of the decline in value of the Venezuelan bolivar and Brazilian real and an organic decline of £11 million (see further performance analysis below). These impacts were partially mitigated by additional net sales of £23 million attributable to the acquisition of a 50% equity interest in Don Julio that the group did not already own.
Operating profit
Operating profit was £258 million in the year ended 30 June 2015 a decrease of £56 million compared to operating profit of £314 million in the year ended 30 June 2014. Operating profit was impacted by adverse exchange rate movements of £60 million primarily due to the Venezuelan bolivar, Brazilian real and Mexican peso and an organic decline of £7 million. Operating profit was impacted by exceptional restructuring costs of £5 million for the year ended 30 June 2015 a decrease of £9 million compared to a £14 million in the year ended 30 June 2014.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Good performances in the domestic markets in LAC were offset by a significant net sales decline in export channels due to currency volatility. The levels of stock held by these customers has reduced, which together with lower depletions, impacted growth in the region by five percentage points. Net sales in domestic markets increased 5% as we expanded our leading positions in scotch and broadened our business into other categories. In Brazil, performance has been affected by a weaker economy and a tougher competitive environment, but we have invested in route to consumer and recruited new consumers into our portfolio through innovation. In Venezuela, there was good growth in local spirits and scotch. Performance in Colombia benefited from investments in route to consumer and innovation, while our strength in scotch drove good net sales growth in Mexico. In Peru and Jamaica, we delivered good growth from our investments in route to consumer and, while net sales were down in Argentina, we moved quickly to offset import levies with local production driving share gains. While significant cost efficiencies were achieved, especially in Brazil, negative market mix and increased marketing investment led to a decrease of 41 basis points in organic operating margin.
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Business review (continued)
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
Latin America and Caribbean | (7 | ) | (6 | ) | (1 | ) | (10 | ) | ||||||||
PUB | (8 | ) | (8 | ) | (2 | ) | (12 | ) | ||||||||
Venezuela | (38 | ) | (38 | ) | 41 | (60 | ) | |||||||||
Colombia | 10 | 9 | 10 | (2 | ) | |||||||||||
Mexico | 14 | 29 | 13 | 19 | ||||||||||||
West LAC | (5 | ) | (5 | ) | (9 | ) | (12 | ) | ||||||||
Spirits(i) | (8 | ) | (7 | ) | (3 | ) | (12 | ) | ||||||||
Beer | 5 | 5 | 17 | 11 | ||||||||||||
Wine | 1 | 1 | 17 | (1 | ) | |||||||||||
Ready to drink | (7 | ) | (7 | ) | 9 | (6 | ) | |||||||||
Global giants and local stars(ii): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Johnnie Walker | (6 | ) | (5 | ) | (11 | ) | ||||||||||
Smirnoff | (12 | ) | 5 | (7 | ) | |||||||||||
Bailey’s | (4 | ) | 8 | — | ||||||||||||
Buchanan’s | (17 | ) | (12 | ) | (24 | ) | ||||||||||
Old Parr | (9 | ) | (10 | ) | (22 | ) | ||||||||||
Ypióca | (5 | ) | (3 | ) | (14 | ) | ||||||||||
Black & White | 17 | 27 | 6 |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement. |
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Business review (continued)
103
Business review (continued)
ASIA PACIFIC
Performance
Netsalesbymarkets(%)Netsalesbycategories(%)Netsalesbypricepoints(%)SouthEastAsiaGlobalTravel,AsiaGreaterChinaandMiddleEastIndiaAustraliaNorthAsiaSpiritsWineOtherBeerRTDsValueSuperpremiumStandardUltrapremiumPremium |
Key financials | 2014 £ million | Exchange £ million | Acquisitions and disposals £ million | Organic movement £ million | 2015 £ million | Reported movement % | ||||||||||||||||||
Net sales | 1,347 | (22 | ) | 920 | (32 | ) | 2,213 | 64 | ||||||||||||||||
Marketing | 305 | (1 | ) | 65 | (25 | ) | 344 | 13 | ||||||||||||||||
Operating profit before exceptional items | 283 | (13 | ) | 66 | 20 | 356 | 26 | |||||||||||||||||
Exceptional operating items | (276 | ) | (193 | ) | ||||||||||||||||||||
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Operating profit | 7 | 163 | 2,229 | |||||||||||||||||||||
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Net sales
Net sales were £2,213 million in the year ended 30 June 2015 an increase of £866 million compared to net sales of £1,347 million in the year ended 30 June 2014. The acquisition of a controlling interest in USL on 2 July 2014 contributed £920 million to net sales, partially offset by adverse exchange rate movements of £22 million mainly driven by the Australian dollar and an organic net sales reduction of £32 million (see further performance analysis below).
Operating profit
Operating profit was £163 million in the year ended 30 June 2015 an increase of £156 million compared to operating profit of £7 million in the year ended 30 June 2014. Operating profit growth was driven by the acquisition of USL which contributed £66 million in the year ended 30 June 2015 and an organic increase of £20 million partially offset by adverse exchange movements of £13 million mainly driven by Australian dollar. Exceptional operating charges decreased by £83 million from £276 million in the year ended 30 June 2014 to £193 million in the year ended 30 June 2015, principally due to lower impairment charges (£41 million in the year ended 30 June 2015 compared with £264 million in the year ended 30 June 2014) and a charge in the year ended 30 June 2015 of £146 million in respect of settlement of several disputes with the Korean tax authorities regarding the transfer pricing methodology applicable for imported products.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Asia Pacific performance reflects inventory reductions in South East Asia, and disruptions in Indonesia due to new restrictions on the sale of beer and ready to drink extending its leadership positionin some channels. All other markets delivered growth, including China led by Chinese white spirits. Reserve sales were up 30%, led by Scotch malts, with particularly strong performance from The Singleton. Innovation responding to changing trends played an important role, with the launch of Haig Club, W ICE by coreWindsor in Korea, Guinness Zero in Indonesia, and new ready to drink offerings. We reduced marketing investment, largely in China and South East Asia, where the consumer environment was challenged. Performance, primarily the reduction in stock levels, in South East Asia resulted in a significant operating loss for that market. Our Chinese white spirits business regained profitability after a loss last year. This return to profitability, along with cost savings, resulted in an overall margin improvement for Asia Pacific of two percentage points. The full consolidation of USL added £921m of net sales and £53m of operating profit to reported performance for the region.
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Business review (continued)
Markets and categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
Asia Pacific | (3 | ) | 622 | (2 | ) | 64 | ||||||||||
South East Asia | (24 | ) | (24 | ) | (28 | ) | (28 | ) | ||||||||
Greater China | 3 | 3 | 15 | 17 | ||||||||||||
India | 5 | 6,347 | 3 | 1,732 | ||||||||||||
Global Travel, Asia and Middle East | 5 | 5 | 4 | 3 | ||||||||||||
Australia | 1 | 1 | 2 | (5 | ) | |||||||||||
North Asia | 1 | 1 | 1 | (1 | ) | |||||||||||
Spirits(i) | (3 | ) | 710 | (3 | ) | 83 | ||||||||||
Beer | (13 | ) | (13 | ) | (12 | ) | (16 | ) | ||||||||
Ready to drink | (2 | ) | (2 | ) | 1 | (5 | ) | |||||||||
Global giants and local stars(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||||||
Johnnie Walker | (10 | ) | (14 | ) | (14 | ) | ||||||||||
Smirnoff | (3 | ) | (7 | ) | (9 | ) | ||||||||||
Guinness | (13 | ) | (12 | ) | (16 | ) | ||||||||||
Captain Morgan | — | 11 | 8 | |||||||||||||
Baileys | (4 | ) | (13 | ) | (16 | ) | ||||||||||
Windsor | (10 | ) | (10 | ) | (8 | ) | ||||||||||
Bundaberg | (5 | ) | (7 | ) | (13 | ) | ||||||||||
Shui Jing Fang | 275 | 239 | 245 |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement. |
105
Business review (continued)
106
Business review (continued)
CATEGORY REVIEW
VolumeNetsalesMarketingspendScotchNorthumVodkaAmericanUqueurswhisk(e)yGinBeerReadyTequilaWinetodrinkIndianMadeForeignliquor(IMFL)Other |
Key categories: | Organic volume movement % | Reported volume movement % | Organic net sales movement % | Reported net sales movement % | ||||||||||||
Spirits(i) | (2 | ) | 72 | (1 | ) | 10 | ||||||||||
Scotch | (4 | ) | (4 | ) | (5 | ) | (9 | ) | ||||||||
Vodka | — | — | 1 | 1 | ||||||||||||
North American whisk(e)y | 10 | 10 | 12 | 15 | ||||||||||||
Rum | (3 | ) | (3 | ) | (3 | ) | (6 | ) | ||||||||
Liqueurs | (1 | ) | (1 | ) | (4 | ) | (8 | ) | ||||||||
Gin | 4 | 4 | 5 | 3 | ||||||||||||
Tequila | 10 | 25 | 14 | 38 | ||||||||||||
Beer | 3 | 3 | 4 | (2 | ) | |||||||||||
Ready to drink | (11 | ) | (18 | ) | (4 | ) | (13 | ) | ||||||||
Wine | (1 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||
Total | (1 | ) | 58 | — | 5 |
(i) | Spirits brands excluding ready to drink. |
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Business review (continued)
Global giants, local stars and reserve(i): | Reported volume movement(ii) % | Organic net sales movement % | Reported net sales movement % | |||||||||
Global giants | ||||||||||||
Johnnie Walker | (6 | ) | (9 | ) | (12 | ) | ||||||
Smirnoff | (1 | ) | (2 | ) | (3 | ) | ||||||
Captain Morgan | (4 | ) | (6 | ) | (7 | ) | ||||||
Baileys | (4 | ) | (4 | ) | (8 | ) | ||||||
Tanqueray | 6 | (5 | ) | 5 | ||||||||
Guinness | (2 | ) | — | (5 | ) | |||||||
Local stars | ||||||||||||
Crown Royal | 13 | 12 | 15 | |||||||||
Yenì Raki | (4 | ) | 4 | (6 | ) | |||||||
JeB | (2 | ) | (4 | ) | (9 | ) | ||||||
Buchanan’s | (9 | ) | (3 | ) | (12 | ) | ||||||
Windsor | (10 | ) | (10 | ) | (8 | ) | ||||||
Old Parr | (13 | ) | (14 | ) | (24 | ) | ||||||
Bundaberg | (5 | ) | (7 | ) | (13 | ) | ||||||
Bell’s | (3 | ) | (5 | ) | (14 | ) | ||||||
White Horse | (5 | ) | (7 | ) | (26 | ) | ||||||
Ypióca | (5 | ) | (3 | ) | (14 | ) | ||||||
Cacique | (37 | ) | 3 | (32 | ) | |||||||
Shui Jing Fang | 268 | 235 | 241 | |||||||||
Reserve | ||||||||||||
Scotch malts | 11 | 16 | 12 | |||||||||
Cîroc | 6 | 6 | 9 | |||||||||
Ketel One vodka | (3 | ) | (2 | ) | 1 | |||||||
Don Julio | 98 | 12 | 43 | |||||||||
Bulleit | 34 | 38 | 42 |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic movement for volume, except for Don Julio where organic volume growth is 8%. |
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
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Business review (continued)
98109
Business review (continued)
Liquidity and capital resources
1. ANALYSIS OF CASH FLOW AND BALANCE SHEET
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 are expected to continue to fund future operating and capital needs.
a) 20152016 compared with 20142015
Net cash from operating activities — see page 52
Movement in net borrowings — see page 5258
Movement in equity — see page 5359
Post employment deficit — see page 5359
b) 20142015 compared with 20132014
Net cash from operating activities — see page 85
Movement in net borrowings — see page 8190
Movement in equity — see page 8291
Post employment deficit — see page 8291
2. ANALYSIS OF BORROWINGS
a) Gross borrowings (excluding finance lease liabilities and the fair value of derivative instruments) will mature as follows:
2015 £ million | 2014 £ million | 2013 £ million | 2016 £ million | 2015 £ million | 2014 £ million | |||||||||||||||||||
Within one year | 1,921 | 1,576 | 1,852 | 2,058 | 1,921 | 1,576 | ||||||||||||||||||
Between one and three years | 2,607 | 1,894 | 2,220 | 2,896 | 2,607 | 1,894 | ||||||||||||||||||
Between three and five years | 970 | 1,972 | 2,509 | 537 | 970 | 1,972 | ||||||||||||||||||
Beyond five years | 4,340 | 3,772 | 3,488 | 4,638 | 4,340 | 3,772 | ||||||||||||||||||
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9,838 | 9,214 | 10,069 | 10,129 | 9,838 | 9,214 | |||||||||||||||||||
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b) During the year the following bonds were issued and repaid: | b) During the year the following bonds were issued and repaid: | |||||||||||||||||||||||
2015 £ million | 2014 £ million | 2013 £ million | 2016 £ million | 2015 £ million | 2014 £ million | |||||||||||||||||||
Issued | ||||||||||||||||||||||||
€ denominated | 791 | 1,378 | — | — | 791 | 1,378 | ||||||||||||||||||
US$ denominated | — | — | 2,100 | — | — | — | ||||||||||||||||||
Repaid | ||||||||||||||||||||||||
€ denominated | (792 | ) | (983 | ) | — | — | (792 | ) | (983 | ) | ||||||||||||||
US$ denominated | (330 | ) | (488 | ) | (869 | ) | (1,003 | ) | (330 | ) | (488 | ) | ||||||||||||
£ denominated(i) | (370 | ) | — | — | — | (370 | ) | — | ||||||||||||||||
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(701 | ) | (93 | ) | 1,231 | (1,003 | ) | (701 | ) | (93 | ) | ||||||||||||||
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(i) |
99110
Business review (continued)
c) The group had available undrawn committed bank facilities as follows:
2015 £ million | 2014 £ million | |||||||
Expiring within one year(i) | 688 | 1,535 | ||||||
Expiring between one and two years | — | 632 | ||||||
Expiring after two years | 1,541 | 1,050 | ||||||
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2,229 | 3,217 | |||||||
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2016 £ million | 2015 £ million | |||||||
Expiring within one year(i) | — | 688 | ||||||
Expiring between one and two years | 470 | — | ||||||
Expiring after two years | 2,072 | 1,541 | ||||||
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2,542 | 2,229 | |||||||
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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). 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 toof its material short and long term borrowings throughout each of the years presented.
3. CAPITAL MANAGEMENT
The group’s management is committed to enhancing shareholder value in the long term, both by investing in the businesses 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 a net borrowing to EBITDA leverage of 2.5 – 3.0x,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 – 3.0x.3.0 times. The group regularly assesses its debt and equity capital levels against its stated policy for capital structure. For this calculation net borrowings are adjusted by the pensionnet post employment deficit whilst EBITDA equals operating profit excluding exceptional operating items and depreciation, amortisation and impairment and includes share of after tax results of associates and joint venturesventures.
4. CAPITAL REPAYMENTS
Authorisation was given by shareholders on 1823 September 20142015 to purchase a maximum of 251,215,000251,514,000 shares at a minimum price of 28101/108 pence and a maximum price of the 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 1722 December 2015,2016, if earlier.
During the year ended 30 June 2015,2016, the company purchased 42 million ordinary shares (including shares acquired through call option exercises), nominal value of £1 million (2014(2015 – 4 million ordinary shares, nominal value of £1 million; 2014 – 14 million ordinary shares, nominal value of £4 million; 2013 — 8 million ordinary shares, nominal value of £2 million), representing approximately 0.1% (2014 —(2015 – 0.1%; 2014 – 0.5%; 2013 — 0.3%) of the issued ordinary share capital (excluding treasury shares).
Shares were either directly granted to employees as part of employee share schemes or held as treasury shares and used to hedge share scheme grants to employees during the course of the year.
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Business review (continued)
The aggregate consideration paid for purchase of own shares was £53 million (excluding expenses) in the year ended 30 June 2016. The annual purchase includes 617,840 shares for £11 million purchased at an average price of 1713 pence for the purpose of satisfying share awards made under the company’s share incentive plans, the cost of which was charged directly to the consolidated
income statement. The monthly breakdown of shares purchased and the average price paid per share (excluding expenses) for the year ended 30 June 20152016 were as follows:
Calendar month | Number of shares purchased | Average price paid pence | Authorised purchases unutilised at month end | |||||||||
September 2014(i) | 1,698,461 | 1781 | 249,516,539 | |||||||||
October 2014 | 636,883 | 1766 | 248,879,656 | |||||||||
March 2015 | 1,801,230 | 1864 | 247,078,426 | |||||||||
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Total | 4,136,574 | 1815 | 247,078,426 | |||||||||
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Calendar month | Number of shares purchased | Average price paid pence | Authorised purchases unutilised at month end | |||||||||
September 2015 | 2,719,851 | 1,737 | 248,794,149 | |||||||||
March 2016 | 295,510 | 1,872 | 248,498,639 | |||||||||
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Total | 3,015,361 | 1,750 | 248,498,639 | |||||||||
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Contractual obligations and other commitments
Payments due by period | Payments due by period | |||||||||||||||||||||||||||||||||||||||
As at 30 June 2015 | Less than 1 year £ million | 1-3 years £ million | 3-5 years £ million | More than 5 years £ million | Total £ million | |||||||||||||||||||||||||||||||||||
As at 30 June 2016 | Less than 1 year £ million | 1-3 years £ million | 3-5 years £ million | More than 5 years £ million | Total £ million | |||||||||||||||||||||||||||||||||||
Long term debt obligations | 1,400 | 2,556 | 968 | 4,365 | 9,289 | 1,639 | 2,854 | 558 | 4,620 | 9,671 | ||||||||||||||||||||||||||||||
Interest obligations | 340 | 479 | 334 | 1,434 | 2,587 | 358 | 449 | 360 | 1,415 | 2,582 | ||||||||||||||||||||||||||||||
Credit support obligations | 76 | — | — | — | 76 | |||||||||||||||||||||||||||||||||||
Purchase obligations | 831 | 800 | 183 | 45 | 1,859 | |||||||||||||||||||||||||||||||||||
Operating leases | 96 | 131 | 102 | 217 | 546 | 92 | 175 | 133 | 407 | 807 | ||||||||||||||||||||||||||||||
Purchase obligations | 1,037 | 921 | 393 | 217 | 2,568 | |||||||||||||||||||||||||||||||||||
Finance leases | 51 | 69 | 86 | 127 | 333 | |||||||||||||||||||||||||||||||||||
Capital commitments | 112 | 2 | — | — | 114 | |||||||||||||||||||||||||||||||||||
Deferred consideration payable | 10 | 23 | 135 | — | 168 | |||||||||||||||||||||||||||||||||||
Post employment benefits(i) | 44 | 88 | 88 | 238 | 458 | 47 | 95 | 95 | 215 | 452 | ||||||||||||||||||||||||||||||
Provisions and other non-current payables | 125 | 133 | 51 | 122 | 431 | 149 | 116 | 49 | 132 | 446 | ||||||||||||||||||||||||||||||
Finance leases | 42 | 78 | 82 | 140 | 342 | |||||||||||||||||||||||||||||||||||
Credit support obligations | 139 | — | — | — | 139 | |||||||||||||||||||||||||||||||||||
Capital commitments | 81 | 6 | — | — | 87 | |||||||||||||||||||||||||||||||||||
Other financial liabilities | 13 | 18 | 159 | — | 190 | |||||||||||||||||||||||||||||||||||
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3,291 | 4,402 | 2,157 | 6,720 | 16,570 | 3,391 | 4,591 | 1,619 | 6,974 | 16,575 | |||||||||||||||||||||||||||||||
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(i) | For further information see note 13(d) 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. 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, grapes, 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. Provisions and other non-current payables exclude £2 million in respect of vacant properties.
Corporate tax payable of £162340 million and deferred tax liabilities 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 contractual obligations comprise committed deficit contributions but exclude future service cost contributions.
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Business review (continued)
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.
112
Business review (continued)
Risk management
The group’s funding, liquidity and exposure to foreign currency, interest rate risks, financial credit risk and commodity price risk are conducted within a framework of board approved policies and guidelines. The group purchases insurance for commercial or, where required, for legal or contractual reasons. In addition, the group retains some insurable risk where external insurance is not considered to be an economic means of mitigating this risk. Loan, trade and other receivables exposures are managed locally in the operating units where they arise and credit limits are established as deemed appropriate for the customer.
For a detailed analysis of the group’s exposure to foreign exchange, interest rate, commodity price, credit and liquidity risks see note 15 to the consolidated financial statements on pages 225-233.245-253.
Critical accounting policies
The consolidated financial statements are prepared in accordance with IFRS. Diageo’s accounting policies are set out in the notes to 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. Of Diageo’s accounting policies, the directors consider that policies in relation to the following areas are particularly subject to estimates and the exercise of judgement.
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 |
• | Taxation — page |
• |
Brands, goodwill and other intangibles — page |
• | Post employment benefits — page |
• | Contingent liabilities and legal proceedings — page |
New accounting standards
A number of accounting standards, amendments and interpretations have recently been issued by the IASB orand IFRIC. Those that are of relevance to the group are discussed in note 1 to the consolidated financial statements on pages 187 and 189.204-206.
102113
Business review (continued)
SUSTAINABILITYOUR ROLE IN SOCIETY
Sustainability & RESPONSIBILITY REVIEWResponsibility review
2015 has beenIn a year of significant progresswhich has seen unprecedented international focus on the developmental and climate challenges facing the world, we began a new chapter in our approach to sustainability and responsibility. With our 2015 targets expiring this year, and in light of external factors such as the UN’s new Sustainable Development Goals, we evaluated the strengths and weaknesses of our strategy against our track record of performance and the work we have done over the last few years in understanding the expectations and concerns of our stakeholders.
As a result, in December 2014, we launched new, ambitious targets for 2020 for our most material issues, which buildBuilding on our achievementslong tradition of contributing to date,society as a company with strong governance and are aligned with the emerging UN Sustainable Development Goals. Ourethics, our new 2020 targets which focus on leadership inthe issues that matter most: creating a positive role for alcohol in society,society; building thriving communitiescommunities; and reducing our environmental impact, are an essential part of how we will deliverimpact.
Our 2020 sustainability and responsibility targets enable us to make a positive contribution to society – and support our Performance Ambition (see page 35 for more information). Given their increasing importanceambition to the business as a whole, this year we have added safety and carbon emissions to our 2014 non-financial key performance indicators, responsible drinking programmes, water efficiency and employee engagement.
Approach to United Spirits Limited (USL) data
Following the acquisition of USL, we are progressively integrating operating systems and practice. As a result, we have only included USL data in the following:
All other data excludes USL.
Looking ahead — focusing on impact
During the year, we appointed a new Sustainable Development Director to lead the team, embed our strategy, and develop sound metrics for our targets and a co-ordinated framework for meeting them everywhere we do business. This will involve a more sophisticated approach focused on impact rather than input. We need to improve how we measure what our programmes are delivering both within and outside our business.
We also need to understand better how everything we do is connected — our impact as a local employer providing jobs and paying taxes with our impact as a company selling alcoholic drinks in regulated markets; our impact as a manufacturer using shared natural resources and purchasing from local and global suppliers, with our impact as a marketer of iconic, much loved brands, for instance. To createbe one of the best performing, most trusted and respected consumer goodsproducts companies in the world, weworld. They were developed to help us support the UN’s Global Goals and World Health Organization (WHO) programmes on health, such as the Global Action Plan for the Prevention and Control of Non-Communicable Diseases.
Put into action this year, the targets underpin our commitment to addressing the issues most material to our stakeholders, and to us as a business:
We see these priorities as interdependent. We recognise that we havewill only succeed in playing a positive role if we take a holistic approach to addressing all three, while continuing to act as a company,good corporate citizen with the aim of ensuring that overall, our contribution isexemplary governance and ethics.
Making a positive one.contribution
We’re proud of the brands we make and the enjoyment our products give to millions of people. And we create value in many other ways as well.
We directly employ around 32,000 people. Our partners employ many more, supporting our global manufacturing, distribution, sales and marketing operations. This year we paid over £4 billion in taxes and other duties to governments. Our manufacturing sites play crucial roles in their local communities.
We have already begun thisinterdependent relationships throughout our value chain, from the farmers who grow our ingredients, to our employees and contractors, to the consumers who buy our brands. We want to make sure that throughout that chain – wherever we source, make and sell – we are making a positive contribution which is aligned with the UN Global Goals and supports our core business.
Focus on impact and execution
Our 2020 targets are designed to create shared value and contribute broadly to the UN’s Global Goals. Metrics for each target evaluate the impacts of our initiatives. This reflects a renewed focus on co-ordinating our efforts to achieve outcomes that bring the maximum possible value for our stakeholders, and for us. Our new Social Impact Framework is a critical tool for evaluating impact and focusing investment, described further in the ‘Building thriving communities’ section on page 117.
Focus on partnership
A key way to achieve greater impact is to work with partners who add value to our new integrated water strategy, our Water Blueprint, launched in April 2015, which has given us a deeper understanding of the total impact of our water useprogrammes and in whichinitiatives. This year we have prioritised what we need to do to improve our stewardshipdeveloped new partnerships with UNITAR, USAID, and the NGO WaterAid, among others, details of water.which can be found in the relevant sections below.
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Performance against 2015 targetsFocus on human rights
We will be reporting next year on howOur commitment to human rights throughout our value chain is fundamental to who we are developing our approach beyond water and how we are performing against our new targets for 2020.do business. In the meantime, inexpanded ‘Human rights’ section on page 117, we describe our work to assess our human rights impact.
Focus on diversity and inclusion
Diversity and inclusion have always been a priority for us, and this reportyear we have gone further than ever to ensure that we are focusingan open, fair, and welcoming business. Details are in the ‘Diversity and inclusion’ section on the progress we have made towardspages 120-121.
Focus on water and sustainable agriculture
The first full year of our 2015 targetsWater Blueprint (see page 125) and the challenges and opportunities that face us as we look towards 2020 and beyond. In recognitiondevelopment of our new Sustainable Agriculture Strategy (see pages 123-124) are significant milestones in our efforts to evaluate and reduce our impacts along our entire value chain and to build thriving communities.
Beyond 2020
While our targets we are structuring this review aroundset for 2020, our strategy is designed to support Diageo’s overall growth and performance for many years to come. It aims to help grow our brands’ relationships with consumers and others, strengthen our supply chain, reduce our costs, and mitigate long-term risk.
In the three areas:
We also continue to report on governance and ethics (see page 117), which underpin how we do business — in a responsible and ethical way — and which are essential for earning the trust and respect of everyone who comes into contact with Diageo.planet.
1. LEADERSHIP INCREATING A POSITIVE ROLE FOR ALCOHOL IN SOCIETY
PERFORMANCE AGAINST TARGETSWe’re proud of what we do – and fully aware of our responsibilities. Ensuring that alcohol plays a positive role in society matters to everyone at Diageo – and as a business it is our most material issue, at the heart of our licence to operate, and essential to our performance.
We work to reduce harmful drinking, promote rigorous company and industry standards for responsible marketing, and provide consumers with information to help them make responsible choices.
Reducing harmful drinking
We seek to raise awareness and shift attitudes and behaviour to encourage informed choices around drinking – or not drinking. Our brands are madeprogrammes cover a wide range of issues depending on local concerns and include initiatives to prevent drink driving, underage drinking, binge drinking and drinking during pregnancy. Diageo shares the goal set by the WHO of reducing harmful drinking by 10% across the world by 2025 in an effort to reduce non-communicable diseases.
Working with pride,others is essential to this effort. Our partnerships with international organisations, governments, law enforcement agents, educators, parents and madecivil society allow us to be enjoyed – responsibly. Consumed moderatelygain important insights and responsiblyto reach more people.
This year Diageo entered into a two-year partnership with the UN Institute for Training and Research (UNITAR) to contribute to reducing death and injuries from traffic accidents. The project will target more than 60 countries with a focus on those with the highest road traffic death rates.
In 2016, we supported 335 programmes to reduce harmful drinking in 55 countries. Highlights include the Diageo-supported industry campaign in Spain, ‘Minors Not a Single Drop’, which won the White Cross of the Order of Merit granted by adults who choose to drink, alcoholthe Minister of Health, and Diageo India’s road safety programme, which received the Prince Michael International Road Safety Award.
Giving consumers information
Diageo believes that responsible and moderate drinking can be part of a balanced lifestyle, and play a positive role in social occasions and celebrations.
The misuse of alcohol, however, can cause serious problems for individuals, communities and society. We care passionately about reducing alcohol-related harm through our own programmes and through partnership and collaboration with others – and we seekwant to provide our consumers with the information, tools and tools they needresources to make informed choices about drinking or not drinking.
Reducing alcohol-related harm
Diageo shares the goal set by the World Health Organization (WHO) of reducing alcohol-related harm by 10% across the world by 2025. We are also one of the 13 leading alcohol beverage companies acting on the Global Beer, Wine and Spirits Producers’ Commitments to Reduce Harmful Drinking. These Commitments are the largest ever industry initiative to implement effective ways to address harmful drinking.
These Commitments identified five areas for action over five years from January 2013:
We believe that efforts to reduce the misuse of alcohol are most effective when government, civil society, individuals and families, as well as the industry, work together. Our approach is built around providing consumers with information; promoting rigorous company and industry standards for responsible marketing; supporting effective programmes and partnerships to tackle alcohol misuse; and advocating effective, evidence-based policy.choices.
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Providing consumer information
In March 2015, we announced our commitment toOur Diageo Consumer Information Standards, launched in June 2016, provide consumers with alcohol content and nutrition information per typical serve – a first for any alcohol company. We intend to provide this information through Diageo‘s responsible drinking website DRINKiQ.com, and/or on-pack in a majority of Diageo’s markets, subject to local regulatory approval.
Furthermore, the Diageo Alcohol Beverage Information Policy (DABIP) provides mandatory minimum standards for the information that must be included on labels and packaging includingon all Diageo-owned brands in all geographies (where legally permitted). Labels and packaging must include alcohol content and nutrition information per serve, alcohol content by volume, at least one and up to three responsible drinking symbols, a linkreference to our global responsible drinking website, DRINKiQ.com, alcohol content, a list of allergens, and recycling and sustainability symbols. The DABIP mandatory elements willWe are the first in our industry to put this level of information in the hands of consumers, demonstrating our desire to be a true leader in place on all Diageo-owned brands in all markets (where legally permitted) by the end of December 2017. Meanwhile, ourhelping consumers make informed decisions.
In January 2016 we relaunched DRINKiQ.com, site,which now has 25 specific country sites and is available in multiple languages, already includes a wealth of12 languages. The refreshed site is making more information about nutrition and responsible drinking.available to more people, especially via mobile.
Developing our approach for
Complaints about advertising upheld by industry bodies that report publicly (2015) | Industry complaints upheld | Complaints upheld about Diageo brands | ||||||||
Australia | Alcohol Beverage Code | 10 | 0 | |||||||
Ireland | Advertising Standards Authority for Ireland (ASAI) | 7 | 1 | |||||||
United Kingdom | The Portman Group | 1 | 0 | |||||||
Advertising Standards Authority (ASA) | 5 | 1 | ||||||||
United States | Distilled Spirits Council of the United States (DISCUS) | 1 | 0 |
Our 2020
We are proud of the approach we have taken, over decades, to help tackle harmful drinking. In setting ourselves new targets for 2020 we aim to continue to go beyond industry-wide commitments. From this year, we will work in partnership to support programmes to address harmful drinking in our top 20 countries that can be evaluated for efficacy and impact, and will report on the results. We also aim to reach one million adults with training materials that enable them to champion responsible drinking.
Performance against 2015 targets target
Industry performance against each of the fivecollaboration
Implement Global Beer, Wine and Spirits Producers’ Commitments to Reducereduce Harmful Drinking, is tracked through key performance indicators. In year two (2014) of the five-year programme, the industry has shown progress in key areas including actions on:
While this unified approach has undoubtedly increased our reach, there is still more work to be done. Our aim is
KPI:
Accenture has developed 19 KPIs for all signatories to the harmful use of alcohol through these programmesCommitments, published in the annual Commitments report and assured by working closely with governments and civil society. A detailed progressKPMG.
The 2015 (latest available) annual report on year two of the Global Producers‘ Commitments will be publishedshows progress against all action areas particularly underage drinking. For example, there was a 50% increase in autumn 2015 and can be found on www.producerscommitments.org.
Complaints about advertising upheld by industry bodies that report publicly (2015) | Industry complaints upheld | Complaints about Diageo brands | ||||||||
Australia | Alcohol Beverage Code | 5 | 0 | |||||||
Ireland | Advertising Standards Authority for Ireland (ASAI) | 1 | 0 | |||||||
United Kingdom | The Portman Group | 4 | 1 | |||||||
Advertising Standards Authority (ASA) | 35 | 1 | ||||||||
United States | Distilled Spirits Council of the United States (DISCUS) | 2 | 0 |
Responsible drinking programmes
Diageo supported 298 responsible drinking programmes in more than 50 countries, focused on reducing alcohol misuse by working with others to seek to raise awareness and change people’s attitudes and behaviour.
This is a reduction from the number of underage education initiatives, which are now available in 86 countries, compared with just 57 in 2014. These programmes we supported last year; it is driven by our stronger focus on implementing programmes in support of the Global Producers’ Commitments. Additionally,directly engaged nearly 30 million unique adult influencers such as stated in last year’s reportparents, teachers, and in line with our 2020 target to measure the impact of our programmes in our top 20 countries, we are prioritising programmes that show impact. This may mean we support fewer, but more effective programmes. Evaluation of our initiatives will help us improve.
Our approach in each country is basedcommunity leaders on the needsimportance of localrespecting legal age limits on buying alcohol. Producers also worked with key stakeholders so the programmes are varied, but last yearto enforce legal purchase age laws where they included advertising campaigns that raised awareness of the risks of excessive drinking, funding the training of midwives about foetal alcohol syndrome, supporting the medical profession in identifyingexist and helping problem drinkers, and initiatives with public and private partners to reduce drink driving, including free rides and enforcement campaigns. In line with our 2020 targets and our aim to focus on the impact of our programmes, we have started to publish evaluations of our initiatives on our website, www.diageo.com.
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implement laws where they do not.
Responsible marketing
The Diageo Marketing Code and Digital Code are our mandatory minimum standards for responsible marketing, and we review them every 12-1812–18 months to ensure they represent best practice. The Diageo Marketing Code was refreshed this year.
Five industry bodies publicly report breaches of their self-regulatory codes. This year, Diageo was found to be in breach by the Advertising Standards AuthorityASA in the United KingdomUK for a Smirnoff television commercial for Parrot Bay frozen pouchesadvertisement on the grounds that the social occasion depicted depended on the presence of underage appeal, andalcohol. We were also found in breach by the Portman GroupASAI in the United KingdomIreland for a pre-filled 20cl counter-top unit becausepost on the phrase ‘mixGuinness Facebook page on the grounds that it up tonight’ could be seen as an encouragement of immoderate consumption. Thesuggested that drinking may have therapeutic benefits. In both cases, the marketing material was immediately withdrawn.
Further details in the S&R Performance Addendum 2015.
Further details at www.diageo.com.
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2. REDUCING OUR ENVIRONMENTAL IMPACTOur 2020 target
PERFORMANCE AGAINST 2015 TARGETS(i)Impactful programmes
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The successNumber of countries that evaluate responsible drinking programmes.
This year, 84% of our top 19 countries assessed the effectiveness of their programmes, measuring increases in awareness or shifts in attitudes or behaviour. While evaluating our projects to determine reach is important, we continue to work with markets to create impact and to put in place robust mechanisms to evaluate that impact. We have developed and rolled out a measurement and evaluation toolkit supporting these efforts.
For examples of our evaluation in action, please see the ‘Our role in society’ section of our website.
Our 2020 target
Training
KPI:
Number of adults, above legal drinking age, who have completed interactive training (face-to-face or online) on responsible drinking, serving, selling, and marketing.
This year we reached 380,622 people, through training programmes such as DRINKiQ, Learning for Life, Diageo Bar Academy, Plan W and others. We are well on our way to meeting our 1 million target, with more than 700,000 RD ambassadors created in the past two years. Our training programmes reach a broad audience including consumers, retail and hospitality industry workers, police and government agency personnel, and members of the medical profession. This year, we also launched an interactive version of DRINKiQ as part of the overall visitor experience at the Guinness Storehouse in Dublin. It will deliver DRINKiQ training on responsible drinking to around 300,000 visitors from across the world each year. In the first two months since launch, we have reached 21,000 people.
BUILDING THRIVING COMMUNITIES
We create value for millions of people as a buyer of goods and services, as an employer, as corporate citizens, and as producers of some of the world’s best-loved brands.
We want to continue to help the communities we live and work in thrive: by making Diageo a great, safe, and diverse place to work; by building sustainable supply chains; and through programmes that empower communities and individuals and increase their access to opportunity.
Human rights
Our commitment to, and respect for, human rights throughout our value chain is fundamental to who we are and how we do business. Our business is dependentbuilt on many natural resources, some of which are becoming increasingly constrained as rising demandlong-term relationships based on trust and climate change place them under pressure. We are committed to minimising our environmental impact across our operations, and we are extending our environmental programmes into the broader supply chain. This will help ensure the sustainability and security of our supply chain, supporting the resilience and growth of our business.shared value.
Our environmental strategy embodies our aspiration to be a business which does not materially deplete natural resources, reduces our impact on climate change, causes no lasting damage to species, habitats, or biodiversity – and, where possible, improves the environment we operate in.
Setting our ambitions for 2020
In 2008, we set ourselves a series of challenging targets to achieve by 2015 in the areas of water, carbon emissions, and waste. These were primarily absolute targets which acknowledged that our existing impacts should be reduced in real terms compared to a 2007 baseline, regardless of the future size of the business. In 2009, we added commitments covering packaging.
These targets have catalysed significant improvements and have been the basis for sustained programmes of investment that will have long-lasting benefits for our business and the environment. We have made considerable progress and significantly reduced our environmental impact during a period when our total production and operational footprint have increased. The progress against the individual targets is detailed in the table above. We have not met all of our stretching targets, but we have made significant improvements, particularly in water efficiency, one of our most important resources, with much of the improvement delivered in water-stressed locations.
Our new and expanded targets for 2020 reflectclear policy which sets out our commitment to continuinghuman rights. We do not tolerate discrimination, harassment, bullying or abuse; we comply with wage and accelerating progressworking time laws; we respect our employees’ decisions to reduce our environmental impacts, within our direct operationsjoin or not join a trade union; and in the wider supply chain,we do not tolerate forced or compulsory labour. We will not work with a set of goals that genuinely stretch and challenge our business. These new targets expand our existing strategy and increase our focus on environmental impacts in our broader supply chain. They continue to prioritise water stewardship,anyone, including an additional target to replenish the amount of water used in our final product in water-stressed areas, and address carbon, waste, and packaging. We have also added targets on zero net deforestation, paper and board sourcing, and eliminating ozone-depleting refrigerants.any supplier, who does not adopt these values.
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Our 2020 target
We are signatories to the UN Guiding Principles on Business and Human Rights (UNGP). These set clear expectations around monitoring and management of human rights. In 2015 we partnered with Business for Social Responsibility, a global not-for-profit consultancy, to help articulate our human rights vision and strategy. We conducted a corporate level assessment, which included mapping all our existing policies, processes, and procedures against the UNGP requirements.
Based on this, during the year, we developed a robust and comprehensive human rights impact assessment (HRIA) with a toolkit to support markets through a systematic review of their businesses to identify and assess potential human rights impacts. The importanceHRIA considers our entire value chain from sourcing to selling, and helps us focus our activities on any areas of waterconcern.
We conducted our first HRIA in Kenya in February, and as a result we are strengthening our stakeholders recognise that water stewardship is one ofprocesses to prevent risks in areas such as land rights and labour standards in agriculture. We also used the most material aspects ofKenya process as a pilot, and are now developing our environmental strategy. The Diageo Water Blueprint, launchedapproach for conducting HRIAs in April 2015, definesother markets.
Empowering and enabling communities through our strategic approach to water stewardship. Incorporating our 2020 targets, it is an integrated approach based on four core areas where we will increase our efforts: in the sourcing of raw materials; in our own operations; in the communities in which we operate; and through local and global advocacy for best practice in water stewardship.programmes
We have expandeda long history of direct investment in long-term, actively-managed programmes that address the developmental challenges facing the communities where we source, make, and sell our products. Our programmes support the three main strands of our strategy, to encompass the company‘s broader global supply chain, which will enable us to better understand and manage Diageo‘s total impact on water, while focusing on water-stressed areas (see map on page 34). We will also continue to invest in infrastructure and sanitation that provides access to safe water to communities through our Water of Life programme (see pages 112-113).
Environmental performance
This year saw a period of particular growth through acquiring control of United Spirits Limited (USL) in India, which significantly expanded our operational footprint in India and increased our volume of production globally. The environmental data reported in this section includes USL,align with the exception of packaging. The water efficiency and carbon emissions performance reported on pages 29 and 31 exclude USL.
Water stewardship
We recognise that we will only become one of the best performing, most trusted and respected companies in the world if we responsibly manage all our material environmental impacts, particularly water. The acquisition of USL reinforces this, given the increased number of water-stressed sites we now manage in India (see map on page 34).
This year we improved water use efficiency by 10.4% and reduced absolute water withdrawals by 2,876,000 cubic metres. In water-stressed locations, we have reduced water wasted by 33.4%. For example in Brazil, investing in optimising water use at our Paraipaba distillery significantly reduced total water withdrawals in this acutely water-stressed location. At our breweries in Kaasi, Ghana, and at our two sites in Nigeria, water use per litre brewed has improved by 29% and 4% respectively, through improving water management and new ways of working.
Water used for agricultural purposes on land under Diageo’s operational control extends to 622,150 cubic metres and is reported separately from water used in our direct operations. The majority of this irrigation water is in respect of sugar cane.
We also aim to reduce the polluting power of wastewater, measured in biochemical oxygen demand (BOD) grams. Overall we reduced BOD by 16.3% this year. Compared to our 2007 baseline, BOD load has reduced by 3.1% and, while not meeting our 2015 target, the multiple investments we have made in wastewater treatment facilities, including in Africa where we have reduced BOD by around 90% are reducing the polluting power of wastewater discharges. The application of cutting edge technology at our bioenergy plant at Cameronbridge Distillery in Scotland, which accounts for approximately 60% of our total BOD, has proven challenging, although compared to the previous year it did reduce BOD load by 16.6%. We will continue to invest to develop and refine the technology and we remain confident that it will deliver the multiple environmental benefits anticipated.UN Global Goals:
Water efficiency by region, by year (l/l)(i),(ii), (iii) | 2007 | 2013 | 2014 | 2015 | ||||||||||||
North America | 6.7 | 6.5 | 5.3 | 5.1 | ||||||||||||
Europe | 7.9 | 6.7 | 7.0 | 6.7 | ||||||||||||
Africa | 9.6 | 6.4 | 5.9 | 5.5 | ||||||||||||
Latin America and Caribbean | 21.9 | 21.0 | 20.6 | 6.9 | ||||||||||||
Asia Pacific | 7.0 | 6.7 | 5.7 | 5.7 | ||||||||||||
Diageo (total) | 8.6 | 7.1 | 6.7 | 6.0 | (iv) |
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Wastewater polluting power by region, by year (BOD/t)(i) | 2007 | 2013 | 2014 | 2015 | ||||||||||||
North America | 248 | 12 | 15 | 13 | ||||||||||||
Europe | 22,927 | 33,842 | 35,851 | 31,543 | ||||||||||||
Africa | 9,985 | 6,068 | 2,722 | 639 | ||||||||||||
Latin America and Caribbean | 565 | 11 | 10 | 33 | ||||||||||||
Asia Pacific | 46 | 482 | 482 | 489 | ||||||||||||
Corporate | 1 | 1 | 1 | 1 | ||||||||||||
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Diageo (total) | 33,772 | 40,416 | 39,081 | 32,718 | ||||||||||||
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Total under direct control | 32,947 | 40,161 | 38,848 | 32,493 | ||||||||||||
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Carbon emissions
We use the World Resources Institute/ World Business Council for Sustainable Development Greenhouse Gas Protocol as a basis for reporting our carbon emissions,
This year Diageo’s carbon emissions (CO2e) were reduced by 8.7% in absolute terms, or 68,400 tonnes (market/net), compared to the prior year. Since 2007 we have reduced absolute tonnes of CO2e by 33%. This falls short of our 50% target, largely as a result of the expansion of the businesswellbeing, including through acquisition and volume growth, particularly in distilling which is an energy-intensive process with consequent increases in carbon emissions. The reductions we have made represent the sum of several large investments, many small improvements, increases in green energy sourcing, and the application of new technology. We remain committed to the goal of a 50% reduction in carbon emissions, while also extending our ambitions to reduce our total supply chain emissions by 30%, both of which are included in our 2020 targets.
Diageo’s total direct and indirect carbon emissions (location/gross) for this year were 909,000 tonnesr (direct emissions 704,000 tonnes and indirect emissions 205,000 tonnes). In 2014, total direct and indirect carbon emissions (location/gross) were 982,000 tonnes (direct emissions 761,000 tonnes and indirect emissions 221,000 tonnes). The intensity ratio for this year was 236 grams per litre packaged (2014 — 254 grams per litre packaged).
This year, approximately 58.5% of electricity at our production sites came from low-carbon sources such as wind, hydro and nuclear (2014 — 56.1%). This includes, at some sites, generating our own electricity from renewable sources, including solar, biomass and biogas.
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Carbon emissions by weight by region (1,000 tonnes CO2e)(i),(ii), (iii) | 2007 | 2013 | 2014 | 2015 | ||||||||||||
North America | 217 | 50 | 56 | 54 | ||||||||||||
Europe | 405 | 359 | 355 | 331 | ||||||||||||
Africa | 251 | 244 | 215 | 224 | ||||||||||||
Latin America and Caribbean | 34 | 20 | 22 | 20 | ||||||||||||
Asia Pacific | 151 | 149 | 129 | 79 | ||||||||||||
Corporate | 25 | 18 | 14 | 14 | ||||||||||||
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Diageo (total) | 1,083 | 840 | 791 | 722 | (iv) | |||||||||||
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This year, we reduced waste to landfill by 48.5% compared to 2014, and by 85% since 2007, against our challenging goal of eliminating it altogether. We have made progress through continuously improving how we segregate waste to enable recovery and reuse. We have also reduced the overall amount of material we use, found alternative uses for waste including in agriculture, recycling, and recovering waste for energy. Eliminating waste to landfill therefore remains one of our targets for 2020, although we recognise that it will become more technologically and economically challenging the closer we get to eliminating residual volumes in certain applications.
Total waste to landfill by region (tonnes)(i),(ii) | 2007 | 2013 | 2014 | 2015 | ||||||||||||
North America | 40,828 | 538 | 246 | 197 | ||||||||||||
Europe | 22,464 | 8,322 | 6,525 | 7,207 | ||||||||||||
Africa | 33,492 | 12,172 | 9,685 | 4,474 | ||||||||||||
Latin America and Caribbean | 4,930 | 919 | 870 | 724 | ||||||||||||
Asia Pacific | 8,268 | 15,625 | 13,765 | 2,978 | ||||||||||||
Corporate | 1,140 | 847 | 453 | 692 | ||||||||||||
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Diageo (total) | 111,122 | 38,423 | 31,544 | 16,272 | ||||||||||||
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In the United Kingdom, 99.5% of our electricity came from low-carbon sources.
For our work on carbon with suppliers, see page 116.
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Sustainable packaging
The packaging that helps protect and market our brands has environmental impacts throughout a chain that stretches from our suppliers, through the retailer, to the consumer and beyond. Our Sustainable Packaging Guidelines are used by brands and support our ongoing programme to produce packaging with low environmental impact.
We are satisfied with our performance against our sustainable packaging targets, with a 1% reduction in average pack weight contributing to a cumulative 7% reduction since 2009; recycled content increasing by 1.5% to an overall average of 39%; and 98.6% of our packaging being reusable or recyclable. While we continue to challenge packaging across the portfolio, some highlights have included the removal of the glass handle from Smirnoff 1.75 litre glass bottles, and the ‘light-weighting’ of Bell’s whisky bottles. Higher cullet contents have been achieved with our glass suppliers in Europe, Brazil and North America.
Looking to 2020, we will continue and accelerate initiatives to maximise the recycled content in our packaging, optimise and reduce the weight of packs, and remove materials that cannot be recycled, or are difficult to recycle, including PVC, foil, mixed plastics, ceramics and some laminates. Where viable alternatives exist, we will remove materials such as inks and heavy metals that may pose a risk to the environment. We have added a new target for 2020 of zero net deforestation from paper and board sourcing.
3. BUILDING THRIVING COMMUNITIES
Diageo can only operate successfully if we work within a broad community of people, businesses and agencies to create shared value. We have a responsibility for, and a clear commercial interest in, ensuring that our people, our suppliers, the communities around our operations, and society at large all thrive as a result of Diageo’s business.
As a successful business, we create significant value directly within this broad community through our daily operations, providing jobs, sourcing ingredients, services and materials from suppliers, and paying local duties. But creating shared value in a lasting way extends beyond this – to addressing development challenges such as skills gaps or access to clean water, advocating high standardssanitation and hygiene
Delivering impact
This year Diageo invested £16.3 million or 0.6% (2015 – 0.6%) of governance, rewardingoperating profit to charitable projects that help serve critical local need.
We want our people,programmes to have impact – it is how we will drive change. Working with partners magnifies our impact. For example, our new partnership with WaterAid helps support access to clean water and supporting farmers and other suppliers as they help us build a sustainable value chain.
A history of engagement
Contributing to the communities and societies we are part of is nothing new to Diageo – our history is rich with examples of community action dating back to Arthur Guinness’s work with Dublin’s poor in the 19th century,sanitation, and we have always valuedalso announced a partnership with USAID on a joint programme in Colombia, building skills for veterans to support the country’s transition and rewardedgrowth, and on farmer training in South Sudan.
Our partners have welcomed our peoplenew Social Impact Framework (SIF), launched this year, because it enables them and us to measure and evaluate the agricultural supply chains that we rely on and support.
In recent years, however, we have increasingly looked at the potential for shared value across our entire value chain. We set targets for ourselves in the fields of community empowerment, employee engagement and diversity, and local sourcing, while looking to develop these further into an integrated whole.
Developing our approach for 2020
To get a better measureimpact of our progress in building thriving communities,programmes. The SIF, which we will evaluate and report on the tangible outcomesdeveloped with input from three of our actions. This will includepartner NGOs in 11 countries, provides a clear guide for the consistent implementation of programmes within our overall strategy. It uses key performance indicators to quantify the impacts of programmes, allowing us to identify and measure potential benefits and make a stronger case for investment. Our SIF is also helping us to ensure we quantify the full value of each of our existing programmes which have hitherto concentrated on a particular area.
Our 2020 target
themselves. We will also continueevaluate and report on the tangible impacts of our programmes.
KPI:
As part of the SIF we developed detailed impact metrics, and are currently working to strengthendetermine appropriate KPIs for each of our supply chains, through more partnerships with farmers, further targets for the local sourcing of agricultural raw materialsprogrammes, which will report in Africa, and continued commitment to improving labour standards and human rights in our supply chains, including our ongoing commitment to the UN Guiding Principles on Business and Human Rights.2017.
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Community empowermentOur programmes include:
PERFORMANCE AGAINST TARGETS
Community investment by focus area1 Community aspects of responsible drinking projects2 46% Brand-led and local community spend3 21% Learning for Life 20% Water of Life 7% Plan W 6% 1 This excludes our legacy commitment to the Thalidomide Trust and the Thalidomide Foundation Ltd of L10.2 million which in prior years we included as part of our community investment data. 2 This is a sub-section of the total responsible drinking budget. 3 Category includes cause-related brand campaigns, local market giving and disaster relief. Community investment by region1 North America 38% Europe and global functions 26% Asia Pacific and GTME 14% Latin America and Caribbean 14% Africa 8% |
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An essential part of our contribution to the wider communities that enable our business to flourish and grow is our investment inlong-term, actively managed programmes that help serve critical local needs, such as access to clean water and developing skills and empowerment.
This year Diageo invested £15.5 million or 0.6% of operating profit to charitable projects that help serve critical local need (2014 — 0.6% of operating profit). From this year we will work towards our 2020 ambition of further evaluating the outcomes of the community programmes we engage in, and strengthening the connections between our individual initiatives and our overall strategy of creating shared value.
This excludes our legacy commitment to the Thalidomide Trust and the Thalidomide Foundation Ltd of |
This is a sub-section of the total responsible drinking budget. |
Category includes cause-related brand campaigns, local market giving and disaster relief. |
Access to clean water
We have a long and proud tradition of investing in local communities through our Water of Life programme, which often involves participation by our employees and is increasingly focused on our supply chain. When we set our target in 2006, our overall
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goal wasOur people
We want our people to reach eight million people, which suggested we needed to reach one million people per year. Although this year we reached only 600,000, overall we have reached more than 10 million people through more than 230 projects in 18 countries, surpassing our initial aspiration by almost 25%. Our initiatives support boreholes, wells, rainwater harvesting, and domestic filtration devices.
Learning for Life
Learning for Life supports vocational and life-skills training which improve the prospects of individuals, families, communities and societies while strengthening our value chain through its emphasis on hospitality, retail, and entrepreneurship.
This year Diageo ran over 85 Learning for Life programmes in 32 countries, training 7,417 people, and bringing the total number of people trained to 109,894, exceeding our 2016 target by 9,894. Our impact studies in five countries in Latin America show that the programmes enabled 75% of participants to get jobs, including 44% with formal contracts,their full potential, and to increase earnings four-fold. Overall, the studies show that the programmes have benefited over halfplay their part in Diageo reaching its full potential as a million people, when taking into account the effects on participants’ families. The young people involved also talk about the increased self-esteembusiness. We aim to create a diverse, inclusive, and dignity they gained alongside valuable and recognised employment skills.
Plan W
Plan W is a sustainable development programme aiming to empower women and enable them to play a greater role in the economy by developing their hospitality and business enterprise skills. Since December 2012, Plan W has empowered 115,091 women, reaching 575,455 people indirectly across 15 countries, largely in Asia. While we continue to develop more projects, our aspiration to empower two million women across the world will only be achieved through broader partnerships and more global engagement than we have hitherto achieved. Alongside our internal diversity programme, we will explore how we can work with others to increase our reach.
The Diageo Foundation
The Foundation is a registered charity funded entirely by Diageo. It makes grants in support of projects or local charitable causes and disaster relief, particularly in regionswelcoming culture, where support from our employees and operations can be leveraged. This year, it funded 20 programmes in 11 markets including India and Ghana, and donated disaster relief to Sierra Leone and Nepal. This year we undertook a review of the Foundation to ensure it continues to support Diageo’s community development programmes effectively.
Our people
PERFORMANCE AGAINST TARGETS
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Our people are at the heartproud of our successtheir work, empowered to succeed, and we want them to be able to deliverknow that their best in a safe, welcoming environment.safety and other human rights are respected.
Health and safety
Everyone has the right to work in a safe, healthy environment, and ourOur global Zero Harm programme is designed to ensure that all our people go home safe, every day. day – and our Health and Safety strategy aims for a business in which no-one is hurt, anywhere.
To reach that end we have set ourselves increasingly challenging milestones, with our current target being less than one lost-time accident (LTA) per 1,000 employees and no fatalities.
Sadly, in December 2014,2015, a colleaguecontractor fell to his death at our Ogba facility in South Africa was killedNigeria while carrying out maintenance work at height. We have long recognised our responsibility to contractors and visitors to our sites, and include them in a road traffic accident whilst driving back from a sales event.
Diageo has aour Severe and Fatal Incident Prevention (SFIP) programme, specificallywhich is designed to identify and eliminate or control severe and fatal risks in our operations. SFIPoperations, and has significantly reduced the number of severe accidents, butaccidents. However, it is always under constant review and, since this tragedy, we have conducted an in-depth review of SFIP compliance across Africa, in particular of contractors working at heights, to prevent accidents like this happening elsewhere.
Our 2020 target
Keep our people safe by achieving less than one LTA per 1,000 employees and no fatalities.
KPI:
Number of LTAs; number of fatalities.
This year we continued to drive significant improvement across the circumstancesbusiness through our Zero Harm programme, with a 13% reduction in LTAs, resulting in an LTA rate of 1.44. We focused particularly on embedding our programme in the recently acquired USL business in India. We also focused on our non-manufacturing sites to bring their safety record closer to that of our manufacturing sites, many of which are recording record low levels of safety incidents. Some of our locations, such as South East Asia and Venezuela, achieved zero LTAs this year, while two of our regions, North America and Africa, achieved less than one accident per 1,000 employees. With results like these, we are confident that Zero Harm is no longer just an aspiration, but a very real and achievable goal.
During the coming year we will continue to focus on practical programmes supported by behavioural change, in an effort to make Zero Harm a reality across Diageo.
Diversity and inclusion
We celebrate diversity and strive to create an inclusive culture that provides all individuals the freedom to succeed, irrespective of their gender, race, religion, disability, age or sexual orientation.
With 47% of our Executive Committee being women, we are proud of the tragic accident aboveprogress we have been investigated so that we can take measuresmade in developing female leaders, but there is more to reduce the riskdo. We are also committed to building local talent, with our people further.general managers representing over 25 different nationalities.
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Our Zero Harm philosophyfocus over the past year has been on broadening and deepening our approach to diversity and inclusion. Each market has developed a detailed multi-year plan to achieve stretching goals, and their performance is aimedregularly tracked and benchmarked. Examples of market activities undertaken as a result include leadership sessions on unconscious bias in Europe, North America and India, a ‘Women in Supply’ leadership programme delivered to over 390 participants globally, and our commitment to ensuring that 50% of hires to our global graduate programme are women.
Our 2020 target
Build diversity, with 30% of leadership positions held by women and measures implemented to help female employees attain and develop in leadership roles.
KPI:
% of leadership positions held by women.
This year, 28% of leadership roles were held by women. At the most senior level, 42% of our Board members and 47% of our Executive Committee members are women.
Engaged and empowered employees
Our people are at eliminating workplace accidents,the heart of our business, and we had set a stretching global targettrust them to use their passion for our brands and pride in what we do to deliver less than one lost-time accident (LTA) per 1,000our performance.
We support our people through clear policies, competitive reward programmes, coaching and development opportunities, and health and wellbeing initiatives. We aim to engage and communicate with them through collaborative campaigns and activities, such as #proudofwhatwedo, and to give them the freedom to succeed by 2015. Since 2007 we have seen significant progress towardsfostering a culture of open communication in which best practice is shared and there is a two-way channel to and from our leadership.
We want our people to be engaged: passionate about our strategy, connected to our values, and motivated to be and perform at their best. The importance of this target, although this year we did not meetto our annual 40% rate reduction target thereby also missing the original aspiration for 2015. Our overall LTA rate has remained static at 1.66 year on year, driven primarily by accidents in our offices and sales functions. Itbusiness is worth noting that the actual number of accidents has reduced by 10%, however a reduction in headcount means this improvement is not reflected in the rate.
Our overall LTA rate compares favourably with peer organisations, however our commitment to our safety purpose –fact that everyone goes home safe, every day, everywhere – means we will always seek to improve. In March 2015, Diageo recorded its first ever LTA-free month, something we will look to build on through the ongoing applicationmeasure employee engagement as one of our Zero Harm strategy. In addition to continuing to identify and control risks, we will increase our focusoverarching KPIs, as set out on the behavioural aspects of safety and grow a safety culture rooted in prevention. LTAs now occur more frequently at offices than at other sites, andpages 23-27. Our annual Values Survey helps us measure how we are introducing new proceduresengaging our people and enabling them to ensure safety in offices is addressed through Risk Management Committees. We are strengthening our Slips, Trips and Falls Prevention programme and we continue to strongly promote our responsible driving programmes.perform.
Lost-time accident frequency rate per 1,000 full-time employees(i) | 2011 | 2012 | 2013 | 2014 | 2015 | |||||||||||||||
North America | 5.06 | 4.15 | 1.64 | 0.84 | 1.83 | |||||||||||||||
Europe | 5.29 | 2.41 | 2.12 | 2.08 | 2.51 | |||||||||||||||
Africa | 1.48 | 1.82 | 2.55 | 0.56 | 1.20 | |||||||||||||||
Latin America and Caribbean | 3.42 | 1.44 | 10.88 | 4.7 | 0.66 | |||||||||||||||
Asia Pacific | 1.41 | 0.0 | 1.26 | 1.62 | 1.21 | |||||||||||||||
Diageo (total) | 3.73 | 2.14 | 2.97 | 1.66 | (ii) | 1.66 |
Lost-time accident frequency rate per 1,000 full-time employees(i) | 2012 | 2013 | 2014 | 2015(ii) | 2016 | |||||||||||||||
North America | 4.15 | 1.64 | 0.84 | 1.83 | 0.37 | |||||||||||||||
Europe, Russia and Turkey | 2.41 | 2.12 | 2.08 | 2.51 | 1.28 | |||||||||||||||
Africa | 1.82 | 2.55 | 0.56 | 1.20 | 0.77 | |||||||||||||||
Latin America and Caribbean | 1.44 | 10.88 | 4.7 | 0.66 | 2.27 | |||||||||||||||
Asia Pacific | 0.0 | 1.26 | 1.62 | 1.21 | 2.01 | |||||||||||||||
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Diageo (total) | 2.14 | 2.97 | 1.66 | 1.66 | 1.44 | |||||||||||||||
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(i) | Number of accidents per 1,000 employees and directly supervised contractors resulting in time lost from work of one calendar day or more. |
(ii) |
Number of days lost to accidents per 1,000 full-time employees | 2011 | 2012 | 2013 | 2014 | 2015 | |||||||||||||||
Diageo (total) | 158.8 | 106.6 | 66.0 | 49.7 | 89.4 | |||||||||||||||
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Fatalities | 2011 | 2012 | 2013 | 2014 | 2015 | |||||||||||||||
Diageo (total) | 4 | 1 | 4 | 1 | 1 | |||||||||||||||
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Employee engagement
We communicate with employees on matters of importance to them and the company in a variety of ways, including through our digital channels. Our principal means of gathering employees’ views is our annual values-based survey, which helps us assess how well we are bringing our values to life, engaging our people and enabling them to perform. We want our people to be ‘engaged’: passionate about our strategy, connected to our values, and motivated to be and perform at their best. We support our employees through clear policies, competitive reward programmes, coaching and development opportunities, and health and wellbeing initiatives.
This year, 94% (25,022 out of the 26,710 able to participate) of our people participated in our online Annual Values Survey, with 75% identified as ‘engaged’. Our people confirmed that one of our core strengths continues to be our employees’ pride and strong sense of ownership in our business and our brands.
In our strategy for 2020, we have reinforced our commitment to employee engagement through new targets, including our ambition to be a top quartile performer on measures including employee satisfaction, pride, and loyalty.
Diversity
Our diversity and inclusion practices are a key competitive advantage to our business. We aim to inspire, support and empower women to take on greater leadership roles across the world. Currently, five of our 11 Board members are women, representing 45% of the directors.
Number of days lost to accidents per 1,000 full-time employees | 2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||||||||||
Diageo (total) | 106.6 | 66.0 | 49.7 | 89.4 | 57 | |||||||||||||||||||
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Fatalities | 2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||||||||||
Diageo (total) | 1 | 4 | 1 | 1 | 1 | |||||||||||||||||||
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We are committed to a diverse leadership and the promotion of local leaders. Currently, six of the 15 members of the Executive Committee are women, representing 40% of the committee; 26% of our senior management positions are held by women; and our 21 managing directors represent 16 different nationalities.
Average number of employees by region by gender(i) | Men | Women | Total | |||||||||
North America | 1,729 | 1,166 | 2,895 | |||||||||
Europe, Russia and Turkey | 6,555 | 4,197 | 10,752 | |||||||||
Africa | 4,110 | 1,166 | 5,276 | |||||||||
Latin America and Caribbean | 2,015 | 1,140 | 3,155 | |||||||||
Asia Pacific | 8,178 | 1,822 | 10,000 | |||||||||
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Diageo (total) | 22,587 | 9,491 | 32,078 | |||||||||
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Average number of employees by role by gender | Men | Women | Total | |||||||||
Senior manager(ii) | 493 | 193 | 686 | |||||||||
Line manager(iii) | 3,798 | 1,650 | 5,448 | |||||||||
Supervised employee(iv) | 18,296 | 7,648 | 25,944 | |||||||||
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Total | 22,587 | 9,491 | 32,078 | |||||||||
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Average number of employees by region by gender(i) | Men | Women | Total | |||||||||
North America | 1,958 | 1,303 | 3,261 | |||||||||
Europe | 6,713 | 4,285 | 10,998 | |||||||||
Africa | 4,366 | 1,132 | 5,498 | |||||||||
Latin America and Caribbean | 1,834 | 1,115 | 2,949 | |||||||||
Asia Pacific | 8,808 | 1,848 | 10,656 | |||||||||
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Diageo (total) | 23,679 | 9,683 | 33,362 | |||||||||
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Average number of employees by role by gender | Men | Women | Total | |||||||||
Senior manager(ii) | 543 | 191 | 734 | |||||||||
Line manager(iii) | 3,938 | 1,719 | 5,657 | |||||||||
Supervised employee(iv) | 19,198 | 7,773 | 26,971 | |||||||||
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Total | 23,679 | 9,683 | 33,362 | |||||||||
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New hires by region by gender(i) | Men | Women | Total | % of regional headcount | ||||||||||||
North America | 229 | 161 | 390 | 12.0 | ||||||||||||
Europe | 846 | 683 | 1,529 | 13.9 | ||||||||||||
Africa | 631 | 226 | 857 | 15.6 | ||||||||||||
Latin America and Caribbean | 375 | 265 | 640 | 21.7 | ||||||||||||
Asia Pacific | 597 | 283 | 880 | 8.3 | ||||||||||||
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Diageo (total) | 2,678 | 1,618 | 4,296 | 12.9 | ||||||||||||
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Percentage of total new hires | 62.3 | 37.7 | ||||||||||||||
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New hires by region by gender(i) | Men | Women | Total | % of regional headcount | ||||||||||||||||||||||||||||
North America | 175 | 130 | 305 | 10.5 | ||||||||||||||||||||||||||||
Europe, Russia and Turkey | 859 | 785 | 1,644 | 15.3 | ||||||||||||||||||||||||||||
Africa | 352 | 203 | 555 | 10.5 | ||||||||||||||||||||||||||||
Latin America and Caribbean | 484 | 270 | 754 | 23.9 | ||||||||||||||||||||||||||||
Asia Pacific | 548 | 317 | 865 | 8.6 | ||||||||||||||||||||||||||||
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Diageo (total) | 2,418 | 1,705 | 4,123 | 12.9 | ||||||||||||||||||||||||||||
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Percentage of total new hires | 58.6 | 41.4 | ||||||||||||||||||||||||||||||
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Leavers by region by gender(i) | Men | Women | Total | % of regional headcount | Men | Women | Total | % of regional headcount | ||||||||||||||||||||||||
North America | 239 | 190 | 429 | 13.2 | 568 | 342 | 910 | 31.4 | ||||||||||||||||||||||||
Europe | 848 | 604 | 1,452 | 13.2 | ||||||||||||||||||||||||||||
Europe, Russia and Turkey | 828 | 579 | 1,407 | 13.1 | ||||||||||||||||||||||||||||
Africa | 409 | 109 | 518 | 9.4 | 899 | 254 | 1,153 | 21.9 | ||||||||||||||||||||||||
Latin America and Caribbean | 411 | 198 | 609 | 20.7 | 646 | 374 | 1,020 | 32.3 | ||||||||||||||||||||||||
Asia Pacific | 801 | 277 | 1,078 | 10.1 | 817 | 294 | 1,111 | 11.1 | ||||||||||||||||||||||||
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Diageo (total) | 2,708 | 1,378 | 4,086 | 12.2 | 3,758 | 1,843 | 5,601 | 17.5 | ||||||||||||||||||||||||
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Percentage of total leavers | 66.3 | 33.7 | 67.1 | 32.9 | ||||||||||||||||||||||||||||
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(i) | Employees have been allocated to the region in which they reside. |
(ii) | Top leadership positions in Diageo, excluding Executive Committee. |
(iii) | All Diageo employees (non-senior managers), with one or more direct reports. |
(iv) | All Diageo employees (non-senior managers) who have no direct reports. |
Human rights
In our workplaces and the communities in which we operate, we believe a serious commitment to respecting human rights is fundamental. We recognise that we are responsible for the impact of our operations on our employees, on workers in our supply chain, on consumers of our products, and on the communities in which we operate. Our policies and guidelines, including our Human Rights Policy, outline our approach to human rights, and we will continue to demonstrate our commitment through our actions.
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We areOur 2020 targets
KPI:
Employee satisfaction, loyalty, advocacy and the UN Women’s Empowerment Principles and, as partpride, measured through our Values Survey.
This year, 97% of our 2020 targets, we have committedpeople participated in the Values Survey* (24,843 out of the 25,712 able to actingparticipate), with 77% identified as engaged, and 80% feeling they were ‘enabled to perform’. They confirmed that our core strengths continue to be our pride and sense of ownership in accordance with the UN Guiding Principlesour business, a passion for our brands, and belief in our strategy.
Gratifyingly our survey scores continue to improve year on Business and Human Rights.
We do not tolerate discrimination, harassment, bullying or abuse; we comply with wage and hour laws; we respect our employees’ decision to join or not join a trade union;year and we do not tolerate forced or compulsory labour. We will not work with anyone, including any supplier, who does not adopt these values.are on our way to achieving our 2020 objective of reaching top quartile scores for the key metrics of engagement and performance enablement.
We aim to provide opportunities for a wide range of people including those with disabilities, fostering a culture that allows for a variety of lifestyles. Our training and education programme includes retraining, if needed, for people who have become disabled. Where possible, we encourage a flexible approach to working and emphasise the importance of treating individuals justly and in a non-discriminatory manner throughout the employment relationship, including recruitment, compensation, training, promotion, and transfers.
Our robust controls, compliance and ethics programme is described in the Governance and Ethics section on pages 117-119
* | In 2014, we reviewed our overall approach to measuring engagement, and adopted a revised index. The new index allows us to compare our results with other best-in-class organisations, and sets us a more stretching benchmark for employee engagement. |
Sustainable supply chains
PERFORMANCE AGAINST TARGETS
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Our supply chains create value directly to local economies, and provide one of the most important ways in which we support and build capability among the communities in which we work. They are also an important part of our contribution to driving higher standards in sustainability and business ethics, bringing shared value to individuals, businesses and society.
A secure, stable supply chain is also critical to the long-term performance of our business. We have a clear interest in mitigating risk, and in supporting suppliers in strengthening their sustainability in ways that benefit them as well as us.
We source goods and services from a wide variety of businesses around the world, and our procurement systems depend on relationships with suppliers that are local, regional, and global. We expect all our suppliers to follow our Partnering with Suppliers Standard, which sets out our minimum social, ethical and environmental compliance standards, and we invite them to be our partners more widely in providing responsibly-sourced materials and services which have a positive impact on communities and the environment.
Responsible sourcing
Around 28,000 direct suppliers – around 28,000 from more than 100 countries – who provide us with the raw materials, expertise, and other resources are essential to our business. We believe that we create value in return, by supporting and building capability among our supplier communities and by strengthening environmental practices, alongside the economic value from trade.
As a minimum, we’re committed to responsible sourcing, which complies with legal and regulatory requirements, including those related to human rights and working conditions. With sustainable sourcing, we’re going beyond compliance to tackle risks and maximise opportunities for us and the people throughout our supply chain, contributing to reducing poverty and inequality, addressing environmental challenges, increasing wellbeing, and improving livelihoods in line with the UN Global Goals.
Sustainable agriculture
Our new Sustainable Agriculture Strategy (due to be launched in summer 2016) is designed to build on our long and mutually beneficial relationships with farmers and suppliers. Our vision is to make our agricultural supply chains environmentally, socially and economically sustainable. That means:
Our 2020 targets
KPI:
As part of our work on the Sustainable Agriculture Strategy, we are in the process of developing metrics to help us make great brands. We aimdrive progress and measure our performance.
By giving farmers the tools they need to increase yields, we can help them improve their sustainability performance by optimising due diligence.
livelihoods and increase capacity. We do this principallythrough a variety of programmes, including: training; enhancing access to inputs that support better yields, such as seeds and fertiliser; providing access to capital through micro-loans; supporting farmers’ groups; and encouraging sustainable practices that protect natural resources.
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Business review (continued)
KPI:
% agricultural raw materials sourced locally in Africa.
We sourced 73% of agricultural materials locally within Africa for use by our African markets, compared to 70% in 2015. We are on track, and believe that our work building farmer capacity in Africa, combined with our long history of engagement in the region, will help us continue to make progress.
KPI:
% of potential high risk supplier sites audited.
We continued to work through SEDEX, a not-for-profit organisation that enables suppliers to share assessments and audits of ethical and responsible practices with multiple customers, and AIM-PROGRESS, a forum of over 40 leading consumer goods companies which promotespromote responsible sourcing practices and sustainable supply chains. We also have an internal Know Your Business Partner (KYBP) programme which assessesto assess third parties against the risk of bribery and corruption.
To date, 1,2981,061 of Diageo’s potential high-risk supplier sites have registered with SEDEX, up from 1,193 last year. Of these, 1,170assessed as a potential risk have completed a SEDEX self-assessment questionnaire. More than 200 of theseOf the 318 supplier sites assessed as a potential high risk, 47% (150) were independently audited during the last three years; eitheryears. Of these, 70 were commissioned by Diageo (34), orand 80 were accessed through SEDEX and AIM-PROGRESS (219).
We have continued to make progress on our work with our supply chain on carbon emissions, in particular through the CDP (formerly the Carbon Disclosure Project) Supply Chain programme, a platform for engaging key suppliers on carbon emissions. Of the 154 suppliers we engaged last year, 92% responded to the CDP questionnaire, giving us further insights as we tackle our new 2020 target of reducing carbon emissions in our supply chain by 30%.
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Business review (continued)
Our confidential whistleblowing service, SpeakUp, is open to our suppliers. This year Diageo received reports from two suppliers and vendors through SpeakUp.
Partnerships with farmers
Our brands have always had long-standing and value-sharing relationships with farmers, on whose raw materials we rely. We continue to work with local agricultural communities to support them and the long term supply of our ingredients, and where appropriate we help equip them with the knowledge, tools and specialist support to develop sustainable agriculture. This year we joined the Sustainable Agriculture Initiative (SAI) Platform, the food and beverage industry initiative that supports the development of sustainable agriculture around the world. In Africa, where we see significant potential for developing more sustainable farming practices, we have met our goal of sourcing 70% of agricultural materials locally by 2015 – locally being defined as materials sourced within Africa and used by our African markets. We have increased this target to 80% for 2020.
or AIM-PROGRESS.
Global raw materials by volume 2016 (Total 1.4 million tonnes) Barley1 43% Maize2 13% Wheat 9% Molasses 9% Sorghum 6% Sugar 6% Grapes 6% Agave 3% Rice 1% Dairy 1% Rye 1% Other 2% (including raisins, cassava, hops and aniseed) Global packaging materials3 by volume 2016 (Total 1.3 million tonnes) Glass 83% Corrugate 8% Cartons 2% PET 1% Closures 1% Cans 1% Bags 1% Labels and sleeves 1% Crowns 1% Beverage cartons 1% |
1 | Includes malted barley. |
2 | Excludes maize used to make the neutral spirit we |
3 | Excludes promotional materials. |
4. GOVERNANCE AND ETHICS
PERFORMANCE AGAINST TARGETS
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REDUCING OUR ENVIRONMENTAL IMPACT
Performance against 2020 targets
2020 target | KPI | 2016 performance | Cumulative performance vs baseline1 | |||||||
Reduce water use through a 50% improvement in water use efficiency | % improvement in litres of water use per litre of packaged product | 12.5 | % | 37.7 | % | |||||
Return 100% of wastewater from our operations to the environment safely | % reduction in wastewater polluting power, measured in BOD (‘000 tonnes) | 37.7 | % | 38.6 | % | |||||
Replenish the amount of water used in our final product in water-stressed areas | % of water replenished in water- stressed locations | 21.0 | % | 21.0 | % | |||||
Reduce absolute GHG emissions from direct operations by 50% | % reduction in absolute GHG (kt CO2e) | 7.7 | % | 36.2 | % | |||||
Achieve a 30% reduction in absolute GHG emissions along the total supply chain | % reduction in absolute GHG (kt CO2e) | 4.0 | % | 18.2 | % | |||||
Reduce total packaging by 15%, while increasing recycled content to | % of total packaging by weight | 0.8 | % | 8.0 | % | |||||
% of recycled content by weight | 1.0 | % | 40.0 | % | ||||||
45% and making 100% of packaging recyclable | % of recyclable packaging by weight | 0.1 | % | 98.7 | % | |||||
Achieve zero waste to landfill | % reduction in total waste to landfill (tonnes) | 41.4 | % | 90.1 | % |
(i) | Baseline year is 2007, except for packaging which is 2009 and water replenishment which is 2015. |
We aim to be a business which uses natural resources efficiently, reduces our impact on climate change, causes no lasting damage to habitats or biodiversity and, where possible, improves the environment we operate in.
We are committed to minimising our environmental impact across all our operations, and we have continued to extend our environmental programmes into the broader supply chain. This will help ensure the sustainability and security of our supply chain, supporting the resilience and growth of our business.
Action on climate change
This year saw an unprecedented international focus on climate action, with the COP21 conference in December resulting in the Paris Agreement on climate change.
We have long advocated the reduction of carbon emissions by business in response to climate change. As members of the We Mean Business Coalition, we committed to carbon emissions reduction targets, eliminating commodity-driven deforestation, and providing climate change information in corporate filings. We are also committed to procuring 100% of our electricity from renewable sources by 2030 and reducing emissions from short-lived climate pollutants. During COP21, we confirmed our membership of the Business Alliance for Water and Climate Change.
Focus on water
Water remains one of our most material environmental issues: as a drinks company, water is an essential resource, and its careful management is a business priority.
Water is also a shared resource, with complex interdependencies between different users, which means that its use, especially in water-stressed areas, can have impacts on communities and the wider environment. The map on page 37 shows the number of our sites located in water-stressed areas. These account for approximately a third of our total production by volume. Our strategic aim is to reduce our overall impact, especially in water-stressed areas such as Africa, India and Brazil which this year saw severe droughts. During the year we developed specific local strategies to address water stewardship in East Africa and India.
Our Water Blueprint, launched in April 2015, outlines how we will protect and manage our water resources globally, particularly in relation to emerging markets. The strategy incorporates our global supply chain, which will enable better understanding and management of our total impact on water.
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Business review (continued)
A year of progress in all areas
This year we have made progress against all our 2020 environmental targets while broadening our scope and ambition. New acquisitions have been fully integrated into the business, including United National Breweries (UNB) in South Africa and Don Julio in Mexico, and are included in our independent environmental auditing and associated limited assurance statement.
Our 2020 targets
Water stewardship
KPI:
% improvement in litres of water used per litre of packaged product.
This year our water efficiency improved by 12.5% compared with 2015 and by 37.7% compared with our baseline. In our operations, this was driven by improvements in East Africa, where our Tusker Brewery in Nairobi improved water efficiency by 27%, and in Canada, where our Gimli distillery improved by 35%.
26,682 cubic metres of water were used for agricultural purposes on land under Diageo’s operational control. This is reported separately from water used in our direct operations.
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Business review (continued)
KPI:
% reduction of wastewater polluting power measured in 1,000t BOD.
We reduced the polluting power of the wastewater we returned to the environment by 37.7% this year.
This year’s performance was driven predominantly by maintaining excellent progress at our breweries in Africa and India, and reducing production (and consequently wastewater volume) from our Cameronbridge distillery in Scotland.
KPI:
% of key suppliers engaged in water management practices.
Since joining the CDP’s Water Programme last year, we have made progress in developing ways to qualitatively evaluate our suppliers’ use of water in future years and to encourage and support suppliers to protect water resources.
We engaged around 40 of our largest suppliers to disclose their water management practices through this programme. Of the 62% of suppliers that responded, 79% reported having a reduction target in place. In the coming year we will scale up this programme to over 100 of our key suppliers and third-party operators.
KPI:
% of water replenished in water-stressed locations.
This year, 21% of total water used in final product in water-stressed areas was replenished.
This new target commits us to replenishing approximately 1,000,000 cubic metres of water by 2020, or 200,000 cubic metres each year. In the first year, we have replenished 215,000 cubic metres through reforestation, desilting of dams, water storage, and safe water and sanitation projects. The majority of these projects are near our sites located in acutely water-stressed areas in India and East Africa.
In addition, the volume of water recycled or reused in our own production was 1,797,985 cubic metres, representing 8.4% of total water withdrawals.
Water efficiency by region, by year (l/l)(i),(ii) | 2007 | 2014 | 2015 | 2016 | ||||||||||||
North America | 6.79 | 5.41 | 5.35 | 5.20 | ||||||||||||
Europe, Russia and Turkey | 7.89 | 7.02 | 6.73 | 5.78 | ||||||||||||
Africa | 8.48 | 5.60 | 5.14 | 4.53 | ||||||||||||
Latin America and Caribbean | 34.66 | 31.20 | 6.26 | 4.58 | ||||||||||||
Asia Pacific | 7.09 | 7.10 | 5.68 | 4.98 | ||||||||||||
Diageo (total) | 8.21 | 6.75 | 5.84 | 5.11 |
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Business review (continued)
Wastewater polluting power by region, by year (BOD/t)(i) | 2007 | 2014 | 2015 | 2016 | ||||||||||||
North America | 242 | 15 | 13 | 101 | ||||||||||||
Europe, Russia and Turkey | 22,927 | 35,851 | 31,543 | 19,494 | ||||||||||||
Africa | 9,970 | 2,727 | 670 | 460 | ||||||||||||
Latin America and Caribbean | 11 | 22 | 50 | 48 | ||||||||||||
Asia Pacific | 92 | 489 | 489 | 298 | ||||||||||||
Corporate | 0 | 0 | 0 | 0 | ||||||||||||
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Diageo (total) | 33,242 | 39,104 | 32,765 | 20,401 | ||||||||||||
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Total under direct control | 32,412 | 38,867 | 32,535 | 20,123 | ||||||||||||
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(i) | 2007 baseline data and data for each of the intervening years in the period ended 30 June 2015 have been restated in accordance with Diageo’s environmental reporting methodologies. |
(ii) | In accordance with Diageo’s environmental reporting methodologies, total water used excludes irrigation water for agricultural purposes on land under the operational control of the company. |
Our 2020 targets
Carbon
KPI:
% reduction in absolute GHG (kt CO2 e).
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 over which we have operational control for the full fiscal year.
We reduced GHG emissions in our direct operations this year by 7.7% through a range of measures and initiatives, including a reduction in coal use in India, energy improvements at our US Virgin Islands business, and the transition to hydro-powered grid electricity in Cameroon.
Diageo’s total direct and indirect carbon emissions (location/gross) were 845,000 tonnes (direct emissions (scope 1) 656,000 tonnes and indirect emissions (scope 2) 189,000 tonnes). In 2015, total direct and indirect carbon emissions (location/gross) were 903,000 tonnes (direct emissions 710,000 and indirect emissions 193,000 tonnes). The intensity ratio this year was 203 grams per litre packaged, compared to 227 grams per litre in 2015.
This year, approximately 52.1% of electricity at our production sites came from low-carbon sources such as wind, hydro and nuclear, compared to 57.6% in 2015. The divestment of the wines business and acquisition of UNB are the principal drivers of this year-on-year change. In the United Kingdom, 99.5% of our electricity came from low-carbon sources.
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Business review (continued)
KPI:
% reduction in absolute GHG (kt CO2e).
This new target underpins our commitment to reduce carbon emissions, including collaborating with our suppliers, distributors and customers to reduce emissions along the total supply chain. This year, we established the total supply chain carbon footprint of our 2007 baseline year as 4.09 million tonnes. In 2016, our total supply chain carbon footprint was 3.34 million tonnes, a reduction of 18.2% versus the baseline and a 4% reduction since 2015. The key drivers are lower emission factors attributed to fertiliser use and consequently agricultural raw materials; reduced emissions from our packaging materials; and the reduced carbon footprint of our direct operations.
In our supply chain we engaged 145 key suppliers on measuring and managing their carbon emissions through the CDP. Of the 85% that responded to the CDP questionnaire, 48% reported having an emissions reduction target in place.
KPI:
% of equipment sourced HFC-free from 1 July 2015.
This year, 99% of the more than 17,000 fridges we purchased were sourced as HFC-free equipment.
Direct and indirect carbon emissions by weight (1,000 tonnes CO2e)1,2 (market-/net-based) 878 739 658 595 190 84 80 86 2007 2014 2015 2016 Direct Indirect
1 | 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. |
2 | 2007 baseline data, and data for each of the intervening years in the period ended 30 June 2015, have been restated in accordance with the WRI/WBCSD GHG Protocol and Diageo’s environmental reporting methodologies. |
Carbon emissions by weight by region (1,000 tonnes CO2 e)(i),(ii) | 2007 | 2014 | 2015 | 2016 | ||||||||||||
North America | 214 | 55 | 53 | 45 | ||||||||||||
Europe, Russia and Turkey | 406 | 355 | 329 | 285 | ||||||||||||
Africa | 271 | 235 | 248 | 250 | ||||||||||||
Latin America and Caribbean | 7 | 15 | 15 | 15 | ||||||||||||
Asia Pacific | 151 | 152 | 81 | 73 | ||||||||||||
Corporate | 19 | 11 | 12 | 13 | ||||||||||||
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Diageo (total) | 1,068 | 823 | 738 | 681 | ||||||||||||
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(i) | CO2e figures (market/net) are calculated using the WRI/WBCSD GHG Protocol guidance available at the beginning of our financial year, the kWh/CO2 e conversion factor provided by energy suppliers, the relevant factors to the country of operation, or the International Energy Agency, as applicable. |
(ii) | 2007 baseline data, and data for each of the intervening years in the period ended 30 June 2015, have been restated in accordance with the WRI/WBCSD GHG Protocol and Diageo’s environmental reporting methodologies. |
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Business review (continued)
Our 2020 targets
Packaging
KPI:
% of total packaging by weight.
KPI: % of recycled content by weight.
KPI: % of recyclable packaging by weight.
This year we achieved a 0.8% reduction in packaging weight vs 2015 (8.0% vs 2009 baseline); a 1.0% increase in recycled content vs 2015 (40% vs 2009 baseline); and increased packaging recyclability by 0.1% vs 2015 (98.7% vs 2009 baseline).
Our Sustainable Packaging Commitments are used by brands and technical teams as well as suppliers and support our on-going programme to produce packaging with the lowest environmental impact. They were refreshed in 2016 to, among other things, introduce new guidance to support a circular economy approach.
KPI:
% sustainably sourced paper and board packaging.
We define sustainably sourced as Forest Stewardship Council (FSC) or Programme for the Endorsement of Forest Certification (PEFC) certified, or recycled fibre. This year we established a strategic process for managing and reporting the volume of sustainably sourced paper and board packaging. To date we have engaged close to 100 suppliers to establish a baseline, and are embedding our sustainable sourcing criteria in how we work with our suppliers.
Our 2020 target
Waste
KPI:
% reduction in total waste to landfill (tonnes).
We achieved a 41.4% reduction in waste to landfill compared to last year. A key driver was achieving approval for new ways to use organic waste from our Turkish operations, particularly reusing by-products from wastewater treatment facilities and using aniseed residues as fertiliser.
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Business review (continued)
Total waste to landfill by region (tonnes)(i) | 2007 | 2014 | 2015 | 2016 | ||||||||||||
North America | 40,154 | 174 | 123 | 148 | ||||||||||||
Europe, Russia and Turkey | 22,464 | 6,525 | 7,207 | 2,974 | ||||||||||||
Africa | 37,062 | 12,699 | 7,507 | 6,080 | ||||||||||||
Latin America and Caribbean | 246 | 285 | 218 | 155 | ||||||||||||
Asia Pacific | 8,583 | 13,766 | 2,984 | 703 | ||||||||||||
Corporate | 591 | 687 | 687 | 894 | ||||||||||||
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Diageo (total) | 109,100 | 34,136 | 18,726 | 10,954 | ||||||||||||
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(i) | 2007 baseline data and data for each of the intervening years in the period ended 30 June 2014 have been restated in accordance with Diageo’s environmental reporting methodologies. |
GOVERNANCE AND ETHICS
In a volatile political and commercial environment, governance and ethics grow ever more important. People want to trust the company behind the brands that they love. Our reputation can only be sustained if every one of us is doing the right thing, every day, everywhere.
We are committed to conducting our business responsibly and in accordance with all laws and regulations to which our business activities are subject. To help our employees make the right decisions at work, we have a sound corporate governance structure and a robust risk, controls and compliance programme, with our Code of Business Conduct (our Code) at the heart of our business.
Standards and procedures
This year we refreshed our Code (published in July 2015), which sets the standard for what is expected of everyone working at Diageo, and from which our other policies and standards flow. Each employee at manager level and above completes an Annual Certification of Compliance (ACC) to confirm their understanding of, and adherence to, our Code and any applicable policies, and to identify any areas of possible non-compliance. In 2015, the ACC was completed by all eligible managers – 9,271 of our employees, or approximately 40% of our people.
This year we also launched our breach management global standard, and refreshed our risk management global standard, as part of the continuing evolution of our risk management programme.
Global risk and compliance
The global risk and compliance team providesprovide rigorous oversight of our risk management, internal control,controls and compliance and ethics programme across Diageo. Our overriding aim is to encourage integrity in every part of the business: we want employees to act with exemplary conduct in all their business interactions and truly embody our value of being proud of what we do.
Due care in delegating authority
programme. As our business expands, it is importantgrows, so does our investment in improving our productivity and performance through increasing levels of automation and more efficient and effective systems and processes.
Communications and compliance training
KPI:
Number of eligible employees completing the Annual Certification of Compliance (ACC).
This year, 100% of manager level and above employees completed the ACC.
We have placed a renewed emphasis on building compliance capability across the business and are working hard to ensure that we embedengage our standards and procedures in all new business units. employees.
We plan ahead and move quickly to ensurelaunched our new acquisitions are operating to the same standards as our existing businesses, and we are consistent in our stance on non-compliance issues. We are also committed to establishing good working relationships with our other business partners, including our suppliers, and ensuring that they adhere appropriately to our principles.
USL, which was integrated this year, updated theirrefreshed Code of Business Conduct & Ethics during the year. It sets out USL’s commitment(our Code) to conducting businessevery employee in accordance withevery market in July 2015, and we have continued to engage our purpose and values, and 100% of USL executives were trained on how to apply it in their work. The Code has clearly defined policies on important areas such as responsible marketing, quality and food safety, anti-corruption, gifts and entertainment, and many more that are aligned with our values and our sustainability goals.
Risk management
Our risk management global standard requires all markets and functions to perform risk assessments at least annually to consider risks concerning human rights, bribery and corruption, anti-money laundering, and all other relevant laws and regulations, as well as our own Code, policies and standards, and to ensure that mitigation plans for their most significant risks have been established.
Training and communicationsemployees through impactful communications.
Each market has its own training plan for our Code and key policies which they deliver through locally organised, risk-based training. To further embed ownership of this agenda with employees, some ofWe have strengthened our businesses go beyond basic training withcommunication on good practice through annual market engagement events such aslike the Pathway of Pride programme, in Africa, Ethics Day in Asia Pacific and Compliance Awareness Day in Great Britain.Latin America.
When an employee joins Diageo, he or she mustWe require all new employees to complete training about our Code training within 30 days. days of joining the business. We regularly review our training and communications material – and methods for delivery – to ensure they remain relevant to the risks our employees face in their roles.
Our ACC certifies that each employee at manager level and above fully understands what is expected of them. In 2016, the ACC was completed by all 9,668 eligible managers.
USL, which updated its Code of Business Conduct and Ethics in 2015, rolled out its first ACC to all eligible managers – 2,540 of USL employees, or approximately 44% of all employees (of which 3,238 work in a non-office environment with no access to computers or email).
Risk management
Following the launch of the new risk management global standard in 2015, we continue to evolve our risk management programme. This year we standardised our scenario planning methodologies and risk management training, and made it mandatory for a wider group within the business, in order to address the increased risk of volatility. Our global standard requires all markets and functions to perform risk assessments at least annually and to consider risks concerning human rights, bribery and corruption, anti-money laundering and all other relevant laws and regulation.
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Business review (continued)
Controls and automation
The 4,296 employees who joined usprinciples of our strong control programme remain unchanged and this year were taken throughwe worked on automating many of our manual control processes as part of our Next Generation Controls programme. Changes are carefully managed to ensure our control environment and assurance programme are robust, but also delivered in an efficient and effective manner.
Due diligence
Continuing to ensure that we do not expose ourselves to additional compliance risk from third-party business partners remains a one-hour induction on compliancepriority. This year we introduced a globally automated system that carries out real-time sanctions due diligence, checking third parties for bribery and ethics.corruption risks.
Monitoring, auditing and reporting
We striveaim to havecreate a culture in which employees feel comfortable raising concerns about potential breaches of our Code or policies. We expect anyone who comes across a breach to report it immediately, either through our confidential whistleblowing helpline SpeakUp, to their manager, or to a member of the global risk and compliance, human resources or legal teams. SpeakUp is also available to suppliers.
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Business review (continued)
our business partners.
There were 703752 suspected breaches reported this year, of which 324340 were subsequently substantiated. Of the suspected breaches, 289311 were reported through SpeakUp, compared with 299386 in 2014.2015.1 All identified breachesallegations are taken very seriously and those that require action are investigated.
Our response to proven breaches varies depending on the severity of the matter, and we monitor breaches to identify trends or common areas where further action may be required. This year, 10994 people exited the business as a result of breaches of our Code or policies.policies, compared with 131 in 2015.1
Our overall case volumes have fallen by 10% since last year and the number of employees exiting our business as a result of breaches has fallen by 28%. We believe this is a positive indication that our compliance programme is maturing. Our employees better understand what constitutes a breach and what doesn’t, and our training and enforcement is having an impact.
1 | 2015 numbers restated to include USL. |
Enforcement and incentives
We aim to improve our culture through training, coaching and incentives. Annual performance appraisals give full consideration to both performance and behaviour, with an individual’s commitment to Diageo’s controls, compliance, and ethics agenda being considered under behaviour. Employees’ overall performance affects their pay increases, and, where relevant, their bonuses.
Controls
We have a strong internal control environment, and we have an annual programme to assess, test, and report on the effectiveness of internal controls across our company. Our controls cover all aspects of risk, ranging from financial to operational to reputational risk, and all markets and functions are required to certify annually whether their internal controls are operating effectively, and quickly remediate any weaknesses identified.
1 | Reported through SpeakUp – 311; 2015 – 386. |
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Business review (continued)
DEFINITIONS AND RECONCILIATIONS OF NON-GAAP MEASURES TO GAAP MEASURES
Diageo’s strategic planning process is based on the following non-GAAP measures. They are chosen for planning and reporting, and some of them are used for incentive purposes. The group’s management believes these measures provide valuable additional information for 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.
Volume
Volume is a non-GAAP measure 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 ten10; and certain pre-mixed products that are classified as ready to drink in nine-litre cases, divide by five.
Organic movements
In the discussion of the performance of the business, ‘organic’ information is presented using pounds sterling amounts on a constant currency basis excluding the impact of exceptional items 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 headedtitled ‘Organic movement’ in the tables below, expressed as a percentage of the amount in the row headed ‘2014titled ‘2015 adjusted’. Organic operating margin is calculated by dividing operating profit before exceptional items by net sales after excluding the impact of exchange rate movements and acquisitions and disposals.
(a) Exchange rates
‘Exchange’ in the organic movement calculation reflects the adjustment to recalculate the prior year results as if they had been generated at the current year’s exchange rates.
Exchange impacts in respect of the external hedging of intergroup sales of products and the intergroup recharging of third party services are allocated to the geographical segment to which they relate. Residual exchange impacts are reported in Corporate.
Exchange impacts in respect of profit on intergroup sales of products and the intergroup recharges are reported in ‘other operating expenses’.
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Business review (continued)
(b) Acquisitions and disposals
For acquisitions in the current year, the post acquisition results are excluded from the organic movement calculations. For acquisitions in the prior year, post acquisition results are included in full in the prior year but are included in the organic movement calculation from the anniversary of the acquisition date in the current year. The acquisition row also eliminates the impact of transaction costs that have been charged to operating profit in the current or prior year in respect of acquisitions that, in management’s judgement, are expected to complete.
Where a business, brand, brand distribution right or agency agreement was disposed of, or terminated, in the current or prior year,period up to the date of the external results announcement, the group, in the organic movement calculations, excludes the results for that business from the current and prior year. In the calculation of operating profit, the overheads included in disposals are only those directly attributable to the businesses disposed of, and do not result from subjective judgements of management. In addition, disposals include the elimination of the results (for volume, sales, net sales and marketing only) of operations in India where United Spirits Limited (USL) previously fully consolidated the results but which are now operated on a royalty or franchise model where USL now receives royalties only for sales made by that operation.
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Business review (continued)
(c) Exceptional items
Exceptional items are those which, in management’s judgement, need to be disclosed by virtue of their size or incidence in order for the user to obtain a proper understanding of the financial information.nature. Such items are included within the income statement caption to which they relate, butand are separately disclosed in the notes to the consolidated financial statements, and are excluded from the organic movement calculations.
Organic movement calculations for the year ended 30 June 20152016 were as follows:
North America million | Europe million | Africa million | Latin America and Caribbean million | Asia Pacific million | Corporate million | Total million | North America million | Europe, Russia and Turkey million | Africa million | Latin America and Caribbean million | Asia Pacific million | Corporate million | Total million | |||||||||||||||||||||||||||||||||||||||||||
Volume (equivalent units) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2014 reported (restated) | 49.3 | 44.6 | 24.4 | 23.0 | 14.8 | — | 156.1 | |||||||||||||||||||||||||||||||||||||||||||||||||
Disposals(ii) | (0.9 | ) | (0.7 | ) | — | — | — | — | (1.6 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
2015 reported | 47.3 | 44.1 | 26.2 | 21.6 | 107.0 | — | 246.2 | |||||||||||||||||||||||||||||||||||||||||||||||||
Disposals(iii) | (1.3 | ) | (2.3 | ) | (0.2 | ) | (1.3 | ) | (3.3 | ) | — | (8.4 | ) | |||||||||||||||||||||||||||||||||||||||||||
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2014 adjusted | 48.4 | 43.9 | 24.4 | 23.0 | 14.8 | — | 154.5 | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals(ii) | 0.3 | 0.4 | — | 0.3 | 92.7 | — | 93.7 | |||||||||||||||||||||||||||||||||||||||||||||||||
2015 adjusted | 46.0 | 41.8 | 26.0 | 20.3 | 103.7 | — | 237.8 | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and | 0.5 | 1.3 | 3.0 | 0.7 | — | — | 5.5 | |||||||||||||||||||||||||||||||||||||||||||||||||
Organic movement | (1.4 | ) | (0.2 | ) | 1.8 | (1.7 | ) | (0.5 | ) | — | (2.0 | ) | 0.5 | 0.8 | 2.3 | (0.4 | ) | (0.1 | ) | — | 3.1 | |||||||||||||||||||||||||||||||||||
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2015 reported | 47.3 | 44.1 | 26.2 | 21.6 | 107.0 | — | 246.2 | |||||||||||||||||||||||||||||||||||||||||||||||||
2016 reported | 47.0 | 43.9 | 31.3 | 20.6 | 103.6 | — | 246.4 | |||||||||||||||||||||||||||||||||||||||||||||||||
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Organic movement % | (3 | ) | — | 7 | (7 | ) | (3 | ) | n/a | (1 | ) | 1 | 2 | 9 | (2 | ) | — | n/a | 1 | |||||||||||||||||||||||||||||||||||||
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121134
Business review (continued)
North America £ million | Europe £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | Corporate £ million | Total £ million | North America £ million | Europe, Russia and Turkey £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | Corporate £ million | Total £ million | |||||||||||||||||||||||||||||||||||||||||||
Sales | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2014 reported (restated) | 3,915 | 4,935 | 1,846 | 1,404 | 1,801 | 79 | 13,980 | |||||||||||||||||||||||||||||||||||||||||||||||||
2015 reported | 3,909 | 4,683 | 1,868 | 1,297 | 4,129 | 80 | 15,966 | |||||||||||||||||||||||||||||||||||||||||||||||||
Exchange(i) | 115 | (307 | ) | (123 | ) | (152 | ) | (39 | ) | (3 | ) | (509 | ) | 199 | (181 | ) | (143 | ) | (181 | ) | (54 | ) | — | (360 | ) | |||||||||||||||||||||||||||||||
Disposals(ii) | (75 | ) | (63 | ) | (1 | ) | (1 | ) | (2 | ) | (45 | ) | (187 | ) | ||||||||||||||||||||||||||||||||||||||||||
Disposals(iii) | (283 | ) | (247 | ) | (31 | ) | (119 | ) | (48 | ) | (48 | ) | (776 | ) | ||||||||||||||||||||||||||||||||||||||||||
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2014 adjusted | 3,955 | 4,565 | 1,722 | 1,251 | 1,760 | 31 | 13,284 | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals(ii) | 28 | 45 | — | 29 | 2,358 | 48 | 2,508 | |||||||||||||||||||||||||||||||||||||||||||||||||
2015 adjusted | 3,825 | 4,255 | 1,694 | 997 | 4,027 | 32 | 14,830 | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals(iii) | 117 | 124 | 89 | 76 | 8 | — | 414 | |||||||||||||||||||||||||||||||||||||||||||||||||
Organic movement | (74 | ) | 73 | 146 | 17 | 11 | 1 | 174 | 95 | 214 | 92 | 5 | (13 | ) | 4 | 397 | ||||||||||||||||||||||||||||||||||||||||
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2015 reported | 3,909 | 4,683 | 1,868 | 1,297 | 4,129 | 80 | 15,966 | |||||||||||||||||||||||||||||||||||||||||||||||||
2016 reported | 4,037 | 4,593 | 1,875 | 1,078 | 4,022 | 36 | 15,641 | |||||||||||||||||||||||||||||||||||||||||||||||||
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Organic movement % | (2 | ) | 2 | 8 | 1 | 1 | 3 | 1 | 2 | 5 | 5 | 1 | — | 13 | 3 | |||||||||||||||||||||||||||||||||||||||||
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Net sales | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2014 reported (restated) | 3,444 | 2,814 | 1,430 | 1,144 | 1,347 | 79 | 10,258 | |||||||||||||||||||||||||||||||||||||||||||||||||
2015 reported | 3,455 | 2,617 | 1,415 | 1,033 | 2,213 | 80 | 10,813 | |||||||||||||||||||||||||||||||||||||||||||||||||
Exchange(i) | 97 | (186 | ) | (100 | ) | (123 | ) | (22 | ) | (3 | ) | (337 | ) | 172 | (87 | ) | (102 | ) | (134 | ) | (21 | ) | — | (172 | ) | |||||||||||||||||||||||||||||||
Disposals(ii) | (62 | ) | (44 | ) | (1 | ) | (1 | ) | (2 | ) | (45 | ) | (155 | ) | ||||||||||||||||||||||||||||||||||||||||||
Disposals(iii) | (272 | ) | (184 | ) | (18 | ) | (98 | ) | (35 | ) | (48 | ) | (655 | ) | ||||||||||||||||||||||||||||||||||||||||||
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2014 adjusted | 3,479 | 2,584 | 1,329 | 1,020 | 1,323 | 31 | 9,766 | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals(ii) | 25 | 31 | 1 | 24 | 922 | 48 | 1,051 | |||||||||||||||||||||||||||||||||||||||||||||||||
2015 adjusted | 3,355 | 2,346 | 1,295 | 801 | 2,157 | 32 | 9,986 | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals(iii) | 113 | 96 | 72 | 57 | 7 | — | 345 | |||||||||||||||||||||||||||||||||||||||||||||||||
Organic movement | (49 | ) | 2 | 85 | (11 | ) | (32 | ) | 1 | (4 | ) | 97 | 102 | 34 | 5 | 34 | 4 | 276 | ||||||||||||||||||||||||||||||||||||||
Reclassification(ii) | — | — | — | — | (122 | ) | — | (122 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
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2015 reported | 3,455 | 2,617 | 1,415 | 1,033 | 2,213 | 80 | 10,813 | |||||||||||||||||||||||||||||||||||||||||||||||||
2016 reported | 3,565 | 2,544 | 1,401 | 863 | 2,076 | 36 | 10,485 | |||||||||||||||||||||||||||||||||||||||||||||||||
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Organic movement % | (1 | ) | — | 6 | (1 | ) | (2 | ) | 3 | — | 3 | 4 | 3 | 1 | 2 | 13 | 3 | |||||||||||||||||||||||||||||||||||||||
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Marketing | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2014 reported (restated) | 540 | 413 | 152 | 203 | 305 | 7 | 1,620 | |||||||||||||||||||||||||||||||||||||||||||||||||
2015 reported | 542 | 388 | 147 | 194 | 344 | 14 | 1,629 | |||||||||||||||||||||||||||||||||||||||||||||||||
Exchange(i) | 16 | (30 | ) | (10 | ) | (22 | ) | (1 | ) | — | (47 | ) | 23 | 1 | (11 | ) | (26 | ) | — | — | (13 | ) | ||||||||||||||||||||||||||||||||||
Disposals(ii) | (4 | ) | (5 | ) | — | — | — | (3 | ) | (12 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Disposals(iii) | (22 | ) | (7 | ) | — | (11 | ) | (1 | ) | (2 | ) | (43 | ) | |||||||||||||||||||||||||||||||||||||||||||
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2014 adjusted | 552 | 378 | 142 | 181 | 304 | 4 | 1,561 | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals(ii) | 11 | 4 | — | 3 | 65 | 3 | 86 | |||||||||||||||||||||||||||||||||||||||||||||||||
2015 adjusted | 543 | 382 | 136 | 157 | 343 | 12 | 1,573 | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals(iii) | 8 | 2 | 6 | 10 | — | — | 26 | |||||||||||||||||||||||||||||||||||||||||||||||||
Organic movement | (21 | ) | 6 | 5 | 10 | (25 | ) | 7 | (18 | ) | (10 | ) | 20 | 1 | — | (42 | ) | (6 | ) | (37 | ) | |||||||||||||||||||||||||||||||||||
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2015 reported | 542 | 388 | 147 | 194 | 344 | 14 | 1,629 | |||||||||||||||||||||||||||||||||||||||||||||||||
2016 reported | 541 | 404 | 143 | 167 | 301 | 6 | 1,562 | |||||||||||||||||||||||||||||||||||||||||||||||||
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Organic movement % | (4 | ) | 2 | 4 | 6 | (8 | ) | 175 | (1 | ) | (2 | ) | 5 | 1 | — | (12 | ) | (50 | ) | (2 | ) | |||||||||||||||||||||||||||||||||||
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Operating profit before exceptional items | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2014 reported (restated) | 1,460 | 853 | 340 | 328 | 283 | (130 | ) | 3,134 | ||||||||||||||||||||||||||||||||||||||||||||||||
2015 reported | 1,448 | 804 | 318 | 263 | 356 | (123 | ) | 3,066 | ||||||||||||||||||||||||||||||||||||||||||||||||
Exchange(i) | 27 | (67 | ) | (52 | ) | (60 | ) | (13 | ) | 4 | (161 | ) | 77 | (24 | ) | (67 | ) | (57 | ) | (5 | ) | (7 | ) | (83 | ) | |||||||||||||||||||||||||||||||
Acquisitions and disposals(ii) | (2 | ) | (15 | ) | — | (1 | ) | 18 | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals(iii) | (55 | ) | (34 | ) | (5 | ) | (17 | ) | (1 | ) | (2 | ) | (114 | ) | ||||||||||||||||||||||||||||||||||||||||||
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2014 adjusted | 1,485 | 771 | 288 | 267 | 288 | (124 | ) | 2,975 | ||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals(ii) | — | 13 | 1 | 3 | 48 | 4 | 69 | |||||||||||||||||||||||||||||||||||||||||||||||||
2015 adjusted | 1,470 | 746 | 246 | 189 | 350 | (132 | ) | 2,869 | ||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals(iii) | 25 | 10 | (7 | ) | 12 | 1 | (1 | ) | 40 | |||||||||||||||||||||||||||||||||||||||||||||||
Organic movement | (37 | ) | 20 | 29 | (7 | ) | 20 | (3 | ) | 22 | 56 | 45 | (27 | ) | (2 | ) | 44 | (17 | ) | 99 | ||||||||||||||||||||||||||||||||||||
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2015 reported | 1,448 | 804 | 318 | 263 | 356 | (123 | ) | 3,066 | ||||||||||||||||||||||||||||||||||||||||||||||||
2016 reported | 1,551 | 801 | 212 | 199 | 395 | (150 | ) | 3,008 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Organic movement % | (2 | ) | 3 | 10 | (3 | ) | 7 | (2 | ) | 1 | 4 | 6 | (11 | ) | (1 | ) | 13 | (13 | ) | 3 | ||||||||||||||||||||||||||||||||||||
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Organic operating margin % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2016 | 44.2 | % | 32.3 | % | 16.5 | % | 23.2 | % | 18.0 | % | n/a | 28.9 | % | |||||||||||||||||||||||||||||||||||||||||||
2015 | 42.2 | % | 30.6 | % | 22.4 | % | 25.8 | % | 23.9 | % | n/a | 30.7 | % | 43.8 | % | 31.8 | % | 19.0 | % | 23.6 | % | 16.2 | % | n/a | 28.7 | % | ||||||||||||||||||||||||||||||
2014 | 42.7 | % | 29.8 | % | 21.7 | % | 26.2 | % | 21.8 | % | n/a | 30.5 | % | |||||||||||||||||||||||||||||||||||||||||||
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Margin improvement (bps) | (47 | ) | 75 | 75 | (41 | ) | 209 | n/a | 24 | |||||||||||||||||||||||||||||||||||||||||||||||
Margin improvement/(decline) (bps) | 39 | 51 | (252 | ) | (39 | ) | 176 | n/a | 19 | |||||||||||||||||||||||||||||||||||||||||||||||
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135
Business review (continued)
(1) | For the reconciliation of sales to net sales and operating profit before exceptional items to operating profit see page |
(2) | Percentages and margin |
122
Business review (continued)
Notes: Information in respect of the organic movement calculations
(i) | The exchange adjustments for sales, net sales, marketing and operating profit are principally in respect of the Nigerian naira, the South African rand, the Venezuelan bolivar, the |
(ii) | Following a review of the third party production arrangements in India it was determined to be more appropriate to ensure consistent reporting by reclassifying the excise duties payable by the third party production companies as excise duties. This change was implemented by USL in its first three months of its financial year ended 30 June 2016, and resulted in net sales for the year ended 30 June 2016 reducing by £122 million with a corresponding decrease in cost of sales. There was no impact on gross or operating profit. |
(iii) | In the year ended 30 June |
Volume equ.units million | Sales £ million | Net sales £ million | Marketing £ million | Operating profit £ million | ||||||||||||||||
Year ended 30 June 2014 | ||||||||||||||||||||
Acquisitions | ||||||||||||||||||||
Transaction costs | — | — | — | — | 12 | |||||||||||||||
Integration costs | — | — | — | — | 12 | |||||||||||||||
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— | — | — | — | 24 | ||||||||||||||||
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Disposals | ||||||||||||||||||||
Jose Cuervo | (0.7 | ) | (54 | ) | (44 | ) | — | 9 | ||||||||||||
Bushmills | (0.8 | ) | (79 | ) | (60 | ) | (10 | ) | (28 | ) | ||||||||||
Gleneagles | — | (45 | ) | (45 | ) | (2 | ) | (2 | ) | |||||||||||
Other disposals | (0.1 | ) | (9 | ) | (6 | ) | — | (1 | ) | |||||||||||
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(1.6 | ) | (187 | ) | (155 | ) | (12 | ) | (22 | ) | |||||||||||
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Acquisitions and disposals | (1.6 | ) | (187 | ) | (155 | ) | (12 | ) | 2 | |||||||||||
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Year ended 30 June 2015 | ||||||||||||||||||||
Acquisitions | ||||||||||||||||||||
United Spirits Limited | 92.7 | 2,356 | 921 | 65 | 53 | |||||||||||||||
DeLeón | — | 5 | 5 | 8 | (8 | ) | ||||||||||||||
Don Julio | 0.3 | 28 | 23 | 3 | 6 | |||||||||||||||
Transaction costs | — | — | — | — | (1 | ) | ||||||||||||||
Integration costs | — | — | — | — | (7 | ) | ||||||||||||||
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93.0 | 2,389 | 949 | 76 | 43 | ||||||||||||||||
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Disposals | ||||||||||||||||||||
Bushmills | 0.7 | 66 | 50 | 8 | 22 | |||||||||||||||
Gleneagles | — | 48 | 48 | 2 | 4 | |||||||||||||||
Other disposals | — | 5 | 4 | — | — | |||||||||||||||
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0.7 | 119 | 102 | 10 | 26 | ||||||||||||||||
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Acquisitions and disposals | 93.7 | 2,508 | 1,051 | 86 | 69 | |||||||||||||||
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123136
Business review (continued)
Revised segmental information for the years ended 30 June 2014 and 30 June 2013
In the year ended 30 June 2015 Diageo changed its internal reporting structure to reflect changes made to management responsibilities. As a result of this change, Diageo reports the following geographical segments both for management reporting purposes and in the external financial statements: North America; Europe; Africa; Latin America and Caribbean; Asia Pacific and Corporate. The reconciliation to previously reported figures for volume, net sales, marketing and operating profit before exceptional items for the years ended 30 June 2014 and 30 June 2013 are as follows:
2014 | 2013 | |||||||||||||||||||||||
As reported million | Reclass million | Restated million | As reported million | Reclass million | Restated million | |||||||||||||||||||
Volume (equivalent units) | ||||||||||||||||||||||||
North America | 49.3 | — | 49.3 | 53.6 | — | 53.6 | ||||||||||||||||||
Europe | — | 44.6 | 44.6 | — | 45.4 | 45.4 | ||||||||||||||||||
Western Europe | 33.0 | (33.0 | ) | — | 33.6 | (33.6 | ) | — | ||||||||||||||||
Africa | — | 24.4 | 24.4 | — | 26.1 | 26.1 | ||||||||||||||||||
Africa, Eastern Europe and Turkey | 36.0 | (36.0 | ) | — | 37.9 | (37.9 | ) | — | ||||||||||||||||
Latin America and Caribbean | 23.0 | — | 23.0 | 23.3 | — | 23.3 | ||||||||||||||||||
Asia Pacific | 14.8 | — | 14.8 | 15.8 | — | 15.8 | ||||||||||||||||||
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156.1 | — | 156.1 | 164.2 | — | 164.2 | |||||||||||||||||||
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2014 | 2013 | |||||||||||||||||||||||
As reported £ million | Reclass £ million | Restated £ million | As reported £ million | Reclass £ million | Restated £ million | |||||||||||||||||||
Sales | ||||||||||||||||||||||||
North America | 3,915 | — | 3,915 | 4,262 | — | 4,262 | ||||||||||||||||||
Europe | — | 4,935 | 4,935 | — | 5,074 | 5,074 | ||||||||||||||||||
Western Europe | 3,644 | (3,644 | ) | — | 3,669 | (3,669 | ) | — | ||||||||||||||||
Africa | — | 1,846 | 1,846 | — | 2,014 | 2,014 | ||||||||||||||||||
Africa, Eastern Europe and Turkey | 3,137 | (3,137 | ) | — | 3,419 | (3,419 | ) | — | ||||||||||||||||
Latin America and Caribbean | 1,404 | — | 1,404 | 1,741 | — | 1,741 | ||||||||||||||||||
Asia Pacific | 1,801 | — | 1,801 | 2,109 | — | 2,109 | ||||||||||||||||||
Corporate | 79 | — | 79 | 76 | — | 76 | ||||||||||||||||||
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13,980 | — | 13,980 | 15,276 | — | 15,276 | |||||||||||||||||||
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| |||||||||||||
2014 | 2013 | |||||||||||||||||||||||
As reported £ million | Reclass £ million | Restated £ million | As reported £ million | Reclass £ million | Restated £ million | |||||||||||||||||||
Net sales | ||||||||||||||||||||||||
North America | 3,444 | — | 3,444 | 3,723 | — | 3,723 | ||||||||||||||||||
Europe | — | 2,814 | 2,814 | — | 2,915 | 2,915 | ||||||||||||||||||
Western Europe | 2,169 | (2,169 | ) | — | 2,203 | (2,203 | ) | — | ||||||||||||||||
Africa | — | 1,430 | 1,430 | — | 1,564 | 1,564 | ||||||||||||||||||
Africa, Eastern Europe and Turkey | 2,075 | (2,075 | ) | — | 2,276 | (2,276 | ) | — | ||||||||||||||||
Latin America and Caribbean | 1,144 | — | 1,144 | 1,453 | — | 1,453 | ||||||||||||||||||
Asia Pacific | 1,347 | — | 1,347 | 1,572 | — | 1,572 | ||||||||||||||||||
Corporate | 79 | — | 79 | 76 | — | 76 | ||||||||||||||||||
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| |||||||||||||
10,258 | — | 10,258 | 11,303 | — | 11,303 | |||||||||||||||||||
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124
Business review (continued)
2014 | 2013 | |||||||||||||||||||||||
As reported £ million | Reclass £ million | Restated £ million | As reported £ million | Reclass £ million | Restated £ million | |||||||||||||||||||
Marketing | ||||||||||||||||||||||||
North America | 540 | — | 540 | 581 | — | 581 | ||||||||||||||||||
Europe | — | 413 | 413 | — | 431 | 431 | ||||||||||||||||||
Western Europe | 323 | (323 | ) | — | 328 | (328 | ) | — | ||||||||||||||||
Africa | — | 152 | 152 | — | 162 | 162 | ||||||||||||||||||
Africa, Eastern Europe and Turkey | 242 | (242 | ) | — | 265 | (265 | ) | — | ||||||||||||||||
Latin America and Caribbean | 203 | — | 203 | 233 | — | 233 | ||||||||||||||||||
Asia Pacific | 305 | — | 305 | 356 | — | 356 | ||||||||||||||||||
Corporate | 7 | — | 7 | 6 | — | 6 | ||||||||||||||||||
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1,620 | — | 1,620 | 1,769 | — | 1,769 | |||||||||||||||||||
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| |||||||||||||
2014 | 2013 | |||||||||||||||||||||||
As reported £ million | Reclass £ million | Restated £ million | As reported £ million | Reclass £ million | Restated £ million | |||||||||||||||||||
Operating profit before exceptional items | ||||||||||||||||||||||||
North America | 1,460 | — | 1,460 | 1,478 | — | 1,478 | ||||||||||||||||||
Europe | — | 853 | 853 | — | 903 | 903 | ||||||||||||||||||
Western Europe | 639 | (639 | ) | — | 650 | (650 | ) | — | ||||||||||||||||
Africa | — | 340 | 340 | — | 400 | 400 | ||||||||||||||||||
Africa, Eastern Europe and Turkey | 554 | (554 | ) | — | 653 | (653 | ) | — | ||||||||||||||||
Latin America and Caribbean | 328 | — | 328 | 468 | — | 468 | ||||||||||||||||||
Asia Pacific | 283 | — | 283 | 381 | — | 381 | ||||||||||||||||||
Corporate | (130 | ) | — | (130 | ) | (151 | ) | — | (151 | ) | ||||||||||||||
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3,134 | — | 3,134 | 3,479 | — | 3,479 | |||||||||||||||||||
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Volume equ. units million | Sales £ million | Net sales £ million | Marketing £ million | Operating profit £ million | ||||||||||||||||
Year ended 30 June 2015 | ||||||||||||||||||||
Acquisitions | ||||||||||||||||||||
Integration costs | — | — | — | — | 7 | |||||||||||||||
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— | — | — | — | 7 | ||||||||||||||||
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Disposals | ||||||||||||||||||||
North America Wines and Percy Fox | (2.2 | ) | (386 | ) | (343 | ) | (18 | ) | (58 | ) | ||||||||||
Grand Marnier | (0.2 | ) | (26 | ) | (20 | ) | — | (2 | ) | |||||||||||
Bouvet | (0.1 | ) | (16 | ) | (16 | ) | (1 | ) | (2 | ) | ||||||||||
Argentina | (0.6 | ) | (38 | ) | (33 | ) | (3 | ) | (4 | ) | ||||||||||
South Africa | (0.2 | ) | (27 | ) | (15 | ) | — | (3 | ) | |||||||||||
Jamaica and Red Stripe | (1.1 | ) | (133 | ) | (107 | ) | (11 | ) | (23 | ) | ||||||||||
Bushmills | (0.7 | ) | (65 | ) | (50 | ) | (8 | ) | (23 | ) | ||||||||||
USL owned to franchise | (3.2 | ) | (29 | ) | (17 | ) | — | — | ||||||||||||
Gleneagles | — | (48 | ) | (48 | ) | (2 | ) | (4 | ) | |||||||||||
Other | (0.1 | ) | (8 | ) | (6 | ) | — | (2 | ) | |||||||||||
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(8.4 | ) | (776 | ) | (655 | ) | (43 | ) | (121 | ) | |||||||||||
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Acquisitions and disposals | (8.4 | ) | (776 | ) | (655 | ) | (43 | ) | (114 | ) | ||||||||||
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Year ended 30 June 2016 | ||||||||||||||||||||
Acquisitions | ||||||||||||||||||||
Don Julio | 0.3 | 34 | 22 | 6 | 23 | |||||||||||||||
United National Breweries | 2.6 | 44 | 44 | 1 | 4 | |||||||||||||||
South Africa | 0.3 | 35 | 23 | 5 | (11 | ) | ||||||||||||||
Argentina | — | 1 | 1 | — | — | |||||||||||||||
Transaction costs | — | — | — | — | (1 | ) | ||||||||||||||
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| |||||||||||
3.2 | 114 | 90 | 12 | 15 | ||||||||||||||||
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| |||||||||||
Disposals | ||||||||||||||||||||
North America Wines and Percy Fox | 1.1 | 181 | 161 | 8 | 12 | |||||||||||||||
Grand Marnier | 0.3 | 28 | 22 | — | 3 | |||||||||||||||
Bouvet | — | 7 | 7 | — | 1 | |||||||||||||||
Argentina | 0.3 | 19 | 16 | 2 | — | |||||||||||||||
South Africa | 0.1 | 9 | 4 | — | (1 | ) | ||||||||||||||
Jamaica and Red Stripe | 0.5 | 52 | 41 | 4 | 7 | |||||||||||||||
Bushmills | — | 3 | 2 | — | 1 | |||||||||||||||
Other | — | 1 | 2 | — | 2 | |||||||||||||||
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2.3 | 300 | 255 | 14 | 25 | ||||||||||||||||
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| |||||||||||
Acquisitions and disposals | 5.5 | 414 | 345 | 26 | 40 | |||||||||||||||
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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.
137
Business review (continued)
Earnings per share before exceptional items for the yearyears ended 30 June 20152016 and 30 June 20142015 are set out in the table below.
2015 £ million | 2014 £ million | |||||||
Profit attributable to equity shareholders of the parent company | 2,381 | 2,248 | ||||||
Exceptional operating items attributable to equity shareholders of the parent company | 268 | 261 | ||||||
Non-operating items | (373 | ) | (140 | ) | ||||
Tax in respect of exceptional operating and non-operating items | (51 | ) | (58 | ) | ||||
Discontinued operations | — | 83 | ||||||
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| |||||
2,225 | 2,394 | |||||||
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| |||||
Weighted average number of shares in issue (million) | 2,505 | 2,506 | ||||||
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| |||||
Earnings per share before exceptional items (pence) | 88.8 | 95.5 | ||||||
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125
Business review (continued)
2016 £ million | 2015 £ million | |||||||
Profit attributable to equity shareholders of the parent company | 2,244 | 2,381 | ||||||
Exceptional operating items attributable to equity shareholders of the parent company | 171 | 268 | ||||||
Non-operating items attributable to equity shareholders of the parent company | (115 | ) | (373 | ) | ||||
Tax in respect of exceptional operating and non-operating items attributable to equity shareholders of the parent company | (58 | ) | (51 | ) | ||||
|
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| |||||
2,242 | 2,225 | |||||||
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| |||||
Weighted average number of shares | ||||||||
Shares in issue excluding own shares (million) | 2,508 | 2,505 | ||||||
Dilutive potential ordinary shares (million) | 10 | 12 | ||||||
|
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| |||||
2,518 | 2,517 | |||||||
|
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| |||||
Basic earnings per share before exceptional items (pence) | 89.4 | 88.8 | ||||||
|
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| |||||
Diluted earnings per share before exceptional items (pence) | 89.0 | 88.4 | ||||||
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|
|
Free cash flow
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 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.
The group’s management regards the purchase and disposal of property, plant and equipment and computer software as ultimately non-discretionary since ongoing investment in plant, machinery and technology is required to support the day-to-day operations, whereas acquisitions and sales of businesses are discretionary.
Where appropriate, separate explanations are given for the impacts of acquisitions and sale of businesses, dividends paid and the purchase of own shares, each of which arises from decisions that are independent from the running of the ongoing underlying business.
Free cash flow reconciliations for the years ended 30 June 20152016 and 30 June 20142015 are set out in the below table.table below:
2015 £ million | 2014 £ million | 2016 £ million | 2015 £ million | |||||||||||||
Net cash from operating activities | 2,551 | 1,790 | 2,548 | 2,551 | ||||||||||||
Disposal of property, plant and equipment and computer software | 52 | 80 | 57 | 52 | ||||||||||||
Purchase of property, plant and equipment and computer software | (638 | ) | (642 | ) | (506 | ) | (638 | ) | ||||||||
Movements in loans and other investments | (2 | ) | 7 | (2 | ) | (2 | ) | |||||||||
|
|
|
| |||||||||||||
Free cash flow | 1,963 | 1,235 | 2,097 | 1,963 | ||||||||||||
|
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|
138
Business review (continued)
Operating cash conversion
Operating cash conversion is calculated by dividing cash generated from operations excluding cash inflows/outflows in respect of exceptional items, dividends received from associates, maturing inventories, 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 ratio is stated at the budgeted exchange rate for the respective year in line with management reporting and is expressed as a percentage.
Operating cash conversion for the years ended 30 June 2016 and 30 June 2015 were as follows:
2016 £ million | 2015 £ million | |||||||
Operating profit | 2,841 | 2,797 | ||||||
Exceptional operating items | 167 | 269 | ||||||
Depreciation and amortisation(i) | 355 | 371 | ||||||
Retranslation to budgeted exchange rates | 18 | 146 | ||||||
|
|
|
| |||||
3,381 | 3,583 | |||||||
|
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|
| |||||
Cash generated from operations | 3,360 | 3,456 | ||||||
Cash payments in respect of exceptional items | 80 | 221 | ||||||
Post employment payments less amounts included in operating profit(i) | 58 | 67 | ||||||
Net movement in maturing inventories | 144 | 247 | ||||||
Dividends received from associates | (173 | ) | (183 | ) | ||||
Other items(i) | 15 | (21 | ) | |||||
Retranslation to budgeted exchange rates | 75 | 148 | ||||||
|
|
|
| |||||
3,559 | 3,935 | |||||||
|
|
|
| |||||
Operating cash conversion | 105.3 | % | 109.8 | % | ||||
|
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|
|
(i) | excluding exceptional items. |
Return on average total invested capital
Return on average total invested capital is used by management to assess the return obtained from the group’s asset base and is calculated to aid evaluation of the performance of the business.
The profit used in assessing the return on average total invested capital reflects operating profit before exceptional items attributable to the equity shareholders of the parent company plus share of after tax results of associates and joint ventures after applying the tax rate before exceptional items for the year. Average total invested capital is calculated using the average derived from the consolidated balance sheets at the beginning, middle and end of the year. Average capital employed comprises average net assets attributable to equity shareholders of the parent company for the year, excluding post employment benefit net 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.
126
139
Business review (continued)
Calculations for the return on average total invested capital for the years ended 30 June 20152016 and 30 June 20142015 are set out in the table below.
2015 £ million | 2014 (restated)(i) £ million | 2016 £ million | 2015 £ million | |||||||||||||
Operating profit | 2,797 | 2,707 | 2,841 | 2,797 | ||||||||||||
Exceptional operating items | 269 | 427 | 167 | 269 | ||||||||||||
Profit for the year attributable to non-controlling interests | (87 | ) | (58 | ) | ||||||||||||
Profit before exceptional operating items attributable to non-controlling interests | (108 | ) | (87 | ) | ||||||||||||
Share of after tax results of associates and joint ventures | 175 | 252 | 221 | 175 | ||||||||||||
Tax at the tax rate before exceptional items of 18.3% (2014 – 18.2%) | (577 | ) | (606 | ) | ||||||||||||
Tax at the tax rate before exceptional items of 19.0% (2015 – 18.3%) | (593 | ) | (577 | ) | ||||||||||||
|
|
|
| |||||||||||||
2,577 | 2,722 | 2,528 | 2,577 | |||||||||||||
|
|
|
| |||||||||||||
Average net assets (excluding net post employment liabilities) | 8,910 | 8,300 | 10,202 | 8,910 | ||||||||||||
Average non-controlling interests | (1,240 | ) | (924 | ) | ||||||||||||
Average non-controlling interest | (1,558 | ) | (1,240 | ) | ||||||||||||
Average net borrowings | 9,682 | 8,783 | 9,130 | 9,682 | ||||||||||||
Average integration and restructuring costs (net of tax) | 1,604 | 1,498 | 1,639 | 1,604 | ||||||||||||
Goodwill at 1 July 2004 | 1,562 | 1,562 | 1,562 | 1,562 | ||||||||||||
Adjustment in respect of acquisition of USL(ii) | 493 | 114 | ||||||||||||||
Adjustment in respect of acquisition of USL(i) | — | 493 | ||||||||||||||
|
|
|
| |||||||||||||
Average total invested capital | 21,011 | 19,333 | 20,975 | 21,011 | ||||||||||||
|
|
|
| |||||||||||||
Return on average total invested capital | 12.3 | % | 14.1 | % | 12.1 | % | 12.3 | % | ||||||||
|
|
|
|
(i) |
140
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, classified as or 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 continuing operations before exceptional and after exceptional items for the yearsyear ended 30 June 2015 and 30 June 20142016 are set out in the table below.
2015 £ million | 2014 £ million | |||||||
Tax before exceptional items (a) | 517 | 546 | ||||||
Tax in respect of exceptional items | (51 | ) | (99 | ) | ||||
|
|
|
| |||||
Taxation on profit from continuing operations (b) | 466 | 447 | ||||||
|
|
|
| |||||
Profit from continuing operations before taxation and exceptional items (c) | 2,829 | 2,998 | ||||||
Non-operating items | 373 | 140 | ||||||
Exceptional operating items | (269 | ) | (427 | ) | ||||
|
|
|
| |||||
Profit before taxation (d) | 2,933 | 2,711 | ||||||
|
|
|
| |||||
Tax rate before exceptional items (a/c) | 18.3 | % | 18.2 | % | ||||
|
|
|
| |||||
Tax rate from continuing operations after exceptional items (b/d) | 15.9 | % | 16.5 | % | ||||
|
|
|
|
127
Business review (continued)
2016 £ million | 2015 £ million | |||||||
Tax before exceptional items (a) | 552 | 517 | ||||||
Tax in respect of exceptional items | (56 | ) | (51 | ) | ||||
|
|
|
| |||||
Taxation on profit from operations (b) | 496 | 466 | ||||||
|
|
|
| |||||
Profit from operations before taxation and exceptional items (c) | 2,902 | 2,829 | ||||||
Non-operating items | 123 | 373 | ||||||
Exceptional operating items | (167 | ) | (269 | ) | ||||
|
|
|
| |||||
Profit before taxation (d) | 2,858 | 2,933 | ||||||
|
|
|
| |||||
Tax rate before exceptional items (a/c) | 19.0 | % | 18.3 | % | ||||
|
|
|
| |||||
Tax rate after exceptional items (b/d) | 17.4 | % | 15.9 | % | ||||
|
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|
|
Other definitions
Volume share is a brand’s retail volume expressed as a percentage of the retail volume of all brands in its segment.
Valueshare 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.
Depletion is the estimated volume of the first onward sales from our direct customers, measured on an equivalent basis.
Price/mix is the number of percentage points by which the organic movement in net sales exceedsdiffers to the organic movement in volume. The difference arises because of changes in the composition of sales between higher and lower priced variants/markets or as price changes are implemented.
Depletion is the estimated volume of the first onward sales from our direct customers, measured on an equivalent units basis.
References toemerging markets include Russia, Eastern Europe, Turkey, Africa, Latin America and Caribbean, and Asia Pacific (excluding Australia, Korea and Japan).
References toreserve brands include Johnnie Walker Blue Label, Johnnie Walker Green Label, Johnnie Walker Gold Label 18 year old, Johnnie Walker Gold Label Reserve, Johnnie Walker Platinum Label 18 year old, John Walker & Sons Collection, Johnnie Walker The Gold Route, Johnnie Walker The Royal Route and other Johnnie Walker super premium brands; The Singleton, Cardhu, Talisker, Lagavulin and other malt brands; Buchanan’s Special Reserve, Buchanan’s Red Seal; Bulleit Bourbon, Bulleit Rye; Tanqueray No. TEN, Tanqueray Malacca;Malacca Gin; Cîroc, Ketel One vodka; Don Julio, Zacapa, Bundaberg SDlx, Shui Jing Fang, Jinzu gin, Haig Club whisky, Orphan Barrel whiskey and DeLeón Tequila.
References toglobal giants include the following brand families: Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Tanqueray and Guinness.Local stars spirits excluding ready to drink include, but are not limited to, Bell’s, Buchanan’s, Bundaberg, Bulleit, Cacique, Crown Royal, Don Julio, JeB, McDowell’s, Old Parr, Yenì Raki, Ketel One vodka, scotch malts, White Horse, Windsor and Ypióca. Global giants and local stars exclude ready to drink.
References toready to drink also include ready to serve products, such as pre-mix cans in some markets, and progressive adult beverages in the United States and certain markets supplied by the United States.
References tobeer include non-alcoholic products such as Guinness Malta Guinness.
References to the group include Diageo plc and Orijin, a flavoured mixed drink.its consolidated subsidiaries.
128141
Business review (continued)
Reconciliations of non-GAAP measures to GAAP measures — 20142015 compared with 20132014
Organic movements
Organic movement calculations for the year ended 30 June 20142015 were as follows:
North America million | Europe million | Africa million | Latin America and Caribbean million | Asia Pacific million | Corporate million | Total million | North America million | Europe, Russia and Turkey million | Africa million | Latin America and Caribbean million | Asia Pacific million | Corporate million | Total million | |||||||||||||||||||||||||||||||||||||||||||
Volume (equivalent units) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2013 reported (restated) | 53.6 | 45.4 | 26.1 | 23.3 | 15.8 | — | 164.2 | |||||||||||||||||||||||||||||||||||||||||||||||||
2014 reported | 49.3 | 44.6 | 24.4 | 23.0 | 14.8 | — | 156.1 | |||||||||||||||||||||||||||||||||||||||||||||||||
Disposals(ii) | (4.3 | ) | (0.5 | ) | (0.1 | ) | (0.2 | ) | (0.2 | ) | — | (5.3 | ) | (0.9 | ) | (0.7 | ) | — | — | — | — | (1.6 | ) | |||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
2013 adjusted | 49.3 | 44.9 | 26.0 | 23.1 | 15.6 | — | 158.9 | |||||||||||||||||||||||||||||||||||||||||||||||||
2014 adjusted | 48.4 | 43.9 | 24.4 | 23.0 | 14.8 | — | 154.5 | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals(ii) | 0.7 | 0.1 | — | 0.1 | — | — | 0.9 | 0.3 | 0.4 | — | 0.3 | 92.7 | — | 93.7 | ||||||||||||||||||||||||||||||||||||||||||
Organic movement | (0.7 | ) | (0.4 | ) | (1.6 | ) | (0.2 | ) | (0.8 | ) | — | (3.7 | ) | (1.4 | ) | (0.2 | ) | 1.8 | (1.7 | ) | (0.5 | ) | — | (2.0 | ) | |||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
2014 reported | 49.3 | 44.6 | 24.4 | 23.0 | 14.8 | — | 156.1 | |||||||||||||||||||||||||||||||||||||||||||||||||
2015 reported | 47.3 | 44.1 | 26.2 | 21.6 | 107.0 | — | 246.2 | |||||||||||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
Organic movement % | (1 | ) | (1 | ) | (6 | ) | (1 | ) | (5 | ) | n/a | (2 | ) | (3 | ) | — | 7 | (7 | ) | (3 | ) | n/a | (1 | ) | ||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
North America £ million | Europe £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | Corporate £ million | Total £ million | North America £ million | Europe, Russia and Turkey £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | Corporate £ million | Total £ million | |||||||||||||||||||||||||||||||||||||||||||
Sales | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2013 reported (restated) | 4,262 | 5,074 | 2,014 | 1,741 | 2,109 | 76 | 15,276 | |||||||||||||||||||||||||||||||||||||||||||||||||
2014 reported | 3,915 | 4,935 | 1,846 | 1,404 | 1,801 | 79 | 13,980 | |||||||||||||||||||||||||||||||||||||||||||||||||
Exchange(i) | (176 | ) | (178 | ) | (172 | ) | (389 | ) | (167 | ) | — | (1,082 | ) | 115 | (307 | ) | (123 | ) | (152 | ) | (39 | ) | (3 | ) | (509 | ) | ||||||||||||||||||||||||||||||
Disposals(ii) | (336 | ) | (68 | ) | (4 | ) | (11 | ) | (11 | ) | — | (430 | ) | (75 | ) | (63 | ) | (1 | ) | (1 | ) | (2 | ) | (45 | ) | (187 | ) | |||||||||||||||||||||||||||||
|
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|
| |||||||||||||||||||||||||||||||||||||||||||
2013 adjusted | 3,750 | 4,828 | 1,838 | 1,341 | 1,931 | 76 | 13,764 | |||||||||||||||||||||||||||||||||||||||||||||||||
2014 adjusted | 3,955 | 4,565 | 1,722 | 1,251 | 1,760 | 31 | 13,284 | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals(ii) | 52 | 9 | — | 1 | — | — | 62 | 28 | 45 | — | 29 | 2,358 | 48 | 2,508 | ||||||||||||||||||||||||||||||||||||||||||
Organic movement | 113 | 98 | 8 | 62 | (130 | ) | 3 | 154 | (74 | ) | 73 | 146 | 17 | 11 | 1 | 174 | ||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
2014 reported | 3,915 | 4,935 | 1,846 | 1,404 | 1,801 | 79 | 13,980 | |||||||||||||||||||||||||||||||||||||||||||||||||
2015 reported | 3,909 | 4,683 | 1,868 | 1,297 | 4,129 | 80 | 15,966 | |||||||||||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
Organic movement % | 3 | 2 | — | 5 | (7 | ) | 4 | 1 | (2 | ) | 2 | 8 | 1 | 1 | 3 | 1 | ||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
Net sales | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2013 reported (restated) | 3,723 | 2,915 | 1,564 | 1,453 | 1,572 | 76 | 11,303 | |||||||||||||||||||||||||||||||||||||||||||||||||
2014 reported | 3,444 | 2,814 | 1,430 | 1,144 | 1,347 | 79 | 10,258 | |||||||||||||||||||||||||||||||||||||||||||||||||
Exchange(i) | (156 | ) | (77 | ) | (124 | ) | (328 | ) | (112 | ) | — | (797 | ) | 97 | (186 | ) | (100 | ) | (123 | ) | (22 | ) | (3 | ) | (337 | ) | ||||||||||||||||||||||||||||||
Disposals(ii) | (272 | ) | (48 | ) | (3 | ) | (9 | ) | (7 | ) | — | (339 | ) | (62 | ) | (44 | ) | (1 | ) | (1 | ) | (2 | ) | (45 | ) | (155 | ) | |||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
2013 adjusted | 3,295 | 2,790 | 1,437 | 1,116 | 1,453 | 76 | 10,167 | |||||||||||||||||||||||||||||||||||||||||||||||||
2014 adjusted | 3,479 | 2,584 | 1,329 | 1,020 | 1,323 | 31 | 9,766 | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals(ii) | 41 | 7 | — | 1 | — | — | 49 | 25 | 31 | 1 | 24 | 922 | 48 | 1,051 | ||||||||||||||||||||||||||||||||||||||||||
Organic movement | 108 | 17 | (7 | ) | 27 | (106 | ) | 3 | 42 | (49 | ) | 2 | 85 | (11 | ) | (32 | ) | 1 | (4 | ) | ||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
2014 reported | 3,444 | 2,814 | 1,430 | 1,144 | 1,347 | 79 | 10,258 | |||||||||||||||||||||||||||||||||||||||||||||||||
2015 reported | 3,455 | 2,617 | 1,415 | 1,033 | 2,213 | 80 | 10,813 | |||||||||||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
Organic movement % | 3 | 1 | — | 2 | (7 | ) | 4 | — | (1 | ) | — | 6 | (1 | ) | (2 | ) | 3 | — | ||||||||||||||||||||||||||||||||||||||
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129142
Business review (continued)
North America £ million | Europe £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | Corporate £ million | Total £ million | North America £ million | Europe, Russia and Turkey £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | Corporate £ million | Total £ million | |||||||||||||||||||||||||||||||||||||||||||
Marketing | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2013 reported (restated) | 581 | 431 | 162 | 233 | 356 | 6 | 1,769 | |||||||||||||||||||||||||||||||||||||||||||||||||
2014 reported | 540 | 413 | 152 | 203 | 305 | 7 | 1,620 | |||||||||||||||||||||||||||||||||||||||||||||||||
Exchange(i) | (27 | ) | (10 | ) | (14 | ) | (30 | ) | (27 | ) | — | (108 | ) | 16 | (30 | ) | (10 | ) | (22 | ) | (1 | ) | — | (47 | ) | |||||||||||||||||||||||||||||||
Disposals(ii) | (27 | ) | (5 | ) | — | (2 | ) | — | — | (34 | ) | (4 | ) | (5 | ) | — | — | — | (3 | ) | (12 | ) | ||||||||||||||||||||||||||||||||||
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2013 adjusted | 527 | 416 | 148 | 201 | 329 | 6 | 1,627 | |||||||||||||||||||||||||||||||||||||||||||||||||
2014 adjusted | 552 | 378 | 142 | 181 | 304 | 4 | 1,561 | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals(ii) | 3 | — | — | — | — | — | 3 | 11 | 4 | — | 3 | 65 | 3 | 86 | ||||||||||||||||||||||||||||||||||||||||||
Organic movement | 10 | (3 | ) | 4 | 2 | (24 | ) | 1 | (10 | ) | (21 | ) | 6 | 5 | 10 | (25 | ) | 7 | (18 | ) | ||||||||||||||||||||||||||||||||||||
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2014 reported | 540 | 413 | 152 | 203 | 305 | 7 | 1,620 | |||||||||||||||||||||||||||||||||||||||||||||||||
2015 reported | 542 | 388 | 147 | 194 | 344 | 14 | 1,629 | |||||||||||||||||||||||||||||||||||||||||||||||||
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Organic movement % | 2 | (1 | ) | 3 | 1 | (7 | ) | 17 | (1 | ) | (4 | ) | 2 | 4 | 6 | (8 | ) | 175 | (1 | ) | ||||||||||||||||||||||||||||||||||||
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Operating profit before exceptional items | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2013 reported (restated) | 1,478 | 903 | 400 | 468 | 381 | (151 | ) | 3,479 | ||||||||||||||||||||||||||||||||||||||||||||||||
2014 reported | 1,460 | 853 | 340 | 328 | 283 | (130 | ) | 3,134 | ||||||||||||||||||||||||||||||||||||||||||||||||
Exchange(i) | (54 | ) | (49 | ) | (51 | ) | (151 | ) | (35 | ) | 4 | (336 | ) | 27 | (67 | ) | (52 | ) | (60 | ) | (13 | ) | 4 | (161 | ) | |||||||||||||||||||||||||||||||
Acquisitions and disposals(ii) | (59 | ) | (6 | ) | (1 | ) | 2 | (1 | ) | — | (65 | ) | (2 | ) | (15 | ) | — | (1 | ) | 18 | 2 | 2 | ||||||||||||||||||||||||||||||||||
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2013 adjusted | 1,365 | 848 | 348 | 319 | 345 | (147 | ) | 3,078 | ||||||||||||||||||||||||||||||||||||||||||||||||
2014 adjusted | 1,485 | 771 | 288 | 267 | 288 | (124 | ) | 2,975 | ||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals(ii) | (12 | ) | (3 | ) | — | — | (18 | ) | (2 | ) | (35 | ) | — | 13 | 1 | 3 | 48 | 4 | 69 | |||||||||||||||||||||||||||||||||||||
Organic movement | 107 | 8 | (8 | ) | 9 | (44 | ) | 19 | 91 | (37 | ) | 20 | 29 | (7 | ) | 20 | (3 | ) | 22 | |||||||||||||||||||||||||||||||||||||
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2014 reported | 1,460 | 853 | 340 | 328 | 283 | (130 | ) | 3,134 | ||||||||||||||||||||||||||||||||||||||||||||||||
2015 reported | 1,448 | 804 | 318 | 263 | 356 | (123 | ) | 3,066 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Organic movement % | 8 | 1 | (2 | ) | 3 | (13 | ) | 13 | 3 | (2 | ) | 3 | 10 | (3 | ) | 7 | (2 | ) | 1 | |||||||||||||||||||||||||||||||||||||
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Organic operating margin % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2015 | 42.2 | % | 30.6 | % | 22.4 | % | 25.8 | % | 23.9 | % | n/a | 30.7 | % | |||||||||||||||||||||||||||||||||||||||||||
2014 | 43.26 | % | 30.50 | % | 23.78 | % | 28.70 | % | 22.35 | % | n/a | 31.04 | % | 42.7 | % | 29.8 | % | 21.7 | % | 26.2 | % | 21.8 | % | n/a | 30.5 | % | ||||||||||||||||||||||||||||||
2013 | 41.43 | % | 30.39 | % | 24.22 | % | 28.58 | % | 23.74 | % | n/a | 30.27 | % | |||||||||||||||||||||||||||||||||||||||||||
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Margin improvement (bps) | 183 | 11 | (44 | ) | 11 | (140 | ) | n/a | 77 | (47 | ) | 75 | 75 | (41 | ) | 209 | n/a | 24 | ||||||||||||||||||||||||||||||||||||||
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(1) | For the reconciliation of sales to net sales and operating profit before exceptional items to operating profit see page |
(2) | Percentages and margin improvement are calculated on rounded figures. |
Notes: Information relating to the organic movement calculations
(i) | The exchange adjustments for sales, net sales, marketing and operating profit are principally in respect of the Venezuelan bolivar, the |
(ii) | In the year ended 30 June |
130
143
Business review (continued)
Volume equ. units million | Sales £ million | Net sales £ million | Marketing £ million | Operating profit £ million | ||||||||||||||||||||||||||||||||||||
Year ended 30 June 2013 | ||||||||||||||||||||||||||||||||||||||||
Acquisitions | — | — | — | — | 4 | |||||||||||||||||||||||||||||||||||
Transaction costs | — | — | — | — | 4 | |||||||||||||||||||||||||||||||||||
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Integration costs | — | — | — | — | 8 | |||||||||||||||||||||||||||||||||||
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Disposals | ||||||||||||||||||||||||||||||||||||||||
Jose Cuervo | (4.7 | ) | (379 | ) | (295 | ) | (29 | ) | (72 | ) | ||||||||||||||||||||||||||||||
Nuvo | (0.2 | ) | (14 | ) | (13 | ) | (5 | ) | 3 | |||||||||||||||||||||||||||||||
Other disposals | (0.4 | ) | (37 | ) | (31 | ) | — | (4 | ) | |||||||||||||||||||||||||||||||
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(5.3 | ) | (430 | ) | (339 | ) | (34 | ) | (73 | ) | |||||||||||||||||||||||||||||||
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Acquisitions and disposals | (5.3 | ) | (430 | ) | (339 | ) | (34 | ) | (65 | ) | ||||||||||||||||||||||||||||||
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| Volume equ. units million | Sales £ million | Net sales £ million | Marketing £ million | Operating profit £ million | |||||||||||||||||||||||||||||||
Year ended 30 June 2014 | ||||||||||||||||||||||||||||||||||||||||
Acquisitions | ||||||||||||||||||||||||||||||||||||||||
DeLeón | — | — | — | 3 | (3 | ) | ||||||||||||||||||||||||||||||||||
Transaction costs | — | — | — | — | (13 | ) | — | — | — | — | 12 | |||||||||||||||||||||||||||||
Integration costs | — | — | — | — | (12 | ) | — | — | — | — | 12 | |||||||||||||||||||||||||||||
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— | — | — | 3 | (28 | ) | — | — | — | — | 24 | ||||||||||||||||||||||||||||||
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Disposals | ||||||||||||||||||||||||||||||||||||||||
Jose Cuervo | 0.7 | 53 | 42 | — | (9 | ) | (0.7 | ) | (54 | ) | (44 | ) | — | 9 | ||||||||||||||||||||||||||
Bushmills | (0.8 | ) | (79 | ) | (60 | ) | (10 | ) | (28 | ) | ||||||||||||||||||||||||||||||
Gleneagles | — | (45 | ) | (45 | ) | (2 | ) | (2 | ) | |||||||||||||||||||||||||||||||
Other disposals | 0.2 | 9 | 7 | — | 2 | (0.1 | ) | (9 | ) | (6 | ) | — | (1 | ) | ||||||||||||||||||||||||||
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0.9 | 62 | 49 | — | (7 | ) | (1.6 | ) | (187 | ) | (155 | ) | (12 | ) | (22 | ) | |||||||||||||||||||||||||
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Acquisitions and disposals | 0.9 | 62 | 49 | 3 | (35 | ) | (1.6 | ) | (187 | ) | (155 | ) | (12 | ) | 2 | |||||||||||||||||||||||||
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Year ended 30 June 2015 | ||||||||||||||||||||||||||||||||||||||||
Acquisitions | ||||||||||||||||||||||||||||||||||||||||
United Spirits Limited | 92.7 | 2,356 | 921 | 65 | 53 | |||||||||||||||||||||||||||||||||||
DeLeón | — | 5 | 5 | 8 | (8 | ) | ||||||||||||||||||||||||||||||||||
Don Julio | 0.3 | 28 | 23 | 3 | 6 | |||||||||||||||||||||||||||||||||||
Transaction costs | — | — | — | — | (1 | ) | ||||||||||||||||||||||||||||||||||
Integration costs | — | — | — | — | (7 | ) | ||||||||||||||||||||||||||||||||||
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93.0 | 2,389 | 949 | 76 | 43 | ||||||||||||||||||||||||||||||||||||
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Disposals | ||||||||||||||||||||||||||||||||||||||||
Bushmills | 0.7 | 66 | 50 | 8 | 22 | |||||||||||||||||||||||||||||||||||
Gleneagles | — | 48 | 48 | 2 | 4 | |||||||||||||||||||||||||||||||||||
Other disposals | — | 5 | 4 | — | — | |||||||||||||||||||||||||||||||||||
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0.7 | 119 | 102 | 10 | 26 | ||||||||||||||||||||||||||||||||||||
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Acquisitions and disposals | 93.7 | 2,508 | 1,051 | 86 | 69 | |||||||||||||||||||||||||||||||||||
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144
Business review (continued)
Earnings per share before exceptional items
Earnings per share before exceptional items for the years ended 30 June 20142015 and 30 June 20132014 were as follows:
2014 £ million | 2013 £ million | |||||||
Profit attributable to equity shareholders of the parent company | 2,248 | 2,452 | ||||||
Exceptional operating items | 261 | 99 | ||||||
Non-operating items | (140 | ) | 83 | |||||
Tax in respect of exceptional operating and non-operating items | (58 | ) | (55 | ) | ||||
Discontinued operations | 83 | — | ||||||
|
|
|
| |||||
2,394 | 2,579 | |||||||
|
|
|
| |||||
Weighted average number of shares in issue (million) | 2,506 | 2,502 | ||||||
|
|
|
| |||||
Earnings per share before exceptional items (pence) | 95.5 | 103.1 | ||||||
|
|
|
|
131
Business review (continued)
2015 £ million | 2014 £ million | |||||||
Profit attributable to equity shareholders of the parent company | 2,381 | 2,248 | ||||||
Exceptional operating items attributable to equity shareholders of the parent company | 268 | 261 | ||||||
Non-operating items | (373 | ) | (140 | ) | ||||
Tax in respect of exceptional operating and non-operating items | (51 | ) | (58 | ) | ||||
Discontinued operations | — | 83 | ||||||
|
|
|
| |||||
2,225 | 2,394 | |||||||
|
|
|
| |||||
Weighted average number of shares in issue (million) | 2,505 | 2,506 | ||||||
|
|
|
| |||||
Earnings per share before exceptional items (pence) | 88.8 | 95.5 | ||||||
|
|
|
| |||||
Diluted earnings per share before exceptional items (pence) | 88.4 | 95.1 | ||||||
|
|
|
|
Free cash flow
Free cash flow reconciliation for the years ended 30 June 20142015 and 30 June 20132014 were as follows:
2014 £ million | 2013 £ million | 2015 £ million | 2014 £ million | |||||||||||||
Net cash from operating activities | 1,790 | 2,033 | 2,551 | 1,790 | ||||||||||||
Disposal of property, plant and equipment and computer software | 80 | 39 | 52 | 80 | ||||||||||||
Purchase of property, plant and equipment and computer software | (642 | ) | (636 | ) | (638 | ) | (642 | ) | ||||||||
Movements in loans and other investments | 7 | 16 | (2 | ) | 7 | |||||||||||
|
|
|
| |||||||||||||
Free cash flow | 1,235 | 1,452 | 1,963 | 1,235 | ||||||||||||
|
|
|
|
Return on average total invested capital
Calculations for the return on average total invested capital for the years ended 30 June 20142015 and 30 June 20132014 were as follows:
2014 (restated) (i) £ million | 2013 (restated) (i) £ million | 2015 £ million | 2014 £ million | |||||||||||||
Operating profit | 2,707 | 3,380 | 2,797 | 2,707 | ||||||||||||
Exceptional operating items | 427 | 99 | 269 | 427 | ||||||||||||
Profit for the year attributable to non-controlling interests | (58 | ) | (98 | ) | (87 | ) | (58 | ) | ||||||||
Share of after tax results of associates and joint ventures | 252 | 217 | 175 | 252 | ||||||||||||
Tax at the tax rate before exceptional items of 18.2% (2013 — 17.4%) | (606 | ) | (626 | ) | ||||||||||||
Tax at the tax rate before exceptional items of 18.3% (2014 — 18.2%) | (577 | ) | (606 | ) | ||||||||||||
|
|
|
| |||||||||||||
2,722 | 2,972 | 2,577 | 2,722 | |||||||||||||
|
|
|
| |||||||||||||
Average net assets (excluding post employment liabilities) | 8,300 | 8,183 | ||||||||||||||
Average net assets (excluding net post employment liabilities) | 8,910 | 8,300 | ||||||||||||||
Average non-controlling interests | (924 | ) | (1,120 | ) | (1,240 | ) | (924 | ) | ||||||||
Average net borrowings | 8,783 | 7,956 | 9,682 | 8,783 | ||||||||||||
Average integration and restructuring costs (net of tax) | 1,498 | 1,413 | 1,604 | 1,498 | ||||||||||||
Goodwill at 1 July 2004 | 1,562 | 1,562 | 1,562 | 1,562 | ||||||||||||
Adjusted in respect of acquisition of USL(ii) | 114 | — | ||||||||||||||
Adjusted in respect of acquisition of USL(i) | 493 | 114 | ||||||||||||||
|
|
|
| |||||||||||||
Average total invested capital | 19,333 | 17,994 | 21,011 | 19,333 | ||||||||||||
|
|
|
| |||||||||||||
Return on average total invested capital | 14.1 | % | 16.5 | % | 12.3 | % | 14.1 | % | ||||||||
|
|
|
|
(i) |
145
Business review (continued)
Tax rate before exceptional items
The tax rates from continuing operations before and after exceptional items for the years ended 30 June 20142015 and 30 June 20132014 were calculated as follows:
2014 £ million | 2013 £ million | |||||||
Tax before exceptional items | 546 | 562 | ||||||
Tax in respect of exceptional items | (99 | ) | (55 | ) | ||||
|
|
|
| |||||
Taxation on profit from continuing operations | 447 | 507 | ||||||
|
|
|
| |||||
Profit from continuing operations before taxation and exceptional items | 2,998 | 3,239 | ||||||
Exceptional non-operating items | 140 | (83 | ) | |||||
Exceptional operating items | (427 | ) | (99 | ) | ||||
|
|
|
| |||||
Profit before taxation | 2,711 | 3,057 | ||||||
|
|
|
| |||||
Tax rate before exceptional items | 18.2 | % | 17.4 | % | ||||
Tax rate from continuing operation after exceptional items | 16.5 | % | 16.6 | % |
132
Business review (continued)
2015 £ million | 2014 £ million | |||||||
Tax before exceptional items | 517 | 546 | ||||||
Tax in respect of exceptional items | (51 | ) | (99 | ) | ||||
|
|
|
| |||||
Taxation on profit from continuing operations | 466 | 447 | ||||||
|
|
|
| |||||
Profit from continuing operations before taxation and exceptional items | 2,829 | 2,998 | ||||||
Exceptional non-operating items | 373 | 140 | ||||||
Exceptional operating items | (269 | ) | (427 | ) | ||||
|
|
|
| |||||
Profit before taxation | 2,933 | 2,711 | ||||||
|
|
|
| |||||
Tax rate before exceptional items | 18.3 | % | 18.2 | % | ||||
Tax rate from continuing operation after exceptional items | 15.9 | % | 16.5 | % |
Organic movement calculations for the year ended 30 June 20132014
Organic movement calculations for net sales, operating profit before exceptional items and operating margin for the group for the year ended 30 June 20132014 were as follows:
£ million | £ million | |||||||
Net sales | ||||||||
2012 reported | 10,639 | |||||||
2013 reported | 11,303 | |||||||
Exchange | (60 | ) | (797 | ) | ||||
Disposals | (355 | ) | (339 | ) | ||||
|
| |||||||
2012 adjusted | 10,224 | |||||||
2013 adjusted | 10,167 | |||||||
Acquisitions and disposals | 569 | 49 | ||||||
Organic movement | 510 | 42 | ||||||
|
| |||||||
2013 reported | 11,303 | |||||||
2014 reported | 10,258 | |||||||
|
| |||||||
Organic movement % | 5 | — | ||||||
|
| |||||||
Operating profit before exceptional items | ||||||||
2012 reported | 3,148 | |||||||
2013 reported | 3,479 | |||||||
Exchange | (4 | ) | (336 | ) | ||||
Acquisitions and disposals | (18 | ) | (65 | ) | ||||
|
| |||||||
2012 adjusted | 3,126 | |||||||
2013 adjusted | 3,078 | |||||||
Acquisitions and disposals | 113 | (35 | ) | |||||
Organic movement | 240 | 91 | ||||||
|
| |||||||
2013 reported | 3,479 | |||||||
2014 reported | 3,134 | |||||||
|
| |||||||
Organic movement % | 8 | 3 | ||||||
|
| |||||||
Organic operating margin % | ||||||||
2014 | 31.04 | % | ||||||
2013 | 31.36 | % | 30.27 | % | ||||
2012 | 30.58 | % | ||||||
|
| |||||||
Margin improvement (bps) | 78 | 77 | ||||||
|
|
133146
Governance
BOARD OF DIRECTORS AND COMPANY SECRETARY
DR FRANZDr Franz B HUMER (69)Humer (70)
Chairman, Non-Executive Director (3)*
Nationality: Swiss/Austrian
Appointed Chairman July 2008 (Appointed Non-Executive Director April 2005). He will retire from the Diageo Board on 1 January 2017
Current external appointments: Member, LetterOne Health Investment Advisory Board; Non-Executive Director, CitiGroup Inc. and Chugai Pharmaceutical Co. Ltd, CitiGroup Inc., LtdEmil Frey SA and Kite Pharma Inc.; Adviser, Tamasek Holdings (Private) Limited and WISeKey SA
Previous relevant experience: Chairman, INSEAD Board of Directors; Chairman, F. Hoffman-La Roche Ltd; Chief Operating Director, Glaxo Holdings plc
IVAN MENEZES (56)Javier Ferrán (59)
Chairman Designate, Non-Executive Director (1),(3),(4)
Nationality: Spanish
Appointed Chairman Designate, Non-Executive Director July 2016
Current external appointments: Partner, Lion Capital LLP; Non-Executive Director, Associated British Foods plc, Coca-Cola European Partners, Desigual; Member, Advisory Board of Agrolimen, ESADE Business School
Previous relevant experience: President and CEO, Bacardi Limited; Non-Executive Director, SAB Miller plc
Ivan Menezes (57)
Chief Executive, Executive Director (2)*
Nationality: American/British
Appointed Chief Executive July 2013 (Appointed Executive Director July 2012)
Current external appointments: Member of the Council, Scotch Whisky Association; Non-Executive Director, Coach Inc; Member of the Global Advisory Board, Kellogg School of Management, Northwestern University
Previous Diageo roles: Chief Operating Officer; President, North America; Chairman, Diageo Asia Pacific; Chairman, Diageo Latin America and Caribbean; senior management positions, Guinness and then Diageo
Previous relevant experience: marketing and strategy roles, Nestlé, Booz Allen Hamilton Inc. and Whirlpool
DEIRDRE MAHLAN (53)Kathryn Mikells (50)
Chief Financial Officer, Executive Director (2)
Nationality: American
Appointed Chief Financial Officer and Executive Director October 2010. She will become the next President, Diageo North AmericaNovember 2015
Current external appointments: Non-Executive Director, Experian plc; Member, Main Committee of the 100The Hartford Financial Services Group, of Finance Directors
Previous Diageo roles: Deputy Chief Financial Officer; Head of Tax and TreasuryInc.
Previous relevant experience: senior finance positions, Joseph E. Seagram & Sons, Inc.;Corporate Executive Vice President and Chief Financial Officer, Xerox Corporation; Senior manager, PricewaterhouseCoopersVice President and Chief Financial Officer, ADT Corporation; Executive Vice President and Chief Financial Officer, Nalco Holding Company and UAL Corporation
LORD DAVIES OF ABERSOCH (62)Lord Davies of Abersoch (63)
Senior Non-Executive Director (1),(3),(4)*
Nationality: British
Appointed Senior Non-Executive Director and Chairman of the Remuneration Committee October 2011 (Appointed Non-Executive Director September 2010)
Current external appointments: Partner and Chairman, Corsair Capital LLC; Chairman, Jack Wills, Chime Communications PLC;Wills; Chair of Trustees, Royal Academy of Arts; Vice Chairman, LetterOne Holdings S.AS.A.
Previous relevant experience: Chairman, Chime Communications PLC; Minister for Trade, Investment and Small Business for the UK Government; Group Chief Executive, Standard Chartered PLC
PEGGYPeggy B BRUZELIUS (65)Bruzelius (66)
Non-Executive Director (1),(3),(4)
Nationality: Swedish
Appointed Non-Executive Director April 2009
Current external appointments: Chairman, Lancelot Asset Management; Non-Executive Director, Akzo Nobel NV, Axfood AB, Lundin Petroleum AB and Skandia Liv AB
Previous relevant experience: Non-Executive Director, HusgvarnaAxfood AB, Husgvarna; Syngenta AG, Scania AB; Managing Director, ABB Financial Services AB; Vice Chairman, Electrolux AB; Executive Vice President, Skandinaviska Enskilda Banken AB
134147
Governance (continued)
LAURENCE M DANON (59)
Non-Executive Director (1),(3),(4)
Nationality: French
Appointed Non-Executive Director January 2006. She will retire from the Diageo Board at the 2015 AGM
Current external appointments: Senior Advisor, Natixis Partners; Non-Executive Director, TF1
Previous relevant experience: Chairman, Leonardo & Co. SAS; Non-Executive Director, Experian Group Limited, Groupe BPCE, Lafuma SA, Plastic Omnium SA and Rhodia SA; served with the French Ministry for Industry and Energy; senior managements posts, Total Fina Elf; Chairman and Chief Executive Officer, France Printemps; Chairman, Executive Board of Edmond de Rothschild Corporate Finance
HO KWONPING (62)Ho KwonPing (63)
Non-Executive Director (1),(3),(4)
Nationality: Singaporean
Appointed Non-Executive Director October 2012
Current external appointments: Executive Chairman and Founder, Banyan Tree Holdings Limited; Chairman, Laguna Resorts & Hotels Public Company Limited, Thai Wah Food Products Public Company Limited and Singapore Management University; Member, International Council and East Asia Council of INSEAD and Global Advisory Board of Moelis & Company; Governor, London Business School; Chairman of School Advisory Committee, School of Hotel and Tourism Management of the Hong Kong Polytechnic University
Previous relevant experience: Member, Global Advisory Board of Moelis & Company; Chairman, MediaCorp Pte. Ltd, Non-Executive Director, Singapore Airlines Limited, Standard Chartered PLC and Singapore Power Limited
BETSYBetsy D HOLDEN (59)Holden (60)
Non-Executive Director (1),(3),(4)
Nationality: American
Appointed Non-Executive Director September 2009
Current external appointments: Senior Advisor, McKinsey & Company; Non-Executive Director Time Inc and Western Union Company; Member of the Board of Trustees, Duke University; Member of the Executive Committee, Kellogg School of Management Global Advisory Board
Previous relevant experience: Non-Executive Director, Catamaran Corporation, Tribune Company and MediaBank LLC; President, Global Marketing and Category Development and Co-Chief Executive Officer, Kraft Foods, Inc; Member of the North American Advisory Board, Schneider Electric
NICOLANicola S MENDELSOHN (43)Mendelsohn (44)
Non-Executive Director (1),(3),(4)
Nationality: British
Appointed Non-Executive Director September 2014
Current external appointments: Vice president, Facebook EMEA; Director, Women’s Prize for Fiction; Co-Chair, Creative Industries Council
Previous relevant experience: Executive Chairman, Karmarama; Deputy Chairman, Grey London; Board Director, BBH and Fragrance Foundation; President, Institute of Practitioners in Advertising; Board Member, CEW; Trustee, White Ribbon Alliance; Chair of the Corporate Board, Women’s Aid
PHILIPPhilip G SCOTT (61)Scott (62)
Non-Executive Director (1)*,(3),(4)
Nationality: British
Appointed Non-Executive Director and Chairman of the Audit Committee October 2007
Previous relevant experience: Non-Executive Director, Royal Bank of Scotland Group plc; President, Institute and Faculty of Actuaries; Chief Financial Officer, Aviva plc
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Governance (continued)
ALANAlan JH STEWART (55)Stewart (56)
Non-Executive Director (1),(3),(4)
Nationality: British
Appointed Non-Executive Director September 2014
Current external appointments: Chief Financial Officer, Tesco plcplc; Member of the Advisory Board, Chartered Institute of Management Accountants; Member of the Main Committee & Chairman of Pension Committee, the 100 Group of Finance Directors
Previous relevant experience: Chief Financial Officer, Marks & Spencer and AWAS; Non-Executive Director, Games Workshop plc; Group Finance Director, WH Smith plc; Chief Executive, Thomas Cook UK
PAUL D TUNNACLIFFE (53)Emma Walmsley (46)
Non-Executive Director (1),(3),(4)
Nationality: British
Appointed Non-Executive Director January 2016
Current external appointments: Chief Executive Officer and Director, GSK Consumer Healthcare Holdings Limited
Previous relevant experience: President, GlaxoSmithKline Consumer Healthcare; Senior marketing and general manager roles, L’Oreal
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Governance (continued)
David Harlock (55)
Company Secretary and General Counsel Corporate Centre
Nationality: British
Appointed Company Secretary and General Counsel Corporate Centre January 2008July 2016
Previous Diageo roles: General Counsel Corporate, Africa, Russia, Turkey; General Counsel Africa, Turkey, Russia & Eastern Europe; General Counsel M&A and Global Functions; Regional Counsel International; Counsel International
Previous relevant experience: Company Secretary, Hanson PLCHogan Lovells
Emma WalmsleyLaurence M Danon has been appointed asceased to be a Non-Executive Director with effect from 1 January 2016. She will seek election at theon 23 September 2015
Paul D Tunnacliffe ceased to be Company Secretary on 30 June 2016 AGM.
Key to committees
(1) Audit
(2) Executive (comprising senior management)
(3) Nomination
(4) Remuneration
* Chairman of committee
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Governance (continued)
EXECUTIVE COMMITTEE
NICK BLAZQUEZ (54)
President, Diageo Africa and Asia Pacific
Nationality: British
Appointed President, Diageo Africa & Asia Pacific September 2014
Previous Diageo roles: President, Diageo Africa, Eurasia and Pacific; President, Africa, Turkey, Russia, Central & Eastern Europe, Global Sales; President, Africa; Managing Director, Diageo Africa and Diageo Asia Key Markets
Previous relevant experience: managerial positions, United Distillers
DAVID CUTTER (47)David Cutter (48)
President, Global Supply and Procurement
Nationality: Australian
Appointed President, Global Supply and Procurement July 2014
Previous Diageo roles: Supply Director, International Supply Centre; President, Supply Americas; Supply Director, Asia Pacific
Previous relevant experience: leadership roles, Frito-Lay and SC Johnson
Current external appointments: Member of the Council, Scotch Whisky Association
SAM FISCHER (47)Sam Fischer (48)
President, Diageo Greater China and Asia
Nationality: Australian
Appointed President, Diageo Greater China and Asia September 2014
Previous Diageo roles: Managing Director, Diageo Greater China; Managing Director of South East Asia, Diageo Asia Pacific; General Manager, Diageo IndoChina and Vietnam
Previous relevant experience: Senior management roles across Central Europe and Indochina, Colgate Palmolive
ALBERTO GAVAZZI (49)Brian Franz (51)
Chief Productivity Officer
Nationality: American/British
Appointed Chief Productivity Officer August 2015
Previous Diageo roles: CIO and Head of GDBS, IS Services
Previous relevant experience: Senior Vice President and CIO, PepsiCo International; Commercial CIO, various CIO and management roles, General Electric
Alberto Gavazzi (50)
President, Diageo Latin America and Caribbean
Nationality: Brazilian/Italian
Appointed President, Diageo Latin America and Caribbean July 2013
Previous Diageo roles: Managing Director, West Latin America and Caribbean; Global Category Director Whiskey, Gins and Reserve Brands; General Manager Brazil, Paraguay and Uruguay; Vice President Consumer Marketing, Chicago; Marketing Director, Brazil
Previous relevant experience: Colgate-Palmolive;Colgate Palmolive; Unilever PLC
JOHN KENNEDY (50)John Kennedy (51)
President, Diageo Europe, Russia and Turkey
Nationality: American
Appointed President, Diageo Europe, Russia and Turkey July 2015
Previous Diageo roles: President, Europe; President,Europe and Western Europe; Chief Operating Officer, Western Europe; Marketing Director, Australia; General Manager for Innovation, North America; President and Chief Executive Officer, Diageo Canada; Managing Director, Diageo Ireland
Previous relevant experience: brand management roles, GlaxoSmithKline and Quaker Oats
ANAND KRIPALU (56)Anand Kripalu (57)
CEO, United Spirits Limited
Nationality: Indian
Appointed CEO, United Spirits Limited September 2014
Previous Diageo roles: CEO-designate, United Spirits Limited
Previous relevant experience: variousVarious management roles at Mondelēz International, Cadbury and Unilever
Current external appointments: Non-Executive Director, Marico
Charlotte Lambkin (44)
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Governance (continued)
CHARLOTTE LAMBKIN (43)
Corporate Relations Director
Nationality: British
Appointed Corporate Relations Director January 2014
Previous relevant experience: Group Communications Director, BAE Systems; Director, Bell Pottinger Corporate
& Financial
ANNA MANZ (42)
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Governance (continued)
Deirdre Mahlan (54)
President, Diageo North America
Nationality: American
Appointed President, Diageo North America December 2015
Current external appointments: Non-Executive Director, Experian plc
Previous Diageo roles: Chief Financial Officer and Executive Director; Deputy Chief Financial Officer; Head of Tax and Treasury
Previous relevant experience: Member, Main Committee of the 100 Group of Finance Directors; senior finance positions, Joseph E. Seagram & Sons, Inc.; Senior manager, PricewaterhouseCoopers
Anna Manz (43)
Group Strategy Director
Nationality: British
Appointed Group Strategy Director July 20132013. She will be leaving Diageo on 30 September 2016
Current external appointments: Non-Executive Director, ITV PLC
Previous Diageo roles: Regional Finance Director, Diageo Asia Pacific; Group Treasurer; Finance Director, Global Marketing, Sales and Innovation; Finance Director Ireland; Vice President Finance, Diageo North America
Previous relevant experience: Unilever PLC and ICI PLC
SIOBHAN MORIARTY (53)Siobhan Moriarty (54)
General Counsel
Nationality: Irish
Appointed General Counsel July 2013
Previous Diageo roles: General Counsel Designate; Corporate M&A Counsel; Regional Counsel Ireland; General Counsel Europe
Previous relevant experience: various positions in law firm private practice, Dublin and London
JOHN O’KEEFFE (43)Mairéad Nayager (41)
Human Resources Director
Nationality: Irish
Appointed Human Resources Director 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 (IBEC)
John O’Keeffe (44)
President, Diageo Africa
Nationality: Irish
Appointed President Diageo Africa July 2015
Previous Diageo roles: CEO and Managing Director, Guinness Nigeria; Global Head of Innovation and Beer and Baileys; Managing Director Russia and Eastern Europe; various management and marketing positions, Diageo
SYL SALLER (58)Syl Saller (59)
Chief Marketing Officer
Nationality: American/British
Appointed Chief Marketing Officer July 2013
Previous Diageo roles: Global Innovation Director; Marketing Director, Diageo Great Britain
Previous relevant experience: brand management and marketing roles, Allied Domecq PLC, Gillette Company and Holson Burnes Group, Inc; Non-Executive Director, Dominos Pizza Group plc
LARRY SCHWARTZ (62)
President, Diageo North America
Nationality:Nick Blazquez American
Appointed President, Diageo North America March 2012. He will retire from Diageo at the end of the calendar year
Previous Diageo roles: President, Diageo USA; President, Joseph E. Seagram & Sons
Previous relevant experience: senior management positions, Joseph E. Seagram & Sons
LEANNE WOOD (42)
Human Resources Director
Nationality: British
Appointed Human Resources Director July 2013
Previous Diageo roles: Global Talent and Organisational Effectiveness Director; Human Resources Director, Africa; Human Resources Director, Ireland; Human Resources Director, Asia Venture Markets
Previous relevant experience: strategy and finance positions, Allied Domecq PLC and LEK Consulting
Andy Fennell, formerly President, Diageo Africa and Asia Pacific, ceased to be an Executive Committee member on 30 June 2015.2016.Gilbert GhostineLarry Schwartz, formerly President, Diageo India and Greater China and Chief Development Officer,North America, ceased to be an Executive Committee member on 30 September 2014.31 December 2015.Leanne Wood, formerly Human Resources Director, ceased to be an Executive Committee member on 5 October 2015.
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Governance (continued)
Letter from the Chairman of the Board of Directors and the Company Secretary
Dear Shareholder
On behalf of the Board, we are pleased to present the corporate governance report for the year ended 30 June 2015.2016.
The purposeBoards of this report is to explain how Diageo is directed and controlled by your Board and to summariseDirectors are ultimately responsible for the corporate governance activityof their companies, that has taken place duringis to say, the year.
In addition to its overall responsibility for corporate governance,way in which companies are directed and controlled. The responsibilities of the Board’s duties includeBoard include: setting the company’s strategystrategic aims and valuesits values; providing the leadership to put them into effect; supervising and overseeing and supportingconstructively challenging management in theirwho are responsible for the day to day operational running of the business.business; and reporting to shareholders on their stewardship. We continue to believe that yourDiageo’s Board demonstrateshas the appropriate behavioursdiversity and has the diversity,balance of skills, experience, independence and knowledge of the businesscompany to enable it to successfully discharge these responsibilities effectively. The description in this report of Diageo’s corporate governance structures and procedures and of the work of the Board, its duties.committees and the Executive Committee is intended to give a sense of how this is carried out.
The principal corporate governance rules applying to Diageo (as a UK company listed on the London Stock Exchange (LSE)) for the year ended 30 June 20152016 are contained in The UK Corporate Governance Code as updated and published by the Financial Reporting Council (FRC) in September 20122014 (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.
Throughout the year, Diageo has complied with all relevant provisions set out in the Code (with the exception that two directors were unable to attend the 2015 AGM), which is publicly available under the heading ‘Corporate Governance’ at the website of the FRC, www.frc.org.uk.
Diageo must also comply with corporate governance rules contained in the FCA Disclosure Guidance and Transparency Rules as well as certain related provisions in the Companies Act 2006 (the Act).
As well as being subject to UK legislation and practice, as a company listed on the New York Stock Exchange (NYSE), Diageo is subject to the listing requirements of the NYSE and the rules of the Securities and Exchange Commission (SEC). Compliance with the provisions of the US Sarbanes-Oxley Act of 2002 (SOX), as it applies to foreign private issuers, is continually monitored. As Diageo follows UK corporate governance practice, differences from the NYSE corporate governance standards are summarised in Diageo’s 20-F filing and on our website at www.diageo.com/en-row/ourbusiness/aboutus/corporategovernance.
Dr Franz B Humer
Chairman
Paul D TunnacliffeDavid Harlock
Company Secretary
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Governance (continued)
BOARD OF DIRECTORS
Membership of the Board and Board Committees
The Chairman, Senior Non-Executive Director and other members of the Board, Audit Committee, Nomination Committee and Remuneration Committee are as set out in this Annual Report in the biographies of Directors and members of the Executive Committee.
There is a clear separation of the roles of the Chairman and the Chief Executive. The Chairman, Dr Franz B Humer, is responsible for the running of the Board and for ensuring all Directors are fully informed of matters, sufficient to make informed judgements. As Chief Executive, Ivan Menezes has responsibility for implementing the strategy agreed by the Board and for managing the company and the group. He is supported in this role by the Executive Committee.
The Non-Executive Directors, all of whom the Board has determined are independent, are experienced and influential individuals from a range of industries, backgrounds and countries. No individual or group dominates the Board’s decision-making processes.
On 19 May 2016, it was announced that Javier Ferrán would be appointed to the Board on 22 July 2016 and would succeed Dr Humer as Chairman on 1 January 2017.
A summary of the terms and conditions of appointment of the Non-Executive Directors is available at
www.diageo.com/en-row/ourbusiness/aboutus/corporategovernance.
Activities and 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 2015 and is available at
www.diageo.com/en-row/ourbusiness/aboutus/corporategovernance.
The Board has agreed an approach and adopted guidelines for dealing with conflicts of interest and responsibility for authorising conflicts of interest is included in the schedule of matters reserved for the Board. The Board confirmed that it was aware of no 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.
In order to fulfil their duties, procedures are in place for Directors to seek both independent advice and the advice and services of the Company Secretary who is responsible for advising the Board, through the Chairman, on all governance matters. The Non-Executive Directors meet without the Chairman present, and also meet with the Chairman without management present, on a regular basis.
The terms of reference of Board Committees are available at www.diageo.com/en-row/ourbusiness/aboutus/corporategovernance.
Induction, training and business engagement
There is a formal induction programme for new Directors, which was followed during the year for Nicola Mendelsohn and Alan Stewart.Emma Walmsley. This included meeting with Executive Committee members and other senior executives individually and visiting a number of operations and sites around the Supply operations in Scotland and the customer collaboration centre in the UK.group.
Following the initial induction for Non-Executive Directors, a continuing understanding of the business is developed through appropriate business engagements. Visits to customers, engagements with employees, and brand events were arranged during the year.
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 with the opportunity, and encouraged, to attend regular training to ensure they are kept up to date on relevant legal developments or changes and best practice and changing commercial and other risks.
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Governance (continued)
Performance evaluation
As reported lastDuring the year an externally facilitated evaluation of the Board’s effectiveness, including the effectiveness of the Audit Committee, the Nomination Committee and the Remuneration andCommittee was undertaken internally by way of written questionnaire followed by the Nomination Committees, continued intoChairman of the subsequent financial year. The external facilitator, Wickland Westcott, has no other connectionBoard meeting individually with the company.all Directors.
A report was prepared and presented, with the conclusion that the Board and its Committees continued to operate effectively, meeting the requirements and spirit of the Code. The climate within the Board, its capability and the diversity of Board members, were again seen as significant factors which contributed to the Board’s effectiveness during the year.
There were, nevertheless, areas identified as being of a particular focus: executive engagement, aimed at building the relationship between the Board and the new executive team, with an aim forteam; understanding consumer insights and trends and the competitive performance; and investor relations, including the communication strategy and execution. A further objective was succession to the Board, in particular finding a successor to continue to support and mentor the team; ensuring sufficient time was allocated to undertake scenario planning, to generate insight and advantage; the understanding of and the deepening of the Board’s relationshipsChairman, which has been successfully executed, as highlighted above, with the Company’s shareholders;appointment of Javier Ferrán to the Board.
In conclusion, and on emerging market volatility, particularly the markets where there is the potential of significant external volatility or risks.
Withoutwithout being complacent, the Board was considered to be in good shape to deal with thesethe areas identified as being of particular focus and to support management in its aspirations to deliver the Performance Ambition.
A similar, internal, exercise building on this evaluation and covering the evaluation of the Board and its Committees started during the year and has continued intowill start in the subsequent financial year. A report will be prepared for the Board for consideration at its next meeting.to consider. The results of the evaluation will be reported in next year’s report.
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 demonstrate commitment to their roles. The senior Non-Executive Director led a performance evaluation of the Chairman. Feedback was discussed in a meeting with the Executive and Non-Executive Directors and then privately with the Chairman.
It is the Board’s intention to continue to review annually its performance and that of its committees and individual directors. It is anticipated that the evaluation in 2017 will be externally facilitated and the results reported in a subsequent Annual Report.
Nomination Committee
Role of the Nomination Committee
The Nomination Committee is responsible for keeping under review the composition of the Board and succession to it, and succession planning for senior leadership positions. It makes recommendations to the Board concerning appointments to the Board.
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 every year.
Activities of the Nomination Committee
The principal activities of the Nomination Committee during the year were: the consideration of potential new Non-Executive Directors, in light of the review of the structure and composition of the Board;Board and, in particular, the focus on finding a successor to the Chairman; the review of individual Director performance; a review of the Executive Committee membership and succession planning for it and for senior leadership positions, in addition to a review of diversity within the group.
In respect of the appointment of Emma Walmsley the recruitment process included the development of a candidate profile and the engagement of MWM Consulting, a professional search agency (which has no other connection with the Company) specialising in the recruitment of high calibre Non-Executive Directors. Reports on potential appointees were provided to the committee, which, after careful consideration, made a recommendation to the Board.
A similar but more focused search was undertaken for a successor to the Chairman, with an alternative professional search agency (JCA Group) used (again with no other connection with the Company). This search resulted in the Nomination Committee meeting on a number of separate occasions before making a recommendation to the Board that Javier Ferrán be appointed as the designated successor to the Chairman.
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Governance (continued)
Diversity
Diageo supports diversity within its Board of Directors, including gender diversity. Further information is given in the section of this Annual Report on sustainability &and responsibility, our people.
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Governance (continued)
Remuneration Committee
Role of the Remuneration Committee
The role of the Remuneration Committee and details of how the company applies the principles of the Code in respect of Directors’ remuneration are set out in the directors’ remunerationDirectors’ Remuneration report.
The Chairman and the Chief Executive may, by invitation, attend Remuneration Committee meetings, except when their own remuneration is discussed. No Director is involved in determining his or her own remuneration.
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 components of the business: North America, Europe, Africa, Latin America and Caribbean, Asia Pacific, International Supply Centre and the global functions.Corporate and other.
The Executive Committee focuses its time and agenda to align with the Performance Ambition and how to achieve theDiageo’s financial and non-financial performance imperatives.objectives. Performance metrics have been developed to measure progress and a further designated focus is on the company’s reputation. In support, monthly performance delivery calls, involving the senior leadership group, focus on progress against the six performance drivers.
To support the market visits made by the presidents in the ordinary course of their business, a small group led by the Chief Executive makes regular market visits focused on the execution of strategy and designed to assist in continuing the development of strategy and in the delivery of performance against the Performance Ambition.
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
www.diageo.com/en-row/ourbusiness/aboutus/corporategovernance.
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 2015,2016, 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, summarizedsummarised 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, summarizedsummarised 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.
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Governance (continued)
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 financial statements were approved and accords with the guidance issued by the Financial Reporting Council in October 2005, ‘Internal Control: RevisedSeptember 2014, Guidance for Directors on Risk management, Internal Control and related Financial and Business Reporting. The Board confirms that, through the Combined Code’, also known asactivities of the Turnbull guidance (as amended byAudit Committee described below, a robust assessment of the Flint review).principal risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity has been carried out. These risks and mitigations are set out above in the Risk factors section of this Annual Report.
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 (which was considered and recommended to the Board by both the Audit & Risk Committee and the Audit Committee). In accordance with the Code, the Board has also considered the company’s longer term viability, based on a robust assessment of its principal risks. This was done through the work of the Audit Committee which recommended the viability statement required pursuant to UK Rules (the Viability Statement) to the Board.
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 preparation of consolidated accounts. Further, a review of the consolidated financial statements is completed by management to ensure that the financial position and results of the group are appropriately reflected therein.
Compliance and ethics programme
Diageo is committed to conducting its business responsibly and in accordance with all laws and regulations to which its business activities are subject. We hold ourselves to the principles in our Code of Business Conduct, which is embedded through a comprehensive training and education programme for all employees.
Our Code of Business Conduct, an updated version of which was reviewed and updatedlaunched during the year in preparation for launch in the next financial year, and other Diageo global policies are available at www.diageo.com/en-row/ourbusiness/aboutus/corporategovernance.
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Governance (continued)
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, presidents and other identifiable persons in the group, including those performing senior accounting and controller functions. No amendments to, or waivers in respect of, the code of ethics were made during the year.
The full text of the code of ethics is available at www.diageo.com/en-row/ourbusiness/aboutus/corporategovernance.
Both the Audit & Risk Committee and the Audit Committee regularly review the strategy and operation of the compliance and ethics programme through the year.
Further information is given in the section of this Annual Report on sustainability &and responsibility, governance &and ethics.
Relations with shareholders
The Board’s primary contact with institutional shareholders is through the Chief Executive and Chief Financial Officer. The Chief Executive and Chief Financial Officer are supported by the investor relations department, who are in regular contact with institutional shareholders and sell-side analysts. A monthly investor relations report, including coverage of the company by sell-side analysts, is circulated to the Board.
The Board also ensures that all Directors develop an understanding of the views of major institutional shareholders through an 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 and the chairman of the Remuneration Committee. Reports on any meetings are made to the Board.
Private shareholders are invited to write to the chairman or any other Director and express their views on any issues of concern at any time and the AGM provides an opportunity for private shareholders to put their questions in person.
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Governance (continued)
Political donations
TheDuring the year, Diageo Great Britain Limited (a wholly owned subsidiary of the Company) helped, with others, defray the costs of an economists’ dialogue (and associated report) hosted by the independent Centre for European Reform think-tank, in the EU referendum context. These costs totalled £2,500 (2015: nil). During the year also, Diageo Germany GmbH (a wholly owned subsidiary of the Company) helped, with others, to support a dialogue between key German media and influencers called ‘CDU Media Night’ hosted by the political party CDU. These costs totalled approximately £1,000 (2015: nil). Otherwise, 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 £0.5£0.4 million during the year (2014 – £0.4(2015: £0.5 million).
These contributions were made almost exclusively to federal and state candidates and committees in North America (consistent with applicable laws), where it is common practice to make political contributions. No particular political persuasion was supported and contributions were made with the aim of promoting a better understanding of the group and its views on commercial matters, as well as a generally improved business environment.
Going concern
The Directors confirm that, after making appropriate enquiries, they have reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future.existence. Accordingly, they continue to adopt the going concern basis in preparing the financial statements. Further information on going concern is given in this Annual Report under note 1 Accounting information and policies – going concern. Although not assessed over the same period as the going concern, the viability of the group has been assessed in the Viability Statement.
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 control over the group’s financial reporting.
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Governance (continued)
Diageo’s internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the EU and IFRS as issued by the International Accounting Standards Board (IASB); provide reasonable assurance that receipts and expenditures are made only in accordance with authorisation of management and the directors of the company; and provide reasonable assurance regarding prevention or timely detection of any unauthorised acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Management has assessed the effectiveness of Diageo’s internal control over financial reporting (as defined in Rules 13(a)-13(f) and 15(d)-15(f) under the US Securities Exchange Act of 1934) based on the framework in ‘Internal Control – Integrated Framework’, issued by the Committee of Sponsoring Organisations of the Treadway Commission (COSO) in 2013. Based on this assessment, management concluded that, as at 30 June 2015,2016, 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.
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. KPMG
PricewaterhouseCoopers LLP (PwC), 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 page 247197 of this document.
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.
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Governance (continued)
Responsibility statement
Each of the Directors, whose names are set out in the Board of Directors and Executive Committee section of this Annual Report, confirms that to the best of his or her knowledge:
The responsibility statement was approved by the Board of Directors on 2927 July 2015.2016.
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Governance (continued)
New York Stock Exchange 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.
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Directors’ attendance record at the AGM, scheduled Board meetings and Board committee meetings, for the year ended 30 June 20152016 was as set out in the table below. 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.
Annual General Meeting | Board (maximum 6)(iii) | Audit Committee (maximum 4) | Nomination Committee (maximum | Remuneration Committee (maximum | ||||||||||||||||||||
Dr Franz B Humer | ü | 6/6 | 4/4 | (i) | 3/3 | 4/4 | (i) | |||||||||||||||||
Ivan Menezes | ü | 6/6 | 2/2 | (ii) | 3/3 | (i) | 4/4 | (ii) | ||||||||||||||||
Deirdre Mahlan | ü | (i) | n/a | | n/a | |||||||||||||||||||
Kathryn Mikells | n/a | 3/3 | 3/3 | (i) | n/a | n/a | ||||||||||||||||||
Lord Davies | ü | 6/6 | 4/4 | |||||||||||||||||||||
| ||||||||||||||||||||||||
| ü | 6/6 | 4/4 | 4/4 | ||||||||||||||||||||
Laurence Danon | × | 1/2 | 1/1 | 1/2 | 1/1 | |||||||||||||||||||
Betsy Holden | ü | 6/6 | 4/4 | 4/4 | ||||||||||||||||||||
Ho KwonPing | ü | 6/6 | 4/4 | |||||||||||||||||||||
Nicola Mendelsohn | × | 5/7 | 4/ | |||||||||||||||||||||
Philip Scott | ü | 6/6 | 4/4 | 4/4 | ||||||||||||||||||||
Alan Stewart | ü | 7/7 | 4/4 | |||||||||||||||||||||
Emma Walmsley | n/a | 2/2 | 2/2 | 3/3 | 2/2 |
(i) | Attended by invitation. |
(ii) | Attended by invitation, for part only. |
(iii) |
(iv) | Four meetings of the Nomination Committee were held |
Where Non-Executive Directors were unable to attend a meeting they gave their views to the Chairman of the respective meetings ahead of the meetings being held. Nicola Mendelsohn was unable to attend the 2014 AGM as a result of another engagement which was arranged prior to her appointment.
Sub-Committee meetings of the Audit Committee were also held involving P G Scott, P B Bruzelius and A JH Stewart.
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Letter from the Chairman of the Audit Committee
Dear Shareholder
On behalf of the Audit Committee, I am pleased to present its report for the year ended 30 June 2015.2016.
The purpose of this report is to describe how the Committee has carried out its responsibilities during the year.
In overview, the role of the Audit Committee is to monitor and review: the integrity of the company’s financial statements; internal control and risk management; audit and risk programmes; business conduct and ethics; ‘whistleblowing’; and the appointment of the external auditor.
A key project undertaken byThe work of the Committee during the year was the tender for the external audit, as flaggedincluded various matters referred to in my report last year. The tender has been completed and PricewaterhouseCoopers LLP (PwC) were selected. The appointment of PwC will take effect for Diageo’s financial year ending 30 June 2016, subject to approval at the company’s September 2015 AGM. KPMG has been the group’s auditor since 1997 and, on behalf of the Audit Committee, I take this opportunity to thank KPMG for their unstinting professionalism and for the insight that they have brought and the value that they have added to the business during their tenure.
year’s report. The Committee took note ofoversaw compliance with both the publication in September 2014 of an updated version of the UK Corporate Governance Code (Code) and(notably the requirementrequirements for a ‘viability statement’ contained therein. As stipulated, we propose to apply the requirements of the updated Code for Diageo’s year ending 30 June 2016Viability Statement and we have begun the thought processincreased disclosure on risk) and preparation to enable us to do so. Again in September 2014, the Financial Reporting Council published itsCouncil’s new ‘Guidance on Risk management, Internal Control and related Financial and Business Reporting’ (replacing(which replaced the current ‘Turnbull’ and other guidance). This is also applicable to Diageo’s financial year ending in 2016 andIn addition the Committee will overseeoversaw the necessary compliance.transition to the new auditors, PricewaterhouseCoopers LLP (PwC).
In discharging its duties, the Audit Committee seeks to balance independent oversight of the matters within its remit with providing support and guidance to management. I remain confident that the Committee, supported by members of senior management and the external auditors, has carried out its duties in the year under review, effectively and to a high standard.
Philip G Scott
Chairman of the Audit Committee
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REPORT OF THE AUDIT COMMITTEE
Role of the Audit Committee
The responsibilities of the Audit Committee include:is responsible for :
(i) | monitoring the integrity of the financial statements, including a review of the significant financial reporting judgements contained in them; |
(ii) | reviewing the effectiveness of the group’s internal control and risk management and of control over financial; |
(iii) | monitoring and reviewing the effectiveness of the global audit and risk function, including reviewing the programme of work undertaken by that function; |
(iv) | reviewing the group’s policies and practices concerning business conduct and ethics, including whistleblowing; |
(v) | overseeing the group’s overall approach to securing compliance with laws, regulations and company policies in areas of risk; and |
(vi) | 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
www.diageo.com/en-row/ourbusiness/aboutus/corporategovernance. Key elements of the role of the committee and work carried out during the year are set out as follows.
Financial statements
During the year, the Audit Committee met four times (and a sub-committee met twice)once) and reviewed the annual reports and associated preliminary year end results announcement, focusing on key areas of judgement and complexity, critical accounting policies, provisioning and any changes required in these areas or policies. In addition, the Audit Committee reviewed the interim results announcement, which included the interim financial statements and oversaw the company’s interim management results and dealt withtransition to the tender for the external audit.new auditors, PwC.
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 preparation of consolidated accounts. A review of the consolidated financial statements is completed by management (through the work of its filings assurance committeeFilings Assurance Committee (FAC)) to ensure that the financial position and results of the group are appropriately reflected therein. The Audit Committee reviewed the work of the FAC and a report on the conclusions of the FAC process was provided to the Audit Committee by the Chief Financial Officer.
Significant issues and judgements that were considered in respect of the 20152016 financial statements were as follows. These include the matters relating to risks disclosed in the UK external auditor’s report.
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As part of its review of the Annual Report, the Committeecommittee considered whether the report is ‘fair, balanced and understandable’ (noting the Code’s new reference to ‘position’ as well as ‘performance, business model and strategy’). On the basis of this work, the Audit Committee recommended to the Board that it could make the required statement that the Annual Report is ‘fair, balanced and understandable’.
Internal control and risk management; audit and risk programme; business conduct and ethics (including ‘whistleblowing’)
At each of its meetings, the Audit Committee reviewed detailed reports from the heads of the Global Risk & Compliance (GRC) and Global Audit & Risk (GAR) teams (including coverage of the areas mentioned in the title of this section) and had sight of the minutes of meetings of management’s Audit & Risk Committee. A key focus for the work of both GRC and GAR during the year and their reporting to the committee, continued to be a review of recent acquisitions. The Committee in turn were thus able to keep under review the development of the controls and compliance framework in acquired companies, bearing in mind the appropriate level for those that were associates during the year rather than wholly owned subsidiaries.companies. The committeeCommittee also received regular updates from the group general counsel on significant litigation and from the head of tax on the group’s tax profile and key issues.
The GRC reporting included a consideration of key risks and related mitigations, including those set out in the section of this Annual Report dealing with principal risks.mitigations. 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 (this was considered also by the Audit & Risk Committee). The Board agreed this recommendation.
Through the activities of the Audit Committee described in this report 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.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.
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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 financial year ended 30 June 2016.
The Audit Committee assessedassesses the ongoing effectiveness and quality of the external auditor and audit process on the basis of meetings and a questionnaire-based internal review with the finance team and other senior executives. The outcome ofGiven that the year under review was PwC’s first in office (following a tender last year), the assessment was positive.will be carried out later in 2016.
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 2015.2016. The review took into consideration the new regulations on non-audit services. Under this policy, the provision of any non-audit service must be approved by the Audit Committee, unless the proposed service is both expected to cost less than £250,000 and also falls within one of a number of service categories which the Audit Committee has pre-approved. All services relevant to taxation require Audit Committee approval. Fees paid to the auditor for audit, audit related and other services are analysed in the notes to the consolidated financial statements. The nature and level of all services provided by the external auditor is a factor taken into account by the Audit Committee when it reviews annually the independence of the external auditor.
Change in registrant’s certifying accountant
During the year, in light of the requirements of the Code and other recent changes to the regulatory framework, the Committee undertook a tender for the external audit. KPMG (initially through KPMG Audit Plc up to fiscal 2013 and through KPMG LLP for fiscal 2014 and 2015) had been the Group’s auditor since 1997 and the audit had last been tendered in 1999. Since that time, there had been four different lead audit partners, in accordance with regulatory requirements and KPMG’s own guidance on independence, with the most recent change being for the year ended 30 June 2013. The result of the tender was that, on the recommendation of the Committee, the Board selected PricewaterhouseCoopers LLP (PwC). Subject to approval at the company’s AGM on 23 September 2015, the appointment of PwC as auditor will take effect for Diageo’s financial year ending 30 June 2016.
During the years ended:
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(1) neither KPMG Audit plc (the former KPMG auditing entity, as explained in the 2014 Form 20-F) nor KPMG LLP (together, “KPMG”), respectively, has issued any reports on the financial statements of the company or on the effectiveness of internal control over financial reporting that contained an adverse opinion or a disclaimer of opinion, nor were the auditors’ reports of KPMG qualified or modified as to uncertainty, audit scope, or accounting principles, (2) there has not been any disagreement over any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreement if not resolved to KPMG’s satisfaction would have caused it to make reference to the subject matter of the disagreement in connection with its auditors’ reports, or any “reportable event” as described in Item 16F(a)(1)(v) of Form 20-F.
The company has provided each KPMG entity with a copy of the foregoing disclosure and has requested that each of them furnish the company with a letter addressed to the Securities and Exchange Commission (the “SEC”) stating whether it agrees with such disclosure and, if not, stating the respects in which it does not agree. Copies of KPMG’s letters, dated 11 August 2015, in which such firms stated that they agree with such disclosure, are filed herewith as Exhibits 15.3 and 15.4.
‘Financial expert’ and other attendees
For the purposes of the Code and the relevant rule under SOX, section 407, the Board has determined that Philip Scott is independent and may be regarded as an Audit Committee financial expert.
The Chairman, the Chief Financial Officer, the group general counsel the group financial controller, the head of GAR, the GRC director, the group chief accountant and the external auditor regularly attend meetings of the committee.
The Audit Committee met privately with the external auditor and with the head of global audit and risk as appropriate.
Training and deep dives
During the year, the Audit Committee had a risk review and training sessions,session, presented by senior executives, on: brand assurance; Eurozone risk; catastrophic risk; and an update on cyber risk.data protection. In addition, as part of a Board meeting, committeeCommittee members had a training sessionpresentation from senior management on the group’s new Risk Management Standard.priorities and challenges of the Europe and GB businesses. The Committee concluded at the time that it was satisfied with the company’sCompany’s position on these matters but that they would be kept under review.
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DIRECTORS’ REMUNERATION REPORT
Annual statement by the Chairman of the Remuneration Committee
Dear Shareholder
As Chairman of the Remuneration Committee, I am pleased to present the Directors’directors’ remuneration report for the year ended 30 June 2015.2016. This report complies with the UK executive remuneration reporting guidelinesDirectors’ Remuneration Reporting Regulations 2013 and contains:
There have been no changes to the Directors’ remuneration policy, as approved by shareholders at the 2014 AGM, and it is reproduced in full for both ease of reference and to provide context to the decisions taken by the Committee during the year. The annual remuneration report will be put forward for your consideration and approval by advisory vote at the AGM on 2321 September 2015.
Diageo’s remuneration principles
The principles underpinning executive remuneration remain fundamentally unchanged, with sustainable performance and long termlong-term value creation for shareholders at the heart of our remuneration policies and practices:
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Focus and highlights in 20152016
The Committee continued its focus on:
The Committee undertook a comprehensive review of total remuneration for Executive Directors and Executive Committee members ahead of the 20152016 annual salary review, and, supported by the Committee’s third party remuneration advisers, Kepler Associates (a brand of Mercer), were satisfied that the shape and levels of our remuneration practice are appropriately positioned against those of comparator companies of similar size and global scope.
The Chief Executive, Ivan Menezes, requested that the company contribution to his retirement benefit plan be reduced from 40% to 30% of salary. This change was implemented on 1 July 2016. There was no compensatory payment or benefit in exchange for this reduction in contribution.
On 9 November 2015, Kathryn Mikells joined the company and was appointed Chief Financial Officer. In accordance with the approved remuneration policy, the Committee agreed a remuneration package that was in line with current practice at the Executive Committee level in terms of the mix of fixed and variable remuneration and also appropriately positioned against the external market.
During the year, the Committee also reviewed and increased the Chairman’s fee and, at thefrom £500,000 to £600,000 per annum effective
1 January 2016, following five successive years of no increases. The Chairman’s request, recommended no increase, as was the case at the last review in December 2013. As agreed with the Chairman, thefee is appropriately positioned against our comparator group of FTSE30 companies excluding financial services. The next review is scheduled for December 2016, subject2017. Dr Franz B Humer will step down as Chairman of the Board on 1 January 2017 and will be succeeded by Javier Ferrán, who joined the Board on 22 July 2016. Javier Ferrán’s fee from 1 January 2017 will be £600,000 per annum.
Following a comprehensive review of competitive market data, the Board also reviewed the fees for Non-Executive Directors and increased the basic fee from £84,000 to £87,000 per annum and the additional Senior Non-Executive Director fee from £20,000 to £25,000 per annum, also effective from 1 January 2016.
The clawback provisions in respect of annual incentive and long-term incentive awards to the Chairman’s letter of appointment.
The Committee has also approved the extension of the clawback provisions that currently apply to Executive Directors for their annual and long term incentiveshave now been extended to the otherall members of the Executive Committee, in addition to the existing malus provisions that apply to everyoneall participants under the Diageo Long TermLong-Term Incentive Plan.
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Plan, as approved by the Committee last year.
Reward in 20152016 at a glance
As a reflection of the company’s performance against very stretching performance targets in the context of challenging market conditions (see key performance indicators on pages 28-31), total variable pay to the Executive Directors in respect of the year ended 30 June 2015 is lower than in respect of the year ended 30 June 2014.
Base salary | ||
Allowances and benefits | Unchanged from last year | |
Retirement benefits | Unchanged from last year | |
Annual incentive | ||
As a reflection of the company’s delivery of a good set of results in the year (see key performance indicators on pages 23-27), total variable pay to the Executive Directors in respect of the year ended 30 June 2016 is higher than the year ended 30 June 2015.
Over the period 1 July 20122013 to 30 June 20152016 (the performance period for long-term incentive awards that vest this year’s long term incentive plan)year in September 2016), Diageo’s share price grew by 11%7.9%, from 16581933.5 pence to 18412086.5 pence, and the company paid a total dividend of 147.5160.0 pence per share. Dividend distribution to shareholders in the year ended 30 June 20152016 was increased by 9%7.6% compared to the previous year.
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Planned for 20162017
Looking ahead to the year ending 30 June 2016,2017, we will continue to operate executive remuneration arrangements in line with the approved remuneration policy. No changes are proposed to the design of the annual or long-term incentive plan for the year ahead.
We will be reviewing our remuneration policy and to maintain an active and positive dialogueactively engaging with shareholders and their advisory bodies. We anticipatebodies in advance of putting the policy to shareholder vote next at the 2017 AGM.
The Committee has refined the design of the Annual Incentive Plan (AIP) to apply for the year ending 30 June 2016. To drive a sustained improvement in the efficient conversion of profits into cash, the weighting on operating cash conversion will be increased from 25% to 30% of the maximum opportunity and there will be a subsequent reduction in the weighting on net sales growth and profit growth from 30% and 35% respectively to 25% on each. These changes create a greater focus on the generation of cash whilst maintaining a significant incentive to increase net sales and profit. The remaining 20% will be based on individual business objectives (IBOs) to ensure focus on the delivery of defined quantitative measures relating to the individual’s key areas of responsibility.
The Committee has also reviewed the performance measures under the Diageo Long Term Incentive Plan (DLTIP) with the result that the operating margin measure will be replaced by a measure based on cumulative free cash flow. The intention is that this will incentivise management to deliver efficiency in capital expenditure and working capital, which will in turn create greater value for shareholders. This change will take effect for awards made from September 2015 onwards. The weightings will be retained at one third of the performance share element of the DLTIP based on cumulative free cash flow alongside one third on net sales value (NSV) growth and one third on TSR. For share options, the measure that will continue to apply is adjusted eps growth.
As you read our remuneration policy and annual remuneration report on the following pages, I hope it is clear how the Committee’s decisions support the business strategy and the delivery of Diageo’s performance ambition.
We were very pleased to receive a very strong vote in favour of both our remuneration policy and report last year. I highly value the direct engagement and feedback from our shareholders and their representative bodies on Diageo’s remuneration policy and look forward to welcoming you and receiving your support again at the AGM this year.
Lord Davies of Abersoch
Senior independent Non-Executive Director and
Chairman of the Remuneration Committee
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DIRECTORS’ REMUNERATION POLICY
This section of the report sets out the policy for Executive Directors’ remuneration, in accordance with section 439A of the Companies Act 2006.remuneration. The policy was put to shareholders for approval in a binding vote at the AGM in 2014, in accordance with section 439A of the Companies Act 2006, and formally came into effect from 18 September 2014, the date of the AGM. The policy section of the report below is as disclosed in the 2014 Directors’ remuneration report,Remuneration Report, with the exception of the reference to the number of employees across Diageo, and a minor addition to the DLTIP section of the policy table to reflect the clarification note released following publication of the 2014 Directors’ Remuneration Report, updates to the illustrations of remuneration report.policy charts to reflect projected remuneration for 2017 and amendments to reflect the change in incumbent for the Chief Financial Officer role. The remuneration policy as disclosed in the 2014 Directors’ Remuneration Report can be found on the Diageo website at: http://www.diageo.com/en-row/ newsmedia/Pages/resource.aspx?resourceid=2320.
Remuneration policy framework
The remuneration structures and performance measures used in executive incentive plans are designed to support Diageo’s business strategy as follows:
Future policy table
Set out below is the remuneration policy for Executive Directors which has been applied from the date of shareholder approval at the AGM on 18 September 2014.
BASE SALARYBase 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
Opportunity
Salary increases will normally be in line with increases awarded 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 the need to align an Executive Director’s salary to market level over time (provided the increase is merited by the individual’s contribution and performance).
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BENEFITSBenefits
Purpose and link to strategy
Provides market competitive and cost effective benefits.
Operation
Opportunity
The benefits package is set at a level which the Remuneration Committee considers:
POST-RETIREMENT PROVISIONSPost-retirement provisions
Purpose and link to strategy
Provides cost-effective, competitive post-retirement benefits.
Operation
Opportunity
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ANNUAL INCENTIVE PLANAnnual incentive plan (AIP)
Purpose and link to strategy
Incentivises year on yearyear-on-year delivery of Diageo’s annual financial and strategic targets. Provides focus on key financial metrics and the individual’s contribution to the company’s performance.
Operation
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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 targeton-target performance and a maximum of 200% of salary payable for outstanding performance.
Performance conditions
Annual incentive plan awards are based 70%-90% on financial measures which may include, but are not limited to, measures of revenue, profit and cash and 10%-30% on broader objectives based on individual contribution and medium termmedium-term strategic goals. Details of the measures and weightings applicable for the year ending 30 June 20162017 are set out on page 165.179. Details of the targets will be disclosed retrospectively in next year’s annual report on remuneration, when they are no longer deemed commercially sensitive by the Board.
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DIAGEO LONG TERM INCENTIVE PLANDiageo long-term incentive plan (DLTIP)
Purpose and link to strategy
Provides focus on delivering superior long termlong-term returns to shareholders.
Operation
Malus provisions will apply up to delivery of shares at the end of the retention period (as opposed to the vesting date).
Opportunity
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Diageo long-term incentive plan (DLTIP)
Performance conditions
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Measures that apply to performance shares and market price options may differ, as is the case for current awards. Weightings may vary year-on-year, subject to a minimum weighting of 25% of the total award. Details of the measures, including targets for the awards to be made in September 20152016 are set out on page 168.183.
ALL-EMPLOYEE SHARE PLANSAll-employee share plans
Purpose and link to strategy
To encourage broader employee share ownership through locally approved plans.
Operation
Opportunity
Limits for all-employeeall employee share plans are set by the tax authorities. The company may choose to set its own lower limits.
Performance conditions
UK Freeshares: based on Diageo plc financial measures which may include, but are not limited to, measures of revenue, profit and cash.
SHAREHOLDING REQUIREMENTShareholding requirement
Purpose and link to strategy
Ensures alignment between the interests of Executive Directors and shareholders.
Operation
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NOTES TO THE POLICY TABLE
Performance measures and targets
Further details of AIP performance measures and DLTIP performance measures and targets that will apply for awards made in September 2015,2016, 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 165pages179 and 169.183.
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.
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Differences in remuneration policy for other employees
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. 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 whilst mindful not to over-pay. It is driven by local market practice as well as level of seniority and accountability, reflecting the global nature of Diageo’s business.
Illustrations of application of the remuneration policy
The graphs below illustrate scenarios for the projected total remuneration of Executive Directors at three different levels of performance: minimum, on-target and maximum. Note that the projected values exclude the impact of any share price movements. These charts are unchanged from the 2014 Directors’ remuneration report and reflect projected remuneration for the financial year endedending 30 June 2015 as at the date when the policy was first presented.2017.
IvanMenezesMinimum100%Total$2,244(L1,516)On-target42%29%29%Total$5,345(L3,612)Maximum17%24%59%Total$13,097(L8,849)Thousands02,0004,0006,0008,00010,00012,00014,000KathrynMikellsMinimum100%TotalL840On-target39%31%30%TotalL2,140Maximum16%25%59%TotalL5,348Thousands01,0002,0003,0004,0005,0006,000Salary,benefitsandpensionAnnualincentiveLong-termincentives
Ivan Menezes Minimum 100% Total $2,233 (L1,370) On Target 42% 29% 29% Total $5,273 (L3,235) Maximum 17% 24% 59% Total $12,873 (L7,897) Thousands 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 Deirdre Mahlan Minimum 100% Total L1,029 On Target 42% 30% 28% Total L2,464 Maximum 17% 24% 59% Total L6,005 Thousands 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Salary, bene_ts and pension Annual incentive Long term incentives
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Basis of calculation and assumptions:
The ‘Minimum’ scenario shows fixed remuneration only, i.e. base salary for thefinancial year ended 30 June 2015,2017, total value of contractually agreed benefits for 2015,2017, and pension. The pension value is based on company contributions applied to 2015 base salary.the estimated pension benefits accrued over the financial year ending 30 June 2017. These are the only elements of the Executive Directors’ remuneration packages which are not at risk.subject to performance conditions.
The ‘On-target’ scenario shows fixed remuneration as above, plus a target pay-out of 50% of the maximum annual bonus and threshold performance vesting for DLTIPlong-term incentive awards.
The ‘Maximum’ scenario reflects fixed remuneration, plus full pay-out of allannual and long-term incentives.
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Approach to recruitment remuneration
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 in recognition that Diageo competes for talent in a global marketplace. The Committee will seek to align the 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, except as described below, variable pay will follow the policy.
Diageo is a global organisation operating in more than 180 countries around the world. The ability, therefore, 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 that will deliver Diageo’s performance ambition.
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, holding period and whether or not performance conditions would 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 very 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 in the 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.
In the event that an internal candidate was promoted to the Board, legacy terms and conditions would normally be honoured, including pension entitlements and any outstanding incentive awards.
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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.
Executive Director | Date of service contract | |
Ivan Menezes | 7 May 2013 | |
Kathryn Mikells | 1 October 2015 | |
Deirdre Mahlan | 1 July 2010 |
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Governance (continued)
Notice period | The contracts provide for a period of six months’ notice by the Executive Director or 12 months’ notice by the company. 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 (excluding incentive plans). The service contracts also provide for the payment of outstanding pay and bonus, if Executive Directors are terminated 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(i) (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. For these purposes, salary in respect of one day of holiday entitlement will be calculated as 1/261 of salary. | ||
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 | |
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 | |
The amount is subject to performance conditions being met and at the discretion of the Committee. The Committee has discretion to determine an earlier payment date, for example on death in service. |
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Governance (continued)
Diageo 2014 | When an Executive Director leaves for any reason other than Good Leaver Reasons, all unvested awards generally lapse immediately. In cases where Good Leaver Reasons apply, awards vest on the original vesting date unless the Remuneration Committee decides otherwise (for example in the case of death in service). The retention period for vested awards continues for all leavers other than in cases of disability, ill 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). |
(i) | the Internal Revenue Code of 1986, as amended |
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Governance (continued)
Awards may be adjusted on a variation of share capital, demerger or other similar event. | ||
The Remuneration Committee may amend the plans, except that any changes to the advantage of participants require shareholder approval, unless the change relates to the administration, or taxation of the plan or participants, or is needed to ensure that the plans operate effectively in another jurisdiction. | ||
Details of existing awards are set out in the annual report on remuneration. | ||
Repatriation | 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 costs for the repatriation of Good Leavers. |
Existing arrangements
The Remuneration 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) before the policy or the relevant legislation came into effect or (ii) 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. For these purposes “payments” includes‘payments’ include the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment which are “agreed”‘agreed’ at the time the award is granted (including awards under the PSP and SESOP). Details of outstanding share awards are set out in the annual report on remuneration. For the purposes of section 226D(6) of the Companies Act, the effective date is the end of the financial year starting in 2014.
External appointments
Executive Directors may accept external appointments as Non-Executive Directors of other companies and retain any related fees paid to them, subject to the specific approval of the Board in each case.
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Governance (continued)
CHAIRMAN OF THE BOARD AND NON-EXECUTIVE DIRECTORSChairman 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
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, Dr Franz B Humer, commenced his appointment on 1 July 2008. Dr Humer had a letter of appointment for an initial five yearfive-year term from 1 July 2008 which has been extended to 30 June31 December 2016. It is terminable on six months’ notice by either party or, if terminated by the company, by payment of six months’ fees in lieu of notice. Dr Humer will step down as Chairman of the Board on 1 January 2017 and will be replaced by Javier Ferrán, who joined the Board on 22 July 2016.
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Governance (continued)
Opportunity
Consideration of employment conditions elsewhere in the company
When reviewing and determining pay for Executive Directors, the Committee takes into account the level and structure of remuneration as well as salary budgets for other employees in the group. More specifically, the Committee reviews annual salary increase budgets for the general employee population in the United Kingdom and North America as well as the remuneration structure and policy for the global Senior Management population.
Diageo employs 33,00032,078 employees and operates in more than 180 countries around the world. Given its global scale and complexity, the Committee has not consulted directly with employees when designing the remuneration policy for its Executive Directors. Diageo runs annual employee surveys which give employees the opportunity to give feedback and express their views on a variety of topics, including remuneration. Any comments relating to Executive Directors’ remuneration are fed back to the Remuneration Committee.
Consideration of shareholder views
The Committee values the continued dialogue with Diageo’s shareholders and engages directly with them and their representative bodies at the earliest opportunity when setting out Diageo’s remuneration policy and approach, proposed base salary increases for the Executive Directors and targets for the long termlong-term incentive plan award. LastThis year, feedback from shareholders resulted in the simplification of the company’s long term incentive vehicles with an enhanced malus provision and an additional retention period. More recently, the company has engaged with shareholders about the base salary proposals for 2015,2016, the change in weightings under the annual incentive planfee review for the year ending 30 June 2016, long termChairman and Non-Executive Directors, long-term incentive plan targets for awards to be made in 2015 and the introduction of free cash flow in replacement of the operating margin improvement measure,2016 as well as the vesting of legacy long term incentive awardsbuy-out share award to the Chief Executive Officer.Financial Officer on appointment to the company.
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Governance (continued)
ANNUAL REPORT ON REMUNERATIONRemuneration Committee
Single total figureRole of remuneration for Executive Directors (audited)the Remuneration Committee
The table belowrole of the Remuneration Committee and details of how the Executivecompany applies the principles of the Code in respect of Directors’ remuneration are set out in the Directors’ Remuneration report.
The Chairman and the Chief Executive may, by invitation, attend Remuneration Committee meetings, except when their own remuneration is discussed. No Director is involved in determining his or her own remuneration.
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 components of the business: North America, Europe, Africa, Latin America and Caribbean, Asia Pacific, International Supply Centre and Corporate and other.
The Executive Committee focuses 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 and a further designated focus is on the company’s reputation. In support, monthly performance delivery calls, involving the senior leadership group, focus on progress against the six performance drivers.
To support the market visits made by the presidents in the ordinary course of their business, a small group led by the Chief Executive makes regular market visits focused on the execution of strategy and designed to assist in continuing the development of strategy and in the delivery of performance against the Performance Ambition.
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
www.diageo.com/en-row/ourbusiness/aboutus/corporategovernance.
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 2015.2016, 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.
Ivan Menezes(i) | Deirdre Mahlan | |||||||||||||||||||||||
2015 | 2015 | 2014 | 2014 | 2015 | 2014 | |||||||||||||||||||
Fixed pay | ’000 | ’000 | ’000 | ’000 | ’000 | ’000 | ||||||||||||||||||
Salary | £ | 968 | $ | 1,520 | £ | 933 | $ | 1,520 | £ | 727 | £ | 706 | ||||||||||||
Benefits(ii) | £ | 155 | $ | 243 | £ | 456 | $ | 744 | £ | 34 | £ | 40 | ||||||||||||
Pension(iii) | £ | 458 | $ | 720 | £ | 411 | $ | 670 | £ | 275 | £ | 258 | ||||||||||||
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Total fixed pay | £ | 1,581 | $ | 2,483 | £ | 1,800 | $ | 2,934 | £ | 1,036 | £ | 1,004 | ||||||||||||
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Annual incentive | £ | 535 | $ | 840 | £ | 170 | $ | 277 | £ | 428 | £ | 130 | ||||||||||||
Long term incentives(iv) | ||||||||||||||||||||||||
Value delivered through performance | £ | 1,451 | $ | 2,278 | £ | 1,158 | $ | 1,887 | £ | 872 | £ | 1,120 | ||||||||||||
Value delivered through share price growth | £ | 1 | $ | 2 | £ | 1,620 | $ | 2,640 | £ | 35 | £ | 1,406 | ||||||||||||
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Total long term incentives | £ | 1,452 | $ | 2,280 | £ | 2,778 | $ | 4,527 | £ | 907 | £ | 2,526 | ||||||||||||
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Other incentives(v) | — | — | — | — | £ | 4 | £ | 4 | ||||||||||||||||
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Total remuneration for Executive Director appointment | £ | 3,568 | $ | 5,603 | £ | 4,748 | $ | 7,738 | £ | 2,375 | £ | 3,664 | ||||||||||||
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Other performance related pay (Granted prior to appointment as Executive Director) | ||||||||||||||||||||||||
Long term incentives(vi) | £ | 354 | $ | 555 | £ | 2,583 | $ | 4,211 | — | — | ||||||||||||||
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TOTAL SINGLE FIGURE | £ | 3,922 | $ | 6,158 | £ | 7,331 | $ | 11,949 | £ | 2,375 | £ | 3,664 | ||||||||||||
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155
Governance (continued)
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 financial statements were approved and accords with the guidance issued by the Financial Reporting Council in September 2014, 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 risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity has been carried out. These risks and mitigations are set out above in the Risk factors section of this Annual Report.
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 (which was considered and recommended to the Board by both the Audit & Risk Committee and the Audit Committee). In accordance with the Code, the Board has also considered the company’s longer term viability, based on a robust assessment of its principal risks. This was done through the work of the Audit Committee which recommended the viability statement required pursuant to UK Rules (the Viability Statement) to the Board.
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 preparation of consolidated accounts. Further, a review of the consolidated financial statements is completed by management to ensure that the financial position and results of the group are appropriately reflected therein.
Compliance and ethics programme
Diageo is committed to conducting its business responsibly and in accordance with all laws and regulations to which its business activities are subject. We hold ourselves to the principles in our Code of Business Conduct, which is embedded through a comprehensive training and education programme for all employees.
Our Code of Business Conduct, an updated version of which was launched during the financial year, and other Diageo global policies are available at www.diageo.com/en-row/ourbusiness/aboutus/corporategovernance.
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Governance (continued)
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, presidents and other identifiable persons in the group, including those performing senior accounting and controller functions. No amendments to, or waivers in respect of, the code of ethics were made during the year.
The full text of the code of ethics is available at www.diageo.com/en-row/ourbusiness/aboutus/corporategovernance.
Both the Audit & Risk Committee and the Audit Committee regularly review the strategy and operation of the compliance and ethics programme through the year.
Further information is given in the section of this Annual Report on sustainability and responsibility, governance and ethics.
Relations with shareholders
The Board’s primary contact with institutional shareholders is through the Chief Executive and Chief Financial Officer. The Chief Executive and Chief Financial Officer are supported by the investor relations department, who are in regular contact with institutional shareholders and sell-side analysts. A monthly investor relations report, including coverage of the company by sell-side analysts, is circulated to the Board.
The Board also ensures that all Directors develop an understanding of the views of major institutional shareholders through an 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 and the chairman of the Remuneration Committee. Reports on any meetings are made to the Board.
Private shareholders are invited to write to the chairman or any other Director and express their views on any issues of concern at any time and the AGM provides an opportunity for private shareholders to put their questions in person.
Political donations
During the year, Diageo Great Britain Limited (a wholly owned subsidiary of the Company) helped, with others, defray the costs of an economists’ dialogue (and associated report) hosted by the independent Centre for European Reform think-tank, in the EU referendum context. These costs totalled £2,500 (2015: nil). During the year also, Diageo Germany GmbH (a wholly owned subsidiary of the Company) helped, with others, to support a dialogue between key German media and influencers called ‘CDU Media Night’ hosted by the political party CDU. These costs totalled approximately £1,000 (2015: nil). Otherwise, 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 £0.4 million during the year (2015: £0.5 million). These contributions were made exclusively to federal and state candidates and committees in North America (consistent with applicable laws), where it is common practice to make political contributions. No particular political persuasion was supported and contributions were made with the aim of promoting a better understanding of the group and its views on commercial matters, as well as a generally improved business environment.
Going concern
The Directors confirm that, after making appropriate enquiries, they have reasonable expectation that the group has adequate resources to continue in operational existence. Accordingly, they continue to adopt the going concern basis in preparing the financial statements. Further information on going concern is given in this Annual Report under note 1 Accounting information and policies – going concern. Although not assessed over the same period as the going concern, the viability of the group has been assessed in the Viability Statement.
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 control over the group’s financial reporting.
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Governance (continued)
Diageo’s internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the EU and IFRS as issued by the International Accounting Standards Board (IASB); provide reasonable assurance that receipts and expenditures are made only in accordance with authorisation of management and the directors of the company; and provide reasonable assurance regarding prevention or timely detection of any unauthorised acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Management has assessed the effectiveness of Diageo’s internal control over financial reporting (as defined in Rules 13(a)-13(f) and 15(d)-15(f) under the US Securities Exchange Act of 1934) based on the framework in ‘Internal Control – Integrated Framework’, issued by the Committee of Sponsoring Organisations of the Treadway Commission (COSO) in 2013. Based on this assessment, management concluded that, as at 30 June 2016, 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.
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.
PricewaterhouseCoopers LLP (PwC), 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 page 197 of this document.
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.
Responsibility statement
Each of the Directors, whose names are set out in the Board of Directors and Executive Committee section of this Annual Report, confirms that to the best of his or her knowledge:
The responsibility statement was approved by the Board of Directors on 27 July 2016.
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Governance (continued)
New York Stock Exchange 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.
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Governance (continued)
Directors’ attendance record at the AGM, scheduled Board meetings and Board committee meetings, for the year ended 30 June 2016 was as set out in the table below. 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.
Annual General Meeting 2015 | Board (maximum 6)(iii) | Audit Committee (maximum 4) | Nomination Committee (maximum 7)(iv) | Remuneration Committee (maximum 4) | ||||||||||||||||
Dr Franz B Humer | ü | 6/6 | 4/4 | (i) | 3/3 | 4/4 | (i) | |||||||||||||
Ivan Menezes | ü | 6/6 | 2/2 | (ii) | 3/3 | (i) | 4/4 | (ii) | ||||||||||||
Deirdre Mahlan | ü | 3/3 | 1/1 | (i) | n/a | n/a | ||||||||||||||
Kathryn Mikells | n/a | 3/3 | 3/3 | (i) | n/a | n/a | ||||||||||||||
Lord Davies | ü | 6/6 | 4/4 | 7/7 | 4/4 | |||||||||||||||
Peggy Bruzelius | ü | 6/6 | 4/4 | 6/7 | 4/4 | |||||||||||||||
Laurence Danon | × | 1/2 | 1/1 | 1/2 | 1/1 | |||||||||||||||
Betsy Holden | ü | 6/6 | 4/4 | 7/7 | 4/4 | |||||||||||||||
Ho KwonPing | ü | 6/6 | 3/4 | 5/7 | 4/4 | |||||||||||||||
Nicola Mendelsohn | × | 5/6 | 4/4 | 5/7 | 4/4 | |||||||||||||||
Philip Scott | ü | 6/6 | 4/4 | 7/7 | 4/4 | |||||||||||||||
Alan Stewart | ü | 6/6 | 4/4 | 7/7 | 4/4 | |||||||||||||||
Emma Walmsley | n/a | 2/2 | 2/2 | 3/3 | 2/2 |
(i) |
(ii) |
(iii) |
(iv) |
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Governance (continued)
Letter from the Chairman of the Audit Committee
Dear Shareholder
On behalf of the Audit Committee, I am pleased to present its report for the year ended 30 June 2016.
The purpose of this report is to describe how the Committee has carried out its responsibilities during the year.
In overview, the role of the Audit Committee is to monitor and review: the integrity of the company’s financial statements; internal control and risk management; audit and risk programmes; business conduct and ethics; ‘whistleblowing’; and the appointment of the external auditor.
The work of the Committee during the year included various matters referred to in last year’s report. The Committee oversaw compliance with both the updated version of the UK Corporate Governance Code (Code) (notably the requirements for a Viability Statement and increased disclosure on risk) and the Financial Reporting Council’s new ‘Guidance on Risk management, Internal Control and related Financial and Business Reporting’ (which replaced the ‘Turnbull’ and other guidance). In addition the Committee oversaw the transition to the new auditors, PricewaterhouseCoopers LLP (PwC).
In discharging its duties, the Audit Committee seeks to balance independent oversight of the matters within its remit with providing support and guidance to management. I remain confident that the Committee, supported by members of senior management and the external auditors, has carried out its duties in the year under review, effectively and to a high standard.
Philip G Scott
Chairman of the Audit Committee
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Governance (continued)
REPORT OF THE AUDIT COMMITTEE
Role of the Audit Committee
The Audit Committee is responsible for :
(i) | monitoring the integrity of the financial |
(ii) | reviewing the |
(iii) | monitoring and reviewing the effectiveness of the global audit and risk function, including reviewing the programme of work undertaken by that function; |
(iv) | reviewing the group’s policies and practices concerning business conduct and ethics, including whistleblowing; |
(v) | overseeing the group’s overall approach to securing compliance with laws, regulations and company policies in areas of risk; and |
(vi) | 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 atwww.diageo.com/en-row/ourbusiness/aboutus/corporategovernance. Key elements of the role of the committee and work carried out during the year are set out as follows.
Financial statements
During the year, the Audit Committee met four times (and a sub-committee met once) and reviewed the annual reports and associated preliminary year end results announcement, focusing on key areas of judgement and complexity, critical accounting policies, provisioning and any changes required in these areas or policies. In addition, the Audit Committee reviewed the interim results announcement, which included the interim financial statements and oversaw the transition to the new auditors, PwC.
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 preparation of consolidated accounts. A review of the consolidated financial statements is completed by management (through the work of its Filings Assurance Committee (FAC)) to ensure that the financial position and results of the group are appropriately reflected therein. The Audit Committee reviewed the work of the FAC and a report on the conclusions of the FAC process was provided to the Audit Committee by the Chief Financial Officer.
Significant issues and judgements that were considered in respect of the 2016 financial statements were as follows. These include the matters relating to risks disclosed in the UK external auditor’s report.
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Governance (continued)
As part of its review of the Annual Report, the committee considered whether the report is ‘fair, balanced and understandable’ (noting the Code’s new reference to ‘position’ as well as ‘performance, business model and strategy’). On the basis of this work, the Audit Committee recommended to the Board that it could make the required statement that the Annual Report is ‘fair, balanced and understandable’.
Internal control and risk management; audit and risk programme; business conduct and ethics (including ‘whistleblowing’)
At each of its meetings, the Audit Committee reviewed detailed reports from the heads of the Global Risk & Compliance (GRC) and Global Audit & Risk (GAR) teams (including coverage of the areas mentioned in the title of this section) and had sight of the minutes of meetings of management’s Audit & Risk Committee. A key focus for the work of both GRC and GAR during the year and their reporting to the committee, continued to be a review of recent acquisitions. The Committee in turn were thus able to keep under review the development of the controls and compliance framework in acquired companies. The Committee also received regular updates from the group general counsel on significant litigation and from the head of tax on the group’s tax profile and key issues.
The GRC reporting included a consideration of key risks and related mitigations. 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 (this was considered also by the Audit & Risk Committee). The Board agreed this recommendation.
Through the activities of the Audit Committee described in this report 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.
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Governance (continued)
Salary
Salary increases to be applied inThe company has complied with the year ending 30 June 2016
In July 2015,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 Remuneration Committee reviewed base salaries for senior management and agreed new salaries which will apply from 1 October 2015. In determining these salaries, the Remuneration Committee took into consideration a number of factors including general employee salary budgets and employment conditions, individual performance and experience, and salary positioning relative to internal and external peers. The overall budgeted salary increase for thefinancial year ended 30 June 20162016.
The Audit Committee assesses the ongoing effectiveness and quality of the external auditor and audit process on the basis of meetings and a questionnaire-based internal review with the finance team and other senior executives. Given that the year under review was PwC’s first in office (following a tender last year), the assessment will be carried out later in 2016.
The group has a policy on auditor independence and on the use of the external auditor for non-audit services, which is 2.5%reviewed annually, most recently in July 2016. The review took into consideration the new regulations on non-audit services. Under this policy, the provision of base salaryany non-audit service must be approved by the Audit Committee, unless the proposed service is both expected to cost less than £250,000 and also falls within one of a number of service categories which the Audit Committee has pre-approved. Fees paid to the auditor for the businessaudit, audit related and other services are analysed in the United Kingdomnotes to the consolidated financial statements. The nature and 3% in North America.level of all services provided by the external auditor is a factor taken into account by the Audit Committee when it reviews annually the independence of the external auditor.
‘Financial expert’ and other attendees
For the purposes of the Code and the relevant rule under SOX, section 407, the Board has determined that Philip Scott is independent and may be regarded as an Audit Committee financial expert.
The Committee considered very carefullyChairman, the total remuneration positioning of the Chief Executive and Chief Financial Officer, the salary budget for all employees ingroup general counsel the United Kingdomgroup financial controller, the head of GAR, the GRC director, the group chief accountant and the expectationsexternal auditor regularly attend meetings of shareholdersthe committee.
The Audit Committee met privately with respect to pay restraint. As a result,the external auditor and forwith the second consecutive year for the Chief Executive, the Chief Executivehead of global audit and the Chief Financial Officer agreed that their base salaries would remain unchanged in October 2015.risk as appropriate.
Ivan Menezes | Deirdre Mahlan | |||||||||||||||
Salary at 1 October (’000) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Base salary | $ | 1,520 | $ | 1,520 | £ | 732 | £ | 732 | ||||||||
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% increase (over previous year) | 0% | 0% | 0% | 2.5% | ||||||||||||
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Annual incentive plan (AIP) (audited)Training and deep dives
AIP payout forDuring the year, ended 30 June 2015
the Audit Committee had a risk review and training session, presented by senior executives, on data protection. In addition, as part of a Board meeting, Committee members had a presentation from senior management on the priorities and challenges of the Europe and GB businesses. The Remuneration Committee assessedconcluded at the performance of Ivan Menezes and Deirdre Mahlan against their specific objectives and concludedtime that it was satisfied with the objectives were partially met. The overall level of performance achieved resulted in an AIP award equating to 55% of base salary for Ivan Menezes and 59% of base salary for Deirdre Mahlan. The following table illustrates how the outcomes for the different bonus measures contribute to the overall bonus payout. The actual awards received by the Executive Directors are shown in the table ‘single total figure of remuneration’Company’s position on page 163.these matters but that they would be kept under review.
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Governance (continued)
AIP outcomeDIRECTORS’ REMUNERATION REPORT
Annual statement by the Chairman of the Remuneration Committee
Dear Shareholder
As Chairman of the Remuneration Committee, I am pleased to present the directors’ remuneration report for the year ended 30 June 2016. This report complies with the UK Directors’ Remuneration Reporting Regulations 2013 and contains:
Measures(i) | Weight (% of maximum) | Target | Actual | Payout (% of maximum) | ||||||||||
Organic net sales (% growth) | 30% | 4.0% | 0.2% | 0.0% | ||||||||||
Profit before exceptional items and tax (% growth) | 35% | 6.0% | 0.9% | 0.0% | ||||||||||
Operating cash conversion(ii) | 25% | 100.0% | 109.3% | 25.0% | ||||||||||
Individual business objectives (IBOs) | 10% | A range of objectives linked to individual contribution, medium term strategic goals and the delivery of the Performance Ambition. | partially met | (iii) | 3.4% | |||||||||
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100% | 28.4% | |||||||||||||
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There have been no changes to the Directors’ remuneration policy, as approved by shareholders at the 2014 AGM, and it is reproduced in full for both ease of reference and to provide context to the decisions taken by the Committee during the year. The annual remuneration report will be put forward for your consideration and approval by advisory vote at the AGM on 21 September 2016.
Diageo’s remuneration principles
The principles underpinning executive remuneration remain fundamentally unchanged, with sustainable performance and long-term value creation for shareholders at the heart of our remuneration policies and practices:
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Governance (continued)
Focus and highlights in 2016
The Committee continued its focus on:
The Committee undertook a comprehensive review of total remuneration for Executive Directors and Executive Committee members ahead of the 2016 annual salary review, and, supported by the Committee’s third party remuneration advisers, Kepler (a brand of Mercer), were satisfied that the shape and levels of our remuneration practice are appropriately positioned against those of comparator companies of similar size and global scope.
The Chief Executive, Ivan Menezes, requested that the company contribution to his retirement benefit plan be reduced from 40% to 30% of salary. This change was implemented on 1 July 2016. There was no compensatory payment or benefit in exchange for this reduction in contribution.
On 9 November 2015, Kathryn Mikells joined the company and was appointed Chief Financial Officer. In accordance with the approved remuneration policy, the Committee agreed a remuneration package that was in line with current practice at the Executive Committee level in terms of the mix of fixed and variable remuneration and also appropriately positioned against the external market.
During the year, the Committee also reviewed and increased the Chairman’s fee from £500,000 to £600,000 per annum effective
1 January 2016, following five successive years of no increases. The Chairman’s fee is appropriately positioned against our comparator group of FTSE30 companies excluding financial services. The next review is scheduled for December 2017. Dr Franz B Humer will step down as Chairman of the Board on 1 January 2017 and will be succeeded by Javier Ferrán, who joined the Board on 22 July 2016. Javier Ferrán’s fee from 1 January 2017 will be £600,000 per annum.
Following a comprehensive review of competitive market data, the Board also reviewed the fees for Non-Executive Directors and increased the basic fee from £84,000 to £87,000 per annum and the additional Senior Non-Executive Director fee from £20,000 to £25,000 per annum, also effective from 1 January 2016.
The clawback provisions in respect of annual incentive and long-term incentive awards to the Executive Directors have now been extended to all members of the Executive Committee, in addition to the existing malus provisions that apply to all participants under the Diageo Long-Term Incentive Plan, as approved by the Committee last year.
Reward in 2016 at a glance
Base salary | 2% increase for both the |
Unchanged from last year | ||
Retirement benefits | Unchanged from last year | |
Annual incentive | Payout above target, delivering 64.8% and | |
Long-term incentives | 30.6% vesting of |
As a reflection of the company’s delivery of a good set of results in the year (see key performance indicators on pages 23-27), total variable pay to the Executive Directors in respect of the year ended 30 June 2016 is higher than the year ended 30 June 2015.
Over the period 1 July 2013 to 30 June 2016 (the performance period for long-term incentive awards that vest this year in September 2016), Diageo’s share price grew by 7.9%, from 1933.5 pence to 2086.5 pence, and the company paid a total dividend of 160.0 pence per share. Dividend distribution to shareholders in the year ended 30 June 2016 was increased by 7.6% compared to the previous year.
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Governance (continued)
Planned for 2017
Looking ahead to the year ending 30 June 2017, we will continue to operate executive remuneration arrangements in line with the approved remuneration policy. No changes are proposed to the design of the annual or long-term incentive plan for the year ahead.
We will be reviewing our remuneration policy and actively engaging with shareholders and their advisory bodies in advance of putting the policy to shareholder vote at the 2017 AGM.
As you read our remuneration policy and annual remuneration report on the following pages, I hope it is clear how the Committee’s decisions support the business strategy and the delivery of Diageo’s performance ambition.
We were very pleased to receive a very strong vote in favour of our remuneration report last year. I highly value the direct engagement and feedback from our shareholders and their representative bodies on Diageo’s remuneration policy and look forward to welcoming you and receiving your support again at the AGM this year.
Lord Davies of Abersoch
Senior independent Non-Executive Director and
Chairman of the Remuneration Committee
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Governance (continued)
DIRECTORS’ REMUNERATION POLICY
This section of the report sets out the policy for Executive Directors’ remuneration. The policy was put to shareholders for approval in a binding vote at the AGM in 2014, in accordance with section 439A of the Companies Act 2006, and formally came into effect from 18 September 2014, the date of the AGM. The policy section of the report below is as disclosed in the 2014 Directors’ Remuneration Report, with the exception of the reference to the number of employees across Diageo, a minor addition to the DLTIP section of the policy table to reflect the clarification note released following publication of the 2014 Directors’ Remuneration Report, updates to the illustrations of remuneration policy charts to reflect projected remuneration for 2017 and amendments to reflect the change in incumbent for the Chief Financial Officer role. The remuneration policy as disclosed in the 2014 Directors’ Remuneration Report can be found on the Diageo website at: http://www.diageo.com/en-row/ newsmedia/Pages/resource.aspx?resourceid=2320.
Remuneration policy framework
The remuneration structures and performance measures used in executive incentive plans are designed to support Diageo’s business strategy as follows:
Future policy table
Set out below is the remuneration policy for Executive Directors which has been applied from the date of shareholder approval at the AGM on 18 September 2014.
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
Opportunity
Salary increases will normally be in line with increases awarded 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 the need to align an Executive Director’s salary to market level over time (provided the increase is merited by the individual’s contribution and performance).
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Governance (continued)
Benefits
Purpose and link to strategy
Provides market competitive and cost effective benefits.
Operation
Opportunity
The benefits package is set at a level which the Remuneration Committee considers:
Post-retirement provisions
Purpose and link to strategy
Provides cost-effective, competitive post-retirement benefits.
Operation
Opportunity
Annual incentive plan (AIP)
Purpose and link to strategy
Incentivises year-on-year delivery of Diageo’s annual financial and strategic targets. Provides focus on key financial metrics and the individual’s contribution to the company’s performance.
Operation
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Governance (continued)
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 based 70%-90% on financial measures which may include, but are not limited to, measures of revenue, profit and cash and 10%-30% on broader objectives based on individual contribution and medium-term strategic goals. Details of the measures and weightings applicable for the year ending 30 June 2016
The measures and targets used in the AIP2017 are reviewed annually by the Remuneration Committee and are chosen to drive financial and individual business performance goals related to the company’s short term strategic operational objectives. The AIP design for the year ending 30 June 2016 will comprise of a four-measure structure (weightings in brackets):
page 179. Details of the targets for this performance period will be disclosed retrospectively in next year’s annual report on remuneration, as soon aswhen they are no longer deemed commercially sensitive by the Board.
Long termDiageo long-term incentive plans (LTIPs) (audited)plan (DLTIP)
LTIP awards vesting in the year ended 30 June 2015Purpose and link to strategy
Until 30 June 2014, long term incentives were a combinationProvides focus on delivering superior long-term returns to shareholders.
Operation
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Governance (continued)
SESOP
On 1 October 2012, Ivan Menezes and Deirdre Mahlan received awards of 46,575 (ADRs) and 146,299 (ordinary shares) market price options, respectively, under the SESOP. Awards werewhich vest subject to a performance condition based on compound annual growth in adjusted epstest and continued employment normally over a three-year period. For the purposeperiod of the SESOP, an adjusted measure of eps is used to ensure that elements such as exceptional itemsthree years.
The adjusted eps growth targets and actual performance for the 2012 SESOP awards are set out below:
Vesting of 2012 SESOP awards | Target | Vesting (% maximum) | ||||||
Threshold | 8% | 25% | ||||||
Maximum | 12% | 100% | ||||||
Actual compound annual adjusted eps growth over 1 July 2012 – 30 June 2015 | 4.1% | 0.0% |
Accordingly, the 2012 award, which is due to vest in October 2015, has not met the performance condition and none of the shares under the award will vest.
PSP
On 1 October 2012, Ivan Menezes and Deirdre Mahlan received awards of 54,927 (ADRs) and 134,653 (ordinary shares) performance shares, respectively, under the PSP. Awards vest after a three-year period subject to the achievement of specified performance tests. Notional dividends accrue on awards and are paid out either in cash or shares in accordance with the vesting schedule.
For the 2012 awards, the primary performance test is split between three equally weighted performance measures:
For the part of the award subject to the TSR condition to vest, there must be an improvement in the underlying financial performance of the company (i.e. growth in organic net sales and total organic operating margin improvement). In addition, the Remuneration Committee must be satisfied that a minimum level of performance in both organic net sales and organic operating margin has been met before any of the award under either measure can be released.
The targets and vesting profile for the PSP awards granted in October 2012 are shown in the following table:
Vesting of 2012 PSP awards | Threshold | Mid-point | Maximum | Actual | Vesting (% maximum) | |||||||||||||||
Organic net sales (CAGR) | 5% | 6.5% | 8.0% | 1.8% | 0.0% | |||||||||||||||
Organic operating margin improvement | 100bps | 150bps | 175bps | 177bps | 100.0% | |||||||||||||||
Relative total shareholder return | | Medium ranking (ninth) | | — | | Upper quintile (third or above) | | 13th | 0.0% | |||||||||||
Vesting (% of maximum) | 25% | 62.5% | 100% | 33.3% |
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Governance (continued)
For operating margin and net sales, there is straight line vesting between threshold and the mid-point, and between the mid-point and the maximum. The full vesting profile for TSR is shown below:
TSR ranking (out of 17) | Vesting profile for PSP awards | Vesting profile for DLTIP performance share awards from 2015 | ||||||
1st, 2nd or 3rd | 100% | 100% | ||||||
4th | 95% | 95% | ||||||
5th | 75% | 75% | ||||||
6th | 65% | 65% | ||||||
7th | 55% | 55% | ||||||
8th | 45% | 45% | ||||||
9th | 25% | 20% | ||||||
10th or below | 0% | 0% |
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On the basis of this performance, the 2012 PSP award, which is due to vest in October 2015, has partially met the performance conditions and, consequently, the shares under award will vest at 33.3% of the initial award.
The Committee has taken into consideration all factors regarding the quality of the underlying performance of the business at the end of the performance period, including the company’s underlying level of sell out performance, the holding of market share across total brands in each year of the performance period and the maintenance of brand investment, and is satisfied that the level of vesting is warranted.
DIP
Ivan Menezes retains interests in awards that were granted to him in 2012 prior to his appointment as Executive Director under the DIP, totalling 117,142 ADRs. 50% of the 2012 DIP award is subject to meeting performance conditions based on the financial measures under the long term incentive plan over the three-year periods ending 30 June 2015, 30 June 2016, 30 June 2017 and 30 June 2018 and the remaining 50% is subject to continued satisfactory employment. The financial measures under the performance part of the award are equally weighted. Actual performance for the first tranche of the 2012 DIP award (i.e. the tranche based on performance over the three years to 30 June 2015) versus target is set out below:
Vesting of performance-based tranche 1 of March 2012 DIP award
Performance measures (equally weighted) | Target | Actual | Vesting (% of maximum) | |||||||||
Organic net sales growth (CAGR) | 6.50% | 1.8% | 0% | |||||||||
Organic operating margin improvement | 150 bps | 177 bps | 33.3% | |||||||||
Compound annual adjusted eps growth | 10% | 4.1% | 0% | |||||||||
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Vesting (% of maximum) | 33.3% | |||||||||||
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As the table shows, 33.3% of the performance related ADRs under the first tranche of the 2012 DIP award will vest in March 2016, subject to continuing employment. The total award that will vest to Ivan Menezes in March 2016 will therefore be 66.6% of the first tranche (including the ADRs that vest on time only), or 19,523 ADRs, provided he remains employed at the time of vesting. The Committee has assessed the underlying performance of the business at the end of the performance period and is satisfied that this level of vesting is warranted. The value of the part of the award based on performance and vesting in March 2016 is included in the single total figure of remuneration.
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Governance (continued)
DLTIP awards made during the year ended 30 June 2015 (audited)
On 25 September 2014, Ivan Menezes and Deirdre Mahlan received awards of 45,447 (ADRs) and 140,590 (ordinary shares) performance shares, respectively, and 45,447 (ADRs) and 140,590 (ordinary shares) market price options, respectively under the DLTIP; details are provided in the table below. The three-year period over which performance will be measured is 1 July 2014 to 30 June 2017. The performance measures are the same as for the 2012 awards. 20% of the award will vest at threshold, with straight-line vesting up to 100% if the maximum level of performance is achieved.
Executive Director | Date of grant | Plan | Share type | Awards made during the year | Award/ exercise price | Face value ’000 | Face value (% of salary) | |||||||||||||||||||||
Ivan Menezes | 25/09/2014 | DLTIP – share options | ADR | 45,447 | $ | 117.55 | $ | 5,342 | 375% | |||||||||||||||||||
Ivan Menezes | 25/09/2014 | DLTIP – performance shares | ADR | 45,447 | $ | 125.42 | $ | 5,700 | 375% | |||||||||||||||||||
Deirdre Mahlan | 25/09/2014 | DLTIP – share options | Ord | 140,590 | 1796p | £ | 2,525 | 360% | ||||||||||||||||||||
Deirdre Mahlan | 25/09/2014 | DLTIP – performance shares | Ord | 140,590 | 1874p | £ | 2,635 | 360% |
The table above specifies the number of performance shares and share options initially awarded under the DLTIP. The proportion of the awards that will vest is dependent upon the achievement of performance conditions, and the actual value may be nil. The vesting outcomes will be disclosed in the 2017 report.
The face value of each award has been calculated using the award/exercise price at time of grant. In accordance with the rules, the number of performance shares granted under the DLTIP was calculated by using the average closing share price for the last six months of the preceding financial year (1874 pence for ordinary shares and $125.42 for ADRs). In accordance with the plan rules, the exercise price and the number of options granted under the SESOP was calculated using the average closing share price of the three days preceding the grant date (1796 pence for ordinary shares and $117.55 for ADRs). The share price on the date of grant was 1779 pence for ordinary shares and $115.80 for ADRs.
Details of the operation of the DLTIP are provided under the section on long term incentive plans.
DLTIP awards to be made in the year ending 30 June 2016
The long term incentive plan (DLTIP) was approved by shareholders at the AGM in September 2014.
The long term incentive plan measures are reviewed annually by the Remuneration Committee for each new award. Details of the measures, weightings and targets applicable for the financial year under review are selectedprovided in the annual report on remuneration.
The table below outlines the targets and the vesting profile for these awards. The measures are equally weighted, with performance shares subject to performance against total shareholder return, net sales and cumulative free cash flow, and share optionsthe award will be reduced;
Malus provisions will apply up to delivery of shares at the end of the retention period (as opposed to the vesting date).
Performance shares | Share options | |||||||||||||||||||
Relative total shareholder return (25%) | Organic net sales (CAGR) (25%) | Cumulative free cash flow (25%) | Adjusted eps growth (CAGR)(25%) | Vesting profile | ||||||||||||||||
Threshold | Median ranking (ninth) | 3.0% | £ | 5,000m | 4.0% | 20% | ||||||||||||||
Mid-point | — | 4.5% | £ | 6,000m | 6.5% | 60% | ||||||||||||||
Maximum | Upper quintile (third or above) | 6.0% | £ | 7,000m | 9.0% | 100% |
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Governance (continued)
It
It is intended that Deirdre Mahlanthe statement of further information on 15 August 2014, under the DLTIP no more than 375% of salary will be awarded a performance share award of 360% of base salary and an award of market price sharein face value terms in options of 120% of base salary (in performance share equivalents) in September 2015.
Pension and benefits in the year ended 30 June 2015
Benefits
Benefits provisions for the Executive Directors continue to be in line with the information set out in the future policy table.
Pension arrangements (audited)
Ivan Menezes and Deirdre Mahlan are members of the Diageo North America, Inc. Supplemental Executive Retirement Plan (SERP) with an accrual rate of 40% and 35% of base salary, respectively. 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, they can withdraw the balance of the plan in the form of five equal annual instalments or a lump sum upon reaching age 55 (Deirdre Mahlan) and after having left service with Diageo (within six months of separation from service).
Ivan Menezes and Deirdre Mahlan participated in the US Cash Balance Plan and the Benefit Supplemental Plan (BSP) until August 2012 and June 2010, 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.
Upon death in service, a life insurance benefit of $3 million is payable to Ivan Menezes and a lump sum of four times base salary is payable to Deirdre Mahlan.
The table below shows the pension benefits accrued by each Director to date. Note that the accrued UK benefits for Ivan Menezes are annual pension amounts, whereas the accrued US benefits for both Ivan Menezes and Deirdre Mahlan are a one-off cash balance amount.
30 June 2015 | 30 June 2014 | |||||||||||||||
Executive Director | UK pension £’000 p.a. | US benefit £’000 | UK pension £’000 p.a. | US benefit £’000 | ||||||||||||
Ivan Menezes(i) | 69 | 4,218 | 68 | 3,409 | ||||||||||||
Deirdre Mahlan(ii) | nil | 1,239 | nil | 874 |
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Governance (continued)
The Normal Retirement Age applicable to each Director’s benefits depends on the pension scheme, as outlined below.
Executive Director | UK benefits (DPS) | US benefits (Cash balance) | US benefits (BSP) | US benefits (SERP) | ||||||||
Ivan Menezes | 60 | 65 | 6 months after age of leaving service | 6 months after age of leaving service | ||||||||
Deirdre Mahlan | n/a | 65 | 6 months after age of leaving service | 6 months after age of leaving service, or age 55 if later |
Ivan Menezes is able to take his UK pension benefits from age 58 without consent, and his benefits would not be subject to any actuarial reductionExecutive Director in respect of early payment. However, this is a discretionary policy Diageo offers that is not set out in the DPS Scheme Rules.
Performance graph and table
The graph below shows the total shareholder return for Diageo and the FTSE 100 Index since 30 June 2009 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.
Total shareholder return - Diageo Chief Executive value of hypothetical FTSE 100 total remuneration L100 holding Chief Executive total remuneration L million L300 30 L250 25 L200 20 L150 15 L100 10 L50 5 0 0
Paul S Walsh | Ivan Menezes(i) | |||||||||||||||||||||||
June 2010 | June 2011 | June 2012 | June 2013 | June 2014 | June 2015 | |||||||||||||||||||
£’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||||||||||||||||||
Chief Executive total remuneration (includes legacy LTIP awards) | 3,231 | 4,449 | 11,746 | 15,557 | 7,331 | 3,922 | ||||||||||||||||||
Annual incentive (% maximum opportunity) | 86% | 77% | 74% | 51% | 9% | 28% | ||||||||||||||||||
Long term incentives – SESOP (% maximum opportunity) | 100% | 100% | 100% | 100% | 71% | 0% | ||||||||||||||||||
Long term incentives – PSP (% maximum opportunity) | 0% | 0% | 65% | 95% | 55% | 33% |
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Governance (continued)
Percentage changeDiageo long-term incentive plan (DLTIP)
Performance conditions
Measures that apply to performance shares and market price options may differ, as is the case for current awards. Weightings may vary year-on-year, subject to a minimum weighting of 25% of the Chief Executive
The table below shows a comparisontotal award. Details of the percentage changemeasures, including targets for the awards to be made in September 2016 are set out on page 183.
All-employee share plans
Purpose and link to strategy
To encourage broader employee share ownership through locally approved plans.
Operation
Opportunity
Limits for all employee share plans are set by the average percentage change in remuneration fortax authorities. The company may choose to set its own lower limits.
Performance conditions
UK Freeshares: based on Diageo plc financial measures which may include, but are not limited to, measures of revenue, profit and cash.
Shareholding requirement
Purpose and link to strategy
Ensures alignment between the UKinterests of Executive Directors and US population from 2014 to 2015. shareholders.
Operation
Salary | Benefits | Bonus | ||||||||||
Chief Executive percentage change from 2014 to 2015 | 0% | (67%) | 203% | |||||||||
Average % change for the UK and US workforce from 2014 to 2015 | 2% | 0% | 60% |
The percentage change forhave five years from their appointment to the Chief Executive is based on the remuneration of Ivan Menezes from 2014Board in which to 2015. Benefits in both 2014 and 2015 included one-off relocation payments.
UK salary, benefits and bonus data have been converted into US dollars using the cumulative weighted average exchange rate for the respective financial year. For the year ended 30 June 2015 the exchange rate was £1 = $1.57, and for the year ended 30 June 2014 the exchange rate was £1 = $1.63.
Directors’ shareholding requirements and share and other interests (audited)
The beneficial interests of the Directors in office at 30 June 2015 (andbuild up their connected persons)shareholding.
Ordinary shares or equivalent(i) | ||||||||||||||||||||||||
17 July 2015 | 30 June 2015 | 30 June 2014 (or date of appointment, if later) | Shareholding requirement (% salary)(iv) | Shareholding at 17 July 2015 (% salary)(iv) | Shareholding requirement met | |||||||||||||||||||
Chairman | ||||||||||||||||||||||||
Dr Franz B Humer | 60,532 | 60,097 | 53,197 | — | — | — | ||||||||||||||||||
Executive Directors | ||||||||||||||||||||||||
Ivan Menezes(ii) | 749,518 | 749,518 | 634,810 | 300% | 1430% | Yes | ||||||||||||||||||
Deirdre Mahlan(ii) | 281,163 | 281,153 | 228,507 | 250% | 710% | Yes | ||||||||||||||||||
Non-Executive Directors | ||||||||||||||||||||||||
Peggy B Bruzelius | 5,000 | 5,000 | 5,000 | — | — | — | ||||||||||||||||||
Laurence M Danon | 5,000 | 5,000 | 5,000 | — | — | — | ||||||||||||||||||
Lord Davies of Abersoch | 5,052 | 5,052 | 5,052 | — | — | — | ||||||||||||||||||
Betsy D Holden(ii) | 17,400 | 17,400 | 17,400 | — | — | — | ||||||||||||||||||
Ho KwonPing | 4,223 | 4,223 | 4,103 | — | — | — | ||||||||||||||||||
Philip G Scott | 10,000 | 10,000 | 10,000 | — | — | — | ||||||||||||||||||
Nicola S Mendelsohn(iii) | 5,000 | 5,000 | — | — | — | — | ||||||||||||||||||
Alan JH Stewart(iii) | 1,500 | 1,500 | — | — | — | — |
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Governance (continued)
OutstandingNOTES TO THE POLICY TABLE
Performance measures and targets
Further details of AIP performance measures and DLTIP performance measures and targets that will apply for awards made in September 2016, and how they are aligned with company strategy and the creation of shareholder value, are set out in the annual report on remuneration, on pages179 and 183.
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.
Differences in remuneration policy for other employees
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. 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 whilst mindful not to over-pay. It is driven by local market practice as well as level of seniority and accountability, reflecting the global nature of Diageo’s business.
Illustrations of application of the remuneration policy
The graphs below illustrate scenarios for the projected total remuneration of Executive Directors at three different levels of performance: minimum, on-target and maximum. Note that the projected values exclude the impact of any share plan interests (audited)price movements. These charts reflect projected remuneration for the financial year ending 30 June 2017.
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 2014(i) | Granted | Vested/ exercised | Dividends awarded and released | Lapsed | Number of shares/ options at 30 June 2015 | Total number of shares/ options in Ords(ii) | |||||||||||||||||||||||||||||||||||||||
Ivan Menezes | ||||||||||||||||||||||||||||||||||||||||||||||||||||
SESOP(iii) | Sep 2010 | 2010-2013 | 2013 | ADR | $ | 67.84 | 55,512 | 55,512 | ||||||||||||||||||||||||||||||||||||||||||||
SESOP(iii) | Sep 2011 | 2011-2014 | 2014 | ADR | $ | 76.70 | 51,531 | 14,944 | 36,587 | |||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Total number of vested but unexercised share options |
| 368,396 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
SESOP(v) | Oct 2012 | 2012-2015 | 2015 | ADR | $ | 112.72 | 46,575 | 46,575 | ||||||||||||||||||||||||||||||||||||||||||||
SESOP(vi) | Sep 2013 | 2013-2016 | 2016 | ADR | $ | 123.27 | 46,239 | 46,239 | ||||||||||||||||||||||||||||||||||||||||||||
DLTIP – share options | Sep 2014 | 2014-2017 | 2017 | ADR | $ | 117.55 | 45,447 | 45,447 | ||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Total number of unvested share options subject to performance |
| 553,044 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
PSP(iii) | Sep 2011 | 2011-2014 | 2014 | ADR | $ | 74.11 | 42,221 | 23,221 | 1,981 | 19,000 | — | |||||||||||||||||||||||||||||||||||||||||
DIP(iv) | Sep 2011 | 2011-2014 | 2014-2015 | ADR | $ | 74.11 | 71,030 | 14,206 | 35,515 | 21,309 | ||||||||||||||||||||||||||||||||||||||||||
DIP(iv) | Mar 2012 | 2012-2019 | 2016-2019 | ADR | $ | 96.44 | 58,571 | 58,571 | ||||||||||||||||||||||||||||||||||||||||||||
PSP(v) | Oct 2012 | 2012-2015 | 2015 | ADR | $ | 113.62 | 54,927 | 54,927 | ||||||||||||||||||||||||||||||||||||||||||||
PSP(vi) | Sep 2013 | 2013-2016 | 2016 | ADR | $ | 123.08 | 47,484 | 47,484 | ||||||||||||||||||||||||||||||||||||||||||||
DLTIP – performance shares | Sep 2014 | 2014-2017 | 2017 | ADR | $ | 115.80 | 45,447 | 45,447 | ||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Total number of unvested shares subject to performance |
| 910,952 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
DIP(iii),(iv) | Mar 2012 | 2012-2019 | 2016-2019 | ADR | $ | 96.44 | 58,571 | 58,571 | ||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Total number of unvested shares not subject to performance |
| 234,284 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Deirdre Mahlan |
| |||||||||||||||||||||||||||||||||||||||||||||||||||
SESOP(iii) | Sep 2009 | 2009-2012 | 2012 | ADR | $ | 63.13 | 20,790 | 20,790 | ||||||||||||||||||||||||||||||||||||||||||||
SESOP | Sep 2010 | 2010-2013 | 2013 | Ord | 1080p | 199,652 | 199,652 | |||||||||||||||||||||||||||||||||||||||||||||
SESOP | Sep 2011 | 2011-2014 | 2014 | Ord | 1232p | 190,239 | 55,170 | 135,069 | ||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Total number of vested but unexercised share options |
| 417,881 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
SESOP(v) | Oct 2012 | 2012-2015 | 2015 | Ord | 1743p | 146,299 | 146,299 | |||||||||||||||||||||||||||||||||||||||||||||
SESOP(vi) | Sep 2013 | 2013-2016 | 2016 | Ord | 1983p | 135,022 | 135,022 | |||||||||||||||||||||||||||||||||||||||||||||
DLTIP – share options | Sep 2014 | 2014-2017 | 2017 | Ord | 1796p | 140,590 | 140,590 | |||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Total number of unvested share options subject to performance |
| 421,911 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
PSP | Sep 2011 | 2011-2014 | 2014 | Ord | 1204p | 159,574 | 87,765 | 7,607 | 71,809 | — | ||||||||||||||||||||||||||||||||||||||||||
PSP(v) | Oct 2012 | 2012-2015 | 2015 | Ord | 1772p | 134,653 | 134,653 | |||||||||||||||||||||||||||||||||||||||||||||
PSP(vi) | Sep 2013 | 2013-2016 | 2016 | Ord | 1978p | 110,241 | 110,241 | |||||||||||||||||||||||||||||||||||||||||||||
DLTIP – performance shares | Sep 2014 | 2014-2017 | 2017 | Ord | 1779p | 140,590 | 140,590 | |||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Total number of unvested shares subject to performance |
| 385,484 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
SAYE(vii) | Sep 2011 | 2014 | Ord | 960p | 937 | 937 | — |
IvanMenezesMinimum100%Total$2,244(L1,516)On-target42%29%29%Total$5,345(L3,612)Maximum17%24%59%Total$13,097(L8,849)Thousands02,0004,0006,0008,00010,00012,00014,000KathrynMikellsMinimum100%TotalL840On-target39%31%30%TotalL2,140Maximum16%25%59%TotalL5,348Thousands01,0002,0003,0004,0005,0006,000Salary,benefitsandpensionAnnualincentiveLong-termincentives
172
Governance (continued)
Payments to former directors
As set out in the annual remuneration report for 2013, on retirement from the Board on 19 September 2013, Paul S Walsh was retained in a role with the Scotch whisky industry on behalfBasis of Diageo for a period of up to five years. Paul retained interests in both the 2011calculation and 2012 PSP and SESOP.assumptions:
The vesting outcome under the 2011 PSP and SESOP, based on performance over the period 1 July 2011 to 30 June 2014, was disclosed in detail in the 2014 annual‘Minimum’ scenario shows fixed remuneration report. In the case of Paul S Walsh, 234,810 shares (including 18,730 shares in respect of accrued dividend shares) and 267,221 share options vested in September 2014. The share price on the vesting date was 1817p and theonly, i.e. base salary for financial year 2017, total value of awardscontractually agreed benefits for 2017, and pension. The pension value is based on vesting was £5,829,735.
In October 2012, Paul was awarded 304,702 shares under the PSP and 264,845 share options underestimated pension benefits accrued over the SESOP,financial year ending 30 June 2017. These are the only elements of the Executive Directors’ remuneration packages which are not subject to performance conditions.
The ‘On-target’ scenario shows fixed remuneration as above, plus a target pay-out of 50% of the maximum annual bonus and threshold performance vesting for long-term incentive awards.
The ‘Maximum’ scenario reflects fixed remuneration, plus full pay-out of annual and long-term incentives.
Approach to recruitment remuneration
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 in recognition that Diageo competes for talent in a global marketplace. The Committee will seek to align the 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, except as described below, variable pay will follow the policy.
Diageo is a global organisation operating in more than 180 countries around the world. The ability, therefore, to recruit and retain the best talent from all over the period 1 July 2012world is critical to 30 June 2015. As disclosed elsewherethe future success of the business. People diversity in this report,all its forms is a core element of Diageo’s global talent strategy and, managed effectively, is a key driver that will deliver Diageo’s performance ambition.
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 outcome underschedules. Depending on individual circumstances at the 2012 PSPtime, the Committee has the discretion to determine the type of award (i.e. cash, shares or options, holding period and whether or not performance conditions would 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 be 33.3%very carefully consider the balance between the need to secure an individual in the best interests of the original awardcompany against the concerns of investors about the quantum in the remuneration and, underif considered appropriate at the 2012 SESOPtime, will be 0%consult with the company’s biggest shareholders. The Remuneration Committee will provide timely disclosure of the initial award. As a result, inreward package of any new Executive Director.
In the caseevent that an internal candidate was promoted to the Board, legacy terms and conditions would normally be honoured, including pension entitlements and any outstanding incentive awards.
Service contracts and policy on payment for loss of Paul Walsh, 101,567 shares will vest and alloffice (including takeover provisions)
Executive Directors have rolling service contracts, details of his share options will lapse in October 2015.
Paul Walsh has no other outstanding interests under the long term incentive plan or any other share plan of the company.
Non-Executive Directors’ fees
The Chairman’s fee was reviewed in December 2014 and,which are set out below. These are available for inspection at the Chairman’s request, there was no increase to his fee in January 2015. As agreed with the Chairman, the next review of his fee is anticipated to take place in December 2016, subject to his letter of appointment, with any changes taking effect on 1 January 2017.company’s registered office.
The last scheduled review of fees for Non-Executive Directors was undertaken in December 2013.
January 2015 | January 2014 | |||||||
Per annum fees | £’000 | £’000 | ||||||
Chairman of the Board | 500 | 500 | ||||||
Non-Executive Directors | ||||||||
Base fee | 84 | 84 | ||||||
Senior Non-Executive Director | 20 | 20 | ||||||
Chairman of the Audit Committee | 30 | 30 | ||||||
Chairman of the Remuneration Committee | 25 | 25 |
Non-Executive Directors’ remuneration for the year ended 30 June 2015 (audited)
Fees £’000 | Benefits(i) £’000 | Total £’000 | ||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||
Chairman | ||||||||||||||||||||||||
Dr Franz B Humer(ii) | 500 | 500 | 12 | 5 | 512 | 505 | ||||||||||||||||||
Non-Executive Directors | ||||||||||||||||||||||||
Peggy B Bruzelius | 84 | 82 | 13 | 6 | 97 | 88 | ||||||||||||||||||
Laurence M Danon | 84 | 82 | 6 | 9 | 90 | 91 | ||||||||||||||||||
Lord Davies of Abersoch | 129 | 125 | 3 | 2 | 132 | 127 | ||||||||||||||||||
Betsy D Holden | 84 | 82 | 35 | 8 | 119 | 90 | ||||||||||||||||||
Ho KwonPing | 84 | 82 | 1 | 1 | 85 | 83 | ||||||||||||||||||
Philip G Scott | 114 | 110 | 5 | 11 | 119 | 121 | ||||||||||||||||||
Nicola S Mendelsohn(iii) | 70 | — | 1 | — | 71 | — | ||||||||||||||||||
Alan JH Stewart(iii) | 70 | — | 1 | — | 71 | — |
Executive Director |
| |
Ivan Menezes | 7 May 2013 | |
Kathryn Mikells | 1 October 2015 | |
Deirdre Mahlan | 1 July 2010 |
173
Governance (continued)
Notice period | The contracts provide for a period of six months’ notice by the Executive Director or 12 months’ notice by the company. A payment may be made in lieu of notice equivalent to | |
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(i) (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. For these | ||
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. In the case of Deirdre Mahlan, the mitigation provision may be excluded in the event of termination as a result of being located permanently outside the United Kingdom and Ireland. | |
Annual incentive plan (AIP) | Where the Executive Director leaves for The amount is subject to performance conditions being met and at the discretion of the Committee. The Committee has discretion to determine an earlier payment date, for example on death in service. | |
Diageo 2014 long-term incentive plan (DLTIP) | When an Executive Director leaves for any reason other than Good Leaver Reasons, all unvested awards generally lapse immediately. In cases where Good Leaver Reasons apply, awards vest on the original vesting date unless the Remuneration Committee decides otherwise (for example in the case of death in service). The retention period for vested awards continues for all leavers other than in cases of disability, ill health or | |
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). |
(i) | the Internal Revenue Code of 1986, as |
174
Governance (continued)
Awards may be adjusted on a variation of share capital, demerger or other similar event. | ||
The Remuneration Committee may amend the plans, except that any changes to the advantage of participants require shareholder approval, unless the change relates to the administration, or taxation of the plan or participants, or is needed to ensure that the plans operate effectively in another jurisdiction. | ||
Details of existing awards are set out in the annual report on remuneration. | ||
Repatriation | In cases where an Executive Director was recruited from outside the United Kingdom |
Existing arrangements
The Remuneration 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) before the policy or the relevant legislation came into effect or (ii) 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. For these purposes ‘payments’ include the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment which are ‘agreed’ at the time the award is granted (including awards under the PSP and SESOP). Details of outstanding share awards are set out in the annual report on remuneration. For the purposes of section 226D(6) of the Companies Act, the effective date is the end of the financial year starting in 2014.
External appointments held by the Executive Directors
Executive Directors may accept external appointments as Non-Executive Directors of other companies and retain any related fees paid to them, subject to the specific approval of the Board in each case.
Ivan Menezes — DuringChairman of the year endedBoard 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
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, Dr Franz B Humer, commenced his appointment on 1 July 2008. Dr Humer had a letter of appointment for an initial five-year term from 1 July 2008 which has been extended to 31 December 2016. It is terminable on six months’ notice by either party or, if terminated by the company, by payment of six months’ fees in lieu of notice. Dr Humer will step down as Chairman of the Board on 1 January 2017 and will be replaced by Javier Ferrán, who joined the Board on 22 July 2016.
175
Governance (continued)
Opportunity
Consideration of employment conditions elsewhere in the company
When reviewing and earned feesdetermining pay for Executive Directors, the Committee takes into account the level and structure of $75,000, which he retained. In line withremuneration as well as salary budgets for other employees in the Coach Incgroup. More specifically, the Committee reviews annual salary increase budgets for the general employee population in the United Kingdom and North America as well as the remuneration structure and policy for outside directors, Ivan Menezes is eligiblethe global Senior Management population.
Diageo employs 32,078 employees and operates in more than 180 countries around the world. Given its global scale and complexity, the Committee has not consulted directly with employees when designing the remuneration policy for its Executive Directors. Diageo runs annual employee surveys which give employees the opportunity to give feedback and express their views on a variety of topics, including remuneration. Any comments relating to Executive Directors’ remuneration are fed back to the Remuneration Committee.
Consideration of shareholder views
The Committee values the continued dialogue with Diageo’s shareholders and engages directly with them and their representative bodies at the earliest opportunity when setting out Diageo’s remuneration policy and approach, proposed base salary increases for the Executive Directors and targets for the long-term incentive plan award. This year, the company has engaged with shareholders about the base salary proposals for 2016, the fee review for the Chairman and Non-Executive Directors, long-term incentive plan targets for awards to be grantedmade in 2016 as well as the buy-out share options and restricted share units (RSUs). During the year ended 30 June 2015, he was granted 11,321 options at an option price of $33.46 and 2,301 RSUs (including dividends received) at a fair market value of $33.46 per share.
Deirdre Mahlan — During the year ended 30 June 2015, Deirdre Mahlan served as a Non-Executive Director of Experian plc and earned fees of £118,675, which she retained.
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, and the percentage change from the year ended 30 June 2014award to the year ended 30 June 2015. DistributionsChief Financial Officer on appointment to shareholders are total dividends. The Committee considers that there are no other significant distributions or payments of profit or cash flow.
Staff pay 1,242 1,180 (5.0%) Distributions to shareholders 1,228 1,341 9.2% Lm 0 500 1,000 1,500 2,000 2,500 3,000 2014 2015
Spend on pay includes exceptional restructuring costs, which were significantly higher in the year ended 30 June 2014 than in the year ended 30 June 2015. Spend on pay for the year ended 30 June 2015 includes the costs of USL employees.company.
Remuneration Committee
Role of the Remuneration Committee
The role of the Remuneration Committee and details of how the company applies the principles of the Code in respect of Directors’ remuneration are set out in the Directors’ Remuneration report.
The Chairman and the Chief Executive may, by invitation, attend Remuneration Committee meetings, except when their own remuneration is discussed. No Director is involved in determining his or her own remuneration.
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 components of the business: North America, Europe, Africa, Latin America and Caribbean, Asia Pacific, International Supply Centre and Corporate and other.
The Executive Committee focuses 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 and a further designated focus is on the company’s reputation. In support, monthly performance delivery calls, involving the senior leadership group, focus on progress against the six performance drivers.
To support the market visits made by the presidents in the ordinary course of their business, a small group led by the Chief Executive makes regular market visits focused on the execution of strategy and designed to assist in continuing the development of strategy and in the delivery of performance against the Performance Ambition.
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
www.diageo.com/en-row/ourbusiness/aboutus/corporategovernance.
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 2016, 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.
155
Governance (continued)
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 financial statements were approved and accords with the guidance issued by the Financial Reporting Council in September 2014, 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 risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity has been carried out. These risks and mitigations are set out above in the Risk factors section of this Annual Report.
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 (which was considered and recommended to the Board by both the Audit & Risk Committee and the Audit Committee). In accordance with the Code, the Board has also considered the company’s longer term viability, based on a robust assessment of its principal risks. This was done through the work of the Audit Committee which recommended the viability statement required pursuant to UK Rules (the Viability Statement) to the Board.
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 preparation of consolidated accounts. Further, a review of the consolidated financial statements is completed by management to ensure that the financial position and results of the group are appropriately reflected therein.
Compliance and ethics programme
Diageo is committed to conducting its business responsibly and in accordance with all laws and regulations to which its business activities are subject. We hold ourselves to the principles in our Code of Business Conduct, which is embedded through a comprehensive training and education programme for all employees.
Our Code of Business Conduct, an updated version of which was launched during the financial year, and other Diageo global policies are available at www.diageo.com/en-row/ourbusiness/aboutus/corporategovernance.
156
Governance (continued)
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, presidents and other identifiable persons in the group, including those performing senior accounting and controller functions. No amendments to, or waivers in respect of, the code of ethics were made during the year.
The full text of the code of ethics is available at www.diageo.com/en-row/ourbusiness/aboutus/corporategovernance.
Both the Audit & Risk Committee and the Audit Committee regularly review the strategy and operation of the compliance and ethics programme through the year.
Further information is given in the section of this Annual Report on sustainability and responsibility, governance and ethics.
Relations with shareholders
The Board’s primary contact with institutional shareholders is through the Chief Executive and Chief Financial Officer. The Chief Executive and Chief Financial Officer are supported by the investor relations department, who are in regular contact with institutional shareholders and sell-side analysts. A monthly investor relations report, including coverage of the company by sell-side analysts, is circulated to the Board.
The Board also ensures that all Directors develop an understanding of the views of major institutional shareholders through an 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 and the chairman of the Remuneration Committee. Reports on any meetings are made to the Board.
Private shareholders are invited to write to the chairman or any other Director and express their views on any issues of concern at any time and the AGM provides an opportunity for private shareholders to put their questions in person.
Political donations
During the year, Diageo Great Britain Limited (a wholly owned subsidiary of the Company) helped, with others, defray the costs of an economists’ dialogue (and associated report) hosted by the independent Centre for European Reform think-tank, in the EU referendum context. These costs totalled £2,500 (2015: nil). During the year also, Diageo Germany GmbH (a wholly owned subsidiary of the Company) helped, with others, to support a dialogue between key German media and influencers called ‘CDU Media Night’ hosted by the political party CDU. These costs totalled approximately £1,000 (2015: nil). Otherwise, 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 £0.4 million during the year (2015: £0.5 million). These contributions were made exclusively to federal and state candidates and committees in North America (consistent with applicable laws), where it is common practice to make political contributions. No particular political persuasion was supported and contributions were made with the aim of promoting a better understanding of the group and its views on commercial matters, as well as a generally improved business environment.
Going concern
The Directors confirm that, after making appropriate enquiries, they have reasonable expectation that the group has adequate resources to continue in operational existence. Accordingly, they continue to adopt the going concern basis in preparing the financial statements. Further information on going concern is given in this Annual Report under note 1 Accounting information and policies – going concern. Although not assessed over the same period as the going concern, the viability of the group has been assessed in the Viability Statement.
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 control over the group’s financial reporting.
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Governance (continued)
Diageo’s internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the EU and IFRS as issued by the International Accounting Standards Board (IASB); provide reasonable assurance that receipts and expenditures are made only in accordance with authorisation of management and the directors of the company; and provide reasonable assurance regarding prevention or timely detection of any unauthorised acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Management has assessed the effectiveness of Diageo’s internal control over financial reporting (as defined in Rules 13(a)-13(f) and 15(d)-15(f) under the US Securities Exchange Act of 1934) based on the framework in ‘Internal Control – Integrated Framework’, issued by the Committee of Sponsoring Organisations of the Treadway Commission (COSO) in 2013. Based on this assessment, management concluded that, as at 30 June 2016, 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.
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.
PricewaterhouseCoopers LLP (PwC), 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 page 197 of this document.
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.
Responsibility statement
Each of the Directors, whose names are set out in the Board of Directors and Executive Committee section of this Annual Report, confirms that to the best of his or her knowledge:
The responsibility statement was approved by the Board of Directors on 27 July 2016.
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Governance (continued)
New York Stock Exchange 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.
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Governance (continued)
Directors’ attendance record at the AGM, scheduled Board meetings and Board committee meetings, for the year ended 30 June 2016 was as set out in the table below. 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.
Annual General Meeting 2015 | Board (maximum 6)(iii) | Audit Committee (maximum 4) | Nomination Committee (maximum 7)(iv) | Remuneration Committee (maximum 4) | ||||||||||||||||
Dr Franz B Humer | ü | 6/6 | 4/4 | (i) | 3/3 | 4/4 | (i) | |||||||||||||
Ivan Menezes | ü | 6/6 | 2/2 | (ii) | 3/3 | (i) | 4/4 | (ii) | ||||||||||||
Deirdre Mahlan | ü | 3/3 | 1/1 | (i) | n/a | n/a | ||||||||||||||
Kathryn Mikells | n/a | 3/3 | 3/3 | (i) | n/a | n/a | ||||||||||||||
Lord Davies | ü | 6/6 | 4/4 | 7/7 | 4/4 | |||||||||||||||
Peggy Bruzelius | ü | 6/6 | 4/4 | 6/7 | 4/4 | |||||||||||||||
Laurence Danon | × | 1/2 | 1/1 | 1/2 | 1/1 | |||||||||||||||
Betsy Holden | ü | 6/6 | 4/4 | 7/7 | 4/4 | |||||||||||||||
Ho KwonPing | ü | 6/6 | 3/4 | 5/7 | 4/4 | |||||||||||||||
Nicola Mendelsohn | × | 5/6 | 4/4 | 5/7 | 4/4 | |||||||||||||||
Philip Scott | ü | 6/6 | 4/4 | 7/7 | 4/4 | |||||||||||||||
Alan Stewart | ü | 6/6 | 4/4 | 7/7 | 4/4 | |||||||||||||||
Emma Walmsley | n/a | 2/2 | 2/2 | 3/3 | 2/2 |
(i) | Attended by invitation. |
(ii) | Attended by invitation, for part only. |
(iii) | Where Non-Executive Directors were unable to attend a meeting they gave their views to the Chairmen of the respective meetings ahead of the meetings being held. Nicola Mendelsohn and Laurence Danon were unable to attend the 2015 AGM as a result of, respectively, a religious holiday and a prior engagement. A Sub-Committee meeting of the Audit Committee was also held involving P G Scott and P B Bruzelius. |
(iv) | Four meetings of the Nomination Committee were held on Chairman succession. |
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Governance (continued)
Letter from the Chairman of the Audit Committee
Dear Shareholder
On behalf of the Audit Committee, I am pleased to present its report for the year ended 30 June 2016.
The purpose of this report is to describe how the Committee has carried out its responsibilities during the year.
In overview, the role of the Audit Committee is to monitor and review: the integrity of the company’s financial statements; internal control and risk management; audit and risk programmes; business conduct and ethics; ‘whistleblowing’; and the appointment of the external auditor.
The work of the Committee during the year included various matters referred to in last year’s report. The Committee oversaw compliance with both the updated version of the UK Corporate Governance Code (Code) (notably the requirements for a Viability Statement and increased disclosure on risk) and the Financial Reporting Council’s new ‘Guidance on Risk management, Internal Control and related Financial and Business Reporting’ (which replaced the ‘Turnbull’ and other guidance). In addition the Committee oversaw the transition to the new auditors, PricewaterhouseCoopers LLP (PwC).
In discharging its duties, the Audit Committee seeks to balance independent oversight of the matters within its remit with providing support and guidance to management. I remain confident that the Committee, supported by members of senior management and the external auditors, has carried out its duties in the year under review, effectively and to a high standard.
Philip G Scott
Chairman of the Audit Committee
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REPORT OF THE AUDIT COMMITTEE
Role of the Audit Committee
The Audit Committee is responsible for :
(i) | monitoring the integrity of the financial statements, including a review of the significant financial reporting judgements contained in them; |
(ii) | reviewing the effectiveness of the group’s internal control and risk management and of control over financial; |
(iii) | monitoring and reviewing the effectiveness of the global audit and risk function, including reviewing the programme of work undertaken by that function; |
(iv) | reviewing the group’s policies and practices concerning business conduct and ethics, including whistleblowing; |
(v) | overseeing the group’s overall approach to securing compliance with laws, regulations and company policies in areas of risk; and |
(vi) | 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 atwww.diageo.com/en-row/ourbusiness/aboutus/corporategovernance. Key elements of the role of the committee and work carried out during the year are set out as follows.
Financial statements
During the year, the Audit Committee met four times (and a sub-committee met once) and reviewed the annual reports and associated preliminary year end results announcement, focusing on key areas of judgement and complexity, critical accounting policies, provisioning and any changes required in these areas or policies. In addition, the Audit Committee reviewed the interim results announcement, which included the interim financial statements and oversaw the transition to the new auditors, PwC.
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 preparation of consolidated accounts. A review of the consolidated financial statements is completed by management (through the work of its Filings Assurance Committee (FAC)) to ensure that the financial position and results of the group are appropriately reflected therein. The Audit Committee reviewed the work of the FAC and a report on the conclusions of the FAC process was provided to the Audit Committee by the Chief Financial Officer.
Significant issues and judgements that were considered in respect of the 2016 financial statements were as follows. These include the matters relating to risks disclosed in the UK external auditor’s report.
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As part of its review of the Annual Report, the committee considered whether the report is ‘fair, balanced and understandable’ (noting the Code’s new reference to ‘position’ as well as ‘performance, business model and strategy’). On the basis of this work, the Audit Committee recommended to the Board that it could make the required statement that the Annual Report is ‘fair, balanced and understandable’.
Internal control and risk management; audit and risk programme; business conduct and ethics (including ‘whistleblowing’)
At each of its meetings, the Audit Committee reviewed detailed reports from the heads of the Global Risk & Compliance (GRC) and Global Audit & Risk (GAR) teams (including coverage of the areas mentioned in the title of this section) and had sight of the minutes of meetings of management’s Audit & Risk Committee. A key focus for the work of both GRC and GAR during the year and their reporting to the committee, continued to be a review of recent acquisitions. The Committee in turn were thus able to keep under review the development of the controls and compliance framework in acquired companies. The Committee also received regular updates from the group general counsel on significant litigation and from the head of tax on the group’s tax profile and key issues.
The GRC reporting included a consideration of key risks and related mitigations. 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 (this was considered also by the Audit & Risk Committee). The Board agreed this recommendation.
Through the activities of the Audit Committee described in this report 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.
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Governance (continued)
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 financial year ended 30 June 2016.
The Audit Committee assesses the ongoing effectiveness and quality of the external auditor and audit process on the basis of meetings and a questionnaire-based internal review with the finance team and other senior executives. Given that the year under review was PwC’s first in office (following a tender last year), the assessment will be carried out later in 2016.
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 2016. The review took into consideration the new regulations on non-audit services. Under this policy, the provision of any non-audit service must be approved by the Audit Committee, unless the proposed service is both expected to cost less than £250,000 and also falls within one of a number of service categories which the Audit Committee has pre-approved. Fees paid to the auditor for audit, audit related and other services are analysed in the notes to the consolidated financial statements. The nature and level of all services provided by the external auditor is a factor taken into account by the Audit Committee when it reviews annually the independence of the external auditor.
‘Financial expert’ and other attendees
For the purposes of the Code and the relevant rule under SOX, section 407, the Board has determined that Philip Scott is independent and may be regarded as an Audit Committee financial expert.
The Chairman, the Chief Financial Officer, the group general counsel the group financial controller, the head of GAR, the GRC director, the group chief accountant and the external auditor regularly attend meetings of the committee.
The Audit Committee met privately with the external auditor and with the head of global audit and risk as appropriate.
Training and deep dives
During the year, the Audit Committee had a risk review and training session, presented by senior executives, on data protection. In addition, as part of a Board meeting, Committee members had a presentation from senior management on the priorities and challenges of the Europe and GB businesses. The Committee concluded at the time that it was satisfied with the Company’s position on these matters but that they would be kept under review.
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Governance (continued)
DIRECTORS’ REMUNERATION REPORT
Annual statement by the Chairman of the Remuneration Committee
Dear Shareholder
As Chairman of the Remuneration Committee, I am pleased to present the directors’ remuneration report for the year ended 30 June 2016. This report complies with the UK Directors’ Remuneration Reporting Regulations 2013 and contains:
There have been no changes to the Directors’ remuneration policy, as approved by shareholders at the 2014 AGM, and it is reproduced in full for both ease of reference and to provide context to the decisions taken by the Committee during the year. The annual remuneration report will be put forward for your consideration and approval by advisory vote at the AGM on 21 September 2016.
Diageo’s remuneration principles
The principles underpinning executive remuneration remain fundamentally unchanged, with sustainable performance and long-term value creation for shareholders at the heart of our remuneration policies and practices:
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Governance (continued)
Focus and highlights in 2016
The Committee continued its focus on:
The Committee undertook a comprehensive review of total remuneration for Executive Directors and Executive Committee members ahead of the 2016 annual salary review, and, supported by the Committee’s third party remuneration advisers, Kepler (a brand of Mercer), were satisfied that the shape and levels of our remuneration practice are appropriately positioned against those of comparator companies of similar size and global scope.
The Chief Executive, Ivan Menezes, requested that the company contribution to his retirement benefit plan be reduced from 40% to 30% of salary. This change was implemented on 1 July 2016. There was no compensatory payment or benefit in exchange for this reduction in contribution.
On 9 November 2015, Kathryn Mikells joined the company and was appointed Chief Financial Officer. In accordance with the approved remuneration policy, the Committee agreed a remuneration package that was in line with current practice at the Executive Committee level in terms of the mix of fixed and variable remuneration and also appropriately positioned against the external market.
During the year, the Committee also reviewed and increased the Chairman’s fee from £500,000 to £600,000 per annum effective
1 January 2016, following five successive years of no increases. The Chairman’s fee is appropriately positioned against our comparator group of FTSE30 companies excluding financial services. The next review is scheduled for December 2017. Dr Franz B Humer will step down as Chairman of the Board on 1 January 2017 and will be succeeded by Javier Ferrán, who joined the Board on 22 July 2016. Javier Ferrán’s fee from 1 January 2017 will be £600,000 per annum.
Following a comprehensive review of competitive market data, the Board also reviewed the fees for Non-Executive Directors and increased the basic fee from £84,000 to £87,000 per annum and the additional Senior Non-Executive Director fee from £20,000 to £25,000 per annum, also effective from 1 January 2016.
The clawback provisions in respect of annual incentive and long-term incentive awards to the Executive Directors have now been extended to all members of the Executive Committee, in addition to the existing malus provisions that apply to all participants under the Diageo Long-Term Incentive Plan, as approved by the Committee last year.
Reward in 2016 at a glance
Base salary | 2% increase for both the Chief Executive and the Chief Financial Officer in October 2016 (versus budgeted 2.2% in the United Kingdom and 3% in the United States for the wider workforce) | |
Allowances and benefits | Unchanged from last year | |
Retirement benefits | Unchanged from last year | |
Annual incentive | Payout above target, delivering 64.8% and 69.8% of maximum opportunity for the Chief Executive and Chief Financial Officer respectively | |
Long-term incentives | 30.6% vesting of performance shares and nil vesting of share options |
As a reflection of the company’s delivery of a good set of results in the year (see key performance indicators on pages 23-27), total variable pay to the Executive Directors in respect of the year ended 30 June 2016 is higher than the year ended 30 June 2015.
Over the period 1 July 2013 to 30 June 2016 (the performance period for long-term incentive awards that vest this year in September 2016), Diageo’s share price grew by 7.9%, from 1933.5 pence to 2086.5 pence, and the company paid a total dividend of 160.0 pence per share. Dividend distribution to shareholders in the year ended 30 June 2016 was increased by 7.6% compared to the previous year.
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Governance (continued)
Planned for 2017
Looking ahead to the year ending 30 June 2017, we will continue to operate executive remuneration arrangements in line with the approved remuneration policy. No changes are proposed to the design of the annual or long-term incentive plan for the year ahead.
We will be reviewing our remuneration policy and actively engaging with shareholders and their advisory bodies in advance of putting the policy to shareholder vote at the 2017 AGM.
As you read our remuneration policy and annual remuneration report on the following pages, I hope it is clear how the Committee’s decisions support the business strategy and the delivery of Diageo’s performance ambition.
We were very pleased to receive a very strong vote in favour of our remuneration report last year. I highly value the direct engagement and feedback from our shareholders and their representative bodies on Diageo’s remuneration policy and look forward to welcoming you and receiving your support again at the AGM this year.
Lord Davies of Abersoch
Senior independent Non-Executive Director and
Chairman of the Remuneration Committee
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Governance (continued)
DIRECTORS’ REMUNERATION POLICY
This section of the report sets out the policy for Executive Directors’ remuneration. The policy was put to shareholders for approval in a binding vote at the AGM in 2014, in accordance with section 439A of the Companies Act 2006, and formally came into effect from 18 September 2014, the date of the AGM. The policy section of the report below is as disclosed in the 2014 Directors’ Remuneration Report, with the exception of the reference to the number of employees across Diageo, a minor addition to the DLTIP section of the policy table to reflect the clarification note released following publication of the 2014 Directors’ Remuneration Report, updates to the illustrations of remuneration policy charts to reflect projected remuneration for 2017 and amendments to reflect the change in incumbent for the Chief Financial Officer role. The remuneration policy as disclosed in the 2014 Directors’ Remuneration Report can be found on the Diageo website at: http://www.diageo.com/en-row/ newsmedia/Pages/resource.aspx?resourceid=2320.
Remuneration policy framework
The remuneration structures and performance measures used in executive incentive plans are designed to support Diageo’s business strategy as follows:
Future policy table
Set out below is the remuneration policy for Executive Directors which has been applied from the date of shareholder approval at the AGM on 18 September 2014.
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
Opportunity
Salary increases will normally be in line with increases awarded 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 the need to align an Executive Director’s salary to market level over time (provided the increase is merited by the individual’s contribution and performance).
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Benefits
Purpose and link to strategy
Provides market competitive and cost effective benefits.
Operation
Opportunity
The benefits package is set at a level which the Remuneration Committee considers:
Post-retirement provisions
Purpose and link to strategy
Provides cost-effective, competitive post-retirement benefits.
Operation
Opportunity
Annual incentive plan (AIP)
Purpose and link to strategy
Incentivises year-on-year delivery of Diageo’s annual financial and strategic targets. Provides focus on key financial metrics and the individual’s contribution to the company’s performance.
Operation
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Governance (continued)
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 based 70%-90% on financial measures which may include, but are not limited to, measures of revenue, profit and cash and 10%-30% on broader objectives based on individual contribution and medium-term strategic goals. Details of the measures and weightings applicable for the year ending 30 June 2017 are set out on page 179. Details of the targets will be disclosed retrospectively in next year’s annual report on remuneration, when they are no longer deemed commercially sensitive by the Board.
Diageo long-term incentive plan (DLTIP)
Purpose and link to strategy
Provides focus on delivering superior long-term returns to shareholders.
Operation
Malus provisions will apply up to delivery of shares at the end of the retention period (as opposed to the vesting date).
Opportunity
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Governance (continued)
Diageo long-term incentive plan (DLTIP)
Performance conditions
Measures that apply to performance shares and market price options may differ, as is the case for current awards. Weightings may vary year-on-year, subject to a minimum weighting of 25% of the total award. Details of the measures, including targets for the awards to be made in September 2016 are set out on page 183.
All-employee share plans
Purpose and link to strategy
To encourage broader employee share ownership through locally approved plans.
Operation
Opportunity
Limits for all employee share plans are set by the tax authorities. The company may choose to set its own lower limits.
Performance conditions
UK Freeshares: based on Diageo plc financial measures which may include, but are not limited to, measures of revenue, profit and cash.
Shareholding requirement
Purpose and link to strategy
Ensures alignment between the interests of Executive Directors and shareholders.
Operation
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Governance (continued)
NOTES TO THE POLICY TABLE
Performance measures and targets
Further details of AIP performance measures and DLTIP performance measures and targets that will apply for awards made in September 2016, and how they are aligned with company strategy and the creation of shareholder value, are set out in the annual report on remuneration, on pages179 and 183.
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.
Differences in remuneration policy for other employees
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. 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 whilst mindful not to over-pay. It is driven by local market practice as well as level of seniority and accountability, reflecting the global nature of Diageo’s business.
Illustrations of application of the remuneration policy
The graphs below illustrate scenarios for the projected total remuneration of Executive Directors at three different levels of performance: minimum, on-target and maximum. Note that the projected values exclude the impact of any share price movements. These charts reflect projected remuneration for the financial year ending 30 June 2017.
IvanMenezesMinimum100%Total$2,244(L1,516)On-target42%29%29%Total$5,345(L3,612)Maximum17%24%59%Total$13,097(L8,849)Thousands02,0004,0006,0008,00010,00012,00014,000KathrynMikellsMinimum100%TotalL840On-target39%31%30%TotalL2,140Maximum16%25%59%TotalL5,348Thousands01,0002,0003,0004,0005,0006,000Salary,benefitsandpensionAnnualincentiveLong-termincentives
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Governance (continued)
Basis of calculation and assumptions:
The ‘Minimum’ scenario shows fixed remuneration only, i.e. base salary for financial year 2017, total value of contractually agreed benefits for 2017, and pension. The pension value is based on the estimated pension benefits accrued over the financial year ending 30 June 2017. These are the only elements of the Executive Directors’ remuneration packages which are not subject to performance conditions.
The ‘On-target’ scenario shows fixed remuneration as above, plus a target pay-out of 50% of the maximum annual bonus and threshold performance vesting for long-term incentive awards.
The ‘Maximum’ scenario reflects fixed remuneration, plus full pay-out of annual and long-term incentives.
Approach to recruitment remuneration
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 in recognition that Diageo competes for talent in a global marketplace. The Committee will seek to align the 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, except as described below, variable pay will follow the policy.
Diageo is a global organisation operating in more than 180 countries around the world. The ability, therefore, 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 that will deliver Diageo’s performance ambition.
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, holding period and whether or not performance conditions would 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 very 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 in the 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.
In the event that an internal candidate was promoted to the Board, legacy terms and conditions would normally be honoured, including pension entitlements and any outstanding incentive awards.
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.
Executive Director | Date of service contract | |
Ivan Menezes | 7 May 2013 | |
Kathryn Mikells | 1 October 2015 | |
Deirdre Mahlan | 1 July 2010 |
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Governance (continued)
Notice period | The contracts provide for a period of six months’ notice by the Executive Director or 12 months’ notice by the company. 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 (excluding incentive plans). The service contracts also provide for the payment of outstanding pay and bonus, if Executive Directors are terminated 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(i) (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. For these purposes, salary in respect of one day of holiday entitlement will be calculated as 1/261 of salary. | ||
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. In the case of Deirdre Mahlan, the mitigation provision may be excluded in the event of termination as a result of being located permanently outside the United Kingdom and Ireland. | |
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 (‘Good Leaver Reasons’) during the financial year, they are 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 will be made. The amount is subject to performance conditions being met and at the discretion of the Committee. The Committee has discretion to determine an earlier payment date, for example on death in service. | |
Diageo 2014 long-term incentive plan (DLTIP) | When an Executive Director leaves for any reason other than Good Leaver Reasons, all unvested awards generally lapse immediately. In cases where Good Leaver Reasons apply, awards vest on the original vesting date unless the Remuneration Committee decides otherwise (for example in the case of death in service). The retention period for vested awards continues for all leavers other than in cases of disability, ill 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). |
(i) | the Internal Revenue Code of 1986, as amended |
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Governance (continued)
Awards may be adjusted on a variation of share capital, demerger or other similar event. | ||
The Remuneration Committee may amend the plans, except that any changes to the advantage of participants require shareholder approval, unless the change relates to the administration, or taxation of the plan or participants, or is needed to ensure that the plans operate effectively in another jurisdiction. | ||
Details of existing awards are set out in the annual report on remuneration. | ||
Repatriation | 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 costs for the repatriation of Good Leavers. |
Existing arrangements
The Remuneration 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) before the policy or the relevant legislation came into effect or (ii) 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. For these purposes ‘payments’ include the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment which are ‘agreed’ at the time the award is granted (including awards under the PSP and SESOP). Details of outstanding share awards are set out in the annual report on remuneration. For the purposes of section 226D(6) of the Companies Act, the effective date is the end of the financial year starting in 2014.
External appointments
Executive Directors may accept external appointments as Non-Executive Directors of other companies and retain any related fees paid to them, subject to the specific approval of the Board in each case.
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
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, Dr Franz B Humer, commenced his appointment on 1 July 2008. Dr Humer had a letter of appointment for an initial five-year term from 1 July 2008 which has been extended to 31 December 2016. It is terminable on six months’ notice by either party or, if terminated by the company, by payment of six months’ fees in lieu of notice. Dr Humer will step down as Chairman of the Board on 1 January 2017 and will be replaced by Javier Ferrán, who joined the Board on 22 July 2016.
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Governance (continued)
Opportunity
Consideration of employment conditions elsewhere in the company
When reviewing and determining pay for Executive Directors, the Committee takes into account the level and structure of remuneration as well as salary budgets for other employees in the group. More specifically, the Committee reviews annual salary increase budgets for the general employee population in the United Kingdom and North America as well as the remuneration structure and policy for the global Senior Management population.
Diageo employs 32,078 employees and operates in more than 180 countries around the world. Given its global scale and complexity, the Committee has not consulted directly with employees when designing the remuneration policy for its Executive Directors. Diageo runs annual employee surveys which give employees the opportunity to give feedback and express their views on a variety of topics, including remuneration. Any comments relating to Executive Directors’ remuneration are fed back to the Remuneration Committee.
Consideration of shareholder views
The Committee values the continued dialogue with Diageo’s shareholders and engages directly with them and their representative bodies at the earliest opportunity when setting out Diageo’s remuneration policy and approach, proposed base salary increases for the Executive Directors and targets for the long-term incentive plan award. This year, the company has engaged with shareholders about the base salary proposals for 2016, the fee review for the Chairman and Non-Executive Directors, long-term incentive plan targets for awards to be made in 2016 as well as the buy-out share award to the Chief Financial Officer on appointment to the company.
ANNUAL REPORT ON REMUNERATION
Single total figure of remuneration for Executive Directors (audited)
The table below details the Executive Directors’ remuneration for the year ended 30 June 2016.
Ivan Menezes(i) | Kathryn Mikells(ii) | Deirdre Mahlan(iii) | ||||||||||||||||||||||||||||||
2016 | 2016 | 2015 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||
Fixed pay | ’000 | ’000 | ’000 | ’000 | ’000 | ’000 | ’000 | ’000 | ||||||||||||||||||||||||
Salary | £ | 1,027 | $ | 1,520 | £ | 968 | $ | 1,520 | £ | 419 | — | £ | 258 | £ | 727 | |||||||||||||||||
Benefits(iv) | £ | 78 | $ | 115 | £ | 155 | $ | 243 | £ | 64 | — | £ | 102 | £ | 34 | |||||||||||||||||
Pension(v) | £ | 486 | $ | 719 | £ | 424 | $ | 666 | £ | 83 | — | £ | 105 | £ | 267 | |||||||||||||||||
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Total fixed pay | £ | 1,591 | $ | 2,354 | £ | 1,547 | $ | 2,429 | £ | 566 | £ | 465 | £ | 1,028 | ||||||||||||||||||
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Annual incentive | £ | 1,330 | $ | 1,969 | £ | 535 | $ | 840 | £ | 585 | — | £ | 363 | £ | 428 | |||||||||||||||||
Long-term incentives(vi) | £ | 1,162 | $ | 1,720 | £ | 1,380 | $ | 2,167 | £ | 1,660 | — | £ | 245 | £ | 870 | |||||||||||||||||
Other incentives(vii) | — | — | — | — | — | — | £ | 3 | £ | 4 | ||||||||||||||||||||||
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Total remuneration for Executive Director appointment | £ | 4,083 | $ | 6,043 | £ | 3,462 | $ | 5,436 | £ | 2,811 | — | £ | 1,076 | £ | 2,330 | |||||||||||||||||
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Other performance related pay(Granted prior to appointment as Executive Director - performance conditions relate to previous role) | ||||||||||||||||||||||||||||||||
Long-term incentives(viii) | £ | 357 | $ | 528 | £ | 330 | $ | 518 | — | — | — | — | ||||||||||||||||||||
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TOTAL SINGLE FIGURE | £ | 4,440 | $ | 6,571 | £ | 3,792 | $ | 5,954 | £ | 2,811 | — | £ | 1,076 | £ | 2,330 | |||||||||||||||||
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Notes
(i) | The amounts shown in sterling are converted using the cumulative weighted average exchange rate for the respective financial year. For the year ended 30 June 2015, the exchange rate was £1 = $1.57 and for the year ended 30 June 2016 the exchange rate was £1 = $1.48. |
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Governance (continued)
(ii) | Kathryn Mikells was appointed as Chief Financial Officer on 9 November 2015, replacing Deirdre Mahlan. |
(iii) | Deirdre Mahlan stepped down from the board and was appointed President, North America on the Executive Committee on 9 November 2015. Deirdre Mahlan’s remuneration has been pro-rated to reflect the period 1 July 2015 to 9 November 2015. |
(iv) | Benefits is the gross value of all taxable benefits. For Ivan Menezes, these include medical insurance (£17k), company car allowance (£17k), chauffeur (£8k), financial counselling (£33k), product allowance, flexible benefits allowance and life and long-term disability cover. Deirdre Mahlan’s benefits include flexible benefits allowance (£6k), contracted car service (£6k), financial counselling (£7k), medical insurance, life cover, product allowance and the cost of relocating her from the United Kingdom to the United States (£81k). Kathryn Mikells’ benefits include flexible benefits allowance (£13k), financial counselling (£24k), contracted car service, life cover, product allowance and relocation costs in relation to her move from the United States to the United Kingdom (£25k). |
(v) | 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 UK pension amount that accrued over the two years in excess of inflation is nil. Kathryn Mikells became a director and started accruing benefits in the Supplemental Executive Retirement Plan (SERP) with effect from 9 November 2015. The pension input amount for the year ended 30 June 2016 only reflects the period from 9 November 2015 and Kathryn Mikells did not build up any pension benefits prior to that point. Deirdre Mahlan’s accrued benefits over the year ended 30 June 2016 have been pro-rated to reflect the period of time she was an Executive Director from 1 July 2015 to 9 November 2015. In previous years, Ivan Menezes’ and Deirdre Mahlan’s deferred pension benefits in the US Cash Balance Plan and the Benefits Supplemental Plan (BSP) have been disclosed although benefits accrual ceased in August 2012 and June 2010 respectively. On further review, and in line with the disclosure requirements, these deferred benefits have been excluded from 2016 remuneration and 2015 has been restated in line with this revised methodology. |
(vi) | Long-term incentives represents the estimated gain delivered through options and performance shares where performance conditions have been met in the respective financial year. For 2016, this includes performance shares awarded under the PSP in 2013 and due to be released in September 2016 and the estimated value of accrued dividend shares on this award. Though the outcome of the performance conditions is known, the share price on the vesting date is estimated, using the average market value of Diageo shares between 1 April and 30 June 2016 (1875.1 pence for ordinary shares and $108.14 for ADRs) for the purpose of this calculation. Share options awarded under the SESOP in 2013 all lapsed due to the performance condition not being met. Long-term incentives for 2015 have been adjusted to reflect the actual share price on the date of vesting on 1 October 2015 (1765.5 pence for ordinary shares and $107.50 for ADRs). For further information on the SESOP and PSP performance conditions and vesting outcomes please refer to the ‘LTIP awards vesting in the year ended 30 June 2016’ section of the report on page 79. For Kathryn Mikells, long-term incentives represents the face value of 87,736 time-vesting replacement share awards (not subject to performance conditions) made on 9 November 2015 in recognition of share awards forfeited from her former employer. The average closing share price of an ordinary share over the three dealing days prior to the date of grant was 1892.0 pence. |
(vii) | Other incentives include the face value of awards made under all-employee share plans. Awards do not have performance conditions attached. |
(viii) | Ivan Menezes retains interests in long-term incentive awards that were granted to him in 2012, prior to joining the board under ‘below-board’ plans (Discretionary Incentive Plan), details of which are shown on page 181. The value of the second tranche of the award based on performance for the year ended 30 June 2016 is shown in the table on the previous page and calculated on the basis of the average market value of Diageo shares between 1 April and 30 June 2016 ($108.14 for ADRs). The value of the part of the award based on continuing employment for the year ended 30 June 2016 is not included in the table on the previous page and amounts to 14,642 ADRs. The second tranche of the award will vest on 8 March 2017. For 2015, the value of the first tranche of the award that vested on 8 March 2016 has been restated to account for the share price on the date of vesting ($106.14 for ADRs). |
Salary
Salary increases to be applied in the year ending 30 June 2017
In June 2016, the Remuneration Committee reviewed base salaries for senior management and agreed new salaries which will apply from 1 October 2016. In determining these salaries, the Remuneration Committee took into consideration a number of factors including general employee salary budgets and employment conditions, individual performance and experience, and salary positioning relative to internal and external peers. The overall budgeted salary increase for the salary review in October 2016 is 2.2% of base salary for the business in the United Kingdom and 3% in North America.
The Committee considered very carefully the total remuneration positioning of the Chief Executive and Chief Financial Officer, the salary budget for all employees in the United Kingdom and the expectations of shareholders with respect to continuing pay restraint. As a result, it was agreed that there would be a 2% salary increase for both the Chief Executive and the Chief Financial Officer, effective from 1 October 2016.
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Governance (continued)
Ivan Menezes | Kathryn Mikells(i) | |||||||||||||||
Salary at 1 October (’000) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Base salary | $ | 1,550 | $ | 1,520 | £ | 663 | £ | 650 | ||||||||
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(i) | For Kathryn Mikells, the 2015 salary refers to her salary on appointment on 9 November 2015. |
Annual incentive plan (AIP) (audited)
AIP payout for the year ended 30 June 2016
Performance against the group financial measures and the Individual Business Objectives (IBOs), as assessed by the Remuneration Committee, is described below.
The overall level of performance achieved resulted in an AIP award equating to 129.6% of base salary for Ivan Menezes and 139.6% of base salary for both Kathryn Mikells and Deirdre Mahlan (pro-rated to reflect the period of their appointments on the Board). The actual awards received in respect of their Executive Director appointments are shown in the ‘single total figure of remuneration’ table on pages 176-177.
PayoutDiageoGroup(i)(%oftotalAIP(80%oftotalAIPopportunity)opportunity)Netsalesmeasure(ii)(%growth)ThresholdTargetMaximum(25%oftotal)Performancetarget1.9%3.9%5.8%Actualperformance3.2%AIPopportunity6.25%12.50%25.00%10.4%ProfitbeforeexceptionalitemsThresholdTargetMaximumandtaxmeasure(iii)(%growth)Performancetarget4.6%7.0%9.2%(25%oftotal)Actualperformance9.6%AIPopportunity6.25%12.50%25.00%25.0%OperatingcashconversionThresholdTargetMaximummeasure(iv)(%)Performancetarget97.0%102.0%107.0%(30%oftotal)Actualperformance104.3%AIPopportunity7.5%15.0%30.0%21.9%TotalDiageogroupAIPoutcome20%40%80%57.3% |
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Governance (continued)
Payout | ||||||||||||||
Total | Total | Total | Total | |||||||||||
Individual | Individual Bonus Objectives (IBOs)(v) | IBOs | Group | (% max) | (% salary) | (£’000) | ($’000) | |||||||
Maximum AIP opportunity | 20% | 80% | 100% | 200% | ||||||||||
Ivan MenezesCEO | • Delivery of investor critical growth priorities • Deliver a transformation in commercial standards and sales capabilities • Enhance our Corporate Reputation | 7.5% | 57.3% | 64.8% | 129.6% | £1,330 | $1,969 | |||||||
Kathryn MikellsCFO | • Deliver cash targets versus plan • Drive improvements in Working Capital through focus on supply chain interventions • Build support for Diageo investment story of good sustainable performance, including demonstration of commitment to cost | 12.5% | 57.3% | 69.8% | 139.6% | £585 | ||||||||
Deirdre MahlanFormer CFO | • Deliver cash targets versus plan • Drive improvements in Working Capital through focus on supply chain interventions • Build support for Diageo investment story of good sustainable performance, including demonstration of commitment to cost | 12.5% | 57.3% | 69.8% | 139.6% | £363 |
(i) | Performance against the AIP measures is calculated using 2016 budgeted exchange rates in line with management reporting and excludes the impact of IAS 21 in respect of short-term intercompany funding balances and IAS 39 in respect of market value movements as recognised in net finance charges and any exceptional items. |
(ii) | For AIP purposes, the net sales value measure is calculated after adjustments for acquisitions and disposals. |
(iii) | For AIP purposes, the profit before exceptional items and tax measure is calculated as operating profit plus earnings from associated companies less net interest, IAS 21/39 adjustments, adjustments for acquisitions and disposals and year-on-year foreign exchange on interest. |
(iv) | The operating cash conversion measure 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 ratio is stated at the budgeted exchange rate for the respective year in line with management reporting and is expressed as a percentage. |
(v) | The Committee assessed the Executive Directors’ performance against each of the IBOs and awarded a rating based on whether they had partially met, achieved or exceeded each goal. The average of all IBO ratings (weighted 50% on the first goal and 25% on each of the second and third goals) is shown as the final payout against the IBO element in the table above. |
AIP design for the year ending 30 June 2017
The measures and targets used in the AIP are reviewed annually by the Remuneration Committee and are chosen to drive financial and individual business performance goals related to the company’s short term strategic operational objectives. The AIP design for the year ending 30 June 2017 will comprise of four measures (weightings in brackets):
Details of the targets for the performance period ending 30 June 2017 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.
Long-term incentive plans (LTIPs) (audited)
LTIP awards vesting in the year ended 30 June 2016 (audited)
Until 30 June 2014, long-term incentives were a combination of share options under the Senior Executive Share Option Plan 2008 (SESOP) and performance share awards under the Performance Share Plan 2008 (PSP). Awards were designed to incentivise Executive Directors and senior managers to deliver long-term sustainable performance. Awards made under both sets of plans were subject to performance conditions normally measured over a three-year period. As approved by shareholders at the AGM in September 2014, these plans were replaced by the Diageo Long-Term Incentive Plan (DLTIP) for awards from 2014 onwards.
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Governance (continued)
SESOP – granted in September 2013, vesting in September 2016 (audited)
On 5 September 2013, Ivan Menezes and Deirdre Mahlan received awards of 46,239 (ADRs) and 135,022 (ordinary shares) market price options, respectively, under the SESOP. Awards were subject to a performance condition based on compound annual growth in adjusted eps over a three-year period. For the purpose of the SESOP, an adjusted measure of eps is used to ensure that elements such as exceptional items and the impact of movements in exchange rates are excluded from year-on-year comparisons of performance. Options only vest when stretching adjusted eps targets are achieved. Vesting is on a pro rata basis ranging from a threshold level of 25% to a maximum level of 100%.
The adjusted eps growth targets and actual performance for the 2013 SESOP awards are set out below:
Vesting of 2013 SESOP awards | Target | Vesting (% maximum) | ||||||
Compound annual adjusted eps growth over 1 July 2013 – 30 June 2016 | ||||||||
Threshold | 7% | 25% | ||||||
Maximum | 11% | 100% | ||||||
Actual | 1.8% | 0.0% |
Accordingly, the 2013 SESOP award, which is due to vest in September 2016, has not met the threshold under the performance condition and the options under the award will lapse.
PSP – awarded in September 2013, vesting in September 2016 (audited)
On 5 September 2013, Ivan Menezes and Deirdre Mahlan received awards of 47,484 (ADRs) and 110,241 (ordinary shares) performance shares, respectively, under the PSP. Awards vest after a three-year period subject to the achievement of specified performance tests. Notional dividends accrue on awards and are paid out either in cash or shares in accordance with the vesting schedule.
For the 2013 awards, the primary performance test is split between three equally weighted performance measures:
1. | A comparison of Diageo’s three-year total shareholder return (TSR) — the percentage growth in Diageo’s share price (assuming all dividends and capital distributions are re-invested) — with the TSR of a peer group of international drinks and consumer goods companies. TSR is calculated on a common currency (US dollar) basis; |
2. | Growth in organic net sales on a compound annual basis; and |
3. | Total organic operating margin improvement. |
For the part of the award subject to the TSR condition to vest, there must also be an improvement in the underlying financial performance of the company. In addition, the Remuneration Committee must be satisfied that performance in both organic net sales and organic operating margin is above an appropriate level before any of the award under either measure can be released.
The targets and vesting profile for the PSP awards granted in September 2013 are shown in the following table:
Vesting of 2013 PSP awards | Threshold | Mid-point | Maximum | Actual | Vesting (% maximum) | |||||||||||||||
Organic net sales (CAGR) | 5.0% | 6.5% | 8.0% | 1.0% | 0.0% | |||||||||||||||
Organic operating margin improvement | 75bps | 100bps | 125bps | 120bps | 91.9% | |||||||||||||||
Relative total shareholder return | | Median ranking (ninth) | | — | | Upper quintile (third or above) | | 15th | 0.0% | |||||||||||
Vesting (% maximum) | 25.0% | 62.5% | 100% | 30.6% |
The three conditions are weighted equally. For operating margin and net sales, there is straight-line vesting between threshold and the midpoint, and between the mid-point and the maximum. The full vesting profile for TSR is shown below:
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Governance (continued)
TSR ranking (out of 17) | Vesting profile for PSP awards | Vesting profile for DLTIP performance share awards from 2014 | ||||||
1st, 2nd or 3rd | 100% | 100% | ||||||
4th | 95% | 95% | ||||||
5th | 75% | 75% | ||||||
6th | 65% | 65% | ||||||
7th | 55% | 55% | ||||||
8th | 45% | 45% | ||||||
9th | 25% | 20% | ||||||
10th or below | 0% | 0% |
TSR peer group (16 companies) | ||
AB Inbev | Mondelēz International | |
Brown Forman | Nestlé | |
Carlsberg | PepsiCo | |
Coca-Cola | Pernod Ricard | |
Colgate-Palmolive | Procter & Gamble | |
Groupe Danone | Reckitt Benckiser | |
Heineken | SABMiller | |
Kimberly-Clark | Unilever |
On the basis of this performance, the 2013 PSP award, which is due to vest in September 2016, has partially met the performance conditions and, consequently, the shares under award will vest at 30.6% of the initial award.
The Committee has taken into consideration all factors regarding the underlying quality of the performance of the business at the end of the performance period and is satisfied that the level of vesting is warranted.
Diageo Incentive Plan (DIP) (audited)
Ivan Menezes retains interests in awards under the Diageo Incentive Plan that were granted to him in 2012, prior to his appointment as Executive Director. The number of shares granted to him on 8 March 2012 was 117,142 ADRs. 50% of this award is subject to meeting the midpoint of the targets for the financial measures under the long-term incentive plan over the three-year performance periods ending 30 June 2015, 30 June 2016, 30 June 2017 and 30 June 2018. The remaining 50% is subject to continued satisfactory employment. The financial measures under the performance part of the award are equally weighted. Actual performance for the second tranche of the 2012 DIP award (i.e. the tranche based on performance over the three years to 30 June 2016) versus target is set out below:
Vesting of second performance-based tranche of March 2012 DIP award
Performance measures (equally weighted) | Target | Actual | Vesting (% of maximum) | |||||||||
Organic net sales growth (CAGR) | 6.50% | 1.0% | 0% | |||||||||
Organic operating margin improvement | 100bps | 120bps | 100.0% | |||||||||
Compound annual adjusted eps growth | 9% | 1.8% | 0% | |||||||||
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As the table shows, 33.3% of the performance related ADRs under the second tranche of the 2012 DIP award will vest in March 2017, subject to continuing employment. The total award that will vest to Ivan Menezes in March 2017 will therefore be 66.6% of the second tranche (including the ADRs that vest on time only), or 19,523 ADRs, provided he remains employed at the time of vesting. The Committee has assessed the underlying performance of the business at the end of the performance period and is satisfied that this level of vesting is warranted. The value of the part of the award based on performance and vesting in March 2017 is included in the single total figure of remuneration.
DLTIP awards made during the year ended 30 June 2016 (audited)
On 3 September 2015, Ivan Menezes and Deirdre Mahlan received awards of 49,825 (ADRs) and 140,515 (ordinary shares) performance shares, respectively and 49,825 (ADRs) and 140,515 (ordinary shares) market price share options, respectively, under the DLTIP; details are provided in the table below. The three-year period over which performance will be measured is 1 July 2015 to 30 June 2018. The performance measures are relative total shareholder return, organic net sales growth, cumulative free cash flow and adjusted eps growth, equally weighted. 20% of the award will vest at threshold, with straight-line vesting up to 100% if the maximum level of performance is achieved.
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Governance (continued)
Executive Director | Date of grant | Plan | Share type | Awards made during the year | Exercise price | Face value ’000 | Face value (% of salary) | |||||||||||||||||||||
Ivan Menezes | 03/09/2015 | DLTIP – share options | ADR | 49,825 | $104.93 | $5,700 | 375% | |||||||||||||||||||||
Ivan Menezes | 03/09/2015 | DLTIP – performance shares | ADR | 49,825 | — | $5,700 | 375% | |||||||||||||||||||||
Deirdre Mahlan | 03/09/2015 | DLTIP – share options | Ord | 140,515 | 1709p | £2,635 | 360% | |||||||||||||||||||||
Deirdre Mahlan | 03/09/2015 | DLTIP – performance shares | Ord | 140,515 | — | £2,635 | 360% |
The table above specifies the number of performance shares and share options initially awarded under the DLTIP. The proportion of the awards that will vest is dependent upon the achievement of performance conditions, and the actual value may be nil. The vesting outcomes will be disclosed in the 2018 annual report.
The face value of each award has been calculated using the share price at the time of grant. In accordance with the rules, the number of performance shares and share options granted under the DLTIP was calculated by using the average closing share price for the last six months of the preceding financial year (1875 pence for ordinary shares and $114.40 for ADRs). In accordance with the plan rules, the exercise price was calculated using the average closing share price of the three days preceding the grant date (1709 pence for ordinary shares and $104.93 for ADRs). The share price on the date of grant was 1713.5 pence for ordinary shares and $104.30 for ADRs.
DLTIP awards to be made in the year ending 30 June 2017
The long-term incentive plan (DLTIP) was approved by shareholders at the AGM in September 2014.
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 DLTIP measures for awards to be granted in September 2016 are the same as those that applied to awards made in September 2015 and are:
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Governance (continued)
The table below outlines the targets and the vesting profile for these awards. The measures are equally weighted, with performance shares subject to performance against relative total shareholder return, organic net sales and cumulative free cash flow, and share options subject to performance against adjusted eps growth. Performance will be tested over three financial years, beginning with the year ending 30 June 2017.
Performance shares | Share options | |||||||||||||||||||
Relative total shareholder return (25%) | Organic net sales (CAGR) (25%) | Cumulative free cash flow (£m) (25%) | Adjusted eps growth (CAGR) (25%) | Vesting profile | ||||||||||||||||
Threshold | Median ranking (ninth) | 3.5% | £5,700m | 4.0% | 20% | |||||||||||||||
Midpoint | — | 4.75% | £6,400m | 6.75% | 60% | |||||||||||||||
Maximum | Upper quintile (third or above) | 6.0% | £7,100m | 9.5% | 100% |
It is intended that a performance share award of 375% of base salary and an award of market price share options of 125% of base salary (in performance share equivalents; one market price option is valued at one-third of a performance share) will be made to Ivan Menezes in September 2016.
It is intended that Kathryn Mikells will be awarded a performance share award of 360% of base salary and an award of market price share options of 120% of base salary (in performance share equivalents) in September 2016.
Award on appointment in the year ended 30 June 2016 (audited)
On her appointment as Chief Financial Officer on 9 November 2015, Kathryn Mikells was awarded shares in Diageo plc in recognition of the share awards forfeited under the terms of her previous employer’s long-term incentive plans. As prescribed by the approved remuneration policy, the fair value of the replacement award in Diageo shares was no higher than the estimated fair value of the awards being forfeited.
The share awards that Kathryn forfeited on leaving her previous employer had a combined face value of £9.1 million (based on the share price at the time of valuing the forfeited stock) and comprised a number of time-vesting shares vesting on 1 July 2016 and a number of performance shares vesting on 1 January 2017, 1 July 2017 and 1 July 2018. The fair value of awards was estimated at £3.9 million.
Replacement awards in Diageo shares were delivered in a mixture of time-vesting and performance-based restricted shares with vesting staggered over a three-year period, to take account of the vesting schedule of the forfeited stock and to ensure appropriate retention value for the company. The face value of replacement awards was £6.3 million and the fair value was £3.9 million on grant.
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Governance (continued)
As was disclosed to the market at the time, Kathryn Mikells was awarded:
Pension and benefits in the year ended 30 June 2016
Benefits
Benefits provisions for the Executive Directors continue to be in line with the information set out in the future policy table.
Pension arrangements (audited)
Ivan Menezes, Kathryn Mikells and Deirdre Mahlan are members of the Diageo North America Inc. Supplemental Executive Retirement Plan (SERP) with an accrual rate of 40%, 20% and 35% of base salary, respectively during the year ended 30 June 2016. On his request, the accrual rate for Ivan Menezes was reduced from 40% to 30% of salary, effective from 1 July 2016. There will be no compensatory payment or benefit in exchange for this reduction in contribution.
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 in the form of five equal annual instalments or a lump sum upon reaching age 55 (Kathryn Mikells and Deirdre Mahlan) and after having left service with Diageo (within six months of separation from service).
Ivan Menezes and Deirdre Mahlan participated in the US Cash Balance Plan and the Benefit Supplemental Plan (BSP) until August 2012 and June 2010, 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.
Upon death in service, a life insurance benefit of $3 million is payable to Ivan Menezes and a lump sum of four times base salary is payable to Kathryn Mikells and Deirdre Mahlan.
The table below shows the pension benefits accrued by each Director to date. Note that the accrued UK benefits for Ivan Menezes are annual pension amounts, whereas the accrued US benefits for Ivan Menezes, Kathryn Mikells and Deirdre Mahlan are one-off cash balance amounts.
184
Governance (continued)
30 June 2016 | 30 June 2015 | |||||||||||||||
Executive Director | UK pension £’000 p.a. | US benefit £’000 | UK pension £’000 p.a. | US benefit £’000 | ||||||||||||
Ivan Menezes(i) | 69 | 5,588 | 69 | 4,218 | ||||||||||||
Kathryn Mikells(ii) | Nil | 92 | n/a | n/a | ||||||||||||
Deirdre Mahlan(iii) | Nil | 1,808 | Nil | 1,239 |
(i) | Ivan Menezes’ US benefits are higher at 30 June 2016 than at 30 June 2015 by £1,370k: |
(a) | £486k of which is due to pension benefits earned over the year (all of which is over and above the increase due to inflation) – as reported in the single figure of remuneration, see pages 176-177; |
(b) | £61k of which is due to interest earned on his deferred US benefits over the year; and |
(c) | £823k of which is due to exchange rate movements over the year. |
(ii) | Kathryn Mikells’ US benefits are higher at 30 June 2016 than on her appointment date on 9 November 2015 by £92k: |
(a) | £83k of which is due to pension benefits earned over the year (all of which is over and above the increase due to inflation) – as reported in the single figure of remuneration, see pages 176-177; and |
(b) | £9k of which is due to exchange rate movements over the year. |
(iii) | Deirdre Mahlan’s US benefits are higher at 30 June 2016 than at 30 June 2015 by £569k: |
(a) | £296k of which is due to pension benefits earned over the year (all of which is over and above the increase due to inflation) – which equates to £105k pro-rated for the period 1 July 2015 – 9 November 2015 when she was a Director, as reported in the single figure of remuneration, see pages 176-177; |
(b) | £14k of which is due to interest earned on her deferred US benefits over the year; and |
(c) | £259k of which is due to exchange rate movements over the year. |
The Normal Retirement Age applicable to each Director’s benefits depends on the pension scheme, as outlined below.
Executive Director | UK benefits (DPS) | US benefits (Cash balance) | US benefits (BSP) | US benefits (SERP) | ||||||||
Ivan Menezes(i) | 60 | 65 | 6 months after age of leaving service | 6 months after age of leaving service | ||||||||
Kathryn Mikells | n/a | n/a | n/a | 6 months after age of leaving service, or age 55 if later | ||||||||
Deirdre Mahlan | n/a | 65 | 6 months after age of leaving service | 6 months after age of leaving service, or age 55 if later |
(i) | Ivan Menezes is able to take his UK pension benefits from age 58 without consent, and his benefits would not be subject to any actuarial reduction in respect of early payment. However, this is a discretionary policy Diageo offers that is not set out in the DPS Scheme Rules. |
185
Governance (continued)
Performance graph and table
The graph below shows the total shareholder return for Diageo and the FTSE100 Index since 30 June 2009 and demonstrates the relationship between pay and performance for the Chief Executive, using current and previously published single total remuneration figures. The FTSE100 Index has been chosen because it is a widely recognised performance benchmark for large companies in the United Kingdom.
Totalshareholderreturn-DiageoChiefExecutivevalueofhypotheticalFTSE100totalremunerationL100holdingChiefExecutivetotalremunerationLmillionL30030 L25025L20020L15015L10010L505 00June2009June2010June2011June2012June2013June2014June2015June2016 PaulSWalshPaulSWalshPaulSWalshPaulSWalshIvanMenezes(i)IvanMenezes(i)IvanMenezes(i)L'000L'000L'000L'000L'000L'000L'000ChiefExecutivetotalremuneration(includeslegacyLTIPawards)3,2314,44911,74615,5577,3123,8884,440Annualincentive(%maximumopportunity)86%77%74%51%9%28%65%LT-SESOP (%maximumopportunity)100%100%100%100%71%0%0%LTI-PSP (%maximumopportunity)0%0%65%95%55%33%31% |
(i) | To enable comparison Ivan Menezes’ single total figure of remuneration has been converted into sterling using the cumulative average weighted exchange rate for the relevant financial year. |
186
Governance (continued)
Percentage change in remuneration of the director undertaking the role of Chief Executive
The table below shows a comparison of the percentage change in the Chief Executive’s remuneration to the average percentage change in remuneration for the UK and US population from 2015 to 2016. The chosen population represents the most appropriate comparator group for the Chief Executive, as the Committee considers salary increase budgets in these countries when reviewing Executive Directors’ base salaries. Furthermore, the majority of Executive Committee members as well as the Executive Directors are on UK or US reward packages.
Salary | Taxable benefits | Bonus | ||||||||||
% change | % change | % change | ||||||||||
Chief Executive percentage change from 2015 to 2016 | 0% | (53%) | 134% | |||||||||
Average % change for the UK and US workforce from 2015 to 2016 | 3% | 0% | 101% |
The percentage change for the Chief Executive is based on the remuneration of Ivan Menezes from 2015 to 2016. Taxable benefits in 2015 included one-off relocation payments.
UK salary, benefits and bonus data for both 2015 and 2016 have been converted into USD using the cumulative weighted average exchange rate for the year ended 30 June 2016 of £1 = $1.48.
Directors’ shareholding requirements and share and other interests (audited)
The beneficial interests of the Directors in office at 30 June 2016 (and their connected persons) in the ordinary shares (or ordinary share equivalents) of the company are shown in the table below.
Ordinary shares or equivalent(i) | ||||||||||||||||||||||||
14 July 2016 | 30 June 2016 (or date of departure, if earlier) | 30 June 2015 (or date of appointment, if later) | Shareholding requirement (% salary)(ii) | Shareholding at 14 July 2016 (% salary)(ii) | Shareholding requirement met | |||||||||||||||||||
Chairman | ||||||||||||||||||||||||
Dr Franz B Humer | 67,699 | 67,316 | 60,097 | — | — | — | ||||||||||||||||||
Executive Directors | ||||||||||||||||||||||||
Ivan Menezes(iii) | 864,714 | 864,714 | 749,518 | 300% | 1552% | Yes | ||||||||||||||||||
Kathryn Mikells(iii),(vi) | 13,589 | 13,580 | — | 250% | 39% | No | ||||||||||||||||||
Deirdre Mahlan(iii) | 308,447 | 308,447 | 281,153 | 250% | 777% | Yes | ||||||||||||||||||
Non-Executive Directors | ||||||||||||||||||||||||
Peggy B Bruzelius | 5,000 | 5,000 | 5,000 | — | — | — | ||||||||||||||||||
Laurence M Danon(iv) | — | 5,000 | 5,000 | — | — | — | ||||||||||||||||||
Lord Davies of Abersoch | 5,052 | 5,052 | 5,052 | — | — | — | ||||||||||||||||||
Betsy D Holden(iii) | 17,400 | 17,400 | 17,400 | — | — | — | ||||||||||||||||||
Ho KwonPing | 4,353 | 4,353 | 4,223 | — | — | — | ||||||||||||||||||
Philip G Scott | 10,000 | 10,000 | 10,000 | — | — | — | ||||||||||||||||||
Nicola S Mendelsohn | 5,000 | 5,000 | 5,000 | — | — | — | ||||||||||||||||||
Alan JH Stewart | 2,560 | 2,560 | 1,500 | — | — | — | ||||||||||||||||||
Emma Walmsley(v) | 5,094 | 5,094 | — | — | — | — |
Notes
(i) | Each person listed beneficially owns less than one percent of Diageo’s ordinary shares. Ordinary shares held by Directors have the same voting rights as all other ordinary shares. |
(ii) | Both the shareholding requirement and shareholding at 14 July 2016 are expressed as a percentage of base salary earned in the year ended 30 June 2016 and calculated using an average share price for the year ending 30 June 2016 of 1843.5 pence. |
(iii) | Ivan Menezes, Deirdre Mahlan, Kathryn Mikells and Betsy D Holden have share interests in ADRs (one ADR is equivalent to four ordinary shares); the share interests in the table are stated as ordinary share equivalents. |
(iv) | Laurence M Danon ceased to be a Non-Executive Director on 23 September 2015 and therefore her shareholding is not disclosed at 14 July 2016. |
(v) | Emma Walmsley was appointed to the Board on 1 January 2016. |
(vi) | Kathryn Mikells has five years from the date of her appointment, that is, until 9 November 2020, to build up the required shareholding in Diageo shares. |
187
Governance (continued)
Outstanding share plan interests (audited)
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 2015(i) | Granted | Vested/ exercised | Dividends awarded and released | Lapsed | Number of shares/ options at 30 June 2016 | Total number of shares/ options in Ords(ii) | |||||||||||||||||||||||||||||||||||||||
Ivan Menezes |
| |||||||||||||||||||||||||||||||||||||||||||||||||||
SESOP(iii) | Sep 2010 | 2010-2013 | 2013 | ADR | $ | 67.84 | 55,512 | 55,512 | ||||||||||||||||||||||||||||||||||||||||||||
SESOP(iii) | Sep 2011 | 2011-2014 | 2014 | ADR | $ | 76.70 | 36,587 | 36,587 | ||||||||||||||||||||||||||||||||||||||||||||
SESOP | Oct 2012 | 2012-2015 | 2015 | ADR | $ | 112.72 | 46,575 | 46,575 | — | |||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Total number of vested but unexercised share options |
| 368,396 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
SESOP(v) | Sep 2013 | 2013-2016 | 2016 | ADR | $ | 123.27 | 46,239 | 46,239 | ||||||||||||||||||||||||||||||||||||||||||||
DLTIP – share options(vi) | Sep 2014 | 2014-2017 | 2017 | ADR | $ | 117.55 | 45,447 | 45,447 | ||||||||||||||||||||||||||||||||||||||||||||
DLTIP – share options | Sep 2015 | 2015-2018 | 2018 | ADR | $ | 104.93 | 49,825 | 49,825 | ||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Total number of unvested share options subject to performance |
| 566,044 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
DIP(iv) | Sep 2011 | 2011-2014 | 2014-2015 | ADR | $ | 74.11 | 21,309 | 21,309 | — | |||||||||||||||||||||||||||||||||||||||||||
DIP(iv) | Mar 2012 | 2012-2019 | 2016-2019 | ADR | $ | 96.44 | 58,571 | 4,880 | 9,763 | 43,928 | ||||||||||||||||||||||||||||||||||||||||||
PSP | Oct 2012 | 2012-2015 | 2015 | ADR | $ | 113.62 | 54,927 | 18,309 | 1,853 | 36,618 | — | |||||||||||||||||||||||||||||||||||||||||
PSP(v) | Sep 2013 | 2013-2016 | 2016 | ADR | $ | 123.08 | 47,484 | 47,484 | ||||||||||||||||||||||||||||||||||||||||||||
DLTIP – performance shares(vi) | Sep 2014 | 2014-2017 | 2017 | ADR | $ | 115.80 | 45,447 | 45,447 | ||||||||||||||||||||||||||||||||||||||||||||
DLTIP – performance shares | Sep 2015 | 2015-2018 | 2018 | ADR | $ | 104.30 | 49,825 | 49,825 | ||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Total number of unvested shares subject to performance |
| 746,736 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
DIP(iv) | Mar 2012 | 2012-2019 | 2016-2019 | ADR | $ | 96.44 | 58,571 | 14,642 | 43,929 | |||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Total number of unvested shares not subject to performance |
| 175,716 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Deirdre Mahlan(viii) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
SESOP(iii) | Sep 2009 | 2009-2012 | 2012 | ADR | $ | 63.13 | 20,790 | 20,790 | ||||||||||||||||||||||||||||||||||||||||||||
SESOP | Sep 2010 | 2010-2013 | 2013 | Ord | 1080p | 199,652 | 199,652 | |||||||||||||||||||||||||||||||||||||||||||||
SESOP | Sep 2011 | 2011-2014 | 2014 | Ord | 1232p | 135,069 | 135,069 | |||||||||||||||||||||||||||||||||||||||||||||
SESOP | Oct 2012 | 2012-2015 | 2015 | Ord | 1743p | 146,299 | 146,299 | — | ||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Total number of vested but unexercised share options |
| 417,881 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
SESOP(v) | Sep 2013 | 2013-2016 | 2016 | Ord | 1983p | 135,022 | 135,022 | |||||||||||||||||||||||||||||||||||||||||||||
DLTIP – share options(vi) | Sep 2014 | 2014-2017 | 2017 | Ord | 1796p | 140,590 | 140,590 | |||||||||||||||||||||||||||||||||||||||||||||
DLTIP – share options | Sep 2015 | 2015-2018 | 2018 | Ord | 1709p | 140,515 | 140,515 | |||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Total number of unvested share options subject to performance |
| 416,127 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
PSP | Oct 2012 | 2012-2015 | 2015 | Ord | 1772p | 134,653 | 44,884 | 4,380 | 89,769 | — | ||||||||||||||||||||||||||||||||||||||||||
PSP(v) | Sep 2013 | 2013-2016 | 2016 | Ord | 1978p | 110,241 | 110,241 | |||||||||||||||||||||||||||||||||||||||||||||
DLTIP – performance shares(vi) | Sep 2014 | 2014-2017 | 2017 | Ord | 1779p | 140,590 | 140,590 | |||||||||||||||||||||||||||||||||||||||||||||
DLTIP – performance shares | Sep 2015 | 2015-2018 | 2018 | Ord | 1714p | 140,515 | 140,515 | |||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Total number of unvested shares subject to performance |
| 391,346 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Kathryn Mikells | ||||||||||||||||||||||||||||||||||||||||||||||||||||
DBOP – performance shares(vii) | Nov 2015 | 2015-2018 | 2018 | Ord | 1866p | 246,300 | 246,300 | |||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Total number of unvested shares subject to performance |
| 246,300 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
DBOP – restricted shares(vii) | Nov 2015 | 2015-2017 | 2017 | Ord | 1866p | 43,868 | 43,868 | |||||||||||||||||||||||||||||||||||||||||||||
DBOP – restricted shares | Nov 2015 | 2015-2018 | 2018 | Ord | 1866p | 43,868 | 43,868 | |||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||
Total number of unvested shares not subject to performance |
| 87,736 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
(i) | For unvested awards this is the number of shares/options initially awarded. For exercisable share options, this is the number of outstanding options. All share options have an expiry date of ten years after the date of grant. |
(ii) | ADRs have been converted to Ords (one ADR is equivalent to four ordinary shares) for the purpose of calculating the total number of vested and unvested shares and options. |
(iii) | Shares/options granted prior to the Executive’s appointment to the Board. |
(iv) | Ivan Menezes retains interests in awards that were granted to him prior to joining the Board under ‘below-board’ plans (Discretionary Incentive Plan), amounting to a total of 188,172 ADRs, granted in 2011 and 2012. 50% of the initial 2011 award of 71,030 ADRs lapsed in September 2014, as disclosed in the 2014 remuneration report. Of the remainder, 40% vested in September 2014, and the remaining portion vested in September 2015. The 2012 award is subject to performance conditions and continuing employment. 66.67% of the first tranche vested in March 2016 and 66.7% of the second tranche is due to vest in March 2017, with the remaining tranches vesting in March 2018 and March 2019. |
(v) | Awards made under the PSP and SESOP in September 2013 and due to vest in September 2016 are included here as unvested share awards subject to performance conditions, although the awards have also been included under long-term incentives in the single figure of total remuneration on pages 176-177, since the performance period ended during the year ended 30 June 2016. |
188
Governance (continued)
(vi) | Details of the performance conditions attached to PSP and SESOP awards granted in 2014 were disclosed in Diageo’s 2015 Annual Report. |
(vii) | Replacement shares awarded to Kathryn Mikells on her appointment as Chief Financial Officer on 9 November 2015, in recognition of share awards she forfeited from her previous employer. These awards were made under the Diageo Buy Out Plan (DBOP). |
(viii) | Awards granted to Deirdre Mahlan after she stepped down from the Board on 9 November 2015 have not been disclosed as she was no longer an Executive Director. |
Payments to former directors (audited)
There were no payments to former directors above the de minimis level of £3k in the year ended 30 June 2016. This does not apply to Deirdre Mahlan, who stepped down from the Board on 9 November 2015.
Payments for loss of office (audited)
There were no payments for loss of office to Executive Directors in relation to the year ended 30 June 2016.
Non-Executive Directors’ fees
The Chairman’s fee was reviewed in December 2015 and increased from £500,000 to £600,000 per annum, effective 1 January 2016, following five successive years of no increases. The Chairman’s fee is appropriately positioned against our comparator group of FTSE30 companies excluding financial services. The next review is scheduled for December 2017.
Following a comprehensive review of competitive market data, the Board also reviewed the fees for Non-Executive Directors and increased the basic fee from £84,000 to £87,000 per annum and the Senior Non-Executive Director fee from £20,000 to £25,000 per annum, also effective from 1 January 2016. There are no changes to the additional fees for the Chairman of the Audit Committee and the Remuneration Committtee.
January 2016 | January 2015 | |||||||
Per annum fees | £’000 | £’000 | ||||||
Chairman of the Board | 600 | 500 | ||||||
Non-Executive Directors | ||||||||
Base fee | 87 | 84 | ||||||
Senior Non-Executive Director | 25 | 20 | ||||||
Chairman of the Audit Committee | 30 | 30 | ||||||
Chairman of the Remuneration Committee | 25 | 25 |
Non-Executive Directors’ remuneration for the year ended 30 June 2016 (audited)
Fees £’000 | Taxable benefits(i) £’000 | Total £’000 | ||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||
Chairman | ||||||||||||||||||||||||
Dr Franz B Humer(ii) | 550 | 500 | 6 | 12 | 556 | 512 | ||||||||||||||||||
Non-Executive Directors | ||||||||||||||||||||||||
Peggy B Bruzelius | 86 | 84 | 6 | 13 | 92 | 97 | ||||||||||||||||||
Laurence M Danon(iii) | 21 | 84 | 1 | 6 | 22 | 90 | ||||||||||||||||||
Lord Davies of Abersoch | 133 | 129 | 3 | 3 | 136 | 132 | ||||||||||||||||||
Betsy D Holden | 86 | 84 | 10 | 35 | 96 | 119 | ||||||||||||||||||
Ho KwonPing | 86 | 84 | 1 | 1 | 87 | 85 | ||||||||||||||||||
Philip G Scott | 116 | 114 | 12 | 5 | 128 | 119 | ||||||||||||||||||
Nicola S Mendelsohn | 86 | 70 | 1 | 1 | 87 | 71 | ||||||||||||||||||
Alan JH Stewart | 86 | 70 | 1 | 1 | 87 | 71 | ||||||||||||||||||
Emma Walmsley(iv) | 44 | — | 1 | — | 45 | — |
189
Governance (continued)
(i) | Other benefits include a contracted car service, product allowance and expense reimbursements relating to travel, accommodation and subsistence in connection with the attendance of Board meetings during the year, which are deemed by HMRC to be taxable in the United Kingdom. The amounts in the single figure of total remuneration table above include the grossed-up cost of UK tax paid by the company on behalf of the directors. Non-taxable expense reimbursements have not been included in the single figure of remuneration table above. |
(ii) | As in the previous year, £96,000 of Dr Franz B Humer’s net remuneration in the year ended 30 June 2016 was used for the monthly purchase of Diageo ordinary shares, which must be retained until he retires from the company or ceases to be a Director for any other reason. |
(iii) | Laurence M Danon ceased to be a Non-Executive Director on 23 September 2015. |
(iv) | Emma Walmsley was appointed to the Board on 1 January 2016. |
External appointments held by the Executive Directors
Executive Directors may accept external appointments as Non-Executive Directors of other companies and retain any related fees paid to them, subject to the specific approval of the Board in each case.
Ivan Menezes — During the year ended 30 June 2016, Ivan Menezes served as a Non-Executive Director of Coach Inc. and earned fees of $75,000, which he retained. In line with the Coach Inc. policy for outside directors, Ivan Menezes is eligible to be granted share options and restricted share units (RSUs). During the year ended 30 June 2016, he was granted 11,734 options at an option price of $32.28 and 2,367 RSUs (including dividends received) at a fair market value of $32.28 per share.
Kathryn Mikells — During the year ended 30 June 2016, Kathryn Mikells served as a Non-Executive Director of Hartford Financial Services Group Inc. and earned fees of $100,000 for the full year, which were deferred into equity.
Deirdre Mahlan — During the year ended 30 June 2016, Deirdre Mahlan served as a Non-Executive Director of Experian plc and earned fees of €68,864, which she retained.
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, and the percentage change from the year ended 30 June 2015 to the year ended 30 June 2016. Distributions to shareholders are total dividends. The Committee considers that there are no other significant distributions or payments of profit or cash flow.
Relative importance of spend on pay - percentage change Sta_ pay 1,180 1,236 4.7% Distributions to shareholders 1,341 1,443 7.6% Lm 0 500 1,000 1,500 2,000 2,500 3,000 2015 2016
Remuneration committee
The Remuneration Committee consists of the following independent Non-Executive Directors: Peggy B Bruzelius, Laurence M Danon, Lord Davies of Abersoch, Betsy D Holden, Ho KwonPing, Philip G Scott, Nicola S Mendelsohn, and Alan JH Stewart.Stewart and Emma Walmsley. Lord Davies is the Chairman of the Remuneration Committee. The Chairman of the Board and the Chief Executive may, by invitation, attend Remuneration Committee meetings except when their own remuneration is discussed. Diageo’s Global Human Resources Director and Capability, Performance and Reward Director are also invited from time to time by the Remuneration Committee to provide their views and advice. The Global Human Resources Director is not present when her own remuneration is discussed. The Chief Financial Officer may also attend to provide performance context to the Committee during its discussions about target setting. Information on meetings held and director attendance is disclosed in the corporate governance report.
174190
Governance (continued)
The Remuneration Committee’s principal responsibilities are:
Full terms of reference for the Committee are available at www.diageo.com and on request from the Company Secretary.
External advisors
During the year ended 30 June 2015,2016, the Remuneration Committee received advice from Kepler Associates (a brand of Mercer), appointed by the Committee in December 2013 following a tendering process, who provided independent advice on remuneration best practice and senior executive remuneration.
Kepler Associates is a signatory to, and abides by, the Remuneration Consultants Group Code of Conduct. Kepler’s parent company, Mercer, provides unrelated services to the company in the areas of all-employee reward and retirement benefits. The Remuneration Committee is satisfied that the advice it receives from Kepler is independent. During the year, Kepler supported the Committee in preparing this Directors’ remuneration report, provided remuneration benchmarking survey data to support the salary review for the Executive Committee, provided advice on the design of the long termlong-term incentives, and calculated the TSRtotal shareholder return of Diageo and its peer companies for the 20112012 and 20122013 PSP awards and provided periodic updates on all outstanding performance cycles. The fees paid to Kepler Associates in relation to advice provided to the Committee were £86,618.£137,935 and are determined on a time and expenses basis.
During the year, Linklaters provided advice on the AIP and the Directors’ remuneration report. Fees paid in relation to this advice, again on a time and expenses basis, were £26,298.£6,000. Linklaters also provide other legal advice from time to time on certain corporate matters.
The Committee is satisfied that the Kepler Associates and Linklaters 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.
Additional remuneration survey data published by Aon Hewitt, Towers Watson, Mercer and PwC were presented to the Remuneration Committee during the year; Clifford Chance provided advice on the operation of share plans.plans during the year.
Statement of voting
The following table summarises the details of votes cast in respect of the resolutions on the directors’Directors’ remuneration policy at the 2014 AGM and annual report on directors’ remuneration at the 20142015 AGM.
For | Against | Total votes cast | Abstentions | For | Against | Total votes cast | Abstentions | |||||||||||||||||||||||||
Directors’ remuneration policy | ||||||||||||||||||||||||||||||||
Total number of votes | 1,663,866,061 | 43,275,688 | 1,707,141,749 | 18,288,488 | 1,663,866,061 | 43,275,688 | 1,707,141,749 | 18,288,488 | ||||||||||||||||||||||||
Percentage of votes cast | 97.47% | 2.53% | 100% | n/a | 97.47% | 2.53% | 100% | n/a | ||||||||||||||||||||||||
Annual report on remuneration | ||||||||||||||||||||||||||||||||
Total number of votes | 1,643,966,601 | 50,619,135 | 1,694,585,736 | 30,844,578 | 1,767,690,112 | 64,973,516 | 1,832,663,628 | 35,221,124 | ||||||||||||||||||||||||
Percentage of votes cast | 97.01% | 2.99% | 100% | n/a | 96.45% | 3.55% | 100% | n/a |
The Committee was pleased with the level of support shown for the remuneration policy and implementationannual report on remuneration and appreciated the active participation of shareholders and their representative advisory bodies in consulting on executive remuneration matters.
175191
Governance (continued)
ADDITIONAL INFORMATION
Emoluments and share interests of senior management
The total emoluments for the year ended 30 June 20152016 of the Executive Directors, the Executive Committee members and the Company Secretary (together, the senior management) of Diageo comprising base salary, annual incentive plan, share incentive plan, termination payments and other benefits were £14.0£20.5 million (2014(2015 – £10.4£14.0 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 £16.7£9.5 million. In addition, they were granted 917,764968,293 performance-based share options under the Diageo Long Term Incentive Plan (DLTIP)DLTIP during the year at a weighted average share price of 17921709 pence, exercisable by 20242025 and 25,37643,444 options not subject to performance under the DLTIP, which will vest in three years. In addition they were granted 4,677212 options over ordinary shares under the UK savings-related share options scheme (SAYE). They were also awarded 860,111901,720 performance shares under the DLTIP in September 2014,2015, which will vest in three years subject to the performance teststest described in the section on DLTIP awards made during the year ended 30 June 2015, 99,2442016, and 4,250 shares not subject to performance under the DLTIP. They were also awarded 146,904 shares under the DIP, which will vest in September 2017, and 6,344 shares not2018, subject to the performance underconditions being met. This excludes the DLTIP, which will vest in September 2017.replacement share awards made to Kathryn Mikells on 9 November 2015.
Senior management options over ordinary shares
At 1714 July 2015,2016, the senior management had an aggregate beneficial interest in 1,572,1311,743,277 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 | ||||||||||||
Deirdre Mahlan | ||||||||||||
Other(i) | ||||||||||||
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(i) | Other members of the Executive Committee and the Company Secretary. |
Key management personnel related party transactions (audited)
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 2015.2016.
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, on 2927 July 20152016 and was signed on its behalf by Lord Davies of Abersoch who is senior Non-Executive Director and Chairman of the Remuneration Committee.
176
Governance (continued)
The Board has followed the principles of good governance as set out in the UK Corporate Governance Code (with the exception that the directors were unable to attend the 2015 AGM) and complied with the regulations contained in the Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, the Listing Rules of the Financial Conduct Authority and the relevant schedules of the Companies Act 2006.
192
Governance (continued)
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.
KPMGPWC LLP has audited the report to the extent required by the Regulations, being the sections headed Single total figure of remuneration for Executive Directors (and notes), Annual incentive plan (AIP), Long termLong-term incentive plans (LTIPs), Pension arrangements, Directors’ shareholding requirements and share and other interests, Outstanding share plan interests, Non-Executive Directors’ remuneration and Key management personnel related party transactions.
The annual report on remuneration is subject to shareholder approval at the AGM on 2321 September 2015;2016; the directors’Directors’ remuneration policy was approved by shareholders at the 2014 AGM.
Terms defined in this remuneration report are used solely herein.
177193
Governance (continued)
DIRECTORS’ REPORT
The Directors have pleasure in submitting their Annual Report for the year ended 30 June 2015.2016.
Annual General Meeting
The AGM will be held at The Mermaid Conference & Events Centre, Puddle Dock, Blackfriars, London EC4V 3DB at 2.30 pm2.30pm on Wednesday, 2321 September 2015.2016.
Directors
The Directors of the company who served during the year are shown in the section ‘Board of Directors and Company Secretary’ and ‘Executive Committee’ above.
In accordance with the UK Corporate Governance Code other than Laurence Danon, who will step down from the Board after the AGM, all the Directors will retire by rotation at the AGM and offer themselves for re-election. The Non-Executive Directors proposed for re-election do not have service contracts. Emma Walmsley hasand Javier Ferrán have been appointed, as a Non-Executive Director,Directors, with effect from 1 January 2016 and 22 July 2016 respectively and will offer herselfthemselves for election at the 2016 AGM. Javier Ferrán will be appointed Chairman on 1 January 2017 on the retirement of Dr Franz B Humer.
Further details of Directors’ contracts, remuneration and their interests in the shares of the company at 30 June 20152016 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
As disclosed in the Report of the Audit Committee, following a tender conducted during the year,The auditor, PricewaterhouseCoopers LLP, were selectedis willing to continue in office and a resolution for its re-appointment as auditor of Diageo. Accordingly, a resolutionthe company will be proposed at the AGM on 23 September 2015 for the appointment of PricewaterhouseCoopers LLP as auditors of Diageo. KPMG LLP’s appointment will end at the conclusion ofsubmitted to the AGM.
Disclosure of information to the auditor
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’Corporate governance report’, ‘the Report of the Audit Committee’ and the ‘Additional’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 agreement governing the company’s 34% investment in Moët Hennessy SNC (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 shares in MH and MHI to LVMH.
The master agreement governing the operation of the group’s regional joint ventures with LVMH states that upon a change of control of the company (being, for these purposes, the acquisition by a third party of 30% or more of the issued share capital having voting rights in the company), LVMH may 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 joint venture entity to be wound up.
178194
Governance (continued)
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 on Form 20-F | |
Agreements with controlling shareholders | Not applicable | |
Amendment of articles of association | Additional information for shareholders – Articles of association | |
Contracts of significance | Not applicable | |
Details of long-term incentive schemes | Directors’ remuneration report | |
Directors – appointment and powers | Additional information for shareholders – Articles of association – Directors | |
Directors’ indemnities and compensation | Directors’ remuneration | |
Dividends | ||
Employment Policies | Strategic report – | |
Events since 30 June | ||
Financial risk management | Financial statements – note 15 Financial instruments and risk management | |
Future developments | Chairman’s statement; Chief Executive’s Statement; Market | |
Greenhouse gas emissions | Strategic report – Sustainability & | |
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 information | |
Purchase of own shares | Additional information for shareholders – Repurchase of | |
Research and development | Financial | |
Restrictions on transfer of securities | Additional information for shareholders – Restrictions on transfer of shares | |
Review of the business | Chief Executive’s statement; Strategic report | |
Share capital – structure, voting and other rights | Additional information for shareholders – Share capital and Articles of association; Financial statements – note 17 Equity | |
Share capital – employee share plan voting rights | Financial statements – note 17 Equity | |
Shareholdings in the company | Additional information for shareholders – Share capital | |
Shareholder waivers of dividends | Note 17 Equity | |
Shareholder waivers of future dividends | Note 17 Equity | |
Sustainability and responsibility | Strategic report – How we will deliver our | |
| ||
Waiver of emoluments by a director | Not applicable | |
Waiver of future emoluments by a director | Not applicable | |
195
Governance (continued)
The Directors’ report of Diageo plc for the year ended 30 June 20152016 comprises these pages and the sections of the Annual Report referred to under ‘Directors’’Directors’, ‘Corporate’Corporate governance statement’ and ‘Other’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’Other information’ above.
The Directors’ report was approved by a duly appointed and authorised committee of the Board of Directors on 2927 July 20152016 and signed on its behalf by Paul D Tunnacliffe,David Harlock, the Company Secretary.
179196
Financial statements
Reports of independent registered public accounting firms
To the Board of Directors and Shareholders of Diageo plc:
In our opinion, the accompanying consolidated balance sheet, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, and the consolidated statement of cash flows present fairly, in all material respects, the financial position of Diageo plc (the Company) and its subsidiaries (collectively Diageo) at 30 June 2016, and the results of their operations and their cash flows for the period ended 30 June 2016 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European Union. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of 30 June 2016, based on criteria established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these 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. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audit. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. 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 audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
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.
/s/ PricewaterhouseCoopers LLP
London, United Kingdom
9 August 2016
197
Financial statements (continued)
The Board of Directors and Stockholders
Diageo plc:
We have audited the accompanying consolidated balance sheetssheet of Diageo plc and subsidiaries as of 30 June 2015, and 30 June 2014, and the related consolidated income statements, and consolidated statements of comprehensive income, changes in equity and cash flows for each of the years in the two-year period then ended on pages 182199 to 246,270 , including the disclosures within the section ‘Directors’ shareholding requirements and share and other interests’ on page 171,187 , and the section ‘Key management personnel related party transactions’ on page 176.192. These consolidated financial statements are the responsibility of Diageo plc’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diageo plc and subsidiaries as of 30 June 2015, and 30 June 2014, and the results of their operations and their cash flows for each of the years in the two-year period then ended, in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board and IFRS as adopted by the European Union.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Diageo plc’s internal control over financial reporting as of 30 June 2015, based on criteria established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated 29 July 2015 expressed an unqualified opinion on the effectiveness of the company’s internal control over financial reporting.
/s/ KPMG LLP
London, England
29 July 2015
180
Financial statements (continued)
The Board of Directors and Stockholders
Diageo plc:
We have audited the accompanying consolidated income statement, and consolidated statements of comprehensive income, changes in equity and cash flows of Diageo plc and subsidiaries for the year ended 30 June 2013 on pages 182 to 246, including the disclosures within the section ‘Directors’ shareholding requirements and share and other interests’ on page 171, and the section ‘Key management personnel related party transactions’ on page 176. These consolidated financial statements are the responsibility of Diageo plc’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations of Diageo plc and subsidiaries and their cash flows for the year-ended 30 June 2013, in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board and IFRS as adopted by the European Union.
KPMG Audit Plc
London, England
30 July 2013, except as to notes 2 and 3(d) which are as of 16 March 2015
181198
Financial statements (continued)
CONSOLIDATED INCOME STATEMENT
Notes | Year ended 30 June 2015 £ million | Year ended 30 June 2014 £ million | Year ended 30 June 2013 £ million | Notes | Year ended 30 June 2016 £ million | Year ended 30 June 2015 £ million | Year ended 30 June 2014 £ million | |||||||||||||||||||||||||
Sales | 2 | 15,966 | 13,980 | 15,276 | 2 | 15,641 | 15,966 | 13,980 | ||||||||||||||||||||||||
Excise duties | 3 | (5,153 | ) | (3,722 | ) | (3,973 | ) | 3 | (5,156 | ) | (5,153 | ) | (3,722 | ) | ||||||||||||||||||
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Net sales | 2 | 10,813 | 10,258 | 11,303 | 2 | 10,485 | 10,813 | 10,258 | ||||||||||||||||||||||||
Cost of sales | 3 | (4,610 | ) | (4,029 | ) | (4,416 | ) | 3 | (4,251 | ) | (4,610 | ) | (4,029 | ) | ||||||||||||||||||
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Gross profit | 6,203 | 6,229 | 6,887 | 6,234 | 6,203 | 6,229 | ||||||||||||||||||||||||||
Marketing | 3 | (1,629 | ) | (1,620 | ) | (1,769 | ) | 3 | (1,562 | ) | (1,629 | ) | (1,620 | ) | ||||||||||||||||||
Other operating expenses | 3 | (1,777 | ) | (1,902 | ) | (1,738 | ) | 3 | (1,831 | ) | (1,777 | ) | (1,902 | ) | ||||||||||||||||||
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Operating profit | 2,797 | 2,707 | 3,380 | 2,841 | 2,797 | 2,707 | ||||||||||||||||||||||||||
Non-operating items | 4 | 373 | 140 | (83 | ) | 4 | 123 | 373 | 140 | |||||||||||||||||||||||
Finance income | 5 | 244 | 241 | 259 | 5 | 262 | 244 | 241 | ||||||||||||||||||||||||
Finance charges | 5 | (656 | ) | (629 | ) | (716 | ) | 5 | (589 | ) | (656 | ) | (629 | ) | ||||||||||||||||||
Share of after tax results of associates and joint ventures | 6 | 175 | 252 | 217 | 6 | 221 | 175 | 252 | ||||||||||||||||||||||||
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Profit before taxation | 2,933 | 2,711 | 3,057 | 2,858 | 2,933 | 2,711 | ||||||||||||||||||||||||||
Taxation | 7 | (466 | ) | (447 | ) | (507 | ) | 7 | (496 | ) | (466 | ) | (447 | ) | ||||||||||||||||||
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Profit from continuing operations | 2,467 | 2,264 | 2,550 | 2,362 | 2,467 | 2,264 | ||||||||||||||||||||||||||
Discontinued operations | 8 | — | (83 | ) | — | 8 | — | — | (83 | ) | ||||||||||||||||||||||
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Profit for the year | 2,467 | 2,181 | 2,550 | 2,362 | 2,467 | 2,181 | ||||||||||||||||||||||||||
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Attributable to: | ||||||||||||||||||||||||||||||||
Equity shareholders of the parent company - continuing operations | 2,381 | 2,331 | 2,452 | 2,244 | 2,381 | 2,331 | ||||||||||||||||||||||||||
- discontinued operations | — | (83 | ) | — | ||||||||||||||||||||||||||||
Equity shareholders of the parent company - discontinued operations | — | — | (83 | ) | ||||||||||||||||||||||||||||
Non-controlling interests - continuing operations | 86 | (67 | ) | 98 | 118 | 86 | (67 | ) | ||||||||||||||||||||||||
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2,467 | 2,181 | 2,550 | 2,362 | 2,467 | 2,181 | |||||||||||||||||||||||||||
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million | million | million | million | million | million | |||||||||||||||||||||||||||
Weighted average number of shares | ||||||||||||||||||||||||||||||||
Shares in issue excluding own shares | 2,505 | 2,506 | 2,502 | 2,508 | 2,505 | 2,506 | ||||||||||||||||||||||||||
Dilutive potential ordinary shares | 12 | 11 | 15 | 10 | 12 | 11 | ||||||||||||||||||||||||||
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2,517 | 2,517 | 2,517 | 2,518 | 2,517 | 2,517 | |||||||||||||||||||||||||||
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pence | pence | pence | pence | pence | pence | |||||||||||||||||||||||||||
Basic earnings per share | ||||||||||||||||||||||||||||||||
Continuing operations | 95.0 | 93.0 | 98.0 | 89.5 | 95.0 | 93.0 | ||||||||||||||||||||||||||
Discontinued operations | — | (3.3 | ) | — | — | — | (3.3 | ) | ||||||||||||||||||||||||
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95.0 | 89.7 | 98.0 | 89.5 | 95.0 | 89.7 | |||||||||||||||||||||||||||
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Diluted earnings per share | ||||||||||||||||||||||||||||||||
Continuing operations | 94.6 | 92.6 | 97.4 | 89.1 | 94.6 | 92.6 | ||||||||||||||||||||||||||
Discontinued operations | — | (3.3 | ) | — | — | — | (3.3 | ) | ||||||||||||||||||||||||
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94.6 | 89.3 | 97.4 | 89.1 | 94.6 | 89.3 | |||||||||||||||||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
182199
Financial statements (continued)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended 30 June 2015 £ million | Year ended 30 June 2014 £ million | Year ended 30 June 2013 £ million | Year ended 30 June 2016 £ million | Year ended 30 June 2015 £ million | Year ended 30 June 2014 £ million | |||||||||||||||||||
Other comprehensive income | ||||||||||||||||||||||||
Items that will not be recycled subsequently to the income statement | ||||||||||||||||||||||||
Net remeasurement of post employment plans | ||||||||||||||||||||||||
– group | 125 | (169 | ) | 119 | (851 | ) | 125 | (169 | ) | |||||||||||||||
– associates and joint ventures | (10 | ) | 2 | (19 | ) | (4 | ) | (10 | ) | 2 | ||||||||||||||
– non-controlling interests | (2 | ) | — | — | (1 | ) | (2 | ) | — | |||||||||||||||
Tax on post employment plans | (11 | ) | 20 | (35 | ) | 166 | (11 | ) | 20 | |||||||||||||||
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102 | (147 | ) | 65 | (690 | ) | 102 | (147 | ) | ||||||||||||||||
Items that may be recycled subsequently to the income statement | ||||||||||||||||||||||||
Exchange differences on translation of foreign operations | ||||||||||||||||||||||||
– group | (345 | ) | (1,117 | ) | 37 | 1,217 | (345 | ) | (1,117 | ) | ||||||||||||||
– associates and joint ventures | (205 | ) | (294 | ) | 108 | 325 | (205 | ) | (294 | ) | ||||||||||||||
– non-controlling interests | 56 | (120 | ) | 36 | 176 | 56 | (120 | ) | ||||||||||||||||
Exchange loss recycled to the income statement in respect of step acquisitions | 88 | — | — | |||||||||||||||||||||
Net investment hedges | 269 | 398 | (150 | ) | (843 | ) | 269 | 398 | ||||||||||||||||
Tax on exchange differences | 30 | 12 | 3 | |||||||||||||||||||||
Exchange loss recycled to the income statement | ||||||||||||||||||||||||
– on translation of foreign operation | 133 | 88 | — | |||||||||||||||||||||
– on net investment hedges | (82 | ) | — | — | ||||||||||||||||||||
Tax on exchange differences - group | (8 | ) | 30 | 12 | ||||||||||||||||||||
Tax on exchange differences - non-controlling interests | 4 | — | — | |||||||||||||||||||||
Effective portion of changes in fair value of cash flow hedges | ||||||||||||||||||||||||
– (losses)/gains taken to other comprehensive income - group | (40 | ) | 59 | (48 | ) | |||||||||||||||||||
– (losses)/gains taken to other comprehensive income - associates and joint ventures | (6 | ) | (5 | ) | 7 | |||||||||||||||||||
– gains/(losses) taken to other comprehensive income - group | 28 | (40 | ) | 59 | ||||||||||||||||||||
– gains/(losses) taken to other comprehensive income - associates and joint ventures | 3 | (6 | ) | (5 | ) | |||||||||||||||||||
– recycled to income statement | (58 | ) | 34 | (33 | ) | (145 | ) | (58 | ) | 34 | ||||||||||||||
Tax on effective portion of changes in fair value of cash flow hedges | 18 | 2 | 17 | 3 | 18 | 2 | ||||||||||||||||||
Fair value movements on available-for-sale investments | ||||||||||||||||||||||||
– gains taken to other comprehensive income - group | 11 | 55 | 85 | 4 | 11 | 55 | ||||||||||||||||||
– gains taken to other comprehensive income - non-controlling interests | 9 | — | — | 4 | 9 | — | ||||||||||||||||||
– recycled to income statement | — | (140 | ) | — | ||||||||||||||||||||
– recycled to income statement - group | (15 | ) | — | (140 | ) | |||||||||||||||||||
– recycled to income statement - non-controlling interests | (13 | ) | — | — | ||||||||||||||||||||
Tax on available-for-sale fair value movements | (4 | ) | — | — | 4 | (4 | ) | — | ||||||||||||||||
Hyperinflation adjustment | 18 | 11 | 4 | 6 | 18 | 11 | ||||||||||||||||||
Tax on hyperinflation adjustment | — | (2 | ) | — | (2 | ) | — | (2 | ) | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
(159 | ) | (1,107 | ) | 66 | 799 | (159 | ) | (1,107 | ) | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Other comprehensive (loss)/income, net of tax, for the year | (57 | ) | (1,254 | ) | 131 | |||||||||||||||||||
Other comprehensive profit/(loss), net of tax, for the year | 109 | (57 | ) | (1,254 | ) | |||||||||||||||||||
Profit for the year | 2,467 | 2,181 | 2,550 | 2,362 | 2,467 | 2,181 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total comprehensive income for the year | 2,410 | 927 | 2,681 | 2,471 | 2,410 | 927 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Attributable to: | ||||||||||||||||||||||||
Equity shareholders of the parent company | 2,261 | 1,114 | 2,547 | 2,183 | 2,261 | 1,114 | ||||||||||||||||||
Non-controlling interests | 149 | (187 | ) | 134 | 288 | 149 | (187 | ) | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total comprehensive income for the year | 2,410 | 927 | 2,681 | 2,471 | 2,410 | 927 | ||||||||||||||||||
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
183200
Financial statements (continued)
CONSOLIDATED BALANCE SHEET
30 June 2015 | 30 June 2014 | 30 June 2016 | 30 June 2015 | |||||||||||||||||||||||||||||||||||||
Notes | £ million | £ million | £ million | £ million | Notes | £ million | £ million | £ million | £ million | |||||||||||||||||||||||||||||||
Non-current assets | ||||||||||||||||||||||||||||||||||||||||
Intangible assets | 10 | 11,231 | 7,891 | 10 | 12,370 | 11,231 | ||||||||||||||||||||||||||||||||||
Property, plant and equipment | 11 | 3,690 | 3,433 | 11 | 3,881 | 3,690 | ||||||||||||||||||||||||||||||||||
Biological assets | 65 | 53 | 10 | 65 | ||||||||||||||||||||||||||||||||||||
Investments in associates and joint ventures | 6 | 2,076 | 3,201 | 6 | 2,528 | 2,076 | ||||||||||||||||||||||||||||||||||
Other investments | 12 | 109 | 63 | 12 | 31 | 109 | ||||||||||||||||||||||||||||||||||
Other receivables | 14 | 46 | 107 | 14 | 46 | 46 | ||||||||||||||||||||||||||||||||||
Other financial assets | 15 | 292 | 250 | 15 | 420 | 292 | ||||||||||||||||||||||||||||||||||
Deferred tax assets | 7 | 189 | 246 | 7 | 298 | 189 | ||||||||||||||||||||||||||||||||||
Post employment benefit assets | 13 | 436 | 251 | 13 | 55 | 436 | ||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
18,134 | 15,495 | 19,639 | 18,134 | |||||||||||||||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||||||||||||||||||
Inventories | 14 | 4,574 | 4,222 | 14 | 4,579 | 4,574 | ||||||||||||||||||||||||||||||||||
Trade and other receivables | 14 | 2,435 | 2,499 | 14 | 2,686 | 2,435 | ||||||||||||||||||||||||||||||||||
Assets held for sale | 143 | 8 | 3 | 143 | ||||||||||||||||||||||||||||||||||||
Other financial assets | 15 | 46 | 118 | 15 | 495 | 46 | ||||||||||||||||||||||||||||||||||
Cash and cash equivalents | 16 | 472 | 622 | 16 | 1,089 | 472 | ||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
7,670 | 7,469 | 8,852 | 7,670 | |||||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total assets | 25,804 | 22,964 | 28,491 | 25,804 | ||||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||||||||||||||||||
Borrowings and bank overdrafts | 16 | (1,921 | ) | (1,576 | ) | 16 | (2,058 | ) | (1,921 | ) | ||||||||||||||||||||||||||||||
Other financial liabilities | 15 | (156 | ) | (146 | ) | 15 | (280 | ) | (156 | ) | ||||||||||||||||||||||||||||||
Trade and other payables | 14 | (2,943 | ) | (2,800 | ) | 14 | (3,372 | ) | (2,943 | ) | ||||||||||||||||||||||||||||||
Liabilities held for sale | (3 | ) | — | — | (3 | ) | ||||||||||||||||||||||||||||||||||
Corporate tax payable | (162 | ) | (197 | ) | (340 | ) | (162 | ) | ||||||||||||||||||||||||||||||||
Provisions | 14 | (105 | ) | (132 | ) | 14 | (137 | ) | (105 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
(5,290 | ) | (4,851 | ) | (6,187 | ) | (5,290 | ) | |||||||||||||||||||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||||||||||||||||||||
Borrowings | 16 | (7,917 | ) | (7,638 | ) | 16 | (8,071 | ) | (7,917 | ) | ||||||||||||||||||||||||||||||
Other financial liabilities | 15 | (443 | ) | (447 | ) | 15 | (500 | ) | (443 | ) | ||||||||||||||||||||||||||||||
Other payables | 14 | (69 | ) | (94 | ) | 14 | (70 | ) | (69 | ) | ||||||||||||||||||||||||||||||
Provisions | 14 | (238 | ) | (253 | ) | 14 | (253 | ) | (238 | ) | ||||||||||||||||||||||||||||||
Deferred tax liabilities | 7 | (1,896 | ) | (1,365 | ) | 7 | (1,982 | ) | (1,896 | ) | ||||||||||||||||||||||||||||||
Post employment benefit liabilities | 13 | (695 | ) | (726 | ) | 13 | (1,248 | ) | (695 | ) | ||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
(11,258 | ) | (10,523 | ) | (12,124 | ) | (11,258 | ) | |||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total liabilities | (16,548 | ) | (15,374 | ) | (18,311 | ) | (16,548 | ) | ||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Net assets | 9,256 | 7,590 | 10,180 | 9,256 | ||||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||||||||||||||||
Share capital | 17 | 797 | 797 | 17 | 797 | 797 | ||||||||||||||||||||||||||||||||||
Share premium | 1,346 | 1,345 | 1,347 | 1,346 | ||||||||||||||||||||||||||||||||||||
Other reserves | 1,994 | 2,243 | 2,625 | 1,994 | ||||||||||||||||||||||||||||||||||||
Retained earnings | 3,634 | 2,438 | 3,761 | 3,634 | ||||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Equity attributable to equity shareholders of the parent company | Equity attributable to equity shareholders of the parent company |
| 7,771 | 6,823 | 8,530 | 7,771 | ||||||||||||||||||||||||||||||||||
Non-controlling interests | 17 | 1,485 | 767 | 17 | 1,650 | 1,485 | ||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total equity | 9,256 | 7,590 | 10,180 | 9,256 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
These consolidated financial statements were approved by a duly appointed and authorised committee of the Board of Directors on 2927 July 20152016 and were signed on its behalf by Ivan Menezes and Deirdre Mahlan,Kathryn Mikells, Directors.
184201
Financial statements (continued)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Retained earnings/(deficit) | 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 | 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 2012 | 797 | 1,344 | 3,146 | 67 | (2,257 | ) | 2,491 | 234 | 5,588 | 1,204 | 6,792 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | (59 | ) | — | 2,606 | 2,606 | 2,547 | 134 | 2,681 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Employee share schemes | — | — | — | — | 25 | (34 | ) | (9 | ) | (9 | ) | — | (9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based incentive plans | — | — | — | — | — | 45 | 45 | 45 | — | 45 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based incentive plans in respect of associates | — | — | — | — | — | 2 | 2 | 2 | — | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax on share-based incentive plans | — | — | — | — | — | 30 | 30 | 30 | — | 30 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions | — | — | — | — | — | — | — | — | (21 | ) | (21 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of put options | — | — | — | — | — | (7 | ) | (7 | ) | (7 | ) | — | (7 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of non-controlling interests | — | — | — | — | — | (100 | ) | (100 | ) | (100 | ) | (100 | ) | (200 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid | — | — | — | — | — | (1,125 | ) | (1,125 | ) | (1,125 | ) | (100 | ) | (1,225 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfers | — | — | — | — | — | 65 | 65 | 65 | (65 | ) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 30 June 2013 | 797 | 1,344 | 3,146 | 8 | (2,232 | ) | 3,973 | 1,741 | 7,036 | 1,052 | 8,088 | 797 | 1,344 | 3,146 | 8 | (2,232 | ) | 3,973 | 1,741 | 7,036 | 1,052 | 8,088 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | (911 | ) | — | 2,025 | 2,025 | 1,114 | (187 | ) | 927 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Profit for the year | — | — | — | — | — | 2,248 | 2,248 | 2,248 | (67 | ) | 2,181 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | (911 | ) | — | (223 | ) | (223 | ) | (1,134 | ) | (120 | ) | (1,254 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Employee share schemes | — | — | — | — | (48 | ) | (67 | ) | (115 | ) | (115 | ) | — | (115 | ) | — | — | — | — | (48 | ) | (67 | ) | (115 | ) | (115 | ) | — | (115 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based incentive plans | — | — | — | — | — | 37 | 37 | 37 | — | 37 | — | — | — | — | — | 37 | 37 | 37 | — | 37 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based incentive plans in respect of associates | — | — | — | — | — | 3 | 3 | 3 | — | 3 | — | — | — | — | — | 3 | 3 | 3 | — | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax on share-based incentive plans | — | — | — | — | — | 1 | 1 | 1 | — | 1 | — | — | — | — | — | 1 | 1 | 1 | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued | — | 1 | — | — | — | — | — | 1 | — | 1 | — | 1 | — | — | — | — | — | 1 | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions | — | — | — | — | — | — | — | — | 8 | 8 | — | — | — | — | — | — | — | — | 8 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of put options | — | — | — | — | — | (7 | ) | (7 | ) | (7 | ) | — | (7 | ) | — | — | — | — | — | (7 | ) | (7 | ) | (7 | ) | — | (7 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of non-controlling interests | — | — | — | — | — | (19 | ) | (19 | ) | (19 | ) | (18 | ) | (37 | ) | — | — | — | — | — | (19 | ) | (19 | ) | (19 | ) | (18 | ) | (37 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid | — | — | — | — | — | (1,228 | ) | (1,228 | ) | (1,228 | ) | (88 | ) | (1,316 | ) | — | — | — | — | — | (1,228 | ) | (1,228 | ) | (1,228 | ) | (88 | ) | (1,316 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At 30 June 2014 | 797 | 1,345 | 3,146 | (903 | ) | (2,280 | ) | 4,718 | 2,438 | 6,823 | 767 | 7,590 | 797 | 1,345 | 3,146 | (903 | ) | (2,280 | ) | 4,718 | 2,438 | 6,823 | 767 | 7,590 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | (249 | ) | — | 2,510 | 2,510 | 2,261 | 149 | 2,410 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Profit for the year | — | — | — | — | — | 2,381 | 2,381 | 2,381 | 86 | 2,467 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | (249 | ) | — | 129 | 129 | (120 | ) | 63 | (57 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Employee share schemes | — | — | — | — | 52 | (58 | ) | (6 | ) | (6 | ) | — | (6 | ) | — | — | — | — | 52 | (58 | ) | (6 | ) | (6 | ) | — | (6 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based incentive plans | — | — | — | — | — | 35 | 35 | 35 | — | 35 | — | — | — | — | — | 35 | 35 | 35 | — | 35 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based incentive plans in respect of associates | — | — | — | — | — | 2 | 2 | 2 | — | 2 | — | — | — | — | — | 2 | 2 | 2 | — | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax on share-based incentive plans | — | — | — | — | — | 4 | 4 | 4 | — | 4 | — | — | — | — | — | 4 | 4 | 4 | — | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued | — | 1 | — | — | — | — | — | 1 | — | 1 | — | 1 | — | — | — | — | — | 1 | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions | — | — | — | — | — | — | — | — | 641 | 641 | — | — | — | — | — | — | — | — | 641 | 641 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of put options | — | — | — | — | — | (9 | ) | (9 | ) | (9 | ) | — | (9 | ) | — | — | — | — | — | (9 | ) | (9 | ) | (9 | ) | — | (9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Disposal of non-controlling interests | — | — | — | — | — | 1 | 1 | 1 | — | 1 | — | — | — | — | — | 1 | 1 | 1 | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid | — | — | — | — | — | (1,341 | ) | (1,341 | ) | (1,341 | ) | (72 | ) | (1,413 | ) | — | — | — | — | — | (1,341 | ) | (1,341 | ) | (1,341 | ) | (72 | ) | (1,413 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
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At 30 June 2015 | 797 | 1,346 | 3,146 | (1,152 | ) | (2,228 | ) | 5,862 | 3,634 | 7,771 | 1,485 | 9,256 | 797 | 1,346 | 3,146 | (1,152 | ) | (2,228 | ) | 5,862 | 3,634 | 7,771 | 1,485 | 9,256 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Profit for the year | — | — | — | — | — | 2,244 | 2,244 | 2,244 | 118 | 2,362 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | 631 | — | (692 | ) | (692 | ) | (61 | ) | 170 | 109 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Employee share schemes | — | — | — | — | 39 | (38 | ) | 1 | 1 | — | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based incentive plans | — | — | — | — | — | 29 | 29 | 29 | — | 29 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based incentive plans in respect of associates | — | — | — | — | — | 1 | 1 | 1 | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax on share-based incentive plans | — | — | — | — | — | 10 | 10 | 10 | — | 10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued | — | 1 | — | — | — | — | — | 1 | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disposal of non-controlling interests | — | — | — | — | — | — | — | — | (24 | ) | (24 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of non-controlling interests | — | — | — | — | — | (18 | ) | (18 | ) | (18 | ) | (3 | ) | (21 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of rights issue of non-controlling interests | — | — | — | — | — | (5 | ) | (5 | ) | (5 | ) | 5 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid | — | — | — | — | — | (1,443 | ) | (1,443 | ) | (1,443 | ) | (101 | ) | (1,544 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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At 30 June 2016 | 797 | 1,347 | 3,146 | (521 | ) | (2,189 | ) | 5,950 | 3,761 | 8,530 | 1,650 | 10,180 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
185202
Financial statements (continued)
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended 30 June 2015 | Year ended 30 June 2014 | Year ended 30 June 2013 | Year ended 30 June 2016 | Year ended 30 June 2015 | Year ended 30 June 2014 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Notes | £ million | £ million | £ million | £ million | £ million | £ million | Notes | £ million | £ million | £ million | £ million | £ million | £ million | |||||||||||||||||||||||||||||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Profit for the year | 2,467 | 2,181 | 2,550 | 2,362 | 2,467 | 2,181 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Discontinued operations | — | 83 | — | — | — | 83 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Taxation | 466 | 447 | 507 | 496 | 466 | 447 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Share of after tax results of associates and joint ventures | (175 | ) | (252 | ) | (217 | ) | (221 | ) | (175 | ) | (252 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net finance charges | 412 | 388 | 457 | 327 | 412 | 388 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Non-operating items | (373 | ) | (140 | ) | 83 | (123 | ) | (373 | ) | (140 | ) | |||||||||||||||||||||||||||||||||||||||||||||
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Operating profit | 2,797 | 2,707 | 3,380 | 2,841 | 2,797 | 2,707 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Increase in inventories | (204 | ) | (229 | ) | (268 | ) | (95 | ) | (204 | ) | (229 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Decrease/(increase) in trade and other receivables | 274 | (276 | ) | (350 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
(Increase)/decrease in trade and other receivables | (86 | ) | 274 | (276 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Increase/(decrease) in trade and other payables and provisions | 47 | (92 | ) | 66 | 128 | 47 | (92 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
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Net decrease/(increase) in working capital | 117 | (597 | ) | (552 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net (increase)/decrease in working capital | (53 | ) | 117 | (597 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation, amortisation and impairment | 440 | 629 | 398 | 473 | 440 | 629 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends received | 183 | 228 | 220 | 173 | 183 | 228 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Post employment payments less amounts included in operating profit | (70 | ) | (196 | ) | (487 | ) | (59 | ) | (70 | ) | (196 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Other items | (11 | ) | (80 | ) | 45 | (15 | ) | (11 | ) | (80 | ) | |||||||||||||||||||||||||||||||||||||||||||||
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542 | 581 | 176 | 572 | 542 | 581 | |||||||||||||||||||||||||||||||||||||||||||||||||||
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Cash generated from operations | 3,456 | 2,691 | 3,004 | 3,360 | 3,456 | 2,691 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Interest received | 183 | 143 | 130 | 174 | 183 | 143 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Interest paid | (599 | ) | (575 | ) | (557 | ) | (479 | ) | (599 | ) | (575 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Taxation paid | (489 | ) | (469 | ) | (544 | ) | (507 | ) | (489 | ) | (469 | ) | ||||||||||||||||||||||||||||||||||||||||||||
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(905 | ) | (901 | ) | (971 | ) | (812 | ) | (905 | ) | (901 | ) | |||||||||||||||||||||||||||||||||||||||||||||
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Net cash from operating activities | 2,551 | 1,790 | 2,033 | 2,548 | 2,551 | 1,790 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disposal of property, plant and equipment and computer software | 52 | 80 | 39 | 57 | 52 | 80 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of property, plant and equipment and computer software | (638 | ) | (642 | ) | (636 | ) | (506 | ) | (638 | ) | (642 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Movements in loans and other investments | (2 | ) | 7 | 16 | (2 | ) | (2 | ) | 7 | |||||||||||||||||||||||||||||||||||||||||||||||
Sale of businesses | 9 | 978 | 2 | (16 | ) | 9 | 1,062 | 978 | 2 | |||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of businesses | 9 | (1,284 | ) | (536 | ) | (644 | ) | 9 | (15 | ) | (1,284 | ) | (536 | ) | ||||||||||||||||||||||||||||||||||||||||||
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Net cash outflow from investing activities | (894 | ) | (1,089 | ) | (1,241 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net cash inflow/(outflow) from investing activities | 596 | (894 | ) | (1,089 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Cash flows from financing activities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from issue of share capital | 1 | 1 | — | 1 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net purchase of own shares for share schemes | (8 | ) | (113 | ) | (11 | ) | (1 | ) | (8 | ) | (113 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Dividends paid to non-controlling interests | (72 | ) | (88 | ) | (100 | ) | (101 | ) | (72 | ) | (88 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Disposal of non-controlling interests | 1 | — | — | — | 1 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of shares of non-controlling interests | 9 | — | (37 | ) | (200 | ) | 9 | (21 | ) | — | (37 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Proceeds from bonds | 16 | 791 | 1,378 | 2,100 | 16 | — | 791 | 1,378 | ||||||||||||||||||||||||||||||||||||||||||||||||
Repayment of bonds | 16 | (1,492 | ) | (1,471 | ) | (869 | ) | 16 | (1,003 | ) | (1,492 | ) | (1,471 | ) | ||||||||||||||||||||||||||||||||||||||||||
Net movements on other borrowings | 16 | 386 | (64 | ) | 7 | 16 | (233 | ) | 386 | (64 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Equity dividends paid | 17 | (1,341 | ) | (1,228 | ) | (1,125 | ) | 17 | (1,443 | ) | (1,341 | ) | (1,228 | ) | ||||||||||||||||||||||||||||||||||||||||||
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Net cash outflow from financing activities | (1,734 | ) | (1,622 | ) | (198 | ) | (2,801 | ) | (1,734 | ) | (1,622 | ) | ||||||||||||||||||||||||||||||||||||||||||||
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Net (decrease)/increase in net cash and cash equivalents | 16 | (77 | ) | (921 | ) | 594 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net increase/(decrease) in net cash and cash equivalents | 16 | 343 | (77 | ) | (921 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange differences | (73 | ) | (192 | ) | 36 | 84 | (73 | ) | (192 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Net cash and cash equivalents at beginning of the year | 532 | 1,645 | 1,015 | 382 | 532 | 1,645 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Net cash and cash equivalents at end of the year | 382 | 532 | 1,645 | 809 | 382 | 532 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Net cash and cash equivalents consist of: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | 16 | 472 | 622 | 1,750 | 16 | 1,089 | 472 | 622 | ||||||||||||||||||||||||||||||||||||||||||||||||
Bank overdrafts | 16 | (90 | ) | (90 | ) | (105 | ) | 16 | (280 | ) | (90 | ) | (90 | ) | ||||||||||||||||||||||||||||||||||||||||||
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382 | 532 | 1,645 | 809 | 382 | 532 | |||||||||||||||||||||||||||||||||||||||||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
186203
Financial statements (continued)
ACCOUNTING INFORMATION AND POLICIESNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
This section describes the basis of preparation of the consolidated financial statements and the group’s accounting policies that are applicable to the financial statements as a whole. Accounting policies, critical accounting estimates and judgements that are specific to a note are included in the note to which they relate. This section also explains new accounting standards, amendments and interpretations, that the group has adopted in the current financial year or will adopt in subsequent years.
1. ACCOUNTING INFORMATION AND POLICIES
(a) Basis of preparation
The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the European Union (EU) and as issued by the International Accounting Standards Board (IASB). The consolidated financial statements are prepared on a going concern basis under the historical cost convention, unless stated otherwise in the relevant accounting policy.
The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates.
(b) Going concern
The group has considerableconsolidated financial resources available. At 30 June 2015 the group has cash and cash equivalents of £472 million and undrawn bank facilities of £2,229 million, with borrowings and bank overdrafts due within one year of £1,921 million. The group ownsstatements are prepared on a diverse portfolio of beverage alcohol assets. With a globally diverse customer and supplier base the directors believe that the group is well positioned to manage its business and financial risks successfully.
The directors have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the consolidated financial statements.basis.
(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. ControlThe group controls an investee when it is the power to direct the relevant activities of the subsidiary that significantly affect the subsidiary’s return so as to haveexposed, or has rights, to the variable returnreturns from its activities.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 consolidatedincluded 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, 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.
Balance sheetsAssets and liabilities are translated at closing rates. Exchange differences arising on the retranslation at closing rates of the opening balance sheets of overseas entities are taken to the exchange reserve, as are exchange differences arising on foreign currency borrowings and financial instruments designated as net investment hedges, to the extent that they are effective. Tax charges and credits arising on such items are also taken to the exchange reserve. Gains and losses accumulated in the exchange reserve are recycled to the 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.
187204
Financial statements (continued)
The principal foreign exchange rates used in the translation of financial statements for the three years ended 30 June 2015,2016, expressed in US dollars and euros per £1, were as follows:
2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||||||||||
US dollar | ||||||||||||||||||||||||
Income statement and cash flows(i) | 1.57 | 1.63 | 1.57 | 1.48 | 1.57 | 1.63 | ||||||||||||||||||
Assets and liabilities(ii) | 1.57 | 1.71 | 1.52 | 1.33 | 1.57 | 1.71 | ||||||||||||||||||
Euro | ||||||||||||||||||||||||
Income statement and cash flows(i) | 1.31 | 1.20 | 1.21 | 1.34 | 1.31 | 1.20 | ||||||||||||||||||
Assets and liabilities(ii) | 1.41 | 1.25 | 1.17 | 1.20 | 1.41 | 1.25 |
(i) | Weighted average rates |
(ii) | Year end rates |
The group uses foreign exchange hedges to mitigate the effect of exchange rate movements. For further information see note 15.
(e) Critical accounting estimates and judgements
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 |
• | Taxation — page |
• | Brands, goodwill and other intangibles — page |
• | Post employment benefits — page |
• | Contingent liabilities and legal proceedings — page |
InVenezuela is a hyper-inflationary economy where the year ended 30 June 2015government maintains a significant judgement was made in respectregime of strict currency controls with multiple foreign currency rate systems. Access to US dollar 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 (VEF) at the rate they are expected to be settled, applying the most appropriate official exchange rate. For consolidation purposes, the group converts its Venezuelan operations using management’s estimate of the exchange rate usedthat capital and dividend repatriations are expected to translate the group’s Venezuelan operations.
In February 2015, the Central Bank of Venezuela opened a new mechanism (known as SIMADI) that allows private and public companies to trade foreign currency with fewer restrictions than other mechanisms in Venezuela. As a result, the group has used the SIMADIbe realised. The consolidation exchange rate to consolidate its Venezuelan operations forand the year ended 30 June 2015. Foraccounting treatment are monitored and reviewed depending on the year ended 30 June 2014,economic and regulatory developments in the group applied the Sicad II exchange rate to consolidate its operations in Venezuela.
Applying the SIMADI consolidation rate of $1 = VEF197.30 (£1 = VEF309.76) compared to the Sicad II rate of $1 = VEF49.98 (£1 = VEF85.47) would have reduced net assets and cash and cash equivalents as at 1 July 2014 by £60 million and £52 million, respectively, and would have reduced the previously reported net sales and operating profit for the year ended 30 June 2014 by £57 million and £36 million, respectively.country.
(f) New accounting policies
The followingNo amendments to the accounting standards were issued by the IASB or the International Financial Reporting Interpretations Committee (IFRIC) that are first applicable to Diageo in the year ending 30 June 2016.
IAS 32 — Financial Instruments: Presentation – Offsetting and endorsedcash-pooling arrangements
In April 2016 guidance was issued by the EU,IFRS Interpretations Committee (IFRIC) to help determine whether entities are able to offset cash-pooling balances in accordance with IAS 32. The group has changed its accounting policy to be in line with the interpretation, but has not restated the prior year financial statements as the amounts involved are not material. Cash and cash equivalents and borrowings and bank overdrafts as at 30 June 2014 and 30 June 2015 would have been adoptedincreased by £102 million and £139 million, respectively with the group from 1 July 2014 with no significantsame impact on the group’s consolidated results, financial position or disclosures:
188
Financial statements (continued)
total assets and total liabilities.
The following standards issued by the IASB (not yet endorsed by the EU) have not yet been adopted by the group:
IFRS 9 — Financial instruments (effective in the year ending 30 June 2019) is ultimately intended to replace IAS 39 and covers the classification, measurement and derecognition of financial instruments together with a new hedge accounting model and new impairment methodology.
Based on a preliminary assessment the group believes that the adoption of IFRS 9 will not have noa significant impact on its consolidated results or financial position.
205
Financial statements (continued)
IFRS 15 — Revenue from contracts with customers (effective in the year ending 30 June 2019) is based on the principle that revenue is recognised when control of goods or services is transferred to the customer and provides a single, principles based five-step model to be applied to all sales contracts. It replaces the separate models for goods, services and construction contracts under current IFRS.
Based on a preliminary assessment the group believes that the adoption of IFRS 15 will not have noa significant impact on its consolidated results or financial position.
Amendments to IASIFRS 16 and IAS 41 — Agriculture: Bearer PlantsLeases (effective in the year ending 30 June 2017) changes2020) sets out the principles for the recognition, measurement, presentation and disclosure of leases for both the lessee and the lessor. It eliminates the classification of leases as either operating leases or finance leases and introduces a single lessee accounting requirementsmodel where the lessee is required to recognise assets and liabilities for biological assetsall material leases that meet the definitionhave a term of bearer plants. These will be within the scope of IAS 16 and will be subject to all of the requirements therein. This includes the ability to choose between the cost model and revaluation model.greater than a year.
The group is currently considering the implications of IFRS 16 which is expected to have an impact ofon the amendments on itsgroup’s consolidated results and financial position.
There are a number of amendments to IFRS, effective for the year ending 30 June 2016 and 30 June 2017, which are not expected to significantly impact the group’s consolidated results or financial position.
189206
Financial statements (continued)
RESULTS FOR THE YEAR
This section explains the results and performance of the group for the three years ended 30 June 2015.2016. 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 and discontinued operations. For associates, joint ventures and taxation, balance sheet disclosures are also provided in this section.
2. SEGMENTAL INFORMATION
Accounting policies
Sales comprise revenue 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 amounts collected on behalf of third parties, such as value added tax. Sales are recognised depending upon individual customer terms at the time of despatch, delivery or when the risk of loss transfers. Provision is made for returns where appropriate. Sales are stated net of price discounts, allowances for customer loyalty and certain promotional activities and similar items.
Net sales are sales less excise duties. Diageo incurs excise duties throughout the world. In somethe majority of countries excise duties are based on sales and are separately identified on the face of the invoice to the external customer. In others it is effectively a production tax which is incurredbecomes payable when the spiritproduct is removed from bonded warehouses. In these countriespremises 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 part of the cost of goods sold andduty are not separately identifiedalways passed on to the sales invoice.customer and where a customer fail to pay for product received the group cannot reclaim the excise duty. The group therefore recognises excise duty 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 committeeExecutive Committee considers the business principally from a geographical perspective based on the location of third party sales and the business analysis is presented by geographical segment.
In addition to these geographical selling segments, a further segment reviewed by the year ended 30 June 2015 Diageo changed its internal reporting structure to reflect changes made to management responsibilities. As a result of this change, Diageo reportsExecutive Committee is the following geographical segments bothInternational Supply Centre (ISC), which manufactures products for management reporting purposesother group companies and inincludes the external financial statements: North America; Europe; Africa; Latin America and Caribbean; Asia Pacific and Corporate. The geographical segments Western Europe and Africa, Eastern Europe and Turkey are no longer reported. Consequently, the segmental information (in parts (a) and (b) below) for the two years ended 30 June 2014 and 2013 has been restated to present the current internal reporting structure.
From 1 July 2013, the majority of the group’s supply operations (formerly the Global Supply segment) have been integrated into demand markets while the supply operationsproduction sites in the United Kingdom, Ireland, Italy and Italy, which manufacture products for other group companies, are operated by the International Supply Centre (ISC). The results of the ISC segment are allocated to the geographical segments for the purpose of explaining the group’s performance. The management reporting, at budget exchange rate, for the year ended 30 June 2013 was not restated as the integration of the non-ISC supply operations into the demand markets did not alter the externally reported net sales and operating profit before exceptional items of the geographical segments. The other segmental information in note 2(b) in respect of capital expenditures and depreciation, intangible asset amortisation and impairment for the year ended 30 June 2013 has been restated for the change in the reporting of the ISC.Guatemala.
Continuing operations also include the Corporate function. Corporate revenues and costs are in respect of central costs, including finance, marketing, corporate relations, human resources and legal, as well as certain information systems, facilities and employee costs that are not allocable to the geographical segments or to the ISC. They also include rents receivable and payable in respect of properties not used by the group in the manufacture, sale or distribution of premium drinks and the results of Gleneagles Hotel (disposed on 30 June 2015).
190
Financial statements (continued)
Diageo uses shared services operations, including captive and outsourced centres, to deliver transaction processing activities for markets and operational entities. These centres are located in Hungary, Romania, Kenya, Colombia, the Philippines and India. The captive business service centre in Budapest also performs certain central finance activities, including elements of financial planning and reporting and treasury. The resultscosts of shared service operations are recharged to the regions.
The segmental information for net sales and operating profit before exceptional items is reported at budgeted exchange rates in line with management reporting. For management reporting purposes the group measures the current year at, and restates the prior year net sales and operating profit to, the current year’s budgeted exchange rates. These exchange rates are set prior to the financial year as part of the financial planning process and provide a consistent exchange rate to measure the performance of the business throughout the year. The adjustments required to retranslate the segmental information to actual exchange rates and to reconcile it to the group’s reported results are shown in the tables below.following tables. 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 years.
207
Financial statements (continued)
In addition, for management reporting purposes Diageo presents separately the results of acquisitions and disposals completed in the current and prior year from the results of the geographical segments. The impact of acquisitions and disposals on net sales and operating profit is disclosed under the appropriate geographical segments in the following tables below at budgeted exchange rates.
(a) Segmental information for the consolidated income statement — continuing operations
North America £ million | Europe, Russia and Turkey £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | ISC £ million | Eliminate inter- segment sales £ million | Total operating segments £ million | Corporate and other £ million | Total £ million | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales | 4,037 | 4,593 | 1,875 | 1,078 | 4,022 | 1,355 | (1,355 | ) | 15,605 | 36 | 15,641 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Net sales | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At budgeted exchange rates(i) | 3,282 | 2,481 | 1,286 | 901 | 2,114 | 1,452 | (1,373 | ) | 10,143 | 38 | 10,181 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals | 106 | 75 | 74 | 59 | 9 | — | — | 323 | — | 323 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ISC allocation | 10 | 50 | 4 | 8 | 7 | (79 | ) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retranslation to actual exchange rates | 167 | (62 | ) | 37 | (105 | ) | (54 | ) | (18 | ) | 18 | (17 | ) | (2 | ) | (19 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Net sales | 3,565 | 2,544 | 1,401 | 863 | 2,076 | 1,355 | (1,355 | ) | 10,449 | 36 | 10,485 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Operating profit/(loss) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At budgeted exchange rates(i) | 1,459 | 738 | 212 | 221 | 399 | 112 | — | 3,141 | (149 | ) | 2,992 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals | 24 | 7 | (8 | ) | 13 | 1 | — | — | 37 | — | 37 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ISC allocation | 14 | 70 | 6 | 11 | 11 | (112 | ) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retranslation to actual exchange rates | 54 | (14 | ) | 2 | (46 | ) | (16 | ) | — | — | (20 | ) | (1 | ) | (21 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Operating profit/(loss) before exceptional items | 1,551 | 801 | 212 | 199 | 395 | — | — | 3,158 | (150 | ) | 3,008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exceptional items | — | — | — | (118 | ) | (49 | ) | — | — | (167 | ) | — | (167 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Operating profit/(loss) | 1,551 | 801 | 212 | 81 | 346 | — | — | 2,991 | (150 | ) | 2,841 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Non-operating items | 123 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net finance charges | (327 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share of after tax results of associates and joint ventures | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Moët Hennessy | 217 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Other | 4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Profit before taxation | 2,858 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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North America £ million | Europe £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | ISC £ million | Eliminate inter- segment sales £ million | Total operating segments £ million | Corporate and other £ million | Total £ million | North America £ million | Europe, Russia and Turkey £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | ISC £ million | Eliminate inter- segment sales £ million | Total operating segments £ million | Corporate and other £ million | Total £ million | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales | 3,909 | 4,683 | 1,868 | 1,297 | 4,129 | 1,381 | (1,381 | ) | 15,886 | 80 | 15,966 | 3,909 | 4,683 | 1,868 | 1,297 | 4,129 | 1,381 | (1,381 | ) | 15,886 | 80 | 15,966 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Net sales | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At budgeted exchange rates(i) | 3,462 | 2,666 | 1,457 | 1,105 | 1,291 | 1,485 | (1,413 | ) | 10,053 | 82 | 10,135 | 3,462 | 2,666 | 1,457 | 1,105 | 1,291 | 1,485 | (1,413 | ) | 10,053 | 82 | 10,135 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals | 25 | 34 | 1 | 26 | 903 | — | — | 989 | — | 989 | 25 | 34 | 1 | 26 | 903 | — | — | 989 | — | 989 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ISC allocation | 9 | 44 | 4 | 8 | 7 | (72 | ) | — | — | — | — | 9 | 44 | 4 | 8 | 7 | (72 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retranslation to actual exchange rates | (41 | ) | (127 | ) | (47 | ) | (106 | ) | 12 | (32 | ) | 32 | (309 | ) | (2 | ) | (311 | ) | (41 | ) | (127 | ) | (47 | ) | (106 | ) | 12 | (32 | ) | 32 | (309 | ) | (2 | ) | (311 | ) | ||||||||||||||||||||||||||||||||||||||||||||
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Net sales | 3,455 | 2,617 | 1,415 | 1,033 | 2,213 | 1,381 | (1,381 | ) | 10,733 | 80 | 10,813 | 3,455 | 2,617 | 1,415 | 1,033 | 2,213 | 1,381 | (1,381 | ) | 10,733 | 80 | 10,813 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Operating profit/(loss) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At budgeted exchange rates(i) | 1,477 | 779 | 329 | 314 | 303 | 75 | — | 3,277 | (136 | ) | 3,141 | 1,477 | 779 | 329 | 314 | 303 | 75 | — | 3,277 | (136 | ) | 3,141 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals | (3 | ) | 12 | — | 1 | 49 | 1 | — | 60 | 4 | 64 | (3 | ) | 12 | — | 1 | 49 | 1 | — | 60 | 4 | 64 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ISC allocation | 10 | 47 | 4 | 8 | 7 | (76 | ) | — | — | — | — | 10 | 47 | 4 | 8 | 7 | (76 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retranslation to actual exchange rates | (36 | ) | (34 | ) | (15 | ) | (60 | ) | (3 | ) | — | — | (148 | ) | 9 | (139 | ) | (36 | ) | (34 | ) | (15 | ) | (60 | ) | (3 | ) | — | — | (148 | ) | 9 | (139 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
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Operating profit/(loss) before exceptional items | 1,448 | 804 | 318 | 263 | 356 | — | — | 3,189 | (123 | ) | 3,066 | 1,448 | 804 | 318 | 263 | 356 | — | — | 3,189 | (123 | ) | 3,066 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exceptional items | (28 | ) | (20 | ) | (7 | ) | (5 | ) | (193 | ) | (6 | ) | — | (259 | ) | (10 | ) | (269 | ) | (28 | ) | (20 | ) | (7 | ) | (5 | ) | (193 | ) | (6 | ) | — | (259 | ) | (10 | ) | (269 | ) | ||||||||||||||||||||||||||||||||||||||||||
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Operating profit/(loss) | 1,420 | 784 | 311 | 258 | 163 | (6 | ) | — | 2,930 | (133 | ) | 2,797 | 1,420 | 784 | 311 | 258 | 163 | (6 | ) | — | 2,930 | (133 | ) | 2,797 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Non-operating items | 373 | 373 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net finance charges | (412 | ) | (412 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share of after tax results of associates and joint ventures | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Moët Hennessy | 164 | 164 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Other | 11 | 11 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Profit before taxation | 2,933 | 2,933 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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191208
Financial statements (continued)
North America £ million | Europe £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | ISC £ million | Eliminate inter- segment sales £ million | Total operating segments £ million | Corporate and other £ million | Total £ million | |||||||||||||||||||||||||||||||
2014 (restated) | ||||||||||||||||||||||||||||||||||||||||
Sales | 3,915 | 4,935 | 1,846 | 1,404 | 1,801 | 1,504 | (1,504 | ) | 13,901 | 79 | 13,980 | |||||||||||||||||||||||||||||
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Net sales | ||||||||||||||||||||||||||||||||||||||||
At budgeted exchange rates(i) | 3,563 | 2,824 | 1,506 | 1,311 | 1,446 | 1,595 | (1,504 | ) | 10,741 | 79 | 10,820 | |||||||||||||||||||||||||||||
Acquisitions and disposals | 44 | 3 | — | — | — | — | — | 47 | — | 47 | ||||||||||||||||||||||||||||||
ISC allocation | 12 | 56 | 5 | 10 | 8 | (91 | ) | — | — | — | — | |||||||||||||||||||||||||||||
Retranslation to actual exchange rates | (175 | ) | (69 | ) | (81 | ) | (177 | ) | (107 | ) | — | — | (609 | ) | — | (609 | ) | |||||||||||||||||||||||
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Net sales | 3,444 | 2,814 | 1,430 | 1,144 | 1,347 | 1,504 | (1,504 | ) | 10,179 | 79 | 10,258 | |||||||||||||||||||||||||||||
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Operating profit/(loss) | ||||||||||||||||||||||||||||||||||||||||
At budgeted exchange rates(i) | 1,535 | 838 | 366 | 397 | 333 | 84 | — | 3,553 | (128 | ) | 3,425 | |||||||||||||||||||||||||||||
Acquisitions and disposals | (12 | ) | (3 | ) | — | — | (19 | ) | — | — | (34 | ) | (2 | ) | (36 | ) | ||||||||||||||||||||||||
ISC allocation | 11 | 52 | 4 | 9 | 8 | (84 | ) | — | — | — | — | |||||||||||||||||||||||||||||
Retranslation to actual exchange rates | (74 | ) | (34 | ) | (30 | ) | (78 | ) | (39 | ) | — | — | (255 | ) | — | (255 | ) | |||||||||||||||||||||||
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Operating profit/(loss) before exceptional items | 1,460 | 853 | 340 | 328 | 283 | — | — | 3,264 | (130 | ) | 3,134 | |||||||||||||||||||||||||||||
Exceptional items | (35 | ) | (20 | ) | (23 | ) | (14 | ) | (276 | ) | (47 | ) | — | (415 | ) | (12 | ) | (427 | ) | |||||||||||||||||||||
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Operating profit/(loss) | 1,425 | 833 | 317 | 314 | 7 | (47 | ) | — | 2,849 | (142 | ) | 2,707 | ||||||||||||||||||||||||||||
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Non-operating items | 140 | |||||||||||||||||||||||||||||||||||||||
Net finance charges | (388 | ) | ||||||||||||||||||||||||||||||||||||||
Share of after tax results of associates and joint ventures | ||||||||||||||||||||||||||||||||||||||||
- Moët Hennessy | 246 | |||||||||||||||||||||||||||||||||||||||
- Other | 6 | |||||||||||||||||||||||||||||||||||||||
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Profit before taxation | 2,711 | |||||||||||||||||||||||||||||||||||||||
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192
Financial statements (continued)
North America £ million | Europe £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | Global Supply £ million | Eliminate inter- segment sales £ million | Total operating segments £ million | Corporate and other £ million | Total £ million | North America £ million | Europe, Russia and Turkey £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | ISC £ million | Eliminate inter- segment sales £ million | Total operating segments £ million | Corporate and other £ million | Total £ million | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2013 (restated) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales | 4,262 | 5,074 | 2,014 | 1,741 | 2,109 | 2,648 | (2,648 | ) | 15,200 | 76 | 15,276 | 3,915 | 4,935 | 1,846 | 1,404 | 1,801 | 1,504 | (1,504 | ) | 13,901 | 79 | 13,980 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Net sales | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At budgeted exchange rates(i) | 3,707 | 2,890 | 1,566 | 1,416 | 1,480 | 2,754 | (2,667 | ) | 11,146 | 76 | 11,222 | 3,563 | 2,824 | 1,506 | 1,311 | 1,446 | 1,595 | (1,504 | ) | 10,741 | 79 | 10,820 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals | — | 49 | 14 | 66 | 119 | — | — | 248 | — | 248 | 44 | 3 | — | — | — | — | — | 47 | — | 47 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Global Supply allocation | 36 | 31 | 3 | 11 | 6 | (87 | ) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ISC allocation | 12 | 56 | 5 | 10 | 8 | (91 | ) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retranslation to actual exchange rates | (20 | ) | (55 | ) | (19 | ) | (40 | ) | (33 | ) | (19 | ) | 19 | (167 | ) | — | (167 | ) | (175 | ) | (69 | ) | (81 | ) | (177 | ) | (107 | ) | — | — | (609 | ) | — | (609 | ) | |||||||||||||||||||||||||||||||||||||||||||||
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Net sales | 3,723 | 2,915 | 1,564 | 1,453 | 1,572 | 2,648 | (2,648 | ) | 11,227 | 76 | 11,303 | 3,444 | 2,814 | 1,430 | 1,144 | 1,347 | 1,504 | (1,504 | ) | 10,179 | 79 | 10,258 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Operating profit/(loss) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At budgeted exchange rates(i) | 1,445 | 864 | 418 | 480 | 369 | 82 | — | 3,658 | (154 | ) | 3,504 | 1,535 | 838 | 366 | 397 | 333 | 84 | — | 3,553 | (128 | ) | 3,425 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisitions and disposals | — | 15 | 2 | — | 22 | — | — | 39 | — | 39 | (12 | ) | (3 | ) | — | — | (19 | ) | — | — | (34 | ) | (2 | ) | (36 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Global Supply allocation | 46 | 30 | 3 | — | 3 | (82 | ) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
ISC allocation | 11 | 52 | 4 | 9 | 8 | (84 | ) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retranslation to actual exchange rates | (13 | ) | (6 | ) | (23 | ) | (12 | ) | (13 | ) | — | — | (67 | ) | 3 | (64 | ) | (74 | ) | (34 | ) | (30 | ) | (78 | ) | (39 | ) | — | — | (255 | ) | — | (255 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
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Operating profit/(loss) before exceptional items | 1,478 | 903 | 400 | 468 | 381 | — | — | 3,630 | (151 | ) | 3,479 | 1,460 | 853 | 340 | 328 | 283 | — | — | 3,264 | (130 | ) | 3,134 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exceptional items | — | (31 | ) | (5 | ) | — | (1 | ) | (62 | ) | — | (99 | ) | — | (99 | ) | (35 | ) | (20 | ) | (23 | ) | (14 | ) | (276 | ) | (47 | ) | — | (415 | ) | (12 | ) | (427 | ) | |||||||||||||||||||||||||||||||||||||||||||||
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Operating profit/(loss) | 1,478 | 872 | 395 | 468 | 380 | (62 | ) | — | 3,531 | (151 | ) | 3,380 | 1,425 | 833 | 317 | 314 | 7 | (47 | ) | — | 2,849 | (142 | ) | 2,707 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Non-operating items | (83 | ) | 140 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net finance charges | (457 | ) | (388 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share of after tax results of associates and joint ventures | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Moët Hennessy | 230 | 246 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
- Other | (13 | ) | 6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Profit before taxation | 3,057 | 2,711 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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(i) | These items represent the IFRS 8 performance measures for the geographical and |
(1) | The net sales figures for |
(2) | The group’s net finance charges are managed centrally and are not attributable to individual operating segments. |
(3) | Approximately 40% of annual net sales occur in the last four months of each calendar year. |
193209
Financial statements (continued)
(b) Other segmental information
North America £ million | Europe £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | ISC £ million | Corporate and other £ million | Total £ million | North America £ million | Europe, Russia and Turkey £ million | Africa £ million | Latin America and Caribbean £ million | Asia Pacific £ million | ISC £ million | Corporate and other £ million | Total £ million | |||||||||||||||||||||||||||||||||||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital expenditure | 105 | 29 | 107 | 20 | 52 | 150 | 43 | 506 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and intangible asset amortisation | (39 | ) | (21 | ) | (83 | ) | (10 | ) | (35 | ) | (106 | ) | (61 | ) | (355 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Exceptional accelerated depreciation and impairment | — | — | — | (14 | ) | — | (8 | ) | — | (22 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Exceptional impairment of intangible assets | — | — | — | (104 | ) | — | — | — | (104 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital expenditure | 95 | 34 | 140 | 53 | 42 | 233 | 41 | 638 | 95 | 34 | 140 | 53 | 42 | 233 | 41 | 638 | ||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and intangible asset amortisation | (38 | ) | (24 | ) | (93 | ) | (15 | ) | (37 | ) | (102 | ) | (62 | ) | (371 | ) | (38 | ) | (24 | ) | (93 | ) | (15 | ) | (37 | ) | (102 | ) | (62 | ) | (371 | ) | ||||||||||||||||||||||||||||||||
Exceptional accelerated depreciation and impairment | (22 | ) | — | — | (1 | ) | — | — | — | (23 | ) | (22 | ) | — | — | (1 | ) | — | — | — | (23 | ) | ||||||||||||||||||||||||||||||||||||||||||
Exceptional impairment of associate | — | — | — | — | (41 | ) | — | — | (41 | ) | — | — | — | — | (41 | ) | — | — | (41 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Exceptional accelerated amortisation | — | — | — | — | — | — | (5 | ) | (5 | ) | — | — | — | — | — | — | (5 | ) | (5 | ) | ||||||||||||||||||||||||||||||||||||||||||||
2014 (restated) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital expenditure | 65 | 28 | 154 | 39 | 25 | 280 | 51 | 642 | 65 | 28 | 154 | 39 | 25 | 280 | 51 | 642 | ||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and intangible asset amortisation | (40 | ) | (24 | ) | (92 | ) | (12 | ) | (19 | ) | (100 | ) | (57 | ) | (344 | ) | (40 | ) | (24 | ) | (92 | ) | (12 | ) | (19 | ) | (100 | ) | (57 | ) | (344 | ) | ||||||||||||||||||||||||||||||||
Exceptional accelerated depreciation and impairment | (2 | ) | — | — | — | (4 | ) | (18 | ) | (1 | ) | (25 | ) | (2 | ) | — | — | — | (4 | ) | (18 | ) | (1 | ) | (25 | ) | ||||||||||||||||||||||||||||||||||||||
Exceptional impairment of intangible assets | — | — | — | — | (260 | ) | — | — | (260 | ) | — | — | — | — | (260 | ) | — | — | (260 | ) | ||||||||||||||||||||||||||||||||||||||||||||
2013 (restated) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital expenditure | 76 | 22 | 183 | 20 | 42 | 226 | 67 | 636 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation, intangible asset amortisation and impairment | (37 | ) | (25 | ) | (92 | ) | (13 | ) | (20 | ) | (89 | ) | (49 | ) | (325 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Exceptional accelerated depreciation | (4 | ) | — | — | — | — | (19 | ) | — | (23 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Exceptional impairment of intangible assets | — | (50 | ) | — | — | — | — | — | (50 | ) |
(c) Category and geographicgeographical analysis
Category analysis | Geographic analysis | Category analysis | Geographical analysis | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Spirits £ million | Beer £ million | Wine £ million | Ready to drink £ million | Other £ million | Total £ million | Great Britain £ million | United States £ million | Nether- lands £ million | India £ million | Rest of World £ million | Total £ million | Spirits £ million | Beer £ million | Wine £ million | Ready to drink £ million | Other £ million | Total £ million | Great Britain £ million | United States £ million | Nether- lands £ million | India £ million | Rest of World £ million | Total £ million | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales(i) | 11,993 | 2,486 | 265 | 726 | 171 | 15,641 | 1,672 | 3,729 | 56 | 2,465 | 7,719 | 15,641 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-current assets(ii),(iii) | — | — | — | — | — | — | 1,679 | 3,859 | 2,350 | 3,764 | 7,224 | 18,876 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales(i) | 12,052 | 2,562 | 479 | 703 | 170 | 15,966 | 1,765 | 3,592 | 54 | 2,463 | 8,092 | 15,966 | 12,052 | 2,562 | 479 | 703 | 170 | 15,966 | 1,765 | 3,592 | 54 | 2,463 | 8,092 | 15,966 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-current assets(ii),(iii) | — | — | — | — | — | — | 1,654 | 3,340 | 2,196 | 3,439 | 6,588 | 17,217 | — | — | — | — | — | — | 1,654 | 3,340 | 2,196 | 3,439 | 6,588 | 17,217 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales(i) | 9,941 | 2,581 | 468 | 817 | 173 | 13,980 | 1,735 | 3,568 | 65 | 86 | 8,526 | 13,980 | 9,941 | 2,581 | 468 | 817 | 173 | 13,980 | 1,735 | 3,568 | 65 | 86 | 8,526 | 13,980 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-current assets(ii),(iii) | — | — | — | — | — | — | 1,625 | 3,097 | 2,100 | 802 | 7,124 | 14,748 | — | — | — | — | — | — | 1,625 | 3,097 | 2,100 | 802 | 7,124 | 14,748 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sales(i) | 10,957 | 2,776 | 503 | 902 | 138 | 15,276 | 1,718 | 3,939 | 65 | 75 | 9,479 | 15,276 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-current assets(ii),(iii) | — | — | — | — | — | — | 1,514 | 3,420 | 2,255 | 8 | 8,337 | 15,534 |
(i) | The geographical analysis of sales is based on the location of third party customers. |
(ii) | The geographical analysis of non-current assets is based on the geographical location of the assets and comprises intangible assets, property, plant and equipment, biological assets, investments in associates and joint ventures, other investments and non-current other receivables. |
(iii) | 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. |
194210
Financial statements (continued)
3. OPERATING COSTS
2015 £ million | 2014 (restated) £ million | 2013 £ million | 2016 £ million | 2015 £ million | 2014 £ million | |||||||||||||||||||
Excise duties | 5,153 | 3,722 | 3,973 | 5,156 | 5,153 | 3,722 | ||||||||||||||||||
Cost of sales | 4,610 | 4,029 | 4,416 | 4,251 | 4,610 | 4,029 | ||||||||||||||||||
Marketing | 1,629 | 1,620 | 1,769 | 1,562 | 1,629 | 1,620 | ||||||||||||||||||
Other operating expenses | 1,777 | 1,902 | 1,738 | 1,831 | 1,777 | 1,902 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
13,169 | 11,273 | 11,896 | 12,800 | 13,169 | 11,273 | |||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Comprising: | ||||||||||||||||||||||||
Excise duties – Great Britain | 862 | 863 | 861 | 853 | 862 | 863 | ||||||||||||||||||
– United States | 450 | 467 | 534 | 468 | 450 | 467 | ||||||||||||||||||
– India | 1,472 | 33 | 25 | 1,588 | 1,472 | 33 | ||||||||||||||||||
– Other | 2,369 | 2,359 | 2,553 | 2,247 | 2,369 | 2,359 | ||||||||||||||||||
Increase in inventories | (200 | ) | (291 | ) | (228 | ) | (100 | ) | (200 | ) | (291 | ) | ||||||||||||
Raw materials and consumables | 2,725 | 2,327 | 2,404 | 2,548 | 2,725 | 2,327 | ||||||||||||||||||
Marketing | 1,629 | 1,620 | 1,769 | 1,562 | 1,629 | 1,620 | ||||||||||||||||||
Other external charges | 2,017 | 1,810 | 2,192 | 1,767 | 2,017 | 1,810 | ||||||||||||||||||
Staff costs | 1,433 | 1,479 | 1,403 | 1,475 | 1,433 | 1,479 | ||||||||||||||||||
Depreciation, amortisation and impairment | 440 | 629 | 398 | 473 | 440 | 629 | ||||||||||||||||||
Gains on disposal of properties | (26 | ) | (25 | ) | (1 | ) | (39 | ) | (26 | ) | (25 | ) | ||||||||||||
Net foreign exchange losses/(gains) | 13 | 12 | (1 | ) | ||||||||||||||||||||
Net foreign exchange losses | 1 | 13 | 12 | |||||||||||||||||||||
Other operating income | (15 | ) | (10 | ) | (13 | ) | (43 | ) | (15 | ) | (10 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
13,169 | 11,273 | 11,896 | 12,800 | 13,169 | 11,273 | |||||||||||||||||||
|
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|
|
|
|
(i) | On 7 July 2015, Diageo sold 8.5 million shares in United Breweries Limited resulting in a gain of £28 million. |
(a) Other external charges
Other external charges include operating lease rentals for plant and equipment of £29 million (2014(2015 – £30£29 million; 20132014 – £27£30 million), other operating lease rentals (mainly properties) of £72 million (2015 – £87 million (2014million; 2014 – £85 million; 2013 – £93 million), research and development expenditure in respect of new drinks products and package design in the year leading up to product launch of £28 million (2015 – £26 million (2014million; 2014 – £24 million; 2013 – £21 million) and maintenance and repairs of £91 million (2015 – £95 million (2014million; 2014 – £72 million; 2013 – £88 million). The group has revised the disclosure of the 2014 comparative amounts by decreasing other external charges by £523 million with a corresponding increase in raw materials and consumables. The revised disclosure is consistent with the current year presentation.
(b) Exceptional operating items
Included in the table above are exceptional operating items as follows:
2015 £ million | 2014 £ million | 2013 £ million | ||||||||||
Other external charges | 170 | 31 | 10 | |||||||||
Staff costs | ||||||||||||
– Net charge in respect of restructuring programmes | 30 | 111 | 36 | |||||||||
– Pension changes – past service credits | — | — | (20 | ) | ||||||||
Depreciation, amortisation and impairment | ||||||||||||
– Accelerated depreciation and amortisation | 28 | 21 | 23 | |||||||||
– Associate impairment | 41 | — | — | |||||||||
– Brand and tangible asset impairment | — | 264 | 50 | |||||||||
|
|
|
|
|
| |||||||
Total exceptional operating costs (note 4) | 269 | 427 | 99 | |||||||||
|
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|
|
| |||||||
Cost of sales | 25 | 23 | 27 | |||||||||
Other operating expenses | 244 | 404 | 72 | |||||||||
|
|
|
|
|
| |||||||
Total exceptional operating costs (note 4) | 269 | 427 | 99 | |||||||||
|
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|
|
|
195
Financial statements (continued)
(c) Auditor fees
Other external charges include the fees of the principal auditor of the group, PricewaterhouseCoopers LLP and its affiliates (PwC) are analysed below.
PwC was appointed as the group’s principal auditor for the year ended 30 June 2016. Accordingly, comparative figures in the table below for the years ended 30 June 2015 and 30 June 2014 are in respect of remuneration paid to the previous principal auditor of the group, KPMG LLP and its affiliates (KPMG):.
2015 £ million | 2014 £ million | 2013 £ million | 2016 £ million | 2015 £ million | 2014 £ million | |||||||||||||||||||
Audit fees of these financial statements | 3.6 | 3.4 | 3.5 | |||||||||||||||||||||
Audit of these financial statements | 3.4 | 3.6 | 3.4 | |||||||||||||||||||||
Audit of financial statements of subsidiaries | 2.7 | 2.3 | 2.4 | 2.3 | 2.7 | 2.3 | ||||||||||||||||||
Audit related assurance services(i) | 1.6 | 1.6 | 1.6 | 1.4 | 1.6 | 1.6 | ||||||||||||||||||
Total audit fees (Audit fees) | 7.9 | 7.3 | 7.5 | 7.1 | 7.9 | 7.3 | ||||||||||||||||||
Other services relevant to taxation (Tax fees)(ii) | 0.8 | 0.6 | 1.1 | 0.5 | 0.8 | 0.6 | ||||||||||||||||||
Other assurance services (Audit related fees)(iii) | 0.6 | 0.7 | 0.5 | 0.4 | 0.6 | 0.7 | ||||||||||||||||||
All other non-audit fees (All other fees)(iv) | 0.7 | 0.4 | 1.1 | 0.9 | 0.7 | 0.4 | ||||||||||||||||||
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| |||||||||||||||||||
10.0 | 9.0 | 10.2 | 8.9 | 10.0 | 9.0 | |||||||||||||||||||
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|
|
|
(i) | Audit related assurance services are principally in respect of reporting under section 404 of the US Sarbanes-Oxley Act and the review of the interim financial information. |
211
Financial statements (continued)
(ii) | Other services relevant to taxation principally comprise tax |
(iii) | Other assurance services comprise the aggregate fees for assurance and related services that are related to the performance of the audit or review of the financial statements and are not reported under ‘total audit fees’. |
(iv) | All other non-audit fees are principally in respect of immigration and advisory |
(1) | Disclosure requirements for auditor fees in the United States are different from those required in the United Kingdom. The terminology by category required in the United States is disclosed in brackets in the above table. All figures are the same for the disclosures in the United Kingdom and the United States apart from |
Audit services provided by KPMG for the year ended 30 June 2016 were £0.6 million. Audit services by firms other than PwC and KPMG for the year ended 30 June 2016, and other than KPMG for the comparative periods were not materialmaterial. PwC fees for audit services in anyrespect of employee pension plans were £0.2 million for the year ended 30 June 2016. In the years presented.ended 30 June 2015 and 2014 the KPMG fees for audit services in respect of employee pension plans were £0.4 million (2014 –and £0.3 million; 2013 – £0.4 million).million, respectively.
(d)(c) Staff costs and average number of employees
2015 £ million | 2014 £ million | 2013 £ million | 2016 £ million | 2015 £ million | 2014 £ million | |||||||||||||||||||
Aggregate remuneration | ||||||||||||||||||||||||
Wages and salaries | 1,180 | 1,242 | 1,148 | 1,236 | 1,180 | 1,242 | ||||||||||||||||||
Share-based incentive plans | 36 | 38 | 46 | 28 | 36 | 38 | ||||||||||||||||||
Employer’s social security | 88 | 92 | 92 | 85 | 88 | 92 | ||||||||||||||||||
Employer’s pension | ||||||||||||||||||||||||
- defined benefit plans | 103 | 91 | 97 | 99 | 103 | 91 | ||||||||||||||||||
- defined contribution plans | 15 | 15 | 13 | 16 | 15 | 15 | ||||||||||||||||||
Other post employment plans | 11 | 1 | 7 | 11 | 11 | 1 | ||||||||||||||||||
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| |||||||||||||||||||
1,433 | 1,479 | 1,403 | 1,475 | 1,433 | 1,479 | |||||||||||||||||||
|
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|
|
|
|
The average number of employees on a full time equivalent basis (excluding employees of associates and joint ventures) was as follows:
2015 | 2014 (restated)(i) | 2013 (restated)(i) | 2016 | 2015 | 2014(i) | |||||||||||||||||||
North America | 2,748 | 3,120 | 3,129 | 2,477 | 2,748 | 3,120 | ||||||||||||||||||
Europe | 4,073 | 4,056 | 3,927 | |||||||||||||||||||||
Europe, Russia and Turkey | 4,164 | 4,073 | 4,056 | |||||||||||||||||||||
Africa | 4,997 | 5,252 | 5,648 | 5,381 | 4,997 | 5,252 | ||||||||||||||||||
Latin America and Caribbean | 3,166 | 3,002 | 3,031 | 3,013 | 3,166 | 3,002 | ||||||||||||||||||
Asia Pacific(ii) | 10,520 | 3,985 | 4,075 | |||||||||||||||||||||
Asia Pacific | 9,711 | 10,520 | 3,985 | |||||||||||||||||||||
ISC | 4,291 | 4,431 | 4,878 | 4,188 | 4,291 | 4,431 | ||||||||||||||||||
Corporate and other | 3,567 | 3,509 | 3,311 | 3,144 | 3,567 | 3,509 | ||||||||||||||||||
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| |||||||||||||||||||
33,362 | 27,355 | 27,999 | 32,078 | 33,362 | 27,355 | |||||||||||||||||||
|
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|
|
|
(i) |
196
Financial statements (continued)
At 30 June 20152016 the group had, on a full time equivalent basis, 32,409 (201431,485 (2015 – 26,588; 201332,409; 2014 – 28,056)26,588) employees. The average number of employees of the group, including part time employees, for the year was 34,179 (201432,969 (2015 – 27,958; 201334,179; 2014 – 28,545)27,958).
212
Financial statements (continued)
(d) Exceptional operating items
Included in the table above are exceptional operating items as follows:
2016 £ million | 2015 £ million | 2014 £ million | ||||||||||
Other external charges | 49 | 170 | 31 | |||||||||
Staff costs | ||||||||||||
- Net charge in respect of restructuring programmes | — | 30 | 111 | |||||||||
Depreciation, amortisation and impairment | ||||||||||||
- Brand, goodwill and tangible asset impairment | 118 | — | 264 | |||||||||
- Accelerated depreciation and amortisation | — | 28 | 21 | |||||||||
- Associate impairment | — | 41 | — | |||||||||
|
|
|
|
|
| |||||||
Total exceptional operating costs (note 4) | 167 | 269 | 427 | |||||||||
|
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|
|
|
| |||||||
Cost of sales | — | 25 | 23 | |||||||||
Other operating expenses | 167 | 244 | 404 | |||||||||
|
|
|
|
|
| |||||||
Total exceptional operating costs (note 4) | 167 | 269 | 427 | |||||||||
|
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|
|
4. EXCEPTIONAL ITEMS
Accounting policies
IAS1 (Revised) – Presentation of financial statementsrequires material items of income and expense to be disclosed separately.
Critical accounting estimates and judgements
Exceptional items are those that in management’s judgement need to be disclosed by virtue of their size or nature. 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.
Non-operating items
Gains and losses on the sale of businesses, brands or distribution rights, step up gains and losses that arise when an investment becomes an associate or an associate becomes a subsidiary and other material, unusual non recurring items, that are not in respect of the production, marketing and distribution of premium drinks, are disclosed as non-operating exceptional items below operating profit in the consolidated income statement. It is believed that such classification further helps investors to understand the performance of the group.
213
2015 £ million | 2014 £ million | 2013 £ million | ||||||||||
Items included in operating profit | ||||||||||||
Restructuring | ||||||||||||
Global efficiency programme (a) | (47 | ) | (98 | ) | — | |||||||
Supply excellence review (b) | (35 | ) | (35 | ) | (25 | ) | ||||||
Irish brewing operations (c) | — | (30 | ) | (36 | ) | |||||||
Global Supply operations | — | — | (8 | ) | ||||||||
Other | ||||||||||||
Korea settlement (d) | (146 | ) | — | — | ||||||||
Associate impairment (e) | (41 | ) | — | — | ||||||||
Brand and tangible asset impairment (f) | — | (264 | ) | (50 | ) | |||||||
Pension changes — past service credits | — | — | 20 | |||||||||
|
|
|
|
|
| |||||||
(269 | ) | (427 | ) | (99 | ) | |||||||
|
|
|
|
|
| |||||||
Non-operating items | ||||||||||||
Step ups | ||||||||||||
United Spirits Limited (g) | 103 | 140 | — | |||||||||
Don Julio (h) | 63 | — | — | |||||||||
South Africa (i) | (10 | ) | — | — | ||||||||
Sale of businesses | ||||||||||||
Bushmills (h) | 174 | — | — | |||||||||
Gleneagles Hotel (j) | 73 | — | — | |||||||||
Nuvo (k) | — | — | (83 | ) | ||||||||
Other | ||||||||||||
Guarantee (l) | (30 | ) | — | — | ||||||||
|
|
|
|
|
| |||||||
373 | 140 | (83 | ) | |||||||||
|
|
|
|
|
| |||||||
Exceptional items before taxation | 104 | (287 | ) | (182 | ) | |||||||
Items included in taxation (note 7) | 51 | 99 | 55 | |||||||||
|
|
|
|
|
| |||||||
Exceptional items in continuing operations | 155 | (188 | ) | (127 | ) | |||||||
Discontinued operations net of taxation (note 8) | — | (83 | ) | — | ||||||||
|
|
|
|
|
| |||||||
Total exceptional items | 155 | (271 | ) | (127 | ) | |||||||
|
|
|
|
|
| |||||||
Attributable to: | ||||||||||||
Equity shareholders of the parent company | 156 | (146 | ) | |||||||||
Non-controlling interests | (1 | ) | (125 | ) | ||||||||
|
|
|
| |||||||||
Total exceptional items | 155 | (271 | ) | |||||||||
|
|
|
|
Financial statements (continued)
2016 £ million | 2015 £ million | 2014 £ million | ||||||||||
Items included in operating profit | ||||||||||||
Brand, goodwill and tangible asset impairment (a) | (118 | ) | — | (264 | ) | |||||||
Disengagement agreements relating to United Spirits Limited (b) | (49 | ) | — | — | ||||||||
Korea settlement (c) | — | (146 | ) | — | ||||||||
Associate impairment (d) | — | (41 | ) | — | ||||||||
Restructuring programmes (e) | — | (82 | ) | (163 | ) | |||||||
|
|
|
|
|
| |||||||
(167 | ) | (269 | ) | (427 | ) | |||||||
|
|
|
|
|
| |||||||
Non-operating items | ||||||||||||
Sale of businesses | ||||||||||||
Jamaica, Singapore and Malaysia beer interests (f) | 457 | — | — | |||||||||
Wines in the United States and Percy Fox (g) | (191 | ) | — | — | ||||||||
Argentina (h) | (38 | ) | — | — | ||||||||
South African associate interests (i) | (27 | ) | — | — | ||||||||
Kenya – glass business (CGI) (j) | 14 | — | — | |||||||||
Gleneagles Hotel (k) | — | 73 | — | |||||||||
Bushmills (l) | — | 174 | — | |||||||||
Step ups | ||||||||||||
United Spirits Limited (m) | — | 103 | 140 | |||||||||
Don Julio (l) | — | 63 | — | |||||||||
South Africa (n) | — | (10 | ) | — | ||||||||
Other | ||||||||||||
Provision for a receivable related to a loan guarantee (o) | (92 | ) | — | — | ||||||||
Guarantee (o) | — | (30 | ) | — | ||||||||
|
|
|
|
|
| |||||||
123 | 373 | 140 | ||||||||||
|
|
|
|
|
| |||||||
Exceptional items before taxation | (44 | ) | 104 | (287 | ) | |||||||
Items included in taxation (note 7) | 56 | 51 | 99 | |||||||||
|
|
|
|
|
| |||||||
Exceptional items in continuing operations | 12 | 155 | (188 | ) | ||||||||
Discontinued operations net of taxation (note 8) | — | — | (83 | ) | ||||||||
|
|
|
|
|
| |||||||
Total exceptional items | 12 | 155 | (271 | ) | ||||||||
|
|
|
|
|
| |||||||
Attributable to: | ||||||||||||
Equity shareholders of the parent company | 2 | 156 | (146 | ) | ||||||||
Non-controlling interests | 10 | (1 | ) | (125 | ) | |||||||
|
|
|
|
|
| |||||||
Total exceptional items | 12 | 155 | (271 | ) | ||||||||
|
|
|
|
|
|
197214
Financial statements (continued)
(a) On 30 January 2014, Diageo announced its plan to restructure the organisation and deliver further operating efficiencies. This is in line with the principles implemented by the operating model review announced in 2011, and includes the reorganisation of teams in the markets working with regions and global functions, a reconfiguration of procurement, logistics and shared services and a transformation of information services. The charge is principally in respect of redundancies in all regions and the programme was completed by 30 June 2015.
(b) In March 2013, the group announced that its Global Supply and procurement operation will be refocused to enhance alignment between supply operations and Diageo’s markets. This is a continuation of the principles implemented by the operating model review announced in 2011. In addition, a number of initiatives were launched to consolidate and streamline the supply operations to create greater operating efficiencies. The charge over the three years ended 30 June 2015 is principally in respect of redundancies, accelerated depreciation and project costs in the United Kingdom, North America and Africa and the programme was completed by 30 June 2015.
(c) The group has centralised its brewing activities in Ireland at one site. This resulted in the closure of the breweries and associated activities at Dundalk, Kilkenny and Waterford. In the year ended 30 June 20152016, an impairment charge in respect of the sites at DundalkYpióca brand and Kilkenny were soldrelated tangible fixed assets and goodwill allocated to the Paraguay, Uruguay and Brazil (PUB) cash-generating unit of £62 million, £14 million and £42 million, respectively, was charged to other operating expenses. Forecast cash flow assumptions have been reduced principally due to a challenging economic environment in Brazil and significant adverse changes in local tax regulation.
In the year ended 30 June 2014, an exceptional impairment loss of £260 million in respect of the Shui Jing Fang brand and £4 million in respect of fixed assets was charged to other operating expenses.
(b) On 25 February 2016 the group incurred an exceptional operating charge of £49 million including a $75 million (£53 million) payment to Dr Vijay Mallya over a five year period in consideration for (i) his resignation and the programmetermination of his appointment and governance rights and his relinquishing of the rights and benefits attached to his position as Chairman and Non-Executive Director of United Spirits Limited (USL); (ii) his agreement to five-year global non-compete (excluding the United Kingdom), non-interference, non-solicitation and standstill undertakings; and (iii) his agreement that he and his affiliates will not pursue any claims against Diageo, USL and their affiliates. In addition to the amount Diageo agreed to pay Dr Vijay Mallya there was completed.net gain of £4 million arising from the termination of certain related agreements, that were previously provided for less legal fees directly attributable to the settlement. See note 18(d).
(d)(c) In the year ended 30 June 2015, £146 million was charged in respect of settlement of several related disputes with the Korean customs authorities regarding the transfer pricing methodology applicable to imported products. Total payments to settle these disputes in 2015 were £74 million as £87 million was paid to the customs authorities prior to 30 June 2014, and was previously accounted for as a receivable from Korean customs.
(e)(d) In the year ended 30 June 2015, an exceptional impairment charge of £41 million was charged to other operating expenses in respect of the group’s 45.56% equity investment in Hanoi Liquor Joint Stock Company. For further details see note 6.
(f) In(e) There have been a number of restructuring programmes which were all completed by 30 June 2015. The costs incurred in the yeartwo years ended 30 June 20142015 were largely in respect of redundancies and accelerated depreciation and were incurred in all regions.
(f) On 7 October 2015, Diageo disposed of its 57.87% shareholding in D&G (Jamaican Red Stripe business) and its 49.99% stake in GAPL Pte Limited (Singapore and Malaysian beer businesses) to Heineken resulting in a gain before taxation of £457 million. The gain is net of a £13 million cumulative exchange loss, in respect of prior years, recycled from other comprehensive income and transaction costs of £7 million. As part of the transaction, Diageo purchased an exceptional impairmentadditional 20% shareholding in Guinness Ghana Breweries Limited (GGBL) from Heineken which increased Diageo’s shareholding in GGBL to 72.42%.
(g) On 1 January 2016, Diageo completed the sale of the majority of its wine interests in the United States and its UK based Percy Fox businesses to Treasury Wine Estates. Together with the sale of the group’s other wine interests in the United States the transactions resulted in a loss before taxation on disposal of £260£191 million including an estimated provision for the settlement of a guarantee given in respect of the lease payments due to Realty Income Corporation, the lessor of the vineyards. The loss is net of an exchange gain of £12 million, in respect of the Shui Jing Fang brandprior years, recycled from other comprehensive income and £4transaction costs of £8 million.
(h) On 29 January 2016, Diageo disposed of its interests in Argentina to Grupo Peñaflor. The transaction resulted in a loss before taxation of £38 million including a cumulative exchange loss of £20 million, in respect of fixed assetsprior years, recycled from other comprehensive income and other directly attributable costs of £7 million.
(i) On 1 December 2015, Diageo disposed of its 42.25% equity interests in DHN Drinks, its 25% equity stake in Sedibeng Breweries Limited and its 15.01% equity stake in Namibia Breweries Limited (South African associate interests) to Heineken. The net cash consideration received was charged to other operating expenses — see note 10.
In£120 million, which included the year ended 30 June 2013 an impairment lossrepayment of £50£31 million was charged to other operating expenses in respect of loans previously made to DHN Drinks and Sedibeng Breweries Limited. A loss before taxation of £27 million, including a £30 million cumulative exchange loss, in respect of prior years, recycled from other comprehensive income, was accounted for in the Cacique brand.income statement.
(g)(j) On 30 September 2015, the group completed the disposal of its shareholding in Central Glass Industries Limited (CGI), a Kenyan glass bottle manufacturer, resulting in a gain before taxation of £14 million, net of £1 million transaction costs. £7 million of the gain is attributable to non-controlling interests.
215
Financial statements (continued)
(k) On 30 June 2015, Diageo completed the disposal of Gleneagles Hotels Limited to the Ennismore group.
(l) On 27 February 2015, the group completed the purchase of the 50% equity interest in Don Julio B.V. that it did not already own (giving Diageo 100% ownership of the brand and production facility) and the Mexican distribution business of Don Julio. As a result of Don Julio becoming a subsidiary of the group a gain of £63 million (net of transaction costs of £7 million) arose, being the difference between the book value of the joint venture prior to the transaction and the fair value of £115 million.
As part of the transaction, Diageo sold its wholly owned subsidiary, The Old Bushmills Distillery Company Limited to the Cuervo group, resulting in a gain of £174 million.
(m) On 4 July 2013, the group acquired an additional 14.98% investment in United Spirits Limited (USL) which increased the group’s investment in USL from 10.04% to 25.02% and triggered a change in accounting from available-for-sale investments to associates. As a result, the difference of £140 million between the original cost of the investment and its fair value of £399 million was included in the income statement in the year ended 30 June 2014.
On 2 July 2014, with the completion of a tender offer, the group acquired an additional 26% investment in USL taking its investment to 54.78% (excluding 2.38% owned by the USL Benefit Trust). From 2 July 2014 the group accounted for USL as a subsidiary with a 43.91% non-controlling interests.interest. As a result of USL becoming a subsidiary of the group a gain of £103 million arose, being the difference between the book value of the associate prior to the transaction and its fair value of £982 million. The gain is net of a £79 million cumulative exchange loss recycled from other comprehensive income and £10 million transaction costs.
(h) On 27 February 2015, the group completed the purchase of the 50% equity interest in Don Julio B.V. that it did not already own (giving Diageo 100% ownership of the brand and production facility) and the Mexican distribution business of Don Julio. As a result of Don Julio becoming a subsidiary of the group a gain of £63 million (net of transaction costs of £7 million) arose, being the difference between the book value of the joint venture prior to the transaction and the fair value of £115 million. In addition, the group reacquired the production and distribution for Smirnoff and Popov in Mexico.
As part of the transaction, Diageo also agreed to sell the equity share capital in its wholly owned subsidiary, The Old Bushmills Distillery Company Limited, resulting in an exceptional gain of £174 million.
(i)(n) On 29 May 2015, Diageo acquired the remaining 50% equity stake of one of the group’s joint ventures in South Africa. The difference between the fair value and the book value of the 50% that Diageo already owned is disclosed as an exceptional step up loss.
(j) On 30 June 2015,(o) A guarantee provided by Diageo completedfor a loan of $135 million (£92 million) given by Standard Chartered Bank (SCB) to Watson Limited was called and $135 million paid to SCB during the disposalyear. The underlying security package for the loan remains in place. A provision of Gleneagles Hotels$135 million has been made. Further details are set out in note 18(a).
A guarantee of £30 million to Standard Chartered Bank was given for borrowings owed by United Breweries Overseas Limited (UBOL), a subsidiary of United Breweries (Holdings) Limited in April 2012. The borrowings went into default, and the guarantee was called, in May 2015. Whilst Diageo continues to have the Ennismore group.
(k) On 5 June 2013,benefit of counter-indemnification from UBOL, it does not believe that it is likely to result in meaningful recovery and therefore fully provided for the group disposed of its 71.25% interestguaranteed amount in London Group, the owner of the Nuvo brand and its 20% equity interest in LNJ Group, LLC, the owner of the 22 Marquis brand at a loss of $126 million (£83 million).
198
Financial statements (continued)
(l) In the year ended 30 June 2015 a provision of £30 million was charged to the income statement in respect of a guarantee provided to a third party financial institution.2015.
Cash payments included in cash generated from operations in respect of exceptional restructuring items, exceptional legal settlements, the guarantee and settlement payments and thalidomide were as follows:
2015 £ million | 2014 £ million | 2013 £ million | 2016 £ million | 2015 £ million | 2014 £ million | |||||||||||||||||||
Exceptional restructuring | (117 | ) | (104 | ) | (61 | ) | (52 | ) | (117 | ) | (104 | ) | ||||||||||||
Disengagement agreements relating to United Spirits Limited | (28 | ) | — | — | ||||||||||||||||||||
Thalidomide | (12 | ) | (19 | ) | (59 | ) | ||||||||||||||||||
Korea settlement | (74 | ) | — | — | — | (74 | ) | — | ||||||||||||||||
Guarantee | (30 | ) | — | — | ||||||||||||||||||||
Thalidomide | (19 | ) | (59 | ) | (23 | ) | ||||||||||||||||||
Guarantee related payments | — | (30 | ) | — | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total cash payments | (240 | ) | (163 | ) | (84 | ) | (92 | ) | (240 | ) | (163 | ) | ||||||||||||
|
|
|
|
|
|
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.
216
Financial statements (continued)
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.
2016 £ million | 2015 £ million | 2014 £ million | ||||||||||
Interest income | 153 | 162 | 109 | |||||||||
Fair value gain on interest rate instruments | 88 | 61 | 115 | |||||||||
|
|
|
|
|
| |||||||
Total interest income | 241 | 223 | 224 | |||||||||
|
|
|
|
|
| |||||||
Interest charge on bank loans and overdrafts | (67 | ) | (102 | ) | (40 | ) | ||||||
Interest charge on finance leases | (13 | ) | (17 | ) | (20 | ) | ||||||
Interest charge on all other borrowings | (379 | ) | (409 | ) | (395 | ) | ||||||
Fair value loss on interest rate instruments | (91 | ) | (55 | ) | (117 | ) | ||||||
|
|
|
|
|
| |||||||
Total interest charges | (550 | ) | (583 | ) | (572 | ) | ||||||
|
|
|
|
|
| |||||||
Net interest charges | (309 | ) | (360 | ) | (348 | ) | ||||||
|
|
|
|
|
| |||||||
Net finance income in respect of post employment plans in surplus (note 13) | 18 | 13 | 17 | |||||||||
Other finance income | 3 | 8 | — | |||||||||
|
|
|
|
|
| |||||||
Total other finance income | 21 | 21 | 17 | |||||||||
|
|
|
|
|
| |||||||
Net finance charge in respect of post employment plans in deficit (note 13) | (23 | ) | (26 | ) | (29 | ) | ||||||
Unwinding of discounts | (11 | ) | (14 | ) | (9 | ) | ||||||
Change in financial liability | — | (13 | ) | — | ||||||||
Hyperinflation adjustment | (1 | ) | (17 | ) | (13 | ) | ||||||
Other finance charges | (4 | ) | (3 | ) | (6 | ) | ||||||
|
|
|
|
|
| |||||||
Total other finance charges | (39 | ) | (73 | ) | (57 | ) | ||||||
|
|
|
|
|
| |||||||
Net other finance charges | (18 | ) | (52 | ) | (40 | ) | ||||||
|
|
|
|
|
|
2015 £ million | 2014 £ million | 2013 £ million | ||||||||||
Interest income | 162 | 109 | 99 | |||||||||
Fair value gain on interest rate instruments | 61 | 115 | 155 | |||||||||
|
|
|
|
|
| |||||||
Total interest income | 223 | 224 | 254 | |||||||||
|
|
|
|
|
| |||||||
Interest charge on bank loans and overdrafts | (102 | ) | (40 | ) | (28 | ) | ||||||
Interest charge on finance leases | (17 | ) | (20 | ) | (20 | ) | ||||||
Interest charge on all other borrowings | (409 | ) | (395 | ) | (454 | ) | ||||||
Fair value loss on interest rate instruments | (55 | ) | (117 | ) | (151 | ) | ||||||
|
|
|
|
|
| |||||||
Total interest charges | (583 | ) | (572 | ) | (653 | ) | ||||||
|
|
|
|
|
| |||||||
Net interest charges | (360 | ) | (348 | ) | (399 | ) | ||||||
|
|
|
|
|
| |||||||
Net finance income in respect of post employment plans in surplus (note 13) | 13 | 17 | — | |||||||||
Other finance income | 8 | — | 5 | |||||||||
|
|
|
|
|
| |||||||
Total other finance income | 21 | 17 | 5 | |||||||||
|
|
|
|
|
| |||||||
Net finance charge in respect of post employment plans in deficit (note 13) | (26 | ) | (29 | ) | (38 | ) | ||||||
Unwinding of discounts | (14 | ) | (9 | ) | (16 | ) | ||||||
Change in financial liability | (13 | ) | — | — | ||||||||
Hyperinflation adjustment | (17 | ) | (13 | ) | (4 | ) | ||||||
Other finance charges | (3 | ) | (6 | ) | (5 | ) | ||||||
|
|
|
|
|
| |||||||
Total other finance charges | (73 | ) | (57 | ) | (63 | ) | ||||||
|
|
|
|
|
| |||||||
Net other finance charges | (52 | ) | (40 | ) | (58 | ) | ||||||
|
|
|
|
|
|
199217
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. Investments in associates and joint ventures are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. The impairment review compares the net carrying value with the recoverable amount, where the recoverable amount is the higher of the value in use calculated as the present value of the group’s share of the associate’s future cash flows and its fair value less costs to sell.
Associates and joint ventures are initially recorded at cost including transaction costs.
Diageo’s principal associate at 30 June 20152016 was Moët Hennessy (2014(2015 – Moët Hennessy and USL)Hennessy).
Diageo owns 34% of Moët Hennessy, the spirits and wine 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 premium brands of Scotch whisky and gin and Moët Hennessy’s premium champagne and cognac 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. The operations of Moët Hennessy in France are conducted through a partnership in which Diageo has a 34% interest and, as a partner, Diageo pays any tax due on its share of the results of the partnership to the tax authorities.
For the year ended 30 June 2014 Diageo equity accounted for its investment in USL, the leading spirits company in India, as an associate. On 2 July 2014, with the completion of the tender offer the group acquired an additional 26% investment in USL taking its investment to 54.78% (excluding 2.38% owned by the USL Benefit Trust). From 2 July 2014 the carrying value of the associate of £790 million was derecognised and the group accounted for USL as a subsidiary with 43.91% non-controlling interests.
On 27 February 2015, Diageo acquired the 50% of Don Julio B.V. that it did not already own and the carrying value of the joint venture of £40 million was derecognised and the group accounted for Don Julio B.V. as a subsidiary.
On 29 May 2015, Diageo acquired the remaining 50% equity stake of one of the group’s joint ventures in South Africa that it did not already own. From that date the carrying value of the joint venture of £22 million was derecognised and the group accounted for it as a subsidiary.
On 7 October 2015, Diageo completed a transaction and disposed of its 57.87% shareholding in D&G (Jamaican Red Stripe business) and its 49.99% stake in GAPL Pte Limited (Singapore and Malaysian beer business) to Heineken. GAPL owns 51% of Guinness Anchor Berhad, operating in Malaysia, which was also disposed of.
200On 1 December 2015, the group disposed of its South African associate interests which were accounted for as assets held for sale at 30 June 2015.
Additions of £28 million include investments made during the year, for which part of the consideration is deferred, in the New World Whisky Distillery Pty Limited and Stauning Whisky Holding ApS where Diageo acquired minority equity stakes.
218
Financial statements (continued)
(a) An analysis of the movement in the group’s investments in associates and joint ventures is as follows:
Moët Hennessy £ million | USL and others £ million | Total £ million | Moët Hennessy £ million | USL and others £ million | Total £ million | |||||||||||||||||||
Cost less provisions | ||||||||||||||||||||||||
At 30 June 2013 | 2,204 | 317 | 2,521 | |||||||||||||||||||||
Exchange differences | (169 | ) | (125 | ) | (294 | ) | ||||||||||||||||||
Additions | — | 483 | 483 | |||||||||||||||||||||
Transfer from other investments | — | 399 | 399 | |||||||||||||||||||||
Share of profit after tax | 246 | 6 | 252 | |||||||||||||||||||||
Dividends | (197 | ) | (31 | ) | (228 | ) | ||||||||||||||||||
Share of tax attributable to shareholders | 68 | — | 68 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
At 30 June 2014 | 2,152 | 1,049 | 3,201 | 2,152 | 1,049 | 3,201 | ||||||||||||||||||
Exchange differences | (200 | ) | (5 | ) | (205 | ) | (200 | ) | (5 | ) | (205 | ) | ||||||||||||
Capital injection | — | 21 | 21 | — | 21 | 21 | ||||||||||||||||||
Step acquisitions | — | (852 | ) | (852 | ) | — | (852 | ) | (852 | ) | ||||||||||||||
Share of profit after tax | 164 | 11 | 175 | 164 | 11 | 175 | ||||||||||||||||||
Transfer to assets held for sale(i) | — | (82 | ) | (82 | ) | |||||||||||||||||||
Share of movements in other comprehensive income and equity | (14 | ) | — | (14 | ) | |||||||||||||||||||
Transfer to assets held for sale | — | (82 | ) | (82 | ) | |||||||||||||||||||
Dividends | (148 | ) | (35 | ) | (183 | ) | (148 | ) | (35 | ) | (183 | ) | ||||||||||||
Share of tax attributable to shareholders | 56 | — | 56 | 56 | — | 56 | ||||||||||||||||||
Impairment charge(ii) | — | (41 | ) | (41 | ) | |||||||||||||||||||
Share of movements in other comprehensive income and equity | (14 | ) | — | (14 | ) | |||||||||||||||||||
Impairment charge | — | (41 | ) | (41 | ) | |||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
At 30 June 2015 | 2,010 | 66 | 2,076 | 2,010 | 66 | 2,076 | ||||||||||||||||||
Exchange differences | 318 | 7 | 325 | |||||||||||||||||||||
Additions | — | 28 | 28 | |||||||||||||||||||||
Share of profit after tax | 217 | 4 | 221 | |||||||||||||||||||||
Transfer to asset held for sale(i) | — | 3 | 3 | |||||||||||||||||||||
Disposals | — | (18 | ) | (18 | ) | |||||||||||||||||||
Dividends | (167 | ) | (6 | ) | (173 | ) | ||||||||||||||||||
Share of tax attributable to shareholders | 67 | — | 67 | |||||||||||||||||||||
Other | — | (1 | ) | (1 | ) | |||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
At 30 June 2016 | 2,445 | 83 | 2,528 | |||||||||||||||||||||
|
|
|
(i) |
(b) Income statement information for the three years ended 30 June 20152016 and balance sheet information as at 30 June 20152016 and
30 June 20142015 of all associates and joint ventures aggregating 100% of the results of each investment,Moët Hennessy is as follows:
2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||||||
Moët Hennessy(i) £ million | Others £ million | Moët Hennessy(i) £ million | USL(ii) £ million | Others £ million | Moët Hennessy(i) £ million | Others £ million | 2016 £ million | 2015 £ million | 2014 £ million | |||||||||||||||||||||||||||||||
Net sales | 3,215 | 1,147 | 3,329 | 1,188 | 1,164 | 3,463 | 1,058 | 3,491 | 3,215 | 3,329 | ||||||||||||||||||||||||||||||
Profit for the year | 482 | 34 | 722 | — | 27 | 677 | (12 | ) | 638 | 482 | 722 | |||||||||||||||||||||||||||||
Total comprehensive income | 588 | 34 | 639 | — | 27 | 620 | (18 | ) | 706 | 588 | 639 |
201219
Financial statements (continued)
2015 | 2014 | |||||||||||||||||||
Moët Hennessy(i) £ million | Others £ million | Moët Hennessy(i) £ million | USL(ii) £ million | Others £ million | ||||||||||||||||
Non-current assets | 3,251 | 166 | 3,498 | 2,079 | 647 | |||||||||||||||
Current assets | 5,118 | 162 | 5,312 | 867 | 427 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total assets | 8,369 | 328 | 8,810 | 2,946 | 1,074 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Non-current liabilities | (894 | ) | (71 | ) | (924 | ) | (577 | ) | (234 | ) | ||||||||||
Current liabilities | (1,562 | ) | (103 | ) | (1,558 | ) | (909 | ) | (302 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total liabilities | (2,456 | ) | (174 | ) | (2,482 | ) | (1,486 | ) | (536 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net assets | 5,913 | 154 | 6,328 | 1,460 | 538 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
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 = €1.34 (2015 – £1 = €1.31; 2014 – £1 = €1.20).
2016 £ million | 2015 £ million | |||||||
Non-current assets | 3,832 | 3,251 | ||||||
Current assets | 6,277 | 5,118 | ||||||
|
|
|
| |||||
Total assets | 10,109 | 8,369 | ||||||
|
|
|
| |||||
Non-current liabilities | (1,009 | ) | (894 | ) | ||||
Current liabilities | (1,907 | ) | (1,562 | ) | ||||
|
|
|
| |||||
Total liabilities | (2,916 | ) | (2,456 | ) | ||||
|
|
|
| |||||
Net assets | 7,193 | 5,913 | ||||||
|
|
|
|
Including acquisition fair value adjustments principally in respect of Moët Hennessy’s brands and translated at £1 = |
(c) For the year ended 30 June 2014 USL had net sales of £1,188 million and £nil net profit.
(d) Information on transactions between the group and its associates and joint ventures is disclosed in note 20.
(d)(e) Investments in associates and joint ventures comprise the cost of shares less goodwill written off on acquisitions prior to 1 July 1998 of £974£1,132 million (2014(2015 – £2,144£974 million), plus the group’s share of post acquisition reserves of £1,102£1,396 million (2014(2015 – £1,057£1,102 million).
(e)(f) The associates and joint ventures have not reported any material contingent liabilities in their latest financial statements any material contingent liabilities.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. Interest and penalties on tax liabilities are provided for in the tax charge.
Full provision fordeferred 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. The recognition of tax benefits and assessment of provisions against tax benefits requires management judgement. In particular the group is routinely subject to tax audits in many jurisdictions, which by their nature are often complex and can take several years to resolve. Provisions are based on management’s 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.
202220
Financial statements (continued)
The evaluation of deferred tax assets recoverability requires judgements to be made regarding the availability of future taxable income.
(a) Analysis of taxation charge for the year
United Kingdom | Rest of world | Total | United Kingdom | Rest of world | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2015 £ million | 2014 £ million | 2013 £ million | 2015 £ million | 2014 £ million | 2013 £ million | 2015 £ million | 2014 £ million | 2013 £ million | 2016 £ million | 2015 £ million | 2014 £ million | 2016 £ million | 2015 £ million | 2014 £ million | 2016 £ million | 2015 £ million | 2014 £ million | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current tax | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current year | 75 | 102 | 63 | 381 | 361 | 370 | 456 | 463 | 433 | 61 | 75 | 102 | 515 | 381 | 361 | 576 | 456 | 463 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustments in respect of prior years | — | (4 | ) | 3 | (15 | ) | (8 | ) | 9 | (15 | ) | (12 | ) | 12 | — | — | (4 | ) | 63 | (15 | ) | (8 | ) | 63 | (15 | ) | (12 | ) | ||||||||||||||||||||||||||||||||||||||||||||
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75 | 98 | 66 | 366 | 353 | 379 | 441 | 451 | 445 | 61 | 75 | 98 | 578 | 366 | 353 | 639 | 441 | 451 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Deferred tax | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Origination and reversal of temporary differences | (7 | ) | (32 | ) | (46 | ) | 11 | 27 | 82 | 4 | (5 | ) | 36 | 26 | (7 | ) | (32 | ) | (109 | ) | 11 | 27 | (83 | ) | 4 | (5 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Changes in tax rates | – | 4 | 10 | (1 | ) | — | (3 | ) | (1 | ) | 4 | 7 | 6 | — | 4 | 1 | (1 | ) | — | 7 | (1 | ) | 4 | |||||||||||||||||||||||||||||||||||||||||||||||||
Adjustments in respect of prior years | 10 | (22 | ) | 21 | 12 | 19 | (2 | ) | 22 | (3 | ) | 19 | 2 | 10 | (22 | ) | (69 | ) | 12 | 19 | (67 | ) | 22 | (3 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
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3 | (50 | ) | (15 | ) | 22 | 46 | 77 | 25 | (4 | ) | 62 | 34 | 3 | (50 | ) | (177 | ) | 22 | 46 | (143 | ) | 25 | (4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
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Taxation on profit from continuing operations | 78 | 48 | 51 | 388 | 399 | 456 | 466 | 447 | 507 | 95 | 78 | 48 | 401 | 388 | 399 | 496 | 466 | 447 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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(b) Exceptional tax (credits)/charges
The taxation charge includes the following exceptional items:
2015 £ million | 2014 £ million | 2013 £ million | ||||||||||
Restructuring | (21 | ) | (34 | ) | (14 | ) | ||||||
Korea settlement | (30 | ) | — | — | ||||||||
Brand impairment | — | (65 | ) | (16 | ) | |||||||
Sale of businesses | — | — | (28 | ) | ||||||||
Other | — | — | 3 | |||||||||
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(51 | ) | (99 | ) | (55 | ) | |||||||
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(c) Taxation rate reconciliation and factors that may affect future tax charges
2016 £ million | 2015 £ million | 2014 £ million | ||||||||||||||||||||||
Sale of businesses | (49 | ) | — | — | ||||||||||||||||||||
Brand impairment | (10 | ) | — | (65 | ) | |||||||||||||||||||
Disengagement agreements relating to United Spirits Limited | 3 | — | — | |||||||||||||||||||||
Korea settlement | — | (30 | ) | — | ||||||||||||||||||||
Restructuring | — | (21 | ) | (34 | ) | |||||||||||||||||||
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(56 | ) | (51 | ) | (99 | ) | |||||||||||||||||||
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(c) Taxation rate reconciliation and factors that may affect future tax charges
| (c) Taxation rate reconciliation and factors that may affect future tax charges
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2015 £ million | 2014 £ million | 2013 £ million | 2016 £ million | 2015 £ million | 2014 £ million | |||||||||||||||||||
Profit from continuing operations before taxation | 2,933 | 2,711 | 3,057 | 2,858 | 2,933 | 2,711 | ||||||||||||||||||
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Notional charge at UK corporation tax rate of 20.75% (2014 – 22.5%; 2013 – 23.75%) | 608 | 610 | 726 | |||||||||||||||||||||
Notional charge at UK corporation tax rate of 20% (2015 – 20.75%; 2014 – 22.5%) | 571 | 608 | 610 | |||||||||||||||||||||
Elimination of notional tax on share of after tax results of associates and joint ventures | (36 | ) | (56 | ) | (46 | ) | (44 | ) | (36 | ) | (56 | ) | ||||||||||||
Differences in overseas tax rates | 64 | 33 | (5 | ) | 50 | 64 | 33 | |||||||||||||||||
Items not chargeable | (358 | ) | (283 | ) | (331 | ) | ||||||||||||||||||
Items not deductible | 182 | 154 | 125 | |||||||||||||||||||||
Intra-group financing | (97 | ) | (81 | ) | (106 | ) | ||||||||||||||||||
Non-taxable gains on disposals of businesses | (90 | ) | (51 | ) | — | |||||||||||||||||||
Step-up gain | — | (34 | ) | (32 | ) | |||||||||||||||||||
Other tax rate and tax base differences | (87 | ) | (95 | ) | (105 | ) | ||||||||||||||||||
Other items not chargeable | (66 | ) | (89 | ) | (40 | ) | ||||||||||||||||||
Impairment | 21 | 9 | — | |||||||||||||||||||||
Non-deductible losses on disposals of businesses | 24 | — | — | |||||||||||||||||||||
Other non-deductible exceptional items | 31 | 10 | — | |||||||||||||||||||||
Other items not deductible(i) | 180 | 155 | 154 | |||||||||||||||||||||
Changes in tax rates | (1 | ) | 4 | 7 | 7 | (1 | ) | 4 | ||||||||||||||||
Adjustments in respect of prior years | 7 | (15 | ) | 31 | (4 | ) | 7 | (15 | ) | |||||||||||||||
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Tax charge for the year | 466 | 447 | 507 | 496 | 466 | 447 | ||||||||||||||||||
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203221
Financial statements (continued)
(i) | Other items not-deductible include irrecoverable withholding tax, controlled foreign companies charge and additional states and local taxes. |
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: 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.
The group has a number of ongoing tax audits worldwide for which provisions are recognised based on best estimates and management’s judgements concerning the ultimate outcome of the audit. As at 30 June 2016 the ongoing worldwideaudits that are provided for individually are not expected to result in a material tax liability. The current tax liability of £340 million includes £249 million (2015 – £205 million) of provisions for tax uncertainties.
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. The group is continuously monitoring the position but does not currently expect material additionalit is expected that our tax exposures to arise, above the amounts provided, as and when the audits are concluded.rate may increase in future years.
(d) Deferred tax assets and liabilities
The amounts of deferred tax accounted for in the consolidated balance sheet comprise the following net deferred tax assets/(liabilities):
Property, plant and equipment £ million | Intangible assets £ million | Post employment plans £ million | Tax losses £ million | Other temporary differences £ million | Total £ million | |||||||||||||||||||||||||||||||||||||||||||
At 30 June 2013 | (164 | ) | (1,526 | ) | 109 | 108 | 248 | (1,225 | ) | |||||||||||||||||||||||||||||||||||||||
Exchange differences | 29 | 154 | (14 | ) | (7 | ) | (17 | ) | 145 | |||||||||||||||||||||||||||||||||||||||
Recognised in income statement — continuing operations | 9 | 11 | 17 | 12 | (45 | ) | 4 | |||||||||||||||||||||||||||||||||||||||||
Recognised in income statement — discontinued operations | — | — | — | — | 8 | 8 | ||||||||||||||||||||||||||||||||||||||||||
Recognised in other comprehensive income and equity | — | — | (12 | ) | — | (39 | ) | (51 | ) | |||||||||||||||||||||||||||||||||||||||
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| 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 2014 | (126 | ) | (1,361 | ) | 100 | 113 | 155 | (1,119 | ) | (126 | ) | (1,361 | ) | 100 | 113 | 155 | (1,119 | ) | ||||||||||||||||||||||||||||||
Exchange differences | 11 | (79 | ) | (1 | ) | (5 | ) | (6 | ) | (80 | ) | 11 | (79 | ) | (1 | ) | (5 | ) | (6 | ) | (80 | ) | ||||||||||||||||||||||||||
Recognised in income statement — continuing operations | 1 | (55 | ) | 14 | (30 | ) | 45 | (25 | ) | |||||||||||||||||||||||||||||||||||||||
Recognised in income statement —continuing operations | 1 | (55 | ) | 14 | (30 | ) | 45 | (25 | ) | |||||||||||||||||||||||||||||||||||||||
Recognised in other comprehensive income and equity | — | — | (73 | ) | 25 | 4 | (44 | ) | — | — | (73 | ) | 25 | 4 | (44 | ) | ||||||||||||||||||||||||||||||||
Acquisition of businesses | (16 | ) | (446 | ) | 2 | — | (12 | ) | (472 | ) | (16 | ) | (446 | ) | 2 | — | (12 | ) | (472 | ) | ||||||||||||||||||||||||||||
Reclassification | — | 14 | 41 | — | (55 | ) | — | — | 14 | 41 | — | (55 | ) | — | ||||||||||||||||||||||||||||||||||
Sale of businesses | 6 | 29 | (2 | ) | — | — | 33 | 6 | 29 | (2 | ) | — | — | 33 | ||||||||||||||||||||||||||||||||||
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At 30 June 2015 | (124 | ) | (1,898 | ) | 81 | 103 | 131 | (1,707 | ) | (124 | ) | (1,898 | ) | 81 | 103 | 131 | (1,707 | ) | ||||||||||||||||||||||||||||||
Exchange differences | (18 | ) | (283 | ) | 28 | 5 | 23 | (245 | ) | |||||||||||||||||||||||||||||||||||||||
Recognised in income statement —continuing operations | 16 | (28 | ) | 7 | (47 | ) | 195 | 143 | ||||||||||||||||||||||||||||||||||||||||
Recognised in other comprehensive income and equity | — | — | 122 | 1 | 11 | 134 | ||||||||||||||||||||||||||||||||||||||||||
Acquisition of businesses | (11 | ) | — | — | — | — | (11 | ) | ||||||||||||||||||||||||||||||||||||||||
Sale of businesses | — | 1 | 2 | — | (1 | ) | 2 | |||||||||||||||||||||||||||||||||||||||||
Reclassification | 11 | 7 | — | (2 | ) | (16 | ) | — | ||||||||||||||||||||||||||||||||||||||||
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At 30 June 2016 | (126 | ) | (2,201 | ) | 240 | 60 | 343 | (1,684 | ) | |||||||||||||||||||||||||||||||||||||||
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Deferred tax on other temporary differences includes items such as the thalidomide provisions, restructuring provisions, share-based payments and intra group sales of products.
(i) | Deferred tax on other temporary differences includes items such as the thalidomide provisions, restructuring provisions, share-based payments and intra group sales of products. |
After offsetting deferred tax assets and liabilities where appropriate within territories, the net deferred tax liability comprises:
2015 £ million | 2014 £ million | 2016 £ million | 2015 £ million | |||||||||||||
Deferred tax assets | 189 | 246 | 298 | 189 | ||||||||||||
Deferred tax liabilities | (1,896 | ) | (1,365 | ) | (1,982 | ) | (1,896 | ) | ||||||||
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(1,707 | ) | (1,119 | ) | (1,684 | ) | (1,707 | ) | |||||||||
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222
Financial statements (continued)
The deferred tax assets of £189£298 million includes £113£223 million (2014(2015 – £152£113 million) arising in jurisdictions with prior year taxable losses. The majority of the asset is in respect of tax losses in the United Kingdom which primarilyand Ireland, where the amounts arose following materialfrom timing differences on intangible fixed assets and pension funding payments. It is considered more likely than not that there will be sufficient future taxable profits to realise these deferred tax assets, most of which can be carried forward indefinitely.
204
Financial statements (continued)
(e) Unrecognised deferred tax assets
Deferred tax assets have not been recognised in respect of the following tax losses:
2015 £ million | 2014 £ million | 2016 £ million | 2015 £ million | |||||||||||||
Capital losses - indefinite | 72 | 73 | 71 | 72 | ||||||||||||
Trading losses - indefinite | 74 | 102 | 76 | 74 | ||||||||||||
Trading losses - expiry dates up to 2025 | 2 | 1 | 3 | 2 | ||||||||||||
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148 | 176 | 150 | 148 | |||||||||||||
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(f) Unrecognised deferred tax liabilities
UK legislation largely exempts overseas dividends remitted from UK tax. A tax liability is more likely to arise in respect of withholding taxes levied by the overseas jurisdiction. Deferred tax is provided where there is an intention to distribute earnings, and a tax liability arises. It is impractical to estimate the amount of unrecognised deferred tax liabilities in respect of these unremitted earnings.
The aggregate amount of temporary differences in respect of investments in subsidiaries, branches, interests in associates and joint ventures for which deferred tax liabilities have not been recognised is approximately £14.5£13.4 billion (2014(2015 – £13.3£14.5 billion).
8. DISCONTINUED OPERATIONS
Accounting policies
Discontinued operations comprise disposal groups where they represent a major line of business or geographical area of operations or business activities that the group no longer participates in or did not form part of the group’s operations.
Discontinued operations in the year ended 30 June 2014 comprised a charge after taxation of £83 million (£91 million less tax of £8 million) in respect of the settlement of thalidomide litigation in Australia and New Zealand and anticipated future payments to thalidomide organisations.
205223
Financial statements (continued)
OPERATING ASSETS AND LIABILITIES
This section describes the assets used to generate the group’s performance 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-employmentpost employment plans.
9. ACQUISITION AND SALE OF BUSINESSES 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.
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.
Critical accounting estimates and judgements
For all entities in which the company, directly or indirectly, owns equity a judgement is made to determine whether the investor 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.
206224
Financial statements (continued)
(a) Acquisition of businesses
Fair value of net assets acquired and cash consideration paid in respect of the acquisition of businesses and the purchase of shares of non-controlling interests in the three years ended 30 June 20152016 were as follows:
Net assets acquired and consideration | Net assets acquired and consideration | |||||||||||||||||||||||||||||||||||
USL £ million | Don Julio £ million | Other £ million | 2015 Total £ million | 2014 £ million | 2013 £ million | 2016 £ million | 2015 £ million | 2014 £ million | ||||||||||||||||||||||||||||
Brands and other intangibles | 1,721 | 220 | — | 1,941 | 10 | 109 | 26 | 1,941 | 10 | |||||||||||||||||||||||||||
Property, plant and equipment | 248 | 10 | 17 | 275 | 1 | 43 | — | 275 | 1 | |||||||||||||||||||||||||||
Biological assets | — | 5 | — | 5 | — | 1 | — | 5 | — | |||||||||||||||||||||||||||
Investments | 58 | — | — | 58 | — | — | — | 58 | — | |||||||||||||||||||||||||||
Inventories | 217 | 27 | 3 | 247 | 1 | 16 | — | 247 | 1 | |||||||||||||||||||||||||||
Assets and liabilities held for sale | 401 | — | — | 401 | — | — | — | 401 | — | |||||||||||||||||||||||||||
Other working capital | 61 | 6 | (5 | ) | 62 | 1 | (5 | ) | — | 62 | 1 | |||||||||||||||||||||||||
Current tax | (35 | ) | (1 | ) | 1 | (35 | ) | — | — | (1 | ) | (35 | ) | — | ||||||||||||||||||||||
Deferred tax | (407 | ) | (65 | ) | — | (472 | ) | — | 10 | (11 | ) | (472 | ) | — | ||||||||||||||||||||||
Cash | 50 | 10 | 4 | 64 | — | — | — | 64 | — | |||||||||||||||||||||||||||
Borrowings | (847 | ) | — | (22 | ) | (869 | ) | — | — | — | (869 | ) | — | |||||||||||||||||||||||
Post employment benefit liabilities | (7 | ) | — | — | (7 | ) | — | (1 | ) | — | (7 | ) | — | |||||||||||||||||||||||
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Fair value of assets and liabilities | 1,460 | 212 | (2 | ) | 1,670 | 13 | 173 | 14 | 1,670 | 13 | ||||||||||||||||||||||||||
Goodwill arising on acquisition | 1,281 | 105 | 33 | 1,419 | 16 | 83 | (14 | ) | 1,419 | 16 | ||||||||||||||||||||||||||
Non-controlling interests | (641 | ) | — | — | (641 | ) | (8 | ) | 21 | — | (641 | ) | (8 | ) | ||||||||||||||||||||||
Step acquisitions | (982 | ) | (115 | ) | (16 | ) | (1,113 | ) | — | — | — | (1,113 | ) | — | ||||||||||||||||||||||
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Consideration payable | 1,118 | 202 | 15 | 1,335 | 21 | 277 | — | 1,335 | 21 | |||||||||||||||||||||||||||
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Satisfied by: | ||||||||||||||||||||||||||||||||||||
Cash consideration paid | 1,118 | 202 | 14 | 1,334 | 28 | 284 | — | 1,334 | 28 | |||||||||||||||||||||||||||
Deferred/contingent consideration payable | — | — | 1 | 1 | 1 | (7 | ) | — | 1 | 1 | ||||||||||||||||||||||||||
Receivables from non-controlling interests | — | — | — | — | (8 | ) | — | — | — | (8 | ) | |||||||||||||||||||||||||
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1,118 | 202 | 15 | 1,335 | 21 | 277 | — | 1,335 | 21 | ||||||||||||||||||||||||||||
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Cash consideration paid for investment in USL | 1,118 | — | — | 1,118 | 474 | 274 | — | 1,118 | 474 | |||||||||||||||||||||||||||
Cash consideration paid for investments in other subsidiaries | — | 202 | 14 | 216 | 28 | 284 | — | 216 | 28 | |||||||||||||||||||||||||||
Cash consideration paid for investments in associates | — | — | — | — | 2 | 25 | 10 | — | 2 | |||||||||||||||||||||||||||
Purchase consideration paid in respect of prior year acquisitions | — | — | 4 | 4 | 14 | 9 | ||||||||||||||||||||||||||||||
Cash consideration paid in respect of prior year acquisitions | 4 | 4 | 14 | |||||||||||||||||||||||||||||||||
Capital injection in associates | — | — | 21 | 21 | 7 | 52 | 1 | 21 | 7 | |||||||||||||||||||||||||||
Cash acquired | (50 | ) | (10 | ) | (4 | ) | (64 | ) | — | — | — | (64 | ) | — | ||||||||||||||||||||||
Deposit (refunded)/paid | (11 | ) | — | — | (11 | ) | 11 | — | — | (11 | ) | 11 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Net cash outflow on acquisition of businesses | 1,057 | 192 | 35 | 1,284 | 536 | 644 | 15 | 1,284 | 536 | |||||||||||||||||||||||||||
Purchase of shares of non-controlling interests | — | — | — | — | 37 | 200 | 21 | — | 37 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Total net cash outflow | 1,057 | 192 | 35 | 1,284 | 573 | 844 | 36 | 1,284 | 573 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
United Spirits Limited (USL)Purchase of non-controlling interest in Ghana
On 2 July 2014, with7 October 2015, Diageo purchased from Heineken an additional 20% shareholding in Guinness Ghana Breweries Limited (GGBL) for $32 million (£21 million) which increased Diageo’s shareholding in GGBL from 52.42% to 72.42%. A subsequent rights issue has increased Diageo’s shareholding in GGBL to 80.4%.
Other
In the completionyear ended 30 June 2016 the change in brands, goodwill, current and deferred tax reflects the finalisation of the fair values of net assets acquired on the acquisition of a tender offer the group acquired an additional 26% investmentjoint venture in USL, the leading spirits companySouth Africa in India, for INR 114.5 billion (£1,118 million) taking its investment to 54.78% (excluding 2.38% owned by the USL Benefit Trust). From 2 July 2014 the group accounted for USL as a subsidiary with a 43.91% non-controlling interests.May 2015.
207225
Financial statements (continued)
USL has been fully consolidated for the period 2 July 2014 to 30 June 2015, and in that period contributed net sales of £921 million, operating profit of £48 million and a £15 million loss after tax (both net of transaction costs of £5 million). In addition, directly attributable integration and transaction costs of £15 million (2014 – £18 million) have been included in other external charges in the year.
The goodwill acquired represents synergies arising from the acquisition and the extension of the group’s portfolio of brands to Indian consumers.
Don Julio
On 27 February 2015 Diageo purchased the 50% equity interest in Don Julio that it did not already own from Casa Cuervo. Don Julio is the brand owner of Don Julio tequila and manufactures the spirit in Mexico. Don Julio has been fully consolidated for the period 27 February to 30 June 2015, and in that period contributed net sales of £23 million and £6 million of operating profit. In addition, directly attributable integration and transaction costs of £8 million (2014 – £2 million) have been included in other external charges in the year. The fair values of the assets and liabilities acquired are provisional and will be finalised in the year ending 30 June 2016.
Other
On 29 May 2015 the group also acquired the remaining 50% equity stake of one of the group’s joint ventures in South Africa. The fair values of the assets and liabilities acquired are provisional and will be finalised in the year ending 30 June 2016.
Prior year acquisitions
In previousprior years, Diageo has made a number of acquisitions of brands, distribution rights and equity interests in drinks businesses. In the two years ended 30 June 20142015 the following acquisitions have been made:
Fair value of net assets acquired | ||||||||||||||||||||||
Cash paid(i) £ million | Brands £ million | Goodwill £ million | Other £ million | Location | Principal brands acquired | Status | ||||||||||||||||
United Spirits Limited(ii)
13 May 2013 to 31 January 2014 | 768 | — | — | — | India | McDowell’s No.1 whisky, rum and brandy, Black Dog, Signature, Antiquity and Bagpiper whisky and other Indian whisky, brandy and rum products | Acquisition of 28.78% investment in United Spirits Limited (see note 6) | |||||||||||||||
SJF Holdco and Shuijingfang
27 January 2007 to 2 August 2013 | 302 | 502 | 115 | 46 | China | Shui Jing Fang Chinese white spirit | Acquisition of a 100% equity stake in SJF Holdco which owns a 39.7% controlling equity interest in Shuijingfang. The group controlled Shuijingfang from 29 June 2012. | |||||||||||||||
Ypióca
9 August 2012 | 284 | 145 | 79 | 60 | Brazil | Ypióca cachaça | Acquisition of 100% of the equity share capital of Ypióca Bebidas S.A. | |||||||||||||||
Other(iii) | 55 | 10 | 16 | 29 |
Fair value of net assets acquired | ||||||||||||||||||||||||
Cash paid(i) £ million | Brands £ million | Goodwill £ million | Other £ million | Location | Principal brands acquired | Status | ||||||||||||||||||
United Spirits Limited(ii)
13 May 2013 to 2 July 2014 | 1,825 | 1,683 | 1,281 | (273 | ) | India | McDowell’s No1 whisky, rum and brandy, Black Dog, Signature, Antiquity and Bagpiper whisky and other Indian whisky, brandy and rum products | Acquisition of a 54.78% equity interest (excluding 2.38% owned by the USL Benefit Trust) in United Spirits Limited with a 43.91% non-controlling interest. The group consolidated USL from 2 July 2014. | ||||||||||||||||
Don Julio(iii)
27 February 2015 | 192 | 220 | 105 | (18 | ) | Mexico | Don Julio tequila | Acquisition of the remaining 50% equity interest in Don Julio | ||||||||||||||||
SJF Holdco and Shuijingfang
27 January 2007 to 2 August 2013 | 302 | 502 | 115 | 46 | China | Shui Jing Fang Chinese white spirit | Acquisition of a 100% equity stake in SJF Holdco which owns a 39.7% controlling equity interest in Shuijingfang. The group controlled Shuijingfang from 29 June 2012. | |||||||||||||||||
Other(iv) | 65 | 36 | 34 | (13 | ) |
(i) | Includes amounts paid in respect of these acquisitions prior to 30 June |
(ii) |
(iii) | In addition to the fair value of net assets acquired, the group derecognised an investment in associate of £40 million and recognised a step up gain of £75 million. |
(iv) | Other primarily includes acquisitions in the United States and South Africa. |
208226
Financial statements (continued)
(b) Sale of businesses
CashThe sale consideration received and a summary of the net assets disposed of in respect of the sale of businesses in the year ended 30 June 20152016 were as follows:
2015 | 2016 | 2015 | ||||||||||||||||||||||||||||||
Bushmills £ million | Other £ million | Total £ million | Jamaica, Singapore and Malaysia £ million | Wines in United States and Percy Fox £ million | Other £ million | Total £ million | Total £ million | |||||||||||||||||||||||||
Sale consideration | ||||||||||||||||||||||||||||||||
Cash received in year | 458 | 543 | 1,001 | 531 | 418 | 165 | 1,114 | 1,001 | ||||||||||||||||||||||||
Cash disposed of | (2 | ) | (15 | ) | (17 | ) | ||||||||||||||||||||||||||
Transaction costs paid | (6 | ) | — | (6 | ) | |||||||||||||||||||||||||||
(Cash)/overdraft disposed of | (14 | ) | 1 | (1 | ) | (14 | ) | (17 | ) | |||||||||||||||||||||||
Transaction and other directly attributable costs paid | (7 | ) | (22 | ) | (9 | ) | (38 | ) | (6 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net cash received | 450 | 528 | 978 | 510 | 397 | 155 | 1,062 | 978 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Transaction costs payable | (1 | ) | (2 | ) | (3 | ) | ||||||||||||||||||||||||||
Deferred consideration payable | (3 | ) | — | (3 | ) | |||||||||||||||||||||||||||
Deferred consideration receivable/(payable) | — | 15 | (1 | ) | 14 | (3 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
446 | 526 | 972 | 510 | 412 | 154 | 1,076 | 975 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net assets disposed of | ||||||||||||||||||||||||||||||||
Brands | (144 | ) | — | (144 | ) | — | (94 | ) | — | (94 | ) | (144 | ) | |||||||||||||||||||
Goodwill | (44 | ) | — | (44 | ) | — | (34 | ) | (2 | ) | (36 | ) | (44 | ) | ||||||||||||||||||
Property, plant and equipment | (51 | ) | (67 | ) | (118 | ) | (40 | ) | (86 | ) | (13 | ) | (139 | ) | (118 | ) | ||||||||||||||||
Biological assets | — | (70 | ) | — | (70 | ) | — | |||||||||||||||||||||||||
Investment in associates | (18 | ) | — | — | (18 | ) | — | |||||||||||||||||||||||||
Assets and liabilities held for sale | — | (404 | ) | (404 | ) | — | — | (113 | ) | (113 | ) | (404 | ) | |||||||||||||||||||
Inventories | (75 | ) | (3 | ) | (78 | ) | (7 | ) | (263 | ) | (24 | ) | (294 | ) | (78 | ) | ||||||||||||||||
Other working capital | 4 | 15 | 19 | 4 | (4 | ) | (5 | ) | (5 | ) | 19 | |||||||||||||||||||||
Post employment benefit liabilities | 7 | 3 | 10 | (6 | ) | 5 | — | (1 | ) | 10 | ||||||||||||||||||||||
Current tax | 1 | — | 1 | 1 | — | — | 1 | 1 | ||||||||||||||||||||||||
Deferred tax | 30 | 3 | 33 | 3 | — | (1 | ) | 2 | 33 | |||||||||||||||||||||||
Borrowings | — | — | 14 | 14 | — | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
(272 | ) | (453 | ) | (725 | ) | (63 | ) | (546 | ) | (144 | ) | (753 | ) | (725 | ) | |||||||||||||||||
Non-controlling interests | 24 | — | — | 24 | — | |||||||||||||||||||||||||||
Accelerated depreciation and directly attributable costs payable | (1 | ) | (69 | ) | (11 | ) | (81 | ) | (3 | ) | ||||||||||||||||||||||
Exchange recycled from other comprehensive income | (13 | ) | 12 | (50 | ) | (51 | ) | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Gain on disposal before and after taxation | 174 | 73 | 247 | |||||||||||||||||||||||||||||
Gain/(loss) on disposal before taxation | 457 | (191 | ) | (51 | ) | 215 | 247 | |||||||||||||||||||||||||
Taxation | (7 | ) | 54 | 2 | 49 | — | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Gain/(loss) on disposal after taxation | 450 | (137 | ) | (49 | ) | 264 | 247 | |||||||||||||||||||||||||
|
|
|
|
|
On 27 February7 October 2015, the group completed the sale of Diageo’s Jamaica, Singapore and Malaysian beer interests to Heineken. In the year ended 30 June 2016 Jamaica beer interests contributed net sales of £41 million, including sales made in respect of country distribution agreements that were terminated after 7 October 2015, (2015 – £107 million; 2014 – £100 million), operating profit of £7 million (2015 – £24 million; 2014 – £25 million) and profit after taxation of £6 million (2015 – £21 million; 2014 – £21 million). In addition the Singaporian and Malaysian beer interests contributed £3 million to share of profit of associates (2015 – £13 million; 2014 – £12 million).
On 1 January 2016, Diageo completed the sale of the majority of its wine interests in the United States and its UK based Percy Fox businesses to Treasury Wine Estates. In addition, in the year ended 30 June 2016 Diageo disposed of its other US wine interests. In the year ended 30 June 2016 the wine businesses, including the ending of distribution agreements in respect of wine brands in the United Kingdom that terminated post 1 January 2016, contributed net sales of £161 million (2015 – £343 million; 2014 – £307 million), operating profit of £12 million (2015 – £58 million; 2014 – £64 million) and profit after taxation of £4 million (2015 – £31 million; 2014 – £39 million).
227
Financial statements (continued)
Other includes the sale of the group’s South African associate interests disposed of on 1 December 2015 which were disclosed as assets held for sale at 30 June 2015. Other also includes the group’s shareholding in Central Glass Industries Limited (CGI) disposed of on 30 September 2015, the Bouvet wine business in France and the group’s subsidiary in Argentina.
In the year ended 30 June 2015 the group disposed of the entire share capital of The Old Bushmills Distillery Company Limited to Jose Cuervo Overseas. In the period of 1 July 2014 to 27 February 2015, Bushmills contributed net sales of £50 million (in the year ended 30 June 2014 – £60 million; 2013 – £55 million), operating profit of £22 million (in the year ended 30 June 2014 – £28 million; 2013 – £23 million) and profit after taxation of £17 million (in the year ended 30 June 2014 – £20 million; 2013 – £16 million).
OtherThe comparative also includes businesses disposed of following the acquisition of USL including the net cash receipt of £391 million on the sale of the Whyte and Mackay Group on 31 October 2014. It also includes2014 and the proceeds and net assets following the disposal of Gleneagles Hotels Limited on 30 June 2015. In the year ended 30 June 2015, Gleneagles Hotel contributed net sales of £48 million (2014 – £45 million; 2013 – £40 million) and operating profit of £4 million (2014 – £2 million; 2013 – nil).
In the year ended 30 June 2013, the group disposed of its interest in London Group, the owner of the Nuvo brand (see note 4).
10. 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 when 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. 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.
209
Financial statements (continued)
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 (value in use or(where recoverable amount is the higher of fair value less cost to sell)sell 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 valueamount of an intangible asset, the useful economic life of an asset, or that an asset has an indefinite life, requires management judgement.
228
Financial statements (continued)
Impairment reviews are carried out to ensure that intangible assets, including brands, are not carried at above their recoverable amounts. The tests are dependent on management’s estimates and judgements, in particular in relation to the forecasting of future cash flows, the discount rates applied to those cash flows and the expected long term growth rates. Such estimates and judgements are subject to change as a result of changing economic conditions and actual cash flows may differ from forecasts.
Brands £ million | Goodwill £ million | Other intangibles £ million | Computer software £ million | Total £ million | ||||||||||||||||
Cost | ||||||||||||||||||||
At 30 June 2014 | 5,839 | 1,213 | 1,121 | 493 | 8,666 | |||||||||||||||
Exchange differences | 157 | (57 | ) | 96 | (7 | ) | 189 | |||||||||||||
Acquisition of businesses | 1,903 | 1,419 | 38 | — | 3,360 | |||||||||||||||
Sale of businesses | (144 | ) | (44 | ) | — | — | (188 | ) | ||||||||||||
Other additions | — | — | 1 | 40 | 41 | |||||||||||||||
Other disposals | — | — | — | (15 | ) | (15 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At 30 June 2015 | 7,755 | 2,531 | 1,256 | 511 | 12,053 | |||||||||||||||
Exchange differences | 969 | 286 | 216 | 32 | 1,503 | |||||||||||||||
Sale of businesses | (94 | ) | (36 | ) | — | (1 | ) | (131 | ) | |||||||||||
Acquisitions(i) | 26 | (14 | ) | — | — | 12 | ||||||||||||||
Other additions | — | — | 1 | 42 | 43 | |||||||||||||||
Other disposals | — | — | (1 | ) | (16 | ) | (17 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At 30 June 2016 | 8,656 | 2,767 | 1,472 | 568 | 13,463 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Amortisation and impairment | ||||||||||||||||||||
At 30 June 2014 | 432 | 12 | 56 | 275 | 775 | |||||||||||||||
Exchange differences | 3 | (2 | ) | — | (2 | ) | (1 | ) | ||||||||||||
Amortisation for the year | — | — | 4 | 56 | 60 | |||||||||||||||
Other disposals | — | — | — | (12 | ) | (12 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At 30 June 2015 | 435 | 10 | 60 | 317 | 822 | |||||||||||||||
Exchange differences | 80 | 16 | 3 | 23 | 122 | |||||||||||||||
Amortisation for the year | — | — | 5 | 51 | 56 | |||||||||||||||
Exceptional impairment | 62 | 42 | — | — | 104 | |||||||||||||||
Other disposals | — | — | — | (11 | ) | (11 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At 30 June 2016 | 577 | 68 | 68 | 380 | 1,093 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Carrying amount | ||||||||||||||||||||
At 30 June 2016 | 8,079 | 2,699 | 1,404 | 188 | 12,370 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At 30 June 2015 | 7,320 | 2,521 | 1,196 | 194 | 11,231 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At 30 June 2014 | 5,407 | 1,201 | 1,065 | 218 | 7,891 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
(i) | Acquisitions represent the finalisation of the fair values of an acquisition completed in the year ended 30 June 2015. |
Brands £ million | Goodwill £ million | Other intangibles £ million | Computer software £ million | Total £ million | ||||||||||||||||
Cost | ||||||||||||||||||||
At 30 June 2013 | 6,397 | 1,395 | 1,255 | 471 | 9,518 | |||||||||||||||
Exchange differences | (568 | ) | (197 | ) | (134 | ) | (20 | ) | (919 | ) | ||||||||||
Acquisition of businesses | 10 | 16 | — | — | 26 | |||||||||||||||
Other additions | — | — | — | 44 | 44 | |||||||||||||||
Disposals | — | (1 | ) | — | (2 | ) | (3 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At 30 June 2014 | 5,839 | 1,213 | 1,121 | 493 | 8,666 | |||||||||||||||
Exchange differences | 157 | (57 | ) | 96 | (7 | ) | 189 | |||||||||||||
Acquisition of businesses | 1,903 | 1,419 | 38 | — | 3,360 | |||||||||||||||
Sale of businesses | (144 | ) | (44 | ) | — | — | (188 | ) | ||||||||||||
Other additions | — | — | 1 | 40 | 41 | |||||||||||||||
Other disposals | — | — | — | (15 | ) | (15 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At 30 June 2015 | 7,755 | 2,531 | 1,256 | 511 | 12,053 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Amortisation and impairment | ||||||||||||||||||||
At 30 June 2013 | 185 | 18 | 55 | 247 | 505 | |||||||||||||||
Exchange differences | (13 | ) | (6 | ) | (2 | ) | (15 | ) | (36 | ) | ||||||||||
Amortisation for the year | — | — | 3 | 44 | 47 | |||||||||||||||
Exceptional impairment | 260 | — | — | — | 260 | |||||||||||||||
Disposals | — | — | — | (1 | ) | (1 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At 30 June 2014 | 432 | 12 | 56 | 275 | 775 | |||||||||||||||
Exchange differences | 3 | (2 | ) | — | (2 | ) | (1 | ) | ||||||||||||
Amortisation for the year | — | — | 4 | 56 | 60 | |||||||||||||||
Other disposals | — | — | — | (12 | ) | (12 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At 30 June 2015 | 435 | 10 | 60 | 317 | 822 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Carrying amount | ||||||||||||||||||||
At 30 June 2015 | 7,320 | 2,521 | 1,196 | 194 | 11,231 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At 30 June 2014 | 5,407 | 1,201 | 1,065 | 218 | 7,891 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At 30 June 2013 | 6,212 | 1,377 | 1,200 | 224 | 9,013 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
210229
Financial statements (continued)
(a) Brands
At 30 June 2015,2016, the principal acquired brands, all of which are regarded as having indefinite useful economic lives, are as follows:
Principal markets | 2015 £ million | 2014 £ million | Principal markets | 2016 £ million | 2015 £ million | |||||||||||||||||||
Crown Royal whisky | United States | 1,101 | 933 | |||||||||||||||||||||
McDowell’s No.1 whisky, rum and brandy | India | 972 | — | India | 1,086 | 972 | ||||||||||||||||||
Crown Royal whisky | United States | 933 | 856 | |||||||||||||||||||||
Captain Morgan | Global | 765 | 702 | Global | 903 | 765 | ||||||||||||||||||
Johnnie Walker whisky | Global | 625 | 625 | Global | 625 | 625 | ||||||||||||||||||
Smirnoff vodka | Global | 525 | 482 | Global | 620 | 525 | ||||||||||||||||||
Windsor Premier whisky | Korea | 494 | 501 | Korea | 568 | 494 | ||||||||||||||||||
Yenì Raki | Turkey | 403 | 469 | Turkey | 446 | 403 | ||||||||||||||||||
Shui Jing Fang Chinese white spirit | Greater China | 232 | 214 | Greater China | 256 | 232 | ||||||||||||||||||
Don Julio tequila | United States | 206 | — | United States | 207 | 206 | ||||||||||||||||||
Signature whisky | India | 183 | — | India | 204 | 183 | ||||||||||||||||||
Bell’s whisky | South Africa | 179 | 179 | United Kingdom | 179 | 179 | ||||||||||||||||||
Black Dog whisky | India | 154 | — | India | 172 | 154 | ||||||||||||||||||
Antiquity whisky | India | 151 | — | India | 169 | 151 | ||||||||||||||||||
Seagram’s 7 Crown whiskey | United States | 142 | 130 | United States | 168 | 142 | ||||||||||||||||||
Zacapa rum | Global | 122 | 112 | Global | 144 | 122 | ||||||||||||||||||
Seagram’s VO whisky | United States | 121 | 111 | |||||||||||||||||||||
Seagram’s VO whiskey | United States | 143 | 121 | |||||||||||||||||||||
Gordon’s gin | Western Europe | 119 | 119 | Europe | 119 | 119 | ||||||||||||||||||
Bagpiper whisky | India | 104 | — | India | 117 | 104 | ||||||||||||||||||
Ypióca cachaça | Brazil | 94 | 121 | |||||||||||||||||||||
Old Parr whisky | Global | 106 | 83 | |||||||||||||||||||||
Other brands | 796 | 786 | 746 | 807 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
7,320 | 5,407 | 8,079 | 7,320 | |||||||||||||||||||||
|
|
|
|
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:
2015 £ million | 2014 £ million | 2016 £ million | 2015 £ million | |||||||||||||
North America – US Spirits and Wines | 217 | 199 | ||||||||||||||
Europe | ||||||||||||||||
– Western Europe | 106 | 165 | ||||||||||||||
North America | 217 | 217 | ||||||||||||||
Europe, Russia and Turkey | ||||||||||||||||
– Europe (excluding Russia and Turkey) | 147 | 106 | ||||||||||||||
– Turkey | 409 | 476 | 452 | 409 | ||||||||||||
Africa – Africa Regional Markets | 86 | 83 | 96 | 86 | ||||||||||||
Latin America and Caribbean – Mexico | 98 | — | 99 | 98 | ||||||||||||
Asia Pacific | ||||||||||||||||
– Greater China | 117 | 107 | 130 | 117 | ||||||||||||
– India | 1,320 | 2 | 1,475 | 1,320 | ||||||||||||
Other cash-generating units | 168 | 169 | 83 | 168 | ||||||||||||
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2,521 | 1,201 | 2,699 | 2,521 | |||||||||||||
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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.
211230
Financial statements (continued)
(c) Other intangibles
Other intangibles principally comprise distribution rights. Diageo owns the global distribution rights for Ketel One vodka products in perpetuity, and the Directors believe that it is appropriate to treat these rights as having an indefinite life for accounting purposes. The carrying value at 30 June 20152016 was £1,147£1,354 million (2014(2015 – £1,053£1,147 million).
(d) Impairment testing
Impairment tests are performed annually, or more frequently if events or circumstances indicate that the carrying amount may not be recoverable. Recoverable amounts are calculated based on the value in use or fair value less cost to sell approach. 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. Where a subsidiary is dominant withinThe individual brands and their associated tangible fixed assets are aggregated and tested as a cash-generating unit. Separate tests are carried out for each cash-generating unit (brand and its shares are publicly traded, the valueattributable tangible fixed assets) and for each of the cash-generating unit may be supported by calculating fair value less costs21 markets. The goodwill is attributed to sell based on quoted market share prices.the markets.
Cash flows
Cash flows are forecast for each brand, other intangible and cash-generating unit for the financial year, which is approved by management and reflects expectations of sales growth, operating costs and margin, based on past experience and external sources of information.
Discount rate
The discount rates used are the weighted average cost of capital which reflects the returns on government bonds specific to the cash-generating units to which the goodwill is attributed or the countries where the brands are sold or returns on government bonds issued by triple ‘A’ rated countries with a maturity of ten10 years, and an equity risk premium adjusted for specific industry. Further risk
premiums are applied according to management’s assessment of the risks in respect of the individual cash flows. 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.
231
Financial statements (continued)
Long term growth rate, period of growth and terminal growth rate
The terminal growth rates applied at the end of the forecast period are the long term annual inflation rate of the country obtained from external sources.sources adjusted to take into account circumstances specific to the group. For some intangible assets, management expects to achieve growth, driven by Diageo’s sales, marketing and distribution expertise, which is significantly in excess of the terminal growth rates for the applicable countries or regions. In these circumstances, the recoverable amount is calculated based on a five-year detailed plan and extended by up to an additional ten10 years using the annual growth rate of the real gross domestic product (GDP) of the country or region aggregated with its inflation rate, adjusted to take into account circumstances specific to the group. In the calculation of the terminal value, a maximum of the long term annual inflation rate of the country is used as the terminal growth rate.
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.
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Financial statements (continued)
The pre-tax discount rates and terminal growth rates used for impairment testing are as follows:
2015 | 2014 | |||||||||||||||
Pre-tax discount rate(i) % | Terminal growth rate % | Pre-tax discount rate(i) % | Terminal growth rate % | |||||||||||||
North America – United States | 9 | 2 | 10 | 2 | ||||||||||||
Europe | ||||||||||||||||
– Western Europe | 10 | 2 | 11 | 2 | ||||||||||||
– Turkey | 15 | 5 | 16 | 5 | ||||||||||||
Africa | ||||||||||||||||
– Africa Regional Markets | 21 | 6 | 22 | 5 | ||||||||||||
– South Africa | 19 | 5 | 16 | 5 | ||||||||||||
Latin America and Caribbean | ||||||||||||||||
– Brazil | 13 | 5 | 13 | 5 | ||||||||||||
– Mexico | 20 | 3 | 16 | 3 | ||||||||||||
Asia Pacific | ||||||||||||||||
– Korea | 9 | 3 | 11 | 3 | ||||||||||||
– Greater China | 11 | 3 | 12 | 3 | ||||||||||||
– India | 19 | 6 | 18 | 6 |
2016 | 2015 | |||||||||||||||
Pre-tax discount rate(i) % | Terminal growth rate % | Pre-tax discount rate(i) % | Terminal growth rate % | |||||||||||||
North America – United States | 9 | 2 | 9 | 2 | ||||||||||||
Europe, Russia and Turkey | ||||||||||||||||
– Europe | 9 | 2 | 10 | 2 | ||||||||||||
– Turkey | 16 | 5 | 15 | 5 | ||||||||||||
Africa | ||||||||||||||||
– Africa Regional Markets | 20 | 5 | 21 | 6 | ||||||||||||
– South Africa | 18 | 5 | 19 | 5 | ||||||||||||
Latin America and Caribbean | ||||||||||||||||
– Brazil | 13 | 5 | 13 | 5 | ||||||||||||
– Mexico | 18 | 3 | 20 | 3 | ||||||||||||
Asia Pacific | ||||||||||||||||
– Korea | 10 | 3 | 9 | 3 | ||||||||||||
– Greater China | 10 | 3 | 11 | 3 | ||||||||||||
– India(ii) | 14 | 6 | 19 | 6 |
(i) | Before additional risk premiums. |
(ii) | Post-tax discount rates for India as at 30 June 2016 and 30 June 2015 were 12%. |
In the year ended 30 June 2014 there were2016, an impairment charges of £260 million and £4 millioncharge in respect of the Shui Jing FangYpióca brand, the related fixed assets and tangible assets, respectively.goodwill allocated to the Paraguay, Uruguay and Brazil (PUB) cash-generating unit of £62 million, £14 million and £42 million, respectively was charged to other operating expenses. Forecast cash flow assumptions have been reduced principally due to a challenging economic environment in Brazil and significant adverse changes in local tax regulation.
(e) Sensitivity to change in key assumptions
Impairment testing for the year ended 30 June 20152016 has identified the Ypióca and Shui Jing Fang brands and goodwill allocated to Africa Regional Marketsfollowing cash-generating units as being sensitive to reasonably possible changes in assumptions due toassumptions.
232
Financial statements (continued)
The table below shows the challenging market conditions. Ypiócaheadroom at 30 June 2016 and Shui Jing Fang brands and goodwill allocated to Africa Regional Marketsthe impairment charge that would be impairedrequired if there is an increasethe assumptions in discount ratesthe calculation of 1ppt by £16 million, £7 million and £21 million, respectively; or a decreasetheir value in forecast annual cash flows of 10% by £15 million, £20 million or £29 million, respectively.use were changed:
Headroom £ million | 1ppt decrease in terminal growth rate £ million | 1ppt increase in discount rate £ million | 10% decrease in annual cash flow(i) £ million | |||||||||||||
India | 93 | (372 | ) | (493 | ) | (361 | ) | |||||||||
Greater China | 60 | — | (13 | ) | (12 | ) | ||||||||||
Meta | 9 | — | — | (11 | ) |
(i) | 20% decrease in annual cash flow was considered as reasonable change for Meta. |
It remains possible that changes in assumptions used to support Shui Jing Fang and Ypióca brands and goodwill allocated to Africa Regional Markets could bearise in excess of those indicated in the table above.
For all intangibles with an indefinite life, other than thosethe cash- generating units mentioned above, management has concluded that no reasonable possible change in the key assumptions on which it has determined the recoverable amounts would cause their carrying values to exceed their recoverable amounts.
11. PROPERTY, PLANT AND EQUIPMENT
Accounting policies
Land and buildings are stated at cost less accumulated depreciation. Freehold land is not depreciated. Leaseholds are 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 25 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.
213
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.
Leases
Where the group has substantially all the risks and rewards of ownership of an asset subject to a lease, the lease is treated as a finance lease. Assets held under finance leases are recognised as assets of the group at their fair value at the inception of the lease. The corresponding liability to the lessor is included in other financial liabilities on the consolidated balance sheet. Lease payments are 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 are treated as operating leases, with payments and receipts taken to the income statement on a straight-line basis over the life of the lease.
233
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 | 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 2013 | 1,325 | 3,301 | 125 | 499 | 377 | 5,627 | ||||||||||||||||||||||||||||||||||||||||||
Exchange differences | (97 | ) | (270 | ) | (13 | ) | (61 | ) | (28 | ) | (469 | ) | ||||||||||||||||||||||||||||||||||||
Acquisition of businesses | 1 | — | — | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||
Other additions | 68 | 204 | 18 | 32 | 318 | 640 | ||||||||||||||||||||||||||||||||||||||||||
Disposals | (49 | ) | (221 | ) | (10 | ) | (17 | ) | — | (297 | ) | |||||||||||||||||||||||||||||||||||||
Transfers | 85 | 205 | — | 24 | (314 | ) | — | |||||||||||||||||||||||||||||||||||||||||
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At 30 June 2014 | 1,333 | 3,219 | 120 | 477 | 353 | 5,502 | 1,333 | 3,219 | 120 | 477 | 353 | 5,502 | ||||||||||||||||||||||||||||||||||||
Exchange differences | (40 | ) | (119 | ) | (5 | ) | (44 | ) | (11 | ) | (219 | ) | (40 | ) | (119 | ) | (5 | ) | (44 | ) | (11 | ) | (219 | ) | ||||||||||||||||||||||||
Acquisition of businesses | 148 | 110 | 4 | — | 13 | 275 | 148 | 110 | 4 | — | 13 | 275 | ||||||||||||||||||||||||||||||||||||
Sale of businesses | (105 | ) | (73 | ) | (7 | ) | — | (1 | ) | (186 | ) | (105 | ) | (73 | ) | (7 | ) | — | (1 | ) | (186 | ) | ||||||||||||||||||||||||||
Other additions | 51 | 181 | 13 | 35 | 297 | 577 | 51 | 181 | 13 | 35 | 297 | 577 | ||||||||||||||||||||||||||||||||||||
Other disposals | (13 | ) | (66 | ) | (3 | ) | (20 | ) | (1 | ) | (103 | ) | (13 | ) | (66 | ) | (3 | ) | (20 | ) | (1 | ) | (103 | ) | ||||||||||||||||||||||||
Transfers | 73 | 210 | 3 | 16 | (302 | ) | — | 73 | 210 | 3 | 16 | (302 | ) | — | ||||||||||||||||||||||||||||||||||
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At 30 June 2015 | 1,447 | 3,462 | 125 | 464 | 348 | 5,846 | 1,447 | 3,462 | 125 | 464 | 348 | 5,846 | ||||||||||||||||||||||||||||||||||||
Exchange differences | 107 | 243 | 11 | 37 | 18 | 416 | ||||||||||||||||||||||||||||||||||||||||||
Sale of businesses | (119 | ) | (164 | ) | (3 | ) | (18 | ) | (18 | ) | (322 | ) | ||||||||||||||||||||||||||||||||||||
Other additions | 30 | 137 | 7 | 23 | 274 | 471 | ||||||||||||||||||||||||||||||||||||||||||
Other disposals | (58 | ) | (98 | ) | (22 | ) | (11 | ) | (8 | ) | (197 | ) | ||||||||||||||||||||||||||||||||||||
Transfers | 76 | 203 | 4 | 21 | (304 | ) | — | |||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
At 30 June 2016 | 1,483 | 3,783 | 122 | 516 | 310 |
| 6,214 |
| ||||||||||||||||||||||||||||||||||||||||
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Depreciation | ||||||||||||||||||||||||||||||||||||||||||||||||
At 30 June 2013 | 386 | 1,436 | 89 | 291 | — | 2,202 | ||||||||||||||||||||||||||||||||||||||||||
Exchange differences | (31 | ) | (118 | ) | (10 | ) | (31 | ) | — | (190 | ) | |||||||||||||||||||||||||||||||||||||
Depreciation charge for the year | 75 | 170 | 11 | 41 | — | 297 | ||||||||||||||||||||||||||||||||||||||||||
Exceptional accelerated depreciation and impairment | 1 | 19 | 1 | — | 4 | 25 | ||||||||||||||||||||||||||||||||||||||||||
Disposals | (40 | ) | (209 | ) | (10 | ) | (6 | ) | — | (265 | ) | |||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
At 30 June 2014 | 391 | 1,298 | 81 | 295 | 4 | 2,069 | 391 | 1,298 | 81 | 295 | 4 | 2,069 | ||||||||||||||||||||||||||||||||||||
Exchange differences | (8 | ) | (64 | ) | (6 | ) | (28 | ) | — | (106 | ) | (8 | ) | (64 | ) | (6 | ) | (28 | ) | — | (106 | ) | ||||||||||||||||||||||||||
Depreciation charge for the year | 46 | 215 | 13 | 42 | — | 316 | 46 | 215 | 13 | 42 | — | 316 | ||||||||||||||||||||||||||||||||||||
Exceptional accelerated depreciation and impairment | — | 23 | — | — | — | 23 | — | 23 | — | — | — | 23 | ||||||||||||||||||||||||||||||||||||
Sale of businesses | (20 | ) | (43 | ) | (5 | ) | — | — | (68 | ) | (20 | ) | (43 | ) | (5 | ) | — | — | (68 | ) | ||||||||||||||||||||||||||||
Other disposals | (6 | ) | (56 | ) | — | (16 | ) | — | (78 | ) | (6 | ) | (56 | ) | — | (16 | ) | — | (78 | ) | ||||||||||||||||||||||||||||
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| �� |
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| ||||||||||||||||||||||||||||||||||||
At 30 June 2015 | 403 | 1,373 | 83 | 293 | 4 | 2,156 | 403 | 1,373 | 83 | 293 | 4 | 2,156 | ||||||||||||||||||||||||||||||||||||
Exchange differences | 36 | 113 | 8 | 25 | — | 182 | ||||||||||||||||||||||||||||||||||||||||||
Depreciation charge for the year | 46 | 200 | 12 | 41 | — | 299 | ||||||||||||||||||||||||||||||||||||||||||
Exceptional accelerated depreciation and impairment | 4 | 10 | — | — | — | 14 | ||||||||||||||||||||||||||||||||||||||||||
Non-operating exceptional accelerated depreciation | — | 8 | — | — | — | 8 | ||||||||||||||||||||||||||||||||||||||||||
Sale of businesses | (65 | ) | (105 | ) | (3 | ) | (10 | ) | — | (183 | ) | |||||||||||||||||||||||||||||||||||||
Other disposals | (24 | ) | (86 | ) | (20 | ) | (9 | ) | (4 | ) | (143 | ) | ||||||||||||||||||||||||||||||||||||
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At 30 June 2016 | 400 | 1,513 | 80 | 340 | — | 2,333 | ||||||||||||||||||||||||||||||||||||||||||
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Carrying amount | ||||||||||||||||||||||||||||||||||||||||||||||||
At 30 June 2016 | 1,083 | 2,270 | 42 | 176 | 310 | 3,881 | ||||||||||||||||||||||||||||||||||||||||||
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At 30 June 2015 | 1,044 | 2,089 | 42 | 171 | 344 | 3,690 | 1,044 | 2,089 | 42 | 171 | 344 | 3,690 | ||||||||||||||||||||||||||||||||||||
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At 30 June 2014 | 942 | 1,921 | 39 | 182 | 349 | 3,433 | 942 | 1,921 | 39 | 182 | 349 | 3,433 | ||||||||||||||||||||||||||||||||||||
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At 30 June 2013 | 939 | 1,865 | 36 | 208 | 377 | 3,425 | ||||||||||||||||||||||||||||||||||||||||||
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(a) The net book value of land and buildings comprises freeholds of £975£1,034 million (2014(2015 – £862£975 million), long leaseholds of £20£28 million (2014(2015 – £36£20 million) and short leaseholds of £49£21 million (2014(2015 – £44£49 million). Depreciation was not charged on £144£203 million (2014(2015 – £129£144 million) of land.
214
Financial statements (continued)
(b) At 30 June 2015,2016, tangible fixed assets held under finance leases amounted to £294£264 million (2014(2015 – £303£294 million), principally in respect of plant and equipment. Depreciation on these assets held under finance leases was £17£19 million (2014(2015 – £20£17 million).
(c) Property, plant and equipment is net of a government grant of £118£139 million (2014(2015 – £108£118 million) received in prior years in respect of the construction of a rum distillery in the United States Virgin Islands.
234
Financial statements (continued)
12. OTHER INVESTMENTS
Accounting policies
Available-for-sale investments are non-derivative financial assets that are either designated as such upon initial recognition or not classified in any of the other financial assets categories. They are included in non-current assets. Subsequent to initial measurement, available-for-sale investments are stated at fair value. Gains and losses arising from the changes in fair value are recognised in other comprehensive income until the investment is disposed of or impaired, when the accumulated gains and losses are recycled to the income statement. Interest and dividends from available-for-sale investments are recognised in the consolidated income statement.
Loans receivable are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. They are subsequently measured at amortised cost using the effective interest method less allowance for impairment. Allowances are made where there is evidence of a risk of non-payment taking into account ageing, previous experience and general economic conditions.
United Spirits Limited £ million | Loans (b) £ million | Others (c) £ million | Total £ million | Loans (a) £ million | Others £ million | Total £ million | ||||||||||||||||||||||
Cost less allowances or fair value | ||||||||||||||||||||||||||||
At 30 June 2013 | 350 | 50 | 12 | 412 | ||||||||||||||||||||||||
Exchange differences | (6 | ) | (6 | ) | 1 | (11 | ) | |||||||||||||||||||||
Additions | — | 26 | — | 26 | ||||||||||||||||||||||||
Repayments and disposals | — | (19 | ) | (6 | ) | (25 | ) | |||||||||||||||||||||
Fair value adjustment | 55 | — | — | 55 | ||||||||||||||||||||||||
Transfer to associates (a) | (399 | ) | — | — | (399 | ) | ||||||||||||||||||||||
Allowances reversed during the year | — | 5 | — | 5 | ||||||||||||||||||||||||
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| |||||||||||||||||||||||||
At 30 June 2014 | — | 56 | 7 | 63 | 56 | 7 | 63 | |||||||||||||||||||||
Exchange differences | — | (2 | ) | 1 | (1 | ) | (2 | ) | 1 | (1 | ) | |||||||||||||||||
Acquisition of businesses | — | — | 58 | 58 | — | 58 | 58 | |||||||||||||||||||||
Other additions | — | 27 | — | 27 | 27 | — | 27 | |||||||||||||||||||||
Repayments and disposals | — | (25 | ) | — | (25 | ) | (25 | ) | — | (25 | ) | |||||||||||||||||
Fair value adjustment | — | — | 20 | 20 | — | 20 | 20 | |||||||||||||||||||||
Transfer to assets held for sale (note 6 (a)) | — | (33 | ) | — | (33 | ) | ||||||||||||||||||||||
Transfer to assets held for sale | (33 | ) | — | (33 | ) | |||||||||||||||||||||||
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At 30 June 2015 | — | 23 | 86 | 109 | 23 | 86 | 109 | |||||||||||||||||||||
Exchange differences | 2 | 2 | 4 | |||||||||||||||||||||||||
Additions (b) | 95 | — | 95 | |||||||||||||||||||||||||
Repayments and disposals (c) | (4 | ) | (89 | ) | (93 | ) | ||||||||||||||||||||||
Fair value adjustment | — | 9 | 9 | |||||||||||||||||||||||||
Provision charged during the year (b) | (93 | ) | — | (93 | ) | |||||||||||||||||||||||
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At 30 June 2016 | 23 | 8 | 31 | |||||||||||||||||||||||||
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(a) On the acquisition of a 10.04% investment in USL in the year endedAt 30 June 2013, USL was accounted for as an available-for-sale investment. On the acquisition of an additional 14.98% investment in USL on 4 July 2013, USL became an associate and the fair value at that date was transferred to investments in associates.
(b) Loans2016, loans comprise £21 million (2014(2015 – £23£21 million; 20132014 – £21£23 million) of loans to customers and other third parties, after allowances of £98 million (2015 – £7 million (2014million; 2014 – £9 million; 2013 – £27 million), and £2 million (2014(2015 – £33£2 million; 20132014 – £29£33 million) of loans to associates. On the consolidation of USL on 2 July 2014 Diageo acquired
(b) Additions include a loan due from United Breweries (Holdings) Limited, including interest, amounting to INR14,505of $135 million (£14192 million). provided by Standard Chartered Bank (SCB) to Watson Limited and guaranteed by a subsidiary of the group. The loan became due in May 2015 and interestwas paid to SCB by Diageo in January 2016. The amount receivable in respect of the guarantee has been fully provided for in the consolidated balance sheet.for. See note 18(a).
(c) Others, at 30 JuneOn 7 July 2015, includes £80 million (2014 and 2013 – £nil) comprising 8,500,000 shares of INR1 eachDiageo sold its investment in United Breweries Limited, a company quoted on the Indian stock exchange. These shares were sold on 7 July 2015.
215
Financial statements (continued)
exchange, for a consideration of £89 million.
13. POST EMPLOYMENT BENEFITS
Accounting policies
The group’s principal pension 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
235
Financial statements (continued)
comprise the net deficit/asset on the plans at the beginning of the financial 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 judgement in relation to various assumptions including future pay rises, inflation and discount rates and employee and pensioner demographics.
Diageo determines the assumptions on a country by country basis in conjunction with its actuaries, and believes these assumptions to be in line with best practice, but the application of different assumptions could have a significant effect on the amounts reflected in the income statement, other comprehensive income and balance sheet. There may be also interdependency between some of the assumptions.
(a) Post employment benefit plans
The group operates a number of pension plans throughout the world, devised in accordance with local conditions and practices. The majority of the 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 employees post employment medical costs.
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 valuations of the significant defined benefit plans were carried out as follows:
Principal plans | Date of valuation | |||
United Kingdom(i) | ||||
Ireland(ii) | | |||
United States | 1 January 2015 |
(i) | The |
(ii) | The triennial valuation of the Guinness Ireland Group Pension Scheme in Ireland (the Irish Scheme) as at 31 December 2015 is in progress and the result of this valuation is expected to be agreed by Diageo and the trustee later in calendar year 2016. 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. |
236
Financial statements (continued)
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 the UK Scheme, 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 UK Scheme, two member nominated directors have beenare appointed from both the pensioner member community and two from the active member community. For the Irish Scheme Diageo Ireland makes four nominations and appoints three further candidates nominated by representative groupings.
216
Financial statements (continued)
The amounts charged to the consolidated income statement for the group’s defined benefit post employment plans and the consolidated statement of comprehensive income for the three years ended 30 June 20152016 are as follows:
2015 £ million | 2014 £ million | 2013 £ million | ||||||||||
Current service cost and administrative expenses | (120 | ) | (118 | ) | (115 | ) | ||||||
Past service gains | 3 | — | 3 | |||||||||
Gains on curtailments and settlements | 3 | 26 | 8 | |||||||||
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Charge to operating profit | (114 | ) | (92 | ) | (104 | ) | ||||||
Net finance charge in respect of post employment plans (note 5) | (13 | ) | (12 | ) | (38 | ) | ||||||
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Charge before taxation(i) | (127 | ) | (104 | ) | (142 | ) | ||||||
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Actual returns less amounts included in finance income | 411 | 306 | 349 | |||||||||
Experience gains | 103 | 24 | 71 | |||||||||
Changes in financial assumptions | (400 | ) | (453 | ) | (298 | ) | ||||||
Changes in demographic assumptions | 9 | (49 | ) | 1 | ||||||||
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Other comprehensive income/(loss) | 123 | (172 | ) | 123 | ||||||||
Changes in the surplus restriction | — | 3 | (4 | ) | ||||||||
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Total other comprehensive income/(loss) | 123 | (169 | ) | 119 | ||||||||
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2016 £ million | 2015 £ million | 2014 £ million | ||||||||||||||||||||||
Current service cost and administrative expenses | (112 | ) | (120 | ) | (118 | ) | ||||||||||||||||||
Past service gains | 1 | 3 | — | |||||||||||||||||||||
Gains on curtailments and settlements | 1 | 3 | 26 | |||||||||||||||||||||
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Charge to operating profit | (110 | ) | (114 | ) | (92 | ) | ||||||||||||||||||
Net finance charge in respect of post employment plans | (5 | ) | (13 | ) | (12 | ) | ||||||||||||||||||
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Charge before taxation(i) | (115 | ) | (127 | ) | (104 | ) | ||||||||||||||||||
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Actual returns less amounts included in finance income | 61 | 411 | 306 | |||||||||||||||||||||
Experience gains | 91 | 103 | 24 | |||||||||||||||||||||
Changes in financial assumptions | (1,066 | ) | (400 | ) | (453 | ) | ||||||||||||||||||
Changes in demographic assumptions | 62 | 9 | (49 | ) | ||||||||||||||||||||
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Other comprehensive (loss)/income | (852 | ) | 123 | (172 | ) | |||||||||||||||||||
Changes in the surplus restriction | — | — | 3 | |||||||||||||||||||||
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Total other comprehensive (loss)/income | (852 | ) | 123 | (169 | ) | |||||||||||||||||||
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(i) The charge before taxation comprises: | ||||||||||||||||||||||||
2015 £ million | 2014 £ million | 2013 £ million | 2016 £ million | 2015 £ million | 2014 £ million | |||||||||||||||||||
United Kingdom | (62 | ) | (39 | ) | (71 | ) | (50 | ) | (62 | ) | (39 | ) | ||||||||||||
Ireland | (22 | ) | (28 | ) | (26 | ) | (19 | ) | (22 | ) | (28 | ) | ||||||||||||
United States | (24 | ) | (25 | ) | (28 | ) | (27 | ) | (24 | ) | (25 | ) | ||||||||||||
Other | (19 | ) | (12 | ) | (17 | ) | (19 | ) | (19 | ) | (12 | ) | ||||||||||||
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(127 | ) | (104 | ) | (142 | ) | (115 | ) | (127 | ) | (104 | ) | |||||||||||||
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In addition to the charge in respect of defined benefit post employment plans, contributions to the group’s defined contribution plans were £15£16 million (2014(2015 – £15 million; 20132014 – £13£15 million).
237
Financial statements (continued)
The movement in the net deficit for the two years ended 30 June 20152016 is set out below:
Plan assets £ million | Plan liabilities £ million | Net deficit £ million | ||||||||||||||||||||||
At 30 June 2013 | 7,082 | (7,618 | ) | (536 | ) | |||||||||||||||||||
Exchange differences | (164 | ) | 215 | 51 | ||||||||||||||||||||
Charge before taxation | 307 | (411 | ) | (104 | ) | |||||||||||||||||||
Other comprehensive income/(loss)(i) | 306 | (478 | ) | (172 | ) | |||||||||||||||||||
Contributions by the group | 288 | — | 288 | |||||||||||||||||||||
Employee contributions | 3 | (3 | ) | — | ||||||||||||||||||||
Benefits paid | (342 | ) | 342 | — | ||||||||||||||||||||
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| Plan assets £ million | Plan liabilities £ million | Net deficit £ million | |||||||||||||||||||
At 30 June 2014 | 7,480 | (7,953 | ) | (473 | ) | 7,480 | (7,953 | ) | (473 | ) | ||||||||||||||
Exchange differences | (144 | ) | 177 | 33 | (144 | ) | 177 | 33 | ||||||||||||||||
Acquisition of businesses | 33 | (40 | ) | (7 | ) | 33 | (40 | ) | (7 | ) | ||||||||||||||
Sale of businesses | (20 | ) | 30 | 10 | (20 | ) | 30 | 10 | ||||||||||||||||
Charge before taxation | 290 | (417 | ) | (127 | ) | 290 | (417 | ) | (127 | ) | ||||||||||||||
Other comprehensive income/(loss)(i) | 411 | (288 | ) | 123 | 411 | (288 | ) | 123 | ||||||||||||||||
Contributions by the group | 184 | — | 184 | 184 | — | 184 | ||||||||||||||||||
Employee contributions | 7 | (7 | ) | — | 7 | (7 | ) | — | ||||||||||||||||
Benefits paid | (358 | ) | 358 | — | (358 | ) | 358 | — | ||||||||||||||||
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At 30 June 2015 | 7,883 | (8,140 | ) | (257 | ) | 7,883 | (8,140 | ) | (257 | ) | ||||||||||||||
Exchange differences | 328 | (463 | ) | (135 | ) | |||||||||||||||||||
Sale of businesses | (38 | ) | 37 | (1 | ) | |||||||||||||||||||
Charge before taxation | 275 | (390 | ) | (115 | ) | |||||||||||||||||||
Other comprehensive income/(loss)(i) | 61 | (913 | ) | (852 | ) | |||||||||||||||||||
Contributions by the group | 169 | — | 169 | |||||||||||||||||||||
Employee contributions | 6 | (6 | ) | — | ||||||||||||||||||||
Benefits paid | (428 | ) | 428 | — | ||||||||||||||||||||
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At 30 June 2016 | 8,256 | (9,447 | ) | (1,191 | ) | |||||||||||||||||||
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(i) | Excludes surplus restriction. |
217
Financial statements (continued)
The plan assets and liabilities by type of post employment benefit and country is analysed below:as follows:
2015 | 2014 | 2016 | 2015 | |||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||
United Kingdom | 5,922 | (5,621 | ) | 5,496 | (5,380 | ) | 6,047 | (6,190 | ) | 5,922 | (5,621 | ) | ||||||||||||||||||||
Ireland | 1,295 | (1,554 | ) | 1,385 | (1,695 | ) | 1,472 | (2,149 | ) | 1,295 | (1,554 | ) | ||||||||||||||||||||
United States | 401 | (420 | ) | 369 | (399 | ) | 474 | (508 | ) | 401 | (420 | ) | ||||||||||||||||||||
Other | 212 | (242 | ) | 218 | (235 | ) | 194 | (240 | ) | 212 | (242 | ) | ||||||||||||||||||||
Post employment medical | 1 | (218 | ) | 1 | (203 | ) | 2 | (260 | ) | 1 | (218 | ) | ||||||||||||||||||||
Other post employment | 52 | (85 | ) | 11 | (41 | ) | 67 | (100 | ) | 52 | (85 | ) | ||||||||||||||||||||
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7,883 | (8,140 | ) | 7,480 | (7,953 | ) | 8,256 | (9,447 | ) | 7,883 | (8,140 | ) | |||||||||||||||||||||
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The balance sheet analysis of the post employment plans is as follows:
2015 | 2014 | 2016 | 2015 | |||||||||||||||||||||||||||||
Non- current assets(i) £ million | Non- current liabilities £ million | Non- current assets(i) £ million | Non- current liabilities £ million | Non- current assets(i) £ million | Non- current liabilities £ million | Non- current assets(i) £ million | Non- current liabilities £ million | |||||||||||||||||||||||||
Funded plans | 436 | (447 | ) | 251 | (488 | ) | 55 | (997 | ) | 436 | (447 | ) | ||||||||||||||||||||
Unfunded plans | — | (248 | ) | — | (238 | ) | — | (251 | ) | — | (248 | ) | ||||||||||||||||||||
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436 | (695 | ) | 251 | (726 | ) | 55 | (1,248 | ) | 436 | (695 | ) | |||||||||||||||||||||
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(i) | Includes surplus restriction of £2 million |
238
Financial statements (continued)
(b) Principal risks and assumptions
The material post employment plans are not exposed to any unusual, entity specific or scheme 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 holdings of inflation linked gilts and swaps and the plans provide for caps on 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 asset/(deficit) 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.
218
Financial statements (continued)
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 ended 30 June are based on the assumptions disclosed as at the previous 30 June.
United Kingdom | Ireland | United States(i) | ||||||||||||||||||||||||||||||||||
2015 % | 2014 % | 2013 % | 2015 % | 2014 % | 2013 % | 2015 % | 2014 % | 2013 % | ||||||||||||||||||||||||||||
Rate of general increase in salaries(ii) | 4.4 | 4.4 | 4.4 | 3.1 | 2.5 | 3.1 | — | — | — | |||||||||||||||||||||||||||
Rate of increase to pensions in payment | 3.4 | 3.5 | 3.6 | 1.7 | 1.7 | 1.8 | — | — | — | |||||||||||||||||||||||||||
Rate of increase to deferred pensions | 2.2 | 2.3 | 2.3 | 1.6 | 1.5 | 1.7 | — | — | — | |||||||||||||||||||||||||||
Discount rate for plan liabilities | 3.8 | 4.2 | 4.6 | 2.6 | 3.0 | 3.6 | 4.3 | 4.2 | 4.5 | |||||||||||||||||||||||||||
Inflation - CPI | 2.2 | 2.3 | 2.3 | 1.6 | 1.5 | 1.7 | 1.7 | 2.1 | 1.8 | |||||||||||||||||||||||||||
Inflation - RPI | 3.2 | 3.3 | 3.3 | — | — | — | — | — | — |
United Kingdom | Ireland | United States(i) | ||||||||||||||||||||||||||||||||||
2016 % | 2015 % | 2014 % | 2016 % | 2015 % | 2014 % | 2016 % | 2015 % | 2014 % | ||||||||||||||||||||||||||||
Rate of general increase in salaries(ii) | 4.0 | 4.4 | 4.4 | 2.8 | 3.1 | 2.5 | — | — | — | |||||||||||||||||||||||||||
Rate of increase to pensions in payment | 3.1 | 3.4 | 3.5 | 1.6 | 1.7 | 1.7 | — | — | — | |||||||||||||||||||||||||||
Rate of increase to deferred pensions | 1.8 | 2.2 | 2.3 | 1.4 | 1.6 | 1.5 | — | — | — | |||||||||||||||||||||||||||
Discount rate for plan liabilities | 2.9 | 3.8 | 4.2 | 1.4 | 2.6 | 3.0 | 3.5 | 4.3 | 4.2 | |||||||||||||||||||||||||||
Inflation - CPI | 1.8 | 2.2 | 2.3 | 1.4 | 1.6 | 1.5 | 1.4 | 1.7 | 2.1 | |||||||||||||||||||||||||||
Inflation - RPI | 2.8 | 3.2 | 3.3 | — | — | — | — | — | — |
(i) | The salary increase assumption in the United States is not a significant assumption as only a minimal amount of members’ pension entitlement is dependent on |
(ii) | The salary increase assumptions include an allowance for age related promotional salary increases. |
For the main 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 | ||||||||||||||||||||||||||||||||||
2015 Age | 2014 Age | 2013 Age | 2015 Age | 2014 Age | 2013 Age | 2015 Age | 2014 Age | 2013 Age | ||||||||||||||||||||||||||||
Retiring currently at age 65 | ||||||||||||||||||||||||||||||||||||
Male | 86.6 | 86.4 | 86.3 | 86.0 | 85.9 | 85.7 | 86.7 | 86.6 | 84.5 | |||||||||||||||||||||||||||
Female | 88.5 | 88.4 | 88.3 | 88.7 | 88.6 | 88.5 | 88.9 | 88.8 | 86.4 | |||||||||||||||||||||||||||
Currently aged 45, retiring at age 65 | ||||||||||||||||||||||||||||||||||||
Male | 88.8 | 88.9 | 88.3 | 88.9 | 88.8 | 88.6 | 88.4 | 88.3 | 86.0 | |||||||||||||||||||||||||||
Female | 91.4 | 91.0 | 90.5 | 91.6 | 91.5 | 91.3 | 90.6 | 90.5 | 87.2 |
United Kingdom(i) | Ireland(ii) | United States | ||||||||||||||||||||||||||||||||||
2016 Age | 2015 Age | 2014 Age | 2016 Age | 2015 Age | 2014 Age | 2016 Age | 2015 Age | 2014 Age | ||||||||||||||||||||||||||||
Retiring currently at age 65 | ||||||||||||||||||||||||||||||||||||
Male | 86.4 | 86.6 | 86.4 | 86.2 | 86.0 | 85.9 | 86.3 | 86.7 | 86.6 | |||||||||||||||||||||||||||
Female | 88.3 | 88.5 | 88.4 | 88.9 | 88.7 | 88.6 | 88.3 | 88.9 | 88.8 | |||||||||||||||||||||||||||
Currently aged 45, retiring at age 65 | ||||||||||||||||||||||||||||||||||||
Male | 88.6 | 88.8 | 88.9 | 89.1 | 88.9 | 88.8 | 88.0 | 88.4 | 88.3 | |||||||||||||||||||||||||||
Female | 91.2 | 91.4 | 91.0 | 91.8 | 91.6 | 91.5 | 89.9 | 90.6 | 90.5 |
(i) | Based on the |
(ii) | Based on the |
239
Financial statements (continued)
For the significant assumptions, the following sensitivity analyses give an estimate of the potential impacts on the consolidated income statement for the year ended 30 June 20152016 and on the plan liabilities at 30 June 2015:2016:
United Kingdom | Ireland | United States and other | ||||||||||||||||||||||||||||||||||
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 | 25 | 20 | 433 | 5 | 4 | 126 | 2 | 1 | 31 | |||||||||||||||||||||||||||
Effect of 0.5% decrease in discount rate | (22 | ) | (17 | ) | (484 | ) | (5 | ) | (4 | ) | (145 | ) | (2 | ) | (1 | ) | (32 | ) | ||||||||||||||||||
Effect of 0.5% increase in inflation | (20 | ) | (16 | ) | (394 | ) | (6 | ) | (5 | ) | (112 | ) | (1 | ) | (1 | ) | (12 | ) | ||||||||||||||||||
Effect of 0.5% decrease in inflation | 19 | 15 | 384 | 4 | 3 | 82 | 1 | 1 | 11 | |||||||||||||||||||||||||||
Effect of one year increase in life expectancy | (10 | ) | (8 | ) | (222 | ) | (2 | ) | (2 | ) | (55 | ) | (1 | ) | (1 | ) | (18 | ) |
United Kingdom | Ireland | United States and other | ||||||||||||||||||||||||||||||||||
Profit before taxation £ million | Profit after taxation £ million | Plan liabilities(i) £ million | Profit before taxation £ million | Profit after taxation £ million | Plan liabilities(i) £ million | Profit before taxation £ million | Profit after taxation £ million | Plan liabilities(i) £ million | ||||||||||||||||||||||||||||
Effect of 0.5% increase in discount rate | 23 | 18 | 489 | 4 | 3 | 193 | 2 | 1 | 38 | |||||||||||||||||||||||||||
Effect of 0.5% decrease in discount rate | (21 | ) | (17 | ) | (560 | ) | (3 | ) | (3 | ) | (224 | ) | (1 | ) | (1 | ) | (39 | ) | ||||||||||||||||||
Effect of 0.5% increase in inflation | (20 | ) | (16 | ) | (429 | ) | (5 | ) | (4 | ) | (136 | ) | (1 | ) | (1 | ) | (17 | ) | ||||||||||||||||||
Effect of 0.5% decrease in inflation | 17 | 14 | 387 | 4 | 3 | 149 | 1 | 1 | 15 | |||||||||||||||||||||||||||
Effect of one year increase in life expectancy | (9 | ) | (7 | ) | (272 | ) | (2 | ) | (2 | ) | (88 | ) | (1 | ) | (1 | ) | (21 | ) |
(i) | The estimated effect on the liabilities excludes the impact of any interest rate and inflation swaps entered into by the pension plans. |
(1) | The sensitivity analyses above have been determined based on reasonably possible changes of the respective assumptions and may not be representative of the actual change. Each sensitivity is calculated on a change in the key assumption while holding all other assumptions constant. The sensitivity to inflation includes the impact on all inflation linked assumptions (e.g. pension increases and salary increases where appropriate). |
(c) Investment and hedging strategy
The investment strategy for the group’s funded post employment plans is decided 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, while 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
219
Financial statements (continued)
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 2015,2016, approximately 27% and 80% (2015 – 35% and 79% (2014 – 37% and 73%) of the UK Scheme’s liabilities were hedged against future movements in interest rates and inflation, respectively, through the combined effect of government bonds repurchase agreements and swaps. At 30 June 2015,2016, approximately 28% and 60% (2015 – 32% and 59% (2014 – 33% and 52%) of the Irish Scheme’s liabilities were hedged against future movements in interest rates and inflation, respectively, through the combined effect of government bonds repurchase agreements and swaps.
The discount rates used are based on the yields of high quality fixed income investments. For the UK plans, which represent approximately 69%66% 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.
The
240
Financial statements (continued)
An analysis of the fair value of the plan assets is as follows:
2015 | 2014 | 2016 | 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | United Kingdom £ million | Ireland £ million | United States and other £ million | Total £ million | |||||||||||||||||||||||||||||||||||||||||||||||||
Equities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Quoted | 812 | 395 | 254 | 1,461 | 1,222 | 433 | 249 | 1,904 | 992 | 433 | 253 | 1,678 | 812 | 395 | 254 | 1,461 | ||||||||||||||||||||||||||||||||||||||||||||||||
Unquoted and private equity | 297 | 2 | 18 | 317 | 281 | 2 | 22 | 305 | 321 | 3 | 20 | 344 | 297 | 2 | 18 | 317 | ||||||||||||||||||||||||||||||||||||||||||||||||
Bonds | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed-interest government | 178 | 117 | 37 | 332 | 319 | 64 | 36 | 419 | 206 | 158 | 46 | 410 | 178 | 117 | 37 | 332 | ||||||||||||||||||||||||||||||||||||||||||||||||
Inflation-linked government | 826 | 133 | 9 | 968 | 857 | 100 | 4 | 961 | 977 | 178 | — | 1,155 | 826 | 133 | 9 | 968 | ||||||||||||||||||||||||||||||||||||||||||||||||
Investment grade corporate | 861 | 210 | 251 | 1,322 | 835 | 362 | 210 | 1,407 | 980 | 225 | 314 | 1,519 | 861 | 210 | 251 | 1,322 | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-investment grade | 265 | 31 | 14 | 310 | 224 | 12 | 11 | 247 | 219 | 43 | 12 | 274 | 265 | 31 | 14 | 310 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loan securities | 614 | 123 | — | 737 | 469 | 143 | — | 612 | 602 | 140 | — | 742 | 614 | 123 | — | 737 | ||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase agreements | 1,980 | — | — | 1,980 | 710 | — | — | 710 | 2,000 | — | — | 2,000 | 1,980 | — | — | 1,980 | ||||||||||||||||||||||||||||||||||||||||||||||||
Liability Driven Investment (LDI) | 80 | 20 | — | 100 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property - unquoted | 665 | 83 | 10 | 758 | 525 | 75 | 8 | 608 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Liability driven investment (LDI) | 114 | 24 | — | 138 | 80 | 20 | — | 100 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property – unquoted | 670 | 108 | 1 | 779 | 665 | 83 | 10 | 758 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hedge funds | — | 122 | — | 122 | 202 | 127 | — | 329 | — | 142 | — | 142 | — | 122 | — | 122 | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate and inflation swaps | (801 | ) | 50 | — | (751 | ) | (295 | ) | 60 | — | (235 | ) | (1,007 | ) | 15 | — | (992 | ) | (801 | ) | 50 | — | (751 | ) | ||||||||||||||||||||||||||||||||||||||||
Cash and other | 145 | 9 | 73 | 227 | 147 | 7 | 59 | 213 | (27 | ) | 3 | 91 | 67 | 145 | 9 | 73 | 227 | |||||||||||||||||||||||||||||||||||||||||||||||
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Total bid value of assets | 5,922 | 1,295 | 666 | 7,883 | 5,496 | 1,385 | 599 | 7,480 | 6,047 | 1,472 | 737 | 8,256 | 5,922 | 1,295 | 666 | 7,883 | ||||||||||||||||||||||||||||||||||||||||||||||||
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(1) | 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. |
(2) | Within the Irish Scheme’s plan assets above there is £0.6 million (2015 – £0.6 million) invested in the ordinary shares of Diageo plc. |
Total cash contributions by the group to all post employment plans in the year ending 30 June 20162017 are estimated to be approximately £180£200 million.
(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 20152016 held inventory with a book value of £663£607 million (2014(2015 – £634£663 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 which for the year ended 30 June 20152016 was £25 million (2014(2015 – £25 million) and is expected to be approximately the same amount for the next nineeight years.
In 2024 the group will be required, dependent upon the funding position of the UK Scheme at that time, to pay an amount expected to be no greater than the deficit at that time, up to a maximum of £430 million in cash, to the UK Scheme to buy out the UK Scheme’s interest in the partnership. If the UK Scheme is in surplus at an actuarial triennial valuation without allowing for the value of the PFP, then Diageo can exit the PFP with the agreement of the trustees. The group has also agreed to make conditional contributions into escrow if the deficit at the 2015 or 2018 actuarial triennial valuation is in excess of £211 million and £84 million, respectively. The escrow accountmillion. These additional contributions would be payable to the UK Scheme by 31 March 2019.
220
Financial statements (continued)
2019, or within one month of completion of the 2018 valuation if later.
Irish plans
The group has also agreed a deficit funding arrangement with the trustees of the Irish Scheme under which it contributes to the Irish Scheme €21 million (£16 million) per annum until the year ending 30 June 2029. The agreement also provides for additional cash contributions into escrow of up to €188 million (£144140 million) if an equivalent reduction in the deficit is not achieved over the 18 year period from 2010 to 2028. As part of this funding plan, Diageo has 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 (£153149 million). During the year ended 30 June 2014 the group made an additional one off cash contribution of €100 million (£85 million) to the Irish plans.
241
Financial statements (continued)
(e) Timing of benefit payments
The following table provides information on the timing of the benefit payments and the average duration of the defined benefit obligations and the distribution of the timing of benefit payments:
United Kingdom | Ireland | United States | United Kingdom | Ireland | United States | |||||||||||||||||||||||||||||||||||||||||||
2015 £ million | 2014 £ million | 2015 £ million | 2014 £ million | 2015 £ million | 2014 £ million | 2016 £ million | 2015 £ million | 2016 £ million | 2015 £ million | 2016 £ million | 2015 £ million | |||||||||||||||||||||||||||||||||||||
Maturity analysis of benefits expected to be paid | ||||||||||||||||||||||||||||||||||||||||||||||||
Within one year | 233 | 217 | 70 | 73 | 42 | 34 | 272 | 233 | 74 | 70 | 61 | 42 | ||||||||||||||||||||||||||||||||||||
Between 1 to 5 years | 802 | 804 | 344 | 360 | 149 | 134 | 998 | 802 | 359 | 344 | 175 | 149 | ||||||||||||||||||||||||||||||||||||
Between 6 to 15 years | 2,501 | 2,525 | 696 | 718 | 337 | 307 | 2,724 | 2,501 | 702 | 696 | 387 | 337 | ||||||||||||||||||||||||||||||||||||
Between 16 to 25 years | 2,841 | 2,925 | 672 | 701 | 237 | 230 | 2,530 | 2,841 | 662 | 672 | 266 | 237 | ||||||||||||||||||||||||||||||||||||
Beyond 25 years | 6,360 | 6,882 | 1,199 | 1,297 | 229 | 236 | 4,210 | 6,360 | 1,121 | 1,199 | 253 | 229 | ||||||||||||||||||||||||||||||||||||
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Total | 12,737 | 13,353 | 2,981 | 3,149 | 994 | 941 | 10,734 | 12,737 | 2,918 | 2,981 | 1,142 | 994 | ||||||||||||||||||||||||||||||||||||
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years | years | years | years | years | years | years | years | years | years | years | years | |||||||||||||||||||||||||||||||||||||
Average duration of the defined benefit obligation | 17 | 17 | 18 | 18 | 11 | 12 | 18 | 17 | 20 | 18 | 11 | 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 in 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.
14. 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 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 costs less any allowance for discounts and doubtful debts.
Trade and other payables are initially recognised at fair value including transaction costs and subsequently carried at amortised costs.
221
Financial statements (continued)
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
2015 £ million | 2014 £ million | 2016 £ million | 2015 £ million | |||||||||||||
Raw materials and consumables | 333 | 306 | 301 | 333 | ||||||||||||
Work in progress | 66 | 59 | 49 | 66 | ||||||||||||
Maturing inventories | 3,586 | 3,300 | 3,647 | 3,586 | ||||||||||||
Finished goods and goods for resale | 589 | 557 | 582 | 589 | ||||||||||||
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4,574 | 4,222 | 4,579 | 4,574 | |||||||||||||
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242
Financial statements (continued)
Maturing inventories include whisk(e)y, rum, wines and Chinese white spirits. The following amounts of inventories are expected to be utilised after more than one year:
2015 £ million | 2014 £ million | 2016 £ million | 2015 £ million | |||||||||||||
Raw materials and consumables | 55 | 84 | 27 | 55 | ||||||||||||
Maturing inventories | 2,988 | 2,635 | 3,180 | 2,988 | ||||||||||||
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3,043 | 2,719 | 3,207 | 3,043 | |||||||||||||
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Inventories are disclosed net of provisions for obsolescence, an analysis of which is as follows:
2015 £ million | 2014 £ million | 2016 £ million | 2015 £ million | |||||||||||||
Balance at beginning of the year | 52 | 64 | 53 | 52 | ||||||||||||
Exchange differences | (2 | ) | (6 | ) | 5 | (2 | ) | |||||||||
Income statement charge | 29 | 14 | 33 | 29 | ||||||||||||
Utilised | (25 | ) | (20 | ) | (15 | ) | (25 | ) | ||||||||
Sale of businesses | (1 | ) | — | (3 | ) | (1 | ) | |||||||||
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53 | 52 | 73 | 53 | |||||||||||||
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(b) Trade and other receivables
2015 | 2014 | 2016 | 2015 | |||||||||||||||||||||||||||||
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 | 1,933 | — | 2,004 | — | 2,154 | 1 | 1,933 | — | ||||||||||||||||||||||||
Interest receivable | 23 | — | 20 | — | 20 | — | 23 | — | ||||||||||||||||||||||||
Other receivables | 297 | 38 | 286 | 94 | 281 | 36 | 297 | 38 | ||||||||||||||||||||||||
Prepayments | 146 | 8 | 142 | 13 | 189 | 9 | 146 | 8 | ||||||||||||||||||||||||
Accrued income | 36 | — | 47 | — | 42 | — | 36 | — | ||||||||||||||||||||||||
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2,435 | 46 | 2,499 | 107 | 2,686 | 46 | 2,435 | 46 | |||||||||||||||||||||||||
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At 30 June 2015,2016, approximately 14%13%, 19%20% and 10%11% of the group’s trade receivables of £1,933£2,155 million are due from counterparties based in the United Kingdom, the United States and India, respectively.
As at 30 June 2014 non-current other receivables included £87 million in respect of the assessment of excise duties made by the Korean customs authorities (see note 18(c)).
222
Financial statements (continued)
The aged analysis of trade receivables, net of allowance,allowances, is as follows:
2015 £ million | 2014 £ million | 2016 £ million | 2015 £ million | |||||||||||||
Not overdue | 1,806 | 1,895 | 2,012 | 1,806 | ||||||||||||
Overdue 1 – 30 days | 47 | 46 | 60 | 47 | ||||||||||||
Overdue 31 – 60 days | 22 | 22 | 25 | 22 | ||||||||||||
Overdue 61 – 90 days | 11 | 10 | 16 | 11 | ||||||||||||
Overdue 91 – 180 days | 32 | 16 | 21 | 32 | ||||||||||||
Overdue more than 180 days | 15 | 15 | 21 | 15 | ||||||||||||
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1,933 | 2,004 | 2,155 | 1,933 | |||||||||||||
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243
Financial statements (continued)
Trade and other receivables are disclosed net of allowance for doubtful debts, an analysis of which is as follows:
2015 £ million | 2014 £ million | 2016 £ million | 2015 £ million | |||||||||||||
Balance at beginning of the year | 63 | 65 | 71 | 63 | ||||||||||||
Exchange differences | (6 | ) | (3 | ) | 5 | (6 | ) | |||||||||
Income statement charge | 21 | 10 | 15 | 21 | ||||||||||||
Written off | (7 | ) | (9 | ) | (8 | ) | (7 | ) | ||||||||
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71 | 63 | 83 | 71 | |||||||||||||
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(c) Trade and other payables
2015 | 2014 | 2016 | 2015 | |||||||||||||||||||||||||||||
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 | 883 | — | 903 | — | 916 | — | 883 | — | ||||||||||||||||||||||||
Interest payable | 77 | — | 101 | — | 81 | — | 77 | — | ||||||||||||||||||||||||
Tax and social security excluding income tax | 546 | 5 | 494 | 3 | 605 | 3 | 546 | 5 | ||||||||||||||||||||||||
Other payables | 524 | 40 | 494 | 81 | 680 | 37 | 524 | 40 | ||||||||||||||||||||||||
Accruals | 879 | 9 | 785 | — | 1,056 | 9 | 879 | 9 | ||||||||||||||||||||||||
Deferred income | 34 | 15 | 23 | 10 | 34 | 21 | 34 | 15 | ||||||||||||||||||||||||
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2,943 | 69 | 2,800 | 94 | 3,372 | 70 | 2,943 | 69 | |||||||||||||||||||||||||
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Interest payable at 30 June 20152016 includes interest on non-derivative financial instruments of £68£73 million (2014(2015 – £91£68 million).
(d) Provisions
Thalidomide £ million | Restructuring £ million | Other £ million | Total £ million | Thalidomide £ million | Restructuring £ million | Other £ million | Total £ million | |||||||||||||||||||||||||
At 30 June 2014 | 200 | 88 | 97 | 385 | ||||||||||||||||||||||||||||
At 30 June 2015 | 191 | 49 | 103 | 343 | ||||||||||||||||||||||||||||
Exchange differences | (2 | ) | (2 | ) | 4 | — | 2 | — | 20 | 22 | ||||||||||||||||||||||
Provisions charged during the year | — | 11 | 118 | 129 | — | — | 100 | 100 | ||||||||||||||||||||||||
Provisions utilised during the year | (19 | ) | (46 | ) | (118 | ) | (183 | ) | (11 | ) | (33 | ) | (33 | ) | (77 | ) | ||||||||||||||||
Transfers | — | (2 | ) | 2 | — | (2 | ) | (10 | ) | 4 | (8 | ) | ||||||||||||||||||||
Unwinding of discounts | 12 | — | — | 12 | 10 | — | — | 10 | ||||||||||||||||||||||||
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At 30 June 2015 | 191 | 49 | 103 | 343 | ||||||||||||||||||||||||||||
At 30 June 2016 | 190 | 6 | 194 | 390 | ||||||||||||||||||||||||||||
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Current liabilities | 13 | 47 | 45 | 105 | 10 | 5 | 122 | 137 | ||||||||||||||||||||||||
Non-current liabilities | 178 | 2 | 58 | 238 | 180 | 1 | 72 | 253 | ||||||||||||||||||||||||
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191 | 49 | 103 | 343 | 190 | 6 | 194 | 390 | |||||||||||||||||||||||||
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(a) Provisions have been established in respect of the discounted value of the group’s commitment to the UK Thalidomide Trust. These will be utilised over the period of the commitments up to 2037.
223
Financial statements (continued)
(b) The group is engaged inimplemented a number of restructuring programmes, which involve the rationalisation of certain operations around the world. EmployeeAs at 30 June 2016 there were provisions for certain costs in respect of employee charges, incremental costs in respect of service contract and information systems infrastructure charges, in connection with the programmesoutstanding provisions are recognised in the restructuring provision, which is expected to be substantially utilised by 30 June 20162017 (see note 4(a)-(c))4).
(c) The largest itemitems in other provisions isare £67 million in respect of the disposal of the wines business in North America and UK based Percy Fox businesses includes a provision for the settlement of a guarantee given in respect of the lease payments due to the lessor of the vineyards and £48 million (2015 – £44 million (2014 – £42 million) in respect of employee deferred compensation plans which will be utilised when employees leave the group.
224244
Financial statements (continued)
RISK MANAGEMENT AND CAPITAL STRUCTURE
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. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Accounting policies
Financial assets and liabilities are initially recorded at fair value including 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: loans and receivables, available-for-sale investments, financial assets and liabilities at fair value through profit and loss and other financial liabilities at amortised cost.
The accounting policies foravailable-for-sale investments andloans are described in note 12, fortrade and other receivables in note 14 and forcash and cash equivalents in note 16.
Financial assets and liabilities at fair value through profit or loss include derivative assets and liabilities. Where financial assets or liabilities are eligible to be carried at either amortised cost or fair value the group does not apply the fair value option.
Derivative financial instruments are carried at fair value using a discounted cash flow technique 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.
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 effectiveness of such hedges is assessed at inception and at least on a quarterly basis, using prospective and retrospective testing. Methods used for testing effectiveness include dollar offset, critical terms, regression analysis and hypothetical derivative method.
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 is de-designated, 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.
225
Financial statements (continued)
Cash flow hedges are used to hedge the foreign currency risk of highly probable future foreign currency cash flows, 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 or interest exposure affects the income statement.
245
Financial statements (continued)
Net investment hedges take the form of either foreign currency borrowings or derivatives. Foreign exchange differences arising on translation of net investments are recorded in other comprehensive income and included in the exchange reserve. Liabilities used as hedging instruments are revalued at closing exchange rates and the resulting gains or losses are also recognised in other comprehensive income to the extent that they are effective, with any ineffectiveness taken to the income statement. Foreign exchange 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.
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-approvedboard approved policies and guidelines, which are recommended and monitored by the finance committee, chaired by the chief financial officer.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-approvedboard approved strategies. Transactions arising from the application of this flexibility may give riseare carried at fair value, gains or losses are taken to exposures different from the defined benchmark levels thatincome statement as they arise and are separately monitored on a daily basis using Value at Risk analysis. These transactions are carried at fair value and gains or losses are taken to the income statement as they arise. In the year ended 30 June 20152016 and 30 June 20142015 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 committee receives a monthly reportsreport on the key activities of the treasury department, includingwhich would identify any exposures differentwhich differ from the defined benchmarks.benchmarks, should 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. Diageo expects hedges entered into to continue to be effective and therefore does not expect the impact of ineffectiveness on the consolidated income statement to be material.
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. The group’s policy is to maintain total net investment Value at Risk below £1.5 billion, where Value at Risk is defined as the maximum amount of loss not exceeded over a one year period with a 95% probability confidence level.
BorrowingsFollowing an internal restructuring foreign currency borrowings and financial derivatives designated in net investment hedge relationships amountedincreased to £3,681£6,787 million as at 30 June 2015 (20142016 (2015 – £3,681 million; 2014 – £3,749 million; 2013 – £5,539 million).
226
Financial statements (continued)
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 group targeting 75% coverage for the current financial year and up to 18 months for other currency pairs. The group’s exposure to foreign currency risk arising on forecasted transactions is managed using forward agreements.
246
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 derivatives. These practices aim to minimise the group’s net finance charges with acceptable year on yearyear-on-year volatility. To facilitate operational efficiency and effective hedge accounting, the group’s policy is to maintain fixed rate borrowings within a band of 40% to 60% of forecast net borrowings. For these calculations, net borrowings exclude interest rate related fair value adjustments. The majority of Diageo’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 is as follows:
2015 | 2014 | 2016 | 2015 | |||||||||||||||||||||||||||||
£ million | % | £ million | % | £ million | % | £ million | % | |||||||||||||||||||||||||
Fixed rate | (4,564 | ) | 48 | (4,922 | ) | 56 | 4,103 | 47 | 4,564 | 48 | ||||||||||||||||||||||
Floating rate(i) | (4,818 | ) | 51 | (3,757 | ) | 42 | 4,738 | 55 | 4,818 | 51 | ||||||||||||||||||||||
Impact of financial derivatives and fair value adjustments | (145 | ) | 1 | (171 | ) | 2 | (206 | ) | (2 | ) | 145 | 1 | ||||||||||||||||||||
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Net borrowings | (9,527 | ) | 100 | (8,850 | ) | 100 | 8,635 | 100 | 9,527 | 100 | ||||||||||||||||||||||
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(i) | The floating rate portion of net borrowings includes cash and cash equivalents, collaterals, floating rate loans and bonds, bank overdrafts and finance lease obligations. |
The table below sets out the average monthly net borrowings and effective interest rate:
Average monthly net borrowings | Average monthly net borrowings | Effective interest rate | Average monthly net borrowings | Effective interest rate | ||||||||||||||||||||||||||||||||||||||||
2015 £ million | 2014 £ million | 2013 £ million | 2015 % | 2014 % | 2013 % | |||||||||||||||||||||||||||||||||||||||
2016 £ million | 2016 £ million | 2015 £ million | 2014 £ million | 2016 % | 2015 % | 2014 % | ||||||||||||||||||||||||||||||||||||||
10,459 | 9,174 | 8,267 | 3.5 | 3.8 | 4.9 | 9,245 | 10,459 | 9,174 | 3.3 | 3.5 | 3.8 |
(1) For this calculation, net interest charge excludes fair value adjustments to derivative financial instruments and borrowings and average monthly net borrowings includes the impact of interest rate swaps that are no longer in a hedge relationship but excludes the market value adjustment for cross currency interest rate swaps.
(c) Commodity price risk
The group is exposed to 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 total commodity exposure Value at Risk below 75bps of forecast gross margin in any given financial year. Where derivative contracts are used the commodity price risk exposure is hedged up to 1824 months forecastedforecast volume usage with up to 80% coverage. Where derivative contracts are used the group manages exposures principally through exchange-traded futures, forwards, swaps and options.
227
Financial statements (continued)
futures.
(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 20152016 and 30 June 2014,2015, for each class of financial instruments with all other variables remaining constant. The sensitivity analysis excludes the impact of market risks on the net post employment benefit liability 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.
247
Financial statements (continued)
The results of the sensitivity analysis should not be considered as projections of likely future events, gains or losses as actual results in the future may differ materially due to developments in the global financial markets which may cause fluctuations in interest and exchange rates to vary from the hypothetical amounts disclosed in the table below.
Impact on income statement gain/(loss) | Impact on consolidated comprehensive income gain/(loss)(i)(ii) | Impact on income statement gain/(loss) | Impact on consolidated comprehensive income gain/(loss)(i)(ii) | |||||||||||||||||||||||||||||
2015 £ million | 2014 £ million | 2015 £ million | 2014 £ million | 2016 £ million | 2015 £ million | 2016 £ million | 2015 £ million | |||||||||||||||||||||||||
0.5% decrease in interest rates | (20 | ) | (8 | ) | (16 | ) | (5 | ) | (24 | ) | (20 | ) | (8 | ) | (16 | ) | ||||||||||||||||
0.5% increase in interest rates | 20 | 9 | 17 | 6 | 24 | 20 | 9 | 17 | ||||||||||||||||||||||||
10% weakening of sterling | (48 | ) | (43 | ) | (624 | ) | (664 | ) | (26 | ) | (48 | ) | (641 | ) | (624 | ) | ||||||||||||||||
10% strengthening of sterling | 40 | 35 | 512 | 545 | 21 | 40 | 525 | 512 |
(i) | The |
(ii) |
(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 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.
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.board. Counterparties are predominantly limited to major 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 Boardboard 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 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.
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 2015,2016, the collateral held under these agreements amounted to $104 million (£78 million) and €73 million (£61 million) (2015 – $82 million (£52 million) and €34 million (£24 million) (2014 – $65 million (£38 million) and €26 million (£21 million)).
228
Financial statements (continued)
Diageo annually reviews the credit limits applied and regularly monitors the counterparties’ credit quality reflecting market credit conditions.
Business related credit risk
Loan, trade and other receivables exposures are managed locally in the operating units where they arise and credit limits are set as deemed appropriate for the customer. 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.
248
Financial statements (continued)
(f) Liquidity risk
Liquidity risk is the risk that Diageo may encounter 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 on a floating rate basis, rates of each cash flow until maturity of the instruments are calculated based on the forward yield curve prevailing at 30 June 20152016 and 30 June 2014.2015. The gross cash flows of derivative contracts are presented for the purposes of this table and financial assets and liabilities are presented gross in the statement of financial position, although in practice, the group uses netting arrangements to reduce its liquidity requirements on these instruments.
Contractual cash flows
Due within 1 year £ million | Due between 1 and 3 years £ million | Due between 3 and 5 years £ million | Due after 5 years £ million | Total £ million | Carrying amount at balance sheet date £ million | |||||||||||||||||||||||||||||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
Borrowings(i) | (2,058 | ) | (2,853 | ) | (558 | ) | (4,621 | ) | (10,090 | ) | (10,129 | ) | ||||||||||||||||||||||||||||||||||||
Interest on borrowings(i),(iii) | (358 | ) | (449 | ) | (360 | ) | (1,415 | ) | (2,582 | ) | (73 | ) | ||||||||||||||||||||||||||||||||||||
Finance lease capital repayments | (29 | ) | (58 | ) | (69 | ) | (86 | ) | (242 | ) | (242 | ) | ||||||||||||||||||||||||||||||||||||
Finance lease future interest payments | (13 | ) | (20 | ) | (13 | ) | (54 | ) | (100 | ) | — | |||||||||||||||||||||||||||||||||||||
Trade and other financial liabilities(ii) | (2,435 | ) | (199 | ) | (8 | ) | (4 | ) | (2,646 | ) | (2,638 | ) | ||||||||||||||||||||||||||||||||||||
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Non-derivative financial liabilities | (4,893 | ) | (3,579 | ) | (1,008 | ) | (6,180 | ) | (15,660 | ) | (13,082 | ) | ||||||||||||||||||||||||||||||||||||
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Gross amount receivable from derivatives | 947 | 153 | 106 | 1,566 | 2,772 | — | ||||||||||||||||||||||||||||||||||||||||||
Gross amount payable on derivatives | (647 | ) | (144 | ) | (73 | ) | (1,130 | ) | (1,994 | ) | — | |||||||||||||||||||||||||||||||||||||
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Derivative instruments(iii) | 300 | 9 | 33 | 436 | 778 | 498 | ||||||||||||||||||||||||||||||||||||||||||
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 |
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2015 | ||||||||||||||||||||||||||||||||||||||||||||||||
Borrowings(i) | (1,920 | ) | (2,556 | ) | (968 | ) | (4,365 | ) | (9,809 | ) | (9,838 | ) | (1,920 | ) | (2,556 | ) | (968 | ) | (4,365 | ) | (9,809 | ) | (9,838 | ) | ||||||||||||||||||||||||
Interest on borrowings(i),(iii) | (340 | ) | (479 | ) | (334 | ) | (1,434 | ) | (2,587 | ) | (68 | ) | (340 | ) | (479 | ) | (334 | ) | (1,434 | ) | (2,587 | ) | (68 | ) | ||||||||||||||||||||||||
Finance lease capital repayments | (38 | ) | (50 | ) | (70 | ) | (104 | ) | (262 | ) | (262 | ) | (38 | ) | (50 | ) | (70 | ) | (104 | ) | (262 | ) | (262 | ) | ||||||||||||||||||||||||
Finance lease future interest payments | (13 | ) | (19 | ) | (16 | ) | (23 | ) | (71 | ) | — | (13 | ) | (19 | ) | (16 | ) | (23 | ) | (71 | ) | — | ||||||||||||||||||||||||||
Trade and other financial liabilities(ii) | (2,172 | ) | (54 | ) | (143 | ) | — | (2,369 | ) | (2,353 | ) | (2,172 | ) | (54 | ) | (143 | ) | — | (2,369 | ) | (2,353 | ) | ||||||||||||||||||||||||||
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Non-derivative financial liabilities | (4,483 | ) | (3,158 | ) | (1,531 | ) | (5,926 | ) | (15,098 | ) | (12,521 | ) | (4,483 | ) | (3,158 | ) | (1,531 | ) | (5,926 | ) | (15,098 | ) | (12,521 | ) | ||||||||||||||||||||||||
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Gross amount receivable from derivatives | 97 | 478 | 176 | 1,360 | 2,111 | — | 97 | 478 | 176 | 1,360 | 2,111 | — | ||||||||||||||||||||||||||||||||||||
Gross amount payable on derivatives | (162 | ) | (374 | ) | (110 | ) | (1,154 | ) | (1,800 | ) | — | (162 | ) | (374 | ) | (110 | ) | (1,154 | ) | (1,800 | ) | — | ||||||||||||||||||||||||||
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Derivative instruments | (65 | ) | 104 | 66 | 206 | 311 | 131 | |||||||||||||||||||||||||||||||||||||||||
Derivative instruments(iii) | (65 | ) | 104 | 66 | 206 | 311 | 131 | |||||||||||||||||||||||||||||||||||||||||
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| �� |
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2014 (restated) | ||||||||||||||||||||||||||||||||||||||||||||||||
Borrowings(i) | (1,564 | ) | (1,891 | ) | (1,905 | ) | (3,806 | ) | (9,166 | ) | (9,214 | ) | ||||||||||||||||||||||||||||||||||||
Interest on borrowings(i),(iii) | (349 | ) | (482 | ) | (345 | ) | (1,522 | ) | (2,698 | ) | (91 | ) | ||||||||||||||||||||||||||||||||||||
Finance lease capital repayments | (32 | ) | (59 | ) | (48 | ) | (152 | ) | (291 | ) | (291 | ) | ||||||||||||||||||||||||||||||||||||
Finance lease future interest payments | (15 | ) | (25 | ) | (19 | ) | (29 | ) | (88 | ) | — | |||||||||||||||||||||||||||||||||||||
Trade and other financial liabilities(ii),(iv) | (2,066 | ) | (185 | ) | (8 | ) | (3 | ) | (2,262 | ) | (2,223 | ) | ||||||||||||||||||||||||||||||||||||
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Non-derivative financial liabilities | (4,026 | ) | (2,642 | ) | (2,325 | ) | (5,512 | ) | (14,505 | ) | (11,819 | ) | ||||||||||||||||||||||||||||||||||||
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Gross amount receivable from derivatives | 246 | 528 | 60 | 719 | 1,553 | — | ||||||||||||||||||||||||||||||||||||||||||
Gross amount payable on derivatives | (183 | ) | (449 | ) | (75 | ) | (621 | ) | (1,328 | ) | — | |||||||||||||||||||||||||||||||||||||
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Derivative instruments | 63 | 79 | (15 | ) | 98 | 225 | 164 | |||||||||||||||||||||||||||||||||||||||||
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(i) | For the purpose of these tables above, borrowings are defined as gross borrowings excluding finance lease liabilities and fair value of derivative instruments as disclosed in note 16. |
(ii) | Primarily consists of trade and other payables that meet the definition of financial liabilities under IAS 32. |
(iii) | Carrying amount of interest on borrowings and interest on derivatives is included within interest payable in note 14. |
229249
Financial statements (continued)
The group had available undrawn committed bank facilities as follows:
2015 £ million | 2014 £ million | |||||||
Expiring within one year(i) | 688 | 1,535 | ||||||
Expiring between one and two years | — | 632 | ||||||
Expiring after two years | 1,541 | 1,050 | ||||||
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| |||||
2,229 | 3,217 | |||||||
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|
2016 £ million | 2015 £ million | |||||||
Expiring within one year | — | 688 | ||||||
Expiring between one and two years | 470 | — | ||||||
Expiring after two years | 2,072 | 1,541 | ||||||
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2,542 | 2,229 | |||||||
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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). 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.
(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.
Available-for-sale investments at 30 June 2015 comprise shares held in United Breweries Limited categorised as level 1 in hierarchy. Other financial liabilities include an option held by Industrias Licoreras de Guatemala to sell the remaining 50% equity stake in Rum Creations & Products, Inc,Inc. the owner of the Zacapa rum brand, to Diageo, with changes in fair value of this 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. The exercise date of this option is estimated based on forecast future performance and an estimated rate of return.
The option is sensitive to reasonably possible changes in assumptions. If the option is exercised two years earlier or two years later the value of the option will increase and decrease by £17 million and £15 million, respectively. If forecast performance increases or decreases by 10%, the value of the option would increase and decrease by £30 million and £13 million, respectively.
230250
Financial statements (continued)
Available-for-sale investments at 30 June 2015 comprised shares held in United Breweries Limited categorised as level 1 in hierarchy. These shares were sold on 7 July 2015.
The group’s financial assets and liabilities measured at fair value are categorised as follows:
2015 £ million | 2014 £ million | |||||||
Available-for-sale investments (note 12) | 80 | — | ||||||
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| |||||
Unadjusted quoted prices in active markets (Level 1) | 80 | — | ||||||
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| |||||
Derivative assets | 338 | 368 | ||||||
Derivative liabilities | (198 | ) | (194 | ) | ||||
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Valuation techniques based on observable market input (Level 2) | 140 | 174 | ||||||
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Other financial liabilities | (139 | ) | (108 | ) | ||||
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Valuation techniques based on unobservable market input (Level 3) | (139 | ) | (108 | ) | ||||
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The movements in level 3 instruments, measured on a recurring basis, are as follows:
| ||||||||
Other financial liabilities | ||||||||
2015 £ million | 2014 £ million | |||||||
At 1 July | (108 | ) | (115 | ) | ||||
Net losses included in the income statement | (14 | ) | (1 | ) | ||||
Net (losses)/gains included in exchange in other comprehensive income | (11 | ) | 13 | |||||
Net losses included in retained earnings | (9 | ) | (7 | ) | ||||
Settlement of liabilities | 3 | 2 | ||||||
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| |||||
At 30 June | (139 | ) | (108 | ) | ||||
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|
2016 £ million | 2015 £ million | |||||||
Available-for-sale investments | — | 80 | ||||||
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| |||||
Unadjusted quoted prices in active markets (Level 1) | — | 80 | ||||||
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| |||||
Derivative assets | 879 | 338 | ||||||
Derivative liabilities | (373 | ) | (198 | ) | ||||
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| |||||
Valuation techniques based on observable market input (Level 2) | 506 | 140 | ||||||
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| |||||
Other financial liabilities | (165 | ) | (139 | ) | ||||
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| |||||
Valuation techniques based on unobservable market input (Level 3) | (165 | ) | (139 | ) | ||||
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|
|
The movements in level 3 instruments, measured on a recurring basis, are as follows:
Other financial liabilities | ||||||||
2016 £ million | 2015 £ million | |||||||
At 1 July | (139 | ) | (108 | ) | ||||
Net losses included in the income statement | (1 | ) | (14 | ) | ||||
Net losses included in exchange in other comprehensive income | (25 | ) | (11 | ) | ||||
Net losses included in retained earnings | (3 | ) | (9 | ) | ||||
Settlement of liabilities | 3 | 3 | ||||||
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| |||||
At 30 June | (165 | ) | (139 | ) | ||||
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|
There were no transfers between levels during the two years ended 30 June 20152016 and 30 June 2014.2015.
In addition retained earnings comprise £3 million capital injection to Zacapa from Industrias Licoreras de Guatemala.
(h) Results of hedging instruments
In respect of cash flow hedging instruments, a lossgain of £31 million (2015 – £46 million (2014loss; 2014 – £54 million gain; 2013 – £41 million loss)gain) has been recognised in other comprehensive income due to changes in fair value. A loss of £26£66 million has been transferred out of other comprehensive income to other operating expenses and a gain of £84£211 million to other finance charges, respectively (2014(2015 – a loss of £26 million and a gain of £84 million; 2014 – a gain of £54 million and a loss of £88 million; 2013 – a gain of £8 million and £25 million, respectively). to offset the foreign exchange impact on the underlying transactions.
For cash flow hedges of forecast transactions at 30 June 2015,2016, based on year end interest and foreign exchange rates, there is expected to be a loss to the income statement of £9£113 million in 2016financial year 2017 and a gainloss of £15£36 million in 2017.financial year 2018. With respect to hedges of the cash flow risk from a change in forward foreign exchange rates using cross currency interest rate swaps, the retranslation of the related bond principal to closing foreign exchange rates and recognition of interest on the related bonds will affect the income statement in each year until the related bonds mature in 2016, 2036 and 2043. Foreign 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.
The gain on fair value hedging instruments for the year was £16 million (2015 – £11 million (2014gain; 2014 – £8 million gain; 2013 – £3 million loss)gain) and the loss on the hedged items attributable to the hedged risks was £26 million (2015 – £11 million (2014loss; 2014 – £6 million loss; 2013 – £3 million gain)loss).
There was no significant ineffectiveness on net investment hedging during the year ended 30 June 2015.2016.
231251
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 | Loans and receivables and liabilities at amortised cost £ million | Available- for-sale £ million | Not categorised as a financial instrument £ million | Total £ million | Current £ million | Non-current £ million | ||||||||||||||||||||||||||||||||||||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other investments and loans | — | 31 | — | — | 31 | — | 31 | |||||||||||||||||||||||||||||||||||||||||||||||||
Trade and other receivables | — | 2,424 | — | 308 | 2,732 | 2,686 | 46 | |||||||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | — | 1,089 | — | — | 1,089 | 1,089 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives in fair value hedge | 35 | — | — | — | 35 | — | 35 | |||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives in cash flow hedge | 362 | — | — | — | 362 | 130 | 232 | |||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives in net investment hedge | 216 | — | — | — | 216 | 216 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Other instruments at fair value | 266 | — | — | — | 266 | 148 | 118 | |||||||||||||||||||||||||||||||||||||||||||||||||
Finance lease assets | — | 36 | — | — | 36 | 1 | 35 | |||||||||||||||||||||||||||||||||||||||||||||||||
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Total other financial assets | 879 | 36 | — | — | 915 | 495 | 420 | |||||||||||||||||||||||||||||||||||||||||||||||||
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Total financial assets | 879 | 3,580 | — | 308 | 4,767 | 4,270 | 497 | |||||||||||||||||||||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||||||||||||||||
Borrowings(i) | — | (10,129 | ) | — | — | (10,129 | ) | (2,058 | ) | (8,071 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Trade and other payables | — | (2,554 | ) | — | (888 | ) | (3,442 | ) | (3,372 | ) | (70 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Derivatives in cash flow hedge | (148 | ) | — | — | — | (148 | ) | (102 | ) | (46 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Derivatives in net investment hedge | (66 | ) | — | — | — | (66 | ) | (66 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||
Other instruments at fair value | (324 | ) | — | — | — | (324 | ) | (83 | ) | (241 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Finance leases | — | (242 | ) | — | — | (242 | ) | (29 | ) | (213 | ) | |||||||||||||||||||||||||||||||||||||||||||||
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Total other financial liabilities | (538 | ) | (242 | ) | — | — | (780 | ) | (280 | ) | (500 | ) | ||||||||||||||||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||||||||||||||||
Total financial liabilities | (538 | ) | (12,925 | ) | — | (888 | ) | (14,351 | ) | (5,710 | ) | (8,641 | ) | |||||||||||||||||||||||||||||||||||||||||||
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|
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Total net financial assets/(liabilities) | 341 | (9,345 | ) | — | (580 | ) | (9,584 | ) | (1,440 | ) | (8,144 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Fair value through income statement £ million | Loans and receivables and liabilities at amortised cost £ million | Available- for-sale £ million | Not categorised as a financial instrument £ million | Total £ million | Current £ million | Non-current £ million |
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| |||||||||||||||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other investments and loans | — | 29 | 80 | — | 109 | — | 109 | — | 29 | 80 | — | 109 | — | 109 | ||||||||||||||||||||||||||||||||||||||||||
Trade and other receivables | — | 2,184 | — | 297 | 2,481 | 2,435 | 46 | — | 2,184 | — | 297 | 2,481 | 2,435 | 46 | ||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | — | 472 | — | — | 472 | 472 | — | — | 472 | — | — | 472 | 472 | — | ||||||||||||||||||||||||||||||||||||||||||
Derivatives in fair value hedge | 19 | — | — | — | 19 | — | 19 | 19 | — | — | — | 19 | — | 19 | ||||||||||||||||||||||||||||||||||||||||||
Derivatives in cash flow hedge | 186 | — | — | — | 186 | 21 | 165 | 186 | — | — | — | 186 | 21 | 165 | ||||||||||||||||||||||||||||||||||||||||||
Derivatives in net investment hedge | 11 | — | — | — | 11 | 8 | 3 | 11 | — | — | — | 11 | 8 | 3 | ||||||||||||||||||||||||||||||||||||||||||
Other instruments at fair value | 122 | — | — | — | 122 | 17 | 105 | 122 | — | — | — | 122 | 17 | 105 | ||||||||||||||||||||||||||||||||||||||||||
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|
| |||||||||||||||||||||||||||||||||||||||||||
Total other financial assets | 338 | — | — | — | 338 | 46 | 292 | 338 | — | — | — | 338 | 46 | 292 | ||||||||||||||||||||||||||||||||||||||||||
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|
| |||||||||||||||||||||||||||||||||||||||||||
Total financial assets | 338 | 2,685 | 80 | 297 | 3,400 | 2,953 | 447 | 338 | 2,685 | 80 | 297 | 3,400 | 2,953 | 447 | ||||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
Borrowings(i) | — | (9,838 | ) | — | — | (9,838 | ) | (1,921 | ) | (7,917 | ) | — | (9,838 | ) | — | — | (9,838 | ) | (1,921 | ) | (7,917 | ) | ||||||||||||||||||||||||||||||||||
Trade and other payables | — | (2,291 | ) | — | (721 | ) | (3,012 | ) | (2,943 | ) | (69 | ) | — | (2,291 | ) | — | (721 | ) | (3,012 | ) | (2,943 | ) | (69 | ) | ||||||||||||||||||||||||||||||||
Derivatives in cash flow hedge | (51 | ) | — | — | — | (51 | ) | (31 | ) | (20 | ) | (51 | ) | — | — | — | (51 | ) | (31 | ) | (20 | ) | ||||||||||||||||||||||||||||||||||
Derivatives in net investment hedge | (52 | ) | — | — | — | (52 | ) | (52 | ) | — | (52 | ) | — | — | — | (52 | ) | (52 | ) | — | ||||||||||||||||||||||||||||||||||||
Other instruments at fair value | (234 | ) | — | — | — | (234 | ) | (35 | ) | (199 | ) | (234 | ) | — | — | — | (234 | ) | (35 | ) | (199 | ) | ||||||||||||||||||||||||||||||||||
Finance leases | — | (262 | ) | — | — | (262 | ) | (38 | ) | (224 | ) | — | (262 | ) | — | — | (262 | ) | (38 | ) | (224 | ) | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total other financial liabilities | (337 | ) | (262 | ) | — | — | (599 | ) | (156 | ) | (443 | ) | (337 | ) | (262 | ) | — | — | (599 | ) | (156 | ) | (443 | ) | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total financial liabilities | (337 | ) | (12,391 | ) | — | (721 | ) | (13,449 | ) | (5,020 | ) | (8,429 | ) | (337 | ) | (12,391 | ) | — | (721 | ) | (13,449 | ) | (5,020 | ) | (8,429 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total net financial assets/(liabilities) | 1 | (9,706 | ) | 80 | (424 | ) | (10,049 | ) | (2,067 | ) | (7,982 | ) | 1 | (9,706 | ) | 80 | (424 | ) | (10,049 | ) | (2,067 | ) | (7,982 | ) | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other investments and loans | — | 63 | — | — | 63 | — | 63 | |||||||||||||||||||||||||||||||||||||||||||||||||
Trade and other receivables | — | 2,337 | — | 269 | 2,606 | 2,499 | 107 | |||||||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | — | 622 | — | — | 622 | 622 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives in fair value hedge | 8 | — | — | — | 8 | — | 8 | |||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives in cash flow hedge | 182 | — | — | — | 182 | 67 | 115 | |||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives in net investment hedge | 18 | — | — | — | 18 | 16 | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other instruments at fair value | 160 | — | — | — | 160 | 35 | 125 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Total other financial assets | 368 | — | — | — | 368 | 118 | 250 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Total financial assets | 368 | 3,022 | — | 269 | 3,659 | 3,239 | 420 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Borrowings(i) | — | (9,214 | ) | — | — | (9,214 | ) | (1,576 | ) | (7,638 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Trade and other payables | — | (2,253 | ) | — | (641 | ) | (2,894 | ) | (2,800 | ) | (94 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Derivatives in cash flow hedge | (20 | ) | — | — | — | (20 | ) | (6 | ) | (14 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Derivatives in net investment hedge | (67 | ) | — | — | — | (67 | ) | (67 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||
Other instruments at fair value | (215 | ) | — | — | — | (215 | ) | (41 | ) | (174 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Finance leases | — | (291 | ) | — | — | (291 | ) | (32 | ) | (259 | ) | |||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Total other financial liabilities | (302 | ) | (291 | ) | — | — | (593 | ) | (146 | ) | (447 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Total financial liabilities | (302 | ) | (11,758 | ) | — | (641 | ) | (12,701 | ) | (4,522 | ) | (8,179 | ) | |||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Total net financial assets/(liabilities) | 66 | (8,736 | ) | — | (372 | ) | (9,042 | ) | (1,283 | ) | (7,759 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
(i) | Borrowings are defined as gross borrowings excluding finance lease liabilities and the fair value of derivative instruments. |
At 30 June 20152016 and 30 June 2014,2015, the carrying values of cash and cash equivalents, other financial assets and liabilities approximate to fair values. At 30 June 20152016 the fair value of borrowings, based on unadjusted quoted market data, was £10,115£10,709 million (2014 –£9,662(2015 – £10,115 million).
232252
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 businesses 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 a net borrowing to EBITDA leverage of 2.5 – 3.0x,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 – 3.0x.3.0 times. The group regularly assesses its debt and equity capital levels against its stated policy for capital structure. For this calculation net borrowings are adjusted by the pensionnet post employment deficit whilst EBITDA equals operating profit excluding exceptional operating items and depreciation, amortisation and impairment and includes share of after tax results of associates and joint ventures.
16. 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 as being part of a 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.
233253
Financial statements (continued)
Net borrowings are defined as gross borrowings (short term borrowings and long term borrowings plus finance lease liabilities plus interest rate hedging instruments, cross currency interest rate swaps and funding foreign currency forwards and swaps used to manage borrowings) less cash and cash equivalents.
2015 £ million | 2014 £ million | 2016 £ million | 2015 £ million | |||||||||||||
Bank overdrafts | 90 | 90 | 280 | 90 | ||||||||||||
Commercial paper | 354 | 129 | — | 354 | ||||||||||||
Bank and other loans | 444 | 193 | 436 | 444 | ||||||||||||
Credit support obligations | 76 | 59 | 139 | 76 | ||||||||||||
€1,000 million 6.625% bonds due 2014 | — | 800 | ||||||||||||||
US$ 500 million 3.25% bonds due 2015 | — | 292 | ||||||||||||||
US$ 750 million 5.3% bonds due 2015 | 478 | — | — | 478 | ||||||||||||
US$ 750 million 0.625% bonds due 2016 | 477 | — | — | 477 | ||||||||||||
US$ 600 million 5.5% bonds due 2016 | 451 | — | ||||||||||||||
US$ 1,000 million 1.5% bonds due 2017 | 751 | — | ||||||||||||||
Fair value adjustment to borrowings | 2 | 13 | 1 | 2 | ||||||||||||
|
|
|
| |||||||||||||
Borrowings due within one year | 1,921 | 1,576 | 2,058 | 1,921 | ||||||||||||
|
|
|
| |||||||||||||
US$ 750 million 5.3% bonds due 2015 | — | 438 | ||||||||||||||
US$ 750 million 0.625% bonds due 2016 | — | 437 | ||||||||||||||
US$ 600 million 5.5% bonds due 2016 | 382 | 350 | — | 382 | ||||||||||||
US$ 1,000 million 1.5% bonds due 2017 | 635 | 582 | — | 635 | ||||||||||||
US$ 1,250 million 5.75% bonds due 2017 | 795 | 729 | 939 | 795 | ||||||||||||
US$ 650 million 1.125% bonds due 2018 | 412 | 377 | 487 | 412 | ||||||||||||
€ 500 million 1.125% bonds due 2019 | 359 | — | ||||||||||||||
€ 850 million 1.125% bonds due 2019 | 601 | 676 | ||||||||||||||
€500 million 1.125% bonds due 2019 | 421 | 359 | ||||||||||||||
€850 million 1.125% bonds due 2019 | 707 | 601 | ||||||||||||||
US$ 696 million 4.828% bonds due 2020 | 399 | 355 | 488 | 399 | ||||||||||||
US$ 1,000 million 2.875% bonds due 2022 | 633 | 581 | 748 | 633 | ||||||||||||
US$ 300 million 8% bonds due 2022 | 189 | 174 | 224 | 189 | ||||||||||||
US$ 1,350 million 2.625% bonds due 2023 | 855 | 784 | 1,011 | 855 | ||||||||||||
€ 500 million 1.75% bonds due 2024 | 351 | — | ||||||||||||||
€ 850 million 2.375% bonds due 2026 | 597 | 674 | ||||||||||||||
€500 million 1.75% bonds due 2023 | 413 | 351 | ||||||||||||||
€850 million 2.375% bonds due 2026 | 702 | 597 | ||||||||||||||
US$ 400 million 7.45% bonds due 2035 | 255 | 234 | 301 | 255 | ||||||||||||
US$ 600 million 5.875% bonds due 2036 | 378 | 346 | 446 | 378 | ||||||||||||
US$ 500 million 4.25% bonds due 2042 | 315 | 289 | 371 | 315 | ||||||||||||
US$ 500 million 3.875% bonds due 2043 | 312 | 286 | 369 | 312 | ||||||||||||
US$ 200 million 4.85% medium term notes due 2018 | 127 | 117 | 150 | 127 | ||||||||||||
Bank and other loans | 213 | 80 | 184 | 213 | ||||||||||||
Fair value adjustment to borrowings | 109 | 129 | 110 | 109 | ||||||||||||
|
|
|
| |||||||||||||
Borrowings due after one year | 7,917 | 7,638 | 8,071 | 7,917 | ||||||||||||
|
|
|
| |||||||||||||
Total borrowings before derivative financial instruments | 10,129 | 9,838 | ||||||||||||||
Fair value of foreign currency derivatives | (82 | ) | (25 | ) | (612 | ) | (82 | ) | ||||||||
Fair value of interest rate hedging instruments | (19 | ) | (8 | ) | (35 | ) | (19 | ) | ||||||||
Finance lease liabilities | 262 | 291 | 242 | 262 | ||||||||||||
|
|
|
| |||||||||||||
Gross borrowings | 9,999 | 9,472 | 9,724 | 9,999 | ||||||||||||
Less: Cash and cash equivalents(i) | (472 | ) | (622 | ) | ||||||||||||
Less: Cash and cash equivalents | (1,089 | ) | (472 | ) | ||||||||||||
|
|
|
| |||||||||||||
Net borrowings | 9,527 | 8,850 | 8,635 | 9,527 | ||||||||||||
|
|
|
|
(1) | The interest rates shown |
(2) | Bonds |
(3) | Bonds are reported |
(4) | All bonds, medium term notes and commercial paper issued by the group’s wholly owned subsidiaries are fully and unconditionally guaranteed by Diageo plc. |
234254
Financial statements (continued)
Gross borrowings (excluding finance lease liabilities and the fair value ofbefore derivative instruments)financial instruments will mature as follows:
2015 £ million | 2014 £ million | 2013 £ million | 2016 £ million | 2015 £ million | 2014 £ million | |||||||||||||||||||
Within one year | 1,921 | 1,576 | 1,852 | 2,058 | 1,921 | 1,576 | ||||||||||||||||||
Between one and three years | 2,607 | 1,894 | 2,220 | 2,896 | 2,607 | 1,894 | ||||||||||||||||||
Between three and five years | 970 | 1,972 | 2,509 | 537 | 970 | 1,972 | ||||||||||||||||||
Beyond five years | 4,340 | 3,772 | 3,488 | 4,638 | 4,340 | 3,772 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
9,838 | 9,214 | 10,069 | 10,129 | 9,838 | 9,214 | |||||||||||||||||||
|
|
|
|
|
|
During the year the following bonds were issued and repaid:
2015 £ million | 2014 £ million | 2013 £ million | 2016 £ million | 2015 £ million | 2014 £ million | |||||||||||||||||||
Issued | ||||||||||||||||||||||||
€ denominated | 791 | 1,378 | — | — | 791 | 1,378 | ||||||||||||||||||
US$ denominated | — | — | 2,100 | — | — | — | ||||||||||||||||||
Repaid | ||||||||||||||||||||||||
€ denominated | (792 | ) | (983 | ) | — | — | (792 | ) | (983 | ) | ||||||||||||||
US$ denominated | (330 | ) | (488 | ) | (869 | ) | (1,003 | ) | (330 | ) | (488 | ) | ||||||||||||
£ denominated(i) | (370 | ) | — | — | — | (370 | ) | — | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
(701 | ) | (93 | ) | 1,231 | (1,003 | ) | (701 | ) | (93 | ) | ||||||||||||||
|
|
|
|
|
|
(i) |
(a) Reconciliation of movement in net borrowings
2015 £ million | 2014 £ million | 2016 £ million | 2015 £ million | |||||||||||||
At beginning of the year | 8,850 | 8,403 | 9,527 | 8,850 | ||||||||||||
Net decrease in cash and cash equivalents before exchange | 77 | 921 | ||||||||||||||
Net decrease in bonds and other borrowings | (315 | ) | (157 | ) | ||||||||||||
Net (increase)/decrease in cash and cash equivalents before exchange | (343 | ) | 77 | |||||||||||||
Net (increase)/decrease in bonds and other borrowings | (1,236 | ) | (315 | ) | ||||||||||||
|
|
|
| |||||||||||||
Change in net borrowings from cash flows | (238 | ) | 764 | (1,579 | ) | (238 | ) | |||||||||
Exchange differences on net borrowings | 7 | (349 | ) | 725 | 7 | |||||||||||
Borrowings on acquisition of businesses | 869 | — | — | 869 | ||||||||||||
Borrowings on disposal of businesses | (14 | ) | — | |||||||||||||
Other non-cash items | 39 | 32 | (24 | ) | 39 | |||||||||||
|
|
|
| |||||||||||||
Net borrowings at end of the year | 9,527 | 8,850 | 8,635 | 9,527 | ||||||||||||
|
|
|
|
255
Financial statements (continued)
(b) Analysis of net borrowings by currency
2015 | 2014 | 2016 | 2015 | |||||||||||||||||||||||||||||
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(i) £ million | Cash and cash equivalents £ million | Gross borrowings(i) £ million | |||||||||||||||||||||||||
US dollar | 35 | (2,759 | ) | — | (956 | ) | 503 | (3,247 | ) | 35 | (2,759 | ) | ||||||||||||||||||||
Euro | 44 | (1,410 | ) | 48 | (1,725 | ) | 61 | (2,034 | ) | 44 | (1,410 | ) | ||||||||||||||||||||
Sterling | 28 | (5,200 | ) | 26 | (6,148 | ) | ||||||||||||||||||||||||||
Sterling(ii) | 66 | (3,980 | ) | 28 | (5,200 | ) | ||||||||||||||||||||||||||
Indian rupee | 13 | (486 | ) | 14 | (39 | ) | 37 | (418 | ) | 13 | (486 | ) | ||||||||||||||||||||
Nigerian naira | 13 | (84 | ) | 16 | (76 | ) | ||||||||||||||||||||||||||
Turkish lira(ii) | 169 | (4 | ) | 4 | (67 | ) | ||||||||||||||||||||||||||
Korean won | 80 | — | 208 | (243 | ) | 35 | — | 80 | — | |||||||||||||||||||||||
Nigerian naira | 16 | (76 | ) | 19 | (134 | ) | ||||||||||||||||||||||||||
Turkish lira | 4 | (67 | ) | 6 | (145 | ) | ||||||||||||||||||||||||||
Venezuelan bolivar | 9 | — | 72 | — | ||||||||||||||||||||||||||||
Brazilian real | 30 | (2 | ) | 16 | (2 | ) | ||||||||||||||||||||||||||
Chinese Yuan | 51 | (7 | ) | 28 | 7 | |||||||||||||||||||||||||||
Other | 243 | (1 | ) | 229 | (82 | ) | 124 | 52 | 208 | (6 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total | 472 | (9,999 | ) | 622 | (9,472 | ) | 1,089 | (9,724 | ) | 472 | (9,999 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
(i) | The analysis of group’s gross borrowings includes foreign currency forwards and swaps and finance leases. |
235
Financial statements (continued)
(ii) | As at 30 June 2016 includes £32 million (Sterling) and £162 million (Turkish lira) cash and cash equivalents in cash-pooling arrangements. See note 1(f). |
17. 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 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 financial 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 2015, 30 June 2014 and 30 June 2013 | 2,754 | 797 |
Number of shares million | Nominal value £ million | |||||||
At 30 June 2016, 30 June 2015 and 30 June 2014 | 2,754 | 797 |
(b) Hedging and exchange reserve
At 30 June 2015 the hedging reserve and exchange reserve comprised a credit of £21 million and a deficit of £1,173 million, respectively (2014 – a credit of £107 million and a deficit of £1,010 million, respectively; 2013 – a credit of £17 million and a deficit of £9 million, respectively).
Hedging reserve £ million | Exchange reserve £ million | Total £ million | ||||||||||
At 30 June 2013 | 17 | (9 | ) | 8 | ||||||||
Other comprehensive income | 90 | (1,001 | ) | (911 | ) | |||||||
|
|
|
|
|
| |||||||
At 30 June 2014 | 107 | (1,010 | ) | (903 | ) | |||||||
Other comprehensive income | (86 | ) | (163 | ) | (249 | ) | ||||||
|
|
|
|
|
| |||||||
At 30 June 2015 | 21 | (1,173 | ) | (1,152 | ) | |||||||
Other comprehensive income | (111 | ) | 742 | 631 | ||||||||
|
|
|
|
|
| |||||||
At 30 June 2016 | (90 | ) | (431 | ) | (521 | ) | ||||||
|
|
|
|
|
|
256
Financial statements (continued)
(c) Own shares
Movements in own shares
Number of shares million | Purchase consideration £ million | |||||||||||||||
At 30 June 2012 | 259 | 2,257 | ||||||||||||||
Share trust arrangements | (6 | ) | (50 | ) | ||||||||||||
Shares call options exercised | 2 | 13 | ||||||||||||||
Shares purchased | 6 | 125 | ||||||||||||||
Shares sold to employees | — | (1 | ) | |||||||||||||
Shares used to satisfy options | (10 | ) | (112 | ) | ||||||||||||
|
| Number of shares million | Purchase consideration £ million | |||||||||||||
At 30 June 2013 | 251 | 2,232 | 251 | 2,232 | ||||||||||||
Share trust arrangements | (3 | ) | (42 | ) | (3 | ) | (42 | ) | ||||||||
Shares call options exercised(i) | 7 | 68 | 7 | 68 | ||||||||||||
Shares purchased | 7 | 138 | 7 | 138 | ||||||||||||
Shares sold to employees | — | (1 | ) | — | (1 | ) | ||||||||||
Shares used to satisfy options | (9 | ) | (115 | ) | (9 | ) | (115 | ) | ||||||||
|
|
|
| |||||||||||||
At 30 June 2014 | 253 | 2,280 | 253 | 2,280 | ||||||||||||
Share trust arrangements | (2 | ) | (18 | ) | (2 | ) | (18 | ) | ||||||||
Shares purchased | 4 | 70 | 4 | 70 | ||||||||||||
Shares used to satisfy options | (7 | ) | (104 | ) | (7 | ) | (104 | ) | ||||||||
|
|
|
| |||||||||||||
At 30 June 2015 | 248 | 2,228 | 248 | 2,228 | ||||||||||||
Share trust arrangements | (1 | ) | (6 | ) | ||||||||||||
Shares purchased | 2 | 42 | ||||||||||||||
Shares used to satisfy options | (5 | ) | (75 | ) | ||||||||||||
|
|
|
| |||||||||||||
At 30 June 2016 | 244 | 2,189 | ||||||||||||||
|
|
(i) | Includes the fair value of foreign currency denominated call options exercised. |
236
Financial statements (continued)
Share trust arrangements
At 30 June 20152016 the employee share trusts owned 87 million of ordinary shares in Diageo plc at a cost of £119£113 million and market value of £155 million (2015 – 8 million shares at a cost of £119 million, market value £149 million (2014million; 2014 – 10 million shares at a cost of £137 million, market value £181 million; 2013 – 7 million shares at a cost of £111 million, market value £126 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 1823 September 20142015 to purchase a maximum of 251,215,000251,514,000 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 1722 December 2015,2016, if earlier.
257
Financial statements (continued)
During the year ended 30 June 2015,2016, the company purchased 42 million ordinary shares (including shares acquired through call option exercises), nominal value of £1 million (2014(2015 – 4 million ordinary shares, nominal value of £1 million; 2014 – 14 million ordinary shares, nominal value of £4 million; 2013 – 8 million ordinary shares, nominal value of £2 million), representing approximately 0.1% (2014(2015 – 0.5%0.1%; 20132014 – 0.3%0.5%) of the issued ordinary share capital (excluding treasury shares).
Shares were either directly granted to employees as part of employee share schemes or held as treasury shares and used to hedge share scheme grants to employees during the course of the year.
The aggregate consideration paid for purchase of own shares was £53 million (excluding expenses) in the year ended 30 June 2016. The annual purchase includes 617,840 shares for £11 million purchased at an average price of 1713 pence for the purpose of satisfying share awards made under the company’s share incentive plans, the cost of which was charged directly to the consolidated income statement. The monthly breakdown of shares purchased and the average price paid per share (excluding expenses) for the year ended 30 June 20152016 were as follows:
Calendar month | Number of shares purchased | Average price paid pence | Authorised purchases unutilised at month end | |||||||||
September 2014(i) | 1,698,461 | 1781 | 249,516,539 | |||||||||
October 2014 | 636,883 | 1766 | 248,879,656 | |||||||||
March 2015 | 1,801,230 | 1864 | 247,078,426 | |||||||||
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Total | 4,136,574 | 1815 | 247,078,426 | |||||||||
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Calendar month | Number of shares purchased | Average price paid pence | Authorised purchases unutilised at month end | |||||||||
September 2015 | 2,719,851 | 1737 | 248,794,149 | |||||||||
March 2016 | 295,510 | 1872 | 248,498,639 | |||||||||
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Total | 3,015,361 | 1750 | 248,498,639 | |||||||||
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(d) Dividends
2015 £ million | 2014 £ million | 2013 £ million | ||||||||||
Amounts recognised as distributions to equity shareholders in the year | ||||||||||||
Final dividend for the year ended 30 June 2014 32.0 pence per share (2013 — 29.3 pence; 2012 — 26.9 pence) | 801 | 735 | 673 | |||||||||
Interim dividend for the year ended 30 June 2015 21.5 pence per share (2014 — 19.7 pence; 2013 — 18.1 pence) | 540 | 493 | 452 | |||||||||
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1,341 | 1,228 | 1,125 | ||||||||||
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2016 £ million | 2015 £ million | 2014 £ million | ||||||||||
Amounts recognised as distributions to equity shareholders in the year | ||||||||||||
Final dividend for the year ended 30 June 2015 | ||||||||||||
34.9 pence per share (2014 – 32.0 pence; 2013 – 29.3 pence) | 876 | 801 | 735 | |||||||||
Interim dividend for the year ended 30 June 2016 | ||||||||||||
22.6 pence per share (2015 – 21.5 pence; 2014 – 19.7 pence) | 567 | 540 | 493 | |||||||||
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1,443 | 1,341 | 1,228 | ||||||||||
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The proposed final dividend of £ 875£918 million (34.9(36.6 pence per share) for the year ended 30 June 20152016 was approved by the boardBoard of directorsDirectors on 2927 July 2015.2016. 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.
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Financial statements (continued)
(e) Non-controlling interests
Diageo consolidatedconsolidates USL, a company incorporated in India, with a 43.91% non-controlling interests from 2 July 2014. Diageo ownsinterest and has a 50% controlling interest (2014(2015 – 50%) in Ketel One Worldwide B.V. (Ketel One), a company incorporated in the Netherlands. All other consolidated subsidiaries are fully owned or the non-controlling interests are not material.
258
Financial statements (continued)
Summarised financial information for USL, Ketel One and others, after fair value adjustments on acquisition, and the amounts attributable to non-controlling interests are as follows:
2015 | 2014 | 2016 | 2015 | |||||||||||||||||||||||||||||||||||||
USL £ million | Ketel One and others £ million | Total £ million | Total £ million | USL £ million | Ketel One and others £ million | Total £ million | USL £ million | Ketel One and others £ million | Total £ million | |||||||||||||||||||||||||||||||
Income statement | ||||||||||||||||||||||||||||||||||||||||
Sales | 2,363 | 1,627 | 3,990 | 1,534 | 2,460 | 1,563 | 4,023 | 2,363 | 1,627 | 3,990 | ||||||||||||||||||||||||||||||
Net sales | 926 | 1,324 | 2,250 | 1,258 | 873 | 1,265 | 2,138 | 926 | 1,324 | 2,250 | ||||||||||||||||||||||||||||||
(Loss)/profit for the period(i) | (10 | ) | 200 | 190 | (69 | ) | ||||||||||||||||||||||||||||||||||
Other comprehensive income/(loss)(ii) | 50 | 66 | 116 | (239 | ) | |||||||||||||||||||||||||||||||||||
Profit/(loss) for the year | 76 | 175 | 251 | (10 | ) | 200 | 190 | |||||||||||||||||||||||||||||||||
Other comprehensive income(i) | 157 | 242 | 399 | 50 | 66 | 116 | ||||||||||||||||||||||||||||||||||
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Total comprehensive income/(loss) | 40 | 266 | 306 | (308 | ) | |||||||||||||||||||||||||||||||||||
Total comprehensive income | 233 | 417 | 650 | 40 | 266 | 306 | ||||||||||||||||||||||||||||||||||
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Attributable to non-controlling interests | 18 | 131 | 149 | (187 | ) | 102 | 188 | 290 | 18 | 131 | 149 | |||||||||||||||||||||||||||||
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Balance sheet | ||||||||||||||||||||||||||||||||||||||||
Non-current assets(iii) | 2,132 | 2,264 | 4,396 | 2,206 | ||||||||||||||||||||||||||||||||||||
Non-current assets(ii) | 2,289 | 2,536 | 4,825 | 2,132 | 2,264 | 4,396 | ||||||||||||||||||||||||||||||||||
Current assets | 527 | 518 | 1,045 | 525 | 601 | 587 | 1,188 | 527 | 518 | 1,045 | ||||||||||||||||||||||||||||||
Non-current liabilities | (579 | ) | (723 | ) | (1,302 | ) | (757 | ) | (518 | ) | (821 | ) | (1,339 | ) | (579 | ) | (723 | ) | (1,302 | ) | ||||||||||||||||||||
Current liabilities | (580 | ) | (462 | ) | (1,042 | ) | (485 | ) | (639 | ) | (554 | ) | (1,193 | ) | (580 | ) | (462 | ) | (1,042 | ) | ||||||||||||||||||||
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Net assets | 1,500 | 1,597 | 3,097 | 1,489 | 1,733 | 1,748 | 3,481 | 1,500 | 1,597 | 3,097 | ||||||||||||||||||||||||||||||
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Attributable to non-controlling interests | 659 | 826 | 1,485 | 767 | 761 | 889 | 1,650 | 659 | 826 | 1,485 | ||||||||||||||||||||||||||||||
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Cash flow | ||||||||||||||||||||||||||||||||||||||||
Net cash from operating activities | (32 | ) | 314 | 282 | 132 | |||||||||||||||||||||||||||||||||||
Net cash inflow/(outflow) from operating activities | 17 | 228 | 245 | (32 | ) | 314 | 282 | |||||||||||||||||||||||||||||||||
Net cash inflow/(outflow) from investing activities | 388 | (88 | ) | 300 | (68 | ) | 70 | (53 | ) | 17 | 388 | (88 | ) | 300 | ||||||||||||||||||||||||||
Net cash outflow from financing activities | (373 | ) | (196 | ) | (569 | ) | (18 | ) | (67 | ) | (145 | ) | (212 | ) | (373 | ) | (196 | ) | (569 | ) | ||||||||||||||||||||
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Net (decrease)/increase in cash and cash equivalents | (17 | ) | 30 | 13 | 46 | |||||||||||||||||||||||||||||||||||
Net increase in cash and cash equivalents | 20 | 30 | 50 | (17 | ) | 30 | 13 | |||||||||||||||||||||||||||||||||
Exchange differences | 2 | 1 | 3 | 1 | 4 | (5 | ) | (1 | ) | 2 | 1 | 3 | ||||||||||||||||||||||||||||
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Dividends paid to non-controlling interests | — | (72 | ) | (72 | ) | (88 | ) | — | (101 | ) | (101 | ) | — | (72 | ) | (72 | ) | |||||||||||||||||||||||
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(i) |
Other comprehensive |
Ketel One includes the global distribution rights to distribute Ketel One vodka products throughout the world. The carrying value of the distribution rights at 30 June |
(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 20152016 is as follows:
2015 £ million | 2014 £ million | 2013 £ million | 2016 £ million | 2015 £ million | 2014 £ million | |||||||||||||||||||
Executive share award plans | 27 | 30 | 31 | 24 | 27 | 30 | ||||||||||||||||||
Executive share option plans | 4 | 4 | 8 | 3 | 4 | 4 | ||||||||||||||||||
Savings plans | 4 | 3 | 6 | 2 | 4 | 3 | ||||||||||||||||||
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35 | 37 | 45 | 29 | 35 | 37 | |||||||||||||||||||
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238259
Financial statements (continued)
Executive share awards are made under the Diageo 2014 Long Term Incentive plan (DLTIP) from September 2014 onwards. Prior to that, awards were made under the Diageo plc 2009 Executive Long Term Incentive Plan (DELTIP) or, the 2008 Performance Share Plan (PSP), the 2008 Senior Executive Share Option Plan (SESOP) or the 2009 Discretionary Incentive Plan (DIP). 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). Under all of these plans, conditional awards can be delivered in the form of restricted shares or share options at the market value at the time of grant. To date, participants in the Performance shares under the DLTIP (previous PSP) have been granted only with conditional rights to receive shares, whilst under DELTIP both share awards and share options have been made.
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 for a further two-year 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 ADSs (one ADS is equivalent to four ordinary shares).
Performance shares under the DLTIP (previous PSP) are subject to the achievement of three equally weighted performance tests over the three-year performance period;period for the 2013 and 2014 grants these were; 1) a comparison of Diageo’s three-year TSR with a peer group; 2) compound annual growth in organic net sales over three years; 3) total organic operating margin improvement over three years. For awards made in September 2015 or later, the third measure was replaced by one based on cumulative free cash flow over a three-year period, measured at constant exchange rates. Performance share options under the DLTIP (previously SESOP) are subject to the achievement of an earnings per share growth condition over a three-year period. Performance measures and targets are set annually by the remuneration committee.Remuneration Committee. The vesting range is 20% or 25% (for Executive Directors and for other participants respectively) for achieving minimum performance targets, up to 100% for achieving the maximum target level. Retesting of the performance condition is not permitted.
For performance shares under the DLTIP (previous PSP) 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 can be paid in the form of cash or shares.
For the three years ended 30 June 2015,2016, the calculation of the fair value of each share award used the Monte Carlo pricing model and the following weighted average assumptions:
2015 | 2014 | 2013 | 2016 | 2015 | 2014 | |||||||||||||||||||
Risk free interest rate | 1.4% | 1.0% | 0.3% | 1.0% | 1.4% | 1.0% | ||||||||||||||||||
Expected life of the awards | 37 months | 36 months | 36 months | 37 months | 37 months | 36 months | ||||||||||||||||||
Dividend yield | 3.1% | 2.7% | 2.7% | 3.2% | 3.1% | 2.7% | ||||||||||||||||||
Weighted average share price | 1832p | 1970p | 1760p | 1737 p | 1832 p | 1970 p | ||||||||||||||||||
Weighted average fair value of awards granted in the year | 753p | 1147p | 916p | 1058 p | 753 p | 1147 p | ||||||||||||||||||
Number of awards granted in the year | 2.5 million | 2.5 million | 3.1 million | 3.1 million | 2.5 million | 2.5 million | ||||||||||||||||||
Fair value of all awards granted in the year | £19 million | £29 million | £28 million | £33 million | £19 million | £29 million |
Transactions on schemes
Transactions on the executive share award plans for the three years ended 30 June 20152016 were as follows:
2015 Number of awards million | 2014 Number of awards million | 2013 Number of awards million | 2016 Number of awards million | 2015 Number of awards million | 2014 Number of awards million | |||||||||||||||||||
Balance outstanding at 1 July | 9.4 | 11.3 | 12.0 | 7.6 | 9.4 | 11.3 | ||||||||||||||||||
Granted | 2.5 | 2.5 | 3.1 | 3.1 | 2.5 | 2.5 | ||||||||||||||||||
Exercised/awarded | (2.6 | ) | (3.4 | ) | (2.6 | ) | (1.6 | ) | (2.6 | ) | (3.4 | ) | ||||||||||||
Forfeited/expired | (1.7 | ) | (1.0 | ) | (1.2 | ) | (1.9 | ) | (1.7 | ) | (1.0 | ) | ||||||||||||
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Balance outstanding at 30 June | 7.6 | 9.4 | 11.3 | 7.2 | 7.6 | 9.4 | ||||||||||||||||||
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At 30 June 2015, 7.22016, 6.7 million executive share options were exercisable at a weighted average exercise price of 11221391 pence.
239260
Financial statements (continued)
OTHER FINANCIAL INFORMATION
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. 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 estimates and judgements
A judgement is necessary in assessing the likelihood that a claim will succeed, or a liability will arise, and 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.
(a) Guarantees and related matters
As of 30 June 2015,2016, the group has no material guarantees or indemnities outstanding in respect of liabilities of third parties with the exception of the following:parties. The following matters relate to guarantees previously discharged.
Diageo Holdings Netherlands B.V. (DHN) has issued a conditional backstop guarantee to Standard Chartered Bank (Standard Chartered) pursuant to a guarantee commitment agreement (the guarantee agreement)Guarantee Agreement). The guarantee iswas in respect of the liabilities of Watson Limited (Watson), a company affiliated with Dr Vijay Mallya (Dr Mallya), under a $135 million (£8192 million) facility from Standard Chartered. The guarantee agreementGuarantee Agreement was entered into as part of the arrangements put in place and announced at closing of the USLUnited Spirits Limited (USL) transaction on 4 July 2013. DHN’s provision of the guarantee agreementGuarantee Agreement enabled the refinancing of certain existing borrowings of Watson tofrom 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.
Whilst the guarantee was not payable immediately, DHN and Standard Chartered agreed to extend the date on which the guarantee was payable to 29 January 2016 to allow additional time for enforcement of the security package underlying the facility. As part of this agreement, in August 2015 DHN deposited $135 million (£92 million) in an escrow account with Standard Chartered. The loan remained in default and the guarantee was paid on 29 January 2016. The $135 million (£92 million) deposit was released to Standard Chartered and has been fully provided for during the year ended 30 June 2016. In aggregate DHN paid Standard Chartered $141 million (£96 million) under this guarantee, including the $135 million (£92 million) previously deposited, as well as payments of default interest and various fees and expenses.
While the guarantee amount has been fully provided for, Watson remains liable for all amounts paid by DHN under the guarantee. DHN is requiredentitled to take certain pre-agreed steps to recover from Watson prior to calling on the DHN guarantee. Thebenefit of the underlying security package held by Standard Charteredfor the loan, which includes shares in United Breweries Limited (UBL) and, Watson’s interest in Orange India Holdings S.a.r.l. (Orange), the joint venture that owns the Force India Formula One (F1) team. Inteam, and the shareholding in Watson, all of which remains in place. On 19 June 2015, a consortium of banks led by State Bank of India (SBI) obtained an ex-parte order from the Debt Recovery Tribunal (DRT) in Bangalore preventing the sale or any other transfer of such UBL shares as part of the enforcement process pending further orders from the DRT. DHN intends to vigorously pursue all options to appeal or lift the DRT order in order to allow for the sale of shares and recovery of outstanding amounts. This order was passed following the filing of a memomemorandum by Dr Mallya with the tribunal that he had no objection to it issuing the order in respect of the UBL shares. There was a further ex-parte order of the DRT on 15 July 2015 restraining the UBL shares being handed over to DHN or to any other party pending further orders of the DRT. DHN filed a writ petition before the High Court of Karnataka (the High Court) against such orders of the DRT, and on 7 November 2015, the High Court passed an interim order granting an interim stay of the order of the DRT dated 15 July 2015 and directing that the UBL shares shall not be dealt with until further orders. Subsequently, DHN was joined in the proceedings before the DRT.
261
Financial statements (continued)
Further, in a separate application filed by the SBI-led consortium before the DRT, on 17 May 2016 the DRT passed another ex-parte order attaching the shares held by Dr Mallya in Watson and directing Watson not to disburse amounts including dividends on shares held by Watson in Orange until further orders of the DRT. DHN and Standard Chartered (who were not named as parties in the above mentioned application filed by the SBI-led consortium) filed applications before the DRT to lift this order.
DHN is continuing to vigorously pursue these matters in order to lift the above DRT orders as part of the efforts for enforcement of the underlying security and recovery of outstanding amounts. Arguments on these matters have been made before the DRT, and the Presiding Officer of the DRT has not yet issued orders. Diageo believes that the existence of any prior rights or dispute in relation to the UBL sharessecurity would be in breach of representations and warranties given by Dr Mallya to Standard Chartered at the time the security was granted and further believes that Dr Mallya’s filing of the memomemorandum with the tribunal in relation to the UBL shares and his failure to object to the order for status quo in that regard are breaches of his obligations to Standard Chartered.
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 if it makes aupon payment under the guarantee of all amounts owed to Standard Chartered. However,Payment under the guarantee has now occurred as described above. Standard Chartered has taken certain recovery steps and is working with DHN in relation to the DRT proceedings.
DHN is actively monitoring the security package and is discussing with Standard Chartered steps to continue enforcement against the background of the DRT proceedings described above as well as in relation to the other elements of the security package. DHN’s ability to assume or enforce security over some elements of the security package is also subject to regulatory consent. It is not at this stage possible to determine whether such consent would be forthcoming.
In addition, DHN has the benefit of counter-indemnitiesa counter-indemnity from Watson and Dr Mallya in respect of its liabilities underpayments in connection with the guarantee. In
The agreement with Dr Mallya referenced in paragraph (d) below does not impact the eventsecurity package, which includes shares in UBL and Watson’s interest in Orange, the joint venture that DHN makes any payment under the guarantee, DHN would intend to pursue claims under these indemnities to seek to recover any outstanding amounts.
240
Financial statements (continued)
In light of the litigation risk associated with the UBL shares and the potential loss of realisable value ofowns the F1 security during enforcement, Diageo believesteam. Watson remains liable for all amounts paid pursuant to the outstanding amounts may not be fully recoverable throughguarantee. DHN is entitled to the security enforcement process and/or otherwise paid under the counter-indemnities. However, Diageo is unable to meaningfully quantify the potential outcome from the recoverybenefit of the security package and/orunderlying the counter-indemnities and therefore any possible loss.
Dr Mallya has indicated, both in response to DHN notifying its intention to bring counter-indemnity claims in respect of any liability incurred under DHN’s guarantee of the Watson facility and as a standalone matter,the security providers have undertaken to take all necessary actions in that he believes he has certain claims against Diageo arising out of the failure to conclude a joint venture with him in respect of certain emerging markets in Africa and Asia (excluding India) and to provide significant financial benefits to him.
The possibility of an emerging markets joint venture was previously disclosed by Diageo in the announcement of its initial USL transaction on 9 November 2012, alongside the details of a non-binding memorandum of understanding for the establishment of a joint venture to own United National Breweries’ traditional sorghum beer business in South Africa (UNB joint venture). That announcement noted that it was not certain whether the emerging markets joint venture would be established or, if so, on what basis. Subsequently, at the time of completion of its initial USL transaction on 4 July 2013, Diageo announced that, once Diageo and Dr Mallya’s near-term priority of the integration of USL into the Diageo group was successfully underway, Diageo and Dr Mallya would explore the opportunity of extending their relationship into other emerging markets in Africa and Asia (excluding India) through a further joint venture relationship on terms and with a scope yet to be determined. This announcement also stated that it was not certain whether such a joint venture would be established and, if so, on what basis, albeit that it was contemplated that it would absorb the UNB joint venture (which had since become the subject of definitive agreement as announced by Diageo on 28 January 2013 and completion of which took place on 27 June 2013 following receipt of necessary regulatory and competition clearances). As announced on 2 April 2015, Diageo agreed to acquire the remaining 50% of the UNB joint venture, and this acquisition completed on 29 May 2015 at which point UNB became a wholly owned Diageo group subsidiary.
Diageo believes, consistently with its prior disclosures, that it has no outstanding obligations to Dr Mallya as regards the establishment of an emerging markets joint venture or the provision of financial benefits. Diageo would contend vigorously any such claim that may be brought by Dr Mallya whether in the context of a counter-indemnity claim for DHN’s liability under its guarantee of the Watson facility or otherwise.regard.
(b) Colombian litigation
An action was filed on 8 October 2004 in the United States District Court for the Eastern District of New York by the Republic of Colombia and a number of its local government entities against Diageo and other spirits companies, alleging several causes of action, including violations of the Federal RICO Act. This claim was dismissed in November 2012. The dismissal was without prejudice and as such, plaintiffs are not barred from bringing a similar action in future, although the company currently believes any such future action to be unlikely. Diageo remains committed to continued dialogue with the Colombian governmental entities to address the underlying issues.
(c) Korean customs dispute
On 5 January 2015, Diageo Korea accepted the Korean court recommendation to settle litigation against Korea customs regarding the transfer pricing methodology applicable to spirits imported between 2004 and 2010. For the fiscal year ended 30 June 2015, Diageo has charged £146 million before tax in respect of resolving this dispute as well as other related matters.
Total payments made to settle this dispute in 2015 were £74 million. £87 million was paid to the customs authorities prior to 30 June 2014, and at 30 June 2014 was accounted for as a receivable from Korean customs. It is expected that any outstanding items will be settled and the customs dispute concluded within the next 18 months based on historical case timelines.
(d) Thalidomide litigation
In June 2014, claims forms alleging product liability and negligence for injuries arising from the consumption of thalidomide were filed in the High Court in London against Distillers Company (Biochemicals) Limited, its parent Diageo Scotland Limited (formerly Distillers Company Limited), as well as against Grünenthal GmbH, the developer of the drug (not a member of the group). On 4 December 2014 these claims forms were served by lawyers acting for the claimants. Since then the proceedings in respect of the 28 individuals that have now issued claims in the United Kingdom have been stayed until 31 December 2015.
241
Financial statements (continued)
30 September 2016 while discussions are ongoing between Diageo and the claimants’ lawyers.
Diageo is unable to meaningfully quantify the possible loss or range of loss to which these lawsuits may give rise. Distillers Company (Biochemicals) Limited distributed thalidomide in the United Kingdom for a period in the late 1950s and early 1960s.
Diageo has worked voluntarily for many years with various thalidomide organisations and has provided significant financial support. A scheduled periodic review of Diageo’s financing of the UK Thalidomide Trust will be undertaken during the year ending 30 June 2017.
(e)(c) Acquisition of USL shares from UBHL, winding-up petitions against UBHL and other proceedings in relation to the USL transaction
(i) On 4 July 2013 Diageo completed its acquisition, under a share purchase agreement with United Breweries (Holdings) Limited (UBHL)UBHL and various other sellers (the SPA), of 21,767,749 shares (14.98%) in USL for a total consideration of INR 31.3 billion (£342349 million), including 10,141,437 shares (6.98%) from UBHL. The SPA was signed on 9 November 2012 and was part of the transaction announced by Diageo in relation to USL on that day (the Original USL Transaction). Through a series of further transactions, as of 2 July 2014, Diageo has a 54.78% investment in USL (excluding 2.38% owned by the USL Benefit Trust).
262
Financial statements (continued)
Prior to the acquisition from UBHL on 4 July 2013, the High Court of Karnataka (the 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 five winding-up petitions (the Original 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 10,141,437 USL shares from UBHL at that time.
Following closing of the UBHL Share Sale, appeals were filed by various petitioners in respect of the Leave Order. On 20 December 2013, the division bench of the High Court set aside the Leave Order (the 20 December Order). Following the 20 December Order, Diageo filed special leave petitions (SLPs) in the Supreme Court of India against the 20 December Order.
On 10 February 2014, the Supreme Court of India issued an order admittinggiving notice in respect of the SLPs and ordering that the status quo be maintained with regard to the UBHL Share Sale. TheSale pending a hearing on the matter in the Supreme Court. Following a number of adjournments, the next hearing date for the SLPs were last scheduled(in respect of which leave has since been granted and which have been converted to civil appeals) is yet to be heard by the Supreme Court on 22 July 2015. The hearing did not, however, take place on that date. The latest indication from the Supreme Court website is that the matter is likely to be listed on 26 August 2015.fixed.
In separate proceedings, the various winding-up petitions against UBHL have been admitted by the High Court. These petitions and certain related proceedings have been progressing through the High Court since closing of the UBHL Share Sale. In separate rulings issued by the High Court on 22 November 2013 and 13 December 2013, the High Court admitted two of the winding-up petitions against UBHL. An appeal filed by UBHL against the first ruling issued on 22 November 2013 was dismissed by a division bench of the High Court on 16 December 2013. That dismissalFollowing earlier adjournments there is now the subject of a further appeal by UBHL before the Supreme Court of India. On 6 February 2014, UBHL filed an appeal with a division bench of the High Court against the second ruling issued on 13 December 2013 and that appeal is still pending. The last hearingcurrently no fixed date of that appeal was 18 June 2015, andfor the next hearing date is yet to be fixed. The High Court admitted a further six winding-up petitions against UBHL on 2 January 2015. On 22 January 2015 and 27 March 2015, UBHL filed appeals with a division bench of the High Court against the latest admission order. Two of these appeals were last heard on 11 June 2015, and one appeal was last heard on 17 June 2015. The matters were adjourned following the last hearings and the next hearing dates for these appeals are yet to be fixed.various winding-up proceedings.
Diageo continues to believe that the acquisition price of INR 14401,440 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 10,141,437 USL shares acquired from UBHL. Diageo believes it would remain in control of USL and be able to consolidate USL as a subsidiary 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 timeframe 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.
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Financial statements (continued)
(ii) Separately, Diageo continuesDiageo’s contractual rights in relation to pursue completion of the acquisition of an additional 3,459,090 USL shares (representing 2.38% of the share capital of USL) under the SPA from the USL Benefit Trust.
Trust have not been capable of completion. Currently certain lenders to USL are refusing to release security that they hold over those shares notwithstanding that they have been repaid in full. USL is taking steps including proceedingsfiled a petition against such lenders before the High Court to expedite thefor release of the security.security and the High Court granted a stay order in favour of USL in December 2015 restraining the lenders from dealing with the 3,459,090 pledged USL shares until further order of the High Court. As previously disclosed, if it is not ultimately possible to complete the acquisition in relation to thesewhile those shares they would instead continue to beare held by the USL Benefit Trust pending any sale, they are subject to an undertaking that the trustees would only vote the shares at the direction of USL.
(f)(iii) Diageo has notified UBHL and its subsidiary, KFinvest, of certain claims that it believes it has against such parties under the SPA in relation to the matters revealed by the Initial Inquiry described in paragraph (d) below, including under provisions requiring the discharge of inter-group balances and also as a result of the non-disclosure of these matters to it during the due diligence exercise that preceded the Original USL Transaction. Diageo also believes that it may have additional claims against those parties under the SPA in relation to the matters revealed by the Additional Inquiry described in paragraph (d) below.
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Financial statements (continued)
(d) USL internal inquiryinquiries, resignation of Dr Vijay Mallya from USL and related matters
In a notice to the Indian stock exchange dated 4 September 2014, USL announced that its boardBoard of directorsDirectors had directed an inquiry into certain matters referred to in USL’s financial statements and the qualified auditor’s report for the financial year ended 31 March 2014 (the Initial Inquiry). The transactions noted in the Initial Inquiry occurred prior to Diageo gaining significant influence over USL on 4 July 2013 when it completed the transaction to purchase shares in USL to take its aggregate shareholding to 25.02%. USL provided an update on 25 April 2015 in relation to the Initial Inquiry which covered various matters, including certain doubtful receivables, advances and deposits. An additional update was set outAdditional updates have been provided by USL in USL’ssubsequent quarterly announcements and most recently in the announcement on 23 July 2015 of its unauditedtheir audited financial results for its first quarteron 26 May 2016, in respect of the year ended 30 June 2015.31 March 2016.
As previously stated by USL, in its update, the Initial Inquiry: (a) revealed that funds involved in many of the commercial transactions covered by the Initial Inquiry were diverted from USL and/or its subsidiaries to certain companies in the UBHL group, including in particular Kingfisher Airlines Limited; (b) prima facie revealed that certain accounting entries appear to have been made and certain transactions entered into on behalf of USL appear to have been undertaken in order to show a lower exposure of USL (and its subsidiaries) to UBHL than that which actually existed at the relevant time; and (c) also identified certain additional parties and matters where documents identified raised concerns as to the propriety of certain underlying commercial transactions with counterparties referred to in the notes to USL’s audited accounts for the financial year toended 31 March 2014. The inquiry suggestsInitial Inquiry suggested that the manner in which these various transactions were conducted, prima facie, indicates various improprieties and potential violations of provisions, inter alia, of the Indian Companies Act, 1956 and the listing agreements signed by USL with various stock exchanges in India on which its securities are listed.
USL has recorded provisions in an aggregate amount of approximately INR 6,712 million (approximately £65(£75 million) with respect to (a) above, and in an aggregate amount of approximately INR 2,368 million (approximately £23(£26 million) with respect to (c) above. Diageo believes that these provisions represent the full amount of funds indicated by the Inquiry as having been diverted from USL and its subsidiaries to companies in the UBHL group in respect of such transactions. These amounts were fully provided for in the fair value balance sheet consolidated by Diageo on 2 July 2014. Diageo does not expect any further material financial impact on USL or Diageo’s financial results in connection with such transactions. USL made provisions in its financial statements for the two years ended 31 March 2014 and 31 March 2015 in respect of the issues identified by the Initial Inquiry. The audit report on the financial statements of USL for the year ended 31 March 2015 was also qualified in respect of these issues.
The USL board stated in its update of 25 April 2015 that it was not in a position to make any final determinationsdetermination with regard to the position of any individuals involved and therefore directed USL to report the relevant transactions to the authorities as required under applicable law and to provide the inquiryInitial Inquiry report to USL’s auditors.auditors and other regulators. The USL board also resolved that USL should take the necessary steps to pursue all rightsassess USL’s legal position and claims against, and expeditiouslythen take such action as is necessary to recover its duesfunds from the relevant parties to the extent possible. As previously announced by USL on 23 July2 November 2015, it is now in the process of initiatingUSL has been taking steps for recovery againstof the funds that were identified by the Initial Inquiry to have been diverted from USL and/or its subsidiaries to the extent possible. During the quarter ended 30 September 2015, USL reached a settlement with one of the parties pursuant to which the party withdrew claims amounting to approximately INR 279 million (£3 million), and accordingly a provision of approximately INR 279 million (£3 million) was written back. Additionally, subsequent to the year ended 31 March 2016, USL has signed settlement agreements with certain such parties and based on these settlements has reversed provisions with respect to interest claimed amounting to INR 265 million (£3 million). During the year ended 31 March 2016, based on its assessment of recoverability, USL’s management has written off INR 5,666 million (£63 million) out of the amounts provided for with respect to the relevant parties.
In light of the above, and without making any determination as to fault or culpability, the USL directors noted in the update of 25 April 2015 that they had lost confidence in Dr Vijay Mallya continuing in his role as a director and as chairman of USL and therefore the USL board called upon Dr Mallya to resign forthwith as a director and as chairman of the board and step down from his positions in USL’s subsidiaries. The board of USL also resolved that, in the event Dr Mallya declined to step down, it would recommend to the shareholders of USL the removal of Dr Mallya as a director and as the chairman of the board. Dr Mallya has indicated at the time that he willwould not tender his resignation.
Diageo is the majority shareholder in USL with a 54.78% holding in USL. As previously announced by Diageo, it hashad certain contractual obligations to support Dr Mallya continuing as non-executive directorNon-Executive Director and chairmanChairman of USL subject to certain conditions and in the absence of certain defaults. Those matters were agreed on 9 November 2012 as part of a broader shareholders’ agreement and came into effect on 4 July 2013 when Diageo completed the purchase of shares to take its aggregate shareholding in USL to 25.02%.
264
Financial statements (continued)
Subsequent to its announcement of 25 April 2015, USL has provided its inquiryInitial Inquiry report and all related materials to Diageo. AsDiageo announced by Diageo on 27 April 2015 Diageo hasthat it noted the recommendation of the USL board and iswas considering its position under its agreements with Dr Mallya and UBHL in light of the inquiry report and materials provided to it.
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 the Initial Inquiry and 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 25 February Agreement) provided for a payment of $75 million (£53 million) to Dr Mallya over a five year period in consideration for the five-year global non-compete, non-interference, non-solicitation and standstill commitments referred to above, his resignation from USL and the termination of that matter is ongoinghis appointment and governance rights, the relinquishing of rights and benefits attached to his position at USL, and his agreement not to pursue claims against Diageo and USL. The 25 February Agreement also provided for the release of Dr Mallya’s personal obligations to indemnify DHN and Diageo will continue to review closely developmentsFinance in respect of any liabilities under the guarantee arrangements described in paragraph (a) above and his personal obligation to indemnify Diageo Finance in respect of its earlier liability (£30 million) under a guarantee of certain borrowings of United Breweries Overseas Limited. $40 million (£28 million) of the $75 million (£53 million) amount was paid on signing of the 25 February 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.
On 7 March 2016, a consortium of banks led by SBI obtained an order from the DRT in Bangalore attaching the sum of $75 million (£53 million) payable to Dr Mallya under the 25 February Agreement. The order provides that Dr Mallya is not to draw on that sum, Diageo is not to disburse such sum to Dr Mallya and Diageo is to deposit such sum with the DRT. Diageo filed an affidavit in the DRT on 5 April 2016 explaining that the sum of $40 million (£28 million) was paid on 25 February 2016, prior to the order dated 7 March 2016. Diageo further explained that no sum is presently due and payable by Diageo to Dr Mallya under the terms of the 25 February Agreement, and there can be no certainty that any amount will become due and payable under the terms of the 25 February Agreement in the future because of the conditional nature of the obligation. Diageo’s position is that the order is not currently capable of being performed. Pursuant to an order of the DRT dated 29 April 2016, on 12 May 2016 Diageo and USL filed memos with the DRT furnishing copies of their respective agreements with Dr Mallya. On 16 July 2016, the DRT issued a clarification in this context.relation to its order dated 7 March 2016 (which forms part of that order), stating that: (i) if Diageo is liable to pay any amount under the 25 February Agreement to Dr Mallya, such amount shall be deposited in the DRT under the 7 March order; and (ii) if Diageo is not liable to pay any amount under the 25 February Agreement to Dr Mallya, Diageo does not need to deposit any amount in the DRT.
At the time of the 25 February 2016 announcement, Diageo confirmed that, by virtue of Dr Mallya having been a director of USL, a subsidiary of Diageo, the arrangements described in that announcement, which were required to be aggregated with certain prior transactions and arrangements, constituted a smaller related party transaction within LR11.1.10R of the Listing Rules. Accordingly, Diageo obtained written confirmation from BofA Merrill Lynch, as sponsor, that the terms of the relevant arrangements were fair and reasonable as far as Diageo shareholders were concerned.
As previously announced by USL and as noted above, 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 & CEO conduct a further inquiry into the transactions involving the additional parties and the additional matters to determine whether they also suffered from improprieties (the Additional Inquiry). USL announced the results of the Additional Inquiry in a notice to the Indian Stock Exchange dated 9 July 2016.
243
265
Financial statements (continued)
As stated in that announcement, the Additional Inquiry revealed: (a) further instances of actual or potential fund diversions amounting to approximately INR 9,135 million (£102 million) as well as other potentially improper transactions involving USL made provisionsand its Indian and overseas subsidiaries amounting to approximately INR 3,118 million (£35 million); (b) that these transactions occurred during the period from October 2010 to July 2014, although certain transactions appear to have been initiated prior to that period; and (c) that these improper transactions involved the diversion of funds to certain non-Indian entities in its financial statements for the two years ended 31 March 2014which Dr Mallya appears to have a material direct or indirect interest (including Force India Formula One, Watson Limited, Continental Administrative Services, Modall Securities Limited, Ultra Dynamix Limited and 31 March 2015Lombard Wall Corporate Services Inc) as well as certain Indian entities (including, in respectmost cases, Kingfisher Airlines Limited).
The USL board has, in light of these findings, and based on expert advice, directed that copies of the issues identifiedAdditional Inquiry report be provided to the relevant authorities and its auditors. The USL board also directed that USL should conduct a detailed review of each indicated case of fund diversion to assess its legal position and then take such action as is necessary to recover its funds from the relevant parties and individuals, to the extent possible. The mutual release in relation to the Initial Inquiry agreed by Diageo and USL with Dr Mallya and announced on 25 February 2016 does not extend to matters arising out of the Additional Inquiry. In addition to the notification sent by Diageo to UBHL and KFinvest in relation to the claims it believes it has against such parties under the SPA in relation to the matters revealed in the Initial Inquiry, as noted in paragraph (c)(iii) above, Diageo also believes it may have claims against UBHL and KFinvest under the SPA in relation to the matters revealed by the Inquiry. The audit report onAdditional Inquiry, including under certain provisions requiring the discharge of inter-group balances and also as a result of the non-disclosure of these matters to it during the due diligence exercise that preceded the Original USL Transaction.
Almost all of the amounts identified in the Additional Inquiry have been previously provided for or expensed in the financial statements of USL or its subsidiaries for prior periods (including by way of provisions made in relation to impairment in the value of or loss on sale of USL’s overseas subsidiaries). USL’s management has recommended to the USL board that a further provision of INR 217 million (£2 million) should be made for the year ended 31 March 2015 wasvalue of certain improper transactions identified by the Additional Inquiry which were not previously expensed or provided for. Based on the information currently available, Diageo believes that no further provisions are required at this stage.
(e) Regulatory notices 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, Serious Fraud Investigation Office, National Stock Exchange, Income Tax Department, Enforcement Directorate, Securities and Exchange Board of India, Bangalore police, Central Excise Intelligence and the Institute of Chartered Accountants of India. Diageo and USL are cooperating fully with the authorities in relation to these matters, and, as noted in paragraph (d) above, USL reported the matters covered by the Initial Inquiry and the Additional Inquiry to the relevant authorities.
Diageo and USL have also qualifiedreceived notices from the Securities and Exchange Board of India (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, in the case of Diageo, whether such arrangements with Dr Mallya or the Watson backstop guarantee arrangements described in paragraph (a) 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 issues.Watson backstop guarantee arrangements, 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 as noted in paragraph (a) above) 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.
(g)
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Financial statements (continued)
Diageo is clear 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 the decision in the SEBI notice to be misconceived and wrong in law and it is taking steps to appeal it.
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 loss or range of loss, if any, to which any such action might give rise if determined against Diageo or USL.
(f) SEC Inquiry
Diageo has received an inquiryrequests for information from the US Securities and Exchange Commission (SEC) regarding its distribution in and public disclosures regarding the United States.States as well as additional context about the Diageo group globally. Diageo is currently responding to the SEC’s requestrequests for information in this matter. Diageo is unable to assess if the inquiry will evolve into a broaderfurther information requestrequests or an 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.
(h)(g) Other
The group has extensive international operations and is the defendant in a number of legal, customs and tax proceedings incidental to these operations, the outcome of which cannot at present be foreseen.
In particular, the group is currently the 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) isare 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.
19. COMMITMENTS
(a) Capital commitments
Commitments for expenditure on intangibles and property, plant and equipment not provided for in these consolidated financial statements are estimated at £87 million (2015 – £114 million (2014 —million; 2014 – £162 million; 2013 — £159 million).
(b) Operating lease commitments
The minimum lease rentals to be paid under non-cancellable leases, principally in respect of properties, are as follows:
2015 £ million | 2014 £ million | 2016 £ million | 2015 £ million | |||||||||||||
Payments falling due: | ||||||||||||||||
Within one year | 96 | 102 | 92 | 96 | ||||||||||||
Between one and two years | 70 | 80 | 94 | 70 | ||||||||||||
Between two and three years | 61 | 59 | 81 | 61 | ||||||||||||
Between three and four years | 51 | 50 | 70 | 51 | ||||||||||||
Between four and five years | 51 | 43 | 63 | 51 | ||||||||||||
After five years | 217 | 223 | 407 | 217 | ||||||||||||
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546 | 557 | 807 | 546 | |||||||||||||
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On 1 January 2016, Diageo completed the North American wines transaction with Treasury Wine Estates (TWE). As part of this transaction Diageo sub-let the North American vineyards to TWE which continue to be leased from Realty Income Corporation (Realty). The terms of the sub lease to TWE are identical to the principal lease and the future lease commitments are included in finance lease liabilities ($47 million (£36 million)) and operating lease commitments ($541 million (£407 million)). The finance lease receivable from TWE of $47 million (£36 million) is included in other financial assets. If TWE default on their payments Diageo continue to be responsible for the lease payments to Realty. A provision has been charged to non-operating items in the year ended 30 June 2016 for the estimated liability if TWE default on their lease commitments.
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Financial statements (continued)
In respect of property not currently utilised the group has entered into sub-leases for which the minimum amount receivable from operating lease is £436 million (2015 – £28 million) under the terms of the contract including the receivable from TWE.
There are no significant leases for which contingent rent is payable, nor any that have purchase options, escalation clauses or restrictions. Certain of the operating leases have renewal clauses which are at fair market value. In respect of property not currently utilised, the group has entered into sub-leases for which the minimum amount receivable is £28 million (2014 — £21 million). The amount received under these leases is included in sales in the income statement.
20. 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.
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Financial statements (continued)
(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 financial positionbalances with associates and joint ventures are set out in the table below:
2015 £ million | 2014 £ million | 2013 £ million | ||||||||||
Income statement items | ||||||||||||
Sales | 117 | 156 | 67 | |||||||||
Purchases(i) | 85 | 89 | 71 | |||||||||
Balance sheet items | ||||||||||||
Group payables | 3 | 8 | 5 | |||||||||
Group receivables | 11 | 12 | 12 | |||||||||
Loans payable | 6 | 7 | 15 | |||||||||
Loans receivable | 2 | 41 | 29 | |||||||||
Cash flow items | ||||||||||||
Loans and equity contributions, net | 26 | 25 | 31 |
2016 £ million | 2015 £ million | 2014 £ million | ||||||||||
Income statement items | ||||||||||||
Sales | 31 | 117 | 156 | |||||||||
Purchases | 36 | 85 | 89 | |||||||||
Balance sheet items | ||||||||||||
Group payables | 5 | 3 | 8 | |||||||||
Group receivables | 2 | 11 | 12 | |||||||||
Loans payable | 6 | 6 | 7 | |||||||||
Loans receivable | 2 | 2 | 41 | |||||||||
Cash flow items | ||||||||||||
Loans and equity contributions, net | — | 26 | 25 |
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’.
2015 £ million | 2014 £ million | 2013 £ million | 2016 £ million | 2015 £ million | 2014 £ million | |||||||||||||||||||
Salaries and short term employee benefits | 9 | 9 | 10 | 11 | 9 | 9 | ||||||||||||||||||
Annual incentive plan | 4 | 2 | 7 | 9 | 4 | 2 | ||||||||||||||||||
Non-executive directors’ fees | 1 | 1 | 1 | |||||||||||||||||||||
Non-Executive Directors’ fees | 1 | 1 | 1 | |||||||||||||||||||||
Share-based payments(i) | 9 | 13 | 16 | 7 | 9 | 13 | ||||||||||||||||||
Post employment benefits(ii) | 2 | 2 | 1 | 2 | 2 | 2 | ||||||||||||||||||
Termination benefits | 1 | – | – | 2 | 1 | — | ||||||||||||||||||
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26 | 27 | 35 | 32 | 26 | 27 | |||||||||||||||||||
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(i) | Time-apportioned fair value of unvested options and share awards. |
(ii) | Includes the |
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Financial statements (continued)
Non-Executive Directors do not receive share-based payments or post employment benefits. Details are given in the Directors’ remuneration report of the individual Directors’ remuneration and transactions between the group and key management personnel.
(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 £16 million (2015 – £13 million (2014 —million; 2014 – £17 million; 2013 — £11 million).
(e) Directors’ remuneration
2015 £ million | 2014 £ million | 2013 £ million | ||||||||||
Salaries and benefits | 2 | 3 | 3 | |||||||||
Annual incentive plan | 1 | — | 3 | |||||||||
Non-executive director’s fees | 1 | 1 | 1 | |||||||||
Share option exercises(i) | — | 4 | 13 | |||||||||
Shares vesting(i) | 5 | 7 | 10 | |||||||||
Post employment benefits(ii) | 1 | 1 | 1 | |||||||||
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10 | 16 | 31 | ||||||||||
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Financial statements (continued)
2016 £ million | 2015 £ million | 2014 £ million | ||||||||||
Salaries and benefits | 2 | 2 | 3 | |||||||||
Annual incentive plan | 2 | 1 | — | |||||||||
Non-Executive Directors’ fees | 1 | 1 | 1 | |||||||||
Share option exercises(i) | — | — | 4 | |||||||||
Shares vesting(i) | 5 | 5 | 7 | |||||||||
Post employment benefits(ii) | 1 | 1 | 1 | |||||||||
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11 | 10 | 16 | ||||||||||
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(i) | 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. |
(ii) | Includes the |
Details of the individual Directors’ remuneration are given in the Directors’ remuneration report.
269
Financial statements (continued)
21. 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 | Country of operation | Percentage of equity owned(i) | Business description | |||||||||||||||||
Subsidiaries | ||||||||||||||||||||
Diageo Ireland | Republic of Ireland | Worldwide | 100 | % | Production, marketing and distribution of premium drinks | |||||||||||||||
Diageo Great Britain Limited | England | Worldwide | 100 | % | Marketing and distribution of premium drinks | |||||||||||||||
Diageo Scotland Limited | Scotland | Worldwide | 100 | % | Production, marketing and distribution of premium drinks | |||||||||||||||
Diageo Brands B.V. | Netherlands | Worldwide | 100 | % | Marketing and distribution of premium drinks | |||||||||||||||
Diageo North America, Inc. | United States | Worldwide | 100 | % | Production, importing, marketing and distribution of premium drinks | |||||||||||||||
United Spirits Limited(ii) | India | India | 54.78 | % | Production, importing, marketing and distribution of premium drinks | |||||||||||||||
Diageo Capital plc(iii) | Scotland | United Kingdom | 100 | % | Financing company for the group | |||||||||||||||
Diageo Finance plc(iii) | England | United Kingdom | 100 | % | Financing company for the group | |||||||||||||||
Diageo Investment Corporation | United States | United States | 100 | % | Financing company for the US group | |||||||||||||||
Mey İçki Sanayi ve Ticaret A.Ş. | Turkey | Turkey | 100 | % | Production, marketing and distribution of premium drinks | |||||||||||||||
Associates | ||||||||||||||||||||
Moët Hennessy SNC(iv) | France | France | 34 | % | Production, marketing and distribution of premium drinks |
(i) | 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) | Excluding 2.38% owned by the USL Benefit Trust. |
(iii) | Directly owned by Diageo plc. |
(iv) | French partnership. |
(1) | Diageo Finance B.V. (Netherlands) is a wholly-owned finance subsidiary of the group. As at 30 June 2016, there were no outstanding securities issued by Diageo Finance B.V. |
246
Report of independent registered public accounting firm — internal controls
The Board of Directors and Stockholders
Diageo plc:
We have audited Diageo plc’s internal control over financial reporting as of 30 June 2015, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Diageo plc’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, appearing in the Corporate Governance Report in Diageo plc’s Annual Report on Form 20-F. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit 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 audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.
In our opinion, Diageo plc maintained, in all material respects, effective internal control over financial reporting as of 30 June 2015, based on criteria established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Diageo plc and subsidiaries as of 30 June 2015 and 2014 and the related consolidated income statements, and consolidated statements of comprehensive income, changes in equity and cash flows for each of the years then ended on pages 182 to 246, including the disclosures within the section ‘Directors’ shareholding requirements and share and other interests’ on page 171, and the section ‘Key management personnel related party transactions’ on page 176 and our report dated 29 July 2015 expressed an unqualified opinion on those consolidated financial statements.
KPMG LLP
London, England
29 July 2015
247270
Unaudited computation of ratio of earnings to fixed charges
Year ended 30 June | ||||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | Year ended 30 June | |||||||||||||||||||||||||||||||||||
£ million | £ million | £ million | £ million | £ million | 2016 £ million | 2015 £ million | 2014 £ million | 2013 £ million | 2012 £ million | |||||||||||||||||||||||||||||||
Earnings | ||||||||||||||||||||||||||||||||||||||||
Income before taxes on income, non-controlling interests and discontinued operations | 2,933 | 2,711 | 3,057 | 3,043 | 2,281 | 2,858 | 2,933 | 2,711 | 3,057 | 3,043 | ||||||||||||||||||||||||||||||
Less: Capitalised interest | (2 | ) | (4 | ) | (2 | ) | (5 | ) | (4 | ) | — | (2 | ) | (4 | ) | (2 | ) | (5 | ) | |||||||||||||||||||||
Less: Share of after tax results of associates and joint ventures | (175 | ) | (252 | ) | (217 | ) | (229 | ) | (192 | ) | (221 | ) | (175 | ) | (252 | ) | (217 | ) | (229 | ) | ||||||||||||||||||||
Add: Dividends received from associates | 183 | 228 | 220 | 190 | 150 | |||||||||||||||||||||||||||||||||||
Add: Dividend income received from associates | 173 | 183 | 228 | 220 | 190 | |||||||||||||||||||||||||||||||||||
Add: Fixed charges | 697 | 671 | 758 | 752 | 766 | 623 | 697 | 671 | 758 | 752 | ||||||||||||||||||||||||||||||
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3,636 | 3,354 | 3,816 | 3,751 | 3,001 | 3,433 | 3,636 | 3,354 | 3,816 | 3,751 | |||||||||||||||||||||||||||||||
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Fixed charges | ||||||||||||||||||||||||||||||||||||||||
Interest payable and other finance charges(i) | 656 | 629 | 716 | 709 | 727 | |||||||||||||||||||||||||||||||||||
Finance charges(i) | 589 | 656 | 629 | 716 | 709 | |||||||||||||||||||||||||||||||||||
Add: Interest capitalised | 2 | 4 | 2 | 5 | 4 | — | 2 | 4 | 2 | 5 | ||||||||||||||||||||||||||||||
Add: One third of rental expense | 39 | 38 | 40 | 38 | 35 | 34 | 39 | 38 | 40 | 38 | ||||||||||||||||||||||||||||||
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697 | 671 | 758 | 752 | 766 | 623 | 697 | 671 | 758 | 752 | |||||||||||||||||||||||||||||||
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ratio | ratio | ratio | ratio | ratio | ratio | ratio | ratio | ratio | ratio | |||||||||||||||||||||||||||||||
Ratio | 5.2 | 5.0 | 5.0 | 5.0 | 3.9 | 5.5 | 5.2 | 5.0 | 5.0 | 5.0 | ||||||||||||||||||||||||||||||
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248271
Additional information for shareholders
Legal proceedings
Information on the legal proceedings is set out in note 18 to the consolidated financial statements.
Related party transactions
Transactions with Directors are disclosed in the Directors’ remuneration report and transactions with other related parties are disclosed in note 20 to the consolidated financial statements.
Share capital
Major shareholders
At 3129 July 2015,2016, the following substantial interests (3% or more) in the company’s ordinary share capital (voting securities) had been notified to the company.
Shareholder | Number of ordinary shares | Percentage of issued ordinary share capital (excluding treasury shares) | Date of notification of interest | 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 | 147,296,928 | 5.89 | % | 3 December 2009 | ||||||||||||||||
Capital Research and Management Company (indirect holding) | 124,653,096 | 4.99 | % | 28 April 2009 | 124,653,096 | 4.99 | % | 28 April 2009 |
(i) | On 26 January 2016, BlackRock Inc. filed an Amendment to Schedule 13G with the SEC in respect of the calendar year ended 31 December 2015 reporting that 161,879,296 ordinary shares representing 6.4% of the issued ordinary share capital were beneficially owned by BlackRock Inc. and its subsidiaries (including BlackRock Investment Management (UK) Limited). |
The company has not been notified of any other substantial interests in its securities. 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 2015, 437,112,6802016, 421,687,933 ordinary shares, including those held through ADSs, were held by approximately 2,7372,769 holders (including ADR holders) with registered addresses in the United States, representing approximately 17.38%16.75% of the outstanding ordinary shares (excluding treasury shares). At such date, 109,174,410105,323,780 ADSs were held by 2,2992,398 registered ADR holders. Since certain of such ordinary shares and ADSs are held by nominees or former GrandMet or Guinness Group 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.
Trading market for shares
Diageo plc ordinary shares are listed on the London Stock Exchange (LSE) and on the Dublin and Paris Stock Exchanges. Diageo ADSs, representing four Diageo ordinary shares each, are listed on the New York Stock Exchange (NYSE).
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.
272
Additional information for shareholders (continued)
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.
249
Additional information for shareholders (continued)
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 pound sterling on the underlying ordinary shares.
The following table shows, for the periods indicated, the reported high and low daily closingmiddle market quotations (which represent an average of bid and asked prices) for the ordinary shares on the LSE, taken from its Daily Official List, and the highest and lowest daily closing prices for ADSs as reported on the NYSE composite tape.
Per ordinary share | Per ADS | Per ordinary share | Per ADS | |||||||||||||||||||||||||||||
High pence | Low pence | High $ | Low $ | High pence | Low pence | High $ | Low $ | |||||||||||||||||||||||||
Year ended 30 June | ||||||||||||||||||||||||||||||||
2011 | 1301 | 1033 | 85.43 | 63.08 | ||||||||||||||||||||||||||||
2012 | 1642 | 1112 | 104.00 | 72.77 | 1642 | 1112 | 104.00 | 72.77 | ||||||||||||||||||||||||
2013 | 2085 | 1649 | 126.40 | 102.48 | 2085 | 1649 | 126.40 | 102.48 | ||||||||||||||||||||||||
2014 | 2137 | 1768 | 132.74 | 115.83 | 2137 | 1768 | 132.74 | 115.83 | ||||||||||||||||||||||||
2015 | 2023 | 1710 | 130.41 | 108.58 | 2023 | 1710 | 130.41 | 108.58 | ||||||||||||||||||||||||
2016 | 2087 | 1640 | 121.62 | 100.98 | ||||||||||||||||||||||||||||
Three months ended | ||||||||||||||||||||||||||||||||
September 2013 | 2137 | 1898 | 131.82 | 115.83 | ||||||||||||||||||||||||||||
December 2013 | 2030 | 1880 | 132.42 | 121.85 | ||||||||||||||||||||||||||||
March 2014 | 2004 | 1768 | 132.74 | 116.32 | ||||||||||||||||||||||||||||
June 2014 | 1942 | 1806 | 130.60 | 121.67 | ||||||||||||||||||||||||||||
September 2014 | 1904 | 1710 | 130.41 | 114.40 | 1904 | 1710 | 130.41 | 114.40 | ||||||||||||||||||||||||
December 2014 | 1981 | 1710 | 123.40 | 109.77 | 1981 | 1710 | 123.40 | 109.77 | ||||||||||||||||||||||||
March 2015 | 2023 | 1782 | 121.94 | 109.08 | 2023 | 1782 | 121.94 | 109.08 | ||||||||||||||||||||||||
June 2015 | 1967 | 1755 | 121.95 | 108.58 | 1967 | 1755 | 121.95 | 108.58 | ||||||||||||||||||||||||
2015 monthly | ||||||||||||||||||||||||||||||||
September 2015 | 1950 | 1640 | 121.62 | 102.64 | ||||||||||||||||||||||||||||
December 2015 | 1945 | 1766 | 116.56 | 107.17 | ||||||||||||||||||||||||||||
March 2016 | 1911 | 1745 | 110.09 | 101.52 | ||||||||||||||||||||||||||||
June 2016 | 2087 | 1748 | 112.88 | 100.98 | ||||||||||||||||||||||||||||
2016 monthly | ||||||||||||||||||||||||||||||||
January | 2023 | 1782 | 121.94 | 109.08 | 1885 | 1778 | 108.35 | 102.07 | ||||||||||||||||||||||||
February | 1950 | 1837 | 119.26 | 113.89 | 1911 | 1745 | 110.09 | 101.52 | ||||||||||||||||||||||||
March | 1954 | 1849 | 117.85 | 110.00 | 1905 | 1851 | 108.98 | 104.84 | ||||||||||||||||||||||||
April | 1967 | 1797 | 116.89 | 111.02 | 1948 | 1846 | 112.23 | 106.39 | ||||||||||||||||||||||||
May | 1842 | 1755 | 112.91 | 108.58 | 1894 | 1818 | 110.55 | 106.53 | ||||||||||||||||||||||||
June | 1932 | 1761 | 121.95 | 109.30 | 2087 | 1748 | 112.88 | 100.98 | ||||||||||||||||||||||||
July | 1950 | 1790 | 121.62 | 112.31 | 2192 | 2097 | 116.99 | 111.68 |
At close of business on 3129 July 2015,2016, the market prices for ordinary shares and ADSs were 17902161 pence and $112.31$116.54 respectively.
American depositary shares
Fees and charges payable by ADR holders
Citibank N.A. serves as the depositary (Depositary) for Diageo’s ADS programme having replaced the Bank of New York Mellon, the predecessor depositary, on 14 February 2013. Pursuant to the deposit agreement between Diageo, the Depositary and owners and holders of ADSs (the ‘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,
273
Additional information for shareholders (continued)
under the terms of the Deposit Agreement, shall charge a fee of up to $5.00 per 100 ADSs (or fraction thereof) relating to the issuance of ADSs; delivery of deposited securities against surrender of ADSs; distribution of cash dividends or other cash distributions (i.e. sale of rights and other entitlements); distribution of ADSs pursuant to stock dividends or other free stock distributions, or exercise of rights to purchase additional ADSs; distribution of securities other than ADSs or rights to purchase additional ADSs (i.e. spin-off shares); and depositary services. Citibank N.A. is located at 388 Greenwich Street, New York, New York, 10013, U.S.A.
250
Additional information for shareholders (continued)
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, 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. Diageo had a similar arrangement with the Bank of New York Mellon.
Under the contractual arrangements with the Depositary, Diageo will receive a fixed contribution of at least $1,000,000 each year (less certain expenses incurred by the Depositary) and a variable contribution based on issuance and cancellation fees in excess of a threshold amount. 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), travel expenses to attend training and seminars, exchange listing fees, legal fees, auditing fees and expenses, the Securities and Exchange Commission (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
The 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 14 October 2009) and applicable English law concerning companies (the Companies Acts), in each case as at 3129 July 2015.2016. 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.
Directors
Diageo’s articles of association provide for a Board of Directors, consisting (unless otherwise determined by an ordinary resolution of shareholders) of not fewer than three directors and not more than 25 directors, in which all powers to manage the business and affairs of Diageo are vested. Directors may be elected by the members in a general meeting or appointed by Diageo’s Board. At each annual general meeting, the following are required to retire and are then reconsidered for election/re-election, assuming they wish to stand for election/re-election: any director who has been appointed by Diageo’s Board since the last Annual General Meeting; any director who has been in office during the two previous general meetings and did not retire at either of them; and any director who has been in office, other than in an executive position, for a continuous period of nine years or more at the date of the meeting. 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.
274
Additional information for shareholders (continued)
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
251
Additional information for shareholders (continued)
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 directorsNon-Executive Directors except for the chairman.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.
Dividend rights
Holders of Diageo’s ordinary shares may, by ordinary resolution, declare dividends but may not declare dividends in excess of the amount recommended by the directors. The directors may also pay interim dividends or fixed rate dividends. No dividend may be paid other than out of profits available for distribution. All of Diageo’s ordinary shares rank equally for dividends, but the Board may withhold payment of all or any part of any dividends or other monies payable in respect of Diageo’s shares from a person with a 0.25% interest (as defined in Diageo’s articles of association) if such a person has been served with a restriction notice (as defined in Diageo’s articles of association) after failure to provide Diageo with information concerning interests in those shares required to be provided under the Companies Acts. Dividends may be paid in currencies other than sterling and such dividends will be calculated using an appropriate market exchange rate as determined by the directors in accordance with Diageo’s articles of association.
If a dividend has not been claimed, the directors may invest the dividend or use it in some other way for the benefit of Diageo until the dividend is claimed. If the dividend remains unclaimed for 12 years after the date such dividend was declared or became due for payment, it will be forfeited and will revert to Diageo (unless the directors decide otherwise). Diageo may stop sending cheques, warrants or similar financial instruments in payment of dividends by post in respect of any shares or may cease to employ any other means for payment of dividends if either (a) at least two consecutive payments have remained uncashed or are returned undelivered or that means of payment has failed, or (b) one payment remains uncashed or is returned undelivered or that means of payment has failed and reasonable enquiries have failed to establish any new postal address or account of the holder. Diageo must resume sending dividend cheques, warrants or similar financial instruments or employing that means of payment if the holder requests such resumption in writing.
Diageo’s articles of association permit payment or satisfaction of a dividend wholly or partly by distribution of specific assets, including fully paid shares or debentures of any other company. Such action must be directed by the general meeting which declared the dividend and upon the recommendation of the directors.
275
Additional information for shareholders (continued)
Voting rights
Voting on any resolution at any general meeting of the company is by a show of hands unless a poll is duly demanded. On a show of hands, (a) every shareholder who is present in person at a general meeting, and every proxy appointed by any one shareholder and present at a general meeting, has/have one vote regardless of the number of shares held by the shareholder (or, subject to (b),
252
Additional information for shareholders (continued)
represented by the proxy), and (b) every proxy present at a general meeting who has been appointed by more than one shareholder has one vote regardless of the number of shareholders who have appointed him or the number of shares held by those shareholders, unless he has been instructed to vote for a resolution by one or more shareholders and to vote against the resolution by one or more shareholders, in which case he has one vote for and one vote against the resolution. On a poll, every shareholder who is present in person or by proxy has one vote for every share held by that shareholder, but a shareholder or proxy entitled to more than one vote need not cast all his votes or cast them all in the same way (the deadline for exercising voting rights by proxy is set out in the form of proxy).
A poll may be demanded by any of the following:
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:
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 up on the shares held by them.
Pre-emption rights and new issues of shares
While holders of ordinary shares have no pre-emptive rights under Diageo’s articles of association, the ability of the directors to cause Diageo to issue shares, securities convertible into shares or rights to shares, otherwise than pursuant to an employee share scheme, is restricted. Under the Companies Acts, the directors of a company are, with certain exceptions, unable to allot any equity securities without express authorisation, which may be contained in a company’s articles of association or given by its shareholders in a general meeting, but which in either event cannot last for more than five years. Under the Companies Acts, Diageo may also not allot shares for cash (otherwise than pursuant to an employee share scheme) without first making an offer to existing shareholders to allot such shares to them on the same or more favourable terms in proportion to their respective shareholdings, unless this requirement is waived by a special resolution of the shareholders.
253276
Additional information for shareholders (continued)
Disclosure of interests in Diageo’s shares
There are no provisions in Diageo’s articles of association whereby persons acquiring, holding or disposing of a certain percentage of Diageo’s shares are required to make disclosure of their ownership percentage, although there are such requirements under the Companies Acts. The basic disclosure requirement under Part 6 of the Financial Services and Markets Act 2000 and Rule 5 of the Disclosure Guidance and Transparency Rules made by the Financial Conduct Authority (successor to the UK Financial Services Authority) imposes a statutory obligation on a person to notify Diageo and the Financial Conduct Authority of the percentage of the voting rights in Diageo he directly or indirectly holds or controls, or has rights over, through his direct or indirect holding of certain financial instruments, if the percentage of those voting rights:
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.
Rule 3Article 19 of the Disclosure and Transparency RulesEU Market Abuse Regulation (2014/596) further requires persons discharging managerial responsibilities within Diageo (and their connected persons)persons closely associated) to notify Diageo of transactions conducted on their own account in Diageo shares or derivatives or certain financial instruments relating to Diageo shares.
The City Code on Takeovers and Mergers also imposes strict disclosure requirements with regard to dealings in the securities of an offeror or offeree company on all parties to a takeover and also on their respective associates during the course of an offer period.
General meetings and notices
At least 21 clear days’ written notice of an annual general meeting is required. Any general meeting which is not an annual general meeting is called a ‘general meeting’. The minimum notice period for general meetings is 21 clear days.
An annual general meeting of shareholders must be held within six months of Diageo’s accounting reference date and at a time and place determined by the directors.
The chairman of any general meeting is entitled to refuse admission to (or eject from) that general meeting any person who fails to comply with any security arrangements or restrictions that the board may impose.
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.
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Additional information for shareholders (continued)
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 251 million 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) an amount equal to 105%5% above the average market value of the average of the middle market quotations for ancompany’s ordinary share (as derived from the London Stock Exchange Daily Official List)shares for the five business days immediately preceding the day on which that ordinary share is contracted to be purchasedof purchase and (b) the higher of the price of the last independent trade and the highest current independent purchase bid on the London Stock Exchange at the timetrading venue where the purchase is carried out.
Restrictions on transfers of shares
The Board may decline to register a transfer of a certificated Diageo share unless the instrument of transfer (a) is duly stamped or certified or otherwise shown to the satisfaction of the Board to be exempt from stamp duty and is accompanied by the relevant share certificate and such other evidence of the right to transfer as the Board may reasonably require, (b) is in respect of only one class of share and (c) if to joint transferees, is in favour of not more than four such transferees.
Registration of a transfer of an uncertificated share may be refused in the circumstances set out in the uncertificated securities rules (as defined in Diageo’s articles of association) and where, in the case of a transfer to joint holders, the number of joint holders to whom the uncertificated share is to be transferred exceeds four.
The Board may decline to register a transfer of any of Diageo’s certificated shares by a person with a 0.25% interest (as defined in Diageo’s articles of association) if such a person has been served with a restriction notice (as defined in Diageo’s articles of association) after failure to provide Diageo with information concerning interests in those shares required to be provided under the Companies Acts, unless the transfer is shown to the Board to be pursuant to an arm’s length sale (as defined in Diageo’s articles of association).
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 may be inspected at the SEC’s publicat the reference roomfacilities located at the SEC Headquarters at 100 F Street, NE, Washington, DC 20549 or on20549. Please call the SEC’s website (www.sec.gov). InformationSEC at 1-800-SEC-0330 for further information on the operation of the public reference room can be obtainedfacilities 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 calling the SEC at 1 800 SEC 0330.www.sec.gov.
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Additional information for shareholders (continued)
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 and ADSs. This section does not apply to any holder who is subject to special rules, including:
If a partnership 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 their shares or ADSs and who hold their 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 or ordinarily 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 (or, in the case of the UK taxation of dividends paid to UK-resident individual shareholders on or after 6 April 2016, as currently proposed), as well as on the Convention Between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Tax on Income and Capital Gains (the Treaty). These laws are subject to change, possibly on a retroactive basis.
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 will be treated as the owner of the shares represented by those ADSs. Exchanges of shares for ADRs, and ADRs for shares, generally will not be subject to US federal income tax or to UK tax on profits or gains.
A US holder is a beneficial owner of ordinary shares or ADSs that is for US federal income tax purposes:
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.
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Additional information for shareholders (continued)
Dividends
UK taxation
There is noThe company will not be required to withhold tax at source when paying a dividend.
Provisions contained in the Finance Bill published by HM Government on 24 March 2016 will, if passed by Parliament, change the tax treatment of dividends in the hands of UK-resident shareholders who are individuals in respect of dividends paid on or after 6 April 2016. Assuming that the relevant provisions are duly enacted, and that the provisions as enacted do not differ in any material respect from the draft provisions published on 24 March 2016, the UK withholding tax treatment of dividends paid on dividends. A shareholder who isor after 6 April 2016 to UK-resident individuals will be as follows:
Where a shareholder’s taxable dividend income for a tax year exceeds the gross dividend, which will be regarded asNil Rate Amount, the top slice of the individual’s income. In the case of a shareholder who is liable to income tax at the basic rate, the tax credit will be treated as discharging the individual’s liability to income tax in respect of the gross dividend. In the case of a shareholder who is liable to income tax at the higher rate, the individualexcess amount (the “Relevant Dividend Income”) will be subject to tax on the gross dividend at the rate of 32.5%, to the extent that the gross dividend falls above the threshold for the higher rate of income tax when it is treated (as mentioned above) as the top slice of the individual’s income. This means that the tax credit will satisfy only part of the individual’s liability to income tax on the gross dividend, so that the individual will have to account for income tax equal to 22.5% of the gross dividend. In the case of a shareholder who is liable to income tax at the additional rate, the individual will be subject to tax on the gross dividend at the rate of 37.5%, to the extent that the gross dividend falls above the threshold for the additional rate of income tax when it is treated (as mentioned above) as the top slice of the individual’s income. This means that the tax credit will satisfy only part of the individual’s liability to income tax on the gross dividend, so that the individual will have to account for income tax equal to 27.5% of the gross dividend. tax:
1. | at the rate of 7.5%, to the extent that the Relevant Dividend Income falls below the threshold for the higher rate of income tax; |
2. | at the rate of 32.5%, 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 |
3. | at the rate of 38.1%, to the extent that the Relevant Dividend Income falls above the threshold for the additional rate of income tax. |
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 Diageo.the company. Other shareholders within the charge to UK corporation tax will not be subject to tax on dividends from Diageo sothe company as 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. A shareholder who is not liable for tax on dividends received on the shares will not be entitled to claim payment of the tax credit in respect of those dividends.
The Chancellor announced in his Budget of 8 July 2015 substantial changes in relation to the taxation of dividends for individuals. If these changes are enacted, from 6 April 2016 the dividend tax credit will be abolished and replaced with a new tax-free dividend allowance of £5,000 for all taxpayers and the dividend tax rates will become 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
Eligible US holders will not normally be entitled to a tax credit under the Treaty, nor will they be subject to a withholding tax by the United Kingdom.
US taxation
Under the US federal income tax laws, and subject to the passive foreign investment company (PFIC), rules discussed below, the gross amount of any dividend 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) 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 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. 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.
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Additional information for shareholders (continued)
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 be income from sources outside the United States, and, depending on the US holder’s circumstances, will generally either be ‘passive’ or ‘general’ income for purposes of computing the foreign tax credit, if 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 pencepounds sterling payments made, determined at the spot pounds sterling/US dollar foreign exchange rate on the date 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 income 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.
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Additional information for shareholders (continued)
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 taxation of chargeabletax 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.
PFIC rules
Diageo believes that ordinary shares and ADSs should not be treated as stock of a PFIC for US federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change. If treated as a PFIC, unless a US holder elects to be taxed annually on a mark-to-market basis with respect to the ordinary shares or ADSs, gain realised on the sale or other disposition of ordinary shares or ADSs would in general not be treated as capital gain. Instead, unless a US holder elects to be taxed annually on a mark-to-market basis with respect to the ordinary shares or ADSs, US holders would be treated as if the holder had realised such gain and certain ‘excess distributions’ pro-rated over the holder’s holding period for the ordinary shares or ADSs and would be taxed at the highest tax rate in effect for each such year to which the gain or distribution was allocated, together with an interest charge in respect of the tax attributable to each such year. With certain exceptions, a holder’s ordinary shares or ADSs will be treated as stock in a PFIC if Diageo were a PFIC at any time during the holding period in a holder’s ordinary shares or ADSs. In addition, dividends received from Diageo will not be eligible for the special tax rates applicable to qualified dividend income if Diageo is a PFIC (or is treated as a PFIC with respect to the holder) either in the taxable year of the distribution or the preceding taxable year, but instead will be taxable at rates applicable to ordinary income.
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Additional information for shareholders (continued)
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 is not a UK national as defined in the Convention will 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 or stamp reserve tax (SDRT) arisesis no longer imposed where new underlying ordinary shares are issued into the Depository system, following the case ofHSBC Holdings plc and Vidacos Nominees Limited v Commissioners for HMRC.Stamp duty or stamp reserve tax (SDRT) is still imposed upon the deposittransfer of an existing underlying ordinary share withto the Depositary, generally at the higher rate of 1.5% of its issue price or, as the case may be, of the consideration for the 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. No UK stamp duty will be payable on the acquisition or transfer of ADSs in practice, provided that the instrument of transfer is not executed in the United Kingdom and remains at all times outside the United Kingdom. Furthermore, an agreement to transfer ADSs in the form of ADRs will not give rise to a liability to SDRT.
Purchases of ordinary shares will be subject to UK stamp duty, 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. However, where ordinary shares being acquired are transferred direct to the Depositary’s nominee, the only charge will generally be the higher SDRT charge of 1.5% of the price payable for the ordinary shares so acquired.
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Additional information for shareholders (continued)
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 where an instrument of transfer is executed and the amount or value of the consideration is (and is certified to be) £1,000 or less. Stamp duty or SDRT is usually paid or borne by the purchaser.
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 in the investor section of the company’s website (www.diageo.com) but in short, if in doubt, take proper professional advice before making any investment decision.
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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/ |
Name: |
Title: Chief Financial Officer |
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Additional information for shareholders (continued)
Exhibits
1.1 | Articles of Association of Diageo plc (incorporated by reference to Exhibit 99.1 to the Report on Form 6-K (File No. 001-10691) filed with the Securities and Exchange Commission on 15 October 2009). | |
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 | Indenture, dated as of 8 December 2003, among Diageo Finance B.V., Diageo plc and The Bank of New York Mellon (incorporated by reference to Exhibit 1 to the Report on Form 6-K (File No. 001-10691) filed with the Securities and Exchange Commission on 9 December 2003).(i) | |
4.1 | Service Agreement, dated 1 | |
4.2 | Service Agreement, dated 7 May 2013, between Diageo plc, Diageo North America, Inc. and Ivan Menezes (incorporated by reference to Exhibit 4.2 to the Annual Report on Form 20-F (File No. 001-10691) filed with the Securities and Exchange Commission on 12 August 2013). | |
4.3 | Letter of Agreement, dated 19 July 2007, between Diageo plc and Dr Franz | |
4.4 | Form of Service Agreement for Diageo plc’s executives in the United Kingdom, dated as of 1 July 2006 (incorporated by reference to Exhibit 4.7 to the Annual Report on Form 20-F (File No. 001-10691) filed with the Securities and Exchange Commission on 17 September 2007). | |
4.5 | Form of Service Agreement for Diageo plc’s executives in the United States, dated as of 1 July 2006 (incorporated by reference to Exhibit 4.8 to the Annual Report on Form 20-F (File No. 001-10691) filed with the Securities and Exchange Commission on 17 September 2007). | |
4.6 | Form of Service Agreement for Diageo plc’s executives in the United Kingdom, in use as of July | |
4.7 | Form of Service Agreement for Diageo plc’s executives in the United States, in use as of July | |
4.8 | Diageo 2010 Sharesave Plan, dated 14 October 2010 (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-8 (File No. 333-169934) filed with the Securities and Exchange Commission on 14 October 2010). | |
4.9 | Diageo 2001 Share Incentive Plan, dated 14 October 2010 (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-8 (File No. 333-169934) filed with the Securities and Exchange Commission on 14 October 2010). | |
4.10 | Rules of the Diageo plc 2009 International Share Match Plan, dated 14 October 2010 (incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-8 (File No. 333-169934) filed with the Securities and Exchange Commission on 14 October 2010). | |
4.11 | Diageo plc 2009 Executive Long Term Incentive Plan, dated 14 October 2009 (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-8 (File No. 333-162490) filed with the Securities and Exchange Commission on 15 | |
4.12 | Diageo plc 2009 Discretionary Incentive Plan, dated 14 October 2009 (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-8 (File No. 333-162490) filed with the Securities and Exchange Commission on 15 | |
4.13 | Diageo plc 2008 Performance Share Plan, dated as of 15 October 2008 (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-8 (File No. 333-154338) filed with the Securities and Exchange Commission on 16 October 2008). | |
4.14 | Diageo plc 2008 Senior Executive Share Option Plan, dated as of 15 October 2008 (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-8 (File No. 333-154338) filed with the Securities and Exchange Commission on 16 October 2008). | |
4.15 | Diageo plc Senior Executive Share Option Plan, dated as of 26 August 2008 (incorporated by reference to Exhibit 4.7 to the Annual Report on Form 20-F (File No. 001-10691) filed with the Securities and Exchange Commission on 15 September 2008). | |
4.16 | Diageo plc Executive Share Option Plan, dated as of 26 August 2008 (incorporated by reference to Exhibit 4.8 to the Annual Report on Form 20-F (File No. 001-10691) filed with the Securities and Exchange Commission on 15 September 2008). |
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Additional information for shareholders (continued)
4.17 | Diageo plc Associated Companies Share Option Plan, dated as of 26 August 2008 (incorporated by reference to Exhibit 4.9 to the Annual Report on Form 20-F (File No. 001-10691) filed with the Securities and Exchange Commission on 15 September 2008). | |
4.18 | Diageo plc Long Term Incentive Plan, dated as of 26 August 2008 (incorporated by reference to Exhibit 4.10 to the Annual Report on Form 20-F (File No. 001-10691) filed with the Securities and Exchange Commission on 15 September 2008). |
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Additional information for shareholders (continued)
4.19 | Diageo plc 1998 United States Employee Stock Purchase Plan, dated as of 26 August 2008 (incorporated by reference to Exhibit 4.12 to the Annual Report on Form 20-F (File No. 001-10691) filed with the Securities and Exchange Commission on 15 September 2008). | |
4.20 | Diageo plc 2007 United States Employee Stock Purchase Plan, dated as of 26 August 2008 (incorporated by reference to Exhibit 4.13 to the Annual Report on Form 20-F (File No. 001-10691) filed with the Securities and Exchange Commission on 15 September 2008). | |
4.21 | Diageo plc UK Sharesave Scheme 2000, dated as of 26 August 2008 (incorporated by reference to Exhibit 4.14 to the Annual Report on Form 20-F (File No. 001-10691) filed with the Securities and Exchange Commission on 15 September 2008). | |
4.22 | Addendum to Form of Service Agreement for Diageo plc’s executives in the United States (incorporated by reference to Exhibit 4.16 to the Annual Report on Form 20-F (File No. 001-10691) filed with the Securities and Exchange Commission on 15 September 2008). | |
4.23 | Diageo plc Associated Companies Share Incentive Plan, dated as of 23 August 2011 (incorporated by reference to Exhibit 4.22 to the Annual Report on Form 20-F (File No. 001-10691) filed with the Securities and Exchange Commission on 5 September 2012). | |
4.24 | Diageo plc Long Term Incentive Plan, dated as of 18 September 2014 (incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 (File No. 333-206290) filed with the Securities and Exchange Commission on 11 August 2015). | |
4.25 | Letter of Agreement, dated 12 May 2016, between Diageo plc and Mr. Javier Ferran. | |
6.1 | Description of earnings per share (included in the section ‘How we measure performance: Key performance indicators’ on | |
7.1 | Description of unaudited computation of ratio of earnings to fixed charges (included on page | |
8.1 | Principal group companies (included in note 21 to the consolidated financial statements on page | |
12.1 | Certification of Ivan Menezes filed pursuant to 17 CFR 240.13a-14(a). | |
12.2 | Certification of | |
13.1 | Certification of Ivan Menezes furnished pursuant to 17 CFR 240.13a-14(b) and 18 U.S.C. 1350(a) and (b). | |
13.2 | Certification of | |
15.1 | Consent of | |
15.2 | Consent of KPMG LLP, independent registered public accounting firm. | |
(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. |
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Additional information for shareholders (continued)
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 | 8-11 | |||
B. Capitalization and indebtedness | Not applicable | |||
C. Reason for the offer and use of proceeds | Not applicable | |||
D. Risk factors | ||||
4. | Information on the company | |||
A. History and development of the company | 5, | |||
B. Business overview | 5, | |||
C. Organizational structure | ||||
D. Property, plants and equipment |
| |||
4A. | Unresolved staff comments | Not applicable | ||
5. | Operating and financial review and prospects | |||
A. Operating results |
| |||
B. Liquidity and capital resources | ||||
C. Research and development, patents and licenses, etc. | 15 | |||
D. Trend information | ||||
E. Off-balance sheet arrangements | ||||
F. Tabular disclosure of contractual obligations | ||||
G. Safe harbor | — | |||
6. | Directors, senior management and employees | |||
A. Directors and senior management | ||||
B. Compensation | ||||
C. Board practices | ||||
D. Employees | ||||
E. Share ownership |
| |||
7. | Major shareholders and related party transactions | |||
A. Major shareholders | ||||
B. Related party transactions | ||||
C. Interests of experts and counsel | Not applicable | |||
8. | Financial information | |||
A. Consolidated statements and other financial information | ||||
B. Significant changes | ||||
9. | The offer and listing | |||
A. Offer and listing details | ||||
B. Plan of distribution | Not applicable | |||
C. Markets | ||||
D. Selling shareholders | ||||
| ||||
Not applicable | ||||
| ||||
E. Dilution | Not applicable | |||
F. Expenses of the issue | ||||
Not applicable | ||||
263286
Additional information for shareholders (continued)
Item | Required item in Form 20-F | Page(s) | ||
10. | Additional information | |||
A. Share capital | Not applicable | |||
B. Memorandum and articles of association | 274-278 | |||
C. Material contracts | 174-176, 259-260 | |||
D. Exchange controls | 278 | |||
E. Taxation | 279-282 | |||
F. Dividends and paying agents | Not applicable | |||
G. Statement by experts | Not applicable | |||
H. Documents on display | 278 | |||
I. Subsidiary information | Not applicable | |||
11. | Quantitative and qualitative disclosures about market risk | |||
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 | ||||
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 | ||||
B. Management’s report on internal control over financial reporting | ||||
C. Attestation report of the registered public accounting firm | ||||
D. Changes in internal control over financial reporting | ||||
16A. | Audit committee financial expert | |||
16B. | Code of ethics | |||
16C. | Principal accountant fees and services | |||
16D. | Exemptions from the listing standards for audit committees | Not applicable | ||
16E. | Purchases of equity securities by the issuer and affiliated purchasers | |||
16F. | Change in registrant’s certifying accountant | |||
16G. | Corporate governance | |||
16H. | Mine safety disclosure | Not applicable | ||
Part III | ||||
17. | Financial statements | Not applicable | ||
18. | Financial statements | See Item 8 | ||
19. | Exhibits | |||
Additional information | ||||
Unaudited computation of ratio of earnings to fixed charges | ||||
Glossary of terms and US equivalents |
It is possible to read and copy documents that have been filed by Diageo plc with the U.S. Securities and Exchange Commission (SEC) at the SEC’s public reference room,facilities located at 450 5ththe SEC Headquarters at 100 F Street, N.W.,NE, Washington, D.C.DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference roomfacilities and their copy charges. Filings with the SEC are also available to the public from commercial document retrieval services, and onfrom the website maintained by the SEC at www.sec.gov.
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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 | |
| ||
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 | |
| ||
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 endorsed and adopted for use in the European Union and International Financial Reporting Standards as issued by the International Accounting Standards Board | |
IWSR, Impact Databank, | 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 |
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Glossary of terms and US equivalents (continued)
Term used in UK annual report | US equivalent or definition | |
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 or as price changes are implemented. |
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Glossary of terms and US equivalents (continued)
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| |
Profit | Earnings | |
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 premix 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 | |
Staff costs | Payroll costs | |
Trade and other payables | Accounts payable and accrued liabilities | |
Trade and other receivables | Accounts receivable | |
US dollar, US$, $, ¢ | US currency |
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