UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: 30 June 20162017
Commission file number 1-10691
DIAGEO plc
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organisation)
Lakeside Drive, Park Royal, London NW10 7HQ, England
(Address of principal executive offices)
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 28101/108 pence each
| | 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: 2,754,380,8362,754,467,515 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 the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.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 ☐ Emerging growth company ☐ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
¨† | The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| | | | |
U.S. GAAP ¨☐ | | International Financial Reporting Standards 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 20162017 of Diageo plc (the 20162017 Form 20-F).
Contents
| | |
5 | | Introduction |
7 | | Recent trends |
8 | | Historical information |
| |
12 | | |
13 | | Strategic report |
1213 | | Business description |
1213 | | Our business model |
17 | | Our global reach |
18 | | Our brands |
19 | | Breadth and depth across price points |
2015 | | Our strategy |
21 | | Our business modelglobal reach |
22 | | Our brands |
23 | | How we measure performance: key performance indicators |
28 | | Chairman’s statement |
3231 | | Chief Executive’s statement |
3534 | | Market dynamics |
38 | | How we will deliver our Performance Ambition |
3937 | | Risk factors |
46 | | Cautionary statement concerning forward-lookingforward looking statements |
| | |
4849 | | Business review |
4849 | | Operating results 2017 compared with 2016 |
83 | | Operating results 2016 compared with 2015 |
80 | | Operating results 2015 compared with 2014 |
110115 | | Liquidity and capital resources |
112117 | | Contractual obligations and commitments |
112118 | | Off-balance sheet arrangements |
113118 | | Risk management |
113118 | | Critical accounting policies |
113118 | | New accounting standards |
114119 | | Our role in society |
133141 | | Definitions and reconciliation of non-GAAP measures to GAAP measures |
| |
147 | | |
155 | | Governance |
147155 | | Board of Directors and Company Secretary |
150 158 | | Executive Committee |
152160 | | Corporate governance report |
161168 | | Report of the Audit Committee |
165172 | | Directors’ remuneration report |
194200 | | Directors’ report |
3
Contents (continued)
| | | | | | |
197 203 | | Financial statements | | | | |
203 | | 197Reports of Independent Registered Public Accounting Firms
| | Reports of independent registered public accounting firms | | |
199 205 | | Consolidated income statement | | | | |
200 206 | | Consolidated statement of comprehensive income | | | | |
201 207 | | Consolidated balance sheet | | | | |
202 208 | | Consolidated statement of changes in equity | | | | |
203 209 | | Consolidated statement of cash flows | | | | |
204 210 | | Notes to the consolidated financial statements | | | | |
204210
| | Accounting information and policies | | | | |
207212
| | Results for the year | | | | |
224227
| | Operating assets and liabilities | | | | |
245247
| | Risk management and capital structure | | | | |
261263
| | Other financial information | | | | |
| | |
271272
| | Unaudited computation of ratio of earnings to fixed charges | | | | |
| | |
272273
| | Additional information for shareholders | | | | |
272273
| | Legal proceedings | | | | |
272273
| | Related party transactions |
272
| | Share capital | | |
273 | | Share capital | | | | |
275 | | American depositary shares | | | | |
274275
| | Articles of association | | | | |
278279
| | Exchange controls | | | | |
278280
| | Documents on display | | | | |
279280
| | Taxation | | | | |
282283
| | Warning to shareholders - share fraud |
283
| | Signature | | |
284 | | ExhibitsSignature | | | | |
286285
| | Exhibits | | | | |
287 | | Cross reference to Form 20-F | | | | |
| | |
288290
| | Glossary of terms and US equivalents | | | | |
4
Introduction
Diageo is a global leader in the world’s leading premium drinks business.beverage alcohol industry. 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 plc (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 2016.2017. 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 2017, 2016 2015 or 2014.2015. PricewaterhouseCoopers LLP has reported on the accounts for the yearyears ended 30 June 2017 and 2016, and the group’s former auditors,auditor, KPMG LLP has reported on the accounts for the year ended 30 June 2015 and 2014;2015; 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 2017, 2016 2015 or 2014.2015. The accounts for 20152016 and 20142015 have been delivered to the registrar of companies for England and Wales and those for 20162017 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 46-47.46-48.
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
Organic movements and organic operating margins are before exceptional items. Commentary, unless otherwise stated, refers to organic movements. Share, unless otherwise stated, refers to value share. For a definition of organic movement and reconciliations of non-GAAP measures to GAAP measures see on page 133.141.
The brand ranking information presented in this report, when comparing information with competitors, reflects data published by sources such as IWSR, Impact Databank, Nielsen, Beverage Information Group and Plato Logic.Databank. Market data information and competitive set classifications are taken from independent industry sources in the markets in which Diageo operates.
5
Introduction (continued)
Disclosures not incorporated by reference
The following pages and sections of the Annual Report of Diageo plc for the year ended 30 June 2016,2017 are not incorporated by reference into this report on Form 20-F and are furnished to the United States Securities and Exchange Commission (SEC)SEC for information only:
Disclosures under the headings ‘Values’, ‘Broad portfolio’, ‘Global reach’, ‘Our role in society’, ‘Financial strength’, ‘Efficient supply and procurement’, ‘Brilliant execution’, ‘Doing business the right way’, ‘We produce’, ‘We innovate’, ‘We market’, and ‘Our role in society’‘We sell’ in the section ‘Strategic Reportreport – Our business’business model’ on pages 13 and 14.
Disclosures under the headings ‘Creating a positive role for alcohol in society’, ‘Building thriving communities’, ‘Reducing our environmental impact’, and ‘Highest standards of governance and ethics’ in the section ‘Strategic report – Our strategy on page 12.16.
5
Introduction (continued)
Disclosures included under the titles ‘Number of responsible drinking programs (%)’, ‘Water withdrawals’withdrawal (%)’, ‘Carbon emission (%)’ and ‘Carbon emissions’‘Number of employees (%)’ in the section ‘Strategic Reportreport – Our Global Reachglobal reach – Diageo reports as five regions’ on page 17.
Disclosures on pages 21 and 22 in the section ‘Strategic Report – Our business model’ under the sub-headings ‘Values’, ‘Our role in society’ and ‘Sustainability and responsibility priorities’.21.
Disclosures on pages 25 and 27 in the section ‘Strategic Reportreport – How we measure performance: key performance indicators’ of non-financial key performance indicators.
Disclosures under the heading ‘Our role in society’ in the Chairman’s Statementstatement on page 30.29.
Disclosures under the heading ’ Our‘Our role in society’ in the Chief Executive’s statement on pages 3332 and 34.
Disclosures on pages 36 and 37 under the heading ‘Strategic Report – Market Dynamics – Earning the trust and respect which support performance’.33.
Disclosures included under the headingtitles ‘Earning trust and respect as part of wider society’, ‘Creating a positive role for alcohol in society’, ‘Industry collaboration and partnership to reduce harmful drinking’, ‘Building thriving communities’, ‘Water and environment’ and ‘Diageo sites located in water-stressed areas’ in the section ‘Strategic Reportreport – How we will deliver our Performance Ambition – our three SustainabilityMarket dynamics’ on pages 35 and responsibility priorities’ on page 38.36.
Disclosures included under the titles ‘Sustainability and responsibility’ on pages 61, 64, 68, 71,62, 65, 69, 73, and 7477 in relation to each reporting segment in the Business Review.
Disclosures in the section ‘Strategic report – Our role in society’ on pages 114119 to 132.140.
6
Recent trends
The following comments were made by Ivan Menezes, Chief Executive of Diageo, in Diageo’s preliminary results announcement on 2827 July 2016:2017:
“This isWe delivered a goodstrong set of results including broad based improvement in organic net sales and operating profit. Our performance demonstrates the effective delivery of our strategy through disciplined execution of our six priorities put in place four years ago. We have delivered consistent strong performance improvement across all regions and I am pleased with progress in our focus areas of US Spirits, scotch and India.
Our productivity work is delivering what we set outahead of expectations allowing us to achieve this time last yearreinvest in our brands, drive margin improvement and demonstrating our momentum.
This better performance reflects the workgenerate consistent strong cash flow. Through productivity we have done to strengthen our big brands through marketingembedded an everyday efficiency mind set in the business and innovation, as well as expanding our distribution reach. Our six global brandswith improved data and our US spirits businessinsight we are all back in growthmaking faster, smarter decisions on investment choices.
Diageo is a strong company today and we have seen a significant improvementare confident in our ability to deliver sustainable growth. We are raising our productivity goal to £700 million with two thirds being reinvested 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 efficiency in each aspect of our business. We have also made significant progress this year in our aimcontinue 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 stronger performance in F17. We are confident of achieving our objective ofexpect mid-single digit top line growth, and inwe are raising our operating margin expansion objective to 175bps over the three years ending F19 delivering 100bps30 June 2019.
Following three years of organic operating margin improvement.consistently improving cash flow generation the Board has approved a share buyback programme of up to £1.5 billion in F18.”
7
Historical information
The following tables present selected consolidated financial data for Diageo for the five years ended 30 June 20162017 and as at the respective year ends. The data presented below for the five years ended 30 June 20162017 and the respective year ends has been derived from Diageo’s consolidated financial statements, audited by Diageo’s independent auditor.auditor, PricewaterhouseCoopers LLP for the two years ended 30 June 2017. The group’s former auditors,auditor, KPMG LLP and its affiliates (KPMG) reported on the financial statements for the fourthree years ended 30 June 2015.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income statement data | | Year ended 30 June | | | Year ended 30 June | |
| | 2016 £ million | | 2015 £ million | | 2014 £ million | | 2013 £ million | | 2012 £ million | | | 2017 £ million | | 2016 £ million | | 2015 £ million | | 2014 £ million | | 2013 £ million | |
Sales | | | 15,641 | | | 15,966 | | | 13,980 | | | 15,276 | | | 14,392 | | | | 18,114 | | | 15,641 | | | 15,966 | | | 13,980 | | | 15,276 | |
Excise duties | | | (5,156 | ) | | (5,153 | ) | | (3,722 | ) | | (3,973 | ) | | (3,753 | ) | | | (6,064 | ) | | (5,156 | ) | | (5,153 | ) | | (3,722 | ) | | (3,973 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | | 10,485 | | | 10,813 | | | 10,258 | | | 11,303 | | | 10,639 | | | | 12,050 | | | 10,485 | | | 10,813 | | | 10,258 | | | 11,303 | |
Cost of sales | | | (4,251 | ) | | (4,610 | ) | | (4,029 | ) | | (4,416 | ) | | (4,208 | ) | | | (4,680 | ) | | (4,251 | ) | | (4,610 | ) | | (4,029 | ) | | (4,416 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 6,234 | | | 6,203 | | | 6,229 | | | 6,887 | | | 6,431 | | | | 7,370 | | | 6,234 | | | 6,203 | | | 6,229 | | | 6,887 | |
Marketing | | | (1,562 | ) | | (1,629 | ) | | (1,620 | ) | | (1,769 | ) | | (1,671 | ) | | | (1,798 | ) | | (1,562 | ) | | (1,629 | ) | | (1,620 | ) | | (1,769 | ) |
Other operating expenses | | | (1,831 | ) | | (1,777 | ) | | (1,902 | ) | | (1,738 | ) | | (1,652 | ) | | | (2,013 | ) | | (1,831 | ) | | (1,777 | ) | | (1,902 | ) | | (1,738 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | 2,841 | | | 2,797 | | | 2,707 | | | 3,380 | | | 3,108 | | | | 3,559 | | | 2,841 | | | 2,797 | | | 2,707 | | | 3,380 | |
Non-operating items | | | 123 | | | 373 | | | 140 | | | (83 | ) | | 147 | | | | 20 | | | 123 | | | 373 | | | 140 | | | (83 | ) |
Net interest and other financial charges | | | (327 | ) | | (412 | ) | | (388 | ) | | (457 | ) | | (441 | ) | | | (329 | ) | | (327 | ) | | (412 | ) | | (388 | ) | | (457 | ) |
Share of other tax results of associates and joint ventures | | | 221 | | | 175 | | | 252 | | | 217 | | | 229 | | |
Share of after tax results of associates and joint ventures | | | | 309 | | | 221 | | | 175 | | | 252 | | | 217 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit before taxation | | | 2,858 | | | 2,933 | | | 2,711 | | | 3,057 | | | 3,043 | | | | 3,559 | | | 2,858 | | | 2,933 | | | 2,711 | | | 3,057 | |
Taxation | | | (496 | ) | | (466 | ) | | (447 | ) | | (507 | ) | | (1,011 | ) | | | (732 | ) | | (496 | ) | | (466 | ) | | (447 | ) | | (507 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit from continuing operations | | | 2,362 | | | 2,467 | | | 2,264 | | | 2,550 | | | 2,032 | | | | 2,827 | | | 2,362 | | | 2,467 | | | 2,264 | | | 2,550 | |
Discontinued operations | | | — | | | | — | | | (83 | ) | | | — | | | (11 | ) | | | (55 | ) | | | — | | | | — | | | (83 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit for the year | | | 2,362 | | | 2,467 | | | 2,181 | | | 2,550 | | | 2,021 | | | | 2,772 | | | 2,362 | | | 2,467 | | | 2,181 | | | 2,550 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average number of shares | | million | | million | | million | | million | | million | | | million | | million | | million | | million | | million | |
Shares in issue excluding own shares | | | 2,508 | | | 2,505 | | | 2,506 | | | 2,502 | | | 2,495 | | | | 2,512 | | | 2,508 | | | 2,505 | | | 2,506 | | | 2,502 | |
Dilutive potential ordinary shares | | | 10 | | | 12 | | | 11 | | | 15 | | | 14 | | | | 11 | | | 10 | | | 12 | | | 11 | | | 15 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2,518 | | | 2,517 | | | 2,517 | | | 2,517 | | | 2,509 | | | | 2,523 | | | 2,518 | | | 2,517 | | | 2,517 | | | 2,517 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Per share data | | pence | | pence | | pence | | pence | | pence | | | pence | | pence | | pence | | pence | | pence | |
Dividend per share | | | 59.2 | | | 56.4 | | | 51.7 | | | 47.4 | | | 43.5 | | | | 62.2 | | | 59.2 | | | 56.4 | | | 51.7 | | | 47.4 | |
Earnings per share | | | | | | | | | | | | | | | | | | | | |
Basic | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | | 89.5 | | | 95.0 | | | 93.0 | | | 98.0 | | | 76.6 | | | | 108.2 | | | 89.5 | | | 95.0 | | | 93.0 | | | 98.0 | |
Discontinued operations | | | — | | | | — | | | (3.3 | ) | | | — | | | (0.4 | ) | | | (2.2 | ) | | | — | | | | — | | | (3.3 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per share | | | 89.5 | | | 95.0 | | | 89.7 | | | 98.0 | | | 76.2 | | | | 106.0 | | | 89.5 | | | 95.0 | | | 89.7 | | | 98.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | | 89.1 | | | 94.6 | | | 92.6 | | | 97.4 | | | 76.2 | | | | 107.7 | | | 89.1 | | | 94.6 | | | 92.6 | | | 97.4 | |
Discontinued operations | | | — | | | | — | | | (3.3 | ) | | | — | | | (0.4 | ) | | | (2.2 | ) | | | — | | | | — | | | (3.3 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted earnings per share | | | 89.1 | | | 94.6 | | | 89.3 | | | 97.4 | | | 75.8 | | | | 105.5 | | | 89.1 | | | 94.6 | | | 89.3 | | | 97.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
8
Historical information (continued)
Balance sheet data
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As at 30 June | | | As at 30 June | |
| | 2016 £ million | | 2015 £ million | | 2014 £ million | | 2013 £ million | | 2012 £ million | | | 2017 £ million | | 2016 £ million | | 2015 £ million | | 2014 £ million | | 2013 £ million | |
Non-current assets | | | 19,639 | | | 18,134 | | | 15,495 | | | 16,481 | | | 15,098 | | | | 20,196 | | | 19,639 | | | 18,134 | | | 15,495 | | | 16,481 | |
Current assets | | | 8,852 | | | 7,670 | | | 7,469 | | | 8,510 | | | 7,171 | | | | 8,652 | | | 8,852 | | | 7,670 | | | 7,469 | | | 8,510 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | | 28,491 | | | 25,804 | | | 22,964 | | | 24,991 | | | 22,269 | | | | 28,848 | | | 28,491 | | | 25,804 | | | 22,964 | | | 24,991 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current liabilities | | | (6,187 | ) | | (5,290 | ) | | (4,851 | ) | | (5,519 | ) | | (4,762 | ) | | | (6,660 | ) | | (6,187 | ) | | (5,290 | ) | | (4,851 | ) | | (5,519 | ) |
Non-current liabilities | | | (12,124 | ) | | (11,258 | ) | | (10,523 | ) | | (11,384 | ) | | (10,715 | ) | | | (10,160 | ) | | (12,124 | ) | | (11,258 | ) | | (10,523 | ) | | (11,384 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities | | | (18,311 | ) | | (16,548 | ) | | (15,374 | ) | | (16,903 | ) | | (15,477 | ) | | | (16,820 | ) | | (18,311 | ) | | (16,548 | ) | | (15,374 | ) | | (16,903 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net assets | | | 10,180 | | | 9,256 | | | 7,590 | | | 8,088 | | | 6,792 | | | | 12,028 | | | 10,180 | | | 9,256 | | | 7,590 | | | 8,088 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Share capital | | | 797 | | | 797 | | | 797 | | | 797 | | | 797 | | | | 797 | | | 797 | | | 797 | | | 797 | | | 797 | |
Share premium | | | 1,347 | | | 1,346 | | | 1,345 | | | 1,344 | | | 1,344 | | | | 1,348 | | | 1,347 | | | 1,346 | | | 1,345 | | | 1,344 | |
Other reserves | | | 2,625 | | | 1,994 | | | 2,243 | | | 3,154 | | | 3,213 | | | | 2,693 | | | 2,625 | | | 1,994 | | | 2,243 | | | 3,154 | |
Retained earnings | | | 3,761 | | | 3,634 | | | 2,438 | | | 1,741 | | | 234 | | | | 5,475 | | | 3,761 | | | 3,634 | | | 2,438 | | | 1,741 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity attributable to equity shareholders of the parent company | | | 8,530 | | | 7,771 | | | 6,823 | | | 7,036 | | | 5,588 | | | | 10,313 | | | 8,530 | | | 7,771 | | | 6,823 | | | 7,036 | |
Non-controlling interests | | | 1,650 | | | 1,485 | | | 767 | | | 1,052 | | | 1,204 | | | | 1,715 | | | 1,650 | | | 1,485 | | | 767 | | | 1,052 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total equity | | | 10,180 | | | 9,256 | | | 7,590 | | | 8,088 | | | 6,792 | | | | 12,028 | | | 10,180 | | | 9,256 | | | 7,590 | | | 8,088 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net borrowings | | | (8,635 | ) | | (9,527 | ) | | (8,850 | ) | | (8,403 | ) | | (7,573 | ) | | | (7,892 | ) | | (8,635 | ) | | (9,527 | ) | | (8,850 | ) | | (8,403 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Notes to the historical information
1. Accounting policiesThe consolidated financial statements for the five years ended 30 June 20162017 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 | | | Year ended 30 June | |
| | 2016 £ million | | 2015 £ million | | 2014 £ million | | 2013 £ million | | 2012 £ million | | | 2017 £ million | | 2016 £ million | | 2015 £ million | | 2014 £ million | | 2013 £ million | |
Items included in operating profit | | | | | | | | | | | | | | | | | | | | |
Competition authority investigation in Turkey | | | | (33 | ) | | | — | | | | — | | | | — | | | | — | |
Customer claim in India | | | | (32 | ) | | | — | | | | — | | | | — | | | | — | |
Disengagement agreements relating to United Spirits Limited | | | | 23 | | | (49 | ) | | | — | | | | — | | | | — | |
Brand, goodwill and tangible asset impairment | | | (118 | ) | | | — | | | (264 | ) | | (50 | ) | | (59 | ) | | | — | | | (118 | ) | | | — | | | (264 | ) | | (50 | ) |
Restructuring programmes | | | — | | | (82 | ) | | (163 | ) | | (69 | ) | | (96 | ) | | | — | | | | — | | | (82 | ) | | (163 | ) | | (69 | ) |
Duty settlements | | | — | | | (146 | ) | | | — | | | | — | | | | — | | |
Korea settlement | | | | — | | | | — | | | (146 | ) | | | — | | | | — | |
Associate impairment | | | — | | | (41 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | (41 | ) | | | — | | | | — | |
Pension changes – past service credits | | | — | | | | — | | | | — | | | 20 | | | 115 | | | | — | | | | — | | | | — | | | | — | | | 20 | |
Disengagement agreements relating to United Spirits Limited | | | (49 | ) | | | — | | | | — | | | | — | | | | — | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (167 | ) | | (269 | ) | | (427 | ) | | (99 | ) | | (40 | ) | | | (42 | ) | | (167 | ) | | (269 | ) | | (427 | ) | | (99 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-operating items | | | | | | | | | | | | | | | | | | | | |
Gains/(losses) on sale of businesses | | | 215 | | | 247 | | | — | | | (83 | ) | | 23 | | | | 20 | | | 215 | | | 247 | | | | — | | | (83 | ) |
Step up gains | | | — | | | 156 | | | 140 | | | | — | | | 124 | | | | — | | | | — | | | 156 | | | 140 | | | | — | |
Other non-operating items | | | (92 | ) | | (30 | ) | | — | | | | — | | | | — | | | | — | | | (92 | ) | | (30 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 123 | | | 373 | | | 140 | | | (83 | ) | | 147 | | | | 20 | | | 123 | | | 373 | | | 140 | | | (83 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Items included in taxation | | | | | | | | | | | | | | | | | | | | |
Tax credit on exceptional operating items | | | 7 | | | 51 | | | 99 | | | 27 | | | 19 | | | | 11 | | | 7 | | | 51 | | | 99 | | | 27 | |
Tax on sale of businesses | | | 49 | | | | — | | | | — | | | 28 | | | | — | | | | (7 | ) | | 49 | | | | — | | | | — | | | 28 | |
Loss of future tax amortisation | | | — | | | | — | | | | — | | | | — | | | (524 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 56 | | | 51 | | | 99 | | | 55 | | | (505 | ) | | | 4 | | | 56 | | | 51 | | | 99 | | | 55 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exceptional items in continuing operations | | | 12 | | | 155 | | | (188 | ) | | (127 | ) | | (398 | ) | | | (18 | ) | | 12 | | | 155 | | | (188 | ) | | (127 | ) |
Discontinued operations net of taxation (note 3) | | | — | | | | — | | | (83 | ) | | | — | | | (11 | ) | | | (55 | ) | | | — | | | | — | | | (83 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exceptional items | | | 12 | | | 155 | | | (271 | ) | | (127 | ) | | (409 | ) | | | (73 | ) | | 12 | | | 155 | | | (271 | ) | | (127 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
3. Discontinued operations In the year ended 30 June 2017 discontinued operations of £55 million, net of £9 million deferred tax comprise additional amounts payable to the UK Thalidomide Trust following an agreement reached in December 2016, updates to the discount and inflation rates applied to the existing thalidomide provision and legal costs. In the year ended 30 June 2014 discontinued operations comprised a charge after taxationtax of £83 million, (£91 million less taxnet of £8 million) (2012 - £16 million less deferred tax, of £5 million) in respect of the settlement of thalidomide litigation in respect of claimants in Australia and New Zealand and anticipated future payments to thalidomide organisations.the UK Thalidomide Trust.
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.
10
Historical information (continued)
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 | |
| | | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| | | | | pence | | | pence | | | pence | | | pence | | | pence | |
Per ordinary share | | | Interim | | | | 22.60 | | | | 21.50 | | | | 19.70 | | | | 18.10 | | | | 16.60 | |
| | | Final | | | | 36.60 | | | | 34.90 | | | | 32.00 | | | | 29.30 | | | | 26.90 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total | | | | 59.20 | | | | 56.40 | | | | 51.70 | | | | 47.40 | | | | 43.50 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | $ | | | $ | | | $ | | | $ | | | $ | |
Per ADS | | | Interim | | | | 1.27 | | | | 1.28 | | | | 1.31 | | | | 1.10 | | | | 1.05 | |
| | | Final | | | | 1.95 | | | | 2.14 | | | | 2.06 | | | | 1.89 | | | | 1.72 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total | | | | 3.22 | | | | 3.42 | | | | 3.37 | | | | 2.99 | | | | 2.77 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
10
Historical information (continued)
| | | | | | | | | | | | | | | | | | | �� | | | | | |
| | | | | Year ended 30 June | |
| | | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| | | | | pence | | | pence | | | pence | | | pence | | | pence | |
Per ordinary share | | | Interim | | | | 23.70 | | | | 22.60 | | | | 21.50 | | | | 19.70 | | | | 18.10 | |
| | | Final | | | | 38.50 | | | | 36.60 | | | | 34.90 | | | | 32.00 | | | | 29.30 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total | | | | 62.20 | | | | 59.20 | | | | 56.40 | | | | 51.70 | | | | 47.40 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | $ | | | $ | | | $ | | | $ | | | $ | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Per ADS | | | Interim | | | | 1.18 | | | | 1.27 | | | | 1.28 | | | | 1.31 | | | | 1.10 | |
| | | Final | | | | 2.02 | | | | 1.85 | | | | 2.14 | | | | 2.06 | | | | 1.89 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total | | | | 3.20 | | | | 3.12 | | | | 3.42 | | | | 3.37 | | | | 2.99 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Note: Subject to shareholders’ approval the final dividend for the year ended 30 June 20162017 will be paid on 65 October 2016,2017, and payment to US ADR holders will be made on 1211 October 2016.2017. In the table above, an exchange rate of £1 = $1.33$1.31 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 65 October 2016.2017.
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 share of 28101⁄/108 pence each in issue with a nominal value of £797 million throughout the five year period ended 30 June 2016.2017.
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 | |
| | 2016 $ | | | 2015 $ | | | 2014 $ | | | 2013 $ | | | 2012 $ | | | 2017 $ | | | 2016 $ | | | 2015 $ | | | 2014 $ | | | 2013 $ | |
Year end | | | 1.32 | | | | 1.57 | | | | 1.71 | | | | 1.52 | | | | 1.57 | | | | 1.30 | | | | 1.32 | | | | 1.57 | | | | 1.71 | | | | 1.52 | |
Average rate(i) | | | 1.47 | | | | 1.57 | | | | 1.64 | | | | 1.57 | | | | 1.59 | | | | 1.27 | | | | 1.47 | | | | 1.57 | | | | 1.64 | | | | 1.57 | |
(i) | The average of the noon buying rates on the last business day of each month during the year ended 30 June. |
11
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 3128 July 2016,2017, expressed in US dollars per £1. The information in respect of the month July is for the period up to and including 28 July 2017.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2016 | | | 2017 | |
| | July | | | June | | | May | | | April | | | March | | | February | | | July | | | June | | | May | | | April | | | March | | | February | |
| | $ | | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | |
Month end | | | 1.33 | | | | 1.32 | | | | 1.45 | | | | 1.46 | | | | 1.44 | | | | 1.39 | | | | 1.31 | | | | 1.30 | | | | 1.29 | | | | 1.29 | | | | 1.25 | | | | 1.24 | |
Month high | | | 1.33 | | | | 1.48 | | | | 1.47 | | | | 1.46 | | | | 1.45 | | | | 1.46 | | | | 1.31 | | | | 1.30 | | | | 1.30 | | | | 1.29 | | | | 1.26 | | | | 1.26 | |
Month low | | | 1.29 | | | | 1.32 | | | | 1.44 | | | | 1.41 | | | | 1.39 | | | | 1.39 | | | | 1.29 | | | | 1.26 | | | | 1.28 | | | | 1.24 | | | | 1.22 | | | | 1.24 | |
Average rate(i) | | | 1.31 | | | | 1.42 | | | | 1.45 | | | | 1.43 | | | | 1.42 | | | | 1.43 | | | | 1.31 | | | | 1.28 | | | | 1.29 | | | | 1.26 | | | | 1.23 | | | | 1.25 | |
(i) | The average of the noon buying rates on each business day of the month. |
| The noon buying exchange rate as at 2928 July 20162017 was £1 = $1.33.$1.31. |
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.
1112
Strategic report
Business description
OUR BUSINESSOur business model
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 society.
Diageo has builtOur organisation is structured into a strong platform for growth. market-based business model, applying country-specific strategies to meet consumer and customer needs.
Our business model enables us to identify and act on consumer trends early and deliver sustainable performance.
We have grown through investment indo this by identifying and executing against the most valuable growth opportunities, using our global expertise to supply our brands efficiently and by acquisitioneffectively, and sourcing and producing locally where optimal to broaden our geographical footprint and category depth and range.
Our 21 market model(i) has established strong local business units, well positioned to win in increasingly competitive and fast paced operating environments.do so.
We wantaim to deliver returns for shareholders, while creating value for our customers and employees. In everything we do, we set out to make a positive contribution – to society,society.
Global leader
Values
Passionate about customers and consumers; be the best; freedom to succeed; proud of what we do; valuing each other.
Broad portfolio
Across categories, brands and price points. Our markets draw on a portfolio of global and local brands to best meet their consumer and customer needs.
Global reach
180 countries; we have a leading position in the geographies that will generate most of the medium-term industry growth and have broad reach in key markets, the United States and Europe.
Our role in society
Passionate about ensuring alcohol plays a positive role in society. Increasing access to opportunity to support thriving communities to individuals, and to the environment – while continuing to prosper as a business. We actively create the shared value that is part ofreducing our heritage,environmental impact.
Financial strength
Strong financial returns and essential toconsistent financial performance.
Efficient supply and procurement
High-quality manufacturing and environmental standards.
Brilliant execution
Cutting-edge consumer insights and marketing, scalable innovation, and valuable winning relationships with our future.customers through distribution and sales.
13
Business description (continued)
Strength through global reach and iconic brands
We build global brands alongside local stars. These brands have broad consumer appeal across geographies to meet demand now and in the future.
Doing 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 codifiedset out in our Code of Business Conduct.
| | | | | | |
We produce | | We innovate | | We market | | We sell |
We produce our brands from more than 150 sites in around 30 countries. We are committed to efficient, sustainable production to the highest quality standards. Our export-led International Supply Centre (ISC) employs over 4,000 people across more than 55 sites in Scotland, England, Ireland, Italy and the Netherlands. | | Innovation is a mindset driving everythingLed by consumer insights, we do and an important growth engine for our business. We combine our world-leading technical and research capability with investments in smaller start-ups. We partner with entrepreneurs to actively experiment in digital technology, new business models and partnerships to solve business issues and unlock new opportunities.opportunities through our recruit, re-recruit, disrupt approach. | | 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 our obligations to market responsibly and help consumers make informed decisions seriously.responsibly. | | Everyone at Diageo sells or understands how they can help sell. This is just one expression of the sales-led organisation we are building. We work to extend our sales reach by ensuring our products are available where people want them and by delivering memorable consumer experiences. |
Key highlights
| | | | |
Brands | | Employees | |
200+ | | | 30,400 | |
| |
Production sites | | Countries | |
143 | | | 180 | |
Agile business model
Market-based
Consumer insights: Our rolein-market teams are able to identify trends more accurately and quickly, delivering more locally relevant solutions.
Portfolio strategy: We have the flexibility to select the best portfolio of brands to capture the unique consumer opportunity in societyeach market, and then to invest directly against the most valuable growth opportunities.
Supply resources: Our markets are designated as import markets; import and third party production markets; or import and local-owned production markets.
Global functions
Our markets are supported by a global structure and shared services designed to drive efficiency, share best practice, impart knowledge and help build capability at a local level, as well as set the standards for governance of controls, compliance and ethics.
Our people
We want all our employees around the world to reach their full potential and play their part in the success of our business. To achieve this we have created a diverse and inclusive culture, with shared values and a common purpose.
14
Business description (continued)
Our strategy
Growth in the spirits category is being driven by population and income growth, and the increasing penetration of spirits in emerging markets. We aim to grow our participation in international premium spirits.
Our strategy is to support premiumisation in developed markets and increase our spirits participation in emerging markets through categories that give us access to the growing middle class consumer.
To support this, we participate in both beer and mainstream spirits selectively where it delivers organisational scale and distribution reach, allows consumers to access our brands at affordable price points and to shape responsible drinking trends in markets where international premium spirits is an emerging category.
Our broad portfolio means we have leading positions across many of our markets, enabling us to serve consumer occasions with our brands, across price points.
Everywhere we operate, we set out todo so in a responsible and sustainable way.
Our strategy is delivered through
Six executional priorities
Keep premium core vibrant
Our premium core brands account for roughly two thirds of Diageo’s net sales. Ensuring we have a positive impactvibrant premium core is therefore critical to our overall performance.
Increase participation in mainstream spirits
Mainstream spirits is a sizeable and growing opportunity. We have rapidly invested in mainstream spirits and now have a strong foundation from which to drive growth.
Continue to win in reserve
We build our reserve brands by ensuring they are available in the most influential accounts and build their reputation with the bartenders and consumers who set trends.
Drive innovation at scale
We build on our existing brands, fulfil new consumer occasions and create the world around us. Doing so is goodbrands of tomorrow with a focus on scale and speed.
Build an advantaged route to consumer
Consumers are at the heart of our business; using insights we ensure we understand where we invest our resources and that our brands show up consistently.
Embed productivity to drive out costs and invest in growth
We are focused on everyday efficiency, effectiveness and agility to reduce costs and create fuel for our business, forgrowth.
15
Business description (continued)
Our sustainability and responsibility priorities and our communities and for our consumers.
At the core of our approach is a commitment to creategovernance and ethics
Creating a positive role for alcohol in society. This is fundamentalsociety
We are committed to alcohol playing a positive role in society with our work to tackle alcohol misuse alongside the industry. We remain focused on delivering the five Global Producers’ Commitments and our own stretching 2020 targets.
Building thriving communities
We want to continue to make Diageo a great, safe and diverse place to work for our people. We want to build sustainable supply chains and create programmes that empower communities and individuals and increase their access to opportunity.
Reducing our environmental impact
We are dependent on the natural resources we share with the communities around us, and with the wider world. We are working to reduce our impact in the areas of water, carbon, packaging, and waste.
Highest standards of governance and ethics
We are constantly looking for ways to strengthen our culture of integrity to help our people make the right choices. For example, within 30 days of joining, all employees complete our Code of Business Conduct training, which sets out our commitment to conducting business in accordance with the laws and regulations to which our activities are subject, in a way that brings to life 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 and breweries are at the very heart of the communities in which we work, which gives us an opportunity to create shared value. To do this, we work hard to increase access to opportunity through: enabling entrepreneurship, employability and skills; improving access to clean water, sanitation and hygiene; and helping to empower women.
By reducing carbon packaging, water and waste now, we are reducing our environmental impact to support future opportunities.values.
(i) | Throughout this Annual Report 2016, reference to Diageo’s 21 geographically based markets are stated as ‘21 markets’. | | | | | |
| | Outcomes of our strategy | | |
| | ① Efficient growth | | ③ Credibility and trust | | |
| | ② Consistent value creation | | ④ Motivated people | | |
| | | | | | |
We measure progress against our strategy using the following financial and non-financial indicators |
Organic net sales growth ① | | Return on average | | Reach and impact of | | Carbon emissions ① ③ |
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 | | | | Health and safety ③ ④ | | |
exceptional items ① | | | | Water efficiency ① ③ | | |
Free cash flow ① | | | | | | |
See our key performance indicators (KPIs) onpages 23-27
1216
Business description (continued)
Production
Diageo owns manufacturing production facilities across the globe, including maltings, distilleries, breweries, packaging plants, maturation warehouses, cooperages and distribution warehouses. Diageo’s brands are also produced at plants owned and operated by third parties and joint ventures at a number of locations internationally.throughout the world.
Diageo has been investing over the last few years in a number of restructuring programmes to increase the efficiency of its supply operations. This has resulted in improvements and changes in the group’s supply operations principally in North America, Scotland and Ireland.
Capacity
The locations, principal activities, products, packaging production capacity and packaging production volume of Diageo’sDiageo owned principal production centres in the year ended 30 June 2016 were2017 are as follows:
| Location | | Principal products | | Production capacity in millions of equivalent units(i) | | | Production volume in 2016 in millions of equivalent units | | | Principal products | | Production capacity in millions of equivalent units(i) | | | Production volume in 2017 in millions of equivalent units | |
United Kingdom (Spirits) | | Scotch whisky, gin, vodka, rum, ready to drink | | | 96 | | | | 52 | | | 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 | | | | 4 | | | Vodka, rum, ready to drink | | | 11 | | | | 4 | |
Turkey | | Raki, vodka, gin, liqueur, wine | | | 8 | | | | 6 | | | Raki, vodka, gin, liqueur, wine | | | 8 | | | | 5 | |
United States, Canada, US Virgin Islands | | Vodka, gin, tequila, rum, Canadian whisky, American whiskey, progressive adult beverages, ready to drink | | | 43 | | | | 34 | | | Vodka, gin, tequila, rum, Canadian whisky, American whiskey, progressive adult beverages, ready to drink | | | 50 | | | | 35 | |
Brazil | | Cachaça, vodka | | | 11 | | | | 8 | | | Cachaça, vodka | | | 10 | | | | 7 | |
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 | | | 7 | | | | 1 | | | Finishing centre | | | 7 | | | | 1 | |
India | | Rum, vodka, whisky, scotch, brandy, gin, wine | | | 160 | | | | 111 | | | Rum, vodka, whisky, scotch, brandy, gin, wine | | | 60 | | | | 42 | |
Nigeria | | Beer | | | 7 | | | | 5 | | | Beer | | | 7 | | | | 6 | |
South Africa | | Beer, spirits and ready to drink | | | 8 | | | | 6 | | | Spirits and ready to drink | | | 4 | | | | 4 | |
East Africa (Uganda, Kenya, Tanzania) | | Beer and spirits | | | 13 | | | | 11 | | | Beer and spirits | | | 13 | | | | 11 | |
Africa Regional Markets (Ethiopia, Cameroon, Ghana, Seychelles) | | Beer | | | 7 | | | | 4 | | | Beer | | | 8 | | | | 4 | |
(i) | Capacity represents ongoing production capacity. The production capacities quoted in the table are based on Diageo owned actual production levels for the year ended 30 June 20162017 adjusted for the elimination of unplanned losses and inefficiencies. On 7 October 2015 the group disposed of its brewing operations in JamaicaIn addition, Diageo has third-party production arrangements with manufacturing facilities including brewers and Singapore and Malysia. On 1 January 2016co-packing partners licensed to produce Diageo disposed of its wine operations in the United States. The figures above exclude the production capacity and volume for these operations.brands |
Spirits
Spirits are produced in distilleries located worldwide. The group owns 29 Scotch whisky distilleries in Scotland, two whiskywhisk(e)y distilleries in Canada and one whiskey distillerytwo 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 white spirits are produced in Chengdu, in the Sichuan province of China, cachaça is produced in Ceará State in Brazil and Don Julio tequila is produced in Mexico.
1317
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 (£8673 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 bycommenced operations at 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. 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 owns a controlling equity stake in United Spirits Limited (USL) which is the leading alcoholic beverage company in India selling over 9082 million equivalent cases of Indian-MadeIndian Made Foreign Liquor (IMFL). USL has a significant market presence across India and operates 2623 owned 17 leased and 39 third party manufacturing facilitiesunits in India and Nepal.Nepal and leases one manufacturing facility in India. USL and Diageo brands are also produced under licence by third-parties in 36 manufacturing units in India. 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), Royal Challenge (Indian whisky) Antiquity (Indian whisky) and Bagpiper (Indian whisky).
Beer
Diageo’s principal brewing facility is at the St James’s Gate brewery in Dublin where the capacity was recently expanded to brew all beers sold in Europe and for global exports in particular to the United States.exports. In addition, Diageo has breweries in a number of African countries:countries; Nigeria, Kenya, Ghana, Cameroon, Ethiopia, Tanzania, Uganda and the Seychelles.
On 1 December 2015, Diageo disposed of its 25% equity stake in Sedibeng Brewery (Pty) Limited, which owned a brewery in South Africa. On 7 October 2015, Diageo also completed the disposal of its 57.87% shareholding in Desnoes & Geddes (Jamaican Red Stripe business)Guinness, Guinness Blonde, Kilkenny 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 isHarp are brewed, under licence arrangements, by over 5040 third parties around the world under licence arrangements. across six continents with total volume over 2 million hectolitres supplying some 70 countries worldwide.
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.bulk to the Runcorn facility which carries out the kegging of Guinness Draught.
In January 2017, the company announced its intention to construct a brewing site for Guinness in the United States. It will be a working brewery, open to the public, in Relay, Maryland. The project adds brewing and packaging capacity to reduce costs, mitigate risks and add format flexibility with a consumer interface via an on-site brew pub, tap room and retail store. The project is expected to be completed by March 2018, with a temporary consumer experience in place for the 200th anniversary of the first Guinness export to the United States in October 2017.
Ready to drink
Diageo produces a range of ready to drink products mainly in the United Kingdom, Italy, Southacross Africa, Australia, the United States and Canada.
Property, plant and equipment
Diageo owns approximately 95%96% of the manufacturing, distilling, brewing, bottling and administration facilities it uses across the group’s worldwide operations. It holds approximately 3% of properties on leases in excess of 50 years. The principal production facilities are described above. As at 30 June 2016,2017, Diageo’s land and buildings are included in the group’s consolidated balance sheet at a net book value of £1,083£1,180 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%35% of the net book value of Diageo’s land and buildings are properties located in Great Britain, 14%11% in India, and 12% bothIreland, 15% in the United States and Ireland.
14
Business description (continued)
12% in India.
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 raki and are sourced from suppliers in 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.
18
Business description (continued)
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, 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.
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 2016,2017, the group’s research and development expenditure amounted to £33 million (2016 — £28 million (2015million; 2015 — £26 million; 2014 — £24 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 cover 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.
19
Business description (continued)
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 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, in Canada, Norway and certain US states) to the common system of licensed on trade outlets (for example, licensed bars and restaurants) which prevails in much of the Western world (for example, in 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 disposedmade a number of its winesacquisitions of brands, distribution rights and certain beer assetsequity interests and disposals in the year ended 30 June 2016.premium drinks businesses. For a description of principal acquisitions and disposals since 1 July 2013,2014, see note 9 to the consolidated financial statements.
Diageo announced the acquisition of super premium tequila Casamigos on 21 June 2017 for an initial consideration of $700 million (£538 million), with a further potential $300 million (£230 million) based on Casamigos performance linked targets being met over the next ten years. The transaction is expected to complete in the second half of calendar 2017, subject to regulatory approval.
Seasonality
Approximately 40% of Diageo’s annual net sales occur in the last four months of each calendar year.
1620
Business description (continued)
OUR GLOBAL REACHOur global reach
Diageo is the leading international spirits player in every region of 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 worlda market-based business and have a presence in over 180 countries. We employ more than 32,00030,400 talented people across our global business.
| | |
| | % Share of net sales by our markets(i) Our markets Each of our markets is accountable for its own US Spirits Diageo Beer Company USA (DBC USA) performance and for driving growth Canada Europe Turkey Asia Pacific Russia East Africa North America Africa Regional Markets (ARM) Nigeria South Africa Latin America Diageo Paraguay, Uruguay and Brazil (PUB) and Caribbean net sales Mexico Central America and Caribbean (CCA) Andean Peru, Ecuador, Bolivia, Argentina, Chile (PEBAC) Africa India Greater China Europe, Russia Australia South East Asia and Turkey North Asia (i) Based on reported net sales for the year ended 30 June 2017. Travel Retail Asia and Middle East Does not include corporate net sales of £46 million. |
Diageo reports as five regions
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | North America | | Europe, Russia and Turkey | | Africa | | Latin America and Caribbean | | Asia Pacific | | | 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 | | | 19.6 | | | 18.3 | | | 13.3 | | | 8.7 | | | 40.1 | |
Net sales(i)(%) | | 34.1 | | | 24.3 | | | 13.4 | | | 8.3 | | | 19.9 | | | 34.7 | | | 23.4 | | | 13.0 | | | 8.7 | | | 20.2 | |
Operating profit before exceptional items(ii)(%) | | 49.1 | | | 25.4 | | | 6.7 | | | 6.3 | | | 12.5 | | | 50.1 | | | 24.7 | | | 5.8 | | | 6.6 | | | 12.8 | |
Operating profit(iii)(%) | | 51.8 | | | 26.8 | | | 7.1 | | | 2.7 | | | 11.6 | | | 50.7 | | | 24.0 | | | 5.8 | | | 6.7 | | | 12.8 | |
Number of responsible drinking programmes (%) | | 21.2 | | | 25.4 | | | 15.6 | | | 15.7 | | | 22.1 | | | 26.9 | | | 34.8 | | | 7.2 | | | 12.2 | | | 18.9 | |
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 | | |
Water withdrawal (%) | | | 11.1 | | | 39.4 | | | 37.7 | | | 1.4 | | | 10.4 | |
Carbon emission (%)(iv) | | | 7.9 | | | 42.3 | | | 37.7 | | | 2.6 | | | 9.5 | |
Number of employees(v)(%) | | 9.0 | | �� | | 33.5 | | | 16.5 | | | 9.8 | | | 31.2 | | | 9.2 | | | 36.5 | | | 16.3 | | | 9.1 | | | 28.9 | |
(i) | Does not include corporate net sales of £36£46 million. (ii) Excluding exceptional operating charges of £167£42 million (2015(2016 – £269£167 million) and net corporate and ISCoperating costs before exceptional items of £150£189 million (2015(2016 – £123£150 million). (iii) Excluding net corporate and ISCoperating costs of £150£189 million (2015(2016 – £139£150 million). (iv) Excludes corporate offices which account for <2% of combined impacts. (v) Employees have been allocated to the region in which they reside. Most people who work on behalf of Diageo are employed by Diageo, although, we also employ fixed term or temporary employees. In 2016 we hired 1,386 fixed-term or temporary employees. We have a strong commitment to dialogue, and in 2016, 46% of our employees were covered by collective bargaining agreements. Diageo aims to maintain regular, open dialogue with unions over issues of common interest. |
1721
Business description (continued)
OUR BRANDSOur brands
Our global reach is matched by our broad portfolio of international and local brands. Our portfolio plays across categories and price tiers, enabling us to participate where the consumer opportunity is greatest to support consistent, reliable growth.
We own two of the top twofive 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 insights, our teams are able to select the most relevant brands from our global portfolio to meet the consumer opportunity in their market. All of our marketing activities adhere to the Diageo Marketing Code to ensure our brands are marketed responsibly. A selection of our brands are included in the table below.
| | | | | | | | | | |
Global giants(i) |
|
Our business is anchoredbuilt around our six biggest global brands. |
Johnnie Walker | | Smirnoff | | Captain MorganBaileys | | BaileysCaptain Morgan | | Tanqueray | | Guinness |
| |
Local stars(ii) | | Reserve(iii) |
| |
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 Blue Label | | Johnnie Walker Gold Label Reserve | | Johnnie Walker King George V |
Buchanan’s | | Windsor | | Grand Old Parr | | John Walker & Sons Private Collection | | Lagavulin | | The Singleton of Glen Ord |
Bundaberg | | Bell’sMcDowell’s No. 1 | | McDowell’s No. 1Ypióca | | Cîroc | | Ketel One vodka | | Tanqueray No. TEN |
YpiócaShui Jing Fang | | CaciqueBlack & White | | Shui Jing Fang | | Ron Zacapa Centenario XO | | Tequila Reserva de Don JuiloJulio | | Bulleit Bourbon |
Source: Impact Databank Value Ratings, May 2016.2017. (i) Global giants represent 40%41% of Diageo net sales.
18
Business description (continued)
BREADTH AND DEPTH ACROSS PRICE POINTS
Our portfolio, well diversified across price tiers, 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 with 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 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 |
North American whisk(e)y | | Crown Royal Extra Rare | | Bulleit Bourbon | | Crown Royal | | Seagram’s 7 Crown | | |
Vodka | | Cîroc | | Ketel One vodka | | Smirnoff Sourced | | 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 | | Tusker Finest Quality Lager | | Dubic Extra Lager |
19
Business description (continued)
OUR STRATEGY
We pursue the following strategy to deliver our Performance Ambition:
We aim to grow our participation in international premium spirits, driven by growth in both populations and incomes, and the increasing penetration (ii) Local stars represent 20% 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.Diageo net sales. (iii) Reserve represent 16% of Diageo net sales.
Our intent is to build 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 scale and access to the fast growing middle-class consumer. Everywhere we operate, we do so in a responsible and sustainable way.
| | | | | | |
Prioritised investment in: | | Targeted investment in: |
Premium core spirits(i) | | Reserve | | Mainstream spirits(i) | | Beer |
The brands at the core of our business that provide both scale and strong margin contribution. | | Exceptional spirits brands at above-premium price points to capture the global luxury opportunity. | | 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. |
| | | | | | |
| | Outcomes of our strategy | | |
| | ① Efficient growth | | ③ Credibility and trust | | |
| | ② Consistent value creation | | ④ Motivated people | | |
| | | | | | |
We measure progress against our strategy using the following financial and non-financial indicators: |
Organic net sales growth ① | | 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 | | | | | | |
See our key performance indicators (KPIs) pages: 23–27.
(i) | Spirits include ready to drinks (RTDs). |
20
Business description (continued)
OUR BUSINESS MODEL
From our position as a global leader, we deliver returns for shareholders, while creating value for our customers 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 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.
| | | | |
Global leader | | Agile business model | | Focused on: |
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 portfolio:we have world-leading brands across categories and price points. | | Consumer insights:in-market consumer insight teams are able to identify trends more accurately and quickly, delivering more locally relevant solutions. | | Performance drivers:we have identified six performance drivers which are key to improving
execution and achieving our aims:premiumcore brands; reserve; innovation; route toconsumer; cost and productivity;andtalent. Each market focuses on the priorities that will drive performance in that market.
|
Global reach:we have global reach through
the breadth and depth of our global and local brands.
| | Participation strategy: flexibility to select the best portfolio of brands that capture the unique consumer opportunity that exists in each specific market and then to invest directly against the largest identified growth opportunities. Each market is able to deploy a customised combination of global and local brands to provide brand price tier coverage that is best suited to its specific consumer needs. | | Sustainability and responsibility priorities: every business decision, every operation, and every programme and initiative must work towards our three sustainability and responsibility priorities:creating a positiverole for alcohol in society; buildingthriving communities;andreducing our environmental impacts. |
Financial strength:our competitive advantage is reflected by our strong financial returns and consistent financial performance. | | Supply resources:our 21 markets are
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 sustainability and responsibility priorities are underpinned by our commitment to the highest standards of governance and ethics. |
Efficient supply and procurement:across
the world we have efficiency in supply and procurement, with high-quality manufacturing operations and environmental standards.
| | Global functions:our 21 markets are
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.
| | |
21
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. | | | | |
Values:at the heart of everything we do are our company values: passionate about customers and consumers; be the best; freedom to succeed; proud of what we do; valuing each other. | | | | |
Our role in society:we are passionate about ensuring alcohol continues to play a positive role in society, and are committed to playing our part in tackling alcohol misuse. | | | | |
22
Business description (continued)
HOW WE MEASURE PERFORMANCE: KeyHow we measure performance: key performance indicators
GAAP measures- Financial GAAP performance measures similar to the financial non-GAAP key performance indicators are presented below.
| | | | |
NET SALES GROWTH (%) | | OPERATING MARGIN IMPROVEMENT (BPS) | | BASIC EARNINGS PER SHARE (PENCE) |
| | | | |
Net sales growth (%)217 14.9 2016 (3.0) 2015 5.4 2014 (9.2) | | Operating margin improvement (BPS)2017 24.4 2016 123 2015 (52) 2014 (351) | | Basic earnings per share2017 106 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 declinedincreased by 3% due to disposals14.9% driven by favourable exchange and adverse exchange, partiallyorganic net sales growth which more than offset by organic growth and acquisitions.the impact from the prior year disposal of non-core assets. | | Operating profit margin improved by 123bps mainly driven by244 bps largely due to favorable exchange, organic growth, lower exceptional operating charges.charges and the disposal of lower margin non-core assets. | | Basic eps of 89.5106 pence reducedincreased by 5.516.5 pence principallyprimarily due to favourable exchange, organic operating profit growth and higher income from associates which more than offset the change in net exceptional chargesnegative impact from a higher tax charge of £44 millon inand the year ended 30 June 2016 compared with a net gain of £104 million inexchange impact on the year ended 30 June 2015.reported tax. |
| | | | |
NET CASH FROM OPERATING ACTIVITIES (£ MILLION) | | RETURN ON CLOSING INVESTED CAPITAL (%) | | |
| | |
| | | | |
Net cash from operating activities (£ million)2017 3,132 2016 2,548 2015 2,551 2014 1,790 | | Return on closing invested capital2017 23.1 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 inincreased by £584 million largely driven by favourable exchange, higher organic operating profit growth and favourable working capital and translation exchange weremovement, partially offset by higher operating profit.tax payments. | | Performance Return on closing invested capital decreasedwas flat. Favourable exchange and higher organic operating profit growth were offset by 350bpshigher net assets mainly due to the increase in net assets driven by the weakening of sterling, partially offset by an increasedecrease in post employment liabilities. | | |
23
Business description (continued)
We use the following 11 key performance indicators (KPIs) to measure our financial and non-financial performance.
TheyOur KPIs measure progress against our strategy and ourstrategy. 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 4.3% | | Organic operating margin improvement (bps) #1 37bps | | Earnings per share before exceptional items (pence)(i) #1 108.5p |
2017 4.3 2016 2.8 2015 0.0 | | 2017 37 2016 19 2015 24 | | 2017 108.5 2016 89.4 2015 88.8 |
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 organicOrganic net sales growth was driven by 1.1% volume growth and 3.2% positive price/mix. Overall, pricing is muted across many of 2.8%.our markets but mix remains strong.
| | Performance OrganicOn an organic basis operating margin improvement wasexpanded 37bps driven by favourable mix effectour productivity programme which helpedenabled gross margin increase combined with procurementexpansion, marketing efficiencies in marketing activity offset by higher overheads.and overhead savings.
| | Performance Earnings per shareEps before exceptional items increased 0.619.1 pence largely driven byoperatingas favourable exchange, organic operating profit growth and higher associate income and lower financefrom associates more than offset the negative impact from higher tax charges partially offset by adverse exchange effects and the exchange impact of disposals.on reported tax.
|
More detail: see pages 49detail onpage 51 | | More detail: seedetail on pages 50-5152-53 | | More detail: see pages 51detail onpage 53 |
24
Business description (continued)
| | | | |
Non-Financial | | Non-Financial | | Non-Financial |
Alcohol in society(ii)(reach (reach and impact of responsible drinking programmes) #3, #4 264 programmes | | Health and safety(lost-time (lost-time accident frequency per 1,000 full-time employees) #3, #4 1.14 | | Water use efficiency(iv)(iii) (l/l) #1, #3 4.96l/l |
| | 2017 264 2016 335 2015 298 | |
2017 1.14 2016 1.44 2015 1.66 | | 2017 4.96 2016 5.13 2015 5.84 |
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, workingand work with others to maximise impact. TheseEvaluating the impact of our programmes is challenging, but essential in ensuring we properly address the risk of harm to consumers or communities and help us deliver our Performance Ambition.communities. | | 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 while scarcity increases, we aim to improve efficiency, minimising our water use particularly in water-stressed areas. |
Performance We seeksupported fewer alcohol in society programmes than last year as we aimed to broadenconcentrate our efforts on those that will have the reach of programmes, butbiggest impact on the issues we are prioritising the impact they have. This involves supporting projects that are effective in meeting their objectives.aim to address. We share case studies showingof how we evaluate the impact evaluationof various programmes on www.diageo.com. In 2017, 95% of our top 19(ii) countries evaluated their programmes, compared with 84% in 2016. | | Performance In 2016, we improved our performance with a reduction in LTAs of 13%were down 21% compared with 2015. This was driven by a2016. We focused on markets in particular need of improvement, embedding compliance to our core standards and programmes, while maintaining strong focus on embedding standards into newer markets to reduce accident levels and leveraging best practice safety management tools. In some ofperformance in our more established markets, this enabled usmarkets. However, progress was overshadowed by the death of a contractor cleaner in India; our investigation showed that our protocols and procedures are the right ones, and we are working to get close to our target of zero accidents.ensure consistent compliance in all markets.
| | Performance 12.1% improvement on 2015, resulting from process optimisationsWater efficiency improved by 3.3% compared to 2016 and improvements across all40% versus our 2007 baseline, with particular progress in markets with sites and in particularly at our Tusker Brewery in Kenya and our Gimli Distillery in Canada.water-stressed locations.
|
More detail: see pages 115-117detail on page 120 | | More detail: seedetail on pages 120-121126-128 | | More detail: seedetail on pages 125-128133-135 |
25
Business description (continued)
| | | | |
Financial ® | | Financial | | Financial ® |
Free cash flow (£ (£ million) #1
£2,663m | | Return on average invested capital (ROIC) (%) #2 13.8% | | Total shareholder return (%) #2 12% |
2017 2,663 2016 2,097 | | 2017 13.8 2016 12.1 2015 12.3 | | 2017 12 2016 17 2015 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, increasedfavourable exchange, higher organic operating profit growth and lower interest paymentsfavourable working capital movement, driven by improvement in debtor collection, partially offset by adverse working capital impact mainly driven by prior year improvement in debtor collection.higher tax payments. | | Performance AdverseFavourable exchange ledand organic operating profit growth resulted in a decline ofan increase in ROIC, partially offset by the increased return from growth in operating profit and income from associates.higher tax charges.
| | Performance Diageo delivered total shareholder return of 17%12% as dividends paid increased by 5% and share price increased driven by underlying business improvement and exchange. |
More detail: seedetail on page 5254 | | More detail: seedetail on page 5355 | | |
26
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)(iii) (1,000 tonnes CO2e) #1, #3 634 | | Employee engagement index(vi) % (%) #3, #4
| 75% |
2017 634 2016 672 2015 731 | | | 2017 75 2016 77 2015 75 |
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 Diageo’s, and our industry’s, environmental impact and the impact of the industry. We recognise the importance of reducingimpact. Reducing our carbon emissions is a significant part of our efforts to mitigate climate change, and positionpositioning us well for a future low-carbon economy, in the future, as well aswhile creating energy 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% reductionCarbon emissions reduced by 5.6% in total carbon emissions resulting from cumulative impacts of multiple energy efficiency initiatives2017, and switches to renewable fuels, predominately biogas recovery and reuse and displacement of fossil fuels.by 40% against the 2007 baseline despite increased production volumes.
| | Performance This year, 97%93% of our people participated in our Values Survey (24,843 out(23,043 of the 25,712 able to participate)24,733 invited). 77% of our people75% were identified as engaged, with 80% feeling they were ‘enableda drop of 2% as discussed on pages 127-128. 89% declared themselves proud to perform’. Our survey scores have improved each year since 2014.work for Diageo, up 1% on 2016.
| | |
More detail: seedetail on pages 128-129135-136 | | More detail: seedetail on pages 121-123 | | 127-129 |
Remuneration
Some KPIs are used as a measure in the incentives plans for the remuneration of executives. These are identified with the symbol ®.
See our Directors’ remuneration report from page 172 for more detail.
(i) | For reward purposes this measure is further adjusted for the impact of exchange rates and other factors not controlled by management, to ensure focus on our underlying performance drivers. |
(ii) | Alcohol in society KPI has been redesigned to measure reach and impact of programmes. See more details on page 116.The top 19 countries are those with the highest net sales. |
(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 and WRI/WBCSD GHG Protocol, data for each of the four years in the period ended 30 June 20152016 has been restated and total water used excludes irrigation water for agricultural purposes on land under the operational control of the company.restated. |
(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.
27
Business description (continued)
CHAIRMAN’S STATEMENTChairman’s statement
Diageo ishas a global leaderrich heritage, quality brands, creativity, talented people and a commitment to delivering growth responsibly. On joining the Diageo Board in an industry that is growingJuly 2016, and financially attractive. As we deliversubsequently becoming Chairman in January 2017, I found Diageo to be a company in transformation, focused 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.consumer.
|
Recommended final dividend per share |
2016: 36.6p2017: 38.5ph5% |
2015: 34.9p2016: 36.6p |
Total dividend per share(i) |
2016: 59.2p2017: 62.2ph5%
|
2015: 56.4p2016: 59.2p |
Total shareholder return (%) |
2016:h17%2017: 12% |
2015:h2%2016: 17% |
(i) | Includes recommended final dividend. |
A stronger, more competitive businessConsumer focus
I am pleased withIt is an honour to serve as Chairman of Diageo. This year saw good progress towards our ambition to become one of the performance Diageo has delivered this year, my last as Chairman. We are a stronger businessbest performing, most trusted and have returned to growth, and respected consumer products companies in the world.
I would like to thank Ivan, our Chief Executive, Ivan Menezes, and the Diageo Executive team for leadingand all Diageo employees globally who worked to deliver this progress. Diageo has positionedyear’s performance. The commitment of all our people around the consumer at the heartworld to living our values and purpose – to celebrate life every day, everywhere – is one of the business, through marketing, innovation, local participation strategiesmany reasons the company is performing well.
Opportunity for growth
Diageo is a global leader in an attractive industry, and now has the consumer-facing culture required to succeeda strong footprint in today’s competitive marketplace.
Diageo’s opportunity for growth lies in positive global demographics and income growth, and the increasing penetration of spiritsdeveloped markets that complements our position in emerging markets. Our footprintopportunity for growth is made upsupported by premiumisation and demographics. As incomes continue to grow, international premium spirits will become available to more than 730 million new consumers over the next decade. Additionally, we will see significant growth in the population of enviable positions in key geographies: in Africa and India, which together represent almostlegal purchase age consumers, half of the global growth opportunity for our industry,whom will come from India and also a leading competitive position in North America, the biggest driver of developed market growth. In each of these markets we have a strongAfrica. Our portfolio of brands, and the balance inherent in our geographic footprint, means we are well placed to take advantage of these opportunities today and in the future.
Diageo has a proven capabilityclear strategy, and during the past year, the Executive Committee led by Ivan and our market teams have continued to make strong progress with broad based growth across regions, and global, local and reserve brands.
Value creation
We are committed to delivering sustainable value for our shareholders. In the first year into our medium term guidance we have delivered a strong sets of results that reported progress against all efficient growth and value creation KPIs. Ivan will cover our efficient growth KPIs in identifying and acting on consumer insights, leading skills in marketing and innovation, and a reputation for operating in a responsible and sustainable way.his statement.
28
Business description (continued)
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 approachLooking 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. ReturnKPIs, return on average invested capital (ROIC) was broadly flat against a decline last yearup 175bps to 13.8% and our total shareholder return (TSR) performance has improved on last year, up 17%was 12%.
Diageo targetsOur aim is to maintain dividend cover (basic(the ratio of basic earnings per share before exceptional items/items to dividend per share) withinin the range of 1.8 to 2.2 times. The recommended final dividend for the year ended 30 June 2016 is 36.638.5 pence per share, an increase of 5% overconsistent with the prior year in line with our policy to rebuild dividend cover to our targeted range.interim dividend. This brings the full year dividend to 59.262.2 pence per share andshare. We continue to expect to maintain dividend increases at roughly a mid-single digit rate until cover to 1.5 times.is back in range. Subject to shareholder approval by shareholders, the final dividend will be paid to shareholdersUK holders on 65 October 2016.2017. Payment to US ADR holders will be made on 1211 October 2016.2017.
On 26 July 2017, the Board approved a share buyback programme of up to £1.5 billion in financial year 2018, following three years of consistently improving cash flow generation.
Business environment
Diageo continues to manage and respond to geopolitical volatility around the world. Negotiations on the UK’s exit from the European Union, a shift in emphasis in US trade policy and a broader resurgence of economic nationalism create uncertainty for business. However, our leadership position in many markets, and the work we have done to improve business agility, means we are more resilient and better positioned to navigate and respond to changes in the external operating environment. Our experience in working with governments and other stakeholders to support global trade, develop local value chains, empower communities and promote responsible drinking, means we have a strong platform to protect and unlock growth in the markets in which we operate.
Our role in society
Doing business in a way we can be proud of has always been a priority for Diageo. Our aim is to create value beyond the significant economic contribution we make to communities.
Diageo’s approach is based on three sustainability and responsibility priorities, which are the most material to the business and our stakeholders:
Creating a positive role for alcohol in society
Building thriving communities
Reducing our environmental impact
Alcohol is an established part of how many people socialise and celebrate life in many societies around the world, and we are proud that our brands are chosen for these occasions. Diageo works with governments, partners and other stakeholders all around the world to target specific issues such as drink driving, underage drinking or heavy episodic drinking, with programmes that aim to change behaviour and reduce harm.
Programmes such as Learning for Life, which creates opportunities for training and careers in the hospitality industry, and Plan W in Asia, which empowers women through learning, both support our alcohol in society agenda and demonstrate our commitment to supporting the communities in which we operate. We have even more scope to have a positive impact, through the full value chain of our business, which connects us to millions of people through the sourcing, making and selling of our products.
Our supply chain work is a crucial element in ensuring that we are environmentally sustainable as a business and play our part in addressing climate change. We have made significant progress over recent years in reducing the environmental impact of our operations and our supply chain on water, greenhouse gas emissions, waste and packaging.
We are clear on the behaviours and values we expect all employees to live by. This year, every employee in the business did refresher training on our Code of Business Conduct, to aid us all in making the right decisions, each and every day.
29
Business description (continued)
Our role in societyDiversity
EnsuringDiversity helps our business to grow. At Diageo we make a positiverespect the unique contribution each person makes to societyour business. I am particularly proud that Diageo has always been a priority for Diageo and isfocused on achieving greater diversity at the coremost senior level. 40% of our Performance Ambition. Doing soBoard members and 40% of our Executive Committee are women. Diageo’s Executive Committee is good for our business, good for our communitiesa team of highly successful men and good for our consumers,women who represent six different nationalities, speak multiple languages and it is also truehave lived and worked across the globe in their careers to our values and our people. Thedate. This year, Diageo Codewas ranked 10th out of Business Conduct defines these values and helps our employees live by them every day.
We put our resources and skills into hundreds of programmesmore than 3,000 companies from around the world that reduce alcohol misuse, working closely with other stakeholders to raise awarenessin Equileap’s Gender Equality Global Report 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.Ranking. We are also proud that weof this achievement and 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,continuing 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 reachrepresentation of women in 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 featuresenior leadership, towards our target 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.35% by 2020.
Board changes
At the end of December 2016, Franz Humer retired from the Board after almost 12 years of service. I would once again like to thank Franz for his leadership and assistance in a smooth transition. Under his chairmanship, Diageo’s share price grew 128% and he stepped down with the company on a sound footing for the future.
In November 2015, Deirdre Mahlan steppedSeptember 2016, following her appointment as GSK CEO, Emma Walmsley stood down from the Board. Emma joined our Board as she moved from her role as Chief Financial Officer to take up the role of President, Diageo North America.a Non-Executive Director in January 2016 and I wishwould like to thank Deirdre mostEmma sincerely for her excellent contribution to the Board during this time.
Philip Scott stood down from his role as Chair of Diageo’s Audit Committee in December 2016, and am pleased that she continues to play a pivotal roleafter almost 10 years of service will retire from the Board at the 2017 AGM. Alan Stewart was appointed Chair of Diageo’s Audit Committee, effective 1 January 2017. Alan’s experience in leadingretail, travel and banking, as well as his background in accountancy and financial management, will serve Diageo well in this important business for Diageo. I am also delighted to have welcomed Kathryn Mikellsrole.
In July 2017, Ursula Burns’ appointment to the Board as Chief Financial Officer,a Non-Executive Director was announced, effective 9 November 2015. Kathryn joined us withApril 2018. Ursula’s significant and senior expertise in corporate services, manufacturing and product development will be a track recordvaluable addition to the Board. I look forward to welcoming Ursula.
Looking ahead
Diageo made good progress this year. The Board is confident that the company has the right strategy, leadership and culture to deliver on its full potential. The commitment of the Board and the Executive team remains unwavering in pursuit of delivering value for capital discipline and for developing strong cost cultures to create efficient, agile organisations.all stakeholders.
Javier Ferrán
Chairman
30
Business description (continued)
DiageoChief Executive’s statement
We continue to build a stronger, more consistent, better performing company. We are delivering against our strategy and this is coming through in our performance. We built on the improved performance we announced last year.
| | |
Volume movement | | Organic volume movement |
2017:i1.7% 2016:h0.1% | | 2017:h1.1% 2016:h1.3% |
Net sales movement | | Organic net sales movement |
2017:h14.9% 2016:i3.0% | | 2017:h4.3% 2016:h2.8% |
Operating profit movement | | Organic operating profit movement |
2017:h25.3% 2016:h1.6% | | 2017:h5.6 2016:h3.5% |
Performance review
We delivered organic net sales up 4.3%, driven by organic volume up 1.1% and strong price mix with broad based growth across categories and regions. Organic operating margin expanded by 37bps driven by our global productivity programme and positive mix.
Reported net sales and operating profit were up 15% and 25% respectively, reflecting favourable exchange and accelerated organic growth. Operating profit grew 5.6% on 18 May 2016, that Javier Ferrán wouldan organic basis.
All regions delivered organic net sales growth and we reported broad based growth across all categories, except vodka. Our global giant brands delivered organic net sales up 3%, with Johnnie Walker, Captain Morgan, Baileys and Tanqueray in growth in every region. Smirnoff organic net sales were down 1%, still challenged in a competitive vodka category in the US, and Guinness organic net sales were flat, impacted by weakness in Nigeria and Kenya.
Earnings per share before exceptional items was up significantly at 21% driven by exchange benefits, organic growth and higher associate income.
Our focus on cash conversion and working capital contributed to deliver free cash flow at £2.7 billion, up £566 million in the year. Our cash conversion continues to be appointedstrong at 107%.
A year of progress
We made good progress against the three focus areas we identified for the year: US spirits, scotch and India. Organic net sales growth in US spirits, scotch and India were 3.4%, 4.7% and 1.9% respectively. I am pleased with the momentum we built in the scotch category during the year, and, in the US, share gains were achieved in all key categories, except vodka. In India, we experienced a challenging environment with demonetisation and the Supreme Court ruling, banning sales by outlets near highways.
When I laid out our Performance Ambition, the most important change I wanted to drive was to put the Board as a Non-Executive Director from 22 July 2016. On my retirement fromconsumer at the Board on 31 December 2016, Javier will take over as Chairman from 1 January 2017. On behalfheart of the Board, I would like to welcome Javier to Diageobusiness – 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.we have made great progress:
Global volume share
We are better equipped to win at the moment of premium spirits (%) Diageo 25% Beam Suntory 6% Pernod Ricard 16% Brown-Forman 7% Bacardi 9% Others 37% Source: Impact Databank, March 2016choice – with increased outlet coverage and better sales execution
Our work on gathering improved insight and measurement is enabling us to make better, more informed decisions, and sets us up well for the future
A global leader
We are a more agile organisation – simpler and quicker – able to adapt more quickly to changing consumer trends
It has been
We bring an
honourefficiency mindset 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 continue to prosper, and succeed in delivering its Performance Ambition for all stakeholders around the world.Dr Franz B Humer
Chairman
everything we do
31
Business description (continued)
CHIEF EXECUTIVE’S STATEMENT
This has been a yearprogress builds on the strength we have in our portfolio of significant progress for Diageo. Our performance demonstratesiconic brands and our focus on disciplined executiontrack record 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.innovation. I am confidentproud that our brands won 66 awards at the 2017 San Francisco World Spirits Competition, more than a third of which were Gold or Double Gold. This not only included great recognition for established brands such as Buchanan’s Special Reserve, Johnnie Walker Green Label and Lagavulin 16 Year Old, but also for innovations such as our premium Irish whiskey Roe & Co, launched to consumers in Europe this year.
As we now havegrow our business, our priority is to invest behind organic growth. We also look for bolt-on acquisitions that will deliver attractive returns and expand our leadership position. For example, in June 2017, we announced the platformacquisition of Casamigos, the fastest growing super-premium tequila brand in the US. This is an exciting opportunity for us 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 Diageostrengthen our participation in the US tequila category, as well as expand the brand internationally. The transaction is expected 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 bothclose in the second half. The improvementhalf of calendar 2017, subject to regulatory clearances. In addition, Distill Ventures, the Diageo-backed and funded accelerator programme for entrepreneurs, offers us the opportunity to invest in organic net sales has been driven by a return to volumenascent brands with growth and a significant turnaround in US Spirits.
We are a more focused company following the disposal of non-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 we 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 continues to provide a strong distribution platform for our spirits ambitions in Africa.
All six global giant brands reported improved organic performance this year. Smirnoff’s and Captain Morgan’s improvement was driven by their performance in the United States combined 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 The Brewers Project.
North America delivered organic net sales growth of 3%. This performance is in line with our expectations, with the biggest contributor to organic net sales improvement being that our biggest brands are back in growth.
Organic operating margin was up, driven by favourable mix effect and marketing efficiency. Operating profit grew 3.5% on an organic basis. On a reported basis, operating profit was up 1.6%, negatively impacted by exchange and disposals. 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 exchange and disposals.
32
Business description (continued)
potential.
20162017 net sales by category (%) Scotch 24%25% Ready to drink 6% Beer 16% IMFL Whisky 5% Beer 18%Vodka 12% Liqueurs 5% Vodka 13%North American 9% Gin 3% NAM Whisk(e)y 8% Tequila 1%2% Rum 7% Other 10% Ready to drink 6%
Productivity programme on track
Diageo delivers operating margins that are among the highest in our peer group. Investment in our business remains our number one value creator. By focusing on costs and efficiency, our productivity programme is aiding this investment, creating the fuel to build our brands, innovate and strengthen our route to consumer.
We continueare pleased with the progress we have made with our productivity programme. This enabled us to driveincrease our marketing spend in the US in the second half of this financial year. In financial year 2018, we are committed to increasing investment further in the US and also in scotch, as we seek to sustain our mid-single digit organic net sales growth. The progress we have made also allowed us to announce in July 2017 that we had raised our productivity and cash conversion, deliveringgoal, 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 beenending 30 June 2019, to put the consumer at the heart of our 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£700 million with two-thirds being reinvested 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 centred 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.business.
Our role in society
We know that the issues that are most material toA crucial component of our business and stakeholders are:
To createstrategy is ensuring that we continue to make a positive role for alcoholcontribution to society. Our Chairman, Javier, in society
Build thriving communities
Reducehis statement, sets out our environmental impacts.
Our strategy recognisesapproach and I am pleased that these issues are connected towe have reported further progress against 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,2020 sustainability and how contributing to society, to communities, and to the environment strengthens our business.responsibility targets.
We are passionate about ensuringEnsuring alcohol has a positive role in society as part of a balanced lifestyle andis vitally important to everyone at Diageo. We are committed to tackling misuse. We do thisalcohol misuse, including through our implementation of the Global Beer, Wine and Spirits Producers’ Commitments to Reduce the Harmful Use of Alcohol, an unprecedentedDrinking, a 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 Global Producers’ Commitments are having a positive impact.take action.
3332
Business description (continued)
We are not complacentcontinue to improve the ways we measure and theremanage the programmes we support. We supported fewer alcohol in society programmes than last year as we aimed to concentrate our efforts on those that will have the biggest impact on the issues we aim to address. As with our marketing work, the focus on evaluating the impact of our programmes is moresharpening our capacity to do. deliver real benefits at scale, often through partnerships with other stakeholders.
This year, for example, we signed a strategicbegan our two year partnership agreement with the United NationsUN Institute for Training and Research (UNITAR) which, over the next two years, will work towardsaimed at reducing traffic death and injuries and improvefrom traffic accidents in more than 60 countries, with a focus on those with the highest road traffic death rates. Together we ran road safety globally. I was proudworkshops in Mexico, Nigeria, South Africa and South Korea. We also introduced a virtual reality experience called ‘Decisions’. This experience places viewers in the front seat of a drink driving accident and shows how one wrong decision can have devastating consequences. Johnnie Walker also published a 360° ‘Decisions’ video online which has been viewed more than 14 million times. This supports the brand’s Join The Pact initiative, which has so far attracted 3.1 million pledges to learn thatnever drink and drive, and has delivered around 1.8 million kilometres of safe rides home.
This year we were approachedcontinued our longstanding commitment to partner with UNITAR on the basisgive consumers information to make informed choices. In March 2017, we developed a new, mobile friendly e-learning version of our strong track record in supporting programmes and policiesDRINKiQ training, which has helped us surpass our target of reaching one million adults with training materials that will enable them to address drink driving.become responsible drinking ambassadors.
Employee safety continues to be an every day priority for us. We are long-standing leadersfocused on markets in providing consumer informationparticular need of improvement, embedding compliance to help peopleour core standards and programmes. We continue to 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 serving alcohol content and nutritional information on-pack. The new labels are designed to help 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 it 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 this referendum will not have any material near-term impactgood progress on our businessenvironmental KPIs, improving on carbon and we are well placed to continue our global business without significant disruption.water efficiency by 6% and 3% respectively.
Our people
I am very proud of Diageo’s culture. As I travel around the business, I am always energised by the passion our people have for our strategy and for delivering our Performance Ambition. I would like to thank all our 32,000 peopleeveryone at Diageo for their energycommitment and dedicationhard work during the year. I am fortunateThe strong connection my 30,400 colleagues have to lead a business with motivated, committed teams around the world. This was demonstrated by this year’sDiageo and our brands, purpose and values is evident in our annual employee Values Survey,survey results. Our people are highly engaged, which showed another year of improving engagement scores. Our results compare very well with those of other multinational companies, which I see asprovides a real 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 likestrong platform to extend my thanks to Franz for his role in making Diageo the strong business it is today,amplify our purpose and for his stewardship of the Diageo Board during his eight years as Chairman. I look forward to working with Javier as we build on Diageo’s leadership position.drive enhanced performance.
Outlook
Today, Diageo has an enviable portfoliois a great blend of brands, a truly global footprintevery day efficiency and exposure to the fastest growing opportunitiesinvestment for growth in our sector.brands. I am pleased with our progress in more disciplined execution and the improved agility we have across the business. Our increased productivity goal underpins an improved organic operating margin expansion objective of 175bps over the three years ending 30 June 2019. 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 to drive growth. We are confident of achieving our objectiveexpectation of mid-single digit organic net sales growth and in the three financial years ending 2019 delivering 100 basis points of organic operating margin improvement.
I am alsosame period continues. We feel confident that, withabout building on the consumer at the heart of our business, we will extend our leadership position and become one of the most trusted and respected consumer products companiespositive momentum in the world.business as we continue to progress towards achieving our Performance Ambition.
Ivan Menezes
Chief Executive
33
Business description (continued)
Market dynamics
The global beverage alcohol market is profitable and growing. An estimated six billion(i) equivalent units of alcohol are sold each year, generating £300 billion(i) of net sales. High levels of regulation combined with the increasing expectations of consumers and other stakeholders create a complex operating environment. We are well placed to navigate this operating environment and to create opportunities for Diageo to succeed.
A market that is diverse, profitable and growing(ii)
Industry growth is well supported by robust macro and consumer trends:
We currently expect 500 million new legal purchase age consumers to come to the market over the next decade – India and Africa will account for half of this
Around 730 million more consumers will be able to afford international style spirits, over the next decade, with 85% of this growth coming from emerging markets
Spirits penetration in many emerging markets is still low when compared to developed markets
Alcohol is an established part of how many people socialise and celebrate life. How alcohol is consumed is often deeply rooted in local tastes and customs, which can vary as widely as the cultures and conditions in which people live. Understanding this diversity while anticipating and shaping trends is key to winning in the marketplace.
Our ability to use insight and measurement to drive brand performance means we can activate the best brands to meet consumers’ local tastes and preferences.
Developed market opportunities
While populations in developed markets are typically stable or growing more slowly than those in emerging markets, overall levels of disposable income are higher. Many consumers seek to drink ‘better, not more’ as they aim to develop their tastes while maintaining a balanced lifestyle, and are prepared to pay a premium for high-quality brands with heritage and provenance. Our international spirits, and within them our reserve portfolio, offer these consumers brands that connect with them and share their values.
Emerging market opportunities
The global growth in the number of people of legal purchasing age is largely driven by population growth in emerging markets. An increasingly wealthy middle class in these markets also presents opportunities to offer consumers premium products. Emerging markets also contain a large proportion of the world’s informal alcohol market, estimated to account for 25% of alcohol sales globally(iii), which presents risks to consumers’ health as well as impacting overall tax revenues. Mainstream spirits is an important opportunity, providing consumers access to safe, branded products at affordable price points, as they aspire to progress to international premium brands.
Operating in a volatile environment
Like all consumer goods businesses, we continue to operate in a global economy subject to political instability and sudden changes to economic variables. Diageo’s global scale provides a natural hedge against individual market volatility. We can respond quickly to local dynamics through our market-based business model. Our increased emphasis on local sourcing, including local bottling, helps us manage risk and plan contingencies. We are building a stronger business through our focus on productivity.
(i) Diageo estimates. (ii) Euromonitor 2015, internal analysis. (iii) World Health Organization.
34
Business description (continued)
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 £260 billion(i) of net sales. Like other consumer goods companies, beverage alcohol companies operate in a context of increasing stakeholder expectation – with the added element of high, and highly diverse, levels of regulation. This environment presents opportunities for Diageo, with our global reach, our range of iconic brands across price tiers, and our approach to responsibility, sustainability, governance and ethics.
A market that is profitable and expanding
The beverage alcohol market is profitable, growing and attractive. Over the medium term, the industry is expected to grow overall in both volume and value. This is driven by consumer fundamentals including a rise in global incomes and a growing legal purchase age population. At the same 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 between developed and emerging markets, but each individual market presents different consumer dynamics and a different outlook. This diversity presents opportunities to agile businesses that can act on consumer insight and deliver trusted, competitive products.
Developed market opportunities
Typically, developed market populations are ageing and growing more slowly than those in emerging markets. Overall, levels of disposable income are higher, and consumers are often prepared to pay a premium for high quality brands with heritage and provenance. We see consumption occasions as opportunities to promote our international spirits brands, and, within those brands, to encourage consumers to trade up 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
While there are positive medium-term prospects for the beverage alcohol industry, all consumer goods 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.
The slowdown in the Chinese economy, oil price shocks, persistent conflicts in many parts of the world, and terrorist 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, and fluctuations in political security can all reduce consumer confidence and spending power.
Our broad participation across geographies, categories and price tiers acts as a natural hedge against individual market volatility, while we retain the flexibility in each market to respond quickly to local dynamics through our 21 market business model. Continued focus on local sourcing of ingredients, scenario planning and risk management, and management of foreign exchange exposure all work to protect the business against the challenges of volatility.
35
Business description (continued)
Earning the trust and respect which support performance
Our ambition is to be oneas part of the best performing, most trusted and respected consumer products companies in the world – ensuring we play a positive role inwider 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 was 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 and in particular millennials, have increasing expectations that businesses must create value beyond their economic contribution.
Delivering measurable social and environmental benefits tackling alcohol misuse, demonstrating good corporate governance and reducing environmental impacts in line with a clear sustainable development strategy are, more than ever, business imperatives whichis intrinsic to commercial efforts to drive performance.
We have built Our 2020 targets focus on our long history of sustainability and 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:stakeholders, and are aligned to the UN’s Global Goals. At the same time, we seek ways for our individual brands to act as catalysts for creating a positive rolesocial impacts – not only because this is the right way to do business, but because we want consumers to recognise the purpose that has underpinned many of our brands 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.generations.
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, withand that regulation varyingvaries widely between countries and jurisdictions. Diageo complies with all laws and regulations, wherever we operate, as a minimum requirement. Werequirement, and we advocate effective, evidence-based alcohol policies as described on page 120 of this report.
While legal and regulatory requirements are a vital part of the operating context for beverage alcohol companies, alcohol itself plays a much broader role in society and culture, and has been part of celebrations around the world for centuries. The majority of people who choose to enjoy alcohol do so moderately and responsibly, but all alcohol companies must recognise that are evidence-based, account for drinking patterns, target at-risk groups, treat all formsthe misuse 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.
However, we advocate against measures that are not based on evidence or are likely to have unintended consequences in what are often complex markets. A particular concern is policies that inadvertently push consumers towards unregulated or illicit alcohol, which can be harmful to individuals and society, and that preventing this is important to the long-term future of the industry as well as for the individuals concerned and their communities. Creating a riskpositive role for alcohol in society through partnerships, industry collaboration and our own initiatives has always been a priority for us, and we continue to public health.put skills and resources into programmes that prevent and reduce alcohol misuse, raise awareness, and change negative attitudes and behaviour.
Industry collaboration and partnerships to reduce harmful drinking
We are one of 12 global producers of beer, wine and spirits which in 2013 launchedstarted 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. These commitments 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 goes
We also work beyond our industry, collaboration and works in partnershipforming partnerships with governments, law enforcement agencies, educators and civil society to support campaigns to reduce harmful drinking.
36
Business description (continued)
At the same time, we advocate against measures that are not based on evidence or which could have unintended consequences. This includes policies that inadvertently push consumers towards unregulated or illicit alcohol, which can be a risk to public health.
Building thriving communities
Our value chains are a critical component of our operating environment, supporting both supply networks and markets. We can add significantlyaim to strengthen them by contributing to the prosperity and resilience of the communities in which we work. As well as the contribution we make to communities through direct and indirect employment and taxes, and community investment efforts by workingour sustainable development strategy aims 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 humanHuman rights throughout our value chain, and throughis a key focus, while important initiatives include local sourcing, initiatives, particularly in Africa where we aim to source 80% of agricultural materials for use in local marketslocally by 2020. This helps secure supply, and delivers wider benefits to the local community.
Climate changeWater and water scarcitythe environment
All businesses, particularly thoseBusinesses that rely on agricultural raw materials are exposed to a variety of environmental issues, including those associated with climate change, such as droughts, floods and biodiversity loss.change. These issues can affect a business’ operationsmay be felt directly, or indirectly as a result of their impact on the wider value chain and associated communities. WaterFor beverage alcohol companies like ours, water scarcity is particularly important, to us becauseas water is our main ingredient.
We have a clearly defined environmental strategy that includes programmes to reduce greenhouse gas emissions and water use throughout our value chain. Our Water Blueprint launched in April 2015, defines our strategic approach to water stewardship and focuses specifically on stewardship in the water-stressed areas shown in the map below.
Trust This includes improving our water efficiency, replenishing water used, managing water quality 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 sustainability and responsibility.helping farmers improve water management in agriculture.
3735
Business description (continued)
HOW WE WILL DELIVER OUR PERFORMANCE AMBITION
Diageo’s performance drivers and sustainability and responsibility priorities are key to achieving our aims. EachDiageo sites located in water-stressed areas 32 21 29 18 34 19 35 38 24 23 20 25 33 22 37 30 13 15 28 17 16 11 12 1 14 36 2 8 26 10 3 5 9 27 31 4 7 6 Sites 1 Kenya Brewing, Nairobi 9 Dar es Salaam, Tanzania India 28 Malkajgiri, Telangana 2 East Africa Maltings, 10 Mwanza, Tanzania 18 Alwar, Rajasthan 29 Meerut, Uttar Pradesh Nairobi 11 UBL, Kampala, Uganda 19 Asansol, West Bengal 30 Nacharam, Telangana 3 Seybrew, Seychelles 12 IDU, Kampala, Uganda 20 Aurangabad, Maharashtra 31 Palakkad, Kerala 4 SA Cider, South Africa 13 Accra, Achimota, Ghana 21 Baddi, Himachal Pradesh 32 Pathankot, Punjab 5 Phelindaba Brewery, 14 Kumasi, Kaasi, Ghana 22 Baramati, Maharashtra 33 Pioneer, Maharashtra South Africa 15 Ogba, Lagos, Nigeria 23 Bhadrakali, West Bengal 34 Rosa, Uttar Pradesh 6 Butterworth Brewery, 16 Paraipaba, Ceará, Brazil 24 Bhopal, Madhya Pradesh 35 Serampore, West Bengal South Africa 17 Agricultural lands, 25 Four Seasons Winery, 36 Sovereign, Karnataka 7 Khangela Brewery, Ceará, Brazil Maharashtra 37 Tern, Andhra Pradesh South Africa 26 Hospet, Karnataka 38 Udaipur, Rajasthan 8 Moshi, Tanzania 27 Kumbalgodu, Karnataka
Examples of our 21 markets focuses on the prioritiesstrategic responses
Reserve – mass luxury
Luxury is increasingly becoming accessible to everyone. Modern luxury speaks to globalisation and pride in local culture. We call this trend mass luxury, and have identified that are most relevant to driving growth and creating shared value in that market.
Our six performance drivers
1 Strengthen and accelerate growthit presents 78% of our premium core brands
Our premium core brands are soldreserve growth opportunity to 2020. To deliver against this we reached more outlets and consumers this year, and nearly doubled our presence in more than 180 countriesthe biggest cities around the world. They are enjoyed by consumers in developed
Innovation – holistic lifestyle products
Holistic lifestyle is a growing trend across markets and have wide appealwe are moving to participate in emerging markets. They include iconic brands Johnnie Walker, Smirnoff, Captain Morgan and Baileys.
2 Win in reserve in every market
Seven years agothis space. With Baileys Almande we shifted our approach to luxury spirits and made reserveare redefining the liqueur category with a strategic priority. The results demonstrate what building capability and having focus can do.
3 Innovate at scale to meet new consumer needs
We are a company built and sustained through innovation, which gives us the drive to create 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, and anticipating, consumer behaviour.
4 Build and then constantly extend our advantage in route to consumer
gluten free, dairy free, vegan almond milk liqueur. We have put the consumer at the centre of our business. Our route to consumer transformation has driven a clear understanding of what success looks like in a store, in a bar andalso launched Smirnoff Seltzer in the handsUnited States and Smirnoff Pure in Australia. Both are low calorie and low sugar ready to drink products.
Mainstream spirits
The mainstream spirits opportunity is critical to accessing emerging middle class consumers. The emerging middle class consumer is worth £11 billion(iv) and accounts for 1.1 billion equivalent units globally.(iv) Our acquisition of our consumers. We now haveUnited Spirits (USL) in India gave us not only the consumer-facing culturefootprint to succeed.compete and win in India, but also the know-how to expand and apply how we develop and sell mainstream spirits in Africa.
5 Drive out costs to invest in profitable growth
We want to continuously get more efficient and effective in everything we do to further enable us to invest in growth for our business, our people and our brands. We have set a goal to deliver productivity savings of £500 million over the next three years, with two-thirds of this re-invested for growth.
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 aims. Our people, culture and values are what will make the difference.
Our three sustainability and responsibility priorities
1 Create a positive role for alcohol in society
We are committed to maintaining our leadership position by ensuring we make a positive contribution to society and work to tackle alcohol misuse alongside the industry. We will continue to operate in a responsible way every day, everywhere, to remain a trusted and respected business and drive our performance. We remain focused on delivering the five Global Producers’ Commitments and our own stretching 2020 targets.
2 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 those communities 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.
3 Reducing our environmental impacts
We’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 through our operations and supply chain. We are working to reduce our impacts in the areas of water, carbon, packaging, and waste.(iv) Euromonitor 2015, internal analysis.
3836
Business description (continued)
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 its securities could decline. Because any global business of the kind Diageo is engaged in is inherently exposed to risks that become apparent only with the benefit of hindsight, risks of which Diageo is not presently aware or which Diageo does not currently consider to be material could also adversely impact Diageo’s ability to execute its strategy. In addition, these risks could affect Diageo’s business, financial condition and performance, and the trading price and liquidity of securities.including its ability to execute its strategy. The order of presentation of the risk factors below does not necessarily indicate the likelihood of 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, political, social or other developments and risks in the countries in which it operates
Diageo may be adversely affected by unfavourable economic developments in any of the countries where it has distribution networks, marketing companies or production facilities or marketing companies.facilities. In particular, Diageo’s business is dependent on general economic conditions in its most important markets, including in the United States and in the United Kingdom and the other countries that form the European Union. If there is aA significant deterioration in the economic conditions in any of Diageo’s important markets, it may contributeincluding economic slowdowns or recessions, inflationary pressures and/or disruptions to reducedcredit and capital markets, could lead to decreased consumer confidence and consumer spending more generally, thus reducing demand for Diageo’s products, reduction in consumer confidenceproducts. Unfavourable economic conditions could also negatively impact Diageo’s customers, suppliers and spending levels generally,financial counterparties, who may experience cash flow problems, increased credit defaults or other financial issues, which could lead to customer destocking negative impacts onas well as an increase in Diageo’s customer, supplier or financial counterparties orbad debt expense. In addition, volatility in the credit and capital markets caused by unfavourable economic developments and uncertainties could result in a reduction in the availability of, or an increase in the cost of financing to, Diageo. Diageo’s business iscould also be affected by other economic developments such as fluctuations in currency exchange rates, 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 or uncertainties (including in relation to the United Kingdom’s decision to withdraw from the European Union), 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 countries where Diageo has operations. Any of the foregoing could have a material adverse effect on Diageo’s business, financial condition and performance.
Many of thesethe above risks are heightened, or occur more frequently, in emerging markets. These disruptionsA substantial portion of Diageo’s operations is conducted in emerging markets, which represented approximately 42% of Diageo’s net sales for the year ended 30 June 2017. In general, emerging markets are also exposed to relatively higher risks of liquidity constraints, inflation, devaluation, price volatility, currency convertibility, corruption, crime and lack of law enforcement, expropriation of assets, and sovereign default, as well as additional legal and regulatory risks and uncertainties. Developments in emerging markets can affect Diageo’s ability to import or export products and to repatriate funds, as well as affecting theimpact 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 are conducted in emerging markets, and emerging markets represented approximately 42% of Diageo’s net sales for the year ended 30 June 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 regulatory risks and uncertainties. Any of these factors may affect Diageo disproportionately or in a different manner as compared tofrom its competitors, depending on Diageo’s specific exposure to any particular emerging markets,market, and could have a material adverse effect on Diageo’s business and financial results.
The results of the United Kingdom’s referendumdecision to leavewithdraw from the European Union may result in a sustained period of economic and political uncertainty and complexity, and may have a negative effectimpact on economic conditions in Europe and adversely affecton Diageo’s business and financial performanceresults
37
Business description (continued)
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 leavewithdraw from membership in the European Union (commonly referred to as “Brexit”). The prime minister of the United Kingdom formally invoked Article 50 of the Treaty of the European Union on 29 March 2017, thus officially initiating the process for the departure of the United Kingdom from the European Union. The terms of this withdrawal are subject to a formal negotiation period that could last at least two years from this notification date. Although it remains too early to fully assess the potential impact of this vote for Diageo, may lead toBrexit on Diageo’s business, it is anticipated that there will be a sustained period of economic and political uncertainty and complexity untilwhilst the detailed terms of the United Kingdom’sKingdom’s exit from the European Union are finalised and as the United Kingdom negotiates, concludes and concludes anyimplements successor trading arrangementarrangements with other countries. The decision in the referendum that the United Kingdom should leaveKingdom’s withdrawal from 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.results. For instance, the referendumnegotiating process surrounding the terms of the departure of the United Kingdom from the European Union may contribute to significant volatility in exchange rates riskand risks to supply chains across the EU,European Union and ultimately lead to changes in market access or trading terms, including to customs duties, tariffs and/or industry-specific requirements and regulations, restrictions on the mobility of employees possible changes to customs duties and tariffs and/or industry specific requirementgenerally increased legal and regulations.
39
Business description (continued)
regulatory complexity and costs.
The withdrawal of the United Kingdom’s referendum vote to leaveKingdom from the European Union could also have further implications for the constitutional makeup of the United Kingdom and issues aroundas a result of renewed discussions following the outcome of the referendum concerning independence andfor Scotland and/or further devolved governmentgovernments in Scotland and Northern Ireland, whichIreland. This 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’ssince Diageo has substantial inventoryoperations and operationsinventory located in Scotland.
Risks related to theDiageo’s 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 collectionportfolio of brands includes some of the world’s leading beverage alcohol brands, as well as a number of brands ofthat are prominent in certain regional and/or local prominence.markets. Maintaining Diageo’s competitive position depends on its continued ability to offer high-quality products that have a strong appeal to a wide range of consumers. Consumer preferences on a global and/or local scale may shift due to a variety of factors, including changes in demographic anddemographics, evolving social trends public health regulations,(including potential shifts in consumer tastes towards locally produced small batch craft products), changes in travel, vacation or leisure activity patterns, weather effects andconditions, public health regulations and/or a downturn in economic conditions, any or all of which may reduce consumers’ willingness to purchase luxury or premium branded products. Continued economicproducts or to purchase products from large producers such as Diageo. Economic pressures could also leadcause consumers to consumers selectingchoose products atwhich have lower price points, whether Diageo’s or those of its competitors, which may have an adverse effect on Diageo’s business and financial results. The competitive position of Diageo’s brands, as well as Diageo’s reputation more generally, could also be adversely affected adversely by any failure by Diageo to achieveprovide consistent, reliable quality in its products or in its service levels to customers.
In addition, the social acceptability of Diageo’s products may decline due to negative publicity surrounding, and/or public concerns about, alcohol consumption. TheseSuch 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 business and financial results.
Growth in Diageo’s business has historically benefited from both the launch of new products or variants of existing brands, and continuing product innovation and the creation of brand extensions and product innovation remains ato existing brands remain significant elementelements of Diageo’s growth plans. The launch and ongoing success of new products is inherently uncertain, especially aswith respect to theirsuch products’ initial and continuing appeal to consumers. The failure to successfully launch successfully a new product or a variant of an existing brand can give rise to inventory write-offs and other costs, and can affectas well as negatively impact 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 ofto ensure or extend the profitable lifespan of newly or recently developedits existing products.
38
Business description (continued)
Diageo is subject to litigation specifically directed at the beverage alcohol industry, andas well as to other litigation
Companies in the beverage alcohol industry are, from time to time, exposed to class action or other private or governmental litigation relating to alcohol advertising, product liability, alcohol abuse problems or other health consequences arising 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.operations, including in connection with the acquisition or disposal of businesses or other assets. Diageo is further subject to the risk of litigation, enforcement or other regulatory actions by tax, customs, competition, environmental, anti-corruption and other relevant regulatory authorities, including with respect to the methodology for assessing importation value, transfer pricing or compliance matters. Diageo’s listing in the United States may also expose it to a higher risk of securities-related class action suits, particularly following any significant decline in the price of Diageo’s securities. Any such litigation or other actions may result in damages, penalties or fines as well as reputational damage to Diageo or its brands, and/or impact the ability of management to focus on business matters, thus adversely affecting Diageo’s business and financial results. For additional information with respect to legal proceedings, including certain litigation in relation to Diageo’s acquisition of USL, see “Additional information for shareholders—Legal proceedings” and note 18 to the consolidated financial statements.
Diageo is subject to tax uncertainties, including changes in tax obligations, tax laws, regulations and interpretations, as well as enforcement actions by tax authorities
Changes in the political and economic climate have resulted in an increased focus on tax collection in recent years, and tax authorities are showing an increased appetite to challenge the methodology used by multinational enterprises, even where a company complies with international best practice guidelines. Changes in tax law (including tax rates), tax treaties, accounting policies and accounting standards, including as a result of the Organisation for Economic Co-Operation and Development’s review of base erosion and profit shifting and the European Union’s anti-tax abuse measures, could also result in litigation or other actions by relevant tax authorities. For example, as discussed in note 18 to the consolidated financial statements, Diageo has entered into a process of collaborative working with HM Revenue & Customs (HMRC) in relation to preliminary notice of assessments it has received with respect to the new Diverted Profits Tax regime in the United Kingdom. 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.
Beverage alcohol products are also subject to national excise, import duty and other types of taxes in most countries around the world, most of which are specific to each jurisdiction. Increases in any such taxes could have a material adverse effect on Diageo’s revenue from sales or margin, either through reducing the level of overall beverage alcohol consumption and/or by encouraging consumers to switch to lower-taxed categories of beverage alcohol.
In addition to the above, other changes in tax law (including tax rates), tax treaties, related accounting policies and accounting standards could also increase Diageo’s cost of doing business and lead to a rise in Diageo’s effective tax rate, thus adversely affecting Diageo’s business and financial results.
Climate change, or legal, regulatory or market measures to address climate change, 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 growing concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse effect on global temperatures, weather patterns and the frequency and severity of extreme weather events and natural disasters. In the event that climate change, or legal, regulatory or market measures enacted to address climate change, has a negative effect on agricultural productivity in the various regions from which Diageo procures its raw materials, Diageo may be subject to decreased availability or increased pricingprices for certaina number of raw materials that are necessary forin the production of Diageo’s products, such asincluding sugar, cereals, hops, agave and grapes.
Water, which is the main ingredient in substantially all of Diageo’s products, and it is also a limited resource in many parts of the world.
40
Business description (continued)
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 (including those related to unfavourable changes to applicable water-related taxes and regulations) or capacity constraints, which in turn could adversely affect Diageo’s business and financial results.
An increase
39
Business description (continued)
Any increases in the cost of production could affect Diageo’s profitability
The components that Diageo uses for the production of its beverage alcohol products are largely commodities that are subject to price volatility caused by factors beyond Diageo’s control, including changes in global supply and demand, weather and/or agricultural conditions, agricultural uncertaintyfluctuations in relevant exchange rates and/or governmental controls. Commodity price changesFluctuations in the prices of various commodities, including energy prices, may result in unexpected increases in the cost of the raw materials Diageo uses in the production of its products, including the prices of the agricultural commodities, flavourings and other ingredients necessary for Diageo to produce its various beverages, as well as glass bottles flavours and other materials used as packaging, materials andthus increasing Diageo’s beverage products.production costs. Diageo may also be adversely affected by shortages of any such materials, by increases in energy costs resulting in higher transportation, freight and other related operating costs or by inflation.inflation in any of the jurisdictions in which it produces its products. Diageo may not be able to increase its prices to offset these increased costs without suffering reduced volume, sales andvolumes of products sold and/or decreased 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.consumption, while, more recently, the Supreme Court of India issued a ruling prohibiting the sale of alcohol in certain outlets near highways. These regulatory measures couldhave impacted, and are likely to continue to impact, the sale and distribution of Diageo’s products in India, which in turn could adversely affect Diageo’s business and financial results.
Regulatory authorities under whose laws Diageo operates may also have enforcement power that can subject the group to actions such as product recall,recalls, seizure of products or other sanctions which could have an adverse effect on DiageoDiageo’s sales or damage its reputation. Any changes to the regulatory environment in which Diageo operates could also cause Diageo to incur material additional costs or liabilities, which could adversely affect Diageo’s performance.
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 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 increase the cost of doing business and lead to rise in Diageo’s effective tax rate.
Diageo is subject to data privacy regulations in many of the markets in which it operates, and laws and regulations in this area are developing and changing on a continual basis, including, forbasis. For example, Diageo is subject to the new General Data Protection Regulation adopted in the European Union in April 2016.2016, which must be fully implemented in all member states by May 2018. 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 oron its digital productivity and growth plans.
FailureAny failure by Diageo to comply with anti-corruption laws, sanctions, trade restrictions or similar laws or regulations, or any failure of Diageo’s related internal policies and procedures to comply with applicable law, may have a material adverse effect on Diageo’s business and financial results
Diageo operatesproduces and markets its products in a global business,scale, including in certain countries whichthat, as a result of political and economic instability, a lack of well-developed legal systems and/or potentially corrupt business environments, are reported to have high levels of 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-briberyanti-corruption laws, including pursuant to the US Foreign Corrupt Practices Act and the UK Bribery Act. Such enforcement has been enhanced by applicable regulations in the United States, which offer substantial financial rewards to whistleblowers for reporting information that leads to monetary fines.
4140
Business description (continued)
If Diageo or any of its associates fails to comply with anti-corruption laws, or with existing or new economic sanctions or trade restrictions imposed by the United States, the European Union or other national or international authorities that are applicable to Diageo or such associate, Diageo may be exposed to the costs associated with investigating potential misconduct as well as potential legal liability and/or reputational damage.
While Diageo has implemented and maintains internal practices, procedures and controls designed to ensure compliance with anti-bribery legislationanti-corruption laws, sanctions, trade restrictions or similar laws and regulations, and routinely conducts investigations, either at its own initiative or in response to requests from regulators in connection with compliance with such internal controls, there is no guarantee that such procedures will be effective in preventing compliance failures at Diageo.Diageo or at third parties with whom Diageo maintains business relationships.
Any investigations and lawsuits, regardless of the ultimate outcome of the proceeding, are time consuming and expensive and can divert the time and effort of Diageo’s personnel, including senior management, from its business. Adverse publicity, governmental scrutiny and legal and enforcement proceedings can also have a negative impact on Diageo’s reputation and on the morale and performance of its employees. To the extent that violations of anti-corruption, sanction and/or trade restriction laws and regulations, and/or Diageo’s internal policies and procedures, are found, or if Diageo’s internal policies and procedures are found not to comply with applicable law, possible regulatory sanctions, and fines and other consequences may also be material.
Defective internal controls could adversely affect Diageo’s financial reporting and management processes, as well as the accuracy of public disclosures
Diageo has in place internal control and risk management systems in relation to its financial reporting process and its process for the preparation of consolidated financial statements. In addition, management undertakes a review of the consolidated financial statements in order to ensure that the financial position and results of the group are appropriately reflected therein. Diageo is required by the laws of various jurisdictions to publicly disclose its financial results, as well as developments that could materially affect its financial results, and regulators routinely review the financial statements of listed companies such as Diageo for compliance with new, revised or existing accounting and regulatory requirements. Should Diageo be subject to an investigation into potential non-compliance with accounting and disclosure requirements or be found to have breached any such requirements, this may lead to restatements of previously reported results and significant penalties. In addition, the reliability of financial reporting is important in ensuring that the management of a business and its results are based on reliable data. Flaws in internal control systems could adversely affect Diageo’s business and financial results, including Diageo’s ability to execute its strategy.
Accurate disclosures also provide investors and other market professionals with information to understand Diageo’s business. Defective internal controls could result in inaccuracies or lack of clarity in public disclosures that could create market uncertainty regarding the reliability of the data presented. As a result, defective internal controls could adversely affect Diageo’s business and financial results and/or the price of Diageo’s securities.
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 inof 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 maintains an online presence as part of its business operations, and increasingly relies on social media and online dissemination of advertising campaigns. Diageo’s reputation may suffer if it is perceived to fail to appropriately restrict access to its online content or if it breaches any marketing regulation, code or policy. In addition, the growing use of social and digital media increases the speed and extent that information or misinformation and opinions can be shared. Negative posts or comments about Diageo, its brands or its products on social or digital media, whether or not valid, could seriously damage Diageo’s brands and reputation.
41
Business description (continued)
Any failure to maintain, extend, and expand Diageo’s brand image or adapt to a changing media environment may have ana material adverse effect on Diageo’s business and financial results.
Diageo faces competition that may reduce its market share and margins
Diageo faces substantial competition from several international companies as well as regional and local companies (including craft breweries and regional companiesdistilleries) 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 among major global producers, as evidenced by several business combinations of substantial value carried out by significant competitors in 2015.recent years. Consolidation is also taking place among Diageo’s customers in many countries. These trends may lead to stronger competitors, increased competitive pressure from customers, negative impacts on Diageo’s distribution network, downward pressure on prices, predatory marketing tactics by Diageo’s competitors and/or a decline in Diageo’s market share in any of these categories. Adverse developments in economic conditions or declines in demand or consumer spending may also result in intensified competition for market share, with potentially adverse effects on sales volume and price. Any of these factors may adversely affectingaffect Diageo’s results and growth potential.potential for growth.
Diageo may not be able to derive the expected benefits from its business strategies, including in relation to expansion in emerging markets, acquisitions, productivity initiatives or inventory forecasting
There can be no assurance that Diageo’s business strategies will result in opportunities for growth and improved margins. Part of Diageo’s growth strategy includes expanding its business in certain emerging market countries where consumer spending in general, and spending on Diageo’s products in particular, has not historically been as greatsignificant, 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 degreedegrees of uncertainty over levels of consumer spending.
42
Business description (continued)
It is also possible that Diageo’s business strategies could give rise to further business combinations, acquisitions, disposals, joint ventures and/or partnerships (including any associated financing or the assumption of actual or potential liabilities, depending on the transaction contemplated). There can be no assurance that any transaction, including the Casamigos transaction announced in June 2017 and described in further detail on page 20 and in note 19 to the consolidated financial statements, 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.benefits of the transaction. 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 businessbusinesses 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 orglobal productivity initiativesprogramme implemented by Diageo in order to improvedrive efficiencies and deliver cost savings will deliver the expected 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 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 could impact DiageoDiageo’s operations and lead to adverse customer or consumer reaction. There may also be a risk of impairment charges on goodwill or other intangible assets andas well as failure to meet financial targets. Any of the foregoing maycould 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.
42
Business description (continued)
Contamination, counterfeiting or other events could harm the integrity of customer support for Diageo’s brands and adversely affect the sales of those brands
The success of Diageo’s brands depends upon the positive image that consumers have of those brands, and contamination, whether arising accidentally or through deliberate third party action, or other events that harm the integrity of 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.consumers, or do not otherwise comply with applicable food safety regulations. Diageo may also recall products in the event of contamination or damage. A significant product liability 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.such counterfeit products. A badnegative consumer experience with such a product could cause them to refrain from purchasing Diageo brands in the future and in turn could impair Diageo’s brand equity, adversely affecting Diageo’s business.
Diageo’s business may be adversely affected by increased costs for, or shortages of, talent, or by labour strikes or disputes
Diageo’s business could be adversely affected by labour or skill shortages or increased labour costs due to increased competition for employees, higher employee turnover or increased employee benefit costs. Diageo’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 personnel possessing the capabilitiesskill sets that it requires to deliver its strategy, for example in relation to sales, marketing and innovation capability within markets or in its senior management. The loss of senior management or other key personnel or the inability to identify, attract and retain qualified personnel in the future could make it difficult to manage Diageo’s operations and could adversely affect Diageo’s business and financial results.
43
Business description (continued)
In addition, labour strikes, work stoppages or slowdowns within Diageo’s operations or those of Diageo’s suppliers could adversely impact Diageo.
Diageo may be adversely affected by disruption to production facilities, business service centres or information systems, (including cyber-attack)including via cyber-attacks
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 a fire or explosion at one or more of Diageo’s production facilities, itthis could result in significant damage to the facilities, plant or equipment, their surroundings and/or the local environment and/or injury or loss of life. Such an event could also lead to a loss inof production capacity, or could result in regulatory action or 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 itsuch demand arises. There can be no assurance that insurance proceeds would cover the replacement value of Diageo’s maturing inventory or other assets werein the event that such assets to bewere lost due to contamination, fire or natural disasters, destruction resulting from negligence or the acts of third parties, or failure of information systems or data infrastructure.
As with all large systems, Diageo’s information systems could be subject to cyber-attackcyber-attacks by outside parties’parties intent on extracting information, corrupting information and/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 suchconsumers. Such information could also be made 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.
43
Business description (continued)
Diageo’s operations and financial results may be adversely affected by fluctuations in exchange rates and fluctuations in interest rates
Diageo is engaged in an international business that operates in, and makes sales into, countries with different currencies, while its financial results are presented in sterling. As a result, Diageo is subject to foreign currency risk due to exchange rate movements, which 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%32% of Diageo’s net sales in the year ended 30 June 20162017 were in US dollars, approximately 11% were in euros and approximately 14.9%13% 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 plans
Diageo operates a number of pension plans throughout the world, which vary in accordance with local conditions and practices. The majority of these pension plans are defined benefit plans and are funded by payments to separately administered trusts or insurance companies. The ability of these pension plans to meet their pension obligations may be affected by, among other things, the performance of assets owned by these pension plans, the liabilities in connection with the pension plans, the underlying actuarial assumptions used to calculate the surplus or deficit in the plans, in particular the discount rate and long term inflation rates used to calculate the liabilities of the pension funds, and any changes in applicable laws and regulations. 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. This deficit subsequently decreased by £702 million to £491 million at 30 June 2017, primarily as a result of an increase in the market value of assets held by the plans. 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 thethese pension funds in the future.
44
Business description (continued)
Furthermore, if the market values of the assets held by Diageo’s pension funds decline, the valuations of assets by the pension trustees decline or the valuation of liabilities in connection with pension plans increase, then company cash contributionspension expenses may increase which, as a result, could materially adversely affect Diageo’s financial position. There is no assurance that interest rates or inflation rates will remain constant, that pension fund assets can earn the assumed rate of return annually or that the value of liabilities will not fluctuate; Diageo’s actual experience may be significantly more negative than the assumptions used.
Diageo’s operations may be adversely affected by failure to maintain or renegotiate distribution, supply, manufacturing or licence agreements on favourable terms
Diageo’s business has a number of distribution, supply, manufacturing or licence agreements for brands owned by it or by other companies. These agreements vary depending on the particular brand, but tend to be for a fixed number of years. There can be no assurance that Diageo will be able to renegotiate its rights on favourable terms when these agreements expire or that they will not be terminated. Failure to renew these agreements on favourable terms could have an adverse impact on Diageo’s business and financial results. In addition, Diageo’s business and financial results may be adversely affected by any disputes with distributors of its products or with suppliers of raw materials.
44
Business description (continued)
Diageo may not be able to protect its intellectual property rights
Given the importance of brand recognition to its business, Diageo has invested considerable effort in protecting its intellectual property rights, including trademark registration and domain names. Diageo’s patents cover some of its process technology, including some aspects of its bottle marking technology. Diageo also uses security measures and agreements to protect its confidential information and trade secrets. However, Diageo cannot be certain that the steps it has taken will be sufficient or that third parties will not infringe on or misappropriate its intellectual property rights in its brands or products. 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.traded in certain jurisdictions. Diageo cannot be certain that the steps it takes to assist the authorities to prevent, detect and eliminate counterfeit products will be effective in preventing material loss of profits or erosion of brand equity resulting from lower quality or even dangerous counterfeit product reaching the market. If Diageo is unable to protect its intellectual property rights against infringement or misappropriation, this could materially harm its future financial results and ability to develop its business.
Risks related to Diageo’s securities
It may be difficult to effect service of US process and enforce US legal process against theDiageo and its 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 all or a substantial portion of the assets of such persons, are located outside of the United States. Therefore, it may not be possible to effect service of process within the United States upon Diageo or these persons in order to enforce judgements of US courts against Diageo or these persons based on the civil liability provisions of the US federal securities laws. There is also doubt as to the enforceability in England and Wales, in original actions or in actions for enforcement of 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.
45
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. Examplesmatters, including trends in results of forward-looking statements include statements regardingoperations, margins, growth rates, overall market trends, the impact of changes in interest or exchange rates, interest rates, the availability or cost of financing to Diageo, social, political and environmental developments, consumer trends, preferences and purchasing power, overall market trends,anticipated cost savings or synergies, expected investments, 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; estimatescompletion of Diageo’s cash flows, effective interest rates, effectivestrategic transactions and restructuring programmes, anticipated tax rates, cost savings, results of hedging instruments,expected cash contributions in post-employment plans, impacts of exchange rates, dividend policies and shareholders return objectives, executive compensation levels,payments, outcomes of litigation, anticipated deficit reductions in relation to pension schemes and the impact of new accounting policies on Diageo’s consolidated results and financial position.general economic conditions. By their nature, forward-looking statements involve riskrisks and uncertaintyuncertainties 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:
��
economic, political, social or other developments in countries and markets in which Diageo operates, which may contribute to reduceda reduction in demand for Diageo’s products, reduceddecreased consumer spending, negativeadverse impacts on Diageo’s customer, supplier andand/or financial counterparties, or the imposition of import, investment or currency restrictions;
the resultsnegotiating process surrounding, as well as the eventual terms of, the decision in the United Kingdom’s referendum on 23 June 2016 to leaveexit from the European Union, which maycould lead to a sustained period of economic and political uncertainty and complexity until thewhile detailed withdrawal terms of the United Kingdom’s exit from the European Union are finalised and as the United Kingdom negotiates and concludes any successor trading arrangements with other countries are negotiated, finalised and which may also negatively impactimplemented, potentially adversely impacting economic conditions in the United Kingdom and Europe more generally which could have an adverse impact onas well as Diageo’s business operations and financial performance;
46
Business description (continued)
changes in consumer preferences and tastes, including as a result of changes in demographic anddemographics, evolving social trends public health regulations and(including potential shifts in consumer tastes towards locally produced small-batch products), changes in travel, vacation or leisure activity patterns, weather conditions, public health regulations and/or as a result of contamination, counterfeiting or other circumstances which could harm the integrity or sales of Diageo’s brands;downturn in economic conditions;
any litigation or other similar proceedings (including with tax, customs, competition, environmental, anti-corruption and other regulatory authorities), including thatlitigation directed at the drinks and spiritsbeverage alcohol industry generally or at Diageo in particular, orparticular;
changes in the impactdomestic and international tax environment, including as a result of a product recall or product liability claim on Diageo’s profitability or reputation;the OECD Base Erosion and Profit Shifting Initiative and EU anti-tax abuse measures, leading to uncertainty around the application of existing and new tax laws and unexpected tax exposures;
the effects of climate change, and related regulations and otheror legal, regulatory or market measures intended to address climate change, on Diageo’s business or operations, including any resulting impact on the cost and supply of water;
changes in the cost of production, including as a result of increases in the cost of commodities, labour and/or energy or as a result of inflation;
legal and regulatory developments, including changes in regulations regardingrelating to production, distribution, importation, marketing, advertising, sales, pricing, packaging and labelling, product liability, distribution, importation, labelling, packaging, consumption, advertisinglabour, compliance and control systems, environmental issues and/or data privacy; changes in tax law (including tax treaties), rates or requirements (including with respect to the impact of excise tax increases) or accounting standards; and changes in environmental laws, health regulations and the laws governing labour and pensions;
the consequences of any failure by Diageo or its associates to comply with anti-corruption, and othersanctions, trade restrictions or similar laws and regulations, or any failure of Diageo’s related internal policies and procedures to comply with applicable law;
46
Business description (continued)
the consequences of any failure of internal controls, including those affecting compliance with existing or new accounting and/or disclosure requirements;
Diageo’s ability to maintain Diageo’sits brand image and corporate reputation or to adapt to a changing media environment, and exposure to adverse publicity, whether or not justified, and any resulting impacts on Diageo’s reputation and the likelihood that consumers choose products offered by Diageo’s competitors;environment;
increased competitive product and pricing pressures, including as a result of actions by increasingly consolidated competitors or increased competition from regional and local companies, that could negatively impact Diageo’s market share, distribution network, costs and/or pricing;
Diageo’s ability to derive the effects of Diageo’sexpected benefits from its business strategies, including in relation to expansion in emerging markets, and growth of participation in international premium spirits markets, the effects of business combinations, partnerships, acquisitions and/or disposals, existing or future, and the ability to realise expected synergies and/or costs savings;
Diageo’s ability to benefit from its strategy, including its ability to expand into new markets, to complete and benefit from existing or future business combinations or other transactions, to implement cost saving and productivity initiatives or to forecast inventory levels successfully;forecasting;
contamination, counterfeiting or other events thatcircumstances which could harm the level of customer support for Diageo’s brands and adversely affect the perception of Diageo’s brands;impact its sales;
increased costs for, or shortages of, talent;talent, as well as labour strikes or disputes;
any disruption to production facilities, or business service centres or information systems, (including cyber-attack), existing or future;including as a result of cyber-attacks;
fluctuations in exchange rates andand/or interest rates, which may impact the value of transactions and assets denominated in other currencies, increase theDiageo’s cost of financing or otherwise adversely affect Diageo’s financial results;
movements in the value of the assets and liabilities related to Diageo’s pension funds;plans;
renewal ofDiageo’s ability to renew supply, distribution, manufacturing or licence agreements (or related rights) and licences on favourable terms, or at all, when they expire; andor
any failure ofby Diageo to protect its intellectual property rights.
47
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 2016.2017.
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 includesmay include information about Diageo’s target debt rating. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organisation. Each rating should be evaluated independently of any other rating.
Past performance cannot be relied upon as a guide to future performance.
4748
Business review
Operating results 20162017 compared with 20152016
GROUP FINANCIAL REVIEW
This isWe have delivered a good setstrong sets of results that show progress on all our measures of efficient growth and reflects better executionvalue creation. Organic net sales growth was broad based and underpinned by volume growth. The everyday focus on efficiency through our productivity programme contributed to organic operating margin expansion across the business.all regions. Our improved performance was driven by the returndiscipline in converting profit to growth of each of our six global brandscash and our US spirits business. The delivery of volume growth; 19bps of organic margin expansion; increasedreducing working capital has enabled us to significantly improve free cash flow;flow. I am confident that with the progress we have made and the disposal of £1 billionhigh performance culture we are building in non-core assets, comes from driving efficiency in every aspect of the business and across every expense itemwe can continue to fuel futuredrive strong growth. I believe this consistent approach to growth, productivity and cash will drive better value creation.
Kathryn Mikells,
Chief Financial Officer
|
NetReported net sales declined 3.0%were up 15% as favourable exchange and organic growth in each region and acquisitions were more than offset bythe adverse exchange andimpact from prior year disposals |
Reported operating profit was up 25% driven by favourable exchange, organic growth and lower exceptional operating charges |
Organic results improved with volume growth of 1.3%1.1% |
Organic net sales growth of 2.8%4.3% |
Operating profit grew 1.6% with organic growth, lower exceptional operating charges and acquisitions partially offset by adverse exchange and disposals |
Organic operating profit growth of 3.5%grew 5.6% |
Net cash from operating activities was flat, £2.5bn£3.1bn |
Free cash flow continued to be strong at £2.1bn£2.7bn up £134£566 million on last year |
Basic eps of 89.5106.0 pence was down 6% as lower exceptional income reduced basic eps by 6.1 penceup 18% |
Eps before exceptional items increased 1%21% to 89.4108.5 pence |
49
Business review (continued)
| | |
| | Volume Net sales(i) Operating profit(ii) Operating profit before exceptionals(iii)exceptionals (iii) North America Europe Africa Latin America and Caribbean Asia Pacific |
(i) | Excluding corporate net sales of £36£46 million (2015 - £80(2016 – £36 million). |
(ii) | Excluding net corporate and ISCoperating costs of £150£189 million (2015 - £139(2016 – £150 million). |
(iii) | Excluding exceptional operating charges of £167£42 million (2015 - £269(2016 – £167 million) and net corporate and ISCoperating costs before exceptional items of £150£189 million (2015 - £123(2016 – £150 million). |
| | | | | | | | | | | | | | | | | | | | | | | | |
Summary financial information | | | | | 2016 | | 2015 | | | | | | 2017 | | 2016 | |
Volume | | | EUm | | | | 246.4 | | | 246.2 | | | | EUm | | | | 242.2 | | | 246.4 | |
Net sales | | | £million | | | | 10,485 | | | 10,813 | | | | £ million | | | | 12,050 | | | 10,485 | |
Marketing | | | £million | | | | 1,562 | | | 1,629 | | | | £ million | | | | 1,798 | | | 1,562 | |
Operating profit before exceptional items | | | £million | | | | 3,008 | | | 3,066 | | | | £ million | | | | 3,601 | | | 3,008 | |
Exceptional operating items(i) | | | £million | | | | (167 | ) | | (269 | ) | | | £ million | | | | (42 | ) | | (167 | ) |
Operating profit | | | £million | | | | 2,841 | | | 2,797 | | | | £ million | | | | 3,559 | | | 2,841 | |
Share of associates and joint ventures profit after tax | | | £million | | | | 221 | | | 175 | | | | £ million | | | | 309 | | | 221 | |
Non-operating items | | | £million | | | | 123 | | | 373 | | |
Exceptional non-operating items(i) | | | | £ million | | | | 20 | | | 123 | |
Net finance charges | | | £million | | | | 327 | | | 412 | | | | £ million | | | | 329 | | | 327 | |
Tax rate | | | % | | | | 17.4 | | | 15.9 | | | | % | | | | 20.6 | | | 17.4 | |
Tax rate before exceptional items | | | % | | | | 19.0 | | | 18.3 | | | | % | | | | 20.6 | | | 19.0 | |
Discontinued operations (after tax)(i) | | | | £ million | | | | (55 | ) | | | — | |
Profit attributable to parent company’s shareholders | | | £million | | | | 2,244 | | | 2,381 | | | | £ million | | | | 2,662 | | | 2,244 | |
| | | | | | | |
| | | | | | | |
Basic earnings per share | | | pence | | | | 89.5 | | | 95.0 | | | | pence | | | | 106.0 | | | 89.5 | |
Earnings per share before exceptional items | | | pence | | | | 89.4 | | | 88.8 | | | | pence | | | | 108.5 | | | 89.4 | |
Recommended full year dividend | | | pence | | | | 59.2 | | | 56.4 | | | | pence | | | | 62.2 | | | 59.2 | |
(i) | For further details of exceptional items see pages 218-221 and discontinued operations see page 227. |
| | | | | | | | | | | | | | | | | | | | |
Growth by region | | Volume % | | | Net sales % | | | Marketing % | | | Operating profit % | | | Operating profit before exceptional items % | |
North America | | | 1 | | | | 17 | | | | 19 | | | | 22 | | | | 22 | |
Europe, Russia and Turkey | | | 1 | | | | 11 | | | | 10 | | | | 13 | | | | 17 | |
Africa | | | 3 | | | | 11 | | | | 16 | | | | 3 | | | | 3 | |
Latin America and Caribbean | | | 2 | | | | 21 | | | | 17 | | | | 209 | | | | 26 | |
Asia Pacific | | | (6 | ) | | | 17 | | | | 14 | | | | 38 | | | | 23 | |
Diageo(ii) | | | (2 | ) | | | 15 | | | | 15 | | | | 25 | | | | 20 | |
| | | | | | | | | | | | | | | | |
Organic growth by region | | Volume % | | | Net sales % | | | Marketing % | | | Operating profit(i) % | |
North America | | | 2 | | | | 3 | | | | 4 | | | | 4 | |
Europe, Russia and Turkey | | | 3 | | | | 5 | | | | 3 | | | | 8 | |
Africa | | | 3 | | | | 5 | | | | 5 | | | | 10 | |
Latin America and Caribbean | | | 2 | | | | 9 | | | | 4 | | | | 15 | |
Asia Pacific | | | (1 | ) | | | 3 | | | | — | | | | 4 | |
Diageo(ii) | | | 1 | | | | 4 | | | | 3 | | | | 6 | |
(i) | Before exceptional items. |
(ii) | Includes Corporate. In the year ended 30 June 2017 corporate net sales were £46 million (2016 – £36 million). Net corporate operating costs were £189 million (2016 – £150 million). |
4850
Business review (continued)
| | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | |
Organic growth by region | | Volume % | | | Net sales % | | | Marketing % | | | Operating profit(ii) % | |
North America | | | 1 | | | | 3 | | | | (2 | ) | | | 4 | |
Europe, Russia and Turkey | | | 2 | | | | 4 | | | | 5 | | | | 6 | |
Africa | | | 9 | | | | 3 | | | | 1 | | | | (11 | ) |
Latin America and Caribbean | | | (2 | ) | | | 1 | | | | – | | | | (1 | ) |
Asia Pacific | | | – | | | | 2 | | | | (12 | ) | | | 13 | |
Diageo(i) | | | 1 | | | | 3 | | | | (2 | ) | | | 3 | |
(i) | Includes Corporate. Corporate net sales in the year ended 30 June 2016 were £36 million (2015 – £80 million) a decrease of 55% due to the sale of the Gleneagles Hotel in June 2015. Net operating charges before exceptional items were £150 million (2015 – £123 million), increased due to costs related to the productivity programme, the reinvestment of the savings delivered by the organisational review announcement in January 2014, and increase in the annual incentive plan costs. These increases were partially offset by increased profit on land sales. |
(ii) | Before exceptional items. |
KEY PERFORMANCE INDICATORSKey performance indicators
Net sales growth (£ million)
Net14.9% increase in reported net sales declined 3.0%. aided by favourable exchange
Organic net sales growth of 2.8% driven by4.3% with 1.1% volume growth and mix.positive price/mix
10,813 145 90 131364 12,050 1,359 124 (282) 10,485 (172) (122) (400) Organic movement 2015 2016 2017 Exchange(i) Volume DisposalsAcquisitions and 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 ofgrew 14.9%, driven by favourable exchange and disposals reduced net sales by 5.3%. These movements were partially offset by organic net sales growth which more than offset the impact from the prior year disposal of 2.8% withnon-core assets.
Organic volume growth of 1.3%1.1% and 3.2% positive price/mix primarily mix.
Netdrove 4.3% organic 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)
growth across all regions.
Operating profit growth (£ million)
OperatingReported operating profit growth of 1.6%. 25.3%
Organic operating profit growth of 3.5%.5.6%
102 99 2,841 2,797 22 (83) (96) 201519bps 57bps 29.5% 47bps 36bps (39)bps 124bps Organic movement 27 .1% 2016 2017 Exceptional operating items AcquisitionsGross margin 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
Other operating expenses
(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 | ) |
| | | | | | | | |
2016 | | | | 327 | |
| | | | | | | | |
| | |
| | 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)
Reported operating profit was up 25.3% largely driven by favourable exchange, organic growth and lower exceptional operating charges. Organic operating profit was up 5.6%.
Acquisitions and disposals
The impact of acquisitions and disposals on the reported figures was primarily attributable to the prior period disposals of non-core assets, including the Desnoes & Geddes Limited beer business based in Jamaica and the group’s wine businesses in the United States and United Kingdom. The year on year net impact from acquisitions and disposals on net sales was £(282) million and on operating profit was £(43) million.
Diageo announced the acquisition of super premium tequila Casamigos on 21 June 2017 for an initial consideration of $700 million (£538 million), with a further potential $300 million (£230 million) based on Casamigos performance linked targets being met over the next ten years. The transaction is expected to complete in the second half of calendar 2017, subject to regulatory approval.
Operating margin (%)
Reported operating margin growth of 244bps
Organic operating margin grew by 37bps
19bps 57bps 29.5% 47bps 36bps (39)bps 124bps Organic movement 27 .1% 2016 2017 Exceptional operating items Gross margin Exchange Marketing Acquisitions and disposals Other operating expenses
52
Business review (continued)
Reported operating margin improved by 244bps driven by the comparison against the prior period exceptional operating charge, favourable exchange, the disposal of lower margin non-core assets and organic operating margin improvement. Organic operating margin improved 37bps driven by our productivity programme which enabled gross margin expansion, marketing efficiencies and overhead savings. The negative impact of other operating expenses arose primarily from lapping the profit on the sale of United Breweries Limited shares and the sale of surplus land, partially mitigated by productivity efficiencies in overheads.
Basic earnings per share (pence)
Basic eps increased 18% from 89.5 pence to 106.0 pence
Eps before exceptional items increased 21% from 89.4 pence to 108.5 pence
3.5 7.6 17.8 (0.1) 106.0 89.5 (1.8) (7.3) (0.4) (0.2) (0.4) (2.2) 2016 2017 Exceptional items after tax Associates and joint ventures Discontinued operations after tax Net nance charges Exchange on operating prot Tax Acquisitions and disposals Non-controlling interests Organic operating prot growth (i) Other (i) Excluding exchange
Basic eps was impacted by net exceptional charges in the current year compared to exceptional income in the prior year and a charge in respect of an agreement with the UK Thalidomide Trust accounted for in discontinued operations.
Eps before exceptional items increased 19.1 pence as favourable exchange, organic operating profit growth and higher income from associates more than offset the negative impact from a higher tax charge and the exchange impact on reported tax.
Net cash from operating activities and free cash flow (£ million)
Net cash from operating activities(i) was £2,548£3,132 million, in 2016 a declinean increase of £3£584 million on £2,551 million in 2015.compared to the same period last year.
2,551 (83) 152 (170) 93 5 2,548 2015204 199 2,663 446 2,097 (233) (27) (23) 2016 Exchange(ii) Operating profit(iii)2017 Capex Working capital Exchange(ii) Interest and tax Operating profit(ii) Other(iv)
53
Business review (continued)
Free cash flow was £2,097£2,663 million, in 2016 an increase of £134£566 million.
1,963 137 152 93 5204 199 2,663 446 2,097 (83) (170) 2015(233) (27) (23) 2016 2017 Capex Working capital movement Exchange (ii)Exchange(ii) Interest and tax Operating prot(ii) Other(iv) (i) Net cash from operating activities excludes net capex, loans and other investments ((L469) million in 2017 (L451) million in 2016) (ii) Exchange on operating profit before exceptional items. (iii) Operating prot excluding exchange, depreciation and amortisation, post employment payments and non cash items but including operating exceptional items. (iv) Other (iv)items include post employment payments, dividends received from associates and joint ventures, loans and other investments and discontinued operations.
(i) | Net cash from operating activities excludes net capex, loans and other investments (collectively £(451)((£469) million in 20162017 – £(588)(£451) million in 2015).2016) |
(ii) | Exchange – on operating profit before exceptional items. |
(iii) | Operating profit excluding exchange, depreciation and amortisation, post employment payments and non-cashnon cash items but including operating exceptional items. |
(iv) | Other items include post employment payments, dividends received from associates and joint ventures.ventures and discontinued operations. In respect of free cash flow other items also include loans and other movements. |
Net cash from operating activities declinedincreased by £3£584 million driven by negativefavourable exchange, higher organic operating profit growth and favourable 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.higher tax payment.
Free cash flow improved £134£566 million in the year ended 30 June 2017 driven by favourable exchange, higher organic operating profit growth and favourable working capital movement, partially offset by higher tax payments. The improvement in working capital is primarily driven by lower capex, increased operating profit before exchange,debtors due to focus on efficient debtor management and lower interest payments, partially offset by negative working capital movement.reduction in overdue debt.
5254
Business review (continued)
Return on invested capital (%)(ROIC) %
The return on closing invested capital of 23.2%23.5% for the year ended 30 June 2016,2017, calculated as profit for the year divided by net assets as of 30 June 2016, decreased2017, increased by 350bps30bps 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.favourable exchange impact and profit increase.
Return on average invested capital (ROIC)(%)(i) decreased 22bpsincreased 175 bps
12.3% 14bps17bps 86bps 12bps 13.8% 3bps (35)bps 92bps 12.1% 3bps 47bps (8)bps (62)bps (16)bps 2015 2016 2017 Exchange Associates and joint ventures AcquisitionsAcquistions and disposals Non-controlling interests Operating profit excludingTax Organic operating prot Other exchange
(i) ROIC calculation excludes exceptional items.
(i) | See pages 147-148 for calculation of ROIC calculation excludes exceptional items.used by Diageo. |
ROIC before exceptional items decreased 22bpsincreased 175bps mainly driven mainly due to the adverse impact ofby favourable exchange which wasand organic operating profit growth, partially offset by the increased return from growth in operating profit and income from associates.higher tax charges.
5355
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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | | 10,813 | | | | (172 | ) | | | (310 | ) | | | 276 | | | | (122 | ) | | | 10,485 | |
Cost of sales(i) | | | (4,585 | ) | | | 68 | | | | 200 | | | | (56 | ) | | | 122 | | | | (4,251 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit before exceptional items | | | 3,066 | | | | (83 | ) | | | (74 | ) | | | 99 | | | | – | | | | 3,008 | |
Exceptional operating items (c) | | | (269 | ) | | | | | | | | | | | | | | | | | | | (167 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Profit before taxation | | | 2,933 | | | | | | | | | | | | | | | | | | | | 2,858 | |
Taxation (d) | | | (466 | ) | | | | | | | | | | | | | | | | | | | (496 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Profit for the year | | | 2,467 | | | | | | | | | | | | | | | | | | | | 2,362 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | 2016 £ million | | | Exchange (a) £ million | | | Acquisitions and disposals (b) £ million | | | Organic movement(ii) £ million | | | 2017 £ million | |
Sales | | | 15,641 | | | | 1,978 | | | | (332 | ) | | | 827 | | | | 18,114 | |
Excise duties | | | (5,156 | ) | | | (619 | ) | | | 50 | | | | (339 | ) | | | (6,064 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net sales | | | 10,485 | | | | 1,359 | | | | (282 | ) | | | 488 | | | | 12,050 | |
Cost of sales | | | (4,251 | ) | | | (525 | ) | | | 219 | | | | (123 | ) | | | (4,680 | ) |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 6,234 | | | | 834 | | | | (63 | ) | | | 365 | | | | 7,370 | |
Marketing | | | (1,562 | ) | | | (193 | ) | | | 8 | | | | (51 | ) | | | (1,798 | ) |
Other operating expenses(i) | | | (1,664 | ) | | | (195 | ) | | | 12 | | | | (124 | ) | | | (1,971 | ) |
| | | | | | | | | | | | | | | | | | | | |
Operating profit before exceptional items | | | 3,008 | | | | 446 | | | | (43 | ) | | | 190 | | | | 3,601 | |
Exceptional operating items (c) | | | (167 | ) | | | | | | | | | | | | | | | (42 | ) |
| | | | | | | | | | | | | | | | | | | | |
Operating profit | | | 2,841 | | | | | | | | | | | | | | | | 3,559 | |
Non-operating items (c) | | | 123 | | | | | | | | | | | | | | | | 20 | |
Net finance charges | | | (327 | ) | | | | | | | | | | | | | | | (329 | ) |
Share of after tax results of associates and joint ventures | | | 221 | | | | | | | | | | | | | | | | 309 | |
| | | | | | | | | | | | | | | | | | | | |
Profit before taxation | | | 2,858 | | | | | | | | | | | | | | | | 3,559 | |
Taxation (d) | | | (496 | ) | | | | | | | | | | | | | | | (732 | ) |
| | | | | | | | | | | | | | | | | | | | |
Profit from continuing operations | | | 2,362 | | | | | | | | | | | | | | | | 2,827 | |
Discontinued operations (c) | | | – | | | | | | | | | | | | | | | | (55 | ) |
| | | | | | | | | | | | | | | | | | | | |
Profit for the year | | | 2,362 | | | | | | | | | | | | | | | | 2,772 | |
| | | | | | | | | | | | | | | | | | | | |
(i) | Before exceptional operating items, see pages 55-56.note (c) below. |
(ii) | For the definition of organic movement see page 133.142. |
(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. |
56
Business review (continued)
(a) Exchange
The impact of movements in exchange rates on reported figures is principally in respect of the Nigerian naira,weakening of sterling against the South African rand,US dollar, the Venezuelan bolivar,euro, the Brazilian realKenyan schilling and the Turkish lira,Indian rupee, partially offset by strengthening against 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.Nigerian naira.
The effect of movements in exchange rates and other movements on profit before exceptional items and taxation for the year ended 30 June 20162017 is set out in the table below.
54
Business review (continued)
| | | | |
| | Gains/ (losses) £ million | |
Translation impact | | | (13323 | ) |
Transaction impact | | | (70123 | ) |
| | | | |
Operating profit before exceptional items | | | (83446 | ) |
| | | | |
Net finance charges – translation impact | | | (1728 | ) |
Mark to market impact of IAS 39 on interest expense | | | (912 | ) |
Impact of IAS 21 and IAS 39 on net other finance charges | | | 2(6 | ) |
| | | | |
Net finance charges | | | (2422 | ) |
Associates – translation impact | | | (434 | ) |
| | | | |
Profit before exceptional items and taxation | | | (111458 | ) |
| | | | |
| | | | | | | | |
| | 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 | |
| | | | | | | | |
| | Year ended 30 June 2017 | | | Year ended 30 June 2016 | |
Exchange rates | | | | | | | | |
Translation £1 = | | | $1.27 | | | | $1.48 | |
Transaction £1 = | | | $1.45 | | | | $1.55 | |
Translation £1 = | | | €1.16 | | | | €1.34 | |
Transaction £1 = | | | €1.22 | | | | €1.28 | |
(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), the Red Stripe business in Jamaica, on 7 October 2015 and the group’s 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 2015.2016.
(c) Exceptional items
Exceptional operating charges in the year ended 30 June 2016 totalled £1672017 were £42 million before tax, a decrease of £102£125 million against last year.
ExceptionalIn the year ended 30 June 2017, £33 million was charged to exceptional items in respect of a Turkish Competition Authority investigation into certain of Mey İçki’s trading practices in Turkey.
During the year ended 30 June 2017 United Spirits Limited received a claim, followed by a debit note, from a customer in India in respect of differential pricing charged over a number of years in respect of products sold to that customer primarily for the period prior to the acquisition of United Spirits Limited by Diageo. While challenging the amount of the claim and contesting it, the group has made a provision of £32 million in exceptional items against the current receivable from the customer.
57
Business review (continued)
On 25 February 2016, the group incurred an exceptional operating chargescharge of £49 million including a £53 million payment to Dr Vijay Mallya (Dr Mallya) over a five year period. In the year ended 30 June 2016 a payment of £28 million was made to Dr Mallya. In the year ended 30 June 2017 owing to various reasons, including breaches of several provisions of the 25 February 2016 Agreement by Dr Mallya, Diageo believes that it was not liable to pay the $7 million (£5 million) instalment in February 2017 under that agreement and considers it very unlikely that it will become liable to pay future instalments in subsequent years and accordingly the outstanding provision of £23 million was credited back to the income statement.
In addition, in the year ended 30 June 2016 exceptional operating charges also included an exceptional impairment charge of £118 million 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.
55
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.unit.
Non-operating items in the year ended 30 June 20162017 were a net gain of £123£20 million before tax compared to a gain of £373£123 million before tax last year,in the comparative period, a decrease of £250£103 million.
Non-operating items in the year ended 30 June 2017 comprised a net gain of £20 million against last year.in respect of the sale of Diageo’s wine interests in the United States arising from the release of Diageo from a guarantee in respect of the vineyards, net of the settlement of the net working capital balance with Treasury Wine Estates on the date of disposal.
TheNon-operating items of £123 million in the year ended 30 June 2016 included an exceptionalcomprised:
a loss of £191 million in the period in respect of the sale of the majority of Diageo’s wine interests in the United States and its UK based Percy Fox businesses.
a loss of £38 million in respect of the sale of Diageo’s interests in Argentina to Grupo Peñaflor.
a loss of £27 million in respect of sale of Diageo’s equity interests in Diageo’s South African associate interests.
a gain before taxationof £14 million in respect of sale of Diageo’s equity interests in Central Glass Industries Limited (CGI), a Kenyan glass bottle manufacturer.
a gain of £457 million in respect of the sale of Diageo’s 57.87% shareholding in D&G (Jamaicanthe group’s Jamaican Red Stripe business)business and a 49.99% stake in GAPL Pte Limited (SingaporeDiageo’s Singapore and Malaysian beer businesses) to Heineken, which completed on 7 October 2015. The gain is net of businesses.
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£92 million (£92 million) given by Standard Chartered Bank (SCB) to Watson Limited was called and $135 million paid to SCB during the year.Limited. The underlying security package for the loan remains in place. A provision
Following an agreement reached in December 2016 with the UK Thalidomide Trust,discontinued operations comprised £55 million (net 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 gaindeferred tax of £63 million as a result£9 million), 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 Limitedadditional amounts payable 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 LimitedTrust, updates to the Ennismore group resulting in an exceptional gain of £73 million. In addition a provision of £30 million was chargeddiscount and inflation rates applied to the income statement in respect of a guarantee provided to a third party financial institution.
existing thalidomide provision and legal costs. Cash payments in the year ended 30 June 2016 for exceptional restructuring, for the payment2017 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 thalidomideagreement 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.
56
Business review (continued)
£31 million.
(d) Taxation
The reported tax rate for the year ended 30 June 20162017 was 17.4%20.6% compared with 15.9%17.4% for the year ended 30 June 2015.2016. The tax rate before exceptional items for the year ended 30 June 20162017 was 19.0%20.6% compared with 18.3%19.0% in the prior year. ItAs for most multinationals the current tax environment is expectedcreating increased levels of uncertainty. The current expectation is that the tax rate before exceptional items for the year ending 30 June 20172018 will be approximately 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 20152016 dividend cover was 1.61.5 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 20162017 is 36.638.5 pence, an increase of 5% consistent with ourthe interim dividend. This brings the full year dividend to 59.262.2 pence per share and dividend cover to 1.51.7 times. We would expectIt is expected to maintain dividend increases at roughly a mid-single digit rate until cover is back in range.
58
Business review (continued)
Subject to approval by shareholders, the final dividend will be paid to holders of ordinary shares and ADRs on the register as of 1211 August 2016.2017. The ex-dividend date for the holders of the ordinary shares is 11 August 2016, and 10 August 20162017, and 9 August 2017 for US ADR holders. The final dividend will be paid to shareholders on 65 October 2016.2017. Payment to US ADR holders will be made on 1211 October 2016.2017. A dividend reinvestment plan is available to holders of ordinary shares in respect of the final dividend and the plan notice date is 1514 September 2016.2017.
(f) Share buyback
57The group aims to maintain a leverage ratio of between 2.5-3.0 times adjusted net debt (net borrowings aggregated with net post employment deficit) to EBITDA (excluding exceptional operating items). This enables the group to support the growth of the business while achieving an efficient cost of capital. Diageo closed the year with an adjusted net debt to EBITDA ratio of 2.0 times driven by strong cash flow performance. The group has now fallen below the target range and generated surplus capital. Consequently, on 26 July 2017 the board approved a share buyback programme to return up to £1.5 billion to shareholders during the year ending 30 June 2018.
Business review (continued)
MovementsMovement 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 | ) |
| | | | | | | | |
| | | | | | | | |
Movement in net borrowings | | 2017 £ million | | | 2016 £ million | |
Net borrowings at the beginning of the year | | | (8,635 | ) | | | (9,527 | ) |
Free cash flow (a) | | | 2,663 | | | | 2,097 | |
Acquisition and sale of businesses (b) | | | (83 | ) | | | 1,047 | |
Proceeds from issue of share capital | | | 1 | | | | 1 | |
Net purchase of own shares for share schemes (c) | | | (41 | ) | | | (1 | ) |
Dividends paid to non-controlling interests | | | (83 | ) | | | (101 | ) |
Purchase of shares of non-controlling interests | | | — | | | | (21 | ) |
Repayment of bonds (d) | | | (1,234 | ) | | | (1,003 | ) |
Net movements in other borrowings (e) | | | 414 | | | | (233 | ) |
Equity dividends paid | | | (1,515 | ) | | | (1,443 | ) |
| | | | | | | | |
Net increase in cash and cash equivalents | | | 122 | | | | 343 | |
Net decrease in bonds and other borrowings | | | 820 | | | | 1,236 | |
Exchange differences (f) | | | (205 | ) | | | (725 | ) |
Borrowings disposed through sale of businesses | | | — | | | | 14 | |
Other non-cash items | | | 6 | | | | 24 | |
| | | | | | | | |
Net borrowings at the end of the year | | | (7,892 | ) | | | (8,635 | ) |
| | | | | | | | |
(a) See page 138146 for the analysis of free cash flow.
(b) AcquisitionsIn the year ended 30 June 2017 acquisitions and sale of businesses included the settlement of the guarantee in respect of the US wines disposal partially offset by the working capital settlement received from Treasury Wine Estates.
In the year ended 30 June 2016 acquisitions and sale of businesses include the disposal of the group’s shareholdings in D&Gits Jamaican Red Stripe business 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;Malaysian beer business, the disposal of the group’s wine interests in the United States and its UK based Percy Fox for a cash considerationwine business, the disposal of $551 million (£375 million), net of disposal costs;the group’s equity stake in its South African associate interests 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.manufacturer.
(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£102 million (2015(2016 – £75£47 million) less receipts from employees on the exercise of share options of £46£61 million (2015(2016 – £67£46 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 2016,2017, the group repaid bonds of $1,500$1,600 million (£1,0031,234 million). In the comparable period the group repaid bonds of €1,000$1,500 million (£7921,003 million) and $500 million (£330 million), issued bonds of €1,000 million (£791 million), and a bond of £370 million acquired on.
(e) In the purchase of USL was repaid usingyear ended 30 June 2017 the proceeds from the sale of the Whyte and Mackay Group.
(f) Net movementsnet movement in other borrowings areprincipally arose from the settlement of cross currency interest rate swaps and cash movements on foreign currency swaps and forwards.
59
Business review (continued)
(f) Increase in net borrowings of £205 million is primarily driven by the net repayment of short term commercial paper.
(g) Net borrowings increased because of unfavourableadverse exchange differences primarily on the US dollar and euro denominated borrowings partially offset by a favourable movement on foreign exchange swaps and forwards.
58
Business review (continued)
| | | | | | | | | | | | | | | | |
Movement in equity | | 2016 £ million | | 2015 £ million | | | 2017 £ million | | 2016 £ million | |
Equity at the beginning of the year | | | 9,256 | | | 7,590 | | | | 10,180 | | | 9,256 | |
Profit for the year | | | 2,362 | | | 2,467 | | | | 2,772 | | | 2,362 | |
Exchange adjustments (a) | | | 875 | | | (225 | ) | | | 36 | | | 875 | |
Net remeasurement of post employment plans | | | (856 | ) | | 113 | | | | 644 | | | (856 | ) |
Tax on post employment plans | | | 166 | | | (11 | ) | | | (122 | ) | | 166 | |
Exchange recycled to the income statement (b) | | | 51 | | | 88 | | | | — | | | 51 | |
Fair value movements on available-for-sale investments | | | (20 | ) | | 20 | | | | — | | | (20 | ) |
Non-controlling interests acquired (b) | | | — | | | 641 | | |
Purchase of shares of non-controlling interests | | | (21 | ) | | | — | | | | — | | | (21 | ) |
Disposal of non- controlling interest | | | (24 | ) | | | — | | |
Dividends to non- controlling interests | | | (101 | ) | | (72 | ) | |
Disposal of non-controlling interest | | | | — | | | (24 | ) |
Dividends to non-controlling interests | | | | (83 | ) | | (101 | ) |
Dividends paid | | | (1,443 | ) | | (1,341 | ) | | | (1,515 | ) | | (1,443 | ) |
Other reserve movements | | | (65 | ) | | (14 | ) | | | 116 | | | (65 | ) |
| | | | | | | | | | | | |
Equity at the end of the year | | | 10,180 | | | 9,256 | | | | 12,028 | | | 10,180 | |
| | | | | | | | | | | | |
(a) Movement in the year ended 30 June 20162017 primarily arose from exchange gains in respect of the Indian rupee, Turkish lira, US dollar and euro.the euro, partially offset by an exchange loss in respect of the Turkish lira.
(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 increaseddecreased by £934£702 million from £259 million at 30 June 2015 to £1,193 million at 30 June 2016.2016 to £491 million at 30 June 2017. The increasedecrease primarily arose due to a decreasean increase in returns from ‘AA’ rated corporate bonds used to calculate the discount rates onmarket value of the liabilities ofassets held by the post employment plans (United Kingdom reduced from 3.8% to 2.9% and Ireland from 2.6% to 1.4%)schemes partially offset by a reductionan increase in long term inflation rates (UK RPI from 3.2%2.8% to 2.8%3.2%, UK CPI from 2.2%1.8% to 1.8%2.2% and Ireland CPI from 1.6%1.4% to 1.4%1.6%). Total cash contributions by the group to all post employment plans in the year ending
30 June 20172018 are estimated to be approximately £200 million.
5960
Business review (continued)
NORTH AMERICANorth America
North America, the largest market for premium drinks in the world, accounts forrepresents about a third of our net sales and around half of operating profit. North America continues to be a very vibrant marketThe consumer is at the center of everything we do and we are focused on settingsustainable growth through our strategy of getting the business up for long-term growth. In the year, we disposed of our wine assetsright brands in the United States,right occasions at the right price. The demographic and economic trends in North America are in our new management team have made a number of changesfavour and the industry is projected to refocus marketing activity, upweight on premise activity, and enhance distributor relationships.grow in line with performance seen over the past several years.
| | |
| | Net sales by markets Net sales by categories Net sales by price points (%) (%) (%) US Spirits CanadaOther Spirits(i) RTDsReady to drink Value Super premium and Wines OtherDBC USA (principally Beer Other Standard Ultra premium DGUSA WineTravel Retail) Canada Premium |
(i) excluding RTDs
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Key financials | | 2016 £ million | | | Exchange £ million | | | Reclassifi- cation(i) £ million | | | Acquisitions and disposals £ million | | | Organic movement £ million | | | 2017 £ million | | | Reported movement % | |
Net sales | | | 3,565 | | | | 588 | | | | 19 | | | | (132 | ) | | | 121 | | | | 4,161 | | | | 17 | |
Marketing | | | 541 | | | | 86 | | | | — | | | | (9 | ) | | | 24 | | | | 642 | | | | 19 | |
Operating profit | | | 1,551 | | | | 270 | | | | 15 | | | | (13 | ) | | | 76 | | | | 1,899 | | | | 22 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 | ) | | | | | | | | | | | | | | | — | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | 1,420 | | | | | | | | | | | | | | | | 1,551 | | | | 9 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(i) | Reclassification comprise changes to a reallocation of the results of the Travel Retail operations to the geographical regions. |
Our markets
The North America business is headquartered in Norwalk, Connecticut, and comprises US Spirits, Diageo GuinnessBeer Company USA (DGUSA)(DBC USA) 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 Shelbyville 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 2010In addition to opening a brand new distillery in Shelbyville, Kentucky – the home of Bulleit Frontier Whiskey – we have invested more than $250 million (£160 million)recently received approval to construct a Guinness brewery and brew pub at our existing site in our network and people to deliver world-class manufacturing and packaging operations.Relay, Maryland.
Route to consumer
RouteThe 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 consolidatehave consolidated our US Spirits business into a single distributordistributors or brokerbrokers in 41 states and the District of Columbia, representing more than 80% of our US Spirits volume.
61
Business review (continued)
The US Spirits business operates through three divisions in open states where we sell to distributors who then sell to retailers, and through two divisiondivisions in control states where we sell to the state, which in turn sells to state or agency stores and on premise retailers. DGUSADBC USA 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 collectionportfolio 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.
60
Business review (continued)
Sustainability and responsibility
ThroughCore to our focus on responsible drinking we have built asuccess in North America, our largest market, is our reputation as a leading voice in theon responsible drinking. We have some industry in North America,firsts to our largest market. 2015 saw the successful culmination ofname, for example including nutritional information on our Crown Royal packaging, following our 12-year campaign for alcohol companies to be allowed to include alcohol content and nutritional information per serve on packaging.packaging (passed in 2015). In October2016 we followed this by putting macro nutritional labels onlaunched an innovative virtual film designed to prevent drink driving and an online version of our Crown Royal packagingDRINKiQ training course to encourage responsible choices.
As a producer in the region, we are looking at our impact across the whole supply chain. This includes how we work to support diversity amongst our supply base, tracking ownership as part of promoting greater diversity. We are also ensuring our environmental performance at our new Bulleit distillery in Kentucky matches the leading performance of our existing distilleries – a first for any alcohol company.
Operational sustainability is another key issue for us. We have introduced rigorousin carbon and water management procedures across our North America sites. For example, at our George Dickelas well as waste and other environmental impacts. The distillery in Tullahoma, Tennessee,is using green electricity and has enough solar panels on site to power 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 efficiencyelectricity-powered forklifts and reducing carbon emissions has made North America Diageo’s best-performing region for this metric.utility vehicles.
Performance
Net sales
Net sales were £4,161 million in the year ended 30 June 2017 an increase of £596 million compared to net sales of £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 2015.2016. Net sales were favourably impacted by exchange rate movements of £172£588 million primarily due to the strengthstrengthening of the US dollar against sterling, and organic growth of £97£121 million (see further performance analysis below) and the reallocation of the results of the Travel Retail operations of £19 million partially offset by thea loss of £159£132 million of net sales due to disposal of the wine businesses in the United States in January 2016 and Bushmills in February 2015.2016.
Operating profit
Operating profit was £1,899 million in the year ended 30 June 2017 an increase of £348 million compared to operating profit of £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 2015.2016. Operating profit benefited £77£270 million from exchange rate movements due to the strengthstrengthening of the US dollar, and organic growth of £56£76 million and the reallocation of the result of the Travel Retail operations of £15 million partially offset by the loss of £30£13 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 2015.2016.
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 with full year performance in the second halfimproving in US Spirits.Spirits and Diageo Beer Company USA (DBC USA), and Canada continuing to grow. Full year depletion and net sales growth in US Spirits was 3%. GrowthShare gains were achieved in all key categories, except vodka. North American whisk(e)y, scotch and tequila drove positive mix.delivered the strongest category performance. North American whisk(e)y with net sales up 6%, was the main driver of net sales growthgrew 12% as momentum on 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%,continued. Scotch grew 8% driven by Johnnie Walker Black Label, Buchanan’s and reserve variants, Bulleit, Don Juliovariants. Captain Morgan and Baileys performance improved versus last year. Vodka net sales declined 8% primarily driven by Cîroc and Ketel One vodka. ElsewhereOne. Smirnoff depletion volume was flat but net sales were down as we continued to focus on inventory management and made price adjustments in the region DGUSAfirst half. DBC USA net sales grew 1%,3% with growth in ready to drink offsetting a decline ingrowing and beer andflat. Net sales in Canada net sales were up 4%3%. Marketing in North America was down 2% as a resultincreased 4%, growing ahead of procurement efficiencies and more focused spendnet sales with increased activity on innovation.core brands in the second half. Operating margin increased 39bps for the year,51bps as improvement inpositive mix and productivity initiatives delivered gross margin expansion with zero based budgeting and organisational effectiveness changes driving lower marketing more thanoverhead cost, partially offset higher overheads.by increased marketing.
| | | | | | | | | | | | | | | | |
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 | |
6162
Business review (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Markets: | | | Organic volume movement % | | Reported volume movement % | | Organic net sales movement % | | Reported net sales movement % | |
North America | | | | 2 | | | 1 | | | 3 | | | 17 | |
| | | | | | | | | | |
Global giants and local stars(i): | | | Reported volume movement(ii) % | | Organic net sales movement % | | Reported net sales movement % | | |
US Spirits | | | | 2 | | | 1 | | | 3 | | | 17 | |
DBC USA | | | | 2 | | | (4 | ) | | 3 | | | 12 | |
Canada | | | | 2 | | | 2 | | | 3 | | | 17 | |
| | | | | | | | | |
Spirits(i) | | | | 1 | | | 1 | | | 3 | | | 20 | |
Beer | | | | (1 | ) | | (9 | ) | | | — | | | 8 | |
Ready to drink | | | | 4 | | | 4 | | | 4 | | | 21 | |
| Global giants and local stars and reserve(i): | | | | | Organic volume movement(ii) % | | Organic net sales movement % | | Reported net sales movement % | |
Crown Royal | | | | | 6 | | | 6 | | | 12 | | | | | 10 | | | 12 | | | 30 | |
Smirnoff | | | | | 1 | | | 2 | | | 6 | | | | | (1 | ) | | (2 | ) | | 15 | |
Captain Morgan | | | | | 3 | | | 2 | | | 6 | | | | | 4 | | | 4 | | | 21 | |
Johnnie Walker | | | | | — | | | 5 | | | 10 | | | | | 3 | | | 6 | | | 23 | |
Ketel One vodka | | | | | 2 | | | 4 | | | 10 | | | | | (3 | ) | | (6 | ) | | 9 | |
Cîroc | | | | | (6 | ) | | (7 | ) | | (1 | ) | | | | (13 | ) | | (15 | ) | | (1 | ) |
Baileys | | | | | (2 | ) | | | — | | | 4 | | | | | 3 | | | 2 | | | 19 | |
Guinness | | | | | — | | | | — | | | 5 | | | | | | — | | | 1 | | | 18 | |
Tanqueray | | | | | 5 | | | 7 | | | 13 | | | | | (1 | ) | | (1 | ) | | 15 | |
Don Julio | | | | | 30 | | | 34 | | | 42 | | | | | 16 | | | 19 | | | 39 | |
Bulleit | | | | | 25 | | | 28 | | | 36 | | | | | 22 | | | 23 | | | 43 | |
Buchanan’s | | | | | 3 | | | 9 | | | 16 | | | | | 12 | | | 7 | | | 25 | |
(i) | Spirits brands excluding ready to drink. |
(ii) | ReportedOrganic equals organicreported volume movement. |
Net sales inUS Spirits were up 3%, with a 10% net sales increase. Diageo maintained its leadership position in the second half following a transition to a replenishment model for innovation launches. Diageo’s North American whisk(e)y brands accounted for half ofcategory in the overall net sales growth asUnited States with Crown Royal and Bulleit delivering strong net sales growth and continued to gain share.share gains. Crown Royal net sales increased 5%,13% with net salesthe launch of Crown Royal Vanilla and the continued growth of Crown Royal Deluxe up 5% as it benefited from the new “The One Made For A King” campaign which focused on the quality and heritage of the brand. Crown Royal Regal Apple continued to benefit from the popularity of the shot occasion and delivered a solid performance, withApple. Johnnie Walker net sales grew 8% with growth in Johnnie Walker Black Label and reserve variants driven by the successful ‘Keep Walking America’ platform, scaled up 15%, as it entered its second year after launch. Cîroc performance improved in the second half, as the brand benefited fromliquid on lips and focus on gifting. Scotch malts grew 9% with the launch of itsThe Singleton and Lagavulin benefiting from the award winning ‘My Tales of Whisky’ partnership with Nick Offerman. Vodka decline was driven primarily by Cîroc and Ketel One declining 15% and 6%, respectively. Cîroc performance was primarily impacted by the lapping of the successful Apple flavour. Smirnoff net sales were up 2% but it underperformed the vodka category. Growth fromflavour innovation with a more focused flavours portfoliosmaller Mango launch and the newly launched Smirnoff Sourced, a blend of real fruit juice and spirit, offset a decline in legacy flavours. Smirnoff Red which lappeddepletion volume was flat and brand equity scores improved as consumers were reminded that it is a quality vodka at a great price through a new campaign involving celebrity influencers and activation against millennials and multi-cultural consumers. Captain Morgan made strong share gains in a weak rum category as it encouraged consumers to ‘Live like a Captain’ through its new campaign, innovated with the launch of LocoNut and new signature serve ‘Morgan Mule’. Don Julio net sales grew 20% building on the momentum of last year’s brand renovationyear. Tanqueray gin and promotional activityBaileys grew net sales and continued to be impacted by a competitive price environment. Performance in scotch improved as Johnnie Walker’s category share gains.
DBC USAnet sales increased 7%, largely driven by reserve variants, up 23%. Buchanan’s net sales were up 9% and share increased, as the ‘A lo Grande’ campaign enhanced the connection3% with hispanic consumers. Increased investment in the on-trade and focus on recruiting new consumers amongst millenials had a positive impact on Captain Morgan, which gained share despite weakness in the rum category. Net sales for the brand were up 2%, largely driven by the Original Spiced variant and Cannon Blast, which proved to be popular in the shot occasion. Don Julio, with net sales up 34%, was the fastest growing brand in the portfolio and gained share.
DGUSA net sales increased 1%, as growth in ready to drink offset a decline in beer. In readygrowing 5% and beer flat. Ready to drink the launch of Smirnoff Electric and a solid performancegrowth was driven by strong growth of Smirnoff Ice which benefited from a packaging and liquid renovation, activation against the football consumption occasion and the launch of two new flavours and packaging, drove net sales growth of 7%. Beer net sales were down 3% largely driven by a decline in Smithwick and Harp. Guinness net sales were broadly flatSmirnoff Ice Spiked, as well as the launch of Smirnoff Spiked Sparkling Seltzer. Guinness Nitro IPA offset the net sales decline of Guinness American Blonde Lager, which lapped the previous year launch,grew 1% offsetting declines on Smithwick’s ale and Guinness draught which continued to be impacted by a crowded craft beer segment.Harp lager.
Net sales inCanadaincreased 4%grew 3%, largely driven by growth in Smirnoff, Crown Royal, which benefited fromJohnnie Walker and ready to drink. Smirnoff grew 5% through its continued association with music through the launch ofSmirnoff Sound Collective and increased digital presence in search. Crown Royal Northern Harvest Rye, rated ‘2016 world whiskey of the year’ by Jim Murray’s Whiskey Bible, distribution gains, andcontinued to benefit from the ‘We Make Whisky The Canadian Way’ campaign, which highlights the brand’s quality and craftmanship. Performance in vodkacraftmanship and readyfrom the launch of Crown Royal Vanilla. Ready to drink growth was also good, with net sales up 2%driven by Smirnoff which benefited from packaging renovation and 6%, respectively.launch of new flavours.
Marketing reduced 2% driven by procurement efficiencies and more focused spendgrew 4% with increased activity on innovations. Spend was also focused against the largestcore brands in US Spirits, with investment in Smirnoff, Crown Royal and Captain Morgan up 6%, and fast growing brands such as Don Julio, Bulleit and Buchanan’s where investment was up 16%.the second half funded partially from productivity initiatives.
6263
Business review (continued)
EUROPE, RUSSIA AND TURKEYEurope, 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 TurkeyOther Spirits(i) RTDsReady to drink Value Super premium Russia Other(principally Beer Other Standard Ultra premium WineTurkey Travel Retail) Premium (i) excluding RTDs |
(i) excluding | excluding RTDs |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Key financials | | 2015 £ million | | Exchange £ million | | Acquisitions and disposals £ million | | Organic movement £ million | | | 2016 £ million | | | Reported movement % | | | 2016 £ million | | Exchange £ million | | Reclassifi- cation(i) £ million | | Acquisitions and disposals £ million | | Organic movement £ million | | 2017 £ million | | Reported movement % | |
Net sales | | | 2,617 | | | (87 | ) | | (88 | ) | | 102 | | | | 2,544 | | | | (3 | ) | | 2,544 | | | 211 | | | 37 | | | (96 | ) | | 128 | | | 2,824 | | | 11 | |
Marketing | | | 388 | | | 1 | | | (5 | ) | | 20 | | | | 404 | | | | 4 | | | 404 | | | 22 | | | 5 | | | (2 | ) | | 14 | | | 443 | | | 10 | |
Operating profit before exceptional items | | | 804 | | | (24 | ) | | (24 | ) | | 45 | | | | 801 | | | | — | | | 801 | | | 64 | | | 14 | | | (10 | ) | | 67 | | | 936 | | | 17 | |
Exceptional operating items | | | (20 | ) | | | | | | | | | — | | | | |
Exceptional operating items(ii) | | | | — | | | | | | | | | | | (33 | ) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | 784 | | | | | | | | | | 801 | | | | 2 | | | 801 | | | | | | | | | | | 903 | | | 13 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(i) | Reclassification comprises changes to a reallocation of the results of the Travel Retail operations to the geographical regions and the results of Lebanon, other Middle Eastern and North African countries which were formerly reported in Asia Pacific and Africa geographical regions now being included in Europe, Russia and Turkey. |
(ii) | For further details of exceptional operating items see pages 218-221. |
Our markets
Europe comprises Great Britain, Ireland, andFrance, Continental Europe (including Northern Europe, Germany, Austria and Switzerland, Poland, Iberia, France, Germanythe Mediterranean and the Europe Partner marketsMarkets 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 shipsexports whisky, vodka, gin, rum, beer, wine, cream liqueurs, and other spirit-based drinks to over 180 countries. Through our planned £1 billion investment in Scotch whisky production and inventory, announced in 2012, distilling capacity has increased by over 25%. since 2012. Raki, vodka and wine are produced at a number of sites in Turkey and Smirnov vodka and other local brands are produced in Russia.
64
Business review (continued)
Route to consumer
In Great Britain we sell and market our products through Diageo GB (spirits, beer and ready to drink) and Justerini & Brooks RetailFine Wines (wines private clients). Products are distributed through independent wholesalers and directly to retailers. In the on-trade, products are sold through major brewers, multiple retail groups and smaller regional independent brewers and wholesalers. 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.
63
Business review (continued)
In France our products are sold through a joint venture arrangement with Moët Hennessy. 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.
companies. 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
PromotingConcern over harmful drinking is high on the public agenda in this region, so our work to promote 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 ownstrength. Our responsible drinking programmes.programmes aim to tackle key issues of drink driving, underage drinking and heavy episodic drinking. For example, our Smashed programme in Great Britain brings theatre to schools to discourage underage drinking, and we work with retailers from Tesco in the UK to Auchan in Italy to provide consumer information about responsible drinking. This work makes an important contributionfocus is at the heart of our Learning for Life programme, which is helping to train a new generation of people in the promotionhospitality industry in Europe. Of those taking part, more than 70% secured lasting employment within 12 months of alcohol as part of a balanced lifestyle, while also enhancing our reputation.completing the programme.
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. Our plans for a new distillery at St James’s Gate in Dublin include the same high standards of environmental performance and management that we expect from any of our new facilities, and build on the leading performance of the new Brewhouse at St James’s Gate.
Performance
Net sales
Net sales were £2,544£2,824 million for the year ended 30 June 2016 a decrease2017 an increase of £73£280 million compared to net sales of £2,617£2,544 million in the year ended 30 June 2015.2016. Net sales were adverselyfavourably impacted by £87 million exchange rate movements driven mainlyof £211 million primarily due to the strengthening of the euro against sterling, organic growth of £128 million (see further performance analysis below) and the net of £37 million due to the reallocation of the result of the Travel Retail operations and the transfer of Lebanon, other Middle East countries and North African countries which were formerly reported in the Asia Pacific and Africa regions respectively and for the year ended 30 June 2017 are included in the Europe, Russia and Turkey region, partially offset by the Turkish lira, euro and Russian rouble, and £88loss of £96 million of net sales 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).2016.
Operating profit
Operating profit was £903 million in the year ended 30 June 2017 an increase of £102 million compared to operating profit of £801 million in the year ended 30 June 2016 an increase2016. Operating profit benefited by £64 million from exchange rate movements due to the strengthening of £17the euro, organic growth of £67 million comparedand the net of £14 million due to operating profitthe reallocation of £784 millionthe result of the Travel Retail operations and the transfer of Lebanon, other Middle East countries and North African countries which were formerly reported in the Asia Pacific and Africa regions respectively and for the year ended 30 June 2015. Operating2017 are included in the Europe, Russia and Turkey region, partially offset by the loss of £10 million 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 tofollowing the disposal of the Percy Fox wine business in January 2016 and Bushmills2016. In the year ended 30 June 2017 a provision of £33 million was made in February 2015 offset by organic growthexceptional items in respect of £45 million. Nothe Competition authority in Turkey. There were 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 2015.2016.
65
Business review (continued)
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
The region’sregion delivered 5% net sales growth reflecting continued strong performance reflects momentum in Europe strongand good 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%4% with Continental Europe and Great Britain and Continental Europe the main contributorscontributors. Europe continued to gain share in spirits, taking 20bps over the year. Strong performance on Johnnie Walker, Baileys and with share gainsCaptain Morgan continued. Tanqueray had double digit growth in most countries across the market. Baileys performed strongly driven by execution against core growth drivers, especially sampling.Europe and Guinness net sales were up 2% supported by innovations from the ‘The Brewers Project’ and Tanqueray grew. Strong performance in reserve brands continued with 9% growth. In Russia, whilst the prior year price increases continued to impact performance with volume down 4%, net sales double digit in most countries across Europe. Reserve brands continued to perform well also growing
64
Business review (continued)
double digit. In Russia, price increases led to net sales increase of 27% while volume was down 9%,grew 7% with share gains in rum but share losses in scotch in the face of increased competition.Bell’s and Johnnie Walker. In Turkey, volumes were down 2% but net sales were up 6%grew 4%, also driven by Johnnie Walker underpinned by steady growth in raki at 3%.price rises following excise increases. Gross margins were up across the three markets driven by positive mix in both Europe and Russia. Overall region operating margins improved by 51bps. In Europe procurement savings offset increased marketing and overheads leaving margin improvementprice in Russia to driveand Turkey. Operating margin in the region’s increase.region increased 91bps driven mainly by positive price/ mix and ongoing productivity initiatives partially offset by other one off operating costs.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Markets and categories: | | Organic volume movement % | | Reported volume movement % | | Organic net sales movement % | | Reported net sales movement % | | |
Markets: | | | Organic volume movement % | | Reported volume movement % | | Organic net sales movement % | | Reported net sales movement % | |
Europe, Russia and Turkey | | | 2 | | | | — | | | 4 | | | (3 | ) | | | 3 | | | 1 | | | 5 | | | 11 | |
| | | | | | | | | | | | | | | | |
Europe | | | 4 | | | | — | | | 3 | | | (2 | ) | | | 3 | | | | — | | | 4 | | | 9 | |
Russia | | | (9 | ) | | (12 | ) | | 27 | | | (12 | ) | | | (4 | ) | | (4 | ) | | 7 | | | 41 | |
Turkey | | | (2 | ) | | (2 | ) | | 6 | | | (7 | ) | | | (2 | ) | | (2 | ) | | 4 | | | 6 | |
| | | | | | | | | | | | | | | | |
Spirits(i) | | | 2 | | | 1 | | | 6 | | | | — | | | | 3 | | | 4 | | | 5 | | | 15 | |
Beer | | | 2 | | | | — | | | | — | | | (2 | ) | | | 2 | | | (1 | ) | | 2 | | | 10 | |
Ready to drink | | | 2 | | | 2 | | | (3 | ) | | (2 | ) | | | (2 | ) | | (2 | ) | | (3 | ) | | 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 % | | Global giants and local stars(i): | | Organic volume movement(ii) % | | Organic net sales movement % | | Reported net sales movement % | |
Guinness | | | | 4 | | | 2 | | | 1 | | | | | 2 | | | 2 | | | 10 | |
Johnnie Walker | | | | 3 | | | 7 | | | 3 | | | | | 10 | | | 10 | | | 34 | |
Smirnoff | | | | | — | | | 1 | | | | — | | | | | (2 | ) | | (4 | ) | | 2 | |
Baileys | | | | 5 | | | 9 | | | 6 | | | | | 8 | | | 6 | | | 16 | |
Yenì Raki | | | | 1 | | | 4 | | | (9 | ) | | | | (2 | ) | | 4 | | | 5 | |
Captain Morgan | | | | 8 | | | 9 | | | 5 | | | | | 14 | | | 12 | | | 23 | |
JeB | | | | (3 | ) | | (4 | ) | | (6 | ) | | | | 2 | | | | — | | | 14 | |
Tanqueray | | | | | 33 | | | 29 | | | 43 | |
(i) | Spirits brands excluding ready to drink. |
(ii) | ReportedOrganic equals organicreported volume movement.movement except Johnnie Walker 19% and JeB 3% which were impacted by the reclassification of Middle Eastern and North African countries to the region. |
InEuropenet sales were up 3%4%:
InGreat Britain, net sales grew 3%. Tanqueray grew strong double digit due to expanded distribution, gaining share of 80bps in the gin category. Captain Morgan grew 6%, taking 300bps of share and gained category leading status. Innovation success with Hop House 13 Lager and Smirnoff Cider also contributed to growth this year. Reserve brands were up 4%. Baileys performance accelerated with net sales up 11%15% driven by increased off-trade visibilityTanqueray and on-trade activation.the launch of Haig Club Clubman. Smirnoff net sales were up 1% supported by a full yeargained share due to momentum of the ‘We’re Open’ platform. Guinnessplatform but net sales were up 1% benefitting from the Rugby World Cup activation, improved distribution and innovation successes from ‘The Brewers Project’. Tanqueray net sales grew double digit and the brand gained 2pps of sharefell 7%, due to changes in the gin category, driven by expanding distribution with improved visibility and increased bartender advocacy. Reserve brands continuedcommercial footprint leading to drive profitable growth with netefficiencies including inventory reduction.
66
Business review (continued)
Net sales up 26% driven by Cîroc and scotch malts.
IninIreland net sales were broadly flat. Guinness net sales were up 4%,2% driven by the continued successful innovations launched through ‘The Brewers Project’. Of these,success of Hop House 13 Lager, has proven to be a stand out success gaining almost 3% share of lageroffset by other beer in the Republic of Ireland. Other beer brands where net sales declined 4% and net. Net sales growth in spirits were down 1%.of 10% was driven by Gordon’s and Smirnoff.
InFrance, net sales increased 3% driven bywere flat. Continued strong performance in Captain Morgan which almost doubled sales and reserve brands up 8%, driven mainly by scotch malts, partiallyZacapa, was offset by weakness in JeB and Smirnoff including ready to drink.
InContinental Europe, net sales were up 7%:
Net sales inIberiawere up 7% due to changes in the commercial footprint in the prior year and Scotch share gain in a growing scotch category, with Johnnie Walker net sales growth of 7% and JeB returning to growth of 3%. Tanqueray net sales were up 9% in a growing gin category.
InGermany, Austria and Switzerland, net sales grew 10% driven by double digit growth in Baileys, Johnnie Walker and Tanqueray, all achieving share gains in their respective categories.
Beneluxnet sales were down 2% within a declining spirits category. Performance continued to be impacted by a significant tax increase implemented in the prior year in Belgium.
InItaly, net sales were up 5%, mainly due to strong net sales growth in Tanqueray in a growing gin category.
Polandnet sales grew 9% due to performance improvement in scotch and reserve brands.
Europe Partner Marketsgrew net sales 12% due to an expanded distribution footprint and performance improvement in Johnnie Walker, Captain Morgan and Guinness.
Russianet sales grew 7%. While performance continues to be impacted by the economy and recent history of price increases, Russia achieved double digit growth in Bell’s and Johnnie Walker, with share gains across both brands. Performance improved due to broader distribution in the off-trade, increased activations and consistent execution of growth drivers as well as innovation success with Bell’s Spiced.
InTurkey, net sales grew 4% reflecting the impact of price rises taken in response to increases in excise duties. This performance was delivered in a challenging market, driven by 5% growth in raki. Johnnie Walker continued to deliver double digit growth.
Marketingincreased 3% and benefited from productivity initiatives which improved efficiency and effectiveness of the brand investment. The region continues to be focused on the key growth opportunities including reserve brands, gin, scotch, beer and innovation with up-weighted spend in the second half.
67
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, price points 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 as 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 (%) (%) (%) East Africa Nigeria Spirits(i) Ready to drink Value Super premium Africa Regional South Africa Beer Other Standard Ultra premium Markets (ARM) Other Premium (principally Travel Retail) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Key financials | | 2016 £ million | | | Exchange £ million | | | Reclassifi- cation(i) £ million | | | Acquisitions and disposals £ million | | | Organic movement £ million | | | 2017 £ million | | | Reported movement % | |
Net sales | | | 1,401 | | | | 78 | | | | (13 | ) | | | 15 | | | | 75 | | | | 1,556 | | | | 11 | |
Marketing | | | 143 | | | | 13 | | | | (2 | ) | | | 5 | | | | 7 | | | | 166 | | | | 16 | |
Operating profit | | | 212 | | | | 7 | | | | (7 | ) | | | (14 | ) | | | 20 | | | | 218 | | | | 3 | |
(i) | Reclassification comprises changes to a reallocation of the results of the Travel Retail operations to the geographical regions and the results of North African countries which were formerly reported in the Africa geographical regions now being included in Europe, Russia and Turkey. |
Our markets
The region comprises 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), Nigeria and South Africa (including the Republic of South Africa and Mozambique).
Supply operations
We operate 12 breweries in Africa, three sites that produce sorghum beer in South Africa, one cider plant and five facilities which provide blending and malting services. In addition, our beer and spirits brands are produced under licence by third-parties in 16 African countries.
68
Business review (continued)
Route to consumer
In Africa our largest businesses are in Nigeria, where we own 54.32% 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 51% of 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. Diageo has agreements with the Castel Group who license, brew and distribute Guinness in several countries across Africa Regional Markets. Diageo sells spirits through distributors in the majority of other sub-Saharan countries.
Sustainability and responsibility
We have a large production footprint, and our overall approach is to consider the broader context of our contribution as a local taxpayer, employer and member of the community. Our sourcing strategy is particularly important, and we aim to source 80% of agricultural raw materials locally by 2020, from some 50,000 farmers. In 2017 we had reached 76%. Through our Sustainable Agriculture Strategy, we are supporting farmers in our supply chain to develop economically, environmentally and socially sustainable farming practices. For example, we are carrying out a pilot in Northern Tanzania to help barley farmers improve their livelihoods through better resilience to drought and broader sustainable agriculture practices.
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 provided more than 173,000 additional people with safe water in 2017, securing a basic resource that underpins their community.
A major focus of our work in Africa centres on preventing drink driving. This year our partnership with the United Nations Training and Research Institute (UNITAR) brought together regional and local stakeholders to promote road safety in Nigeria and South Africa. We also support awareness and education campaigns in all our major markets and work with transportation authorities on training and enforcement initiatives. And we work with partners, such as community health care workers in Ethiopia, to reduce underage drinking.
Performance
Net sales
Net sales were £1,556 million in the year ended 30 June 2017 an increase of £155 million compared to net sales of £1,401 million in the year ended 30 June 2016. Net sales were favourably impacted by exchange rate movements of £78 million primarily due to the strengthening of the Kenyan schilling and South African rand partially offset by the weakness of Nigerian naira against sterling, combined with organic growth of £75 million (see further performance analysis below) and £15 million arising from the restructuring of the South African operation offset by £13 million due to the reallocation of the result of the Travel Retail operations and the transfer of the North African countries which were formerly reported in the Africa region respectively and for the year ended 30 June 2017 are included in the Europe, Russia and Turkey region.
Operating profit
Operating profit was £218 million in the year ended 30 June 2017 an increase of £6 million compared to operating profit of £212 million in the year ended 30 June 2016. Operating profit was favourably impacted by exchange rate movements of £7 million primarily due to the strengthening of the Kenyan schilling and South African rand partially offset by the weakness of Nigerian naira against sterling and organic growth of £20 million partially offset by the restructuring of the South African operation of £14 million and £7 million due to the reallocation of the result of the Travel Retail operations and the transfer of the North African countries which were formerly reported in the Africa region respectively and for the year ended 30 June 2017 are included in the Europe, Russia and Turkey region.
69
Business review (continued)
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Africa delivered net sales growth of 5% with all markets contributing to growth except East Africa, which remained flat. East Africa performance was driven by mainstream spirits up 24%, with strong growth of Kenya Cane offset by beer, down 4%, due to a significant increase in duty in Kenya in December 2015. Africa Regional Markets were up 5% driven by the relaunch of Meta in Ethiopia and in Ghana, good growth of Guinness and Malta Guinness, partially offset by a decline in Orijin due to increased competition in the bitters category. Nigeria was up 16% as the beer market continues to shift towards the value segment with Satzenbrau, up 61%, capitalising on the trend. South Africa was up 7%, due to growth of Smirnoff 1818. Beer performance in the region with net sales up 3%, was driven by Senator and Satzenbrau, partially offset by Guinness down 5% and Tusker down 10%. Mainstream spirits showed strong growth, up 21%. Scotch was up 5% and in growth across all markets except South Africa, driven by Johnnie Walker supported by the ‘Keep Walking’ campaign. Operating margin increased 60bps supported by productivity savings in supply, zero based budgeting on indirect spend and organisation effectiveness benefits, partially offset by an increase in marketing spend and route to consumer investments.
| | | | | | | | | | | | | | | | |
Markets: | | Organic volume movement % | | | Reported volume movement % | | | Organic net sales movement % | | | Reported net sales movement % | |
Africa | | | 3 | | | | 3 | | | | 5 | | | | 11 | |
| | | | | | | | | | | | | | | | |
East Africa | | | 5 | | | | 5 | | | | — | | | | 16 | |
Africa Regional Markets | | | — | | | | — | | | | 5 | | | | 18 | |
Nigeria | | | 10 | | | | 10 | | | | 16 | | | | (16 | ) |
South Africa | | | (1 | ) | | | 2 | | | | 7 | | | | 40 | |
| | | | | | | | | | | | | | | | |
Spirits(i) | | | 9 | | | | 7 | | | | 13 | | | | 24 | |
Beer | | | 1 | | | | 1 | | | | 3 | | | | 4 | |
Ready to drink | | | (10 | ) | | | 3 | | | | (3 | ) | | | 14 | |
| | | | |
Global giants and local stars(i): | | | | | Organic volume movement(ii) % | | | Organic net sales movement % | | | Reported net sales movement % | |
Guinness | | | | | | | (5 | ) | | | (5 | ) | | | (7 | ) |
Johnnie Walker | | | | | | | (1 | ) | | | 3 | | | | 5 | |
Smirnoff | | | | | | | 4 | | | | 22 | | | | 47 | |
Other beer: | | | | | | | | | | | | | | | | |
Malta Guinness | | | | | | | (12 | ) | | | 2 | | | | (11 | ) |
Tusker | | | | | | | (7 | ) | | | (10 | ) | | | 5 | |
Senator | | | | | | | 10 | | | | 14 | | | | 32 | |
Satzenbrau | | | | | | | 22 | | | | 61 | | | | 18 | |
(i) | Spirits brands excluding ready to drink. |
(ii) | Organic equals reported volume movement except for Johnnie Walker (10)% which was impacted by the reclassification of Algeria and Morocco to the Europe, Russia and Turkey region. |
Key highlights
InEast Africa, net sales were flat. Beer was down 4%, driven by the impact of the duty increase on bottled beer affecting Guinness and Tusker, partially offset by growth in Senator of 14%. Growth in value beers was supplemented by Ngule, a new value price point innovation in Uganda. Spirits grew 17% driven by mainstream spirits, up 24%. Reserve brands grew double digit following enhanced outlet partnerships and activation supported by brand ambassadors.
InAfrica Regional Markets, net sales grew 5% reflecting strong growth in Ethiopia, and a solid contribution by Ghana and Cameroon. These markets continued to benefit from the enhanced route to consumer delivering improved distribution, availability and execution.
70
Business review (continued)
In Ethiopia, net sales increased 28% driven by Meta, up 23%, following the relaunch last year. Spirits growth was fuelled by Johnnie Walker strong double digit growth driven by the new distributor model.
Ghana net sales increased 4%. Growth in beer offset a decline in spirits driven by Orijin Bitters which lapped its launch. Guinness net sales were up 15% and Malta Guinness, up 14% both benefiting from the ‘First Beer On Us’ campaign, offsetting declines in other beer brands, predominantly Star.
In Cameroon, net sales growth of 3% was driven largely by ready to drink, up 42%. This was led by Orijin ready to drink following the launch last year. Spirits also contributed to the good performance driven predominately by Johnnie Walker Black Label, up 17%. Malta Guinness declined due to rising competition in the category.
InNigeria, net sales increased 16% driven by beer growth up 11%. The beer value category continues to grow and now represents more than 50% of the market volume. Satzenbrau with net sales up 61% and the Dubic Malt launch, more than offset the decline in Guinness, Malta Guinness and Harp. Strong mainstream spirits growth was driven by increased support and the successful launch of brands including McDowell’s in the first half of the year, which is now produced locally at Benin. Scotch net sales were up strong double digit, driven by Johnnie Walker increased investment. Ready to drink was down 15%, driven by the highly competitive category affecting Orijin, partly offset by strong performance in Smirnoff Double Black and Guarana and Smirnoff Ice. The recent launch of Orijin Zero is extending reach into the non-alcoholic drinks market.
South Africa net sales grew 7% driven by growth in mainstream spirits, up 15%, led by strong growth of Smirnoff 1818 which was partially offset by Guinness decline and scotch down 1% with volume down 6% following the negative category trend and impacted by price increases across the portfolio.
Marketing was up 5% in the region. In Africa Regional Markets investment was focused behind the activation of Guinness campaigns and Johnnie Walker ‘Step up’ across all markets, and in Ethiopia on the Meta relaunch. South Africa investment was behind Johnnie Walker and Bell´s to revitalize the scotch category with activations at scale through liquid on lips. In Nigeria investment remained flat, with special focus on Satzenbrau and mainstream spirits launches. East Africa investment was focused on Johnnie Walker, while efficiencies on Tusker were reinvested in mainstream spirits.
71
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.
| | |
| | Net sales by markets Net sales by categories Net sales by price points (%) (%) (%) PUB PEBAC Spirits(i) Ready to drink Value Super premium Mexico Other Beer Other Standard Ultra premium CCA (principally Premium Travel Retail) Andean |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Key financials | | 2016 £ million | | | Exchange £ million | | | Reclassifi- cation(i) £ million | | | Acquisitions and disposals £ million | | | Organic movement £ million | | | 2017 £ million | | | Reported movement % | |
Net sales | | | 863 | | | | 131 | | | | (13 | ) | | | (26 | ) | | | 89 | | | | 1,044 | | | | 21 | |
Marketing | | | 167 | | | | 22 | | | | 1 | | | | (2 | ) | | | 7 | | | | 195 | | | | 17 | |
Operating profit before exceptional items | | | 199 | | | | 35 | | | | (11 | ) | | | (5 | ) | | | 32 | | | | 250 | | | | 26 | |
Exceptional operating items(ii) | | | (118 | ) | | | | | | | | | | | | | | | | | | | — | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | 81 | | | | | | | | | | | | | | | | | | | | 250 | | | | 209 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(i) | Reclassification comprise changes to a reallocation of the results of the Travel Retail operations to the geographical regions. |
Our markets
Our Latin America and Caribbean (LAC) business comprises five markets: PUB (Paraguay, Uruguay and Brazil), Mexico, CCA (Central America and Caribbean), Andean (Colombia and Venezuela) and PEBAC (Peru, Ecuador, Bolivia, Argentina and Chile).
Supply operations
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 14 brewers and 10 co-packing partners.
72
Business review (continued)
Route to consumer
We drive an efficient route to consumer through differentiated models tailored to each markets’ size and needs. In Mexico and Peru our in-market companies sell directly to retailers and wholesalers. In Brazil, we distribute the majority of Ypióca through a reseller network in Ceará state, and serve the rest of the country and brands via distributors, wholesalers, and multiple retail groups. In Andean we partner with geographically exclusive distributors, but in Colombia a subsidiary sells to the key accounts directly. In Chile we also serve retailers directly, while the rest of the channels are covered by a single distributor. In most of CCA and Argentina we partner with distributors in each country who are responsible for the execution of the sales and marketing programmes.
Sustainability and responsibility
Diageo has long been known in the region for our flagship community re-investment programme, Learning for Life, and our overall approach to developing an industry that brings economic and social value to society. Our commercial and brand teams have been working to increase the scale and impact of Learning for Life, to deliver more for our communities, partners, customers and our business. In Mexico, for example, Project Entrepreneur creates new businesses, and has resulted in around 12,000 new jobs in Mexico City.
Key issues we address in the region are underage drinking and drink driving. For example, we support schemes with retailers in Brazil, Mexico and Colombia to ensure they check for identification to prevent underage sales. In the Dominican Republic, we worked with industry partners to support legislation to establish a maximum blood alcohol level for driving.
Performance
Net sales
Net sales were £1,044 million in the year ended 30 June 2017 an increase of £181 million compared to net sales of £863 million in the year ended 30 June 2016. Net sales were favourably impacted by exchange rate movements of £131 million due to the strengthening of the Brazilian real, Mexican peso and Colombian peso against sterling and organic growth of £89 million (see further performance analysis below) partially offset by £26 million due to the disposals of the Jamaican operation and Argentina business restructuring in the year ended 30 June 2016 and the reallocation of the Travel Retail operations of £13 million.
Operating profit
Operating profit was £250 million in the year ended 30 June 2017 an increase of £169 million compared to operating profit of £81 million in the year ended 30 June 2016. Operating profit was favourably impacted by exchange rate movements of £35 million mainly driven by the Brazilian real, Mexican peso and Colombian peso and organic growth of £32 million partially offset by £5 million due to the disposals of the Jamaican operation and Argentina business restructuring in the year ended 30 June 2016 and the reallocation of the Travel Retail operations of £11 million. There were no exceptional operating charges in the year ended 30 June 2017 compared to operating charges of £118 million in the year ended 30 June 2016 when the group impaired the Ypióca brand and related tangible fixed assets and goodwill allocated to the Paraguay, Uruguay and Brazil (PUB) cash-generating unit.
73
Business review (continued)
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Latin America and Caribbean delivered 2% growth in volume and 9% growth in net sales, with strong performance from Mexico, Andean and PEBAC. Mexico net sales were up 20% driven by scotch and strong double digit growth from Don Julio. Andean performance was driven by Colombia with net sales growth of 20%. Both Andean and PEBAC growth was mainly driven by scotch. PUB grew net sales 4% as the rate of decline in Brazil slowed due to lapping the impact of prior year tax increases, and performance improvement in Uruguay and Paraguay. Across the region, scotch net sales grew 12% and a decline in vodka was offset by growth in tequila, Baileys and rum. Operating margin for the region increased 111bps benefiting from product mix in Mexico and Colombia, productivity led marketing efficiencies and overhead savings through both indirect spend and organisational effectiveness programmes.
| | | | | | | | | | | | | | | | |
Markets: | | Organic volume movement % | | | Reported volume movement % | | | Organic net sales movement % | | | Reported net sales movement % | |
Latin America and Caribbean | | | 2 | | | | 2 | | | | 9 | | | | 21 | |
| | | | | | | | | | | | | | | | |
PUB | | | (3 | ) | | | (3 | ) | | | 4 | | | | 38 | |
Mexico | | | 16 | | | | 16 | | | | 20 | | | | 27 | |
CCA | | | (4 | ) | | | (10 | ) | | | (1 | ) | | | 1 | |
Andean | | | (11 | ) | | | (11 | ) | | | 21 | | | | 39 | |
PEBAC | | | 43 | | | | 46 | | | | 13 | | | | 18 | |
| | | | | | | | | | | | | | | | |
Spirits(i) | | | 3 | | | | 4 | | | | 12 | | | | 27 | |
Beer | | | 1 | | | | (29 | ) | | | 17 | | | | (36 | ) |
Ready to drink | | | (16 | ) | | | (17 | ) | | | (3 | ) | | | 20 | |
| | | |
Global giants and local stars(i): | | | Organic volume movement(ii) % | | | Organic net sales movement % | | | Reported net sales movement % | |
Johnnie Walker | | | | | | | 2 | | | | 11 | | | | 23 | |
Buchanan’s | | | | | | | 19 | | | | 23 | | | | 32 | |
Smirnoff | | | | | | | (2 | ) | | | (10 | ) | | | 10 | |
Old Parr | | | | | | | (1 | ) | | | 3 | | | | 20 | |
Baileys | | | | | | | 8 | | | | 15 | | | | 28 | |
Ypióca | | | | | | | 1 | | | | 5 | | | | 41 | |
Black & White | | | | | | | 46 | | | | 21 | | | | 40 | |
(i) | Spirits brands excluding ready to drink. |
(ii) | Organic equals reported volume movement except for Smirnoff 4% and Baileys 9% due to acquisitions and disposals. |
Key highlights
InPUB (Paraguay, Uruguay and Brazil), net sales grew 4%. In Brazil, the decline in net sales slowed as performance lapped the impact from the tax increase in December 2015. Net sales declined in vodka and ready to drink, which offset the 4% growth in scotch, where Black & White grew 28% gaining 11 percentage points share of primary scotch. In cachaça, Ypióca net sales grew 5% with Ypióca Ouro (Gold variant) growing double digit driven by strong in store execution and commercial incentives. Paraguay and Uruguay continued to grow due to improved performance in the export channels. Net sales for reserve brands in PUB continued their strong performance with 18% growth driven by Ketel One vodka and Johnnie Walker Gold Label Reserve.
InMexico, net sales increased 20% driven by strong performance across all categories except ready to drink and vodka. Scotch continues to be a key category driver with net sales growth for Johnnie Walker at 16% and Buchanan’s at 14%. In primary scotch, Black & White net sales grew double digit. Reserve grew net sales 33% driven by Don Julio which grew 42% taking 2pps of share. Net sales also grew in rum, Baileys and gin.
74
Business review (continued)
InCCA (Central America and Caribbean), net sales declined 1%. The domestic markets grew net sales 3% driven by scotch, Smirnoff ready to drink and Guinness. Export channels net sales declined 9% as market conditions remained challenging given the continued currency weakness against the US dollar.
Andean (Colombia and Venezuela)continued strong growth with net sales up 21%. Colombia net sales increased 20% driven by route to consumer expansion and implementation of commercial standards. Growth in Colombia was across all categories except vodka with scotch up 23% driven by Buchanan’s and Johnnie Walker continuing to grow our leadership position in the category. In Venezuela volume decreased 27% as volatility in the market continued. Although net sales grew significantly faster, with price increases in the high inflation environment, the business remains small with net sales of approximately £10m.
PEBAC (Peru, Ecuador, Bolivia, Argentina and Chile) delivered net sales growth of 13%, mainly driven by Chile and Argentina. Growth in Chile was driven by scotch. Argentina’s growth was driven by a route to market change, implemented in F16.
Marketing increased by 4%, and benefited from procurement savings resulting in an underlying investment increase of 9%. Investment on scotch was spread across price points with support focused behind Johnnie Walker, Buchanan’s and Black & White.
75
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 (%) (%) (%) India North Asia Spirits(i) Ready to drink Value Super premium Greater China Travel Retail Asia Beer Other Standard Ultra premium Australia and Middle East Premium South East Asia |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Key financials | | 2016 £ million | | | Exchange £ million | | | Reclassification(i) £ million | | | Acquisitions and disposals £ million | | | Organic movement £ million | | | 2017 £ million | | | Reported movement % | |
Net sales | | | 2,076 | | | | 346 | | | | (30 | ) | | | (43 | ) | | | 70 | | | | 2,419 | | | | 17 | |
Marketing | | | 301 | | | | 47 | | | | (4 | ) | | | — | | | | (1 | ) | | | 343 | | | | 14 | |
Operating profit before exceptional items | | | 395 | | | | 85 | | | | (11 | ) | | | (1 | ) | | | 19 | | | | 487 | | | | 23 | |
Exceptional operating items(ii) | | | (49 | ) | | | | | | | | | | | | | | | | | | | (9 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | 346 | | | | | | | | | | | | | | | | | | | | 478 | | | | 38 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(i) | Reclassification comprises changes to a reallocation of the results of the Travel Retail operations to the geographical regions and the results of Lebanon, other Middle Eastern countries which were formerly reported in the Asia Pacific geographical region now being included in Europe, Russia and Turkey. |
(ii) | For further details of exceptional operating items see pages 218-221. |
Our markets
Asia Pacific comprises India, Greater China (China, Taiwan, Hong Kong and Macau), Australia (including New Zealand), South East Asia (Vietnam, Thailand, Philippines, Indonesia, Malaysia, Singapore, Cambodia, Laos, Myanmar, Nepal and Sri Lanka), North Asia (Korea and Japan) and Travel Retail Asia and Middle East.
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 23 owned manufacturing units in India and Nepal and leases one manufacturing facility in India. USL and Diageo brands are also produced under licence by third-parties in 36 manufacturing units in India. In addition, we have bottling plants in Korea, Thailand, Indonesia and Australia with ready to drink manufacturing capabilities.
76
Business review (continued)
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.
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
We have spent time re-aligning our programmes based on material issues to our business and our stakeholders, such that they better support our commercial agenda and our relationships in the many and varied markets that make up this region. We are moving our efforts towards programmes focused where we source, make and sell.
For example, we have developed community water programmes in India around our production sites, reducing the amount we use while ensuring safe drinking water for around 40,000 people. Our Model Villages programme is also tackling illicit alcohol and heavy episodic drinking. We are working with local NGOs and communities to support more balanced lifestyles and with women’s groups to support their empowerment.
To address local concerns we focus on preventing underage drinking, and this year launched Smashed, our theatre education programme, in many countries including China, Taiwan and Indonesia. We are also continuing to focus on preventing heavy drinking among university students in Korea and Australia.
Performance
Net sales
Net sales were £2,419 million in the year ended 30 June 2017 an increase of £343 million compared to net sales of £2,076 million in the year ended 30 June 2016. Net sales were favourably impacted by exchange rate movements of £346 million due to the strengthening of Australian dollar, Indian rupee, New Taiwan dollar and South Korean won against sterling and organic growth of £70 million (see further performance analysis below) partially offset by a £43 million reduction due to the transition of a number of operations in India to a royalty or franchise model, the disposal of the Bouvet wine business and the net of £30 million due to the reallocation of the result of the Travel Retail operations and the transfer of Lebanon and other Middle East countries which were formerly reported in the Asia Pacific region respectively and for the year ended 30 June 2017 are included in the Europe, Russia and Turkey region.
77
Business review (continued)
Operating profit
Operating profit was £478 million in the year ended 30 June 2017 an increase of £132 million compared to operating profit of £346 million in the year ended 30 June 2016. Operating profit was favourably impacted by exchange rate movements of £85 million due to strengthening Australian dollar, Indian rupee, New Taiwan dollar and South Korean won against sterling and organic growth of £19 million partially offset by a £1 million loss due to disposal of the Bouvet wine business and £11 million due to the reallocation of the result of the Travel Retail operations and the transfer of Lebanon and other Middle East countries which were formerly reported in the Asia Pacific region respectively and for the year ended 30 June 2017 are included in the Europe, Russia and Turkey region. In addition, operating profit for the year ended 30 June 2017 was impacted by a net £9 million exceptional operating charge due to the release of a provision in respect of disengagement agreements relating to United Spirits Limited and a charge for a customer claim in India. The year ended 30 June 2016 included an exceptional operating charge of £49 million in respect of disengagement agreements relating to United Spirits Limited.
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Asia Pacific net sales grew 3% with strong growth in Greater China and solid performance in Australia and South East Asia. This was partly offset by the continued contraction of the scotch category in Korea which led to a further decline in net sales and there was also weakness in travel retail in the region. In Greater China, net sales grew 25% as a result of strong momentum in Chinese white spirits and scotch performance, up 5%. The business in India grew net sales by 2%, largely driven by IMFL whisky and scotch, despite the impact of demonetisation and the Supreme Court ruling banning sales in certain outlets near highways. South East Asia net sales grew 3% and Australia net sales also grew 3% driven by scotch and ready to drink innovation. Operating margin improved 20bps benefiting from mix, driven by strong growth from reserve brands, overhead efficiency benefits from the productivity programme across all markets, and in India, margin improvement was supported in particular by significant supply efficiencies. These benefits were partially offset by lapping the profit on the sale of United Breweries shares in the prior year.
| | | | | | | | | | | | | | | | |
Markets: | | Organic volume movement(i) % | | | Reported volume movement % | | | Organic net sales movement % | | | Reported net sales movement % | |
Asia Pacific | | | (1 | ) | | | (6 | ) | | | 3 | | | | 17 | |
| | | | | | | | | | | | | | | | |
India | | | (2 | ) | | | (7 | ) | | | 2 | | | | 14 | |
Greater China | | | 25 | | | | 25 | | | | 25 | | | | 45 | |
Australia | | | — | | | | — | | | | 3 | | | | 25 | |
South East Asia | | | 7 | | | | 13 | | | | 3 | | | | 15 | |
North Asia | | | 11 | | | | 11 | | | | (3 | ) | | | 18 | |
Travel Retail Asia and Middle East | | | (14 | ) | | | (17 | ) | | | (13 | ) | | | (15 | ) |
| | | | | | | | | | | | | | | | |
Spirits(ii) | | | (1 | ) | | | (7 | ) | | | 4 | | | | 16 | |
Beer(iii) | | | 1 | | | | 46 | | | | — | | | | 17 | |
Ready to drink | | | — | | | | — | | | | — | | | | 20 | |
| | | |
Global giants and local stars(ii) | | | Organic volume movement(iv) % | | | Organic net sales movement % | | | Reported net sales movement % | |
Johnnie Walker | | | | | | | 3 | | | | 1 | | | | 7 | |
McDowell’s | | | | | | | (1 | ) | | | 1 | | | | 13 | |
Windsor | | | | | | | (11 | ) | | | (12 | ) | | | 5 | |
Smirnoff | | | | | | | (1 | ) | | | 1 | | | | 17 | |
Guinness | | | | | | | — | | | | (1 | ) | | | 18 | |
Bundaberg | | | | | | | (4 | ) | | | — | | | | 21 | |
Shui Jing Fang(v) | | | | | | | 66 | | | | 65 | | | | 81 | |
78
Business review (continued)
(i) | Difference between organic and reported volume for Asia Pacific is driven by the move to the franchise model for some popular segment brands in India. |
(ii) | Spirits brands excluding ready to drink. |
(iii) | Following a review of group’s reporting of volume an adjustment was made to include Malaysia and Singapore contract brew volume in the reported beer figures which increased the reported volume in Asia Pacific by 0.3 million equivalent cases (2016 – 0.4 million equivalent cases). |
(iv) | Organic equals reported volume movement except for Johnnie Walker (2)%, Smirnoff (2)% and McDowell’s (7)% which were impacted by the reclassification of Lebanon and other Middle East countries to the Europe, Russia and Turkey region and the move from an owned to a franchise model in India. |
(v) | Organic growth figures represent total Chinese white spirits of which Shui Jing Fang is the predominant brand. |
Key highlights
India net sales were up 2% despite the impact of demonetisation and the recent Supreme Court ruling prohibiting the sale of alcohol in certain outlets near highways. Prestige and above grew 7% as McDowell’s No. 1 and Signature continued to benefit from their renovation, with net sales growth of 9% and 31%, respectively. Scotch grew net sales 6% driven by Johnnie Walker and Black & White. Popular brands declined 5% particularly within the rum category. The focus on route to consumer continues with perfect stores now representing over a third of total business. Distribution and share of shelf have grown, driving net sales growth and share on key scotch brands.
Greater China net sales were up 25%. Chinese white spirits grew 69%, driven by route to consumer initiatives and brand equity investment. Scotch net sales growth was up 5% driven by Johnnie Walker, The Singleton and other malts.
Australia net sales increased 3% driven by growth in scotch. The relaunch of the Johnnie Walker ‘Keep Walking’ campaign and innovations including blender’s batch select cask and red rye finish contributed to Johnnie Walker net sales growth of 4%. Reserve was up 9%. Whilst the ready to drink category remains challenging, innovation launches including Bundaberg Lazy Bear, Smirnoff Pure and Pimm’s Premixes, delivered significant net sales for the business through addressing consumer demand for low tempo refreshing drinks.
South East Asia net sales grew 3% with growth in the Philippines and Key Accounts offsetting the declines in Thailand and Indonesia. In the Philippines the focus on route to consumer is driving significant increases in distribution in the modern trade and secondary outlets, while also improving execution standards and activation. The ‘Keep Walking Philippines’ campaign launch during the first half supported by occasion-driven activation during the second half led to double digit growth for Johnnie Walker. Scotch grew net sales 7% driven by Key Accounts, which continues to lap a period of planned inventory reduction, and the Philippines. The mourning period in Thailand, following the death of the king, impacted performance with net sales down 10% following the closure of on- trade outlets for varying periods over the one year formal mourning period. In Indonesia, total beer net sales declined 5% impacted by structural trade changes. Guinness decline was mitigated by the launch of Ginseng under the Guinness Zero brand.
InNorth Asia, net sales declined 3%. In Korea net sales declined 7% as Windsor continued to be impacted by the contraction of the traditional on-trade, increased competition and shifts to lower alcohol by volume local whisky segments. This was partially offset by net sales growth of 41% for W Ice by Windsor, a low alcohol variant and by Guinness as the international beer category grows. Japan grew net sales 6% driven by scotch with net sales growth of 21% offsetting the decline in ready to drink.
Travel Retail Asia and Middle East continued to decline net sales at 13% with lower spend by travellers and currency volatility impacting performance.
Marketing investment remained broadly flat with marketing efficiencies across the region offset by up-weighted investment behind Chinese white spirits.
79
Business review (continued)
Category review
| | |
| | Volume Net sales Marketing spend (%) (%) (%) Scotch North Rum Liqueurs Tequila Ready to Other Vodka American Indian Made Gin Beer drink Whisk(e)y Foreign Liquor (IMFL) |
| | | | | | | | | | | | |
Key categories | | Reported volume movement(iii) % | | | Organic net sales movement % | | | Reported net sales movement % | |
Spirits(i) | | | 1 | | | | 5 | | | | 19 | |
Scotch | | | 4 | | | | 5 | | | | 18 | |
Vodka(ii) | | | (2 | ) | | | (4 | ) | | | 10 | |
North American whisk(e)y | | | 8 | | | | 11 | | | | 29 | |
Rum(ii) | | | (2 | ) | | | 4 | | | | 19 | |
Indian-Made Foreign Liquor (IMFL) whisky | | | 1 | | | | 6 | | | | 21 | |
Liqueurs | | | 4 | | | | 3 | | | | 12 | |
Gin(ii) | | | 8 | | | | 8 | | | | 20 | |
Tequila | | | 27 | | | | 26 | | | | 43 | |
Beer | | | 1 | | | | 2 | | | | 7 | |
Ready to drink | | | (4 | ) | | | — | | | | 17 | |
(i) | Spirits brands excluding ready to drink. |
(ii) | Vodka, rum, gin including IMFL brands. |
(iii) | Organic equals reported volume movement except for Spirits (2)%, Rum (6)%, IMFL whisky (2)%, Liqueurs 1%, Gin 3% and Ready to drink 0% which were impacted by disposals and the move from an owned to a franchise model in India. |
80
Business review (continued)
| | | | | | | | | | | | |
Global giants, local stars and reserve(i): | | Organic volume movement(ii) % | | | Organic net sales movement % | | | Reported net sales movement % | |
Global giants | | | | | | | | | | | | |
Johnnie Walker | | | 4 | | | | 6 | | | | 18 | |
Smirnoff | | | (1 | ) | | | (1 | ) | | | 13 | |
Baileys | | | 6 | | | | 5 | | | | 18 | |
Captain Morgan | | | 7 | | | | 6 | | | | 22 | |
Tanqueray | | | 12 | | | | 9 | | | | 24 | |
Guinness | | | (1 | ) | | | — | | | | 8 | |
Local stars | | | | | | | | | | | | |
Crown Royal | | | 10 | | | | 12 | | | | 30 | |
Yenì Raki | | | (3 | ) | | | 4 | | | | 5 | |
Buchanan’s | | | 16 | | | | 16 | | | | 29 | |
JeB | | | 3 | | | | — | | | | 13 | |
Windsor | | | (11 | ) | | | (12 | ) | | | 5 | |
Old Parr | | | — | | | | 5 | | | | 22 | |
Bundaberg | | | (4 | ) | | | — | | | | 21 | |
Black & White | | | 24 | | | | 16 | | | | 37 | |
Ypióca | | | 1 | | | | 5 | | | | 41 | |
McDowell’s | | | (1 | ) | | | 2 | | | | 15 | |
Shui Jing Fang(iii) | | | 66 | | | | 65 | | | | 81 | |
Reserve | | | | | | | | | | | | |
Scotch malts | | | 3 | | | | 2 | | | | 17 | |
Cîroc | | | (10 | ) | | | (12 | ) | | | 1 | |
Ketel One vodka | | | — | | | | (5 | ) | | | 11 | |
Don Julio | | | 25 | | | | 25 | | | | 43 | |
Bulleit | | | 23 | | | | 24 | | | | 44 | |
(i) | Spirits brands excluding ready to drink. |
(ii) | Organic equals reported volume movement except for McDowell’s No.1 (6)%, which was impacted by the move from an owned to a franchise model in India. |
(iii) | Organic growth figures represent total Chinese white spirits of which Shui Jing Fang is the predominant brand. |
Scotchrepresents 25% of Diageo’s net sales and was up 5% with broad based growth across all regions except Asia Pacific which was impacted by Windsor decline in line with the scotch category contraction in Korea. This was more than offset by growth driven by Johnnie Walker up 6% and Buchanan’s up 16%. Performance was consistently strong across all price segments, growing net sales in standard and primary from brands such as Johnnie Walker Red Label up 6% and Black & White up 16%. Premium segments grew 5% with Buchanan’s continuing to perform strongly in Latin America and Caribbean and North America. Scotch reserve brands grew net sales 4%, driven by Johnnie Walker Gold Label Reserve and The Singleton up 8%.
Vodkarepresents 12% of Diageo’s net sales and declined 4%, driven by soft performance in all the regions except for Africa where net sales grew 22%. Net sales decline was driven predominantly by Cîroc and Ketel One vodka in North America. Smirnoff declined 1%. This was driven by Great Britain, where despite gaining share, it was impacted by changes to the commercial footprint that led to efficiencies, including an inventory reduction, and declined 7%. Smirnoff was also down 2% in US Spirits, partially offset by a strong growth of Smirnoff 1818 in South Africa.
North American whisk(e)yrepresents 9% of Diageo’s net sales and grew 11%. Performance continued to be driven by strong growth and share gains in Crown Royal and Bulleit in US Spirits.
Rumrepresents 7% of Diageo’s net sales and grew 4%. In Europe, Africa and Latin America and Caribbean net sales grew double digit while North America was up 3%, driven by the turnaround of Captain Morgan. In India net sales declined 8% driven by McDowell’s No.1 Rum.
81
Business review (continued)
IMFL whiskyrepresents 5% of Diageo’s net sales and grew 6%. The relaunches of two of the biggest brands McDowell’s No.1 and Signature have contributed to this growth with both brands growing double digit.
Liqueursrepresents 5% of Diageo’s net sales and grew 3% driven by growth in all regions except Africa. Baileys was up 5%, led by Europe, following an exceptional on-trade execution and positive results of the ‘Don’t mind if I Baileys’ advertising campaign.
Ginrepresents 3% of Diageo’s net sales and grew 8%. Strong double digit growth in Europe, Africa and Latin America and Caribbean fuelled growth in the category. Tanqueray was the largest contributor, followed by Gordon’s.
Tequilarepresents 2% of Diageo’s net sales and grew 26%. The performance was driven by continued double digit growth of Don Julio in US Spirits and Mexico.
Beerrepresents 16% of Diageo’s net sales and grew 2%. Strong performance in the value beer portfolio in Africa was driven by Satzenbrau in Nigeria and Senator in Kenya. Guinness growth in Europe was led by innovation from the ‘The Brewers Project’ including Guinness Hop House 13 Lager. This was offset by declines in Tusker and Guinness Extra Stout as a result of the increase of duty on bottled beer in Kenya as well as a decline in Guinness in Nigeria.
Ready to drinkrepresents 6% of Diageo’s net sales and remained flat. North America delivered strong performance in Smirnoff launches offset predominantly by declines in Orijin in Nigeria.
Global giantsrepresent 41% of Diageo net sales and grew 3%, driven by Europe up 6% and Latin America and Caribbean up 9%. All Global Giants grew with the exception of Guinness which remained flat and Smirnoff which was down 1%.
Johnnie Walkernet sales were up 6% with growth in all regions. Latin America and Caribbean and Europe were the largest contributors with 11% and 9% growth, respectively. North America was up 6%, accelerating growth in the second half. In Asia Pacific, net sales grew 1%, with growth driven by South East Asia, China and India partially offset by Travel Retail Asia and Middle East. Reserve variants grew 6% driven by Johnnie Walker Gold Label Reserve and Johnnie Walker Green Label.
Smirnoffnet sales were down 1%. Declines in US Spirits, Europe and Latin America and Caribbean were partly offset by Asia Pacific up 1%, and Africa growth up 22% driven by the strong performance of Smirnoff 1818 in South Africa. The decline in Europe was driven by Great Britain, Benelux and France performance, partly offset by Iberia up 16% and Ireland up 9%.
Baileys net sales grew 5% across all regions driven by 6% growth in its biggest market, Europe, following an exceptional on-trade execution. Latin America and Caribbean contributed with double digit growth behind Mexico Mother’s Day shopper platform and North America contributed with brand innovations.
Captain Morgannet sales grew 6% across all regions, with a strong performance in Europe driven by Europe Partner Markets, France and Great Britain. In US Spirits net sales grew 4% and gained share, supported by innovation.
Tanqueraynet sales grew 9% across all regions except for North America. Europe led the growth with strong double digit growth driven by Great Britain, Italy and Germany, Austria and Switzerland.
Guinnessnet sales were flat. Africa declined 5% largely driven by the shift to value beer in Kenya and Nigeria partially offset by growth in Europe and Africa Regional Markets. Guinness in Europe grew 2% driven by expansion of distribution in Europe Partner Markets supported by media investment and the success of Hop House 13 Lager in Great Britain and Ireland.
Local starsrepresent 20% of net sales and grew 9%. This was driven by Crown Royal in North America growing 12%, Buchanan’s up 16% and double digit growth in Chinese white spirits. Solid growth in Yenì Raki in Turkey and McDowell’s more than offset the declines in Windsor in Korea. Black & White growth of 16% was driven by Latin America and Caribbean and Asia Pacific.
Reserve brandsrepresent 16% of net sales and grew 7%, across all regions. Chinese white spirits and strong performance in Don Julio growth in US Spirits and Mexico were partly offset by Cîroc and Ketel One vodka declines in US Spirits. Scotch reserve brands grew 4% with Johnnie Walker driving the growth. Bulleit continued its strong growth with net sales up 24%. Tanqueray No. TEN grew strong double digit, up 25%. Malts up 2%, was driven by Lagavulin in North America and The Singleton in Asia Pacific and North America.
82
Business review (continued)
Operating results 2016 compared with 2015
GROUP FINANCIAL REVIEW
The following comments were made by Kathryn Mikells, Chief Financial Officer, in Diageo’s Annual Report for the year ended 30 June 2016:
“This is a good set of results and reflects better execution across the business. Our improved performance was driven by the return to growth of each of our six global brands and our US spirits business. The delivery of volume growth; 19bps of organic margin expansion; increased free cash flow; and the disposal of £1 billion in non-core assets, comes from driving efficiency in every aspect of the business and across every expense item to fuel future growth. I believe this consistent approach to growth, productivity and cash will drive better value creation.”
|
Net sales declined 3.0% as organic growth in each region and acquisitions were more than offset by adverse exchange and disposals |
Organic results improved with volume growth of 1.3% |
Organic net sales growth of 2.8% |
Operating profit grew 1.6% with organic growth, lower exceptional operating charges and acquisitions partially offset by adverse exchange and disposals |
Organic operating profit growth of 3.5% |
Net cash from operating activities was flat, £2.5bn |
Free cash flow continued to be strong at £2.1bn up £134 million on last year |
Basic eps of 89.5 pence was down 6% as lower exceptional income reduced basic eps by 6.1 pence |
Eps before exceptional items increased 1% to 89.4 pence |
| | |
| | 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 sales of £36 million (2015 – £80 million). |
(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 of £150 million (2015 – £123 million). |
83
Business review (continued)
| | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | |
| | Volume | | | Net sales | | | Marketing | | | Operating profit | |
Growth by region | | % | | | % | | | % | | | % | |
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 | |
| | | | |
Organic growth by region | | Volume % | | | Net sales % | | | Marketing % | | | Operating profit(ii) % | |
North America | | | 1 | | | | 3 | | | | (2 | ) | | | 4 | |
Europe, Russia and Turkey | | | 2 | | | | 4 | | | | 5 | | | | 6 | |
Africa | | | 9 | | | | 3 | | | | 1 | | | | (11 | ) |
Latin America and Caribbean | | | (2 | ) | | | 1 | | | | — | | | | (1 | ) |
Asia Pacific | | | — | | | | 2 | | | | (12 | ) | | | 13 | |
Diageo(i) | | | 1 | | | | 3 | | | | (2 | ) | | | 3 | |
(i) | Includes Corporate. Corporate net sales in the year ended 30 June 2016 were £36 million (2015 — £80 million) a decrease of 55% due to the sale of the Gleneagles Hotel in June 2015. Net operating charges before exceptional items were £150 million (2015 — £123 million), increased due to costs related to the productivity programme, the reinvestment of the savings delivered by the organisational review announcement in January 2014, and increase in the annual incentive plan costs. These increases were partially offset by increased profit on land sales. |
(ii) | Before exceptional items. |
84
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 Pacic 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 89 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.
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.
85
Business review (continued)
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 Pacic 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 89 for more details. |
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.
86
Business review (continued)
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 prot Finance charges Acquisitions and disposals Tax Operating prot excluding Non-controlling interests exchange
(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 net finance charges. Net 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 | ) |
| | | | | | |
2016 | | | 327 | |
| | | | | | |
| | | | | | | | |
| | 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.
87
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.
137 152 93 5 2,097 1,963 (83) (170) 2015 2016 Capex Working capital movement Exchange (ii) Interest and tax Operating prot (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.
88
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.
Income statement
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2015 £ million | | | Exchange (a) £ million | | | Acquisitions and disposals (b) £ million | | | Organic movement(ii) £ million | | | Reclassification(iii) £ million | | | 2016 £ million | |
Sales | | | 15,966 | | | | (360 | ) | | | (362 | ) | | | 397 | | | | — | | | | 15,641 | |
Excise duties | | | (5,153 | ) | | | 188 | | | | 52 | | | | (121 | ) | | | (122 | ) | | | (5,156 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | | 10,813 | | | | (172 | ) | | | (310 | ) | | | 276 | | | | (122 | ) | | | 10,485 | |
Cost of sales(i) | | | (4,585 | ) | | | 68 | | | | 200 | | | | (56 | ) | | | 122 | | | | (4,251 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit before exceptional items | | | 3,066 | | | | (83 | ) | | | (74 | ) | | | 99 | | | | — | | | | 3,008 | |
Exceptional operating items (c) | | | (269 | ) | | | | | | | | | | | | | | | | | | | (167 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Profit before taxation | | | 2,933 | | | | | | | | | | | | | | | | | | | | 2,858 | |
Taxation (d) | | | (466 | ) | | | | | | | | | | | | | | | | | | | (496 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Profit for the year | | | 2,467 | | | | | | | | | | | | | | | | | | | | 2,362 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(i) | Before exceptional operating items, see pages 90-91. |
(ii) | For the definition of organic movement see page 142. |
(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. |
89
Business review (continued)
(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.
| | | | |
| | 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.
90
Business review (continued)
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.
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.
91
Business review (continued)
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.
(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.
92
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 | ) |
| | | | | | | | |
(a) See page 88 for the analysis of free cash flow.
93
Business review (continued)
(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.
94
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 | ) |
| | | | | | | | |
Equity at the end of the year | | | 10,180 | | | | 9,256 | |
| | | | | | | | |
(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.
95
Business review (continued)
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.
96
Business review (continued)
North America
Performance
| | |
| | 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 |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 | ) | | | | | | | | | | | | | | | — | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | 1,420 | | | | | | | | | | | | | | | | 1,551 | | | | 9 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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.
97
Business review (continued)
Further performance analysis
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
North America delivered net sales growth of 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 | |
| | | |
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. |
98
Business review (continued)
Net sales in US Spirits were up 3%, with a 10% net sales increase in the second half following a transition to a replenishment model for innovation launches. Diageo’s North American whisk(e)y brands accounted for half of the overall net sales growth as Crown Royal and Bulleit continued to gain share. Crown Royal net sales increased 5%, with net sales of Crown Royal Deluxe up 5% as it benefited from the new “The One Made For A King” campaign which focused on the quality and heritage of the brand. Crown Royal Regal Apple continued to benefit from the popularity of the shot occasion and delivered a solid performance, with net sales up 15%, as it entered its second year after launch. Cîroc performance improved in the second half, as the brand benefited from the launch of its Apple flavour. Smirnoff net sales were up 2% but it underperformed the vodka category. Growth from a more focused flavours portfolio and the newly launched Smirnoff Sourced, a blend of real fruit juice and spirit, offset a decline in Smirnoff Red which lapped last year’s brand renovation and promotional activity and continued to be impacted by a competitive price environment. Performance in scotch improved as Johnnie Walker’s net sales increased 7%, largely driven by reserve variants, up 23%. Buchanan’s net sales were up 9% and share increased, as the ‘A lo Grande’ campaign enhanced the connection with hispanic consumers. Increased investment in the on-trade and focus on recruiting new consumers amongst millenials had a positive impact on Captain Morgan, which gained share despite weakness in the rum category. Net sales for the brand were up 2%, largely driven by the Original Spiced variant and Cannon Blast, which proved to be popular in the shot occasion. Don Julio, with net sales up 34%, was the fastest growing brand in the portfolio and gained share.
DGUSA net sales increased 1%, as growth in ready to drink offset a decline in beer. In ready to drink the launch of Smirnoff Electric and a solid performance of Smirnoff Ice, which benefited from new flavours and packaging, drove net sales growth of 7%. Beer net sales were down 3% largely driven by a decline in Smithwick and Harp. Guinness net sales were broadly flat as the launch of Guinness Nitro IPA offset the net sales decline of Guinness American Blonde Lager, which lapped the previous year launch, and Guinness draught which continued to be impacted by a crowded craft beer segment.
Net sales in Canada increased 4%, largely driven by Crown Royal, which benefited from the launch of Crown Royal Northern Harvest Rye, rated ‘2016 world whiskey of the year’ by Jim Murray’s Whiskey Bible, distribution gains, and the ‘We Make Whisky The Canadian Way’ campaign, which highlights the brand’s quality and craftmanship. Performance in vodka and ready to drink was also good, with net sales up 2% and 6%, respectively.
Marketing reduced 2% driven by procurement efficiencies and more focused spend on innovations. Spend was also focused against the largest brands in US Spirits, with investment in Smirnoff, Crown Royal and Captain Morgan up 6%, and fast growing brands such as Don Julio, Bulleit and Buchanan’s where investment was up 16%.
99
Business review (continued)
Europe, Russia and Turkey
Performance
| | |
| | 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 |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 | ) | | | | | | | | | | | | | | | — | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | 784 | | | | | | | | | | | | | | | | 801 | | | | 2 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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.
100
Business review (continued)
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 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. |
101
Business review (continued)
In Europe net sales were up 3%:
In Great Britain net sales were up 4%. Baileys performance accelerated with net sales up 11% driven by increased off-trade visibility and on-trade activation. Smirnoff net sales were up 1% supported by a full year of the ‘We’re Open’ platform. Guinness net sales were up 1% benefitting from the Rugby World Cup activation, improved distribution and innovation successes from ‘The Brewers Project’. Tanqueray net sales grew double digit and the brand gained 2pps of share in the gin category, driven by expanding distribution with improved visibility and increased bartender advocacy. Reserve brands continued to drive profitable growth with net sales up 26% driven by Cîroc and scotch malts.
In Ireland net sales were broadly flat. Guinness net sales were up 4%, driven by the continued successful innovations launched through ‘The Brewers Project’. Of these, Hop House 13 Lager has proven to be a stand out success gaining almost 3% share of lager beer in the Republic of Ireland. Other beer brands net sales declined 4% and net sales in spirits were down 1%.
In France net sales increased 3% driven by Captain Morgan which almost doubled sales and reserve brands up 8%, driven mainly by scotch malts, partially offset by weakness in Smirnoff ready to drink.
In Continental Europe net sales were up 4%:
Net sales inIberiawere up 2%. Johnnie Walker net sales grew 6% in the year and Baileys performed strongly supported by increased investment. Gordon’s net sales were also up in the growing gin category. These positive net sales performances more than offset net sales decline in JeB.
Net sales inGermany, Austria and Switzerlandgrew 12% driven by double digit growth in Johnnie Walker, Smirnoff, Tanqueray and Baileys. Reserve brand net sales were up 11% driven by scotch malts, Johnnie Walker and Tanqueray No. TEN.
65
Business review (continued)
Beneluxnet sales were down 1% overall in this group of countries. Performance was impacted by a significant tax increase implemented towards the end of the first half in Belgium. As a result, the spirits market in Belgium has seen a significant decline through the second half which led to a 26% net sales decline over the same period.
InItalynet sales were up 8% driven by double digit growth in scotch and gin. Johnnie Walker and scotch malts performed well with both Tanqueray and Gordon’s delivering strong growth albeit not as fast as the gin category.
InGreece, net sales were up 5% driven by route to consumer investment and focus on consistent activation.
Net Sales inPoland and the Europe Partner Markets were broadly flat.
Performance inRussiacontinued to be impacted by the challenged economic dynamics. Price increases were implemented to offset currency devaluation, which impacted volume, down 9% but with net sales up 27%. Diageo scotch share has declined as a result of the level of these price increases on scotch relative to the competition. Captain Morgan however continued to achieve strong share gains and net sales growth, supported by consistent execution of growth drivers and the launch of Captain Morgan white.
InTurkeynet sales grew 6% and in raki, with net sales up 3%, the premiumisation trend continued with Yenì Raki and the super premium variant Tekirdağ Raki driving growth. Johnnie Walker net sales continued to be up double digit.
Marketing increased by 5% and benefitted from procurement savings resulting in an underlying investment increase of 10%. The region continues to be focused on the key growth opportunities, reserve brands, gin, beer and innovation.
66102
Business review (continued)
AFRICAAfrica
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.Performance
| | |
| | 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 | ) | | | | | | | | | | | | | | | — | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | 311 | | | | | | | | | | | | | | | | 212 | | | | (32 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
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.
67
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.
103
Business review (continued)
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 | ) |
68
Business review (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | ) |
| Global giants and local stars(i): | Global giants and local stars(i): | | | Reported volume movement(ii) % | | Organic net sales movement % | | Reported net sales movement % | | Global giants and local stars(i): | | Reported volume movement(ii) % | | Organic net sales movement % | | Reported net sales movement % | |
Guinness | | | | | 6 | | | 6 | | | 1 | | | | | 6 | | | 6 | | | 1 | |
Malta Guinness | | | | | 14 | | | 13 | | | 10 | | | | | 14 | | | 13 | | | 10 | |
Tusker | | | | | (15 | ) | | (11 | ) | | (27 | ) | | | | (15 | ) | | (11 | ) | | (27 | ) |
Senator | | | | | 151 | | | 157 | | | 134 | | | | | 151 | | | 157 | | | 134 | |
Harp | | | | | (23 | ) | | (26 | ) | | (28 | ) | | | | (23 | ) | | (26 | ) | | (28 | ) |
Johnnie Walker | | | | | (10 | ) | | 1 | | | (7 | ) | | | | (10 | ) | | 1 | | | (7 | ) |
Smirnoff | | | | | 6 | | | 12 | | | (4 | ) | | | | 6 | | | 12 | | | (4 | ) |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement. |
InNigeria, net sales declined 15% due primarily to Orijin lapping the successful launch last year and now competing with ‘me too’ brands. The introduction of new formats at compelling price points, brand equity building through the ‘Live Orijinal’ campaign and the recruitment of new consumers with Orijin Zero have stabilised the brand. In beer, distribution expansion, higher brand equity driven by the ‘Made of Black’ campaign, robust activation during the broadcast sponsorship of Barclay’s Premier League and innovation with Guinness Africa Special led to the growth of Guinness. Malta Guinness also grew, with net sales up 15%, on the back of ‘You vs’ brand campaign and increased distribution particularly into the off-trade. The business continued to broaden its portfolio in the value lager segment with brands such as Satzenbrau offsetting the decline in Harp. Beer net sales grew 8%.
104
Business review (continued)
InEast Africa, net sales increased 16% driven by double digit growth in beer, spirits and ready to drink. Senator grew in Kenya following the roll back of the duty increase early in the year and momentum was sustained throughout the year. This more than offset the decline in Tusker, which was impacted by the duty increase in Kenya and currency volatility in the markets, resulting in 17% net sales growth in beer. Mainstream spirits grew 26% led by Kenya Cane and Kane Extra, together with innovation such as Kenya Cane Coconut and Chrome vodka. The improved route to consumer, with deepening mainstream outlet coverage, continued to drive growth in this segment. Reserve brands grew 24% following enhanced distribution and activation supported by brand ambassadors. Ready to drink was up 14% as Smirnoff Ice Double Black and Guarana grew with positive gearing driven by price increase.
InAfrica Regional Markets, net sales grew 9% reflecting the strong growth in Cameroon, Ghana and Ethiopia. Ghana net sales growth accelerated to 30% due to the launch of Orijin Bitters and ready to drink variants. Beer, driven by Guinness, was up 9% as activation and promotion was stepped up behind the ‘Made of Black’ campaign and Guinness Africa Special was rolled out. In Cameroon, net sales growth of 12% was driven largely by good performance in beer coupled with double digit growth in spirits and ready to drink categories. In Ethiopia, net sales grew 8% with Malta Guinness up 71%. This more than offset the slight decline in Meta as competition intensified. A number of interventions were made, including relaunching Meta in November and introducing Azmera in April 2016 to recruit value oriented consumers. Markets continued to benefit from the enhanced route to consumer and capability builds, including the adoption of a sales force automation tool. Angola net sales declined 65% due to the macroeconomic headwinds and inventory reduction in view of weakening consumer demand and weaker currency.
South Africa grew 5% driven by 13% growth in vodka led by Smirnoff 1818. Overall, scotch sales were flat reflecting the weaker performance of Bell’s, White Horse, J&B and Black and White due to increased competition in this price sensitive consumer segment. This was offset by 9% growth in Johnnie Walker across key variants such as Johnnie Walker Red Label, Johnnie Walker Black Label, Johnnie Walker Gold Label Reserve and Johnnie Walker Green Label which was launched in the second half of the year.
Marketing was up 1% in the region with investment prioritised behind the biggest growth opportunities with proven sales drivers. In Nigeria, marketing declined in line with net sales, with spend focused on the Guinness and Orijin brands. East Africa up-weighted investment on mainstream spirits and value beer, notably in Kenya Cane and Senator. In Africa Regional Markets, the innovation, marketing campaigns and activation programmes behind Guinness and Malta Guinness contributed to the increase in marketing. South Africa maintained spend in Smirnoff to build scale and increased investment behind Johnnie Walker.
69105
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.
Performance
| | |
| | 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 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | 258 | | | | | | | | | | | | | | | | 81 | | | | (69 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
(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.
70
Business review (continued)
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
(i) | In the year ended 30 June 2016 exceptional operating item of £118 million was in respect of the impairment of Ypióca. |
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.
106
Business review (continued)
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 | ) |
71
Business review (continued)
| | | | | | | | | | | | | | | | | |
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 | ) |
| | | | | | | | | | | | | | | | | | |
Global giants and local stars(i): | Global giants and local stars(i): | | | Reported volume movement(ii) % | | Organic net sales movement % | | Reported net sales movement % | | Global giants and local stars(i): | | Reported volume movement(ii) % | | Organic net sales movement % | | Reported net sales movement % | |
Johnnie Walker | | | | | (8 | ) | | (4 | ) | | (15 | ) | | | | (8 | ) | | (4 | ) | | (15 | ) |
Buchanan’s | | | | | (5 | ) | | 9 | | | (7 | ) | | | | (5 | ) | | 9 | | | (7 | ) |
Smirnoff | | | | | — | | | 6 | | | (19 | ) | | | | | — | | | 6 | | | (19 | ) |
Old Parr | | | | | (15 | ) | | (1 | ) | | (17 | ) | | | | (15 | ) | | (1 | ) | | (17 | ) |
Baileys | | | | | (3 | ) | | (1 | ) | | (14 | ) | | | | (3 | ) | | (1 | ) | | (14 | ) |
Ypióca | | | | | (6 | ) | | (6 | ) | | (28 | ) | | | | (6 | ) | | (6 | ) | | (28 | ) |
Black and White | | | | | 48 | | | 63 | | | 34 | | | | | 48 | | | 63 | | | 34 | |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement except for Smirnoff 4%. |
InParaguay, Uruguay and Brazil(PUB), net sales declined 9%. In Brazil, net sales were down with declines in scotch, vodka and cachaça, driven primarily by the slowing economy, a tax increase in December 2015, currency volatility and a slowdown in the duty free channel. Despite the challenging operating environment, the business gained share in scotch, delivered through Johnnie Walker and Black and White marketing campaigns. The business continued to invest behind the Smirnoff trademark in music festivals and trade activations, as well as the rejuvenation of Ypióca. Net sales in Paraguay and Uruguay declined due to reduced demand in the export and travel retail channels given currency volatility.
Colombia delivered 9% volume growth and 28% net sales increase, on the back of favourable mix and successive price increases following the currency devaluation. Scotch was the key growth driver, with double digit growth and share gains. The portfolio in Colombia continues to broaden with gin, vodka and tequila net sales growing double digit.
107
Business review (continued)
Mexico net sales increased 10%. Scotch was a key growth driver with net sales up 17%, reflecting strong volume growth and price increase. Buchanan’s was up 20% following the relaunch of the brand with the ‘Good versus Great’ campaign, the introduction of new packaging and strong activations around Father’s Day with ‘A Great Father A Great Day’ campaign. Similarly, Johnnie Walker net sales grew double digit on the back of 8% volume growth across core variants such as Johnnie Walker Red Label, Johnnie Walker Black Label and Johnnie Walker reserve brands including the newly launched Johnnie Walker Green Label. In mainstream scotch, Black and White net sales grew supported by expanded distribution and activation across the on and off-trade. Following the execution of the new Smirnoff strategy to build the brand’s credentials through participation in music festivals and increasing activation across the on-trade, Smirnoff net sales doubled and share increased in the last six months. Don Julio also gained share in the year reflecting the successful marketing campaign, activation and higher brand awareness.
West LAC net sales declined 3% primarily due to weakness in the export channels. Domestic markets’ net sales were stable with growth in Peru, Chile and Jamaica offset by a decline in Central America and Caribbean. In Peru, net sales grew 16%, led by increases in Johnnie Walker Red Label, Johnnie Walker Black Label and Old Parr, underpinned by the marketing campaigns and activations around gifting for Christmas and Father’s Day. Scotch was also a key engine behind Chile’s net sales growth of 9%. Johnnie Walker Red Label and mainstream scotch such as VAT 69, Old Parr and White Horse grew following distribution expansion as well as improved trade visibility. Central America and Caribbean net sales contracted 4% given currency volatility across the market.
InVenezuela, volume increased 4% driven primarily by strong growth in rum as the business resumed production of local spirits following the stabilisation of glass supply. This was offset by the decline in scotch as access to foreign currency remains constrained. Net sales grew significantly faster as the business increased prices in a high inflation environment and transacted some scotch sales in sterling.
Marketing increased broadly in line with net sales. Spend in Brazil was reduced in view of the weaker economic outlook. Mexico increased spend by 9%, investing behind Smirnoff and scotch to build brand equity and enhance activations. In Colombia, incremental spend was invested behind Johnnie Walker, Buchanan’s and Smirnoff ready to drink to support the Smirnoff Ice Green Apple flavour launch.
72108
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.
Performance
| | |
| | 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 | 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 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | 163 | | | | | | | | | | | | | | | | | | | | 346 | | | | 112 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 54.151. |
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.
73
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.
109
Business review (continued)
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.
74
Business review (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
Markets and categories: | | Organic volume movement % | | Reported volume movement % | | Organic net sales movement % | | Reported net sales movement % | | | Organic volume movement % | | Reported volume movement % | | Organic net sales movement % | | Reported net sales movement % | |
Asia Pacific | | | — | | | (3 | ) | | 2 | | | (6 | ) | | | — | | | (3 | ) | | 2 | | | (6 | ) |
| | | | | | | | | | | | | | | | |
India | | | — | | | (4 | ) | | 5 | | | (11 | ) | | | — | | | (4 | ) | | 5 | | | (11 | ) |
South East Asia | | | 3 | | | 3 | | | 16 | | | 15 | | | | 3 | | | 3 | | | 16 | | | 15 | |
Greater China | | | (5 | ) | | (5 | ) | | (2 | ) | | — | | | | (5 | ) | | (5 | ) | | (2 | ) | | | — | |
Global Travel Asia and Middle East | | | (9 | ) | | (9 | ) | | (15 | ) | | (14 | ) | | | (9 | ) | | (9 | ) | | (15 | ) | | (14 | ) |
Australia | | | 2 | | | 2 | | | 2 | | | (5 | ) | | | 2 | | | 2 | | | 2 | | | (5 | ) |
North Asia | | | 6 | | | 6 | | | (5 | ) | | (6 | ) | | | 6 | | | 6 | | | (5 | ) | | (6 | ) |
| | | | | | | | | | | | | | | | |
Spirits(i) | | | — | | | (3 | ) | | 1 | | | (7 | ) | | | — | | | (3 | ) | | 1 | | | (7 | ) |
Beer | | | 8 | | | 8 | | | 7 | | | 4 | | | | 8 | | | 8 | | | 7 | | | 4 | |
Ready to drink | | | (3 | ) | | (3 | ) | | (3 | ) | | (8 | ) | | | (3 | ) | | (3 | ) | | (3 | ) | | (8 | ) |
| Global giants and local stars(i): | Global giants and local stars(i): | | Reported volume movement(ii) % | | Organic net sales movement % | | Reported net sales movement % | | Global giants and local stars(i): | | Reported volume movement(ii) % | | Organic net sales movement % | | Reported net sales movement % | |
Johnnie Walker | | | | (4 | ) | | (2 | ) | | (2 | ) | | | | (4 | ) | | (2 | ) | | (2 | ) |
McDowell’s | | | | (2 | ) | | | — | | | (16 | ) | | | | (2 | ) | | | — | | | (16 | ) |
Windsor | | | | (4 | ) | | (10 | ) | | (12 | ) | | | | (4 | ) | | (10 | ) | | (12 | ) |
Smirnoff | | | | (4 | ) | | (7 | ) | | (9 | ) | | | | (4 | ) | | (7 | ) | | (9 | ) |
Guinness | | | | 8 | | | 7 | | | 4 | | | | | 8 | | | 7 | | | 4 | |
Bundaberg | | | | (5 | ) | | (3 | ) | | (10 | ) | | | | (5 | ) | | (3 | ) | | (10 | ) |
Shui Jing Fang | | | | 55 | | | 20 | | | 22 | | |
Shui Jing Fang(iii) | | | | | 55 | | | 20 | | | 22 | |
(i) | Spirits brands excluding ready to drink. |
(ii) | Reported equals organic volume movement except for McDowell’s 0%. |
(iii) | Organic growth figures represent total Chinese white spirits of which Shui Jing Fang is the predominant brand. |
South East Asia net sales were up 16% as it lapped the inventory reduction last year. In Thailand performance improved after a weak first half with net sales growing in the second half as the launch of Smirnoff Midnight 100 ready to drink offset the decline in scotch, which gained share in a declining category. In Indonesia net sales increased 1% as Guinness grew due to the focus on the on-trade post regulations restricting sale of alcohol in the off-trade were introduced last year. Vietnam was impacted by the special consumption tax on imported products introduced in January 2016 resulting in a net sales decline of 35%. Reserve brands performance was strong with net sales up 27% led by Johnnie Walker Gold Label Reserve and Johnnie Walker Blue Label.
Greater China net sales were down 2%. In mainland China, scotch declined 42% as the continued weakness in premium scotch in the traditional on-trade channel resulted in distributors reducing inventory, although Diageo gained share in the super deluxe scotch segment. Chinese white spirits net sales grew 19% as growth in the second half was lower due to a tougher prior year comparison. In Taiwan net sales grew 8% driven by growth in Johnnie Walker.
110
Business review (continued)
India net sales were up 5%, driven by the premiumisation strategy with good growth in prestige and above brands and popular brands net sales flat. Royal Challenge and McDowell’s No. 1 were relaunched during the year performed and contributed to growth with Royal Challenge net sales up 54%. Scotch grew 17% as Black Dog grew 23% and Johnnie Walker grew 22% with strong performance in Johnnie Walker Black Label, Johnnie Walker Red Label and Johnnie Walker Blue Label. The integration of Diageo’s brands into USL has created an exceptionally strong brand portfolio in India that participates across all price tiers in the IMFL and imported spirits segments. As a result of the focus on route to consumer, 20% of outlets are now meeting ‘perfect outlet’ standards driving recruitment and brand building. Gross margin improved 99bps with the growth of prestige and above brands driving positive mix and productivity initiatives that reduced the cost of goods sold. Operating margin improved 702bps as a result of gross margin improvement, lower marketing and the sale by USL of United Breweries Limited shares.
Global Travel Asia and Middle East net sales declined 15% largely driven by the Middle East where net sales declined 20% as geopolitical developments led to weak performance in the domestic and travel retail business. Global Travel Asia net sales declined 7% as a result of lower spend by travellers and currency volatility.
75
Business review (continued)
Australia net sales increased 2% with growth in scotch, vodka, liqueurs and gin offsetting the decline in the ready to drink business. In rum, strong growth of Captain Morgan both in ready to drink and spirits categories, offset the decline in Bundaberg. Reserve brands were up 7% largely driven by Johnnie Walker, as consumers continue to premiumise within the spirits category.
North Asia net sales were down 5%. In Korea, net sales declined 10%, as Windsor suffered from increased competition in the traditional on-trade with net sales down 20% which offset growth from W-Ice, an innovation in the growing lower ABV premium whisky segment. In Japan, net sales were up 8% largely driven by scotch net sales growing 21% capitalising on the growth of the brown spirits segment.
Marketing was 12% lower driven by reductions on Johnnie Walker Black Label and Johnnie Walker Blue Label in China and India where marketing reduced as a result of termination of USL related party agreements.
76111
Business review (continued)
CATEGORY REVIEWCategory 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)%. |
77112
Business review (continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
Global giants, local stars and reserve(i): | | Reported volume movement(ii) % | | Organic net sales movement % | | Reported net sales movement % | | | Reported volume movement(ii) % | | Organic net sales movement % | | Reported net sales movement % | |
Global giants | | | | | | | | | | | | |
Johnnie Walker | | | (4 | ) | | 1 | | | (3 | ) | | | (4 | ) | | 1 | | | (3 | ) |
Smirnoff | | | 1 | | | 2 | | | | — | | | | 1 | | | 2 | | | | — | |
Baileys | | | 2 | | | 4 | | | 3 | | | | 2 | | | 4 | | | 3 | |
Captain Morgan | | | 4 | | | 3 | | | 5 | | | | 4 | | | 3 | | | 5 | |
Tanqueray | | | 11 | | | 12 | | | 15 | | | | 11 | | | 12 | | | 15 | |
Guinness | | | 4 | | | 4 | | | 2 | | | | 4 | | | 4 | | | 2 | |
Local stars | | | | | | | | | | | | |
Crown Royal | | | 5 | | | 6 | | | 11 | | | | 5 | | | 6 | | | 11 | |
Yenì Raki | | | 1 | | | 4 | | | (9 | ) | | | 1 | | | 4 | | | (9 | ) |
Buchanan’s | | | (2 | ) | | 10 | | | 1 | | | | (2 | ) | | 10 | | | 1 | |
JeB | | | (6 | ) | | (9 | ) | | (12 | ) | | | (6 | ) | | (9 | ) | | (12 | ) |
Windsor | | | (4 | ) | | (10 | ) | | (12 | ) | | | (4 | ) | | (10 | ) | | (12 | ) |
Old Parr | | | (13 | ) | | 1 | | | (14 | ) | | | (13 | ) | | 1 | | | (14 | ) |
Bundaberg | | | (6 | ) | | (3 | ) | | (10 | ) | | | (6 | ) | | (3 | ) | | (10 | ) |
Bell’s | | | — | | | (1 | ) | | (10 | ) | | | — | | | (1 | ) | | (10 | ) |
White Horse | | | (11 | ) | | 6 | | | (15 | ) | | | (11 | ) | | 6 | | | (15 | ) |
Ypióca | | | (6 | ) | | (6 | ) | | (28 | ) | | | (6 | ) | | (6 | ) | | (28 | ) |
Cacique | | | 25 | | | 9 | | | (24 | ) | | | 25 | | | 9 | | | (24 | ) |
McDowell’s | | | (2 | ) | | | — | | | (16 | ) | | | (2 | ) | | | — | | | (16 | ) |
Shui Jing Fang | | | 55 | | | 20 | | | 22 | | |
Shui Jing Fang(iii) | | | | 55 | | | 20 | | | 22 | |
Reserve | | | | | | | | | | | | |
Scotch malts | | | 8 | | | 7 | | | 6 | | | | 8 | | | 7 | | | 6 | |
Cîroc | | | (2 | ) | | (3 | ) | | 2 | | | | (2 | ) | | (3 | ) | | 2 | |
Ketel One vodka | | | 4 | | | 4 | | | 10 | | | | 4 | | | 4 | | | 10 | |
Don Julio | | | 25 | | | 18 | | | 40 | | | | 25 | | | 18 | | | 40 | |
Bulleit | | | 27 | | | 29 | | | 36 | | | | 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%. |
(iii) | Organic growth figures represent total Chinese white spirits of which Shui Jing Fang is the predominant brand. |
Unless otherwise stated percentage movements refer to organic movements in the following analysis.
Scotch represents 24% of Diageo net sales and was flat in the year. Net sales grew in North America, Europe and Latin America and Caribbean driven by Johnnie Walker and Buchanan’s supported by new campaigns. Net sales declined in Africa; primarily in Angola, and in Asia Pacific driven by declines in China and Korea. The performance of Black and White was strong with net sales up 31%. Windsor net sales declined double digit in Korea due to the decline of the whisky category. Scotch reserve brands net sales grew 7% driven by strong growth in Johnnie Walker Gold Label Reserve, Johnnie Walker Blue Label and Johnnie Walker Green Label.
Vodka represents 13% of Diageo’s net sales and grew 1%. Performance of Smirnoff, the largest brand in the category, improved growing 2%. Ketel One vodka returned to growth in the United States and Canada supported by a new campaign and pricing strategy. In addition, Cîroc performance improved from the first half driven by the success of Cîroc Apple in the United States.
North American whisk(e)y represents 8% of Diageo’s net sales and grew 6%. Performance continued to be driven by strong growth in Crown Royal Regal Apple and Bulleit which continue to gain share in the United States.
Rum represents 7% of Diageo’s net sales and grew 3%. Captain Morgan grew 3% driven by the base variant Original Spiced rum growing 3% and the Cannon Blast launch going well in the United States. Kenya Cane, a mainstream rum in Kenya, and Zacapa also contributed to the growth.
78113
Business review (continued)
IMFL whisky represents 5% of Diageo’s net sales and grew 3%. The relaunches of two of the biggest brands Royal Challenge and McDowell’s No.1 drove this growth with Royal Challenge net sales up 55% due to the relaunch.
Liqueurs represents 5% of Diageo’s net sales and grew 3%. Baileys, the leading brand in this category, grew 4% due to 9% growth in its biggest market, Europe. The key growth drivers were on premise visibility, focused media content and sampling.
Gin represents 3% of Diageo’s net sales and grew 8%. Tanqueray was the largest contributor growing double digit, followed by Gordon’s.
Tequila represents 1% of Diageo’s net sales and grew 8%. The performance was driven by continued double digit growth of Don Julio in its biggest market, the United States.
Beer represents 18% of Diageo’s net sales and grew 6% driven by strong performance in Africa where net sales grew 11%. Key contributors were East Africa and Nigeria. Strong growth of Senator following the excise duty remission grew sales in East Africa. In Nigeria, Malta Guinness, Pilsner and value brand Satzenbrau delivered a strong performance. Europe grew 2% on Guinness driven by the effectiveness of the ‘Made of More’ advertising campaign, innovations like Hop House 13 lager from ‘The Brewers Project’ and strong activation around the Rugby World Cup.
Ready to drink represents 6% of Diageo’s net sales and declined 11%. This was largely driven by the decline in Orijin in Nigeria. The decline was partially offset by a good performance in Smirnoff Ice flavours in the United States driven by new marketing programmes and the launch of Orijin in Ghana and Cameroon. In Thailand, the Smirnoff Midnight 100 launch continued to progress well.
Global giants represent 40% of Diageo net sales and grew at 3%.
Johnnie Walker net sales grew 1% due to reserve brands growing 10% driven by Johnnie Walker Gold Label Reserve, Johnnie Walker Blue Label and Johnnie Walker Green Label. Europe and North America were the largest contributors with 7% and 5% growth, respectively. In Latin America and Caribbean, double digit growth in Mexico and Colombia was more than offset by decline in Brazil. In Asia Pacific, double digit growth in India and South East Asia was offset by declines in the Middle East, Global Travel and China.
Smirnoff net sales grew 2%, as it returned to growth in the United States, the biggest market, where net sales were up 2%. In Europe, performance improved versus the first half and net sales grew 1%. South Africa and Mexico also delivered strong growth on Smirnoff growing double digit.
Baileys net sales grew 4%, driven by 9% growth in Europe with the brand growing double digit in Great Britain, Iberia, Germany and Austria.
Captain Morgan net sales grew 3% due to a strong performance in Europe and Russia. In the United States net sales grew 2% and it gained share in the category driven by increased on premise activity and the launch of Captain Morgan Cannon Blast.
Tanqueray net sales grew 12% with Europe and North America accounting for more than two thirds of the growth. All other regions also delivered strong growth.
Guinness net sales grew 4%. In Nigeria net sales grew 3% driven by the success of the ‘Made of Black’ campaign and activation against the football viewing occasion. In Cameroon and Ghana net sales increased double digit. Guinness also gained share and increased net sales in Great Britain and Ireland supported by the ‘Brewers Project’ innovations.
Local stars represent 19% of net sales and grew 3%, due to Crown Royal in North America growing 6% and Buchanan’s up 10%, largely in North America and Mexico. Growth in Yenì Raki in Turkey and Shui Jing Fang in China largely offset the declines in Windsor in Korea and JeB.
Reserve brands represent 15% of net sales and grew 7%. The return to growth in the second half was a result of the improved performance of Cîroc driven by the success of Cîroc Apple in the United States. Scotch reserve brands grew 7% with Johnnie Walker driving the growth particularly in the United States where it grew 23% and scotch malts growing 7%. Bulleit continued its strong growth with net sales 29%. Net sales of Shui Jing Fang were up 20% and Tanqueray No. TEN grew 26%.
In Africa there are four local beer brands Senator, Malta Guinness, Tusker and Harp. Their performance is covered in the Africa section.
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). |
80
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 |
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 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%).
82
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 | |
| | | | |
2015 | | | 412 | |
| | | | |
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.
84
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
85
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.
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 | ) |
| | | | | | | | | | | | | | | | | | | | |
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 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.
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.
| | | | |
| | 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 | |
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.
(c) Exceptional items
Exceptional operating charges of £269 million (2014 — £427 million) in the year ended 30 June 2015 comprised:
£47 million (2014 — £98) in respect of the Global efficiency programme announced in January 2014;
£35 million (2014 — £35 million) in respect of the Supply excellence restructuring programme;
£41 million in respect of the impairment of the group’s 45.56% equity investment in Hanoi Liquor Joint Stock Company; and
£146 million 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 the year 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.
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.
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 | ) |
| | | | | | | | |
(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.
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 | |
| | | | | | | | |
Equity at the end of the year | | | 9,256 | | | | 7,590 | |
| | | | | | | | |
(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%).
91
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 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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.
92
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)
Net sales in US Spirits and Wines declined 2% while the value of distributor depletions was up 4%. Diageo’s North American whisk(e)y performance was very strong with the portfolio outpacing category growth and net sales up 13%. Crown Royal was the primary driver as Crown Royal Regal Apple, the top selling innovation according to Nielsen, gained share as it recruited new consumers to the brand, driving double digit top line growth for the trademark. Bulleit, the fastest growing unflavoured North American whisk(e)y, drove one third of that category’s growth with net sales up 35%. Both Bulleit Bourbon and Bulleit Rye led their respective segments through increased distribution, consumer experience marketing, and the engagement of key trade influencers. In scotch, Buchanan’s was the fastest growing brand in the United States, with net sales up over 20%. Buchanan’s resonates particularly well with the growing Hispanic population, and this year added sponsorship of the Latin Grammy Awards to its full suite of marketing activities. Johnnie Walker did not perform well, partly as a result of lapping the strong launch of Platinum and Gold Label Reserve last year but also due to a reduction in promotional activities for Red, Black, and Blue Label. Cîroc net sales growth of 4% was driven by the notable success of Cîroc Pineapple, the latest addition to the flavour range. Despite an improved performance trajectory, net sales of Smirnoff declined 4% as the flavour portfolio, confections in particular, continued to be a drag on performance. The launch of Captain Morgan White Flavours partially offset the effect of lapping the prior year’s launch of Captain Morgan White which, together with weakness on Original Spiced, drove double digit net sales decline for the brand. Net sales of tequila were up double digit, driven by 10% growth of Don Julio, which was supported by marketing campaigns focused on the heritage and craftsmanship of the brand, and the launch of new DeLeón variants, which broadened the price range and contributed to increased distribution of the brand.
Guinness net sales were up 3% on the strong performance of Blonde American Lager. Guinness Draught was weak given competition in the craft beer segment, particularly in the on trade. Net sales of ready to drink declined slightly, bringing net sales ofDGUSAdown 1%. Stronger execution and competitive pricing on Smirnoff Ice stabilised the core and flavoured variants but the brand’s growth still lags the category.
InCanadathe new distribution system helped drive net sales growth of 2%. Spirits growth of 3% was driven by Johnnie Walker and vodka. Ready to drink net sales growth was principally due to Smirnoff variants, with beer down and wine down double digit. Tactical price reductions resulted in share improvement, with a marginally negative impact on price/mix.
Marketing investment in North America reduced 4% driven by US Spirits and Wines, which delivered significant savings on media and agency fees and procurement efficiencies. Advertising remained focused on Cîroc, Crown Royal, Smirnoff, Captain Morgan and Johnnie Walker, and increased on Don Julio and Bulleit to support new programmes. Marketing investment in DGUSA supported the launch of Guinness Blonde American Lager and in Canada, a 1% increase went behind innovation launches.
94
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 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | 833 | | | | | | | | | | | | | | | | 784 | | | | (6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 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 Europe, which was partially reinvested in marketing and route to consumer.
95
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 | ) |
| | | | | | | | | | | | | | | | |
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. |
96
Business review (continued)
InEurope net sales were flat:
InGreat Britain net sales were up 3%, with spirits, beer, and ready to drink all in growth. Reserve net sales were up 47% driven by Cîroc and the successful launch of Haig Club. Captain Morgan net sales were up 15%, with investment focused on increased activation in outlets and Smirnoff was back in growth with net sales up 1%, supported by the new ‘We’re Open’ campaign. Beer net sales were up 2% driven by innovation on Guinness. Ready to drink net sales were up 8% supported by strong growth in pre-mix. The only weakness was in Baileys where net sales were down 1%, however Baileys Original was in growth.
InIreland net sales were down 1%, or flat after accounting for the transfer of wine sales to Diageo Wines Europe. Guinness sustained its positive momentum with net sales up 2%, supported by successful innovations launched through ‘The Brewers Project at St James’s Gate’. Net sales in spirits were down 2% as the category continued to be affected by last year’s duty increase.
Within Continental Europe,Southern Europe net sales were down 1%. Net sales in Iberia were flat, after accounting for a transfer of sales of one customer to Africa Regional Markets, but showing positive momentum with growth from Tanqueray and Gordon’s in a vibrant gin category and declines in JeB and Cacique. Double digit growth of reserve was the main driver behind the 1% net sales growth in Italy, where Zacapa was up 10% and 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. InGermany andAustria, net sales declined 2%. In Germany net sales were up 5%. Underlying performance was strong with net sales of Baileys, Captain Morgan and Johnnie Walker Red Label all up double digit. In Austria, net sales were down 53% against the buy in ahead of the excise duty increase in January 2014. InBenelux performance continued to be impacted by the decision to realign prices in the first half on premium core brands which resulted in a net sales decline of 10%. InPoland, net sales of Johnnie Walker Red Label declined 15% and the brand lost share, as some competitors did not follow Diageo price increases to cover last year’s excise duty increase.
In a challenging trading environment inFrance net sales increased 2% largely driven by growth in scotch, with Scotch malts up 6%, and the strong performance of Captain Morgan which, in its third year, more than doubled net sales.
Net sales inDiageo Wines Europe were up 3% largely driven by the transfer of wine net sales from Diageo Ireland and the strong performance of [yellow tail].
InRussia, net sales declined 14%, driven by both destocking amongst distributors and consumers trading down. This impacted Johnnie Walker, however Diageo extended its leadership in whisky and rum, and gained share with brands such as White Horse, Black & White and Captain Morgan.
InTurkey net sales grew 3% despite an excise duty increase in January and the earlier start to Ramadan. Net sales in raki were up 5% with Yenì Raki and the super premium variant Tekirdağ Raki premiumising the category. Good underlying performance of international spirits resulted in share gains for Johnnie Walker, Smirnoff and Baileys.
Marketing investment in Europe, Russia and Turkey increased 2% largely driven by Europe where spend was up 3%. The increased investment was focused on the biggest growth opportunities such as reserve and innovation to support the launches of Haig Club and the Guinness Brewers project.
97
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 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | 317 | | | | | | | | | | | | | | | | 311 | | | | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net sales
Net 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 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 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 exceptional 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 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 and route to consumer investments leading to organic operating margin improvement of 75 basis points.
98
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. |
Nigeria delivered double digit volume growth driven primarily by the national rollout of Orijin, while net sales grew 6%. The weak consumer environment led to a move to value lager which resulted in a strong performance of Satzenbrau and a weak performance of Harp. Similarly net sales of Guinness declined although the brand’s performance improved in the second half and volume share stabilised. Spirits net sales were up 19% as inventory reductions on Johnnie Walker and Baileys were offset by the strong performance of local mainstream spirits.
InEast Africa,where net sales grew 9%, Guinness volume and net sales grew strong double digits supported by the ‘Made of More’ campaign. Innovation in value beer, in particular, Balozi lager in Kenya, a no added sugar offering, and in Tanzania Kibo Gold, positioned to capture consumers trading down, offset a decline in Senator due to excise duty changes in Kenya in the first half last year. In spirits, growth was led by mainstream spirits brands and good 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 introduction of motorcycles to increase 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 East Africa’s growth.
InAfrica Regional Markets,net sales grew strongly, up 15%. In Ghana, net sales grew 32%. Investment in route to consumer, together with price increases, led to 28% net sales growth of beer, and spirits grew strongly driven by the growth of Johnnie Walker and the introduction of Orijin Bitters. In Cameroon, net sales grew 10% driven by growth of Guinness, which benefited from increased awareness through the ‘Made of Black’ campaign, together with outperformance of Harp and growth of Johnnie Walker and Baileys. In Angola, spirits net sales doubled following route to consumer investments and the appointment of a new distributor. This led to strong performances from Johnnie Walker, White Horse, and Gordon’s gin. While the performance of Meta beer in Ethiopia was impacted by increased competitive pricing, this was mostly offset by strong net sales of Malta and the introduction of Zemen, a lower-price beer innovation, along with a good performance of spirits.
99
Business review (continued)
Net sales inSouth Africawere down 7% driven by a decline in Smirnoff Ice Double Black and Guarana, which lapped strong replenishment sales and high inventories in the last financial year. Spirits net sales increased 8% driven by Smirnoff 1818, with net sales up 27% based on competitive pricing and following a packaging upgrade. Net sales of Johnnie Walker increased 10% with marketing focused on the brand’s quality credentials. Its contribution to total scotch performance was partially offset by a weaker performance of JeB and Bell’s. Reserve brands continued to benefit from investments in route to consumer.
• | | 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. |
100
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 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | 314 | | | | | | | | | | | | | | | | 258 | | | | (18 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
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.
101
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. |
Net sales inParaguay, Uruguay and Brazil (PUB)declined 2% as currency weakness and a slower Brazilian economy impacted consumer spending. In Brazil, volume declined mainly as a result of changes in the route to consumer and the harmonisation of interstate pricing, which led to a reduction in inventories held by distributors. In PUB, price increases and a reduction in commercial discounts led to 6pps of positive price/mix. Scotch net sales declined 2% driven by Johnnie Walker, which was down 9% as intense competitor promotional activity amplified the price premium of Johnnie Walker Red Label. In premium scotch, Old Parr and Johnnie Walker Double Black had strong net sales growth and share gains, and in standard scotch, White Horse grew net sales supported by a new media campaign. Smirnoff strengthened its leadership position in vodka, growing net sales 6% driven by price increases and the launch of Smirnoff Peach. Net sales of Ypióca were affected by the transfer from net sales to overheads of tax credits from local production incentives. On a like for like basis, net sales of Ypióca increased high single digit driven by price increases and continued strong performance in the North East.
InVenezuela,while volume declined, net sales increased 41% to £32 million. Access to currency allowed for the importation of some scotch leading to strong comparative performances of Johnnie Walker, Buchanan’s, and Ye Monks. Increased focus on developing local spirits led to strong performances of Cacique, which doubled net sales, despite glass supply constraints, and Gordon’s vodka net sales increased 185%.
InColombia,investments in the route to consumer increased share across key categories and drove 10% net sales growth. The launch of Old Parr Tribute and the introduction of Buchanan’s Special Reserve, together with double digit growth of Johnnie Walker, led to an 11% increase in the net sales of scotch. Innovations contributed to a 22% increase in Baileys net sales.
InMexico,the breadth of Diageo’s scotch portfolio was the main driver of a 13% increase in net sales. Selective price increases along with strong trade executions delivered growth across all price segments of scotch other than value. Johnnie Walker net sales increased 15% with growth across all variants and a particularly strong contribution from Johnnie Walker Red Label. Diageo gained share in the fast-growing but competitive standard scotch segment with the introduction of Black & White, which increased net sales over 80%. There was a good contribution to net sales growth from Smirnoff, since Diageo took direct control over marketing and distribution of the brand in December 2014.
102
Business review (continued)
InWest LAC,net sales were down 9%, driven by inventory reductions in the export channels where net sales declined 51%. This impacted the performance of Johnnie Walker, Old Parr, and Buchanan’s. In domestic markets, strong performances in Peru and Jamaica led to a 3% increase in net sales. In Peru, net sales increased 26% with scotch driving growth together with Baileys, while growth in Red Stripe, pack renovations on Guinness and the strong consumer appeal of Dragon Stout helped deliver 15% growth in net sales in Jamaica. Price realignments in Chile and Caribbean & Central America led to some negative price/mix but delivered share gains in key categories. In Argentina, restrictions on imports affected overall performance but a shift to locally bottled spirits including VAT 69, White Horse, and Smirnoff drove share gains.
An increase inmarketinginvestment of 6% supported broader participation within spirits. Spend on scotch was focused on increasing brand equity across price points in Mexico and on supporting the launch of Old Parr Tribute in Colombia. In Jamaica, investment also increased to support the growth of beer and there was growth in spend on Smirnoff to maintain its leadership position in Brazil and in Mexico as Diageo regained distribution of the brand.
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 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | 7 | | | | | | | | | | | | | | | | 163 | | | | 2,229 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 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.
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. |
InSouth East Asia,net sales declined 28% given an inventory level reduction in specific wholesale channels, with Johnnie Walker Red and Black Label most impacted. Performance in these channels was also impacted by transferring sales from some Indian travel retail customers to Global Travel Asia. New regulations in Indonesia caused major disruptions, and Guinness net sales declined 30%. In Thailand, price repositioning on Johnnie Walker Red Label and Smirnoff led to negative price/mix, however, Johnnie Walker Red Label volume was up double digit in the second half, while Smirnoff gained share.
InGreater China,net sales were up 15%. Taiwan net sales increased 6%, driven by continued success of The Singleton, which was up significantly and has become the largest malt brand in Taiwan. Mainland China was up 26% including an 11pps benefit from an additional quarter of Shuijingfang to align financial year end timing. Shuijingfang grew significantly through innovation, strengthened route to consumer, and a soft prior year comparable. Shuijingfang also generated profit and drove margin improvement for Greater China, due to a significant reduction in the underlying business loss and benefiting from provision releases. While scotch in mainland China was down 17%, due to increased competition for on trade contracts and a reduction in wholesaler inventory levels, The Singleton and Haig Club drove growth and share gains.
Despite shipment disruptions due to new food safety labelling requirements,Diageo Indiavolume was up 5% and net sales up 3%, and all key priority brands grew depletions. Investment in Johnnie Walker and VAT 69 campaigns, and a Black & White packaging relaunch drove continued premiumisation. The Smirnoff Black launch helped increase Smirnoff share by 5pps over the past three months to 56% of vodka. The integration of Diageo and USL completed, and from June, USL started selling Diageo brands.
105
Business review (continued)
Global Travel, Asia and Middle East net sales were up 4% including 6pps of benefit from transferring sales from some Indian travel retail customers from South East Asia. Middle East performance slowed in the second half due to geopolitical tensions and increased pricing pressure on scotch, with second half sales down 16%. Across GTME, Diageo brands gained share particularly in whisky, led by Johnnie Walker in Global Travel Asia, where premium and above variants drove the brand’s net sales growth.
Net sales inAustraliaimproved 2%, reversing a first half decline. Spirits were up 2%, driven by super premium scotch, spiced rum, and North American whisk(e)y. Captain Morgan net sales grew nearly 50% and it is now the second largest rum brand behind Bundaberg. While pricing pressure impacted Bundaberg and Smirnoff, depletions improved in the last quarter. Ready to drink growth continued in the second half driven by Captain Morgan variants and pack format innovations from several brands.
North Asia net sales were up 1% with Japan up 10% and Korea down 2%, as second half performance slowed following an increase in import duties after a Customs settlement in January. In Korea, whisky contraction decelerated, and the launch of lower ABV offering W ICE by Windsor stabilised Windsor share in the fourth quarter. While Windsor was down, whisky sales in Korea benefited from strong growth of Johnnie Walker Blue and Black Label. Guinness was up 41%, driven by a campaign and price promotion. In Japan, performance improved due to scotch growth, with depletions up high single digit, and increased distribution and new flavours of Smirnoff Ice.
Marketing investment decreased 8%, due to Johnnie Walker reductions, particularly in Black Label, in China and South East Asia. In China, investment declined in the competitive on trade and was reinvested in testing new at home and with meal off trade campaigns. In Thailand and the Philippines, Johnnie Walker investment focused on recruiting consumers and maintaining Gold and Blue Label sponsorships. Many markets also supported Haig Club’s launch.
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. |
107
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.
Global giants represent 39% of Diageo net sales
Johnnie Walker, with nearly 70% of its net sales in the emerging markets, was impacted by currency weakness and inventory reductions in South East Asia and export channels in Latin America. In the United States, the brand lapped the shipment of two big innovations, Gold Label Reserve and Platinum Label in the prior year; Red and Black Label were negatively impacted by reduced promotional activities. In China, the government’s anti extravagance measures drove continued closure of traditional on trade outlets, leading to increased competition in the modern on trade negatively impacting the whole scotch category. Many other markets delivered strong performance, including Cameroon, Angola, Ghana, and East Africa with net sales up more than 50% and Mexico, Venezuela, and Colombia which all delivered double digit sales growth. In the developed markets in Asia Pacific, Johnnie Walker performed strongly and net sales grew high single digit.
Smirnoffnet sales declined 2%, largely driven by the United States, and the weakness in flavoured vodka there. The relaunch of the brand with the ‘Exclusively for Everybody’ marketing campaign, new packaging and targeted price promotions drove improved depletions momentum and share gains on Smirnoff Red. In Europe, a number of countries, notably Great Britain, delivered growth. Net sales were up in Latin America, with Brazil growing 8% following the national ‘Cheers to Real Life’ campaign launch. Smirnoff had a very strong year in South Africa with Smirnoff 1818 sales growing 27%.
Captain Morgannet sales were down 6% due to the performance of the brand in the United States, where Captain Morgan held share in a flat rum category that is facing heightened competition from other categories. The decline in shipments was driven by weakness on Original Spiced Rum, and Captain Morgan White Rum which lapped its launch last year. The launch of Captain Morgan White Flavours partially offset the shipments decline on the core variants. Elsewhere, the brand’s performance continued to be strong with double digit growth in Great Britain, Germany, Southern Europe, Australia, India, and East Africa.
108
Business review (continued)
Baileysnet sales declined 4% having started the year with high inventory levels. It experienced softer depletions this year in the United States and Nigeria. In China, after weakness in the first half, specific interventions to drive consumer conversion resulted in stronger second half depletions, up mid single digit. In Europe performance was impacted by lapping the launch of Chocolat Luxe in the prior year, but the Baileys brand achieved share gains in the key markets of Great Britain and Germany. The brand continued to expand its footprint in emerging markets, with double digit growth in Colombia, West LAC, and Africa Regional Markets.
Tanqueray gin benefited from a strong focus on increased visibility and distribution in the on trade, supported by the highly effective ‘Tonight We Tanqueray’ campaign. This drove strong double digit growth in Europe, particularly in Spain and Great Britain, with accelerating growth in Germany and Benelux. Net sales for the gin brand grew 6%, with Tanqueray No. TEN up double digit in every region.
Guinnessnet sales were flat, reflecting a strong performance in both the United States and Europe, where the brand grew 3% and 2% respectively. This was achieved through a combination of acclaimed innovations such as Blonde American Lager and Dublin Porter that built on the Guinness brewing heritage, a drive to increase presence and distribution in bars, and a series of award winning marketing campaigns built under the ‘Made of More’ platform. In Nigeria, sales declined but performance improved over the course of the year and volume share stabilised. Sales declined in Indonesia due to adverse regulatory changes.
Local starsrepresent 16% of Diageo net sales. Overall performance was good with net sales growth of 4%. In developed markets, there was double digit growth on certain premium brands that have resonance with particular consumer groups, such as Buchanan’s in the United States with the Hispanic community, and Crown Royal Regal Apple with millennial consumers in high energy occasions. In China, Shui Jing Fang showed significant growth due to innovation, a strengthened route to consumer, and a soft prior year comparable. In emerging markets more broadly, there was good performance from local and secondary imported brands as certain consumer segments traded down, particularly where local production protected pricing from currency volatility. The net result is that whilst premium imported brands such as Windsor and Old Parr have seen sales decline, there was strong growth on brands such as Yenì Raki in Turkey, Cacique in Venezuela and White Horse in Brazil.
Reserve brandsrepresent 13% of Diageo net sales, and continued to perform well with net sales growth of 8%. During the economic volatility of recent years, the wealthy consumer base that underpins reserve has been resilient. The slight deceleration in overall reserve growth was driven by lapping strong innovation shipments on Johnnie Walker Gold Label Reserve and Platinum Label in the United States. Ketel One vodka faced increased competitive pressure from both within and outside the category. Across the wider portfolio, performance was strong. Scotch malts grew double digit, led by The Singleton which was the fastest growing of the top 5 global malt whisky brands last year. The very strong performance of Bulleit continued with sales up 38%, benefiting from high advocacy amongst the bartender community. Zacapa rum and tequila Don Julio also delivered double digit growth globally, reflecting the quality and heritage of these products, and the strength of the reserve business model. Cîroc continues to expand its footprint outside of North America with strong growth in Europe, particularly Great Britain, where it rapidly gained share from the market leader and is now the number two ultra premium vodka.
Within whisk(e)y, scotchrepresents 24% of Diageo net sales and declined by 5%. Approximately 80% of this decline was due to inventory reductions in South East Asia and export channels in Latin America on Johnnie Walker, Buchanan’s, and Old Parr. Other brands including Haig Club, The Singleton, and scotch malts globally, and Buchanan’s in the United States performed well, with many growing double digit.
Also within whisk(e)y, North American whisk(e)y,which represents 7% of Diageo net sales, grew 12% this year with over 2pps of positive price/mix. This strong performance was driven by the successful launch of Crown Royal Regal Apple, the continued strong growth of Bulleit, and the acclaimed range of rare bourbons in the Orphan Barrel series.
Vodka represents 12% of Diageo net sales and grew 1%. The growth of Cîroc in Europe and North America, as well as Smirnoff in Africa and Latin America was partially offset by the decline of Smirnoff in developed markets.
Beer represents 18% of Diageo net sales, grew 4% and delivered 1.1pps of positive price/mix. Beer in Africa grew 8%, led by double digit growth in Africa Regional Markets. In Nigeria, the success of Orijin and Satzenbrau more than offset declines in Guinness and Harp. East Africa delivered double digit growth on Guinness and a good performance with Tusker. Performance of Guinness in developed markets was good, driven by the successful launch of Brewer’s Project innovations and Blonde American Lager.
Ready to drink represents 5% of Diageo net sales and declined 4% this year. The main driver of this decline was in South Africa with Smirnoff Ice Double Black and Guarana where the brand lapped a strong performance in the previous year and an increase in inventories ahead of its transition to DHN Drinks. Elsewhere there was growth in ready to drink, including East Africa, West LAC, and Australia. In Great Britain, ready to drink cans underpinned sales growth of 7% in the category.
Wine represents 4% of Diageo sales and declined 1%. In the United States, a decline of 1% was driven by depletion softness as the business lapped one off programming in the prior year on core brands. In Europe, commercial challenges on Blossom Hill were offset by the strong performance of [yellow tail].
109114
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) 2017 compared with 2016
Net cash from operating activities – see pages 53-54
Movement in net borrowings – see pages 59-60
Movement in equity – see page 60
Post employment deficit – see page 60
b) 2016 compared with 2015
Net cash from operating activities —– see page 5288
Movement in net borrowings —– see page 58pages 93-94
Movement in equity —– see page 59pages 95-96
Post employment deficit —– see page 59
b) 2015 compared with 2014
Net cash from operating activities — see page 85
Movement in net borrowings — see page 90
Movement in equity — see page 91
Post employment deficit — see page 9196
2. ANALYSIS OF BORROWINGS
a) Gross borrowings (excluding finance lease liabilities and the fair value of derivative instruments) will mature as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2016 £ million | | 2015 £ million | | 2014 £ million | | | 2017 £ million | | 2016 £ million | | 2015 £ million | |
Within one year | | | 2,058 | | | 1,921 | | | 1,576 | | | | 2,459 | | | 2,058 | | | 1,921 | |
Between one and three years | | | 2,896 | | | 2,607 | | | 1,894 | | | | 1,255 | | | 2,896 | | | 2,607 | |
Between three and five years | | | 537 | | | 970 | | | 1,972 | | | | 1,324 | | | 537 | | | 970 | |
Beyond five years | | | 4,638 | | | 4,340 | | | 3,772 | | | | 4,004 | | | 4,638 | | | 4,340 | |
| | | | | | | | | | | | | | | | | | |
| | | 10,129 | | | 9,838 | | | 9,214 | | | | 9,042 | | | 10,129 | | | 9,838 | |
| | | | | | | | | | | | | | | | | | |
| b) During the year the following bonds were issued and repaid: | | |
| b) The following bonds were issued and repaid: | | b) The following bonds were issued and repaid: | |
| | 2016 £ million | | 2015 £ million | | 2014 £ million | | | 2017 £ million | | 2016 £ million | | 2015 £ million | |
Issued | | | | | | | | | | | | |
€ denominated | | | — | | | 791 | | | 1,378 | | | | — | | | | — | | | 791 | |
US$ denominated | | | — | | | | — | | | | — | | |
Repaid | | | | | | | | | | | | |
€ denominated | | | — | | | (792 | ) | | (983 | ) | | | — | | | | — | | | (792 | ) |
US$ denominated | | | (1,003 | ) | | (330 | ) | | (488 | ) | | | (1,234 | ) | | (1,003 | ) | | (330 | ) |
£ denominated(i) | | | — | | | (370 | ) | | | — | | | | — | | | | — | | | (370 | ) |
| | | | | | | | | | | | | | | | | | |
| | | (1,003 | ) | | (701 | ) | | (93 | ) | | | (1,234 | ) | | (1,003 | ) | | (701 | ) |
| | | | | | | | | | | | | | | | | | |
(i) | In the year ended 30 June 2015 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. |
110115
Business review (continued)
c) The group had available undrawn committed bank facilities as follows:
| | | | | | | | | | | | | | | | |
| | 2016 £ million | | | 2015 £ million | | | 2017 £ million | | | 2016 £ million | |
Expiring within one year(i) | | | — | | | | 688 | | | | 481 | | | | — | |
Expiring between one and two years | | | 470 | | | | — | | | | 900 | | | | 470 | |
Expiring after two years | | | 2,072 | | | | 1,541 | | | | 1,219 | | | | 2,072 | |
| | | | | | | | | | | | |
| | | 2,542 | | | | 2,229 | | | | 2,600 | | | | 2,542 | |
| | | | | | | | | | | | |
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.
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 – 3.0 times, this range for Diageo being currently broadly consistent with an A band credit rating. Diageo would consider operating outside of this range in order to effect strategic initiatives within its stated goals, which could have an impact on its rating. If Diageo’s leverage was to be negatively impacted by the financing of an acquisition, it would seek over time to return to the range of 2.5 – 3.0 times. The group regularly assesses its debt and equity capital levels against its stated policy for capital structure. For this calculation net borrowings are adjusted by the net post employmentpension 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.
4. CAPITAL REPAYMENTS
Authorisation was given by shareholders on 2321 September 20152016 to purchase a maximum of 251,514,000251,781,000 shares at a minimum price of 28101/101/108 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 2220 December 2016,2017, if earlier.
During the year ended 30 June 2016,2017, the company purchased 25 million ordinary shares, (including shares acquired through call option exercises), nominal value of £1 million (2015(2016 – 2 million ordinary shares, nominal value of £1 million; 2015 – 4 million ordinary shares, nominal value of £1 million; 2014 – 14 million ordinary shares, nominal value of £4 million), representing approximately 0.1% (20150.2% (2016 – 0.1%; 20142015 – 0.5%0.1%) 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.
111116
Business review (continued)
The aggregate consideration paid for purchase of own shares was £53£101 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.2017. The monthly breakdown of shares purchased and the average price paid per share (excluding expenses) for the year ended 30 June 20162017 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
Calendar month | | Number of shares purchased | | | Average price paid pence | | | Authorised purchases unutilised at month end | | | 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 | | |
September 2016 | | | | 3,807,881 | | | | 2213 | | | | 247,973,119 | |
March 2017 | | | | 739,319 | | | | 2278 | | | | 247,233,800 | |
| | | | | | | | | | | | | | | | | | |
Total | | | 3,015,361 | | | | 1,750 | | | | 248,498,639 | | | | 4,547,200 | | | | 2223 | | | | 247,233,800 | |
| | | | | | | | | | | | | | | | |
On 26 July 2017 the Board approved a share buyback programme of up to £1.5 billion for the year ending 30 June 2018.
Contractual obligations and other commitments
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments due by period | | | Payments due by period | |
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 | | |
As at 30 June 2017 | | | Less than 1 year £ million | | | 1-3 years £ million | | | 3-5 years £ million | | | More than 5 years £ million | | | Total £ million | |
Long term debt obligations | | | 1,639 | | | | 2,854 | | | | 558 | | | | 4,620 | | | | 9,671 | | | | 2,111 | | | | 1,253 | | | | 1,351 | | | | 3,996 | | | | 8,711 | |
Interest obligations | | | 358 | | | | 449 | | | | 360 | | | | 1,415 | | | | 2,582 | | | | 334 | | | | 421 | | | | 366 | | | | 1,461 | | | | 2,582 | |
Purchase obligations | | | 831 | | | | 800 | | | | 183 | | | | 45 | | | | 1,859 | | | | 1,034 | | | | 664 | | | | 231 | | | | 68 | | | | 1,997 | |
Operating leases | | | 92 | | | | 175 | | | | 133 | | | | 407 | | | | 807 | | | | 95 | | | | 124 | | | | 68 | | | | 51 | | | | 338 | |
Post employment benefits(i) | | | 47 | | | | 95 | | | | 95 | | | | 215 | | | | 452 | | | | 58 | | | | 108 | | | | 94 | | | | 168 | | | | 428 | |
Provisions and other non-current payables | | | 149 | | | | 116 | | | | 49 | | | | 132 | | | | 446 | | | | 135 | | | | 86 | | | | 44 | | | | 173 | | | | 438 | |
Finance leases | | | 42 | | | | 78 | | | | 82 | | | | 140 | | | | 342 | | | | 35 | | | | 86 | | | | 48 | | | | 45 | | | | 214 | |
Credit support obligations | | | 139 | | | | — | | | | — | | | | — | | | | 139 | | | | 74 | | | | — | | | | — | | | | — | | | | 74 | |
Capital commitments | | | 81 | | | | 6 | | | | — | | | | — | | | | 87 | | | | 84 | | | | — | | | | — | | | | — | | | | 84 | |
Other financial liabilities | | | 13 | | | | 18 | | | | 159 | | | | — | | | | 190 | | | | 9 | | | | 15 | | | | 173 | | | | — | | | | 197 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 3,391 | | | | 4,591 | | | | 1,619 | | | | 6,974 | | | | 16,575 | | | | 3,969 | | | | 2,757 | | | | 2,375 | | | | 5,962 | | | | 15,063 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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, 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£4 million in respect of vacant properties. For certain provisions there are discounted numbers presented.
Corporate tax payable of 340£294 million and deferred tax liabilities are not included in the table above, as the ultimate timing of
settlement cannot be reasonably estimated.
117
Business review (continued)
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.
On 21 June 2017 Diageo agreed to purchase of Casamigos Tequila LLC (Casamigos) for a consideration of $1,000 million (£768 million) of which $300 million (£230 million) is contingent on Casamigos performance linked targets being met over the next ten years. The acquisition is dependent on regulatory approval.
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 245-253.247-255.
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.
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 213218 |
| • | | Taxation —– page 220224 |
| • | | Brands, goodwill and other intangibles —– page 228230 |
| • | | Post employment benefits —– page 235237 |
| • | | Contingent liabilities and legal proceedings —– page 261263 |
New accounting standards
A number of accounting standards, amendments and interpretations have recently been issued by the IASB andor IFRIC. Those that are of relevance to the group are discussed in note 1 to the consolidated financial statements on pages 204-206.210-212.
113118
Business review (continued)
OUR ROLE IN SOCIETYOur role in society
Sustainability & Responsibility review
In a year which has seen unprecedented international focus on the developmental and climate challenges facing the world, we began a new chapter in our approachOur vision is to sustainability and responsibility. Building on our long tradition of contributing to society as a company with strong governance and ethics, our new 2020 targets focus on the issues that matter most: creatingcreate a positive role for alcohol in society; building thriving communities;society, and reducing our environmental impact.
an inclusive business that can play its part in a low-carbon and water-resilient economy. Our 2020 sustainability and responsibility targets enable us to make a positive contribution to society – and support our ambition to be one of the best performing, most trusted and respected consumer products companies in the world. They were developedare designed 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 tothat journey, by addressing the issues most material to our stakeholders, and to us as a business:business. They are core to our growth, now and in the future.
CreatingOur sustainability and responsibility strategy is designed to support Diageo’s overall growth and performance. It aims to make a positive role for alcohol incontribution to society while building our business by marketing responsibly, puttinggrowing our resources and skills into programmes that prevent and reduce harmful drinking, workingbrands’ relationships with others to raise awareness and change people’s attitudes and behaviour, and providing the information consumers, need to make informed decisions about drinking as part of a balanced lifestyle, or choosing not to drink
Building thriving communities by empowering people throughout our value chain, including our employees – increasing their access to opportunity, to resources and to skills
Reducing our environmental impact by using natural resources responsibly in our operations and throughoutstrengthening our supply chain,
withsupporting our productivity, and mitigating risk.Key to our strategy is our assessment of our most material issues – those which are important to our stakeholders, the environment, and the future success of our business. These are reflected in our risk register and our growth plans too. That means looking at what will matter to the world, and our business, in 2020, 2030, and even 2050. As a particular emphasis on water.
We see these priorities as interdependent. We recognise thatresult, we will only succeed in playingprioritise addressing climate change, water, non-communicable diseases, and empowering women – issues central to the UN’s Global Goals for Sustainable Development.
Our 2020 targets help drive this strategy, which is underpinned by a positive role if we take a holistic approachcommitment to addressing all three, while continuing to actacting as a good corporate citizen, with exemplary governance and ethics.ethics, respect for human rights and a focus on creating shared value. We measure and drive our performance in three interdependent areas:
Making
Creating a positive role for alcohol in society
Building thriving communities
Reducing our environmental impacts
Proud of our contribution
We’re proud of theOur brands we make and thegive enjoyment our products give to millions of people. Andpeople, and we createare proud of them – not just of their heritage, quality and craftsmanship, but of the value in many other ways as well.they create.
We directly employ around 32,000 people. Our partners employ many more, supporting our global manufacturing, distribution, salesover 30,400 people, and marketing operations. This yearin 2017, we paid over £4£7.4 billion in taxes and other duties to governments. Our manufacturing sites play crucial roles inbrands can use their local communities.
We have interdependent relationships throughoutconnection to people’s lives to build positive social impacts such as challenging prejudice, inspiring personal progress, and fostering inclusivity. And our value chain as a whole is built on interdependent relationships, from the farmers who grow our ingredients, to our employees and contractors, to the consumersretailers and premises who buysell our brands. We want to make sure that throughout that chain – wherever we source, make and sell – we are making a positiveproducts.
Maximising our contribution which is aligned with the UN Global Goals and supports our core business.
Focus on impact and execution
Our 2020 targets are designedeach include metrics 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-ordinatingwork and help us coordinate our effortsefforts. We aim to achieve outcomes that bringcreate value and contribute to the UN Global Goals at scale, bringing the maximum possible valuebenefit 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 towe achieve greater impact and create value is to work with partners who add valuebring expertise and scale to our programmes as discussed in this review.
Throughout our business, an important focus this year has been on delivering productivity and initiatives. This yearefficiency, maximising impact at reduced cost. We made structural changes that enabled our strategy to be better implemented in each market, strengthening synergies between our programmes. Our focus on improving our performance management systems is helping us drive performance in our programmes and increasing the value we have developed new partnerships with UNITAR, USAID, and the NGO WaterAid, among others, details of which can be found in the relevant sections below.create.
114119
Business review (continued)
Focus on human rights
Our commitment to human rights throughoutReporting our value chain is fundamental to who we are and how we do business. In the expanded ‘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 year we have gone further than ever to ensure that we are an open, fair, and welcoming business. Details are in the ‘Diversity and inclusion’ section on pages 120-121.
Focus on water and sustainable agriculture
The first full year of our Water Blueprint (see page 125) and the development 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 are set 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.contribution
In the year that saw the launch of the UN’sthis review, we report at a high level against our 2020 targets. Please see our Sustainability & Responsibility Performance Addendum for disclosures against GRI and UN Global Goals for sustainable development and the Paris Agreement on climate change, our strategy helps prepare us for a future in which the only successful business models will be those that can demonstrateCompact (UNGC).
Creating a positive contribution to people and the planet.role for alcohol in society
CREATING A POSITIVE ROLE FOR ALCOHOL IN SOCIETY
We’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.performance now and in the future. It is a material issue to everyone who works at Diageo as well as to our stakeholders more broadly: we’re proud of what we do, and we maintain that pride by working to ensure that our business has a positive impact on the people around us.
We workOur contribution includes working to reduce harmful drinking, promotepromoting rigorous company and industry standards for responsible marketing, and provideproviding consumers with information to help them make responsible choices. We aim to make an impact at scale – whether through global partnerships, through industry collaboration, or by harnessing innovation and technology to reach and inform more people than ever before.
Reducing harmful drinking
We seekshare the WHO goal of reducing harmful drinking by 10% across the world by 2025, and we work on a wide range of initiatives and programmes aimed at preventing drink driving, underage drinking and heavy episodic drinking among other issues.
We aim to raiseachieve impact by raising awareness and shiftshifting attitudes and behaviour to encourage informed choices around drinking – or not drinking. Our programmes cover a wide range of issues depending on local concernsdrinking – 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.
Workingwe work with others is essential to this effort.maximise the contribution we can make. Our partnerships with international organisations, governments, law enforcement agents, educators, parents and civil society allow us to gain important insights and to reach more people.
This year Diageo entered intoIncreasingly, we are focusing our efforts on partnerships that can deliver measurable impact, at scale and where it is most needed. In 2016, for example, we began a two-year partnership with the UN Institute for Training and Research (UNITAR) to contribute toaimed at reducing death and injuries from traffic accidents. The project will targetaccidents in more than 60 countries, with a focus on those with the highest road traffic death rates. In its first year, the partnership began advocacy and programme work in countries including Mexico, Nigeria, South Korea and South Africa, where national and local government officials, representatives from academia, the private sector and civil society gathered to build capacity and exchange best practices and approaches that improve road safety. We have also been working in India with government agencies, leading national news channel NDTV and a leading nationwide chain of petrol stations on a campaign to encourage responsible drinking and reduce drink driving particularly in young adults. Since the campaign began in 2013, We have reached 50 cities in 15 states, and gathered more than three million pledges never to drink and drive. As part of the programme, we have trained police officials to better enforce drink driving laws, and educated thousands of commercial and student drivers on the dangers of drinking and driving.
In 2016,We have also significantly scaled up our partnerships to bring ‘Smashed’, a theatre-based education programme that aims to teach teenagers the dangers of underage drinking, to eight countries. Since it began 10 years ago, the programme has reached 1,400 schools and more than 300,000 young people. This year, as a result of expanding the programme, we reached 135,000. ‘Smashed’ is really helping to tackle perceptions of underage drinking, as seen by the change in awareness of those reached by the programme before and after they took part. There was a 30% increase in awareness of where to get help, a 19% increase in awareness of the influence of peer pressure on behaviour, and a 38% increase in awareness of alcohol misuse. And, 98% of teachers say they would welcome ‘Smashed’ back in the following school year. Overall in 2017, we supported 335264 programmes to reduce harmful drinking in 5557 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 the Minister of Health, and Diageo India’s road safety programme, which received the Prince Michael International Road Safety Award.
GivingInforming consumers information
Diageo believes that responsible and moderate drinking can be part of a balanced lifestyle, and weWe want to provide our consumers with the information, tools and resources to make informed, personal choices. Harnessing innovation and technology to reach more people is an essential part of this.
In response to the growing demand for our DRINKiQ training on the effects of drinking, in 2016 we developed a new, mobile-friendly e-learning version of the training in order to reach more individuals and organisations. The new online tool uses interactive learning and tests to allow people to gain insights on how drinking affects the body, and gives them the tips they need to make the right choices. The e-learning was launched in March 2017 in the UK, US and Australia, with plans to launch in 20 more countries.
115120
Business review (continued)
Our labels and packaging give us another key way to help consumers make smart choices about drinking, or choosing not to drink. Through our Diageo Consumer Information Standards, launched in June 2016, providewe deliver consistent, mandatory minimum standards for the information that must be included on labels and packaging on all Diageo-ownedour brands in all geographies (where legally permitted). Labels and packaging must include alcohol content and nutrition information per serve, alcohol content by volume (ABV), at least one and up to three responsible drinking symbols, a reference to our global responsible drinking website, DRINKiQ.com, a list of allergens, and recycling and sustainability symbols. Alcohol content and nutrition information about all of our brands is also available on DRINKiQ.com.
We have also taken an important step towards meeting consumers’ increasing interest in the environmental footprint of their brands. This year we published illustrative environmental footprints for five of our global brands, drawing on a series of assessments to understand and estimate their greenhouse gas (carbon) and water impact across their life cycles. An approximation of these brands’ carbon and water impact is available at www.diageo.com, alongside comparisons with a number of generic beverages and information on how we are working to address our impacts.
| | | | | | | | | | |
| | Industry | | | Complaints | |
Complaints about advertising upheld by industry bodies that report publicly | | complaints | | | upheld about | |
Country | | Body | | upheld | | | Diageo brands | |
Australia | | Alcohol Beverage Code | | | 7 | | | | 0 | |
Ireland | | Advertising Standards Authority for Ireland (ASAI) | | | 3 | | | | 0 | |
United Kingdom | | The Portman Group | | | 1 | | | | 0 | |
| | Advertising Standards Authority (ASA) | | | 9 | | | | 1 | |
United States | | Distilled Spirits Council of the United States (DISCUS) | | | 2 | | | | 0 | |
Responsible marketing
The Diageo Marketing Code and Digital Code are our mandatory minimum standards for responsible marketing and we review them every 12-18 months to ensure they represent best practice.
Five industry bodies publicly report breaches of their self-regulatory codes. This year, we were found in breach on one occasion: the ASA in the UK found that a TV advertisement for Captain Morgan was in breach of their code on the grounds that it implied drinking alcohol could contribute to an individual’s popularity or confidence. While disagreeing with this judgement, Diageo withdrew the advert from all media channels immediately.
Advocating effective public policy
We comply with all laws and regulations, wherever we operate, as a minimum requirement – but we go beyond this to advocate for alcohol policies and regulations where they do not exist, such as 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. For example, we worked with industry partners to encourage the passage of a new transportation law in the Dominican Republic, including a maximum blood alcohol content law for drivers for 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 helping consumers make informed decisions.
In January 2016 we relaunched DRINKiQ.com, which now has 25 specific country sites and is available in 12 languages. The refreshed site is making more information available to more people, especially via mobile.time.
| | | | | | | | | | |
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 | |
121
Business review (continued)
Our 2020 target
Industry collaboration
Implement GlobalTo support greater impact, we work with our peers to implement the global Beer, Wine and Spirits Producers’ Commitments to reduceReduce Harmful Drinking, including actions on:including:
Reducing underage drinking
Strengthening and expanding marketing codes of practice
Providing consumer information and responsible product innovation
Reducing drink driving
Enlisting the support of retailers to reduce harmful drinking.
KPI:
Accenture has developed 19 KPIs for all signatoriesThe Global Producers’ Commitments are set to the Commitments, publishedexpire in the annual Commitments reportDecember 2017 and assured by KPMG.
The 2015 (latest available) annual report on the Commitments showswe are pleased that, working together with our industry colleagues, we have continued to make good progress against all action areas particularly underage drinking.focus areas. For example, there wasour collective efforts resulted in 236 education programmes operating in 73 countries and 10,744,296 underage individuals reached, up from 9,750,367 in 2015, a 50% increase in10% increase. We also continued to work with retailers and others to ensure the number of underage education initiatives, which are now available in 86 countries, compared with just 57 in 2014. These programmes directly engaged nearly 30 million unique adult influencers such as parents, teachers, and community leaders on the importance of respecting legal age limits on buying alcohol. Producers also worked with key stakeholders to enforce legal purchase age laws where they existin countries are enforced. For example, in Brazil, Diageo works in partnership with Walmart and small retailers to 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 12–18 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 in breach byreinforce the ASA in the UK for a Smirnoff television advertisement on the grounds that the social occasion depicted depended on the presence of alcohol. We were also found in breach by the ASAI in Ireland for a post on the Guinness Facebook page on the grounds that it suggested that drinking may have therapeutic benefits. In both cases, the marketing material was immediately withdrawn.law through age verification programmes.
116122
Business review (continued)
Our 2020 target
Impactful programmes
Going beyond industry commitments, we will work in partnership to support programmes to address harmful drinking in our top 19*19 countries. We will evaluate these initiatives for efficacy and impact and report on the results.
* | Number of countries reduced from 20 to 19 following the sale of our Jamaican Red Stripe business (Jamaica having been one of our top countries). |
KPI:
Number of countries that evaluate responsible drinking programmes.
This year, 84%95% of our top 19 countries assessed the effectiveness of their programmes, measuring increases in awareness or shifts in attitudes or behaviour. While evaluating our projectsFor example, since 2012, Guinness Ghana has worked to determinereduce drink driving by commercial drivers through the Twa Kwano Mmom Don’t Drink and Drive campaign. This year, working with the police force, we ran 17,600 random breathalyser tests at transport terminals and on roads. Since the start of the programme, we have conducted close to 76,000 breathalyser tests, and educated more than 7,000 drivers all over the country on road safety and the effects of alcohol.
This campaign, which is increasing in reach is important, we continue to work with markets to createand impact year on year, has been endorsed by the Ministry of Health, Ministry of Transport, National Road Safety Commission and to put in place robust mechanisms to evaluate that impact. We have developedthe Motor Traffic and rolled out a measurement and evaluation toolkit supporting these efforts.Transport Department of the Ghana Police Service.
For more examples of our evaluation in action, please see the ‘Our role in society’ section of our website.www.diageo.com.
Our 2020 target
Training
Reach 1 million adults with training materials that will enable them to become responsible drinking (RD) ambassadors.
KPI:
Number of adults, above legal drinking age, who have completed interactive training (face-to-face or online) on responsible drinking, which can also include training on responsible serving, selling and marketing.
We are reaching more people than ever before, linking our programmes to increase our scale. Our new e-learning DRINKiQ tool, launched in March 2017, helped us surpass our 1 million target. We have reached and enabled more than 1,150,000 RD ambassadors since 2015. This year alone we reached 380,622397,843 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 trainingThese 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.123
Business review (continued)
Building thriving communities
We want to continue to helpstrengthen the value we create by helping the communities we live and work in thrive: byto thrive. That means making Diageo a great, safe, and diverse place to work; by building sustainable and inclusive supply chains; and throughdelivering programmes that empower communities and individuals and increase their accessenable them to opportunity.grow.
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 built on long-term relationships based on trust and shared value.value, and respect for human rights is fundamental to who we are and how we do business.
We have a clearwell-developed and embedded policy which sets outframework that addresses human rights, and details our commitment to human rights.acting ethically and with integrity in all our business dealings. We do not tolerate discrimination, harassment, bullying or abuse; we comply with wage and working time laws; we respect our employees’ decisions to join or not join a trade union; and we do not tolerate forced or compulsory labour. WeIn 2016 we published our Modern Slavery Statement, describing the activities we are undertaking to prevent slavery and human trafficking in our business operations and supply chain in line with the UK Modern Slavery Act 2015 and the California Transparency in Supply Chains Act 2010.
Our human rights commitments apply throughout our value chain: we will not work with anyone, including any supplier, who we discover does not adopt these values.
117
Business review (continued)
Further details of our policies are available on www.diageo.com.
Our 2020 target
Act in accordance with the UN Guiding Principles on Business and Human Rights.
KPI:
Number of markets in which we have carried out HRIAs.
We arehave been 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 since 2014. This year, we partnered with Business for Social Responsibility, a global not-for-profit consultancy,continued to help articulate ourembed human rights vision and strategy. We conducted a corporate level assessment, which included mapping allthroughout our existing policies, processes, and procedures against the UNGP requirements.
Based on this, during the year, we developed avalue chain, using our robust and comprehensive human rights impact assessmentHuman Rights Impact Assessment (HRIA) within our markets, prioritised by risk and based on a toolkit to support markets through a systematic review of their businesses to identify and assess potential human rights impacts.global mapping process. The HRIA considers our entire value chain from sourcing to selling,selling. It is based on international and helps us focus our activities on any areas of concern.
We conducted our first HRIA in Kenya in February,local risk assessments, and as a resultleads to mitigation plans where we are strengtheningneed to address specific human rights issues or strengthen our processes to prevent risksthem arising. The HRIA was initially piloted in areasKenya in 2015, and in 2017, we carried out HRIAs in Uganda, Mexico, Brazil, Turkey, Thailand and Ghana. We aim to conduct HRIAs in all markets by 2020.
In line with the UNGP, we have identified three issues as particularly salient to our business: labour rights, including the risk of child labour, especially in agricultural supply networks; treatment of contract workers; and sexual harassment in the hospitality sector in some countries. These issues were identified as external risk factors in the places where we operate, rather than through reported incidents in our value chain. Nonetheless, we are focusing resources on awareness programmes around child protection, and measures to protect workers, including seasonal contract workers and sales teams working in bars. Because human rights issues such as land rights and labour standards in agriculture. Wethese are often systemic, we will also used the Kenya process as a pilot, and are now developing our approach for conducting HRIAs in other markets.work with others to address them at scale.
Empowering and enabling communities through our programmes
We have aare proud of our long historyrecord 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, which align with a number of the UN Global Goals:
Enabling entrepreneurship, employability and skills (Goal 4)
Improving health and wellbeing (Goal 3), including through access to clean water, sanitation and hygiene (Goal 6)
Helping to empower women.women (Goal 5).
Delivering
124
Business review (continued)
Working in partnership to deliver holistic impact
This year, Diageo invested £16.3£9 million or 0.6% (2015 – 0.6%)0.3% of operating profit to charitable(2016 – £14.3 million(i)) in projects that help serve critical local need.
We wantmatter most to our 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 sanitation, and we have also announced a partnership with USAID on a joint programme in Colombia, building skills for veterans to support the country’s transition and growth, and on farmer training in South Sudan.
stakeholders. Our partners have welcomed our new Social Impact Framework (SIF), launched this year, because it enables them and us to measure and evaluate guides the impact of our programmes. The SIF, which we developed with input from three of our partner NGOs in 11 countries, provides a clear guide for the consistent implementation of programmes, within our overall strategy. It usesusing key performance indicators to quantify the impacts of programmes, allowingtheir impacts. This allows us to identify and measure potential benefits and make a stronger case for investment. Our
Through our online global performance management system, developed this year, our SIF is also helping us to ensure webetter quantify the full value of eachexisting programmes. This work is in its early stages, and we are just beginning to see results for some of our existing programmes whichprogrammes. For example, we have hitherto concentrated onlearnt that Learning for Life is leading to greater awareness of the benefits of more balanced consumption. Data from the tool is also indicating where we might have greater impact through partnerships: this year, we worked with the UNDP and the NGOs CARE and WaterAid, among others, to improve livelihoods in our value chain.
Our partnership work around our distillery and bottling plant in Alwar, Rajasthan, in India, is an example of how working with the community, government and an NGO has brought together WASH (water, sanitation and hygiene), water replenishment, and women’s empowerment initiatives in a particular area.single, impactful programme.
(i) | Restated: 2016 investment was £14.3 million rather than the £16.3 million reported in 2016. |
Our 2020 target
Our community programmes enable those who live and work in our communities, particularly women, to have the skills and resources to build a better future for themselves. We will evaluate and report on the tangible impacts of our programmes.
KPI:
As part of the SIF we developed detailed impact metrics, and are currently working to determine appropriate KPIs for each of our programmes, which will report in 2017.
118
Business review (continued)
Our programmes include:Each programme has its own KPI.
Water of Life – this programme has reached more than 10 million people in 1821 countries in Africa since 2006.2006, including 173,044 this year. It is focused on access to water, sanitation and hygiene (WASH) in line with UN Global Goal 6: ‘Clean water and sanitation’, and is increasingly active6. We are developing projects in rural areas that supply our raw materials, to ensure the programme is aligned with our business. This year we provided access to safe water and sanitation to 351,700 more beneficiaries.
Plan W –this programme, which contributes to UN Global Goal 5, aims to empower women bothin our employeesbusiness and those in our wider value chain and enable them to play a greater role in the economy – this contributeseconomy. Our programmes support women’s economic empowerment by working closely with the hospitality sector, and by enabling women to UN Global Goal 5: ‘Gender Equality’.build their own businesses. We also work with whole households, including men, to support broader women’s empowerment. To date, this programmePlan W has empowered 260,000 women. However, we have revised the target set in 2013 to empower 2more than 300,000 women and reached more than 1.7 million women by 2016 because we realised that to achieve meaningful change we needed to focus on impact rather than simply reach.people.
Learning for Life – this supports vocational and life-skills training, which enable entrepreneurship, employability and skills, in line with UN Global Goal 4: ‘Ensure inclusive and quality education for all and promote lifelong learning’. It also strengthens our value chain through its emphasis on hospitality, retail, and entrepreneurship. Learningentrepreneurship, while delivering long-term opportunities for Life currently operates over 90 initiatives a year in morethe young people involved. More than 40 countries. Since123,000 young people have taken part since we launched the programme in 2008, with more than 115,000 young people have taken part.70% gaining permanent jobs.
125
Business review (continued)
| | | | |
| | |
| Community investment by focus area1 Community aspects of responsible 46% drinking projects2 46%projects(i) Learning for Life 23% Brand-led and local community spend3 21% Learning for Life 20%spend (ii) 16% Plan W 9% 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%33% Europe and global functions 26%24% Asia PacificPacic and GTME 14%Travel Retail 20% Latin America and Caribbean 14%15% Africa 8% |
1 | This excludes our legacy commitment to the Thalidomide Trust and the Thalidomide Foundation Ltd of £10.2 million which in prior years we included as part of our community investment data. |
2(i) | This is a sub-sectionsub section of the total responsible drinking budget. |
3(ii) | Category includes cause-related brand campaigns, local market giving and disaster relief. |
119
Business review (continued)
Our people
We want our people to reach their full potential, and to play their part in Diageo reaching its full potential as a business. We aim to create a diverse, inclusive and welcoming culture, where people are proud of their work, empowered to succeed, and know that their safety and other human rights are respected.
Health and safety
Our global Zero Harm programme is designed to ensure that all our people go home safe, every day –day. It has brought significant improvements in safety, with a 21% reduction in lost-time accidents (LTAs) this year compared with 2016, and an LTA rate of 1.14, approaching our 2020 target of less than one LTA per 1,000 employees and no fatalities. We are evolving our approach to focus on employee wellbeing as a key leading indicator of safety. Our new Health, Safety and Safety strategy aims for a business in which no-one is hurt, anywhere.Wellbeing Policy reflects this more integrated approach.
To reach that end we have set ourselves increasingly challenging milestones, with
126
Business review (continued)
Our 2020 target
Keep our
current target beingpeople safe by achieving less than one lost-time accident (LTA) per 1,000 employees and no fatalities.
Sadly, in December 2015, a contractor fell to his death at our Ogba facility in Nigeria while carrying out maintenance work at height. We have long recognised our responsibility to contractors and visitors to our sites, and include them in our Severe and Fatal Incident Prevention (SFIP) programme, which is designed to identify and eliminate severe and fatal risks in our operations, and has significantly reduced the number of severe accidents. However, it is 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 yearWe regret that our good progress in safety in many locations was overshadowed by the death of a contractor cleaner at our Rosa site in India, who fell from the packing hall roof. Our investigation showed that our protocols and procedures are the right ones, and we continuedare working to drive significantensure consistent compliance in all markets.
Turning to our LTAs, we saw a 21% improvement in both these and medical treatment cases across the business, throughand 16 of our Zero Harm programme, with a 13% reduction21 markets achieved or bettered our 2020 target of one LTA per 1,000 employees. We are pleased to have achieved this progress.
Further improvements 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 onIndia and continued excellence in high-performing sites, along with continued sustained performance in our non-manufacturing sites to bring theirmore developed markets, underpin several years of progress.
Our overall aim remains zero accidents, and the health, safety record closer to thatand wellbeing of our manufacturing sites, many of whichemployees remains top priority. We are recording record low levels of safety incidents. Some ofrenewing 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 effortcompliance to make Zero Harm a reality across Diageo.our primary standards, and are moving to enhance our ability to predict and prevent incidents through greater integration of wellbeing into our health and safety policy and programmes.
Diversity and inclusion
We celebrate diversity and strive to create an inclusive culture, from recruitment onwards, that provides all individualsgives everyone the freedom to succeed, irrespective of their gender, race, religion, disability, age or sexual orientation. Our training and education programme includes retraining, if needed, for people who have become disabled.
With 47% of our Executive Committee being women, weWe are proud of the progressfact that 40% of our Executive and 40% of our Board are women, and more than 30% of leadership positions are now held by women. We are now focusing on delivering our target of 35% of leadership positions held by women by 2020.
Throughout the company, we have made in developing female leaders, but there is moreset ambitious plans to do.achieve our gender diversity targets and each of our markets has a multi-year talent plan with stretching goals. We are also committedreviewing our policies to building local talent, withfurther support our general managers representing over 25 different nationalities.
120
Business review (continued)
diversity and inclusion agenda.
Our focus overwider ambition is to ensure that our workforce reflects the past year has been on broadeningconsumer demographics of our markets, especially our three priority markets of India, UK 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 regularly 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.US.
Our 2020 target
Build diversity, with 30%35% 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%30% of leadership roles were held by women. At the most senior level, 42%40% of our Board members and 47%40% of our Executive Committee members are women.
Engaged and empowered employees
OurWe want our people areto be engaged – passionate about our strategy, connected to our values and purpose, and motivated to perform at the hearttheir best as advocates of our business,brands. We measure employee engagement as one of our overarching KPIs, as set out on page 23, using our annual employee Values Survey. This year we simplified and improved our survey. While our engagement metrics are unchanged, we trust themhave changed the way we measure other aspects of performance (see footnote to use their passion for our brands and pride in what we do to deliver our performance.KPI on page 129).
We support our peopleemployees through clear policies, competitive reward programmes, coaching and development opportunities, andalongside 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 fostering a culture of open communication in which best practice is shared and there is acommunication. A two-way channel of communication between employees and leadership is particularly important, and our Chief Executive’s weekly blog and regular global leadership broadcasts play a significant role.
127
Business review (continued)
Employees are inspired by local and brand community projects, and by business-wide initiatives such as International Women’s Day and Learning for Life. Each March, our #proudofwhatwedo campaign invites employees to celebrate locally and fromshare globally the achievements that make them proud, and this year, our leadership.
Proud to Work for Diageo Values Survey metric increased to 89%. 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 to our business is reflected inalso measured whether employees believe that Diageo makes the fact that we measure employee engagement as onemost of our overarching KPIs, as set out on pages 23-27. Our annual Values Survey helps us measure how we are engaging our people and enabling thempeople’s diversity to perform.improve business performance, with 72% responding favourably.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Lost-time accident frequency rate per 1,000 full-time employees(i) | | 2012 | | | 2013 | | | 2014 | | | 2015(ii) | | | 2016 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | |
North America | | | 4.15 | | | | 1.64 | | | | 0.84 | | | | 1.83 | | | | 0.37 | | | | 1.64 | | | | 0.84 | | | | 1.83 | | | | 0.37 | | | | 0.70 | |
Europe, Russia and Turkey | | | 2.41 | | | | 2.12 | | | | 2.08 | | | | 2.51 | | | | 1.28 | | | | 2.12 | | | | 2.08 | | | | 2.51 | | | | 1.28 | | | | 1.46 | |
Africa | | | 1.82 | | | | 2.55 | | | | 0.56 | | | | 1.20 | | | | 0.77 | | | | 2.55 | | | | 0.56 | | | | 1.20 | | | | 0.77 | | | | 1.26 | |
Latin America and Caribbean | | | 1.44 | | | | 10.88 | | | | 4.7 | | | | 0.66 | | | | 2.27 | | | | 10.88 | | | | 4.7 | | | | 0.66 | | | | 2.27 | | | | 1.79 | |
Asia Pacific | | | 0.0 | | | | 1.26 | | | | 1.62 | | | | 1.21 | | | | 2.01 | | | | 1.26 | | | | 1.62 | | | | 1.21 | | | | 2.01 | | | | 0.81 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diageo (total) | | | 2.14 | | | | 2.97 | | | | 1.66 | | | | 1.66 | | | | 1.44 | | | | 2.97 | | | | 1.66 | | | | 1.66 | | | | 1.44 | | | | 1.14 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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) | 2015 data has not been restated to include USL, so this comparison does not include the additional improvements within USL that we have seen in 2016. For further detail and the reporting methodologies, see our Sustainability & Responsibility Performance Addendum 2016. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Number of days lost to accidents per 1,000 full-time employees | | 2012 | | | 2013 | | | | | | 2014 | | | 2015 | | | 2016 | | | 2013 | | | 2014 | | | | | | 2015 | | | 2016 | | | 2017 | |
Diageo (total) | | | 106.6 | | | | 66.0 | | | | | | 49.7 | | | | 89.4 | | | | 57 | | | | 66.0 | | | | 49.7 | | | | | | 89.4 | | | | 57 | | | | 36 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fatalities | | 2012 | | | 2013 | | | | | | 2014 | | | 2015 | | | 2016 | | | 2013 | | | 2014 | | | | | | 2015 | | | 2016 | | | 2017 | |
Diageo (total) | | | 1 | | | | 4 | | | | | | 1 | | | | 1 | | | | 1 | | | | 4 | | | | 1 | | | | | | 1 | | | | 1 | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Average number of employees by region by gender(i) | | | Men | | | % | | | | | | Women | | | % | | | Total | |
North America | | | | 1,661 | | | | 60 | | | | | | 1,124 | | | | 40 | | | | 2,785 | |
Europe, Russia and Turkey | | | | 6,758 | | | | 61 | | | | | | 4,364 | | | | 39 | | | | 11,122 | |
Africa | | | | 3,769 | | | | 76 | | | | | | 1,196 | | | | 24 | | | | 4,965 | |
Latin America and Caribbean | | | | 1,758 | | | | 63 | | | | | | 1,023 | | | | 37 | | | | 2,781 | |
Asia Pacific | | | | 6,920 | | | | 79 | | | | | | 1,860 | | | | 21 | | | | 8,780 | |
| | | | | | | | | | | | | | | | | | |
Diageo (total) | | | | 20,866 | | | | 69 | | | | | | 9,567 | | | | 31 | | | | 30,433 | |
| | | | | | | | | | | | | | | | | | |
| Average number of employees by role by gender | | | Men | | | % | | | | | | Women | | | % | | | Total | |
Senior manager(ii) | | | | 449 | | | | 70 | | | | | | 192 | | | | 30 | | | | 641 | |
Line manager(iii) | | | | 3,560 | | | | 68 | | | | | | 1,656 | | | | 32 | | | | 5,216 | |
Supervised employee(iv) | | | | 16,857 | | | | 69 | | | | | | 7,719 | | | | 31 | | | | 24,576 | |
| | | | | | | | | | | | | | | | | | |
Diageo (total) | | | | 20,866 | | | | 69 | | | | | | 9,567 | | | | 31 | | | | 30,433 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
New hires by region by gender(i) | | Men | | | Women | | | Total | | | % of regional headcount | |
North America | | | 267 | | | | 169 | | | | 436 | | | | 15.7 | |
Europe, Russia and Turkey | | | 866 | | | | 686 | | | | 1,552 | | | | 14.0 | |
Africa | | | 383 | | | | 177 | | | | 560 | | | | 11.3 | |
Latin America and Caribbean | | | 307 | | | | 175 | | | | 482 | | | | 17.3 | |
Asia Pacific | | | 882 | | | | 545 | | | | 1,427 | | | | 16.3 | |
| | | | | | | | | | | | | | | | |
Diageo (total) | | | 2,705 | | | | 1,752 | | | | 4,457 | | | | 14.6 | |
| | | | | | | | | | | | | | | | |
Percentage of total new hires | | | 60.7 | | | | 39.3 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
121128
Business review (continued)
| | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | |
Diageo (total) | | | 22,587 | | | | 9,491 | | | | 32,078 | |
| | | | | | | | | | | | |
| | | |
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 | |
| | | | | | | | | | | | |
Total | | | 22,587 | | | | 9,491 | | | | 32,078 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
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 | | |
| | | | | | | | | | | | |
Diageo (total) | | | 2,418 | | | | 1,705 | | | | 4,123 | | | | 12.9 | | |
| | | | | | | | | | | | |
Percentage of total new hires | | | 58.6 | | | | 41.4 | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Leavers by region by gender(i) | | Men | | | Women | | | Total | | | % of regional headcount | | | Men | | | Women | | | Total | | | % of regional headcount | |
North America | | | 568 | | | | 342 | | | | 910 | | | | 31.4 | | | | 206 | | | | 177 | | | | 383 | | | | 13.8 | |
Europe, Russia and Turkey | | | 828 | | | | 579 | | | | 1,407 | | | | 13.1 | | | | 877 | | | | 826 | | | | 1,703 | | | | 15.3 | |
Africa | | | 899 | | | | 254 | | | | 1,153 | | | | 21.9 | | | | 797 | | | | 255 | | | | 1,052 | | | | 21.2 | |
Latin America and Caribbean | | | 646 | | | | 374 | | | | 1,020 | | | | 32.3 | | | | 509 | | | | 290 | | | | 799 | | | | 28.7 | |
Asia Pacific | | | 817 | | | | 294 | | | | 1,111 | | | | 11.1 | | | | 874 | | | | 398 | | | | 1,272 | | | | 14.5 | |
| | | | | | | | | | | | | | | | | | | | | | |
Diageo (total) | | | 3,758 | | | | 1,843 | | | | 5,601 | | | | 17.5 | | | | 3,263 | | | | 1,946 | | | | 5,209 | | | | 17.1 | |
| | | | | | | | | | | | | | | | | | | | | | |
Percentage of total leavers | | | 67.1 | | | | 32.9 | | | | | | | | 62.6 | | | | 37.4 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
(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. |
122
Business review (continued)
Our 2020 targetstarget(i)
Increase employee engagement to 80%, becoming a top quartile performer on measures such as employee satisfaction, pride and loyalty.
Raise our performance enablement score, which measures a link between engagement and performance commitment, to 83%.
KPI:
Employee satisfaction, loyalty, advocacy and pride, measured through our Values Survey.
This year, 97%93% of our people participated in the annual Values Survey* (24,843 outSurvey (23,043 of the 25,712 able24,733 invited), a best-in-class response rate. 75% identified themselves as being engaged, down from 77% in 2016. This small shift, in a year of significant organisational change, shows that, overall, we have continued to participate),bring our people with 77% identifiedus as engaged, and 80% feeling they were ‘enabledwe focus on productivity improvements to perform’. They confirmed that our core strengths continue to be our pride and sense of ownershipenable investment in our business, a passion for our brands, and belief in our strategy.growth.
Gratifyingly our survey scores continue to improve year on year and we are on our way to achieving our 2020 objective of reaching top quartile scores for the key metrics of engagement and performance enablement.
*(i) | In 2014,2017, we reviewedimproved our overall approachannual Values Survey to measuringsimplify the process and ensure the results were relevant to the business, reducing the survey from 40 questions to 15. As a result, we no longer measure our previous performance enablement metric and we will cease reporting on what was formerly the second 2020 target in this area, ‘Raise our performance enablement score, which measures a link between engagement and adopted a revised index. The new index allows usperformance commitment, to compare our results with other best-in-class organisations, and sets us a more stretching benchmark for employee engagement.83%.’ |
Sustainable supply chains
Our direct suppliers – around 28,000business has always depended on, and created value for, the communities from more than 100 countries – who provide us withwhom we buy our raw materials, expertise, and other resources arematerials. In recent years we have deepened this essential to our business. We believe that we create value in return, by supporting andrelationship, focusing on building capability among our supplier communities and by strengthening environmental practices alongside the economic value from trade.in our supply chain.
As a minimum, we’re committed to responsible sourcing, which compliesbusiness, we comply with legal and regulatory requirements, including those related to human rights and working conditions. With sustainable sourcing, we’re going beyond complianceconditions – but we aim to tackle risks and maximise opportunities for us and the people throughoutgo further. We want our supply chain contributingto be a resilient foundation for our business success, while enabling us to contribute to reducing poverty and inequality, addressing environmental challenges, increasing wellbeing, and improving livelihoods in line with the UN Global Goals.
Sustainable agriculture strategy
Our newIn July 2016 we launched ‘Building Sustainable Agriculture Strategy (due to be launched in summer 2016) is designed to build onSupply Chains’, our long and mutually beneficial relationships with farmers and suppliers. Our vision is to makestrategy for sustainable agriculture. It sets out our aims for making our agricultural supply chains environmentally, socially and economically sustainable. That means:
Respecting human rights (including land rights), building capacityWhile we will tailor our approach for different raw materials and creating shared value with farming communities
markets, the strategy is built on three core principles:
Using resources efficiently and safeguarding future crops and ecosystems
Securing a supply for our business, while contributing to economic and wider growth.growth
Respecting human rights, building capacity and creating shared value with farming communities
129
Business review (continued)
Using resources efficiently, minimising environmental impact, and safeguarding future crops and ecosystems.
We aim to expand our strategy for sustainable agriculture to cover all raw materials used in our products, but we are initially focusing on six priority raw materials – barley, maize, sugar, sorghum, agave and aniseed.
Identifying risks and opportunities
We have been working to understand the risks and opportunities in our supply chain, and this year we completed our work to map our agricultural supply chain to tier 1, which includes around 200 suppliers. This analysis also supports our work on human rights (see page 124, and our Modern Slavery Statement, published on our website).
Our 2020 targets
Establish partnerships with farmers to develop sustainable agricultural supplies of key raw materials.
KPI:
As partNumber of smallholders in our work on the Sustainable Agriculture Strategy, we arefarming development programmes.
We support more than 45,000 farmers in the process of developing metrics to help us drive progressAfrica, creating resilient and measure our performance.
By giving farmers the tools they need to increase yields, we can help them improve livelihoods and increase capacity. We do thisviable farms through a variety of programmes, including: training; enhancingbetter access to inputs that support better yields, such as seeds and fertiliser;fertilisers to improve yields; providing access to capital through micro-loans; supporting farmers’ groups; and encouraging sustainable practices that protect natural resources.
123
Business review (continued)
We are aligned to industry standards through the Farm Sustainability Assessment (FSA) developed by the Sustainable Agriculture Initiative (SAI) Platform, and other standards where appropriate, working with large-scale farmers. We have begun to measure sustainability practices in our supply chains through a system of benchmarking while avoiding duplication or increasing burdens on farmers. For small-scale farmers, we have tested a smallholder FSA in Tanzania and will continue to work with the SAI and others on the development of this tool.
Source 80% of our agricultural raw materials locally in Africa by 2020.
KPI:
% of agricultural raw materials sourced locally in Africa.
We sourced 73% of agricultural materials locally within Africa for use by our African markets,76% this year compared to 70% in 2015. We are73% last year. Our continuing progress is closely related to our capacity-building among farmers. Our research demonstrates the positive impact this has on track,farmers and believe that our work building farmer capacity in Africa, combined with our long history of engagement in the region, will help ustheir families but we need to continue to make progress.build their resilience. Our Sourcing for Growth report on Ethiopian barley farming, available on www.diageo.com, examines this in more detail.
Deliver our responsible sourcing commitments with suppliers to improve labour standards and human rights in our supply chains.
KPI:
% of potential high riskhigh-risk supplier sites audited.
We continued to work through SEDEX, a not-for-profit organisation that enablesenabling 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 promotepromotes responsible sourcing practices and sustainable supply chains.practices. We also have an internala Know Your Business Partner (KYBP) programme to assess third partiessuppliers against the risk of bribery and corruption.corruption, as well as money laundering.
To date, 1,0611,224 of Diageo’s supplier sites assessed as a potential risk have completed a SEDEX self-assessment questionnaire.self-assessment. Of the 318 supplier sitesthese, 424 were assessed as a potential high risk, 47% (150) werewith 65% independently audited duringover the lastpast three years. Of these 70 wereaudits, we commissioned by Diageo157 and 80 were accessed117 came through SEDEX or AIM-PROGRESS. 147 were conducted in the past year. Our audit programme helps embed human rights further across our business, as described on page 124.
| | | | |
| | | | 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% |
2 | Excludes maize used to make the neutral spirit we purchase in North America to ensure our figures represent only raw materials we buy directly; maize therefore represents 13% of raw materials by volume this year, compared with 22% in 2015. |
3 | Excludes promotional materials. |
124130
Business review (continued)
| | |
| | |
Barley(ii) 37% Sugar 6% Maize 12% Agave 4% Wheat 12% Rice 4% Molasses 9% Dairy 1% Grapes 7% Raisins 1% Sorghum 6% Other 1% (including rye, cassava, hops, and aniseed) (i) Figures represent raw materials we buy directly, and excludes raw materials used to make the neutral spirit we purchase. (ii) Includes malted barley. | | Glass 83% Closures and crowns 2% Corrugate 7% Cans 1% Cartons 3% Labels and sleeves 1% PET 2% Beverage cartons 1% (i) Excludes promotional materials. |
REDUCING OUR ENVIRONMENTAL IMPACTReducing our environmental impact
Performance against key 2020 targets
| | | | | | | | | | | | | | | | |
2020 target | | KPI | | 2016 performance | | Cumulative performance vs baseline1 | | | KPI | | 2017 performance | | Cumulative performance vs baseline(i) |
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 | % | | % improvement in litres of water used per litre of packaged product | | 3.3% | | 40.0% |
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 | % | | % reduction in wastewater polluting power, measured in BOD (‘000 tonnes) | | 10.6% | | 44.5% |
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 | % | | % of water replenished in water-stressed areas (m3) | | 24.8% | | 45.5% |
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 | % | |
Reduce absolute greenhouse gas (GHG) emissions from direct operations by 50% | | | % reduction in absolute GHG (kt CO2 e) | | 5.6% | | 40.5% |
Achieve a 30% reduction in absolute greenhouse gas emissions along the total supply chain | | | % reduction in absolute GHG (kt CO2 e) | | 7.7% | | 22.1% |
Reduce total packaging by 15%, while increasing recycled content to 45% and making 100% of packaging recyclable | | | % of total packaging by weight | | 0.8% | | 8.8% |
| | % of recycled content by weight | | 1.0% | | 41.0% |
| | | % of recyclable packaging by weight | | 0.0% | | 98.7% |
Achieve zero waste to landfill | | % reduction in total waste to landfill (tonnes) | | | 41.4 | % | | 90.1 | % | | % reduction in total waste to landfill (tonnes) | | 37.9% | | 93.8% |
(i) | Baseline year is 2007, except for packaging which is 2009 and water replenishment which is 2015. |
131
Business review (continued)
Our business success is inextricably linked with the natural environment. Not only do we rely on a supply of high-quality raw materials and water to make our brands, but our business shares with others the social and financial risks associated with climate change, water scarcity, soil degradation or the loss of biodiversity. We therefore aim to be a business which uses natural resources efficiently reduces our impact on climate change, causes no lasting damage to habitats or biodiversityacross the whole value chain, and where possible, improves the environment we operate in. Our strategy aligns with and supports the UN Global Goals, particularly on water and climate change.
We are absolutely committed to minimising our environmental impact, across allin particular reducing carbon emissions to address climate change. We aim to reduce harm to habitats or biodiversity, making improvements where we can, and to be a responsible steward of water. While we have most control over our own operations, where we have achieved the fastest results, we are also working to reduce our impacts throughout our value chain.
Continuing to improve our environmental performance is the right thing to do, both in itself and because of the interdependency between the environment and the communities around us. It also makes business sense. We welcome recent trends in the disclosure of climate change risk and the work in the UK of the Financial Stability Board’s Task Force on Climate-related Financial Disclosure (TCFD), which aims to improve how companies report on climate change risk. Mitigating climate change through appropriate water stewardship is particularly critical for our business, and is an important element in our Water Blueprint, described below. Leadership in these issues will strengthen our business, reduce costs and mitigate risks. The measures we take will improve our efficiency and make 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.chains more robust.
Action on climateClimate change action
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 are 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,
This year, alongside improvements in greenhouse gas performance in our own operations, we confirmedcontinued our membershipwork on assessing, quantifying and identifying opportunity areas in our upstream and downstream supply chain emissions. Increasing our understanding of our indirect (Scope 3) emissions is an important step towards our target to reducing total supply chain emissions by 30%. We have also increased our understanding of the Business Alliance for Water and Climate Change.
Focus on water
Water remains oneenvironmental footprint of our most material environmental issues: as a drinks company,brands: this year, we published indicative carbon and water footprints of five global brands, which included comparisons with other beverages to contextualise our impact for consumers and other stakeholders.
132
Business review (continued)
Water: our continuing strategic focus
Water is an essential resource to our business, and its careful management is a business priority.
Water is alsocommercial priority as well as a shared resource, with complex interdependencies between different users, which means that its use, especially in water-stressed areas, can have impacts onresponsibility to the communities and the wider environment. The map on page 37 shows the numberhabitats with which we share it. Good water stewardship is a vital part of our sites located in water-stressed areas. These accountstrategy for approximately a third of our total production by volume. mitigating and adapting to climate change, since climate change and water scarcity are inextricably linked.
Our strategic aim is to reduce our overall impact, especially in water-stressed areas such asregions in Africa, India and Brazil, which this year saw severe droughts. During the year we developed specific local strategiesrequires a deep commitment to address water stewardshipcollaboration with multiple stakeholders. The map on page 36 shows where our sites are located 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 managementwater-stressed areas: these sites account for approximately a third of our total impact on water.production by volume.
125133
Business review (continued)
A year of progressWe continue to deliver our Water Blueprint, launched in all areas
This year we have made progress against all2015, which outlines our 2020 environmental targets while broadeningstrategic approach to protecting and managing our scope and ambition. New acquisitions have been fully integrated into the business, including United National Breweries (UNB)water resources globally, particularly in South Africa and Don Julio in Mexico, and are includedrelation to markets where there is significant water stress. It includes our approach to reducing water use in our independent environmental auditingown operations and associated limited assurance statement.agricultural supply chains; replenishing water in water-stressed areas; and supporting community water programmes which combined create greater collaboration and impact in water management. This strategy incorporates our global supply chain, so that we can better understand and manage our total impact on water, and also includes a commitment to global water advocacy, working in partnership with key NGOs such as WaterAid.
Our 2020 targets
Water stewardship
Reduce water use through a 50% improvement in water use efficiency.
KPI:
% improvement in litres of water used per litre of packaged product.
This year our water efficiency improved by 12.5%3.3% compared with 2015to 2016 and by 37.7% compared with40% against our 2007 baseline. InThe steady improvement reflects the continuous application of efficiency measures across our operations, this was driven by improvementswith particular gains coming from our distilleries and packaging plants in East Africa,India, where our Tusker Brewery in Nairobi improved water efficiency by 27%, and in Canada, where our Gimli distillery improved by 35%17%.
26,682 539,933 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.
Return 100% of wastewater from our operations to the environment safely.
126
Business review (continued)
KPI:
% reduction ofin wastewater polluting power measured in 1,000t BOD.BOD (‘000 tonnes).
We reduced theWastewater polluting power has improved by 10.6% versus prior year. This is mainly attributable to improvements in the treatment 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 breweriesacross sites in India, Africa and India, and reducing production (and consequently wastewater volume) from ourprogress in commissioning the bioenergy facility at Cameronbridge distilleryDistillery in Scotland. When fully operational, the bioenergy plant and auxiliary wastewater treatment plant at Cameronbridge will reduce BOD significantly, converting the organic materials to biogas for subsequent use as energy, and displacing fossil fuels.
Replenish the amount of water used in our final product in water-stressed areas.
KPI:
% of of water replenished in water stressed areas (m3).
Cumulatively 45.5% of total water used in final product in water-stressed areas was replenished. Of this, 53.6% has been replenished in India, where we run holistic programmes that bring together WASH community empowerment and water replenishment initiatives. In Kenya, Ghana, Uganda and Tanzania, there was an increased emphasis on water replenishment during this reporting year through our continued investment in WASH programmes in the communities where we source raw materials. We ensure that we replenish in catchments impacted by our sites and their supply chain that are water-stressed.
In addition, the volume of water recycled or reused in our own production was 1,169,696m3, representing 5.6% of total water withdrawals.
Equip our suppliers with tools to protect water resources in our most water-stressed locations.
KPI:
% of key suppliers engaged in water management practices.
Since joining the
134
Business review (continued)
We engage suppliers through CDP’s Supply Chain Water Programme, lastwhich we joined in 2015. This 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 40107 of our largest suppliers to disclose their water management practices through this programme.programme, with a 77% response rate. Of the 62% ofthese suppliers, that responded, 79%54% reported having awater reduction targettargets in place. InOur next step is to complete water risk mapping of the coming year we will scale up this programme to over 100sites of all our key suppliers, building on our risk assessment of our third-party operations in India. This will help us better understand the water impact of our supply chain and third-party operators.then directly support suppliers with a comprehensive water stewardship guide.
Replenish the amount of water used in our final product in water-stressed areas.
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 | |
127
Business review (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Water efficiency by region, by year (l/l)(i),(ii) | | | 2007 | | | 2015 | | | 2016 | | | 2017 | |
North America | | | | 6.67 | | | | 5.35 | | | | 5.20 | | | | 5.72 | |
Europe, Russia and Turkey | | | | 7.89 | | | | 6.73 | | | | 5.79 | | | | 5.76 | |
Africa | | | | 8.48 | | | | 5.14 | | | | 4.55 | | | | 4.32 | |
Latin America and Caribbean | | | | 34.66 | | | | 6.26 | | | | 4.58 | | | | 3.84 | |
Asia Pacific | | | | 7.02 | | | | 5.68 | | | | 5.00 | | | | 4.25 | |
Diageo (total) | | | | 8.21 | | | | 5.84 | | | | 5.13 | | | | 4.96 | |
| Wastewater polluting power by region, by year (BOD/t)(i) | | 2007 | | | 2014 | | | 2015 | | | 2016 | | | 2007 | | | 2015 | | | 2016 | | | 2017 | |
North America | | | 242 | | | | 15 | | | | 13 | | | | 101 | | | | 242 | | | | 13 | | | | 101 | | | | 276 | |
Europe, Russia and Turkey | | | 22,927 | | | | 35,851 | | | | 31,543 | | | | 19,494 | | | | 22,927 | | | | 31,543 | | | | 19,494 | | | | 17,613 | |
Africa | | | 9,970 | | | | 2,727 | | | | 670 | | | | 460 | | | | 9,970 | | | | 670 | | | | 436 | | | | 181 | |
Latin America and Caribbean | | | 11 | | | | 22 | | | | 50 | | | | 48 | | | | 11 | | | | 50 | | | | 48 | | | | 38 | |
Asia Pacific | | | 92 | | | | 489 | | | | 489 | | | | 298 | | | | 95 | | | | 489 | | | | 299 | | | | 64 | |
Corporate | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Diageo (total) | | | 33,242 | | | | 39,104 | | | | 32,765 | | | | 20,401 | | | | 33,245 | | | | 32,765 | | | | 20,378 | | | | 18,172 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total under direct control | | | 32,412 | | | | 38,867 | | | | 32,535 | | | | 20,123 | | | | 32,415 | | | | 32,535 | | | | 20,999 | | | | 17,969 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(i) | 2007 baseline data and data for each of the intervening years in the period ended 30 June 20152016 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
Reduce absolute GHGgreenhouse gas emissions from direct operations by 50%.
KPI:
% reduction in absolute GHG (kt CO2e).
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 GHGgreenhouse gas emissions in our direct operations this year by 7.7%5.6% through a range of measures and initiatives, including afurther reduction in coal use in India, energy improvements at our US Virgin Islands business, and the transition to hydro-powered grid electricity in Cameroon.India.
Diageo’s total direct and indirect carbon emissions (location/gross) this year were 845,000809,077 tonnes, (directcomprising direct emissions (scope(Scope 1) 656,000of 618,104 tonnes and indirect (Scope 2) emissions (scope 2) 189,000 tonnes).of 190,973 tonnes. In 2015,2016, total direct and indirect carbon emissions, (location/(location basis/gross), were 903,000 tonnes841,866 tonnes; (direct emissions 710,000656,524 and indirect emissions 193,000185,342 tonnes). The intensity ratio for this year was 203191 grams per litre packaged, compared to 227202 grams per litre in 2015.2016.
This year approximately 52.1%53.6% of electricity at our production sites came from low-carbon sources such as wind, hydro and nuclear, compared to 57.6%52.7% in 2015. The divestment2016, and 23.2% of the wines business and acquisition of UNB are the principal drivers of this year-on-year change.our electricity was from renewable sources only. In the United Kingdom, 99.5%100% of our electricity came from low-carbon sources.
Achieve a 30% reduction in absolute greenhouse gas emissions along the total supply chain.
128
135
Business review (continued)
Achieve a 30% reduction in absolute GHG emissions along the total supply chain.
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 2016,2017, our total supply chain carbon footprint was 3.343.2 million tonnes, a reduction of 18.2%22.1% versus the baseline and a 4% reduction since 2015. The key drivers are lower emission factors attributed7.7% versus 2016, driven predominantly by emissions reductions in distribution and logistics and direct operations. We will continue to fertiliser use and consequently agricultural raw materials; reduced emissions from our packaging materials; andimprove the reduced carbon footprint of our direct operations.
In ourmethodology to aggregate total supply chain carbon and are partnering with our suppliers and customers to reduce our footprint.
We achieved an excellent response rate, 93%, from the 155 key suppliers we engaged 145 key suppliers on measuring and managing their carbon emissions through the CDP. Of the 85% that responded to the CDP questionnaire,these suppliers, 48% reported having an emissions reduction target in place. At the same time, we have introduced a new performance review system for suppliers, alongside our own background data assurance method, which enables us to analyse and assess the Scope 3 emissions our suppliers report to CDP, and drive further reductions.
Ensure all our new refrigeration equipment in trade is HFC-free,HFC- free, with a reduction in associated GHGgreenhouse gas emissions from 2015.
KPI:
% of new equipment sourced HFC-freeHFC- free from 1 July 2015.
This year, 99%Eliminating HFCs plays a role in reducing our overall carbon footprint. 100% of the more than 17,00025,000 new fridges we purchased since July 2015 were sourced as HFC-free equipment.HFC- free. In 2016 we reported that 99% of new fridges purchased were HFC- free; we have replaced the 200 units purchased in error that were not HFC- free, to bring our total back to 100% this year.
Direct and indirect carbon emissions by weight (1,000 tonnes CO2e)1,2 (market-/net-based) 878 739 658 595593 555 190 8473 80 8679 2007 2014 2015 2016 2017Ä Direct Indirect
1(i) | 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(ii) | 2007 baseline data, and data for each of the intervening years in the period ended 30 June 2015,2016, 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 | | | 2007 | | | 2015 | | | 2016 | | | 2017 | |
North America | | | 214 | | | | 55 | | | | 53 | | | | 45 | | | | 213 | | | | 53 | | | | 45 | | | | 49 | |
Europe, Russia and Turkey | | | 406 | | | | 355 | | | | 329 | | | | 285 | | | | 405 | | | | 330 | | | | 283 | | | | 264 | |
Africa | | | 271 | | | | 235 | | | | 248 | | | | 250 | | | | 271 | | | | 243 | | | | 244 | | | | 235 | |
Latin America and Caribbean | | | 7 | | | | 15 | | | | 15 | | | | 15 | | | | 8 | | | | 15 | | | | 15 | | | | 16 | |
Asia Pacific | | | 151 | | | | 152 | | | | 81 | | | | 73 | | | | 151 | | | | 80 | | | | 72 | | | | 59 | |
Corporate | | | 19 | | | | 11 | | | | 12 | | | | 13 | | | | 20 | | | | 10 | | | | 10 | | | | 11 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Diageo (total) | | | 1,068 | | | | 823 | | | | 738 | | | | 681 | | | | 1,068 | | | | 731 | | | | 672 | | | | 634 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(i) | CO2e figures (market/net) 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. |
(ii) | 2007 baseline data, and data for each of the intervening years in the period ended 30 June 2015,2016, have been restated in accordance with the WRI/WBCSD GHG Protocol and Diageo’s environmental reporting methodologies. |
129136
Business review (continued)
Our 2020 targets
Packaging
Reduce total packaging by 15%, while increasing recycled content to 45% and making 100% of packaging recyclable.
KPI:
% of total packaging by weight.
KPI:
% of recycled content by weight.
KPI:
% of recyclable packaging by weight.
This year weWe achieved a 0.8% reduction in packaging weight vs 2015 (8.0% vsversus 2016 (8.8% versus our 2009 baseline); and a 1.0% increase in recycled content vs 2015 (40% vs 2009 baseline);versus 2016. The overall recycled content in our packaging now stands at 41%, and increased packaging recyclability by 0.1% vs 2015 (98.7% vs 2009 baseline)remains at 98.7%.
Glass makes up a significant proportion of our packaging weight, and we work with our suppliers and other partners to improve recycled content. Partnership work with a number of suppliers has increased the proportion of recycled content in glass in, for example, flint glass for Smirnoff and Johnnie Walker. Our Sustainable Packaging Commitments, refreshed in 2016, are used by brands and technical teams as well as suppliers and support our on-goingongoing programme to produce packaging with the lowestlower environmental impact. They were refreshed in 2016 to, among other things, introduce new guidanceThis year we published a supplementary guideline on plastics to support a circular economy approach.our sustainable packaging strategy and in recognition of the increasing concern about the impact of plastics on the environment.
Sustainably source all of our paper and board packaging to ensure zero net deforestation.
KPI:
% sustainably sourced paper and board packaging.
137
Business review (continued)
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.continued embedding our sustainable sourcing requirements with our suppliers. To date we have engaged close to 100over 250 suppliers to establish a baseline,with 70% responding. Collectively these suppliers have self-reported that 78% of the paper and are embeddingboard packaging they supply meets our sustainable sourcing criteria in howcriteria. Over the next year we workwill continue our programme of engagement with our suppliers.
Our 2020 targetsuppliers to increase this percentage and drive improvements.
Waste
Achieve zero waste to landfill.
KPI:
% reduction in total waste to landfill (tonnes).
We achieved a 41.4%37.9% reduction in waste to landfill compared to last year. A key driverThis performance was achieving approval fordriven by a new waysinitiative to use organic waste from our Turkish operations, particularly reusingrecover and reuse carton materials in South Africa. Meanwhile in Turkey, the re-use of by-products from wastewater treatment facilities in a number of applications was used as a source of energy in brick manufacture and using aniseed residuesin land application as fertiliser.
130
Business review (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total waste to landfill by region (tonnes)(i) | | 2007 | | | 2014 | | | 2015 | | | 2016 | | | 2007 | | | 2015 | | | 2016 | | | 2017 | |
North America | | | 40,154 | | | | 174 | | | | 123 | | | | 148 | | | | 40,142 | | | | 123 | | | | 148 | | | | 146 | |
Europe, Russia and Turkey | | | 22,464 | | | | 6,525 | | | | 7,207 | | | | 2,974 | | | | 22,442 | | | | 7,208 | | | | 2,974 | | | | 1,241 | |
Africa | | | 37,062 | | | | 12,699 | | | | 7,507 | | | | 6,080 | | | | 37,062 | | | | 7,507 | | | | 6,081 | | | | 3,937 | |
Latin America and Caribbean | | | 246 | | | | 285 | | | | 218 | | | | 155 | | | | 246 | | | | 218 | | | | 155 | | | | 390 | |
Asia Pacific | | | 8,583 | | | | 13,766 | | | | 2,984 | | | | 703 | | | | 8,583 | | | | 2,984 | | | | 922 | | | | 346 | |
Corporate | | | 591 | | | | 687 | | | | 687 | | | | 894 | | | | 604 | | | | 690 | | | | 648 | | | | 718 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Diageo (total) | | | 109,100 | | | | 34,136 | | | | 18,726 | | | | 10,954 | | | | 109,079 | | | | 18,730 | | | | 10,928 | | | | 6,778 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(i) | 2007 baseline data and data for each of the intervening years in the period ended 30 June 20142016 have been restated in accordance with Diageo’s environmental reporting methodologies. |
GOVERNANCE AND ETHICS
In a volatile political and commercial environment, governance138
Business review (continued)
Governance and ethics grow ever
Trust in business has never been more important. People wantimportant, and we know that doing business with integrity is key to trust the company behind the brands they love.
Theour performance ambition. Our global risk and compliance teamframework is designed to support our business through focus on the right behaviours and to provide rigorous oversight of our risk management, controls and compliance environment. We expect good governance and ethics programme. Asto contribute to our performance and safeguard our reputation, and we continue to invest to make our programme more engaging and efficient.
Leadership and ethical business
There is no room for complacency when it comes to doing business grows, so doeswith integrity, and the importance of ethical business conduct has been repeatedly emphasised by our investmentsenior leadership to all employees this year: each one of us holds the hard-earned reputation of Diageo and our brands in improving our productivity and performance through increasinghands. While our employees have received renewed compliance training this year, described below, we believe that our culture must encourage levels of automationintegrity that are beyond compliance, and more efficient and effective systems and processes.this is encouraged through a range of creative engagement activities.
Communications and compliance training
In July 2016 we retrained all our people on our refreshed Code of Business Conduct (our Code) through eLearning, which for the first time integrated our Annual Certification of Compliance (ACC). All employees at manager level and above certified that they fully understood what was expected of them. In July 2016, the ACC was completed by all eligible employees, a total of 9,403 people. In USL, which runs its own ACC training, 2,176 (100%) of eligible employees completed the ACC. Next year, USL will be integrated into Diageo’s global eLearning programme.
The Code eLearning training was delivered within a year of the launch of our refreshed Code to every employee in every market. It covered all areas of our Code, with specific emphasis on key topics reinforced by scenario-based animated films. Employees were able to complete it in one of 19 languages on their desktop, laptop, tablet or smartphone, with a face-to-face classroom training option delivered at sites where employees do not use computers. All new joiners are required to complete the training within 30 days.
KPI:
Number of eligible employees completing the Annual Certification of Compliance (ACC).
This year, 100% of manager level and above employees completed the ACC as part of our combined Master the Code eLearning and ACC.
Managing third parties
We continue to improve our third-party due diligence programme. As part of this we have placedimplemented a renewed emphasis on building compliance capabilityglobal tool which supports a more streamlined and automated way to assess third parties against the risk of bribery, corruption and money laundering, and to mitigate those risks across the businessbusiness.
Monitoring and are working hard to engage our employees.auditing
We launched our refreshed Code of Business Conduct (our Code) to every employee in every market in July 2015, and we have continued to engage our employees 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. We have strengthened our communication on good practice through annual market engagement events like the Pathway of Pride programme, Ethics Day in Asia Pacific and Compliance Awareness Day in Latin America.
We require all new employees to complete our Code training within 30 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 standardisedfurther rationalised and simplified both our scenario planning methodologiesassurance delivery methodology and our controls assurance framework to focus on key risk management training,areas. Deep dives into key operating areas, and made it mandatory forexpansion of our continuous monitoring tool, created opportunities to leverage our shared service centres, allowing us to deliver assurance in a wider group within the business, in order to address the increased risk of volatility. Our global standard requires all marketsmore efficient 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.effective way.
131139
Business review (continued)
ControlsReporting and automation
The principles of our strong control programme remain unchanged and this year we 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 priority. This year we introduced a globally automated system that carries out real-time sanctions due diligence, checking third parties for bribery and corruption risks.
Monitoring, auditing and reportinginvestigation
We aimwant employees to create 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. SpeakUpAlongside the independent phone lines, our www.diageospeakup.com website was refreshed in 2017 to make it simpler to report. It is now available in all our Code languages, and is also available to our business partners.
There were 752701 suspected breaches reported this year, of which 340281 (40%) were subsequently substantiated. Of the suspected breaches, 311282 were reported through SpeakUp, compared with 386311 in 2015.12016. Of the total number reported, seven related to human rights issues. All allegationshuman rights issues identified through this process feed into our wider human rights programme and inform our work in this area. Each issue is investigated with appropriate actions put in place.
All reports are taken seriously, and we follow up and investigate those that require action are investigated. Our response to proven breaches varies depending on the severity of the matter, and weaction. We monitor breaches to identify trends or common areas where further action may be required.and use any findings to inform the development of our compliance and ethics programme. This year, 9477 people exited the business as a result of breaches of our Code or policies, compared with 131 in 2015.1policies.
Our overallOverall case volumes have fallenfell by 10% since last year and7% with the number of employees exiting ourthe business as a result of breaches has fallenfalling by 28%18%. We believe this iscontinues to be a positive indication thatof the maturity of our compliance programme is maturing. Our employees better understand what constitutes a breach and what doesn’t, andthe impact of our training and enforcement is having an impact.communication with employees and third parties.
1 | 2015 numbers restated to include USL. |
835 752 701 386 340 281 131 94 77 2015 2016 2017 Reported Substantiated Code-related leavers
1 | Reported through SpeakUp – 311; 2015 – 386. |
132140
Business review (continued)
DEFINITIONS AND RECONCILIATIONS OF NON-GAAP MEASURES TODefinitions and reconciliations of non-GAAP measures to GAAP MEASURESmeasures
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.
It is not possible to reconcile the forecast tax rate before exceptional items and forecast organic operating margin improvement to the most comparable GAAP measures as it is not possible to predict, with reasonable certainty, the future impact of changes in exchange rates, acquisitions and disposals and potential exceptional items.
Volume
Volume is a non-GAAP measure that is measured on an equivalent units basis to nine-litre cases of spirits. An equivalent unit represents one nine-litre case of spirits, which is approximately 272 servings. A serving comprises 33ml of spirits, 165ml of wine, or 330ml of ready to drink or beer. Therefore, to convert volume of products other than spirits to equivalent units, the following guide has been used: beer in hectolitres, divide by 0.9; wine in nine-litre cases, divide by five; ready to drink in nine-litre cases, divide by 10; and certain pre-mixed products that are classified as ready to drink in nine-litre cases, divide by five.
141
Business review (continued)
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 titled ‘Organic movement’ in the tables below, expressed as a percentage of the amount in the row titled ‘2015‘2016 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 intergroup recharges are reported in ‘other operating expenses’.
(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 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 and 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 only receives royalties only for sales made by that operation.
133
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 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, and are excluded from the organic movement calculations.
Exceptional operating items are those that are considered to be material and are part of the operating activities of the group such as impairments of fixed assets, duty settlements, property disposals and changes in post employment plans. Charges in respect of
142
Business review (continued)
material global restructuring programs were disclosed as exceptional operating items until and including the year ended 30 June 2015.
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 separate disclosure of exceptional items and the classification between operating and non-operating further helps investors to understand the performance of the group.
Organic movement calculations for the year ended 30 June 20162017 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | North America million | | Europe, Russia and Turkey 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) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
Reclassification(ii) | | | | 0.1 | | | 0.5 | | | (0.2 | ) | | | — | | | | — | | | | — | | | | 0.4 | |
Disposals(iii) | | | (1.3 | ) | | (2.3 | ) | | (0.2 | ) | | (1.3 | ) | | (3.3 | ) | | | — | | | | (8.4 | ) | | | (0.5 | ) | | (1.2 | ) | | (0.1 | ) | | (0.4 | ) | | (13.3 | ) | | | — | | | | (15.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 adjusted | | | 46.0 | | | 41.8 | | | 26.0 | | | 20.3 | | | 103.7 | | | | — | | | | 237.8 | | |
2016 adjusted | | | | 46.6 | | | 43.2 | | | 31.0 | | | 20.2 | | | 90.3 | | | | — | | | | 231.3 | |
Acquisitions and disposals(iii) | | | 0.5 | | | | 1.3 | | | | 3.0 | | | | 0.7 | | | | — | | | | — | | | | 5.5 | | | | — | | | | — | | | | 0.3 | | | | 0.5 | | | | 7.6 | | | | — | | | | 8.4 | |
Organic movement | | | 0.5 | | | | 0.8 | | | | 2.3 | | | | (0.4 | ) | | | (0.1 | ) | | | — | | | | 3.1 | | | | 0.8 | | | | 1.2 | | | | 0.9 | | | | 0.4 | | | | (0.8 | ) | | | — | | | | 2.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 reported | | | 47.0 | | | | 43.9 | | | | 31.3 | | | | 20.6 | | | | 103.6 | | | | — | | | | 246.4 | | |
2017 reported | | | | 47.4 | | | | 44.4 | | | | 32.2 | | | | 21.1 | | | | 97.1 | | | | — | | | | 242.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Organic movement % | | | 1 | | | | 2 | | | | 9 | | | | (2 | ) | | | — | | | | n/a | | | | 1 | | | | 2 | | | | 3 | | | | 3 | | | | 2 | | | | (1 | ) | | | n/a | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
134
143
Business review (continued)
| | | | North America £ million | | Europe, Russia and Turkey £ 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
Exchange(i) | | 199 | | | (181 | ) | | (143 | ) | | (181 | ) | | (54 | ) | | | — | | | (360 | ) | | 667 | | | 312 | | | 153 | | | 158 | | | 683 | | | 5 | | | 1,978 | |
Reclassification(ii) | | | 19 | | | 37 | | | (12 | ) | | (13 | ) | | (31 | ) | | | — | | | | — | |
Disposals(iii) | | (283 | ) | | (247 | ) | | (31 | ) | | (119 | ) | | (48 | ) | | (48 | ) | | (776 | ) | | (137 | ) | | (128 | ) | | (9 | ) | | (41 | ) | | (255 | ) | | | — | | | (570 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 adjusted | | 3,825 | | | 4,255 | | | 1,694 | | | 997 | | | 4,027 | | | 32 | | | 14,830 | | |
2016 adjusted | | | 4,586 | | | 4,814 | | | 2,007 | | | 1,182 | | | 4,419 | | | 41 | | | 17,049 | |
Acquisitions and disposals(iii) | | | 117 | | | | 124 | | | | 89 | | | | 76 | | | | 8 | | | | — | | | | 414 | | | | — | | | | 3 | | | | 32 | | | | 7 | | | | 196 | | | | — | | | | 238 | |
Organic movement | | | 95 | | | | 214 | | | | 92 | | | | 5 | | | | (13 | ) | | | 4 | | | | 397 | | | | 139 | | | | 168 | | | | 93 | | | | 114 | | | | 308 | | | | 5 | | | | 827 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 reported | | | 4,037 | | | | 4,593 | | | | 1,875 | | | | 1,078 | | | | 4,022 | | | | 36 | | | | 15,641 | | |
2017 reported | | | | 4,725 | | | | 4,985 | | | | 2,132 | | | | 1,303 | | | | 4,923 | | | | 46 | | | | 18,114 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Organic movement % | | | 2 | | | | 5 | | | | 5 | | | | 1 | | | | — | | | | 13 | | | | 3 | | | | 3 | | | | 3 | | | | 5 | | | | 10 | | | | 7 | | | | 12 | | | | 5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
Exchange(i) | | 172 | | | (87 | ) | | (102 | ) | | (134 | ) | | (21 | ) | | | — | | | (172 | ) | | 588 | | | 211 | | | 78 | | | 131 | | | 346 | | | 5 | | | 1,359 | |
Reclassification(ii) | | | 19 | | | 37 | | | (13 | ) | | (13 | ) | | (30 | ) | | | — | | | | — | |
Disposals(iii) | | (272 | ) | | (184 | ) | | (18 | ) | | (98 | ) | | (35 | ) | | (48 | ) | | (655 | ) | | (132 | ) | | (99 | ) | | (6 | ) | | (34 | ) | | (91 | ) | | | — | | | (362 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 adjusted | | 3,355 | | | 2,346 | | | 1,295 | | | 801 | | | 2,157 | | | 32 | | | 9,986 | | |
2016 adjusted | | | 4,040 | | | 2,693 | | | 1,460 | | | 947 | | | 2,301 | | | 41 | | | 11,482 | |
Acquisitions and disposals(iii) | | | 113 | | | | 96 | | | | 72 | | | | 57 | | | | 7 | | | | — | | | | 345 | | | | — | | | | 3 | | | | 21 | | | | 8 | | | | 48 | | | | — | | | | 80 | |
Organic movement | | | 97 | | | | 102 | | | | 34 | | | | 5 | | | | 34 | | | | 4 | | | | 276 | | | | 121 | | | | 128 | | | | 75 | | | | 89 | | | | 70 | | | | 5 | | | | 488 | |
Reclassification(ii) | | | — | | | | — | | | | — | | | | — | | | | (122 | ) | | | — | | | | (122 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 reported | | | 3,565 | | | | 2,544 | | | | 1,401 | | | | 863 | | | | 2,076 | | | | 36 | | | | 10,485 | | |
2017 reported | | | | 4,161 | | | | 2,824 | | | | 1,556 | | | | 1,044 | | | | 2,419 | | | | 46 | | | | 12,050 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Organic movement % | | | 3 | | | | 4 | | | | 3 | | | | 1 | | | | 2 | | | | 13 | | | | 3 | | | | 3 | | | | 5 | | | | 5 | | | | 9 | | | | 3 | | | | 12 | | | | 4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Marketing | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 reported | | 542 | | | 388 | | | 147 | | | 194 | | | 344 | | | 14 | | | 1,629 | | |
2016 reported | | | 541 | | | 404 | | | 143 | | | 167 | | | 301 | | | 6 | | | 1,562 | |
Exchange(i) | | 23 | | | 1 | | | (11 | ) | | (26 | ) | | | — | | | | — | | | (13 | ) | | 86 | | | 22 | | | 13 | | | 22 | | | 47 | | | 3 | | | 193 | |
Reclassification(ii) | | | | — | | | 5 | | | (2 | ) | | 1 | | | (4 | ) | | | — | | | | — | |
Disposals(iii) | | (22 | ) | | (7 | ) | | | — | | | (11 | ) | | (1 | ) | | (2 | ) | | (43 | ) | | (9 | ) | | (2 | ) | | | — | | | (4 | ) | | | — | | | | — | | | (15 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 adjusted | | 543 | | | 382 | | | 136 | | | 157 | | | 343 | | | 12 | | | 1,573 | | |
2016 adjusted | | | 618 | | | 429 | | | 154 | | | 186 | | | 344 | | | 9 | | | 1,740 | |
Acquisitions and disposals(iii) | | | 8 | | | | 2 | | | | 6 | | | | 10 | | | | — | | | | — | | | | 26 | | | | — | | | | — | | | | 5 | | | | 2 | | | | — | | | | — | | | | 7 | |
Organic movement | | | (10 | ) | | | 20 | | | | 1 | | | | — | | | | (42 | ) | | | (6 | ) | | | (37 | ) | | | 24 | | | | 14 | | | | 7 | | | | 7 | | | | (1 | ) | | | — | | | | 51 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 reported | | | 541 | | | | 404 | | | | 143 | | | | 167 | | | | 301 | | | | 6 | | | | 1,562 | | |
2017 reported | | | | 642 | | | | 443 | | | | 166 | | | | 195 | | | | 343 | | | | 9 | | | | 1,798 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Organic movement % | | | (2 | ) | | | 5 | | | | 1 | | | | — | | | | (12 | ) | | | (50 | ) | | | (2 | ) | | | 4 | | | | 3 | | | | 5 | | | | 4 | | | | — | | | | — | | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit before exceptional items | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 reported | | 1,448 | | | 804 | | | 318 | | | 263 | | | 356 | | | (123 | ) | | 3,066 | | |
2016 reported | | | 1,551 | | | 801 | | | 212 | | | 199 | | | 395 | | | (150 | ) | | 3,008 | |
Exchange(i) | | 77 | | | (24 | ) | | (67 | ) | | (57 | ) | | (5 | ) | | (7 | ) | | (83 | ) | | 270 | | | 64 | | | 7 | | | 35 | | | 85 | | | (15 | ) | | 446 | |
Reclassification(ii) | | | 15 | | | 14 | | | (7 | ) | | (11 | ) | | (11 | ) | | | — | | | | — | |
Acquisitions and disposals(iii) | | (55 | ) | | (34 | ) | | (5 | ) | | (17 | ) | | (1 | ) | | (2 | ) | | (114 | ) | | (13 | ) | | (10 | ) | | (3 | ) | | (5 | ) | | (1 | ) | | 1 | | | (31 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 adjusted | | 1,470 | | | 746 | | | 246 | | | 189 | | | 350 | | | (132 | ) | | 2,869 | | |
2016 adjusted | | | 1,823 | | | 869 | | | 209 | | | 218 | | | 468 | | | (164 | ) | | 3,423 | |
Acquisitions and disposals(iii) | | | 25 | | | | 10 | | | | (7 | ) | | | 12 | | | | 1 | | | | (1 | ) | | | 40 | | | | — | | | | — | | | | (11 | ) | | | — | | | | — | | | | (1 | ) | | | (12 | ) |
Organic movement | | | 56 | | | | 45 | | | | (27 | ) | | | (2 | ) | | | 44 | | | | (17 | ) | | | 99 | | | | 76 | | | | 67 | | | | 20 | | | | 32 | | | | 19 | | | | (24 | ) | | | 190 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 reported | | | 1,551 | | | | 801 | | | | 212 | | | | 199 | | | | 395 | | | | (150 | ) | | | 3,008 | | |
2017 reported | | | | 1,899 | | | | 936 | | | | 218 | | | | 250 | | | | 487 | | | | (189 | ) | | | 3,601 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Organic movement % | | | 4 | | | | 6 | | | | (11 | ) | | | (1 | ) | | | 13 | | | | (13 | ) | | | 3 | | | | 4 | | | | 8 | | | | 10 | | | | 15 | | | | 4 | | | | (15 | ) | | | 6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Organic operating margin % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2017 | | | | 45.6 | % | | | 33.2 | % | | | 14.9 | % | | | 24.1 | % | | | 20.5 | % | | | n/a | | | | 30.2 | % |
2016 | | | 44.2 | % | | | 32.3 | % | | | 16.5 | % | | | 23.2 | % | | | 18.0 | % | | | n/a | | | | 28.9 | % | | 45.1 | % | | 32.3 | % | | 14.3 | % | | 23.0 | % | | 20.3 | % | | n/a | | | 29.8 | % |
2015 | | 43.8 | % | | 31.8 | % | | 19.0 | % | | 23.6 | % | | 16.2 | % | | n/a | | | 28.7 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Margin improvement/(decline) (bps) | | | 39 | | | | 51 | | | | (252 | ) | | | (39 | ) | | | 176 | | | | n/a | | | | 19 | | |
Margin improvement (bps) | | | | 51 | | | | 91 | | | | 60 | | | | 111 | | | | 20 | | | | n/a | | | | 37 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
135144
Business review (continued)
(1) | For the reconciliation of sales to net sales and operating profit before exceptional items to operating profit see page 5456 and page 207.214. |
(2) | Percentages and margin improvement/(decline)improvement are calculated on rounded figures. |
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,US dollar, the South African rand,euro, the Venezuelan bolivar, the Brazilian realKenyan schilling and the Turkish lira,Indian rupee, partially offset by the US dollar.Nigerian naira. |
(ii) | FollowingReclassification comprises (a) the results of Lebanon, other Middle Eastern and North African countries which were formerly reported in Asia Pacific and Africa geographical regions now being included in Europe, Russia and Turkey and (b) the results of the Travel Retail operations have been reallocated to the geographical regions to better reflect the region in which the sale to the customer is made. In addition following a review of the third party production arrangementsgroup’s reporting of volume an adjustment was made to include Malaysia and Singapore contract brew volume in India it was determined to be more appropriate to ensure consistent reportingthe reported beer figures which increased volume in Asia Pacific 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 £1220.3 million with a corresponding decrease in cost of sales. There was no impact on gross or operating profit.equivalent cases (2016 – 0.4 million equivalent cases). |
(iii) | In the year ended 30 June 20162017 the acquisitions and disposals that affected volume, sales, net sales, marketing and operating profit were as follows: |
| | | | | | | | | | | | | | | | | | | | |
| | Volume equ. units million | | | Sales £ million | | | Net sales £ million | | | Marketing £ million | | | Operating profit £ million | |
Year ended 30 June 2016 | | | | | | | | | | | | | | | | | | | | |
Acquisitions | | | | | | | | | | | | | | | | | | | | |
Integration costs | | | — | | | | — | | | | — | | | | — | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | |
| | | — | | | | — | | | | — | | | | — | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | |
Disposals | | | | | | | | | | | | | | | | | | | | |
North America Wines | | | (0.3 | ) | | | (112 | ) | | | (110 | ) | | | (8 | ) | | | (8 | ) |
Percy Fox | | | (0.8 | ) | | | (84 | ) | | | (67 | ) | | | (1 | ) | | | (5 | ) |
Grand Marnier | | | (0.2 | ) | | | (31 | ) | | | (24 | ) | | | — | | | | (4 | ) |
Bouvet | | | — | | | | (8 | ) | | | (8 | ) | | | — | | | | (1 | ) |
Argentina | | | (0.3 | ) | | | (18 | ) | | | (15 | ) | | | (2 | ) | | | (2 | ) |
South Africa - ready to drink and beer | | | (0.1 | ) | | | (7 | ) | | | (5 | ) | | | — | | | | (2 | ) |
Jamaica and Red Stripe | | | (0.5 | ) | | | (59 | ) | | | (47 | ) | | | (4 | ) | | | (8 | ) |
Bushmills | | | — | | | | (3 | ) | | | (2 | ) | | | — | | | | (1 | ) |
USL franchise | | | (13.3 | ) | | | (246 | ) | | | (82 | ) | | | — | | | | — | |
CGI (Kenya) | | | — | | | | (2 | ) | | | (2 | ) | | | — | | | | (1 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | (15.5 | ) | | | (570 | ) | | | (362 | ) | | | (15 | ) | | | (32 | ) |
| | | | | | | | | | | | | | | | | | | | |
Acquisitions and disposals | | | (15.5 | ) | | | (570 | ) | | | (362 | ) | | | (15 | ) | | | (31 | ) |
| | | | | | | | | | | | | | | | | | | | |
Year ended 30 June 2017 | | | | | | | | | | | | | | | | | | | | |
Acquisitions | | | | | | | | | | | | | | | | | | | | |
South Africa - ready to drink and beer | | | 0.3 | | | | 32 | | | | 21 | | | | 5 | | | | (11 | ) |
Argentina | | | 0.3 | | | | 4 | | | | 5 | | | | — | | | | — | |
Transaction costs | | | — | | | | — | | | | — | | | | — | | | | (1 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | 0.6 | | | | 36 | | | | 26 | | | | 5 | | | | (12 | ) |
| | | | | | | | | | | | | | | | | | | | |
Disposals | | | | | | | | | | | | | | | | | | | | |
Argentina | | | 0.2 | | | | 3 | | | | 3 | | | | 2 | | | | — | |
USL franchise | | | 7.6 | | | | 196 | | | | 48 | | | | — | | | | — | |
Yellow tail | | | — | | | | 3 | | | | 3 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | 7.8 | | | | 202 | | | | 54 | | | | 2 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Acquisitions and disposals | | | 8.4 | | | | 238 | | | | 80 | | | | 7 | | | | (12 | ) |
| | | | | | | | | | | | | | | | | | | | |
136
145
Business review (continued)
| | | | | | | | | | | | | | | | | | | | |
| | Volume equ. units million | | | Sales £ million | | | Net sales £ million | | | Marketing £ million | | | Operating profit £ million | |
Year ended 30 June 2015 | | | | | | | | | | | | | | | | | | | | |
Acquisitions | | | | | | | | | | | | | | | | | | | | |
Integration costs | | | — | | | | — | | | | — | | | | — | | | | 7 | |
| | | | | | | | | | | | | | | | | | | | |
| | | — | | | | — | | | | — | | | | — | | | | 7 | |
| | | | | | | | | | | | | | | | | | | | |
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 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | (8.4 | ) | | | (776 | ) | | | (655 | ) | | | (43 | ) | | | (121 | ) |
| | | | | | | | | | | | | | | | | | | | |
Acquisitions and disposals | | | (8.4 | ) | | | (776 | ) | | | (655 | ) | | | (43 | ) | | | (114 | ) |
| | | | | | | | | | | | | | | | | | | | |
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 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | 3.2 | | | | 114 | | | | 90 | | | | 12 | | | | 15 | |
| | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
| | | 2.3 | | | | 300 | | | | 255 | | | | 14 | | | | 25 | |
| | | | | | | | | | | | | | | | | | | | |
Acquisitions and disposals | | | 5.5 | | | | 414 | | | | 345 | | | | 26 | | | | 40 | |
| | | | | | | | | | | | | | | | | | | | |
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 yearsyear ended 30 June 20162017 and 30 June 20152016 are set out in the table below.
| | | | | | | | |
| | 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 | ) |
| | | | | | | | |
| | | 2,242 | | | | 2,225 | |
| | | | | | | | |
Weighted average number of shares | | | | | | | | |
Shares in issue excluding own shares (million) | | | 2,508 | | | | 2,505 | |
Dilutive potential ordinary shares (million) | | | 10 | | | | 12 | |
| | | | | | | | |
| | | 2,518 | | | | 2,517 | |
| | | | | | | | |
Basic earnings per share before exceptional items (pence) | | | 89.4 | | | | 88.8 | |
| | | | | | | | |
Diluted earnings per share before exceptional items (pence) | | | 89.0 | | | | 88.4 | |
| | | | | | | | |
| | | | | | | | |
| | 2017 £ million | | | 2016 £ million | |
Profit attributable to equity shareholders of the parent company – continuing operations | | | 2,717 | | | | 2,244 | |
Exceptional operating items attributable to equity shareholders of the parent company | | | 28 | | | | 171 | |
Non-operating items attributable to equity shareholders of the parent company | | | (20 | ) | | | (115 | ) |
Tax in respect of exceptional operating and non-operating items attributable to equity shareholders of the parent company | | | 1 | | | | (58 | ) |
| | | | | | | | |
| | | 2,726 | | | | 2,242 | |
| | | | | | | | |
| | |
Weighted average number of shares | | million | | | million | |
Shares in issue excluding own shares | | | 2,512 | | | | 2,508 | |
Dilutive potential ordinary shares | | | 11 | | | | 10 | |
| | | | | | | | |
| | | 2,523 | | | | 2,518 | |
| | | | | | | | |
| | |
| | pence | | | pence | |
Basic earnings per share before exceptional items | | | 108.5 | | | | 89.4 | |
| | | | | | | | |
Diluted earnings per share before exceptional items | | | 108.0 | | | | 89.0 | |
| | | | | | | | |
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 20162017 and 30 June 20152016 are set out in the table below:below.
| | | | | | | | | | | | | | | | |
| | 2016 £ million | | 2015 £ million | | | 2017 £ million | | 2016 £ million | |
Net cash from operating activities | | | 2,548 | | | 2,551 | | | | 3,132 | | | 2,548 | |
Disposal of property, plant and equipment and computer software | | | 57 | | | 52 | | | | 46 | | | 57 | |
Purchase of property, plant and equipment and computer software | | | (506 | ) | | (638 | ) | | | (518 | ) | | (506 | ) |
Movements in loans and other investments | | | (2 | ) | | (2 | ) | | | 3 | | | (2 | ) |
| | | | | | | | | | | | |
Free cash flow | | | 2,097 | | | 1,963 | | | | 2,663 | | | 2,097 | |
| | | | | | | | | | | | |
138146
Business review (continued)
Operating cash conversion
Operating cash conversion is calculated by dividing cash generated from operations excluding cash inflows/inflows and 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 raterates for the respective year in line with management reporting and is expressed as a percentage.
Operating cash conversion for the years ended 30 June 20162017 and 30 June 20152016 were as follows:
| | | | | | | | | | | | | | | | |
| | 2016 £ million | | 2015 £ million | | | 2017 £ million | | 2016 £ million | |
Operating profit | | | 2,841 | | | 2,797 | | | | 3,559 | | | 2,841 | |
Exceptional operating items | | | 167 | | | 269 | | | | 42 | | | 167 | |
Depreciation and amortisation(i) | | | 355 | | | 371 | | | | 361 | | | 355 | |
Retranslation to budgeted exchange rates | | | 18 | | | 146 | | | | (582 | ) | | 18 | |
| | | | | | | | | | | | |
| | | 3,381 | | | 3,583 | | | | 3,380 | | | 3,381 | |
| | | | | | | | | | | | |
Cash generated from operations | | | 3,360 | | | 3,456 | | | | 4,177 | | | 3,360 | |
Cash payments in respect of exceptional items | | | 80 | | | 221 | | |
Cash payments in respect of exceptional items(ii) | | | | 45 | | | 80 | |
Post employment payments less amounts included in operating profit(i) | | | 58 | | | 67 | | | | 111 | | | 58 | |
Net movement in maturing inventories | | | 144 | | | 247 | | |
Net movement in maturing inventories(iii) | | | | 138 | | | 144 | |
Dividends received from associates | | | (173 | ) | | (183 | ) | | | (223 | ) | | (173 | ) |
Other items(i) | | | 15 | | | (21 | ) | |
Other items(i),(iv) | | | | (25 | ) | | 15 | |
Retranslation to budgeted exchange rates | | | 75 | | | 148 | | | | (614 | ) | | 75 | |
| | | | | | | | | | | | |
| | | 3,559 | | | 3,935 | | | | 3,609 | | | 3,559 | |
| | | | | | | | | | | | |
Operating cash conversion | | | 105.3 | % | | 109.8 | % | | | 106.8 | % | | 105.3 | % |
| | | | | | | | | | | | |
(i) | excludingExcluding exceptional items. |
(ii) | Exceptional cash payments for exceptional restructuring and for discontinued operations were £14 million (2016 – £52 million) and £31 million (2016 – £nil), respectively. In addition, the year ended 30 June 2016 included £28 million of payments in respect of disengagement agreements relating to United Spirits Limited. |
(iii) | Excluding non-cash movements such as exchange and impact of acquisitions and disposals of £35 million (2016 – £(83) million). |
(iv) | Excluding payment of £31 million in respect of discontinued operations in the year ended 30 June 2017 (2016 – £nil). |
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 thecalculate average total invested capital.
139
Business review (continued)
Calculations for the return on average total invested capital for the years ended 30 June 20162017 and 30 June 20152016 are set out in the table below.
| | | | | | | | |
| | 2016 £ million | | | 2015 £ million | |
Operating profit | | | 2,841 | | | | 2,797 | |
Exceptional operating items | | | 167 | | | | 269 | |
Profit before exceptional operating items attributable to non-controlling interests | | | (108 | ) | | | (87 | ) |
Share of after tax results of associates and joint ventures | | | 221 | | | | 175 | |
Tax at the tax rate before exceptional items of 19.0% (2015 – 18.3%) | | | (593 | ) | | | (577 | ) |
| | | | | | | | |
| | | 2,528 | | | | 2,577 | |
| | | | | | | | |
Average net assets (excluding net post employment liabilities) | | | 10,202 | | | | 8,910 | |
Average non-controlling interest | | | (1,558 | ) | | | (1,240 | ) |
Average net borrowings | | | 9,130 | | | | 9,682 | |
Average integration and restructuring costs (net of tax) | | | 1,639 | | | | 1,604 | |
Goodwill at 1 July 2004 | | | 1,562 | | | | 1,562 | |
Adjustment in respect of acquisition of USL(i) | | | — | | | | 493 | |
| | | | | | | | |
Average total invested capital | | | 20,975 | | | | 21,011 | |
| | | | | | | | |
Return on average total invested capital | | | 12.1 | % | | | 12.3 | % |
| | | | | | | | |
(i) | For the year ended 30 June 2015 average net assets were adjusted for the inclusion of USL as though it was owned throughout the year as it became a subsidiary on 2 July 2014. |
140147
Business review (continued)
| | | | | | | | |
| | 2017 £ million | | | 2016 £ million | |
Operating profit | | | 3,559 | | | | 2,841 | |
Exceptional operating items | | | 42 | | | | 167 | |
Profit before exceptional operating items attributable to non-controlling interests | | | (119 | ) | | | (108 | ) |
Share of after tax results of associates and joint ventures | | | 309 | | | | 221 | |
Tax at the tax rate before exceptional items of 20.6% (2016 – 19.0%) | | | (781 | ) | | | (593 | ) |
| | | | | | | | |
| | | 3,010 | | | | 2,528 | |
| | | | | | | | |
Average net assets (excluding net post employment liabilities) | | | 11,828 | | | | 10,202 | |
Average non-controlling interests | | | (1,715 | ) | | | (1,558 | ) |
Average net borrowings | | | 8,488 | | | | 9,130 | |
Average integration and restructuring costs (net of tax) | | | 1,639 | | | | 1,639 | |
Goodwill at 1 July 2004 | | | 1,562 | | | | 1,562 | |
| | | | | | | | |
Average total invested capital | | | 21,802 | | | | 20,975 | |
| | | | | | | | |
Return on average total invested capital | | | 13.8 | % | | | 12.1 | % |
| | | | | | | | |
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 operations before exceptional and after exceptional items for the yearyears ended 30 June 20152017 and 30 June 2016 are set out in the table below.
| | | | | | | | | | | | | | | | |
| | 2016 £ million | | 2015 £ million | | | 2017 £ million | | 2016 £ million | |
Tax before exceptional items (a) | | | 552 | | | 517 | | | | 736 | | | 552 | |
Tax in respect of exceptional items | | | (56 | ) | | (51 | ) | | | (4 | ) | | (56 | ) |
| | | | | | | | | | | | |
Taxation on profit from operations (b) | | | 496 | | | 466 | | |
Taxation on profit from continuing operations (b) | | | | 732 | | | 496 | |
| | | | | | | | | | | | |
Profit from operations before taxation and exceptional items (c) | | | 2,902 | | | 2,829 | | |
Profit from continuing operations before taxation and exceptional items (c) | | | | 3,581 | | | 2,902 | |
Non-operating items | | | 123 | | | 373 | | | | 20 | | | 123 | |
Exceptional operating items | | | (167 | ) | | (269 | ) | | | (42 | ) | | (167 | ) |
| | | | | | | | | | | | |
Profit before taxation (d) | | | 2,858 | | | 2,933 | | | | 3,559 | | | 2,858 | |
| | | | | | | | | | | | |
Tax rate before exceptional items (a/c) | | | 19.0 | % | | 18.3 | % | | | 20.6 | % | | 19.0 | % |
| | | | | | | | | | | | |
Tax rate after exceptional items (b/d) | | | 17.4 | % | | 15.9 | % | |
Tax rate from continuing operations after exceptional items (b/d) | | | | 20.6 | % | | 17.4 | % |
| | | | | | | | | | | | |
Other definitions
Volume shareis a brand’s retail volume expressed as a percentage of the retail volume of all brands in its segment.
Value share is a brand’s retail sales value expressed as a percentage of the retail sales value of all brands in its segment. Unless otherwise stated, share refers to value share.
Price/mixis the number of percentage points by which the organic movement in net sales differs to the organic movement in volume. The difference arises because of changes in the composition of sales between higher and lower priced variants/markets or as price changes are implemented.
DepletionShipments iscomprise the volume of products made to Diageo’s immediate (first tier) customers. Depletions are the estimated volume of the first onward sales frommade by our direct customers,immediate customers. Both shipments and depletions are measured on an equivalent units basis.
148
Business review (continued)
References toemerging markets includeinclude Russia, Eastern Europe, Turkey, Africa, Latin America and Caribbean, and Asia Pacific (excluding Australia, Korea and Japan).
References toreserve brands include, but not limited to, 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; Roe & Co; The Singleton, Cardhu, Talisker, Lagavulin and other malt brands; Buchanan’s Special Reserve, Buchanan’s Red Seal; Bulleit Bourbon, Bulleit Rye; Tanqueray No. TEN, Tanqueray 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 giantsinclude the following brand families: Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Tanqueray and Guinness.Local starsspirits 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,Black & White, Horse,Shui Jing Fang, Windsor and Ypióca. Global giants and local stars exclude ready to drink.drink and beer except Guinness. References to Shui Jing Fang represent total Chinese white spirits of which Shui Jing Fang is the predominant brand.
References 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 tobeerincludecider and some non-alcoholic products such as Malta Guinness.
References to the group include Diageo plc and its consolidated subsidiaries.
141149
Business review (continued)
Reconciliations of non-GAAP measures to GAAP measures — 2015– 2016 compared with 20142015
Organic movements
Organic movement calculations for the year ended 30 June 20152016 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | North America million | | Europe, Russia and Turkey 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 | | 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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 disposals(iii) | | | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Organic movement % | | | (3 | ) | | | — | | | | 7 | | | | (7 | ) | | | (3 | ) | | | n/a | | | | (1 | ) | | | 1 | | | | 2 | | | | 9 | | | | (2 | ) | | | — | | | | n/a | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | North America £ million | | Europe, Russia and Turkey £ 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 | | 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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Organic movement % | | | (2 | ) | | | 2 | | | | 8 | | | | 1 | | | | 1 | | | | 3 | | | | 1 | | | | 2 | | | | 5 | | | | 5 | | | | 1 | | | | — | | | | 13 | | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Organic movement % | | | (1 | ) | | | — | | | | 6 | | | | (1 | ) | | | (2 | ) | | | 3 | | | | — | | | | 3 | | | | 4 | | | | 3 | | | | 1 | | | | 2 | | | | 13 | | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
142150
Business review (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | North America £ million | | Europe, Russia and Turkey £ 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2014 reported | | | 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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 reported | | | 542 | | | | 388 | | | | 147 | | | | 194 | | | | 344 | | | | 14 | | | | 1,629 | | |
2016 reported | | | | 541 | | | | 404 | | | | 143 | | | | 167 | | | | 301 | | | | 6 | | | | 1,562 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Organic movement % | | | (4 | ) | | | 2 | | | | 4 | | | | 6 | | | | (8 | ) | | | 175 | | | | (1 | ) | | | (2 | ) | | | 5 | | | | 1 | | | | — | | | | (12 | ) | | | (50 | ) | | | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit before exceptional items | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2014 reported | | | 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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 reported | | | 1,448 | | | | 804 | | | | 318 | | | | 263 | | | | 356 | | | | (123 | ) | | | 3,066 | | |
2016 reported | | | | 1,551 | | | | 801 | | | | 212 | | | | 199 | | | | 395 | | | | (150 | ) | | | 3,008 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Organic movement % | | | (2 | ) | | | 3 | | | | 10 | | | | (3 | ) | | | 7 | | | | (2 | ) | | | 1 | | | | 4 | | | | 6 | | | | (11 | ) | | | (1 | ) | | | 13 | | | | (13 | ) | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Margin improvement (bps) | | | (47 | ) | | | 75 | | | | 75 | | | | (41 | ) | | | 209 | | | | n/a | | | | 24 | | |
Margin improvement/(decline) (bps) | | | | 39 | | | | 51 | | | | (252 | ) | | | (39 | ) | | | 176 | | | | n/a | | | | 19 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | For the reconciliation of sales to net sales and operating profit before exceptional items to operating profit see page 8789 and pages 208-209.214-215. |
(2) | Percentages and margin improvementimprovement/(decline) are calculated on rounded figures. |
Notes: Information relating to the organic movement calculations
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 euro,Brazilian real and the Russian rouble andTurkish lira, partially offset by the US dollar. |
(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 20152016 the acquisitions and disposals that affected volume, sales, net sales, marketing and operating profit were as follows: |
143151
Business review (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Volume equ. units million | | Sales £ million | | Net sales £ million | | Marketing £ million | | Operating profit £ million | | | Volume equ. units million | | Sales £ million | | Net sales £ million | | Marketing £ million | | Operating profit £ million | |
Year ended 30 June 2014 | | | | | | | | | | | |
Year ended 30 June 2015 | | | | | | | | | | | |
Acquisitions | | | | | | | | | | | | | | | | | | | | |
Transaction costs | | | — | | | | — | | | | — | | | | — | | | 12 | | |
Integration costs | | | — | | | | — | | | | — | | | | — | | | 12 | | | | — | | | | — | | | | — | | | | — | | | 7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | — | | | | — | | | | — | | | | — | | | 24 | | | | — | | | | — | | | | — | | | | — | | | 7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Disposals | | | | | | | | | | | | | | | | | | | | |
Jose Cuervo | | | (0.7 | ) | | (54 | ) | | (44 | ) | | | — | | | 9 | | |
North America Wines | | | | (0.8 | ) | | (229 | ) | | (221 | ) | | (15 | ) | | (39 | ) |
Percy Fox | | | | (1.4 | ) | | (157 | ) | | (122 | ) | | (3 | ) | | (19 | ) |
Grand Marnier | | | | (0.2 | ) | | (26 | ) | | (20 | ) | | | — | | | (2 | ) |
Bouvet | | | | (0.1 | ) | | (16 | ) | | (16 | ) | | (1 | ) | | (2 | ) |
Argentina | | | | (0.6 | ) | | (38 | ) | | (33 | ) | | (3 | ) | | (4 | ) |
South Africa - ready to drink and beer | | | | (0.2 | ) | | (27 | ) | | (15 | ) | | | — | | | (3 | ) |
Jamaica and Red Stripe | | | | (1.1 | ) | | (133 | ) | | (107 | ) | | (11 | ) | | (23 | ) |
Bushmills | | | (0.8 | ) | | (79 | ) | | (60 | ) | | (10 | ) | | (28 | ) | | | (0.7 | ) | | (65 | ) | | (50 | ) | | (8 | ) | | (23 | ) |
USL franchise | | | | (3.2 | ) | | (29 | ) | | (17 | ) | | | — | | | | — | |
Gleneagles | | | — | | | (45 | ) | | (45 | ) | | (2 | ) | | (2 | ) | | | — | | | (48 | ) | | (48 | ) | | (2 | ) | | (4 | ) |
Other disposals | | | (0.1 | ) | | (9 | ) | | (6 | ) | | | — | | | (1 | ) | |
Other | | | | (0.1 | ) | | (8 | ) | | (6 | ) | | | — | | | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (1.6 | ) | | (187 | ) | | (155 | ) | | (12 | ) | | (22 | ) | | | (8.4 | ) | | (776 | ) | | (655 | ) | | (43 | ) | | (121 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Acquisitions and disposals | | | (1.6 | ) | | (187 | ) | | (155 | ) | | (12 | ) | | 2 | | | | (8.4 | ) | | (776 | ) | | (655 | ) | | (43 | ) | | (114 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year ended 30 June 2015 | | | | | | | | | | | |
Year ended 30 June 2016 | | | | | | | | | | | |
Acquisitions | | | | | | | | | | | | | | | | | | | | |
United Spirits Limited | | | 92.7 | | | 2,356 | | | 921 | | | 65 | | | 53 | | |
DeLeón | | | — | | | 5 | | | 5 | | | 8 | | | (8 | ) | |
Don Julio | | | 0.3 | | | 28 | | | 23 | | | 3 | | | 6 | | | | 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 | ) | | | — | | | | — | | | | — | | | | — | | | (1 | ) |
Integration costs | | | — | | | | — | | | | — | | | | — | | | (7 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 93.0 | | | 2,389 | | | 949 | | | 76 | | | 43 | | | | 3.2 | | | 114 | | | 90 | | | 12 | | | 15 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Disposals | | | | | | | | | | | | | | | | | | | | |
North America Wines | | | | 0.3 | | | 97 | | | 94 | | | 7 | | | 7 | |
Percy Fox | | | | 0.8 | | | 84 | | | 67 | | | 1 | | | 5 | |
Grand Marnier | | | | 0.3 | | | 28 | | | 22 | | | | — | | | 3 | |
Bouvet | | | | — | | | 7 | | | 7 | | | | — | | | 1 | |
Argentina | | | | 0.3 | | | 19 | | | 16 | | | 2 | | | | — | |
South Africa - ready to drink and beer | | | | 0.1 | | | 9 | | | 4 | | | | — | | | (1 | ) |
Jamaica and Red Stripe | | | | 0.5 | | | 52 | | | 41 | | | 4 | | | 7 | |
Bushmills | | | 0.7 | | | 66 | | | 50 | | | 8 | | | 22 | | | | — | | | 3 | | | 2 | | | | — | | | 1 | |
Gleneagles | | | — | | | 48 | | | 48 | | | 2 | | | 4 | | |
Other disposals | | | — | | | 5 | | | 4 | | | | — | | | | — | | |
Other | | | | — | | | 1 | | | 2 | | | | — | | | 2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 0.7 | | | 119 | | | 102 | | | 10 | | | 26 | | | | 2.3 | | | 300 | | | 255 | | | 14 | | | 25 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Acquisitions and disposals | | | 93.7 | | | | 2,508 | | | | 1,051 | | | | 86 | | | | 69 | | | | 5.5 | | | 414 | | | 345 | | | 26 | | | 40 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
144152
Business review (continued)
Earnings per share before exceptional items
Earnings per share before exceptional items for the years ended 30 June 20152016 and 30 June 20142015 were as follows:
| | | | | | | | |
| | 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 | |
| | | | | | | | |
| | | | | | | | |
| | 2016 £ million | | | 2015 £ million | |
Profit attributable to equity shareholders of the parent company - continuing operations | | | 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 | ) |
| | | | | | | | |
| | | 2,242 | | | | 2,225 | |
| | | | | | | | |
Weighted average number of shares in issue (million) | | | | | | | | |
Shares in issue excluding own shares (million) | | | 2,508 | | | | 2,505 | |
Dilutive potential ordinary shares (million) | | | 10 | | | | 12 | |
| | | | | | | | |
| | | 2,518 | | | | 2,517 | |
| | | | | | | | |
Basic earning per share before exceptional items (pence) | | | 89.4 | | | | 88.8 | |
| | | | | | | | |
Diluted earnings per share before exceptional items (pence) | | | 89.0 | | | | 88.4 | |
| | | | | | | | |
Free cash flow
Free cash flow reconciliation for the years ended 30 June 20152016 and 30 June 20142015 were as follows:
| | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | |
Return on average total invested capital
Calculations for the return on average total invested capital for the years ended 30 June 20152016 and 30 June 20142015 were as follows:
| | | | | | | | | | | | |
| | 2015 £ million | | 2014 £ 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 | ) | | | (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% (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 interets | | | | (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 | | |
Average intergration and restructuring costs (net of tax) | | | | 1,639 | | | 1,604 | |
Goodwill at 1 July 2004 | | | 1,562 | | | 1,562 | | | | 1,562 | | | 1,562 | |
Adjusted in respect of acquisition of USL(i) | | | 493 | | | 114 | | | | — | | | 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) | For the yearsyear 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. |
145153
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 20152016 and 30 June 20142015 were calculated as follows:
| | | 2015 £ million | | 2014 £ million | | | 2016 £ million | | 2015 £ million | |
Tax before exceptional items | | | 517 | | | 546 | | | | 552 | | | 517 | |
Tax in respect of exceptional items | | | (51 | ) | | (99 | ) | | | (56 | ) | | (51 | ) |
| | | | | | | | | | | | |
Taxation on profit from continuing operations | | | 466 | | | 447 | | | | 496 | | | 466 | |
| | | | | | | | | | | | |
Profit from continuing operations before taxation and exceptional items | | | 2,829 | | | 2,998 | | |
Exceptional non-operating items | | | 373 | | | 140 | | |
Profit from operations before taxation and exceptional items | | | | 2,902 | | | 2,829 | |
Non-operating items | | | | 123 | | | 373 | |
Exceptional operating items | | | (269 | ) | | (427 | ) | | | (167 | ) | | (269 | ) |
| | | | | | | | | | | | |
Profit before taxation | | | 2,933 | | | 2,711 | | | | 2,858 | | | 2,933 | |
| | | | | | | | | | | | |
Tax rate before exceptional items | | | 18.3 | % | | 18.2 | % | | | 19.0 | % | | 18.3 | % |
Tax rate from continuing operation after exceptional items | | | 15.9 | % | | 16.5 | % | |
| | | | | | | |
Tax rate after exceptional items | | | | 17.4 | % | | 15.9 | % |
| | | | | | | |
Organic movement calculations for the year ended 30 June 20142015
Organic movement calculations for net sales, operating profit before exceptional items and operating margin for the group for the year ended 30 June 20142015 were as follows:
| | | | | | |
| | £ million | | | £ million | |
Net sales | | | | |
2013 reported | | | 11,303 | | |
2014 reported | | | | 10,258 | |
Exchange | | | (797 | ) | | | (337 | ) |
Disposals | | | (339 | ) | | | (155 | ) |
| | | | | | |
2013 adjusted | | | 10,167 | | |
2014 adjusted | | | | 9,766 | |
Acquisitions and disposals | | | 49 | | | | 1,051 | |
Organic movement | | | 42 | | | | (4 | ) |
| | | | | | |
2014 reported | | | 10,258 | | |
2015 reported | | | | 10,813 | |
| | | | | | |
Organic movement % | | | — | | | | — | |
| | | | | | |
Operating profit before exceptional items | | | | |
2013 reported | | | 3,479 | | |
2014 reported | | | | 3,134 | |
Exchange | | | (336 | ) | | | (161 | ) |
Acquisitions and disposals | | | (65 | ) | | | 2 | |
| | | | | | |
2013 adjusted | | | 3,078 | | |
2014 adjusted | | | | 2,975 | |
Acquisitions and disposals | | | (35 | ) | | | 69 | |
Organic movement | | | 91 | | | | 22 | |
| | | | | | |
2014 reported | | | 3,134 | | |
2015 reported | | | | 3,066 | |
| | | | | | |
Organic movement % | | | 3 | | | | 1 | |
| | | | | | |
Organic operating margin % | | | | |
2015 | | | | 30.7 | % |
2014 | | | 31.04 | % | | | 30.5 | % |
2013 | | | 30.27 | % | |
| | | | | | |
Margin improvement (bps) | | | 77 | | | | 24 | |
| | | | | | |
146154
Governance
BOARD OF DIRECTORS AND COMPANY SECRETARYBoard of Directors and Company Secretary
Dr Franz B Humer (70)Javier Ferrán (60)
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, Chugai Pharmaceutical Co. Ltd, CitiGroup Inc., Emil 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
Javier Ferrán (59)
Chairman Designate, Non-Executive Director (1),(3),(4)3*
Nationality: Spanish
Appointed Chairman January 2017 (Appointed Chairman Designate and Non-Executive Director July 20162016)
Current external appointments: Partner, Lion Capital LLP; Non-Executive Director, Associated British Foods plc and Coca-Cola European Partners Desigual;plc; 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)(58)
Chief Executive, Executive Director (2)*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
Kathryn Mikells (50)(51)
Chief Financial Officer, Executive Director (2)2
Nationality:American
Appointed Chief Financial Officer and Executive Director November 2015
Current external appointments: Non-Executive Director, The Hartford Financial Services Group, Inc.
Previous relevant experience: Corporate Executive Vice President and Chief Financial Officer, Xerox Corporation; Senior Vice President and Chief Financial Officer, ADT Corporation; Executive Vice President and Chief Financial Officer, Nalco Holding Company and UAL Corporation
Lord Davies of Abersoch (63)(64)
Senior Non-Executive Director (1),(3),(4)*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;Cydar Medical and LetterOne Holdings S.A; Vice Chairman, Teneo; Chair of Trustees, Royal Academy of Arts; Vice Chairman, LetterOne Holdings S.A.Arts
Previous relevant experience:Chairman, Chime Communications PLC;PLC, Jack Wills; Minister for Trade, Investment and Small Business for the UK Government; Group Chief Executive, Standard Chartered PLC
Peggy B Bruzelius (66)(67)
Non-Executive Director (1),(3),(4)1,3,4
Nationality: Swedish
Appointed Non-Executive Director April 2009
Current external appointments: Chairman, Lancelot Asset Management; Non-Executive Director, Akzo Nobel NV, Lundin Petroleum AB and Skandia Liv AB
Previous relevant experience: Non-Executive Director, Axfood AB, Husgvarna;Husqvarna AB; Syngenta AG and Scania AB; Managing Director, ABB Financial Services AB; Vice Chairman, Electrolux AB; CEO, ABB Financial Services AB; Executive Vice President, Skandinaviska Enskilda Banken AB
147155
Governance (continued)
Ho KwonPing (63)(64)
Non-Executive Director (1),(3),(4)1,3,4
Nationality: Singaporean
Appointed Non-Executive Director October 2012
CCurrenturrent external appointments: Executive Chairman and Founder, Banyan Tree Holdings Limited; Chairman, Laguna Resorts & Hotels Public Company Limited, Thai Wah Public Company Limited and Singapore Management University; 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, Singapore Power Limited and Standard Chartered PLC and Singapore Power Limited
Betsy D Holden (60)(61)
Non-Executive Director (1),(3),(4)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 Executive Committee 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, MediaBank LLC and Tribune Company and MediaBank LLC;Company; President, Global Marketing and Category Development and Co-Chief Executive Officer, Kraft Foods, Inc; Member of the North American Advisory Board, Schneider Electric
Nicola S Mendelsohn (44)(45)
Non-Executive Director (1),(3),(4)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 CouncilCouncil; Co-President, Norwood; Member, Mayor’s Business Advisory Board
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
Philip G Scott (62)(63)
Non-Executive Director (1)*,(3),(4)1,3,4
Nationality: British
Appointed Non-Executive Director and October 2007 (Former Chairman of the Audit Committee October 2007Committee). He will retire from the Diageo Board at the September 2017 Annual General Meeting.
Previous relevant experience: Non-Executive Director, Royal Bank of Scotland Group plc; President, Institute and Faculty of Actuaries; Chief Financial Officer, Aviva plc
Alan JH Stewart (56)(57)
Non-Executive Director (1),(3),(4)1*,3,4
Nationality:British
Appointed Chairmanof the Audit Committee January 2017 (Appointed Non-Executive Director September 20142014)
Current external appointments: Chief Financial Officer, Tesco plc; 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
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
148156
Governance (continued)
David Harlock (55)(56)
Company Secretary and General Counsel Corporate Centre
Nationality:British
Appointed Company Secretary and General Counsel Corporate CentreJuly 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:Hogan Lovells
Laurence M DanonDr Franz B Humer ceased to be Chairman and Non-Executive Director on 1 January 2017.
Emma Walmsleyceased to be a Non-Executive Director on 2321 September 20152016.
Paul D TunnacliffeUrsula Burns ceased to be Company Secretary on 30 June 2016has been appointed as a Non-Executive Director with effect from 2 April 2018. She will seek election at the 2018 Annual General Meeting.
Key to committees
(1)1. Audit
(2)2. Executive (comprising senior management)
(3)3. Nomination
(4)4. Remuneration
* Chairman of committee
149157
Governance (continued)
EXECUTIVE COMMITTEEExecutive Committee
David Cutter (48)(49)
President, Global Supply and Procurement
Nationality: Australian
Appointed President, Global Supply and ProcurementJuly 2014
PreviousDiageo 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 (48)(49)
President, Diageo Greater China and Asia
Nationality:Australian
Appointed President, 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
Victoria Frame (44)
Group Strategy Director
Nationality: British
Appointed Group Strategy DirectorMay 2017
Previous relevant experience: MD International and Chief Marketing Officer, Barry’s Bootcamp; Partner, Bain & Company; Roles at Marakon Associates and CITI
Brian Franz (51)(52)
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)(51)
President, Diageo Latin America and Caribbean
Nationality: Brazilian/Italian
Appointed President, Latin America and CaribbeanJuly 2013
PreviousDiageo 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 (51)(52)
President, Diageo Europe, Russia, Turkey and TurkeyIndia
Nationality: American
Appointed President, Diageo Europe, Russia, Turkey and TurkeyIndia July 20152016
Previous Diageo roles:President, Europe and Western Europe; Chief Operating Officer, Western Europe; Marketing Director, Australia; General Manager for Innovation, North America; President and Chief Executive Officer, Diageo Canada; Managing Director, Diageo Ireland
Previous relevant experience:brand management roles, GlaxoSmithKline and Quaker Oats
158
Governance (continued)
Anand Kripalu (57)(58)
CEO, United Spirits Limited
Nationality: Indian
AppointedAppointed CEO, United Spirits LimitedSeptember 2014
Previous Diageo roles:CEO-designate, United Spirits Limited
Previous relevant experience: Various management roles at MondelēzMondelez International, Cadbury and Unilever
Current external appointments:Non-Executive Director, Marico
Charlotte Lambkin (44)
Corporate Relations Director
Nationality: British
Appointed Corporate Relations Director January 2014
Previous relevant experience: Group Communications Director, BAE Systems; Director, Bell Pottinger Corporate
& Financial
150
Governance (continued)
Deirdre Mahlan (54)(55)
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)Current external appointments: Non-Executive Director, Experian plc
Group StrategyDaniel Mobley (41)
Corporate Relations Director
Nationality: British
Appointed Group StrategyCorporate Relations Director July 2013. She will be leaving Diageo on 30 September 2016
Current external appointments: Non-Executive Director, ITV PLCJune 2017
Previous Diageo roles: Regional FinanceCorporate Relations Director, Diageo Asia Pacific; Group Treasurer; Finance Director, Global Marketing, Sales and Innovation; Finance Director Ireland; Vice President Finance, Diageo North AmericaEurope
Previous relevant experience: Unilever PLCRegional Head of Corporate Affairs India & South Asia, Standard Chartered; Regional Head of Corporate Affairs Africa, Standard Chartered; Group Head of Government Relations, Standard Chartered; Extensive government experience including in HM Treasury and ICI PLCForeign & Commonwealth Office
Siobhan Moriarty (54)(55)
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
Mairéad Nayager (41)(42)
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)(45)
President, Diageo Africa
Nationality: Irish
Appointed President 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 (59)(60)
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
Nick BlazquezCharlotte Lambkin, formerly President, Diageo Africa and Asia Pacific, ceased to be an Executive Committee member on 30 June 2016.Larry Schwartz, formerly President, Diageo North America,Corporate Relations Director, ceased to be an Executive Committee member on 31 December 2015.2016.
Leanne WoodAnna Manz, formerly Human ResourcesGroup Strategy Director, ceased to be an Executive Committee member on 5 October 2015.30 September 2016.
151159
Governance (continued)
CORPORATE GOVERNANCE REPORTCorporate governance report
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 2016.2017.
BoardsThis report describes Diageo’s corporate governance structures and procedures and the work of Directorsthe Board, its committees and the Executive Committee, to give a sense of how all these things are carried out.
The Board is ultimately responsible for the corporate governance of their companies, that is to say, the(the way in which companies are directed and controlled. Thecontrolled) and its responsibilities of the Board include: setting the company’s strategic aims and its values; providing the leadership to put them into effect; supervising and constructively challenging management who(who 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 Diageo’s Board has the appropriate diversity anda balance of skills, experience, independence and knowledge of the company to enablequalities that enables it to discharge theseits responsibilities effectively. The description in this report of Diageo’s
Recent debate around corporate governance structureshas continued to focus on diversity in various forms. At Diageo, we have long believed that supporting and procedures andrespecting all aspects of the workdiversity of our people is an important contributor to business performance as well as being the Board, its committeesright thing to do. We believe also that reputation is critical to commercial success and the Executive Committee is intended to give a sensecan only be enhanced by behaviours of how this is carried out.which we are proud.
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 20162017 are contained in The UK Corporate Governance Code as updated and published by the Financial Reporting Council (FRC) in September 2014April 2016 (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. save that there was no performance evaluation of Franz Humer given his retirement as Chairman during the year.
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 US 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.
J Ferrán
Chairman
D Harlock
Company Secretary
160
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, Javier Ferrán (who was appointed to the Board on 22 July 2016 and succeeded Dr Humer as Chairman on 1 January 2017), 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.
A summary of the terms and conditions of appointment of the Non-Executive Directors is available at www.diageo.com/enrow/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 includes meeting with Executive Committee members and other senior executives individually and visiting a number of operations and sites around the 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.
161
Governance (continued)
Performance evaluation
During the year an evaluation of the Board’s effectiveness, including the effectiveness of the Audit Committee, the Nomination Committee and the Remuneration Committee was undertaken internally by way of written questionnaire followed by the Chairman of the Board meeting individually with all Directors.
The results were presented to and discussed by the Board which agreed that the Board and its Committees continued to operate effectively, meeting the requirements and spirit of the Code. The culture, capability and diversity of the Board contributed to the Board’s effectiveness.
The Board agreed to take various actions – the planning of future Non-Executive Director succession over the short and medium term, the selection of appropriate Board agenda items flowing from the Annual Strategy Conference, understanding in more depth the challenges to Diageo’s business coming from volatility in emerging markets, ensuring the right balance between discussion and decision in Board meetings and continued focus on risk and the company’s risk appetite through the Audit Committee. It is the Board’s intention to continue to review annually its performance and that of its committees and individual directors. The evaluation later in 2017 will be externally facilitated.
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. It was agreed that a performance evaluation of the former Chairman by the Senior Non-Executive Director was not necessary given the changeover in January 2017. An evaluation of the current Chairman will be included as part of the 2017 evaluation.
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; 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.
The recruitment process for Non-Executive Directors typically includes the development of a candidate profile and the engagement of a professional search agency (which has no other connection with the company) specialising in the recruitment of high calibre Non-Executive Directors. Reports on potential appointees are provided to the committee, which, after careful consideration, makes a recommendation to the Board.
In respect of the appointment of Javier Ferrán a focussed search was undertaken with professional search agency JCA Group (which has 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 Mr Ferrán be appointed as the designated successor to the Chairman. In respect of the appointment of Ursula Burns the recruitment process included the development of a candidate profile and the engagement of a professional search agency (JCA Group, 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. The Board approved her appointment.
162
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 & responsibility, our people.
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.
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. There is also focus 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 2017, 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.
163
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 FRC 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 section of this Annual Report dealing with principal risks.
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 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 and other Diageo global policies are available at www.diageo.com/en-row/ourbusiness/aboutus/ corporategovernance.
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 & 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.
164
Governance (continued)
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
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 2016. 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 above.
Management’s report on internal control over financial reporting
Management, under the supervision of the Chief Executive and Chief Financial Officer, is responsible for establishing and maintaining adequate control over the group’s financial reporting.
Diageo’s internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the EU and IFRS as issued by the International Accounting Standards Board (IASB); provide reasonable assurance that receipts and expenditures are made only in accordance with authorisation of management and the directors of the company; and provide reasonable assurance regarding prevention or timely detection of any unauthorised acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Management has assessed the effectiveness of Diageo’s internal control over financial reporting (as defined in Rules 13(a)-13(f) and 15(d)-15(f) under the 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 2017, 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, 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 203 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.
165
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 Annual Report and Accounts for the year ended 30 June 2017, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the group’s position and performance, business model and strategy;
the consolidated financial statements contained in the Annual Report and Accounts for the year ended 30 June 2017, which have been prepared in accordance with IFRS as issued by the IASB and as adopted for use in the EU, give a true and fair view of the assets, liabilities, financial position and profit of the group; and
the management report represented by the Directors’ Report contained in the Annual Report and Accounts for the year ended 30 June 2017 includes a fair review of the development and performance of the business and the position of the group, together with a description of the principal risks and uncertainties that the group faces.
The responsibility statement was approved by the Board of Directors on 26 July 2017.
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.
Basis of regulation: UK listed companies are required to include in their annual report a narrative statement of (i) how they have applied the principles of the Code and (ii) whether or not they have complied with the best practice provisions of the Code. NYSE listed companies must adopt and disclose their corporate governance guidelines. Diageo complied throughout the year with the best practice provisions of the Code.
Director independence: the Code requires at least half the Board (excluding the Chairman) to be independent Non-Executive Directors, as determined by affirmatively concluding that a Director is independent in character and judgement and determining whether there are relationship and cicumstances which are likely to affect, or could appear to affect, the Director’s judgement. The Code requires the Board to state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination. NYSE rules require a majority of independent directors, according to the NYSE’s own ‘brightline’ tests and an affirmative determination by the Board that the Director has no material relationship with the listed company. Diageo’s Board has determined that, in its judgement and without taking into account the NYSE brightline tests, all of the Non-Executive Directors (excluding the Chairman) are independent. As such, currently seven of Diageo’s ten directors are independent.
Chairman and Chief Executive: the Code requires these roles to be separate. There is no corresponding requirement for US companies. Diageo has a separate chairman and chief executive.
Non-Executive Director meetings: NYSE rules require Non-Management Directors to meet regularly without management and independent directors to meet separately at least once a year. The Code requires Non-Executive Directors to meet without the Chairman present at least annually to appraise the Chairman’s performance, although it was agreed that a performance evaluation of the former Chairman was not necessary this year given the changeover in Chairman in January 2017. During the year, Diageo’s Chairman and Non-Executive Directors met six times as a group without Executive Directors being present.
166
Governance (continued)
Board committees: Diageo has a number of Board committees that are similar in purpose and constitution to those required by NYSE rules. Diageo’s Audit, Remuneration and Nomination Committees consist entirely of independent Non-Executive Directors (save that the Chairman of the Nomination Committee, Javier Ferrán, is not independent). Under NYSE standards, companies are required to have a nominating/corporate governance committee, which develops and recommends a set of corporate governance principles and is composed entirely of independent directors. The terms of reference for Diageo’s Nomination Committee, which comply with the Code, do not contain such a requirement. In accordance with the requirements of the Code, Diageo discloses in its Annual Report the results and means of evaluation of the Board, its Committees and the Directors, and it provides extensive information regarding the Directors’ compensation in the Directors’ remuneration report.
Code of ethics: NYSE rules require a Code of Business Conduct and ethics to be adopted for directors, officers and employees and disclosure of any waivers for executive directors or officers. Diageo has adopted a code of business conduct for all directors, officers and employees, as well as a code of ethics for Senior Officers in accordance with the requirements of SOX. Currently, no waivers have been granted to directors or executive officers.
Compliance certification: NYSE rules require chief executives to certify to the NYSE their awareness of any NYSE corporate governance violations. Diageo is exempt from this as a foreign private issuer but is required to notify the NYSE if any executive officer becomes aware of any non-compliance with NYSE corporate governance standards. No such notification was necessary during the period covered by this report.
Directors’ attendance record at the AGM, scheduled Board meetings and Board committee meetings, for the year ended 30 June 2017 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 2016 | | | Board (maximum 6)(iv) | | | Audit Committee (maximum 4) | | | Nomination Committee (maximum 5)(iv) | | | Remuneration Committee (maximum 5)(iv) | |
Dr Franz B Humer
ChairmanExecutive Committee
David HarlockCutter (49) Company SecretaryPresident, Global Supply and Procurement
Nationality: Australian Appointed President, Global Supply and ProcurementJuly 2014 PreviousDiageo 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 (49) President, Diageo Greater China and Asia Nationality:Australian Appointed President, 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 Victoria Frame (44) Group Strategy Director Nationality: British Appointed Group Strategy DirectorMay 2017 Previous relevant experience: MD International and Chief Marketing Officer, Barry’s Bootcamp; Partner, Bain & Company; Roles at Marakon Associates and CITI Brian Franz (52) 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 (51) President, Diageo Latin America and Caribbean Nationality: Brazilian/Italian Appointed President, Latin America and CaribbeanJuly 2013 PreviousDiageo roles:Managing Director, West Latin America and Caribbean; Global Category Director Whiskey, Gins and Reserve Brands; General Manager Brazil, Paraguay and Uruguay; Vice President Consumer Marketing, Chicago; Marketing Director, Brazil Previous relevant experience: Colgate-Palmolive; Unilever PLC John Kennedy (52) President, Diageo Europe, Russia, Turkey and India Nationality: American Appointed President, Diageo Europe, Russia, Turkey and India July 2016 Previous Diageo roles:President, Europe and Western Europe; Chief Operating Officer, Western Europe; Marketing Director, Australia; General Manager for Innovation, North America; President and Chief Executive Officer, Diageo Canada; Managing Director, Diageo Ireland Previous relevant experience:brand management roles, GlaxoSmithKline and Quaker Oats 152158
Governance (continued) BOARD OF DIRECTORSAnand Kripalu (58)
CEO, United Spirits Limited Nationality: Indian Appointed CEO, United Spirits LimitedSeptember 2014 Previous Diageo roles:CEO-designate, United Spirits Limited Previous relevant experience: Various management roles at Mondelez International, Cadbury and Unilever Current external appointments:Non-Executive Director, Marico Deirdre Mahlan (55) President, Diageo North America Nationality:American Appointed President, Diageo North America December 2015 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 Current external appointments: Non-Executive Director, Experian plc Daniel Mobley (41) Corporate Relations Director Nationality: British Appointed Corporate Relations DirectorJune 2017 Previous Diageo roles:Corporate Relations Director, Europe Previous relevant experience: Regional Head of Corporate Affairs India & South Asia, Standard Chartered; Regional Head of Corporate Affairs Africa, Standard Chartered; Group Head of Government Relations, Standard Chartered; Extensive government experience including in HM Treasury and Foreign & Commonwealth Office Siobhan Moriarty (55) 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 Mairéad Nayager (42) 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 John O’Keeffe (45) President, Diageo Africa Nationality: Irish Appointed President 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 Syl Saller (60) 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 Charlotte Lambkin, formerly Corporate Relations Director, ceased to be an Executive Committee member on 31 December 2016. Anna Manz, formerly Group Strategy Director, ceased to be an Executive Committee member on 30 September 2016. 159
Governance (continued) Corporate governance report Letter from the Chairman of the Board of Directors and the Company Secretary Dear Shareholder On behalf of the Board, we present the corporate governance report for the year ended 30 June 2017. This report describes Diageo’s corporate governance structures and procedures and the work of the Board, its committees and the Executive Committee, to give a sense of how all these things are carried out. The Board is ultimately responsible for corporate governance (the way in which companies are directed and controlled) and its responsibilities include: setting strategic aims and values; providing the leadership to put them into effect; supervising and constructively challenging management (who are responsible for the day to day operational running of the business); and reporting to shareholders on their stewardship. We continue to believe that Diageo’s Board has a balance of qualities that enables it to discharge its responsibilities effectively. Recent debate around corporate governance has continued to focus on diversity in various forms. At Diageo, we have long believed that supporting and respecting all aspects of the diversity of our people is an important contributor to business performance as well as being the right thing to do. We believe also that reputation is critical to commercial success and can only be enhanced by behaviours of which we are proud. 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 2017 are contained in The UK Corporate Governance Code as updated and published by the Financial Reporting Council (FRC) in April 2016 (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, which is publicly available under the heading ‘Corporate Governance’ at the website of the FRC, www.frc.org.uk. save that there was no performance evaluation of Franz Humer given his retirement as Chairman during the year. 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 US 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. J Ferrán Chairman D Harlock Company Secretary 160
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, Javier Ferrán (who was appointed to the Board on 22 July 2016 and succeeded Dr Franz B Humer as Chairman on 1 January 2017), 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 atwww.diageo.com/en-row/enrow/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 atwww.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 Emma Walmsley. This includedincludes meeting with Executive Committee members and other senior executives individually and visiting a number of operations and sites around the 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. 153161
Governance (continued) Performance evaluation During the year an evaluation of the Board’s effectiveness, including the effectiveness of the Audit Committee, the Nomination Committee and the Remuneration Committee was undertaken internally by way of written questionnaire followed by the Chairman of the Board meeting individually with all Directors. A report was preparedThe results were presented to and presented, withdiscussed by the conclusionBoard which agreed that the Board and its Committees continued to operate effectively, meeting the requirements and spirit of the Code. The climate withinculture, capability and diversity of the Board its capability and the diversity of Board members, were again seen as significant factors which contributed to the Board’s effectiveness duringeffectiveness.
The Board agreed to take various actions – the year. There were, nevertheless, areas identified as beingplanning of a particular focus: executive engagement, aimed at buildingfuture Non-Executive Director succession over the relationshipshort and medium term, the selection of appropriate Board agenda items flowing from the Annual Strategy Conference, understanding in more depth the challenges to Diageo’s business coming from volatility in emerging markets, ensuring the right balance between thediscussion and decision in Board meetings and continued focus on risk and the executive team; understanding consumer insightscompany’s risk appetite through the Audit Committee. It is the Board’s intention to continue to review annually its performance and trendsthat of its committees and the competitive performance; and investor relations, including the communication strategy and execution. A further objective was succession to the Board,individual directors. The evaluation later in particular finding a successor to the Chairman, which has been successfully executed, as highlighted above, with the appointment of Javier Ferrán to the Board.
In conclusion, and without being complacent, the Board was considered to be in good shape to deal with the 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 will start in the subsequent financial year. A report2017 will be prepared for the Board to consider. The results of the evaluation will be reported in next year’s report.externally facilitated.
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,board, and that each demonstrate commitment to their roles. The senior Non-Executive Director ledIt was agreed that a performance evaluation of the Chairman. Feedbackformer Chairman by the Senior Non-Executive Director was discussednot necessary given the changeover in a meeting withJanuary 2017. An evaluation of 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 2017current Chairman will be externally facilitated andincluded as part of the results reported in a subsequent Annual Report.2017 evaluation.
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 and, in particular, the focus on finding a successor to the Chairman;Directors; 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. The recruitment process for Non-Executive Directors typically includes the development of a candidate profile and the engagement of a professional search agency (which has no other connection with the company) specialising in the recruitment of high calibre Non-Executive Directors. Reports on potential appointees are provided to the committee, which, after careful consideration, makes a recommendation to the Board. In respect of the appointment of Emma WalmsleyJavier Ferrán a focussed search was undertaken with professional search agency JCA Group (which has 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 Mr Ferrán be appointed as the designated successor to the Chairman. In respect of the appointment of Ursula Burns the recruitment process included the development of a candidate profile and the engagement of MWM Consulting, a professional search agency (which(JCA Group, which has no other connection with the Company)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 The Board that Javier Ferrán be appointed as the designated successor to the Chairman.approved her appointment.
154162
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. 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 CONTROLExecutive 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. 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. There is also focus 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 2017, 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. 163
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 FRC 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 section of this Annual Report dealing with principal risks. 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 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 and other Diageo global policies are available at www.diageo.com/en-row/ourbusiness/aboutus/ corporategovernance. 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 & 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. 164
Governance (continued) 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 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 2016. 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 above. Management’s report on internal control over financial reporting Management, under the supervision of the Chief Executive and Chief Financial Officer, is responsible for establishing and maintaining adequate control over the group’s financial reporting. Diageo’s internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the EU and IFRS as issued by the International Accounting Standards Board (IASB); provide reasonable assurance that receipts and expenditures are made only in accordance with authorisation of management and the directors of the company; and provide reasonable assurance regarding prevention or timely detection of any unauthorised acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements. Management has assessed the effectiveness of Diageo’s internal control over financial reporting (as defined in Rules 13(a)-13(f) and 15(d)-15(f) under the 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 2017, 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, 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 203 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. 165
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 Annual Report and Accounts for the year ended 30 June 2017, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the group’s position and performance, business model and strategy; the consolidated financial statements contained in the Annual Report and Accounts for the year ended 30 June 2017, which have been prepared in accordance with IFRS as issued by the IASB and as adopted for use in the EU, give a true and fair view of the assets, liabilities, financial position and profit of the group; and the management report represented by the Directors’ Report contained in the Annual Report and Accounts for the year ended 30 June 2017 includes a fair review of the development and performance of the business and the position of the group, together with a description of the principal risks and uncertainties that the group faces. The responsibility statement was approved by the Board of Directors on 26 July 2017. 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. Basis of regulation: UK listed companies are required to include in their annual report a narrative statement of (i) how they have applied the principles of the Code and (ii) whether or not they have complied with the best practice provisions of the Code. NYSE listed companies must adopt and disclose their corporate governance guidelines. Diageo complied throughout the year with the best practice provisions of the Code. Director independence: the Code requires at least half the Board (excluding the Chairman) to be independent Non-Executive Directors, as determined by affirmatively concluding that a Director is independent in character and judgement and determining whether there are relationship and cicumstances which are likely to affect, or could appear to affect, the Director’s judgement. The Code requires the Board to state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination. NYSE rules require a majority of independent directors, according to the NYSE’s own ‘brightline’ tests and an affirmative determination by the Board that the Director has no material relationship with the listed company. Diageo’s Board has determined that, in its judgement and without taking into account the NYSE brightline tests, all of the Non-Executive Directors (excluding the Chairman) are independent. As such, currently seven of Diageo’s ten directors are independent. Chairman and Chief Executive: the Code requires these roles to be separate. There is no corresponding requirement for US companies. Diageo has a separate chairman and chief executive. Non-Executive Director meetings: NYSE rules require Non-Management Directors to meet regularly without management and independent directors to meet separately at least once a year. The Code requires Non-Executive Directors to meet without the Chairman present at least annually to appraise the Chairman’s performance, although it was agreed that a performance evaluation of the former Chairman was not necessary this year given the changeover in Chairman in January 2017. During the year, Diageo’s Chairman and Non-Executive Directors met six times as a group without Executive Directors being present. 166
Governance (continued) Board committees: Diageo has a number of Board committees that are similar in purpose and constitution to those required by NYSE rules. Diageo’s Audit, Remuneration and Nomination Committees consist entirely of independent Non-Executive Directors (save that the Chairman of the Nomination Committee, Javier Ferrán, is not independent). Under NYSE standards, companies are required to have a nominating/corporate governance committee, which develops and recommends a set of corporate governance principles and is composed entirely of independent directors. The terms of reference for Diageo’s Nomination Committee, which comply with the Code, do not contain such a requirement. In accordance with the requirements of the Code, Diageo discloses in its Annual Report the results and means of evaluation of the Board, its Committees and the Directors, and it provides extensive information regarding the Directors’ compensation in the Directors’ remuneration report. Code of ethics: NYSE rules require a Code of Business Conduct and ethics to be adopted for directors, officers and employees and disclosure of any waivers for executive directors or officers. Diageo has adopted a code of business conduct for all directors, officers and employees, as well as a code of ethics for Senior Officers in accordance with the requirements of SOX. Currently, no waivers have been granted to directors or executive officers. Compliance certification: NYSE rules require chief executives to certify to the NYSE their awareness of any NYSE corporate governance violations. Diageo is exempt from this as a foreign private issuer but is required to notify the NYSE if any executive officer becomes aware of any non-compliance with NYSE corporate governance standards. No such notification was necessary during the period covered by this report. Directors’ attendance record at the AGM, scheduled Board meetings and Board committee meetings, for the year ended 30 June 2017 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 2016 | | | Board (maximum 6)(iv) | | | Audit Committee (maximum 4) | | | Nomination Committee (maximum 5)(iv) | | | Remuneration Committee (maximum 5)(iv) | | Executive Committee David Cutter (49) President, Global Supply and Procurement Nationality: Australian Appointed President, Global Supply and ProcurementJuly 2014 PreviousDiageo 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 (49) President, Diageo Greater China and Asia Nationality:Australian Appointed President, 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 Victoria Frame (44) Group Strategy Director Nationality: British Appointed Group Strategy DirectorMay 2017 Previous relevant experience: MD International and Chief Marketing Officer, Barry’s Bootcamp; Partner, Bain & Company; Roles at Marakon Associates and CITI Brian Franz (52) 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 (51) President, Diageo Latin America and Caribbean Nationality: Brazilian/Italian Appointed President, Latin America and CaribbeanJuly 2013 PreviousDiageo roles:Managing Director, West Latin America and Caribbean; Global Category Director Whiskey, Gins and Reserve Brands; General Manager Brazil, Paraguay and Uruguay; Vice President Consumer Marketing, Chicago; Marketing Director, Brazil Previous relevant experience: Colgate-Palmolive; Unilever PLC John Kennedy (52) President, Diageo Europe, Russia, Turkey and India Nationality: American Appointed President, Diageo Europe, Russia, Turkey and India July 2016 Previous Diageo roles:President, Europe and Western Europe; Chief Operating Officer, Western Europe; Marketing Director, Australia; General Manager for Innovation, North America; President and Chief Executive Officer, Diageo Canada; Managing Director, Diageo Ireland Previous relevant experience:brand management roles, GlaxoSmithKline and Quaker Oats 158
Governance (continued) Anand Kripalu (58) CEO, United Spirits Limited Nationality: Indian Appointed CEO, United Spirits LimitedSeptember 2014 Previous Diageo roles:CEO-designate, United Spirits Limited Previous relevant experience: Various management roles at Mondelez International, Cadbury and Unilever Current external appointments:Non-Executive Director, Marico Deirdre Mahlan (55) President, Diageo North America Nationality:American Appointed President, Diageo North America December 2015 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 Current external appointments: Non-Executive Director, Experian plc Daniel Mobley (41) Corporate Relations Director Nationality: British Appointed Corporate Relations DirectorJune 2017 Previous Diageo roles:Corporate Relations Director, Europe Previous relevant experience: Regional Head of Corporate Affairs India & South Asia, Standard Chartered; Regional Head of Corporate Affairs Africa, Standard Chartered; Group Head of Government Relations, Standard Chartered; Extensive government experience including in HM Treasury and Foreign & Commonwealth Office Siobhan Moriarty (55) 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 Mairéad Nayager (42) 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 John O’Keeffe (45) President, Diageo Africa Nationality: Irish Appointed President 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 Syl Saller (60) 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 Charlotte Lambkin, formerly Corporate Relations Director, ceased to be an Executive Committee member on 31 December 2016. Anna Manz, formerly Group Strategy Director, ceased to be an Executive Committee member on 30 September 2016. 159
Governance (continued) Corporate governance report Letter from the Chairman of the Board of Directors and the Company Secretary Dear Shareholder On behalf of the Board, we present the corporate governance report for the year ended 30 June 2017. This report describes Diageo’s corporate governance structures and procedures and the work of the Board, its committees and the Executive Committee, to give a sense of how all these things are carried out. The Board is ultimately responsible for corporate governance (the way in which companies are directed and controlled) and its responsibilities include: setting strategic aims and values; providing the leadership to put them into effect; supervising and constructively challenging management (who are responsible for the day to day operational running of the business); and reporting to shareholders on their stewardship. We continue to believe that Diageo’s Board has a balance of qualities that enables it to discharge its responsibilities effectively. Recent debate around corporate governance has continued to focus on diversity in various forms. At Diageo, we have long believed that supporting and respecting all aspects of the diversity of our people is an important contributor to business performance as well as being the right thing to do. We believe also that reputation is critical to commercial success and can only be enhanced by behaviours of which we are proud. 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 2017 are contained in The UK Corporate Governance Code as updated and published by the Financial Reporting Council (FRC) in April 2016 (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, which is publicly available under the heading ‘Corporate Governance’ at the website of the FRC, www.frc.org.uk. save that there was no performance evaluation of Franz Humer given his retirement as Chairman during the year. 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 US 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. J Ferrán Chairman D Harlock Company Secretary 160
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, Javier Ferrán (who was appointed to the Board on 22 July 2016 and succeeded Dr Humer as Chairman on 1 January 2017), 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. A summary of the terms and conditions of appointment of the Non-Executive Directors is available at www.diageo.com/enrow/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 includes meeting with Executive Committee members and other senior executives individually and visiting a number of operations and sites around the 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. 161
Governance (continued) Performance evaluation During the year an evaluation of the Board’s effectiveness, including the effectiveness of the Audit Committee, the Nomination Committee and the Remuneration Committee was undertaken internally by way of written questionnaire followed by the Chairman of the Board meeting individually with all Directors. The results were presented to and discussed by the Board which agreed that the Board and its Committees continued to operate effectively, meeting the requirements and spirit of the Code. The culture, capability and diversity of the Board contributed to the Board’s effectiveness. The Board agreed to take various actions – the planning of future Non-Executive Director succession over the short and medium term, the selection of appropriate Board agenda items flowing from the Annual Strategy Conference, understanding in more depth the challenges to Diageo’s business coming from volatility in emerging markets, ensuring the right balance between discussion and decision in Board meetings and continued focus on risk and the company’s risk appetite through the Audit Committee. It is the Board’s intention to continue to review annually its performance and that of its committees and individual directors. The evaluation later in 2017 will be externally facilitated. 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. It was agreed that a performance evaluation of the former Chairman by the Senior Non-Executive Director was not necessary given the changeover in January 2017. An evaluation of the current Chairman will be included as part of the 2017 evaluation. 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; 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. The recruitment process for Non-Executive Directors typically includes the development of a candidate profile and the engagement of a professional search agency (which has no other connection with the company) specialising in the recruitment of high calibre Non-Executive Directors. Reports on potential appointees are provided to the committee, which, after careful consideration, makes a recommendation to the Board. In respect of the appointment of Javier Ferrán a focussed search was undertaken with professional search agency JCA Group (which has 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 Mr Ferrán be appointed as the designated successor to the Chairman. In respect of the appointment of Ursula Burns the recruitment process included the development of a candidate profile and the engagement of a professional search agency (JCA Group, 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. The Board approved her appointment. 162
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 & responsibility, our people. 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.Corporate. 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 designatedprogress. There is also 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 2016,2017, 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. 155163
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 CouncilFRC 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.Report dealing with principal risks. 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)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. 164
Governance (continued) Private shareholders are invited to write to the chairmanChairman 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, theThe 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).2016. 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.above. Management’s report on internal control over financial reporting Management, under the supervision of the Chief Executive and Chief Financial Officer, is responsible for establishing and maintaining adequate control over the group’s financial reporting. 157
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 2016,2017, 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 197203 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. 165
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 Annual Report and Accounts for the year ended 30 June 2016,2017, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the group’s position and performance, business model and strategy; the consolidated financial statements contained in the Annual Report and Accounts for the year ended 30 June 2016,2017, which have been prepared in accordance with IFRS as issued by the IASB and as adopted for use in the EU, give a true and fair view of the assets, liabilities, financial position and profit of the group; and the management report represented by the Directors’ Report contained in the Annual Report and Accounts for the year ended 30 June 20162017 includes a fair review of the development and performance of the business and the position of the group, together with a description of the principal risks and uncertainties that the group faces. The responsibility statement was approved by the Board of Directors on 2726 July 2016. 158
Governance (continued)
2017. 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. Basis of regulation: UK listed companies are required to include in their annual report a narrative statement of (i) how they have applied the principles of the Code and (ii) whether or not they have complied with the best practice provisions of the Code. NYSE listed companies must adopt and disclose their corporate governance guidelines. Diageo complied throughout the year with the best practice provisions of the Code (with the exception that two directors were unable to attend the 2015 AGM).Code. Director independence: the Code requires at least half the Board (excluding the Chairman) to be independent Non-Executive Directors, as determined by affirmatively concluding that a Director is independent in character and judgement and determining whether there are relationshipsrelationship and circumstancescicumstances which are likely to affect, or could appear to affect, the Director’s judgement. The Code requires the Board to state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination. NYSE rules require a majority of independent directors, according to the NYSE’s own ‘brightline’ tests and an affirmative determination by the Board that the Director has no material relationship with the listed company. Diageo’s Board has determined that, in its judgement and without taking into account the NYSE brightline tests, all of the Non-Executive Directors (excluding the Chairman) are independent. As such, currently nineseven of Diageo’s twelveten directors are independent. Chairman and Chief Executive: the Code requires these roles to be separate. There is no corresponding requirement for US companies. Diageo has a separate chairman and chief executive. Non-Executive Director meetings: NYSE rules require Non-Management Directors to meet regularly without management and independent directors to meet separately at least once a year. The Code requires Non-Executive Directors to meet without the Chairman present at least annually to appraise the Chairman’s performance.performance, although it was agreed that a performance evaluation of the former Chairman was not necessary this year given the changeover in Chairman in January 2017. During the year, Diageo’s Chairman and Non-Executive Directors met six times as a group without Executive Directors being present, and the independent Directors met once without the Chairman.present. 166
Governance (continued) Board committees: Diageo has a number of Board committees that are similar in purpose and constitution to those required by NYSE rules. Diageo’s Audit, Remuneration and Nomination Committees consist entirely of independent Non-Executive Directors (save that the chairmanChairman of the Nomination Committee, Dr Franz B Humer,Javier Ferrán, is not independent). Under NYSE standards, companies are required to have a nominating/corporate governance committee, which develops and recommends a set of corporate governance principles and is composed entirely of independent directors. The terms of reference for Diageo’s Nomination Committee, which comply with the Code, do not contain such a requirement. In accordance with the requirements of the Code, Diageo discloses in its Annual Report the results and means of evaluation of the Board, its Committees and the Directors, and it provides extensive information regarding the Directors’ compensation in the Directors’ remuneration report. Code of ethics: NYSE rules require a Code of Business Conduct and ethics to be adopted for directors, officers and employees and disclosure of any waivers for executive directors or officers. Diageo has adopted a code of business conduct for all directors, officers and employees, as well as a code of ethics for Senior Officers in accordance with the requirements of SOX. Currently, no waivers have been granted to directors or executive officers. Compliance certification: NYSE rules require chief executives to certify to the NYSE their awareness of any NYSE corporate governance violations. Diageo is exempt from this as a foreign private issuer but is required to notify the NYSE if any executive officer becomes aware of any non-compliance with NYSE corporate governance standards. No such notification was necessary during the period covered by this report. 159
Governance (continued)
Directors’ attendance record at the AGM, scheduled Board meetings and Board committee meetings, for the year ended 30 June 20162017 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
20152016 | | | Board (maximum 6)(iii)(iv) | | | Audit Committee (maximum 4) | | | Nomination Committee (maximum 7)5)(iv) | | | Remuneration Committee (maximum 4)5)(iv) | | Dr Franz B Humer | | | ü✓ | | | | 4/4 | | | | 2/2 | (i) | | | 3/3 | | | | 2/2 | (i) | Javier Ferrán | | | ✓ | | | | 6/6 | | | | 4/4 | (i) | | | 3/35/5 | | | | 4/45/5 | (i) | Ivan Menezes | | | ü✓ | | | | 6/6 | | | | 2/2 | (ii) | | | 3/3 | (i) | | | 4/45/5 | (ii)(i) | Deirdre MahlanKathryn Mikells
| | | ü✓ | | | | 3/36/6 | | | | 4/4 | (i) | | | 1/1 | (i)(ii) | | | n/a | | | | n/a | | Kathryn Mikells
| | | n/a | | | | 3/3 | | | | 3/3 | (i) | | | n/a | | | | n/a | | Lord Davies | | | ü✓ | | | | 5/6 | | | | 3/4 | | | | 4/5 | | | | 4/5 | | Peggy Bruzelius | | | ✓ | | | | 6/6 | | | | 4/4 | | | | 7/75/5 | | | | 4/45 | | Peggy BruzeliusBetsy Holden
| | | ü✓ | | | | 6/6 | | | | 4/4 | | | | 6/75/5 | | | | 4/45/5 | | Laurence DanonHo KwonPing
| | | × | | | | 1/2 | | | | 1/1 | | | | 1/2 | | | | 1/1 | | Betsy Holden
| | | ü✓ | | | | 6/6 | | | | 4/4 | | | | 7/7 | | | | 4/4 | | Ho KwonPing
| | | ü | | | | 6/6 | | | | 3/45/5 | | | | 5/7 | | | | 4/45 | | Nicola Mendelsohn(iii) | | | ×✓ | | | | 5/6 | | | | 4/4 | | | | 5/74/5 | | | | 4/45 | | Philip Scott | | | ü✓ | | | | 6/6 | | | | 4/4 | | | | 7/75/5 | | | | 4/45/5 | | Alan Stewart | | | ü✓ | | | | 6/6 | | | | 4/4 | | | | 7/74/5 | | | | 4/45/5 | | Emma Walmsley | | | n/a✓ | | | | 2/2 | | | | 1/1 | | | | 2/2 | | | | 3/3 | | | | 2/21/1 | |
(i) | Attended by invitation. Javier Ferrán attended by invitation after his appointment as Chairman. |
(ii) | Attended by invitation, for part only. |
(iii) | Nicola Mendelsohn attended the Annual General Meeting by telephone. |
(iv) | Where Non-Executive Directors were unable to attend a meeting they gave their views to the ChairmenChairman 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 ScottMr Stewart and P B Bruzelius. |
(iv) | Four meetings of the Nomination Committee were held on Chairman succession.Mr Scott. |
160167
Governance (continued) REPORT OF THE AUDIT COMMITTEEReport of the Audit Committee
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 2016.2017. I succeeded Philip Scott as Chairman of the Committee on 1 January 2017. Philip chaired the Committee for some nine years and I would like to take this opportunity to thank him and to pay tribute to his leadership of the Committee during his outstanding tenure. 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’“whistleblowing”; and the appointment of the external auditor. The work of the Committee during the year included various matters referredgave attention to in last year’s report.all elements of its remit. 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 transitiongave additional focus to the new auditors, PricewaterhouseCoopers LLP (PwC)risk programme, beginning a series of review and training sessions covering each of its principal risks (as set out above in the Annual Report). It is the intention to continue this work, to cover each principal risk on a regular basis. 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 remainam 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 ScottAlan JH Stewart
Chairman of the Audit Committee 161168
Governance (continued) REPORT OF THE AUDIT COMMITTEEReport of the Audit Committee
Role of the Audit Committee The Audit Committee is responsible for :for: (i) | monitoring the integrity of the financial statements, including a review of the significant financial reporting judgements contained in them; |
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; |
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; |
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; |
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 |
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. |
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.statements. 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 20162017 financial statements were as follows. These include the matters relating to risks disclosed in the UK external auditor’s report. Disclosure on the quality of the earnings and one off items included in cash flow. The committee agreed that sufficient disclosure was made in the financial statements. The committee determined that exceptional items are appropriately classified considering their size and nature, and sufficient disclosure is provided in the financial statements (see note 4). Review of carrying value of assets – in particular intangible assets. The committee agreed that an impairment charge of £118 million (excluding tax) be made against the Ypióca brand and related fixed assets and goodwill allocated to the Paraguay, Uruguay and Brazil cash-generating unit but that, otherwise, the fair value of the company’s assets was in excess of their carrying value (see notes 6 and 10). Exchange rate used to translate operations in Venezuela. The committee determined an appropriate rate used for the year ended 30 June 20162017 for consolidation purposes, that represents the best estimation of the rate at which capital and dividend repatriations are expected to be realised (see note 1). 169
Governance (continued) Disclosure on taxation. The committee agreed that the separate presentation of the tax risk and the expansion of the tax note disclosure appropriately addresses the significant change in the international tax environment givingand sufficient and transparent informationdisclosures are provided for the usersongoing tax discussions (see page 4139 and note 7). Review of legal cases. The committee agreed that adequate provision has been made for all material litigation and disputes, based on the currently most likely outcomes, including the litigation summarised in note 18. 162
Governance (continued)
Assumptions used in respect of post employment plans. Having considered advice from external actuaries and assumptions used by companies with comparator plans, the committee agreed that the assumptions used to calculate the income statement and balance sheet assets and liabilities for post employment plans were appropriate (see note 13). Viability Statement.statement. The committee noted that severe but plausible risk scenarios had been identified; a robust risk assessment had been carried out; and the group’s viability and going concern consideration proved with stress testing. Taking into account the company’s balance sheet position, the committee expected the group to be able to meet its liabilities as they fell due over the three-year period ending 30 June 2019.2020. The risk that the group would become insolvent during this timeframe was considered remote. The Committee recommended to the Board that the Viability Statementstatement above be approved. 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 forThe work and reporting to the workCommittee of both GRC and GAR during the year focused on recent acquisitions, cyber security and their reporting tochange in the committee, continued to be a review of recent acquisitions.organisation. The Committee in turn were thus able to keep under review the developmentoperation of the controls and compliance framework in acquired companies.these areas. 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.mitigations, including those set out in the section of this Annual Report dealing with principal risks. Based on this activity during the year, the Audit Committee made a recommendation to the Board covering the nature and extent of the risks it was willing to take to achieve its strategic goals and its internal statement of risk appetite (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 Following a tender process carried out during the year ended 30 June 2015, PwC were appointed as external auditors with effect from the year ended 30 June 2016. 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. 163
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’Order”) for the financial year ended 30 June 2016.2017. 170
Governance (continued) 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 2016.2017. 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 ScottAlan Stewart 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 reviewreviews and training session,sessions, presented by senior executives, on data protection.Scotch whisky inventory management and political violence and terrorism. In addition as partmembers of the Committee had (at a Board meeting, Committee members hadmeeting) a presentation from senior managementsession 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.crisis management. 164171
Governance (continued) DIRECTORS’ REMUNERATION REPORTDirectors’ 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 2016.2017. This report complies with the UK Directors’ Remuneration Reporting Regulations 2013 and contains: The Directors’new directors’ remuneration policy, aswhich will be put forward for shareholder approval at the AGM on 20 September 2017; and The Annual report on remuneration describing how the remuneration policy that was approved by shareholders at the AGM in September 2014. The annual report on remuneration, describing how the remuneration policy2014 has been put into practice during the year ended 30 June 2016.2017.
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: Delivery of business strategy: Short- and long-term incentive plans for Executive Directors and senior managers reward the achievement of Diageo’s business strategy and performance goals. ConsistentSustainable, long-term performance:The focus is on the delivery of performance in a consistent and responsible way which also creates long-term value for our shareholders. Alignment between the interests of Executive Directors and shareholders remains a key principle, with Executive Directors required to acquire and hold Diageo shares over the long term.
Performance-related compensation: Reward components offer a balanced mix of short- and long-term incentives conditional upon achieving stretching performance targets. Performance measures such as organic net sales, organic operating margin,profit growth, cash efficiency and relative total shareholder return (TSR) and earnings per share (eps) growth are key drivers of growth for the business that are aligned with the creation of shareholder value. Competitive total remuneration:Reward levels are framed in the context of total remuneration packages paid by relevant global comparators. In competition with similar global companies, the ability to recruit and retain the best talent from all over the world is critical to Diageo’s continued business success. Simplicity and transparency:The Committee seeks to embed simplicity and transparency in the design and delivery of executive reward programmes. Performance targets clearly align with the company’s short- and long-term goals. 165
Governance (continued)
Focus and highlightsRemuneration in 2016
The Committee continued its focus on:
Understanding and responding to shareholder feedback and fostering continuous open dialogue;
Reviewing and assessing the ongoing appropriateness of the current remuneration policy, executive plan design and target stretch; and
Ensuring that remuneration arrangements continue to attract and retain the highest quality global talent with a clear link between performance and reward.
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% increaseincreases for both the Chief Executive and the Chief Financial Officer in October 20162017 (versus budgeted 2.2%2.5% in the United Kingdom and 3% in the United States for the wider workforce) | Allowances and benefits | | Unchanged from last year | Retirement benefits | | UnchangedChief Executive’s pension contribution reduced from last year40% to 30% of salary from 1 July 2016 | Annual incentive | | PayoutPay-out above target, delivering 64.8%68.0% and 69.8%69.7% of maximum opportunity for the Chief Executive and Chief Financial Officer respectively | Long-term incentives | | 30.6%Nil vesting of performance shares and nil vesting of share options |
As a reflectionresult of the company’s delivery of a good set of results in the year (see keylong-term incentive performance indicators on pages 23-27),conditions not being achieved, total variable pay to the Chief Executive Directorsand Chief Financial Officer in respect of the year ended 30 June 20162017 is higher35% and 50% lower respectively than in the year ended 30 June 2015.2016. Over the period 1 July 20132014 to 30 June 20162017 (the performance period for long-term incentive awards that vest this year in September 2016)2017), Diageo’s share price grew by 7.9%19%, from 1933.51902.5 pence to 2086.52268.5 pence, and the company paid a total dividend of 160.0171.3 pence per share. Dividend distribution to shareholders in the year ended 30 June 20162017 was increased by 7.6%5% compared to the previous year. 166172
Governance (continued) Planned for 2017
Looking ahead Following a comprehensive review of the effectiveness of the directors’ remuneration policy in the context of the external viewpoints of the investor community, the Committee concluded that the policy remains in line with business strategy and well-aligned to shareholder interests. As a result, there have been no material changes to the year ending 30 June 2017, we will continueremuneration policy in terms of the design or quantum of executive remuneration. The key changes to operatethe remuneration policy are as follows: Reduction of maximum company pension contribution from 30% to 20% of salary for new hires: Bringing executive remunerationpension arrangements more in line with the approved remuneration policy. No changes are proposedpension arrangements for other employees in the United Kingdom and United States, as well as enabling consistency in approach for the rest of the Executive Committee. Significant increase to the Chief Executive’s shareholding requirement from 300% to 500% of salary, and for the Chief Financial Officer from 250% to 400% of salary: Positioning the shareholding requirement at or above the face value of their long-term incentive award opportunity after tax. Restriction on selling shares of 50% of the executive’s vested long-term incentive awards (after the sale of shares to cover tax), until the shareholding requirement is met: To support executives meeting their shareholding requirements within five years of appointment. Throughout the remuneration policy review, the company has proactively engaged with its largest shareholders to understand their views on the policy proposals, as well as continuing an open dialogue on the ongoing appropriateness of executive short- and long-term incentive plan design, the level of stretch in performance measures as part of the target-setting process, and ensuring that remuneration arrangements continue to attract and retain the highest quality global talent. Whilst arrangements that defer part of the annual orbonus into shares are common practice in the FTSE 100, the Committee is satisfied that the company’s current annual bonus structure (payable entirely in cash) remains appropriate, as the increased shareholding requirement, the level of stretch in the long-term incentive plan, and the post-vesting holding period in concert provide appropriate alignment of executives with the interests of shareholders in fostering sustainable share price growth over the long term. There are also robust clawback and malus provisions under both the annual and long-term incentive plans, which apply to all members of the Executive Committee. The Committee remains confident that the mix of performance shares and share options is an appropriate long-term incentive for the year ahead.leaders of the business, and the share options element provides an additional stretch in that the share price has to grow materially in addition to the performance condition being achieved in order for it to provide value for executives. This strengthens the alignment between executives and shareholders in the commitment to fostering sustainable share price growth. Share option plans remain majority practice within Diageo’s international peer group, against which the company needs to remain competitive in order to attract and retain the highest calibre of talent. WeThe directors’ remuneration policy will be reviewing ourput forward for your consideration and approval by binding vote, and the annual remuneration policy and actively engaging with shareholders and theirreport by advisory bodies in advance of putting the policy to shareholder vote at the 2017 AGM.
As you read our remuneration policy and annual remuneration reportAGM 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.20 September 2017.
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 167173
Governance (continued) DIRECTORS’ REMUNERATION POLICYDirectors’ remuneration policy
This section of the report sets out the policy for Executive Directors’ remuneration. The proposed policy wasis broadly consistent with the policy approved in 2014, save for the changes highlighted in the Remuneration Committee Chairman’s statement. The policy will be put to shareholders for approval in a binding vote at the AGM in 2014,2017, in accordance with section 439A of the Companies Act 2006, and, if approved, will formally camecome into effect from 1820 September 2014,2017, 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: Focused on consistent growth drivers: As a public limited company, Diageo has a fiduciary responsibility to maximise long-term value for shareholders. Thus, variable elements of remuneration are dependent upon the achievement of performance measures that are identified as key consistent and responsible growth drivers for the business and that are aligned with the creation of shareholder value. Variable with performance: A significant proportion of total remuneration for the Executive Directors is linked to business and individual performance so that remuneration will increase or decrease in line with performance. Share ownership: Full participation in incentives is conditional upon building up a significant personal shareholding in Diageo to ensure the company’s leaders think and act like owners. Cost effectiveness: Fixed elements of remuneration are determined by reference to the median of the market, individual experience and performance, and other relevant factors to ensure competitiveness while controlling fixed costs to maximise efficiency. Future policy table Set out below is the remuneration policy for Executive Directors which, has beenif approved by shareholders, will be applied from the date of shareholder approval at the AGM on 1820 September 2014.2017. Base salary Purpose and link to strategy Supports the attraction and retention of the best global talent with the capability to deliver Diageo’s strategy and performance goals. Operation Normally reviewed annually or following a change in responsibilities with changesany increases usually taking effect from 1 October. The Remuneration Committee considers the following parameters when reviewing base salary levels: Pay increases for other employees across the group;group. Economic conditions and governance trends;trends. The individual’s performance, skills and responsibilities;responsibilities. Base salaries (and total remuneration) at companies of similar size and international scope to Diageo, with roles typically benchmarked against the topFTSE 30 companies in the FTSE100 by market capitalisation excluding companies in the financial services sector,companies, or against similar comparator groups in other locations dependent on the Executive Director’s home market. Opportunity Salary increases will be made in the context of the broader employee pay environment, and will normally be in line with increases awardedthose made to other employees in relevant markets in which Diageo operates, typically the United Kingdom and the United States, unless there is a change in role or responsibility or 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).other exceptional circumstances. 168174
Governance (continued) Benefits Purpose and link to strategy Provides market competitive and cost effective benefits. Operation The provision of benefits depends on the country of residence of the Executive Director and may include but is not limited to a company car or car allowance, the provision of a car and contracted car service or equivalent, product allowance, life insurance, accidental death & disability insurance, medical cover, for the Executive Directorfinancial counselling and family and financial counselling.tax advice. The Remuneration Committee has discretion to offer additional allowances, or benefits, to Executive Directors, if considered appropriate and reasonable. These may include relocation expenses, housing allowance and school fees where a Director hasis asked to relocate from his/her home location as part of their appointment. Opportunity The benefits package is set at a level which the Remuneration Committee considers: Provides an appropriate level of benefits depending on the role and individual circumstances; Is appropriate in the context of the benefits offered to the wider workforce in the relevant market, and Is in line with comparable roles in companies of a similar size and complexity in the relevant market. Post-retirement provisions Purpose and link to strategy Provides cost-effective, competitive post-retirement benefits. Operation Provision of market competitive pension arrangements or a cash alternative based on a percentage of base salary. Further detail on current pension provisions for Executive Directors is disclosed in the annualAnnual report on remuneration. Opportunity The maximum company pension contribution is 30%20% of base salary for any new external appointments to an Executive Director position. Current legacy company contributions for Ivan Menezes and Deirdre MahlanKathryn Mikells in the year ended 30 June 20162017 were 40%30% and 35%20% of base salary respectively. At his request, Ivan Menezes’companyMenezes’ company contribution was reduced from 40% to 30% effective 1 July 2016. Kathryn Mikells’ company contribution in the year ended 30 June 2016 was 20% of base salary. Annual 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 Performance measures, weightings and stretching targets are set annually by the Remuneration CommitteeCommittee. Appropriately stretching targets are set by reference to the annual operating plan.plan and historical and projected performance for the company and its peer group. The level of award is determined with reference to Diageo’s overall financial and strategic performance and individual performance and is paid out in cash after the end of the financial year. 175
Governance (continued) The Committee has discretion to amendadjust the level of payment if it is not deemed to reflect appropriately the individual’s contribution or the overall business performance. Any discretionary adjustments will be detailed in the following year’s annualAnnual report on remuneration. 169
Governance (continued)
The Committee has discretion to apply clawback to bonus, i.e. the company may seek to recover bonus paid in exceptional circumstances, such as gross misconduct or gross negligence during the performance period. Details of the AIP for 2017 are set out in the annualAnnual report on remuneration on page 169.pages 186-187. 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%-100% on financial measures which may include, but are not limited to, measures of revenue, profit and cash and 10%0%-30% on broader objectives based on strategic goals and/or individual contribution and medium-term strategic goals.contribution. Details of the measures and weightings applicable for the year ending 30 June 20172018 are set out on page 179.187. Details of the targets will be disclosed retrospectively in next year’s annualAnnual 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 An annual grant of performance shares and/or market price share options which vest subject to a performance test and continued employment normally over a period of three years. Measures and stretching targets are reviewed annually by the Remuneration Committee for each new award. Details of the measures, weightings and targets applicable for the financial year under review are provided in the annualAnnual report on remuneration. Following vesting there is a further retention period of two years. Executive Directors are able to exercise an option or sell sufficient shares to cover any tax liability when an award vests, provided they retain the net shares arising for the two-year retention period. Notional dividends accrue on performance share awards to the extent that the performance conditions have been met, delivered as shares or cash at the discretion of the Remuneration Committee at the end of the vesting period. The Committee has discretion to reduce the number of shares which vest (subject to HMRC rules regarding approved share options), for example in the event of a material performance failure, or a material restatement of the accounts.financial statements. There is an extensive malus clause for awards made from September 2014. The Committee has discretion to decide that: the number of shares subject to the award will be reduced; the award will lapse; retention shares (i.e. vested shares subject to the additional two-year retention period) will be forfeited; vesting of the award or the end of any retention period will be delayed (e.g. until an investigation is completed); additional conditions will be imposed on the vesting of the award or the end of the retention period; and/or any award, bonus or other benefit which might have been granted or paid to the participant in any later year will be reduced or not awarded. Malus and clawback provisions will apply up to delivery of shares at the end of the retention period (as opposed to the vesting date). The company also has the standard discretion to take account of unforeseen events such as a variation to share capital. Under the DLTIP plan rules, long-term incentive awards, when aggregated with awards under all of the company’s other share plans, will not exceed 10% of the company’s issued share capital (adjusted for share issuance and cancellation) in any rolling 10-year period. In addition, awards under executive schemes will not exceed 5% of the company’s issued share capital in any rolling 10-year period. 176
Governance (continued) Further details of the DLTIP are set out in the annualAnnual report on remuneration on pages 179-184.187-190. Opportunity The maximum annual grant isgrants for the Chief Executive and Chief Financial Officer are 500% and 480% of salary in performance share equivalents respectively (where a market price option is valued at one-third of a performance share). As clarified in the statement of further information on 15 August 2014, underUnder the DLTIP no more than 375% of salary will be awarded in face value terms in options to any Executive Director in any year. 170
Governance (continued)
Threshold vesting level of 20% of maximum with straight-linestraight line vesting up to 100% at maximum for attaining financial metrics and a ranking profile for relative total shareholder return. Diageo long-term incentive plan (DLTIP)
Performance conditions The vesting of awards is linked to a range of measures which may include, but are not limited to: a growth measure (e.g. net sales, eps)profit growth); a measure of efficiency (e.g. operating margin, operatingcumulative free cash conversion,flow, return on invested capital (ROIC)); and a measure of Diageo’s relative performance in relation to its peers (e.g. relative total shareholder return). Measures that apply to performance shares and market price options may differ, as is the case for current awards. Weightings of these measures may vary year-on-year, subject to a minimum weighting of 25% of the total award.year-on-year. Details of the measures, including targets for the awards to be made in September 20162017 are set out on page 183.pages 189-190. The Remuneration Committee has discretion to amend the performance conditions in exceptional circumstances if it considers it appropriate to do so, e.g. in cases of accounting policy changes, M&Amerger and acquisition activities and disposals. Any such amendments would be fully disclosed and explained in the following year’s annualAnnual report on remuneration. All-employee share plans Purpose and link to strategy To encourage broader employee share ownership through locally approved plans. Operation The company operates tax-efficient all-employee share savings plans in various jurisdictions. Executive Directors’ eligibility may depend on their country of residence, tax status and employment company. 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 requirement Purpose and link to strategy Ensures alignment between the interests of Executive Directors and shareholders. 177
Governance (continued) Operation The minimum shareholding requirement is 300%500% of base salary for the Chief Executive and 250%400% of base salary for any other Executive Directors. Executive Directors haveare expected to build up their shareholding within five years fromof their appointment to the Board inBoard. Executive Directors will be restricted from selling more than 50% of shares which vest under the long-term incentive plan (excluding the sale of shares to build upcover tax on vesting and other exceptional circumstances to be specifically approved by the Chief Executive and/or Chairman), until the shareholding requirement is met. 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 shareholding.skills and experience, and performance. Operation Fees for the Chairman and Non-Executive Directors are normally reviewed every two years. Full participationA proportion of the Chairman’s annual fee is used for the monthly purchase of Diageo ordinary shares, which have to be retained until the Chairman retires from the company or ceases to be a Director.
Fees are reviewed in the DLTIPlight of market practice in the FTSE 30, excluding financial services companies, and anticipated workload, tasks and potential liabilities. The Chairman and Non-Executive Directors do not participate in any of the company’s incentive plans nor do they receive pension contributions or benefits. Their travel and accommodation expenses in connection with the attendance of Board meetings (and any tax thereon) are paid by the company. The Chairman and the Non-Executive Directors are eligible to receive a product allowance or cash equivalent at the same level as the Executive Directors. All Non-Executive Directors have letters of appointment. A summary of their terms and conditions of appointment is conditional upon meeting this requirement beyondavailable at www.diageo.com/en/our-business/corporate-governance/compliance. The Chairman of the five-year timeframe.Board, Javier Ferrán, was appointed on 1 January 2017, under a letter of appointment for an initial three-year term, terminable on six months’ notice by either party or, if terminated by the company, by payment of six months’ fees in lieu of notice. Opportunity Fees for Non-Executive Directors are within the limits set by the shareholders from time to time, with an aggregate limit of £1,200,000, excluding the Chairman’s fees. Current fee levels are disclosed in the Annual report on remuneration on page 195. 171178
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 2016,2017, and how they are aligned with company strategy and the creation of shareholder value, are set out in the annualAnnual report on remuneration, on pages179 and 183.pages 187-190. 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.overpay. 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 2017.2018.
Ivan MenezesMinimum 100%16% 24% 60%40% 30% 30%Total $2,149 (£1,692)Total $13,219 (£10,408)On Target Total $5,312 (£4,183)MaximumMinimum 100%15% 25% 60%39% 31% 30%Total $1,286 (£1,013)On Target Total $3,325 (£2,618)MaximumThousands $ 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000Kathryn MikellsTotal $8,360 (£6,583)Thousands $Salary, bene_ts and pension0 2,000 4,000 6,000 8,000 10,000Annual incentiveLong term incentives 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)
Basis of calculation and assumptions: The ‘Minimum’ scenario shows fixed remuneration only, i.e. base salary for financialthe year 2017,ending 30 June 2018, total value of contractually agreed benefits for 2017,2018, and pension. The pension value is based on the estimated pension benefits to be accrued over the financial year ending 30 June 2017.2018. These are the only elements of the Executive Directors’ remuneration packages which are not subject to performance conditions. 179
Governance (continued) 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.awards of 20% of maximum award. 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 annualAnnual 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 theof 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 wasis promoted to the Board, legacy terms and conditions would normally be honoured, including pension entitlements and any outstanding incentive awards. 180
Governance (continued) 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 |
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 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’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. |
181
Governance (continued) | | | 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 |
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 annualAnnual 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
(i) | the Internal Revenue Code of 1986, as amended |
182
Governance (continued) Non-Executive Directors’ unexpired terms of appointment All Non-Executive Directors are on three-year terms which are expected to be extended up to a total of nine years. The date of initial appointment to the Board and the point at which the current letter of appointment expires for Non-Executive Directors are shown in the table below. | | | | | Non-Executive Directors | | Date of appointment to the Board | | Current letter of appointment expires at AGM | Javier Ferrán | | 22 July 2016 | | September 2019 | Lord Davies of Abersoch | | 1 September 2010 | | September 2019 | Peggy B Bruzelius | | 24 April 2009 | | September 2018 | Betsy D Holden | | 1 September 2009 | | September 2018 | Ho KwonPing | | 1 October 2012 | | September 2018 | Nicola S Mendelsohn | | 1 September 2014 | | September 2017 | Philip G Scott | | 17 October 2007 | | September 2017 | Alan JH Stewart | | 1 September 2014 | | September 2017 |
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. Payments under previous policies 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) under a previous policy, in which case the provision of that policy shall continue to apply until such payments have been made; (ii) before the policy or the relevant legislation came into effecteffect; or (ii)(iii) at a time when the relevant individual was not a Directordirector of the company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a Directordirector of the company. For these purposes, ‘payments’ include the Committee satisfyingsatisfaction of awards of variable remuneration and, in relation to an award overawards of 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.granted. 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
Fees for the Chairman and Non-Executive Directors are normally reviewed annually.
A proportion of the Chairman’s annual fee is used for the monthly purchase of Diageo ordinary shares, which have to be retained until the Chairman retires from the company or ceases to be a Director.
Fees are reviewed in the light of market practice in the top 30 companies in the FTSE100 by market capitalisation (excluding companies in the financial services sector) and anticipated workload, tasks and potential liabilities.
The Chairman and Non-Executive Directors do not participate in any of the company’s incentive plans or receive pension contributions or benefits.
The Chairman and the Non-Executive Directors are eligible to receive a product allowance or cash equivalent at the same level as the Executive Directors.
All Non-Executive Directors have letters of appointment. A summary of their terms and conditions of appointment is available at www.diageo.com. The Chairman of the Board, 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
Fees for Non-Executive Directors are within the limits set by the shareholders from time to time, currently an aggregate of £1,000,000, as approved by shareholders at the October 2005 AGM. This limit excludes the Chairman’s fees.
Current fee levels are disclosed in the annual report on remuneration.
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 AmericaUnited States as well as the remuneration structure and policy for the global Senior Managementsenior management population. Diageo employs 32,07830,400 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 to take their views into account when setting out Diageo’sand implementing the company’s remuneration policy and approach, proposed base salary increases for the Executive Directors and targets for the long-term incentive plan award.policies. This year, the company has engaged extensively with shareholders and their proxy advisers about the new directors’ remuneration policy, as well as the base salary proposals for 2016, the fee review for the Chairman2017, short- and Non-Executive Directors, long-term incentive plan targetsdesign and target setting for long-term incentive awards to be made in 2016 as well as2017. 183
Governance (continued) Annual report on remuneration The following section provides details of how the buy-out share awardcompany’s 2014 remuneration policy was implemented during the year ended 30 June 2017, and how the Remuneration Committee intends to implement the Chief Financial Officer on appointment toproposed remuneration policy in the company. ANNUAL REPORT ON REMUNERATIONyear ending 30 June 2018.
Single total figure of remuneration for Executive Directors (audited) The table below details the Executive Directors’ remuneration for the year ended 30 June 2016.2017. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ivan Menezes(i) | | | Kathryn Mikells(ii) | | | Deirdre Mahlan(iii) | | | Ivan Menezes(i) | | | Kathryn Mikells(i),(ii) | | | | 2016 | | | 2016 | | | 2015 | | | 2015 | | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2017 | | | 2017 | | | 2016 | | | 2016 | | | 2017 | | | 2017 | | | 2016 | | | 2016 | | Fixed pay | | ’000 | | | ’000 | | | ’000 | | | ’000 | | | ’000 | | | ’000 | | | ’000 | | | ’000 | | | ‘000 | | | ‘000 | | | ‘000 | | | ‘000 | | | ‘000 | | | ‘000 | | | ‘000 | | | ‘000 | | Salary | | £ | 1,027 | | | $ | 1,520 | | | £ | 968 | | | $ | 1,520 | | | £ | 419 | | | | — | | | £ | 258 | | | £ | 727 | | | £ | 1,215 | | | $ | 1,543 | | | £ | 1,027 | | | $ | 1,520 | | | £ | 671 | | | $ | 853 | | | £ | 419 | | | $ | 620 | | Benefits(iv) | | £ | 78 | | | $ | 115 | | | £ | 155 | | | $ | 243 | | | £ | 64 | | | | — | | | £ | 102 | | | £ | 34 | | | Pension(v) | | £ | 486 | | | $ | 719 | | | £ | 424 | | | $ | 666 | | | £ | 83 | | | | — | | | £ | 105 | | | £ | 267 | | | Benefits(ii) | | | £ | 92 | | | $ | 117 | | | £ | 78 | | | $ | 115 | | | £ | 198 | | | $ | 251 | | | £ | 64 | | | $ | 95 | | Pension(iii) | | | £ | 432 | | | $ | 549 | | | £ | 486 | | | $ | 719 | | | £ | 135 | | | $ | 171 | | | £ | 83 | | | $ | 123 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total fixed pay | | £ | 1,591 | | | $ | 2,354 | | | £ | 1,547 | | | $ | 2,429 | | | £ | 566 | | | | | £ | 465 | | | £ | 1,028 | | | £ | 1,739 | | | $ | 2,209 | | | £ | 1,591 | | | $ | 2,354 | | | £ | 1004 | | | $ | 1,275 | | | £ | 566 | | | $ | 838 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Performance related pay | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Annual incentive | | £ | 1,330 | | | $ | 1,969 | | | £ | 535 | | | $ | 840 | | | £ | 585 | | | | — | | | £ | 363 | | | £ | 428 | | | £ | 1,660 | | | $ | 2,109 | | | £ | 1,330 | | | $ | 1,969 | | | £ | 1,120 | | | $ | 1,422 | | | £ | 585 | | | $ | 866 | | Long-term incentives(vi) | | £ | 1,162 | | | $ | 1,720 | | | £ | 1,380 | | | $ | 2,167 | | | £ | 1,660 | | | | — | | | £ | 245 | | | £ | 870 | | | Other incentives(vii) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | £ | 3 | | | £ | 4 | | | Long-term incentives(iv) | | | | — | | | | — | | | £ | 1,235 | | | $ | 1,827 | | | | — | | | | — | | | £ | 1,660 | | | $ | 2,457 | | Other incentives(v) | | | | — | | | | — | | | | — | | | | — | | | £ | 4 | | | $ | 5 | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total remuneration for Executive Director appointment | | £ | 4,083 | | | $ | 6,043 | | | £ | 3,462 | | | $ | 5,436 | | | £ | 2,811 | | | | — | | | £ | 1,076 | | | £ | 2,330 | | | £ | 3,399 | | | $ | 4,318 | | | £ | 4,156 | | | $ | 6,150 | | | £ | 2,128 | | | $ | 2,702 | | | £ | 2,811 | | | $ | 4,161 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | — | | | | — | | | | — | | | | — | | | Other performance related pay(Granted prior to appointment as Executive Director) | | | | | | | | | | | | | | | | | | Long-term incentives(vi) | | | | — | | | | — | | | £ | 366 | | | $ | 542 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | TOTAL SINGLE FIGURE | | £ | 4,440 | | | $ | 6,571 | | | £ | 3,792 | | | $ | 5,954 | | | £ | 2,811 | | | | — | | | £ | 1,076 | | | £ | 2,330 | | | £ | 3,399 | | | $ | 4,318 | | | £ | 4,522 | | | $ | 6,692 | | | £ | 2,128 | | | $ | 2,702 | | | £ | 2,811 | | | $ | 4,161 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 2015,2017 the exchange rate was £1 = $1.57$1.27 and for the year ended 30 June 2016 the exchange rate was £1 = $1.48. |
176
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)20k), company car allowance (£17k)20k), chauffeurcontracted car service (£8k)6k), financial counselling (£33k)42k), 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)18k), financial counselling (£24k)14k), contracted car service, life cover and product allowance andallowance. 2017 remuneration includes one-off relocation costs in relation to her move from the United States to the United Kingdom, grossed up for tax (£25k)162k). |
(v)(iii) | 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 UKUnited Kingdom 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)(iv) | Long-term incentives representsrepresent the estimated gain delivered through share options and performance shares where performance conditions have been met in the respective financial year. For 2016, this includesIvan Menezes in 2017, 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 SESOPDLTIP in 20132014 all lapsed due to the performance conditionconditions not being met. Long-term incentives for 20152016 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).5 September 2016. For further information on the SESOPPSP and PSPSESOP performance conditions and vesting outcomes please refer to the ‘LTIP awards vesting in the year ended 30 June 2016’2017’ section of the report on page 79.report. For Kathryn Mikells, 2016 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.employer, and granted in accordance with the remuneration policy on recruitment remuneration. The average closing share price of an ordinary share over the three dealing days prior to the date of grant was 1892.0 pence. There are no other long-term incentive awards vesting based on performance in the year ended 30 June 2017 to report for Kathryn Mikells. |
(vii)(v) | Other incentives include the face value of awards made under all-employee share plans. Awards do not have performance conditions attached. |
184
Governance (continued) (viii)(vi) | Ivan Menezes retains interests in long-term incentive awards that were granted to him in 2012, prior to joining the boardBoard under ‘below-board’‘below-Board’ plans (Discretionary(Diageo Incentive Plan), details of which are shown on page 181.pages 188-189. The valuepart of the secondthird tranche of the award based on performance for the year ended 30 June 2016 is shown in2017 will lapse as 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).performance conditions have not been met. The value of the part of the award based on continuing employment for the year ended 30 June 20162017 is not includedrequired to be reported in the table on the previous pageabove and amounts to 14,642 ADRs. The14,643 ADRs, which will vest on 8 March 2018. For 2016, the value of 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 actual share price on the date of vesting ($106.14110.99 for ADRs). |
Salary Salary increases to be applied in the year ending 30 June 20172018 As outlined in the 2016 Annual report on remuneration, base salaries for the Chief Executive and Chief Financial Officer were increased by 2%, effective from 1 October 2016. In June 2016,2017, the Remuneration Committee reviewed base salaries for senior management and agreed new salaries which will apply from 1 October 2016.2017. 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 20162017 is 2.2%2.5% of base salary for the businessemployees 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 2016.2017. The Chief Financial Officer, Kathryn Mikells, is a US national and her salary on appointment on 9 November 2015 ($1,000,000) was converted into sterling (£650,000) based on the prevailing exchange rate at that point (£1 = $1.54). As Kathryn continues to have living costs in the United States, her salary has been fixed in US dollars from 1 June 2017, rather than in sterling, with salary increases since appointment applied to her US dollar salary. Her salary for 2016 has been converted to US dollars using the same exchange rate as at her appointment. 177
Governance (continued)
| | | | | | | | | | | | | | | | | | | Ivan Menezes | | | Kathryn Mikells(i) | | Salary at 1 October (’000) | | 2016 | | | 2015 | | | 2016 | | | 2015 | | Base salary | | $ | 1,550 | | | $ | 1,520 | | | £ | 663 | | | £ | 650 | | | | | | | | | | | | | | | | | | | % increase (over previous year) | | | 2% | | | | 0% | | | | 2% | | | | — | | | | | | | | | | | | | | | | | | |
(i) | For Kathryn Mikells, the 2015 salary refers to her salary on appointment on 9 November 2015. |
| | | | | | | | | | | | | | | | | | | Ivan Menezes | | | Kathryn Mikells | | Salary at 1 October (’000) | | 2017 | | | 2016 | | | 2017 | | | 2016 | | Base salary | | $ | 1,581 | | | $ | 1,550 | | | $ | 1,040 | | | $ | 1,020 | | | | | | | | | | | | | | | | | | | % increase (over previous year) | | | 2% | | | | 2% | | | | 2% | | | | 2% | | | | | | | | | | | | | | | | | | |
Annual incentive plan (AIP) (audited) AIP payout for the year ended 30 June 20162017 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%136.0% of base salary for Ivan Menezes and 139.6%139.4% of base salary for both Kathryn Mikells and Deirdre Mahlan (pro-rated to reflect the period of their appointments on the Board).Mikells. The actual awards received in respect of theirby the Executive Director appointmentsDirectors are shown in the ‘single total figure of remuneration’ table on pages 176-177.page 184. 185
Governance (continued) | | |
| | PayoutDiageoGroup(i)(%oftotalAIP(80%oftotalAIPopportunity)Diageo Group Payout (% of total AIP (80% of total AIP opportunity)Netsalesmeasure(ii) opportunity) Net sales measure Threshold Target Maximum (%growth)ThresholdTargetMaximum(25%oftotal)Performancetarget1.9%3.9%5.8%Actualperformance3.2%AIPopportunity6.25% Performance target 2.25% 4.5% 6.75% Actual performance 4.5% AIP opportunity 6.25% 12.50%25.00%10.4%ProfitbeforeexceptionalitemsThresholdTargetMaximumandtaxmeasure(iii) 12.5% Profit before exceptional items Threshold Target Maximum and tax measure (%growth)Performancetarget4.6%7.0%9.2%(25%oftotal)Actualperformance9.6%AIPopportunity6.25% Performance target 4.1% 7.8% 11.5% Actual performance 8.8% AIP opportunity 6.25% 12.50%25.00%25.0%OperatingcashconversionThresholdTargetMaximummeasure(iv) 15.8% Operating cash conversion Threshold Target Maximum measure (%)Performancetarget97.0%102.0%107.0%(30%oftotal)Actualperformance104.3%AIPopportunity7.5%15.0%30.0%21.9%TotalDiageogroupAIPoutcome20% Performance target 97% 102% 107% Actual performance 106.9% AIP opportunity 7.50% 15.00% 30.00% 29.7% Total Diageo Group AIP outcome 20% 40%80%57.3% 58.0% |
178
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 20162017 budgeted exchange rates in line with management reporting and excludes the impact of IAS 21 in respect of short-termshort 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 after adjustments for acquisitions and disposals plus earnings from associated companies less net interest, IAS 21/39 adjustments adjustments for acquisitions and disposals and year-on-year foreign exchange onin respect of interest. |
(iv) | The operatingOperating 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. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Payout | | | | | | | | | | | | Total | | | Total | | | Total | | | Total | | Individual | | Individual Business Objectives(v) | | IBOs | | | Group | | | (% max) | | | (% salary) | | | (£’000) | | | ($’000) | | Maximum AIP opportunity | | | 20 | % | | | 80 | % | | | 100 | % | | | 200 | % | | | | | | | | | Ivan Menezes CEO | | • Shift to a productivity focused organisation and deliver the F17 productivity objectives for Diageo | | | | | | | | | | | | | | | | | | | | | | | | | | | • Deliver the Diageo Scotch ambition and Scotch plan and beat the competition | | | 10.0 | % | | | 58.0 | % | | | 68.0 | % | | | 136.0 | % | | £ | 1,660 | | | $ | 2,109 | | | | • Deliver performance improvement in North America market | | | | | | | | | | | | | | | | | | | | | | | | | Kathryn Mikells CFO | | • Deliver the F17 productivity objectives for Diageo and the global finance function | | | | | | | | | | | | | | | | | | | | | | | | | | | • Deliver the Diageo Scotch ambition and Scotch plan and beat the competition | | | 11.7 | % | | | 58.0 | % | | | 69.7 | % | | | 139.4 | % | | £ | 1,120 | | | $ | 1,422 | | | | • Reduce average working capital as a proportion of net sales through improvements to inventory levels and sales forecast accuracy, and achieve nominal cash delivery target | | | | | | | | | | | | | | | | | | | | | | | | |
(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)equally) is shown as the final payout against the IBO element in the table above. |
186
Governance (continued) AIP design for the year ending 30 June 20172018 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. For the year ending 30 June 2018, the Remuneration Committee has decided to replace the measure on operating cash conversion with average working capital as a proportion of net sales, in order to drive focus on working capital management throughout the year and incentivise sustainable actions beneficial to the business in the long term. In addition, the measure on profit before exceptional items and tax (PBET) will be replaced with organic operating profit growth, to align with the profit measure currently used across the rest of Diageo. PBET will instead be measured under the long-term incentive plan. The weightings remain unchanged from last year. The AIP design for the year ending 30 June 20172018 will comprise of four measures (weightings in brackets): Profit before exceptional items and taxOperating profit (% growth) (25%): stretching profit targets drive operational efficiency and influence the level of returns that can be delivered to shareholders through increases in share price and dividend income;income not including exceptional items or exchange;
Net sales (% growth) (25%): year-on-year net sales growth is a key performance measure;measure of year-on-year top-line growth; Operating cash conversionAverage working capital as a proportion of net sales (30%): ensures focus on efficient conversion of profit into cash;working capital management throughout the year and incentivises sustainable actions that are beneficial for the business in the long term; and
Individual business objectives (20%): are measurable deliverables that are specific to the individual and are focused on supporting the delivery of key strategic objectives. Details of the targets for the performance periodyear ending 30 June 20172018 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 20162017 (audited) Until 30 JuneAs approved by shareholders at the AGM in September 2014, long-term incentives were a combination of share optionsincentive awards are made under the Senior Executive Share OptionDiageo Long-Term Incentive Plan 2008 (SESOP) and performance share(DLTIP) for awards under the Performance Share Plan 2008 (PSP).from 2014 onwards. Awards wereare designed to incentivise Executive Directors and senior managers to deliver long-term sustainable performance. Awards made under both sets of plans wereperformance and are 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.
179
Governance (continued)
SESOPShare options – granted in September 2013,2014, vesting in September 20162017 (audited)
On 525 September 2013,2014, Ivan Menezes and Deirdre Mahlan received awardsan award of 46,23945,447 (ADRs) and 135,022 (ordinary shares) market price options, respectively, under the SESOP. Awards wereDLTIP. The award was subject to a performance condition based on absolute 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 inat constant exchange rates, are excluded from year-on-year comparisons of performance.with a straight-line payout between threshold and maximum. Options only vest when stretching adjusted eps targets are achieved. Vesting is on a pro rata basis ranging from a threshold level of 25%20% to a maximum level of 100%. The adjusted eps growth targets and actual performance for the 2013 SESOP2014 DLTIP 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% | |
| | | | | | | | | Vesting of 2014 share option awards | | Target | | | Vesting (% maximum) | | Compound annual adjusted eps growth over 1 July 2014 – 30 June 2017 | | | | | | | | | Threshold | | | 6% p.a. | | | | 20% | | Maximum | | | 11% p.a. | | | | 100% | | Actual | | | 3.0% p.a. | | | | 0% | |
Accordingly, the 2013 SESOP2014 DLTIP 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. PSPPerformance shares – awarded in September 2013,2014, vesting in September 20162017 (audited)
On 525 September 2013,2014, Ivan Menezes and Deirdre Mahlan received awardsan award of 47,48445,447 (ADRs) and 110,241 (ordinary shares) performance shares, respectively, under the PSP.DLTIP. 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. 187
Governance (continued) For the 20132014 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 PSPperformance share awards granted in September 20132014 are shown in the following table:tables: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Vesting of 2013 PSP awards | | Threshold | | | Mid-point | | | Maximum | | | Actual | | | Vesting (% maximum) | | | Vesting of 2014 performance share awards | | | Threshold | | Mid-point | | Maximum | | Actual | | Vesting (% maximum) | Relative total shareholder return | | | Median ranking (9th) | | — | | Upper quintile (3rd or above) | | 16th | | 0% | Organic net sales (CAGR) | | | 5.0% | | | | 6.5% | | | | 8.0% | | | | 1.0% | | | | 0.0% | | | 4.0% p.a. | | 5.5% p.a. | | 7.0% p.a. | | 2.3% p.a. | | 0% | Organic operating margin improvement | | | 75bps | | | | 100bps | | | | 125bps | | | | 120bps | | | | 91.9% | | | 125 bps | | 175 bps | | 225 bps | | 80 bps | | 0% | Relative total shareholder return | | | Median ranking (ninth) | | | | — | | | | Upper quintile (third or above) | | | | 15th | | | | 0.0% | | | Vesting (% maximum) | | | 25.0% | | | | 62.5% | | | | 100% | | | | | | 30.6% | | | 20% | | 60% | | 100% | | 0% | | 0% |
The three conditions are weighted equally. For operating margin and net sales, there is straight-linestraight line vesting between threshold and the midpoint, and between the mid-point and the maximum. The full vesting profile for TSR is shown below: 180
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 ranking (out of 17) | | Vesting profile for DLTIP performance share awards from 2014 | | 1st, 2nd or 3rd | | | 100 | % | 4th | | | 95 | % | 5th | | | 75 | % | 6th | | | 65 | % | 7th | | | 55 | % | 8th | | | 45 | % | 9th | | | 20 | % | 10th or below | | | 0 | % |
| | | TSR peer group (16 companies) | | | AB Inbev | | Mondelēz International | Brown Forman | | Nestlé | Carlsberg | | PepsiCo | Coca-Cola | | Pernod Ricard | Colgate-Palmolive | | Procter & Gamble | Groupe Danone | | Reckitt Benckiser | Heineken | | SABMiller | Kimberly-Clark | | Unilever |
On the basis of this performance, the 2013 PSP2014 performance share award which is due to vest in September 2016, has partially metdid not meet 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.lapse.
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 midpointmid-point 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 secondthird tranche of the 2012 DIP award (i.e. the tranche based on performance over the three years to 30 June 2016)2017) versus target is set out below: 188
Governance (continued) Vesting of secondthird 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% | | | | | | | | | | | | | | | Total | | | | | | | | | | | 33.3% | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Performance measures (equally weighted) | | Target | | | Actual | | | Vesting (% of maximum) | | Organic net sales growth (CAGR) | | | 5.5% p.a. | | | | 2.3% p.a. | | | | 0% | | Organic operating margin improvement | | | 175 bps | | | | 80 bps | | | | 0% | | Compound annual adjusted EPS growth | | | 8.5% p.a. | | | | 3.0% p.a. | | | | 0% | | | | | | | | | | | | | | | Total | | | | | | | | | | | 0% | | | | | | | | | | | | | | |
As the table shows, 33.3%none of the performance related ADRs under the secondthird tranche of the 2012 DIP award will vest in March 2017, subject to continuing employment.2018. The total award that will vest to Ivan Menezes in March 20172018 will therefore be 66.6%the part based on continuing employment only (50% of the second tranche (including the ADRs that vest on time only)third tranche), or 19,523which is 14,643 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 theAs no part of the award vesting in March 2018 is based on performance and vesting in Marchduring the year ended 30 June 2017, it is not included in the single total figure of remuneration. DLTIP awards made during the year ended 30 June 20162017 (audited) On 35 September 2015,2016, Ivan Menezes and Deirdre MahlanKathryn Mikells received awards of 49,82554,356 (ADRs) and 140,515128,253 (ordinary shares) performance shares respectively, and 49,82554,356 (ADRs) and 140,515128,253 (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 20152016 to 30 June 2018.2019. 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. 181
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 | | | 05/09/2016 | | | | DLTIP – share options | | | | ADR | | | | 54,356 | | | | $113.66 | | | | $5,814 | | | | 375% | | Ivan Menezes | | | 05/09/2016 | | | | DLTIP – performance shares | | | | ADR | | | | 54,356 | | | | — | | | | $5,814 | | | | 375% | | Kathryn Mikells | | | 05/09/2016 | | | | DLTIP – share options | * | | | Ord | | | | 128,253 | | | | 2113p | | | | £2,387 | | | | 360% | | Kathryn Mikells | | | 05/09/2016 | | | | DLTIP – performance shares | | | | Ord | | | | 128,253 | | | | — | | | | £2,387 | | | | 360% | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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% | |
* | Of these, 1,419 were tax qualified options and the remainder were non-tax qualified. |
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 continued employment, and the actual value may be nil. The vesting outcomes will be disclosed in the 20182019 annual report. The face value of each award has been calculated using the shareaward 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(1861 pence for ordinary shares and $114.40$106.96 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(2113 pence for ordinary shares and $104.93$113.66 for ADRs). The share price on the date of grant was 1713.52126.5 pence for ordinary shares and $104.30$115.77 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 2014.2018
The long-term incentive plan measures are reviewed annually by the Remuneration Committee and are selected to reward long-term consistent performance in line with Diageo’s business strategy and to create alignment with the delivery of value for shareholders. The Committee has ensured that the incentive structure for senior management does not raise environmental, social and governance risks by inadvertently motivating irresponsible behaviour. The Committee has considered the mix and appropriateness of performance measures under the DLTIP, measuresin view of the uncertainty of the tax environment and the unpredictability of the effective tax rate in years to come. As a result, for DLTIP awards to be granted in September 2016 are2017, the samemeasure on earnings per share (eps) growth will be replaced with one on profit before exceptional items and tax (PBET) growth, and the allocation of measures between the performance share and share option elements of the plan will be shifted, as those that applied to awards madeoutlined in September 2015 and are:the table below. 189
Governance (continued) | | | | | | | | | Eligibility | | 2016 DLTIP awards | | 2017 DLTIP awards | Share options | | Executive Directors and Executive Committee | | 100% on adjusted eps growth | | 50% on relative TSR vs peer group 50% on organic PBET growth | Performance shares | | Executive Directors, | | 1/3rd on Relative TSR vs peer group | | 1/3rd on organic PBET growth | | | Executive Committee | | 1/3rd on cumulative free cash flow | | 1/3rd on cumulative free cash flow | | | & senior leaders | | 1/3rd on organic net sales growth | | 1/3rd on organic net sales growth |
The performance share element of the DLTIP applies to the Executive Committee and the top 50 senior leaders across the organisation worldwide, whilst the share option element is applicable to a much smaller population comprising only members of the Executive Committee. The structure for the performance share element of DLTIP using PBET instead of relative TSR will embed a focus on long-term earnings growth deeper in the organisation. This enables performance to be driven against a measure that the senior leadership group can directly influence. Relative total shareholder return:TSR, which reflects the value of share price growth plus dividends, thus measuringis still seen as an important measure of long-term performance, and one that provides alignment with shareholder value, and this measure will therefore be retained under the value returned on shareholder investments; Organic net sales: sustained year-on-year organic net sales growthshare option element of the DLTIP, where it is a keymore appropriate focal point for the Executive Committee. It is proposed to also introduce PBET under the share option element of DLTIP to provide a more balanced view of long-term performance measure;
Cumulative free cash flow: measuresby capturing both internal and external, and relative and absolute performance. Although the efficiencyimpact of cash management;
Compound annual adjusted eps growth: reflects profitabilityany changes to the tax rate will not be directly incentivised under the DLTIP, management of the tax rate will continue to be part of the accountabilities of the Chief Financial Officer and is a key measure for shareholders.
182
Governance (continued)
the Head of Group Tax. The table below outlines the targets and the vesting profile for these awards. The measures are equally weighted, withawards to the Executive Directors and the relative weightings of each performance shares subject tomeasure as a percentage of the total award in performance against relative total shareholder return, organic net sales and cumulative free cash flow, and share options subject to performance against adjusted eps growth.equivalents. Performance will be tested over three financial years, beginning with the year ending 30 June 2017.2018. | | | Performance shares | | | Share options | | | | | | 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 | | | Profit before exceptional items and tax growth (CAGR) | | Organic net sales (CAGR) | | Cumulative free cash flow (£m) | | Relative total shareholder return | | Profit before exceptional items and tax growth (CAGR) | | Vesting profile | Weighting (% total) | | | 25% | | 25% | | 25% | | 12.5% | | 12.5% | | 100% | Threshold | | | Median ranking (ninth) | | | | 3.5% | | | | £5,700m | | | | 4.0% | | | | 20% | | | 4.5% p.a. | | 3.5% p.a. | | £7,200m | | Median ranking (ninth) | | 4.5% p.a. | | 20% | Midpoint | | | — | | | | 4.75% | | | | £6,400m | | | | 6.75% | | | | 60% | | | Mid-point | | | 7.5% p.a. | | 4.75% p.a. | | £7,900m | | — | | 7.5% p.a. | | 60% | Maximum | | | Upper quintile (third or above) | | | | 6.0% | | | | £7,100m | | | | 9.5% | | | | 100% | | | 10.5% p.a. | | 6% p.a. | | £8,600m | | Upper quintile (third or above) | | 10.5% p.a. | | 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 2016.2017. 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 2016.2017. 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.
183
Governance (continued)
As was disclosed to the market at the time, Kathryn Mikells was awarded:
43,868 ordinary shares, which will vest on 9 May 2017, subject to continuing employment;
43,868 ordinary shares, which will vest on 9 November 2018, subject to continuing employment; and
246,300 ordinary shares, which will vest on 9 November 2018, subject to the achievement of performance conditions based on net sales growth, cumulative free cash flow and relative total shareholder return over the three-year period ending 30 June 2018 (the same performance conditions and targets that apply to performance share awards granted in September 2015 under the DLTIP). The share price on award, being the average closing price of an ordinary share over the three dealing days prior to the date of grant, was 1892 pence and the face value note above is based on this price.
Pension and benefits in the year ended 30 June 20162017 Benefits Benefits provisions for the Executive Directors continue to be in line with the information set out in the future policy table. 190
Governance (continued) Pension arrangements (audited) Ivan Menezes and Kathryn Mikells and Deirdre Mahlan are members of the Diageo North America Inc. Supplemental Executive Retirement Plan (SERP) with an accrual rate of 40%,30% and 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.2017. 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)Mikells) 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 havehas accrued benefits under both plans. The Cash Balance Plan is a qualified funded pension arrangement, employerarrangement. 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.Mikells. The table below shows the pension benefits accrued by each Director to date. Note that the accrued UKUnited Kingdom benefits for Ivan Menezes are annual pension amounts, whereas the accrued US benefits for Ivan Menezes and Kathryn Mikells and Deirdre Mahlan are one-off cash balance amounts. 184
Governance (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | 30 June 2016 | | | 30 June 2015 | | | 30 June 2017 | | | 30 June 2016 | | Executive Director | | UK pension £’000 p.a. | | | US benefit £’000 | | | UK pension £’000 p.a. | | | US benefit £’000 | | | 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 | | | | 69 | | | | 6,236 | | | | 69 | | | | 5,588 | | Kathryn Mikells(ii) | | | Nil | | | | 92 | | | | n/a | | | | n/a | | | | Nil | | | | 227 | | | | Nil | | | | 92 | | Deirdre Mahlan(iii) | | | Nil | | | | 1,808 | | | | Nil | | | | 1,239 | | |
(i) | Ivan Menezes’ US benefits are higher at 30 June 20162017 than at 30 June 20152016 by £1,370k:£648k; |
| (a) | £486k of which is463k higher due to pension benefits earned over the year (all(£432k of which is over and above the increase due to inflation)inflation – as reported in the single figure of remuneration, see pages 176-177;page 184); |
| (b) | £61k of which is69k higher due to interest earned on his deferred US benefits over the year; and |
| (c) | £823k of which is116k higher due to exchange rate movements over the year. |
(ii) | Kathryn Mikells’ US benefits are higher at 30 June 2017 than at 30 June 2016 than on her appointment date on 9 November 2015 by £92k:£135k; |
| (a) | £83k of which is136k higher due to pension benefits earned over the year (all(£135k of which is over and above the increase due to inflation)inflation – as reported in the single figure of remuneration, see pages 176-177;page 184); 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 is1k lower 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) | | 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 | | | 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 | | | 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. |
185191
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)Total shareholder return Diageo Chief Executive value of hypothetical FTSE 100 total remuneration £100 holding Chief Executive total remuneration £ million £350 35 £300 30 £250 25 £200 20 £150 15 £100 10 £50 5 0 0 June 2009 June 2010 June 2011 June 2012 June 2013 June 2014 June 2015 June 2016 June 2017 Paul S Walsh Paul S Walsh Paul S Walsh Paul S Walsh Ivan Menezes (i) Ivan Menezes(i) Ivan Menezes(i) Ivan Menezes(i) £000 £000 £000 £000 £000 £000 £000 £000 Chief Executive total remuneration (includes legacy LTIP awards) 3,231 4,449 11,746 15,557 7,312 3,888 4,156 3,399 Annual incentive (% maximum opportunity) 86%77%74%51%9%28% 44% 65%LT-SESOP 68% LT SESOP (%maximumopportunity) maximum opportunity) 100%100%100%100%71%0%0%LTI-PSP 0% LTI PSP (%maximumopportunity) maximum opportunity) 0%0%65%95%55%33%31% 0% |
(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 20152016 to 2016.2017. 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% | |
| | | | | | | | | | | | | | | Salary | | | Taxable benefits | | | Bonus | | | | % change | | | % change | | | % change | | Chief Executive percentage change from 2016 to 2017 | | | 2% | | | | 2% | | | | 7% | | Average % change for the UK and US workforce from 2016 to 2017 | | | 4% | | | | 0% | | | | 2% | |
The percentage change for the Chief Executive is based on the remuneration of Ivan Menezes from 20152016 to 2016. Taxable benefits in 2015 included one-off relocation payments.2017. UK salary, benefits and bonus data for both 20152016 and 20162017 have been converted into USDUS dollars using the cumulative weighted average exchange rate for the year ended 30 June 20162017 of £1 = $1.48.$1.27. 192
Governance (continued) Directors’ shareholding requirements and share and other interests (audited) The beneficial interests of the Directors in office at 30 June 20162017 (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) | | | | | | | | | | | | 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 | | | 13 July 2017 | | | 30 June 2017 (or date of departure, if earlier) | | | 30 June 2016 (or date of appointment, if later) | | | Shareholding requirement (% salary)(ii) | | | Shareholding at 13 July 2017 (% salary)(ii) | | | Shareholding requirement met | | Chairman | | | | | | | | | | | | | | | | | | | | | | | | | Dr Franz B Humer | | | 67,699 | | | | 67,316 | | | | 60,097 | | | | — | | | | — | | | | — | | | Javier Ferrán(iii) | | | | 48,685 | | | | 48,323 | | | | — | | | | — | | | | — | | | | — | | 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 | | | Ivan Menezes(iv) | | | | 943,854 | | | | 943,854 | | | | 864,714 | | | | 500% | | | | 1696% | | | | Yes | | Kathryn Mikells(iv),(vi) | | | | 37,036 | | | | 37,028 | | | | 13,580 | | | | 400% | | | | 123% | | | | No | | Non-Executive Directors | | | | | | | | | | | | | | | | | | | | | | | | | Lord Davies of Abersoch | | | | 5,052 | | | | 5,052 | | | | 5,052 | | | | — | | | | — | | | | — | | Peggy B Bruzelius | | | 5,000 | | | | 5,000 | | | | 5,000 | | | | — | | | | — | | | | — | | | | 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 | | | | — | | | | — | | | | — | | | Betsy D Holden(iv) | | | | 17,400 | | | | 17,400 | | | | 17,400 | | | | — | | | | — | | | | — | | Ho KwonPing | | | 4,353 | | | | 4,353 | | | | 4,223 | | | | — | | | | — | | | | — | | | | 4,397 | | | | 4,397 | | | | 4,353 | | | | — | | | | — | | | | — | | Nicola S Mendelsohn | | | | 5,000 | | | | 5,000 | | | | 5,000 | | | | — | | | | — | | | | — | | Philip G Scott | | | 10,000 | | | | 10,000 | | | | 10,000 | | | | — | | | | — | | | | — | | | | 2,000 | | | | 2,000 | | | | 10,000 | | | | — | | | | — | | | | — | | Nicola S Mendelsohn | | | 5,000 | | | | 5,000 | | | | 5,000 | | | | — | | | | — | | | | — | | | Alan JH Stewart | | | 2,560 | | | | 2,560 | | | | 1,500 | | | | — | | | | — | | | | — | | | | 2,560 | | | | 2,560 | | | | 2,560 | | | | — | | | | — | | | | — | | Emma Walmsley(v) | | | 5,094 | | | | 5,094 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 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 1413 July 20162017 are expressed as a percentage of base salary earned in the year endedon 30 June 20162017 and calculated using an average share price for the year endingended 30 June 20162017 of 1843.52193.46 pence. |
(iii) | Javier Ferrán joined the Board on 22 July 2016, initially in the role of a non-executive director, and was appointed as Chairman on 1 January 2017. |
(iv) | 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 toon 1 January 2016 and stepped down from the Board on 1 January21 September 2016. |
(vi) | Kathryn Mikells has five years from the date of her appointment, that is, until 9 November 2020, to build upmeet the required shareholding in Diageo shares.requirement. |
187193
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) | | | 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 2016(i) | | Granted | | Vested/ exercised | | Dividends awarded and released | | Lapsed | | Number of shares/ options at 30 June 2017 | | Total number of shares/ options in Ords(ii) | | Ivan Menezes | Ivan Menezes | | | | | | | | | | | | | | Ivan Menezes | | | | | | | | | | | | | | SESOP(iii) | | Sep 2010 | | | 2010-2013 | | | 2013 | | | ADR | | | | | $ | 67.84 | | | 55,512 | | | | | | | | | | | 55,512 | | | | | 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 | | | | | 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 | | | | — | | | | | Sep 2013 | | | 2013-2016 | | | 2016 | | | ADR | | | | | $ | 123.27 | | | 46,239 | | | | | | | | | 46,239 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total number of vested but unexercised share options | | | | | | | | | | | | | | 368,396 | | | Total vested but unexercised share options | | Total vested but unexercised share options | | | | | | | | | | | | | | 146,348 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | SESOP(v) | | Sep 2013 | | | 2013-2016 | | | 2016 | | | ADR | | | | | $ | 123.27 | | | 46,239 | | | | | | | | | | | 46,239 | | | | | DLTIP – share options(v) | | | Sep 2014 | | | 2014-2017 | | | 2017 | | | ADR | | | | | $ | 117.55 | | | 45,447 | | | | | | | | | | | 45,447 | | | | DLTIP – share options(vi) | | Sep 2014 | | | 2014-2017 | | | 2017 | | | ADR | | | | | $ | 117.55 | | | 45,447 | | | | | | | | | | | 45,447 | | | | | Sep 2015 | | | 2015-2018 | | | 2018 | | | ADR | | | | | $ | 104.93 | | | 49,825 | | | | | | | | | | | 49,825 | | | | DLTIP – share options | | Sep 2015 | | | 2015-2018 | | | 2018 | | | ADR | | | | | $ | 104.93 | | | | | 49,825 | | | | | | | | | 49,825 | | | | | Sep 2016 | | | 2016-2019 | | | 2019 | | | ADR | | | | | $ | 113.66 | | | | — | | | 54,356 | | | | | | | | | 54,356 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total number of unvested share options subject to performance | | | | | | | | | | | | | | 566,044 | | | Total unvested share options subject to performance | | Total unvested share options subject to performance | | | | | | | | | | | | | | 598,512 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | DIP(iv) | | Sep 2011 | | | 2011-2014 | | | 2014-2015 | | | ADR | | | $ | 74.11 | | | | | 21,309 | | | | | 21,309 | | | | | | | | — | | | | | Mar 2012 | | | 2012-2019 | | | 2016-2019 | | | ADR | | | $ | 96.44 | | | | | 43,928 | | | | | 4,880 | | | | | 9,762 | | | 29,286 | | | | 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 | | | | — | | | | | Sep 2013 | | | 2013-2016 | | | 2016 | | | ADR | | | $ | 123.08 | | | | | 47,484 | | | | | 14,530 | | | | | 32,954 | | | | — | | | | PSP(v) | | Sep 2013 | | | 2013-2016 | | | 2016 | | | ADR | | | $ | 123.08 | | | | | 47,484 | | | | | | | | | | | 47,484 | | | | | DLTIP – performance shares(v) | | | Sep 2014 | | | 2014-2017 | | | 2017 | | | ADR | | | $ | 115.80 | | | | | 45,447 | | | | | | | | | | | 45,447 | | | | DLTIP – performance shares(vi) | | Sep 2014 | | | 2014-2017 | | | 2017 | | | ADR | | | $ | 115.80 | | | | | 45,447 | | | | | | | | | | | 45,447 | | | | | Sep 2015 | | | 2015-2018 | | | 2018 | | | ADR | | | $ | 104.30 | | | | | 49,825 | | | | | | | | | | | 49,825 | | | | DLTIP – performance shares | | Sep 2015 | | | 2015-2018 | | | 2018 | | | ADR | | | $ | 104.30 | | | | | | | 49,825 | | | | | | | | | 49,825 | | | | | Sep 2016 | | | 2016-2019 | | | 2019 | | | ADR | | | $ | 115.77 | | | | | | — | | | 54,356 | | | | | | | | | 54,356 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total number of unvested shares subject to performance | | | | | | | | | | | | | | 746,736 | | | Total unvested shares subject to performance | | Total unvested shares subject to performance | | | | | | | | | | | | | | 715,656 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | DIP(iv) | | Mar 2012 | | | 2012-2019 | | | 2016-2019 | | | ADR | | | $ | 96.44 | | | | | 58,571 | | | | | 14,642 | | | | | | | 43,929 | | | | | Mar 2012 | | | 2012-2019 | | | 2016-2019 | | | ADR | | | $ | 96.44 | | | | | 43,929 | | | | | 14,643 | | | | | | | 29,286 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total number of unvested shares not subject to performance | | | | | | | | | | | | | | 175,716 | | | Total unvested shares not subject to performance | | Total unvested shares not subject to performance | | | | | | | | | | | | | | 117,144 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | Kathryn Mikells | | | | | | | | | | | | | | | | | | | | | | | | | | | | DLTIP – share options | | Sep 2015 | | | 2015-2018 | | | 2018 | | | Ord | | | | | 1709p | | | | | 140,515 | | | | | | | | | 140,515 | | | | | Sep 2016 | | | 2016-2019 | | | 2019 | | | Ord | | | | | 2113p | | | | — | | | 128,253 | | | | | | | | | 128,253 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total number of unvested share options subject to performance | | | | | | | | | | | | | | 416,127 | | | Total unvested share options subject to performance | | Total unvested share options subject to performance | | | | | | | | | | | | | | 128,253 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | DBOP – performance shares(vii) | | | Nov 2015 | | | 2015-2018 | | | 2018 | | | Ord | | | 1866p | | | | | 246,300 | | | | | | | | | | | 246,300 | | | | DLTIP – performance shares(viii) | | | Sep 2016 | | | 2016-2019 | | | 2019 | | | Ord | | | 2127p | | | | | | – | | | 128,253 | | | | | | | | | 128,253 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | Total unvested shares subject to performance | | Total unvested shares subject to performance | | | | | | | | | | | | | | | | | | | | | | | | 374,553 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | DBOP – restricted shares(vii) | | Nov 2015 | | | 2015-2017 | | | 2017 | | | Ord | | | 1866p | | | | | | | 43,868 | | | | | | | | | 43,868 | | | | | 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 | | | | | Nov 2015 | | | 2015-2018 | | | 2018 | | | Ord | | | 1866p | | | | | 43,868 | | | | | | | | | | | 43,868 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total number of unvested shares not subject to performance | | | | | | | | | | | | | | 87,736 | | | Total unvested shares not subject to performance | | Total unvested shares not subject to performance | | | | | | | | | | | | | | 43,868 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 awardsan award that were granted to him prior to joining the Board under ‘below-board’ plans (Discretionary Incentive Plan), amounting to a total of 188,172117,142 ADRs, granted in 2011 and 2012. 50%2012 (58,572 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.remains unvested). The 2012 award is subject to performance conditions and continuing employment. 66.67% of the first tranche vested in March 2016, and 66.7%66.67% of the second tranche vested in March 2017 and 50% of the third tranche is due to vest in March 2017,2018, with the remaining tranchestranche vesting in March 2018 and March 2019. |
(v) | Awards made of performance shares and share options under the PSP and SESOPDLTIP in September 20132014 and due to vest in September 20162017 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 table on pages 176-177,page 184, since the performance period ended during the year ended 30 June 2016.2017. |
188
Governance (continued)
(vi) | Details of the performance conditions attached to PSPDLTIP awards of performance shares and SESOP awardsshare options granted in 20142015 were disclosed in Diageo’s 20152016 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 disclosed1,419 Ords of this award were delivered as she was no longer an Executive Director.tax-qualified share options. |
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 2015.2017. Payments for loss of office (audited) There were no payments for loss of office to Executive Directors in relation tofor the year ended 30 June 2016.2017. 194
Governance (continued) Non-Executive Directors’ fees The Chairman’sJavier Ferrán’s fee was reviewed in December 2015 and increased from £500,000 to £600,000 per annum,as non-executive Chairman effective 1 January 2016, following five successive years of no increases.2017 is £600,000 per annum. The Chairman’s fee is appropriately positioned against our comparator group of FTSE30FTSE 30 companies excluding financial services. The next review is scheduled for December 2017.
Following a comprehensive review of competitive market data,There have been no changes to the Board also reviewed the feesbasic fee levels 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 changesor to the additional fees for the Chairman of the Audit Committee and the Chairman of the Remuneration Committtee.Committee in the year ended 30 June 2017. The next review is scheduled for January 2018.
| | | | | | | | | | | 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 | |
| | | | | | | | | | | January 2017 | | | January 2016 | | Per annum fees | | £’000 | | | £’000 | | Chairman of the Board | | | 600 | | | | 600 | | Non-Executive Directors | | | | | | | | | Base fee | | | 87 | | | | 87 | | Senior Non-Executive Director | | | 25 | | | | 25 | | Chairman of the Audit Committee | | | 30 | | | | 30 | | Chairman of the Remuneration Committee | | | 25 | | | | 25 | |
Non-Executive Directors’ remuneration for the year ended 30 June 20162017 (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)
| | | | | | | | | | | | | | | | | | | | | | | | | | | Fees £’000 | | | Taxable benefits(i) £’000 | | | Total £’000 | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | Chairman | | | | | | | | | | | | | | | | | | | | | | | | | Dr Franz B Humer | | | 300 | | | | 550 | | | | 6 | | | | 6 | | | | 306 | | | | 556 | | Javier Ferrán(ii) | | | 338 | | | | — | | | | 1 | | | | — | | | | 339 | | | | — | | Non-Executive Directors | | | | | | | | | | | | | | | | | | | | | | | | | Lord Davies of Abersoch | | | 137 | | | | 133 | | | | 2 | | | | 3 | | | | 139 | | | | 136 | | Peggy B Bruzelius | | | 87 | | | | 86 | | | | 3 | | | | 6 | | | | 90 | | | | 92 | | Betsy D Holden | | | 87 | | | | 86 | | | | 6 | | | | 10 | | | | 93 | | | | 96 | | Ho KwonPing | | | 87 | | | | 86 | | | | 1 | | | | 1 | | | | 88 | | | | 87 | | Nicola S Mendelsohn | | | 87 | | | | 86 | | | | 1 | | | | 1 | | | | 88 | | | | 87 | | Philip G Scott | | | 102 | | | | 116 | | | | 13 | | | | 12 | | | | 115 | | | | 128 | | Alan JH Stewart | | | 102 | | | | 86 | | | | 1 | | | | 1 | | | | 103 | | | | 87 | | Emma Walmsley(iii) | | | 22 | | | | 44 | | | | 2 | | | | 1 | | | | 24 | | | | 45 | |
(i) | OtherTaxable 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£50,000 of Dr Franz B Humer’sJavier Ferrán’s net remuneration in the year ended 30 June 20162017 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 and stepped down from the Board on 21 September 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 2016,2017, Ivan Menezes served as a Non-Executive Director of Coach Inc.Inc and earned fees of $75,000,$81,250, which he retained. In line with the Coach Inc.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 2016,2017, he was granted 11,73411,284 options at an option price of $32.28$36.72 and 2,3672,078 RSUs (including dividends received) at a fair market value of $32.28$36.72 per share. Kathryn Mikells —– During the year ended 30 June 2016,2017, 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.
195
Governance (continued) 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 20152016 to the year ended 30 June 2016.2017. 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_Staff pay 1,180 1,236 4.7%1,330 7.6% Distributions 1,443 1,515 5.0% to shareholders 1,341 1,443 7.6% Lm£m 0 500 1,000 1,500 2,000 2,500 3,000 20153,500 2016 2017 Remuneration committee The Remuneration Committee consists of the following independent Non-Executive Directors: Peggy B Bruzelius, Lord Davies of Abersoch, Betsy D Holden, Ho KwonPing, Philip G Scott, Nicola S Mendelsohn and Alan JH Stewart and Emma Walmsley.Stewart. 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,Global Performance and Reward Director are also invited from time to time by the Remuneration Committee to provide their views and advice. The Chief Executive and Global Human Resources Director isare not present when hertheir 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. 190
Governance (continued)
The Remuneration Committee’s principal responsibilities are: Making recommendations to the Board on remuneration policy as applied to the Executive Directors and the Executive Committee; Setting, reviewing and approving individual remuneration arrangements for the Chairman of the Board, Executive Directors and Executive Committee members including terms and conditions of employment; Determining arrangements in relation to termination of employment of the Executive Directors and other designated senior executives; and Making recommendations to the Board concerning the introduction of any new share incentive plans which require approval by shareholders. 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 2016,2017, the Remuneration Committee received advice from Kepler (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. 196
Governance (continued) Kepler 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-term incentives, and calculated the total shareholder returnTSR of Diageo and its peer companies for the 20122013 PSP and 2013 PSP2014 DLTIP awards and provided periodic updates on all outstanding performance cycles. The fees paid to Kepler in relation to advice provided to the Committee were £137,935£139,333 and are determined on a time and expenses basis. During the year, LinklatersClifford Chance provided advice on the Directors’ remuneration report.operation of share plans during the year. Fees paid in relation to this advice, again on a time and expenses basis, were £6,000. Linklaters also provide other legal£29,367.
The Remuneration Committee is satisfied that the advice it receives from time to time on certain corporate matters.Kepler and Clifford Chance is independent. The Committee is satisfied that the Kepler and LinklatersClifford Chance engagement partnerspartner and teamsteam, 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. Clifford Chance provided advice on the operation of share 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 annualAnnual report on remuneration at the 20152016 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 | | | 1,767,690,112 | | | | 64,973,516 | | | | 1,832,663,628 | | | | 35,221,124 | | | | 1,847,226,415 | | | | 100,963,321 | | | | 1,948,189,736 | | | | 1,783,328 | | Percentage of votes cast | | | 96.45% | | | | 3.55% | | | | 100% | | | | n/a | | | | 94.82% | | | | 5.18% | | | | 100% | | | | n/a | |
The Committee was pleased with the level of support shown for the remuneration policy and annualimplementation report on remuneration and appreciated the active participation of shareholders and their representative advisory bodies in consulting on executive remuneration matters. 191197
Governance (continued) ADDITIONAL INFORMATIONAdditional information
Emoluments and share interests of senior management The total emoluments for the year ended 30 June 20162017 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 £20.5£21.8 million (2015(2016 – £14.0£20.5 million). The aggregate amount of gains made by the senior management from the exercise of share options and from the vesting of awards during the year was £9.5£11.4 million. In addition, they were granted 968,2931,095,347 performance-based share options under the DLTIPDiageo Long-Term Incentive Plan (DLTIP) during the year at a weighted average share price of 17091708 pence, exercisable by 20252027 and 43,4441,703 options not subject to performance under the DLTIP, which will vest in three years. In addition they were granted 212516 options over ordinary shares under the UK savings-related share options scheme (SAYE). They were also awarded 901,7201,056,437 performance shares under the DLTIP in September 2015,2016, which will vest in three years subject to the performance testtests described in the section on DLTIP awards made during the year ended 30 June 2016,2017 and 4,250 shares not subject to performance under the DLTIP. They were also awarded 146,90487,980 shares under the DIP, which will vest in September 2018, subject to the performance conditions being met. This excludes the replacement share awards made to Kathryn Mikells on 9 November 2015.2019. Senior management options over ordinary shares At 1413 July 2016,2017, the senior management had an aggregate beneficial interest in 1,743,2771,911,458 ordinary shares in the company and in the following options over ordinary shares in the company: | | | | | | | | | | | | | | | Number of
of options | | | Weighted average exercise price | | | Option period | | Ivan Menezes | | | 934,440744,860 | | | | 1535p1754p | | | | 20132014 – 20252026 | | Deirdre MahlanKathryn Mikells
| | | 834,008128,253 | | | | 1488p2113p | | | | 20122019 – 20252026 | | Other(i) | | | 1,862,3242,446,971 | | | | 1731p1708p | | | | 20112012 – 20252026 | | | | | | | | | | | | | | | | | | 3,630,7723,320,084 | | | | | | | | | | | | | | | | | | | | | | |
(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 2016.2017. 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. 198
Governance (continued) Statutory and audit requirements This report was approved by a duly authorised Committee of the Board of Directors, on 2725 July 20162017 and was signed on its behalf by Lord Davies of Abersoch who is senior Non-Executive Director and Chairman of the Remuneration Committee. 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’scompany’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. PWC 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-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 2118 September 2016;2017; the Directors’directors’ remuneration policy was approved by shareholders at the 2014 AGM. Terms defined in this remuneration report are used solely herein. 193199
Governance (continued) DIRECTORS’ REPORTDirectors’ report
The Directors have pleasure in submitting their Annual Report for the year ended 30 June 2016.2017. Annual General Meeting The AGM will be held at The Mermaid Conference & Events Centre, Puddle Dock, Blackfriars, London EC4V 3DB at 2.30pm on Wednesday, 2120 September 2016.2017. 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 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 and Javier Ferrán have been appointed, as Non-Executive Directors, with effect from 1 January 2016 and 22 July 2016 respectively andthe exception of Philip G Scott, who will offer themselves for electionretire at the AGM. Javier Ferrán will be appointed Chairman on 1 January 2017 onend of the retirement of Dr Franz B Humer.AGM. Further details of Directors’ contracts, remuneration and their interests in the shares of the company at 30 June 20162017 are given in the Directors’ remuneration report. The Directors’ powers are determined by UK legislation and Diageo’s articles of association. The Directors may exercise all the company’s powers provided that Diageo’s articles of association or applicable legislation do not stipulate that any powers must be exercised by the members. Auditor The auditor, PricewaterhouseCoopers LLP, is willing to continue in office and a resolution for its re-appointment as auditor of the company will be submitted to the AGM. Disclosure of information to the auditor The Directors who held office at the date of approval of this Directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the company’s auditor is unaware; and each Director has taken all reasonable steps to ascertain any relevant audit information and to ensure that the company’s auditor is aware of that information. Corporate governance statement The corporate governance statement, prepared in accordance with rule 7.2 of the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules, comprises the following sections of the Annual Report: the ’Corporate governance report’, ‘the Reportthe ’Report of the Audit Committee’ and the ’Additional information for shareholders’. Significant agreements – change of control The following significant agreements contain certain termination and other rights for Diageo’s counterparties upon a change of control of the company. Under the 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 sharesinterests 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. 194200
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 report – Directors’ remuneration policy and Additional information; Financial statements – note 20 Related party transactions | Dividends | | Financial statementsStatements – Unaudited financial information and group financial review | Employment Policies | | Strategic report – How we will deliver our Performance Ambition;Our strategy in action; Strategic report – Risk factors;How we protect our business: risk management and principal risks; Strategic report – Sustainability & Responsibility review | Events since 30 June 20162017 | | NoneFinancial statements – note 22 Post balance sheet events | Financial risk management | | Financial statements – note 15 Financial instruments and risk management | Future developments | | Chairman’s statement; Chief Executive’s Statement;statement; Market dynamicsDynamics | Greenhouse gas emissions | | Strategic report – Sustainability & Responsibility Reviewresponsibility review – Reducing our environmental impactimpact; | 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 shares; Financial statements – note 17 Equity | Research and development | | Financial statementsStatements – note 3 Operating costs | Restrictions on transfer of securities | | Additional information for shareholders – Restrictions on transfer of shares | Review of the business and principal risks and uncertainties | | Chief Executive’s statement; Strategic report – Risk factorsreport: How we protect our business: risk management and principal risks | 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 | | NoteFinancial statements - note 17 Equity | Shareholder waivers of future dividends | | NoteFinancial statements - note 17 Equity | Sustainability and responsibility | | Strategic report – How we will deliver our Performance Ambition: Sustainability & responsibility;Responsibility Strategic report - Risk factors;– How we protect our business: risk management and principal risks; Strategic report -– Sustainability and& Responsibility Reviewreview | Waiver of emoluments by a director | | Not applicable | Waiver of future emoluments by a director | | Not applicable |
195201
Governance (continued) The Directors’ report of Diageo plc for the year ended 30 June 20162017 comprises these pages and the sections of the Annual Report referred to under ’Directors’, ’Corporate governance statement’ and ’Other information’ above, which are incorporated into the Directors’ report by reference. In addition, certain disclosures required to be contained in the Directors’ report, have been incorporated into the ‘Strategic report’ as set out in ’Other information’ above. The Directors’ report was approved by a duly appointed and authorised committee of the Board of Directors on 2726 July 20162017 and signed on its behalf by David Harlock, the Company Secretary. 196202
Financial statements ReportsReport of independent registered public accounting firmsIndependent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Diageo plc:plc In our opinion, the accompanying consolidated balance sheet, and the related 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 2017 and 30 June 2016, and the results of their operations and their cash flows for each of the two years in the period ended 30 June 20162017 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 Companycompany maintained, in all material respects, effective internal control over financial reporting as of 30 June 2016,2017, based on criteria established inInternal Control —- Integrated Framework (2013)2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’scompany’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’scompany’s internal control over financial reporting based on our integrated audit.audits. 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 auditaudits 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 auditaudits 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 auditaudits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit providesaudits provide 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 Directorsdirectors 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 98 August 20162017
197203
Financial statements (continued) The Board of Directors and Stockholders Diageo plc: We have audited the accompanying consolidated balance sheet of Diageo plc and subsidiaries as of 30 June 2015, and the related consolidated income statements,statement, and consolidated statements of comprehensive income, changes in equity and cash flows of Diageo plc and its subsidiaries for each of the years in the two-year period thenyear ended on pages 199 to 270 ,30 June 2015, including the disclosures within the section ‘Directors’ shareholding requirements and share and other interests’ on page 187 , and the section ‘Key management personnel related party transactions’ on page 192.198. 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 auditsaudit 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 provideaudit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial positionresults of the operations and the cash flows of Diageo plc and its subsidiaries as offor the year ended 30 June 2015, 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. /s/ KPMG LLP London, England 29 July 2015 198204
Financial statements (continued) CONSOLIDATED INCOME STATEMENTConsolidated income statement
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Notes | | | Year ended 30 June 2016 £ million | | Year ended 30 June 2015 £ million | | Year ended 30 June 2014 £ million | | | Notes | | | Year ended 30 June 2017 £ million | | Year ended 30 June 2016 £ million | | Year ended 30 June 2015 £ million | | Sales | | | 2 | | | | 15,641 | | | 15,966 | | | 13,980 | | | | 2 | | | | 18,114 | | | 15,641 | | | 15,966 | | Excise duties | | | 3 | | | | (5,156 | ) | | (5,153 | ) | | (3,722 | ) | | | 3 | | | | (6,064 | ) | | (5,156 | ) | | (5,153 | ) | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | | 2 | | | | 10,485 | | | 10,813 | | | 10,258 | | | | 2 | | | | 12,050 | | | 10,485 | | | 10,813 | | Cost of sales | | | 3 | | | | (4,251 | ) | | (4,610 | ) | | (4,029 | ) | | | 3 | | | | (4,680 | ) | | (4,251 | ) | | (4,610 | ) | | | | | | | | | | | | | | | | | | | | | | | | Gross profit | | | | | 6,234 | | | 6,203 | | | 6,229 | | | | | | 7,370 | | | 6,234 | | | 6,203 | | Marketing | | | 3 | | | | (1,562 | ) | | (1,629 | ) | | (1,620 | ) | | | 3 | | | | (1,798 | ) | | (1,562 | ) | | (1,629 | ) | Other operating expenses | | | 3 | | | | (1,831 | ) | | (1,777 | ) | | (1,902 | ) | | | 3 | | | | (2,013 | ) | | (1,831 | ) | | (1,777 | ) | | | | | | | | | | | | | | | | | | | | | | | | Operating profit | | | | | 2,841 | | | 2,797 | | | 2,707 | | | | | | 3,559 | | | 2,841 | | | 2,797 | | Non-operating items | | | 4 | | | | 123 | | | 373 | | | 140 | | | | 4 | | | | 20 | | | 123 | | | 373 | | Finance income | | | 5 | | | | 262 | | | 244 | | | 241 | | | | 5 | | | | 235 | | | 262 | | | 244 | | Finance charges | | | 5 | | | | (589 | ) | | (656 | ) | | (629 | ) | | | 5 | | | | (564 | ) | | (589 | ) | | (656 | ) | Share of after tax results of associates and joint ventures | | | 6 | | | | 221 | | | 175 | | | 252 | | | | 6 | | | | 309 | | | 221 | | | 175 | | | | | | | | | | | | | | | | | | | | | | | | | Profit before taxation | | | | | 2,858 | | | 2,933 | | | 2,711 | | | | | | 3,559 | | | 2,858 | | | 2,933 | | Taxation | | | 7 | | | | (496 | ) | | (466 | ) | | (447 | ) | | | 7 | | | | (732 | ) | | (496 | ) | | (466 | ) | | | | | | | | | | | | | | | | | | | | | | | | Profit from continuing operations | | | | | 2,362 | | | 2,467 | | | 2,264 | | | | | | 2,827 | | | 2,362 | | | 2,467 | | Discontinued operations | | | 8 | | | | — | | | | — | | | (83 | ) | | | 8 | | | | (55 | ) | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | Profit for the year | | | | | 2,362 | | | 2,467 | | | 2,181 | | | | | | 2,772 | | | 2,362 | | | 2,467 | | | | | | | | | | | | | | | | | | | | | | | | | | Attributable to: | | | | | | | | | | | | | | | | | Equity shareholders of the parent company - continuing operations | | | | | 2,244 | | | 2,381 | | | 2,331 | | | | | | 2,717 | | | 2,244 | | | 2,381 | | Equity shareholders of the parent company - discontinued operations | | | | | — | | | | — | | | (83 | ) | | | | | (55 | ) | | | — | | | | — | | Non-controlling interests - continuing operations | | | | | 118 | | | 86 | | | (67 | ) | | | | | 110 | | | 118 | | | 86 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,362 | | | 2,467 | | | 2,181 | | | | | | 2,772 | | | 2,362 | | | 2,467 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | million | | million | | million | | | | | | million | | million | | million | | Weighted average number of shares | | | | | | | | | | | | | | | | | Shares in issue excluding own shares | | | | | 2,508 | | | 2,505 | | | 2,506 | | | | | | 2,512 | | | 2,508 | | | 2,505 | | Dilutive potential ordinary shares | | | | | 10 | | | 12 | | | 11 | | | | | | 11 | | | 10 | | | 12 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,518 | | | 2,517 | | | 2,517 | | | | | | 2,523 | | | 2,518 | | | 2,517 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | pence | | pence | | pence | | | | | | pence | | pence | | pence | | Basic earnings per share | | | | | | | | | | | | | | | | | Continuing operations | | | | | 89.5 | | | 95.0 | | | 93.0 | | | | | | 108.2 | | | 89.5 | | | 95.0 | | Discontinued operations | | | | | — | | | | — | | | (3.3 | ) | | | | | (2.2 | ) | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 89.5 | | | 95.0 | | | 89.7 | | | | | | 106.0 | | | 89.5 | | | 95.0 | | | | | | | | | | | | | | | | | | | | | | | | | Diluted earnings per share | | | | | | | | | | | | | | | | | Continuing operations | | | | | 89.1 | | | 94.6 | | | 92.6 | | | | | | 107.7 | | | 89.1 | | | 94.6 | | Discontinued operations | | | | | — | | | | — | | | (3.3 | ) | | | | | (2.2 | ) | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 89.1 | | | 94.6 | | | 89.3 | | | | | | 105.5 | | | 89.1 | | | 94.6 | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. 199
205
Financial statements (continued) CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEConsolidated statement of comprehensive income
| | | | | | | | | | | | | | | | | | | | | | | | | | | Year ended 30 June 2016 £ million | | Year ended 30 June 2015 £ million | | Year ended 30 June 2014 £ million | | | Year ended 30 June 2017 £ million | | Year ended 30 June 2016 £ million | | Year ended 30 June 2015 £ million | | Other comprehensive income | | | | | | | | | | | | | Items that will not be recycled subsequently to the income statement | | | | | | | | | | | | | Net remeasurement of post employment plans | | | | | | | | | | | | | – group | | | (851 | ) | | 125 | | | (169 | ) | | | 649 | | | (851 | ) | | 125 | | – associates and joint ventures | | | (4 | ) | | (10 | ) | | 2 | | | | (8 | ) | | (4 | ) | | (10 | ) | – non-controlling interests | | | (1 | ) | | (2 | ) | | | — | | | | 3 | | | (1 | ) | | (2 | ) | Tax on post employment plans | | | 166 | | | (11 | ) | | 20 | | | | (122 | ) | | 166 | | | (11 | ) | | | | | | | | | | | | | | | | | | | | | | | (690 | ) | | 102 | | | (147 | ) | | | 522 | | | (690 | ) | | 102 | | Items that may be recycled subsequently to the income statement | | | | | | | | | | | | | Exchange differences on translation of foreign operations | | | | | | | | | | | | | – group | | | 1,217 | | | (345 | ) | | (1,117 | ) | | | 105 | | | 1,217 | | | (345 | ) | – associates and joint ventures | | | 325 | | | (205 | ) | | (294 | ) | | | 120 | | | 325 | | | (205 | ) | – non-controlling interests | | | 176 | | | 56 | | | (120 | ) | | | 35 | | | 176 | | | 56 | | Net investment hedges | | | (843 | ) | | 269 | | | 398 | | | | (224 | ) | | (843 | ) | | 269 | | Exchange loss recycled to the income statement | | | | | | | | | | | | | – on translation of foreign operation | | | 133 | | | 88 | | | | — | | | – on translation of foreign operations | | | | — | | | 133 | | | 88 | | – on net investment hedges | | | (82 | ) | | | — | | | | — | | | | — | | | (82 | ) | | | — | | Tax on exchange differences - group | | | (8 | ) | | 30 | | | 12 | | | | (2 | ) | | (8 | ) | | 30 | | Tax on exchange differences - non-controlling interests | | | 4 | | | | — | | | | — | | | | — | | | 4 | | | | — | | Effective portion of changes in fair value of cash flow hedges | | | | | | | | | | | | | – gains/(losses) taken to other comprehensive income - group | | | 28 | | | (40 | ) | | 59 | | | – (losses)/gains taken to other comprehensive income - group | | | | (34 | ) | | 28 | | | (40 | ) | – gains/(losses) taken to other comprehensive income - associates and joint ventures | | | 3 | | | (6 | ) | | (5 | ) | | | 5 | | | 3 | | | (6 | ) | – recycled to income statement | | | (145 | ) | | (58 | ) | | 34 | | | | 101 | | | (145 | ) | | (58 | ) | Tax on effective portion of changes in fair value of cash flow hedges | | | 3 | | | 18 | | | 2 | | | | (3 | ) | | 3 | | | 18 | | Fair value movements on available-for-sale investments | | | | | | | | | | | | | – gains taken to other comprehensive income - group | | | 4 | | | 11 | | | 55 | | | | — | | | 4 | | | 11 | | – gains taken to other comprehensive income - non-controlling interests | | | 4 | | | 9 | | | | — | | | | — | | | 4 | | | 9 | | – recycled to income statement - group | | | (15 | ) | | | — | | | (140 | ) | | | — | | | (15 | ) | | | — | | – recycled to income statement - non-controlling interests | | | (13 | ) | | | — | | | | — | | | | — | | | (13 | ) | | | — | | Tax on available-for-sale fair value movements | | | 4 | | | (4 | ) | | | — | | | | — | | | 4 | | | (4 | ) | Hyperinflation adjustment | | | 6 | | | 18 | | | 11 | | | | 47 | | | 6 | | | 18 | | Tax on hyperinflation adjustment | | | (2 | ) | | | — | | | (2 | ) | | | (21 | ) | | (2 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | 799 | | | (159 | ) | | (1,107 | ) | | | 129 | | | 799 | | | (159 | ) | | | | | | | | | | | | | | | | | | | | Other comprehensive profit/(loss), net of tax, for the year | | | 109 | | | (57 | ) | | (1,254 | ) | | | 651 | | | 109 | | | (57 | ) | Profit for the year | | | 2,362 | | | 2,467 | | | 2,181 | | | | 2,772 | | | 2,362 | | | 2,467 | | | | | | | | | | | | | | | | | | | | | Total comprehensive income for the year | | | 2,471 | | | 2,410 | | | 927 | | | | 3,423 | | | 2,471 | | | 2,410 | | | | | | | | | | | | | | | | | | | | | Attributable to: | | | | | | | | | | | | | Equity shareholders of the parent company | | | 2,183 | | | 2,261 | | | 1,114 | | | Equity shareholders of the parent company - continuing operations | | | | 3,330 | | | 2,183 | | | 2,261 | | Equity shareholders of the parent company - discontinued operations | | | | (55 | ) | | | — | | | | — | | Non-controlling interests | | | 288 | | | 149 | | | (187 | ) | | | 148 | | | 288 | | | 149 | | | | | | | | | | | | | | | | | | | | | Total comprehensive income for the year | | | 2,471 | | | 2,410 | | | 927 | | | | 3,423 | | | 2,471 | | | 2,410 | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. 200206
Financial statements (continued) CONSOLIDATED BALANCE SHEETConsolidated balance sheet
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 30 June 2016 | | 30 June 2015 | | | | | | 30 June 2017 | | 30 June 2016 | | | | Notes | | | £ million | | £ million | | £ million | | £ million | | | Notes | | | £ million | | £ million | | £ million | | £ million | | Non-current assets | | | | | | | | | | | | | | | | | | | | | Intangible assets | | | 10 | | | | 12,370 | | | | | 11,231 | | | | | | 10 | | | | 12,566 | | | | | 12,370 | | | | Property, plant and equipment | | | 11 | | | | 3,881 | | | | | 3,690 | | | | | | 11 | | | | 4,014 | | | | | 3,881 | | | | Biological assets | | | | | 10 | | | | | 65 | | | | | | | | 21 | | | | | 10 | | | | Investments in associates and joint ventures | | | 6 | | | | 2,528 | | | | | 2,076 | | | | | | 6 | | | | 2,824 | | | | | 2,528 | | | | Other investments | | | 12 | | | | 31 | | | | | 109 | | | | | | 12 | | | | 31 | | | | | 31 | | | | Other receivables | | | 14 | | | | 46 | | | | | 46 | | | | | | 14 | | | | 58 | | | | | 46 | | | | Other financial assets | | | 15 | | | | 420 | | | | | 292 | | | | | | 15 | | | | 267 | | | | | 420 | | | | Deferred tax assets | | | 7 | | | | 298 | | | | | 189 | | | | | | 7 | | | | 134 | | | | | 298 | | | | Post employment benefit assets | | | 13 | | | | 55 | | | | | 436 | | | | | | 13 | | | | 281 | | | | | 55 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 19,639 | | | | | 18,134 | | | | | | | | 20,196 | | | | | 19,639 | | Current assets | | | | | | | | | | | | | | | | | | | | | Inventories | | | 14 | | | | 4,579 | | | | | 4,574 | | | | | | 14 | | | | 4,788 | | | | | 4,579 | | | | Trade and other receivables | | | 14 | | | | 2,686 | | | | | 2,435 | | | | | | 14 | | | | 2,592 | | | | | 2,686 | | | | Assets held for sale | | | | | 3 | | | | | 143 | | | | | | | | — | | | | | 3 | | | | Other financial assets | | | 15 | | | | 495 | | | | | 46 | | | | | | 15 | | | | 81 | | | | | 495 | | | | Cash and cash equivalents | | | 16 | | | | 1,089 | | | | | 472 | | | | | | 16 | | | | 1,191 | | | | | 1,089 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 8,852 | | | | | 7,670 | | | | | | | | 8,652 | | | | | 8,852 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | | | | | 28,491 | | | | | 25,804 | | | | | | | | 28,848 | | | | | 28,491 | | | | | | | | | | | | | | | | | | | | | | | | | | | Current liabilities | | | | | | | | | | | | | | | | | | | | | Borrowings and bank overdrafts | | | 16 | | | | (2,058 | ) | | | | (1,921 | ) | | | | | 16 | | | | (2,459 | ) | | | | (2,058 | ) | | | Other financial liabilities | | | 15 | | | | (280 | ) | | | | (156 | ) | | | | | 15 | | | | (215 | ) | | | | (280 | ) | | | Trade and other payables | | | 14 | | | | (3,372 | ) | | | | (2,943 | ) | | | | | 14 | | | | (3,563 | ) | | | | (3,372 | ) | | | Liabilities held for sale | | | | | — | | | | | (3 | ) | | | | Corporate tax payable | | | | | (340 | ) | | | | (162 | ) | | | | | | | (294 | ) | | | | (340 | ) | | | Provisions | | | 14 | | | | (137 | ) | | | | (105 | ) | | | | | 14 | | | | (129 | ) | | | | (137 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (6,187 | ) | | | | (5,290 | ) | | | | | | | (6,660 | ) | | | | (6,187 | ) | Non-current liabilities | | | | | | | | | | | | | | | | | | | | | Borrowings | | | 16 | | | | (8,071 | ) | | | | (7,917 | ) | | | | | 16 | | | | (6,583 | ) | | | | (8,071 | ) | | | Other financial liabilities | | | 15 | | | | (500 | ) | | | | (443 | ) | | | | | 15 | | | | (383 | ) | | | | (500 | ) | | | Other payables | | | 14 | | | | (70 | ) | | | | (69 | ) | | | | | 14 | | | | (24 | ) | | | | (70 | ) | | | Provisions | | | 14 | | | | (253 | ) | | | | (238 | ) | | | | | 14 | | | | (286 | ) | | | | (253 | ) | | | Deferred tax liabilities | | | 7 | | | | (1,982 | ) | | | | (1,896 | ) | | | | | 7 | | | | (2,112 | ) | | | | (1,982 | ) | | | Post employment benefit liabilities | | | 13 | | | | (1,248 | ) | | | | (695 | ) | | | | | 13 | | | | (772 | ) | | | | (1,248 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (12,124 | ) | | | | (11,258 | ) | | | | | | | (10,160 | ) | | | | (12,124 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | | | | | | (18,311 | ) | | | | (16,548 | ) | | | | | | | (16,820 | ) | | | | (18,311 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Net assets | | | | | | | 10,180 | | | | | 9,256 | | | | | | | | 12,028 | | | | | 10,180 | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity | | | | | | | | | | | | | | | | | | | | | Share capital | | | 17 | | | | 797 | | | | | 797 | | | | | | 17 | | | | 797 | | | | | 797 | | | | Share premium | | | | | 1,347 | | | | | 1,346 | | | | | | | | 1,348 | | | | | 1,347 | | | | Other reserves | | | | | 2,625 | | | | | 1,994 | | | | | | | | 2,693 | | | | | 2,625 | | | | Retained earnings | | | | | 3,761 | | | | | 3,634 | | | | | | | | 5,475 | | | | | 3,761 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity attributable to equity shareholders of the parent company | | | | | | | 8,530 | | | | | 7,771 | | | | | | | | 10,313 | | | | | 8,530 | | Non-controlling interests | | | 17 | | | | | | 1,650 | | | | | 1,485 | | | | 17 | | | | | | 1,715 | | | | | 1,650 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total equity | | | | | | | 10,180 | | | | | 9,256 | | | | | | | | 12,028 | | | | | 10,180 | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 2726 July 20162017 and were signed on its behalf by Ivan Menezes and Kathryn Mikells, Directors. 201207
Financial statements (continued) CONSOLIDATED STATEMENT OF CHANGES IN EQUITYConsolidated 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 | | | At 30 June 2013 | | | 797 | | | | 1,344 | | | | 3,146 | | | | 8 | | | (2,232 | ) | | 3,973 | | | 1,741 | | | 7,036 | | | 1,052 | | | 8,088 | | | 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 | ) | | Share-based incentive plans | | | — | | | | — | | | | — | | | | — | | | | — | | | 37 | | | 37 | | | 37 | | | | — | | | 37 | | | Share-based incentive plans in respect of associates | | | — | | | | — | | | | — | | | | — | | | | — | | | 3 | | | 3 | | | 3 | | | | — | | | 3 | | | Tax on share-based incentive plans | | | — | | | | — | | | | — | | | | — | | | | — | | | 1 | | | 1 | | | 1 | | | | — | | | 1 | | | Shares issued | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | 1 | | | | — | | | 1 | | | Acquisitions | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | 8 | | | 8 | | | Change in fair value of put options | | | — | | | | — | | | | — | | | | — | | | | — | | | (7 | ) | | (7 | ) | | (7 | ) | | | — | | | (7 | ) | | Purchase of non-controlling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | (19 | ) | | (19 | ) | | (19 | ) | | (18 | ) | | (37 | ) | | Dividends paid | | | — | | | | — | | | | — | | | | — | | | | — | | | (1,228 | ) | | (1,228 | ) | | (1,228 | ) | | (88 | ) | | (1,316 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 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 | | Profit for the year | | | — | | | | — | | | | — | | | | — | | | | — | | | 2,381 | | | 2,381 | | | 2,381 | | | 86 | | | 2,467 | | | | — | | | | — | | | | — | | | | — | | | | — | | | 2,381 | | | 2,381 | | | 2,381 | | | 86 | | | 2,467 | | Other comprehensive income | | | — | | | | — | | | | — | | | | (249 | ) | | | — | | | 129 | | | 129 | | | (120 | ) | | 63 | | | (57 | ) | | | — | | | | — | | | | — | | | | (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 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | — | | | | — | | | | — | | | | — | | | | — | | | 2,244 | | | 2,244 | | | 2,244 | | | 118 | | | 2,362 | | Other comprehensive income | | | — | | | | — | | | | — | | | | 631 | | | | — | | | | (692 | ) | | | (692 | ) | | | (61 | ) | | | 170 | | | | 109 | | | | — | | | | — | | | | — | | | | 631 | | | | — | | | (692 | ) | | (692 | ) | | (61 | ) | | 170 | | | 109 | | Employee share schemes | | | — | | | | — | | | | — | | | | — | | | | 39 | | | | (38 | ) | | | 1 | | | | 1 | | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | 39 | | | (38 | ) | | 1 | | | 1 | | | | — | | | 1 | | Share-based incentive plans | | | — | | | | — | | | | — | | | | — | | | | — | | | | 29 | | | | 29 | | | | 29 | | | | — | | | | 29 | | | | — | | | | — | | | �� | — | | | | — | | | | — | | | 29 | | | 29 | | | 29 | | | | — | | | 29 | | Share-based incentive plans in respect of associates | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | 1 | | | | 1 | | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | 1 | | | 1 | | | 1 | | | | — | | | 1 | | Tax on share-based incentive plans | | | — | | | | — | | | | — | | | | — | | | | — | | | | 10 | | | | 10 | | | | 10 | | | | — | | | | 10 | | | | — | | | | — | | | | — | | | | — | | | | — | | | 10 | | | 10 | | | 10 | | | | — | | | 10 | | Shares issued | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | 1 | | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | 1 | | | | — | | | 1 | | Disposal of non-controlling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (24 | ) | | | (24 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | (24 | ) | | (24 | ) | Purchase of non-controlling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | (18 | ) | | | (18 | ) | | | (18 | ) | | | (3 | ) | | | (21 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | (18 | ) | | (18 | ) | | (18 | ) | | (3 | ) | | (21 | ) | Purchase of rights issue of non-controlling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | (5 | ) | | | (5 | ) | | | (5 | ) | | | 5 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | (5 | ) | | (5 | ) | | (5 | ) | | 5 | | | | — | | Dividends paid | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,443 | ) | | | (1,443 | ) | | | (1,443 | ) | | | (101 | ) | | | (1,544 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | (1,443 | ) | | (1,443 | ) | | (1,443 | ) | | (101 | ) | | (1,544 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 30 June 2016 | | | 797 | | | | 1,347 | | | | 3,146 | | | | (521 | ) | | | (2,189 | ) | | | 5,950 | | | | 3,761 | | | | 8,530 | | | | 1,650 | | | | 10,180 | | | | 797 | | | | 1,347 | | | | 3,146 | | | | (521 | ) | | | (2,189 | ) | | | 5,950 | | | | 3,761 | | | | 8,530 | | | | 1,650 | | | | 10,180 | | Profit for the year | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,662 | | | | 2,662 | | | | 2,662 | | | | 110 | | | | 2,772 | | Other comprehensive income | | | | — | | | | — | | | | — | | | | 68 | | | | — | | | | 545 | | | | 545 | | | | 613 | | | | 38 | | | | 651 | | Employee share schemes | | | | — | | | | — | | | | — | | | | — | | | | 13 | | | | (23 | ) | | | (10 | ) | | | (10 | ) | | | — | | | | (10 | ) | Share-based incentive plans | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 34 | | | | 34 | | | | 34 | | | | — | | | | 34 | | Share-based incentive plans in respect of associates | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3 | | | | 3 | | | | 3 | | | | — | | | | 3 | | Tax on share-based incentive plans | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 12 | | | | 12 | | | | 12 | | | | — | | | | 12 | | Shares issued | | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | 1 | | Purchase ofnon-controlling interest by associates | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (5 | ) | | | (5 | ) | | | (5 | ) | | | — | | | | (5 | ) | Change in fair value of put option | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (12 | ) | | | (12 | ) | | | (12 | ) | | | — | | | | (12 | ) | Dividends paid | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,515 | ) | | | (1,515 | ) | | | (1,515 | ) | | | (83 | ) | | | (1,598 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 30 June 2017 | | | | 797 | | | | 1,348 | | | | 3,146 | | | | (453 | ) | | | (2,176 | ) | | | 7,651 | | | | 5,475 | | | | 10,313 | | | | 1,715 | | | | 12,028 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. 202208
Financial statements (continued) CONSOLIDATED STATEMENT OF CASH FLOWSConsolidated statement of cash flows
| | | | | | Year ended 30 June 2016 | | Year ended 30 June 2015 | | Year ended 30 June 2014 | | | | | | Year ended 30 June 2017 | | Year ended 30 June 2016 | | Year ended 30 June 2015 | | | | Notes | | | £ million | | £ million | | £ million | | £ million | | £ million | | £ million | | | Notes | | | £ million | | £ million | | £ million | | £ million | | £ million | | £ million | | Cash flows from operating activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit for the year | | | | | 2,362 | | | | | 2,467 | | | | | 2,181 | | | | | | | | 2,772 | | | | | 2,362 | | | | | 2,467 | | | | Discontinued operations | | | | | — | | | | | | — | | | | | 83 | | | | | | | | 55 | | | | | | — | | | | | | — | | | | Taxation | | | | | 496 | | | | | 466 | | | | | 447 | | | | | | | | 732 | | | | | 496 | | | | | 466 | | | | Share of after tax results of associates and joint ventures | | | | | (221 | ) | | | | (175 | ) | | | | (252 | ) | | | | | | | (309 | ) | | | | (221 | ) | | | | (175 | ) | | | Net finance charges | | | | | 327 | | | | | 412 | | | | | 388 | | | | | | | | 329 | | | | | 327 | | | | | 412 | | | | Non-operating items | | | | | (123 | ) | | | | (373 | ) | | | | (140 | ) | | | | | | | (20 | ) | | | | (123 | ) | | | | (373 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit | | | | | | | 2,841 | | | | | 2,797 | | | | | 2,707 | | | | | | | | 3,559 | | | | | 2,841 | | | | | 2,797 | | Increase in inventories | | | | | (95 | ) | | | | (204 | ) | | | | (229 | ) | | | | | | | (159 | ) | | | | (95 | ) | | | | (204 | ) | | | (Increase)/decrease in trade and other receivables | | | | | (86 | ) | | | | 274 | | | | | (276 | ) | | | | Increase/(decrease) in trade and other payables and provisions | | | | | 128 | | | | | 47 | | | | | (92 | ) | | | | Decrease/(increase) in trade and other receivables | | | | | | 89 | | | | | (86 | ) | | | | 274 | | | | Increase in trade and other payables and provisions | | | | | | 221 | | | | | 128 | | | | | 47 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net (increase)/decrease in working capital | | | | | | | (53 | ) | | | | 117 | | | | | (597 | ) | | Net decrease/(increase) in working capital | | | | | | | | 151 | | | | | (53 | ) | | | | 117 | | Depreciation, amortisation and impairment | | | | | 473 | | | | | 440 | | | | | 629 | | | | | | | | 361 | | | | | 473 | | | | | 440 | | | | Dividends received | | | | | 173 | | | | | 183 | | | | | 228 | | | | | | | | 223 | | | | | 173 | | | | | 183 | | | | Post employment payments less amounts included in operating profit | | | | | (59 | ) | | | | (70 | ) | | | | (196 | ) | | | | | | | (111 | ) | | | | (59 | ) | | | | (70 | ) | | | Other items | | | | | (15 | ) | | | | (11 | ) | | | | (80 | ) | | | | | | | (6 | ) | | | | (15 | ) | | | | (11 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 572 | | | | | 542 | | | | | 581 | | | | | | | | 467 | | | | | 572 | | | | | 542 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash generated from operations | | | | | | | 3,360 | | | | | 3,456 | | | | | 2,691 | | | | | | | 4,177 | | | | | 3,360 | | | | | 3,456 | | Interest received | | | | | 174 | | | | | 183 | | | | | 143 | | | | | | | | 180 | | | | | 174 | | | | | 183 | | | | Interest paid | | | | | (479 | ) | | | | (599 | ) | | | | (575 | ) | | | | | | | (493 | ) | | | | (479 | ) | | | | (599 | ) | | | Taxation paid | | | | | (507 | ) | | | | (489 | ) | | | | (469 | ) | | | | | | | (732 | ) | | | | (507 | ) | | | | (489 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (812 | ) | | | | (905 | ) | | | | (901 | ) | | | | | | | (1,045 | ) | | | | (812 | ) | | | | (905 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash from operating activities | | | | | | | 2,548 | | | | | 2,551 | | | | | 1,790 | | | | | | | | 3,132 | | | | | 2,548 | | | | | 2,551 | | Cash flows from investing activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Disposal of property, plant and equipment and computer software | | | | | 57 | | | | | 52 | | | | | 80 | | | | | | | | 46 | | | | | 57 | | | | | 52 | | | | Purchase of property, plant and equipment and computer software | | | | | (506 | ) | | | | (638 | ) | | | | (642 | ) | | | | | | | (518 | ) | | | | (506 | ) | | | | (638 | ) | | | Movements in loans and other investments | | | | | (2 | ) | | | | (2 | ) | | | | 7 | | | | | | | | 3 | | | | | (2 | ) | | | | (2 | ) | | | Sale of businesses | | | 9 | | | | 1,062 | | | | | 978 | | | | | 2 | | | | | | 9 | | | | (52 | ) | | | | 1,062 | | | | | 978 | | | | Acquisition of businesses | | | 9 | | | | (15 | ) | | | | (1,284 | ) | | | | (536 | ) | | | | | 9 | | | | (31 | ) | | | | (15 | ) | | | | (1,284 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash inflow/(outflow) from investing activities | | | | | | | 596 | | | | | (894 | ) | | | | (1,089 | ) | | Net cash (outflow)/inflow from investing activities | | | | | | | | (552 | ) | | | | 596 | | | | | (894 | ) | Cash flows from financing activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Proceeds from issue of share capital | | | | | 1 | | | | | 1 | | | | | 1 | | | | | | | | 1 | | | | | 1 | | | | | 1 | | | | Net purchase of own shares for share schemes | | | | | (1 | ) | | | | (8 | ) | | | | (113 | ) | | | | | | | (41 | ) | | | | (1 | ) | | | | (8 | ) | | | Dividends paid to non-controlling interests | | | | | (101 | ) | | | | (72 | ) | | | | (88 | ) | | | | | | | (83) | | | | | (101) | | | | | (72) | | | | Disposal of non-controlling interests | | | | | — | | | | | 1 | | | | | | — | | | | | | | | — | | | | | | — | | | | | 1 | | | | Purchase of shares of non-controlling interests | | | 9 | | | | (21 | ) | | | | | — | | | | | (37 | ) | | | | | 9 | | | | — | | | | | (21 | ) | | | | | — | | | | Proceeds from bonds | | | 16 | | | | — | | | | | 791 | | | | | 1,378 | | | | | | 16 | | | | — | | | | | | — | | | | | 791 | | | | Repayment of bonds | | | 16 | | | | (1,003 | ) | | | | (1,492 | ) | | | | (1,471 | ) | | | | | 16 | | | | (1,234 | ) | | | | (1,003 | ) | | | | (1,492 | ) | | | Net movements on other borrowings | | | 16 | | | | (233 | ) | | | | 386 | | | | | (64 | ) | | | | | 16 | | | | 414 | | | | | (233 | ) | | | | 386 | | | | Equity dividends paid | | | 17 | | | | (1,443 | ) | | | | (1,341 | ) | | | | (1,228 | ) | | | | | 17 | | | | (1,515 | ) | | | | (1,443 | ) | | | | (1,341 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash outflow from financing activities | | | | | | | (2,801 | ) | | | | (1,734 | ) | | | | (1,622 | ) | | | | | | | (2,458 | ) | | | | (2,801 | ) | | | | (1,734 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net increase/(decrease) in net cash and cash equivalents | | | 16 | | | | | | 343 | | | | | (77 | ) | | | | (921 | ) | | | 16 | | | | | | 122 | | | | | 343 | | | | | (77 | ) | Exchange differences | | | | | | | 84 | | | | | (73 | ) | | | | (192 | ) | | | | | | | (14 | ) | | | | 84 | | | | | (73 | ) | Net cash and cash equivalents at beginning of the year | | | | | | | 382 | | | | | 532 | | | | | 1,645 | | | | | | | | 809 | | | | | 382 | | | | | 532 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash and cash equivalents at end of the year | | | | | | | 809 | | | | | 382 | | | | | 532 | | | | | | | | 917 | | | | | 809 | | | | | 382 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash and cash equivalents consist of: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | 16 | | | | | | 1,089 | | | | | 472 | | | | | 622 | | | | 16 | | | | | | 1,191 | | | | | 1,089 | | | | | 472 | | Bank overdrafts | | | 16 | | | | | | (280 | ) | | | | (90 | ) | | | | (90 | ) | | | 16 | | | | | | (274 | ) | | | | (280 | ) | | | | (90 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 809 | | | | | 382 | | | | | 532 | | | | | | | | 917 | | | | | 809 | | | | | 382 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. 203209
Financial statements (continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes 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 POLICIESAccounting 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 consolidated financial statements are prepared on a going concern 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. The group controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Where the group has the ability to exercise joint control over an entity but has rights to specified assets and obligations for liabilities of that entity, the entity is included on the basis of the group’s rights over those assets and liabilities. (d) Foreign currencies Items included in the financial statements of the group’s subsidiaries, associates and joint ventures are measured using the currency of the primary economic environment in which each entity operates (its functional currency). The consolidated financial statements are presented in sterling, which is the functional currency of the parent company. The income statements and cash flows ofnon-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. Assets and liabilities are translated at closing rates. Exchange differences arising on the retranslation at closing rates of the opening balance sheets of overseas entities are taken to the exchange reserve, as are exchange differences arising on foreign currency borrowings and financial instruments designated as net investment hedges, to the extent that they are effective. Tax charges and credits arising on such items are also taken to the exchange reserve. Gains and losses accumulated in the exchange reserve are recycled to the 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. 204210
Financial statements (continued) The principal foreign exchange rates used in the translation of financial statements for the three years ended 30 June 2016,2017, expressed in US dollars and euros per £1, were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | | 2015 | | | 2014 | | | 2017 | | | 2016 | | | 2015 | | US dollar | | | | | | | | | | | | | Income statement and cash flows(i) | | | 1.48 | | | | 1.57 | | | | 1.63 | | | | 1.27 | | | | 1.48 | | | | 1.57 | | Assets and liabilities(ii) | | | 1.33 | | | | 1.57 | | | | 1.71 | | | | 1.30 | | | | 1.33 | | | | 1.57 | | Euro | | | | | | | | | | | | | Income statement and cash flows(i) | | | 1.34 | | | | 1.31 | | | | 1.20 | | | | 1.16 | | | | 1.34 | | | | 1.31 | | Assets and liabilities(ii) | | | 1.20 | | | | 1.41 | | | | 1.25 | | | | 1.14 | | | | 1.20 | | | | 1.41 | |
(i) | Weighted average 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 213218 |
| • | | Taxation —– page 220224 |
| • | | Brands, goodwill and other intangibles —– page 228230 |
| • | | Post employment benefits —– page 235237 |
| • | | Contingent liabilities and legal proceedings —– page 261263 |
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. (f) New accounting policies NoThe following 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 cash-pooling arrangements
In April 2016 guidance was issuedendorsed by the IFRS Interpretations Committee (IFRIC) to help determine whether entities are able to offset cash-pooling balances in accordanceEU, have been adopted by the group from 1 July 2016 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 increased by £102 million and £139 million, respectively with the sameno impact on total assets and total liabilities.the group’s consolidated results, financial position or disclosures:
| • | | Amendment to IFRS 7 – Applicability of the amendments to IFRS 7 to condensed interim financial statements |
| • | | Amendments to IFRS 11 – Accounting for Acquisitions of Interests in Joint Operations |
| • | | Amendments to IAS 1 – Disclosure Initiative |
| • | | Amendments to IAS 16 and IAS 38 – Clarification of Acceptable Methods of Depreciation and Amortisation |
| • | | Amendments to IAS 16 and IAS 41 – Agriculture: Bearer Plants |
| • | | Amendments to IAS 19 – Discount rate: Regional Market Issue |
| • | | Amendments to IAS 34 – Disclosure of Information, Elsewhere in the Interim Financial Report’ |
The following standards, issued by the IASB (not yetand endorsed by the EU)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 replacereplaces IAS 39 (Financial instruments – Recognition and measurement). The standard covers the classification, measurement and derecognition of financial instruments togetherand applies an approach where the business model of an entity and the cash flows associated with each financial asset defines the classification of the financial instrument. IFRS 9 applies a forward-looking impairment model that will replace the currently applicable incurred loss model. In contrast to the complex and rules based approach of IAS 39, the new hedge accounting modelrequirements will provide an improved link to risk management and new impairment methodology.treasury operations and will be simpler to apply. 211
Financial statements (continued) Based on a preliminarythe assessment carried out the group believes that the adoption of IFRS 9, as at 1 July 2017, will not have a significant impact on its consolidated results or financial position. 205
Financial statements (continued)
position and will not require a restatement of comparative figures in the 2018 Annual Report. 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. It also provides further guidance on the measurement of sales on contracts which have discounts, rebates and consignment inventories. Based on a preliminary assessmentDuring the year the group believes thatcarried out a detailed review of the adoptioncurrent recognition criteria for revenue against the requirements of IFRS 15 will not have15. This review in particular closely examined promotional payments made to customers post the initial sale, the recognition of sales made where a significantthird party manufactures or modifies a product on behalf of Diageo and consignment inventories. Differences in practice across the group were identified but the impact of these changes on the 2017 and 2016 income statements are immaterial and the impact on the balance sheet at 30 June 2017 is not material. Diageo will adopt, as at 1 July 2017, the modified retrospective approach for IFRS 15 in its consolidated results or2018 financial position.statements.
Diageo will early adopt IFRS 9 and IFRS 15 in the year ending 30 June 2018. The following standards, issued by the IASB that have not been endorsed by the EU have not been adopted by the group: IFRS 16 —– Leases (effective(effective in the year ending 30 June 2020) sets out the principles for the recognition, measurement, presentation and disclosure of leases for both the lessee and the lessor. It eliminates the classification of leases as either operating leases or finance leases and introduces a single lessee accounting model where the lessee is required to recognise assets and liabilities for all material leases that have a term of greater than a year. The group is currently considering the implications of IFRS 16 which is expected to have an impact on the group’s consolidated results and financial position. IFRS 17 – Insurance Contracts (effective in the year ending 30 June 2022) is ultimately intended to replace IFRS 4. Based on a preliminary assessment the group believes that the adoption of IFRS 17 will not have a significant impact on its consolidated results or financial position. There are a number of amendments and clarifications to IFRS, effective for the year ending 30 June 2017,in future years, which are not expected to significantly impact the group’s consolidated results or financial position. 206
Financial statements (continued)
RESULTS FOR THE YEARResults for the year
This section explains the results and performance of the group for the three years ended 30 June 2016.2017. 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 INFORMATIONSegmental 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 amountsduties and taxes 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 the majority of countries excise duties are effectively a production tax which becomes payable when the product is removed from bonded premises and is not directly related to the value of sales. It is generally not included as a separate item on external invoices; increases in excise duty are not always passed on to the customer and where a customer failfails to pay for product received the group cannot reclaim the excise duty. The group therefore recognises excise duty as a cost to the group. 212
Financial statements (continued) 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 committeeExecutive Committee (the chief operating decision maker). The Executive Committee considers the business principally from a geographical perspective based on the location of third party sales and the business analysis is presented by geographical segment. In addition to these geographical selling segments, a further segment reviewed by the Executive Committee is the International Supply Centre (ISC), which manufactures products for other group companies and includes the production sites in the United Kingdom, Ireland, Italy and Guatemala. Continuing operations also include the Corporate function. Corporate revenues and costs are in respect of central costs, including finance, marketing, corporate relations, human resources and legal, as well as certain information systems, facilities and employee costs that are not allocable to the geographical segments or to the ISC. They also include rents receivable and payable in respect of properties not used by the group in the manufacture, sale or distribution of premium drinks and the results of Gleneagles Hotel (disposed on 30 June 2015). 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 costs of shared service operations are recharged to the regions. In the year ended 30 June 2017 Diageo changed its internal reporting structure to reflect changes made to management responsibilities. As a result of this change, Lebanon, other Middle East countries and North African countries which were formerly reported in the Asia Pacific and Africa regions respectively are now included in the Europe, Russia and Turkey region. In addition, the results of the Travel Retail operations have been reallocated to the geographical regions to better reflect the region in which the sale to the customer is made. The comparative information has not been restated as the amounts involved are not material. 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 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 at budgeted exchange rates. 213
Financial statements (continued) (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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | | 3,565 | | | | 2,544 | | | | 1,401 | | | | 863 | | | | 2,076 | | | | 1,355 | | | | (1,355 | ) | | | 10,449 | | | | 36 | | | | 10,485 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) before exceptional items | | | 1,551 | | | | 801 | | | | 212 | | | | 199 | | | | 395 | | | | — | | | | — | | | | 3,158 | | | | (150 | ) | | | 3,008 | | Exceptional items | | | — | | | | — | | | | — | | | | (118 | ) | | | (49 | ) | | | — | | | | — | | | | (167 | ) | | | — | | | | (167 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) | | | 1,551 | | | | 801 | | | | 212 | | | | 81 | | | | 346 | | | | — | | | | — | | | | 2,991 | | | | (150 | ) | | | 2,841 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-operating items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 123 | | Net finance charges | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (327 | ) | Share of after tax results of associates and joint ventures | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - Moët Hennessy | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 217 | | - Other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before taxation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,858 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | Acquisitions and disposals | | | 25 | | | | 34 | | | | 1 | | | | 26 | | | | 903 | | | | — | | | | — | | | | 989 | | | | — | | | | 989 | | ISC allocation | | | 9 | | | | 44 | | | | 4 | | | | 8 | | | | 7 | | | | (72 | ) | | | — | | | | — | | | | — | | | | — | | Retranslation to actual exchange rates | | | (41 | ) | | | (127 | ) | | | (47 | ) | | | (106 | ) | | | 12 | | | | (32 | ) | | | 32 | | | | (309 | ) | | | (2 | ) | | | (311 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | | 3,455 | | | | 2,617 | | | | 1,415 | | | | 1,033 | | | | 2,213 | | | | 1,381 | | | | (1,381 | ) | | | 10,733 | | | | 80 | | | | 10,813 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At budgeted exchange rates(i) | | | 1,477 | | | | 779 | | | | 329 | | | | 314 | | | | 303 | | | | 75 | | | | — | | | | 3,277 | | | | (136 | ) | | | 3,141 | | Acquisitions and disposals | | | (3 | ) | | | 12 | | | | — | | | | 1 | | | | 49 | | | | 1 | | | | — | | | | 60 | | | | 4 | | | | 64 | | ISC allocation | | | 10 | | | | 47 | | | | 4 | | | | 8 | | | | 7 | | | | (76 | ) | | | — | | | | — | | | | — | | | | — | | Retranslation to actual exchange rates | | | (36 | ) | | | (34 | ) | | | (15 | ) | | | (60 | ) | | | (3 | ) | | | — | | | | — | | | | (148 | ) | | | 9 | | | | (139 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) before exceptional items | | | 1,448 | | | | 804 | | | | 318 | | | | 263 | | | | 356 | | | | — | | | | — | | | | 3,189 | | | | (123 | ) | | | 3,066 | | Exceptional items | | | (28 | ) | | | (20 | ) | | | (7 | ) | | | (5 | ) | | | (193 | ) | | | (6 | ) | | | — | | | | (259 | ) | | | (10 | ) | | | (269 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) | | | 1,420 | | | | 784 | | | | 311 | | | | 258 | | | | 163 | | | | (6 | ) | | | — | | | | 2,930 | | | | (133 | ) | | | 2,797 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-operating items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 373 | | Net finance charges | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (412 | ) | Share of after tax results of associates and joint ventures | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - Moët Hennessy | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 164 | | - Other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before taxation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,933 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales | | | 4,725 | | | | 4,985 | | | | 2,132 | | | | 1,303 | | | | 4,923 | | | | 1,390 | | | | (1,390 | ) | | | 18,068 | | | | 46 | | | | 18,114 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At budgeted exchange rates(i) | | | 3,523 | | | | 2,474 | | | | 1,240 | | | | 873 | | | | 1,977 | | | | 1,418 | | | | (1,324 | ) | | | 10,181 | | | | 39 | | | | 10,220 | | Acquisitions and disposals | | | — | | | | 2 | | | | 15 | | | | 7 | | | | 41 | | | | — | | | | — | | | | 65 | | | | — | | | | 65 | | ISC allocation | | | 11 | | | | 60 | | | | 4 | | | | 11 | | | | 8 | | | | (94 | ) | | | — | | | | — | | | | — | | | | — | | Retranslation to actual exchange rates | | | 627 | | | | 288 | | | | 297 | | | | 153 | | | | 393 | | | | 66 | | | | (66 | ) | | | 1,758 | | | | 7 | | | | 1,765 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | | 4,161 | | | | 2,824 | | | | 1,556 | | | | 1,044 | | | | 2,419 | | | | 1,390 | | | | (1,390 | ) | | | 12,004 | | | | 46 | | | | 12,050 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At budgeted exchange rates(i) | | | 1,648 | | | | 741 | | | | 159 | | | | 195 | | | | 375 | | | | 116 | | | | — | | | | 3,234 | | | | (169 | ) | | | 3,065 | | Acquisitions and disposals | | | — | | | | — | | | | (8 | ) | | | — | | | | — | | | | — | | | | — | | | | (8 | ) | | | (1 | ) | | | (9 | ) | ISC allocation | | | 14 | | | | 72 | | | | 5 | | | | 13 | | | | 12 | | | | (116 | ) | | | — | | | | — | | | | — | | | | — | | Retranslation to actual exchange rates | | | 237 | | | | 123 | | | | 62 | | | | 42 | | | | 100 | | | | — | | | | — | | | | 564 | | | | (19 | ) | | | 545 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) before exceptional items | | | 1,899 | | | | 936 | | | | 218 | | | | 250 | | | | 487 | | | | — | | | | — | | | | 3,790 | | | | (189 | ) | | | 3,601 | | Exceptional items | | | — | | | | (33 | ) | | | — | | | | — | | | | (9 | ) | | | — | | | | — | | | | (42 | ) | | | — | | | | (42 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) | | | 1,899 | | | | 903 | | | | 218 | | | | 250 | | | | 478 | | | | — | | | | — | | | | 3,748 | | | | (189 | ) | | | 3,559 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-operating items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 20 | | Net finance charges | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (329 | ) | Share of after tax results of associates and joint ventures | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Moët Hennessy | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 302 | | – Other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before taxation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,559 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | | 3,565 | | | | 2,544 | | | | 1,401 | | | | 863 | | | | 2,076 | | | | 1,355 | | | | (1,355 | ) | | | 10,449 | | | | 36 | | | | 10,485 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) before exceptional items | | | 1,551 | | | | 801 | | | | 212 | | | | 199 | | | | 395 | | | | — | | | | — | | | | 3,158 | | | | (150 | ) | | | 3,008 | | Exceptional items | | | — | | | | — | | | | — | | | | (118 | ) | | | (49 | ) | | | — | | | | — | | | | (167 | ) | | | — | | | | (167 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) | | | 1,551 | | | | 801 | | | | 212 | | | | 81 | | | | 346 | | | | — | | | | — | | | | 2,991 | | | | (150 | ) | | | 2,841 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-operating items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 123 | | Net finance charges | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (327 | ) | Share of after tax results of associates and joint ventures | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Moët Hennessy | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 217 | | – Other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before taxation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,858 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
208214
Financial statements (continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales | | | 3,915 | | | | 4,935 | | | | 1,846 | | | | 1,404 | | | | 1,801 | | | | 1,504 | | | | (1,504 | ) | | | 13,901 | | | | 79 | | | | 13,980 | | 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 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | | 3,444 | | | | 2,814 | | | | 1,430 | | | | 1,144 | | | | 1,347 | | | | 1,504 | | | | (1,504 | ) | | | 10,179 | | | | 79 | | | | 10,258 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) | | | 1,425 | | | | 833 | | | | 317 | | | | 314 | | | | 7 | | | | (47 | ) | | | — | | | | 2,849 | | | | (142 | ) | | | 2,707 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-operating items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 140 | | Net finance charges | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (388 | ) | Share of after tax results of associates and joint ventures | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - Moët Hennessy | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 246 | | - Other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before taxation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,711 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | Acquisitions and disposals | | | 25 | | | | 34 | | | | 1 | | | | 26 | | | | 903 | | | | — | | | | — | | | | 989 | | | | — | | | | 989 | | ISC allocation | | | 9 | | | | 44 | | | | 4 | | | | 8 | | | | 7 | | | | (72 | ) | | | — | | | | — | | | | — | | | | — | | Retranslation to actual exchange rates | | | (41 | ) | | | (127 | ) | | | (47 | ) | | | (106 | ) | | | 12 | | | | (32 | ) | | | 32 | | | | (309 | ) | | | (2 | ) | | | (311 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net sales | | | 3,455 | | | | 2,617 | | | | 1,415 | | | | 1,033 | | | | 2,213 | | | | 1,381 | | | | (1,381 | ) | | | 10,733 | | | | 80 | | | | 10,813 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At budgeted exchange rates(i) | | | 1,477 | | | | 779 | | | | 329 | | | | 314 | | | | 303 | | | | 75 | | | | — | | | | 3,277 | | | | (136 | ) | | | 3,141 | | Acquisitions and disposals | | | (3 | ) | | | 12 | | | | — | | | | 1 | | | | 49 | | | | 1 | | | | — | | | | 60 | | | | 4 | | | | 64 | | ISC allocation | | | 10 | | | | 47 | | | | 4 | | | | 8 | | | | 7 | | | | (76 | ) | | | — | | | | — | | | | — | | | | — | | Retranslation to actual exchange rates | | | (36 | ) | | | (34 | ) | | | (15 | ) | | | (60 | ) | | | (3 | ) | | | — | | | | — | | | | (148 | ) | | | 9 | | | | (139 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) before exceptional items | | | 1,448 | | | | 804 | | | | 318 | | | | 263 | | | | 356 | | | | — | | | | — | | | | 3,189 | | | | (123 | ) | | | 3,066 | | Exceptional items | | | (28 | ) | | | (20 | ) | | | (7 | ) | | | (5 | ) | | | (193 | ) | | | (6 | ) | | | — | | | | (259 | ) | | | (10 | ) | | | (269 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit/(loss) | | | 1,420 | | | | 784 | | | | 311 | | | | 258 | | | | 163 | | | | (6 | ) | | | — | | | | 2,930 | | | | (133 | ) | | | 2,797 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-operating items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 373 | | Net finance charges | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (412 | ) | Share of after tax results of associates and joint ventures | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – Moët Hennessy | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 164 | | – Other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before taxation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,933 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(i) | These items represent the IFRS 8 performance measures for the geographical and ISC segments. |
(1) | The net sales figures for ISC reported to the Executive Committee primarily comprise inter-segment sales and these are eliminated in a separate column in the above segmental analysis. Apart from sales by the ISC segment to the other operating segments, inter-segmental sales are not material. |
(2) | The group’s net finance charges are managed centrally and are not attributable to individual operating segments. |
(3) | Approximately 40% of annual net sales occur in the last four months of each calendar year. |
(b) Other segmental information 209
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital expenditure | | | 112 | | | | 27 | | | | 126 | | | | 34 | | | | 48 | | | | 125 | | | | 46 | | | | 518 | | Depreciation and intangible asset amortisation | | | (41 | ) | | | (21 | ) | | | (77 | ) | | | (7 | ) | | | (42 | ) | | | (107 | ) | | | (66 | ) | | | (361 | ) | 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 | | Depreciation and intangible asset amortisation | | | (38 | ) | | | (24 | ) | | | (93 | ) | | | (15 | ) | | | (37 | ) | | | (102 | ) | | | (62 | ) | | | (371 | ) | Exceptional accelerated depreciation and impairment | | | (22 | ) | | | — | | | | — | | | | (1 | ) | | | — | | | | — | | | | — | | | | (23 | ) | Exceptional impairment of associate | | | — | | | | — | | | | — | | | | — | | | | (41 | ) | | | — | | | | — | | | | (41 | ) | Exceptional accelerated amortisation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (5 | ) | | | (5 | ) |
215
Financial statements (continued) (b) Other segmental information
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | Depreciation and intangible asset amortisation | | | (38 | ) | | | (24 | ) | | | (93 | ) | | | (15 | ) | | | (37 | ) | | | (102 | ) | | | (62 | ) | | | (371 | ) | Exceptional accelerated depreciation and impairment | | | (22 | ) | | | — | | | | — | | | | (1 | ) | | | — | | | | — | | | | — | | | | (23 | ) | Exceptional impairment of associate | | | — | | | | — | | | | — | | | | — | | | | (41 | ) | | | — | | | | — | | | | (41 | ) | Exceptional accelerated amortisation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (5 | ) | | | (5 | ) | 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital expenditure | | | 65 | | | | 28 | | | | 154 | | | | 39 | | | | 25 | | | | 280 | | | | 51 | | | | 642 | | Depreciation and intangible asset amortisation | | | (40 | ) | | | (24 | ) | | | (92 | ) | | | (12 | ) | | | (19 | ) | | | (100 | ) | | | (57 | ) | | | (344 | ) | Exceptional accelerated depreciation and impairment | | | (2 | ) | | | — | | | | — | | | | — | | | | (4 | ) | | | (18 | ) | | | (1 | ) | | | (25 | ) | Exceptional impairment of intangible assets | | | — | | | | — | | | | — | | | | — | | | | (260 | ) | | | — | | | | — | | | | (260 | ) |
(c) Category and geographical 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 | | 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 | | Non-current assets(ii),(iii) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 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 | | Non-current assets(ii),(iii) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,625 | | | | 3,097 | | | | 2,100 | | | | 802 | | | | 7,124 | | | | 14,748 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Category analysis | | | Geographic analysis | | | | Spirits £ million | | | Beer £ million | | | Wine £ million | | | Ready to drink £ million | | | Other(iv) £ million | | | Total £ million | | | Great Britain £ million | | | United States £ million | | | Nether- lands £ million | | | India £ million | | | Rest of World £ million | | | Total £ million | | 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales(i) | | | 14,241 | | | | 2,635 | | | | 81 | | | | 854 | | | | 303 | | | | 18,114 | | | | 1,558 | | | | 4,366 | | | | 62 | | | | 3,070 | | | | 9,058 | | | | 18,114 | | Non-current assets(ii),(iii) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,678 | | | | 4,012 | | | | 2,392 | | | | 4,009 | | | | 7,410 | | | | 19,501 | | 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 | | Non-current assets(ii),(iii) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,654 | | | | 3,340 | | | | 2,196 | | | | 3,439 | | | | 6,588 | | | | 17,217 | |
(i) | The geographical analysis of sales is based on the location of third party customers. |
(ii) | The geographical analysis ofnon-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 andnon-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. |
(iv) | In the year ended 30 June 2017 ‘Other’ includes the group’s sorghum beer business which was in prior years reported in ‘Beer’. |
210
Financial statements (continued) 3. Operating costs 3. OPERATING COSTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 £ million | | 2015 £ million | | 2014 £ million | | | 2017 £ million | | 2016 £ million | | 2015 £ million | | Excise duties | | | 5,156 | | | 5,153 | | | 3,722 | | | | 6,064 | | | 5,156 | | | 5,153 | | Cost of sales | | | 4,251 | | | 4,610 | | | 4,029 | | | | 4,680 | | | 4,251 | | | 4,610 | | Marketing | | | 1,562 | | | 1,629 | | | 1,620 | | | | 1,798 | | | 1,562 | | | 1,629 | | Other operating expenses | | | 1,831 | | | 1,777 | | | 1,902 | | | | 2,013 | | | 1,831 | | | 1,777 | | | | | | | | | | | | | | | | | | | | | | | | 12,800 | | | 13,169 | | | 11,273 | | | | 14,555 | | | 12,800 | | | 13,169 | | | | | | | | | | | | | | | | | | | | | Comprising: | | | | | | | | | | | | | Excise duties – Great Britain | | | 853 | | | 862 | | | 863 | | | | 774 | | | 853 | | | 862 | | – United States | | | 468 | | | 450 | | | 467 | | | | 558 | | | 468 | | | 450 | | – India | | | 1,588 | | | 1,472 | | | 33 | | | | 2,073 | | | 1,588 | | | 1,472 | | – Other | | | 2,247 | | | 2,369 | | | 2,359 | | | | 2,659 | | | 2,247 | | | 2,369 | | Increase in inventories | | | (100 | ) | | (200 | ) | | (291 | ) | | | (146 | ) | | (100 | ) | | (200 | ) | Raw materials and consumables | | | 2,548 | | | 2,725 | | | 2,327 | | | | 2,813 | | | 2,548 | | | 2,725 | | Marketing | | | 1,562 | | | 1,629 | | | 1,620 | | | | 1,798 | | | 1,562 | | | 1,629 | | Other external charges | | | 1,767 | | | 2,017 | | | 1,810 | | | | 2,124 | | | 1,767 | | | 2,017 | | Staff costs | | | 1,475 | | | 1,433 | | | 1,479 | | | | 1,583 | | | 1,475 | | | 1,433 | | Depreciation, amortisation and impairment | | | 473 | | | 440 | | | 629 | | | | 361 | | | 473 | | | 440 | | Gains on disposal of properties | | | (39 | ) | | (26 | ) | | (25 | ) | | | (7 | ) | | (39 | ) | | (26 | ) | Net foreign exchange losses | | | 1 | | | 13 | | | 12 | | | Net foreign exchange (gains)/losses | | | | (16 | ) | | 1 | | | 13 | | Other operating income(i) | | | (43 | ) | | (15 | ) | | (10 | ) | | | (19 | ) | | (43 | ) | | (15 | ) | | | | | | | | | | | | | | | | | | | | | | | 12,800 | | | 13,169 | | | 11,273 | | | | 14,555 | | | 12,800 | | | 13,169 | | | | | | | | | | | | | | | | | | | | |
(i) | On 7 July 2015,In the year ended 30 June 2016 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£20 million (2015(2016 – £29 million; 20142015 – £30£29 million), other operating lease rentals (mainly properties) of £96 million (2016 – £72 million (2015million; 2015 – £87 million; 2014 – £85 million), research and development expenditure in respect of new drinks products and package design in the year leading up to product launch of £33 million (2016 – £28 million (2015million; 2015 – £26 million; 2014 – £24 million) and maintenance and repairs of £100 million (2016 – £91 million (2015million; 2015 – £95 million; 2014 – £72 million). 216
Financial statements (continued) (b) 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 yearsyear 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).LLP. | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 £ million | | | 2015 £ million | | | 2014 £ million | | | 2017 £ million | | | 2016 £ million | | | 2015 £ million | | Audit of these financial statements | | | 3.4 | | | | 3.6 | | | | 3.4 | | | | 3.1 | | | | 3.4 | | | | 3.6 | | Audit of financial statements of subsidiaries | | | 2.3 | | | | 2.7 | | | | 2.3 | | | | 3.4 | | | | 2.3 | | | | 2.7 | | Audit related assurance services(i) | | | 1.4 | | | | 1.6 | | | | 1.6 | | | | 1.6 | | | | 1.4 | | | | 1.6 | | Total audit fees (Audit fees) | | | 7.1 | | | | 7.9 | | | | 7.3 | | | | 8.1 | | | | 7.1 | | | | 7.9 | | Other services relevant to taxation (Tax fees)(ii) | | | 0.5 | | | | 0.8 | | | | 0.6 | | | | 0.3 | | | | 0.5 | | | | 0.8 | | Other assurance services (Audit related fees)(iii) | | | 0.4 | | | | 0.6 | | | | 0.7 | | | | 0.5 | | | | 0.4 | | | | 0.6 | | All other non-audit fees (All other fees)(iv) | | | 0.9 | | | | 0.7 | | | | 0.4 | | | | 0.9 | | | | 0.9 | | | | 0.7 | | | | | | | | | | | | | | | | | | | | | | | | 8.9 | | | | 10.0 | | | | 9.0 | | | | 9.8 | | | | 8.9 | | | | 10.0 | | | | | | | | | | | | | | | | | | | | |
(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 advice. |
(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 othernon-audit fees are principally in respect of immigration and advisory services. |
(1) | Disclosure requirements for auditor fees in the United States are different from those required in the United Kingdom. The terminology by category required in the United States is disclosed in brackets in the above table. All figures are the same for the disclosures in the United Kingdom and the United States apart from £0.3 million of the costs for the year ended 20162017 provided by PwC (£0.4(2016 – £0.3 million; £0.4 million for both of the years endedyear 30 June 2015, and 30 June 2014, respectively provided by KPMG) in respect of the review of the interim financial information which would be included in audit related fees in the United States rather than audit fees. |
Audit services provided by firms other than PwC for the year ended 30 June 2017 were £0.5 million (2016 – £0.9 million). Audit services provided by firms other than 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 periods2015 were not material. PwC fees for audit services in respect of employee pension plans were £0.2£0.3 million for the year ended 30 June 2016.2017 (2016 – £0.2 million). In the yearsyear ended 30 June 2015 and 2014 the KPMG fees for audit services in respect of employee pension plans were £0.4 million and £0.3 million, respectively.million. (c) Staff costs and average number of employees | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 £ million | | | 2015 £ million | | | 2014 £ million | | | 2017 £ million | | | 2016 £ million | | | 2015 £ million | | Aggregate remuneration | | | | | | | | | | | | | Wages and salaries | | | 1,236 | | | | 1,180 | | | | 1,242 | | | | 1,330 | | | | 1,236 | | | | 1,180 | | Share-based incentive plans | | | 28 | | | | 36 | | | | 38 | | | | 34 | | | | 28 | | | | 36 | | Employer’s social security | | | 85 | | | | 88 | | | | 92 | | | | 93 | | | | 85 | | | | 88 | | Employer’s pension | | | | | | | | | | | | | - defined benefit plans | | | 99 | | | | 103 | | | | 91 | | | - defined contribution plans | | | 16 | | | | 15 | | | | 15 | | | – defined benefit plans | | | | 95 | | | | 99 | | | | 103 | | – defined contribution plans | | | | 17 | | | | 16 | | | | 15 | | Other post employment plans | | | 11 | | | | 11 | | | | 1 | | | | 14 | | | | 11 | | | | 11 | | | | | | | | | | | | | | | | | | | | | | | | 1,475 | | | | 1,433 | | | | 1,479 | | | | 1,583 | | | | 1,475 | | | | 1,433 | | | | | | | | | | | | | | | | | | | | |
217
Financial statements (continued) The average number of employees on a full time equivalent basis (excluding employees of associates and joint ventures) was as follows: | | | | | | | | | | | | | | | 2016 | | | 2015 | | | 2014(i) | | North America | | | 2,477 | | | | 2,748 | | | | 3,120 | | Europe, Russia and Turkey | | | 4,164 | | | | 4,073 | | | | 4,056 | | Africa | | | 5,381 | | | | 4,997 | | | | 5,252 | | Latin America and Caribbean | | | 3,013 | | | | 3,166 | | | | 3,002 | | Asia Pacific | | | 9,711 | | | | 10,520 | | | | 3,985 | | ISC | | | 4,188 | | | | 4,291 | | | | 4,431 | | Corporate and other | | | 3,144 | | | | 3,567 | | | | 3,509 | | | | | | | | | | | | | | | | | | 32,078 | | | | 33,362 | | | | 27,355 | | | | | | | | | | | | | | |
(i) | Employees of corporate functions whose costs are charged to the operating segments are included in Corporate. |
| | | | | | | | | | | | | | | 2017 | | | 2016 | | | 2015 | | North America | | | 2,251 | | | | 2,477 | | | | 2,748 | | Europe, Russia and Turkey | | | 4,074 | | | | 4,164 | | | | 4,073 | | Africa | | | 4,898 | | | | 5,381 | | | | 4,997 | | Latin America and Caribbean | | | 2,573 | | | | 3,013 | | | | 3,166 | | Asia Pacific | | | 8,690 | | | | 9,711 | | | | 10,520 | | ISC | | | 4,244 | | | | 4,188 | | | | 4,291 | | Corporate and other | | | 3,703 | | | | 3,144 | | | | 3,567 | | | | | | | | | | | | | | | | | | 30,433 | | | | 32,078 | | | | 33,362 | | | | | | | | | | | | | | |
At 30 June 20162017 the group had, on a full time equivalent basis, 31,485 (201530,051 (2016 – 32,409; 201431,485; 2015 – 26,588)32,409) employees. The average number of employees of the group, including part time employees, for the year was 32,969 (201531,472 (2016 – 34,179; 201432,969; 2015 – 27,958)34,179). 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 | | | 2017 £ million | | | 2016 £ million | | | 2015 £ million | | Other external charges | | | 49 | | | | 170 | | | | 31 | | | | 42 | | | | 49 | | | | 170 | | Staff costs | | | | | | | | | | | | | - Net charge in respect of restructuring programmes | | | — | | | | 30 | | | | 111 | | | – Net charge in respect of restructuring programmes | | | | — | | | | — | | | | 30 | | Depreciation, amortisation and impairment | | | | | | | | | | | | | - Brand, goodwill and tangible asset impairment | | | 118 | | | | — | | | | 264 | | | - Accelerated depreciation and amortisation | | | — | | | | 28 | | | | 21 | | | - Associate impairment | | | — | | | | 41 | | | | — | | | – Brand, goodwill and tangible asset impairment | | | | — | | | | 118 | | | | — | | – Accelerated depreciation and amortisation | | | | — | | | | — | | | | 28 | | – Associate impairment | | | | — | | | | — | | | | 41 | | | | | | | | | | | | | | | | | | | | | Total exceptional operating costs (note 4) | | | 167 | | | | 269 | | | | 427 | | | | 42 | | | | 167 | | | | 269 | | | | | | | | | | | | | | | | | | | | | Cost of sales | | | — | | | | 25 | | | | 23 | | | | — | | | | — | | | | 25 | | Other operating expenses | | | 167 | | | | 244 | | | | 404 | | | | 42 | | | | 167 | | | | 244 | | | | | | | | | | | | | | | | | | | | | Total exceptional operating costs (note 4) | | | 167 | | | | 269 | | | | 427 | | | | 42 | | | | 167 | | | | 269 | | | | | | | | | | | | | | | | | | | | |
4. EXCEPTIONAL ITEMSExceptional items Accounting policies 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. It is believed that such classification further helps investors to understand the performance of the group. Operating items Exceptional operating items are those that are considered to be material and are part of the operating activities of the group such as impairments of fixed assets, duty settlements, property disposals and changes in post employment plans. Charges in respect of material global restructuring programs were disclosed as exceptional operating items until and including the year ended 30 June 2015. 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 asnon-operating exceptional items below operating profit in the consolidated income statement. 218
Financial statements (continued) It is believed that suchseparate disclosure of exceptional items and the classification between operating andnon-operating further helps investors to understand the performance of the group. | | | | | | | | | | | | | | | 2017 £ million | | | 2016 £ million | | | 2015 £ million | | Items included in operating profit | | | | | | | | | | | | | Competition authority investigation in Turkey (a) | | | (33 | ) | | | — | | | | — | | Customer claim in India (b) | | | (32 | ) | | | — | | | | — | | Disengagement agreements relating to United Spirits Limited (c) | | | 23 | | | | (49 | ) | | | — | | Brand, goodwill and tangible asset impairment (d) | | | — | | | | (118 | ) | | | — | | Korea settlement (e) | | | — | | | | — | | | | (146 | ) | Associate impairment (f) | | | — | | | | — | | | | (41 | ) | Restructuring programmes (g) | | | — | | | | — | | | | (82 | ) | | | | | | | | | | | | | | | | | (42 | ) | | | (167 | ) | | | (269 | ) | | | | | | | | | | | | | | Non-operating items | | | | | | | | | | | | | Sale of businesses | | | | | | | | | | | | | Wines in the United States and Percy Fox (h) | | | 20 | | | | (191 | ) | | | — | | Argentina (i) | | | — | | | | (38 | ) | | | — | | South African associate interests (j) | | | — | | | | (27 | ) | | | — | | Jamaica, Singapore and Malaysia beer interests (k) | | | — | | | | 457 | | | | — | | Kenya – glass business (CGI) (l) | | | — | | | | 14 | | | | — | | Gleneagles Hotel (m) | | | — | | | | — | | | | 73 | | Bushmills (n) | | | — | | | | — | | | | 174 | | Step ups | | | | | | | | | | | | | United Spirits Limited (o) | | | — | | | | — | | | | 103 | | Don Julio (n) | | | — | | | | — | | | | 63 | | South Africa (p) | | | — | | | | — | | | | (10 | ) | Other | | | | | | | | | | | | | Provision for a receivable related to a loan guarantee (q) | | | — | | | | (92 | ) | | | — | | Guarantee (q) | | | — | | | | — | | | | (30 | ) | | | | | | | | | | | | | | | | | 20 | | | | 123 | | | | 373 | | | | | | | | | | | | | | | Exceptional items before taxation | | | (22 | ) | | | (44 | ) | | | 104 | | Items included in taxation (note 7) | | | 4 | | | | 56 | | | | 51 | | Exceptional items in continuing operations | | | (18 | ) | | | 12 | | | | 155 | | Discontinued operations net of taxation (note 8) | | | (55 | ) | | | — | | | | — | | | | | | | | | | | | | | | Total exceptional items | | | (73 | ) | | | 12 | | | | 155 | | | | | | | | | | | | | | | Attributable to: | | | | | | | | | | | | | Equity shareholders of the parent company | | | (64 | ) | | | 2 | | | | 156 | | Non-controlling interests | | | (9 | ) | | | 10 | | | | (1 | ) | | | | | | | | | | | | | | Total exceptional items | | | (73 | ) | | | 12 | | | | 155 | | | | | | | | | | | | | | |
213
(a) In the year ended 30 June 2017, TRY150 million (£33 million) was charged to exceptional items in respect of the Turkish Competition Authority investigation into certain of Mey İçki’s trading practices in Turkey.Financial statements (continued) (b) During the year ended 30 June 2017 United Spirits Limited received a claim, followed by a debit note, from a customer in India in respect of differential pricing charged over a number of years in respect of products sold to that customer primarily for the period prior to the acquisition of United Spirits Limited by Diageo. While challenging the amount of the claim and contesting it, the group has made a provision of INR2,678 million (£32 million) in exceptional items against the current receivable from the customer. | | | | | | | | | | | | | | | 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 | ) | | | | | | | | | | | | | |
214219
Financial statements (continued) (c) On 25 February 2016, in relation to an agreement entered into with Dr Vijay Mallya (Dr Mallya) and described further at note 18(d) (25 February Agreement), the group incurred an exceptional operating charge of £49 million. This included provisions for payments to Dr Mallya of, in aggregate, $75 million (£53 million) 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 andNon-Executive Director of United Spirits Limited (USL); (ii) his agreement to five-year globalnon-compete (excluding the United Kingdom),non-interference,non-solicitation and standstill undertakings; and (iii) his agreement that he and his affiliates would not pursue any claims against Diageo, USL and their affiliates. Separately, other arrangements entered into on 25 February 2016 resulted in a net gain of £4 million, comprising the gain upon termination of certain other agreements that were the subject of prior provisions, less legal fees directly attributable to the 25 February Agreement. In the year ended 30 June 2016 a payment of $40 million (£28 million) was made to Dr Mallya as the first instalment due under the 25 February Agreement. In the year ended 30 June 2017 owing to various reasons, including breaches of several provisions of the 25 February 2016 Agreement by Dr Mallya, Diageo believes that it was not liable to pay the $7 million (£5 million) instalment in February 2017 under that agreement and considers it very unlikely that it will become liable to pay future instalments in subsequent years and accordingly the outstanding provision of $29 million (£23 million) was credited back to the income statement. (a)(d) In the year ended 30 June 2016, 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, 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 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. See note 18(d).
(c)(e) 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.
(d)(f) 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.
(e)(g) There have been a number of restructuring programmes which were all completed by 30 June 2015. The costs incurred in the two yearsyear ended 30 June 2015 were largely in respect of redundancies and accelerated depreciation and were incurred inacross 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 additional 20% shareholding in Guinness Ghana Breweries Limited (GGBL) from Heineken which increased Diageo’s shareholding in GGBL to 72.42%.
(g)(h) 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 in the year ended 30 June 2016, 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 iswas net of an exchange gain of £12 million, in respect of prior years, recycled from other comprehensive income and transaction costs of £8 million.
(h)In the year ended 30 June 2017 the guarantee in respect of the lease payments to Realty Income Corporation was settled and the working capital on disposal was agreed with Treasury Wine Estates resulting in a net £20 million exceptional gain.
(i) 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. (i)(j) 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.
(j)(k) 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 additional 20% shareholding in Guinness Ghana Breweries Limited (GGBL) from Heineken which increased Diageo’s shareholding in GGBL to 72.42%.
(l) 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.manufacturer. 215220
Financial statements (continued) (k)(m) On 30 June 2015, Diageo completed the disposal of Gleneagles Hotels Limited to the Ennismore group.
(l)(n) 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.
(o) 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 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. (n)(p) 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.
(o) A(q) During the year ended 30 June 2016 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 was paid to SCB during the year.SCB. The underlying security package for the loan remainsis currently being contested in place. Acourt and a provision of $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 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 guaranteed amount in the year ended 30 June 2015. Cash payments included in cash generated from operations in respect of exceptional restructuring items, exceptional legal settlements, guarantee5. Finance income and settlement payments and thalidomide were as follows:
| | | | | | | | | | | | | | | 2016 £ million | | | 2015 £ million | | | 2014 £ million | | Exceptional restructuring | | | (52 | ) | | | (117 | ) | | | (104 | ) | Disengagement agreements relating to United Spirits Limited | | | (28 | ) | | | — | | | | — | | Thalidomide | | | (12 | ) | | | (19 | ) | | | (59 | ) | Korea settlement | | | — | | | | (74 | ) | | | — | | Guarantee related payments | | | — | | | | (30 | ) | | | — | | | | | | | | | | | | | | | Total cash payments | | | (92 | ) | | | (240 | ) | | | (163 | ) | | | | | | | | | | | | | |
5. FINANCE INCOME AND CHARGEScharges
Accounting policies Net interestincludes 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 chargesinclude items in respect of post employment plans, the discount unwind of long term obligations and hyperinflation charges. The results of operations in hyperinflationary economies are adjusted to reflect the changes in the purchasing power of the local currency of the entity before being translated to sterling. | | | | | | | | | | | | | | | 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 | ) | | | | | | | | | | | | | |
217221
Financial statements (continued) | | | | | | | | | | | | | | | 2017 £ million | | | 2016 £ million | | | 2015 £ million | | Interest income | | | 148 | | | | 153 | | | | 162 | | Fair value gain on interest rate instruments | | | 76 | | | | 88 | | | | 61 | | | | | | | | | | | | | | | Total interest income | | | 224 | | | | 241 | | | | 223 | | | | | | | | | | | | | | | Interest charge on bank loans and overdrafts | | | (72 | ) | | | (67 | ) | | | (102 | ) | Interest charge on finance leases | | | (11 | ) | | | (13 | ) | | | (17 | ) | Interest charge on all other borrowings | | | (368 | ) | | | (379 | ) | | | (409 | ) | Fair value loss on interest rate instruments | | | (67 | ) | | | (91 | ) | | | (55 | ) | | | | | | | | | | | | | | Total interest charges | | | (518 | ) | | | (550 | ) | | | (583 | ) | | | | | | | | | | | | | | Net interest charges | | | (294 | ) | | | (309 | ) | | | (360 | ) | | | | | | | | | | | | | | Net finance income in respect of post employment plans in surplus (note 13) | | | 2 | | | | 18 | | | | 13 | | Hyperinflation adjustment | | | 9 | | | | — | | | | — | | Other finance income | | | — | | | | 3 | | | | 8 | | | | | | | | | | | | | | | Total other finance income | | | 11 | | | | 21 | | | | 21 | | | | | | | | | | | | | | | Net finance charge in respect of post employment plans in deficit (note 13) | | | (27 | ) | | | (23 | ) | | | (26 | ) | Unwinding of discounts | | | (8 | ) | | | (11 | ) | | | (14 | ) | Change in financial liability (Level 3) | | | (8 | ) | | | — | | | | (13 | ) | Hyperinflation adjustment | | | — | | | | (1 | ) | | | (17 | ) | Other finance charges | | | (3 | ) | | | (4 | ) | | | (3 | ) | | | | | | | | | | | | | | Total other finance charges | | | (46 | ) | | | (39 | ) | | | (73 | ) | | | | | | | | | | | | | | Net other finance charges | | | (35 | ) | | | (18 | ) | | | (52 | ) | | | | | | | | | | | | | |
6. INVESTMENTS IN ASSOCIATES AND JOINT VENTURESInvestments 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 20162017 was Moët Hennessy (2015(2016 – Moët 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 anon-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. 222
Financial statements (continued) On 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 in the year ended 30 June 2016 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 wherein which 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 | | Others £ million | | Total £ million | | Cost less provisions | | | | | | | | | | | | | At 30 June 2014 | | | 2,152 | | | 1,049 | | | 3,201 | | | Exchange differences | | | (200 | ) | | (5 | ) | | (205 | ) | | Capital injection | | | — | | | 21 | | | 21 | | | Step acquisitions | | | — | | | (852 | ) | | (852 | ) | | Share of profit after tax | | | 164 | | | 11 | | | 175 | | | Share of movements in other comprehensive income and equity | | | (14 | ) | | | — | | | (14 | ) | | Transfer to assets held for sale | | | — | | | (82 | ) | | (82 | ) | | Dividends | | | (148 | ) | | (35 | ) | | (183 | ) | | Share of tax attributable to shareholders | | | 56 | | | | — | | | 56 | | | Impairment charge | | | — | | | (41 | ) | | (41 | ) | | | | | | | | | | | | | At 30 June 2015 | | | 2,010 | | | | 66 | | | | 2,076 | | | | 2,010 | | | 66 | | | 2,076 | | Exchange differences | | | 318 | | | | 7 | | | | 325 | | | | 318 | | | 7 | | | 325 | | Additions | | | — | | | | 28 | | | | 28 | | | | — | | | 28 | | | 28 | | Share of profit after tax | | | 217 | | | | 4 | | | | 221 | | | | 217 | | | 4 | | | 221 | | Transfer to asset held for sale(i) | | | — | | | | 3 | | | | 3 | | | | — | | | 3 | | | 3 | | Disposals | | | — | | | | (18 | ) | | | (18 | ) | | | — | | | (18 | ) | | (18 | ) | Dividends | | | (167 | ) | | | (6 | ) | | | (173 | ) | | | (167 | ) | | (6 | ) | | (173 | ) | Share of tax attributable to shareholders | | | 67 | | | | — | | | | 67 | | | | 67 | | | | — | | | 67 | | Other | | | — | | | | (1 | ) | | | (1 | ) | | | — | | | (1 | ) | | (1 | ) | | | | | | | | | | | | | | | | | | | | At 30 June 2016 | | | 2,445 | | | | 83 | | | | 2,528 | | | | 2,445 | | | | 83 | | | | 2,528 | | Exchange differences | | | | 117 | | | | 3 | | | | 120 | | Additions | | | | — | | | | 10 | | | | 10 | | Share of profit after tax | | | | 302 | | | | 7 | | | | 309 | | Dividends | | | | (218 | ) | | | (5 | ) | | | (223 | ) | Share of tax attributable to shareholders | | | | 85 | | | | — | | | | 85 | | Other | | | | (5 | ) | | | — | | | | (5 | ) | | | | | | | | | | | | | | | | | | | | At 30 June 2017 | | | | 2,726 | | | | 98 | | | | 2,824 | | | | | | | | | | | | |
(i) | In respect of South African associate interests that were disposed of in the year.year ended 30 June 2016. The businesses were reported as asset held for sale at 30 June 2015. |
(b) Income statement information for the three years ended 30 June 20162017 and balance sheet information as at 30 June 20162017 and 30 June 20152016 of Moët Hennessy is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 £ million | | | 2015 £ million | | | 2014 £ million | | | 2017 £ million | | | 2016(i) £ million | | | 2015 £ million | | Net sales | | | 3,491 | | | | 3,215 | | | | 3,329 | | | Sales | | | | 4,356 | | | | 3,491 | | | | 3,215 | | Profit for the year | | | 638 | | | | 482 | | | | 722 | | | | 888 | | | | 638 | | | | 482 | | Total comprehensive income | | | 706 | | | | 588 | | | | 639 | | | | 838 | | | | 509 | | | | 588 | |
219
Financial statements (continued)
(i) | The group has revised the disclosure of the 2016 comparative amounts by decreasing total comprehensive income of Moët Hennessy by £197 million. The revised disclosure is consistent with the current year and 2015 presentation. |
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€1.16 (2016 – £1 = €1.31; 2014€1.34; 2015 – £1 = €1.20)€1.31). | | | | | | | | | | | 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 | | | | | | | | | | |
223
Financial statements (continued) | | | | | | | | | | | 2017 £ million | | | 2016 £ million | | Non-current assets | | | 4,160 | | | | 3,832 | | Current assets | | | 6,897 | | | | 6,277 | | | | | | | | | | | Total assets | | | 11,057 | | | | 10,109 | | | | | | | | | | | Non-current liabilities | | | (973 | ) | | | (1,009 | ) | Current liabilities | | | (2,067 | ) | | | (1,907 | ) | | | | | | | | | | Total liabilities | | | (3,040 | ) | | | (2,916 | ) | | | | | | | | | | Net assets | | | 8,017 | | | | 7,193 | | | | | | | | | | |
(1) | Including acquisition fair value adjustments principally in respect of Moët Hennessy’s brands and translated at £1 = €1.2 (2015€1.14 (2016 – £1 = €1.41)€1.20). |
(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.
(e)(d) Investments in associates and joint ventures comprise the cost of shares less goodwill written off on acquisitions prior to 1 July 1998 of £1,132£1,196 million (2015(2016 – £974£1,132 million), plus the group’s share of post acquisition reserves of £1,396£1,628 million (2015(2016 – £1,102£1,396 million).
(f)(e) The associates and joint ventures have not reported any material contingent liabilities in their latest financial statements.
7. TAXATIONTaxation 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 estimate and 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. 220
Financial statements (continued)
The evaluation of deferred tax assets recoverability requires judgements to be made regarding the availability of future taxable income. 224
Financial statements (continued) (a) Analysis of taxation charge for the year | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | United Kingdom | | Rest of world | | Total | | | United Kingdom | | Rest of world | | Total | | | | 2016 £ million | | | 2015 £ million | | 2014 £ million | | 2016 £ million | | 2015 £ million | | 2014 £ million | | 2016 £ million | | 2015 £ million | | 2014 £ million | | | 2017 £ million | | | 2016 £ million | | | 2015 £ million | | 2017 £ million | | 2016 £ million | | 2015 £ million | | 2017 £ million | | 2016 £ million | | 2015 £ million | | Current tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current year | | | 61 | | | | 75 | | | 102 | | | | 515 | | | 381 | | | 361 | | | | 576 | | | 456 | | | 463 | | | | 50 | | | | 61 | | | | 75 | | | | 541 | | | 515 | | | 381 | | | | 591 | | | 576 | | | 456 | | Adjustments in respect of prior years | | | — | | | | — | | | (4 | ) | | | 63 | | | (15 | ) | | (8 | ) | | | 63 | | | (15 | ) | | (12 | ) | | | 4 | | | | — | | | | — | | | | 16 | | | 63 | | | (15 | ) | | | 20 | | | 63 | | | (15 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 61 | | | | 75 | | | 98 | | | | 578 | | | 366 | | | 353 | | | | 639 | | | 441 | | | 451 | | | | 54 | | | | 61 | | | | 75 | | | | 557 | | | 578 | | | 366 | | | | 611 | | | 639 | | | 441 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deferred tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Origination and reversal of temporary differences | | | 26 | | | | (7 | ) | | (32 | ) | | | (109 | ) | | 11 | | | 27 | | | | (83 | ) | | 4 | | | (5 | ) | | | 40 | | | | 26 | | | | (7 | ) | | | 94 | | | (109 | ) | | 11 | | | | 134 | | | (83 | ) | | 4 | | Changes in tax rates | | | 6 | | | | — | | | 4 | | | | 1 | | | (1 | ) | | | — | | | | 7 | | | (1 | ) | | 4 | | | | 5 | | | | 6 | | | | — | | | | (14 | ) | | 1 | | | (1 | ) | | | (9 | ) | | 7 | | | (1 | ) | Adjustments in respect of prior years | | | 2 | | | | 10 | | | (22 | ) | | | (69 | ) | | 12 | | | 19 | | | | (67 | ) | | 22 | | | (3 | ) | | | 13 | | | | 2 | | | | 10 | | | | (17 | ) | | (69 | ) | | 12 | | | | (4 | ) | | (67 | ) | | 22 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 34 | | | | 3 | | | (50 | ) | | | (177 | ) | | 22 | | | 46 | | | | (143 | ) | | 25 | | | (4 | ) | | | 58 | | | | 34 | | | | 3 | | | | 63 | | | (177 | ) | | 22 | | | | 121 | | | (143 | ) | | 25 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Taxation on profit from continuing operations | | | 95 | | | | 78 | | | 48 | | | | 401 | | | 388 | | | 399 | | | | 496 | | | 466 | | | 447 | | | | 112 | | | | 95 | | | | 78 | | | | 620 | | | 401 | | | 388 | | | | 732 | | | 496 | | | 466 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(b) Exceptional tax (credits)/charges The taxation charge includes the following exceptional items: | | | | | | | | | | | | | | | 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 | ) | | | | | | | | | | | | | | | | | (56 | ) | | | (51 | ) | | | (99 | ) | | | | | | | | | | | | | | (c) Taxation rate reconciliation and factors that may affect future tax charges | | | | | | | | 2016 £ million | | | 2015 £ million | | | 2014 £ million | | Profit from continuing operations before taxation | | | 2,858 | | | | 2,933 | | | | 2,711 | | | | | | | | | | | | | | | 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 | | | (44 | ) | | | (36 | ) | | | (56 | ) | Differences in overseas tax rates | | | 50 | | | | 64 | | | | 33 | | 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 | | | 7 | | | | (1 | ) | | | 4 | | Adjustments in respect of prior years | | | (4 | ) | | | 7 | | | | (15 | ) | | | | | | | | | | | | | | Tax charge for the year | | | 496 | | | | 466 | | | | 447 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 2017 £ million | | | 2016 £ million | | | 2015 £ million | | Sale of businesses | | | 7 | | | | (49 | ) | | | — | | Customer claim in India | | | (11 | ) | | | — | | | | — | | Brand impairment | | | — | | | | (10 | ) | | | — | | Disengagement agreements relating to United Spirits Limited | | | — | | | | 3 | | | | — | | Korea settlement | | | — | | | | — | | | | (30 | ) | Restructuring | | | — | | | | — | | | | (21 | ) | | | | | | | | | | | | | | | | | (4 | ) | | | (56 | ) | | | (51 | ) | | | | | | | | | | | | | |
221
Financial statements (continued) (c) Taxation rate reconciliation and factors that may affect future tax charges | | | | | | | | | | | | | | | 2017 £ million | | | 2016 £ million | | | 2015 £ million | | Profit from continuing operations before taxation | | | 3,559 | | | | 2,858 | | | | 2,933 | | | | | | | | | | | | | | | Notional charge at UK corporation tax rate of 19.75% (2016 – 20%; 2015 – 20.75%) | | | 703 | | | | 571 | | | | 608 | | Elimination of notional tax on share of after tax results of associates and joint ventures | | | (60 | ) | | | (44 | ) | | | (36 | ) | Differences in overseas tax rates(i) | | | 162 | | | | 50 | | | | 64 | | Intra-group financing | | | (64 | ) | | | (97 | ) | | | (81 | ) | Non-taxable gains on disposals of businesses | | | — | | | | (90 | ) | | | (51 | ) | Step-up gain | | | — | | | | — | | | | (34 | ) | Other tax rate and tax base differences | | | (100 | ) | | | (87 | ) | | | (95 | ) | Other items not chargeable | | | (78 | ) | | | (66 | ) | | | (89 | ) | Impairment | | | — | | | | 21 | | | | 9 | | Non-deductible losses on disposals of businesses | | | (1 | ) | | | 24 | | | | — | | Othernon-deductible exceptional items | | | 7 | | | | 31 | | | | 10 | | Other items not deductible(ii) | | | 156 | | | | 180 | | | | 155 | | Changes in tax rates | | | (9 | ) | | | 7 | | | | (1 | ) | Adjustments in respect of prior years | | | 16 | | | | (4 | ) | | | 7 | | | | | | | | | | | | | | | Taxation on profit from continuing operations | | | 732 | | | | 496 | | | | 466 | | | | | | | | | | | | | | |
(i) | Differences in overseas tax rates increased mainly due to higher profits in the year ended 30 June 2017 compared with the year ended 30 June 2016 and non-tax deductible losses arising on disposals in the year ended 30 June 2016. |
(ii) | Other itemsnot-deductible include irrecoverable withholding tax, controlled foreign companies charge and additional statesstate and local taxes. |
225
Financial statements (continued) 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 judgementsjudgments concerning the ultimate outcome of the audit. As at 30 June 20162017 the ongoing audits that are provided for individually are not expected to result in a material tax liability. The current tax liability of £294 million (2016 – £340 million) includes £287 million includes(2016 – £249 million (2015 – £205 million) of provisions for tax uncertainties.uncertainties principally in respect of a number of issues in the United States and India. 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 it is expected that ourthe tax rate may increase in future years. See note 18 (h). (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(i) £ million | | Total £ million | | | At 30 June 2014 | | | (126 | ) | | (1,361 | ) | | 100 | | | 113 | | | 155 | | | (1,119 | ) | | Exchange differences | | | 11 | | | (79 | ) | | (1 | ) | | (5 | ) | | (6 | ) | | (80 | ) | | Recognised in income statement —continuing operations | | | 1 | | | (55 | ) | | 14 | | | (30 | ) | | 45 | | | (25 | ) | | Recognised in other comprehensive income and equity | | | — | | | | — | | | (73 | ) | | 25 | | | 4 | | | (44 | ) | | Acquisition of businesses | | | (16 | ) | | (446 | ) | | 2 | | | | — | | | (12 | ) | | (472 | ) | | Reclassification | | | — | | | 14 | | | 41 | | | | — | | | (55 | ) | | | — | | | Sale of businesses | | | 6 | | | 29 | | | (2 | ) | | | — | | | | — | | | 33 | | | | | | | | | | | | | | | | | | | | | | | 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 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 | ) | | | (18 | ) | | (283 | ) | | 28 | | | 5 | | | 23 | | | (245 | ) | Recognised in income statement —continuing operations | | | 16 | | | | (28 | ) | | | 7 | | | | (47 | ) | | | 195 | | | | 143 | | | Recognised in income statement — continuing operations | | | | 16 | | | (28 | ) | | 7 | | | (47 | ) | | 195 | | | 143 | | Recognised in other comprehensive income and equity | | | — | | | | — | | | | 122 | | | | 1 | | | | 11 | | | | 134 | | | | — | | | | — | | | 122 | | | 1 | | | 11 | | | 134 | | Acquisition of businesses | | | (11 | ) | | | — | | | | — | | | | — | | | | — | | | | (11 | ) | | | (11 | ) | | | — | | | | — | | | | — | | | | — | | | (11 | ) | Sale of businesses | | | — | | | | 1 | | | | 2 | | | | — | | | | (1 | ) | | | 2 | | | | — | | | 1 | | | 2 | | | | — | | | (1 | ) | | 2 | | Reclassification | | | 11 | | | | 7 | | | | — | | | | (2 | ) | | | (16 | ) | | | — | | | | 11 | | | 7 | | | | — | | | (2 | ) | | (16 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 30 June 2016 | | | (126 | ) | | | (2,201 | ) | | | 240 | | | | 60 | | | | 343 | | | | (1,684 | ) | | | (126 | ) | | | (2,201 | ) | | | 240 | | | | 60 | | | | 343 | | | | (1,684 | ) | Exchange differences | | | | 6 | | | | (51 | ) | | | 5 | | | | 2 | | | | 8 | | | | (30 | ) | Recognised in income statement — continuing operations | | | | (60 | ) | | | (25 | ) | | | (3 | ) | | | (25 | ) | | | (8 | ) | | | (121 | ) | Recognised in other comprehensive income and equity | | | | — | | | | — | | | | (130 | ) | | | 6 | | | | (21 | ) | | | (145 | ) | Discontinued operations | | | | — | | | | — | | | | — | | | | — | | | | 2 | | | | 2 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 30 June 2017 | | | | (180 | ) | | | (2,277 | ) | | | 112 | | | | 43 | | | | 324 | | | | (1,978 | ) | | | | | | | | | | | | | | | | | | | | |
(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: | | | | | | | | | | | | | | | | | | | 2016 £ million | | 2015 £ million | | | 2017 £ million | | 2016 £ million | | Deferred tax assets | | | 298 | | | 189 | | | | 134 | | | 298 | | Deferred tax liabilities | | | (1,982 | ) | | (1,896 | ) | | | (2,112 | ) | | (1,982 | ) | | | | | | | | | | | | | | | | | (1,684 | ) | | (1,707 | ) | | | (1,978 | ) | | (1,684 | ) | | | | | | | | | | | | | |
222226
Financial statements (continued) The deferred tax assets of £298£134 million includes £223£63 million (2015(2016 – £113£223 million) arising in jurisdictions with prior year taxable losses. The majority of the asset is in respect of the United Kingdom and Ireland, where the amounts arose from 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. (e) Unrecognised deferred tax assets Deferred tax assets have not been recognised in respect of the following tax losses: | | | | | | | | | | | 2016 £ million | | | 2015 £ million | | Capital losses - indefinite | | | 71 | | | | 72 | | Trading losses - indefinite | | | 76 | | | | 74 | | Trading losses - expiry dates up to 2025 | | | 3 | | | | 2 | | | | | | | | | | | | | | 150 | | | | 148 | | | | | | | | | | |
| | | | | | | | | | | 2017 £ million | | | 2016 £ million | | Capital losses – indefinite | | | 67 | | | | 71 | | Trading losses – indefinite | | | 80 | | | | 76 | | Trading losses – expiry dates up to 2026 | | | 60 | | | | 3 | | | | | | | | | | | | | | 207 | | | | 150 | | | | | | | | | | |
(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 £13.4£13.7 billion (2015(2016 – £14.5£13.4 billion). 8. DISCONTINUED OPERATIONSDiscontinued 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. DiscontinuedFollowing an agreement reached in December 2016 with the UK Thalidomide Trust, discontinued operations comprised £55 million (net of deferred tax of £9 million), of additional amounts payable to the Trust, updates to the discount and inflation rates applied to the existing thalidomide provision and legal costs. Cash payments in the year ended 30 June 2014 comprised a charge after taxation of £83 million (£91 million less tax of £8 million)2017 in respect of the settlement of thalidomide litigation in Australiaagreement were £31 million.
Operating assets and New Zealand and anticipated future payments to thalidomide organisations. 223
Financial statements (continued)
OPERATING ASSETS AND LIABILITIESliabilities
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 INTERESTSAcquisition and sale of businesses and purchase ofnon-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. 227
Financial statements (continued) 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. Thenon-controlling interests on the date of acquisition can be measured either at the fair value or at thenon-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 anon-controlling interest, the group derecognises thenon-controlling interests and instead recognises a contingent deferred consideration liability for the estimated amount likely to be paid to thenon-controlling interest on the exercise of those options. Movements in the estimated liability in respect of put options are recognised in retained earnings. Transactions withnon-controlling interests are recorded directly in retained earnings. For all entities in which the company, directly or indirectly, owns equity a judgement is made to determine whether the 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. 224
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 ofnon-controlling interests in the three years ended 30 June 20162017 were as follows: | | | | | | | | | | | | | | | Net assets acquired and consideration | | | | 2016 £ million | | | 2015 £ million | | | 2014 £ million | | Brands and other intangibles | | | 26 | | | | 1,941 | | | | 10 | | Property, plant and equipment | | | — | | | | 275 | | | | 1 | | Biological assets | | | — | | | | 5 | | | | — | | Investments | | | — | | | | 58 | | | | — | | Inventories | | | — | | | | 247 | | | | 1 | | Assets and liabilities held for sale | | | — | | | | 401 | | | | — | | Other working capital | | | — | | | | 62 | | | | 1 | | Current tax | | | (1 | ) | | | (35 | ) | | | — | | Deferred tax | | | (11 | ) | | | (472 | ) | | | — | | Cash | | | — | | | | 64 | | | | — | | Borrowings | | | — | | | | (869 | ) | | | — | | Post employment benefit liabilities | | | — | | | | (7 | ) | | | — | | | | | | | | | | | | | | | Fair value of assets and liabilities | | | 14 | | | | 1,670 | | | | 13 | | Goodwill arising on acquisition | | | (14 | ) | | | 1,419 | | | | 16 | | Non-controlling interests | | | — | | | | (641 | ) | | | (8 | ) | Step acquisitions | | | — | | | | (1,113 | ) | | | — | | | | | | | | | | | | | | | Consideration payable | | | — | | | | 1,335 | | | | 21 | | | | | | | | | | | | | | | Satisfied by: | | | | | | | | | | | | | Cash consideration paid | | | — | | | | 1,334 | | | | 28 | | Deferred/contingent consideration payable | | | — | | | | 1 | | | | 1 | | Receivables from non-controlling interests | | | — | | | | — | | | | (8 | ) | | | | | | | | | | | | | | | | | — | | | | 1,335 | | | | 21 | | | | | | | | | | | | | | | Cash consideration paid for investment in USL | | | — | | | | 1,118 | | | | 474 | | Cash consideration paid for investments in other subsidiaries | | | — | | | | 216 | | | | 28 | | Cash consideration paid for investments in associates | | | 10 | | | | — | | | | 2 | | Cash consideration paid in respect of prior year acquisitions | | | 4 | | | | 4 | | | | 14 | | Capital injection in associates | | | 1 | | | | 21 | | | | 7 | | Cash acquired | | | — | | | | (64 | ) | | | — | | Deposit (refunded)/paid | | | — | | | | (11 | ) | | | 11 | | | | | | | | | | | | | | | Net cash outflow on acquisition of businesses | | | 15 | | | | 1,284 | | | | 536 | | Purchase of shares of non-controlling interests | | | 21 | | | | — | | | | 37 | | | | | | | | | | | | | | | Total net cash outflow | | | 36 | | | | 1,284 | | | | 573 | | | | | | | | | | | | | | |
Purchase of non-controlling interest in Ghana
On 7 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 year 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 joint venture in South Africa in May 2015.
| | | | | | | | | | | | | | | Net assets acquired and consideration | | | | 2017 £ million | | | 2016 £ million | | | 2015 £ million | | Brands and other intangibles | | | — | | | | 26 | | | | 1,941 | | Property, plant and equipment | | | — | | | | — | | | | 275 | | Biological assets | | | — | | | | — | | | | 5 | | Investments | | | — | | | | — | | | | 58 | | Inventories | | | — | | | | — | | | | 247 | | Assets and liabilities held for sale | | | — | | | | — | | | | 401 | | Other working capital | | | — | | | | — | | | | 62 | | Current tax | | | — | | | | (1 | ) | | | (35 | ) | Deferred tax | | | — | | | | (11 | ) | | | (472 | ) | Cash | | | — | | | | — | | | | 64 | | Borrowings | | | — | | | | — | | | | (869 | ) | Post employment benefit liabilities | | | — | | | | — | | | | (7 | ) | | | | | | | | | | | | | | Fair value of assets and liabilities | | | — | | | | 14 | | | | 1,670 | | Goodwill arising on acquisition | | | — | | | | (14 | ) | | | 1,419 | | Non-controlling interests | | | — | | | | — | | | | (641 | ) | Step acquisitions | | | — | | | | — | | | | (1,113 | ) | | | | | | | | | | | | | | Consideration payable | | | — | | | | — | | | | 1,335 | |
225228
Financial statements (continued) | | | | | | | | | | | | | Satisfied by: | | | | | | | | | | | | | Cash consideration paid | | | — | | | | — | | | | 1,334 | | Deferred/contingent consideration payable | | | — | | | | — | | | | 1 | | | | | | | �� | | | | | | | | | | | — | | | | — | | | | 1,335 | | | | | | | | | | | | | | | Cash consideration paid for investment in USL | | | — | | | | — | | | | 1,118 | | Cash consideration paid for investments in other subsidiaries | | | — | | | | — | | | | 216 | | Cash consideration paid for investments in associates | | | 6 | | | | 10 | | | | — | | Cash consideration paid in respect of prior year acquisitions | | | 23 | | | | 4 | | | | 4 | | Capital injection in associates | | | 2 | | | | 1 | | | | 21 | | Cash acquired | | | — | | | | — | | | | (64 | ) | Deposit refunded | | | — | | | | — | | | | (11 | ) | | | | | | | | | | | | | | Net cash outflow on acquisition of businesses | | | 31 | | | | 15 | | | | 1,284 | | Purchase of shares ofnon-controlling interests | | | — | | | | 21 | | | | — | | | | | | | | | | | | | | | Total net cash outflow | | | 31 | | | | 36 | | | | 1,284 | | | | | | | | | | | | | | |
Prior year acquisitions In prior years, Diageo has made a number of acquisitions of brands, distribution rights and equity interests in a number of drinks businesses. In the two years ended 30 June 20152016 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 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 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 No.1 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 | | | | | | | | | | | | | | | | | | | | | | | | | | Other(iv) | | | 67 | | | | 26 | | | | 19 | | | | (28 | ) | | | | | | | | |
(i) | Includes amounts paid in respect of these acquisitions prior to 30 June 2013.2014. |
(ii) | Includes transaction costs of £33 million on the initial acquisition of shares in USL when the investment was accounted for as an associate. In addition to the fair value of net assets acquired, the group recognised anon-controlling interest of £641 million and a step up gain of £192 million. |
(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 payments made on acquisitions that completed in the two years ended 30 June 2016. Includes acquisitions principally in the United StatesKingdom and South Africa. |
226
Financial statements (continued)
(b) Sale of businesses The sale consideration received and a summary of the net assets disposed of in respect of the sale of businesses inwere as follows: | | | | | | | | | | | | | | | 2017 | | | 2016 | | | 2015 | | | | £ million | | | £ million | | | £ million | | Sale consideration | | | | | | | | | | | | | Cash received in year | | | 15 | | | | 1,114 | | | | 1,001 | | (Cash)/overdraft disposed of | | | — | | | | (14 | ) | | | (17 | ) | Transaction and other directly attributable costs paid | | | (67 | ) | | | (38 | ) | | | (6 | ) | | | | | | | | | | | | | | Net cash (paid)/received | | | (52 | ) | | | 1,062 | | | | 978 | | | | | | | | | | | | | | |
229
Financial statements (continued) | | | | | | | | | | | | | Cash settlement in respect of prior period disposals | | | 52 | | | | 4 | | | | — | | Deferred consideration (payable)/receivable | | | (2 | ) | | | 14 | | | | (3 | ) | | | | | | | | | | | | | | | | | (2 | ) | | | 1,080 | | | | 975 | | | | | | | | | | | | | | | Net assets disposed of | | | | | | | | | | | | | Brands | | | — | | | | (94 | ) | | | (144 | ) | Goodwill | | | — | | | | (36 | ) | | | (44 | ) | Property, plant and equipment | | | — | | | | (139 | ) | | | (118 | ) | Biological assets | | | — | | | | (70 | ) | | | — | | Investment in associates | | | — | | | | (18 | ) | | | — | | Assets and liabilities held for sale | | | — | | | | (113 | ) | | | (404 | ) | Inventories | | | — | | | | (294 | ) | | | (78 | ) | Other working capital | | | — | | | | (5 | ) | | | 19 | | Post employment benefit liabilities | | | — | | | | (1 | ) | | | 10 | | Current tax | | | — | | | | 1 | | | | 1 | | Deferred tax | | | — | | | | 2 | | | | 33 | | Borrowings | | | — | | | | 14 | | | | — | | | | | | | | | | | | | | | | | | — | | | | (753 | ) | | | (725 | ) | Non-controlling interests | | | — | | | | 24 | | | | — | | Accelerated depreciation and directly attributable costs payable | | | — | | | | (85 | ) | | | (3 | ) | Exchange recycled from other comprehensive income | | | — | | | | (51 | ) | | | — | | Release of deferred income in respect of finance leases | | | 22 | | | | — | | | | — | | | | | | | | | | | | | | | Gain on disposal before taxation | | | 20 | | | | 215 | | | | 247 | | Taxation | | | (7 | ) | | | 49 | | | | — | | | | | | | | | | | | | | | Gain on disposal after taxation | | | 13 | | | | 264 | | | | 247 | | | | | | | | | | | | | | |
In the year ended 30 June 2017 the group settled the guarantee in respect of the sale of Diageo’s wine interests in the United States partially offset by the working capital settlement received from Treasury Wine Estates. In the year ended 30 June 2016 were as follows: | | | | | | | | | | | | | | | | | | | | | | | 2016 | | | 2015 | | | | 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 | | | 531 | | | | 418 | | | | 165 | | | | 1,114 | | | | 1,001 | | (Cash)/overdraft disposed of | | | (14 | ) | | | 1 | | | | (1 | ) | | | (14 | ) | | | (17 | ) | Transaction and other directly attributable costs paid | | | (7 | ) | | | (22 | ) | | | (9 | ) | | | (38 | ) | | | (6 | ) | | | | | | | | | | | | | | | | | | | | | | Net cash received | | | 510 | | | | 397 | | | | 155 | | | | 1,062 | | | | 978 | | | | | | | | | | | | | | | | | | | | | | | Deferred consideration receivable/(payable) | | | — | | | | 15 | | | | (1 | ) | | | 14 | | | | (3 | ) | | | | | | | | | | | | | | | | | | | | | | | | | 510 | | | | 412 | | | | 154 | | | | 1,076 | | | | 975 | | | | | | | | | | | | | | | | | | | | | | | Net assets disposed of | | | | | | | | | | | | | | | | | | | | | Brands | | | — | | | | (94 | ) | | | — | | | | (94 | ) | | | (144 | ) | Goodwill | | | — | | | | (34 | ) | | | (2 | ) | | | (36 | ) | | | (44 | ) | Property, plant and equipment | | | (40 | ) | | | (86 | ) | | | (13 | ) | | | (139 | ) | | | (118 | ) | Biological assets | | | — | | | | (70 | ) | | | — | | | | (70 | ) | | | — | | Investment in associates | | | (18 | ) | | | — | | | | — | | | | (18 | ) | | | — | | Assets and liabilities held for sale | | | — | | | | — | | | | (113 | ) | | | (113 | ) | | | (404 | ) | Inventories | | | (7 | ) | | | (263 | ) | | | (24 | ) | | | (294 | ) | | | (78 | ) | Other working capital | | | 4 | | | | (4 | ) | | | (5 | ) | | | (5 | ) | | | 19 | | Post employment benefit liabilities | | | (6 | ) | | | 5 | | | | — | | | | (1 | ) | | | 10 | | Current tax | | | 1 | | | | — | | | | — | | | | 1 | | | | 1 | | Deferred tax | | | 3 | | | | — | | | | (1 | ) | | | 2 | | | | 33 | | Borrowings | | | — | | | | — | | | | 14 | | | | 14 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | (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/(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 7 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, DiageoThe group also 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.businesses. In addition, in the year ended 30 June 2016 Diageogroup 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’sits 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. The 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 and the proceeds and net10. Intangible assets following the disposal of Gleneagles Hotels Limited on 30 June 2015.
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 anynon-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. Amortisation and impairment of intangible assets is based on their useful economic lives and are amortised on a straight-line basis over those lives and reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. Goodwill and intangible assets that are regarded as having indefinite useful economic lives are not amortised and are reviewed for impairment at least annually or when there is an indication that the assets may be impaired. Impairment reviews compare the net carrying value with the recoverable amount (where recoverable amount is the higher of fair value less cost to 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. 230
Financial statements (continued) Critical accounting estimates and judgements Assessment of the recoverable amount of an intangible asset, the useful economic life of an asset, or that an asset has an indefinite life, requires management estimate and 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 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Brands £ million | | | Goodwill £ million | | | Other intangibles £ million | | | Computer software £ million | | | Total £ million | | Cost | | | | | | | | | | | | | | | | | | | | | 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 | | Exchange differences | | | 159 | | | | 24 | | | | 34 | | | | 4 | | | | 221 | | Additions | | | — | | | | — | | | | — | | | | 47 | | | | 47 | | Disposals | | | — | | | | — | | | | — | | | | (41 | ) | | | (41 | ) | | | | | | | | | | | | | | | | | | | | | | At 30 June 2017 | | | 8,815 | | | | 2,791 | | | | 1,506 | | | | 578 | | | | 13,690 | | | | | | | | | | | | | | | | | | | | | | | Amortisation and impairment | | | | | | | | | | | | | | | | | | | | | 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 | | Exchange differences | | | 9 | | | | — | | | | 1 | | | | 3 | | | | 13 | | Amortisation for the year | | | — | | | | — | | | | 3 | | | | 53 | | | | 56 | | Disposals | | | — | | | | — | | | | — | | | | (38 | ) | | | (38 | ) | | | | | | | | | | | | | | | | | | | | | | At 30 June 2017 | | | 586 | | | | 68 | | | | 72 | | | | 398 | | | | 1,124 | | | | | | | | | | | | | | | | | | | | | | | Carrying amount | | | | | | | | | | | | | | | | | | | | | At 30 June 2017 | | | 8,229 | | | | 2,723 | | | | 1,434 | | | | 180 | | | | 12,566 | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | | | | | |
(i) | Acquisitions in the year ended 30 June 2016 represent the finalisation of the fair values of an acquisition completed in the year ended 30 June 2015. |
229231
Financial statements (continued) (a) Brands At 30 June 2016,2017, the principal acquired brands, all of which are regarded as having indefinite useful economic lives, are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Principal markets | | | 2016 £ million | | | 2015 £ million | | | Principal markets | | | 2017 £ million | | | 2016 £ million | | McDowell’s No.1 whisky, rum and brandy | | | | India | | | | 1,156 | | | | 1,086 | | Crown Royal whisky | | | United States | | | | 1,101 | | | | 933 | | | | United States | | | | 1,126 | | | | 1,101 | | McDowell’s No.1 whisky, rum and brandy | | | India | | | | 1,086 | | | | 972 | | | Captain Morgan | | | Global | | | | 903 | | | | 765 | | | | Global | | | | 924 | | | | 903 | | Smirnoff vodka | | | | Global | | | | 634 | | | | 620 | | Johnnie Walker whisky | | | Global | | | | 625 | | | | 625 | | | | Global | | | | 625 | | | | 625 | | Smirnoff vodka | | | Global | | | | 620 | | | | 525 | | | Windsor Premier whisky | | | Korea | | | | 568 | | | | 494 | | | | Korea | | | | 583 | | | | 568 | | Yenì Raki | | | Turkey | | | | 446 | | | | 403 | | | | Turkey | | | | 372 | | | | 446 | | Shui Jing Fang Chinese white spirit | | | Greater China | | | | 256 | | | | 232 | | | | Greater China | | | | 257 | | | | 256 | | Signature whisky | | | | India | | | | 218 | | | | 204 | | Don Julio tequila | | | United States | | | | 207 | | | | 206 | | | | United States | | | | 216 | | | | 207 | | Signature whisky | | | India | | | | 204 | | | | 183 | | | Bell’s whisky | | | United Kingdom | | | | 179 | | | | 179 | | | Black Dog whisky | | | India | | | | 172 | | | | 154 | | | | India | | | | 184 | | | | 172 | | Antiquity whisky | | | India | | | | 169 | | | | 151 | | | | India | | | | 180 | | | | 169 | | Bell’s whisky | | | | United Kingdom | | | | 179 | | | | 179 | | Seagram’s 7 Crown whiskey | | | United States | | | | 168 | | | | 142 | | | | United States | | | | 171 | | | | 168 | | Zacapa rum | | | Global | | | | 144 | | | | 122 | | | | Global | | | | 147 | | | | 144 | | Seagram’s VO whiskey | | | United States | | | | 143 | | | | 121 | | | Seagram’s VO whisky | | | | United States | | | | 146 | | | | 143 | | Bagpiper whisky | | | | India | | | | 124 | | | | 117 | | Gordon’s gin | | | Europe | | | | 119 | | | | 119 | | | | Europe | | | | 119 | | | | 119 | | Bagpiper whisky | | | India | | | | 117 | | | | 104 | | | Old Parr whisky | | | Global | | | | 106 | | | | 83 | | | | Global | | | | 101 | | | | 106 | | Other brands | | | | | 746 | | | | 807 | | | | | | 767 | | | | 746 | | | | | | | | | | | | | | | | | | | | | | | | 8,079 | | | | 7,320 | | | | | | 8,229 | | | | 8,079 | | | | | | | | | | | | | | | | | | |
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: | | | | | | | | | | | | | | | | | | | 2016 £ million | | | 2015 £ million | | | 2017 £ million | | | 2016 £ million | | North America | | | 217 | | | | 217 | | | | 207 | | | | 217 | | Europe, Russia and Turkey | | | | | | | | | – Europe (excluding Russia and Turkey) | | | 147 | | | | 106 | | | | 154 | | | | 147 | | – Turkey | | | 452 | | | | 409 | | | | 377 | | | | 452 | | Africa – Africa Regional Markets | | | 96 | | | | 86 | | | | 93 | | | | 96 | | Latin America and Caribbean – Mexico | | | 99 | | | | 98 | | | | 103 | | | | 99 | | Asia Pacific | | | | | | | | | – Greater China | | | 130 | | | | 117 | | | | 130 | | | | 130 | | – India | | | 1,475 | | | | 1,320 | | | | 1,572 | | | | 1,475 | | Other cash-generating units | | | 83 | | | | 168 | | | | 87 | | | | 83 | | | | | | | | | | | | | | | | | | 2,699 | | | | 2,521 | | | 2,723 | | | 2,699 | | | | | | | | | | | | | | |
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. 230232
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 20162017 was £1,354£1,385 million (2015(2016 – £1,147£1,354 million). (d) Impairment testing Impairment tests are performed annually, or more frequently if events or circumstances indicate that the carrying amount may not be recoverable. Recoverable amounts are calculated based on the value in use approach. The value in use calculations are based on discounted forecast cash flows using the assumption that cash flows continue in perpetuity at the terminal growth rate of each country or region. The individual brands 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 attributable tangible fixed assets) and for each of the 21 markets. The goodwill is attributed to each of the markets.markets that comprise the five geographical regions. Cash flows Cash flows are forecast for each 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 10ten 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 appliespost-tax discount rates topost-tax cash flows as the valuation calculated using this method closely approximates to applyingpre-tax discount rates topre-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 adjusted to take into account circumstances specific to the group. Forgroup.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 10ten 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. 233
Financial statements (continued) Thepre-tax discount rates and terminal growth rates used for impairment testing are as follows: | | | | | | | | | | | | | | | | | | | 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%. |
| | | | | | | | | | | | | | | | | | | 2017 | | | 2016 | | | | Pre-tax discount rate % | | | Terminal growth rate % | | | Pre-tax discount rate % | | | Terminal growth rate % | | North America – United States | | | 10 | | | | 2 | | | | 9 | | | | 2 | | Europe, Russia and Turkey | | | | | | | | | | | | | | | | | – Europe | | | 8 | | | | 2 | | | | 9 | | | | 2 | | – Turkey | | | 16 | | | | 5 | | | | 16 | | | | 5 | | Africa | | | | | | | | | | | | | | | | | – Africa Regional Markets | | | 21 | | | | 4 | | | | 22 | | | | 5 | | – South Africa | | | 18 | | | | 5 | | | | 18 | | | | 5 | | Latin America and Caribbean | | | | | | | | | | | | | | | | | – Brazil | | | 15 | | | | 5 | | | | 18 | | | | 5 | | – Mexico | | | 17 | | | | 3 | | | | 18 | | | | 3 | | Asia Pacific | | | | | | | | | | | | | | | | | – Korea | | | 8 | | | | 2 | | | | 12 | | | | 3 | | – Greater China | | | 10 | | | | 3 | | | | 12 | | | | 3 | | – India | | | 14 | | | | 6 | | | | 14 | | | | 6 | |
In the year ended 30 June 2016, an impairment charge in respect of the Ypióca brand, the related 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. (e) Sensitivity to change in key assumptions Impairment testing for the year ended 30 June 20162017 has identified the following cash-generating units as being sensitive to reasonably possible changes in assumptions. 232
Financial statements (continued)
The table below shows the headroom at 30 June 20162017 and the impairment charge that would be required if the assumptions in the calculation of their value in 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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | Headroom £ million | | | 1ppt decrease in terminal growth rate £ million | | | 1ppt increase in discount rate £ million | | | 10% decrease for India and 20% decrease for Meta in annual cash flow £ million | | | 5ppt decrease in growth rate in forecast period 2022-2029(i) £ million | | India | | | 72 | | | | (259 | ) | | | (617 | ) | | | (449 | ) | | | (937 | ) | Meta(ii) | | | 10 | | | | — | | | | — | | | | (53 | ) | | | — | |
(i) | As India is a developing market, where the maturity is not expected for a number of years, a specific forecast period was used until 2029. The cumulative effect of the 5ppt reduction in the annual growth rate in the forecast period from 2022 to 2029 and the impact on the terminal period is disclosed in the table above. |
(ii) | For Meta the only change in the key assumptions considered reasonably possible that would result in an impairment of the brand would be a 20% decrease in annual cash flow was considered as reasonable change for Meta.flow. |
234
Financial statements (continued) It remains possible that changes in assumptions could arise in excess of those indicated in the table above. For all intangibles with an indefinite life, other than the cash- generatingcash-generating units mentionedin the table 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 EQUIPMENTProperty, 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. 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. 233235
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 2014 | | | 1,333 | | | 3,219 | | | 120 | | | 477 | | | 353 | | | 5,502 | | | Exchange differences | | | (40 | ) | | (119 | ) | | (5 | ) | | (44 | ) | | (11 | ) | | (219 | ) | | Acquisition of businesses | | | 148 | | | 110 | | | 4 | | | | — | | | 13 | | | 275 | | | Sale of businesses | | | (105 | ) | | (73 | ) | | (7 | ) | | | — | | | (1 | ) | | (186 | ) | | Other additions | | | 51 | | | 181 | | | 13 | | | 35 | | | 297 | | | 577 | | | Other disposals | | | (13 | ) | | (66 | ) | | (3 | ) | | (20 | ) | | (1 | ) | | (103 | ) | | Transfers | | | 73 | | | 210 | | | 3 | | | 16 | | | (302 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | 107 | | | 243 | | | 11 | | | 37 | | | 18 | | | 416 | | Sale of businesses | | | (119 | ) | | | (164 | ) | | | (3 | ) | | | (18 | ) | | | (18 | ) | | | (322 | ) | | | (119 | ) | | (164 | ) | | (3 | ) | | (18 | ) | | (18 | ) | | (322 | ) | Other additions | | | 30 | | | | 137 | | | | 7 | | | | 23 | | | | 274 | | | | 471 | | | Additions | | | | 30 | | | 137 | | | 7 | | | 23 | | | 274 | | | 471 | | Other disposals | | | (58 | ) | | | (98 | ) | | | (22 | ) | | | (11 | ) | | | (8 | ) | | | (197 | ) | | | (58 | ) | | (98 | ) | | (22 | ) | | (11 | ) | | (8 | ) | | (197 | ) | Transfers | | | 76 | | | | 203 | | | | 4 | | | | 21 | | | | (304 | ) | | | — | | | | 76 | | | 203 | | | 4 | | | 21 | | | (304 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 30 June 2016 | | | 1,483 | | | | 3,783 | | | | 122 | | | | 516 | | | | 310 | | | | 6,214 | | | | 1,483 | | | | 3,783 | | | | 122 | | | | 516 | | | | 310 | | | | 6,214 | | Exchange differences | | | | 39 | | | | (12 | ) | | | (1 | ) | | | (14 | ) | | | — | | | | 12 | | Additions | | | | 39 | | | | 117 | | | | 14 | | | | 28 | | | | 261 | | | | 459 | | Disposals | | | | (28 | ) | | | (90 | ) | | | (10 | ) | | | (24 | ) | | | (3 | ) | | | (155 | ) | Transfers | | | | 95 | | | | 160 | | | | 2 | | | | 17 | | | | (274 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | At 30 June 2017 | | | | 1,628 | | | | 3,958 | | | | 127 | | | | 523 | | | | 294 | | | | 6,530 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation | | | | | | | | | | | | | | | | | | | | | | | | | At 30 June 2014 | | | 391 | | | 1,298 | | | 81 | | | 295 | | | 4 | | | 2,069 | | | Exchange differences | | | (8 | ) | | (64 | ) | | (6 | ) | | (28 | ) | | | — | | | (106 | ) | | Depreciation charge for the year | | | 46 | | | 215 | | | 13 | | | 42 | | | | — | | | 316 | | | Exceptional accelerated depreciation and impairment | | | — | | | 23 | | | | — | | | | — | | | | — | | | 23 | | | Sale of businesses | | | (20 | ) | | (43 | ) | | (5 | ) | | | — | | | | — | | | (68 | ) | | Other disposals | | | (6 | ) | | (56 | ) | | | — | | | (16 | ) | | | — | | | (78 | ) | | | | | | | | | | | | | | | | | | | | | | 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 | | | | 36 | | | 113 | | | 8 | | | 25 | | | | — | | | 182 | | Depreciation charge for the year | | | 46 | | | | 200 | | | | 12 | | | | 41 | | | | — | | | | 299 | | | | 46 | | | 200 | | | 12 | | | 41 | | | | — | | | 299 | | Exceptional accelerated depreciation and impairment | | | 4 | | | | 10 | | | | — | | | | — | | | | — | | | | 14 | | | | 4 | | | 10 | | | | — | | | | — | | | | — | | | 14 | | Non-operating exceptional accelerated depreciation | | | — | | | | 8 | | | | — | | | | — | | | | — | | | | 8 | | | | — | | | 8 | | | | — | | | | — | | | | — | | | 8 | | Sale of businesses | | | (65 | ) | | | (105 | ) | | | (3 | ) | | | (10 | ) | | | — | | | | (183 | ) | | | (65 | ) | | (105 | ) | | (3 | ) | | (10 | ) | | | — | | | (183 | ) | Other disposals | | | (24 | ) | | | (86 | ) | | | (20 | ) | | | (9 | ) | | | (4 | ) | | | (143 | ) | | | (24 | ) | | (86 | ) | | (20 | ) | | (9 | ) | | (4 | ) | | (143 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 30 June 2016 | | | 400 | | | | 1,513 | | | | 80 | | | | 340 | | | | — | | | | 2,333 | | | | 400 | | | | 1,513 | | | | 80 | | | | 340 | | | | — | | | | 2,333 | | Exchange differences | | | | 3 | | | | (5 | ) | | | — | | | | (7 | ) | | | — | | | | (9 | ) | Depreciation charge for the year | | | | 57 | | | | 196 | | | | 13 | | | | 39 | | | | — | | | | 305 | | Disposals | | | | (12 | ) | | | (73 | ) | | | (7 | ) | | | (21 | ) | | | — | | | | (113 | ) | | | | | | | | | | | | | | | | | | | | | At 30 June 2017 | | | | 448 | | | | 1,631 | | | | 86 | | | | 351 | | | | — | | | | 2,516 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Carrying amount | | | | | | | | | | | | | | | | | | | | | | | | | At 30 June 2017 | | | | 1,180 | | | | 2,327 | | | | 41 | | | | 172 | | | | 294 | | | | 4,014 | | | | | | | | | | | | | | | | | | | | | | At 30 June 2016 | | | 1,083 | | | | 2,270 | | | | 42 | | | | 176 | | | | 310 | | | | 3,881 | | | | 1,083 | | | 2,270 | | | 42 | | | 176 | | | 310 | | | 3,881 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 30 June 2015 | | | 1,044 | | | 2,089 | | | 42 | | | 171 | | | 344 | | | 3,690 | | | | 1,044 | | | 2,089 | | | 42 | | | 171 | | | 344 | | | 3,690 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 30 June 2014 | | | 942 | | | 1,921 | | | 39 | | | 182 | | | 349 | | | 3,433 | | | | | | | | | | | | | | | | | | | | | | |
(a) The net book value of land and buildings comprises freeholds of £1,034£1,128 million (2015(2016 – £975£1,034 million), long leaseholds of £28£31 million (2015(2016 – £20£28 million) and short leaseholds of £21 million (2015(2016 – £49£21 million). Depreciation was not charged on £203£196 million (2015(2016 – £144£203 million) of land. (b) At 30 June 2016,2017, tangible fixed assets held under finance leases amounted to £264£250 million (2015(2016 – £294£264 million), principally in respect of plant and equipment. Depreciation on assets held under finance leases was £19£15 million (2015(2016 – £17£19 million). (c) Property, plant and equipment is net of a government grant of £139£142 million (2015(2016 – £118£139 million) received in prior years in respect of the construction of a rum distillery in the United States Virgin Islands. 234236
Financial statements (continued) 12. OTHER INVESTMENTSOther investments Accounting policies Available-for-sale investments arenon-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 innon-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 fromavailable-for-sale investments are recognised in the consolidated income statement. Loans receivable arenon-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 ofnon-payment taking into account ageing, previous experience and general economic conditions. | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans (a) £ million | | Others £ million | | Total £ million | | | Loans £ million | | Others £ million | | Total £ million | | Cost less allowances or fair value | | | | | | | | | | | | | At 30 June 2014 | | | 56 | | | 7 | | | 63 | | | At 30 June 2015 | | | | 23 | | | 86 | | | 109 | | Exchange differences | | | (2 | ) | | 1 | | | (1 | ) | | | 2 | | | 2 | | | 4 | | Acquisition of businesses | | | — | | | 58 | | | 58 | | | Other additions | | | 27 | | | | — | | | 27 | | | Additions | | | | 95 | | | | — | | | 95 | | Repayments and disposals | | | (25 | ) | | | — | | | (25 | ) | | | (4 | ) | | (89 | ) | | (93 | ) | Fair value adjustment | | | — | | | 20 | | | 20 | | | | — | | | 9 | | | 9 | | Transfer to assets held for sale | | | (33 | ) | | | — | | | (33 | ) | | | | | | | | | | | | | At 30 June 2015 | | | 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 | ) | | Provision charged during the year | | | | (93 | ) | | | — | | | (93 | ) | | | | | | | | | | | | | | | | | | | | At 30 June 2016 | | | 23 | | | | 8 | | | | 31 | | | | 23 | | | | 8 | | | | 31 | | Exchange differences | | | | 1 | | | | — | | | | 1 | | Additions | | | | 2 | | | | — | | | | 2 | | Repayments and disposals | | | | (5 | ) | | | — | | | | (5 | ) | Fair value adjustment | | | | — | | | | 2 | | | | 2 | | | | | | | | | | | | | | | | | | | | | At 30 June 2017 | | | | 21 | | | | 10 | | | | 31 | | | | | | | | | | | | |
(a) At 30 June 2016,2017, loans comprise £21£18 million (2015(2016 – £21 million; 20142015 – £23£21 million) of loans to customers and other third parties, after allowances of £110 million (2016 – £98 million (2015million; 2015 – £7 million; 2014 – £9 million), and £2£3 million (2015(2016 – £2 million; 20142015 – £33£2 million) of loans to associates.
(b) AdditionsLoans include a loan of $135 million (£92104 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 was paid to SCB by Diageo in January 2016. The amount receivable in respect of the guarantee has been fully provided for. See note 18(a).
(c) On 7 July 2015, Diageo sold its investment in United Breweries Limited, a company quoted on the Indian stock exchange, for a consideration of £89 million.
13. POST EMPLOYMENT BENEFITSPost 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. 237
Financial statements (continued) Contributions payable by the group in respect of defined contribution plans are charged to operating profit as incurred. Critical accounting estimates and judgements Application of IAS 19 requires the exercise of estimate and judgement in relation to various assumptions 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) | | | 1 April 2015 | | Ireland(ii) | | | 31 December 2015 | | United States | | | 1 January 20152017 | |
(i) | The Diageo Pension Scheme (the UK Scheme) closed to new members in November 2005. Employees who have joined Diageo in the United Kingdom since the defined benefit scheme closed have been eligible to become members of the Diageo Lifestyle Plan (a cash balance defined benefit pension plan). In 30 June 2017 it was communicated to the current members of the Diageo Pension Scheme that there would be changes to the future benefits earnt by employees from 1 April 2018. The change would impact the service cost for the year ending 30 June 2018 but not the benefits earnt by the members as at 30 June 2017. |
(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, member nominated directors are appointed from both the pensioner member community and the active member community. For the Irish Scheme Diageo Ireland makes four nominations and appoints three further candidates nominated by representative groupings. 238
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 20162017 are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 £ million | | 2015 £ million | | 2014 £ million | | | 2017 £ million | | 2016 £ million | | 2015 £ million | | Current service cost and administrative expenses | | | (112 | ) | | (120 | ) | | (118 | ) | | | (133 | ) | | (112 | ) | | (120 | ) | Past service gains | | | 1 | | | 3 | | | | — | | | | 14 | | | 1 | | | 3 | | Gains on curtailments and settlements | | | 1 | | | 3 | | | 26 | | | | 10 | | | 1 | | | 3 | | | | | | | | | | | | | | | | | | | | | Charge to operating profit | | | (110 | ) | | (114 | ) | | (92 | ) | | | (109 | ) | | (110 | ) | | (114 | ) | Net finance charge in respect of post employment plans | | | (5 | ) | | (13 | ) | | (12 | ) | | | (25 | ) | | (5 | ) | | (13 | ) | | | | | | | | | | | | | | | | | | | | Charge before taxation(i) | | | (115 | ) | | (127 | ) | | (104 | ) | | | (134 | ) | | (115 | ) | | (127 | ) | | | | | | | | | | | | | | | | | | | | Actual returns less amounts included in finance income | | | 61 | | | 411 | | | 306 | | | | 973 | | | 61 | | | 411 | | Experience gains | | | 91 | | | 103 | | | 24 | | | | 58 | | | 91 | | | 103 | | Changes in financial assumptions | | | (1,066 | ) | | (400 | ) | | (453 | ) | | | (466 | ) | | (1,066 | ) | | (400 | ) | Changes in demographic assumptions | | | 62 | | | 9 | | | (49 | ) | | | 86 | | | 62 | | | 9 | | | | | | | | | | | | | | | | | | | | | Other comprehensive (loss)/income | | | (852 | ) | | 123 | | | (172 | ) | | Other comprehensive income/(loss) | | | | 651 | | | (852 | ) | | 123 | | Changes in the surplus restriction | | | — | | | | — | | | 3 | | | | 1 | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | Total other comprehensive (loss)/income | | | (852 | ) | | 123 | | | (169 | ) | | Total other comprehensive income/(loss) | | | | 652 | | | (852 | ) | | 123 | | | | | | | | | | | | | | | | | | | | | (i) The charge before taxation comprises: | | | | | | | (i) The charge before taxation comprises: | | | | | 2016 £ million | | 2015 £ million | | 2014 £ million | | | 2017 £ million | | 2016 £ million | | 2015 £ million | | United Kingdom | | | (50 | ) | | (62 | ) | | (39 | ) | | | (67 | ) | | (50 | ) | | (62 | ) | Ireland | | | (19 | ) | | (22 | ) | | (28 | ) | | | (15 | ) | | (19 | ) | | (22 | ) | United States | | | (27 | ) | | (24 | ) | | (25 | ) | | | (34 | ) | | (27 | ) | | (24 | ) | Other | | | (19 | ) | | (19 | ) | | (12 | ) | | | (18 | ) | | (19 | ) | | (19 | ) | | | | | | | | | | | | | | | | | | | | | | | (115 | ) | | (127 | ) | | (104 | ) | | | (134 | ) | | (115 | ) | | (127 | ) | | | | | | | | | | | | | | | | | | | |
In addition to the charge in respect of defined benefit post employment plans, contributions to the group’s defined contribution plans were £17 million (2016 – £16 million (2015 – £15 million; 20142015 – £15 million). 237
Financial statements (continued)
The movement in the net deficit for the two years ended 30 June 20162017 is set out below: | | | | | | | | | | | | | | | | | | | | | | | | | | | Plan assets £ million | | Plan liabilities £ million | | Net deficit £ million | | | At 30 June 2014 | | | 7,480 | | | (7,953 | ) | | (473 | ) | | Exchange differences | | | (144 | ) | | 177 | | | 33 | | | Acquisition of businesses | | | 33 | | | (40 | ) | | (7 | ) | | Sale of businesses | | | (20 | ) | | 30 | | | 10 | | | Charge before taxation | | | 290 | | | (417 | ) | | (127 | ) | | Other comprehensive income/(loss)(i) | | | 411 | | | (288 | ) | | 123 | | | Contributions by the group | | | 184 | | | | — | | | 184 | | | Employee contributions | | | 7 | | | (7 | ) | | | — | | | Benefits paid | | | (358 | ) | | 358 | | | | — | | | | | | | | | | | | | | Plan assets £ million | | Plan liabilities £ million | | Net deficit £ million | | At 30 June 2015 | | | 7,883 | | | | (8,140 | ) | | | (257 | ) | | | 7,883 | | | (8,140 | ) | | (257 | ) | Exchange differences | | | 328 | | | | (463 | ) | | | (135 | ) | | | 328 | | | (463 | ) | | (135 | ) | Sale of businesses | | | (38 | ) | | | 37 | | | | (1 | ) | | | (38 | ) | | 37 | | | (1 | ) | Charge before taxation | | | 275 | | | | (390 | ) | | | (115 | ) | | | 275 | | | (390 | ) | | (115 | ) | Other comprehensive income/(loss)(i) | | | 61 | | | | (913 | ) | | | (852 | ) | | | 61 | | | (913 | ) | | (852 | ) | Contributions by the group | | | 169 | | | | — | | | | 169 | | | | 169 | | | | — | | | 169 | | Employee contributions | | | 6 | | | | (6 | ) | | | — | | | | 6 | | | (6 | ) | | | — | | Benefits paid | | | (428 | ) | | | 428 | | | | — | | | | (428 | ) | | 428 | | | | — | | | | | | | | | | | | | | | | | | | | | At 30 June 2016 | | | 8,256 | | | | (9,447 | ) | | | (1,191 | ) | | | 8,256 | | | | (9,447 | ) | | | (1,191 | ) | Exchange differences | | | | 99 | | | | (135 | ) | | | (36 | ) | Charge before taxation | | | | 173 | | | | (307 | ) | | | (134 | ) | Other comprehensive income/(loss)(i) | | | | 973 | | | | (322 | ) | | | 651 | | Contributions by the group | | | | 220 | | | | — | | | | 220 | | Employee contributions | | | | 8 | | | | (8 | ) | | | — | | Benefits paid | | | | (503 | ) | | | 503 | | | | — | | | | | | | | | | | | | | | | | | | | | At 30 June 2017 | | | | 9,226 | | | | (9,716 | ) | | | (490 | ) | | | | | | | | | | | |
(i) | Excludes surplus restriction. |
239
Financial statements (continued) The plan assets and liabilities by type of post employment benefit and country is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | 2015 | | | 2017 | | 2016 | | | | 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 | | | 6,047 | | | | (6,190 | ) | | 5,922 | | | | (5,621 | ) | | | 6,789 | | | | (6,680 | ) | | 6,047 | | | | (6,190 | ) | Ireland | | | 1,472 | | | | (2,149 | ) | | 1,295 | | | | (1,554 | ) | | | 1,663 | | | | (1,952 | ) | | 1,472 | | | | (2,149 | ) | United States | | | 474 | | | | (508 | ) | | 401 | | | | (420 | ) | | | 522 | | | | (516 | ) | | 474 | | | | (508 | ) | Other | | | 194 | | | | (240 | ) | | 212 | | | | (242 | ) | | | 178 | | | | (215 | ) | | 194 | | | | (240 | ) | Post employment medical | | | 2 | | | | (260 | ) | | 1 | | | | (218 | ) | | | 2 | | | | (263 | ) | | 2 | | | | (260 | ) | Other post employment | | | 67 | | | | (100 | ) | | 52 | | | | (85 | ) | | | 72 | | | | (90 | ) | | 67 | | | | (100 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 8,256 | | | | (9,447 | ) | | 7,883 | | | | (8,140 | ) | | | 9,226 | | | | (9,716 | ) | | 8,256 | | | | (9,447 | ) | | | | | | | | | | | | | | | | | | | | | | | | | |
The balance sheet analysis of the post employment plans is as follows: | | | 2016 | | 2015 | | | 2017 | | 2016 | | | | 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 | | | 55 | | | | (997 | ) | | 436 | | | | (447 | ) | | | 281 | | | | (492 | ) | | 55 | | | | (997 | ) | Unfunded plans | | | — | | | | (251 | ) | | | — | | | | (248 | ) | | | — | | | | (280 | ) | | | — | | | | (251 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 55 | | | | (1,248 | ) | | 436 | | | | (695 | ) | | | 281 | | | | (772 | ) | | 55 | | | | (1,248 | ) | | | | | | | | | | | | | | | | | | | | | | | | | |
(i) | Includes surplus restriction of £2£1 million (2015(2016 – £2 million). |
238
Financial statements (continued)
The disclosures have been prepared in accordance with IFRIC 14. In particular, where the calculation for a plan results in a surplus, the recognised asset is limited to the present value of any available future refunds from the plan or reductions in future contributions to the plan, and any additional liabilities are recognised as required. At this stage, the company does not believe the IASB’s proposed amendments to IFRIC 14 will materially affect its ability to recognise these surpluses, but will review this fully once any amendments are finalised. (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 onAA-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. 240
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) | | | United Kingdom | | | Ireland | | | United States(i) | | | | 2016 % | | | 2015 % | | | 2014 % | | | 2016 % | | | 2015 % | | | 2014 % | | | 2016 % | | | 2015 % | | | 2014 % | | | 2017 % | | | 2016 % | | | 2015 % | | | 2017 % | | | 2016 % | | | 2015 % | | | 2017 % | | | 2016 % | | | 2015 % | | Rate of general increase in salaries(ii) | | | 4.0 | | | | 4.4 | | | | 4.4 | | | | 2.8 | | | | 3.1 | | | | 2.5 | | | | — | | | | — | | | | — | | | | 4.4 | | | | 4.0 | | | | 4.4 | | | | 3.0 | | | | 2.8 | | | | 3.1 | | | | — | | | | — | | | | — | | Rate of increase to pensions in payment | | | 3.1 | | | | 3.4 | | | | 3.5 | | | | 1.6 | | | | 1.7 | | | | 1.7 | | | | — | | | | — | | | | — | | | | 3.4 | | | | 3.1 | | | | 3.4 | | | | 1.7 | | | | 1.6 | | | | 1.7 | | | | — | | | | — | | | | — | | Rate of increase to deferred pensions | | | 1.8 | | | | 2.2 | | | | 2.3 | | | | 1.4 | | | | 1.6 | | | | 1.5 | | | | — | | | | — | | | | — | | | | 2.2 | | | | 1.8 | | | | 2.2 | | | | 1.6 | | | | 1.4 | | | | 1.6 | | | | — | | | | — | | | | — | | Discount rate for plan liabilities | | | 2.9 | | | | 3.8 | | | | 4.2 | | | | 1.4 | | | | 2.6 | | | | 3.0 | | | | 3.5 | | | | 4.3 | | | | 4.2 | | | | 2.6 | | | | 2.9 | | | | 3.8 | | | | 2.1 | | | | 1.4 | | | | 2.6 | | | | 3.7 | | | | 3.5 | | | | 4.3 | | 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 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | Inflation – CPI | | | | 2.2 | | | | 1.8 | | | | 2.2 | | | | 1.6 | | | | 1.4 | | | | 1.6 | | | | 1.8 | | | | 1.4 | | | | 1.7 | | Inflation – RPI | | | | 3.2 | | | | 2.8 | | | | 3.2 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
(i) | The salary increase assumption in the United States is not a significant assumption as only a minimal amount of members’ pension entitlement is dependent on a member’s projected final salary. |
(ii) | 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 | | | 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 | | | 2017 Age | | | 2016 Age | | | 2015 Age | | | 2017 Age | | | 2016 Age | | | 2015 Age | | | 2017 Age | | | 2016 Age | | | 2015 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 | | | | 86.3 | | | | 86.4 | | | | 86.6 | | | | 86.3 | | | | 86.2 | | | | 86.0 | | | | 85.9 | | | | 86.3 | | | | 86.7 | | Female | | | 88.3 | | | | 88.5 | | | | 88.4 | | | | 88.9 | | | | 88.7 | | | | 88.6 | | | | 88.3 | | | | 88.9 | | | | 88.8 | | | | 88.1 | | | | 88.3 | | | | 88.5 | | | | 89.0 | | | | 88.9 | | | | 88.7 | | | | 87.9 | | | | 88.3 | | | | 88.9 | | 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 | | | | 88.2 | | | | 88.6 | | | | 88.8 | | | | 89.2 | | | | 89.1 | | | | 88.9 | | | | 87.5 | | | | 88.0 | | | | 88.4 | | Female | | | 91.2 | | | | 91.4 | | | | 91.0 | | | | 91.8 | | | | 91.6 | | | | 91.5 | | | | 89.9 | | | | 90.6 | | | | 90.5 | | | | 90.5 | | | | 91.2 | | | | 91.4 | | | | 91.9 | | | | 91.8 | | | | 91.6 | | | | 89.5 | | | | 89.9 | | | | 90.6 | |
(i) | Based on the CMI’s series oflatest SAPS mortality tables with scaling factors based on the experience of the plan and where people live, with suitable future improvements. |
(ii) | Based on the ‘00’ series of mortality tables with scaling factors based on the experience of the plan and with suitable future improvements. |
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 20162017 and on the plan liabilities at 30 June 2016:2017: | | | United Kingdom | | Ireland | | United States and other | | | 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 | | | Benefit/(cost) | | | Operating profit £ million | | Profit after taxation £ million | | Plan liabilities(i) £ million | | Operating profit £ million | | Profit after taxation £ million | | Plan liabilities(i) £ million | | Operating profit £ million | | Profit after taxation £ million | | Plan liabilities(i) £ million | | Effect of 0.5% increase in discount rate | | | 23 | | | | 18 | | | | 489 | | | | 4 | | | | 3 | | | | 193 | | | | 2 | | | | 1 | | | | 38 | | | | 7 | | | | 20 | | | | 559 | | | | 3 | | | | 4 | | | | 161 | | | | 1 | | | | 1 | | | | 34 | | Effect of 0.5% decrease in discount rate | | | (21 | ) | | | (17 | ) | | | (560 | ) | | | (3 | ) | | | (3 | ) | | | (224 | ) | | | (1 | ) | | | (1 | ) | | | (39 | ) | | | (8 | ) | | | (18 | ) | | | (626 | ) | | | (3 | ) | | | (3 | ) | | | (188 | ) | | | (1 | ) | | | (1 | ) | | | (35 | ) | Effect of 0.5% increase in inflation | | | (20 | ) | | | (16 | ) | | | (429 | ) | | | (5 | ) | | | (4 | ) | | | (136 | ) | | | (1 | ) | | | (1 | ) | | | (17 | ) | | | (8 | ) | | | (18 | ) | | | (508 | ) | | | (2 | ) | | | (4 | ) | | | (141 | ) | | | (1 | ) | | | (1 | ) | | | (13 | ) | Effect of 0.5% decrease in inflation | | | 17 | | | | 14 | | | | 387 | | | | 4 | | | | 3 | | | | 149 | | | | 1 | | | | 1 | | | | 15 | | | | 6 | | | | 15 | | | | 438 | | | | 2 | | | | 3 | | | | 103 | | | | — | | | | 1 | | | | 12 | | Effect of one year increase in life expectancy | | | (9 | ) | | | (7 | ) | | | (272 | ) | | | (2 | ) | | | (2 | ) | | | (88 | ) | | | (1 | ) | | | (1 | ) | | | (21 | ) | | | (1 | ) | | | (7 | ) | | | (297 | ) | | | (1 | ) | | | (2 | ) | | | (75 | ) | | | — | | | | (1 | ) | | | (25 | ) |
(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). |
241
Financial statements (continued) (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 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 2016,2017, approximately 38% and 78% (2016 – 27% and 80% (2015 – 35% and 79%) of the UK Scheme’s liabilities were hedged against future movements in interest rates and inflation, respectively, through the combined effect of bonds and swaps. At 30 June 2016,2017, approximately 36% and 68% (2016 – 28% and 60% (2015 – 32% and 59%) of the Irish Scheme’s liabilities were hedged against future movements in interest rates and inflation, respectively, through the combined effect of bonds and swaps. The discount rates used are based on the yields of high quality fixed income investments. For the UK plans, which represent approximately 66%69% of total plan liabilities, the discount rate is determined by reference to the yield curves ofAA-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 thenon-UK plans. 240
Financial statements (continued)
An analysis of the fair value of the plan assets is as follows: | | | 2016 | | 2015 | | | 2017 | | 2016 | | | | 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 | | | 992 | | | | 433 | | | | 253 | | | | 1,678 | | | 812 | | | 395 | | | | 254 | | | | 1,461 | | | | 902 | | | | 367 | | | | 296 | | | | 1,565 | | | 992 | | | 433 | | | | 253 | | | | 1,678 | | Unquoted and private equity | | | 321 | | | | 3 | | | | 20 | | | | 344 | | | 297 | | | 2 | | | | 18 | | | | 317 | | | | 365 | | | | 2 | | | | 19 | | | | 386 | | | 321 | | | 3 | | | | 20 | | | | 344 | | Bonds | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed-interest government | | | 206 | | | | 158 | | | | 46 | | | | 410 | | | 178 | | | 117 | | | | 37 | | | | 332 | | | | 193 | | | | 153 | | | | 50 | | | | 396 | | | 206 | | | 158 | | | | 46 | | | | 410 | | Inflation-linked government | | | 977 | | | | 178 | | | | — | | | | 1,155 | | | 826 | | | 133 | | | | 9 | | | | 968 | | | | 1,036 | | | | 182 | | | | — | | | | 1,218 | | | 977 | | | 178 | | | | — | | | | 1,155 | | Investment grade corporate | | | 980 | | | | 225 | | | | 314 | | | | 1,519 | | | 861 | | | 210 | | | | 251 | | | | 1,322 | | | | 998 | | | | 277 | | | | 337 | | | | 1,612 | | | 980 | | | 225 | | | | 314 | | | | 1,519 | | Non-investment grade | | | 219 | | | | 43 | | | | 12 | | | | 274 | | | 265 | | | 31 | | | | 14 | | | | 310 | | | | 230 | | | | 51 | | | | 17 | | | | 298 | | | 219 | | | 43 | | | | 12 | | | | 274 | | Loan securities | | | 602 | | | | 140 | | | | — | | | | 742 | | | 614 | | | 123 | | | | — | | | | 737 | | | | 956 | | | | 222 | | | | — | | | | 1,178 | | | 602 | | | 140 | | | | — | | | | 742 | | Repurchase agreements | | | 2,000 | | | | — | | | | — | | | | 2,000 | | | 1,980 | | | | — | | | | — | | | | 1,980 | | | | 2,812 | | | | — | | | | — | | | | 2,812 | | | 2,000 | | | | — | | | | — | | | | 2,000 | | Liability driven investment (LDI) | | | 114 | | | | 24 | | | | — | | | | 138 | | | 80 | | | 20 | | | | — | | | | 100 | | | | 122 | | | | 69 | | | | — | | | | 191 | | | 114 | | | 24 | | | | — | | | | 138 | | Property – unquoted | | | 670 | | | | 108 | | | | 1 | | | | 779 | | | 665 | | | 83 | | | | 10 | | | | 758 | | | | 641 | | | | 121 | | | | 1 | | | | 763 | | | 670 | | | 108 | | | | 1 | | | | 779 | | Hedge funds | | | — | | | | 142 | | | | — | | | | 142 | | | | — | | | 122 | | | | — | | | | 122 | | | | — | | | | 151 | | | | — | | | | 151 | | | | — | | | 142 | | | | — | | | | 142 | | Interest rate and inflation swaps | | | (1,007 | ) | | | 15 | | | | — | | | | (992 | ) | | (801 | ) | | 50 | | | | — | | | | (751 | ) | | | (1,440 | ) | | | 41 | | | | — | | | | (1,399 | ) | | (1,007 | ) | | 15 | | | | — | | | | (992 | ) | Cash and other | | | (27 | ) | | | 3 | | | | 91 | | | | 67 | | | 145 | | | 9 | | | | 73 | | | | 227 | | | | (26 | ) | | | 27 | | | | 54 | | | | 55 | | | (27 | ) | | 3 | | | | 91 | | | | 67 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total bid value of assets | | | 6,047 | | | | 1,472 | | | | 737 | | | | 8,256 | | | 5,922 | | | 1,295 | | | | 666 | | | | 7,883 | | | | 6,789 | | | | 1,663 | | | | 774 | | | | 9,226 | | | 6,047 | | | 1,472 | | | | 737 | | | | 8,256 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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£0.5 million (2015(2016 – £0.6 million) invested in the ordinary shares of Diageo plc. |
242
Financial statements (continued) Total cash contributions by the group to all post employment plans in the year ending 30 June 20172018 are estimated to be approximately £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 20162017 held inventory with a book value of £607£532 million (2015(2016 – £663£607 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 20162017 was £25 million (2015(2016 – £25 million) and is expected to be approximately the same amount for the next eightseven 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 nonot greater than the actuarial deficit at that time, up to a maximum of £430 million in cash, to the UK Scheme to buy outpurchase 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 if the deficit at the 2018 actuarial triennial valuation is in excess of £84 million. These additional contributions would be payable to the UK Scheme by 31 March 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€23 million (£1620 million) per annum until the year ending 30 June 2029.2028. The agreement also provides for additional cash contributions into escrow of up to €188€135 million (£140116 million) if an equivalent reduction in the deficit is not achieved over the 18 year period from 2010reduced at each triennial valuation to 2028.agreed limits up to 2027. As part of this funding plan, Diageo has also granted to the Irish Scheme a contingent asset comprising mortgages over certain land and buildings and fixed and floating charges over certain receivables of the group up to a value of €200 million (£149175 million). 241
Financial statements (continued)
Following the actuarial triennial valuation as of 31 December 2015, the group made additional cash contributions of €32 million (£28 million) during the year ended 30 June 2017, and has agreed to pay a further €9 million (£8 million) in each of the next two years. The group has also agreed to make conditional payments up to a maximum of €29 million (£25 million) if the deficit on the plan is greater than €232 million (£204 million) at the 2018 actuarial triennial valuation. The conditional payments would be made equally over the three years after the 2018 actuarial triennial valuation has been agreed. (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 | | | | 2016 £ million | | | 2015 £ million | | | 2016 £ million | | | 2015 £ million | | | 2016 £ million | | | 2015 £ million | | | 2017 £ million | | | 2016 £ million | | | 2017 £ million | | | 2016 £ million | | | 2017 £ million | | | 2016 £ million | | Maturity analysis of benefits expected to be paid | | | | | | | | | | | | | | | | | | | | | | | | | Within one year | | | 272 | | | | 233 | | | | 74 | | | | 70 | | | | 61 | | | | 42 | | | | 347 | | | | 272 | | | | 76 | | | | 74 | | | | 57 | | | | 61 | | Between 1 to 5 years | | | 998 | | | | 802 | | | | 359 | | | | 344 | | | | 175 | | | | 149 | | | | 1,079 | | | | 998 | | | | 374 | | | | 359 | | | | 243 | | | | 175 | | Between 6 to 15 years | | | 2,724 | | | | 2,501 | | | | 702 | | | | 696 | | | | 387 | | | | 337 | | | | 2,800 | | | | 2,724 | | | | 742 | | | | 702 | | | | 366 | | | | 387 | | Between 16 to 25 years | | | 2,530 | | | | 2,841 | | | | 662 | | | | 672 | | | | 266 | | | | 237 | | | | 2,511 | | | | 2,530 | | | | 701 | | | | 662 | | | | 234 | | | | 266 | | Beyond 25 years | | | 4,210 | | | | 6,360 | | | | 1,121 | | | | 1,199 | | | | 253 | | | | 229 | | | | 4,201 | | | | 4,210 | | | | 1,170 | | | | 1,121 | | | | 198 | | | | 253 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 10,734 | | | | 12,737 | | | | 2,918 | | | | 2,981 | | | | 1,142 | | | | 994 | | | | 10,938 | | | | 10,734 | | | | 3,063 | | | | 2,918 | | | | 1,098 | | | | 1,142 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | years | | | years | | | years | | | years | | | years | | | years | | | years | | | years | | | years | | | years | | | years | | | years | | Average duration of the defined benefit obligation | | | 18 | | | | 17 | | | | 20 | | | | 18 | | | | 11 | | | | 11 | | | | 19 | | | | 18 | | | | 19 | | | | 20 | | | | 10 | | | | 11 | |
243
Financial statements (continued) 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 CAPITALWorking 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. 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 | | | | | | | | | | | 2016 £ million | | | 2015 £ million | | Raw materials and consumables | | | 301 | | | | 333 | | Work in progress | | | 49 | | | | 66 | | Maturing inventories | | | 3,647 | | | | 3,586 | | Finished goods and goods for resale | | | 582 | | | | 589 | | | | | | | | | | | | | | 4,579 | | | | 4,574 | | | | | | | | | | |
242
Financial statements (continued)
| | | | | | | | | | | 2017 £ million | | | 2016 £ million | | Raw materials and consumables | | | 327 | | | | 301 | | Work in progress | | | 45 | | | | 49 | | Maturing inventories | | | 3,820 | | | | 3,647 | | Finished goods and goods for resale | | | 596 | | | | 582 | | | | | | | | | | | | | | 4,788 | | | | 4,579 | | | | | | | | | | |
Maturing inventories include whisk(e)y, rum, winestequila and Chinese white spirits. The following amounts of inventories are expected to be utilised after more than one year: | | | | | | | | | | | | | | | | | | | 2016 £ million | | | 2015 £ million | | | 2017 £ million | | | 2016 £ million | | Raw materials and consumables | | | 27 | | | | 55 | | | | 8 | | | | 27 | | Maturing inventories | | | 3,180 | | | | 2,988 | | | | 3,194 | | | | 3,180 | | | | | | | | | | | | | | | | | | 3,207 | | | | 3,043 | | | | 3,202 | | | | 3,207 | | | | | | | | | | | | | | |
244
Financial statements (continued) Inventories are disclosed net of provisions for obsolescence, an analysis of which is as follows: | | | | | | | | | | | | | | | | | | | 2016 £ million | | 2015 £ million | | | 2017 £ million | | 2016 £ million | | Balance at beginning of the year | | | 53 | | | 52 | | | | 73 | | | 53 | | Exchange differences | | | 5 | | | (2 | ) | | | (1 | ) | | 5 | | Income statement charge | | | 33 | | | 29 | | | | 41 | | | 33 | | Utilised | | | (15 | ) | | (25 | ) | | | (25 | ) | | (15 | ) | Sale of businesses | | | (3 | ) | | (1 | ) | | | — | | | (3 | ) | | | | | | | | | | | | | | | | | 73 | | | 53 | | | | 88 | | | 73 | | | | | | | | | | | | | | |
(b) Trade and other receivables | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | | 2015 | | | 2017 | | | 2016 | | | | 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 | | | 2,154 | | | | 1 | | | | 1,933 | | | | — | | | | 2,130 | | | | — | | | | 2,154 | | | | 1 | | Interest receivable | | | 20 | | | | — | | | | 23 | | | | — | | | | 19 | | | | — | | | | 20 | | | | — | | Other receivables | | | 281 | | | | 36 | | | | 297 | | | | 38 | | | | 244 | | | | 45 | | | | 281 | | | | 36 | | Prepayments | | | 189 | | | | 9 | | | | 146 | | | | 8 | | | | 159 | | | | 13 | | | | 189 | | | | 9 | | Accrued income | | | 42 | | | | — | | | | 36 | | | | — | | | | 40 | | | | — | | | | 42 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,686 | | | | 46 | | | | 2,435 | | | | 46 | | | | 2,592 | | | | 58 | | | | 2,686 | | | | 46 | | | | | | | | | | | | | | | | | | | | | | | | | | |
At 30 June 2016,2017, approximately 13%15%, 20%21% and 11%12% of the group’s trade receivables of £2,155£2,130 million are due from counterparties based in the United Kingdom, the United States and India, respectively. The aged analysis of trade receivables, net of allowances, is as follows: | | | | | | | | | | | | | | | | | | | 2016 £ million | | | 2015 £ million | | | 2017 £ million | | 2016 £ million | | Not overdue | | | 2,012 | | | | 1,806 | | | | 2,026 | | | 2,012 | | Overdue 1 – 30 days | | | 60 | | | | 47 | | | | 28 | | | 60 | | Overdue 31 – 60 days | | | 25 | | | | 22 | | | | 19 | | | 25 | | Overdue 61 – 90 days | | | 16 | | | | 11 | | | | 11 | | | 16 | | Overdue 91 – 180 days | | | 21 | | | | 32 | | | | 21 | | | 21 | | Overdue more than 180 days | | | 21 | | | | 15 | | | | 25 | | | 21 | | | | | | | | | | | | | | | | | | 2,155 | | | | 1,933 | | | | 2,130 | | | 2,155 | | | | | | | | | | | | | | | Trade and other receivables are disclosed net of allowance for doubtful debts, an analysis of which is as follows: | | Trade and other receivables are disclosed net of allowance for doubtful debts, an analysis of which is as follows: | | | | | | 2017 £ million | | 2016 £ million | | Balance at beginning of the year | | | | 83 | | | 71 | | Exchange differences | | | | (1 | ) | | 5 | | Income statement charge | | | | 54 | | | 15 | | Written off | | | | (7 | ) | | (8 | ) | | | | | | | | | | | | | 129 | | | 83 | | | | | | | | | |
243245
Financial statements (continued) Trade and other receivables are disclosed netThe income statement charge includes £32 million in respect of allowance for doubtful debts, an analysis of which is as follows:a claim made by a customer in India. See note 4(b).
| | | | | | | | | | | 2016 £ million | | | 2015 £ million | | Balance at beginning of the year | | | 71 | | | | 63 | | Exchange differences | | | 5 | | | | (6 | ) | Income statement charge | | | 15 | | | | 21 | | Written off | | | (8 | ) | | | (7 | ) | | | | | | | | | | | | | 83 | | | | 71 | | | | | | | | | | |
(c) Trade and other payables | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | | 2015 | | | 2017 | | | 2016(i) | | | | 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 | | | 916 | | | | — | | | | 883 | | | | — | | | | 1,365 | | | | — | | | | 1,088 | | | | — | | Interest payable | | | 81 | | | | — | | | | 77 | | | | — | | | | 75 | | | | — | | | | 81 | | | | — | | Tax and social security excluding income tax | | | 605 | | | | 3 | | | | 546 | | | | 5 | | | | 543 | | | | 2 | | | | 605 | | | | 3 | | Other payables | | | 680 | | | | 37 | | | | 524 | | | | 40 | | | | 487 | | | | 16 | | | | 508 | | | | 37 | | Accruals | | | 1,056 | | | | 9 | | | | 879 | | | | 9 | | | | 1,064 | | | | 6 | | | | 1,056 | | | | 9 | | Deferred income | | | 34 | | | | 21 | | | | 34 | | | | 15 | | | | 29 | | | | — | | | | 34 | | | | 21 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,372 | | | | 70 | | | | 2,943 | | | | 69 | | | | 3,563 | | | | 24 | | | | 3,372 | | | | 70 | | | | | | | | | | | | | | | | | | | | | | | | | | |
(i) | The group has revised the disclosure of ‘trade payables’ and ‘other payables’ as at 30 June 2016 to be consistent with the current year presentation. |
Interest payable at 30 June 20162017 includes interest onnon-derivative financial instruments of £73£68 million (2015(2016 – £68£73 million). (d) Provisions | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Thalidomide £ million | | Restructuring £ million | | Other £ million | | Total £ million | | | Thalidomide £ million | | Other £ million | | Total £ million | | At 30 June 2015 | | | 191 | | | | 49 | | | | 103 | | | | 343 | | | At 30 June 2016 | | | | 190 | | | | 200 | | | | 390 | | Exchange differences | | | 2 | | | | — | | | | 20 | | | | 22 | | | | 1 | | | | 5 | | | | 6 | | Provisions charged during the year | | | — | | | | — | | | | 100 | | | | 100 | | | | 64 | | | | 95 | | | | 159 | | Provisions utilised during the year | | | (11 | ) | | | (33 | ) | | | (33 | ) | | | (77 | ) | | | (40 | ) | | | (106 | ) | | | (146 | ) | Transfers | | | (2 | ) | | | (10 | ) | | | 4 | | | | (8 | ) | | | — | | | | (2 | ) | | | (2 | ) | Unwinding of discounts | | | 10 | | | | — | | | | — | | | | 10 | | | | 8 | | | | — | | | | 8 | | | | | | | | | | | | | | | | | | | | | | | | At 30 June 2016 | | | 190 | | | | 6 | | | | 194 | | | | 390 | | | At 30 June 2017 | | | | 223 | | | | 192 | | | | 415 | | | | | | | | | | | | | | | | | | | | | | | | Current liabilities | | | 10 | | | | 5 | | | | 122 | | | | 137 | | | | 18 | | | | 111 | | | | 129 | | Non-current liabilities | | | 180 | | | | 1 | | | | 72 | | | | 253 | | | | 205 | | | | 81 | | | | 286 | | | | | | | | | | | | | | | | | | | | | | | | | | | 190 | | | | 6 | | | | 194 | | | | 390 | | | | 223 | | | | 192 | | | | 415 | | | | | | | | | | | | | | | | | | | | | | | |
(a) Provisions have been established in respect of the discounted value of the group’s commitment to the UK and Australian Thalidomide Trust.Trusts. These will be utilised over the period of the commitments up to 2037. See note 8. (b) The group implemented a number of restructuring programmes, which involve the rationalisation of certain operations around the world. As 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, the outstanding provisions are expected to be substantially utilised by 30 June 2017 (see note 4). (c) The largest items in other provisions at 30 June 2017 are £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) in respect of employee deferred compensation plans which will be utilised when employees leave the group.group and £33 million in respect of the Turkish Competition Authority investigation into Mey İçki’s trading practices in Turkey.
244246
Financial statements (continued) RISK MANAGEMENT AND CAPITAL STRUCTURERisk management and capital structure
Introduction This section sets out the policies and procedures applied to manage the group’s capital structure and the financial risks the group is exposed to. Diageo considers the following components of its balance sheet to be capital: borrowings and equity. Diageo manages its capital structure to achieve capital efficiency, provide flexibility to invest through the economic cycle and give efficient access to debt markets at attractive cost levels. 15. FINANCIAL INSTRUMENTS AND RISK MANAGEMENTFinancial 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 investmentsandloans are described in note 12, fortrade and other receivablesin 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 liabilitiesare 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 isde-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. 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. 245247
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 approved policies and guidelines, which are recommended and monitored by the finance committee, chaired by the Chief Financial Officer. The policies and guidelines include benchmark exposure and/or hedge cover levels for key areas of treasury risk which are periodically reviewed by the boardBoard 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 boardBoard approved strategies. Transactions arising from the application of this flexibility are carried at fair value, gains or losses are taken to the income statement as they arise and are separately monitored on a daily basis using Value at Risk analysis. In the year ended 30 June 20162017 and 30 June 20152016 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 report on the key activities of the treasury department, which would identify any exposures which differ from the defined 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 over a one yearone-year period with a 95% probability confidence level. Following an internal restructuringAt 30 June 2017 foreign currency borrowings and financial derivatives designated in net investment hedge relationships increasedamounted to £6,787£6,746 million as at 30 June 2016 (2015(2016 – £3,681 million; 2014 – £3,749£6,787 million).
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. 246248
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,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’sthe group’s existing interest rate derivatives are designated as hedges and are expected to be effective. Fair value of these derivatives is recognised in the income statement, along with any changes in the relevant fair value of the underlying hedged asset or liability. The group’s net borrowings interest rate profile as at 30 June 2017 and 2016 is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | 2015 | | | 2017 | | | 2016 | | | | £ million | | % | | £ million | | | % | | | £ million | | | % | | | £ million | | % | | Fixed rate | | | 4,103 | | | | 47 | | | 4,564 | | | | 48 | | | | 4,443 | | | | 57 | | | | 4,103 | | | 47 | | Floating rate(i) | | | 4,738 | | | | 55 | | | 4,818 | | | | 51 | | | | 3,336 | | | | 42 | | | | 4,738 | | | 55 | | Impact of financial derivatives and fair value adjustments | | | (206 | ) | | | (2 | ) | | 145 | | | | 1 | | | | 113 | | | | 1 | | | | (206 | ) | | (2 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Net borrowings | | | 8,635 | | | | 100 | | | 9,527 | | | | 100 | | | | 7,892 | | | | 100 | | | | 8,635 | | | 100 | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 | | 2016 £ million | | 2015 £ million | | 2014 £ million | | 2016 % | | 2015 % | | 2014 % | | | 2017 £ million | | 2017 £ million | | 2016 £ million | | 2015 £ million | | 2017 % | | 2016 % | | 2015 % | | | 9,245 | | | 10,459 | | | 9,174 | | | | 3.3 | | | 3.5 | | | 3.8 | | 8,771 | | | 9,245 | | | 10,459 | | | | 3.5 | | | 3.3 | | | 3.5 | |
(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 boardBoard 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 24 months of forecast volume principally through exchange-traded 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 20162017 and 30 June 2015,2016, 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. 249
Financial statements (continued) The sensitivity analysis estimates the impact of changes in interest and foreign exchange rates. All hedges are expected to be highly effective for this analysis and it considers the impact of all financial instruments including financial derivatives, cash and cash equivalents, borrowings and other financial assets and liabilities. 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) | | | | 2016 £ million | | 2015 £ million | | 2016 £ million | | 2015 £ million | | | 2017 £ million | | 2016 £ million | | 2017 £ million | | 2016 £ million | | 0.5% decrease in interest rates | | | (24 | ) | | (20 | ) | | | (8 | ) | | (16 | ) | | | (20 | ) | | (24 | ) | | | (12 | ) | | (8 | ) | 0.5% increase in interest rates | | | 24 | | | 20 | | | | 9 | | | 17 | | | | 20 | | | 24 | | | | 13 | | | 9 | | 10% weakening of sterling | | | (26 | ) | | (48 | ) | | | (641 | ) | | (624 | ) | | | (19 | ) | | (26 | ) | | | (835 | ) | | (641 | ) | 10% strengthening of sterling | | | 21 | | | 40 | | | | 525 | | | 512 | | | | 16 | | | 21 | | | | 684 | | | 525 | |
(i) | The impact on foreign currency borrowings and derivatives in net investment hedgehedges is largely offset by the foreign exchange difference arising on the translation of net investments. |
(ii) | The impact on the consolidated statement of comprehensive income includes the impact on the income statement. |
(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 2016,2017, the collateral held under these agreements amounted to $96 million (£74 million) and €nil million (£nil million) (2016 – $104 million (£78 million) and €73 million (£61 million) (2015 – $82 million (£52 million) and €34 million (£24 million)). 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. 248250
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 itsday-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 20162017 and 30 June 2015.2016. The gross cash flows of derivative contractscross currency swaps are presented for the purposes of this table and financialtable. All other derivative contracts are presented on a net basis. 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 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Non-derivative financial liabilities | | | (4,893 | ) | | | (3,579 | ) | | | (1,008 | ) | | | (6,180 | ) | | | (15,660 | ) | | | (13,082 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Gross amount receivable from derivatives | | | 947 | | | | 153 | | | | 106 | | | | 1,566 | | | | 2,772 | | | | — | | Gross amount payable on derivatives | | | (647 | ) | | | (144 | ) | | | (73 | ) | | | (1,130 | ) | | | (1,994 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative instruments(iii) | | | 300 | | | | 9 | | | | 33 | | | | 436 | | | | 778 | | | | 498 | | | | | | | | | | | | | | | | | | | | | | | | | | | 2015 | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings(i) | | | (1,920 | ) | | | (2,556 | ) | | | (968 | ) | | | (4,365 | ) | | | (9,809 | ) | | | (9,838 | ) | Interest on borrowings(i),(iii) | | | (340 | ) | | | (479 | ) | | | (334 | ) | | | (1,434 | ) | | | (2,587 | ) | | | (68 | ) | Finance lease capital repayments | | | (38 | ) | | | (50 | ) | | | (70 | ) | | | (104 | ) | | | (262 | ) | | | (262 | ) | Finance lease future interest payments | | | (13 | ) | | | (19 | ) | | | (16 | ) | | | (23 | ) | | | (71 | ) | | | — | | Trade and other financial liabilities(ii) | | | (2,172 | ) | | | (54 | ) | | | (143 | ) | | | — | | | | (2,369 | ) | | | (2,353 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Non-derivative financial liabilities | | | (4,483 | ) | | | (3,158 | ) | | | (1,531 | ) | | | (5,926 | ) | | | (15,098 | ) | | | (12,521 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Gross amount receivable from derivatives | | | 97 | | | | 478 | | | | 176 | | | | 1,360 | | | | 2,111 | | | | — | | Gross amount payable on derivatives | | | (162 | ) | | | (374 | ) | | | (110 | ) | | | (1,154 | ) | | | (1,800 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative instruments(iii) | | | (65 | ) | | | 104 | | | | 66 | | | | 206 | | | | 311 | | | | 131 | | | | | | | | | | | | | | | | | | | | | | | �� | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | 2017 | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings(i) | | | (2,458 | ) | | | (1,253 | ) | | | (1,350 | ) | | | (3,998 | ) | | | (9,059 | ) | | | (9,042 | ) | Interest on borrowings(i),(iii) | | | (334 | ) | | | (421 | ) | | | (366 | ) | | | (1,461 | ) | | | (2,582 | ) | | | (68 | ) | Finance lease capital repayments | | | (26 | ) | | | (74 | ) | | | (41 | ) | | | (42 | ) | | | (183 | ) | | | (183 | ) | Finance lease future interest payments | | | (9 | ) | | | (12 | ) | | | (7 | ) | | | (3 | ) | | | (31 | ) | | | — | | Trade and other financial liabilities(ii) | | | (2,693 | ) | | | (34 | ) | | | (173 | ) | | | (3 | ) | | | (2,903 | ) | | | (2,889 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Non-derivative financial liabilities | | | (5,520 | ) | | | (1,794 | ) | | | (1,937 | ) | | | (5,507 | ) | | | (14,758 | ) | | | (12,182 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Cross currency swaps (gross) | | | | | | | | | | | | | | | | | | | | | | | | | – Receivable | | | 61 | | | | 122 | | | | 122 | | | | 2,302 | | | | 2,607 | | | | — | | – Payable | | | (41 | ) | | | (82 | ) | | | (82 | ) | | | (1,853 | ) | | | (2,058 | ) | | | — | | Other derivative instruments (net) | | | (94 | ) | | | 13 | | | | 2 | | | | — | | | | (79 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative instruments(iii) | | | (74 | ) | | | 53 | | | | 42 | | | | 449 | | | | 470 | | | | 110 | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Non-derivative financial liabilities | | | (4,893 | ) | | | (3,579 | ) | | | (1,008 | ) | | | (6,180 | ) | | | (15,660 | ) | | | (13,082 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Cross currency swaps (gross) | | | | | | | | | | | | | | | | | | | | | | | | | – Receivable | | | 515 | | | | 82 | | | | 82 | | | | 1,558 | | | | 2,237 | | | | — | | – Payable | | | (367 | ) | | | (56 | ) | | | (56 | ) | | | (1,125 | ) | | | (1,604 | ) | | | — | | Other derivative instruments (net) | | | 152 | | | | (17 | ) | | | 7 | | | | 3 | | | | 145 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative instruments(iii) | | | 300 | | | | 9 | | | | 33 | | | | 436 | | | | 778 | | | | 498 | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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. |
249251
Financial statements (continued) The group had available undrawn committed bank facilities as follows: | | | | | | | | | | | | | | | | | | | 2016 £ million | | | 2015 £ million | | | 2017 £ million | | | 2016 £ million | | Expiring within one year | | | — | | | | 688 | | | | 481 | | | | — | | Expiring between one and two years | | | 470 | | | | — | | | | 900 | | | | 470 | | Expiring after two years | | | 2,072 | | | | 1,541 | | | | 1,219 | | | | 2,072 | | | | | | | | | | | | | | | | | | 2,542 | | | | 2,229 | | | | 2,600 | | | | 2,542 | | | | | | | | | | | | | | |
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. Anynon-compliance with covenants underlying Diageo’s financing arrangements could, if not waived, constitute an event of default with respect to any such arrangements, and anynon-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. Other financial liabilities include an option held by Industrias Licoreras de Guatemala to sell the remaining 50% equity stake in Rum Creations & Products, 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 decrease or increase and decrease by £17£18 million and £15£32 million, respectively. If forecast performance increasesdecreases or decreasesincreases by 10%, the value of the option would decrease or increase and decrease by £30£35 million and £13£38 million, respectively. 250252
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: | | | | | | | | | | | | | | | | | | | 2016 £ million | | 2015 £ million | | | Available-for-sale investments | | | — | | | 80 | | | | | | | | | | | Unadjusted quoted prices in active markets (Level 1) | | | — | | | 80 | | | | | | | | | | | 2017 £ million | | 2016 £ million | | Derivative assets | | | 879 | | | 338 | | | | 348 | | | 879 | | Derivative liabilities | | | (373 | ) | | (198 | ) | | | (232 | ) | | (373 | ) | | | | | | | | | | | | | | Valuation techniques based on observable market input (Level 2) | | | 506 | | | 140 | | | | 116 | | | 506 | | | | | | | | | | | | | | | Other financial liabilities | | | (165 | ) | | (139 | ) | | | (183 | ) | | (165 | ) | | | | | | | | | | | | | | Valuation techniques based on unobservable market input (Level 3) | | | (165 | ) | | (139 | ) | | | (183 | ) | | (165 | ) | | | | | | | | | | | | | |
The movements in level 3 instruments, measured on a recurring basis, are as follows: | | | | | | | | | | | | | | | | | | | Other financial liabilities | | | Other financial liabilities | | | | 2016 £ million | | 2015 £ million | | | 2017 £ million | | 2016 £ million | | At 1 July | | | (139 | ) | | (108 | ) | | | (165 | ) | | (139 | ) | Net losses included in the income statement | | | (1 | ) | | (14 | ) | | | (8 | ) | | (1 | ) | Net losses included in exchange in other comprehensive income | | | (25 | ) | | (11 | ) | | | (4 | ) | | (25 | ) | Net losses included in retained earnings | | | (3 | ) | | (9 | ) | | | (12 | ) | | (3 | ) | Settlement of liabilities | | | 3 | | | 3 | | | | 6 | | | 3 | | | | | | | | | | | | | | | At 30 June | | | (165 | ) | | (139 | ) | | | (183 | ) | | | (165 | ) | | | | | | | | | | | | | |
There were no transfers between levels during the two years ended 30 June 20162017 and 30 June 2015.2016. In addition, retained earnings compriseincluded a £3 million capital injection to ZacapaRum Creations & Products, Inc. from Industrias Licoreras de Guatemala. (h) Results of hedging instruments In respect of cash flow hedging instruments, a gainloss of £29 million (2016 – £31 million (2015gain; 2015 – £46 million loss; 2014 – £54 million gain)loss) has been recognised in other comprehensive income due to changes in fair value. A loss of £66£143 million has been transferred out of other comprehensive income to other operating expenses and a gain of £211£42 million to other finance charges, respectively (2015(2016 – a loss of £66 million and a gain of £211 million; 2015 – a loss of £26 million and a gain of £84 million; 2014 – a gain of £54 million and loss of £88 million, respectively) to offset the foreign exchange impact on the underlying transactions. For cash flow hedges of forecast transactions at 30 June 2016,2017, based on year end interest and foreign exchange rates, there is expected to be a loss to the income statement of £113£33 million in financialthe year 2017ending 30 June 2018 and a lossgain of £36£4 million in financialthe year 2018.ending 30 June 2019. 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 2016,2023, 2036 and 2043. Foreign exchangeExchange 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 gainloss on fair value hedging instruments for the year was £36 million (2016 – £16 million (2015gain; 2015 – £11 million gain; 2014 – £8 million gain) and the lossgain on the hedged items attributable to the hedged risks was £43 million (2016 – £26 million (2015loss; 2015 – £11 million loss; 2014 – £6 million loss). There was no significant ineffectiveness on net investment hedging during the year ended 30 June 2016.2017. 251253
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 | | 2017 | | | | | | | | | | | | | | | | Other investments and loans | | | | — | | | | 31 | | | | — | | | | — | | | | 31 | | | | — | | | | 31 | | Trade and other receivables | | | | — | | | | 2,406 | | | | — | | | | 244 | | | | 2,650 | | | | 2,592 | | | | 58 | | Cash and cash equivalents | | | | — | | | | 1,191 | | | | — | | | | — | | | | 1,191 | | | | 1,191 | | | | — | | Derivatives in fair value hedge | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Derivatives in cash flow hedge | | | | 234 | | | | — | | | | — | | | | — | | | | 234 | | | | 8 | | | | 226 | | Derivatives in net investment hedge | | | | 49 | | | | — | | | | — | | | | — | | | | 49 | | | | 49 | | | | — | | Other instruments at fair value | | | | 65 | | | | — | | | | — | | | | — | | | | 65 | | | | 24 | | | | 41 | | | | | | | | | | | | | | | | | | | | | | | | | Total other financial assets | | | | 348 | | | | — | | | | — | | | | — | | | | 348 | | | | 81 | | | | 267 | | | | | | | | | | | | | | | | | | | | | | | | | Total financial assets | | | | 348 | | | | 3,628 | | | | — | | | | 244 | | | | 4,220 | | | | 3,864 | | | | 356 | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings(i) | | | | — | | | | (9,042 | ) | | | — | | | | — | | | | (9,042 | ) | | | (2,459 | ) | | | (6,583 | ) | Trade and other payables | | | | — | | | | (2,780 | ) | | | �� | | | | (807 | ) | | | (3,587 | ) | | | (3,563 | ) | | | (24 | ) | Derivatives in fair value hedge | | | | (2 | ) | | | — | | | | — | | | | — | | | | (2 | ) | | | (1 | ) | | | (1 | ) | Derivatives in cash flow hedge | | | | (72 | ) | | | — | | | | — | | | | — | | | | (72 | ) | | | (47 | ) | | | (25 | ) | Derivatives in net investment hedge | | | | (6 | ) | | | — | | | | — | | | | — | | | | (6 | ) | | | (6 | ) | | | — | | Other instruments at fair value | | | | (335 | ) | | | — | | | | — | | | | — | | | | (335 | ) | | | (135 | ) | | | (200 | ) | Finance leases | | | | — | | | | (183 | ) | | | — | | | | — | | | | (183 | ) | | | (26 | ) | | | (157 | ) | | | | | | | | | | | | | | | | | | | | | | | | Total other financial liabilities | | | | (415 | ) | | | (183 | ) | | | — | | | | — | | | | (598 | ) | | | (215 | ) | | | (383 | ) | | | | | | | | | | | | | | | | | | | | | | | | Total financial liabilities | | | | (415 | ) | | | (12,005 | ) | | | — | | | | (807 | ) | | | (13,227 | ) | | | (6,237 | ) | | | (6,990 | ) | | | | | | | | | | | | | | | | | | | | | | | | Total net financial liabilities | | | | (67 | ) | | | (8,377 | ) | | | — | | | | (563 | ) | | | (9,007 | ) | | | (2,373 | ) | | | (6,634 | ) | | | 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 | | | | — | | | 31 | | | | — | | | | — | | | 31 | | | | — | | | 31 | | Trade and other receivables | | | — | | | | 2,424 | | | | — | | | | 308 | | | | 2,732 | | | | 2,686 | | | | 46 | | | | — | | | 2,424 | | | | — | | | | 308 | | | 2,732 | | | 2,686 | | | 46 | | Cash and cash equivalents | | | — | | | | 1,089 | | | | — | | | | — | | | | 1,089 | | | | 1,089 | | | | — | | | | — | | | 1,089 | | | | — | | | | — | | | 1,089 | | | 1,089 | | | | — | | Derivatives in fair value hedge | | | 35 | | | | — | | | | — | | | | — | | | | 35 | | | | — | | | | 35 | | | | 35 | | | | — | | | | — | | | | — | | | 35 | | | | — | | | 35 | | Derivatives in cash flow hedge | | | 362 | | | | — | | | | — | | | | — | | | | 362 | | | | 130 | | | | 232 | | | | 362 | | | | — | | | | — | | | | — | | | 362 | | | 130 | | | 232 | | Derivatives in net investment hedge | | | 216 | | | | — | | | | — | | | | — | | | | 216 | | | | 216 | | | | — | | | | 216 | | | | — | | | | — | | | | — | | | 216 | | | 216 | | | | — | | Other instruments at fair value | | | 266 | | | | — | | | | — | | | | — | | | | 266 | | | | 148 | | | | 118 | | | | 266 | | | | — | | | | — | | | | — | | | 266 | | | 148 | | | 118 | | Finance lease assets | | | — | | | | 36 | | | | — | | | | — | | | | 36 | | | | 1 | | | | 35 | | | | — | | | 36 | | | | — | | | | — | | | 36 | | | 1 | | | 35 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total other financial assets | | | 879 | | | | 36 | | | | — | | | | — | | | | 915 | | | | 495 | | | | 420 | | | | 879 | | | 36 | | | | — | | | | — | | | 915 | | | 495 | | | 420 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total financial assets | | | 879 | | | | 3,580 | | | | — | | | | 308 | | | | 4,767 | | | | 4,270 | | | | 497 | | | | 879 | | | 3,580 | | | | — | | | | 308 | | | 4,767 | | | 4,270 | | | 497 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings(i) | | | — | | | | (10,129 | ) | | | — | | | | — | | | | (10,129 | ) | | | (2,058 | ) | | | (8,071 | ) | | | — | | | (10,129 | ) | | | — | | | | — | | | (10,129 | ) | | (2,058 | ) | | (8,071 | ) | Trade and other payables | | | — | | | | (2,554 | ) | | | — | | | | (888 | ) | | | (3,442 | ) | | | (3,372 | ) | | | (70 | ) | | | — | | | (2,554 | ) | | | — | | | | (888 | ) | | (3,442 | ) | | (3,372 | ) | | (70 | ) | Derivatives in cash flow hedge | | | (148 | ) | | | — | | | | — | | | | — | | | | (148 | ) | | | (102 | ) | | | (46 | ) | | | (148 | ) | | | — | | | | — | | | | — | | | (148 | ) | | (102 | ) | | (46 | ) | Derivatives in net investment hedge | | | (66 | ) | | | — | | | | — | | | | — | | | | (66 | ) | | | (66 | ) | | | — | | | | (66 | ) | | | — | | | | — | | | | — | | | (66 | ) | | (66 | ) | | | — | | Other instruments at fair value | | | (324 | ) | | | — | | | | — | | | | — | | | | (324 | ) | | | (83 | ) | | | (241 | ) | | | (324 | ) | | | — | | | | — | | | | — | | | (324 | ) | | (83 | ) | | (241 | ) | Finance leases | | | — | | | | (242 | ) | | | — | | | | — | | | | (242 | ) | | | (29 | ) | | | (213 | ) | | | — | | | (242 | ) | | | — | | | | — | | | (242 | ) | | (29 | ) | | (213 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total other financial liabilities | | | (538 | ) | | | (242 | ) | | | — | | | | — | | | | (780 | ) | | | (280 | ) | | | (500 | ) | | | (538 | ) | | (242 | ) | | | — | | | | — | | | (780 | ) | | (280 | ) | | (500 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total financial liabilities | | | (538 | ) | | | (12,925 | ) | | | — | | | | (888 | ) | | | (14,351 | ) | | | (5,710 | ) | | | (8,641 | ) | | | (538 | ) | | (12,925 | ) | | | — | | | | (888 | ) | | (14,351 | ) | | (5,710 | ) | | (8,641 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total net financial assets/(liabilities) | | | 341 | | | | (9,345 | ) | | | — | | | | (580 | ) | | | (9,584 | ) | | | (1,440 | ) | | | (8,144 | ) | | | 341 | | | (9,345 | ) | | | — | | | | (580 | ) | | (9,584 | ) | | (1,440 | ) | | (8,144 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2015 | | | | | | | | | | | | | | | | Other investments and loans | | | — | | | 29 | | | 80 | | | | — | | | 109 | | | | — | | | 109 | | | Trade and other receivables | | | — | | | 2,184 | | | | — | | | | 297 | | | 2,481 | | | 2,435 | | | 46 | | | Cash and cash equivalents | | | — | | | 472 | | | | — | | | | — | | | 472 | | | 472 | | | | — | | | Derivatives in fair value hedge | | | 19 | | | | — | | | | — | | | | — | | | 19 | | | | — | | | 19 | | | Derivatives in cash flow hedge | | | 186 | | | | — | | | | — | | | | — | | | 186 | | | 21 | | | 165 | | | Derivatives in net investment hedge | | | 11 | | | | — | | | | — | | | | — | | | 11 | | | 8 | | | 3 | | | Other instruments at fair value | | | 122 | | | | — | | | | — | | | | — | | | 122 | | | 17 | | | 105 | | | | | | | | | | | | | | | | | | | | | | | | | | Total other financial assets | | | 338 | | | | — | | | | — | | | | — | | | 338 | | | 46 | | | 292 | | | | | | | | | | | | | | | | | | | | | | | | | | Total financial assets | | | 338 | | | 2,685 | | | 80 | | | | 297 | | | 3,400 | | | 2,953 | | | 447 | | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings(i) | | | — | | | (9,838 | ) | | | — | | | | — | | | (9,838 | ) | | (1,921 | ) | | (7,917 | ) | | Trade and other payables | | | — | | | (2,291 | ) | | | — | | | | (721 | ) | | (3,012 | ) | | (2,943 | ) | | (69 | ) | | Derivatives in cash flow hedge | | | (51 | ) | | | — | | | | — | | | | — | | | (51 | ) | | (31 | ) | | (20 | ) | | Derivatives in net investment hedge | | | (52 | ) | | | — | | | | — | | | | — | | | (52 | ) | | (52 | ) | | | — | | | Other instruments at fair value | | | (234 | ) | | | — | | | | — | | | | — | | | (234 | ) | | (35 | ) | | (199 | ) | | Finance leases | | | — | | | (262 | ) | | | — | | | | — | | | (262 | ) | | (38 | ) | | (224 | ) | | | | | | | | | | | | | | | | | | | | | | | | | Total other financial liabilities | | | (337 | ) | | (262 | ) | | | — | | | | — | | | (599 | ) | | (156 | ) | | (443 | ) | | | | | | | | | | | | | | | | | | | | | | | | | Total financial liabilities | | | (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 | ) | | | | | | | | | | | | | | | | | | | | | | | | |
(i) | Borrowings are defined as gross borrowings excluding finance lease liabilities and the fair value of derivative instruments. |
254
Financial statements (continued) At 30 June 20162017 and 30 June 2015,2016, the carrying values of cash and cash equivalents, other financial assets and liabilities approximate to fair values. At 30 June 20162017 the fair value of borrowings, based on unadjusted quoted market data, was £9,641 million (2016 – £10,709 million (2015 – £10,115 million). 252
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 – 3.0 times, this range for Diageo being currently broadly consistent with an A band credit rating. Diageo would consider operating outside of this range in order to effect strategic initiatives within its stated goals, which could have an impact on its rating. If Diageo’s leverage was to be negatively impacted by the financing of an acquisition, it would seek over time to return to the range of 2.5 – 3.0 times. The group regularly assesses its debt and equity capital levels against its stated policy for capital structure. For this calculation net borrowings are adjusted by the net post employmentpension 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 BORROWINGSNet 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. 253255
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. | | | | | | | | | | | 2016 £ million | | | 2015 £ million | | Bank overdrafts | | | 280 | | | | 90 | | Commercial paper | | | — | | | | 354 | | Bank and other loans | | | 436 | | | | 444 | | Credit support obligations | | | 139 | | | | 76 | | US$ 750 million 5.3% bonds due 2015 | | | — | | | | 478 | | US$ 750 million 0.625% bonds due 2016 | | | — | | | | 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 | | | 1 | | | | 2 | | | | | | | | | | | Borrowings due within one year | | | 2,058 | | | | 1,921 | | | | | | | | | | | US$ 600 million 5.5% bonds due 2016 | | | — | | | | 382 | | US$ 1,000 million 1.5% bonds due 2017 | | | — | | | | 635 | | US$ 1,250 million 5.75% bonds due 2017 | | | 939 | | | | 795 | | US$ 650 million 1.125% bonds due 2018 | | | 487 | | | | 412 | | €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 | | | 488 | | | | 399 | | US$ 1,000 million 2.875% bonds due 2022 | | | 748 | | | | 633 | | US$ 300 million 8% bonds due 2022 | | | 224 | | | | 189 | | US$ 1,350 million 2.625% bonds due 2023 | | | 1,011 | | | | 855 | | €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 | | | 301 | | | | 255 | | US$ 600 million 5.875% bonds due 2036 | | | 446 | | | | 378 | | US$ 500 million 4.25% bonds due 2042 | | | 371 | | | | 315 | | US$ 500 million 3.875% bonds due 2043 | | | 369 | | | | 312 | | US$ 200 million 4.85% medium term notes due 2018 | | | 150 | | | | 127 | | Bank and other loans | | | 184 | | | | 213 | | Fair value adjustment to borrowings | | | 110 | | | | 109 | | | | | | | | | | | Borrowings due after one year | | | 8,071 | | | | 7,917 | | | | | | | | | | | Total borrowings before derivative financial instruments | | | 10,129 | | | | 9,838 | | Fair value of foreign currency derivatives | | | (612 | ) | | | (82 | ) | Fair value of interest rate hedging instruments | | | (35 | ) | | | (19 | ) | Finance lease liabilities | | | 242 | | | | 262 | | | | | | | | | | | Gross borrowings | | | 9,724 | | | | 9,999 | | Less: Cash and cash equivalents | | | (1,089 | ) | | | (472 | ) | | | | | | | | | | Net borrowings | | | 8,635 | | | | 9,527 | | | | | | | | | | |
| | | | | | | | | | | 2017 £ million | | | 2016 £ million | | Bank overdrafts | | | 274 | | | | 280 | | Bank and other loans | | | 495 | | | | 436 | | Credit support obligations | | | 74 | | | | 139 | | US$ 600 million 5.5% bonds due 2016 | | | — | | | | 451 | | US$ 1,000 million 1.5% bonds due 2017 | | | — | | | | 751 | | US$ 1,250 million 5.75% bonds due 2017 | | | 962 | | | | — | | US$ 650 million 1.125% bonds due 2018 | | | 499 | | | | — | | US$ 200 million 4.85% medium term notes due 2018 | | | 154 | | | | — | | Fair value adjustment to borrowings | | | 1 | | | | 1 | | | | | | | | | | | Borrowings due within one year | | | 2,459 | | | | 2,058 | | | | | | | | | | | US$ 1,250 million 5.75% bonds due 2017 | | | — | | | | 939 | | US$ 650 million 1.125% bonds due 2018 | | | — | | | | 487 | | € 500 million 1.125% bonds due 2019 | | | 441 | | | | 421 | | € 850 million 1.125% bonds due 2019 | | | 745 | | | | 707 | | US$ 696 million 4.828% bonds due 2020 | | | 508 | | | | 488 | | US$ 1,000 million 2.875% bonds due 2022 | | | 766 | | | | 748 | | US$ 300 million 8% bonds due 2022 | | | 229 | | | | 224 | | US$ 1,350 million 2.625% bonds due 2023 | | | 1,035 | | | | 1,011 | | € 500 million 1.75% bonds due 2024 | | | 436 | | | | 413 | | € 850 million 2.375% bonds due 2026 | | | 740 | | | | 702 | | US$ 400 million 7.45% bonds due 2035 | | | 308 | | | | 301 | | US$ 600 million 5.875% bonds due 2036 | | | 456 | | | | 446 | | US$ 500 million 4.25% bonds due 2042 | | | 380 | | | | 371 | | US$ 500 million 3.875% bonds due 2043 | | | 377 | | | | 369 | | US$ 200 million 4.85% medium term notes due 2018 | | | — | | | | 150 | | Bank and other loans | | | 119 | | | | 184 | | Fair value adjustment to borrowings | | | 43 | | | | 110 | | | | | | | | | | | Borrowings due after one year | | | 6,583 | | | | 8,071 | | | | | | | | | | | Total borrowings before derivative financial instruments | | | 9,042 | | | | 10,129 | | Fair value of foreign currency derivatives | | | (144 | ) | | | (612 | ) | Fair value of interest rate hedging instruments | | | 2 | | | | (35 | ) | Finance lease liabilities | | | 183 | | | | 242 | | | | | | | | | | | Gross borrowings | | | 9,083 | | | | 9,724 | | Less: Cash and cash equivalents | | | (1,191 | ) | | | (1,089 | ) | | | | | | | | | | Net borrowings | | | 7,892 | | | | 8,635 | | | | | | | | | | |
(1) | The interest rates shown are those contracted on the underlying borrowings before taking into account any interest rate hedges (see note 15). |
(2) | Bonds are stated net of unamortised finance costs of £61 million (2016 – £72 million (2015million; 2015 – £82 million; 2014 – £94 million). |
(3) | Bonds are reported above at amortised cost with a fair value adjustment shown separately. |
(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. |
254256
Financial statements (continued) Gross borrowings before derivative financial instruments will mature as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 £ million | | | 2015 £ million | | | 2014 £ million | | | 2017 £ million | | | 2016 £ million | | | 2015 £ million | | Within one year | | | 2,058 | | | | 1,921 | | | | 1,576 | | | | 2,459 | | | | 2,058 | | | | 1,921 | | Between one and three years | | | 2,896 | | | | 2,607 | | | | 1,894 | | | | 1,255 | | | | 2,896 | | | | 2,607 | | Between three and five years | | | 537 | | | | 970 | | | | 1,972 | | | | 1,324 | | | | 537 | | | | 970 | | Beyond five years | | | 4,638 | | | | 4,340 | | | | 3,772 | | | | 4,004 | | | | 4,638 | | | | 4,340 | | | | | | | | | | | | | | | | | | | | | | | | 10,129 | | | | 9,838 | | | | 9,214 | | | | 9,042 | | | | 10,129 | | | | 9,838 | | | | | | | | | | | | | | | | | | | | |
During the year the following bonds were issued and repaid: | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 £ million | | 2015 £ million | | 2014 £ million | | | 2017 £ million | | 2016 £ million | | 2015 £ million | | Issued | | | | | | | | | | | | | € denominated | | | — | | | 791 | | | 1,378 | | | | — | | | | — | | | 791 | | US$ denominated | | | — | | | | — | | | | — | | | Repaid | | | | | | | | | | | | | € denominated | | | — | | | (792 | ) | | (983 | ) | | | — | | | | — | | | (792 | ) | US$ denominated | | | (1,003 | ) | | (330 | ) | | (488 | ) | | | (1,234 | ) | | (1,003 | ) | | (330 | ) | £ denominated(i) | | | — | | | (370 | ) | | | — | | | | — | | | | — | | | (370 | ) | | | | | | | | | | | | | | | | | | | | | | | (1,003 | ) | | (701 | ) | | (93 | ) | | | (1,234 | ) | | (1,003 | ) | | (701 | ) | | | | | | | | | | | | | | | | | | | |
(i) | In the year ended 30 June 2015 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. |
(a) Reconciliation of movement in net borrowings | | | | | | | | | | | | | | | | | | | 2016 £ million | | 2015 £ million | | | 2017 £ million | | 2016 £ million | | At beginning of the year | | | 9,527 | | | 8,850 | | | | 8,635 | | | 9,527 | | Net (increase)/decrease in cash and cash equivalents before exchange | | | (343 | ) | | 77 | | | Net (increase)/decrease in bonds and other borrowings | | | (1,236 | ) | | (315 | ) | | Net increase in cash and cash equivalents before exchange | | | | (122 | ) | | (343 | ) | Net decrease in bonds and other borrowings | | | | (820 | ) | | (1,236 | ) | | | | | | | | | | | | | | Change in net borrowings from cash flows | | | (1,579 | ) | | (238 | ) | | | (942 | ) | | (1,579 | ) | Exchange differences on net borrowings | | | 725 | | | 7 | | | | 205 | | | 725 | | Borrowings on acquisition of businesses | | | — | | | 869 | | | Borrowings on disposal of businesses | | | (14 | ) | | | — | | | | — | | | (14 | ) | Other non-cash items | | | (24 | ) | | 39 | | | | (6 | ) | | (24 | ) | | | | | | | | | | | | | | Net borrowings at end of the year | | | 8,635 | | | 9,527 | | | | 7,892 | | | 8,635 | | | | | | | | | | | | | | |
255257
Financial statements (continued) (b) Analysis of net borrowings by currency | | | 2016 | | 2015 | | | 2017 | | 2016 | | | | 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 | | | 503 | | | | (3,247 | ) | | 35 | | | | (2,759 | ) | | | 576 | | | | (2,492 | ) | | 503 | | | | (3,247 | ) | Euro | | | 61 | | | | (2,034 | ) | | 44 | | | | (1,410 | ) | | | 69 | | | | (1,965 | ) | | 61 | | | | (2,034 | ) | Sterling(ii) | | | 66 | | | | (3,980 | ) | | 28 | | | | (5,200 | ) | | | 51 | | | | (4,214 | ) | | 66 | | | | (3,980 | ) | Indian rupee | | | 37 | | | | (418 | ) | | 13 | | | | (486 | ) | | | 16 | | | | (405 | ) | | 37 | | | | (418 | ) | Kenyan shilling | | | | 15 | | | | (115 | ) | | 5 | | | | (99 | ) | South African rand | | | | 6 | | | | (52 | ) | | 11 | | | | (34 | ) | Nigerian naira | | | 13 | | | | (84 | ) | | 16 | | | | (76 | ) | | | 19 | | | | (41 | ) | | 13 | | | | (84 | ) | Chinese Yuan | | | | 110 | | | | (30 | ) | | 51 | | | | (7 | ) | Turkish lira(ii) | | | 169 | | | | (4 | ) | | 4 | | | | (67 | ) | | | 133 | | | | (27 | ) | | 169 | | | | (4 | ) | Korean won | | | 35 | | | | — | | | 80 | | | | — | | | Brazilian real | | | 30 | | | | (2 | ) | | 16 | | | | (2 | ) | | Chinese Yuan | | | 51 | | | | (7 | ) | | 28 | | | | 7 | | | Other | | | 124 | | | | 52 | | | 208 | | | | (6 | ) | | | 196 | | | | 258 | | | 173 | | | | 183 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 1,089 | | | | (9,724 | ) | | 472 | | | | (9,999 | ) | | | 1,191 | | | | (9,083 | ) | | 1,089 | | | | (9,724 | ) | | | | | | | | | | | | | | | | | | | | | | | | | |
(i) | The analysis of the group’s gross borrowings includes foreign currency forwards and swaps and finance leases. |
(ii) | As at 30 June 2016 includes £322017 balances include £29 million (Sterling) and £162£128 million (Turkish lira) cash and cash equivalents in cash-pooling arrangements. See note 1(f)(2016 – £32 million (Sterling) and £162 million (Turkish lira)). |
17. EQUITYEquity Accounting policies Own sharesrepresent shares and share options of Diageo plc that are held in treasury or by employee share trusts for the purpose of fulfilling obligations in respect of various employee share plans or were acquired as part of a share buyback programme. Own shares are treated as a deduction from equity until the shares are cancelled, reissued or disposed of and when vest are transferred from own shares to retained earnings at their weighted average cost. Share based paymentsinclude 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 2016, 30 June 2015 and 30 June 2014 | | | 2,754 | | | | 797 | |
| | | | | | | | | | | Number of shares million | | | Nominal value £ million | | At 30 June 2017, 30 June 2016 and 30 June 2015 | | | 2,754 | | | | 797 | |
258
Financial statements (continued) (b) Hedging and exchange reserve | | | | | | | | | | | | | | | 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)
| | | | | | | | | | | | | | | Hedging reserve £ million | | | Exchange reserve £ million | | | Total £ million | | 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 | ) | Other comprehensive income | | | 69 | | | | (1 | ) | | | 68 | | | | | | | | | | | | | | | At 30 June 2017 | | | (21 | ) | | | (432 | ) | | | (453 | ) | | | | | | | | | | | | | |
(c) Own shares Movements in own shares | | | | | | | | | | | Number of shares million | | | Purchase consideration £ million | | At 30 June 2013 | | | 251 | | | | 2,232 | | Share trust arrangements | | | (3 | ) | | | (42 | ) | Shares call options exercised(i) | | | 7 | | | | 68 | | Shares purchased | | | 7 | | | | 138 | | Shares sold to employees | | | — | | | | (1 | ) | Shares used to satisfy options | | | (9 | ) | | | (115 | ) | | | | | | | | | | At 30 June 2014 | | | 253 | | | | 2,280 | | Share trust arrangements | | | (2 | ) | | | (18 | ) | Shares purchased | | | 4 | | | | 70 | | Shares used to satisfy options | | | (7 | ) | | | (104 | ) | | | | | | | | | | At 30 June 2015 | | | 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. |
| | | | | | | | | | | Number of shares million | | | Purchase consideration £ million | | At 30 June 2014 | | | 253 | | | | 2,280 | | Share trust arrangements | | | (2 | ) | | | (18 | ) | Shares purchased | | | 4 | | | | 70 | | Shares used to satisfy options | | | (7 | ) | | | (104 | ) | | | | | | | | | | At 30 June 2015 | | | 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 | | Share trust arrangements | | | (3 | ) | | | (32 | ) | Shares purchased | | | 5 | | | | 101 | | Shares used to satisfy options | | | (5 | ) | | | (82 | ) | | | | | | | | | | At 30 June 2017 | | | 241 | | | | 2,176 | | | | | | | | | | |
Share trust arrangements At 30 June 20162017 the employee share trusts owned 75 million of ordinary shares in Diageo plc at a cost of £113£81 million and market value of £107 million (2016 – 7 million shares at a cost of £113 million, market value £155 million (2015million; 2015 – 8 million shares at a cost of £119 million, market value £149 million; 2014 – 10 million shares at a cost of £137 million, market value £181 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 2321 September 20152016 to purchase a maximum of 251,514,000251,781,000 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 2220 December 2016,2017, if earlier. 257
Financial statements (continued)
During the year ended 30 June 2016,2017, the company purchased 25 million ordinary shares, (including shares acquired through call option exercises), nominal value of £1 million (2015(2016 – 2 million ordinary shares, nominal value of £1 million; 2015 – 4 million ordinary shares, nominal value of £1 million; 2014 – 14 million ordinary shares, nominal value of £4 million), representing approximately 0.1% (20150.2% (2016 – 0.1%; 20142015 – 0.5%0.1%) of the issued ordinary share capital (excluding treasury shares). 259
Financial statements (continued) 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£101 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.2017. The monthly breakdown of shares purchased and the average price paid per share (excluding expenses) for the year ended 30 June 20162017 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | Calendar month | | Number of shares purchased | | | Average price paid pence | | | Authorised purchases unutilised at month end | | | 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 | | | September 2016 | | | | 3,807,881 | | | | 2213 | | | | 247,973,119 | | March 2017 | | | | 739,319 | | | | 2278 | | | | 247,233,800 | | | | | | | | | | | | | | | | | | | | | Total | | | 3,015,361 | | | | 1750 | | | | 248,498,639 | | | | 4,547,200 | | | | 2223 | | | | 247,233,800 | | | | | | | | | | | | | | | | | | | | |
(d) Dividends | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | 1,443 | | | | 1,341 | | | | 1,228 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 2017 £ million | | | 2016 £ million | | | 2015 £ million | | Amounts recognised as distributions to equity shareholders in the year | | | | | | | | | | | | | Final dividend for the year ended 30 June 2016 | | | | | | | | | | | | | 36.6 pence per share (2015 – 34.9 pence; 2014 – 32.0 pence) | | | 920 | | | | 876 | | | | 801 | | Interim dividend for the year ended 30 June 2017 | | | | | | | | | | | | | 23.7 pence per share (2016 – 22.6 pence; 2015 – 21.5 pence) | | | 595 | | | | 567 | | | | 540 | | | | | | | | | | | | | | | | | | 1,515 | | | | 1,443 | | | | 1,341 | | | | | | | | | | | | | | |
The proposed final dividend of £918£967 million (36.6(38.5 pence per share) for the year ended 30 June 20162017 was approved by the Board of Directors on 2726 July 2016.2017. 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. (e)Non-controlling interests Diageo consolidates USL, a company incorporated in India, with a 43.91%non-controlling interest and has a 50% controlling interest (2015 – 50%) in Ketel One Worldwide B.V. (Ketel One), a company incorporated in the Netherlands. All other consolidated subsidiaries are fully owned or thenon-controlling interests are not material. 258260
Financial statements (continued) Summarised financial information for USL, Ketel One and others, after fair value adjustments on acquisition, and the amounts attributable tonon-controlling interests are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | 2015 | | | 2017 | | 2016 | | 2015 | | | | USL £ million | | Ketel One and others £ million | | Total £ million | | USL £ million | | Ketel One and others £ million | | Total £ million | | | USL £ million | | Ketel One and others £ million | | Total £ million | | Total £ million | | Total £ million | | Income statement | | | | | | | | | | | | | | | | | | | | | | | Sales | | | 2,460 | | | | 1,563 | | | | 4,023 | | | 2,363 | | | 1,627 | | | 3,990 | | | | 3,068 | | | | 1,776 | | | | 4,844 | | | 4,023 | | | 3,990 | | Net sales | | | 873 | | | | 1,265 | | | | 2,138 | | | 926 | | | 1,324 | | | 2,250 | | | | 994 | | | | 1,418 | | | | 2,412 | | | 2,138 | | | 2,250 | | Profit/(loss) for the year | | | 76 | | | | 175 | | | | 251 | | | (10 | ) | | 200 | | | 190 | | | Profit for the year | | | | 29 | | | | 200 | | | | 229 | | | 251 | | | 190 | | Other comprehensive income(i) | | | 157 | | | | 242 | | | | 399 | | | 50 | | | 66 | | | 116 | | | | 121 | | | | (5 | ) | | | 116 | | | 399 | | | 116 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income | | | 233 | | | | 417 | | | | 650 | | | 40 | | | 266 | | | 306 | | | | 150 | | | | 195 | | | | 345 | | | 650 | | | 306 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Attributable to non-controlling interests | | | 102 | | | | 188 | | | | 290 | | | 18 | | | 131 | | | 149 | | | | 66 | | | | 82 | | | | 148 | | | 290 | | | 149 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance sheet | | | | | | | | | | | | | | | | | | | | | | | Non-current assets(ii) | | | 2,289 | | | | 2,536 | | | | 4,825 | | | 2,132 | | | 2,264 | | | 4,396 | | | | 2,435 | | | | 2,540 | | | | 4,975 | | | 4,825 | | | 4,396 | | Current assets | | | 601 | | | | 587 | | | | 1,188 | | | 527 | | | 518 | | | 1,045 | | | | 610 | | | | 612 | | | | 1,222 | | | 1,188 | | | 1,045 | | Non-current liabilities | | | (518 | ) | | | (821 | ) | | | (1,339 | ) | | (579 | ) | | (723 | ) | | (1,302 | ) | | | (517 | ) | | | (810 | ) | | | (1,327 | ) | | (1,339 | ) | | (1,302 | ) | Current liabilities | | | (639 | ) | | | (554 | ) | | | (1,193 | ) | | (580 | ) | | (462 | ) | | (1,042 | ) | | | (644 | ) | | | (555 | ) | | | (1,199 | ) | | (1,193 | ) | | (1,042 | ) | Net assets | | | 1,733 | | | | 1,748 | | | | 3,481 | | | 1,500 | | | 1,597 | | | 3,097 | | | | 1,884 | | | | 1,787 | | | | 3,671 | | | 3,481 | | | 3,097 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Attributable to non-controlling interests | | | 761 | | | | 889 | | | | 1,650 | | | 659 | | | 826 | | | 1,485 | | | | 827 | | | | 888 | | | | 1,715 | | | 1,650 | | | 1,485 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flow | | | | | | | | | | | | | | | | | | | | | | | Net cash inflow/(outflow) from operating activities | | | 17 | | | | 228 | | | | 245 | | | (32 | ) | | 314 | | | 282 | | | Net cash inflow/(outflow) from investing activities | | | 70 | | | | (53 | ) | | | 17 | | | 388 | | | (88 | ) | | 300 | | | Net cash outflow from financing activities | | | (67 | ) | | | (145 | ) | | | (212 | ) | | (373 | ) | | (196 | ) | | (569 | ) | | Net cash inflow from operating activities | | | | 41 | | | | 314 | | | | 355 | | | 245 | | | 282 | | Net cash (outflow)/inflow from investing activities | | | | (10 | ) | | | (76 | ) | | | (86 | ) | | 17 | | | 300 | | Net cash (outflow) from financing activities | | | | (49 | ) | | | (123 | ) | | | (172 | ) | | (212 | ) | | (569 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | �� | | | | | Net increase in cash and cash equivalents | | | 20 | | | | 30 | | | | 50 | | | (17 | ) | | 30 | | | 13 | | | Net (decrease)/increase in cash and cash equivalents | | | | (18 | ) | | | 115 | | | | 97 | | | 50 | | | 13 | | Exchange differences | | | 4 | | | | (5 | ) | | | (1 | ) | | 2 | | | 1 | | | 3 | | | | 2 | | | | (5 | ) | | | (3 | ) | | (1 | ) | | 3 | | Dividends paid to non-controlling interests | | | — | | | (101 | ) | | (101 | ) | | | — | | | (72 | ) | | (72 | ) | | | — | | | | (83 | ) | | | (83 | ) | | (101 | ) | | (72 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(i) | Other comprehensive income is principally in respect of exchange on translating the subsidiaries to sterling. |
(ii) | 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 20162017 was £1,385 million (2016 – £1,354 million (2015million; 2015 – £1,147 million). |
(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 20162017 is as follows: | | | | | | | | | | | | | | | 2016 £ million | | | 2015 £ million | | | 2014 £ million | | Executive share award plans | | | 24 | | | | 27 | | | | 30 | | Executive share option plans | | | 3 | | | | 4 | | | | 4 | | Savings plans | | | 2 | | | | 4 | | | | 3 | | | | | | | | | | | | | | | | | | 29 | | | | 35 | | | | 37 | | | | | | | | | | | | | | |
259
Financial statements (continued)
| | | | | | | | | | | | | | | 2017 £ million | | | 2016 £ million | | | 2015 £ million | | Executive share award plans | | | 28 | | | | 24 | | | | 27 | | Executive share option plans | | | 3 | | | | 3 | | | | 4 | | Savings plans | | | 3 | | | | 2 | | | | 4 | | | | | | | | | | | | | | | | | | 34 | | | | 29 | | | | 35 | | | | | | | | | | | | | | |
Executive share awards are made under the Diageo 2014 Long Term Incentive planPlan (DLTIP) from September 2014 onwards. Prior to that, awards were made under the Diageo plc 2009 Executive Long Term Incentive Plan (DELTIP), 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). There was a single grant in September 2016 under the Diageo Performance Incentive plan. Under all of these plans, conditional awards can be delivered in the form of restricted shares or share options at the market value at the time of grant. 261
Financial statements (continued) 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 furthertwo-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(previously PSP) are subject to the achievement of three equally weighted performance tests over the three-year performance period for the 2013 and 2014 grants these were;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 shares under the Diageo Performance Incentive plan (DPI) in September 2016 are subject to the achievement of two equally weighted performance tests over the three-year performance period. These were: 1) compound annual growth in organic net sales over three years; and 2) productivity savings over three years, with an assessment of line manager performance as an underpin. 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. 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(previously 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 2016,2017, the calculation of the fair value of each share award used the Monte Carlo pricing model and the following weighted average assumptions: | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | | 2015 | | | 2014 | | | 2017 | | | 2016 | | | 2015 | | Risk free interest rate | | | 1.0% | | | | 1.4% | | | | 1.0% | | | | 0.1% | | | | 1.0% | | | | 1.4% | | Expected life of the awards | | | 37 months | | | | 37 months | | | | 36 months | | | | 36 months | | | | 37 months | | | | 37 months | | Dividend yield | | | 3.2% | | | | 3.1% | | | | 2.7% | | | | 3.0% | | | | 3.2% | | | | 3.1% | | Weighted average share price | | | 1737 p | | | | 1832 p | | | | 1970 p | | | | 2130 p | | | | 1737 p | | | | 1832 p | | Weighted average fair value of awards granted in the year | | | 1058 p | | | | 753 p | | | | 1147 p | | | | 1427 p | | | | 1058 p | | | | 753 p | | Number of awards granted in the year | | | 3.1 million | | | | 2.5 million | | | | 2.5 million | | | | 3.6 million | | | | 3.1 million | | | | 2.5 million | | Fair value of all awards granted in the year | | | £33 million | | | | £19 million | | | | £29 million | | | | £51 million | | | | £33 million | | | | £19 million | |
Transactions on schemes Transactions on the executive share award plans for the three years ended 30 June 20162017 were as follows: | | | | | | | | | | | | | | | | | | | | | 2016 Number of awards million | | 2015 Number of awards million | | 2014 Number of awards million | | | 2017 Number of awards million | | 2016 Number of awards million | | 2015 Number of awards million | | Balance outstanding at 1 July | | | 7.6 | | | 9.4 | | | 11.3 | | | | 7.2 | | | 7.6 | | | 9.4 | | Granted | | | 3.1 | | | 2.5 | | | 2.5 | | | | 3.6 | | | 3.1 | | | 2.5 | | Exercised/awarded | | | (1.6 | ) | | (2.6 | ) | | (3.4 | ) | | | (1.3 | ) | | (1.6 | ) | | (2.6 | ) | Forfeited/expired | | | (1.9 | ) | | (1.7 | ) | | (1.0 | ) | | | (1.6 | ) | | (1.9 | ) | | (1.7 | ) | | | | | | | | | | | | | | | | | | | | Balance outstanding at 30 June | | | 7.2 | | | 7.6 | | | 9.4 | | | | 7.9 | | | 7.2 | | | 7.6 | | | | | | | | | | | | | | | | | | | | |
At 30 June 2016, 6.72017, 5.6 million executive share options were exercisable at a weighted average exercise price of 13911725 pence. 260262
Financial statements (continued) OTHER FINANCIAL INFORMATIONOther financial information
Introduction This section includes additional financial information that are either required by the relevant accounting standards or management considers these to be material information for shareholders. 18. CONTINGENT LIABILITIES AND LEGAL PROCEEDINGSContingent 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 AEstimate and 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 2016,2017, the group has no material unprovided guarantees or indemnities outstanding in respect of liabilities of third parties. The following matters relate to guarantees previously discharged. Diageo Holdings Netherlands B.V. (DHN) issued a conditional backstop guarantee to Standard Chartered Bank (Standard Chartered) pursuant to a guarantee commitment agreement (the Guarantee Agreement). The guarantee was in respect of the liabilities of Watson Limited (Watson), a company affiliated with Dr Vijay Mallya (Dr Mallya), under a $135 million (£92 million) facility from Standard Chartered. The Guarantee Agreement was entered into as part of the arrangements put in place and announced at closing of the United Spirits Limited (USL) transaction on 4 July 2013. DHN’s provision of the Guarantee Agreement enabled the refinancing of certain existing borrowings of Watson from a third party bank and facilitated the release by that bank of rights over certain USL shares that were to be acquired by Diageo as part of the USL transaction. The facility matured and entered into default in May 2015. 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 entitled to the benefit of the underlying security package for the loan, which includes shares in United Breweries Limited (UBL), Watson’s interest in Orange India Holdings S.a.r.l. (Orange), the joint venture that owns the Force India Formula One (F1) team, 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. This order was passed following the filing of a memorandum 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 security 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 memorandum 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 upon payment under the guarantee of all amounts owed to Standard Chartered. 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 a counter-indemnity from Watson in respect of payments in connection with the guarantee.
The agreement with Dr Mallya referenced in paragraph (d) below does not impact the security package, which includes shares in UBL and Watson’s interest in Orange, the joint venture that owns the F1 team. Watson remains liable for all amounts paid pursuant to the guarantee. DHN is entitled to the benefit of the security package underlying the facility and the security providers have undertaken to take all necessary actions in that regard.
(b) Thalidomide litigation In June 2014, claimsclaim 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 byIn June 2017, following discussions between lawyers acting for the claimants. Since then the proceedings in respect28 claimants and Diageo, a settlement was reached where six claimants were admitted as beneficiaries of the 28 individuals that have now issued claims in the United Kingdom have been stayed until 30 September 2016 while discussions are ongoing between DiageoThalidomide Trust and the claimants’ lawyers.remaining 22 claimants agreed to discontinue their claims. 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 In the year endingended 30 June 2017.2017 a charge of £55 million after tax was made to discontinued operations in the income statement in respect of thalidomide. (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 UBHLUnited Breweries (Holdings) Limited (UBHL) and various other sellers (the SPA), of 21,767,749 shares (14.98%) in USLUnited Spirits Limited (USL) for a total consideration of INR 31.3 billion (£349 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).
262263
Financial statements (continued) Prior to the acquisition from UBHL on 4 July 2013, the High Court of Karnataka (High Court) had granted leave to UBHL under sections 536 and 537 of the Indian Companies Act 1956 (the Leave Order) to enable the sale by UBHL to Diageo to take place (the UBHL Share Sale) notwithstanding the continued existence of fivewinding-up petitions that were pending against UBHL on 9 November 2012, being the date of the SPA. Additionalwinding-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 giving notice in respect of the SLPs and ordering that the status quo be maintained with regard to the UBHL Share Sale pending a hearing on the matter in the Supreme Court. Following a number of adjournments, the next firm hearing date for the SLPs (in respect of which leave has since been granted and which have been converted to civil appeals) is yet to be fixed. In separate proceedings, various the High Court passed awinding-up petitions order against UBHL have been admitted byon 7 February 2017. On 4 March 2017, UBHL appealed against this order before a division bench of the High Court. These petitions and certain related proceedings have been progressing through the High Court since closing of the UBHL Share Sale. Following earlier adjournments thereThis appeal is currently no fixed date for the next hearing of the various winding-up proceedings.pending. Diageo continues to believe that the acquisition price of INR 1,440 per share paid to UBHL for the USL shares is fair and reasonable as regards UBHL, UBHL’s shareholders and UBHL’s secured and unsecured creditors. However, adverse results for Diageo in the proceedings referred to above could, absent leave or relief in other proceedings, ultimately result in Diageo losing title to the 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 thewinding-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. (ii) Separately, Diageo’s contractual rights in relation(d) Continuing matters relating to 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 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 filed a petition against such lenders before the High Court for release of the 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, while those shares are 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.
(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.
263
Financial statements (continued)
(d) USL internal inquiries, 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 Board of Directors had directed an inquiry into certain matters referred to in USL’s financial statements and the qualified auditor’s report for the year ended 31 March 2014 (the Initial Inquiry). 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. Additional updates have been provided by USL in subsequent quarterly announcements and most recently in the announcement of their audited financial results on 26 May 2016, in respect of the year ended 31 March 2016.
As previously stated by USL, 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 year ended 31 March 2014. The Initial 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 (£75 million) with respect to (a) above, and in an aggregate amount of approximately INR 2,368 million (£26 million) with respect to (c) above. 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 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 determination 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 Initial Inquiry report to USL’s auditors and other regulators. The USL board also resolved that USL should take the necessary steps to assess USL’s legal position and then take such action as is necessary to recover its funds from the relevant parties to the extent possible. As previously announced by USL on 2 November 2015, USL has been taking steps for recovery of 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 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 chairman of the board. Dr Mallya indicated at the time that he would not tender his resignation.
Diageo is the majority shareholder in USL with a 54.78% holding in USL. As previously announced by Diageo, it had certain contractual obligations to support Dr Mallya continuing as Non-Executive Director and Chairman 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 provided its Initial Inquiry report and all related materials to Diageo. Diageo announced on 27 April 2015 that it noted the recommendation of the USL board and was considering its position under its agreements with Dr Mallya and UBHL in light of the inquiry report and materials provided to it.internal inquiries
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 globalnon-compete (excluding the United Kingdom),non-interference,non-solicitation and standstill arrangement with Dr Mallya. As part of those arrangements, USL, Diageo and Dr Mallya agreed a mutual release in relation to matters arising out of an inquiry into certain matters referred to in USL’s financial statements and the qualified auditor’s report for the year ended 31 March 2014 (the Initial Inquiry andInquiry) which had revealed, among other things, certain diversions of USL funds. Dr Mallya also agreed not to pursue any claims against Diageo, USL and their affiliates (including under the prior agreement with Diageo). In evaluating entering into such arrangements, Diageo considered the impact of the arrangements on USL and all of USL’s shareholders, and came to the view that the arrangements were in the best interests of USL and its shareholders. 264
Financial statements (continued) 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 globalnon-compete,non-interference,non-solicitation and standstill commitments referred to above, his resignation from USL and the termination of hisUSL-related appointment and governance rights, the relinquishing of rights and benefits attached to his position at USL, and his agreement not to pursue claims against Diageo and USL. The 25 February Agreement also provided for the release of Dr Mallya’s personal obligations to indemnify DHN and(i) Diageo FinanceHoldings Netherlands B.V. in respect of any liabilitiesits earlier liability ($141 million (£96 million)) under thea backstop guarantee arrangements described in paragraph (a) aboveof certain borrowings of Watson Limited (Watson) (a company affiliated with Dr Mallya), and his personal obligation to indemnify(ii) Diageo Finance plc 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 While the first instalment of banks led by SBI obtained an order from the DRT in Bangalore attaching the sum$7 million (£5 million) would have become due on 25 February 2017, owing to various reasons, including breaches of $75 million (£53 million) payable to Dr Mallya underseveral provisions of the 25 February Agreement. The order provides thatAgreement committed by Dr Mallya, Diageo believes that it was not liable to pay such amount, and is notvery unlikely to draw on that sum, Diageo is notbecome liable to disburse such sumpay future instalments, to Dr Mallya. Further, Diageo and other group companies have demanded from 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 sumrepayment of $40 million (£28 million) which was paid by Diageo on 25 February 2016, prior toand also sought compensation from him for various losses incurred by the order dated 7 March 2016. Diageo further explained that no sum is presently due and payable by Diageo to Dr Mallya under the termsrelevant members of the 25 February Agreement, and there can be no certainty that any amount will become due and payable under the termsDiageo group on account 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 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,breaches committed 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.him.
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 & CEOand Chief Executive Officer 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. 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 and 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 certainnon-Indian entities in which 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 Lombard Wall Corporate Services Inc) as well as certain Indian entities (including, in mostthe majority of cases, Kingfisher Airlines Limited). The USL board has, in light of these findings, and based on expert advice, directed that copies of the Additional Inquiry report be provided to the relevant authorities and its auditors.auditors, in the same way as the Initial Inquiry report had been. 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. In connection with the matters identified by the Additional Inquiry, USL has, pursuant to a detailed review of each case of such fund diversion and after obtaining expert legal advice, where appropriate, filed civil suits for recovery of funds from certain parties, including Dr Mallya, before the relevant courts. 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 Additional 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 theThe 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 wayperiods. Further, at this stage, it is not possible for the management of provisions madeUSL to estimate the financial impact on USL, if any, arising out of potentialnon-compliance with applicable laws in relation to impairmentsuch fund diversions.
(e) Other continuing matters relating to Dr Mallya and affiliates Diageo Holdings Netherlands B.V. (DHN) issued a conditional backstop guarantee on 2 August 2013 to Standard Chartered Bank (Standard Chartered) pursuant to a guarantee commitment agreement (the Guarantee Agreement). The guarantee was in respect of the liabilities of Watson, a company affiliated with Dr Mallya, under a $135 million (£92 million) facility from Standard Chartered. The Guarantee Agreement was entered into as part of the arrangements put in place and announced at the closing of the USL transaction on 4 July 2013. 265
Financial statements (continued) DHN’s provision of the Guarantee Agreement enabled the refinancing of certain existing borrowings of Watson from a third party bank and facilitated the release by that bank of rights over certain USL shares that were to be acquired by Diageo as part of the USL transaction. The facility matured and entered into default in May 2015. In aggregate DHN paid Standard Chartered $141 million (£96 million) under this guarantee, i.e. including payments of default interest and various fees and expenses. Watson remains liable for all amounts paid by DHN under the guarantee. Under the guarantee documentation with Standard Chartered, DHN was entitled to the benefit of the underlying security package for the loan, including: (a) certain shares in United Breweries Limited (UBL) held solely by Dr Mallya and certain other shares in UBL held by Dr Mallya jointly with his son Sidhartha Mallya, (b) Watson’s interest in Orange India Holdings S.a.r.l. (Orange), the joint venture that owns the Force India Formula One (F1) team, and (c) the shareholding in Watson. Aspects of the security package are the subject of various proceedings in India in which third parties are alleging and asserting prior rights to certain assets comprised in the valuepackage or otherwise seeking to restrain enforcement against certain assets by Standard Chartered and/or DHN. These proceedings are ongoing and DHN will continue to vigorously pursue these matters as part of or loss on saleits efforts for enforcement of USL’s overseas subsidiaries). USL’s management has recommended to the USL board that a further provisionunderlying security and recovery of INR 217 million (£2 million) should be made for the value of certain improper transactions identified by the Additional Inquiry which were not previously expensed or provided for. Based on the information currently available,outstanding amounts. Diageo believes that nothe existence of any prior rights or dispute in relation to the security would be in breach of representations and warranties given by Dr Mallya to Standard Chartered at the time the security was granted and further provisionsbelieves that certain actions taken by Dr Mallya in relation to the proceedings described above also breached his obligations to Standard Chartered. Under the terms of the guarantee and as a matter of law, there are requiredarrangements to pass on to DHN the benefit of the security package upon payment under the guarantee of all amounts owed to Standard Chartered. Payment under the guarantee has now occurred as described above. To the extent possible in the context of the proceedings described above, Standard Chartered has taken certain recovery steps and is working with DHN in relation to these proceedings. DHN is actively monitoring the security package and is discussing with Standard Chartered steps to continue enforcement against the background of the proceedings described above, as well as enforcement steps in relation to elements of the security package that are unaffected by those proceedings. 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.stage possible to determine whether such consent would be forthcoming. (e)The agreement with Dr Mallya referenced in paragraph (d) above does not impact the security package, which, as described above, includes shares in UBL and Watson’s interest in Orange, the joint venture that owns the Force India F1 team. Watson remains liable for all amounts paid pursuant to the guarantee and DHN has the benefit of a counter-indemnity from Watson in respect of payments in connection with the guarantee. The various security providers, including Dr Mallya and Watson, acknowledged in the agreement referred to in paragraph (d) above that DHN is entitled to the benefit of the security package underlying the Standard Chartered facility and have also undertaken to take all necessary actions in that regard. Further, Diageo believes that the existence of any prior rights or disputes in relation to the security package would be in breach of certain confirmations given to Diageo and DHN pursuant to that agreement by Dr Mallya, Watson and certain connected persons.
(f) 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 (SEBI), 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 itself reported the matters covered by the Initial Inquiry and the Additional Inquiry to the relevant authorities. 266
Financial statements (continued) Diageo and USL have also received notices from the Securities and Exchange Board of India (SEBI)SEBI requesting information in relation to, and explanation of the reasons for, the arrangements with Dr Mallya that were the subject of the 25 February 2016 announcement as well as, in the case of USL, in relation to the Initial Inquiry and the Additional Inquiry, and, in the case of Diageo, whether such arrangements with Dr Mallya or the Watson backstop guarantee arrangements describedreferred to in paragraph (a)paragraphs (d) and (e) above were part of agreements previously made with Dr Mallya at the time of the Original USL Transaction announced on 9 November 2012 and the open offer made as part of the Original USL Transaction. Diageo and USL have complied with such information requests and Diageo has confirmed that, consistent with prior disclosures, the Watson backstop guarantee arrangements and the matters described in the 25 February 2016 announcement were not the subject of any earlier agreement with Dr Mallya. In respect of the Watson backstop guarantee arrangements, 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)pending) on account of the Watson backstop guarantee, such liability, if any, would be considered to be part of the price paid for the acquisition of USL shares under the SPA which formed part of the Original USL Transaction and that, in that case, additional equivalent payments would be required to be made to those shareholders (representing 0.04% of the shares in USL) who tendered in the open offer made as part of the Original USL Transaction. 266
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 has appealed against it before the Securities Appellate Tribunal, Mumbai (SAT) on 29 July 2016. The matter was last mentioned before SAT on 3 April 2017, and is taking stepsnext posted for 7 August 2017. Diageo has also responded to appeal it.a show cause notice dated 12 May 2017 from SEBI arising out of the correspondence in relation to the matters described in the 25 February 2016 announcement. 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)(g) SEC Inquiry
Diageo has received requests for information from the US Securities and Exchange Commission (SEC) regarding its distribution in and public disclosures regarding the United States and its distribution in certain other Diageo markets as well as additional context about the Diageo group globally. Diageo is currently responding to the SEC’s requests for information in this matter. Diageo is unable to assess if the inquiry will evolve into further information requests 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. (g)(h) Tax
During the year ended 30 June 2017 Diageo entered into a process of collaborative working with HM Revenue & Customs (HMRC), the UK tax authority, to seek clarity on its transfer pricing and related issues. These discussions are ongoing. Further to the announcement by Diageo on 10 May 2017, HMRC has issued on 2 June 2017 preliminary notices of assessment under the new Diverted Profits Tax regime which came into effect in April 2015. Under these notices, Diageo is required to pay additional tax and interest of £107 million in aggregate for the financial years ended 30 June 2015 and 30 June 2016. Diageo does not believe that it falls within the scope of the Diverted Profits Tax regime. Accordingly, Diageo intends to challenge the assessments and in order to do so will have to pay in August 2017 the full amount assessed and then continue to work to resolve this matter with HMRC. The payment of this amount is not a reflection of Diageo’s view on the merits of the case and, based on its current assessment, Diageo believes no provision is required in relation to Diverted Profits Tax. Diageo has also been in discussions with the French Tax Authorities over the deductibility of certain interest costs for periods from 1 July 2011. It is understood that the French Tax Authorities are intending to deny tax relief for certain interest costs. Diageo believes that the interest costs are deductible and accordingly intends to challenge any such assessment from the French Tax Authorities. At this stage of discussions Diageo is unable to meaningfully estimate the financial effect, if any, which might ultimately arise. Based on its current assessment, Diageo believes that no provision is required in respect of this issue. 267
Financial statements (continued) (i) Other The group has extensive international operations and is thea 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 thea 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) areis 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. COMMITMENTSCommitments (a) Capital commitments Commitments for expenditure on intangibles and property, plant and equipment not provided for in these consolidated financial statements are estimated at £84 million (2016 – £87 million (2015million; 2015 – £114 million; 2014 – £162 million). On 21 June 2017 Diageo agreed to purchase Casamigos Tequila LLC (Casamigos) for a consideration of $1,000 million (£768 million) of which $300 million (£230 million) is contingent on Casamigos performance linked targets being met over the next ten years. The acquisition is dependent on regulatory approval. (b) Operating lease commitments The minimum lease rentals to be paid undernon-cancellable leases, principally in respect of properties, are as follows: | | | | | | | | | | | | | | | | | | | 2016 £ million | | | 2015 £ million | | | 2017 £ million | | | 2016 £ million | | Payments falling due: | | | | | | | | | Within one year | | | 92 | | | | 96 | | | | 95 | | | | 92 | | Between one and two years | | | 94 | | | | 70 | | | | 72 | | | | 94 | | Between two and three years | | | 81 | | | | 61 | | | | 52 | | | | 81 | | Between three and four years | | | 70 | | | | 51 | | | | 40 | | | | 70 | | Between four and five years | | | 63 | | | | 51 | | | | 28 | | | | 63 | | After five years | | | 407 | | | | 217 | | | | 51 | | | | 407 | | | | | | | | | | | | | | | | | | 807 | | | | 546 | | | | 338 | | | | 807 | | | | | | | | | | | | | | |
On 1 January 2016 Diageo completed the North American wines transaction with Treasury Wine Estates (TWE). As part of this transaction Diageosub-let the North American vineyards to TWE which continue to be leased from Realty Income Corporation (Realty).TWE. The terms of the sub lease to TWE arewere identical to the principal lease with Realty Income Corporation (Realty) and as at 30 June 2016 the future lease commitments areto Realty were included in finance lease liabilities ($47 million (£36 million)) and operating lease commitments ($541 million (£407 million)). The finance lease receivable from TWE ofother receivables amounting to $47 million (£36 million) is includedand operating lease liabilities of $541 million (£407 million) were reported in other financial assets. If TWE default on their payments Diageo continue to be responsible for theoperating lease payments to Realty. A provision has been charged to non-operating items incommitments. In the year ended 30 June 20162017 Diageo exited the sublease arrangement and the finance and operating leases for the estimated liability ifvineyards were directly between TWE default on their lease commitments. 267
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.and Realty.
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. 268
Financial statements (continued) 20. RELATED PARTY TRANSACTIONSRelated 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. (b) Associates and joint ventures Sales and purchases to and from associates and joint ventures are principally in respect of premium drinks products but also include the provision of management services. Transactions and balances with associates and joint ventures are set out in the table below: | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 £ million | | | 2015 £ million | | | 2014 £ million | | | 2017 £ million | | | 2016 £ million | | | 2015 £ million | | Income statement items | | | | | | | | | | | | | Sales | | | 31 | | | | 117 | | | | 156 | | | | 10 | | | | 31 | | | | 117 | | Purchases | | | 36 | | | | 85 | | | | 89 | | | | 32 | | | | 36 | | | | 85 | | Balance sheet items | | | | | | | | | | | | | Group payables | | | 5 | | | | 3 | | | | 8 | | | | 4 | | | | 5 | | | | 3 | | Group receivables | | | 2 | | | | 11 | | | | 12 | | | | 1 | | | | 2 | | | | 11 | | Loans payable | | | 6 | | | | 6 | | | | 7 | | | | 6 | | | | 6 | | | | 6 | | Loans receivable | | | 2 | | | | 2 | | | | 41 | | | | 4 | | | | 2 | | | | 2 | | Cash flow items | | | | | | | | | | | | | Loans and equity contributions, net | | | — | | | | 26 | | | | 25 | | | | 14 | | | | — | | | | 26 | |
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 andNon-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’. | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 £ million | | | 2015 £ million | | | 2014 £ million | | | 2017 £ million | | | 2016 £ million | | | 2015 £ million | | Salaries and short term employee benefits | | | 11 | | | | 9 | | | | 9 | | | | 10 | | | | 11 | | | | 9 | | Annual incentive plan | | | 9 | | | | 4 | | | | 2 | | | | 9 | | | | 9 | | | | 4 | | Non-Executive Directors’ fees | | | 1 | | | | 1 | | | | 1 | | | | 1 | | | | 1 | | | | 1 | | Share-based payments(i) | | | 7 | | | | 9 | | | | 13 | | | | 9 | | | | 7 | | | | 9 | | Post employment benefits(ii) | | | 2 | | | | 2 | | | | 2 | | | | 2 | | | | 2 | | | | 2 | | Termination benefits | | | 2 | | | | 1 | | | | — | | | | 2 | | | | 2 | | | | 1 | | | | | | | | | | | | | | | | | | | | | | | | 32 | | | | 26 | | | | 27 | | | | 33 | | | | 32 | | | | 26 | | | | | | | | | | | | | | | | | | | | |
(i) | Time-apportioned fair value of unvested options and share awards. |
(ii) | Includes the cash allowance in lieu of pension contributions. |
268
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. 269
Financial statements (continued) (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 £15 million (2016 – £16 million (2015million; 2015 – £13 million; 2014 – £17 million). (e) Directors’ remuneration | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 £ million | | | 2015 £ million | | | 2014 £ million | | | 2017 £ million | | | 2016 £ million | | | 2015 £ million | | Salaries and benefits | | | 2 | | | | 2 | | | | 3 | | | Salaries and short term employee benefits | | | | 2 | | | | 2 | | | | 2 | | Annual incentive plan | | | 2 | | | | 1 | | | | — | | | | 3 | | | | 2 | | | | 1 | | Non-Executive Directors’ fees | | | 1 | | | | 1 | | | | 1 | | | | 1 | | | | 1 | | | | 1 | | Share option exercises(i) | | | — | | | | — | | | | 4 | | | | 2 | | | | — | | | | — | | Shares vesting(i) | | | 5 | | | | 5 | | | | 7 | | | | 4 | | | | 5 | | | | 5 | | Post employment benefits(ii) | | | 1 | | | | 1 | | | | 1 | | | | 1 | | | | 1 | | | | 1 | | | | | | | | | | | | | | | | | | | | | | | | 11 | | | | 10 | | | | 16 | | | | 13 | | | | 11 | | | | 10 | | | | | | | | | | | | | | | | | | | | |
(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 cash allowance in lieu of pension contributions. |
Details of the individual Directors’ remuneration are given in the Directors’ remuneration report. 269270
Financial statements (continued) 21. PRINCIPAL GROUP COMPANIESPrincipal group companies The companies listed below include those which principally affect the profits and assets of the group. The operating companies listed below may carry on the business described in the countries listed in conjunction with their subsidiaries and other group companies. | | | | | | | | | | | | | | | Country of incorporation | | Country of operation | | | Percentage of equity owned(i) | | | 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) | ExcludingPercentage ownership excludes 2.38% owned by the USL Benefit Trust. |
(iii) | Directly owned by Diageo plc. |
(1) | Diageo Finance B.V. (Netherlands) is a wholly-owned finance subsidiary of the group. As at 30 June 2016,2017, there were no outstanding securities issued by Diageo Finance B.V. |
22. Post balance sheet event 270On 26 July 2017 the Board approved a share buyback programme of up to £1.5 billion for the year ending 30 June 2018.
271
Unaudited computation of ratio of earnings to fixed charges | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year ended 30 June | | | Year ended 30 June | | | | 2016 £ million | | 2015 £ million | | 2014 £ million | | 2013 £ million | | 2012 £ million | | | 2017 £ million | | 2016 £ million | | 2015 £ million | | 2014 £ million | | 2013 £ million | | Earnings | | | | | | | | | | | | | | | | | | | | | Income before taxes on income, non-controlling interests and discontinued operations | | | 2,858 | | | 2,933 | | | 2,711 | | | 3,057 | | | 3,043 | | | | 3,559 | | | 2,858 | | | 2,933 | | | 2,711 | | | 3,057 | | Less: Capitalised interest | | | — | | | (2 | ) | | (4 | ) | | (2 | ) | | (5 | ) | | | — | | | | — | | | (2 | ) | | (4 | ) | | (2 | ) | Less: Share of after tax results of associates and joint ventures | | | (221 | ) | | (175 | ) | | (252 | ) | | (217 | ) | | (229 | ) | | | (309 | ) | | (221 | ) | | (175 | ) | | (252 | ) | | (217 | ) | Add: Dividend income received from associates | | | 173 | | | 183 | | | 228 | | | 220 | | | 190 | | | Add: Dividends income received from associates | | | | 223 | | | 173 | | | 183 | | | 228 | | | 220 | | Add: Fixed charges | | | 623 | | | 697 | | | 671 | | | 758 | | | 752 | | | | 603 | | | 623 | | | 697 | | | 671 | | | 758 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,433 | | | 3,636 | | | 3,354 | | | 3,816 | | | 3,751 | | | | 4,076 | | | 3,433 | | | 3,636 | | | 3,354 | | | 3,816 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed charges | | | | | | | | | | | | Finance charges(i) | | | 589 | | | 656 | | | 629 | | | 716 | | | 709 | | | | 564 | | | 589 | | | 656 | | | 629 | | | 716 | | Add: Interest capitalised | | | — | | | 2 | | | 4 | | | 2 | | | 5 | | | | — | | | | — | | | 2 | | | 4 | | | 2 | | Add: One third of rental expense | | | 34 | | | 39 | | | 38 | | | 40 | | | 38 | | | | 39 | | | 34 | | | 39 | | | 38 | | | 40 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 623 | | | 697 | | | 671 | | | 758 | | | 752 | | | | 603 | | | 623 | | | 697 | | | 671 | | | 758 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ratio | | ratio | | ratio | | ratio | | ratio | | | ratio | | ratio | | ratio | | ratio | | ratio | | Ratio | | | 5.5 | | | 5.2 | | | 5.0 | | | 5.0 | | | 5.0 | | | | 6.8 | | | 5.5 | | | 5.2 | | | 5.0 | | | 5.0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(i) | FinanceInterest payable and other finance charges for the year ended 30 June 20162017 includes a £91£67 million charge (2015(2016 – £91 million; 2015 – £55 million; 2014 – £117 million; 2013 – £151 million; 2012 – £151 million) in respect of fair value adjustments to the group’s derivative instruments. |
271272
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 other related parties are disclosed in note 20 to the consolidated financial statements. Share capital Major shareholders At 2928 July 2016,2017, 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 | | BlackRock Investment Management (UK) Limited (indirect holding)(i) | | | 147,296,928 | | | | 5.89 | % | | | 3 December 2009 | | Capital Research and Management Company (indirect holding) | | | 124,653,096 | | | | 4.99 | % | | | 28 April 2009 | |
(i) | On 2619 January 2016, BlackRock2017, Blackrock Inc. filed an Amendment to Schedule 13G with the SEC in respect of the calendar year ended 31 December 20152016 reporting that 161,879,296169,104,885 ordinary shares representing 6.4%6.7% 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 2928 July 2016, 421,687,9332017 427,923,967 ordinary shares, including those held through ADSs, were held by approximately 2,7692,802 holders (including ADR holders) with registered addresses in the United States, representing approximately 16.75%17.00% of the outstanding ordinary shares (excluding treasury shares). At such date, 105,323,780106,624,985 ADSs were held by 2,3982,500 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 notre-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 displayedon-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. 272273
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. 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 poundpounds sterling on the underlying ordinary shares. The following table shows, for the periods indicated, the reported high and low middle 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 | | | | | | | | | | | | | | | | | 2012 | | | 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 | | | | 2087 | | | | 1640 | | | | 121.62 | | | | 100.98 | | 2017 | | | | 2390 | | | | 1957 | | | | 123.48 | | | | 99.95 | | Three months ended | | | | | | | | | | | | | | | | | September 2014 | | | 1904 | | | | 1710 | | | | 130.41 | | | | 114.40 | | | December 2014 | | | 1981 | | | | 1710 | | | | 123.40 | | | | 109.77 | | | March 2015 | | | 2023 | | | | 1782 | | | | 121.94 | | | | 109.08 | | | June 2015 | | | 1967 | | | | 1755 | | | | 121.95 | | | | 108.58 | | | September 2015 | | | 1950 | | | | 1640 | | | | 121.62 | | | | 102.64 | | | | 1950 | | | | 1640 | | | | 121.62 | | | | 102.64 | | December 2015 | | | 1945 | | | | 1766 | | | | 116.56 | | | | 107.17 | | | | 1945 | | | | 1766 | | | | 116.56 | | | | 107.17 | | March 2016 | | | 1911 | | | | 1745 | | | | 110.09 | | | | 101.52 | | | | 1911 | | | | 1745 | | | | 110.09 | | | | 101.52 | | June 2016 | | | 2087 | | | | 1748 | | | | 112.88 | | | | 100.98 | | | | 2087 | | | | 1748 | | | | 112.88 | | | | 100.98 | | 2016 monthly | | | | | | | | | | September 2016 | | | | 2225 | | | | 2066 | | | | 116.99 | | | | 110.91 | | December 2016 | | | | 2268 | | | | 1957 | | | | 116.38 | | | | 99.95 | | March 2017 | | | | 2328 | | | | 2099 | | | | 116.68 | | | | 104.27 | | June 2017 | | | | 2390 | | | | 2202 | | | | 123.48 | | | | 113.76 | | 2017 monthly | | | | | | | | | | January | | | 1885 | | | | 1778 | | | | 108.35 | | | | 102.07 | | | | 2244 | | | | 2099 | | | | 113.00 | | | | 104.27 | | February | | | 1911 | | | | 1745 | | | | 110.09 | | | | 101.52 | | | | 2292 | | | | 2188 | | | | 115.42 | | | | 111.20 | | March | | | 1905 | | | | 1851 | | | | 108.98 | | | | 104.84 | | | | 2328 | | | | 2252 | | | | 116.68 | | | | 110.99 | | April | | | 1948 | | | | 1846 | | | | 112.23 | | | | 106.39 | | | | 2305 | | | | 2202 | | | | 117.47 | | | | 113.76 | | May | | | 1894 | | | | 1818 | | | | 110.55 | | | | 106.53 | | | | 2337 | | | | 2252 | | | | 122.01 | | | | 117.25 | | June | | | 2087 | | | | 1748 | | | | 112.88 | | | | 100.98 | | | | 2390 | | | | 2269 | | | | 123.48 | | | | 119.26 | | July | | | 2192 | | | | 2097 | | | | 116.99 | | | | 111.68 | | | | 2442 | | | | 2248 | | | | 130.09 | | | | 118.28 | |
The information in respect of the month of July is for the period up to and including 28 July 2017. At close of business on 2928 July 2016,2017, the market prices for ordinary shares and ADSs were 21612442 pence and $116.54$130.09 respectively. 274
Additional information for shareholders (continued) 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.programme. Pursuant to the deposit agreement dated 14 February 2013 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. 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 receivehave received approximately $1.8 million arising out of fees charged in respect of dividends paid during the year and a fixed contribution of at least $1,000,000 each year (less certain expenses incurred byto the Depositary) and a variable contribution based on issuance and cancellation fees in excess of a threshold amount.company’s ADR programme costs. These payments are received for expenses associated withnon-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 2928 July 2016.2017. 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. 275
Additional information for shareholders (continued) 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 forelection/re-election, assuming they wish to stand forelection/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 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. 276
Additional information for shareholders (continued) 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), represented by the proxy), and (b) every proxy present at a general meeting who has been appointed by more than one shareholder has one vote regardless of the number of shareholders who have appointed him or the number of shares held by those shareholders, unless he has been instructed to vote for a resolution by one or more shareholders and to vote against the resolution by one or more shareholders, in which case he has one vote for and one vote against the resolution. On a poll, every shareholder who is present in person or by proxy has one vote for every share held by that shareholder, but a shareholder or proxy entitled to more than one vote need not cast all his votes or cast them all in the same way (the deadline for exercising voting rights by proxy is set out in the form of proxy). A poll may be demanded by any of the following: the chairman of the general meeting; at least three shareholders entitled to vote on the relevant resolution and present in person or by proxy at the meeting; any shareholder or shareholders present in person or by proxy and representing in the aggregate not less thanone-tenth of the total voting rights of all shareholders entitled to vote on the relevant resolution; or any shareholder or shareholders present in person or by proxy and holding shares conferring a right to vote on the relevant resolution on which there have been paid up sums in the aggregate equal to not less thanone-tenth of the total sum paid up on all the shares conferring that right. Diageo’s articles of association and the Companies Acts provide for matters to be transacted at general meetings of Diageo by the proposing and passing of two kinds of resolutions: ordinary resolutions, which include resolutions for the election,re-election and removal of directors, the declaration of final dividends, the appointment andre-appointment of the external auditor, the remuneration report and remuneration policy, the increase of authorised share capital, and the grant of authority to allot shares; and special resolutions, which include resolutions for the amendment of Diageo’s articles of association, resolutions relating to the disapplication ofpre-emption rights, and resolutions modifying the rights of any class of Diageo’s shares at a meeting of the holders of such class. An ordinary resolution requires the affirmative vote of a simple majority of the votes cast by those entitled to vote at a meeting at which there is a quorum in order to be passed. Special resolutions require the affirmative vote of not less than three-quarters of the votes cast by those entitled to vote at a meeting at which there is a quorum in order to be passed. The necessary quorum for a meeting of Diageo is a minimum of two shareholders present in person or by proxy and entitled to vote. A shareholder is not entitled to vote at any general meeting or class meeting in respect of any share held by him if he has been served with a restriction notice (as defined in Diageo’s articles of association) after failure to provide Diageo with information concerning interests in those shares required to be provided under the Companies Acts. 277
Additional information for shareholders (continued) Liquidation rights In the event of the liquidation of Diageo, after payment of all liabilities and deductions taking priority in accordance with English law, the balance of assets available for distribution will be distributed among the holders of ordinary shares according to the amounts paid up on the shares held by them. Pre-emption rights and new issues of shares While holders of ordinary shares have nopre-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. 276
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: reaches, exceeds or falls below 3% and/or any subsequent whole percentage figure as a result of an acquisition or disposal of shares or financial instruments; or reaches, exceeds or falls below any such threshold as a result of any change in the breakdown or number of voting rights attached to shares in Diageo. The Disclosure Guidance and Transparency Rules set out in detail the circumstances in which an obligation of disclosure will arise, as well as certain exemptions from those obligations for specified persons. Under section 793 of the Companies Act 2006, Diageo may, by notice in writing, require a person that Diageo knows or has reasonable cause to believe is or was during the three years preceding the date of notice interested in Diageo’s shares to indicate whether or not that is the case and, if that person does or did hold an interest in Diageo’s shares, to provide certain information as set out in that Act. Article 19 of the EU Market Abuse Regulation (2014/596) further requires persons discharging managerial responsibilities within Diageo (and their persons closely associated) to notify Diageo of transactions conducted on their own account in Diageo shares or derivatives or certain financial instruments relating to Diageo shares. The City Code on Takeovers and Mergers also imposes strict disclosure requirements with regard to dealings in the securities of an offeror or offeree company on all parties to a takeover and also on their respective associates during the course of an offer period. General meetings and notices At least 21 clear days’ written notice of an annual general meeting is required. Any general meeting which is not an annual general meeting is called a ‘general meeting’. The minimum notice period for general meetings is 21 clear days. An annual general meeting of shareholders must be held within six months of Diageo’s accounting reference date and at a time and place determined by the directors. 278
Additional information for shareholders (continued) 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 thanone-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. 277
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) 5% abovean amount equal to 105% of the average market value of the company’smiddle market quotations for an ordinary sharesshare (as derived from the London Stock Exchange Daily Official List) for the five business days immediately preceding the day of purchaseon which that ordinary share is contracted to be purchased and (b) the higher of the price of the last independent trade and the highest current independent purchase bid on the trading venue whereLondon Stock Exchange at the time 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 arenon-residents of the UK or on the conduct of Diageo’s operations. 279
Additional information for shareholders (continued) There are no restrictions under the company’s articles of association or under English law that limit the right ofnon-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 Form20-F and any other documents filed by the company with the SEC may be inspected at the SEC’s at the reference facilities located at the SEC Headquarters at 100 F Street NE, Washington, DC 20549. Please call the SEC at1-800-SEC-0330 for further information on the operation of the public reference facilities and their copy charges. Filings with the SEC are also available to the public from commercial document retrieval services, and from the website maintained by the SEC at www.sec.gov. 278
Additional information for shareholders (continued)
www.sec.gov. 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: a dealer in securities or foreign currency; a trader in securities that elects to use amark-to-market method of accounting for securities holdings; atax-exempt organisation; a life insurance company; a person liable for alternative minimum tax; a person that actually or constructively owns 10% or more of the voting stock of Diageo; a person that holds ordinary shares or ADSs as part of a straddle or a hedging or conversion transaction; a person that holds ordinary shares or ADSs as part of a wash sale for tax purposes; or a US holder (as defined below) whose functional currency is not the US dollar. If 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 asnon-domiciled and resident in the United Kingdom for the purposes of UK tax law. This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, the laws of the United Kingdom and the practice of Her Majesty’s Revenue and Customs, all as currently in effect (or, in the case of the UK taxation of dividends paid toUK-resident individual shareholders on or after 6 April 2016, as currently proposed)2016), 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. 280
Additional information for shareholders (continued) A US holder is a beneficial owner of ordinary shares or ADSs that is for US federal income tax purposes: a citizen or resident for tax purposes of the United States and who is not and has at no point been resident in the United Kingdom; a US domestic corporation; an estate whose income is subject to US federal income tax regardless of its source; or a trust if a US court can exercise primary supervision over the trust’s administration and one or more US persons are authorised to control all substantial decisions of the trust. This section is not intended to provide specific advice and no action should be taken or omitted in reliance upon it. This section addresses only certain aspects of US federal income tax and UK income tax, corporation tax, capital gains tax, inheritance tax and stamp taxes. Holders of the ordinary shares or ADSs are urged to consult their own tax advisors regarding the US federal, state and local, and UK and other tax consequences of owning and disposing of the shares or ADSs in their respective circumstances. In particular, holders are encouraged to confirm with their advisor whether they are US holders eligible for the benefits of the Treaty. 279
Additional information for shareholders (continued)
Dividends UK taxation The 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 taxTax 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 tax treatment of dividends paid on or after 6 April 2016 to UK-resident individuals will behas changed as follows:
Dividends will not carry a tax credit. All dividends received by an individual shareholder from the company (or from other sources) will, except to the extent that they are earned through an ISA, self-invested pension plan or other regime which exempts the dividends from tax, form part of the shareholder’s total income for UK income tax purposes and will represent the highest part of that income. A nil rate of income tax will apply to the first £5,000 of taxable dividend income received by an individual shareholder in a tax year (the “Nil Rate Amount”), regardless of what tax rate would otherwise apply to that dividend income. However, this income is taken into account in determining the income tax band. Any taxable dividend income in excess of the Nil Rate Amount will be taxed at a special rate, as set out below. That tax will be applied to the amount of the dividend income actually received by the individual shareholder (rather than to agrossed-up amount). Where a shareholder’s taxable dividend income for a tax year exceeds the Nil Rate Amount, the excess amount (the “Relevant Dividend Income”) will be subject to income 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; |
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 |
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. |
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 the company. Other shareholders within the charge to UK corporation tax will not be subject to tax on dividends from the company asso 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. 281
Additional information for shareholders (continued) US taxation Under the US federal income tax laws, and subject to the passive foreign investment company (PFIC), rules discussed below, the gross amount of any 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 anon-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 theex-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. 280
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 pounds 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 anon-taxable return of capital to the extent of the holder’s basis in the ordinary shares or ADSs and thereafter as capital gain. However, Diageo does not expect to calculate earnings and profits in accordance with US federal income tax principles. Accordingly, a US holder should expect to generally treat distributions Diageo makes as dividends. Taxation of capital gains UK taxation A citizen or resident (for tax purposes) of the United States who has at no time been resident in the United Kingdom will not be liable for UK tax on capital gains realised or accrued on the sale or other disposal of ordinary shares or ADSs, unless the ordinary shares or ADSs are held in connection with a trade or business carried on by the holder in the United Kingdom through a UK branch, agency or a permanent establishment. A disposal (or deemed disposal) of shares or ADSs by a holder who is resident in the United Kingdom may, depending on the holder’s particular circumstances, and subject to any available exemption or relief, give rise to a chargeable gain or an allowable loss for the purposes of UK tax on capital gains. US taxation Subject to the PFIC rules discussed below, a US holder who sells or otherwise disposes of ordinary shares or ADSs will recognise capital gain or loss for US federal income tax purposes equal to the difference between the US dollar value of the amount that is realised and the tax basis, determined in US dollars, in the ordinary shares or ADSs. Capital gain of anon-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. 282
Additional information for shareholders (continued) 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, 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 amark-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. 281
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) is 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 imposedarises upon the transferdeposit of an existing underlying ordinary share towith 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 charge of 1.5% of the price payable for the ordinary shares so acquired. Any stamp duty payable (as opposed to SDRT) is rounded up to the nearest £5. No stamp duty (as opposed to SDRT) will be payable where an instrument of transfer is executed andif 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. 282283
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 onForm 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/ KKathryn Mikells | Name: KKathryn Mikells | | Title: Chief Financial Officer | | 98 August 20162017 |
283284
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 Form6-K (File No. 001-10691)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 | | | (incorporated by reference to Exhibit 4.1 to the Registration Statement on FormF-1 (FileNo. 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 | | | (incorporated by reference to Exhibit 2.2 to the Annual Report on Form20-F (FileNo. 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 Form6-K (FileNo. 001-10691) filed with the Securities and Exchange Commission on 9 December 2003).(i) | 4.1 | | Service Agreement, dated 1 October 2015, between Diageo plc and Kathryn Mikells.Mikells (incorporated by reference to Exhibit 4.1 to the Annual Report on Form 20-F (File No. 001-10691) filed with the Securities and Exchange Commission on 9 August 2016). | 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 Form20-F (FileNo. 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 B. Humer (incorporated by reference to Exhibit | | | 4.4 to the Annual Report on Form20-F (FileNo. 001-10691) filed with the Securities and Exchange Commission on 15 September 2008). | 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 Form20-F (FileNo. 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 Form20-F (FileNo. 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 2015 (incorporated by reference to Exhibit 4.6 to the Annual Report on Form20-F (FileNo. 001-10691) filed with the Securities and Exchange Commission on 11 August 2015). | 4.7 | | Form of Service Agreement for Diageo plc’s executives in the United States, in use as of July 2015 (incorporated by reference to Exhibit 4.7 to the Annual Report on Form20-F (FileNo. 001-10691) filed with the Securities and Exchange Commission on 11 August 2015). | 4.8 | | Diageo 2010 Sharesave Plan, dated 14 October 2010 (incorporated by reference to Exhibit 4.2 to the Registration Statement on FormS-8 (FileNo. 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 FormS-8 (FileNo. 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 FormS-8 (FileNo. 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 FormS-8 (FileNo. 333-162490) filed with the Securities and Exchange Commission on 15 September 2009). | 4.12 | | Diageo plc 2009 Discretionary Incentive Plan, dated 14 October 2009 (incorporated by reference to Exhibit 4.3 to the | | | Registration Statement on FormS-8 (FileNo. 333-162490) filed with the Securities and Exchange Commission on 15 September 2009). | 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 FormS-8 (FileNo. 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 FormS-8 (FileNo. 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 Form20-F (FileNo. 001-10691) filed with the Securities and Exchange Commission on 15 September 2008). |
285
Additional information for shareholders (continued) | | | 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 Form20-F (FileNo. 001-10691) filed with the Securities and Exchange Commission on 15 September 2008). |
284
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 Form20-F (FileNo. 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 Form20-F (FileNo. 001-10691) filed with the Securities and Exchange Commission on 15 September 2008). | 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 Form20-F (FileNo. 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 Form20-F (FileNo. 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 Form20-F (FileNo. 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 Form20-F (FileNo. 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 Form20-F (FileNo. 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 FormS-8 (FileNo. 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.Ferrán (incorporated by reference to Exhibit 4.25 to the Annual Report on Form 20-F (File No. 001-10691) filed with the Securities and Exchange Commission on 9 August 2016). | 6.1 | | Description of earnings per share (included in the section ‘How we measure performance: Key performance indicators’ on pages 23-24 and pages 146 and 205 of this Annual Report on Form20-F). | 7.1 | | Description of unaudited computation of ratio of earnings to fixed charges (included on page 271272 of this Annual Report on Form20-F). | 8.1 | | Principal group companies (included in note 21 to the consolidated financial statements on page 270271 of this Annual Report on Form20-F). | 12.1 | | Certification of Ivan Menezes filed pursuant to 17 CFR240.13a-14(a). | 12.2 | | Certification of Kathryn Mikells filed pursuant to 17 CFR240.13a-14(a). | 13.1 | | Certification of Ivan Menezes furnished pursuant to 17 CFR240.13a-14(b) and 18 U.S.C. 1350(a) and (b). | 13.2 | | Certification of Kathryn Mikells furnished pursuant to 17 CFR240.13a-14(b) and 18 U.S.C. 1350(a) and (b). | 15.1 | | Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm. | 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. |
285286
Additional information for shareholders (continued) Cross reference toForm 20-F | | | | | Item | | Required item in Form 20-F | | Page(s)Pages
| 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 | | 8-118-12 | | | B. Capitalization and indebtedness | | Not applicable | | | C. Reason for the offer and use of proceeds | | Not applicable | | | D. Risk factors | | 39-4537-45 | 4. | | Information on the company | | | | | A. History and development of the company | | 5, 13-15, 48-50, 55-57, 81, 89-90, 223-228, 258-259, 267-26817-19, 49-52, 57-59, 83-84, 227-230, 260-261, 268 | | | B. Business overview | | 5, 13-17, 60-79, 92-109, 207-21017-21, 61-82, 97-114, 212-216 | | | C. Organizational structure | | 270271 | | | D. Property, plants and equipment | | 13-14, 60, 63, 67, 70, 73, 213-216, 233-23417-18, 61, 64, 68, 72, 76, 218-221, 235-236 | 4A. | | Unresolved staff comments | | Not applicable | 5. | | Operating and financial review and prospects | | | | | A. Operating results | | 8-11, 15-17, 35, 48-109, 133-146, 213-217, 235-242, 246-2478-12, 17-21, 34, 61-114, 141-154, 211, 218-222, 237-244, 248-249 | | | B. Liquidity and capital resources | | 52, 58-59, 85, 90-91, 110-113, 242-244, 249-256, 267-26853, 59-60, 88, 93-96, 115-118, 244-246, 251-260, 268 | | | C. Research and development, patents and licenses, etc. | | 1519 | | | D. Trend information | | 5, 32-357, 28-34 | | | E. Off-balance sheet arrangements | | 112118 | | | F. Tabular disclosure of contractual obligations | | 112117 | | | G. Safe harbor | | — | 6. | | Directors, senior management and employees | | | | | A. Directors and senior management | | 147-151, 190155-159, 195 | | | B. Compensation | | 176-193, 235-242184-200, 237-244 | | | C. Board practices | | 147-149, 152-155, 161-164, 173-176, 190-191155-157, 160-163, 168-171, 181-183, 196-197 | | | D. Employees | | 17, 176, 21221, 183, 218 | | | E. Share ownership | | 179-184, 187-188, 192, 259-260186-190, 193-194, 198, 261-262 | 7. | | Major shareholders and related party transactions | | | | | A. Major shareholders | | 272273 | | | B. Related party transactions | | 192, 268-269, 272198, 269-270, 273 | | | C. Interests of experts and counsel | | Not applicable | 8. | | Financial information | | | | | A. Consolidated statements and other financial information | | 199-270205-271 | | | B. Significant changes | | — | 9. | | The offer and listing | | | | | A. Offer and listing details | | 272-273273-274 | | | B. Plan of distribution | | Not applicable | | | C. Markets | | 272-273273-274 | | | D. Selling shareholders | | Not applicable | | | E. Dilution | | Not applicable | | | F. Expenses of the issue | | Not applicable | 10. | | Additional information | | | | | A. Share capital | | Not applicable | | | B. Memorandum and articles of association | | 275-279 | | | C. Material contracts | | 181-182, 200, 261-262 | | | D. Exchange controls | | 279 | | | E. Taxation | | 280-283 | | | F. Dividends and paying agents | | Not applicable |
286287
Additional information for shareholders (continued) | | | | | Item | | Required item in Form 20-F | | Page(s)
| 10.
| | Additional information | | | | | A. Share capital
| | Not applicablePages
| | | B. Memorandum and articles of association G. Statement by experts | | 274-278Not applicable | | | C. Material contracts H. Documents on display | | 174-176, 259-260280 | | | D. Exchange controls I. Subsidiary information | | 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 | | 113, 245-253118, 247-255 | 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 | | 273-274275 | Part II | | | | | 13. | | Defaults, dividend arrearagesanddelinquencies | | 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 | | 155163-164 | | | B. Management’s report on internal control over financial reporting | | 156-158164-165 | | | C. Attestation report of the registered public accounting firm | | 197203 | | | D. Changes in internal control over financial reporting | | 156-158165 | 16A. | | Audit committee financial expert | | 164171 | 16B. | | Code of ethics | | 156-157164-165 | 16C. | | Principal accountant fees and services | | 163-164, 211-212170-171, 217 | 16D. | | Exemptions from the listing standards for audit committees | | Not applicable | 16E. | | Purchases of equity securities by the issuer and affiliated purchasers | | 111-112, 257-25859, 94, 116-117, 209, 258-260 | 16F. | | Change in registrant’s certifying accountant | | Not applicable | 16G. | | Corporate governance | | 159166-167 | 16H. | | Mine safety disclosure | | Not applicable | Part III | | | | | 17. | | Financial statements | | Not applicable | 18. | | Financial statements | | See Item 8 | 19. | | Exhibits | | 284-285 | | 285-286 | Additional information | | | | | Unaudited computation of ratio of earnings to fixed charges | | 271272 | | | Glossary of terms and US equivalents | | 288-289289-290 |
It is possible to read and copy documents that have been filed by Diageo plc at the reference facilities located at the SEC Headquarters at 100 F Street NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities and their copy charges. Filings with the SEC are also available to the public from commercial document retrieval services, and from the website maintained by the SEC at www.sec.gov. 287288
Glossary of terms and US equivalents In this document the following words and expressions shall, unless the context otherwise requires, have the following meanings: | | | Term used in UK annual report | | US equivalent or definition | Associates | | Entities accounted for under the equity method | American Depositary Receipt (ADR) | | Receipt evidencing ownership of an ADS | American Depositary Share (ADS) | | Registered negotiable security, listed on the New York Stock Exchange, representing four Diageo plc ordinary shares of 28101/108 pence each | Called up share capital | | Common stock | Capital redemption reserve | | Other additional capital | Company | | Diageo plc | CPI | | Consumer price index | Creditors | | Accounts payable and accrued liabilities | Debtors | | Accounts receivable | Employee share schemes | | Employee stock benefit plans | Employment or staff costs | | Payroll costs | Equivalent units | | An equivalent unit represents one nine-litre case of spirits, which is approximately 272 servings. A serving comprises 33ml of spirits, 165ml of wine, or 330ml of ready to drink or beer. To convert volume of products other than spirits to equivalent units: beer in hectolitres divide by 0.9, wine in nine-litre cases divide by five, ready to drink in nine-litre cases divide by 10, and certainpre-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, Nielsen,IWSR, IRI, Beverage Information Group and Plato Logic
| | Information source companies that research the beverage alcohol industry and are independent from industry participants | Net sales | | Sales after deducting excise duties | Noon buying rate | | Buying rate at noon in New York City for cable transfers in sterling as certified for customs purposes by the Federal Reserve Bank of New York | Operating profit | | Net operating income | Organic movement | | At level foreign exchange rates and after adjusting for exceptional items, acquisitions and disposals for continuing operations |
288
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. | Profit | | Earnings |
289
Glossary of terms and US equivalents (continued) | | | Term used in UK annual report | | US equivalent or definition | Profit for the year | | Net income | Provisions | | Accruals for losses/contingencies | Reserves | | Accumulated earnings, other comprehensive income and additional paid in capital | RPI | | Retail price index | Ready to drink | | Ready to drink products. Ready to drink also include ready to serve products, such as 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 |
289290
|
|