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Diageo PLC (DGE)

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Thursday 30 January, 2014

Diageo PLC

Interim Results

RNS Number : 8380Y
Diageo PLC
30 January 2014
 




30 January 2014


Interim results, six months ended 31 December 2013

 

The strength of a diverse portfolio in a tougher environment

 

·      Net sales grew 1.8% in the first half, following growth of 2.2% in Q1*

-     North America up 4.6%

-     Western Europe down 1.0%, continuing the improving trend seen in Q1

-     Emerging markets up 1.3%, impacted by weakness in baijiu in China and in Nigeria

·      Continued strong price/mix in both developed and emerging markets at 4ppts

·      Marketing investment up 2.7%, ahead of net sales growth, to 15.6% of net sales

·      Super and ultra premium brands grew strongly, with reserve brands up 18.5%

·      Beer was the only category to decline, down 2.6%, with weakness in Nigeria and Ireland

·      Operating profit grew 2.9% with 0.4ppts of operating margin improvement

·      Free cash flow was £326 million

·      eps pre-exceptional items 62.6 pence per share, up 4%

·      Interim dividend increased 9%

·      Detailed plans to be developed to de-layer the organisation and deliver further operating efficiencies

·      Savings of £200 million a year by year ending 30 June 2017 will fund future change programmes, investment in growth and improved margin

·      Restructuring costs, expected to be taken as an exceptional charge, will be between £200 million and £250 million

*Q1 organic growth restated to $1 = VEF19 (Venezuelan Bolivars). See explanatory note 2 on organic movements.

Ivan Menezes, Chief Executive, commenting on the six months ended 31 December 2013

 

"We have continued to demonstrate the strength of our broad portfolio and diverse global business in a period which saw a more challenging emerging market environment. Sustained performance in the US and improved performance in Western Europe enabled Diageo to absorb the current challenges in some of our emerging markets. We reacted quickly to the changing emerging market environment, reducing inventory levels in several key markets, which led to a weaker Q2, and tightly managing our cost base to deliver improved operating margins in line with our expectations. We continued to invest in the business increasing marketing spend ahead of net sales growth and keeping our strong focus on innovation and route to consumer improvements.

 

In the first half the organisation has aligned behind the six key performance drivers which I identified when I was appointed CEO; premium core brands, reserve, innovation, route to consumer, cost and talent. This clarity of focus at a market level enables me to take the changes I have already made to the operating model to the next level. Over the next two months we will set out detailed plans to simplify our processes and de-layer our organisation. This will create a more agile, accountable and effective organisation to deliver our performance ambition. I expect this to deliver cost savings of £200 million a year by the end of fiscal 2017.

 

We do expect some top line improvement in the second half and our focus across the business on the six key performance drivers means that even though some markets may remain challenging, this business is in good shape for the medium and long term and we remain committed to achieving our performance ambition."

 

 Key financials:





Organic

Reported

2014

H1

2013

H1

growth

growth

%

%

 Volume

EUm

84.3

88.4

(3) 

(5)

 Net sales

£million

5,932

5,975

2

(1)

 Marketing spend

£million

903

918

3

(2)

 Operating profit before exceptional items

£million

2,060

2,001

3

3

 Operating profit

£million

2,040

2,017


1

 Profit attributable to parent company's






 equity shareholders

£million

1,599

1,521

5

 Free cash flow

£million

326

708



 Basic eps

pence

63.8

60.8

5

 eps pre-exceptional items

pence

62.6

60.2


4

 Interim dividend

pence

19.7

18.1

9

 

Operating profit before exceptional items includes attributable transaction and integration costs of £7 million (2012 - £29 million) in respect of business acquisitions.

The reported tax rate, which includes tax on exceptional items, remained unchanged at 18.2% (2012 - 18.2%). The tax rate before exceptional items for the six months ended 31 December 2013 was 19.4% compared with 18.3% in the six months ended 31 December 2012. In the six months ended 31 December 2013 a higher level of profit in the group's Venezuelan operations impacted the tax charges for the period. Excluding the group's Venezuelan operation, the tax rate before exceptional items was 17.9%.

 

 Organic growth by region:


Volume %

Net sales %

Marketing spend %

Operating profit %

 North America

(2)

5

5

8

 Western Europe

(2)

(1)

(2)

(3)

 Africa, Eastern Europe and Turkey

(4)

2

8

(4)

 Latin America and Caribbean

(2)

8

8

10

 Asia Pacific

(4)

(6)

(3)

(4)

 

 

Exchange rate movement








£million

 Net sales


(86)

 Operating profit before exceptional items


(54)

 

The exchange rate movement for net sales and operating profit before exceptional items include the translation of prior year reported results at current year exchange rates. A rate of $1 = VEF9 has been used in respect of the translation of the current and prior period's reported performance in Venezuela.

 

In the calculation of organic growth for the six months ended 31 December 2013, the group's Venezuelan operations have been translated at a rate of $1 = VEF19 (£1 = VEF30.4) to ensure currency controls do not materially distort the group's performance. The rate of $1 = VEF19 is derived from the consolidation rate of $1 = VEF9 adjusted by inflation. Applying this method the exchange rate for the year ending 30 June 2014 is expected to be approximately $1 = VEF26 (£1 = VEF42.4) and our full year guidance, for reported results and for the organic growth calculation is based on this rate.

 

Using the following rates (£1 = $1.65 ; £1 = €1.21 ; £1 = VEF42.4), exchange rate movements for the year ending 30 June 2014 are expected to adversely impact operating profit by £280 million and decrease finance charges by £10 million (excluding IAS21 and IAS39).

 

Update on strategic transactions

 

On 26 November 2013, Diageo acquired an additional 1.35% equity share (1.97 million shares) in United Spirits Limited (USL) through an on-market purchase on the Bombay Stock Exchange. This purchase brought the aggregate equity stake of USL held by Diageo to 26.37% and followed the closing of the earlier USL transaction announced on 9 November 2012 under which, as previously announced on 4 July 2013, Diageo acquired a shareholding of 25.02% of USL for a total consideration of INR 52 billion (£592 million). 

 

There are currently various proceedings pending in courts in India in relation to the earlier USL transaction. More detailed analysis of these proceedings appears in Note 13 to the Financial Statements.

 

 

Definitions

 

Unless otherwise stated in this announcement:

·      volume is in millions of equivalent units (EUm)

·      net sales are sales after deducting excise duties

·      percentage movements are organic movements

·      commentary refers to organic movements

·      share refers to value share

See explanatory notes section for additional information for shareholders and an explanation of non-GAAP measures.

 

BUSINESS REVIEW

For the six months ended 31 December 2013

 

North America

 

Larry Schwartz, President, Diageo North America, commenting on the six months ended 31 December 2013, said:

 

"Our North American business has delivered a strong set of results in a market where economic recovery has been uneven. Net sales grew 5% with 7ppts of positive price/mix, driven by price increases, favourable mix in US spirits and new innovation launches. Our reserve brands grew 26%, driven by Cîroc, Bulleit, Ketel One vodka and Johnnie Walker which gained a point of share and consolidated its leadership position in the category. Smirnoff's volume declined as it maintained its price position in an increasingly competitive standard vodka category. Our leadership in innovation continued to be a key driver of growth with a number of current and prior year launches amongst the strongest performers in innovation in the United States. Diageo Canada has been affected by economic slowdown as well as a decline in ready to drink and Baileys. While DGUSA net sales declined 10% as a result of destocking in the pouch segment, Guinness was back in growth as our new marketing campaign reinvigorated the brand. Marketing investment was up 5% and focused on key brands such as Guinness and Johnnie Walker and our reserve brands. We have continued to build on our already strong route to market, covering more retail outlets and increasing dedicated resources. Our strong price/mix drove gross margin expansion and overheads were reduced, resulting in an operating margin expansion of 1.3ppts."

 

 Key financials £m:


2013

H1

FX

Acquisitions

Organic movement

2014

H1

Reported movement

%

and

disposals

 Net sales

1,942

(9)

(111)

82

1,904

(2)

 Marketing spend

299

(1)

(18)

13

293

(2)

 Operating profit before exceptional items

822

-

(31)

60

851

4

 Exceptional items

-




(1)


 Operating profit

822




850

3

 

 Key markets and categories:                                              The strategic brands**:


Organic

Organic net

Reported net



Organic

Organic net

Reported net


volume*

sales

sales



volume*

sales

sales


%

%

%



%

%

%

 North America

(2)

5

(2)


 Johnnie Walker

1

13

13






 Crown Royal

(3)

1

-

 US Spirits & Wines

(1)

6

(1)


 Buchanan's

18

19

19

 DGUSA

(8)

(10)

(10)


 Smirnoff

(7)

(5)

(5)

 Canada

(3)

(1)

(7)


 Ketel One vodka

4

7

7






 Cîroc

16

18

18

 Spirits**

(2)

5

(1)


 Captain Morgan

2

3

2

 Beer

(3)

-

(1)


 Baileys

(1)

2

1

 Wine

(3)

5

5


 Tanqueray

(4)

(3)

(3)

 Ready to drink

(10)

(17)

(30)


 Guinness

1

4

3

 

*       Organic equals reported movement for volume except for North America (7)%, US Spirits & Wines (7)%, Canada (5)%, spirits (7)% and ready to drink (17)%, reflecting the disposal of Nuvo and the termination of the Jose Cuervo distribution agreement.

**     Spirits brands excluding ready to drink.

 

·      In US Spirits & Wines, which grew net sales 6% with 7ppts of positive price/mix, super and ultra premium segments and new innovation launches fuelled growth. Weaker volume in Smirnoff was the main driver of the 1% volume decline. Good performance from the Smirnoff Sorbet line and the extension of the Confectionary line was not enough to offset a decline in the Smirnoff core variant, whose price premium in an increasingly price competitive segment has impacted volume. Net sales of Johnnie Walker grew 16% on the back of increased marketing investment and the successful launches of new super premium variants such as Johnnie Walker Platinum Label and Johnnie Walker Gold Label Reserve. Crown Royal and Bulleit continued to perform well in the growing North American whiskey category. Crown Royal grew net sales 1% after lapping last year's launch of Crown Royal Maple Finished, Bulleit outperformed the category and grew net sales 59%. Ketel One vodka and Cîroc grew ahead of the vodka category with Ketel One vodka net sales up 7% driven by the new 'Ketel One vodka of substance' campaign and Cîroc up 16% following the successful launch of Cîroc Amaretto.  Don Julio continued to perform strongly as net sales grew 25%, and gained share. Buchanan's volume and net sales grew double digit through its continued focus on the Hispanic community. Net sales growth in the second quarter benefitted from the shipment of Captain Morgan white rum ahead of the launch in January.

·      In Canada, net sales were impacted by the weaker economy. Guinness and Cîroc grew while weakness in ready to drink and Baileys led to net sales decline of 1%.

·     In DGUSA net sales were down 10% driven by category decline and destocking in the pouch segment, weakness in Smirnoff Ice, which continued to face competition from innovation in beer, and in Red Stripe. However, Guinness improved its performance and grew net sales 2%, benefitting from increased marketing investment on a new campaign.

·     Marketing investment was up 5%, largely driven by increases in spend on premium core and reserve brands. Investment was focused on Johnnie Walker's super and ultra premium variants with the 'Keep walking' campaign aimed at maintaining the brand's relevance for a new generation of consumers, and on Guinness largely driven by the 'Basketball' national television commercial which generated 18 million views on YouTube. We increased media spend on proven campaigns such as the Crown Royal 'Reign on' campaign, 'Luck be a lady' campaign for Cîroc and launched the first Hispanic marketing programme for Captain Morgan, 'Noches del capitan', which contributed to making the brand popular amongst Hispanic male consumers. Marketing investment in our reserve portfolio grew 10% driven by increased commercial activation in Don Julio and support of the launch of Cîroc Amaretto.

 

Western Europe

 

John Kennedy, President, Diageo Western Europe, commenting on the six months ended 31 December 2013, said:

 

"The improvement in performance we delivered in the first quarter has continued through the half as a result of investment in brands and markets and successful innovation. The net sales decline of 1% was largely driven by the tough economic environment in Southern Europe and Ireland, where the beer market continues to decline. Great Britain and France both grew in this half and Germany continues to perform well. We continue to pursue our strategy to invest behind our premium core brands, our innovation agenda and our reserve portfolio. Overall marketing investment declined broadly in line with net sales, we have delivered greater efficiency in marketing spend and increased our media spend especially on Captain Morgan and Tanqueray which were the best performing brands in the region. Our upweighted investment on Cîroc, Johnnie Walker, Zacapa and Talisker has been an important driver of the continued double digit growth of our reserve brands. Innovation was a key contributor to Western Europe's improved performance, as we invested behind recent multi-country launches such as Baileys Chocolat Luxe and Parrot Bay Frozen Pouches, and sustained prior year launches. These results show we have the strategy to capture the growth opportunities in the region."

 

 Key financials £m:


2013

H1

FX

Acquisitions

Organic movement

2014

H1

Reported movement

%

and

disposals

 Net sales

1,174

38

(21)

(12)

1,179

-

 Marketing spend

176

6

(2)

(3)

177

1

 Operating profit before exceptional items

378

6

(2)

(12)

370

(2)

 Exceptional items

20




-

-

 Operating profit

398




370

(7)

 

 

 Key market and categories:                                             The strategic brands**:


Organic

Organic net

Reported net



Organic

Organic net

Reported net


volume*

sales

sales



volume*

sales

sales


%

%

%



%

%

%

 Western Europe

(2)

(1)

-


 Johnnie Walker

(1)

(2)

2






 JεB

(11)

(14)

(9)

 Spirits**

(1)

(1)

1


 Smirnoff

(2)

(4)

(2)

 Beer

(7)

(4)

-


 Captain Morgan

14

11

14

 Wine

(7)

(1)

(11)


 Baileys

(5)

(2)

1

 Ready to drink

(1)

-

2


 Guinness

(6)

(3)

(1)

 

*       Organic equals reported movement for volume except for Western Europe (4)%, spirits (2)% and wine (15)%, reflecting the termination of the Jose Cuervo and Pommery distribution agreements.

**     Spirits brands excluding ready to drink.

 

·      Volume in Southern Europe declined 7% and net sales 6% as the weak economy continued to affect consumption. Scotch net sales represents half of the business and declined double digit mainly driven by JεB, as promotional activity was reduced. In contrast, Tanqueray grew double digit as the brand benefited from a new communication platform in the more vibrant gin category.

·      In Ireland net sales were down 6% as the beer market continued to decline across all channels. As a result Guinness net sales declined 6% and the brand lost 0.5ppts of share mainly due to the warm summer. Excise duty was increased for the second year and contributed to the 16% net sales decline of the spirits portfolio.

·      In Great Britain, net sales grew 1%. Reserve brands performed strongly, up 24% driven by Cîroc and Talisker. Successful innovations also drove growth including Cîroc Red Berry, Smirnoff Gold and Baileys Chocolat Luxe. Pimm's net sales nearly trebled in the good summer weather and Captain Morgan performed well driven by increased media activity. Guinness performance was flat, however price increases and competitors' pricing and promotional activity impacted Smirnoff and net sales declined 2%. The decision to hold price on Bell's impacted performance and net sales were down 21%.

·      Germany delivered net sales and volume growth of 6% and 3% respectively. Baileys and Johnnie Walker Red Label were weak as a result of price pressure. However the reserve portfolio performed well and net sales were up 22% driven by a strong performance of malts. Captain Morgan continued to perform strongly with net sales up 20%, gaining 2.6ppts of share on the back of a new television campaign.

·      In France net sales were up 2% with 1ppt of positive price/mix, mainly driven by the solid performance of malts which gained share.

·      Diageo Wines Europe net sales declined 1% as Justerini & Brooks discontinued distribution of spirits to focus on the core wine business, which was up 1% overall.

·      Marketing investment decreased 2% mainly driven by Guinness, following last year's significantly increased investment. We upweighted our investment in media, supporting Johnnie Walker's 'Where flavour is king' campaign, Captain Morgan's 'Live like the captain' campaign in Germany which brings to life the legendary tales of Captain Henry Morgan and Baileys' 'Christmas with spirit' campaign featuring a modern telling of the Nutcracker.

·      Innovation has been a key contributor to Western Europe's performance. Successful recent launches include Baileys Chocolat Luxe, Parrot Bay frozen pouches, Cîroc Red Berry, Smirnoff Gold, Talisker Storm and Pimm's Blackberry and Elderflower.

 

Africa, Eastern Europe and Turkey

 

Nick Blazquez, President, Diageo Africa, Eastern Europe and Turkey commenting on the six months ended 31 December 2013, said:

 

"Our regional performance has been impacted by two factors; contraction of the beer market and the growth of value beers in Nigeria, and a decline in Senator keg as excise duty was introduced on the brand.  This has led to a weaker top line performance and negatively impacted our margin.  That said, the region has also achieved success in a number of areas; reserve brands grew strongly, South Africa delivered a very good performance, and in East Africa, net sales of Guinness and Tusker were up double digit.  Russia and Poland delivered robust results through focused efforts on whiskey and Captain Morgan. Turkey delivered a solid performance given the recent duty increases and legislative changes to the sale and advertising of alcohol.  We have continued to build our brands with the region's emerging market consumers and marketing was up 8%, driven by the rollout of successful innovations, notably in ready to drink in Africa and scotch in Russia and Eastern Europe.  We relaunched the Guinness brand in Nigeria and East Africa with a step change in the quality of our packaging, new visibility materials, and a full suite of advertising assets as part of the new 'Made of more' global positioning.  We continued to make good progress in improving our route to consumer in Nigeria and Ghana and we have driven out costs in East Africa by optimising our supply chain.  All of these initiatives further strengthen our position to capture the growth opportunities in the region."

 

 Key financials £m:


2013

H1

FX

Acquisitions

Organic movement

2014

H1

Reported movement

%

and

disposals

 Net sales

1,188

(50)

(3)

20

1,155

(3)

 Marketing spend

137

(11)

(1)

10

135

(1)

 Operating profit before exceptional items

371

(33)

1

(12)

327

(12)

 Exceptional items

-




(2)


 Operating profit

371




325

(12)

 

 Key markets and categories:                                                The strategic brands**:


Organic

Organic net

Reported net



Organic

Organic net

Reported net


volume*

sales

sales



volume*

sales

sales


%

%

%



%

%

%

 Africa, Eastern Europe

 and Turkey

(4)

2

(3)


 Johnnie Walker

4

2

(2)





 JεB

(4)

(3)

(10)






 Smirnoff

(3)

(4)

(13)

 Africa

(6)

2

(2)


 Captain Morgan

21

17

9

 Nigeria

(13)

(10)

(10)


 Baileys

(11)

(5)

(6)

 East Africa

(9)

4

3


 Guinness

(9)

(2)

(2)

 Africa Regional Markets

(8)

1

(2)






 South Africa

7

20

1






 Russia and Eastern Europe

4

5

3






 Turkey

(5)

(1)

(10)















 Spirits**

2

2

(6)






 Beer

(16)

(4)

(5)






 Ready to drink

91

70

62






 

*       Organic equals reported movement for volume except for South Africa 6%, Russia and Eastern Europe 3% and Spirits 1% reflecting the termination of the Jose Cuervo distribution agreement.

**     Spirits brands excluding ready to drink.

 

·      The beer market decline in Nigeria continued at a mid-single digit rate, and consumers continued to be drawn to value offerings, particularly in lager, as low government spending and high inflation constrained disposable incomes and Harp and Guinness were both impacted by this trading down and by the effect of price increases.  Dubic, which was launched in fiscal 2012, is still a relatively small proportion of the business but grew strongly and nearly doubled in size. In ready to drink, Snapp drove category net sales growth of 10%.  Spirits volume was up 22% and net sales grew nearly 30% as a significant increase in marketing investment drove 39% growth on Johnnie Walker and reserve brands doubled.

·      In East Africa, Senator keg was originally developed to replace illicit alcohol products and the government initially reduced and then eliminated duty on the brand.  In October the duty remission was halved, leading to a 67% price increase. Following the price rise, volume fell roughly significantly, and net sales were down for the half year.  The bottled beer market in Kenya softened slightly following the introduction of the VAT act, but the Tusker brand remained strong and it delivered double digit net sales growth, maintained its leadership position and increased price.  Guinness net sales also grew double digit and price increases were taken, supported by a significant increase in marketing investment behind the brand.  The success of recent innovations, Jebel and Jebel Gold, a mid-proof spirit in a keg, drove almost half of the spirits net sales growth.

·      Net sales in Africa Regional Markets grew 1%.  While beer net sales in Ghana and Cameroon were roughly flat, as Malta compensated for softness in Guinness, Meta delivered a strong performance and the 15% growth of the brand drove 21% growth in Ethiopia.  In West and Central Africa Johnnie Walker and Guinness net sales grew 35% and 21% respectively, on the back of strong brand execution and more consistent regional pricing.  However, this was offset by the destock of Johnnie Walker in Angola as a result of the change in route to market which was introduced at the end of last year, and while net sales declined 74% in spirits, depletions continued to be strong.

·      In South Africa net sales grew 20%, despite softness in the macroeconomic environment, on the success of recent innovations and the strength of marketing execution.  Spirits performance was led by Johnnie Walker Red Label, with net sales growth of nearly 30%, as the brand was supported by increased distribution and activations in outlets.  The growth of Johnnie Walker Red Label was offset in part by a 9% net sales decline in Smirnoff 1818, which continued to take share from competitor offerings but was lapping a strong performance in the comparable period.  Ready to drink performed very well with the continued success of Smirnoff Ice Double Black & Guarana.

·      Russia and Eastern Europe delivered 5% net sales growth driven by whiskey and rum.  In Russia, scotch volume was up 6%, with strong depletions driven by significant share gains on Johnnie Walker Red Label and Bell's, which was up 49%.  Bushmills delivered a particularly good performance with net sales up 33%.  Rums also performed well as Captain Morgan gained share against its main competitor in Russia with net sales up 36% and Zacapa net sales doubled. Vodka net sales declined slightly with a strong performance of Smirnoff in Poland offset by weakness in Smirnov in Russia where the mass vodka segment has been in double digit decline following duty increases.   

·      In Turkey, volume declined 5% and net sales were down 1%.  Raki volume declined 6% in line with the category and the Diageo Raki portfolio maintained share. Scotch volume grew 2% but net sales declined as strong domestic depletions were offset by volume softness in duty free and North Cyprus, and recent price increases did not fully cover excise duty increases.  In vodka, net sales declined 7%.  Smirnoff domestic depletions were strong but price increases did not fully cover excise duty increases and Istanblue slowed in the increasingly price competitive value segment.

 

Latin America and Caribbean

 

Alberto Gavazzi, President, Diageo Latin America and Caribbean, commenting on the six months ended 31 December 2013, said:

 

"Our performance in Latin America in the half has been solid reflecting resilience in consumer demand, albeit growth is now at more modest levels. This has resulted in the good performance of our domestic businesses. However the fluctuating currency environment has impacted trade in the free trade zone and border channels. This together with our tight management on pricing has led to destocking in West LAC. In Venezuela and Argentina the trading environment continues to be challenging. In both markets we are actively managing pricing and working to build our domestic portfolio and the strength of our scotch brands delivered good growth.  In Brazil, performance improved, net sales were up mid-single digit, despite a destock which halved the rate of net sales growth. Our acquisition of Ypióca is now fully integrated and all the synergies identified. Our strong scotch portfolio continued to be a key driver of net sales growth, up 6% despite destocking and we are diversifying into other categories, with rums up over 20% and cachaça growing nearly 30%.  We're building the strength of our brands with an 8% increase in marketing investment and we actively managed our cost base, driving operating margin expansion of 51 basis points, despite investment in route to consumer in Brazil, Mexico and Colombia."

 


 Key financials £m:


2013

H1

FX*

Acquisitions

Organic movement

2014

H1

Reported movement

%

and

disposals

 Net sales

794

53

(5)

58

900

13

 Marketing spend

120

(4)

(2)

9

123

3

 Operating profit before exceptional items

301

60

-

25

386

28

 Exceptional items

-




(1)


 Operating profit

301




385

28

 

*       The net foreign exchange adjustment for net sales, marketing spend and operating profit before exceptional items includes an adjustment to the calculation of Venezuela's organic growth of £83 million, £2 million and £73 million respectively, after adjusting the current and prior period's performance at $1 = VEF19 (£1 = VEF30.4).

 

 Key markets and categories:                                           The strategic brands**:


Organic

Organic net

Reported net



Organic

Organic net

Reported net


volume*

sales

sales



Volume*

sales

sales


%

%

%



%

%

%

 Latin America and

 Caribbean

(2)

8

13

 

 Johnnie Walker

(4)

2

3





 Buchanan's

(28)

6

23






 Smirnoff

-

(2)

(9)

 PUB

5

3

(6)


 Baileys

3

13

13

 Andean

(4)

83

92






 Mexico

3

-

-






 West LAC

(13)

(14)

(17)















 Spirits**

(2)

8

14






 Beer

5

10

-






 Wine

(11)

9

(6)






 Ready to drink

3

14

18






 

*       Organic equals reported movement for volume except for: Andean (6)%, Mexico 2%, West LAC (14)% and Spirits (3)% reflecting the disposal of Nuvo and the termination of the distribution agreement with Cuervo.

**     Spirits brands excluding ready to drink.

 

·      Paraguay, Uruguay and Brazil (PUB) delivered 3% net sales growth.  Declines in Paraguay and Uruguay, resulted from currency movements which drove significant destocking in the duty free businesses in those countries.  Net sales growth in Brazil was strong, driven by scotch and cachaça.  Within scotch, super premium Johnnie Walker variants were up 29%, and Old Parr and White Horse were particularly strong with net sales growth of 50% and 46% respectively, reflecting the bifurcation of consumer spending patterns.  The Ypióca brand was re-launched with new packaging and a media campaign featuring John Travolta. Ypióca has been fully integrated into the portfolio and top line growth was 31%.  Vodka net sales declined 8% as softness in Smirnoff was only partially offset by strong double digit growth of Cîroc. Smirnoff Ice declined as lower priced regional players gained share in a declining market.

·      The Andean business of Venezuela and Colombia continued to grow.  In Venezuela, price increases were taken on the scotch portfolio to address inflation and this has now impacted total volume which was down 5%. Net sales growth was driven by premium scotch, notably Buchanan's, Old Parr and Johnnie Walker Black Label. Net sales of rum more than doubled as price increases and on and off trade activations built on the already strong Cacique brand equity.

·      Net sales were flat in Mexico.  The strong performances of Johnnie Walker Black Label and Johnnie Walker super premium, which both delivered double digit net sales growth and Black & White which nearly trebled in size, were offset by weakness in Johnnie Walker Red Label and JεB in the increasingly competitive standard segment, and Buchanan's 12 in the premium segment.  Baileys continued to lead the liqueur category and support behind the 'Baileys with coffee' platform helped drive 15% top line growth of the brand.

·     Diageo's largest market in the region, West LAC, saw net sales decline 14%.  This was driven almost exclusively by wholesale channels where there was significant destocking and Chile, where price re-alignment led to significant destocking, impacting key brands such as Buchanan's and Old Parr.  In Argentina, Johnnie Walker, Smirnoff and Navarro wines performed well after import restrictions were eased. In Jamaica, new flavour innovations on Smirnoff and Smirnoff Ice and net sales growth of 11% on beer drove 17% top line growth.

 

Asia Pacific

 

Gilbert Ghostine, President, Diageo Asia Pacific, commenting on the six months ended 31 December 2013, said:

 

"The region faced some specific challenges.  Chinese white spirits declined significantly due to the anti-extravagance measures and South East Asia was impacted by weakness in some markets and channels, including Thailand.  Aside from these difficulties, however, we had a number of successes.  In Greater China, super and ultra premium scotch growth was fuelled by Johnnie Walker innovations and Blue Label and The Singleton which grew 35%.   We had success in Korea, Windsor performance improved significantly and this along with growth of JεB resulted in net sales growth.  We saw strong growth in India and started to see benefits from the USL sales promotion agreement that we have put in place.  Across a number of our markets we gained share in key categories including vodka in Japan, ready to drink in Australia and Japan and volume share gains in scotch in Korea, China and India.   Organic operating margin improved as we increased focus on driving cost efficiencies, with a significant reduction in overheads."

 

 Key financials £m:


2013

H1

FX

Acquisitions

Organic movement

2014

H1

Reported movement

%

and

disposals

 Net sales

835

(36)

(3)

(44)

752

(10)

 Marketing spend

182

(7)

-

(5)

170

(7)

 Operating profit before exceptional items

201

(15)

16

(9)

193

(4)

 Exceptional items

-




-

-

 Operating profit

201




193

(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key markets and categories:                                           The strategic brands**:


Organic

Organic

net

Reported

net



Organic

Organic net

Reported net


volume*

sales

sales



volume*

sales

sales


%

%

%



%

%

%

 Asia Pacific

(4)

(6)

(10)


 Johnnie Walker

(10)

(10)

(11)





 Windsor

(7)

(1)

1

 South East Asia

(15)

(11)

(13)


 Smirnoff

3

4

(4)

 Greater China

(7)

(23)

(22)


 Baileys

4

5

-

 India

27

35

19


 Guinness

1

-

(7)

 GTME

4

1

-

 





 Australia hub

1

(1)

(13)






 North Asia

(3)

4

(2)















 Spirits**

(4)

(8)

(10)






 Beer

1

-

(6)

  





 Ready to drink

1

(1)

(12)






 

 

*       Organic equals reported movement for volume except  for Greater China (8)% and Australia (1)% reflecting  the termination of the distribution contract for Jose Cuervo.

**     Spirits brands excluding ready to drink.

 

·      In South East Asia net sales declined 11%.  In Thailand, political unrest, a weaker market environment and double digit price increases due to tax rises significantly impacted performance.  Elsewhere in South East Asia, it has been a mixed picture.  In some markets and channels, sales were impacted by lower shipments as economic softness and currency weakness affected trade confidence, while in Indonesia and Vietnam net sales have grown double digit.   Guinness net sales growth in Indonesia slowed to 5%, impacted by tightening of government regulations which has reduced the number of outlets stocking beer.

·      Greater China performance largely reflects the impact of the government's anti-extravagance measures.  The Shui Jing Fang business was most affected, with significant price discounting by competitors in the baijiu category driving a 66% decline in net sales Johnnie Walker Black Label net sales declined, with shipments impacted by management of trade stock levels, however, depletions increased slightly compared to last year and the brand grew volume share.  Super and ultra premium scotch performed strongly and also gained volume share driven by Johnnie Walker Blue Label in China and Johnnie Walker Gold Label XR and The Singleton in Taiwan.  Increased investment behind media, sampling and gifting resulted in continued growth of Baileys, with 37% net sales growth.

·      India delivered strong double digit net sales growth driven by volume share gains and initial distribution gains resulting from our sales promotion agreement with USL, lower stock in trade at the start of the financial year and a soft comparison against the prior period.  Momentum continued on scotch as Johnnie Walker net sales grew 87% and delivered almost half of India's growth. Smirnoff net sales returned to growth, growing double digit due to increased focus on flavours through upweighted on trade activation, experiential events and a new global brand campaign 'Smirnoff experience'. 

·      Global Travel Asia & Middle East (GTME) reflected the strong performance in the Middle East, largely offset by the Asia duty free business.  In the Middle East, net sales grew double digit driven by improvement in our route to consumer and on trade growth partly due to increased tourism in the Gulf region.  Innovation also played a key role in driving growth, particularly super and ultra premium variants in the Middle East travel retail channel. The Asia duty free business net sales declined significantly as a result of destocking by key customers.

·      In Australia, growth in spirits was offset by the continued decline of ready to drink.  Spirits net sales grew 5% driven by the launch of Smirnoff Double Black and the significant growth of Ketel One vodka, Tanqueray and Don Julio.  Captain Morgan also contributed with rapid growth of the spiced rum segment resulting in 81% net sales growth. In the declining ready to drink category, net sales declined 6%.  Within the segment, innovation, increased shopper activities and marketing campaigns resulted in share gains, particularly for vodka, gin and rum brands. Marketing investment declined 2% reflecting reduced spend behind ready to drink brands partly offset by increased focus on innovation and super premium brands.

·      North Asia returned to growth with net sales increasing 4%, through the recovery of scotch volume share in Korea and continued growth of Smirnoff Ice in Japan.  In Korea, the whisky market continues to contract, but now that competitors have taken price increases, Diageo has regained and extended its volume share.  Windsor net sales are in line with last year, supported by the launch of Windsor 17 Black.  In Japan, Smirnoff Ice net sales grew double digit and gained share, with growth from Smirnoff Ice Red and incremental net sales from the launch of Smirnoff Ice Green Apple Bite. Net sales of Guinness in Japan declined, due to lower foot traffic in the on premise and loss of share as a result of significant investment by Japanese beers to capture growth in the craft beer segment. 

·      Marketing investment declined 3% largely driven by Korea in response to the contracting whisky market and in Thailand in response to market softness.  Investment increased behind Baileys to support growth, particularly in Vietnam and China.  Investment also increased behind Bundaberg rum in Australia to support the launch of Bundaberg 125th Anniversary in the ultra premium rum segment.  Marketing spend on Shui Jing Fang increased to support the brand in the competitive environment and behind innovation.

 

Corporate revenue and costs

Net sales were £42 million in the period ended 31 December 2013, flat relative to the comparable prior period. Net operating charges were £67 million in the period ended 31 December 2013 (2012 - £72 million). The reduction comprised, a £6 million decrease in corporate costs, less a £1 million adverse exchange rate movement.

 

 CATEGORY REVIEW

For the six months ended 31 December 2013



















 Key financials category performance:


Organic

Organic

net

Reported

net



Organic

Organic

net

Reported

net


volume*

sales

sales



volume*

sales

sales


%

%

%



%

%

%










Spirits**

(1)

2

-


Rum:

9

9

10

Beer

(12)

(3)

(3)


Captain Morgan

6

6

5

Wine

(6)

3

(2)






Ready to drink

12

5

(6)


Liqueurs:

(3)

-

(3)

Total

(3)

2

(1)


Baileys

(3)

1

1










Strategic brand performance**



Tequila:

29

26

(67)








Whisk(e)y:

(3)

2

4


Gin:

(1)

-

1

Johnnie Walker

(3)

(1)

(1)


Tanqueray

2

2

2

Crown Royal

(3)

1

-






JεB

(9)

(9)

(9)


Beer:

(12)

(3)

(3)

Buchanan's

(20)

9

23


Guinness

(5)

(1)

(1)

Windsor

(7)

(1)

1



 

 

 

Bushmills

17

13

14















Vodka:

(3)

3

2






Smirnoff

(4)

(3)

(5)






Ketel One vodka

6

9

8






Cîroc

20

22

22






 

*       Organic equals reported movement for volume except for total (5)%, spirits (4)%, wine (11)%, ready to drink 6%, liqueurs (5)%, and tequila (80)%, largely reflecting the disposal of Nuvo and the termination of the distribution agreement of Pommery and Jose Cuervo.

**     Spirits brands excluding ready to drink.

 

Category percentages of net sales are for the year ended 30 June 2013.

 

Spirits represents 69% of Diageo net sales and grew 2% and delivered 3ppts of positive price/mix.  The growth was driven by North America, whereas volatility in emerging markets resulted in flat net sales.  Super and ultra premium spirits led the growth and contributed to positive price/mix.

 

Whisk(e)y represents 36% of Diageo net sales and contributed over half of total net sales growth, driven by North America and Latin America and Caribbean. Scotch performance was in line with total whiskey, with net sales growth of 2% and volume decline of 4%.

·      Johnnie Walker net sales declined slightly.  The decline was driven by Johnnie Walker Red Label and Black Label performance which was impacted by market weakness in Thailand and destocking across a number of markets including South East Asia, Asia duty free, West LAC and PUB.  Performance was also impacted by the comparison against the prior period in North America when Johnnie Walker Double Black was launched. Super and ultra premium variants grew double digit, largely driven by North America which along with pricing in Venezuela drove positive price mix. In North America as a result of the successful launches of new super premium and above variants and marketing activity aimed at recruiting the new generation of whisky drinkers, net sales grew 13%.

·      Net sales of Crown Royal in North America grew, driven by the launch of Crown Royal XO, a super premium variant.  This growth was partly offset by the comparison against the prior period when Crown Royal Maple Finished was launched.  Marketing investment was focused on the 'Reign on' marketing campaign.  With strong brand equity in place, price was increased and delivered 4ppts of positive price/mix.

·      JεB net sales declined 9%, primarily driven by continued contraction in Spain and weakness in emerging markets also having an impact. This was partly offset by growth in South Africa, the brand's third largest market and growth in Korea where the brand more than doubled net sales.

·      Buchanan's net sales increased despite volume decline. In Latin America and Caribbean, volume performance was significantly impacted by destocking in wholesale channels and a slow down in Mexico, offset by Venezuela, where price increases delivered significant net sales growth but volume declined.   Net sales grew double digit in North America where the brand continued to target Latin American consumers and marketing investment increased to support the 'A lo Grande' campaign, sponsorships and trade activation.

·      Windsor performance improved and net sales were broadly in line with last year.  In the brand's primary market, Korea, the brand has regained and extended its volume share position and a new super premium variant, Windsor 17 Black was launched to drive incremental growth in the on trade.

·      Bushmills again performed strongly with particularly strong performance in Russia and Eastern Europe and in Germany and Austria where net sales for the brand more than doubled.  Growth was driven by 'Bushmills live' marketing events, collaborations with Elijah Wood and Aaron Paul and the expansion of the Bushmills Honey innovation in Western and Eastern Europe. 

·      Malts continue to perform well with net sales growth of 22%.  The recently launched Talisker Storm and the Talisker Whisky Atlantic Challenge drove net sales growth for the brand of 44%.  The Singleton and Lagavulin also contributed with net sales growth of 28% and 22% respectively. 

 

Vodka represents 12% of Diageo net sales. Net sales grew 3%, with growth of super and ultra premium variants driving 6ppts of positive price/mix.  North America contributed over 60% of vodka net sales and 90% of the net sales growth for the category.

·      Smirnoff net sales declined in North America, its largest market, where the brand lost share in an increasingly price sensitive segment.  However, innovations performed well, as the Smirnoff Light Sorbet line and the launch of new Smirnoff Wild Honey and Cinna-Sugar Twist flavoured vodka positively impacted performance.  Net sales in Western Europe also declined, primarily driven by competitive pricing in the on trade in Great Britain and difficult market conditions in Ireland.  This was largely offset by the launch of the new signature serve Smirnoff Apple Bite in both countries and Smirnoff Gold in Great Britain, with both innovations supported by strong marketing campaigns. In Australia, net sales grew 4% driven by the launch of Smirnoff Double Black, with a national campaign.

·      Ketel One vodka grew both net sales and volume.  In North America, net sales growth was driven by the launch of the 'Vodka of substance' campaign and brand ambassador and mentoring programmes.  Outside of North America, net sales grew by almost 50%, led by net sales in Australia more than doubling.

·      Cîroc again performed strongly, with net sales growth of 22%.  In North America, growth was driven by price increases and the launch of Cîroc Amaretto, supported by increased marketing investment behind the 'Luck be a lady' campaign.  Net sales doubled outside of the United States, with all markets performing well, in particular, Canada and Great Britain.

Rum represents 6% of Diageo net sales. Net sales of rum grew 9% driven by Captain Morgan, Cacique and Zacapa.  Cacique net sales increased 38% driven by both volume growth and price increases in Venezuela. 

·      Captain Morgan net sales grew 6% fuelled by growth in Germany and Austria, Great Britain and Russia and Eastern Europe through success of the 'Keys to adventure' experiential events and the new 'Live like the captain' campaign.  In North America, which contributes over 70% of net sales for the brand, net sales grew 3%.  The sell in of Captain Morgan white rum ahead of a planned launch early in the second half and the Captain Morgan Sherry Oak limited edition offer offset the impact on performance of increased competition from flavoured whiskies and other spiced rums.

·      Zacapa performed strongly with double digit net sales growth, driven by 28% growth in its largest region, Western Europe.  Investment focused on trade persuasion, mentoring and sampling.  The successful Zacapa Rooms, a luxury temporary lounge dedicated to tasting events for key influencers, media and consumers, continued to be rolled out across Western Europe.

Liqueurs represents 5% of Diageo total net sales. Performance was driven by Baileys, which represents over 85% of the category.

·      Baileys net sales grew 1% with mixed performance across markets.  The brand continued to grow net sales in North America driven by the success of the Baileys Vanilla Cinnamon launch with the campaign 'The most stylish shot of the night'. In Greater China, building on the success achieved in Shanghai, Baileys was launched in Beijing, growing net sales 37%.  Baileys also grew in Latin America and Caribbean following the roll out of the global campaign 'Cream with spirit' and activation in Mexico focused on 'Baileys and coffee'.  In Western Europe, net sales declined slightly.  Performance was impacted by price increases in Germany and Benelux and high stock in trade levels at the start of the financial year in Great Britain, however, this was partly offset by the successful launch of Baileys Chocolat Luxe.  Marketing investment increased slightly behind the global marketing campaign and local campaigns such as 'Christmas with spirit', the first Christmas television commercial in Great Britain for five years.

 

Tequila net sales grew 26% driven by strong performance of Don Julio.  In its primary market, North America, net sales grew 25% and share increased.  This was driven by a significant increase in marketing investment to support new brand positioning and commercial activation around the summer programme, 'Elevate your summer'.  Don Julio continued to perform strongly outside of the United States, growing net sales 33%.

 

Gin represents 3% of Diageo net sales and net sales were flat. Growth in Africa was offset by a 4% net sales decline of Gordons across all regions except Latin America and Caribbean.

·      Tanqueray net sales grew 2% largely driven by a strong performance in Western Europe.  The launch of new print and online communications is helping to drive significant net sales growth across the region.  In North America, depletions performed well and Diageo grew share but shipments were impacted by higher stock levels at the start of the financial year.  

 

Beer, which represents 21% of Diageo net sales, declined 3% driven by Nigeria, where in a weak market  consumers are trading down to value beer and by challenges in the beer market in Ireland.

·      Guinness net sales declined 1%, delivering 4ppts of positive price/mix from price increases.  Guinness performed well in East Africa, North America and South East Asia.  In East Africa, a price increase drove net sales growth of 23%, and this was supported by a significant increase in marketing investment.  In North America, the United States grew slightly and Canada grew net sales 15% supported by the 'Basketball' advertising.  Offsetting this growth was a decline in Nigeria and Ireland due to difficult market conditions and in Japan due to on premise decline and a significant increase in competitor investment in craft beer.

·      Performance of local African beers was negatively impacted by the decline of mainstream beer and increased pricing pressure in Nigeria, with the Harp brand most affected.  The excise duty impact on Senator in Kenya also resulted in net sales decline.  These challenges were in part offset by growth of other local beer brands including Tusker which grew double digit driven by price increases and strong football related marketing programmes.

 

Wine represents 4% of Diageo net sales and grew 3%. Growth was largely driven by North America, as a result of price increases and innovation.   

 

Ready to drink represents 6% of Diageo's net sales and grew 5% driven by South Africa, Venezuela and Japan, partly offset by a decline in North America and Australia.  In South Africa, the growth was driven by the successful launch of Smirnoff Ice Double Black & Guarana.  In Japan, net sales grew 32% driven by both Smirnoff Ice core variants and the launch of Smirnoff Ice Green Apple Bite as a permanent variant.  Destocking of pouches largely drove the net sales decline in North America, and in Australia, category decline continued to impact performance.

 

 

FINANCIAL REVIEW










Summary consolidated income statement


Six months ended

Six months ended


31 December 2013

31 December 2012





(restated)


£ million

£ million






Sales


8,014 


8,131 

Excise duties


 (2,082)


 (2,156)

Net sales


5,932 


5,975 

Operating costs before exceptional items


 (3,872)


 (3,974)

Operating profit before exceptional items


2,060 


2,001 

Exceptional operating items


 (20)


16 

Operating profit


2,040 


2,017 

Non-operating items


138 


 - 

Net finance charges


 (225)


 (229)

Share of associates' profits after tax


181 


140 

Profit before taxation


2,134 


1,928 

Taxation


 (388)


 (351)

Profit from continuing operations


1,746 


1,577 

Discontinued operations


 (92)


 - 

Profit for the period


1,654 


1,577 






Attributable to:





Equity shareholders of the parent company


1,599 


1,521 

Non-controlling interests


55 


56 



1,654 


1,577 

 

Sales and net sales

On a reported basis, sales decreased by £117 million from £8,131 million in the six months ended 31 December 2012 to £8,014 million in the six months ended 31 December 2013 and net sales decreased by £43 million from £5,975 million in the six months ended 31 December 2012 to £5,932 million in the six months ended 31 December 2013. Exchange rate movements decreased reported sales by £143 million and reported net sales by £86 million. Disposals decreased reported sales by £179 million and reported net sales by £143 million.

 

Operating costs before exceptional items

On a reported basis, operating costs before exceptional items decreased by £102 million from £3,974 million in the six months ended 31 December 2012 to £3,872 million in the six months ended 31 December 2013 due to a decrease in cost of sales of £64 million from £2,248 million to £2,184 million, a decrease in marketing spend of £15 million from £918 million to £903million, and a decrease in other operating expenses before exceptional costs of £23 million, from £808 million to £785 million. Exchange rate movements benefited total operating costs before exceptional items by £32 million.

 

Exceptional operating items

Exceptional operating charges of £20 million in the six months ended 31 December 2013 comprised £3 million (2012 - £nil) in respect of the Supply excellence restructuring programme and £17 million (2012 - £4 million) for the restructuring of the group's supply operations in Ireland.

In the six months ended 31 December 2012 exceptional operating items also included a gain of £20 million in respect of changes to future pension increases for the Diageo Guinness Ireland Group Pension Scheme.

      In the six months ended 31 December 2013 total restructuring cash expenditure was £41 million (2012 - £34 million). An exceptional charge of approximately £70 million is expected to be incurred in the year ending 30 June 2014 in respect of the Supply excellence review and the restructuring of the group's supply operations in Ireland, and the cash expenditure in respect of these programmes is expected to be approximately £75 million.

 

Operating profit

Reported operating profit for the six months ended 31 December 2013 increased by £23 million to £2,040 million from £2,017 million in the comparable prior period. Before exceptional operating items, operating profit for the six months ended 31 December 2013 increased by £59 million to £2,060 million from £2,001 million in the comparable prior period. Exchange rate movements decreased both operating profit and operating profit before exceptional items for the six months ended 31 December 2013 by £54 million. Acquisitions increased reported operating profit by £22 million and disposals decreased reported operating profit by £38 million.

 

Non-operating items

In the six months ended 31 December 2013 non-operating items of £138 million included a gain of £140 million following the acquisition of additional equity shares in United Spirits Limited (USL) which increased the group's equity interest 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 accumulated fair value movements, in respect of the 10.04% holding in USL, previously reported in other comprehensive income were recycled to the income statement.

 

Net finance charges

Net finance charges amounted to £225 million in the six months ended 31 December 2013 (2012 - £229 million).

      Net interest charge decreased by £13 million from £201 million in the comparable prior period to £188 million in the six months ended 31 December 2013. The effective interest rate was 4.1% (2012 - 4.9%) in the six months ended 31 December 2013 and average net borrowings increased by £1,016 million compared to the comparable prior period. For the calculation of effective interest rate, the net interest charge excludes fair value adjustments to derivative financial instruments and borrowings and average monthly net borrowings include the impact of interest rate swaps that are no longer in a hedge relationship but exclude the market value adjustment for cross currency interest rate swaps.

      Net other finance charges for the six months ended 31 December 2013 were £37 million (2012 - £28 million). There was a decrease of £15 million in finance charges in respect of post employment plans from £22 million in the six months ended 31 December 2012 to £7 million in the six months ended 31 December 2013. Other finance charges also included £3 million (2012 - £6 million) in respect of the unwinding of discounts on liabilities and a hyperinflation adjustment of £27 million (2012 - £2 million) in respect of the group's Venezuela operations.

 

Associates

The group's share of associates' profits after interest and tax was £181 million for the six months ended 31 December 2013 compared to £140 million in the comparable prior period. Diageo's 34% equity interest in Moët Hennessy contributed £164 million (2012 - £132 million) to share of associates' profits after interest and tax.

 

Profit before taxation

Profit before taxation increased by £206 million from £1,928 million in the comparable prior period to £2,134 million in the six months ended 31 December 2013.

 

Taxation

The reported tax rate remained unchanged at 18.2% in the six months ended 31 December 2013 compared to the comparable prior period. The tax rate before exceptional items for the six months ended 31 December 2013 was 19.4% compared with 18.3% in the six months ended 31 December 2012. In the six months ended 31 December 2013 an increase in the hyperinflation charge for Venezuela which is not tax deductible, and an increase in the proportional share of profit from Venezuela impacted the tax charge for the period. Excluding the group's Venezuelan operation, the tax rate before exceptional items was 17.9%, and it is expected that it will remain at approximately 18%.

 

Discontinued operations

Discontinued operations in the six months ended 31 December 2013 represented a charge after taxation of £92 million (2012 - £nil) in respect of the settlement of the litigation in Australia and New Zealand (£51 million) and anticipated future payments to thalidomide injured individuals and thalidomide organisations (£41 million). It is anticipated that approximately £65 million will be paid in the year ending 30 June 2014.

 

Exchange rate and other movements

Exchange rate movements are calculated by retranslating the prior period results as if they had been generated at the current period exchange rates. The difference is excluded from organic growth. The estimated effect of exchange rate and other movements on profit before exceptional items and taxation for the six months ended 31 December 2013 is set out in the table below.

 



Gains/(losses)




£ million


Operating profit before exceptional items




   Translation impact



(9)


   Transaction impact



(45)


Total exchange effect on operating profit before exceptional items


(54)


Interest and other finance charges





   Net finance charges - translation impact




   Mark to market impact of IAS 39 on interest expense



   Impact of IAS 21 and IAS 39 on other finance charges


(1)


Associates - translation impact




Total effect on profit before exceptional items and taxation


(44)








Six months ended

Six months ended



31 December 2013

31 December 2012


Exchange rates





    Translation  £1 =

$1.60


$1.60


    Transaction £1 =

$1.58


$1.59


    Translation  £1 =

€1.18


€1.25


    Transaction £1 =

€1.23


€1.21


 

The results for the six months ended 31 December 2013 include net sales and operating profit attributable to Venezuela of £294 million (2012 - £126 million) and £204 million (2012 - £68 million), respectively. Cash and cash equivalents include £291 million denominated in Venezuelan bolivar as at 31 December 2013. A change in the exchange rate from $1 = VEF9 (£1 = VEF14.9) to $1 = VEF19 (£1 = VEF30.4) would, for the six months ended 31 December 2013, reduce net sales by £149 million (2012 - £66 million), operating profit by £108 million (2012 - £35 million) and cash and cash equivalents by £148 million.

 

Dividend

An interim dividend of 19.7 pence per share will be paid to holders of ordinary shares and ADRs on the register as of 28 February 2014. This represents an increase of 9% on last year's interim dividend. The interim dividend will be paid to shareholders on 7 April 2014. Payment to US ADR holders will be made on 10 April 2014. A dividend reinvestment plan is available in respect of the interim dividend and the plan notice date is 14 March 2014.

 

Cash flow





Six months ended

Six months ended

31 December 2013

31 December 2012





(restated)


£ million

£ million






Cash generated from operations before exceptional costs


 1,210 


 1,467 

Exceptional operating costs paid


 (41)


 (34)

Cash generated from operations


 1,169 


 1,433 

Interest paid (net)


 (275)


 (262)

Taxation paid


 (288)


 (176)

Net capital expenditure


 (279)


 (264)

Movements in loans and other investments


 (1)


 (23)

Free cash flow


 326 


 708 

 

Free cash flow decreased by £382 million to £326 million in the six months ended 31 December 2013. Cash generated from operations decreased from £1,433 million to £1,169 million primarily driven by lower creditors across the regions as the result of larger proportion of marketing activities being incurred in the first quarter in the current period coupled with a one off €100 million (£85 million) payment into the Irish pension plans and the dividend from Moët Hennessy being received earlier in the comparable prior period. Higher tax payments are principally the result of increased taxable profits and tax audit payments. See explanatory note 3 for the definition of free cash flow.

 

 

Balance sheet

At 31 December 2013 total equity was £8,038 million compared with £8,088 million at 30 June 2013. The decrease was mainly due to the dividend paid out of shareholders' equity of £735 million, adverse exchange movements of £770 million, a net remeasurement of the post employment liability of £89 million and fair value movements on available-for-sale investments of £90 million. These decreases were partially offset by the profit for the period of £1,654 million.

The deficit in respect of post employment plans before taxation decreased by £54 million from £541 million at 30 June 2013 to £487 million at 31 December 2013 primarily as a result of a one off €100 million (£85 million) cash contribution into the Irish pension plans. Cash contributions to the group's post employment plans in the six months ended 31 December 2013 were £182 million (2012 - £98 million) and are expected to be approximately £290 million for the year ending 30 June 2014.

Net borrowings were £9,096 million at 31 December 2013, an increase of £693 million from £8,403 million at 30 June 2013. The principal components of this increase were £735 million (2012 - £673 million) equity dividends paid, and £420 million (2012 - £301 million) paid for the acquisition of businesses, primarily in respect of United Spirits Limited, which were partially offset by favourable exchange movements of £337 million (2012 - £111 million) andfree cash flow of £326 million (2012 - £708 million).

Diageo manages its capital structure to achieve capital efficiency, maximise flexibility and give the appropriate level of access to debt markets at attractive cost levels in order to enhance long term shareholder value. To achieve this, Diageo targets a range of ratios which are currently broadly consistent with an A band credit rating. Diageo would consider modifying these ratios in order to effect strategic initiatives within its stated goals, which could have an impact on its rating. If Diageo's ratings were to be negatively impacted by the financing of an acquisition, it would seek over time to return to such ratios that are consistent with an A band credit rating.

To ensure that intangibles with indefinite useful lives are not carried above their recoverable amount an impairment triggering event review was carried out in the six months ended 31 December 2013 for all material intangibles and recent acquisitions. As a result of the weak performance in China, in particular in respect of the Shui Jing Fang brand, due to a downturn in the baijiu category, an impairment test was carried out to support the book value of the Shui Jing Fang brand and the Greater China cash generating unit. This resulted in no impairment charge for the six months ended 31 December 2013. As announced by Sichuan Shuijingfang Co., Ltd (Shuijingfang), a new strategy is currently being developed, based on which the impairment test will be updated in the second half of the financial year. At 31 December 2013, the book value of the Greater China cash generating unit was £660 million of which £499 million is in respect of the Shui Jing Fang brand. The non-controlling interest in respect of Shuijingfang amounted to £317 million.

 

Economic profit

Economic profit decreased by £4 million from £1,001 million in the six months ended 31 December 2012 to £997 million in the six months ended 31 December 2013. See explanatoru note 5 for the calculation and definition of economic profit.

 

DIAGEO CONDENSED CONSOLIDATED INCOME STATEMENT















Six months ended

Six months ended



31 December 2013

31 December 2012






(restated)


Notes

£ million

£ million







Sales

2


 8,014 


8,131 

Excise duties



(2,082)


(2,156)

Net sales

2


5,932 


5,975 

Cost of sales



(2,200)


(2,251)

Gross profit



3,732 


3,724 

Marketing



(903)


(918)

Other operating expenses



(789)


(789)

Operating profit

2


2,040 


2,017 

Non-operating items

3


138 


Net interest payable

4


(188)


(201)

Net other finance charges

4


(37)


(28)

Share of associates' profits after tax



181 


140 

Profit before taxation



2,134 


1,928 

Taxation

5


(388)


(351)

Profit from continuing operations



 1,746 


1,577 

Discontinued operations

3


(92)


Profit for the period



 1,654 


1,577 







Attributable to:






Equity shareholders of the parent company



1,599 


1,521 

Non-controlling interests



55 


56 




1,654 


1,577 













Basic earnings per share






Continuing operations



67.5p


60.8p

Discontinued operations



(3.7)p


 - 




63.8p


60.8p







Diluted earnings per share






Continuing operations



67.2p


60.4p

Discontinued operations



(3.7)p


 - 




63.5p


60.4p







Average shares (in million)



2,507 


 2,501 







Figures for the six months ended 31 December 2012 have been restated following the adoption of IFRS 11 and the amendment to IAS 19. See Note 1 and 15 to the financial information.

 

 

DIAGEO CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME












Six months ended

Six months ended


31 December 2013

31 December 2012





(restated)


£ million

£ million

Other comprehensive income





  Items that will not be recycled subsequently to the income

   statement





  Net remeasurement of post employment plans





     -  group


 (90)


 (80)

     -  associates


 1 


 - 

  Tax credit on post employment plans


 11 


 7 



 (78)


 (73)

  Items that may be recycled subsequently to the income

   statement





  Exchange differences on translation of foreign operations

    excluding borrowings





     -  group


 (862)


 (206)

     -  non-controlling interests


 (82)


 (31)

     -  associates


 (191)


 9 

  Exchange differences on borrowings and derivative net investment





    hedges


 365 


 103 

  Tax on exchange differences on borrowings and derivative net





    investment hedges


 (7)


 2 

  Effective portion of changes in fair value of cash flow hedges





     -  gains/(losses) taken to other comprehensive income


 30 


 (14)

     -  recycled to income statement


 49 


 11 

  Tax on effective portion of changes in fair value of cash flow

    hedges


 2 


 9 

  Fair value movements on available-for-sale investments





     -  gains taken to other comprehensive income


 56 


 - 

     -  recycled to income statement


 (146)


 - 

  Hyperinflation adjustment


 51 


 2 

  Tax on hyperinflation adjustment


 (11)


 - 



 (746)


 (115)

Other comprehensive loss, net of tax, for the period


 (824)


 (188)

Profit for the period


 1,654 


 1,577 

Total comprehensive income for the period


 830 


 1,389 






Attributable to:





Equity shareholders of the parent company


 859 


 1,365 

Non-controlling interests


 (29)


 24 

Total comprehensive income for the period


 830 


 1,389 






Figures for the six months ended 31 December 2012 have been restated following the adoption of IFRS 11 and the amendment to IAS 19. See Note 1 and 15 to the financial information.






 

 

 

DIAGEO CONDENSED CONSOLIDATED BALANCE SHEET
































31 December 2013


30 June 2013


31 December 2012








(restated)


(restated)


Notes


£ million


£ million


£ million


£ million


£ million


£ million

Non-current assets














Intangible assets



 8,324 




 9,013 




 8,877 



Property, plant and equipment



 3,393 




 3,425 




 3,083 



Biological assets



 34 




 36 




 34 



Investments in associates



 3,329 




 2,521 




 2,407 



Other investments



 68 




 412 




 98 



Other receivables



 110 




 127 




 115 



Other financial assets

 9 


 276 




 393 




 449 



Deferred tax assets



 229 




 242 




 326 



Post employment benefit assets



 177 




 312 




 18 








 15,940 




 16,481 




 15,407 

Current assets














Inventories

 6 


 4,320 




 4,207 




 4,165 



Trade and other receivables



 2,957 




 2,437 




 2,849 



Assets held for sale



 8 




 51 




 76 



Other financial assets

 9 


 129 




 65 




 57 



Cash and cash equivalents

 7 


 891 




 1,750 




 686 








 8,305 




 8,510 




 7,833 

Total assets





 24,245 




 24,991 




 23,240 

Current liabilities














Borrowings and bank overdrafts             

 7 


 (3,007)




 (1,852)




 (2,205)



Other financial liabilities

 9 


 (153)




 (122)




 (123)



Trade and other payables



 (3,040)




 (3,212)




 (3,220)



Corporate tax payable



 (276)




 (224)




 (416)



Provisions



 (90)




 (109)




 (99)








 (6,566)




 (5,519)




 (6,063)

Non-current liabilities














Borrowings                                         

 7 


 (6,716)




 (8,217)




 (6,220)



Other financial liabilities

 9 


 (453)




 (473)




 (506)



Other payables



 (103)




 (118)




 (96)



Provisions



 (268)




 (256)




 (273)



Deferred tax liabilities



 (1,437)




 (1,467)




 (1,519)



Post employment benefit liabilities



 (664)




 (853)




 (1,132)








 (9,641)




 (11,384)




 (9,746)

Total liabilities





 (16,207)




 (16,903)




 (15,809)

Net assets





 8,038 




 8,088 




 7,431 















Equity














Share capital



 797 




 797 




 797 



Share premium



 1,344 




 1,344 




 1,344 



Other reserves



 2,540 




 3,154 




 3,127 



Retained earnings



 2,405 




 1,741 




 1,059 



Equity attributable to equity

  shareholders of the parent company





 7,086 




 7,036 




 6,327 

Non-controlling interests





 952 




 1,052 




 1,104 

Total equity





 8,038 




 8,088 




 7,431 















Figures as at 31 December 2012 and as at 30 June 2013 have been restated following the adoption of IFRS 11. See Note 1 and 15 to the financial information.

 

 

DIAGEO CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY


























Retained earnings/(deficit)


Equity attributable to parent company share-holders






Share capital


Share premium


Other reserves


Own shares


Other retained earnings


Total



Non-controlling interests


Total equity

£ million


£ million


£ million


£ million


£ million


£ million


£ million


£ million


£ million



















At 30 June 2013

  as previously reported

 797 


 1,344 


 3,154 


 (2,232)


 3,973 


 1,741 


 7,036 


 1,071 


 8,107 

Prior year adjustments

(see note 1)


















 - Adoption of IFRS 11

 - 


 - 


 - 


 - 


 - 


 - 


 - 


 (19)


 (19)

At 30 June 2013

  as restated

 797 


 1,344 


 3,154 


 (2,232)


 3,973 


 1,741 


 7,036 


 1,052 


 8,088 

Total comprehensive income

 - 


 - 


 (614)


 - 


 1,473 


 1,473 


 859 


 (29)


 830 

Employee share schemes

 - 


 - 


 - 


 (9)


 (51)


 (60)


 (60)


 - 


 (60)

Share-based incentive plans

 - 


 - 


 - 


 - 


 19 


 19 


 19 


 - 


 19 

Share-based incentive plans in respect


















 of associates

 - 


 - 


 - 


 - 


 1 


 1 


 1 


 - 


 1 

Tax on share-based incentive plans

 - 


 - 


 - 


 - 


 (13)


 (13)


 (13)


 - 


 (13)

Acquisition of businesses

 - 


 - 


 - 


 - 


 - 


 - 


 - 


 8 


 8 

Change in fair value of put options

 - 


 - 


 - 


 - 


 (4)


 (4)


 (4)


 - 


 (4)

Purchase of non-controlling interests

 - 


 - 


 - 


 - 


 (17)


 (17)


 (17)


 (18)


 (35)

Dividends paid

 - 


 - 


 - 


 - 


 (735)


 (735)


 (735)


 (61)


 (796)

At 31 December 2013

 797 


 1,344 


 2,540 


 (2,241)


 4,646 


 2,405 


 7,086 


 952 


 8,038 



















At 30 June 2012

  as previously reported

 797 


 1,344 


 3,213 


 (2,257)


 2,491 


 234 


 5,588 


 1,223 


 6,811 

Prior year adjustments

(see note 1)


















 - Adoption of IFRS 11

 - 


 - 


 - 


 - 


 - 


 - 


 - 


 (19)


 (19)

At 30 June 2012

  as restated

 797 


 1,344 


 3,213 


 (2,257)


 2,491 


 234 


 5,588 


 1,204 


 6,792 

Total comprehensive income

 - 


 - 


 (86)


 - 


 1,451 


 1,451 


 1,365 


 24 


 1,389 

Employee share schemes

 - 


 - 


 - 


 (19)


 (25)


 (44)


 (44)


 - 


 (44)

Share-based incentive plans

 - 


 - 


 - 


 - 


 21 


 21 


 21 


 - 


 21 

Share-based incentive plans in respect


















 of associates

 - 


 - 


 - 


 - 


 1 


 1 


 1 


 - 


 1 

Tax on share-based incentive plans

 - 


 - 


 - 


 - 


 7 


 7 


 7 


 - 


 7 

Change in fair value of put options

 - 


 - 


 - 


 - 


 (3)


 (3)


 (3)


 - 


 (3)

Dividends paid

 - 


 - 


 - 


 - 


 (673)


 (673)


 (673)


 (59)


 (732)

Transfers

 - 


 - 


 - 


 - 


 65 


 65 


 65 


 (65)


 - 

At 31 December 2012


















   as restated

 797 


 1,344 


 3,127 


 (2,276)


 3,335 


 1,059 


 6,327 


 1,104 


 7,431 



















Figures for the six months ended 31 December 2012 have been restated following the adoption of IFRS 11. See Note 1 and 15 to the financial information.



















 

 

 

DIAGEO CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 








 








 



Six months ended


Six months ended

 



31 December 2013


31 December 2012

 







(restated)

 


£ million

£ million

£ million

£ million

 










 

Cash flows from operating activities









 

  Cash generated from operations (see note 11)


 1,169 




 1,433 



 

  Interest received


 71 




 64 



 

  Interest paid


 (346)




 (326)



 

  Taxation paid


 (288)




 (176)



 

  Net cash from operating activities




 606 




 995 

 










 

Cash flows from investing activities









 

  Disposal of property, plant and equipment and computer software


 64 




 3 



 

  Purchase of property, plant and equipment and computer software


 

 (343)




 

(267)



 

  Movements in loans and other investments


 (1)




 (23)



 

  Acquisition of businesses


 (420)




 (301)



 

  Net cash outflow from investing activities




 (700)




 (588)

 










 

Cash flows from financing activities









 

  Net purchase of own shares for share schemes


 (61)




 (56)



 

  Dividends paid to equity non-controlling interests


 (61)




 (59)



 

  Purchase of shares of non-controlling interests


 (35)




 - 



 

  Net increase in loans


 139 




 14 



 

  Equity dividends paid


 (735)




 (673)



 

  Net cash outflow from financing activities




 (753)




 (774)

 










 










 

Net decrease in net cash and cash equivalents




 (847)




 (367)

 

Exchange differences




 (41)




 - 

 

Net cash and cash equivalents at beginning of the period




 1,645 




 1,015 

 

Net cash and cash equivalents at end of the period




 757 




 648 

 










 

Net cash and cash equivalents consist of:









 

Cash and cash equivalents




 891 




 686 

 

Bank overdrafts




 (134)




 (38)

 





 757 




 648 

 










 

Figures for the six months ended 31 December 2012 have been restated following the adoption of IFRS 11. See Note 1 and 15 to the financial information.

 



















 

NOTES

 

1. Basis of preparation

 

The financial information included within this report has been prepared using accounting policies in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and adopted for use in the European Union (EU), and in accordance with the Disclosure and Transparency Rules (DTR) of the Financial Conduct Authority. The condensed consolidated financial statements have been prepared in accordance with IAS 34 - Interim Financial Reporting. This interim condensed consolidated financial information is unaudited and has been prepared on the basis of accounting policies consistent with those applied in the consolidated financial statements for the year ended 30 June 2013 except for the impact of adoption of new accounting standards explained below. IFRS is subject to ongoing review and endorsement by the EU or possible amendment by interpretative guidance and the issuance of new standards by the IASB.

The directors have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the condensed consolidated financial statements.

 

Adopted by the group

The following accounting standards and amendments, issued by the International Accounting Standards Board (IASB), are effective for the first time in the current financial year and have been adopted by the group:

 

IFRS 10 - Consolidated financial statementsreplaces the guidance of control and consolidation in IAS 27 and SIC-12 - Consolidation - special purpose entities. The core principle that a consolidated entity presents a parent and its subsidiaries as if they were a single entity remains unchanged, as do the mechanics of consolidation. Application of IFRS 10 has not affected the scope of the consolidation.

 

IFRS 11 - Joint arrangements requires joint arrangements to be accounted for as a joint operation or as a joint venture depending on the rights and obligations of each party to the arrangement. This means that for certain entities the group's share of their sales and other financial items is no longer consolidated on a line by line basis but the group's net share of their net income is included in the line 'Share of profits of associates after tax'. Following the adoption of IFRS 11, the group has restated its financial information.

 

IFRS 12 - Disclosure of interests in other entities requires enhanced disclosures of the nature, risks and financial effects associated with the group's interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities.

 

IFRS 13 - Fair value measurement explains how to measure fair value and aims to enhance fair value disclosures. The standard does not materially change the measurement of fair values but codifies it in one place.

 

Amendments to IAS 19 - Employee benefits changes a number of disclosure requirements for post employment arrangements and restricts the options currently available on how to account for defined benefit pension plans. The most significant change that impacts the group is that the amendment requires the expected returns on pension plan assets, previously calculated based on management's estimate of expected returns, to be replaced by a credit on the pension plan assets calculated at the liability discount rate.

 

As a consequence of the above changes, comparative prior period figures have been restated. The impact on the group's consolidated statement of comprehensive income, net assets and net cash flow are provided in Note 15 to the financial information. Restated segmental information for the six months ended 31 December 2012 is provided the explanatory notes section.

 

The following accounting standards and amendments, issued by the IASB, have been adopted by the group from 1 July 2013 with no significant impact on its consolidated results or financial position:

 

Amendment to IAS 1 - Clarification of the requirements for comparative information

Limited scope amendment to IAS 12 - Income taxes

Amendment to IAS 16 - Classification of servicing equipment

IAS 27 (Revised) - Separate financial statements

IAS 28 (Revised) - Investments in associates and joint ventures

Amendment to IAS 32 - Tax effect of distribution to holders of equity instruments

Amendment to IAS 34 - Interim financial reporting

Amendment to IFRS 7 - Disclosures - Offsetting financial assets and financial liabilities

 

The comparative figures for the financial year ended 30 June 2013 are not the company's statutory accounts for that financial year. Those accounts have been reported on by the company's auditor and delivered to the registrar of companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor 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.

2. Segmental information

Diageo presents segmental information for the manufacture, distribution and selling of premium drinks in operating segments based on the geographical location of third party customers. The information presented is consistent with management reporting provided to the chief operating decision maker, which has been identified as the executive committee.

      The executive committee considers the business principally from a geographical perspective 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 Global Supply, which manufactures products for other group companies and includes the production sites in the United Kingdom, Ireland and Italy. Continuing operations also include the Corporate function. In view of the focus on the geographical segments in explaining the group's performance in the Business review, the results of the Global Supply segment have been allocated to the geographical segments. Corporate revenues and costs are in respect of central costs, including finance, corporate relations, human resources and legal, as well as certain information systems, facilities and employee costs that do not relate to the geographical segments or to Global Supply and hence are not allocated. They also include rents receivable in respect of properties not used by the group in the manufacture, sale or distribution of premium drinks and the results of Gleneagles Hotel.

      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 period at, and restates the prior period net sales and operating profit to, the current period's budgeted exchange rates. These exchange rates are set prior to the financial year as part of the financial planning process and provide a consistent exchange rate to measure the performance of the business throughout the year. The adjustments required to retranslate the segmental information to actual exchange rates and to reconcile it to the group's reported results are shown in the tables below. The comparative segmental information, prior to retranslation, has not been restated at the current period's budgeted exchange rates but is presented at the budgeted rates for the year ended 30 June 2013.

      In addition, for management reporting purposes Diageo excludes the impact of acquisitions and disposals completed in the current and prior period from the results of the geographical segments in order to provide comparable results. The impact of acquisitions and disposals on net sales and operating profit is disclosed under the appropriate geographical segments in the tables below at budgeted exchange rates.

 

 

Six months ended

31 December 2013

North America

£ million


Western Europe

£ million


Africa, Eastern Europe and

Turkey

£ million


Latin America and Caribbean

£ million


Asia

Pacific

£ million


Global Supply

£ million


Eliminate

inter-

segment

sales

 £ million


Total

operating

segments

£ million


Corporate

and other

£ million


Total

£ million





















Sales

2,149 


1,970 


1,739 


1,102 


1,012 


821 


 (821)


7,972 


42 


8,014 

Net sales




















At budgeted exchange rates*

1,934 


1,134 


1,191 


741 


792 


864 


 (821)


5,835 


42 


5,877 

Acquisitions and disposals

20 




 - 


 - 


 - 


 - 


23 


 - 


23 

Global Supply allocation


23 





 (43)


 - 


 - 


 - 


 - 

Retranslation to actual

  exchange rates

 (56)


20 


 (43)


155 


 (44)


 - 


 - 


32 


 - 


32 

Net sales

1,904 


1,179 


1,155 


900 


752 


821 


 (821)


5,890 


42 


5,932 

Operating profit/(loss)




















At budgeted exchange rates*

866 


338 


351 


263 


217 


56 


 - 


2,091 


 (69)


2,022 

Acquisitions and disposals

 (4)



 (1)


 - 


 (7)


 - 


 - 


 (10)


 - 


 (10)

Global Supply allocation


29 





 (56)


 - 


 - 


 - 


 - 

Retranslation to actual

  exchange rates

 (19)



 (31)


117 


 (22)


 - 


 - 


46 



48 

Operating profit/(loss)

  before exceptional items

851 


370 


327 


386 


193 


 - 


 - 


2,127 


 (67)


2,060 

Exceptional items

 (1)


 - 


 (2)


 (1)


 - 


 (16)


 - 


 (20)


 - 


 (20)

Operating profit/(loss)

850 


370 


325 


385 


193 


 (16)


 - 


2,107 


 (67)


2,040 

Non-operating items



















138 

Net finance charges



















 (225)

Share of associates' profits

  after tax




















 - Moët Hennessy



















164 

 - Other associates



















17 

Profit before taxation



















2,134 

 

Six months ended

31 December 2012 (restated)

North America

£ million


Western

Europe

£ million


Africa,

Eastern Europe and

Turkey

£ million


Latin America and Caribbean

£ million


Asia

Pacific

£ million


Global

Supply

£ million


Eliminate

inter-

segment

sales

£ million


Total

operating

segments

£ million


Corporate

and other

£ million


Total

£ million





















Sales

2,218 


1,977 


1,791 


965 


1,138 


1,396 


 (1,396)


8,089 


42 


8,131 

Net sales




















At budgeted exchange rates*

1,980 


1,190 


1,156 


793 


805 


1,473 


 (1,425)


5,972 


43 


6,015 

Acquisitions and disposals

 - 



62 


30 


51 


 - 


 - 


144 


 - 


144 

Global Supply allocation


23 





 (48)


 - 


 - 


 - 


 - 

Retranslation to actual

  exchange rates

 (45)


 (40)


 (36)


 (36)


 (26)


 (29)


29 


 (183)


 (1)


 (184)

Net sales

1,942 


1,174 


1,188 


794 


835 


1,396 


 (1,396)


5,933 


42 


5,975 

Operating profit/(loss)




















At budgeted exchange rates*

819 


371 


364 


308 


221 


63 


 - 


2,146 


 (75)


2,071 

Acquisitions and disposals

 - 


 - 


18 



 (17)


 - 


 - 



 - 


Global Supply allocation

27 


21 





 (63)


 - 


 - 


 - 


 - 

Retranslation to actual

  exchange rates

 (24)


 (14)


 (17)


 (14)


 (8)


 - 


 - 


 (77)



 (74)

Operating profit/(loss)

  before exceptional items

822 


378 


371 


301 


201 


 - 


 - 


2,073 


 (72)


2,001 

Exceptional items

 - 


20 


 - 


 - 


 - 


 (4)


 - 


16 


 - 


16 

Operating profit/(loss)

822 


398 


371 


301 


201 


 (4)


 - 


2,089 


 (72)


2,017 

Net finance charges



















 (229)

Share of associates' profits

  after tax




















- Moët Hennessy



















132 

- Other associates



















Profit before taxation



















1,928 

* These items represent the IFRS 8 performance measures for the geographical and Global Supply segments.

 

(i) The group's net finance charges are managed centrally and are not attributable to individual operating segments.

 

Approximately 40% of annual net sales occur in the last four months of each calendar year.

 

Weighted average exchange rates used in the translation of income statements were US dollar - £1 = $1.60 (2012 - £1 = $1.60) and euro - £1 = €1.18 (2012 - £1 = €1.25). Exchange rates used to translate assets and liabilities at the balance sheet date were US dollar - £1 = $1.66 (30 June 2013 - £1 = $1.52, 31 December 2012 - £1 = $1.63) and euro - £1 = €1.20 (30 June 2013 - £1 = €1.17, 31 December 2012 - £1 = €1.23). The group uses foreign exchange transaction hedges to mitigate the effect of exchange rate movements.

 

 

3. Exceptional items

Exceptional items are those which, in management's judgement, need to be disclosed by virtue of their size or incidence in order for the user to obtain a proper understanding of the financial information.


Six months ended

Six months ended


31 December 2013

31 December 2012


£ million

£ million

Items included in operating profit





Supply excellence review


 (3)


 - 

Restructuring of Irish brewing operations


 (17)


 (4)



 (20)


 (4)






Pension changes - past service credits


 - 


 20 



 (20)


 16 






Non-operating items





Fair value gain on USL


 140 


 - 

Sale of business


 (2)


 - 



 138 


 - 






Exceptional items before taxation


 118 


 16 






Tax on exceptional operating items


 


 (2)






Exceptional items in continuing operations


 121 


 14 






Discontinued operations net of taxation





Thalidomide (Australia and New Zealand)


(51)


Thalidomide (Other)


(41)




 (92)


 - 






Total exceptional items


 29 


 14 






Items included in operating profit are charged to:





Cost of sales


 (16)


 (3)

Other operating expenses


 (4)


 19 



 (20)


 16 

 

4. Net interest and other finance charges






Six months ended

Six months ended


31 December 2013

31 December 2012




(restated)


£ million

£ million






Interest payable


(239)


(250)

Interest receivable


52 


 51 

Market value movements on interest rate instruments


(1)


(2)

Net interest payable


(188)


(201)






Net finance charges in respect of post employment plans


(7)


(22)

Unwinding of discounts


(3)


(6)

Hyperinflation adjustment on Venezuela operations


(27)


(2)



(37)


(30)

Net exchange movements on certain financial instruments



Net other finance charges


(37)


(28)

 

5. Taxation

For the six months ended 31 December 2013, the £388 million taxation charge (2012 - £351 million) comprises a UK tax charge of £37 million (2012 - £19 million) and a foreign tax charge of £351 million (2012 - £332 million).










6. Inventories










31 December

 2013


30 June

2013

(restated)


31 December

2012

(restated)


£ million


£ million


£ million










Raw materials and consumables


 387 



 346 



 390 

Work in progress


 65 



 63 



 75 

Maturing inventories


 3,234 



 3,182 



 3,092 

Finished goods and goods for resale


 634 



 616 



 608 



 4,320 



 4,207 



 4,165 

 

7. Net borrowings








31 December

 2013

30 June

 2013

31 December

2012





(restated)


(restated)



£ million


£ million


£ million








Borrowings due within one year and bank overdrafts


 (3,007)


 (1,852)


 (2,205)

Borrowings due after one year


(6,716)


 (8,217)


 (6,220)

Fair value of foreign currency forwards and swaps


 35 


 205 


 106 

Finance lease liabilities


 (299)


 (289)


 (258)



 (9,987)


 (10,153)


 (8,577)

Cash and cash equivalents


 891 


 1,750 


 686 



 (9,096)


 (8,403)


 (7,891)

 

8. Reconciliation of movement in net borrowings






Six months ended

Six months ended


31 December 2013

31 December 2012





(restated)


£ million

£ million






Net decrease in cash and cash equivalents before exchange


(847)


 (367)

Net increase in loans


(139)


 (14)

Increase in net borrowings from cash flows


(986)


 (381)

Exchange differences on net borrowings


337 


 111 

Other non-cash items


(44)


 (48)

Net borrowings at beginning of the period


(8,403)


 (7,573)

Net borrowings at end of the period


(9,096)


 (7,891)

 

Other non-cash items primarily comprise fair value changes on bonds, interest rate derivatives and new finance leases. On 1 July 2013 the group repaid bonds of €1,150 million (£983 million).

 

 

9. Financial instruments

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 levels can be broadly described as follows:

·      Level 1 - use of unadjusted quoted prices in active markets for identical assets or liabilities;

·      Level 2 - use of observable inputs other than quoted prices included within level 1, such as quoted prices for similar assets or liabilities in active markets; and

·      Level 3 - use of inputs not based on observable market data but reflecting management's own assumptions about pricing the asset or liability.

 

There were no significant changes in the measurement and valuation techniques, or significant transfers between levels of the financial assets and liabilities in the six months ended 31 December 2013.

 

The group's financial assets and liabilities measured at fair value are categorised as follows:

 


31 December 2013


30 June 2013


31 December 2012


Level 1


Level 2


Level 3


Total


Level 1


Level 2


Level 3


Total


Level 1


Level 2


Level 3


Total

£ million


£ million


£ million


£ million


£ million


£ million


£ million


£ million


£ million


£ million


£ million


£ million

Assets
























Derivative assets

 - 


405



405


 - 


 458 


 - 


 458 


 - 


 506 


 - 


 506 

Available-for-sale

investments

 - 


 - 


 - 


 - 


 350 


 - 


 - 


 350 


 - 


 - 


 - 


 - 

Total assets

 - 


405


 - 


405


 350 


 458 


 - 


 808 


 - 


 506 


 - 


 506 

Liabilities
























Derivative liabilities

 - 


(198)


 - 


(198)


 - 


(191)



(191)



(249)


(4)


(253)

Other financial

liabilities

 - 


 - 


(109)


(109)


 - 



(115)


(115)




(118)


(118)

Total liabilities

 - 


(198)


(109)


(307)



(191)


(115)


(306)



(249)


(122)


(371)

 

Finance lease liabilities amounted to £299 million in the six months ended 31 December 2013 (30 June 2013 - £289 million, 31 December 2012 - £258 million).

      The carrying amount of the group's financial assets and liabilities are generally the same as their fair value apart from borrowings. At 31 December 2013 the fair value of gross borrowings was £9,992 million and the carrying value was £9,723 million (30 June 2013 - £10,436 million and £10,069 million respectively, 31 December 2012 - £9,196 million and £8,425 million respectively).

 

 

10. Dividends and other reserves








Six months ended


Six months ended



31 December 2013


31 December 2012



£ million


£ million

Amounts recognised as distributions to equity

   shareholders in the period







Final dividend paid for the year ended 30 June 2013 of 

   29.30 pence per share (2012 - 26.90 pence)



735 



673 

 

An interim dividend of 19.7 pence per share (2012 - 18.10 pence) was approved by the board on 29 January 2014. As the approval was after the balance sheet date, it has not been included as a liability.

Other reserves of £2,540 million at 31 December 2013 (2012 - £3,127 million) includes a capital redemption reserve of £3,146 million credit (2012 - £3,146 million) and hedging and exchange reserve of £606 million deficit (2012 - £19 million deficit).

 

11. Cash generated from operations









Six months ended


Six months ended


31 December 2013


31 December 2012








(restated)


£ million


£ million


£ million


£ million









Profit for the period

 1,654 




 1,577 



Discontinued operations

 92 






Taxation

 388 




 351 



Share of associates' profits after tax

 (181)




 (140)



Net finance charges

 225 




 229 



Non-operating items

 (138)






Operating profit



 2,040 




 2,017 

Increase in inventories

 (213)




 (243)



Increase in trade and other receivables

 (693)




 (790)



(Decrease)/increase in trade and other payables and provisions

 (7)




 285 



Net increase in working capital



 (913)




 (748)

Depreciation, amortisation and impairment



 186 




 160 

Dividends received



 8 




 58 

Post employment payments less amounts included

  in operating profit



 (122)




 (60)

Other items



 (30)




 6 

Cash generated from operations



 1,169 




 1,433 

 

Cash generated from operations is stated after £41 million (2012 - £34 million) of cash outflows in respect of exceptional operating items.

 

 

12. Acquisition of businesses

 

On 4 July 2013, Diageo purchased a further 14.98% equity share (21.77 million shares) in United Spirits Limited (USL) at a cost of INR 1440 per share totalling INR 31.3 billion (£342 million). This took the group's equity interest in USL to 25.02% and changed its accounting treatment from available-for-sale investments to associates.

On 26 November 2013, Diageo acquired an additional 1.35% equity share (1.97 million shares) in USL through an on-market purchase on the Bombay Stock Exchange at a cost of INR 2400 per share totalling INR 4.7 billion (£47 million). This brought the aggregate equity stake held by Diageo to 26.37% of USL.

Diageo have accounted for USL as an associate in the six months ended 31 December 2013. Diageo's share of USL's results was not material.

On 2 August 2013, Diageo acquired the remaining 7% equity stake in Sichuan Chengdu Shuijingfang Group Co., Ltd. (SJF Holdco) for a cash consideration of RMB 326 million (£35 million). The acquisition of the additional stake in SJF Holdco brought Diageo's shareholding to 100% and increased its effective interest in Shuijingfang from 36.9% to 39.7%.

 

13. Contingent liabilities and legal proceedings

 

(a) Guarantees

As of 31 December 2013 the group has no material guarantees or indemnities to third parties with the exception of a conditional back-stop guarantee issued by Diageo Holdings Netherlands B.V. (DHN) to Standard Chartered Bank (Standard Chartered) in respect of the liabilities of Watson Limited (Watson), a company affiliated with Dr Vijay Mallya, under a $135 million (£81 million) facility from Standard Chartered. The terms require that any right of Standard Chartered to call on the guarantee from DHN will be subject to Standard Chartered having first taken certain agreed steps to recover from Watson, including defined steps towards enforcement of its security package. In addition, DHN has, in respect of its potential liability under this guarantee, the benefit of counter-indemnities from Watson and Dr Vijay Mallya as well as the security package put in place for the Standard Chartered facility.

 

(b) Colombian litigation 

An action was filed on 8 October 2004 in the United States District Court for the Eastern District of New York by the Republic of Colombia and a number of its local government entities against Diageo and other spirits companies, alleging several causes of action, including violations of the Federal RICO Act. This claim was dismissed in November 2012. The dismissal was without prejudice and as such, plaintiffs are not barred from bringing a similar action in future. Diageo cannot meaningfully quantify the possible loss or range of loss in the event of any future litigation. Diageo remains committed to continued dialogue with the Colombian governmental entities to address the underlying issues.

 

(c) Korean customs dispute

Litigation is ongoing in Korea in connection with the application of the methodology used in transfer pricing on spirits imports since 2004. In December 2009, Diageo Korea received a final customs audit assessment notice from the Korean customs authorities, covering the period from 1 February 2004 to 30 June 2007, for Korean won 194 billion or £112 million (including £14 million of value added tax), which was paid in full and appealed to the Korean Tax Tribunal.

      On 18 May 2011, the Tax Tribunal made a determination that the statute of limitations had run for part of the assessment period, ordered a partial penalty refund and instructed the Korean customs authorities to reinvestigate the remaining assessments. Accordingly, a refund of Korean won 43 billion or £25 million (including £2 million of value added tax) was made to Diageo Korea in the year ended 30 June 2012.

      However, post the completion of the reinvestigation, the Korean customs authorities have concluded that they will continue to pursue the application of the same methodology and on 18 October 2011 a further final imposition notice was issued for Korean won 217 billion or £125 million (including £14 million of value added tax) in respect of the period from 29 February 2008 to 31 October 2010.

      In response Diageo Korea filed a claim with the Seoul Administrative Court (Court) along with a petition for preliminary injunction to stay the final imposition notice. The Court granted Diageo Korea's request for a preliminary injunction and has stayed the final imposition until the decision of the Court on the underlying matter. On 31 October 2012, the Court instructed the Korean customs authorities to reinvestigate the second imposition notice per the instructions of the Tax Tribunal and stayed the Court hearings until the completion of the re-audit. The re-audit was completed in February 2013 and the Court hearings continue.

      The underlying matter remains in progress with the Court and Diageo Korea is unable to quantify meaningfully the possible loss or range of loss to which these claims may give rise. Diageo Korea continues to defend its position vigorously.

 

(d) Thalidomide litigation

In Australia, class action claims alleging product liability and negligence for injuries arising from the consumption of the drug thalidomide were filed in the Supreme Court of Victoria against Distillers Company (Biochemicals) Limited, its parent Diageo Scotland Limited (formerly Distillers Company Limited), as well as against Grϋnenthal GmbH, the developer of the drug (not a member of the group). On 18 July 2012 Diageo settled the claim of the lead claimant Lynette Rowe and agreed a process to consider the remaining claimants. As a result of that process, agreement has been reached between Diageo and the claimants, without admission of liability by Diageo, to settle the class action claims for the sum of AU$89 million and AU$6.5 million in costs, subject to the approval of the Supreme Court of Victoria. Grϋnenthal GmbH is not a party to the settlement. The application for approval will be heard by the Supreme Court of Victoria on 7 February 2014. If the settlement is approved the class action claims will be dismissed. A liability for £51 million has been charged to discontinued operations in the income statement in the six months ended 31 December 2013.

In the United Kingdom, proceedings have twice been commenced but lapsed for lack of service. Distillers Company (Biochemicals) Limited distributed the drug in Australia and the United Kingdom for a period in the late 1950s and early 1960s. Diageo is unable to quantify meaningfully the possible loss or range of loss to which any lawsuit may give rise. The group has worked voluntarily for many years with various thalidomide organisations and has provided significant financial support.

 

(e) Acquisition of USL shares from UBHL, winding-up petitions against UBHL and other proceedings in relation to the USL transaction

On 4 July 2013 Diageo completed its acquisition, under a share purchase agreement with United Breweries (Holdings) Limited (UBHL) and various other sellers (the SPA) of a further 21,767,749 shares (14.98%) in USL for a total consideration of INR 31.3 billion (£342 million), including 10,141,437 shares (6.98%) from UBHL. This followed a preferential allotment of 14,532,775 shares (10%) in USL for a total consideration of INR 20.9 billion (£249 million) and the acquisition of 58,668 additional shares through a mandatory tender offer for a total consideration of INR 85,778,082 (£1 million). By these transactions Diageo became the major shareholder in USL with a shareholding of 25.02% acquired for total consideration of INR 52 billion (£592 million). In the period since completion of these transactions, Diageo has acquired further USL shares, increasing its shareholding in USL to 26.37%.

      At the time of the acquisition from UBHL on 4 July 2013, the High Court of Karnataka (the High Court) had granted leave under sections 536 and 537 of the Indian Companies Act to enable the sale by UBHL to Diageo to take place (the UBHL Share Sale) notwithstanding the continued existence of five winding-up petitions (the Original Petitions) that were pending against UBHL on 9 November 2012, being the date of the SPA. Additional winding-up petitions have been brought against UBHL since 9 November 2012, and the leave granted by the High Court (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. 

      Since closing of the UBHL Share Sale, appeals have been filed by various petitioners in respect of the Leave Order. The Appellate Division of the High Court of Karnataka (the Appeal Court) announced its decision in respect of those appeals on 20 December 2013 in which it set aside the Leave Order.

Diageo is seeking leave to appeal this decision of the Appeal Court to the Supreme Court of India and the hearing of that leave application is currently adjourned to 31 January 2014. 

In separate proceedings, the various winding-up petitions against UBHL have been progressing through the High Court since closing of the USL transaction. A ruling was issued by the High Court on 22 November 2013 to admit one of the winding-up petitions against UBHL and directing that a general advertisement be made to creditors of UBHL after a period of 4 weeks from the date of the ruling. This ruling is the subject of an application for appeal by UBHL. 

Diageo continues to believe that the acquisition price of INR 1440 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. 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.

Separately, Diageo continues to pursue completion of the acquisition of an additional 3,459,090 USL shares (representing approximately 2.38% of the share capital of USL) under the SPA from the USL Benefit Trust. Currently certain lenders to USL are refusing to release security that they hold over those shares notwithstanding that they have been repaid in full. USL is taking steps including proceedings before the High Court to expedite the release of the security. As previously disclosed, if it is not ultimately possible to complete the acquisition in relation to these shares, they would instead continue to be held by the USL Benefit Trust subject to an undertaking that the trustees would only vote the shares at the direction of USL.

 

(f) Other

The group has extensive international operations and is defendant in a number of legal, customs and tax proceedings incidental to these operations, the outcome of which cannot at present be foreseen. In particular, the group is currently the defendant in various customs proceedings that challenge the declared customs value of products imported by certain Diageo companies. Diageo continues to defend its position vigorously in these proceedings.

 

Save as disclosed above, neither Diageo, nor any member of the Diageo group, is or has been engaged in, nor (so far as Diageo is aware) is there pending or threatened by or against it, any legal or arbitration proceedings which may have a significant effect on the financial position of the Diageo group.

 

14. Related party transactions

The group's significant related parties are its associates, joint ventures, key management personnel and pension plans, as disclosed in the annual report for the year ended 30 June 2013. There have been no transactions with these related parties during the six months ended 31 December 2013 on terms other than those that prevail in arm's length transactions.

 

 

15. Impact of new accounting standards

 

As reported in Note 1, the group has adopted IFRS 11 and the amendment to IAS 19. As a consequence, comparative prior period figures have been restated. Restated consolidated statement of comprehensive income for the six months ended 31 December 2012 is set out below:

 

Consolidated statement of comprehensive income

for the six months ended 31 December 2012








 

As reported


IFRS 11


IAS 19


Restated


£ million


£ million


£ million


£ million









Sales

 8,235 


 (104)


 - 


 8,131 

Excise duties

 (2,196)


 40 


 - 


 (2,156)

Net sales

 6,039 


 (64)


 - 


 5,975 

Operating costs before exceptional items

 (4,010)


 41 


 (5)


 (3,974)

Operating profit before exceptional items

 2,029 


 (23)


 (5)


 2,001 

Exceptional operating items

 16 


 - 


 - 


 16 

Operating profit

 2,045 


 (23)


 (5)


 2,017 

Net finance charges

 (212)


 - 


 (17)


 (229)

Share of associates' profits after tax

 128 


 12 


 - 


 140 

Profit before taxation

 1,961 


 (11)


 (22)


 1,928 

Taxation

 (360)


 4 


 5 


 (351)

Profit for the period

 1,601 


 (7)


 (17)


 1,577 

Other comprehensive loss

 (205)


 - 


 17 


 (188)

Total comprehensive income for the period

 1,396 


 (7)


 - 


 1,389 









Profit for the period attributable to:








Equity shareholders

 1,538 


 - 


 (17)


 1,521 

Non-controlling interests

 63 


 (7)


 - 


 56 


 1,601 


 (7)


 (17)


 1,577 









Total comprehensive income for the period attributable to:








Equity shareholders

 1,365 


 - 


 - 


 1,365 

Non-controlling interests

 31 


 (7)


 - 


 24 


 1,396 


 (7)


 - 


 1,389 










pence


pence


pence


pence

Basic earnings per share

 61.5 


 - 


 (0.7)


 60.8 

Diluted earnings per share

 61.1 


 - 


 (0.7)


 60.4 









 

The adoption of IFRS 11 reduced the group's net assets by £19 million and £17 million at 30 June 2013 and at 31 December 2012, respectively and reduced the group's net cash outflow by £10 million for the six months ended 31 December 2012. The amendment to IAS 19 has neither affected the group's net assets nor the group's net cash outflow.

 

INDEPENDENT REVIEW REPORT TO DIAGEO PLC

 

Introduction

 

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 December 2013 which comprises the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated balance sheet, the condensed consolidated statement of changes in equity, the condensed consolidated statement of cash flows and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

 

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules ('the DTR') of the UK's Financial Conduct  Authority ('the UK FCA'). Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.

 

Directors' responsibilities

 

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly