Diageo PLC - Half-year Report

Delivering our strategy through strong consistent performance

   Reported net sales (£6.9 billion) was up 5.8% with organic growth partially offset by unfavourable exchange. Reported operating profit (£2.4 billion) was up 11.0%, driven by organic growth

     All regions contributed to broad based organic net sales growth, up 7.5%, with organic volume up 3.5%

     Organic operating profit grew 12.3%, ahead of top line growth, as cost inflation and higher marketing investment were more than offset by improved price/mix and efficiencies from our productivity programme

     Cash flow continued to be strong, with net cash from operating activities at £1.6 billion, up £356 million and free cash flow at £1.3 billion, up £317 million

    Basic eps of 80.9 pence was down by (1.6)%. Pre-exceptional eps was 77.0 pence, up 13.6%, driven by higher operating profit and lower finance charges, which more than offset an increased tax charge largely as a result of lapping the positive impact of US tax reform in the prior period

    The interim dividend increased 5% to 26.1 pence per share

Ivan Menezes, Chief Executive, commenting on the results said:

 

 

"Diageo delivered broad-based volume and organic net sales growth across regions and categories. We continue to expand organic operating margins while increasing investment in our brands ahead of organic net sales growth.

 

These results are further evidence of the changes we have made in Diageo to put the consumer at the heart of our business, to embed productivity and to act with agility to enable us to win sustainably. 

 

At £1.3 billion, we delivered another period of strong free cash flow. As a result the board approved an incremental share buyback of £660 million, bringing the total programme up to £3.0 billion for the year ending 30 June 2019.

 

This half has benefitted from some one-time and phasing gains in both organic net sales and operating profit, and therefore we continue to expect to deliver mid-single digit organic net sales growth for the year and to expand operating margins in line with our previous guidance of 175 bps for the three years ending 30 June 2019.

 

As we deploy our strategy, we remain focused on building the long-term health of our brands and ensuring we grow our business in a consistent and sustainable way."

 

 

Key financial information

Six months ended 31 December 2018

Summary financial information

 

 

 

F19 H1

F18 H1

Organic
growth
%

Reported growth
%

Volume

EUm

130.5

 

126.4

 

4

 

3

 

Net sales

£ million

6,908

 

6,530

 

7

 

6

 

Marketing

£ million

1,054

 

968

 

9

 

9

 

Operating profit before exceptional items

£ million

2,451

 

2,190

 

12

 

12

 

Exceptional operating items(i)

£ million

(21

)

-

 

 

 

Operating profit

£ million

2,430

 

2,190

 

 

11

 

Share of associate and joint venture profit after tax

£ million

179

 

168

 

 

7

 

Exceptional non-operating gain(i)

£ million

146

 

-

 

 

 

Net finance charges

£ million

(128

)

(154

)

 

 

Exceptional taxation (charge)/credit(i)

£ million

(30

)

360

 

 

 

Tax rate including exceptional items

%

21.3

 

3.5

 

 

509

 

Tax rate before exceptional items

%

21.2

 

19.8

 

 

7

 

Profit attributable to parent company's shareholders

£ million

1,976

 

2,058

 

 

(4

)

Basic earnings per share

pence

80.9

 

82.2

 

 

(2

)

Earnings per share before exceptional items

pence

77.0

 

67.8

 

 

14

 

Interim dividend

pence

26.1

 

24.9

 

 

5

 

(i)   For further details of exceptional items see Additional Financial Information (c) Exceptional items.

Outlook for exchange 

Using exchange rates £1 = $1.32; £1 = €1.16, the exchange rate movement for the year ending 30 June 2019 is estimated to adversely impact net sales by approximately £80 million and operating profit by approximately £10 million.

Outlook for tax 

The tax rate before exceptional items for the six months ended 31 December 2018 was 21.2% compared with 19.8% in the prior comparable period. Our current expectation is that the tax rate before exceptional items for the year ending 30 June 2019 will be in the range of 21% to 22%, which reflects changing business mix and the increased levels of uncertainty in the current tax environment for most multinationals. For further details on taxation see Additional Financial Information (d) Taxation.

Net sales (£ million)

Reported net sales were up 5.8% with organic growth partially offset by unfavourable exchange

Organic net sales grew 7.5% driven by volume up 3.5% and positive price/mix up 4.0%

(i

 

Net sales

£ million

F18 H1

6,530

 

Exchange(i)

(91

)

Acquisitions and disposals

(7

)

Volume

224

 

Price/mix

252

 

F19 H1

6,908

 

 

(i)   Exchange rate movements reflect the translation of prior year reported results at current year exchange rates.

 

Reported net sales grew 5.8%, driven by organic growth which was partially offset by unfavourable exchange and acquisitions and disposals.

 

Organic volume growth of 3.5% and 4.0% positive price/mix drove 7.5% organic net sales growth. All regions reported organic net sales growth. 

Operating profit (£ million)

Reported operating profit grew 11.0%

Organic operating profit grew 12.3%

 

Operating profit

£ million

F18 H1

2,190

 

Exceptional operating items

(21

)

Exchange

-

 

Acquisitions and disposals

(3

)

Organic movement

264

 

F19 H1

2,430

 

 

Brexit

There continues to be uncertainty with respect to the process surrounding the United Kingdom's proposed exit from the European Union and the eventual outcome of the ongoing Brexit negotiations. We continue to believe that, in the event of either a negotiated exit or no-deal scenario, the direct financial impact to Diageo will not be material. In the EU, we expect that our finished case goods will continue to trade tariff free in either scenario. While there continues to be uncertainty over future trading arrangements between the UK and the rest of the world, we have mitigation plans in place for the short-term disruption that could arise from a 'no deal' scenario; in which the UK leaves the EU on the current deadline for exit, under the Article 50 notification of 29 March 2019, without the parties reaching a formal withdrawal agreement approved by the UK Parliament, and including the inability of the UK Government to renew existing EU Free Trade Agreements with third party countries to which we export and where trading could revert to WTO rules.

We have further considered the principal impact to our supply chain which we have assessed as limited and have appropriate stock levels in place to mitigate this risk. The full implications of Brexit will not be understood until future tariffs, trade, regulatory, tax, and other free trade agreements to be entered into by the United Kingdom are established. Furthermore, we could experience changes to laws and regulations post Brexit, in areas such as intellectual property rights, employment, environment, supply chain logistics, data protection, and health and safety.

A cross-functional working group is in place that meets on a regular basis to identify and assess the consequences of Brexit, with all major functions within our business represented. We continue to monitor this risk area very closely, including a continuing focus on identifying critical decision points to ensure potential disruption is minimised, and take prudent actions to mitigate risk wherever practical.