Diageo : 2020 Interim Results presentation with script

DIAGEO INTERIM RESULTS

HALF YEAR ENDED 31 DECEMBER 2019

30thJanuary 2020

1

CONSISTENT DELIVERY OF RESULTS

Reflecting our ambition to be one of the best performing, most trusted and respected consumer products companies in the world

Delivering through our six priorities with clear goals defined by our performance ambition

Four measures of our progress

• Efficient growth
• Value creation
• Credibility and trust
• Engaged people

2

• Good morning everyone.
• I am pleased to share with you another set of good consistent results.
• Once again, we are demonstrating progress and momentum towards achieving our performance ambition, to be one of the best performing, most trusted and respected consumer product companies in the world.
• Despite the significant progress we have made in recent years as an organisation, we are not complacent.
• We are relentless in our desire to achieve our performance ambition.
• We remain focused on our six priorities which I will go to in more detail later.
• We continue to measure our progress against these priorities throughout the organisation.
• Once again, I would like to thank all Diageo employees for their contribution to these results.

2

CONSISTENT DELIVERY OF RESULTS

Organic volume up 0.2%. Organic net sales up 4.2%

Organic operating margin expansion 13bps in H1 F20

Free cash flow £ 0.97bn

Eps pre-exceptionals up 4.2%

Full year dividend up 5% to 27.4p

Returned £1.1bn to shareholders through share buyback in H1 F20

3

• In this first half of fiscal 20, organic net sales grew by 4.2%, in line with our medium term,mid-single digit topline guidance, largely driven by strong price/mix performance.
• Growth was broad based, but we had some market specific challenges in India, within Latin America & Caribbean and in Travel Retail.
• At a category level, rapid growth in tequila, Canadian whisky and Chinese white spirits, balanced softer scotch performance.
• These results, lapping last year's very strong first half, reflect the resilience of our strong and diversified geographic footprint and portfolio.
• Operating margins continued to expand in the first half, up 13bps, reflecting our continuing work on productivity, net revenue management and the mitigation of cost inflation.
• Kathy will talk more about this later.
• Our free cash flow remains consistent at £966m reflecting our continued focus.
• Pre-exceptionalearnings per share grew 4.2% mainly driven by organic operating profit growth.
• We have again increased the interim dividend by 5%.
• And we returned £1.1 billion to shareholders in the first half through our capital return programme via share buyback.

3

CONSISTENT DELIVERY OF RESULTS

SUSTAINABLE ORGANIC

TOPLINE PERFORMANCE %

			6.1
Mid-		5.0
single
digit	4.3			4.2
4-6%
2.8
F16	F17	F18	F19	F20 H1

EVERYDAY EFFICIENCY, FUELLING INCREASED INVESTMENT AND DRIVING MARGIN IMPROVEMENT

Organic	+198	+13
operating	bps	bps
margin
	F17-19	F20H1
	Z
	(Cumulative)
Marketing
investment	+30bps	+25bps
rate*

CONSISTENT & SOLID

FREE CASH FLOW

FIRST HALF £bn

			1.3
	1.1	1.0
			1.0
0.8
F16	F17	F18	F19	F20

All numbers are organic. * Organic movement	4

• Our strategy is to be a reliable compounder of growth, creating a virtuous circle of consistent top line performance, margin expansion and increased investment in our brands.
• This relentless, focused and disciplined execution of our strategy has delivered consistent performance since F17.
• Once again, we have deliveredmid-single digit organic net sales growth in line with our medium- term guidance.
• Our embedded culture of everyday efficiency is continuing to enable increased investment behind our brands. We have increased marketing investment by 30bps over the past three years and 25bps in this half, with the goal of fueling long term sustainable growth.
• At the same time, we continued to expand our operating margins, just shy of 200bps over the past three years and another +13bps in this half, largely driven by overhead productivity initiatives.
• We also continued to deliver solid free cash flow.

4

CREATING VALUE FOR SHAREHOLDERS

PORTFOLIO MANAGEMENT		DIVIDENDS		TOTAL SHAREHOLDER RETURN
AND M&A

ACQUISITIONS
				65.3	68.6
			62.2
		59.2
	56.4
DISPOSALS
Wines
Bushmills
Beer interests in Jamaica and Malaysia	F15	F16	F17	F18	F19
Gleneagles
Portfolio of 19 brands	Dividend per share, pence

				27%
			23%
	17%
		12% Z
2%
					(4)%
F15	F16	F17	F18	F19	F20
Annual growth				H1

Source: Factset

5

• We have an active and disciplined approach to maximise value for shareholders.
• We are continuously evaluating and evolving our portfolio.
• We have acquired a number of companies and brands, notably Don Julio, United Spirits and Casamigos as well as increasing our shareholding in Shui Jing Fang.
• We believe that our incubator Distill Ventures ensures that we are well positioned to capture new brands and align to emerging consumer trends. A good example is the majority stake we acquired last August in Seedlip, further developing our position in thenon-alc category.
• We have also divested several assets including the portfolio of 19 brands in the US.
• We continue to generate and return cash to shareholders and have delivered consistent dividend growth of +5% over the last five years.
• And while our total shareholder return has been slightly down over the past six months, our performance over the past 5 and 10 years has been in the top quartile of our peer group.
• Let me now hand over to Kathy to go more into the details around our financials.

5

A CONSISTENT SET OF RESULTS

Efficient growth:	F20 H1
Organic net sales growth	4.2%
Organic operating margin improvement	+13bps
Free cash flow	£966m
Pre-exceptional eps	80.2p up 4.2%
Value creation:	17.5% down 33bps
ROIC
Total Shareholder Return	4% down
	6

• Thank you, Ivan and good morning, everyone.
• We have delivered another consistent set of results in the first half of fiscal 20 and our full year expectations continue to be in line with ourmedium-term guidance on both top line and profit growth.
• Let me start with a recap of some of the highlights for the first half that Ivan has already talked you through.
• Organic net sales grew 4.2%, with 0.2% organic volume growth and 4.0% positive price/mix.
• Organic operating margin increased 13bps.
• Free cash flow at £966m reflects consistent delivery despite being lower than last year largely due toone-off tax payments.
• Pre-exceptionalearnings per share grew 4.2% to 80.2p mainly driven by organic operating profit growth.
• Return on invested capital at 17.5% was down 33bps. Organic operating profit growth was offset by the divestiture of a portfolio of 19 brands to Sazerac last year, increases in capex, higher tax payments on increased profit and also the impact of IFRS 16 which negatively impacted ROIC by 20bps in the period.
• We returned £1.1 billion to shareholders through share buybacks in the first half against the total capital return programme of up to £4.5bn over the three years from fiscal 20 to fiscal 22.
• TSR was down 4% over the past 6 months affected in part by foreign exchange volatility however as Ivan mentioned, both the5-year and 10-year TSR compound average growth was up 15%, which is top quartile performance within our peer group.

6

REPORTED NET SALES UP 4.2%

ORGANIC GROWTH UP 4.2%

Organic growth

£ million

275 7,200

6,908	52		11
		(46)

F19 H1 Exchange Acquisitions Volume Price/mix F20 H1

and	7
disposals

• Reported net sales were up 4.2% driven by organic growth with the positive impact of foreign exchange being offset by the negative impact from the disposal of 19 brands.

7

4.2% ORGANIC NET SALES GROWTH

Organic volume growth	Price/mix		Organic net sales growth
				6.1%
				5.0%
		3.8%	4.0%	4.2%
2.5%	2.3%	2.5%

0.2%

F18 F19 F20 H1

8

• Organic net sales growth at 4.2% was primarily driven by strong price mix of 4.0% as volume was broadly flat.
• Growth was broad based across regions and categories.
• There was continued momentum in price/mix driven by premiumisation, improved capabilities in net revenue management and sustainable innovation launched in prior years including Crown Royal Regal Apple and Tanqueray Flor de Sevilla.

8

BROAD BASED ORGANIC GROWTH ACROSS

OUR CATEGORIES

Organic net sales growth

				31%
11%
		6%	7%	7%
			3%	2%
			2%
0%
(1)%
	Scotch Vodka* Canadian	US	Rum Liqueurs IMFL	Gin Tequila Beer
	Whisky	Whiskey	Whisky
* Vodka includes Ketel One Botanical			9

• Net sales growth continued across key categories, apart from vodka.
• Scotch net sales were flat as growth in malts and Buchanan's was offset by Johnnie Walker softening, due to challenging trading conditions in Mexico and Travel Retail, and political and economic disruptions in Peru and Chile, which are all big scotch markets. Outside of these specific markets scotch performance was strong, growingmid-single digit.
• Vodka was down 1% driven by US Spirits. Outside of North America, vodka was up 3% with growth in every region driven largely by Mexico, Kenya and Australia.
• In US Spirits, vodka was down 5% driven by declines in Cîroc and Ketel One.
• Canadian Whisky net sales were up 11% driven by Crown Royal, which continued to gain share, supported by the limited- edition Crown Royal Peach as well as Crown Royal Regal Apple, which is in its sixth year since launch and delivered double digit net sales growth.
• In US Whiskey, growth was driven by Bulleit with net sales up 4% in US Spirits.
• Rum returned to growth, with net sales up 2%, largely driven by Captain Morgan'sdouble-digit growth across Europe.
• In liqueurs, net sales increased 7% with growth in Baileys across all regions except Latin America & Caribbean. Performance was driven by our strategy to createyear-round occasions for consumers to treat themselves with Baileys.
• Net sales in IMFL Whisky were up 3% driven McDowell's performance in India.
• In gin, net sales were up 7% with growth broad based across every region. Tanqueray continues to deliver double digit growth driven by Brazil and South Africa where the brand is recruiting in the early evening occasion.
• In tequila, net sales increased 31% driven by Don Julio which in US Spirits and Mexico grew double digit and continues to gain share. Casamigos in US Spirits also grew strongly with improved distribution coverage as well as rate of sale.
• Beer net sales were up 2% driven by Africa which grew 5%. Senator Keg in Kenya grew double digits. Guinness was up 1.5% driven by Europe and North America supported by the continued growth of both Guinness Draught and Open Gate Brewery brands, respectively.

9

BROAD BASED PERFORMANCE ACROSS OUR

PORTFOLIO

Organic net sales growth*

		11%		Global giants
			Johnnie Walker	(4)%
	8%		Smirnoff		1%
			Captain Morgan		5%
			Baileys		8%
			Tanqueray		13%
1%			Guinness		1%
Global	Local	Reserve		*Spirits brands excluding ready to drink
giants	stars
		10

• Global giants were up 1%, with all brands in growth except Johnnie Walker which was the brand most impacted by the slow down in Mexico, Travel Retail and the market disruptions in Peru and Chile. Across all other markets Johnnie Walker grew roughly 3% in the half.
• Net sales of local stars increased 8% driven by strong growth in Crown Royal in the US, Chinese white spirits, and Buchanan's in Colombia. This was partially offset by continued decline in Windsor in South Korea and JεB in Europe.
• In Reserve, net sales were up 11% driven by Don Julio, Casamigos, Chinese white spirits, malts and Johnnie Walker super deluxe.

10

REPORTED OPERATING PROFIT BEFORE

EXCEPTIONAL ITEMS UP 2.0%

ORGANIC OPERATING PROFIT UP 4.6%

	£m			F20 H1	F19 H1
	PRIOR PERIOD OPERATING PROFIT *	2,451	2,190
	Exchange			(15)	-
	Acquisitions & Disposals		(45)	(3)
	Organic growth			110	264
	CURRENT PERIOD OPERATING PROFIT *	2,501	2,451
	Reported operating	Exchange	Acquisitions	Organic	Reported operating
	margin** F19 H1		and disposals	growth	margin** F20 H1
	35.5%	(46)bps	(41)bps	13bps	34.7%
*Reported operating profit before exceptional items
** Reported operating margin before exceptional items		11

• Reported operating profit before exceptional items increased 2.0% as organic growth was partially offset by disposals and exchange.
• Organic operating profit, which excludes exchange and acquisitions and disposals, increased 4.6% with organic operating margin up 13bps.
• Reported operating margin excluding exceptional items decreased 74 bps as disposals and exchange impacts offset the organic growth.

11

ORGANIC OPERATING MARGIN UP 13 BPS

Movement in organic operating margin

35.2%			103bps	35.4%
	(65)bps
		(25)bps
F19 H1	Gross margin	Marketing	Other	F20 H1
			operating
			items

12

• Organic operating margin expanded 13bps in the half, driven by overhead efficiencies and positive items in other income.
• Gross margin declined 65bps in the half as we lapped a strong first half in fiscal 19 when gross margin was up 50bps. While price/mix continues to be strong, cost of goods sold inflation and flat volumes in the half eroded gross margin gains. We experienced upward inflationary pressure across our commodity costs, particularly base neutral spirits in India, Agave and glass globally.
• Our marketing spend was up 6% in the half, ahead of net sales, driving a 25bps higher marketing investment rate as we continue to seek to invest behind marketing initiatives where we see strong returns and in attractive growth categories.
• Other operating items delivered 103bps of margin improvements largely as a result of overhead everyday efficiency initiatives.
• I am pleased with the progress that we have made across all our productivity workstreams and how this work continued to contribute to our organic margin expansion, investment in the business and driving simplification in process and speed in decision making.

12

CONSISTENT FREE CASH FLOW DELIVERY

£ million
1,346	69
(15)		(22)	(64)

18 966

(318) (48)

F19 H1	Exchange	Operating	Working	Capex	Tax	Interest Other (iv)	F20 H1
	(i)	profit (ii)	capital (iii)

1. Exchange on operating profit before exceptional items.
2. Operating profit excluding exchange, depreciation and amortisation, post employment charges and non cash items. Free cash flow for the six months ending 31 December 2019 has benefited by £32m following the adoption of IFRS16 on 1 July 2019.
3. Working capital includes maturing inventory.
4. Other items include post employment payments, dividends received from associates and joint ventures, and loans and other

investments.

13

• Cash delivery continues to be consistently solid with free cash flow at about £1.0bn this half despite over £300m in higher tax payments primarily driven byone-off tax settlements and timing of payments. We expect both of these tax items to impact free cash flow delivery in the full year.
• Interest payments were higher driven by an increased debt balance as a result of the share buyback execution and higher interest on tax settlements.
• Net capex increased £64m versus last year as we increase investment in Scotland to transform our scotch whisky visitor experiences and reopen the Port Ellen and Brora distilleries.
• As I look to the full year fiscal 20 I expect net capex of between £700m and £750m, a slight increase on previous guidance, given we are tracking ahead on implementation of some IT projects.

13

A CONSISTENT AND DISCIPLINED APPROACH TO CAPITAL

STRUCTURE

Leverage policy

Adjusted Net Debt* to EBITDA: 2.5x - 3.0x

Organic growth		Dividends - 1.8x to		M&A and portfolio
	2.2x dividend cover		management

Return excess cash to shareholders

* Net debt is equivalent to net borrowings. Adjusted net debt includes net debt and post employment plan benefit liabilities.

14

• Our disciplined approach to our capital structure strategy remains unchanged, anchored by our leverage policy which targets a leverage ratio range between 2.5x to 3.0x adjusted net debt to EBITDA.
• Our priorities remain to invest in the business to deliver sustainable and efficient organic growth and to generate value through acquisitions that further strengthen our exposure to fast growing categories and occasions.
• We continue to review our portfolio to ensure that we allocate resources behind opportunities that can maximize shareholder value.
• We maintain a clear dividend policy to target dividend cover of 1.8x to 2.2x and we closed the fiscal 2019 at roughly 1.9x. Today we have announced an interim dividend of 27.4 pence per share. This is an increase of 5% from last year and it's in line with our guidance ofmid-single digit increases.
• When we have excess cash, we have been clear we will seek to return this to shareholders. The key metric we consider in determining this is our leverage ratio. We opened fiscal 20 with a leverage ratio of 2.5x and we have now closed the first half at 2.8x, within our target range.
• As we announced back in July, over fiscal 20 to fiscal 22 we expect to return up to £4.5bn to shareholders; to be determined by the most appropriate mechanic via share buybacks or special dividends, depending on market conditions.
• In the first half we have returned £1.1bn to shareholders through sharebuy-back.

14

INCREASED DEBT SUPPORTED BY

FAVOURABLE FUNDING

		F20 H1	F19 H1	Movement
Closing net debt*	£m	(12,880)	(10,352)	(2,528)
Average net debt*	£m	(12,311)	(10,183)	(2,128)
Net interest charge	£m	(148)	(120)	(28)
Net other finance charges	£m	(6)	(8)	2
Net finance charges	£m	(154)	(128)	(26)
Effective interest rate	%	2.4	2.4	(0.0)
Adjusted** net debt* / EBITDA	x	2.8	2.3	0.5
* Net debt is equivalent to net borrowings				15
** Adjusted to include net debt and post employment plan benefit liabilities

• Average net debt increased by approximately £2bn year on year driven primarily by share buyback.
• Our effective interest rate was 2.4% for the first half, consistent with prior year as we continue to drive efficient funding of new borrowing and refinancing of maturing debt.
• For fiscal 20, I expect our effective interest rate to be broadly in line with fiscal 19 based on prevailing market conditions.
• Other finance charges were broadly in line with last year for the first half. For the full year I expect other finance charges to be slightly ahead of last year, as we lap someone-off benefit from the comparative period.

15

F20 EXCHANGE IMPACT FORECAST TO BE ADVERSE FOR BOTH OPERATING PROFIT AND NET SALES

Exchange rates

Translation rate

	F19*	F20	F20
		H1**	forecast ***
$/£	1.29	1.26	1.29
€/£	1.13	1.14	1.17

• Average rate **Average rateJul-Dec ***Weighted
  average rate of F20 H1 and spot rate for H2

Transaction rate

	F19	F20 H1	F20 forecast1
$/£	1.33	1.36	1.33
€/£	1.13	1.13	1.14

Weighted average of hedging and spot rates

1. 79% of £/$ exposure hedged

63% of €/£ exposure hedged

Total Exchange Impact

£m	F20 H1	F20
forecast
Net Sales	52	(110)
Operating	(15)	(40)
profit
Net	(3)	(3)
Interest
		16

• Moving now to foreign exchange.
• Favourable exchange rate impact on net sales in the first half has been driven by the strengthening of the US Dollar and Indian Rupee, partly offset by the weakening Euro compared to the prior year period.
• As I look to the full year, using the rates presented here, exchange is expected to adversely impact net sales by about £110m and operating profit by about £40m.

16

BASIC EPS DECREASED 2.1%

EPS BEFORE EXCEPTIONAL ITEMS UP 4.2%

	Pence per share
F19 H1 eps before exceptional items	77.0
Exchange on operating profit	(0.6)
Acquisitions and disposals(i)	(1.4)
Organic operating profit growth	4.5
Associates and joint ventures	(0.1)
Tax(iii)	(1.3)
Net finance charges(ii)	0.3
Non-controlling interests	0.1
Share buyback(i)	1.7
F20 H1 eps before exceptional items	80.2
(i) Includes finance charges net of tax	17
(ii) Excludes finance charges related to acquisitions, disposals and share buyback.

• 1. Excludes tax related to acquisitions, disposals and share buyback
• Earnings per share before exceptional items increased by 4.2%.
• Organic operating profit growth and the impact of the share buyback more than offset the divestiture of a portfolio of 19 brands to Sazerac and higher tax expense driven mainly by increased operating profit.
• Our tax rate before exceptional items was 21.6%, in line with our guidance. Our expectation for the full year remains the same, that our tax rate before exceptional items will be between 21% and 22%.
• Non-controllinginterests had a positive impact on eps as a result of the lower profit in our listed subsidiaries.
• The execution of share buyback reduced the weighted average number of shares and had a positive impact on eps.

17

A CONSISTENT SET OF RESULTS

Efficient growth:	F20 H1
Organic net sales growth	4.2%
Organic operating margin improvement	+13bps
Free cash flow	£966m
Pre-exceptional eps	80.2p up 4.2%
Value creation:	17.5% down 33bps
ROIC
Total Shareholder Return	4% down
	18

• These are another set of consistent, good results, with broad based growth across regions and categories.
• The results reflect the resilience in our business. We've seen increased levels of volatility within this half in India, LAC and Travel Retail. However organic net sales growth continued to remain within themid-single digit range that we're targeting for the medium term.
• For the full fiscal year I expect organic net sales growth to be towards the lower end of our4-6% medium term guidance range.
• We continue to expect organic operating profit growth to be roughly one percentage point ahead of net sales, again consistent with our medium term guidance.
• However, I would note that we would not be immune from significant changes to global trade policy as well as the evolving Coronavirus situation in China and we continue to monitor both closely.
• Regarding China, there will be an impact on this year's performance however at this stage we are unsure of the scale.
• And back to you Ivan.

18

CONSISTENT DELIVERY OF RESULTS

Reflecting our ambition to be one of the best performing, most trusted and respected consumer products companies in the world

Delivering through our six priorities with clear goals defined by our performance ambition

Four measures of our progress

• Efficient growth
• Value creation
• Credibility and trust
• Engaged people

19

• Thank you, Kathy.
• These results reflect the consistent progress we have made against our ambition to be "one of the best performing and most trusted and respected" consumer products companies in the world.
• We believe achieving our ambition requires consistentmid-single digit top line growth, steady margin expansion and strong cash flows year after year.

19

A CLEAR STRATEGY DELIVERED THROUGH OUR SIX PRIORITIES

1

2

3

4

5

6

Embed Everyday Efficiency

Promote Positive Drinking

20

• Let me now share some examples of some great work we are doing against four of our evolved priorities - to "sustain quality growth", "invest smartly", "champion inclusion and diversity" and "pioneer grain to glass sustainability"

20

SUSTAIN QUALITY GROWTH

Greater China	+24%
Crown Royal	+11%
Beer	+2.5%

21

• Sustainable growth is about ensuring; the right balance of price, mix and volume over time; building brand equity; driving sustainable innovation, strengthening the big brands of today and seeding those of tomorrow. And it's about a sell out focused route to consumer.
• Let me share some examples across a market, brand and category of how we are sustaining quality growth.

21

SUSTAIN QUALITY GROWTH: GREATER CHINA

Chinese White Spirits*

Organic net sales growth %

65	63
		22	26
F17 FY	F18 FY	F19 FY	F20 H1

	Greater China (excl CWS)
		Organic net sales growth %	21
			13
	4
		(4)			22
* Includes international sales	F17 FY	F18FY	F19 FY	F20 H1

• Our businesses across Greater China are continuing to perform very strongly, with combined net sales up 24%. While we saw some benefit from the earlier timing of the Chinese New Year, the main driver has been the consistent execution of our strategy in this attractive market.
• We are the only international spirits company with a meaningful presence in the growing Chinese white spirits category.
• Shui Jing Fang grew net sales 26%, gaining market share, particularly in the rapidly growing super premium segment.
• Performance was supported by continued route to market expansion, increased marketing investment and the development of premium innovations.
• Across Greater China, we continue to build the scotch category through initiatives such as; building whisky boutiques; scaled deployment of the Diageo whisky academy; banqueting and cultural partnerships; building our prestige position, as well as strengthening our route to consumer.
• Scotch continues to grow double digit, up 19% in the half with particularly strong performance from scotch malts and Johnnie Walker super deluxe variants.
• Our Prestige Scotch business continues to grow double digit strengthening our quality credentials and driving aspiration.
• We saw continued strong performance from scotch malt whisky The Singleton as well as the Johnnie Walker Blue Label Ghost and Rare and special release series.
• Taiwan performance continued to strengthen with particularly strong performance from the premium end of its portfolio including scotch malts. Johnnie Walker maintained its leadership position
• And finally, Zhong Shi Ji is our innovativenew-to-world whisky crafted by master blenders and distillers from Scotland and China, for the meal occasion. Although still early days, we look forward to seeing this brand recruit new Chinese consumers into whisky.

22

SUSTAIN QUALITY GROWTH: CROWN ROYAL

Crown Royal

Organic net sales growth %

12			11
		6
	3
F17	F18	F19	F20H1

Core vs Flavours

% total net sales

Flavours

Core

F17	F18	F19	F20 H1
			23

• Our iconic Canadian whisky brand Crown Royal, our most valuable brand in North America, continued its strong growth.
• Net sales grew 11% in the first half, once again outperforming the category.
• The brand benefited from its distinctive, purpose driven marketing, which was upweighted in F19 and is driving strong brand equity.
• Innovation remains an important driver of performance. Crown Royal Regal Apple, now in its 6thyear, is continuing to grow double-digit, recruiting new consumers and recruiting in new occasions. Limited time offerings such as Crown Royal Peach have further contributed to growth and to the vibrancy of the brand.
• Driving a positive social impact is at the heart of Crown Royal and fits perfectly with the brand's purpose.
• Our "drink in moderation" message via the 'Crown Royal Water Break' is now in its third year. This encourages American Football fans to drink water during Game Day, whether in bars, at home or in the stadium. We ran TV ads across the US during televised NFL games, and distributed water. We also partnered with NFL teams and former legends to spread the message.
• Our Purple Bag Project continued, with the iconic Crown Royal bag used as a way to deliver essentials to military personnel stationed overseas. We are closing in our goal to deliver one million care bags by the end of 2020.

SUSTAIN QUALITY GROWTH: BEER

Total Beer

Organic net sales growth %

3.8

3.1

	2.1						2.5
	F17		F18	F19	F20 H1
			Guinness
		Organic net sales growth %
		4.8
					1.9		1.5
	0.4
	F17		F18	F19	F20 H1
							24

• Beer, 15% of Diageo's net sales, grew 2.5% in the first half.
• With strong performance from Senator, Serengeti and Rockshore which all grew double digit.
• Total Guinness was up 1.5% with strong growth of 6% in GB, our largest market, where Guinness gained share driven by strong on trade execution and brand experiences, as well as increased rugby activation.
• One in every 10 pints served in London is now a Guinness.
• Growth was also strong in the US up 5%.
• And in Nigeria which grew 8%, this was supported by the launch of Guinness Extra Smooth as well as successful promotional activity around our partnership with the English Premier League.
• Overall Guinness brand growth was softened by aone-off supply challenge in Cameroon.

24

A CLEAR STRATEGY DELIVERED THROUGH OUR SIX

PRIORITIES

• Sustain Quality Growth

• Embed Everyday Efficiency

3

• Promote Positive Drinking

• Champion Inclusion and Diversity

• Pioneer Grain to Glass Sustainability

25

• Investing smartly is about ensuring that we use our increased return on investment transparency and accountability culture to make the right investments in brands, capabilities, tools and capex to drive stronger performance.

25

INVEST SMARTLY: ACROSS THE BUSINESS

DATA ANALYTICS AND TOOLS		MARKETING INVESTMENT

Net sales and marketing investment growth %

8

7

66

CATALYST

5

4				4
			3
	F17	F18	F19	F20 H1
		Net sales growth %
		Marketing investment growth%

26

• We are continuing to build best in class capabilities, via data analytic tools such as Catalyst. This increases transparency of our investments and further strengthens our effectiveness culture.
• This tool, which becomes stronger and more granular with use, gives us the confidence to invest for thelong-term growth as well as optimising short term performance.
• For example, in Europe, where we are now in our third year of using Catalyst, it has enabled us to shift our spend on Smirnoff to aserve-related creative platform, to shorter TV copy lengths, as well as improving our use of digital media channels, all driving stronger performance.
• We have built a suite of tools to enable Every Day Great Execution or EDGE. These tools provide our salesforce with the insights necessary to ensure we have the right brands in the right outlets, in the right way.
• An example of one of these tools is TRAX in the US. This tool uses digital image recognition to measureon-shelf availability, assortment and shelf position further strengthening our performance.
• Increased transparency on the effectiveness of our investments, further reinforces our performance culture and enables us to invest to drive the best returns.

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INVEST SMARTLY: ACROSS THE BUSINESS

BRAND HOMES		SUSTAINABLE CAPEX

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• Smart investment is also about investing capex to support growth with good returns.
• We are continuing to invest and expand our brand homes around the world. This follows the success of the Guinness Storehouse in Dublin to provide consumers with the opportunity to engage in a more material way with our brands.
• This calendar year we are opening, amongst others, our flagship Johnnie Walker experience in Edinburgh, marking the brand's 200thanniversary.
• We are also upgrading our visitor centers across the four corners of Scotland in our Glenkinchie, Clynelish, Caol Ila and Cardhu distilleries.
• And we are continuing the environmental investment we announced last year across 11 of our African brewing sites, to deliver new solar energy, biomass power and water recovery processes, to improve thelong-term sustainability of our African supply chain.

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A CLEAR STRATEGY DELIVERED THROUGH OUR SIX

PRIORITIES

• Sustain Quality Growth

• Embed Everyday Efficiency

• Invest Smartly

• Promote Positive Drinking

5

• Pioneer Grain to Glass Sustainability

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• In order to achieve our ambition, we need the perfect blend of financial performance and the core elements of our environmental, social and governance agenda.

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CHAMPION INCLUSION AND DIVERSITY

• I am very proud of the inclusive and diverse culture we are creating at Diageo, which is core to our purpose of Celebrating Life, Every Day, Everywhere.
• In 2019 I was proud to announce our ambitious new family leave policy. Globally, all women at Diageo are entitled to 6 months fully paid maternity leave. And in most places, including our biggest markets of Europe and the US, new parents, irrespective of gender, are entitled to 6 months' parental leave.
• Championing inclusion and diversity is fundamental to driving engagement and for achieving the best possible outcomes for our business.
• We view diversity in the broadest possible sense - from gender, age, ethnicity and sexuality; to social class, education, experience and thinking style.
• We initially focused on gender and I'm pleased to say that we have made significant progress.
• Today 44% of Diageo's Board and 35% of Diageo's Executive Committee are women and we are ranked 6th in FTSE Female Board Report 'for women on boards and in leadership'.
• We are also making rapid progress on our goal for women to make up 40% of our global senior leadership team by 2025.
• And this progress has been recognised externally, with Diageo ranked the second Most Diverse and Inclusive Workplace globally, by the Refinitiv Diversity & Inclusion Index, and the number one company for Gender Equality globally, by Equileap.
• We have made strong progress on gender but our work in many broader areas of inclusion and diversity is just beginning.
• I am pleased to see our commitment also being championed by our brands. Globally our marketers are focussed on progressive gender portrayal in all our creative work, a stance that is leading to better advertising, while also helping to support diversity within the creative industries.
• While there is more to do, Diageo is playing a significant role in shapingmarket-leading policies and practices. And we will continue to champion inclusion and diversity, to create the best possible culture, attract and retain the best talent and ensure all of our people can thrive.

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A CLEAR STRATEGY DELIVERED THROUGH OUR SIX PRIORITIES

1

2

3

4

5

6

Sustain Quality Growth

Embed Everyday Efficiency

Invest Smartly

Promote Positive Drinking

Champion Inclusion and Diversity

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Another of the areas in which we are focussed is pioneering grain to glass sustainability.

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IMPROVING GRAIN-TO-GLASS SUSTAINABILITY

Carbon Emissions	Water Efficiency
(1000- tonnes CO2e)	(Litres used per litre of packaged product)
731			5.8
672	633	623	5.2	5.0	4.9
			586		4.5

F15

F16

F17

F18

F19

F15

F16

F17

F18

F19

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• Grain-to-glasssustainability is about ensuring we preserve the natural resources on which our long term success depends and positively impact the communities where we operate.
• Diageo was a pioneer in setting an absolute carbon reduction target - aiming to reduce our emissions by 50% by the end of F20 versus a 2007 baseline, despite growing volumes over the same period.
• This bold move has helped us to spur innovation and new approaches to reduce our environmental impact and we have delivered a 45% cumulative reduction in our emissions to date. With a 20% reduction in the past four years.
• Water efficiency has also improved, with a 44% absolute reduction since 2007 and a particular focus onwater-stressed areas.
• We are on track to deliver our ambitious targets in these two important areas and are fully focused on driving progress on the rest of our F20 targets.
• In addition we are looking towards 2030 and expect to announce our new targets in the summer.

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FOCUS AREAS: F20 H1 ORGANIC NET SALES

GROWTH

ScotchFlat

US Spirits

6.1%

India2.0%

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Now let me update you on our three focus areas: Scotch, US Spirits and India.

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F20 FOCUS AREAS: STRONG SCOTCH

PERFORMANCE OUTSIDE OF JOHNNIE WALKER

Organic net sales growth (%)

							16.2							16.7
															11.6
										9.4				8.9
	5.7	6.0	5.4	6.8					6.3					7.1
4.7											4.8
												2.5
	1.9												1.2
	0.3
							(2.2)							(0.3)
				(3.8)									(3.1)
														(4.5)
																	(9.3)
																	(13.1)
Total Scotch	Johnnie Walker		Buchanan's	Scotch Malts	Primary Scotch	Other
						F17			F18			F19			F20 H1
% of Scotch		56%			9%						14%	11%	10%
net sales										33

• Ourlong-term strategy in scotch remains unchanged, with core brands and innovation delivering significant growth in the past two years.
• Overall net sales were flat in the first half, due to some specific challenges. Primarily disruptions in Mexico, Travel Retail, in Peru and Chile. These adversely impacted Johnnie Walker Black Label and Johnnie Walker Red Label in particular.
• Overall the brand remains strong, with the Johnnie Walker reserve portfolio continuing its rapid growth, with particularly strong performance from Asia Pacific.
• We are looking forward to celebrating Johnnie Walker's upcoming 200thanniversary, with the opening of the new Johnnie Walker home in Edinburgh, celebratory packaging and special releases.
• Innovation maintained its strong contribution to growth, driven by the "Johnnie Walker Game of Thrones Limited Editions A Song of Ice and A Song of Fire" and "The Game of Thrones Single Malt Scotch Whisky Collection".
• Buchanan's net sales continued to gain momentum and were up 9% with good growth in both the US and Latin America, following increased investment over the past two years.
• Our scotch malts grew double digit in all regions, with strong performance from Mortlach, Lagavulin and The Singleton.
• Primary scotch brands remained flat. Growth in Black & White and VAT 69 was offset by headwinds on Bell's and other local primary brands.
• In other scotch, JεB slowed its decline in Iberia, and Windsor continues to decline in Korea driven by changing consumer trends.

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F20 FOCUS AREAS: US SPIRITS

CONTINUED PERFORMANCE IMPROVEMENT

Organic volume and net sales growth (%)

6.1

5.0

3.43.3

2.5

2.0

1.5

1.2

Volume

Net sales

F17

F18

F19

F20 H1

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• Now turning to our second focus area, US Spirits. This remains a very attractive market, where we are well positioned due to our competitive advantage, executional capabilities and innovation.
• Our US spirits business continues to build momentum with continued premiumisation and strong price/ mix improvements.
• Growth was further strengthened by last year's upweighted marketing investment, which has been continued this fiscal year.
• We continue to use Catalyst our data analytics tool to guide our marketing investment decisions.
• And we have our Every Day Great Execution tools to strengthen our route to consumer.
• A number of areas grew strongly, including Crown Royal, Don Julio and Casamigos all up double digit, and our innovation performance remained strong.
• This growth offset softer performance in vodka where performance remains challenged.

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F20 FOCUS AREAS: US SPIRITS
					Nielsenand NABCA combined value growth
						(%)			42
											F19*
									27		F20H1**
								22
11										14
8	7								8
			5					6
						4
		1			1	1				3
			(1)	(4)		(3)	(4)
			Core brands		(9)
Crown Royal	Johnnie	Captain	Baileys	Smirnoff	Cîroc	Ketel One	Don Julio	Bulleit	Buchanan's
		Walker	Morgan				vodka***
					F20 H1 category value share change**
* FYTD: Nielsen to 15thJune 2019, NABCA to 31stMay 2019, ** FYTD Nielsen to 28thDecember 2019, NABCA to 30thNovember 2019, *** includes Ketel One Botanical	35

• Overall in this fiscal half we grew broadly in line with the US spirits market.
• Our strong performance in the growing Canadian whisky and tequila categories continued, with Crown Royal, Don Julio and Casamigos all gaining share.
• Johnnie Walker continued to gain category share, but at a slower rate. Our latest innovation "Johnnie Walker Game of Thrones Limited Editions A Song of Ice and A Song of Fire" has performed strongly but is lapping last year's highly successful White Walker by Johnnie Walker. Buchanan's also continued to grow share.
• Smirnoff and Cîroc category share continued to decline however Ketel One continued to gain category share.
• Captain Morgan continues to lag the category. We've upweighted marketing investment. In November we launched a TV campaign focusing on the simple serve message and behind our partnership with Major League Soccer ahead of the 2020 season.

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F20 FOCUS AREAS: INDIA NET SALES UP 2%,

INFLATIONARY COGS IMPACTING MARGIN

		India organic net sales growth, %	India organic operating margin
									improvement, bps
			12.2	12.4				252
8.8			8.2
6.9						77
							5.1
1.9						2.0
											(161)
	F17	F18	F19	F20 H1
									F18	F19	F20H1
		Total India			Prestige and above

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• The current economic slowdown in India is softening category growth. Against this background, total net sales grew 2%.
• Overall performance was impacted by the decline in McDowell's No.1 rum and Old Tavern Whisky which both play in the popular segment of the market.
• In prestige and above we grew net sales by 5.1%, driven by strong growth in scotch.
• Johnnie Walker and Black & White both grew double digit and McDowell's No.1 was strengthened by the continued success of its Platinum range.
• We had some temporary supply chain disruption which has now been resolved as well as liquidity challenges in some key scotch markets, which slowed growth in this half.
• High inflationary COGS, particularly on raw materials, put significant pressure on gross margins, however we managed to significantly reduce the impact on operating profit through continued focus on net revenue management, productivity initiatives as well as tight overhead management.
• We remain very confident in our long term strategy in this market.

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EFFECTIVE EXECUTION OF OUR STRATEGY

CONSISTENT RESULTS

Delivering consistent results through our strategy

On track to meet guidance

Consistent top line growth, increased marketing investment and operating margin expansion enabled by every day efficiency and solid cash flow

Delivering on our environmental, social and governance goals. Doing business the right way from grain to glass

Confidence in delivering our medium term guidance and delivering our long term performance ambition

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• Once again, we have delivered another good, consistent set of results in the first half through the ongoing focus on all six of our execution priorities.
• Organic net sales growth was broad based across regions and categories, demonstrating our strengthened ability to withstand volatility and still deliver ourmedium-term guidance.
• We continue to build our business in the right way, with increased investment to drive sustainable growth, while expanding organic operating margin and delivering strong cash flow.
• We remain confident in ourlong-term performance and expect to continue to deliver against our fiscal 20-22 medium term guidance of mid-single digit organic net sales growth, in the range of 4% to 6%.
• We also expect to grow organic operating profit ahead of net sales in the range of 5% to 7% over the same period.
• With the consumer at the heart of the business, and greater agility and discipline in the execution of our strategy, we will continue to grow Diageo in a consistent, sustainable way.
• Thank you.

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FINANCIAL/LEGAL APPENDIX

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APPENDIX 1: 1/2

FORWARD LOOKING STATEMENTS

Exchange rate outlook

Using exchange rates £1 = $1.31; £1 = €1.19, the exchange rate movement for the year ending 30 June 2020 is estimated to unfavourably impact net sales by approximately £110 million and operating profit by approximately £40 million.

Net sales

For the full year F20 we expect organic net sales growth to be towards the lower end of our 4-6% medium term guidance range.

Operating margin

For F20 we continue to expect organic operating profit to grow roughly one percentage point ahead of net sales.

Medium term guidance

We remain confident in our long-term performance and expect to continue to deliver against our fiscal 20-22 medium term guidance of mid-single digit organic net sales growth, in the range of 4% to 6%.

We also expect to grow organic operating profit ahead of net sales in the range of 5% to 7% over the same period.

Net finance charges

For F20, I expect our effective interest rate to be broadly in line with F19 based on prevailing market conditions. For the full year I expect other finance charges to be slightly ahead of last year, as we lap some one-off benefit from the comparative period.

Taxation before exceptionals

Our tax rate before exceptional items was 21.6%, in line with our guidance. Our current expectation for the full year is that our tax rate before exceptional items will continue to be between 21% and 22%.

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APPENDIX 1: 2/2

FORWARD LOOKING STATEMENTS

Taxation cash flow

We had £300m in higher tax payments in the first half F20 primarily driven by one-off tax settlements and timing of payments We expect both of these tax items to impact free cash flow delivery in the full year.

Capital expenditure

As I look to the full year fiscal 20 I expect net capex of between £700m and £750m

Post employment plans

Total cash contributions by the group to all post employment plans in the year ending 30 June 2020 are estimated to be approximately £160m.

Dividend

We maintain a clear dividend policy to target dividend cover of 1.8x to 2.2x and closed the last fiscal year 19 at roughly 1.9x. We announced an interim dividend of 27.41 pence per share.

Capital structure

Our disciplined approach to our capital structure strategy remains unchanged, anchored by our leverage policy which targets a leverage ratio range between 2.5x to 3.0x adjusted net debt to EBITDA.

Return of Capital

Over fiscal 20 to 22 we expect to return up to £4.5bn to shareholders; to be returned by the most appropriate mechanic via share buybacks or special dividends, depending on market conditions.

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APPENDIX 2: RECONCILIATION OF CASH FLOW STATEMENT

Statement of cash flows (£m)	F19	F20	Movement
Operating profit after exceptional items	2,430	2,442	12
Increase in working capital excluding maturing stock	(503)	(593)	(90)
Increase in maturing stock	(153)	(85)	68
Working capital	(656)	(678)	(22)
Depreciation, amortisation and impairment	185	286	101
Dividends received	3	3	0
Post employment charges in operating profit	(53)	(36)	17
Post employment payments	(114)	(96)	18
Post employment payments less amounts included in	(61)	(60)	1
operating profit
Other Items	37	(5)	(42)
Tax paid	(229)	(547)	(318)
Net interest	(105)	(153)	(48)
Net capex	(258)	(322)	(64)
Movements in loans and other investments	0	0	0
Free cash flow	1,346	966	(380)

Reconciliation of free cash flow waterfall on slide 14

Movement on OP as shown in YoY waterfall (£m)

Operating profit after exceptional items	12
Depreciation, amortisation and impairment	101
Other items	(42)
Post employment charges in operating profit	(17)
Operating profit movement excluding non-cash items	54
Operating profit excluding exchange	69
Exchange on operating profit	(15)
Operating profit movement excluding non-cash items	54
Other movements as shown in YoY waterfall (£m)
Post employment payments	18
Movements in loans and other investments	0
Dividends received	0
Other operating activities	18

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Cautionary statement concerning forward-looking statements

This document contains 'forward-looking' statements. These statements can be identified by the fact that they do not relate only to historical or current facts. In particular, forward- looking statements include all statements that express forecasts, expectations, plans, outlook, objectives and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of changes in interest or exchange rates, the availability or cost of financing to Diageo, anticipated cost savings or synergies, expected investments, the completion of any strategic transactions and restructuring programmes, anticipated tax rates, changes in the international tax environment, expected cash payments, outcomes of litigation or regulatory enquiries, anticipated changes in the value of assets and liabilities related to pension schemes and general economic conditions. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements, including factors that are outside Diageo's control.

Brexit

The process surrounding the United Kingdom's future trading relationship with the European Union continues. We remain of the view that, in the event of either a future free trade agreement (FTA) or a 'no FTA' outcome at the end of the implementation period between the UK and the EU, the direct financial impact to Diageo will not be material. In the EU, we expect that the vast majority of our finished case goods will continue to trade tariff free, with no change to existing tariffs in either scenario. There has been progress made in relation to the future trading arrangements of the UK with a number of third party countries agreeing to trade on the terms of existing EU FTAs, once the UK leaves the EU. If the UK Government is unable to renew all of the existing FTAs on which we rely, trading could revert to WTO rules. We have mitigation plans in place to minimise any short term disruption that could arise from such a scenario.

We have further considered the principal impact to our supply chain of a no FTA scenario which we have assessed as limited and believe that we have appropriate plans in place to mitigate this risk. The full implications of Brexit will not be understood until future trade, regulatory and tax arrangements 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.

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(continued from previous page)

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, as well as the broader environment risks, including a continuing focus on identifying critical decision points to ensure potential disruption is minimised, and take prudent actions to mitigate these risks wherever practical.

Factors that could cause actual results and developments to differ materially from those expressed or implied by forward-looking statements include, but are not limited to:

• economic, political, social or other developments in countries and markets in which Diageo operates, which may contribute to a reduction in demand for Diageo's products, adverse impacts on Diageo's customer, supplier and/or financial counterparties, or the imposition of import, investment or currency restrictions (including the potential impact of any global, regional or local trade disputes, including but not limited to any such dispute between the United States and the European Union and/or the United Kingdom) or any tariffs, duties or other restrictions or barriers imposed on the import or export of goods between territories;
• the process surrounding the United Kingdom's exit from the European Union, which could lead to a sustained period of economic and political uncertainty and complexity whilst any successor trading arrangements with other countries are negotiated, finalised and implemented, potentially adversely impacting economic conditions in the United Kingdom and Europe more generally as well as Diageo's business operations and financial performance (see more detailed status on Brexit above);
• changes in consumer preferences and tastes, including as a result of changes in demographics, evolving social trends (including any shifts in consumer tastes towardssmall-batch craft alcohol, low or no alcohol, or other alternative products), changes in travel, vacation or leisure activity patterns, weather conditions, health concerns, pandemics and/or a downturn in economic conditions;
• any litigation or other similar proceedings (including with tax, customs, competition, environmental,anti-corruption or other regulatory authorities), including litigation directed at the beverage alcohol industry generally or at Diageo in particular;
• changes in the domestic and international tax environment, including as a result of the OECD Base Erosion and Profit Shifting Initiative and EUanti-tax abuse measures, leading to uncertainty around the application of existing and new tax laws and unexpected tax exposures;
• the effects of climate change, or legal, regulatory or market measures intended to address climate change, on Diageo's business or operations, including on the cost and supply of water;

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• changes in the cost of production, including as a result of increases in the cost of commodities, labour and/or energy or as a result of inflation;
• legal and regulatory developments, including changes in regulations relating to production, distribution, importation, marketing, advertising, sales, pricing, labelling, packaging, product liability, antitrust, labour, compliance and control systems, environmental issues and/or data privacy;
• the consequences of any failure by Diageo or its associates to comply withanti-corruption, sanctions, trade restrictions or similar laws and regulations, or any failure of Diageo's related internal policies and procedures to comply with applicable law or regulation;
• the consequences of any failure of internal controls, including those affecting compliance with existing or new accounting and/or disclosure requirements;
• Diageo's ability to maintain its brand image and corporate reputation or to adapt to a changing media environment;
• contamination, counterfeiting or other circumstances which could harm the level of customer support for Diageo's brands and adversely impact its sales;
• increased competitive product and pricing pressures, including as a result of actions by increasingly consolidated competitors or increased competition from regional and local companies, that could negatively impact Diageo's market share, distribution network, costs and/or pricing;
• any disruption to production facilities, business service centres or information systems, including as a result ofcyber-attacks;
• increased costs for, as well as shortages of, talent, as well as labour strikes or disputes;
• Diageo's ability to derive the expected benefits from its business strategies, including in relation to expansion in emerging markets, acquisitions and/or disposals, cost savings and productivity initiatives or inventory forecasting;
• fluctuations in exchange rates and/or interest rates, which may impact the value of transactions and assets denominated in other currencies, increase Diageo's cost of financing or otherwise adversely affect Diageo's financial results;
• movements in the value of the assets and liabilities related to Diageo's pension plans;

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• Diageo's ability to renew supply, distribution, manufacturing or licence agreements (or related rights) and licences on favourable terms, or at all, when they expire; or
• any failure by Diageo to protect its intellectual property rights.

Other Information

All oral and written forward-looking statements made on or after the date of this document and attributable to Diageo are expressly qualified in their entirety by the above risk factors and by the 'Risk factors' section contained in the annual report on Form 20-F for the year ended 30 June 2019 filed with the US Securities and Exchange Commission (SEC). Any forward-looking statements made by or on behalf of Diageo speak only as of the date they are made. Diageo does not undertake to update forward-looking statements to reflect any changes in Diageo's expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. The reader should, however, consult any additional disclosures that Diageo may make in any documents which it publishes and/or files with the SEC. All readers, wherever located, should take note of these disclosures.

This document includes names of Diageo's products, which constitute trademarks or trade names which Diageo owns, or which others own and license to Diageo for use. All rights reserved. © Diageo plc 2020.

The information in this document does not constitute an offer to sell or an invitation to buy shares in Diageo plc or an invitation or inducement to engage in any other investment activities.

This document may include information about Diageo's target debt rating. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organisation. Each rating should be evaluated independently of any other rating.

Past performance cannot be relied upon as a guide to future performance.

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CELEBRATING LIFE, EVERY DAY, EVERYWHERE

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