Diageo : 2022 Interim Results, half year ended 31 December 2021

Interim results, six months ended 31 December 2021

27 January 2022

Diageo delivers strong net sales growth and margin expansion

Delivered strong net sales growth across all regions

• Reported net sales of £8.0 billion increased 15.8%, with strong organic growth, partially offset by an adverse foreign exchange impact.
• Organic net sales grew 20.0%, driven by strong double-digit growth across all regions, supported by effective marketing and excellent commercial execution.
• Growth reflects continued recovery in the on-trade, resilient consumer demand in the off-trade and market share gains, and was underpinned by favourable industry trends of spirits taking share of total beverage alcohol and premiumisation(i).

Expanded operating margin while increasing marketing investment

• Reported operating profit of £2.7 billion increased 22.5%, and reported operating margin increased 190bps, primarily due to growth in organic operating profit.
• Organic operating profit grew 24.7%, with growth across all regions.
• Organic operating margin increased 131bps, primarily driven by a strong recovery in gross margin and leverage on operating costs, while increasing marketing investment.
• Supply productivity savings and price increases more than offset the impact of cost inflation.

Delivered broad-based category growth and gained market share

• Broad-basedgrowth across most categories, with particularly strong performance in scotch, tequila and beer.
• Premium plus brands contributed 56% of reported net sales and drove 74% of organic net sales growth.
• Grew or held off-trade market share in over 85%(ii) of total net sales value in measured markets.

Invested to sustain long-term growth

• Organic growth in marketing investment of 27.0%, ahead of organic net sales growth.
• Continued capex investment in production capacity, digital capabilities and consumer experiences.

Delivered strong cash generation

• Net cash flow from operating activities decreased £0.1 billion to £1.9 billion, and free cash flow decreased £0.2 billion to £1.6 billion, primarily due to lapping an exceptionally strong working capital benefit in the first half of fiscal 21.
• Strong balance sheet, with leverage ratio(iii) of 2.5x at 31 December 2021, at the low end of our target range.

Continued progress in delivering Society 2030 goals

• Opened our first carbon-neutral whiskey distillery in North America and broke ground on a carbon-neutral distillery in China.
• Responsible drinking campaigns: launched 'Wrong Side of the Road' and continued roll out of 'Know When to Stop'.
• Included in Dow Jones World Sustainability Index for fourth consecutive year.
• Retained 'double A' status for both climate change and water security on CDP's lists.

Created long-term shareholder value

• Increased basic eps by 24.7% to 84.3 pence and pre-exceptional eps by 22.5% to 85.6 pence.
• Increased interim dividend by 5% to 29.36 pence per share.
• Completed £0.5 billion of share buybacks as part of return of capital programme of up to £4.5 billion.
• Accelerating timeline to complete return of capital programme during fiscal 23.

See page 47 for explanation and reconciliation of non-GAAP measures, including organic net sales, organic operating profit, free cash flow, eps before exceptionals, ROIC, adjusted net debt, adjusted EBITDA and tax rate before exceptional items.

1. IWSR, 2021 (20 TBA markets, approximately 75% of industry TBA volume).
2. Internal estimates incorporating AC Nielsen, Association of Canadian Distillers, Dichter & Neira, Frontline, Intage, IRI, ISCAM, NABCA, Scentia, State Monopolies, TRAC, IPSOS and other third-party providers. All analysis of data has been applied with a tolerance of +/- 3 bps. Percentages represent percent of markets by total Diageo net sales contribution that have held or gained off-trade share. India, Nigeria and Canada share data represents total trade. Measured markets indicate a market where we have purchased any market share data. Market share data may include beer, wine, spirits or other elements. Measured market net sales value sums to 87% of total Diageo net sales value in first half of fiscal 22.
3. Ratio of adjusted net borrowings to adjusted EBITDA.

1	Diageo Interim results, six months ended 31 December 2021

Ivan Menezes, Chief Executive, said:

I am very pleased with our financial results, which build on our growth momentum in fiscal 21. We delivered strong organic net sales growth across all regions and operating margin expansion. This performance demonstrates our world-class brand building capability, supply chain excellence and agile culture, and reflects the strength of our portfolio across geographies, categories and price tiers.

In the off-trade channel, where consumer demand has remained resilient, we have gained or held market share across the majority of our measured markets. We also benefitted from the continued recovery of the on-trade channel, particularly in Europe and North America.

Strong sales volume growth and continued premiumisation drove an improvement in organic operating margin during the half. This was achieved while increasing our investment in marketing to gain share and support innovation, particularly in North America and Greater China. In addition, our focus on revenue growth management and productivity savings are helping to mitigate the impact of cost inflation.

Strong cash flow generation is enabling re-investment in sustainable long-term growth. We are expanding our production capacity, enhancing our digital capabilities, investing in talent and progressing with our ambitious 10-year sustainability plan. During the half, we also returned £0.5 billion to shareholders via share buybacks and we are accelerating the timeline of our return of capital programme of up to £4.5 billion to now be completed during fiscal 23.

We have made a strong start to fiscal 22. While we expect near-term volatility to remain, including potential impacts from Covid-19, global supply chain constraints and rising cost inflation, I am confident in our ability to successfully navigate these disruptions through the remainder of the year. Over the medium-term, from fiscal 23 to fiscal 25, we continue to expect organic net sales to consistently grow within a range of 5% to 7% and organic operating profit to grow sustainably within a range of 6% to 9%.

Financial performance

Volume (equivalent units)				Operating profit			Earnings per share (eps)
EU140.2m				£2,743m			84.3p
(F21 H1: EU 128.3 m)				(F21 H1: £2,239m)			(F21 H1: 67.6p)
Reported movement	9 % h	Reported movement	23 % h	Reported movement	25 % h
Organic movement(i)	9 %	h	Organic movement(i)	25 % h	Eps before exceptional items(i)	22 %	h
Net sales				Net cash from operating			Interim dividend
				activities			per share
£7,957m				£1,947m			29.36p
(F21 H1: £6,874m)				(F21 H1: £1,998m)			(F21 H1: 27.96p)
Reported movement	16 %	h	F22 H1 free cash flow(i) £1,575m			Increase	5 %	h
Organic movement(i)	20 %	h	F21 H1 free cash flow(i) £1,753m

1. See page 47 for explanation and reconciliation of non-GAAP measures.

2	Diageo Interim results, six months ended 31 December 2021

Key financial information

Six months ended 31 December 2021

Summary financial information

				Organic growth	Reported growth
		F22 H1	F21 H1	%	%
Volume	EUm	140.2	128.3	9	9
Net sales	£ million	7,957	6,874	20	16
Marketing	£ million	1,351	1,085	27	25
Operating profit before exceptional items	£ million	2,743	2,256	25	22
Exceptional operating items(i)	£ million	-	(17)
Operating profit	£ million	2,743	2,239		23
Share of associate and joint venture profit after tax	£ million	190	154		23
Non-operating exceptional items(i)	£ million	(31)	5
Net finance charges	£ million	(180)	(200)
Exceptional taxation (charge)/credit(i)	£ million	-	(42)
Tax rate including exceptional items	%	23.3	24.4		(5)
Tax rate before exceptional items	%	23.0	22.4		3
Profit attributable to parent company's shareholders	£ million	1,965	1,580		24
Basic earnings per share	pence	84.3	67.6		25
Basic earnings per share before exceptional items	pence	85.6	69.9		22
Interim dividend	pence	29.36	27.96		5

1. For further details on exceptional items see pages 22 and 34.

Reported growth by region

										Operating profit before
	Volume		Net sales		Marketing		exceptional items	Operating profit
	%		EUm	%		£ million	%		£ million	%	£ million	%	£ million
North America	1		0.3	10		263	24		105	6	69	6	69
Europe	23		5.4	21		309	22		55	37	167	43	184
Asia Pacific	4		1.7	10		136	16		36	17	65	17	65
Africa	15		2.5	17		123	21		18	85	81	85	81
Latin America and Caribbean	16		2.0	41		240	60		47	69	136	69	136
Corporate	-		-	109		12	500		5	(33)	(31)	(33)	(31)
Diageo	9		11.9	16		1,083	25		266	22	487	23	504

Organic growth by region

										Operating profit before
	Volume		Net sales		Marketing		exceptional items
	%		EUm	%		£ million	%		£ million	%	£ million
North America	1		0.2	13		338	24		105	7	89
Europe	23		5.4	27		389	26		65	42	184
Asia Pacific	4		1.7	13		181	18		41	19	72
Africa	16		2.6	23		166	28		23	85	88
Latin America and Caribbean	16		2.0	45		258	65		50	80	152
Corporate	-		-	109		12	133		4	(36)	(35)
Diageo	9		11.9	20		1,344	27		288	25	550

First half of fiscal 19 to first half of fiscal 22 growth on a constant basis(i)

First half of fiscal 19 to first half of fiscal 22 Reported growth %(i)

First half of fiscal 19 to first half of fiscal 22 Growth on a constant basis %(i)

Net sales

North America	26	34
Europe	7	17
Asia Pacific	10	14
Africa	6	26
Latin America and Caribbean	22	39
Corporate	(18)	(18)
Diageo	15	25

1. For further details on first half of fiscal 19 to first half of fiscal 22 growth on a constant basis see pages 48-53. See page 47 for explanation and reconciliation of non-GAAP measures.

3	Diageo Interim results, six months ended 31 December 2021

Net sales (£ million)

Reported net sales grew 15.8%

Organic net sales grew 20.0%

Reported net sales grew 15.8%, driven by strong organic growth, partially offset by unfavourable foreign exchange.

Organic net sales growth of 20.0% reflects organic volume growth of 9.3% and positive price/mix of 10.7%. All regions grew organic net sales, driven by the recovery of the on-trade channel, resilient consumer demand in the off-trade channel and market share gains. Growth was supported by favourable industry trends of spirits taking share of total beverage alcohol and premiumisation(i).

The positive price/mix benefit was primarily driven by mix, reflecting the strong growth of premium plus brands, particularly in scotch, tequila and Chinese white spirits, as well as the continued recovery of the on-trade channel in Europe and North America and the partial recovery of Travel Retail. There was also a price benefit, primarily from price increases in Latin America and Caribbean, Africa and North America.

							Organic movement
						(i
		720	7,957
6,874		624
		17
(271)	(7)

F21 H1	Exchange(ii)	Acquisitions and	Reclassification(iii)	Volume	Price/mix	F22 H1
		disposals

1. IWSR, 2021 (20 TBA markets, approximately 75% of industry TBA volume).
2. Exchange rate movements reflect the adjustment to recalculate the reported results as if they had been generated at the prior period weighted average exchange rates.
3. For the six months ended 31 December 2021, £7 million has been reclassified from cost of sales to excise duties.

Operating profit (£ million)

Reported operating profit grew 22.5%

Organic operating profit grew 24.7%

Reported operating profit increased 22.5%, primarily due to growth in organic operating profit. This was partially offset by the negative impact of adverse exchange rate movements.

Organic operating profit grew 24.7%, ahead of organic net sales growth, driven by growth across all regions.

5502,743

2,239	17	34

1. (10)

F21 H1	Exceptional	Exchange	Acquisitions and	FVR(ii)	Organic	F22 H1
	operating items(i)		disposals		movement

1. For further details on exceptional operating items see pages 22 and 34.
2. Fair value remeasurements. For further details see page 22.

4	Diageo Interim results, six months ended 31 December 2021

Operating margin (%)

Reported operating margin increased 190bps

Organic operating margin increased 131bps

Reported operating margin increased 190bps, primarily driven by an increase in organic operating margin.

Organic operating margin increased 131bps, primarily driven by a strong recovery in gross margin and leverage on operating costs, while increasing marketing investment. Latin America and Caribbean, Europe and Africa largely drove the operating margin improvement, partially offset by a decline in North America.

Gross margin increased 147bps, primarily driven by positive mix and improved fixed cost absorption from volume growth. Supply productivity savings and price increases more than offset the impact of cost inflation.

Organic movement 131 bps

147bps

76bps

34.5%

32.6%

25bps

5bps

46bps

(92)bps

(17)bps

F21 H1	Exceptional	Exchange	Acquisitions	Other(ii)	Gross margin	Marketing	Other	F22 H1
	operating		and				operating
	items(i)		disposals				items

1. For further details on exceptional operating items see pages 22 and 34.
2. Fair value remeasurements and reclassification. For the six months ended 31 December 2021, £7 million has been reclassified from cost of sales to excise duties. For further details on fair value remeasurements see page 22.

Basic earnings per share (pence)

Basic eps increased 24.7% from 67.6 pence to 84.3 pence

Basic eps before exceptional items(i) increased 22.5% from 69.9 pence to 85.6 pence

Basic eps increased 16.7 pence primarily driven by organic operating profit growth, partially offset by higher tax, and an unfavourable foreign exchange impact.

Basic eps before exceptional items increased 15.7 pence.

F21 H1	Exceptional	Exchange	Acquisitions	Organic	Associates	Finance	Tax(v)	Share	Non-	FVR(vi)	F22 H1
	items	on	and	operating	and	charges(iv)		buyback	controlling
	after tax(ii)	operating	disposals(iii)	profit	joint				interests
		profit			ventures

(i

1. See page 47 for explanation of the calculation and use of non-GAAP measures.
2. For further details on exceptional items see pages 22 and 34.
3. Includes finance charges net of tax.
4. Excludes finance charges related to acquisitions and disposals.
5. Excludes tax related to acquisitions and disposals.
6. Fair value remeasurements. For further details see page 22.

5	Diageo Interim results, six months ended 31 December 2021