Diageo : Half-year Report

RNS Number : 5999O Diageo PLC

31 January 2019

Interim results, six months ended 31 December 2018

31 January 2019

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

See Explanatory Notes for explanation of the use of non-GAAP measures.

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

4

3

130.5

126.4

Net sales

£ million

7

6

6,908

6,530

Marketing

£ million

9

9

1,054

968

Operating profit before exceptional items

£ million

12

12

2,451

2,190

Exceptional operating items(i)

£ million

(21)

-Operating profit

£ million 11

2,430

2,190

Share of associate and joint venture profit after tax

£ million 7

179

168

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

% 509

21.3

3.5

Tax rate before exceptional items

% 7

21.2

19.8

Profit attributable to parent company's shareholders

£ million (4)

1,976

2,058

Basic earnings per share

pence (2)

80.9

82.2

Earnings per share before exceptional items

pence 14

77.0

67.8

Interim dividend

pence 5

26.1

24.9

(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.

Share buyback programme

On 26 July 2018 the Board approved a share buyback programme to return up to £2.0 billion to shareholders during the year ending 30 June 2019. On 20 December 2018 Diageo completed the sale of a portfolio of 19 brands to Sazerac. The net proceeds of approximately £340 million, after corporate tax and transaction costs, will be returned to shareholders through a share buyback programme, which brought the total programme to £2.34 billion.

On 30 January 2019 the board approved a further incremental share buyback programme of £660 million, bringing the total programme to up to £3.0 billion for the year ending 30 June 2019.

In the six months ended 31 December 2018, 46.5 million shares were repurchased for an aggregate consideration of £1.275 billion.

Acquisitions and disposals

The impact of acquisitions and disposals on the reported figures was primarily attributable to the disposal of a portfolio of 19 brands to Sazerac which was completed on 20 December 2018 and to the prior year acquisition of the Casamigos brand.

For further details on the impact of acquisitions and disposals see Explanatory Notes.)

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

Reported operating profit was up 11.0% with organic growth partially offset by exceptional operating items and acquisitions and disposals. Organic operating profit grew ahead of net sales at 12.3%.

Operating margin (%)

Reported operating margin increased 164bps Organic operating margin increased 152 bps

Operating margin	ppt
F18 H1	33.5
Exceptional operating items	(0.30)
Exchange	0.47
Acquisitions and disposals	(0.05)
Gross margin	0.50
Marketing	(0.26)
Other operating expenses	1.28
F19 H1	35.2

Reported operating margin increased 164bps driven by organic operating margin improvement and the positive impact on operating margin due to exchange, as a result of the higher negative impact of exchange on net sales relative to operating profit. Organic operating margin improved 152bps driven by improved price/mix and efficiencies from our productivity programme partially offset by higher marketing spend.

Basic earnings per share (pence)

Basic eps decreased 1.6% from 82.2 pence to 80.9 pence

Eps before exceptional items increased 13.6% from 67.8 pence to 77.0 pence

( i

Basic earnings per share	pence
F18 H1	82.2
Exceptional items after tax	(10.5)
Exchange on operating profit	0.1
Acquisitions and disposals	(0.1)
Organic operating profit growth(i)	10.4
Associates and joint ventures	0.4
Net finance charges	2.2
Tax	(4.0)
Share buyback	1.1
Non-controlling interests	(0.9)
F19 H1	80.9
(i) Excludingexchange

Basic eps declined 1.3 pence largely due to lapping the benefit of an exceptional tax credit in the prior period following the tax reduction in the United States under the US Tax Cut and Jobs Act.

Eps before exceptional items increased 9.2 pence as organic operating profit growth and lower finance charges more than offset the higher tax charge.

Free cash flow (£ million)

Net cash from operating activities(i) was £1,604 million, an increase of £356 million compared to the same period last year. Free cash flow was £1,346 million, an increase of £317 million

Free cash flow	£ million
F18 H1	1,029
Exchange(ii)	-
Operating profit(iii)	283
Working capital(iv)	(126)
Capex	(57)
Tax	179
Interest	23
Other(v)	15
F19 H1	1,346

• (i) Net cash fromoperating activities excludes net capex, movements in loans and other investments (2018 - (£258) million; 2017 - (£219) million).

• (ii) Exchange on operating profit before exceptional items.

• (iii) Operating profit excludes exchange, depreciation and amortisation, post employment charges and non-cash items.

• (iv) Working capital movement includes maturing inventory.

• (v) Other items include post employment payments, dividends received fromassociates and joint ventures, and movements in loans and other investments.

Free cash flow continued to be strong at £1.3 billion largely driven by operating profit growth and lower tax payments which benefitted from the lapping of the one-off payment made to the UK tax authorities in August 2017. This increase was partially offset by a higher year on year working capital outflow, including increased investment in maturing inventory, and increased capex.

The operating working capital position, excluding maturing inventory, on the balance sheet improved in the half compared to the same period last year, largely as a result of higher creditors.

Returnon average invested capital (%)(i)

ROIC improved 135bps

Return on average invested capital	ppt
F18 H1	16.5
Exchange	0.19
Acquisitions and disposals	(0.16)
Organic operating profit growth	2.38
Associates and joint ventures	(0.03)
Tax	(0.68)
Other	(0.35)
F19 H1	17.8
(i) ROIC calculation excludes exceptional items.

ROIC increased 135bps largely driven by organic operating profit growth which was partially offset by the impact from higher tax charges, acquisitions and disposals and associates and joint ventures.

Reported growth by region

North America

Volume
%	EUm	%	£ million	%	£ million	%	£ million
2	0.4	8	173	13	45	7	74

Net sales

MarketingOperating profit(i)