diageo preliminary results year ended 30 june 2019 · • in gin, net sales were up 22% with...
TRANSCRIPT
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DIAGEO PRELIMINARY RESULTS YEAR ENDED 30 JUNE 2019
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CONSISTENT DELIVERY OF STRONG RESULTS
Four measures of our progress• Efficient growth• Value creation• Credibility and trust• Engaged people
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
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• Good morning everyone.• Today, I am happy to share another strong set of results.• We continue to make consistent progress towards our ambition to be one of the best
performing, most trusted and respected consumer product companies in the world.• We are delivering against our six priorities and have made good progress against all four of our
measures of progress.• I would like to thank everyone who works for and with Diageo for their contributions to today’s
results.
2
CONSISTENT DELIVERY OF STRONG RESULTS
Free cash flow £2.6bn
Organic operating margin expansion 83bps in F19
Delivered three year margin guidance with +198bps F17 to F19
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Organic volume 2.3%. Organic net sales 6.1%
Eps pre-exceptionals up 10.3%
Returned £2.8bn to shareholders through share buy-back in F19.
Further return to shareholders of up to £4.5bn for the period F20 to F22
Full year dividend up 5% to 68.57p
• We have delivered organic net sales growth of 6.1% in line with our F19 guidance, withstrong price mix.
• Growth is broad-based across regions and categories.• Our operating margin guidance over the F17 to F19 period was for 175bps improvement.• I am proud to say that we have exceeded that.• We delivered +83bps of margin expansion in F19, bringing total margin expansion over the
last three years to +198bps.• Free cash flow of £2.6bn reflects our focus on achieving strong, consistent cash delivery.• We delivered 10% growth in EPS before exceptionals and increased the full year dividend by
5%.• In F19, we returned £2.8bn back to shareholders through a share buy-back programme and
our leverage ratio of 2.5 is back within the policy range.• Today, we are announcing a further return of capital to shareholders of up to £4.5bn over
the next three years.
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Z
WE ARE CONSISTENTLY DELIVERING EFFICIENT GROWTH
CONSISTENT & STRONG FREE CASH FLOW
£bn
EVERYDAY EFFICIENCY, FUELLING INCREASED INVESTMENT AND
DRIVING MARGIN IMPROVEMENT
SUSTAINABLE ORGANIC TOPLINE PERFORMANCE %
Organic operating
margin
F17-19 F19
+198bps
Marketing investment
rate*+30bps
2.0 2.1
2.72.5
2.6
F18F15 F16 F17 F19
+22bps
+83bps
All numbers are organic. * Organic movement
2.8
4.3
5.0
6.1
0.0
F18F15 F16 F17 F19
Mid-single digit 4-6%
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• We have been working to deliver efficient growth and consistent value creation.• This year’s net sales growth is once again in line with the 3-year guidance of mid-single
digit growth.• We have successfully embedded a culture of everyday efficiency in the business.• This has allowed us to up-weight our investment behind our brands to fuel long term
growth while improving spend effectiveness through the use of cutting edge analyticaltools, as we talked about at our Capital Markets Day in May.
• At the same time we have improved our organic operating margin and we continue todrive strong free cash flow.
4
ZZ
TOTAL SHAREHOLDER RETURNDIVIDENDSPORTFOLIO MANAGEMENT
AND M&A
ACQUISITIONS
DISPOSALS
Dividend per share, pence
WinesBushmills
Non core beerGleneagles
Portfolio of 19 brands
AND WE ARE CREATING VALUE FOR SHAREHOLDERS
2%
17%
12%
23%
27%
F16F15 F17 F18 F19
Source: Factset
56.459.2
62.265.3
68.6
F16F15 F19F17 F18Annual growth
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• We actively manage our portfolio to maximise value for shareholders.• Since F14 we’ve completed the acquisition of several companies and brands, notably
Don Julio, USL and Casamigos and have increased our shareholding in Shui Jing Fang.• We have also divested assets including, most recently, a portfolio of 19 brands to
Sazerac.• The business continues to generate and return cash to shareholders and we’ve delivered
consistent dividend per share growth of at least 5% since F15.• And finally, our 5 year cumulative Total Shareholder Return is towards the top of our
peer group.• All of this has been achieved with a continued focus on ensuring we make a positive
contribution to society and have a high level of employee engagement. I will talk moreabout this later on.
• We are not done.• We are working to deliver a self-sustaining model of consistent top line growth, everyday
efficiency and smart investment, underpinned by the actions we are taking to buildcredibility, trust and engagement.
• We see ongoing opportunities to drive efficient growth in our core brands and developand grow the big brands of tomorrow.
• Let me now hand over to Kathy to talk through our financial results in more detail.
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A SET OF STRONG CONSISTENT RESULTS
ROIC
Organic net sales growth
Organic operating margin improvement
Free cash flow
Pre-exceptional eps
Total Shareholder Return
Value creation:
Efficient growth: F19 FY
up 80bps to 15.1%
6.1%
+83bps
£2.6bn
up 10.3% to 130.8p
up 27%
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• Thank you Ivan and good morning everyone.• We have delivered another strong set of results in F19.• Our underlying results are consistent with our medium-term guidance.• Let me start with a recap of some of the highlights that Ivan has already talked you
through.• Organic net sales grew 6.1%, with 2.3% organic volume growth and 3.8% positive
price/mix.• Organic operating margin increased 83bps.• At £2.6bn, free cash flow continued to be strong, £85m higher than last year.• Pre-exceptional earnings per share grew 10.3% to 130.8p mainly driven by organic
operating profit growth.• Return on invested capital improved 80bps to 15.1%. This was largely driven by
organic profit growth partially offset by increased capex, the acquisition ofCasamigos and the divestiture of a portfolio of 19 brands to Sazerac.
• We returned £4.4 billion in cash to shareholders through dividends and our sharebuy-back programme.
• Let’s dive into it.
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7
Organic growth
REPORTED NET SALES UP 5.8%6.1% ORGANIC GROWTH
24
280
457
Acquisitions and disposals
ExchangeF18 Volume Price/mix F19
12,163
(57)
12,867
£ million
• Reported net sales were up 5.8% driven by organic growth with strong price/mix which I willtalk through in detail in a moment.
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6.1% ORGANIC NET SALES GROWTH
4.3%
1.1%
2.5%2.5% 2.3%
3.8%
3.2%
5.0%
6.1%
Organic volume growth Organic net sales growthPrice/mix
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F18F17 F19
• Organic net sales grew just over 6% with a good balance of 2.3% organic volume growth and3.8% positive price/mix.
• Growth was broad based across regions and categories.• There was a step up in price/mix driven by continued premiumisation, improved capabilities in
net revenue management and successful premium innovation performance. This included thelaunch of “White Walker by Johnnie Walker” and sustained growth in premium innovationslaunched in prior years including Ketel One Botanical, Crown Royal Regal Apple and TanquerayFlor de Sevilla.
• Net sales growth was at the top end of our medium term guidance and driven by particularlysuccessful innovation launches across categories, broad based gin growth and strongperformance from our Reserve portfolio especially tequila and Chinese white spirits.
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BROAD BASED ORGANIC GROWTH ACROSS OUR CATEGORIES
6%
2%
6%
4% 4%
8%
3%
Vodka*Scotch Canadian Whisky
US Whiskey
Rum Liqueurs IMFL Whisky
Gin Tequila Beer
22%
29%
(2)%
Organic net sales growth
9* Vodka includes Ketel One Botanical
• Net sales growth continued to be broad based across all categories, apart from rum.• Scotch net sales were up 6% with strong growth in all regions except Europe where Scotch sales
were flat. Ivan will share more detail with you on the drivers of our Scotch performance.• Vodka continued to improve with net sales up 2% driven by Kenya, Brazil and South Africa as well as
improved performance in US Spirits.• In US Spirits, vodka was up 0.4% supported by innovation led growth in Ketel One and Smirnoff
which more than offset a decline in Cîroc vodka. Outside US Spirits, vodka net sales increased 5%with growth in every region except Europe.
• Canadian Whisky net sales were up 6% driven by Crown Royal, which continued to gain share in thecategory in the US, supported by the limited time offer Crown Royal Peach. Crown Royal Regal Apple,which is in its fifth year since launch, delivered double digit net sales growth.
• In US Whiskey, growth was driven by Bulleit with net sales up 8% in US Spirits where it continued togain share.
• Rum net sales declined 2%, largely driven by a 5% decline in Captain Morgan in US Spirits in adeclining category.
• In liqueurs, net sales increased 4% with growth in Baileys across all regions. Performance was drivenby our campaign that reminds consumers year-round that Baileys is a delicious indulgent treat.
• Net sales in IMFL Whisky were up 8% driven by our prestige and above brands, especiallyMcDowell’s.
• In gin, net sales were up 22% with Gordon’s and Tanqueray delivering double digit growth.• In tequila, net sales increased 29% with Don Julio and Casamigos delivering strong growth and share
gains in the US. In Mexico, Don Julio net sales grew double digit and gained share.• Beer net sales were up 3% driven by Senator Keg, Guinness including Foreign Extra Stout, Draught
and Hop House 13 Lager, Serengeti Premium Lite, Malta Guinness and Rockshore lager, partly offsetby a decline in Satzenbrau.
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STRONG PERFORMANCE ACROSS OUR PORTFOLIO
10
6%
Global giants
Local stars
Reserve
5%
11%Organic net sales growth
4%
Johnnie Walker
Tanqueray
Smirnoff
Captain Morgan
Guinness
7%
Global giants
Baileys
3%
(2)%
19%
2%
• Global giants were up 5%, with all brands in growth except Captain Morgan.• Net sales of local stars increased 6% driven by strong growth in Chinese white spirits,
Crown Royal in the US, and McDowell’s in India. This was partially offset by a decline inJεB in Europe and Windsor in South Korea, which is being mitigated with the W range byWindsor, the lower ABV variant.
• In Reserve, net sales were up 11% driven by Don Julio and Casamigos, Chinese whitespirits, Malts, Johnnie Walker super deluxe and Ketel One.
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REPORTED OPERATING PROFIT BEFORE EXCEPTIONAL ITEMS UP 7.8% ORGANIC OPERATING PROFIT UP 9.0%
11
£m F19 F18
PRIOR PERIOD OPERATING PROFIT * 3,819 3,601
Exchange 25 (56)
Acquisitions & Disposals (64) 4
Organic growth 336 270
CURRENT PERIOD OPERATING PROFIT * 4,116 3,819
*Reported operating profit before exceptional items** Reported operating margin before exceptional items
Reported operating margin** F18
Exchange Acquisitions and disposals
Organic growth
Reported operating margin** F19
31.4% 14bps (37)bps 83bps 32.0%
• Reported operating profit before exceptional items increased 7.8% driven by organicgrowth.
• Organic operating profit, which excludes exchange, acquisitions and disposals, increased9.0% with organic operating margin up 83bps.
• Reported operating margin excluding exceptional items increased 60bps driven mainly byorganic operating margin improvements.
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ORGANIC OPERATING MARGIN UP 83 BPS
12
Movement in organic operating margin
F18 F19Gross margin Marketing Other operating
items
31.2%
32.0%
(22)bps
67bps
38bps
• As you heard me talk about in some detail at Capital Markets Day in May, everydayefficiency is embedded in our self-sustaining model. This is allowing us to make smartinvestments in marketing and new technology while expanding margins.
• Organic operating margin was up 83bps. This was ahead of our guidance and slightlyahead of expectations as strong price/mix continued in the second half. This, combinedwith on-going productivity savings, more than offset the inflationary pressure weexperienced, supporting gross margin expansion in the second half and the full year.
• Marketing spend was up 8%, ahead of net sales growth, driving a 22bps higher investmentrate.
• We increased marketing investment in all regions with the largest increases in US Spirits.• Over the past two years our marketing investment rate has increased by roughly 50bps as
we continue to build a platform for sustained growth.• Other operating items delivered 67bps of margin improvement driven by productivity
initiatives in overheads. Overheads as a percent of net sales decreased 71bps as wecontinued the use of zero-based budgeting on indirect costs and have begun to adoptimproved tools and simplified ways of working to drive greater standardization andefficiencies. These efforts are also providing easy access to data and information whichenables faster insights and actions to improve the business.
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CONSISTENT STRONG FREE CASH FLOW DELIVERY
13
25
248
25
F18
(1)
Exchange (i)
Operating profit (ii)
Working capital
Capex Tax Interest Other (iii) F19
2,523
(63)
(95)(54)
2,608
(i) Exchange on operating profit before exceptional items(ii) Operating profit excluding exchange, depreciation and amortisation, post employment charges and non cash items(iii) Other items include post employment payments, dividends received from associates and joint ventures, and loans and other
investments
£ million
• Cash delivery continues to be strong with £2.6bn of free cash flow delivered.• This is £85m higher than last year as operating profit growth more than offset reduced
working capital gains and investment in maturing stock, increased capex, and higher taxpayments.
• Net capex increased by £95m year on year to £639m equivalent to 5.0% of net sales value.• We have an everyday focus on working capital management which has resulted in
continued reduction in average working capital as a percent of net sales, which camedown by 81bps in F19.
• As we look to F20 we expect capex of between £675m and £725m as we complete most ofour £150m investment in consumer experiences in Scotland, including the new JohnnieWalker experience in Edinburgh, and also up-weight our spending on environmentalsustainability.
13
A CONSISTENT AND DISCIPLINED APPROACH TO CAPITAL STRUCTURE
14* Net debt is equivalent to net borrowings. Adjusted net debt includes net debt and post employment plan benefit liabilities.
Organic growthDividends – 1.8x to 2.2x dividend cover
M&A and portfolio management
Leverage policyAdjusted Net Debt* to EBITDA: 2.5x – 3.0x
Return excess cash to shareholders
• Our disciplined approach to our capital structure targets an adjusted Net Debt to EBITDA ratio of 2.5xto 3.0x.
• We‘re pleased to be back within our leverage policy range.• 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 categoriesand occasions.
• We regularly review our portfolio to ensure that we allocate resources behind opportunities that canmaximise shareholder value.
• In F19, we increased our shareholding in Shui Jing Fang, our fast-growing premium Chinese whitespirits business from 40% to just over 63%.
• We continue to actively manage our portfolio of brands including the recent divestiture of 19 brands toSazerac primarily in the value segment in US Spirits.
• This divestiture enables us to focus our resources on the premium and above brands, where there’sstronger growth and profit opportunities.
• In F19 the full-year dividend increased 5% to 68.57 pence per share with dividend cover at roughly1.9x.
• The dividend increase was consistent with our guidance of mid-single digit increases as we look tobuild dividend cover and operate comfortably within our policy range of 1.8x to 2.2x.
• When we have excess cash we have been clear we will seek to return it to shareholders. One of thekey metrics we consider in determining this is our leverage ratio. We opened F19 with a leverage ratioof 2.2x, which was below our leverage policy range.
• The share buy-back programme this year was therefore set at a higher level with the intention ofgetting us back in the 2.5x to 3.0x leverage range. We repurchased £2.8bn in shares which included theuse of £340m of net proceeds from the sale of the portfolio of 19 brands to further up-weight theshare buy-back this year.
• We ended the year with a 2.5x leverage ratio, so back within the range that we’re targeting.• Going forward we expect to operate in the 2.5x to 3.0x leverage range.• Over the next three years, we expect to return a further £4.5bn to shareholders, to be returned by the
most appropriate mechanic via share buybacks or special dividends, depending on market conditions.
14
IMPROVED COST OF DEBT SUPPORTED BY FAVOURABLE FUNDING TERMS
F19 FY F18 FY Movement
Closing net debt* £m (11,277) (9,091) (2,186)
Average net debt* £m (10,393) (9,063) (1,330)
Net interest charge £m (248) (241) (7)
Net other finance charges £m (15) (19) 4
Net finance charges £m (263) (260) (3)
Effective interest rate % 2.4 2.6 (0.2)
Adjusted** net debt* / EBITDA x 2.5 2.2 0.3
15* Net debt is equivalent to net borrowings ** Adjusted to include net debt and post employment plan benefit liabilities
• Average net debt increased by approximately £1.3bn as we moved back into the leveragerange we’re targeting of 2.5x to 3.0x adjusted net debt to EBITDA supported by both theexecution of our share buy-back programme and our purchase of increased ownership inSJF.
• Our effective interest rate was 2.4%, 20bps lower than last year as we continue to seebenefits from our efficient group funding transactions as well as benefits from swapportfolio gains.
• For F20, I expect our effective interest rate to be broadly in line with F19 based onprevailing market conditions.
• Other finance charges were broadly in line with last year. In F20 I expect other financecharges to be similar to F19.
15
16
F20 EXCHANGE IMPACT FORECAST TO BE FAVOURABLE FOR BOTH OPERATING PROFITAND NET SALES
Translation rate
F19* F20**
$/£ 1.29 1.25
€/£ 1.13 1.11
* Average rate **Current spot rate
Transaction rate
F191 F201,2
$/£ 1.33 1.32
€/£ 1.13 1.11
1. Average rate inc. hedging2. 81% of $/£ exposure hedged
42% of €/£ exposure hedged
Exchange rates Total Exchange Impact
£m F19 F20
Net Sales 24 375
OperatingProfit
25 135
Interest Charge
(9) (6)
• Moving now to foreign exchange.• In F19 we had a modest favourable exchange impact on net sales and operating profit
as a result of the strengthening US Dollar partially offset by the weakening of severalcurrencies including the Turkish Lira, Indian Rupee and the Australian Dollar.
• As I look forward to F20, using the rates presented here, exchange is expected tofavourably impact net sales by £375m and operating profit by £135m.
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BASIC EPS INCREASED 7.4%EPS BEFORE EXCEPTIONAL ITEMS UP 10.3%
17
Pence per share
F18 eps before exceptional items 118.6
Exchange 1.0
Acquisitions and disposals(i) (2.0)
Organic operating profit growth 13.5
Associates and joint ventures 0.1
Tax (3.3)
Finance charges(ii) 2.5
Non-controlling interests (1.2)
Share buy-back(i) 1.6
F19 eps before exceptional items 130.8
(i) Includes finance charges net of tax(ii) Excludes finance charges related to acquisitions, disposals and share buy-back.
• Earnings per share before exceptional items increased by 10.3%.• Organic operating profit growth, lower finance charges, the positive impact of the share
buy-back programme and favourable exchange more than offset the negative impact ofhigher tax expense and higher non-controlling interests.
• Our tax rate before exceptional items was 20.6%, just shy of our full year guidance ofbetween 21% and 22%.
• We had a few one-off tax benefits in F19 which are not expected to repeat; this combinedwith changes in profit mix is expected to result in a tax rate in the range of 21% to 22% inF20.
• Finance charges were lower than last year and had a positive impact on eps.• Non-controlling interests had a negative impact on eps as a result of the higher profit in
our listed subsidiaries.• The execution of our share buy-back programme reduced the weighted average number
of shares and had a positive impact on eps.
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A SET OF STRONG CONSISTENT RESULTS
ROIC
Organic net sales growth
Organic operating margin improvement
Free cash flow
Pre-exceptional eps
Total Shareholder Return
Value creation:
Efficient growth: F19 FY
18
up 80bps to 15.1%
6.1%
+83bps
£2.6bn
up 10.3% to 130.8p
up 27%
• So we have delivered another set of strong results with mid-single digit top line growth,up-weighted A&P investment and strong margin expansion.
• We generated strong consistent cash flow delivery and returned £4.4 billion in cash toshareholders through dividends and our share buy-back programme in F19. Totalshareholder return increased 27%.
• Across the board a good year.• Before I turn to F20 in more detail I just want to touch on a change to our organic
calculation methodology in F20 that I announced at our Capital Markets Day in May.• You can expect to hear more about this before we report interim results for F20 but in
summary our organic numbers will be based on prior year exchange rates which isconsistent with our internal management reporting and will drive simplification benefitsfor us while also better aligning to how our peers report.
• We have back-tested the new methodology and there is no material difference in theresults of the new method compared to the current approach.
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Over the medium term we expect todrive consistent mid-single digit organic net
sales growth
andsustainably grow organic operating profit
about 1% ahead of net sales, within a range of 5% to 7% 19
• I am pleased that we have successfully delivered our three-year guidance from F17 to F19.Organic top line growth has consistently been in the mid-single digit range and we delivered198bps of margin expansion, nicely ahead of our guided organic margin expansion of 175bps.
• At Capital Markets Day in May this year we shared our new medium-term guidance for thethree years F20 to F22 which is to continue to deliver mid-single digit organic net sales growthand to sustainably grow organic operating profit about 1ppt ahead of net sales, within a rangeof 5% to 7%.
• This is underpinned by our self-sustaining model of quality growth, everyday efficiency andsmart investments.
• As I look forward to F20, I would expect net sales growth around the mid-point of the 4% to6% range.
• I expect the top line growth rate to slow down versus F19 following a year of very successfulinnovation launches and acknowledging that volatility was unusually benign in F19, especiallyin Emerging Markets.
• I am pleased with the progress that we’ve made embedding everyday efficiency in thebusiness.
• As I shared at Capital Markets Day we have confidence that there are further efficiencies thatwe can unlock.
• In F20 I would expect the value of these to be in the range of £100m to £150m.• Our focus on everyday efficiency has allowed us to up-weight our investment behind our
brands to fuel long term growth while improving spend effectiveness through the use ofcutting edge analytic tools.
• In fiscal 20 we expect to further up-weight our overall marketing investment rate focusing onthe US to sustain the gains that we’ve made there as well as ensuring we are strongly investingbehind our smaller and new to world brands.
• Overall for the group I would expect operating profit to grow roughly one percentage pointahead of organic net sales with continued margin expansion in emerging markets.
• Thank you and I’ll now hand it back over to Ivan.
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CONSISTENT DELIVERY OF STRONG RESULTS
Four measures of our progress• Efficient growth• Value creation• Credibility and trust• Engaged people
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
20
• Thank you Kathy.• These results reflect the progress we’ve made against our ambition to be “one of the best
performing and most trusted and respected” consumer products companies in the world.• Let me turn now to our performance against our environmental, social and governance
goals. This is how we make and measure our positive contribution to society everywherewe make, source and sell our products.
• These goals are an equally critical part of delivering our ambition and have always been acore part of how we operate.
• Our actions help us to attract and keep talent, engage our customers, keep up withchanging consumer trends and reduce costs.
• Just as we set targets for financial performance, we also set ambitious targets forenvironmental, social and governance performance.
• Let me talk you through the excellent progress we’ve made over the last 5 years on someof our most critical metrics.
20
IMPROVING GRAIN-TO-GLASS SUSTAINABILITY
21
Carbon Emissions1000 tonnes CO2e
Water EfficiencyLitres used per litre of packaged product
5.84
5.16
4.98
4.94
4.64
2015
2016
2017
2018
2019
Skills Empowerment# of people participating in our skills
empowerment programmes
7,400
5,000
8,000
7,000
10,300
2015
2016
2017
2018
2019
731
672
633
623
586
2015
2016
2017
2018
2019
• Grain-to-glass sustainability is about ensuring we preserve the natural resources on whichour long term success depends and positively impact the communities where we operate.
• Three of our key metrics here are carbon emission reduction, water efficiency and skillsempowerment.
• Diageo was a pioneer in setting an absolute carbon reduction target – aiming to reduce ouremissions by 50% by the end of F20 versus a 2007 baseline, despite growing volumes at thesame time.
• This bold move has helped us to spur innovation and new approaches to reduce ourenvironmental impact and we have delivered a 45% cumulative reduction in our emissions todate.
• Water efficiency has also improved, with a 44% absolute reduction since 2007 and aparticular focus on water-stressed areas.
• We also run a range of skills building programmes around the world to help people overcomebarriers, move in to work and build their careers. In 2019, these programmes benefitted10,300 people.
21
VALUING AND ENGAGING OUR PEOPLE
22
Health and SafetyLost time accident frequency per 1000
employees
Employee Engagement index% employees identified as engaged
Women in Diageo Leadership% of Diageo leadership positions held
by women
75
77
75
76
75
2015
2016
2017
2018
2019
26
28
30
34
36
2015
2016
2017
2018
2019
1.66
1.44
1.14
1.00
0.98
2015
2016
2017
2018
2019
• Our people are at the heart of our success.• Creating an inclusive and diverse culture and keeping our people safe and engaged helps our
business thrive.• We are proud of our safety record and continue to improve employee safety in our operations every
year.• The frequency of lost time accidents has declined over 40% in the last 4 years and we have already
achieved our 2020 target of less than 1 lost time accident per 1,000 employees.• We have exceeded our 2020 target of 35% women in leadership a year early and we’ve set a target of
40% by 2025.• And our latest Annual Employee Survey results show that our employees continue to feel very
connected to Diageo.• Our strong employee engagement results are in line with best-in-class external benchmarks.• And we recently rolled out ground breaking parental leave policies for both men and women, which
we believe will drive even higher levels of engagement and help attract and retain the best talent.
22
PROMOTING POSITIVE DRINKING
23
By 2025 we will:
Educate 5 million young people, parents and teachers about the dangers of underage drinking
Collect 50 million pledges never to drink and drive through #JoinThePact
Reach 200 million people with moderation messages from our brands
632,000 to date
16.9 million pledges to date
66 million people reached to date
• We have a longstanding commitment to promoting a positive role for alcohol and addressingthe misuse of our products.
• Last year, we announced new global targets around this commitment.• We’re already making good progress against these targets:o We have educated over 600,000 people about the dangers of underage drinking.o We have collected almost 17 million pledges to never drink and drive through Join the
Pact - already 34% of our 2025 target.o We have reached 66 million people with messages of moderation through our marketing
– already 33% of our 2025 target.o Our Guinness Clear activation, linked to our Six Nations Rugby sponsorship, won a Gold
Lion award in Cannes.
23
EXTERNAL RECOGNITION
24
• We are proud to have been recognised externally for our efforts to run a sustainable andresponsible business.
• On sustainability:o The Dow Jones Sustainability World Index, which assesses company performance on
economic impact, and environmental, social and governance performance, includedDiageo in this year’s Index.
o We were one of only 19 companies out of 7,000 companies to be rated “Double A” for ourclimate and water efficiency in the Carbon Disclosure Project and the only alcoholcompany to be rated this way year on year.
o Gartner named Diageo as one of the Top 25 Supply Chain companies for our performancein environmental, social and governance in our direct operations and supply chain.
• And on people:o Thomson Reuters ranked us 4th in their Diversity & Inclusion Index; ando Management Today named Diageo “Britain’s Most Admired Company in 2018”.
• We are committed to doing more.• We are making investments that will help us continue our progress against our current
targets and have also started work to define our ambition and targets for environmental,social and governance work beyond 2020, when many of our current public commitmentsexpire.
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A CLEAR STRATEGY DELIVERED THROUGH OUR SIX PRIORITIES
1 Keep premium core vibrant
2 Increase participation in mainstream spirits
3 Continue to win in reserve
4 Drive innovation at scale
5 Build advantaged routes to consumer
6 Embed productivity in our culture to drive out costs to invest in growth
25
• Turning back to our business performance, we have focused on six executionpriorities.
• We have made good progress on all six.• Today, I want to touch on a few examples of the great work we’re doing against two
of them - “Keeping premium core vibrant” and “Driving innovation at scale”.
25
KEEPING PREMIUM CORE VIBRANT: TANQUERAY GIN
10%
15%
20%
F19F17 F18
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• The gin category continues to expand, growing value 18% in calendar 2018 in IWSR.• Tanqueray gin again grew ahead of the category. Net sales growth accelerated to 20%, with
strong performance across the brand’s major focus markets of Europe, South Africa andBrazil.
• Our marketing strategy combines a global media campaign focused on taste, with locally-relevant experiential events, such as Taste London, Brazil Lollapalooza and South AfricaDelicious Festival.
• Tanqueray continues to be voted the Bartender’s Favourite Gin for the 7th year in a row aspublished by Drinks International.
• And we’re now bringing Tanqueray into the pre-mix market, launching two super-premiumTanqueray pre-mixed offerings in Australia and recently in GB.
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Almost 400k visitors to US breweryGuinness Six Nations sponsorship
Guinness Gold launch in Nigeria
KEEPING PREMIUM CORE VIBRANT: GUINNESS
Award winning responsible drinking activation
2.1%
3.8%
3.1%
F17 F18 F19
Organic net sales growth
Total Beer
0.4%
4.8%
1.9%
F18F17 F19
Guinness27
• Beer represents 16% of our portfolio.• In F19, net sales grew 3% with Guinness growing 2%.• We saw some standout executions and performance.• In GB, we executed an award-winning campaign around Six Nations Rugby.• The campaign reached 50 million consumers – including the biggest ever responsible
drinking platform for Guinness – and helped drive strong Guinness growth in GB.• In the US, the new brewery in Baltimore has already welcomed almost 400k visitors since
opening in August 2018 and has received praise from consumers for both the breweryexperience and for the beers.
• The new brewery is helping to underpin ongoing share growth for Guinness in the US.• In Nigeria, Guinness Gold launched in March and we have already sampled 50k consumers.• And in Ireland, while Guinness was impacted by difficult market conditions which we’re
addressing, lager performed really well, particularly our new brand Rockshore.• Lagers have also been a source of strength in other markets. Globally, premium lager net
sales grew by 9% and standard lager by 7%.• Hop House 13 Lager continues to grow as it enters new markets.• And in Tanzania, Serengeti Premium Lite lager sales had strong double-digit growth.
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DRIVING INNOVATION AT SCALE: RECRUITMENT
Strong recruit, disrupt and re-recruit innovation
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• F19 has been a banner year for innovation, with outstanding results from new innovations andsustained performance from recent innovations.
• Our focus is on recruiting new consumers to our brands and recruiting into new occasions.• Ketel One Botanical, launched in May 2018, has been one of the most impactful launches in our
history.• Gordon’s Pink in Europe also continued to perform very strongly last year.• And F19 has also been an exciting year for scotch innovation.• Leveraging the Game of Thrones global phenomenon, we created two limited edition offerings
– “White Walker by Johnnie Walker” and “The Game of Thrones Single Malt Scotch WhiskyCollection”.
• These opened up the scotch category to a whole new set of consumers across a number ofmarkets.
• And following the ongoing success of Crown Royal Regal Apple and Crown Royal Vanilla in theUS, we brought back Crown Royal Salted Caramel as a limited time offer and introduced CrownRoyal Peach as a limited time offer to further expand occasions for Crown Royal.
• These innovations helped deliver 6% overall Crown Royal net sales growth in the US in F19.
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DRIVING INNOVATION AT SCALE: NEW TO WORLDDiageo-Owned Brands Distill Ventures Brands
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• We are also investing in disruptive new to world brands, including brands that provide low andno alcohol choices to consumers.
• Our portfolio of rising stars includes brands we have developed and brands we have acquired.• In Europe this year, we launched Villa Ascenti, an Italian gin, to recruit premium and super
premium gin drinkers.• We acquired Belsazar in F18, a brand we had supported through Distill Ventures, to strengthen
our participation in the aperitif occasion.• We completed the acquisition of Copper Dog, a blend of Speyside single malt whiskeys with a
quirky attitude to bring vibrancy to scotch.• And since our acquisition of Casamigos, we have taken the brand to new markets, built new
distribution and recruited new drinkers into this great brand.• We also invest in new brands through Distill Ventures, our Diageo-backed accelerator
programme for drinks entrepreneurs.• The Distill Ventures portfolio includes:
• Seedlip, the world’s first non-alcoholic spirit;• Stauning, a Danish single malt and rye whisky and one of Europe’s standout new whiskies;• Starward, an Australian whisky matured in Australian wine barrels; and• Westward, an American Single Malt whiskey brewed and distilled in Portland, Oregon using
locally malted Pacific Northwest barley and ale yeast.• While small today, these new-to-the-world innovations have the potential to become the big
brands of tomorrow.• And as I look ahead, we have a real opportunity to invest even more behind new-to-world
brands to set us up for sustained long term growth and portfolio health.
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CONTINUED STRONG GROWTH IN THE THREE FOCUS AREAS: F19 ORGANIC NET SALES GROWTH
India 8.2%
US Spirits 5.0%
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Scotch 5.7%
• Now let me share the progress we’ve made on our three focus areas: Scotch, US Spirits andIndia.
• We’ve seen a strong step-up in performance in all three areas.
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F19 FOCUS AREAS: SCOTCH STRONG PERFORMANCE
Organic net sales growth
% of Scotchnet sales
58% 8% 13% 11% 10%
Update side image
4.7%6.0%
16.2%
2.5%
4.8%
1.9%
5.4%
1.2%
7.1%5.7%
6.8% 6.3%
11.6%
8.9%
Other
(9.3)%
Scotch MaltsTotal Scotch Johnnie Walker
Buchanan’s
(2.2)%
Primary Scotch
(4.5)%
(13.1)%
F17 F18 F19
• Scotch top line growth accelerated to 5.7%, up from 1.9% last year.• Johnnie Walker had an outstanding year, growing 7% with good performance across all
regions.• Johnnie Walker Blue Label grew 10% and our “White Walker by Johnnie Walker” innovation
drove growth and strong price/mix.• Buchanan’s net sales were up 6% with good growth in both the US and Latin America.• Our scotch Malts performance improved significantly after underperforming in F18.• Here again, our Game of Thrones innovations drove growth and played a key role in
introducing new consumers to our Malts collection.• But scotch Malts in Europe was soft and we’ve more to do to here accelerate growth.• Primary scotch continued to perform well with double-digit growth in Latin America led by
White Horse and in India, led by Black & White and local brand Black Dog.• In other scotch, JεB declined, principally in Spain, and in Korea, Windsor declined with
changing consumer trends.
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F19 FOCUS AREAS: US SPIRITSCONTINUED PERFORMANCE IMPROVEMENT
Organic volume and net sales growth
1.5%1.2%
2.0%
3.4% 3.3%
5.0%
F19F17 F18
Volume
Net sales
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• Now turning to our second focus area, US Spirits.• The health of the US Spirits business has improved significantly over the last year due to up-
weighted and targeted marketing investment, improved brand plan effectiveness, recruitingnew consumers with strong innovation and portfolio management.
• We have used our Catalyst data analytics tool, as discussed in our Capital Markets Day, tobring data and discipline to guide our marketing investment decisions.
• We have seen a step up in net sales growth to 5.0% and good price/mix performance.• The biggest contributors to net sales growth were Don Julio, Crown Royal, Ketel One and
Johnnie Walker, with all except Don Julio benefitting from strong innovation.
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F19 FOCUS AREAS: US SPIRITSBROAD BASED CATEGORY SHARE GAINS
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5.8% 5.1%
1.2%
7.6%
(0.8)%
(7.1)%
34.3%
7.3%
10.7%
6.7%
(1.1%)
4.9%
0.5%
(3.5)%
6.0%
Crown Royal JohnnieWalker
CaptainMorgan
Baileys Smirnoff Cîroc Ketel Onevodka***
Don Julio Bulleit Buchanan's
Nielsen and NABCA combined value growth
F18* F19**
Core brands
(1.0)%
22.9%
12.8%14.3%
* FYTD Nielsen to 16th June 2018, NABCA to 31st May 2018. ** FYTD: Nielsen to 15th June 2019, NABCA to 31st May 2019*** Includes Ketel One Botanical
42.1%
F19 FY category value share change*,**
• In F19, we grew broadly in line with the US Spirits market.• In Tequila, the fastest growing category in US Spirits, Don Julio was the largest share gainer
and Casamigos also gained share.• Crown Royal was the largest share gainer in the Canadian Whisky category.• And strong Ketel One performance has also driven good share gain.• The US Spirits business continues to strengthen, with some particularly good innovation
results this year, but we have more to do to ensure we deliver sustainable growth.• Smirnoff and Cîroc share continued to decline, although Cîroc has benefitted recently from
the successful launch of the Summer Watermelon limited time offer in March.• We launched Smirnoff Zero Sugar Infusions in May. Good early results suggest this could
be a source of growth for Smirnoff in F20.• Captain Morgan is in a challenging position in a category in decline. We’ve begun to focus
on expanding consumption beyond the Captain and Cola serve and will need to do more toattract new consumers on more occasions in F20.
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F19 FOCUS AREAS: INDIA NET SALES UP 8%, SIGNIFICANT MARGIN IMPROVEMENT
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India organic net sales growth
1.9%
8.8%8.2%
6.9%
12.2% 12.4%
F17 F18 F19
Prestige and above
Total India
India organic operating margin improvement, bps
77
252
F18 F19
• In India, net sales were up 8%.• First half growth was strong as we lapped the impact of the highway ban. In the second half,
growth slowed as we lapped a stronger period last year and faced some election-relateddisruption.
• Prestige and above continued to perform well:• Scotch growth was north of 20%, led by Johnnie Walker, as we continued our efforts
to make the brand more accessible to young, affluent consumers;• Locally bottled scotch brands Black & White and Black Dog also grew strongly;• And McDowell’s saw good growth, bolstered by the launch of the new Platinum
variant.• The Indian business has continued to make significant progress on operating margin which is
now in the mid-teens.• Margin improvement is underpinned by focused efforts to drive productivity improvements
across the business.• We also continue to invest in capabilities, technology and process improvement in India.• I have confidence that we are well on the way to delivering our medium-term goal of
achieving sustainable operating margins in the mid to high teens.
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BUILDING ONE OF THE BEST PERFORMING, MOST TRUSTED AND RESPECTED CONSUMER PRODUCTS COMPANIES
ONE OF THE BEST PERFORMING,
MOST TRUSTED and RESPECTED
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• This picture summarises the way we think about how everything comes together.• We want to be one of the best performing, most trusted and respected consumer
products companies in the world.• To achieve this, we need to deliver efficient growth and value creation for our
shareholders.• We have a set of goals around everyday efficiency, smart investment and quality
growth that are self-sustaining.• Everyday efficiency creates room to invest. Investing smartly drives growth based on
a foundation of strong brand equity, sustainable innovation and the best route toconsumer.
• Delivering our ambition also means being trusted by all our stakeholders for doingbusiness the right way from grain to glass, and ensuring our people are highlyengaged.
• Our goals are to pioneer grain-to-glass sustainability, promote positive drinking andchampion inclusion and diversity.
• All of this ensures we operate in a sustainable way and have a positive impact onsociety.
• These elements are interrelated and mutually reinforcing. Together, they will help usto achieve our ambition.
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EFFECTIVE EXECUTION OF OUR STRATEGY. STRONG RESULTS
Consistent top line growth, increased marketing investment and margin expansion enabled by every day efficiency and strong cash flow
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Delivering strong results through our strategy
Delivered our three year F17-F19 guidance. Clear guidance set for the next three years F20-22
Confidence in delivering our medium term guidance and delivering our long term performance ambition
Delivering on our environmental, social and governance goals. Doing business the right way from grain to glass
• To end where I started, these are a very strong set of results and in line with our guidance.• They reflect a focus on our strategic priorities.• We have shifted our culture to embed everyday efficiency and maintained our high levels
of employee engagement.• As we look to the next three years, we are building off a strong base.• We will continue to invest smartly and nurture our fantastic brands to drive consistent,
sustainable performance and deliver our long term performance ambition.• Thank you.
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FINANCIAL/LEGAL APPENDIX
37
APPENDIX 1: 1/2FORWARD LOOKING STATEMENTS
38
Exchange rate outlookUsing exchange rates £1 = $1.25; £1 = €1.11, the exchange rate movement for the year ending 30 June 2020 is estimated to favourably impact net salesby approximately £375 million and operating profit by approximately £135 million.
Net salesLooking ahead to fiscal 20 I expect net sales growth around the mid-point of the 4% to 6% range.
Operating marginIn fiscal 20 I expect us to deliver everyday efficiencies in the range of £100m to £150m. Our focus on everyday efficiency has allowed us to up-weightour investment behind our brands to fuel long term growth while improving spend effectiveness through the use of cutting edge analytical tools. Infiscal 20 we expect to further up-weight our overall marketing investment rate focusing on the US to sustain the gains that we have made there as wellas ensuring we are strongly investing behind our smaller and new to world brands. I would expect operating profit to grow about one percentage pointahead of organic net sales with continued margin expansion in emerging markets.
Net finance chargesFor next year I expect our effective interest rate to be broadly in line with fiscal 19 based on prevailing market conditions. In fiscal 20, I expect otherfinance charges to be similar to fiscal 19.
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APPENDIX 1: 2/2FORWARD LOOKING STATEMENTS
Taxation before exceptionalsThe year ended 30 June 2019 benefitted from one-off items which are not expected to repeat. This combined with our changing business mix isexpected to result in a tax rate before exceptional items for the year ending 30 June 2020 to be in the range of 21% to 22%.
Capital expenditureWe expect our full year capex spend to be in the range of £675m to £725m for the year ending 30 June 2020.
Post employment plansTotal cash contributions by the group to all post employment plans in the year ending 30 June 2020 are estimated to be approximately £170million.
DividendIn fiscal 19 dividend cover was 1.9x. The dividend increase was consistent with our guidance of mid-single digit increases as we look to builddividend cover and operate comfortably within our policy range of 1.8x to 2.2x.
Capital structureWe ended fiscal 19 with an adjusted Net Debt to EBITDA ratio of 2.5x. Going forward we expect to operate in the 2.5x to 3.0x leverage range.
Share buy-backOn 25 July 2019, the Board approved plans for a further return of capital up to £4.5 billion to shareholders for the period F20 to F22.
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Reconciliation of free cash flow waterfall on slide 13
APPENDIX 2: RECONCILIATION OF CASH FLOW STATEMENT
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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, anticipated deficit reductions in relation 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 and related risks
There continues to be uncertainty with respect to the process surrounding the United Kingdom’s proposed exit from the European Union, and in relation to the political environment
more generally in the United Kingdom. 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 the vast majority of our finished case goods will continue to trade tariff free, with no change to existing tariffs in either scenario. There remains
uncertainty in relation to future trading arrangements between the UK and the rest of the world where today we rely on a number of existing EU Free Trade Agreements (FTAs) with
third party countries. However, more recently, a number of countries have agreed with the UK to continue to trade on these terms in the event of a ‘no deal’ outcome. 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 a no-deal scenario.
We have further considered the principal impact to our supply chain of a no-deal scenario which we have assessed as limited and believe that we 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, 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.
(Continued on following page)
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(Continued from previous page)
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 wars or any tariffs, duties or other restrictions or barriers imposed on the import or export of goods between territories, including but not limited to,
imports into and exports from the United States, Canada, Mexico, the United Kingdom and/or the European Union);
• the negotiating process surrounding, as well as the final terms of, the United Kingdom’s exit from the European Union, which could lead to a sustained period of economic and
political uncertainty and complexity whilst detailed withdrawal terms and 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 towards small-batch
craft alcohol, low or no alcohol, or other alternative products), changes in travel, vacation or leisure activity patterns, weather conditions, health concerns 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 EU anti-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;
• 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 with anti-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;
• (continued on following page)
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• (continued from previous page)
• 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 of cyber-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;
• 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 2018 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 2019.
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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