Diageo delivers strong cash generation and is well positioned for future growth despite challenging first half environment
â—¦ Reported net sales of $11.0 billion declined 1.4% or $158 million, due to a $167 million unfavourable foreign exchange impact and an organic net sales decline of $67 million or 0.6%, driven by a $310 million or 23% decline in Latin America and Caribbean (LAC).
â—¦ Excluding the impact of LAC, reported net sales grew $72 million or 0.7%, and organic net sales grew $243 million or 2.5%, driven by Asia Pacific, Africa and Europe, partially offset by a $64 million or 1.5% decline in North America which improved sequentially from the second half of fiscal 23.
â—¦ The decline in LAC was driven by a strong double-digit net sales growth comparator as well as lower consumption and consumer downtrading due to macroeconomic pressures in the region.
â—¦ Reported operating profit declined 11.1% to $3.3 billion, and reported operating profit margin contracted 329bps due to lower organic operating margin and a negative impact from exceptional operating items.
â—¦ Organic operating profit declined by $205 million or 5.4%, of which $234 million was attributable to LAC; organic operating margin contracted 167bps.
â—¦ Excluding the impact of LAC, organic operating profit grew by $29 million or 0.9%, and organic operating margin contracted 53bps, driven by increased marketing investment.
â—¦ Net cash flow from operating activities increased by $0.7 billion to $2.1 billion. Free cash flow increased by $0.5 billion to $1.5 billion, driven by disciplined working capital management and the positive impact of lapping one-off cash tax payments from the prior year.
â—¦ Declared interim dividend increased by 5% to 40.50 cents per share. Completed $0.5 billion of share buybacks as part of the return of capital programme announced on 1 August 2023.
Debra Crew, Chief Executive, said:
The first half of fiscal 24 was challenging for Diageo and our sector, particularly as we lapped strong growth in the prior year and faced an uneven global consumer environment. Excluding LAC, our group organic net sales grew 2.5%, driven by good growth in Europe, Asia Pacific and Africa. While North America delivered sequential improvement in line with our expectations, we are focused on returning to high-quality share growth as consumer behaviour continues to normalise in our largest region.
As previously announced in November 2023, materially weaker performance in LAC, driven by fast-changing consumer sentiment and high inventory levels, significantly impacted total business performance. Having conducted a review of inventory levels and monitored performance in the critical holiday season, we have taken action and have further plans to reduce inventory to more appropriate levels for the current consumer environment in the region by the end of fiscal 24. This is a key priority.
With a strong focus on execution, we delivered an improved free cash flow of $1.5 billion, and our pipeline of productivity initiatives in the first half of fiscal 24 drove $335 million of savings, helping us to sustain investment in brand building. During the half, we returned $0.5 billion to shareholders via share buybacks as part of our commitment to return up to $1.0 billion of capital to shareholders in fiscal 24. We declared an interim dividend increase to 40.50 cents per share, reflecting our commitment to a progressive dividend policy.
Looking ahead to the second half of fiscal 24, despite continued global economic volatility, we expect to deliver improvement in organic net sales and organic operating profit growth at the group level, compared to the first half. While the macro environment will continue to present challenges, I am confident that we remain well-positioned and resilient for the long term. We are diversified by category, price point and region and will continue to invest behind our iconic brands to maintain our position as an industry leader in total beverage alcohol, an attractive sector with a long runway for growth.
| Financial performance | |||||||||||
| Volume (equivalent units) | Operating profit | Earnings per share (eps) | |||||||||
| EU124.6m | $3,317m | 98.6c | |||||||||
| (F23 H1: EU136.8m) | (F23 H1(2): $3,731m) | (F23 H1(2): 119.1c) | |||||||||
| Reported movement | (9)% | i | Reported movement | (11)% | i | Reported movement | (17)% | i | |||
| Organic movement(1) | (5)% | i | Organic movement(1) | (5)% | i | Eps before exceptional items(1) | (7)% | i | |||
| Net sales | Net cash from operating activities | Interim dividend per share | |||||||||
| $10,962m | $2,146m | 40.50c | |||||||||
| (F23 H1(2): $11,120m) | (F23 H1(2): $1,472m) | (F23 H1(2): 38.57c) | |||||||||
| Reported movement | (1)% | i | F24 H1 free cash flow(1) $1,462m | Increase | 5% | h | |||||
| Organic movement(1) | (1)% | i | F23 H1 free cash flow(1),(2) $964m | ||||||||
(1)See page 44 for an explanation and reconciliation of non-GAAP measures.
(2)See page 29 for an explanation under Basis of preparation.
See page 44 for an explanation and reconciliation of non-GAAP measures, including organic net sales, organic marketing investment, organic operating profit, free cash flow, eps before exceptionals, adjusted net debt, adjusted EBITDA and tax rate before exceptional items.
Unless otherwise stated, movements in results are for the six months ended 31 December 2023 compared to the six months ended 31 December 2022.
Key financial information
Six months ended 31 December 2023
Summary financial information
| F24 H1 | F23 H1Re-presented(1) | Organic growth% | Reported growth% | ||
| Volume | EUm | 124.6 | 136.8 | (5) | (9) |
| Net sales | $ million | 10,962 | 11,120 | (1) | (1) |
| Marketing | $ million | 1,952 | 1,861 | 4 | 5 |
| Operating profit before exceptional items | $ million | 3,510 | 3,770 | (5) | (7) |
| Exceptional operating items(2) | $ million | (193) | (39) | ||
| Operating profit | $ million | 3,317 | 3,731 | (11) | |
| Share of associate and joint venture profit after tax | $ million | 253 | 202 | 25 | |
| Non-operating exceptional items(2) | $ million | (60) | 19 | ||
| Net finance charges | $ million | (431) | (345) | ||
| Exceptional taxation credit(2) | $ million | 42 | 84 | ||
| Tax rate including exceptional items | % | 23.9 | 21.2 | 13 | |
| Tax rate before exceptional items | % | 23.4 | 23.4 | – | |
| Profit attributable to parent company’s shareholders | $ million | 2,210 | 2,709 | (18) | |
| Basic earnings per share | cents | 98.6 | 119.1 | (17) | |
| Basic earnings per share before exceptional items | cents | 108.1 | 116.4 | (7) | |
| Interim dividend | cents | 40.50 | 38.57 | 5 |
(1)See page 29 for an explanation under Basis of preparation.
(2)For further details on exceptional items see pages 21 and 33-34.
Reported growth by region
| Volume | Net sales | Marketing | Operating profit before exceptional items | Operating profit | ||||||
| % | EUm | % | $ million | % | $ million | % | $ million | % | $ million | |
| North America | (3) | (0.7) | (2) | (65) | 2 | 15 | 2 | 35 | (7) | (116) |
| Europe | (3) | (0.9) | 10 | 226 | 19 | 72 | (3) | (23) | (6) | (51) |
| Asia Pacific | (15) | (6.9) | 2 | 37 | 14 | 50 | (2) | (15) | 1 | 10 |
| Latin America and Caribbean | (19) | (3.0) | (18) | (230) | (12) | (25) | (41) | (222) | (41) | (222) |
| Africa | (4) | (0.7) | (12) | (138) | (20) | (27) | (40) | (85) | (40) | (85) |
| Corporate | – | – | 24 | 12 | 67 | 6 | 25 | 50 | 25 | 50 |
| Diageo | (9) | (12.2) | (1) | (158) | 5 | 91 | (7) | (260) | (11) | (414) |
Organic growth by region
| Volume | Net sales | Marketing | Operating profit before exceptional items | |||||
| % | EUm | % | $ million | % | $ million | % | $ million | |
| North America | (3) | (0.8) | (2) | (64) | 2 | 12 | (1) | (21) |
| Europe | (4) | (1.1) | 3 | 78 | 9 | 35 | (4) | (34) |
| Asia Pacific | (2) | (0.8) | 6 | 125 | 15 | 53 | 3 | 23 |
| Latin America and Caribbean | (19) | (3.0) | (23) | (310) | (19) | (40) | (41) | (234) |
| Africa | (6) | (1.1) | 9 | 95 | 6 | 7 | 9 | 21 |
| Corporate | – | – | 17 | 9 | 27 | 3 | 22 | 40 |
| Diageo | (5) | (6.8) | (1) | (67) | 4 | 70 | (5) | (205) |
See page 44 for an explanation and reconciliation of non-GAAP measures.
Net sales ($ million)
Reported net sales declined 1.4%
Organic net sales declined 0.6%
Reported net sales declined 1.4%, driven by unfavourable foreign exchange impacts, organic net sales decline and a negative impact from acquisitions and disposals, partially offset by hyperinflation adjustments.
Organic net sales decline of 0.6% was primarily attributable to weak performance in LAC driven by a strong double-digit net sales growth comparator, as well as lower consumption and consumer downtrading due to macroeconomic pressures in the region. These impacts materially contributed to the group’s organic volume decline of 5.2%, which was partially offset by positive price/mix of 4.6% delivered across all other regions, and mainly driven by positive pricing. Excluding LAC, organic net sales grew 2.5%.
| Net sales | $ million |
| F23 H1 Re-presented(1) | 11,120 |
| Exchange(2) | (167) |
| Acquisitions and disposals | (51) |
| Hyperinflation(3) | 127 |
| Volume | (573) |
| Price/mix | 506 |
| F24 H1 | 10,962 |
(1)See page 29 for an explanation under Basis of preparation.
(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)See pages 35 and 45-47 for details of hyperinflation adjustment.
Operating profit ($ million)
Reported operating profit declined 11.1%
Organic operating profit declined 5.4%
Reported operating profit declined 11.1%, primarily driven by a decrease in organic operating profit and negative exceptional operating items.
Organic operating profit declined 5.4%, ahead of the organic net sales decline, primarily driven by a $234 million operating profit decline in LAC.
| Operating profit | $ million |
| F23 H1 Re-presented(1) | 3,731 |
| Exceptional operating items(2) | (154) |
| Exchange | 4 |
| Acquisitions and disposals | (37) |
| FVR(3) | (19) |
| Hyperinflation(4) | (3) |
| Organic movement | (205) |
| F24 H1 | 3,317 |
(1)See page 29 for an explanation under Basis of preparation.
(2)For further details on exceptional operating items see pages 21 and 33-34.
(3)Fair value remeasurements. For further details see page 21.
(4)See pages 35 and 45-47 for details on hyperinflation adjustments.
Operating margin (%)
Reported operating margin declined by 329bps
Organic operating margin declined by 167bps
Reported operating margin declined by 329bps, primarily driven by a decrease in organic operating margin and the negative impact of exceptional operating items.
Organic operating margin declined by 167bpspredominantly due to weak performance in LAC. Excluding LAC, organic operating margin declined 53bps. The decline was driven by an increase in marketing, partially offset by the favourable impact from other operating items and a positive gross margin.At the group level, including LAC, the impact on gross margin from price increases and productivity initiatives more than offset cost inflation in absolute terms.
| Operating margin | ppt |
| F23 H1Re-presented(1) | 33.6 |
| Exceptional operating items(2) | (1.41) |
| Exchange | 0.51 |
| Acquisitions and disposals | (0.16) |
| Other(3) | (0.56) |
| Gross margin | (0.56) |
| Marketing | (0.75) |
| Other operating items | (0.36) |
| F24 H1 | 30.3 |
(1)See page 29 for explanation under basis of preparation.
(2)For further details on exceptional operating items see pages 21 and 33-34.
(3)Fair value remeasurements and hyperinflation adjustments. For further details on fair value remeasurements see page 22. See pages 36 and 49-52 for details on hyperinflation adjustments.
Basic earnings per share (cents)
Basic eps decreased 17.2% from 119.1 cents to 98.6 cents
Basic eps before exceptional items(1) decreased 7.1% from 116.4 cents to 108.1 cents
Basic eps decreased 20.5 cents, mainly driven by exceptional items, lower organic operating profit and higher finance charges, partially offset by lower tax, higher income from associates and joint ventures, and the impact of share buybacks.
Basic eps before exceptional items decreased 8.3 cents.
(
| Basic earnings per share | cents |
| F23 H1 Re-presented(2) | 119.1 |
| Exceptional items after tax(3) | (12.2) |
| Exchange on operating profit | 0.2 |
| Acquisitions and disposals(4) | (1.2) |
| Organic operating profit | (9.0) |
| Associates and joint ventures | 2.2 |
| Finance charges(5) | (4.1) |
| Tax(6) | 2.7 |
| Share buyback(4) | 1.8 |
| Non-controlling interests | 0.1 |
| FVR(7) | (0.8) |
| Hyperinflation (operating profit)(8) | (0.2) |
| F24 H1 | 98.6 |
(1)See page 44 for an explanation of the calculation and use of non-GAAP measures.
(2)See page 29 for an explanation under Basis of preparation.
(3)For further details on exceptional items see pages 21 and 33-34.
(4)Includes finance charges net of tax.
(5)Excludes finance charges related to acquisitions, disposals, share buybacks and includes finance charges related to hyperinflation adjustments.
(6)Excludes tax related to acquisitions, disposals and share buybacks.
(7)Fair value remeasurements. For further details see page 21.
(8)Operating profit hyperinflation adjustments movement was $(3) million compared to the first half of fiscal 23 (F24 H1 – $(12) million; F23 H1 – $(9) million).
Net cash from operating activities and free cash flow ($ million)
Generated $2,146 million net cash from operating activities(1) and $1,462 million free cash flow
Net cash from operating activities was $2,146 million, an increase of $674 million compared to the first half of fiscal 23. Free cash flow grew by $498 million to $1,462 million.
Free cash flow growth was driven by strong working capital management interventions and the positive impact of lapping one-off cash tax payments from the prior year. These favourable factors more than offset the negative impacts of lower operating profit and increased interest payments, attributable to the current higher interest rate environment. The increase in capital expenditure (capex) demonstrates our commitment to investments for long-term sustainable growth.
| Free cash flow | $ million |
| F23 H1 Net cash from operating activities re-presented(2) | 1,472 |
| F23 H1 Capex and movements in loans and other investments re-presented(2) | (508) |
| F23 H1 Free cash flow re-presented(2) | 964 |
| Exchange(3) | 4 |
| Operating profit(4) | (299) |
| Working capital(5) | 893 |
| Capex | (69) |
| Tax | 200 |
| Interest | (137) |
| Other(6) | (94) |
| F24 H1 Free cash flow | 1,462 |
| F24 H1 Capex and movements in loans and other investments | 684 |
| F24 H1 Net cash from operating activities | 2,146 |
(1)Net cash from operating activities excludes net capex (F24 H1 – $(575) million; F23 H1 – $(506) million) and movements in loans and other investments.
(2) See page 29 for an explanation under Basis of preparation.
(3)Exchange on operating profit before exceptional items.
(4)Operating profit excludes exchange, depreciation and amortisation, post employment charges of $(10) million and other non-cash items.
(5)Working capital movement includes maturing inventory.
(6)Other items include dividends received from associates and joint ventures, movements in loans and other investments and post employment payments.
Fiscal 24 outlook
Organic net sales growth
Overall, for the group, we expect our organic net sales growth rate in the second half to gradually improve compared to the growth rate in the first half.
In North America, in the second half of fiscal 24, we expect to drive gradual improvement in organic net sales performance, despite uncertainty in the consumer environment. We will continue to invest in our brands and innovations as we work towards the delivery of high-quality market share improvement as the consumer environment continues to normalise.
In the second half of fiscal 24, we expect macroeconomic pressures will persist in LAC and impact progress in reducing inventory levels. As a result, we expect organic net sales in LAC to decline between the range of -10% to -20% in the second half of fiscal 24, compared to the second half of fiscal 23. However, we expect to close fiscal 24 with a more appropriate level of inventory for the current consumer environment.
In Europe, Asia Pacific and Africa, we expect continued growth in the second half recognising that macroeconomic volatility and consumer uncertainty will likely persist.
Organic operating profit growth
In the second half of fiscal 24, we expect an organic operating profit decline compared to the prior year, but we expect the rate of decline to improve compared to the first half of fiscal 24. While we expect headwinds to persist from continued inflation and relatively low operating leverage as we reduce inventory in LAC, we will continue to focus on delivering strong productivity and leveraging revenue growth management capabilities, while remaining invested in marketing.
Taxation
We expect the tax rate before exceptional items for fiscal 24 to be in the region of 23% mainly as a result of profit mix.
Effective interest rate
We expect the effective interest rate to reduce slightly for the full year from the first half of fiscal 24 which was reported at 4.4%, given current market conditions.
Productivity
At the end of fiscal 24, we will complete a three-year period over which we committed to deliver $1.5 billion of productivity benefits and we expect to exceed this target.
At our Capital Markets Event in November 2023, we announced a new productivity commitment to deliver $2.0 billion of productivity savings over the three years, from fiscal 25 to fiscal 27. We plan to deliver this accelerated productivity commitment across cost of goods, marketing spend and overheads. This acceleration will be supported by investments, including our supply chain agility programme, which was announced in July 2022. We expect benefits from our supply chain agility programme to increase from fiscal 25 and accelerate in the following years.
Capital expenditure and free cash flow
In fiscal 24, we continue to expect capital expenditure for the full year to be in the range of $1.3-1.5 billion. We expect broadly this level of spend to continue in the coming years, but then normalise to historical levels as a percentage of net sales starting in fiscal 27. We expect cash flow to grow organically through the second half of fiscal 24, while we continue to invest in capital expenditure and maturing stock.
Foreign exchange guidance
We are not providing specific guidance in relation to foreign exchange for fiscal 24. However, using the first half experienced foreign exchange impact and spot exchange rates of $1=£0.79 and $1=€0.90 as at 31 December 2023 for the second half and applying them to a representative income statement profile, for operating profit we would see a positive exchange impact of approximately $210 million and a negative impact on net sales of approximately $90 million.
Fiscal 25 outlook
As we move into fiscal 25 and the consumer environment improves, we expect to progress towards the delivery of our medium-term guidance with our organic net sales growth trajectory improving in full year fiscal 25 compared to fiscal 24. We expect organic operating profit growth in full year fiscal 25 to be broadly in line with organic net sales growth.
Medium-term guidance
Organic net sales growth and organic operating profit growth
We believe in the fundamental strength of our business and expect our advantaged portfolio to benefit from international spirits continuing to gain share of Total Beverage Alcohol and premiumisation trends, combined with continued investment in marketing and innovation. Our portfolio is well-positioned across categories, price points and regions. We will use our deep understanding of consumers to quickly adapt to changes in trends and behaviours, while investing in marketing and innovation and leveraging our revenue growth management capabilities, including balancing strategic pricing actions with individual market share growth objectives.
As discussed at our recent Capital Markets Event, over the medium term, we expect to deliver organic net sales growth in the range of 5% to 7%. We expect to deliver sustainable organic operating profit growth broadly in line with organic net sales growth as we increase marketing investment and navigate continued cost inflation in the near term. In the long term, we expect to deliver organic operating profit growth ahead of organic net sales growth.
Functional and presentation currency
Commencing with the interim dividend declared in January 2024, Diageo’s dividends will be declared in US dollars and remain in line with the group’s existing progressive dividend policy. Holders of ordinary shares will continue to receive their dividends in sterling, but will have the option to elect to receive their dividends in US dollars instead. Holders of American Depositary Receipts (ADRs) will continue to receive dividends in US dollars.
Unaudited recast full primary financial information and selected financial information as of and for the years ended 30 June 2021, 30 June 2022 and 30 June 2023 will be re-presented in US dollars and made available later today to reflect the change in the presentation currency of Diageo from sterling to US dollars.
Notes to the business and financial review
Unless otherwise stated:
– movements in results are for the six months ended 31 December 2023 compared to the six months ended 31 December 2022;
– commentary below refers to organic movements unless stated as reported;
– volume is in millions of equivalent units (EUm);
– net sales are sales after deducting excise duties;
– percentage movements are organic movements unless stated as reported;
– growth is organic net sales movement; and
– market share refers to value share, except for India which is volume share.
Following a review of our interim performance metrics, we have made the decision to report return on average invested capital only on a full-year basis at year end going forward.
See page 44 for an explanation of the calculation and use of non-GAAP measures.