Diageo delivers strong performance while investing in sustainable long-term growth
| Delivered strong net sales growth, with growth across all regions– Reported net sales of £9.4 billion, increased 18.4%, primarily reflecting strong organic net sales growth as well as favourable impacts from foreign exchange, mainly due to the strengthening of the US dollar.- Organic net sales grew 9.4%, with growth in all regions. Price/mix of 7.6 percentage points reflects a high single-digit price contribution to net sales growth, premiumisation and organic volume growth of 1.8%.- Growth was enabled by our diversified footprint, advantaged portfolio, strong brands and underpinned by favourable industry trends of premiumisation. | ||
| Resilient operating margin despite increased cost inflation– Reported operating profit grew 15.2% to £3.2 billion. Reported operating margin declined by 92bps, with organic margin expansion more than offset by exceptional operating items and foreign exchange.- Organic operating profit grew 9.7% and organic operating margin expanded by 9bps, driven by leverage on operating cost reflecting disciplined cost management, despite inflation.- Price increases and supply productivity savings more than offset the impact of absolute cost inflation on gross margin. | ||
| Advantaged portfolio and premiumisation drove market share growth– Growth was delivered across most categories, primarily scotch, tequila and beer.- Premium-plus brands contributed 57% of reported net sales and drove 65% of organic net sales growth.- Total trade market share grew or held in over 75%(1) of total net sales value in measured markets. | ||
| Continued optimisation of portfolio through acquisitions and disposals– Acquired Mr Black, a leading Australian premium-priced coffee liqueur, and Balcones Distilling, a Texas craft distiller and one of the leading producers of American single malt whisky.- Announced an agreement to acquire Don Papa rum, a super-premium, dark rum from the Philippines.- Agreed to dispose of Guinness Cameroon S.A., disposed of Archers and completed the disposal and franchising of a portfolio of brands in India. | ||
| Invested to sustain long-term growth– Increased organic marketing investment by 6.8%, reflecting strong, consistent investment in our brands.- Invested £0.4 billion of capex in supply capacity, sustainability, digital capabilities and consumer experiences. | ||
| Cash flow generation– Net cash flow from operating activities declined by £0.7 million to £1.2 billion.- Free cash flow of £0.8 billion, declined £0.8 billion. Operating profit and positive foreign exchange impact were offset by higher year-on-year working capital outflow primarily due to lapping a larger increase in creditors, phasing of spend and higher tax payments.- Strong balance sheet, with leverage ratio(2) of 2.5x as at 31 December 2022, at the lower end of our target range, as a result of strong profit performance. | ||
| Continued progress in delivering Society 2030 ESG goals and doing business the right way– Launched ‘Drops of Advice’, a new global festive responsible drinking campaign.- Announced plans for a hydrogen powered furnace in the UK to create the world’s first net zero glass bottles to be produced at scale.- Diageo North America was named in the Top 10 Inclusive Companies for 2022.- Included in Dow Jones World Sustainability Index for the fifth consecutive year. | ||
| Continued creation of long-term shareholder value– Increased basic eps by 19.7% to 100.9 pence and pre-exceptional eps by 15.2% to 98.6 pence.- Increased declared interim dividend by 5% to 30.83 pence per share.- Total shareholder return was 5%, in the top half of our peer group.- Expect to complete remaining £0.3 billion of current programme to return up to £4.5 billion of capital to shareholders in February 2023 and return up to an additional £0.5 billion in fiscal 23. |
See page 46 for explanation and reconciliation of non-GAAP measures, including organic net sales, organic marketing investment, organic operating profit, free cash flow, eps before exceptionals, ROIC, adjusted net debt, adjusted EBITDA and tax rate before exceptional items.
(1)Internal estimates incorporating 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 total trade share fiscal year to date. 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 86% of total Diageo net sales value in the first half of fiscal 23.
(2)Ratio of adjusted net borrowings to adjusted EBITDA. For further details see page 53.
Ivan Menezes, Chief Executive, said :
We have made a strong start to fiscal 23. Organic net sales grew 9%, with growth across all regions, organic volume grew 2%, and organic operating profit grew 10%. In a challenging cost environment, our organic operating margin increased 9 basis points whilst we also continued to invest for the future. Today, Diageo is 36%(1) larger than it was prior to Covid-19, reflecting the strength of our diversified footprint and advantaged portfolio. I want to thank my nearly 28,000 colleagues for their tireless work, focus and agility which has helped us to achieve these results.
Sales growth was supported by our continued focus on premiumising our portfolio, bolstered by strong global premiumisation trends, with our super-premium-plus brands growing organic net sales 12%. As category growth trends continue to normalise following Covid-19, winning quality market share remains a key focus. I am pleased to say that we gained or held share in 75%(2) of total net sales value in our measured markets, demonstrating our strong commercial execution.
We have delivered targeted price increases across all regions, enabled by our expertise in revenue growth management and supported by strong consumer demand for our brands. This, combined with our culture of everyday efficiency, has allowed us to increase our investments. We are investing in world-class brand building, digital and data capabilities and our ambitious 2030 sustainability plan to create a stronger and more resilient business for the long-term.
As we look to the second half of fiscal 23, whilst the operating environment remains challenging, I remain confident in the resilience of our business and our ability to navigate volatility. We believe we are well-positioned to deliver our medium-term guidance of consistent organic net sales growth in the range of 5% to 7% and sustainable organic operating profit growth in the range of 6% to 9% for fiscal 23 to fiscal 25.
| Financial performance | ||||||||||
| Volume (equivalent units) | Operating profit | Earnings per share (eps) | ||||||||
| EU136.8m | £3,161m | 100.9p | ||||||||
| (F22 H1: EU 140.2 m) | (F22 H1: £2,743m) | (F22 H1: 84.3p) | ||||||||
| Reported movement | (2)% | i | Reported movement | 15% | h | Reported movement | 20% | h | ||
| Organic movement(3) | 2% | h | Organic movement(3) | 10% | h | Eps before exceptional items(3) | 15% | h | ||
| Net sales | Net cash from operating activities | Interim dividendper share | ||||||||
| £9,420m | £1,248m | 30.83p | ||||||||
| (F22 H1: £7,957m) | (F22 H1: £1,947m) | (F22 H1: 29.36p) | ||||||||
| Reported movement | 18% | h | F23 H1 free cash flow(3) £817m | Increase | 5% | h | ||||
| Organic movement(3) | 9% | h | F22 H1 free cash flow(3) £1,575m | |||||||
(1)Global H1 F23 net sales value 36% ahead of H1 F19 on a constant basis, see page 47 for explanation.
(2)Internal estimates incorporating 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 total trade share fiscal year to date. 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 86% of total Diageo net sales value in the first half of fiscal 23.
(3)See page 46 for explanation and reconciliation of non-GAAP measures.
Key financial information
Six months ended 31 December 2022
Summary financial information
| F23 H1 | F22 H1 | Organic growth% | Reported growth% | ||
| Volume | EUm | 136.8 | 140.2 | 2 | (2) |
| Net sales | £ million | 9,420 | 7,957 | 9 | 18 |
| Marketing | £ million | 1,577 | 1,351 | 7 | 17 |
| Operating profit before exceptional items | £ million | 3,194 | 2,743 | 10 | 16 |
| Exceptional operating items(1) | £ million | (33) | – | ||
| Operating profit | £ million | 3,161 | 2,743 | 15 | |
| Share of associate and joint venture profit after tax | £ million | 172 | 190 | (9) | |
| Non-operating exceptional items(1) | £ million | 16 | (31) | ||
| Net finance charges | £ million | (292) | (180) | ||
| Exceptional taxation credit/(charge)(1) | £ million | 70 | – | ||
| Tax rate including exceptional items | % | 21.3 | 23.3 | (9) | |
| Tax rate before exceptional items | % | 23.4 | 23.0 | 2 | |
| Profit attributable to parent company’s shareholders | £ million | 2,295 | 1,965 | 17 | |
| Basic earnings per share | pence | 100.9 | 84.3 | 20 | |
| Basic earnings per share before exceptional items | pence | 98.6 | 85.6 | 15 | |
| Interim dividend | pence | 30.83 | 29.36 | 5 |
(1)For further details on exceptional items see pages 22 and 34.
Reported growth by region
| Volume | Net sales | Marketing | Operating profit before exceptional items | Operating profit | ||||||
| % | EUm | % | £ million | % | £ million | % | £ million | % | £ million | |
| North America | (4) | (1.0) | 19 | 553 | 18 | 101 | 10 | 124 | 8 | 98 |
| Europe | (1) | (0.2) | 13 | 227 | 7 | 21 | 13 | 81 | 15 | 95 |
| Asia Pacific | (4) | (2.0) | 20 | 306 | 15 | 39 | 30 | 136 | 25 | 115 |
| Latin America and Caribbean | 7 | 1.0 | 34 | 281 | 42 | 52 | 41 | 138 | 41 | 138 |
| Africa | (6) | (1.2) | 9 | 75 | 10 | 10 | 2 | 4 | 2 | 4 |
| Corporate | – | – | 91 | 21 | 50 | 3 | (26) | (32) | (26) | (32) |
| Diageo | (2) | (3.4) | 18 | 1,463 | 17 | 226 | 16 | 451 | 15 | 418 |
Organic growth by region
| Volume | Net sales | Marketing | Operating profit before exceptional items | |||||
| % | EUm | % | £ million | % | £ million | % | £ million | |
| North America | (4) | (1.1) | 3 | 88 | 2 | 13 | (2) | (26) |
| Europe | 0 | (0.1) | 10 | 164 | 3 | 9 | 19 | 106 |
| Asia Pacific | 10 | 3.6 | 17 | 250 | 9 | 24 | 27 | 119 |
| Latin America and Caribbean | 6 | 0.9 | 20 | 167 | 29 | 37 | 20 | 69 |
| Africa | (5) | (1.0) | 6 | 52 | 8 | 8 | 12 | 23 |
| Corporate | – | – | 91 | 21 | 33 | 2 | (23) | (30) |
| Diageo | 2 | 2.3 | 9 | 742 | 7 | 93 | 10 | 261 |
| First half of fiscal 19 to first half of fiscal 23 growth | |||||
| Reported net sales growth %(1) | Net sales growth on a constant basis %(1) | Organic volume CAGR %(2) | Organic net sales CAGR %(2) | ||
| North America | 49 | 38 | 2 | 8 | |
| Europe | 21 | 27 | 4 | 7 | |
| Asia Pacific | 31 | 32 | 2 | 7 | |
| Latin America and Caribbean | 64 | 64 | 6 | 15 | |
| Africa | 15 | 32 | 3 | 8 | |
| Corporate | 57 | 57 | 6 | 13 | |
| Diageo | 36 | 36 | 3 | 8 |
(1)For further details on first half of fiscal 19 to first half of fiscal 23 growth on a constant basis see pages 47-50.
(2)First half of fiscal 19 to first half of fiscal 23 CAGR indicative, and the impact from disposals, acquisitions and re-classifications may not be fully captured.
See page 46 for explanation and reconciliation of non-GAAP measures.
Net sales (£ million)
Reported net sales grew 18.4%
Organic net sales grew 9.4%
Reported net sales grew18.4%, driven by strong organic growth and a positive favourable foreign exchange impact.
Organic net sales growth of 9.4% reflects organic volume growth of 1.8% and 7.6 percentage points of positive price/mix. All regions delivered growth, despite lapping strong double-digit growth. Price/mix was primarily driven by price increases across all regions.
| Net sales | £ million |
| F22 H1 | 7,957 |
| Exchange(1) | 669 |
| Acquisitions and disposals | (33) |
| Hyperinflation(2) | 85 |
| Volume | 142 |
| Price/mix | 600 |
| F23 H1 | 9,420 |
(1)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.
(2)See pages 35 and 47-50 for details of hyperinflation adjustment.
Operating profit (£ million)
Reported operating profit grew 15.2%
Organic operating profit grew 9.7%
Reported operating profit grew 15.2%, mainly driven by growth in organic operating profit and positive impact from exchange rate movements. This was partially offset by the negative impact of exceptional operating items, primarily driven by the supply chain agility programme and the negative impact of acquisitions and disposals.
Organic operating profit grew 9.7% , ahead of organic net sales growth, driven by growth across all regions except North America.
| Operating profit | £ million |
| F22 H1 | 2,743 |
| Exceptional operating items(1) | (33) |
| Exchange | 201 |
| Acquisitions and disposals | (19) |
| FVR(2) | (12) |
| Hyperinflation(3) | 20 |
| Organic movement | 261 |
| F23 H1 | 3,161 |
(1)For further details on exceptional operating items see pages 22 and 34.
(2)Fair value remeasurements. For further details see page 22 .
(3)See pages 35 and 47-50 for details of hyperinflation adjustment.
Operating margin (%)
Reported operating margin declined by 92bps
Organic operating margin expanded by 9bps
Reported operating margin declined b y 92bps, with organic operating margin expansion more than offset by exceptional operating items, negative impact of foreign exchange, acquisitions and disposals and other items.
Organic operating margin expanded by 9bps, reflecting disciplined cost management despite inflation. Strong operating margin expansion in Asia Pacific and Europe was partially offset by a decline in North America.
Organic gross margin declined by 79bps, primarily driven by cost pressure. Price increases and supply productivity savings more than offset the absolute impact of cost inflation.
| Operating margin | ppt |
| F22 H1 | 34.5 |
| Exceptional operating items(1) | (0.35) |
| Exchange | (0.31) |
| Acquisitions and disposals | (0.08) |
| Other(2) | (0.27) |
| Gross margin | (0.79) |
| Marketing | 0.41 |
| Other operating items | 0.47 |
| F23 H1 | 33.6 |
(1)For further details on exceptional operating items see pages 22 and 34.
(2)Fair value remeasurements and hyperinflation adjustment. For further details on fair value remeasurements see page 22. See pages 35 and 47-50 for details of hyperinflation adjustment.
Basic earnings per share (pence)
Basic eps increased 19.7% from 84.3 pence to 100.9 pence
Basic eps before exceptional items(1) increased 15.2% from 85.6 pence to 98.6 pence
Basic eps increased 16.6 pence, mainly driven by organic operating profit growth and favourable foreign exchange impact, partially offset by higher tax and increased finance charges.
Basic eps before exceptional items increased 13 pence.
| Basic earnings per share | pence |
| F22 H1 | 84.3 |
| Exceptional items after tax(2) | 3.6 |
| Exchange on operating profit | 8.6 |
| Acquisitions and disposals(3) | (0.8) |
| Organic operating profit | 11.1 |
| Associates and joint ventures | (0.8) |
| Finance charges(4) | (3.5) |
| Tax(5) | (4.0) |
| Share buyback | 1.5 |
| Non-controlling interests | 0.5 |
| FVR(6) | (0.5) |
| Hyperinflation (operating profit)(7) | 0.9 |
| F23 H1 | 100.9 |
(1)See page 46 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, disposals, share buybacks and includes finance charges related to hyperinflation adjustments (F23 H1 – £(6) million; F22 H1 – £1 million).
(5)Excludes tax related to acquisitions, disposals and share buybacks.
(6)Fair value remeasurements. For further details see page 22.
(7)Operating profit hyperinflation adjustment movement was £20 million compared to the first half of fiscal 22 (F23 H1 – £20 million; F22 H1 – £nil).
Net cash from operating activities and free cash flow (£ million)
Generated £1,248 million net cash from operating activities(1) and £817 million free cash flow
Net cash from operating activities was £1,248 million, a decrease of £699 million compared to the first half of fiscal 22. Free cash flow decreased by £758 million to £817 million.
Free cash flow decreased as strong growth in operating profit and a favourable foreign exchange impact was more than offset by a higher year-on-year working capital outflow, higher cash tax and interest paid, and increased capital investment.
The higher year-on-year working capital outflow was due to the normalisation of creditors relative to the first half of fiscal 22, as our growth rate began to moderate in the first half of fiscal 23. Creditors increased significantly in the first half of fiscal 22 due to accelerated growth as markets recovered from the impact of Covid-19. Working capital has also been impacted by the phasing of spend in the half, and the increase was also driven by higher investment in inventory, including maturing stock, to deliver supply chain resilience and to support future growth of the business. This higher investment was also impacted by inflation.
The additional cash tax payments were the result of increased profit impacting tax instalments, higher balancing payments and adverse FX movements on our tax liabilities. Higher interest cost reflects the higher interest rate environment globally.
| Free cash flow | £ million |
| F22 H1 Net cash from operating activities | 1,947 |
| F22 H1 Capex and movements in loans and other investments | (372) |
| F22 H1 Free cash flow | 1,575 |
| Exchange(2) | 201 |
| Operating profit(3) | 238 |
| Working capital(4) | (855) |
| Capex | (54) |
| Tax | (258) |
| Interest | (38) |
| Other(5) | 8 |
| F23 H1 Free cash flow | 817 |
| F23 H1 Capex and movements in loans and other investments | 431 |
| F23 H1 Net cash from operating activities | 1,248 |
(1)Net cash from operating activities excludes net capex (F23 H1 – £(429) million; F22 H1 – £(375) million) and movements in loans and other investments.
(2)Exchange on operating profit before exceptional items.
(3)Operating profit excludes exchange, depreciation and amortisation, post employment charges of £(9) million and other non-cash items.
(4)Working capital movement includes maturing inventory.
(5)Other items include dividends received from associates and joint ventures, movements in loans and other investments and post employment payments.
Return on average invested capital (%)(1)
ROIC increased 37bps
ROIC increased 37bps , mainly driven by organic operating profit growth, partially offset by higher tax, increased capex and maturing stock investment.
| Return on average invested capital | ppt |
| F22 H1 | 19.3 |
| Exchange | 0.51 |
| Acquisitions and disposals | (0.31) |
| Organic operating profit | 2.17 |
| Associates and joint ventures | (0.35) |
| Tax | (0.94) |
| Other | (0.71) |
| F23 H1 | 19.7 |
(1)ROIC calculation excludes exceptional operating items from operating profit. For further details on ROIC see page 52.
Fiscal 23 outlook
Organic net sales
The strong organic net sales growth delivered in the first half of fiscal 23 moderated compared to double-digit fiscal 22 levels, as expected. While we expect the operating environment to continue to be challenging, we are confident in the resilience of our business and our ability to navigate continued cost inflation and global geopolitical and macroeconomic uncertainty.
In North America, organic net sales grew 3% in the first half of fiscal 23. We expect organic net sales growth to continue to normalise through the second half of fiscal 23, compared to the double-digit growth in the prior period. In Europe, we expect organic net sales growth to moderate in the second half of fiscal 23 as we lap on-trade re-opening recovery. In Asia Pacific, Latin America and Caribbean and Africa, we expect continued growth through the second half of fiscal 23, albeit at a moderated pace relative to the strong growth in fiscal 22.
We believe in the fundamental strength of our business and expect our advantaged portfolio to benefit from spirits continuing to gain share of total beverage alcohol (TBA), premiumisation, strategic pricing actions and continued strong investment in marketing and innovation. Our portfolio is well-positioned across geographies, categories and price points. We will use our deep understanding of consumers to quickly adapt to changes in trends and behaviours, while investing strongly in marketing and innovation, and leveraging our revenue growth management capabilities, including strategic pricing actions.
Organic operating margin
In a challenging inflationary environment, we will continue to focus on revenue growth management, including strategic pricing actions. For the second half of fiscal 23, we expect marketing investment to grow ahead of sales growth. We continue to expect organic operating margin to benefit from premiumisation trends, our culture of everyday efficiency and operating leverage, while we continue to invest strongly in marketing.
Exchange
We are not providing specific guidance in relation to foreign exchange for fiscal 23. However, using spot exchange rates of £1=$1.20 and £1=€1.13 as at 31 December 2022, where sterling has depreciated compared to the actual exchange rates experienced in fiscal 22, and applying them to last year’s P&L profile for net sales and operating profit, we would see positive exchange impacts of approximately £950 million and £300 million respectively.
Taxation
We expect the tax rate before exceptional items to continue to be in the range of 22.0% to 24.0% in fiscal 23.
Effective interest rate
We expect the effective interest rate to be around 4% in fiscal 23.
Capital expenditure and free cash flow
In fiscal 23, we continue to expect capex for the full year to be in the range of £1.0-1.2 billion. In the second half of fiscal 23, we expect to deliver stronger free cash flow than the first half, as we lap more normalised working capital movements in the second half of fiscal 22.
Medium-term guidance, fiscal 23 to fiscal 25
Organic net sales and organic operating profit
We continue to expect to deliver our medium-term guidance of consistent organic net sales growth in the range of 5% to 7% and sustainable organic operating profit growth in the range of 6% to 9% for fiscal 23 to fiscal 25.
Notes to the business and financial review
Unless otherwise stated:
– movements in results are for the six months ended 31 December 2022 compared to the six months ended 31 December 2021;
– 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 value movement unless states otherwise; and
– share refers to value share, except for India which is volume share.
See page 46 for explanation of the calculation and use of non-GAAP measures.