DIAGEO INTERIM RESULTS SIX MONTHS ENDED 31 DECEMBER 2017

Transcription

1 DIAGEO INTERIM RESULTS SIX MONTHS ENDED 31 DECEMBER

2 CONSISTENT DELIVERY OF STRONG RESULTS 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 Four measures of our progress efficient growth value creation credibility and trust motivated people 2

3 CONSISTENT DELIVERY OF STRONG RESULTS Organic volume 1.8%. Organic net sales 4.2% Organic operating margin expansion 81bps Consistent strong cash delivery: Free cash flow 1bn Eps pre-exceptionals up 9.4% Returned 0.8bn to shareholders through share buy-back Interim dividend up 5% 3

4 CONTINUING OUR PERFORMANCE MOMENTUM Organic net sales growth Organic operating margin improvement (bps) Free cash flow ( million) 4.3% 4.2% % ,084 1, % 0.0% F14 F15 F16 F17 F18 H1 F14 F15 F16 F17 F18 H1 F14 H1 F15 H1 F16 H1 F17 H1 F18 H1 4

5 CONTINUED SOLID GROWTH IN THE THREE FOCUS AREAS: ORGANIC NET SALES GROWTH Scotch 2.8% US Spirits 2.9% India 2.3% 5

6 CONTINUED MOMENTUM WHICH REFLECTS: Delivering our strategy through our six execution priorities Consistent broad based growth across the business and the three focus areas Continued margin expansion enabled by productivity programme and strong cash flow Confidence in delivering our medium term guidance and enables our long term performance ambition 6

7 A SET OF RESULTS THAT DEMONSTRATE CONTINUED PERFORMANCE MOMENTUM Efficient growth: Organic net sales growth Organic operating margin improvement Free cash flow F18 H1 4.2% +81bps 1.0bn Pre-exceptional eps up 9.4% to 67.8p Value creation: ROIC Total Shareholder Return up 77 bps to 16.5% up 22% 7

8 REPORTED NET SALES UP 1.7% 4.2% ORGANIC GROWTH Organic growth 149 6,530 6, (134) (17) F17 H1 Exchange Acquisitions and disposals Volume Price/mix F18 H1 8

9 4.2% ORGANIC NET SALES GROWTH Organic volume growth Price/Mix Organic net sales growth 4.3% 4.2% 3.2% 2.4% 2.8% 1.3% 1.1% 1.8% 1.5% F16 F17 F18 H1 9

10 ALL REGIONS DELIVERED TOP LINE GROWTH Organic net sales growth 6.9% 6.8% price/mix volume 4.4% 1.7% 8.7% 8.3% 4.2% 2.5% 1.7% 0.8% 4.6% 3.6% 2.4% 1.8% (0.2)% (1.9)% (1.8)% (1.5)% NAM EUROPE & TURKEY AFRICA LAC APAC DIAGEO 10

11 BROAD BASED ORGANIC GROWTH ACROSS OUR CATEGORIES Organic net sales growth 16% 43% 3% 4% 5% 5% 1% 4% (3)% Scotch Vodka NAM Whiskey Rum Liqueurs IMFL Whisky Gin Tequila Beer Category as a % of net sales 27% 11% 9% 7% 6% 5% 4% 3% 15% 11

12 STRONG PERFORMANCE ACROSS OUR PORTFOLIO Organic net sales growth 11% Global giants Johnnie Walker 7% Smirnoff (1)% 5% 5% Captain Morgan 6% Baileys 6% Tanqueray 16% Guinness 4% Global giants Local stars Reserve 12

13 REPORTED OPERATING PROFIT BEFORE EXCEPTIONAL ITEMS UP 6.1% ORGANIC OPERATING PROFIT UP 6.7% m F18 H1 F17 H1 PRIOR PERIOD OPERATING PROFIT * 2,065 1,717 Exchange (15) 303 Acquisitions & Disposals 2 (42) Organic growth CURRENT PERIOD OPERATING PROFIT * 2,190 2,065 *Reported operating profit before exceptional items 13

14 REPORTED OPERATING MARGIN EXCLUDING EXCEPTIONAL ITEMS UP 138 BPS ORGANIC OPERATING MARGIN GREW 81 BPS 81bps 33.5% 45bps 12bps 32.2% F17 H1 Exchange Acquisitions and disposals Organic operating margin F18 H1 14

15 ORGANIC OPERATING MARGIN UP 81 BPS Movement in organic operating margin 122bps 33.6% 32.8% 3bps (44)bps F17 H1 Gross margin Marketing Other operating items F18 H1 15

16 PRODUCTIVITY EFFICIENCY FUNDED A SIGNIFICANT INCREASE IN MARKETING ACTIVITY m F18 H1 Prior period marketing 908 Exchange (8) Acquisitions 2 Marketing efficiencies (69) Underlying increase 15% 135 Current period marketing

17 ORGANIC OPERATING MARGIN UP 81 BPS Movement in organic operating margin 122bps 33.6% 32.8% 3bps (44)bps F17 H1 Gross margin Marketing Other operating items F18 H1 17

18 PRODUCTIVITY PROGRAMME ON TRACK TO DELIVER INCREASED GUIDANCE F17-F19 Guidance Productivity target 700m 2/3 reinvested Margin improvement of 175bps NET REVENUE MANAGEMENT MARKETING GLOBAL SUPPLY ORGANISATION EFFECTIVENESS INDIRECTS 18

19 STRONG FREE CASH FLOW DELIVERY 86 1,084 (15) (37) (17) ,029 (101) F17 Exchange (i) Operating profit (ii) Working capital Capex Tax Interest Other (iii) F18 (i) (ii) (iii) Exchange on operating profit before exceptional items Operating profit excluding exchange, depreciation and amortisation, post employment charges and non cash items Other items include post employment payments, dividends received from associates and joint ventures, and loans and other investments 19

20 IMPROVED COST OF DEBT SUPPORTED BY FAVOURABLE REFINANCING F18 H1 F17 H1 Movement Closing net debt* m (9,198) (8,936) (262) Average net debt* m (8,819) (9,066) 247 Net interest charge m (130) (153) 23 Net other finance charges m (24) (29) 5 Net finance charges m (154) (182) 28 Effective interest rate % (0.5) Adjusted** net debt* / EBITDA x (0.3) * Net debt is equivalent to net borrowings ** Adjusted to include net debt and post employment liabilities 20

21 DISCIPLINED APPROACH TO CAPITAL STRUCTURE, SHARE BUY BACK IS ON TRACK Leverage policy Adjusted Net Debt* to EBITDA: 2.5x 3.0x Organic growth Dividends 1.8x to 2.2x dividend cover M&A and portfolio management * Net debt is equivalent to net borrowings. Adjusted net debt includes net debt and post employment liabilities 21

22 F18 EXCHANGE IMPACT NOW FORECAST TO BE NEGATIVE FOR BOTH OPERATING PROFIT AND NET SALES Exchange rates Total Exchange Impact Translation rate F17* F18 H1** $/ / F18 forecast *** * Average rate **Average rate Jul-Dec ***Weighted average rate of F18 H1 and spot rate for H2 Transaction rate F17 1 F18 H1 F18 forecast 2 $/ / Average rate inc. hedging 2. 81% of /$ exposure hedged 59% of / exposure hedged m F17 F18 H1 F18 forecast Net Sales 1,359 (134) (460) Operating profit Net Interest 447 (15) (60) (28)

23 BASIC EPS INCREASED 36% EPS BEFORE EXCEPTIONAL ITEMS UP 9.4% Pence per share F17 H1 eps before exceptional items 62.0 Exchange (0.6) Organic operating profit growth 5.5 Associates and joint ventures (0.1) Tax (0.3) Finance charges 1.1 Other 0.2 F18 H1 eps before exceptional items

24 A STRONG SET OF RESULTS DELIVERING EFFICIENT GROWTH AND VALUE CREATION Efficient growth: Organic net sales growth Organic operating margin improvement Free cash flow F18 H1 4.2% 81bps 1.0bn Pre-exceptional eps up 9.4% to 67.8p Value creation: ROIC Total Shareholder Return up 77 bps to 16.5% up 22% 24

25 CONSISTENT DELIVERY OF STRONG RESULTS 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 Four measures of our progress efficient growth value creation credibility and trust motivated people 25

26 ALCOHOL IN SOCIETY: DIAGEO S AMBITIOUS NEW TARGETS The outcome we seek through our Alcohol in Society work: Our consumers drink better, not more We contribute to the World Health Organization goal of 10% reduction in harmful drinking by 2025 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 26

27 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 27

28 EXECUTION OF THE SIX PRIORITIES IN MEXICO: DELIVERING CONSISTENT STRONG GROWTH AND SHARE GAINS Organic net sales growth 19.9% 25.2 Rolling 12 month spirits industry value share* % 10.2% 11.9% (4.3)% F14 F15 F16 F17 F18 H1 F14 F15 F16 F17 *Source: NISCAM spirits industry reporting November F18 28

29 KEEPING PREMIUM CORE VIBRANT WITH PURPOSE DRIVEN MARKETING IN MEXICO F15-F17 organic net sales CAGR 14% 29

30 INCREASING PARTICIPATION IN MAINSTREAM SPIRITS: BLACK & WHITE LEADING PRIMARY SCOTCH GROWTH IN MEXICO REGIONAL DISTRIBUTION + NATIONAL DISTRIBUTION + REGIONAL COMMUNICATIONS + NATIONAL COMMUNICATIONS ACCELERATE 550K cases 65K cases 128K cases 231K cases 391K cases Value Share* F13 F14 F15 F16 F *Share of primary scotch category. Source: NISCAM spirits industry reporting

31 CONTINUE TO WIN IN RESERVE WITH THE LEADING LUXURY DRINKS PORTFOLIO IN MEXICO Rolling 12 month value share of reserve category* F14 F15 F16 F17 November F18 *Source: NISCAM spirits industry reporting 31

32 DRIVING INNOVATION AT SCALE IN MEXICO 32

33 BUILD ADVANTAGED ROUTES TO CONSUMER: EXPANDING OUR FOOTPRINT IN MEXICO On Trade Expanded distribution from 50 to 75 cities More than doubled called on outlets while increasing sales force effectiveness Off Trade Created a team 100% focused on execution Increased distribution by 25% Almost doubled called on outlets Automation to track and audit execution Hotels and Third Space Small dedicated team to increase focus Increased hotel distribution more than 4X Reaching 30 festivals and over 10 million consumers 33

34 EMBEDDING PRODUCTIVITY TO DRIVE OUT COSTS TO INVEST IN GROWTH Net revenue management enabling top line growth Delivered supply savings through footprint optimisation, operational excellence and procurement savings Marketing efficiencies delivered through rationalising media agencies, reducing cost of point of sale material and non-working spend Organisational effectiveness and zero based budgeting driving overheads savings 34

35 GUINNESS IS VIBRANT AND GROWING 5.6% Organic net sales growth 3.7% 3.9% 3.6% 2.1% 0.0% 0.4% (1.6)%* Total Beer Total Guinness *Excluding Orijin F15 F16 F17 F18 H1 35

36 GUINNESS IS VIBRANT AND GROWING Nigeria/Kenya GB US Ethiopia 36

37 CONTINUED SOLID GROWTH IN THE THREE FOCUS AREAS: ORGANIC NET SALES GROWTH Scotch 2.8% US Spirits 2.9% India 2.3% 37

38 F18 FOCUS AREAS: SCOTCH SOLID FIRST HALF PERFORMANCE Organic net sales growth 16.2% 6.0% 4.7% 2.8% 0.4% 0.7% 6.7% 9.6% 0.9% 6.5% 2.5% 2.5% 8.8% 4.8% 7.5% (4.5)% F16 F17 F18 H1 (13.5)% (14.0)% Total Scotch Johnnie Walker Buchanan's Scotch Malts Primary Scotch Other % of Scotch net sales 57% 9% 12% 11% 11% 38

39 F18 FOCUS AREAS: SCOTCH RECRUITING WITH JOHNNIE WALKER INSPIRING STORIES COMPELLING DRINKS STRATEGY GIFTING BLUE LABEL 39

40 THE YEAR WE PAINT THE WORLD JOHNNIE WALKER BLACK 40

41 F18 FOCUS AREAS: SCOTCH ACCELERATING THE FUTURE OF SCOTCH IN CHINA Liquid on Lips- Whisky Academy Love Whisky Social Media Platform for Whisky Enthusiasts Prestige Scotch Whisky Boutiques Johnnie Walker Blue Label and The Singleton 41

42 F18 FOCUS AREAS: US SPIRITS ROBUST FIRST HALF PERFORMANCE Organic volume and net sales growth Volume Net sales Net sales excluding Ciroc Cîroc and and Ketel Ketel One One vodka vodka 6.1% 4.2% 3.1% 3.4% 2.9% 5.5% 1.2% 1.5% 0.9% (1.5)% (2.1)% (3.5)% F15* F16 F17 F18 H1 * Excluding Wine 42

43 F18 FOCUS AREAS: US SPIRITS CATEGORY SHARE GAINS CONTINUED FOR ALL KEY BRANDS EXCEPT VODKA Nielsen and NABCA combined value growth 34.2% 10.6% 27.8% 15.0% 11.9% 11.6% 5.9% 5.3% 4.7% 7.3% 5.7% 4.4% 1.5% 1.8% v Core brands (1.6)%(2.4)% (8.1)% (14.4)% (3.9)% (2.4)% Crown Royal Johnnie Walker Captain Morgan Baileys Smirnoff Cîroc Ketel One vodka F17 H2 F18 H1* Don Julio Bulleit Buchanan's F18 H1 category value share change* * Nielsen through 30 December, 2017, NABCA through 30 November,

44 US SPIRITS: STRONG PLANS IN THE SECOND HALF Execute proven plans for our brands in the second half supported by marketing up-weight Improve super premium vodka Continue double digit growth on reserve* Robust innovation pipeline for the second half * Excluding super premium vodka 44

45 F18 FOCUS AREAS: INDIA IMPROVED PERFORMANCE AS TOP LINE HEADWINDS SUBSIDE India organic net sales growth Prestige and above brands organic net sales growth 5.3% 4.0% 2.3% 9.5% 11.3% 5.7% 0.5% 2.8% 45

46 Black & White 12 year old Captain Morgan Original Rum Royal Challenge Xtra Bold 46 F18 FOCUS AREAS: INDIA PRESTIGE AND ABOVE PLANS ARE WORKING PAINTING INDIA JOHNNIE WALKER BLACK Continuing renovation of Prestige and Above brands Primary scotch - Black Dog Innovation

47 F18 FOCUS AREAS: INDIA MITIGATED GST IMPACT WITH ACCELERATED PRODUCTIVITY AND ADDITIONAL MITIGATION STEPS Net Revenue Management COGS Price increases implemented across 13 states Efficiency in trade spend Positive mix from prestige and above brands growth Inputs rate negotiation with suppliers post GST roll-out Tramlining and Brand Value Engineering Gross margin improvement c. 200bps Marketing Overheads Efficiency in agency and point of sale costs Leveraging new tools to improve ROI Additional savings from organisation effectiveness Zero based budgeting driving further indirect spend savings Overheads reduced 10% 47

48 EFFECTIVE EXECUTION OF OUR STRATEGY CONSISTENT DELIVERY OF STRONG RESULTS: Delivering our strategy through our six execution priorities Creating a more agile, disciplined and high performing organisation Consistent top line growth and margin expansion enabled by productivity programme and strong cash flow Confidence in delivering our medium term guidance and enables our long term performance ambition 48

49 APPENDIX 1: 1/2 FORWARD LOOKING STATEMENTS Exchange rate outlook Using exchange rates 1 = $1.39; 1 = 1.13, the exchange rate movement for the year ending 30 June 2018 is estimated to adversely impact net sales by approximately 460 million and operating profit by approximately 60 million. Net sales Looking to the full year, our expectations for fiscal 18 remain unchanged. We continue to expect organic net sales growth roughly in line with last year and consistent with our mid-term guidance of mid-single digit top line growth. Operating margin On margin, we expect continued progress toward our goal to deliver 175 basis points of improvement for the three years ended June 2019, with more of the margin expansion across both financial years coming through in fiscal 19 as we expect to have less costs to absorb and will get greater benefits from our investments in NRM and marketing catalyst capabilities. Net finance charges For the full year we expect our effective interest rate to remain around 3.0% as we continue to see the benefit from the refinancing with some risk of floating rates rising. We expect other finance charges for the full year to be roughly in line with fiscal

50 APPENDIX 1: 2/2 FORWARD LOOKING STATEMENTS Taxation Our current expectation is that the tax rate before exceptional items for the year ending 30 June 2018 will be approximately 20%, a 1ppt improvement versus our prior guidance. The decrease between our prior expectation and the estimated tax rate for the year ending 30 June 2018 is principally driven by the headline rate reduction in the United States introduced by the Tax Cuts and Jobs Act enacted on 22 December As for most multinationals the current tax environment is creating increased levels of uncertainty. Capital expenditure We expect our full year Capex spend to be in the range of 500m to 550m. Dividend We have a progressive dividend policy and we expect to maintain a mid single digit increase until we rebuild dividend cover back to our target range of 1.8 to 2.2x. Share buy-back In July 2017, the board approved a share buy-back programme to return up to 1.5bn of capital back to shareholders. We are on track and at the end of December 760m has been utilised to repurchase 29.5m shares with these shares having been cancelled. 50

51 APPENDIX 2: RECONCILIATION OF CASH FLOW STATEMENT Statement of cash flows ( m) F17 H1 F18 H1 Movement Reconciliation of free cash flow waterfall on slide 19 Operating profit after exceptional items 2,065 2, Operating profit after exceptional items 125 Increase in working capital excluding maturing stock (471) (428) 43 Depreciation, amortisation and impairment 9 Increase in maturing stock (22) (102) (80) Other items (45) Net increase in working capital (493) (530) (37) Post employment charges in operating profit (18) Depreciation, amortisation and impairment Operating profit movement excluding non-cash items 71 Dividends received 4 3 (1) Post employment charges in operating profit (18) Operating profit excluding exchange 86 Post employment payments (139) (111) 28 Exchange on operating profit (15) Post employment payments less amounts included in operating profit (76) (66) 10 Operating profit movement excluding non-cash items 71 Other Items 45 0 (45) Tax paid (307) (408) (101) Movement on operating profit as shown on Cash slide YoY waterfall ( m) Movement on other operating activities as shown on Cash slide YoY waterfall ( m) Net interest (149) (128) 21 Post employment payments 28 Net capex (184) (201) (17) Movements in loans and other investments (19) Movements in loans and other investments 1 (18) (19) Dividends received (1) Free cash flow 1,084 1,029 (55) Other operating activities 8 51

52 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. These factors 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, decreased consumer spending, adverse impacts on Diageo s customer, supplier and/or financial counterparties, or the imposition of import, investment or currency restrictions; the negotiating process surrounding, as well as the eventual 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; changes in consumer preferences and tastes, including as a result of changes in demographics, evolving social trends (including potential shifts in consumer tastes towards locally produced small batch products), changes in travel, vacation or leisure activity patterns, weather conditions, public health regulations and/or a downturn in economic conditions; any litigation or other similar proceedings (including with customs, competition, environmental, anti-corruption and other regulatory authorities), including litigation directed at the drinks and spirits industry generally or at Diageo in particular; changes in the 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 any impact on the cost and supply of water; (Continued on following page) 52

53 (continued from previous page) 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, packaging and labelling, product liability, 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; the consequences of any failure of internal controls, including those impacting compliance with 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; increased competitive product and pricing pressures, including as a result of actions by increasingly consolidated competitors, that could negatively impact Diageo s market share, distribution network, costs and/or pricing; 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 saving and productivity initiatives or inventory forecasting; contamination, counterfeiting or other circumstances which could harm the level of customer support for Diageo s brands and adversely impact its sales; increased costs for, or shortages of, talent, as well as labour strikes or disputes; any disruption to production facilities, business service centres or information systems, including as a result of cyber-attacks; 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. 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 2017 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 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. 53

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