Diageo plc — FY2023 Form 20-F summary
Period note: The supplied filing is Diageo’s annual report for the fiscal year ended 30 June 2023, not a report for 2022 Q4. Financial statements are prepared under IFRS and presented in pounds sterling for FY2023.
Business context and reporting period
Diageo is a global beverage alcohol company selling more than 200 brands in nearly 180 countries. Its portfolio spans spirits and beer, including Johnnie Walker, Guinness, Don Julio, Smirnoff and Baileys. The filing reports the year ended 30 June 2023, compared mainly with FY2022.
Financial performance and liquidity
| Metric | FY2023 | FY2022 / movement |
|---|---|---|
| Net sales, after excise duties | £17.113bn | £15.452bn; reported +11%, organic +6.5% |
| Volume | 243.4m equivalent units | 263.0m; reported -7%, organic -0.8% |
| Operating profit | £4.632bn | £4.409bn; reported +5.1% |
| Operating profit before exceptional items | £5.254bn | £4.797bn; reported +10%, organic +7.0% |
| Operating margin | Reported 27.1%; organic before exceptional items 30.9% | Reported margin declined 147bps; organic margin expanded 15bps |
| Profit attributable to parent shareholders | £3.734bn | £3.249bn; +15% |
| Basic EPS / EPS before exceptional items | 164.9p / 163.5p | 140.2p / 151.9p; adjusted EPS +7.6% |
| Net cash from operating activities / free cash flow | £3.024bn / £1.800bn | £3.935bn / £2.783bn |
| Net borrowings | £15.541bn | £14.137bn |
| Cash and committed undrawn bank facilities | £1.439bn / £2.678bn | Cash: £2.285bn; facilities: £2.789bn |
| Adjusted net borrowings / adjusted EBITDA | 2.6x | 2.5x; stated target range 2.5–3.0x |
| Recommended full-year dividend per share | 80.00p | 76.18p; +5% |
Organic net sales growth comprised positive price/mix of 7.3 percentage points and an organic volume decline of 0.8%. Free cash flow fell as higher working-capital outflows, tax, interest and capital investment more than offset operating profit growth. Net working capital outflow was £1.175bn, versus £179m in FY2022; capital expenditure was £1.180bn, versus £1.097bn. The reported operating margin figures reflect exceptional items and other reported movements; organic margin excludes specified items.
Material changes versus FY2022
- Organic net sales growth slowed to 6.5% from 21.4%, while organic volume moved from 10.3% growth to a 0.8% decline.
- Organic operating profit growth was 7.0%, compared with 26.3%; organic operating margin nevertheless expanded 15bps, as pricing and productivity partly offset inflation.
- Operating cash flow fell £911m and free cash flow fell £983m. Net borrowings increased £1.404bn.
- Exceptional operating charges increased to £622m from £388m, principally brand impairments and the supply chain agility programme. Reported EPS rose, with exceptional items contributing to the movement.
- Organic growth was strong in Europe (+11%), Asia Pacific (+13%), Latin America and Caribbean (+9%) and Africa (+5%); North America was flat. Results included a decline in US spirits and weaker Greater China sales.
- Diageo acquired Don Papa Rum, Balcones Distilling and Mr Black, among other transactions; it sold Guinness Cameroun S.A., Archers and selected USL brands. It also increased its controlling stake in East African Breweries to 65%.
Outlook, management commentary and significant items
- Guidance: Management reaffirmed medium-term guidance for consistent organic net sales growth of 5%–7% and sustainable organic operating profit growth of 6%–9% for FY2023–FY2025. The supplied filing text does not provide a specific numerical FY2024 outlook.
- Management priorities: Management cited quality market-share gains, brand investment, pricing, premiumisation, productivity and supply-chain resilience. Productivity savings were £450m in FY2023; marketing spend rose 6%.
- Exceptional and unusual items: FY2023 included £498m of brand impairment charges, mainly McDowell’s in India; a £100m charge for the supply chain agility programme; and a £44m distributor termination charge. A £310m gain arose from selling Guinness Cameroun S.A.; total exceptional non-operating items were a net £328m gain. The reported tax rate was 20.5%, versus 23.9%; the rate before exceptional items was 23.0%, and management expected approximately 24% for FY2024.
- Liquidity and investment: Management reported compliance with borrowing covenants and assessed the group as a going concern for at least 12 months. The five-year supply chain agility programme is expected to cost up to £500m. The company’s functional and presentation currencies changed to US dollars from 1 July 2023.
- Risks and contingencies: Principal risks include inflation and weaker consumer spending, foreign-exchange and interest-rate volatility, commodity and supply-chain costs, changing alcohol preferences and regulation, climate and water scarcity, cyber disruption, and tax disputes. Disclosed possible tax-assessment exposures were up to approximately £616m in Brazil and £90m in India; management said no provision was required. The filing also describes continuing USL-related litigation and a complaint concerning DeLeón tequila and Cîroc-related agreements; Diageo disputes the allegations. Outcomes and potential financial effects are uncertain.
- Audit and controls: PwC issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified impairment testing and provisions for tax uncertainties as critical audit matters.
Most important facts for investors to verify
- Confirm the period: this is FY2023, ended 30 June 2023, despite the request metadata referring to 2022 Q4.
- Reconcile organic growth and margins to IFRS results, especially the effect of exceptional impairments and the Guinness Cameroun disposal gain.
- Track cash conversion, working capital, capital expenditure and the increase in net borrowings; assess whether cash generation supports investment and shareholder distributions.
- Monitor execution of the 5%–7% sales and 6%–9% operating-profit medium-term guidance, alongside North American and Greater China performance.
- Review the Brazil and India tax exposures, USL-related proceedings, and the DeLeón/Cîroc dispute for developments or changes in estimated exposure.
- Assess impairment assumptions, the cost and benefits of the supply chain agility programme, and the effects of the move to US-dollar reporting.