Business context and reporting period
Diageo plc is a global beverage-alcohol producer, with more than 200 brands sold in over 180 countries. This is its annual Form 20-F for the fiscal year ended 30 June 2021—not a standalone 2020 Q4 filing. Financial statements are prepared under IFRS and presented in pounds sterling.
Financial performance and position
| Metric | FY2021 | FY2020 | Change / context |
|---|---|---|---|
| Sales | £19.153bn | £17.697bn | Up 8.3% reported |
| Net sales | £12.733bn | £11.752bn | Up 8.3% reported; 16.0% organic |
| Operating profit | £3.731bn | £2.137bn | Up 74.6% reported; 17.7% organic before exceptional items |
| Profit before taxation | £3.706bn | £2.043bn | Increase reflects recovery and substantially lower exceptional charges |
| Profit for the year | £2.799bn | £1.454bn | Parent shareholders’ attributable profit was £2.660bn versus £1.409bn |
| Basic EPS | 113.8p | 60.1p | EPS before exceptional items was 117.5p, up from 109.4p |
| Organic operating margin | 30.9% | 30.4% | Up 46 basis points; reported margin rose 1,112 basis points |
| Net cash from operating activities | £3.654bn | £2.320bn | Up £1.334bn |
| Free cash flow | £3.037bn | £1.634bn | Up £1.403bn |
| Net borrowings | £12.109bn | £13.246bn | Reduced by £1.137bn |
| Adjusted net borrowings / adjusted EBITDA | 2.8x | 3.3x | Within the company’s 2.5–3.0x target range |
Cash and cash equivalents were £2.749bn, versus £3.323bn. Undrawn committed bank facilities totalled £2.518bn, down from £5.285bn. Diageo reported compliance with financing covenants and no material off-balance-sheet financing arrangements. Total equity was £8.431bn, broadly unchanged from £8.440bn.
Material changes versus the prior comparable period
- Organic net sales rebounded after declining in FY2020, with organic growth across all regions, driven by volume growth of 11.2% and positive price/mix of 4.8%.
- Reported operating profit rose sharply in part because FY2020 included £1.345bn of impairment charges. FY2021 operating profit included £15m of exceptional operating charges.
- North America led growth; Europe and Turkey remained uneven, with organic operating profit down 5%. Travel retail remained severely affected, including net sales declines of 56% in Europe and 63% in Asia Pacific and Latin America and Caribbean.
- Gross margin fell 40 basis points, reflecting adverse mix, particularly in Guinness. Organic operating margin improved through overhead efficiencies and the comparison with prior-year disruption costs, partly offset by higher marketing spending.
- Marketing expenditure increased 23% on an organic basis. Diageo resumed its share-buyback programme in May 2021; it purchased 3.2 million shares for £109m during the year, compared with £1.282bn in FY2020.
Outlook, risks, contingencies and unusual items
- Management expected net-sales momentum to continue into FY2022 but warned of near-term volatility in some markets. It remained positive about long-term industry growth, premiumisation and spirits gaining share of total beverage alcohol. No quantified group sales or profit growth guidance is provided in the supplied filing text.
- The company expected its FY2022 tax rate before exceptional items to be 22%–24%; FY2021 was 22.2%.
- Covid-19 risks included further restrictions on hospitality and travel, uneven recovery, changes in consumer demand, supply-chain disruption and possible further impairment. Management cited constrained travel retail and on-trade recovery as ongoing challenges.
- Other principal risks include foreign-exchange and interest-rate volatility, commodity and packaging costs, water and climate risks, alcohol regulation and taxation, litigation, competition, cyber threats, and acquisition and inventory-forecasting risks. Management cited rising agave costs and supply-chain constraints.
- Exceptional FY2021 items included a £15m provision for ongoing litigation in Turkey, a £5m guaranteed-minimum-pension equalisation charge, £5m for the Raising the Bar programme, and a £7m inventory provision release. FY2020’s exceptional impairment charge was £1.345bn. FY2021 also included exceptional tax charges of £46m related to the UK tax-rate increase and £42m related to the Netherlands tax-rate change.
- Potential tax exposures disclosed were up to approximately £449m in Brazil and £140m in India; Diageo stated it had not provided for these matters because it assessed that an adverse outcome was less than probable. These are disclosed possible exposures, not recorded liabilities.
- Other legal matters include ongoing USL-related proceedings in India, including litigation involving former USL chairman Vijay Mallya, and an SEC information request concerning operations in certain markets. The filing says outcomes and potential financial effects cannot currently be estimated clearly. The 20-F also discloses USL-related litigation that could, in an adverse outcome, affect Diageo’s title to a 6.98% USL stake, while management believes it would retain control of USL.
- The proposed FY2021 final dividend was 44.59p per share, bringing the full-year dividend to 72.55p, up 4%. Dividend cover was 1.6x, below the stated target range of 1.8–2.2x. The company restarted a share-return programme, with a second phase of up to £1bn expected to be completed by 30 June 2022; the overall programme completion date was extended to 30 June 2024.
- Diageo reported net zero carbon goals for direct operations by 2030 and its full value chain by 2050 or sooner. It estimated around £1bn of environmental-sustainability capital expenditure over the next decade. Its climate scenario analysis did not identify a material financial impact in the scenarios assessed, but the analysis covered selected regions and carries stated limitations.
PwC issued an unqualified audit opinion on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of 30 June 2021.
Important facts for investors to verify
- Separate underlying growth from reported growth: confirm the impact of currency, acquisitions and disposals, exceptional items, and the FY2020 impairment comparison.
- Assess cash-flow quality: free cash flow benefited from working-capital movements, including higher creditors, and receipt of a delayed associate dividend.
- Review leverage and liquidity capacity, including £12.109bn net borrowings, 2.8x adjusted leverage, £2.518bn undrawn facilities, and the maturity profile of debt and leases.
- Track whether the 22%–24% FY2022 tax-rate expectation and the dividend policy remain supportable, particularly given 1.6x dividend cover.
- Monitor recovery in hospitality and travel retail, supply constraints and input-cost inflation, and whether these affect sales mix and margins.
- Review developments in the Brazil and India tax cases, USL-related litigation, the Turkey litigation provision, and the SEC information request.
- Check progress against climate, water, packaging and inclusion commitments, including the cost, measurement basis and delivery of long-term targets.