Diageo plc — FY2019 Form 20-F Summary
Period and scope: This is Diageo’s annual report for the fiscal year ended 30 June 2019, prepared under IFRS. Although the request metadata says “2018 Q4,” the filing covers FY2019; it does not provide a standalone 2018 Q4 results summary. Amounts below are in pounds sterling unless stated otherwise.
Financial performance
| Metric | FY2019 | FY2018 | Change / context |
|---|---|---|---|
| Sales, including excise duties | £19.294bn | £18.432bn | Up 4.7% reported |
| Excise duties | £6.427bn | £6.269bn | Net sales are sales less excise duties |
| Net sales | £12.867bn | £12.163bn | Up 5.8% reported; up 6.1% organically |
| Operating profit | £4.042bn | £3.691bn | Up 9.5% reported; organic operating profit up 9.0% |
| Operating profit before exceptional items | £4.116bn | £3.819bn | Organic operating margin improved 83 basis points to 32.0% |
| Profit before tax | £4.235bn | £3.740bn | Included a £144m non-operating gain on disposals |
| Profit for the year | £3.337bn | £3.144bn | Up 6.1% |
| Basic EPS | 130.7p | 121.7p | Up 7.4%; EPS before exceptional items was 130.8p, up 10.3% |
| Net cash from operating activities | £3.248bn | £3.084bn | Up £164m |
| Free cash flow | £2.608bn | £2.523bn | Up £85m |
| Net borrowings | £11.277bn | £9.091bn | Increased £2.186bn |
Margins, cash flow and returns
- Reported operating margin rose 107 basis points. Organic margin expansion reflected improved price/mix and productivity savings, partly offset by cost inflation and higher marketing investment.
- Marketing expenditure increased to £2.042bn from £1.882bn. Management said marketing investment rose 8% organically, ahead of organic net sales growth.
- Operating cash flow benefited from profit growth and exchange movements, partly offset by weaker working-capital gains and higher tax payments. Free cash flow also faced increased investment in maturing inventory and capital expenditure; capital expenditure was £671m versus £584m.
- Return on average invested capital increased to 15.1% from 14.3%. Return on closing invested capital was 32.9%, up 610 basis points, principally because net assets decreased.
Liquidity, debt and shareholder returns
- Cash and cash equivalents were £932m. Undrawn committed bank facilities were £2.756bn, all expiring after two years. Management said funding was sufficient for working-capital requirements; the group reported compliance with its financing covenants.
- Adjusted net borrowings to adjusted EBITDA increased to 2.5x from 2.2x, at the lower end of Diageo’s target range of 2.5x–3.0x. Adjusted net borrowings were £12.123bn and adjusted EBITDA was £4.802bn.
- The group repurchased 94.7m shares for an aggregate £2.775bn and paid £1.623bn in equity dividends. The recommended full-year dividend was 68.57p per share, up 5%, with dividend cover of 1.9x.
Material changes versus FY2018
- Organic net sales growth accelerated to 6.1% from 5.0%; organic operating profit growth increased to 9.0% from 7.6%.
- Net sales rose across all regions organically. Asia Pacific and Latin America and Caribbean each grew 9%; Africa grew 7%, North America 5%, and Europe and Turkey 4%.
- Reported results included favourable exchange effects and the effects of acquisitions and disposals. Diageo sold 19 brands to Sazerac for $550m (£435m), recording a £155m pre-tax exceptional gain. The sale proceeds contributed to shareholder returns.
- The reported tax rate rose to 21.2% from 15.9%, while the tax rate before exceptional items was broadly stable at 20.6% versus 20.7%. FY2018 had benefited from a large US tax-reform credit.
- Net borrowings rose by £2.186bn, reflecting share buybacks, dividends, bond and other borrowing movements, and £784m spent buying additional non-controlling interests in Sichuan Shuijingfang. Diageo’s holding in that business increased to 63.14%.
Outlook, risks and unusual items
- Management outlook: For the three years ending 30 June 2022, management expected mid-single-digit organic net sales growth and organic operating profit growth of 5%–7%, ahead of net sales growth. For FY2020, the pre-exceptional tax rate was expected to be 21%–22%.
- Exceptional and non-recurring items: FY2019 included £74m of exceptional operating charges, including £35m for Korean indirect tax, £21m for UK guaranteed-minimum-pension equalisation, and £18m of French tax-audit penalties. The French settlement also included £61m tax and £9m interest; it was agreed in July 2019 and closed open issues through FY2017. The £144m non-operating gain primarily reflected the Sazerac brand sale.
- Tax contingencies: The European Commission’s state-aid decision concerning the UK Group Financing Exemption could result in a payment during FY2020. Diageo stated a maximum potential liability of approximately £275m if the decision is upheld, had appealed, and had not recorded a provision. Disclosed possible exposures were up to approximately £313m for Brazil and £180m for India; management considered the likelihood of the tax authorities prevailing lower than probable but higher than remote. Tax provisions for uncertainties totalled £251m.
- Other legal and regulatory matters: Proceedings concerning former USL chairman Vijay Mallya and the Watson guarantee remain ongoing. A UK court ruled that Watson and CASL owed DHN amounts including approximately $135m plus interest, but the ordered payments were not made by the deadline; Diageo was considering enforcement. Diageo also disclosed an SEC inquiry into US distribution and disclosures and distribution in certain other markets; the possible outcome could not be estimated clearly.
- Principal business risks: Economic and political volatility, currency and interest-rate movements, Brexit-related trade or regulatory changes, consumer preference shifts, competition, excise and other taxes, commodity and energy costs, water scarcity and climate change, regulation of alcohol marketing and sales, cyber and operational disruption, litigation, and the ability to protect brands and forecast aged inventory.
- Brexit: Management assessed the direct financial impact as not material and said it had stock and mitigation plans in place, while acknowledging uncertainty around future UK trade arrangements and possible disruption.
- Accounting change: IFRS 16 was to be adopted from 1 July 2019. Diageo estimated approximately £0.3bn of additional lease liabilities and similar right-of-use assets, with no net cash-flow impact and no significant expected effect on profit before tax or EPS.
- PwC gave unqualified opinions on the consolidated financial statements and internal control over financial reporting. The auditor highlighted impairment testing of brands and goodwill, uncertain tax provisions, and legal contingencies as critical audit matters.
Most important facts for investors to verify
- Whether organic growth, margin expansion and free-cash-flow conversion persist, particularly after higher brand investment and maturing-inventory spending.
- How leverage evolves relative to the 2.5x–3.0x target as Diageo funds dividends, buybacks, acquisitions and capital investment.
- The amount and timing of any payment related to the UK Group Financing Exemption case, and developments in the Brazil and India tax disputes.
- Material developments in USL-related litigation, the Mallya/Watson recovery efforts, the SEBI appeal and the SEC inquiry.
- Whether the announced return of up to £4.5bn of capital through FY2022 is delivered without constraining investment or balance-sheet flexibility.
- Whether key impairment assumptions for goodwill and brands remain supportable; the filing identifies India and the Windsor Premier brand as sensitive to changes in forecast growth or discount rates.