DIAGEO PLC annual report, Q4 FY2022

Business context and reporting period

Diageo plc is a global beverage-alcohol company with more than 200 brands and sales in over 180 countries. This Form 20-F reports the fiscal year ended 30 June 2022, compared with the year ended 30 June 2021; it is not a report for calendar 2021 Q4. Financial statements are prepared under IFRS.

Financial performance and position

MetricFY2022FY2021 / change
Sales before excise duties£22.448bn£19.153bn
Net sales£15.452bn; up 21.4% reported and organic£12.733bn
Organic net sales driversVolume +10.3%; price/mix +11.1 percentage points—
Operating profit£4.409bn; up 18.2%£3.731bn
Organic operating profit£4.797bn before exceptional items; up 26.3%£3.746bn before exceptional items
Operating marginReported margin down 77 bps; organic margin up 121 bps to 31.0%Organic margin 29.8%
Profit attributable to parent shareholders£3.249bn; basic EPS 140.2p£2.660bn; basic EPS 113.8p
EPS before exceptional items151.9p; up 29.3%117.5p
Operating cash flow / free cash flow£3.935bn / £2.783bn£3.654bn / £3.037bn
Net borrowings£14.137bn£12.109bn
Adjusted net borrowings / adjusted EBITDA2.5x2.8x
Cash and undrawn committed facilities£2.285bn cash; £2.789bn facilities£2.749bn cash; £2.518bn facilities

All five regions delivered organic net sales growth: North America 14%, Europe 30%, Asia Pacific 16%, Africa 22% and Latin America and Caribbean 43%. Premium-plus brands generated 57% of reported net sales and 71% of organic net sales growth. Return on average invested capital rose 331 bps to 16.8%. The recommended full-year dividend was 76.18p per share, up 5%; 61 million shares were repurchased for £2.284bn.

Material changes versus the prior year

  • Net sales growth accelerated to 21.4%; volume rose 10.3% and positive price/mix contributed 11.1 points, reflecting price increases, premiumisation and recovery in on-trade sales.
  • Organic operating profit grew faster than net sales, lifting organic margin by 121 bps. Reported margin nevertheless fell 77 bps, mainly because of £388m of exceptional operating charges.
  • Free cash flow declined £254m despite higher operating cash flow, reflecting the prior year’s unusually strong working-capital benefit, increased capital expenditure, lower associate and joint-venture dividends, and higher cash taxes.
  • Net borrowings increased £2.028bn, including substantial buybacks and dividends; leverage improved to 2.5x from 2.8x under Diageo’s adjusted measure.

Outlook, risks and unusual items

Management’s medium-term guidance for fiscal 2023–2025 is organic net sales growth of 5%–7% consistently and organic operating profit growth of 6%–9% sustainably. Diageo targets increasing its total beverage alcohol value share from 4% to 6% by 2030. Fiscal 2023’s operating environment was expected to remain challenging, with inflation, supply disruption, geopolitical uncertainty and possible weakening of consumer spending. The company expects its pre-exceptional tax rate in fiscal 2023 to be 22%–24%.

A five-year supply-chain agility programme began in fiscal 2023, intended to improve resilience, efficiency and sustainability; management expects a five-year payback, with most savings in fiscal 2025 and beyond. Management also expects approximately £1bn of environmental-sustainability investment by 2030. These expectations are forward-looking and unaudited.

  • Exceptional charges and disposals: £388m exceptional operating loss included £336m of impairments (£240m McDowell’s No.1, £77m Bell’s and £19m Smirnov-related goodwill) and £50m of direct Russia wind-down costs. The total Russia wind-down impact was £146m. Diageo also recorded a £95m loss on selling Meta Abo Brewery, a £19m loss related to the proposed Windsor disposal and a £91m gain on selling Picon. Separately, Turkey’s first-time hyperinflation accounting resulted in a £312m opening-equity impairment adjustment.
  • Geopolitical exposure: Diageo halted shipments and sales in Russia in March 2022 and decided to wind down its Russian operations in June. Russia represented less than 1% of reported net sales and operating profit in each of FY2021 and FY2022. Broader consequences of the Ukraine conflict remain a risk.
  • Contingencies: Disclosed possible tax-assessment exposures are up to approximately £545m in Brazil and £131m in India; management said no provision was required. The filing also describes ongoing USL-related litigation and an SEC information request, whose potential financial outcomes were not clearly quantifiable.
  • Principal business risks: inflation and weaker consumer spending, commodity and energy costs, supply-chain disruption, foreign-exchange and interest-rate movements, regulation and alcohol taxation, competition, climate and water stress, and legal, tax, cyber and reputational exposures. Management states that climate change is not expected to have a material financial impact by 2030, while severe drought could become material by 2050 without mitigation.

PwC issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective at 30 June 2022.

Important facts for investors to verify

  • Reconcile reported results with the company’s non-GAAP organic growth, organic margin, free cash flow and adjusted leverage measures.
  • Assess the sustainability of price/mix-led growth and the extent to which distributor inventory replenishment contributed to US shipments.
  • Review cash conversion, working-capital movements, higher capital expenditure and the pace of planned supply-chain programme savings.
  • Track net debt, leverage, buybacks, dividends and the remaining return-of-capital commitments against cash generation.
  • Monitor impairment assumptions, the Russia wind-down and disposal outcomes, and the Brazil and India tax exposures and USL-related proceedings.
  • Compare progress against fiscal 2023–2025 guidance with the stated inflation, consumer-demand, supply and currency risks.