Diageo Earnings 2019-06-30

Diageo Earnings 2019-06-30

DEO 20F Annual Report

Balance Sheet	Income Statement	Cash Flow

20-F 1 a20-ff19p12.htm 20-F Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: 30 June 2019

Commission file number 1-10691

DIAGEO plc

(Exact name of Registrant as specified in its charter)

England and Wales

(Jurisdiction of incorporation or organisation)

Lakeside Drive, Park Royal, London NW10 7HQ, England

(Address of principal executive offices)

Siobhan Moriarty, Company Secretary

Tel: +44 20 8978 6000

E-mail: the.cosec@diageo.com

Lakeside Drive, Park Royal, London NW10 7HQ, England

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:



Title of each class	Trading symbol(s)	Name of each exchange on which registered
American Depositary Shares	DEO	New York Stock Exchange
Ordinary shares of 28¹⁰¹/₁₀₈ pence each		New York Stock Exchange⁽ⁱ⁾
2.875% Guaranteed Notes due 2022	DEO/22	New York Stock Exchange
8.000% Guaranteed Notes due 2022	DEO/22A	New York Stock Exchange
7.450% Guaranteed Notes due 2035	DEO/35	New York Stock Exchange
4.250% Guaranteed Notes due 2042	DEO/42	New York Stock Exchange


(i)	Not for trading, but only in connection with the registration of American Depositary Shares representing such ordinary shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report: 2,600,942,652 ordinary shares of 28¹⁰¹/₁₀₈ pence each.

Indicate by check mark if each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes þ No ¨

If this report is an annual or transition report, indicate by check mark if each registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ Accelerated Filer ¨ Non-Accelerated Filer ¨ Emerging growth company ¨

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ¨



†	The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:



U.S. GAAP ¨	International Financial Reporting Standards as issued by the International Accounting Standards Board þ	Other ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Contents




5			Cross reference to Form 20-F
7			Introduction
9			Recent trends
10			Historical information

14			Strategic report
14			Business description
14			Our business model
16			Our strategy
22			Our brands
23			Our global reach
24			How we measure performance: key performance indicators
29			Chairman’s statement
32			Chief Executive’s statement
35			Market dynamics
38			Risk factors
47			Cautionary statement concerning forward-looking statements

49			Business review
49			Operating results 2019 compared with 2018
84			Liquidity and capital resources
86			Contractual obligations and commitments
86			Off-balance sheet arrangements
86			Risk management
87			Critical accounting policies
87			New accounting standards
88			Our role in society
110			Definitions and reconciliation of non-GAAP measures to GAAP measures


118			Governance
118			Board of Directors and Company Secretary
121			Executive Committee
124			Corporate governance report
136			Audit Committee report
140			Nomination Committee report
142			Directors’ remuneration report
174			Directors’ report

Contents (continued)




178			Financial statements
178			Report of independent registered public accounting firm
181			Consolidated income statement
182			Consolidated statement of comprehensive income
183			Consolidated balance sheet
184			Consolidated statement of changes in equity
185			Consolidated statement of cash flows
186			Notes to the consolidated financial statements
186			Accounting information and policies
190			Results for the year
206			Operating assets and liabilities
227			Risk management and capital structure
244			Other financial information

253			Additional information for shareholders
253			Legal proceedings
253			Articles of association
257			Exchange controls
257			Documents on display
257			Taxation
260			Warning to shareholders - share fraud
261			Exhibits
263			Signature

264			Glossary of terms and US equivalents

Cross reference to Form 20-F




Item	Required item in Form 20-F	Page(s)
Part I
1.	Identity of directors, senior management and advisers	Not applicable
2.	Offer statistics and expected timetable	Not applicable
3.	Key information
	A. Selected financial data	10-13
	B. Capitalisation and indebtedness	Not applicable
	C. Reason for the offer and use of proceeds	Not applicable
	D. Risk factors	38-46
4.	Information on the company
	A. History and development of the company	7, 12, 18-21, 51, 55-57, 197-198, 199-201, 205-208, 250
	B. Business overview	7, 18-23, 49-83, 190-191, 196-198
	C. Organisational structure	252
	D. Property, plant and equipment	18, 19, 49-83, 196, 214-216
4A.	Unresolved staff comments	Not applicable
5.	Operating and financial review and prospects
	A. Operating results	10-13, 20, 23-28, 35-36, 49-83, 114, 198-199, 227-236
	B. Liquidity and capital resources	10-13, 27, 58-59, 84-86, 114, 223-239, 250
	C. Research and development, patents and licenses, etc.	20
	D. Trend information	9, 32-37
	E. Off-balance sheet arrangements	86
	F. Tabular disclosure of contractual obligations	86
	G. Safe harbor	—
6.	Directors, senior management and employees
	A. Directors and senior management	118-122, 168
	B. Compensation	148-173, 216-223
	C. Board practices	118-123, 136-139, 153-155, 142-171
	D. Employees	195
	E. Share ownership	148-173, 242-243
7.	Major shareholders and related party transactions
	A. Major shareholders	175
	B. Related party transactions	172, 223, 250-251
	C. Interests of experts and counsel	Not applicable
8.	Financial information
	A. Consolidated statements and other financial information	181-252
	B. Significant changes	252
9.	The offer and listing
	A. Offer and listing details	1, 175
	B. Plan of distribution	Not applicable
	C. Markets	175
	D. Selling shareholders	Not applicable
	E. Dilution	Not applicable
	F. Expenses of the issue	Not applicable

Cross reference to Form 20-F (continued)




Item	Required item in Form 20-F	Page(s)
10.	Additional information
	A. Share capital	Not applicable
	B. Memorandum and articles of association	253-256
	C. Material contracts	153-154, 239-243
	D. Exchange controls	257
	E. Taxation	257-260
	F. Dividends and paying agents	Not applicable
	G. Statement by experts	Not applicable
	H. Documents on display	257
	I. Subsidiary information	Not applicable
11.	Quantitative and qualitative disclosures about market risk	86, 132-136, 227-236
12.	Description of securities other than equity securities
	A. Debt securities	Not applicable
	B. Warrants and rights	Not applicable
	C. Other securities	Not applicable
	D. American depositary shares	176
Part II
13.	Defaults, dividend arrearages and delinquencies	Not applicable
14.	Material modifications to the rights of security holders and use of proceeds	Not applicable
15.	Controls and procedures
	A. Disclosure controls and procedures	132
	B. Management’s report on internal control over financial reporting	134
	C. Attestation report of the registered public accounting firm	178-180
	D. Changes in internal control over financial reporting	134
16A.	Audit committee financial expert	139
16B.	Code of ethics	133
16C.	Principal accountant fees and services	138-139, 195
16D.	Exemptions from the listing standards for audit committees	Not applicable
16E.	Purchases of equity securities by the issuer and affiliated purchasers	57, 239-243, 252
16F.	Change in registrant’s certifying accountant	Not applicable
16G.	Corporate governance	134-135
16H.	Mine safety disclosure	Not applicable
Part III
17.	Financial statements	Not applicable
18.	Financial statements	See Item 8
19.	Exhibits	261-262
Additional information
	Glossary of terms and US equivalents	264-265

Introduction

Diageo is a global leader in the beverage alcohol industry. Its geographic breadth and range of industry leading brands across categories and price points is unparalleled.

Diageo plc is incorporated as a public limited company in England and Wales. Diageo was incorporated as Arthur Guinness Son and Company Limited on 21 October 1886. The group was formed by the merger of Grand Metropolitan Public Limited Company (GrandMet) and Guinness plc (the Guinness Group) in December 1997. Diageo plc’s principal executive office is located at Lakeside Drive, Park Royal, London NW10 7HQ and its telephone number is +44 (0) 20 8978 6000. Diageo plc’s agent for service in the United States for the purposes of Diageo’s registration statement on Form F-3 (333-224340) is General Counsel, Diageo North America, Inc., 801 Main Avenue (6078-06), Norwalk, CT 06851.

This is the Annual Report on Form 20-F of Diageo plc for the year ended 30 June 2019. The information set out in this Form 20-F does not constitute Diageo plc’s statutory accounts under the UK Companies Act for the years ended 30 June 2019, 2018 or 2017. The accounts for 2018 and 2017 have been delivered to the registrar of companies for England and Wales and those for 2019 will be delivered in due course.

This document contains forward-looking statements that involve risk and uncertainty. 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 beyond Diageo’s control. For more details, please refer to the Cautionary statement concerning forward-looking statements on pages 47-48.

The content of the company’s website (www.diageo.com) should not be considered to form a part of or be incorporated into this report. This report 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. In this report, the term ‘company’ refers to Diageo plc and terms ‘group’ and ‘Diageo’ refer to the company and its consolidated subsidiaries, except as the context otherwise requires. A glossary of terms used in this report is included at the end of the report.

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and related interpretations as adopted for use in the European Union (EU) and as issued by the International Accounting Standards Board (IASB). IFRS as adopted by the EU differs in certain respects from IFRS as issued by the IASB. The differences have no impact on the group’s consolidated financial statements for the years presented. Unless otherwise indicated, all financial information contained in this document has been prepared in accordance with IFRS.

The financial performance expectations related to future organic net sales and organic operating profit (the financial performance expectations) included in this document have been prepared by and are the responsibility of Diageo’s management. PricewaterhouseCoopers LLP has not audited, reviewed, examined, compiled nor applied agreed-upon procedures with respect to the financial performance expectations and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers LLP report included in this document relates to Diageo’s historical financial statements. It does not extend to the financial performance expectations and should not be read to do so. The financial performance expectations were not prepared with a view toward compliance with published guidelines of the Securities and Exchange Commission or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information.

Information presented

Organic movements and organic operating margins are before exceptional items. Commentary, unless otherwise stated, refers to organic movements. Share, unless otherwise stated, refers to value share. For a definition of organic movement and reconciliations of non-GAAP measures to GAAP measures see page 110.

The brand ranking information presented in this report, when comparing information with competitors, reflects data published by sources such as Impact Databank, Global Data, Nielsen and IWSR. Market data information and competitive set classifications are taken from independent industry sources in the markets in which Diageo operates. Diageo’s financial year end is 30 June, and such data may relate to dates other than 30 June or periods other than the year ended 30 June, such as calendar year end.

Introduction (continued)

Disclosures not included in Annual Report on Form 20-F

The following pages and sections of this document do not form part of the Annual Report on Form 20-F and are furnished to the SEC for information only:

•

Disclosures under the headings ‘We innovate’, ‘We make’, ‘We market’, ‘We sell’, ‘Broad portfolio’, ‘Markets’, ‘Global functions, support and governance’, ‘Our people’, ‘Our values’, ‘Our role in society’, ‘Our brands’, ‘Our geographic footprint’, ‘Brilliant execution’, ‘Efficient supply and procurement’, and ‘Financial strength’ in the section ‘Strategic report – Our business model’ on pages 14 and 15.


•	Disclosures under the headings ‘Our sustainability and responsibility priorities and our commitment to governance and ethics’, ‘Promoting positive drinking’, ‘Building thriving communities’, ‘Reducing our environmental impact’, and ‘Highest standards of governance and ethics’ in the section ‘Strategic report – Our strategy’ on page 17.


•	Disclosures included under the titles ‘Water withdrawal (%)’ and ‘Carbon emissions (%)’ and ‘Number of employees (%)’ in the section ‘Strategic report – Our global reach – Diageo reports as five regions’ on page 23.


•	Disclosures on pages 26 and 28 in the section ‘Strategic report – How we measure performance: key performance indicators’ of non-financial key performance indicators.


•	Disclosures under the heading ‘Culture’, ‘Diageo in society’ ‘Communities’ and ‘Looking ahead’ in the Chairman’s statement on pages 29 to 31.


•	Disclosures under the heading ‘Trusted and respected’ in the Chief Executive’s statement on pages 33 and 34.


•	Disclosures included under the titles ‘Safeguarding our future by earning trust and respect’, ‘Promoting positive drinking’, ‘Promoting inclusivity and human rights’, ‘Climate change, water stress and a responsible environmental strategy’ and ‘Diageo sites located in water-stressed areas’ in the section ‘Strategic report – Market dynamics’ on pages 36 and 37.


•	Disclosures included under the titles ‘Sustainability and responsibility’ on pages 61, 65, 69, 73, and 77 in relation to each reporting segment in the Business review.


•	Disclosures in the section ‘Strategic report – Our role in society’ on pages 88 to 109.


•	Disclosures under the heading ‘Relations with shareholders’, ‘Internal control and risk management’, ‘Political donations’ , ‘Going concern’, ‘Responsibility Statement’, ‘Directors' responsibilities in respect of the Annual Report and financial statements’ in the Corporate governance report on pages 131 to 134.

Recent trends

The following comments were made by Ivan Menezes, Chief Executive of Diageo, in Diageo’s preliminary results announcement on 25 July 2019:

“Diageo has delivered another year of strong performance. Organic volume and net sales growth was broad based across regions and categories, with new product innovation being a strong contributor. We expanded organic operating margin ahead of our guidance and increased investment behind our brands ahead of organic net sales growth.

Fiscal 19 has been another year of strong free cash flow delivery at £2.6 billion and we have returned £2.8 billion to shareholders via share buybacks. The Board has approved plans for an additional return to shareholders of up to £4.5 billion over Fiscal 20 to Fiscal 22.

Our focus on quality sustainable growth is backed by a culture of everyday efficiency that enables us to invest smartly in marketing and growth initiatives while expanding margins.

These results reflect the steady progress we are making and as we look ahead we see attractive opportunities to deliver consistent growth and create shareholder value. In the medium term I expect Diageo to maintain organic net sales growth in the mid-single digit range and to grow organic operating profit ahead of net sales in the range of 5%-7%.”

Brexit and related risks

There continues to be uncertainty with respect to the process surrounding the United Kingdom’s proposed exit from the European Union, and in relation to the political environment more generally in the United Kingdom. We continue to believe that, in the event of either a negotiated exit or no-deal scenario, the direct financial impact to Diageo will not be material. In the EU, we expect that the vast majority of our finished case goods will continue to trade tariff free, with no change to existing tariffs in either scenario. There remains uncertainty in relation to future trading arrangements between the UK and the rest of the world where today we rely on a number of existing EU Free Trade Agreements (FTAs) with third party countries. However, more recently, a number of countries have agreed with the UK to continue to trade on these terms in the event of a ‘no deal’ outcome. If the UK Government is unable to renew all of the existing FTAs on which we rely, trading could revert to WTO rules.

We have further considered the principal impact to our supply chain of a no-deal scenario which we have assessed as limited and believe that we have appropriate stock levels in place to mitigate this risk. The full implications of Brexit will not be understood until future tariffs, trade, regulatory, tax, and other free trade agreements to be entered into by the United Kingdom are established. Furthermore, we could experience changes to laws and regulations post Brexit, in areas such as intellectual property rights, employment, environment, supply chain logistics, data protection, and health and safety.

A cross-functional working group is in place that meets on a regular basis to identify and assess the consequences of Brexit, with all major functions within our business represented. We continue to monitor this risk area very closely, as well as the broader environment risks, including a continuing focus on identifying critical decision points to ensure potential disruption is minimised, and take prudent actions to mitigate these risks wherever practical.

Historical information

The following tables present selected consolidated financial data for Diageo for the five years ended 30 June 2019 and as at the respective year ends. The data presented below for the five years ended 30 June 2019 and the respective year ends has been derived from Diageo’s consolidated financial statements, audited by Diageo’s independent auditor, PricewaterhouseCoopers LLP for each of the four years ended 30 June 2019. The group’s former auditor, KPMG LLP (KPMG) reported on the financial statements for the year ended 30 June 2015.

Income statement data



	Year ended 30 June
	2019 £ million		2018 £ million		2017 £ million		2016 £ million		2015 £ million
Sales	19,294		18,432		18,114		15,641		15,996
Excise duties	(6,427	)	(6,269	)	(6,064	)	(5,156	)	(5,153	)
Net sales	12,867		12,163		12,050		10,485		10,813
Cost of sales	(4,866	)	(4,634	)	(4,680	)	(4,251	)	(4,610	)
Gross profit	8,001		7,529		7,370		6,234		6,203
Marketing	(2,042	)	(1,882	)	(1,798	)	(1,562	)	(1,629	)
Other operating expenses	(1,917	)	(1,956	)	(2,013	)	(1,831	)	(1,777	)
Operating profit	4,042		3,691		3,559		2,841		2,797
Non-operating items	144		—		20		123		373
Net interest and other finance charges	(263	)	(260	)	(329	)	(327	)	(412	)
Share of after tax results of associates and joint ventures	312		309		309		221		175
Profit before taxation	4,235		3,740		3,559		2,858		2,933
Taxation	(898	)	(596	)	(732	)	(496	)	(466	)
Profit from continuing operations	3,337		3,144		2,827		2,362		2,467
Discontinued operations	—		—		(55	)	—		—
Profit for the year	3,337		3,144		2,772		2,362		2,467
Weighted average number of shares	million		million		million		million		million
Shares in issue excluding own shares	2,418		2,484		2,512		2,508		2,505
Dilutive potential ordinary shares	10		11		11		10		12
	2,428		2,495		2,523		2,518		2,517
Per share data	pence		pence		pence		pence		pence
Dividend per share	68.57		65.3		62.2		59.2		56.4

Basic earnings per share
Continuing operations	130.7		121.7		108.2		89.5		95.0
Discontinued operations	—		—		(2.2	)	—		—
	130.7		121.7		106.0		89.5		95.0
Diluted earnings per share
Continuing operations	130.1		121.1		107.7		89.1		94.6
Discontinued operations	—		—		(2.2	)	—		—
	130.1		121.1		105.5		89.1		94.6

Historical information (continued)

Balance sheet data



	As at 30 June
	2019 £ million		2018 £ million		2017 £ million		2016 £ million		2015 £ million
Non-current assets	21,923		21,024		20,196		19,639		18,134
Current assets	9,373		8,691		8,652		8,852		7,670
Total assets	31,296		29,715		28,848		28,491		25,804
Current liabilities	(7,003	)	(6,360	)	(6,660	)	(6,187	)	(5,290	)
Non-current liabilities	(14,137	)	(11,642	)	(10,160	)	(12,124	)	(11,258	)
Total liabilities	(21,140	)	(18,002	)	(16,820	)	(18,311	)	(16,548	)
Net assets	10,156		11,713		12,028		10,180		9,256
Share capital	753		780		797		797		797
Share premium	1,350		1,349		1,348		1,347		1,346
Other reserves	2,372		2,133		2,693		2,625		1,994
Retained earnings	3,886		5,686		5,475		3,761		3,634
Equity attributable to equity shareholders of the parent company	8,361		9,948		10,313		8,530		7,771
Non-controlling interests	1,795		1,765		1,715		1,650		1,485
Total equity	10,156		11,713		12,028		10,180		9,256
Net borrowings	(11,277	)	(9,091	)	(7,892	)	(8,635	)	(9,527	)

Historical information (continued)

Notes to the historical information

1. Accounting policies The consolidated financial statements for each of the five years ended 30 June 2019 have been prepared in accordance with IFRS. The IFRS accounting policies applied by the group to prepare the financial information in this document are disclosed in the notes to the consolidated financial statements.

2. Exceptional items Exceptional items are those that in management’s judgement need to be disclosed by virtue of their size and/or nature. Such items are included within the income statement caption to which they relate, and are separately disclosed in the notes to the consolidated financial statements. An analysis of exceptional items is as follows:



	Year ended 30 June
	2019 £ million		2018 £ million		2017 £ million		2016 £ million		2015 £ million
Items included in operating profit
Indirect tax in Korea	(35	)	—		—		—		—
Guaranteed minimum pension equalisation	(21	)	—		—		—		—
French tax audit penalty	(18	)	—		—		—		—
Brand, goodwill, tangible and other assets impairment	—		(128	)	—		(118	)	—
Competition authority investigation in Turkey	—		—		(33	)	—		—
Customer claim in India	—		—		(32	)	—		—
Disengagement agreements relating to United Spirits Limited	—		—		23		(49	)	—
Restructuring programmes	—		—		—		—		(82	)
Korea settlement	—		—		—		—		(146	)
Associate impairment	—		—		—		—		(41	)
	(74	)	(128	)	(42	)	(167	)	(269	)
Non-operating items
Gains on sale of businesses	144		—		20		215		247
Step up gains	—		—		—		—		156
Other non-operating items	—		—		—		(92	)	(30	)
	144		—		20		123		373
French tax audit interest	(9	)	—		—		—		—

Items included in taxation
French audit settlement	(61	)	—		—		—		—
Tax rate change in the Netherlands	51		—		—		—		—
US tax reform	—		354		—		—		—
UK transfer pricing settlement	—		(143	)	—		—		—
UK industrial building allowance	—		(21	)	—		—		—
Tax credit on exceptional operating items	4		13		11		7		51
Tax on sale of businesses	(33	)	—		(7	)	49		—
	(39	)	203		4		56		51
Exceptional items in continuing operations	22		75		(18	)	12		155
Discontinued operations net of taxation (note 3)	—		—		(55	)	—		—
Exceptional items	22		75		(73	)	12		155

3. Discontinued operations In the year ended 30 June 2017 discontinued operations of £55 million, net of £9 million deferred tax comprise additional amounts payable to the UK Thalidomide Trust following an agreement reached in December 2016, updates to the discount and inflation rates applied to the existing thalidomide provision and legal costs.

Historical information (continued)

4. Dividends The Board expects that Diageo will pay an interim dividend in April and a final dividend in October of each year. Approximately 40% of the total dividend in respect of any financial year is expected to be paid as an interim dividend and approximately 60% as a final dividend. The payment of any future dividends, subject to shareholder approval, will depend upon Diageo’s earnings, financial condition and such other factors as the Board deems relevant. Proposed dividends are not considered to be a liability until they are approved by the Board for the interim dividend and by the shareholders at the Annual General Meeting for the final dividend.

The table below sets out the amounts of interim, final and total cash dividends paid by the company on each ordinary share. The dividends are translated into US dollars per ADS (each ADS representing four ordinary shares) at the actual rate on each of the respective dividend payment dates.



		Year ended 30 June
		2019 pence	2018 pence	2017 pence	2016 pence	2015 pence
Per ordinary share	Interim	26.10	24.90	23.70	22.60	21.50
	Final	42.47	40.40	38.50	36.60	34.90
	Total	68.57	65.30	62.20	59.20	56.40
		$	$	$	$	$
Per ADS	Interim	1.36	1.39	1.18	1.27	1.28
	Final	2.11	2.10	2.02	1.85	2.14
	Total	3.47	3.49	3.20	3.12	3.42

Note: Subject to shareholders’ approval the final dividend for the year ended 30 June 2019 will be paid on 3 October 2019, and payment to US ADR holders will be made on 8 October 2019. In the table above, an exchange rate of £1 = $1.24 has been assumed for this dividend, but the exact amount of the payment to US ADR holders will be determined by the rate of exchange on 8 October 2019.

5. Net borrowings Net borrowings are defined as gross borrowings (short-term borrowings and long-term borrowings plus finance lease liabilities plus interest rate hedging instruments, cross currency interest rate swaps and funding foreign currency forwards and swaps used to manage borrowings) less cash and cash equivalents.

6. Share capital As at 30 June 2019 there were 2,601 million (2018 – 2,695 million) ordinary shares of 28¹⁰¹/₁₀₈ pence each in issue with a nominal value of £753 million (2018 – £780 million). For the three years ended 30 June 2017 there were 2,754 million ordinary shares of 28¹⁰¹/₁₀₈ pence each in issue with a nominal value of £797 million.

In the year ended 30 June 2019 the group purchased 94.7 million ordinary shares (2018 – 58.9 million), representing approximately 3.5% of the issued ordinary share capital (2018 – 2.1%) at an average price of £29.24 per share, and an aggregate cost of £2,775 million (including £6 million of transaction costs) (2018 – £25.43 per share, and an aggregate cost of £1,507 million including £9 million of transaction costs) under share buyback programmes. The programme completed on 10 July 2019 resulting in the repurchase of an additional 0.3 million shares at an average price of £33.73, and an aggregate cost of £26 million (including £17 million settlement payments for the full tranche) recognised as a financial liability at 30 June 2019. The shares purchased under the share buyback programmes were cancelled.

7. Exchange rates A substantial portion of the group’s assets, liabilities, revenues and expenses are denominated in currencies other than sterling. For a discussion of the impact of exchange rate fluctuations on the group’s financial position and results of operations, see note 15 to the consolidated financial statements.

Strategic report

Business description

Our business model

Diageo is a global leader in beverage alcohol with a portfolio of iconic spirits and beer brands.

We have a broad portfolio across categories and price points. Our portfolio and geographic reach position us to deliver sustainable performance and create value for our shareholders.

The consumer is at the heart of our business. Using our proven marketing and innovation skills, we aim to build and sustain strong brands that play a positive role in society.

Our organisation is structured in market-based model. This means we have greater agility and can better apply our strategy in individual countries to meet the diverse needs of our consumers and customers. It also enables us to quickly identify and shape consumer trends to support growth.

We use our local and global market expertise to identify and deliver against the most valuable growth opportunities. Our global supply capabilities enable us to manufacture and distribute our brands efficiently and effectively. Where it makes sense to do so, we source and produce locally.

We are passionate about our role in society and the responsibility we have to our stakeholders, communities and the environment.

Key highlights



Brands		Countries
200+		180
Production sites		Employees
150+		28,400

Business description (continued)

How we operate

Broad portfolio

Each market has the flexibility to select the best portfolio of brands to capture unique consumer opportunities. We then invest in opportunities that we believe offer the most valuable growth.

Markets

We operate through a market-based structure so that we can act on local consumer insights and identify trends quickly to deliver locally relevant solutions.

Global functions, support and governance

Our markets are supported by global functional teams and a broad range of shared services. Together, these drive the sharing of best practice, enhance efficiency and help build in-market capabilities. We set our standards for governance, compliance and ethics globally.

Our people

We want all our employees around the world to reach their full potential and play their part in the success of our business. We have created an inclusive and diverse culture with shared values and a common purpose.

Our values

Passionate about consumers; be the best; freedom to succeed; proud of what we do; valuing each other.

Our role in society

We are committed to playing a positive role in society. We work to reduce alcohol harm and promote moderation, increase access to opportunities for local communities and reduce our environmental impact.

Our brands

We own two of the world’s five largest spirits brands by value, Johnnie Walker and Smirnoff, and 23 of the world’s top 100 spirits brands by value⁽ⁱ⁾.We own Guinness, the 4^th largest premium beer brand by value⁽ⁱⁱ⁾.

Our geographic footprint

We have broad reach in the United States and Europe and leading positions in many of the markets that are expected to generate most of the medium-term industry growth.

Brilliant execution

We use cutting-edge consumer insights and marketing. We innovate at scale and we develop winning relationships with our customers through distribution and sales.

Efficient supply and procurement

We work to high-quality manufacturing and environmental standards.

Financial strength

We aim to deliver consistent net sales value growth and margin expansion, as well as strong cash generation.

(i) Impact Databank Value Ratings May 2019.

(ii) Global Data, 2018.

Business description (continued)

Our strategy

The global spirits category has shown resilient, long-term growth. Our strategy is to support premiumisation in developed and emerging countries.

Everywhere we operate, we aim to do so in a responsible and sustainable way. Our broad portfolio means we can access different consumer occasions with our brands, across price points.

In developed markets, we support premiumisation through our premium core and reserve brands. In emerging markets, we aim to grow participation in international premium spirits. To support this, we selectively participate in attractive mainstream spirits segments. This means consumers can access our brands at affordable price points and we can shape responsible drinking trends by introducing consumers to branded products.

Beer is our second largest category after scotch and our global beer business is led by our premium brand, Guinness. Guinness is available in approximately 130 countries. We use a variety of routes to the consumer, depending on the most efficient model for each market. In Africa, we have a large beer business with a broad portfolio that reaches across price points.

Our focus on consumers, the balance of creative flair and data-led insight in our marketing and our track record for innovation, combined with our financial discipline and everyday efficiency, all support our goal to be a reliable compounder of growth. We aim to combine these to deliver a virtuous circle of consistent top-line performance, margin expansion and increased investment in our brands and business.

Our strategy is delivered through

Six executional priorities

Keep premium core vibrant

Ensuring we have a vibrant premium core is critical to our overall performance.

Continue to win in reserve

We build our reserve brands by ensuring they are available in the most influential outlets. We also build their reputations with the bartenders and consumers who set trends.

Drive innovation at scale

We build on our existing brands, anticipate new consumer occasions and create the brands of tomorrow with a focus on scale and speed.

Increase participation in mainstream spirits

Mainstream spirits is a sizeable and growing opportunity. We have invested in mainstream spirits and have a strong foundation from which to drive growth.

Build an advantaged route to consumer

Using insights, we understand where to invest our resources so that our brands are available in the right formats and locations for our consumers.

Embed productivity to drive out costs and invest in growth

We are focused on every day efficiency, effectiveness and agility to reduce costs and create fuel for our growth.

Business description (continued)

Our sustainability and responsibility priorities and our commitment to governance and ethics

Promoting positive drinking

We are committed to promoting positive drinking through encouraging moderation and tackling misuse.

Building thriving communities

We want to continue to make Diageo a great, safe, inclusive and diverse place to work for our people. We want to build sustainable supply chains and create programmes that empower communities and individuals, making a positive difference everywhere we live, work, source and sell.

Reducing our environmental impact

We aim to preserve the natural resources on which our-long-term success depends. We are working to reduce our impact in the areas of water, carbon, packaging and waste.

Highest standards of governance and ethics

We are constantly looking for ways to strengthen our culture of integrity and help our people make the right choices, to do business the right way, from grain to glass.



Outcomes of our strategy
① Efficient growth	③ Credibility and trust
② Consistent value creation	④ Engaged people



We measure progress against our strategy using the following financial and non-financial indicators
Organic net sales growth ①	Return on average invested capital ②	Reach and impact of responsible drinking programmes ③ ④	Carbon emissions ③
Organic operating margin improvement⁽ⁱ⁾ ①	Return on average invested capital ②		Employee engagement index ③ ④
Organic operating margin improvement⁽ⁱ⁾ ①	Total shareholder return ②		Employee engagement index ③ ④
Earnings per share before exceptional items ①		Health and safety ③ ④
Earnings per share before exceptional items ①		Water efficiency ③
Free cash flow ①

(i) From July 2019, this financial indicator will be organic operating profit growth.

See our key performance indicators (KPIs) on pages 24-28.

Business description (continued)

Production

Diageo owns manufacturing production facilities across the globe, including maltings, distilleries, breweries, packaging plants, maturation warehouses, cooperages and distribution warehouses. Diageo’s brands are also produced at plants owned and operated by third parties and joint ventures at a number of locations throughout the world.

Capacity

The locations, principal activities, products, packaging production capacity and packaging production volume of Diageo owned principal production centres in the year ended 30 June 2019 are as follows:



Location	Principal products	Production capacity in millions of equivalent units⁽ⁱ⁾	Production volume in 2019 in millions of equivalent units
United Kingdom (Spirits)	Scotch whisky, gin, vodka, rum, ready to drink	96	53
UK, Ireland (Guinness)	Beer	8	8
Ireland (Baileys)	Irish cream liqueur	12	8
Italy (Santa Vittoria)	Vodka, rum, ready to drink	11	8
Turkey	Raki, vodka, gin, liqueur, wine	8	5
United States, Canada, US Virgin Islands	Vodka, gin, tequila, rum, Canadian whisky, American whiskey, progressive adult beverages, ready to drink	52	37
Brazil	Cachaça, vodka	10	4
Mexico	Tequila	3	3
Australia	Rum, vodka, ready to drink	4	2
Singapore	Finishing centre	7	1
India	Rum, vodka, whisky, scotch, brandy, gin, wine	64	41
Nigeria	Beer	7	6
South Africa	Spirits and ready to drink	4	4
East Africa (Uganda, Kenya, Tanzania)	Beer and spirits	17	15
Africa Regional Markets (Ethiopia, Cameroon, Ghana, Seychelles)	Beer	7	4

(i) Capacity represents ongoing production capacity. The production capacities quoted in the table are based on Diageo owned actual production levels for the year ended 30 June 2019 adjusted for the elimination of unplanned losses and inefficiencies. In addition, there are third party production arrangements with manufacturing facilities including brewers and co-packing partners licensed to produce Diageo brands.

Spirits

Spirits are produced in distilleries located worldwide. The group owns 29 Scotch whisky distilleries in Scotland, two whisky distilleries in Canada and two in the United States. Diageo produces Smirnoff internationally. Ketel One and Cîroc vodkas are purchased as finished product from The Nolet Group and Maison Villevert, respectively. Gin distilleries are located in both the United Kingdom and in Santa Vittoria, Italy. Baileys is produced in the Republic of Ireland and Northern Ireland. Rum is blended and bottled in the United States, Canada, Italy and the United Kingdom, and is distilled in the US Virgin Islands and in Australia, Venezuela and Guatemala. Raki is produced in Turkey, Chinese white spirits are produced in Chengdu, in the Sichuan province of China, cachaça is produced in Ceará State in Brazil and tequila in Mexico.

Diageo’s maturing Scotch whisky is located in warehouses in Scotland (the largest at Blackgrange holding approximately 50% of the group’s maturing Scotch whisky), its maturing Canadian whisky in Valleyfield and Gimli in Canada, its maturing American whiskey in Kentucky and Tennessee in the United States and maturing Chinese white spirit in Chengdu, China. In August 2018, the company opened the Guinness Open Gate Brewery & Barrel House in Relay, Maryland. It is a working brewery which is open to the public, and has an on-site brew pub, tap room and retail store.

Diageo continues to invest in our tequila facility in Mexico to enable additional capacity to support growth. The program includes a new distillery, bottling capacity expansion, wastewater treatment plan, tanking and liquid processing equipment as well as warehousing facilities for maturation, packaging materials, and finished goods.

Business description (continued)

Diageo opened the Roe & Co Irish whiskey distillery in June 2019. The iconic Guinness Power Station has been regenerated into a new visitor experience and urban distillery. A visit to the fully live, working distillery will also involve learning about the history of George Roe who was one of the most iconic names in Irish Whiskey in the nineteenth century.

The £150 million Scotch investment program focusing on whisky tourism is progressing. In April 2019, it was confirmed that the global flagship visitor experience for Johnnie Walker would be in Edinburgh city centre.

Diageo owns a controlling equity stake in United Spirits Limited (USL) which is the leading alcoholic beverage company in India selling almost 80 million equivalent cases per annum of Indian Made Foreign Liquor (IMFL). USL has a significant market presence across India and operates 16 owned sites as well as a network of leased and third party manufacturing facilities in India. USL owns several Indian brands such as McDowell’s (Indian whisky, rum and brandy), Black Dog (scotch), Signature (Indian whisky), Royal Challenge (Indian whisky), Antiquity (Indian whisky) and Bagpiper (Indian whisky).

Beer

Diageo’s principal brewing facility is at the St James’s Gate brewery in Dublin, Ireland. In addition, Diageo owns breweries in a number of African countries: Nigeria, Kenya, Ghana, Cameroon, Ethiopia, Tanzania, Uganda and the Seychelles.

Guinness flavour extract is shipped from Ireland to all overseas Guinness brewing operations which use the flavour extract to brew Guinness locally. Guinness is transported from Ireland to Great Britain in bulk to the Runcorn facility which carries out the kegging of Guinness Draught.

Guinness, Guinness Blonde, Kilkenny and Harp are brewed, under licence arrangements, by over 40 third parties across six continents with total volume of over 2 million hectolitres being sold in more than 130 countries.

Diageo is expanding capacity in Africa to support beer growth with the renovation and reopening of the Kisumu brewery in Kenya.

Ready to drink

Diageo produces a range of ready to drink products mainly in the United Kingdom, Italy, across Africa, Australia, the United States and Canada.

Property, plant and equipment

Diageo owns approximately 97% of the manufacturing, distilling, brewing, bottling and administration facilities it uses across the group’s worldwide operations. It holds approximately 3% of properties on leases in excess of 50 years. The principal production facilities are described above. As at 30 June 2019, Diageo’s land and buildings are included in the group’s consolidated balance sheet at a net book value of £1,201 million. Diageo’s two largest individual facilities, in terms of book value, are the Leven bottling, blending and warehousing facility in Scotland and St James’s Gate brewery in Dublin.

Raw materials and supply agreements

The group has several long-term contracts in place for the purchase of raw materials including glass, other packaging, spirit, cream, rum and grapes. Forward contracts are in place for the purchase of cereals to minimise the effects of short-term price fluctuations.

Cream is the principal raw material used in the production of Irish cream liqueur and is sourced from Ireland. Grapes and aniseed are used in the production of Raki and are sourced from suppliers in Turkey. Other raw materials purchased in significant quantities to produce spirits and beer are molasses, cereals, sugar and a number of flavors (such as juniper berries, agave, chocolate and herbs). These are sourced from suppliers around the world.

Many products are supplied to customers in glass bottles. Glass is purchased from a variety of multinational and local suppliers; the largest suppliers are Ardagh Packaging in the United Kingdom and Owens Illinois in the United States.

Business description (continued)

Competition

Diageo’s brands compete on the basis of consumer loyalty, quality and price.

In spirits, Diageo’s major global competitors are Pernod Ricard, Beam Suntory, Bacardi and Brown Forman, each of which has several brands that compete directly with Diageo’s brands. In addition, Diageo faces competition from regional and local companies in the countries in which it operates.

In beer, Diageo competes globally as well as on a regional and local basis (with the profile varying between regions) with several competitors, including AB InBev, Heineken, Molson Coors, Constellation Brands and Carlsberg.

Research and development

Innovation forms an important part of Diageo’s growth strategy, playing a key role in positioning its brands for continued growth in both the developed and emerging markets. The strength and depth of Diageo’s brand range provides a solid platform from which to drive innovation. Diageo continuously invests to deepen its understanding of shopper trends and changing consumer habits to inform product and packaging development. Supporting this, the group has ongoing programmes to develop new products across beverage alcohol categories which are managed internally by the innovation and research and development function.

Trademarks

Diageo produces, sells and distributes branded goods and is therefore substantially dependent on the maintenance and protection of its trademarks. All brand names mentioned in this document are trademarks. The group also holds numerous licences and trade secrets, as well as having substantial trade knowledge related to its products. The group believes that its significant trademarks are registered and/or otherwise protected (insofar as legal protection is available) in all material respects in its most important markets. Diageo also owns valuable patents and trade secrets for technology and takes all reasonable steps to protect these rights.

Regulations and taxes

Diageo’s worldwide operations are subject to extensive regulatory requirements regarding production, product liability, distribution, importation, marketing, promotion, sales, pricing, labelling, packaging, advertising, antitrust, labour, pensions, compliance and control systems and environmental issues. In the United States, the beverage alcohol industry is subject to strict federal and state government regulations. At the federal level, the Alcohol and Tobacco Tax and Trade Bureau of the U.S. Treasury Department oversees the industry, and each state as well as some local authorities in jurisdictions in which Diageo sells or produces products, have regulations. Federal, state and local regulations cover virtually every aspect of its operations, including production, distribution, marketing, promotion, sales, pricing, labelling, packaging and advertising.

Spirits and beer are subject to national import and excise duties in many markets around the world. Most countries impose excise duties on beverage alcohol products, although the form of such taxation varies significantly from a simple application to units of alcohol by volume, to advanced systems based on imported or wholesale value of the product. Several countries impose additional import duty on distilled spirits, often discriminating between categories (such as Scotch whisky or bourbon) in the rate of such tariffs. Within the European Union, such products are subject to different rates of excise duty in each country, but within an overall European Union framework, there are minimum rates of excise duties that can be applied.

Import and excise duties can have a significant impact on the final pricing of Diageo’s products to consumers. These duties have an impact on the competitive position as compared to other brands. The group devotes resources to encouraging the equitable taxation treatment of all beverage alcohol categories and to reducing government-imposed barriers to fair trading.

Advertising, marketing and sales of alcohol are subject to various restrictions in markets around the world. These range from a complete prohibition of alcohol in certain cultures and countries, such as in certain states in India, and through the prohibition of the import of spirits, wine and beer, to restrictions on the advertising style, media and messages used. In a number of countries, television is a prohibited medium for spirits brands and in other countries, television advertising, while permitted, is carefully regulated. Many countries also regulate the use of internet-based advertising and social media in connection with alcohol sales.

Spirits and beer are also regulated in distribution. In many countries, alcohol may only be sold through licensed outlets, both on and off-trade, varying from government or state operated monopoly outlets (for example, in Canada, Norway and certain US states) to the common system of licensed on-trade outlets (for example, licensed bars and restaurants) which prevails in much of the Western world (for example, in most US states and the European Union). In about one-third of the states in the United States, price changes must be filed or published 30 days to three months, depending on the state, before they become effective.

Business description (continued)

Labelling of beverage alcohol products is also regulated in many markets, varying from health warning labels to importer identification, alcohol strength and other consumer information. As well as producer, importer or bottler identification, specific warning statements related to the risks of drinking beverage alcohol products are required to be included on all beverage alcohol products sold in the United States and in other countries where Diageo operates. Expressions of political concern signify the uncertain future of beverage alcohol products advertising on network television in the United States. Any prohibitions on advertising or marketing could have an adverse impact on sales of the group.

Regulatory decisions and changes in the legal and regulatory environment could increase Diageo’s costs and liabilities or impact on its business activities.

Acquisitions and disposals

Diageo has made a number of acquisitions of brands, distribution rights and equity interests and disposals in premium drinks businesses. For a description of principal acquisitions and disposals since 1 July 2016, see note 9 to the consolidated financial statements.

On 28 September 2018 Diageo acquired the remaining 70% of Copper Dog Whisky Limited (CDWL) that it did not already own for an upfront valuation of £6.5 million and further earn-out payments based on CDWL achieving performance targets. The discounted current estimate for the earn-out payments is £10 million.

On 17 August 2018 Diageo completed the purchase of 20.29% of the share capital of Sichuan Shuijingfang Company Limited (SJF) for RMB 6,084 million (£696 million) and transaction costs of £7 million. This took Diageo’s shareholding in SJF from 39.71% to 60%. SJF was already controlled and therefore consolidated prior to the transaction.

On 9 April 2019 Diageo completed the purchase of a further 3.14% of the share capital of SJF for RMB 690 million (£79 million) and transaction costs of £2 million, which took Diageo's shareholding in SJF from 60% to 63.14%.

In addition, Diageo has made a number of smaller acquisitions of brands, distribution rights and equity interests in various drinks businesses.

Diageo completed the sale of a portfolio of 19 brands (Seagram’s VO, Seagram’s 83, Seagram’s Five Star, Popov, Myers’s, Parrot Bay, Yukon Jack, Romana Sambuca, Scoresby, Goldschlager, Relska, Stirrings, The Club, Booth’s, Black Haus, Peligroso, Grind, Piehole and John Begg) to Sazerac on 20 December 2018 for an aggregate consideration of $550 million (£435 million). Diageo will continue to provide manufacturing services for all disposed brands until December 2019 and for five brands up to December 2028.

Seasonality

Approximately 40% of Diageo’s annual net sales occur in the last four months of each calendar year.

Business description (continued)

Our brands

We have built a leading portfolio of brands across key categories and price points.

We invest in the sustainable growth of these brands and ensure they are positioned to meet the consumer opportunity in each market.

We own two of the world’s five largest spirits brands by value, Johnnie Walker and Smirnoff, and 23 of the world’s top 100⁽ⁱ⁾.^.

Guinness, our premium beer brand, is the 4^th largest premium beer in the world by value⁽ⁱⁱ⁾.



Global giants⁽ⁱⁱⁱ⁾
Our business is built around six of our biggest global brands.
Johnnie Walker	Smirnoff	Baileys	Captain Morgan	Tanqueray	Guinness
Local stars^(iv)			Reserve^(v)
Can be individual to any one market and provide a platform for our business to grow.			Exceptional spirits brands at premium price points to capture the global luxury opportunity.
Crown Royal	Yenì Raki	Shui Jing Fang	Johnnie Walker Blue Label	Bulleit Bourbon	Don Julio
Buchanan’s	JɛB	Grand Old Parr	Tanqueray No. TEN	Ron Zacapa Centenario XO	Casamigos
Bundaberg	McDowell’s No. 1	Ypióca	Lagavulin	The Singleton of Glen Ord	Johnnie Walker Gold Label Reserve
Windsor	Black&White		Cîroc	Ketel One vodka	Talisker


(i)	Impact Databank Value Ratings, May 2019.


(ii)	Global Data, 2018.


(iii)	Global giants represent 41% of Diageo net sales.


(iv)	Local stars represent 20% of Diageo net sales.


(v)	Reserve brands represent 19% of Diageo net sales.

Business description (continued)

Our global reach

Our regional profile provides us with exposure to the greatest consumer growth opportunities in our sector.

We operate as a market-based business and our products are sold in over 180 countries. Each of our markets is accountable for its own performance and for driving growth. We employ 28,400 talented people across our global business.

% share of net sales by region^(i)(ii)


(i)	The above diagram is intended to illustrate general geographic regions of the world in which Diageo has a presence and/or in which its products are sold, and is not intended to imply that Diageo has a presence in and/or that its products are sold in every country within a geographical region.


(ii)	Based on reported net sales for the year ended 30 June 2019. Does not include corporate net sales of £53 million.



% share by region	North America	Europe and Turkey	Africa	Latin America and Caribbean	Asia Pacific
Volume	20.1	18.4	13.7	9.1	38.7
Net sales⁽ⁱ⁾	34.9	22.9	12.4	8.8	21.0
Operating profit before exceptional items⁽ⁱⁱ⁾	45.2	23.6	6.4	8.5	16.3
Operating profit⁽ⁱⁱⁱ⁾	45.8	23.4	6.5	8.6	15.7
Water withdrawal	12.2	39.5	38.5	1.3	8.5
Carbon emissions^(iv)	9.3	40.5	38.9	3.2	8.1
Employees^(v)	9.7	36.9	15.0	8.8	29.6


(i)	Excluding corporate net sales of £53 million.


(ii)	Excluding exceptional operating charges of £74 million (2018 – £128 million) and net corporate operating costs of £189 million (2018 – £158 million).


(iii)	Excluding net corporate operating costs of £210 million (2018 – £158 million).


(iv)	Excludes corporate offices which account for <2% of combined impacts.


(v)	Employees have been allocated to the region in which they reside.

Business description (continued)

How we measure performance: key performance indicators

GAAP measures - Financial GAAP performance measures similar to the financial non-GAAP key performance indicators are presented below.



NET SALES GROWTH (%)	OPERATING MARGIN IMPROVEMENT (bps)	BASIC EARNINGS PER SHARE (pence)



Definition	Definition	Definition
Sales growth after deducting excise duties.	The percentage point movement in operating profit, divided by net sales.	Profit attributable to equity shareholders of the parent company, divided by the weighted average number of shares in issue.
Performance	Performance	Performance
Reported net sales grew 5.8%, driven by organic growth and favourable exchange which was partially offset by acquisitions and disposals.	Reported operating margin increased by 107bps driven by organic operating margin improvement, lower exceptional operating charges offset by the impact of acquisitions and disposals and favourable exchange.	Basic eps of 130.7 pence increased by 9.0 pence driven by organic operating profit growth and lower finance charges which was partially offset by higher tax charge and net increase in exceptional charges.



NET CASH FROM OPERATING ACTIVITIES (£ million)	RETURN ON CLOSING INVESTED CAPITAL (%)



Definition	Definition
Net cash from operating activities comprises the net cash flow from operating activities as disclosed on the face of the cash flow statement.	Profit for the year divided by net assets at the end of the financial year.
Performance	Performance
Net cash from operating activities increased by £164 million due to organic operating profit growth partially offset by unfavourable working capital movement and higher tax payments.	Return on closing invested capital increased by 610 bps principally driven by decrease in net assets.

Business description (continued)

We use the following 11 key performance indicators (KPIs) to measure our financial and non-financial performance

Our KPIs measure progress against our strategy. Our performance against our KPIs are explained below:

Relevance to strategy

① Efficient growth

② Consistent value creation

③ Credibility and trust

④ Engaged people



Financial	® ①		Financial	® ①		Financial	® ①
Organic net sales growth (%)	6.1	%	Organic operating margin improvement (bps)	83	bps	Earnings per share before exceptional items (pence)⁽ⁱ⁾	130.8p



Definition	Definition	Definition
Sales growth after deducting excise duties, excluding the impact of exchange rate movements, acquisitions and disposals.	The percentage point movement in operating profit before exceptional items, divided by net sales after excluding the impact of exchange rate movements and acquisitions and disposals.	Profit before exceptional items attributable to equity shareholders of the parent company, divided by the weighted average number of shares in issue.
Why we measure	Why we measure	Why we measure
This measure reflects our performance as the result of the choices made in terms of category and market participation, and Diageo’s ability to build brand equity, increase prices and grow market share.	The movement in operating margin measures the efficiency of the business. Consistent operating margin improvement is a business imperative, driven by investment choices, our focus on driving out costs across the business and improving mix.	Earnings per share reflects the profitability of the business and how effectively we finance our balance sheet. It is a key measure for our shareholders.
Performance	Performance	Performance
Organic net sales grew 6.1%, driven by 2.3% volume growth and 3.8% positive price/mix. Growth was broad based with all regions delivering net sales growth.	Organic operating margin improved 83bps driven by improved price/mix and our productivity programme partially offset by higher marketing spend.	Eps before exceptional items increased 12.2 pence driven by organic operating profit growth and lower finance charges partially offset by the impact from acquisitions and disposals and a higher tax expense.
More detail on page 51	More detail on page 52	More detail on page 52

Business description (continued)



Non-Financial	③ ④	Non-Financial	③ ④	Non-Financial	③
Positive drinking		Health and safety (lost-time accident frequency per 1,000 full-time employees)	0.98	Water efficiency⁽ⁱⁱ⁾(l/l)	4.64l/l



Definition	Definition	Definition
We report against three indicators for positive drinking.	Number of accidents per 1,000 full-time employees and directly supervised contractors resulting in time lost from work of one calendar day or more.	Ratio of the amount of water required to produce one litre of packaged product.
Why we measure	Why we measure	Why we measure
We support the World Health Organization’s (WHO) goal of reducing harmful drinking by 10% across the world by 2025 and we put resources and skills into a range of programmes around the world that aim to reduce harm and change behaviour. We have set ourselves stretching targets to measure our contribution to this area, focusing on tackling underage drinking and drink driving, in addition to promoting moderation.	Safety is a basic human right: everyone has the right to work in a safe environment, and our Zero Harm safety philosophy is that everyone should go home safe and healthy, every day, everywhere.	Water is the main ingredient in all of our brands. We aim to improve efficiency, and minimise our water use, particularly in water-stressed areas. This will ensure we can sustain production growth, address climate change risk and respond to the growing global demand for water, as scarcity increases.
Performance	Performance	Performance
We launched a new Positive Drinking strategy last year and this is the first year we have reported against these targets for 2025.	We achieved a milestone safety performance level of 0.98 lost-time accidents (LTAs) per 1,000 employees, our lowest rate ever. This represents a 7% reduction in LTAs compared with 2018. We continued to focus on markets in particular need of support, delivering improvements by increasing compliance with our core standards and programmes. We also maintained strong performance in our more established markets.	Water efficiency improved by 6% compared to 2018 and 43.8% versus our 2007 baseline.
More detail on pages 89-93	More detail on pages 106-108	More detail on pages 98-106

Business description (continued)



Financial	® ①			Financial	②		Financial	® ②
Free cash flow (£ million)		£2,608	m	Return on average invested capital (ROIC) (%)	15.1	%	Total shareholder return (%)	27%



Definition	Definition	Definition
Free cash flow comprises the net cash flow from operating activities aggregated with the net cash received/paid for loans receivable and other investments, and the net cash cost paid for property, plant and equipment, and computer software.	Profit before finance charges and exceptional items attributable to equity shareholders divided by average invested capital. Invested capital comprises net assets aggregated with exceptional restructuring costs and goodwill at the date of transition to IFRS, excluding post employment liabilities, net borrowings and non-controlling interests.	Percentage growth in the value of a Diageo share (assuming all dividends and capital distributions are re-invested).
Why we measure	Why we measure	Why we measure
Free cash flow is a key indicator of the financial management of the business and reflects the cash generated by the business to fund payments to our shareholders and acquisitions.	ROIC is used by management to assess the return obtained from the group’s asset base. Improving ROIC builds financial strength to enable Diageo to attain its financial objectives.	Diageo’s Directors have a fiduciary responsibility to maximise long-term value for shareholders. We also monitor our relative TSR performance against our peers.
Performance	Performance	Performance
Free cash flow continued to be strong at £2.6 billion. Operating profit growth was partially offset by reduced operating working capital improvements year on year, increased investment in maturing inventory and higher tax payments.	ROIC before exceptional items increased 80bps as organic operating profit growth was partially offset by the impact from acquisitions and disposals and higher underlying tax charges.	Diageo delivered total shareholder return of 27% as dividends increased, a share buyback programme of £2.8 billion was executed and the share price benefited from underlying business improvements.
More detail on page 53	More detail on page 54

Business description (continued)



Non-Financial	③	Non-Financial	③ ④
Carbon emissions⁽ⁱⁱⁱ⁾ (1,000 tonnes CO₂e)	586	Employee engagement index (%)	75	%



Definition	Definition
Absolute volume of carbon emissions, in 1,000 tonnes.	Measured through our Your Voice survey; includes metrics for employee satisfaction, loyalty, advocacy and pride.
Why we measure	Why we measure
Carbon emissions are a key element of Diageo’s, and our industry’s, environmental impact. Reducing our carbon emissions is a significant part of our efforts to mitigate climate change, positioning us well for a future low-carbon economy, while creating energy efficiencies and savings now.	Employee engagement is a key enabler of our strategy and performance. The survey allows us to measure, quantitatively and qualitatively, how far employees believe we are living our values. The results inform our ways of working, engagement strategies and leadership development.
Performance	Performance
Carbon emissions reduced by 5.9% in 2019, and cumulatively by 44.7% against the 2007 baseline despite increased production volume.	94% of our people participated in our Your Voice survey (22,615 of the 24,129 invited). 75% were identified as engaged, a decrease of 1% on last year. 89% declared themselves proud to work for Diageo, down 1% on 2018. Despite this small shift, we have maintained a strong engagement score in line with best in class benchmarks.
More detail on page 105	More detail on pages 108-109

Remuneration

Some KPIs are used as a measure in the incentives plans for the remuneration of executives. These are identified with the symbol ®.

See our Directors’ remuneration report from page 142 for more detail.


(i)	For reward purposes this measure is further adjusted for the impact of exchange rates and other factors not controlled by management, to ensure focus on our underlying performance drivers.


(ii)	In accordance with Diageo's environmental reporting methodologies, data for each of the four years in the period ended 30 June 2018 has been restated where relevant.


(iii)	In accordance with Diageo's environmental reporting methodologies and WRI/WBCSD GHG Protocol, data for each of the four years in the period ended 30 June 2018 has been restated where relevant.

Business description (continued)

Chairman’s statement

We want to have a positive impact wherever we operate and we are determined to earn trust and respect by doing business in the right way, from grain to glass. For Diageo to thrive, we must focus on the long term and continue to demonstrate the value we create for those around us.

Recommended final dividend per share

2019: 42.47p á5%

2018: 40.4p

Total dividend per share⁽ⁱ⁾

2019: 68.57p á5%

2018: 65.3p

Total shareholder return (%)

2018: 27%

2017: 23%


(i)	Includes final recommended dividend of 42.47p.

I am pleased to report another year of strong and consistent performance. Diageo continues to make good progress towards its ambition of becoming one of the best performing, most trusted and respected consumer products companies in the world and I would like to express my thanks to all our employees for their continued passion and commitment.

Culture

Under Ivan’s leadership, Diageo is being transformed into a more entrepreneurial and creative business. Proximity to the consumer and to the trade, the agility to adapt to a changing environment and speed in execution are increasingly the way in which Diageo operates, every day.

A culture of discipline and efficiency has also been embedded. This has resulted in significant operational savings, which have largely been reinvested in the most attractive opportunities. These investments not only support the growth of our brands and strengthen our portfolio, but have also allowed us to build more advanced capabilities through new technology and enhanced training.

Notwithstanding the progress we have made, we are not complacent and we continue working towards further improvement.

Opportunities for growth

We are a global leader in an industry that is growing and premiumising at the same time. Around the world, consumers are looking for more premium brands and experiences. Growth in total beverage alcohol is underpinned by strong consumer fundamentals: in developed markets, spirits are well positioned, on trend and premiumising. In emerging markets, we expect an additional 750 million consumers to be able to afford international-style spirits by 2030.

While we are leaders in global premium spirits and have a substantial presence in selected beer markets, we produce just 1.7% of the total beverage alcohol drinks consumed around the world. So there is ample opportunity for us to grow share. We continue to see consumers switching from beer and wine into spirits. In the United States, spirits are taking share from beer; in Europe, spirits are taking share from beer and wine; and in many markets in Africa, consumers are trading up from illicit alcohol into a regulated, well-manufactured product. Beer consumers are also trading up to more premium, flavourful and differentiated products. The trend to 'drink better, not more', is well established in many markets.

Our deep consumer insights and strong customer relationships, combined with the strength and breadth of our portfolio, mean that we are well positioned to take advantage of these favourable long-term growth trends.

Business description (continued)

The global environment

Diageo’s brands are enjoyed in more than 180 countries and international trade is at the heart of our business. Although we are not immune from volatility in the global environment, our broad footprint, across markets and categories, makes us more resilient and provides a natural hedge against instability in our operating environment.

In particular, while there is considerable uncertainty around Brexit, we have robust plans in place to cover all scenarios. We do not believe the direct financial impact to Diageo will be material. Nevertheless, we look forward to a clear resolution that will bring certainty to business in the United Kingdom.

Our stakeholders

We are committed to engaging and working constructively with all our stakeholders. Listening and responding to the views and needs of those who are touched by our operations is fundamental to building a sustainable future for our business, our brands and the communities in which we live, work, source and sell.

The Board was particularly pleased that our 2019 ‘Your Voice’ employee survey showed that 89% of our employees are proud to work for Diageo and 77% are extremely satisfied with Diageo as a place to work. We are committed to engaging with our employees and ensuring that their voices are heard at the highest levels in our business. In December, the Board agreed that I will take responsibility for workforce engagement, as the designated non-executive under the 2018 UK Corporate Governance Code. I look forward to working with our employees around the world in order to represent their views in the Boardroom. From 2020, we will issue an annual ‘workforce engagement statement’ explaining how the Board has gathered and reviewed employees’ views and how these have been considered in the Board’s decision making.

Diageo in society

We want to have a positive impact wherever we operate and we are determined to earn trust and respect by doing business in the right way, from grain to glass. At the core of our approach is a commitment to positive drinking through encouraging moderation and tackling misuse, which Ivan outlines in more detail in his statement.

For Diageo to thrive, we must focus on the long term and continue to demonstrate the value we create for those around us. Social purpose was a driving force for the founders of many of our brands and is part of the fabric of our company today.

Communities

As a global company, we have an important role to play in helping the communities where we live and work to thrive. This is why we are focused on the issues we believe matter most in the communities where we source our raw materials and where we make and sell our products. We take great care to build sustainable supply chains and work hard to protect the environment and the natural resources on which we rely. Our women’s empowerment programmes have supported around 400,000 women around the world. They provide women with equal access to the skills and resources they need to build a better future for themselves and their families.

Our Water of Life programme has reached more than 10 million people in India and Africa since 2006 – making a real difference by supplying vulnerable communities with clean water, sanitation and hygiene. This year, we reached 232,000 people through these programmes.

Our Learning for Life programme gives people around the world the opportunity to reach their full potential and enhance their employment opportunities, through training and education in the hospitality industry and other sectors. Since launching in 2008, over 140,000 people have participated in Learning for Life, and typically, more than 70% move into permanent jobs.

Business description (continued)

Creating value

In fiscal 2019, we have delivered another year of strong, consistent performance. And we continue to make good progress across the four areas of performance we measure: efficient growth, value creation, credibility and trust, and engaged people.

Our efficient growth key performance indicators (KPIs) continue to improve. At the same time, return on average invested capital (ROIC) and total shareholder return (TSR) both increased, to 15.1% and 27% respectively, reflecting continued value creation.

We continue to target dividend cover (the ratio of basic earnings per share before exceptional items to dividend per share) of between 1.8 and 2.2 times. The recommended final dividend is 42.47 pence per share, an increase of 5%. This brings the recommended full-year dividend to 68.57 pence per share and dividend cover to 1.9 times. We expect to maintain dividend increases at a mid-single digit rate until our dividend cover is comfortably back in range. Subject to shareholder approval, the final dividend will be paid to UK shareholders on 3 October 2019. Payment will be made to US ADR holders on 8 October 2019. This year, we purchased 94.7 million shares, returning £2.8 billion to shareholders. On 25 July, the Board approved plans for a further return of capital of up to £4.5 billion to shareholders over the three years ending 30 June 2022.

Board changes

In March 2018, we agreed with Ursula Burns that her appointment as Non-Executive Director would be delayed, as a result of her appointment as Executive Chairman at VEON Ltd

20-F	2019-06-30	Filed 2019-08-05
20-F	2018-06-30	Filed 2018-08-06
20-F	2017-06-30	Filed 2017-08-08
20-F	2016-06-30	Filed 2016-08-09
20-F	2014-06-30	Filed 2014-08-12
20-F	2013-06-30	Filed 2013-08-12
20-F	2012-06-30	Filed 2012-09-05
20-F	2011-06-30	Filed 2011-09-13
20-F	2010-06-30	Filed 2010-09-14

EX-1.1	diageoplcarticlesofassoc.htm
EX-2.4	exhibit24final.htm
EX-12.1	exhibit121.htm
EX-12.2	exhibit122.htm
EX-13.1	exhibit131.htm
EX-13.2	exhibit132.htm
EX-15.1	exhibit151.htm

We innovate

Led by consumer insights, we unlock new opportunities to recruit and re-recruit consumers to our brands. We innovate with new offerings that meet changing consumer demands.

We are the makers of premium spirits and beer, committed to the highest quality and standards.

We invest in world-class marketing to responsibly build vibrant brands that resonate with our consumers.

We extend our sales reach through leading activations and advocacy to ensure our brands are part of consumer celebrations around the world.