Edgar Filing: DIAGEO PLC

Blueprint

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 OF THE

SECURITIES EXCHANGE ACT OF 1934

26 January 2017

Commission File Number: 001-10691

DIAGEO plc

(Translation of registrant’s name into English)

Lakeside Drive, Park Royal, London NW10 7HQ

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F ........X..... Form 40-F ..........

Indicate by check mark whether the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ..................

Indicate by check mark whether the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ..................

Interim results, six months ended 31 December 2016

26 January 2017

Stronger performance reflects continued effective execution against our strategy

● Reported net sales (£6,421 million) and operating profit (£2,065 million) were up 14.5% and 28.0% respectively, reflecting accelerated organic growth and favourable exchange

● Organic growth, across all regions, with 1.8% volume growth and 4.4% net sales growth

● Organic operating profit grew 4.4%, in line with top line growth, driven by gross margin improvement, good progress on productivity offset by implementation costs and the profit on sale of the UB shares in the prior period

● Free cash flow continued to be strong at £1,084 million, increasing by £245 million compared to the prior period with net cash from operating activities up £230 million to £1,267 million

● Basic eps of 60.3 pence. Pre-exceptional eps was 62.0 pence, up 21%, as higher operating profit and associate income along with favourable exchange more than offset the impact of disposals and a higher tax rate

● Interim dividend up 5% at 23.7 pence per share

See explanatory notes for explanation of the use of non-GAAP measures.

Ivan Menezes, Chief Executive, commenting on the results said:

“We have delivered a strong set of results with broad based improvement in both organic volume and top line growth and this positive momentum demonstrates continued effective execution of our strategy. Highlights this half include improved performance in our US Spirits business and across our scotch portfolio, driven by our focus on marketing with impact, innovating at scale, expanding our route to consumer, and winning in reserve. Progress on productivity supports growth, margin improvement and consistent strong cash flow generation as well as improving our agility.

Diageo is building a stronger, more consistent, better performing company. We are identifying consumer trends faster, expanding the reach of our products across markets and developing trade channels to capture these growth opportunities. Our productivity work is on track, driving efficiency and effectiveness across the business. Our work on trade and marketing spend gives us better data enabling smarter, quicker decisions that generate higher returns.

Our expectations of delivering stronger financial performance this year are unchanged. We are confident of achieving our medium term objective of consistent mid-single digit top line growth and 100bps of organic operating margin improvement in the three years ending 30 June 2019.”

Key financial information

Six months ended 31 December 2016

Summary financial information

		F17 H1	F16 H1	Organic growth %	Reported growth %
Volume	EUm	129.4	130.3	2	(1)
Net sales	£ million	6,421	5,606	4	15
Marketing	£ million	908	822	(2)	10
Operating profit before exceptional items	£ million	2,065	1,717	4	20
Exceptional operating items	£ million	-	(104)
Operating profit	£ million	2,065	1,613		28
Share of associate and joint venture profit after tax	£ million	171	136		26
Exceptional non-operating items(i)	£ million	20	211
Net finance charges	£ million	182	176
Tax rate	%	21.0	16.6		27
Tax rate before exceptional items	%	20.9	19.0		10
Discontinued operations (after tax)(i)	£ million	(55)	-
Profit attributable to parent company’s shareholders	£ million	1,514	1,406		8
Basic earnings per share	pence	60.3	56.1		7
Earnings per share before exceptional items	pence	62.0	51.3		21
Interim dividend	pence	23.7	22.6		5

(i)

For further details of exceptional and discontinued operations items see notes 3.

Outlook for exchange

Using exchange rates £1 = $1.24; £1 = €1.16, the exchange rate movement for the year ending 30 June 2017 is estimated to favourably impact net sales by approximately £1.4 billion and operating profit by approximately £460 million and have an adverse impact of approximately £36 million on net interest. This is primarily driven by the strenghtening of the US dollar and the euro.

Outlook for tax

The tax rate before exceptional items for the six months ended 31 December 2016 was 20.9% compared with 19.0% in the prior period. It is expected that the tax rate before exceptional items for the year ending 30 June 2017 will be approximately 21%.

Dividend

Interim dividend at 23.7 pence per share is up 5%.

Diageo has agreed with its ADR depositary bank that from the beginning of fiscal 2017, a dividend fee will be charged at the rate of 1 cent per ADR per dividend payment.

Acquisitions and disposals

The impact of acquisitions and disposals on the reported figures was primarily attributable to the prior period disposals of non-core assets, including the Desnoes & Geddes Limited beer business based in Jamaica and the group’s wine businesses in the United States and United Kingdom. The year on year net impact from acquisitions and disposals on net sales was £(236) million and on operating profit was £(42) million.

For further details on the impact of acquisitions and disposals see explanatory notes.

Shares in issue

The issued share capital at 31 December 2016 was 2,754,440,635 ordinary shares, including 237,763,765 held as treasury shares. Excluding those shares the issued share capital at 31 December 2016 was 2,516,676,870 ordinary shares. The weighted average number of shares used for the basic eps calculation for the six months ended 31 December 2016 was 2,511 million.

Net sales (£ million)

14.5% increase in reported net sales with favourable exchange

Organic net sales growth of 4.4% with 1.8% volume growth and positive mix

Net sales	£ million
F16 H1	5,606
Asia Pacific net sales adjustment(i)	(72)
Exchange(ii)	853
Disposals	(260)
Acquisitions	24
Volume	107
Price/mix	163
F17 H1	6,421

)

(i)

Adjustment for the impact of an accounting change made by USL to account for sales by third party manufacturers to a net sales basis in the prior period. See additional financial information for more details.

(ii)

Exchange rate movements reflect the translation of prior period reported results at current exchange rates.

Net sales grew 14.5%, driven by favourable exchange and organic net sales growth offset by the disposal of non-core assets and the accounting change in India.

Organic volume growth of 1.8% and positive mix drove 4.4% net sales growth, with organic net sales growth across all regions.

Operating profit (£ million)

Reported operating profit growth of 28%

Organic operating profit growth of 4.4%

Operating profit	£ million
F16 H1	1,613
Exceptional operating items	104
Exchange	303
Disposals	(33)
Acquisitions	(9)
Organic movement	87
F17 H1	2,065

Reported operating profit was up 28% as a result of favourable exchange, organic growth and comparison against an exceptional charge in the prior period. Organic operating profit was was up 4.4%, in line with organic net sales growth.

Operating margin (%)

Reported operating margin growth of 339bps

Organic margin declined (1) bps

Operating margin	ppt
F16 H1	28.77
Exceptional operating items	1.86
Exchange	0.64
Asia Pacific net sales adjustment(i)	0.35
Acquisitions and disposals	0.55
Gross margin	0.39
Marketing	0.90
Other operating expenses	(1.30)
F17 H1	32.16

(i)

Operating margin improved by 339bps mainly driven by the comparison against the prior period exceptional charge, favourable exchange, the disposal of lower margin non-core assets and the net sales adjustment in Asia Pacific. Organic operating margin was broadly flat. Improvement in gross margin was driven primarily by positive mix. Procurement savings and cost efficiencies drove 90bps of margin improvement on marketing spend despite increased activity in line with net sales growth. The increase in other operating expenses resulted from lapping the profit on the sale of UB shares, as well as incremental productivity related costs and non-recurring costs in the period. These costs were partially offset by benefits related to the productivity programme.

Basic earnings per share (pence)

Basic eps increased from 56.1 pence to 60.3 pence

Eps before exceptional items increased from 51.3 pence to 62.0 pence

Basic earnings per share	pence
F16 H1	56.1
Exceptional items after tax(i)	(4.32)
Discontinued operations after tax	(2.19)
Exchange on operating profit	12.05
Acquisitions and disposals	(1.68)
Organic operating profit growth(ii)	3.50
Associates and joint ventures	1.39
Net finance charges	(0.22)
Tax	(4.43)
Non-controlling interests	0.09
F17 H1	60.3

(i)

Exceptional items net of tax for the six months ended 31 December 2015 included a net gain from the sale of non-core assets.

(ii)

Excluding exchange

Basic eps was impacted by lower exceptional income compared to the prior period and a discontinued operations charge in respect of an agreement with the UK Thalidomide Trust. Favourable exchange and operating profit growth also contributed to overall eps growth, although eps was negatively impacted by the increased tax rate.

Free cash flow (£ million)

Net cash from operating activities(i) was £1,267 million, an increase of £230 million compared to the same period last year. Free cash flow was £1,084 million, an increase of £245 million

Free cash flow	£ million
F16 H1	839
Capex	12
Exchange(ii)	303
Operating profit(iii)	108
Working capital	29
Interest and tax	(158)
Other(iv)	(49)
F17 H1	1,084

(i)

Net cash from operating activities excludes net capex, loans and other investments ( (£183) million in 2016 – (£198) million in 2015)

(ii)

Exchange on operating profit before exceptional items.

(iii)

Operating profit excluding exchange, depreciation and amortisation, post employment payments and non cash items but including operating exceptional items

(iv)

Other items include post employment payments, dividends received from associates and joint ventures, loans and other investments.

Free cash flow improved £245 million in the six months ended 31 December 2016 driven by favourable exchange and higher organic operating profit growth, partially offset by higher tax payments. Working capital improved driven mainly by extended settlement terms, which positively impacted creditors and favourable provisions, partially offset by higher debtor balances.

Return on average invested capital (%)(i)

ROIC increased 186bps

Return on average invested capital	ppt
F16 H1	13.85
Exchange	1.50
Acquisitions and disposals	0.06
Organic operating profit growth	0.84
Associates and joint ventures	0.28
Tax	(1.00)
Other	0.18
F17 H1	15.71

(i)

ROIC calculation excludes exceptional items.

ROIC before exceptional items increased 186bps mainly driven by favourable exchange and organic operating profit growth, partially offset by higher tax charges.

Reported growth by region

	Volume		Net sales		Marketing		Operating profit(i)
	%	EUm	%	£ million	%	£ million	%	£ million
North America	-	(0.1)	16	305	16	43	26	210
Europe, Russia and Turkey	-	-	13	173	5	11	19	85
Africa	3	0.5	13	92	14	10	(4)	(6)
Latin America and Caribbean	(1)	(0.1)	20	106	3	3	33	51
Asia Pacific	(2)	(1.2)	12	132	11	17	11	25
Corporate	-	-	41	7	100	2	(25)	(17)
Diageo	(1)	(0.9)	15	815	10	86	20	348

Organic growth by region

	Volume		Net sales		Marketing		Operating profit(i)
	%	EUm	%	£ million	%	£ million	%	£ million
North America	1	0.3	3	67	1	2	6	59
Europe, Russia and Turkey	3	0.6	5	76	(2)	(4)	6	32
Africa	3	0.5	4	32	3	2	2	3
Latin America and Caribbean	-	-	11	60	(6)	(6)	13	23
Asia Pacific	2	0.8	3	32	(6)	(11)	(6)	(16)
Corporate	-	-	14	3	-	-	(20)	(14)
Diageo	2	2.2	4	270	(2)	(17)	4	87

(i) Before operating exceptional items.

Notes to the business and financial review

Unless otherwise stated:

●

commentary below refers to organic movements

●

volume is in millions of equivalent units (EUm)

●

net sales are sales after deducting excise duties

●

percentage movements are organic movements

●

share refers to value share


BUSINESS REVIEW Six months ended 31 December 2016

North America

North America delivered net sales growth of 3% and performance improved in each market: US Spirits, Diageo Beer Company USA and Canada. US Spirits net sales grew 4% with volume growth and positive mix. Depletions grew faster than shipments with continued focus on inventory management to drive operational and working capital efficiencies internally and through our distributor channels. North American whisk(e)y, scotch and tequila delivered the strongest category performance. North American whisk(e)y net sales grew 15% as Crown Royal and Bulleit continued to gain share in a vibrant category. Scotch growth was driven by reserve variants and Johnnie Walker Black Label, with net sales up 11% and 9%, respectively. Smirnoff depletion volume grew although net sales were down on further price adjustments and negative mix. Performance of Captain Morgan, Baileys, Tanqueray and Buchanan’s improved although net sales was impacted by inventory management. DBC USA net sales grew 3% with ready to drink growing and beer stabilising. Net sales in Canada were up 5%. Marketing in North America increased 1% with increased activity partially funded by procurement savings and other efficiencies. Operating margin increased 131bps as positive mix and productivity initiatives delivered gross margin expansion, with marketing efficiencies, and zero based budgeting driving lower costs.

Key financials £ million:
	F16 H1	FX	Acquisitions and disposals	Organic movement	F17 H1	Reported movement %


Net sales	1,867	364	(126)	67	2,172	16
Marketing	275	50	(9)	2	318	16
Operating profit	809	163	(12)	59	1,019	26

Markets:					Global giants, local stars and reserve(i):
	Organic volume movement	Reported volume movement	Organic net sales movement	Reported net sales movement		Organic volume movement(ii)	Organic net sales movement	Reported net sales movement
	%	%	%	%		%	%	%
North America	1	-	3	16	Crown Royal	15	17	40
					Smirnoff	(1)	(4)	16
US Spirits	1	-	4	17	Captain Morgan	-	(1)	18
DBC USA	-	(8)	3	14	Johnnie Walker	4	5	25
Canada	4	3	5	21	Ketel One vodka	(5)	(9)	9
					Cîroc	8	6	27
Spirits	1	1	3	24	Baileys	(7)	(7)	11
Beer	(3)	(14)	(1)	7	Guinness	(2)	-	20
Ready to drink	3	3	4	25	Tanqueray	-	-	19
					Don Julio	9	10	32
					Bulleit	27	29	54
					Buchanan’s	(1)	(2)	17

(i)

Spirits brands excluding ready to drink.

(ii) Organic equals reported volume movement.

●

Net sales in US Spirits were up 4% building on the momentum of last year. Diageo’s North American whisk(e)y brands, Crown Royal and Bulleit, delivered strong net sales growth and continued share gains. Crown Royal net sales increased 17% with the launch of Crown Royal Vanilla and as Crown Royal Regal Apple continued to recruit new consumers in its third year after launch. Johnnie Walker net sales grew 8% with growth in Johnnie Walker Black Label and reserve variants as the brand launched a new campaign ‘Keep Walking America’, scaled up mentoring and focused on festive gifting. Cîroc performance improved in the first half, as the brand benefitted from the earlier innovation launch this half. Smirnoff is focused on reminding its core consumer base of its strong credentials as an award winning, quality vodka and bringing fresh news to the brand through seasonal innovations like Smirnoff Peppermint Twist. These measures together with a more focused flavours portfolio and last year’s launch of Smirnoff Sourced, led to depletion volume growth. Captain Morgan made strong share gains in a weak rum category with continued focus in the on-trade, activation to recruit multi-cultural consumers and the launch of Jack-O’Blast, a limited edition pumpkin spiced rum shot for the holiday season. Pricing adjustments continued on Smirnoff and Captain Morgan, and were also made on Ketel One vodka to ensure competitiveness. Smirnoff also experienced negative mix from higher sales of its largest format. Don Julio net sales grew 10% building on the momentum of last year. Buchanan’s, Tanqueray and Baileys share gains accelerated in the half. Inventory changes impacted net sales performance of Captain Morgan, Buchanan’s, Crown Royal Deluxe, Baileys and Tanqueray.

●

DBC USA (Diageo Beer Company USA) net sales increased 3% with ready to drink growing 5% and beer performance stabilising. Ready to drink growth was driven by the recent launch of Smirnoff Spiked Sparkling Seltzer and Smirnoff Electric which was launched last year, and the solid performance of Smirnoff Ice, which benefitted from a packaging and liquid renovation and a football programme focused on women. Guinness net sales grew 1% while Smithwicks and Harp were weaker.

●

Net sales in Canada grew 5%, largely driven by growth in Crown Royal, Smirnoff and ready to drink. Crown Royal continued to benefit from the ‘We Make Whisky The Canadian Way’ campaign, which highlights the brand’s quality and craftmanship and from the launch of Crown Royal Vanilla and Crown Royal Northern Harvest Rye. Smirnoff continued its association with music integrating the Smirnoff Sound Collective programme into festival and on-premise activations. Ready to drink growth was driven by the launch of Smirnoff Electric and Smirnoff Bellini.

●

Marketing spend grew 1% as increased activity on key brands was funded by procurement savings and other efficiencies.

Europe, Russia and Turkey

The region’s performance reflects stronger performance in Europe, and good net sales growth in Russia and Turkey. In Europe, net sales were up 5% with Continental Europe the main contributor. Johnnie Walker and Baileys performed strongly driven by execution against core growth drivers, communication of brand purpose, in-store activation and sampling. Guinness net sales were up 2% supported by a solid performance of Hop House 13 Lager and Tanqueray grew net sales double digit in most countries across Europe. Reserve brands continued to perform well. In Russia, price rises reflecting currency weakness in a tough economic and exchange environment led to a net sales increase of 6% with volume down 7%. In Turkey volume was down 5% but price increases drove net sales up 5%. Gross margins were up across the three markets driven by positive mix in Europe and price in Russia and Turkey. Operating margin in the region increased 37bps mainly driven by the ongoing productivity work and positive price/mix.

Key financials £ million:
	F16 H1	FX	Reclassifi- cation(i)	Acquisitions and disposals	Organic movement	F17 H1	Reported movement %


Net sales	1,361	149	23	(75)	76	1,534	13
Marketing	218	13	4	(2)	(4)	229	5
Operating profit	450	53	10	(10)	32	535	19

(i)

Reclassification for markets which were formerly reported in the Asia Pacific and Africa regions and are now included in Europe, Russia and Turkey. Prior period figures have not been restated for this change.

Markets:					Global giants and local stars(i):
	Organic volume movement	Reported volume movement	Organic net sales movement	Reported net sales movement		Organic volume movement(ii)	Organic net sales movement	Reported net sales movement
	%	%	%	%		%	%	%
Europe, Russia					Guinness	2	2	12
and Turkey	3	-	5	13	Johnnie Walker	11	12	38
					Smirnoff	(2)	(3)	4
Europe	4	(1)	5	10	Baileys	12	10	22
Russia	(7)	(7)	6	29	Yenì Raki	(4)	5	16
Turkey	(5)	(5)	5	15	Captain Morgan	12	12	23
					JeB	9	8	28
Spirits	3	4	6	19	Tanqueray	31	26	44
Beer	1	(3)	-	9
Ready to drink	1	2	(5)	3

(i)

Spirits brands excluding ready to drink.

(ii)

Organic equals reported volume movement except Johnnie Walker 21% and JeB 11% which were impacted by the reclassification of Middle Eastern and North African countries to the region.

●

In Europe net sales were up 5%:

●

In Great Britain, focus on route to consumer led to share gains, although net sales were broadly flat as changes in the commercial footprint led to efficiencies, including inventory reduction. Baileys performance improved with net sales up 2% driven by increased on-trade activations especially around Christmas in the off-trade. Guinness net sales were flat, lapping last year’s ‘Rugby World Cup’, but it gained 10bps of share driven by improved distribution and innovation success with Hop House 13 Lager. Tanqueray net sales grew 42% due to expanded distribution. Reserve brands experienced solid growth driven by scotch and Tanqueray No. TEN. Smirnoff recovered momentum gaining share both in off-trade and on-trade, but net sales were down 6%.

●

In Ireland, net sales grew 1%. High double digit growth in the premium and reserve brands contributed to a share gain in spirits. Guinness net sales were up 3%, driven by the continued success of Hop House 13 Lager which had a strong performance in the on-trade and more recently in the off-trade.

●

In France, net sales were up 1%. Continued strong performance of Captain Morgan and the scotch malts Cardhu and Knockando, was partially offset by weakness in Smirnoff including ready to drink.

●

In Continental Europe net sales were up 11%:

●

Net sales in Iberia were up 15%, driven by a stronger on-trade but primarily the comparison to the prior period, when inventory was reduced following changes to the commercial footprint. JeB and Johnnie Walker net sales grew in the high teens and Baileys performed strongly, supported by increased investment. Smirnoff performance also improved with net sales up 21% which contributed to on-trade share gain.

●

In Germany, Austria and Switzerland, net sales grew 17% driven by double digit growth in Baileys, Johnnie Walker and Tanqueray. Diageo’s scotch and liqueur brands grew strongly resulting in overall share gains in Germany.

●

Benelux net sales were down 6% impacted by a significant tax increase implemented in November last year in Belgium.

●

In Italy, net sales were up single digit driven by solid momentum in the off-trade. Scotch declined 2%. Gin continued its double digit growth momentum and Captain Morgan delivered growth contributing to a 2pps share gain in rum.

●

In Greece, net sales were flat. Johnnie Walker and single malts performed well driven by consistent shopper focused activity which effectively communicated brand benefits and contributed to increased in-store activation.

●

Net sales in Poland were up 13% due to the performance improvement of the scotch and reserve brands.

●

Europe Partner Markets grew 19% due to the implementation of new route to market capabilities which expanded the distributors’ footprints and improved in-store execution. Johnnie Walker and JeB grew 22% and 49%, respectively.

●

Performance in Russia continued to be impacted by the economy. Price increases were implemented to offset currency devaluation with net sales growth of 6% driven by Bell’s and Johnnie Walker. However, this resulted in a 7% loss of volume and share declined as the price increases on scotch were higher relative to the competition.

●

In Turkey, net sales grew 5% driven by growth in all raki variants and the continued premiumisation trend of the category together with price increases. Johnnie Walker net sales increased 14%.

●

Marketing spend declined 2% as a result of productivity initiatives which improved the effectiveness of the brand investment, driving in store execution and activations in the on-trade and off-trade channels. Marketing investment continues to focus on key growth opportunities for the region in reserve, gin, beer, rum and innovation.

Africa

In Africa, performance improved with net sales up 4%. Beer performance was impacted by the significant increase in duty on bottled beer in Kenya with Guinness down 22%, Tusker down 15% and the comparison against the double digit growth in Guinness in Nigeria in the prior period. This offset the strong growth of, Satzenbrau, up 108%, and Senator, up 17% and net sales growth of beer in Africa Regional Markets of 7% with the relaunch of Meta in Ethiopia and the growth of Guinness supported by the ‘Made of Black’ Guinness campaign. Across the region, mainstream spirits net sales grew 20%, driven by the strong performance of Smirnoff 1818 and Kenya Cane which benefited from a consumer shift from beer to mainstream spirits. Premium spirits grew 13% with growth coming from Johnnie Walker Black Label in Africa Regional Markets and Nigeria. Operating margin decreased 37bps due primarily to the impact of adverse mix in Nigeria and East Africa. This was partially offset by COGS savings, changes to improve organisational effectiveness and benefits from zero based budgeting across the region.

Key financials £ million:
	F16 H1	FX	Reclassifi- cation(i)	Acquisitions and disposals	Organic movement	F17 H1	Reported movement %


Net sales	716	54	(8)	14	32	808	13
Marketing	74	4	(1)	5	2	84	14
Operating profit	138	10	(5)	(14)	3	132	(4)

(i)

Reclassifications comprise Algeria and Morocco which were formerly reported in the Africa region and are now included in Europe, Russia and Turkey. Prior period figures have not been restated for this change.

Markets:					Global giants and local stars(i):
	Organic volume movement	Reported volume movement	Organic net sales movement	Reported net sales movement		Organic volume movement(ii)	Organic net sales movement	Reported net sales movement
	%	%	%	%		%	%	%
Africa	3	3	4	13	Guinness	(8)	(8)	(7)
					Johnnie Walker	1	12	11
East Africa	5	5	-	19	Smirnoff	5	33	56
ARM	-	-	6	22
Nigeria	7	7	6	(19)	Other beer:
South Africa	(2)	4	10	42
					Malta Guinness	(13)	(5)	(13)
Spirits	7	4	17	26	Tusker	(12)	(13)	-
Beer	1	1	(1)	5	Senator	13	17	42
Ready to drink	(11)	15	(6)	25	Satzenbrau	72	108	59

(i)

Spirits brands excluding ready to drink.

(ii)

Organic equals reported volume movement except for Johnnie Walker (11)% which was impacted by the reclassification of Algeria and Morocco to the Europe, Russia and Turkey region.

●

In Nigeria, net sales increased 6% with spirits growth of 47% being the main driver. This was built on mainstream spirits, up 135%, driven by the successful launch of brands including McDowell’s, which is now produced locally at Benin with increased focus and support behind mainstream brands. Increased investment behind Johnnie Walker delivered 22% growth. Beer net sales grew 1% as the performance of Satzenbrau, where net sales doubled following targeted investment, offset the decline in Guinness of 11% and Malta Guinness of 14%, which grew strongly in the prior period with sales up 41%. Within ready to drink Smirnoff grew strongly but it did not offset the decline in Orijin, now also available in smaller formats to help realign pricing and improve competiveness. The recent launch of Orijin Zero is extending reach into the non-alcoholic drinks market.

●

East Africa, net sales were flat with 17% increase in Senator net sales and strong spirits growth of 24% offset by the impact of the duty increase on bottled beer which was down 16%. Mainstream spirits grew 26% led by Kenya Cane and the innovation, Kenya Cane Coconut. In value beer, strong growth in Senator and Pilsner was supplemented by Ngule a new value price point innovation in Uganda. Reserve brands grew 11% following enhanced outlet partnerships and activation supported by brand ambassadors.

●

In Africa Regional Markets, net sales grew 6% reflecting the strong growth in Ethiopia and Cameroon, supported by Ghana. Markets continued to benefit from the enhanced route to consumer delivering improved distribution, availability and execution.

●

In Ethiopia, net sales increased 46% driven by Meta, up 44%, following the relaunch last year and the Azmera innovation.

●

In Cameroon, net sales growth of 5% was driven largely by ready to drink up 114%. This was led by Orijin ready to drink following the launch last year. Spirits also contributed to the good performance driven predominately by Johnnie Walker Black Label, up 79%, which offset the decline on Malta Guinness of 38% arising from strong competition in this category. In beer, Guinness grew 2%.

●

Ghana net sales increased 4% as net sales growth in beer and ready to drink offset a decline in spirits driven by Orijin Bitters which lapped its launch. In beer, Guinness net sales were up 14% as the brand benefitted from the ‘First Beer On Us’ campaign. Growth in Malta Guinness, up 14%, has offset declines in other beer brands, predominantly Star. Momentum continued in ready to drink, with net sales up 27% driven by Orijin.

●

South Africa net sales grew 10% driven by growth in mainstream spirits led by Smirnoff 1818. In premium spirits, scotch returned to growth with all brands contributing and Johnnie Walker benefiting from significant focus and investment as well as the launch of Johnnie Walker Green Label and up weighted gifting activity on Johnnie Walker Blue Label.

●

Marketing was up 3% in the region with investment prioritised behind the biggest growth opportunities and with proven sales drivers. In Nigeria, marketing has been focused on key campaigns including Satzenbrau Smart Choice. In Africa Regional Markets, marketing campaigns and activation programmes behind Guinness and Orijin contributed to the increase in marketing. South Africa increased investment behind Johnnie Walker and the reserve portfolio.

Latin America and Caribbean

Net sales grew 11% in LAC, reflecting a strong recovery. Brazil remained weak but Mexico, Andean and CCA performed strongly. Performance in Mexico with net sales up 21% was led by scotch and 31% growth in Don Julio. The Andean performance was driven by growth in Colombia with net sales up 29% driven by 31% volume growth in scotch. Diageo’s strategy in LAC is to expand our leadership position in scotch and broaden our portfolio. Scotch net sales grew 15%, led by Johnnie Walker and improved momentum for Buchanan’s with net sales up 46%. The net sales growth in rum and tequila was offset by a decline in vodka in Brazil and Mexico. Operating margin increased 60bps, primarily driven by positive mix, lower marketing spend in Brazil and marketing efficiencies in Colombia.

Key financials £ million:
	F16 H1	FX	Acquisitions and disposals	Organic movement	F17 H1	Reported movement %


Net sales	522	77	(31)	60	628	20
Marketing	96	13	(4)	(6)	99	3
Operating profit before exceptional items	154	34	(6)	23	205	33
Exceptional operating items	(104)				-
Operating profit	50				205	310

Markets:					Global giants and local stars:
	Organic volume movement	Reported volume movement	Organic net sales movement	Reported net sales movement		Organic volume movement(ii)	Organic net sales movement	Reported net sales movement
	%	%	%	%		%	%	%
Latin America and					Johnnie Walker	1	8	20
Caribbean	-	(1)	11	20	Buchanan’s	44	46	57
					Smirnoff	(12)	(17)	(2)
PUB	(6)	(6)	(6)	26	Old Parr	5	12	31
Mexico	20	20	21	25	Baileys	7	7	17
CCA	7	(5)	10	4	Ypióca	-	(3)	31
Andean	(19)	(19)	30	56	Black and White	40	3	21
PEBAC	3	12	5	(13)

Spirits	1	2	12	27
Beer	16	(38)	25	(54)
Ready to drink	(25)	(26)	(7)	17

(i)

Spirits brands excluding ready to drink.

(ii) Organic equals reported volume movement except for Smirnoff (5)% and Baileys 9% due to the impact of businesses disposed of.

●

In PUB (Paraguay, Uruguay and Brazil), net sales declined 6%. In Brazil, net sales were down, driven by the slowing economy and lapping a comparable period which benefited from a pre-excise duty buy-in. Despite the challenging operating environment, with scotch net sales down, the business held share in scotch, delivered through Black and White's growth in the primary scotch category following a price repositioning in the market. Ypióca net sales declined 3%. Net sales for reserve brands in PUB grew 12%, driven by Ketel One vodka and Johnnie Walker Gold Label Reserve. Net sales in Paraguay and Uruguay grew due to improved performance both domestically and in the export channels.

●

Mexico net sales increased 21%. Scotch was the key growth driver with net sales up 20% on the back of strong volume growth, reflecting successful marketing campaigns and improved execution of commercial platforms. Buchanan’s net sales grew 12% with the Special Reserve variant up 27%. Johnnie Walker net sales grew 22%, with double digit volume growth from Johnnie Walker reserve brands and across core variants such as Johnnie Walker Red Label and Johnnie Walker Black Label. Black and White net sales grew 65% supported by expanded distribution and activation across the on- and off-trade driving strong recruitment into the category. Don Julio net sales grew 31%, with strong market share gains in a growing tequila category, reflecting the successful marketing campaign, activation and higher brand awareness. Although gaining share, Smirnoff net sales declined as the category contracted.

●

CCA (Central America and Caribbean) delivered 7% volume growth and 10% net sales growth. The domestic markets net sales grew 4%, with scotch flat in Central America. Net sales in the export channels grew 25%, lapping the prior year inventory reduction programme in the market, however conditions remain challenging given the continued currency weakness against the US dollar.

●

Andean (Colombia and Venezuela) net sales grew 30%. Colombia delivered 26% volume growth and 29% net sales increase on stronger consumer demand and improved execution standards at the point of sale. There was strong growth in scotch with net sales up 31%. Old Parr grew net sales 9% with strong double digit growth for Johnnie Walker and Buchanan’s, which contributed to reserve brands net sales growth of 44%. This was driven by a focused reserve model targeting distribution, visibility, staff training and mentorship. In Venezuela, volume decreased 43% as volatility in the market continued. Although net sales grew significantly faster, with price increases in the high inflation environment, the business remains small with net sales of £6 million in the half.

●

PEBAC (Peru, Ecuador, Bolivia, Argentina and Chile) delivered net sales growth of 5%. The growth in Chile and Bolivia was partially offset by a decline in Peru where economic conditions have impacted domestic demand. In Chile, net sales grew 16%, led by Johnnie Walker which grew 21%, driven by Johnnie Walker Black Label and Johnnie Walker Red Label, and the standard scotch brands. Leveraging the 'Celebrate Together' platform to drive recruitment into reserve brands, whilst diversifying the portfolio has delivered 8% net sales growth for reserve brands.

●

Marketing declined 6% with reductions in Brazil partially offset by increased spend in Mexico which was focused on driving scotch performance through Johnnie Walker.

Asia Pacific

Asia Pacific grew net sales 3% with significant growth in Greater China and solid performance in India, Australia and South East Asia. The continued contraction of the local whisky market in Korea led to a further decline in net sales and there was also weakness in travel retail in the region. In mainland China, net sales grew 44% as a result of strong underlying momentum in Chinese white spirits and an earlier Chinese New Year, and scotch returned to growth delivering a net sales increase of 7%. The business in India continues to strengthen although net sales growth of 4%, largely driven by IMFL whisky and scotch, was impacted by the government’s move to demonetise high value notes. South East Asia net sales grew 2%, as the mourning period in Thailand impacted performance. Australia net sales increased 3% driven by scotch. Operating margin declined 188bps, as India lapped the sale of shares in United Breweries Limited. Excluding this impact, operating margin would have increased 43bps, as positive mix and productivity initiatives delivered margin expansion.

Key financials £ million:
	F16 H1	FX	Reclassifi- cation(i)	Acquisitions and disposals	Organic movement	Asia Pacific net sales adjustment	F17 H1	Reported movement %


Net sales	1,123	205	(15)	(18)	32	(72)	1,255	12
Marketing	157	31	(3)	-	(11)	-	174	11
Operating profit	234	47	(5)	(1)	(16)	-	259	11

(i)

Reclassification comprise Lebanon and other Middle East countries which were formerly reported in the Asia Pacific region and are now included in Europe, Russia and Turkey. Prior period figures have not been restated for this change.

Markets:					Global giants and local stars(i):
	Organic volume movement	Reported volume movement	Organic net sales movement	Reported net sales movement		Organic volume movement(ii)	Organic net sales movement	Reported net sales movement
	%	%	%	%		%	%	%
Asia Pacific	2	(2)	3	12	Johnnie Walker	-	1	9
					McDowell's	-	3	-
India	2	(2)	4	3	Windsor	(15)	(15)	4
Australia	2	2	3	29	Smirnoff	(6)	(7)	9
Greater China	24	24	22	44	Guinness	(3)	1	24
South East Asia	4	(5)	2	15	Bundaberg	(3)	1	26
North Asia	10	10	(2)	23
Travel Retail Asia and Middle East	(20)	(23)	(18)	(19)
Travel Retail Asia and Middle East	(20)	(23)	(18)	(19)

Spirits	2	(2)	4	11
Beer	(2)	(3)	2	25
Ready to drink	1	1	-	25

(i)

Spirits brands excluding ready to drink.

(ii)

Organic equals reported volume movement except for Johnnie Walker (4)%, Smirnoff (7)% and McDowell’s (4)% which were impacted by the reclassification of Lebanon and other Middle East countries to the Europe, Russia and Turkey region and the move from an owned to a franchise model in India.

●

India net sales were up 4%, despite momentum being disrupted by the demonetisation in November and December. Prestige and above brands grew net sales 11%. Following its relaunch in February 2016, McDowell's No.1 Whisky grew net sales 17% and gained share together with Royal Challenge which enjoyed double digit growth. The renovation of Signature in March 2016 has increased net sales 35%, supported by advertising and digital campaigns. Scotch grew 11% with Johnnie Walker net sales up 23% driven by strong performance across the variants. The integration of Diageo´s brands into USL has created a strong portfolio in India that participates across all price tiers in the IMFL and imported spirits segments. The focus on route to consumer continues to drive net sales growth and share gains on key brands through the 'Perfect Outlet' programme delivering increased distribution and better share of shelf.

●

Australia net sales increased 3%. Growth in scotch and reserve brands was partially offset by a decline in ready to drink and vodka. The performance in scotch was supported by the relaunched Johnnie Walker 'Keep Walking' campaign, which helped Johnnie Walker grow net sales 17%. Reserve brands were up 24% driven by Johnnie Walker Blue Label, Lagavulin and Cîroc as consumers continue to premiumise within the spirits category. Whilst the ready to drink category remains challenged, the innovation launches of Bundaberg Lazy Bear, Pimm's RTD and Smirnoff Pure have seen early success in addressing consumer demand for low tempo refreshing drinks.

●

Greater China net sales grew 22%, driven by strong growth in mainland China. Chinese white spirits grew, benefitting significantly from an earlier Chinese New Year, with strong performance from Wellbay and Master Distiller No.8. Scotch grew net sales 5%, with share gains in deluxe and super deluxe categories in mainland China, driven by the performance of the Johnnie Walker portfolio in mainland China and Taiwan, partially offset by a decline in Hong Kong where the tough economic conditions have impacted the traditional on-trade.

●

South East Asia net sales grew 2%, with growth in Key Accounts and Indonesia, partially offset by declining net sales in Thailand and Vietnam. Indonesia net sales grew 5%, driven by growth in Johnnie Walker and the ready to drink category. The mourning period in Thailand impacted performance, with net sales declining 17% following the closure of on-trade outlets for the initial 30 days of mourning. Scotch saw marginal growth, driven by Key Accounts which lapped a period of planned inventory reduction.

●

North Asia net sales were down 2%. In Korea, net sales declined 8%, as Windsor suffered from the continued contraction of the traditional on-trade, and increased competition in lower alcohol by volume local whisky segments. This is partially offset by net sales growth of 44% for W ICE by Windsor, a low alcohol by volume variant, and in Guinness as the international beer category grows. In Japan, net sales were up 11% largely driven by scotch net sales growing 29%, capitalising on the growth of brown spirits.

●

Travel Retail Asia and Middle East net sales declined 18%, with lower spend by travellers and currency volatility having impacted performance. Geopolitical developments continue to impact the domestic and travel retail business in the Middle East.

●

Marketing reduced 6% with efficiencies reported across the region, a decline in Korea in line with the contracting scotch category and delayed activities in Thailand due to the mourning period. These reductions were partially offset by an increased spend on Chinese white spirits in Greater China to further strengthen brand equity and drive sustainable growth.

CATEGORY AND BRAND REVIEW

For six months ended 31 December 2016

Key categories:
	Organic	Organic net	Reported net
	volume	sales	sales
	movement(iii)	movement	movement
	%	%	%
Spirits(i)	2	6	20
Scotch	4	6	21
Vodka(ii)	(2)	(2)	15
North American whisk(e)y	11	15	37
Rum(ii)	(4)	2	13
Indian-Made Foreign Liquor (IMFL) whisky	6	11	14
Liqueurs	3	2	12
Gin(ii)	4	7	21
Tequila	22	18	36
Beer	1	-	7
Ready to drink	(5)	(1)	21

(i)

Spirits brands excluding ready to drink.

(ii)

Vodka, rum, gin including IMFL brands.

(iii)

Organic equals reported volume movement except for Spirits 0%, Rum (7)%, IMFL whisky 4%, Liqueurs 0%, Beer (2)% and Ready to drink 2% which were impacted by disposals and the move from an owned to a franchise model in India.

●

Scotch represents 27% of Diageo’s net sales and was up 6% in the half with growth in North America, Europe, Africa and Latin America and Caribbean driven by Johnnie Walker and Buchanan’s. Net sales declined in Asia Pacific with weakness in travel retail, Thailand and Korea. Standard and value segments had net sales growth of 6% from brands such as Johnnie Walker Red Label up 7%. Net sales of the premium and super premium segments grew 6% from brand such as Buchanan’s, up 24%. Windsor net sales declined double digit in Korea due to the decline of the scotch category. Scotch reserve brands grew net sales 6%.

●

Vodka represents 12% of Diageo’s net sales and declined 2%, driven by soft performance in all the regions with the exception of Africa where net sales grew 33%. Net sales decline was driven by Smirnoff and Ketel One vodka, partially offset by Cîroc’s launch of innovations in the United States.

●

North American whisk(e)y represents 9% of Diageo’s net sales and grew 15%. Performance continued to be driven by strong growth and share gains in Crown Royal and Bulleit in the United States.

●

Rum represents 7% of Diageo’s net sales and grew 2%. In Europe, Africa and Latin America and the Caribbean net sales grew double digit. In India net sales declined 7% driven by McDowell's No.1 while Captain Morgan drove the decline in North America.

●

IMFL whisky represents 5% of Diageo’s net sales and grew 11%. The relaunches of two of the biggest brands McDowell’s No. 1 and Signature have contributed to this growth with both brands growing double digit.

●

Liqueurs represents 6% of Diageo’s net sales and grew 2%. Growth of 8% in Europe, the largest liqueur market, was partially offset by net sales decline in the United States. In Latin American and Caribbean and Asia Pacific net sales were up.

●

Gin represents 3% of Diageo’s net sales and grew 7%. Strong double digit net sales growth in Europe, East Africa and South Africa fuelled growth in the category. Tanqueray was the largest contributor growing 9%, followed by Gordon’s and Gilbey’s.

●

Tequila represents 2% of Diageo’s net sales and grew 18%. The performance was driven by continued double digit growth of Don Julio in its biggest market, the United States. In Mexico the brand grew nearly three times faster than the category.

●

Beer represents 16% of Diageo’s net sales and performance was broadly flat. Net sales declined 1% in Africa as the decline in East Africa, the largest beer market, as a result of a significant excise duty increase, was partially offset by growth in Africa Regional Markets with net sales up 7%. Beer net sales in Europe were flat.

●

Ready to drink represents 5% of Diageo’s net sales and declined 1%. This was largely driven by the decline in Bundaberg in Australia which was partially offset by a good performance in Gordon’s.

Global giants, local stars and reserve(i):
	Organic	Organic	Reported
	volume	net sales	net sales
	movement(ii)	movement	movement
	%	%	%
Global giants
Johnnie Walker	4	6	20
Smirnoff	(2)	(2)	13
Baileys	5	3	17
Captain Morgan	4	2	20
Tanqueray	12	9	28
Guinness	(3)	-	10
Local stars
Crown Royal	15	17	40
Yenì Raki	(4)	5	16
Buchanan’s	28	24	40
JeB	6	5	20
Windsor	(14)	(15)	4
Old Parr	7	14	34
Bundaberg	(3)	1	26
Black and White	21	9	27
Ypióca	-	(3)	32
McDowell's	1	4	1
Reserve
Scotch malts	4	3	20
Cîroc	7	6	25
Ketel One vodka	(3)	(8)	10
Don Julio	22	17	35
Bulleit	27	29	54

(i)

Spirits brands excluding ready to drink.

(ii)

Organic equals reported volume movement except for McDowell’s (3)% which was impacted by the move from an owned to a franchise model in India.

●

Global Giants represent 42% of Diageo net sales and grew 3% with stronger growth of the reserve variants up 9%.

●

Johnnie Walker net sales were up 6% with growth in all regions. Europe and Latin America and Caribbean were the largest contributors with 12% and 8% growth respectively, and net sales in the United States grew 8%. In Asia Pacific, the largest market for the brand, net sales grew 1% with growth of 19% in China and 17% in Australia and a decline in travel retail. Reserve variants grew 9% driven by Johnnie Walker Gold Label Reserve and Johnnie Walker Green Label.

●

Smirnoff net sales declined 2%. In US Spirits depletions performance improved but net sales were down 5% following price adjustments to improve competitiveness and some negative mix. In Great Britain net sales declined as changes to the commercial footprint led efficiencies including inventory reduction. In Africa net sales grew 33% driven by the strong performance of innovations like Smirnoff 1818 in South Africa.

●

Baileys net sales grew 3%, driven by 10% growth in its biggest market, Europe, following an exceptional on-trade execution and positive results of the ‘Don’t mind if I Baileys’ advertising campaign. In US Spirits net sales declined 7%.

●

Captain Morgan net sales grew 2% due to a strong performance in Europe driven by the base variant Original Spiced growing double digit. In US Spirits net sales declined 1% with depletions growing faster than shipments as we continued to focus on inventory management to drive working capital efficiencies internally and through our distribution channels.

●

Tanqueray net sales grew 9% with Europe and Latin America and Caribbean largely driving the growth and other regions delivering good performance.

●

Guinness net sales were broadly flat. A decline in Africa with the exception of Africa Regional Markets which grew net sales up 5%, was partially offset by growth in Ireland driven by the success of Hop House 13 Lager, an innovation of the ‘Brewers Project’. In Latin America and Caribbean net sales were up high teens.

●

Local stars represent 21% of net sales and grew 12%, due to Crown Royal in North America growing 17% and Buchanan’s up 24%, largely in Latin America and Caribbean. Solid growth in Yenì Raki in Turkey and McDowell’s more than offset the declines in Windsor in Korea.

●

Reserve brands represent 16% of net sales and grew 9%. There was double digit growth in Chinese white spirits and strong performance in Don Julio with double digit sales growth in United States and Mexico. Scotch reserve brands grew 6% with Johnnie Walker driving the growth. Bulleit continued its strong growth with net sales up 29%. Tanqueray No. TEN grew 23%.

ADDITIONAL FINANCIAL INFORMATION

For the six months ended 31 December 2016

SUMMARY INCOME STATEMENT

	31 December 2015	Exchange (a)	Acquisitions and disposals (b)	Organic movement(ii)	Reclassifi- cation(iii)	31 December 2016
	£ million	£ million	£ million	£ million	£ million	£ million
Sales	8,267	1,227	(271)	392	-	9,615
Excise duties	(2,661)	(374)	35	(122)	(72)	(3,194)
Net sales	5,606	853	(236)	270	(72)	6,421
Cost of sales(i)	(2,292)	(338)	171	(78)	72	(2,465)
Gross profit	3,314	515	(65)	192	-	3,956
Marketing	(822)	(113)	10	17	-	(908)
Other operating expenses(i)	(775)	(99)	13	(122)	-	(983)
Operating profit before exceptional items	1,717	303	(42)	87	-	2,065
Exceptional operating items (c)	(104)					-
Operating profit	1,613					2,065
Non-operating items (c)	211					20
Net finance charges	(176)					(182)
Share of after tax results of associates and joint ventures	136					171
Profit before taxation	1,784					2,074
Taxation (d)	(296)					(436)
Profit from continuing operations	1,488					1,638
Discontinued operations (c)	-					(55)
Profit for the period	1,488					1,583

(i)

Before exceptional operating items, see notes 3.

(ii)

For the definition of organic movement see explanatory notes.

(iii)

Following a review of the third party production arrangements in India at 30 June 2016 it was determined that it would be more appropriate to ensure consistent reporting by reclassifying the excise duties payable by the third party production companies in India as excise duties. As a result there was a reclassification of the reported figures for

the six months ended 31 December 2015 which resulted in a reduction in net sales of £72 million with a corresponding decrease in cost of sales. There was no impact on gross or operating profit. The comparative information has not been restated as the amounts involved are not material.

(a) Exchange

The impact of movements in exchange rates on reported figures is principally in respect of the weakening of sterling against the US dollar, the euro, the Kenyan schilling and the Indian rupee, partially offset by the Nigerian naira.

The effect of movements in exchange rates and other movements on profit before exceptional items and taxation for the six months ended 31 December 2016 is set out in the table below.

			Gains/ (losses)
			£ million
Translation impact			225
Transaction impact			78
Operating profit before exceptional items			303
Net finance charges – translation impact			(21)
Mark to market impact of IAS 39 on interest expense			5
Impact of IAS 21 and IAS 39 on net other finance charges			(3)
Net finance charges			(19)
Associates – translation impact			27
Profit before exceptional items and taxation			311


	Six months ended	Six months ended
	31 December 2016	31 December 2015
Exchange rates
Translation £1 =	$1.27	$1.52
Transaction £1 =	$1.44	$1.57
Translation £1 =	€1.16	€1.39
Transaction £1 =	€1.24	€1.33

(b) Acquisitions and disposals

The impact of acquisitions and disposals on the reported figures was primarily attributable to the disposals of Desnoes & Geddes Limited (D&G), the Red Stripe business in Jamaica, on 7 October 2015 and the group’s wine businesses in the United States and the UK Percy Fox wine business on 1 January 2016.

There were no exceptional operating items in the six months ended 31 December 2016.

Exceptional operating charges in the six months ended 31 December 2015 comprised an impairment charge in respect of the Ypióca brand and goodwill of £104 million.

Non-operating items in the six months ended 31 December 2016 were a net gain of £20 million before tax compared to a gain of £211 million before tax in the comparative period, a decrease of £191 million.

Non-operating items in the six months ended 31 December 2016 comprised a net gain of £20 million in respect of the sale of Diageo’s wine interests in the United States arising from the release of Diageo from a guarantee in respect of the vineyards, net of the settlement of the net working capital balance with Treasury Wine Estates on the date of disposal.

Non-operating items of £211 million in the six months ended 31 December 2015 comprised:

●

a gain of £457 million in respect of the sale of Diageo's 57.87% shareholding in the group’s Jamaican Red Stripe business and a 49.99% stake in Diageo’s Singapore and Malaysian beer businesses.

●

a loss of £123 million in the period in respect of the sale of the majority of Diageo’s wine interests in the United States and its UK based Percy Fox businesses.

●

a loss of £28 million in respect of sale of Diageo’s equity interests in Diageo’s South African associate interests.

●

a net loss of £3 million in respect of other disposals.

●

a provision for a guarantee provided by Diageo for a loan of $135 million (£92 million) given by Standard Chartered Bank (SCB) to Watson Limited. The underlying security package for the loan remains in place.

See explanatory notes for the definition of exceptional items.

Discontinued operations of £55 million (net of deferred tax of £9 million) 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.

Cash payments in the six months ended 31 December 2016 for exceptional restructuring were £7 million representing the utilisation of a prior year provision (2015 - £33 million). In the comparable period there was a £92 million payment deposit into an escrow account with SCB in respect of the Watson guarantee (see note [11(a)] for further details).

(d) Taxation

The reported tax rate for the six months ended 31 December 2016 was 21.0% compared with 16.6% for the six months ended 31 December 2015. The increase is mainly driven by exceptional items in the six months period ended 31 December 2015.

The tax rate before exceptional items for the six months ended 31 December 2016 was 20.9% compared with 19.0% in the six months ended 31 December 2015. It is expected that the tax rate before exceptional items for the year ending 30 June 2017 will be approximately 21%.

(e) Dividend

The group aims to increase the dividend at each half-year and the decision as to the rate of the dividend increase is made with reference to dividend cover as well as the current performance trends including top and bottom line together with cash generation. Diageo targets dividend cover (the ratio of basic earnings per share before exceptional items to dividend per share) within the range of 1.8-2.2 times. For the year ended 30 June 2016 dividend cover was 1.5 times. It is expected that dividend increases will be maintained at roughly a mid-single digit rate until cover is back in range.

An interim dividend of 23.7 pence per share will be paid to holders of ordinary shares and ADRs on the register as of 24 February 2017. The ex-dividend date is 23 February 2017. This represents an increase of 5% on last year’s interim dividend. The interim dividend will be paid to shareholders on 6 April 2017. Payment to US ADR holders will be made on 11 April 2017. A dividend reinvestment plan is available to holders of ordinary shares in respect of the interim dividend and the plan notice date is 16 March 2017.

MOVEMENT IN NET BORROWINGS AND EQUITY

Movement in net borrowings

	2016	2015
	£ million	£ million
Net borrowings at 30 June	(8,635)	(9,527)
Free cash flow (a)	1,084	839
Acquisition and sale of businesses (b)	(31)	643
Proceeds from issue of share capital	1	-
Net purchase of own shares for share schemes (c)	(49)	(20)
Dividends paid to non-controlling interests	(44)	(56)
Purchase of shares of non-controlling interests	-	(21)
Net movements in bonds (d)	(461)	(489)
Net movements in other borrowings (e)	549	94
Equity dividends paid	(920)	(876)
Net increase in cash and cash equivalents	129	114
Net (increase)/decrease in bonds and other borrowings	(88)	395
Exchange differences (f)	(271)	(259)
Borrowings disposed through sale of businesses	-	7
Other non-cash items	(71)	42
Net borrowings at 31 December	(8,936)	(9,228)

(a) See free cash flow table for the analysis of free cash flow.

(b) In the six months ended 31 December 2016 acquisitions and sale of businesses include part of the settlement of the guarantee in respect of the US wines disposal partially offset by the working capital settlement received from Treasury Wine Estates.

In the six months ended 31 December 2015 acquisitions and sale of businesses include the disposal of the group’s shareholdings in its Jamaican Red Stripe business and Malaysian beer business and the South African associate interests.

(c) Net purchase of own shares comprised purchase of treasury shares for the future settlement of obligations under the employee share option schemes of £86 million (2015 – £39 million) less receipts from employees on the exercise of share options of £37 million (2015 – £19 million).

(d) In the six months ended 31 December 2016, the group repaid bonds of $600 million (£461 million). In the comparable period the group repaid bonds of $750 million (£489 million).

(e) In the six months ended 31 December 2016 net movements in other borrowings are driven by the settlements of the cross currency interest rate swaps and the cash movements on foreign currency swaps and forwards.

(f) Net borrowings increased because of adverse exchange differences primarily on the US dollar and euro denominated borrowings partially offset by a favourable movement on foreign exchange swaps and forwards.

Movement in equity

	2016	2015
	£ million	£ million
Equity at 30 June	10,180	9,256
Profit for the period	1,583	1,488
Exchange adjustments (a)	304	81
Net remeasurement of post employment plans (net of tax)	234	(185)
Exchange recycled to the income statement	-	43
Fair value movements on available-for-sale investments	-	(20)
Purchase of shares of non-controlling interests	-	(21)
Disposal of non-controlling interest	-	(24)
Dividends to non-controlling interests	(44)	(56)
Dividends paid	(920)	(876)
Other reserve movements	(84)	(9)
Equity at 31 December	11,253	9,677

(a) Movement in the six months ended 31 December 2016 primarily arose from exchange gains in respect of the US dollar, the Indian rupee and the euro partially offset by the exchange loss in respect of the Turkish lira.

Post employment plans

The deficit in respect of post employment plans before taxation decreased by £321 million from £1,193 million at 30 June 2016 to £872 million at 31 December 2016. The decrease primarily arose due to an increase in the market value of the assets held by the post employment schemes partially offset by an increase in long term inflation rates (UK RPI from 2.8% to 3.3%, UK CPI from 1.8% to 2.3% and Ireland CPI from 1.4% to 1.7%) and decrease in returns from ‘AA’ rated corporate bonds used to calculate the discount rates on the liabilities of the post employment plans (UK from 2.9% to 2.8%). Total cash contributions by the group to all post employment plans in the year ending 30 June 2017 are estimated to be approximately £220 million.

DIAGEO CONDENSED CONSOLIDATED INCOME STATEMENT


	Six months ended			Six months ended
	31 December 2016			31 December 2015
	Notes	£ million		£ million

Sales	2		9,615		8,267
Excise duties			(3,194)		(2,661)
Net sales	2		6,421		5,606
Cost of sales			(2,465)		(2,292)
Gross profit			3,956		3,314
Marketing			(908)		(822)
Other operating expenses			(983)		(879)
Operating profit	2		2,065		1,613
Non-operating items	3		20		211
Finance income	4		153		110
Finance charges	4		(335)		(286)
Share of after tax results of associates and joint ventures			171		136
Profit before taxation			2,074		1,784
Taxation	5		(436)		(296)
Profit from continuing operations			1,638		1,488
Discontinued operations	3		(55)		-
Profit for the period			1,583		1,488

Attributable to:
Equity shareholders of the parent company - continuing operations			1,569		1,406
Equity shareholders of the parent company - discontinued operations			(55)		-
Non-controlling interests			69		82
			1,583		1,488


Weighted average number of shares			million		million
Shares in issue excluding own shares			2,511		2,507
Dilutive potential ordinary shares			12		11
			2,523		2,518

			pence		pence
Basic earnings per share
Continuing operations			62.5		56.1
Discontinued operations			(2.2)		-
			60.3		56.1

Diluted earnings per share
Continuing operations			62.2		55.8
Discontinued operations			(2.2)		-
			60.0		55.8

DIAGEO CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME



	Six months ended		Six months ended
	31 December 2016		31 December 2015
	£ million		£ million
Other comprehensive income
Items that will not be recycled subsequently to the income statement
Net remeasurement of post employment plans
- group		298		(240)
- associates and joint ventures		(5)		-
Tax on post employment plans		(59)		55
		234		(185)
Items that may be recycled subsequently to the income statement
Exchange differences on translation of foreign operations
- group		470		118
- associates and joint ventures		64		80
- non-controlling interests		104		63
Net investment hedges		(334)		(180)
Exchange loss recycled to the income statement
- on translation of foreign operations		-		43
Tax on exchange differences		1		4
Effective portion of changes in fair value of cash flow hedges
- (losses)/gains taken to other comprehensive income - group		(35)		45
- gains taken to other comprehensive income - associates and joint ventures		-		1
- recycled to income statement		(34)		(50)
Tax on effective portion of changes in fair value of cash flow hedges		16		(5)
Fair value movements on available-for-sale investments
- gains taken to other comprehensive income - group		-		4
- gains taken to other comprehensive income - non-controlling interests		-		4
- recycled to income statement - group		-		(15)
- recycled to income statement - non-controlling interests		-		(13)
Tax on available-for-sale fair value movements		-		5
Hyperinflation adjustment		-		(2)
Tax on hyperinflation adjustment		-		1
		252		103
Other comprehensive profit/(loss), net of tax, for the period		486		(82)
Profit for the period		1,583		1,488
Total comprehensive income for the period		2,069		1,406

Attributable to:
Equity shareholders of the parent company		1,896		1,270
Non-controlling interests		173		136
Total comprehensive income for the period		2,069		1,406

DIAGEO CONDENSED CONSOLIDATED BALANCE SHEET

		31 December 2016		30 June 2016		31 December 2015
	Notes	£ million	£ million	£ million	£ million	£ million	£ million
Non-current assets
Intangible assets		12,911		12,370		11,333
Property, plant and equipment		3,992		3,881		3,624
Biological assets		10		10		9
Investments in associates and joint ventures		2,797		2,528		2,314
Other investments		31		31		29
Other receivables		55		46		49
Other financial assets	9	327		420		259
Deferred tax assets		296		298		167
Post employment benefit assets		84		55		224
			20,503		19,639		18,008
Current assets
Inventories	6	4,741		4,579		4,387
Trade and other receivables		3,603		2,686		3,077
Assets held for sale		3		3		563
Other financial assets	9	126		495		221
Cash and cash equivalents	7	1,254		1,089		541
			9,727		8,852		8,789
Total assets			30,230		28,491		26,797
Current liabilities
Borrowings and bank overdrafts	7	(2,743)		(2,058)		(1,935)
Other financial liabilities	9	(274)		(280)		(111)
Trade and other payables		(3,939)		(3,372)		(3,194)
Liabilities held for sale		-		-		(175)
Corporate tax payable		(469)		(340)		(294)
Provisions		(140)		(137)		(91)
			(7,565)		(6,187)		(5,800)
Non-current liabilities
Borrowing	7	(7,502)		(8,071)		(7,930)
Other financial liabilities	9	(443)		(500)		(439)
Other payables		(38)		(70)		(58)
Provisions		(293)		(253)		(248)
Deferred tax liabilities		(2,180)		(1,982)		(1,923)
Post employment benefit liabilities		(956)		(1,248)		(722)
			(11,412)		(12,124)		(11,320)
Total liabilities			(18,977)		(18,311)		(17,120)
Net assets			11,253		10,180		9,677

Equity
Share capital		797		797		797
Share premium		1,348		1,347		1,346
Other reserves		2,772		2,625		2,050
Retained earnings		4,557		3,761		3,946
Equity attributable to equity shareholders of the parent company			9,474		8,530		8,139
Non-controlling interests			1,779		1,650		1,538
Total equity			11,253		10,180		9,677

DIAGEO CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

							Equity attributable to parent company shareholders
				Retained earnings/(deficit)
	Share capital	Share premium	Other reserves	Own shares	Other retained earnings	Total		Non- controlling interests	Total equity
	£ million	£ million	£ million	£ million	£ million	£ million	£ million	£ million	£ million

At 30 June 2015	797	1,346	1,994	(2,228)	5,862	3,634	7,771	1,485	9,256
Profit for the period	-	-	-	-	1,406	1,406	1,406	82	1,488
Other comprehensive income	-	-	56	-	(192)	(192)	(136)	54	(82)
Employee share schemes	-	-	-	10	(28)	(18)	(18)	-	(18)
Share-based incentive plans	-	-	-	-	13	13	13	-	13
Share-based incentive plans in respect of associates	-	-	-	-	1	1	1	-	1
Tax on share-based incentive plans	-	-	-	-	(3)	(3)	(3)	-	(3)
Change in fair value of put options	-	-	-	-	(1)	(1)	(1)	-	(1)
Purchase of non-controlling interests	-	-	-	-	(18)	(18)	(18)	(3)	(21)
Disposal of non-controlling interests	-	-	-	-	-	-	-	(24)	(24)
Dividends paid	-	-	-	-	(876)	(876)	(876)	(56)	(932)
At 31 December 2015	797	1,346	2,050	(2,218)	6,164	3,946	8,139	1,538	9,677

At 30 June 2016	797	1,347	2,625	(2,189)	5,950	3,761	8,530	1,650	10,180
Profit for the period	-	-	-	-	1,514	1,514	1,514	69	1,583
Other comprehensive income	-	-	147	-	235	235	382	104	486
Employee share schemes	-	-	-	(22)	(12)	(34)	(34)	-	(34)
Share-based incentive plans	-	-	-	-	18	18	18	-	18
Share-based incentive plans in respect of associates	-	-	-	-	1	1	1	-	1
Tax on share-based incentive plans	-	-	-	-	(2)	(2)	(2)	-	(2)
Shares issued	-	1	-	-	-	-	1	-	1
Change in fair value of put options	-	-	-	-	(11)	(11)	(11)	-	(11)
Purchase of non-controlling interest in associates	-	-	-	-	(5)	(5)	(5)	-	(5)
Dividends paid	-	-	-	-	(920)	(920)	(920)	(44)	(964)
At 31 December 2016	797	1,348	2,772	(2,211)	6,768	4,557	9,474	1,779	11,253

DIAGEO CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

	Six months ended		Six months ended
	31 December 2016		31 December 2015
	£ million	£ million	£ million	£ million
Cash flows from operating activities
Profit for the period	1,583		1,488
Discontinued operations	55		-
Taxation	436		296
Share of after tax results of associates and joint ventures	(171)		(136)
Net finance charges	182		176
Non-operating items	(20)		(211)
Operating profit		2,065		1,613
Increase in inventories	(72)		(78)
Increase in trade and other receivables	(864)		(698)
Increase in trade and other payables and provisions	443		254
Net increase in working capital		(493)		(522)
Depreciation, amortisation and impairment	178		281
Dividends received	4		3
Post employment payments less amounts included in operating profit	(76)		(32)
Other items	45		(8)
		151		244
Cash generated from operations		1,723		1,335
Interest received	90		81
Interest paid	(239)		(235)
Taxation paid	(307)		(144)
		(456)		(298)
Net cash from operating activities		1,267		1,037
Cash flows from investing activities
Disposal of property, plant and equipment and computer software	13		8
Purchase of property, plant and equipment and computer software	(197)		(204)
Movements in loans and other investments	1		(2)
Sale of businesses	(13)		654
Acquisition of businesses	(18)		(11)
Net cash (outflow)/inflow from investing activities		(214)		445
Cash flows from financing activities
Proceeds from issue of share capital	1		-
Net purchase of own shares for share schemes	(49)		(20)
Dividends paid to non-controlling interests	(44)		(56)
Purchase of shares of non-controlling interests	-		(21)
Repayment of bonds	(461)		(489)
Net movements on other borrowings	549		94
Equity dividends paid	(920)		(876)
Net cash outflow from financing activities		(924)		(1,368)

Net increase in net cash and cash equivalents		129		114
Exchange differences		33		(29)
Net cash and cash equivalents at beginning of the period		809		382
Net cash and cash equivalents at end of the period		971		467

Net cash and cash equivalents consist of:
Cash and cash equivalents		1,254		541
Bank overdrafts		(283)		(74)
		971		467

NOTES

1. Basis of preparation

This condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as issued by the International Accounting Standards Board (IASB) and as adopted by the EU.

The annual financial statements of the group are prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the IASB and as adopted by the EU. As required by the Disclosure and Transparency Rules of the Financial Conduct Authority, the condensed set of financial statements has been prepared applying the accounting policies and presentation that were applied in the preparation of the company's published consolidated financial statements for the year ended 30 June 2016. IFRS is subject to ongoing review and endorsement by the EU or possible amendment by interpretative guidance and the issuance of new standards by the IASB. In preparing these condensed interim financial statements, the significant judgements made by management when applying the group’s accounting policies and the significant areas where estimates were required were the same as those that applied to the consolidated financial statements for the year ended 30 June 2016, with the exception of changes in estimates disclosed in note 11 - Contingent liabilities and legal proceedings.