Annual Report 2020 Annual Report 2020 Contents Diageo is a global leader in beverage Strategic report alcohol with an outstanding collection Our brands ....................................................................... 2 of brands across spirits and beer. Our global reach .......................................................... 3 Chairman’s statement ............................................ 4 Our Performance Ambition is to be one of the Our purpose and ambition ................................ 6 best performing, most trusted and respected Chief Executive’s statement ............................... 8 Our business model ................................................. 10 consumer products companies in the world. Stakeholder engagement ................................... 12 Our market dynamics ............................................. 14 Our products are sold in more Our strategic priorities ............................................ 17 than 180 countries and our brands include Key performance indicators ............................... 30 Johnnie Walker, Crown Royal, JεB, Buchanan’s Sustainability performance ................................. 32 Our principal risks and and Windsor whiskies, Smirnoff, Cîroc risk management ....................................................... 38 and Ketel One vodkas, Captain Morgan, Climate-related risks ................................................. 42 Baileys, Don Julio, Tanqueray and Guinness. Group financial review ........................................... 44 Business review ............................................................ 50 We are proud of the brands we make and Category review .......................................................... 60 Definitions and reconciliation the enjoyment they give to millions. We are of non-GAAP measures to passionate about the role alcohol plays in GAAP measures ........................................................... 62 bringing people together, to celebrate life Governance report every day, everywhere. Board of Directors and Company Secretary ....................................... 68 Executive Committee ............................................. 70 Corporate governance report .......................... 72 Audit Committee report ....................................... 81 Nomination Committee report ...................... 83 Directors’ remuneration report ....................... 84 Directors’ report ........................................................... 107 Financial statements ......................... 109 Additional information for shareholders ....................................... 183 Bulleit Bourbon whiskey Cover images, from left to right: Top row: Ketel One vodka Grapefruit Spritz; consumer enjoying Guinness. Second row: Diageo hand sanitiser; Diageo blenders from the ‘Craftswomen’ programme: Nicole Austin, Joanna Scandella, Emma Walker and Eboni Major; Baileys Coffee Granita. Third row: Guinness ‘Stay at Home’ creative by Luke O'Reilly; Tanqueray and Smirnoff cocktails; Don Julio Blood Orange Paloma cocktail. Fourth row: Johnnie & Ginger Highball cocktails; Diageo ‘Raising the Bar’ fund; Johnnie Walker Walking Tall cocktail from the Kitchen Sink Drinks programme. STRATEGIC REPORT STRATEGIC 2020 Financial performance Volume (equivalent units) Operating profit Earnings per share (eps) 2020 EU217.0m 2020 £2,137m 2020 60.1p 2019 EU245.9m 2019 £4,042m 2019 130.7p Reported movement Ô11.8% Reported movement Ô47.1% Reported movement Ô54.0% Organic movement Ô11.2% Organic movement Ô14.4% Eps before exceptional items movement(i) Ô16.4% Net sales(ii) Net cash from operating activities Total recommended dividend per share(iii) 2020 £11,752m 2020 £2,320m 2020 69.88p 2019 £12,867m 2019 £3,248m 2019 68.57p Reported movement Ô8.7% 2020 decrease of £928 million Ó2.0% Organic movement Ô8.4% 2020 free cash flow(i) £1,634 million 2020 Non-financial performance Positive drinking(iv) Health and safety Water efficiency(vi) 2020 229.2m 2020 0.60∆ 2020 4.62l/l∆ 2019 66.02m 2019 0.98 2019 4.72l/l Number of people reached with moderation Lost-time accident frequency(v) messages from our brands (i) See definitions and reconciliation of non-GAAP measures to GAAP measures on pages 62-67. (ii) Net sales are sales less excise duties. (iii) Includes recommended final dividend of 42.47p. (iv) Our 2020 number reflects the cumulative progress against our target from the 2019 and 2020 fiscal years. (v) Per 1,000 full-time employees. (vi) Data for the year ended 30 June 2019 has been restated where relevant in accordance with Diageo’s environmental reporting methodologies. Δ Within PricewaterhouseCoopers LLP's (PwC) independent limited assurance scope. For further detail and the reporting methodologies, see our Sustainability & Responsibility Performance Addendum 2020. 2020 Performance by region North America Europe Africa Latin America Asia Pacific and Turkey and Caribbean Volume (equivalent units) EU48.4m EU40.2m EU28.8m EU19.0m EU80.6m Reported 2% Reported 11% Reported 14% Reported 15% Reported 15% Organic 0% Organic 11% Organic 13% Organic 15% Organic 15% Net sales(i) £4,623m £2,567m £1,346m £908m £2,270m Reported 4% Reported 13% Reported 16% Reported 20% Reported 16% Organic 2% Organic 12% Organic 13% Organic 15% Organic 16% Operating profit(ii) £2,034m £757m £101m £248m £501m Reported 4% Reported 25% Reported 63% Reported 32% Reported 29% Organic 4% Organic 24% Organic 56% Organic 29% Organic 29% (i) Excluding corporate net sales of £38 million (2019: £53 million). (ii) Excluding exceptional operating charges of £1,357 million (2019: £74 million) and net corporate operating costs of £147 million (2019: £189 million). Unless otherwise stated in this document, percentage movements refer to organic movements which are non-GAAP measures. For a definition of organic movement and reconciliation of non-GAAP measures to GAAP measures, see pages 62-67. Share refers to value share. Percentage figures presented are reflective of a year-on-year comparison, namely 2019-2020, only. DIAGEO Annual Report 2020 1 Our global portfolio Our brands We have built a leading portfolio of brands across key categories and price points. We own two of the world’s five largest spirits brands by retail sales value, Johnnie Walker and Smirnoff.(i) The combined retail sales value of our six global giants is over £16 billion.(ii) Global giants Our business is built around six of our biggest global brands. Local stars Can be individual to any one market and provide a platform for our business to grow. Reserve Exceptional spirits brands at premium price points to capture the global luxury opportunity. Net sales(iii) 39% 20% 21% Global giants Local stars Reserve (i) IWSR, 2019. (iii) Percentages do not add to 100. Reserve group includes some brands and variants (ii) IWSR, 2019 and Global Data, 2019. in both global giants and local stars. For detail on percentage of total net sales by category, see page 60. 2 DIAGEO Annual Report 2020 STRATEGIC REPORT STRATEGIC Our global reach Our regional profile provides exposure to the greatest consumer growth opportunities in our sector. We employ 27,775 talented people. Our products are sold in over 180 countries and each of our markets is accountable for its own performance and for driving growth. % share of net sales by region(i)(ii) North America Europe Africa Latin America Asia Pacic 39.5% and Turkey 11.5% and Caribbean 19.3% 21.9% 7.8% US Spirits Europe East Africa Mexico India Diageo Beer Company (DBC) USA Turkey Africa Regional Markets (ARM) Paraguay, Uruguay and Brazil (PUB) Greater China Canada Other (principally Travel Retail) Nigeria Central America and Caribbean (CCA) Australia Other (principally Travel Retail) South Africa Andean (Colombia and Venezuela) South East Asia Other (principally Travel Retail) Peru, Ecuador, Bolivia, North Asia Argentina, Chile (PEBAC) Travel Retail Asia and Middle East Other (principally Travel Retail) (i) The above map is intended to illustrate general geographic regions where Diageo has a presence and/or in which its products are sold. It is not intended to imply that Diageo has a presence in and/or that its products are sold in every country within a geographic region. (ii) Based on reported net sales for the year ended 30 June 2020. Does not include corporate net sales of £38 million (2019: £53 million). Percentage share by region Europe Latin America North America and Turkey Africa and Caribbean Asia Pacific Volume 22.3 18.5 13.3 8.8 37.1 Net sales(i) 39.5 21.9 11.5 7.8 19.3 Operating profit before exceptional items(ii) 55.9 20.8 2.8 6.8 13.7 Operating profit(iii) 91.4 30.4 (1.9) 10.6 (30.5) Water withdrawal 13.7 40.2 34.7 2.0 9.4 Carbon emissions(iv) 26.8 27.4 33.8 4.5 7.5 Employees(v) 9.5 36.3 14.9 9.7 29.6 (i) Excluding corporate net sales of £38 million (2019: £53 million). (iii) Excluding net corporate operating costs of £147 million (2019: £210 million). (ii) Excluding exceptional operating charges of £1,357 million (2019: £74 million) (iv) Excludes corporate offices which account for 1.4% of combined impacts. and net corporate operating costs of £147 million (2019: £189 million). (v) Employees have been allocated to the region in which they reside. DIAGEO Annual Report 2020 3 Chairman’s statement Chairman’s statement ‘We are determined to build Diageo for the very long term and we seek to make a positive impact on the issues that matter most to our stakeholders and to wider society. During Covid-19 we have been closely tracking and adapting to consumer behaviour and have taken